Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2003

OR

For the transition period from                                 to                                 

Commission file number 0-14463

WELLS REAL ESTATE FUND I

(Exact name of registrant as specified in its charter)

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 nonaffiliates:    Not Applicable

Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Form 10-K of Wells Real Estate Fund I (the “Partnership”) other than historical facts may be considered 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. Such statements include, in particular, statements about our plans, strategies and prospects and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the Securities and Exchange Commission. Neither the Partnership nor the general partners make any representations or warranties (expressed or implied) about the accuracy of any such forward-looking statements. Actual results could differ materially from any forward-looking statements contained in this Form 10-K, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Any such forward-looking statements are subject to known and unknown risks, uncertainties, and other factors and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations; provide distributions to limited partners; and maintain the value of our real estate properties, may be significantly hindered. Following are some of the risks and uncertainties, although not all risks and uncertainties, which could cause actual results to differ materially from those presented in certain forward-looking statements:

General economic risks

Real estate risks

Page 1

Table of Contents

Other operational risks

Page 2

Table of Contents

PART I

General

Wells Real Estate Fund I (the “Partnership”) is a Georgia public limited partnership with Leo F. Wells, III and Wells Capital, Inc. (“Wells Capital”), a Georgia corporation, serving as its general partners (the “General Partners”). The Partnership was formed on April 26, 1984 for the purpose of acquiring, developing, constructing, owning, operating, improving, leasing, and 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 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) add or 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 September 6, 1984, the Partnership commenced an offering of up to $50,000,000 of Class A or Class B limited partnership units ($250.00 per unit) pursuant to a Registration Statement filed on Form S-11 under the Securities Act of 1933. The Partnership commenced active operations upon receiving and accepting subscriptions for 5,000 units on February 15, 1985. The offering was terminated on September 5, 1986 at which time the Partnership had sold approximately 98,716 Class A Units and 42,568 Class B Units representing capital contributions of $35,321,000 from investors who were admitted to the Partnership as limited partners.

Management believes that the Partnership would ideally operate through the course of the following five key life cycle phases. The time spent in each phase is dependent upon various economic, industry, market, and other internal/external factors. Some overlap naturally exists in the transition from one phase to the next.

The period during which the Partnership is raising capital through the sale and issuance of limited partner units to the public

The period during which the Partnership invests the capital raised during the fund-raising phase, less upfront fees, into the acquisition of real estate assets

The period during which real estate assets are owned and operated by the Partnership during the initial lease terms of the tenants

The period during which the leases in place at the time of acquisition expire and, thus, the Partnership expends time, effort, and funds to re-lease such space to existing and/or new tenants. Following the holding phase, the Partnership continues to own and operate the real estate assets, evaluate various options for disposition, and market the real estate assets for sale

Page 3

Table of Contents

The period during which the Partnership sells its real estate investments and distributes net sales proceeds to the partners

Currently, management believes that the Partnership is straddling the positioning-for-sale phase and the disposition and liquidation phase and, accordingly, will focus resources primarily on positioning its properties for sale and locating prospective acquirers of properties.

Cash management is a chief area of focus for the Partnership. Historically, the Partnership has not taken out borrowings from third-party lenders and, while operating cash flows and net property sales proceeds are withheld to provide for known events from time to time, the Partnership does not maintain as a general rule cash reserves for unknown events. Instead, management prefers to maximize operating cash flows distributed to investors commensurate with the period earned; however, it is likely that, in connection with the re-leasing of certain of the Partnership’s properties, the Partnership may be required to use cash flow from operations and/or net sale proceeds from the sale of the Partnership’s properties, which would otherwise be available for distribution to limited partners, to fund tenant improvements, leasing commissions, and other leasing costs associated with such re-leasing efforts. The Partnership’s cash needs evolve during the course of its life cycle and, accordingly, volatility in operating returns is a natural and expected part of the process.

Employees

The Partnership has no direct employees. The employees of Wells Capital and Wells Management Company, Inc. (“Wells Management”), an affiliate of the General Partners, 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 Partners and Affiliates,” for a summary of the fees paid to the General Partners and their affiliates during the year ended December 31, 2003.

Insurance

Wells Management carries comprehensive liability and extended coverage with respect to the properties owned by the Partnership holds an interest directly and through its interest in joint ventures. In the opinion of management of the Partnership, all such properties are adequately insured.

