10-K 1 d50220_10k.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-15796 CORPORATE REALTY INCOME FUND I, L. P. (Exact Name of Registrant as Specified in Its Charter) Delaware 13-3311993 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 475 Fifth Avenue, New York, NY 10017 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: 212-696-0701 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered None Not Applicable Securities registered pursuant to Section 12(g) of the Act: Depositary Units of Limited Partnership (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 such 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 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 in this Form 10-K None. -2- CORPORATE REALTY INCOME FUND I, L. P. Annual Report on Form 10-K December 31, 2001 TABLE OF CONTENTS PAGE ---- PART I........................................................................1 Item 1. Business.............................................................1 Item 2. Properties...........................................................6 Item 3. Legal Proceedings....................................................13 Item 4. Submission of Matters to a Vote of Security Holders..................13 PART II.......................................................................14 Item 5. Market for Registrant's Securities and Related Security Holder Matters..............................................................14 Item 6. Selected Financial Data..............................................16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................16 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........20 Item 8. Financial Statements and Supplementary Data .........................21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................22 PART III......................................................................23 Item 10. Directors and Executive Officers of the Registrant...................23 Item 11. Executive Compensation...............................................24 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters......................................25 Item 13. Certain Relationships and Related Transactions.......................26 ITEM IV.......................................................................28 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....28 -3- PART I Item 1. Business. General Corporate Realty Income Fund I, L.P. ("Registrant") is a Delaware limited partnership organized on November 25, 1985 pursuant to the Delaware Revised Uniform Limited Partnership Act. The general partners of Registrant are 1345 Realty Corporation, a Delaware corporation (the "Corporate General Partner"), and Robert F. Gossett, Jr. (the "Individual General Partner") (collectively, the "General Partners"). The limited partners of Registrant are hereinafter collectively referred to as the "Limited Partners." Registrant organized two subsidiaries in March 1999 in connection with the financing of its property at 475 Fifth Avenue, New York, New York. One subsidiary, 475 Fifth Avenue Limited Partnership (the "Subsidiary Partnership"), a Delaware limited partnership, owns 475 Fifth Avenue. The other subsidiary, 475 Fifth-GP, Inc. (the "Subsidiary Corporation"), a Delaware corporation, is the sole general partner of the Subsidiary Partnership. Registrant is the sole limited partner of the Subsidiary Partnership, with a 99% interest in all items of income, gain, loss, and deduction, and the sole shareholder of the Subsidiary Corporation. Registrant's business consists of owning and leasing to others the properties described in Item 2 below. Registrant's properties are leveraged as described below. On March 26, 1986, Registrant commenced an offering (the "Offering") of $80,000,000 of depositary units of limited partnership interest (the "Units"). Registrant terminated the Offering in September 1987, having issued 3,200,000 Units ($80,000,000) and received net proceeds from the Offering (after deduction for organization and offering expenses of $5,948,103) aggregating $74,051,897. Since the Offering, Registrant has invested aggregate funds in excess of $100,000,000 (including $40,000,000 of financing proceeds) in acquiring and improving its properties, which currently number six. Rental revenue from the following tenant at Registrant's properties each accounted for more than 10% of Registrant's total rental revenue for each of the years ended December 31, 1999, 2000 and 2001: a. For 1999, GTE Directories Corporation ("GTE") as tenant in the Directory Building (16%). b. For 2000, GTE as tenant in the Directory Building (18%). c. For 2001, GTE as tenant in the Directory Building (20%). 475 Fifth Avenue Loan On August 9, 1999, the Subsidiary Partnership obtained a first mortgage loan (the "475 Loan") from Heller Financial, Inc. ("Heller") in the amount of $32,000,000. On such date, Registrant paid down approximately $23,381,000 of the Fleet Loan (see "Fleet Bank Loan" below) to release the lien of the Fleet Loan from 475 Fifth Avenue and subject the property to the lien of the 475 Loan. The balance of proceeds borrowed by the Subsidiary Partnership from Heller after payment of loan broker fees and costs of approximately $329,000 and other closing costs of approximately $505,000, were used to provide cash to fund capital improvements and leasing costs at 475 Fifth Avenue and to augment working capital. As of March 18, 2002, the outstanding principal balance of the 475 Loan was approximately $31,423,355. The 475 Loan is evidenced by a Consolidated and Restated Promissory Note, a Mortgage Consolidation, Assignment of Rents, Security Agreement and Fixture Filing, and a Hazardous Substance Indemnification Agreement (collectively, the "475 Loan Agreements"). The 475 Loan matures on September 1, 2009 and bears interest at a rate of 8.27% per annum. The 475 Loan requires monthly payments of interest plus principal payments based on a 30-year amortization schedule. The monthly payments amount to $240,855. No prepayments are permitted, in whole or in part, prior to the fourth loan year (commencing September 2, 2002). From September 2, 2002, the Subsidiary Partnership may prepay the 475 Loan, in full but not in part, on the first day of any calendar month and upon at least 30 days' prior written notice, upon payment of all accrued and unpaid interest and any fees and costs, together with an additional payment equal to the greater of (i) an amount equal to one percent (1%) of the then outstanding principal amount or (ii) a yield maintenance amount equal to the present value of a series of monthly amounts assumed to be paid from the date of prepayment through the maturity date of the 475 Loan. The yield maintenance amount preserves for the holder of the 475 Loan Agreements (the "Holder") a fixed yield tied to a United States Treasury obligation with a term equal to that remaining on the 475 Loan on the date of prepayment. Any payments not received by the Holder within 10 days after the due date will incur a late charge equal to five percent (5%) of the amount of such payment. Overdue amounts, whether at maturity, by acceleration, or otherwise will bear interest at a rate equal to five percent (5%) above the otherwise applicable interest rate. The 475 Loan is secured by a first mortgage lien, an assignment of rents, a security agreement, and a fixture filing on 475 Fifth Avenue, including the improvements, machinery, equipment, mechanical systems, personal property, management contracts, permits, certificates, licenses, agreements, trademarks, trade names, books and records, and any monies on deposit with or for the benefit of the Holder relating to this property. This loan also is secured by an assignment of Registrant's management agreement with the Subsidiary Partnership. Heller sold the 475 Loan pursuant to a mortgage-backed securitized plan as of February 10, 2000. The 475 Loan is currently serviced by Midland Loan Services. The 475 Loan currently has three separate reserves: 1. The first, a property tax reserve, requires monthly payments sufficient to enable all real estate taxes against 475 Fifth Avenue to be paid before they become due and payable. The property tax reserve has a balance of approximately $499,203 as of March 18, 2002; 2. The second, a replacement reserve, was funded with $200,000 of the proceeds of the 475 Loan. This reserve is to be utilized to fund capital improvements reasonably approved in advance by Heller. The replacement reserve accrues interest for the Subsidiary Partnership's benefit at a "non-personal money market rate." If the balance of this reserve falls below $200,000, the Subsidiary Partnership must make monthly deposits of $4,000 until the balance of the replacement reserve equals $200,000. As of March 18, 2002, the Subsidiary Partnership had not utilized any funds from the replacement reserve and the balance in this account was approximately $214,586; 3. The third, a repair reserve, was funded with $1,967,000 of the proceeds of the 475 Loan and combined with an additional repair reserve of $533,000. This reserve is utilized to fund capital improvements determined in the Subsidiary Partnership's sole discretion. The capital improvements -2- reserve accrues interest for the Subsidiary Partnership's benefit at a "non-personal money market rate." As of March 18, 2002, the Subsidiary Partnership had funded capital improvements aggregating approximately $2,264,365 from the repair reserve. The balance in this account was approximately $366,952. The 475 Loan Agreements require the Holder's prior written consent to the execution or material modification or amendment of any lease of 15,000 or more rentable square feet at 475 Fifth Avenue. An event of default under the 475 Loan Agreements includes the following: 1. the failure to make any payment within 10 days of the due date thereof; 2. any sale or transfer of 475 Fifth Avenue or any interest therein or any controlling interest therein; 3. the imposition of any lien against 475 Fifth Avenue; and 4. filing of any petition under the United States Bankruptcy Code or any similar law or regulation by or against Registrant, the Subsidiary Partnership, or the Subsidiary Corporation. Upon the occurrence of an event of default under the 475 Loan Agreements, the Holder may enforce one or more of its remedies, including the following: 1. the right to declare all principal, interest, and other amounts due under the 475 Loan to be due and payable immediately; 2. the right to require that 475 Fifth Avenue (including all equipment, fixtures, agreements, and other rights and interests relating thereto) be sold at auction to the highest bidder; and 3. to take possession of, manage, and collect the rents from the property. The Subsidiary Partnership and Robert F. Gossett, Jr., the Individual General Partner of Registrant, have agreed to indemnify and hold harmless the Holder and its officers, directors, employees, shareholders, agents, and affiliates from and against any and all liabilities, obligations, deficiencies, demands, claims, actions, assessments, losses, costs, expenses, interest, fines, penalties, and damages resulting from or arising out of or by virtue of the presence of hazardous materials on or from 475 Fifth Avenue. Mr. Gossett also has assumed joint and several liability to pay the Holder for certain losses, damages, costs, and expenses incurred by the Holder in connection with the 475 Loan . Fleet Bank Loan Registrant's properties, other than 475 Fifth Avenue, are subject to the lien of a first mortgage line-of-credit loan (the "Fleet Loan") from Fleet National Bank ("Fleet"). On August 9, 1999, the Fleet Loan was divided into the following two notes: a note in the amount of $22,594,880 and secured by a mortgage on 475 Fifth Avenue, which note was repaid in full to Fleet and which mortgage was consolidated with and into Heller's mortgage on that property; and, a note in the amount of $26,405,120 and secured by Registrant's five other properties. On October 12, 2000 Registrant entered into an Amended and Restated Loan Agreement providing for maximum gross borrowings of $25,000,000. Registrant obtained an advance of approximately $19,641,440 on October 12, 2000 under the amended Fleet Loan, which included the outstanding balance of approximately $13,141,440 under the Fleet Loan immediately prior to the amendment. During 2001, Registrant obtained -3- additional advances aggregating $5,300,000 so that as of March 18, 2002, the outstanding principal balance of the Fleet Loan was approximately $24,237,835. The Fleet Loan is evidenced by an Amended and Restated Promissory Note, an Amended and Restated Loan Agreement, and an Environmental Compliance and Indemnification Agreement (collectively, the "Fleet Loan Agreements"). The Fleet Loan is secured by a first mortgage lien, an assignment of rents, a security agreement, and a fixture filing on and from each of Registrant's properties, other than 475 Fifth Avenue, including the improvements, equipment, furnishings, proceeds, books and records, and all payments related thereto, which consists of the following five properties: the Monterey Park Building (formerly the American Color Building and the GE Medical Systems Office Building); the Directory Building; the Tumi Building (formerly the Austin Place Building); the Marathon Oil Building; and the Alamo Towers. The Fleet Loan has an initial maturity date of September 30, 2003 which, subject to Registrant's compliance with certain financial covenants, may be extended by Registrant for two additional one year periods. Upon exercising each extension, Registrant must pay an extension fee equal to 0.25% of the then outstanding principal balance. Registrant incurred fees and expenses aggregating $609,259 upon amending the Fleet Loan, including a loan facility fee of $250,000. Registrant may borrow additional amounts during the term of the Fleet Loan up to an aggregate of $25,000,000, which amount is permanently reduced by required monthly payments of principal and by any prepayments or other repayments of principal made by Registrant. As of the date of this Report, available amounts for borrowing under the Fleet Loan had been reduced to approximately $58,000. The Fleet Loan bears interest on each advance of funds from the date of such advance at Fleet's Prime Rate, plus one-half percent (0.5%) per annum or, if Registrant so chooses, at the LIBOR rate (offered rates for Eurodollar deposits) (any such rate, a "Fixed Rate"), plus two percent (2.0%) per annum. The Prime Rate is the rate announced from time to time by Fleet as a means of pricing some of its loans to customers (not necessarily the lowest rate actually charged to any customer class or category). Registrant may elect to pay interest based on a Fixed Rate on the whole or a portion of the outstanding principal amount, upon notice to Fleet, but only in amounts of at least $1,000,000 and in additional integral multiples of $100,000. As of March 18, 2002, the Prime Rate was 4.75% (interest using this rate would be at 5.25%) and the 30-day Fixed Rate was 1.9% (interest using this rate would be at 3.9%). The entire aggregate outstanding balance of the Fleet Loan as of March 18, 2002 bears interest at the rate of 3.9%. The Fleet Loan requires monthly payments of interest plus principal payments equal to 1/500th of the then outstanding principal balance. The Fleet Loan may be prepaid at any time, on notice, in whole or in part (a minimum of $1,000,000 and additional integral multiples of $100,000). Any such prepayment will be without premium or penalty with respect to funds bearing interest based on the Prime Rate or, if the prepayment is made on the last day of the applicable interest period, with respect to funds bearing interest based on a Fixed Rate; however, a prepayment at any other time of funds bearing interest based on a Fixed Rate will require payment of a breakage fee, which guarantees Fleet a fixed rate yield maintenance tied to United States Treasury obligations for the period from the date of prepayment to the end of the applicable interest period. Any payments not received by Fleet within 10 days after the due date will incur a late charge equal to four percent (4%) of the amount of such payment. Overdue amounts, whether at maturity, by acceleration, or otherwise will bear interest at a rate equal to four percent (4%) above the otherwise applicable interest rate. -4- The Fleet Loan Agreements contain continuing covenants regarding Registrant's financial condition and the conduct of its operations. Registrant's debt service coverage ratio (the ratio of projected net income from operations of Registrant's properties, adjusted for depreciation, amortization, fees paid to the General Partners, and step rent receivables, to projected loan amortization payments) cannot be less than 1.50 to 1.0 and its loan to value ratio (the ratio of the outstanding principal balance of the Fleet Loan to the appraised value of the secured properties) cannot exceed fifty-five percent (55%). In addition, Registrant must maintain a liquid net worth (cash, short-term investments, and marketable securities) of at least $1,000,000 and its total liabilities may not exceed sixty percent (60%) of the appraised value of the secured properties. The Fleet Loan Agreements also provide that Registrant may distribute to its partners up to 90% of the sum of its cumulative net income from real estate operations, adjusted for depreciation, amortization and write-off of step rent receivables. Compliance with this distribution provision is tested as of the last day of each fiscal quarter for the period from and including January 1, 2001 through the date as of which compliance is tested. As of December 31, 2001, Registrant had exceeded this distribution limitation by approximately $548,000 and expects to continue to exceed this limitation unless and until it can generate sufficient additional rental revenue from its properties. If Fleet were to force Registrant to comply with this provision, Registrant would need to reduce its distributions to Unitholders or risk a default under the Fleet Loan. Registrant must also obtain Fleet's consent, not to be unreasonably withheld or delayed, to any lease of 10,000 