UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-11129
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BALCOR PENSION INVESTORS-III
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(Exact name of registrant as specified in its charter)
Illinois 36-3164211
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Balcor Plaza
4849 Golf Road, Skokie, Illinois 60077-9894
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (708) 677-2900
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Interests
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark 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 ]
PART I
Item 1. Business
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Balcor Pension Investors-III (the "Registrant") is a limited partnership formed
in 1982 under the laws of the State of Illinois. The Registrant raised
$118,738,000 from sales of Limited Partnership Interests. The Registrant's
operations consist of investment in wrap-around mortgage loans and, to a lesser
extent, other junior mortgage loans and first mortgage loans. The Registrant
also currently operates three properties acquired through foreclosure, and
holds minority joint venture interests in two additional properties. All
financial information included in this report relates to this industry segment.
The Registrant originally funded thirty-two loans collateralized by
twenty-eight properties. A portion of Mortgage Reductions generated by
repayments was reinvested in five additional loans. The remainder was added to
working capital reserves. As a result of repayments, foreclosures and wrap-
around notes received as a portion of the sale price for three property
dispositions, the Registrant has seven loans in its portfolio as of December
31, 1994. Eleven properties were acquired through foreclosure and two loans
were reclassified to investments in joint ventures with affiliates. The
Registrant sold eight of these properties, including the Crossings Shopping
Center which was sold in January 1995. As of December 31, 1994, the Registrant
had four properties and two investments in joint ventures with affiliates in
its portfolio. See Item 2. Properties for additional information.
During November 1993, the Registrant placed the Bannockburn Executive Plaza
loan in default and the borrower filed for protection under the U.S. Bankruptcy
Code. During February 1995, a plan of reorganization related to this loan was
confirmed by the Bankruptcy Court. See Item 3. Legal Proceedings for additional
information.
During 1994, the Registrant received repayments on two loans receivable. See
Item 7. Liquidity and Capital Resources for additional information.
The Registrant obtained title to The Woods Apartments through a non-judicial
foreclosure in July 1994. See Item 7. Liquidity and Capital Resources for
additional information.
The Registrant sold the Orchards Office Building during 1994 but continues to
own the Orchards Shopping Center. See Item 7. Liquidity and Capital Resources
for additional information.
The Registrant, by virtue of its ownership of real estate acquired through
foreclosure, is subject to federal and state laws and regulations covering
various environmental issues. Management of the Registrant utilizes the
services of environmental consultants to assess a wide range of environmental
issues and to conduct tests for environmental contamination as appropriate.
The General Partner is not aware of any potential liability due to
environmental issues or conditions that would be
material to the Registrant.
The officers and employees of Balcor Mortgage Advisors-II and its affiliates
perform services for the Registrant. The Registrant currently has no employees
engaged in its operations.
OTHER INFORMATION
Crossings Shopping Center
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In 1983, the Registrant funded a $1,400,000 loan collateralized by a wrap-
around mortgage on the Crossings Shopping Center, Smyrna, Georgia ("Center")
and on the leasehold interest in the land underneath the Center (together, the
"Property"). The Registrant obtained title to the Property through a non-
judicial foreclosure in 1992, subject to the existing first mortgage loan held
by an unaffiliated lender.
On January 31, 1995 ("Closing"), the Registrant sold the Property for a sale
price of $2,650,000 to an unaffiliated entity, Triple N Co., Inc., a Georgia
corporation ("Purchaser"). The Purchaser assumed the first mortgage loan which
had a principal balance of $1,793,760 at Closing and the Registrant received
$776,490 of sale proceeds.
Item 2. Properties
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As of December 31, 1994, the Registrant owns the four properties described
below:
Location Description of Property
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Dallas, Texas Candlewyck Apartments: a 452-unit apartment
complex located on 28 acres.
Smyrna, Georgia * Crossings Shopping Center: a shopping
center containing 153,178 square feet located on
18.8 acres.
Loveland, Colorado Orchards Shopping Center: a shopping center
containing 167,779 square feet located on
24.01 acres.
Austin, Texas The Woods Apartments: a 278-unit apartment
complex located on 13 acres.
* This property was sold during 1995. See Note 11 of Notes to Financial
Statements for additional information.
Certain of these properties are held subject to various mortgages. See Note 5
of Notes to Financial Statements for additional information.
The Registrant also holds minority joint venture interests in the
Brookhollow/Stemmons Office Building located in Dallas, Texas, and the
Perimeter 400 Center Office Building located in Fulton County, Georgia.
In the opinion of the General Partner, the Registrant has provided for adequate
insurance coverage for its real estate properties.
See Notes to Financial Statements for other information regarding real property
investments.
Item 3. Legal Proceedings
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a) Williams class action
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In February 1990, a proposed class-action complaint was filed, Paul Williams
and Beverly Kennedy, et al. vs. Balcor Pension Investors, et al., Case No.: 90-
C-0726 (U. S. District Court, Northern District of Illinois) against the
Registrant, the General Partner, The Balcor Company, Shearson Lehman Hutton,
Inc., American Express Company, other affiliates, and seven affiliated limited
partnerships (the "Related Partnerships") as defendants. The complaint alleges
that the defendants violated Federal securities laws as to the adequacy and
accuracy of disclosure of information in the offering of limited partnership
interests of the Registrant and the Related Partnerships and alleges breach of
fiduciary duty, fraud, negligence and violations under the Racketeer Influenced
and Corrupt Organizations Act. The complaint seeks compensatory and punitive
damages. The defendants filed their answer, affirmative defenses and a
counterclaim to the complaint. The defendants' counterclaim asserts claims of
fraud and breach of warranty against certain plaintiffs, as well as a request
for declaratory relief regarding the defendants' rights to be indemnified for
their expenses incurred in defending the litigation. The defendants seek to
recover damages to their reputations and business as well as costs and
attorneys' fees in defending the claims.
In May 1993, the Court issued an order denying the plaintiffs' motion for class
certification based principally on the inadequacy of the individual plaintiffs
representing the proposed class. However, the Court gave plaintiffs leave to
propose new individual class representatives. Further, the Court granted the
defendants' motion for sanctions and ordered that plaintiffs' counsel pay
certain of the defendants' attorneys' fees incurred with the class
certification motion. In January 1995, the Court ordered the plaintiffs'
counsel to pay $75,000 to the defendants and $25,000 to the Court.
The plaintiffs retained new co-counsel and proposed new class representatives.
In July 1994, the Court granted plaintiffs' motion certifying a class relating
to the Federal securities fraud claims. The class certified by the Court
includes only the original investors in the Registrant and the Related
Partnerships. The defendants filed a motion for reconsideration in opposition
to the class certification which was denied on December 21, 1994. The Court
has ordered the parties to meet to discuss notice to the class and a schedule
for discovery.
A motion filed by the plaintiffs seeking to dismiss the defendants'
counterclaim for fraud was denied by the Court in August 1994.
The defendants intend to continue vigorously contesting this action. Management
of each of the defendants believes they have meritorious defenses to contest
the claims.
b) Bannockburn Executive Plaza
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In September 1982, the Registrant funded a $5,027,736 loan (the "Loan") to an
unaffiliated entity evidenced by a note in the amount of $10,100,000 and
collateralized by a wrap-around mortgage on the Bannockburn Executive Plaza,
Bannockburn, Illinois. The Loan and the underlying first mortgage loan held by
an unaffiliated entity both matured in January 1994. In November 1993, the Loan
was placed in default due to the failure of the borrower to make payments due
and the borrower commenced bankruptcy proceedings under Chapter 11 of the U.S.
Bankruptcy Act in the U.S. Bankruptcy Court, Northern District of Illinois,
Eastern Division, In re Bannockburn Executive Plaza Venture, Case No.: 93-B-
23909. Pursuant to a cash collateral order, cash receipts from the property
have been used for property operating expenses and to make debt service
payments to the Registrant, out of which payments to the underlying first
mortgage lender have been made. All excess cash has been deposited into a
segregated account.
