Hutton/ConAm Realty Investors 2
1996 Annual Report
Exhibit 13
Hutton/ConAm Realty Investors 2
Hutton/ConAm Realty Investors 2 is a California limited
partnership formed in 1982 to acquire, operate and hold
for investment multifamily housing properties. At
December 31, 1996, the Partnership's portfolio
consisted of four apartment properties located in
Arizona and Florida. Provided below is a comparison of
average occupancy levels for the years ended
December 31, 1996 and 1995.
Average Occupancy
Property Location 1996 1995
Creekside Oaks Jacksonville, Florida 94% 93%
Ponte Vedra Beach
Village I Ponte Vedra Beach, Florida 95% 96%
Rancho Antigua Scottsdale, Arizona 94% 92%
Village at the
Foothills I Tucson, Arizona 94% 95%
Contents
1 Message to Investors
3 Performance Summary
4 Financial Highlights
5 Consolidated Financial Statements
8 Notes to the Consolidated
Financial Statements
13 Report of Independent Accountants
14 Net Asset Valuation
Administrative Inquiries Performance Inquiries/Form 10-Ks
Address Changes/Transfers First Data Investor Services Group
Service Data Corporation P.O. Box 1527
2424 South 130th Circle Boston, Massachusetts 02104-1527
Omaha, Nebraska 68144-2596 Attn: Financial Communications
800-223-3464 800-223-3464
Message to Investors
Presented for your review is the 1996 Annual Report for
Hutton/ConAm Realty Investors 2. In this report, we review
Partnership operations and discuss general market conditions
affecting the Partnership's properties. We have also included a
performance summary which addresses operating results at each of
the properties and financial highlights for the year.
Cash Distributions
The Partnership paid cash distributions totaling $9.00 per Unit
for the year ended December 31, 1996, including the fourth
quarter distribution of $2.25 per Unit, which was credited to
your brokerage account or sent directly to you on February 5,
1997. Since inception, the Partnership has paid distributions
totaling $337.19 per original $500 Unit, including $220 per Unit
in return of capital payments. The level of future distributions
will be evaluated on a quarterly basis and will depend on the
Partnership's operating results and future cash needs.
As reported in the Partnership's third quarter report, existing
problems with the roofs at Ponte Vedra Beach Village I were
aggravated by severe tropical rain storms late in 1996. After
evaluating the damages, the General Partners received several
competitive bids to repair the roofs, and subsequently selected a
contractor. The roof repairs are currently underway and are
scheduled to be completed this year. The anticipated cost of
repairing the roofs is approximately $400,000. In order to pay
for the costs of the repairs, the General Partners are
considering reducing or temporarily suspending cash
distributions. We will update you on the status of cash
distributions in future correspondence.
Operations Overview
Multi-family real estate continued to perform well during 1996,
with property values and apartment rents increasing in many areas
of the country. In particular, Jacksonville was among the
strongest multifamily housing markets in the country in 1996.
The improving conditions prompted a rise in new construction in
the markets where the Partnership owns properties, causing a
slowdown in leasing activity towards the end of the year. In
Tucson, market conditions were also impacted by the decision of
many renters to purchase homes. This increased the use of rent
specials to attract new tenants at many apartment properties,
including Village at the Foothills I. The Scottsdale market also
experienced slow growth during the year as a result of increased
construction, even though Metro Phoenix was ranked as the
nation's strongest labor market in 1996. Nonetheless, all of the
Partnership's properties maintained average occupancy levels for
the year of at least 94%, and the Partnership's rental income for
the four remaining properties increased by 5.5% from the previous
year. It is expected that the competitive conditions will
persist in 1997, but continued economic improvement and a
slowdown in construction should prevent these areas from becoming
significantly overbuilt.
General Information
As you are probably aware, several third parties have commenced
partial tender offers to purchase Units of the Partnership at
grossly inadequate prices which are substantially below the
Partnership's Net Asset Value. In response, we recommended that
limited partners reject these offers because they do not reflect
the underlying value of the Partnership's assets. To date,
holders of over 96% of the outstanding Units agreed that these
offers were inadequate, rejected the offer and did not tender
their Units. Please be assured that if any additional tender
offers are made for your Units, we will make every effort to
provide you with our position regarding such offer on a timely
basis.
Summary
During 1997, we intend to explore opportunities to sell the
Partnership's remaining properties within the next few years.
Assuming these efforts are successful, we would expect to
distribute the sales proceeds and subsequently dissolve the
Partnership in 1998 or 1999. However, meeting this objective
will be dependent upon a variety of factors, many of which are
not within the Partnership's control. Consequently, there can be
no assurance that any specific property or all the properties can
be sold, or that certain prices will be achieved, within this
time frame. In the interim, we will seek to maximize the
performance of the properties and further improve their
marketability and appeal. We will keep you apprised of
significant developments affecting your investment in future
reports.
Very truly yours,
/s/ Paul L. Abbott /s/ Daniel J. Epstein
Paul L. Abbott Daniel J. Epstein
President President
RI2 Real Estate Services Inc. Continental American Development, Inc.
