Annual Report (Form 10-K), fiscal year 1994

Item 1. Business
General Development of Business
Hutton/GSH Commercial Properties 3 (the "Registrant" or the "Partnership"), is a Virginia limited partnership formed on April 19, 1984, of which Real Estate Services VII, Inc. ("RES"), formerly Hutton Real Estate Services VII, Inc. (See Item 10. "Certain Matters Involving Affiliates"), and HS Advisors III, Ltd. ("HS Advisors"), are the general partners (the "General Partners"). Commencing December 13, 1983, the Registrant began offering through E.F. Hutton & Company Inc., a former affiliate of the Registrant, up to a maximum of 120,000 units of limited partnership interest (the "Units") at $500 per Unit. Investors who purchased the Units (hereafter referred to as "Unitholders" or the "Limited Partners") are not required to make any additional capital contributions. The Units were registered under the Securities Act of 1933, as amended (the "Act"), under Registration Statement No. 2-85936, which Registration Statement was declared effective on December 13, 1983.
The offering of Units was terminated on August 9, 1984. Upon termination of the offering, the Registrant had accepted subscriptions for 109,378 Units for an aggregate of $54,689,000. After deducting offering costs and initial working capital reserves, approximately $46,000,000 was available for investment in real estate. As of December 31, 1994, $44,995,452 of such proceeds had been invested in an office and light industrial complex, one limited partnership and two joint ventures, each of which owns a specific office building, and $1,093,780 of uncommitted funds were distributed to the Limited Partners as a return of capital on May 15, 1986. The Registrant also distributed $437,512 in 1986 and $218,756 in 1985 to the Limited Partners as a return of capital, which sums represented the excess of the initial working capital reserves set aside for present and future operating requirements. To the extent that funds committed for investment or held as a working capital reserve have not been expended (and have not otherwise been distributed to the Limited Partners as a return of capital), the Registrant has invested such funds in bank certificates of deposit, unaffiliated money market funds or other highly liquid short-term investments where there is appropriate safety of principal, in accordance with the Registrant's investment objectives and policies.
Narrative Description of Business
Incorporated by reference to Note 1 "Organization" and Note 4 "Real Estate Investments" of the Notes to Consolidated Financial Statements on pages 9 and 10, respectively, of the Partnership's Annual Report to Unitholders for the year ended December 31, 1994 filed as an exhibit under Item 14.
The Registrant's principal investment objectives with respect to the Properties (in no particular order of priority) are:
1) Preservation and protection of capital;
2) Distributions of net cash from operations attributable to rental income; and
3) Capital appreciation.
Distributions of net cash from operations will be the Registrant's objective during its operational phase, while the preservation of and appreciation of capital will be the Registrant's long-term objectives. The attainment of the Registrant's investment objectives will depend on many factors, including, among others, successful management of the operations of the Properties.
The Registrant expects to sell its Properties at such time or times as it deems appropriate, taking into consideration such factors as market conditions for these types of properties, leasing conditions, property cash flow and the possible risks of continued ownership. No Property will be sold, financed or refinanced by the Registrant without agreement of both General Partners. Proceeds from any future sale, financing or refinancing of the Properties will not be reinvested but will be distributed to the Limited Partners as a return of capital, so that the Registrant, in effect, will be self-liquidating. As partial payment for Properties sold, the Registrant may receive purchase money obligations collateralized by mortgages or deeds of trust. In such cases, the amount of such obligations will not be included in net proceeds from sale or refinancing (distributable to the Limited Partners) until and to the extent the obligations are realized in cash, sold or otherwise liquidated.
Competition
A detailed description of the Properties, leases considered material to the Partnership's operations and competition relevant to the specific markets in which the Properties are located is incorporated by reference to the section entitled Property Profiles & Leasing Update on pages 3 and 4 of the Partnership's Annual Report to Unitholders for the year ended December 31, 1994 filed as an exhibit under Item 14.
Employees
The Registrant has no employees.
Item 2.



Item 2. Properties
A detailed description of the Properties, leases considered material to the Partnership's operations and competition relevant to the specific markets in which the Properties are located is incorporated by reference to the section entitled Property Profiles & Leasing Update on pages 3 and 4 of the Partnership's Annual Report to Unitholders for the year ended December 31, 1994 filed as an exhibit under Item 14.
Item 3.

Item 3. Legal Proceedings
During June 1992, a purported class action on behalf of all Unitholders was served upon Hutton Real Estate Services IV, Inc., Hutton Real Estate Services VII, Inc., HS Advisors II, Ltd. and HS Advisors III, Ltd. in the Circuit Court of Loudoun County, Virginia. The complaint alleges that, among other things, the General Partners were negligent in their duties, as a result of having failed to conclude a sale of the Registrant's properties within seven to ten years. The defendants, on August 11, 1992, filed a Demurrer and Pleas of Statute of Limitations and Laches. On December 16, 1994, the Circuit Court of Loudoun County, Virginia dismissed the case since two years had lapsed since any action was taken or any pleading filed. Furthermore, plaintiffs attorneys were notified that the proceeding would be dismissed unless they show cause why it should be retained, and none appeared or answered to object to such notice.
Neither the Registrant nor any of the Properties is subject to any material legal proceedings.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the year ended December 31, 1994, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise.
PART II
Item 5.

Item 5. Market for Registrant's Limited Partnership Units and Related Unitholder Matters
(a) Market Information - No established public trading market has developed for the Units, and it is not anticipated that such a market will develop in the future.
(b) Holders - As of December 31, 1994, the number of holders of Units was 5,508.
(c) Distributions - Cash distributions paid to the Limited Partners for the three years ended December 31, 1994 incorporated by reference to the section entitled Message to Investors on page 1 of the Partnership's Annual Report to Unitholders for the year ended December 31, 1994 filed as an exhibit under Item 14.
Item 6.

Item 6. Selected Financial Data
Incorporated by reference to the section entitled Financial Highlights on page 5 of the Partnership's Annual Report to Unitholders for the year ended December 31, 1994, which is filed as an exhibit under Item 14.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
The Partnership had cash and cash equivalents totaling $1,637,501 at December 31, 1994, compared with $734,361 at December 31, 1993. The increase of $903,140 is due to net cash provided by operating activities in excess of additions to real estate assets totaling $504,597 and the payment of cash distributions to partners totaling $451,044. The Partnership had a restricted cash balance of $216,079 at December 31, 1994, compared with $212,154 at December 31, 1993. Tenant security deposits comprise the restricted cash balance. Unexpended funds and working capital reserves are invested in unaffiliated money market funds and interest on such invested balances accrues to the benefit of the Partnership.
Accounts and rent receivable were $28,326 at December 31, 1994 compared to $141,297 at December 31, 1993. The decrease is due to the collection of rents and the write off of uncollectible rent. Deferred rent receivable increased to $235,246 at December 31, 1994 from $98,373 at December 31, 1993. The increase is primarily attributable to the straight-lining of rental income from new leases. Prepaid expenses increased to $645,993 at December 31, 1994 from $624,200 at December 31, 1993 mainly due to prepaid leasing commissions, partially offset by the amortization of existing leasing commissions in the amount of $208,985. Accounts payable and accrued expenses increased to $426,642 at December 31, 1994 from $381,463 at year-end 1993. The increase is primarily due to an increase in prepaid rent from tenants, and to tenant improvement invoices received but unpaid at December 31, 1994.
