ITEM 1. BUSINESS
Duke Realty Limited Partnership (the "Partnership") was formed on October 4, 1993, when Duke Realty Investments, Inc. (the "Predecessor Company" or the "General Partner") contributed all of its properties and related assets and liabilities along with the net proceeds of $309.3 million from the issuance of an additional 14,000,833 shares through an offering (the "1993 Offering") to the Partnership. Simultaneously, the Partnership completed the acquisition of Duke Associates, a full-service commercial real estate firm operating in the Midwest. The General Partner was formed in 1985 and qualifies as a real estate investment trust under provisions of the Internal Revenue Code. The General Partner is the sole general partner of the Partnership currently owning 88.9% of the partnership interest ("General Partner Units"). The remaining 11.1% of the Partnership is owned by limited partners ("Limited Partner Units" and, together with the General Partner Units, the "Common Units").
The Partnership's primary business segment is the ownership and rental of industrial, office and retail properties throughout the Midwest. As of December 31, 1996, it owned interests in a diversified portfolio of 266 rental properties comprising 31.2 million square feet (including 17 properties and one expansion comprising 3.8 million square feet under development). Substantially all of these properties are located in the Partnership's primary markets of Indianapolis, Indiana; Cincinnati, Cleveland, and Columbus, Ohio; Detroit, Michigan; St. Louis, Missouri and Nashville, Tennessee. In addition to its Rental Operations, the Partnership through its Service Operations provides, on a fee basis, leasing, management, construction, development and other real estate services for approximately 8.7 million square feet of properties owned by third parties. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8 "Financial Statements and Supplementary Data" for financial information of these industry segments. The Partnership conducts its Service Operations through Duke Realty Services Limited Partnership and Duke Construction Limited Partnership, in which the Partnership has an 89% profits interest (after certain preferred returns on partners' capital accounts) and effective control of their operations. All references to the "Partnership" in this Form 10-K Report include the Partnership and those entities owned or controlled by the Partnership, unless the context indicates otherwise. The Partnership has the largest commercial real estate operations in Indianapolis and Cincinnati and is one of the largest real estate companies in the Midwest.
The Partnership's headquarters and executive offices are located in Indianapolis, Indiana. In addition, the Partnership has seven regional offices located in Cincinnati, Ohio; Columbus, Ohio; Cleveland, Ohio; Decatur, Illinois; Detroit, Michigan; Nashville, Tennessee and St. Louis, Missouri. The Partnership had 480 employees as of December 31, 1996.
BUSINESS STRATEGY
The Partnership's business objective is to increase its Funds From Operations ("FFO") by (i) maintaining and increasing property occupancy and rental rates through the aggressive management of its portfolio of existing properties; (ii) expanding existing properties; (iii) developing and acquiring new properties; and (iv) providing a full line of real estate services to the Partnership's tenants and to third- parties. FFO is defined by the National Association of Real Estate Investment Trusts as net income or loss excluding gains or losses from debt restructuring and sales of property plus depreciation and amortization, and after adjustments for minority interest, unconsolidated partnerships and joint ventures (adjustments for minority interests, unconsolidated partnerships and joint ventures are calculated to reflect FFO on the same basis). While management believes that FFO is a relevant measure of the Partnership's operating performance because it is widely used by industry analysts to measure the operating performance of equity REITs and real estate partnerships, such amount does not represent cash flow from operations as defined by generally accepted accounting principles, should not be considered as an alternative to net income as an indicator of the Partnership's operating performance, and is not indicative of cash available to fund all cash flow needs. As a fully integrated commercial real estate firm, the Partnership believes that its in-house leasing, management, development and construction services and the Partnership's significant base of commercially zoned and unencumbered land in existing business parks should give the Partnership a competitive advantage in its future development activities.
The Partnership believes that the analysis of real estate opportunities and risks can be done most effectively at regional or local levels. As a result, the Partnership intends to continue its emphasis on increasing its market share and effective rents in its primary markets within the Midwest. The Partnership also expects to utilize its approximately 1,200 acres of unencumbered land and its many business relationships with more than 2,800 commercial tenants to expand its build-to-suit business (development projects substantially pre-leased to a single tenant) and to pursue other development and acquisition opportunities in its primary markets and elsewhere in the Midwest. The Partnership believes that this regional focus will allow it to assess market supply and demand for real estate more effectively as well as to capitalize on its strong relationships with its tenant base.
The Partnership's policy is to seek to develop and acquire Class A commercial properties located in markets with high growth potential for Fortune 500 companies and other quality regional and local firms. The Partnership's industrial and suburban office development focuses on business parks and mixed-use developments suitable for development of multiple projects on a single site where the Partnership can create and control the business environment. These business parks and mixed-use developments generally include restaurants and other amenities which the Partnership believes will create an atmosphere that is particularly efficient and desirable. The Partnership's retail development focuses on community, power and neighborhood centers in its existing markets. As a fully integrated real estate company, the Partnership is able to arrange for or provide to its industrial, office and retail tenants not only well located and well maintained facilities, but also additional services such as build-to-suit construction, tenant finish construction, expansion flexibility and advertising and marketing services.
Consistent with its business strategy of expanding in attractive Midwestern markets, the Partnership carefully analyzed the real estate investment potential of several major Midwestern metropolitan areas. Based on this analysis, management concluded that the St. Louis and Cleveland markets offer attractive real estate investment returns in the industrial and suburban office markets based on the following factors: (i) fragmented competition; (ii) strong real estate fundamentals; and (iii) favorable economic conditions.
In 1995, the Partnership established a regional office in St. Louis and acquired 463,000 square feet of suburban office properties and 153 acres of land for the future development of industrial properties. In February 1996, the Partnership acquired a 782,000 gross square foot suburban office portfolio and the operating personnel of an independent real estate developer and operator in Cleveland. The Partnership intends to aggressively pursue the development and acquisition of additional rental properties in both the St. Louis and Cleveland markets.
All of the Partnership's properties are located in areas that include competitive properties. Such properties are generally owned by institutional investors, other REITs or local real estate operators; however, no single competitor or small group of competitors is dominant in the Partnership's markets. The supply and demand of similar available rental properties may affect the rental rates the Partnership will receive on its properties. Based upon the current occupancy rates in the Partnership and competitive properties, the Partnership believes there will not be significant competitive pressure to lower rental rates in the near future.
FINANCING STRATEGY
The Partnership seeks to maintain a well-balanced, conservative and flexible capital structure by: (i) currently targeting a ratio of long- term debt to total market capitalization in the range of 25% to 40%; (ii) extending and sequencing the maturity dates of its debt; (iii) borrowing primarily at fixed rates; (iv) generally pursuing current and future long-term debt financings and refinancings on an unsecured basis; and (v) maintaining conservative debt service and fixed charge coverage ratios. Management believes that these strategies have enabled and should continue to enable the General Partner and the Partnership to access the debt and equity capital markets for their long-term requirements such as debt refinancings and financing development and acquisitions of additional rental properties. The General Partner and the Partnership have raised approximately $626 million through public debt and equity offerings during the three years ended December 31, 1996. Based on these offerings, the General Partner and the Partnership have demonstrated their abilities to access the public markets as a source of capital to fund future growth. In addition, as discussed under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Partnership has a $150 million line of credit available for short-term fundings of development and acquisition of additional rental properties. The Partnership's debt to total market capitalization ratio (total market capitalization is defined as the total market value of all Common and Preferred Units outstanding plus outstanding indebtedness) at March 7, 1997 was 25.3%. The market value of the Common and Preferred Units is assumed to be equal to the General Partner's market value of Common and Preferred Shares. The Partnership's ratio of earnings to debt service and ratio of earnings to fixed charges for the year ended December 31, 1996 were 2.62x and 2.20x, respectively. In computing the ratio of earnings to debt service, earnings have been calculated by adding debt service to income before gains or losses on property sales. Debt service consists of interest expense and recurring principal amortization (excluding maturities) and excludes amortization of debt issuance costs. In computing the
ratio of earnings to fixed charges, earnings have been calculated by adding fixed charges, excluding capitalized interest, to income before gains or losses on property sales. Fixed charges consist of interest costs, whether expensed or capitalized, the interest component of rental expense, amortization of debt issuance costs and preferred stock dividend requirements. Management believes these measures to be consistent with its financing strategy.
