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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
Commission file number 0-14438
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
A CALIFORNIA LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
CALIFORNIA 13-3239107
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
411 West Putnam Avenue, Greenwich, CT 06830
(Address of principal executive offices)
(203) 862-7000
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check 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 [ ]
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INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - March 31, 1996
INDEX
Part I. Financial Information:
Balance Sheets--March 31, 1996 and December 31, 1995
Statements of Operations--Three Months Ended March 31, 1996
and 1995
Statement of Partners' Equity--Three Months Ended
March 31, 1996
Statements of Cash Flows--Three Months Ended
March 31, 1996 and 1995
Notes to Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. Other Information:
Legal Proceedings, Exhibits and Reports on Form 8-K
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - March 31, 1996
Part I. Financial Information
The financial information contained herein is unaudited; however, in the opinion
of management, all adjustments necessary for a fair presentation of such
financial information have been included. Other than the write-down for
impairment, all of the aforementioned adjustments are of a normal recurring
nature and there have not been any non-recurring adjustments included in the
results reported for the current period.
BALANCE SHEETS
March 31, 1996 December 31, 1995
-------------- -----------------
ASSETS
Real estate ................................ $ 32,449,278 $ 32,533,972
Cash and cash equivalents .................. 3,265,359 2,450,943
Other assets ............................... 2,158,476 2,121,920
Receivables ................................ 146,873 202,762
------------ ------------
$ 38,019,986 $ 37,309,597
============ ============
LIABILITIES AND PARTNERS' EQUITY
Accounts payable and accrued expenses ...... $ 1,198,898 $ 1,016,797
Due to affiliates .......................... 289,203 352,633
Distributions payable ...................... 252,638 252,638
------------ ------------
1,740,739 1,622,068
------------ ------------
Commitments and contingencies
PARTNERS' EQUITY:
Limited partners' equity (400,010
units issued and outstanding) .......... 39,464,458 38,902,326
General partners' deficit ................ (3,185,211) (3,214,797)
------------ ------------
36,279,247 35,687,529
------------ ------------
$ 38,019,986 $ 37,309,597
============ ============
See notes to financial statements
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - March 31, 1996
STATEMENTS OF OPERATIONS
For The Three Months Ended
March 31,
--------------------------
1996 1995
------------ ------------
Rental revenue .......................................... $ 2,413,390 $ 2,165,304
------------ ------------
Costs and Expenses:
Operating expenses ................................. 857,605 849,797
Depreciation and amortization ...................... 319,365 318,000
Partnership management fee ......................... 227,043 227,043
Administrative expenses ............................ 131,460 117,027
Property management fee ............................ 75,297 57,566
Write-down for impairment .......................... -- 20,469,050
------------ ------------
1,610,770 22,038,483
------------ ------------
Income (loss) before interest
and other income ................................... 802,620 (19,873,179)
Interest income .................................... 27,286 33,522
Other income ....................................... 14,450 14,700
------------ ------------
Net income (loss) ....................................... $ 844,356 $(19,824,957)
============ ============
Net income (loss) attributable to:
Limited partners ................................... $ 802,138 $(18,833,709)
General partners ................................... 42,218 (991,248)
------------ ------------
Net income (loss) ....................................... $ 844,356 $(19,824,957)
============ ============
Net income (loss) per unit of limited
partnership interest (400,010 units
outstanding) ....................................... $ 2.01 $ (47.08)
============ ============
See notes to financial statements
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - March 31, 1996
STATEMENT OF PARTNERS' EQUITY
General Limited
Partners' Partners'
(Deficit) Equity Total
------------ ------------ ------------
Balance, January 1, 1996 ................... $ (3,214,797) $ 38,902,326 $ 35,687,529
Net income for the three
months ended March 31, 1996 ............ 42,218 802,138 844,356
Distributions as a return of capital for the
three months ended March 31, 1996
($.60 per limited partnership unit) .... (12,632) (240,006) (252,638)
------------ ------------ ------------
Balance, March 31, 1996 .................... $ (3,185,211) $ 39,464,458 $ 36,279,247
============ ============ ============
See notes to financial statements
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - March 31, 1996
STATEMENTS OF CASH FLOWS
For The Three Months Ended
March 31,
--------------------------
