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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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
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[_] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
[No Fee Required]
For the transition period from to
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Commission file number 0-16518
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Wells Real Estate Fund II
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(Exact name of registrant as specified in its charter)
Georgia 58-1678709
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3885 Holcomb Bridge Road Norcross, Georgia 30092
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 449-7800
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Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of exchange on which registered
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NONE NONE
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Securities registered pursuant to Section 12 (g) of the Act:
CLASS A UNITS
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(Title of Class)
CLASS B UNITS
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(Title of Class)
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
-- ____
Aggregate market value of the voting stock held by non-affiliates:
Not Applicable
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PART I
ITEM 1. BUSINESS
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GENERAL
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Wells Real Estate Fund II (the "Partnership") is a Georgia public limited
partnership having Leo F. Wells, III and Wells Capital, Inc., as General
Partners. The Partnership was formed on June 23, 1986, for the purpose of
acquiring, developing, constructing, owning, operating, improving, leasing and
otherwise managing for investment purposes income-producing commercial or
industrial properties.
On September 8, 1986, the Partnership commenced a public offering of its 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 September
7, 1988, and received gross proceeds of $34,948,250 representing subscriptions
from 4,440 Limited Partners, composed of two classes of limited partnership
interests, Class A and Class B limited partnership units.
As of December 31, 1996, the Partnership owned interests in the following
properties: (i) a retail shopping and commercial office complex located in
Tucker, Georgia, (ii) a shopping center located in Cherokee County, Georgia,
(iii) a two-story office building located in Charlotte, North Carolina, (iv) a
four-story office building located in metropolitan Houston, Texas, (v) a
restaurant located in Fulton County, Georgia, and (vi) an office/retail shopping
center currently being developed in Fulton County, Georgia. All of the foregoing
properties were acquired on an all cash basis and are described in more detail
in Item 2 below. The lease on the Atrium Building in Houston, which contributes
a significant proportion of the revenue to the Partnership, expired in June,
1996, and although the Partnership has responded to various potential tenants
regarding leasing the Atrium, no leases have been signed as of December 31,
1996. See the detailed discussion in Item 2, Properties.
EMPLOYEES
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The Partnership has no direct employees. The employees of Wells Capital, Inc., a
General Partner of the Partnership, perform a full range of real estate services
including leasing and property management, accounting, asset management and
investor relations for the Partnership. See Item 11 - "Compensation of General
Partner and Affiliates" - for a summary of the fees paid to the General Partners
and their affiliates during the fiscal year ended December 31, 1996.
INSURANCE
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Wells Management Company, Inc., an affiliate of the General Partner, carries
comprehensive liability and extended coverage with respect to all the properties
owned directly or indirectly by the Partnership. In the opinion of management of
the registrant, the properties are adequately insured.
2
COMPETITION
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The Partnership will experience competition for tenants from owners and managers
of competing projects which may include the General Partners and their
affiliates. As a result, the Partnership may be required to provide free rent,
reduced charges for tenant improvements and other inducements, all of which may
have an adverse impact on results of operations. At the time the Partnership
elects to dispose of its properties, the Partnership will also be in competition
with sellers of similar properties to locate suitable purchasers for its
properties.
ITEM 2. PROPERTIES
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The Partnership owns all of its properties through a joint venture (the "Fund
II-Fund II-OW Joint Venture") formed on March 1, 1988, between the Partnership
and Wells Real Estate Fund II-OW ("Wells Fund II-OW"). Wells Fund II-OW is a
Georgia public limited partnership affiliated with the Partnership through
common general partners. The investment objectives of Wells Fund II-OW are
substantially identical to those of the Partnership. As of December 31, 1996,
the Partnership's equity interest in the Fund II-Fund II-OW Joint Venture was
approximately 95%, and the equity interest of Wells Fund II-OW was approximately
5%. The Partnership does not have control over the operations of the joint
venture; however, it does exercise significant influence. Accordingly,
investment in joint venture is recorded on the equity method.
Of the six properties owned by the joint venture, three are retail shopping
centers, two are office buildings and one is a restaurant. As of December 31,
1996, these properties were 63.69% occupied, down from 95.87% at December 31,
1995, 97.34% at December 31, 1994, 66.90% at December 31, 1993, and 93.76% at
December 31, 1992.
3
The following table shows lease expirations during each of the next ten years
for all leases as of December 31, 1996, assuming no exercise of renewal options
or termination rights:
Partnership's Percentage of
Share of Total
Number of Annualized Annualized Percentage of Annualized
Year of Lease Leases Square Feet Gross Base Gross Base Total Square Gross Base
Expiration Expiring Expiring Rent (1) Rent Feet Expiring Rent
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1997 18 40,850 539,250 241,520 20.99% 22.62%
1998 9 11,993 155,248 68,899 6.16% 6.51%
1999 17 29,645 464,952 163,972 15.23% 19.50%
2000 2 5,240 59,245 27,950 2.69% 2.49%
2001(2) 6 84,116 684,488 474,225 43.22% 28.71%
2002 4 16,830 358,333 190,834 8.65% 15.03%
2003 0 0 0 0 0.00% 0.00%
2004 0 0 0 0 0.00% 0.00%
2005 0 0 0 0 0.00% 0.00%
2006 1 5,935 122,294 52,012 3.05% 5.13%
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57 194,609 $2,383,810 $1,219,412 100.00% 100.00%
(1) Average monthly gross rent over the life of the lease, annualized.
(2) Expiration of First Union Bank with 70,752 square feet at the Charlotte
project.
The following describes the properties in which the Partnership owns an interest
as of December 31, 1996:
THE CHARLOTTE PROPERTY/FUND II-FUND II-OW JOINT VENTURE
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On May 9, 1988, the Fund II-Fund II-OW Joint Venture acquired a two-story
building containing approximately 70,752 net leasable square feet, located on a
9.54 acre tract of land located in Charlotte, Mecklenburg County, North Carolina
(the "Charlotte Property") for a purchase price of $8,550,000.
While the entire project was originally leased under a net lease to IBM, IBM
elected not to exercise its second three year option to extend its lease and
vacated the building effective September 30, 1993, after paying a $425,000 lease
termination fee.
On May 1, 1994, First Union Bank assumed occupancy of the Charlotte property
under a lease which expires April 30, 2001. The principal terms of the lease
provide for First Union's sole tenancy of the project as a regional operations
center for the initial term of seven years. Because First Union Bank invested
approximately $1 million on tenant improvements at the Charlotte property, a
lower rental rate was accepted for the first five years. There are presently no
plans for improvement or further development of the project.
4
The annual base rent during the initial term is $412,705 payable in equal
monthly installments of $34,392.08 during the first two years, annual base rent
of $454,651 payable in equal monthly installments of $37,887.58 during the third
year, annual base rent of $489,650 payable in equal monthly installments of
$40,804.17 during the fourth year and annual base rent of $524,625 payable in
equal monthly installments of $43,718.75 during the fifth year. Rental rates
during the remaining two years of the lease term will be determined by market
rates.
The occupancy rates at the Charlotte Property as of December 31 were 100% in
1996, 1995, 1994, 0% in 1993, and 100% in 1992.
The average effective annual rental per square foot at the Charlotte Property
was $6.51 for 1996, $5.83 for 1995, $3.88 for 1994, $28.12 for 1993 and $15.69
for 1992. The higher effective annual rental rate for 1993 is due to the payment
of $425,000 in lease termination fees by IBM.
THE ATRIUM/FUND II - FUND III JOINT VENTURE
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On April 3, 1989, the Fund II-Fund II-OW Joint Venture formed a joint venture
(the "Fund II-Fund III Joint Venture") with Wells Real Estate Fund III, L.P.
("Wells Fund III"), a public Georgia limited partnership affiliated with the
Partnership through common general partners. The investment objectives of Wells
Fund III are substantially identical to those of the Partnership.
In April 1989, the Fund II-Fund III Joint Venture acquired a four-story office
building located on a 5.6 acre tract of land adjacent to the Johnson Space
Center in metropolitan Houston, in the City of Nassau Bay, Harris County, Texas,
know as "The Atrium at Nassau Bay" (the "Atrium").
The funds used by the Fund II-Fund III Joint Venture to acquire the Atrium were
derived from capital contributions made to the Fund II-Fund III Joint Venture by
the Fund II-Fund II-OW Joint Venture and Wells Fund III in the amounts of
$8,327,856 and $2,538,000, respectively, for total initial capital contributions
of $10,865,856. As of December 31, 1996, the Fund II-Fund II-OW Joint Venture
and Wells Fund III had made total capital contributions to the Fund II-Fund III
Joint Venture of approximately $8,330,000 and $4,448,000, respectively, for the
acquisition and development of the Atrium. The Fund II - Fund II-OW Joint
Venture holds approximately 66% equity interest in the Fund II - Fund III Joint
Venture, and Wells Funds III holds approximately 34% equity interest in the Fund
II -Fund III Joint Venture.
The Atrium was first occupied in 1987 and contains approximately 119,000 net
leasable square feet. Each floor of the Atrium was originally under a separate
lease to Lockheed Engineering and Science Company, Inc., a wholly-owned
subsidiary of the Lockheed Company, each of which leases had terms of
approximately eight years and expired June 30, 1996.
Since Lockheed vacated the building as of June 30, 1996, the occupancy rate of
the Atrium Property as of December 31, 1996 was 0% and 100% for 1992 through
1995. The average annual effective rate was $8.81 for 1996, and $17.47 for 1992
through 1995. As set forth above,
5
the lease with Lockheed Company expired on June 30, 1996, and although the
Partnership has responded to various potential tenants regarding leasing
portions of the Atrium, no leases have been signed as of December 31, 1996. It
is anticipated that when leases are obtained for the Atrium, rental rates will
be lower than those paid by the previous tenant, and income could decrease
significantly under the new leases. In addition, such leases are likely to
require substantial tenant finish and refurbishment expenditures by the
Partnership which could further significantly reduce future cash distributions
to Limited Partners.
