WAREHOUSE FACILITY IN AZUSA, CALIFORNIA This facility consists of three one-story warehouse buildings in Azusa, California, approximately 20 miles east of downtown Los Angeles. The buildings were constructed in 1986. They contain approximately 432,000 rentable square feet which were 100% leased to four tenants at December 31, 1994.
OFFICE FACILITY IN LISLE, ILLINOIS The property is a four-story office building on 5.6 acres of land. It was constructed in 1985 and contains approximately 102,000 square feet of leasable space. R.R. Donnelley & Sons Company currently leases the entire building under a renewable lease expiring in 1997. The facility is located at 750 Warrenville Road in the Corporetum Office Park in Lisle, Illinois. Corporetum Office Park is a 75 acre planned office development located 25 miles west of downtown Chicago.
Land under the leasehold estate was capitalized upon the assignment of a ground lease from the previous owner. The lease term extends until November 2078 with no renewal options. The annual ground lease payments are $250,000 through November 1994, and, for each ten year increment thereafter, are subject to increase by 50% of the increase in the Consumer Price Index during the previous period. For 1995, the annual ground lease payment will increase $126,450 to $376,450. The ground lease agreement contains a purchase option from November 1994 to November 1997 at a fixed price of $4,000,000.
The Partnership has established a $10 million annually renewable unsecured revolving line of credit with First Fidelity Bank National Association to be drawn upon as needed for potential liquidity needs. As of December 31, 1994, no drawdowns had occurred. Management does not anticipate the need to draw upon this resource in the near future. In addition, The Prudential has also committed to fund up to $100 million to enable the Partnership to acquire real estate investments. Contributions to the Partnership under this commitment are utilized for property acquisitions and returned to The Prudential on an ongoing basis from Contract owners' net contributions. The amount of the commitment is reduced by $10 million for every $100 million in current value net assets of the Partnership. The amount available for future investments is approximately $51.6 million as of December 31, 1994.
The Partnership's two mortgage loans receivable matured in May 1994. The mortgagor on the Lincoln, NE loan paid the full amount due of $3,513,704. As previously reported, the mortgagor on the Flint, MI loan notified the Partnership that it would not make any of the payments due in 1994 on the loan. These payments totalled $8,094,271 including principal and interest. On July 1, 1994, the Partnership foreclosed on the property under a voluntary conveyance from the mortgagor. The Partnership took title to the property on January 3, 1995 upon expiration of the redemption period. Upon foreclosure,
During 1994, the Partnership expended approximately $1,173,000 in capital expenditures, of which approximately $838,000 was for tenant alterations and leasing commissions. Approximately $427,000 in tenant improvements and leasing commissions was spent at the Azusa, CA warehouse related to a new tenant, Best Buy. This is the first installment of such costs related to this tenant. Approximately $214,000 was expended at the Pomona, CA warehouse related to the expansion of space by Ashley Furniture (approximately $114,000), a new tenant, JB Engineering (approximately $72,000), and a lease renewal by Performance Engineered (nearly $28,000). Approximately $164,000 was expended at the Bolingbrook, IL warehouse for the extension of Gillette's lease.
Other major capital expenditures in 1994 included approximately $118,000 for HVAC upgrades, installation of an energy management system and expenditures related to the Americans with Disabilities Act at the Morristown, NJ office center; approximately $51,000 for improvements in the flooring at the Bolingbrook warehouse and approximately $103,000 for exterior improvements, signage and landscaping at the Pomona and Azusa, CA warehouses, the Farmington Hills, MI apartments and the Morristown office building. An additional $54,000 was expended at the Partnership's apartment complexes for various projects including remodeling the clubhouse and model apartments.
Other major capital projects planned for 1995 include $57,000 for fencing and entrance gates at the Azusa warehouse and Atlanta, GA apartments; $51,000 for sprinklers, electric transformers and climate control units at Morristown; $45,000 for exterior lighting at the Lisle, IL office building; $44,000 for irrigation and drainage upgrades and landscaping at Farmington Hills, Bolingbrook and the four Jacksonville, FL warehouses (the Unit warehouses) and approximately $33,000 for smaller projects among the various properties including improvements to common areas and carpet replacements at the apartments.
Neither of the Partnership's California properties, which are covered by earthquake insurance, suffered damage in the January 1994 Los Angeles earthquake.
The following is a brief discussion of a comparison of the results of operations for the three years ended December 31, 1994, 1993 and 1992.
The Partnership's net investment income for 1994 was $12,848,199, an increase of $193,568 (1.5%) from net investment income for 1993 of $12,654,631. The increase was primarily the result of higher interest income from short-term investments ($827,470) and income from property operations ($270,620) partially offset by lower interest income on mortgage loans ($917,598).
Real estate taxes for 1994 were $1,792,775, a reduction of $193,471 (9.7%) from $1,986,246 for 1993. Approximately $110,000 of this decrease was the result of appealing the assessed values of the Azusa, Pomona and Morristown properties. The sale of the Denver warehouse reduced real estate taxes by approximately $32,000. Real estate taxes at the net lease properties in Bolingbrook and Lisle also decreased nearly $47,000. As net leased properties, the tenants absorb almost all operating costs, so this decrease also reduced rental income as noted above.
Interest income on the mortgage loans decreased $917,598 (89.7%) from $1,023,292 for 1993 to $105,694 for 1994. This was due to the maturing of the Lincoln, NE loan in May 1994 and the default of the mortgagor on the Flint loan. These are discussed further in the Liquidity and Capital Resources section.
The investment management fee for 1994 was $2,287,816. This is $18,610 (0.8%) higher than the fee for 1993 of $2,269,206. The fee is computed as 1.25% of gross assets. During 1994, gross assets were
slightly higher than the prior year due to cash flow retained by the Partnership and increased market values of the real estate investments.
