FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the Fiscal Year Ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from N/A Commission file number 0-15680 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) Massachusetts 04-2921566 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 200 Clarendon Street, Boston, MA 02116 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (800) 722-5457 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: Units of Investor Limited Partnership Interest Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filling requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. (See definition of affiliate in Rule 405.) Not applicable, since the securities are non-voting NOTE: If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this Form. Exhibit Index on Pages 29 - 33 Page 1 of 34 TABLE OF CONTENTS PART I Item 1 Business 3 Item 2 Properties 6 Item 3 Legal Proceedings 8 Item 4 Submission of Matters to a Vote of Security Holders 8 PART II Item 5 Market for the Partnership's Securities and Related Security Holder Matters 8 Item 6 Selected Financial Data 10 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 8 Financial Statements and Supplementary Data 22 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 22 PART III Item 10 Directors and Executive Officers of the Registrant 22 Item 11 Executive Compensation 25 Item 12 Security Ownership of Certain Beneficial Owners and Management 25 Item 13 Certain Relationships and Related Transactions 26 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 29 Signatures 34 2 Part I Item 1 - Business The Registrant, John Hancock Realty Income Fund Limited Partnership (the "Partnership"), is a limited partnership organized on June 12, 1986 under the Massachusetts Uniform Limited Partnership Act. As of December 31, 1996, the partners in the Partnership consisted of John Hancock Realty Equities, Inc. (the "General Partner"), John Hancock Realty Funding, Inc. (the "John Hancock Limited Partner"), and 4,142 Investor Limited Partners (the "Investors") owning 91,647 Units of Investor Limited Partnership Interests (the "Units"). The John Hancock Limited Partner and the Investors are collectively referred to as the Limited Partners. The initial capital of the Partnership was $2,000 representing capital contributions of $1,000 from the General Partner and $1,000 from the John Hancock Limited Partner. During the offering period, the John Hancock Limited Partner made additional capital contributions of $7,330,760. There have been no changes in the number of Units outstanding subsequent to the termination of the offering period. The Amended Agreement of Limited Partnership of the Partnership (the "Partnership Agreement") authorized the sale of up to 100,000 Units of Investor Limited Partnership Interests. The Units were offered and sold to the public during the period from September 9, 1986 to September 9, 1987, pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933. The Partnership sold the Units for $500 per Unit. No established public market exists on which the Units may be traded. The Partnership is engaged in the business of acquiring, improving, holding for investment and disposing of existing, income-producing, commercial and industrial properties on an all-cash basis, free and clear of mortgage indebtedness. Although the Partnership's properties were acquired and are held free and clear of mortgage indebtedness, the Partnership may incur mortgage indebtedness on its properties under certain circumstances, as specified in the Partnership Agreement. The latest date on which the Partnership is due to terminate is December 31, 2016, unless it is sooner terminated in accordance with the terms of the Partnership Agreement. It is expected that in the ordinary course of the Partnership's business, the properties of the Partnership will be disposed of, and the Partnership terminated, before December 31, 2016. 3 Item 1 - Business (continued) The Partnership's equity real estate investments are subject to various risk factors. Although the risks of equity investing are reduced when properties are acquired on an unleveraged basis, the major risk of owning income-producing properties is the possibility that the properties will not generate income sufficient to meet operating expenses and to fund adequate reserves for repairs, replacements, contingencies and anticipated obligations. The income received from properties may be affected by many factors, including: i) adverse changes in general economic conditions and local conditions, such as competitive over-building, a decrease in employment, or adverse changes in real estate zoning laws, which may reduce the desirability of real estate in the area or ii) other circumstances over which the Partnership may have little or no control, such as fires, earthquakes and floods. To the extent that the Partnership's properties are leased in any substantial portion to a specific retail, industrial or office tenant, the financial failure of any such major tenant, resulting in the termination of the tenant's lease or non-payment of rental amounts due, would likely cause at least a temporary reduction in cash flow from any such property and might result in a decrease in the market value of that property. Under various federal, state and local laws, ordinances and regulations, an owner or operator of real property may become liable for the costs of removal or remediation of certain hazardous substances released on or in its property. Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. If any such substances were found in or on any property owned by the Partnership, the Partnership could be exposed to liability and be required to incur substantial remediation costs. The presence of such substances or the failure to undertake proper remediation could adversely affect the ability to finance, refinance or dispose of such property. On October 24, 1986, the Partnership acquired the 1300 North Dutton Avenue, an office/industrial facility located in Santa Rosa, California. The tenant that had leased all of the rentable space at the property notified the Partnership during 1994 that it would not renew its lease, which expired on January 31, 1995. The property remained vacant after January 31, 1995 until the General Partner secured a new tenant, Union Oil Company of California, to occupy the entire property under a five year lease which commenced in October 1996. Although real estate market conditions for office/industrial space in Santa Rosa have declined since the Partnership acquired the 1300 North Dutton Avenue property, leasing activity and rental rates have increased during recent months. Due to this new lease at the property and the current favorable market conditions in the Santa Rosa, California area, the General Partner listed the 1300 North Dutton Avenue property for sale during October 1996. 4 Item 1 - Business (continued) On February 17, 1987, the Partnership acquired the Marlboro Square Shopping Center, a neighborhood shopping center located in Marlboro, Massachusetts. Market conditions in Marlboro have weakened since the Partnership acquired the property and have remain depressed. An excess of supply over demand for retail space has resulted in continued high vacancy rates and competitive pricing for leasing space in the Marlboro area. In addition, a new retail development within close proximity to Marlboro Square commenced operations during August 1996. The General Partner anticipates that absorption of existing retail space in the Marlboro area will remain sluggish during 1997 due to both the lack of demand and the recent increase in available retail space in the area. The General Partner will continue to offer competitive rental rates and concessions at Marlboro Square in an effort to retain existing tenants and to lease the remaining vacant space at the property. On November 20, 1987, the Partnership acquired the Crossroads Square Shopping Center, a neighborhood shopping center located in Jacksonville, Florida. Although real estate market conditions for retail properties in Jacksonville have declined as compared to when the Partnership acquired the property, occupancy levels and rental rates within the market have stabilized over recent years and remain relatively favorable. The General Partner anticipates that these favorable retail market conditions in Jacksonville and at the property should continue during 1997. On December 22, 1987, the Partnership acquired the Carnegie Center, a multi-tenant office/industrial facility located in Cincinnati, Ohio. Since the Partnership acquired the Carnegie Center, the Cincinnati industrial real estate market has experienced an oversupply of office/industrial space, which has resulted in a decline in rental rates and an increase in vacancy rates. In addition, during 1994 a tenant that had occupied 45% of the Carnegie Center property did not renew its leases upon their expirations and, as a result, the property's occupancy declined to 35%. As of December 31, 1996, the property's occupancy was 64%. The General Partner anticipates that market conditions in Cincinnati will remain competitive during 1997 and, therefore, will continue to offer competitive rental rates and concessions in an effort to further increase occupancy at Carnegie Center. On February 25, 1988, the Partnership acquired the Warner Plaza Shopping Center, a neighborhood shopping center located in Chandler, Arizona. The Partnership acquired Warner Plaza exclusive of areas totaling 55,562 rentable square feet owned by a non-affiliate of the Partnership. Real estate market conditions have declined in the Chandler area since the Partnership acquired the property. However, steady population growth in the Chandler area over the past few years has increased demand for available retail space and stimulated the development of new retail space. The Warner Plaza Shopping Center property was 100% leased at December 31, 1996. The General Partner anticipates favorable retail market conditions to continue in the Chandler area during 1997 and that the property should provide the Partnership with stable income performance during 1997. 5 Item 1 - Business (continued) On September 13, 1988, the Partnership acquired the J.C. Penney Credit Operations Center, an office/service center located in Albuquerque, New Mexico and 100% occupied by J.C. Penney. J.C. Penney's lease had been scheduled to expire during 1996; however, during the first quarter of 1995, the General Partner negotiated an extension of the lease through June 2006. The General Partner listed the J.C. Penney Credit Operations Center for sale during July 1995 based upon the extension of J.C. Penney's lease at the property and the then existing favorable real estate market conditions in Albuquerque, New Mexico. On December 29, 1995, the Partnership sold the J.C. Penney Credit Operations Center to a non-affiliated buyer for a gross sales price of $5,600,000 and received net sales proceeds of $5,392,032, after deductions for commissions and selling expenses incurred in connection with the sale of the property. During February 1996, the Partnership distributed $5,315,526 of the net sales proceeds, of which $4,582,350 was distributed to the Investors, and $733,176 was distributed to the John Hancock Limited Partner. The remaining net sales proceeds of $76,506 were retained in the Partnership's working capital reserves. Within the power accorded to the General Partner under the terms of the Partnership Agreement, the General Partner contracted, effective as of January 1, 1992, with Hancock Realty Investors Incorporated ("HRI"), a wholly-owned, indirect subsidiary of John Hancock Mutual Life Insurance Company ("John Hancock"), to assist the General Partner in the performance of its management duties as enumerated in the Partnership Agreement. Effective May 28, 1993, HRI subcontracted with John Hancock to assist HRI in the performance of its duties as enumerated in the January 1, 1992 contract. The Partnership has not incurred any additional costs or expenses as a result of these agreements. The General Partner is further described in Item 10 ("Directors and Executive Officers of the Partnership") of this Report. Industry segment information has not been provided since the Partnership is engaged in only one industry segment. Item 2 - Properties At December 31, 1996, the Partnership held five properties in its portfolio. 1300 North Dutton Avenue Office Complex - --------------------------------------- On October 24, 1986, the Partnership purchased the 1300 North Dutton Avenue office building ("1300 North Dutton Avenue"), located in Santa Rosa, California, from a non-affiliated seller. The property consists of one building with 24,120 rentable square feet of office space. The building and two adjacent buildings comprise "Park Campus", an association which in common owns a 5.9 acre parcel with landscaping and parking serving all three buildings. 1300 North Dutton Avenue's allocation of interest in Park Campus is approximately 32% and includes the exclusive right to use 95 parking spaces. This property was listed for sale during October 1996. 