On February 16, 1995, the borrower's plan of reorganization was confirmed by
the Bankruptcy Court and became effective as of March 20, 1995. Pursuant to
the plan, the Bankruptcy Court allowed the Registrant's claim of $13,641,800,
consisting of $10,100,000 in principal and $3,541,800 in previous unpaid
interest. The maturity of the Loan will be extended to December 1, 1997 and
the Loan will continue to bear interest at 14.5% per annum with a pay rate of
9% per annum, payable monthly, based on the principal amount of $10,100,000.
The maturity of the underlying loan was also extended to December 1, 1997. The
borrower is obligated to make certain deposits from property cash flow into
reserves held by an escrow agent, with the remaining cash flow applied to the
principal balance of the underlying loan. If the Loan and underlying loan are
repaid on or prior to maturity, the Registrant will waive payment of the
$3,541,800 in unpaid interest and certain other interest payments due under the
terms of the Loan.
Item 4. Submission of Matters to a Vote of Security Holders
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No matters were submitted to a vote of the Limited Partners of the Registrant
during 1994.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
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Matters
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There has not been an established public market for Limited Partnership
Interests and it is not anticipated that one will develop. For information
regarding previous distributions, see Financial Statements, Statements of
Partners' Capital, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources", below.
As of December 31, 1994, the number of record holders of Limited Partnership
Interests of the Registrant was 10,765.
Item 6. Selected Financial Data
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Year ended December 31,
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1994 1993 1992 1991 1990
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Total income $7,904,391 $6,125,896 $6,728,618 $8,254,515 $9,109,854
Provision for po-
tential losses on
loans, real estate
and accrued inter-
est receivable 600,000 2,720,000 3,750,000 3,215,500 5,000,000
Income before net
gains on sales
of assets 6,379,013 2,541,797 2,166,157 4,458,722 3,565,665
Net income 6,498,855 3,141,300 2,166,157 4,458,722 3,575,049
Net income per
average number of
Limited Partner-
ship Interests
outstanding 26.35 12.68 8.72 17.87 14.26
Total assets 77,868,675 81,568,277 86,628,240 87,612,905 92,445,765
Mortgage notes
payable 7,153,074 8,436,279 10,997,864 9,234,008 10,920,679
Distributions per
Limited Partner-
ship Interest 34.35 20.00 22.50 30.00 44.00
Item 7. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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Summary of Operations
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Balcor Pension Investors - III (the "Partnership") decreased its provision for
potential losses on loans, real estate and accrued interest receivable during
1994 as compared to 1993. In addition, during 1993, the Partnership recognized
its share of a loss provision related to a decline in the fair value of a
property in which it holds a minority joint venture interest. The combined
effect of these events resulted in an increase in net income during 1994 as
compared to 1993.
The Partnership's provision for potential losses on loans, real estate and
accrued interest receivable also decreased during 1993 as compared to 1992.
This decrease and the net gain recognized on the sales of real estate during
1993 were the primary reasons for the increase in net income during 1993 as
compared to 1992. This increase was partially offset by the sale of Partnership
properties which had generated income for financial statement purposes. Further
discussion of the Partnership's operations is summarized below.
Operations
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1994 Compared to 1993
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Increased interest income was received from the borrowers of the Bannockburn
Executive Plaza, Carmel on Providence and The Woods loans during 1994. In
addition, the Partnership purchased The Woods underlying loan in December 1993
which reduced interest expense on loans payable. Finally, the Partnership
received additional interest and a prepayment fee in connection with the North
Morris Estates loan repayment in November 1994. As a result, net interest
income on loans receivable increased during 1994 as compared to 1993. The
prepayment of the Airport III Industrial Park and the Continental Park loans in
November 1993 and June 1994, respectively, reduced interest income which
partially offset this increase.
The Partnership has two non-accrual loans at December 31, 1994 which are
collateralized by Carmel on Providence Apartments and Bannockburn Executive
Plaza. The funds advanced by the Partnership for these two loans total
approximately $6,200,000, representing approximately 6% of original funds
advanced. For non-accrual loans, income is recorded only as cash payments are
received from the borrower. During 1994, the Partnership received cash payments
of net interest income totaling approximately $244,000 on the Carmel on
Providence loan. The Partnership would have received approximately $288,000 of
net interest income under the terms of the original loan agreement. The loan
receivable and underlying first mortgage loan collateralized by the Bannockburn
Executive Plaza matured in January 1994. However, the borrower filed for
protection under the U.S. Bankruptcy Code in November 1993 and did not pay
either amount due. The Partnership has received cash payments of net interest
income totaling approximately $585,000 during 1994 while the Partnership, the
holder of the underlying loan and the borrower negotiated a plan of
reorganization. See Liquidity and Capital Resources for additional information.
Allowances are charged to income when the General Partner believes an
impairment has occurred, either in a borrower's ability to repay the loan or in
the value of the collateral property. Determinations of fair value are made
periodically on the basis of performance under the terms of the loan agreement
and assessments of property operations. Determinations of fair value represent
estimations based on many variables which affect the value of real estate,
including economic and demographic conditions. The Partnership recognized
provisions of $600,000 and $2,000,000 related to its loans in 1994 and 1993,
respectively. In addition, during 1993, the Partnership recognized a provision
of $720,000 related to the Partnership's real estate held for sale to provide
for declines in the fair value of certain properties in the Partnership's
portfolio. During 1994, allowances of $3,715,406 related to the Continental
Park loan were written off in connection with the prepayment of the loan at a
discount.
Operations of real estate held for sale represent the net operations of those
properties acquired by the Partnership through foreclosure. At December 31,
1994, the Partnership was operating the Candlewyck and The Woods apartment
complexes and the Crossings and Orchards shopping centers. Original funds
advanced by the Partnership totaled approximately $14,378,000 for these real
estate investments. Operating expenses decreased at the Crossings Shopping
Center due to decreased maintenance and repair expense and decreased real
estate tax expense resulting from a reduction in the assessed property value.
Operating expenses also decreased at the Orchards Shopping Center due to the
completion of roof repairs during 1993. In addition, the Partnership acquired
The Woods Apartments in July 1994, which generated income. Finally, the
Riverview Office Building and the Villa Verde Apartments, which generated
income, were sold in September and November 1993, respectively. The combined
effect of these events resulted in an increase in income from real estate held
for sale during 1994 as compared to 1993.
Participation in income (loss) of joint ventures with affiliates represents the
Partnership's 27.5% and 12.68% shares of income (loss) from the
Brookhollow/Stemmons and Perimeter 400 Center office buildings, respectively.
During 1993, the Partnership recognized its share of a loss provision related
to a decline in the fair value of the Brookhollow/Stemmons Office Building.
This, combined with decreased leasing costs and increased average occupancy
levels and rental rates at the Perimeter 400 Center Office Building during
1994, were the primary reasons for the recognition of income during 1994 as
compared to a loss in 1993.
Proceeds were received in 1993 in connection with the settlement of the
Kensington loan, the refinancing of the Villa Verde loan and the sales of the
Riverview Office Building, Villa Verde Apartments and vacant land adjacent to
the Orchards Shopping Center. A portion of these proceeds were distributed in
April 1994. The remainder of these proceeds, along with the proceeds received
in 1994 from the prepayment of the Continental Park and North Morris Estates
loans and the sale of the Orchards Office Building, are invested in short-term
interest-bearing instruments. This, along with higher interest rates resulted
in an increase in interest income on short-term investments during 1994 as
compared to 1993.
The Partnership's loans generally bear interest at contractually-fixed interest
rates. Some loans also provide for additional interest in the form of
participations, usually consisting of either a share in the capital
appreciation of the property securing the Partnership's loan and/or a share in
the increase of the gross income of the property above a certain level.
Participation income increased during 1994 as compared to 1993 primarily due to
participations received in connection with the North Morris Estates loan
repayment during the fourth quarter of 1994.
The prepayment of the Airport III Industrial Park, Continental Park and North
Morris Estates loans and the foreclosure of The Woods Apartments resulted in a
decrease in mortgage servicing fees during 1994 as compared to 1993.
An increase in accounting and portfolio management fees resulted in an increase
in administrative expenses during 1994 as compared to 1993. This increase was
partially offset by a decrease in legal fees.
During 1994, the Partnership recognized a gain of $119,842 on the sale of the
Orchards Office Building. During 1993, the Partnership recognized a net gain
totaling $599,503 on the sales of the vacant land adjacent to the Orchards
Shopping Center, the Riverview Office Building and the Villa Verde Apartments.