or more rentable square feet. Fleet's mortgage lien against any of Registrant's secured properties will be released only upon payment of an amount equal to 110% of the loan amount allocated to such property (or 100% of the gross sales price or principal amount of refinancing, if greater, for Alamo Towers and the Directory Building). In addition, such lien will be released only if Registrant's remaining properties satisfy the debt service coverage ratio and loan to value ratio. Upon the occurrence of an event of default under the Fleet Loan Agreements (which includes the failure to make any payment within 10 days of the due date thereof and a failure to comply with its financial covenants which continues for 30 days), Fleet may enforce one or more of its remedies, including the right to (i) declare all principal and interest on the Fleet Loan to be due and payable immediately, (ii) require any or all of Registrant's secured properties (including all equipment, fixtures, agreements, and other rights and interests relating thereto) to be sold at auction to the highest bidder, and (iii) collect any and all rents from the properties. Registrant has also agreed to indemnify and hold harmless Fleet and its officers, directors, employees, agents, representatives, contractors and subcontractors, and their respective successors and assigns from and against any and all claims, liability, costs, and expenses arising out of the presence and/or clean-up of hazardous materials on or affecting Registrant's secured properties. Financing Policies The General Partners expect to approximate Registrant's original intention of a loan to value ratio of 50%. Accordingly, it is expected that Registrant's total borrowings will approximate 50% of the sum of (i) the appraised values of its six properties plus (ii) the purchase price of additional properties acquired by Registrant. Registrant is not limited by its Partnership Agreement as to borrowing for any individual property; the aggregate borrowings on all properties may not exceed an amount equal to the sum of (x) 60% of the aggregate purchase price of all properties which are not refinanced plus (y) 80% of the aggregate value of all refinanced properties. As of December 31, 2001, Registrant had a loan to appraised value ratio of approximately 54%. The Fleet Loan and the 475 Loan have enabled Registrant to acquire and improve properties, but have increased the risk of loss on its properties. Registrant may acquire additional properties, the -5- purchase of which would be funded out of the proceeds of sale of one or more of Registrant's current properties. Registrant has no current agreements to sell any of its existing properties. To be profitable, Registrant's properties must generate cash flow in amounts sufficient to not only cover operating expenses but also to pay all financing costs. Registrant's objectives in making its investments continue to be to (i) preserve and protect Registrant's capital; (ii) provide long term capital appreciation, generating long term capital gains for federal income tax purposes upon sale of the properties; (iii) build up equity through the reduction of mortgage loans encumbering the properties; and (iv) provide cash distributions from operations which may be partially tax-sheltered. There is no assurance that these objectives will be achieved. Competition The Directory Building is fully leased to a single tenant and does not face competition from other properties during the term of such lease. The Monterey Park Building is also now fully leased to a single tenant on a net lease or substantially equivalent basis. However, upon termination of these leases, and for any of Registrant's other properties, Registrant does, and will continue to, compete with other properties for tenants. Depending upon market conditions and occupancy rates at the time and place of any vacancies in Registrant's properties, there is currently and there may be, in the future, intense competition in obtaining tenants to fill such vacancies. Furthermore, such competition has resulted and may result, because of reduced rental rates and required concessions to tenants, in decreases in the rental revenue received by Registrant and capital outlays necessary to fund tenant improvements. See Item 2 - "Properties" for a discussion of market conditions in the areas in which Registrant currently competes for tenants. Employees Registrant currently employs 16 persons (two of whom are part-time employees). The business of Registrant is managed by the General Partners. See Item 10 - "Directors and Executive Officers of the Registrant" and Item 13 - "Certain Relationships and Related Transactions." Item 2. Properties. Monterey Park Building (formerly American Color Building and GE Medical Systems Office Building) On July 10, 1986, Registrant acquired the Monterey Park Building, located in Monterey Park, California, for approximately $4,182,000, inclusive of acquisition fees. Registrant owns fee title to the Monterey Park Building and its 90,000 square feet of underlying land, subject to the lien of the Fleet Loan (See Item 1. - "Business-Fleet Bank Loan"). The property was built in 1985 and contains 22,250 net rentable square feet (increased from 20,250 square feet for previous tenancies). The property had been a unique combination of office space (approximately 71%) and warehouse space, but the building has been reconfigured solely for use as office, design and development space for use pursuant to a net lease for the entire premises. The building is 100% leased to LightCross, Inc. pursuant to a lease dated as of November 17, 2000. The initial term of the lease is ten (10) years from September 1, 2001, subject to two five-year renewal options. The lease requires approximate annual net rent of $433,915 for the first two years ($19.50 per square foot), increasing to $446,197 in the third and fourth years ($20.05 per square foot), $458,970 in the fifth and sixth years ($20.63 per square foot), $472,254 in the seventh and eighth years ($21.22 per -6- square foot), and $486,070 in the ninth and tenth years ($21.85 per square foot). The lease shall require payment of a fair market rental during any renewal periods. This lease is a net lease and, except for certain structural and mechanical conditions, the tenant is responsible for all costs, expenses, and obligations relating to the premises and the use, operation, occupancy, management, maintenance, and repair of the building, including insurance and real estate taxes. LightCross is expected to be a large user of electricity. Electric rates in this area have risen greatly, the effect of which could adversely affect LightCross's financial condition. During 2001, Registrant expended approximately $1,533,000 in capital improvements and tenant improvements in connection with this lease. The improvements include enclosing the rear loading bays, converting warehouse space to office space, building a new entrance area, improving distribution of electricity, and contributing to the tenant's construction of a dust-free "clean room." In addition, the tenant expended approximately $800,000 to make further improvements to the premises. For the year ended December 31, 2001, Registrant paid approximately $37,000 in real property taxes with respect to the Monterey Park Building. At December 31, 2001, such taxes were imposed at a rate of 1.2522% on an assessed value of $3,100,000. The tenant has been granted a right of first offer to purchase the Monterey Park Building on the same terms and conditions on which Registrant may be willing to sell the building to a third party. The Monterey Park area includes approximately 2,135,000 square feet of office space. The vacancy rate for commercial properties in such area approximates 4.4% for office buildings. Net rents (like the LightCross lease) for office space approximate $15.60 to $16.20 per square foot and gross rents approximate $19.80 to $24.60 per square foot in this area. Registrant obtained rents from LightCross in excess of those otherwise available in the Monterey Park area in consideration of agreeing to pay for construction of the "clean room" at an approximate cost of $800,000. The Directory Building (formerly, the IBM Building) On October 27, 1986, Registrant acquired the Directory Building, located in Las Colinas, Texas, for a purchase price of approximately $24,580,000, inclusive of acquisition fees. Registrant owns fee title to the Directory Building and its 6.67 acres of underlying land, subject to the lien of the Fleet Loan. The Directory Building was built in 1982 and contains approximately 152,100 net rentable square feet (reduced from 154,300 square feet during IBM's tenancy). The building is 100% leased to GTE pursuant to a lease dated as of April 20, 1994, as subsequently amended by amendments dated as of July 29, 1994 and as of February 22, 1995 and as extended by an Extension Agreement and Supplement dated as of March 31, 2000. The renewed initial term of the lease expires on September 30, 2003, subject to two (2) five-year renewal options at a rate equal to the then market rate. The renewed lease requires approximate monthly rent of $259,873 through September 30, 2003 ($20.50 per square foot). GTE must also pay additional rent equal to excess electric charges and operating expenses over base levels. Registrant has agreed to cap most operating expenses at cumulative increases of five percent (5%) per annum for purposes of this lease. Registrant incurred approximately $66,000 in capital expenditures at the building during 2001. Registrant has expended an aggregate of approximately $3,348,000 in capital expenditures and tenant improvements at the building. -7- For the year ended December 31, 2001, Registrant paid approximately $437,000 in real property taxes with respect to the Directory Building. At December 31, 2001, such taxes were imposed at an aggregate rate of 2.727725% on an assessed value of $16,025,940. The Las Colinas office market includes approximately 18,365,000 square feet of office space, of which approximately 13,105,000 square feet constitute Class "A" office space and 6,190,000 square feet constitute Class "B" office space. As of November 2001, approximately 75.3% of office space (80.2% of Class "A" office space and 69.6% of Class "B" office space) was leased. Average asking rents were approximately $22.01 per square foot for available Class "A" space and $18.04 for available Class "B" space. The Directory Building is considered to be Class "B+" space. Tumi Building (formerly Austin Place Building) On December 30, 1986, Registrant acquired the Tumi Building, a two-wing office building located in South Plainfield, New Jersey, for a purchase price of approximately $16,473,000, inclusive of acquisition fees. Registrant owns fee title to the Tumi Building and its underlying five acres of land, subject to the lien of the Fleet Loan. The property was built in 1986 and contains approximately 107,900 net rentable square feet for use as a multi-tenant facility (reduced from 108,000 square feet as a single tenant facility, but subsequently increased from 106,600 square feet due to tenant expansion into common areas). As of March 15, 2002, the property is approximately 75.7% leased, with 45,700 square feet leased to Tumi, Inc. (as discussed below) and the remainder at an average current rent of approximately $18.15 per square foot. Such other leases expire in October and November 2005 (approximately 17,400 square feet) and June 2006 (approximately 18,600 square feet). Tumi's lease is for 45,700 square feet and expires on January 19, 2009. It requires rent payments equal to $16.00 per square foot until January 2006 and $17.00 per square foot from February 2006 to January 2009. The lease includes two 5-year renewal terms, the first at a base rent of $20.00 per square foot and the second at a then fair market rental. Tumi is also obligated to pay for its electric current consumption and its proportionate share (42.3%) of increases in operating expenses, taxes, and insurance over base year 1999 levels. Registrant has also entered into a five year lease with AT&T Wireless PCS, LLC to permit installation and operation of a cellular telephone tower on the roof of the Tumi Building. The lease provides for annual rental payments of $19,800, five automatic five-year renewal periods and a three percent (3%) increase in rental payments at the commencement of each renewal period. On March 9, 1999, Gdynia America Line, Inc., a tenant occupying approximately 21,650 square feet (20.3%) in the Tumi Building filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Polish Ocean Lines, a Polish corporation partially owned by the Polish Government, is jointly and severally obligated under this lease. On or about April 30, 1999, the lease, with a term expiring in May 2007 and annual rental payments of approximately $446,000, was rejected in the bankruptcy proceeding. In July 2000, Registrant obtained a judgment in an action in the Superior Court of New Jersey Law Division; Middlesex County against Polish Ocean Lines in the approximate amount of $618,600. On May 4, 2001, the amount of this judgment was increased to approximately $4,389,400. Registrant is pursuing enforcement of its judgment in Poland, but there can be no assurance as to its ability to collect any of the judgment against Polish Ocean Lines. This space in the Tumi Building remains vacant. -8- For the year ended December 31, 2001, Registrant paid approximately $226,000 in real property taxes with respect to the Tumi Building. At December 31, 2001, such taxes were imposed at a rate of 1.81% on an assessed value of $6,500,000. South Plainfield is located in Middlesex County (approximately 17,058,000 square feet of office space, of which approximately 13,128,000 is Class A and 3,385,000 is Class B). Vacancies in Middlesex County approximate 17.3%, including 19.1% in Class A space and 10.3% in Class B space. Average asking rents for office space in the Middlesex County approximate $24.31 per square foot, including $25.47 for Class A space and $19.21 for Class B space. Registrant has expended approximately $3,110,000 for capital expenditures and tenant improvements, all of which were incurred prior to 2001. Marathon Oil Building (formerly, the Tenneco Building) On March 21, 1988, Registrant acquired the Marathon Oil Building (formerly the Tenneco Building), an office building located in Oklahoma City, Oklahoma, for approximately $10,736,000, inclusive of acquisition fees. Registrant owns fee title to the Marathon Oil Building with its 6.1 acres of underlying land, subject to the lien of the Fleet Loan. The property contains approximately 90,925 net rentable square feet on two floors, plus a 10,016 square foot basement. Marathon Oil Company leases approximately 65,700 square feet (including approximately 4,300 in the basement) in the building. Marathon renewed its lease to extend the term from February 2001 for an additional five-year term that expires in February 2006. The lease is subject to an additional renewal option for another five-year term. Marathon's lease also was amended in February 2001 to expand its space by approximately 700 square feet. Annual rent under Marathon's lease is approximately $716,488 ($11.25 per square foot, plus $6.00 per square foot for basement space), increasing to approximately $793,201 ($12.50 per square foot, plus $6.00 per square foot for basement space) in the third year and $869,915 ($13.75 per square foot, plus $6.00 per square foot for basement space) in the fourth and fifth years. Marathon must also pay additional rent equal to its proportionate share of any increases in operating costs of the building after 1996. Registrant has leased approximately an additional 9,340 square feet in the building (plus 340 square feet of basement space) at an average current rent of approximately $13.50 per square foot (plus $5.00 per square foot for basement space). These leases expire in December 2004 (approximately 5,640 square feet plus 340 square feet of basement) and May 2006 (approximately 3,700 square feet). The remaining space (approximately 24.7% of the space) is vacant and Registrant is seeking tenants for such space. For the year ended December 31, 2001, Registrant paid approximately $57,000 in real property taxes with respect to the Marathon Oil Building. At December 31, 2001, such taxes were imposed at a rate of 1.1% on an assessed value of $5,218,680. Market conditions in the northwest section of Oklahoma City featured reduced demand and rental rates attributable to a weakening economy and the addition of Class A office space. Such market contains approximately 5,058,000 square feet of commercial space of which approximately 15.2% is vacant. Average rents for commercial space range from $8.50 to $18.50 per square foot, with an average rate of $14.31 per square foot. Registrant has expended approximately $519,250 on capital and tenant improvements at this building, $78,000 of which was spent in 2001. -9- 475 Fifth Avenue On December 6, 1996, Registrant purchased the land, building and other improvements commonly known as 475 Fifth Avenue, and situated in New York, New York, for approximately $27,440,000 including capitalized costs and related costs. The property contains a multi-tenant office building comprised of approximately 241,000 square feet and is located on the southeast corner of 41st Street and Fifth Avenue in New York City; the Subsidiary Partnership owns fee title to 475 Fifth Avenue, subject to the lien of the 475 Loan. 475 Fifth Avenue is a 23-story office building with approximately 20,000 square feet of retail space on the first floor and basement, 216,300 square feet of office space, and 5,100 square feet of basement storage space. As of March 15, 2002, approximately 78.4% of the rentable square footage of office and retail space in the building was leased (including approximately 84.3% of the office space and 14.7% of the retail space), at an average current rent (base rent plus electric charges and prior year adjustments) of approximately $36.51 per square foot (approximately $34.86 per square foot of office space and $138.14 per square foot of retail space). Following is a schedule of the expirations of such leases.
