FORM 10-K--ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(As last amended in Rel. No. 34-31905, eff 10/26/93.)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[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, 1995
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [No Fee Required]
For the transition period.........to.........
Commission file number 0-11723
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
(Exact name of registrant as specified in its charter)
California 94-2883067
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Insignia Financial Plaza, P.O. Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (864) 239-1000
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
Limited Partnership Units
(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 (229.405 of this chapter) 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] (Amended by Exch Act Rel No. 28869,
eff. 5/1/91.)
State the aggregate market value of the Limited Partnership Units ("Units") held
by non-affiliates. 902,360 of the Partnership's 909,138 Units are held by non-
affiliates. The aggregate market value of Units held by affiliates and non-
affiliates is not determinable since there is no public trading market for Units
and transfers of Units are not subject to certain restrictions.
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
LIST OF FINANCIAL STATEMENTS
Reports of Independent Auditors
Balance Sheets as of December 31, 1995 and 1994
Statements of Operations for the Years Ended December 31,
1995, 1994 and 1993
Statement of Partners' Capital (Deficit) for the Years
Ended December 31, 1995, 1994 and 1993
Statements of Cash Flows for the Years Ended December 31,
1995, 1994 and 1993
Notes to Financial Statements
Report of Ernst & Young LLP, Independent Auditors
The Partners
Consolidated Capital Institutional Properties/2
We have audited the accompanying balance sheet of Consolidated Capital
Institutional Properties/2 as of December 31, 1995, and the related statements
of operations, changes in partners' capital (deficit) and cash flows for the
period then ended. 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 audit.
We conducted our audit 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 the
Partnership's management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 Consolidated Capital
Institutional Properties/2 as of December 31, 1995, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
As discussed in Note A to the financial statements, in 1995 the Partnership
changed its method of accounting for impairment of long-lived assets and for
long-lived assets to be disposed of, and of accounting by creditors for
impairment of a loan.
/s/ERNST & YOUNG LLP
Greenville, South Carolina
February 23, 1996
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Consolidated Capital Institutional Properties/2:
We have audited the accompanying balance sheet of Consolidated Capital
Institutional Properties/2 (a California limited partnership) as of December 31,
1994, and the related statements of operations, partners' capital (deficit) and
cash flows for the years ended December 31, 1994 and 1993. 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 Consolidated Capital
Institutional Properties/2 as of December 31, 1994, and the results of its
operations and its cash flows for the years ended December 31, 1994 and 1993, in
conformity with generally accepted accounting principles.
/s/Arthur Andersen, LLP
Dallas, Texas
March 23, 1995
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
BALANCE SHEETS
(in thousands, except unit data)
DECEMBER 31,
Assets 1995 1994
Cash and cash equivalents:
Unrestricted $ 9,276 $ 1,351
Restricted - tenant security deposits 5 --
Securities available for sale 11 9,769
Other assets 818 575
Due from affiliates -- 1,347
Net investment in master loan to affiliate 91,771 91,523
Less: Allowance for impairment loss (48,405) (48,992)
43,366 42,531
Investment property:
Land 716 1,247
Buildings and related personal property 5,440 7,578
6,156 8,825
Less: accumulated depreciation (4,138) (3,325)
2,018 5,500
$ 55,494 $ 61,073
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable and accrued liabilities $ 136 $ 89
Tenant security deposits 114 106
Distributions payable 141 141
Accrued taxes 58 73
449 409
Partners' Capital (Deficit)
General Partner (554) (498)
Limited Partners - (909,138 and 909,145
units outstanding at December 1995 and