OTHER
The Partnership's operations are not dependent on a single or few customers as no single customer accounts for more than 2% of the Partnership's total revenue. The Partnership's operations are not subject to any significant seasonal fluctuations. The Partnership believes it is in compliance with environmental regulations and does not anticipate material effects of continued compliance.
For additional information regarding the Partnership's investments and operations, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 8, "Financial Statements and Supplementary Data." For additional information about the Partnership's business segments see Item 8, "Financial Statements and Supplementary Data."
ITEM 2.

ITEM 2. PROPERTIES
As of December 31, 1996, the Partnership owns an interest in a diversified portfolio of 266 commercial properties encompassing approximately 31.2 million net rentable square feet (including 17 properties and one expansion comprising 3.8 million square feet under development) located primarily in five states and approximately 1,200 acres of land for future development. The properties are described on the following pages.
[CAPTION]
[CAPTION]
[CAPTION]
[1] These buildings are owned by a limited liability company in which the Partnership is a 50.1% member. The Partnership shares in the profit or loss from such buildings in accordance with the Partnership's ownership interest. This limited liability company owns a 50% general partnership interest in Park Fletcher Buildings 27 and 28 and shares in the profit or loss from these buildings in accordance with the limited liability company's interest.
[2] These buildings are owned by a partnership in which the Partnership is a partner. The Partnership owns a 10% capital interest in the partnership and receives a 50% interest in the residual cash flow after payment of a 9% preferred return to the other partner on its capital interest.
[3] This building is owned in partnership with a tenant of the building. The Partnership owns a 50% general partnership interest in the partnership. The Partnership shares in the profit or loss from the building in accordance with such ownership interest.
[4] This building was constructed in three phases; 1962, 1971 and 1974.
[5] This building was contributed to the limited liability company referenced in footnote [1] in 1996.
[6] This building is owned by a partnership in which the Partnership owns a 10% limited partnership interest. The Partnership shares in the cash flow from the building in accordance with such ownership interest.
[7] This building is owned by a limited partnership in which the Partnership has a 1% general partnership interest and a 39% limited partnership interest. The Partnership shares in the profit or loss from such building in accordance with the Partnership's ownership interest.
[8] This building was renovated in 1996.
[9] This building is owned by a partnership in which the Partnership owns a 33.33% limited partnership interest. The Partnership shares in the profit or loss from the building in accordance with such ownership interest.
[10] The Partnership owns a 66.67% general partnership interest in the partnership owning this building. The Partnership shares in the profit or loss of this building in accordance with such ownership interest.
[11] The Partnership owns the building and has a leasehold interest in the land underlying this building with a lease term expiring October 31, 2067.
[12] The Partnership has a leasehold interest in this building with a lease term expiring May 9, 2006.
[13] The Partnership owns these buildings and has a leasehold interest in the land underlying these buildings, with the lease term expiring November 16, 2043.
[14] The Partnership owns this building and has a leasehold interest in the land underlying this building with a lease term expiring August 2045, with two 20-year options to renew.
[15] The Partnership has a leasehold interest in the building and the underlying land with a lease term expiring March 31, 2020. The Partnership has an option to purchase the fee interest in the property throughout the term of the lease.
[16] This building was renovated in 1986.
[17] These buildings are owned by a partnership in which the Partnership has a 50% general partnership interest. The Partnership shares in the profit or loss from such buildings in accordance with such ownership interest.
[18] This building was renovated in 1985.
[19] Tri-County Office Park consists of four buildings. One was built in 1971, two were built in 1973, and one was built in 1982.
[20] The Partnership owns this building and has a leasehold interest in the land underlying this building with a lease term expiring June 2095.
[21] The Partnership owns these buildings and has a leasehold interest in the land underlying these buildings with a lease term expiring May 31, 2057.
[22] These buildings are owned through a limited liability company in which the partnership is a 25% member. The limited liability company will own a 57.5% interest in the Fountain Place retail project.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Partnership or any subsidiary was a party or to which any of their property is subject other than routine litigation incidental to the Partnership's business. In the opinion of management, such litigation is not material to the Partnership's business operations or financial condition.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1996.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS
There is no established public trading market for the Common Units. The following table sets forth the cash distributions paid during each quarter. Comparable cash distributions are expected in the future. As of March 1, 1997, there were 159 record holders of Common Units.
On January 30, 1997, the Partnership declared a quarterly cash distribution of $0.51 per Common Unit payable on February 28, 1997 to Common Unitholders of record on February 14, 1997.
ITEM 6.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following sets forth selected consolidated financial and operating information on a historical basis for the Partnership for each of the years in the five-year period ended December 31, 1996. The following information should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the Partnership and Item 8, the "Financial Statements and Supplementary Data" included in this Form 10-K. The historical operating data for the years ended December 31, 1996, 1995, 1994 and 1993 has been derived from the historical financial statements of the Partnership and the Predecessor Company. The historical operating data for the year ended December 31, 1992 has been derived from the historical financial statements of the Predecessor Company.
(in thousands, except per share amounts)
(1)Information for 1993 and 1992 has been adjusted for the 1 for 4.2 reverse stock split of the Predecessor Company effected prior to the completion of the 1993 reorganization.
(2)Funds From Operations, is defined by the National Association of Real Estate Investment Trusts as net income or loss excluding gains or losses from debt restructuring and sales of property plus depreciation and amortization, and after adjustments for minority interest, unconsolidated partnerships and joint ventures (adjustments for minority interests, unconsolidated partnerships and joint ventures are calculated to reflect Funds From Operations on the same basis). Funds From Operations does not represent cash flow from operations as defined by generally accepted accounting principles, should not be considered as an alternative to net income as an indicator of the Partnership's operating performance, and is not indicative of cash available to fund all cash flow needs. In March 1995, NAREIT issued a clarification of its definition of FFO effective for years beginning after December 31, 1995. The clarification provides that amortization of deferred financing costs and depreciation of non-rental real estate assets are no longer to be added back to net income in arriving at FFO. The Partnership adopted these changes effective January 1, 1996, and the calculations of FFO for the years ended December 31, 1995, 1994, 1993 and 1992 have been revised accordingly.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW -------- The Partnership's operating results depend primarily upon income from the rental operations of its industrial, office and retail properties located in its primary - 14 -
markets. This income from rental operations is substantially influenced by the supply and demand for the Partnership's rental space in its primary markets. In addition, the Partnership's continued growth is dependent upon its ability to maintain occupancy rates and increase rental rates on its in-service portfolio and to continue development and acquisition of additional rental properties.
The Partnership's primary markets in the Midwest have continued to offer strong and stable local economies and have provided attractive new development opportunities because of their central location, established manufacturing base, skilled work force and moderate labor costs. Consequently, the Partnership's occupancy rate of its in- service portfolio has exceeded 92.0% the last two years and was 95.0% at December 31, 1996. The Partnership expects to maintain its overall occupancy at comparable levels and also expects to increase rental rates as leases are renewed or new leases are executed. This stable occupancy as well as increasing rental rates should improve the Partnership's results of operations from its in-service properties. The Partnership's strategy for continued growth also includes developing and acquiring additional rental properties in its primary markets and expanding into other attractive Midwestern markets.
A new statistic that the Partnership started tracking in 1996 is Same Property Performance which compares those properties that were fully in-service for all of 1995 and 1996. Because of the rapid growth of the Partnership, this population of properties only represented about 42.2% of the in-service portfolio at year end. As a result of the loss of a 90,000 square foot downtown Cincinnati office tenant in 1996, along with the effects of a property tax reassessment in another downtown Cincinnati property, Same Property FFO increased only 1.1%. Without the decrease in the downtown Cincinnati portfolio, Same Property FFO increase for this portfolio would have been 2.7%.