1996 1995
------------ ------------
Cash Flows From Operating Activities:
Net income (loss) ......................... $ 844,356 $(19,824,957)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Write-down for impairment ........... -- 20,469,050
Depreciation and amortization ....... 319,365 318,000
Straight-line adjustment for stepped
lease rentals ....................... (10,442) (1,850)
Changes in assets and liabilities:
Accounts payable and accrued expenses 182,102 170,896
Receivables ......................... 55,889 (390,171)
Due to affiliates ................... (63,430) (23,825)
Other assets ........................ (75,889) (53,021)
------------ ------------
Net cash provided by
operating activities ................ 1,251,951 664,122
------------ ------------
Cash Flows From Investing Activities:
Improvements to real estate ............... (184,897) (309,607)
------------ ------------
Cash Flows From Financing Activities:
Distributions to partners ................. (252,638) (252,638)
------------ ------------
Increase In Cash And Cash Equivalents .......... 814,416 101,877
Cash And Cash Equivalents,
Beginning of Year ......................... 2,450,943 2,666,385
------------ ------------
Cash And Cash Equivalents,
End of Quarter ............................ $ 3,265,359 $ 2,768,262
============ ============
See notes to financial statements
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - March 31, 1996
NOTES TO FINANCIAL STATEMENTS
l. GENERAL
The accompanying financial statements, notes and discussions should be
read in conjunction with the financial statements, related notes and
discussions contained in the Partnership's annual report on Form 10-K
for the year ended December 31, 1995. The December 31, 1995 year end
balance sheet data presented herein was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles.
2. SIGNIFICANT ACCOUNTING POLICIES
Impairment of Assets
In March 1995, the Financial Accounting Standards Board issued
Statement # 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of" ("SFAS # 121"). Although
the adoption of the statement was not required until fiscal years
beginning after December 15, 1995, the Partnership implemented SFAS
#121 for the year ended December 31, 1995.
Under SFAS #121 the initial test to determine if an impairment exists
is to compute the recoverability of the asset based on anticipated cash
flows (net realizable value) compared to the net carrying value of the
asset. If anticipated cash flows on an undiscounted basis are
insufficient to recover the net carrying value of the asset, an
impairment loss should be recognized, and the asset written down to its
estimated fair value. The fair value of the asset is the amount by
which the asset could be bought or sold in a current transaction
between willing parties, that is, other than in a forced or liquidation
sale. The net realizable value of an asset will generally be greater
than its fair value because net realizable value does not discount cash
flows to present value and discounting is usually one of the
assumptions used in determining fair value. The write-downs for
impairment do not affect the tax basis of the assets and the
write-downs are not included in the determination of taxable income or
loss.
Because the determination of both net realizable value and fair value
is based upon projections of future economic events such as property
occupancy rates, rental rates, operating cost inflation and market
capitalization rates which are inherently subjective, the amounts
ultimately realized at disposition may differ materially from the net
carrying value as of the balance sheet date. The cash flows used to
determine fair value and net realizable value are based on good faith
estimates and assumptions developed by management. Inevitably,
unanticipated events and circumstances may occur and some assumptions
may not materialize; therefore actual results may vary from our
estimate and the variances may be material. The Partnership may provide
additional losses in subsequent periods if the real estate market or
local economic conditions change and such write-downs could be
material.
Certain reclassifications were made to the prior year financial
statements in order to conform them to the current period presentation.
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
The Managing General Partner of the Partnership, Resources High Equity,
Inc. was, until November 3, 1994, a wholly-owned subsidiary of
Integrated Resources, Inc. ("Integrated") at which time, pursuant to
the consummation of the plan of reorganization, substantially all of
the assets of Integrated were sold to Presidio Capital Corp., a British
Virgin Islands corporation ("Presidio") and the Managing General
Partner became a wholly owned subsidiary of Presidio. Presidio AGP
Corp., which is a wholly-owned subsidiary of Presidio, became the
Associate General Partner on February 28, 1995, replacing Z Square G
Partners II which withdrew as of that date. The General Partners and
affiliates of the General Partners are also engaged in businesses
related to the acquisition and operation of real estate. Presidio is
also the parent of other corporations that are or may in the future be
engaged in businesses that may be in competition with the Partnership.