THE BROOKWOOD GRILL PROPERTY/FUND II - FUND III JOINT VENTURE
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On January 31, 1990, the Fund II-Fund II-OW Joint Venture acquired a 5.8 acre
tract of undeveloped real property at the intersection of Warsaw Road and
Holcomb Bridge Road in Roswell, Fulton County, Georgia (the "Brookwood Grill
Property"). The Fund II - Fund II-OW Joint Venture paid $1,848,561, including
acquisition expenses, for the 5.8 acre tract of undeveloped property.
On September 20, 1991, the Fund II-Fund II-OW Joint Venture contributed the
Brookwood Grill, along with its interest as landlord under the lease agreement
referred to below, as a capital contribution to the Fund II-Fund III Joint
Venture. As of September 20, 1991, the Fund II-Fund II-OW Joint Venture had
expended approximately $2,128,000 for the land acquisition and development of
the Brookwood Grill Property.
As of September 20, 1991, a lease agreement was entered into with the Brookwood
Grill of Roswell, Inc. for the development of approximately 1.5 acres and the
construction of a 7,440 square foot restaurant. This Roswell site, which opened
early March 1992, is the second location in the Atlanta area for what is
anticipated as a southeastern chain of restaurants similar in concept to
Houston's, Ruby Tuesday, and Friday's. This chain is principally owned by David
Rowe, an Atlanta real estate developer of Kroger shopping centers, and several
operating partners formerly with Houston's. The terms of the lease call for an
initial term of 9 years and 11 months, with two additional 10-year option
periods. The agreement calls for a base rental of $217,006 per year for Years 1
through 5, with a 15% increase over the remainder of the initial term. Rental
rates for all option periods will be based on the prevailing market values and
rates for those periods. The Fund II-Fund III Joint Venture has expended
approximately $1,100,000 for the development and construction of the restaurant
building together with parking areas, driveways, landscaping and other
improvements. In addition to the base rent described above, the tenant is
required to pay "additional rent" in amounts equal to a 12% per annum return on
all amounts expended for such improvements.
The occupancy rate for the Brookwood Grill, a sole tenant, was 100% for 1996,
1995, 1994, 1993 and 1992. The average effective rental per square foot at the
Brookwood Grill is $30.29 for 1996, $30.21 for 1995, 1994 and 1993, and $24.60
for 1992, the first year of occupancy.
6
As of December 31, 1996, the Fund II-Fund II-OW Joint Venture and Wells Fund III
had made total contributions to the Fund II-Fund III Joint Venture of
approximately $2,128,000 and $1,330,000, respectively, for the acquisition and
development of the Brookwood Grill. The Fund II-Fund II-OW Joint Venture holds
an approximately 62% equity interest in the Brookwood Grill property, and Wells
Fund III holds an approximately 38% equity interest in the project.
On January 10, 1995, the remaining 4.3 undeveloped acres of land comprising the
Holcomb Bridge Road Property was contributed to a new joint venture, Fund II,
III, VI, and VII Associates by Fund II-Fund III Joint Venture. This property is
described below.
FUND II, III, VI AND VII ASSOCIATES/HOLCOMB BRIDGE ROAD PROPERTY
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On January 10, 1995, Fund II-Fund III Joint Venture, Wells Real Estate Fund VI ,
L.P. ("Wells Fund VI"), a Georgia public limited partnership having Leo F.
Wells, III and Wells Partners, L.P., a Georgia limited partnership, as general
partners, and Wells Real Estate Fund VII, L.P. ("Wells Fund VII"), a Georgia
public limited partnership having Leo F. Wells, III and Wells Partners, L.P., a
Georgia limited partnership, as general partners, entered into a Joint Venture
Agreement known as Fund II, III, VI and VII Associates ("Fund II, III, VI and
VII Joint Venture"). Wells Partners, L.P. is a private limited partnership
having Wells Capital, Inc., a General Partner of the Partnership, as its sole
general partner. The investment objectives of Wells Fund VI and Wells Fund VII
are substantially identical to those of the Partnership.
In January 1995, the Fund II-Fund III Joint Venture contributed to the Fund II-
III-VI-VII Joint Venture approximately 4.3 acres of land at the intersection of
Warsaw Road and Holcomb Bridge Road in Roswell, Fulton County, Georgia (the
"Holcomb Bridge Road Property") including land improvements. Development is
substantially complete on two buildings containing a total of approximately
49,500 square feet.. Nine tenants occupied the Holcomb Bridge Property as of
December 31, 1996, for an occupancy rate of 63%. The average effective annual
rental was $9.87 per square foot for 1996.
As of December 31, 1996, Fund II and Fund III Joint Venture had contributed
$1,729,116 in land and improvements for an equity interest of approximately
25.2%, Wells Fund VI had contributed $1,699,846 for an equity interest of
approximately 26.0%, and Wells Fund VII had contributed $3,217,154 for an equity
interest of approximately 48.8%. The total cost to develop the Holcomb Bridge
Road Property is currently estimated to be approximately $5,100,000, excluding
land. It is anticipated that of the remaining cost of approximately $183,000,
$100,000 will be contributed by Wells Fund VI and $83,000 by Wells Fund VII,
after which the equity interests in the property will be 48.3% for Wells Fund
VII, 26.4% for Wells Fund VI, and 25.3% for the Fund II-Fund III Joint Venture.
Wells Fund VI and Wells Fund VII have reserved sufficient funds for this
purpose. The Partnership is not obligated to provide any additional funding for
the Holcomb Bridge Road Property.
7
TUCKER PROPERTY/FUND I - FUND II JOINT VENTURE
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The Tucker Property consists of a retail shopping center and a commercial office
building complex located in Tucker, DeKalb County, Georgia (the "Tucker
Property"). The retail shopping center at the Tucker Property contains
approximately 29,858 net leasable square feet. The commercial office space at
the Tucker Property, which is divided into seven separate buildings, contains
approximately 67,465 net leasable square feet.
On January 9, 1987, the Partnership acquired an interest in the Tucker Property
which was acquired by a joint venture (the "Tucker Joint Venture") originally
between the Partnership and Wells Real Estate Fund I ("Wells Fund I"). Wells
Fund I is a Georgia public limited partnership affiliated with the Partnership
through common general partners. The investment objectives of Wells Fund I are
substantially identical to those of the Partnership. Upon the formation of the
Fund II-Fund II-OW Joint Venture in March 1988, the Partnership contributed its
joint venture interest in the Tucker Joint Venture to the Fund II-Fund II-OW
Joint Venture as a part of its capital contribution. On January 1, 1991, the
Cherokee Joint Venture, which is defined below, was merged into the Tucker Joint
Venture forming a new joint venture (the "Tucker-Cherokee Joint Venture"). As
described below, the Cherokee Joint Venture was also a joint venture between the
Fund II-Fund II-OW Joint Venture and Wells Fund I. Under the terms of the
Amended and Restated Joint Venture Agreement of Fund I and Fund II
Tucker-Cherokee, the percentage interest of the Fund II-Fund II-OW Joint Venture
in the Tucker Project remained unchanged as a result of the merger of the Tucker
Joint Venture into the Tucker-Cherokee Joint Venture.
On August 1, 1995, Wells Fund I and the Fund II-Fund-II-OW Joint Venture entered
into another amendment to effect the contribution of the Cherokee Project to the
Fund I, II, II-OW, VI, VII Joint Venture, as described below. As a result, the
name of the joint venture was changed back to "Fund I and Fund II Tucker", and
is therefore no longer merged with the Cherokee Joint Venture. The Partnership's
percentage interest in the Tucker Project remained unchanged as a result of the
transaction.
Both Wells Fund I and the Fund II-Fund II-OW Joint Venture have funded the cost
of completing the Tucker Property through capital contributions which have been
paid as progressive stages of construction were completed. As of December 31,
1996, Wells Fund I had contributed a total of $6,399,854, and the Fund II-Fund
II-OW Joint Venture had contributed a total of $4,826,015 to the Tucker
Property. As of December 31, 1996, Wells Fund I had an approximately 55% equity
interest in the Tucker Property and the Fund II-Fund II-OW Joint Venture had an
approximately 45% equity interest in the Tucker Property. As of December 31,
1996, the Tucker Property was 77% occupied by 31 tenants.
There are no tenants in the project occupying ten percent or more of the
rentable square footage. The principal businesses, occupations, and professions
carried on in the building are typical retail shopping/commercial office
services.
8
The occupancy rate at the Tucker Property was 77% in 1996, 83% in 1995, 96% in
1994, 89% in 1993, and 80% in 1992.
The average effective annual rental per square foot at the Tucker Property was
$13.78 for 1996, $12.61 for 1995, $12.63 for 1994, $11.37 for 1993, and $11.37
for 1992.
CHEROKEE PROPERTY/FUND I, II, II-OW, VI, VII JOINT VENTURE
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The Cherokee Property consists of a retail shopping center known as "Cherokee
Commons Shopping Center" located in metropolitan Atlanta, Cherokee County,
Georgia (the "Cherokee Property"). The Cherokee Property consists of
approximately 103,755 net leasable square feet.
On June 30, 1987, the Partnership acquired an interest in the Cherokee Property
through a joint venture (the "Cherokee Joint Venture") between the Wells Fund
II-Fund II-OW Joint Venture and Wells Fund I.
