Item 1. Business. ---------
Registrant is engaged in the business of investing in commercial and industrial real estate properties which are net leased to commercial and industrial entities. Registrant was organized as a California limited partnership on November 7, 1980. The General Partners of Registrant are W.P. Carey & Co., Inc. (the "Corporate General Partner" or "W.P. Carey") and William Polk Carey (the "Individual General Partner"). The Corporate General Partner, the Individual General Partner and/or affiliates are also the General Partners of affiliates of Registrant, Corporate Property Associates ("CPA(R):1"), Corporate Property Associates 2 ("CPA(R):2"), Corporate Property Associates 4, a California limited partnership ("CPA(R):4"), Corporate Property Associates 5 ("CPA(R):5"), Corporate Property Associates 6 - a California limited partnership ("CPA(R):6"), Corporate Property Associates 7 - a California limited partnership ("CPA(R):7"), Corporate Property Associates 8, L.P., a Delaware limited partnership ("CPA(R):8"), Corporate Property Associates 9, L.P., a Delaware limited partnership ("CPA(R):9"), the advisor of Corporate Property Associates 10 Incorporated ("CPA(R):10"), Carey Institutional Properties Incorporated ("CIP(TM)") and Corporate Property Associates 12 Incorporated ("CPA(R):12"). Registrant has a management agreement with Carey Corporate Property Management Company ("Carey Management"), a division of W.P. Carey. According to the terms of this agreement, Carey Management performs a variety of management services for Registrant. Registrant has entered into an agreement with Fifth Rock L.P., an affiliate, for the purpose of leasing office space. Reference is made to the Prospectus of Registrant dated July 31, 1981, as supplemented by Supplements dated December 9, 1981, January 8, 1982 and February 10, 1982, filed pursuant to Rules 424(b) and 424(c) under the Securities Act of 1933 and such Prospectus and such Supplements are incorporated herein by reference (said Prospectus, as so supplemented, is hereinafter called the "Prospectus").
Registrant has only one industry segment which consists of the investment in and the leasing of industrial and commercial real estate. See Selected Financial Data in Item 6 for a summary of Registrant's operations. Also see the material contained in the Prospectus under the heading INVESTMENT OBJECTIVES AND POLICIES .
The properties owned by Registrant are described in Properties in Item 2.
Item 3. Legal Proceedings. -----------------
On April 1, 1993, New Valley Corporation, ("New Valley"), a tenant of a property owned by Registrant and formerly a tenant of two other of Registrant's properties, filed a petition of voluntary bankruptcy seeking reorganization under Chapter 11 of the United States Bankruptcy Code. In connection with the filings, Registrant and Corporate Property Associates 2, which together own the properties as tenants-in-common, filed a bankruptcy claim in the amount of $6,766,904. New Valley is contesting the claims and Registrant and New Valley are now in litigation regarding this claim. The matter is expected to go to trial in May of 1996. No prediction regarding the outcome of this litigation can be made at this time.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders. ---------------------------------------------------
No matter was submitted during the fourth quarter of the year ended December 31, 1995 to a vote of security holders, through the solicitation of proxies or otherwise.
PART II -------
Item 5.
Item 5. Market for Registrant's Common Equity and Related ------------------------------------------------- Stockholder Matters. -------------------
Information with respect to Registrant's common equity is hereby incorporated by reference to page 22 of Registrant's Annual Report contained in Appendix A.
Item 6.
Item 6. Selected Financial Data. ------------------------ Selected Financial Data are hereby incorporated by reference to page 1 of Registrant's Annual Report contained in Appendix A.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition ----------------------------------------------------------- and Results of Operations.
Management's Discussion and Analysis are hereby incorporated by reference to pages 2 to 5 of Registrant's Annual Report contained in Appendix A.
Item 8.
Item 8. Financial Statements and Supplementary Data. --------------------------------------------
The following financial statements and supplementary data are hereby incorporated by reference to pages 5 to 18 of Registrant's Annual Report contained in Appendix A:
(i) Report of Independent Accountants. (ii) Balance Sheets as of December 31, 1994 and 1995. (iii) Statements of Income for the years ended December 31, 1993, 1994 and 1995. (iv) Statements of Partners' Capital for the years ended December 31, 1993, 1994 and 1995. (v) Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995. (vi) Notes to Financial Statements.
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure. ----------------------------------------------------- NONE
- 6 -
PART III --------
Item 10.
Item 10. Directors and Executive Officers of the Registrant. ---------------------------------------------------
Registrant has no officers or directors. The executive officers and directors of the Corporate General Partner are as follows:
(1) Each officer and director of the Corporate General Partner will hold office until the next annual meeting of the Board of Directors and thereafter until his successor shall have been elected and shall have qualified or until his prior death, resignation or removal.
William Polk Carey and Francis J. Carey are brothers and Raymond S. Clark is their brother-in-law. H. Augustus Carey is the nephew of William Polk Carey and Raymond S. Clark and the son of Francis J. Carey.
A description of the business experience of each officer and director of the Corporate General Partner is set forth below:
William Polk Carey, Chairman and Chief Executive Officer, has been active in lease financing since 1959 and a specialist in net leasing of corporate real estate property since 1964. Before founding W.P. Carey & Co., Inc. ("W.P. Carey") in 1973, he served as Chairman of the Executive Committee of Hubbard,
- 7 -
Westervelt & Mottelay (now Merrill Lynch Hubbard), head of Real Estate and Equipment Financing at Loeb Rhoades & Co. (now Lehman Brothers), head of Real Estate and Private Placements, Director of Corporate Finance and Vice Chairman of the Investment Banking Board of duPont Glore Forgan Inc. A graduate of the University of Pennsylvania's Wharton School of Finance, Mr. Carey is a Governor of the National Association of Real Estate Investment Trusts (NAREIT). He also serves on the boards of The Johns Hopkins University and its medical school, The James A. Baker III Institute for Public Policy at Rice University, and other educational and philanthropic institutions. He founded the Visiting Committee to the Economics Department of the University of Pennsylvania and co-founded with Dr. Lawrence R. Klein the Economics Research Institute at that university.
Francis J. Carey was elected President and a Managing Director of W.P. Carey in April 1987, having served as a Director since its founding in 1973. He served as a member of the Executive Committee and Board of Managers of the Western Savings Bank of Philadelphia from 1972 until its takeover by another bank in 1982 and is former chairman of the Real Property, Probate and Trust Section of the Pennsylvania Bar Association. Mr. Carey served as a member of the Board of Overseers of the School of Arts and Sciences of the University of Pennsylvania from 1983 through 1990 and has served as a member of the Board of Trustees of the Investment Program Association since 1990. From April 1987 until August 1992, he served as counsel to Reed Smith Shaw & McClay, counsel for Registrant, the General Partners, the CPA(R) Partnerships and W.P. Carey and some of its affiliates. A real estate lawyer of more than 30 years' experience, he holds A.B. and J.D. degrees from the University of Pennsylvania.
George E. Stoddard, Chief Investment Officer, was until 1979 head of the bond department of The Equitable Life Assurance Society of the United States, with responsibility for all activities related to Equitable's portfolio of corporate investments acquired through direct negotiation. Mr. Stoddard was associated with Equitable for over 30 years. He holds an A.B. degree from Brigham Young University, an M.B.A. from Harvard Business School and an LL.B. from Fordham University Law School.