Accordingly, conflicts of interest may arise between the Partnership
and such other businesses. Wexford Management LLC ("Wexford") has been
engaged to perform administrative services to Presidio and its direct
and indirect subsidiaries as well as the Partnership. During the three
months ended March 31, 1996, reimbursable expenses to Wexford by the
Partnership amounted to $23,650. Wexford is engaged to perform similar
services for other similar entities that may be in competition with the
Partnership.
The Partnership has entered into a property management services
agreement with Resources Supervisory Management Corp. ("Resources
Supervisory"), an affiliate of the General Partner, to perform certain
functions relating to the management of the properties of the
Partnership. A portion of the property management fees were paid to
unaffiliated management companies which are engaged for the purpose of
performing the management functions for certain properties. For the
quarters ended March 31, 1996 and 1995, Resources Supervisory was
entitled to receive $75,297 and $57,566, respectively, of which $50,637
and $35,566 was paid to unaffiliated management companies,
respectively. These fees were paid in the quarters subsequent to March
31, 1996 and 1995, respectively.
For the administration of the Partnership, the Managing General Partner
is entitled to receive reimbursement of expenses up to a maximum of
$150,000 per year. For each of the quarters ended March 31, 1996 and
1995, the Managing General Partner was entitled to receive $37,500
which was paid in the quarters subsequent to March 31, 1996 and 1995,
respectively.
For managing the affairs of the Partnership, the Managing General
Partner is entitled to receive an annual partnership management fee
equal to 1.05% of the amount of original gross proceeds paid or
allocable to the acquisition of property by the Partnership. For each
of the quarters ended March 31, 1996 and 1995, the Managing General
Partner was entitled to receive $227,043 which was paid in the quarters
subsequent to March 31, 1996 and 1995, respectively.
The general partners are allocated 5% of the net income and (losses) of
the Partnership which amounted to $42,218 and $(991,248) for the
quarters ended March 31, 1996 and 1995, respectively. They are also
entitled to receive 5% of distributions which amounted to $12,632 for
each of the quarters ended March 31, 1996 and 1995.
4. REAL ESTATE
Management recorded write-downs for impairment totaling $20,469,050 in
the first quarter 1995 pursuant to adoption of SFAS #121 as discussed
in Note 2. No write-downs were deemed necessary for the first quarter
1996.
The following table represents the write-downs for impairment recorded
on the Partnership's properties:
Three Months Ended March 31,
---------------------------------
Property 1996 1995
- -------------------- ----------- -----------
Seattle Tower ...................... $ -- $ 3,550,000
Century Park I ..................... -- 1,250,000
568 Broadway ....................... -- 2,569,050
Westbrook .......................... -- 3,400,000
Loch Raven ......................... -- 4,800,000
Southport .......................... -- 4,900,000
----------- -----------
$ -- $20,469,050
=========== ===========
The following table is a summary of the Partnership's real estate as
of:
March 31, December 31,
1996 1995
------------ ------------
Land ................................... $ 11,056,966 $ 11,056,966
Building and improvements .............. 34,356,690 34,171,794
------------ ------------
45,413,656 45,228,760
Less: Accumulated depreciation ......... (12,964,378) (12,694,788)
------------ ------------
$ 32,449,278 $ 32,533,972
============ ============
5. DISTRIBUTIONS PAYABLE
March 31, December 31,
1996 1995
-------- --------
Limited partners ($.60 per unit) .............. $240,006 $240,006
General partners ............................... 12,632 12,632
-------- --------
$252,638 $252,638
======== ========
Such distributions were paid in the quarters subsequent to March 31,
1996 and December 31, 1995, respectively.
6. DUE TO AFFILIATES
March 31, December 31,
1996 1995
-------- --------
Partnership management fee ....................... $227,043 $227,044
Property management fee .......................... 24,660 88,089
Non-accountable expense reimbursement ............ 37,500 37,500
-------- --------
$289,203 $352,633
======== ========
Such amounts were paid in the quarters subsequent to March 31, 1996 and
December 31, 1995, respectively.