Competition

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 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.

Page 4

Table of Contents

During the periods presented, the Partnership owned direct interests in the following three properties. Accordingly, the accounts of these properties are consolidated in the Partnership’s financial statements.

During the periods presented, the Partnership owned interests in three properties through the following affiliated joint ventures:

Each of the aforementioned properties was acquired on an all-cash basis. The investment objectives of each of the joint venture partners listed in the above table are substantially identical to those of the Partnership.

Page 5

Table of Contents

The Partnership does not control the operations of Fund I-II-IIOW-VI-VII Associates or Fund I-II Tucker Associates (collectively, the “Joint Ventures”); however, it does exercise significant influence. Thus, the Partnership accounts for its investment in the Joint Ventures using the equity method of accounting. The Partnership substantially controls the operations of Wells-Baker Associates. Accordingly, the accounts of Wells-Baker Associates are consolidated in the accompanying consolidated financial statements.

As of December 31, 2003, the lease expirations scheduled during each of the following ten years for all properties in which the Partnership held an interest directly or through an affiliated joint venture, assuming no exercise of renewal options or termination rights, are summarized below:

The Joint Ventures and properties in which the Partnership owns an interest during the periods presented are further described below:

Paces Pavilion

On December 27, 1985, the Partnership acquired a three-story medical office building on 1.65 acres of land located on Howell Mill Road in metropolitan Atlanta, Fulton County, Georgia, known as Paces Pavilion for a purchase price of $3,443,203. Paces Pavilion is held in condominium ownership and contains approximately 30,800 net rentable square feet. As of December 31, 2003, six tenants occupied Paces Pavilion, the following three of which occupied 10% or more of the rentable space: Eye Consultants of Atlanta; King, Sanderson & Heidecker; and Peachtree Park Pediatrics. All of the tenants of Paces Pavilion are in the business of providing various medical services.

Eye Consultants of Atlanta occupies two suites representing 11,757 square feet (or approximately 38% of the premises) with annual base rent payable at $230,085 and a lease expiration date of December 31, 2006. King, Sanderson & Heidecker occupy 3,752 rentable square feet (or approximately 12% of the premises) with annual base rent payable at $87,219 and a lease expiration date of December 31, 2007. Peachtree Park Pediatrics occupies 5,906 rentable square feet (or approximately 19% of the premises) with an annual base rent payable at $114,458 and a lease expiration date of March 31, 2014.

The average effective annual rental rate per square foot at Paces Pavilion was $19.58 for 2003, $17.88 for 2002, $7.78 for 2001, $3.84 for 2000, and $3.31 for 1999.

Page 6

Table of Contents

Black Oak Plaza

On December 31, 1986, the Partnership acquired a portion of a retail shopping center located in Metropolitan Knoxville, Knox County, Tennessee known as Black Oak Plaza which was initially developed in 1981. Black Oak Plaza contains a total of approximately 175,000 square feet and is currently occupied by multiple tenants, including Kmart department store (“Kmart”) and Kroger Food/Drug (“Kroger”). The Partnership does not own the portion of the shopping center occupied by Kmart and Kroger. The portion of the shopping center owned and operated by the Partnership contains 69,000 net rentable square feet. As of December 31, 2003, Black Oak Plaza was leased to sixteen tenants with no single tenant occupying more than 10% of the premises.

The average annual rental rate per square foot for Black Oak Plaza was $5.59 for 2003, $5.91 for 2002, $6.37 for 2001, $6.01 for 2000, and $5.53 for 1999.

Crowe’s Crossing

On December 31, 1986, the Partnership acquired a retail shopping center located in metropolitan Atlanta, DeKalb County, Georgia known as Crowe’s Crossing containing approximately 94,000 net rentable square feet.

On January 11, 2001, the Partnership sold the Crowe’s Crossing property to an unrelated third party. This sale resulted in a gain of approximately $1,139,000 and yielded net proceeds of $6,486,653.

The average effective rental rate per square foot for Crowe’s Crossing was $0.19 through January 11, 2001, $8.81 for 2000, and $7.64 for 1999.

