UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: AUGUST 31, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 0-17147
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
(Exact name of registrant as specified in its charter)
Delaware 04-2798638
(State of organization) (I.R.S.Employer
Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
Prospectus of registrant dated Part IV
October 14, 1983, as supplemented
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
1995 FORM 10-K
TABLE OF CONTENTS
PART I Page
Item 1 Business I-1
Item 2 Properties I-3
Item 3 Legal Proceedings I-3
Item 4 Submission of Matters to a Vote of Security HoldersI-4
PART II
Item 5 Market for the Partnership's Limited
Partnership Interests and
Related Security Holder Matters II-1
Item 6 Selected Financial Data II-1
Item 7 Management's Discussion and Analysis of
Financial Condition
and Results of Operations II-2
Item 8 Financial Statements and Supplementary Data II-4
Item 9 Changes in and Disagreements with Accountants
on Accounting
and Financial Disclosure II-4
PART III
Item10 Directors and Executive Officers of the
Partnership III-1
Item 11 Executive Compensation III-3
Item12 Security Ownership of Certain Beneficial
Owners and Management III-3
Item13 Certain Relationships and Related Transactions III-3
PART IVItem14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K IV-1
SIGNATURES IV-2
INDEX TO EXHIBITS IV-3
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA F-1 to F-14
PART I
Item 1. Business
Paine Webber Qualified Plan Property Fund Three, LP (the "Partnership") is
a limited partnership formed in June 1983 under the Uniform Limited Partnership
Act of the State of Delaware for the purpose of investing in a diversified
portfolio of existing income-producing operating properties through land
purchase-leaseback transactions and first mortgage loans. The Partnership sold
$35,794,000 in Limited Partnership Units (35,794 Units at $1,000 per Unit) from
October 14, 1983 to October 13, 1984 pursuant to a Registration Statement filed
on Form S-11 under the Securities Act of 1933 (Registration No. 2-85347).
Limited Partners will not be required to make any additional capital
contributions.
Originally, the Partnership owned land and made first mortgage loans
secured by buildings with respect to six operating properties. As of August 31,
1995, the Partnership's mortgage loan and land lease investments on two of the
original properties were still outstanding and the Partnership owned one
operating property directly as a result of foreclosing on a mortgage loan
investment. The Partnership's wholly-owned real estate investment and the
security for the Partnership's other investments are described below.
Property Name Type of Property and
and Location Date of Investment Size Type of Ownership (1)
Appletree Apartments 288 Fee ownership
Apartments 5/8/84 units; of land and
Omaha, NE 16.2 first mortgage
acres of lien on
land improvements
Woodcroft Shopping 85,300 Fee ownership
Shopping Center net of land and
Center 12/17/84 leasable first mortgage
Durham, NC sq. ft. ; lien on
Phase I and 12 acres improvements
Phase II of land
Westside Creek Apartments 142 Fee ownership
Apartments (2) 7/1/85 units; of land and
Little Rock, AR 11.4 improvements
acres of
land
(1) See Notes to the Financial Statements filed with this Annual Report for a
description of the transactions through which the Partnership has acquired
these real estate investments.
(2) On March 23, 1989, the Partnership foreclosed under the terms of the
mortgage note receivable secured by the Westside Creek Apartments for non-
payment of the required monthly payments of interest in accordance with the
terms of the mortgage loan. The Partnership has been operating the
property utilizing the services of a local management company since the
date of the foreclosure. See Note 5 to the Financial Statements
accompanying this Annual Report for a further discussion of this
transaction.
To date, the Partnership has sold or been prepaid on its investments with
respect to three of the original operating properties, including one during
fiscal 1995. On September 25, 1989, the Partnership liquidated its investments
in a Howard Johnson's Hotel, located in Orlando, Florida. The transaction
consisted of a repayment of the Partnership's mortgage loan receivable for
$6,400,000 as well as a sale of the related land at an amount equal to the
Partnership's original cost of $1,600,000. The repayment resulted in a loss on
the mortgage loan investment of $1,799,750 and $750,000 of bad debt expense for
previously accrued but uncollectible interest income. On July 31, 1992 the
Partnership liquidated its investments in the Exeter Street Theatre Building,
when the borrower sold the operating property to a third party. The transaction
consisted of a prepayment of the mortgage loan receivable at par, for
$5,100,000, and a sale of the related land for $3,000,000 (prior to closing
costs). The land had a carrying value of $500,000, equal to the Partnership's
original investment, at the time of the sale. On February 20, 1990, an
affiliate of the Partnership, which held the mortgage loan and land lease on the
Cordova Creek Apartments, foreclosed on the property due to non-payment of the
required interest payments. The affiliate operated the property, using the
services of a local management company, for more than five years during which
time the Partnership received a share of the net cash flow generated from
property operations after capital improvements. On April 12, 1995, the
affiliate of the Partnership sold the property. The Partnership, which owned a
3.5% equity interest in the operations of the property, received net proceeds of
$311,000 and realized a gain of $61,000 on the sale.
The Partnership's investment objectives are to:
(1) preserve and protect the Limited Partners' capital and related buying
power;
(2) provide the Limited Partners with cash distributions from investment
income; and
(3) achieve long-term appreciation in the value of Partnership's
investments.
Through August 31, 1995, the Limited Partners had received cumulative cash
distributions totalling approximately $38,946,000, or $1,100 per original $1,000
investment for the Partnership's earliest investors. This return includes a
distribution of $224 per original $1,000 investment from the liquidation of the
Howard Johnson's mortgage loan and land investment in September of 1989, a
distribution of $232 per original $1,000 investment in October 1992 from the
liquidation of the Exeter Street Theatre Building investment in July 1992, and a
$42 distribution following the sale of the Cordova Creek Apartments in June 1995
($9 from the sale of Cordova Creek and $33 of excess Partnership reserves). At
August 31, 1995, the Partnership retains an interest in three of the six
properties underlying its original mortgage loan and land investments.
The Partnership's success in meeting its capital appreciation objective
will depend upon the proceeds received from the final liquidation of its
remaining investments. The amount of such proceeds will ultimately depend upon
the value of the underlying investment properties at the time of their final
liquidation, which cannot presently be determined. The Partnership expects to
finance or sell its investments and have its mortgage loans repaid from time to
time. Due to the combination of relatively low mortgage interest rates and
increased availability of funds for sales and mortgage refinancings which has
existed over the past two years, the likelihood of the Partnership's loans being
prepaid has increased. During fiscal 1995, the borrowers on both of the
outstanding loan investments approached the Partnership regarding potential
prepayment transactions. See Item 7 for a further discussion of these potential
transactions. While there are no assurances that these borrowers will be able
to finance prepayment transactions in the near term, if such transactions were
to be completed the Partnership would be positioned for a possible liquidation
pending the sale of the wholly-owned Westside Creek Apartments, which is
currently being marketed for sale. In deciding whether to sell any of the
Partnership's investments, the General Partner will consider such factors as the
amount of appreciation in value, if any, to be realized, the risks of continued
investment and the anticipated advantages to be gained from continuing to hold
the investment. The proceeds from such sales, financings or refinancings of the
investments will not be reinvested but will be distributed to the Partners, so
that the Partnership will in effect be self-liquidating.
The property in which the Partnership has an equity interest and the
properties securing the Partnership's mortgage loan investments are located in
real estate markets in which they face significant competition for the revenues
they generate. The apartment complexes compete with numerous projects of
similar type generally on the basis of price, location and amenities. Apartment
properties in all markets also compete with the local single family home market
for prospective tenants. The availability of low home mortgage interest rates
over the past three years has generally caused this competition to increase in
all areas of the country. The shopping center also competes for long-term
commercial tenants with numerous projects of similar type generally on the basis
of rental rate, location and tenant improvement allowances. The Partnership has
no real estate investments located outside the United States. The Partnership
is engaged solely in the business of real estate investment. Therefore, a
presentation of information about industry segments is not applicable.