On August 1, 1995, the Fund II-Fund II-OW Joint Venture, Wells Fund I, Wells
Real Estate Fund VI, L.P. ("Wells Fund VI"), a Georgia public limited
partnership having Leo F. Wells, III and Wells Partners, L.P., a Georgia limited
partnership, as general partners, and Wells Real Estate Fund VII, L.P. ("Wells
Fund VII"), a Georgia public limited partnership having Leo F. Wells, III and
Wells Partners, L.P., a Georgia limited partnership, as general partners entered
into a joint venture agreement known as Fund I, II, II-OW, VI, VII Associates
(the "Fund I, II, II-OW, VI, VII Joint Venture"), which was formed to own and
operate the Cherokee Project. Wells Partners, L.P. is a private limited
partnership having Wells Capital, Inc., a General Partnership, as its sole
general partner. The investment objectives of Wells Fund I, Wells Fund VI and
Wells Fund VII are substantially identical to those of the Partnership.
As of December 31, 1996, Wells Fund I had contributed property with a book value
of $2,139,900, the Fund II-Fund II-OW Joint Venture had contributed property
with a book value of $4,860,100, Wells Fund VI had contributed cash in the
amount of $953,798 and Wells Fund VII had contributed cash in the amount of
$953,798 to the Fund I, II, II-OW, VI, VII Joint Venture. As of December 31,
1996, the equity interests in the Fund I, II, II-OW, VI, VII Joint Venture were
approximately as follows: Wells Fund I - 24%, Fund II-Fund II-OW Joint
Venture-54%, Wells Fund VI - 11% and Wells Fund VII - 11%.
The Cherokee Property is anchored by a 67,115 square foot lease with Kroger
Food/Drug which expires in 2011. Kroger's original lease was for 45,528 square
feet. In 1994, Kroger expanded to the current 67,115 square feet which is
approximately 65% of the total rentable square feet in the property. As of
December 31, 1996, the Cherokee Property was approximately 93% occupied by 19
tenants, including Kroger. Kroger, a retail grocery chain, is the only tenant
occupying ten percent or more of the rentable square footage. The other tenants
in the shopping center provide typical retail shopping services.
9
The Kroger lease provides for an annual rent of $392,915 which increased to
$589,102 on August 16, 1995 due to the expansion from 45,528 square feet to
67,115 square feet. The lease expires March 31, 2011 with Kroger entitled to
five successive renewals each for a term of five years at the same rental rate
as the original lease.
The occupancy rate at the Cherokee Property was 93% in 1996, 94% in 1995, 91% in
1994, 89% in 1993, and 88% in 1992.
The average effective annual rental per square foot at the Cherokee Property was
$8.59 for 1996, $7.50 for 1995, $5.33 for 1994, $6.47 for 1993, and $6.46 for
1992.
ITEM 3. LEGAL PROCEEDINGS
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Litigation was instituted in the Superior Court of Gwinnett County, Georgia on
January 13, 1997 against the Partnership, Wells Real Estate Fund III, L.P.
("Wells Fund III"), Wells Capital, Inc. and Leo F. Wells, III, who are the
general partners of the Partnership and Wells Fund III, in connection with a
request by a limited partner in the Partnership and Wells Fund III for a list of
the names, addresses and ownership interests of the limited partners which to
date the defendants have refused to furnish to the plaintiff. The case is
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styled Gramercy Park Investments L.P. v. Wells Real Estate Fund II, Wells Real
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Estate Fund III, L.P., Wells Capital, Inc. and Leo F. Wells, III. The
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plaintiff, which is a limited partner in both the Partnership and Wells Fund
III, alleges that it is entitled to copies of the limited partner lists under
applicable provisions of Georgia partnership law and the partnership agreements
of the Partnership and Wells Fund III so that plaintiff may make an offer to
purchase up to 4.9% of the partnership units in each Fund. The plaintiff is
seeking an order directing the defendants to furnish to the plaintiff a current
list of the names, addresses and ownership interests of the limited partners in
the Partnership and Wells Fund III, as well as an award of certain damages,
including its costs and attorneys' fees and such other relief as the court deems
just and proper. On February 26, 1997, the Court denied the plaintiff's request
for an immediate order requiring defendants to furnish the lists to the
plaintiff and instead ordered expedited discovery which is to be completed by
March 31, 1997. Thereafter the Court will again consider the plaintiff's request
to turn over the limited partner lists.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of the Limited Partners during the fourth
quarter of 1996.
10
PART II
ITEM 5. MARKET FOR PARTNERSHIP'S UNITS AND RELATED SECURITY HOLDER MATTERS
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As of February 28, 1997, the Partnership had 108,572 outstanding Class A Units
held by a total of 3,539 Limited Partners and 30,221 outstanding Class B Units
held by a total of 697 Limited Partners. The total number of Limited Partners
has decreased due to repurchase of units since the termination of the offering
in 1988. The capital contribution per unit is $250. There is no established
public trading market for the Partnership's limited partnership units, and it is
not anticipated that a public trading market for the units will develop. Under
the Partnership Agreement, the General Partners have the right to prohibit
transfers of units.
Class A Unit holders are entitled to an annual 8% non-cumulative distribution
preference over Class B Unit holders as to cash distributions from Net Cash from
Operations, defined in the Partnership Agreement as Cash Flow, less adequate
cash reserves for other obligations of the Partnership for which there is no
provision, but are initially allocated none of the depreciation, amortization,
cost recovery and interest expense. These items are allocated to Class B Unit
holders until their capital account balances have been reduced to zero.
Cash distributions from Net Cash from Operations to the Limited Partners is
distributed on a quarterly basis unless Limited Partners elect to have their
cash distributions paid monthly. Cash distributions made to the Limited Partners
for the two most recent fiscal years were as follows:
Per Class A Per Class A Per Class B
Unit Unit Unit
Distribution for Total Cash Investment Return of Return of General
Quarter Ended Distributed Income Capital Capital Partner
- ----------------------------------------------------------------------------------------------------
March 31, 1995 $437,508 $ 4.03 $ 0.00 $ 0.00 $ 0.00
June 30, 1995 $472,259 $ 4.35 $ 0.00 $ 0.00 $ 0.00
September 30, 1995 $493,535 $ 4.55 $ 0.00 $ 0.00 $ 0.00
December 31, 1995 $479,001 $ 4.41 $ 0.00 $ 0.00 $ 0.00
March 31, 1996 $497,059 $ 4.57 $ 0.00 $ 0.00 $ 0.00
June 30, 1996 $454,706 $ 4.19 $ 0.00 $ 0.00 $ 0.00
September 30, 1996 $152,680 $ 1.41 $ 0.00 $ 0.00 $ 0.00
December 31, 1996 $150,750 $ 1.39 $ 0.00 $ 0.00 $ 0.00
The fourth quarter distributions were accrued for accounting purposes in 1996
and were not actually paid until February 1997.
11
ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------------
The following sets forth a summary of the selected financial data for the fiscal
years ended December 31, 1996, 1995, 1994, 1993, and 1992:
1996 1995 1994 1993 1992
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Total Assets $24,608,842 $26,078,445 $27,004,981 $27,906,164 $28,196,307
Total Revenues 112,454 1,011,995 505,921 1,983,268 1,573,182
Net Income 112,364 1,011,745 505,921 1,983,268 1,569,736
Net Income
allocated to
General Partners 0 0 0 0 0
Net Income
allocated to Class
A Limited Partners 1,335,976 1,922,246 1,275,951 2,586,995 2,197,866
Net Loss
allocated to Class
B Limited Partners 1,223,612 (910,501) (770,030) (603,727) (628,130)
Net Income
per Class A Limited
Partner Unit 12.30 17.71 11.75 23.83 20.24
Net Loss
per Class B Limited
Partner Unit (40.49) (30.13) (25.48) (19.98) (20.78)
Cash Distribution
per Class A
Limited Partner Unit 11.56 17.34 14.03 18.82 20.00
Cash Distribution
per Class B Limited
Partner Unit 0 0 0 0 3.11
Cash distributions per unit have been paid from net cash from operations and do
not constitute a return of capital.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
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RESULTS OF OPERATION
--------------------
The following discussion and analysis should be read in conjunction with the
selected financial data and the accompanying financial statements of the
Partnership and notes thereto.
This Report contains forward-looking statements, within the meaning of Section
27A of the Securities Act of 1933 and 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 could cause actual results to
differ materially from any forward-looking statement made in the Report, which
include construction costs which may exceed estimates, construction delays,
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.
RESULTS OF OPERATIONS AND CHANGES IN FINANCIAL CONDITIONS
- ---------------------------------------------------------
General
- -------
As of December 31, 1996, the developed properties owned by the Fund II-Fund
II-OW Joint Venture, excluding the Holcomb Bridge Road Property which is not yet
fully developed, were 64% leased, as compared to 1995, and 1994 when the
properties were 96% and 98% leased respectively. The decrease in the leased
percentages for 1996 compared to 1995 and 1994 is due to the vacancy of the
Atrium for the last six months of 1996.
Gross revenues of the Partnership were $112,454 for the year ended December 31,
1996, as compared to $1,011,995 for the fiscal year ended December 31, 1995, and
$505,921 for the fiscal year ended December 31, 1994. The decrease in gross
revenues for fiscal year 1996 from fiscal year 1995 is due primarily to the
vacancy of the Atrium for the last six months of 1996. The increase in gross
revenues for the fiscal year ended 1995 from fiscal 1994 was due primarily to
the full year occupancy at the Charlotte Property.
Administrative expenses of the Partnership are incurred at the joint venture
level. Depreciation expense increased from 1995 to 1996 due to change in the
estimated useful lives of buildings and improvements from 40 years to 25 years,
which became effective October 1, 1995. For further discussion of depreciation
expense, please refer to the notes to the accompanying financial statements.
13
Partnership distributions paid during the fiscal year ended December 31, 1996,
totaled $1,255,195, as compared to $1,882,302 during the fiscal year ended
December 31, 1995, and $1,523,337 during the fiscal year ended December 31,
1994. The decrease in partnership distributions paid for fiscal year 1996 as
compared to fiscal years 1995 and 1994 was primarily due to the vacancy of the
Atrium in the last six months of 1996.
