UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1998 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 0-13402 Brauvin Real Estate Fund L.P. 4 (Name of small business issuer as specified in its charter) Delaware 36-3304339 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 30 North LaSalle Street, Chicago, Illinois 60602 (Address of principal executive offices) (Zip Code) (312) 759-7660 (Issuer's telephone number) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: Limited Partnership Interests (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . INDEX PART I Page Item 1. Consolidated Financial Statements. . . . . . . . . . . . . . 3 Consolidated Balance Sheet at September 30, 1998 . . . . . . 4 Consolidated Statements of Operations for the nine months ended September 30, 1998 and 1997. . . . . . . 5 Consolidated Statements of Operations for the three months ended September 30, 1998 and 1997 . . . . . . 6 Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997. . . . . . . 7 Notes to Consolidated Financial Statements . . . . . . . . . 8 Item 2. Management's Discussion and Analysis or Plan of Operation . . . . . . . . . . . . . . . . . . .18 PART II Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . .24 Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . .24 Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . .24 Item 4. Submission of Matters to Vote of Security Holders. . . . . . . . . . . . . . . . . . . . . . . . . .24 Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . .24 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . .24 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 PART I - FINANCIAL INFORMATION ITEM 1. Consolidated Financial Statements The following Consolidated Balance Sheet as of September 30, 1998, Consolidated Statements of Operations for the nine months ended September 30, 1998 and 1997, Consolidated Statements of Operations for the three months ended September 30, 1998 and 1997, and Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997 for Brauvin Real Estate Fund L.P. 4 (the "Partnership") are unaudited but reflect, in the opinion of the management, all adjustments necessary to present fairly the information required. All such adjustments are of a normal recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Partnership's 1997 Annual Report on Form 10-KSB. CONSOLIDATED BALANCE SHEET (Unaudited) September 30, 1998 ASSETS Investment in real estate: Land $ 3,710,168 Buildings and improvements 14,556,229 18,266,397 Less accumulated depreciation (5,615,585) Net investment in real estate 12,650,812 Investment in Sabal Palm Joint Venture (Note 5) 814,405 Cash and cash equivalents 790,023 Rent receivable (net of allowance of $154,000) 259,172 Escrow deposits 41,167 Other assets 44,585 Total Assets $14,600,164 LIABILITIES AND PARTNERS' CAPITAL LIABILITIES: Mortgage notes payable (Note 3) $11,075,081 Accounts payable and accrued expenses 294,764 Tenant security deposits 70,693 Due to affiliates 54,590 Total Liabilities 11,495,128 MINORITY INTEREST IN STRAWBERRY JOINT VENTURE (153,731) PARTNERS' CAPITAL: General Partners (27,615) Limited Partners (9,550 limited partnership units issued and outstanding) 3,286,382 Total Partners' Capital 3,258,767 Total Liabilities and Partners' Capital $14,600,164 See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF OPERATIONS For the nine months ended September 30, (Unaudited) 1998 1997 INCOME Rental $1,339,388 $1,337,552 Interest 21,199 28,366 Other, primarily tenant expense reimbursements 261,170 291,717 Total income 1,621,757 1,657,635 EXPENSES Interest 808,522 733,632 Depreciation 312,527 331,210 Real estate taxes 195,626 186,232 Repairs and maintenance 43,565 80,684 Management fees (Note 4) 91,847 92,894 Other property operating 82,497 83,156 Provision for impairment 1,564,101 -- General and administrative 224,002 240,463 Total expenses 3,322,687 1,748,271 Loss before minority and equity interests in joint ventures (1,700,930) (90,636) Minority interest's share of Strawberry Joint Venture's net loss 689,947 21,171 Equity interest in Sabal Palm Joint Venture's net income 44,335 17,559 Net loss $(966,648) $ (51,906) Net loss allocated to: General Partners $ (9,666) $ (519) Limited Partners $(956,982) $ (51,387) Net loss per Limited Partnership Interest (9,550 units outstanding) $ (100.21) $ (5.38) See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF OPERATIONS For the three months ended September 30, (Unaudited) 1998 1997 INCOME Rental $463,611 $444,876 Interest 6,811 9,709 Other, primarily tenant expense reimbursements 86,593 86,962 Total income 557,015 541,547 EXPENSES Interest 267,684 253,905 Depreciation 101,598 109,852 Real estate taxes 55,232 63,327 Repairs and maintenance 9,032 61,615 Management fees (Note 4) 32,597 25,865 Other property operating 24,114 31,503 General and administrative 32,369 83,992 Total expenses 522,626 630,059 Income(loss)before minority and equity interests in joint ventures 34,389 (88,512) Minority interest's share of Strawberry Joint Venture's net loss 6,031 8,256 Equity