EXHIBIT 13
CONAM REALTY INVESTORS 3 L.P.
1998 ANNUAL REPORT
- -------------------------------------------------------------------------------
CONAM REALTY INVESTORS 3 L.P.
- -------------------------------------------------------------------------------
ConAm Realty Investors 3 L.P. is a California limited partnership
formed in 1983 to acquire, operate and hold for investment multifamily
residential properties. At November 30, 1998, the Partnership's
portfolio consisted of three apartment properties located in Colorado,
Arizona and Florida. On January 29, 1999, with the consent of the
Unitholders, all three of the remaining properties were sold for a
price of $25,200,000 (before closing costs). Substantially all of the
cash, less an amount for contingencies, was distributed to the
Unitholders.
CONTENTS
1 Message to Investors
2 Performance Summary
3 Financial Highlights
4 Consolidated Financial Statements
7 Notes to the Consolidated Financial Statements
12 Independent Auditors' Report
13 Report of Former Independent Accountants
14 Net Asset Valuation
- --------------------------------------------------------------------------------
ADMINISTRATIVE INQUIRIES PERFORMANCE INQUIRIES/FORM 10-Ks
ADDRESS CHANGES/TRANSFERS Brock, Tibbitts and Snell
MAVRICC Management Systems, Inc. 625 Broadway, Suite 911
1845 Maxwell, Suite 101 San Diego, California 92101
Troy, MI 48084-4510 619-232-0365
Attn: Financial Communications
248-637-7897
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MESSAGE TO INVESTORS
- --------------------------------------------------------------------------------
Presented for your review is the 1998 Annual Report for ConAm Realty
Investors 3 L.P. (the "Partnership"). In this report we have included a
performance summary which addresses operations at each of the properties
(the "Properties") and the financial highlights for the year.
We are pleased to announce that the proposed sale of the Partnership's
three remaining Properties to DOC Investors, L.L.C., a Delaware limited
liability company, was approved by the Limited Partners on January 15, 1999
and that the sale was completed on January 29, 1999. Within 30 days of the
close of the sale of the Properties, distributions of $207.50 per Unit,
representing the majority of the net proceeds from the sale and other cash
from operations, were distributed to Unitholders.
CASH DISTRIBUTIONS
The Partnership paid cash distributions totaling $4.50 per Unit for the
year ended November 30, 1998. The General Partner decided not to make a
fourth quarter distribution pending the outcome of the solicitation of the
consent of the Unitholders to the sale of the Partnership's Properties.
Including the distribution in February 1999, since inception the
Partnership has paid distributions totaling $620.50 per original $500 Unit.
These distributions include the net proceeds from the sale of the
Partnership's Properties in January of 1999 of $205.81 per Unit, and cash
from operations of $1.69 per Unit, both of which were distributed on
February 26, 1999.
OPERATIONS OVERVIEW
Operations at the Properties remained stable in 1998, reflecting healthy
economic conditions, tempered by increased competition for tenants in the
markets where the Properties are located. As a result of new apartment
construction in the Jacksonville and Colorado Springs markets, several
large apartment Properties have begun to offer rental concessions to
attract tenants. In Tucson, where Skyline Village is located, many high-end
renters opted to purchase homes due to low interest rates. Despite these
trends, strong economic growth in all three areas helped strengthen
multi-family housing, and the Properties sustained average occupancy levels
at or above 93% in 1998.
Several interior and exterior repairs were performed at each Property
during 1998, including carpet and flooring replacement and other routine
repairs. In addition, roof replacements at Ponte Vedra Beach Village II
that were begun in 1997 were completed in the first quarter of 1998.
Clubhouse renovations and landscaping repairs were completed at Autumn
Heights in 1998.
SUMMARY
The sale of the Properties on January 29, 1999 represents the first step
toward the liquidation of the Partnership that is expected to be completed
in August 1999. A final distribution of remaining Partnership cash, if any,
will be made shortly thereafter.
Very truly yours,
/s/ Daniel J. Epstein
Daniel J. Epstein, President
Continental American Development Inc.
General Partner of ConAm Property Services IV, Ltd.
February 28, 1999
1
CONAM REALTY INVESTORS 3 L.P.
AND CONSOLIDATED VENTURES
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY
- --------------------------------------------------------------------------------
AUTUMN HEIGHTS COLORADO SPRINGS, COLORADO
Autumn Heights is a 140-unit apartment complex located in the southwest
section of Colorado Springs. The property reported stable operations in
1998, with average occupancy increasing to 94% in fiscal 1998, from 92% in
fiscal 1997. Strong market conditions over the last two years, however,
have prompted an increase in new construction of multifamily properties.
