SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Fiscal Year Ended December 31, 1997
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period from _______to _______
Commission file number: 0-14438
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85,
A CALIFORNIA LIMITED PARTNERSHIP
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(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) (Zip Code)
Registrant's telephone number, including area code: (203) 862-7444
Securities registered pursuant to Section 12(b) of the Act:
None None
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(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest, $250 Per Unit
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(Title of class)
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 [ ]
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 the 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]
DOCUMENTS INCORPORATED BY REFERENCE
Exhibit A to the Prospectus of the registrant dated February 4, 1985, filed
pursuant to Rule 424(b) under the Securities Act of 1933, as amended, is
incorporated by reference in Part IV of this Form 10-K.
PART I
Item 1. Business
Integrated Resources High Equity Partners, Series 85, a
California Limited Partnership (the "Partnership"), was formed as of August 19,
1983. The Partnership is engaged in the business of operating and holding for
investment previously acquired income-producing properties, consisting of office
buildings, shopping centers and other commercial and industrial properties.
Resources High Equity, Inc., a Delaware corporation and a wholly owned
subsidiary of Presidio Capital Corp., a British Virgin Islands corporation
("Presidio"), is the Partnership's managing general partner (the "Managing
General Partner"). Until November 3, 1994, Resources High Equity, Inc. was a
wholly owned subsidiary of Integrated Resources, Inc. ("Integrated"). On
November 3, 1994 Integrated consummated its plan of reorganization under Chapter
11 of the United States Bankruptcy Code at which time, pursuant to such plan of
reorganization, the newly-formed Presidio purchased substantially all of
Integrated's assets. Presidio AGP Corp., which is a wholly-owned subsidiary of
Presidio, became the associate general partner (the "Associate General Partner")
on February 28, 1995 replacing Z Square G Partners II which withdrew as of that
date. The Managing General Partner and the Associate General Partner are
referred to collectively hereinafter as the "General Partners." Affiliates of
the General Partners are also engaged in businesses related to the acquisition
and operation of real estate.
The Partnership offered 400,000 units of limited partnership
interest (the "Units") pursuant to the Prospectus of the Partnership dated
February 4, 1985, as supplemented by Supplements dated January 27, 1986 and
April 11, 1986 (collectively, the "Prospectus"), filed pursuant to Rules 424(b)
and 424(c) under the Securities Act of 1933, as amended. The Prospectus was
filed as part of the Partnership's Registration Statement on Form S-11,
Commission File No. 2-92319 (the "Registration Statement"), pursuant to which
the Units were registered and offered. The offering was terminated on May 30,
1986. Upon final admission of limited partners, the Partnership had accepted
subscriptions for 400,010 Units (including the initial limited partner) for an
aggregate of $100,002,500 in gross proceeds, resulting in net proceeds from the
offering of $98,502,500 (gross proceeds of $100,002,500 less organization and
offering costs of $1,500,000). All underwriting and sales commissions were paid
by Integrated or its affiliates and not by the Partnership.
As of March 15, 1998, the Partnership had invested all of its
net proceeds in real estate. Revenues from the following properties represented
15% or more of the Partnership's gross revenues during each of the last three
fiscal years: in 1997, Southport and 568 Broadway represented 31% and 27% of
gross revenues, respectively; 1996, Southport and 568 Broadway represented 30%
and 25% of gross revenues, respectively; in 1995, revenue from Southport, 568
Broadway and Loch Raven represented 31%, 24% and 17% of gross revenues,
respectively.
The Partnership owned the following properties as of March 15, 1998:
(1) Westbrook Mall Shopping Center
On July 10, 1985, the Partnership purchased the fee simple
interest in the Westbrook Mall Shopping Center ("Westbrook"), a partially
enclosed shopping center located next to a regional mall in Brooklyn Center,
Minnesota, near Minneapolis. It comprises three buildings on approximately 9.87
acres, with a total of 79,242 square feet of gross leasable area and parking for
approximately 460 cars. It was built in three phases from 1966 to 1977.
Westbrook is located directly across the street from the
1,000,000 square foot Brookdale Regional Shopping Center. Westbrook is in direct
competition with two nearby shopping centers: Brookdale Square, which is located
one-quarter mile east of Westbrook, has 140,000 square feet of gross leasable
area; and Northbrook Center, which is located one and one-quarter miles east of
Westbrook, contains 18 stores and has 76,000 square feet of gross leasable area.
In addition, there are two relatively new shopping centers in the vicinity: one,
anchored by a 105,000 square foot Target Discount Store, has an additional
39,000 square feet of retail space; the other, anchored by a 68,000 square foot
Designer Depot, has an additional 32,000 square feet of retail space. Overall
the Brookdale market comprises approximately 1.6 million square feet of retail
space.
Westbrook was 38% leased as of January 1, 1998, compared to
77% as of January 1, 1997. Occupancy, however, was only 14% as of January 1,
1998. Kids R' Us closed its 18,500 square foot store in October 1994. However,
it remains obligated under its lease until it expires in January 2014. There are
no leases that represent at least 10% of the square footage of the center
scheduled to expire in 1998.
The Partnership's efforts to lease space in the center have
been unsuccessful due primarily to the functional obsolescence of the structure,
and secondarily to the weak retail climate in the immediate market. Therefore,
in addition to continuing to search for tenants for the existing vacancies, the
Partnership is pursuing various alternatives.
(2) Southport Shopping Center
On April 15, 1986, the Partnership purchased the fee simple
interest in Southport Shopping Center ("Southport"), a regional shopping center
located on the 17th Street Causeway in Fort Lauderdale, Florida near the
intercoastal waterway and beach area. The center's three buildings, comprising a
total of 143,089 square feet, are situated on a 9.45 acre site. Southport was
built in phases from 1968 to 1977 and expanded again and renovated in 1985. The
site provides parking for 563 cars. Southport was 100% occupied as of January 1,
1998 as compared to 95% on January 1, 1997. There are no leases that represent
at least 10% of the square footage of the center scheduled to expire in 1998.
The roof on the East quadrant of the main center building was replaced in 1997.
Southport is highly visible from S.E. 17th Street, the major
east/west artery in the commercially-oriented area. Developments in the area are
diversified and include hotels, restaurants, retail centers, office buildings
and the 750,000 square foot Broward County Convention Center, which opened in
1991, is within walking distance. In 1996, the new 75,000 square foot, three
story mixed-use NorthPort Marketplace opened on county owned land adjacent to
the Convention Center. The development has attracted national
restaurant/entertainment chains and is not considered competition for
Southport's tenants. The center continues to maintain a solid tenant base and
anchor tenants, Publix, Eckerd and McCrory's, combined square footage represents
39% of the center's leasable area.
(3) Loch Raven Plaza
On June 26, 1986, the Partnership purchased the fee simple
interest in Loch Raven Plaza ("Loch Raven"), a retail/office complex located in
Towson, Maryland. It contains approximately 25,000 square feet of office and
storage space and 125,000 square feet of retail space, with parking for
approximately 655 vehicles.
The property was 90% occupied as of January 1, 1998, compared
to 91% at January 1, 1997. There are no leases which represent at least 10% of
the square footage of the center scheduled to expire during 1998.
A complete renovation of the exterior of the center and the
parking lot was completed in 1997. The entire project cost $1.1 million and was
completed during the fourth quarter of 1997. The renovation was deemed necessary
in order to retain tenants as neighboring centers have recently undertaken
renovation and re-tenanting programs.
(4) Century Park I
On November 7, 1986, a joint venture (the "Century Park Joint
Venture") comprised of the Partnership and High Equity Partners L.P. - Series 86
("HEP-86"), an affiliated public limited partnership, purchased the fee simple
interest in Century Park I ("Century Park I"), an office complex. The
Partnership and HEP-86 each have a 50% interest in the Century Park Joint
Venture.
Century Park I, situated on approximately 8.6 acres, is
located in the center of San Diego County in Kearny Mesa, California, directly
adjacent to Highway 163 at the northeast corner of Balboa Avenue and Kearny
Villa Road. Century Park I is part of an office park consisting of six office
buildings and two parking garages, in which Century Park Joint Venture owns
three buildings, comprising 200,002 net rentable square feet and one garage with
approximately 810 parking spaces. One of the three buildings was completed in
the latter half of 1985, and the other two buildings were completed in February
1986. The property was 91% leased as of January 1, 1998 compared to 74% at
January 1, 1997. There are no leases that represent at least 10% of the square
footage of the property scheduled to expire in 1998. Capital expenditures during
1997 included replacing the roof and the installation of an HVAC monitoring
system in Building I.
Century Park I competes with other office parks and office
buildings in the Kearny Mesa sub-market. The primary competition continues to be
Metropolitan Office Park with 100,000 square feet of available space.
(5) 568 Broadway
On December 2, 1986, a joint venture (the "Broadway Joint
Venture") comprised of the Partnership and HEP-86 acquired a fee simple interest
in 568-578 Broadway ("568 Broadway"), a commercial building in New York City,
New York. Until February 1, 1990, the Partnership and HEP-86 each had a 50%
interest in the Broadway Joint Venture. On February 1, 1990, the Broadway Joint
Venture admitted a third joint venture partner, High Equity Partners L.P. -
Series 88 ("HEP-88"), an affiliated public limited partnership sponsored by
Integrated. HEP-88 contributed $10,000,000 for a 22.15% interest in the joint
venture. The Partnership and HEP-86 each retain a 38.925% interest in the joint
venture.
568 Broadway is located in the SoHo district of Manhattan on
the northeast corner of Broadway and Prince Street. 568 Broadway is a 12-story
plus basement and sub-basement building constructed in 1898. It is situated on a
site of approximately 23,600 square feet, has a rentable square footage of
approximately 299,000 square feet and a floor size of approximately 26,000
square feet. Formerly catering primarily to industrial light manufacturing, the
building has been converted to an office building and is currently being leased
to art galleries, photography studios, retail and office tenants. The last
manufacturing tenant vacated in January 1993. The building was 100% leased as of
January 1, 1998 and January 1, 1997. There are no leases which represent at
least 10% of the square footage of the property scheduled to expire during 1998.
568 Broadway competes with several other buildings in the SoHo
area.
(6) Seattle Tower
On December 16, 1986, a joint venture (the "Seattle Landmark
Joint Venture") comprised of the Partnership and HEP-86 acquired a fee simple
interest in Seattle Tower, a commercial office building located in downtown
Seattle ("Seattle Tower"). The Partnership and HEP-86 each have a 50% interest
in the Seattle Landmark Joint Venture.
Seattle Tower is located at Third Avenue and University Street
on the eastern shore of Puget Sound in the financial and retail core of the
Seattle central business district. Seattle Tower, built in 1928, is a 27-story
commercial building containing approximately 141,000 rentable square feet,
including almost 10,000 square feet of retail space and approximately 2,211
square feet of storage space. The building also contains a 55-car garage.
Seattle Tower is connected to the Unigard Financial Center and the Olympic Four
Seasons Hotel by a skybridge system. Seattle Tower, formerly Northern Life
Tower, represented the first appearance in Seattle of a major building in the
Art Deco style. It was accepted into the National Register of Historic Places in
1975. Seattle Tower's occupancy at January 1, 1998 was 95% compared to 96% at
January 1, 1997. There are no leases which represent at least 10% of the square
footage of the property scheduled to expire during 1998.
Roof replacement and exterior building facade projects, which
were budgeted for 1997 in the aggregate amount of approximately $630,000, have
been postponed until 1998.
