SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
(Amendment No. )
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[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule
14a-12
Decade Companies Income Properties A Limited Partnership
(Name of Registrant as Specified In Its Charter)
__________________________________
(Name of Person(s) Filing Proxy Statement,
if Other Than Registrant)
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[Partnership Letterhead]
March 31, 2003
Re: Decade Companies Income Properties ("DCIP")
Dear Limited Partner:
Enclosed you will find a proxy statement relating to (1) the
approval of certain actions already taken by the General Partner
and investments made by DCIP and (2) the adoption of certain
proposed amendments to the DCIP Partnership Agreement. We request
your vote for both of these matters.
The approval and proposed amendments are designed to authorize DCIP
to set aside proceeds generated from the January 31, 2002 sale of
one of the Partnership's properties, The Meadows II Apartments, to
invest some of the available cash in an entity that purchases or
issues mortgage notes or other debt instruments in connection with
real estate owned by DCIP. The General Partner has already taken
such actions and seeks your approval of this investment. The
proposed amendments will amend the Partnership Agreement and affect
the holders as described in the following proxy statement, which
you should read carefully.
The General Partner recommends the ratification of the approval and
the adoption of the proposed amendments because they provide the
opportunity to invest its funds in additional equity investments
and approve steps and actions taken by the General Partner to
better protect an investment of Partnership funds. Please review
the risk factors beginning on page 16 before voting.
The enclosed proxy statement contains a more complete description
of the terms of the approval and proposed amendments and other
important information, including any possible negative effects the
approval and proposed amendments may have on limited partners. You
are urged to read the proxy statement carefully.
Voting only takes a few minutes please respond promptly. The
General Partner proposes these amendments to the Partnership
Agreement and recommends that you vote for them.
Please complete and return your Consents in the enclosed self-
addressed postage paid envelope as soon as possible to DCIP.
Very truly yours,
/s/ Michael Sweet
Michael Sweet
Partnership Manager
MS
Enclosure
DECADE COMPANIES INCOME PROPERTIES, A LIMITED PARTNERSHIP
PROXY STATEMENT
INTRODUCTION
This Proxy Statement is being distributed on or about March 31,
2003 in connection with (1) the approval of certain actions already
taken by the General Partner described in this Proxy Statement (the
"Approval"), and (2) the adoption of certain proposed amendments to
Sections 3.49, 7.2, 7.3 and 7.4 to Decade Companies Income
Properties' (the "Partnership" or "DCIP") Partnership Agreement
(the "Proposed Amendments"). This Proxy Statement is being sent to
all limited partners of the Partnership as of March 31, 2003. As
of that date, there were approximately 10,261.51 Partnership
Interests ("Interests") outstanding.
The Approval and the Proposed Amendments are designed to ratify the
General Partner's action of investing cash generated from the
January 31, 2002 sale of The Meadows II Apartments ("The Meadows
II") into a limited liability company that purchases or issues
mortgage notes or other debt instruments in connection with real
estate owned by DCIP and to allow DCIP to make similar investments
in the future. If adopted, the proposed amendments will amend the
Partnership Agreement and affect the limited partners as described
elsewhere in this Proxy Statement, which you should read carefully.
The General Partner requests you vote in favor of both of these
proposals by marking the box adjacent to "For" on the Consent form
attached to this Proxy Statement.
The Partnership requests that you complete and return the enclosed
Consent (an extra copy is enclosed) at your first convenience to:
Decade Companies Income Properties A Limited Partnership
N19 W24130 Riverwood Drive, Suite 100
Waukesha, WI 53188
VOTING MATTERS
The Approval and Proposed Amendments will become immediately
effective once the Partnership receives Consents voting in favor by
a majority of the then outstanding Interests (and not revoked by
holders). The enclosed Consent is the ballot you must use to cast
your vote. You should mark the box adjacent to each proposal
indicating your vote "For" or "Against" the Approval and Proposed
Amendments or desire to "Abstain" from the vote. If the Approval
and Proposed Amendments are adopted, we will notify you.
Interests represented by duly executed Consents will be voted or
not voted in accordance with the instructions contained on the
Consents. If no instruction is provided for on your executed
Consent, your Interests will be voted in favor of the Approval and
Proposed Amendments. The cost of this solicitation of Consents is
being borne by the Partnership.
This solicitation of Consents will expire at 11:59 p.m. Central
Time on the earlier to occur of the following dates (the
"Expiration Date"): (i) April 30, 2003 or such later date to which
the Partnership extends the solicitation; or (ii) the date upon
which the Partnership receives Consents totaling a majority of the
then outstanding Interests.
Under Section 14.1 of the Partnership's Partnership Agreement,
approval of both matters requires the affirmative vote of a
majority of Interests and consent of the General Partner (which has
been received). As of March 31, 2003, approximately 428 limited
partners hold 10,261.51 Interests, and, therefore, the affirmative
vote of approximately 5,131 Interests is required. Jeffrey
Keierleber, an individual General Partner in Decade Companies,
directly and indirectly, currently holds 6,639.067 Interests
(approximately 64.7% of the outstanding Interests) and intends to
vote for adoption of the Proposed Amendments and the Approval. Mr.
Keierleber holds enough Interests to provide for an affirmative
vote of a majority of the Interests and upon his execution of the
Consent, the Approval will be ratified and the Proposed Amendments
will be adopted. Michael G. Sweet, an officer in Decade 80, Inc.,
a General Partner of Decade Companies, and Partnership Manager,
holds 8.05 Interests and also intends to vote for the Proposed
Amendments. In the last two years, Jeffrey Keierleber has
purchased 3,876.267 Interests and Michael G. Sweet has not
purchased any Interests. Neither Jeffrey Keierleber nor Michael G.
Sweet has sold any Interests in the last two years and neither are
a party to any contract, arrangement or understanding with respect
to any Interests.
Each limited partner is entitled to one vote for each Interest held
of record by such holder. No meeting of the limited partners is
required or will be held and the General Partner intends to accept
Consents until the Expiration Date. The Partnership is not
required to and has not had annual meetings of the limited
partners.
All questions as to the validity, form, eligibility (including time
of receipt), acceptance and revocation of a Consent, and the
interpretation of the terms and conditions of this solicitation of
Consents, will be determined by the General Partner, whose
determination will be final and binding.
REVOCABILITY OF CONSENT
You may revoke your Consent at any time before the Expiration Date
by sending notice of your intent to revoke your Consent to the
Partnership at:
Decade Companies Income Properties A Limited Partnership
N19 W24130 Riverwood Drive, Suite 100
Waukesha, WI 53188-1131
DISSENTERS' RIGHTS
There are no dissenters' rights for limited partners who disagree
with the adoption of the Proposed Amendments or who do not wish to
ratify the Approval.
BACKGROUND
Partnership Opportunity to Purchase Properties
On January 31, 2002, the Partnership sold The Meadows II. Under
Section 1031 of the Internal Revenue Code (the "Section 1031
Exchange Rule"), the Partnership had until July 30, 2002 to
reinvest the proceeds of that sale into another piece of real
property. Otherwise, the partners would have to pay federal income
tax on the gain realized from the sale of The Meadows II. The
General Partner then began a search for a replacement property.
The General Partner identified an opportunity to purchase two
pieces of real estate with office buildings consisting of
approximately 166,000 (total combined) rentable square feet,
located in Florida.
The first of these buildings, The Spectrum Building ("Spectrum"),
is located at 900 Winderly Place in the Maitland Center office park
in Maitland, Orange County, Florida. Spectrum is a two-story,
125,098 square foot (with approximately 113,000 rentable square
feet) atrium-style office building, which was built in 1986. The
land area is approximately 9.28 acres and consists of approximately
409 grade level parking spaces. The Maitland Center office park is
adjacent to Interstate 4, a major freeway. Occupancy was
approximately 41% on July 30, 2002, and it varies from time to
time, often significantly. Spectrum was owned by ABR Spectrum,
Ltd. ("ABR Spectrum"), a Florida limited partnership, an
unaffiliated party. Spectrum was independently appraised at an
estimated market value of $12,050,000 as of July 1, 1997.
The second building, Plymouth Plaza ("Plymouth"), is located at
26750 U.S. 19 North in the North Pinellas office submarket in
Clearwater, Pinellas County, Florida. Plymouth is a five-story,
53,723 rentable square foot office building. The building includes
a 354 car, five level parking garage and 47 surface spaces. The
property has access from Countryside Boulevard and U.S. 19 service
road. Occupancy was approximately 79% on July 30, 2002, and it
varies from time to time. Plymouth was owned by ABR Plymouth Plaza,
Ltd. ("ABR Plymouth"), a Florida limited partnership, an
unaffiliated party. Plymouth was independently appraised at an
estimated market value of $4,800,000 as of July 1, 1997.
Spectrum and Plymouth are hereinafter collectively referred to as
the "Properties." ABR Spectrum and ABR Plymouth are hereinafter
collectively referred to as the "Sellers." There is no material
relationship between the Sellers and the Partnership or any of the
Partnership's affiliates, any general partner, director or officer
of the Partnership, or any associate of any such general partner,
director or officer. More information on these properties is
included in our securities filings.
