WELLS REAL ESTATE FUND III L P - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2005 or

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

For the transition period from to

Commission file number 0-18407

WELLS REAL ESTATE FUND III, L.P.

(Exact name of registrant as specified in its charter)


Georgia		58-1800833
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

6200 The Corners Pkwy., Norcross, Georgia		30092-3365
(Address of principal executive offices)		(Zip Code)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Form 10-Q of Wells Real Estate Fund III, L.P. (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. Specifically, among others, we consider statements concerning projections of future operating results and cash flows, our ability to meet future obligations, and the amount and timing of future distributions to limited partners to be forward-looking statements.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date that 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-Q, 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. 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 follow:

General economic risks

•

Adverse changes in general or local economic conditions; and

•

Adverse economic conditions affecting the particular industry of one or more tenants in properties owned by our joint ventures.

Enterprise risks

•

Our dependency on Wells Capital, Inc. (“Wells Capital”) and its affiliates and their key personnel for various administrative services; and

•

Wells Capital’s ability to attract and retain high quality personnel who can provide acceptable service levels and generate economies of scale over time.

Real estate risks

•

Ability to achieve appropriate occupancy levels resulting in rental amounts sufficient to cover operating costs;

•

Supply of or demand for similar or competing rentable space, which may adversely impact retaining or obtaining new tenants upon lease expiration at acceptable rental amounts;

•

Tenant ability or willingness to satisfy obligations relating to our existing lease agreements;

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•

Increases in property operating expenses, including property taxes, insurance, and other costs not recoverable from tenants;

•

Ability to secure adequate insurance at reasonable and appropriate rates to avoid uninsured losses or losses in excess of insured amounts;

•

Discovery of previously undetected environmentally hazardous or other undetected adverse conditions at our properties;

•

Ability to fund foreseen and unforeseen capital expenditures, including those related to tenant build-out projects, tenant improvements, and lease-up costs, out of operating cash flow or net property sale proceeds; and

•

Ability to sell a property when desirable at an acceptable return, including the ability of the purchaser to satisfy any and all closing conditions.

Other operational risks

•

Our reliance on Wells Management Company, Inc. (“Wells Management”) or third parties to manage our properties;

•

Increases in our administrative operating expenses, including increased expenses associated with operating as a public company in the current regulatory environment;

•

Ability to comply with governmental, tax, real estate, environmental, and zoning laws or regulations and funding the related costs of compliance; and

•

Actions of our joint venture partners including potential bankruptcy, business interests differing from ours, or other actions that may adversely impact the operations of joint ventures.

Page 3

WELLS REAL ESTATE FUND III, L.P.

TABLE OF CONTENTS


			Page No.
PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Balance Sheets—March 31, 2005 (unaudited) and December 31, 2004	5

		Statements of Operations for the Three Months Ended March 31, 2005 (unaudited) and 2004 (unaudited)	6

		Statements of Partners’ Capital for the Year Ended December 31, 2004 and the Three Months Ended March 31, 2005 (unaudited)	7

		Statements of Cash Flows for the Three Months Ended March 31, 2005 (unaudited) and 2004 (unaudited)	8

		Condensed Notes to Financial Statements (unaudited)	9

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	22

	Item 4.	Controls and Procedures	22

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	23

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23

	Item 3.	Defaults Upon Senior Securities	23

	Item 4.	Submission of Matters to a Vote of Security Holders	23

	Item 5.	Other Information	23

	Item 6.	Exhibits	24

Page 4

WELLS REAL ESTATE FUND III, L.P.

BALANCE SHEETS

ASSETS


	March 31, 2005 (unaudited)		December 31, 2004
Investments in joint ventures	$	5,206,498	$	5,260,006
Cash and cash equivalents		2,198,090		2,184,474
Due from joint ventures		240,754		181,462

Total assets	$	7,645,342	$	7,625,942

LIABILITIES AND PARTNERS’ CAPITAL


LIABILITIES:
Accounts payable and accrued expenses	$	15,342	$	16,033
Due to affiliates		8,247		6,370

Total liabilities		23,589		22,403

PARTNERS’ CAPITAL:
Limited partners:
Class A—19,635,965 units issued and outstanding		7,621,753		7,603,539
Class B—2,544,540 units issued and outstanding		0		0
General partners		0		0

Total partners’ capital		7,621,753		7,603,539

Total liabilities and partners’ capital	$	7,645,342	$	7,625,942

See accompanying notes.