The Partnership believes that Seattle Tower's primary direct
competition comes from three office buildings of similar size or age in the
immediate vicinity of Seattle Tower, which buildings have current occupancy
rates which are comparable to Seattle Tower's.
Write-downs for Impairment
See Note 4 to the financial statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations for a
discussion of write-downs for impairment.
Competition
The real estate business is highly competitive and, as
discussed more particularly above, the properties acquired by the Partnership
may have active competition from similar properties in the vicinity. In
addition, various limited partnerships have been formed by the Managing General
Partner and/or its affiliates that engage in businesses that may be competitive
with the Partnership. The Partnership will also experience competition for
potential buyers at such time as it seeks to sell any of its properties.
Employees
On-site personnel perform services for the Partnership at the
properties. Salaries for such on-site personnel are paid by the Partnership or
by unaffiliated management companies that service the Partnership's properties
from monies received by them from the Partnership. Services are also performed
by the Managing General Partner and by Resources Supervisory Management Corp.
("Resources Supervisory"), each of which is an affiliate of the Partnership.
Resources Supervisory currently provides supervisory management and leasing
services for all of the Partnership's properties and subcontracts certain
management and leasing functions to unaffiliated third parties.
The Partnership does not have any employees. NorthStar
Presidio Management Company, LLC ("NorthStar") performs accounting, secretarial,
transfer and administrative services for the Partnership. See Item 10,
"Directors and Executive Officers of the Registrant", Item 11, "Executive
Compensation", and Item 13, "Certain Relationships and Related Transactions".
Forward-Looking Statements
Certain statements made in this report may constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1993, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Such forward-looking
statements include statements regarding the intent, belief or current
expectations of the Partnership and its management and involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of the Partnership to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, the
following: general economic and business conditions, which will, among other
things, affect the demand for retail space or retail goods, availability and
creditworthiness of prospective tenants, lease rents and the terms and
availability of financing, adverse changes in the real estate markets including,
among other things, competition with other companies; risks of real estate
development and acquisition; governmental actions and initiatives; and
environment/safety requirements.
Item 2. Properties
A description of the Partnership's properties is contained in
Item 1 above (see Schedule III to the financial statements for additional
information with respect to the properties).
Item 3. Legal Proceedings
The 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 counterclaims
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 Broadway Joint Venture's action for rent against Solo Press was
tried in 1992 and resulted in a judgment in favor of the Broadway Joint Venture
for rent owed. The Partnership believes this will result in dismissal of the
action brought by Solo Press against the Broadway Joint Venture. Since the facts
of the other actions which involve similar claims and counterclaims are
substantially similar, the Partnership believes that the Broadway Joint Venture
will prevail in those actions as well.
A former retail tenant of 568 Broadway (Galix Shops, Inc.) and
a related corporation that 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 alleged 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 alleged
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 their property. The suit seeks a judgment
requiring removal of the sidewalk shed, compensatory damages of $20 million, and
punitive damages of $10 million. The Partnership believes that this suit is
meritless and intends to vigorously defend it.
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 "California Action') 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") on behalf
of a class consisting of all of the purchasers of limited partnership interests
in HEP-86, the Partnership and High Equity Partners L.P. - Series 88 ("HEP-88"),
another affiliated partnership.
On November 30, 1995, after the Court preliminarily approved a
settlement of the California Action but ultimately declined to grant final
approval and after the Court granted motions to intervene, the original and
intervening plaintiffs filed a Consolidated Class and Derivative Action
Complaint (the "Consolidated Complaint") against the Managing General Partner of
the Partnership and HEP-88 and the Investment General Partner of HEP-86; the
Administrative General Partner of HEP-86 (the "General Partners"); a subsidiary
of the indirect corporate parent of the General Partners; and the indirect
corporate parent of the General Partners. The Consolidated Complaint alleged
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 Sec. 17200; negligence; dissolution,
accounting and receivership; fraud; and negligent misrepresentation. The
Consolidated Complaint alleged, among other things, that the General Partners
caused a waste of the HEP partnership's 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
HEP partnerships without trying to run the HEP partnerships for the purposes for
which they are intended; that the General Partners acted improperly to enrich
themselves in their position of control over the HEP partnerships and that their
actions prevented non-affiliated entities from making and completing tender
offers to purchase units in the HEP partnerships; that by refusing to seek the
sale of the HEP partnerships' properties, the General Partners diminished the
value of the limited partners' equity in the HEP partnerships; that the General
Partners took a heavily overvalued partnership asset management fee; and that
limited partnership units were sold and marketed through the use of false and
misleading statements.
The Court entered an order on January 14, 1997 rejecting the
settlement and concluding that there had not been an adequate showing that the
settlement was fair and reasonable. On February 24, 1997, the Court granted the
request of one plaintiffs' law firm to withdraw as class counsel. Thereafter, in
June 1997, the plaintiffs again amended their complaint (the "Second Amended
Complaint"). The Second Amended Complaint asserts substantially the same claims
as the Consolidated Complaint, except that it no longer contains causes of
action for fraud, for negligent misrepresentation, or for negligence. The
defendants served answers denying the allegations and asserting numerous
affirmative defenses. In February 1998, the Court certified three plaintiff
classes consisting of current unit holders in each of the three HEP
Partnerships. On March 11, 1998, the Court stayed the California Action
temporarily to permit the parties to engage in renewed settlement discussions.
The General Partners believe that each of the claims asserted
in the Second Amended Complaint are meritless and intend to continue to
vigorously defend the California Action. It is impossible at this time to
predict what the defense of the California Action will cost, the Partnership's
financial exposure as a result of the indemnification agreement discussed above,
and whether the costs of defending could adversely affect the Managing General
Partner's ability to perform its obligations to the Partnership.
The Limited Partnership Agreement provides for indemnification of
the General Partners and their affiliates in certain circumstances. The
Partnership has agreed to reimburse the General Partners for their actual costs
incurred in defending this litigation and the costs of preparing settlement
materials. Through December 31, 1997, the General Partners had billed the
Partnership a total of $1,034,510 for these costs, $824,510 of which was paid in
February 1997.
On February 6,1998, Everest Investors 8, LLC commenced an
action in the Superior Court of the State of California for the County of Los
Angeles (Case No. BC 185554), against, among others, the HEP partnerships,
Resources Pension Shares 5 LP (an affiliated partnership), the general partners
of each of the partnerships, and DCC Securities Corp. In the action, Everest
alleged, among other things, that the partnerships, and the general partners
breached the provisions of the applicable partnership agreements by refusing to
recognize transfers to Everest of limited partnership units purportedly acquired
pursuant to tender offers that had been made by Everest (the "Everest Tender
Units"). Everest sought injunctive relief (a) directing the recognition of
transfers to Everest of the Everest Tender Units and the admission of Everest as
a limited partner with respect to the Everest Tender Units and (b) enjoining the
transfer of the Everest Tender Units to any either party. Everest seeks damages,
including punitive damages, for alleged breach of contract, defamation and
intentional interference with contractual relations. Everest's motion for a
temporary restraining order was denied on February 6, 1998. A hearing on
Everest's application for a preliminary injunction had been scheduled for
February 26, however, on February 20, 1998, Everest asked the Court to take its
application off calendar. The defendants served answers denying the allegations
and asserting numerous affirmative defenses. Merits discovery has commenced. The
partnerships and the general partners believe that Everest's claims are without
merit and intend to vigorously contest the action.
On March 27, 1998, Everest commenced an action in the United
States District Court for the Central District of California against, among
others, the general partners of the HEP partnerships. In the action, Everest
alleged, among other things, various violations of the Williams Act Section
14(d) of the Securities Exchange Act of 1934 in connection with the general
partners' refusal to recognize transfers to Everest of limited partnership units
purportedly acquired pursuant to the Everest tender offers and the letters sent
by the general partners to the limited partners advising them of the general
partners' determination that the Everest tender offers violated applicable
securities laws. The general partners believe that Everest's claims are without
merit and intend to vigorously contest the action.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report through the
solicitation of proxies or otherwise.
PART II
Item 5. Market for Registrant's Securities and
Related Security Holder Matters
Units of the Partnership are not publicly traded. There are
certain restrictions set forth in the Partnership's amended limited partnership
agreement (the "Limited Partnership Agreement") which may limit the ability of a
limited partner to transfer Units. Such restrictions could impair the ability of
a limited partner to liquidate its investment in the event of an emergency or
for any other reason.
In 1987, the Internal Revenue Service adopted certain rules
concerning publicly traded partnerships. The effect of being classified as a
publicly traded partnership would be that income produced by the Partnership
would be classified as portfolio income rather than passive income. In order to
avoid this effect, the Limited Partnership Agreement contains limitations on the
ability of a limited partner to transfer Units in circumstances in which such
transfers could result in the Partnership being classified as a publicly traded
partnership. However, due to the low volume of transfers of Units, it is not
anticipated that this will occur.
As of March 15, 1998, there were 10,266 holders of Units of
the Partnership, owning an aggregate of 400,010 Units (including Units held by
the initial limited partner).
Distributions per Unit of the Partnership for periods during
1996 and 1997 were as follows:
Distributions for the Amount of Distribution
Quarter Ended Per Unit
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March 31, 1996 $ 0.60
June 30, 1996 $ 0.60
September 30, 1996 $ 0.60
December 31, 1996 $ 0.60
March 31, 1997 $ 0.75
June 30, 1997 $ 0.94
September 30, 1997 $ 0.94
December 31, 1997 $ 0.94
The source of distributions in 1996 and 1997 was cash flow
from operations. All distributions are in excess of accumulated undistributed
net income and, therefore, represent a return of capital to investors on a
generally accepted accounting principles basis. In 1996, capital expenditures
were funded from cash flow and working capital reserves and in 1997, capital
expenditures were funded from cash flow. There are no material legal
restrictions set forth in the Limited Partnership Agreement upon the
Partnership's present or future ability to make distributions.
See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations", for a discussion of factors which may
affect the Partnership's ability to pay distributions.
Pursuant to an agreement dated as of March 6, 1998 among Presidio
Capital Corp., American Real Estate Holding L.P. and Olympia Investors L.P. (the
"Purchaser"), on March 12, 1998, the Purchaser commenced a tender offer to
purchase up to 40% of the outstanding units of limited partnership interest at a
purchase price of $95.00 per unit.
The agreement provides, among other things, for: (i) the Purchaser's
tender offers for up to 40% of the outstanding units of limited partnership
interest of the Partnership and of High Equity Partners L.P. - Series 86 and
High Equity Partners L.P. -Series 88 (collectively, the "Partnerships") and the
cooperation of the general partners of the Partnerships (collectively, the
"General Partners") to facilitate such offers (including furnishing the
Purchaser with limited partner lists for use in connection with the tender
offers and taking a neutral stance with respect to the tender offers) and the
transfer of tendered units to the Purchaser without transfer fees; (ii) an
agreement by the Purchaser and its affiliates to limit their acquisition of
units to those acquired in the tender offers and to limit their acquisition of
assets or properties of the Partnerships to properties or assets the General
Partners or their affiliates have publicly announced their intention to sell or
in respect of which they have hired a broker; (iii) an agreement by the
Purchaser and its affiliates not to (A) seek the removal of the General Partners
or call any meeting of limited partners of the Partnerships; (B) make any
proposal to or seek proxies from limited partners of the Partnerships; or (C)
act, either alone or in concert with others, to seek to control the management,
policies or affairs of the Partnerships or to effect any business combination or
other extraordianry transactions with the Partnerships or the General Partners;
(iv) an agreement by the Purchaser and its affiliates to vote all units owned by
them in favor of a proposal, if any, by the General Partners resulting in
limited partners receiving securities listed on NASDAQ or a national securities
exchange; (v) the Purchaser's grant to an affiliate of the General Partners of
an option to purchase 50% of the units acquired in the offers at a price equal
to the lesser of the price paid by the Purchaser or $95.00 per unit (except that
this limitation does not apply, if the purchase price in the offer is increased
to more than $110.68 in response to a competing bid), plus 50% of the
Purchaser's costs associated with the offer; (vi) the grant to that same
affiliate of the General Partners of a similar option to purchase 50% of the
units in the other Partnerships acquired pursuant to the tender offers; and
(vii) an agreement pursuant to which either party can initiate so-called
"buy/sell" procedures by notifying the other of a specified price per unit (not
to exceed the then current net asset value of the units) and the other terms and
conditions on which the non-initiating party would then be requried to elect
(subject to certain exceptions) either to buy the units acquired in connection
with the tender offer from the initiating party or to sell the units to the
initiating party. The agreements of the Purchaser and its affiliates described
in clauses (ii), (iii), and (iv) above expire on March 6, 2001, but may expire
earlier under certain circumstances.