1993 Compared to 1992
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The Partnership had four non-accrual loans at December 31, 1993 which were
collateralized by The Woods Apartments, Continental Park Office Building,
Carmel on Providence Apartments, and Bannockburn Executive Plaza. The funds
advanced by the Partnership for these four loans totaled approximately
$16,800,000, which represented approximately 16% of original funds advanced.
During 1993, the Partnership received cash payments of net interest income
totaling approximately $1,531,000 on the Continental Park, Carmel on Providence
and Bannockburn Executive Plaza loans. The Partnership would have received
approximately $2,702,000 of net interest income during 1993 under the terms of
the original loan agreements for these three loans. (See below for further
information regarding The Woods Apartments loan.)
During May 1992, an extension of the maturity of the loan receivable and
underlying mortgage loan collateralized by The Woods Apartments was completed.
The maturity dates were extended to June 20, 1993 and July 1, 1993,
respectively. The borrower failed to repay either of the loans and the
Partnership obtained title to the property through a non-judicial foreclosure
in July 1994.
The Partnership recognized a provision for potential losses of $2,000,000 for
its loans during 1993. In addition, during the second quarter of 1993, a
valuation allowance of $720,000 was established to provide for a further
decline in the fair value of the Riverview Office Building which was
subsequently sold in September 1993.
Operations of real estate held for sale represent the net property operations
of those properties acquired by the Partnership through foreclosure. Interest
expense increased at the Orchards Shopping Center due to the placement of a new
first mortgage loan on the property in September 1992. In addition, the
Riverview Office Building and the Villa Verde Apartments, which were generating
income, were sold in September and November 1993, respectively. These events
resulted in a decrease in income from real estate held for sale during 1993 as
compared to 1992. Operations at the Candlewyck Apartments improved during 1993
due to increased rental income which resulted from higher rental rates and due
to decreased repair and maintenance expense. This partially offset the above
decrease.
Proceeds received in 1993 in connection with the settlement of the Kensington
loan, the refinancing of the Villa Verde loan and the sales of the Riverview
Office Building, the Villa Verde Apartments and vacant land adjacent to the
Orchards Shopping Center were retained and invested in short-term interest-
bearing instruments. As a result, interest income on short-term investments
increased during 1993 as compared to the same period in 1992.
Participation in joint ventures with affiliates represents the Partnership's
27.5% and 12.68% share of losses from the Brookhollow/Stemmons and Perimeter
400 Center office buildings. The Partnership recognized its share of a loss
provision related to a decline in the fair value of the Brookhollow/Stemmons
Office Building during 1993. As a result of this and an increase in leasing
costs at this property and at the Perimeter 400 Center Office Building, the
participation in loss of joint ventures with affiliates increased during 1993
as compared to 1992.
During the first quarter of 1992, the Partnership paid mortgage servicing fees,
which had not been previously billed, relating to the loan receivable accepted
by the Partnership in connection with the October 1990 sale of the Rivergate
Apartments. These fees related to the period from October 1990 through March
31, 1992. The Partnership continues to pay a monthly fee to service this loan.
As a result, mortgage servicing fees decreased during 1993 as compared to 1992.
The Partnership incurred significant legal fees during 1993 in connection with
the bankruptcy proceedings on The Woods loan and the borrower's default on the
Carmel on Providence loan. As a result, administrative expense increased during
1993 as compared to 1992.
Liquidity and Capital Resources
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The cash position of the Partnership increased as of December 31, 1994
compared to December 31, 1993. The Partnership generated cash flow from its
operating activities primarily as a result of the net interest income earned on
its loans receivable, the operations of its properties, and the interest
received on its short-term investments. The payment of administrative costs
partially offset this cash flow. The Partnership also generated cash from its
investing activities primarily as a result of the prepayment of the Continental
Park and North Morris Estates loans and the sale of the Orchards Office
Building. The Partnership used cash to fund its financing activities consisting
primarily of the payment of distributions to the General Partner and Limited
Partners and the payment of principal on underlying loans and mortgage notes
payable. A portion of the cash reserves is being held for anticipated capital
requirements at the Partnership's properties.
The Partnership classifies the cash flow performance of its properties as
either positive, marginal or a significant deficit, each after consideration of
debt service payments unless otherwise indicated. A deficit is considered to be
significant if it exceeds $250,000 annually or 20% of the property's rental and
service income. The Partnership defines cash flow generated from its properties
as an amount equal to the property's revenue receipts less property related
expenditures, which include debt service payments. During 1994 and 1993, the
Candlewyck Apartments and the Crossings and Orchards shopping centers generated
positive cash flow. The Woods Apartments, which was acquired through
foreclosure in July 1994, also generated positive cash flow during 1994. The
Candlewyck and The Woods apartment complexes and the Crossings and Orchards
shopping centers have occupancy rates of 98%, 91%, 65% and 91%, respectively.
The Crossings Shopping Center was sold in January 1995. The
Brookhollow/Stemmons and Perimeter 400 Center office complexes, properties in
which the Partnership holds minority joint venture interests, generated
positive cash flow during 1994 and 1993. Significant leasing costs were
incurred during 1993 at both properties in order to lease vacant space and
renew existing tenant leases which were scheduled to expire. These costs were
not included in classifying the cash flow performance of the properties since
they are non-recurring expenditures. Had these costs been included, both
properties would have operated at significant deficits during 1993. The General
Partner is continuing its efforts to maintain high occupancy levels, while
increasing rents where possible, and to monitor and control operating expenses
and capital improvement requirements at the properties. The General Partner
will also examine the terms of any mortgage loans collateralized by its
properties, and may refinance or, in certain instances, use Partnership
reserves to repay such loans.
Certain borrowers have failed to make payments when due to the Partnership for
more than ninety days and, accordingly, these loans have been placed on non-
accrual status (income is recorded only as cash payments are received). The
General Partner has negotiated with some of these borrowers regarding
modifications of the loan terms and has instituted foreclosure proceedings
under certain circumstances. Such foreclosure proceedings may be delayed by
factors beyond the General Partner's control such as bankruptcy filings by
borrowers and state law procedures regarding foreclosures. Further, certain
loans made by the Partnership have been restructured to defer and/or reduce
interest payments where the properties collateralizing the loans were
generating insufficient cash flow to support property operations and debt
service.
Because of the weak real estate markets in certain cities and regions of the
country, attributable to local and regional market conditions such as
overbuilding and recessions in local economies and specific industry segments,
certain borrowers have requested that the Partnership allow prepayment of
mortgage loans. The Partnership has allowed some of these borrowers to prepay
such loans, in some cases without assessing prepayment premiums, under
circumstances where the General Partner believed that refusing to allow such
prepayment would ultimately prove detrimental to the Partnership because of the
likelihood that the properties would not generate sufficient revenues to keep
loan payments current. In other cases, borrowers have requested prepayment in
order to take advantage of lower available interest rates. In these cases, the
Partnership has collected prepayment premiums.
In June 1994, the borrower of the $12,767,949 Continental Park wrap-around loan
prepaid the loan at a discount due to the diminished value of the property
collateralizing the loan. The Partnership received proceeds of approximately
$4,873,085 which represented a portion of the funds advanced on the loan and
the borrower repaid the $4,143,890 underlying mortgage loan. See Note 10 of
Notes to Financial Statements for additional information.
In November 1994, the borrower of the North Morris Estates first mortgage loan
prepaid the loan. The Partnership received proceeds of approximately $7,189,500
which is comprised of the principal balance of the loan ($6,600,000),
additional interest ($202,500), participation income ($189,000) and a
prepayment premium ($198,000).
During February 1995, a plan of reorganization related to the Bannockburn
Executive Plaza loan was confirmed by the Bankruptcy Court. See Item 3. Legal
Proceedings and Note 3 of Notes to Financial Statements for additional
information.
During July 1994, the Partnership acquired The Woods Apartments through a non-
judicial foreclosure. See Note 9 of Notes to Financial Statements for
additional information.
