UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________to _________
Commission file number 0-14570
MCCOMBS REALTY PARTNERS
(Exact name of small business issuer as specified in its charter)
California 33-0068732
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Beattie Place, PO Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ___ No _X_
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MCCOMBS REALTY PARTNERS
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
September 30, 2005
Assets
Cash and cash equivalents $ 82
Receivables and deposits 167
Restricted escrows 97
Other assets 146
Investment property:
Land $ 499
Buildings and related personal property 6,409
6,908
Less accumulated depreciation (5,260) 1,648
$ 2,140
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 68
Tenant security deposit liabilities 32
Accrued property taxes 53
Other liabilities 75
Due to affiliates (Note D) 1,650
Mortgage note payable (Note E) 4,350
Partners' Deficit
General partner $ (1)
Limited partners (17,169.13 units
issued and outstanding) (4,087) (4,088)
$ 2,140
See Accompanying Notes to Consolidated Financial Statements
MCCOMBS REALTY PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per unit data)
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
Revenues:
Rental income $ 266 $ 282 $ 779 $ 928
Other income 37 54 121 137
Casualty gain (Note F) -- -- -- 16
Total revenues 303 336 900 1,081
Expenses:
Operating 223 166 634 557
General and administrative 29 29 87 90
Depreciation 66 69 194 207
Interest 115 114 347 340
Property taxes 18 27 54 82
Total expenses 451 405 1,316 1,276
Net loss $ (148) $ (69) $ (416) $ (195)
Net loss allocated to
general partner $ -- $ -- $ -- $ --
Net loss allocated to
limited partners (148) (69) (416) (195)
$ (148) $ (69) $ (416) $ (195)
Net loss per limited
partnership unit $ (8.62) $ (4.02) $(24.23) $(11.36)
See Accompanying Notes to Consolidated Financial Statements
MCCOMBS REALTY PARTNERS
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partner Partners Total
Partners' deficit at
December 31, 2004 17,169.13 $ (1) $ (3,671) $ (3,672)
Net loss for the nine months
ended September 30, 2005 -- -- (416) (416)
Partners' deficit
at September 30, 2005 17,169.13 $ (1) $ (4,087) $ (4,088)
See Accompanying Notes to Consolidated Financial Statements
MCCOMBS REALTY PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
2005 2004
Cash flows from operating activities:
Net loss $ (416) $ (195)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation 194 207
Amortization of loan costs 28 14
Bad debt expense 22 49
Casualty gain -- (16)
Loss on early extinguishment of debt 3 --
Change in accounts:
Receivables and deposits (101) (49)
Other assets (9) (35)
Accounts payable 8 (5)
Tenant security deposit liabilities 4 (3)
Accrued property taxes 53 (25)
Due to affiliates 105 64
Other liabilities (7) 12
Net cash (used in) provided by operating activities (116) 18
Cash flows from investing activities:
Insurance proceeds received -- 16
Property improvements and replacements (155) (73)
Net withdrawals from (deposits to) restricted escrows 51 (35)
Net cash used in investing activities (104) (92)
Cash flows from financing activities:
Repayment of mortgage note payable (5,160) --
Proceeds from mortgage note payable 4,350 --
Loan costs paid (111) --
Payments on mortgage note payable (41) (70)
Advances from affiliate 1,234 120
Net cash provided by financing activities 272 50
Net increase (decrease) in cash and cash equivalents 52 (24)
Cash and cash equivalents at beginning of period 30 132
Cash and cash equivalents at end of period $ 82 $ 108
Supplemental disclosure of cash flow information:
Cash paid for interest $ 272 $ 320
Supplemental disclosure of non-cash activity:
Property improvements and replacements included in
accounts payable $ 12 $ --
Included in property improvements and replacements for the nine months ended
September 30, 2005 are approximately $14,000 of property improvements and
replacements which were included in accounts payable at December 31, 2004.
See Accompanying Notes to Consolidated Financial Statements
MCCOMBS REALTY PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Going Concern
The accompanying unaudited consolidated financial statements have been prepared
assuming McCombs Realty Partners (the "Partnership" or "Registrant") will
continue as a going concern. The Partnership has experienced decreasing
occupancy levels and suffers from a lack of cash flow from operations. The
Partnership's general partner, CRPTEX, Inc., a Texas corporation (the "General
Partner") is currently evaluating its options to improve the operations of the
property and increase occupancy levels to improve the cash flows generated by
the property.
As a result of the above, there is substantial doubt about the Partnership's
ability to continue as a going concern. The unaudited consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
Note B - Basis of Presentation
The accompanying unaudited consolidated financial statements of the Partnership
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Item 310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of the General Partner, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three and nine
month periods ended September 30, 2005 are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 2005. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Partnership's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2004. The General Partner is a subsidiary of
Apartment Investment and Management Company ("AIMCO"), a publicly traded real
estate investment trust.
Note C - Plan of Reorganization
On March 9, 1987, the original general partners of the Partnership, on behalf of
the Partnership, filed a voluntary petition under Chapter 11 of the Federal
Bankruptcy Code in U.S. Bankruptcy Court, Central District of California
("Court"). The Partnership continued as Debtor-In-Possession to operate its
business in the ordinary course until the Court confirmed the Partnership's Plan
of Reorganization (the "Plan") effective October 25, 1988. The Plan was approved
by all required classes of creditors.
