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Gateway BP(1.1)-CS 891212SANTA FE PACIFIC R~Ai~TY I SANTA FE PACIFIC REALTY December 12, 1989 Steve Goram Dir. of Public Works P. O. Box 478 732 De Forest Rd. Coppell, Texas 75019 RE: Gateway Business Park Dear Mr. Goram: Santa Fe Pacific Realty Corporation is proud to announce the pending development of Gateway Business Park, a 225 acre mixed use business park in Coppell, Texas. For a number of years one of our prior affiliates, Southern Pacific Industrial Development, owned the 104 acre tract bounded by Freeport Parkway on the east, Cotton Road on the south, the St. Louis Southwestern Railroad on the north, and the Thompson Property on the west. On September 26, 1989, we purchased the 104 acre tract, previously owned by Triland, from the Federal Depositors Insurance Corporation and on September 29, 1989, we purchased an adjacent 15.5 acre tract from the Stewart family. The combined property, with 1.25 miles of frontage on 1-635 and 1.5 miles of frontage along Freeport Parkway, is owned by Santa Fe Pacific Realty Corporation, an independent, non railroad, real estate investment and development company. The combined 225 acre parcel, to be known as Gateway Business Park, will be developed as a phased, mixed use business park with the initial phase being development of the northern portion of the property as warehouse/distribution and light manufacturing facilities. Subsequent development will include higher use industrial buildings and high tech facilities transtttoning to office development along 1-635. There is also a site for potential hotel development. Ne are presently finalizing our preliminary design plans for the first phase of development and have authorized our engineers to proceed with production drawings for streets and utilities. Initial meetings have been held with city staff to apprise them of our project and we are preparing submittals for review by Planning and Zoning Commission and City Council. Santa Fe Pacific Realty Corporation 5429 LBJ Freeway, Suite 600 Dallas, Texas 75240-2609 Telephone 214 980-7707 Facsimile 214 770-3272 m Steve Goram Page Two December 12, lg89 It goes without saying that we are excited about our project and, with 225 acres of prime property within the city limits of Coppell, we have a vested interest in the growth and success of Coppell. Obviously we must work together to bring growth to our park and to the community. Although the past few years have crippled the Texas real estate industry and the near future remains questionable for office development; we think that the timing is good to start development of the industrial sector of our park. However, we are committing ourselves to invest substantial dollars in the development of our property and we need your utmost support if we, and the community, are to be successful in attracting industrial and office tenants. It is imperative that we have the support and cooperation of city staff and elected officials as we proceed with development and pursue new growth and increased tax base for the City of Coppell. We look forward to working with you in creating Gateway Business Park. We need your help and support. Let's work together to make Coppell grow) Sincerely~r~ /// /~ , Vice President of Development TND/trr RAIL DRILL TRACK PHASE 15,0 AC. COTToN'~-~' N LANDSCAPED GATEWAY BUSINESS PARK LOCATION MAP DATA SUMMARY TOTAL SITE AC 225.0 AC +/- PHASE 1 ACRES 109,2AC z FUTURE PHASES 95.0 AC_~ TOTAL DEVELOPABLE 204.2 AC ~ RAIL DRILL TRACK 1 5AC ~ GRAPEVINE CREEK 8.2AC ~ HIGH VISIBILITY FREEWAY GATEWAY BUSINESS PARK 225 ACRES-COPPELL, TEXAS Santa Fe Pacific Realty AN INTRODUCTION TO SANTA IrE PACIFIC REALTY CORPORATION Santa Fe Pacific Realty Corporation is, at the present time, a wholly owned but independent subsidiary of Santa Fe Pacific Corporation. Through a recent transaction, the corporate structure is taking a new form. California Public Employees Retirement System (CALPERS), one of the world's largest pension funds, has recently executed an agreement to purchase 20% of the stock in Santa Fe Pacific Realty Corporation for $400,000,000.00. This transaction becomes official on December 31, 198g. By January l, 1992, Santa Fe Pacific Realty Corporation will become a separate corporation, totally independent of Santa Fe Pacific Corporation. The major stockholders in the new corporation will be CALPERS, owning 20% of it's stock, Olympia & York, owning 17% of it's stock and Chicago financeer Sam Zell's Itel Corporation owning 14% of it's stock. Santa Fe Pacific Realty Corporation has developed and owns more that ll million square feet of industrial, office, hotel and retail facilities nationwide. In addition to these developed properties, we have extensive land holdings in prime growth markets throughout the nation, totalling 2.8 million acres. We currently have over two million square feet of new facilities under construction as well as current and pending development of business/industrial parks. We have targeted 6,875 acres of prime property for development over the next twenty years and plan to develop up to 80 million square feet of industrial, office and residential facilities thereon. Santa Fe Pacific Realty Corporation, through recent evolution in the ownership and management of the company, has committed itself to be one of the nation's most active and aggressive real estate developers in the coming years. To fulfill our commitment; we must successfully be of service to the communities and corporations we serve. Following are some of the advantages offered by doing business with Santa Fe Pacific Realty Corporation: Land Inventory: The geographic diversity, quality and relative low basis of our land holdings provide a broad spectrum of location opportunities in numerous growth markets throughout the nation. Development Control: As the land owner, park developer and buildings developer, we can determine and control the timing of development to meet market demand and the type of development to meet the specific needs of our tenants. Long Term: We are an investment builder who builds, owns and maintains our properties for the long term. We, therefore, create facilities wherein design and construction offer long term