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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q


(Mark One)

  x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

    For the quarterly period ended September 30, 2002

OR

  o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

    For the transition period from                                                         to                                                        

Commission file number 0-25606


WELLS REAL ESTATE FUND VII, L.P.
(Exact name of registrant as specified in its charter)


  Georgia
(State or other jurisdiction of incorporation or organization)
   58-2022629
(I.R.S. Employer Identification Number)		  

  6200 The Corners Pkwy., Atlanta, Georgia
(Address of principal executive offices)
   30092
(Zip Code)		  

Registrant’s telephone number, including area code (770) 449-7800

__________________________________________________________________________________________
(Former name, former address, and former fiscal year, if changed since last report)

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 filing requirements for the past 90 days.

             Yes x No o


 

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FORM 10-Q

WELLS REAL ESTATE FUND VII, L.P.

(A Georgia Public Limited Partnership)

INDEX

        Page No.
           
PART I.   FINANCIAL INFORMATION  
           
    Item 1.   Financial Statements  
           
        Balance Sheets—September 30, 2002 (unaudited) and December 31, 2001 3
           
        Statements of Income for the Three Months and Nine Months Ended September 30, 2002 (unaudited) and 2001 (unaudited) 4
           
        Statements of Partners’ Capital for the Year Ended December 31, 2001 and the Nine Months Ended September 30, 2002 (unaudited) 5
           
        Statements of Cash Flows for the Nine Months Ended September 30, 2002 (unaudited) and 2001 (unaudited) 6
           
        Condensed Notes to Financial Statements (unaudited) 7
           
    Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 11
           
    Item 4.   Controls and Procedures 13
           
           
           
PART II.   OTHER INFORMATION 15

 
   
Exhibit Index 18
   
Exhibit 99.1 — Certification of Chief Executive Officer 19
   
Exhibit 99.2 — Certification of Chief Financial Officer 20

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WELLS REAL ESTATE FUND VII, L.P.

(A GEORGIA PUBLIC LIMITED PARTNERSHIP)

BALANCE SHEETS

(unaudited)
September 30, 2002		 December 31, 2001
             
ASSETS:              
   Investments in joint ventures (Note 2)   $ 14,263,949   $ 15,772,696  
   Due from affiliates     1,260,692     460,193  
   Cash and cash equivalents     94,898     45,950  
         Total assets   $ 15,619,539   $ 16,278,839  
             
LIABILITIES AND PARTNERS’ CAPITAL:              
   Liabilities:              
     Accounts payable   $ 6,449   $ 7,207  
     Partnership distributions payable     430,825     463,881  
         Total liabilities     437,274     471,088  
   Partners’ capital:              
     Limited partners:              
       Class A—2,088,847 units and 2,067,020 units as of September 30, 2002 and
            December 31, 2001, respectively		     15,182,265     15,807,751  
       Class B—329,170 units and 350,997 units as of September 30, 2002 and
            December 31, 2001, respectively		     0     0  
         Total partners’ capital     15,182,265     15,807,751  
         Total liabilities and partners’ capital   $ 15,619,539   $ 16,278,839  

See accompanying condensed notes to financial statements.

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WELLS REAL ESTATE FUND VII, L.P.

(A Georgia Public Limited Partnership)

STATEMENTS OF INCOME

(unaudited) (unaudited)
Three Months Ended Nine Months Ended
September 30,
2002		 September 30,
2001		 September 30,
2002		 September 30,
2001
                         
REVENUES:                          
   Equity in income of joint ventures (Note 2)   $ 239,091   $ 268,852   $ 727,303   $ 715,097  
   Interest income     345     0     1,451     1,290  
    239,436     268,852     728,754     716,387  
EXPENSES:                          
   Legal and accounting     1,030     2,215     13,739     14,942  
   Partnership administration     18,338     12,664     47,488     41,283  
   Computer costs     1,946     2,997     6,753     8,504  
    21,314     17,876     67,980     64,729  
NET INCOME   $ 218,122   $ 250,976   $ 660,774   $ 651,658  
                         