The following table sets forth information regarding the Partnership's in-service portfolio of rental properties as of December 31, 1996 and 1995 (square feet in thousands):
Management expects occupancy of the in-service property portfolio to remain stable because (i) only 10.7% and 12.3% of the Partnership's occupied square footage is subject to leases expiring in 1997 and 1998, respectively, and (ii) the Partnership's renewal percentage averaged 80%, 65% and 73% in 1996, 1995 and 1994, respectively. - 15 -
The following table reflects the Partnership's in-service lease expiration schedule as of December 31, 1996, by product type indicating square footage and annualized net effective rents under expiring leases (in thousands, except per square foot amounts):
This stable occupancy, along with increasing rental rates in each of the Partnership's markets, will allow the in-service portfolio to continue to provide a comparable or increasing level of earnings from rental operations. The Partnership also expects to realize growth in earnings from rental operations through (i) the development and acquisition of additional rental properties in its primary markets; (ii) the expansion into other attractive Midwestern markets; and (iii) the completion of the 3.8 million square feet of properties under development at December 31, 1996 over the next five quarters. The 3.8 million square feet of properties under development should provide future earnings from rental operations growth for the Partnership as they are placed in service as follows (in thousands, except percentages):
RESULTS OF OPERATIONS ---------------------
A summary of the Partnership's operating results and property statistics for each of the years in the three-year period ended December 31, 1996 is as follows (in thousands, except number of properties and per Common Unit amounts):
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995 -------------------------------------------------------------------------- Rental Operations ----------------- The Partnership increased its in-service portfolio of rental properties from 201 properties comprising 20.1 million square feet at December 31, 1995 to 249 properties comprising 27.4 million square feet at December 31, 1996 through the acquisition of 34 properties totaling 3.4 million square feet and the placement in service of 16 properties and four building expansions totaling 4.1 million square feet developed by the Partnership.
The Partnership also disposed of two properties totaling 182,000 square feet. These 48 net additional rental properties primarily account for the $48.5 million increase in revenues from Rental Operations from 1995 to 1996. The increase from 1995 to 1996 in rental expenses, real estate taxes and depreciation and amortization expense is also a result of the additional 48 in-service rental properties.
Interest expense increased by approximately $9.8 million. This increase was primarily because of interest expense on the $150.0 million of unsecured notes which the Partnership issued in September 1995. These notes bear interest at an effective rate of 7.46% and were outstanding a full year in 1996 as compared to approximately three months in 1995. The Partnership also issued $90.0 million of unsecured debt under its medium-term note program in 1996 which bears interest at a weighted average rate of 7.20%. The proceeds from these debt issuances were used to fund development and acquisition of additional rental properties during 1995 and 1996.
As a result of the above mentioned items, earnings from rental operations increased $17.0 million from $37.2 million for the year ended December 31, 1995 to $54.2 million for the year ended December 31, 1996.
Service Operations ------------------ Service Operations revenues increased from $17.8 million to $19.9 million for the year ended December 31, 1996 as compared to the year ended December 31, 1995 primarily as a result of increases in construction management fee revenue because of an increase in construction volume. Service Operations
expenses increased from $11.2 million to $13.5 million for the year ended December 31, 1996 as compared to the year ended December 31, 1995 primarily as a result of an increase in operating expenses resulting from the overall growth of the Partnership and the additional regional offices opened in 1995 and 1996.
As a result of the above-mentioned items, earnings from Service Operations decreased from $6.6 million to $6.4 million for the years ended December 31, 1995 and 1996, respectively.
General and Administrative Expense --------------------------------- General and administrative expense increased from $3.2 million for the year ended December 31, 1995 to $4.1 million for the year ended December 31, 1996 primarily as a result of increased state and local taxes due to the growth in revenues and net income of the Partnership. Property advertising expense as well as other administrative expenses also increased as a result of the expanding size of the Partnership.
Other Income (Expense) --------------------- Interest income decreased from $1.7 million for the year ended December 31, 1995 to $1.2 million for the year ended December 31, 1996 as a result of the temporary short-term investment of a greater amount of excess proceeds from the 1995 debt and equity offerings compared to excess proceeds invested from the 1996 debt and equity offerings.
During the year ended December 31, 1996, the Partnership sold a 251,000 square foot corporate headquarters facility to John Alden Life Insurance Company in Miami, Florida pursuant to a purchase option contained in John Alden's original agreement to lease the building. The project was sold for approximately $32.9 million and the Partnership recognized a gain of approximately $1.6 million on the sale. The Partnership also realized gains totaling $2.9 million in 1996 related to the sale of a retail center and several parcels of land.
Net Income Available for Common Units ------------------------------------ Net income available for common units for the year ended December 31, 1996 was $58.7 million compared to net income available for common units of $41.6 million for the year ended December 31, 1995. This increase results primarily from the changes in the operating results of rental and service operations explained above.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994 -------------------------------------------------------------------------- Rental Operations ----------------- The Partnership increased its in-service portfolio of rental properties from 127 properties comprising 12.9 million square feet at December 31, 1994 to 201 properties comprising 20.1 million square feet at December 31, 1995 through the acquisition of 60 properties totaling 4.6 million square feet and the placement in service of 17 properties and two building expansions totaling 3.2 million square feet developed by the Partnership. The Partnership also disposed of three properties totaling 570,000 square feet. These 74 net additional rental properties primarily account for the $24.3 million increase in revenues from Rental Operations from 1994 to 1995.
The increase from 1994 to 1995 in rental expenses, real estate taxes and depreciation and amortization expense is also a result of the additional 74 in-service rental properties.
Interest expense increased by approximately $2.6 million. This increase was primarily because of interest expense on the $150.0 million of unsecured notes which the Partnership issued in September 1995. These notes bear interest at an effective rate of 7.46%. The proceeds from these notes were used to (i) retire the outstanding balance of $35.0 million on the Partnership's unsecured line of credit; (ii) retire $39.5 million of mortgage debt which had a weighted average interest rate of 6.08% and was scheduled to reset at a market interest rate in the fourth quarter of 1995; and (iii) fund development and acquisition of additional rental properties during the fourth quarter of 1995.
As a result of the above mentioned items, earnings from rental operations increased $10.3 million from $26.9 million for the year ended December 31, 1994 to $37.2 million for the year ended December 31, 1995.
Service Operations ----------------- Earnings from Service Operations decreased by approximately $500,000 in 1995 as compared to 1994. This decrease results primarily from a decrease in construction fees even though total construction volume remained consistent. This decrease in fees resulted from certain contracts with above-market fees in 1994 which were not obtained in 1995. Property management, maintenance and leasing fees remained consistent from 1994 to 1995. Payroll expense decreased from 1994 to 1995 as a result of the allocation of a greater portion of these costs to the Partnership's Rental Operations segment. Other operating expenses did not change materially.
Other Income (Expense) --------------------- Interest income increased from $1.1 million for the year ended December 31, 1994 to $1.7 million for the year ended December 31, 1995 as a result of the temporary short-term investment of excess proceeds from the 1995 debt and equity offerings.
As part of its October 1993 acquisition of Duke Associates, the Partnership acquired an option to purchase an interest in an entity which provided telecommunication services to tenants in properties owned and managed by the Partnership. At the time the option was acquired, the option was not considered to have value because of recurring net operating losses by such entity. Subsequent to the acquisition of the option, the entity made changes in its operations, principally entering into new contracts for the purchase of telecommunication services and the provision of billing services, which significantly improved its operating results. As a result of these improvements in operating results, the entity entered into an agreement to sell its telecommunications business to an unaffiliated third party at an amount significantly in excess of the Partnership's option price. The net proceeds from the sale were then loaned to a subsidiary of the Partnership with a mortgage on certain property. The Partnership subsequently exercised its option to acquire the interest in this entity and recognized a gain of approximately $2.0 million based on the difference between its option price and the net proceeds received from the sale to the unaffiliated third-party. Such gain is included in earnings from property sales in 1994.
Net Income Available for Common Units ------------------------------------- Net income available for common units for the year ended December 31, 1995 was $41.6 million compared to net income available for common units of $33.0 million for the year ended December 31, 1994. This increase results primarily from the changes in the operating results of rental and service operations explained above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaling $95.5 million, $78.6 million and $51.9 million for the years ended December 31, 1996, 1995 and 1994, respectively, represents the primary source of liquidity to fund distributions to unitholders and minority interests and to fund recurring costs associated with the renovation and re- letting of the Partnership's properties. The primary reason for the increases in net cash provided by operating activities is, as discussed above under "Results of Operations," the increase in net income each year resulting from the expansion of the in-service portfolio through development and acquisitions of additional rental properties.
