ITEM 1.BUSINESS.
The Registrant, Dean Witter Realty Income Partnership I, L.P. (the "Partnership"), is a limited partnership formed in August 1983 under the Uniform Limited Partnership Act of the State of Delaware for the purpose of investing primarily in income-producing office, industrial and retail properties.
The Managing General Partner of the Partnership is Dean Witter Realty Income Properties I Inc. (the "Managing General Partner"), a Delaware corporation which is wholly owned by Dean Witter Realty Inc. The Associate General Partner is Dean Witter Realty Income Associates I, L.P. (the "Associate General Partner"), a Delaware limited partnership, the general partner of which is Dean Witter Realty Income Associates I Inc., a wholly-owned subsidiary of the Managing General Partner. The Managing General Partner manages and controls all aspects of the business of the Partnership. The terms of transactions between the Partnership and its affiliates are set forth in Item 13 below.
The Partnership issued 92,780 units of limited partnership interest (the "Units") with gross proceeds from the offering of $92,780,000. The offering has been terminated and no additional Units will be sold.
The proceeds from the offering were used to make equity investments in four office properties, two office/research and development properties and one retail property which were acquired without mortgage debt. The properties are described in Item 2
ITEM 2.PROPERTIES.
The Partnership owns directly or through a partnership interest the following seven property interests, none of which is encumbered by mortgage debt. Generally, the leases pertaining to the properties provide for pass-throughs to the tenants of their pro-rata share of certain operating expenses.
An affiliate of the Partnership is the property manager for Century Square, North Lake Plaza, 1718 Connecticut Avenue, Westwood 10, Carmel Park and Harborgate.
Further information relating to the Partnership's properties is included in Item 7 and footnotes 4 and 5 to the consolidated financial statements in Item 8 below.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Neither the Partnership nor any of its properties is subject to any material pending legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of the fiscal year to a vote of Unit holders.
PART II.
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
An established public trading market for the Units does not exist, and it is not anticipated that such a market will develop in the future. Accordingly, information as to the market value of a Unit at any given date is not available. However, the Partnership does allow its limited partners (the "Limited Partners") to transfer their units if a suitable buyer can be located.
As of October 31, 1994 there were 15,148 holders of limited partnership interests.
The Partnership is a limited partnership and, accordingly, does not pay dividends. It does, however, make quarterly distributions of cash to its partners. Pursuant to the partnership agreement, distributable cash, as defined, is paid 90% to the Limited Partners and 10% to the general partners (the "General Partners").
The Partnership paid quarterly cash distributions during the year ended October 31, 1994 aggregating $15.00 per Unit to Limited Partners. The total distribution aggregated $1,546,333 with $1,391,700 distributed to the Limited Partners and $154,633 due to the General Partners. The General Partners deferred receipt of their 1994 distributions.
On November 29, 1994, the Partnership paid a cash distribution of $3.75 per Unit to Limited Partners. The total distribution aggregated $386,583 with $347,925 of cash distributed to the Limited Partners and $38,658 due to the General Partners. The General Partners deferred receipt of their distribution.
The Partnership anticipates making regular distributions to its partners in the future.
Sale or financing proceeds will be distributed, to the extent available, first, to each Limited Partner, until there has been a return of the Limited Partner's capital contribution plus cumulative distributions of distributable cash and sale or financing proceeds in an amount sufficient to provide a 9% cumulative annual return on the Limited Partner's adjusted capital contribution. Thereafter, any remaining sale or financing proceeds will be distributed 85% to the Limited Partners and 15% to the General Partners after the Managing General Partner receives a brokerage fee of up to 3% of the selling price of any equity investment.
Taxable income generally will be allocated in the same proportions as distributions of distributable cash or sale or financing proceeds. In the event there is no distributable cash or sale or financing proceeds, taxable income will be allocated 90% to the Limited Partners and 10% to the General Partners. Any tax loss will be allocated 90% to the Limited Partners and 10% to the General Partners.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Liquidity and Capital Resources
The Partnership raised $92,780,000 in a public offering which was terminated in 1984. The Partnership has no plans to raise additional capital.
The Partnership has purchased six properties and has made one investment in a partnership on an all-cash basis. The Partnership's acquisition program has been completed. No additional investments are planned.
Many real estate markets are stabilizing primarily due to the continued absence of significant construction activity. However, the recovery of the office market will be slow because tenant demand is weak as a result of continued downsizing by many major corporations. Increased consumer spending has helped the retail property market although increased interest rates have slowed spending. Most geographic regions of the country are stabilizing or improving, with the exception of Southern California, where the impact of defense industry reductions has not been offset by growth in other industries.