======================================================================================= Approximate Avg. Current Expiration Year Square Feet % of Total Rent/Sq. Ft. --------------------------------------------------------------------------------------- 2002 10,790 4.6% $32.16 --------------------------------------------------------------------------------------- 2003 11,416 4.8% $37.69 --------------------------------------------------------------------------------------- 2004 17,782 7.5% $39.46 --------------------------------------------------------------------------------------- 2005 16,634 7.0% $37.17 --------------------------------------------------------------------------------------- 2006 22,243 9.4% $30.47 --------------------------------------------------------------------------------------- 2007 14,537 6.2% $47.64 --------------------------------------------------------------------------------------- 2008 47,399 20.1% $27.85 --------------------------------------------------------------------------------------- 2009 37,625 15.9% $36.45 --------------------------------------------------------------------------------------- 2010 3,833 1.6% $51.00 --------------------------------------------------------------------------------------- 2016 2,947 1.2% $138.14 =======================================================================================
During 2001, two retail tenants occupying an aggregate of approximately 16,740 square feet (plus 1,900 square feet of storage space) and paying aggregate annual rents of approximately $1,000,000 vacated 475 Fifth Avenue. One of such tenants (paying approximately $240,000 in annual rent) had its lease rejected in bankruptcy proceedings and paid rent through December 2001. The other retail tenant (paying $750,000 in annual rent) ceased paying rent after September 2001 and vacated the building in December 2001 upon forfeiture of a security deposit in the approximate amount of $91,670. During 2001, Registrant also experienced vacancies aggregating approximately 29,950 square feet (with aggregate annual rents of approximately $1,200,000) at 475 Fifth Avenue. One of such leases (for 14,470 square feet and annual rents of approximately $607,000) was terminated early in exchange for a fee in the approximate amount of $720,000. -10- Registrant's leases generally provide for a base rent, inclusive of an electricity charge, plus additional rent in the form of a porter's wage and real estate tax escalation factors; Registrant may increase the electricity charge if a review demonstrates that Registrant's cost of obtaining such electricity exceeds the charge imposed on tenants. Certain tenants (leasing approximately 20% to 25% of the space in the building) have leases that provide for a base rent, inclusive of an electricity charge, plus additional rent in the form of operating expense and real estate tax escalation factors. In 1997, Registrant commenced a capital improvement program, designed to increase rental rates and the value of the building. In connection with obtaining the 475 Loan, a capital reserve schedule was prepared for 475 Fifth Avenue, detailing improvements aggregating approximately $1,840,000 over a 12-year period. Registrant has completed the following improvements at 475 Fifth Avenue: roof replacement and masonry restoration above the 19th floor; elevator modernization, including mechanical cables and security system; drain and drain line replacement; installation of a new electrical panel on one side of the building; continuing installation of hot water heating and sprinkler systems and upgrading of electric service and closets on floors as vacancies occur; lobby and entrance renovation; renovating restrooms to comply with Americans with Disabilities Act ("ADA") requirements on floors as vacancies occur; construction and enclosing of basement staircases to conform with building code requirements; and demolition of vacant retail space to prepare it for marketing. Registrant intends to make the following additional improvements: masonry restoration on the lower floors of the building; continuation of hot water heating and sprinkler system installation, upgrading of electric service and closets, and renovating restrooms to comply with ADA on floors as vacancies occur; installing the main sprinkler distribution system; installation of a new electrical panel on the other side of the building; completion of elevator interior redecoration; and continuing window replacement. Registrant estimates that such additional improvements, planned to be made over the next several years, will cost approximately $1,900,000. In 2001, Registrant expended capital improvements and tenant improvements aggregating approximately $1,783,000 at 475 Fifth Avenue. Certain capital improvements can only be made as tenancies expire. Capital improvements and tenant improvements have been, and are expected in the future to be, funded from working capital, the repair reserve under the 475 Loan, and from increases in rental income, if any. For the year ended December 31, 2001, Registrant paid approximately $1,293,000 in real property taxes with respect to 475 Fifth Avenue. At December 31, 2001, such taxes were imposed at a rate of 9.768% on an assessed value of $13,503,000. 475 Fifth Avenue is situated in the Grand Central district of the New York City midtown market. Such district includes approximately 51,920,000 aggregate rentable square feet (vacancy rate of approximately 8.7%), of which approximately 45,460,000 are Class A buildings (8.9% vacancy rate) and 6,460,000 are Class B buildings (6.9% vacancy rate). Asking rents in this district average approximately $50.44 per square foot ($51.88 for Class A buildings and $40.47 for Class B buildings). The entire midtown market includes approximately 250,496,000 aggregate rentable square feet (194,356,000 in Class A buildings and 56,140,000 in Class B buildings), an approximate 6.1% vacancy rate (5.5% for Class A buildings and 8.0% for Class B buildings), and average asking rents of approximately $51.13 per square foot ($54.94 for Class A buildings and $37.70 for Class B buildings). Alamo Towers On March 17, 1997, Registrant purchased the land, building and other improvements commonly known as the Alamo Towers, and situated in San Antonio, Texas for approximately $12,002,000, including capitalized closing and related costs. The Alamo Towers contains a multi-tenant office building comprised of approximately 193,000 square feet (reduced from approximately -11- 196,000 square feet when Registrant acquired the property). Registrant owns fee title to the Alamo Towers, subject to the lien of the Fleet Loan. The Alamo Towers is an office building consisting of two stand-alone 8-story towers with approximately 184,600 square feet of office space and 8,300 square feet of basement space. As of March 1, 2002, approximately 83.2% of the rentable square footage of office space in the Alamo Towers was leased, at an average current rent (base rent plus escalation adjustments) of approximately $15.03 per square foot. Following is a schedule of expiration of such leases. =============================================================================== Approximate Avg. Current Expiration Year Square Feet % of Total Rent/Sq.Ft. ------------------------------------------------------------------------------- 2002 33,580 18.2% $15.79 ------------------------------------------------------------------------------- 2003 17,124 9.3% $15.91 ------------------------------------------------------------------------------- 2004 32,151 17.5% $15.56 ------------------------------------------------------------------------------- 2005 16,701 9.1% $14.99 ------------------------------------------------------------------------------- 2006 45,806 24.9% $13.78 ------------------------------------------------------------------------------- 2007 7,766 4.2% $15.05 =============================================================================== The Alamo Towers has yet to achieve sustainable increases in occupancy rates, primarily because of the absence of a covered parking garage. Registrant's planned significant capital improvements for this building, delayed in large part because of the capital improvements made at 475 Fifth Avenue, began implementation in earnest in 2001. Registrant completed renovation of the lobby in the West Tower and added granite to the entrances and stairs in both towers. In 2001, Registrant completed payment for the relocation of the building's mechanical plant and replacement of all heating, ventilation, and air conditioning equipment. Registrant also upgraded the fire alarm panels in both towers and is continuing to separate the heating and air conditioning systems in tenant spaces (to better regulate the temperature) as vacancies occur. In 2001, Registrant also upgraded the parking lot surface and lighting. Registrant plans to construct a covered parking garage in 2002, depending upon the availability of funds. Registrant likely will need to sell one of its properties to finance this construction. The planned garage has been scaled back to a 550 car garage at an estimated cost of $3,250,000 (as contrasted to a 1,000 car garage at a cost of $6,000,000). The garage construction is tentatively scheduled to commence in the summer of 2002 and is expected to take six to eight months to complete. In the future, Registrant may need to replace the roof (estimated at $400,000), recaulk the glass walls and windows (estimated at $200,000), install sprinklers on all floors (estimated at $250,000), and upgrade restrooms to comply with ADA (estimated at $500,000 to $600,000), but these improvements are unlikely to occur in the near future. In 2001, Registrant expended approximately $2,158,000 in tenant improvements and capital improvements to the Alamo Towers. For the year ended December 31, 2001, Registrant paid approximately $300,000 (with a discount) in real property taxes with respect to the Alamo Towers. At December 31, 2001, such taxes were imposed at a rate of 3.015365% on an assessed value of $10,000,000. The San Antonio office market includes approximately 21,990,000 aggregate rentable square feet (including approximately 7,410,000 square feet of Class A space and 10,770,000 square feet of -12- Class B space), of which approximately 14.1% is currently vacant (8.7% of Class A space and 15.2% of Class B space). Asking rents in this market now average $17.86 per square foot ($21.10 for Class A space and $16.69 for Class B space). The north-central San Antonio market includes approximately 8,030,000 aggregate rentable square feet (including approximately 3,140,000 square feet of Class A space and 4,420,000 square feet of Class B space), of which approximately 12.6% is vacant (10.3% of Class A space and 12.9% of Class B space) and for which asking rents average approximately $18.46 per square foot ($20.75 for Class A space and $17.36 for Class B space). The Alamo Towers is located in the north-central market and is classified as Class B space. Item 3. Legal Proceedings. Except for its action against Polish Ocean Lines, Inc., Registrant does not know of any material legal proceedings, other than ordinary immaterial routine litigation incidental to its business, pending against or involving Registrant or any of its properties. The action against Polish Ocean Lines, Inc. is attributable to the rejection of its subsidiary's lease for space in the Tumi Building. See "Item 2. Properties - Tumi Building." In July 2000, Registrant obtained a judgment in the approximate amount of $618,600 in the Superior Court of New Jersey Law Division; Middlesex County. In May 2001, the amount of this judgment was increased to approximately $4,389,400. Registrant is pursuing enforcement of this judgment in Poland. Item 4. Submission of Matters to a Vote of Security-Holders. There were no matters submitted to a vote of Limited Partners or Unitholders and none were required to be submitted during the fourth quarter of the fiscal year covered by this report through the solicitation of proxies or otherwise. -13- PART II Item 5. Market for Registrant's Securities and Related Security-Holder Matters. The Units of Registrant are not traded in any established public trading market. Because of certain provisions of the Internal Revenue Code of 1986, as amended (the "Code"), as described below, the General Partners have not applied to include the Units for quotation or listing on any national or regional stock exchange or any other established securities market. Registrant has administered a Unit Repurchase Plan since 1995, pursuant to which Registrant, in its discretion, has purchased outstanding Units. Any such purchases are made at prices no higher than the lowest current independent offer quotation. During 2001, Registrant did not repurchase any Units. Repurchases both divert funds otherwise available for capital improvements and require a monthly reallocation of Unitholders' interests. For these reasons, Registrant limits future repurchases, if any, to the final one or two months of a calendar year. To provide an alternative outlet for Unit sales, the General Partners and their affiliates have, during any periods of suspension in Registrant's Unit Repurchase Plan, purchased Units on the same terms and conditions as under the Unit Repurchase Plan. Provisions found in Section 7704 of the Code have an adverse impact on investors in a "publicly traded partnership" ("PTP"). A PTP is a partnership whose interests are traded on an established securities market or readily tradeable on a secondary market (or the substantial equivalent thereof). If Registrant were classified as a PTP, (i) Registrant may be taxed as a corporation or (ii) income derived from an investment in Registrant would be treated as non-passive income. The IRS has established alternative safe harbors that allow interests in a partnership to be transferred or redeemed in certain circumstances without causing the partnership to be characterized a PTP. Although the Units are not listed or quoted for trading on an established securities market, it is possible that transfers of Units could occur in a secondary market in sufficient amount and frequency to cause Registrant to be treated as a PTP. To the extent that any proposed transfer of Units in secondary market transactions would exceed a safe harbor volume limitation, the proposed transfer will be restricted pursuant to a policy adopted by Registrant. Such a restriction could impair the ability of an investor to liquidate its investment quickly and thus, possibly prevent the reclassification of Registrant as a corporation pursuant to Code Section 7704. It is anticipated that Registrant's policy will remain in effect until such time, if ever, as further clarification of Code Section 7704 permits Registrant to lessen the scope of its policy. The General Partners, if so authorized, will take such steps as are necessary, if any, to prevent the reclassification of Registrant as a PTP. As of March 19, 2002, there were 2,536 Unitholders of record. -14- The following represents per Unit cash distributions to investors for the fiscal years ended December 31, 2001 and 2000.