The Partnership made cash distributions to Limited Partners holding Class A
units of $11.56 per Unit for fiscal year ended December 31, 1996, $17.34 per
Unit for fiscal year ended December 31, 1995, and $14.03 per Unit for fiscal
year ended December 31, 1994. The Partnership made no cash distributions to
Limited Partners holding Class B Units for fiscal year ended 1996, 1995, or
1994.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 121, "Accounting for the impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed of", which is
effective for fiscal years beginning after December 15, 1995. SFAS No. 121
established standards for determining when impairment losses on long-lived
assets have occurred and how impairment losses should be measured. The joint
venture adopted SFAS No. 121, effective January 1, 1995. The impact of adopting
SFAS No. 121 was not material to the financial statements of the joint ventures.
14
PROPERTY OPERATIONS
- -------------------
As of December 31, 1996, the Partnership's percentage ownership in properties
was as follows: 94.7% in the Charlotte Property, 62.10% in The Atrium, 59% in
the Brookwood Grill Property, 14.9% in the Holcomb Bridge Property, 42.5% in the
Tucker Property, and 51.7% in the Cherokee Property.
As of December 31, 1996, the Partnership owned interests in the following
properties through the Fund II - Fund II-OW Joint Venture:
Charlotte Property
- ------------------
For the Year Ended December 31
------------------------------------------
1996 1995 1994
---- ---- ----
Revenues:
Rental Income $460,920 $458,867 $275,137
-------- -------- --------
Expenses:
Depreciation 367,667 235,794 194,278
Management and
leasing expenses 27,532 27,532 18,355
Other operating expenses 36,864 39,203 142,231
-------- -------- --------
432,063 302,529 354,864
-------- -------- --------
Net income (loss) $ 28,857 $156,338 $(79,727)
======== ======== ========
Occupied % 100.00% 100.00% 100.00%
Partnership Ownership % 94.70% 94.70% 94.70%
Cash generated to the
Fund II-Fund II-OW
Joint Venture* $396,681 $364,325 $ 96,013
Net income (loss) allocated
to the Fund II-Fund II-OW
Joint Venture* $ 28,857 $156,338 $(79,727)
* The Partnership holds a 95% ownership in the Fund II-Fund II-OW Joint
Venture. For allocations to the Partnership, see footnotes in the audited
financial statements.
15
Rental income increased slightly in 1996 compared to 1995 due to the increase in
rent at the Property as of April 1996. Rental income increased to $458,867 for
1995 as compared to $275,137 in 1994 due to the occupancy of the building by
First Union Bank for a full year. Depreciation expense increased to $367,667 in
1996 compared to $235,794 in 1995 due to recording a full year's depreciation
expense reflecting the change in estimated useful lives which was made beginning
in fourth quarter, 1995. Depreciation expense increased from $194,278 in 1994 to
$235,794 in 1995 as a result of the change in the estimated useful lives of
buildings and improvements as previously discussed under the "General" section
of "Results of Operations and Change in Financial Conditions". Management and
leasing expenses are stable for the years ended 1996, 1995, and 1994 in
proportion to rental revenues. Other operating expenses decreased slightly from
1995 to 1996 due primarily to a decrease in architectural fees. Other operating
expenses decreased to $39,203 in 1995 compared to $142,231 expended in 1994 due
mainly to marketing and administrative expenses incurred in efforts to lease the
property. Net income decreased to $28,857 in 1996 compared to $156,338 due
primarily to the increase in depreciation expense discussed above. Net income
increased to $156,338 in 1995 compared to the loss of $79,727 in 1994 for the
reasons stated above. (Note: Expenses, income and cash generated to the joint
venture have been restated for 1994. The 1994 statement included expenses paid
by the joint venture on behalf of the Partnership.) The Charlotte Property
lease agreement is one in which the tenant is directly responsible for primarily
all operational expenses including real estate taxes.
For comments on the general conditions to which the property may be subject, see
Item 1, Business, page 2. For additional information on the property, tenants,
etc., see Item 2, Properties, page 3.
16
The Atrium/Fund II-Fund III Joint Venture
- -----------------------------------------
For the Year Ended December 31
------------------------------------
1996 1995 1994
---- ---- ----
Revenues:
Rental Income $1,048,583 $2,079,345 $2,079,345
Interest Income 24,188 29,965 24,636
---------- ---------- ----------
1,072,771 2,109,310 2,103,981
Expenses:
Depreciation 674,479 517,507 475,928
Management and
leasing expenses 71,381 142,761 142,735
Other operating expenses 158,405 451,362 504,609
---------- ---------- ----------
904,265 1,111,630 1,123,272
---------- ---------- ----------
Net income $ 168,506 $ 997,680 $ 980,709
========== ========== ==========
Occupied % 0.00% 100.00% 100.00%
Partnership Ownership % 62.10% 62.10% 62.10%
Cash distributed to the
Fund II-Fund II-OW
Joint Venture* $ 398,911 $1,123,602 $1,095,388
Net income allocated
to the Fund II-Fund II-OW
Joint Venture* $ 110,540 $ 654,478 $ 643,344
* The Partnership holds a 95% ownership in the Fund II-Fund II-OW Joint
Venture. For allocations to the Partnership, see footnotes in the audited
financial statements.
Rental income decreased to $1,048,583 in 1996 compared to $2,079,345 due to the
termination of the Lockheed lease as of June 30, 1996. Revenues, expenses and
net income have remained relatively stable for the years ended December 31, 1995
and 1994. Depreciation expense increased in 1996 compared to 1995 due to
recording a full year's depreciation expense reflecting the change in estimated
useful lives which was made beginning in fourth quarter 1995. In 1995, the
increase in depreciation expense due to the change in the estimated useful lives
of buildings and improvements was offset by a decrease in other operating
expenses. Management and leasing fees decreased in 1996 compared to 1995 due to
the decrease in rental income for the last six months of 1996. Other operating
expenses decreased from $451,362 in 1995 to $158,405 in 1996 primarily due to
the vacancy of the Atrium for the last six months of the year.
The real estate taxes were $150,105 for 1996, $182,687 for 1995, and $186,273
for 1994.
17
The lease with Lockheed Company expired on June 30, 1996, and although the
Partnership has responded to various potential tenants regarding leasing the
Atrium, no leases have been signed as of December 31, 1996. It is anticipated
that when leases are obtained for the Atrium, rental rates will be lower than
those paid by the previous tenant, and income could decrease significantly under
these new leases. In addition, such leases are likely to require significant
tenant finish and refurbishment expenditures by the Partnership which could
substantially reduce future cash distributions to Limited Partners.
For comments on the general condition to which the property may be subject, see
Item 1, Business, page 2. For additional information on the property, tenants,
etc., see Item 2, Properties, page 3.
18
The Brookwood Grill Property/Fund II-Fund III Joint Venture
- -----------------------------------------------------------
For the Year Ended December 31
--------------------------------
1996 1995 1994
---- ---- ----
Revenues:
Rental Income $225,359 $230,316 $224,750
Equity in Loss of Joint Venture (19,378) 0 0
-------- -------- --------
205,981 230,316 224,750
Expenses:
Depreciation 54,014 63,446 58,659
Management and
leasing expenses 27,004 29,351 30,217
Other operating expenses 109,478 45,175 44,553
-------- -------- --------
190,496 137,972 133,429
-------- -------- --------
Net income $ 15,485 $ 92,344 $ 91,321
======== ======== ========
Occupied % 100.00% 100.00% 100.00%
Partnership Ownership % 59.00% 59.00% 59.00%
Cash distributed to the
Fund II-Fund II-OW
Joint Venture* $ 66,498 $ 96,065 $ 92,446
Income allocated to the
Fund II-Fund II-OW
Joint Venture* $ 9,655 $ 57,577 $ 56,941
* The Partnership holds a 95% ownership in the Fund II - Fund II-OW Joint
Venture. For allocations to the Partnership, see footnotes in the audited
financial statements.
Rental income decreased in 1996 compared to 1995 due to a decrease in billing of
expenses to the tenant. Rental income and expenses were relatively stable for
1995 and 1994. Although there was a change in useful lives of assets from 40
years to 25 years in the fourth quarter of 1995, depreciation expense decreased
in 1996, compared to 1995, due to the contribution of land and land improvements
by Brookwood Grill to the Holcomb Bridge Road Property. Other operating
expenses increased in 1996 compared to 1995 due to decreased property tax
reimbursements from tenant, and a reimbursement to the tenant in first quarter,
1996, of administrative charges paid in 1995. Net income decreased to $15,485
in 1996 compared to $92,344 in 1995 due primarily to the increased operating
expenses in 1996, and due to the net loss generated by the Fund II, III, VI and
VII Joint Venture.
Real estate taxes were $33,494 for 1996, $39,668 for 1995, and $38,091 for
1994.
19
For comments on the general competitive conditions to which the property may be
subject, see Item 1, Business, page 2. For additional information on the
property, tenants, etc., see Item 2, Properties, page 3.
Holcomb Bridge Road Property/Fund II, III, VI, VII Joint Venture
- ----------------------------------------------------------------
For the Nine Months
Ended December 31, 1996
-----------------------
Revenues:
Rental Income $255,062
Expenses:
Depreciation 181,798
Management and
leasing expenses 28,832
Other operating expenses 101,600
--------
312,230
--------
Net Loss $(57,168)
========
Occupied % 62.90%
Partnership Ownership % in the
Fund II, III, VI, VII Joint Venture* 14.90%
Cash Distribution to the
Fund II-Fund III Joint Venture* $ 19,494
Net Loss Allocated to the
Fund II-Fund III Joint Venture* $(19,378)
* The Partnership holds a 59.04% ownership in the Fund II-Fund III Joint
Venture.
Since the Holcomb Bridge Property was under construction and not occupied until
first quarter, 1996, comparative income and expense figures for the years ended
December 31, 1995 and 1994, are not available.