On March 25, 1998, the Partnership advised its limited partners of its
neutral stance on the offer.
Item 6. Selected Financial Data
For the Year Ended December 31,
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1997 1996 1995 1994 1993
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Revenue $ 9,021,378 $ 8,888,016 $ 7,877,644 $ 7,995,126 $ 9,568,198
Net Income (Loss) 2,134,659 2,134,717 (18,624,934)4 1,442,884 2 (7,160,418)
Net Income (Loss) per Unit 5.07 5.07 (44.23)4 3.43 2 (17.01) 1
Distribution Per Unit 5 3.57 2.40 2.40 14.39 3 6.25
Total Assets 39,600,417 39,290,185 37,309,597 56,742,945 63,040,600
(1) Net loss for the year ended December 31, 1993 includes a write-down for
impairment on Southern National, Century Park I and 568 Broadway in the
aggregate amount of $10,050,650, or $23.87 per Unit.
(2) Net income for the year ended December 31, 1994 includes a write-down for
impairment on Southern National of $181,000, or $0.43 per Unit.
(3) Distributions for the year ended December 31, 1994 include a $9.45 per Unit
distribution from the proceeds of the sale of Southern National.
(4) Net loss for the year ended December 31, 1995 includes a write-down for
impairment on Century Park I, Seattle Tower, 568 Broadway, Loch Raven,
Southport and Westbrook in the aggregate amount of $20,469,050, or $48.61
per Unit.
(5) All distributions are in excess of accumulated undistributed net income
and, therefore represent a return of capital to investors on a generally
accepted accounting principles basis.
Item 7. 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 year ended December 31,
1997, all capital expenditures and distributions were funded from cash flow. As
of December 31, 1997, the Partnership had total working capital reserves of
approximately $2,850,000. The Partnership intends to distribute less than all of
its future cash flow from operations in order to maintain adequate reserves for
capital improvements and capitalized lease procurement costs. If real estate
market conditions deteriorate in any areas where the Partnership's properties
are located, there is substantial risk that future cash flow distributions may
be reduced. Working capital reserves are temporarily invested in short-term
instruments and, together with operating cash flow, are expected to be
sufficient to fund anticipated capital improvements to the Partnership's
properties.
During the year ended December 31, 1997, cash and cash
equivalents decreased $519,630 as a result of capital expenditures and
distributions to partners in excess of cash provided by operations. The
Partnership's primary source of funds is cash flow from the operation of its
properties, principally rents received from tenants, which amounted to
$2,808,029 for the year ended December 31, 1997. The Partnership used $1,967,626
for capital expenditures related to capital and tenant improvements to the
properties and $1,360,033 for distributions to partners for the year ended
December 31, 1997.
The following table sets forth, for each of the last three
fiscal years, the amount of the Partnership's expenditures at each of its
properties for capital improvements and capitalized tenant procurement costs:
Capital Improvements and Capitalized Tenant Procurement Costs
1997 1996 1995
---------- -------- -----------
Seattle Tower $ 78,754 $352,522 $ 227,677
Century Park I 506,704 28,010 1,243,594
568 Broadway 84,805 233,376 742,972
Westbrook 0 0 10,410
Loch Raven 990,911 224,666 327,807
Southport 520,032 58,571 86,233
========== ======== ==========
Totals $2,181,206 $897,145 $2,638,693
========== ========= ==========
The Partnership has budgeted expenditures for capital
improvements and capitalized tenant procurement costs in 1998 which is expected
to be funded from cash flow from operations. However, such expenditures will
depend upon the level of leasing activity and other factors which cannot be
predicted with certainty.
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, eliminate or
reduce distributions, or sell one or more properties. 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 has begun to recover from the effects
of the substantial decline in the market value of existing properties which
occurred in the early 1990's. However, market values have been slow to recover,
and high vacancy rates continue to exist in some 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
continued risk.
Impairment of Assets
The Partnership evaluates the recoverability of the net
carrying value of its real estate and related assets at least annually, and more
often if circumstances dictate. The Partnership estimates the future cash flows
expected to result from the use of each property and its eventual disposition,
generally over a five-year holding period. In performing this review, management
takes into account, among other things, the existing occupancy, the expected
leasing prospects of the property and the economic situation in the region where
the property is located.
If the sum of the expected future cash flows, undiscounted, is
less than the carrying amount of the property, the Partnership recognizes an
impairment loss, and reduces the carrying amount of the asset to its estimated
fair value. Fair value is the amount at 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. Management estimates fair value using discounted
cash flows or market comparables, as most appropriate for each property.
Independent certified appraisers are utilized to assist management, when
warranted.
Impairment write-downs recorded by the Partnership do not
affect the tax basis of the assets and are not included in the determination of
taxable income or loss.
Because the cash flows used to evaluate the recoverability of
the assets and their fair values are 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 at the balance sheet dates. The cash flows and market comparables used in
this process are based on good faith estimates and assumptions developed by
management. Unanticipated events and circumstances may occur and some
assumptions may not materialize; therefore, actual results may vary from the
estimates and the variances may be material. The Partnership may provide
additional write-downs, which could be material in subsequent years if real
estate markets or local economic conditions change. All of the Partnership's
properties have experienced varying degrees of operating difficulties and the
Partnership recorded significant impairment write-downs in 1995 and prior years.
Improvements in the real estate market and in the properties operations resulted
in no write-downs for impairment being needed in 1996 or 1997.
The following table represents the write-downs for impairment
recorded on the Partnership's properties:
Property
1995 Prior
----------- -----------
Seattle Tower $ 3,550,000 $ 2,500,000
Century Park I 1,250,000 10,450,000
568 Broadway 2,569,050 8,252,100
Westbrook 3,400,000 0
Loch Raven 4,800,000 0
Southport 4,900,000 0
Southern National(a) 0 3,631,000
----------- -----------
$20,469,050 $24,833,100
=========== ===========
(a) Property sold in August 1994
The details of each 1995 write-down are as follows:
Seattle Tower
The Partnership was not able to achieve leasing expectations
at Seattle Tower and occupancy in 1995 remained at approximately 80%. In
addition, market rents remained lower than projected. Because the estimate of
undiscounted cash flows prepared in 1995 yielded a result lower than the asset's
net carrying value, management determined that an impairment existed. Management
estimated the property's fair value in order to determine the write-down for
impairment. Because the estimate of fair value using expected cash flows
discounted at 13% over 15 years and an assumed sale at the end of the holding
period using a 10% capitalization rate yielded a result which in management's
opinion, was lower than the property's value in the marketplace, the property
was valued using sales of comparable buildings which indicated a fair value of
$25 per square foot. This fair value estimate resulted in a $7,100,000
write-down for impairment in 1995 of which the Partnership's share was
$3,550,000.
Century Park I
During 1995 market conditions surrounding Century Park I
deteriorated causing higher vacancy and lower rental rates. Leasing expectations
were not achieved and capital expenditures exceeded projections due to
converting the building from a single user to multi-tenancy capabilities. In
early 1995, occupancy was only 25%. Because the estimate of undiscounted cash
flows prepared in 1995 yielded a result lower than the asset's net carrying
value, management determined that an impairment existed. Management estimated
the property's fair value using expected cash flows discounted at 13% over 15
years and an assumed sale at the end of the holding period using a 10%
capitalization rate, in order to determine the write-down for impairment. The
fair value estimate resulted in a $2,500,000 write-down for impairment in 1995
of which the Partnership's share was $1,250,000.
568 Broadway
During 1995 significantly greater capital improvement expenditures than
were previously anticipated were required in order to render 568 Broadway more
competitive in the New York market. Because the estimate of undiscounted cash
flows prepared in 1995 yielded a result lower than the asset's net carrying
value, management determined that an impairment existed. Management estimated
the property's fair value in order to determine the write-down for impairment.
Because the estimate of fair value using expected cash flows discounted at 13%
over 15 years and an assumed sale at the end of the holding period using a 10%
capitalization rate yielded a result which, in management's opinion, was lower
than the property's value in the marketplace, the property was valued using
sales of comparable buildings which indicated a fair value of $45 per square
foot. This fair value estimate resulted in a $6,600,000 write-down for
impairment in 1995 of which the Partnership's share was $2,569,050.
Westbrook
Occupancy at Westbrook was 28% in early 1995. Two significant
tenants were not operating while continuing to make rental payments under the
terms of their leases. However, their absence adversely impacted both the
lease-up of the remaining space and rental rates, and required additional tenant
procurement costs. Because the estimate of undiscounted cash flows prepared in
1995 yielded a result lower than the asset's net carrying value, management
determined that an impairment existed. Management estimated the property's fair
value in order to determine the write-down for impairment. Because the estimate
of fair value using expected cash flows discounted at 13% over 15 years and an
assumed sale at the end of the holding period using a 10% capitalization rate
yielded a result which, in management's opinion, was lower than the property's
value in the marketplace, the property was valued using sales of comparable
buildings which indicated a fair value of $25 per square foot. This fair value
estimate resulted in a $3,400,000 write-down for impairment in 1995.
Loch Raven
Rental income at Loch Raven in 1995 did not meet previously
projected levels due to lower rental market rates. Expenses also decreased
slightly but this decrease was offset by significant capital expenditures which
were not anticipated. Because the estimate of undiscounted cash flows prepared
in 1995 yielded a result lower than the asset's net carrying value, management
determined that an impairment existed. Management estimated the property's fair
value using expected cash flows discounted at 13% over 15 years and an assumed
sale at the end of the holding period using a 10% capitalization rate, in order
to determine the write-down for impairment. This fair value estimate resulted in
$4,800,000 write-down for impairment in 1995.
Southport
Despite an occupancy rate in excess of 90% in 1995, actual
income levels at Southport did not meet previously projected income levels due
to lower rental market rates. Expenses were slightly higher than anticipated and
tenant procurement cost estimates are greater than amounts projected. Because
the estimate of undiscounted cash flows prepared in 1995 yielded a result lower
than the asset's net carrying value, management determined that an impairment
existed. Management estimated the property's fair value in order to determine
the write-down for impairment. Because the estimate of fair value using expected
cash flows discounted at 13% over 15 years and an assumed sale at the end of the
holding period using a 10% capitalization rate yielded a result which, in
management's opinion, was lower than the property's value in the marketplace,
the property was valued using sales of comparable buildings which indicated a
fair value of $105 per square foot. This fair value estimate resulted in a
$4,900,000 write-down for impairment in 1995.
