UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K405 [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 ----------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to_____________ Commission file number 0-9783 --------- McNEIL REAL ESTATE FUND XI, LTD. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) California 94-2669577 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 13760 Noel Road, Suite 600, LB70, Dallas, Texas, 75240 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (972) 448-5800 ----------------------------- Securities registered pursuant to Section 12(b) of the Act: None - ---------------------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Limited partnership units - ---------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] 159,500 of the registrant's 159,813 limited partnership units are held by non-affiliates of this registrant. The aggregate market value of units held by non-affiliates is not determinable since there is no public trading market for limited partnership units and transfers of units are subject to certain restrictions. Documents Incorporated by Reference: See Item 14, Page 40 TOTAL OF 43 PAGES PART I ITEM 1. BUSINESS - ------- -------- ORGANIZATION - ------------ McNeil Real Estate Fund XI, Ltd. (the "Partnership") was organized June 2, 1980 as a limited partnership under the provisions of the California Uniform Limited Partnership Act. The general partner of the Partnership is McNeil Partners, L.P. (the "General Partner"), a Delaware limited partnership, an affiliate of Robert A. McNeil ("McNeil"). The Partnership is governed by an amended and restated partnership agreement of limited partnership dated August 6, 1991, as amended (the "Amended Partnership Agreement"). Prior to August 6, 1991, Pacific Investors Corporation (the prior "Corporate General Partner"), a wholly-owned subsidiary of Southmark Corporation ("Southmark"), and McNeil were the general partners of the Partnership, which was governed by an agreement of limited partnership dated June 2, 1980 (the "Original Partnership Agreement") as amended August 29, 1980. The principal place of business for the Partnership and for the General Partner is 13760 Noel Road, Suite 600, LB70, Dallas, Texas, 75240. On September 18, 1980, a Registration Statement on Form S-11 was declared effective by the Securities and Exchange Commission whereby the Partnership offered for sale $80,000,000 of limited partnership units ("Units"). The Units represent equity interests in the Partnership and entitle the holders thereof to participate in certain allocations and distributions of the Partnership. The sale of Units closed on June 1, 1981, with 160,000 Units sold at $500 each, or gross proceeds of $80,000,000 to the Partnership. In addition, the original general partners purchased a total of 140 Units for $70,000. During the years 1993 through 1998, 327 Units were rescinded leaving 159,813 Units outstanding as of December 31, 1998. SOUTHMARK BANKRUPTCY AND CHANGE IN GENERAL PARTNER - -------------------------------------------------- On July 14, 1989, Southmark filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Neither the Partnership, McNeil nor the Corporate General Partner were included in the filing. Southmark's reorganization plan became effective August 10, 1990. Under the plan, most of Southmark's assets, which included Southmark's interests in the Corporate General Partner, were sold or liquidated for the benefit of creditors. In accordance with Southmark's reorganization plan, Southmark, McNeil and various of their affiliates entered into an asset purchase agreement on October 12, 1990, providing for, among other things, the transfer of control to McNeil or his affiliates of 34 limited partnerships (including the Partnership) in the Southmark portfolio. On February 14, 1991, pursuant to the asset purchase agreement as amended on that date: (a) an affiliate of McNeil purchased the Corporate General Partner's economic interest in the Partnership; (b) McNeil became the managing general partner of the Partnership pursuant to an agreement with the Corporate General Partner that delegated management authority to McNeil; (c) McNeil Real Estate Management, Inc. ("McREMI"), an affiliate of McNeil, acquired the assets relating to the property management and partnership administrative business of Southmark and its affiliates and commenced management of the Partnership's properties pursuant to an assignment of the existing property management agreements from the Southmark affiliates; and (d) the General Partner purchased the short-term, unsecured loan owing from the Partnership to a Southmark affiliate in the amount of $2,645,950. The unsecured loan has now been settled. On August 6, 1991, the limited partners approved a restructuring proposal providing for (i) the replacement of the Corporate General Partner and McNeil with the General Partner; (ii) the adoption of the Amended Partnership Agreement, which substantially alters the provisions of the Original Partnership Agreement relating to, among other things, compensation, reimbursement of expenses, and voting rights; and (iii) the approval of a new property management agreement with McREMI, the Partnership's property manager. The Amended Partnership Agreement provides for a Management Incentive Distribution ("MID") to replace all other forms of general partner compensation, other than property management fees and reimbursements of certain costs. Additional Units may be issued in connection with the payment of the MID pursuant to the Amended Partnership Agreement. See Item 8 - Note 2 - "Transactions with Affiliates." For a discussion of the methodology for calculating and distributing the MID, see Item 13 - Certain Relationships and Related Transactions. Settlement of Claims: During 1990, the Partnership filed claims in the Southmark bankruptcy in the amount of $1,180,040. McNeil also filed claims on behalf of the Partnership in an indeterminate amount, some of which overlapped in whole or in part with claims filed by the Partnership. No claims were filed by McNeil or the Partnership on behalf of individual limited partners. In July 1991, the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, approved an agreement whereby the Partnership settled its claims against Southmark. Under the settlement agreement, an affiliate of McNeil agreed to waive on a dollar-for-dollar basis an amount equal to the settled claims against affiliate advances owed by the Partnership, which at June 30, 1991, were in excess of the amount of the claim. The reduction of affiliate advances resulted in an extraordinary gain on extinguishment of debt of $1,180,040 in 1991. CURRENT OPERATIONS - ------------------ General: The Partnership is engaged in real estate activities, including the ownership, operation and management of residential real estate and other real estate related assets. At December 31, 1998, the Partnership owned seven income-producing properties as described in Item 2 - Properties. The Partnership does not directly employ any personnel. The Partnership is managed by the General Partner, and, in accordance with the Amended Partnership Agreement, the Partnership reimburses affiliates of the General Partner for certain cost incurred by affiliates of the General Partner in connection with the management of the Partnership's business. See Item 8 - Note 2 - "Transactions with Affiliates." The business of the Partnership to date has involved only one industry segment. See Item 8 - Financial Statements and Supplementary Data. The Partnership has no foreign operations. The business of the Partnership is not seasonal. Business Plan: As previously announced, the Partnership has retained PaineWebber, Incorporated ("PaineWebber") as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership, including, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The Partnership, through PaineWebber, provided financial and other information to interested parties as part of an auction process and until early March 1999 was conducting discussions with one bidder in an attempt to reach a definitive agreement with respect to a sale transaction. In early March 1999, because the Partnership had been unable to conclude negotiations for a transaction with such bidder, the Partnership terminated such discussions and commenced discussions with respect to a sale transaction with another well-financed bidder who had been involved in the original auction process. During the last full week of March, the Partnership entered into a 45 day exclusivity agreement with such party. It is possible that the General Partner and its affiliates will receive non-cash consideration for their ownership interests in connection with any such transaction. There can be no assurance regarding whether any such agreement will be reached nor the terms thereof. The Partnership has placed Rock Creek Apartments on the market for sale effective October 1, 1996. Competitive Conditions: Since the principal business of the Partnership is to own and operate real estate, the Partnership is subject to all of the risks incident to ownership of real estate and interests therein, many of which relate to the illiquidity of this type of investment. These risks include changes in general or local economic conditions, changes in supply or demand for competing properties in an area, changes in interest rates and availability of permanent mortgage funds which may render the sale or refinancing of a property difficult or unattractive, changes in real estate and zoning laws, increases in real property tax rates and Federal or local economic or rent controls. The illiquidity of real estate investments generally impairs the ability of the Partnership to respond promptly to changed circumstances. The Partnership competes with numerous established companies, private investors (including foreign investors), real estate investment trusts, limited partnerships and other entities (many of which have greater resources than the Partnership) in connection with the sale, financing and leasing of properties. The impact of these risks on the Partnership, including losses from operations and foreclosures of the Partnership's properties, is described in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. See Item 2 - Properties for discussion of competitive conditions at the Partnership's properties. Forward-Looking Information: Within this document, certain statements are made as to the expected occupancy trends, financial condition, results of operations, and cash flows of the Partnership for periods after December 31, 1998. All of these statements are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical and involve risks and uncertainties. The Partnership's actual occupancy trends, financial condition, results of operations, and cash flows for future periods may differ materially due to several factors. These factors include, but are not limited to, the Partnership's ability to control costs, make necessary capital improvements, negotiate sales or refinancings of its properties and respond to changing economic and competitive factors. Environmental Matters: Environmental laws create potential liabilities that may affect property owners. The environmental laws of Federal and certain state governments, for example, impose liability on current and certain past owners of property from which there is a release or threat of release of hazardous substances. This liability includes costs of investigation and remediation of the hazardous substances and natural resource damages. Liability for costs of investigation and remediation is strict and may be imposed irrespective of whether the property owner was at fault, although there are a number of defenses. Both governments and third parties may seek recoveries under these laws. Third parties also may seek recovery under the common law for damages to their property or person, against owners of property from which there has been a release of hazardous and other substances. The presence of contamination or the failure to remediate contaminations may adversely affect the owner's ability to sell or lease real estate or to borrow using the real estate as collateral. Various buildings at properties do or may contain building materials that are the subject of various regulatory programs intended to protect human health. Such building materials include, for example, asbestos, lead-based paint, and lead plumbing components. The Company has implemented programs to deal with the presence of those materials, which include, as appropriate, reduction of potential exposure situations. The Company does not believe that the costs of such programs are likely to have a material adverse effect. Failure to implement such programs can result in regulatory violations or liability claims resulting from alleged exposure to such materials. In connection with the proposed sale transaction as more fully described above, Phase I environmental site assessments have been completed for each property owned by the Partnership. Such environmental assessments performed on the properties have not revealed any environmental liability that the Partnership believes would have a material adverse effect on the Partnership's business, assets, or results of operations. The Partnership has not been notified by any governmental authority of any non-compliance, liability or other claim in connection with any of its properties. There can be no assurances, however, that environmental liabilities have not developed since such environmental assessments were prepared, or that future uses or conditions (including, without limitation, changes in applicable environmental laws and regulations) will not result in imposition of environmental liability. Other Information: In August 1995, High River Limited Partnership, a Delaware limited partnership controlled by Carl C. Icahn ("High River") made an unsolicited tender offer to purchase from holders of Units up to approximately 45% of the outstanding Units of the Partnership for a purchase price of $63 per Unit. In September 1996, High River made another unsolicited tender offer to purchase any and all of the outstanding Units of the Partnership for a purchase price of $104.50 per Unit. In addition High River made unsolicited tender