UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
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SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: AUGUST 31, 1997
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 0-17149
PAINEWEBBER MORTGAGE PARTNERS FIVE, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 04-2889712
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(State of organization) (I.R.S. Employer
Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (617) 439-8118
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
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(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No_____
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
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Prospectus of registrant dated Parts II and IV
December 3, 1985, as supplemented
Current Report on Form 8-K Part IV
of registrant dated August 25, 1997
PAINEWEBBER MORTGAGE PARTNERS FIVE, L.P.
1997 FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1 Business I-1
Item 2 Properties I-3
Item 3 Legal Proceedings I-4
Item 4 Submission of Matters to a Vote of Security Holders I-5
Part II
Item 5 Market for the Partnership's Limited Partnership
Interests and Related Security Holder Matters II-1
Item 6 Selected Financial Data II-1
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations II-2
Item 8 Financial Statements and Supplementary Data II-7
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-7
Part III
Item 10 Directors and Executive Officers of the Partnership III-1
Item 11 Executive Compensation III-2
Item 12 Security Ownership of Certain Beneficial Owners and
Management III-3
Item 13 Certain Relationships and Related Transactions III-3
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
Financial Statements and Supplementary Data F-1 to F-14
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Partnership's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such a difference are discussed in Item 7 in the section entitled
"Certain Factors Affecting Future Operating Results" beginning on page II-6 of
this Form 10-K.
PART I
Item 1. Business
PaineWebber Mortgage Partners Five, L.P. (the "Partnership") is a limited
partnership formed in October 1985 under the Uniform Limited Partnership Act of
the State of Delaware for the purpose of investing in a diversified portfolio of
income-producing operating properties through land purchase-leaseback
transactions and first mortgage loans. The Partnership sold $38,849,400 in
Limited Partnership Units (776,988 Units at $50 per Unit) from December 3, 1985
to December 2, 1987 pursuant to an Amended Registration Statement filed on Form
S-11 under the Securities Act of 1933 (Registration No. 33-934). Limited
Partners will not be required to make any additional capital contributions.
The Partnership originally owned land and made first mortgage loans
secured by buildings with respect to four operating properties. As of August 31,
1997, the Partnership owned one operating property directly as a result of
foreclosure actions resulting from a default under the terms of the mortgage
loan receivable and had one remaining loan receivable and land investment. The
Partnership's operating property and security for its mortgage loan investment
are described below.
Property name Type of Property and
and Location Date of Investment Size Type of Ownership (1)
- --------------- -------------------------- ---- ----------------------
Hacienda Plaza (2) Retail and Office Complex 78,415 sq. ft.; Feeownership of land and
Pleasanton, CA 8/15/86 6.3 acres of land improvements
Park South (3) Apartments 240 units; Fee ownership of land
Charlotte, NC 12/29/88 19 acres of land subject to ground lease and
first mortgage lien
on improvements
(1) See Notes to the Financial Statements filed with this Annual Report for a
description of the transactions through which the Partnership has acquired
these real estate investments.
(2) On June 22, 1990, the Partnership was granted title to the Hacienda Plaza
property and assumed ownership as a result of certain defaults by the
borrower under the terms of the Partnership's mortgage loan receivable. The
Partnership has been operating the property utilizing the services of a
local property management company since the date of the foreclosure.
(3) The Partnership owns a 23% interest in the land underlying the Park South
Apartments and has an equivalent interest in the related secured mortgage
loan. The remaining 77% interest in the land and mortgage loan receivable is
owned by an affiliated partnership, Paine Webber Qualified Plan Property
Fund Four, LP.
In addition to the above properties, the Partnership previously had
investment interests in the Ballston Place Phase I apartment building, a
139-unit high-rise apartment complex located in Arlington, Virginia, and the
Spartan Place Shopping Center, a 151,489 leasable square foot retail center
located in Spartanburg, South Carolina. In November 1989, the Partnership sold
the land it had previously owned and leased back to Ballston Place Associates
Limited Partnership ("BPA"). The Partnership also allowed BPA to prepay the
mortgage loan secured by the Ballston Place Phase I apartment building. BPA made
a cash payment of approximately $11,402,000 to the Partnership on November 29,
1989 in return for the Partnership's agreement to release the first leasehold
mortgage applicable to the Ballston Place Apartments Phase I. In connection with
the sale, the Partnership received a fixed installment note in the principal
amount of $355,200, which was to be payable in eight annual installment payments
beginning April 1, 1992 and ending on April 1, 1999. The fixed installment note
was to bear interest, beginning in April of 1992, equal to the interest rate
applicable to one-year U.S. Treasury bills and was guaranteed as to its payment
by the parent company of the borrowing entity. During fiscal 1992, the borrower
failed to make the required April 1, 1992 initial installment payment due the
Partnership and filed for protection under Chapter 11 of the U.S. Bankruptcy
Code due to defaults on the first mortgage loan secured by the property.
Throughout fiscal 1993, management pursued legal action against the guarantors
of the note in an effort to collect the principal and interest receivable.
During the quarter ended February 28, 1993, a settlement agreement between the
Partnership and the guarantors was approved by the United States Bankruptcy
Court whereby the Partnership received a cash payment of $81,000 to fully
satisfy all of the borrower's outstanding obligations to the Partnership. As a
result, the Partnership no longer has any investment interest in the Ballston
Place property.
The Partnership had assumed ownership of the Spartan Place Shopping Center
in February 1991 as a result of a deed-in-lieu of foreclosure transaction which
resulted from certain defaults under the terms of the Partnership's first
mortgage loan receivable. The Partnership operated the property using the
services of a local management company subsequent to assuming ownership. On
August 25, 1997, the Partnership sold the Spartan Place property to an unrelated
third party for $4,450,000. After closing costs and adjustments, the Partnership
realized net proceeds of approximately $4,381,000 from the sale of Spartan
Place. As a result of the sale of the Spartan Place Shopping Center, a Special
Distribution of approximately $5,750,000, or $148 per original $1,000
investment, was made on October 15, 1997 to unitholders of record as of August
25, 1997. The Special Distribution included the net proceeds from the sale of
the Spartan Place Shopping Center as well as substantially all of the proceeds
of the $1.5 million letter of credit that was collected from the Spartan Place
borrower at the time of the original default and foreclosure on February 12,
1991. Approximately $180,000 of those proceeds were retained by the Partnership
to provide for the capital needs of the Partnership's wholly-owned Hacienda
Plaza property. The Partnership had begun to examine the possibility of selling
Spartan Place in fiscal 1996 and had engaged in selective marketing efforts over
the past two years. After careful evaluation of the potential benefits of a sale
in an "as-is" condition versus the risks of continuing to search for tenants to
replace the two anchor stores that closed their operations during fiscal year
1995, an agreement was signed during the third quarter of fiscal 1997 which gave
a prospective third-party buyer a 60-day exclusive right to purchase the
property. Although the agreement expired during the fourth quarter, negotiations
continued with this prospective buyer and eventually resulted in the sale of the
Spartan Place Shopping Center on August 25, 1997. The sale price of $4,450,000
compares favorably with the most recent independent appraisal of the property.
Due to the Spartan Place Special Distribution and the resulting decrease in the
Partnership's cash flow, it is anticipated that the Partnership's annualized
distribution rate will be adjusted from 2% to 1% beginning with the distribution
for the quarter ending November 30, 1997, which will be made on January 15,
1998.
The Partnership's investment objectives are to:
(1) preserve and protect the Limited Partners' capital;
(2) preserve the Limited Partners' buying power (i.e., provide an inflation
hedge);
(3) provide the Limited Partners with cash distributions from investment
income; and
(4) achieve long-term appreciation in the value of the Partnership's
investments.
Through August 31, 1997, the Limited Partners had received cumulative cash
distributions totalling approximately $27,061,000, or $713 per original $1,000
investment for the Partnership's earliest investors. This return includes
capital distributions of $322 per original $1,000 investment from the prepayment
of the Ballston Place mortgage loan and related land repurchase in November of
1989. In addition, as noted above, a capital distribution of $148 per original
$1,000 investment was made subsequent to year-end as a result of the sale of the
Spartan Place Shopping Center. As of August 31, 1997, the Partnership retained
interests in two of the four investment properties underlying its original
mortgage loan and land investments. The Partnership's success in meeting its
capital appreciation objective will depend upon the proceeds received from the
final liquidation of these remaining investments. The amount of such proceeds
will ultimately depend upon the value of the underlying investment properties at
the time of their final liquidation, which cannot presently be determined. While
market values for commercial office buildings have generally begun to recover
after several years of depressed conditions, such values, for the most part,
remain below the levels which existed in the mid-1980's, which is when the
Partnership's properties were acquired. Such conditions are due, in part, to the
residual effects of the overbuilding which occurred in the late 1980's and the
trend toward corporate downsizing and restructurings which occurred in the wake
of the last national recession. In addition, at the present time real estate
values for retail shopping centers in certain markets are being adversely
impacted by the effects of overbuilding and consolidations among retailers which
have resulted in an oversupply of space and by the generally flat rate of growth
in retail sales. The market for multi-family residential properties in most
markets throughout the country remained strong during fiscal 1997 although
estimated market values in some markets appeared to have plateaued as a result
of an increase in development activity.
With the sale of Spartan Place, the Partnership has two remaining real
estate assets which consist of the mortgage loan and ground lease secured by the
Park South Apartments and the wholly-owned Hacienda Plaza, a mixed-use
office/retail property. The first mortgage loan secured by Park South matures on
December 28, 2001, however, it opens to prepayment without penalty on December
29, 1997. The owner of the Park South Apartments has recently indicated that it
may prepay the first leasehold mortgage loan and repurchase the underlying land
in early 1998 in conjunction with a sale of the property. In addition, the
Partnership is currently working on a leasing program at Hacienda Plaza that is
expected to increase the value of the property and position it for a possible
sale in the near term. Given the Park South owner's indication of its intent to
prepay the first mortgage loan and repurchase the underlying land and
management's intent to market the Hacienda Plaza property for sale in 1998, it
is possible that a liquidation of the Partnership could be completed in calendar
year 1998. However, there are no assurances that the disposition of the
remaining real estate assets and the liquidation of the Partnership will be
completed within this time frame.