Results Of Operations
1997 vs. 1996
The Partnership's net income for the year ended December 31, 1997 remained
consistent compared to the prior year as higher rental revenues and interest
income were offset by higher costs and expenses and lower other income during
1997.
Rental revenues increased at Southport and 568 Broadway during the year ended
December 31, 1997 compared to 1996, primarily due to higher percentage rents
collected during 1997 at Southport and lease renewals at 568 Broadway at rates
higher than those in 1996. These increases were partially offset by lower rental
revenues at Westbrook primarily due to lower occupancy rates in 1997 as compared
to 1996.
Costs and expenses increased during the year ended December 31, 1997 compared to
the same periods in 1996, primarily due to increases in operating expenses,
depreciation and amortization, and property management fees. Operating expenses
increased during 1997 due to higher real estate taxes and higher bad debt
expenses partially offset by lower insurance expense. Overall real estate tax
expense was higher at 568 Broadway in 1997 due to the significant refunds
received in 1996 which offset the annual tax payments. Bad debt expense
increased at Westbrook as certain tenants' accounts were written-off as the
tenants vacated. Insurance expenses decreased during 1997 due to the payment of
lower premiums while coverage remained the same. Depreciation and property
management fees were higher in 1997 due to significant capital additions in 1996
and higher revenues, respectively. These increases were partially offset by
lower administrative expenses, as legal and accounting fees related to ongoing
litigation and the HEP reorganization were higher in 1996.
Interest income increased in 1997 due to higher interest rates and higher
invested cash balances compared to the 1996. Other income decreased during the
year ended December 31, 1997 compared to 1996 due to fewer investor transfers.
1996 vs. 1995
The Partnership experienced net income for the year ended
December 31, 1996 compared to a net loss for the prior year due primarily to the
significant write-downs for impairment recorded during 1995 as previously
discussed.
Rental revenue increased for the year ended December 31, 1996
as compared to the prior year. Revenues at 568 Broadway, Seattle Tower and
Century Park I increased during 1996 due to higher occupancy rates and increased
at Southport due to higher rental rates in 1996 as compared to the prior year.
These increases, however, were partially offset by a decrease in revenue at
Westbrook as certain tenants vacated during 1996.
Costs and expenses decreased during 1996 as compared to 1995
due primarily to the significant write-downs for impairment recorded in 1995.
Operating expenses decreased slightly during 1996 due to decreases in real
estate taxes and bad debt expenses at certain properties partially offset by an
increase in repairs and maintenance and utility costs. Real estate taxes
decreased significantly at 568 Broadway due to the receipt of refunds related to
the 1992-1995 tax years of which the partnership's share was $353,500. Bad debt
expenses decreased at Southport, Westbrook, and Loch Raven due to fewer tenant
write-offs and/or bankruptcies in 1996 compared to 1995. Repairs and maintenance
at Century Park I and utility expenses at 568 Broadway increased due to
increased occupancy during the year ended December 31, 1996 as compared to the
prior year. Depreciation expense for 1996 increased due to the significant
capital improvement and tenant procurement costs incurred and capitalized during
the year ended December 31, 1995. The partnership management fee remained
relatively consistent in 1996 as compared to the prior year. Administrative
expenses increased due to the Partnership's reimbursement of the General
Partner's litigation and settlement costs as previously discussed. The property
management fee increase was the direct result of higher revenues at the
aforementioned properties.
Interest income increased due to higher cash balances in 1996
partially offset by slightly lower interest rates in 1996 as compared to the
prior year. For the year ended December 31, 1996, other income, which consists
of investor ownership transfer fees, increased compared to 1995 due to a greater
number of transfers during 1996.
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 8
to the Partnership's financial statements for a description thereof.
Year 2000 Compliance
The Partnership's accounting, administrative and property
management services are provided by affiliates of the General Partners. Those
affiliates have and will continue to make certain investments in their software
systems and applications to ensure that they are year 2000 compliant. The
Partnership's management believes that the financial impact to the Partnership
of ensuring its year 2000 compliance has not been and is not anticipated to be
material to the Partnership's financial position or results of operations.
Item 8. Financial Statements and Supplementary Data
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85,
A CALIFORNIA LIMITED PARTNERSHIP
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
I N D E X
Independent Auditors' report....................................................
Financial statements, years ended
December 31, 1997, 1996 and 1995
Balance Sheets.........................................................
Statements of Operations...............................................
Statements of Partners' Equity.........................................
Statements of Cash Flows...............................................
Notes to Financial Statements..........................................
INDEPENDENT AUDITORS' REPORT
To the Partners of Integrated Resources High Equity Partners, Series 85
We have audited the accompanying balance sheets of Integrated Resources High
Equity Partners, Series 85 (a California limited partnership) as of December 31,
1997 and 1996, and the related statements of operations, partners' equity and
cash flows for each of the three years in the period ended December 31, 1997.
Our audit also included the financial statement schedule listed in the Index at
Item 14(a) 2. These financial statements and the financial statement schedule
are the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements and the financial statement
schedule 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, such financial statements present fairly, in all material
respects, the financial position of Integrated Resources High Equity Partners,
Series 85 at December 31, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1997
in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/DELOITTE & TOUCHE LLP
- ------------------------
DELOITTE & TOUCHE LLP
March 27, 1998
New York, NY
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
BALANCE SHEETS
December 31,
-----------------------------
1997 1996
----------- -----------
ASSETS
Real estate ................................ $33,033,710 $32,154,253
Cash and cash equivalents .................. 4,350,887 4,870,517
Other assets ............................... 2,033,252 2,107,211
Receivables ................................ 182,568 158,204
----------- -----------
TOTAL ASSETS ............................... $39,600,417 $39,290,185
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Accounts payable and accrued expenses ...... $ 1,183,720 $ 1,061,732
Due to affiliates .......................... 577,739 1,164,121
Distributions payable ...................... 395,799 252,638
----------- -----------
Total liabilities ..................... 2,157,258 2,478,491
----------- -----------
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY:
Limited partners' equity (400,010
units issued and outstanding) .......... 35,570,050 34,970,158
General partners' equity ................. 1,873,109 1,841,536
----------- -----------
Total partners' equity ................ 37,443,159 36,811,694
----------- -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY ..... $39,600,417 $39,290,185
=========== ===========
See notes to financial statements
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
----------------------------------------------
1997 1996 1995
------------ ------------ ------------
Rental Revenue .................................. $ 9,021,378 $ 8,888,016 $ 7,877,644
------------ ------------ ------------
Costs and Expenses:
Operating expenses .................. 3,426,267 3,139,504 3,397,690
Depreciation and amortization ...... 1,360,929 1,270,172 1,161,328
Partnership management fee .......... 908,172 908,172 908,172
Administrative expenses ............ 1,116,971 1,359,027 447,270
Property management fee ............. 350,490 327,759 303,936
Write-down for impairment ........... -- -- 20,469,050
------------ ------------ ------------
7,162,829 7,004,634 26,687,446
------------ ------------ ------------
Income (loss) before interest and other income .. 1,858,549 1,883,382 (18,809,802)
Interest income ........................ 207,420 141,939 130,173
Other income ........................... 68,690 109,396 54,695
------------ ------------ ------------
Net Income (loss) ............................... $ 2,134,659 $ 2,134,717 $(18,624,934)
============ ============ ============
Net income (loss) attributable to:
Limited partners ........................ $ 2,027,926 $ 2,027,981 $(17,693,687)
General partners ....................... 106,733 106,736 (931,247)
------------ ------------ ------------
Net income (loss) ............................... $ 2,134,659 $ 2,134,717 $(18,624,934)
============ ============ ============
Net income (loss) per unit of limited partnership
Interest (400,010 units outstanding) ....... $ 5.07 $ 5.07 $ (44.23)
============ ============ ============
See notes to financial statements
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
STATEMENTS OF PARTNERS' EQUITY
General Limited
Partners' Partners'
Equity Equity Total
------------ ------------ ------------
Balance, January 1, 1995 ........... $ 2,767,103 $ 52,555,912 $ 55,323,015
Net Loss ........................... (931,247) (17,693,687) (18,624,934)
Distributions as a return of capital
($2.40 per limited partnership unit) (50,528) (960,024) (1,010,552)
------------ ------------ ------------
Balance, December 31, 1995 ......... 1,785,328 33,902,201 35,687,529
Net Income ......................... 106,736 2,027,981 2,134,717
Distributions as return of capital
($2.40 per limited partnership unit) (50,528) (960,024) (1,010,552)
----------- ------------ ------------
Balance, December 31, 1996 ......... 1,841,536 34,970,158 36,811,694
Net Income ......................... 106,733 2,027,926 2,134,659
Distributions as return of capital
($3.57 per limited partnership unit) (75,160) (1,428,034) (1,503,194)
------------ ------------ ------------
Balance, December 31, 1997 ......... $ 1,873,109 $ 35,570,050 $ 37,443,159
============ ============ ============
See notes to financial statements
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss) ..................................... $ 2,134,659 $ 2,134,717 $(18,624,934)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Write-down for impairment ........................ -- -- 20,469,050
Depreciation and amortization .................... 1,360,929 1,270,172 1,161,328
Straight line adjustment for stepped lease rentals 3,999 (52,915) (43,550)
Changes in asset and liabilities:
Accounts payable and accrued expenses ............ 121,988 44,935 159,873
Receivables ...................................... (24,364) 44,558 211,547
Due to affiliates ................................ (586,382) 811,488 42,265
Other assets...................................... (202,800) (177,542) (504,798)
------------ ------------ ------------
Net cash provided by operating activities ............. 2,808,029 4,075,413 2,870,781
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements to real estate....................... (1,967,626) (645,287) (2,075,671)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners......................... (1,360,033) (1,010,552) (1,010,552)
------------ ------------ ------------
(Decrease) Increase in Cash and Cash Equivalents ..... (519,630) 2,419,574 (215,442)
Cash and Cash Equivalents, Beginning of Year .......... 4,870,517 2,450,943 2,666,385
------------ ------------ ------------
Cash and Cash Equivalents, End of Year ................ $ 4,350,887 $ 4,870,517 $ 2,450,943
============ ============ ============
See notes to financial statements
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Integrated Resources High Equity Partners, Series 85, A California
Limited Partnership (the "Partnership"), is a limited partnership,
organized under the Uniform Limited Partnership Laws of California on
August 19, 1983 for the purpose of investing in, holding and operating
income-producing real estate. The Partnership will terminate on
December 31, 2008 or sooner, in accordance with terms of the Agreement
of Limited Partnership. The Partnership invested in three shopping
centers and four office properties (one of which was sold in 1994),
none of which are encumbered by debt.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial statements
The financial statements are prepared on the accrual basis of
accounting. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Reclassifications
Certain reclassifications have been made to the financial statements
for the prior years in order to conform to the current year's
classifications.
Cash and cash equivalents
For purposes of the statements of cash flows, the Partnership considers
all short-term investments which have original maturities of three
months or less from the date of issuance to be cash equivalents.
Leases
The Partnership accounts for its leases under the operating method.
Under this method, revenue is recognized as rentals become due, except
for stepped leases where the revenue from the lease is averaged over
the life of the lease.
Depreciation
Depreciation is computed using the straight-line method over the useful
life of the property, which is estimated to be 40 years. The cost of
properties represents the initial cost of the properties to the
Partnership plus acquisition and closing costs less write-downs, if
any. Tenant improvements are amortized over the applicable lease term.
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments in joint ventures
For properties purchased in joint venture ownership with affiliated
partnerships, the financial statements present the assets, liabilities,
and expenses of the joint venture on a pro rata basis in accordance
with the Partnership's percentage of ownership.