The Registrant declared cash distributions to Limited Partners of $5.50 per Unit for the year ended December 31, 1994. Included in this total is a cash distribution of $2.50 per Unit for the quarter ended December 31, 1994, which was paid on February 13, 1995. Due to leasing progress at the Partnership's properties which resulted in increased rental income, and the completion of various tenant and other capital improvements during 1993 and 1994, the General Partners were able to increase cash distributions from its previous level of $1.00 per Unit to $2.50 per Unit in the fourth quarter of 1994. The timing and amount of future cash distributions will be determined quarterly by the General Partners, and will depend on the adequacy of cash flow and the Partnership's cash reserve requirements. A significant number of leases will be expiring in 1995. Accordingly, the General Partners will closely monitor the Partnership's cash needs and, if necessary, will reduce future distribution l evels to ensure that adequate reserves are available to fund leasing costs or other Partnership obligations.
Results of Operations
1994 vs 1993 For the year ended December 31, 1994, the Partnership's operations resulted in a net loss of $331,534, compared to a net loss of $910,071 for the corresponding period in 1993. The decrease in net loss is primarily attributable to an increase in rental income and lower depreciation and amortization expense.
Rental income totaled $4,641,823 for the year ended December 31, 1994 compared to $4,181,367 for the year ended December 31, 1993. The increase is due to higher occupancy and rent escalations at three of the Partnership's four properties.
Property operating expenses totaled $2,231,683 for the year ended December 31, 1994 compared with $2,114,664 for the year ended December 31, 1993. The increase is primarily attributable to an increase in building repairs and maintenance during 1994, and to increases in insurance premiums. Bad debt expense, reflecting the uncollectibility of delinquent rent, was $77,710 for the year ended December 31, 1994, compared to $14,427 for the corresponding period in 1993. Depreciation and amortization decreased to $2,388,925 for the year ended December 31, 1994, from $2,680,516 for the year ended December 31, 1993. The decline is primarily attributable to a lower depreciable asset base in 1994.
For the year ended December 31, 1994, net income of $62,186 and $22,225, was allocated to the co-venturers of Three Financial Centre and Quorum, respectively. This allocation resulted from the properties' net income, prior to depreciation expense, being in excess of net cash distributed from operations.
As of December 31, 1994, lease levels at each of the properties were as follows: Metro Park Executive Center - 91%; Fort Lauderdale Commerce Center - 82%; Three Financial Centre - 93 %; Quorum II Office Building - 90%.
1993 vs 1992 The Registrant's operations resulted in a net loss of $910,071 for the year ended December 31, 1993, compared with a net loss of $712,236 for the year ended December 31, 1992. The larger net loss in 1993 is primarily attributable to an increase in depreciation and amortization expenses associated with building and tenant improvements completed during 1993.
For the year ended December 31, 1993, net income of $86,904 was allocated to the co-venturer of Three Financial Centre. This allocation resulted from the property's net income, prior to depreciation expenses, being in excess of net cash distributed from operations. For the year ended December 31, 1992, the property's net cash distributions from operations were in excess of net income prior to depreciation; consequently, no income was allocated to the co-venturer.
Rental income totaled $4,181,367 for the twelve months ended December 31, 1993, as compared to $3,986,736 for the corresponding period in 1992. The increase is largely due to increased rental income at the Registrant's properties. Interest income totaled $29,571 for the twelve months ended December 31, 1993 compared with $47,044 for the twelve months ended December 31, 1992. The decrease in 1993 is attributable to the Registrant's lower average cash balance and lower interest rates.
Property operating expenses totaled $2,114,664 for the year ended December 31, 1993, largely unchanged from $2,103,000 for the corresponding period in 1992. Depreciation and amortization expense totaled $2,680,516 for the year ended December 31, 1993 compared to $2,357,140 for the year ended December 31, 1992. The increase in 1993 is primarily attributable to substantial tenant and capital improvements completed at Three Financial Centre, Fort Lauderdale Commerce Center and Metro Park Executive Center. General and administrative expenses totaled $224,498 for the year ended December 31, 1993 compared to $263,400 for the comparable period in 1992.
As of December 31, 1993, lease levels at each of the properties were as follows: Metro Park Executive Center - 85%; Fort Lauderdale Commerce Center - 78%; Three Financial Centre - 84%; Quorum II Office Building - 99%.
Item 8.


Item 8. Financial Statements and Supplementary Data
Incorporated by reference to the Partnership's Annual Report to Unitholders for the year ended December 31, 1994, which is filed as an exhibit under Item 14.
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.



Item 10. Directors and Executive Officers of the Registrant
The Registrant has no officers and directors. RES and HS Advisors, the General Partners of the Registrant, jointly manage and control the affairs of the Registrant and have general responsibility and authority in all matters affecting its business.
Real Estate Services VII, Inc. Real Estate Services VII, Inc. ("RES"), formerly known as Hutton Real Estate Services VII, Inc., is a Delaware corporation formed on August 2, 1982 and is an affiliate of Lehman Brothers Inc. ("Lehman"). The names and ages of, as well as the positions held by, the directors and executive officers of RES are set forth below. There are no family relationships between any officer or director and any other officer or director.
Certain officers and directors of RES are now serving (or in the past have served) as officers and directors of entities which act as general partners of a number of real estate limited partnerships which have sought protection under the provisions of the Federal Bankruptcy Code. The partnerships which have filed bankruptcy petitions own real estate which has been adversely affected by the economic conditions in the markets in which that real estate is located and, consequently, the partnerships sought the protection of the bankruptcy laws to protect the partnership's assets from loss through foreclosure.
Name Age Office Rocco F. Andriola 36 Director, President, Chief Financial Officer 	 Kenneth L. Zakin	 47	 Director, Vice President 	 William Caulfield	 35 	Vice President Michael Marron 31 Vice President
Rocco F. Andriola is a Senior Vice President of Lehman Brothers in its Diversified Asset Group. Since joining Lehman Brothers in 1986, Mr. Andriola has been involved in a wide range of restructuring and asset management activities involving real estate and other direct investment transactions. From 1986-89, Mr. Andriola served as a Vice President in the Corporate Transactions Group of Shearson Lehman Brothers' office of the general counsel. Prior to joining Lehman Brothers, Mr. Andriola practiced corporate and securities law at Donovan Leisure Newton & Irvine in New York. Mr. Andriola received a B.A. degree from Fordham University, a J.D. degree from New York University School of Law, and an LL.M degree in Corporate Law from New York University's Graduate School of Law.
Kenneth L. Zakin is a Senior Vice President of Lehman Brothers and has held such title since November 1988. He is currently a senior manager in Lehman Brothers' Diversified Asset Group and was formerly group head of the Commercial Property Division of Shearson Lehman Brothers' Direct Investment Management Group responsible for the management and restructuring of limited partnerships owning commercial properties throughout the United States. From January 1985 through November 1988, Mr. Zakin was a Vice President of Shearson Lehman Brothers Inc. Mr. Zakin is a director of Lexington Corporate Properties, Inc. He is a member of the Bar of the State of New York and previously practiced as an attorney in New York City from 1973 to 1984 specializing in the financing, acquisition, disposition, and restructuring of real estate transactions. Mr. Zakin is currently an associate member of the Urban Land Institute and a member of the New York District Council Advisory Services Committee. He r eceived a Juris Doctor degree from St. John's University School of Law in 1973 and a B.A. degree from Syracuse University in 1969.
William Caulfield is a Vice President of Lehman Brothers and is responsible for investment management of commercial real estate in the Diversified Asset Group. Prior to the Shearson/Hutton merger in 1988, Mr. Caulfield was a Senior Analyst with E.F. Hutton since October 1986 in Hutton's Partnership Administration Group. Before joining Hutton, Mr. Caulfield was a Business Systems Analyst at Eaton Corp. from 1985 to 1986. Prior to Eaton, he was an Assistant Treasurer with National Westminster Bank USA. Mr. Caulfield holds a B.S. degree in Finance from St. John's University and an M.B.A. from Long Island University.