Peachtree Place

In 1985, the Partnership acquired an interest in two commercial office buildings located on Holcomb Bridge Road in Norcross, Gwinnett County, Georgia known as Peachtree Place. Peachtree Place is owned by Wells-Baker Associates. The land on which Peachtree Place was developed was originally purchased by Wells & Associates, Inc. for a purchase price of approximately $190,000. Upon the formation of Wells-Baker Associates, Wells & Associates, Inc. contributed the land to this joint venture as its initial capital contribution. As of December 31, 2003, the Partnership and Wells-Baker Associates owned approximately 90% and 10% of Peachtree Place, respectively.

Wells-Baker Associates sold one of its commercial office buildings, 3875 Peachtree Place, on August 31, 2000, for net sale proceeds of approximately $704,000 and recognized a gain on the sale of approximately $268,000, of which approximately $634,000 and $241,000, respectively, were allocated to the Partnership.

The remaining office building at Peachtree Place contains approximately 11,000 net rentable square feet and is leased to six tenants, of which the following four tenants occupy 10% or more of the total rentable square footage: Law Offices of Jules & Associates; Adevco Corporation, a commercial real estate development company; Flying Fotos, Inc., an aerial photo company; and American Express Financial, a financial services company.

Law Offices of Jules & Associates leases 3,004 rentable square feet (or approximately 27% of the premises) with annual base rent payable at $49,566 and a lease expiration date of September 30, 2006. Adevco Corporation leases 1,512 rentable square feet (or approximately 14% of the premises) with an annual base rent payable at $27,594 and a lease expiration date of September 30, 2005. Flying Fotos, Inc. leases 1,449 rentable square feet (or approximately 13% of the premises) with a base rent payable at $26,807 and a lease expiration date of

Page 7

Table of Contents

January 31, 2004. American Express Financial leases 1,512 rentable square feet (or approximately 13% of the premises) with an annual base rent payable at $24,948 and a lease expiration date of October 31, 2006.

The average annual rental rate per square foot at Peachtree Place was $12.15 for 2003, $18.79 for 2002, $14.06 for 2001, $18.05 for 2000, and $13.86 for 1999.

Fund I-II Tucker Associates

On December 10, 1986, Fund I-II Tucker Associates was formed for the purpose of investing in commercial real estate properties. As of December 31, 2003, the Partnership and Fund II and Fund II-OW held equity interests of approximately 52% and 48%, respectively, in the following property based on their respective cumulative capital contributions to Fund I-II Tucker Associates:

Heritage Place

Fund I-II Tucker Associates developed and constructed Heritage Place, a retail shopping center containing approximately 29,858 square feet and a commercial office building complex containing approximately 67,212 square feet and located in Tucker, DeKalb County, Georgia.

On April 7, 2003, the Fund I-II Tucker Associates sold the retail portion of Heritage Place, which comprises approximately 30% of the total premises. The retail portion of Heritage Place was sold for a gross sales price of $3,400,000, resulting in a gain of approximately $293,000, net of selling expenses of approximately $158,000. As a result of this sale, net sales proceeds of approximately $1,665,000 and a gain of approximately $152,000 were allocated to the Partnership.

No individual tenant occupied ten percent or more of the total rentable square footage of the property as of December 31, 2003. The principal businesses of the tenants at Heritage Place include primarily commercial office services.

The average effective annual rental rate per square foot at Heritage Place was $10.90 for 2003, $12.66 for 2002, $13.66 for 2001, $14.29 for 2000, and $14.11 for 1999.

Fund I-II-IIOW-VI-VII Associates

Fund I-II-IIOW-VI-VII Associates was formed for the purpose of developing, owning and operating Cherokee Commons, a retail shopping center comprised of approximately 104,000 net rentable square feet located in metropolitan Atlanta, Cherokee County, Georgia. Cherokee Commons was initially acquired and developed through a joint venture between the Partnership and Fund II and Fund II-OW. On August 1, 1995, the joint venture between the Partnership and Fund II and Fund II-OW contributed Cherokee Commons, and Wells Real Estate Fund VI, L.P., and Wells Real Estate Fund VII, L.P. contributed approximately $1 million each in order to fund the additional build-out of Cherokee Commons upon the formation of Fund I-II-IIOW-VI-VII Associates.