The Plan required that the Partnership make certain payments to its secured
creditors and others on or before October 20, 1995. These payments were made on
or about June 25, 1995, when the Partnership refinanced the outstanding
mortgages encumbering the property. The Plan also required that the Partnership
make the following distributions on October 20, 1998, from available cash:
1) First, Limited Partners, both original and substitute, who made
additional capital contributions under the Plan would receive a
repayment of the additional contributions totaling approximately
$730,000; if sufficient funds were unavailable to fully satisfy this
amount then a pro-rata portion would be paid based upon available
funds;
2) Second, Class 12 unsecured creditors ($23,100) would be paid on
their claims;
3) Third, Limited Partners who made additional capital contributions
and were original Limited Partners would receive a repayment of
their original capital contributions totaling approximately
$9,818,000; if sufficient funds were unavailable to fully satisfy
this amount then a pro-rata portion of available cash less a
pro-rata portion reserved for one third of the existing capital
contributions of non-contributing Limited Partners would be paid
based upon available funds;
4) Fourth, Limited Partners who did not make additional capital
contributions would receive a repayment of one-third of their
original capital contributions (i.e., one-third of $1,200,000); if
sufficient funds were unavailable to fully satisfy this amount then
a pro-rata portion would be paid based upon available funds.
Additionally, the Plan required CRPTEX, Inc. to make a capital contribution of
$14,500 and loan an additional $117,500 on behalf of the Partnership. The
Partnership received the $14,500 capital contribution but did not receive or
require the additional $117,500 to be loaned.
The payments required by number 2 above were timely made. With respect to the
amounts due to the Limited Partners under numbers 1, 3, and 4 above, there were
not sufficient funds available to completely satisfy these obligations at
October 20, 1998.
It was not anticipated that at October 20, 1998, there would be available funds
to fully satisfy the unsecured claims of the Limited Partners, as indicated
under the Plan. The limited partners were approached in August 1998 and asked to
either approve a sale of the Partnership's sole investment property or for the
General Partner to petition the Bankruptcy Court for an extension of the
settlement date. The required fifty-one percent response was not received. As a
result, the Partnership did not make any payments to the Limited Partners on
October 20, 1998, as required by the Plan from available funds. There is no
requirement, however, that the Partnership sell or again refinance the property
in order to pay in part or in whole, the payments to the Limited Partners
referred to above. The General Partner has determined that although all of the
required payments due under the Plan to the Limited Partners were not made, that
the Partnership is not in any material financial default in connection with its
prior bankruptcy. In addition, the General Partner believes that it is proper
for the Partnership to continue operating under the terms of its Partnership
Agreement as modified by the Plan.
Since the expiration of the Plan on October 20, 1998, the General Partner had
reserved all excess cash to ensure that the Partnership would be able to meet
its operating and capital improvement needs rather than making pro-rata payments
to the limited partners in accordance with numbers 1, 3, and 4 above. During the
fourth quarter of 2001, the General Partner determined that the Partnership had
accumulated approximately $562,000 in excess funds. Approximately $530,000,
which had been reserved since 1998 to ensure that the property was fully able to
meet its operating and capital improvement needs with existing operating funds,
was distributed during the year ended December 31, 2002 in accordance with
number 1 above. In addition, approximately $32,000 was distributed from
operations during the year ended December 31, 2002. Any additional funds will be
distributed in accordance with the terms of the Partnership Agreement as
modified by the Plan.
Note D - Transactions with Affiliated Parties
The Partnership has no employees and depends on the General Partner and its
affiliates for the management and administration of all Partnership activities.
The Partnership Agreement provides for certain payments to affiliates for
services and for reimbursement of certain expenses incurred by affiliates on
behalf of the Partnership.
Affiliates of the General Partner receive 5% of gross receipts from the
Partnership's investment property as compensation for providing property
management services. The Partnership paid to such affiliates approximately
$45,000 and $53,000 for the nine months ended September 30, 2005 and 2004,
respectively, which are included in operating expenses.
Affiliates of the General Partner charged the Partnership for reimbursement of
accountable administrative expenses amounting to approximately $50,000 and
$58,000 for the nine months ended September 30, 2005 and 2004, respectively,
which are included in general and administrative expenses. Approximately
$210,000 in reimbursement of accountable administrative expenses, including
related accrued interest of approximately $17,000, was owed to affiliates of the
General Partner at September 30, 2005 and is included in due to affiliates.
During the nine months ended September 30, 2005 and 2004 an affiliate of the
General Partner advanced the Partnership approximately $1,234,000 and $120,000,
respectively, to fund the refinancing of the mortgage encumbering Lakewood at
Pelham (as discussed in Note E), operating expenses and audit fees. These
advances bear interest at the prime rate plus 2% (8.75% at September 30, 2005).
Interest expense for the nine months ended September 30, 2005 and 2004 was
approximately $46,000 and $3,000, respectively. At September 30, 2005 the total
outstanding advances and accrued interest was approximately $1,440,000 and is
included in due to affiliates. Subsequent to September 30, 2005, an affiliate of
the General Partner advanced the Partnership's approximately $26,000 to fund
operating expenses.