Michael Marron is a Vice President of Lehman Brothers and has been a member of the Diversified Asset Group since 1990. Prior to joining Lehman Brothers, Mr. Marron was associated with Peat Marwick Mitchell & Co. serving in both its audit and tax divisions from 1985 to 1989. Mr. Marron received a B.S. degree in accounting from the State University of New York at Albany in 1985 and is a Certified Public Accountant.
HS Advisors III, Ltd.
HS Advisors, a California limited partnership formed on August 11, 1982, the sole general partner of which is Hogan Stanton Investment, Inc. ("HS Inc."), a wholly-owned subsidiary of Goodman Segar Hogan, Inc. The names and ages of, as well as the positions held by, the directors and executive officers of HS Inc. are as set forth below. There are no family relationships between or among any officer and any other officer or director.
Name Age Office Robert M. Stanton 56 Chairman of the Board, Principal Executive Officer Stewart H. Buckle, III 42 President Mark P. Mikuta 37 Treasurer, Secretary
Robert M. Stanton is Chairman and Chief Executive Officer of Goodman Segar Hogan, Inc., a diversified commercial real estate company headquartered in Norfolk, Virginia. Mr. Stanton joined Goodman Segar Hogan in 1966, was named to the company's board of directors in 1972 and was named President and Chief Executive Officer in 1975. Early in 1990, he assumed the position of Chairman and CEO of the company, responsible for managing the brokerage, management and development divisions. Mr. Stanton currently serves as a Trustee of the Urban Land Institute (ULI) and chair of the Commercial and Retail Development Council. He is a past Trustee and State Director of the International Council of Shopping Centers (ICSC). He was chairman of the 1981 edition of The Dollars and Cents of Shopping Centers, published by ULI. He also served on the Board of Editors of the 1979 edition. Mr. Stanton co-authored The Valuation of Shopping Centers, published by the American Institute of Real Estate Appr aisers. Currently, he serves on the advisory board of Norfolk Southern Corporation and on the board of directors of Forward Hampton Roads, the Future of Hampton Roads and Greater Norfolk Corporation. He holds the Certified Property Manager (CPM) designation conferred by the Institute of Real Estate Management, as well as the Certified Shopping Center Manager (CSM) designation conferred by the International Council of Shopping Centers. Mr. Stanton also serves as Chairman of American Storage Properties and as Managing Partner of Bayville Holstein Associates. A graduate of Old Dominion University with a B.A. Degree in Banking and Finance, he served as Rector of the Board of Visitors. Active in civic affairs, Mr. Stanton was named First Citizen of Virginia Beach in 1976.
Stewart H. Buckle, III is President of Goodman Segar Hogan, Inc. He is responsible for the company's finance, asset management and acquisition divisions. Prior to his promotion to President, Mr. Buckle served as the company's Director of Acquisitions and Project Finance. Before joining Goodman Segar Hogan, Inc. in 1986, he was Project Manager for Essex Financial Group in 1985 and Vice President of Elizabeth River Terminals from 1983 to 1985. He had also held the position of Vice President of Lance J. Eller, Inc. and Senior Accountant at Price Waterhouse & Company. Mr. Buckle received his bachelor of science degree in accounting from Virginia Polytechnic Institute and State University in 1974 and his MBA from University of Colorado in 1977. He is a member of the Urban Land Institute and the International Council of Shopping Centers.
Mark P. Mikuta is Chief Financial Officer of Goodman Segar Hogan, Inc. and is Controller of Dominion Capital, Inc., a wholly-owned subsidiary of Dominion Resources. Mr. Mikuta joined Dominion Resources in 1987. Prior to joining Dominion Resources, he was an internal auditor with Virginia Commonwealth University in Richmond, Virginia from 1980 - 1987 and an accountant with Coopers & Lybrand from 1977 - 1980. Mr. Mikuta earned a bachelor of science degree in accounting from the University of Richmond in 1977. He is a Certified Public Accountant (CPA) and Certified Financial Planner (CFP) in the state of Virginia and a member of the American Institute of Certified Public Accountants.
Certain Matters Involving Affiliates On July 31, 1993, Shearson Lehman Brothers Inc. sold certain of its domestic retail brokerage and asset management businesses to Smith Barney, Harris Upham & Co. Incorporated ("Smith Barney"). Subsequent to the sale, Shearson Lehman Brothers Inc. changed its name to Lehman Brothers Inc. The transaction did not affect the ownership of the General Partners. However, the assets acquired by Smith Barney included the name "Hutton." Consequently, Hutton Real Estate Services VII, Inc., a General Partner, changed its name to Real Estate Services VII Inc., and the name of the Partnership is expected to change in the near future to delete any references to "Hutton."
On August 1, 1993, GSH transferred all of its leasing, management and sales operations to Goodman Segar Hogan Hoffler, L.P., a Virginia limited partnership ("GSHH"). On that date, thte leasing, management and sales operations of a portfolio of properties owned by the principals of Armada/Hoffler ("HK") were also obtained by GSHH. The General Partner of GSHH is Goodman Segar Hogan Hoffler, Inc., a Virginia corporation ("GSHH Inc."), which has a one percent interest in GSHH. The stockholders of GSHH Inc. are GSH with a sixty-two percent stock interest and H.K. Associates, L.P., and affiliate of HK, with a thirty-eight percent stock interest. The remaining ninety-nine percentage interests in GSHH are limited partnership interests owned fifty percent by GSH and forty-nine percent by HK. The transaction did not affect the ownership of the general partners.
Item 11.

Item 11. Executive Compensation
Neither of the General Partners nor any of their directors and officers received any compensation from the Registrant. See Item 13. "Certain Relationships and Related Transactions" below with respect to a description of certain transactions of the General Partners and their affiliates with the Registrant.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Beneficial Owners
As of December 31, 1994, no person was known by the Registrant to be the beneficial owner of more than five percent of the Units of the Registrant. Neither of the General Partners of the Registrant, nor any of their directors and officers own any Units.
Changes in Control
The Registrant has been advised by representatives of HS Advisors that the following transactions occurred on October 19, 1992, resulting in an indirect change of control of HS Advisors and, therefore, of the Registrant. Capital stock of Stanton Associates, Inc., a Virginia Corporation ("Stanton"), which indirectly owns 100% of the capital stock of the sole general partner of HS Advisors, was acquired by Dominion Capital, Inc., a Virginia Corporation ("Dominion Capital"). The shares were acquired in connection with a restructuring of indebtedness owed by Stanton to Dominion Capital. On October 19, 1992, Dominion Capital acquired 51,993 shares of common stock of Stanton upon conversion of Series A convertible preferred stock and, thereafter, acquired from Stanton an additional 387,418 shares of common stock of Stanton, resulting in Dominion Capital's owning approximately 83% of the outstanding common stock of Stanton. Since, as a result of these transactions, Dominion Capital has th e indirect power to control HS Advisors, a change of control of the Registrant is deemed to have occurred. The consideration received by Stanton for the issuance of the 387,418 shares consisted of a covenant on the part of Dominion Capital not to sue on an aggregate of $7,473,567.44 owed to Dominion Capital by Stanton provided that certain conditions are met by Stanton. No borrowings were incurred in connection with the transactions.
To the knowledge of the Registrant, there are no arrangements or understandings between Dominion Capital and Stanton with respect to the selection of general partners of the Registrant or other matters regarding the Registrant.
Item 13.

Item 13. Certain Relationships and Related Transactions
Pursuant to the Certificate and Agreement of Limited Partnership of the Registrant, for the year ended December 31, 1994, $3,315 of the Registrant's loss was allocated to the General Partners ($2,210 to RES and $1,105 to HS Advisors). For a description of the share of net cash from operations and the allocation of income and loss to which the General Partners are entitled, reference is made to the material contained on pages 45 through 48 of the Prospectus of Registrant dated December 13, 1983 (the "Prospectus"), contained in Amendment No. 1 to Registrant's Registration Statement No. 2-85936, under the section captioned "Distributions and Allocations," which section is incorporated herein by reference thereto.