Raymond S. Clark is former President and Chief Executive Officer of the Canton Company of Baltimore and the Canton Railroad Company. A graduate of Harvard College and Yale Law School, he is presently a Director and Chairman of the Executive Committee of W.P. Carey and served as Chairman of the Board of W.P. Carey from its founding in 1973 until 1982. He is past Chairman of the Maryland Industrial Development Financing Authority.
Madelon DeVoe Talley, Vice Chairman, is a member of the New York State Controller's Investment Committee, a Commissioner of the Port Authority of New York and New Jersey, former CIO of New York State Common Retirement Fund and New York State Teachers Retirement System. She also served as a managing director of Rothschild, Inc. and as the President of its asset management division. Besides her duties at W.P. Carey, Mrs. Talley is also a former Governor of the N.A.S.D. and is a director of Biocraft Laboratories, a New York Stock Exchange company. She is an alumna of Sarah Lawrence College and the graduate school of International Affairs at Columbia University.
Barclay G. Jones III, Executive Vice President, Managing Director, and co-head of the Investment Department. Mr. Jones joined W.P. Carey as Assistant to the President in July 1982 after his graduation from the Wharton School of the University of Pennsylvania, where he majored in Finance and Economics. He was elected to the Board of Directors of W.P. Carey in April 1992. Mr. Jones is also a Director of the Wharton Business School Club of New York.
- 8 -
Lawrence R. Klein, Chairman of the Economic Policy Committee since 1984, is Benjamin Franklin Professor of Economics Emeritus at the University of Pennsylvania, having joined the faculty of Economics and the Wharton School in 1958. He holds earned degrees from the University of California at Berkeley and Massachusetts Institute of Technology and has been awarded the Nobel Prize in Economics as well as over 20 honorary degrees. Founder of Wharton Econometric Forecasting Associates, Inc., Dr. Klein has been counselor to various corporations, governments, and government agencies including the Federal Reserve Board and the President's Council of Economic Advisers.
Claude Fernandez, Chief Administrative Officer, Managing Director, and Executive Vice President, joined W.P. Carey in 1983. Previously associated with Coldwell Banker, Inc. for two years and with Arthur Andersen & Co., he is a Certified Public Accountant. Mr. Fernandez received his B.S. degree in Accounting from New York University in 1975 and his M.B.A. in Finance from Columbia University Graduate School of Business in 1981.
Howard J. Altmann, Senior Vice President, Investment Department, joined W.P. Carey in August 1990. He was a securities analyst at Goldman Sachs & Co. for the retail industry from 1986 to 1988. Mr. Altmann received his undergraduate degree in economics and finance from McGill University and his M.B.A. from the Stanford University Graduate School of Business.
H. Augustus Carey, Senior Vice President, returned to W.P. Carey in 1988. Mr. Carey previously worked for W.P. Carey from 1979 to 1981 as Assistant to the President. Prior to rejoining W.P. Carey, Mr. Carey served as a loan officer of the North American Department of Kleinwort Benson Limited in London, England. He received an A.B. from Amherst College in 1979 and an M.Phil. in Management Studies from Oxford University in 1984. Mr. Carey is a trustee of the Oxford Management Centre Associates Council.
John J. Park, Senior Vice President and Treasurer, joined W.P. Carey as an Investment Analyst in December 1987. Mr. Park received his undergraduate degree from Massachusetts Institute of Technology and his M.B.A. in Finance from New York University.
Michael D. Roberts joined W. P. Carey as a Second Vice President and Assistant Controller in April 1989 and is currently First Vice President and Controller. Prior to joining W.P. Carey, Mr. Roberts was employed by Coopers & Lybrand, where he attained the title of audit manager. A certified public accountant, Mr. Roberts received a B.A. from Brandeis University and an M.B.A. from Northeastern University.
Item 11.
Item 11. Executive Compensation. -----------------------
Under the Amended Agreement of Limited Partnership of Registrant (the "Agreement"), 1.9% of Distributable Cash From Operations, as defined, is payable to the Corporate General Partner and .1% of Distributable Cash From Operations is payable to the Individual General Partner. The Corporate General Partner and the Individual General Partner received $89,725 and $84,722 respectively, from Registrant as their share of Distributable Cash From Operations during the year ended December 31 1995. As owner of 200 Limited Partnership Units, the Corporate General Partner received cash distributions of $38,024 ($190.12 per Unit) during the year ended December 31, 1995. See Item 6 for the net income allocated to the General Partners under the Agreement. Registrant is not required to pay, and has not paid, any remuneration to the officers or directors of the Corporate General Partner or any other affiliate of Registrant during the year ended December 31, 1995. Although Registrant is authorized to pay the Individual General Partner a fee of up to $15,000 in any year beginning after December 31, 1980, no fee will be paid so long as Mr. Carey is the Individual General Partner and no fee may be paid to any successor Individual General Partner appointed by Mr. Carey pursuant to the Agreement.
In the future, the Corporate General Partner will continue to receive 1.9% of Distributable Cash From Operations, the Individual General Partner will continue to receive .1% of Distributable Cash From Operations and each General Partner will continue to be allocated the same percentage of the profits and losses of Registrant as had been allocated in the past. For a description of the subordinated interest of the Corporate General Partner and the Individual General Partner in Cash From Sales and Cash From Financing, reference is made to the materials contained in the Prospectus under the heading MANAGEMENT COMPENSATION.
- 9 -
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and --------------------------------------------------- Management. -----------
As of December 31, 1995, no person owned of record, or was known by Registrant to own beneficially, more than 5% of the Limited Partnership Units of Registrant.
The following table sets forth as of March 20, 1996 certain information as to the ownership by directors and executive officers of securities of Registrant:
(1) As of March 20, 1996, the Corporate General Partner, W. P. Carey & Co., Inc., owned 200 Limited Partnership Units of Registrant. William Polk Carey, the sole shareholder of the Corporate General Partner, is the beneficial owner of these Units.
There exists no arrangement, known to Registrant, the operation of which may at a subsequent date result in a change of control of Registrant.
Item 13.
Item 13. Certain Relationships and Related Transactions. -----------------------------------------------
For a description of transactions and business relationships between Registrant and its affiliates and their directors and officers, see Notes 2 and 3 to the Financial Statements contained in Item 8. Michael B. Pollack, First Vice President and Secretary of the Corporate General Partner, is a partner of Reed Smith Shaw & McClay which is engaged to perform legal services for Registrant.
No officer or director of the Corporate General Partner or any other affiliate of Registrant or any member of the immediate family or associated organization of any such officer or director was indebted to Registrant at any time since the beginning of Registrant's last fiscal year.
- 10 -
PART IV -------
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on ------------------------------------------------------ Form 8-K --------
(a) 1. Financial Statements: ---------------------
The following financial statements are filed as a part of this Report:
Report of Independent Accountants.
Balance Sheets, December 31, 1994 and 1995.
Statements of Income for the years ended December 31, 1993, 1994 and 1995.
Statements of Partners' Capital for the years ended December 31, 1993, 1994 and 1995.
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995.
Notes to Financial Statements.
The financial statements are hereby incorporated by reference to pages 7 to 18 of Registrant's Annual Report contained in Appendix A.
(a) 2. Financial Statement Schedule: -----------------------------
The following schedule is filed as a part of this Report:
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1995. Notes to Schedule III.
Schedule III and notes thereto are hereby incorporated by reference to pages 19 to 20 of Registrant's Annual Report contained in Appendix A.
Financial Statement Schedules other than those listed above are omitted because the required information is given in the Financial Statements, including the Notes thereto, or because the conditions requiring their filing do not exist.