The General Partner believed that the Partnership would be able to
purchase the Properties on very attractive terms. The General
Partner therefore began to take steps to purchase the Properties so
that the Partnership would be able to reinvest the proceeds from
the sale of The Meadows II by the deadline imposed by the tax laws.
General Partner's Decision to Purchase the Properties
Both Properties were encumbered by a nonrecourse first mortgage
(the "Mortgage"), which secured a note in the amount of
approximately $10.08 million (the "Note"). The Note contained some
unattractive terms, as described more fully below, one of which was
a provision that accelerated payment of all amounts due under the
Note in the event the Properties were transferred to a third party.
The General Partner thus needed to obtain the consent of the
mortgage holder/lender (the "Lender") in order to purchase the
Properties unless DCIP was willing to pay off the Note at the time
of purchase and pay a substantial prepayment penalty as more fully
described herein.
The General Partner negotiated with the Lender in order to obtain
the Lender's consent to the transfer the Properties. During
discussions between the Lender and General Partner, the Lender
indicated a willingness to work with the Partnership or its
affiliates to achieve a mutually satisfactory result if the
Partnership purchased the Properties. However, the Lender had not
actually consented to the transfer of the Properties to the
Partnership as of the July 2002 closing date.
Given that: (i) the General Partner was under a time constraint to
reinvest the proceeds from the sale of The Meadows II into real
estate by July 30, 2002 in order to avoid negative tax consequences
to the partners as described above; (ii) the General Partner had no
other realistic prospects, other than the Properties, for
purchasing real estate that would have a closing date on or before
July 30, 2002; and (iii) the Lender indicated a willingness to work
with the Partnership concerning the transfer of the Properties to
the Partnership, the General Partner decided to purchase the
Properties, subject to the Note, without the Lender's approval of
the transaction.
While purchasing the Properties without the Lender's consent would
leave the Partnership exposed to the possibility that the Lender
would accelerate the approximately $10.08 million due under the
Note, the General Partner had no reason to believe that the Lender
would actually enforce the acceleration provision of the Note and
demand full payment upon the transfer of the Properties. The
General Partner believed that the Lender was acting in good faith
when the Lender indicated a willingness to work with the
Partnership, and the General Partner sincerely believed that the
Lender and the Partnership would be able to work out a mutually
beneficial arrangement.
The Purchase of the Properties and Closing
The outstanding principal balance of the Note was approximately
$10.08 million. For income tax considerations related to
preserving the benefits of the Section 1031 Exchange Rule to the
extent possible, the Partnership needed to reduce the balance of
the Note from approximately $10.08 million to approximately $8.8
million, which amount is equal to the balance of the mortgage
liability of The Meadows II. Accordingly, the Partnership
earmarked approximately $1.28 million in cash to be paid down on
the Note. This amount was committed to the Lender on July 22, 2002
and would leave the Partnership approximately $4.2 million of sale
proceeds from The Meadows II. On July 30, 2002, the Partnership
closed its transaction with Sellers.
The former owner of Plymouth retained approximately 4.5 acres of
vacant land adjacent to Plymouth. The Partnership agreed to enter
into a lease agreement with the owner of the vacant parcel for
parking privileges in the parking garage owned by the Partnership.
The Partnership did not pay an acquisition fee to the General
Partner, or any affiliate, in connection with its acquisition of
the Properties or assumption of the Mortgage (such as real estate
commissions, selection fees or development fees). The Sellers also
did not pay a fee to the General Partner, or any affiliate, in
connection with the transaction. However, the Partnership incurred
a real estate commission payable to an unaffiliated broker in the
amount of $150,000.
The Properties were used by the Sellers as commercial office
buildings, and the Partnership intends to continue such use.
Lender Agrees to Sell Note
The Note was secured by both Properties, and the Lender was not
willing to release a portion of the collateral consisting of the
4.5 acres adjacent to Plymouth that the Seller desired to retain.
The Partnership offered to reduce the outstanding principal balance
of the Note by approximately $1.28 million (from $10.08 million to
$8.8 million) to compensate for the requested release of the 4.5
acres. However, the Lender was not willing to accept a partial
payment of the outstanding loan balance. The terms of the Note
provided for prepayment in full, but not in part, on the first day
of any calendar month, upon 90 days prior notice to the Lender and
upon payment in full of all amounts payable under the loan
documents, which would include a Prepayment Premium (that is, a
prepayment penalty). The Prepayment Premium was estimated under a
yield maintenance formula to be approximately $2.1 million as of
the July 30, 2003 closing date.
After additional negotiations, the Lender agreed to sell the Note
to the Partnership or an affiliate and accept a Prepayment Premium
of $302,372, which equaled 3% of the outstanding principal balance
of the Note.
Formation of Decade Mortgage Loan Partners LLC
After earmarking approximately $1.28 million to pay down the Note,
the Partnership needed approximately $8.8 million in additional
funds by August 29, 2002, to retire the Note.
The Partnership did not want to reduce the Note below $8.8 million
to avoid relief of liability issues for the income tax purposes of
the limited partners. (See "Certain Tax Considerations: Use of
Cash Reserves to Reduce Principal - Effect on Adjusted Basis of
Limited Partners in Partnership Interests; Gain Recognized by
Limited Partners"). Accordingly, the Partnership did not use the
$4.2 million of cash generated from the sale of The Meadows II to
further reduce the Note.
The Partnership did not have sufficient cash reserves to purchase
and retire the Note by itself. Initially, the General Partner
sought financial assistance from its traditional lenders. However,
time constraints prevented the bank from participating in the
purchase of the Note from the Lender, because the bank's
underwriting procedures would not be able to meet the Partnership's
time constraints mentioned above.
Therefore, the General Partner determined that it was in the best
interests of the Partnership to create an affiliated limited
liability company, which would provide the capital necessary to
purchase the Note. The General Partner thus created Decade
Mortgage Loan Partners LLC ("DMLP") to purchase the Note and the
Mortgage on the Properties from the Lender.
The General Partner considered having only affiliates of the
Partnership and the General Partner invest in DMLP, but the General
Partner determined that it was in the best interest of the
Partnership and the limited partners to have the Partnership also
invest in DMLP because of the expected returns. Although the
General Partner knew such investment was not expressly authorized
by the Partnership Agreement, the General Partner believed that the
investment in DMLP was in the best interest of the Partnership and
its limited partners. Furthermore, the General Partner believed
that the transaction could be subsequently approved by the consent
of Mr. Keierleber because he owns more than a majority of the
outstanding Interests.
On August 27, 2002, the Partnership used cash reserves of $4.2
million to purchase 4,200 Units (the "DMLP Units") of DMLP. The
DMLP Units purchased by the Partnership represent approximately
47.7% of the 8,805 DMLP Units issued and outstanding. The
Partnership's source of the funds used in this transaction
consisted of cash reserves held by the Partnership which were
obtained from the Exchange Escrow which had held the proceeds from
the sale of The Meadows II on January 31, 2002. Because the
Partnership's Partnership Agreement did not specifically authorize
the General Partner to make such an investment, the General Partner
is asking the limited partners to ratify this investment by voting
in favor of the Approval.
The other members of DMLP are five affiliated entities that are
either wholly owned or controlled by Mr. Jeffrey Keierleber, the
General Partner of Decade Companies, which is the Partnership's
General Partner. As illustrated below, these other members of DMLP
consist of three corporations, which are wholly owned by Mr.
Keierleber, and two limited partnerships, of which Mr. Keierleber
owns a majority of the outstanding limited partnership units.
DMLP Member # of Units % of DMLP Units Mr. Keierleber owns
Outstanding % of Entity
Decade Properties,
Inc. 1,330 15.1% 100%
DIC Corp. 1,100 12.5% 100%
Decade Securities
Corp. 700 7.9% 100%
Decade 80-IV,
a Limited
Partnership 985 11.2% 81.9%
Decade Companies
Preferred
Placement VIII -
Springtree Crossing,
a Limited
Partnership 490 5.6% 88.0%
As a result of the aforementioned sale of DMLP Units, Mr.
Keierleber beneficially owned approximately 78.7% of the 8,805
issued and outstanding DMLP Units when it was organized in August
2002. However, as a result of additional Interests purchased by
Mr. Keierleber during the fourth calender quarter of 2002, his
beneficial ownership of the 8,805 issued and outstanding DMLP Units
increased to more than 80%. For income tax purposes of each
limited partner, if Mr. Keierleber's beneficial interest in the
Note exceeds 80% at a year end, then the entire amount of the Note
would be allocated to Mr. Keierleber (and none to the other limited
partners) for the purpose of computing the adjusted income tax
basis in the Interests. (See "Certain Tax Considerations: Purchase
of Note by DMLP Effect on Adjusted Basis of Limited Partners in
Partnership Interests; Gain Recognized by Limited Partners"). Such
allocation could be detrimental to any limited partner to the
extent that relief of nonrecourse liability would result in the
recognition of gain for income tax purposes. Therefore, on
December 30, 2002, the Partnership purchased an additional 85 DMLP
Units from Decade Properties, Inc. for $85,000 (the original issue
price). The effect of this transaction was to reduce the
beneficial ownership of Mr. Keierleber to 79.9% of the 8,805 issued
and outstanding DMLP Units.