6 Item 2 - Properties (continued) 1300 North Dutton Avenue Office Complex (continued) - --------------------------------------- For the year ended December 31, 1996, the average occupancy of 1300 North Dutton Avenue was 25%. At December 31, 1996, the property was 100% leased to Union Oil Company of California under a lease which expires on September 30, 2001. Marlboro Square Shopping Center - ------------------------------- On February 17, 1987, the Partnership purchased the Marlboro Square Shopping Center ("Marlboro Square"), located in Marlboro, Massachusetts, from a non-affiliated seller. The property consists of two freestanding buildings. One of the buildings contains 39,150 rentable square feet, and the other building contains 3,000 rentable square feet, for a total of 42,150 rentable square feet of space. For the year ended December 31, 1996, the average occupancy of Marlboro Square was 80%. At December 31, 1996 Marlboro Square's occupancy was 70%. Crossroads Square Shopping Center - --------------------------------- On November 20, 1987, the Partnership purchased the Crossroads Square Shopping Center ("Crossroads Square"), located in Jacksonville, Florida, from a non-affiliated seller. Crossroads Square contains 174,196 rentable square feet of space with a total land area in excess of 18.5 acres. For the year ended December 31, 1996, the average occupancy of Crossroads Square was 93%. At December 31, 1996, Crossroads Square's occupancy was 93%. Carnegie Center Office/Warehouse - -------------------------------- On December 22, 1987, the Partnership purchased Carnegie Center, located in Cincinnati, Ohio, from a non-affiliated seller. The property consists of two buildings containing an aggregate of 128,059 rentable square feet with a total land area of approximately 7.8 acres. For the year ended December 31, 1996, the average occupancy of Carnegie Center was 61%. At December 31, 1996, Carnegie Center's occupancy was 64%. Warner Plaza Shopping Center - ---------------------------- On February 25, 1988, the Partnership purchased 92,848 rentable square feet of the Warner Plaza Shopping Center ("Warner Plaza") (which consists of a total of 148,410 rentable square feet), located in Chandler, Arizona, from a non-affiliated seller. For the year ended December 31, 1996, average occupancy, for the portion of Warner Plaza which is owned by the Partnership, was 100%. At December 31, 1996 occupancy for such portion was 100%. The foregoing properties are described more fully in Items 1, 2 and 7 and Note 4 to the Financial Statements included in Item 8 of this Report. 7 Item 3 - Legal Proceedings In February 1996, a putative class action complaint was filed in the Superior Court in Essex County, New Jersey by a single investor in a limited partnership affiliated with the Partnership. The complaint named as defendants the Partnership, the General Partner, certain other affiliates of the General Partner, and certain unnamed officers, directors, employees and agents of the named defendants. The plaintiff sought unspecified damages stemming from alleged misrepresentations and omissions in the marketing and offering materials associated with the Partnership and two limited partnerships affiliated with the Partnership. The complaint alleged, among other things, that the marketing materials for the Partnership and the affiliated limited partnerships did not contain adequate risk disclosures. On March 18, 1997, the court certified a class of investors who were original purchasers in the Partnership. The certification order should not be construed as suggesting that any member of the class is entitled to recover, or will recover, any amount in the action. The General Partner believes the allegations are totally without merit and will continue to vigorously contest the action. There are no other material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Partnership, to which the Partnership is a party or to which any of its properties is subject. Item 4 - Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders of the Partnership during the fourth quarter of 1996. Part II Item 5 - Market for the Partnership's Securities and Related Security Holder Matters (a) Market Information The Partnership's outstanding securities consist of 91,647 Units originally sold for $500 per Unit. The Units were offered and sold to the public during the period from September 9, 1986 to September 9, 1987. No established public market exists on which the Units may be traded. Consequently, holders of Units may not be able to liquidate their investments in the event of an emergency, or for any other reason. Additionally, the assignment or other transfer of Units would be subject to compliance with the minimum investment and suitability standards imposed by the Partnership or by applicable law, including state "Blue Sky" laws. 8 Item 5 - Market for the Partnership's Securities and Related Security Holder Matters (b) Number of Security Holders Number of Number of Units record holders as of outstanding as of Title of Class December 31, 1996 December 31, 1996 -------------- ----------------- ----------------- Units of Investor Limited Partnership Interests 4,142 91,647 (c) Dividend History and Restrictions During the fiscal year ended December 31, 1996, the Partnership distributed cash in the aggregate amount of $7,485,429 to the Partners. Of this amount, $2,169,903 was generated from Distributable Cash from Operations (defined in the Partnership Agreement), and $5,315,526 was generated from Distributable Cash from Sales or Financings (defined in the Partnership Agreement). During the fiscal year ended December 31, 1995, the Partnership distributed cash in the amount of $2,314,318 from Distributable Cash from Operations. These amounts were distributed in accordance with the Partnership Agreement. The following table reflects aggregate cash distributions with respect to Distributable Cash from Operations and Distributable Cash from Sales or Refinancings (in each case, as defined in the Partnership Agreement) made during 1995 and 1996: Amount Paid to Date of Amount of Amount Paid to John Hancock Amount Paid Distribution Distribution Distribution General Partner Limited Partner to Investors Per Unit ------------ ------------ -------------- -------------- ------------ -------- February 15, 1995 $578,579 $5,786 $- $572,793 $6.25 May 15, 1995 578,580 5,786 - 572,794 6.25 August 15, 1995 578,580 5,786 - 572,794 6.25 November 15, 1995 578,579 5,785 - 572,794 6.25 February 15, 1996 * 5,894,105 5,785 733,176 5,155,144 56.25 May 15, 1996 548,956 5,489 - 546,467 5.93 August 15, 1996 521,184 5,212 - 515,972 5.63 November 15,1996 521,184 5,212 - 515,972 5.63 * Includes Distributable Cash from Sales or Refinancings 9 Item 5 - Market for the Partnership's Securities and Related Security Holder Matters (c) Dividend History and Restrictions (continued) The source of future distributions from cash from operations is dependent upon cash generated by the Partnership's investments and the use of working capital reserves for leasing costs and capital expenditures. Distributions of Cash from Operations during the year ended 1996 represent a 5% return on Investors' Invested Capital. The General Partner anticipates that the Partnership will make distributions of Cash from Operations in 1997 comparable to those made during both 1996 and 1995. For further discussion on the financial condition and results of operations of the Partnership see Item 7 of this Report. Should any of the Partnership's properties be sold, the General Partner will make a distribution of Distributable Cash from Sales or Refinancings, as provided in the Partnership Agreement. The 1300 North Dutton Avenue property was listed for sale in October 1996. There can be no assurances that the property will be sold, or what the sales price may be, or how much cash will be distributable to Limited Partners, if any, if the property is sold. Item 6 - Selected Financial Data The following table sets forth selected financial information regarding the Partnership's financial position and operating results for the five year period ended December 31, 1996. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Financial Statements and Notes thereto, which are included in Items 7 and 8, respectively, of this Report. Years Ended December 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Rental income $2,614,989 $3,065,751 $3,618,826 $3,519,445 $3,648,457 Interest income 171,767 173,286 110,982 71,557 87,970 Gain on sale of property - 128,539 - - - Net (loss)/income (851,115) 1,551,706 1,497,221 1,684,608 1,095,594 Net (loss)/income per Unit (b) (5.60) 17.42 17.02 18.95 12.49 Ordinary tax income (a) 1,130,346 1,480,158 2,128,148 1,826,365 2,042,510 Ordinary tax income per Unit (b) 12.74 16.80 23.61 20.35 22.68 Cash distribution per Unit from operations 23.44 25.00 25.00 28.75 30.00 Distributable cash from sales or financings - 5,315,526 - - - Cash distribution per Unit from sales or financings 50.00 Cash and cash equivalents at December 31 2,197,847 8,397,420 3,124,999 2,359,803 2,552,370 Total assets at December 31 25,375,190 33,605,444 34,325,239 35,150,707 36,092,419 10 Item 6 - Selected Financial Data (continued) (a) The ordinary tax income for the Partnership was allocated as follows: Years Ended December 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- General Partner $11,303 $14,802 $21,281 $18,263 $20,425 John Hancock Limited Partner (48,573) (74,321) (56,684) (56,684) (56,684) Investors 1,167,586 1,539,677 2,163,551 1,864,786 2,078,769 ---------- ---------- ---------- ---------- ---------- Total $1,130,346 $1,480,158 $2,128,148 $1,826,365 $2,042,510 ========== ========== ========== ========== ========== (b) The actual ordinary tax income per Unit has not been presented because the actual ordinary tax income/(loss) is allocated between tax-exempt and tax-paying entities based upon the respective number of Units held by each group at December 31, 1996, 1995, 1994, 1993 and 1992. The ordinary tax income per Unit as presented was computed by dividing the Investors' share of ordinary tax income by the number of Units outstanding at December 31, 1996, 1995, 1994, 1993 and 1992, respectively. Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations General - ------- During the offering period from September 9, 1986 to September 9, 1987, the Partnership sold 91,647 Units representing gross proceeds (exclusive of the John Hancock Limited Partner's contribution which was used to pay sales commissions, acquisition fees and organizational and offering expenses) of $45,823,500. The proceeds of the offering were used to acquire investment properties and fund reserves. These properties are described more fully in Item 2 and Note 4 to the Financial Statements included in Item 8 of this Report. Liquidity and Capital Resources - ------------------------------- At December 31, 1996, the Partnership had $2,197,847 in cash and cash equivalents, $5,799 in restricted cash and $53,333 in long-term restricted cash. The Partnership's cash and cash equivalents decreased by $6,199,573 from December 31, 1995 to December 31, 1996 primarily due to the distribution of proceeds from the sale of the J.C. Penney Credit Operations Center during the first quarter of 1996 and also due to leasing costs incurred at the Partnership's properties. 11 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources (continued) - ------------------------------------------- The Partnership has established a working capital reserve with a current balance of approximately 3% of the offering proceeds. The General Partner anticipates that such amount should be sufficient to satisfy the Partnership's general liquidity requirements. Liquidity would, however, be materially adversely affected by a significant reduction in revenues or significant unanticipated operating costs or unanticipated capital expenditures. If any or all of these events were to occur, to the extent that working capital reserves would be insufficient to satisfy the cash requirements of the Partnership, it is anticipated that additional funds would be obtained through a further reduction of cash distributions to Investors, bank loans, short-term loans from the General Partner or its affiliates or the sale or financing of Partnership properties. During 1996, cash from working capital reserves was used for the payment of leasing costs in the aggregate amount of $953,606 incurred at the 1300 North Dutton Avenue, Carnegie Center, Marlboro Square and Crossroads Square properties. The General Partner estimates that the Partnership will incur approximately $342,000 of leasing costs at its properties during 1997, of which approximately $238,000 is expected to be incurred at the Carnegie Center property in connection with the Partnership's efforts to secure new tenants to lease the available space. The General Partner anticipates that the current balance in the working capital reserve should be sufficient to pay such costs. During the years ended December 31, 1996 and 1995, approximately $75,000 and $167,000, respectively, of cash from operations was used to fund non- recurring maintenance and repair expenses incurred at the Partnership's properties. The General Partner estimates that the Partnership will incur approximately $140,000 of non-recurring maintenance and repair expenses at its properties during 1997. These expenses will be funded from the operations of the Partnership's properties and are not expected to have a significant impact on the Partnership's liquidity. Cash in the aggregate amount of $7,485,429 was distributed to the Partners during 1996. Of this amount, $2,169,903 was generated from Distributable Cash from Operations, and $5,315,526 was generated from Distributable Cash from Sales or Financings. These amounts were distributed in accordance with the Partnership Agreement and were allocated as follows: From Distributable From Distributable Cash From Cash From Operations Sales or Financings ---------- ------------------- Investors $2,148,204 $4,582,350 John Hancock Limited Partner - 733,176 General Partner 21,699 - ---------- ---------- Total $2,169,903 $5,315,526 ========== ========== 12 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources (continued) - ------------------------------------------- The amount distributed to Investors from Distributable Cash from Operations during 1996 represented a 5% annualized return on Investors' Invested Capital. The following table summarizes the leasing activity and occupancy status at the Partnership's properties during 1996: 1300 North Marlboro Sq. Crossroads Sq. Carnegie Warner Pl. Dutton Ave. Shopping Ctr. Shopping Ctr. Center Shopping Ctr. ----------- ------------- ------------- ------ ------------- Square Feet 24,120 42,150 174,196 128,059 92,848 Occupancy at January 1, 1996 0% 69% 93% 56% 100% ==== ==== ==== ==== ==== New Leases 100% 27% 0% 8% 0% Lease Renewals 0% 8% 5% 11% 0% Leases Expired 0% 26% 0% 0% 0% Occupancy at December 31, 1996 100% 70% 93% 64% 100% ==== ==== ==== ==== ==== Leases Scheduled to Expire During 1997 0% 0% 3% 3% 3% ==== ==== ==== ==== ==== Leases Scheduled to Commence During 1997 0% 0% 0% 2% 0% ==== ==== ==== ==== ==== All of the rentable space at the 1300 North Dutton Avenue property became vacant when the former tenant's lease expired on January 31, 1995 and remained vacant until October 1996. During July 1996, the General Partner entered into a lease on behalf of the Partnership with a new tenant, Union Oil Company of California, to take occupancy of the entire property. The lease, which commenced in October 1996, is for a five year term with a base rent of approximately $355,000 for the first lease year. The Partnership incurred approximately $685,000 in leasing costs in connection with this lease during 1996. Due to this new lease at the property and current favorable real estate market conditions in Santa Rosa, California, the General Partner listed the 1300 North Dutton Avenue property for sale during October 1996. 