The recent addition of several new apartments to the market led to
increased competition and a decline in rental rates in 1998 in the market
area. While competition has been strong, rental income and average
occupancy at Autumn Heights have increased slightly from the prior year.
The needed roof replacements were completed in 1998 along with the
renovation of the clubhouse and needed landscaping. These improvements
enhanced the property's overall value and helped to increase rents and
occupancy levels in this competitive market in 1998.
PONTE VEDRA BEACH VILLAGE II PONTE VEDRA BEACH, FLORIDA
Ponte Vedra Beach Village II is a 124-unit luxury apartment complex located
in an oceanside residential area to the southeast of Jacksonville. The
property reported an average occupancy level of 93% in fiscal 1998, a small
decrease from 95% in fiscal 1997. Rental income was consistent with the
prior year. Property improvements for the year included roof replacements,
carpet replacement and other improvements to increase the appearance of the
property. Favorable market conditions in the Jacksonville area have led to
an increase in new multifamily construction, with new construction adding
approximately 2,617 new apartment units throughout the year. Although
population and job growth in the Jacksonville area remain strong,
continuing construction at this pace and the affordable housing market has
lead to significant softness and increased market vacancy.
SKYLINE VILLAGE TUCSON, ARIZONA
Skyline Village contains 168 units and is located in the northwest area of
Tucson. The property continued to perform well despite strong competition
with a small decrease in its average occupancy rate from 97% during 1997 to
95% for 1998. Overall, apartment vacancy rates remain high in this market,
but significant population growth in Tucson over the last few years is
slowly reducing the number of available units. Low interest rates and
affordable home prices have also increased competition by luring many
renters to purchase homes. This competition has led to the reemergence of
rental incentives and other concessions to attract tenants. Rental income
remained steady as rental rate increases at the property offset the
decrease in occupancy. Property improvements in 1998 included painting,
carpet replacement and ceiling fan replacement in selected units.
2
CONAM REALTY INVESTORS 3 L.P.
AND CONSOLIDATED VENTURES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
For the periods ended November 30, 1998 1997 1996 1995 1994
-------------------------------------------------------------------------------------------------------------------
DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT DATA
Total Income $3,693 $3,632 $3,745 $4,203 $4,298
Loss on Sale of Property -- -- -- (84) --
Net Income (loss) (35) (195) 354 85 18
Net Cash Provided by Operating Activities 976 921 1,205 1,185 1,197
Long-term Obligations 8,152 8,293 8,435 8,565 11,599
Total Assets at Year End 17,432 18,075 18,977 19,650 27,614
Net Income (loss) per Limited Partnership (.43) (2.42) 3.98 .87 .20
Unit*
Distributions per Limited Partnership Unit* 4.50 6.00 10.00 10.00 14.00
Special Distributions per Limited -- -- -- 50.00 30.00
Partnership Unit*
* 80,000 UNITS OUTSTANDING
CASH DISTRIBUTIONS
PER LIMITED PARTNERSHIP UNIT 1998 1997
------------------------------------------------------------------- ---------------- ----------------
First Quarter $1.50 $1.50
Second Quarter $1.50 $1.50
Third Quarter $1.50 $1.50
Fourth Quarter $ -- $1.50
---------------- ----------------
TOTAL $4.50 $6.00
------------------------------------------------------------------- ---------------- ----------------
Cash distributions were reduced in 1998 due to a suspension of
distributions pending the outcome of the solicitation of the consent the
Unitholders to the sale of the Properties.
3
CONAM REALTY INVESTORS 3 L.P.
AND CONSOLIDATED VENTURES
-------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS AT NOVEMBER 30, AT NOVEMBER 30,
1998 1997
-------------------------------------------------------------------------------------------------------------------
ASSETS
Investments in real estate:
Land $ 5,817,668 $ 5,817,668
Buildings and improvements 22,534,407 22,465,678
---------------------------------------
28,352,075 28,283,346
Less accumulated depreciation (12,020,027) (11,223,921)
----------------------------------------
16,332,048 17,059,425
Cash and cash equivalents 849,125 796,824
Restricted cash 107,640 109,843
Other assets, net of accumulated amortization
of $249,225 in 1998 and $206,209 in 1997 143,646 109,293
-------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 17,432,459 $ 18,075,385
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
-------------------------------------------------------------------------------------------------------------------
Liabilities:
Mortgages payable $ 8,151,572 $ 8,292,972
Distribution payable -- 146,659
Accounts payable and accrued expenses 302,618 218,266
Due to general partner and affiliates 15,684 16,703
Security deposits 98,029 101,198
---------------------------------------
Total Liabilities 8,567,903 8,775,798
---------------------------------------
Partners' Capital (Deficit):
General Partner (995,408) (955,059)
Limited Partners (80,000 Units outstanding) 9,859,964 10,254,646
---------------------------------------
Total Partners' Capital 8,864,556 9,299,587
-------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 17,432,459 $ 18,075,385
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
4
CONAM REALTY INVESTORS 3 L.P.