benefits and which are welcomed by communities wherein they are located. Financial Strength: Santa Fe Pacific Realty Corporation is a publicly held corporation with major stock interest owned by some of America's most successful real estate investors. We have financial strength and staying power matched by few other real estate developers. Professional Staff: Our staff, from senior officers to project level, consists of people who understand construction and real estate. From local expertise, knowledgeable of their markets and building conditions, to national support, providing sophisticated financial structuring, our staff is committed to the successful development of our properties. Cost Effective: We will combine our controlled land value, our construction/development expertise and our financial capability to offer the best combination of project location/quality/cost available. Service: Service to the customer) Regardless of all other benefits, without this attitude, we will not create the long term repeat business relationships we need for long term success; and we know that real estate is a long term business. 0043d/1-3 Santa Fe Pacific Realty Corporation 1988 Annual Report Creating value from an extensive portfolio of diverse properties. Contents President's Message 2 Market Flexibility 4 Income 6 Properties Current inventory of 11.1 million square feet of industrial, office and retail buildings, plus 94 ground leases. Planned Developments 8 5,392 acres targeted for up to 70 million square feet of office space, industrial parks, retail centers and residential communities. Joint Ventures 12 Partnerships in seven successful joint ventures and plans for creating more where appropriate. Land with Commemiall Industrial Development Potential 14 Nearly 34,000 acres of undevel oped land in suburban and rural areas that lie in paths of growth. Mountain, Desert and Agricultural Properties 15 More than 2.6 million acres of mountain and desert land in California, Utah and Nevada with diverse potential uses; 90,000 acres of agricultural lands in process of sale. Financlals 16 President's Letter Welcome to the first annual report of Santa Fe Pacific Realty Corpora- tion. Although we are included in the annual report of our parent, Santa Fe Southern Pacific Corporation, we believe our story deserves the special attention ora separate report. 1988 was a critical year for our company. With the debt financing of $442 million worth o four developed industrial, office and retail proper- ties and the sale o fan additional $276 million of properties that did not fit our development program, we contributed substantially to the finan- cial restructuring of our parent corporation. By mortgaging rather than selling, our developed properties, we also assured ourselves the opportunity to continue to reap their appreciating value, while generat- ing cash flow. In addition, we arranged a $125 million revolving line of credit to support our ongoing development activities. These first-time leveraging activities mark a dramatic step in our corporate strategy to be an aggressive real estate development company that pursues investment opportunities and creates value through developing and holding our properties for long-term appreciation. We have strong confidence in the success of our strategy for several reasons: 1) Location. The majority of ourproperties are located in the midst of high population growth areas in California, Arizona, Illinois and Texas. 2) Timing. We have the ability to be flexible and to build according to market demands. 3) Diversity. The core of our business is industrial properties, but our portfolio contains a broad range of property types, from highrise office buildings to scenic mountain areas with potential recreational use. Our development and leasing activities in 1988prove the merit of our strategy. Last year we completed or had under construction more than 2.6 million square feet of industrial, office and retail space, and cu~ rently, our buildings, including thosejust completed, are 85 percent leased. We have undertaken a number of joint ventures with various partners, and 1988 marked two grand openings of such successful projects. One is an Embassy Suites Hotel in downtown San Diego, in which we were the developmentpartner and have 50percent interest. The other is Phase II of Pacific Design Center in West Hollywood, California. We own 47per- cent of this striking architectural landmark, which has become the capital of the West Coast design~contract furnishings industry. (Standing) O. G. Linde, President and Chief Executive Officer; (seat- ed from left) Kenneth L. Tibbetts, Senior Vice President and Chief Financial Officer; Vernon B. Schwartz, incoming President and Chief Executive Officer. Mission Bay, the planned waterfront Community that we intend to develop in San Francisco, took a major step forward in 1988 when the most comprehensive draft environmental impact report in San Francisco history was issued. We expect the EIR will be certified in 1989, leading the way to ultimate approval of Mission Bay by public officials. (In millions of $) 1988 1987 1986 1985 1984 Sales $276.1 $179.9 $164.1 $167.9 $121.7 Rents-Commemlal & 64.8 58.9 41.7 34.9 3 l. 1 Industrial Properties Income 8oforo 256.7 190.3 172.1 167.5 131.9 income Taxes In summarizing our activities for the past five years, the chart on this page illustrates the steady progress we have made in meeting our goals. In terms of square footage, the buildings we own and have developed has increased more than 150percent, and rents from our leasing activities have more than doubled. Total Properties, 820.1 794.5 676.8 551.8 487.9 At Cost Buildings Owned 11.1 8.8 (Millions of sq ft) AS you read about our projects and plans for the years ahead, we hope you sense the excitement and 8.2 4.8 4.4 promise of Santa Fe Pacific Realty I am privileged to have served as President of the company since 1984 and of one of its predeces- sors, Southern Pacific Land Company, for 14 years prior Santa Fe Pacific Realty is built upon a legacy of two strong companies that played a vital role in settling the West. Decisions on how best to preserve and invest that legacy by maximizing use of our lands have guided my 38-year