Impairment of Assets
The Partnership evaluates the recoverability of the net carrying value
of its real estate and related assets at least annually, and more often
if circumstances dictate. The Partnership estimates the future cash
flows expected to result from the use of each property and its eventual
disposition, generally over a five-year holding period. In performing
this review, management takes into account, among other things, the
existing occupancy, the expected leasing prospects of the property and
the economic situation in the region where the property is located.
If the sum of the expected future cash flows, undiscounted, is less
than the carrying amount of the property, the Partnership recognizes an
impairment loss, and reduces the carrying amount of the asset to its
estimated fair value. Fair value is the amount at 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. Management
estimates fair value using discounted cash flows or market comparables,
as most appropriate for each property. Independent certified appraisers
are utilized to assist management, when warranted.
Impairment write-downs recorded by the Partnership do not affect the
tax basis of the assets and are not included in the determination of
taxable income or loss.
Because the cash flows used to evaluate the recoverability of the
assets and their fair values are 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 at the balance sheet
dates. The cash flows and market comparables used in this process are
based on good faith estimates and assumptions developed by management.
Unanticipated events and circumstances may occur and some assumptions
may not materialize; therefore, actual results may vary from the
estimates and the variances may be material. The Partnership may
provide additional write-downs, which could be material in subsequent
years if real estate markets or local economic conditions change.
Income taxes
No provision has been made for federal, state and local income taxes
since they are the personal responsibility of the partners.
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net income (loss) and distributions per unit of limited partnership
interest
Net income (loss) and distributions per unit of limited partnership
interest is calculated based upon the number of units outstanding
(400,010), for each of the years ended December 31, 1997, 1996 and
1995.
Recently issued accounting pronouncements
The Financial Accounting Standards Board ("FASB") has recently issued
several new accounting pronouncements. Statement No. 130, "Reporting
Comprehensive Income" establishes standards for reporting and display
of comprehensive income and its components. Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information:
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosure about products and services, geographic areas, and major
customers. These two standards are effective for the Partnership's 1998
financial statements, but the Partnership does not believe that they
will have any effect on the Partnership's computation or presentation
of net income or other disclosures.
The implementation in 1997 of FASB Statement No. 128 "Earnings per
Share" and Statement No. 129 "Disclosure of Information about Capital
Structure" did not have any impact on the Partnerships financial
statements.
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
The Managing General Partner of the Partnership, Resources High Equity
Inc., is a wholly owned subsidiary of Presidio Capital Corp.
("Presidio"). Presidio AGP Corp., which is also a wholly owned
subsidiary of Presidio, is the Associate General Partner (together with
the Managing General Partner the "General Partners"). 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
business that may be in competition with the Partnership. Accordingly,
conflicts of interest may arise between the Partnership and such other
businesses. Subject to the rights of the Limited Partners under the
Limited Partnership Agreement, Presidio controls the Partnership
through its indirect ownership of all the shares of the General
Partners. On August 28,1997, an affiliate of NorthStar Capital Partners
acquired all of the Class B shares of Presidio. This acquisition, when
aggregated which other acquisitions, caused NorthStar Capital Partners
to acquire indirect control of the General Partners.
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
NOTES TO FINANCIAL STATEMENTS
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
On November 2, 1997 the Administrative Services Agreement with Wexford
Management LLC ("Wexford"), the administrator for Presidio, expired
pursuant to its terms. Pursuant to that agreement, Wexford had
authority to designate directors of the General Partners. Presidio also
entered into a management agreement with NorthStar Presidio Management
Company, LLC ("NorthStar Presidio"). Under the terms of the management
agreement, NorthStar Presidio will provide the day-to-day management of
Presidio, and its direct and indirect subsidiaries and affiliates.
Effective November 3, 1997, Wexford and Presidio entered into an
Administrative Services Agreement dated as of November 3, 1997 (the
"ASA"). The ASA provides that Wexford will continue to provide
consulting and administrative services to Presidio and its affiliates
for a term of six months. During the years ended December 31, 1997 and
1996, reimbursable expenses paid to Wexford by the Partnership amounted
to $41,994 and $80,895, respectively.
The Partnership has a property management services agreement with
Resources Supervisory Management Corp. ("Resources Supervisory"), an
affiliate of the Managing General Partner, to perform certain functions
relating to the management of the properties of the Partnership.
Portions 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 years ended
December 31, 1997, 1996, and 1995, Resources Supervisory was entitled
to receive an aggregate of $350,490, $327,759, and $303,936, of which
$196,300, $191,956, and $161,137 was paid to unaffiliated management
companies, respectively.
For the administration of the Partnership the Managing General Partner
is entitled to receive reimbursement of expenses of a maximum of
$150,000 per year for each of the years ended December 31, 1997, 1996
and 1995.
For managing the affairs of the Partnership, the Managing General
Partner is entitled to receive a 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 years ended
December 31, 1997, 1996, and 1995 the Managing General Partner earned
$908,172.
The General Partners are allocated 5% of the net income or (losses) of
the Partnership which amounted to $106,733, $106,736, and ($931,247) in
1997, 1996 and 1995, respectively. The General Partners are also
entitled to receive 5% of distributions which amounted to $75,160,
$50,528, and $50,528 in 1997, 1996 and 1995, respectively.
During the liquidation stage of the Partnership, the Managing General
Partner or an affiliate may be entitled to receive certain fees which
are subordinated to the limited partners receiving their original
invested capital and certain specified minimum returns on their
investments. All fees received by the General Partners are subject to
certain limitations as set forth in the Partnership Agreement.
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
NOTES TO FINANCIAL STATEMENTS
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
During July 1996 through March 1998, Millennium Funding II Corp., a
wholly owned indirect subsidiary of Presidio, contracted to purchase
39,123 units of the Partnership from various limited partners, which
represents approximately 9.8% of the outstanding limited partnership
units of the Partnership. During 1997, distributions in the amount of
$26,697 were received by Millennium Funding II Corp related to these
units.
Pursuant to an agreement dated as of March 6, 1998 among Presidio,
American Real Estate Holding L.P. and Olympia Investors L.P. (the
"Purchaser"), on March 12, 1998, the Purchaser commenced a tender offer
to purchase up to 40% of the outstanding units of limited partnership
interest at a purchase price of $95.00 per unit.
4. REAL ESTATE
Management recorded write-downs for impairment totaling $20,469,050 in
1995. No write-downs were required for the years ended December 31,
1996 or 1997. The details of write-downs recorded in 1995 are as
follows:
During 1995, market conditions surrounding Century Park deteriorated
causing higher vacancy and lower rental rates. Leasing expectations
were not achieved and capital expenditures exceeded projections due to
converting the building from a single user to multi-tenancy
capabilities. In early 1995, occupancy was only 25%. Because the
estimate of undiscounted cash flows prepared in 1995 yielded a result
lower that the asset's net carrying value, management determined that
an impairment existed. Management estimated the property's fair value
using expected cash flows discounted at 13% over 15 years and an
assumed sale at the end of the holding period using a 10%
capitalization rate in order to determine the write-down for
impairment. This fair value estimate resulted in a $2,500,000
write-down for impairment in 1995 of which the Partnership's share was
$1,250,000.
The Partnership was not able to achieve leasing expectations at Seattle
Tower and occupancy in 1995 remained at approximately 80%. In addition,
market rents were lower than projected. Because the estimate of
undiscounted cash flows prepared in 1995 yielded a result lower than
the asset's net carrying value, management determined that an
impairment existed. Management estimated the property's fair value in
order to determine the write-down for impairment. Because the estimate
of fair value using expected cash flows discounted at 13% over 15 years
and an assumed sale at the end of the holding period using a 10%
capitalization rate yielded a result which, in management's opinion,
was lower than the property's value in the marketplace, the property
was valued using sales of comparable buildings which indicated a fair
value of $25 per square foot. This fair value estimate resulted in a
$7,100,000 write-down for impairment in 1995 of which the Partnership's
share was $3,550,000.
During 1995, significantly greater capital improvement expenditures
than were previously anticipated were required in order to render 568
Broadway more competitive in the New York market. Because the estimate
of undiscounted cash flows prepared in 1995 yielded a result lower than
the net carrying value, management determined that an impairment
existed. Management estimated the property's fair value in order to
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
NOTES TO FINANCIAL STATEMENTS
4. REAL ESTATE (CONTINUED)
determine the write-down for impairment. Because the estimate of fair
value using expected cash flows discounted at 13% over 15 years and an
assumed sale at the end of the holding period using a 10%
capitalization rate yielded a result which, in management's opinion,
was lower than the property's value in the marketplace, the property
was valued using sales of comparable buildings which indicated a fair
value of $45 per square foot. This fair value estimate resulted in a
$6,600,000 write-down for impairment in 1995 of which the Partnership's
share was $2,569,050.
Occupancy at Westbrook was 28% in early 1995. Two significant tenants
were not operating while continuing to make rental payments under the
terms of their leases. However, their absence adversely impacted both
the lease-up of the remaining space and rental rates, and required
additional tenant procurement costs. Because the estimate of
undiscounted cash flows prepared in 1995 yielded a result lower than
the asset's net carrying value, management determined that an
impairment existed. Management estimated the property's fair value in
order to determine the write-down for impairment. Because the estimate
of fair value using expected cash flows discounted at 13% over 15 years
and an assumed sale at the end of the holding period using a 10%
capitalization rate yielded a result which, in management's opinion,
was lower than the property's value in the marketplace, the property
was valued using sales of comparable buildings which indicated a fair
value of $20 per square foot. This fair value estimate resulted in a
$3,400,000 write-down for impairment in 1995.
Rental income at Loch Raven in 1995 did not meet previously projected
levels due to lower rental market rates. Expenses also decreased
slightly but this decrease was offset by significant capital
expenditures which were not anticipated. Because the estimate of
undiscounted cash flows prepared in 1995 yielded a result lower than
the asset's net carrying value, management determined that an
impairment existed. Management estimated the property's fair value,
using expected cash flows discounted at 13% over 15 years and an
assumed sale at the end of the holding period using a 10%
capitalization rate, in order to determine the write-down for
impairment. This fair value estimate resulted in a $4,800,000
write-down for impairment in 1995.
Despite an occupancy rate in excess of 90% in 1995, actual income
levels at Southport did not meet previously projected income levels due
to lower rental market rates. Expenses were slightly higher than
anticipated and tenant procurement cost estimates were greater than
amounts projected. Because the estimate of undiscounted cash flows
prepared in 1995 yielded a result lower than the asset's net carrying
value, management determined that an impairment existed. Management
estimated the property's fair value in order to determine the
write-down for impairment. Because the estimate of fair value using
expected cash flows discounted at 13% over 15 years and an assumed sale
at the end of the holding period using a 10% capitalization rate
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
NOTES TO FINANCIAL STATEMENTS
4. REAL ESTATE (CONTINUED)
yielded a result which, in management's opinion, was lower than the
property's value in the marketplace, the property was valued using
sales of comparable buildings which indicated a fair value of $105 per
square foot. This fair value estimated resulted in a $4,900,000
write-down for impairment in 1995.