On October 1, 2001, Fund I-II-IIOW-VI-VII Associates sold Cherokee Commons for net sale proceeds of $8,414,089 and recognized a gain of $1,725,015 on the sale, of which approximately $2,126,000 and $436,000, respectively, were allocated to the Partnership.

The average effective rental rate per square foot at Cherokee Commons was $7.31 through September 30, 2001, $9.31 for 2000, and $9.11 for 1999.

Page 8

Table of Contents

On January 17, 2003, the Partnership was served with a putative class action by a limited partner holding Class B units, on behalf of all limited partners holding Class B units as of January 15, 2003, that seeks equitable relief with regard to the rights and obligations of all the Partnership’s limited partners and general partners under the partnership agreement. This litigation was filed in the Superior Court of Gwinnett County, Georgia (Roy Johnston v. Wells Real Estate Fund I, Civil Action No. 03-A00525-6) (the “Johnston Action”). The plaintiff in the Johnston Action generally alleges that the terms of the partnership agreement, as it relates to the allocation and distribution of net sale proceeds, are inconsistent with the original intent of the parties. The plaintiff alleges that the original intent was that limited partners holding Class B units would have a priority in payment of cash distributions of net sale proceeds to bring them even with the amount of cash distributions previously made to limited partners holding Class A units. The Johnston Action seeks, among other things, to have the Partnership’s partnership agreement equitably reformed consistent with the alleged original intent or, in the alternative, to have the investments made by limited partners holding Class B units equitably rescinded, and requests an injunction prohibiting the General Partners of the Partnership from distributing net sales proceeds until the resolution of the action.

On April 15, 2003, several limited partners holding Class A units filed a motion to intervene in the Johnston Action on the grounds that Mr. Johnston seeks relief that would be detrimental to limited partners holding Class A units, and that judgment in favor of Mr. Johnston would impair or impede the Class A unit holders’ ability to protect their interests. The Partnership then filed its answer, a counterclaim seeking a declaratory judgment and an interpleader action, and a motion to join the intervenor Class A unit holders and recast the action as one in interpleader. In its counterclaim, the Partnership seeks a declaratory judgment as to how net sale proceeds should be distributed as between limited partners holding Class A units and limited partners holding Class B units.

On June 27, 2003, the Court entered an order granting the motion to intervene previously filed by certain limited partners holding Class A units (the “A Unit Holder Defendants”). On July 29, 2003, the A Unit Holder Defendants filed a cross-claim against the Partnership seeking that the Partnership be required and directed to disburse funds in accordance with the partnership documents.

On or about October 16, 2003, all of the A Unit Holder Defendants other than John Weiss (“Defendant Weiss”) filed a Dismissal Without Prejudice in the action. On or about that same date, Defendant Weiss filed a motion to dismiss or in the alternative for summary judgment. On November 3, 2003, the Partnership filed a motion to dismiss or in the alternative for summary judgment.

On or about December 8, 2003, the plaintiff in the Johnston action filed a Motion to Conditionally Certify Class Action Claims. On or about December 10, 2003, Mr. Johnston filed a Motion for Partial Summary Judgment as to his Count II for Rescission.

The Court held a hearing on February 2, 2004. The Court took matters under advisement, and directed that all the proceedings be held in abeyance pending further order from the Court.

No matters were submitted to a vote of the limited partners during the fourth quarter of 2003.

Page 9

Table of Contents

PART II

As of February 15, 2004, the Partnership had 98,716 outstanding Class A Units held by a total of 3,350 limited partners and 42,568 outstanding Class B Units held by a total of 959 limited partners. The capital contribution per unit was $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 9% distribution preference over Class B Unit holders as to distributions from Cash Available for Distribution 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 Available for Distribution to the limited partners is distributed on a quarterly basis. No distributions were paid to Class B Units in 2003 or 2002. The cash distributions made to the limited partners holding Class A Units during 2002 and 2003 are summarized below:

The Partnership has reserved distributions to limited partners for the second quarter through the fourth quarter of 2003 in order to fund additional legal costs anticipated to be required in connection with the litigation discussed in Part I, Item 3, and lease-up costs anticipated to be needed in connection with increasing the occupancy of Paces Pavilion, Black Oak Plaza, and Heritage Place.

Page 10

Table of Contents

The following sets forth a summary of selected financial data as of and for the years ended December 31, 2003, 2002, 2001, 2000, and 1999.