During September 1994 and January 1995, the Partnership sold the Orchards
Office Building and the Crossings Shopping Center in all cash sales for
$1,200,000 and $2,650,000, respectively. The Partnership continues to own the
Orchards Shopping Center. The purchaser of the Crossings Shopping Center took
title subject to the existing $1,793,760 first mortgage loan and the
Partnership repaid $1,000,000 of the Orchards first mortgage loan with proceeds
from the sale. See Note 11 of Notes to Financial Statements for additional
information.
Distributions to Limited Partners can be expected to fluctuate for various
reasons. Generally, distributions are made from Cash Flow generated by interest
and other payments made by borrowers under the Partnership's mortgage loans.
Loan prepayments and repayments can initially cause Cash Flow to increase as
prepayment premiums and participations are paid; however, thereafter
prepayments and repayments will have the effect of reducing Cash Flow. If such
proceeds are distributed, Limited Partners will have received a return of
capital and the dollar amount of Cash Flow available for distribution
thereafter can be expected to decrease. Distribution levels can also vary as
loans are placed on non-accrual status, modified or restructured and, if the
Partnership has taken title to properties through foreclosure or otherwise, as
a result of property operations.
The Partnership made distributions totaling $17.50 of Cash Flow and $16.85 of
Mortgage Reductions in 1994, $20.00 of Cash Flow in 1993 and $22.50 of Cash
Flow in 1992. See Statement of Partners' Capital for additional information.
The distribution of Mortgage Reductions in 1994 resulted from the prepayment of
the Airport III Industrial Park loan, the refinancing of the Villa Verde loan
and the sale of the Riverview Office Building. The distributions made from Cash
Flow decreased in 1994 from 1993 due to property sales and loan prepayments and
in 1993 from 1992 due to increases in working capital reserves.
In January 1995, the Partnership paid $949,904 to Limited Partners representing
the quarterly distribution for the fourth quarter of 1994 of $4.00 of Cash Flow
per Interest. The level of the quarterly distribution is consistent with the
amount distributed for the third quarter of 1994. The Partnership also paid
$79,159 to the General Partner as its distributive share of the Cash Flow
distributed for the fourth quarter of 1994 and $26,386 as its contribution to
the Early Investment Incentive Fund. To date, the Partnership has distributed
$512.80 per $500 Interest, of which $427.80 represents Cash Flow from
operations and $85.00 represents Original Capital.
The Partnership expects to continue making cash distributions from the Cash
Flow generated by the receipt of mortgage payments and Cash Flow from property
operations, less payments on the underlying loans, fees to the General Partner
and administrative expenses. The General Partner believes the Partnership has
retained an appropriate amount of working capital to meet cash or liquidity
requirements which may occur.
During 1994, the General Partner used amounts placed in the Early Investment
Incentive Fund to repurchase 1,316 Interests from Limited Partners at a cost of
$434,007.
The General Partner has recently completed the outsourcing of the financial
reporting and accounting services, transfer agent and investor records
services, and computer operations and systems development functions that
provided services to the Partnership. All of these functions are now being
provided by independent third parties. Additionally, Allegiance Realty Group,
Inc., which has provided property management services to all of the
Partnership's properties, was sold to a third party. Each of these transactions
occurred after extensive due diligence and competitive bidding processes. The
General Partner does not believe that the cost of providing these services to
the Partnership, in the aggregate, will be materially different to the
Partnership during 1995 when compared to 1994.
Inflation has several types of potentially conflicting impacts on real estate
investments. Short-term inflation can increase real estate operating costs
which may or may not be recovered through increased rents and/or sales prices,
depending on general or local economic conditions. In the long-term, inflation
can be expected to increase operating costs and replacement costs and may lead
to increased rental revenues and real estate values.
Item 8. Financial Statements and Financial Statement Schedules and
- ------------------------------------------------------------------
Supplementary Data
- ------------------
See Index to Financial Statements in this Form 10-K.
The supplemental financial information specified by Item 302 of Regulation S-K
is not applicable.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
- --------------------
There have been no changes in or disagreements with accountants on any matter
of accounting principles, practices or financial statement disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
(a) Neither the Registrant nor Balcor Mortgage Advisors-II, its General
Partner, has a Board of Directors.
(b, c & e) The names, ages and business experiences of the executive officers
and significant employees of the General Partner of the Registrant are as
follows:
TITLE OFFICERS
----- --------
Chairman, President and Chief Thomas E. Meador
Executive Officer
Executive Vice President, Allan Wood
Chief Financial Officer and
Chief Accounting Officer
Senior Vice President Alexander J. Darragh
First Vice President Daniel A. Duhig
First Vice President Josette V. Goldberg
First Vice President Alan G. Lieberman
First Vice President Brian D. Parker
and Assistant Secretary
First Vice President John K. Powell, Jr.
First Vice President Reid A. Reynolds
First Vice President Thomas G. Selby
Thomas E. Meador (July 1947) joined Balcor in July 1979. He is Chairman,
President and Chief Executive Officer and has responsibility for all ongoing
day-to-day activities at Balcor. He is a Director of The Balcor Company.
Prior to joining Balcor, Mr. Meador was employed at the Harris Trust and
Savings Bank in the commercial real estate division where he was involved in
various lending activities. Mr. Meador received his M.B.A. degree from the
Indiana University Graduate School of Business.
Allan Wood (January 1949) joined Balcor in August 1983 and, as Balcor's Chief
Financial Officer and Chief Accounting Officer, is responsible for the
financial and administrative functions. He is also a Director of The Balcor
Company. Mr. Wood is a Certified Public Accountant. Prior to joining Balcor,
he was employed by Price Waterhouse where he was involved in auditing public
and private companies.
Alexander J. Darragh (February 1955) joined Balcor in September 1988 and has
primary responsibility for the Portfolio Advisory Group. He is responsible for
due diligence analysis and real estate advisory services in support of asset
management, institutional advisory and capital markets functions. Mr. Darragh
has supervisory responsibility of Balcor's Investor Services, Investment
Administration, Fund Management and Land Management departments. Mr. Darragh
received masters' degrees in Urban Geography from Queens's University and in
Urban Planning from Northwestern University.
Daniel A. Duhig (October 1956) joined Balcor in November 1986 and is
responsible for the Asset Management Department relating to real estate
investments made by Balcor and its affiliated partnerships, including
negotiations for modifications or refinancings of real estate mortgage
investments and the disposition of real estate investments.
Josette V. Goldberg (April 1957) joined Balcor in January 1985 and has primary
responsibility for all human resources matters. In addition, she has
supervisory responsibility for Balcor's administrative and MIS departments.
Ms. Goldberg has been designated as a Senior Human Resources Professional
(SHRP).
Alan G. Lieberman (June 1959) joined Balcor in May 1983 and is responsible for
the Property Sales and Capital Markets Groups. Mr. Lieberman is a Certified
Public Accountant.
Brian D. Parker (June 1951) joined Balcor in March 1986 and is responsible for
Balcor's corporate and property accounting, treasury and budget activities.
Mr. Parker is a Certified Public Accountant and holds an M.S. degree in
Accountancy from DePaul University.
John K. Powell, Jr. (June 1950) joined Balcor in September 1985 and is
responsible for the administration of the investment portfolios of Balcor's
partnerships and for Balcor's risk management functions. Mr. Powell received a
Master of Planning degree from the University of Virginia. He has been
designated a Certified Real Estate Financier by the National Society for Real
Estate Finance and is a full member of the Urban Land Institute.
Reid A. Reynolds (April 1950) joined Balcor in March 1981 and is involved with
the asset management of residential properties for Balcor. Mr. Reynolds is a
licensed Real Estate Broker in the State of Illinois.
Thomas G. Selby (July 1955) joined Balcor in February 1984 and has
responsibility for various Asset Management functions, including oversight of
the residential portfolio. From January 1986 through September 1994, Mr. Selby
was Regional Vice President and then Senior Vice President of Allegiance Realty
Group, Inc., an affiliate of Balcor providing property management services.
Mr. Selby was responsible for supervising the management of residential
properties in the western United States.
(d) There is no family relationship between any of the foregoing officers.
(f) None of the foregoing officers or employees are currently involved in any
material legal proceedings nor were any such proceedings terminated during the
fourth quarter of 1994.