NET INCOME ALLOCATED TO CLASS A
    LIMITED PARTNERS		   $ 218,122   $ 250,976   $ 660,774   $ 651,658  
                         
NET LOSS ALLOCATED TO CLASS B LIMITED
    PARTNERS		   $ 0   $ 0   $ 0   $ 0  
                         
NET INCOME PER WEIGHTED AVERAGE
    CLASS A LIMITED PARTNER UNIT		   $ 0.10   $ 0.12   $ 0.32   $ 0.32  
                         
NET LOSS PER WEIGHTED AVERAGE CLASS
    B LIMITED PARTNER UNIT		   $ 0.00   $ 0.00   $ 0.00   $ 0.00  
                         
CASH DISTRIBUTION PER CLASS A LIMITED
    PARTNER UNIT		   $ 0.21   $ 0.22   $ 0.62   $ 0.67  

See accompanying condensed notes to financial statements.

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WELLS REAL ESTATE FUND VII, L.P.

(A Georgia Public Limited Partnership)

STATEMENTS OF PARTNERS’ CAPITAL

FOR THE YEAR ENDED DECEMBER 31, 2001

AND THE NINE MONTHS ENDED SEPTEMBER 30, 2002 (UNAUDITED)

Limited Partners
Class A Class B
Units Amounts Units Amounts Total
Partners’
Capital
                               
BALANCE, December 31, 2000     2,045,427   $ 16,534,159     372,590   $ 0   $ 16,534,159  
                               
   Net income     0     1,113,684     0     0     1,113,684  
   Partnership distributions     0     (1,840,092 )   0     0     (1,840,092 )
   Class B conversion elections     21,593     0     (21,593 )   0     0  
BALANCE, December 31, 2001     2,067,020     15,807,751     350,997     0     15,807,751  
                               
   Net income     0     660,774     0     0     660,774  
   Partnership distributions     0     (1,286,260 )   0     0     (1,286,260 )
   Class B conversion elections     21,827     0     (21,827 )   0     0  
BALANCE, September 30, 2002 (unaudited)     2,088,847   $ 15,182,265     329,170   $ 0   $ 15,182,265  

See accompanying condensed notes to financial statements.

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WELLS REAL ESTATE FUND VII, L.P.

(A Georgia Public Limited Partnership)

STATEMENTS OF CASH FLOWS

(unaudited)
Nine Months Ended
September 30,
2002		 September 30,
2001
             
CASH FLOWS FROM OPERATING ACTIVITIES:              
   Net income   $ 660,774   $ 651,658  
   Adjustments to reconcile net income to net cash used in operating activities:              
     Equity in income of joint ventures     (727,303 )   (715,097 )
     Changes in assets and liabilities:              
       Prepaid expenses and other assets     0     2,375  
       Accounts payable     (758 )   (3,224 )
         Net cash used in operating activities     (67,287 )   (64,288 )
CASH FLOWS FROM INVESTING ACTIVITIES:              
   Distributions received from joint ventures     1,435,551     1,435,260  
CASH FLOWS FROM FINANCING ACTIVITIES:              
   Partnership distributions paid from accumulated earnings     (904,680 )   (855,496 )
   Partnership distributions paid in excess of accumulated earnings     (414,636 )   (510,310 )
         Net cash used in financing activities     (1,319,316 )   (1,365,806 )
NET INCREASE IN CASH AND CASH EQUIVALENTS     48,948     5,166  
             
CASH AND CASH EQUIVALENTS, beginning of year     45,950     55,216  
CASH AND CASH EQUIVALENTS, end of period   $ 94,898   $ 60,382  

See accompanying condensed notes to financial statements.

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WELLS REAL ESTATE FUND VII, L.P.