The Partnership's operating property and the property securing its
mortgage loan investment are located in real estate markets in which they face
significant competition for the revenues they generate. The apartment complex
competes with numerous similar projects generally on the basis of price,
location and amenities. Apartment properties in all markets also compete with
the local single family home market for prospective tenants. The availability of
low home mortgage interest rates over the past several years has generally
caused this competition to increase in all areas of the country. The
retail/office complex competes for long-term commercial tenants with numerous
projects of similar type generally on the basis of location, rental rates and
tenant improvement allowances. The Partnership has no real estate investments
located outside the United States. The Partnership is engaged solely in the
business of real estate investment. Therefore, a presentation of information
about industry segments is not applicable.
The Partnership has no employees; it has, however, entered into an
Advisory Contract with PaineWebber Properties Incorporated (the "Adviser"),
which is responsible for the day-to-day operations of the Partnership. The
Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a
wholly-owned subsidiary of PaineWebber Group Inc. ("PaineWebber").
The general partners of the Partnership (the "General Partners") are Fifth
Mortgage Partners, Inc. and Properties Associates 1985, L.P. Fifth Mortgage
Partners, Inc., a wholly-owned subsidiary of PaineWebber, is the Managing
General Partner of the Partnership. The Associate General Partner is Properties
Associates 1985, L.P., a Virginia limited partnership, certain limited partners
of which are also officers of the Adviser and the Managing General Partner.
Subject to the Managing General Partner's overall authority, the business of the
Partnership is managed by the Adviser.
The terms of transactions between the Partnership and affiliates of the
Managing General Partner of the Partnership are set forth in Items 11 and 13
below to which reference is hereby made for a description of such terms and
transactions.
Item 2. Properties
As of August 31, 1997, the Partnership owned one operating property
directly as a result of a foreclosure on the mortgage loan receivable during
fiscal 1990, as noted in Item 1 above to which reference is made for the
description, name and location of such property. Additionally, as of August 31,
1997 the Partnership owned, and had leased back to the seller, the land
underlying the investment property referred to under Item 1.
Occupancy figures for each fiscal quarter during 1997, along with an
average for the year, are presented below for each property.
Percent Occupied At
----------------------------------------------------
Fiscal
1997
11/30/96 2/29/97 5/31/97 8/31/97 Average
-------- ------- ------- ------- -------
Hacienda Plaza 84% 85% 89% 92% 88%
Park South 92% 90% 91% 92% 91%
Spartan Place 35% 33% 33% N/A N/A
Item 3. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly
dissatisfied partnership investors. In March 1995, after the actions were
consolidated under the title In re PaineWebber Limited Partnership Litigation,
the plaintiffs amended their complaint to assert claims against a variety of
other defendants, including Fifth Mortgage Partners, Inc. and Properties
Associates 1985, L.P. ("PA85"), which are the General Partners of the
Partnership and affiliates of PaineWebber. On May 30, 1995, the court certified
class action treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleged
that, in connection with the sale of interests in PaineWebber Mortgage Partners
Five, L.P., PaineWebber, Fifth Mortgage Partners, Inc. and PA85 (1) failed to
provide adequate disclosure of the risks involved; (2) made false and misleading
representations about the safety of the investments and the Partnership's
anticipated performance; and (3) marketed the Partnership to investors for whom
such investments were not suitable. The plaintiffs, who purported to be suing on
behalf of all persons who invested in PaineWebber Mortgage Partners Five, L.P,
also alleged that following the sale of the partnership interests, PaineWebber,
Fifth Mortgage Partners, Inc. and PA85 misrepresented financial information
about the Partnership's value and performance. The amended complaint alleged
that PaineWebber, Fifth Mortgage Partners, Inc. and PA85 violated the Racketeer
Influenced and Corrupt Organizations Act ("RICO") and the federal securities
laws. The plaintiffs sought unspecified damages, including reimbursement for all
sums invested by them in the partnerships, as well as disgorgement of all fees
and other income derived by PaineWebber from the limited partnerships. In
addition, the plaintiffs also sought treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which provides for the complete resolution of the class action litigation,
including releases in favor of the Partnership and PWPI, and the allocation of
the $125 million settlement fund among investors in the various partnerships and
REITs at issue in the case. As part of the settlement, PaineWebber also agreed
to provide class members with certain financial guarantees relating to some of
the partnerships and REITs. The details of the settlement are described in a
notice mailed directly to class members at the direction of the court. A final
hearing on the fairness of the proposed settlement was held in December 1996,
and in March 1997 the court announced its final approval of the settlement. The
release of the $125 million of settlement proceeds had been delayed pending the
resolution of an appeal of the settlement agreement by two of the plaintiff
class members. In July 1997, the United States Court of Appeals for the Second
Circuit upheld the settlement over the objections of the two class members. As
part of the settlement agreement, PaineWebber agreed not to seek indemnification
from the related partnerships and real estate investment trusts at issue in the
litigation (including the Partnership) for any amounts that it is required to
pay under the settlement.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleged, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint sought
compensatory damages of $15 million plus punitive damages against PaineWebber.
In September 1996, the court dismissed many of the plaintiffs' claims in the
Abbate action as barred by applicable securities arbitration regulations.
Mediation with respect to the Abbate action was held in December 1996. As a
result of such mediation, a settlement between PaineWebber and the plaintiffs
was reached which provided for the complete resolution of this matter. Final
releases and dismissals with regard to this action were received during fiscal
1997.
Based on the settlement agreements discussed above covering all of the
outstanding unitholder litigation, management does not expect that the
resolution of these matters will have a material impact on the Partnership's
financial statements, taken as a whole
The Partnership is not subject to any other material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Security Holder Matters
At August 31, 1997, there were 5,699 record holders of Units in the
Partnership. There is no public market for the resale of Units, and it is not
anticipated that a public market for Units will develop. Upon request, the
Managing General Partner will endeavor to assist a Unitholder desiring to
transfer his Units and may utilize the services of PWI in this regard. The price
to be paid for the Units will be subject to negotiation by the Unitholder. The
Managing General Partner will not redeem or repurchase Units.
Effective with the distribution made on October 15, 1997 for the quarter
ended August 31, 1997, the Partnership's Distribution Reinvestment Plan (DRP)
has been terminated and all distributions to Unitholders will be in made in
cash. The Partnership's DRP, which had been in effect since inception, was
designed to enable Unitholders to have their distributions from the Partnership
invested in additional Units of the Partnership. The terms under which the Plan
operated prior to its termination are outlined in detail in the Prospectus, a
copy of which Prospectus, as supplemented, is incorporated herein by reference.
Reference is made to Item 6 below for a discussion of cash distributions
made to the Unitholders during fiscal 1997.
Item 6. Selected Financial Data
PaineWebber Mortgage Partners Five, L.P.
For the years ended August 31, 1997, 1996, 1995, 1994 and 1993
(In thousands, except per Unit data)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Revenues $ 271 $ 280 $ 300 $ 247 $ 231
Operating loss $ (187) $ (178) $ (193) $ (201) $ (153)
Provision for possible
investment loss - $(1,000) $(1,000) $ (1,300) $ (900)
Income from
investment properties
held for sale, net $ 463 $ 467 $ 480 $ 886 $ 837
Gain on sale of
investment property $ 381 - - - -
Net income (loss) $ 657 $ (711) $ (713) $ (614) $ (215)
Net income (loss)
per Limited
Partnership Unit $ 0.84 $ (0.91) $ (0.91) $ (0.78) $ (0.27)
Cash distributions
per Limited
Partnership Unit $ 0.68 $ 0.51 $ 0.99 $ 0.86 $ 0.73
Total assets $ 13,303 $ 13,186 $ 14,175 $ 15,592 $ 16,977
The above selected financial data should be read in conjunction with the
financial statements and related notes appearing elsewhere in this Annual
Report.
The above net income (loss) and cash distributions per Limited Partnership
Unit are based upon the 776,988 Limited Partnership Units outstanding during
each year.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Information Relating to Forward-Looking Statements
- --------------------------------------------------
The following discussion of financial condition includes forward-looking
statements which reflect management's current views with respect to future
events and financial performance of the Partnership. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified below under the heading "Certain Factors Affecting Future Operating
Results", which could cause actual results to differ materially from historical
results or those anticipated. The words "believe", "expect", "anticipate," and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which were made
based on facts and conditions as they existed as of the date of this report. The
Partnership undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Liquidity and Capital Resources
- -------------------------------
The Partnership offered Limited Partnership Interests to the public from
December 3, 1985 to December 2, 1987 pursuant to an Amended Registration
Statement filed under the Securities Act of 1933. Gross proceeds of $38,849,400
were received by the Partnership and, after deducting selling expenses and
offering costs, $33,600,000 was invested in four operating properties in the
form of first mortgage loans and land purchase-leaseback transactions. Since the
time that the original investments were made, the Partnership has liquidated its
Ballston Place mortgage loan and land investments. In addition, the Partnership
had assumed direct ownership of the Hacienda Plaza and Spartan Place properties
subsequent to foreclosure proceedings resulting from defaults under the terms of
the Partnership's first leasehold mortgage loans. On August 25, 1997, the
Partnership sold the Spartan Place property to an unrelated third party for
$4,450,000. After closing costs and adjustments, the Partnership realized net
proceeds of approximately $4,381,000 from the sale of Spartan Place. As a result
of the sale of the Spartan Place Shopping Center, a Special Distribution of
approximately $5,750,000, or $148 per original $1,000 investment, was made on
October 15, 1997 to unitholders of record as of August 25, 1997. The Special
Distribution included the net proceeds from the sale of the Spartan Place
Shopping Center as well as substantially all of the proceeds of the $1.5 million
letter of credit that was collected from the Spartan Place borrower at the time
of the original default and foreclosure on February 12, 1991. Approximately
$180,000 of those proceeds were retained by the Partnership to provide for the
capital needs of the Partnership's wholly-owned Hacienda Plaza property. As
previously reported, the Partnership had begun to examine the possibility of
selling Spartan Place in fiscal 1996 and had engaged in selective marketing
efforts over the past two years. After careful evaluation of the potential
benefits of a sale in an "as-is" condition versus the risks of continuing to
search for tenants to replace the two anchor stores that closed their operations
during fiscal year 1995, an agreement was signed during the third quarter of
fiscal 1997 which gave a prospective third-party buyer a 60-day exclusive right
to purchase the property. Although the agreement expired during the fourth
quarter, negotiations continued with this prospective buyer and eventually
resulted in the sale of the Spartan Place Shopping Center on August 25, 1997.