The following table is a summary of the Partnership's real estate as
of:
December 31,
--------------------------------
1997 1996
------------ ------------
Land ................................... $ 11,056,966 $ 11,056,966
Buildings and improvements ............. 36,784,708 34,817,081
------------ ------------
47,841,674 45,874,047
Less: Accumulated depreciation ........ (14,807,964) (13,719,794)
------------ ------------
$ 33,033,710 $ 32,154,253
============ ============
The following is a summary of the Partnership's share of anticipated
future receipts under noncancellable leases:
YEARS ENDING DECEMBER 31,
------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter Total
---------- ---------- ---------- ---------- ---------- ----------- -----------
$6,446,000 $5,951,000 $5,342,000 $4,343,000 $4,101,000 $12,176,000 $38,359,000
========== ========== ========== ========== ========== =========== ===========
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
NOTES TO FINANCIAL STATEMENTS
5. DISTRIBUTIONS PAYABLE
December 31,
----------------------
1997 1996
-------- ---------
Limited Partners ($.94 and $.60 per unit) .............. $376,009 $240,006
General Partners ....................................... 19,790 12,632
-------- --------
$395,799 $252,638
======== ========
Such distributions were paid in the subsequent quarters
6. DUE TO AFFILIATES
December 31,
--------------------------
1997 1996
---------- -----------
Partnership asset management fee ........................ $ 227,044 $ 227,044
Reorganization and litigation cost reimbursement (Note 7) 210,000 824,510
Property management fee ................................. 103,195 75,067
Non-accountable expense reimbursement ................... 37,500 37,500
========== ==========
$ 577,739 $1,164,121
========== ==========
Such amounts were paid in the subsequent quarters
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 Broadway Joint
Venture's action for rent against Solo Press was tried in 1992 and
resulted in a judgement in favor of the Broadway Joint Venture for rent
owed. The Partnership believes this will result in dismissal of the
action brought by Solo Press against the Broadway Joint Venture. Since
the facts of the other actions which involve material claims or
counterclaims are substantially similar, the Partnership believes that
the Broadway Joint Venture will prevail in those actions as well.
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
NOTES TO FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES (continued)
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 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 their property. The
suit seeks a judgement requiring removal of the sidewalk shed,
compensatory damages of $20 million, and punitive damages of $10
million. The Partnership believes that this suit is without merit 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 "California Action") 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 the Partnership. On April 7, 1994 the plaintiffs were
granted leave to file an amended complaint (the "Amended Complaint") on
behalf of a class consisting of all of the purchasers of limited
partnership interests in HEP-86, the Partnership and High Equity
Partners L.P. - Series 88 ("HEP-88"), another affiliated partnership.
On November 30, 1995, after the Court preliminarily approved a
settlement of the California Action but ultimately declined to grant
final approval and after the Court granted motions to intervene, the
original and intervening plaintiffs filed a Consolidated Class and
Derivative Action Complaint (the "Consolidated Complaint") against the
Managing General Partner of the Partnership and HEP-88 and the
Investment General Partner of HEP-86; the Administrative General
Partner of HEP-86 (the "General Partners"); a subsidiary of the
indirect corporate parent of the General Partners; and the indirect
corporate parent of the General Partners. The Consolidated Complaint
alleged 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 Sec.
17200; negligence; dissolution, accounting and receivership; fraud; and
negligent misrepresentation. The Consolidated Complaint alleged, among
other things, that the General Partners caused a waste of the HEP
partnership's 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 HEP partnerships without trying to run the HEP
partnerships for the purposes for which they are intended; that the
General Partners acted improperly to enrich themselves in their
position of control over the HEP partnerships and that their actions
prevented non-affiliated entities from making and completing tender
offers to purchase units in the HEP partnerships; that by refusing to
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
NOTES TO FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
seek the sale of the HEP partnerships' properties, the General Partners
diminished the value of the limited partners' equity in the HEP
partnerships; that the General Partners took a heavily overvalued
partnership asset management fee; and that limited partnership units
were sold and marketed through the use of false and misleading
statements.
The Court entered an order on January 14, 1997 rejecting the settlement
and concluding that there had not been an adequate showing that the
settlement was fair and reasonable. On February 24, 1997, the Court
granted the request of one plaintiffs' law firm to withdraw as class
counsel. Thereafter, in June 1997, the plaintiffs again amended their
complaint (the "Second Amended Complaint"). The Seconded Amended
Complaint asserts substantially the same claims as the Consolidated
Complaint, except that it no longer contains causes of action for
fraud, for negligent misrepresentation, or for negligence. The
defendants served answers denying the allegations and asserting
numerous affirmative defenses. In February 1998, the Court certified
three plaintiff classes consisting of current unit holders in each of
the three HEP partnerships. On March 11, 1998, the Court stayed the
California Action temporarily to permit the parties to engage in
renewed settlement discussions.
The General Partners believe that each of the claims asserted in the
Second Amended Complaint are meritless and intend to continue to
vigorously defend the California Action. It is impossible at this time
to predict what the defense of the California Action will cost, the
Partnership's financial exposure as a result of the indemnification
agreement discussed above, and whether the costs of defending could
adversely affect the Managing General Partner's ability to perform its
obligations to the Partnership.
The Limited Partnership Agreement provides for indemnification of the
General Partners and their affiliates in certain circumstances. The
Partnership has agreed to reimburse the General Partners for their
actual costs incurred in defending this litigation and the costs of
preparing settlement materials. Through December 31, 1997, the General
Partners had billed the Partnership a total of $1,034,510 for these
costs, of which $824,510 was paid in February 1997.
d) On February 6,1998, Everest Investors 8, LLC("Everest") commenced an
action in the Superior Court of the State of California for the County
of Los Angeles (Case No. BC 185554), against, among others, the HEP
partnerships, Resources Pension Shares 5 LP (an affiliated
partnership), the general partners of each of the partnerships, and DCC
Securities Corp. In the action, Everest alleged, among other things,
that the partnerships and the general partners breached the provisions
of the applicable partnership agreements by refusing to recognize
transfers to Everest of limited partnership units purportedly acquired
pursuant to tender offers that had been made by Everest (the "Everest
Tender Units"). Everest sought injunctive relief (a) directing the
recognition of transfers to Everest of the Everest Tender Units and the
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
NOTES TO FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES (continued)
admission of Everest as a limited partner with respect to the Everest
Tender Units and (b) enjoining the transfer of the Everest Tender Units
to any either party. Everest seeks damages, including punitive damages,
for alleged breach of contract, defamation and intentional interference
with contractual relations. Everest's motion for a temporary
restraining order was denied on February 6, 1998. A hearing on
Everest's application for a preliminary injunction had been scheduled
for February 26, however, on February 20, 1998, Everest asked the Court
to take its application off calendar. The defendants served answers
denying the allegations and asserting numerous affirmative defenses.
Merits discovery has commenced. The partnerships and the general
partners believe that Everest's claims are without merit and intend to
vigorously contest the action.
On March 27, 1998, Everest commenced an action in the United States
District Court for the Central District of California against, among
others, the general partners of the HEP partnerships. In the action,
Everest alleged, among other things, various violations of the Williams
Act Section 14(d) of the Securities Exchange Act of 1934 in connection
with the general partners' refusal to recognize transfers to Everest of
limited partnership units purportedly acquired pursuant to the Everest
tender offers and the letters sent by the general partners to the
limited partners advising them of the general partners' determination
that the Everest tender offers violated applicable securities laws. The
general partners believe that Everest's claims are without merit and
intend to vigorously contest the action.
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
NOTES TO FINANCIAL STATEMENTS
8. RECONCILIATION OF NET INCOME (LOSS) AND NET ASSETS PER FINANCIAL
STATEMENTS TO TAX REPORTING
The Partnership files its tax returns on an accrual basis and has
computed depreciation for tax purposes using the accelerated cost
recovery systems, which is not in accordance with generally accepted
accounting principles. The following is a reconciliation of the net
income (loss) per the financial statements to the net taxable income
(loss).
Years Ended December 31,
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
Net income (loss) per financial statements ...... $ 2,134,659 $ 2,134,717 $(18,624,934)
Write-down for impairment ....................... -- -- 20,469,050
Tax depreciation in excess of financial statement
depreciation .................................... (1,524,130) (1,553,354) (1,564,609)
------------ ------------ ------------
Net taxable income .............................. $ 610,529 $ 581,363 $ 279,507
============ ============ ============
The differences between the Partnership's assets and liabilities for
tax purposes and financial reporting purposes are as follows:
December 31,
1997
-------------
Net assets per financial statements ..................................... $ 37,443,159
Write-down for impairment ............................................... 41,671,150
Tax depreciation in excess of financial statement depreciation .......... (13,519,187)
Gain on admission of joint venture partner not recognied for tax purposes (307,093)
Organization costs not charged to partners' equity for tax purposes ..... 1,500,000
------------
Net assets per tax reporting ............................................ $ 66,788,029
============
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Partnership has no officers or directors. The Managing
General Partner manages and controls substantially all of the Partnership's
affairs and has general responsibility and ultimate authority in all matters
affecting its business. The Managing General Partner is also the investment
general partner of HEP-86 and the managing general partner of HEP-88, both
limited partnerships with investment objectives similar to those of the
Partnership. The Associate General Partner is also a general partner in other
partnerships affiliated with Presidio and whose investment objectives are
similar to those of the Partnership. The Associate General Partner, in its
capacity as such, does not devote any material amount of its business time and
attention to the Partnership's affairs.
Based on a review of Forms 3 and 4 and amendments thereto
furnished to the Partnership pursuant to Rule 16a-3(e) during its most recent
fiscal year and Form 5 and amendments thereto furnished to the Partnership with
respect to its most recent fiscal year, and written representations pursuant to
Item 405(b)(2)(i) of Regulation S-K, none of the General Partners, directors or
officers of the Managing General Partner or beneficial owners of more than 10%
of the Units failed to file on a timely basis reports required by Section 16(a)
of the Securities Exchange Act of 1934 (the "Exchange Act") during the most
recent fiscal or prior fiscal years. No written representations were received
from the partners of the Associate General Partner.
As of March 15, 1998, the names and ages of, and the positions
held by, the officers and directors of the Managing General Partner and the
Associate General Partner are as follows:
Has Served as an Officer and/or
Name Age Position Director Since
---- --- -------- --------------
W. Edward Scheetz 33 Director November 1997
David Hamamoto 38 Director November 1997
Richard Sabella 42 President, Director November 1997
David King 35 Executive VP, Director and Assistant Treasurer November 1997
Larry Schacter 41 Senior VP, CFO January 1998
Kevin Reardon 39 VP, Secretary, Treasurer & Director November 1997
Allan B. Rothschild 36 Executive Vice President December 1997
Marc Gordon 33 Vice President November 1997
Charles Humber 24 Vice President November 1997
Adam Anhang 24 Vice President November 1997
Gregory Peck 23 Assistant Secretary November 1997
W. Edward Scheetz co-founded NorthStar with David Hamamoto in
July 1997 having previously been a partner at Apollo Real Estate Advisors L.P.
since 1993. From 1989 to 1993, Mr. Scheetz was a principal with Trammell Crow
Ventures.
David Hamamoto co-founded NorthStar with W. Edward Scheetz in
July 1997, having previously been a partner and co-head of the Real Estate
Principal Investment Area at Goldman, Sachs & Co., where he initiated the effort
to build a real estate principal investment business in 1988 under the auspices
of the Whitehall Funds.
Richard Sabella joined NorthStar in November 1997, having
previously been the head of real estate and a partner at the law firm of Cahill,
Gordon & Reindel since 1989. Mr. Sabella has also been associated with the law
firms of Milgrim, Thomajian, Jacobs & Lee, P.C. and Cravath, Swaine & Moore.
David King joined NorthStar in November 1997, having
previously been a Senior Vice President of Finance at Olympia & York Companies
(USA). Prior to joining Olympia & York in 1990. Mr. King worked for Bankers
Trust in its real estate finance group.