The Partnership has no employees; it has, however, entered into an Advisory
Contract with PaineWebber Properties Incorporated (the "Adviser"), which is
responsible for the day-to-day operations of the Partnership. The Adviser is a
wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned
subsidiary of PaineWebber Group Inc. ("PaineWebber").
The general partners of the Partnership (the "General Partners") are Third
Qualified Properties, Inc. and Properties Associates. Third Qualified
Properties, Inc., a wholly-owned subsidiary of PaineWebber, is the Managing
General Partner of the Partnership. The Associate General Partner is Properties
Associates, a Massachusetts general partnership, certain general partners of
which are also officers of the Adviser and the Managing General Partner.
Subject to the Managing General Partner's overall authority, the business of the
Partnership is managed by the Adviser.
The terms of transactions between the Partnership and affiliates of the
Managing General Partner of the Partnership are set forth in Items 11 and 13
below to which reference is hereby made for a description of such terms and
transactions.
Item 2. Properties
As of August 31, 1995, the Partnership owns, and has leased back to the
sellers, the land related to the two investments referred to under Item 1 above
to which reference is made for the name, location and description of each
investment. Additionally, the Partnership owns one property directly which was
acquired through foreclosure proceedings as noted in Item 1.
Occupancy figures for each fiscal quarter during 1995, along with an
average for the year, are presented below for each property:
Percent Occupied At
Fiscal 1995
11/30/94 2/28/95 5/31/95 8/31/95 Average
Appletree Apartments
Omaha, NE 96% 96% 98% 98% 97%
Woodcroft Shopping Center
Durham, NC
Phase I and Phase II 99% 99% 97% 97% 98%
Westside Creek Apartments
Little Rock, AR 96% 92% 93% 97% 95%
Item 3. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly
dissatisfied partnership investors. In March 1995, after the actions were
consolidated under the title In re PaineWebber Limited Partnership Litigation,
the plaintiffs amended their complaint to assert claims against a variety of
other defendants, including Third Qualified Properties, Inc., and Properties
Associates (`PA''), which are the General Partners of the Partnership and
affiliates of PaineWebber.
The amended complaint in the New York Limited Partnership Actions alleges
that, in connection with the sale of interests in Paine Webber Qualified Plan
Property Fund Three, LP, PaineWebber, Third Qualified Properties, Inc. and PA
(1) failed to provide adequate disclosure of the risks involved; (2) made false
and misleading representations about the safety of the investments and the
Partnership's anticipated performance; and (3) marketed the Partnership to
investors for whom such investments were not suitable. The plaintiffs, who
purport to be suing on behalf of all persons who invested in Paine Webber
Qualified Plan Property Fund Three, LP, also allege that following the sale of
the partnership interests, PaineWebber, Third Qualified Properties, Inc. and PA
misrepresented financial information about the Partnership's value and
performance. The amended complaint alleges that PaineWebber, Third Qualified
Properties, Inc. and PA violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs seek
unspecified damages, including reimbursement for all sums invested by them in
the partnerships, as well as disgorgement of all fees and other income derived
by PaineWebber from the limited partnerships. In addition, the plaintiffs also
seek treble damages under RICO. The defendants' time to move against or answer
the complaint has not yet expired.
Pursuant to provisions of the Partnership Agreement and other contractual
obligations, under certain circumstances the Partnership may be required to
indemnify Third Qualified Properties, Inc., PA and their affiliates for costs
and liabilities in connection with this litigation. The General Partners intend
to vigorously contest the allegations of the action, and believe that the action
will be resolved without material adverse effect on the Partnership's financial
statements, taken as a whole.
The Partnership is not subject to any other material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and Related
Security Holder Matters
At August 31, 1995, there were 6,262 record holders of Units in the
Partnership. There is currently no public market for the resale of Units, and
it is not anticipated that a public market for Units will develop. The Managing
General Partner will not redeem or repurchase Units.
Item 6. Selected Financial Data
PAINEWEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
SELECTED FINANCIAL DATA
For the years ended August 31, 1995, 1994, 1993, 1992 and 1991
(in thousands, except per Unit data)
1995 1994 1993 1992 1991
Revenues $ 1,315 $ 1,272 $ 1,296 $ 2,062 $ 1,950
Operating income $ 831 $ 834 $ 852 $ 1,471 $ 1,486
Gain on sale of land $ - $ - $ - $ 2,479 $ -
Gain on sale of
investment in
operating property $ 61 $ - $ - $ - $ -
Income from
investment property
held for sale $ 545 $ 551 $ 568 $ 551 $ 454
Net income $ 1,437 $ 1,385 $ 1,420 $ 4,501 $ 1,940
Per Limited Partnership Unit:
Net income $ 39.73 $ 38.31 $ 39.26 $124.48 $ 53.66
Cash distributions
from operations $ 35.36 $ 35.36 $ 37.94 $ 45.69 $ 42.70
Cash distributions
from sale, refinancing
and other disposition
transactions $ 42.00 $ - $232.00 $ - $ -
Total assets $ 16,030 $ 17,350 $17,269 $25,529 $22,776
The above selected financial data should be read in conjunction with the
financial statements and related notes appearing elsewhere in this Annual
Report.
The above net income and cash distributions per Limited Partnership Unit
are based upon the 35,794 Limited Partnership Units outstanding during each
year.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
LIQUIDITY AND CAPITAL RESOURCES
The Partnership offered Limited Partnership Interests to the public from
October 1983 to October 1984 pursuant to a Registration Statement filed under
the Securities Act of 1933. Gross proceeds of $35,794,000 were received by the
Partnership and, after deducting selling expenses and offering costs, approxi-
mately $31,410,000 was invested in six operating property investments in the
form of mortgage loans and land purchase-leaseback transactions. Since the time
that the original investments were made, the Partnership has liquidated its
Howard Johnson's Hotel mortgage loan and land investments at a loss and has
liquidated its Exeter Street Theatre Building mortgage loan and land investments
and the investment in the Cordova Creek Apartments at gains. In addition, the
Partnership assumed ownership of the Westside Creek Apartments property after
foreclosing under the terms of the first mortgage loan. The Partnership's
investment in the Cordova Creek Apartments had also been converted to an equity
interest in the operating property as a result of foreclosure proceedings
carried out by an affiliated partnership. The affiliated partnership which
held the majority ownership interest in the
Cordova Creek Apartments, PaineWebber Qualified Plan Property Fund Four, LP,
sold the property to an unaffiliated third party for $9,100,000 on April 12,
1995. The Partnership had an ownership interest of 3.5% in the Cordova Creek
property. The Partnership's share of the net sales proceeds was approximately
$311,000, which represented a $61,000 premium over the Partnership's cost basis.
A special distribution of $42 per original $1,000 investment, or $1,503,000, was
made to Limited Partners on June 15, 1995, which included the Cordova Creek net
sales proceeds and a distribution from cash reserves which were deemed to be in
excess of the Partnership's expected future requirements.
Operations of the properties securing the Partnership's two remaining
mortgage loan investments remained strong during fiscal 1995 and continue to
fully support the debt service and land rent payments owed to the Partnership.
During the year ended August 31, 1995, the Partnership received additional rent
of $47,000 under the terms of the Woodcroft Shopping Center ground lease because
cash flow from the property was in excess of certain base amounts specified in
the lease agreement. Leasing levels at the Appletree Apartments and Woodcroft
Shopping Center were 98% and 97%, respectively, as of August 31, 1995. The
mortgage loans secured by the Appletree Apartments and Woodcroft Shopping Center
bear interest at annual rates of 11.00% and 11.25%, respectively. As previously
reported, since current market interest rates for first mortgage loans are
considerably lower than these rates, and with the increased availability of
credit in the capital markets for real estate transactions, the likelihood of
the Partnership's mortgage loan investments being prepaid has been high since
the time that the terms of such mortgage loans allowed for prepayment. The
Appletree loan became prepayable in April 1994. However, the Appletree loan
includes a prepayment premium for any prepayment between May 1994 and April 1998
at rates between 5% and 1.25% of the mortgage loan balance. The Woodcroft loan
became prepayable without penalty in December 1994. As discussed further below,
the borrowers on both of the outstanding loan investments have approached the
Partnership regarding potential prepayment transactions. While there are no
assurances that these borrowers will be able to finance such transactions in the
near term, if these transactions are completed the Partnership could be
positioned for a possible liquidation pending the disposition of the wholly-
owned Westside Creek Apartments, which, as discussed further below, is currently
being marketed for sale.