The sale price of $4,450,000, while substantially less than the Partnership's
original investments in the land and mortgage loan secured by Spartan Place, of
$9.8 million, compares favorably with the most recent independent appraisal of
the property. Due to the Spartan Place Special Distribution and the resulting
decrease in the Partnership's cash flow, it is anticipated that the
Partnership's annualized distribution rate will be adjusted from 2% to 1%
beginning with the distribution for the quarter ending November 30, 1997, which
will be made on January 15, 1998.
With the sale of Spartan Place, the Partnership has two remaining real
estate assets which consist of the mortgage loan and ground lease secured by the
Park South Apartments and the wholly-owned Hacienda Plaza, a mixed-use
office/retail property. The first mortgage loan secured by Park South opens to
prepayment without penalty on December 29, 1997. As discussed further below, the
borrower of the mortgage loan secured by Park South has indicated an intent to
prepay the loan and repurchase the underlying land in early calendar year 1998.
In addition, as discussed further below, the Partnership is currently working on
a leasing program at Hacienda Plaza that is expected to increase the value of
the property and position it for a possible sale in the near term. Given the
Park South owner's indication of its intent to prepay the first mortgage loan
and repurchase the underlying land and management's intent to market the
Hacienda Plaza property for sale in 1998, it is possible that a liquidation of
the Partnership could be completed in calendar year 1998. However, there are no
assurances that the disposition of the remaining real estate assets and the
liquidation of the Partnership will be completed within this time frame.
The Hacienda Plaza office and retail complex was 92% leased as of August
31, 1997, up from 83% as of August 31, 1996. This increase was due to three new
retail leases and one office lease renewal and expansion which were signed
during fiscal 1997. Occupancy of the retail portion of Hacienda Plaza declined
during the first quarter due to the expiration of a lease covering 2,315 square
feet of space. During the second quarter, a new tenant opened a beauty shop in
1,080 square feet of space. In the third quarter, a new retail tenant leased
approximately 2,600 square feet of space. And during the fourth quarter, a lease
was signed with a retail tenant that is now operating a copy and printing center
in a 2,315 square foot retail space. This newly opened business brought the
occupancy level in the retail portion of the property to 97% from 89% at the end
of the third quarter and 85% at August 31, 1996. Only one retail space of
approximately 1,100 spare feet remains available for lease at Hacienda Plaza. As
previously reported, overall occupancy rates for the local office market have
improved considerably over the past 12-18 months, reaching the mid-to-high 90%
range. Such improvement is primarily the result of the resurgence in the growth
of the high technology industries over the past two years. As a result, rental
rates in the Pleasanton, California office market have improved in recent
months. In addition, a significant amount of build-to-suit office and
multi-family residential properties have been constructed within the past year
in the planned development area in which Hacienda Plaza is located. This
development has substantially reduced the amount of available land which could
be developed for competing speculative office properties. As a result of these
conditions, operations of the Hacienda Plaza investment property have been
improving after several years of intense local office and retail market
competition. During the first quarter of fiscal 1997, an existing office tenant
expanded into approximately 6,000 square feet of available space from its
previous 2,400 square feet. The occupancy level in the office portion of the
property has remained at 89% for the past three quarters. The property's leasing
team has been actively working to renew leases with nine tenants that currently
occupy 25% of the office space. All of these tenants have leases that expire
during the next twelve months. This large number of lease expirations provides a
significant opportunity to increase the value of this property as leases are
renewed or new leases are signed at the higher prevailing market rental rates.
To date, the leasing team has successfully renewed two of these leases at
substantially higher rental rates. In addition, the leasing team is negotiating
with two potential new tenants that would occupy substantially all of the
remaining available space in the office portion of the property. As part of the
leasing program, property improvements have been planned for the common areas of
the office building for 1998. Management expects that these improvements will
help maintain the building's competitive position in the Pleasanton market and
will support higher rents from existing tenants as their leases are renewed and
from potential new tenants.
The average occupancy level at Park South Apartments in Charlotte, North
Carolina, was 92% for the quarter ended August 31, 1997. Operations of the
property continue to fully support the debt service and ground lease payments
owed to the Partnership despite a weakening in market conditions for existing
properties in the greater Charlotte area over the past year. A significant
number of new apartment units have been added to the overall Charlotte market
during this time period, including several hundred new units which are in Park
South's sub-market, and a substantial amount of additional units are either
currently under construction or in the planning stages. In order to remain
competitive with these new units, Park South currently offers reduced rental
rates and/or discounted move-in rates to prospective tenants. As an incentive to
renew leases, current tenants are offered minimal increases at the expiration of
their leases. The use of rental concessions and renewal incentives is expected
to continue for the near term. Notwithstanding the current market conditions,
management believes that the long-term prospects for the Park South property
remain positive due to the property's strong position within the marketplace and
the region's outlook for job and population growth over the next several years.
The current occupancy level is in line with the levels of the eight properties
which compete directly with Park South.
The first mortgage loan secured by Park South matures on December 28,
2001, however, it opens to prepayment without penalty on December 29, 1997. The
owner of the Park South Apartments has recently indicated that it may prepay the
first leasehold mortgage loan and repurchase the underlying land in early 1998
in conjunction with a sale of the property. However, there are no assurances
that this sale transaction and the resulting prepayments of the Partnership's
investments will occur within this time frame. The Partnership's Park South land
investment contains a participation feature which entitles the Partnership to
share in the appreciation of the property upon a sale or refinancing. Based on
recent third-party valuations, this property has an estimated value that is
higher than the Partnership's combined original loan and land investments. As a
result, it is anticipated that the Partnership will realize its original net
investments plus some portion of the appreciated value of the property when it
is sold.
At August 31, 1997, the Partnership had available cash and cash
equivalents of $6,795,000. Such amount includes the $5,750,00 capital
distribution that was paid to the Limited Partners on October 15, 1997 as a
result of the Spartan Place sale transaction discussed further above. The
remaining cash and cash equivalents will be used for the working capital
requirements of the Partnership, distributions to the partners and, if
necessary, for leasing costs related to the Hacienda Plaza property. The source
of future liquidity and distributions to the partners is expected to be from the
operations and future sale of the wholly-owned office and retail property,
mortgage interest and land rent payments from the Partnership's mortgage loan
and ground lease investments, interest income on the Partnership's cash
reserves, the repayment of the mortgage loan receivable and the sale of the
underlying parcel of land.
Results of Operations
1997 Compared to 1996
- ---------------------
The Partnership reported net income of $657,000 for the year ended August
31, 1997, as compared to a net loss of $711,000 in the prior fiscal year. The
favorable change in the Partnership's net operating results is primarily due to
the sale of the Spartan Place Shopping Center to an unrelated third party on
August 25, 1997, as discussed further above. The Partnership recognized a gain
of $381,000 from the sale of the investment property. This gain represents the
difference between the gross sales price, net of selling costs, of $4,381,000
and the carrying value of the operating investment property of $4,000,000. In
addition, the fiscal 1996 results reflect a provision for possible investment
loss of $1,000,000 to write down the carrying value of the Spartan Place
property to management's estimate of its net realizable value as of August 31,
1996.
The effects of the fiscal 1997 gain on the sale of the Spartan Place
Shopping Center and the fiscal 1996 provision for possible investment loss were
partially offset by an increase in the Partnership's operating loss of $9,000
and a decrease of $4,000 in income from investment properties held for sale. The
Partnership's operating loss increased by $9,000 in fiscal 1997 due to a
decrease in land rent revenue. Land rent revenue decreased because the
Partnership received $4,000 as additional rent from the Park South Apartments
during fiscal 1997 as compared to $13,000 of additional rent which was received
during fiscal 1996. The decrease of $4,000 in income from investment properties
held for sale is a result of a $31,000 decrease in the net operating income at
Spartan Place, which was partially offset by an increase in net operating income
of $27,000 at Hacienda Plaza. Net operating income at Spartan Place decreased
primarily due to a decrease in rental income. Rental income decreased as a
result of a decline in the property's occupancy level over the past year which
resulted from the anchor tenant vacancies discussed further above. The increase
in net operating income at Hacienda Plaza was primarily due to an increase in
rental income of $119,000. Rental income increased due to an increase in the
property's average occupancy level and an increase in the average rental rates.
A $64,000 increase in capital expenditures at Hacienda Plaza partially offset
the increase in rental income. Under the Partnership's accounting policy with
respect to assets held for sale, capital and tenant improvement costs and
leasing commissions are expensed as incurred. In addition, real estate taxes for
the Hacienda Plaza property increased by $14,000 in fiscal 1997.
1996 Compared to 1995
- ---------------------
The Partnership had a net loss of $711,000 for the year ended August 31,
1996, as compared to a net loss of $713,000 for the prior fiscal year. A
decrease in the Partnership's operating loss was offset by a decrease in income
from investment properties held for sale in fiscal 1996 and kept net operating
results comparable to the prior year. In both years, the Partnership recognized
a provision for possible investment loss of $1,000,000 to reduce the carrying
value of the Partnership's investment in Spartan Place to management's estimate
of fair value as of August 31, 1996 and 1995. The value decline during fiscal
1995 was mainly the result of the Phar-Mor anchor lease termination referred to
above. The lack of leasing progress during fiscal 1996 and the general market
factors affecting retail properties across the country contributed to an
additional decline in estimated fair value which was recognized during fiscal
1996.