Pursuant to Section 12(g) of the Registrant's Certificate and Agreement of Limited Partnership, the General Partners and certain affiliates may be reimbursed by the Registrant for certain costs as described on page 16 of the Prospectus, which description is incorporated herein by reference thereto. TSSG provides partnership accounting and investor relations services for the Registrant. Prior to May 1993, these services were provided by an affiliate of a general partner. The Registrant's transfer agent and certain tax reporting services are provided by Service Data Corporation. Disclosure relating to amounts paid to the General Partners or their affiliates during the past three years is incorporated by reference to Note 6 "Transactions With the General Partners and Affiliates" of Notes to Consolidated Financial Statements contained in the Partnership's Annual Report to Unitholders for the year ended December 31, 1994 filed as an exhibit under Item 14.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
	(a) The following documents are filed as part of this report:
Page Number (1) Financial Statements:
Report of Independent Auditors (1)
Consolidated Balance Sheets - At December 31, 1994 and 1993 (1)
Consolidated Statements of Partners' Capital (Deficit) - For the years ended December 31, 1994, 1993 and 1992 (1)
Consolidated Statements of Operations - For the years ended December 31, 1994, 1993 and 1992 (1)
Consolidated Statements of Cash Flows - For the years ended December 31, 1994, 1993 and 1992 (1)
Notes to the Consolidated Financial Statements (1)
(2) Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(3) See Exhibit Index contained herein.
(1) Incorporated by reference to the Partnership's Annual Report to Unitholders for the year ended December 31, 1994, which is filed as an exhibit under Item 14.
(b) Reports on Form 8-K filed in the fourth quarter of calendar year 1994:
None.
(c) See Exhibit Index contained herein.
(d) See page. EXHIBIT INDEX 	 	Exhibit No.
(4) (A) Certificate and Agreement of Limited Partnership (included as, and incorporated herein by reference to, Exhibit A to the Prospectus of Registrant dated December 13, 1983 (the "Prospectus"), contained in Amendment No. 1 to Registration Statement, No. 2-85936, of the Registrant filed December 13, 1983 (the "Registration Statement")).
(B) First Amendment to Certificate and Agreement of Limited Partnership (included as, and incorporated herein by reference to, Exhibit 4(B) of the Registrant's Annual Report on Form 10-K for the fiscal year ended November 30, 1984 (the "1984 Annual Report")).
(C) Subscription Agreement and Signature Page (included as, and incorporated herein by reference to, Exhibit 3.1 to the 1983 Registration Statement).
(10)(A) Agreements relating to Quorum II Office Building (included as, and incorporated herein by reference to, Exhibit (10)(A) to the 1984 Annual Report).
(B) Agreements relating to Three Financial Centre Office Building (included as, and incorporated herein by reference to, Exhibit (10)(B) to the 1984 Annual Report).
(C) Agreements relating to Fort Lauderdale Commerce Center (included as, and incorporated herein by reference to, Exhibit (10)(C) to the 1984 Annual Report).
(D) Agreements relating to Metro Park Executive Center (included as, and incorporated herein by reference to, Exhibit (10)(D) to the 1984 Annual Report).
(13) Annual report to the Unitholders for the year ended December 31, 1994.
(23) Consent of Independent Auditors
(28) Portions of Prospectus of Registrant dated December 13, 1983.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 29, 1995
HUTTON/GSH COMMERCIAL PROPERTIES 3
BY: HS Advisors III, Ltd. General Partner
Hogan Stanton Investment, Inc. General Partner
BY: /s/Robert M. Stanton Name: Robert M. Stanton Title: Chairman of the Board
BY: Real Estate Services VII, Inc. General Partner
BY: /s/Rocco F. Andriola Name: Rocco F. Andriola Title: Director, President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capabilities and on the dates indicated.
REAL ESTATE SERVICES VII, INC. A General Partner
Date: March 29, 1995
BY: /s/Rocco F. Andriola Rocco F. Andriola Director, President and Chief Financial Officer
Date: March 29, 1995 BY: /s/William Caulfield William Caulfield Vice President
Date: March 29, 1995 BY: /s/Kenneth L. Zakin Kenneth L. Zakin Vice President and Director
Date: March 29, 1995 BY: /s/Michael T. Marron Michael T. Marron Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capabilities and on the dates indicated.
HS ADVISORS III, LTD. A General Partner
Date: March 29, 1995 BY: /s/Robert M. Stanton Robert M. Stanton Chairman of the Board of Hogan Stanton Investment, Inc., as general partner of HS Advisors III, Ltd.
Date: March 29, 1995 BY: /s/Stewart H. Buckle, III Stewart H.Buckle, III President, Asst. Treasurer and Asst. Secretary of Hogan Stanton Investment, Inc., as general partner of HS Advisors III, Ltd.
Date: March 29, 1995 BY: /s/Mark P. Mikuta Mark P. Mikuta Treasurer and Secretary of Hogan Stanton Investment, Inc., as general partner of HS Advisors III, Ltd.
HUTTON/GSH COMMERCIAL PROPERTIES 3 Schedule 3 - Real Estate and Accumulated Depreciation
December 31, 1994
Cost Capitalized Subsequent Initial Cost to Partnership To Acquisition
Buildings Buildings and Description Encumbrances Land Improvements Improvements
Commercial Property:
Consolidated Ventures: Partnership Owned:
Ft. Lauderdale Commerce Center Ft. Lauderdale, FL $ - $2,741,551 $10,102,018 $2,648,957
Consolidated Ventures:
Metro Park Executive Center Ft. Myers, FL - 548,643 4,587,861 697,443 Three Financial Center Little Rock, AK - 1,018,332 9,433,673 909,216 Quorum II Office Building Dallas, TX - 2,113,775 10,881,609 504,154
$ $6,422,301 $35,005,161 $4,759,770
HUTTON/GSH COMMERCIAL PROPERTIES 3 Schedule 3 - Real Estate and Accumulated Depreciation
December 31, 1994
Gross Amount at Which Carried at Close of Period
Buildings and Accumulated Description Land Improvements Total(2) Depreciation(1)
Commercial Property:
Consolidated Ventures: Partnership Owned:
Ft. Lauderdale Commerce Center Ft. Lauderdale, FL $2,741,551 $12,750,975 $15,492,526 $5,222,281
Consolidated Ventures:
Metro Park Executive Center Ft. Myers, Fl 548,643 5,285,304 5,833,947 2,162,124 Three Financial Center Little Rock, AK 1,018,332 10,342,889 11,361,221 4,295,601 Quorum II Office Building Dallas, TX 2,113,775 11,385,763 13,499,538 4,433,290
$6,422,301 $39,764,931 $46,187,232 $16,113,296
HUTTON/GSH COMMERCIAL PROPERTIES 3 Schedule 3 - Real Estate and Accumulated Depreciation
December 31, 1994
Life on which Depreciation in Latest Date of Date Income Statements Description Construction Acquired is Computed
Commercial Property:
Consolidated Venture: Partnership Owned:
Ft. Lauderdale Commerce Center Ft. Lauderdale, FL 1985 04/18/85 25 years
Consolidated Ventures:
Metro Park Executive Center Ft. Myers, FL 1984 01/07/85 25 years Three Financial Center Little Rock, AK 1984 01/22/85 25 years Quorum II Office Building	 Dallas, TX 1985 06/12/85 25 years
(1) For Federal income tax purposes, the amount of accumulated depreciation is $21,322,696.
(2) For Federal income tax purposes, the basis of land, building and improvements is $46,965,336.