The Partnership insures its property up to certain limits through coverage
provided by AIMCO which is generally self-insured for a portion of losses and
liabilities related to workers' compensation, property casualty, general
liability and vehicle liability. The Partnership insures its property above the
AIMCO limits through insurance policies obtained by AIMCO from insurers
unaffiliated with the General Partner. During the nine months ended September
30, 2005 and 2004, the Partnership was charged by AIMCO and its affiliates
approximately $26,000 and $25,000, respectively, for insurance coverage and fees
associated with policy claims administration.
Note E - Refinancing
On May 27, 2005, the Partnership obtained a mortgage in the maximum principal
amount of $5,500,000 on Lakewood at Pelham Apartments. The new mortgage is
comprised of an initial advance of $4,350,000 that was made to the Partnership
on May 27, 2005 and an earn-out advance of $1,150,000 that is available to the
Partnership based upon certain performance criteria being met prior to June 1,
2006. The existing mortgage with an outstanding principal amount of
approximately $5,160,000 was repaid with proceeds from the initial advance of
the new mortgage and an additional loan from an affiliate of the General Partner
of approximately $1,035,000. The Partnership recognized a loss on the early
extinguishment of debt of approximately $3,000 due to the write off of
unamortized loan costs, which is included in interest expense. Total capitalized
loan costs associated with the new mortgage were approximately $111,000 during
the nine months ended September 30, 2005 which are included in other assets. The
new mortgage requires monthly payments of interest beginning on July 1, 2005
until the loan matures June 1, 2007, with interest being equal to the average of
the one month LIBOR plus 230 basis points (6.16% at September 30, 2005 with a
minimum rate of 5.40%). In conjunction with the new mortgage note, the
Partnership paid approximately $14,000 to enter into an interest rate cap
agreement, which limits the Partnership's exposure to interest rate increases.
Under this interest rate cap agreement, the Partnership's interest rate on the
amounts owed to the lender will be no higher than 7.55%. The Partnership has
adopted Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which was
amended by SFAS No. 138 "Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an Amendment of SFAS No. 133". The Partnership's
interest rate cap does not qualify for special hedge accounting treatment as
defined by SFAS 133, and therefore all changes in the fair value of the interest
rate cap will be recognized in the consolidated statements of operations as an
adjustment to interest expense. In addition, the new mortgage requires monthly
escrow deposits for taxes, insurance and replacement reserves and a $80,000
repair reserve that was established with the lender at closing. The Partnership
has the option of extending the maturity date for two additional six month
periods upon delivering written notice to the lender, paying an extension fee of
..25% of the outstanding principal amount of the mortgage, no event of default
existing and certain performance criteria being met. As a condition of making
the new mortgage, the lender required AIMCO Properties, L.P., an affiliate of
the Partnership, to guarantee the obligations and liabilities of the Partnership
with respect to the new mortgage.
Note F - Casualty Event
In October 2002, a fire occurred at Lakewood at Pelham, which resulted in damage
to the laundry area. The property incurred damages of approximately $52,000.
Insurance proceeds of approximately $26,000 were received during the nine months
ended September 30, 2003 to partially cover the damages. After writing off the
undepreciated cost of the damaged asset of approximately $11,000, the
Partnership realized a casualty gain of approximately $15,000 from this event
during the nine months ended September 30, 2003. During the nine months ended
September 30, 2004, the Partnership received additional proceeds of
approximately $16,000, resulting in a casualty gain of approximately $16,000 for
the nine months ended September 30, 2004.
Note G - Contingencies
AIMCO Properties L.P. and NHP Management Company, both affiliates of the General
Partner, are defendants in a lawsuit alleging that they willfully violated the
Fair Labor Standards Act ("FLSA") by failing to pay maintenance workers overtime
for all hours worked in excess of forty per week. The complaint, filed in the
United States District Court for the District of Columbia, attempts to bring a
collective action under the FLSA and seeks to certify state subclasses in
California, Maryland, and the District of Columbia. Specifically, the plaintiffs
contend that AIMCO Properties L.P. and NHP Management Company failed to
compensate maintenance workers for time that they were required to be "on-call".
Additionally, the complaint alleges AIMCO Properties L.P. and NHP Management
Company failed to comply with the FLSA in compensating maintenance workers for
time that they worked in excess of 40 hours in a week. In June 2005 the Court
conditionally certified the collective action on both the on-call and overtime
issues, which allows the plaintiffs to provide notice of the collective action
to all non-exempt maintenance workers from August 7, 2000 through the present.
Those employees will have the opportunity to opt-in to the collective action,
and AIMCO Properties, L.P. and NHP Management Company will have the opportunity
to move to decertify the collective action. Because the court denied plaintiffs'
motion to certify state subclasses, on September 26, 2005, the plaintiffs filed
a class action with the same allegations in the Superior Court of California
(Contra Costa County). Although the outcome of any litigation is uncertain,
AIMCO Properties, L.P. does not believe that the ultimate outcome will have a
material adverse effect on its consolidated financial condition or results of
operations. Similarly, the General Partner does not believe that the ultimate
outcome will have a material adverse effect on the Partnership's consolidated
financial condition or results of operations.