AND CONSOLIDATED VENTURES
-------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED NOVEMBER 30, 1998 1997 1996
-------------------------------------------------------------------------------------------------------------------
INCOME
Rental $ 3,671,959 $ 3,593,135 $ 3,688,364
Interest and other 20,755 38,921 57,109
----------------------------------------------
Total Income 3,692,714 3,632,056 3,745,473
-------------------------------------------------------------------------------------------------------------------
EXPENSES
Property operating 1,820,339 1,838,576 1,581,543
Depreciation and amortization 918,690 922,261 908,783
Interest 723,420 736,373 748,229
General and administrative 177,538 177,129 152,783
Write-off of assets 87,759 153,200 --
----------------------------------------------
Total Expenses 3,727,746 3,827,539 3,391,338
-------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (35,032) (195,483) $ 354,135
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) ALLOCATED:
To the General Partner $ (350) (1,955) $ 35,413
To the Limited Partners (34,682) (193,528) 318,722
-------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (35,032) (195,483) $ 354,135
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
PER LIMITED PARTNERSHIP UNIT
(80,000 UNITS OUTSTANDING): $ (0.43) $ (2.42) $ 3.98
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997, AND 1996 GENERAL LIMITED
PARTNER PARTNERS TOTAL
-------------------------------------------------------------------------------------------------------------------
BALANCE (DEFICIT) AT NOVEMBER 30, 1995 $ (846,302) $ 11,409,452 $ 10,563,150
Net income 35,413 318,722 354,135
Distributions ($10.00 per Unit) (88,888) (800,000) (888,888)
-------------------------------------------------------------------------------------------------------------------
BALANCE (DEFICIT) AT NOVEMBER 30, 1996 $ (899,777) $ 10,928,174 $ 10,028,397
Net loss (1,955) (193,528) (195,483)
Distributions ($6.00 per Unit) (53,327) (480,000) (533,327)
--------------------------------------------------------------------------------------------------------------------
BALANCE (DEFICIT) AT NOVEMBER 30, 1997 $ (955,059) $ 10,254,646 $ 9,299,587
Net loss (350) (34,682) (35,032)
Distributions ($4.50 per Unit) (39,999) (360,000) (399,999)
-------------------------------------------------------------------------------------------------------------------
BALANCE (DEFICIT) AT NOVEMBER 30, 1998 $ (995,408) $ 9,859,964 $ 8,864,556
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
5
CONAM REALTY INVESTORS 3 L.P.
AND CONSOLIDATED VENTURES
-------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1998 1997 1996
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (35,032) (195,483) $ 354,135
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 918,690 922,261 908,783
Write-off of assets 87,759 153,200 --
Increase (decrease) in cash arising from changes
in operating assets and liabilities:
Fundings to restricted cash (220,235) (128,748) (156,654)
Release of restricted cash to property operations 222,438 103,839 132,861
Other assets (77,369) 21,259 (25,471)
Accounts payable and accrued expenses 84,352 61,480 (17,938)
Due to general partners and affiliates (1,019) 895 798
Security deposits (3,169) (17,403) 8,725
----------------------------------------------
Net cash provided by operating activities 976,415 921,300 1,205,239
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Insurance recovery of real estate additions 54,191 -- --
Additions to real estate (290,247) (458,198) (162,200)
-----------------------------------------------
Net cash used in investing activities (236,056) (458,198) (162,200)
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Mortgage principal payments (141,400) (141,871) (130,016)
Distributions (546,658) (608,890) (888,888)
-----------------------------------------------
Net cash used in financing activities (688,058) (750,761) (1,018,904)
-------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 52,301 (287,659) 24,135
Cash and cash equivalents, beginning of period 796,824 1,084,483 1,060,348
-------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 849,125 796,824 $ 1,084,483
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 663,658 736,373 $ 748,229
-------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING ACTIVITIES:
Write-off of buildings and improvements $ (167,327) (319,300) $ --
Write-off of accumulated depreciation $ 79,568 166,100 $ --
-------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
6
CONAM REALTY INVESTORS 3 L.P.