offers for certain other partnerships controlled by the General Partner. The Partnership recommended that the limited partners reject the tender offers made with respect to the Partnership and not tender their Units. The General Partner believes that as of February 1, 1999, High River has purchased 11.65% of the outstanding Units pursuant to the tender offers. In addition, all litigation filed by High River, Mr. Icahn and his affiliates in connection with the tender offers have been dismissed without prejudice. ITEM 2. PROPERTIES - ------- ---------- The following table sets forth the real estate investment portfolio of the Partnership at December 31, 1998. The buildings and the land on which they are located are owned by the Partnership in fee, subject in each case to a first lien deed of trust as set forth more fully in Item 8 - Note 5 - "Mortgage Notes Payable" and Item 8 - Note 6 - "Mortgage Note Payable - Affiliate." See also Item 8 - Note 4 - "Real Estate Investments" and Schedule III - "Real Estate Investments and Accumulated Depreciation." In the opinion of management, the properties are adequately covered by insurance. Net Basis 1998 Date Property Description of Property Debt Property Tax Acquired - -------- ----------- ----------- ---- ------------ -------- Real Estate Investments: Acacia Lakes (1) Apartments Mesa, AZ 576 units $ 5,614,216 $ 8,680,219 $ 142,014 5/81 Gentle Gale (2) Apartments Galveston, TX 133 units 1,586,638 2,489,136 75,379 5/81 Knollwood (3) Apartments Kansas City, MO 315 units 2,814,547 4,326,728 76,410 5/81 Sun Valley (4) Apartments Charlotte, NC 311 units 4,120,235 6,376,663 118,309 8/81 Villa Del Rio (5) Apartments Jacksonville, FL 444 units 4,047,045 5,331,844 182,673 5/81 The Village (6) Apartments Gresham, OR 152 units 1,488,086 2,635,000 81,221 5/81 ------------- ------------- ----------- $ 19,670,767 $ 29,839,590 $ 676,006 ============= ============= =========== Asset held for sale: Rock Creek (7) Apartments Portland, OR 388 units $ 4,765,942 $ 6,225,000 $ 143,295 2/81 ============= ============= =========== - ----------------------------------------- Total: Apartments - 2,319 units (1) Acacia Lakes Apartments is owned by Acacia Lakes Fund XI Limited Partnership which is wholly-owned by the Partnership and the General Partner. (2) Gentle Gale Apartments is owned by Gentle Gale Fund XI Limited Partnership which is wholly-owned by the Partnership. (3) Knollwood Apartments is owned by Knollwood Fund XI Associates, a general partnership, which is wholly-owned by the Partnership and the General Partner. (4) Sun Valley Apartments is owned by Sun Valley Fund XI Associates, a general partnership, which is wholly-owned by the Partnership and the General Partner. (5) Villa Del Rio Apartments is owned by Villa Del Rio Fund XI Limited Partnership which is wholly-owned by the Partnership. (6) The Village Apartments is owned by Village Fund XI Associates Limited Partnership which is wholly-owned by the Partnership and the General Partner. (7) Rock Creek Apartments is owned by Rock Creek Fund XI, Ltd., which is wholly -owned by the Partnership. The following table sets forth the properties' occupancy rate and rent per square foot for each of the last five years: 1998 1997 1996 1995 1994 ------------- ------------- -------------- ------------- ---------- Acacia Lakes Occupancy Rate............ 96% 95% 94% 96% 97% Rent Per Square Foot...... $8.07 $7.92 $7.73 $7.44 $6.64 Gentle Gale Occupancy Rate............ 90% 93% 90% 88% 93% Rent Per Square Foot...... $8.10 $7.90 $7.78 $7.86 $7.83 Knollwood Occupancy Rate............ 97% 97% 96% 96% 93% Rent Per Square Foot...... $6.20 $6.06 $5.72 $5.53 $5.17 Sun Valley Occupancy Rate............ 96% 96% 96% 97% 97% Rent Per Square Foot...... $8.01 $7.81 $7.40 $7.12 $6.51 Villa Del Rio Occupancy Rate............ 96% 92% 96% 100% 98% Rent Per Square Foot...... $5.83 $5.76 $5.67 $5.46 $4.98 The Village Occupancy Rate............ 96% 98% 96% 100% 100% Rent Per Square Foot...... $8.69 $8.31 $8.27 $7.96 $7.76 Asset held for sale: Rock Creek Occupancy Rate............ 95% 94% 95% 99% 94% Rent Per Square Foot...... $8.58 $8.35 $8.27 $7.91 $7.54 Occupancy rate represents all units leased divided by the total number of units of the property as of December 31 of the given year. Rent per square foot represents all revenue, except interest, derived from the property's operations divided by the leasable square footage of the property. Competitive Conditions at Properties - ------------------------------------ Acacia Lakes - ------------ Due to a substantial investment of capital since 1994, Acacia Lakes has increased its rent per square foot by 22% over the last five years. Currently, the property is slightly above the average market occupancy rate of 95%. Over the last year, approximately 8,250 multi-family units were added to the Mesa submarket. Strong employment growth is expected to add renters to the market and provide positive absorption. Rental rates at Acacia Lakes are lower than the market rate. Gentle Gale - ----------- Gentle Gale is located in Galveston, Texas, where the local economy is dependent upon the University of Texas Medical Branch and tourism. The University of Texas announced a reduction of over 600 jobs effective January 1999 and additional cut backs are anticipated. Over the last few years the economy has been sluggish. Gentle Gale experienced a decrease in its occupancy rate and is currently at 90%. Gentle Gale competes with properties that are newer and offer better amenity packages. Rental rates at Gentle Gale are just below many of their competitors in the market. In 1998, an additional 177 units were added to the already soft market. The property has been upgrading the units and offering rental discounts to remain competitive in the market. Knollwood - --------- Knollwood finished 1998 above the average market occupancy rate of 94%. The current rental rates for Knollwood's townhouses and one and two bedroom apartments are comparable to the market rate. Continued capital improvements are planned to improve the curb appeal and upgrade the apartments to take advantage of the strong market conditions. Sun Valley - ---------- Strong market conditions have stimulated new developments in the area surrounding Sun Valley. Currently, 3,458 units are under construction in the Charlotte market, and an additional 3,419 units are proposed. The market began to soften in 1997 and the continued heavy development continued to increase the market competitiveness in 1999. With the capital improvements made at the property over the last few years, the property has been able to stay competitive with the newer properties. Sun Valley finished 1998 at the market average occupancy rate of 95%. Villa Del Rio - ------------- Villa Del Rio's occupancy rate finished 1998 above the market average of 91%. During 1998, 7,500 units were added to the market with other projects in the planning stages. Villa Del Rio's advantage over its competitors is design and layout of the property. All units are single story apartments and the property is spread over 25 acres. The Village - ----------- The Village finished the year equal to the Gresham market occupancy rate of 96%. The expanding economy in Portland is slowing down after several years growth. The new construction over the last couple of years has softened the market with higher vacancies and rental concessions. The market rental rate is slightly lower than the rental rate at The Village. The Village should continue to remain competitive in the marketplace. Asset held for sale: Rock Creek - ---------- Rock Creek finished the year at the market average of 95%. The Portland market has become saturated with new multi-family units with the addition of 1,500 units in 1998. Over the past few years the property has been upgrading the interiors of the units as well as improving the outside appearances with landscaping and a renovation of the clubhouse and office. These enhancements have allowed the property to remain competitive in the market and compete with the new apartments being built in the area. ITEM 3. LEGAL PROCEEDINGS - ------- ----------------- The Partnership is not party to, nor are any of the Partnership's properties the subject of, any material pending legal proceedings, other than ordinary, routine litigation incidental to the Partnership's business, except for the following: James F. Schofield, Gerald C. Gillett, Donna S. Gillett, Jeffrey Homburger, Elizabeth Jung, Robert Lewis, and Warren Heller et al. v. McNeil Partners L.P., McNeil Investors, Inc., McNeil Real Estate Management, Inc., Robert A. McNeil, Carole J. McNeil, McNeil Pacific Investors Fund 1972, Ltd., McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil Real Estate Fund XI, Ltd., McNeil Real Estate Fund XII, Ltd., McNeil Real Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate Fund XX, L.P., McNeil Real Estate Fund XXI, L.P., McNeil Real Estate Fund XXII, L.P., McNeil Real Estate Fund XXIII, L.P., McNeil Real Estate Fund XXIV, L.P., McNeil Real Estate Fund XXV, L.P., McNeil Real Estate Fund XXVI, L.P., and McNeil Real Estate Fund XXVII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P., - Superior Court of the State of California for the County of Los Angeles, Case No. BC133799 (Class and Derivative Action Complaint). The action involves purported class and derivative actions brought by limited partners of each of the limited partnerships that were named as nominal defendants as listed above (the "Partnerships"). Plaintiffs allege that McNeil Investors, Inc., its affiliate McNeil Real Estate Management, Inc. and three of their senior officers and/or directors (collectively, the "Defendants") breached their fiduciary duties and certain obligations under the respective Amended Partnership Agreement. Plaintiffs allege that Defendants have rendered such Units highly illiquid and artificially depressed the prices that are available for Units on the resale market. Plaintiffs also allege that Defendants engaged in a course of conduct to prevent the acquisition of Units by an affiliate of Carl Icahn by disseminating purportedly false, misleading and inadequate information. Plaintiffs further allege that Defendants acted to advance their own personal interests at the expense of the Partnerships' public unit holders by failing to sell Partnership properties and failing to make distributions to unitholders. On December 16, 1996, the Plaintiffs filed a consolidated and amended complaint. Plaintiffs are suing for breach of fiduciary duty, breach of contract and an accounting, alleging, among other things, that the management fees paid to the McNeil affiliates over the last six years are excessive, that these fees should be reduced retroactively and that the respective Amended Partnership Agreements governing the Partnerships are invalid. Defendants filed a demurrer to the consolidated and amended complaint and a motion to strike on February 14, 1997, seeking to dismiss the consolidated and amended complaint in all respects. A hearing on Defendant's demurrer and motion to strike was held on May 5, 1997. The Court granted Defendants' demurrer, dismissing the consolidated and amended complaint with leave to amend. On October 31, 1997, the Plaintiffs filed a second consolidated and amended complaint. The case was stayed pending settlement discussions. A Stipulation of Settlement dated September 15, 1998 has been signed by the parties. Preliminary Court approval was received on October 6, 1998. A hearing for Final Approval of Settlement, initially scheduled for December 17, 1998, has been continued to May 25, 1999. Because McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. would be part of the transaction contemplated in the settlement and Plaintiffs claim that an effort should be made to sell the McNeil Partnerships, Plaintiffs have included allegations with respect to McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. in the third consolidated and amended complaint. Plaintiff's counsel intends to seek an order awarding attorney's fees and reimbursements of their out-of-pocket expenses. The amount of such award is undeterminable until final approval is received from the court. Fees and expenses shall be allocated amongst the Partnerships on a pro rata basis, based upon tangible asset value of each such partnership, less total liabilities, calculated in accordance with the Amended Partnership Agreements for the quarter most recently ended. For a discussion of the Southmark bankruptcy, see Item 1 - Business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- --------------------------------------------------- None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNERSHIP AND RELATED - ------- -------------------------------------------------------------------- SECURITY HOLDER MATTERS ----------------------- (A) There is no established public trading market for limited partnership units, nor is one expected to develop. (B) Title of Class Number of Record Unit Holders Limited partnership units 6,802 as of February 1, 1999 (C) Cash distributions of $4,221,415 were made to the limited partners during 1998. No distributions were made to the partners in 1997. During the last week of March 1999, the Partnership distributed approximately $500,000 to the limited partners of record at March 1, 1999. The Partnership accrued distributions of $853,756 and $905,153 for the benefit of the General Partner for the years ended December 31, 1998 and 1997, respectively. Total distributions of $2,597,224 remain unpaid at December 31, 1998. These distributions are the MID pursuant to the Amended Partnership Agreement. See Item 8 - Note 2 - "Transactions with Affiliates." See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations for a discussion of distributions and the likelihood that they will continue distributions to the limited partners. ITEM 6. SELECTED FINANCIAL DATA - ------- ----------------------- The following table sets forth a summary of certain financial data for the Partnership. This summary should be read in conjunction with the Partnership's financial statements and notes thereto appearing in Item 8 - Financial Statements and Supplementary Data. Statements of Years Ended December 31, Operations 1998 1997 1996 1995 1994 - ------------------ ------------- ------------- -------------- ------------- ------------- Rental revenue................. $ 15,012,339 $ 15,187,999 $ 14,855,652 $ 14,304,055 $ 13,313,091 Total revenue.................. 