The Partnership is unaware of any other pending or outstanding litigation
matters involving it or its investment property that are not of a routine nature
arising in the ordinary course of business.
Environmental
Various Federal, state and local laws subject property owners or operators to
liability for management, and the costs of removal or remediation, of certain
hazardous substances present on a property. Such laws often impose liability
without regard to whether the owner or operator knew of, or was responsible for,
the release or presence of the hazardous substances. The presence of, or the
failure to manage or remedy properly, hazardous substances may adversely affect
occupancy at affected apartment communities and the ability to sell or finance
affected properties. In addition to the costs associated with investigation and
remediation actions brought by government agencies, and potential fines or
penalties imposed by such agencies in connection therewith, the presence of
hazardous substances on a property could result in claims by private plaintiffs
for personal injury, disease, disability or other infirmities. Various laws also
impose liability for the cost of removal, remediation or disposal of hazardous
substances through a licensed disposal or treatment facility. Anyone who
arranges for the disposal or treatment of hazardous substances is potentially
liable under such laws. These laws often impose liability whether or not the
person arranging for the disposal ever owned or operated the disposal facility.
In connection with the ownership, operation and management of its property, the
Partnership could potentially be liable for environmental liabilities or costs
associated with its property.
Mold
The Partnership is aware of lawsuits against owners and managers of multifamily
properties asserting claims of personal injury and property damage caused by the
presence of mold, some of which have resulted in substantial monetary judgments
or settlements. The Partnership has only limited insurance coverage for property
damage loss claims arising from the presence of mold and for personal injury
claims related to mold exposure. Affiliates of the General Partner have
implemented a national policy and procedures to prevent or eliminate mold from
its properties and the General Partner believes that these measures will
minimize the effects that mold could have on residents. To date, the Partnership
has not incurred any material costs or liabilities relating to claims of mold
exposure or to abate mold conditions. Because the law regarding mold is
unsettled and subject to change the General Partner can make no assurance that
liabilities resulting from the presence of or exposure to mold will not have a
material adverse effect on the Partnership's consolidated financial condition or
results of operations.
SEC Investigation
The Central Regional Office of the United States Securities and Exchange
Commission (the "SEC") continues its formal investigation relating to certain
matters. Although the staff of the SEC is not limited in the areas that it may
investigate, AIMCO believes the areas of investigation have included AIMCO's
miscalculated monthly net rental income figures in third quarter 2003,
forecasted guidance, accounts payable, rent concessions, vendor rebates,
capitalization of payroll and certain other costs, tax credit transactions, and
tender offers for limited partnership interests. AIMCO is cooperating fully.
AIMCO is not able to predict when the investigation will be resolved. AIMCO does
not believe that the ultimate outcome will have a material adverse effect on its
consolidated financial condition or results of operations. Similarly, the
General Partner does not believe that the ultimate outcome will have a material
adverse effect on the Partnership's consolidated financial condition or results
of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The matters discussed in this report contain certain forward-looking statements,
including, without limitation, statements regarding future financial performance
and the effect of government regulations. Actual results may differ materially
from those described in the forward-looking statements and will be affected by a
variety of risks and factors including, without limitation: national and local
economic conditions; the terms of governmental regulations that affect the
Registrant and interpretations of those regulations; the competitive environment
in which the Registrant operates; financing risks, including the risk that cash
flows from operations may be insufficient to meet required payments of principal
and interest; real estate risks, including variations of real estate values and
the general economic climate in local markets and competition for tenants in
such markets; litigation, including costs associated with prosecuting and
defending claims and any adverse outcomes, and possible environmental
liabilities. Readers should carefully review the Registrant's financial
statements and the notes thereto, as well as the risk factors described in the
documents the Registrant files from time to time with the Securities and
Exchange Commission.
The Partnership's investment property consists of one apartment complex. The
following table sets forth the average occupancy of the property for the nine
months ended September 30, 2005 and 2004:
Average Occupancy
Property 2005 2004
Lakewood at Pelham 72% 93%
Greenville, South Carolina
The General Partner attributes the decrease in occupancy at Lakewood at Pelham
to an increase in credit standards and the implementation of a strict collection
policy.
The Partnership's financial results depend upon a number of factors including
the ability to attract and maintain tenants at the investment property, interest
rates on mortgage loans, costs incurred to operate the investment property,
general economic conditions and weather. As part of the ongoing business plan of
the Partnership, the General Partner monitors the rental market environment of
its investment property to assess the feasibility of increasing rents,
maintaining or increasing occupancy levels and protecting the Partnership from
increases in expenses. As part of this plan, the General Partner attempts to
protect the Partnership from the burden of inflation-related increases in
expenses by increasing rents and maintaining a high overall occupancy level.
However, the General Partner may use rental concessions and rental rate
reductions to offset softening market conditions; accordingly, there is no
guarantee that the General Partner will be able to sustain such a plan. Further,
a number of factors which are outside the control of the Partnership such as the
local economic climate and weather can adversely or positively impact the
Partnership's financial results.