1994, respectively.) 55,599 61,162
55,045 60,664
$ 55,494 $ 61,073
See Accompanying Notes to Financial Statements
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
STATEMENTS OF OPERATIONS
(in thousands, except per unit data)
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
Revenues:
Rental income $ 1,887 $ 1,798 $ 1,529
Interest income on net investment
in master loan to affiliate 721 1,880 1,916
Interest income on investments 556 626 594
Other income 314 53 29
Reduction of provision for impairment loss 587 -- --
Total revenues 4,065 4,357 4,068
Expenses:
Operating 1,576 1,666 1,529
General and administrative 888 628 806
Depreciation and amortization 867 1,041 879
Provision for impairment loss -- 9,262 2,000
Write-down of investment property 3,350 2,496 2,000
Total expenses 6,681 15,093 7,214
Net loss $(2,616) $(10,736) $(3,146)
Net loss allocated to general partner (1%) $ (26) $ (107) $ (31)
Net loss allocated to limited partners (99%) (2,590) (10,629) (3,115)
$(2,616) $(10,736) $(3,146)
Net loss per limited partnership unit $ (2.85) $ (11.69) $ (3.43)
<FN>
See Accompanying Notes to Financial Statements
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
For the Years Ended December 31, 1995, 1994 and 1993
(in thousands)
TOTAL
LIMITED PARTNERS
PARTNERSHIP GENERAL LIMITED EQUITY
UNITS PARTNERS PARTNERS (DEFICIT)
Original capital contributions 912,182 $ 1 $228,046 $228,047
Partners' capital (deficit) at
December 31, 1992 909,174 (360) 74,906 74,546
Net loss for the year ended
December 31, 1993 (31) (3,115) (3,146)
Partners' capital (deficit) at
December 31, 1993 909,154 (391) 71,791 71,400
Net loss for the year ended
December 31, 1994 (107) (10,629) (10,736)
Partners' capital (deficit) at
December 31, 1994 909,145 (498) 61,162 60,664
Net loss for the year ended
December 31, 1995 (26) (2,590) (2,616)
Distributions (30) (2,973) (3,003)
Partners' capital (deficit) at
December 31, 1995 909,138 $ (554) $ 55,599 $ 55,045
<FN>
See Accompanying Notes to Financial Statements
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
STATEMENTS OF CASH FLOWS
(in thousands)
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
Cash flows from operating activities:
Net loss $ (2,616) $(10,736) $(3,146)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 867 1,041 879
Write-down of investment property 3,350 2,496 2,000
(Reduction of) provision for
impairment loss (587) 9,262 2,000
Receipt of Southmark stock -- (11) --
Changes in accounts:
Restricted cash (5) -- --
Other assets (296) (23) (23)
Accounts payable and accrued
liabilities 47 36 (16)
Due from affiliates 1,347 (1,063) 206
Tenant security deposits 8 -- --
Accrued taxes (15) -- --
Net cash provided by
operating activities 2,100 1,002 1,900
Cash flows from investing activities:
Property improvements and replacements (681) (635) (473)
Advances on Master Loan (1,500) -- (662)
Principal receipts on Master Loan 1,252 315 1,075
Purchase of securities available for sale (41,487) (8,729) (3,872)
Proceeds from sale of securities
available for sale 51,244 7,488 2,350
Net cash provided by (used in)
investing activities 8,828 (1,561) (1,582)
Cash flows from financing activities:
Distributions (3,003) -- --
Payments on previously
declared distributions -- (2) (1)
Net cash used in financing
activities (3,003) (2) (1)
Net increase (decrease) in cash and
cash equivalents 7,925 (561) 317
Cash and cash equivalents at beginning 1,351 1,912 1,595
of period
Cash and cash equivalents at end of period $ 9,276 $ 1,351 $ 1,912
<FN>
See Accompanying Notes to Financial Statements
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
NOTES TO FINANCIAL STATEMENTS
Note A - Organization and Summary of Significant Accounting Policies
Organization: Consolidated Capital Institutional Properties/2 (the
"Partnership"), a California limited partnership, was formed on April 12, 1983,
to lend funds through nonrecourse notes with participation interests (the
"Master Loan"). The loans were made to, and the real properties that secure the
Master Loan were purchased and owned by Equity Partners/Two, ("EP/2"), a
California general partnership in which certain of the partners were former
shareholders and former management of Consolidated Capital Equities Corporation
("CCEC"), the former corporate general partner. Through December 31, 1995, the
Partnership had advanced approximately $182.1 million under the Master Loan.