In January 1995, the Fund II-Fund III Joint Venture contributed 4.3 acres of
land and land improvements at the Holcomb Bridge Road Property to the Fund II-
III-VI-VII Joint Venture. Development is being completed on two buildings
containing a total of approximately 49,500 square feet. As of December 31,
1996, nine tenants occupied approximately 31,144 square feet of space in the
retail and office building under leases of varying lengths.
20
As of December 31, 1996, the Fund II-Fund III Joint Venture contributed
$1,729,116 in land and improvements for an equity interest of approximately
25.2%, Wells Fund VI had contributed $1,699,846 for an equity interest of
approximately 26.0%, and Wells Fund VII had contributed $3,217,154 for an
equity interest of approximately 48.8%. The total cost to develop the Holcomb
Bridge Road Property is currently estimated to be approximately $5,100,000,
excluding land. It is anticipated that of the remaining cost of approximately
$183,000, $100,000 will be contributed by Wells Fund VI and $83,000 by Wells
Fund VII, after which the equity interests in the property will be 48.3% for
Wells Fund VII, 26.4% for Wells Fund VI, and 25.3% for the Fund II-Fund III
Joint Venture. Wells Fund VI and Wells Fund VII have reserved sufficient funds
for this purpose.
Real estate taxes were $37,191 for 1996.
Tucker Property/Fund I - Fund II Joint Venture
- ----------------------------------------------
For the Year Ended December 31
-------------------------------------
1996 1995 1994
---- ---- ----
Revenues:
Rental Income $1,065,598 $1,227,116 $1,228,960
Interest Income 624 2,599 3,269
---------- ---------- ----------
1,066,222 1,229,715 1,232,229
Expenses:
Depreciation 419,137 277,862 238,238
Loss on Real Estate Assets 61,985 0 0
Management and
leasing expenses 118,542 135,517 133,650
Other operating expenses 501,724 563,049 500,494
---------- ---------- ----------
1,101,388 976,428 872,382
---------- ---------- ----------
Net (loss) income $ (35,166) $ 253,287 $ 359,847
========== ========== ==========
Occupied % 77.00% 83.00% 96.00%
Partnership Ownership % 42.52% 42.52% 42.52%
Cash Distribution to the
Fund II-Fund II-OW
Joint Venture* $ 194,473 $ 250,278 $ 202,642
Net Income Allocated to
Fund II - Fund II-OW
Joint Venture* $ (15,793) $ 113,752 $ 161,608
* The Partnership holds a 95% ownership in the Fund II-Fund II-OW Joint
Venture. For allocations to the Partnership, see footnotes in the audited
financial statements.
21
Rental income decreased from 1995 to 1996 due primarily to decreased tenant
occupancy. Operating expenses increased in 1996 over 1995 due to an increase in
HVAC repairs, painting expense and maintenance. Operating expenses decreased in
1995 as compared to 1994 due chiefly to an increase in property taxes, utilities
and other repairs/maintenance. The increase in depreciation expense in 1996
over 1995 and 1994 is a result of the change in the estimated useful lives of
buildings and improvements as previously discussed under the "General Section of
Results of Operations and Changes in Financial Conditions."
Net income decreased in 1996 to ($35,166) from $253,287 in 1995 due to increased
depreciation and operating expenses, as discussed above. Further, a fire
occurred in September 1996 resulting in estimated repair costs of $210,927. An
insurance check in the amount of $143,944 was received in December 1996, and
repairs are expected to be completed by the end of the first quarter of 1997. A
loss on real estate assets of $61,985 is reflected in the aforementioned loss of
income. Net income decreased in 1995 to $253,287 from $359,847 in 1994 due to
decreased tenant occupancy and an increase in operating expenses as discussed
above.
The property was 77% leased as of December 31, 1996, as compared to 83% as of
December 31, 1995, and 96% as of December 31, 1994. Rental income for 1996
decreased over the 1995 level due to the loss of tenants occupying 8,500 square
feet.
Real estate taxes were $111,947 for 1996, $127,484 for 1995, and $105,042 for
1994.
For comments on the general conditions to which the property may be subject, see
Item 1, Business, Page 2. For additional information on the property, tenants,
etc., see Item 2, Properties, page 3.
22
Cherokee Commons Shopping Center/Fund I, II, II-OW, VI, VII Joint Venture
- -------------------------------------------------------------------------
For the Year Ended December 31
-------------------------------
1996 1995 1994
---- ---- ----
Revenues:
Rental Income $890,951 $778,204 $ 552,823
Interest Income 73 180 50
-------- -------- ---------
891,024 778,384 552,873
Expenses:
Depreciation 429,419 277,099 172,583
Management and
leasing expenses 48,882 36,303 22,410
Other operating expenses 180,841 115,885 569,830
-------- -------- ---------
659,142 429,287 764,823
-------- -------- ---------
Net (loss) income $231,882 $349,097 $(211,950)
======== ======== =========
Occupied % 93.00% 94.00% 91.00%
Partnership Ownership % 51.70% 51.70% 65.70%
Cash distributed to
the Fund II-Fund II-OW
Joint Venture* $409,039 $269,900 $ 213,478
Net income (loss) allocated
to the Fund II-Fund II-OW
Joint Venture* $126,517 $216,845 $(148,827)
* The Partnership holds a 95% ownership in the Fund II-Fund II-OW Joint
Venture. For allocations to the Partnership, see footnotes in the audited
financial statements.
Rental income increased in 1996 over 1995 due to the Kroger expansion which was
completed in November 1994. Rental income for the year ended December 31, 1995
increased approximately $225,500 from the rental income for the year ended
December 31, 1994. This increase is due to excess rents relating to the Kroger
expansion which, although completed in November of 1994, was billed
retroactively and paid in September 1995. The decrease in occupancy in 1996 is
due to the current vacancy of 2,380 square feet; however, a lease is being
negotiated for 1,200 square feet with anticipated occupancy in February 1997.
Operating expenses of the property increased to $180,841 in 1996 from $115,885
in 1995 and decreased from $569,830 in 1994. The increase
23
from 1995 to 1996 is due primarily to repairs and maintenance (roof repairs,
painting and tenant finish) and general and administrative expenses. The
decrease in operating expenses in 1995 over 1994 is due to retirement of tenant
improvements which resulted from the Kroger expansion. The increase in
depreciation expense for 1996 as compared to 1995 and 1994 is a result of the
change in the estimated useful lives of buildings and improvements which became
effective in the fourth quarter of 1995, as previously discussed. Net income of
the property decreased to $231,882 in 1996 from $349,097 in 1995 and increased
from ($211,950) in 1994, due to the increase in operating expenses as discussed
above.
A lease amendment was executed with Kroger expanding its existing store at the
Cherokee Commons Shopping Center from 45,528 square feet to 66,918 square feet.
In November, 1994 construction was completed on the Kroger expansion and
remodeling of the center. The total cost for both the Kroger expansion and
remodeling of the Center was $2,807,367. The costs of this expansion were
funded in the following amounts: Wells Fund I, $94,679 and the Fund II-Fund II-
OW Joint Venture $805,092, as of December 31, 1994 and Wells Fund VI $953,798
and Wells Fund VII $953,798 as of December 31, 1995.
Real estate taxes were $63,696 for 1996, $63,694 for 1995 and $56,080 for 1994.
For comments on the general conditions to which the property may be subject, see
Item 1, Business, Page 2. For additional information on the property, tenants,
etc., see Item 2, Properties, page 3.
24
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During its offering, which terminated on September 7, 1988, the Partnership
raised a total of $34,948,250 through the sale of 139,793 units. No additional
units will be sold by the Partnership. As of December 31, 1996, the Partnership
contributed an aggregate of $28,187,574 in capital contributions to the Fund II
- - Fund II-OW Joint Venture. after incurring approximately $6,700,000 in offering
costs.
Since the Partnership is an investment partnership formed for the purpose of
acquiring, owning and operating income-producing real property and has invested
all of its funds available for investment, it is highly unlikely that the
Partnership will acquire interests in any additional properties, and the
Partnership's capital resources are anticipated to remain relatively stable over
the holding period of its investments.
The Partnership's net cash provided by operating activities increased to $24,741
in 1996 from $9,968 in 1995 due primarily to reimbursement of state taxes by
Limited Partners. Net cash provided by operating activities increased to $9,968
in 1995 as compared to net cash used in operating activities of $138,870 in 1994
due primarily to distribution to the partners of approximately $138,000, the
prior year balance of IBM lease termination fee discussed on page 4.
Cash used in investing activities decreased in 1996 due to payment of $84,504
accrued in 1995. The increase in cash used in investing activities from $78,863
in 1994 to $84,504 in 1995 was due to the additional investment in the Fund II-
and II-OW Joint Venture for the Cherokee Commons Property, specifically the
Kroger expansion. These investments were funded from the working capital
reserves which were primarily reserved from the Partners' initial contributions
to the Partnership. Cash and cash equivalents decreased from $112,536 in 1994
to $38,000 in 1995 primarily due to the aforementioned investments. Cash and
cash equivalents increased to $62,741 in 1996 due primarily to the repayment of
taxes mentioned above.
Partnership distributions paid to limited partners decreased from $1,851,243 in
1995 to $1,582,817 in 1996 due primarily to the decrease in joint venture
distributions which were the result of reduced rental revenue. Partnership
distributions paid to limited partners increased from $1,491,607 in 1994 to
$1,851,243 in 1995 due to increased distributions from the Fund II-Fund II-OW
Joint Venture.
The Partnership's cash distribution to Class A Unit holders paid and payable
through the fourth quarter of 1996 have been paid from Net Cash from Operations
and do not constitute a return of capital. The Partnership anticipates that
distributions will continue to be paid on a quarterly basis from Net Cash from
Operations. No cash distributions were paid to Class B Unit holders for 1996.