The Partnership did not pay an acquisition fee or sales commission
to the General Partner, or any affiliate, in connection with its
acquisition of the DMLP Units. DMLP also did not pay a fee to the
General Partner, or any affiliate, in connection with the
transaction.
Purchase of Note by DMLP
On August 29, 2002, DMLP purchased the Note for $8,801,838 from the
Teachers Insurance and Annuity Association of America ("TIAA"). In
conjunction with the transfer of the Note from TIAA to DMLP, the
Partnership paid TIAA approximately $1,726,000 to (1) reduce the
outstanding principal balance of the Note by $1,277,226 (from
$10,079,064 to $8,801,838), (2) pay a prepayment penalty of
$302,372 (the "Prepayment Premium") computed at 3% of the
outstanding principal balance of the Note payable to TIAA, (3) pay
accrued interest of $139,746 (the "Interest Payment"), and (4) pay
a late fee of $4,354 (the "Late Fee") computed at five cents for
each dollar (5% of $87,074.87) of delinquent payment payable to
TIAA. The Late Fee was subsequently reimbursed to the Partnership
by the Seller of Spectrum and Plymouth. The Interest Payment
included $68,689 of prorated interest for July which was received
by the Partnership as a closing credit from the Seller.
DMLP's source of the funds used in this transaction consisted of
cash generated from the sale of the DMLP Units on August 27, 2002
to the Partnership and affiliated entities.
There is no material relationship between TIAA and the Partnership
or any of the Partnership's affiliates, any general partner,
director or officer of the Partnership, or any associate of any
such general partner, director or officer.
DMLP did not pay any fees to the General Partner, or any affiliate,
in connection with its acquisition of the Note (such as mortgage
placement fees or mortgage brokerage fees). TIAA also did not pay
a fee to the General Partner, or any affiliate, in connection with
the transaction.
Revision of Note Terms by DMLP
The Note purchased from TIAA contained terms which greatly
increased the risk of owning the Properties, and limited the
marketability of the Properties. The Note bears interest on the
outstanding principal balance from July 1, 1997 (the "Date of
Loan") through and including the Maturity Date (August 1, 2007) at
a fixed rate of 8.46% per annum. The Note provided for monthly
payments of principal and interest of $87,074.87. The required
loan payments amortize the principal balance over a 25-year period.
The Note permitted prepayment in full, but not in part, on the
first day of any calendar month, upon 90 days prior notice to
Lender and upon payment in full of all amounts payable under the
loan documents, which would include a Prepayment Premium (that is,
a prepayment penalty). The Prepayment Premium consists of the
greater of (1) 2% of the outstanding loan principal balance and (2)
an amount computed under a yield maintenance formula defined in the
Note. The Prepayment Premium computed under the yield maintenance
formula was computed to be approximately $2.1 million as of the
July 30, 2002 closing date. In addition, the Note required both
Properties to be held as collateral until the Note was paid in
full.
These terms of the Note adversely affected the Partnership's
potential for a sale and a return on its investment in the
Properties. First, the Note essentially prohibited the Partnership
from selling one property without selling the other because the
Note permitted prepayment in full, but not in part. Consequently,
the terms of the Note hindered one of the advantages of owning
multiple properties in different real estate markets: being free to
sell them independently as the Orlando and Clearwater real estate
markets dictated. The inability to freely sell one of the
Properties, without simultaneously selling the other, limited the
market to potential buyers who would be financially able to own two
office buildings in separate real estate markets. The General
Partner believed that the lack of flexibility to sell the
Properties independently of each other, and at different times,
would have a negative impact on the potential resale price of the
Properties.
Thus, in order to attempt to improve the potential value of the
Properties to be realized by the Partnership upon any future sale,
and in consideration for the Partnership's payment of the
Prepayment Premium, the Partnership and the General Partner and
affiliates caused DMLP to modify certain terms of the Note. These
changes were: (1) the monthly payment of $87,074.87 required under
the Note was suspended until November 1, 2003, at which time an
interest only payment of $33,810 for the period from August 29 to
September 30, 2003 was required, (2) beginning November 1, 2003,
the monthly payment of principal and interest was reduced from
$87,074.87 to $70,637.68, which will amortize the outstanding
principal balance of $8,801,838 over a 25-year period, (3) the
prepayment of the outstanding principal balance is permitted in
part as well as in full, (4) a credit of the 3% Prepayment Premium
paid at closing of $302,372 will be offset against any future
prepayment penalties incurred by the Partnership under the Note,
and (5) the 4.5 acres of land adjacent to Plymouth could be
released as collateral.
THE APPROVAL
The General Partner did not have express authority under the
Partnership Agreement to set aside sales proceeds generated from
the January 31, 2002 sale of The Meadows II and invest such funds
into DMLP at the time the Partnership made the investment.
Consequently, the General Partner is asking the limited partners in
this solicitation to approve the Partnership's investment in DMLP.
At the time the General Partner made the investment of Partnership
funds in DMLP Units, it considered several other alternatives.
First, it sought new financing from its bank or another financial
institution. However, time constraints prevented the bank from
participating in the purchase of the Note from the Lender, because
the bank's underwriting procedures would not be able to meet the
Partnership's time constraints mentioned above.
Secondly, the General Partner considered using all of the proceeds
available from the sale of The Meadows II to reduce the outstanding
loan balance from approximately $10.28 million to approximately
$4.6 million. However, the Partnership did not want to reduce the
Note below $8.8 million to avoid relief of liability issues for the
income tax purposes of the limited partners. (See "Certain Tax
Considerations: Use of Cash Reserves to Reduce Principal - Effect
on Adjusted Basis of Limited Partners in Partnership Interests;
Gain Recognized by Limited Partners"). Accordingly, the
Partnership did not use $4.2 million of cash generated from the
sale of The Meadows II to further reduce the Note.
Thirdly, the General Partner considered seeking capital for DMLP
from affiliates only (under this alternative, DCIP would not have
participated in DMLP). However, by committing $4.2 million of its
own capital to investing in DMLP, the Partnership (1) could
effectively benefit by paying interest due under the Note at 8.46
% per annum to an entity in which it has an investment (to the
extent of its percentage ownership of DMLP), (2) might effectively
benefit in the future if a Prepayment Penalty is incurred (to the
extent of its percentage ownership of DMLP), and (3) as a 47.7%
participant in DMLP, the Partnership would have some control over
the proposed changes to the terms of the Note.
Although the General Partner knew the investment was not expressly
authorized by the Partnership Agreement, the General Partner
believed that the transaction was in the best interest of the
Partnership and its limited partners. Furthermore, the General
Partner believed that the transaction could be subsequently
approved by the consent of Mr. Keierleber because he owns more than
a majority of the outstanding Interests.
The limited partners are urged to read the possible negative
effects of voting in favor of the Approval, which are discussed
elsewhere in this Proxy Statement, before voting and returning the
Consent.
THE PROPOSED AMENDMENTS
The Partnership proposes to amend Sections 3.49, 7.2, 7.3 and 7.4
to its Partnership Agreement as follows:
Amend Section 3.49 as follows (proposed additions are in bold):
3.49. Reserves Such amounts set aside at the reasonable
discretion of the General Partner to pay for
repairs, maintenance, improvements, or contingent
or unforeseen liabilities or obligations which the
General Partner deems necessary or appropriate for
the operation and protection of the Partnership,
including amounts allocated to the Repurchase Pool,
plus any Sales Proceeds set aside at the discretion
of the General Partner for investment in Property
or for investments to be made pursuant to Section
7.2.A(xviii), herein.
Create new Section 7.2.A(xviii):
(xviii) notwithstanding any other limitation in this
Agreement, invest Partnership funds in an entity controlled by
the Partnership or an Affiliate of the General Partner, which
entity has the sole purpose of investing in mortgage notes or
other debt instruments in connection with the purchase or sale
or refinancing of any Property of the Partnership, or which
encumber any Property owned by the Partnership; provided,
however, that the Partnership may not invest in such entity
unless the mortgage notes or other debt instruments have terms
and conditions substantially similar, as determined by the
General Partner, to the terms and conditions provided in
Section 7.4 of this Agreement.
Amend Section 7.3.A(ix) as follows (deletions have been stricken
and additions are in bold):
(ix) cause the Partnership to invest any of its funds in any
other limited partnership entity, except that the Partnership
may participate as a partner in general partnerships invest in
an entity or joint ventures which that either (i) owns or
operates real Property, provided that the Partnership or an
Affiliate of the General Partner controls such other general
partnership entity or joint venture or (ii) is pursuant to
Section 7.2.A(xviii), and further provided, that no duplicate
property management or other fees are paid. The Partnership
also may participate in joint venture with other real estate
programs sponsored by the General Partner and/or Affiliates
provided that (a) the affiliated real estate program has
investment objectives substantially identical to the
investment objectives of the Partnership, (b) no duplicate
property management or other fees are paid, (c) the
compensation to the sponsor or sponsors of the affiliated real
estate program is substantially similar to the compensation to
the General Partner, (d) the Partnership is granted a right of
first refusal to purchase the real Property of the joint
venture in the event the affiliated joint venturer desire to
sell such Property and (e) the investments in the joint
venture by the Partnership and the affiliated real estate
program are on substantially the same terms and conditions.