During 1994, the Partnership experienced an unrealized gain of $2,576,828 on its real estate investments. Of this, $1,502,226 represents decreases in the market values of the Unit warehouses, sold in October 1994, which had already been reported as unrealized losses in prior years. With the sale of the properties, these unrealized losses were reclassified as unrealized gains on the statement of operations. These unrealized gains revert the property value back to its historical cost, which is used to calculate the $1,237,000 realized loss described above. The remaining $1,074,602 is the net increase in the current values of the investments owned by the Partnership at the end of 1994. This represents 0.8% of the investments' December 31, 1993 value.
The office buildings experienced the largest increase, approximately $1,145,000. The apartments increased by about $945,000. The warehouses experienced an unrealized loss of approximately $184,000 and the retail property, an unrealized loss of about $832,000.
The Partnership's apartment complex in Atlanta had an unrealized gain of $671,245 (6.0% of the property's December 31, 1993 value) while the Farmington Hills apartments experienced an increase of $274,134 (2.1% of its year-end 1993 value). These increases were primarily the result of higher rental rates, occupancy and tenant retention than previously projected for these properties.
Occupancy at the Partnership's properties at December 31, 1994 is generally higher than at December 31, 1993, especially for the industrial properties. During the fourth quarter of 1994, a lease covering the vacant 215,000 square feet (50% of the property) was executed at the Azusa warehouse making the property 100% leased as of the end of 1994. The tenant is Best Buy, a distributor of home appliances and electronics. The lease term is seven years and provides that the tenant will take an additional 145,000 square feet of space in 1996 when another lease expires. No leases are scheduled to expire at the property until 1996.
The Morristown office building was 93% occupied at December 31, 1994 as it was at the end of 1993. One lease, covering 6,600 square feet (8% of the property) expired on March 31, 1994. The tenant, Kodak, has continued to occupy the space on a month-to-month basis. The Partnership is negotiating with the tenant on a new lease and expects that an agreement will be reached during the first quarter of 1995. During the fourth quarter of 1994, a 2,000 square foot expansion was executed with Smith Barney, effective January 16, 1995. This represents 2% of the property and brings occupancy to 95%. The Partnership is also discussing expansions with other tenants in the property. No leases are scheduled to expire in 1995.
Income from property operations, including income from interest in properties, for the year ended December 31, 1993, was $13,752,631. This is an increase of $438,239 (3.3%) over the $13,314,392 for the corresponding period of 1992. Property revenues increased by $118,543 (0.6%) from $18,593,928 for 1992 to $18,712,471 for 1993. Property revenues at the Morristown office building increased approximately $400,000 due to higher occupancy and the expiration of free rent periods during 1993. The office building in Lisle generated approximately $200,000 in higher revenues as a result of a scheduled increase in the rental rate. These increases were partially offset by a reduction in revenues of approximately $450,000 due the sale of three properties in 1993.
as the 1993 sale of the Denver warehouse and the Partnership's 50% interest in the warehouses located in Hightstown, NJ and one of the Jacksonville, FL warehouses.
The investment management fee incurred for the year ended December 31, 1993 were $2,269,206 and for the same period in 1992, $2,405,024. This is a decrease of $135,818 (5.6%) which is due to a decline in the assets upon which the fee is calculated due primarily to the sale of the three properties described below.
Administrative expenses on the statement of operations includes both property and Partnership administrative expenses. Partnership administrative expenses for 1993 were $275,526 and, for 1992, $248,133. This increase of $27,393 (11.0%) was primarily the result of higher appraisal fees.
Due to a capitalized lease, the Partnership incurred $320,484 of interest expense during 1993. This change is a $5,969 (1.9%) increase from the $314,515 of interest expense incurred during 1992.
The Denver warehouse was sold on August 6, 1993 for $2,650,000. The net sales proceeds were approximately $2,561,000. This resulted in a loss of approximately $1,451,000 based on cost and a gain of approximately $206,500 based on the property's carrying value on the date of sale.
The Partnership sold its 50% interest in the Unit warehouse located in Hightstown, NJ on October 29, 1993, for $825,000. Net sales proceeds were approximately $786,000. This resulted in a realized loss of approximately $792,000 based on cost and a loss of approximately $163,600 based on the investment's carrying value on the date of sale.
The market values of the properties and interest in properties declined approximately $1,300,000 (0.8% of the investments' December 31, 1992 values) between December 31, 1992 and 1993. The market values of the Partnership's industrial properties decreased by approximately $3,400,000 (4.9% of the properties December 31, 1992 value) in 1993. The warehouses in Azusa and Pomona experienced the largest declines totalling approximately $3,000,000. This was due to the continuing soft warehouse real estate market in southern California as well as a major tenant vacating before the expiration of its lease at Azusa. The tenant, citing a decline in its business and financial difficulties, vacated its 160,000 square foot space (37% of the property) during the fourth quarter of 1993. The lease was scheduled to expire in 1997.
The market value of Kings Market Shopping Center in Roswell, GA increased approximately $2,300,000 (7.4% of its December 31, 1992 value) during 1993 as a result of securing CompUSA to occupy the space vacated by Lionel Playworld earlier in 1993.
The Partnership's two apartment complexes increased in value by approximately $1,200,000 (5.3% of their December 31, 1992 values). All of the increase was at the Farmington Hills property. This was the result of higher actual and projected rental rates and higher retention of tenants by the property. The value of the apartments in Atlanta did not change from its December 31, 1992 value.
The only change in the current values of the mortgage loans during 1993 resulted from the repayments of principal.
The financial statements and supplementary data listed in the accompanying Index to Financial Statements and Supplementary Data are incorporated herein by reference and filed as a part of this report.