Item 11. Executive Compensation
- -------------------------------
The Registrant has not paid and does not propose to pay any remuneration to the
executive officers and directors of the General Partner. Certain of these
officers receive compensation from The Balcor Company (but not from the
Registrant) for services performed for various affiliated entities, which may
include services performed for the Registrant. However, the General Partner
believes that any such compensation attributable to services performed for the
Registrant is immaterial to the Registrant. See Note 7 of Notes to Financial
Statements for the information relating to transactions with affiliates.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
(a) No person owns of record or is known by the Registrant to own beneficially
more than 5% of the outstanding Limited Partnership Interests of the
Registrant.
(b) Balcor Mortgage Advisors-II and its officers own as a group or individually
the following Limited Partnership Interests of the Registrant:
Amount
Beneficially
Title of Class Owned Percent of Class
-------------- ------------- ----------------
Limited Partnership
Interest 5 Interests Less than 1%
Relatives and affiliates of the officers and partners of the General Partner do
not own any additional interests.
(c) The Registrant is not aware of any arrangement, the operation of which may
result in a change of control of the Registrant.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
(a, b) See Note 2 of Notes to Financial Statements for information relating to
the Partnership Agreement and the allocation of distributions and profits and
losses.
See Note 7 of Notes to Financial Statements for information relating to
transactions with affiliates.
(c) No management person is indebted to the Registrant.
(d) The Registrant has no outstanding agreements with any promoters.
PART IV
Item 14. Exhibits, Financial Statements and Financial Statement Schedules,
- --------------------------------------------------------------------------
and Reports on Form 8-K
- -----------------------
(a)
(1 & 2) See Index to Financial Statements in this Form 10-K.
(3) Exhibits:
(3) The Amended and Restated Agreement of Limited Partnership, and the Amended
and Restated Certificate of Limited Partnership of Balcor Pension
Investors-III, previously filed as Exhibits 3(a) and 3(b), respectively, to
Amendment No. 2 to the Registrant's Registration Statement on Form S-11 dated
May 20, 1982 (Registration No. 2-75938), and as Exhibits 3(a) and 3(b),
respectively, to the Registrant's Registration Statement on Form S-11 dated
November 2, 1982 (Registration No. 2-80123), are hereby incorporated herein by
reference.
(4) Form of Subscription Agreement, previously filed as Exhibit 4(a) to
Amendment No. 2 to the Registrant's Registration Statement on Form S-11 dated
May 20, 1982 (Registration Statement No. 2-75938) and as previously filed as
Exhibit 4(a) to Registrant's Registration Statement on Form S-11 dated
November 2, 1982 (Registration No. 2-80123), and Form of Confirmation regarding
Interests in the Registrant set forth as Exhibit 4.2 to the Registrant's Report
on Form 10-Q for the quarter ended June 30, 1992 (Commission File No. 0-011129)
are incorporated herein by reference.
(27) Financial Data Schedule of the Registrant for 1994 is attached hereto.
(28) Agreement of Sale relating to the sale of the Crossings Shopping Center,
Smyrna, Georgia is attached hereto.
(b) Reports on Form 8-K: There were no reports filed on Form 8-K during the
quarter ended December 31, 1994.
(c) Exhibits: See Item 14(a)(3) above.
(d) Financial Statement Schedules: None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BALCOR PENSION INVESTORS-III
By: /s/Allan Wood
-------------------------------------
Allan Wood
Executive Vice President, and Chief
Accounting and Financial Officer
(Principal Accounting and Financial
Officer) of Balcor Mortgage Advisors-II,
the General Partner
Date: March 24, 1995
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- ---------------------- ------------------------------------ ------------
President and Chief Executive
Officer (Principal Executive
Officer) of Balcor Mortgage
/s/Thomas E. Meador Advisors-II, the General Partner March 24, 1995
-------------------- --------------
Thomas E. Meador
Executive Vice President, and Chief
Accounting and Financial Officer
(Principal Accounting and Financial
Officer) of Balcor Mortgage
/s/Allan Wood Advisors-II, the General Partner March 24, 1995
- -------------------- --------------
Allan Wood
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors
Financial Statements:
Balance Sheets, December 31, 1994 and 1993
Statements of Partners' Capital, for the years ended December 31, 1994, 1993
and 1992
Statements of Income and Expenses, for the years ended December 31, 1994, 1993
and 1992
Statements of Cash Flows, for the years ended December 31, 1994, 1993 and 1992
Notes to Financial Statements
Schedules are omitted for the reason that they are inapplicable or equivalent
information has been included elsewhere herein.
REPORT OF INDEPENDENT AUDITORS
To the Partners of
Balcor Pension Investors-III:
We have audited the accompanying balance sheets of Balcor Pension Investors-III
(An Illinois Limited Partnership) as of December 31, 1994 and 1993, and the
related statements of partners' capital, income and expenses and cash flows for
each of the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements 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 Balcor Pension Investors-III
at December 31, 1994 and 1993, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
March 6, 1995
BALCOR PENSION INVESTORS-III
(An Illinois Limited Partnership)
BALANCE SHEETS
December 31, 1994 and 1993
ASSETS
1994 1993
------------- -------------
Cash and cash equivalents $ 18,445,509 $ 10,156,355
Cash and cash equivalents - Early Investment
Incentive Fund 21,171 25,783
Escrow deposits 427,562 375,028
Escrow deposits - restricted 899,929 1,238,638
Accounts and accrued interest receivable 286,756 526,698
Deferred expenses, net of accumulated
amortization of $28,120 in 1994 and
$15,622 in 1993 34,368 46,866
------------- -------------
20,115,295 12,369,368
------------- -------------
Investment in loans receivable:
Loans receivable - wrap-around
and first mortgages 75,491,676 102,095,930
Less:
Loans payable - underlying mortgages 42,548,988 47,870,972
Allowance for potential loan losses 5,013,959 8,129,365
------------- -------------
Net investment in loans receivable 27,928,729 46,095,593
Real estate held for sale 23,801,567 17,369,132
Investments in joint ventures with affiliates 6,023,084 5,734,184
------------- -------------
57,753,380 69,198,909
------------- -------------
$ 77,868,675 $ 81,568,277
============= =============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 119,483 $ 222,483
Due to affiliates 110,862 62,601
Other liabilities, principally interest,
real estate taxes and escrow deposits 1,541,327 1,823,666
Security deposits 120,870 73,750
Mortgage notes payable 7,153,074 8,436,279
------------- -------------
Total liabilities 9,045,616 10,618,779
------------- -------------
Partners' capital (237,476 Limited
Partnership Interests issued) 73,437,669 75,130,101
Less Interests held by Early Investment
Incentive Fund (10,208 at December 31, 1994
and 8,892 at December 31, 1993) (4,614,610) (4,180,603)
------------- -------------
68,823,059 70,949,498
------------- -------------
$ 77,868,675 $ 81,568,277
============= =============
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-III
(An Illinois Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
for the years ended December 31, 1994, 1993 and 1992
Partners' Capital (Deficit) Accounts
-----------------------------------------
General Limited
Total Partner Partners
------------- ------------- -------------
Balance at December 31, 1991 $ 76,941,929 $ (1,103,856) $ 78,045,785
Repurchase of 914 Limited
Partnership Interests (345,175) (345,175)
Cash distributions to:
Limited Partners (A) (5,177,586) (5,177,586)
General Partner (445,267) (445,267)
Net income for the year
ended December 31, 1992 2,166,157 162,462 2,003,695
------------- ------------- -------------
Balance at December 31, 1992 73,140,058 (1,386,661) 74,526,719
Repurchase of 956 Limited
Partnership Interests (351,782) (351,782)
Cash distributions to:
Limited Partners (A) (4,584,286) (4,584,286)
General Partner (395,792) (395,792)
Net income for the year
ended December 31, 1993 3,141,300 235,598 2,905,702
------------- ------------- -------------
Balance at December 31, 1993 70,949,498 (1,546,855) 72,496,353
Repurchase of 1,316 Limited
Partnership Interests (434,007) (434,007)
Cash distributions to:
Limited Partners (A) (7,844,967) (7,844,967)
General Partner (346,320) (346,320)
Net income for the year
ended December 31, 1994 6,498,855 487,414 6,011,441
------------- ------------- -------------
Balance at December 31, 1994 $ 68,823,059 $ (1,405,761) $ 70,228,820