Except for the foregoing real estate joint ventures or general
partnerships, and except where real estate constitutes assets
of a corporation an entity or a corporation an entity owns
assets which constitute a functional part of a real estate
project being acquired by the Partnership and acquisition of
the real estate or such related assets can best be effected by
acquiring stock or other equity interest of that corporation
entity, the Partnership will not invest in other real estate
programs or invest in securities or other equity interests of
other issuers for the purchase of exercising control and will
not underwrite securities of other issuers or issue Interests
in exchange for Property;
Amend Section 7.4.A as follows (deletions have been stricken and
additions are in bold):
A. The Partnership may, in the sole discretion of the
General Partner, utilize up to an aggregate of 20% 50% of
the net proceeds available for investment for the purpose
of making permanent equity participating and other loans
on real property secured by first or junior mortgage
liens as described below. (The Partnership shall not be
obligated, however, to invest any of the net proceeds
from the sale of Interests in mortgage loans.) Subject
to the limitations expressed herein, if the Partnership
elects to make mortgage loans, it shall utilize such
proceeds primarily for the purpose of making mortgage
loans that are secured by first or junior mortgage liens
on improved income-producing real property such as
shopping centers, office buildings or apartment
complexes.
Amend Section 7.4.B as follows (deletions have been stricken):
B. The terms of mortgage loans made by the Partnership shall
be established by the General Partner in accordance with
the following principles: The Partnership shall not make
or commit to make mortgage loans for terms of more than
ten years or with maturity dates beyond December 31,
2005. The interest rate on mortgage loans made by the
Partnership shall be established by the General Partner
with due consideration for then prevailing market rates
for loans of similar type and maturity, the
creditworthiness of the borrowers, the collateral
security for the loans, projected future financial and
economic conditions and other relevant criteria. Such
interest rates may be fixed at a specified rate or may
vary according to a designated index.
Amend Section 7.4.F as follows (deletions have been stricken and
additions are in bold):
F. In determining to make or commit to make a particular
mortgage loan, the General Partner shall consider such
factors as historical and projected operating income and
expenses of the underlying property, the real estate
management and operating experience of the prospective
borrower, historical occupancy rates of the underlying
property and all existing and future competitive market
conditions, general financial and economic conditions,
the investment objectives of the Partnership, the
geographic diversity of its mortgage loans and other
factors deemed relevant by the General Partner. In each
case, if the Partnership shall commit to fund a
particular mortgage loan, it shall do so subject to
conditions that the General Partner determines are
warranted under the circumstances. Such conditions shall
include, at a minimum, a requirement that the prospective
borrower obtain a mortgagee's or owner's policy of title
insurance or commitment insuring the priority of the
Partnership's lien and the condition of title to be
obtained on the underlying property. The Partnership
shall also receive an independent appraisal of the value
of each property on which it is to make a mortgage loan
or on such other real property that is to serve as
collateral for the Partnership's mortgage loan (not
required for participation in mortgage loans made
pursuant to Section 7.2.A(xviii)). The aggregate
principal amount of each mortgage loan made by the
Partnership (if any) and all other mortgage loans on the
mortgaged property shall not exceed 80% of the appraised
value of such property at the time the mortgage loan is
made; provided that such loan-to-value ratio may be
increased to not more than 85% 88% for a particular
mortgage loan if, in the judgment of the General Partner,
the borrower's credit conditions or the collateral
security for the mortgage loan justifies such higher
ratio; and provided further that the above-mentioned
loan-to-value ratio shall not apply to insured mortgage
loans made by the Partnership. In addition, the
Partnership shall not make any one mortgage loan in a
principal amount in excess of 15% (50% for participation
in mortgage loans made pursuant to Section 7.2.A(xviii))
of the gross proceeds from the sale of Interests or
mortgage loans to a single borrower in an aggregate
principal amount in excess of 15% (50% for participation
in mortgage loans made pursuant to Section 7.2.A(xviii))
of such proceeds.
Amend Section 7.4.H as follows (additions are in bold):
H. The General Partner or an Affiliate may originally make
or acquire mortgage loans in its own name and temporarily
hold the loans for the purpose of avoiding the receipt of
unrelated business taxable income by tax-exempt Limited
Partners, facilitating the making of such loans or for
any other purpose related to the business of the
Partnership; provided that (a) any such mortgage loan is
acquired by the Partnership for a price no greater than
the cost to the General Partner of Affiliate of making
and holding such mortgage loan, except for compensation
to the General Partner or Affiliate as provided herein,
(b) there is no difference in the interest rate of the
mortgage loan at the time it was made or acquired by the
General Partner or Affiliate and the time it is acquired
by the Partnership and (c) the General Partner or
Affiliate receives no other benefit arising out of such
transaction apart from compensation permitted hereunder,
except that the General Partner or Affiliates may receive
any benefits (including interest, late fees, prepayment
premiums, and any amounts due under acceleration
provisions) permitted in any mortgage loans made pursuant
to Section 7.2.A(xviii), herein.
Amend Section 7.4.J as follows (additions are in bold):
J. In the event a mortgage loan made with proceeds from the
sale of Interests is repaid or refinanced within 24
months of the termination of the offering, the resulting
proceeds may in the discretion of the General Partner be
used to fund new mortgage loans. However, reinvestment
of the resulting proceeds shall not occur unless
sufficient cash will be distributed to pay any state or
federal income tax created by the repayment of a mortgage
loan (assuming investors are in the highest applicable
federal tax bracket). Any proceeds resulting from the
repayment or refinancing of mortgage loans after 24
months following the termination of the offering of
Interests shall be available for distribution as part of
the Cash Available for Distribution or Sales Proceeds, as
the case may be, and shall not be reinvested, except that
any proceeds resulting from the repayment or refinancing
of mortgage loans made pursuant to Section 7.2.A(xviii)
may be reinvested to purchase Property, to invest in an
entity pursuant to Section 7.2.A(xviii) herein, or to
make mortgage loans pursuant to Section 7.4 herein. Any
proceeds from the repayment or refinancing of loans not
used to make new mortgage loans will, to the extent
available for distribution, be included as part of Cash
Available for Distribution or Sales Proceeds, as the case
may be.
Amend Section 7.4.K as follows (additions are in bold):
K. The Partnership may provide mortgage financing to
publicly or privately offered real estate limited
partnerships affiliated with the General Partner in
connection with the acquisition and/or ownership by such
partnerships of real properties. Prior to any such
transaction, an independent and qualified adviser meeting
the qualifications set forth in the NASAA Guidelines,
shall issue a letter of opinion to the effect that the
proposed loan is fair and at least as favorable to the
Partnership as a loan to an unaffiliated borrower in
similar circumstance. Mortgage loans made by the
Partnership to partnerships affiliated with the General
Partner shall be on terms not less favorable to the
Partnership than those that would be required by
unrelated lending institutions or entities that would be
willing to provide comparable loans for the same purpose.
The General Partner will be required to obtain a letter
of opinion from the independent adviser in connection
with any disposition, renegotiation or other subsequent
transaction involving loans made to the General Partner
or an Affiliate. The adviser's compensation will be paid
by the General Partner and will not be reimbursed by the
Partnership. Not withstanding the foregoing, the
provisions of this Section 7.4.K. shall not apply to any
mortgage loans made pursuant to Section 7.2.A(xviii).
The limited partners are urged to read the possible negative
effects of voting in favor of the Proposed Amendments, which are
discussed elsewhere in this Proxy Statement, before voting and
returning the Consent.
POSSIBLE NEGATIVE EFFECTS OF VOTING IN FAVOR OF THE APPROVAL AND
THE PROPOSED AMENDMENTS
The Approval and Proposed Amendments to the Partnership Agreement
may have certain negative effects on the limited partners. These
possible negative effects are discussed below.
Proposed Amendments Broaden Investment Options for DCIP and May
Increase Investment Concentration Risks
Under the current terms of the Partnership Agreement, the
Partnership may only invest in real estate properties and
mortgages. The Proposed Amendments allow the General Partner to
expand the investment of the Partnership in addition to its
authorization to invest in real estate and mortgages.
First, the Proposed Amendments would allow the Partnership to
invest in other entities that invest in mortgage notes and other
debt instruments which encumber any property that is owned, that
will be owned, or that was formerly owned, by the Partnership.
However, there is no guarantee that an investment in an entity
investing in such mortgage notes or other debt instruments will be
profitable or provide the same return on capital as the
Partnership's direct investment in real estate or mortgages. Such
investment may result in the Partnership concentrating more of its
investment in the Properties.
Second, the Proposed Amendments would also allow the Partnership to
invest in other entities or joint ventures that own or operate real
property, provided that the Partnership or an Affiliate of the
General Partner controls such other entity. Returns on such
investments may vary, and there is a risk that there will be no
returns such investments.