Results of Operations
The Partnership's net loss for the three and nine months ended September 30,
2005 was approximately $148,000 and $416,000, respectively, as compared to net
loss of approximately $69,000 and $195,000 for the three and nine months ended
September 30, 2004, respectively. The increase in net loss for both the three
and nine months ended September 30, 2005 is due to a decrease in total revenues
and an increase in total expenses. The decrease in total revenues for the three
months ended September 30, 2005 is due to decreases in both rental and other
income. The decrease in total revenues for the nine months ended September 30,
2005 is due to decreases in both rental and other income and the recognition of
a casualty gain during 2004 (as discussed below). The decrease in rental income
for both periods is primarily due to the decrease in occupancy, partially offset
by an increase in the average rental rate and reduced bad debt expense at
Lakewood at Pelham. The decrease in other income for the three months ended
September 30, 2005 is primarily due to a decrease in lease cancellation fees at
the Partnership's investment property. The decrease in other income for the nine
months ended September 30, 2005 is primarily due to decreases in lease
cancellation fees and late charges, partially offset by an increase in cleaning
fees at the property.
The increase in total expenses for the three months ended September 30, 2005 is
due to an increase in operating expenses, partially offset by a decrease in
property tax expense. The increase in total expenses for the nine months ended
September 30, 2005 is due to increases in both operating and interest expenses,
partially offset by decreases in depreciation and property tax expenses. Both
depreciation and interest expense remained relatively constant for the three
months ended September 30, 2005. General and administrative expenses remained
relatively constant for both the three and nine months ended September 30, 2005.
The increase in operating expenses for both periods is primarily due to
increases in advertising, contract services, and payroll related expenses at
Lakewood at Pelham. The increase in interest expense for the nine months ended
September 30, 2005 is primarily due to an increase in interest on advances from
an affiliate of the General Partner, amortization expense and the loss
recognized on the early extinguishment of debt associated with the refinancing
of the mortgage encumbering Lakewood at Pelham (as discussed in "Liquidity and
Capital Resources"), partially offset by scheduled principal payments made on
the previous mortgage encumbering the property, which reduced the carrying
balance of the loan and the refinancing of the mortgage at a lower variable
interest rate. The decrease in depreciation expense for the nine months ended
September 30, 2005 is primarily due to property improvements and replacements
placed into service in prior years becoming fully depreciated during the fourth
quarter of 2004. The decrease in property tax expense for both periods is
primarily a result of a decrease in the assessed value of Lakewood at Pelham.
Included in general and administrative expenses for the three and nine months
ended September 30, 2005 and 2004 are management reimbursements to the General
Partner as allowed under the Partnership Agreement, costs associated with
quarterly and annual communications with investors and regulatory agencies and
the annual audit required by the Partnership Agreement.
In October 2002, a fire occurred at Lakewood at Pelham, which resulted in damage
to the laundry area. The property incurred damages of approximately $52,000.
Insurance proceeds of approximately $26,000 were received during the nine months
ended September 30, 2003 to partially cover the damages. After writing off the
undepreciated cost of the damaged asset of approximately $11,000, the
Partnership realized a casualty gain of approximately $15,000 from this event
during the nine months ended September 30, 2003. During the nine months ended
September 30, 2004, the Partnership received additional proceeds of
approximately $16,000, resulting in a casualty gain of approximately $16,000 for
the nine months ended September 30, 2004.
Liquidity and Capital Resources
At September 30, 2005, the Partnership had cash and cash equivalents of
approximately $82,000, compared to approximately $108,000 at September 30, 2004.
The increase in cash and cash equivalents of approximately $52,000, from
December 31, 2004, is due to approximately $272,000 of cash provided by
financing activities, partially offset by approximately $116,000 of cash used in
operating activities and approximately $104,000 of cash used in investing
activities. Cash provided by financing activities consisted of proceeds received
related to the refinancing of the mortgage encumbering Lakewood at Pelham and
advances from an affiliate of the General Partner, partially offset by the
repayment of the mortgage encumbering Lakewood at Pelham, loan costs paid, and
payments of principal made on the mortgage encumbering the Partnership's
investment property. Cash used in investing activities consisted of property
improvements and replacements, partially offset by net withdrawals from escrow
accounts maintained by the mortgage lender. The Partnership invests its working
capital reserves in interest bearing accounts.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
expenditures required at the property to adequately maintain the physical assets
and other operating needs of the Partnership and to comply with Federal, state
and local legal and regulatory requirements. The General Partner monitors
developments in the area of legal and regulatory compliance. For example, the
Sarbanes-Oxley Act of 2002 mandates or suggests additional compliance measures
with regard to governance, disclosure, audit and other areas. In light of these
changes, the Partnership expects that it will incur higher expenses related to
compliance. Capital improvements planned at the Partnership's investment
property are detailed below.
During the nine months ended September 30, 2005, the Partnership completed
approximately $153,000 of capital improvements at Lakewood at Pelham, consisting
primarily of interior improvements and appliance and floor covering
replacements. These improvements were funded from replacement reserves and
operations. The Partnership regularly evaluates the capital improvement needs of
the property. While the Partnership has no material commitments for property
improvements and replacements, certain routine capital expenditures are
anticipated during 2005. Such capital expenditures will depend on the physical
condition of the property as well as replacement reserves and anticipated cash
flow generated by the property.