- 11 -
(a) 3. Exhibits: ---------
The following exhibits are filed as part of this Report. Documents other than those designated as being filed herewith are incorporated herein by reference.
- 12 -
- 13 -
- 14 -
(b) Reports on Form 8-K -------------------
During the quarter ended December 31, 1995 the Registrant was not required to file any reports on Form 8-K.
- 15 -
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership)
BY: W. P. CAREY & CO., INC.
04/08/96 BY: /s/ Claude Fernandez ----------- --- --------------------- Date Claude Fernandez Executive Vice President and Chief Administrative Officer (Principal 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 and in the capacities and on the dates indicated.
BY: W. P. CAREY & CO., INC.
William P. Carey Chairman of the Board and Director (Principal Executive Officer)
Francis J. Carey President and Director
George E. Stoddard BY: /s/ George E. Stoddard Chairman of the Investment ----------------------- Committee and Director George E. Stoddard Attorney in fact April 8, 1996 Dr. Lawrence R. Klein Chairman of the Economic Policy Committee and Director
Madelon DeVoe Talley Vice Chairman of the Board of Directors and Director
04/08/96 BY: /s/ Claude Fernandez -------------- --- --------------------- Date Claude Fernandez Executive Vice President and Chief Administrative Officer (Principal Financial Officer)
04/08/96 BY: /s/ Michael D. Roberts -------------- --- ----------------------- Date Michael D. Roberts First Vice President and Controller (Principal Accounting Officer)
- 16 -
APPENDIX A TO FORM 10-K
CORPORATE PROPERTY ASSOCIATES 3 (A CALIFORNIA LIMITED PARTNERSHIP)
1995 ANNUAL REPORT
SELECTED FINANCIAL DATA - --------------------------------------------------------------------------------
(In thousands except per unit amounts)
(1) Includes distributions attributable to the fourth quarter of each fiscal year payable in the following fiscal year less distributions in the first fiscal quarter attributable to the prior year. (2) Include special distributions of $50 and $120 in 1992 and 1995, respectively, per Limited Partnership Unit. (3) Represents mortgage obligations due after more than one year.
MANAGEMENT'S DISCUSSION AND ANALYSIS - --------------------------------------------------------------------------------
Results of Operations ---------------------
Net income for the year ended December 31, 1995 increased by $12,761,000 as compared with net income for the year ended December 31, 1994, primarily due to the successful settlement of litigation with the Leslie Fay Company ("Leslie Fay") which accounted for $11,499,000 of the increase to net income. Excluding the effect of Leslie Fay, other nonrecurring income of $225,000 and writedowns of properties to net realizable value in 1995 and 1994 of $146,000 and $697,000, respectively, the Partnership would have reflected an increase in net income of $485,000. The increase in income, as adjusted, was due to decreases in interest and property expenses and an increase in other interest income and was partially offset by a decrease in lease revenues. The decrease in interest expense resulted from the $1,320,000 prepayment of mortgage loans on properties leased or formerly leased to New Valley Corporation ("New Valley") in the first quarter of 1995 and the prepayment of the mortgage loan on the Gibson Greetings, Inc. ("Gibson") properties in November 1995 in connection with the restructuring of the Gibson lease. The decrease in property expenses was due to the costs incurred in 1994 in connection with the Partnership's assessment of its liquidity alternatives which included environmental reviews and property valuations. Other interest income increased as the result of the receipt of a lump sum cash payment of $5,000,000 received upon resolution of the dispute with Leslie Fay and invested in money market funds, before being distributed to partners through a special distribution. The decrease in lease revenues was due to the termination of the New Valley lease on the Reno, Nevada property in December 1994 and the modification and restructuring of the Gibson lease as described below. The substantial increase in cash flow provided from operations was primarily due to the receipt of lump sum payments of $13,732,000 relating to Gibson and Leslie Fay.
The Partnership realized a net gain of $11,499,000 upon settlement of a dispute with Leslie Fay, described in Note 10 to the Financial Statements. Proceeds from the settlement amount to $18,900,000, of which $13,081,000 had been collected prior to 1995. Pursuant to the settlement, Leslie Fay was released from all obligations under the lease, relinquished all claims to the property and vacated the facility. In connection with the settlement, the Partnership incurred a $7,400,000 writeoff on the property to its net realizable value, unencumbered by the lease. The Leslie Fay property was purchased by the Partnership for $9,400,000 in 1982. The vacant property was subsequently sold to a third party in January 1996 and, in connection with the sale, the Partnership recognized an additional writeoff of $146,000 to net realizable value in 1995. Total proceeds from the settlement of the Leslie Fay dispute and the sale of the property amount to approximately $20,900,000. In addition, as more fully described in Note 11 to the Financial Statements, the Partnership received $8,723,000 ($8,150,941, net of costs) in connection with consenting to a modification of the Gibson lease. The Partnership severed one of three properties from the Gibson master lease, modified the master lease for the remaining two properties and entered into a new lease with Cleo, Inc. ("Cleo"), a new lessee, for the severed property. Annual gross revenues will decrease as a result of the lease modification; however, net cash flow will increase as a result of the retirement of the Gibson mortgage which was paid off with proceeds from the lump sum payment. For financial reporting purposes, income from this transaction has been deferred and will be recognized over the remaining terms of the Gibson and Cleo leases.
Net income for the year ended December 31, 1994 increased by $286,000 to $3,215,000 as compared with net income for the year ended December 31, 1993. In addition, cash provided from operations for 1994 increased by $260,000 to $4,647,000 as compared with 1993. The increase in net income was primarily due to the noncash charges of $1,302,000 in 1993 for the writedown on the Partnership property in Moorestown, New Jersey as compared with the noncash charge of $697,000 in 1994 on the writedown of the Partnership's property in Reno, Nevada. Excluding the effect of the writedowns, income would have decreased by $319,000 in 1994 as compared with 1993. Such a decrease would have resulted from the increase in property expenses and a decrease on other interest income due to the Leslie Fay litigation and bankruptcy proceedings and related interest incurred on the Leslie Fay installments.
Net income and cash flow provided by operating activities may be affected by the uncertainty related to the Hughes Markets, Inc. ("Hughes") lease. The lease with Hughes for a dairy processing plant in Los Angeles, California is currently scheduled to expire in April 1996. The Partnership and Hughes have entered into negotiations for a two-year lease extension; however, there can be no assurance that such an extension will be executed. The Partnership is in the process of remarketing the property in the event that Hughes vacates. The Partnership's share of annual rent from the Hughes lease is currently $305,000. If the property were vacated, the Partnership estimates that annual carrying costs for insurance, real estate taxes and maintenance and security would be approximately $100,000. The Partnership's share of annual carrying charges on the vacant property in Reno, Nevada is currently $80,000. The Partnership is continuing its efforts to remarket the Reno property for either lease or sale.
In May 1996, the Partnership is scheduled to start receiving rent of $188,000 per year from its lease with Sports & Recreation, Inc. ("Sports & Recreation") on the Moorestown, New Jersey property. Sports & Recreation is in the process of retrofitting the Moorestown property for use as a retail store. Annual rentals on the two Gibson properties and the Cleo property which had formerly been leased to Gibson are $2,367,000 and $1,145,000, respectively. Prior to the modification of the Gibson lease, the Partnership's annual rentals from the property were $5,962,000. Although annual revenues from these properties will be reduced by $2,450,000, the Partnership had been paying annual debt service of $2,510,000 on the Gibson mortgage loan. As the result of the prepayment of the mortgage loan, annual cash flow from the Gibson and Cleo properties will reflect an increase of $60,000 in spite of the reduction in rental income. The Gibson mortgage loan had been scheduled to mature with a balloon payment of $12,582,000 in 1996 and the Partnership would have attempted to refinance the loan at that time. It is possible that the Partnership would have realized a reduction in debt service on any refinancing. Prior to the restructuring, Gibson represented approximately 80% of lease revenues. If the Hughes lease is extended, Gibson's share of lease revenues will decrease to approximately 50% of lease revenues, thereby reducing the Partnership's exposure to any adverse changes in the financial condition of Gibson. By entering into the lease with Cleo, the Partnership has achieved greater diversification.