During 1989, EP/2 defaulted on certain interest payments that were due under the
Master Loan. Before the Partnership could exercise its remedies for such
defaults, EP/2 filed for bankruptcy protection under Chapter 11 of the United
States Bankruptcy Code ("Chapter 11"). On October 18, 1990, the bankruptcy
court approved EP/2's consensual plan of reorganization (the "Plan"). In
November 1990, EP/2 and the Partnership consummated a closing under the Plan
pursuant to which, among other things, the Partnership and EP/2 executed an
amended and restated loan agreement (the "New Master Loan Agreement"), EP/2 was
converted from a California general partnership to a California limited
partnership, Consolidated Capital Equity Partners/Two, L.P. ("CCEP/2"), and
CCEP/2 renewed the deeds of trust and mortgages on all the properties
collaterally securing the New Master Loan Agreement. ConCap Holdings, Inc.
("CHI"), a Texas corporation and wholly-owned subsidiary of CEI, is the sole
general partner of CCEP/2 and an affiliate of the Partnership. The general
partners of EP/2 became limited partners in CCEP/2. CHI has full discretion
with respect to conducting CCEP/2's business, including managing CCEP/2's
properties and initiating and approving capital expenditures and asset
dispositions and refinancings. See "Note C" for further discussion of EP/2's
bankruptcy settlement.
Upon the Partnership's formation in 1983, CCEC, a Colorado corporation, was the
corporate general partner. In December 1988, CCEC filed for reorganization under
Chapter 11. In 1990, as part of CCEC's reorganization plan, ConCap Equities,
Inc., a Delaware corporation (the "General Partner" or "CEI") acquired CCEC's
general partner interests in the Partnership and in 15 other affiliated public
limited partnerships and replaced CCEC as managing general partner in all 16
partnerships.
All of CEI's outstanding stock is owned by GII Realty, Inc. In December 1994,
the parent of GII Realty, Inc., entered into a transaction (the "Insignia
Transaction") in which among other things, MAE-ICC, Inc., a wholly owned
subsidiary of Metropolitan Asset Enhancement, L.P., an affiliate of Insignia
Financial Group, Inc. ("Insignia") acquired an option (exercisable in whole or
in part from time to time) to purchase all of the stock of GII Realty, Inc. and,
pursuant to a partial exercise of such option, acquired 50.5% of that stock. As
a part of the Insignia Transaction, MAE-ICC, Inc. also acquired all of the
outstanding stock of Partnership Services, Inc., an asset manager, and Insignia
acquired all of the outstanding stock of Coventry Properties, Inc., a property
manager. In addition, confidentiality, non-competition, and standstill
arrangements were entered into between certain of the parties. Those
arrangements, among other things, prohibit GII Realty's former sole shareholder
from purchasing Partnership Units for a period of three years. On October 24,
1995, MAE-ICC, Inc. exercised the remaining option to purchase all of the
remaining outstanding capital stock of GII Realty, Inc. held by Gordon Realty,
Inc. Pursuant to the terms of the option, MAE-ICC, Inc. acquired the remaining
49.5% of the outstanding capital stock of GII Realty, Inc.
The Partnership owns and operates one commercial property in Michigan. Also,
the Partnership is the holder of a note receivable which is collateralized by
apartment and commercial properties located throughout the United States.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ from those estimates.
Escrows for Taxes: These funds are held by the Partnership, designated for the
payment of real estate taxes and are included in other assets.
Depreciation: Depreciation is provided by the straight-line method over the
estimated life of the commercial property and related personal property. For
Federal income tax purposes, the modified accelerated cost recovery method is
used. As a result of the Tax Reform Act of 1986, for additions after December
31, 1986, the modified accelerated cost recovery method is used for depreciation
of (1) real property additions over 27 1/2 years and (2) personal property
additions over 5 to 15 years.
Cash and Cash Equivalents:
Unrestricted - Unrestricted cash includes cash on hand and in banks, money
market funds and U.S. Treasury Bills with original maturities less than 90 days.
U.S. Treasury Bills with original maturities greater than 90 days are considered
to be investments. At certain times, the amount of cash deposited at a bank may
exceed the limit on insured deposits.
Restricted cash - tenant security deposits - The Partnership requires security
deposits from lessees for the duration of the lease and such deposits are
considered restricted cash. Deposits are refunded when the tenant vacates,
provided the tenant has not damaged its space and is current on its rental
payments.
Advertising: The Partnership expenses the costs of advertising as incurred.