The capital expenditures will be incurred only if cash is available from
operations or from Partnership reserves. To the extent that capital improvements
are completed, the Partnership's distributable cash flow, if any, may be
adversely affected at least in the short term.
On May 27, 2005, the Partnership obtained a mortgage in the maximum principal
amount of $5,500,000 on Lakewood at Pelham Apartments. The new mortgage is
comprised of an initial advance of $4,350,000 that was made to the Partnership
on May 27, 2005 and an earn-out advance of $1,150,000 that is available to the
Partnership based upon certain performance criteria being met prior to June 1,
2006. The existing mortgage with an outstanding principal amount of
approximately $5,160,000 was repaid with proceeds from the initial advance of
the new mortgage and an additional loan from an affiliate of the General Partner
of approximately $1,035,000. The Partnership recognized a loss on the early
extinguishment of debt of approximately $3,000 due to the write off of
unamortized loan costs, which is included in interest expense. Total capitalized
loan costs associated with the new mortgage were approximately $111,000 during
the nine months ended September 30, 2005 which are included in other assets on
the consolidated balance sheet included in "Item 1. Financial Statements". The
new mortgage requires monthly payments of interest beginning on July 1, 2005
until the loan matures June 1, 2007, with interest being equal to the average of
the one month LIBOR plus 230 basis points (6.16% at September 30, 2005 with a
minimum rate of 5.40%). In conjunction with the new mortgage note, the
Partnership paid approximately $14,000 to enter into an interest rate cap
agreement, which limits the Partnership's exposure to interest rate increases.
Under this interest rate cap agreement, the Partnership's interest rate on the
amounts owed to the lender will be no higher than 7.55%. The Partnership has
adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which was amended by SFAS No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of SFAS No.
133". The Partnership's interest rate cap does not qualify for special hedge
accounting treatment as defined by SFAS 133, and therefore all changes in the
fair value of the interest rate cap will be recognized in the consolidated
statements of operations as an adjustment to interest expense. In addition, the
new mortgage requires monthly escrow deposits for taxes, insurance and
replacement reserves and a $80,000 repair reserve that was established with the
lender at closing. The Partnership has the option of extending the maturity date
for two additional six month periods upon delivering written notice to the
lender, paying an extension fee of .25% of the outstanding principal amount of
the mortgage, no event of default existing and certain performance criteria
being met. As a condition of making the new mortgage, the lender required AIMCO
Properties, L.P., an affiliate of the Partnership, to guarantee the obligations
and liabilities of the Partnership with respect to the new mortgage.
On March 9, 1987, the original general partners of the Partnership, on behalf of
the Partnership, filed a voluntary petition under Chapter 11 of the Federal
Bankruptcy Code in U.S. Bankruptcy Court, Central District of California
("Court"). The Partnership continued as Debtor-In-Possession to operate its
business in the ordinary course until the Court confirmed the Partnership's Plan
of Reorganization (The "Plan") effective October 25, 1988. The Plan was approved
by all required classes of creditors.
The Plan required that the Partnership make certain payments to its secured
creditors and others on or before October 20, 1995. These payments were made on
or about June 25, 1995, when the Partnership refinanced the outstanding
mortgages encumbering the property. The Plan also required that the Partnership
make the following distributions on October 20, 1998, from available cash:
1) First, Limited Partners, both original and substitute, who made
additional capital contributions under the Plan would receive a
repayment of the additional contributions totaling approximately
$730,000; if sufficient funds were unavailable to fully satisfy this
amount then a pro-rata portion would be paid based upon available
funds;
2) Second, Class 12 unsecured creditors ($23,100) would be paid on
their claims;
3) Third, Limited Partners who made additional capital contributions
and were original Limited Partners would receive a repayment of
their original capital contributions totaling approximately
$9,818,000; if sufficient funds were unavailable to fully satisfy
this amount then a pro-rata portion of available cash less a
pro-rata portion reserved for one third of the existing capital
contributions of non-contributing Limited Partners would be paid
based upon available funds;
4) Fourth, Limited Partners who did not make additional capital
contributions would receive a repayment of one-third of their
original capital contributions (i.e., one-third of $1,200,000); if
sufficient funds were unavailable to fully satisfy this amount then
a pro-rata portion would be paid based upon available funds.
Additionally, the Plan required CRPTEX, Inc. to make a capital contribution of
$14,500 and loan an additional $117,500 on behalf of the Partnership. The
Partnership received the $14,500 capital contribution but did not receive or
require the additional $117,500 to be loaned.
The payments required by number 2 above were timely made. With respect to the
amounts due to the Limited Partners under numbers 1, 3, and 4 above, there were
not sufficient funds available to completely satisfy these obligations at
October 20, 1998.