Because of the long-term nature of the Partnership's net leases, inflation and changes in prices have not unfavorably affected the Partnership's net income or had an impact on the continuing operations of the Partnership's properties. The leases with Gibson, New Valley, Sports & Recreation and AT&T Corporation ("AT&T") provide periodic fixed rent increases and the lease with Cleo provides for periodic rent increases based on formulas indexed to increases in the Consumer Price Index. No rental increases are scheduled to occur until 1997, when an increase is scheduled on the AT&T lease.
Financial Condition -------------------
Except for the vacant property in Reno, Nevada, all of the Partnerships properties are leased to corporate tenants under net leases by which tenants are generally required to pay all operating expenses relating to the leased properties. The Partnership depends on a relatively stable operating cash flow from its net leases to meet operating expenses and fund quarterly distributions to partners. During 1995, the Partnership significantly modified its capital structure by liquidating all of its mortgage debt. At the beginning of the year, the Partnership had a remaining mortgage obligation at the beginning of the year of approximately $15,600,000. In addition, the Company paid a special distribution of $8,000,000 (resulting in a $120 return of capital per Limited Partnership Unit as defined in the Partnership Agreement). As a result, the Partnership's cash balances decreased from $8,851,000 to $1,158,000.
Cash provided from operating activities of $12,918,000 was sufficient to pay distributions to partners of $4,722,000 and scheduled mortgage installment payments of $1,113,000. Approximately $8,151,000 of the cash provided from operations resulted from nonrecurring lump sum payments, net of the related costs. Future operating cash flows are subject to various uncertainties described herein and the ability to sustain or increase the distribution rate is subject to the outcome of the uncertainty related to the Hughes property.
Cash flow generated from operating and investing activities has generally exceeded distributions paid. Distributions paid per Limited Partnership Unit in 1993 and 1994 exceeded net income per Limited Partnership Unit by $24.91 and $21.40 in 1993 and 1994, respectively. This is because the Partnership evaluates its projection of cash flows in determining the distribution rate. Net income is reduced by charges such as depreciation, amortization and property writedowns which do not impact cash flows.
The Partnership's financing activities in 1995 included paying off all of the Partnership's remaining mortgage balances and paying a special distribution to partners of $8,000,000 as well as paying quarterly distributions to partners of $4,722,000. As a result of these activities, the Partnership significantly reduced its cash reserves. Since the inception of the Partnership, special distributions of $250 per Unit have been paid representing a return of 50% of the original cost of a Unit. Accordingly, the amount of quarterly distributions per Unit can be expected to decrease even though the distribution rate on adjusted capital, as defined in the Partnership Agreement, may continue to increase. The Corporate General Partner advanced a loan of $2,300,000 to help retire the Gibson mortgage loan. The loan is a demand note and it is anticipated that the note will be repaid from future operating cash flow. Since December 31, 1995, the Partnership has repaid $1,500,000 of the advance. The Partnership has ample unused borrowing capacity because all of its properties are unleveraged; however, no financings are currently being contemplated.
The Partnership's sole investing activity for the periods presented in the financial statements consisted of the receipt of purchase installments and settlement payments from Leslie Fay. Pursuant to its lease with Sports and Recreation, the Partnership has an obligation to reimburse Sports and Recreation for certain retrofitting costs which are currently estimated to be $458,000. It is currently anticipated that such costs will be funded from operating cash flow. In the event that there are insufficient cash reserves, the Partnership could seek an additional advance from the Corporate General Partner or borrow on its unleveraged properties.
In connection with the termination of the Moorestown and Reno leases, the Partnership expects to receive a bankruptcy settlement; however, the amount of such settlement cannot be estimated and no amounts that the Partnership may ultimately receive have been recorded in the accompanying financial statements.
Cleo has an option to purchase its property which is exercisable at any time with at least six months notice.
All of the Partnership's properties are subject to environmental statutes and regulations regarding the discharge of hazardous materials and related remediation obligations. All but two of the Partnership's properties are currently leased to corporate tenants. The Partnership generally structures a lease to require the tenant to comply with all laws. In addition, substantially all of the Partnership's net leases include provisions which require tenants to indemnify the Partnership from all liabilities and losses related to their operations at the leased properties. If the Partnership undertakes to clean up or remediate any of its properties, the General Partners believe that in most cases the Partnership will be entitled to reimbursement from tenants for such costs. In the event that the Partnership absorbs a portion of such costs because of a tenant's failure to fulfill its obligations (or because a property currently has no tenant), the General Partners believe such expenditures will not have a material adverse effect on the Partnership's financial condition, liquidity or results of operations.
In 1994, the Partnership voluntarily conducted Phase II environmental reviews of certain of its properties based on the results of Phase I environmental reviews conducted in 1993. The Partnership believes, based on the results of such reviews, that its properties are in substantial compliance with Federal and state environmental statutes and regulations. Portions of certain properties have been documented as having a limited degree of contamination, principally in connection with either leakage from underground storage tanks or surface spills from facility activities. For those conditions which were identified, the Partnership advised the affected tenant of the Phase II findings and of its obligation to perform required remediation.
Effective January 1, 1995, the Partnership adopted the provisions of Statement of Financial Accounting Standards No. 121 - Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of ("SFAS 121"). Pursuant to SFAS 121, the Partnership assesses the recoverability of its real estate assets, including residual interests, based on projections of cash flows over the life of such assets. In the event that such cash flows are insufficient, the assets are adjusted to their estimated net realizable value. The adoption of SFAS 121 did not have a material effect on the Partnership's financial condition or results of operations.
REPORT of INDEPENDENT ACCOUNTANTS
To the Partners of Corporate Property Associates 3:
We have audited the accompanying balance sheets of Corporate Property Associates 3 (a California limited partnership) as of December 31, 1994 and 1995, and the related statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 1995. We have also audited the financial statement schedule included on pages 19 to 20 of this Annual Report. These financial statements and financial statement schedule are the responsibility of the General Partners. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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 the General Partners, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Corporate Property Associates 3 (a California limited partnership) as of December 31, 1994 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. In addition, in our opinion, the Schedule of Real Estate and Accumulated Depreciation as of December 31, 1995, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the financial information required to be included therein pursuant to Securities and Exchange Commission Regulation S- X Rule 12-28.
/s/ Coopers & Lybrand L.L.P.
NEW YORK, NEW YORK March 29, 1996
CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership)
BALANCE SHEETS December 31, 1994 and 1995
The accompanying notes are an integral part of the financial statements.
CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership)
STATEMENTS of INCOME
For the years ended December 31, 1993, 1994 and 1995
The accompanying notes are an integral part of the financial statements.
CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership)
STATEMENTS of PARTNERS' CAPITAL
For the years ended December 31, 1993, 1994 and 1995
(a) Based on 66,000 Units issued and outstanding during all periods.
The accompanying notes are an integral part of the financial statements.
CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership)
STATEMENTS of CASH FLOWS For the years ended December 31, 1993, 1994 and 1995
The accompanying notes are an integral part of the financial statements.
CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership)
NOTES to FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies: ------------------------------------------- Real Estate Leased to Others: ---------------------------- Real estate is leased to others on a net lease basis, whereby the tenant is generally responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance, repairs, renewals and improvements.
The Partnership diversifies its real estate investments among various corporate tenants engaged in different industries and by property type throughout the United States. The leases are accounted for under the direct financing or operating methods. Such methods are described below:
Direct financing method - Leases accounted for under the direct ----------------------- financing method are recorded at their net investment (Note 5). Unearned income is deferred and amortized to income over the lease terms so as to produce a constant periodic rate of return on the Partnership's net investment in the lease.
Operating method - Real estate is recorded at cost, revenue is ---------------- recognized as rentals are earned and expenses (including depreciation) are charged to operations as incurred.
Effective January 1, 1995, the Partnership adopted the provisions of Statement of Financial Accounting Standards No. 121 - Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of ("SFAS 121"). Pursuant to SFAS 121, the Partnership assesses the recoverability of its real estate assets, including residual interests, based on projections of cash flows over the life of such assets. In the event that such cash flows are insufficient, the assets are adjusted to their estimated net realizable value. The adoption of SFAS 121 did not have a material effect on the Partnership's financial condition or results of operations.
Substantially all of the Partnership's leases provide for either scheduled rent increases or periodic rent increases based on formulas indexed to increases in the Consumer Price Index ("CPI").
Use of Estimates: - -----------------
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Real Estate Held for Sale: - --------------------------
Real estate held for sale is accounted for at the lower of cost or fair value less costs to sell.
Depreciation: - -------------
Depreciation is computed using the straight-line method over the estimated useful lives of components of the property, which range from 5 to 36 years.
Cash Equivalents: - ----------------- Corporate Property Associates 3 (the "Partnership") considers all short-term, highly-liquid investments that are both readily convertible to cash and have a maturity of generally three months or less at the time of purchase to be cash equivalents. Items classified as cash equivalents include commercial paper and money market funds. Substantially all of the
Continued
CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership)
NOTES to FINANCIAL STATEMENTS, Continued
Partnership's cash and cash equivalents at December 31, 1994 and 1995 were held in the custody of two financial institutions.
Other Assets: - -------------
Included in other assets at December 31, 1994 are costs incurred in connection with mortgage note refinancings which are amortized on a straight-line basis over the terms of the mortgages.
Income Taxes: - -------------
A partnership is not liable for income taxes as each partner recognizes his proportionate share of the partnership income or loss in his tax return. Accordingly, no provision for income taxes is recognized for financial statement purposes.
2. Partnership Agreement: ----------------------
The Partnership was organized on November 7, 1980 under the Uniform Limited Partnership Act of the State of California for the purpose of engaging in the business of investing in and leasing industrial and commercial real estate. The Corporate General Partner purchased 200 Limited Partnership Units in connection with the Partnership's public offering. The Partnership will terminate on December 31, 2018, or sooner, in accordance with the terms of the Amended Agreement of Limited Partnership (the "Agreement").
The Agreement provides that the General Partners are allocated 2% (.1% to the Individual General Partner, William P. Carey, and 1.9% to the Corporate General Partner, W. P. Carey & Co., Inc. ("W.P. Carey") and the Limited Partners are allocated 98% of the profits and losses as well as distributions of distributable cash from operations, as defined. The partners are also entitled to receive net proceeds from the sale of the Partnership properties as defined in the Agreement. An affiliate of the General Partners may be entitled to incentive fees during the liquidation stage of the Partnership. A division of W.P. Carey is engaged in the real estate brokerage business. The Partnership may sell properties through the division and pay subordinated real estate commissions as provided in the Agreement. The division could ultimately earn a real estate commission of up to $675,477 with respect to the sales of properties, which amounts will be retained by the Partnership unless the subordination provisions of the Agreement are satisfied.
3. Transactions with Related Parties: ----------------------------------
Under the Agreement, a division of W.P. Carey is also entitled to receive a property management fee and reimbursement of certain expenses incurred in connection with the Partnership's operations. Property management fee in 1995 includes the effects of certain transactions described in Notes 10 and 11. General and administrative expense reimbursements consist primarily of the actual cost of personnel needed in providing administrative services necessary to the operation of the Partnership. Property management fee and general and administrative expense reimbursements are summarized as follows:
During 1993, 1994 and 1995, fees and expenses aggregating $246,406, $32,352 and $96,306, respectively, were incurred for legal services performed by a firm in which the Secretary of the Corporate General Partner and other affiliates is a partner.
Continued
CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership)
NOTES to FINANCIAL STATEMENTS, Continued
The Partnership is a participant in an agreement with W.P. Carey and other affiliates for the purpose of leasing office space used for the administration of real estate entities and W.P. Carey and for sharing the associated costs. Pursuant to the terms of the agreement, the Partnership's share of rental, occupancy and leasehold improvement costs is based on adjusted gross revenues as defined. Net expenses incurred in 1993, 1994 and 1995 were $50,655, $53,757 and $87,907 respectively. The increase in 1995 is due, in part, to certain nonrecurring costs incurred in connection with the relocation of the Partnership's offices.
On November 16, 1995, the Partnership borrowed $2,300,000 from W.P. Carey in connection with the retirement of a mortgage loan (see Note 11). The loan which is evidenced by a promissory note and bears interest at the prime rate requires the Partnership to pay the entire principal amount and accrued interest thereon on demand. The Partnership may prepay the note, in whole or in part, at any time without penalty. The retired mortgage loan had a fixed interest rate of 10%. Interest incurred of $25,586 on the loan is included in interest expense for the year ended December 31, 1995. Such amount is also included in accounts payable to affiliates as of December 31,1995. The Partnership repaid $1,500,000 to W.P. Carey since December 31, 1995.
The Partnership's ownership interests in certain properties are jointly held with affiliated entities as tenants-in-common with the Partnership's ownership interests in such jointly held properties ranging from 16.76% to 71.5%. The Partnership accounts for its assets and liabilities relating to tenants-in-common interests on a proportional basis.
4. Real Estate Leased to Others Accounted for Under the Operating Method: ----------------------------------------------------------------------
The scheduled minimum future rentals, exclusive of renewals, under a noncancelable operating lease with Hughes Markets, Inc. aggregate approximately $84,000 through April 1996 at which time the lease terminates.
Contingent rentals were approximately $36,000 in both 1993 and 1994 and $39,000 in 1995.
5. Net Investment in Direct Financing Leases: ------------------------------------------
Net investment in direct financing leases is summarized as follows:
The scheduled minimum future rentals, exclusive of renewals, under noncancelable direct financing leases amount to approximately $4,338,000 in 1996, $4,375,000 in 1997, $4,339,000 in 1998, $4,321,000 in 1999 and $4,360,000 in 2000 and aggregate approximately $72,193,000 through 2013.
Contingent rentals were approximately $1,904,000 in both 1993 and 1994 and $1,142,000 in 1995.
6. Distributions: --------------
Distributions are declared and paid to partners quarterly and are summarized as follows:
Continued
CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership)
NOTES to FINANCIAL STATEMENTS, Continued
Distributions of $15,599 to the General Partners and $804,540 to the Limited Partners for the quarter ended December 31, 1995 were declared and paid in January 1996.