Voting for Approval May Subject Limited Partners to General
Liability
As discussed below, limited partners may become subject to claims
of general liability by voting for the Approval and ratifying the
General Partner's transaction with DMLP. Generally, Wisconsin law
provides a limited partner with limited liability, unless the
limited partner participates in the control of the business. Wis.
Stat. Section 179.23(1). The Wisconsin Statutes state that actions by
limited partners that (1) approve changes in the nature of the
partnership's business or (2) ratify a transaction involving a
potential conflict of interest between the General Partner and the
Partnership will not be deemed to be control. However, the
Wisconsin Court of Appeals has suggested in one case that, if
limited partners ratify the actions of a general partner, the
limited partners could be considered as participating in the
control of the limited partnership business and would expose
themselves to general liability for the acts they ratify. Wyss v.
Albee, 183 Wis.2d 245 (Ct. App. 1994) That case did not cover
Section 179.23 of the Wisconsin Statutes. (Other jurisdictions are
split on the issue. Compare Illinois Rockford Corp. v. Dickman,
520 N.E.2d 1184 (Ill. Ct. App. 1988) (indicating that a limited
partner is not a principal of the partnership and cannot ratify the
acts of a general partner), with Phillips v. Kula 200, 629 P.2d 119
(Haw. Ct. App. 1981) (supporting proposition that limited partners,
in fact, can ratify acts of general partner in breach of the
limited partnership agreement)). Thus, under the Wyss Court's
opinion, limited partners voting in favor of the Approval could be
subjecting themselves to general liability for actions of the
General Partner that they are ratifying.
Nevertheless, based upon oral legal advice, the General Partner
believes that limited partners will not be deemed to be
participating in the control of the Partnership under Wisconsin
law, and hence will not be subject to general liability, should
they vote in favor of the Approval. Despite the Wyss case, the
General Partner believes the limited partners may approve the
transactions of the General Partner without losing their limited
liability pursuant to Wis. Stat. Section 179.23(2). Under that
section, limited partners may approve, among other things, (1) a
change in the nature of the Partnership's business, or (2) a
transaction involving an actual or potential conflict of interest
between the general partner and the limited partnership or limited
partners, without participating in the control of the business.
The transactions by the General Partner arguably involve a change
in the ordinary business of DCIP because the General Partner has
made an investment not expressly permitted by the Partnership
Agreement. The primary business of DCIP prior to the transaction
was to invest in property. The transaction by the General Partner
was an investment in an entity investing in mortgage notes and thus
a change in the business of the Partnership. In addition, the
transaction involved a conflict of interest as the General Partner
invested Partnership funds into an entity controlled by the
Partnership and affiliates of the General Partner.
Business Risks Mortgage Asset Portfolio Investments
The Proposed Amendments to the Partnership Agreement also expose
the Partnership to certain risks related to the real estate
mortgage lending business. Those risks are as follows:
Adverse Effects of Loan Prepayments. The level of prepayments of
the Note or other future collateral mortgage loans may materially
adversely impact the financial condition and results of operations
of DMLP. The General Partner expects that the Partnership will,
prior to the Maturity Date, prepay all or part of the Note either:
(1) upon the sale of either Spectrum or Plymouth, or (2) upon
refinancing the Note to obtain more favorable mortgage loan terms.
Although prepayment of the Note (or other future collateral
mortgage loans) by the Partnership may result in lower interest
costs and thereby benefit the Partnership, such prepayment of the
Note (or other future collateral mortgage loans) by the Partnership
may adversely affect the amount of portfolio income that the
Partnership can earn through its investment in DMLP which owns the
Note (or other future collateral mortgage loans). The General
Partner believes that collateral mortgage loan prepayment rates
generally increase when market interest rates fall below the
current interest rates on mortgage loans. The General Partner
believes that prepayment experience also may be affected by the
expiration of prepayment penalty clauses, the ability of the
borrower to obtain a more favorable mortgage loan, geographic
location of the property securing the mortgage loans, the
assumability of a mortgage loan, conditions in the housing and
financial markets and general economic conditions.
Risks of Extending Credit. During the time that DMLP holds the
Note (or other future collateral mortgage loans), it is subject to
credit risks, including risks of borrower defaults, bankruptcies
and special hazard losses that are not covered by standard hazard
insurance (such as those occurring from earthquakes or floods). In
the event of a default on any mortgage loan (including the Note)
held by DMLP, DMLP will bear the risk of loss of principal to the
extent of any deficiency between the value of the secured property
and the amount owing on the mortgage loans (including the Note),
less any payments from an insurer or guarantor. DMLP has not
established an allowance for loan losses, and there can be no
assurance that any allowance for loan losses which may be
established will be sufficient to offset losses on mortgage loans
in the future.
Risks of Economic Downturn. A downturn in the national economy and
the resultant adverse impact on employment rates could adversely
affect mortgage loan defaults. Additional credit could become
scarce in such an environment and therefore risk of loss through
loan default and decreased property value could increase. DMLP
does not have an allowance for loan losses, which may be inadequate
should economic conditions worsen significantly causing a default
of the Note (or other future collateral mortgage loans) and
property value decreases. The management of DMLP believes that no
allowance for loan losses is adequate or appropriate at this time.
Adverse Effect of Possible Delays. Even assuming that properties
secured by the Note (or other future collateral mortgage loans)
held by DMLP provide adequate security for such Note (or other
future collateral mortgage loans), substantial delays could be
encountered in connection with the foreclosure of the defaulted
Note (or other future collateral mortgage loans), with
corresponding delays in the receipt of related proceeds by DMLP.
State and local statutes and rules may delay or prevent DMLP's
foreclosure on or sale of the mortgaged property and typically
prevent DMLP from receiving net proceeds sufficient to repay all
amounts due on the related mortgage loan (including the Note).
Risks Associated with DMLP's Business Strategy
Lack of Operating History and Experience. DMLP has no operating
history in the mortgage origination industry, which makes if
difficult to evaluate DMLP's anticipated business performance and
future prospects. DMLP was recently formed for the purpose of
investing in the Note. There are no immediate plans for DMLP to
originate and sell mortgages (mortgage banking) in the future to
grow its business. However, DMLP reserves the right to do so.
While DMLP's executive officer (Mr. Keierleber) has had limited
prior mortgage origination and mortgage banking experience, DMLP
has not hired any personnel with experience in the mortgage banking
industry, and there are a significant number of risks and
uncertainties inherent in the mortgage origination industry,
especially in light of DMLP's lack of an operating history and
experience originating mortgages.
Reliance upon Key Employees. DMLP may not be successful if it
loses the services of key personnel. DMLP expects that the
services of Mr. Jeffrey Keierleber will be important to its future
operations. If DMLP loses the services of key personnel, it may not
be able to achieve its short or long-term objectives or create or
retain DMLP Unit value.
CONFLICTS OF INTEREST
In proposing the Approval and Proposed Amendments, the Partnership
and its General Partner may be viewed as having a conflict of
interest in that adoption of the proposed Amendments would make it
likely that the General Partner and its affiliates would in effect
become lenders to the Partnership. You will be approving actions
taken in violation of the current Agreement.
As reported in periodic information and financial statements
provided to the limited partners, and as disclosed in the
Partnership's prospectuses dated January 31, 1986, June 3, 1987,
and August 25, 1987, and the Partnership Agreement, the General
Partner and certain of its affiliates derive certain fees in return
for providing specified services to the Partnership, including a
property management fee and a real estate commission upon the sale
of the properties. In addition, depending upon the financial
success of the Partnership, the General Partner may be entitled to
a portion of the profits upon the winding up of the Partnership and
the sale of its properties ("Back-end Fees"). Any such Back-end
Fees to the General Partner are subordinated to a return to the
limited partners of their initial capital investment plus a
cumulative, non compounded distribution of 6% per annum, less cash
distributions previously received. The General Partner hopes these
actions result in a return to Partners which could increase the
chance to receive the Back-end Fees.
CERTAIN TAX CONSIDERATIONS
Set forth below is a summary of certain federal income tax
considerations generally applicable to the purchase of DMLP Units
by the Partnership and affiliates, the purchase of the Note by DMLP
and the Partnership's use of cash reserves to reduce the principal
balance of the Note and the consequences to you.
This summary is based on the Internal Revenue Code of 1986, as
amended (the "Code"), and on judicial decisions, U.S. Treasury
regulations (the "Regulations"), and IRS rulings and other
administrative materials interpreting the Code, all of which are
subject to change, possibly on a retroactive basis. The
authorities on which this summary is based are subject to various
interpretations, and are not binding on the IRS or the courts,
either of which could take a contrary position. No rulings have
been or will be sought from the IRS with respect to the
transactions described herein. Accordingly, there can be no
assurance that the IRS will not challenge the disclosures expressed
herein or that a court will not sustain such a challenge.
The following summary is for general information only, and the tax
treatment described herein may vary depending upon each limited
partners's particular situation. Certain limited partners
(including, but not limited to, insurance companies, tax-exempt
organizations, financial institutions or broker/dealers, foreign
corporations, and persons who are not citizens or residents of the
United States) may be subject to special rules not discussed below.