(A Georgia Public Limited Partnership)

CONDENSED NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2002 (UNAUDITED)

1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  (a)  Organization and Business

  Wells Real Estate Fund VII, L.P. (the “Partnership”) is a Georgia public limited partnership, with Leo F. Wells, III and Wells Partners, L.P. (“Wells Partners”), a Georgia nonpublic limited partnership, serving as the General Partners. The Partnership was formed on December 1, 1992 for the purpose of acquiring, developing, owning, operating, improving, leasing, and otherwise managing income-producing commercial properties for investment purposes. The Partnership has two classes of limited partnership interests, Class A and Class B units. Limited partners have the right to change their prior elections to have some or all of their units treated as Class A units or Class B units one time during each quarterly accounting period. Limited partners may vote to, among other things, (a) amend the partnership agreement, subject to certain limitations, (b) change the business purpose or investment objectives of the Partnership, and (c) remove a general partner. A majority vote on any of the above described matters will bind the Partnership, without the concurrence of the general partners. Each limited partnership unit has equal voting rights, regardless of class.

  On April 6, 1994, the Partnership commenced an offering of up to $25,000,000 of Class A or Class B limited partnership units pursuant to a Registration Statement filed on Form S-11 under the Securities Act of 1933. The Partnership terminated its offering on January 5, 1995 upon receiving gross proceeds of $24,180,174 representing subscriptions for approximately 1,678,810 Class A units and 739,207 Class B units held by 1,591 and 319 limited partners, respectively.

  The Partnership owns interests in all of its real estate assets through joint ventures with other Wells Real Estate Funds. As of September 30, 2002, the Partnership owned interests in the following 8 properties through the affiliated joint ventures listed below:

Joint Venture     Joint Venture Partners     Properties
Fund II-III-VI-VII Associates   - Fund II and III Associates*   1. Holcomb Bridge Property
    - Wells Real Estate Fund VI, L.P.          An office/retail center located in
    - Wells Real Estate Fund VII, L.P.          Roswell, Georgia
Fund V-VI-VII Associates   - Wells Real Estate Fund V, L.P.   2. Marathon Building
    - Wells Real Estate Fund VI, L.P.          A three-story office building located in
    - Wells Real Estate Fund VII, L.P.          Appleton, Wisconsin
Fund VI-VII Associates   - Wells Real Estate Fund VI, L.P.   3. Stockbridge Village III
    - Wells Real Estate Fund VII, L.P.          Two retail buildings located in
                 Stockbridge, Georgia


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        4. Stockbridge Village I Expansion
                 A retail shopping center expansion      located in Stockbridge, Georgia
Fund VI-VII-VIII Associates   - Wells Real Estate Fund VI, L.P.   5. BellSouth Building
    - Wells Real Estate Fund VII, L.P.          A four-story office building located in
    - Wells Real Estate Fund VIII, L.P.          Jacksonville, Florida
             
          6. Tanglewood Commons
                 A retail center in Clemmons, North      Carolina
Fund VII-VIII Associates   - Wells Real Estate Fund VII, L.P.   7. Hannover Center
    - Wells Real Estate Fund VIII, L.P.          A retail center located in      Stockbridge, Georgia
             
          8. CH2M Hill Building
                 An office building located in      Gainesville, Florida


      *   Fund II-III Associates is a joint venture between Fund II and IIOW Associates and Wells Real Estate Fund III, L.P.; Fund II and Fund IIOW Associates is a joint venture between Wells Real Estate Fund II and Wells Real Estate Fund II-OW.

  On October 1, 2001, Fund I-II-IIOW-VI-VII Associates, a joint venture among the Partnership, Wells Real Estate Fund I, Fund II and IIOW Associates, and Wells Real Estate Fund VI, L.P., sold the Cherokee Commons property to an unrelated third party. The Cherokee Commons property is a retail shopping center located in Cherokee County, Georgia. The portion of the proceeds from the sale of the Cherokee Commons property attributable to the Partnership in an amount of $886,212 is included in due from affiliates in the accompanying balance sheet as of September 30, 2002.