Distribution Quarter Ended Per Unit Payment Date ------------- -------- ------------ December 31, 2001 $ 0.30 March 2002 September 30, 2001 $ 0.30 November 2001 June 30, 2001 $ 0.30 August 2001 March 31, 2001 $ 0.30 May 2001 December 31, 2000 $ 0.30 February 2001 September 30, 2000 $ 0.30 November 2000 June 30, 2000 $ 0.30 August 2000 March 31, 2000 $ 0.30 May 2000
There are no material legal restrictions upon Registrant's present or future ability to make distributions in accordance with the provisions of Registrant's Agreement of Limited Partnership, as amended through the date of this report. However, the Fleet Loan Agreements limit distributions to 90% of the sum of its cumulative net income from real estate operations, adjusted for depreciation, amortization, and write-off of step rent receivables. See, however, Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of economic conditions affecting Registrant's ability to make distributions in the future. -15- Item 6. Selected Financial Data
Year Ended Year Ended Year Ended Year Ended Year Ended December 31, December 31, December 31, December 31, December 31, 2001 2000 1999 1998 1997 ------------- ------------- ------------- ------------- ------------- Operating Revenues $16,984,791 $15,554,869 $16,695,999 $19,752,206 $14,958,799 Net (Loss)/Income $(1,676,547) $1,808,954 $(2,828,104) $1,930,984 $(420,892) Net (Loss)/Income Per Unit (1) $(0.56) $0.60 $(0.94) $0.64 $(0.14) Total Assets $100,532,466 $102,145,141 $107,255,707 $105,748,365 $100,946,968 Long-Term Obligations $55,879,036 $51,335,864 $55,539,288 $46,930,800 $41,578,800 Distributions Per Unit (1)(2) $1.20 $1.20 $1.20 $1.20 $1.20
(1) Per Unit numbers are based on 2,983,531 Units for 2001, 2000 and 1999 and a weighted average number of Units of 2,986,460 and 3,022,492 for 1998 and 1997, respectively. (2) Each year's distributions include funds distributed after the end of the year which are attributable to that year. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Liquidity and Capital Resources At December 31, 2001, Registrant had cash and receivables of approximately $1,475,000 as contrasted to accounts payable and accrued expenses of approximately $2,430,000. Registrant measures its liquidity by its ability to generate sufficient cash flow from operations to meet its current operating and debt service requirements on a short-term and long-term basis. Registrant's operations have provided this liquidity and are expected to continue to do so. To the extent additional funds are required, Registrant likely will need to sell assets as its borrowing capacity under the Fleet Loan is nearly exhausted. In June 2000, Registrant sold the Flatiron Building for $13,050,000, exclusive of closing costs of approximately $473,000. From the sale proceeds, the sum of $434,466 was placed into escrow pending resolution of the bankruptcy of one of the tenants in the building. In 2001, Registrant recognized approximately $103,000 of the amount held in escrow. -16- In October 2000, the Fleet Loan was amended to provide for maximum gross borrowings of $25,000,000 and to extend the maturity date to September 30, 2003 (subject to two additional one year extension options). Registrant has drawn down an aggregate of approximately $24,941,000 under the amended Fleet Loan. Registrant can only borrow approximately an additional $58,000 under the Fleet Loan. Registrant may draw funds from its replacement reserve (currently approximately $214,586) and its repair reserve (currently approximately $366,952) under the 475 Fifth Loan, to fund certain improvements at 475 Fifth Avenue. Registrant has been investing capital in improving its properties with a view to increasing its revenues from real estate operations and ultimately realizing appreciation in property values. Capital resources have been expended since the beginning of 2001 to make the following capital and tenant improvements: approximately $1,783,000 at 475 Fifth Avenue; $0 at the Tumi Building; approximately $1,533,000 at the Monterey Park Building; approximately $66,000 at the Directory Building; approximately $78,000 at the Marathon Oil Building; and approximately $2,158,000 at Alamo Towers. Registrant may also require capital to fund additional tenant improvements as tenancies turn over at its properties as well as further capital improvements at 475 Fifth Avenue (estimated at $2,055,000) and Alamo Towers (estimated at $4,200,000). These additional capital improvements are expected to be made over several years. In March 1999, Gdynia America Line, Inc., which leased approximately 20% of the Tumi Building pursuant to a lease expiring in May 2007, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Polish Ocean Lines, a Polish corporation partially owned by the Polish Government, is jointly and severally obligated under this lease. On or about April 30, 1999, the lease, which required annual rental payments of approximately $446,000, was rejected in the bankruptcy proceeding. In July 2000, Registrant obtained a judgment in the approximate amount of $618,600 against Polish Ocean Lines for amounts then due under the lease. In May 2001, the amount of such judgment was increased to approximately $4,389,400. There can be no assurance that Registrant will be successful in collecting any damages from Polish Ocean Lines. This space in the Tumi Building remains vacant. During 2001, two retail tenants paying aggregate annual rents of approximately $1,000,000 vacated 475 Fifth Avenue. One of such tenants had its lease rejected in bankruptcy proceedings and the other retail tenant's lease was terminated upon forfeiture of a security deposit in the approximate amount of $91,670. In addition, office tenants paying aggregate annual rents of approximate $1,200,000 vacated 475 Fifth Avenue during 2001. Registrant realized lease cancellation income of approximately $576,000 in 2001, consisting of an early termination fee in the approximate amount of $720,000 from a tenant in 475 Fifth Avenue, net of a write-off of deferred rent receivable of approximately $144,000. The loss of rental payments from these terminated leases and the tenant improvement allowances that Registrant expects to pay to replacement tenants will place demands on Registrant's liquidity and capital resources. To date, Registrant has funded its capital requirements from the 475 Loan, the Fleet Loan and working capital. As discussed above, Registrant has very limited remaining borrowing capacity under its loans. Registrant's quarterly distribution to partners for each of the four quarters of 2001 was $0.30 per Unit. Registrant expects that it will be unable to maintain this level of distributions commencing with the distributions attributable to the first quarter of 2002. The exact amount by which distributions will be reduced has yet to be determined. The level of distributions in the future will be dependent upon numerous factors, including securing replacement tenants at 475 Fifth Avenue and, possibly, the funding of additional capital improvements from the proceeds of the sale of one or more of Registrant's properties. -17- Registrant has used working capital reserves provided from the net proceeds of the Offering, loan proceeds, and any undistributed cash from operations as its primary source of liquidity. Registrant generally intends to distribute its distributable cash from operations to Unitholders. However, such distributions are subject to suspension or reduction to meet capital requirements and are also limited by the Fleet Loan Agreements to 90% of the sum of its cumulative net income from real estate operations, adjusted for depreciation, amortization, and write-off of step rent receivables. Results of Operations 2001 versus 2000 Rental revenues increased by 6.9% from 2000 to 2001, primarily because of new leases and rent increases in the New York, New Jersey, and Las Colinas, Texas properties, the commencement of rent payments from LightCross at the Monterey Park Building, and the delay in feeling the effects of lease terminations at the New York building. Lease cancellation income in 2001, which consisted of $720,000 in cash received from the termination of a lease at 475 Fifth Avenue, less a step rent write-off, increased by 462.0% from the amounts received in 2000. As a result, total revenues increased by 9.2% from 2000 to 2001. Interest expense in 2001 decreased by 7.7% from 2000, because larger loan balances were more than offset by lower interest rates. Depreciation increased by 1.4% in 2001 primarily because of capital improvements made at 475 Fifth Avenue, the Monterey Park Building, and Alamo Towers. Amortization increased by 10.9% primarily because of the amortization of deferred costs related to the Fleet Loan refinancing and commissions paid pertaining to new and renewed leases and the write-off of leasing commissions on leases that were terminated early. Property operating expenses increased by 4.1% in 2001 primarily because of increases in real estate taxes at the two Texas properties, utilities and other operating costs associated with increased occupancy at certain properties despite the reduction attributable to the sale of the Colorado building, and the reimbursement in 2001 of real property taxes attributable to the period prior to the sale of the Colorado property. Management fees increased by 15.7% in 2001 from 2000 because of property management fees computed as a percentage of Registrant's increased revenues from rental revenues. Professional fees decreased by 44.9% from 2000 to 2001 primarily because of the legal fees incurred by Registrant in 2000 in connection with obtaining a judgment against Polish Ocean Lines with respect to the Tumi Building. General and administrative expenses increased by 17.1% from 2000 to 2001 primarily because of the payment in 2001 of Colorado tax on gain from the sale of the Flatiron Building, which more than offset non-recurring costs paid in 2000 to change the Registrant's transfer agent. The 53.0% decrease in bad debt expense is attributable to lower rent balances written-off for tenants that moved out in 2001 as compared to those vacating space in 2000. Registrant's loss from real estate operations decreased by 46.1% in 2001 as compared to 2000. After adjusting for non-cash items (depreciation, amortization and bad debt expense), operations generated cash flows of approximately $2,946,970 in 2001 and $1,415,002 in 2000 (a 108.3% increase). These cash flows are not computed in accordance with generally accepted accounting principles ("GAAP") and contrast to net cash provided by operating activities (computed in accordance with GAAP) of $1,897,372 in 2001 and $461,698 in 2000. Registrant realized a gain on sale of real estate of $103,333 in 2001 as contrasted to $5,111,393 in 2000, in both cases from the sale of the Flatiron Building. Accordingly, Registrant realized a net loss of $1,676,547 in 2001 as contrasted to net income of $1,808,954 in 2000. The significant reduction in Registrant's loss from real estate operations and increase in net cash provided by operations reflect new leases and higher rents attributable to Registrant's extensive capital improvement program, principally at 475 Fifth Avenue and Alamo Towers, Texas, as well as the benefits of interest rate decreases under the Fleet Loan. However, the effects of the recession of -18- 2001, the events of September 11, 2001, and the loss of retail and office tenants at 475 Fifth Avenue will challenge Registrant's operations in 2002. 2000 versus 1999 Rental revenues decreased by 1.8% from 1999 to 2000, primarily because the absence of revenues from the Flatiron Building after its sale in June 2000 more than offset increased occupancy and rental rates at 475 Fifth Avenue and increased rent payments under the renewed GTE lease for the Directory Building. In addition, lease cancellation fees decreased by 69.0% from the significant amounts received in 1999 with respect to the Monterey Park Building and 475 Fifth Avenue. Registrant's interest and other income decreased from 1999 to 2000 by 64.9% principally because of a loan break-up fee, reimbursement of real estate taxes with respect to 475 Fifth Avenue and write-offs of payables to former tenants of the Tumi Building, all of which occurred in 1999. As a result, total revenues decreased by 6.8% from 1999 to 2000. Interest expense in 2000 increased by 16.6% from 1999, both because of larger loan balances (the 475 Loan was funded in mid-1999) and higher interest rates. Depreciation increased by 1.0% in 2000 primarily because capital improvements made from 1997 through 2000 (primarily at 475 Fifth Avenue and Alamo Towers) more than offset the impact of selling the Flatiron Building in June 2000. Amortization decreased by 45.4% primarily because of the write-off in 1999 of leasing commissions on leases that were terminated early and financing costs under the Fleet Loan following partial prepayment of the loan. Property operating expenses increased by 1.6% in 2000 primarily because of higher occupancy and increased electric rates at 475 Fifth Avenue and Alamo Towers. Management fees decreased by 6.3% in 2000 from 1999 primarily due to property management fees computed as a percentage of Registrant's decreased rental revenues. Professional fees increased by 95.9% from 1999 to 2000 primarily because of legal fees incurred in connection with litigation against Polish Ocean Lines for amounts due under the Gdynia lease at the Tumi Building, the payment in 2000 of legal fees attributable to prior years, and increased auditing fees. The 77.1% decrease in bad debt expense reflects the relative absence of significant early terminations as contrasted to 1999, including the write-off of unpaid rent and deferred rent receivable from the Gdynia lease in the Tumi Building. The 5.5% increase in general and administrative expenses in 2000 from 1999 is primarily attributable to costs associated with changing Registrant's transfer agent, increased expenses incurred in preparing unitholders' tax information, and salary increases to Registrant's employees. Registrant's loss from real estate operations increased by 16.8% in 2000 as compared to 1999. After adjusting for non-cash items (depreciation, amortization, and bad debt expense), operations generated cash flows of approximately $1,415,022 in 2000 and $3,574,475 in 1999 (a 60.4% decrease). These cash flows are not computed in accordance with GAAP and contrast to net cash provided by operating activities (computed in accordance with GAAP) of $461,698 in 2000 and $467,101 in 1999. Registrant realized a gain on sale of real estate of $5,111,393 in 2000 from the sale of the Flatiron Building. Accordingly, Registrant realized net income of $1,808,954 in 2000 as contrasted to a net loss of $2,828,104 in 1999. The recognition of a loss from real estate operations was largely due to the interest expense associated with Registrant's capital improvement program at 475 Fifth Avenue and Alamo Towers, which increased occupancy and rental rates. -19- Inflation In the past, inflation has not had a material impact on Registrant's operations or financial condition, as certain leases of Registrant's properties provide for increases in rents based on changes in the consumer price index, and other leases provide lease payments that escalate over time. Registrant's properties with performing leases are protected by arrangements whereby the tenants pay to Registrant an amount equal to all or a portion of the operating costs of the properties, with Registrant's share of expenses, if any, subject to a predetermined limit. These arrangements help to insulate Registrant from the effects of any increases in operating costs. However, to the extent that there is vacant space or nonperforming leases at any of the Registrant's properties, Registrant lacks this protection against inflation, particularly with regards to increased expenses that are not reimbursed. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Interest Rates Registrant's primary market risk exposure is to changes in interest rates on its mortgage loan borrowings. Registrant has obtained the 475 Loan, a fixed rate debt instrument, to manage its exposure to fluctuations in market interest rates. Registrant has also obtained the Fleet Loan, a variable rate debt instrument, to enable it to draw down funds as needed for capital improvements, tenant improvements, and leasing commissions on its diverse portfolio of properties. Approximately 44% and 38% of Registrant's outstanding debt was subject to variable rates at December 31, 2001 and 2000, respectively. In addition, the average interest rate on Registrant's debt decreased from 8.44% at December 31, 2000 to 6.44% at December 31, 2001. Registrant does not have any other material market-sensitive financial instruments. It is not Registrant's policy to engage in hedging activities for previously outstanding debt instruments or for speculative or trading purposes. The table below provides information about Registrant's debt instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. Weighted average variable rates are based on rates in effect at the reporting date. -20-
Expected Maturity Date ---------------------------------------------------------------------------------------------- There- Fair 2002 2003 2004 2005 2006 After Total Value ---- ---- ---- ---- ---- ------- ----- ----- (in thousands) Secured Variable $579 $23,805 $ -- $ -- $ -- $ -- $24,384 $24,384 Average Interest rate 4.08% 4.08% -- -- -- -- 4.08% Secured Fixed $259 $282 $299 $333 $362 $29,960 $31,495 $32,354 Average interest rate 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27%
Registrant believes that the interest rates given in the table for fixed rate borrowings are above the rates Registrant could currently obtain for instruments of similar terms and maturities. The fair values of such instruments are estimated using discounted cash flow analyses, based on borrowing rates for similar types of borrowing arrangements at December 31, 2001 (estimated at 7.77% per annum). A change of 1% in the index rate to which Registrant's variable rate debt is tied would change the annual interest incurred by Registrant by approximately $244,000, based upon the balances outstanding on variable rate instruments at December 31, 2001. Item 8. Financial Statements and Supplementary Data See list of Financial Statements and Financial Statement Schedules at page F-2, filed as part of this report. -21- Quarterly Results of Operations (Unaudited)
2001 ---------------------------------------------------------------- Three Months Ended ---------------------------------------------------------------- March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- (Thousands of dollars, except per unit data) Total revenues $4,023 $4,090 $4,669 $4,203 Total expenses 4,435 4,463 4,676 5,191 Loss from real estate (412) (373) (7) (988) operations before gain on sale of real estate Gain on sale of real 103 -- -- -- estate Net loss (309) (373) (7) (988) Net loss per Unit (0.10) (0.12) -- (0.33)
2000 ----------------------------------------------------------------- Three Months Ended ----------------------------------------------------------------- March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- (Thousands of dollars, except per unit data) Total revenues $4,023 $3,955 $3,599 $3,978 Total expenses 4,624 4,520 4,418 5,295 Loss from real estate operations before gain on (601) (565) (819) (1,317) sale of real estate Gain on sale of real estate -- 5,111 -- -- Net (loss) income (601) 4,546 (819) (1,317) Net (loss) income Per Unit (0.20) 1.51 (0.27) (0.44)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. -22- PART III Item 10. Directors and Executive Officers of the Registrant Registrant has no officers or directors. The General Partners manage and control substantially all of Registrant's affairs and have general responsibility and ultimate authority in all matters affecting Registrant's business. The Individual General Partner is Robert F. Gossett, Jr. The Corporate General Partner is 1345 Realty Corporation. All of the outstanding capital stock of 1345 Realty Corporation is owned by the Individual General Partner and his wife. The directors and executive officers of the Corporate General Partner are as follows:
Officer/ Director Name Age Position Since ---- --- -------- -------- Robert F. Gossett, Jr. 58 President, Treasurer and Director 1994 Pauline G. Gossett 58 Secretary 1994
Information with respect to the Individual General Partner and with respect to the above officers and directors is set forth below: Robert F. Gossett, Jr., the Individual General Partner since 1985, is Managing Director of Vance Capital Corporation (1981 to present), a real estate management and finance company. Between 1978 and 1981, Mr. Gossett served as Executive Vice President and Director of Loeb Capital Corporation. From 1974 until 1978, he was a Vice President of Oppenheimer Properties, Inc. and, between 1969 and 1974, was associated with the Investment Banking Division of Merrill, Lynch, Pierce, Fenner & Smith, Inc. He received a B.A. degree from the University of Texas, a J.D. degree from Georgetown University, and an M.B.A. degree from the University of Pennsylvania. He is a member of the Texas Bar. Pauline G. Gossett, the Secretary of the Corporate General Partner, is a stockholder and Director of Vance Capital Corporation (1981 to present). Mrs. Gossett received an Associate of Arts degree from Briarcliff College. Mrs. Gossett is the wife of Robert F. Gossett, Jr. Registrant employs the following employees who make significant contributions to the business of Registrant: Employee Name Age Position Since ---- --- -------- ---- James N. Walsh 48 Property Manager 1997 Wallis J. Hoskins 48 Property Manager 1993 Veronica Rios 37 Property Manager 1999 Madeline Matlak 36 Fund Administrator 1994 -23- James N. Walsh is the Property Manager for 475 Fifth Avenue. Mr. Walsh has been designated a Real Property Administrator (RPA) by the Building Owners and Managers Association. From 1989 to 1997, he was a building manager, comptroller, and leasing manager for 584 Operating Corp., the owner of an office building in New York, New York which is similarly sized to 475 Fifth Avenue. Prior thereto, Mr. Walsh served for four years as an assistant comptroller and construction accountant for the residential division of Cadillac Fairview. He also acted for four years as a project accountant for residential properties owned by Olympia & York. Mr. Walsh received a B.B.A. degree in accounting from Iona College. Wallis J. Hoskins is the Property Manager for the Austin Place Building. For the 20 years prior thereto he was employed by The Prudential Insurance Company of America, from 1981 to 1992 as a facilities manager for company-owned buildings and from 1973 to 1980 as a claims approver. Veronica Rios is the Property Manager for Alamo Towers. Ms. Rios has been designated a Real Property Administrator (RPA) by the Building Owners and Managers Association. From 1995 to 1999, she was a property manager for three office buildings owned by Mission City Properties in San Antonio. Ms. Rios was a property manager from 1993 to 1995 for several office, office/warehouse, and rental properties owned by the Bonner Group in San Antonio. Prior thereto, from 1989 to 1993, she was employed in various office, accounting, and property management capacities by Commercial Real Estate Associates in San Antonio. Madeline Matlak is the Fund Administrator of the Registrant. Mrs. Matlak was formerly employed as a Fund Administrator in the Direct Investment Department of Smith Barney, Inc. (1989 through 1994). Based solely upon its review of copies of Forms 3, 4, and 5 received by it during 2001, and written representations from reporting persons that no other Forms 5 were required for such persons for 2001, Registrant believes that all filing requirements applicable to its General Partners and the directors and officers of the Corporate General Partner pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended, for 2001 and prior years were complied with on a timely basis except as previously reported. Item 11. Executive Compensation Registrant is not required to and did not pay remuneration to the officers and directors of the Corporate General Partner. However, the General Partners and/or their affiliates receive compensation for services performed for Registrant. -24- Summary Compensation Table
Share of Adjusted Cash Management Leasing Expense Year From Operations Fees Commissions Reimbursement ---- --------------- ---------- ----------- ------------- Corporate General Partner 2001 $28,931 $953,191 $ -0- $54,240 Individual General Partner 2001 $7,233 $238,298 $ -0- $13,560 Corporate General Partner 2000 $28,931 $824,040 $ -0- $56,000 Individual General Partner 2000 $7,233 $206,010 $ -0- $14,000 Corporate General Partner 1999 $28,822 $879,765 $ -0- $44,000 Individual General Partner 1999 $7,205 $219,941 $ -0- $11,000
See Item 13 - "Certain Relationships and Related Transactions" for a discussion of the above compensation. Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth information as of February 28, 2002 as to persons known by Registrant to be the beneficial owner of more than five percent (5%) of the outstanding Units of Registrant. Name and Address Amount and Percent Of Nature of Of Beneficial Owner Beneficial Ownership Class ---------------- -------------------- ----- Vance, Teel & Company, Ltd.(1) 406 E. 85th Street 370,427 12.4% New York, New York 10028 ------------- (1)Each of Robert F. Gossett, Jr., the Individual General Partner and the President of the Corporate General Partner, and Pauline G. Gossett, the Secretary of the Corporate General Partner, own a 25% proportionate interest in Vance, Teel & Company, Ltd. -25- The following table sets forth information as of February 28, 2002 with respect to the beneficial ownership of Units of Registrant by (i) each of the General Partners, (ii) each of the directors and executive officers of the Corporate General Partner, and (iii) all General Partners and executive officers and directors of the Corporate General Partner, as a group. Amount and Name of Nature of Beneficial Beneficial Percent Owner Ownership of Class 1345 Realty Corporation(1) -0- 0% Robert F. Gossett, Jr.(2) 92,606.75 3.1% Pauline G. Gossett(3) 92,606.75 3.1% All General Partners and Directors and Executive Officers as a group (3 persons) 185,213.5 6.2% Robert F. Gossett, Jr., the Individual General Partner and an officer and director of the Corporate General Partner, and Pauline G. Gossett, an officer of the Corporate General Partner, own all of the outstanding capital stock of the Corporate General Partner. Item 13. Certain Relationships and Related Transactions Registrant has and will continue to have certain relationships with the General Partners and their affiliates as discussed below. The General Partners received $36,164 ($28,931 to the Corporate General Partner and $7,233 to the Individual General Partner) as their allocable share (1%) of adjusted cash from operations with respect to the year ended December 31, 2001. For the year ended December 31, 2001, $16,765 (1%) of Registrant's net loss was allocated to the General Partners ($13,412 to the Corporate General Partner and $3,353 to the Individual General Partner). The General Partners or their affiliates are also entitled to receive: a partnership management fee for managing the affairs of Registrant, equal to 7% of adjusted cash from operations less the asset management fee; an asset management fee for managing Registrant's funds which are not invested in properties, equal to 0.5% per annum of the average amount of outstanding funds during each calendar month which are not otherwise invested in properties; and a property management fee for property management services for Registrant's properties, equal to the normal and competitive fees customarily -------- (1) 1345 Realty Corporation is the Corporate General Partner. (2) Mr. Gossett is the Individual General Partner and the President of the Corporate General Partner. Consists of Mr. Gossett's 25% proportionate interest in Vance, Teel & Company, Ltd. He disclaims beneficial ownership of the remaining 75% proportionate interest owned by his wife, Pauline Gossett, and his two adult children. (3) Ms. Gossett is the Secretary of the Corporate General Partner. Consists of Ms. Gossett's 25% proportionate interest in Vance, Teel & Company, Ltd. She disclaims beneficial ownership of the remaining 75% proportionate interest owned by her husband, Robert F. Gossett, Jr., and her two adult children. -26- charged by unaffiliated parties rendering similar services in the same geographic area, not to exceed 1% of the annual gross revenues for net leases with terms of ten years or more or 6% of the annual gross revenues for replacement leases. During the year ended December 31, 2001, the General Partners earned and were paid an aggregate of $1,191,489 of such management fees ($953,191 to the Corporate General Partner and $238,298 to the Individual General Partner). The General Partners are also entitled to receive leasing commissions in connection with leasing, releasing or leasing related services performed on behalf of the Registrant in connection with the negotiation of tenant leases. Such fees are computed at the following rates: (i) in the case of a property leased long-term (10 or more years) net (or similar) basis, 1% of annual gross revenues; and (ii) in the case of other properties, a fee, not to exceed the competitive rate charged by others rendering similar services in the same geographical area, not greater than 6% of annual gross revenues where the General Partners or their affiliates perform leasing, re-leasing and related leasing services, or 3% of annual gross revenues where they do not perform any such services. If a long-term net (or similar) lease is terminated for any reason and the General Partners or their affiliates perform leasing, re-leasing or leasing related services, they will be entitled to a leasing fee of 3% of the gross revenue for the first five years of each replacement lease signed. During the year ended December 31, 2001, no such fees were paid to the General Partners. During the year ended December 31, 2001, the General Partners were also entitled to reimbursement for expenses incurred in connection with Registrant's operations aggregating $67,800 ($54,240 to the Corporate General Partner and $13,560 to the Individual General Partner). -27- PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1), (2) See page F-2. Sequential Page Number ------ (a)(3) Exhibits: 3. Certificate of Limited Partnership, incorporated by reference to Exhibit 4 to Registration Statement No. 33-2258 (the "Registration Statement"). 