AND CONSOLIDATED VENTURES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998, 1997 AND 1996
1. ORGANIZATION
ConAm Realty Investors 3 L.P. (the "Partnership") was organized as a
limited partnership under the laws of the State of California pursuant to a
Certificate and Agreement of Limited Partnership (as subsequently amended
the "Partnership Agreement") dated July 14, 1983. The Partnership was
formed for the purpose of acquiring and operating multi-family residential
real estate. The general partners of the Partnership were RI 3-4 Real
Estate Services, Inc. ("RI 3-4"), an affiliate of Lehman Brothers, Inc.
(see below), and ConAm Property Services IV, Ltd. ("CPS IV"), an affiliate
of Continental American Properties, Ltd. (the "General Partners"). On
January 27, 1998, CPS IV acquired RI 3-4's co general partner interest in
the Partnership, effective July 1, 1997, pursuant to a purchase agreement
between CPS IV and RI 3-4 dated August 29, 1997. As a result, CPS IV now
serves as the sole general partner (the "General Partner") of the
Partnership. In conjunction with this transaction, the name of the
Partnership changed from Hutton/ConAm Realty Investors 3 to ConAm Realty
Investors 3 L.P. On January 15, 1999, a majority in interest of
Unitholders agreed to the sell the Partnership's remaining properties and
liquidate the Partnership (Note 10). The Partnership sold its properties on
January 29,1999 and expects to liquidate during fiscal year 1999.
2. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
FINANCIAL STATEMENTS The consolidated financial statements are prepared on
the accrual basis of accounting and include the accounts of the Partnership
and its affiliated ventures when the Partnership has a controlling interest
in the ventures. The effects of transactions between the Partnership and
its ventures have been eliminated in consolidation.
INVESTMENTS IN REAL ESTATE INVESTMENTS in real estate are recorded at cost
less accumulated depreciation and include the initial purchase price of the
property, legal fees, acquisition and closing costs.
Revenue is recognized when earned and expenses (including depreciation) are
recognized when incurred in accordance with generally accepted accounting
principles. Leases are generally for terms of one year or less.
Depreciation is computed using the straight-line method based upon the
estimated useful lives of the properties (25 years). Maintenance and
repairs are charged to operations as incurred. Costs incurred for
significant betterments and improvements are capitalized and depreciated
over their estimated useful lives.
For assets sold or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss
is reflected in net income for the period.
IMPAIRMENT OF LONG-LIVED ASSETS The Partnership assesses its real estate
investments for impairment whenever events or changes in circumstances
indicate that the carrying amount of the real estate may not be
recoverable. Recoverability of real estate to be held and used is measured
by a comparison of the carrying amount of the real estate to future net
cash flows (undiscounted and without interest) expected to be generated by
the real estate. If the real estate is considered to be impaired, the
impairment to be recognized is measured as the amount by which the carrying
amount of the real estate exceeds the fair value of the real estate.
As of November 30, 1998, the Partnership's properties were assets to be
held and used as the Partnership did not have the ability to sell the
properties without the approval of a majority of the Unitholders.
OTHER ASSETS Included in other assets are costs incurred in connection with
obtaining financing for the Partnership's properties. Such costs are
amortized over the initial term of the loan on a method that approximates
the effective-interest method.
INCOME TAXES No provision for income taxes has been made in the financial
statements, as the liability for such taxes is that of the partners rather
than the Partnership.
CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of highly
liquid short-term investments with original maturities of three months or
less.
7
CONAM REALTY INVESTORS 3 L.P.
AND CONSOLIDATED VENTURES
CONCENTRATION OF CREDIT RISK Financial instruments which potentially
subject the Partnership to a concentration of credit risk principally
consist of cash and cash equivalents and restricted cash in excess of the
financial institution's federally insured limits. The Partnership invests
its cash and cash equivalents and restricted cash with high credit quality
federally insured financial institutions or treasury based money market
funds.
RESTRICTED CASH Restricted cash consists of escrows for real estate taxes
as required by the first mortgage lender.
USE OF ESTIMATES Management of the Partnership has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities, the 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 to prepare these financial statements
in conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
3. THE PARTNERSHIP AGREEMENT The Partnership Agreement provides that net
cash from operations, as defined, is to be distributed quarterly, 90% to
the limited partners and 10% to the General Partners.
Net loss for any fiscal year is to be allocated 99% to the limited partners
and 1% to general partners. Net income for any fiscal year will generally
be allocated 90% to the limited partners and 10% to the General Partners.
Net proceeds from sales or refinancing are to be distributed 100% to the
limited partners until each limited partner has received an amount equal to
his adjusted capital value (as defined) and an annual, non-compounded
cumulative 7% return thereon. The balance, if any, is to be distributed 85%
to the limited partners and 15% to the General Partners. Generally, all
gain from sales is to be allocated in the same manner as net proceeds from
sales or refinancing.