13 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources (continued) - ------------------------------------------- At December 31, 1996, Marlboro Square's occupancy was 70%. During 1996, new leases on 27% of the property were executed, but leases on 26% of the property expired. Of the new leases, one tenant, occupying approximately 7% of the property, has not met its rental obligations since the lease commenced in December 1996. The General Partner will pursue collection of all past due rental amounts owed by this tenant as well as all future obligations not met by this tenant. The General Partner anticipates that absorption of existing retail space in the Marlboro, Massachusetts area will remain sluggish during 1997 based upon both the lack of demand and increase in retail space in the area. The increase in retail space is due to a new retail development near to the Marlboro Square property which commenced operations during August 1996. The General Partner will continue to offer competitive rental rates and concessions in an effort to retain existing tenants as well as to lease the remaining vacant space at the property. During 1994, a tenant that had occupied 45% of the Carnegie Center property did not renew its leases upon their expirations and, as a result, the property's occupancy declined to 35%. Carnegie Center's occupancy was 64% at December 31, 1996 and increased to 66% as of the date hereof with the addition of a new tenant that took occupancy of approximately 3,000 square feet in February 1997. The Cincinnati area has an oversupply of industrial space which has resulted in increased competition among landlords for available tenants. Rental rates and concessions are priced aggressively in an effort to secure new tenants as well as retain existing tenants at the property. A tenant at the Crossroads Square property, with a lease for approximately 12,500 square feet, or 7% of the property, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code in March 1996. Prior to filing for protection, this tenant discontinued satisfying its rental obligations and subsequently requested a reduction in its rental payments through the end of its lease, which is scheduled to expire in October 2003. Given the current favorable real estate market conditions in the area where Crossroads Square is located, the General Partner did not agree to a reduced rental amount. This tenant has since resumed paying its rent, but it remains two months in arrears on its past due rental obligations. The General Partner will pursue full collection of this past due rental amount and any future rental obligations not met by this tenant. A tenant at the Warner Plaza property with a lease for approximately 13,000 square feet, or 14% of the property, vacated its space during August 1996. The tenant continues to make all rental payments due under the lease. Under the terms of its lease, the tenant has an option to terminate its lease obligations in April 1999. The General Partner has commenced efforts to find a replacement tenant for this space and negotiate a lease buyout with the former tenant. In addition, one tenant at the property that occupied approximately 1,600 square feet, or 2% of the property, had a clause in its lease allowing it to terminate its lease if this above described tenant vacates the property. This tenant terminated its lease, which had been scheduled to expire in August 2000, effective February 24, 1997. 14 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources (continued) - ------------------------------------------- The General Partner believes that, based upon the current occupancy and tenant mix at Crossroads Square and Warner Plaza, as well as the current real estate market conditions in the areas in which these properties are located, these properties should provide the Partnership with stable income performance during 1997. During the second quarter of 1996, the General Partner had the Marlboro Square Shopping Center property independently appraised. Based upon the appraiser's investigation and analysis, the property's market value was estimated to be approximately $1,650,000. The net book value of the Marlboro Square Shopping Center property of approximately $2,309,000 at June 30, 1996 was evaluated in comparison to its estimated future undiscounted cash flows and to the independent appraisal. Based upon such evaluation, the General Partner determined that the property's estimated future undiscounted cash flows were not expected to exceed its then net book value. Therefore, a write-down of $660,000, representing the difference between the property's net book value and its estimated market value (and not its estimated future undiscounted cash flows), was required at June 30, 1996. Weak absorption of available retail space in Marlboro, Massachusetts, in general, has contributed to the decline in this property's value. The General Partner evaluated Marlboro Square's carrying value at December 31, 1996 in comparison to the estimated future undiscounted cash flows and determined that no further impairment in value existed and, therefore, an additional write-down in value was not required. The Partnership's cumulative investment in the property, before accumulated depreciation and write-downs, is approximately $5,254,000. During the third quarter of 1996, the General Partner had the Carnegie Center property independently appraised. Based upon the appraiser's investigation and analysis, the property's market value was estimated to be approximately $3,800,000. The carrying value of the Carnegie Center property of approximately $5,098,000 at September 30, 1996 was evaluated in comparison to its estimated future undiscounted cash flows and the independent appraisal. Based upon such evaluation, the General Partner determined that the property's estimated future undiscounted cash flows were expected to exceed its carrying value and, therefore, a write-down in value was not required at September 30, 1996. The General Partner evaluated the carrying value of the Carnegie Center property of approximately $5,047,000 at December 31, 1996 in comparison to its estimated future undiscounted cash flows and a recent internal appraisal. Based upon such evaluation, the General Partner determined that the property's estimated future undiscounted cash flows were not expected to exceed its carrying value. Therefore, a write-down of $1,247,093, representing the difference between the property's carrying value and its estimated current market value (and not its estimated future undiscounted cash flows) was required as of December 31, 1996. Since the date of the independent appraisal, the General Partner's estimate of future lease acquisition costs has increased, causing the property's estimated future undiscounted cash flows to not exceed its carrying value. An excess of supply over demand for industrial space in Cincinnati, Ohio, in general, has contributed to the decline in this property's value. The Partnership's cumulative investment in the property, before accumulated depreciation and write-downs, is approximately $8,005,000. 15 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources (continued) - ------------------------------------------- The General Partner also evaluated the carrying value of each of the Partnership's other properties as of December 31, 1996 by comparing such value to the respective property's future undiscounted cash flows and the then most recent internal appraisal. Based on such evaluations, the General Partner determined that no impairment in values exist with respect to these properties and no write-downs were recorded as of December 31, 1996. The General Partner will continue to conduct property valuations, using internal or independent appraisals, in order to determine whether a permanent impairment in value exists on any of the Partnership's properties. Results of Operations - --------------------- Average occupancy for the Partnership's properties was as follows: Years ended December 31, 1996 1995 1994 ---- ---- ---- 1300 North Dutton Avenue Office Complex 25% 8% 100% Marlboro Square Shopping Center 81% 73% 81% Crossroads Square Shopping Center 93% 94% 94% Carnegie Center Office/Industrial 61% 47% 65% Warner Plaza Shopping Center 100% 99% 97% J.C. Penney Credit Operations Center N/A N/A 100% Results of Operations - 1996 compared with 1995 The Partnership generated a net loss of $851,115 for the year ended December 31, 1996 as compared to net income of $1,551,706 during the year ended December 31, 1995. Included in the results for 1996 are write-downs in the value of two of the Partnership's properties in the aggregate amount of $1,907,093. Included in the results for 1995 is a non-recurring gain in the amount of $128,539 resulting from the sale of the J.C. Penney Credit Operations Center (J.C. "Penney") in December 1995 and approximately $438,000 of net income generated at the J.C. Penney property during 1995. Also, the Partnership's 1995 results reflect the collection of a one time payment of approximately $82,000 made by the former tenant at the 1300 North Dutton Avenue property because of alterations it made to the property without the consent of the General Partner, as required under the terms of its lease agreement. Excluding the amounts described above, the Partnership's net income increased by 17% during 1996 as compared to 1995 as a result of increases in the performance of the Carnegie Center, Warner Plaza and 1300 North Dutton Avenue properties. Partially offsetting these increases were a decrease in the performance of the Marlboro Square property and increases in the Partnership's general and administrative expenses and amortization of lease acquisition costs. 16 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations (continued) - --------------------------------- Rental income for the year ended December 31, 1996 decreased by $450,762, or 15%, as compared to 1995. This decrease was primarily due to the sale of J.C. Penney. Excluding the rental income generated by J.C. Penney during 1995, rental income increased by 6% during 1996 as compared to 1995. This increase is primarily due to increases in rental income at the 1300 North Dutton Avenue and Carnegie Center properties which were partially offset by a decrease in rental income at the Marlboro Square property. Rental income increased by 190% and 35% between periods at the 1300 North Dutton Avenue and Carnegie Center properties, respectively, primarily due to an increase in average occupancy at the properties. Although average occupancy increased between periods at Marlboro Square, rental income decreased by 18% primarily due to a significant reduction in the rental rate paid by the anchor tenant at the property. Rental income also decreased at Marlboro Square because rental rates on leases executed during 1995 and 1996 were less than the rates contracted and paid by previous tenants at the property. Rental income at the Crossroads Square and Warner Plaza properties was consistent between periods. Depreciation expense for the year ended December 31, 1996 decreased by $179,535, or 19%, as compared to the same period in 1995. This decrease is primarily due to the sale of J.C. Penney. The Partnership's share of property operating expenses for the year ended December 31, 1996 decreased by $179,985, or 37%, as compared to the same period in 1995. This decrease is primarily due to decreases in the Partnership's share of operating expenses at the Carnegie Center and Warner Plaza properties partially offset by an increase in the Partnership's share of property operating expenses at the 1300 North Dutton Avenue property. Property operating expenses at the Carnegie Center property decreased by 51% as compared to 1995. The property incurred approximately $25,000 and $87,000 of non-recurring maintenance and repair expenses during 1996 and 1995, respectively. Excluding these amounts, the Partnership's share of property operating expenses at Carnegie Center decreased by 39%, as a result of an increase in average occupancy at the property and, therefore, an increase in tenant reimbursements for such expenses. The Partnership's share of property operating expenses decreased at the Warner Plaza property by 57% in 1996 as compared to 1995. The property incurred approximately $21,000 and $54,000 of non-recurring maintenance and repair expenses during 1996 and 1995, respectively. Excluding these amounts, the Partnership's share of property operating expenses at Warner Plaza decreased by 53% in 1996 as compared to 1995. This decrease primarily resulted because the accrual of tenant reimbursements due for 1995 and payable in 1996 was understated. Therefore, when the actual 1995 reimbursements were collected in 1996, it had the effect of reducing the Partnership's share of property operating expenses in 1996. The Partnership's share of property operating expenses at the Crossroads Square property were consistent between periods. The property incurred approximately $20,000 and $22,000 of non-recurring maintenance and repair expenses during 1996 and 1995, respectively. 