4.(a) Amended and Restated Agreement of Limited Partnership dated as of July 24, 1995, incorporated by reference to Exhibit 4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995. 10.(a) Property Management Agreement, incorporated by reference to Exhibit 10B to the Registration Statement. (b) Lease dated as of April 20, 1994 between Registrant and GTE with respect to the Directory Building.(1) (c) Amendment No. 1 to Lease dated as of July 29, 1994 between Registrant and GTE.(1) (d) Amendment No. 2 to Lease dated as of February 22, 1995 between Registrant and GTE.(1) (e) Extension Agreement and Supplement dated as of March 31, 2000 between Registrant and GTE.(2) ------------- (1) Incorporated by reference to Exhibits 100(y), (z), and (aa) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. (2) Incorporated by reference to Exhibit 10(e) to Registrant's Annual Report on Form 10-K for the year ended -28- (f) Environmental Compliance and Indemnification Agreement dated ______, 1996, made by Registrant.(3) (g) Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated September 26, 1996, made by Registrant with respect to the Monterey Park Building.(3) (h) First Amendment to Deed of Trust dated December __, 1996, made by Registrant with respect to the Monterey Park Building.(3) (i) Mortgage, Assignment of Leases and Rents and Security Agreement dated September 26, 1996, made by Registrant with respect to the Tumi Building.(3) (j) First Amendment to Mortgage dated December __, 1996, made by Registrant with respect to the Tumi Building.(3) (k) Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated September 26, 1996, made by Registrant with respect to the Marathon Oil Building.(3) (l) First Amendment to Mortgage dated December __, 1996, made by Registrant with respect to the Marathon Oil Building.(3) -------------------------------------------------------------------------------- December 31, 2000. (3) Incorporated by reference to Exhibits 10 (k), (m), (n), (q), (r), (t), (u), (v), and (w) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996. -29- (m) Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated September 26, 1996, made by Registrant with respect to the Directory Building.(3) (n) First Amendment to Deed of Trust dated December __, 1996, made by Registrant with respect to the Directory Building.(3) (o) Amended and Restated Loan Agreement dated as of October 12, 2000 between Registrant and Fleet National Bank.(4) (p) Amended and Restated Secured Promissory Note dated October 12, 2000, made by Registrant.(4) (q) Second Amendment to Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of October 12, 2000 made by Registrant with respect to the Directory Building.(4) (r) Second Amendment to Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of October 12, 2000 made by Registrant with respect to Alamo Towers.(4) (s) Third Amendment to Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of October 12, 2000 made by Registrant with respect to the Monterey Park Building.(4) ------------- (4) Incorporated by reference to Exhibits 10 (o), (p), (q), (r), (s), (t), and (u) to Registrant's Annual Report on Form 10-K for the year ended December 31, 2000. -30- (t) Third Amendment to Mortgage, Assignment of Leases and Rents and Security Agreement dated as of October 12, 2000 made by Registrant with respect to the Tumi Building.(4) (u) Third Amendment to Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of October 12, 2000 made by Registrant with respect to the Marathon Oil Building.(4) (v) Splitter Agreement dated as of August 9, 1999 between Fleet Bank and Registrant.(5) (w) Demand Note dated August 9, 1999 made by Registrant.(5) (x) Assignment of Mortgages and Note dated as of August 9, 1999 made by Registrant with respect to 475 Fifth Avenue. (5) (y) Consolidated and Restated Promissory Note dated August 9, 1999 made by 475 Fifth Avenue Limited Partnership.(5) (z) Mortgage Consolidation, Assignment of Rents, Security Agreement and Fixture Filing made as of August 9, 1999 by 475 Fifth Avenue Limited Partnership to and for the benefit of Heller Financial, Inc.(5) (aa) Letter Agreement dated August 9, 1999 made by Robert F. Gossett, Jr. to and for the benefit of Heller.(5) ------------- (5) Incorporated by reference to Exhibits 10 (v), (w), (x), (y), (z), (aa), (bb), and (cc) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1999. -31- (bb) Manager's Agreement, Subordination and Consent to Assignment dated as of August 9, 1999 made by Registrant to and for the benefit of Heller.(5) (cc) Hazardous Substance Indemnification Agreement dated as of August 9, 1999 made by 475 Fifth Avenue Limited Partnership and Robert F. Gossett, Jr. to and for the benefit of Heller.(5) (dd) Lease dated as of November 17, 2000 between Registrant and LightCross, Inc. with respect to the Monterey Park Building.(6) (b) Reports on Form 8-K: No reports on Form 8-K were filed during the last quarter of the period covered by this report. ------------- (6) Incorporated by reference to Exhibit 10 (dd) to Registrant's Annual Report on Form 10-K for the year ended December 31, 2000. -32- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CORPORATE REALTY INCOME FUND I, L.P. (Registrant) By: 1345 REALTY CORPORATION as Corporate General Partner Dated: March 27, 2002 By: /s/ Robert F. Gossett, Jr. --------------------------------- ROBERT F. GOSSETT, JR., President Dated: March 27, 2002 By: /s/ Robert F. Gossett, Jr. --------------------------------- ROBERT F. GOSSETT, JR. Individual General Partner -33- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities (with respect to the Corporate General Partner) and on the dates indicated. 1345 REALTY CORPORATION Dated: March 27, 2002 By: /s/ Robert F. Gossett, Jr. --------------------------------- Robert F. Gossett, Jr. President, Director Dated: March 27, 2002 By: /s/ Pauline G. Gossett --------------------------------- Pauline G. Gossett Secretary -34- Corporate Realty Income Fund I, L.P. and Subsidiaries List of Consolidated Financial Statements and Consolidated Financial Statement Schedules The following consolidated financial statements of Corporate Realty Income Fund I, L.P. and Subsidiaries are included in Item 8: Report of Independent Auditors - Ernst & Young LLP .........................F-2 Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 2001 and 2000 ...............F-3 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 .........................................F-4 Consolidated Statements of Changes in Partners' Capital for the years ended December 31, 2001, 2000 and 1999 .............................F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 .........................................F-6 Notes to Consolidated Financial Statements .................................F-7 Schedule III - Real Estate and Accumulated Depreciation.....................F-21 All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted since (1) the information required is disclosed in the consolidated financial statements and notes thereto; (2) the schedules are not required under the related instructions; or (3) the schedules are inapplicable. Report of Independent Auditors To the Partners of Corporate Realty Income Fund I, L.P. We have audited the accompanying consolidated balance sheets of Corporate Realty Income Fund I, L.P. (a Delaware limited partnership) and subsidiaries (the "Partnership") as of December 31, 2001 and 2000 and the related consolidated statements of operations, changes in partners' capital and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14 (a). These financial statements and schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Corporate Realty Income Fund I, L.P. and subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young New York, New York February 4, 2002 F-2 Corporate Realty Income Fund I, L.P. and Subsidiaries Consolidated Balance Sheets
December 31, 2001 2000 ------------------------------- Assets Real estate, at cost: Land $18,795,477 $18,795,477 Buildings and improvements 99,031,250 94,703,273 Equipment and furniture 262,607 242,302 ------------------------------- 118,089,334 113,741,052 Less accumulated depreciation 27,462,963 25,197,692 ------------------------------- 90,626,371 88,543,360 Cash and cash equivalents 1,077,273 2,411,748 Accounts receivable, net of allowance for doubtful accounts of $252,228 and $134,679 in 2001 and 2000 398,089 440,796 Due from general partners -- 273,252 Note receivable, net of unamortized discount of $11,195 and $20,463 in 2001 and 2000 240,485 184,723 Deferred rent receivable 2,546,931 2,523,954 Deferred financing costs, net of accumulated amortization of $448,464 and $1,918,751 in 2001 and 2000 994,815 1,281,303 Lease commissions, net of accumulated amortization of $1,426,842 and $1,973,860 in 2001 and 2000 2,634,446 2,864,780 Escrow deposits 1,196,814 2,823,307 Deposits and other assets 817,242 797,918 ------------------------------- Total assets $100,532,466 $102,145,141 =============================== Liabilities and partners' capital Accounts payable and accrued expenses $ 2,430,003 $ 2,965,347 Mortgage loans payable 55,879,036 51,335,864 Other liabilities 1,302,330 1,629,885 ------------------------------- Total liabilities 59,611,369 55,931,096 Commitments and contingencies Partners' capital: General partners: Capital contributions 1,000 1,000 Net income 368,280 385,045 Cash distributions (675,555) (639,391) ------------------------------- (306,275) (253,346) ------------------------------- Limited partners: ($25 per unit; 4,000,000 units authorized, 2,983,531 issued and outstanding in 2001 and 2000) Capital contributions, net of offering costs 71,724,856 71,724,856 Net income 36,459,500 38,119,282 Cash distributions (66,956,984) (63,376,747) ------------------------------- 41,227,372 46,467,391 ------------------------------- Total partners' capital 40,921,097 46,214,045 ------------------------------- Total liabilities and partners' capital $100,532,466 $102,145,141 ===============================
See accompanying notes. F-3 Corporate Realty Income Fund I, L.P. and Subsidiaries Consolidated Statements of Operations
For the years ended December 31, 2001 2000 1999 ----------------------------------------------- Revenue: Rental $16,149,439 $15,109,228 $15,387,502 Lease cancellation 575,923 102,469 330,062 Interest and other income 259,429 343,172 978,435 ----------------------------------------------- 16,984,791 15,554,869 16,695,999 ----------------------------------------------- Expenses: Interest 4,019,262 4,356,650 3,736,687 Depreciation 3,535,432 3,486,070 3,452,891 Amortization 1,062,902 958,010 1,753,623 Property operations 8,062,211 7,742,251 7,622,547 Management fees - affiliate 1,191,489 1,030,050 1,099,706 Professional fees 372,768 675,940 345,000 Bad debt expense 128,516 273,381 1,196,065 General and administrative 392,091 334,956 317,584 ----------------------------------------------- 18,764,671 18,857,308 19,524,103 ----------------------------------------------- Loss from real estate operations (1,779,880) (3,302,439) (2,828,104) Gain on sale of real estate 103,333 5,111,393 -- ----------------------------------------------- Net (loss) income $(1,676,547) $ 1,808,954 $(2,828,104) =============================================== Net (loss) income allocated: General partners $(16,765) $18,090 $(28,281) Limited partners (1,659,782) 1,790,864 (2,799,823) ----------------------------------------------- $(1,676,547) $1,808,954 $(2,828,104) =============================================== Net (loss) income per unit of limited partnership interest - basic and diluted $(0.56) $0.60 $(0.94) ===============================================
See accompanying notes. F-4 Corporate Realty Income Fund I, L.P. and Subsidiaries Consolidated Statements of Changes in Partners' Capital
General Limited Total Partners Partners ----------------------------------------------- Partners' capital (deficit) at December 31, 1998 $54,452,261 $(170,964) $54,623,225 Cash distributions to partners (3,602,666) (36,027) (3,566,639) Net loss (2,828,104) (28,281) (2,799,823) ----------------------------------------------- Partners' capital (deficit) at December 31, 1999 48,021,491 (235,272) 48,256,763 Cash distributions to partners (3,616,400) (36,164) (3,580,236) Net income 1,808,954 18,090 1,790,864 ----------------------------------------------- Partners' capital (deficit) at December 31, 2000 46,214,045 (253,346) 46,467,391 Cash distributions to partners (3,616,401) (36,164) (3,580,237) Net loss (1,676,547) (16,765) (1,659,782) ----------------------------------------------- Partners' capital (deficit) at December 31, 2001 $40,921,097 $(306,275) $41,227,372 ===============================================
See accompanying notes. F-5 Corporate Realty Income Fund I, L.P. and Subsidiaries Consolidated Statements of Cash Flows