Effective July 1, 1997, all general partner allocations were made solely to
CPS IV.
4. INVESTMENTS IN REAL ESTATE
The Partnership owns three residential apartment complexes that were
acquired either directly or through an investment in a joint venture as
follows:
APARTMENT DATE PURCHASE
PROPERTY NAME UNITS LOCATION ACQUIRED PRICE
-------------------------------------------------------------------------------------------------------------------
Autumn Heights 140 Colorado Springs, CO 1/25/85 $ 9,234,438
Skyline Village 168 Tucson, AZ 3/20/85 10,388,068
Ponte Vedra Beach Village II 124 Jacksonville, FL 8/22/85 6,547,829
-------------------------------------------------------------------------------------------------------------------
Skyline Village was acquired through a joint venture with an unaffiliated
developer. The Partnership assigned its rights to acquire Skyline Village
and contributed cash equal to the purchase price of the property to the
joint venture. The developer did not make an initial capital contribution
to these ventures.
Skyline Village's joint venture was converted to a limited partnership. The
Partnership entered into an amended and restated Agreement of Limited
Partnership, dated as of July 1, 1992 with its two corporate General
Partners, RI 3-4 Real Estate Services, Inc. and ConAm Property Services IV,
Ltd., as General Partners, and the Partnership as the sole limited partner.
The amended limited partnership agreement of Skyline Village substantially
provides that:
a. Available cash from operations is to be distributed 100% to the
Partnership until it has received an annual, non-cumulative preferred
return for Skyline Village of $675,000. Any remaining balance is to be
distributed 99% to the Partnership and 1% to the corporate General Partner.
8
CONAM REALTY INVESTORS 3 L.P.
AND CONSOLIDATED VENTURES
b. Net income is to be allocated first, proportionately to partners with
negative capital accounts, as defined, until such capital accounts have
been increased to zero then, to the Partnership up to the amount of any
payments made on account of its preferred return and thereafter, 99% to the
Partnership and 1% to the corporate General Partner. All net losses are to
be allocated first, to the partners with positive capital accounts, as
defined, until such accounts have been reduced to zero and then, 99% to the
Partnership and 1% to the corporate General Partner.
c. Income from a sale is to be allocated first, to the Partnership until
the Partnership's capital accounts, as defined, are equal to the fair
market value of the ventures' assets at the date of the amendment. Then,
any remaining balance is to be allocated 99% to the Partnership and 1% to
the corporate General Partners. Net proceeds from a sale or refinancing are
to be distributed first, to the partners with the positive capital account
balance, as defined; thereafter, 99% to the Partnership and 1% to the
corporate General Partners.
5. MORTGAGES PAYABLE
The Partnership's first mortgage loans payable are comprised as follows:
AUTUMN HEIGHTS On January 6, 1994, the Partnership obtained a first
mortgage loan from John Hancock. Total proceeds of $5,500,000 were received
and are collateralized by a Deed of Trust, Security Agreement and Fixture
Filing with Assignment of Rents Agreement encumbering the property. The
loan is for a term of seven years and bears interest at an annual rate of
8% requiring monthly installments of principal and interest based on a 25
year amortization schedule. The loan requires monthly real estate tax
escrow fundings. The loan matures on January 1, 2001, upon which time a
balloon payment of $4,736,587 and any accrued interest are due.
SKYLINE VILLAGE On December 20, 1991, the venture obtained a first mortgage
loan of $3,350,000 from the Penn Mutual Life Insurance Company ("Penn
Mutual") collateralized by a deed of trust on the land and the
improvements, and an assignment of rents. During 1996, Penn Mutual
transferred the first mortgage loan to GE Capital Asset Management Corp.
("GE") under the existing terms. The loan is for a term of seven years and
bears interest at an annual rate of 10.125% requiring monthly installments
of principal and interest. The loan matures on December 31, 1998, upon
which time a balloon payment of $3,054,594 and any accrued interest are
due. Management obtained GE's approval to a six-month extension.
In conjunction with the sale of the Properties on January 29, 1999, the
mortgage loan with respect to Skyline Village was repaid in full and the
Partnership's obligations under the loan with respect to Autumn Heights
were assumed by the Purchaser of that property (Note 10).
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", requires that the fair values be
disclosed for the Partnership's financial instruments. The carrying amount
of cash and cash equivalents, distributions payable, accounts payable and
accrued expenses, due to general partners and affiliates and security
deposits are reasonable estimates of their fair values due to the
short-term nature of those instruments.