Real estate markets are generally divided into sub-markets by geographic location and property type. Not all sub-markets have been affected equally by the above factors.
The Partnership's liquidity depends on the cash flow from operations of its properties, expenditures for tenant improvements and leasing commissions in connection with the leasing of vacant space. In 1994 all of the Partnership's properties generated positive cash flow from operations, and it is anticipated that they will continue to do so.
In 1994, Partnership cash flow from operations and distributions received from its joint venture investment exceeded distributions to investors and capital expenditures. The Partnership expects that such cash flows will be sufficient to fund capital expenditures and distributions to investors in 1995. The Partnership expects to increase the cash distribution rate from 1.5% to 2% per Unit beginning with the cash distribution for the first fiscal quarter of 1995. In addition, the General Partners will no longer defer their share of cash distributions.
In 1994, the Partnership incurred approximately $400,000 for tenant improvements and leasing commissions at Arlington Business Center and approximately $333,000 on tenant improvements and leasing commissions at the Carmel Park I and II.
The office market in Los Angeles, California, the location of the Harborgate office building is weak, primarily as a result of cuts in the defense industry. The vacancy rate (including sublet space) in this market is approximately 29%. It is unlikely that this vacant space will be absorbed in this market for several years. Approximately 62% of the Harborgate building's net rentable space is scheduled for lease renewal in 1995. Accordingly net cash flow is anticipated to decline in the near term, as it will be necessary to offer lower rents to attract new and retain existing tenants. These factors have resulted in a decline in the value of this property. The Partnership believes this decline is other than temporary and has therefore recorded a loss on impairment of its investment in the property of approximately $6,130,000 at October 31, 1994.
Although the Arlington Business Center property located in Arlington Heights, Illinois is 100% leased, the office/research and development building market in its market area has been negatively impacted by an over supply of research and development buildings. The vacancy rate in this market is currently 20%. To maintain high occupancy at this property, it has been necessary to offer lower rents in order to attract new and retain existing tenants. These factors have resulted in a decline in the value of the property. The Partnership believes this decline is other than temporary and has recorded a loss on impairment of real estate of approximately $4,707,000 at October 31, 1994.
Subsequent to year-end, the lease term of Countrywide Credit, the largest tenant at the Century Square office building, was extended from March 2000 to March 2010. The rental rate will remain constant over the next five years rather than increasing, as provided for under the original leases.
As of October 31, 1994, $4,048,307 was outstanding on a demand loan from an affiliate of the Managing General Partner. The loan bears interest at the prime rate (7.75% as of October 31, 1994). Interest expense on the affiliate loan amounted to $281,361, $287,091 and $451,845 for the years ended October 31, 1994, 1993 and 1992, respectively.
In December 1992, the Partnership established a $3.8 million line of credit with a bank. Borrowings bore interest, payable monthly, at the prime rate plus three quarters percent and were repayable in 18 consecutive equal payments beginning September 1, 1994. In September 1994, the loan was repaid in its entirety.
On November 29, 1994 the Partnership paid the fourth quarter cash distribution of $3.75 per Unit to Limited Partners. The total distribution aggregated $386,583 with $347,925 of cash distributed to the Limited Partners and $38,658 due to the General Partners. The General Partners deferred the receipt of their distribution.
Operations
Fluctuations in the Partnership's operating results for the year ended October 31, 1994 compared to 1993 and for the year ended October 31, 1993 compared to 1992 are primarily attributable to the following:
The increase in rental revenue in 1994 compared to 1993 is primarily attributable to increased average occupancy levels at 1718 Connecticut, Westwood 10 and Arlington Business Center during 1994. The increase in rental revenue in 1993 compared to 1992 relates primarily to an increase in average occupancy during 1993 at Arlington Business Center and Carmel Park. 1993 fourth quarter revenues include adjustments to estimates made to recognize lease-by-lease income and expense reimbursement pass-throughs.
The decrease in interest and other revenue in 1994 compared to 1993 is primarily due to the receipt of lease termination fees in 1993 of $52,500 from a tenant at the Arlington Business Center and $160,000 from another tenant at Carmel Park I. This decrease was partially offset by an increase in interest income resulting from greater funds invested in short-term investments as well as an increase in interest rates. The decrease in interest and other revenue in 1993 as compared to 1992 is attributable to the following fees received in 1992: a $225,000 lease termination fee received from a tenant at Carmel Park II and a $200,000 fee received from Home Depot in connection with its relocation from North Lake Plaza, partially offset by the lease termination fees received at Arlington Business Center and Carmel Park I in 1993.