For the years ended December 31, 2001 2000 1999 ----------------------------------------------- Operating activities Net (loss) income $(1,676,547) $ 1,808,954 $(2,828,104) ----------------------------------------------- Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 4,598,334 4,444,080 5,206,514 Gain on sale of real estate (103,333) (5,111,393) -- (Increase) decrease in deferred rent receivable (22,977) (142,531) 159,032 Changes in operating assets and liabilities: Decrease in accounts receivable 42,707 137,684 159,137 Change in due to/from general partners 273,252 (336,786) 158,550 (Increase) decrease in note receivable (55,762) 59,920 279,736 Decrease (increase) in escrow deposits- operating 166,668 523,848 (885,658) Increase in lease commissions (546,080) (1,505,194) (497,390) (Increase) decrease in deposits and other assets (19,324) 8,657 (550,806) (Decrease) increase in accounts payable and accrued expenses (535,344) 410,859 (383,687) (Decrease) increase in other liabilities (224,222) 163,600 (350,223) ----------------------------------------------- Total adjustments 3,573,919 (1,347,256) 3,295,205 ----------------------------------------------- Net cash provided by operating activities 1,897,372 461,698 467,101 ----------------------------------------------- Investing activities Decrease (increase) in escrow deposits - investing 1,459,825 (46,008) (1,981,024) Proceeds from sale of real estate -- 12,142,626 -- Acquisition of real estate (5,618,443) (5,039,804) (3,450,996) ----------------------------------------------- Net cash (used in) provided by investing activities (4,158,618) 7,056,814 (5,432,020) ----------------------------------------------- Financing activities Deferred financing costs -- (609,259) (834,019) Proceeds from mortgage loan payable 5,300,000 19,641,440 35,000,000 Repayments of mortgage loan payable (756,828) (23,844,864) (26,391,512) Cash distributions to partners (3,616,401) (3,616,400) (3,602,666) ----------------------------------------------- Net cash provided by (used in) financing activities 926,771 (8,429,083) 4,171,803 ----------------------------------------------- Net (decrease) increase in cash and cash equivalents (1,334,475) (910,571) (793,116) Cash and cash equivalents at beginning of year 2,411,748 3,322,319 4,115,435 ----------------------------------------------- Cash and cash equivalents at end of year $ 1,077,273 $ 2,411,748 $ 3,322,319 ===============================================
See accompanying notes. F-6 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2001 1. Organization Corporate Realty Income Fund I, L.P. ("CRIF") was formed as a limited partnership on November 25, 1985 under the laws of the State of Delaware. CRIF was formed for the purpose of acquiring and owning income-producing commercial and industrial real estate properties for lease to others. CRIF will terminate on December 31, 2010 or sooner, in accordance with the Partnership Agreement. During 1999, in connection with refinancing a portion of its debt, CRIF formed a wholly-owned subsidiary to which it transferred ownership of its New York City property. The general partners of CRIF are 1345 Realty Corporation, the corporate general partner, and Robert F. Gossett, Jr., the individual general partner. On November 30, 1994, all of the outstanding capital stock of the corporate general partner of CRIF was acquired by the individual general partner in a transaction which was effective as of July 1, 1994. As a result of this acquisition, the entire interest of the general partners is controlled by the individual general partner. The initial capital was $1,025 representing capital contributions of $1,000 by the general partners and $25 by the original limited partner. The Partnership commenced operations on June 2, 1986 with the acceptance of subscriptions for 1,082,640 Depositary Units of limited partnership interest (the "Units"). The Partnership has authorized the issuance of up to 4,000,000 Units. The Partnership sold 3,200,000 Units, representing $80,000,000, which completed the offering. Upon the first admittance of the additional limited partners and unitholders, the original limited partner withdrew from the Partnership. Offering costs incurred in connection with the initial offering are nonamortizable and have been deducted from limited partners' capital. There were no unit redemptions during 2001, 2000 and 1999. F-7 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of CRIF and its wholly-owned subsidiaries (collectively, the "Partnership"). All significant intercompany accounts and transactions have been eliminated. Real Estate and Depreciation Costs directly related to the acquisition and improvement of real estate are capitalized. Ordinary repairs and maintenance are expensed as incurred. Depreciation of buildings, improvements, and equipment and furniture for financial reporting purposes is computed under the straight-line method over the estimated economic useful life of the assets which range from five to forty years. Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the Partnership's assets, which are held for use, are measured by a comparison of the carrying amount of an asset to future net cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by which the carrying amount of the assets exceeds the fair value. Assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. No impairment losses were required on any of the properties owned by the Partnership. Deferred Financing Costs Deferred financing costs are being amortized over the term of the loan agreements. Lease Commissions Leasing commissions are capitalized and amortized over the term of the related leases. F-8 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Deferred Rent Rental income is recognized on the straight-line basis over the entire term of the lease including rent-free periods. Accordingly, rental income for the years ended December 31, 2001, 2000 and 1999, includes approximately $186,457, $221,900 and $615,300, respectively, of the excess of income on the straight-line basis over the actual amount billed. During 2001, the Partnership wrote off deferred rent receivable of approximately $163,500, of which approximately $144,000 related to one tenant vacating 475 Fifth Avenue prior to the expiration of the lease term. During 2000, the Partnership wrote off deferred rent receivable of approximately $79,400, of which approximately $76,700 and $2,700 related to tenants vacating 475 Fifth Avenue and Alamo Towers, respectively, prior to the expiration of their lease terms. During 1999, the Partnership wrote-off deferred rent receivable of approximately $774,400, of which approximately $407,200, $338,200 and $29,000 related to tenants vacating the Tumi Building, 475 Fifth Avenue, and the Monterey Park Building, respectively, prior to the expiration of their lease terms. Income Taxes No provision for income taxes has been made since all items of income or losses and tax benefits are passed through to the individual partners. Cash Equivalents The Partnership considers all highly liquid financial instruments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents, which consist principally of money market funds, are carried at cost which approximates market value. Fair Value of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," defines fair value of a financial instrument as the amount at which the instrument could be exchanged F-9 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Fair Value of Financial Instruments (continued) in a current transaction between willing parties. The Partnership's accounts receivable and note receivable, deposits, accounts payable and accrued expenses, interest payable and variable rate mortgage loan payable are carried at cost, which approximates fair value. The fair value of the Partnership's fixed rate long term borrowings are estimated using discounted cash flow analyses, based on current borrowing rates for similar types of borrowing arrangements. The carrying amount and fair value of the Partnership's fixed rate long-term debt at December 31, 2001 is $31,495,092 and $32,354,182, respectively. Segments SFAS No. 131 "Disclosure about Segments of an Enterprise and Related Information", ("Statement 131") requires disclosures about segments of an enterprise and related information regarding the different types of business activities in which an enterprise engages and the different economic environments in which it operates. The Partnership is engaged in owning and managing office properties and has one reportable segment, office real estate. The primary sources of revenue are tenant rents and escalations and reimbursement revenue. Real estate property operating expenses primarily consist of real estate taxes, security, maintenance and utility costs. Recently Issued Accounting Pronouncement In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a segment of a business. FAS 144 is effective for fiscal years beginning after December 15, 2001, with F-10 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) earlier application encouraged. The Company will adopt FAS 144 as of January 1, 2002 and it does not expect that the adoption of the Statement will have a significant impact on the Company's financial position and results of operations. Use of Estimates The general partners have made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States. Actual results could differ from those estimates. 3. Partnership Agreement The Partnership Agreement provides that profits, losses and distributions shall be allocated 99% to the limited partners and 1% to the general partners. Sale or refinancing proceeds will generally be distributed 99% to the limited partners and 1% to the general partners until the limited partners have received an amount which, when added to all prior distributions of cash, will equal their original invested capital plus an 8% per annum cumulative noncompounded return. Thereafter, after payment of the subordinated disposition fee, as defined in the agreement, proceeds will be distributed 75% to the limited partners and 25% to the general partners. The Partnership Agreement further provides that net income shall be allocated to each calendar month of the year, and shall be apportioned on a monthly basis to the holders of interests, in the ratio in which the number of interests owned by each limited partner or unitholder on the first day of the month bears to the total number of interests owned by the limited partners and unitholders as of that date. 4. Investments in Real Estate Monterey Park Building On July 10, 1986, the Partnership purchased the Monterey Park Building (formerly the American Color Building), an office building located at 2630 Corporate Place, Monterey F-11 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Investments in Real Estate (continued) Monterey Park Building (continued) Park, California, and the 90,000 square feet of underlying land. The property contains approximately 22,250 square feet of net rentable area. The terms of the agreement with the seller provided for a purchase price, including capitalized closing and related costs, of approximately $4,182,000. During 1999, a tenant, American Color Graphics vacated the property and paid a lease cancellation fee of approximately $140,000. During 2000, the building was approximately 45% leased to one tenant under a lease which expired in November 2000. In November 2000, the Partnership entered into a 10 year net lease with Lightcross for the entire building. The tenant occupied the premises in August 2001. The Directory Building On October 27, 1986, the Partnership purchased the Directory Building (formerly the IBM building), an office building located in Las Colinas, Texas, and the 6.67 acres of underlying land. The property contains approximately 152,100 square feet of net rentable area. The terms of the agreement with the seller provided for a purchase price, including capitalized closing and related costs, of approximately $24,580,000. As of December 31, 2001, the building was 100% leased to GTE Directories Corporation for a term, which expires on September 30, 2003. Rent from the tenant represented 20%, 18%, and 16% of the Partnership's total rental revenue in 2001, 2000 and 1999, respectively. Tumi Building On December 30, 1986, the Partnership purchased the Tumi Building (formerly the Austin Place Building), an office building located in South Plainfield, New Jersey, and F-12 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Investments in Real Estate (continued) Tumi Building (continued) the five acres of underlying land. The property contains approximately 107,900 square feet of net rentable area. The terms of the agreement with the seller provided for a purchase price, including capitalized closing and related costs, of approximately $16,473,000. In March 1999, Gdynia America Line, Inc. ("Gdynia"), a tenant who had occupied approximately 20% of the Tumi Building, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The lease was rejected in bankruptcy proceedings and the Partnership is currently pursuing amounts from Polish Ocean Lines, a Polish corporation partially owned by the Polish government, that is jointly and severally obligated under Gdynia's lease. As of December 31, 2001, the building was approximately 76% leased to various tenants under leases with remaining terms ranging from four to seven years. Flatiron Building On January 5, 1988, the Partnership purchased the Flatiron Building (formerly the Cadnetix Building) located in Boulder, Colorado, and the five acres of underlying land. The building contains approximately 96,000 square feet of net rentable area. The terms of the agreement with the seller provided for a purchase price, including capitalized closing and related costs, of approximately $9,003,000. On June 30, 2000, the Partnership sold the Flatiron Building for $13,050,000 and recognized a gain of approximately $5,111,000, net of closing costs of approximately $473,000. Proceeds from the sale of $10,000,000 were used to partially pay down the Mortgage (Note 7). An escrow account of $434,466 was established from the proceeds of the sale which will be released to the Partnership if and when it finds a replacement for a tenant who applied F-13 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Investments in Real Estate (continued) Flatiron Building (continued) for bankruptcy protection. As of December 31, 2001, a balance of $254,000 remains in the escrow. The recognition of gain on sale, to the extent held in such escrow, has been deferred. Marathon Oil Building On March 21, 1988, the Partnership purchased the Marathon Oil Building (formerly the Tenneco Oil Building) located in Oklahoma City, Oklahoma, and the 6.1 acres of underlying land. The building contains approximately 90,925 net rentable square feet plus a 10,016 square foot basement. The terms of the agreement with the seller provided for a purchase price, including capitalized closing and related costs, of approximately $10,736,000. As of December 31, 2001, the building was approximately 75% leased to various tenants under leases with remaining terms ranging from three years to five years. The Marathon Oil Company leases approximately 65,700 square feet of space pursuant to a lease, which expires in February, 2006. Approximately 9,300 square feet of the remaining space is leased to two tenants. 