caree~ I am pleased that the course we have charted will be directed by the talented and experienced Vernon Schwartz, who succeeds me as President and CEO It is difficult to capture the real spirit of an organization on the pages of an annual report. Behind all the numbers, it is actually the people of Santa Fe Pacific Realty who distinguish our firm. Ourproperty assets are valuable, but it is ultimately the collective talent, energy and commitment of our people that determine our success. San Francisco Bay Area Suburban Chicago Southern California San Diego Metropolitan Phoenix 4 I/ Market Flexibility The broad geograp divcrsit lng to market dema USC, or ' e of Santa Fe Pacific Realty's 2.8 million acres and the : us flexibility to manage and develop them accord- ppropriate time to develop our properties or residential uses; we can hold propcrtics for future to raise capital for other opportunities. We are con · is classified into five primary groups: the current inventory of developed properties totals 11.1 office and retail buildings. We have 94 e from a thoroughbred race track Inn on San Francisco's Fisherman's Wharf. 5,392 acres with potential buildout of 70 million ~ of office, industrial, retail and residential facilities. projects totaling 2 million square feet, in which our ~ ranges from 25 to 50 percent. and industrial development: 33,641 desert and agricultural properties: 2,767,100 acres total. 90,000 tgricultural land are in the process of being liquidated. Nearly 2.7 million acres of mountain and desert properties provide various opportu- nities, including waste disposal and commercial and recreational potential. Dallas/Fort Worth Income Properties Planned Developments ~ JolntVentures Other Land with Commercial/Industrial Development Potential Mountain, Desert and Agriculture Properties 5 I/ Income Properties Since Santa Fe Pacific Realty was formed, our portfolio of buildings has expanded from approximately 3.5 million square feet of primarily industrial facilities to 11.1 million square feet of industrial, office and retail facilities through our aggressive development, management and acquisition of properties. From 1984 through 1988, we constructed 7 million square feet of new facilities, including 2 ~6 million square feet under construction or completed in 1988. In 1986, we added 367,000 square feet to our retail portfolio through the acquisition of four shopping centers, located in Livermore and Woodland Hills, California; Denver, Colorado; and Portland, Oregon. Since we are an investment builder that owns and manages properties for the long term, we accept only the highest quality design and materials. We develop speculatively as welI as for build-to-suit tenants, including firms such as Microage, Scantron, Global Van Lines, and Norden Systems, subsidiary of United Technologies. We seek tenants nationwide and have attracted firms such as AT&T Informa tion Systems, lnc., Honeywell, Inc. and Cray Research, Inc. In 1987, we concluded one of the largest office leases in the history of Santa Clara County, when McDonnell Douglas Corp. leased four buildings in our six-building, 414,000- square-foot office complex in North San Jose. Our income properties have a distinct advantage in the market place-- location. Situated near freeways and population centers, they are readily leased. The majority of our income properties are located in three high growth areas: Southern California (Los Angeles, Orange, San Bernardino, Riverside and San Diego counties); Northern California (the Bay Area); and Arizona (Phoenix/Tempe). In burgeoning Orange County, we own nearly two million square feet of industrial, office and retail space, and we have another 242,000 square feet under construction. In Los Angeles County, our holdings total 2.3 million square feet of industrial and office buildings, including 1.2 million square feet developed since 1984. We are now looking east to the fast-growing Inland Empire Riverside and San Bernardino counties--where we developed 555,000 square feet of space in 1988. In San Diego County, we own two multi-tenant industrial parks, Centerpointe and Kearny Mesa, that encompass a total 390,000 square feet and have 100 tenants. In Phoenix and nearby Tempe, Arizona, we own five industrial/business parks covering approximately 800 acres. Since 1984, we have acquired 320,000 square feet and developed approximately 857,000 square feet of industrial, office and retail space. More than 400,000 square feet were completed in 1988. In Northern California, we own two industrial parks in thc heavily populated East Bay cities of Union City and Livermore, where we have developed 863,000 square feet of facilities. 3O00 2500 2000 1500 1000 500 100 0 Square Footage of Buildings Constructed, 1984-1988 (In Thousands) 1984 85 86 87 88 'P/pes of Income Properties Office 16% Retoil 4o, Industrial 80°/ I/ (From upper left to lower right) McDonnell Douglas Center, San Jose, California; Nedhridge 8usi- ness Pm'k, Chatsworth, California; Broadway Indush'iai Park, Tempe, Arizona; Alvarado Business Center, Unien City, California. 7 'qJed aqi u! §ulPllflq lsJlt Jno uo 6861. 'lie:l u! punoJ§ )lea~q o! ueld oA~ pug '§ulPignq oo!#o iooJ-aJgnbs -OOO'§Z£ e pololdmO0 sgq ~peaJIg · Je~ seIDnoo IleUuooow ~oeds Ilqm pUB O~H 'eOlUO q3~-qOlq ~ ose3~qs eoq lil~ 'elUJOJlle~ 'euv ~ues ul ~Mo~ podMoN aql ol lueoe~pe qJed ~Oulsnq peuueld 4~sg~ '~OB-~L g boluo~UlO~ STUOLUdoIoAOO pauuelcJ Mission Bay will become San Francisco's newest neighborhood with our planned development ot housing, offices, light industrial and retail space, plus parks, open space, recreational facilities and a school. We are working closely with the city of San Francisco and expect to reach agreement on the plan in 1989. Two blocks from the San Diego waterfront, wu are planning a high- rise office development on 16 acres surrounding the historic Santa Fe Depot. A few blocks south, next to the Embassy Suites Hotel, we are planning an upscale residential complex of 790 units. 