Net cash used by investing activities totaling $277.0 million, $289.6 million and $116.2 million for the years ended December 31, 1996, 1995 and 1994, respectively, represents the investment of funds by the Partnership to expand its portfolio of rental properties through the development and acquisition of additional rental properties. In 1996, $328.4 million was invested in the development and acquisition of additional rental properties and land held for development and $9.9 million was used for recurring building and tenant improvements and leasing costs. Included in the $328.4 million of development and acquisition of rental properties and land held for development for the year ended December 31, 1996 is $44.5 million related to the acquisition of eight suburban office buildings totaling 782,000 gross square feet in Cleveland, Ohio. The purchase price of these eight buildings was approximately $76.0 million which included the assumption of $23.1 million of mortgage debt and the issuance of $8.4 million of Common Units. Also in 1996, the Partnership sold two properties and several parcels of land and received $50.8 million of net sales proceeds. These proceeds were used to fund a portion of the 1996 development and acquisition activity. In 1995, $250.3 million was invested in the development and acquisition of additional rental properties and land held for development and $8.6 million was used for recurring building and tenant improvements and leasing costs. In 1994, $106.9 million was invested in the development and acquisition of additional rental properties and land held for development and $5.9 million was used for recurring building and tenant improvements and leasing costs.
Net cash provided by financing activities totaling $181.2 million, $176.2 million and $94.7 million for the years ended December 31, 1996, 1995 and 1994, respectively, is comprised of debt and equity issuances, net of distributions to unitholders and minority interests and repayments of outstanding indebtedness. In March 1996, the Partnership received $125.3 million of net proceeds from the General Partner's common stock offering which was used to pay down amounts outstanding on the unsecured line of credit. During 1996, the Partnership also received $5.5 million of net proceeds from the issuance of common stock under the General Partner's Direct Stock Purchase and Dividend Reinvestment Plan. The Partnership used these net proceeds to fund the development and acquisition of additional rental properties. In August 1996, the Partnership received $72.3 million of net proceeds from the General Partner's preferred stock offering. In July 1996, the Partnership issued $40.0 million of unsecured debt under its medium-term note program. These notes mature in July 2000 and bear interest at 7.28%. In November 1996, the Partnership issued $50.0 million of unsecured debt under its medium- term note program. These notes mature in November 2004 and bear interest at 7.14%. The Partnership used the net proceeds from the preferred offering and the two medium-term note offerings to pay off approximately $82.5 million of existing secured debt which was scheduled to mature in the fourth quarter of 1996 or early 1997 and the remainder to fund the development and acquisition of additional rental properties. In 1995, the Partnership received $96.3 million of net proceeds from the General Partner's common stock offering and used the proceeds to fund development and acquisition of additional rental properties. In 1995, the Partnership also received $150.0 million from an unsecured debt offering and used the proceeds to retire outstanding mortgage indebtedness and to fund acquisition and development of additional rental properties. In 1994, the Partnership received $92.1 million of net proceeds from the General Partner's common stock offering and
$60.0 million from a seven-year mortgage loan. Of the $152.1 million of these proceeds, the Partnership used $16.1 million to retire outstanding mortgage indebtedness, and the remainder primarily to fund development and acquisition of additional rental properties.
The recurring capital needs of the Partnership are funded primarily through the undistributed net cash provided by operating activities. An analysis of the Partnership's recurring capital expenditures is as follows (in thousands):
The Partnership has a $150.0 million unsecured line of credit available to fund the development and acquisition of additional rental properties and to provide working capital as needed. This line of credit matures in April 1998 and bears interest at the 30-day London Interbank Offered Rate ("LIBOR") plus 1.25%. Borrowings of $24.0 million under this line of credit as of December 31, 1996 bear interest at an effective rate of 6.9375%. The Partnership also has a demand $10.0 million secured line of credit which is available to provide working capital. This facility bears interest payable monthly at the 30-day LIBOR rate plus .75%. Borrowings of $10.0 million are outstanding on this line of credit at December 31, 1996 and bear interest at an effective rate of 6.23%. The current 30-day LIBOR rate as of March 3, 1997 is 5.4375%.
The General Partner and the Partnership currently have on file two Form S-3 Registration Statements with the Securities and Exchange Commission (the "Shelf Registrations") which have remaining availability as of December 31, 1996 of $470.0 million to issue additional common stock, preferred stock or unsecured debt securities. The General Partner and the Partnership intend to issue additional securities under such Shelf Registrations to fund the development and acquisition of additional rental properties.
The total debt outstanding at December 31, 1996 consists of notes totaling $525.8 million with a weighted average interest rate of 7.55% maturing at various dates through 2017. The Partnership has $264.0 million of unsecured debt and $261.8 million of secured debt outstanding at December 31, 1996. Scheduled principal amortization of such debt totaled $2.1 million for the year ended December 31, 1996. A summary of the scheduled future amortization and maturities of the Partnership's indebtedness is as follows (in thousands):
The $10.0 million of maturities in 1997 represents the outstanding balance as of December 31, 1996 on the Partnership's demand secured line of credit.
The Partnership intends to pay regular quarterly distributions from net cash provided by operating activities. A quarterly distribution of $.51 per common unit was declared on January 30, 1997 which represents an annualized distribution of $2.04 per common unit.
FUNDS FROM OPERATIONS
Management believes that Funds From Operations ("FFO"), which is defined by the National Association of Real Estate Investment Trusts as net income or loss excluding gains or losses from debt restructuring and sales of property plus depreciation and amortization, and after adjustments for minority interest, unconsolidated partnerships and joint ventures (adjustments for minority interest, unconsolidated partnerships and joint ventures are calculated to reflect FFO on the same basis), is the industry standard for reporting the operations of real estate investment trusts.
The following reflects the calculation of the Partnership's FFO for the years ended December 31 (in thousands):
The increase in FFO for the three-year period results primarily from the increased in-service rental property portfolio as discussed above under "Results of Operations."
In March 1995, NAREIT issued a clarification of its definition of FFO effective for years beginning after December 31, 1995. The clarification provides that amortization of deferred financing costs and depreciation of non-rental real estate assets are no longer to be added back to net income in arriving at FFO. The Partnership adopted these changes effective January 1, 1996, and the calculations of FFO for the years ended December 31, 1995 and 1994 have been revised accordingly.
While management believes that FFO is the most relevant and widely used measure of the Partnership's operating performance, such amount does not represent cash flow from operations as defined by generally accepted accounting principles, should not be considered as an alternative to net income as an indicator of the Partnership's operating performance, and is not indicative of cash available to fund all cash flow needs.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are included under Item 14 of this Report.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership does not have any directors or officers. The information required by this Item for Directors and certain Executive Officers of the General Partner will be contained in a definitive proxy statement of Duke Realty Investments, Inc. which the Registrant anticipates will be filed no later than March 24, 1997, which proxy statement is incorporated herein by reference, and thus this part has been omitted in accordance with General Instruction G(3) to Form 10-K.
The following information is provided regarding the executive officers of the General Partner who do not serve as Directors of the General Partner:
GARY A. BURK Age 45, President of Construction Services and Executive Vice President of Duke Services, Inc. - Mr. Burk joined the Partnership in 1979, and has been responsible for the Partnership's construction management operations since 1986.
WILLIAM J. DEBOER Age 41, Vice President of Construction Services - Mr. DeBoer joined the Partnership in 1983. Prior to that time, Mr. DeBoer was with Tousley Bixler Construction, an Indianapolis general contractor.
ROSS C. FARRO Age 53, Vice President, Cleveland Group - Mr. Farro joined the Partnership in January 1996 and is responsible for the Cleveland activities of the Partnership. Prior to joining the Partnership, Mr. Farro was an independent real estate developer and operator.
ROBERT D. FESSLER Age 39, Vice President, Ohio Industrial Group - Mr. Fessler joined the Partnership in 1987 and is responsible for the Cincinnati industrial activities of the Partnership. Prior to joining the Partnership, Mr. Fessler was a leasing representative with Trammel Crow.