interest in Sabal Palm Joint Venture's net loss (5,876) (16,658) Net income (loss) $ 34,544 $(96,914) Net income(loss)allocated to: General Partners $ 345 $ (969) Limited Partners $ 34,199 $(95,945) Net income (loss)per Limited Partnership Interest (9,550 units outstanding) $ 3.58 $ (10.05) See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months September 30, (Unaudited) 1998 1997 Cash Flows From Operating Activities: Net loss $(966,648) $(51,906) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 312,527 331,210 Provision for impairment 1,564,101 -- Provision for doubtful accounts 47,723 43,887 Minority interest's share of Strawberry Joint Venture's net loss (689,947) (21,171) Equity interest in Sabal Palm Joint Venture net income (44,335) (17,559) Change in rent receivable (107,556) (88,952) Change in escrow deposits (34,415) (31,935) Change in other assets (1,648) 863 Change in accounts payable and accrued expenses 73,259 87,051 Change in due to affiliates 7,849 690 Change in tenant security deposits 28,318 (3,622) Net cash provided by operating activities 189,228 248,556 Cash Flows From Investing Activities: Capital expenditures (58,080) (6,902) Distribution from Sabal Palm Venture 79,900 13,160 Net cash provided by investing activities 21,820 6,258 Cash Flows From Financing Activities: Repayment of mortgage notes payable (262,255) (1,152,069) Loan fees -- (33,005) Proceeds from mortgage note payable -- 875,000 Net cash used in financing activities (262,255) (310,074) Net decrease in cash and cash equivalents (51,207) (55,260) Cash and cash equivalents at beginning of year 841,230 844,598 Cash and cash equivalents at end of period $790,023 $ 789,338 Supplemental disclosure of cash flow information: Cash paid for interest $791,075 $ 726,310 See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Brauvin Real Estate Fund L.P. 4 (the "Partnership") is a Delaware limited partnership organized for the purpose of acquiring, operating, holding for investment and disposing of existing office buildings, medical office centers, shopping centers and industrial and retail commercial buildings of a general purpose nature, all in metropolitan areas. The General Partners of the Partnership are Brauvin Ventures, Inc. and Jerome J. Brault. Mr. Cezar M. Froelich resigned as a director of the corporate general partner in December 1994, and resigned as an Individual General Partner effective 90 days from August 14, 1997. Brauvin Ventures, Inc. is owned by A.G.E. Realty Corporation Inc.(50%), and by Messrs. Brault (beneficially) (25%) and Froelich (25%). A. G. Edwards & Sons, Inc. and Brauvin Securities, Inc., affiliates of the General Partners, were the selling agents of the Partnership. The Partnership is managed by an affiliate of the General Partners. The Partnership was formed on April 30, 1984 and filed a Registration Statement on Form S-11 with the Securities and Exchange Commission which became effective on February 16, 1984. The sale of the minimum of $1,200,000 of limited partnership interests of the Partnership (the "Units") necessary for the Partnership to commence operations was achieved on April 30, 1984. The Partnership's offering closed on December 31, 1984. A total of $9,550,000 of Units were subscribed for and issued between February 16, 1984 and December 31, 1984 pursuant to the Partnership's public offering. The Partnership has acquired directly or through joint ventures the land and buildings underlying Fortune Professional Building, Raleigh Springs Marketplace, Strawberry Fields Shopping Center and Sabal Palm Shopping Center. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Management's 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Accounting Method The accompanying consolidated financial statements have been prepared using the accrual method of accounting. Rental Income Rental income is recognized on a straight line basis over the life of the related leases. Differences between rental income earned and amounts due per the respective lease agreements are credited or charged, as applicable, to deferred rent receivable. Federal Income Taxes Under the provisions of the Internal Revenue Code, the Partnership's income and losses are reportable by the partners on their respective income tax returns. Accordingly, no provision is made for Federal income taxes in the consolidated financial statements. Consolidation of Joint Venture Partnership The Partnership owns a 58% equity interest in an affiliated joint venture ("Strawberry Joint Venture") which acquired Strawberry Fields Shopping Center ("Strawberry Fields"). The accompanying consolidated financial statements have consolidated 100% of the assets, liabilities, operations and partners' capital of Strawberry Joint Venture. The minority interest in the consolidated joint venture is adjusted for the joint venture partner's share of income or loss and any cash contributions or cash disbursements from the joint venture partner, Brauvin Real Estate Fund L.P. 5 ("BREF 5"). All intercompany items and transactions have been eliminated. Investment