During the last quarter of fiscal 1995, the Partnership received notice from
the Appletree borrower of its intent to prepay the Partnership's mortgage loan
and repurchase the underlying land. The amount to be received by the
Partnership under the terms of the ground lease as its share of the appreciation
of the Appletree property has not been agreed upon to date. The terms of the
ground lease provide for the possible resolution of disputes between the parties
over value issues through an arbitration process. Presently, the Partnership
and the borrower continue to try to resolve their differences regarding the
value of the property. If an agreement cannot be reached, the borrower could
force the Partnership to submit to arbitration during fiscal 1996. In addition
to the amount to be determined as the Partnership's share of the property's
appreciation under the ground lease, the terms of the Appletree mortgage loan
require a prepayment penalty which would be equal to 3.75% of the outstanding
principal balance of $4,850,000. If completed, the proceeds of this transaction
would be distributed to the Limited Partners. However, the transaction remains
contingent on, among other things, a resolution of the value issue and the
borrower obtaining sufficient financing to repay its obligations to the
Partnership. Accordingly, there are no assurances that this transaction will be
consummated.
Subsequent to the end of fiscal 1995, the Partnership received notice from
the owner of the Woodcroft Shopping Center of its intent to repay the
Partnership's first mortgage loan and purchase the underlying land in
conjunction with a sale of the operating property to a third party. The
proposed terms of the transaction would result in the full repayment of the
Partnership's mortgage loan of $4,335,000 and the receipt of $1,220,000 as
payment in full for obligations owing under the ground lease, representing the
repayment of the $500,000 land investment and $720,000 as the Partnership's
share of the appreciation in value of the underlying property. The terms of the
Partnership's ground lease require that the Partnership agree with the
borrower's determination of value for purposes of calculating the Partnership's
share of the appreciation in value due under the lease before a sale of the land
can be completed. Management believes that the amounts due to the Partnership
under the proposed terms reflect the fair value of the underlying property, as
supported by the borrower's extensive marketing efforts which resulted in the
potential sale transaction and the Partnership's most recent independent
appraisal. Accordingly, the Partnership has tentatively agreed to the terms of
this transaction. However, the transaction remains contingent on, among other
things, the satisfactory completion of the buyer's due diligence and the
consummation of the sale transaction. Consequently, there are no assurances
that this transaction will be completed. If completed, the proceeds of this
transaction would be distributed to the Limited Partners.
In January 1995, the Partnership executed a purchase and sale agreement to
sell the Westside Creek Apartments to an unaffiliated third party for
$6,775,000. Subsequently, the prospective purchaser, which is a national
pension fund, encountered internal tax regulation compliance issues related to
the sale which prevented the sale from closing. Accordingly, management has
begun to remarket the property to other potential buyers. However, there are no
assurances that a sale transaction will be completed in the near future.
Management will base its hold/sell decision with respect to Westside Creek on an
assessment of the impact on the overall returns to the Limited Partners.
Management continues to believe that the Partnership will realize a substantial
gain over its original investment of $4,850,000 upon the eventual sale of the
Westside Creek property.
At August 31, 1995 the Partnership had available cash and cash equivalents of
approximately $790,000. Such cash and cash equivalents will be used for working
capital requirements and for distributions to the partners. The source of
future liquidity and distributions to the partners is expected to be through
cash generated from the Partnership's real estate investments, repayment of the
mortgage loans receivable and the proceeds from the sales or refinancings of the
underlying land and the investment property. Such sources of liquidity are
expected to be adequate to meet the Partnership's needs on both a short-term and
long-term basis. However, to the extent that the potential loan prepayment and
land sale transactions discussed above are completed and the net proceeds are
returned to the Limited Partners, the Partnership's quarterly distribution rate
on remaining invested capital may have to be adjusted downward to reflect the
reduction in cash flows which would result from such transactions.
RESULTS OF OPERATIONS
1995 Compared to 1994
The Partnership's net income increased by $52,000 for the year ended August
31, 1995, when compared to the prior year. The primary reason for the increase
in net income is the gain realized by the Partnership from the sale of the
Cordova Creek Apartments on April 12, 1995. As discussed further above, the
Partnership held a 3.5% interest in Cordova Creek and realized a gain of $61,000
from the sale of the property. The gain from the sale of Cordova Creek was
partially offset by a decrease in the income from the operations of the Westside
Creek Apartments of $6,000 and a decrease in the Partnership's operating income
of $3,000. Income from the operations of the Westside Creek Apartments
decreased primarily due to an increase in capital improvement expenses over the
prior year. Capital improvement expenses increased in connection with preparing
the property for a possible sale, as discussed further above. Due the
Partnership's policy of accounting for its assets held for sale, capital
improvement costs are expensed as incurred. Rental revenues at Westside Creek
were up slightly compared to fiscal 1994. The Partnership's net operating
income decreased slightly, despite an increase in revenues of $43,000, due to an
increase in professional fees. Professional fees increased mainly as a result
of legal expenses incurred in connection with the proposed Westside Creek sale
transaction which failed to close during fiscal 1995.
1994 Compared to 1993
The Partnership's net income decreased by $35,000 for the year ended August
31, 1994, when compared to the prior year. The decrease in net income was
mainly the result of a decrease in interest earned on invested cash equivalents
and a decrease in income from operations of the investment property held for
sale. Interest earned on invested cash equivalents decreased by $21,000 during
fiscal 1994 as a result of a substantial decrease in the average outstanding
balance of cash held by the Partnership. During the quarter ended November 30,
1992, the Partnership held the proceeds from the sale of the Exeter Street
Theatre Building investment. These proceeds, of over $8 million, were invested
in short-term interest bearing instruments prior to being distributed to the
Limited Partners in October 1992. Income from investment property held for sale
represents the net operating income of the Westside Creek Apartments property
reduced by capital improvement expenses. Net income from the operations of
Westside Creek decreased by $17,000, mainly due to an increase in administrative
and capital improvement expenses. The increases in administrative and capital
improvement expenses were partially offset by a slight increase in rental and
other income at Westside Creek. A decline in Partnership general and
administrative expenses of $6,000 partially offset the reduction in interest
income and income from Westside Creek during fiscal 1994.
1993 Compared to 1992
The Partnership's net income decreased by $3,081,000 for the year ended
August 31, 1993 when compared to the prior year. The decrease was primarily due
to the gain recognized in fiscal 1992 of $2,479,000 from the liquidation of the
Exeter Street Theatre Building land and mortgage loan investments on July 31,
1992. In addition, the Partnership's operating income decreased by $619,000
during fiscal 1993, primarily due to a decrease in revenue from land rents and
interest from mortgage loans of $766,000, which were also attributable to the
liquidation of the Exeter Street Theatre investments. The decrease in land
rents and mortgage loan interest was partially offset by decreases in
management fees and amortization expense. Management fees decreased by $29,000
during fiscal 1993 due to the decrease in the adjusted cash flow distributed to
the Limited Partners subsequent to the sale of the Exeter Street Theatre
Building investment and the return of the capital proceeds to the Limited
Partners. Amortization expense decreased $147,000 as a result of the write-off
of deferred expenses associated with the Exeter Street Theatre Building
investment in the prior year.