10 At West 10 Crossroads, our 66-acre site on Interstate 10 in Phoenix, we plan a mixed-ese development of office and retail buildings, restau- rants and a hotel. We plan to break greun(! in mi[I-1989 on the four- building, 320,000-square-foot office/rstail complex shown in model. Plans for Developing Major Holdings Gross Location Acres Los Angeles Area: Orange County 300 Type of Development Off icc/Industrial/ Multi-tcnant/Hotcl Los Angeles County 171 Industrial/Multi tenant Riverside/San Bcrnardino 850 indust rial/Multl-tcnant / Counties Retail/Office San Francisco Bay Area 1,850 Office/Retail/Industrial/ Hotel/Rcsidential/R&D San Diego Metropolitan Area 20 O ffice/Residc n rial/Retail Phoenix Metropolitan Area 500 Industrial/Office Texas (Dallas/Houston) 785 Industrial/Office Chicago Metropolitan Area 916 Industrial/Office Total 5,392 To~l Po~ntlal Estim~ed Development Year of (miJlion sq ~ ) Completion 61 1998 26 1995 11.5 2014 19.2 2013 5.1 2014 65 2005 107 2014 8.3 2005 70.0 11 Joint Ventures Santa Fe Pacific Realty is a partner in seven joint venture developments, including two major projects completed in 1988. We were the development partner and have a 50 percent interest in a new Emhassy Suites Hotel tbat opened in August 1988 in downtown San Diego. Located adjacent to the waterfront, this botel includes 337 suites, a 12-story atrium with a waterfall and reflecting pond, two restaurants, indoor swimming pool, meeting rooms and a grand Ballroom. Also in 1988, a major expansion was completed to the Pacific Design Center in West Hollywood, California. We own 47 percent of this bighly successful arcbitectural landmark that has become the huh of the interior design/contract furnishings industry on the West Coast, Thc Phase 1i expansion added designer showrooms, a theater, conference center, meeting roolI1s, a restaurant and struc- tured parking. Phase I of the Center, completed in 1976 and fully leased, consists of a dramatic, six-story, 750,000-square foot design mart sheathed in cobalt blue glass, We have a 25 percent interest in thc International Rivercenter in New Orleans, a mixed use complex comprised of the 1600 room New Orleans Hilton Riverside and Towers, a cruise-ship passenger terminal and a festival marketplace overlooking thc Mississippi River, adjacent to the New Orleans International Trade Mart. A related joint venture, New- Orleans Rivcrcenter, in which we have 39 percent interest, owns 12 acres of undeveloped land next to the International RivercemeE We own 50 percent of a downtown San Francisco office highrise building, Spear Street Terrace. We managed the development of this 18-story, 232,000- square foot structure. The building was completed in 1985 and is currently 94 percent leased. We have a 50 percent interest in a complex of office buildings in Torrance, California called Park Del Amo that currently consists of two office buildings totaling 260,000 square feet and a third under construction. We have entitlements to build up to 850,000 square feet of office space. The complex is surrounded by a successful condominium complex of 1,250 units. In downtown Dallas, we have a 24 percent interest in a 47 acre tract of land, located near the Farmers Market and adjacent to the central business district, that we and our parmcrs plan to develop as tile Dallas economy improves. With the strong empbasis we are placing on development, we intend to pursue more joint venture arrangements, particularly in areas where outside expertise will enable us to maximize the value of our properties. Embassy Suites Hotel, San Diego, California Spear Street Terrace, San Francisco, California 12 I/ Other Land With Commercial / Industrial Development Potential In addition to 5,392 acres of land targeted for development in urban and subur- ban areas, Santa Fe Pacific Realty owns 33,641 acres of undeveloped suburban and rural land in 12 western, southwestern and plains states. Although not in our current development plans, many of these properties are located in paths of growth where we believe future opportunities lie. The maps at right indicate our properties in three such areas. We continually update plans for these properties as growth patterns and market projections change, and we evaluate our options for their eventual deployment, including retaining and developing them or replacing them with other properties that augment our development portfolio. In the central valleys of California, we own nearly 7,000 acres of land, stretching from Fairfield in the north central part of the state, south to Stockton, Tracy, Merced, and Fresno. As the coastal cities of California become more crowded, population growth is heading inland to the valleys, and our properties lie in some of the areas most likely to absorb this growth. In the Reno/Sparks, Nevada area, we own approximately 175 acres of land that is well-suited for industrial development. In the Dallas/Fort Worth area of Texas, we own almost 2,000 acres, including approximately 1,400 acres in the towns of Wilmer and Hutchins in southeast DaIlas. This property consists of three major parcels astride Interstate 45, immediately outside the Interstate 635 loop. As industrial property in North Dallas becomes more expensive, we believe that large industrial space users will seek less expensive areas south of Dallas. In the Houston area, we own more than 1,475 acres, including an 87¢acre parcel in southwest Houston at Clodine and 339 acres two miles south of Houston's central industrial park. These properties may provide future develop- ment opportunities as the Houston economy recovers. In central Oregon, we own 22 parcels of land totaling 446 acres along the Interstate 5 corridor, from the Portland suburbs south to Eugene and Grants Pass, that offer opportunities for industrial devclopment. The other states where we own land with potential for development are Arizona, Arkansas, Colorado, Illinois, Kansas, New Mexico, Oklahoma and Utah. Central California Houston, Texas Central Oregon Just outside of Reno and Sparks, Nevada, we own 175 acres of land well-suited for industrial develop- ment (phote, above leR). 