The carrying amount of the mortgages payable is a reasonable estimate of
fair value based on management's belief that the interest rates and terms
of the debt are comparable to those commercially available to the
Partnership in the marketplace for similar instruments.
9
CONAM REALTY INVESTORS 3 L.P.
AND CONSOLIDATED VENTURES
7. TRANSACTIONS WITH RELATED PARTIES
The following is a summary of fees earned and reimbursable expenses to the
General Partners and affiliates for the years ended November 30, 1998, 1997
and 1996, and the unpaid portion at November 30, 1998:
EARNED AND
UNPAID AT
NOVEMBER 30, EARNED
---------------------------------------------------
YEAR 1998 1998 1997 1996
----------------------------------------------------------------------------------------------------------------------
RI 3-4 Real Estate Services, Inc.
And affiliates:
Out-of-pocket expenses $ -- $ -- $ 2,216 $ 1,125
ConAm and affiliates:
Property operating salaries -- 282,599 258,808 233,653
Property management fees 15,684 184,337 180,111 184,685
--------------------------------------------------------------------
TOTAL $15,684 $466,936 $441,135 $419,463
----------------------------------------------------------------------------------------------------------------------
8. RECONCILIATION OF FINANCIAL STATEMENT AND TAX INFORMATION
The following is a reconciliation of consolidated net income for financial
statement purposes to net income (loss) for federal income tax purposes for
the years ended November 30, 1998, 1997 and 1996:
1998 1997 1996
-------------------------------------------------------------------------------------------------------------------
Net income (loss) per financial statements $ (35,032) $ (195,483) $ 354,135
Depreciation deducted for tax
purposes less than (in excess) of depreciation
expense per financial statements (24,516) 17,787 (143,654)
Tax basis joint venture net
income (loss) in excess of GAAP
basis joint venture net loss (75,097) (72,635) (72,634)
Other (16,385) 13,854 (11,175)
-------------------------------------------------------------------------------------------------------------------
TAXABLE NET INCOME (LOSS) (UNAUDITED) $ (151,030) $ (236,477) $ 126,672
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
The following is a reconciliation of partners' capital for financial
statement purposes to partners' capital for federal income tax purposes as
of November 30, 1998, 1997 and 1996:
1998 1997 1996
-------------------------------------------------------------------------------------------------------------------
Partners' capital per financial statements $ 8,864,556 $ 9,299,587 $ 10,028,397
Adjustment for cumulative difference
between tax basis net income (loss) and
net income (loss) per financial statements (3,609,752) (3,493,754) (3,452,760)
-------------------------------------------------------------------------------------------------------------------
PARTNERS' CAPITAL PER INCOME TAX RETURN (UNAUDITED) $ 5,254,804 $ 5,805,833 $ 6,575,637
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
At November 30, 1998, the tax basis of the Partnership's assets was
$10,681,981 and the tax basis of the Partnership's liabilities was
$5,427,177. The Partnership does not consolidate its investment in the
joint ventures for income tax purposes.
10
CONAM REALTY INVESTORS 3 L.P.
AND CONSOLIDATED VENTURES
9. DISTRIBUTIONS PAID
Distributions, per the consolidated statements of partners' capital, are
recorded on the accrual basis, which recognizes specific record dates for
payments within each fiscal year. The consolidated statements of cash flows
recognize actual cash distributions paid during the fiscal year. The
following table discloses the annual differences as presented on the
consolidated financial statements:
DISTRIBUTIONS DISTRIBUTIONS
PAYABLE DISTRIBUTIONS DISTRIBUTIONS PAYABLE
BEGINNING OF YEAR DECLARED PAID NOVEMBER 30,
-------------------------------------------------------------------------------------------------------------------
1998 $ 146,659 $ 399,999 $ 546,658 $ --
1997 222,222 533,327 608,890 146,659
1996 222,222 888,888 888,888 222,222
-------------------------------------------------------------------------------------------------------------------
10. SALE OF PROPERTIES
On January 29, 1999, the Partnership consummated the sale of the Properties
to DOC Investors, L.L.C., a Delaware limited liability company, for a sales
price of $25,200,000 (before selling costs and prorations). As required by
the Partnership's Partnership Agreement, the General Partner solicited the
consent of a majority in interest of the Unitholders to the sale pursuant
to a Consent Solicitation Statement dated December 16, 1998. The requisite
consent was obtained on January 15, 1999. The Partnership received
$16,624,444 of cash proceeds from the sale, net of closing costs of
approximately $42,000 and repayment or assumption of indebtedness of
approximately $8,533,556.