Net income from the operations of the Westside Creek Apartments increased by
$16,000 in fiscal 1993, primarily as a result of an increase in revenues of
$51,000 due to an increase in occupancy from 94% at August 31, 1992 to 96% at
August 31, 1993, along with a slight improvement in rental rates. The increase
in revenues was partially offset by an increase in expenses of $35,000 due to
the roof replacement of three buildings, parking lot repairs and various
landscaping improvements.
Inflation
The Partnership completed its eleventh full year of operations in fiscal 1995
and the effects of inflation and changes in prices on revenues and expenses to
date have not been significant.
The impact of inflation in future periods may be offset, in part, by an
increase in revenues because the Partnership's land leases provide for
additional rent based upon increases in the revenues of the related operating
properties, which would tend to rise with inflation. In addition, the
Partnership's wholly-owned apartment complex has leases which are short-term;
generally 6 to 12 months. Rental rates on such leases could be adjusted to keep
pace with inflation, to the extent market conditions allow, as the leases turn
over. Such increases in revenues would be expected to at least partially offset
the increases in Partnership and property operating expenses resulting from
inflation.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included under Item 14 of
this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Partnership
The Managing General Partner of the Partnership is Third Qualified
Properties, Inc., a Delaware corporation, which is a wholly-owned subsidiary of
PaineWebber. The Associate General Partner of the Partnership is Properties
Associates, a Massachusetts general partnership, certain general partners of
which are also officers of the Adviser and the Managing General Partner. The
Managing General Partner has overall authority and responsibility for the
Partnership's operations, however, the day-to-day business of the Partnership is
managed by the Adviser pursuant to an advisory contract.
(a) and (b) The names and ages of the directors and principal executive
officers of the Managing General Partner of the Partnership are as follows:
Date elected
Name Office Age to Office
Lawrence A. Cohen President and Chief Executive Officer 42 5/15/91
Albert Pratt Director 84 6/1/83 *
J. Richard Sipes Director 48 6/9/94
Walter V. Arnold Senior Vice President and Chief
Financial Officer 48 10/29/85
James A. Snyder Senior Vice President 50 7/6/92
John B. Watts III Senior Vice President 42 6/6/88
David F. Brooks First Vice President and
Assistant Treasurer 53 6/1/83 *
Timothy J. Medlock Vice President and Treasurer 34 8/4/89
Thomas W. Boland Vice President 33 12/1/91
Dorothy F. Haughey Secretary 69 6/1/83 **
The date of incorporation of the Managing General Partner
(c) There are no other significant employees in addition to the directors
and executive officers mentioned above.
(d) There is no family relationship among any of the foregoing directors
or executive officers of the Managing General Partner of the Partnership. All
of the foregoing directors and executive officers have been elected to serve
until the annual meeting of the Managing General Partner.
(e) All of the directors and officers of the Managing General Partner hold
similar positions in affiliates of the Managing General Partner, which are the
corporate general partners of other real estate limited partnerships sponsored
by PWI, and for which PaineWebber Properties Incorporated serves as the
Adviser. The business experience of each of the directors and principal
executive officers of the Managing General Partner is as follows:
Lawrence A. Cohen is President and Chief Executive Officer of the Managing
General Partner and President and Chief Executive Officer of the Adviser which
he joined in January 1989. He is a also member of the Board of Directors and
the Investment Committee of the Adviser. From 1984 to 1988, Mr. Cohen was First
Vice President of VMS Realty Partners where he was responsible for origination
and structuring of real estate investment programs and for managing national
broker-dealer relationships. He is a member of the New York Bar and is a
Certified Public Accountant.
Albert Pratt is a Director of the Managing General Partner, a Consultant of
PWI and a general partner of the Associate General Partner. Mr. Pratt joined
PWI as Counsel in 1946 and since that time has held a number of positions
including Director of both the Investment Banking Division and the International
Division, Senior Vice President and Vice Chairman of PWI and Chairman of
PaineWebber International, Inc.
J. Richard Sipes is a Director of the Managing General Partner and a Director
of the Adviser. Mr. Sipes is an Executive Vice President at PaineWebber. He
joined the firm in 1978 and has served in various capacities within the Retail
Sales and Marketing Division. Before assuming his current position as Director
of Retail Underwriting and Trading in 1990, he was a Branch Manager, Regional
Manager, Branch System and Marketing Manager for a PaineWebber subsidiary,
Manager of Branch Administration and Director of Retail Products and Trading.
Mr. Sipes holds a B.S. in Psychology from Memphis State University.
Walter V. Arnold is a Senior Vice President and Chief Financial Officer of
the Managing General Partner and a Senior Vice President and Chief Financial
Officer of the Adviser which he joined in October 1985. Mr. Arnold joined PWI
in 1983 with the acquisition of Rotan Mosle, Inc. where he had been First Vice
President and Controller since 1978, and where he continued until joining the
Adviser. Mr. Arnold is a Certified Public Accountant licensed in the state of
Texas.
James A. Snyder is a Senior Vice President of the Managing General Partner
and a Senior Vice President and Member of the Investment Committee of the
Adviser. Mr. Snyder re-joined the Adviser in July 1992 having served previously
as an officer of PWPI from July 1980 to August 1987. From January 1991 to July
1992, Mr. Snyder was with the Resolution Trust Corporation where he served as
the Vice President of Asset Sales prior to re-joining PWPI. From February 1989
to October 1990, he was President of Kan Am Investors, Inc., a real estate
investment company. During the period August 1987 to February 1989, Mr. Snyder
was Executive Vice President and Chief Financial Officer of Southeast Regional
Management Inc., a real estate development company.
John B. Watts III is a Senior Vice President of the Managing General
Partner and a Senior Vice President of the Adviser which he joined in June 1988.
Mr. Watts has had over 16 years of experience in acquisitions, dispositions and
finance of real estate. He received degrees of Bachelor of Architecture,
Bachelor of Arts and Master of Business Administration from the University of
Arkansas.
David F. Brooks is a First Vice President and Assistant Treasurer of the
Managing General Partner and a First Vice President and an Assistant Treasurer
of the Adviser. Mr. Brooks joined the Adviser in March 1980. From 1972 to
1980, Mr. Brooks was an Assistant Treasurer of Property Capital Advisors, Inc.
and also, from March 1974, the Assistant Treasurer of Capital for Real Estate,
which provided real estate investment, asset management and consulting
services.
Timothy J. Medlock is a Vice President and Treasurer of the Managing
General Partner and a Vice President and Treasurer of the Adviser which he
joined in 1986. From June 1988 to August 1989, Mr. Medlock served as the
Controller of the Managing General Partner and the Adviser. From 1983 to 1986,
Mr. Medlock was associated with Deloitte Haskins & Sells. Mr. Medlock graduated
from Colgate University in 1983 and received his Masters in Accounting from New
York University in 1985.
Thomas W. Boland is a Vice President of the Managing General Partner and a
Vice President and Manager of Financial Reporting of the Adviser which he joined
in 1988. From 1984 to 1987, Mr. Boland was associated with Arthur Young &
Company. Mr. Boland is a Certified Public Accountant licensed in the state of
Massachusetts. He holds a B.S. in Accounting from Merrimack College and an
M.B.A. from Boston University.
Dorothy F. Haughey is Secretary of the Managing General Partner, Assistant
Secretary of PaineWebber and Secretary of PWI. Ms. Haughey joined PaineWebber
in 1962.
(f) None of the directors and officers was involved in legal proceedings
which are material to an evaluation of his or her ability or integrity as a
director or officer.
(g) Compliance With Exchange Act Filing Requirements: The Securities
Exchange Act of 1934 requires the officers and directors of the Managing General
Partner, and persons who own more than ten percent of the Partnership's limited
partnership units, to file certain reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and ten-
percent beneficial holders are required by SEC regulations to furnish the
Partnership with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Partnership believes that, during the year ended August 31, 1995, all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
Item 11. Executive Compensation
The directors and officers of the Partnership's Managing General Partner
receive no current or proposed remuneration from the Partnership.