7. COMMITMENTS AND CONTINGENCIES
a) 568 Broadway Joint Venture is currently involved in litigation with a
number of present or former tenants who are in default on their lease
obligations. Several of these tenants have asserted claims or counter
claims seeking monetary damages. The plaintiffs' allegations include
but are not limited to claims for breach of contract, failure to
provide certain services, overcharging of expenses and loss of profits
and income. These suits seek total damages in excess of $20 million
plus additional damages of an indeterminate amount. The 568 Broadway
Joint Ventures action for rent against Solo Press was tried in 1992 and
resulted in a judgement in favor of the 568 Broadway Joint Venture for
rent owed. The Partnership believes this will result in dismissal of
the action brought by Solo Press against the 568 Broadway Joint
Venture. Since the facts of the other actions which involve material
claims or counterclaims are substantially similar, the Partnership
believes that the 568 Broadway Joint Venture will prevail in those
actions as well.
b) A former retail tenant of 568 Broadway (Galix Shops, Inc.) and a
related corporation which is a retail tenant of a building adjacent to
568 Broadway filed a lawsuit in the Supreme Court of the state of New
York, County of New York, against the Broadway Joint Venture which owns
568 Broadway. The action was filed on April 13, 1994. The plaintiffs
allege that by erecting a sidewalk shed in 1991, 568 Broadway deprived
plaintiffs of light, air and visibility to their customers. The
sidewalk shed was erected, as required by local law, in connection with
the inspection and restoration of the 568 Broadway building facade,
which is also required by local law. Plaintiffs further allege that the
erection of the sidewalk shed for a continuous period of over two years
is unreasonable and unjustified and that such conduct by defendants has
deprived plaintiffs of the use and enjoyment of property. The suit
seeks a judgement requiring removal of the sidewalk shed, compensatory
damage theirs of $20 million, and punitive damages of $10 million. The
Partnerships believes that this suit is meritless and intends to
vigorously defend it.
c) On or about May 11, 1993 High Equity Partners L.P. - Series 86
("HEP-86"), an affiliated partnership, was advised of the existence of
an action (the "B&S Litigation') in which a complaint (the "HEP
Complaint") was filed in the Superior Court for the State of California
for the County of Los Angeles (the "Court") on behalf of a purported
class consisting of all of the purchasers of limited partnership
interests in HEP-86.
On April 7, 1994 the plaintiffs were granted leave to file an amended
complaint (the "Amended Complaint"). The Amended Complaint asserted
claims against the General Partners of the Partnership, the general
partners of HEP-86, the managing general partner of HEP-88 and certain
officers of the Managing General Partner, among others. The Managing
General Partner of the Partnership is also a general partner of HEP-86
and HEP-88.
On July 19, 1995, the Court preliminarily approved a settlement of the
B&S Litigation and approved the form of a notice (the "Notice")
concerning such proposed settlement. In response to the Notice,
approximately 1.1% of the limited partners of the three HEP
partnerships (representing approximately 4% of outstanding units)
requested exclusion and 15 limited partners filed written objections to
the settlement. The California Department of Corporations also sent a
letter to the Court opposing the settlement. Five objecting limited
partners, represented by two law firms, also made motions to intervene
so they could participate more directly in the action. The motions to
intervene were granted by the Court on September 14, 1995.
In October and November 1995, the attorneys for the plaintiffs-
intervenors conducted extensive discovery. At the same time, there were
continuing negotiations concerning possible revisions to the proposed
settlement.