  Each of the aforementioned properties was acquired on an all cash basis. For further information regarding the foregoing joint ventures and properties, refer to the report filed for the Partnership Form 10-K for the year ended December 31, 2001.

  (b)  Basis of Presentation

  The financial statements of the Partnership have been prepared in accordance with the instructions for Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles (“GAAP”) for complete financial statements. The quarterly statements have not been examined by independent accountants. However, in the opinion of the General Partners, the statements for the unaudited interim periods presented include all adjustments that are of a normal and recurring nature and necessary to fairly present the results for the year. For further information, refer to the financial statements and footnotes included in the report filed for the Partnership on Form 10-K for the year ended December 31, 2001.

  (c)  Distribution of Net Cash From Operations

  As defined by the partnership agreement, cash available for distributions is distributed quarterly on a cumulative non-compounded basis to the limited partners as follows:

  •  
First, to all Class A limited partners until such limited partners have received distributions equal to a 10% per annum return on their respective adjusted capital contributions, as defined.

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  •  
Second, to the General Partners until each General Partner has received distributions equal to 10% of the total distributions declared by the Partnership per annum.

  •  
Third, to the Class A limited partners and the General Partners allocated on a basis of 90% and 10%, respectively.

  No distributions will be made to the limited partners holding Class B units.

  (d)  Impairment of Real Estate Assets

  On January 1, 2002, the Partnership adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Under this accounting standard, management reviews each of the properties in which the partnership holds an interest for impairment as events or changes in circumstances arise, which indicate that the carrying amounts of such assets may not be recoverable and the future undiscounted cash flows expected to be generated by such assets are less than the respective carrying amounts. If such assets are considered to be impaired, the Partnership records impairment losses and reduces the carrying amounts of the impaired assets to amounts that reflect the fair value of the assets at the time impairment is evident.

  Management also reviews estimated selling prices of assets held for sale and records impairment losses to reduce the carrying amount of assets held for sale when the carrying amounts exceed the estimated selling prices less costs to sell. Material long-lived assets held for sale are separately identified in the balance sheets, and the related net operating income is segregated as income from discontinued operations in the statements of income. Depreciation is not recorded for long-lived assets held for sale. If an asset held for sale reverts to an asset used in operations, the asset will be measured at the lower of the original carrying cost, adjusted for the forgone depreciation, or the fair value at the date of the decision to hold the assets for use in operations. Neither the Partnership nor its joint ventures have recognized impairment losses to date.

2.      INVESTMENTS IN JOINT VENTURES

  (a)  Basis of Presentation

  The Partnership owned interests in eight properties as of September 30, 2002 through its ownership in the joint ventures described in Note 1. The Partnership does not have control over the operations of these joint ventures; however, it does exercise significant influence. Accordingly, investments in joint ventures are recorded using the equity method of accounting. For further information, refer to the report filed for partnership on Form 10-K for the year ended December 31, 2001.

(THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK)

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  (b)  Summary of Operations

  The following information summarizes the operations of the unconsolidated joint ventures in which the Partnership held ownership interests for the three and nine months ended September 30, 2002 and 2001:

Total Revenues Net Income Partnership’s
Share of Net Income
Three Months Ended Three Months Ended Three Months Ended
September 30,
2002		 September 30,
2001		 September 30,
2002		 September 30,
2001		 September 30,
2002		 September 30,
2001
Fund V-VI-VII
    Associates		   $ 244,445   $ 244,189   $ 156,098   $ 150,721   $ 65,109   $ 62,866  
Fund VI-VII Associates     171,325     179,052     92,489     48,583     51,054     26,818  
Fund II-III-VI-VII
    Associates		     140,100     215,407     20,320     84,664     9,971     41,545  
Fund VII-VIII
    Associates		     194,326     185,201     68,150     50,868     24,978     18,644  
Fund VI-VII-VIII
    Associates		     615,826     633,032     251,378     303,339     83,948     101,300  
Fund I-II-IIOW-VI-VII
    Associates		     37,846     253,155     37,651     165,105     4,031     17,679  
    $ 1,403,868   $ 1,710,036   $ 626,086   $ 803,280   $ 239,091   $ 268,852  