in Joint Venture Partnership The Partnership owns a 47% equity interest in the Sabal Palm Joint Venture (see Note 5). Sabal Palm is reported as an investment in an affiliated joint venture. The accompanying financial statements include the investment in Sabal Palm Joint Venture using the equity method of accounting. Investment in Real Estate The Partnership's rental properties are stated at cost including acquisition costs, leasing commissions, tenant improvements and net of provision for impairment. Depreciation and amortization are recorded on a straight-line basis over the estimated economic lives of the properties, which approximate 38 years, and the term of the applicable leases, respectively. All of the Partnership's properties are subject to liens under first mortgages (see Note 3). In 1995, the Partnership adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121). In conjunction with the adoption of SFAS 121, the Partnership performed an analysis of its long-lived assets, and the Partnership's management determined that there were no events or changes in circumstances that indicated that the carrying amount of the assets may not be recoverable at September 30, 1998 and December 31, 1997, except as disclosed below. In the second quarter of 1998, the Partnership recorded an impairment of $1,564,101 related to an other than temporary decline in the value of real estate for Strawberry Fields. This allowance has been allocated to land and building based on the original acquisition percentages. Cash and Cash Equivalents Cash and cash equivalents include all highly liquid debt instruments with an original maturity within three months from date of purchase. Estimated Fair Value of Financial Instruments Disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosure About Fair Value of Financial Instruments." The estimated fair value amounts have been determined by using available market information and appropriate valuation methodologies. However, considerable judgement is necessarily required in interpreting market data to develop estimates of fair value. The fair value estimates presented herein are based on information available to management as of September 30, 1998, but may not necessarily be indicative of the amounts that the Partnership could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The carrying amounts of the following items are reasonable estimates of fair value: cash and cash equivalents; rent receivable; escrow deposits; accounts payable and accrued expenses; and due to affiliates. (2) PARTNERSHIP AGREEMENT The Partnership Agreement (the "Agreement") provides that 99% of the net profits and losses from operations of the Partnership for each fiscal year shall be allocated to the Limited Partners and 1% of net profits and losses from operations shall be allocated to the General Partners. The net profit of the Partnership from the sale or other disposition of a Partnership property shall be allocated as follows: first, there shall be allocated to the General Partners the greater of: (i) 1% of such net profits; or (ii) the amount distributable to the General Partners as Net Sale Proceeds from such sale or other disposition in accordance with paragraph 2, SECTION K of the Agreement; and second, all remaining profits shall be allocated to the Limited Partners. The net loss of the Partnership from any sale or other disposition of a Partnership property shall be allocated as follows: 99% of such net loss shall be allocated to the Limited Partners and 1% of such net loss shall be allocated to the General Partners. The Agreement provides that distributions of Operating Cash Flow, as defined in the Agreement, shall be distributed 99% to the Limited Partners and 1% to the General Partners. The receipt by the General Partners of such 1% of Operating Cash Flow shall be subordinated to the receipt by the Limited Partners of Operating Cash Flow equal to a 10% per annum, cumulative, non-compounded return on Adjusted Investment (the "Preferential Distribution"), as such term is defined in the Agreement. In the event the full Preferential Distribution is not made in any year (herein referred to as a "Preferential Distribution Deficiency") and Operating Cash Flow is available in following years in excess of the Preferential Distribution for said year, then the Limited Partners shall be paid such excess Operating Cash Flow until they have been paid any unpaid Preferential Distribution Deficiency from prior years. Net Sale Proceeds, as defined in the Agreement, received by the Partnership shall be distributed as follows: (a) first, to the Limited Partners until such time as the Limited Partners have been paid an amount equal to the amount of their Adjusted Investment; (b) second, to the Limited Partners until such time as the Limited Partners have been paid an amount equal to any unpaid Preferential Distribution Deficiency; and (c) third, 85% of any remaining Net Sale Proceeds to the Limited Partners, and the remaining 15% of the Net Sale Proceeds to the General Partners. At September 30, 