On November 30, 1995, the original plaintiffs and the intervening
plaintiffs filed a Consolidated Class and Derivative Action Complaint
("Consolidated Complaint") against the Managing General Partner, two of
the general partners of HEP-86, the managing general partner of HEP-88
and the indirect corporate parent of the General Partners, alleging
various state law class and derivative claims, including claims for
breach of fiduciary duties; breach of contract; unfair and fraudulent
business practices under California Bus. & Prof. Code Section 17200;
negligence; dissolution, accounting, receivership, and removal of
general partner; fraud; and negligent misrepresentation. The
Consolidated Complaint alleges, among other things, that the general
partners caused a waste of HEP Partnership assets by collecting
management fees in lieu of pursuing a strategy to maximize the value of
the investments owned by the limited partners; that the general
partners breached their duty of loyalty and due care to the limited
partners by expropriating management fees from the Partnerships without
trying to run the HEP Partnerships for the purposes for which they are
intended; that the general partners are acting improperly to enrich
themselves in their position of control over the HEP Partnerships and
that their actions prevent non-affiliated entities from making the
completing tender offers to purchase HEP Partnership Units; that by
refusing to seek the sale of the HEP Partnerships' properties, the
general partners have diminished the value of the limited partners'
equity in the HEP Partnerships; that the general partners have taken a
heavily overvalued partnership asset management fee; that the limited
partnership units were sold and marketed through the use of false and
misleading statements.
On or about January 31, 1996, the parties to the B & S Litigation
agreed upon a revised settlement, which would be significantly more
favorable to limited partners than the previously proposed settlement,
The revised settlement proposal, like the previous proposal, involves
the reorganization of (i) the Partnership, (ii) HEP-86 and, (iii)
HEP-88 (collectively, the "HEP Partnerships"), through an exchange (the
"Exchange") in which limited partners (the "Participating Investors")
of the partnerships participating in the Exchange (the "Participating
Partnerships") would receive, in exchange for the partnership units,
shares of common stock ("Shares") of a newly-formed corporation,
Millennium Properties Inc. ("Millennium") which intends to qualify as a
real estate investment trust. Such reorganization would only be
effected with respect to a particular partnership if holders of a
majority of the outstanding units of that partnership consent to such
reorganization pursuant to a Consent Solicitation Statement (the
"Consent Solicitation Statement") which would be sent to all limited
partners after the settlement is approved by the Court. In connection
with the Exchange, Participating Investors would receive Shares of
Millennium in exchange for their limited partnership units. 84.65% of
the Shares would be allocated to Participating Investors in the
aggregate (assuming each of the Partnerships participate in the
Exchange) and 15.35% of the Shares would be allocated to the general
partners in consideration of the general partner's existing interests
in the Participating Partnerships, their relinquishment of entitlement
to receive fees and expense reimbursements, and the payment by the
general partners or an affiliate of certain amounts for legal fees.
As part of the Exchange, Shares issued to Participating Investors would
be accompanied by options granting such Investors the right to require
an affiliate of the general partners to purchase Shares at a price of
$11.50 per Share, exercisable during the three month period commencing
nine months after the effective date of the Exchange. A maximum of 1.5
million Shares (representing approximately 17.7% of the total Shares
issued to investors if all partnerships participate) would be required
to be purchased if all partnerships participate in the Exchange. Also
as part of the Exchange, the indirect parent of the General Partners
would agree that in the event that dividends paid with respect to the
Shares do not aggregate at least $1.10 per Share for the first four
complete fiscal quarters following the Effective Date, it would make a
supplemental payment to holders of such Shares in the amount of such
difference. The general partners or an affiliate would also provide an
amount, not to exceed $2,232,500 in the aggregate, for the payment of
attorneys' fees and reimbursable expenses of class counsel, as approved
by the Court, and the costs of providing notice to the class (assuming
that all three Partnerships participate in the Exchange). In the event
that fewer than all of the Partnerships participate in the Exchange,
such amount would be reduced. The general partners would advance to the
Partnerships the amounts necessary to cover such fees and expenses of
the Exchange (but not their litigation costs and expenses, which the
general partners would bear). Upon the effectuation of the Exchange,
the B & S Litigation would be dismissed with prejudice.