Moreover, the summary does not address the federal income tax
consequences to limited partners who do not hold the Interests in
the Partnership as "capital assets," as defined by Section 1221 of
the Code and assumes that the Note is a capital asset in the hands
of DMLP. In addition, the consequences of the transactions
described herein to limited partners may be affected by taxes other
than federal income taxes, such as foreign, state and local taxes,
and federal estate and gift taxes. Controversy and uncertainty
exist in many areas of the federal income tax law which may affect
the transactions described herein. Accordingly, there can be no
assurance that some of the views expressed herein will not be
challenged by the IRS. The following information is intended as a
general statement of certain tax considerations, and limited
partners should not construe this as legal or tax advice.
LIMITED PARTNERS ARE URGED TO CONSULT AND MUST RELY UPON THEIR OWN
TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE
TRANSACTIONS DESCRIBED HEREIN, INCLUDING THE APPLICABILITY AND
EFFECT OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX LAWS, ANY RECENT
CHANGES IN APPLICABLE TAX LAWS AND ANY PROPOSED LEGISLATION.
Partnership Status of DMLP
Subject to the discussion below regarding publicly-traded
partnerships, DMLP will be classified as a partnership for federal
income tax purposes (and not as an association taxable as a
corporation) under existing law, provided that DMLP does not make
an affirmative election to be taxed as a corporation. DMLP does
not intend to make such an election.
Section 7704 of the Code provides that certain "publicly traded"
partnerships ("PTP") are treated as corporations rather than as
partnerships for income tax purposes. In general, a PTP includes
any partnership whose interests are traded on an established
securities market or are readily tradable on a secondary market (or
the substantial equivalent thereof). Section 301.7704-1(h) of the
Regulations indicates, however, that if all of the interests in a
partnership are offered in a private placement, and the partnership
has not more than 100 partners at any time, the partnership will
not be treated as a "publicly traded partnership." Based on the
Regulation cited above, the General Partner that DMLP will not be
treated as a corporation under the publicly traded partnership
rule. This conclusion could be affected by the issuance of
regulations or other legislative or administrative developments,
any of which could have retroactive effect.
The discussion below is based on the assumption that DMLP will be
classified as a partnership for federal income tax purposes.
Taxation of Investment in DMLP
Each limited partner is required to take into account in computing
its own federal income tax liability, its allocable share of the
Partnership's income, gains, losses, deductions, credits and tax
preference items for any taxable year of the Partnership ending
with or within the taxable year of such limited partner, without
regard to whether the limited partner has received or will receive
a cash distribution. For purposes of determining the tax
consequences of limited partners' investments in the Partnership,
the Partnership's income, gains, losses, deductions and items of
tax preference will include its share of such tax items received
from DMLP.
The Partnership and DMLP are each required to file annually an
information return on IRS Form 1065 and, following the close of
their respective tax years, to provide each of its investors with
a Schedule K-1 indicating such investor's allocable share of the
Partnership's or DMLP's income, gain, losses, deductions, credits
and tax preference items, as determined for federal income tax
purposes. The Partnership will include on its Form 1065 its
ratable share of the income, gain, losses, deductions, credits and
items of tax preference of DMLP. Accordingly, each limited
partner's Schedule K-1 will indicate the limited partner's
allocable share of Partnership income, gain, loss, deduction,
credit and tax preference item including amounts attributable to
DMLP.
Adjusted Basis of Partnership's Investment in DMLP
The adjusted tax basis of the Partnership's DMLP Units will
generally be the amount of cash contributed to DMLP in
consideration for the Units, increased by the amount of any
additional capital contributions and by the amount of DMLP income
and gain allocated to the Partnership. Although the Partnership's
adjusted tax basis for the Units owned by it may also include any
indebtedness for which the Partnership has full recourse liability
and the Partnership's share, if any, of DMLP's nonrecourse
liabilities, DMLP does not expect to incur any such liabilities.
The adjusted tax basis of the Partnership's Units will be decreased
by the amount of DMLP losses allocated to the Partnership, the
amount of any distributions made by DMLP to the Partnership, and
expenditures of DMLP not deductible in computing its taxable income
and not properly chargeable to a capital account.
The receipt of a cash distribution from DMLP by the Partnership
which is not in liquidation of the Partnership's Units generally
will not result in the recognition of gain or loss for federal
income tax purposes. However, cash distributions in excess of the
Partnership's adjusted basis for the DMLP Units will result in the
recognition by the Partnership of gain in the amount of such
excess.
Income or gain will be recognized by the Partnership with respect
to distributions made to the Partnership by DMLP upon a redemption
of all or part of the Partnership's Units if either (1) the amount
of cash distributed to the Partnership exceeds the Partnership's
adjusted basis for its Units immediately before the distribution
(including adjustments reflecting operations in the year of
redemption) or (2) there is an actual or deemed disproportionate
distribution to the Partnership of unrealized receivables (such as
market discount or income on certain short-term obligations). It
is not anticipated that DMLP will have any unrealized receivables.
No loss will be recognized by the Partnership in connection with a
distribution made upon a redemption of a part of the Partnership's
Units. A loss may be recognized by the Partnership in connection
with a distribution made upon a redemption of all of the
Partnership's DMLP Units if the distribution consists solely of
cash and then only to the extent that the cash received is less
than the Partnership's adjusted basis for the Partnership's Units.
Application of Passive Activity Income and Loss Rules to Investment
in DMLP
Section 469 of the Code limits the deductibility of passive
activity losses by an individual, estate, trust, or personal
service corporation or, with modifications, certain closely held
corporations of passive activity losses against non-passive
activity income. In general, passive activity losses can be used
only to offset passive activity income and not wages or portfolio
income (such as dividends, interest, annuities and royalties). Any
passive activity losses in excess of passive activity income in one
year may be used to offset passive activity income in future years
or upon the disposition of an investor's entire interest in the
passive activity.
The U.S. Treasury has promulgated final, temporary and proposed
Regulations under Section 469 of the Code (the "Passive Loss
Regulations"). Under the Passive Loss Regulations, the General
Partner believes that the income or loss generated by DMLP
(including any income or loss recognized by the Partnership on the
sale of its ownership interest in DMLP) should be considered to be
portfolio income or loss and not as income or loss from a passive
activity. As a result, income generated by DMLP will generally not
be passive activity income, but portfolio income. Accordingly,
limited partners will not be able to offset their allocable share
of the Partnership's income or gains from DMLP against their
allocable share of any passive activity losses generated by other
activities of the Partnership or against any other passive activity
losses in which they participate. Furthermore, a limited partner's
allocable share of the Partnership's interest in losses generated
by DMLP (such as investment or portfolio expenses and capital loss)
will generally be deductible without regard to the passive loss
rules (although the deductibility of those losses may be otherwise
limited by the 2% limitation imposed on miscellaneous itemized
deductions as discussed subsequently herein).
In applying the passive loss rules, portfolio income, as a per se
matter, is treated as not derived from a passive activity.
Portfolio income generally includes gross income attributable to
interest. Items of income which generally constitute portfolio
income are not so treated if they are derived in the ordinary
course of a trade or business. Under the Passive Loss Regulations,
treatment of portfolio items as having been derived in the ordinary
course of a trade or business is allowed in only certain specified
circumstances, including interest income on loans and investments
made in the ordinary course of a business of lending money.
Because DMLP has purchased a note rather than extended credit and
because the purchase of the Note is an isolated and non-recurring
transaction, the General Partner does not believe that DMLP is
engaged in the ordinary course of a business of lending money.
Accordingly, amounts attributable to the Partnership's investment
in DMLP will be non-passive, portfolio income and losses.
Limitation on Deduction of Portfolio Expenses - 2% Floor
Under Section 67 of the Code, individual taxpayers may deduct
certain miscellaneous expenses (e.g., investment expenses, tax
preparation fees, unreimbursed employee expenses, etc.) only to the
extent such deductions exceed, in the aggregate, 2% of the
taxpayer's adjusted gross income. Because the General Partner
believes that the income or loss generated by DMLP should be
considered to be portfolio income or loss, any expenses incurred by
DMLP which are attributable to such portfolio income or loss and
which are passed through to the Partnership and, in turn, to the
limited partners, will be included among miscellaneous expenses
potentially subject to the 2% floor. Section 68 of the Code
separately imposes limitations on the deductibility of itemized
deductions by individuals whose adjusted gross incomes exceed
certain thresholds (annually adjusted for inflation), and these
limitations could have a significant effect on the deductibility by
individual taxpayers of such expenses as well.
Taxation of DMLP Investment to Tax-Exempt Limited Partnership
Investors
Certain entities, including trusts formed as part of corporate
pension or profit-sharing plans that are qualified under Section
401(a) of the Code, individual retirement accounts, and certain
charitable and other organizations described in Section 501(c)
(collectively "Qualified Plans") are generally exempt from federal
income tax. Qualified Plans, however, are subject to federal
income tax with respect to any "unrelated business taxable income"
("UBTI"). UBTI is income (with specific exceptions) derived from
any trade or business activity, regularly carried on by a tax-
exempt entity (or by a partnership of which it is a member) that is
not substantially related to the entity's exempt purpose. Thus, to
the extent the activity of DMLP is unrelated to a Qualified Plan's
exempt purpose, income derived by the Partnership from DMLP and
allocated to Qualified Plans may constitute UBTI. For any exempt
employees supplemental unemployment benefit plans, trusts, exempt
qualified employee pension, profit-sharing and stock bonus trusts,
or non-exempt trusts, any trade or business conducted by the Fund
will constitute an unrelated trade or business.