The Partnership is required to pay certain fees to the Adviser, and the
General Partners are entitled to receive a share of cash distributions and a
share of profits and losses. These items are described in Item 13. The
Partnership has paid cash distributions to the Unitholders on a
quarterly basis at rates ranging from 5.35% to 6.5% per annum on remaining
invested capital over the past five years. However, the Partnership's Units of
Limited Partnership Interest are not actively traded on any organized exchange,
and no efficient secondary market exists. Accordingly, no accurate price
information is available for these Units. Therefore, a presentation of
historical Unitholder total returns would not be meaningful.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) The Partnership is a limited partnership issuing Units of Limited
Partnership Interest, not voting securities. All the outstanding stock of the
Managing General Partner, Third Qualified Properties, Inc., is owned by
PaineWebber. Properties Associates, the Associate General Partner, is a
Massachusetts general partnership, the general partners of which are also
officers of the Adviser and the Managing General Partner. Properties Associates
was the Initial Limited Partner of the Partnership. No limited partner is known
by the Partnership to own beneficially more than 5% of the outstanding interests
of the Partnership.
(b) Neither the directors and officers of the Managing General Partner nor
the general partners of the Associate General Partner individually own any Units
of Limited Partnership Interest of the Partnership. No director or officer of
the Managing General Partner nor the general partners of the Associate General
Partner possess a right to acquire beneficial ownership of Units of Limited
Partnership Interest of the Partnership.
(c) There exists no arrangement, known to the Partnership, the operation
of which may at a subsequent date result in a change in control of the
Partnership.
Item 13. Certain Relationships and Related Transactions
The Managing General Partner of the Partnership is Third Qualified
Properties, Inc., a wholly-owned subsidiary of PaineWebber Group Inc.
("PaineWebber"). The Associate General Partner is Properties Associates, a
Massachusetts general partnership, certain general partners of which are also
officers of the Adviser and the Managing General Partner. Subject to the
Managing General Partner's overall authority, the business of the Partnership is
managed by the Adviser pursuant to an advisory contract. The Adviser is a
wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned
subsidiary of PaineWebber.
The General Partners, the Adviser and PWI receive fees and compensation
determined on an agreed-upon basis, in consideration of various services
performed in connection with the sale of the Units, the management of the
Partnership and the acquisition, management, financing and disposition of
Partnership investments.
Distributable Cash, as defined, of the Partnership will be distributed 98%
to the Limited Partners, 1% to the General Partners and 1% to the Adviser as an
asset management fee. Residual proceeds resulting from disposition of
Partnership investments will be distributed, generally, 85% to the Limited
Partners, 11.99% to the Adviser as an asset management fee and 3.01% to the
General Partners after the prior receipt by the Limited Partners of their
original capital contributions and a cumulative annual return of 10%-12%,
depending upon their date of admission into the Partnership, as defined in the
Amended Partnership Agreement.
In connection with investing Partnership capital, the Adviser earned
acquisition fees, paid by both the borrowers and sellers and the Partnership,
aggregating not more than 3% of the gross proceeds of the offering.
The Adviser received total acquisition fees of $1,073,820, of which $305,926
was paid by the Partnership. The Adviser may receive a commission, in an
amount not yet determinable, upon the disposition of certain Partnership
investments.
Under the advisory contract, the Adviser has specific management
responsibilities to administer day-to-day operations of the Partnership and to
report periodically the performance of the Partnership to the General Partners.
The Adviser is paid a basic management fee (6% of adjusted cash flow distributed
to the partners) and an incentive management fee (2% of adjusted cash flow
distributed to the partners, subordinated to a noncumulative annual return to
the Limited Partners equal to 9% based upon their adjusted capital
contribution), in addition to the asset management fee described above for
services rendered. Basic and asset management fees of $89,000 were earned for
the year ended August 31, 1995. No incentive management fees have been earned
to date.
All taxable income or tax loss (other than from a Capital Transaction) of
the Partnership will be allocated 98.989899% to the Limited Partners and
1.010101% to the General Partners. Taxable income or tax loss arising from a
sale or refinancing of investment properties will be allocated to the Limited
Partners and the General Partners in proportion to the amounts of residual
proceeds to which they are entitled; provided that the General Partners shall be
allocated at least 1% of taxable income arising from a sale or refinancing. If
there are no residual proceeds, tax loss or taxable income from a sale or
refinancing will be allocated 98.989899% to the Limited Partners and 1.010101%
to the General Partners. Allocations of the Partnership's operations between
the General Partners and the Limited Partners for financial accounting purposes
have been made in conformity with the allocations of taxable income or tax loss.
The Managing General Partner and the Adviser are reimbursed for their
direct expenses relating to the offering of Units, the administration of the
Partnership and the acquisition and operations of the Partnership's real
property investments.
An affiliate of the Managing General Partner performs certain accounting,
tax preparation, securities law compliance and investor communications and
relations services for the Partnership. The total costs incurred by this
affiliate in providing such services are allocated among several entities,
including the Partnership. Included in general and administrative expenses for
the year ended August 31, 1995 is $178,000 representing reimbursements to this
affiliate for providing such services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an
independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees
of $4,000 (included in general and administrative expenses) during fiscal 1995
for managing the Partnership's cash assets. Fees charged by Mitchell Hutchins
are based on a percentage of invested cash reserves which varies based on the
total amount of invested cash which Mitchell Hutchins manages on behalf of PWPI.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) and (2) Financial Statements and Schedules:
The response to this portion of Item 14 is submitted as a separate
section of this report. See Index to Financial Statements and
Financial Statement Schedules at page F-1.
Financial statements for the properties securing the Partnership's
mortgage loans have not been included since the Partnership has no
contractual right to the information and cannot otherwise practicably
obtain the information.
(3) Exhibits:
The exhibits listed on the accompanying index to exhibits at page IV-3
are filed as part of this Report.
(b) No reports on Form 8-K were filed during the last quarter of fiscal 1995.
(c) Exhibits
See (a)(3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this report. See Index to Financial Statements and Financial
Statement Schedules at page F-1.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINE WEBBER QUALIFIED PLAN
PROPERTY FUND THREE, LP
By: Third Qualified Properties, Inc.
Managing General Partner
By: /s/ Lawrence A. Cohen
Lawrence A. Cohen
President and Chief Executive
Officer
By: /s/ Walter V. Arnold
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
By: /s/ Thomas W. Boland
Thomas W. Boland
Vice President
Dated: November 27, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Partnership in the capacity and on the dates indicated.
By: /s/ Albert Pratt Date: November 27, 1995
Albert Pratt
Director
By: /s/ J. Richard Sipes Date: November 27, 1995
J. Richard Sipes
Director
ANNUAL REPORT ON FORM 10-K
ITEM 14(A)(3)
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
INDEX TO EXHIBITS
PAGE NUMBER IN
EXHIBIT NO. DESCRIPTION OF DOCUMENT THE REPORT OR
OTHER REFERENCE
(3) and (4) Prospectus of the Filed with the
Registrant dated Commission
October 14, 1983, as pursuant to Rule
supplemented, with 424(c) and
particular reference incorporated
to the Restated herein by
Certificate and reference.
Agreement of Limited
Partnership
(10) Material contracts Filed with the
previously filed as Commission
exhibits to pursuant to
registration Section 13 or
statements and 15(d) of the
amendments thereto Securities
of the registrant Exchange Act of
together with all 1934 and
such contracts filed incorporated
as exhibits of herein by
previously filed reference.
Forms 8-K and Forms
10-K are hereby
incorporated herein
by reference.
(13) Annual Reports to No Annual Report
Limited Partners for the year
ended August 31,
1995 has been
sent to the
Limited Partners.
An Annual Report
will be sent to
the Limited
Partners
subsequent to
this filing.