7. Income for Federal Tax Purposes: --------------------------------
Income for financial statement purposes differs from income for Federal income tax purposes because of the difference in the treatment of certain items.for income tax purposes and financial statement purposes. A reconciliation of accounting differences is as follows:
8. Industry Segment Information: -----------------------------
The Partnership's operations consist of the investment in and the leasing of industrial and commercial real estate.
In 1993, 1994 and 1995, the Partnership earned its total operating revenues (rental income plus interest income from direct financing leases) from the following lease obligors:
9. Properties Formerly Leased to New Valley Corporation: ----------------------------------------------------- The Partnership and Corporate Property Associates 2 ("CPA(R):2"), an affiliate, own approximate 61% and 39% interests, respectively, in three properties located in Reno, Nevada; Bridgeton,
Continued
CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership)
NOTES to FINANCIAL STATEMENTS, Continued
Missouri and Moorestown, New Jersey. On April 1, 1993, the lessee, New Valley Corporation ("New Valley"), filed a petition of voluntary bankruptcy seeking reorganization under Chapter 11 of the United States Bankruptcy Code. In connection with the bankruptcy filing, the Bankruptcy Court approved New Valley's termination of its lease with the Partnership and CPA(R):2 for the Moorestown, New Jersey property in May 1993. In 1993, the Partnership wrote down the Moorestown property to its estimated net realizable value of $1,800,000 and recognized a charge of $1,302,318 on the writedown. In December 1994, the Bankruptcy Court also approved the termination of New Valley's lease on the Reno property effective December 31, 1994. In connection with the lease termination, the Partnership recognized a charge of $697,325 and wrote down the Reno property in 1994 to its estimated net realizable value of $2,000,000.
On April 7, 1995, the Partnership and CPA(R):2, entered into a net lease for the property with Sports & Recreation, Inc. ("Sports & Recreation") which is retrofitting the Moorestown Property into a retail store. The lease provided for a feasibility period through September 30, 1995 which was extended through December 31, 1995 and is followed by an initial term of 16 years. Sports & Recreation will commence paying rent at the earlier of completion of construction or 120 days after the end of the feasibility period (May 1, 1996). Sports & Recreation will incur all retrofitting costs; however, the Partnership and CPA(R):2 will reimburse Sports & Recreation for the cost of replacing the HVAC system and installing a new roof and drainage system. The Partnership's share of the cost for replacing the HVAC system and installing a new roof and drainage system is estimated to be approximately $458,000. Annual rentals will initially be $308,750 (of which the Partnership's share is approximately $187,750) during the first five lease years with stated increases every five years thereafter.
In connection with the termination of the Moorestown and Reno leases, the Partnership and CPA(R):2 expect to receive a bankruptcy settlement from New Valley. The amount of such settlement cannot be estimated and no amounts that the Partnership may ultimately receive have been recorded in the accompanying financial statements. The Partnership and CPA(R):2 are currently remarketing the Reno property.
10. Gain on Settlement: -------------------
During 1991, The Leslie Fay Company ("Leslie Fay") informed the Partnership that it was exercising an option to purchase its leased property from the Partnership as of April 30, 1992. Under the purchase option in the lease, Leslie Fay's purchase exercise price was to be the greater of $9,400,000, the price the Partnership paid for the property in 1982, or the fair market value of the property as impacted by the lease as of the option exercise date. The process of determining the fair market value of the property was underway when Leslie Fay filed suit to ask the court to intervene in order to determine the contractual interpretation of fair value. The court ruled in favor of the Partnership and the ruling was upheld on appeal by the Pennsylvania Superior and Supreme Courts. Leslie Fay also filed a second lawsuit seeking to transfer the property and other benefits of ownership. In connection with this second suit, the court ordered Leslie Fay to pay $7,200,000 to the Partnership as partial payment for the purchase of the Leslie Fay property, post a surety bond for $15,000,000 and to continue making its monthly payments of $190,516 to the Partnership, for application of such payments to the ultimate purchase price. Effective January 1, 1995, the monthly payment was reduced to $65,000. For financial reporting purposes, the $7,200,000 payment and all subsequent monthly payments were recorded as installment payments at the time such payments were received by the Partnership pending final resolution of the suits. In addition, Leslie Fay was entitled to interest on its monthly installments and the Partnership would be entitled to interest on the difference between the ultimate purchase price and the initial $7,200,000 payment upon resolution of the second suit.
Continued
CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership)
NOTES to FINANCIAL STATEMENTS, Continued
On April 5, 1993, Leslie Fay filed a voluntary bankruptcy petition under Chapter 11 of the United States Bankruptcy Code and continued to make monthly payments to the Partnership for the period subsequent to the filing of the petition. In July 1995, Leslie Fay, the Partnership, the surety company and the Official Committee of Unsecured Creditors of Leslie Fay signed and entered into a compromise and settlement agreement which was intended to resolve the dispute between Leslie Fay and the Partnership. The agreement was presented to the bankruptcy court on August 7, 1995 and subsequently approved.
In connection with a compromise and settlement agreement, on August 29, 1995, the Partnership received $5,250,000 plus interest of $174,149, from the surety company and, in turn, made a lump sum payment to Leslie Fay of $250,000. Under the agreement the Partnership unconditionally retained ownership of the property as well as the aggregate installment payments received from Leslie Fay of $13,665,601, consisting of the initial payment of $7,200,000 and $6,465,601 of monthly payments which were received through September 30, 1995.
As the fair value of the property was no longer impacted by the Leslie Fay lease, the Partnership wrote down the estimated estimated fair value of the property, net of anticipated selling costs, to $2,000,000 and recognized a noncash charge of $7,400,000, which is netted against the gain on settlement.
In connection with the settlement, the Partnership has recognized a gain of $11,499,176, which consists of aggregate net cash received from Leslie Fay and the surety company of $18,839,750 and the waiving of the $382,706 interest obligation that had been accrued on the Leslie Fay monthly payments, offset by the writedown of $7,400,000 and aggregate management fees, payable to an affiliate, of $323,280 on the monthly payments received from Leslie Fay. Under the compromise and settlement agreement, Leslie Fay is required to dismiss with prejudice all of its suits filed against the Partnership, and the Partnership's bankruptcy claim against Leslie Fay, as an unsecured creditor, has been reduced to $2,650,000. The Partnership may not realize the full amount of the bankruptcy claim.
As a result of the settlement, a special distribution of $120 per Limited Partner Unit ($7,920,000) was declared and paid in October 1995. In 1992, a special distribution of $50 per Limited Partner Unit ($3,300,000) was paid from the receipt of the $7,200,000 installment from Leslie Fay.
On January 10, 1996, the Partnership sold the vacant property to a third party, net of transaction costs, for $1,853,816. The Partnership has recognized an additional writedown on the property to an amount equal to the net sales proceeds, resulting in a charge to income in 1995 of $146,184. Accordingly, no gain or loss will be recognized in 1996 in connection with the sale.
11. Properties Leased to Gibson Greetings, Inc.: --------------------------------------------
On January 25, 1982, the Partnership and CPA(R):2 entered into a net lease with Gibson Greetings, Inc. ("Gibson"), for three properties in Memphis, Tennessee, Berea, Kentucky and Cincinnati, Ohio. In 1988, the Partnership and CPA(R):2 consented to Gibson's sublease of the Memphis, Tennessee property to a wholly-owned subsidiary, Cleo, Inc. ("Cleo"). The lease for the three properties had an initial term of 20 years with two five-year renewal options and provided for minimum annual rentals of $5,865,000 with increases every five years based on a formula indexed to the CPI. The lease also provided Gibson with a purchase option which was exercisable during the tenth year of the lease and at the end of the initial term. Gibson declined to exercise its option during the tenth lease year in 1992.