14 Mountain, Desed Agriculture Mountain, Desert and Agricultural Properties Santa Fe Pacific Realty's extensive land holdings include 59,000 acres of undevel- oped mountain properties in Nurthcrn California and nearly 2.6 million acres of desert lands in Southern CaliIornia, Nevada and Utah. Wc also own 90,000 acres of agricultural property in California Our scenic mountain properties lie in Northern California, near thc Oregon border and in the Sierra mountains. We currently ///~ ua, lease 462 acres to thc Alpine Meadows ski resort near Lake Tahoe and 640 acres to the Mt. Shasta ski resort in Shasta County. We believe there will be future opportunities for recreational, residential and commercial development of these properties through joint ventures. The desert properties in Southern California, extending through Imperial, Kern, Los Angeles, Riverside, San Bernardino and San Diego counties, offer a number of possibilities. As population densities con- tinue to increase in Southern California, the demand tbr housing and commercial development continually extends outward tu rural areas. Another emerging requirement is the need to site waste disposal facilities and land fills, both requiring vast acreages in rural, undeveloped areas. Recently, some of our lands have been used as sires for alternative energy generation, and we believe there is further potential for this type of use, including wind and solar power that require wide, open spaces. We are in the process of selling to l~rmers all of our agricultural lands in thc SanJoaquin Valley of California and currently have 90,000 acres remaining to be sold. Of our original 151,000 acres of farmland, 106,000 acres were located in the Westlands Water District, most of which we were required to sell under mandate of federal water reclamation law. In 1988 agricultural land sales represented about 20 percent of our overall land sales program. The farmland sales program is expected to bc completed by thc end of 1990. Alpine Meadows Ski Area, Lake Tahoe, California 15 Financial Overview Santa Fe Pacific Realty reported $256.7 million in pre tax income for the year end- ed December 31, 1988. Of this amount, $223.9 million represented gains from sales of $276 million of developable land, industrial and commercial buildings, and agricultural properties. Property sales for 1988 exceeded 1987 sales by $96.2 million. For the five-year period, 1984 through 1988, ()ur property sales totaled approximately $910 million. We anticipate sales in future years will decline substantially. Rental revenues totaled $92.3 million for calendar year 1988, witb $64.8 million representing rents from industrial and commercial buildings and from ground leases. Our rental revenues from buildings and ground leases bave more than doubled in five years, climbing from $31 million in 1984 to $64.8 million in 1988. We anticipate rents from these properties and from our on going develop- ment program to increase substantially in coming years. ()ur agricultural properties, during the five year period from 1984 tt~rough 1988, provided rental revenue totaling $93.1 million. As we proceed with the planned divestiture of all of our agricultural holdings, this source of revenue will gradually decline over the next two years. In December 1988, we concluded $442 million in first-mortgage financing at~d arranged a $125 million bank revolving credit agrccmcnt to support our on-going development of industrial and commercial buildings. As a result of our current debt financing, projected debt financing for buildings we are constructing and increasing depreciation expense, we anticipate pre-tax income in future years will decline substantially from previous levels. Our focus now is on creating value from our opcrating properties and on generating casb flow from operations and financings. We also plan to divest ourselves of properties that do not fit our port folio in the long term. We believe tbis strategy will provide tbe greatest value enhancement to shareholders of our parent corporation. The value of properties that we own, based on historical cost accounting as required by generally accepted accounting principles, totals more than $ 820 million as of December 31, 1988. This includes construction in progress as well as our land and completed buildings. Since our property values are based on bistorical cost, it should be recognized that thc market value of these properties is considerably higher. ~gettior Vice President and C/2ieJ' Financial Of J}cer Consolidated Balance Sheet Assets Developable properties Income producing properties Surplus industrial/commercial properties Agricultural and other properties Joint venture investments Less accumulated depreciation and amortization Other assets and deferred charges Note receivable from affiliate Notes receivable Accounts receivable, less allowances Cash and temporary investments, at cost which approximates market 'lbtal Liabilities and stockholders' equity Mortgage loans payable Note payable to affiliate Accounts payable and accrued expenses Deferred credits and other liabilities Deferred income taxes Stockholders' equity Common stock without par value: Authorized and issued, 1,000 shares Paid-in capital Retained income Total stockholders' equity Total December 31, 1988 (In thousands) $505,886 368,177 127,084 18,912 756 49,098 771,717 50,661 25,000 9,381 11,286 66,141 $934,186 $462,231 25,103 43,039 18,638 156,485 35,713 187,528 5,449 228,690 $934,196 17 I/ I/ (00~'909) o1£'6~t amoaul pau!ela}l lei!de3 u!-P!r.d qaols uommo3 (gpuT;gnoql Ul) 886~. '~£ JaqLuaaafl papua JaoX Olk'6~I$ 266'96 [OL'9gz og6'~qt £98'6I £O¢'LZ 6~9'L 0~9'6I ggo'9Lz~ (spuusnoql uI) 896~. 