On February 26, 1999, the Partnership distributed $16,600,000 ($207.50
per Unit) to the Unitholders and $15,037 to the General Partner, out of
cash proceeds from the sale and Net Cash From Operations, as defined.
11
CONAM REALTY INVESTORS 3 L.P.
AND CONSOLIDATED VENTURES
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The General Partner
ConAm Realty Investors 3 L.P.:
We have audited the accompanying consolidated balance sheets of ConAm
Realty Investors 3 L.P. (a California limited partnership) and
consolidated ventures (the "Partnership"), as of November 30, 1998 and
1997, and the related consolidated statements of operations, partners'
capital, and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
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.
As further discussed in Note 10 to the consolidated financial statements,
the Partnership sold substantially all of its assets on January 29, 1999.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ConAm
Realty Investors 3 L.P. and consolidated ventures as of November 30, 1998
and 1997, and the results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting
principles.
KPMG LLP
San Diego, California
January 29, 1999, except for the second paragraph
of Note 10 to the consolidated financial
statements, as to which the date is
February 26, 1999
12
- --------------------------------------------------------------------------------
REPORT OF FORMER INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Partners of
ConAm Realty Investors 3 L.P.:
We have audited the consolidated balance sheet of ConAm Realty Investors 3
L.P. (formerly Hutton/ConAm Realty Investors 3), a California Limited
Partnership, and Consolidated Ventures as of November 30, 1996 and the
related consolidated statements of operations, partners' capital (deficit)
and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit 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 audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of ConAm Realty Investors 3 L.P., a California Limited
Partnership, and Consolidated Ventures as of November 30, 1996, and the
consolidated results of their operations and their cash flows for the
year then ended in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
February 14, 1997
13
- --------------------------------------------------------------------------------
NET ASSET VALUATION
- --------------------------------------------------------------------------------
COMPARISON OF ACQUISITION COSTS TO NOVEMBER 30, 1998 PROPERTY VALUES AND
DETERMINATION OF NET ASSET VALUE PER UNIT AT NOVEMBER 30, 1998 (UNAUDITED)
ACQUISITION COST
(PURCHASE PRICE
PLUS GENERAL PARTNERSHIP'S
DATE OF PARTNERS' SHARE OF PROPERTY NET ASSET VALUE
PROPERTY ACQUISITION ACQUISITION FEES) VALUE (1) DETERMINATION
-----------------------------------------------------------------------------------------------------------------------
Autumn Heights 01-25-85 $ 9,687,174 $11,300,000
Skyline Village 03-20-85 10,838,195 8,100,000
Ponte Vedra Beach Village II 08-22-85 6,869,917 5,800,000
Aggregate Property Value at 11-30-98 $25,200,000
Less estimated transaction costs in escrow (42,000)
------------------
Sales proceeds (before repayment or buyer assumption of secured debt) 25,158,000
Cash and cash equivalents (including previously restricted cash) 956,765
Other assets 33,070
------------------
Total assets 26,147,835
------------------
Less:
Secured debt 8,151,572
Prepayment penalty 350,406
Other liabilities 416,331
Contingency amounts (2) 614,489
------------------
Total liabilities 9,532,798
------------------
Partnership Net Asset Value (3) 16,615,037
------------------
Net Asset Value Allocated:
Limited Partners 16,600,000
General Partner 15,037
------------------
16,615,037
------------------
NET ASSET VALUE PER UNIT
(80,000 UNITS OUTSTANDING) $207.50
-----------------------------------------------------------------------------------------------------------------------
(1) Represents the Partnership's share of the fair market value of the
properties as reflected in the purchase and sale agreements pursuant
to which the properties were sold on January 29, 1999. The purchase
prices contained in such agreements were negotiated and agreed to
within approximately 30 days of November 30, 1998.
(2) Includes a provision for estimated future costs related to the sale
and liquidation and an amount the General Partner determined to set
aside for contingencies, net of expected cash provided by operations
through the date of sale.
(3) The Partnership Net Asset Value assumes a sale at November 30, 1998
of all the Partnership's properties at prices equal to the sales
prices set forth in the purchase and sale agreements described in
Note (1), payment of all Partnership liabilities, and the
distribution of the net proceeds of such sale and other Partnership
cash, to the Partners.