The Partnership's operating loss decreased by $15,000 in fiscal 1996
mainly due to a decline in general and administrative expenses of $32,000.
General and administrative expenses decreased primarily as a result of a
reduction in certain required professional services. A decrease of $19,000 in
interest income earned on the Partnership's cash reserves partially offset the
decline in general and administrative expenses for fiscal 1996. Interest income
decreased due to a decrease in the average interest rates earned on the
Partnership's invested cash reserves and a reduction in the average outstanding
cash balances.
The decrease of $13,000 in income from investment property held for sale
during fiscal 1996 was due to a decrease of $155,000 in net income at Spartan
Place. The decrease in net income at Spartan Place resulted from a decline in
rental income of $280,000. Rental income decreased mainly due to the termination
of the 40,000 square foot Phar-Mor lease in July 1995 and the failure to
re-lease this space during fiscal 1996. A decrease of $127,000 in operating
expenses at Spartan Place partially offset the decrease in rental income.
Operating expenses at Spartan Place decreased mainly due to reductions in bad
debt expense of $51,000, repairs and improvements expense of $24,000 and real
estate taxes of $46,000. The higher bad debt expense in fiscal 1995 was
attributable to the store closings of the shopping center's two anchor tenants
and the related number of smaller shop space tenants that subsequently went out
of business. The decrease in net income at Spartan Place was partially offset by
an increase in net income of $142,000 at Hacienda Plaza. The increase in net
income at Hacienda Plaza was mainly due to a decrease in operating expenses of
$184,000. Operating expenses decreased because during fiscal 1995 the property
experienced a fair amount of tenant turnover, downsizing and re-locating. Such
leasing activity resulted in increased bad debt expense from tenants who vacated
the property and expenditures on tenant improvements to re-lease the vacated
space. In addition, a number of capital improvement projects were completed
during fiscal 1995 at Hacienda Plaza. Under the Partnership's accounting policy
with respect to assets held for sale, capital and tenant improvement costs and
leasing commissions are expensed as incurred. A decrease in revenues at Hacienda
Plaza of $42,000 partially offset the decrease in operating expenses. The
decrease in revenues was mainly due to the decline in the average occupancy from
87% during fiscal 1995 to 84% in fiscal 1996.
1995 Compared to 1994
- ---------------------
The Partnership's net loss increased by $99,000 in fiscal 1995, when
compared to the prior year. The primary reason for this increase was a decline
in income from investment properties held for sale of $407,000. Income from
investment properties held for sale decreased mainly due to an increase in real
estate tax expense at Spartan Place and significant capital improvement and
leasing costs incurred at Hacienda Plaza. Real estate taxes increased by $86,000
at Spartan Place. At Hacienda Plaza, despite ending fiscal 1995 at the same 86%
leasing level that existed at August 31, 1994, the property experienced a fair
amount of tenant turnover, downsizing and relocation during the year. Such
leasing activity resulted in increased bad debt expense from tenants who vacated
the property and expenditures on tenant improvements and leasing commissions to
re-lease the vacated space. In addition, certain capital improvement projects
were completed during fiscal 1995 at Hacienda Plaza. As noted above, under the
Partnership's accounting policy with respect to assets held for sale, capital
and tenant improvement costs and leasing commissions are expensed as incurred.
An overall increase in rental revenues at Hacienda Plaza offset the decrease in
rental income at Spartan Place which resulted from the decrease in occupancy
during fiscal 1995, as discussed further above.
The decrease in income from investment properties held for sale was
partially offset by a decrease in the provision for possible investment loss in
fiscal 1995. The provision for possible investment loss decreased by $300,000 in
fiscal 1995. The fiscal 1995 provision of $1 million represents an adjustment to
reduce the carrying value of the investment in Spartan Place to management's
estimate of fair value at August 31, 1995. The value decline during fiscal 1995
was primarily the result of the Phar-Mor anchor lease termination referred to
above. No adjustment was made to the carrying value of the Hacienda Plaza
investment for fiscal 1995. In fiscal 1994, the Partnership recorded an
additional provision of $400,000 related to the Hacienda Plaza property, along
with a $900,000 adjustment to the carrying value of the Spartan Place Shopping
Center, to reflect additional declines in management's estimates of the fair
values of the investment properties. In addition to the decrease in the
provision for possible investment loss, the Partnership's operating loss
decreased by $8,000 in fiscal 1995. Operating loss decreased due to an increase
in interest income of $47,000, which resulted from an increase in interest rates
earned on cash and cash equivalents when compared to fiscal 1994, and an
increase in land rent revenue from the Park South Apartments of $6,000. The
increases in interest income and land rent revenue were partially offset by an
increase in general and administrative expenses of $44,000 primarily due to an
increase in professional fees.
Certain Factors Affecting Future Operating Results
- --------------------------------------------------
The following factors could cause actual results to differ materially from
historical results or those anticipated:
Real Estate Investment Risks. Real property investments are subject to
varying degrees of risk. Revenues and property values may be adversely affected
by the general economic climate, the local economic climate and local real
estate conditions, including (i) the perceptions of prospective tenants of the
attractiveness of the property; (ii) the ability to retain qualified individuals
to provide adequate management and maintenance of the property; (iii) the
inability to collect rent due to bankruptcy or insolvency of tenants or
otherwise; and (iv) increased operating costs. Real estate values may also be
adversely affected by such factors as applicable laws, including tax laws,
interest rate levels and the availability of financing.
Effect of Uninsured Loss. The Partnership carries, or requires its
borrower to carry, comprehensive liability, fire, flood, extended coverage and
rental loss insurance with respect to its properties with insured limits and
policy specifications that management believes are customary for similar
properties. There are, however, certain types of losses (generally of a
catastrophic nature such as wars, floods or earthquakes) which may be either
uninsurable, or, in management's judgment, not economically insurable. Should an
uninsured loss occur, the Partnership could lose both its invested capital in
and anticipated profits from the affected property.
Possible Environmental Liabilities. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may become liable for the costs of the investigation,
removal and remediation of hazardous or toxic substances on, under, in or
migrating from such property. Such laws often impose liability without regard to
whether the owner or operator knew of, or was responsible for, the presence of
such hazardous or toxic substances.
The Partnership is not aware of any notification by any private party or
governmental authority of any non-compliance, liability or other claim in
connection with environmental conditions at any of its properties that it
believes will involve any expenditure which would be material to the
Partnership, nor is the Partnership aware of any environmental condition with
respect to any of its properties that it believes will involve any such material
expenditure. However, there can be no assurance that any non-compliance,
liability, claim or expenditure will not arise in the future.
Competition. The financial performance of the Partnership's remaining real
estate investments will be significantly impacted by the competition from
comparable properties in their local market areas. The occupancy levels and
rental rates achievable at the properties are largely a function of supply and
demand in the markets. In many markets across the country, development of new
multi-family properties has increased significantly in the past year. Existing
apartment properties in such markets could be expected to experience increased
vacancy levels, declines in effective rental rates and, in some cases, declines
in estimated market values as a result of the increased competition. The
commercial office segment has begun to experience limited new development
activity in selected areas after several years of virtually no new supply being
added to the market. There are no assurances that these competitive pressures
will not adversely affect the operations and/or market values of the
Partnership's investment properties in the future.
Availability of a Pool of Qualified Buyers. The availability of a pool of
qualified and interested buyers for the Partnership's remaining real estate
assets is critical to the Partnership's ability to realize the estimated fair
market values of such assets and to complete the liquidation of the Partnership
on a timely basis. Demand by buyers of multi-family apartment and office
properties is affected by many factors, including the size, quality, age,
condition and location of the subject property, the quality and stability of the
tenant roster, the terms of any long-term leases, potential environmental
liability concerns, the liquidity in the debt and equity markets for asset
acquisitions, the general level of market interest rates and the general and
local economic climates.
Inflation
- ---------
The Partnership completed its eleventh full year of operations in fiscal
1997 and the effects of inflation and changes in prices on the Partnership's
revenues and expenses to date have not been significant.
The impact of inflation in future periods may be partially offset by an
increase in revenues because the Partnership's wholly-owned commercial property
has leases which require the tenants to pay for a significant portion of the
property operating expenses. In addition, the Partnership's remaining land lease
provides for additional rent based upon increases in the revenues of the related
operating property which would tend to rise with inflation. Such increases in
revenues would be expected to at least partially offset the increases in
Partnership and property operating expenses resulting from inflation.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included under Item 14
of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Partnership
The Managing General Partner of the Partnership is Fifth Mortgage
Partners, Inc., a Delaware corporation, which is a wholly-owned subsidiary of
PaineWebber. The Associate General Partner of the Partnership is Properties
Associates 1985, L.P., a Virginia limited partnership, certain limited partners
of which are also officers of the Adviser and the Managing General Partner. The
Managing General Partner has overall authority and responsibility for the
Partnership's operation, however, the day-to-day business of the Partnership is
managed by the Adviser pursuant to an advisory contract.
(a) and (b) The names and ages of the directors and principal executive
officers of the Managing General Partner of the Partnership are as follows:
Date elected
Name Office Age to Office
---- ------ --- ---------
Bruce J. Rubin President and Director 38 8/22/96
Terrence E. Fancher Director 44 10/10/96
Walter V. Arnold Senior Vice President and
Chief Financial Officer 50 10/29/85
David F. Brooks First Vice President and
Assistant Treasurer 55 8/27/85 *
Timothy J. Medlock Vice President and Treasurer 36 6/1/88
Thomas W. Boland Vice President and Controller 35 12/1/91
Dorothy F. Haughey Secretary 71 8/27/85 *
* The date of incorporation of the Managing General Partner
(c) There are no other significant employees in addition to the directors
and executive officers mentioned above.