Larry Schachter joined NorthStar Presidio in January 1998,
having previously held the position as Controller at CB Commercial/Hampshhire,
LLC from 1996 to 1997. Prior to joining CB, Mr. Schachter held the position of
Controller at Goodrich Associates in 1996, and at Greenthal/Harlan Realty
Services Co. from 1992 to 1995. Mr. Schachter, who holds a CPA, graduated from
Miami University (Ohio).
Kevin Reardon joined NorthStar in October 1997, having
previously held the position of Controller at Lazard Freres Real Estate
Investors from 1996 to 1997. Prior to joing Lazard Freres, MR. Reardon was the
Director of Finance in charge of European expansion at the law firm of Dewey
Ballantine from 1993 to 1996. Prior to 1993, Mr. Reardon held a financial
position at Hearst-ABC-Viacom Entertainment Services. Mr. Reardon, who holds a
CPA, graduated from Fordham University with a B.S. in accounting.
Allan B. Rothschild joined NorthStar in December 1997, having
previously been the Senior Vice President and General Counsel of Newkirk Limited
Partnership wehre he managed a large portfolio of net-leased real estate assets.
Prior to joining Newkirk, Mr. Rothschild was associated with the law firm of
Proskauer, Rose LLP in its real estate group.
Marc Gordon joined NorthStar in October 1997, having
previously been a Vice President in the Real Estate Investment Banking Group at
Merrill Lynch where he executed corporate finance and strategic transactions for
public and private real estate ownership companies, including REITs, real estate
service companies, and real estate intensive operating companies. Prior to joing
Merrill Lynch, in 1993, Mr. Gordon was in the Real Estate and Banking Group at
the law firm of Irell & Manella. Mr. Gordon graduated from Dartmouth College
with an A.B. in economics and also holds a J.D. from the UCLA School of Law.
Charles Humber joined NorthStar in September 1997, having
previously worked for Merrill Lynche's Real Estate Investment Banking group from
1996 to 1997. Mr. Humber graduated from Brown University with a B.A. in
international relations and organizational behavior and management.
Adam Anhang joined NorthStar in August 1997, having previously
worked for the Athena Group's Russia and Former Soviet Union development team
from 1996 to 1997. Mr. Anhang graduated from the Wharton School of the
University of Pennsylvania with a B.S. in economics with concentrations in
finance and real estate.
Gregory Peck joined NorthStar in July 1997, having previously
worked for the Morgan Stanley Realty Real Estate Funds (MSREF) and Morgan
Stanley's Real Estate Investment Banking group from 1996 to 1997. Prior to
joining Morgan Stanley, Mr. Peck worked for Lazard Freres & Co. LLC in the Real
Estate Investment Banking group from 1994 to 1996. Mr. Peck graduated from
Columbia College with a A.B. in mathematics and a A.B. in economics.
All of the directors will hold office, subject to the bylaws
of the Managing General Partner, until the next annual meeting of stockholders
of the Managing General Partner and until their successors are elected and
qualified.
There are no family relationships between any executive
officer and any other executive officer or director of the Managing General
Partner.
Affiliates of the General Partners are also engaged in
business related to the acquisition and operation of real estate.
Many of the officers, directors and partners of the Managing
General Partner and the Associate General Partner are also officers and/or
directors of the general partners of other public partnerships controlled by
Presidio and various subsidiaries of Presidio.
Item 11. Executive Compensation
The Partnership is not required to and did not pay
remuneration to the officers and directors of the Managing General Partner or
the partners of the Associate General Partner. Certain officers and directors of
the Managing General Partner receive compensation from the Managing General
Partner and/or its affiliates (but not from the Partnership) for services
performed for various affiliated entities, which may include services performed
for the Partnership; however, the Managing General Partner believes that any
compensation attributable to services performed for the Partnership is
immaterial. See also "Item 13. Certain Relationships and Related Transactions."
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of March 15, 1998, an affiliate of the General Partners
owned approximately 9.8% of the Units. No directors, officers or partners of the
Managing General Partner presently own any Units.
To the knowledge of the Registrant, the following sets forth
certain information regarding ownership of the Class A shares of Presidio as of
March 11, 1998 (except as otherwise noted) by (i) each person or entity who owns
of record or beneficially five percent or more of the Class A shares, (ii) each
director and executive officer of Presidio, and (iii) all directors and
executive officers of Presidio as a group. To the knowledge of Presidio, each of
such shareholders has sole voting and investment power as to the shares shown
unless otherwise noted.
All outstanding shares of Presidio are owned by Presidio
Capital Investment Company, LLC ("PCIC"), a Delaware limited liability company.
The interest in PCIC (and beneficial ownership in Presidio) are held as follows:
Percentage Ownership in PCIC and
Percentage Beneficial Ownership
Name of Beneficial Owner in Presidio
------------------------ --------------------------------
Five Percent Holders:
Presidio Holding Company, LLC(1) 71.93%
AG Presidio Investors, LLC(2) 14.12%
DK Presidio Investors, LLC(3) 8.45%
Stonehill Partners, LP(4) 5.50%
The holdings of the directors and executive officers of Presidio are as follows:
Directors and Officers:
Adam Anhang(5) 0%
Marc Gordon(5) 0%
David Hamamoto(5) 71.93%
Charles Humber(5) 0%
David King(5) 0%
Gregory Peck(5) 0%
Kevin Reardon(5) 0%
Allan Rothschild(5) 0%
Richard J. Sabella(5) 0%
Lawrence Schachter(5) 0%
W. Edward Scheetz(5) 71.93%
Directors and Officers as a group: 71.93%
(1) Presidio Holding Company, LLC is a New York limited liability
company whose address is 527 Madison Avenue, 16th Floor, New
York, New York 10022. PHC has two members, Polaris Operating
LLC ("Polaris") which holds a 1% interest, and Northstar
Operating, LLC ("Northstar") which holds a 99% interest.
Polaris is a Delaware limited liability company whose address
is 527 Madison Avenue, 16th Floor, New York, New York 10022.
Polaris has two members, Sextant Operating Corp. ("Sextant"),
which holds a 1% interest, and Northstar, which holds a 99%
interest. Sextant is a Delaware corporation whose address is
527 Madison Avenue, 16th Floor, New York, New York 10022 and
whose sole shareholder is Northstar. Northstar is a Delaware
limited liability company whose address is527 Madison Avenue,
16th Floor, New York, New York 10022. Northstar has two
members, Northstar Capital Partners ("NCP"), which holds a 99%
interest, and Northstar Capital Holdings I, LLC ("NCHI"),
which holds a 1% interest. Both NCP and NCHI are Delaware
limited liability companies, whose business address is 527
Madison Avenue, 16th Floor, New York, New York 10022. NCP has
two members, NCHI, which holds a 74.75% interest, and
Northstar Capital Holdings II LLC ("NCHII"), which holds a
25.25% interest. The business address for NCHII, a Delaware
limited liability company is 527 Madison Avenue, 16th Floor,
New York, New York 10022. NCHII has three members, NCHI, which
holds a 99% interest, Edward Scheetz, who holds a 0.5%
interest and David Hamamoto, who holds a 0.5% interest. Mr.
Scheetz, a U.S. citizen whose business address is 527 Madison
Avenue, 16th Floor, New York, New York 10022, is a founding
member of NCP. Mr. Hamamoto, a U.S. citizen whose business
address is 527 Madison Avenue, 16th Floor, New York, New York
10022, is a founding member of NCP. NCHI has two members, Mr.
Scheetz and Mr. Hamamoto, each of whom holds a 50% interest.
Pursuant to that certain Amended and Restated Pledge and
Security Agreement (the "Pledge Agreement") dated March 5,
1998 made by PHC in favor of Credit Suisse First Boston
Mortgage Capital LLC ("CSFB"), PHC pledged all of its
membership interest in PCIC to CSFB as security for loans
issued under the Loan Agreement dated as of February 20, 1998
by and among PHC and CSFB and the First Amendment thereon
dated March 5, 1998 (together, the "Loan Agreement"). The
Pledge Agreement and Loan Agreement contain standard default
and event of default provisions which may at a subsequent date
result in a change of control of PCIC and, therefore, the
Registrant.
(2) Each of Angelo, Gordon & Company, LP, as sole manager of AG
Presidio Investors, LLC, and John M. Angelo and Michael L.
Gordon, as general partners of the general partner of Angelo,
Gordon & Company, LP may be deemed to beneficially own for
purposes of rule 13 d-3 of the Exchange Act, the securities
beneficially owned by AG Presidio Investors, LLC. Each of John
M. Angelo and Michael L. Gordon disclaim such beneficial
ownership. The business address for such persons is c/o
Angelo, Gordon & Company, LP, 345 Park Avenue, 26th Floor, New
York, New York 10167.
(3) M.H. Davidson & Company, Inc., as sole manager of DK Presidio
Investors, LLC may be deemed to beneficially own for purposes
of Rule 13d-3 of the Exchange Act, the securities beneficially
owned by DK Presidio Investors, LLC. The business address for
such person is c/o M.H. Davidson & Company, 885 Third Avenue,
New York, New York 10022.
(4) Includes shares of PCIC beneficially owned by Stonehill
Offshore Partners Limited and Stonehill Institutional
Partners, LP. John A. Motulsky is a managing general partner
of Stonehill Partners, LP, a managing member of the investment
advisor to Stonehill Offshore Partners Limited and is a
general partner of Stonehill Institutional Partners, LP. John
A. Motulsky disclaims beneficial ownership of the shares held
by these entities. The business address for such person is c/o
Stonehill Investment Corporation, 110 East 59th Street, New
York, New York 10022.
(5) The business address for such person is 527 Madison Avenue,
16th Floor, New York, New York 10022.
Item 13. Certain Relationships and Related Transactions
The General Partners and certain affiliated entities have, during
the year ended December 31, 1997, earned or received compensation or payments
for services or reimbursements from the Partnership or Presidio subsidiaries as
follows:
Name of Recipient Capacity in Which Served Compensation from the Partnership
----------------- ------------------------ ---------------------------------
Resources High Equity Inc. Managing General Partner $1,271,859(1)
Presidio AGP Corp. Associate General Partner 1,473(2)
Resources Supervisory Management Corp. Affiliated Property Managers 154,190(3)
Resources Capital Corp. Affiliate 70,000(4)
1 Of this amount $73,687 represents the Managing General Partner's share
of distributions of cash from operations, $150,000 represents payment
for non-accountable expenses of the Managing General Partner based upon
the number of Units sold, $140,000 represents reimbursement of costs in
connection with the California Action, and $908,172 represents a
Partnership Management Fee for managing the affairs of the Partnership.
Furthermore, under the Partnership's Limited Partnership Agreement, 5%
of the Partnership's net income and net loss is allocated to the
General Partners (0.1% to the Associate General Partner and 4.9% to the
Managing General Partner). Pursuant thereto, for the year ended
December 31, 1997, $30,643 of the Partnership's taxable income was
allocated to the Managing General Partner.
2 This amount represents the Associate General Partner's share of
distributions of cash from operations. In addition, for the year ended
December 31, 1997, $625 of the Partnership's taxable income was
allocated to the Associate General Partner.
3 This amount was earned pursuant to a management agreement with
Resources Supervisory, a wholly owned subsidiary of Presidio, for
performance of certain functions relating to the management of the
Partnership's properties. The total fee paid to Resources Supervisory
was $350,490, of which $196,300 was paid to unaffiliated management
companies.
4 This amount represents reimbursements of actual costs incurred in
defending the California Action and the cost of preparing settlement
materials.