Investment Properties: Prior to 1995, investment properties were carried at the
lower of cost or estimated fair value, which was determined using the higher of
the property's non-recourse debt amount, when applicable, or the net operating
income of the investment property capitalized at a rate deemed reasonable for
the type of property. During 1995, the Partnership adopted FASB Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. The impairment loss is measured by
comparing the fair value of the asset to its carrying amount. The fair value of
the investment property owned by the Partnership was determined using the net
operating income of the investment property capitalized at a rate deemed
reasonable for the type of property. This methodology has not changed from the
methodology under the previous accounting policy except the Partnership no
longer uses the non-recourse debt as a floor for recording impairment losses.
The effect of adoption was not material.
The property owned by the Partnership has experienced declines in its estimated
net realizable value due to regional economic factors such as a depressed real
estate market in the area of Michigan that the property is located and its
deteriorating physical condition due to the decision of the General Partner to
postpone both routine and major maintenance projects. Additionally, occupancy
for this property was 61% at December 31, 1994, and it was believed that
occupancy could be increased. The General Partner did not believe that this
occupancy rate was permanent in nature. After unsuccessful attempts at
increasing occupancy during 1995 (occupancy remained at 61% at September 30,
1995) and with no new major tenants expected in the future, it was determined
that occupancy could not be increased as expected and the asset was permanently
impaired. Accordingly, the Partnership recorded approximately $3.3 million,
$2.5 million and $2.0 million in expense for the write-down on the real estate
in the years ended December 31, 1995, 1994 and 1993, respectively.
Investment in Master Loan: Beginning in 1995, the Partnership adopted Financial
Accounting Standards Board Statement No. 114, "Accounting by Creditors for
Impairment of a Loan." Under the new standard, the 1995 allowance for credit
losses related to loans that are identified for evaluation in accordance with
Statement 114 is based on discounted cash flows using the loan's initial
effective interest rate or the fair value of the collateral for certain
collateral dependent loans. Prior to 1995, the allowance for credit losses
related to these loans was based on undiscounted cash flows or the fair value of
the collateral for collateral dependent loans.
Investments: Securities available-for-sale: The General Partner determines the
appropriate classification of debt securities at the time of purchase and
reevaluates such designation as of each balance sheet date. Presently, all of
the Partnership's investments are classified as available-for-sale. Available-
for-sale securities are carried at fair value, with the unrealized gains and
losses, net of tax, reported in a separate component of partner's capital. The
amortized cost of debt securities in this category is adjusted for amortization
of premiums and accretion of discounts to maturity. Such amortization is
included in investment income. Realized gains and losses and declines in value
judged to be other-than-temporary on available-for-sale securities are included
in investment income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in investment income.
Leases: The Partnership leases certain commercial space to tenants under
various lease terms. The leases are accounted for as operating leases in
accordance with Financial Accounting Standards Board Statement No. 13. Some of
the leases contain stated rental increases during their term. For leases with
fixed rental increases, rents are recognized on a straight-line basis over the
terms of the lease.
For all other leases, minimum rents are recognized over the terms of the leases.
Income Taxes: No provision has been made in the financial statements for
Federal income taxes because, under current law, no Federal income taxes are
paid directly by the Partnership. The Unitholders are responsible for their
respective shares of Partnership net income or loss. The Partnership reports
certain transactions differently for tax than for financial statement purposes.
The tax basis of the Partnership's assets and liabilities is approximately
$111.4 million greater than the assets and liabilities as reported in the
financial statements.
Lease Commissions: Lease commissions are capitalized and amortized using the
straight-line method over the life of the applicable lease. At December 31,
1995 and 1994, lease commissions totaled $272,855 and $202,746, respectively,
with accumulated amortization of $86,679 and $57,112, respectively. Lease
commissions are included in other assets.
Partners' Capital (Deficit): The Partnership Agreement provides for net income
and net losses for both financial and tax reporting purposes to be allocated 99%
to the Limited Partners and 1% to the General Partner. "Distributable Cash from
Operations," as defined in the Partnership Agreement, are to be allocated 99%
to the Limited Partners and 1% to the General Partner. Distributions of surplus
funds are to be allocated 100% to the Limited Partners.