A reconciliation of the carrying amount of real estate and accumulated depreciation for the years ended December 31, 1994, 1993 and 1992:
Real Estate investments: 1994 1993 1992
Beginning of year $45,533,902 $46,247,218 $45,740,585 Additions 654,844 646,560 956,285 Basis adjustment (1,514) (1,359,876) (449,652)
End of year $46,187,232 $45,533,902 $46,247,218
Accumulated Depreciation:
Beginning of year $13,941,302 $12,840,967 $11,121,026 Depreciation expense 2,173,508 2,460,211 2,169,593 Deletions (1,514) (1,359,876) (449,652)
End of year $16,113,296 $13,941,302 $12,840,967
Exhibit 13
1994 Annual Report to Unitholders
Hutton/GSH Commercial Properties 3 is a limited partnership formed in 1984 to acquire, operate and hold for investment commercial real estate properties. The Partnership's investments are comprised of three office buildings located in Dallas, Texas, Little Rock, Arkansas, and Fort Myers, Florida, and a combined office/warehouse and office/showroom property located in Fort Lauderdale, Florida. Provided below is a comparison of lease levels at the properties as of December 31, 1994 and 1993.
Percentage Leased Property Location 1994 1993
Metro Park Executive Center Fort Myers, FL 91% 85% Fort Lauderdale Commerce Center Fort Lauderdale, FL 82% 78% Three Financial Centre Little Rock, AR 93% 84% Quorum II Office Building Dallas, TX 90% 99%
	Administrative Inquiries	Performance Inquiries/Form 10-Ks 	Address Changes/Transfers	The Shareholder Services Group 	Service Data Corporation	P.O. Box 1527 2424 South 130th Circle Boston, Massachusetts 02104-1527 Omaha, Nebraska 68144 Attn: Financial Communications (800) 223-3464 (800) 223-3464
Contents
1 Message to Investors
3 Property Profiles & Leasing Update
5 Financial Highlights
6 Consolidated Financial Statements
9 Notes to the Consolidated Financial Statements
13 Report of Independent Auditors
14 Net Asset Valuation
MESSAGE TO INVESTORS Presented for your review is the 1994 Annual Report for Hutton/GSH Commercial Properties 3 (the "Partnership"). The General Partners made significant leasing progress during 1994 as operating conditions in the markets in which several of the Partnership's properties are located began to show signs of improvement. At Fort Lauderdale Commerce Center, we executed four new leases, increasing occupancy to 82% by year-end 1994 from 78% a year earlier. Additionally, we were able to increase occupancy at Metro Park Executive Center and Three Financial Centre to 91% and 93%, respectively, at December 31, 1994 from 85% and 84%, respectively, a year earlier. Details regarding our leasing progress at each of the Partnership's properties is provided in the Property Profiles & Leasing Update beginning on page 3.
Cash Distributions For the year ended December 31, 1994, the Partnership paid cash distributions to the Limited Partners totaling $5.50 per Unit. Included in this total was a fourth quarter cash distribution of $2.50 per Unit which was paid on February 15, 1995. Since inception, Limited Partners have received distributions totaling $125.76 per Unit including return of capital payments in the amount of $16.00 per Unit which reduced each Limited Partner's Unit size from $500 to $484. Due to the increase in occupancy at the Partnership's properties the corresponding increase in rental income, and the completion of tenant and capital improvements, the General Partners were able to increase the quarterly cash distribution rate in the fourth quarter of 1994 from its previous level of $1.00 per Unit to $2.50 per Unit.
The timing and amount of future distributions will depend on several factors, including the adequacy of rental income generated by current leases and Partnership cash flow. As discussed in the Property Profiles and Leasing Update section of this report, a significant number of leases will be expiring in 1995. Accordingly, the General Partners will closely monitor the Partnership's cash needs and, if necessary, will adjust future distribution levels to ensure that adequate reserves are available to fund leasing costs or other Partnership obligations. Information regarding cash distributions paid over the past two years is provided below.
CASH DISTRIBUTIONS PER LIMITED PARTNERSHIP UNIT
First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ------ 1993 $1.00 $1.00 $1.00 $1.00 $4.00 1994 $1.00 $1.00 $1.00 $2.50 $5.50
Market Overview The real estate industry, in general, continued its slow recovery during 1994. The apartment complex and warehouse and distribution sectors exhibited the strongest performance, and certain types of commercial office properties began to show signs of improvement. Specifically, the suburban office market has experienced declining vacancies and little new development. While the downtown office market continues to lag in the recovery, rental concessions have diminished and rental rates have stabilized. As a result of these conditions, the national vacancy rate for commercial office space declined to approximately 16% as of the fourth quarter of 1994, down from approximately 19% in the fourth quarter of 1993. The ongoing recovery of this market, however, is expected to be gradual, as technological advancements have made it easier and more efficient for traditional users of office space to work from home or satellite locations. As a result of this trend and continued corporate layoffs in many markets, a meaningful recovery in the value of office buildings, except for certain select markets, is not anticipated in the immediate future.
The financing environment for commercial real estate also began to show signs of improvement during 1994. According to National Investor Survey, a CB Commercial publication, there are new sources of capital from commercial securitization and mortgage conduits. Additionally, Emerging Trends in Real Estate indicated that traditional sources of capital such as pension funds, banks and, to a lesser degree, insurance companies, are showing renewed interest in commercial real estate investment. It is important to note, however, that lenders are extremely selective in choosing their real estate investments, and there remains a gap between supply and demand for funds, particularly with respect to the office sector. As a result, it is difficult for many potential buyers of commercial office space to obtain adequate financing, and sales opportunities remain limited.
Summary While we are pleased with the improved performance of the Partnership's properties, 1995 is expected to be a challenging year as a significant number of leases are scheduled to expire at Three Financial Centre, Quorum II Office Building and Metro Park Executive Center. We have contacted several tenants whose leases are expiring and will approach the balance throughout 1995, however, there can be no assurance that renewals will be executed. Additionally, we will focus on efficient and responsive management to attract and retain tenants, and enhance our ability to ultimately sell the properties. As discussed above, the real estate market is generally not currently conducive to the sale of office property, as real estate asset values remain depressed, and capital markets restricted. However, it is the General Partners' objective that, as market conditions gradually improve, the properties will be well positioned in their respective markets to take advantage of any favorable sales oppo rtunities which may arise. We will update you with respect to these efforts in future investor reports.
Very truly yours,
Real Estate Services VII, Inc. Hogan Stanton Investment, Inc. General Partner General Partner of HS Advisors III, Ltd.
/s/Kenneth L. Zakin /s/Robert M. Stanton
Kenneth L. Zakin Robert M. Stanton Vice President Chairman
March 31, 1995
PROPERTY PROFILES AND LEASING UPDATE METRO PARK EXECUTIVE CENTER Fort Myers, Florida Metro Park Executive Center contains 60,597 square feet of commercial office space. The property is one of five class "A" commercial office buildings located in a suburban office park just east of the Fort Myers central business district in the Edison Central submarket.
Leasing Update - During 1994, we executed two new leases totaling 3,044 square feet, two lease renewals totaling 1,681 square feet, and three lease expansions. As a result, the property was 91% leased at December 31, 1994 compared to 85% leased a year earlier. None of the property's tenants generated rental income in excess of 10% of the Partnership's consolidated rental income. Four leases representing 14,387 square feet or approximately 24% of the property's leasable area are scheduled to expire in 1995 and two tenants leasing 3,470 square feet continue to pay rent on a month to month basis. These tenants have been contacted by the General Partners to discuss the renewal of their leases, however, it is uncertain whether they will renew.
Fort Myers Market Update - Although operating conditions improved somewhat in the Fort Myers office market during 1994, the leasing environment remained competitive. As of the fourth quarter of 1994, the vacancy rate for commercial office space in Fort Myers increased to approximately 18%, from 15% a year earlier. However, the vacancy rate for the Edison Central submarket improved significantly to approximately 15% as of the fourth quarter of 1994, down from 21.2% a year earlier as the area attracted new business, primarily in the financial services industry. Nevertheless, leasing conditions are expected to remain competitive throughout 1995.