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K
(a) (1) Financial Statements: see Index to Financial Statements in Item 8.
(a) (2) Financial Statement Schedule:
III. Real Estate and Accumulated Depreciation
(a) (3) Exhibits:
3, 4. (a) Amended and Restated Partnership Agreement ("Partnership
Agreement") of the Partnership, incorporated by reference to
Exhibit A to the Prospectus of the Partnership dated February
4, 1985, included in the Partnership's Registration Statement
on Form S-11 (Reg. No. 2-92319).
(b) Amendment dated April 1, 1985 to the Partnership's
Partnership Agreement, incorporated by reference to the
Partnership's Annual Report on Form 10-K for the year ended
December 31, 1985.
(c) Restatement of Amendment dated December 1, 1986 to the
Partnership's Partnership Agreement, incorporated by reference
to the Partnership's Current Report on Form 8-K dated December
8, 1986.
(d) Amendment dated as of April 1, 1988 to the Partnership's
Partnership Agreement, incorporated by reference to the
Partnership's Annual Report on Form 10-K for the year ended
December 31, 1988.
10. (a) Agent's Agreement between the Partnership and Resources
Property Management Corp., incorporated by reference to
Exhibit 10(b) to the Partnership's Registration Statement on
Form S-11 (Reg. No. 2-92319).
(b) Acquisition and Disposition Services Agreement among the
Partnership and Realty Resources Inc., and Resources
Acquisitions, Inc., incorporated by reference to Exhibit 10(c)
to the Partnership's Registration Statement on Form S-11 (Reg.
No. 2-92319).
(c) Agreement among Resources High Equity, Inc., Integrated
Resources, Inc. and Z Square G Partners II, incorporated by
reference to Exhibit 10(d) to the Partnership's Registration
Statement on Form S-11 (Reg. No. 2-92319). (d) Lease Agreement
dated June 12, 1985, between the Partnership and First Federal
Savings and Loan Association of South Carolina for the First
Federal Office Building, incorporated by reference to Exhibit
10(g) to the Partnership's Post-Effective Amendment No. 1 to
Registration Statement on Form S-11 (Reg. No. 2-92319).
(e) Joint Venture Agreement dated November 2, 1986 between the
Partnership and High Equity Partners, L.P. - Series 86, A
California Limited Partnership, with respect to Century Park
I, incorporated by reference to Exhibit 10(b) to the
Partnership's Current Report on Form 8-K dated November 7,
1986.
(f) Joint Venture Agreement dated October 27, 1986 between the
Partnership and High Equity Partners, L.P. - Series 86, with
respect to 568 Broadway, incorporated by reference to Exhibit
10(b) to the Partnership's Current Report on Form 8-K dated
November 19, 1986.
(g) Joint Venture Agreement dated November 24, 1986 between
the Partnership and High Equity Partners, L.P. - Series 86,
with respect to Seattle Tower, incorporated by reference to
Exhibit 10(b) to the Partnership's Current Report on Form 8-K
dated December 8, 1986.
(h) Amended and Restated Joint Venture Agreement dated
February 1, 1990 among the Partnership, High Equity Partners,
L.P. - Series 86 and High Equity Partners, L.P. - Series 88,
with respect to 568 Broadway, incorporated by reference to
Exhibit 10(a) to the Partnership's Current Report on Form 8-K
dated February 1, 1990.
(i) First Amendment to Amended and Restated Joint Venture
Agreement of 568 Broadway Joint Venture, dated as of February
1, 1990, among the Partnership, High Equity Partners, L.P. -
Series 86 and High Equity Partners, L.P. - Series 88,
incorporated by reference to Exhibit 10(p) to the
Partnership's Annual Report on Form 10-K for the year ended
December 31, 1990.
(j) Agreement, dated as of March 23, 1990, among the
Partnership, Resources High Equity Inc. and Resources Property
Management Corp., with respect to the payment of deferred
fees, incorporated by reference to Exhibit 10(q) to the
Partnership's Annual Report on Form 10-K for the year ended
December 31, 1990.
(k) Amending Agreement, dated as of December 31, 1991, to
Agreement dated as of March 23, 1990, among the Partnership,
Resources High Equity Inc. and Resources Property Management
Corp., with respect to the payment of deferred fees,
incorporated by reference to Exhibit 10(r) to the
Partnership's Annual Report on Form 10-K for the year ended
December 31, 1991.
(l) Form of Termination of Supervisory Management Agreement
(separate agreement entered into with respect to each
individual property) and Form of Supervisory Management
Agreement between the Partnership and Resources Supervisory
(separate agreement entered into with respect to each
property), incorporated by reference to Exhibit 10(s) to the
Partnership's Annual Report on Form 10-K for the year ended
December 31, 1991.
(m) Amending Agreement, dated as of December 30, 1992, to
Agreement dated as of March 23, 1990, among the Partnership,
Resources High Equity, Inc. and Resources Property Management
Corp., with respect to the payment of deferred fees,
incorporated by reference to Exhibit 10(m) to the
Partnership's Annual Report on Form 10-K for the year ended
December 31, 1992.
(n) Amending Agreement, dated as of December 29, 1993, to
Agreement dated as of March 23, 1990, among the Partnership,
Resources High Equity, Inc. and Resources Property Management
Corp., incorporated by reference with
respect to the payment of deferred fees.
(b) Reports on Form 8-K:
The Partnership filed the following reports on Form 8-K during the last
quarter of the fiscal year:
None.
Financial Statement Schedule Filed Pursuant to
Item 14(a)(2)
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85,
A CALIFORNIA LIMITED PARTNERSHIP
ADDITIONAL INFORMATION
YEARS ENDED DECEMBER 31, 1997 1996 AND 1995
INDEX
Additional financial information furnished pursuant to the requirements
of Form 10-K:
Schedules- December 31, 1997, 1996 and 1995 and years then ended, as
required:
Schedule III - Real estate and accumulated depreciation
- Notes to Schedule III - Real estate and
accumulated depreciation
All other schedules have been omitted because they are inapplicable,
not required, or the information is included in the financial statements or
notes thereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 27, 1998 By: /s/ Richard Sabella
--------------------
Richard Sabella
President and Director
(Principal Executive Officer)
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
registrant and in their capacities on the dates indicated.
Dated: March 27, 1998 By: /s/ Richard Sabella
--------------------
Richard Sabella
President and Director
(Principal Executive Officer)
Dated: March 27, 1998 By: /s/ Lawrence Schachter
----------------------
Lawrence Schachter
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Dated: March 27, 1998 By: /s/ Kevin Reardon
------------------
Kevin Reardon
Director, Vice President,
Treasurer and Secretary
Dated: March 27, 1998 By: /s/ David King
---------------
David King
Director and
Executive Vice President
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
A California Limited Partnership
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
Costs Reductions
Capitalized Recorded
Subsequent to Subsequent to
Initial Cost Acquisition Acquisition
----------------------- ----------------------- -----------
Buildings
And Carrying
Description Encumbrances Land Improvements Improvement Costs Write Downs
----------- ------------ ---- ------------ ----------- ----- -----------
RETAIL:
The Westbrook Brooklyn $ -- $1,424,800 $ 3,648,837 $ 714,579 $ 374,968 $ (3,400,000)
Mall Shopping Center, MN
Center
The Southport Ft. -- 6,961,667 13,723,333 1,347,160 1,866,962 (4,900,000)
Shopping Center Lauderdale, FL
The Loch Raven Towson, MD -- 2,469,871 6,860,748 1,945,911 953,837 (4,800,000)
Shopping Center -------- ----------- ----------- ---------- ---------- ------------
-- 10,856,338 24,232,918 4,007,650 3,195,767 (13,100,000)
-------- ----------- ----------- ---------- ---------- ------------
OFFICE:
Century Park Kearny Mesa, -- 3,122,064 12,717,936 1,885,955 1,353,130 (11,700,000)
Office Complex CA
568 Broadway New York, NY -- 2,318,801 9,821,517 4,916,105 1,556,212 (10,821,150)
Office Building
Seattle Tower Seattle, WA -- 2,163,253 5,030,803 1,714,983 609,392 (6,050,000)
Office Building --------- ----------- ----------- ---------- ---------- ------------
-- 7,604,118 27,570,256 8,517,043 3,528,734 (28,571,150)
--------- ----------- ----------- ----------- ---------- ------------
$ $18,460,456 $51,803,174 $12,524,693 $6,724,501 $(41,671,150)
========= =========== =========== =========== ========== ============
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
A California Limited Partnership
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(continued)
Gross Amount at Which
Carried at Close of Period
------------------------------------
Buildings
And Accumulated Date
Description Land Improvements Total Depreciation Acquired
----------- ---- ------------ ----- ------------ --------
RETAIL:
The Westbrook Brooklyn $ 686,001 $ 2,077,183 $ 2,763,184 $ 1,297,890 1985
Mall Shopping Center, MN
Center
The Southport Ft. 5,998,194 13,000,928 18,999,122 4,535,166 1986
Shopping Center Lauderdale, FL
The Loch Raven Towson, MD 1,507,227 5,923,140 7,430,367 2,113,329 1986
Shopping Center ---------- ----------- ------------ ------------
8,191,422 21,001,251 29,192,673 7,946,385
---------- ----------- ------------ ------------
OFFICE:
Century Park Kearny Mesa, 1,123,811 6,265,274 7,389,085 2,829,950 1986
Office Complex CA
568 Broadway New York, NY 977,120 6,814,365 7,791,485 2,684,159 1986
Office Building
Seattle Tower Seattle, WA 764,613 2,703,818 3,468,431 1,347,470 1986
Office Building ---------- ----------- ------------ ------------
2,865,544 15,783,457 18,649,001 6,861,579
----------- ----------- ------------ ------------
$11,056,966 $36,784,708 $47,841,674 $14,807,964
=========== =========== =========== ===========
Note: The aggregate cost for Federal income tax purposes is $89,512,824
at December 31, 1997.
INTEGRATED RESOURCES HIGH EQUITY PARTNERS, SERIES 85
A California Limited Partnership
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(A) RECONCILIATION OF REAL ESTATE OWNED:
For the Years Ended December 31,
------------ ------------ -------------
1997 1996 1995
------------ ------------ -------------
BALANCE AT BEGINNING OF YEAR ... $ 45,874,047 $ 45,228,760 $ 63,622,139
ADDITIONS DURING THE YEAR ...... 1,967,627 645,287 2,075,671
Improvements to Real Estate
OTHER CHANGES
Write-down for impairment -- -- (20,469,050)
============ ============ ============
BALANCE AT END OF YEAR (1) ..... $ 47,841,674 $ 45,874,047 $ 45,228,760
============ ============ ============
(1) INCLUDES THE INITIAL COST OF THE PROPERTIES PLUS ACQUISITION AND
CLOSING COSTS.
(B) RECONCILIATION OF ACCUMULATED DEPRECIATION:
For the Years Ended December 31,
------------ ------------ ------------
1997 1996 1995
------------ ------------ ------------
BALANCE AT BEGINNING OF YEAR ... $13,719,794 $12,694,788 $11,714,459
ADDITIONS DURING THE YEAR
Depreciation Expense(1) ... 1,088,170 1,025,006 980,329
----------- ----------- -----------
BALANCE AT END OF YEAR ......... $14,807,964 $13,719,794 $12,694,788
=========== =========== ===========
(1) DEPRECIATION IS PROVIDED ON BUILDINGS USING THE STRAIGHT-LINE
METHOD OVER THE USEFUL LIFE OF THE PROPERTY, WHICH IS ESTIMATED TO BE 40 YEARS.