'L£ JaquJaaaQ papua maA Al!nb] ,sJaPlOqqaols jo lUaLUalelS paleP!lOSUO9 amoau! lan poa~J&c.l lU~nD $axlq auloauI saxal aLUOaUg aJojaq amOaUl uollgZ[l~OtUg put: uo[lg!aDJdDc] pIos ,tlxodo~d jo IgoD sasuadxa pueslsoa sanuaAaU ouJOaUl lo luamolelS palep!losuo:) Consolidated Statemen! of Cash Flows Cash flows from operating activities: Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Provision for losses ()iq accounts receivable Rent concessions, net Deferred profit recognized Cost of property sold Changes in assets and liabilities: Decrease in accounts receivable Increase in notes receivable Increase in otber assets and deferred charges Decrease in accounts payable and accrued expenses Increase in deferred income taxes Decrease in deferred credits and other liabilities Net cash provided by operating activities Cash flows from investing activities: Capital expenditures Distributions from joint ventures Contributions ~o }oint ventures Payments received on notes receivable Net cash used by investing activites Net cash provided by operating and investing activities ¥0ar ended December 31, lg88 (Jrt thousands) $159,710 12,378 474 (6,281) (1,980) 52,177 4,598 (4,259) (18,629) (40,374) 19,732 (7,318) 170,228 (81,041) 8,403 (259) 10,692 (62,205) 108,023 19 Consolidated Statement of Cash Flows Net cash provided by operating and investing activities Cash flows from financing activities: Principal payment of Long term debt Increase in long term debt Dividends paid Decrease in notes receivable from affiliates Decrease in notes payable to affililtcs Capital contribution Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental disclosures of cash flow information: Cash paid during the year for: Interest (net of amount capitalized) Income taxes Disclosure of accounting policy: For purposes of thc statement of cash flows, thc Company considers all highly liquid investments with a maturity of three months or less wben purchased to be cash equivalents. Year ended December 31, 1988 $108,023 (10,472) 442,000 (606,500) 127,000 (3,631) 14 (51,589) 56,434 9,707 $ 66,141 $ 2,262 121,735 2O Noles to Financial Statements Note 1: Ownership and Summary of Significant Accounting Principles Ownership andprinciples qfconsolidation Santa Fc Pacific Realty Corporation (SFPR) is owned 58.3% by Soutbcrn Pacific Company and 41.7% by Santa Fc In- dustries, Inc., both of which are wbolly owned subsidiaries of S2nta Fe Southern Pacific Corporation (SFSP); therefore, per share data are not shown in the financial statements. The accompanying financial statements include thc accounts of SFPR and entities over 50% owned (thc Company) on a consolidated basis, lnvcsunents in 20% to 50% owned joint ventures arc accounted for tinder thc equity method Property and deJi,rred costs Real estate is stated at the lower of cost or estimated net realizable value. Thc Company capitalizes construction and development costs. Costs associated with financing or leasing of projects arc also capitalized and deferred as costs associated with thc projects to be subsequently amortized over thc period benefited by those expenditures. Depreciation is computed using thc straight-linc method. Buildings and improve- ments are depreciated using lives of between 20 and 40 years. Tenant improve ments are depreciated over thc primary terms of the leases (generally 3-15 years) while furniturc and equipment arc depreciated using lives ranging between 3 and IO years. Maintenance and repair costs arc charged to operations :is incurred, while signi ficant improvements, replacements and major renovations arc capitalized Real estata sales~he Company follows Statement of Financial Accounting Standards No. 66 (FAS 66), "Accounting for Sales of Real Estate," in determining the appropriate mcthod for recording rcal estate sales transactions. Under FAS 66, profit is recognized in full on an accrual basis when profit is determinable, an adequate down payment has been made, collectibility of the sales price is reason ably assured and the earnings process is complete. Otherwise, all revenue or a portion thereof is deferred. In Dcccmber 1987, Statement of Financial Accounting Standards No, 96 (1%S 96), "Accounting fi)r Income Taxes," was issued. The Statement requires adoption of the liability method of accounting for income taxes. The ]new liability method includes thc effect of taxable assets and liabilities which are reported in different perk)ds for financial smtemem purposes than for income tax returns. Thc State may be applied prospectively or retroactively in the year of adoption. Manage- meat plans to implement the provisions of I~SkS 96 prospectively in the Company's 1989 financial statements and estimates that the cumulative effect of this change in accounting principle will result in a $25 million increase in net income. When the Statement is adopted, changes in tax laws, including rates of taxation, ,?,'ill he reported in thc period in which the changes become effective rather than being deferred for financial reporting purposes under present generally accepted accounting principles. 21 Note 2: Mortgage Loans Payable In December of 1988, thc Company concluded a $400 million first mortgage loan agreement with Prudential Insurance Contpany of America (Prudential). Thc loan is collateralized by a majority of the Company's income producing properties. The loan is in two parts: Segment A for $220 million at 9.893 %, due January 1, 1994 and Scglnent B for $180 million at 10.13%, due January 1, 1996. Thc Corn pany can borrow up to an additional $30 million provided that certain conditions set tbrth in the loan agreement have been satisfied. Monthly payments on Segment A include interest only from inception of thc loan to January 1, 1994 when the entire principal portion of Segment A is payable. Monthly payments on Segment B include interest only from the inception of the loan through January 1, 1994. Thereafter, payments of principal and interest based on a 30 year amortization schedule are duc monthly from February 1, 1994 through January 1, 1996 w hen the remaining principal balance is payable in its cn tire Future rental revenues on certain properties owned by the Company have been assigned to Prudential as security in the event of default by thc Company. In addi tion, two unconditional, irrevocable letters of credit ($4 million and $14.8 million) were provided to Prudential to be used in the event of default by the Company or upon certain operating shortfalls specified in thc loan agreement. The letters of credit expire on April 30, 1990 and are to be renewed annually with the amounts varying in accordance with certain operating criteria related to the respective properties as set forth in thc loan agreement. The Company also concluded a $42 million first mortgage loan agreement with Security Pacific National Bank (Security Pacific) in December 198& The loan is collateralized by eight completed real estate projects. Future rental revenues on these projects have been assigned to Security Pacific as additional security in the event of default by the Company. The interest rate for this loan, at the Company's election as