17 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations (continued) - --------------------------------- The Partnership's share of property operating expenses at the 1300 North Dutton Avenue property increased by 7% in 1996 as compared to 1995 primarily due to the fact that the property was unoccupied during 1995 and only minor routine maintenance and repair expenses were incurred during that time. A new tenant took occupancy of the property in October 1996. General and administrative expenses for the year ended December 31, 1996 increased by $123,770, or 52%, primarily due to legal fees incurred by the Partnership in connection with the class action complaint filed against the Partnership during February 1996. (For further information regarding the class action complaint, see Item 3-Legal Proceedings). Excluding this amount, general and administrative expenses increased by 6% between years primarily due an increase in the time required to be expended by the General Partner in connection with its efforts to secure a tenant at the 1300 North Dutton Avenue property and to secure new leases at the Marlboro Square and Carnegie Center properties. Amortization of deferred expenses for the year ended December 31, 1996 increased by $75,970, or 57%, as compared to 1995 primarily due to the amortization of lease acquisition costs related to leasing activity which occurred at the Partnership's properties during both 1996 and 1995. Management fee expense, which is equal to 3.5% of Cash from Operations, decreased by $7,320, or 9%, during 1996 as compared to 1995. This decrease was due to a decline in Cash from Operations between periods primarily resulting from the sale of J.C. Penney. As referred to above, during 1996, the General Partner determined that the values of the Carnegie Center and Marlboro Square Shopping Center properties had been impaired. As a result, the Partnership reduced the carrying amount of the Carnegie Center and Marlboro Square properties by $1,247,093 and $660,000, respectively, and these amounts were charged directly to operations. Results of Operations - 1995 compared with 1994 Net income for the year ended December 31, 1995 was $1,551,706 as compared to net income of $1,497,221 in 1994. Included in the results for 1995 is a non-recurring gain in the amount of $128,539 resulting from the sale of the J.C. Penney Credit Operations Center on December 29, 1995. Included in the results for 1994 is a write-down of $512,000 of the value of the Carnegie Center property. Excluding these amounts, net income decreased by 29% in 1995 as compared to 1994 due to declines in the performance of the Carnegie Center, 1300 North Dutton Avenue and Marlboro Square properties. These declines were partially offset by increases in the performance of the Crossroads Square and Warner Plaza properties. 18 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations (continued) - --------------------------------- Rental income for the year ended December 31, 1995 decreased by $553,075, or 15%, as compared to 1994, primarily due to declines in rental income at the 1300 North Dutton Avenue, Marlboro Square and Carnegie Center properties, which were partially offset by increases in rental income at the Crossroads Square and Warner Plaza properties. Rental income at the 1300 North Dutton Avenue property decreased by 92% in 1995 as compared to 1994 because the lease held by the sole tenant at the property expired on January 31, 1995 and the property remained vacant through the remainder of 1995. Rental income at the Marlboro Square property decreased by 23% in 1995 as compared to 1994 primarily due to a decline in average occupancy between years. Rental income at Marlboro Square declined further in 1995 due to a significant reduction in the rental rate paid by the anchor tenant after June 1, 1995. Rental income at the Carnegie Center property decreased by 39% in 1995 as compared to 1994 primarily due to a significant decrease in average occupancy at the property. Rental income at the Crossroads Square property increased by 4% in 1995 as compared to 1994 primarily due to an increase in the rental rates paid by certain tenants. Rental income at the Warner Plaza property increased by 6% in 1995 as compared to 1994 primarily due to an increase in average occupancy as well as increases in rental rates paid by certain tenants. Rental income at the J.C. Penney property was consistent between years. Interest income for the year ended December 31, 1995 increased by $62,304, or 56%, as compared to 1994. This increase was primarily due to an increase in the interest rates earned on the Partnership's working capital reserves during 1995 as well as an increase in the amount of such reserves. The Partnership's share of property operating expenses for the year ended December 31, 1995 decreased by $173,463, or 55%, as compared to 1994 primarily due to increases in the Partnership's share of property operating expenses at the Carnegie Center, Marlboro Square and Warner Plaza properties partially offset by a decrease in the Partnership's share of property operating expenses at the 1300 North Dutton Avenue property. The Partnership's share of property operating expenses at the Carnegie Center property increased during 1995 by 142% as compared to 1994. The property incurred approximately $87,000 and $31,000 of non-recurring maintenance and repair expenses during 1995 and 1994, respectively. Excluding these amounts, the Partnership's share of property operating increased by 55%. This increase is primarily due to a decline in average occupancy at the property and, therefore, a decline in tenant reimbursements for such expenses. The Partnership's share of property operating expenses at Marlboro Square increased by 39% in 1995 as compared to 1994. This increase is primarily due to a decrease in occupancy at the property, and therefore, decreases in tenant reimbursements for such expenses. Minor increases in real estate taxes, maintenance and repair expenses and management fees also contributed to the increase in 1995 as compared to 1994. 19 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations (continued) - --------------------------------- The Partnership's share of property operating expenses increased at the Warner Plaza property by 22% in 1995 as compared to 1994. The property incurred approximately $54,000 and $32,000 of non-recurring maintenance and repair expenses during 1995 and 1994, respectively. Excluding these amounts, the Partnership's share of property operating expenses at Warner Plaza increased by 21% in 1995 as compared to 1994 primarily due to an increase in real estate taxes. The Crossroads Square property incurred approximately $22,000 and $14,000 of non-recurring maintenance and repair expenses during 1995 and 1994, respectively. Excluding these amounts, the Partnership's share of property operating expenses was consistent between periods. The Partnership's share of property operating expenses at the 1300 North Dutton Avenue property decreased by 22% in 1995 as compared to 1994. The sole tenant occupying the 1300 North Dutton Avenue property did not renew its lease upon its expiration on January 31, 1995 and vacated its space during 1994. As a result, only minor routine maintenance expenses were incurred subsequent to the tenant vacating the space, resulting in a decrease in the Partnership's share of property operating expenses during 1995 as compared to 1994. General and administrative expenses for the year ended December 31, 1995 increased by $34,662, or 17%, as compared to 1994. The increase in 1995 as compared to 1994 is primarily due to an increase in the time required to be expended by the General Partner and expenses incurred in connection with managing the Partnership's properties, including actions taken in the attempt to increase their occupancies and sell the J.C. Penney Credit Operations Center. In addition, general and administrative expenses increased during 1995 as compared to 1994 due to an increase in postage charges on investor mailings resulting from the increase in postal rates. Amortization of deferred expenses for the year ended December 31, 1995 decreased by $15,174, or 10%, as compared to 1994. The decrease in 1995 as compared to 1994 was primarily due to the expiration of certain leases at the 1300 North Dutton Avenue, Marlboro Square and Warner Plaza properties and the full amortization of the related deferred leasing costs. This decrease in 1995 as compared to 1994 was partially offset by an increase in deferred expenses relating to leasing costs incurred at the Carnegie Center property during 1995. During 1994, the General Partner determined that the value of the Carnegie Center property had been permanently impaired. As a result, the carrying value of the property was reduced by $512,000 and this amount was charged directly to operations. The General Partner believes that inflation has had no significant impact on the Partnership's operations during the last three fiscal years, and the General Partner anticipates that inflation will not have a significant impact during 1997. 20 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Cash Flow - --------- The following table provides the calculations of Cash from Operations and Distributable Cash from Operations, which are calculated in accordance with Section 17 of the Partnership Agreement: Years Ended December 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Net cash provided by operating activities (a) $2,239,462 $2,431,249 $3,118,434 $2,853,183 $2,907,816 Net change in operating assets and liabilities (a) (201,460) 77,507 7,210 17,432 83,153 --------- --------- -------- -------- -------- Cash provided by operations (a) 2,038,002 2,508,756 3,125,644 2,870,615 2,990,969 Increase in working capital reserves - (194,438) (811,326) (324,865) (213,789) Add: Accrual basis Partnership management fee 76,619 83,939 83,939 89,101 104,854 --------- --------- -------- -------- -------- Cash from operations (b) 2,114,621 2,398,257 2,398,257 2,634,851 2,882,034 Decrease in working capital reserves 74,507 - - - - Less: Accrual basis Partnership management fee (76,619) (83,939) (83,939) (89,101) (104,854) --------- --------- -------- -------- -------- Distributable cash from operations (b) $2,112,509 $2,314,318 $2,314,318 $2,545,750 $2,777,180 ========== ========== ========== ========== ========== Allocation to General Partner $21,125 $23,143 $23,143 $25,458 $27,772 Allocation to John Hancock Limited Partner - - - - - Allocation to Investors 2,091,384 2,291,175 2,291,175 2,520,292 2,749,408 --------- --------- -------- -------- -------- Distributable cash from operations (b) $2,112,509 $2,314,318 $2,314,318 $2,545,750 $2,777,180 ========== ========== ========== ========== ========== (a) Net cash provided by operating activities, net change in operating assets and liabilities, and cash provided by operations are as calculated in the Statements of Cash Flows included in Item 8 of this Report. (b) As defined in the Partnership Agreement. Distributable Cash from Operations should not be considered as an alternative to net income (i.e. not an indicator of performance) or to reflect cash flows or availability of discretionary funds. On February 14, 1997, the Partnership made a cash distribution of $515,972 to the Investors representing a 5% annualized return to all Investors at December 31, 1996, based on Distributable Cash from Operations for the quarter then ended. The General Partner anticipates that the Partnership will be able to make cash distributions from Distributable Cash from Operations in each of the four quarters of 1997 comparable to those made during 1996. 21 Item 8 - Financial Statements and Supplementary Data The response to this Item appears beginning on page F-1 of this Report. Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No events requiring disclosure under this Item have occurred. Part III Item 10 - Directors and Executive Officers of the Partnership (a-b) Identification of Directors and Executive Officers By virtue of its organization as a limited partnership, the Partnership has no directors or executive officers. As indicated in Item 1 of this Report, the General Partner of the Partnership is John Hancock Realty Equities, Inc., a Delaware corporation. Pursuant to the terms of the Partnership Agreement, the General Partner is solely responsible for the management of the Partnership's business. The names and ages of the directors and executive officers of the General Partner are as follows: Name Title Age ---- ----- --- William M. Fitzgerald President and Director 53 Malcolm G. Pittman, III Director 45 Susan M. Shephard Director 44 Richard E. Frank Treasurer (Chief Accounting Officer) 35 The term of office and other positions held by the persons listed above appear in paragraph (e) below. (c) Identification of certain significant persons The General Partner is responsible for the identification, analysis, purchase, operation, and disposal of specific Partnership real estate investments. The General Partner has established a Real Estate Investment Committee utilizing senior real estate personnel of John Hancock and its Affiliates (defined in the Partnership Agreement) to review each proposed investment. The members of the Real Estate Investment Committee are designated each year at the annual meeting of the Board of Directors of John Hancock Realty Equities, Inc. The current members of the committee are as follows: Name Title Age ---- ----- --- Edward P. Dowd Senior Vice President of 54 John Hancock's Real Estate Investment Group Kevin McGuire Vice President of John Hancock's 50 Real Estate Investment Group, President of John Hancock Realty Services Corp. and subsidiaries 22 Item 10 - Directors and Executive Officers of the Partnership (continued) Name Title Age ---- ----- --- Stephen Kindl Senior Investment Officer of 39 John Hancock's Real Estate Investment Group, Assistant Vice President of John Hancock Realty Equities, Inc. (d) Family relationships There exist no family relationships among any of the foregoing directors or officers of the General Partner. (e) Business experience William M. Fitzgerald (age 53) joined John Hancock in 1968. He has been President and a Director of the General Partner, and a Senior Investment Officer of John Hancock, since June 1993 and a Managing Director of Hancock Realty Investors Incorporated since November 1991. His term as a Director of the General Partner expires in May 1997. From 1987 to 1991, Mr. Fitzgerald was a Senior Vice President of John Hancock Properties, Inc. Prior to that time, he held a number of positions including Senior Real Estate Management Officer and Real Estate Management Officer of John Hancock. He holds an M.B.A. from Boston University and an A.B. from Boston College. Malcolm G. Pittman III (age 45) joined John Hancock in 1986 as an Assistant Counsel. He has been a Director of the General Partner since November 1991. His term as a Director of the General Partner expires in May 1997. Mr. Pittman has been a Counsel of John Hancock's Real Estate Law Division since 1993. From 1989 to 1993, he was an Associate Counsel of John Hancock. He holds a J.D. from Yale Law School and a B.A. from Oberlin College. Susan M. Shephard (age 44) joined John Hancock in 1985 as an Attorney. She has been a Director of the General Partner since November 1991. Her term as a Director of the General Partner expires in May 1997. Ms. Shephard has been a Mortgage Investment Officer of John Hancock since 1991. From 1988 to 1991, she was an Associate Counsel of John Hancock and from 1987 to 1988, she was an Assistant Counsel of John Hancock. She holds a J.D. from Georgetown University Law Center and a B.A. from the University of Rhode Island. Richard E. Frank (age 35) joined John Hancock in 1983. He has been Treasurer of the General Partner since June 1993. Mr. Frank has been an Associate Investment Officer of John Hancock since January 1995. From 1993 to 1995, he was a Senior Financial Administrator of John Hancock; from 1991 to 1993, he was an Associate of Hancock Realty Investors, Incorporated; from 1990 to 1991 he held the position of Assistant Treasurer of John Hancock Realty Services Corp. He holds a B.S. from Stonehill College. 23 Item 10 - Directors and Executive Officers of the Partnership (continued) Edward P. Dowd (age 54) joined John Hancock in 1970. He has been a Director of Hancock Realty Investors, Incorporated since 1991, and a Director of John Hancock Realty Services Corp. and subsidiaries and John Hancock Property Investors Corp. since 1987. Mr. Dowd has been a Senior Vice President of John Hancock since 1991. From 1989 to 1990, he was a Vice President of John Hancock and from 1986 to 1989, he was a Second Vice President of John Hancock. Prior to that time, he held a number of positions including Senior Real Estate Investment Officer and Real Estate Investment Officer of John Hancock. From July 1982 to May 1986, Mr. Dowd was President of the General Partner. He holds an A.B. from Boston College. Kevin McGuire (age 50) joined John Hancock in 1968. He has been a Vice President of John Hancock since June 1993 and President of John Hancock Realty Services Corp. and subsidiaries since July 1993. He has been a Managing Director and a Director of Hancock Realty Investors Incorporated since 1991, and a Director of John Hancock Property Investors Corp. since 1987. Mr. McGuire served as an interim basis President of the General Partner from May 1991 to November 1991 and was President of John Hancock Properties, Inc. from 1987 to 1991. Prior to that time, he held a number of positions including Second Vice President, Senior Real Estate Investment Officer and Real Estate Investment Officer of John Hancock. He holds an M.B.A. from Babson College and an A.B. from Boston College. Stephen Kindl (age 39), joined John Hancock in 1995 as a Senior Real Estate Investment Officer. Prior to joining John Hancock, he held a number of positions with Aetna Real Estate Investment, Inc., including Managing Director and Director. He holds an M.B.A. from the University of Hartford and a B.S. from the University of Connecticut. (f) Involvement in certain legal proceedings None Compliance with Section 16(a) of the Exchange Act Under Section 16(a) of the Securities Exchange Act of 1934, as amended, the General Partner's directors and executive officers, as well as any person holding more than ten percent of the Units, are required to report their initial ownership of Units and any subsequent change in such ownership to the Securities and Exchange Commission and the Partnership (such requirements hereinafter referred to as "Section 16(a) filing requirements"). Specific time deadlines for Section 16(a) filing requirements have been established. To the Partnership's knowledge, no officer or director of the General Partner has or had an ownership interest in the Partnership at any time during the 1996 fiscal year or as of the date hereof. In addition, to the Partnership's knowledge, the Commonwealth of Massachusetts Pension Reserve Investment Trust Fund, the greater than ten percent holder of the Units, was not required to file any reports relating to Section 16(a) filing requirements during the 1996 fiscal year. 24 Item 11 - Executive Compensation None of the officers or directors of the General Partner or any of the Real Estate Investment Committee members referred to in Item 10(c) receive any current or proposed direct remuneration from the Partnership in their capacities as officers, directors or Real Estate Investment Committee members, pursuant to any standard arrangements or otherwise, nor is any such remuneration currently proposed. In addition, the Partnership has not given and does not propose to give any options, warrants or rights, including stock appreciation rights, to any such persons in such capacities. No long-term incentive plan exists with any such persons in such capacities and no remuneration plan or arrangement exists with any such persons resulting from resignation, retirement or any other termination. Therefore, tables relating to these topics have been omitted. Compensation Committee Interlocks and Insider Participation: The Partnership did not have a Compensation Committee in 1996 and does not currently have such a committee. During the 1996 fiscal year, no current or former officer or employee of the General Partner or its Affiliates participated in deliberations regarding the General Partner's or its Affiliates' compensation as it relates to the Partnership. Item 12 - Security Ownership of Certain Beneficial Owners and Management (a) Security ownership of certain beneficial owners No person or group, including the General Partner, is known by the General Partner to own beneficially more than 5% of the Partnership's 91,647 outstanding Units as of December 31, 1996, except as follows: Title Amount and Percent of Name and Address Nature of of Class of Beneficial Owner Beneficial Ownership Class ----- ------------------- -------------------- ----- Units of The Commonwealth of 10,000 Units 10.91% Investor Massachusetts Pension owned directly Limited Reserve Investment Partnership Trust Fund Interests 125 Summer Street, 10th Floor Boston, MA (b) Security ownership of management By virtue of its organization as a Limited Partnership, the Partnership has no officers or directors. Neither the General Partner nor any officer or director of the General Partner possesses the right to acquire a beneficial ownership of Units. (c) Changes in control The Partnership does not know of any arrangements the operations of which may at a subsequent date result in a change of control of the Partnership. 25 Item 13 - Certain Relationships and Related Transactions See Note 6 of the Notes to the Financial Statements included in Item 8 of this Report for a description of certain transactions and related amounts paid by the Partnership to the General Partner and its Affiliates (as defined in the Partnership Agreement) during the years ended 1996, 1995 and 1994. The Partnership provides indemnification to the General Partner and its Affiliates for acts or omissions of the General Partner or its Affiliates performed in good faith on behalf of the Partnership, subject to certain specified exceptions, as described in the following paragraph. The Partnership Agreement provides that General Partner and its Affiliates performing services on behalf of the Partnership shall be entitled to indemnity from the Partnership for any loss, damage, or claim by reason of any act performed or omitted to be performed by the General Partner in good faith on behalf of the Partnership and in a manner within the scope of the authority granted to the General Partner by the Partnership Agreement and in the best interest of the Partnership, except that they shall not be entitled to be indemnified in respect of any loss, damage, or claim incurred by reason of fraud, negligence, misconduct, or breach of fiduciary duty. Any indemnity shall be provided out of and to the extent of Partnership assets only. The Partnership shall not advance any funds to the General Partner or its Affiliates for legal expenses and other costs incurred as a result of any legal action initiated against the General Partner or its Affiliates by a Limited Partner in the Partnership, except under certain specified circumstances. In accordance with the terms of the Partnership Agreement, the General Partner and/or its Affiliates are entitled to the following types of compensation, fees, profits/(losses), expense reimbursements and distributions: The General Partner may receive a Partnership Management Fee (defined in the Partnership Agreement) for managing the normal operations of the Partnership in an amount equal to 3.5% of cash flow from operations. In such circumstances the General Partner was paid a Partnership Management Fee totaling $76,619, $83,939 and $83,939 during the years ended December 31, 1996, 1995 and 1994, respectively. An Affiliate of the General Partner is entitled to receive a Property Management Fee (defined in the Partnership Agreement) for providing property management services to the Partnership's properties. The Partnership is obligated to pay a fee equal to the amount customarily charged in arms-length transactions by other entities rendering services in an area where the Partnership's properties are located, but in no event may such fees exceed 6% of the gross receipts of any property under management. To date, no Affiliate of the General Partner has provided property management services to the Partnership's properties; therefore, the Partnership did not pay any such fees during the years ended December 31, 1996, 1995 or 1994. 26 Item 13 - Certain Relationships and Related Transactions (continued) The General Partner and its Affiliates are entitled to receive reimbursement for expenses relating to the administrative services necessary to the prudent operation of the Partnership, such as legal, accounting, computer, transfer agent and other services. The amounts charged to the Partnership for such administrative services may not exceed the lesser of the General Partner's or such Affiliates' costs or 90% of those which the Partnership would be required to pay to independent parties for comparable services in the same or comparable geographic locations. The Partnership reimbursed the General Partner for $171,710, $151,675 and $118,293 of such expenses during the years ended December 31, 1996, 1995 and 1994, respectively. Upon disposition of any property, the General Partner is entitled to a Subordinated Disposition Fee (defined in the Partnership Agreement) in the amount of 3% of the sales price of each property sold. However, no such Subordinated Disposition Fees may be paid to the General Partner unless and until the Investors and the John Hancock Limited Partner have received a return of their total Invested Capital (defined in the Partnership Agreement) plus the Cumulative Return on Investment (defined in the Partnership Agreement) of 12% per annum for all fiscal years ended prior to the date of payment. Such Subordinated Disposition Fees may not exceed 50% of the competitive real estate commission in the area where the property is located or, together with any other brokerage commission payable to or by any other person, exceed 6% of the contract sales price of such property. The Partnership did not pay any such fees to the General Partner during the years ended December 31, 1996, 1995 or 1994. A share of the Partnership's Distributable Cash from Operations (defined in the Partnership Agreement) may be distributed to the General Partner and the John Hancock Limited Partner. Distributable Cash from Operations is distributable 1% to the General Partner and the remaining 99% among the Investors, the General Partner and the John Hancock Limited Partner, in accordance with Section 8 of the Partnership Agreement (described more fully in Note 3 to the Financial Statements included in Item 8 of this Report). The General Partner's Share of Distributable Cash from Operations was $21,125, $23,143 and $23,143 for the years ended December 31, 1996, 1995 and 1994, respectively. In accordance with the Partnership Agreement, the John Hancock Limited Partner was not entitled to receive any such distributions during the 1996, 1995 and 1994 fiscal years. A share of Cash from Sales or Financings (defined in the Partnership Agreement) may be distributable to the General Partner and the John Hancock Limited Partner. Cash from Sales or Financings are distributable in accordance with Section 8 of the Partnership Agreement (described more fully in Note 3 to the Financial Statements included in Item 8 of this Report). The John Hancock Limited Partner's share of Cash from Sales or Financings was $0, $733,176 and $0 during the years ended December 31, 1996, 1995 and 1994, respectively. In accordance with the Partnership Agreement, the General Partner was not entitled to receive any such distributions during the years ended 1996, 1995 or 1994. 