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WELLS REAL ESTATE FUND III, L.P.

STATEMENTS OF OPERATIONS

(unaudited)


	Three Months Ended March 31,
	2005		2004
EQUITY IN INCOME OF JOINT VENTURES	$	45,933	$	149,478

EXPENSES:
Partnership administration		29,726		22,029
Legal and accounting		11,524		10,024
Other general and administrative		482		512

Total expenses		41,732		32,565

INTEREST AND OTHER INCOME		14,013		2,909

NET INCOME	$	18,214	$	119,822

NET INCOME ALLOCATED TO LIMITED PARTNERS:
CLASS A	$	18,214	$	31,008

CLASS B	$	0	$	88,814

NET INCOME PER LIMITED PARTNER UNIT:
CLASS A	$	0.00	$	0.00

CLASS B	$	0.00	$	0.03

See accompanying notes.

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WELLS REAL ESTATE FUND III, L.P.

STATEMENTS OF PARTNERS’ CAPITAL

FOR THE YEAR ENDED DECEMBER 31, 2004

AND THE THREE MONTHS ENDED MARCH 31, 2005 (unaudited)


	Limited Partners								General Partners		Total Partners’ Capital
	Class A				Class B
	Units	Amounts			Units	Amounts
BALANCE, December 31, 2003	19,635,965	$	12,431,705		2,544,540	$	0		$	0	$	12,431,705

Net income	0		2,289,224		0		852,617			0		3,141,841
Distributions of net sale proceeds ($0.36 and $0.34 per Class A Unit and Class B Unit, respectively)	0		(7,117,390	)	0		(852,617	)		0		(7,970,007	)

BALANCE, December 31, 2004	19,635,965		7,603,539		2,544,540		0			0		7,603,539

Net income	0		18,214		0		0			0		18,214

BALANCE, March 31, 2005	19,635,965	$	7,621,753		2,544,540	$	0		$	0	$	7,621,753

See accompanying notes.

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WELLS REAL ESTATE FUND III, L.P.

STATEMENTS OF CASH FLOWS

(unaudited)


	Three Months Ended March 31,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	18,214		$	119,822
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in income of joint ventures		(45,933	)		(149,478	)
Operating distributions received from joint ventures		40,149			200,239
Changes in assets and liabilities:
Due to affiliates		1,877			0
Accounts payable and accrued expenses		(691	)		11,498

Total adjustments		(4,598	)		62,259

Net cash provided by operating activities		13,616			182,081

CASH FLOWS FROM FINANCING ACTIVITIES:
Net sale proceeds distributions paid to limited partners		0			(1,312,003	)
Operating distributions paid to limited partners		0			(220,904	)

Net cash used in financing activities		0			(1,532,907	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		13,616			(1,350,826	)

CASH AND CASH EQUIVALENTS, beginning of period		2,184,474			2,552,904

CASH AND CASH EQUIVALENTS, end of period	$	2,198,090		$	1,202,078

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Partnership distribution payable	$	0		$	220,904

See accompanying notes.

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WELLS REAL ESTATE FUND III, L.P.

CONDENSED NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2005 (unaudited)

1.	ORGANIZATION AND BUSINESS

Wells Real Estate Fund III, L.P. (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 (collectively, the “General Partners”). Wells Capital is a wholly-owned subsidiary of Wells Real Estate Funds, Inc. Leo F. Wells, III is the president and sole director of Wells Capital and the sole owner of Wells real Estate Funds, Inc. The Partnership was formed on July 31, 1988 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. The 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 partner unit has equal voting rights regardless of class.

On October 24, 1988, the Partnership commenced an offering of up to $50,000,000 of Class A or Class B limited partnership units ($1.00 per unit) pursuant to a Registration Statement filed on Form S-11 under the Securities Act of 1933. The offering was terminated on October 23, 1990, at which time the Partnership had sold approximately 19,635,965 Class A and 2,544,540 Class B Units representing capital contributions of $22,206,310.