25
The Partnership expects to meet liquidity requirements and budget demands
through cash flow from operations subject to the potential need to fund tenant
improvements which may be required for new tenants at the Atrium, as previously
discussed. The Partnership is unaware of any known demands, commitments,
events or capital expenditures other than that which is required for the normal
operation of its properties that will result in the Partnership's liquidity
increasing or decreasing in any material way. The Partnership is not obligated
to fund any additional costs for the Holcomb Bridge Road Project. Additional
funding for the Holcomb Bridge Road Project is anticipated to be provided by
capital contributions from Wells Fund VI and Wells Fund VII, which have reserved
sufficient capital for this purpose.
INFLATION
- ---------
Real estate has not been affected significantly by inflation in the past three
years due to the relatively low inflation rate. There are provisions in the
majority of the tenant leases to protect the Partnership from the impact of
inflation. These leases contain common area maintenance charges (CAM charges),
real estate tax and insurance reimbursements on a per square foot basis, or in
some cases, annual reimbursement of operating expenses above a certain per
square foot allowance. These provisions reduce the Partnership's exposure to
increases in costs and operating expenses resulting from inflation. In
addition, a number of the Partnership's leases are for terms of less than five
years which may permit the Partnership to replace existing leases with new
leases at higher base rental rates if the existing leases are below market rate.
There is no assurance, however, that the Partnership would be able to replace
existing leases with new leases at higher base rentals.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------
The financial statements of the Registrant and supplementary data are detailed
under Item 14(a) and filed as part of the report on the pages indicated.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
The Partnership's change in accountants during 1995 was previously reported in
the Partnership's Form 8-K dated September 11, 1995. There were no
disagreements with the Partnership's accountants or other reportable events
during 1996.
27
PART III
ITEM 10. GENERAL PARTNERS OF THE PARTNERSHIP
- ---------------------------------------------
WELLS CAPITAL, INC. Wells Capital, Inc. ("Capital") is a Georgia corporation
- -------------------
formed in April 1984. The executive offices of Capital are located at 3885
Holcomb Bridge Road, Norcross, Georgia 30092. Leo F. Wells, III is the sole
shareholder, sole Director and the President of Capital.
LEO F. WELLS, III. Mr. Wells is a resident of Atlanta, Georgia, is 53 years of
- -----------------
age and holds a Bachelor of Business Administration Degree in Economics from the
University of Georgia. Mr. Wells is the President and sole Director of Capital.
Mr. Wells is the President of Wells & Associates, Inc., a real estate brokerage
and investment company formed in 1976 and incorporated in 1978, for which he
serves as principal broker. Mr. Wells is also currently the sole Director and
President of Wells Management Company, Inc., a property management company he
founded in 1983. In addition, Mr. Wells is the President and Chairman of the
Board of Wells Investment Securities, Inc., Wells & Associates, Inc., Wells
Management Company, Inc. and Wells Investment Securities, Inc. which are
affiliates of the General Partners. From 1980 to February 1985, Mr. Wells
served as Vice-President of Hill-Johnson, Inc., a Georgia corporation engaged in
the construction business. From 1973 to 1976, he was associated with Sax Gaskin
Real Estate Company and from 1970 to 1973, he was a real estate salesman and
property manager for Roy D. Warren & Company, an Atlanta real estate company.
28
ITEM 11. COMPENSATION OF GENERAL PARTNERS AND AFFILIATES
- ---------------------------------------------------------
The following table summarizes the compensation and fees paid to the General
Partners and their affiliates during the year ended December 31, 1996:
( A ) ( B ) ( C )
Name of Individual or Number in Capacities in which served Form of
Group Compensation Cash Compensation
- --------------------------------------------------------------------------------------------------
Wells Management Company, Inc. Property Manager-Management and $165,045 (1)
Leasing Fees
Wells Capital, Inc. General Partner -0-
Leo F. Wells, III General Partner -0-
(1) The majority of these fees are not paid directly by the Partnership but are
paid by the joint venture entities which own properties for which the
property management and leasing services relate and include management and
leasing fees which were accrued for accounting purposes in 1996 but not
actually paid until January, 1997.
29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
No Limited Partner is known by the Partnership to own beneficially more than 5%
of the outstanding units of the Partnership.
Set forth below is the security ownership of management as of February 28, 1997.
(2) (3)
(1) Name and Address of Amount and Nature of (4)
Title of Class Beneficial Owner Beneficial Ownership Percent of Class
-------------- ------------------- -------------------- ----------------
Class A Units Leo F. Wells, III 61 Units (IRA, 401 (k) Less than 1%
and Profit Sharing)
Class A Units Leo F. Wells, III 114 Units (401 (k)) Less than 1%
Class A Units Leo F. Wells, III 20 Units (outright) Less than 1%
The General Partner did not receive any distribution from cash flows or sale
proceeds in 1996.
No arrangements exist which would, upon operation, result in a change in control
of the Partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The compensation and fees paid or to be paid by the Partnership to the General
Partners and their affiliates in connection with the operation of the
Partnership are as follows:
INTEREST IN PARTNERSHIP CASH FLOW AND NET SALE PROCEEDS
- -------------------------------------------------------
The General Partners will receive a subordinated participation in distributions
from cash available for distribution equal to 10% of the total distributions for
such year payable only after the Limited Partners receive distributions from
cash available for distribution equal to 8% of their adjusted capital accounts
in each fiscal year. In addition, after Limited Partners receive their
distributions equal to 8% of their adjusted capital contributions and the
General Partners receive their distributions equal to 10% of the total
distributions for such year, the General Partners will receive a participation
of 10% of the additional distributions from cash available for a distribution,
9% of which shall be paid to the General Partners as a Partnership Management
Fee. The General Partners will also receive a return of their adjusted capital
contributions plus a 12% cumulative return on their adjusted capital
contributions. The General Partners did not receive any distributions from net
cash flow from operations or net sale proceeds for the year ended December 31,
1996.
30
PROPERTY MANAGEMENT AND LEASING FEES
- ------------------------------------
Wells Management Company, Inc., an affiliate of the General Partners, will
receive compensation for supervising the management of the Partnership
properties equal to 6%(3% management and 3% leasing) of rental income. In no
event will such fees exceed the sum of (i) 6% of the gross receipts of each
property, plus (ii) a separate one-time fee for initial rent-up or leasing-up of
development properties in an amount not to exceed the fee customarily charged in
arm's-length transactions by others rendering similar services in the same
geographic area for similar properties. With respect to properties leased on a
net basis for a period of ten years or longer, property management fees will not
exceed 1% of gross revenues from such leases, plus a one-time initial leasing
fee of 3% of the gross revenues which are payable over the first five years of
the term of such net leases. Management and leasing fees are not paid directly
by the Partnership but by the joint venture entities which own the properties.
The Partnership's share of these fees which were paid to Wells Management
Company, Inc. totalled $165,045 for the year ended December 31, 1996.
REAL ESTATE COMMISSIONS
- -----------------------
In connection with the sale of Partnership properties, the General Partners or
their affiliates may receive commissions not exceeding the lesser of (A) 50% of
the commissions customarily charged by other brokers in arm's-length
transactions involving comparable properties in the same geographic area or (B)
3% of the gross sales price of the property, and provided that payments of such
commissions will be made only after Limited Partners have received prior
distributions totaling 100% of their capital contributions plus a 6% cumulative
return on their adjusted capital contributions. No real estate commissions were
paid to the General Partners or affiliates for the year ended December 31, 1996.
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a)1. Financial Statements
Information with respect to this item is contained on Pages F-2 to F-38
of this Annual Report on Form 10-K. See Index to Financial Statements on
Page F-1.
(a)2. Financial Statement Schedule III
Information with respect to this item begins on Page S-1 of this Annual
Report on Form 10-K.
(a)3. The Exhibits filed in response to Item 601 of Regulation S-K are listed
on the Exhibit Index attached hereto.
(b) No reports on Form 8-K were filed with the Commission during the fourth
quarter of 1996.
(c) The Exhibits filed in response to Item 601 of Regulation S-K are listed
on the Exhibit Index attached hereto.
(d) See (a)2 above.
32
SIGNATURES
----------
Pursuant to the requirements of Sections 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 this 17th day of March,
1997
WELLS REAL ESTATE FUND II
(Registrant)
By: /s/Leo F. Wells, III
-------------------------------------
LEO F. WELLS, III
Individual General Partner and as President
of Wells Capital, Inc., the Corporate
General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following person on behalf of the registrant and in
the capacity as and on the date indicated.
Signature Title
- --------- -----
/s/Leo F. Wells, III Individual General Partner, March 17, 1997
- --------------------
Leo F. Wells, III President and Sole Director of
Wells Capital, Inc., the
Corporate General Partner
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRARS WHICH HAVE NOT BEEN REGISTERED PURSUANT TO
SECTION 12 OF THE ACT.
No annual report or proxy material relating to an annual or other meeting of
security holders has been sent to security holders.
33
EXHIBIT INDEX
-------------
(Wells Real Estate Fund II)
The following documents are filed as exhibits to this report. Those
exhibits previously filed and incorporated herein by reference are identified
below by an asterisk. For each such asterisked exhibit, there is shown below the
description of the previous filing. Exhibits which are not required for this
report are omitted.
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF DOCUMENT PAGE NUMBER
- ------ ----------------------- -----------
*4 First Restated and Amended Certificate N/A
and Agreement of Limited Partnership of
Wells Real Estate Fund II (Registration
Statement of Wells Real Estate Fund II,
Exhibit B to the Prospectus, File No.
33-7395)
*10(a) Management Agreement between Registrant N/A
and Wells Management Company, Inc. (Exhibit
to Form 10-K of Wells Real Estate Fund II
for the fiscal year ended December 31, 1990,
File No. 0-16518)
*10(b) Leasing and Tenant Coordination Agreement N/A
between Registrant and Wells Management
Company, Inc. (Exhibit to Form 10-K of
Wells Real Estate Fund II for the fiscal
year ended December 31, 1990, File No.