The increase in operating expense in 1994 compared to 1993 is primarily attributable to increases in real estate taxes in 1994 at Arlington Business Center as a result of an increase in the assessed value of the property and at Harborgate due to a refund received in 1993. These increases were partially offset by a real estate tax refund received at Westwood 10 in 1994. The increase in operating expenses in 1993 compared to 1992 relates primarily to increased average occupancy at Carmel Park and increased expenditures in 1993 at North Lake Plaza for repairs, maintenance and landscaping.
The increases in depreciation and amortization in 1994 compared to 1993 and 1993 compared to 1992 corresponds to increased expenditures for tenant improvement and leasing commissions in each year.
The decrease in general and administrative expense in 1994 as compared to 1993 is primarily due to decreased legal fees in 1994.
Losses on impairments of real estate in 1994 represent impairment writedowns of the Harborgate office building and the Arlington Business Center properties.
A summary of the office, retail and research and development building markets where the Partnership's properties are located and the performance of each property is as follows:
In Pasadena, California, the location of the Century Square office building, the office market overall vacancy rate is approximately 16%, and it is expected to face some deterioration in the near term as a result of downsizing by two large employers in that market. However, Century Square remained 100% leased during the year. The occupancy of the property's largest tenant, Countrywide Credit, remained at approximately 83%.
The Los Angeles, California office market, the location of Harborgate, is weak primarily as a result of cuts in the defense industry. The vacancy rate (including sublet space) in this market is approximately 29%. At October 31, 1994, occupancy at the property was 88%. The property is leased to 12 tenants. The lease to U.S. Sprint Communications, which occupies approximately 52% of the property's net rentable space, was extended until October 31, 1995.
Arlington Business Center, located in Arlington Heights, Illinois, had been negatively impacted by the oversupply of research and development buildings in its market area. The vacancy rate in this market is currently 20%. However, as of October 31, 1994, occupancy at the property remained at 100%. The property is leased to 9 tenants. Major tenants include Racal Data Communications, CTC International, Inc. and Digital Equipment, whose leases expire in 1997, 2001, and 1995, respectively.
Westwood 10, located in Westwood, Massachusetts, has also been subject to significant competition from an oversupply of research and development buildings. This is due in large part to the sharp decline in the Boston economy and the severe contraction experienced by the primary users of research and development type space. During 1994, occupancy at the property remained at 55%. However, subsequent to year-end, the Partnership signed a lease with a publicly traded surgical products company which will increase occupancy at the property to approximately 85%. As of October 31, 1994, the property was leased to 5 tenants. Major tenants include Executive Information Systems and Mobile Media X-Ray, both of whose leases expire in 1997.
The Washington D.C., office market in which 1718 Connecticut is located has begun to improve. As of October 31, 1994, occupancy at the property was 88%. The property is leased to 8 tenants. Major tenants include Policy Studies Association and Island Press whose leases expire in 1997 and 1998, respectively.
The Charlotte, North Carolina office market vacancy rate is approximately 7% and there is little new construction. In addition, market rental rates have increased slightly. Carmel Park's occupancy was 93% as of October 31, 1994. The property is leased to 15 tenants. Major tenants include CIGNA and Royal Indemnity whose leases expire in 1997 and 2000, respectively.
Altamonte Springs, Florida, the location of the North Lake Plaza Shopping Center, is a difficult retail market where overbuilding has exerted downward pressure on rents and the market vacancy rate is approximately 20%. Occupancy at the property as of October 31, 1994 was 91%. The property was leased to 12 tenants as of October 31, 1994. Major tenants include Marshalls and Burlington Coat Factory, whose leases expire in 1997 and 1998, respectively. In March 1992, Home Depot subleased its space to Burlington Coat Factory for the remainder of the lease term. Home Depot will remain obligated to pay rent under its lease until the lease expires in 1998.
Inflation
Inflation has been consistently low during the periods presented in the financial statements and, as a result, has not had a significant effect on the operations of the Partnership or its properties.
The office market in Los Angeles, California, the location of the Harborgate office building is weak, primarily as a result of cuts in the defense industry. The vacancy rate (including sublet space) in this market is approximately 29%. It is unlikely that this vacant space will be absorbed in this market for several years. Additionally, approximately 62% of the Harborgate building's net rentable space is scheduled for lease renewal in 1995. Accordingly net cash flow is anticipated to decline in the near term, as it will be necessary to offer lower rents to attract new and retain existing tenants. These factors have resulted in a decline in the value of this property. The Partnership believes this decline is other than temporary and has therefore recorded a loss on impairment of its investment in the property of approximately $6,130,000 at October 31, 1994.