It was not anticipated that at October 20, 1998, there would be available funds
to fully satisfy the unsecured claims of the Limited Partners, as indicated
under the Plan. The limited partners were approached in August 1998 and asked to
either approve a sale of the Partnership's sole investment property or for the
General Partner to petition the Bankruptcy Court for an extension of the
settlement date. The required fifty-one percent response was not received. As a
result, the Partnership did not make any payments to the Limited Partners on
October 20, 1998, as required by the Plan from available funds. There is no
requirement, however, that the Partnership sell or again refinance the property
in order to pay in part or in whole, the payments to the Limited Partners
referred to above. The General Partner has determined that although all of the
required payments due under the Plan to the Limited Partners were not made, that
the Partnership is not in any material financial default in connection with its
prior bankruptcy. In addition, the General Partner believes that it is proper
for the Partnership to continue operating under the terms of its Partnership
Agreement as modified by the Plan.
Since the expiration of the Plan on October 20, 1998, the General Partner had
reserved all excess cash to ensure that the Partnership would be able to meet
its operating and capital improvement needs rather than making pro-rata payments
to the limited partners in accordance with numbers 1, 3, and 4 above. During the
fourth quarter of 2001, the General Partner determined that the Partnership had
accumulated approximately $562,000 in excess funds. Approximately $530,000 which
had been reserved since 1998 to ensure that the property was fully able to meet
its operating and capital improvement needs with existing operating funds, was
distributed during the year ended December 31, 2002 in accordance with number 1
above. In addition, approximately $32,000 was distributed from operations during
the year ended December 31, 2002. Any additional funds will be distributed in
accordance with the terms of the Partnership Agreement as modified by the Plan.
The Partnership's cash available for distribution is reviewed on a monthly
basis. In light of the amounts accrued and payable to affiliates of the General
Partner at September 30, 2005, there can be no assurance that the Partnership
will generate sufficient funds from operations, after required capital
improvement expenditures to permit any distributions to its partners during 2005
or subsequent periods.
Other
In addition to its indirect ownership of the general partner interests in the
Partnership, AIMCO and its affiliates owned 4,558.50 limited partnership units
(the "Units") in the Partnership representing 26.55% of the outstanding Units at
September 30, 2005. A number of these Units were acquired pursuant to tender
offers made by AIMCO or its affiliates. It is possible that AIMCO or its
affiliates will acquire additional Units in exchange for cash or a combination
of cash and units in AIMCO Properties, L.P., the operating partnership of AIMCO,
either through private purchases or tender offers. Pursuant to the Partnership
Agreement, unitholders holding a majority of the Units are entitled to take
action with respect to a variety of matters that include, but are not limited
to, voting on certain amendments to the Partnership Agreement and voting to
remove the General Partner. Although the General Partner owes fiduciary duties
to the limited partners of the Partnership, the General Partner also owes
fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of
the General Partner, as general partner, to the Partnership and its limited
partners may come into conflict with the duties of the General Partner to AIMCO
as its sole stockholder.
Critical Accounting Policies and Estimates
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States which require the Partnership
to make estimates and assumptions. The Partnership believes that of its
significant accounting policies, the following may involve a higher degree of
judgment and complexity.
Impairment of Long-Lived Assets
The Partnership's investment property is recorded at cost, less accumulated
depreciation, unless considered impaired. If events or circumstances indicate
that the carrying amount of the property may be impaired, the Partnership will
make an assessment of its recoverability by estimating the undiscounted future
cash flows, excluding interest charges, of the property. If the carrying amount
exceeds the aggregate future cash flows, the Partnership would recognize an
impairment loss to the extent the carrying amount exceeds the fair value of the
property.
Real property investments are subject to varying degrees of risk. Several
factors may adversely affect the economic performance and value of the
Partnership's investment property. These factors include, but are not limited
to, changes in the national, regional and local economic climate; local
conditions, such as an oversupply of multifamily properties; competition from
other available multifamily property owners and changes in market rental rates.
Any adverse changes in these factors could cause impairment of the Partnership's
asset.
Revenue Recognition
The Partnership generally leases apartment units for twelve-month terms or less.
The Partnership will offer rental concessions during particularly slow months or
in response to heavy competition from other similar complexes in the area.
Rental income attributable to leases, net of any concessions, is recognized on a
straight-line basis over the term of the lease. The Partnership evaluates all
accounts receivable from residents and establishes an allowance, after the
application of security deposits, for accounts greater than 30 days past due on
current tenants and all receivables due from former tenants.
ITEM 3. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. The Partnership's management, with the
participation of the principal executive officer and principal financial officer
of the General Partner, who are the equivalent of the Partnership's principal
executive officer and principal financial officer, respectively, has evaluated
the effectiveness of the Partnership's disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the
period covered by this report. Based on such evaluation, the principal executive
officer and principal financial officer of the General Partner, who are the
equivalent of the Partnership's principal executive officer and principal
financial officer, respectively, have concluded that, as of the end of such
period, the Partnership's disclosure controls and procedures are effective.