ANNUAL REPORT ON FORM 10-K
ITEM 14(A)(1) AND (2) AND 14(D)
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference
Paine Webber Qualified Plan Property Fund Three, LP:
Report of independent auditors F-2
Balance sheets as of August 31, 1995 and 1994 F-3
Statements of income for the years ended August
31, 1995, 1994 and 1993 F-4
Statements of changes in partners' capital for
the years ended August 31, 1995, 1994 and 1993 F-5
Statements of cash flows for the years ended
August 31, 1995, 1994 and 1993 F-6
Notes to financial statements F-7
Financial Statement Schedules:
Schedule - III Real Estate Owned F-13
Schedule - IV Investments in Mortgage Loans
on Real Estate F-14
Other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements, including the notes thereto.
REPORT OF INDEPENDENT AUDITORS
The Partners of
Paine Webber Qualified Plan Property Fund Three, LP:
We have audited the accompanying balance sheets of Paine Webber Qualified
Plan Property Fund Three, LP as of August 31, 1995 and 1994, and the related
statements of income, changes in partners' capital and cash flows for each of
the three years in the period ended August 31, 1995. Our audits also included
the financial statement schedules listed in the Index at Item 14(a). These
financial statements and schedules are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements and schedules 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 Paine Webber Qualified Plan
Property Fund Three, LP at August 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
August 31, 1995, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
November 20, 1995
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
BALANCE SHEETS
August 31, 1995 and 1994
(In Thousands, except per Unit data)
ASSETS
1995 1994
Real estate investments:
Investment property held for sale $ 4,720 $ 4,720
Investment in operating property - 250
Land 1,150 1,150
Mortgage loans receivable 9,185 9,185
15,055 15,305
Cash and cash equivalents 790 1,854
Interest receivable 85 85
Tax and tenant security deposit escrows 73 71
Prepaid expenses 14 18
Deferred expenses, net of accumulated
amortization of $429 ($425 in 1994) 13 17
$ 16,030 $17,350
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 18 $ 19
Accounts payable and accrued expenses 110 83
Tenant security deposits 14 14
Total liabilities 142 116
Partners' capital
General Partners:
Capital contributions 1 1
Cumulative net income 326 311
Cumulative cash distributions (317) (304)
Limited Partners ($1,000 per Unit,
35,794 Units issued):
Capital contributions, net of offering costs 32,130 32,130
Cumulative net income 22,694 21,272
Cumulative cash distributions (38,946) (36,176)
Total partners' capital 15,888 17,234
$ 16,030 $17,350
See accompanying notes.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
STATEMENTS OF INCOME
For the years ended August 31, 1995, 1994 and 1993
(In Thousands, except per Unit data)
1995 1994 1993
REVENUES:
Interest from mortgage loans $ 1,021 $1,021 $1,021
Land rent 175 161 164
Interest earned on cash equivalents 95 65 86
Other income 24 25 25
1,315 1,272 1,296
EXPENSES:
Management fees 89 90 90
General and administrative 391 344 350
Amortization of deferred expenses 4 4 4
484 438 444
Operating income 831 834 852
Gain on sale of investment
in operating property 61 - -
Income from investment
property held for sale 545 551 568
Net income $ 1,437 $1,385 $1,420
Net income per Limited
Partnership Unit $ 39.73 $ 38.31 $ 39.26
Cash distributions per
Limited Partnership Unit $ 77.36 $ 35.36 $269.94
The above net income and cash distributions per Limited Partnership Unit are
based upon the 35,794 Units of Limited Partnership Interest outstanding
during each year.
See accompanying notes.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the years ended August 31, 1995, 1994 and 1993
(In Thousands)
General Limited
Partners Partners Total
Balance at August 31, 1992 $ 7 $ 25,377 $ 25,384
Net income 14 1,406 1,420
Cash distributions (14) (9,662) (9,676)
BALANCE AT AUGUST 31, 1993 7 17,121 17,128
Net income 14 1,371 1,385
Cash distributions (13) (1,266) (1,279)
BALANCE AT AUGUST 31, 1994 8 17,226 17,234
Net income 15 1,422 1,437
Cash distributions (13) (2,770) (2,783)
BALANCE AT AUGUST 31, 1995 $ 10 $ 15,878 $ 15,888
See accompanying notes.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
STATEMENTS OF CASH FLOWS
For the years ended August 31, 1995, 1994 and 1993
Increase (Decrease) in Cash and Cash Equivalents
(In Thousands)
1995 1994 1993
Cash flows from operating activities:
Net income $ 1,437 $ 1,385 $ 1,420
Adjustments to reconcile net income
to net cash provided by operating
activities:
Gain on sale of investment
in operating property (61) - -
Amortization of deferred expenses 4 4 4
Changes in assets and liabilities:
Interest and land rent receivable - - 28
Prepaid expenses 4 (5) (1)
Tax and tenant security deposit
escrows (2) 5 (3)
Accounts payable - affiliates (1) (29) (4)
Accounts payable and accrued
expenses 27 3 2
Tenant security deposits - - (2)
Total adjustments (29) (22) 24
Net cash provided by
operating activities 1,408 1,363 1,444
Cash flows from investing activities:
Net proceeds from sale of investment
in operating property 311 - -
Cash flows from financing activities:
Distributions to partners (2,783) (1,279) (9,676)
Net (decrease) increase
in cash and cash equivalents (1,064) 84 (8,232)
Cash and cash equivalents,
beginning of period 1,854 1,770 10,002
Cash and cash equivalents,
end of period $ 790 $ 1,854 $ 1,770
See accompanying notes.
1.General
Paine Webber Qualified Plan Property Fund Three, LP (the "Partnership") is
a limited partnership organized pursuant to the laws of the State of Delaware in
June 1983 for the purpose of investing in a diversified portfolio of existing
income-producing real properties through land purchase-leaseback transactions
and first mortgage loans. The Partnership authorized the issuance of units (the
"Units") of Partnership interests, of which 35,794 (at $1,000 per Unit) were
subscribed and issued between October 14, 1983 and October 13, 1984.
The Partnership originally owned land and made first mortgage loans secured
by buildings with respect to six operating investment properties. To date, the
Partnership has sold or been prepaid on its investments with respect to three of
the original operating properties, including one during fiscal 1995. As of
August 31, 1995, the Partnership's mortgage loan and land lease investments on
two of the original properties were still outstanding and the Partnership owned
one operating property directly as a result of foreclosing on a mortgage loan.
As discussed further in Notes 4 and 5, during fiscal 1995 the borrowers on both
of the remaining loan investments approached the Partnership regarding potential
prepayment transactions. While there are no assurances that these borrowers
will be able to finance prepayment transactions in the near term, if such
transactions were to be completed the Partnership would be positioned for a
possible liquidation pending the disposition of the wholly-owned Westside Creek
Apartments, which is currently being marketed for sale.
2.Summary of Significant Accounting Policies
Investment property held for sale represents an asset acquired by the
Partnership through foreclosure proceedings on a first mortgage loan. The
Partnership's policy is to carry this asset at the lower of cost or estimated
fair value (net of selling expenses). The Partnership's cost basis is equal to
the fair value of the asset at the date of foreclosure. Declines in the
estimated fair value of the asset subsequent to foreclosure would be recorded
through the use of a valuation allowance. Subsequent increases in the estimated
fair value of the asset would result in a reduction of the valuation allowance,
but not below zero. All costs incurred to hold the asset are charged to expense
and no depreciation expense is recorded.
The Partnership's investments in land subject to ground leases are carried
at the lower of cost or net realizable value. The net realizable value of a
real estate investment held for long-term investment purposes is measured by the
recoverability of the investment through expected future cash flows on an
undiscounted basis, which may exceed the property's current market value. The
net realizable value of a property held for sale approximates its current market
value. None of the Partnership's land investments were held for sale as of
August 31, 1995 or 1994. The Partnership has reviewed FAS No. 121 `Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed
Of', which is effective for financial statements for years beginning after
December 15, 1995, and believes this new pronouncement will not have a material
effect on the Partnership's financial statements.