============= ============= =============
(A) Summary of cash distributions paid per Limited Partnership Interest:
1994 1993 1992
------------- ------------- -------------
First Quarter $ 5.50 $ 5.00 $ 7.50
Second Quarter 20.85 5.00 5.00
Third Quarter 4.00 5.00 5.00
Fourth Quarter 4.00 5.00 5.00
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-III
(An Illinois Limited Partnership)
STATEMENTS OF INCOME AND EXPENSES
for the years ended December 31, 1994, 1993 and 1992
1994 1993 1992
------------- ------------- -------------
Income:
Interest on loans receivable $ 10,162,922 $ 10,535,990 $ 10,544,202
Less interest on loans
payable - underlying
mortgages 4,280,261 4,916,217 5,032,431
------------- ------------- -------------
Net interest income on
loans receivable 5,882,661 5,619,773 5,511,771
Income from operations of
real estate held for sale 804,434 599,785 1,121,499
Participation in income (loss)
of joint ventures with
affiliates 438,608 (482,783) (239,537)
Interest on short-term
investments 543,293 283,425 217,438
Participation income 235,395 105,696 117,447
------------- ------------- -------------
Total income 7,904,391 6,125,896 6,728,618
------------- ------------- -------------
Expenses:
Provision for potential
losses on loans, real
estate and accrued interest
receivable 600,000 2,720,000 3,750,000
Mortgage servicing fees 84,798 104,143 124,051
Administrative 840,580 759,956 688,410
------------- ------------- -------------
Total expenses 1,525,378 3,584,099 4,562,461
------------- ------------- -------------
Income before net gain on sales
of real estate 6,379,013 2,541,797 2,166,157
Net gain on sales of real estate 119,842 599,503
------------- ------------- -------------
Net income $ 6,498,855 $ 3,141,300 $ 2,166,157
============= ============= =============
Net income allocated to
General Partner $ 487,414 $ 235,598 $ 162,462
============= ============= =============
Net income allocated to
Limited Partners $ 6,011,441 $ 2,905,702 $ 2,003,695
============= ============= =============
Net income per average number
of Limited Partnership
Interests outstanding (228,132
in 1994, 229,084 in 1993 and
229,880 in 1992) $ 26.35 $ 12.68 $ 8.72
============= ============= =============
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-III
(An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1994, 1993 and 1992
1994 1993 1992
------------- ------------- -------------
Operating activities:
Net income $ 6,498,855 $ 3,141,300 $ 2,166,157
Adjustments to reconcile net
income to net cash provided
by operating activities:
Net gain on sales of real
estate (119,842) (599,503)
Participation in (income)
loss of joint ventures
with affiliates (438,608) 482,783 239,537
Provision for potential
losses on loans, real
estate and accrued
interest receivable 600,000 2,720,000 3,750,000
Amortization of deferred
expenses 12,498 254,853 18,354
Accrued interest income
due at maturity (201,260) (56,434)
Collection of accrued
interest income due
at maturity 449,978 396,873
Net change in:
Escrow deposits (52,534) 309,617 (459,681)
Escrow deposits -
restricted 338,709 (300,814) (374,748)
Accounts and accrued
interest receivable 203,867 258,361 (306,153)
Accounts payable (103,000) (628,108) 764,762
Due to affiliates 48,261 7,298 (8,285)
Other liabilities (178,291) 352,786 285,202
Security deposits 47,120 (39,794) 11,671
------------- ------------- -------------
Net cash provided by
operating activities 6,857,035 6,207,497 6,427,255
------------- ------------- -------------
Investing activities:
Capital contributions to joint
venture partners - affiliates (78,147) (316,577)
Distributions from joint
venture partners - affiliates 227,855 4,294 380,606
Loan fundings (12,379) (53,661)
Collection of principal
payments on loans receivable 11,511,219 2,045,070 33,950
Additions to real estate (256,770) (107,172) (64,574)
Proceeds from sales of
real estate 1,200,000 3,736,019
Costs incurred in connection
with sales of real estate (49,586) (325,277)
Costs incurred in connection
with real estate acquired
through foreclosure (40,471)
------------- ------------- -------------
Net cash provided by
investing activities 12,514,100 5,023,978 296,321
------------- ------------- -------------
Financing activities:
Distributions to Limited
Partners (7,844,967) (4,584,286) (5,177,586)
Distributions to General
Partner (346,320) (395,792) (445,267)
Decrease in cash and cash
equivalents - Early
Investment Incentive Fund 4,612 54,553 30,255
Payment of deferred expenses (172,580) (79,738)
Repurchase of Limited
Partnership Interests (434,007) (351,782) (345,175)
Principal payments on
underlying loans payable (1,178,094) (1,369,417) (1,116,054)
Repayment of mortgage notes
payable (4,798,550) (746,897)
Proceeds from issuance of
mortgage note payable 4,298,400 2,853,000
Principal payments on mortgage
notes payable (1,283,205) (334,887) (342,279)
------------- ------------- -------------
Net cash used in
financing activities (11,081,981) (7,654,341) (5,369,741)
------------- ------------- -------------
Net change in cash and
cash equivalents 8,289,154 3,577,134 1,353,835
Cash and cash equivalents
at beginning of year 10,156,355 6,579,221 5,225,386
------------- ------------- -------------
Cash and cash equivalents
at end of year $ 18,445,509 $ 10,156,355 $ 6,579,221
============= ============= =============
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-III
(An Illinois Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. Accounting Policies:
(a) The Partnership records wrap-around mortgage loans at the face amount of
the mortgage instrument which includes the outstanding indebtedness of the
borrower under the terms of the underlying mortgage obligations. The underlying
mortgage obligations are recorded as a reduction of the wrap-around mortgage
loan and the resulting balance represents the Partnership's net advance to the
borrower. The Partnership is responsible for making periodic payments to the
underlying mortgage lenders only to the extent that payments as required by the
wrap-around mortgage agreement are received by the Partnership from the
borrower.
(b) Income on loans is recorded as earned in accordance with the terms of the
related loan agreements. The accrual of interest is discontinued when a loan
becomes ninety days contractually delinquent or sooner when, in the opinion of
the General Partner, an impairment has occurred in the value of the collateral
property securing the loan. Income on nonaccrual loans or loans which are
otherwise not performing in accordance with their terms is recorded on a cash
basis.
Various loan agreements provide for participation by the Partnership in
increases in value of the collateral property when the loan is repaid or
refinanced. In addition, certain loan agreements allow the Partnership to
receive a percentage of rental income exceeding a base amount. Participation
income is reflected in the accompanying Statements of Income and Expenses when
received.
Income from operations of real estate owned is reflected in the accompanying
Statements of Income and Expenses net of related direct operating expenses.
(c) Allowances are recorded through charges to income when the General Partner
believes an impairment has occurred, either in a borrower's ability to repay
the loan or in the value of the collateral property. Determinations of
impairment are made periodically on the basis of performance under the terms of
the loan agreement and assessments of property operations.
When the General Partner believes the likelihood of foreclosure is more than
remote, a loss provision is recorded if the loan balance exceeds the estimated
fair value of the collateral property less costs of disposal. Upon foreclosure,
actual losses are charged to the allowance and the fair value of the property
is transferred to real estate held for sale. Determinations of fair value
represent estimations based on many variables which affect the value of real
estate, including economic and demographic conditions. An allowance for loss is
recorded when a decline in the value of a property owned is believed to be
temporary. Impairment in value considered to be permanent results in the direct
writedown of the property's carrying value to its estimated fair value.
(d) Deferred expenses consist of leasing commissions which are amortized over
the term of the respective lease, and refinancing fees which are amortized over
the term of the respective loan agreement.
(e) Income from operating leases with significant abatements and/or scheduled
rent increases is recognized on a straight-line basis over the respective lease
term.
(f) Investment in joint ventures with affiliates represents the Partnership's
percentage interests in joint ventures with affiliated partnerships. The
Partnership records its initial investment at cost and adjusts its investment
account for additional capital contributions, distributions and its share of
income or loss.