On February 8, 1996, at a hearing on preliminary approval of the
revised settlement, the Court determined that in light of renewed
objections to the settlement by the California Department of
Corporations, the Court would appoint a securities litigation expert to
evaluate the settlement. The Court stated that it would rule on the
issue of preliminary approval of the settlement after receiving the
expert's report. On May 6, 1996, the expert submitted a report stating
that he was unable to conclude that the revised settlement as proposed
is fair, reasonable and adequate, and recommending that the revised
settlement be restructured so as to allocate Shares to the general
partners based solely on the value of their 5% equity interests in the
Partnerships, that the allocation of Shares be based on independent
appraisals of all of the Partnerships' properties, and that
Participating Investors be provided with dissenters' rights. The
Partnership is considering a variety of alternatives relating to the
structure of, and consideration to be received in connection with, the
settlement in response to the expert's report. A hearing on the
expert's report and preliminary approval of the revised settlement is
scheduled for May 28, 1996. If the settlement receives preliminary
approval, a revised notice regarding the proposed settlement would be
sent to limited partners, after which the Court would hold a fairness
hearing in order to determine whether the settlement would be given
final approval. If final approval of the settlement is granted by the
Court, the Consent Solicitation Statement concerning the settlement and
the reorganization would be sent to all limited partners. There would
be at least a 60 day solicitation period and a reorganization of the
Partnership cannot be consummated unless a majority of the limited
partners in the Partnership affirmatively voted to approve it.
8. RESULTS OF OPERATIONS
Results of operations for the three months ended March 31, 1996 are not
necessarily indicative of the results to be expected for the entire
year.
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - March 31, 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's real estate properties are office buildings and shopping
centers, all of which were acquired for cash. The public offering of the Units
commenced on February 4, 1985 and was terminated on May 30, 1986. Upon
termination, the Partnership had accepted subscriptions for 400,010 Units for
aggregate net proceeds of $98,502,500 (gross proceeds of $100,002,500 less
organization and offering expenses aggregating $1,500,000).
The Partnership uses working capital reserves remaining from the net proceeds of
its public offering and any undistributed cash from operations as its primary
source of liquidity. For the quarter ended March 31, 1996, 100% of distributions
and capital expenditures were funded from cash flows. As of March 31, 1996, the
Partnership had total working capital reserves of approximately $1,890,000. The
Partnership intends to distribute less than all of its future cash flow from
operations to maintain adequate reserves for capital improvements and
capitalized lease procurement costs. In addition, if real estate market
conditions deteriorate in any areas where the Partnership's properties are
located, there is substantial risk that this would have an adverse effect on
future cash flow distributions. Working capital reserves are temporarily
invested in short-term instruments and, together with cash flow from operations,
are expected to be sufficient to fund future capital improvements to the
Partnership's properties.
During the three months ended March 31, 1996, cash and cash equivalents
increased $814,416 as a result of cash provided by operations in excess of
capital expenditures and distributions to partners. The Partnership's primary
source of funds is cash flow from the operation of its properties, principally
rents received from tenants, which amounted to $1,251,951 for the three months
ended March 31, 1996. The Partnership used $184,897 for capital expenditures
related to capital and tenant improvements to the properties and $252,638 for
distributions to partners for the three months ended March 31, 1996.
The Partnership expects to continue to utilize a portion of its cash flow from
operations to pay for various capital and tenant improvements to the properties
and leasing commissions (the amount of which cannot be predicted with
certainty). Capital and tenant improvements may in the future exceed the
Partnership's current working capital reserves. In that event, the Partnership
would utilize the remaining working capital reserves or sell one or more
properties, which would have an adverse effect on future distributions. Except
as discussed above, management is not aware of any other trends, events,
commitments or uncertainties that will have a significant impact on liquidity.
REAL ESTATE MARKET
The real estate market continues to suffer from the effects of the recession
which included a substantial decline in the market value of existing properties.
Market values have been slow to recover, and while the pace of new construction
has slowed, high vacancy rates continue to exist in many areas. Technological
changes are also occurring which may reduce the office space needs of many
users. These factors may continue to reduce rental rates. As a result, the
Partnership's potential for realizing the full value of its investment in its
properties is at increased risk.
IMPAIRMENT OF ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement # 121,
"Accounting for The Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of" ("SFAS # 121"). Although the adoption of the statement was not
required until fiscal years beginning after December 15, 1995, the Partnership
implemented SFAS #121 for the year ended December 31, 1995.