27 Item 13 - Certain Relationships and Related Transactions (continued) A share of the Partnership's profits or losses for tax purposes (defined in the Partnership Agreement) is allocable to the General Partner and the John Hancock Limited Partner. Such allocation generally approximates, insofar as practicable, their percentage share of Distributable Cash from Operations and of Cash from Sales or Financings. The General Partner is generally allocated 1% of the Partnership's losses for tax purposes, while the John Hancock Limited Partner is allocated tax losses associated with the Partnership's sales commissions funded by the John Hancock Limited Partner's Capital Contributions. The General Partner's share of such profits or losses were profits of $11,303, $14,802 and $21,281 during the years ended December 31, 1996, 1995 and 1994, respectively. The John Hancock Limited Partner's share of such profits or losses were losses of $48,573, $74,321 and $56,684 during the years ended December 31, 1996, 1995 and 1994 respectively. The following table reflects compensation, fees, profits/(losses), expense reimbursements or distributions from the Partnership to the General Partner and/or its Affiliates: Years Ended December 31, 1996 1995 1994 ---- ---- ---- Partnership management fee expense $76,619 $83,939 $83,939 Reimbursement for operating expenses 171,710 151,675 118,293 General Partner's share of Distributable Cash from Operations 21,125 23,143 23,143 John Hancock Limited Partner's share of Cash from Sales or Financings - 733,176 - General Partner's share of profits for tax purposes 11,303 14,802 21,281 John Hancock Limited Partner's share of losses for tax purposes (48,573) (74,321) (56,684) 28 Part IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) (1) and (2) - Listed on Index to Financial Statements and Financial Statement Schedules. (3) - Listing of Exhibits Exhibit Number Page Number or Under Incorporation by Regulation S-K Description Reference - -------------- ----------- --------- 4 Instruments defining the rights of security holders 4.1 Amended Agreement of Limited Exhibit A to the Partnership* final Prospectus dated September 4, 1986 filed under the Partnership's Form S-11 Registration Statement (File 33-6451) 4.2 The Seventeenth Amendment and Exhibit 4.2 to the Restatement of Certificate of Partnership's Limited Partnership filed with Report on the Massachusetts Secretary of Form 10-K dated State on September 15, 1987* December 31, 1987 (File 0-15680) 10 Material contracts and other documents 10.1 Form of Escrow Agreement* Exhibit 10.1 to the Partnership's Form S-11 Registration Statement (File 33-6451) 10.2 Letter from John Hancock Exhibit 10.1 to Subsidiaries, Inc. containing the Partnership's undertaking as to the net Form S-11 worth of the General Partner* Registration Statement (File 33-6451) 10.3 Documents relating to 1300 North Dutton Avenue (a) Agreement of Purchase and Sale Exhibit 10.3(a) to dated September 30, 1986, and the Post-Effective First Amendment to Agreement of Amendment No. 1 to Purchase and Sale dated the Partnership's October 22, 1986, between Form S-11 Park Campus Associates and Registration Statement John Hancock Realty Income Fund (File 33-6451) Limited Partnership* 29 Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) (b) Lease dated June 12, 1986, and Exhibit 10.3(b) to First Amendment to Lease dated the Post-Effective June 12, 1986, between Amendment No. 1 to Park Campus Associates and the Partnership's Mag Media Ltd.* Form S-11 Registration Statement (File 33-6451) (c) Amended and Restated Statements Exhibit 10.3(c) to of Development Policy and the Post-Effective Declarations of Restrictions of Amendment No. 1 to Santa Rosa Business Park dated the Partnership's June 5, 1986* Form S-11 Registration Statement (File 33-6451) (d) Declaration of Covenants, Exhibit 10.3(d) to Conditions and Restrictions of the Post-Effective Park Campus dated October 2, Amendment No. 1 to 1986* the Partnership's Form S-11 Registration Statement (File 33-6451) 10.4 Documents relating to Marlboro Square Shopping Center (a) Agreement of Purchase and Sale Exhibit 10.4(a) to dated January 17, 1987, between the Post-Effective Marlborough GLR Realty Trust Amendment No. 2 to and John Hancock Realty Equities, the Partnership's Inc.* Form S-11 Registration Statement (File 33-6451) 10.5 Documents relating to Crossroads Square Shopping Center (a) Agreement of Purchase and Sale Exhibit 1 to the dated November 20, 1987, between Partnership's Crossroads Square Limited Report on Partnership and John Hancock Form 8-K dated Realty Income Fund Limited December 8, 1987 Partnership* (File 0-15680) (b) Limited Warranty Deed dated Exhibit 2 to the November 20, 1987, relating Partnership's to Crossroads Square Shopping Report on Center* Form 8-K dated December 8, 1987 (File 0-15680) 30 Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) (c) Master Lease Agreement Exhibit 3 to the dated November 18, 1987, Partnership's relating to Crossroads Square Report on Shopping Center* Form 8-K dated December 8, 1987 (File 0-15680) 10.6 Documents relating to Carnegie Center Office/Warehouse (a) Agreement of Purchase and Sale Exhibit 1 to the between Carnegie Properties Partnership's Partnership, Carnegie Properties Report on Partnership II and John Hancock Form 8-K dated Realty Income Fund Limited January 22, 1988 Partnership* (File 0-15680) (b) General Warranty Deed dated Exhibit 2 to the December 22, 1987, between Partnership's Carnegie Properties Partnership Report on and John Hancock Realty Income Form 8-K dated Fund Limited Partnership* January 22, 1988 (File 0-15680) (c) General Warranty Deed dated Exhibit 3 to the December 22, 1987, between Partnership's Carnegie Properties Partnership Report on II and John Hancock Realty Income Form 8-K dated Fund Limited Partnership* January 22, 1988 (File 0-15680) 10.7 Documents relating to Warner Plaza Shopping Center (a) Agreement of Purchase and Sale Exhibit 1 to the between First Republic bank Partnership's Dallas, N.A., and John Hancock Report on Realty Income Fund Limited Form 8-K dated Partnership* March 17, 1988 (File 0-15680) (b) Special Warranty Deed dated Exhibit 2 to the February 24, 1988, between Partnership's First Republic bank, Dallas, Report on N.A., and John Hancock Form 8-K dated Realty Income Fund Limited March 17, 1988 Partnership* (File 0-15680) 31 Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) 10.8 Documents relating to J.C. Penney Credit Operations Center (a) Agreement of Purchase and Sale Exhibit 1 to the between Noro-Rocky Mountains Partnership's B.V., a Netherlands Corporation, Report on and John Hancock Realty Income Form 8-K dated Fund Limited Partnership* November 17, 1988 (File 0-15680) (b) Warranty and Guaranty dated Exhibit 2 to the August 18, 1988, between Partnership's Noro-Rocky Mountains Report on B.V., a Netherlands Corporation, Form 8-K dated and John Hancock Realty Income November 17, 1988 Fund Limited Partnership* (File 0-15680) (c) Purchase and Sale Agreement Exhibit 1 to the between John Hancock Realty Partnership's Report Income Fund Limited Partnership on Form 8-K dated and 4580 Paradise Blvd. December 29, 1995 Associates Limited Partnership (File 0-15680) dated November 20, 1995* 10.9 Documents relating to Management Agreement (a) Management Agreement dated Exhibit 10.9(a) to the January 1, 1992, between Partnership's Report on Hancock Realty Investors Form 10-K dated Incorporated and John Hancock December 31, 1992 Realty Equities, Inc.* (File 0-15680) (b) Agreement Concerning Subcontracting Exhibit 10.9(b) to the of Management Services Pertaining Partnership's Report on to John Hancock Realty Income Fund Form 10-K dated Limited Partnership dated December 31, 1993 May 28, 1993 between John Hancock (File 0-15680) Realty Equities,Inc., Hancock Realty Investors, Incorporated and John Hancock Mutual Life Insurance Company* 10.10 Documents relating to Executive Compensation Plans and Arrangements (a) Amended Agreement of Exhibit A to the Final Limited Partnership* Prospectus dated September 4, 1986, filed under the Partnership's Form S-11 Registration Statement (File 33-6451) 32 Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) (b) No reports on Form 8-K were filed during the quarter ended December 31, 1996. (c) Exhibits - See Item 14 (a) (3) of this Report. (d) Financial Statement Schedules - The response to this portion of Item 14 is submitted as a separate section of this Report commencing on Page F-17. +Filed herewith *Incorporated by reference 33 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, on the 31st day of March, 1997. JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP By: John Hancock Realty Equities, Inc. General Partner By: WILLIAM M. FITZGERALD -------------------------------- William M. Fitzgerald, President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 31st day of March, 1997. Signatures Title ----------- ------ President (Principal Executive Officer) and Director of John Hancock Realty Equities, WILLIAM M. FITZGERALD Inc. (General Partner of Registrant) --------------------- William M. Fitzgerald Treasurer (Chief Accounting Officer) of John Hancock Realty Equities, Inc. RICHARD E. FRANK (General Partner of Registrant) --------------------- Richard E. Frank Director of John Hancock Realty Equities, MALCOLM G. PITTMAN Inc. (General Partner of Registrant) --------------------- Malcolm G. Pittman, III Director of John Hancock Realty Equities, SUSAN M. SHEPHARD Inc. (General Partner of Registrant) --------------------- Susan M. Shephard 34 ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14 (a) (1) AND (2), (c) AND (d) FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FINANCIAL STATEMENT SCHEDULES YEAR ENDED DECEMBER 31, 1996 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP BOSTON, MASSACHUSETTS JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (ITEMS 8 AND 14(a)(1) AND (2)) 1. Financial Statements: Page Report of Independent Auditors F-3 Balance Sheets at December 31, 1996 and 1995 F-4 Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 F-5 Statements of Partners' Equity for the Years Ended December 31, 1996, 1995 and 1994 F-6 Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 F-7 Notes to Financial Statements F-8 2. Financial Statement Schedules: Schedule III: Real Estate and Accumulated Depreciation F-17 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. F-2 Report of Independent Auditors To the Partners John Hancock Realty Income Fund Limited Partnership We have audited the accompanying balance sheets of John Hancock Realty Income Fund Limited Partnership as of December 31, 1996 and 1995, and the related statements of operations, partners' equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial 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 John Hancock Realty Income Fund Limited Partnership at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. ERNST & YOUNG LLP Boston, Massachusetts February 14, 1997, except for Note 8, as to which the date is March 18, 1997 F-3 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) BALANCE SHEETS ASSETS December 31, 1996 1995 ---- ---- Current assets: Cash and cash equivalents $2,197,847 $8,397,420 Restricted cash 5,799 4,946 Other current assets 78,999 183,696 Property held for sale 2,678,599 - ---------- ---------- Total current assets 4,961,244 8,586,062 Investment in property: Land 6,198,330 7,511,167 Buildings and improvements 17,991,609 24,094,055 ---------- ---------- 24,189,939 31,605,222 Less: accumulated depreciation (4,214,134) (7,165,026) ---------- ---------- 19,975,805 24,440,196 Long-term restricted cash 53,333 44,659 Deferred expenses, net of accumulated amortization of $361,132 in 1996 and $604,967 in 1995 384,808 534,527 ---------- ---------- Total assets $25,375,190 $33,605,444 ========== ========== LIABILITIES AND PARTNERS' EQUITY Current liabilities: Accounts payable and accrued expenses $340,087 $282,398 Accounts payable to affiliates 108,961 60,360 ---------- ---------- Total current liabilities 449,048 342,758 Partners' equity/(deficit): General Partner's deficit (230,844) (200,634) Limited Partners' equity 25,156,986 33,463,320 ---------- ---------- Total partners' equity 24,926,142 33,262,686 ---------- ---------- Total liabilities and partners' equity $25,375,190 $33,605,444 ========== ========== See Notes to Financial Statements F-4 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) STATEMENTS OF OPERATIONS Years Ended December 31, 1996 1995 1994 ---- ---- ---- Income: Rental income $2,614,989 $3,065,751 $3,618,826 Interest income 171,767 173,286 110,982 Other income - 82,008 - Gain on sale of property - 128,539 - ---------- ---------- ---------- Total income 2,786,756 3,449,584 3,729,808 Expenses: Depreciation 772,298 951,833 967,493 Property operating expenses 311,439 491,424 317,961 General and administrative expenses 360,696 236,926 202,264 Amortization of deferred expenses 209,726 133,756 148,930 Management fee 76,619 83,939 83,939 Property write-downs 1,907,093 - 512,000 ---------- ---------- ---------- Total expenses 3,637,871 1,897,878 2,232,587 ---------- ---------- ---------- Net (loss)/income ($851,115) $1,551,706 $1,497,221 ========== ========== ========== Allocation of net (loss)/income: General Partner ($8,511) $15,517 $14,972 John Hancock Limited Partner (329,810) (60,357) (77,909) Investors (512,794) 1,596,546 1,560,158 ---------- ---------- ---------- ($851,115) $1,551,706 $1,497,221 ========== ========== ========== Net (loss)/income per