(g) The Partnership records repurchases of Interests by the Early Investment
Incentive Fund as a reduction of Partners' Capital (see Note 2 of Notes to
Financial Statements). Cash and cash equivalents not yet utilized to repurchase
Interests, but which are part of the Early Investment Incentive Fund, are
classified as restricted assets of the Partnership.
(h) Cash equivalents include all highly liquid investments with a maturity of
three months or less when purchased.
(i) The Partnership is not liable for Federal income taxes as each partner
recognizes his proportionate share of the Partnership income or loss in his tax
return; therefore, no provision for income taxes is made in the financial
statements of the Partnership.
(j) Several reclassifications have been made in the previously reported 1993
and 1992 financial statements to conform with classifications used in 1994
including the reclassification of "loans in substantive foreclosure" to loans
to conform with the provisions of Statement of Financial Accounting Standards
No.114 which was adopted as of January 1, 1994.
These reclassifications have not changed the 1993 or 1992 operating results.
2. Partnership Agreement:
The Partnership was organized on January 22, 1982. The Partnership Agreement
provides for Balcor Mortgage Advisors-II to be the General Partner and for the
admission of Limited Partners through the sale of Limited Partnership Interests
at $500 per Interest, 237,476 of which were sold on or prior to November 10,
1982, the termination date of the offering.
For financial statement purposes, profits and losses are allocated 92.5% to the
Limited Partners, of which 2.5% relates to the Early Investment Incentive Fund,
and 7.5% to the General Partner.
To the extent that Cash Flow is distributed, distributions will be made as
follows: (i) 90% of such Cash Flow will be distributed to the Limited Partners,
(ii) 7.5% of such Cash Flow will be distributed to the General Partner, and
(iii) 2.5% of such Cash Flow will be set aside in a separate account for
repurchase of Interests and for payment on dissolution of the Partnership to
investors who subscribed prior to December 31, 1982 ("Early Investors") if
necessary for them to receive an amount equal to their Original Capital plus a
specified cumulative return based on the date of investment. Amounts, if any,
remaining in the account after the Early Investors have received their
cumulative return will be distributed 90% to all Limited Partners and 10% to
the General Partner.
Amounts placed in the Early Investment Incentive Fund may, at the sole
discretion of the General Partner and subject to certain limitations, be used
to repurchase Interests from existing Limited Partners. During 1994, 1,316
Interests were repurchased at a cost of $434,007. All repurchases of Interests
have been made at 95% of the then current valuation of such Limited Partnership
Interests at the previous quarter end less any distributions made after the
previous quarter end. Distributions of Cash Flow and Mortgage Reductions
pertaining to any repurchased Interests are paid to the Early Investment
Incentive Fund. To the extent that amounts in the Early Investment Incentive
Fund are not utilized to repurchase Interests, such amounts are invested in
short-term interest-bearing instruments with earnings thereon credited to this
account.
3. Investment in Loans Receivable:
Loans receivable and loans payable at December 31, 1994 consisted of the
following:
Loans Receivable
---------------------------------------------------------
Current Current Original Final
Mortgage Monthly Interest Funding Maturity Additional
Property Balances(A) Payments Rate Date Date Interest
- -------------- ----------- -------- -------- ------- ------ ----------
First and Wrap-around
Mortgages:
Apartments:
Carmel on
Providence (B) $ 3,200,000 $ 34,333 12.875% 1982 1997
Chicago Colony 16,750,000 157,031 11.25 1985 1995 (C)
Pepper Square 3,300,000 27,500 10.00 1989 1996
Rivergate 5,289,051 47,718 10.00 1990 1995
Office Buildings:
Bannockburn
Executive Plaza(D) 8,727,625 75,750 9.00 1982 1997
Seafirst Financial
Center 32,425,000 268,955 9.95 1982 1997 (C)
Corporate Campus I
(E) 5,800,000 44,467 9.20 1988 1998
-----------
Total $75,491,676
===========
Loans Payable
---------------------------------------
Underlying Current Current Due
Mortgage Monthly Interest Date of
Property Balances Payments Rate Loan
- --------------- ---------- -------- -------- -------
Apartments:
Carmel on Providence $1,334,265 $17,777 9.50% 1997
Chicago Colony 3,120,208 37,762 8.75 1995
2,743,070 33,042 8.75 1995
1,698,238 21,875 9.75 1995
Pepper Square 1,886,820 19,760 9.25 1996
Office Buildings:
Bannockburn
Executive Plaza 4,097,678 44,677 9.75 1997
Seafirst Financial
Center 24,958,067 231,196 9.75 1997
Corporate Campus I 2,710,642 29,934 9.50 1999
-----------
Total $42,548,988
===========
(A) All loans are wrap-around mortgage loans except for Rivergate Apartments
which is a first mortgage loan.
(B) A plan of reorganization was approved by the Bankruptcy Court in June 1993
which extended the maturity date of this loan and the underlying mortgage loan
to December 1997. In addition, the interest rate on the underlying loan was
increased from 9.0% to 9.5% effective July 1993.
(C) The Partnership may receive additional payments from the borrower
representing participation in the operating results of the collateral property
which exceed specified levels and a share in the appreciation of the collateral
property upon repayment or refinancing.
(D) A plan of reorganization was confirmed by the Bankruptcy Court in February
1995 which extended the maturity date of this loan and the underlying mortgage
loan to December 1997. This loan will continue to bear interest at 14.5% per
annum with a pay rate of 9% per annum based on the outstanding principal.
Unpaid interest will be waived by the Partnership if this loan is repaid on or
prior to maturity assuming no previous uncured defaults.
(E) In August 1993, the loan was modified. Effective January 1, 1993, the
interest rate was reduced from 10.5% to 9.2% and the maturity date of the loan
was extended five years to September 1998. In addition, the borrower delivered
a $500,000 letter of credit to the Partnership as additional security for the
loan.
Loans which have been classified as nonaccrual as a result of delinquency or
other noncompliance with terms of loan agreements aggregated $11,927,625 and
$31,893,745 at December 31, 1994 and 1993, respectively.
Under certain circumstances, the General Partner has entered into negotiations
with borrowers which resulted in a reduction of interest rates, periodic
payments or the modification of other loan terms. Loans whose monetary terms
have been restructured amounted to $38,225,000 at December 31, 1994 and 1993.
Nonaccrual loans and loans which have been restructured are hereinafter
referred to as impaired loans.
Net interest income relating to all of the impaired loans except for the Woods
Apartments loan would have been approximately $1,915,000 in 1994, $3,787,000 in
1993 and $3,281,000 in 1992. Net interest income from impaired loans included
in the accompanying Statements of Income and Expenses amounted to approximately
$1,958,000 ($1,877,000 cash basis) in 1994, $2,375,000 in 1993 and $2,129,000
in 1992.
The Woods Apartments loan was placed on non-accrual status in 1988. During May
1992, an extension of the maturity of the loan receivable and underlying loan
was completed. The maturity dates were extended to June 20, 1993 and July 1,
1993, respectively. The borrower failed to repay either of the loans and the
Partnership obtained title to the property through a non-judicial foreclosure
in July 1994. The Partnership received net interest income of approximately
$653,000, $301,000 and $385,000 in 1994, 1993 and 1992, respectively.
Included in the impaired loan balances of $50,152,625 at December 31, 1994 is
$38,225,000 of impaired loans for which the related allowance for losses is
$3,654,000. The average recorded investment in impaired loans during the year
ended December 31, 1994 was approximately $60,136,000.
4. Allowances for Losses on Loans and Real Estate Held for Sale:
Activity recorded in the allowances for losses on loans and real estate held
for sale during the three years ended December 31, 1994 is described in the
table below.