Net Income (Loss) Per Limited Partnership Unit: Net income (loss) per Limited
Partnership Unit ("Unit") is computed by dividing net income (loss) allocated to
the Limited Partners by the number of Units outstanding. Per Unit information
has been computed based on 909,138, 909,145, and 909,154 Units outstanding in
1995, 1994, and 1993, respectively.
Fair Value: In 1995, the Partnership implemented Statement of Financial
Accounting Standards No. 107, "Disclosure about Fair Value of Financial
Instruments," which requires disclosure of fair value information about
financial instruments for which it is practicable to estimate that value. The
carrying amount of the Partnership's cash and cash equivalents approximates fair
value due to short-term maturities. The carrying amount of the Partnership's
net investment in the Master Loan approximates fair value due to the fact that
it has been valued based on the fair value of the underlying collateral.
Allowance for Impairment Loss: Allowances to reduce the carrying cost of the
Master Loan are provided when it is probable that reasonably estimable net
realizable values are less than the recorded carrying cost of such investment.
Gains or losses that result from the ongoing periodic evaluation of the net
realizable value of the Master Loan are credited or charged, as appropriate, to
operations in the period in which they are identified. If a collateral property
is sold, CCEP/2 remains liable for any outstanding debt under the Master Loan
Agreement, however, the value of the net investment in Master Loan on the
Partnership's books would be written down to the appropriate level.
Reclassifications: Certain reclassifications have been made to the 1994 and
1993 information to conform to the 1995 presentation.
Note B - Securities Available for Sale
Investments, stated at cost, consist of the following at December 31, 1995, (in
thousands):
Interest Face Maturity
Rate Amount Cost Date
Southmark Corporation
Redeemable Series A
Preferred Stock N/A $11 $11 N/A
The Partnership's investments are classified as available for sale. The General
Partner believes that the market value of the investment is approximately the
same as its cost. Securities available for sale as of December 31, 1994,
consist of $9,758,000 in U.S. Treasury Bills and $11,000 in Equity Securities.
Note C - Net Investment in Master Loan
At December 31, 1995, the recorded investment in the Master Loan is considered
to be impaired under Statement 114. The Partnership measured the impairment of
the loan based upon the fair value of the collateral due to the fact repayment
of the loan is expected to be provided solely by the collateral. For the year
ended December 31, 1995, the Partnership recorded approximately $587,000 in
income based upon an increase in the fair value of the collateral.
The principal balance of the Master Loan due to the Partnership totaled
approximately $91.8 million and $91.5 million at December 31, 1995 and 1994,
respectively. Interest due to the Partnership pursuant to the terms of the
Master Loan Agreement, but not recognized in the income statements, totaled
approximately $18.8 million, $15.4 million and $13.8 million for the years ended
December 31, 1995, 1994 and 1993, respectively. At December 31, 1995 and 1994,
such cumulative unrecognized interest totaled approximately $112.7 million and
$93.9 million and was not included in the balance of the investment in Master
Loan. The allowance for possible losses totaled approximately $48.4 million and
$49 million at December 31, 1995 and 1994, respectively.
During 1995, the Partnership advanced $1,500,000 to CCEP/2 as an advance on the
Master Loan. The advance was used by CCEP/2 to fund deferred maintenance and
capital improvement projects on these properties in order to maximize returns
during improved market conditions and maintain the condition of the properties
securing the Master Loan. CCEP/2 has approximately $24,284,000 in liens on the
collateral that are superior to the Master Loan.