FORT LAUDERDALE COMMERCE CENTER Fort Lauderdale, Florida Fort Lauderdale Commerce Center is located in a planned business and industrial park in the Cypress Creek submarket of Fort Lauderdale in Broward County, Florida. The property contains 186,936 square feet and consists of six office/showroom and office/warehouse buildings.
Leasing Update - We are pleased to report the execution of four new leases totaling 22,509 square feet, including a three-year lease for 8,000 square feet. Additionally, a tenant whose lease was originally scheduled to expire in May 1995, executed an early renewal and expanded its leasable space from 4,000 square feet to 10,000 square feet. The new lease is scheduled to expire in 2000. The property was 82% leased as of year-end 1994, compared to 78% as of year-end 1993. None of the property's tenants accounted for 10% or more of the Partnership's consolidated rental income. Three leases representing 12,195 square feet are scheduled to expire in 1995 and four leases representing 10,893 square feet continue on a month to month basis while their lease renewals are being negotiated.
Fort Lauderdale Market Update - The Broward County office market improved somewhat during 1994 as demand for space increased. As of the third quarter of 1994, the vacancy rate for office/service space and distribution space in the Cypress Creek submarket, where the property is located, decreased significantly to 15.5% and 10.4%, respectively, from 23.9% and 11.1%, respectively, a year earlier. Additionally, improved conditions allowed commercial property owners, in general, to cease offering rental concessions and in some cases to increase rental rates, particularly in the warehouse/distribution sector which experienced a 33% increase in rental rates in 1994. Despite this improvement, the leasing environment remains competitive.
THREE FINANCIAL CENTRE Little Rock, Arkansas Situated in the Financial Centre Complex located in west Little Rock, Three Financial Centre is a 123,123 square foot, eight-story brick office building. The property affords easy access to downtown Little Rock and the Little Rock Regional Airport, and is located near two interstate highways, I-630 and I-430. Several restaurants, hotels, hospitals and a country club are within the immediate vicinity.
Leasing Update - The General Partners executed three new leases, totalling 5,914 square feet, and two lease renewals in 1994. One tenant executed two lease expansions during 1994 and now leases 18,498 square feet or approximately 15% of the property's leasable space pursuant to leases scheduled to expire in April 1998. As a result, the property was 93% leased as of December 31, 1994 compared to 84% leased a year earlier. No tenant accounted for 10% or more of the Partnership's consolidated rental income. Approximately eight leases representing over 45,000 square feet, or 39% of the property's space, will expire in 1995. Many of these tenants have been contacted to discuss the renewal of their lease, however, there can be no assurance that any renewals will be executed.
Little Rock Market Update - The Little Rock office market improved somewhat in 1994 as a lack of new construction, combined with an increase in business activity, narrowed the gap between supply and demand for office space. Although the overall vacancy rate for office property remained largely unchanged from 1993, at approximately 10%, average rental rates increased by approximately 3% during the year including the suburban submarket where the property is located. Vacancy rates in the suburban office market remained at approximately 7%, unchanged from 1993.
QUORUM II OFFICE BUILDING Dallas, Texas Quorum II Office Building contains 84,094 square feet of commercial office space and is located within the Quorum/North Tollway sector of northwestern Dallas. This area is within close proximity to Loop 635, Dallas Parkway, the Dallas North Tollway and Inwood Road, providing easy access to downtown Dallas.
Leasing Update - As previously reported, during the first quarter of 1994, a tenant which leased 30,158 square feet downsized to 9,761 square feet. The General Partners executed three new leases representing 14,955 square feet and two lease renewals representing 17,439 square feet. As a result, the property was 90% leased at December 31, 1994 compared to 99% leased at December 31, 1993. Five leases totaling 26,401 square feet or approximately 31% of the property's leasable space are scheduled to expire in 1995. These tenants have been contacted by the General Partners to discuss the renewal of their leases, however, it is uncertain whether they will renew. No tenant accounted for 10% or more of the Partnership's consolidated rental income.
Dallas Market Update - The Dallas office market improved in 1994 as the area led the country in job growth and benefitted from a lack of new office construction. As a result, the overall vacancy rate in Dallas declined slightly to 18.0% as of mid-year 1994, from 18.5% at year-end 1993. The primary beneficiaries of Dallas' improving conditions were those submarkets which contain a greater concentration of high-quality office properties such as the LBJ Freeway submarket where the property is located. The vacancy rate for office space within this submarket declined to approximately 16% at mid-year 1994, from 21% a year earlier. With the increase in demand for office space, the use of rental concessions to attract prospective tenants has diminished. Despite this improvement, the area has not yet experienced any meaningful increase in rental rates and property values remain depressed.
FINANCIAL HIGHLIGHTS For the years ended December 31, (dollars in thousands, except for per Unit data)
1994 1993 1992 1991 1990
Total income $ 4,691 $ 4,211 $ 4,034 $ 3,981 $ 3,750 Net loss (332) (910) (712) (766) (683) Total assets 32,837 33,454 35,220 37,448 40,490 Net cash from operations 1,859 1,536 1,592 1,221 1,265 Net loss per Limited Partnership Unit (3.00) (8.24) (6.45) (6.94) (6.18) Cash distributions per Limited Partnership Unit(1) 5.50 4.00 14.00 14.00 14.00(2)
(1) Cash distributions are paid approximately 45 days following the quarter for which they are declared. (2) Includes $3.00 special distribution resulting from improved property operations in 1990.
The above selected financial data should be read in conjunction with the financial statements and related notes included in this report.
* Total income increased 11% in 1994 primarily as a result of higher occupancy at three of the Partnership's properties.
* Net loss was lower in 1994 as a result of increased rental income and lower depreciation and amortization expense. Operating expenses during 1994 were largely unchanged from a year earlier. Depreciation and amortization expense declined as a result of a lower depreciable asset base in 1994, compared with 1993.