Notwithstanding the foregoing, among other things, interest income
and rental income is excluded from UBTI, except to the extent that
such income is derived from debt-financed property. In general,
debt-financed property is any property which is held to produce
income and with respect to which there is "acquisition
indebtedness" at any time during the tax year or during the
preceding twelve months if the property is disposed of during the
tax year. Among other things, "acquisition indebtedness" includes
indebtedness incurred by an organization in acquiring property and
indebtedness incurred before the acquisition of property, if the
indebtedness would not have been incurred but for the acquisition
of the property. In addition, if a Qualified Plan incurred
indebtedness to finance its purchase of Units in the Partnership,
that indebtedness would also constitute acquisition indebtedness.
Because the Partnership has incurred indebtedness to acquire its
rental real estate assets and because the General Partner believes
that the Partnership will be deemed to have incurred indebtedness
to acquire its interest in DMLP, a Qualified Plan's share of any
interest income or rental income of the Partnership will be UBTI to
the extent of debt-financing.
If in any year UBTI is realized by the Partnership, a Qualified
Plan that purchased Units is required to report its pro rata share
of the portion of the Partnership's income (including its ratable
share of any income from DMLP) that constituted UBTI, but only to
the extent that the Qualified Plan's UBTI from all sources exceeded
$1,000 in such year. The Qualified Plan will incur a tax liability
with respect to such excess at such tax rates that would be
applicable if such organization were not otherwise exempt from
taxation. The trustee or custodian of the Qualified Plan that
purchases Units may be required to file form 990-T (Exempt
Organization Business Income Tax Return) with the IRS to report
UBTI, regardless of the amount of UBTI recognized by the Qualified
Plan. In addition, the Qualified Plan will be required to pay from
the Qualified Plan the tax on any UBTI in excess of $1,000.
The discussion contained herein is not a complete treatise on the
tax implications of the transactions described herein to Qualified
Plans. There are numerous issues involved and consequently,
Qualified Plans should consult with and must rely upon their own
tax advisors concerning the application of federal income tax laws.
Use of Cash Reserves to Reduce Principal - Effect on Adjusted Basis
of Limited Partners in Partnership Interests; Gain Recognized by
Limited Partners
The adjusted basis of a limited partner in his Partnership Units is
generally the amount of cash and the adjusted basis of any property
contributed to the Partnership in consideration for the Interests,
increased by any additional capital contributions and by the amount
of any Partnership income and gain allocated to the limited
partner. A limited partner's adjusted tax basis also includes any
indebtedness for which the limited partner has full recourse
liability and the limited partner's share of the Partnership's
nonrecourse liabilities. The adjusted basis of a limited partner's
Interests is decreased by the amount of Partnership losses
allocated to the limited partner, the amount of any distributions
made by the Partnership to the limited partner, and expenditures of
the Partnership not deductible in computing its taxable income and
not properly chargeable to a capital account. Reduction in a
limited partner's share of recourse and nonrecourse liabilities is
treated as a cash distribution.
The receipt of a cash distribution (including a deemed distribution
attributable to a reduction in a limited partner's share of
recourse and nonrecourse liabilities) from the Partnership by a
limited partner will result in the recognition of gain if the
distribution is in excess of the limited partner's adjusted basis
for his Partnership Interests in the amount of such excess. A
limited partner will recognize loss with respect to a cash
distribution (including a deemed distribution attributable to a
reduction in a limited partner's share of recourse and nonrecourse
liabilities) only if the distribution is in connection with the
complete liquidation of the limited partner's Interests and the
cash distribution is less than the limited partner's adjusted basis
in his Interests.
Provided that Units are held by a limited partner as capital assets
within the meaning of Section 1221 of the Code, any capital gain or
loss recognized by a limited partner in connection with cash
distributions will be characterized as either short-term or long-
term, depending upon how long the limited partner has held his
Interests. A capital gain or loss will be long-term if the
Interests have been held for longer than one (1) year. A limited
partner's long-term or short-term capital gain or loss attributable
to distributions from the Partnership will be combined with his net
short-term capital gain or loss for the year to arrive at an
overall (net) capital gain or loss. If a net short-term capital
gain results, the overall gain will be taxable to a limited partner
who is an individual at the same rates as ordinary income, with a
maximum rate of 38.6% for the tax year ending December 31, 2002.
If a net long-term capital gain results, the overall gain will
generally be taxable to a limited partner who is an individual at
a maximum rate of 20% and to a corporate limited partner at a
maximum rate of 35%. A net capital loss may be deducted on an
individual or a married filing joint return only to the extent of
any capital gains plus ordinary income of up to $3,000. (If a
husband and wife file separate returns, the capital loss deduction
is limited to $1,500 per return.) Non-corporate taxpayers may
carry forward unused capital losses indefinitely and may use such
losses to offset capital gains plus up to $3,000 ($1,500 in the
case of a husband and wife filing separate returns) of ordinary
income each year.
On August 29, 2002, the Partnership reduced the outstanding
principal balance of the Note by approximately $1.28 million in
connection with the transfer of the Note to DMLP. However, this
reduction should not cause any limited partner to recognize gain
because, following the reduction, the Partnership's outstanding
debt with respect to the replacement property will be approximately
equal to the debt owed at the time of the sale of The Meadows II,
or $8.8 million.
Purchase of Note by DMLP Effect on Adjusted Basis of Limited
Partners in Partnership Interests; Gain Recognized by Limited
Partners
For purposes of determining a partner's adjusted basis in his
partnership interest, a partner is allocated a nonrecourse
liability in its entirety to the extent such partner bears the
economic risk of loss for such partnership liability. Under the
Regulations, a partner bears the economic risk of loss for a
partnership liability to the extent that the partner or a related
person makes (or acquires an interest in) a nonrecourse loan to the
partnership. Among other relationships, a partnership is related
to a partner if the partnership and the partner bear a relationship
to each other in which such partner owns, directly or indirectly,
more than 80 percent of the capital interest or profits interest in
such partnership. The Regulations also provide an anti-abuse rule
which provides that if a partnership liability is owed to a
corporation, partnership or trust for the principal purpose of
avoiding the application of the related party rules with respect to
a partner (or a related party) who is an owner (shareholder,
partner, or beneficial owner) of more than 20 percent of the
corporation, partnership or trust, the partner or related party is
treated as holding the other entity's interest as a creditor to the
extent of the partner's or related person's ownership interest in
the entity.
The Note was sold to DMLP on August 29, 2002. Jeffrey Keierleber,
a Limited Partner, currently beneficially owns 79.9% of DMLP. The
General Partner does not believe that transfer of the Note to DMLP
will cause the entire liability under the Note to be allocated to
Mr. Keierleber for purposes of determining a limited partner's
adjusted basis. The related party rules generally do not apply
provided Mr. Keierleber does not beneficially own more than 80
percent of DMLP (which he does not) unless the anti-abuse rule
applies. The General Partner does not believe the anti-abuse rule
is applicable to the sale of the Note to DMLP because there were
substantial business reasons for the sale.
"At Risk" Rules
The Code limits the deductibility of losses by certain taxpayers
(such as individuals and certain closely held corporations) from a
given activity to the amount which the taxpayer is "at risk" in the
activity. Losses which cannot be deducted by a limited partner
because of the "at risk" rules may be carried over to subsequent
years until such time as they are allowable.
A limited partner will initially be considered to be "at risk" to
the extent of (1) the amount of money and the adjusted basis of
other property contributed by the limited partner to the
Partnership, (2) amounts borrowed by the limited partner for use in
the Partnership except as described below, provided the limited
partner is personally liable for the repayment of such borrowed
amounts or has pledged property (other than property used in the
activity) as security for the repayment of such borrowed amounts,
and (3) the limited partner's share of any "qualified nonrecourse
financing" which is secured by real property used in the activity.
Loans from related parties are generally excluded from the
definition of "qualified nonrecourse financing" unless the
financing is provided by a related person that is actively and
regularly engaged in the business of lending money and the
financing is commercially reasonable and on substantially the same
terms as loans involving unrelated persons. If a limited partner's
at-risk amount is reduced below zero, losses previously allowed are
recaptured to the extent zero exceeds the limited partner's at-risk
amount. A limited partner's amount "at risk" is increased or
decreased by the items which increase and decrease the limited
partner's basis in the Partnership as described above. A limited
partner is not considered to be "at risk" to the extent the limited
partner is protected against loss through nonrecourse financing,
guarantees, stop loss agreements, or similar agreements.