18,569,006 15,536,941 15,582,063 14,451,813 13,425,413 Net income (loss).............. 4,453,260 1,744,719 1,592,611 307,243 (193,822) Net income (loss) per limited partnership unit.............. $ 26.44 $ 3.61 $ 5.03 $ 1.83 $ (3.98) Distributions per limited partnership unit.............. $ 26.41 $ - $ - $ - $ - As of December 31, Balance Sheets 1998 1997 1996 1995 1994 - -------------- ------------- ------------- -------------- ------------- ------------- Real estate investments, net... $ 19,670,767 $ 20,677,187 $ 22,992,254 $ 27,251,831 $ 27,916,213 Assets held for sale........... 4,765,942 5,910,865 4,203,597 - - Total assets................... 29,746,379 32,369,919 32,592,153 32,508,764 33,355,998 Mortgage notes payable, net.... 36,064,590 38,796,649 39,255,045 39,684,440 40,090,432 Partners' deficit.............. (10,415,809) (9,793,898) (10,633,464) (11,323,378) (10,759,568) See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------- ----------------------------------------------------------- AND RESULTS OF OPERATIONS ------------------------- FINANCIAL CONDITION - ------------------- The Partnership was formed to acquire, operate and ultimately dispose of a portfolio of income-producing real properties. As of December 31, 1998, the Partnership owned seven apartment properties. All of the Partnership's properties are subject to mortgage notes. RESULTS OF OPERATIONS - --------------------- 1998 compared to 1997 Revenue: Total Partnership revenues for 1998 increased by $3,032,065 as compared to 1997. Rental revenue decreases were offset by increased interest revenue. The Partnership also recognized a gain of $3,319,137 on the sale of The Park Apartments. No such gain was recognized in 1997. Rental revenue for 1998 decreased $175,660 primarily due to the sale of The Park Apartments in April of 1998. Excluding the revenue from The Park, rental revenue increased $367,910 or 3%. Interest income for 1998 increased by $108,216 as compared to the prior year due to higher average cash balances being invested in interest bearing accounts. Expenses: Partnership expenses increased by $323,524 or 2% for the year ended 1998 as compared to 1997. The effects from the sale of The Park in April 1998 were declines of $96,205 for interest, $5,817 for property taxes, $69,876 for personnel expenses, $32,376 for repairs and maintenance, $13,699 for property management fees, $17,064 for utilities and $28,339 for other property operating expenses. In addition to the sale of The Park, other factors affected the level of expenses reported by the remaining properties. Interest expense - affiliates decreased by $138,241 in 1998 as compared to 1997. This decrease is due to the repayment of the affiliate mortgage note in April 1998. Personnel expenses increased by $126,098 or 7% in 1998 due to an increase of compensation and benefits at all the properties. General and administrative expenses increased $394,531 for the year ended December 31, 1998 and compared to the same period last year. The increase was mainly due to the costs incurred to explore alternatives to maximize the value of the Partnership. The increase was partially offset by decreases attributable to investor services. During 1997, charges for investor services were provided by a third party vendor. Beginning with 1998, these services are provided by affiliates of the General Partner. As a result of this, general and administrative affiliates increased by $65,155 in 1998. 1997 compared to 1996 Revenue: Total Partnership revenues for 1997 decreased by $45,122 as compared to 1996. Rental revenue increased $332,347 or 2%. In 1997, the Partnership recognized a gain on involuntary conversion of $219,628 for fires at The Park, The Village and Knollwood as compared to $598,859 in 1996. Rental revenue for 1997 was $15,187,999 as compared to $14,855,652 for 1996. This increase of $332,347 is due to an increase in the rental rates at seven of the eight Partnership's properties, offset by decreases in the occupancy rates at three of the eight Partnership's properties. Expenses: Total Partnership expenses decreased by $197,230 for the year ended December 31, 1997 as compared to 1996. Decreases in depreciation, general and administrative, and general and administrative - affiliates were offset by increases in repairs and maintenance and interest - affiliate. Interest expense decreased by $249,546 or 7% as compared to the same period last year. This decrease is due to the November 1996 refinancing of the mortgage note on The Village with an affiliate mortgage note. As a result of this refinancing, interest expense - affiliates increased by $221,118 for the year ended December 31, 1997. Depreciation declined by $289,254 or 12% for the period ended December 31, 1997 as compared to the same period in 1996. This decrease is mainly due to Rock Creek, which is currently classified as an asset held for sale, for which no depreciation has been recognized since October 1, 1996. The Park was also classified as an asset held for sale as of August 1, 1997, and no depreciation has been recognized since that date. Repairs and maintenance expense increased by $211,296 or 11% for the period ended December 31, 1997 compared to the same period in 1996. The increase can be attributed to increases in service expenses and the replacement of carpeting. Carpet replacements of $162,461 for three of the Partnership properties, which met the Partnership's criteria for capitalization in 1996, were expensed in 1997. General and administrative expenses decreased $234,637 or 54% for the year ended December 31, 1997 as compared to the same period last year. In 1996, the Partnership incurred costs to evaluate and disseminate information regarding an unsolicited tender offer. The decrease was slightly offset by charges for investor services, which beginning in 1997, was provided by a third party vendor. In 1996, these costs were paid to an affiliate of the General Partner and were included in general and administrative - affiliates. General and administrative - affiliates expense decreased by $74,448 or 22% for 1997 as compared to the same period last year due to the reduction of overhead expenses allocable to the Partnership. Allocated expenses decreased in part due to investor services being performed by an unrelated third party in 1997, as discussed above. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At December 31, 1998, the Partnership held cash and cash equivalents of $2,397,968, down $647,817 as compared to 1997. The Partnership has experienced positive cash flow from operations of $10,761,719 for the three years ended December 31, 1998. During 1996, the Partnership received a mortgage loan from affiliates of $2,588,971. The Partnership has also received $1,009,178 in insurance proceeds for the three years ended December 31, 1998. Over the last three years the Partnership has used cash to fund $5,325,786 in additions to real estate investments, $1,446,347 in principal payments, $152,564 for additions to deferred borrowing costs and $2,513,937 for the payment of the MID. The Partnership received $4,787,389 as proceeds from the sale of The Park, of which $2,565,604 was used to retire the related mortgage note payable. On April 27, 1998, the Partnership refinanced the mortgage note payable on The Village. The new mortgage note, in the amount of $2,635,000 bears interest at a variable rate equal to 1.75% plus the London Interbank Offered Rate per annum. The new mortgage note requires monthly interest only payments and quarterly principal payments in the amount necessary to reduce the principal balance of the note by 5% annually. The maturity date of the new mortgage note is May 1, 2001. The Partnership realized $46,029 of cash proceeds from the transaction; however, the cash proceeds together with additional cash reserves were used to fund various deferred borrowing costs of $57,134 related to the transaction. On September 28, 1998, the Partnership refinanced the mortgage note payable on Rock Creek. The new mortgage note, in the amount of $6,225,000 bears interest at a variable rate equal to 1.75% plus the London Interbank Offered Rate per annum. The new mortgage note requires monthly interest only payments and quarterly principal payments in the amount necessary to reduce the principal balance of the note by 5% annually. The maturity date of the new mortgage note is October 1, 2001. The Partnership realized $250,217 of cash proceeds from the transaction; however, $82,273 of the cash proceeds was used to fund various deferred borrowing costs related to the transaction. The Partnership generated $3,645,973 through operating activities in 1998 as compared to $3,703,741 in 1997. The decrease of $57,768 can be attributed to the decrease in cash received from tenants and increases in cash paid to suppliers and property taxes paid. The decrease was partially offset with decreases in interest paid and interest - affiliate paid. The Partnership generated $3,703,741 through operating activities in 1997 as compared to $3,412,005 in 1996. The increase of $291,736 can be attributed to the increase in tenant receipts as a result of the increased rental rates at all the Partnership's properties and a decrease in the cash paid to affiliates. Short-term liquidity: The Partnership expended considerable resources during the past three years to restore its properties to good operating condition. These expenditures have been necessary to maintain the competitive position of the Partnership's aging properties in each of their markets. The capital improvements made during the past three years have enabled the Partnership to increase its rental revenues and reduce certain of its repairs and maintenance expenses. The Partnership has budgeted an additional $1.03 million of capital improvements for 1999, to be funded from property operations and cash reserves. At December 31, 1998, the Partnership held cash and cash equivalents of $2,397,968. The General Partner considers this level of cash reserves to be adequate to meet the Partnership's operating needs. The General Partner anticipates continuing MID payments if the Partnership's properties continue to perform as projected. The General Partner believes that anticipated operating results for 1999 will be sufficient to fund the Partnership's budgeted capital improvements for 1999 and to repay the current portion of the Partnership's mortgage notes. Long-term liquidity: For the long-term, property operations will remain the primary source of funds. In this regard, the General Partner expects that the $5.3 million of capital improvements made by the Partnership during the past three years will yield improved cash flow from property operations in the future. If the Partnership's cash position deteriorates, the General Partner may elect to defer certain of the capital improvements, except where such improvements are expected to increase the competitiveness or marketability of the Partnership's properties. As previously announced, the Partnership has retained PaineWebber, Incorporated ("PaineWebber") as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership, including, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The Partnership, through PaineWebber, provided financial and other information to interested parties as part of an auction process and until early March 1999 was conducting discussions with one bidder in an attempt to reach a definitive agreement with respect to a sale transaction. In early March 1999, because the Partnership had been unable to conclude negotiations for a transaction with such bidder, the Partnership terminated such discussions and commenced discussions with respect to a sale transaction with another well-financed bidder who had been involved in the original auction process. During the last full week of March, the Partnership entered into a 45 day exclusivity agreement with such party. It is possible that the General Partner and its affiliates will receive non-cash consideration for their ownership interests in connection with any such transaction. There can be no assurance regarding whether any such agreement will be reached nor the terms thereof. The Partnership has placed Rock Creek Apartments on the market for sale effective October 1, 1996 Income allocation and distributions: Terms of the Amended Partnership Agreement specify that income before depreciation is allocated to the General Partner to the extent of MID paid in cash. Depreciation is allocated in the ratio of 95:5 to the limited partners and the General Partner, respectively. Therefore, for each of the three years in the period ended December 31, 1998, $228,243, $1,167,537 and $788,575, respectively, of net income was allocated to the General Partner. The limited partners received allocations of net income of $4,225,017, $577,182 and $804,036, respectively, for the three year period ended December 31, 1998. During 1998, the limited partners received a cash distribution of $4,221,415. The distributions consisted of funds from operations and cash reserves. A distribution of $853,756 for the MID has been accrued by the Partnership for the year ended December 31, 1998 for the General Partner. During the last week of March 1999, the General Partner distributed approximately $500,000 to the limited partners of record as of March 1, 1999. The General Partner will continue to monitor the cash reserves and working capital needs of the Partnership to determine when cash flows will support additional distributions to the limited partners. YEAR 2000 DISCLOSURE - -------------------- State of readiness - ------------------ The year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in major systems failure or miscalculations. Management has assessed its information technology ("IT") infrastructure to identify any systems that could be affected by the year 2000 problem. The IT used by the Partnership for financial reporting and significant accounting functions was made year 2000 compliant during recent systems conversions. The software utilized for these functions are licensed by third party vendors who have warranted that