(b) Internal Control Over Financial Reporting. There have not been any changes
in the Partnership's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, the Partnership's internal control
over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
AIMCO Properties L.P. and NHP Management Company, both affiliates of the General
Partner, are defendants in a lawsuit alleging that they willfully violated the
Fair Labor Standards Act ("FLSA") by failing to pay maintenance workers overtime
for all hours worked in excess of forty per week. The complaint, filed in the
United States District Court for the District of Columbia, attempts to bring a
collective action under the FLSA and seeks to certify state subclasses in
California, Maryland, and the District of Columbia. Specifically, the plaintiffs
contend that AIMCO Properties L.P. and NHP Management Company failed to
compensate maintenance workers for time that they were required to be "on-call".
Additionally, the complaint alleges AIMCO Properties L.P. and NHP Management
Company failed to comply with the FLSA in compensating maintenance workers for
time that they worked in excess of 40 hours in a week. In June 2005 the Court
conditionally certified the collective action on both the on-call and overtime
issues, which allows the plaintiffs to provide notice of the collective action
to all non-exempt maintenance workers from August 7, 2000 through the present.
Those employees will have the opportunity to opt-in to the collective action,
and AIMCO Properties, L.P. and NHP Management Company will have the opportunity
to move to decertify the collective action. Because the court denied plaintiffs'
motion to certify state subclasses, on September 26, 2005, the plaintiffs filed
a class action with the same allegations in the Superior Court of California
(Contra Costa County). Although the outcome of any litigation is uncertain,
AIMCO Properties, L.P. does not believe that the ultimate outcome will have a
material adverse effect on its consolidated financial condition or results of
operations. Similarly, the General Partner does not believe that the ultimate
outcome will have a material adverse effect on the Partnership's consolidated
financial condition or results of operations.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
See Exhibit Index.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MCCOMBS REALTY PARTNERS
By: CRPTEX, INC.
General Partner
By: /s/Martha L. Long
Martha L. Long
Senior Vice President
By: /s/Stephen B. Waters
Stephen B. Waters
Vice President
Date: November 14, 2005
EXHIBIT INDEX
Exhibit Description of Exhibit
3.1 Amended and Restated Certificate and Agreement of Limited Partners of
McCombs Realty Partners, a California Limited Partnership, incorporated by
reference to the exhibits to the Registrant's Annual Report filed on Form
10-K, filed on April 13, 1990.
3.2 Certificate of Limited Partnership of the Partnership, incorporated by
reference to the exhibits to the Registrant's Annual Report filed on Form
10-K, filed on April 13, 1990.
10.2 Loan Agreement dated May 27, 2005 between Pelham Place, L.P., a South
Carolina limited partnership and GMAC Commercial Mortgage Bank,
(incorporated by reference to the Partnership's Current Report on Form 8-K
dated May 27, 2005).
10.3 Promissory Note A dated May 27, 2005 between Pelham Place, L.P., a South
Carolina limited partnership and GMAC Commercial Mortgage Bank,
(incorporated by reference to the Partnership's Current Report on Form 8-K
dated May 27, 2005).
10.4 Promissory Note B dated May 27, 2005 between Pelham Place, L.P., a South
Carolina limited partnership and GMAC Commercial Mortgage Bank,
(incorporated by reference to the Partnership's Current Report on Form 8-K
dated May 27, 2005).
10.5 Guaranty dated May 27, 2005 by AIMCO Properties, L.P., for the benefit of
GMAC Commercial Mortgage Bank, (incorporated by reference to the
Partnership's Current Report on Form 8-K dated May 27, 2005).
10.6 Rate Cap Provider - Consent and Acknowledgement dated May 27, 2005 by and
among GMAC Commercial Mortgage Bank, Pelham Place, L.P., a South Carolina
Limited Partnership, and SMBC, (incorporated by reference to the
Partnership's Current Report on Form 8-K dated May 27, 2005).
31.1 Certification of equivalent of Chief Executive Officer pursuant to
Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of equivalent of Chief Financial Officer pursuant to
Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the equivalent of the Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.1
CERTIFICATION
I, Martha L. Long, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of McCombs Realty
Partners;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the small business issuer as of, and for, the periods presented in this
report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based
on such evaluation; and
(c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small
business issuer's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the small business issuer's internal control over
financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
Date: November 14, 2005
/s/Martha L. Long
Martha L. Long
Senior Vice President of CRPTEX, Inc.,
equivalent of the chief executive
officer of the Partnership
Exhibit 31.2
CERTIFICATION
I, Stephen B. Waters, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of McCombs Realty
Partners;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the small business issuer as of, and for, the periods presented in this
report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based
on such evaluation; and
(c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small
business issuer's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the small business issuer's internal control over
financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
Date: November 14, 2005
/s/Stephen B. Waters
Stephen B. Waters
Vice President of CRPTEX, Inc.,
equivalent of the chief financial
officer of the Partnership
Exhibit 32.1
Certification of CEO and CFO
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-QSB of McCombs Realty
Partners (the "Partnership"), for the quarterly period ended September 30, 2005
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), Martha L. Long, as the equivalent of the chief executive officer of
the Partnership, and Stephen B. Waters, as the equivalent of the chief financial
officer of the Partnership, each hereby certifies, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that, to the best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Partnership.
/s/Martha L. Long
Name: Martha L. Long
Date: November 14, 2005
/s/Stephen B. Waters
Name: Stephen B. Waters
Date: November 14, 2005
This certification is furnished with this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Partnership for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.