The General Partner believes there is a reasonable basis to assert
that the limited partners will continue to be "at-risk" with
respect to the outstanding balance on the Note. The financing was
initially provided by a qualified person, namely TIAA and
accordingly, the financing constitutes "qualified nonrecourse
financing." The subsequent transfer of the Note by TIAA to DMLP is
a transaction separate and apart from the financing. It is the
sale of a note, not a refinancing. While the General Partner
believes there is a reasonable basis for this position, there can
be no assurances that the IRS may not be able to successfully
assert that the Note no longer constitutes "qualified nonrecourse
financing" following its sale to DMLP. If so, a limited partner
would be required to recapture previously deducted losses to the
extent that their "at-risk" amount is reduced below zero.
On August 29, 2002, the Partnership reduced the outstanding
principal balance of the Note by approximately $1.28 million in
connection with the transfer of the Note to DMLP. However, this
reduction should not cause any limited partner to recognize gain
because, following the reduction, the Partnership's outstanding
debt with respect to the replacement property will be approximately
equal to the debt owed at the time of the sale of The Meadows II,
or $8.8 million.
State and Local Taxes
In addition to the federal income tax considerations described
above, limited partners should consider potential state and local
tax consequences of the transactions described herein. The extent
to which a limited partner's allocable share of the income, gain
and loss attributable to the transactions described herein will be
taxable by any state or local government will depend on the limited
partner's particular circumstances and is a matter that limited
partners are urged to discuss with their own tax advisers.
REVOCATION OF THE AMENDMENTS ONCE ADOPTED
Under Section 14.1, amendments to the Partnership Agreement require
the consent of the General Partner and limited partners. If the
Proposed Amendments are adopted, such amendments could only be
revoked with the consent of a majority of Interests and consent of
the General Partner. The General Partner does not intend to
consent to a revocation. Under such circumstances, in order to
revoke the Proposed Amendments, the General Partner would have to
be removed, which could be expensive and require the payment to the
General Partner for its general partnership interest and would
require compliance with the terms of the Partnership Agreement.
RECENT EVENTS
Mr. Keierleber Acquired Control of a Majority of the Outstanding
Partnership Interests
In May 2002, the Partnership and Mr. Keierleber conducted a tender
offer for the purchase of up to 7,700 Interests, at a price of $895
per Interest. In the tender offer, the Partnership purchased 3,000
Interests and Mr. Keierleber purchased 2,809.097 Interests. A
total of 671 limited partners tendered their Interests in the
tender offer. Prior to the tender offer, Mr. Keierleber owned
24.4% of the outstanding Interests. After the tender offer, Mr.
Keierleber purchased an additional 620.5 Interests at a price of
$895 per Interest from 30 limited partners, thereby increasing his
beneficial ownership to approximately 64.7% of the outstanding
Interests. Consequently, Mr. Keierleber acquired sufficient
Interests in the tender offer to control a majority of the
outstanding Interests and is able to control the vote on matters
for which the limited partners have voting rights.
Consequences of Mr. Keierleber Controlling a Majority of the
Outstanding Partnership Interests
Mr. Keierleber therefore has enough Interests to ratify the
Approval and adopt the Proposed Amendments, and he intends to vote
in favor of both. In the future, it is possible that Mr.
Keierleber may propose and adopt additional changes to the
investment parameters of the Partnership.
SOLICITATION EXPENSES
The expenses of preparing, printing and mailing these proxy
materials and the costs of soliciting Consents (which are estimated
at $7,700, exclusive of any expenses associated with salaries or
wages of officers who may participate in the solicitation efforts)
will be paid by the Partnership. Consents are being solicited
principally by mail, but Consents may also be solicited personally
by telephone, telecopy, telegraph and similar means by the
Partnership and employees of its affiliates. The Partnership may
also reimburse brokerage firms and others for their expense in
forwarding proxy solicitation materials to the beneficial owners of
the Interests.
It is anticipated that any solicitation for this proposal will be
undertaken by Mr. Jeffrey Keierleber and Mr. Michael G. Sweet,
General Partner of Decade Companies and Partnership Manager of the
Partnership, respectively. Jeffrey Keierleber is also the sole
director and shareholder of Decade 80, Inc., a General Partner of
Decade Companies. Both Mr. Keierleber and Mr. Sweet maintain
offices at Decade Companies, N19 W24130 Riverwood Drive, Waukesha,
WI 53188. It is not anticipated that any specially engaged
employees, representatives, or other persons will be employed to
solicit Consents. To date, the Partnership estimates that it has
incurred $4,000 in costs and expenses in connection with this
solicitation and preparing the Proxy Statement.
No participant in the solicitation has been convicted in a criminal
proceeding.
The limited partners can help the Partnership avoid the additional
expense of further solicitations by promptly returning the executed
Consent. The enclosed addressed envelope requires no postage if
mailed in the U.S. and is intended for your convenience.
LEGAL BASIS FOR THE PROPOSED AMENDMENTS
DCIP believes it can adopt the Proposed Amendments, under Wis.
Stats. Chapter 179 and the DCIP Partnership Agreement. The
Partnership Agreement permits amendments with the consent of the
General Partner and holders of a majority of Interests and the
General Partner desires the Approval.
INTERESTS OWNED BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table indicates the persons who (i), as of March 1,
2003, were known by the Partnership to be the beneficial owners of
more than 5% of any Partnership Interests and (ii) affiliates of
the General Partner and officers or key employees thereof. The
following information is based on the Partnership's list of
holders.
Name and Business Amount and Nature
Address of of Beneficial Percent
Title of Class Beneficial Owner Ownership Of Class
Limited Mr. Jeffrey Keierleber(1)
Partnership N19 W24130 Riverwood
Interest Drive #100
Waukesha, WI 53188 6,639.067(2) 64.7%
Limited Mr. Michael Sweet(3)
Partnership N19 W24130 Riverwood
Interest Drive #100
Waukesha, WI 53188 8.05 0.08%
General Decade Companies (1)
Partnership N19 W24130 Riverwood
Interest Drive #100
Waukesha, WI 53188 0 0%
General Decade 80, Inc. (1)
Partnership N19 W24130 Riverwood
Interest Drive #100
Waukesha, WI 53188 0 0%
General Mr. Jeffrey Keierleber(1)
Partnership N19 W24130 Riverwood
Interest Drive #100
Waukesha, WI 53188 1 100%
(1) The General Partner of Decade Companies Income Properties is
Decade Companies, a Wisconsin general partnership. Mr. Keierleber
is a General Partner in Decade Companies along with Decade 80, Inc.
Mr. Keierleber owns 100% of the outstanding shares of Decade 80,
Inc.
(2) Decade Properties, Inc. owns eight Interests that are included
as beneficially owned by Mr. Keierleber. Mr. Keierleber owns 100%
of the outstanding shares of Decade Properties, Inc.
(3) Mr. Sweet is an officer of Decade 80, Inc. and serves as the
Partnership Manager of the Partnership.
DELIVERY OF DOCUMENTS TO LIMITED PARTNERS SHARING AN ADDRESS
Only one Proxy Statement is being delivered to two or more limited
partners who share an address, unless the Partnership has received
contrary instructions from one or more of the limited partners.
The Partnership will undertake to deliver promptly upon written or
oral request a separate copy of the Proxy Statement to a limited
partner at a shared address to which a single copy of the Proxy
Statement was delivered. If a limited partner wishes to receive a
separate copy of the Proxy Statement, such limited partner should
notify the Partnership by mail at N19 W24130 Riverwood Drive, Suite
100, Waukesha, WI 53188, or by telephone at 262-522-8990.
DECADE COMPANIES INCOME PROPERTIES
CONSENT
THIS CONSENT IS SOLICITED ON BEHALF OF
DECADE COMPANIES INCOME PROPERTIES
The undersigned hereby appoints Michael G. Sweet and Jeffrey
Keierleber with the power to act alone and with full power of
substitution and revocation to represent and vote, as specified
below, all Interests which the undersigned is entitled to vote.
The Interests represented by the Consent will be voted
concerning the adoption of the Approval and Proposed Amendments as
indicated below. The undersigned hereby acknowledges receipt of
the Proxy Statement.
1. Approval: To approve the General Partner's investment of
Partnership funds in Decade Mortgage Loan Partners, LLC and
related actions.
For Abstain Against
[ ] [ ] [ ]
2. Proposed Amendments: To adopt the Proposed Amendments to
Sections 3.49, 7.2, 7.3 and 7.4 of the Partnership Agreement
as described in the Proxy Statement.
For Abstain Against
[ ] [ ] [ ]
THE PARTNERSHIP RECOMMENDS THAT YOU VOTE FOR THE APPROVAL AND
PROPOSED AMENDMENTS.
[Name of Owner and Number of Interests Owned]
Date _______________ ______________________________
*Signature
Date _______________ ______________________________
*Signature (if jointly held)
Please check a box and sign, date and return this Consent to:
Decade Companies Income Properties A Limited Partnership
N19 W24130 Riverwood Drive, Suite 100
Waukesha, WI 53188
*Please sign as name appears herein. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee or
guardian, please give full title as such and sign. If a
corporation, please sign in full corporate name by authorized
officer. If a partnership, please sign in partnership name by
authorized person.