(d) There is no family relationship among any of the foregoing directors
or officers of the Managing General Partner of the Partnership. All of the
foregoing directors and executive officers have been elected to serve until the
annual meeting of the Managing General Partner.
(e) All of the directors and officers of the Managing General Partner hold
similar positions in affiliates of the Managing General Partner, which are the
corporate general partners of other real estate limited partnerships sponsored
by PWI, and for which PaineWebber Properties Incorporated ("PWPI") serves as the
Adviser. The business experience of each of the directors and principal
executive officers of the Managing General Partner is as follows:
Bruce J. Rubin is President and Director of the Managing General
Partner. Mr. Rubin was named President and Chief Executive Officer of PWPI in
August 1996. Mr. Rubin joined PaineWebber Real Estate Investment Banking in
November 1995 as a Senior Vice President. Prior to joining PaineWebber, Mr.
Rubin was employed by Kidder, Peabody and served as President for KP Realty
Advisers, Inc. Prior to his association with Kidder, Mr. Rubin was a Senior
Vice President and Director of Direct Investments at Smith Barney Shearson.
Prior thereto, Mr. Rubin was a First Vice President and a real estate workout
specialist at Shearson Lehman Brothers. Prior to joining Shearson Lehman
Brothers in 1989, Mr. Rubin practiced law in the Real Estate Group at Willkie
Farr & Gallagher. Mr. Rubin is a graduate of Stanford University and Stanford
Law School.
Terrence E. Fancher was appointed a Director of the Managing General
Partner in October 1996. Mr. Fancher is the Managing Director in charge of
PaineWebber's Real Estate Investment Banking Group. He joined PaineWebber as
a result of the firm's acquisition of Kidder, Peabody. Mr. Fancher is
responsible for the origination and execution of all of PaineWebber's REIT
transactions, advisory assignments for real estate clients and certain of the
firm's real estate debt and principal activities. He joined Kidder, Peabody
in 1985 and, beginning in 1989, was one of the senior executives responsible
for building Kidder, Peabody's real estate department. Mr. Fancher previously
worked for a major law firm in New York City. He has a J.D. from Harvard Law
School, an M.B.A. from Harvard Graduate School of Business Administration and
an A.B. from Harvard College.
Walter V. Arnold is a Senior Vice President and Chief Financial Officer of
the Managing General Partner and a Senior Vice President and Chief Financial
Officer of the Adviser which he joined in October 1985. Mr. Arnold joined PWI in
1983 with the acquisition of Rotan Mosle, Inc. where he had been First Vice
President and Controller since 1978, and where he continued until joining the
Adviser. He began his career in 1974 with Arthur Young & Company in Houston. Mr.
Arnold is a Certified Public Accountant licensed in the state of Texas.
David F. Brooks is a First Vice President and Assistant Treasurer of the
Managing General Partner and a First Vice President and an Assistant Treasurer
of the Adviser. Mr. Brooks joined the Adviser in March 1980. From 1972 to 1980,
Mr. Brooks was an Assistant Treasurer of Property Capital Advisors, Inc. and
also, from March 1974 to February 1980, the Assistant Treasurer of Capital for
Real Estate, which provided real estate investment, asset management and
consulting services.
Timothy J. Medlock is a Vice President and Treasurer of the Managing
General Partner and a Vice President and Treasurer of the Adviser which he
joined in 1986. From June 1988 to August 1989, Mr. Medlock served as the
Controller of the Managing General Partner and the Adviser. From 1983 to 1986,
Mr. Medlock was associated with Deloitte Haskins & Sells. Mr. Medlock graduated
from Colgate University in 1983 and received his Masters in Accounting from New
York University in 1985.
Thomas W. Boland is a Vice President and Controller of the Managing
General Partner and a Vice President and Controller of the Adviser which he
joined in 1988. From 1984 to 1987, Mr. Boland was associated with Arthur
Young & Company. Mr. Boland is a Certified Public Accountant licensed in the
state of Massachusetts. He holds a B.S. in Accounting from Merrimack College
and an M.B.A. from Boston University.
Dorothy F. Haughey is Secretary of the Managing General Partner,
Assistant Secretary of PaineWebber and Secretary of PWI. Ms. Haughey joined
PaineWebber in 1962.
(f) None of the directors and officers was involved in legal proceedings
which are material to an evaluation of his or her ability or integrity as a
director or officer.
(g) Compliance With Exchange Act Filing Requirements: The Securities
Exchange Act of 1934 requires the officers and directors of the Managing General
Partner, and persons who own more than ten percent of the Partnership's limited
partnership units, to file certain reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and ten-percent
beneficial holders are required by SEC regulations to furnish the Partnership
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Partnership believes that, during the year ended August 31, 1997, all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
Item 11. Executive Compensation
The directors and officers of the Partnership's Managing General Partner
receive no current or proposed remuneration from the Partnership.
The Partnership is required to pay certain fees to the Adviser and the
General Partners are entitled to receive a share of cash distributions and a
share of profits and losses. These items are described in Item 13.
The Partnership has paid cash distributions to the Unitholders on a
quarterly basis at rates ranging from 1% to 3% per annum on remaining invested
capital over the past five years. However, the Partnership's Units of Limited
Partnership Interest are not actively traded on any organized exchange, and no
efficient secondary market exists. Accordingly, no accurate price information is
available for these Units. Therefore, a presentation of historical Unitholder
total returns would not be meaningful.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) The Partnership is a limited partnership issuing Units of Limited
Partnership Interest, not voting securities. All the outstanding stock of the
Managing General Partner, Fifth Mortgage Partners, Inc., is owned by
PaineWebber. Properties Associates 1985, L.P., the Associate General Partner, is
a Virginia limited partnership, certain limited partners of which are also
officers of the Adviser and the Managing General Partner. Properties Associates
1985 was the Initial Limited Partner of the Partnership. No limited partner is
known by the Partnership to own beneficially more than 5% of the outstanding
interests of the Partnership.
(b) Neither the directors and officers of the Managing General Partner nor
the limited partners of the Associate General Partner individually own any Units
of Limited Partnership interest of the Partnership. No director or officer of
the Managing General Partner nor the limited partners of the Associate General
Partner possess a right to acquire beneficial ownership of Units of Limited
Partnership Interest of the Partnership.
(c) There exists no arrangement, known to the Partnership, the operation
of which may at a subsequent date result in a change in control of the
Partnership.
Item 13. Certain Relationships and Related Transactions
The General Partners of the Partnership are Fifth Mortgage Partners, Inc.
(the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group
Inc. ("PaineWebber"), and Properties Associates 1985, L.P. (the "Associate
General Partner"), a Virginia limited partnership, certain limited partners of
which are also officers of the Adviser and the Managing General Partner. Subject
to the Managing General Partner's overall authority, the business of the
Partnership is managed by the Adviser pursuant to an advisory contract. The
Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a
wholly-owned subsidiary of PaineWebber.
The General Partners, the Adviser and PWI receive fees and compensation
determined on an agreed-upon basis, in consideration of various services
performed in connection with the sale of the Units, the management of the
Partnership and the acquisition, management and disposition of Partnership
investments.
Acquisition fees in the amount of 3% of the gross offering proceeds were
paid to the Adviser for analyzing, structuring and negotiating the acquisitions
of the Partnership's investments. The Adviser may receive a commission, in an
amount not yet determinable, upon the disposition of certain Partnership
investments.
Distributable Cash, as defined, of the Partnership will be distributed 98%
to the Limited Partners, 1% to the General Partners and 1% to the Adviser as an
asset management fee. Residual proceeds resulting from disposition of
Partnership investments will be distributed generally, 95% to the Limited
Partners, 3.99% to the Adviser as an asset management fee and 1.01% to the
General Partners after the prior receipt by the Limited Partners of their
original capital contributions and a cumulative annual return of 10%, as set
forth in the Amended Partnership Agreement.
Any taxable income or tax loss (other than from a Capital Transaction) of
the Partnership will be allocated 98.989899% to the Limited Partners and
1.010101% to the General Partners. Taxable income or tax loss arising from a
sale or refinancing of investment properties will be allocated to the Limited
Partners and the General Partners in proportion to the amounts of sale or
refinancing proceeds to which they are entitled; provided that the General
Partners shall be allocated at least 1% of taxable income arising from a sale or
refinancing. Allocations of the Partnership's operations between the General
Partners and the Limited Partners for financial accounting purposes have been
made in conformity with the allocations of taxable income or tax loss.
The Adviser has been contracted to perform specific management
responsibilities; to administer day-to-day operations of the Partnership and to
report periodically the performance of the Partnership to the Managing General
Partner. The Adviser will be paid a base management fee of 1/2 of 1% of the
gross proceeds of the offering, in addition to the asset management fee
described above, for these services. The Adviser earned base and asset
management fees totalling $137,000 for the year ended August 31, 1997. In
accordance with the Partnership Agreement, management fees payable in respect to
any fiscal year ending prior to December 1, 1987 were to be deferred to the
extent that cash distributions were insufficient to provide a 9% non-cumulative
annual return to the Limited Partners in respect to such fiscal year. Any
portion of the management fees so deferred ($245,000 at August 31, 1997) are to
be paid (without interest) from cash distributions in any succeeding fiscal year
after the limited partners have received a 9% annual return for that fiscal year
or from Residual Proceeds, as defined.
The Managing General Partner and its affiliates are reimbursed for their
direct expenses relating to the offering of Units, the administration of the
Partnership and the acquisition and operations of the Partnership's real
property investments.
An affiliate of the Managing General Partner performs certain accounting,
tax preparation, securities law compliance and investor communications and
relations services for the Partnership. The total costs incurred by this
affiliate in providing such services are allocated among several entities,
including the Partnership. Included in general and administrative expenses for
the year ended August 31, 1997 is $140,000, representing reimbursements to this
affiliate for providing such services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an
independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees
of $8,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during fiscal 1997. Fees charged by Mitchell Hutchins
are based on a percentage of invested cash reserves which varies based on the
total amount of invested cash which Mitchell Hutchins manages on behalf of PWPI.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) and (2) Financial Statements and Schedules:
The response to this portion of Item 14 is submitted as a
separate section of this report. See Index to Financial
Statements and Financial Statement Schedules at page F-1.