The Partnership owns indirect interests in all of its real estate assets through joint ventures with other entities affiliated with the General Partners. During the periods presented, the Partnership owned interests in the following joint ventures (the “Joint Ventures”) and properties:


Joint Venture	Joint Venture Partners	Properties
Fund II and Fund III Associates (“Fund II-III Associates”)	• Fund II and Fund II-OW⁽¹⁾ • Wells Real Estate Fund III, L.P.	1. Boeing at the Atrium A four-story office building located in Houston, Texas 2. Brookwood Grill⁽²⁾ A restaurant located in Roswell, Georgia
Fund II, III, VI and VII Associates (“Fund II-III-VI-VII Associates”)	• Fund II-III Associates • Wells Real Estate Fund VI, L.P. • Wells Real Estate Fund VII, L.P.	3. Holcomb Bridge Property⁽²⁾ An office/retail center located in Roswell, Georgia
Fund III and Fund IV Associates (“Fund III-IV Associates”)	• Wells Real Estate Fund III, L.P. • Wells Real Estate Fund IV, L.P.	4. Stockbridge Village Shopping Center⁽³⁾ A retail shopping center located in Stockbridge, Georgia 5. 4400 Cox Road An office building located in Richmond, Virginia

⁽¹⁾

Fund II and Fund II-OW is a joint venture between Wells Real Estate Fund II and Wells Real Estate Fund II-OW.

⁽²⁾

Properties were sold in July 2004.

⁽³⁾

Property was sold in April 2004.

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Each of the aforementioned properties was acquired on an all-cash basis. Approval by the Partnership as well as the other Joint Venture partners is required for any major decision or any action that would materially affect the Joint Ventures, or their real property investments. For further information regarding the Joint Ventures and foregoing properties, refer to the Partnership’s Form 10-K for the year ended December 31, 2004.

On April 29, 2004, four Wells-affiliated Joint Ventures, including Fund III-IV Associates, sold five real properties, including Stockbridge Village Shopping Center, to an unrelated third party for a gross sale price of $23,750,000. As a result of the sale of Stockbridge Village Shopping Center, the Partnership received net sale proceeds of approximately $6,900,000 and was allocated a gain of approximately $2,700,000.

On July 1, 2004, Fund II-III Associates and Fund II-III-VI-VII Associates, collectively, sold Brookwood Grill and the Holcomb Bridge Property to an unrelated third party for a gross sale price of $9,500,000. As a result of the sale of Brookwood Grill, the Partnership received net sale proceeds of approximately $884,000 and was allocated a gain of approximately $290,000. As a result of the sale of the Holcomb Bridge Property, the Partnership received net sale proceeds of approximately $608,000 and was allocated a gain of approximately $178,000, of which approximately $14,000 was deferred. The deferred gain represents the Partnership’s pro-rata allocation of maximum exposure under an eighteen-month rental guarantee provided to the purchaser in connection with the sale. As of March 31, 2005, the Partnership recognized approximately $1,700 of the deferred gain.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The financial statements of the Partnership have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, including the instructions to Form 10-Q and Article 10 of Regulation S-X, and in accordance with such rules and regulations, do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of the General Partners, the statements for the unaudited interim periods presented include all adjustments that are of a normal and recurring nature and necessary to fairly present the results for such periods. Results for interim periods are not necessarily indicative of full-year results. For further information, refer to the financial statements and footnotes included in the Partnership’s Form 10-K for the year ended December 31, 2004.

Distributions of Net Cash from Operations

Net cash from operations, if available, is generally distributed to limited partners quarterly. In accordance with the partnership agreement, such distributions are paid first to limited partners holding Class A Units until each has received an 8% per annum return on his adjusted capital contribution, as defined. Net cash from operations is then distributed to limited partners holding Class B Units until each has received an 8% per annum return on his adjusted capital contributions, as defined. If any net cash from operations remains, the General Partners receive an amount equal to 10% of total net cash from operations distributed for such year. Thereafter, amounts are distributed 10% to the General Partners and 90% to the limited partners.

Distribution of Sales Proceeds

Upon the sale of properties, the net sales proceeds will be distributed in the following order:

•

In the event that the particular property sold is sold for a price that is less than the original property purchase price, to the limited partners holding Class A Units until each has received an amount equal to the excess of the original property purchase price over the price for which the property was sold, limited to the amount of depreciation, amortization, and cost recovery deductions taken by the limited partners holding Class B Units with respect to such property;

•

To limited partners until each limited partner has received 100% of his capital contributions, as defined;

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•

To limited partners holding Class B Units until each such limited partner has received an amount equal to the net cash available for distribution paid to the limited partners holding Class A Units on a per-unit basis;

•

To all limited partners until each limited partner has received a cumulative 12% per annum return on his adjusted capital contributions, as defined;

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