Since the Partnership sold all of its real property assets in January 1999,
is in dissolution, and is in the process of winding up and liquidating, the
foregoing Partnership Net Asset Value is intended to approximate the
liquidation value of the Partnership and the Net Asset Value Per Unit is
intended to approximate the per Unit amount which is expected to be
distributed to the Limited Partners in connection with the Partnership's
liquidation. The Net Asset Valuation does not take into account the
illiquid nature of an investment in the Units or the fact that at November
30, 1998 a holder of Units would likely not have been able to sell their
Units for the Net Asset Value Per Unit set forth above. Fiduciaries of
Limited Partners which are subject to ERISA or other provisions of law
requiring valuation of Units should consider all relevant factors,
including but not limited to Net Asset Value Per Unit, in determining the
fair market value of the investment in the Partnership for such purposes.
14
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
NOVEMBER 30, 1998
CONSOLIDATED
PONTE VEDRA VENTURE
RESIDENTIAL PROPERTY: AUTUMN HEIGHTS BEACH VILLAGE II SKYLINE VILLAGE TOTAL
-------------------------------------------------------------------------------------------------------------------
Location Colorado Springs, CO Jacksonville, FL Tucson, AZ na
Construction date 1983-1985 1984-1985 1984-1985 na
Acquisition date 01-25-85 08-22-85 03-20-85 na
Life on which depreciation
in latest income statements
is computed 25 years 25 years 25 years na
Encumbrances $ 5,092,055 $ -- $ 3,059,517 $ 8,151,572
Initial cost to Partnership:
Land $ 1,581,000 $ 788,000 $ 3,410,000 $ 5,779,000
Buildings and
improvements $ 8,123,598 $ 6,138,289 $ 7,510,205 $ 21,772,092
Costs capitalized
subsequent to acquisition--
Land, buildings
and improvements $ 688,584 $ 466,896 $ 132,130 $ 1,287,610
Write-off of buildings
and improvements $ (330,327) $ (156,300) $ -- $ (486,627)
Gross amount at which
carried at close of period: (1)
Land $ 1,589,840 $ 789,882 $ 3,437,946 $ 5,817,668
Buildings and
improvements 8,473,015 6,447,003 7,614,389 22,534,407
-------------------------------------------------------------------------------------------------------------------
$ 10,062,855 $ 7,236,885 $ 11,052,335 $ 28,352,075
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Accumulated depreciation (2) $ 4,477,994 $ 3,293,997 $ 4,248,036 $ 12,020,027
-------------------------------------------------------------------------------------------------------------------
(1) Represents aggregate cost for both financial reporting for Federal
income tax purposes.
(2) The amount of accumulated depreciation for Federal income tax purposes
is $12,447,272.
A reconciliation of the carrying amount of real estate and accumulated
depreciation for the years ended November 30, 1998, 1997, and 1996 follows:
1998 1997 1996
-------------------------------------------------------------------------------------------------------------------
INVESTMENTS IN REAL ESTATE:
Beginning of period $ 28,283,346 $ 28,144,448 $ 27,982,248
Additions 236,056 458,198 162,200
Dispositions (167,327) (319,300) --
-------------------------------------------------------------------------------------------------------------------
End of period $ 28,352,075 $ 28,283,346 $ 28,144,448
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
ACCUMULATED DEPRECIATION:
Beginning of period $ 11,223,921 $ 10,510,777 $ 9,645,010
Depreciation 875,674 879,244 865,767
Dispositions (79,568) (166,100) --
-------------------------------------------------------------------------------------------------------------------
End of period $ 12,020,027 $ 11,223,921 $ 10,510,777
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT.
F-1
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The General Partner
ConAm Realty Investors 3 L.P.:
Under date of January 29, 1999, we reported on the consolidated balance
sheets of ConAm Realty Investors 3 L.P. (a California limited partnership)
and consolidated ventures (the "Partnership"), as of November 30, 1998 and
1997, and the related consolidated statements of operations, partners'
capital, and cash flows for the years then ended, as contained in the 1998
annual report to Unitholders. These consolidated financial statements
and our report thereon are incorporated by reference in the 1998 annual
report on Form 10-K. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related
consolidated financial statement schedule. This consolidated financial
statement schedule is the responsibility of the Partnership's management.
Our responsibility is to express an opinion on this consolidated financial
statement schedule based on our audits.
In our opinion, the consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set
forth therein.
KPMG LLP
San Diego, California
January 29, 1999
F-2
- -------------------------------------------------------------------------------
REPORT OF FORMER INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
Our report on the consolidated financial statements of ConAm Realty
Investors 3 L.P. (formerly Hutton/ConAm Realty Investors 3), a California
Limited Partnership, and Consolidated Ventures has been incorporated by
reference in this Form 10-K from the Annual Report to Unitholders of ConAm
Realty Investors 3 L.P. for the year ended November 30, 1996. In connection
with our audit of such financial statements, we have also audited the
related financial statement schedule listed in the index of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
February 14, 1997
F-3