Financial statements for the property securing the Partnership's
remaining mortgage loan have not been included since the
Partnership has no contractual right to the information and
cannot otherwise practicably obtain the information.
(3) Exhibits:
The exhibits listed on the accompanying index to exhibits at page
IV-3 are filed as part of this Report.
(b) A Current Report on Form 8-K dated August 25, 1997 was filed to
report the sale of the Spartan Place Shopping Center and is hereby
incorporated by reference.
(c) Exhibits
See (a)(3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this report. See Index to Financial Statements and
Financial Statement Schedules at page F-1.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINEWEBBER MORTGAGE PARTNERS FIVE, L.P.
By: Fifth Mortgage Partners, Inc.
Managing General Partner
By: /s/ Bruce J. Rubin
------------------
Bruce J. Rubin
President and Chief Executive Officer
By: /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
By: /s/ Thomas W. Boland
--------------------
Thomas W. Boland
Vice President and Controller
Dated: November 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Partnership in
the capacity and on the dates indicated.
By:/s/ Bruce J. Rubin Date: November 26, 1997
------------------ -----------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: November 26, 1997
----------------------- -----------------
Terrence E. Fancher
Director
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINEWEBBER MORTGAGE PARTNERS FIVE, L.P.
INDEX TO EXHIBITS
Page Number in the Report
Exhibit No. Description of Document or Other Reference
- ----------- ----------------------- ------------------
(3) and (4) Prospectus of the Registrant Filed with the Commission
dated December 3, 1985, supplemented, pursuant to Rule 424(c)
with particular reference to the and incorporated herein by
Restated Certificate and Agreement reference.
Limited Partnership.
(10) Material contracts previously filed as Filed with the Commission
exhibits to registration statements and pursuant to Section 13 or
amendments thereto of the registrant 15(d) of the Securities
together with all such contracts filed Exchange Act of 1934 and
as exhibits of previously filed Forms incorporated herein by
8-K and Forms 10-K are hereby reference.
incorporated herein by reference.
(13) Annual Reports to Limited Partners No Annual Report for the
year ended August 31, 1997
has been sent to the
Limited Partners. An Annual
Report will be sent to the
Limited Partners subsequent
to this filing.
(27) Financial Data Schedule Filed as last page of EDGAR
submission following the
Financial Statements and
Financial Statement
Schedule required by
Item 14.
ANNUAL REPORT ON FORM 10-K
Item 14(a)(1) and (2) and 14(d)
PAINEWEBBER MORTGAGE PARTNERS FIVE, L.P.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference
PaineWebber Mortgage Partners Five, L.P.:
Report of independent auditors F-2
Balance sheets as of August 31, 1997 and 1996 F-3
Statements of operations for the years ended August 31, 1997,
1996 and 1995 F-4
Statements of changes in partners' capital (deficit) for the years
ended August 31, 1997, 1996 and 1995 F-5
Statements of cash flows for the years ended August 31, 1997,
1996 and 1995 F-6
Notes to financial statements F-7
Financial Statement Schedules:
Schedule III - Real Estate Owned F-13
Schedule IV - Investments in Mortgage Loans on Real Estate F-14
Other schedules have been omitted since the required information is not present
or not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the financial statements,
including the notes thereto.
REPORT OF INDEPENDENT AUDITORS
The Partners of
PaineWebber Mortgage Partners Five, L.P.:
We have audited the accompanying balance sheets of PaineWebber Mortgage
Partners Five, L.P. as of August 31, 1997 and 1996, and the related statements
of operations, changes in partners' capital (deficit), and cash flows for each
of the three years in the period ended August 31, 1997. Our audits also included
the financial statement schedules listed in the Index at Item 14(a). These
financial statements and schedules are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PaineWebber Mortgage
Partners Five, L.P. at August 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
August 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Boston, Massachusetts
November 20, 1997
PAINEWEBBER MORTGAGE PARTNERS FIVE, L.P.
BALANCE SHEETS
August 31, 1997 and 1996
(In thousands, except per Unit data)
ASSETS
1997 1996
---- ----
Real estate investments:
Investment properties held for sale, net
of allowance for possible investment
loss of $3,300 ($7,140 in 1996) $ 4,900 $ 8,900
Land 230 230
Mortgage loan receivable 1,270 1,270
------- -------
6,400 10,400
Cash and cash equivalents 6,795 2,637
Interest and land rent receivable 21 10
Accounts receivable 48 87
Prepaid expenses 19 27
Deferred expenses, net of accumulated
amortization of $43 ($38 in 1996) 20 25
------- -------
$13,303 $13,186
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 33 $ 33
Accounts payable and accrued expenses 298 307
Tenant security deposits 88 85
Deferred management fees 245 245
------- -------
Total liabilities 664 670
Partners' capital:
General Partners:
Capital contributions 1 1
Cumulative net income 90 83
Cumulative cash distributions (190) (185)
Limited Partners ($50 per Unit, 776,988
Units issued and outstanding):
Capital contributions, net of offering costs 34,968 34,968
Cumulative net income 4,831 4,181
Cumulative cash distributions (27,061) (26,532)
------- -------
Total partners' capital 12,639 12,516
------- -------
$13,303 $13,186
======= =======
See accompanying notes.
PAINEWEBBER MORTGAGE PARTNERS FIVE, L.P.
STATEMENTS OF OPERATIONS
For the years ended August 31, 1997, 1996 and 1995
(In thousands, except per Unit data)
1997 1996 1995
---- ---- ----
Revenues:
Interest from mortgage loan $ 114 $ 114 $ 114
Land rent 25 34 35
Other interest income 132 132 151
------- ------- -------
271 280 300
Expenses:
Management fees 137 136 139
General and administrative 316 317 349
Amortization of deferred expenses 5 5 5
------- ------- -------
458 458 493
------- ------- -------
Operating loss (187) (178) (193)
Investment properties held for sale:
Provision for possible investment loss - (1,000) (1,000)
Income from investment
properties held for sale, net 463 467 480
Gain on sale of investment property 381 - -
------- ------- -------
844 (533) (520)
------- ------- -------
Net income (loss) $ 657 $ (711) $ (713)
======= ======== ========
Net income (loss) per Limited
Partnership Unit $ 0.84 $ (0.91) $ (0.91)
====== ======= =======
Cash distributions per Limited
Partnership Unit $ 0.68 $ 0.51 $ 0.99
====== ======= =======
The above net income (loss) and cash distributions per Limited Partnership
Unit are based upon the 776,988 Units of Limited Partnership Interest
outstanding during each year.
See accompanying notes.
PAINEWEBBER MORTGAGE PARTNERS FIVE, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended August 31, 1997, 1996 and 1995
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
Balance at August 31, 1994 $ (75) $ 15,194 $ 15,119
Net loss (7) (706) (713)
Cash distributions (8) (772) (780)
-------- ---------- ----------
Balance at August 31, 1995 (90) 13,716 13,626
Net loss (7) (704) (711)
Cash distributions (4) (395) (399)
-------- ---------- ----------
Balance at August 31, 1996 (101) 12,617 12,516
Net income 7 650 657
Cash distributions (5) (529) (534)
-------- ---------- ----------
Balance at August 31, 1997 $ (99) $ 12,738 $ 12,639
======== ========== ==========
See accompanying notes.
PAINEWEBBER MORTGAGE PARTNERS FIVE, L.P.
STATEMENTS OF CASH FLOWS
For the years ended August 31, 1997, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 657 $ (711) $ (713)
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Gain on sale of investment property (381) - -
Provision for possible investment loss - 1,000 1,000
Amortization of deferred expenses 5 5 5
Changes in assets and liabilities:
Interest and land rent receivable (11) - -
Accounts receivable 39 (61) 62
Prepaid expenses 8 (10) 7
Accounts payable and accrued expenses (9) 115 60
Tenant security deposits 3 6 16
--------- --------- ---------
Total adjustments (346) 1,055 1,150
--------- --------- ---------
Net cash provided by
operating activities 311 344 437
Cash flows from investing activities:
Proceeds from sale of
investment property 4,381 - -
Cash flows from financing activities:
Distributions to partners (534) (399) (780)
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents 4,158 (55) (343)
Cash and cash equivalents,
beginning of year 2,637 2,692 3,035
--------- --------- ---------
Cash and cash equivalents, end of year $ 6,795 $ 2,637 $ 2,692
======== ======== ========
See accompanying notes.
PAINEWEBBER MORTGAGE PARTNERS FIVE, L.P.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Nature of Operations
-------------------------------------
PaineWebber Mortgage Partners Five, L.P. (the "Partnership") is a limited
partnership organized pursuant to the laws of the State of Delaware in October
1985 for the purpose of investing in a diversified portfolio of existing
income-producing real properties through land purchase-leasebacks and first
mortgage loans. The initial capital was $2,000, representing capital
contributions of $1,000 by the General Partners and $1,000 for twenty units by
the Initial Limited Partner. The Partnership authorized the issuance of Units
(the "Units") of Limited Partnership Interest of which 776,988 Units (at $50 per
Unit) were subscribed and issued between December 3, 1985 and December 2, 1987.
The Partnership originally owned land and made first mortgage loans
secured by buildings with respect to four operating investment properties. To
date, the Partnership has sold or been prepaid on its investments with respect
to two of the original operating properties, including one during fiscal 1997.
As of August 31, 1997, one of the Partnership's mortgage loan and land lease
investments on the original properties was still outstanding, and the
Partnership owned one operating property directly as a result of foreclosing
under the terms of its mortgage loan receivable. See Notes 4 and 5 for a further
discussion of the Partnership's remaining real estate investments.