their systems are year 2000 compliant. Management is in the process of evaluating the mechanical and embedded technological systems at the various properties. Management has inventoried all such systems and queried suppliers, vendors and manufacturers to determine year 2000 compliance. Management will complete assessment of findings by May 1, 1999. In circumstances of non-compliance management will work with the vendor to remedy the problem or seek alternative suppliers who will be in compliance. Management believes that the remediation of any outstanding year 2000 conversion issues will not have a material or adverse effect on the Partnership's operations. However, no estimates can be made as to the potential adverse impact resulting from the failure of third party service providers and vendors to be year 2000 compliant. Cost - ---- The cost of IT and embedded technology systems testing and upgrades is not expected to be material to the Partnership. Because all the IT systems have been upgraded over the last three years, all such systems were compliant, or made compliant at no additional cost by third party vendors. Management anticipates the costs of assessing, testing, and if necessary replacing embedded technology components will be less than $50,000. Such costs will be funded from operations of the Partnership. Risks - ----- Ultimately, the potential impact of the year 2000 issue will depend not only on the corrective measures the Partnership undertakes, but also on the way in which the year 2000 issue is addressed by government agencies and entities that provide services or supplies to the Partnership. Management has not determined the most likely worst case scenario to the Partnership. As management studies the findings of its property systems assessment and testing, management will develop a better understanding of what would be the worst case scenario. Management believes that progress on all areas is proceeding and that the Partnership will experience no adverse effect as a result of the year 2000 issue. However, there is no assurance that this will be the case. Contingency plans - ----------------- Management is developing contingency plans to address potential year 2000 non-compliance of IT and embedded technology systems. Management believes that failure of any IT system could have an adverse impact on operations. However, management believes that alternative systems are available that could be utilized to minimize such impact. Management believes that any failure in the embedded technology systems could have an adverse impact on that property's performance. Management will assess these risks and develop plans to mitigate possible failures by June, 1999. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------- ---------------------------------------------------------- Not Applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------- -------------------------------------------- Page Number ------ INDEX TO FINANCIAL STATEMENTS - ----------------------------- Financial Statements: Report of Independent Public Accountants....................................... 16 Balance Sheets at December 31, 1998 and 1997................................... 17 Statements of Operations for each of the three years in the period ended December 31, 1998..................................................... 18 Statements of Partners' Deficit for each of the three years in the period ended December 31, 1998....................................... 19 Statements of Cash Flows for each of the three years in the period ended December 31, 1998..................................................... 20 Notes to Financial Statements.................................................. 22 Financial Statement Schedule - Schedule III - Real Estate Investments and Accumulated Depreciation............................................................. 32 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of McNeil Real Estate Fund XI, Ltd.: We have audited the accompanying balance sheets of McNeil Real Estate Fund XI, Ltd. (a California limited partnership) as of December 31, 1998 and 1997, and the related statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1998. These financial statements and the schedule referred to below are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and the 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 financial statements referred to above present fairly, in all material respects, the financial position of McNeil Real Estate Fund XI, Ltd. as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Dallas, Texas March 19, 1999 McNEIL REAL ESTATE FUND XI, LTD. BALANCE SHEETS December 31, ---------------------------------- 1998 1997 ------------ ------------- ASSETS - ------ Real estate investments: Land ................................................. $ 4,407,325 $ 4,407,325 Buildings and improvements ........................... 48,327,237 47,211,527 ------------ ------------ 52,734,562 51,618,852 Less: Accumulated depreciation ...................... (33,063,795) (30,941,665) ------------ ------------ 19,670,767 20,677,187 Assets held for sale .................................... 4,765,942 5,910,865 Cash and cash equivalents ............................... 2,397,968 3,045,785 Cash segregated for security deposits ................... 459,382 413,487 Cash restricted for mortgage payments ................... 286,160 -- Accounts receivable ..................................... 149,681 40,018 Prepaid expenses and other assets ....................... 233,791 242,961 Escrow deposits ......................................... 617,502 683,785 Deferred borrowing costs, net of accumulated amortization of $682,223 and $677,649 at December 31, 1998 and 1997, respectively ............. 1,165,186 1,355,831 ------------ ------------ $ 29,746,379 $ 32,369,919 ============ ============ LIABILITIES AND PARTNERS' DEFICIT - --------------------------------- Mortgage notes payable, net ............................. $ 36,064,590 $ 36,207,678 Mortgage note payable - affiliate ....................... -- 2,588,971 Accrued interest ........................................ 240,794 292,766 Accrued expenses and deferred rental income ............. 414,875 382,446 Payable to affiliates - General Partner ................. 2,950,388 2,231,389 Deferred gain - fire .................................... 25,037 -- Security deposits ....................................... 466,504 460,567 ------------ ------------ 40,162,188 42,163,817 ------------ ------------ Partners' deficit: Limited partners - 159,813 limited partnership units issued and outstanding at December 31, 1998 and 1997 .................................... (3,598,672) (3,602,274) General Partner .................................... (6,817,137) (6,191,624) ------------ ------------ (10,415,809) (9,793,898) ------------ ------------ $ 29,746,379 $ 32,369,919 ============ ============ See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XI, LTD. STATEMENTS OF OPERATIONS For the Years Ended December 31, ------------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Revenue: Rental revenue ........................... $15,012,339 $15,187,999 $14,855,652 Interest ................................. 237,530 129,314 127,552 Gain on involuntary conversion ........... -- 219,628 598,859 Gain on disposition of real estate ....... 3,319,137 -- -- ----------- ----------- ----------- Total revenue .......................... 18,569,006 15,536,941 15,582,063 ----------- ----------- ----------- Expenses: Interest ................................. 3,443,644 3,535,009 3,784,555 Interest - affiliates .................... 106,497 244,738 23,620 Depreciation ............................. 2,135,144 2,083,616 2,372,870 Property taxes ........................... 825,119 793,994 787,865 Personnel expenses ....................... 1,934,708 1,808,610 1,716,875 Repairs and maintenance .................. 2,028,214 2,133,196 1,921,900 Property management fees - affiliates ............................. 811,452 752,909 734,247 Utilities ................................ 1,159,166 1,161,104 1,093,688 Other property operating expenses ........ 742,860 809,790 775,491 General and administrative ............... 592,301 197,770 432,407 General and administrative - affiliates ............................. 336,641 271,486 345,934 ----------- ----------- ----------- Total expenses ......................... 14,115,746 13,792,222 13,989,452 ----------- ----------- ----------- Net income .................................. $ 4,453,260 $ 1,744,719 $ 1,592,611 =========== =========== =========== Net income allocable to limited partners ................................. $ 4,225,017 $ 577,182 $ 804,036 Net income allocable to General Partner .................................. 228,243 1,167,537 788,575 ----------- ----------- ----------- Net income .................................. $ 4,453,260 $ 1,744,719 $ 1,592,611 =========== =========== =========== Net income per limited partnership unitxxxxxx $ 26.44 $ 3.61 $ 5.03 =========== =========== =========== Distributions per limited partnership unit ..................................... $ 26.41 $ -- $ -- =========== =========== =========== See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XI, LTD. STATEMENTS OF PARTNERS' DEFICIT For the Years Ended December 31, 1998, 1997 and 1996 Total General Limited Partners' Partner Partners Deficit ------------- ------------- ------------- Balance at December 31, 1995 ........... $ (6,339,886) $ (4,983,492) $(11,323,378) Net income ............................. 788,575 804,036 1,592,611 Management Incentive Distribution....... (902,697) -- (902,697) ------------ ------------ ------------ Balance at December 31, 1996 ........... (6,454,008) (4,179,456) (10,633,464) Net income ............................. 1,167,537 577,182 1,744,719 Management Incentive Distribution ...... (905,153) -- (905,153) ------------ ------------ ------------ Balance at December 31, 1997 ........... (6,191,624) (3,602,274) (9,793,898) Net income ............................. 228,243 4,225,017 4,453,260 Distributions to limited partners ...... -- (4,221,415) (4,221,415) Management Incentive Distribution ...... (853,756) -- (853,756) ------------ ------------ ------------ Balance at December 31, 1998 ........... $ (6,817,137) $ (3,598,672) $(10,415,809) ============ ============ ============ See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XI, LTD. STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents For the Years Ended December 31, ------------------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- Cash flows from operating activities: Cash received from tenants ............... $ 14,884,390 $ 15,197,251 $ 14,877,289 Cash paid to suppliers ................... (6,352,045) (6,259,909) (5,836,491) Cash paid to affiliates .................. (879,258) (984,779) (1,369,172) Interest received ........................ 237,530 129,314 127,552 Interest paid ............................ (3,271,612) (3,352,192) (3,645,580) Interest paid to affiliates .............. (106,497) (244,738) (23,620) Property taxes paid ...................... (866,535) (781,206) (717,973) ------------ ------------ ------------ Net cash provided by operating activities ............................... 3,645,973 3,703,741 3,412,005 ------------ ------------ ------------ Cash flows from investing activities: Additions to real estate investments and assets held for sale ............... (1,342,388) (1,516,353) (2,467,045) Insurance proceeds from fire damage ...... -- 260,164 681,998 Insurance proceeds from hail damage Proceeds from disposition of real estate ............................ 4,787,389 -- -- ------------ ------------ ------------ Net cash provided by (used in) investing activities ..................... 3,445,001 (1,256,189) (1,718,031) ------------ ------------ ------------ Cash flows from financing activities: Principal payments on mortgage notes payable .......................... (487,451) (481,928) (476,968) Cash restricted for mortgage note payment ................................ (286,160) -- -- Deferred borrowing costs paid ............ (139,407) -- (13,157) Proceeds from mortgage notes payable ................................ 8,860,000 -- -- Repayment of mortgage note - affiliate .............................. (2,588,971) -- -- Retirement of mortgage note payable ...... (5,974,783) -- (2,564,266) Retirement of mortgage note payable due to disposition ............. (2,565,604) -- -- Distributions to limited partners ........ (4,221,415) -- -- Mortgage loan from affiliate ............. -- -- 2,588,971 Management Incentive Distribution ........ (335,000) (1,271,718) (907,219) ------------ ------------ ------------ Net cash used in financing activities ....... (7,738,791) (1,753,646) (1,372,639) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents ....................... (647,817) 693,906 321,335 Cash and cash equivalents at beginning of year ...................... 3,045,785 2,351,879 2,030,544 ------------ ------------ ------------ Cash and cash equivalents at end of year ................................ $ 2,397,968 $ 3,045,785 $ 2,351,879 ============ ============ ============ See discussion of noncash investing and financing activities in Note 2, 7 and 9. See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XI, LTD. STATEMENTS OF CASH FLOWS Reconciliation of Net Income to Net Cash Provided by Operating Activities For the Years Ended December 31, --------------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Net income ................................... $ 4,453,260 $ 1,744,719 $ 1,592,611 ----------- ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Gain on involuntary conversion ............ -- (219,628) (598,859) Gain on disposition of real estate ........ (3,319,137) -- -- Depreciation .............................. 2,135,144 2,083,616 2,372,870 Amortization of discounts on mortgage notes payable .................. 24,750 23,532 22,868 Amortization of deferred borrowing costs ................................... 199,254 161,947 123,008 Changes in assets and liabilities: Cash segregated for security deposits .............................. (45,895) (9,538) (17,824) Accounts receivable ..................... (75,368) (10,132) 1,441 Prepaid expenses and other assets ................................ 