Consolidated Balance Sheets December 31, 1994 and 1993
Assets 1994 1993
Real estate investments, at cost: Land $ 6,422,301 $ 6,422,301 Buildings and improvements 39,764,931 39,111,601
46,187,232 45,533,902 Less accumulated depreciation (16,113,296) (13,941,302)
30,073,936 31,592,600
Cash and cash equivalents 1,637,501 734,361 Restricted cash 216,079 212,154
1,853,580 946,515
Accounts and rent receivable, net of allowance for doubtful accounts of $14,557 in 1994 28,326 141,297 Deferred rent receivable 235,246 98,373 Notes receivable, net of allowance for doubtful accounts of $14,427 in 1993 - 51,403 Prepaid expenses and other assets, net of accumulated amortization of $718,547 in 1994 and $503,130 in 1993 645,993 624,200
Total Assets $ 32,837,081 $33,454,388
Liabilities and Partners' Capital
Liabilities: Accounts payable and accrued expenses $ 426,642 $ 381,463 Due to affiliates 50,702 32,256 Distributions payable 281,902 112,761 Security deposits 204,465 187,230
Total Liabilities 963,711 713,710
Minority Interest 171,315 86,904
Partners' Capital (Deficit): General Partners (321,732) (299,811) Limited Partners 32,023,787 32,953,585
Total Partners' Capital 31,702,055 32,653,774
Total Liabilities and Partners' Capital $32,837,081 $33,454,388
Consolidated Statements of Partners' Capital (Deficit) For the years ended December 31, 1994, 1993 and 1992
General Limited Total Partners' Partners' Partners'
Balance at December 31, 1991 $(222,695) $36,528,473 $36,305,778 Net loss (7,122) (705,114) (712,236) Distributions (47,360) (1,531,292) (1,578,652)
Balance at December 31, 1992 (277,177) 34,292,067 34,014,890 Net loss (9,101) (900,970) (910,071) Distributions (13,533) (437,512) (451,045)
Balance at December 31, 1993 (299,811) 32,953,585 32,653,774 Net loss (3,315) (328,219) (331,534) Distributions (18,606) (601,579) (620,185)
Balance at December 31, 1994 $(321,732) $32,023,787 $31,702,055
Consolidated Statements of Operations For the years ended December 31, 1994, 1993 and 1992
Income 1994 1993 1992
Rent $4,641,823 $4,181,367 $3,986,736 Interest 49,446 29,571 47,044
Total Income 4,691,269 4,210,938 4,033,780
Expenses
Property operating 2,231,683 2,114,664 2,103,000 Depreciation and amortization 2,388,925 2,680,516 2,357,140 General and administrative 240,074 224,498 263,400 Bad debt 77,710 14,427 22,476
Total Expenses 4,938,392 5,034,105 4,746,016
Net loss before minority interest (247,123) (823,167) (712,236)
Minority interest (84,411) (86,904) -
Net Loss $ (331,534) $ (910,071) $ (712,236)
Net Loss Allocated:
To the General Partners $ (3,315) $ (9,101) $ (7,122) To the Limited Partners (328,219) (900,970) (705,114)
$ (331,534) $ (910,071) $ (712,236)
Per limited partnership unit (109,378 outstanding) $ (3.00) $ (8.24) $ (6.45)
Consolidated Statements of Cash Flows For the years ended December 31, 1994, 1993 and 1992
Cash Flows from Operating Activities: 1994 1993 1992
Net loss $ (331,534) $ (910,071) $ (712,236) Adjustments to reconcile net loss to net cash provided by operating activities: Minority Interest 84,411 86,904 - Depreciation and amortization 2,388,925 2,680,516 2,357,140 Increase (decrease) in cash arising from changes in operating assets and liabilities: Restricted cash (3,925) (6,039) (30,411) Accounts and rent receivable, net 112,971 9,248 63,500 Deferred rent receivable (136,873) 34,755 127,876 Notes receivable 51,403 58,519 49,488 Prepaid expenses (237,210) (207,489) (326,964) Accounts payable and accrued expenses (105,068) (218,713) 42,705 Due to affiliates 18,446 4,234 (4,633) Security deposits 17,235 4,630 25,442
Net cash provided by operating activities 1,858,781 1,536,494 1,591,907
Cash Flows from Investing Activities:
Additions to real estate assets (504,597) (646,560) (956,285)
Net cash used for investing activities (504,597) (646,560) (956,285)
Cash Flows from Financing Activities:
Cash distributions (451,044) (732,947) (1,578,652)
Net cash used for financing activities (451,044) (732,947) (1,578,652)
Net increase/(decrease) in cash and cash equivalents 903,140 156,987 (943,030) Cash and cash equivalents at beginning of year 734,361 577,374 1,520,404
Cash and cash equivalents at end of year $1,637,501 $ 734,361 $ 577,374
Supplemental Schedule of Non-Cash Investing Activity:
Additions to real estate assets capitalized but unpaid at end of period $ 150,247 $ - $ -
Notes to the Consolidated Financial Statements December 31, 1994, 1993 and 1992
1. Organization Hutton/GSH Commercial Properties 3 (the "Partnership") was organized as a limited partnership under the laws of the State of Virginia pursuant to a Certificate and Agreement of Limited Partnership dated and filed April 19, 1984 (the "Partnership Agreement"). The Partnership was formed for the purpose of acquiring and operating certain types of commercial real estate. The General Partners of the Partnership are Real Estate Services VII, Inc. ("Real Estate Services"), formerly Hutton Real Estate Services VII, Inc. , which is an affiliate of Lehman Brothers Inc. ("Lehman Brothers") and HS Advisors III, Ltd. ("HS Advisors"), which is an affiliate of Goodman Segar Hogan, Inc. The Partnership will continue until December 31, 2010, unless terminated sooner in accordance with the terms of the Partnership Agreement.
On July 31, 1993, Shearson Lehman Brothers Inc. sold certain of its domestic retail brokerage and asset management businesses to Smith Barney, Harris Upham & Co. incorporated ("Smith Barney"). Subsequent to the sale, Shearson Lehman Brothers Inc. changed its name to Lehman Brothers Inc. ("Lehman Brothers"). The transaction did not affect the ownership of the General Partners. However, the assets acquired by Smith Barney included the name "Hutton." Consequently, effective October 22, 1993, the Hutton Real Estate Services VII, Inc. General Partner changed its name to delete any reference to Hutton.
2. Significant Accounting Policies
Consolidation - The consolidated financial statements include the accounts of the Partnership and its ventures, Metro Park Associates Joint Venture ("Metro Park"), Three Financial Centre Joint Venture ("Three Financial Centre"), and 14850 Quorum Associates, Ltd. ("Quorum"). Intercompany accounts and transactions between the Partnership and the ventures are eliminated in consolidation.
Real Estate Investments - Real estate investments, which consist of commercial buildings (the "Properties"), are recorded at cost, which includes the initial purchase price of the property plus closing costs, acquisition and legal fees and other miscellaneous acquisition costs.
Depreciation is computed using the straight-line method based upon the estimated useful lives of 3 to 25 years except for tenant improvements which are depreciated over the terms of the respective leases.
Leases are accounted for as operating leases. Leasing commissions generally are amortized over the terms of the respective leases.
Deferred rent receivable - Deferred rent receivable consists of rental income which is recognized on a straight-line basis over the terms of the respective leases even though rent is not received until later periods as a result of rental escalations.
Cash Equivalents - Cash equivalents consist of short-term highly liquid investments which have maturities of three months or less from the date of purchase.
Restricted Cash - Restricted cash consists of amounts held for security deposits.
Income Taxes - No provision for income taxes has been made in the financial statements of the Partnership since such taxes are the responsibility of the individual partners rather than of the Partnership.
Reclassification - Certain balances in the 1993 financial statements have been reclassified to conform to the 1994 presentation.
3. Partnership Agreement The Partnership agreement provides that net cash from operations, as defined, for each fiscal year will be distributed on a quarterly basis as follows: 97% to the Limited Partners and 3% to the General Partners until each Limited Partner has received a 9% annual noncumulative return on his adjusted capital investment, as defined. The net cash from operations will then be distributed to the General Partners until the General Partners have received 10% of the aggregate net cash from operations distributed to all partners. The balance of net cash from operations, if any, will then be distributed 90% to the Limited Partners and 10% to the General Partners.
Net proceeds from sales or refinancings shall be distributed as follows: 99% to the Limited Partners and 1% to the General Partners until each Limited Partner has received an amount equal to his adjusted capital investment, as defined, and a 10% cumulative annual return thereon, reduced by any net cash from operations actually distributed to such Limited Partner. The balance of net proceeds, if any, will then be distributed 85% to the Limited Partners and 15% to the General Partners.
Losses and all depreciation for any fiscal year shall be allocated 99% to the Limited Partners and 1% to the General Partners. Income for each fiscal year and all gain from sales will be allocated in substantially the same manner as net cash from operations.
If income exceeds the amount of net cash from operations distributable to the Partners for any fiscal year, the excess will be allocated (1) 100% to the General Partners in an amount equal to the excess, if any, of General Partners' deficit in their capital accounts, over an amount equal to 1% of the total capital contributions to the Partnership as reduced by the amount of the General Partners' capital contributions and (2) 99% to the Limited Partners and 1% to the General Partners.
Upon the dissolution of the Partnership, the General Partners shall contribute to the capital of the Partnership, an amount not to exceed 1% of the total capital contributions made by all the Partners, less any prior capital contributions made by the General Partners. In no event shall the General Partners be obligated to contribute an amount in excess of any negative balance in their respective capital accounts.