The investment in Master Loan consists of the following:
AS OF DECEMBER 31,
1995 1994
(in thousands)
Master Loan funds advanced, at
beginning of year $ 91,523 $ 91,838
Advances on Master Loan 1,500 --
Principal receipts on Master Loan (1,252) (315)
Master Loan funds advanced, at
end of year $ 91,771 $ 91,523
The allowance for impairment loss on Master Loan to affiliates consists of the
following:
AS OF DECEMBER 31,
1995 1994 1993
(in thousands)
Allowance for impairment loss on Master
Loan to affiliates, beginning of year $ 48,992 $ 39,730 $ 37,730
Reduction of provision for impairment loss (587) -- --
Provision for impairment loss -- 9,262 2,000
Allowance for impairment loss on Master
Loan to affiliates, end of year $ 48,405 $ 48,992 $ 39,730
Terms of the New Master Loan Agreement: Under the terms of the New Master Loan
Agreement, interest accrues at 10% and payments are due quarterly in an amount
equal to Excess Cash Flow, generally defined in the New Master Loan Agreement as
net cash flow after third party debt service and capital improvements. If such
Excess Cash Flow payments are less than the current accrued interest during the
quarterly period, the unpaid interest is added to principal, compounded
annually, and is payable at the maturity. If such Excess Cash Flow payments
are greater than the current accrued interest, the excess amount is applied to
the principal balance of the loan. Any net proceeds from the sale or
refinancing of any of CCEP/2's properties are paid to the Partnership under the
terms of the New Master Loan Agreement. The New Master Loan Agreement matures
in November 2000.
Effective January 1, 1993, the Partnership and CCEP/2 amended the New Master
Loan Agreement to stipulate that Excess Cash Flow would be computed net of
capital improvements. Such expenditures were formerly funded from advances on
the Master Loan from the Partnership to CCEP/2. This amendment and change in
the definition of Excess Cash Flow will have the effect of reducing income on
the investment in Master Loan by the amount of CCEP/2's capital expenditures,
since such amounts were previously excluded from Excess Cash Flow.
EP/2's Bankruptcy Settlement: In November 1990, pursuant to EP/2's
reorganization plan described in "Note A," the Partnership and EP/2 consummated
a closing pursuant to which: (1) the Partnership and EP/2 executed the New
Master Loan Agreement more fully described below; (2) CCEP/2 renewed the deeds
of trust on all the collateral securing the Master Loan; (3) the Partnership
received cash of approximately $2.5 million, including $1.8 million from the
general partners of EP/2 related to their promissory notes; (4) the Partnership
accepted assignment of certain partnership interests in affiliated partnerships
(the "Affiliated Partnership Interests"), which were valued by management of the
Partnership at approximately $2.5 million, as additional collateral securing the
Master Loan; and (5) all liabilities and claims between the Partnership and
EP/2's general partners were released.
EP/2 was the holder of a note receivable secured by North Park Plaza which had
not been performing according to the note terms since 1989. In the process of
negotiating the final bankruptcy settlement discussed above, EP/2 assigned its
interest in the note receivable to the Partnership. The Partnership foreclosed
upon and acquired North Park Plaza in July 1990, CCEP/2 is still obligated for
$6.6 million under the Master Loan attributable to North Park Plaza not
extinguished in the foreclosure proceeding.
Note D - Related Party Transactions
The Partnership has no employees and is dependent on the General Partner and its
affiliates for the management and administration of all Partnership activities.
The Partnership paid property management fees based upon collected gross rental
revenues for property management services as noted below for the years ended
December 31, 1995, 1994 and 1993. For the year ended December 31, 1994, a
portion of such property management fees were paid to Coventry Properties, Inc.
("Coventry"), an affiliate of the General Partner, for day-to-day property
management services and a portion was paid to Partnership Services, Inc. ("PSI")
for advisory services related to day-to-day property operations. During 1993,
property management services were provided by an unaffiliated management
company. In July 1993, Coventry assumed day-to-day property management
responsibilities. In late December 1994, an affiliate of Insignia Financial
Group, Inc. ("Insignia") assumed day-to-day property management responsibilities
for the Partnership's property. Fees paid to affiliates of Insignia during the
year ended December 31, 1995, and fees paid to Coventry and PSI for the years
ended December 31, 1994 and 1993, are reflected in the following table:
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
(in thousands)
Property management fees $95 $19 $15
The Partnership Agreement ("Agreement") also provides for reimbursement to the
General Partner and its affiliates for costs incurred in connection with the
administration of Partnership activities. The General Partner and its current
and former affiliates, which included Coventry, received reimbursements as
reflected in the following table:
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
(in thousands)
Reimbursements for services of affiliates $379 $325 $451
Leasing commissions 101 -- --
On July 1, 1995, the Partnership began insuring its properties under a master
policy through an agency and insurer unaffiliated with the General Partner. An
affiliate of the General Partner acquired, in the acquisition of a business,
certain financial obligations from an insurance agency which was later acquired
by the agent who placed the current year's master policy. The agent assumed the
financial obligations to the affiliate of the General Partner, who receives
payments on these obligations from the agent. The amount of the partnership's
insurance premiums accruing to the benefit of the affiliate of the General
Partner by virtue of the agent's obligations is not significant.