1998, the Preferential Distribution Deficiency equaled $11,113,815. (3) MORTGAGE NOTES PAYABLE Mortgage notes payable at September 30, 1998 consist of the following: Interest Date 1998 Rate Due Raleigh Springs Marketplace $4,780,325 (a)10% 10/99 Fortune Professional Building 802,070 (b) 06/99 Strawberry Fields Shopping Center 5,492,686 (c)9% 12/98 $11,075,081 Maturities of the mortgage notes payable are as follows: 1998 $ 5,523,593 1999 5,551,488 $11,075,081 Raleigh Springs Marketplace ("Raleigh"), Fortune Professional Building ("Fortune") and Strawberry Fields Shopping Center ("Strawberry Fields") serve as collateral under the respective nonrecourse debt obligations. (a) Monthly principal and interest payments are based on a 25- year amortization schedule. The carrying value of Raleigh at September 30, 1998 was approximately $5,714,000. (b) Prior to June 26, 1997, the Partnership made monthly payments of interest and principal payments based upon a: (i) 25-year amortization schedule plus 100% of Available Cash Flow from July 1, 1992 through June 1, 1993; and (ii) 15-year amortization schedule plus 50% of Available Cash Flow from July 1, 1993 through July 1, 1997. The lender had the option to accelerate the loan maturity July 1 of each year, if the property was not: (i) in good condition and repair; (ii) occupied at a rate that was equal to the prevailing occupancy rate for similar properties in the same locale; and (iii) leased at rental rates which were at least 90% of the prevailing rate for similar properties in the same locale. The Partnership was required to make a balloon mortgage payment in July 1997 of approximately $934,000. On June 26, 1997, the Partnership obtained a first mortgage loan in the amount of $875,000 secured by Fortune, from American National Bank and Trust Company (the "Replacement Loan"). In connection with the funding of the Replacement Loan, the Partnership was required to reduce the principal balance of the original loan by approximately $59,000, out of cash and cash equivalents, to release the original mortgage loan and pay loan fees of approximately $33,000. The Replacement Loan has a floating interest rate based on American National Bank's prime rate, which at September 30, 1998 was 8.5%. Principal is being amortized based on a 15-year amortization period and is payable with interest on a monthly basis. The carrying value of Fortune at September 30, 1998 was approximately $1,632,000. (c) In February 1993, the Partnership and Strawberry Joint Venture, finalized a refinancing of the first mortgage loan (the "Refinancing") on Strawberry Fields with the lender. The Refinancing became effective retroactive to October 1992. Due to the Refinancing, the interest rate was reduced to 9% with monthly payments of interest only from October 1992 through November 1995. The Strawberry Joint Venture has the option to extend the term of the loan and make monthly payments of principal and interest from December 1995 through November 1998, if it is not in default of the terms of the Refinancing. On September 18, 1995, the Strawberry Joint Venture notified Lutheran Brotherhood (the "Strawberry Lender") that it would exercise its option to extend the term of the Strawberry Fields loan from the original maturity of November 1, 1995 to December 1, 1998. The terms of the extension called for all provisions of the loan to remain the same except for an additional monthly principal payment of $12,500. Effective November 1, 1995, the Strawberry Joint Venture and the Strawberry Lender agreed to modify the loan by reducing the interest rate to 7.5% for November 1, 1995 through October 31, 1997 and by reducing the monthly principal payment to $12,000. Commencing November 1, 1997 and through the maturity date, December 1, 1998, the interest rate reverted to the original 9.0% rate. Effective October 1, 1998, the Strawberry Joint Venture and the Strawberry Lender agreed to modify and extend the first mortgage loan. As of October 1, 1998 and through the extended maturity date, December 1, 1999, the interest rate has been reduced from 9% to 7% with principal amortization changed from a ten year period to an eighteen year period. The carrying value of Strawberry Fields at September 30, 1998 was approximately $5,305,000. The Partnership is required to make balloon mortgage payments for Fortune in the amount of $758,300 on June 30, 1999 and for Strawberry Fields in the amount of $5,307,000 at December 1, 1999. (4) TRANSACTIONS WITH AFFILIATES Fees and other expenses paid or payable to the General Partners or their affiliates for the nine months ended September 30, 1998 and 1997 were as follows: 1998 1997 Management fees $91,847 $80,785 Reimbursable office expenses 74,175 85,338 Legal fees -- 270 The Partnership believes the amounts paid to affiliates are representative of amounts which would have been paid to independent parties for similar services. The Partnership had made all payments to affiliates, except for $11,981 for management fees and $6,909 for legal fees, as of September 30, 1998. An amount of $35,700 was due to an affiliate at September 30, 1998, representing an advance made from BREF 5. (5) EQUITY INVESTMENT The Partnership owns a 47% interest in Sabal Palm Joint Venture ("Sabal Palm") and accounts for its investment under the equity method. The following are condensed financial statements for Sabal Palm: September 30, 1998 Land, building and personal property, net $4,749,958 Other assets 270,072 $5,020,030 Mortgage note payable $3,154,560 Other liabilities 129,024 3,283,584 Partners' capital 1,736,446 $5,020,030 For the nine months ended September 30, September 30, 1998 1997 Rental income $548,984 $513,244 Other income 59,450 42,216 608,434 555,460 Mortgage and other interest 226,535 230,746 Depreciation 102,391 101,946 Operating and administrative expenses 185,179 185,407 514,105 518,099 Net income $ 94,329 $ 37,361 Sabal Palm was required to make a balloon mortgage payment in February 1997. Prior to the scheduled maturity of the then existing mortgage obligation, the lender granted Sabal Palm an extension until April 1, 1997. On March 31, 1997, Sabal Palm obtained a new first mortgage loan in the amount of $3,200,000 (the "First Mortgage Loan") secured by its real estate, from NationsBanc Mortgage Capital Corporation. The First Mortgage Loan bears interest at the rate of 8.93% per annum, is amortized over a 25- year period, requires monthly payments of principal and interest of approximately $26,700 and matures on March 26, 2002. A portion of the proceeds of the First Mortgage Loan, approximately $3,077,000, was used to retire Sabal Palm's existing mortgage from Lincoln National Pension Insurance Company. The outstanding mortgage balance encumbered by the property was $3,154,560 at September 30, 1998. In the first quarter of 1998, the Partnership became aware that both Winn-Dixie and Walgreens may vacate their respective spaces at Sabal Palm prior to their lease termination dates. In the second quarter of 1998, Winn-Dixie vacated its space at the center. Walgreens has not given official notice that they will vacate their space prior to the lease termination, the General Partners, however, believe that there is a likelihood that this tenant will vacate. The General Partners are working to determine the most beneficial steps to be taken by the Partnership. Winn-Dixie remains liable for rental payments under its lease at Sable Palm until April 2005. ITEM 2. Management's Discussion and Analysis or Plan of Operation. General Certain statements in this Quarterly Report that are not historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Without limiting the foregoing, words such as "anticipates," "expects," "intends," "plans" and similar expressions are intended to identify forward-looking statements. These statements are subject to a number of risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. The Partnership undertakes no obligation to update these forward-looking statements to reflect future events or circumstances. Year 2000 In 1997, the Partnership initiated the conversion from its existing accounting software to a program that is year 2000 compliant. Management has determined that the year 2000 issue will not pose significant operational problems for its computer system. All costs associated with this conversion are being expensed as incurred, and are not material. Also in 1997, management of the Partnership initiated formal communications with all of its significant third party vendors, service providers and financial institutions to determine the extent to which the Partnership is vulnerable to those third parties failure to remedy their own year 2000 issue. There can be no guarantee that the systems of these third parties will be timely converted and would not have an adverse effect on the Partnership. Liquidity and Capital Resources The Partnership intends to satisfy its short-term liquidity needs through cash flow from the properties. Long-term liquidity needs are expected to be satisfied through refinancing or modification of the mortgages at more favorable interest rates. Fortune was required to make a balloon mortgage payment in July 1997 of approximately $934,000. On June 26, 1997, the Partnership obtained the Replacement Loan in the amount of $875,000 secured by Fortune, from American National Bank and Trust Company. In connection with the funding of the Replacement Loan, the Partnership was required to reduce the outstanding principal balance of the original mortgage loan by approximately $59,000, out of cash and cash equivalents, to release the original mortgage loan and pay loan fees of approximately $24,600. The Replacement Loan has a floating interest rate based on American National Bank's prime rate, which at September 30, 1998 was 8.5%. Principal is being amortized based on a 15-year amortization period and is payable with interest on a monthly basis. The Replacement Loan matures on June 30, 1999 at which time a balloon mortgage payment in the amount of approximately $758,300 will be due. As a result of a recent decline in the Albuquerque, New Mexico office