If as a result of the dissolution of the Partnership, the sum of the Limited Partners' capital contribution plus an amount equal to a 6% cumulative annual return on each Limited Partner's adjusted capital value less any distributions made to each Limited Partner from net cash flow from operations, exceeds total distributions to the Limited Partners of net proceeds from a sale or refinancing, the General Partners will contribute to the Partnership for distribution to the Limited Partners an amount equal to the lesser of such excess or the aggregate distribution of net proceeds from a sale or refinancing distributed to the General Partners.
4. Real Estate Investments Since inception, the Partnership has acquired, directly or indirectly, the following three commercial office buildings and an office and light industrial complex. The purchase price amounts exclude acquisition fees and other closing costs.
Net Leasable Square Date Type of Purchase Property Name Feet Location Acquired Ownership Price
Metro Park Fort Myers, Joint Executive Center 60,597 Florida 1/17/85 Venture $ 5,136,504
Three Financial Little Rock, Joint Centre 123,123 Arkansas 1/22/85 Venture $10,452,005
Fort Lauderdale Fort Lauderdale, Fee Commerce Center 186,936 Florida 4/18/85 Simple $12,843,569
Quorum II Dallas, Office Building 84,094 Texas 6/12/85 (A) $12,995,384
(A) The Partnership is the General Partner in a Limited Partnership.
The Joint Venture and Limited Partnership agreements substantially provide that:
i. Net cash from operations will be distributed 100% to the Partnership until it has received an annual, noncumulative return on its adjusted capital balance, as defined, of 10.5% for Three Financial Centre, 12% for Metro Park, and 10% for Quorum. With regard to Three Financial Centre, net cash from operations will then be distributed 100% to the co-venturer until it has received an annual amount of $115,000. Thereafter, any remaining net cash from operations will be distributed 80% to the Partnership and 20% to the respective co-venturers.
ii. Net proceeds from a sale or other refinancing of the properties will be distributed 100% to the Partnership until it has received 115% of its capital contribution and a cumulative return of 10.5% for Three Financial Centre, 12% for Metro Park, and 10% for Quorum on its adjusted capital investment, as defined. With regard to Three Financial Centre, net proceeds will then be distributed 100% to the co-venturer until it has received $1,100,000. Thereafter, any remaining net proceeds will be distributed ranging from 75% to 80% to the Partnership and the balance to the respective co-venturers.
iii. Income will be allocated in substantially the same manner as net cash from operations. For Three Financial Centre and Metro Park, net income in excess of net cash from operations distributed in such year shall be allocated 80% to the Partnership and 20% to the co-venturers. Losses and all depreciation will generally be allocated 100% to the Partnership.
5. Reconciliation of Net Loss to Tax Loss The tax loss reported to the partners for the years ended December 31, 1994 and 1992, exceeded the net loss reported in the financial statements by $215,496 and $74,715, respectively. The net loss reported in the financial statements for the year ended December 31, 1993, exceeded the tax loss reported to the partners by $153,541. These variances are due to differences in the tax basis versus the financial statement basis of the buildings and improvements and different methods of recording depreciation expense. The Partnership uses accelerated methods for depreciating real estate for tax purposes and the straight-line method for financial statement purposes. In addition, rental income is recognized when received or receivable for tax purposes and on a straight-line basis for financial statement purposes.
6. Transactions with General Partners and Affiliates The following is a summary of the amounts earned by the General Partners and their affiliates during the years ended December 31, 1994, 1993 and 1992:
Unpaid at December 31, Earned 1994 1994 1993 1992
Real Estate Services and affiliates $ 43,135 $ 96,376 $ 61,112 $ 59,084
HS Advisors and affiliates 7,567 37,566 31,871 36,345
Administrative salaries and expenses $ 50,702 $133,942 $ 92,983 $ 95,429
The above amounts have been included in general and administrative expenses.
7. Rental Income Under Operating Leases Future minimum rental income to be received on noncancellable operating leases as of December 31, 1994 is as follows:
1995 $ 3,376,884 1996 2,681,365 1997 1,668,440 1998 871,145 1999 290,537 Thereafter 570,867
$ 9,459,238
Generally, leases are for terms of 2 to 10 years and contain renewal options. The leases allow for increases in certain property operating costs to be passed on to the tenants.
REPORT OF INDEPENDENT AUDITORS
The Partners Hutton/GSH Commercial Properties 3 and Consolidated Ventures
We have audited the accompanying consolidated balance sheets of Hutton/GSH Commercial Properties 3 and Consolidated Ventures as of December 31, 1994 and 1993, and the related consolidated statements of operations, partners' capital (deficit), and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respect, the consolidated financial position of Hutton/GSH Commercial Properties 3 and Consolidated Ventures at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts February 6, 1995
Comparison of Acquisition Costs to Appraised Value and Determination of Net Asset Value Per $484 Unit at December 31, 1994 (Unaudited)
Acquisition Appraised Property Date of Acquisition Cost (1) Value (2)
Metro Park Executive Center 01-17-85 $ 5,543,159 $ 3,500,000 Three Financial Centre 01-22-85 11,378,512 10,850,000 Fort Lauderdale Commerce Center 04-18-85 14,125,050 9,475,000 Quorum Building II 06-12-85 13,939,093 5,500,000
$44,985,814 $29,325,000
Cash and cash equivalents 1,637,501 Accounts receivable and Prepaid expenses 28,326
30,990,827 Less: Accounts payable and accrued expenses (426,642) Due to affiliates (50,702) Distribution payable (281,902) Minority Interest (171,315)
Partnership Net Asset Value (3) $30,060,266
Net Asset Value Allocated: Limited Partners $29,759,663 General Partners 300,603
$30,060,266
Net Asset Value Per Unit (109,378 units outstanding) $272.08
(1) The acquisition cost of each property is comprised of fundings made through December 31, 1994, the acquisition fee paid to the General Partners and an amount estimated to fund the completion of tenant improvements.
(2) This represents the Partnership's share of the December 31, 1994 Appraised Values which were determined by an independent property appraisal firm. The Partnership's share of the December 31, 1994 Appraised Values takes into account the allocation provisions of the Joint Venture and Limited Partnership Agreements governing the distribution of sales proceeds for each of the above properties.
(3) The Net Asset Value assumes a hypothetical sale at December 31, 1994 of all Partnership properties at their appraised values and the distribution of the proceeds of such sales, together with the Partnership's cash and the proceeds from temporary investments, to the Partners. Real estate brokerage commissions payable to the General Partners or others are not determinable at this time and have not been included in the determination. Since the Partnership would incur real estate brokerage commissions and other selling expenses in connection with the sale of its properties and other assets, cash available for distribution to the Partners would be less than the appraised Net Asset Value.
Limited Partners should note that appraisals are only estimates of current value and actual values realizable upon sale may be significantly different. A significant factor in establishing an appraised value is the actual selling price for properties which the appraiser believes are comparable. Further, the appraised value does not reflect the actual costs which would be incurred in selling the property. As a result of these factors and the illiquid nature of an investment in Units of the Partnership, the variation between the appraised value of the Partnership's properties and the price at which Units of the Partnership could be sold is likely to be significant. Fiduciaries of Limited Partners which are subject to ERISA or other provisions of law requiring valuation of Units should consider all relevant factors, including, but not limited to Net Asset Value per Unit, in determining the fair market value of the investment in the Partnership for such purposes.
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CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K) of Hutton/GSH Commercial Properties 3 of our report dated February 6, 1995, included in the 1994 Annual Report to Shareholders of Hutton/GSH Commercial Properties 3 and Consolidated Ventures.
Our audit also included the financial statement schedule of Hutton/GSH Commercial Properties 3 and Consolidated Ventures listed in Item 14(a). This schedule is the responsibility of the Partnership's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Boston, Massachusetts February 6, 1995