0-16518)
*10(c) Purchase Agreement for the acquisition N/A
of Heritage Place at Tucker dated
April 25, 1986 (Exhibit 10(f) to Form 10-K
of Wells Real Estate Fund I for the
fiscal year ended December 31, 1990,
File No. 0-14463)
*10(d) Joint Venture Agreement of Fund I and N/A
Fund II Tucker dated January 9, 1987
(Exhibit 10(g) to Form 10-K of Wells Real
Estate Fund I for the fiscal year ended
December 31, 1990, File No. 0-14463)
34
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF DOCUMENT PAGE NUMBER
- ------ ----------------------- -----------
*10(e) Purchase Agreement for the acquisition N/A
of the Cherokee Commons Shopping Center
dated December 31, 1986 (Exhibit 10(h) to
Form 10-K of Wells Real Estate Fund I
for the fiscal year ended December 31,
1990, File No. 0-14463)
*10(f) Joint Venture Agreement of Fund I and N/A
Fund II Cherokee dated June 27, 1987
(Exhibit 10(i) to Form 10-K of Wells Real
Estate Fund I for the fiscal year ended
December 31, 1990, File No. 0-14463)
*10(g) Fund II - Fund II-OW Joint Venture N/A
Agreement dated March 1, 1988 (Exhibit to
Form 10-K of Wells Real Estate Fund II for
the fiscal year ended December 31, 1990,
File No. 0-16518)
*10(h) Lease with IBM dated March 17, 1987 N/A
(Exhibit to Form 10-K of Wells Real
Estate Fund II for the fiscal year ended
December 31, 1990, File No. 0-16518)
*10(i) Purchase Agreement for the Acquisition N/A
of the Atrium at Nassau Bay dated
March 1, 1989 (Exhibit to Form 10-K of
Wells Real Estate Fund II for the fiscal
year ended December 31, 1990, File
No. 0-16518)
*10(j) Joint Venture Agreement of Fund II and N/A
Fund III Associates dated March 1, 1989
(Exhibit to Post-Effective Amendment
No. 2 to Registration Statement of
Wells Real Estate Fund III, L.P.,
File No. 33-24063)
35
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF DOCUMENT PAGE NUMBER
- ------ ----------------------- -----------
*10(k) First Amendment to Joint Venture Agreement N/A
of Fund II and Fund III Associates dated
April 1, 1989 (Exhibit to Form 10-K of
Wells Real Estate Fund II for the fiscal
year ended December 31, 1990, File
No. 0-16518)
*10(l) Leases with Lockheed Engineering and N/A
Sciences Company, Inc. (Exhibit to Form
10-K of Wells Real Estate Fund II for
the fiscal year ended December 31, 1990,
File No. 0-16518)
*10(m) Cost Sharing Agreement between Registrant, N/A
Wells Fund II-OW and the Fund II - Fund
II-OW Joint Venture dated January 1,
1990 (Exhibit to Form 10-K of Wells Real
Estate Fund II for the fiscal year ended
December 31, 1990, File No. 0-16518)
*10(n) Amended and Restated Joint Venture Agreement N/A
of Fund I and Fund II Tucker-Cherokee dated
January 1, 1991 (Exhibit 10(j) to Form 10-K
of Wells Real Estate Fund I for the fiscal
year ended December 31, 1991, File No. 0-14463)
*10(o) Amended and Restated Joint Venture Agreement N/A
of Fund II and Fund III Associates (Exhibit
to Form 10-K of Wells Real Estate Fund II
for the fiscal year ended December 31, 1991,
File No. 0-16518)
*10(p) Land and Building Lease Agreement between N/A
Fund II and Fund II-OW and Brookwood Grill
of Roswell, Inc. (Exhibit to Form 10-K of
Wells Real Estate Fund II for the fiscal
year ended December 31, 1991, File No. 0-16518)
36
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF DOCUMENT PAGE NUMBER
- ------ ----------------------- -----------
*10(q) Assignment and Assumption of Lease dated N/A
September 20, 1991 between Fund II and Fund
II-OW and Fund II and Fund III Associates
(Exhibit to Form 10-K of Wells Real Estate
Fund II for the fiscal year ended December 31,
1991, File No. 0-16518)
*10(r) Lease Modification Agreement No. 3 with N/A
The Kroger Co. dated December 21, 1993
(Exhibit 10(k) to Form 10-K of Wells
Real Estate Fund I for the fiscal year
ended December 31, 1993, File No. 0-14463)
*10(s) Lease Agreement with First Union National N/A
Bank of N.C. dated March 31, 1994, and
First Amendment to Lease Agreement dated
April 14, 1994 (Exhibit to Form 10-K of
Wells Real Estate Fund II for the fiscal
year ended December 31, 1994, File
No. 0-16518)
*10(t) Joint Venture Agreement of Fund II, III, N/A
VI and VII Associates dated January 10,
1995 (Exhibit to Form 10-K of Wells Real
Estate Fund VI, L.P. for the fiscal year
ended December 31, 1995, File No. 0-23656)
*10(u) Joint Venture Agreement of Fund I, II, N/A
II-OW, VI and VII Associates dated
August 1, 1995 (Exhibit to Form 10-K of
Wells Real Estate Fund VI, L.P. for the
fiscal year ended December 31, 1995,
File No. 0-23656)
37
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF DOCUMENT PAGE NUMBER
- ------ ----------------------- -----------
*10(v) First Amendment to Amended and Restated N/A
Joint Venture Agreement of Fund I and
Fund II Tucker (formerly Fund I and
Fund II Tucker-Cherokee) dated August 1,
1995 (Exhibit 10(m) to Form 10-K of
Wells Real Estate Fund I for the fiscal
year ended December 31, 1995, File
No. 0-14463)
*10(w) Custodial Agency Agreement between Wells N/A
Real Estate Fund II and NationsBank of
Georgia, N.A. dated January 10, 1995
(Exhibit to Form 10-K of Wells Real
Estate Fund II for the fiscal year ended
December 31, 1995, File No. 0-16518)
*10(x) Amended and Restated Custodial Agency N/A
Agreement between Wells Real Estate
Fund II and NationsBank of Georgia,
dated August 1, 1995 (Exhibit to Form
10-K of Wells Real Estate Fund II for
the fiscal year ended December 31, 1995,
File No. 0-16518)
38
INDEX TO FINANCIAL STATEMENTS
-----------------------------
FINANCIAL STATEMENTS PAGE
- -------------------- ----
Independent Auditors' Reports F2, F-3
Balance Sheets as of December 31, 1996 and 1995 F4
Statements of Income for the Years Ended
December 31, 1996, 1995, and 1994 F5
Statements of Partners' Capital for the Years Ended
December 31, 1996, 1995, and 1994 F6
Statements of Cash Flows for the Years Ended
December 31, 1996, 1995, and 1994 F7
Notes to Financial Statements for December 31, 1996, 1995, and 1994 F8-F38
F-1
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Wells Real Estate Fund II:
We have audited the accompanying balance sheets of WELLS REAL ESTATE FUND II (a
Georgia public limited partnership) as of December 31, 1996 and 1995 and the
related statements of income, partners' capital, and cash flows for the years
then ended. These financial statements and the schedule referred to below 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. The financial statements of Wells Real Estate Fund II for the year ended
December 31, 1994 were audited by other auditors whose report dated January 13,
1995 expressed an unqualified opinion on those statements.
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 and schedule 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 Wells Real Estate Fund II as of
December 31, 1996 and 1995 and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Atlanta, Georgia
January 10, 1997
F-2
[lETTERHEAD Of KPMG PEAT MARWICK LLP APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
The Partners
Wells Real Estate Fund II:
We have audited the balance sheet (which is not presented separately herein) of
Wells Real Estate Fund II (a limited partnership) as of December 31, 1994, and
the related statements of income, partners' capital, and cash flows for the year
then ended. In connection with our audit of the financial statements, we have
also audited the information for the year ended December 31, 1994 included in
the December 31, 1996 financial statement Schedule III - Real Estate and
Accumulated Depreciation. These financial statements and information included in
the financial statement schedule are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements and information included in the financial statement schedule 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 financial statements referred to above present fairly, in
all material respects, the financial position of Wells Real Estate Fund II as of
December 31, 1994, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Also in our opinion, the related information for 1994 included in 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 set forth therein.
KPMG PEAT MARWICK LLP
January 13, 1995
Atlanta, Georgia
F-3
WELLS REAL ESTATE FUND II
(A GEORGIA PUBLIC LIMITED PARTNERSHIP)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
----------- -----------
INVESTMENT IN JOINT VENTURE $24,418,757 $25,561,588
CASH AND CASH EQUIVALENTS 62,741 38,000
DUE FROM AFFILIATE 127,344 478,857
----------- -----------
Total assets $24,608,842 $26,078,445
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable $ 5,408 $ 4,558
Partnership distributions payable 159,482 487,104
----------- -----------
Total liabilities 164,890 491,662
=========== ===========
COMMITMENTS AND CONTINGENCIES (NOTE 6)
PARTNERS' CAPITAL:
Limited partners:
Class A 24,281,269 24,200,488
Class B 162,683 1,386,295
----------- -----------
Total partners' capital 24,443,952 25,586,783
----------- -----------
Total liabilities and
partners' capital $24,608,842 $26,078,445
=========== ===========
The accompanying notes are an integral part of these balance sheets.