9,170 13,190 20,634 Escrow deposits ......................... 66,283 (21,782) 175,504 Accounts payable ........................ -- (52,886) (9,170) Accrued interest ........................ (51,972) (2,662) (6,901) Accrued expenses and deferred rental income ......................... 44,304 (73,411) (1,127) Payable to affiliates - General Partner ............................... 200,243 39,616 (288,991) Security deposits ....................... 5,937 27,160 25,941 ----------- ----------- ----------- Total adjustments ................... 807,287 1,959,022 1,819,394 ----------- ----------- ----------- Net cash provided by operating activities ................................ $ 3,645,973 $ 3,703,741 $ 3,412,005 =========== =========== =========== See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XI, LTD. NOTES TO FINANCIAL STATEMENTS December 31, 1998 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------- Organization - ------------- McNeil Real Estate Fund XI, Ltd. (the "Partnership") was organized June 2, 1980 as a limited partnership under the provisions of the California Uniform Limited Partnership Act. The general partner of the Partnership is McNeil Partners, L.P. (the "General Partner"), a Delaware limited partnership, an affiliate of Robert A. McNeil. The Partnership is governed by an amended and restated partnership agreement of limited partnership dated August 6, 1991, as amended (the "Amended Partnership Agreement"). The principal place of business for the Partnership and for the General Partner is 13760 Noel Road, Suite 600, LB70, Dallas, Texas, 75240. The Partnership is engaged in real estate activities, including the ownership, operation and management of residential real estate and other real estate related assets. At December 31, 1998, the Partnership owned seven income-producing properties as described in Note 4 - Real Estate Investments. As previously announced, the Partnership has retained PaineWebber, Incorporated ("PaineWebber") as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership, including, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The Partnership, through PaineWebber, provided financial and other information to interested parties as part of an auction process and until early March 1999 was conducting discussions with one bidder in an attempt to reach a definitive agreement with respect to a sale transaction. In early March 1999, because the Partnership had been unable to conclude negotiations for a transaction with such bidder, the Partnership terminated such discussions and commenced discussions with respect to a sale transaction with another well-financed bidder who had been involved in the original auction process. During the last full week of March, the Partnership entered into a 45 day exclusivity agreement with such party. It is possible that the General Partner and its affiliates will receive non-cash consideration for their ownership interests in connection with any such transaction. There can be no assurance regarding whether any such agreement will be reached nor the terms thereof. The Partnership has placed Rock Creek Apartments on the market for sale effective October 1, 1996 Basis of Presentation - --------------------- The accompanying financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Partnership's financial statements include the accounts of the following listed tier partnerships for the years ended December 31, 1998, 1997 and 1996. These single asset tier partnerships were formed to accommodate the refinancing of the respective property. The Partnership's and the General Partner's ownership interest in each tier partnership is detailed below. The Partnership retains effective control of each tier partnership. The General Partner's minority interest is not presented as it is both negative or immaterial. % of Ownership Interest Tier Partnership Partnership General Partner ---------------- ----------- --------------- Limited Partnerships: Acacia Lakes Fund XI Limited Partnership 99% 1% Gentle Gale Fund XI Limited Partnership* 100 - Rock Creek Fund XI Limited* 100 - Villa Del Rio XI Limited Partnership* 100 - Village Fund XI Associates 99 1 General Partnerships: Knollwood XI Associates 99 1 The Park Fund XI Associates** 99 1 Sun Valley Fund XI Associates 99 1 * The general partner of these partnerships is a corporation whose stock is 100% owned by the Partnership. ** The Partnership sold The Park Apartments on April 30, 1998. See Note 7. Adoption of Recent Accounting Pronouncements - -------------------------------------------- The Partnership has adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131 requires an enterprise to report financial information about its reportable operating segments, which are defined as components of a business for which separate financial information is evaluated regularly by the chief decision maker in allocating resources and assessing performance. The Partnership does not prepare such information for internal use, since it analyzes the performance of and allocates resources for each property individually. The Partnership's management has determined that it operates one line of business and it would be impracticable to report segment information. Therefore, the adoption of SFAS 131 has no impact on the Partnership's financial statements. Real Estate Investments - ----------------------- Real estate investments are generally stated at the lower of depreciated cost or fair value. Real estate investments are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". When the carrying value of a property exceeds the sum of all estimated future cash flows, an impairment loss is recognized. At such time, a write-down is recorded to reduce the basis of the property to its estimated fair value. Improvements and betterments are capitalized and expensed through depreciation charges. Repairs and maintenance are charged to operations as incurred. Assets Held for Sale - -------------------- The assets held for sale are stated at the lower of depreciated cost or fair value less costs to sell. Depreciation on these assets ceased at the time they were placed on the market for sale. Depreciation - ------------ Buildings and improvements are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from 3 to 40 years. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents include cash on hand and cash on deposit with financial institutions with original maturities of three months or less. Carrying amounts for cash and cash equivalents approximate fair value. Escrow Deposits - --------------- The Partnership is required to maintain escrow accounts in accordance with the terms of various mortgage indebtedness agreements. These escrow accounts are controlled by the mortgagee and are used for payment of property taxes, hazard insurance, capital improvements and/or property replacements. Carrying amounts for escrow deposits approximate fair value. Deferred Borrowing Costs - ------------------------ Loan fees and other related costs incurred to obtain long-term financing on real property are capitalized and amortized using a method that approximates the effective interest method over the terms of the related mortgage notes payable. Amortization of deferred borrowing costs is included in interest expense on the Statements of Operations. Discounts on Mortgage Notes Payable - ----------------------------------- Discounts on mortgage notes payable are being amortized over the remaining terms of the related mortgage notes using the effective interest method. Amortization of discounts on the mortgage notes payable is included in interest expense on the Statements of Operations. Rental Revenue - -------------- The Partnership leases its residential properties under short-term operating leases. Lease terms generally are less than one year in duration. Rental revenue is recognized as earned. Income Taxes - ------------ No provision for Federal income taxes is necessary in the financial statements of the Partnership because, as a partnership, it is not subject to Federal income tax, and the tax effect of its activities accrues to the partners. Allocation of Net Income and Net Loss - -------------------------------------- The Amended Partnership Agreement provides for net income of the Partnership for both financial statement and income tax reporting purposes to be allocated as indicated below. For allocation purposes, net income and net loss of the Partnership are determined prior to deductions for depreciation: a) first, deductions for depreciation shall be allocated 5% to the General Partner and 95% to the limited partners; b) then, net income in an amount equal to the cumulative amount paid to the General Partner for the Management Incentive Distribution ("MID"), for which no previous income allocations have been made, shall be allocated to the General Partner; provided, however, that if all or a portion of such payment consists of limited partnership units ("Units"), the amount of net income allocated shall be equal to the amount of cash the General Partner would have otherwise received; and c) then, any remaining net income shall be allocated to achieve the allocation of 5% to the General Partner and 95% to the limited partners. The Amended Partnership Agreement provides that net losses, other than that arising from a sale or refinancing, shall be allocated 5% to the General Partner and 95% to the limited partners. Net losses arising from a sale or refinancing shall be allocated 1% to the General Partner and 99% to the limited partners. Federal income tax law provides that the allocation of loss to a partner will not be recognized unless the allocation is in accordance with a partner's interest in the partnership or the allocation has substantial economic effect. Internal Revenue Code Section 704(b) and accompanying Treasury Regulations establish criteria for allocations of Partnership deductions attributable to debt. The Partnership's tax allocations for 1998, 1997 and 1996 have been made in accordance with these provisions. Distributions - ------------- Pursuant to the Amended Partnership Agreement and at the discretion of the General Partner, distributions during each taxable year shall be made as follows: (a) first, to the General Partner, in an amount equal to the MID; and (b) any remaining distributable cash, as defined, shall be distributed 100% to the limited partners. Cash distributions of $4,221,415 were made to the limited partners in 1998. No distributions were made to the limited partners in 1997 or 1996. The Partnership paid or accrued distributions of $853,756, $905,153 and $902,697 for the benefit of the General Partner for the years ended December 31, 1998, 1997 and 1996, respectively. These distributions are the MID pursuant to the Amended Partnership Agreement. The General Partner has waived the collection terms of reimbursable expenses and MID, and has elected for the Partnership to pay limited partner distributions before the payment of such amounts. During the last week of March 1999, the Partnership distributed approximately $500,000 to the limited partners of record at March 1, 1999. Net Income Per Limited Partnership Unit - --------------------------------------- Net income per Unit is computed by dividing net income allocated to the limited partners by the number of Units outstanding. Per Unit information has been computed based on 159,813 Units outstanding in 1998, 1997 and 1996. NOTE 2 - TRANSACTIONS WITH AFFILIATES - ------------------------------------- The Partnership pays property management fees equal to 5% of the gross rental receipts of the Partnership's properties to McNeil Real Estate Management, Inc. ("McREMI"), an affiliate of the General Partner, for providing property management and leasing services. The Partnership reimburses McREMI for its costs, including overhead, of administering the Partnership's affairs. Under terms of the Amended Partnership Agreement, the Partnership is paying the MID to the General Partner. The maximum MID is calculated as 1% of the tangible asset value of the Partnership. Tangible asset value is determined by using the greater of (i) an amount calculated by applying a capitalization rate of 9% to the annualized net operating income of each property or (ii) a value of $10,000 per apartment unit for residential property to arrive at the property tangible asset value. The property tangible asset value is then added to the book value of all other assets excluding intangible items. The maximum MID percentage decreases to .75% in 2000, .50% in 2001 and .25% thereafter. The MID will be paid to the extent of the lesser of the Partnership's excess cash flow as defined, or net operating income, as defined (the "Entitlement Amount"), and may be paid (i) in cash, unless there is insufficient cash to pay the distribution in which event any unpaid portion not taken in Units will be deferred and is payable, without interest, from the first available cash and/or (ii) in Units. A maximum of 50% of the MID may be paid in Units. The number of Units issued in payment of the MID is based on the greater of $50 per Unit or the net tangible asset value per Unit, as defined. No Units were issued in payment of the MID in 1998, 1997 or 1996. During 1991, the Partnership amended its capitalization policy and began capitalizing certain costs of improvements and betterments which under policies of prior management had been expensed when incurred. The purpose of the amendment was to more properly recognize items which were capital in nature. The effect of the amendment standing alone was evaluated at the time the change was made and determined not to be material to the financial statements of the Partnership in 1991, nor was it expected to be material in any future year. However, the amendment can have a material effect on the calculation of the Entitlement Amount which determines the amount of MID earned. Capital improvements are excluded from cash flow, as defined. The majority of base period cash flow was measured under the previous capitalization policy, while incentive period cash flow is determined using the amended policy. Under the amended policy, more items are capitalized, and cash flow increases. The amendment of the capitalization policy did not materially affect the MID for 1998, 1997 or 1996 because the Entitlement Amount was sufficient to pay MID notwithstanding the amendment to the capitalization policy. Any amount of the MID that is paid to the General Partner in Units will be treated as if cash is distributed to the General Partner and is then contributed to the Partnership by the General Partner. The MID represents a return of equity to the General Partner for increasing cash flow, as defined, and accordingly is treated as a distribution. Compensation and reimbursements paid or accrued for the benefit of the General Partner or its affiliates are as follows: For the Years Ended December 31, 1998 1997 1996 ---------- ---------- ---------- Property management fees - affiliates ....... $ 811,452 $ 752,909 $ 734,247 Interest - affiliates ....................... 