Due from affiliates at December 31, 1994, primarily represents cash flow
payments owed by CCEP/2 to the Partnership under the terms of the New Master
Loan and were paid during 1995.
Note E - Commitment and Contingencies
The Partnership is required by the Partnership Agreement to maintain working
capital reserves for contingencies of not less than 5% of Net Invested Capital,
as defined in the Partnership Agreement. In the event expenditures are made
from this reserve, operating revenue shall be allocated to such reserves to the
extent necessary to maintain the foregoing levels. Reserves, including cash and
cash equivalents and securities available for sale (at market), totaling
approximately $9.3 million, were greater than the reserve requirement of $7.6
million at December 31, 1995.
The Partnership is unaware of any pending or outstanding litigation that is not
of a routine nature. The General Partner believes that all such matters are
adequately covered by insurance and will be resolved without a material adverse
effect upon the business, financial condition, results of operations, or
liquidity of the Partnership.
Note F - Other Income
In 1991, the Partnership (and simultaneously 15 Affiliated Partnerships) entered
claims in Southmark Corporation's Chapter 11 bankruptcy proceeding. These
claims related to Southmark Corporation's activities while it exercised control
(directly, or indirectly through its affiliates) over the Partnership. The
Bankruptcy Court set the Partnership's and the affiliated Partnerships' allowed
claim at $11 million, in aggregate. In March 1994, the Partnership received
1,468 shares of Southmark Corporation Redeemable Series A Preferred Stock and
10,738 shares of Southmark Corporation New Common Stock with an aggregate market
value on the date of receipt of $11,000 and approximately $80,000 in cash
representing the Partnership's share of the recovery, based on its pro rata
share of the claims filed. Other income for 1995 includes a $286,000 refund
from the former master insurance policy.
Note G - Real Estate and Accumulated Depreciation
(in thousands)
Initial Cost
To Partnership
Buildings Cost
and Related Written Down
Personal Subsequent to
Description Land Property Acquisition
North Park Plaza $ 2,281 $ 7,719 $ (3,844)
Southfield, MI
(in thousands) Gross Amount At Which Carried
at December 31, 1995
Buildings
And Related
Personal Accumulated Date of Date Depreciable
Description Land Property Total Depreciation Construction Acquired Life-Years
North Park Plaza $ 716 $ 5,440 $ 6,156 $ 4,138 1972 7/13/90 5-20
Reconciliation of real estate and accumulated depreciation:
Years Ended December 31,
1995 1994 1993
(in thousands)
REAL ESTATE:
Balance, real estate at beginning of year $ 8,825 $ 10,686 $ 12,213
Additions 681 635 473
Write-downs (3,350) (2,496) (2,000)
Balance, real estate at end of year $ 6,156 $ 8,825 $ 10,686
ACCUMULATED DEPRECIATION:
Accumulated depreciation of real estate
at beginning of year $ 3,325 $ 2,339 $ 1,460
Depreciation of real estate 813 986 879
Accumulated depreciation of real estate
at end of year $ 4,138 $ 3,325 $ 2,339
The aggregate cost of the real estate for Federal income tax purposes at
December 31, 1995 and 1994 is $14,104,103 and $13,422,847. The accumulated
depreciation taken for Federal income tax purposes at December 31, 1995 and 1994
is $2,069,998 and $1,687,082.
Note H - Revenues
The Partnership leases its commercial property under operating leases which vary
in duration from one to seven years. Rental income is recognized on a straight-
line basis over the life of the applicable leases. Minimum future rental income
subject to noncancellable operating leases is as follows (in thousands):
YEAR ENDING
DECEMBER 31,
1996 $ 1,533
1997 1,139
1998 866
1999 495
2000 283
Thereafter 231
Total $ 4,547
There is no assurance that this rental income will continue at the same level
when the current leases expire.