JOHN R. GASKIN Age 35, Vice President, General Counsel and Secretary - Mr. Gaskin joined the Partnership in 1990. Prior to joining the Partnership, Mr. Gaskin worked as an associate attorney in a mid-size Indianapolis, Indiana law firm.
JAMES W. GRAY Age 36, Vice President, Cincinnati Office Group - Mr. Gray joined the Partnership in 1989 and has been responsible for the Partnership's Cincinnati office activities since 1994. Prior to that time, Mr. Gray was Vice President and General Counsel of Brian Properties, Inc., a Chicago area commercial real estate developer.
RICHARD W. HORN Age 39, Vice President of Acquisitions - Mr. Horn joined the Partnership in 1984. Mr. Horn is responsible for the acquisition activities of the Partnership and oversees the Nashville and Michigan operations of the Partnership.
DONALD J. HUNTER Age 37, Vice President, Columbus Group - Mr. Hunter joined the Partnership in 1989 and is responsible for the Columbus activities of the Partnership. Prior to joining the Partnership, Mr. Hunter was with Cushman and Wakefield, a national real estate firm.
STEVEN R. KENNEDY Age 40, Vice President of Construction Services - Mr. Kennedy joined the Partnership in 1986. Prior to that time, Mr. Kennedy was a Project Manager for Charles Pankow Builders, Inc.
WAYNE H. LINGAFELTER Age 37, Vice President, Indiana Office Group - Mr. Lingafelter joined the Partnership in 1987 and is responsible for the Indiana office activities of the Partnership. Prior to that time, Mr. Lingafelter was with the management consulting firm of DRI, Inc.
WILLIAM E. LINVILLE, III Age 42, Vice President, Industrial Group - Mr. Linville joined the Partnership in 1987 and is responsible for all industrial activities of the Partnership. Prior to that time, Mr. Linville was Vice President and Regional Manager of the CB Commercial Brokerage Office in Indianapolis.
DAVID R. MENNEL Age 42, General Manager of Services Operations and President and Treasurer of Duke Services, Inc.- Mr. Mennel was with the accounting firm of Peat, Marwick, Mitchell & Co. and the property development firm of Melvin Simon & Associates before joining the Partnership in 1978.
MICHAEL L. MYRVOLD Age 41, Vice President, Retail Group - Mr. Myrvold joined the Partnership in 1995 and is responsible for retail activities of the Partnership. Prior to joining the Partnership, Mr. Myrvold was Vice President of Real Estate of the Melville Realty Co., Inc.
JOHN M. NEMECEK Age 41, President of Asset / Property Management - Mr. Nemecek joined the Partnership in 1994. Prior to joining the Partnership, Mr. Nemecek was the Senior Vice President/Florida Division of Compass Real Estate.
DENNIS D. OKLAK Age 43, Vice President and Treasurer - Mr. Oklak joined the Partnership in 1986 and has served as Tax Manager and Controller of Development. Prior to joining the Partnership, Mr. Oklak was a Senior Manager with the public accounting firm of Deloitte Haskins + Sells.
JEFFREY G. TULLOCH Age 52, Vice President and General Manager, Cincinnati Group - Mr. Tulloch joined the Partnership in 1995 and is responsible for all Cincinnati activities of the Partnership. Mr. Tulloch was Senior Vice President of the Galbreath Company before joining the Partnership.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the officers and directors of the General Partner, and persons who own more than 10% of the Limited Partner Units, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Such officers, directors and greater than 10% Limited Partner Unitholders are required by Securities and Exchange Commission regulations to furnish the Partnership with copies of all Section 16(a) forms they file. To date, there have been no delinquencies in filing such reports.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 with respect to officers and directors of the General Partner will be contained in a definitive proxy statement for Duke Realty Investments, Inc. which the Registrant anticipates will be filed no later than March 24, 1997, which proxy statement is incorporated herein by reference, and thus this part has been omitted in accordance with General Instruction G(3) to Form 10-K.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Partnership had 3,309,758 Limited Partner Units which were outstanding as of the close of business on March 7, 1997.
The following table shows, as of March 7, 1997, the number and percentage of Limited Partner Units held by each person known to the Company who beneficially owned more than five percent of outstanding Limited Partner Units. Except as otherwise noted, all Limited Partner Units are held with sole power to vote and sole power of disposition.
(1) Includes 1,061,058 Limited Partner Units owned by DMI Partnership, a partnership in which each of these individuals owns a 20.71% beneficial interest.
(2) Includes 1,061,058 Limited Partner Units owned by DMI Partnership, a partnership in which Mr. Mennel owns a 7.50% beneficial interest.
(3) Includes 1,061,058 Limited Partner Units owned by DMI Partnership, a partnership in which Mr. Burk owns a 7.51% beneficial interest.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 with respect to officers and directors of the General Partner will be contained in a definitive proxy statement for Duke Realty Investments, Inc. which the Registrant anticipates will be filed no later than March 24, 1997, which proxy statement is incorporated herein by reference, and thus this part has been omitted in accordance with General Instruction G(3) to Form 10-K.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT.
1. CONSOLIDATED FINANCIAL STATEMENTS:
Index ----- Independent Auditors' Report Consolidated Balance Sheets, December 31, 1996 and 1995 Consolidated Statements of Operations, Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows, Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Partners' Equity, Years Ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Index ----- Schedule III - Real Estate and Accumulated Depreciation
EDGAR Financial Data Schedule -----------------------------
Exhibit 27 - Financial Data Schedule for year ended December 31, 1996 (EDGAR filing only)
Other schedules are omitted for the reasons that they are not required, are not applicable, or the required information is set forth in the financial statements or notes thereto.
INDEPENDENT AUDITORS' REPORT
To the Partners of Duke Realty Limited Partnership:
We have audited the consolidated financial statements of Duke Realty Limited Partnership and Subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and the financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on the consolidated financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Duke Realty Limited Partnership and Subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP Indianapolis, Indiana January 29, 1997
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
See accompanying Notes to Consolidated Financial Statements.
- 28 -
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
See accompanying Notes to Consolidated Financial Statements.
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See accompanying Notes to Consolidated Financial Statements.
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (IN THOUSANDS, EXCEPT FOR PER UNIT AMOUNTS)
See accompanying Notes to Consolidated Financial Statements.
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) THE PARTNERSHIP --------------- Duke Realty Limited Partnership (the "Partnership") was formed on October 4, 1993, when Duke Realty Investments, Inc. (the "Predecessor Company" or the "General Partner") contributed all of its properties and related assets and liabilities along with the net proceeds of $309.2 million from the issuance of an additional 14,000,833 shares through an offering (the "1993 Offering") to the Partnership. Simultaneously, the Partnership completed the acquisition of Duke Associates, a full-service commercial real estate firm operating in the Midwest. The General Partner was formed in 1985 and qualifies as a real estate investment trust under provisions of the Internal Revenue Code. In connection with the 1993 Offering, the formation of the Partnership and the acquisition of Duke Associates, the General Partner effected a 1 for 4.2 reverse stock split of its existing common shares. The General Partner is the sole general partner of the Partnership and received 16,046,144 units of partnership interest ("General Partner Units") in exchange for its original contribution which represented a 78.36% interest in the Partnership. As part of the acquisition, Duke Associates received 4,432,109 units of limited partnership interest ("Limited Partner Units") (together with the General Partner Units, the ("Common Units")) which represented a 21.64% interest in the Partnership. The Limited Partner Units are exchangeable for shares of the General Partner's common stock on a one-for-one basis subject generally to a one-year holding period.
The Partnership owns and operates a portfolio of industrial, office and retail properties in the Midwest and provides real estate services to third-party property owners. The Partnership's primary markets are Indianapolis, Indiana; Cincinnati, Cleveland and Columbus, Ohio; St. Louis, Missouri and Nashville, Tennessee.
The service operations are conducted through Duke Realty Services Limited Partnership and Duke Construction Limited Partnership, in which the Partnership has an 89% profits interest (after certain preferred returns on partners' capital accounts) and effective control of their operations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ PRINCIPLES OF CONSOLIDATION --------------------------- The equity interests in these majority-owned or controlled subsidiaries not owned by the Partnership are reflected as minority interests in the consolidated financial statements. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
RECLASSIFICATIONS ----------------- Certain 1995 and 1994 balances have been reclassified to conform with the 1996 presentation.