made from time to time, is based on Security Pacific's prime lending rate or on a Certificate of Deposit, LIBOR or Eurodollar rate Monthly payments on the loan are interest only fi-om inception to December 31, 1990 when the entire principal amount is duc and payable. Loan fees and other costs in the amount of $17.4 million are being amortized over the terms of the Prudcntial and Security Pacific loans. During the year ended December 31, 1988, the amount of such f~¢s and costs chargcd to operations was not significant. In addition to the Prudential and Security Pacific loans, the Company had various other mortgage loans payable which totaled $20.2 million at December 31, 1988. One loan bears interest at prime plus 1.5%, the remainder arc at interest rates ranging from 8.0% to 11.0% These loans mature trom 1989 to 1998. Thc annual maturities of all mortgage loans payable as of December 31, 1988 arc summarized as follows (in thousands): 1989 $ 1,486 1990 57,956 1991 178 1992 163 1993 124 Thereafter 402,324 $ 462,231 22 / Note 3: Income Taxes Interest costs incurred during 1988 relating tt) mortgage loans payable amounted to $2.5 million of which $2.2 million was capitalized. In addition, other interest costs of $1.2 million were incurred primarily for assessment district improvement bonds, all of which was capitalized. The Company has entered a bank revolving credit agreement with Security Pacific for a maximum amount of $125 million. Under the terms of the agreement, wbich expires on December 31, 1990, the funds are to be used to finance various real estate projects. Tbe total amount borrowed for eacb project is due on thc earlier of December 31, 1992 or two years after the date on which tbe trust deed is recorded The interest rate for this revolving credit agreement, at the Company's election as made from time to time, will be based on Security Pacific's prime lending rate or on a Certificate of Deposit, LIBOR, or Eurodollar rate. At December 31, 1988, thcrc were no borrowings under this credit line. The Cotnpany is included in the consolidated federal income tax return of SFSE The Company's liability for federal income taxes is determined using the separate return method established by a Tax Allocation Agreement with St;SE The federal income tax statutory rate is reconciled to thc Company's effective rate as follows: Statutory rate 34.0% State income taxes, net of federal benefit 4.0 Other (0.2) Effective rate 37.8% Income taxes include state income tax expense of $15 7 million in 1988. The sources and tax effects of timing difi'~zrences resulting in deferred income taxes are summarized below (in thousands): Deferred gains on involuntary conversions $21,990 Recognition of previously deferred gains (3,633) State income taxes, net of federal benefit 2,381 Other (1,514) Provision for deferred income taxes $19,224 23 Note 4: Property Property and capitalized property costs at December 31, /988 consisted of the following (in thousands): Land and improvements Buildings Construction in progress Capitalized interest and property taxes Other Less accumulated depreciation and amnrtization $416.511 243,896 58,294 75,688 25,67/I 820,059 (49,098) $770,961 Note 5: Joint Venture Investments Note 6: Leases The Company is involved in a variety of real estate oriented joint venture activi- ties. These currently include two hotels, an office building and a 1.2 million square foot trade mart center for the contract and home furnishing industries in Los Angeles, California. Equity in earnings of joint venture investments for thc }Tar ended December 31, 1988 was $1.8 million. Equity in the net assets of the joint ventures exceeded the Company's investments by $3.4 million at December 31, 1988. Such excess, result ing primarily from the differences between the carrying value of properties con tributed to several ioint ventures and thc agreed valuations for joint venture purposes, will be recognized as other revenue when the related properties are sold. The Company, as lessee, has entered into noncancelable operating leases expiring at various dates through 2020. Rental expense and related sublease income under these leases totaled $8.1 million and $3.9 million, respectively, in 1988. Future minimum lease payments and sublease income as of December 31, 1988 are sum marized as follows (in thousands): Minimum Sublease payments income 1989 $ 6,257 $ 3,418 1990 5,704 2,966 1991 5,046 2,755 1992 4,981 2,648 1995 2,637 2,085 Therea~er 3,247 6,968 $27,872 $20,840 24 Note 7: Transactions with Affiliates Thc Company, as lessor, has entered into noncancelable operating leases expiring at various dates througb 2040. Rental rew'nucs, excludiog sublease income, totaled $88.4 million in 19gg which included $10.3 million of contingent rental revenues Future minimum rental revenues as of December 31, 198,q are summarized as fol lows (in thousands): 1989 $ 5t),955 1990 41,721 1991 33,847 1992 29,705 1993 27,672 Thereafter 282,355 $466,255 The Company, as lessor, had property, including construction in progress, capital ized interest and capitalized property taxes, under operating leases or held for rent as of December 31, 1988 in the following amounts (in thousands): Buildings $305,609 Land and improvements 73,154 Less accumulated depreciation 378,763 (44,026) $334,737 During 1988 the Company acquired real estate from affiliates with an agreed upon value of $1.4 million. Additionally, the Company sold property to a 50% owned partnership as a result of tbis affiliate exercising an option to purchase this property for $7.7 million. The partnership subsequently sold tbe real estate to a third party during 1988. Rental revenues for 1988 included rents received from affiliates of $10.3 million. Operating and maintcnancc expense incurred during 1988 included $.5 million paid to affiliates. At December 31, 1988 accounts receivable included $2.2 million receivable from affiliates and accounts payable included $3.6 million duc affiliated companies. Tbe note receivable from an affiliate is a demand note which bears interest at 1% above the monthly average of the daily E flee five Federal Funds Rate During 1988, thc interest rate paid rangcd between 7.6% and 9.4% and interest income included $12.5 million