As discussed further in Notes 4 and 5, the Partnership expects to be
prepaid during fiscal 1998 on the remaining mortgage loan and land investments
and plans to market the wholly-owned property for sale in the near term. The
disposition of all of the remaining real estate assets would be followed by a
liquidation of the Partnership which could be accomplished prior to the end of
calendar 1998. There are no assurances, however, that the disposition of the
remaining assets and the liquidation of the Partnership will be completed within
this time frame.
2. Use of Estimates and Summary of Significant Accounting Policies
---------------------------------------------------------------
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
which require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of August 31, 1997 and 1996 and revenues and expenses for
each of the three years in the period ended August 31, 1997. Actual results
could differ from the estimates and assumptions used.
The Partnership's investments in land subject to a ground lease is carried
at the lower of cost or an amount less than cost if indicators of impairment are
present in accordance with statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," which was adopted in fiscal 1997. SFAS No. 121
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets
carrying amount. The Partnership generally assesses indicators of impairment by
a review of independent appraisal reports on each operating investment property.
Such appraisals make use of a combination of certain generally accepted
valuation techniques, including direct capitalization, discounted cash flows and
comparable sales analysis. SFAS No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of.
Investment properties held for sale represent assets acquired by the
Partnership through foreclosure proceedings on first mortgage loans. In
accordance with SFAS No. 121, the Partnership's policy is to carry these assets
at the lower of cost or estimated fair value (net of selling expenses). The
Partnership's cost basis is equal to the fair value of the assets at the date of
foreclosure. Declines in the estimated fair value of the assets subsequent to
foreclosure are recorded through the use of a valuation allowance. Subsequent
increases in the estimated fair value of the assets result in reductions of the
valuation allowance, but not below zero. All costs incurred to hold the assets,
including capital improvements and leasing costs, are charged to expense and no
depreciation expense is recorded.
The Partnership's mortgage loan receivable is carried at the lower of cost
or fair value. The Partnership's policy is to provide for any valuation
allowances for its mortgage loan investment on a specific identification basis,
principally by evaluating the market value of the underlying collateral since
the loan is collateral dependent.
Deferred expenses represent acquisition fees paid to PaineWebber
Properties Incorporated (the "Adviser") as compensation for analyzing,
structuring and negotiating the Partnership's real estate investments. These
costs are being amortized using the straight-line method over the term of the
remaining mortgage loan (13 years).
For purposes of reporting cash flows, cash and cash equivalents include
all highly liquid investments with original maturities of 90 days or less.
The mortgage loan receivable and cash and cash equivalents appearing on
the accompanying balance sheets represent financial instruments for purposes of
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments." The carrying amount of cash and cash
equivalents approximates its fair value as of August 31, 1997 and 1996 due to
the short-term maturities of these instruments. Information regarding the fair
value of the Partnership's mortgage loan receivable is provided in Note 4. The
fair value of the mortgage loan receivable is estimated using discounted cash
flow analysis and further considers an independent appraisal of the underlying
collateral property. Such appraisal makes use of a combination of certain
generally accepted valuation techniques, including direct capitalization,
discounted cash flows and comparable sales analysis.
No provision for income taxes has been made as the liability for such
taxes is that of the partners rather than the Partnership.
3. The Partnership Agreement and Related Party Transactions
--------------------------------------------------------
The General Partners of the Partnership are Fifth Mortgage Partners, Inc.
(the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group
Inc. ("PaineWebber"), and Properties Associates 1985, L.P. (the "Associate
General Partner"), a Virginia limited partnership, certain limited partners of
which are also officers of the Adviser and the Managing General Partner. Subject
to the Managing General Partner's overall authority, the business of the
Partnership is managed by the Adviser pursuant to an advisory contract. The
Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a
wholly-owned subsidiary of PaineWebber.
The General Partners, the Adviser and PWI receive fees and compensation
determined on an agreed-upon basis, in consideration of various services
performed in connection with the sale of the Units, the management of the
Partnership and the acquisition, management and disposition of Partnership
investments.
Acquisition fees in the amount of 3% of the gross offering proceeds were
paid to the Adviser for analyzing, structuring and negotiating the acquisitions
of the Partnership's investments. The Adviser may receive a commission, in an
amount not yet determinable, upon the disposition of certain Partnership
investments.
Distributable Cash, as defined, of the Partnership will be distributed 98%
to the Limited Partners, 1% to the General Partners and 1% to the Adviser as an
asset management fee. Residual proceeds resulting from disposition of
Partnership investments will generally be distributed 95% to the Limited
Partners, 3.99% to the Adviser as an asset management fee and 1.01% to the
General Partners after the prior receipt by the Limited Partners of their
original capital contributions and a cumulative annual return of 10%, as set
forth in the Amended Partnership Agreement.
Any taxable income or tax loss (other than from a Capital Transaction) of
the Partnership will be allocated 98.989899% to the Limited Partners and
1.010101% to the General Partners. Taxable income or tax loss arising from a
sale or refinancing of investment properties will be allocated to the Limited
Partners and the General Partners in proportion to the amounts of sale or
refinancing proceeds to which they are entitled; provided that the General
Partners shall be allocated at least 1% of taxable income arising from a sale or
refinancing. Allocations of the Partnership's operations between the General
Partners and the Limited Partners for financial accounting purposes have been
made in conformity with the allocations of taxable income or tax loss.
The Adviser has been contracted to perform specific management
responsibilities; to administer day-to-day operations of the Partnership and to
report periodically the performance of the Partnership to the Managing General
Partner. The Adviser will be paid a base management fee of 1/2 of 1% of the
gross proceeds of the offering, in addition to the asset management fee
described above, for these services. The Adviser earned base and asset
management fees totalling $137,000, $136,000 and $139,000 for the years ended
August 31, 1997, 1996 and 1995, respectively. Accounts payable - affiliates at
both August 31, 1997 and 1996 includes $33,000 of management fees payable to the
Adviser. In accordance with the Partnership Agreement, management fees payable
in respect to any fiscal year ending prior to December 1, 1987 were to be
deferred to the extent that cash distributions were insufficient to provide a 9%
non-cumulative annual return to the limited partners in respect to such fiscal
year. Any portion of the management fees so deferred ($245,000 at August 31,
1997 and 1996) are to be paid (without interest) from cash distributions in any
succeeding fiscal year after the limited partners have received a 9% annual
return for that fiscal year or from Residual Proceeds, as defined.
The Managing General Partner and its affiliates are reimbursed for their
direct expenses relating to the offering of Units, the administration of the
Partnership and the acquisition and operations of the Partnership's real
property investments.
Included in general and administrative expenses for the years ended August
31, 1997, 1996 and 1995 is $140,000, $127,000 and $157,000, representing
reimbursements to an affiliate of the Managing General Partner for providing
certain financial, accounting and investor communication services to the
Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an
independently operated subsidiary of PaineWebber. Mitchell Hutchins earned
$8,000, $10,000, and $5,000 for the years ended August 31, 1997, 1996 and 1995,
respectively, (included in general and administrative expenses) for managing the
Partnership's cash assets.
4. Mortgage Loan and Land Investments
----------------------------------
The following first mortgage loan was outstanding at August 31, 1997 and
1996 (in thousands):
Date of Loan
Property Amount of Loan Interest Rate and Maturity
-------- ------------------ ------------- ------------
1997 1996
---- ----
Park South $ 1,270 $ 1,270 9.00% 12/29/88
Charlotte, NC 12/28/01
The loan is secured by a first mortgage on the Park South Apartments
property, the owner's leasehold interest in the land and an assignment of all
tenant leases. Interest is payable monthly and the principal is due at maturity.
The first mortgage loan secured by the Park South Apartments is scheduled to
mature on December 28, 2001, however, it opens to prepayment without penalty on
December 29, 1997. Subsequent to the end of fiscal 1997, the owner of the Park
South Apartments has indicated that it may prepay the first leasehold mortgage
loan and repurchase the underlying land described below in early 1998 in
conjunction with a sale of the property. There are no assurances, however, that
this sale transaction and the resulting prepayment of the Partnership's
investments will occur within this time frame. The fair value of the Park South
loan, which does not become prepayable until December 1997, approximates its
carrying value as of August 31, 1997.
In relation to the above-mentioned mortgage loan, the following land
purchase-leaseback transaction had also been entered into as of August 31, 1997
and 1996 (in thousands):
Cost of Land
Property to the Partnership Annual Base Rental
-------- ------------------ ------------------
1997 1996
---- ----
Park South $ 230 $ 230 $ 21 through 12/28/28
The Partnership owns a 23% interest in the land underlying the Park South
Apartments and has an equivalent interest in the first mortgage loan secured by
the operating property. The remaining 77% interest in the land and mortgage loan
receivable is owned by an affiliated partnership, Paine Webber Qualified Plan
Property Fund Four, LP. The land lease has a term of 40 years. Among the
provisions of the lease agreement, the Partnership is entitled to additional
rent based upon gross revenues in excess of a base amount, as defined. The
Partnership received $4,000, $13,000 and $14,000 of additional rent from its
Park South land lease during fiscal 1997, fiscal 1996 and fiscal 1995,
respectively. The lessee has the option to repurchase the land, beginning in
December of 1997, at a price based on the fair market value, as defined, but not
less than the original cost to the Partnership.
The objectives of the Partnership with respect to its mortgage loan and
land investments are to provide current income from fixed mortgage interest
payments and base land rents, then to provide increases to this current income
through participation in the annual revenues generated by the property as they
increase above a specified base amount. In addition, the Partnership's remaining
investment is structured to share in the appreciation in value of the underlying
real estate. Accordingly, upon either sale, refinancing, maturity of the
mortgage or exercise of the option to repurchase the land, the Partnership will
receive a 50% share of the appreciation above a specified base amount.