1994 1993 1992
------------ ------------- ------------
Loans:
Balance at beginning of
year $ 8,129,365 $ 8,129,365 $ 10,401,365
Provision charged to
income 600,000 2,000,000 224,000
Charge-off of losses (3,715,406) (2,000,000) (2,496,000)
----------- ----------- ------------
Balance at the end of
the year $ 5,013,959 $ 8,129,365 $ 8,129,365
=========== =========== ============
Real Estate Held for Sale:
Balance at beginning of
year None None $ 8,825,000
Provision charged to
income None $ 720,000 3,526,000
Charge-off of losses None (720,000) (12,351,000)
----------- ----------- ------------
Balance at the end of
the year None None None
=========== =========== ============
Included in the 1992 charge-off of losses are amounts reflecting the
Partnership's adoption of Statement of Position 92-3, "Accounting for
Foreclosed Assets" which required the Partnership to adjust the carrying
amounts of its real estate held for sale and loans previously classified as in
substantive foreclosure to the lower of fair value of the asset less estimated
costs to sell, or the cost of the asset. This change had no effect on the
results of operations of the Partnership in 1992 since the Partnership had
previously recorded these allowances to reflect declines in the value of the
real estate and loans.
5. Mortgage Notes Payable:
The mortgage notes payable at December 31, 1994 and 1993 consisted of the
following:
Carrying Carrying
Amounts Amounts
of Notes of Notes Current Current Final Estimated
at at Monthly Interest Maturity Balloon
Property 12/31/94 12/31/93 Payments Rate Date Payment
- ---------------- ---------- --------- -------- -------- ------ ---------
Apartments:
Candlewyck $1,313,768 $1,371,443 $15,598 9.625% 1996 $1,233,000
1,065,228 1,127,628 13,217 8.75 1996 979,000
1,274,175 1,325,227 14,835 9.75 1996 1,203,000
Shopping Centers:
Crossings(A) 1,793,760 1,845,849 18,768 9.50 1995 1,780,000
Orchards 1,706,143 2,766,132 16,334 9.25 1997 1,587,000
---------- ----------
Total $7,153,074 $8,436,279
========== ==========
(A) In January 1995, this mortgage note payable was assumed by the purchaser
in connection with the sale of the property.
Real estate held for sale with an aggregate carrying value of $16,338,560 at
December 31, 1994 was pledged as collateral for repayment of mortgage notes.
During the years ended December 31, 1994, 1993 and 1992, the Partnership
incurred interest expense on mortgage notes payable of $780,047, $1,531,785 and
$1,302,291, respectively, and paid interest of $780,047, $1,526,182 and
$1,279,853, respectively.
Future maturities of the above mortgage notes payable are approximately as
follows:
1995 $2,021,000
1996 3,509,000
1997 1,623,000
6. Management Agreements:
As of December 31, 1994, all of the properties owned by the Partnership are
managed by a third-party management company. These management agreements
provide for annual fees of 5% of gross operating receipts for residential
properties and 3% to 6% of gross operating receipts for commercial properties.
7. Transactions with Affiliates:
Fees and expenses paid and payable by the Partnership to affiliates are:
Year Ended Year Ended Year Ended
12/31/94 12/31/93 12/31/92
-------------- -------------- --------------
Paid Payable Paid Payable Paid Payable
------ ------- ------ ------- ------ -------
Mortgage servicing fees $88,396 $4,839 $104,581 $8,437 $123,214 $8,875
Property management fees 238,090 None 333,195 18,262 311,150 26,433
Reimbursement of expenses
to the General Partner
at cost:
Accounting 74,803 30,698 71,203 5,880 74,411 5,710
Data processing 41,023 9,216 41,726 10,010 44,027 3,598
Investor communica-
tion 27,664 8,893 20,499 1,693 30,743 2,359
Legal 16,094 9,316 14,911 1,231 13,452 1,032
Portfolio management 84,441 38,103 62,738 16,384 80,545 5,755
Other 26,381 9,797 8,518 704 20,076 1,541
Allegiance Realty Group, Inc., an affiliate of the General Partner, managed all
of the Partnership's properties until the affiliate was sold to a third-party
in November 1994.
The Partnership participates in an insurance deductible program with other
affiliated partnerships in which the program pays claims up to the amount of
the deductible under the master insurance policies for its properties. The
program is administered by an affiliate of the General Partner who receives no
fee for administering the program. The Partnership's premiums to the deductible
insurance program were $46,538, $31,861 and $46,573 for 1994, 1993 and 1992,
respectively.
8. Investments in Joint Ventures with Affiliates:
The Partnership owns a 27.5% joint venture interest in the Brookhollow/Stemmons
Office Center and a 12.68% joint venture interest in the Perimeter 400 Center
Office Building. During 1994, 1993 and 1992, the Partnership received
distributions totaling $227,855, $4,294 and $380,606, respectively, from the
joint ventures. During 1994 and 1993, the Partnership also made contributions
totaling $78,147 and $316,577 to the joint ventures, respectively. In addition,
during 1993 and 1992, the joint ventures recognized provisions for loss
totaling $3,165,000 and $6,988,000, respectively, due to a decline in the fair
value of the properties. The Partnership's participation in loss of joint
ventures with affiliates includes the Partnership's share of the provisions of
$771,873 and $757,498, respectively.
The following information has been summarized from the financial statements of
the joint ventures:
1994 1993 1992
------------ ----------- ------------
Net investment in
real estate as
of December 31 $ 34,174,946 $34,008,955 $34,487,647
Total liabilities
as of December 31 391,765 510,366 348,805
Total income 7,319,405 6,834,797 7,681,487
Net income before
provision 2,733,148 1,295,097 3,329,866
Provision for
potential loss None (3,165,000) (6,988,000)
Net income (loss) 2,733,148 (1,869,903) (3,658,134)
9. Real Estate Held for Sale:
The Partnership acquired The Woods Apartments through foreclosure in July 1994
and the Crossings Shopping Center in March 1992. The Partnership recorded the
costs of the properties at $7,198,171 and $4,248,350 in 1994 and 1992,
respectively. These amounts represented the outstanding loan balances plus any
accrued interest receivable. In 1994 the Partnership increased the basis of The
Woods Apartments by $8,066 for certain receivables, escrows and costs incurred
in connection with the foreclosure.
At the date of foreclosure, the property was transferred to real estate held
for sale at its fair value.
10. Discounted Prepayment of Loan Receivable:
In June 1994, the borrower of the $12,767,949 Continental Park wrap-around loan
prepaid the loan at a discount. The Partnership received proceeds of
approximately $4,873,085 and the borrower repaid the $4,143,890 underlying
mortgage loan. The remaining wrap-around loan receivable balance, net of the
underlying mortgage payable balance, and escrow liabilities of $35,568 were
written off in connection with the prepayment of the loan.
11. Sale of Real Estate:
The Partnership sold the Crossings Shopping Center during 1995, the Orchards
Office Building during 1994, and the Villa Verde Apartments, Riverview Office
Building and vacant land adjacent to the Orchards Shopping Center during 1993
in separate all cash sales for $2,650,000, $1,200,000 and $8,025,000,
respectively. From the proceeds of the 1994 sale, the Partnership repaid
$1,000,000 of the Orchards first mortgage loan. The Partnership continues to
own the Orchards Shopping Center. The purchasers of the Crossings Shopping
Center and the Villa Verde Apartments took title subject to the existing first
mortgage loans which had balances of $1,793,760 and $4,288,981, respectively.
The carrying value of the real estate sold during 1995, 1994 and 1993 totaled
$1,852,350, $1,030,572 and $7,100,220, respectively. For financial statement
purposes, the Partnership recognized net gains of $119,842 and $599,503 from
the sale of the real estate during 1994 and 1993, respectively. The Partnership
expects to recognize a gain of $717,900 on the sale of the Crossings Shopping
Center during the first quarter of 1995.
12. Contingencies:
The Partnership is currently involved in a lawsuit whereby the Partnership and
certain affiliates have been named as defendants alleging certain federal
securities law violations with regard to the adequacy and accuracy of
disclosures of information concerning the offering of the Limited Partnership
Interests of the Partnership. The defendants continue to vigorously contest
this action. While a plaintiff class has been certified, no determinations of
the merits have been made. Although the outcome of these matters is not
presently determinable, it is management's opinion that the ultimate outcome
should not have a material adverse affect on the financial position of the
Partnership. Management of the defendants believes they have meritorious
defenses to contest the claims.
13. Subsequent Event:
In January 1995, the Partnership paid $949,904 to Limited Partners representing
the regular quarterly distribution of available Cash Flow of $4.00 per Interest
for the fourth quarter of 1994.