received from thc affiliate. The note payable to an affiliate bears interest at I 1% and requires annual principal payments as follows (in thousands): 1989 $ 4,031 1990 4,474 1991 4,966 1992 5,513 1993 6,119 $25,103 25 Note 8: Pension and Employee Benefit Plans Interest expense paid to affiliates was $1hl million for 1988, of which $8.0 million was capitalized. The amount paid includes interest on a note that was fully retired during 1988 and interest on a note to an affiliated company that was sold during the year, After the company was sold and ceased to qualify as an affiliate, the note was transferred to mortgage loans payable and the related interest expense was record ed as a third party transaction. The Company is a participant in the Santa Fe Southern Pacific Retirement Plan (the Plan), a trusteed noncontributory plan, which fully complies with the Employee Retirement Income Security Act (ERISA). The Plan covers substantially all officers and salaried employees of thc Company. Benefits payable under thc Plan arc based on years of service and compensation during the sixty highest paid consecutive months of service during the ten years immediately preceding retirement SFSP's funding policy is to contribute annually at a rate that nmtches pension costs accrued, but not less than the ERISA minimum, and not more than the maximum amount deductible for income tax purposes. Total pension income, including charges related to other plans, for SFSP and its sub- sidiaries applicable m continuing operations of $.9 million was recognized by SFSP in 1988. Total pension expense for thc Company was $.4 million in 1988. Since the Company is included with certain otlxer SFSP affiliates, most Plan infor- mation for the Company is commingled with information relating to other SFSP affiliates. Therefore, the following table sets forth the components of SFSP's con- solidawd pension (income) expense applicable to the Plan for 1988 (in thousands): Service cost Interestcost Actualreturn on Plan assets Net amortization and det~rral $ 17,000 65,80fi 119,200 (212,800) $(10,800) 26 I/ Note 9: Commitments and Contingencies The date used to measure Plan assets and liabilities wus September 50, 1988 The Plan's funded status, amounts recognized in SFSP's consolidated balance sheet at December 31, 1988 and tnajor assumptions used to determine these amount~ arc shown below (dollars in tbousands): Plan assets at fair value, primarily invested in common stocks, U.S. Bonds and corporate bonds $503,900 Actuarial present value of projected benefit obligations: Accumulated benefit obligations: Vested (388,000) Nonvested (2,600) Provision for future salary increases (84,800) Excess of Plan assets over projected benefit obligations 28,500 Unrecognized net loss from past experience diftk:rent from that assumed and effects of changes in assumptions 4,000 Unrecognized net assets being recognized over 16 years (16,700) Prepaid pension cost 15,800 Major assumptions at year end Discount rate Rate of increase in compensation levels Expected long term rate of return on Plan assets 9.6% 65% 12.5% The Company also provides health care and life insurance benefits for certain retired employees. The costs of these benefits are recognized as expenses when claims arc paid; however, actuarially determined accruals are uscd for some life insurance benefits. Expenses recognized by thc Company for these plans in 1988 amounted to $.3 million The Company,; as a partner in certain joint ventures, has made certain financing guarantees which do not individually or collectively represent a material corn with certainty, considering tbe substantial legal defenses available, it is the ()pinion will have a material adverse eftkct on the consolidated financial position of tbe Company. 27 Repo~ oflndependentAccountan~ To the Board oJ Directors and Stockholders of Santa Fe Pactfic Realty Corporation In our opinion, the accompa~tl,ing consolidated balance sheet and the related consolidated str~tements oJ income, xtockholderg ' equity and oJ casb ~lows present fair05 in all material respects, the ftnancial position of Sartta Fe Pacific Realty Corporation and its subsidiaries (tbe Company) at December 31, 1988 attd the results bi' their operations and their cash flowsJor the year in co~jormicy u ith generalO, acceptedaccountingprinciples Thesefinancialstatementsarethe responsibility ~e/ the Company's manageme~t; our responsibility is to express a. opinion on tbeseJ~nancial statements based on our audit. We conducted our audit of these statements in accordance with general(F accepted auditing stan- dards whicto require that weplan and perJbrm the audit to ohtain reasonable assurance about whether tbe jTnancial stat~.ments are j)'ee of material misstate ment An audit i?lcludes examining, on a test basis, evidence supporting Ibc principles used and signi./icant estimates made hy ma~mgement, and evaluating the overall /Ynatwial statement presentation ~Xg, believe that our audit provides a reasonable basisJor the opinion ex~;ressed above San Francisco, California February l~ 1989 28 Corporate Office Santa Fe Pacific Realty Corporation 20l Mission Street San Francisco, California 94105 (415) 974-4500 Regional Offices 201 Mission Street San Francisco, California 94105 (415) 974-4585 3230 East Imperial Suite 100 Brea, California 92621 (714) 993-9000 12850 Spurling Drive Suite 100 Dallas, Texas 75230 (214) 980-7707 Project Offices 1262 Kettner Boulevard San Diego, California 92101 (619) 231-8963 5110 East Clinton Way Suite 117 Fresno, California 93727 (209) 251-0377 3200 East Camelback Road Suite 275 Phoenix, Arizona 85018 (602) 224-7550 250 S, Rock Boulevard Suite 100 Reno, Nevada 89502 (702) 329-9144 Corporate Officers O. G. Linde President and Chief Executive Officer Vernon B. Schwartz President and Chief Executive Officer (effective April 1, 1989) Kenneth L. Tibbetts Senior Vice President and Chief Financial Officer Vice Presidents: David G. Baldwin W. William Ehri Jeffrey K. Gwin James G. O'Gara Larry W, Telford General Counsel Susan E Saltzer Director, Government & Public Relations Design The GNU Group, Sausalito, CA Photography: Aerial Photo Bank, Lewis Bencze, Richard Burns, Ron Moore, Bob Morris, Larry Prosor, Michel Venera