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SEGMENT OPERATIONS ------------------ The Partnership is engaged in two business segments, the ownership and rental of real estate investments ("Rental Operations") and the providing of various real estate services such as property management, maintenance, leasing and construction management to third-party property owners ("Service Operations"). There are no material intersegment sales or transfers between Rental Operations and Service Operations. The identifiable assets of the Service Operations consisting of cash, accounts receivable, construction receivables and other assets as of December 31, 1996 and 1995 were $20.7 million and $15.8 million, respectively. Capital expenditures related to Service Operations were $2.0 million, $1.5 million and $761,000 for the years ended December 31, 1996, 1995, and 1994, respectively. All remaining assets, capital expenditures, depreciation, amortization and investments in and advances to unconsolidated companies relate to Rental Operations. The operations of each segment are reflected separately on the Statement of Operations.
REAL ESTATE INVESTMENTS ----------------------- Real estate investments are stated at the lower of cost less accumulated depreciation or fair value if impairment is identified. Buildings and land improvements are depreciated on the straight-line method over 40 years, and tenant improvement costs are depreciated on the straight-line method over the term of the related lease.
All direct and indirect costs, including interest and real estate taxes clearly associated with the acquisition, development, construction or expansion of real estate investments, are capitalized as a cost of the property and depreciated over the estimated useful life of the related asset.
The Partnership evaluates its real estate investments upon occurrence of significant changes in the operations, but not less than annually, to assess whether any impairment indications are present, including recurring operating losses and significant adverse changes in legal factors or business climate that affect the recovery of the recorded value. If any real estate investment is considered impaired, a loss is provided to reduce the carrying value of the property to its estimated fair value.
DEFERRED COSTS -------------- Costs incurred in connection with financing or leasing are amortized on the straight-line method over the term of the related loan. All direct and indirect costs associated with the rental of real estate projects owned by the Partnership are amortized over the term of the related lease. Unamortized costs are charged to expense upon the early termination of the lease or upon early payment of the financing. Prepaid interest is amortized to interest expense using the effective interest method over the terms of the related loans.
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
REVENUES -------- Rental Operations ----------------- Rental income from leases with scheduled rental increases during their terms is recognized for financial reporting purposes on a straight-line basis.
Service Operations ------------------ Management fees are based on a percentage of rental receipts of properties managed and are recognized as the rental receipts are collected. Maintenance fees are based upon established hourly rates and are recognized as the services are performed. Leasing fees are based on a percentage of the total rental due under completed leases and are generally recognized upon lease execution. Construction management and development fees are generally based on a percentage of costs and are recognized as the project costs are incurred. Other income consists primarily of payroll reimbursements for on-site property management services.
NET INCOME PER COMMON UNIT -------------------------- Net income per common unit is calculated using the weighted average number of common units outstanding during the year. Common unit equivalents dilute net income per common unit by less than 3% and are not considered in computing weighted average common units outstanding.
FEDERAL INCOME TAXES -------------------- As a partnership, the allocated share of income or loss for the year is included in the income tax returns of the partners; accordingly, no accounting for income taxes is required in the accompanying consolidated financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS ----------------------------------- The fair values of the Partnership's financial instruments, including accounts receivable, accounts payable, accrued expenses, mortgage debt, unsecured notes payable, line of credit and other financial instruments, generally determined using the present value of estimated future cash flows using a discount rate commensurate with the risks involved, approximate their carrying or contract values.
USE OF ESTIMATES ---------------- The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) RELATED PARTY TRANSACTIONS -------------------------- The Partnership provides management, leasing, construction and other tenant related services to partnerships in which certain executive officers of the General Partner have continuing ownership interests. The Partnership was paid fees totaling $3.2 million, $2.8 million and $3.0 million for such services in 1996, 1995 and 1994, respectively. Management believes the terms for such services are equivalent to those available in the market. The Partnership has an option to purchase the executive officers' interest in each of these properties which expires October 2003. The option price of each property was established at the date the option was granted.
(4) INVESTMENTS IN UNCONSOLIDATED COMPANIES --------------------------------------- The Partnership has equity interests in unconsolidated partnerships and joint ventures which own and operate rental properties and hold land for development in the Midwest. The equity method of accounting is used for these investments in which the Partnership has the ability to exercise significant influence over operating and financial policies. Any difference between the carrying amount of these investments and the underlying equity in net assets is amortized to equity in earnings of unconsolidated companies over 40 years. The cost method of accounting is used for non-majority owned joint ventures over which the Partnership does not have the ability to exercise significant influence. The difference between the cost method and the equity method for such ventures does not significantly affect the financial position or results of operations of the Partnership. In 1995, the Partnership acquired its unaffiliated partner's 50% interest in a joint venture which owned two suburban office rental properties (one of which was under construction as of December 31, 1995) and 40.3 acres of land held for development. The Partnership accounted for the acquisition of the 50% interest using the purchase method with its recorded investment in the properties equal to the sum of the balance of its investment in and advances to the joint venture at the date of acquisition, the net liabilities assumed and cash paid to the joint venture partner amounting to $24.4 million. In 1994, the Partnership acquired its unaffiliated partner's 55% interest in a partnership which owned a suburban office rental property. The Partnership accounted for the acquisition of the 55% interest using the purchase method with its recorded investment in the property equal to the sum of its investment in the partnership at the date of acquisition, the cash payment to the unaffiliated partner, cash repayment of a portion of the partnership's mortgage loan and net liabilities assumed, including the remaining balance on the partnership's mortgage loan of $4.5 million. The fair value of the property exceeds the Partnership's recorded investment. Also in 1994, a partnership in which the Partnership owned a 50% interest was dissolved through the distribution of all assets and liabilities to the partners. At the date of dissolution, the Partnership had loans and advances to the partnership totaling $4.2 million. Under terms of the dissolution agreement, the Partnership received 71 acres of land held for development and the partnership was not required to repay the Partnership's loans and advances. The Partnership's recorded investment in the property received is equal to the sum of its investment in and loans and advances to the partnership at the date of dissolution. The fair value of the property exceeds the Partnership's recorded investment.
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On December 28, 1995, the Partnership formed a joint venture (Dugan Realty L.L.C.) with an institutional real estate investor and purchased 25 industrial buildings totaling approximately 2.3 million square feet. Upon formation of the venture, the Partnership contributed approximately 1.4 million square feet of recently developed and acquired industrial properties, 113 acres of recently acquired land held for future development, at an agreed value of $50.8 million, and approximately $16.7 million of cash for a 50.1% interest in the joint venture. The Partnership's recorded investment at December 31, 1995 in the joint venture of $59.4 million is the sum of the carrying value of the properties, land, and cash contributed. The Partnership's joint venture partner contributed cash of $67.5 million which was equal to the agreed value of the Partnership's contribution. The total cash contributed by the Partnership and the joint venture partner was used to purchase the 25 industrial buildings noted above. The recently acquired industrial properties and the undeveloped land which were contributed were acquired as part of the acquisition of Park Fletcher, Inc., an Indianapolis, Indiana based real estate development and management company. The acquisition was accounted for under the purchase method. The recorded carrying value of the acquired properties and land was equal to the net liabilities assumed plus cash paid plus mortgage indebtedness assumed of $17.4 million. The fair value of the property exceeds the Partnership's recorded investment. The operating results of the acquired properties and land have been included in the consolidated operating results subsequent to the date of acquisition. The Partnership completed the development of 1.1 million square feet of property in 1996 and contributed these properties to the joint venture at an agreed value of $24.9 million. The Partnership recorded its investment in the joint venture related to the additional contribution at its carrying value of $20.5 million. The joint venture partner contributed cash to the venture equal to 49.9% of the agreed value of the properties contributed, $12.4 million, and this cash was distributed to the Partnership and reduced its recorded investment in the venture. The Partnership accounts for its investment in this joint venture on the equity method because the joint venture partner's approval is required for all major decisions and the joint venture partner has equal control regarding the primary day-to-day operations of the venture.