Under SFAS #121 the initial test to determine if an impairment exists is to
compute the recoverability of the asset based on anticipated cash flows (net
realizable value) compared to the net carrying value of the asset. If
anticipated cash flows on an undiscounted basis are insufficient to recover the
net carrying value of the asset, an impairment loss should be recognized, and
the asset written down to its estimated fair value. The fair value of the asset
is the amount by which the asset could be bought or sold in a current
transaction between willing parties, that is, other than in a forced or
liquidation sale. The net realizable value of an asset will generally be greater
than its fair value because net realizable value does not discount cash flows to
present value and discounting is usually one of the assumptions used in
determining fair value. The write-downs for impairment do not affect the tax
basis of the assets and the write-downs are not included in the determination of
taxable income or loss.
Because the determination of both net realizable value and fair value is based
upon projections of future economic events such as property occupancy rates,
rental rates, operating cost inflation and market capitalization rates which are
inherently subjective, the amounts ultimately realized at disposition may differ
materially from the net carrying values as of the balance sheet date. The cash
flows used to determine fair value and net realizable value are based on good
faith estimates and assumptions developed by management. Inevitably,
unanticipated events and circumstances may occur and some assumptions may not
materialize; therefore actual results may vary from our estimate and the
variances may be material. The Partnership may provide additional losses in
subsequent periods if the real estate market or local economic conditions change
and such write-downs could be material.
Management recorded write-downs for impairment totaling $20,469,050 in the first
quarter 1995 pursuant to the adoption of SFAS #121 as discussed above. No
write-downs were deemed necessary for the first quarter 1996.
The following table represents the write-downs for impairment recorded on the
Partnership's properties:
Three Months Ended March 31,
----------------------------
Property 1996 1995
-------- --------- ------------
Seattle Tower $ --- $ 3,550,000
Century Park I --- 1,250,000
568 Broadway --- 2,569,050
Westbrook --- 3,400,000
Loch Raven --- 4,800,000
Southport --- 4,900,000
-------- ------------
$ --- $20,469,050
======== ============
RESULTS OF OPERATIONS
The Partnership experienced net income for the three months ended March 31, 1996
compared to a net loss for the three months ended March 31, 1995 due primarily
to the significant write-downs for impairment recorded in 1995.
Rental revenue increased slightly for the three months ended March 31, 1996 as
compared to the prior period. Revenues at Century Park increased during 1996 due
to higher occupancy rates as three new leases were executed in mid-1995.
Revenues at Southport increased as higher percentage rent was collected from
certain tenants during the three months ended March 31, 1996 compared to the
same period in 1995 due to higher sales volume at the tenants' stores.
Costs and expenses decreased during the three months ended March 31, 1996
compared to the same period in 1995 due primarily to the write-down for
impairment recorded in 1995. Operating expenses, depreciation and amortization,
and partnership management fees were relatively consistent with the same period
in the prior year. The increase in administrative expenses is primarily related
to increases in allocated partnership payroll costs and higher printing costs
related to investor services in the first quarter of 1996 compared to 1995.
Property management fees increased during the three months ended March 31, 1996
as compared to the prior period due to the increase in rental revenue.
For the three months ended March 31, 1996, interest income and other income,
which consists of investor ownership transfer fees, remained relatively
consistent as compared to the same three month period in 1995.
Inflation is not expected to have a material impact on the Partnership's
operations or financial position.
Legal Proceedings
The Partnership is a party to certain litigation. See Note 7 to the financial
statements for a description thereof.
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - March 31, 1996
Part II. - Other Information
Item 1 - Legal Proceedings
(a) See Management's Discussion and Analysis of Financial
Condition and Results of Operations and Notes to Financial
Statements - Note 7 which is herein incorporated by reference.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits: There were no exhibits filed.
(b) Reports on Form 8-K: There were no reports filed.
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
FORM 10-Q - March 31, 1996
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Integrated Resources High Equity
Partners, Series 85,
A California Limited Partnership
By: Resources High Equity, Inc.,
Managing General Partner
Dated: May 15, 1996 By: /S/ Joseph M. Jacobs
--------------------
Joseph M. Jacobs
President
(Duly Authorized Officer)
Dated: May 15, 1996 By: /S/ Jay L. Maymudes
-------------------
Jay L. Maymudes
Vice President, Secretary
and Treasurer
(Principal Financial and
Accounting Officer)