5. Investment Properties Held for Sale
-----------------------------------
At August 31, 1997, the Partnership owned one operating investment
property (two at August 31, 1996) directly as a result of foreclosure
proceedings prompted by defaults under the terms of the first mortgage loan held
by the Partnership. As discussed further below, on August 25, 1997 the
Partnership sold one of its wholly-owned operating investments properties, the
Spartan Place Shopping Center, to an unrelated third party for $4,450,000. The
balance of investment properties held for sale on the accompanying balance sheet
at August 31, 1997 and 1996 is comprised of the following net carrying values
(in thousands):
1997 1996
---- ----
Hacienda Plaza $ 4,900 $ 4,900
Spartan Place Shopping Center - 4,000
-------- --------
$ 4,900 $ 8,900
======== ========
Descriptions of the transactions through which the Partnership acquired
these properties and of the properties themselves are summarized below:
Hacienda Plaza
- --------------
The Partnership assumed ownership of Hacienda Plaza on June 22, 1990. The
property, which is comprised of 78,415 square feet of leasable office/retail
space, was 92% leased as of August 31, 1997. The property, which is located in
Pleasanton, California, had operated below breakeven from the inception of the
Partnership's mortgage loan and land investment in 1986 and, therefore, had not
been generating sufficient cash flow to cover the mortgage interest and land
rent payments due to the Partnership. Rather than continue to support the cash
flow shortfalls to keep the mortgage loan current, the borrower agreed to
transfer the property's title to the Partnership. The combined balance of the
land and the mortgage loan investments at the time title was transferred was
$9,789,000. The estimated fair value of the operating property at the date of
foreclosure was $8,200,000. Accordingly, a write-down of $1,589,000 was recorded
in fiscal 1990. During fiscal 1994, 1993, 1992 and 1991, the Partnership
recorded provisions for possible investment loss of $400,000, $900,000, $562,000
and $1,438,000, respectively, to write down the net carrying value of the
Hacienda Plaza investment property to reflect additional declines in its
estimated fair value, net of selling expenses. The net carrying value of the
investment property as of both August 31, 1997 and 1996 was $4,900,000, which is
net of a valuation allowance of $3,300,000.
Spartan Place Shopping Center
- -----------------------------
The Partnership assumed ownership of the Spartan Place Shopping Center, in
Spartanburg, South Carolina, on February 12, 1991. The property consists of
151,489 square feet of leasable retail space. Rather than continue to support
the cash shortfalls between the cash flow from property operations and required
debt service to keep the mortgage loan current, the borrower agreed to transfer
the title to the property to the Partnership in fiscal 1991. The combined
balance of the land and the mortgage loan investment at the time title was
transferred, including the unamortized balance of deferred costs associated with
the original acquisition of the Spartan Place investments, was $8,419,000.
Management estimated that the fair value of the property, net of selling
expenses, at the time of the foreclosure was $7,840,000. Accordingly, a loss of
$579,000 was recorded in fiscal 1991 to adjust the carrying value to this
estimate and the investment was reclassified to investment properties held for
sale. During fiscal 1996, 1995, 1994 and 1992, the Partnership recorded
provisions for possible investment loss of $1,000,000, $1,000,000, $900,000 and
$940,000, respectively, to write down the net carrying value of the Spartan
Place investment property to reflect additional declines in its estimated fair
value, net of selling expenses. The net carrying value of the investment
property was $4,000,000 as of August 31, 1996. Such carrying value was net of a
valuation allowance of $3,840,000.
On August 25, 1997, the Partnership sold the Spartan Place property to an
unrelated third party for $4,450,000. After closing costs and adjustments, the
Partnership realized net proceeds of approximately $4,381,000 from the sale of
Spartan Place. As a result of the sale of the Spartan Place Shopping Center, a
Special Distribution of approximately $5,750,000, or $148 per original $1,000
investment, was made on October 15, 1997 to unitholders of record as of August
25, 1997. The Special Distribution included the net proceeds from the sale of
the Spartan Place Shopping Center as well as substantially all of the proceeds
of the $1.5 million letter of credit that was collected from the Spartan Place
borrower at the time of the original default and foreclosure on February 12,
1991. Approximately $180,000 of those proceeds were retained by the Partnership
to provide for the capital needs of the Partnership's wholly-owned Hacienda
Plaza property. As previously reported, the Partnership had begun to examine the
possibility of selling Spartan Place in fiscal 1996 and had engaged in selective
marketing efforts over the past two years. After careful evaluation of the
potential benefits of a sale in an "as-is" condition versus the risks of
continuing to search for tenants to replace the two anchor stores that closed
their operations during fiscal year 1995, an agreement was signed during the
third quarter of fiscal 1997 which gave a prospective third-party buyer a 60-day
exclusive right to purchase the property. Although the agreement expired during
the fourth quarter, negotiations continued with this prospective buyer and
eventually resulted in the sale of the Spartan Place Shopping Center on August
25, 1997. The sale price of $4,450,000, while substantially less than the
Partnership's original investments in the land and mortgage loan secured by
Spartan Place, of $9.8 million, compares favorably with the most recent
independent appraisal of the property. Due to the Spartan Place Special
Distribution and the resulting decrease in the Partnership's cash flow, it is
anticipated that the Partnership's annualized distribution rate will be adjusted
from 2% to 1% beginning with the distribution for the quarter ending November
30, 1997, which will be made on January 15, 1998.
The Partnership recognizes income from the investment properties held for
sale in the amount of the excess of the properties' gross revenues over property
operating expenses (including capital improvement expenses and leasing
commissions), taxes, insurance and other expenses. Combined summarized operating
results for Hacienda Plaza and Spartan Place (through the date of sale) for the
years ended August 31, 1997, 1996 and 1995 are as follows (in thousands):
1997 1996 1995
---- ---- ----
Revenues:
Rental income and
expense reimbursements $ 1,661 $ 1,558 $ 1,914
Other income 13 44 12
-------- -------- --------
1,674 1,602 1,926
Expenses:
Property operating expenses 445 403 812
Property taxes and insurance 330 322 367
Administrative and other expenses 436 410 267
-------- -------- --------
1,211 1,135 1,446
-------- -------- --------
Income from investment
properties held for sale, net $ 463 $ 467 $ 480
======== ======== ========
6. Leases
------
The Hacienda Plaza investment property has operating leases with tenants
which provide for fixed minimum rents and reimbursements of certain operating
costs. Rental revenues are recognized on a straight-line basis over the life of
the related lease agreements. Minimum future rental revenues to be received by
the Partnership under noncancellable operating leases for the next five years
and thereafter are as follows (in thousands):
Year ending August 31, Amount
---------------------- ------
1998 $ 928
1999 815
2000 660
2001 403
2002 131
Thereafter 35
--------
$ 2,972
========
7. Subsequent Event
----------------
On October 15, 1997, the Partnership distributed $1,000 to the General
Partners, $132,000 to the Limited Partners, and paid $2,000 to the Adviser as an
asset management fee for the quarter ended August 31, 1997. Also, on the same
date, a special distribution was made to the Limited Partners in the amount of
approximately $5,750,000, representing the net proceeds from the sale of the
Spartan Place Shopping Center as discussed further in Note 5.
Schedule III - Real Estate Owned
PAINEWEBBER MORTGAGE PARTNERS FIVE, L.P.
August 31, 1997
(In thousands)
Gross Amount at
Cost of Which Carried Date of
Investment to at Close of Original Size of
Description Partnership (A) Period (A) Investment Investment
----------- -------------- ----------- ---------- ----------
Retail and Office
Complex
Pleasanton, CA $ 9,789 $ 8,200 (1) 8/15/86 78,415
rentable
square feet on
6.3 acres of
land
Land underlying
apartment complex (B)
Charlotte, NC 230 230 12/29/88 19 acres
-------- --------
$ 10,019 $ 8,430
======== ========
Notes:
(A) These amounts represent the original cost of each investment and the
gross amount at which these investments are carried on the balance
sheet at August 31, 1997. The aggregate cost for federal income tax
purposes at August 31, 1997 is approximately $9,141,000.
(B) A senior mortgage on the apartment property in North Carolina is held
by PaineWebber Mortgage Partners Five, L.P. See Schedule IV.
(C) Reconciliation of real estate owned:
1997 1996 1995
---- ---- ----
Balance at beginning of year $16,270 $16,270 $16,270
Dispositions during the year (2) (7,840) - -
------- ------- -------
Balance at end of year $ 8,430 $16,270 $16,270
======= ======= =======
(1) The Partnership assumed ownership of Hacienda Plaza, in Pleasanton,
California, on June 22, 1990 as the result of foreclosure proceedings.
The cost of the land and balance of the mortgage loan at the time title
was transferred was $9,789,000. The Partnership recorded a $1,589,000
write-down to reflect the estimate of the property's fair value at the
time of the foreclosure. During fiscal 1994, 1993, 1992 and 1991, the
Partnership recorded provisions for possible investment loss of
$400,000, $900,000, $562,000 and $1,438,000, respectively, to provide
for further declines in the estimated fair value, net of selling
expenses, of the Hacienda Plaza investment property. The net carrying
value of the investment on the Partnership's balance sheet at August
31, 1997 amounted to $4,900,000. See Note 5 to the financial statements
for a further discussion.
(2) The Partnership sold the Spartan Place Shopping Center, in Spartanburg,
South Carolina, on August 25, 1997 to an unrelated third party for
$4,450,000. After closing costs and adjustments, the Partnership
realized net proceeds of approximately $4,381,000. See Note 5 to the
financial statements for a further discussion.
Schedule IV - Investments in Mortgage Loans on Real Estate
PAINEWEBBER MORTGAGE PARTNERS FIVE, L.P.
August 31, 1997
(In thousands)
Principal
amount of
loans subject
Carrying to delinquent
Final maturity Periodic Face amount of amount of principal
Description Interest rate Date payment terms mortgage mortgage or interest
----------- ------------- -------------- ------------- -------- -------- -----------
First Mortgage Loans:
Apartment Complex 9% December 28, 2001 Interest monthly, $ 1,270 $ 1,270 -
Charlotte, NC principal at ======= =======
maturity
1997 1996 1995
---- ---- ----
Balance at beginning of year $ 1,270 $ 1,270 $ 1,270
Additions during the year - - -
Reductions during the year - - -
-------- -------- --------
Balance at end of year $ 1,270 $ 1,270 $ 1,270
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