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Combined summarized financial information of the companies which are accounted for by the equity method as of December 31, 1996 and December 31, 1995 and for the years ended December 31, 1996, 1995 and 1994 are as follows (in thousands):
Investments in unconsolidated companies include $6.1 million and $6.0 million at December 31, 1996 and 1995, respectively, related to joint ventures accounted for on the cost method. Included in equity in earnings of unconsolidated companies are distributions from a joint venture accounted for on the cost method totaling $735,000, $521,000 and $837,000 in 1996, 1995 and 1994, respectively.
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) INDEBTEDNESS ------------
Indebtedness at December 31 consists of the following (in thousands):
As of December 31, 1996, the $261.8 million of mortgage notes are collateralized by rental properties with a net carrying value of $523.2 million.
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In April 1995, the Partnership obtained an unsecured line of credit in the aggregate amount of $100.0 million. The unsecured line of credit matures in April 1998. Borrowings under this line of credit required interest at 30-day LIBOR plus 2.00% as of December 31, 1995 (effective rate of 7.69%). In 1996, the Partnership increased its amount available under the unsecured line of credit to $150.0 million and reduced the borrowing rate to LIBOR plus 1.25% as of December 31, 1996 (effective rate of 6.75%).
The Partnership has an interest rate swap agreement (the "Agreement") on $33.0 million of the Partnership's outstanding mortgage debt to effectively fix the interest rate on a portion of its floating rate debt. Under the Agreement, the Partnership pays or receives the difference between a fixed rate of 5.1875% and a floating rate of 30- day LIBOR plus .75% based on the notional principal amount of $33.0 million. The amount paid or received under the Agreement is included in interest expense on a monthly basis. The Agreement matures along with the related mortgage loan in December 1999. The Agreement will stay in place until maturity unless the 30-day LIBOR rate on the date of monthly repricing exceeds 6.25% which will cause a termination of the Agreement. The 30-day LIBOR rate at December 31, 1996 was 5.50%. The estimated fair value of the Agreement at December 31, 1996 was $312,000. The fair value was estimated by discounting the expected cash flows to be received under the Agreement using rates currently available for interest rate swaps of similar terms and maturities.
At December 31, 1996, scheduled amortization and maturities of all indebtedness for the next five years and thereafter are as follows (in thousands):
Cash paid for interest in 1996, 1995, and 1994 was $35.5 million, $22.1 million, and $20.3 million, respectively. Total interest capitalized in 1996, 1995 and 1994 was $5.5 million, $4.2 million and $1.7 million, respectively.
(6) LEASING ACTIVITY ---------------- Future minimum rents due to the Partnership under non-cancelable operating leases at December 31, 1996 are scheduled as follows (in thousands):
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In addition to minimum rents, certain leases require reimbursements of specified operating expenses which amounted to $19.7 million, $12.7 million, and $10.0 million for the years ended December 31, 1996, 1995 and 1994, respectively.
(7) EMPLOYEE BENEFIT PLANS ----------------------
The Partnership maintains a profit sharing and salary deferral plan for the benefit of its full-time employees. The Partnership matches the employees' contributions up to two percent of the employees' salary and may also make annual discretionary contributions. Total expense recognized by the Partnership was $328,000, $245,000 and $370,000 for the years ended 1996, 1995 and 1994, respectively.
The Partnership makes contributions to a contributory health and welfare plan as necessary to fund claims not covered by employee contributions. Total expense recognized by the Partnership related to this plan was $1,193,000, $882,000 and $766,000 for 1996, 1995 and 1994, respectively. Included in total expense is an estimate based on historical experience of the effect of claims incurred but not reported as of year-end.
(8) PARTNERS' EQUITY ----------------
The General Partner periodically accesses the public equity markets and contributes the net proceeds to the Partnership to fund the development and acquisition of additional rental properties. The proceeds of these offerings are contributed to the Partnership in exchange for additional Common Units, or in the case of the 1996 Preferred Stock Offering, Preferred Units. A summary of the public equity issuances by the General Partner during the three-year period ended December 31, 1996 is as follows (in thousands, except per share price):
During the three years ended December 31, 1996, the General Partner acquired a portion of the minority interest in the Partnership through the issuance of shares of common stock for a like number of common units. The acquisition of the minority interest was accounted for under the purchase method with assets acquired recorded at the fair market value of the General Partner's common stock on the date of acquisition.
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following acquisition amounts were allocated to rental property, undeveloped land and investments in unconsolidated companies based on their estimated fair values (in thousands):
In August 1996, the General Partner issued 300,000 shares of 9.10% Series A Cumulative Redeemable Preferred Shares receiving net proceeds of approximately $72.3 million which were contributed to the Partnership in exchange for a like number of Preferred Units. On or after August 31, 2001, the Series A Preferred Units may be redeemed for cash at the option of the General Partner, in whole or in part at a redemption price of $250.00 per unit plus accrued and unpaid distributions, if any, to the redemption date. The redemption price of the Series A Preferred Units (other than any portion thereof consisting of accrued and unpaid distributions) may only be paid from the proceeds of other capital units of the Partnership, which may include other classes or series of preferred units. The Series A Preferred Units have no stated maturity, are not subject to sinking fund or mandatory redemption provisions and are not convertible into any other securities of the General Partner or the Partnership. Distributions on the Series A Preferred Units are cumulative from the date of original issue and are payable quarterly on or about the last day of February, May, August and November of each year, commencing on December 2, 1996, at the rate of 9.10% of the liquidation preference per annum (equivalent to $22.75 per annum per unit).
(9) STOCK BASED COMPENSATION ------------------------
The General Partner and the Partnership have four stock-based compensation plans, which are described below. The Partnership applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. The Partnership does charge compensation costs against its income for its two performance based stock plans. If compensation cost for the Partnership's four stock-based compensation plans had been determined consistent with FASB Statement No. 123, the Partnership's net income and earnings per unit would have been reduced to the pro forma amounts indicated below:
The effects of applying FASB Statement No. 123 in this pro forma disclosure are not indicative of future amounts. The Statement does not apply to awards prior to 1995, and additional awards in future years are anticipated.
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Fixed Stock Option Plans ------------------------
The Partnership has two fixed stock option plans, the Duke Realty Services 1993 Stock Option Plan (the "1993 Plan") and the 1995 Key Employees' Stock Option Plan of Duke Realty Investments, Inc. (the "1995 Plan"). Under the 1995 Plan, the General Partner and the Partnership are authorized to grant options to its employees for up to 558,400 shares of common stock, as well as up to an additional 400,000 shares to the extent grants under the 1993 Plan lapse, are forfeited or are otherwise terminated. The 1995 Plan was adopted in 1995, subject to shareholder approval, which approval was received in 1996. Under the 1993 Plan, the General Partner and the Partnership were authorized to grant options to its employees for up to 1,315,000 shares of common stock, of which 751,180 are outstanding as of December 31, 1996. Upon the approval of the 1995 Plan, no further grants are permitted under the 1993 Plan.
Under both plans, the exercise price of each option equals the market price of the General Partner's stock on the date of grant, and each option's maximum term is ten years. Options granted under the 1993 Plan vest at 20% per year. Options granted under the 1995 Plan vest 50% at the end of the third year following the grant date, and 25% per year for each of the two succeeding years, or, if earlier, upon the death, retirement or disability of the optionee or a change in control of the General Partner.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1995 and 1996: Dividend yield of 6.0%; expected volatility of 19%; weighted average risk- free interest rates of 6.8% and 5.6% for 1995 and 1996 grants, respectively; and weighted average expected lives of 7.8 years and 7.9 years for 1995 and 1996 grants, respectively.
A summary of the status of the General Partner and the Partnership's two fixed stock option plans as of December 31, 1994, 1995 and 1996, and changes during the years ended on those dates is as follows:
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes information about fixed stock options outstanding at December, 31, 1996:
Performance Based Stock Plans -----------------------------
The Partnership has two performance based equity compensation plans. Under the 1995 Dividend Increase Unit Plan (the "DIU Plan"), Dividend Increase Units ("DIUs") are granted to key employees. The value of DIUs exercised by employees is payable in company stock. A maximum of 100,000 shares of the General Partner's stock may be issued under the DIU Plan. The maximum term of all DIUs granted is ten years.