market, the General Partners have decided not to continue to market this property for sale at this time. The occupancy level at Fortune at September 30, 1998 was 73%, compared to 60% at December 31, 1997 and 77% at September 30, 1997. Fortune had a negative cash flow for the nine months ended September 30, 1998. The Partnership is currently working to improve the occupancy rate at Fortune. Raleigh Springs has continued to generate a slight positive operating cash flow despite losing T.J. Maxx, an anchor tenant, which occupied 21% of the total space. In November 1996, Methodist Hospital entered into a lease for approximately 9,500 square feet. The remaining space is currently being marketed both regionally and nationally. The occupancy level at Raleigh at September 30, 1998 was 95%, compared to 78% at December 31, 1997 and 78% at September 30, 1997. Toys R US, the major tenant, at Raleigh Springs has indicated to the General Partners that this store is one of ninety that has been identified for possible disposition or sublease. The Toys R US lease expires in October 2017 and in the event that they decide to vacate the space they will continue to be liable for all rental charges through the lease expiration. However, Toys R US still continues to operate this store and is current in all its rental obligations. Because of the uncertainty of the status, the General Partners are considering a number of different alternatives for this space. The occupancy level at Strawberry Fields at September 30, 1998 was 87%, compared to 89% at December 31, 1997 and 90% at September 30, 1997. Strawberry Fields had a negative cash flow for the nine months ended September 30, 1998. On September 18, 1995, the Strawberry Joint Venture notified the Strawberry Lender that it would exercise its option to extend the term of the Strawberry Fields loan from the original maturity of November 1, 1995 to December 1, 1998. The terms of the extension called for all provisions of the loan to remain the same except for an additional monthly principal payment of $12,500. Effective November 1, 1995, the Strawberry Joint Venture and the Strawberry Lender agreed to modify the loan by reducing the interest rate to 7.5% for November 1, 1995 through October 31, 1997 and by reducing the monthly principal payment to $12,000. As of November 1, 1997 and through the maturity date, December 1, 1998, the interest rate reverted to the original 9.0% rate. Effective October 1, 1998, the Strawberry Joint Venture and the Strawberry Lender agreed to modify and extend the first mortgage loan. As of October 1, 1998 and through the extended maturity date, December 1, 1999, the interest rate has been reduced from 9% to 7% with principal amortization changed from a ten year period to an eighteen year period. In the second quarter of 1998, the Partnership recorded an impairment of $1,564,101 related to an other than temporary decline in the value of real estate for the Strawberry Fields property. This allowance has been allocated to land and building based on the original acquisition percentages. At Sabal Palm, the Partnership and its joint venture partner are working to improve the occupancy level of the shopping center which stood at 96% as of September 30, 1998. Although the Sabal Palm retail market appears to be over built, the occupancy level of the building has stayed relatively constant and it has generated positive cash flow since the joint venture acquired the property in 1986. In the first quarter of 1998, the Partnership became aware that both Winn-Dixie and Walgreens may vacate their respective spaces at Sabal Palm prior to their lease termination dates. In the second quarter of 1998, Winn-Dixie vacated its space at the center. Walgreens has not given official notice that they will vacate the space prior to their lease termination, the General Partners, however, believe that there is a likelihood that this tenant will vacate. The General Partners are working to determine the most beneficial steps to be taken by the Partnership. Winn-Dixie remains liable for rental payments under its lease at Sable Palm until April 2005. Sabal Palm was required to make a balloon mortgage payment in February 1997. Prior to the scheduled maturity of the First Mortgage Loan, the lender granted Sabal Palm an extension until April 1, 1997. On March 31, 1997, Sabal Palm obtained a first mortgage loan in the amount of $3,200,000 (the "First Mortgage Loan") secured by its real estate, from NationsBanc Mortgage Capital Corporation. The First Mortgage Loan bears interest at the rate of 8.93% per annum, is amortized over a 25-year period, requires monthly payments of principal and interest of approximately $26,700 and matures on March 26, 2002. A portion of the proceeds of the First Mortgage Loan, approximately $3,077,000, was used to retire Sabal Palm's existing mortgage from Lincoln National Pension Insurance Company. The outstanding mortgage balance encumbered by the property was $3,154,560 at September 30, 1998. The Partnership has engaged a nationally known appraisal firm