Unit ($5.60) $17.42 $17.02 ========== ========== ========== See Notes to Financial Statements F-5 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) STATEMENTS OF PARTNERS' EQUITY Years Ended December 31, 1996, 1995 and 1994 General Limited Partner Partners Total ------- -------- ----- Partners' equity/(deficit) at January 1, 1994 (91,647 Units outstanding) ($184,837) $35,027,232 $34,842,395 Less: Cash distributions (23,143) (2,291,175) (2,314,318) Add: Net income 14,972 1,482,249 1,497,221 --------- ----------- ----------- Partners' equity/(deficit) at December 31, 1994 (91,647 Units outstanding) (193,008) 34,218,306 34,025,298 Less: Cash distributions (23,143) (2,291,175) (2,314,318) Add: Net income 15,517 1,536,189 1,551,706 --------- ----------- ----------- Partners' equity/(deficit) at December 31, 1995 (91,647 Units outstanding) (200,634) 33,463,320 33,262,686 Less: Cash distributions (21,699) (7,463,730) (7,485,429) Add: Net loss (8,511) (842,604) (851,115) --------- ----------- ----------- Partners' equity/(deficit) at December 31, 1996 (91,647 Units outstanding) ($230,844) $25,156,986 $24,926,142 ========== =========== =========== See Notes to Financial Statements F-6 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) STATEMENTS OF CASH FLOWS Years Ended December 31, 1996 1995 1994 ---- ---- ---- Operating activities: Net (loss)/income ($851,115) $1,551,706 $1,497,221 Adjustments to reconcile net (loss)/income to net cash provided by operating activities: Amortization of deferred expenses 209,726 133,756 148,930 Depreciation 772,298 951,833 967,493 Property write-downs 1,907,093 - 512,000 Gain on sale of property - (128,539) - ---------- ---------- ---------- 2,038,002 2,508,756 3,125,644 Changes in operating assets and liabilities: Increase in restricted cash (9,527) (4,982) (4,850) Decrease/(increase) in other current assets 104,697 (115,342) 6,011 Increase/(decrease) in accounts payable and accrued expenses 57,689 30,422 (5,208) Increase/(decrease) in accounts payable to affiliates 48,601 12,395 (3,163) ---------- ---------- ---------- Net cash provided by operating activities 2,239,462 2,431,249 3,118,434 Investing activities: Proceeds from sale of property - 5,392,032 - Increase in deferred expenses (953,606) (236,542) (38,920) ---------- ---------- ---------- Net cash (used in)/provided by investing activities (953,606) 5,155,490 (38,920) Financing activities: Cash distributed to Partners (7,485,429) (2,314,318) (2,314,318) ---------- ---------- ---------- Net cash used in financing activities (7,485,429) (2,314,318) (2,314,318) ---------- ---------- ---------- Net (decrease)/increase in cash and cash equivalents (6,199,573) 5,272,421 765,196 Cash and cash equivalents at beginning of year 8,397,420 3,124,999 2,359,803 ---------- ---------- ---------- Cash and cash equivalents at end of year $2,197,847 $8,397,420 $3,124,999 ========== ========== ========== See Notes to Financial Statements F-7 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS 1. Organization of Partnership --------------------------- John Hancock Realty Income Fund Limited Partnership (the "Partnership") was formed under the Massachusetts Uniform Limited Partnership Act on June 12, 1986. As of December 31, 1995, the Partnership consisted of John Hancock Realty Equities, Inc. (the "General Partner"), a wholly-owned, indirect subsidiary of John Hancock Mutual Life Insurance Company; John Hancock Realty Funding, Inc. (the "John Hancock Limited Partner"); and 4,142 Investor Limited Partners (the "Investors"), owning 91,647 Units of Investor Limited Partnership Interests (the "Units"). The John Hancock Limited Partner and the Investors are collectively referred to as the Limited Partners. The initial capital of the Partnership was $2,000, representing capital contributions of $1,000 from the General Partner and $1,000 from the John Hancock Limited Partner. The Amended Agreement of Limited Partnership of the Partnership (the "Partnership Agreement") authorized the issuance of up to 100,000 Units of Limited Partnership Interests at $500 per unit. During the offering period, which terminated on September 9, 1987, 91,647 Units were sold and the John Hancock Limited Partner made additional capital contributions of $7,330,760. There have been no changes in the number of Units outstanding subsequent to the termination of the offering period. The Partnership is engaged in the business of acquiring, improving, holding for investment and disposing of existing, income-producing, commercial and industrial properties on an all-cash basis, free and clear of mortgage indebtedness. Although the Partnership's properties were acquired and are held free and clear of mortgage indebtedness, the Partnership may incur mortgage indebtedness on its properties under certain circumstances, as specified in the Partnership Agreement. The latest date on which the Partnership is due to terminate is December 31, 2016, unless it is sooner terminated in accordance with the terms of the Partnership Agreement. It is expected that in the ordinary course of the Partnership's business, the properties of the Partnership will be disposed of, and the Partnership terminated, before December 31, 2016. 2. Significant Accounting Policies ------------------------------- The Partnership maintains its accounting records and recognizes rental revenue on the accrual basis. 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 revenue and expenses during the reporting period. Actual results may differ from those estimates. F-8 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) 2. Significant Accounting Policies (continued) ------------------------------------------ Cash equivalents are highly liquid investments with maturities of three months or less when purchased. These investments are recorded at cost plus accrued interest, which approximates market value. Restricted cash represents funds restricted for tenant security deposits and other escrows, and has been designated as current or long- term, based upon the term of the related lease agreement. Property held for sale is recorded at the lower of its carrying amount, at the time the property is listed for sale, or its fair value, less cost to sell. Carrying amount includes the property's cost, as described below, less accumulated depreciation thereon and less any property write-downs for impairment in value and plus any related unamortized deferred expenses. Investments in property are recorded at cost less any property write- downs for permanent impairment in values. Cost includes the initial purchase price of the property plus acquisition and legal fees, other miscellaneous acquisition costs, and the cost of significant improvements. Depreciation has been provided on a straight-line basis over the estimated useful lives of the various assets: thirty years for the buildings and five years for related improvements. Maintenance and repairs are charged to operations as incurred. Deferred expenses relating to tenant improvements and lease commissions are amortized on a straight-line basis over the terms of the leases to which they relate. During 1993, the Partnership reduced the period over which its remaining deferred acquisition fees are amortized from thirty years, the estimated useful life of the buildings owned by the Partnership, to four and one-half years, the then estimated remaining life of the Partnership. The net (loss)/income per Unit for each year is computed by dividing the Investors' share of net (loss)/income by the number of Units outstanding during each year. No provision for income taxes has been made in the financial statements as such taxes are the responsibility of the individual partners and not of the Partnership. In the fourth quarter of 1995, the Partnership adopted the Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (the "Statement 121"). Statement 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. F-9 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) 3. The Partnership Agreement ------------------------- Distributable Cash from Operations (defined in the Partnership Agreement) is distributed 99% to the Limited Partners and 1% to the General Partner. The Limited Partners' share of Distributable Cash from Operations is distributed as follows: first, to the Investors until they receive a 7% non-cumulative, non-compounded annual cash return on their Invested Capital (defined in the Partnership Agreement); second, to the John Hancock Limited Partner until it receives a 7% non-cumulative, non-compounded annual cash return on its Invested Capital; and third, to the Investors and the John Hancock Limited Partner in proportion to their respective Capital Contributions (defined in the Partnership Agreement). However, any Distributable Cash from Operations which is available as a result of the reduction of working capital reserves funded by Capital Contributions of the Investors will be distributed 100% to the Investors. Cash from Sales or Financings (defined in the Partnership Agreement) is first used to pay all debts and liabilities of the Partnership then due and is then used to fund any reserves for contingent liabilities. Cash from Sales or Financings is then distributed as follows: first, to the Limited Partners until they receive an amount equal to their Invested Capital with the distribution being made between the Investors and the John Hancock Limited Partner in proportion to their respective Capital Contributions; second, to the Investors until they have received, with respect to all previous distributions during the year, their Cumulative Return on Investment (defined in the Partnership Agreement); third, to the John Hancock Limited Partner until it has received, with respect to all previous distributions during the year, its Cumulative Return on Investment; fourth, to the General Partner to pay any Subordinated Disposition Fees (defined in the Partnership Agreement); and fifth, 99% to the Limited Partners and 1% to the General Partner, with the distribution being made between the Investors and the John Hancock Limited Partner in proportion to their respective Capital Contributions. Cash from the sale of the last of the Partnership's properties is to be distributed in the same manner as Cash from Sales or Financings, except that before any other distribution is made to the Partners, each Partner shall first receive from such cash, an amount equal to the then positive balance, if any, in such Partner's Capital Account after crediting or charging to such account the profits or losses for tax purposes from such sale. To the extent, if any, that a Partner is entitled to receive a distribution of cash based upon a positive balance in its capital account prior to such distribution, such distribution will be credited against the amount of such cash the Partner would have been entitled to receive based upon the manner of distribution of Cash from Sales or Financings, as specified in the previous paragraph. F-10 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) 3. The Partnership Agreement (continued) ------------------------------------- Profits from the normal operations of the Partnership for each fiscal year are allocated to the Limited Partners and General Partner in the same amounts as Distributable Cash from Operations for that year. If such profits are less than Distributable Cash from Operations for any year, they are allocated in proportion to the amounts of Distributable Cash from Operations for that year. If such profits are greater than Distributable Cash from Operations for any year, they are allocated 99% to the Limited Partners and 1% to the General Partner, with the allocation made between the John Hancock Limited Partner and the Investors in proportion to their respective Capital Contributions. Losses from the normal operations of the Partnership are allocated 99% to the Limited Partners and 1% to the General Partner, with the allocation made between the John Hancock Limited Partner and the Investors in proportion to their respective Capital Contributions. Depreciation deductions are allocated 1% to the General Partner and 99% to the Investors, and not to the John Hancock Limited Partner. Profits and Losses from Sales or Financings are generally allocated 99% to the Limited Partners and 1% to the General Partners. In connection with the sale of the last of the Partnership's properties, and therefore the dissolution of the Partnership, profits will be allocated to any Partners having a deficit balance in their Capital Account in an amount equal to the deficit balance. Any remaining profits will be allocated in the same order as cash from the sale would be distributed. Neither the General Partner nor any Affiliate (as defined in the Partnership Agreement) of the General Partner shall be liable, responsible or accountable in damages to any of the Partners or the Partnership for any act or omission of the General Partner in good faith on behalf of the Partnership within the scope of the authority granted to the General Partner by the Partnership Agreement and in the best interest of the Partnership, except for acts or omissions constituting fraud, negligence, misconduct or breach of fiduciary duty. The General Partner and its Affiliates performing services on behalf of the Partnership shall be entitled to indemnity from the Partnership for any loss, damage, or claim by reason of any act performed or omitted to be performed by the General Partner in good faith on behalf of the Partnership and in a manner within the scope of the authority granted to the General Partner by the Partnership Agreement and in the best interest of the Partnership, except that they shall not be entitled to be indemnified in respect of any loss, damage, or claim incurred by reason of fraud, negligence, misconduct, or breach of fiduciary duty. Any indemnity shall be provided out of and to the extent of Partnership assets only. The Partnership shall not advance any funds to the General