F-4
WELLS REAL ESTATE FUND II
(A GEORGIA PUBLIC LIMITED PARTNERSHIP)
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1996 1995 1994
----------- ---------- ----------
REVENUES:
Equity in income of joint venture $ 111,864 $1,011,096 $ 499,229
Interest income 590 899 6,692
----------- ---------- ----------
112,454 1,011,995 505,921
EXPENSES:
Partnership administration 90 250 0
----------- ---------- ----------
NET INCOME $ 112,364 $1,011,745 $ 505,921
=========== ========== ==========
NET INCOME ALLOCATED TO CLASS A LIMITED
PARTNERS $ 1,335,976 $1,922,246 $1,275,951
=========== ========== ==========
NET LOSS ALLOCATED TO CLASS B LIMITED
PARTNERS $(1,223,612) $ (910,501) $ (770,030)
=========== ========== ==========
NET INCOME PER CLASS A LIMITED PARTNER
UNIT $ 12.30 $ 17.70 $ 11.75
=========== ========== ==========
NET LOSS PER CLASS B LIMITED PARTNER
UNIT $ (40.49) $ (30.13) $ (25.48)
=========== ========== ==========
CASH DISTRIBUTION PER CLASS A LIMITED
PARTNER UNIT $ 11.56 $ 17.34 $ 14.03
=========== ========== ==========
The accompanying notes are an integral part of these statements.
F-5
WELLS REAL ESTATE FUND II
(A GEORGIA PUBLIC LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
LIMITED PARTNERS TOTAL
------------------------------------------
CLASS A CLASS B PARTNERS'
-------------------- --------------------
UNITS AMOUNT UNITS AMOUNT CAPITAL
------- ----------- ------ ----------- -----------
BALANCE, DECEMBER 31, 1993 108,572 $24,407,930 30,221 $ 3,066,826 $27,474,756
Net income (loss) 0 1,275,951 0 (770,030) 505,921
Partnership distributions 0 (1,523,337) 0 0 (1,523,337)
------- ----------- ------ ----------- -----------
BALANCE, DECEMBER 31, 1994 108,572 24,160,544 30,221 2,296,796 26,457,340
Net income (loss) 0 1,922,246 0 (910,501) 1,011,745
Partnership distributions 0 (1,882,302) 0 0 (1,882,302)
------- ----------- ------ ----------- -----------
BALANCE, DECEMBER 31, 1995 108,572 24,200,488 30,221 1,386,295 25,586,783
Net income (loss) 0 1,335,976 0 (1,223,612) 112,364
Partnership distributions 0 (1,255,195) 0 0 (1,255,195)
------- ----------- ------ ----------- -----------
BALANCE, DECEMBER 31, 1996 108,572 $24,281,269 30,221 $ 162,683 $24,443,952
======= =========== ====== =========== ===========
The accompanying notes are an integral part of these statements.
F-6
WELLS REAL ESTATE FUND II
(A GEORGIA PUBLIC LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1996 1995 1994
------------ ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash $ 112,364 $ 1,011,745 $ 505,921
provided by (used in) operating activities: ------------ ----------- -----------
Equity in income of joint venture
Distributions received from joint venture
Distributions to partners from accumulated earnings (111,864) (1,011,096) (499,229)
Changes in assets and liabilities: 1,606,208 1,849,592 1,334,005
Accounts payable (1,582,817) (1,851,243) (1,491,607)
Due from limited partners
850 (2,534) 0
Total adjustments 0 13,504 12,040
------------ ----------- -----------
(87,623) (1,001,777) (644,791)
Net cash provided by (used in) operating activities ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES: 24,741 9,968 (138,870)
Investment in joint venture
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 0 (84,504) (78,863)
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 24,741 (74,536) (217,733)
CASH AND CASH EQUIVALENTS, END OF YEAR 38,000 112,536 330,269
------------ ----------- -----------
$ 62,741 $ 38,000 $ 112,536
============ =========== ===========
The accompanying notes are an integral part of these statements.
F-7
WELLS REAL ESTATE FUND II
(A GEORGIA PUBLIC LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Wells Real Estate Fund II (the "Partnership") is a public limited
partnership organized on June 23, 1986 under the laws of the state of
Georgia. The public general partners are Leo F. Wells III and Wells
Capital, Inc. (the "Company"). The Partnership has two classes of limited
partnership interests, Class A and Class B units. 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 described matters will bind the Partnership,
without the concurrence of the general partners. Each limited partnership
unit has equal voting rights, regardless of class.
The Partnership was formed to acquire and operate commercial real
properties, including properties which are either to be developed,
currently under development or construction, newly constructed, or have
operating histories. The Partnership owns an interest in several properties
through a joint venture between the Partnership and Wells Real Estate Fund
II-OW ("Wells Fund II-OW") referred to as Fund II and II-OW.
Through its investment in Fund II and II-OW joint venture, the Partnership
owns interests in the following properties: (i) a two story office building
located in Charlotte, North Carolina (the "Charlotte Property"); (ii) a
retail shopping and commercial office complex located in Tucker, Georgia,
Heritage Place at Tucker ("Tucker"); (iii) a shopping center located in
Cherokee County, Georgia, the Cherokee Commons Shopping Center ("Cherokee
Commons"); (iv) a four story office building located in metropolitan
Houston, Texas, the Atrium at Nassau Bay ("The Atrium"), (v) a restaurant
located in Fulton County, Georgia; and (vi) a retail shopping center in
Fulton County, Georgia. Fund II and II-OW joint venture owns 100% of the
Charlotte Property. All remaining properties are owned by Fund II and II-OW
joint venture through investments in joint ventures with other Wells funds.
USE OF ESTIMATES AND FACTORS AFFECTING THE PARTNERSHIP
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
F-8
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
The carrying values of real estate are based on management's current intent
to hold the real estate assets as long-term investments. The success of the
Partnership's future operations and the ability to realize the investment
in its assets will be dependent upon the Partnership's ability to maintain
rental rates, occupancy, and an appropriate level of operating expenses in
future years. Management believes that the steps it is taking will enable
the Partnership to realize its investment in its assets.
The lease with one significant tenant at The Atrium contributed
approximately 14% and 43% of rental income to the Partnership for the years
ended December 31, 1996 and 1995, respectively. This tenant's lease expired
in June 1996. As of December 31, 1996, the Partnership has been unable to
re-lease The Atrium. If the Partnership is able to obtain leases with new
tenants for The Atrium, such leases are likely to require substantial
tenant finish and refurbishment expenditures by the Partnership and may be
re-leased at rates substantially lower than those previously obtained,
which could have the effect of substantially reducing future cash
distributions to the partners.
INCOME TAXES
The Partnership is not subject to federal or state income taxes, and
therefore, none have been provided for the accompanying financial
statements. The partners are required to include their respective shares
of profits and losses in their individual income tax returns.
DISTRIBUTIONS OF NET CASH FROM OPERATIONS
Cash available for distribution is distributed on a cumulative
noncompounded basis to limited partners on a quarterly basis. In
accordance with the partnership agreement, distributions first are paid to
limited partners holding Class A units until they have received an 8%
return on their adjusted capital contributions, as defined. Cash available
for distribution is then distributed to limited partners holding Class B
units until they have received an 8% return on their adjusted capital
contributions, as defined. Excess cash available for distribution will be
distributed to the general partners until each has received 10% of total
distributions to limited partners for the year. Thereafter, cash available
for distribution is distributed 90% to the limited partners and 10% to the
general partners.
DISTRIBUTION OF SALES PROCEEDS
Upon sales of properties, the net sales proceeds are distributed in the
following order:
. To limited partners until all limited partners have received 100%
of their adjusted capital contributions, as defined
. To limited partners holding Class B units until they receive an
amount equal to the net cash available for distribution received
by the limited partners holding Class A units
. To all limited partners until they receive a cumulative 12% per
annum return on their adjusted capital contributions, as defined
F-9
. To all limited partners until they receive an amount equal to
their respective cumulative distributions
. To all general partners until they have received 100% of their
capital contributions
. Thereafter, 85% to the limited partners and 15% to the general
partners
ALLOCATION OF NET INCOME, NET LOSS, AND GAIN ON SALE
Net income is defined as net income recognized by the Partnership,
excluding deductions for depreciation, amortization, and cost recovery.
Net income, as defined, of the Partnership will be allocated each year in
the same proportions that net cash from operations is distributed to the
partners. To the extent the Partnership's net income in any year exceeds
net cash from operations, it will be allocated 99% to the limited partners
and 1% to the general partners.
Net loss, depreciation, amortization, and cost recovery deductions for each
fiscal year will be allocated as follows: (a) 99% to the limited partners
holding Class B units and 1% to the general partners until their capital
accounts are reduced to zero, (b) then to any partner having a positive
balance in his capital account in an amount not to exceed such positive
balance, and (c) thereafter to the general partners.
Gain on the sale or exchange of the Partnership's properties will be
allocated generally in the same manner that the net proceeds from such sale
are distributed to partners after the following allocations are made, if
applicable: (a) allocations made pursuant to a qualified income offset
provision in the Partnership agreement, (b) allocations to partners having
negative capital accounts until all negative capital accounts have been
restored to zero, and (c) allocations to Class B limited partners in
amounts equal to deductions for depreciation, amortization, and cost
recovery previously allocated to them with respect to the specific
Partnership property sold, but not in excess of the amount of gain on sale
recognized by the Partnership with respect to the sale of such property.
INVESTMENT IN JOINT VENTURE
BASIS OF PRESENTATION. The Partnership does not have control over the
operations of the joint venture; however, it does exercise significant
influence. Accordingly, the Partnership's investment in joint venture is
recorded using the equity method of accounting. The joint ventures in
which Fund II and II-OW hold an ownership interest follow the same
significant accounting policies as the Partnership.
REAL ESTATE ASSETS. Real estate assets held by Fund II and II-OW are stated
at cost less accumulated depreciation. Major improvements and betterments
are capitalized when they extend the useful life of the related asset. All
repairs and maintenance are expensed as incurred.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
of," which is effective for fiscal years beginning after December 15, 1995.
SFAS No. 121 establishes standards for determining
F-10
when impairment losses on long-lived assets have occurred and how
impairment losses should be measured. Fund II and II-OW, and the entities
in which it holds joint venture interests, adopted SFAS No. 121, effective
Januar