475 Fifth Avenue On December 6, 1996 the Partnership purchased an office building and the underlying land, approximately one third of an acre, located at 475 Fifth Avenue, New York, New York (the "New York Building"). The building contains approximately 240,000 net rentable square feet. The terms of the agreement with the seller provided for a purchase price, including capitalized closing and related costs, of approximately $27,440,000. As of December 31, 2001, the building was approximately 92% leased to various tenants under operating leases with remaining terms ranging from one to fourteen years. F-14 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Investments in Real Estate (continued) 475 Fifth Avenue (continued) During 2001, the Partnership recognized lease cancellation income of approximately $576,000, net of write off of deferred rent receivable of approximately $144,000. For the years ended December 31, 2000 and 1999, $70,000 and $190,000, respectively, were earned from tenants that terminated their leases prior to the end of their lease terms. Alamo Towers On March 17, 1997, the Partnership purchased an office building and the thirteen acre underlying land located in San Antonio, Texas, for a purchase price, including capitalized closing and related costs, of approximately $12,002,000. The building contains approximately 193,000 net rentable square feet. As of December 31, 2001, the building was approximately 81% leased to various tenants under operating leases with remaining terms ranging from one to six years. During 2000 the partnership earned lease cancellation fees aggregating approximately $32,000 from tenants that terminated leases prior to the end of their respective lease terms. 5. Leases Minimum future rentals from tenants under noncancellable operating leases as of December 31, 2001 are approximately as follows: 2002 $ 13,652,000 2003 12,608,000 2004 9,838,000 2005 8,435,000 2006 5,873,000 Thereafter 15,144,000 ---------------- Total $ 65,550,000 ================ F-15 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. Leases (continued) In addition to the minimum lease amounts, the leases provide for escalation charges to the tenants for operating expenses, electric and real estate taxes. For the years ended December 31, 2001, 2000 and 1999, escalation charges amounting to approximately $1,421,000, $1,846,000 and $2,034,000, respectively, have been included in rental income. 6. Transactions With General Partners and Affiliates The general partners or their affiliates receive a property management fee equal to either 1% for a long-term net lease with a term of ten years or more or 6% for other types of leases on the gross revenue from the property, and a partnership management fee equal to 7% of adjusted cash from operations, as defined, and reimbursement of administrative expenses. The general partners also receive leasing commissions in connection with leasing, re-leasing or leasing related services performed on behalf of the Partnership in connection with the negotiation of tenant leases. Such commissions are computed at a rate equal to 3% of the gross revenues for the first five years of each lease signed where the general partners have performed such leasing services. Following is a summary of the fees earned and reimbursable expenses for the years ended December 31, 2001, 2000 and 1999: 2001 2000 1999 -------------------------------------------- Partnership management fees $253,148 $106,508 $250,908 Property management fees 938,341 923,542 848,798 Administrative expenses 67,800 70,000 55,000 There were no leasing commissions billed by the general partner in 2001, 2000 and 1999. 7. Loans Payable On September 26, 1996, the Partnership entered into a $24,000,000 senior secured revolving credit facility (the "Mortgage"). The purpose of the Mortgage was to refinance the existing $7,800,000 secured revolving line of credit, to provide working capital for F-16 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. Loans Payable (continued) tenant improvements and leasing commissions with respect to the properties owned by the Partnership, and to provide funds for the acquisition of additional properties. On December 6, 1996, the Partnership amended the Mortgage, increasing the principal amount to $44,000,000. On September 25, 1998, the Partnership further amended the Mortgage. The terms of the Mortgage, as amended, provided for a term of four years and provided for maximum gross borrowings of $49,000,000. On August 9, 1999, the Partnership divided the Mortgage into two notes. One note, in the amount of $22,594,880, was secured by the New York Building, and the second note in the amount of $26,405,120 was secured by the six other properties owned by the Partnership. The loan secured by the New York Building was repaid in 1999. As a result of the Mortgage borrowing capacity reduction, approximately $251,000 of unamortized loan fees were written off during 1999. On October 12, 2000, the Partnership entered into an Amended and Restated Loan Agreement in connection with the Mortgage (the "New Mortgage"). The terms of the New Mortgage provide for maximum gross borrowings of $25,000,000, of which $19,641,440 was advanced on October 12, 2000. The loan commitment is permanently reduced by required monthly principal payments and any prepayments. The New Mortgage provides for an initial maturity date of September 30, 2003, however, the Partnership has the option to extend the maturity date for two additional one year periods provided that certain conditions are met. The New Mortgage is secured by the properties owned by the Partnership, other than the New York Building. Borrowings under the New Mortgage bear interest monthly at a rate, selected at the option of the Partnership at the time of the associated borrowing, based on (i) the prime rate plus .50% or (ii) the applicable LIBOR rate plus 2%. The New Mortgage requires monthly amortization of principal in an amount equal to 1/500th of the outstanding principal on the first day of the applicable month with a final payment of the then outstanding balance due at maturity. Borrowings bearing interest based upon the prime rate can be prepaid any time without penalty. The LIBOR based advances can be prepaid at the end of the interest periods without penalty, and during the interest period subject to a penalty. Upon the sale of any property, the Partnership is required to repay principal on the total indebtedness under the New Mortgage in an amount equal to 110% of that F-17 7. Loans Payable (continued) portion of the outstanding balance of the loan attributable to the sold property, as defined in the New Mortgage agreement, or 100% of the sales price, if greater, for Alamo Towers and the Directory Building. The New Mortgage requires the Partnership to comply with certain covenants, including but not limited to, maintenance of certain financial ratios. In addition, the New Mortgage provides that the Partnership may distribute to its partners up to 90% of the sum of its cumulative net income from real estate operations, adjusted for depreciation, amortization, and write-offs of deferred rent receivables. Compliance with this distribution provision is tested as of the last day of each fiscal quarter for the period from and including January 1, 2001, through the date as of which compliance is tested. As of December 31, 2001, the Partnership had exceeded this distribution limitation by approximately $548,000 and expects to continue to exceed this limitation unless and until it can generate sufficient additional rental revenue from its properties. If Fleet were to force the Partnership to comply with this provision, the Partnership would need to reduce its distributions to Unitholders or risk a default under the Fleet Loan. At December 31, 2001, $24,383,944 was outstanding under the New Mortgage at an interest rate of approximately 4.0% based on (ii) above. In connection with obtaining the New Mortgage, the Partnership incurred fees and expenses of $609,259, which have been capitalized and are being amortized over the term of the loan agreement. On August 9, 1999, the Partnership obtained a $32,000,000 fixed rate mortgage (the "New York Loan"). The loan is secured by the New York Building, matures on September 1, 2009, and bears interest on the outstanding balance, payable monthly, at a fixed rate of 8.27%. The terms of the note require monthly principal and interest payments of $240,855. In connection with the New York Loan, the Partnership incurred fees aggregating approximately $834,000. These fees have been deferred and are being amortized over the term of the New York Loan. As of December 31, 2001, the outstanding balance of the loan was $31,495,092. The New York Loan may not be prepaid prior to September 2, 2002. Thereafter, the New York Loan can be prepaid in full and not in part, subject to a prepayment penalty. Pursuant to the New York Loan F-18 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. Loans Payable (continued) agreement, the Partnership had approximately $1,197,000 included in escrow deposits on December 31, 2001 in restricted funds for capital improvements, repairs and replacements, and real estate taxes. Minimum future principal payments pursuant to the Partnership's loan agreements as of December 31, 2001 are as follows: 2002 $ 838,229 2003 24,087,136 2004 299,029 2005 332,652 2006 361,641 Thereafter 29,960,349 -------------- Total $ 55,879,036 ============== 8. Supplemental Disclosure of Cash Flow Information
2001 2000 1999 ------------------------------------------ Cash paid during the year for interest $4,083,149 $4,388,197 $3,653,401 ==========================================
9. Employee Savings Plan During 1997, the Partnership established an employee savings plan (the "Plan") in accordance with Section 401(K) of the Internal Revenue Code. The Plan permits eligible employees to make contributions through salary reductions. For the years ended December 31, 2001, 2000 and 1999, the Partnership made contributions of $25,000, $0, and $0, respectively to the Plan. 10. Earnings and Distributions per Limited Partnership Unit Basic earnings per limited partnership unit amounts were computed based on 2,983,531 (2001, 2000 and 1999) weighted average limited partnership units outstanding. F-19 Corporate Realty Income Fund I, L.P. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Earnings and Distributions per Limited Partnership Unit (continued) For the three years ended December 31, 2001, there were no partnership unit equivalents and, in accordance with the provisions of SFAS No. 128, dilutive earnings per limited partnership unit for the three years ended December 31, 2001, were computed based on the weighted average limited partnership units outstanding. Distributions per limited partnership unit were $1.20 for the years ended December 31, 2001, 2000 and 1999. F-20 Corporate Realty Income Fund I, L.P. and Subsidiaries Schedule III - Real Estate and Accumulated Depreciation December 31, 2001
Costs Capitalized Subsequent to Gross Amount at Which Initial Cost (B) Acquisition Carried at Close of Period ------------------------------------------------------------------------------------ Building Building Building Encumbrances and and and Description (A) Land Improvements Improvements Land Improvements ----------------------------------------------------------------------------------------------------------------------------- Office Building Monterey Park, $ 1,194,813 $ 1,762,126 $ 2,459,141 $ 1,593,359 $ 1,762,126 $ 4,052,500 CA Office Building Las Colinas, TX 8,778,220 4,925,745 19,702,979 3,348,026 4,925,745 23,051,005 Office Building So. Plainfield, 5,778,995 3,147,912 13,378,294 2,019,437 3,147,912 15,397,731 NJ Office Building San Antonio, TX 6,437,361 2,408,000 9,636,883 5,854,580 2,408,000 15,491,463 Office Building Oklahoma City, 2,194,555 1,063,694 9,713,348 519,250 1,063,694 10,232,598 OK Office Building New York, NY 31,495,092 5,488,000 21,951,998 9,116,562 5,488,000 31,068,560 ----------- ----------- ----------- ----------- ----------- ----------- $55,879,036 $18,795,477 $76,842,643 $22,451,214 $18,795,477 $99,293,857 =========== =========== =========== =========== =========== ===========
Accumulated Life on Which Total Depreciation Date of Date Depreciation Description (C) (D) Construction Acquired Is Computed -------------------------------------------------------------------------------------------------------- Office Building Monterey Park, $ 5,814,626 $ (1,008,090) 1985 7/10/1986 5 to 40 years CA Office Building Las Colinas, TX 27,976,750 (10,159,402) 1982 10/27/1986 5 to 40 years Office Building So. Plainfield, 18,545,643 (6,070,257) 1986 12/30/1986 5 to 40 years NJ Office Building San Antonio, TX 17,899,463 (1,648,153) 1975/1 3/17/1997 5 to 40 years Office Building Oklahoma City, 11,296,292 (3,750,726) 1986 3/21/1988 5 to 40 years OK Office Building New York, NY 36,556,560 (4,826,335) 1927 12/6/1996 5 to 40 years ------------ ------------ $118,089,334 $(27,462,963) ============ ============
F-21 Corporate Realty Income Fund I, L.P. and Subsidiaries Schedule III - Real Estate and Accumulated Depreciation (continued) December 31, 2001 Notes: (A) Encumbrances represents loans secured by deeds of trust given with respect to all of the properties of the Partnership. (B) The initial cost to the Partnership represents the original purchase price of the properties net of purchase price adjustments, including amounts incurred subsequent to acquisition which were contemplated. The initial cost includes the purchase price paid by the Partnership and acquisition fees and expenses. (C) Reconciliation Summary of Transactions - Real Estate Owned
For the years ended December 31, 2001 2000 1999 ----------------------------------------------- Balance at beginning of year $113,741,052 $118,185,492 $115,495,174 Net additions during the year 5,618,443 5,039,804 3,450,996 Cost of real estate sold -- (9,395,006) -- Write off fully depreciated assets (1,270,161) (89,238) (760,678) ----------------------------------------------- Balance at close of year $118,089,334 $113,741,052 $118,185,492 ===============================================
The aggregate cost of land, buildings and improvements for federal income tax purposes at December 31, 2001 was approximately $119,982,000. (D) Reconciliation Summary of Transactions - Accumulated Depreciation
For the years ended December 31, 2001 2000 1999 ----------------------------------------------- Balance at beginning of year $25,197,692 $24,361,971 $21,669,758 Depreciation charged to expense 3,535,432 3,486,070 3,452,891 Accumulated depreciation of real estate sold -- (2,561,111) -- Write-off of fully depreciated assets (1,270,161) (89,238) (760,678) ----------------------------------------------- Balance at close of year $27,462,963 $25,197,692 $24,361,971 ===============================================
F-22