to value the Partnership's assets. Additionally, this firm will assist the General Partners in determining the appropriate method and timing for the disposition of the Partnership's assets. The appraisal of the assets is expected to be completed by the end of the calendar year. The General Partners expect to distribute proceeds from operations, if any, and from the sale of real estate to Limited Partners in a manner that is consistent with the investment objectives of the Partnership. Management of the Partnership believes that cash needs may arise from time to time which will have the effect of reducing distributions to Limited Partners to amounts less than would be available from refinancings or sale proceeds. These cash needs include, among other things, maintenance of working capital reserves in compliance with the Agreement as well as payments for major repairs, tenant improvements and leasing commissions in support of real estate operations. Results of Operations - Nine months Ended September 30, 1998 and 1997 (Amounts rounded to 000's) The Partnership generated a net loss of $967,000 for the nine months ended September 30, 1998 as compared to net loss of $52,000 for the same nine month period in 1997. The $915,000 decrease was primarily due to a $1,564,000 increase in the provision for impairment at Strawberry. Partially offsetting this increase was the minority interest's share of the Strawberry Joint Venture's net loss associated with the provision for impairment in the amount of approximately $657,000. Total income for the nine months ended September 30, 1998 was $1,622,000 as compared to $1,658,000 for the same nine month period in 1997, a decrease of $36,000. The $36,000 decrease resulted from a decrease of $15,000 in deferred rental income at Strawberry, a decrease of $57,000 in other income (tenant reimbursements) at Raleigh, and a decrease of $43,000 in rental income at Fortune. The decrease in rental income at Fortune was the result of a decrease in the occupancy rate to 73% from 77%, respectively, at September 30, 1998 and 1997. Partially offsetting the decrease in total income were increases of $31,000 in other income at Strawberry and $41,000 in rental income at Raleigh. The increase in rental income at Raleigh resulted from an increase in the occupancy rate to 95% from 78%, respectively, at September 30, 1998 and 1997. For the nine months ended September 30, 1998 total expenses were $3,323,000 as compared to $1,748,000 for the same nine month period in 1997, an increase of $1,575,000. This increase in total expenses was primarily a result of increases in the provision for impairment and interest expense. The provision for impairment at Strawberry was $1,564,000 for the nine months ended September 30, 1998 as compared to $0 for the same nine month period in 1997, an increase of $1,564,000. Interest expense was $809,000 for the nine months ended September 30, 1998 as compared to $734,000 for the same nine month period in 1997, an increase of $75,000. This increase was caused primarily by the increase in the interest rate at Fortune from 3% in 1997 to 8.5% in 1998. In addition, interest expense also increased as a result of the interest rate for Strawberry's mortgage loan reverting to 9.0% from 7.5% in November 1997. Partially offsetting the increase in total expenses were decreases of $34,000 in roof repair expense and $39,000 in bad debt expense at Raleigh. Results of Operations - Three Months Ended September 30, 1998 and 1997 (Amounts rounded to 000's) The Partnership generated a net income of $35,000 for the three months ended September 30, 1998 as compared to net loss of $97,000 for the same three month period in 1997. Total income for the three months ended September 30, 1998 was $557,000 as compared to $542,000 for the same three month period in 1997, an increase of $15,000. The $15,000 increase resulted from an increase of $15,000 in rental income at Raleigh. The increase in rental income at Raleigh resulted from an increase in the occupancy rate to 95% from 78%, respectively, at September 30, 1998 and 1997. For the three months ended September 30, 1998 total expenses were $523,000 as compared to $630,000 for the same three month period in 1997, a decrease of $107,000. This decrease in total expenses resulted from decreases of $43,000 in roof repair expense and $66,000 in bad debt expense at Raleigh. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings. None. ITEM 2. Changes in Securities. None. ITEM 3. Defaults Upon Senior Securities. None. ITEM 4. Submission of Matters to a Vote of Security Holders. None. ITEM 5. Other Information. None. ITEM 6. Exhibits and Reports On Form 8-K. Exhibit 27. Financial Data Schedule. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BY: Brauvin Ventures, Inc. Corporate General Partner of Brauvin Real Estate Fund L.P. 4 BY: /s/ Jerome J. Brault Jerome J. Brault Chairman of the Board of Directors and President DATE: November 13, 1998 BY: /s/ Thomas E. Murphy Thomas E. Murphy Chief Financial Officer and Treasurer DATE: November 13, 1998