Although the Arlington Business Center property located in Arlington Heights, Illinois is 100% leased, the office/research and development building market in its market area has been negatively impacted by an over supply of research and development buildings. The vacancy rate in this market is currently 20%. To maintain high occupancy at this property, it has been necessary to offer lower rents in order to attract new and retain existing tenants. These factors have resulted in a decline in the value of the property. The Partnership believes this decline is other than temporary and has recorded a loss on impairment of real estate of approximately $4,707,000 at October 31, 1994.
5. Investment in Joint Venture
Century Square, Pasadena, California
In 1985, the Partnership purchased, for $9.7 million, a 25% general partnership interest in the partnership which owns the property. An affiliate of the Partnership, Dean Witter Realty Income Partnership II, L.P., purchased the remaining 75% general partnership interest. The Partnership and the affiliate receive cash flow and profits and losses according to their shares in the partnership.
In fiscal 1994, the Century Square joint venture settled a lawsuit with the developer of the property relating to certain defects in the parking structure and heating, ventilation and air conditioning systems. Pursuant to the settlement, the joint venture received $835,000 in 1994. The proceeds were distributed to the co-venturers according to their interests; accordingly the Partnership received $208,750. The joint venture will receive an additional $100,000 in each of fiscal years 1995 and 1996. The Partnership recorded the proceeds, which represent the recovery of costs incurred and capitalized to correct the defects, as a reduction of its investment in joint venture.
The accounting policies employed by the joint venture are the same as those of the Partnership.
Subsequent to year-end, the lease term of Countrywide Credit, the largest tenant at the Century Square office building, was extended from March 2000 to March 2010. The rental rate will remain constant over the next five years rather than increasing, as provided for under the original leases.
6. Loan Payable to Bank
In December 1992, the Partnership established a $3.8 million line of credit with a bank. Borrowings were secured by a first mortgage on North Lake Plaza, an assignment of distributions from the Century Square and 1718 Connecticut properties, and an assignment of leases in the Partnership's other properties. Additionally, a $250,000 interest- bearing deposit was maintained with the lender. Borrowings bore interest, payable monthly, at the prime rate plus three quarters percent and were repayable in 18 consecutive equal payments beginning September 1, 1994. Approximately $2.7 million of the initial draw under this line of credit was used to repay amounts borrowed from an affiliate of the Managing General Partner. In September, 1994, this loan was repaid in its entirety.
7. Leases
Minimum future rental income under noncancellable operating leases as of October 31, 1994 is as follows:
Year ending October 31: 1995 $5,468,805 1996 4,927,913 1997 4,127,213 1998 2,733,244 1999 2,120,269 Thereafter 3,904,799 Total $23,282,243
The Partnership has determined that all leases relating to its properties are operating leases. The lease terms range from three to fifteen years, and generally provide for fixed minimum rents with rental escalation and/or expense reimbursement clauses.
8. Related Party Transactions
An affiliate of the Managing General Partner provided property management services for six properties in 1994 and 1993, and five properties in 1992. The Partnership paid the affiliate management fees of $232,272, $221,284 and $149,321 for the years ended October 31, 1994, 1993 and 1992 respectively.
Another affiliate of the Managing General Partner performs administrative functions and processes certain investor and tax information on behalf of the Partnership. For the years ended October 31, 1994, 1993 and 1992 the affiliate was reimbursed $278,250, $278,500 and $280,364 respectively for these services. As of October 31, 1994, the affiliate was owed $70,091 for these services.
The Partnership borrowed funds from an affiliate of the Managing General Partner. Interest expense, which was calculated at the prime rate, amounted to $281,361 in 1994, $287,091 in 1993 and $451,845 in 1992. At October 31, 1994 and 1993 the balance due to the affiliate was $4,048,307.
Through October 31, 1994, the General Partners have deferred receipt of an aggregate amount of $2,429,016 of distributions to which they are entitled, including distributions of $154,633 for each of the years
ended October 31, 1994, 1993 and 1992. Amounts deferred are charged against partners' capital and recorded as liabilities owing to the General Partners.
9. Subsequent Events
On November 29, 1994, the Partnership paid a cash distribution of $3.75 per Unit to Limited Partners. The distribution was $386,583 with $347,925 of cash distributed to the Limited Partners and $38,658 due to the General Partners. The General Partners deferred receipt of their distribution.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Partnership is a limited partnership which has no directors or officers.