Total Revenues Net Income Partnership’s
Share of Net Income
Nine Months Ended Nine Months Ended Nine Months Ended
September 30,
2002		 September 30,
2001		 September 30,
2002		 September 30,
2001		 September 30,
2002		 September 30,
2001
Fund V-VI-VII
    Associates		   $ 731,264   $ 735,685   $ 445,597   $ 449,066   $ 185,859   $ 187,305  
Fund VI-VII Associates     579,014     544,613     315,153     171,580     173,966     94,713  
Fund II-III-VI-VII
    Associates		     498,567     631,698     140,517     175,834     68,952     86,281  
Fund VII-VIII
    Associates		     582,507     568,735     149,634     177,723     54,842     65,137  
Fund VI-VII-VIII
    Associates		     1,823,659     1,806,896     700,759     698,230     234,018     233,175  
Fund I-II-IIOW-VI-VII
    Associates		     108,124     764,131     90,675     452,799     9,666     48,486  
    $ 4,323,135   $ 5,051,758   $ 1,842,335   $ 2,125,232   $ 727,303   $ 715,097  

3.      SUBSEQUENT EVENT

  On October 7, 2002, Fund VI-VII-VIII Associates sold an outparcel of land at Tanglewood Commons to Truliant Federal Credit Union, an unrelated third-party, for a gross sales price of $558,570. As a result of this sale, Fund VI-VII-VIII received net sale proceeds of $524,377 and recognized a gain of approximately $52,000. Approximately $175,100 and $17,400 of the sales proceeds and gain, respectively, are attributable to the Partnership.

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  ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

  The following discussion and analysis should be read in conjunction with the accompanying financial statements and notes thereto.

  (a)  Forward-Looking Statements

  This Report contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including discussion and analysis of the financial condition of the Partnership, anticipated capital expenditures required to complete certain projects, amounts of cash distributions anticipated to be distributed to limited partners in the future and certain other matters. Readers of this Report should be aware that there are various factors that may cause actual results to differ materially from any forward-looking statement made in this Report, including lease-up risks, inability to obtain new tenants upon the expiration of existing leases, and the potential need to fund tenant improvements or other capital expenditures out of operating cash flow.

  (b)  Results of Operations

  Gross Revenues
  Gross revenues of the Partnership increased to $728,754 for the nine months ended September 30, 2002, from $716,387 for the nine months ended September 30, 2001, primarily due to an increase in equity in income of joint ventures resulting from (i) increased rental rates for Stockbridge Village I Expansion, (ii) decreased expenses for Stockbridge Village III, as uncollectible receivables were written off during the first nine months of 2001, (iii) tenant renewals at the BellSouth Building during the first half of 2001, which resulted in higher rental rates, (iv) receivables due from tenants at Tanglewood Commons and the Holcomb Bridge Property, which were written-off in 2001 and subsequently collected in 2002, and (v) decreased depreciation expense for the BellSouth Building, as tenant improvements became fully depreciated upon the expiration of the BellSouth lease in June 2001, partially offset by (i) a decrease in revenues generated from Fund II-III-VI-VII Associates resulting from a decrease in occupancy at the Holcomb Bridge Property, (ii) a decrease in receivables due from tenants at Hannover Center that were written-off in 2002, (iii) a reduction in income generated from Fund I-II-IIOW-VI-VII relating to the sale of the Cherokee Commons property in the fourth quarter of 2001, (iv) an increase in HVAC supplies expense for the CH2M Hill Building and BellSouth Building during the second quarter of 2002, and (v) decreased operating cost reimbursement billings to tenants of the BellSouth Building. Tenants are billed for operating expenses reimbursements at estimated amounts, which are reconciled as tenants are billed (credited) for the net annual under (over) billings in the followings year.