The value of each DIU when exercised is equal to the increase in the General Partner's annualized dividend per share from the date of grant to the date of exercise, divided by the "dividend yield". Dividend yield is the annualized dividend per share of the General Partner divided by the market price per share of the General Partner's common stock at the date of grant. DIUs are subject to the same vesting schedule as stock options issued under the 1995 Plan. The compensation cost that has been charged against income for the DIU Plan was $152,000 and $39,000 for 1996 and 1995, respectively. A summary of the status of DIUs granted by the Partnership is as follows:
Under the 1995 Shareholder Value Plan (the "SV Plan"), the Partnership may grant awards in specified dollar amounts to key employees. The award is payable to the employee on the third anniversary of the date of grant. One-half of the award is payable in common stock of the General Partner, and one-half is payable in cash. A maximum of 100,000 shares of the General Partner's common stock may be issued under the SV Plan.
The initial dollar amount of each award granted under the SV Plan is adjusted upward or downward based on a comparison of the General Partner's cumulative total shareholder return for the three year period as compared to the cumulative total return of the S&P 500 and the NAREIT Equity REIT Total Return indices. The award is not payable upon the employee's termination of employment for any reason other than retirement, death, disability or a change in control of the General Partner.
DUKE REALTY LIMITED PARTNERSHIP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes information about the initial amount of SV Plan awards granted in 1995 and 1996:
The Partnership believes that it is not possible to reasonably estimate the fair value of the General Partner's common stock to be issued under the DIU and SV Plans and, therefore, computes compensation cost for the Plans based on the intrinsic value of the awards as if they were exercised at the end of each applicable reporting period. The compensation cost that has been charged against income for the SV Plan was $361,000 and $152,000 for 1996 and 1995, respectively.
3. Exhibits
Exhibit Number Description -------- --------------
4.1 Amended and Restated Agreement of Limited Partnership of Duke Realty Limited Partnership ("DRLP") is incorporated herein by reference to Exhibit 10.1 to the registration statement of Duke Realty Investments, Inc. on Form S-2, as amended, filed on June 8, 1993, as File No. 33-64038 (the "1993 Registration Statement").
4.2 First and Second Amendments to Amended and Restated Agreement of Limited Partnership of DRLP are incorporated herein by reference to Exhibit 10.2 of the Annual Report on Form 10-K of Duke Realty Investments, Inc. for the year ended December 31, 1995 (File No. 1-9044)("DRE 10-K"), and the Third Amendment to Amended and Restated Agreement of DRLP is incorporated herein by reference to Exhibit 10 to the Report of Duke Realty Investments, Inc. on Form 8-K filed August 15, 1996.
4.3 Indenture between DRLP and The First National Bank of Chicago, Trustee, and the First Supplement thereto, are incorporated by reference to Exhibits 4.1 and 4.2 to the report of Duke Realty Investments, Inc. on Form 8-K filed September 19, 1995 and the Second Supplement thereto, is incorporated herein by reference to Exhibit 4 to the report of Duke Realty Investments, Inc. on Form 8-K filed July 12, 1996.
10.1 Second Amended and Restated Agreement of Limited Partnership of Duke Realty Services Limited Partnership (the "Services Partnership") is incorporated herein by reference to Exhibit 10.3 of the DRE 10-K.
10.2 Promissory Note of the Services Partnership is incorporated herein by reference to Exhibit 10.3 to the 1993 Registration Statement.
10.3 Duke Realty Services Partnership 1993 Stock Option Plan is incorporated herein by reference to Exhibit 10.4 to the 1993 Registration Statement.
10.4 Acquisition Option Agreement relating to certain properties not contributed to DRLP by Duke Associates (the "Excluded Properties") is incorporated herein by reference to Exhibit 10.5 to the 1993 Registration Statement.
10.5 Management Agreement relating to the Excluded Properties is incorporated herein by reference to Exhibit 10.6 to the 1993 Registration Statement.
10.6 Contribution Agreement for certain properties and land contributed by Duke Associates and Registrant to DRLP is incorporated herein by reference to Exhibit 10.7 to the 1993 Registration Statement.
10.7 Contribution Agreement for certain assets and contracts contributed by Duke Associates to the Service Partnership is incorporated herein by reference to Exhibit 10.8 to the 1993 Registration Statement.
10.8 Contribution Agreement for certain contracts contributed by Duke Associates to DRLP is incorporated herein by reference to Exhibit 10.9 to the 1993 Registration Statement.
10.9 Stock Purchase Agreement is incorporated herein by reference to Exhibit 10.10 to the 1993 Registration Statement.
10.10 Indemnification Agreement is incorporated herein by reference to Exhibit 10.11 to the 1993 Registration Statement.
10.11 1995 Key Employee Stock Option Plan is incorporated herein by reference to Exhibit 10.13 of the DRE 10-K.
10.12 1995 Dividend Increase Unit Plan is incorporated herein by reference to Exhibit 10.14 of the DRE 10-K.
10.13 1995 Shareholder Value Plan is incorporated herein by reference to Exhibit 10.15 of the DRE 10-K.
21. List of Subsidiaries of Registrant.
23. Consent of KPMG Peat Marwick LLP.
24. Executed powers of attorney of certain directors.
27. Financial Data Schedule
99.1 Selected Quarterly Financial Information
The Partnership will furnish to any security holder, upon written request, copies of any exhibit incorporated by reference, for a fee of 15 cents per page, to cover the costs of furnishing the exhibits. Written request should include a representation that the person making the request was the beneficial owner of securities.
(b) Reports on Form 8-K
None
DUKE REALTY LIMITED PARTNERSHIP REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996
DUKE REALTY LIMITED PARTNERSHIP REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996
DUKE REALTY LIMITED PARTNERSHIP REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31,1996
DUKE REALTY LIMITED PARTNERSHIP REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996
DUKE REALTY LIMITED PARTNERSHIP REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996
(IN THOUSANDS) (1) Costs capitalized subsequent to acquisition include decreases for purchase price reduction payments received and land sales or takedowns.
(2) The Partnership owns a 66.67% interest in th partnership owning this building. The Partnership shares in the cash flow of this building in accordance with the Partnership's ownership interests.
(3) The four buildings comprising Tri-County Office Park were constructed in 1971, 1973 and 1982.
(4) Depreciation of real estate is computed using the straight-line method over 40 years for building and shorter periods based on lease terms (generally 3 to 10 years) for tenant improvements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DUKE REALTY LIMITED PARTNERSHIP
By: Duke Realty Investments, Inc. Its General Partner
March 14, 1997 By: /s/ Thomas L. Hefner ----------------- ------------------------------ Thomas L. Hefner President and Chief Executive Officer
By: /s/ Darell E. Zink, Jr. ------------------------------ Darell E. Zink, Jr. Executive Vice President and Chief Financial Officer
By: /s/ Dennis D. Oklak ------------------------------ Dennis D. Oklak Vice President and Treasurer (Chief Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Date Title --------- ---- -----
/s/ John W. Wynne * 3/14/97 Chairman of the Board ---------------------- John W. Wynne
/s/ Thomas L. Hefner * 3/14/97 President and Chief Executive ---------------------- Officer and Director Thomas L. Hefner
/s/ Daniel C. Staton * 3/14/97 Executive Vice President and ---------------------- Chief Operating Officer and Daniel C. Staton Director
/s/ Darell E. Zink, Jr.* 3/14/97 Executive Vice President and ----------------------- Chief Financial Officer and Darell E. Zink, Jr. Director
/s/ Geoffrey Button * 3/14/97 Director ---------------------- Geoffrey Button
/s/ John D. Peterson * 3/14/97 Director ---------------------- John D. Peterson
/s/ Ngaire E. Cuneo * 3/14/97 Director ---------------------- Ngaire E. Cuneo
/s/ L. Ben Lytle * 3/14/97 Director ---------------------- L. Ben Lytle
/s/ Jay J. Strauss * 3/14/97 Director ---------------------- Jay J. Strauss
/s/ Howard L. Feinsand * 3/14/97 Director ---------------------- Howard L. Feinsand
/s/ James E. Rogers * 3/14/97 Director ---------------------- James E. Rogers
* By Dennis D. Oklak, Attorney-in-Fact /s/ Dennis D. Oklak ---------------------