Continued
CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership)
NOTES to FINANCIAL STATEMENTS, Continued
In connection with Gibson's sale of the Cleo subsidiary to CSS Industries, Inc. ("CSS"), the Partnership, CPA(R):2 and Gibson entered into a transaction on November 15, 1995, whereby the Memphis, Tennessee property occupied by Cleo was severed from the Gibson master lease, the Gibson lease was amended and Cleo entered into a separate lease for the Tennessee property with CSS as the guarantor of Cleo's lease obligations. The Partnership and CPA(R):2 received $12,200,000 (of which the Partnership's share was $8,723,000) as a one-time lump sum payment in consideration for severing the Tennessee property from the Gibson master lease. Gibson still retains certain specific obligations for any environmental violations which may be detected and which resulted from any pre-existing conditions and is ensuring that roof repairs or replacement are performed on the Tennessee property. Gibson and Cleo have until May 15, 1996 to complete the roof repair.
The Gibson lease, as amended, on the two remaining properties in Kentucky and Ohio provides for an initial term which has been extended through November 30, 2013 and provides for one renewal term of ten years. Annual rent is $3,100,000 (of which the Partnership's share is approximately $2,367,000) with stated increases of 20% every five years through the end of the renewal term. The lease includes new purchase options, exercisable on November 30, 2005 and 2010 and Gibson has the right to exercise the purchase option on one of its leased properties or both. The option is exercisable at fair market value of the properties as encumbered by the lease.
The Cleo lease provides for a ten-year term through December 31, 2005 with two five-year renewal terms. Annual rent is $1,500,000 (of which the Partnership's share is approximately $1,145,000) with a rent increase effective January 1, 2001. The rent which will be based on a formula indexed to the CPI, will be at least $1,689,000 but no more than $1,898,000. Cleo has an option to purchase the property at any time during the term of the lease including the renewals terms so long as there is no event of monetary default. Exercise of the purchase option requires between six and twelve months notice. The exercise price is the greater of (i) $15,000,000 or (ii) fair market value capped at a maximum of $16,250,000.
In connection with consenting to sever the Tennessee property from the Gibson lease, the Partnership has deferred recognition of a gain on restructuring of $8,150,941, consisting of its $8,723,000 share of the lump sum payment offset by costs of $572,059, including management fees of $429,560, payable to an affiliate, and will amortize such deferral over the remaining initial terms of the Gibson and Cleo direct financing leases. The net proceeds from the agreement as well as other available funds were used to pay off the Partnership's share of the mortgage loan collateralized by the Gibson properties of $13,190,566 in November 1995.
12. Environmental Matters: ----------------------
All of the Partnership's properties are subject to environmental statutes and regulations regarding the discharge of hazardous materials and related remediation obligations. All but one of the Partnership's properties are currently leased to corporate tenants. The Partnership generally structures a lease to require the tenant to comply with all laws. In addition, substantially all of the Partnership's net leases include provisions which require tenants to indemnify the Partnership from all liabilities and losses related to their operations at the leased properties. The costs for remediation, which are being performed and paid for by the affected tenant at three of the properties, are not expected to be material. In the event that the Partnership absorbs a portion of
Continued
CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership)
NOTES to FINANCIAL STATEMENTS, Continued
such costs because of a tenant's failure to fulfill its obligations (or because a property currently has no tenant), the General Partners believe such expenditures will not have a material adverse effect on the Partnership's financial condition, liquidity or results of operations.
In 1994, based on the results of Phase I environmental reviews performed in 1993, the Partnership voluntarily conducted Phase II environmental reviews on four of its properties. The Partnership believes, based on the results of Phase I and Phase II reviews, that its properties are in substantial compliance with Federal and state environmental statutes and regulations. Portions of certain properties have been documented as having a limited degree of contamination, principally in connection with surface spills from facility activities. For those conditions which were identified, the Partnership advised the affected tenants of the Phase II findings and of their obligations to perform required remediation.
13. Disclosures About Fair Value of Financial Instruments: ------------------------------------------------------
The carrying amounts of cash, receivables and accounts payable and accrued expenses approximate fair value because of the short maturity of these items.
CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership)
SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1995
See accompanying notes to Schedule.
CORPORATE PROPERTY ASSOCIATES 3 (a California limited partnership)
NOTES TO SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION
(a) Consists of acquisition costs including legal fees, appraisal fees, title costs and other related professional fees, and the purchase of additional land subsequent to purchase.
(b) The increase (decrease) in net investment is due to the amortization of unearned income producing a constant periodic rate of return on the net investment which is greater (less) than lease payments received, the writedowns to net realizable value of the Moorestown, New Jersey; Reno, Nevada and Wilkes Barre, Pennsylvania properties and adjustments relating to deferred gains on lease restructurings.
(c) At December 31, 1995, the aggregate cost of real estate owned for Federal income tax purposes is $50,925,119.
(d) Reconciliation of Real Estate Accounted --------------------------------------- for Under the Operating Method ------------------------------
December 31, ------------ 1994 1995 ---- ---- Balance at beginning of period $ 3,769,927 $5,769,927
Additions during period
Reclassification from direct financing real estate 2,000,000 ---------- ---------
Balance at close of period $5,769,927 $5,769,927 ========== ==========
Reconciliation of Accumulated Depreciation ------------------------------------------
December 31, ----------- 1994 1995 ---- ----
Balance at beginning of period $ 818,045 $ 976,612
Depreciation expense for the period 158,567 198,590 ---------- ----------
Balance at close of period $ 976,612 $1,175,202 =========== ==========
PROPERTIES - -------------------------------------------------------------------------------
(1) Formerly leased to New Valley Corporation.
MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED UNITHOLDER MATTERS - --------------------------------------------------------------------------------
Except for limited or sporadic transactions, there is no established public trading market for the Limited Partnership Units of the Partnership. As of December 31, 1995 there were 2,457 holders of record of the Limited Partnership Units of the Partnership.
In accordance with the requirements of the Partnership's Amended Agreement of Limited Partnership (the "Agreement") contained as Exhibit A to the Prospectus, the Corporate General Partner expects to continue to make quarterly distributions of Distributable Cash From Operations as defined in the Agreement. The following table shows the frequency and amount of distributions paid per Unit since 1992:
(a) Includes a special distribution of $120 per Unit.
REPORT ON FORM 10-K - --------------------------------------------------------------------------------
The Corporate General Partner will supply to any owner of Limited Partnership Units, upon written request and without charge, a copy of the Annual Report on Form 10-K for the year ended December 31, 1995 as filed with the Securities and Exchange Commission.
DIRECTORS AND SENIOR OFFICERS - -------------------------------------------------------------------------------
The Partnership has no directors or officers. The directors and senior officers of the Corporate General Partner are as follows:
William Polk Carey Chairman of the Board Director Francis J. Carey President Director George E. Stoddard Chairman of the Investment Committee Director Raymond S. Clark Chairman of the Executive Committee Director Madelon DeVoe Talley Vice Chairman of the Board Director Barclay G. Jones III Executive Vice President Director Lawrence R. Klein Chairman of the Economic Policy Committee Director Claude Fernandez Executive Vice President Chief Administrative Officer Howard J. Altmann Senior Vice President H. Augustus Carey Senior Vice President John J. Park Senior Vice President Treasurer Debra E. Bigler First Vice President Ted G. Lagried First Vice President Anthony S. Mohl First Vice President Michael D. Roberts First Vice President Controller
The directors and senior officers of W. P. Carey & Co., Inc. are substantially the same as above.