106,497 244,738 23,620 Charged to general and administrative - affiliates: Partnership administration ............... 336,641 271,486 345,934 ---------- ---------- ---------- $1,254,590 $1,269,133 $1,103,801 ========== ========== ========== Charged to General Partner's deficit: MID ...................................... $ 853,756 $ 905,153 $ 902,697 ========== ========== ========== Payable to affiliates - General Partner at December 31, 1998 and 1997 consisted primarily of accrued property management fees, MID and cost reimbursements and are due and payable from operations. In 1998 and 1997, the Partnership paid $335,000 and $1,271,718, respectively, from cash reserves for the MID. The General Partner has waived the collection terms of reimbursable expenses and MID, and has elected for the Partnership to pay limited partner distributions before the payment of such amounts. NOTE 3 - TAXABLE INCOME - ----------------------- McNeil Real Estate Fund XI, Ltd. is a partnership and is not subject to Federal and state income taxes. Accordingly, no recognition has been given to income taxes in the accompanying financial statements of the Partnership since the income or loss of the Partnership is to be included in the tax returns of the individual partners. The tax returns of the Partnership are subject to examination by Federal and state taxing authorities. If such examinations result in adjustments to distributive shares of taxable income or loss, the tax liability of the partners could be adjusted accordingly. The Partnership's net assets and liabilities for tax purposes were less than the net assets and liabilities for financial reporting purposes by $2,449,717 in 1998, $261,840 in 1997and $831,834 in 1996. NOTE 4 - REAL ESTATE INVESTMENTS - -------------------------------- The basis and accumulated depreciation of the Partnership's real estate investments at December 31, 1998 and 1997 are set forth in the following tables: Buildings and Accumulated Net Book 1998 Land Improvements Depreciation Value ---- -------------- ------------ ------------ --------------- Acacia Lakes Mesa, AZ $ 1,953,090 $ 13,505,267 $ (9,844,141) $ 5,614,216 Gentle Gale Galveston, TX 450,155 3,837,200 (2,700,717) 1,586,638 Knollwood Kansas City, MO 330,547 7,481,953 (4,997,953) 2,814,547 Sun Valley Charlotte, NC 562,797 8,887,177 (5,329,739) 4,120,235 Villa Del Rio Jacksonville, FL 636,634 10,072,157 (6,661,746) 4,047,045 The Village Gresham, OR 474,102 4,543,483 (3,529,499) 1,488,086 ------------- ------------- ------------- ------------- $ 4,407,325 $ 48,327,237 $ (33,063,795) $ 19,670,767 ============= ============= ============= ============= Buildings and Accumulated Net Book 1997 Land Improvements Depreciation Value ---- -------------- ------------ ------------ --------------- Acacia Lakes $ 1,953,090 $ 13,280,033 $ (9,302,116) $ 5,931,007 Gentle Gale 450,155 3,768,457 (2,533,853) 1,684,759 Knollwood 330,547 7,257,557 (4,638,122) 2,949,982 Sun Valley 562,797 8,654,858 (4,963,089) 4,254,566 Villa Del Rio 636,634 9,760,851 (6,264,146) 4,133,339 The Village 474,102 4,489,771 (3,240,339) 1,723,534 ------------- ------------- ------------- ------------- $ 4,407,325 $ 47,211,527 $ (30,941,665) $ 20,677,187 ============= ============= ============= ============= On August 1, 1997, the General Partner placed The Park Apartments, located in Joplin, Missouri, on the market for sale. The property was classified as an asset held for sale at December 31, 1997. The net book value of the property was $1,341,317 at December 31, 1997. On April 30, 1998, the Partnership sold The Park Apartments. See Note 7. On October 1, 1996, the General Partner placed Rock Creek Apartments, located in Portland, Oregon, on the market for sale. The property was classified as an asset held for sale at December 31, 1998 and 1997. The net book value of the property was $4,765,942 and $4,569,548 at December 31, 1998 and 1997, respectively. The results of operations for the assets held for sale at December 31, 1998 were $600,215, $671,919 and $263,104 for 1998, 1997 and 1996, respectively. Results of operations are operating revenues less operating expenses including interest expense and depreciation expense. The Partnership's real estate properties are encumbered by mortgage indebtedness as discussed in Notes 5 and 6. NOTE 5 - MORTGAGE NOTES PAYABLE - ------------------------------- The following table sets forth the mortgage notes payable of the Partnership at December 31, 1998 and 1997. All mortgage notes are secured by real estate investments or the assets held for sale. Mortgage Annual Monthly Lien Interest Payments/ December 31, Property Position (a) Rates % Maturity Date (g) 1998 1997 - -------- --------------- ------- ----------------- --------------- -------------- Acacia Lakes First 8.700 $ 71,069 01/01 $ 8,680,219 $ 8,773,421 ------------- -------------- Gentle Gale (f) First 8.150 22,327 07/03 2,530,638 2,589,676 Discount (b) (41,502) (50,020) ------------- -------------- 2,489,136 2,539,656 ------------- -------------- Knollwood First 7.750 32,506 05/24 4,326,728 4,379,253 ------------- -------------- Rock Creek First (c) Variable Variable 10/01 6,225,000 - First 11.875 67,860 02/01 - 6,049,641 ------------- -------------- 6,225,000 6,049,641 ------------- -------------- Sun Valley First 7.875 48,384 06/24 6,376,663 6,451,832 ------------- -------------- Mortgage Annual Monthly Lien Interest Payments/ December 31, Property Position (a) Rates % Maturity Date (g) 1998 1997 - -------- --------------- ------- ----------------- --------------- -------------- The Park First (d) 10.500 24,021 05/24 - 2,571,755 ------------- -------------- The Village First (e) Variable Variable 05/01 2,635,000 - ------------- -------------- Villa Del Rio (f) First 8.150 47,843 07/03 5,422,798 5,549,306 Discount (b) (90,954) (107,186) ------------- --------------- 5,331,844 5,442,120 ------------- -------------- $ 36,064,590 $ 36,207,678 ============= ============== (a) The debt is non-recourse to the Partnership. (b) Discounts are based on an effective interest rate of 8.62%. (c) On September 28, 1998, the Partnership refinanced the mortgage note payable on Rock Creek. The new mortgage note bears interest at a variable rate equal to 1.75% plus the London Interbank Offered Rate ("LIBOR"). The interest rate is adjusted every three months. Terms of the note require monthly interest-only debt service payments, plus annual principal payments equal to 5% of the outstanding principal balance. At December 31, 1998, the interest rate of the mortgage note was 7.06%. See Note 8. (d) On April 30, 1998, The Park was sold. See Note 7. (e) On April 27, 1998, the Partnership refinanced the mortgage note payable on The Village. The new mortgage note bears interest at a variable rate equal to 1.75% plus the London Interbank Offered Rate ("LIBOR"). The interest rate is adjusted every three months. Terms of the note require monthly interest-only debt service payments, plus annual principal payments equal to 5% of the outstanding principal balance. At December 31, 1998, the interest rate of the mortgage note was 7.37%. See Note 6 and 8. (f) Financing was obtained under the terms of a Real Estate Mortgage Investment Conduit financing. The mortgage notes payable are cross-collateralized. Principal prepayments made before July 2000 are subject to a Yield Maintenance premium, as defined. Additionally, the Partnership must pay a release payment equal to 25% of the prepaid balance which will be applied to the remaining mortgage notes in the collateral pool. (g) Balloon payments on the mortgage notes are due as follows: Property Balloon Payment Date -------- --------------- ---- Acacia Lakes $ 8,468,000 01/01 Rock Creek 5,766,000 10/01 The Village 2,380,000 05/01 Gentle Gale 2,197,000 07/03 Villa Del Rio 4,707,000 07/03 Scheduled principal maturities of the mortgage notes, before consideration of discounts of $132,456, are as follows: Real Estate Asset Held Investments For Sale ------------ ------------ 1999.................................... $ 570,214 $ 155,000 2000.................................... 603,912 303,500 2001.................................... 11,246,139 5,766,500 2002.................................... 431,266 - 2003.................................... 5,032,325 - Thereafter.............................. 12,088,190 - ----------- ----------- Total................................. $ 29,972,046 $ 6,225,000 =========== =========== Based on borrowing rates currently available to the Partnership for mortgage loans with similar terms and average maturities, the fair value of notes payable was approximately $36,137,000 as of December 31, 1998 and $38,601,000 as of December 31, 1997. NOTE 6 - MORTGAGE NOTE PAYABLE - AFFILIATE - ------------------------------------------ The following sets forth the mortgage note payable - affiliate of the Partnership at December 31, 1998 and 1997. The mortgage note was secured by the real estate investment. Mortgage Annual Monthly Lien Interest Payments/ December 31, Property Position (a) Rates % Maturity Date 1998 1997 - -------- --------------- ------- ------------------- --------------- ----------- The Village (b) First (c) Variable 11/99 $ - $ 2,588,971 =============== ========== (a) The debt is non-recourse to the Partnership. (b) In October 1996, the Partnership obtained a mortgage note commitment from an affiliate of the General Partner for an amount up to $2,588,971. On November 25, 1996, $2,588,971 was funded to the Partnership to pay off the mortgage note on The Village. The Partnership incurred deferred borrowing costs of $13,157 for the new mortgage note payable, and the deferred borrowing costs for the old mortgage note payable were written off. On April 27, 1998, the mortgage note was paid in full. (c) The note required monthly payments of interest only equal to the prime lending rate plus 1%. At December 31, 1997, the prime rate was 8.50%. Under the terms of the Amended Partnership Agreement, borrowings from affiliates approximate fair market value. NOTE 7 - DISPOSITION OF PROPERTY - --------------------------------- On April 30,1998, the Partnership sold to an unaffiliated buyer, The Park, a 192 unit apartment complex in Joplin, Missouri, for a cash purchase price of $4,900,000. Cash proceeds from this transaction, as well as the gain on disposition are detailed below. Gain on Disposition Cash Proceeds ---------------- ------------- Cash sales price..................................... $ 4,900,000 $ 4,900,000 Selling costs........................................ (112,611) (112,611) Basis of real estate sold............................ (1,349,329) Deferred revenue written-off......................... 11,875 Deferred borrowing costs written off............... (130,798) --------------- ----------- Gain on sale of real estate.......................... $ 3,319,137 ============== Proceeds from sale of real estate.................... 4,787,389 Retirement of mortgage note payable.................. (2,565,604) ----------- Net cash proceeds.................................... $ 2,221,785 =========== NOTE 8 - REFINANCING OF MORTGAGE NOTES PAYABLE - ---------------------------------------------- On September 28, 1998, the Partnership refinanced the Rock Creek mortgage note. The new mortgage note, in the amount of $6,225,000 bears interest at a variable rate equal to 1.75% plus the London Interbank Offered Rate per annum (7.06% at December 31, 1998). The new mortgage note requires monthly interest-only payments and annual principal payments equal to 5% of the outstanding principal balance of the mortgage note. Terms of the new note require the Partnership to deposit funds into a restricted cash account on a quarterly basis. The restricted funds will be used to pay the annual principal payment and are included in cash restricted for mortgage payments on the Balance Sheet. The maturity date of the new mortgage note is October 1, 2001. Cash proceeds from the refinancing transaction are as follows: New mortgage note proceeds........................... $ 6,225,000 Amount required to payoff existing debt.............. 5,974,783 ---------- Cash proceeds from refinancing....................... $ 250,217 ========== The Partnership incurred $82,273 of deferred borrowing costs related to the refinancing of the Rock Creek mortgage note. On April 27, 1998, the Partnership refinanced The Village mortgage note. The new mortgage note, in the amount of $2,635,000 bears interest at a variable rate equal to 1.75% plus the London Interbank Offered Rate per annum (7.37% at December 31, 1998). The new mortgage note requires monthly interest-only payments and annual principal payments equal to 5% of the outstanding principal balance of the mortgage note. Terms of the new note require the Partnership to deposit funds into a restricted cash account on a quarterly basis. The restricted funds will be used to pay the annual principal payment and are included in cash restricted for mortgage payments on the Balance Sheet. The maturity date of the new mortgage note is May 1, 2001. Cash proceeds from the refinancing transaction are as follows: New mortgage note proceeds........................... $ 2,635,000 Amount required to payoff existing debt.............. 2,588,971 ----------- Cash proceeds from refinancing....................... $ 46,029 =========== The Partnership incurred $57,134 of deferred borrowing costs related to the refinancing of The Village mortgage note. NOTE 9 - GAIN ON INVOLUNTARY CONVERSION - --------------------------------------- On November 5, 1998, a fire destroyed two units and damaged four units at Gentle Gale Apartments. The Partnership expects to receive $34,295 in insurance reimbursements to cover the cost of repairs which is included in accounts receivable as of December 31, 1998. A deferred gain of $25,037 was recorded by the Partnership as of December 31, 1998. The deferred gain represents the amount of insurance reimbursements to be received in excess of the basis of the property destroyed. The deferred gain will be recognized when the insurance proceeds are received. On January 25, 1997, a fire destroyed two units at The Park. The Partnership received $37,624 in insurance reimbursements to cover the cost of repairs. Insurance reimbursements received in excess of the basis of the property damage were recorded as a $22,630 gain on involuntary conversion. On January 20, 1997, a fire destroyed three units at The Village. The Partnership received $49,552 in insurance reimbursements to cover the cost of repairs. Insurance reimbursements received in excess of the basis of the property damage were recorded as a $24,010 gain on involuntary conversion. On January 8, 1996, 23,347 square feet of Knollwood Apartments were destroyed by fire causing approximately $857,000 in damages. The Partnership received $681,998 in insurance reimbursements as of December 31, 1996, to cover the cost to repair Knollwood. Insurance reimbursements received in excess of the basis of the property damaged were recorded as a $531,843 gain on involuntary conversion during 1996. In 1997, the Partnership received an additional $172,988 in insurance reimbursements, all of which was recorded as a gain on involuntary conversion. In 1994, the Partnership received $67,016 in insurance proceeds to cover the cost of repairs caused by a hail storm in August 1994 at Knollwood Apartments. The insurance proceeds were placed in escrow until completion of repairs. During 1996, the Partnership completed the repairs, received the proceeds that had been held in escrow, and recorded a $67,016 gain on the involuntary conversion. NOTE 10 - LEGAL PROCEEDINGS - --------------------------- The Partnership is not party to, nor are any of the Partnership's properties the subject of, any material pending legal proceedings, other than ordinary, routine litigation incidental to the Partnership's business, except for the following: James F. Schofield, Gerald C. Gillett, Donna S. Gillett, Jeffrey Homburger, Elizabeth Jung, Robert Lewis, and Warren Heller et al. v. McNeil Partners L.P., McNeil Investors, Inc., McNeil Real Estate Management, Inc., Robert A. McNeil, Carole J. McNeil, McNeil Pacific Investors Fund 1972, Ltd., McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil Real Estate Fund XI, Ltd., McNeil Real Estate Fund XII, Ltd., McNeil Real Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate Fund XX, L.P., McNeil Real Estate Fund XXI, L.P., McNeil Real Estate Fund XXII, L.P., McNeil Real Estate Fund XXIII, L.P., McNeil Real Estate Fund XXIV, L.P., McNeil Real Estate Fund XXV, L.P., McNeil Real Estate Fund XXVI, L.P., and McNeil Real Estate Fund XXVII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P., - Superior Court of the State of California for the County of Los Angeles, Case No. BC133799 (Class and Derivative Action Complaint). The action involves purported class and derivative actions brought by limited partners of each of the limited partnerships that were named as nominal defendants as listed above (the "Partnerships"). Plaintiffs allege that McNeil Investors, Inc., its affiliate McNeil Real Estate Management, Inc. and three of their senior officers and/or directors (collectively, the "Defendants") breached their fiduciary duties and certain obligations under the respective Amended Partnership Agreement. Plaintiffs allege that Defendants have rendered such Units highly illiquid and artificially depressed the prices that are available for Units on the resale market. Plaintiffs also allege that Defendants engaged in a course of conduct to prevent the acquisition of Units by an affiliate of Carl Icahn by disseminating purportedly false, misleading and inadequate information. Plaintiffs further allege that Defendants acted to advance their own personal interests at the expense of the Partnerships' public unit holders by failing to sell Partnership properties and failing to make distributions to unitholders. On December 16, 1996, the Plaintiffs filed a consolidated and amended complaint. Plaintiffs are suing for breach of fiduciary duty, breach of contract and an accounting, alleging, among other things, that the management fees paid to the McNeil affiliates over the last six years are excessive, that these fees should be reduced retroactively and that the respective Amended Partnership Agreements governing the Partnerships are invalid. Defendants filed a demurrer to the consolidated and amended complaint and a motion to strike on February 14, 1997, seeking to dismiss the consolidated and amended complaint in all respects. A hearing on Defendant's demurrer and motion to strike was held on May 5, 1997. The Court granted Defendants' demurrer, dismissing the consolidated and amended complaint with leave to amend. On October 31, 1997, the Plaintiffs filed a second consolidated and amended complaint. The case was stayed pending settlement discussions. A Stipulation of Settlement dated September 15, 1998 has been signed by the parties. Preliminary Court approval was received on October 6, 1998. A hearing for Final Approval of Settlement, initially scheduled for December 17, 1998, has been continued to May 25, 1999. Because McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. would be part of the transaction contemplated in the settlement and Plaintiffs claim that an effort should be made to sell the McNeil Partnerships, Plaintiffs have included allegations with respect to McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. in the third consolidated and amended complaint. Plaintiff's counsel intends to seek an order awarding attorney's fees and reimbursements of their out-of-pocket expenses. The amount of such award is undeterminable until final approval is received from the court. Fees and expenses shall be allocated amongst the Partnerships on a pro rata basis, based upon tangible asset value of each such partnership, less total liabilities, calculated in accordance with the Amended Partnership Agreements for the quarter most recently ended. NOTE 11 - COMMITMENTS AND CONTINGENCIES - --------------------------------------- Environmental laws create potential liabilities that may affect property owners. The environmental laws of Federal and certain state governments, for example, impose liability on current and certain past owners of property from which there is a release or threat of release of hazardous substances. This liability includes costs of investigation and remediation of the hazardous substances and natural resource damages. Liability for costs of investigation and remediation is strict and may be imposed irrespective of whether the property owner was at fault, although there are a number of defenses. Both governments and third parties may seek recoveries under these laws. Third parties also may seek recovery under the common law for damages to their property or person, against owners of property from which there has been a release of hazardous and other substances. The presence of contamination or the failure to remediate contaminations may adversely affect the owner's ability to sell or lease real estate or to borrow using the real estate as collateral. Various buildings at properties do or may contain building materials that are the subject of various regulatory programs intended to protect human health. Such building materials include, for example, asbestos, lead-based paint, and lead plumbing components. The Company has implemented programs to deal with the presence of those materials, which include, as appropriate, reduction of potential exposure situations. The Company does not believe that the costs of such programs are likely to have a material adverse effect. Failure to implement such programs can result in regulatory violations or liability claims resulting from alleged exposure to such materials. In connection with the proposed sale transaction as more fully described in Note 1 - "Organization and Summary of Significant Accounting Policies", Phase I environmental site assessments have been completed for each property owned by the Partnership. Such environmental assessments performed on the properties have not revealed any environmental liability that the Partnership believes would have a material adverse effect on the Partnership's business, assets, or results of operations. The Partnership has not been notified by any governmental authority of any non-compliance, liability or other claim in connection with any of its properties. There can be no assurances, however, that environmental liabilities have not developed since such environmental assessments were prepared, or that future uses or conditions (including, without limitation, changes in applicable environmental laws and regulations) will not result in imposition of environmental liability. McNEIL REAL ESTATE FUND XI, LTD. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION December 31, 1998 Costs Initial Cost (b) Cumulative Capitalized Related (b) Buildings and Write-down for Subsequent Description Encumbrances Land Improvements Impairment (d) To Acquisition - ----------- ------------- ----- -------------- -------------- -------------- APARTMENTS: Acacia Lakes Mesa, AZ $ 8,680,219 $ 1,953,090 $ 10,784,729 $ - $ 2,720,538 Gentle Gale Galveston, TX 2,489,136 450,155 2,925,081 (21,141) 933,260 Knollwood Kansas City, MO 4,326,728 330,547 5,122,225 - 2,359,728 Sun Valley Charlotte, NC 6,376,663 562,797 7,056,988 - 1,830,189 Villa Del Rio Jacksonville, FL 5,331,844 636,634 7,685,383 - 2,386,774 The Village Gresham, OR 2,635,000 474,102 3,372,567 - 1,170,916 -------------- -------------- -------------- ------------ ------------- $ 29,839,590 $ 4,407,325 $ 36,946,973 $ (21,141) $ 11,401,405 ============== ============== ============== ============ ============ Asset Held for Sale: Rock Creek (c) Portland, OR $ 6,225,000 ============== (b) The initial cost and encumbrances reflect the present value of future loan payments discounted, if appropriate, at a rate estimated to be the prevailing interest rate at the date of acquisition or refinancing. (c) Asset held for sale is stated at the lower of depreciated cost or fair value less costs to sell. Historical cost net of accumulated depreciation and write-downs becomes the new cost basis when the asset is classified as "Held for sale." Depreciation ceases at the time they are placed on the market for sale. (d) The carrying value of Gentle Gale Apartments was reduced by $21,141 in 1990. See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XI, LTD. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION December 31, 1998 Gross Amount at Which Carried at Close of Period Buildings and Accumulated Description Land Improvements Total (a) Depreciation - ----------- ---- -------------- --------- ------------ APARTMENTS: Acacia Lakes Mesa, AZ $ 1,953,090 $ 13,505,267 $ 15,458,357 $ (9,844,141) Gentle Gale Galveston, TX 450,155 3,837,200 4,287,355 (2,700,717) Knollwood Kansas City, MO 330,547 7,481,953 7,812,500 (4,997,953) Sun Valley Charlotte, NC 562,797 8,887,177 9,449,974 (5,329,739) Villa Del Rio Jacksonville, FL 636,634 10,072,157 10,708,791 (6,661,746) The Village Gresham, OR 474,102 4,543,483 5,017,585 (3,529,499) -------------- ------------- -------------- ------------ $ 4,407,325 $ 48,327,327 $ 52,734,562 $ (33,063,795) ============== ============= ============== ============ Asset Held for Sale: Rock Creek (c) Portland, OR $ 4,765,942 ============== (a) For Federal income tax purposes, the properties are depreciated over lives ranging from 5-27.5 years using ACRS or MACRS methods. The aggregate cost of real estate investments for Federal income tax purposes was $71,002,898 and accumulated depreciation was $56,512,227 at December 31, 1998. (c) Asset held for sale is stated at the lower of depreciated cost or fair value less costs to sell. Historical cost net of accumulated depreciation and write-downs becomes the new cost basis when the asset is classified as "Held for sale." Depreciation ceases at the time they are placed on the market for sale. See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XI, LTD. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION December 31, 1998 Date of Date Depreciable Description Construction Acquired lives (years) - ----------- ------------ -------- ------------- APARTMENTS: Acacia Lakes Mesa, AZ 1980 05/81 3-33 Gentle Gale Galveston, TX 1980 05/81 3-21 Knollwood Kansas City, MO 1970 05/81 3-29 Sun Valley Charlotte, NC 1980 08/81 3-40 Villa Del Rio Jacksonville, FL 1976 05/81 3-40 The Village Gresham, OR 1974 05/81 3-30 Asset Held for Sale: Rock Creek (c) Portland, OR 1975 02/81 (c) Asset held for sale is stated at the lower of depreciated cost or fair value less costs to sell. Historical cost net of accumulated depreciation and write-downs becomes the new cost basis when the asset is classified as "Held for sale." Depreciation ceases at the time they are placed on the market for sale. See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XI, LTD. Notes to Schedule III Real Estate Investments and Accumulated Depreciation A summary of activity for the real estate investments and accumulated depreciation is as follows: For the Years Ended December 31, ------------------------------------------------------ 1998 1997 1996 ------------- ------------- ------------ Real estate investments: Balance at beginning of year .................. $ 51,618,852 $ 55,173,438 $ 64,347,015 Improvements .................................. 1,137,982 1,150,402 2,391,036 Reclassification to assets held for sale....... -- (4,561,586) (11,110,783) Replacement of assets ......................... (22,272) (143,402) (453,830) ------------ ------------ ------------ Balance at end of year ........................ $ 52,734,562 $ 51,618,852 $ 55,173,438 ============ ============ ============ Accumulated depreciation: Balance at beginning of year .................. $ 30,941,665 $ 32,181,184 $ 37,095,184 Depreciation .................................. 2,135,144 2,083,616 2,372,870 Reclassification to assets held for sale ...... -- (3,220,269) (6,983,195) Replacement of assets ......................... (13,014) (102,866) (303,675) ------------ ------------ ------------ Balance at end of year ........................ $ 33,063,795 $ 30,941,665 $ 32,181,184 ============ ============ ============ Assets Held for Sale: Balance at beginning of year .................. $ 5,910,865 $ 4,203,597 $ -- Reclassification to assets held for sale ...... -- 1,341,317 4,127,588 Sale of asset ................................. (1,349,329) -- -- Improvements .................................. 204,406 365,951 76,009 ------------ ------------ ------------ Balance at end of year ........................ $ 4,765,942 $ 5,910,865 $ 4,203,597 ============ ============ ============ ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING - ------- ----------------------------------------------------------- AND FINANCIAL DISCLOSURE ------------------------ None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - -------- -------------------------------------------------- Neither the Partnership nor the General Partner has any directors or executive officers. The names and ages of, as well as the positions held by, the officers and directors of McNeil Investors, Inc., the general partner of the General Partner, are as follows: Other Principal Occupations and Other Name and Position Age Directorships During the Past 5 Years - ----------------- --- ------------------------------------- Robert A. McNeil, 78 Mr. McNeil is also Chairman of the Chairman of the Board and Director of McNeil Real Estate Board and Director Management, Inc. ("McREMI") which is an affiliate of the General Partner. He has held the foregoing positions since the formation of such an entity in 1990. Mr. McNeil received his B.A. degree from Stanford University in 1942 and his L.L.B. degree from Stanford Law School in 1948. He is a member of the State Bar of California and has been involved in real estate financing since the late 1940's and in real estate acquisitions, syndications and dispositions since 1960. From 1986 until active operations of McREMI and McNeil Partners, L.P. began in February 1991, Mr. McNeil was a private investor. Mr. McNeil is a member of the International Board of Directors of the Salk Institute, which promotes research in improvements in health care. Carole J. McNeil 55 Mrs. McNeil is Co-Chairman, with husband Co-Chairman of the Robert A. McNeil, of McNeil Investors, Board Inc. Mrs. McNeil has twenty years of real estate experience, most recently as a private investor from 1986 to 1993. In 1982, she founded Ivory & Associates, a commercial real estate brokerage firm in San Francisco, CA. Prior to that, she was a commercial real estate associate with the Madison Company and, earlier, a commercial sales associate and analyst with Marcus and Millichap in San Francisco. In 1978, Mrs. McNeil established Escrow Training Centers, California's first accredited commercial training program for title company escrow officers and real estate agents needing college credits to qualify for brokerage licenses. She began in real estate as Manager and Marketing Director of Title Insurance and Trust in Marin County, CA. Mrs. McNeil serves on the International Board of Directors of the Salk Institute. Ron K. Taylor 41 Mr. Taylor is the President and Chief President and Chief Executive Officer of McNeil Real Estate Executive Officer Management which is an affiliate of the General Partner. Mr. Taylor has been in this capacity since the resignation of Donald K. Reed on March 4, 1997. Prior to assuming his current responsibilities, Mr. Taylor served as a Senior Vice President of McREMI. Mr. Taylor has been in this capacity since McREMI commenced operations in 1991. Prior to joining McREMI, Mr. Taylor served as an Executive Vice President for a national syndication/property management firm. In this capacity, Mr. Taylor had the responsibility for the management and leasing of a 21,000,000 square foot portfolio of commercial properties. Mr. Taylor has been actively involved in the real estate industry since 1983. Each director shall serve until his successor shall have been duly elected and qualified. ITEM 11. EXECUTIVE COMPENSATION - -------- ---------------------- No direct compensation was paid or payable by the Partnership to directors or officers (since it does not have any directors or officers) for the year ended December 31, 1998, nor was any direct compensation paid or payable by the Partnership to directors or officers of the general partner of the General Partner for the year ended December 31, 1998. The Partnership has no plans to pay any such remuneration to any directors or officers of the general partner of the General Partner in the future. See Item 13 - Certain Relationships and Related Transactions for amounts of compensation and reimbursements paid by the Partnership to the General Partner and its affiliates. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------- -------------------------------------------------------------- (A) Security ownership of certain beneficial owners. No individual or group, as defined by Section 13(d)(3) of the Securities Exchange Act of 1934, known to the Partnership is the beneficial owner of more than 5 percent of the Partnership's Units, other than High River Limited Partnership, which owns 18,622 Units (11.65% of the outstanding Units) as of February 1, 1999. The business address for High River Limited Partnership is 100 South Bedford Road, Mount Kisco, New York 10549. (B) Security ownership of management. The General Partner and the officers and directors of its general partner, collectively, own 313 Units which represent less than 1% of the outstanding Units. (C) Change in control. None. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ---------------------------------------------- Under the terms of the Amended Partnership Agreement, the Partnership is paying the MID to the General Partner. The maximum MID is calculated as 1% of the tangible asset value of the Partnership. Tangible asset value is determined by using the greater of (i) an amount calculated by applying a capitalization rate of 9% to the annualized net operating income of each property or (ii) a value of $10,000 per apartment unit for residential property to arrive at the property tangible asset value. The property tangible asset value is then added to the book value of all other assets excluding intangible items. The maximum MID percentage decreases to .75% in 2000, .50% in 2001 and .25% thereafter. The MID will be paid to the extent of the lesser of the Partnership's excess cash flow as defined, or net operating income, as defined (the "Entitlement Amount"), and may be paid (i) in cash, unless there is insufficient cash to pay the distribution in which event any unpaid portion not taken in Units will be deferred and is payable, without interest, from the first available cash and/or (ii) in Units. A maximum of 50% of the MID may be paid in Units. The number of Units issued in payment of the MID is based on the greater of $50 per Unit or the net tangible asset value, as defined. For the year ended December 31, 1998, the Partnership paid or accrued for the General Partner MID in the amount of $853,756. Any amount of the MID which is paid to the General Partner in Units will be treated as if cash is distributed to the General Partner and is then contributed to the Partnership by the General Partner. The MID represents a return of equity to the General Partner for increasing cash flow, as defined, and accordingly is treated as a distribution. The Partnership pays property management fees equal to 5% of the gross rental receipts of the Partnership's properties to McREMI for providing property management and leasing services. Effective February 14, 1991, the Partnership began reimbursing McREMI for its costs, including overhead, of administering the Partnership's affairs. For the year ended December 31, 1998, the Partnership paid or accrued for McREMI $1,148,093 in property management fees and reimbursements. See Item 1 - Business, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8 - Note 2 - "Transactions with Affiliates." In November 1996, the Partnership obtained a loan from McNeil Real Estate Fund XXVII, L.P., an affiliate of the General Partner, totaling $2,588,971. The note is secured by The Village and requires monthly interest-only payments equal to the prime lending rate of Bank of America plus 1%. Total interest expense for this loan was $106,497 for the year ended December 31, 1998. The mortgage note was repaid on April 27, 1998. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K - -------- ----------------------------------------------------------------- See accompanying index to financial statements at Item 8 - Financial Statements and Supplementary Data. (A) Exhibits Exhibit Number Description ------- ----------- 3. Limited Partnership Agreement (Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended September 30, 1987). 3.1 Amended and Restated Limited Partnership Agreement, dated August 6, 1991 (Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1991). 3.2 Amendment No. 1 to the Amended and Restated Partnership Agreement of McNeil Real Estate Fund XI, Ltd., dated March 28, 1994. (2) 3.3 Amendment No. 2 to the Amended and Restated Partnership Agreement of McNeil Real Estate Fund XI, Ltd., dated March 28, 1994. (2) 10.1 Deed of Trust Note, dated April 5, 1989, between Knollwood Fund XI Associates and American Mortgages, Inc. (1) 10.2 Deed of Trust Note, dated May 5, 1989, between Sun Valley Fund XI Associates and American Mortgages, Inc. (1) 10.4 Termination Agreement, dated as of August 6, 1991 between Sun Valley Fund XI Associates and McNeil Real Estate Management, Inc. (1) 10.5 Termination Agreement, dated as of August 6, 1991, between Knollwood Fund XI Associates and McNeil Real Estate Management, Inc. (1) Exhibit Number Description -------- ----------- 10.6 Termination Agreement, dated as of August 6, 1991 among Southmark Management Corporation, Southmark Commercial Management Company, McNeil Real Estate Fund XI, Ltd. and McNeil Real Estate Fund XI, Ltd. and McNeil Real Estate Management, Inc. (1) 10.7 Property Management Agreement, dated as of August 6, 1991, between McNeil Real Estate Fund XI, Ltd. and McNeil Real Estate Management, Inc. (1) 10.8 Property Management Agreement, dated as of August 6, 1991, between Knollwood Fund XI Associates and McNeil Real Estate Management, Inc. (1) 10.9 Property Management Agreement, dated as of August 6, 1991, between Sun Valley Fund XI Associates and McNeil Real Estate Management, Inc. (1) 10.12 Amendment of Property Management Agreement, dated March 5, 1993, between McNeil Real Estate Fund XI, Ltd. and McNeil Real Estate Management, Inc. (Incorporated by reference, to the Annual Report of McNeil Real Estate Fund XI, Ltd. (File No. 0-9783), on Form 10-K for the period ended December 31, 1992) 10.13 Loan Agreement dated June 24, 1993, between Lexington Mortgage Company and McNeil Real Estate Fund XI, Ltd. (2) 10.14 Master Property Management Agreement, dated as of June 24, 1993, between McNeil Real Estate Management, Inc. and McNeil Real Estate Fund XI, Ltd. (2) 10.15 Multifamily Note, dated November 1, 1993 between Value Line Mortgage Corporation and Acacia Lakes Fund XI Limited Partnership. (2) Exhibit Number Description -------- ----------- 10.16 Modification of Deed of Trust Note, dated December 15, 1993, between American Mortgages, Inc. and Knollwood Fund XI Associates. (2) 10.17 Modification of Deed of Trust Note, dated December 20, 1993, between American Mortgages, Inc. and Sun Valley Fund XI Associates. (2) 10.18 Promissory Note, dated April 27, 1998, between Village Fund XI Associates Limited and NationsBank of Texas, N.A. 10.19 Promissory Note, dated September 28, 1998, between Rock Creek Fund XI Limited and NationsBank, N.A. 11. Statement regarding computation of Net Income per limited partnership unit (see Item 8 - Note 1 - "Organization and Summary of Significant Accounting Policies). 22. List of subsidiaries of the Partnership. Names Under Jurisdiction of Which It Is Name of Subsidiary Incorporation Doing Business ------------------ --------------- -------------- Acacia Lakes Fund XI Arizona None Limited Partnership Gentle Gale Fund XI Delaware None Limited Partnership Knollwood Fund XI Missouri None Associates Rock Creek Fund XI Ltd. Texas None Sun Valley Fund XI North Carolina None Associates Villa Del Rio Fund XI Delaware None Limited Partnership Village Fund XI Associates Oregon None Limited Partnership (1) Incorporated by reference to the Annual Report of McNeil Real Estate Fund XI, Ltd. (File No. 0-9783), on Form 10-K for the period ended December 31, 1991, as filed with the Securities and Exchange Commission on March 29, 1992. (2) Incorporated by reference to the Annual Report of McNeil Real Estate Fund XI, Ltd. (File No. 0-9783), on Form 10-K for the period ended December 31, 1993, as filed with the Securities and Exchange Commission on March 30, 1995. 27. Financial Data Schedule for the year ended December 31, 1998. (B) Reports on Form 8-K. There were no reports on Form 8-K filed during the quarter ended December 31, 1998. McNEIL REAL ESTATE FUND XI, LTD. A Limited Partnership SIGNATURE PAGE 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. McNEIL REAL ESTATE FUND XI, LTD. By: McNeil Partners, L.P., General Partner By: McNeil Investors, Inc., General Partner March 31, 1999 By: /s/ Robert A. McNeil - -------------- --------------------------------------------- Date Robert A. McNeil Chairman of the Board and Director (Principal Executive 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. March 31, 1999 By: /s/ Ron K. Taylor - -------------- --------------------------------------------- Date Ron K. Taylor President and Director of McNeil Investors, Inc. (Principal Financial Officer) March 31, 1999 By: /s/ Brandon K. Flaming - -------------- --------------------------------------------- Date Brandon K. Flaming Vice President of McNeil Investors, Inc. (Principal Accounting Officer)