Partner or its Affiliates for legal expenses and other costs incurred as a result of any legal action initiated against the General Partner or its Affiliates by a Limited Partner in the Partnership, except under certain specified circumstances. F-11 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) 4. Investment in Property ---------------------- Investment in property at cost and reduced by write-downs consists of managed, fully-operating, commercial real estate as follows: December 31, 1996 1995 ---- ---- 1300 North Dutton Avenue Office Complex $- $2,835,779 Marlboro Square Shopping Center 1,649,130 3,183,643 Crossroads Square Shopping Center 12,266,920 12,266,920 Carnegie Center Office/Warehouse 3,800,000 6,844,991 Warner Plaza Shopping Center 6,473,889 6,473,889 ------------ ----------- Total $24,189,939 $31,605,222 ============ =========== The real estate market is cyclical in nature and is materially affected by general economic trends and economic conditions in the market where a property is located. As a result, determination of real estate values involves subjective judgments. These judgments are based on current market conditions and assumptions related to future market conditions. These assumptions involve, among other things, the availability of capital, occupancy rates, rental rates, interest rates and inflation rates. Amounts ultimately realized from each property may vary significantly from the values presented and the differences could be material. Actual market values of real estate can be determined only by negotiation between the parties in a sales transaction. During 1996, the General Partner determined that the estimated future undiscounted cash flows from the Carnegie Center and Marlboro Square Shopping Center properties were less than their respective carrying amounts, due, in general, to weak real estate market conditions for similar properties in the areas where these properties are located. Accordingly, the Partnership wrote-down the carrying amounts of the Carnegie Center and Marlboro Square Shopping Center by $1,247,093 and $660,000, respectively. These write-downs represent the difference between the property's carrying value and its estimated fair market value. During 1994, the General Partner determined that the estimated future undiscounted cash flows from the Carnegie Center property were less than the property's carrying value, due in general, to weak real estate market conditions for similar properties in the area where the property is located. Accordingly, the Partnership wrote-down the carrying value of the Carnegie Center by $512,000, representing the difference between the property's carrying value and its estimated future undiscounted cash flows. F-12 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) 4. Investment in Property (continued) ---------------------- The General Partner listed the 1300 North Dutton Avenue for sale during October 1996. Accordingly, this property is classified in "Property Held For Sale" on the Balance Sheet at December 31, 1996 at its carrying value, which is not in excess of its estimated fair value less selling costs. The General Partner believes that this property will be sold during 1997. The 1300 North Dutton Avenue property only contributed approximately 2% of the Partnership's net cash from operations primarily because the property was vacant for most of the year,. The Partnership leases its properties to non-affiliated tenants under primarily long-term operating leases. At December 31, 1996, future minimum rentals on non-cancelable leases relating to the above properties were as follows: 1997 $2,459,074 1998 2,190,344 1999 1,807,765 2000 1,594,592 2001 1,517,586 Thereafter 7,762,555 ---------- Total $17,331,916 ========== 5. Deferred Expenses ----------------- Deferred expenses consist of the following: Unamortized Balance at December 31, Description 1996 1995 ----------- ---- ---- $114,494 of acquisition fees paid to the General Partner. This amount was amortized over a period of thirty years prior to June 30, 1993. Subsequent to June 30, 1993, the unamortized balance is amortized over a period of fifty-four months. $21,415 $42,829 $368,673 of tenant improvements. These amounts are amortized over the terms of the leases to which they relate. 187,716 256,271 $262,773 of lease commissions. These amounts are amortized over the terms of the leases to which they relate. 175,677 235,427 --------- -------- $384,808 $534,527 ========= ========= F-13 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) 6. Transactions with the General Partner and Affiliates ---------------------------------------------------- Fees and expenses incurred or paid by the General Partner or its affiliates on behalf of the Partnership and to which the General Partner or its affiliates are entitled to reimbursement from the Partnership were as follows: Years Ended December 31, 1996 1995 1994 ---- ---- ---- Reimbursement for operating expenses $171,710 $151,675 $118,293 Partnership management fee expense 76,619 83,939 83,939 -------- -------- -------- Total $248,329 $235,614 $202,232 ======== ======== ======== These expenses are included in expenses on the Statements of Operations. The Partnership provides indemnification to the General Partner and its Affiliates for any acts or omissions of the General Partner good faith on behalf of the Partnership, except for acts or omissions constituting fraud, negligence, misconduct or breach of fiduciary duty. The General Partner believes that this indemnification applies to the class action complaint described in Note 8. Accordingly, the Partnership has accrued $41,475, which amount is included in the Statements of Operations, and represents the Partnership's share of the costs incurred by the General Partner and its affiliates relating to the class action complaint. Accounts payable to affiliates represents amounts due to the General Partner or its affiliates for various services provided to the Partnership, including amounts to indemnify the General Partner or its affiliates for claims incurred by them in connection with their actions as General Partner of the Partnership. All amounts accrued by the Partnership to indemnify the General Partner or its affiliates for legal fees incurred by them shall not be paid unless or until all conditions set forth in the Partnership Agreement for such payment have been fulfilled. The General Partner serves in a similar capacity for two other affiliated real estate limited partnerships. F-14 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) 7. Federal Income Taxes -------------------- A reconciliation of the net (loss)/income reported in the Statements of Operations to the net income reported for federal income tax purposes is as follows: Years Ended December 31, 1996 1995 1994 ---- ---- ---- Net (loss)/income per Statements of Operations ($851,115) $1,551,706 $1,497,221 Add/(deduct): Excess of book gain over tax gain on disposition of assets - (260,176) - Excess of tax depreciation over book depreciation (87,266) (44,106) (31,514) Excess of book amortization over tax amortization 96,919 70,286 67,356 Other income/(loss) - 3,573 - Reduction of property carrying value 1,907,093 - 512,000 Other expenses 64,715 158,875 83,085 ---------- ---------- ---------- Net income for federal income tax purposes $1,130,346 $1,480,158 $2,128,148 ========== ========== ========== A reconciliation of the Partnership's properties' aggregate cost for book and federal income tax purposes is as follows: Years Ended December 31, 1996 1995 1994 ---- ---- ---- Aggregate cost, book purposes $24,189,939 $28,769,443 $28,769,443 Add/(deduct): Costs capitalized for federal income tax purposes, cumulative 370,203 329,109 170,235 Book basis property write-downs, cumulative 10,887,498 6,307,993 6,307,993 ---------- ---------- ---------- Aggregate cost, federal income tax purposes $35,447,640 $35,404,545 $35,247,671 ========== ========== ========== F-15 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) 8. Contingencies ------------- In February 1996, a putative class action complaint was filed in the Superior Court in Essex County, New Jersey by a single investor in a limited partnership affiliated with the Partnership. The complaint named as defendants the Partnership, the General Partner, certain other Affiliates of the General Partner, and certain unnamed officers, directors, employees and agents of the named defendants. The plaintiff sought unspecified damages stemming from alleged misrepresentations and omissions in the marketing and offering materials associated with the Partnership and two limited partnerships affiliated with the Partnership. On March 18, 1997, the court certified a class of investors who were original purchasers in the Partnership. The Partnership provides indemnification to the General Partner and its Affiliates for acts or omissions of the General Partner in good faith on behalf of the Partnership, except for acts or omissions constituting fraud, negligence, misconduct or breach of fiduciary duty. The General Partner believes that this indemnification applies to the class action complaint described above. Accordingly, the Partnership has accrued $41,475 for the year ended December 31, 1996, which amount is included in the Statement of Operations and represents the Partnership's share of costs incurred by the General Partner and its Affiliates relating to the class action complaint. At the present time, the General Partner can not estimate the impact, if any, of the potential indemnification claims on the Partnership's Financial Statements, taken as a whole. Accordingly, no provision for any liability which could result from the eventual outcome of these matters has been made in the accompanying financial statements. 9. Subsequent Events ----------------- On February 14, 1997, the Partnership made a cash distribution of $515,972 to the Investors representing a 5% annualized return to all Investors of record at December 31, 1996, based on Distributable Cash from Operations for the quarter then ended. F-16 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION Year Ended December 31, 1996 Costs Capitalized Initial Costs to Subsequent to Gross Amount Partnership Acquisition At Which Carried at Close of Period ----------------------- ----------------------- ----------------------------------- Buildings Buildings and and Description Encumbrances Land Improvements ImprovementsWrite-down (1) Land Improvements Total (2) - ----------- ------------ ---- ------------ -------------------------- ---- ------------ --------- Marlboro Square Shopping Center Marlboro, MA - $1,700,000 $ 3,431,725 $121,775 ($3,604,370) $345,000 $1,304,130 $1,649,130 Crossroads Square Shopping Center Jacksonville, FL - 3,910,000 10,582,095 74,825 (2,300,000) 3,266,000 9,000,920 12,266,920 Carnegie Center Office/Warehouse Cincinnati, OH - 400,000 6,824,894 132,097 (3,556,991) 315,000 3,485,000 3,800,000 Warner Plaza Shopping Center Chandler, AZ - 2,800,000 5,069,990 30,035 (1,426,136) 2,272,330 4,201,559 6,473,889 -- ---------- ----------- --------- ---------- ---------- ----------- ----------- Total - $8,810,000 $25,908,704 $358,732 ($10,887,497) $6,198,330 $17,991,609 $24,189,939 == ========== =========== ======== ========== ========== =========== =========== F-17 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) SCHEDULE III (Continued) REAL ESTATE AND ACCUMULATED DEPRECIATION Year Ended December 31, 1996 Life on Which Depreciation in Latest Statement Accumulated Date of Date of Operations Description Depreciation (5) Construction Acquired is Computed ----------- ---------------- ------------ -------- ----------- Marlboro Square Shopping Center Marlboro, MA $26,460 1986 2/17/87 30 Years (3) 15 Years (4) Crossroads Square Shopping Center Jacksonville, FL 2,875,103 1986 11/20/87 30 Years (3) Carnegie Center Office/Warehouse Cincinnati, OH - 1986 12/22/87 30 Years (3) Warner Plaza Shopping Center Chandler, AZ 1,315,571 1985 2/25/88 30 Years (3) ----------- Total $4,214,134 =========== (1) These write-downs represent impairment in the values of the properties based upon the General Partner's estimates. For a further discussion relating to the determination of property write-downs, please see "Management's Discussion and Analysis of Financial Condition" included in Item 7 of this Report. F-18 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) SCHEDULE III (continued) REAL ESTATE AND ACCUMULATED DEPRECIATION Year Ended December 31, 1996 (2) The Partnership's properties' aggregate cost for federal income tax purposes at December 31, 1996 are as follows: Property Amount -------- ------- Marlboro Square Shopping Center $5,269,490 Crossroads Square Shopping Center 14,653,372 Carnegie Center Office/Warehouse 7,487,529 Warner Plaza Shopping Center 8,037,249 ----------- Total $35,447,640 =========== The Partnership's aggregate cost for federal income tax purposes may differ from the aggregate cost for Financial Statement purposes. (3) Estimated useful life for buildings (4) Estimated useful life for land improvements (5) Reconciliation of real estate and accumulated depreciation: Years Ended December 31, 1996 1995 1994 ---- ---- ---- Investment in Real Estate Balance at beginning of year $31,605,222 $38,108,981 $38,620,981 Improvements - - - Sale of property - (6,503,759) - Property held for sale (2,835,779) - - Reduction of carrying value, including leasing costs (4,579,504) - (512,000) ----------- ----------- ----------- Balance at end of year $24,189,939 $31,605,222 $38,108,981 =========== =========== =========== Accumulated Depreciation Balance at beginning of year $7,165,026 $7,453,459 $6,485,966 Sale of property - (1,240,266) - Additions charged to costs and expenses 772,298 951,833 967,493 Property held for sale (808,904) - - Reduction of carrying value (2,914,286) - - ----------- ----------- ----------- Balance at end of year $4,214,134 $7,165,026 $7,453,459 =========== =========== =========== F-19