The directors and executive officers of the Managing General Partner are as follows:
Position with the Name Managing General Partner
William B. Smith Chairman of the Board of Directors E. Davisson Hardman, Jr. President and Director Lawrence Volpe Controller, Assistant Secretary and Director Ronald T. Carman Secretary and Director
All of the directors have been elected to serve until the next annual meeting of the shareholder of the Managing General Partner or until their successors are elected and qualify. Each of the officers has been elected to serve until his successor is elected and qualifies.
William B. Smith, age 51, is a Managing Director of Dean Witter Realty Inc. and has been with Dean Witter Realty Inc. since April 1982.
E. Davisson Hardman, Jr., age 45, is a Managing Director of Dean Witter Realty Inc. and has been with Dean Witter Realty Inc. since April 1982.
Lawrence Volpe, age 47, is a Director and the Controller of Dean Witter Realty Inc. He is a Senior Vice President and Controller of Dean Witter Reynolds Inc., which he joined in 1983.
Ronald T. Carman, age 43, is a Director and the Secretary of Dean Witter Realty, Inc. He is a Senior Vice President and Associate General Counsel of Dean Witter Reynolds Inc., which he joined in 1984.
There is no family relationship among any of the foregoing persons.
ITEM 11. EXECUTIVE COMPENSATION.
The General Partners are entitled to receive cash distributions, when and as cash distributions are made to the Limited Partners, and a share of taxable income or tax loss. Descriptions of such distributions and allocations are in Item 5 above. The General Partners were entitled to receive cash distributions of $154,633 during each of the years ended October 31, 1994, 1993 and 1992, which they agreed to defer. At October 31, 1994, the General Partners have deferred receipt of a total of $2,429,016 of such distributions. The General Partners will no longer defer their share of cash distributions beginning with the cash distribution for the first fiscal quarter of 1995.
The General Partners and their affiliates were paid certain fees and reimbursed for certain expenses. Information concerning such fees and reimbursements is contained in Note 8 of the Notes to Consolidated Financial Statements in Item 8
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) No person is known to the Partnership to be the beneficial owner of more than five percent of the Units.
(b) The directors of the Managing General Partner and the officers and directors of the Managing General Partner as a group own the following Units as of January 28, 1995:
ITEM 13.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
As a result of their being partners of a limited partnership which is the limited partner of the Associate General Partner, certain current and former officers and directors of the Managing General Partner also own indirect general partnership interests in the Partnership. The Partnership Agreement of the Partnership provides that cash distributions and allocations of income and loss to the General Partners be distributed or allocated 50% to the Managing General Partner and 50% to the Associate General Partner. The General Partners' share of cash distributions and income or loss is described in Item 5 above.
All of the outstanding shares of common stock of the Managing General Partner are owned by Dean Witter Realty Inc. ("Realty"), a Delaware corporation which is a wholly-owned subsidiary of Dean Witter, Discover & Co. The general partner of the Associate General Partner is Dean Witter Realty Income Associates I Inc., which is a wholly-owned subsidiary of Realty. The limited partner of the Associate General Partner is LSA 84 L.P., a Delaware limited partnership. Realty and certain current and former officers and directors of Realty are partners of LSA 84 L.P. Additional information with respect to the directors and executive officers and compensation of the Managing General Partner and affiliates is contained in Items 10 and 11 above.
The General Partners and their affiliates were paid certain fees and reimbursed for certain expenses. Information concerning such fees and reimbursements is contained in Note 8 to the Consolidated Financial Statements in Item 8 above.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual Report:
1. Financial Statements (see Index to Financial Statements filed as part of Item 8 of this Annual Report).
2. Financial Statement Schedules (see Index to Financial Statements filed as part of Item 8 of this Annual Report).
3. Exhibits (3) Amended and Restated Agreement of Limited Partnership dated as of August 15, 1983 set forth in Exhibit A to the Prospectus included in Registration Statement Number 2- 86041 is incorporated herein by reference.
(4) Not applicable.
(9) Not applicable.
(10) Purchase and Sale Agreements for properties purchased were filed as Exhibits to Form 8-K on October 17, 1984, October 25, 1984, October 31, 1984, December 20, 1984, July 30, 1985 and October 29, 1985 and are incorporated herein by reference.
(11) Not applicable.
(12) Not applicable.
(13) Not applicable.
(18) Not applicable.
(19) Not applicable.
(22) Subsidiary: 1718 Connecticut, Ltd., a District of Columbia limited partnership.
(23) Not applicable.
(24) Not applicable.
(25) Not applicable.
(28) Not applicable.
(29) Not applicable.
(b) No Forms 8-K were filed by the Partnership during the last quarter of the period covered by this report.