Mortgage loans receivable are carried at cost. The Partnership's policy is
to provide for any valuation allowances for its mortgage loan investments on a
specific identification basis, principally by evaluating the market value of the
underlying collateral since the loans are collateral dependent.
Deferred expenses consist of legal fees incurred in connection with the
organization of the Partnership and acquisition fees paid to PaineWebber
Properties Incorporated (the "Adviser") as compensation for analyzing,
structuring and negotiating the Partnership's real estate investments. These
expenses are being amortized using the straight-line method over sixty-month
and twelve- to fifteen-year periods, respectively.
For purposes of reporting cash flows, the Partnership considers all highly
liquid investments with original maturities of 90 days or less to be cash
equivalents.
No provision for income taxes has been made as the liability for such taxes
is that of the partners rather than the Partnership.
3.The Partnership Agreement and Related Party Transactions
The Managing General Partner of the Partnership is Third Qualified
Properties, Inc., a wholly-owned subsidiary of PaineWebber Group Inc.
("PaineWebber"). The Associate General Partner is Properties Associates, a
Massachusetts general partnership, certain general partners of which are also
officers of the Adviser and the Managing General Partner. Subject to the
Managing General Partner's overall authority, the business of the Partnership is
managed by the Adviser pursuant to an advisory contract. The Adviser is a
wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned
subsidiary of PaineWebber.
The General Partners, the Adviser and PWI receive fees and compensation
determined on an agreed-upon basis, in consideration of various services
performed in connection with the sale of the Units, the management of the
Partnership and the acquisition, management, financing and disposition of
Partnership investments.
Distributable Cash, as defined, of the Partnership will be distributed 98%
to the Limited Partners, 1% to the General Partners and 1% to the Adviser as an
asset management fee. Residual proceeds resulting from disposition of
Partnership investments will be distributed, generally, 85% to the Limited
Partners, 11.99% to the Adviser as an asset management fee and 3.01% to the
General Partners after the prior receipt by the Limited Partners of their
original capital contributions and a cumulative annual return of 10%-12%,
depending upon their date of admission into the Partnership, as defined in the
Amended Partnership Agreement.
In connection with investing Partnership capital, the Adviser earned
acquisition fees, paid by both the borrowers and sellers and the Partnership,
aggregating not more than 3% of the gross proceeds of the offering. The
Adviser received total acquisition fees of $1,073,820, of which $305,926 was
paid by the Partnership. The Adviser may receive a commission, in an amount not
yet determinable, upon the disposition of certain Partnership investments.
Under the advisory contract, the Adviser has specific management
responsibilities to administer day-to-day operations of the Partnership and to
report periodically the performance of the Partnership to the General Partners.
The Adviser is paid a basic management fee (6% of adjusted cash flow distributed
to the partners) and an incentive management fee (2% of adjusted cash flow
distributed to the partners, subordinated to a noncumulative annual return to
the Limited Partners equal to 9% based upon their adjusted capital
contribution), in addition to the asset management fee described above for
services rendered. Basic and asset management fees of $89,000, $90,000 and
$90,000 were earned for the years ended August 31, 1995, 1994 and 1993,
respectively. No incentive management fees have been earned to date. Accounts
payable - affiliates at August 31, 1995 and 1994 consists of management fees of
$18,000 and $19,000, respectively, payable to the Adviser.
All taxable income or tax loss (other than from a Capital Transaction) of
the Partnership will be allocated 98.989899% to the Limited Partners and
1.010101% to the General Partners. Taxable income or tax loss arising from a
sale or refinancing of investment properties will be allocated to the Limited
Partners and the General Partners in proportion to the amounts of residual
proceeds to which they are entitled; provided that the General Partners shall be
allocated at least 1% of taxable income arising from a sale or refinancing. If
there are no residual proceeds, tax loss or taxable income from a sale or
refinancing will be allocated 98.989899% to the Limited Partners and 1.010101%
to the General Partners. Allocations of the Partnership's operations between
the General Partners and the Limited Partners for financial accounting purposes
have been made in conformity with the allocations of taxable income or tax loss.
The Managing General Partner and the Adviser are reimbursed for their
direct expenses relating to the offering of Units, the administration of the
Partnership and the acquisition and operations of the Partnership's real
property investments.
Included in general and administrative expenses for the years ended August
31, 1995, 1994 and 1993 is $178,000, $159,000 and $155,000, respectively,
representing reimbursements to an affiliate of the Managing General Partner for
providing certain financial, accounting and investor communication services to
the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an
independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees
of $4,000, $5,000, and $8,000 (included in general and administrative expenses)
during fiscal 1995, 1994 and 1993, respectively, for managing the Partnership's
cash assets.
4.Mortgage Loan and Land Investments
The following first mortgage loans were outstanding at August 31, 1995 and
1994 (in thousands):
Date of
Amount of Loan Loan and
Property 1995 1994 Interest Rate Maturity
Appletree Apartments $ 4,850 $ 4,850 11.00% 5/8/84
Omaha, NE 6/1/99
Woodcroft Shopping
Center
Durham, NC:
Phase I 3,100 3,100 11.25% 12/17/84
12/17/96
Phase II 1,235 1,235 11.25% 11/29/85
12/17/96
$ 9,185 $ 9,185
The loans are secured by first mortgages on the properties, the owner's
leasehold interest in the land and an assignment of all tenant leases, where
applicable. Interest is payable monthly and the principal is due at maturity.
In relation to the above-mentioned mortgage loans, the following land
purchase-leaseback transactions had also been entered into as of August 31, 1995
and 1994 (in thousands):
Cost of Land
to the Partnership Annual
Property 1995 1994 Base Rent
Appletree Apartments $ 650 $ 650 $ 72
Woodcroft Shopping Center 500 500 $ 56
$1,150 $1,150
The land leases have terms of 40 years. Among the provisions of the lease
agreements, the Partnership is entitled to additional rent based upon the gross
revenues in excess of a base amount, as defined. For the years ended August
31, 1995, 1994 and 1993, additional rents of $47,000, $33,000 and $36,000,
respectively, were earned from the Woodcroft Shopping Center investment. The
lessees have the option to purchase the land for specified periods of time at a
price based on the fair market value, as defined, but not less than the original
cost to the Partnership.
The objectives of the Partnership with respect to its mortgage loan and
land investments are to provide current income from fixed mortgage interest
payments and base land rents, then to provide increases to this current income
through participation in the annual revenues generated by the property as they
increase above a specified base amount. In addition, the Partnership's
investments are structured to share in the appreciation in value of the
underlying real estate. Accordingly, upon either sale, refinancing, maturity of
the mortgage or exercise of the option to repurchase the land, generally, the
Partnership will receive a 33% to 50% share of the appreciation above a
specified base amount.
During the last quarter of fiscal 1995, the Partnership received notice
from the Appletree borrower of its intent to prepay the Partnership's mortgage
loan and repurchase the underlying land. The amount to be received by the
Partnership as its share of the appreciation of the Appletree property has not
been agreed upon to date. The terms of the Partnership's ground lease provide
for the possible resolution of disputes between the parties over value issues
through an arbitration process. Presently, the Partnership and the borrower
continue to try to resolve their differences regarding the value of the
property. If an agreement cannot be reached, the borrower could force the
Partnership to submit to arbitration during fiscal 1996. In addition to the
amount to be determined as the Partnership's share of the property's
appreciation under the ground lease, the terms of the Appletree mortgage loan
require a prepayment penalty which would be equal to 3.75% of the outstanding
principal balance of $4,850,000. If completed, the proceeds of this transaction
would be distributed to the Limited Partners. However, the transaction remains
contingent on, among other things, a resolution of the value issue and the
borrower obtaining sufficient financing to repay its obligations to the
Partnership. Accordingly, there are no assurances that this transaction will be
consummated.