  Generally, changes in gross revenues for the nine months ended September 30, 2002, compared with the nine months ended September 30, 2001, mirrored changes in gross revenue for the three months ended September 30, 2002 compared with the three months ended September 30, 2001. However, (i) the decrease in income from I-II-IIOW-VI-VII relating to the sale of the Cherokee Commons property in the fourth quarter of 2001 and (ii) decreased occupancy at the Holcomb Bridge Property in the third quarter of 2002 caused equity in income of joint ventures and, consequently gross revenues, to decrease to $239,436 for the three months ended September 30, 2002 from $268,852 for the same period in 2001.

  Expenses
  Expenses increased slightly to $67,980 for the nine months ended September 30, 2002 from $64,729 for the same period in 2001 due to an increase in partnership administration expenses.

  As a result, net income increased to $660,774 for the nine months ended September 30, 2002 from $651,658 for the nine months ended September 30, 2001.

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  Distributions
  Distributions made to the limited partners holding Class A units decreased of $0.62 per unit, with respect to the nine months ended September 30, 2002, from $0.67 for the same period in 2001, primarily due to reserving cash otherwise distributable to limited partners holding Class A units in order to fund tenant improvements and leasing costs associated with re-leasing of space at Stockbridge Village III. Such distributions have been made from net cash from operations and distributions received from investments in joint ventures. No distributions have been made to the limited partners holding Class B units or to the General Partners.

  The General Partners’ guidance with regard to future operating cash distributions to the limited partners holding Class A units is that such distributions may decline in the near term as the Partnership funds its portion of leasing costs and tenant improvements related to the re-leasing of space at the Holcomb Bridge Property, as further discussed below.

  (c)  Liquidity and Capital Resources

  Net cash used in operating activities increased to $67,287 for the nine months ended September 30, 2002, from $64,288 for the nine months ended September 30, 2001, primarily due to increased partnership administration expenses. Net cash provided by investing activities remained relatively stable at $1,435,551 for the nine months ended September 30, 2002 compared to $1,435,260 for the nine months ended September 30, 2001. Net cash used in financing activities decreased to $1,319,316 for the nine months ended September 30, 2002 from $1,365,806 for the same period in 2001 due to the $0.05 decrease in cash distributions paid per Class A limited partner unit for the nine months ended September 30, 2002, compared to the nine months ended September 30, 2001, as a result of reserving cash otherwise distributable to limited partners holding Class A units in order to fund tenant improvement and leasing costs associated with the re-leasing of space at the Holcomb Bridge Property.

  The Partnership expects to continue to meets its short-term liquidity requirements, generally through the use of net cash from operations and distributions received from investments in joint ventures. The General Partners believe that such sources will continue to provide adequate cash flows for the purposes of meeting the Partnership’ operating requirements.

  Rather than being distributed to the limited partners, the Partnership’s share of the net proceeds generated from the sale of Cherokee Commons is currently being held as reserves and additional limited partner distributions may be withheld to fund tenant improvement and leasing costs associated with the re-leasing of space at the Holcomb Bridge Property. The Partnership expects to continue to meet its short-term liquidity requirements generally through net cash provided by operations and distributions received from joint ventures.

  (d)  Inflation

  The real estate market has not been affected significantly by inflation in the past three years due to the relatively low inflation rate. Most tenant leases include provisions designed to protect the lessor from the impact of inflation and other increases in costs and operating expenses, including common area maintenance, real estate tax and insurance reimbursements from tenants either on a per square foot basis, or above a certain allowance per square foot annually. In addition, a number of the Partnership’s leases are for remaining terms of less than five years, which may allow the Partnership to enter into new leases at higher base rental rates in the event that market rental rates rise above the existing lease rates. There is no assurance, however, that the Partnership would be able to replace existing leases with new leases at higher base rental rates.

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