A description of the business experience of each officer and director of the Corporate General Partner is set forth below:
William Polk Carey, Chairman and Chief Executive Officer, has been active in lease financing since 1959 and a specialist in net leasing of corporate real estate property since 1964. Before founding W.P. Carey & Co., Inc. ("W.P. Carey") in 1973, he served as Chairman of the Executive Committee of Hubbard, Westervelt & Mottelay (now Merrill Lynch Hubbard), head of Real Estate and Equipment Financing at Loeb Rhoades & Co. (now Lehman Brothers), head of Real Estate and Private Placements, Director of Corporate Finance and Vice Chairman of the Investment Banking Board of duPont Glore Forgan Inc. A graduate of the University of Pennsylvania's Wharton School of Finance, Mr. Carey is a Governor of the National Association of Real Estate Investment Trusts (NAREIT). He also serves on the boards of The Johns Hopkins University and its medical school, The James A. Baker III Institute for Public Policy at Rice University, and other educational and philanthropic institutions. He founded the Visiting Committee to the Economics Department of the University of Pennsylvania and co- founded with Dr. Lawrence R. Klein the Economics Research Institute at that university.
Francis J. Carey was elected President and a Managing Director of W.P. Carey in April 1987, having served as a Director since its founding in 1973. He served as a member of the Executive Committee and Board of Managers of the Western Savings Bank of Philadelphia from 1972 until its takeover by another bank in 1982 and is former chairman of the Real Property, Probate and Trust Section of the Pennsylvania Bar Association. Mr. Carey served as a member of the Board of Overseers of the School of Arts and Sciences of the University of Pennsylvania from 1983 through 1990 and has served as a member of the Board of Trustees of the Investment Program Association since 1990. From April 1987 until August 1992, he served as counsel to Reed Smith Shaw & McClay, counsel for Registrant, the General Partners, the CPA(R) Partnerships and W.P. Carey and some of its affiliates. A real estate lawyer of more than 30 years' experience, he holds A.B. and J.D. degrees from the University of Pennsylvania.
George E. Stoddard, Chief Investment Officer, was until 1979 head of the bond department of The Equitable Life Assurance Society of the United States, with responsibility for all activities related to Equitable's portfolio of corporate investments acquired through direct negotiation. Mr. Stoddard was associated with Equitable for over 30 years. He holds an A.B. degree from Brigham Young University, an M.B.A. from Harvard Business School and an LL.B. from Fordham University Law School.
Raymond S. Clark is former President and Chief Executive Officer of the Canton Company of Baltimore and the Canton Railroad Company. A graduate of Harvard College and Yale Law School, he is presently a Director and Chairman of the Executive Committee of W.P. Carey and served as Chairman of the Board of W.P. Carey from its founding in 1973 until 1982. He is past Chairman of the Maryland Industrial Development Financing Authority.
Madelon DeVoe Talley, Vice Chairman, is a member of the New York State Controller's Investment Committee, a Commissioner of the Port Authority of New York and New Jersey, former CIO of New York State Common Retirement Fund and New York State Teachers Retirement System. She also served as a managing director of Rothschild, Inc. and as the President of its asset management division. Besides her duties at W.P. Carey, Mrs. Talley is also a former Governor of the N.A.S.D. and is a director of Biocraft Laboratories, a New York Stock Exchange company. She is an alumna of Sarah Lawrence College and the graduate school of International Affairs at Columbia University.
Barclay G. Jones III, Executive Vice President, Managing Director, and co-head of the Investment Department. Mr. Jones joined W.P. Carey as Assistant to the President in July 1982 after his graduation from the Wharton School of the University of Pennsylvania, where he majored in Finance and Economics. He was elected to the Board of Directors of W.P. Carey in April 1992. Mr. Jones is also a Director of the Wharton Business School Club of New York.
Lawrence R. Klein, Chairman of the Economic Policy Committee since 1984, is Benjamin Franklin Professor of Economics Emeritus at the University of Pennsylvania, having joined the faculty of Economics and the Wharton School in 1958. He holds earned degrees from the University of California at Berkeley and Massachusetts Institute of Technology and has been awarded the Nobel Prize in Economics as well as over 20 honorary degrees. Founder of Wharton Econometric Forecasting Associates, Inc., Dr. Klein has been counselor to various corporations, governments, and government agencies including the Federal Reserve Board and the President's Council of Economic Advisers.
Claude Fernandez, Chief Administrative Officer, Managing Director, and Executive Vice President, joined W.P. Carey in 1983. Previously associated with Coldwell Banker, Inc. for two years and with Arthur Andersen & Co., he is a Certified Public Accountant. Mr. Fernandez received his B.S. degree in Accounting from New York University in 1975 and his M.B.A. in Finance from Columbia University Graduate School of Business in 1981.
Howard J. Altmann, Senior Vice President, Investment Department, joined W.P. Carey in August 1990. He was a securities analyst at Goldman Sachs & Co. for the retail industry from 1986 to 1988. Mr. Altmann received his undergraduate degree in economics and finance from McGill University and his M.B.A. from the Stanford University Graduate School of Business.
H. Augustus Carey, Senior Vice President, returned to W.P. Carey in 1988. Mr. Carey previously worked for W.P. Carey from 1979 to 1981 as Assistant to the President. Prior to rejoining W.P. Carey, Mr. Carey served as a loan officer of the North American Department of Kleinwort Benson Limited in London, England. He received an A.B. from Amherst College in 1979 and an M.Phil. in Management Studies from Oxford University in 1984. Mr. Carey is a trustee of the Oxford Management Centre Associates Council.
John J. Park, Senior Vice President and Treasurer, joined W.P. Carey as an Investment Analyst in December 1987. Mr. Park received his undergraduate degree from Massachusetts Institute of Technology and his M.B.A. in Finance from New York University.
Debra E. Bigler, First Vice President, joined W.P. Carey in 1989 as an assistant marketing director, rising to her present position where she bears responsibility for investor services throughout the southern United States. She was previously employed by E. F. Hutton & Company for nine years where she began as a Marketing Associate in Private Placement, Sales and Marketing and was then promoted to Regional Director.
Ted G. Lagreid, First Vice President, joined W.P. Carey in 1994 and is regional director responsible for investor services in the western United States. Prior to joining the firm, he was a Vice President with Shurgard Capital Group, then for Sun America where he was an executive in its mutual funds group. He earned an A.B. from the University of Washington, received an M.P.A. from the University of Puget Sound and then spent eight years in the city of Seattle's Office of Management and Budget and Department of Community Development. Mr. Lagreid was a commissioner of the City of Oakland, California, serving on its Community and Economic Advisory Commission.
Anthony S. Mohl, First Vice President, Director of Portfolio Management, joined W.P. Carey as Assistant to the President after receiving his M.B.A. from the Columbia University Graduate School of Business. Mr. Mohl was employed as an analyst in the strategic planning group at Kurt Salmon Associates after receiving an undergraduate degree from Wesleyan University.
Michael D. Roberts joined W. P. Carey as a Second Vice President and Assistant Controller in April 1989 and is currently First Vice President and Controller. Prior to joining W.P. Carey, Mr. Roberts was employed by Coopers & Lybrand, where he attained the title of audit manager. A certified public accountant, Mr. Roberts received a B.A. from Brandeis University and an M.B.A. from Northeastern University.