Subsequent to the end of fiscal 1995, the Partnership received notice from
the owner of the Woodcroft Shopping Center of its intent to repay the
Partnership's first mortgage loan and purchase the underlying land in
conjunction with a sale of the operating property to a third party. The
proposed terms of the transaction would result in the full repayment of the
Partnership's mortgage loan of $4,335,000 and the receipt of $1,220,000 as
payment in full for obligations owing under the ground lease, representing the
repayment of the $500,000 ground investment and $720,000 as the Partnership's
share of the appreciation in value of the underlying property. The terms of
the Partnership's ground lease require that the Partnership agree with the
borrower's determination of value for purposes of calculating the Partnership's
share of the appreciation in value due under the lease before a sale of the land
can be completed. Management believes that the amounts due to the Partnership
under the proposed terms reflect the fair market value of the underlying
property, as supported by the borrower's extensive marketing efforts which
resulted in the potential sale transaction and the Partnership's most recent
independent appraisal. Accordingly, the Partnership has tentatively agreed to
the terms of this transaction. However, the transaction remains contingent on,
among other things, the satisfactory completion of the buyer's due diligence and
the consummation of the sale transaction. Consequently, there are no assurances
that this transaction will be completed. If completed, the proceeds of this
transaction would be distributed to the Limited Partners.
5.Investment Property Held for Sale
On March 23, 1989, the Partnership foreclosed under the terms of the
mortgage loan secured by Westside Creek Apartments due to nonpayment of the
required debt service. The Adviser has employed a local management company to
operate the property on the Partnership's behalf.
The Partnership complies with the guidelines set forth in the Statement of
Position entitled "Accounting for Foreclosed Assets," issued by the American
Institute of Certified Public Accountants, to account for its investment
properties acquired through foreclosures. Under the Statement of Position, a
foreclosed asset is recorded at the lower of cost or estimated fair value,
reduced by the estimated costs to sell the asset. Cost is defined as the fair
value of the asset at the date of the foreclosure. Declines in the estimated
fair value of the asset subsequent to foreclosure are recorded through the use
of a valuation allowance. Subsequent increases in the estimated fair value of
the asset result in a reduction in the valuation allowance, but not below zero.
The Partnership recognizes income from the investment property held for
sale in the amount of the excess of the property's gross revenues over property
operating expenses (including capital improvement costs), taxes and insurance.
Summarized operating results for the years ended August 31, 1995, 1994 and 1993
are as follows (in thousands):
1995 1994 1993
Rental income $ 937 $ 924 $ 909
Other income 33 34 30
970 958 939
Property operating expenses 338 324 291
Property taxes and insurance 87 83 80
425 407 371
Income from investment
property held for sale $ 545 $ 551 $ 568
During the quarter ended February 28, 1995, the Partnership executed a
purchase and sale agreement to sell the Westside Creek Apartments to an
unaffiliated third party for $6,775.000. Subsequently, the prospective
purchaser, which is a national pension fund advisor, encountered internal tax
regulation compliance issues related to the sale which prevented the sale from
closing. Accordingly, management has begun to actively remarket the property to
other potential buyers. There are no assurances that a sale transaction will be
completed in the near future. The Westside Creek investment was originally made
by the Partnership on July 1, 1985 and was structured as a ground lease and
first leasehold mortgage. The total investment by the Partnership was comprised
of the land, purchased for $215,000, and a $4,635,000 mortgage loan secured by
the improvements.
6.Investment in Operating Property
On February 20, 1990, an affiliate of the Partnership, which held the
mortgage and land lease on the Cordova Creek Apartments, foreclosed on the
property due to nonpayment of the required interest payments. The Partnership
had held a 3.5% interest in the mortgage loan and land investments through an
agreement with this affiliate. Subsequent to foreclosure, the Partnership
recorded its investment at the net combined carrying value of its previous
interest in the land and mortgage loan of $250,000. The Partnership's
investment, which consisted of a 3.5% equity ownership in the operations and
eventual sales proceeds of the Cordova Creek property, was accounted for on the
cost method. Accordingly, distributions which were received from the operations
of Cordova Creek were recorded as income when received, to the extent that they
represented current earnings. The Partnership received distributions from the
current earnings of the Cordova Creek property totalling $24,000, $25,000 and
$21,000 in fiscal 1995, 1994 and 1993, respectively. Such amounts have been
recorded as other income on the Partnership's statements of income.
The affiliate which held the majority ownership interest in the operating
property sold the Cordova Creek Apartments to an unaffiliated third party on
April 12, 1995. The Partnership's share of the net sales proceeds was $311,000,
resulting in a $61,000 gain over the Partnership's cost basis of $250,000. A
special distribution of $42 per original $1,000 investment, or $1,503,000, was
made to Limited Partners on June 15, 1995, which represented $9 from Cordova
Creek net sales proceeds and $33 as a distribution from cash reserves which were
deemed to be in excess of the Partnership's expected future requirements.
7.Subsequent Events
On October 13, 1995 the Partnership distributed $292,000 to the Limited
Partners, $3,000 to the General Partners and $3,000 to the Adviser as asset
management fees for the quarter ended August 31, 1995.
8.Contingencies
The Partnership is involved in certain legal actions. The Managing General
Partner believes these actions will be resolved without material adverse effect
on the Partnership's financial statements, taken as a whole.
SCHEDULE III - REAL ESTATE OWNED
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
AUGUST 31, 1995
(In Thousands)
Gross Amount at
Cost of Which Carried Date of
Investment to at Close of Original Size of
Description Partnership (A) Period (A) Investment Investment
Land underlying $ 650 $ 650 5/8/84 16.2 acres
Apartment Complex (B)
Omaha, NE
Land underlying 500 500 12/17/84 12 acres
Shopping Center (B)
Durham, NC
Apartment Complex 4,850 4,720 (1) 7/1/85 11.4 acres
Little Rock, AR of land;
142 units
$6,000 $5,870
Notes:
(A) These amounts represent the cost of each investment and the gross
amount at which the investment is carried on the balance sheet at August
31, 1995. The aggregate cost for federal income tax purposes at August 31,
1995 is approximately $6,125,000.
(B) Senior mortgages on the properties related to the land investments
listed above are held by Paine Webber Qualified Plan Property Fund Three,
LP. See Schedule IV.
(C) Reconciliation of real estate owned (in thousands):
1995 1994 1993
Balance at beginning of year $6,120 $6,120 $6,120
Acquisitions - - -
Sale of investment in
operating property (2) (250) - -
Balance at end of year $5,870 $6,120 $6,120
(1) The Partnership foreclosed on the mortgage loan secured by the property on
March 23, 1989. A loss of $130,000 related to the foreclosure was recorded
in fiscal 1989. The cost of the land and the face amount of the related
mortgage loan were adjusted for the loss on foreclosure and were reclassified
to investment property held for sale. See discussion in Note 5 to the
financial statements.
(2) See discussion in Note 6 to the accompanying financial statements regarding
the sale in 1995 of the Cordova Creek Apartment complex.
SCHEDULE IV - INVESTMENTS IN MORTGAGE LOANS ON REAL ESTATE
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
AUGUST 31, 1995
(In Thousands)
Principal
amount of
loans subject
Face Carrying to delinquent
Final maturity Periodic amount of amount of principal
Description Interest rate Date payment terms mortgage mortgage or interest
FIRST MORTGAGE LOANS:
Apartments 11% May 8, 1999 Interest $ 4,850 $ 4,850 -
Omaha, Nebraska monthly,
principal
at maturity
Shopping Center 11.25% December 17, 1996 Interest $ 3,100 $ 3,100 -
Durham, North Carolina monthly,
Phase I principal
at maturity
Phase II 11.25% December 17, 1996 Interest $ 1,235 $ 1,235 -
monthly,
principal
at maturity $ 9,185 $ 9,185 -
1995 1994 1993
Balance at beginning of year $ 9,185 $ 9,185 $ 9,185
Reductions during year:
Repayments - - -
Balance at close of year $ 9,185 $ 9,185 $ 9,185