General Partner of ConAm Property
Services II, Ltd.
March 27, 1997
Performance Summary
Creekside Oaks - Jacksonville Florida
Creekside Oaks, is a 120-unit apartment community situated in the
Baymeadows-Deerwood neighborhood of southeast Jacksonville. The
property reported an average occupancy level of 94% in 1996 and a
4.9% increase in rental income from the previous year. The
Southeast submarket, where Creekside Oaks is located, has
experienced notable population growth and limited new
construction in recent years, resulting in strong occupancy for
area apartment complexes. A local survey of the Southeast
submarket reported an average apartment occupancy rate of 95.4%
as of the second quarter of 1996. The use of rental concessions
in the market is minimal. Given the strong market conditions,
several apartment projects are in the planning or construction
phase. During 1995, 953 new units were permitted for
construction with an additional 1,597 units permitted through the
second quarter of 1996. Strong absorption in the submarket due
to the area's increasing popularity is expected to ameliorate the
adverse effects the new construction could have on the market.
Ponte Vedra Beach Village I - Ponte Vedra Beach, Florida
Located in an oceanside residential area southeast of
Jacksonville, this 124-unit luxury apartment property reported an
average occupancy level of 95% in 1996 and an increase in rental
income of 5.0% from the prior year. Property improvements for
the year included roof and asphalt repairs and carpet
replacement. Favorable market conditions in the Jacksonville
area have led to an increase in new multifamily construction.
Three new apartment complexes were recently completed in the
Ponte Vedra Beach submarket near Ponte Vedra Beach Village I
containing approximately 631 units. Despite the new units
becoming available for rent, it is expected that the market will
remain stable in 1997 as Jacksonville remains one of the fastest
growing labor markets in the country.
Rancho Antigua - Scottsdale, Arizona
This 220-unit apartment community is located eight miles
northeast of Phoenix in southwest Scottsdale. Rancho Antigua
reported average occupancy of 94% during 1996, up from 92% in
1995. The higher occupancy, combined with rental rate increases
implemented on renewal units during the year, resulted in a 7.3%
increase in rental income from 1995 to 1996. The Scottsdale
apartment market experienced continued strong competition during
1996, reflecting high levels of construction in the area and
notable competition from condominiums and single family houses as
affordable prices and low mortgage rates entice renters to buy.
City-wide, 5,229 apartment units were permitted during the first
six months of 1996, 1,938 of these in the Scottsdale submarket,
and 1,042 of these had been completed or were currently under
construction. Although vacancy rates in Phoenix and the
Scottsdale submarket remained low in 1996, declining to 4.4% and
3.5% as of the second quarter, respectively, vacancies are
expected to increase with the new construction. While the area's
strong population and job growth are likely to absorb much of
this new supply, competition for tenants is expected to remain
strong.
Village at the Foothills I - Tucson, Arizona
Village at the Foothills I contains 168 units and is located in
the northwest area of Tucson. The property maintained an average
occupancy rate of 94% during 1996 compared to 95% for 1995.
While Tucson's economy began to slow in 1995 and 1996,
construction of multifamily properties has increased
significantly. The addition of new properties is beginning to
put downward pressure on occupancy rates and is limiting rental
rate increases. The increased competition has also led to the
reemergence of rental incentives. In addition, the multifamily
market has been unfavorably impacted by relatively low interest
rates which has made home ownership a viable alternative for
renters. A local survey of metropolitan Tucson conducted in the
second quarter of 1996 showed an average occupancy rate of 88.9%
among multifamily properties, down from 91.1% at the same period
in 1995. In the Catalina Foothills submarket, where Village at
the Foothills I is located, occupancy rates declined from 91% in
the second quarter of 1995 to 84.5% in the same period in 1996.
Strong competition for tenants is likely to continue in 1997 as
the addition of new properties puts further pressure on
occupancies.
Financial Highlights
Selected Financial Data
For the periods ended
December 31, 1996 1995 1994 1993 1992
Dollars in thousands,
except for per unit data
Total Income $ 4,328 $ 4,516 $ 4,718 $ 4,479 $ 4,316
Gain on Sale of Property _ 232 _ _ _
Net Income (Loss) (3) (113) 37 (528) (409)
Net Cash Provided by (Used for)
Operating Activities 1,334 864 1,150 (180) 680
Long-term Obligations 11,770 11,969 14,219 14,418 15,636
Total Assets at Year End 18,920 19,931 24,772 25,237 26,946
Net Income (Loss) per
Limited Partnership Unit* (.03) (4.27) .42 (6.53) (5.06)
Distributions per
Limited Partnership Unit* 9.00 9.00 5.50 _ _
Special Distributions per
Limited Partnership Unit* _ 20.00 _ _ _
* 80,000 units outstanding
- Total income declined in 1996, reflecting the sale of
Country Place Village I on July 20, 1995. This was partially
offset by increased rental income at Rancho Antigua, Creekside
Oaks and Ponte Vedra Beach Village I.
- The decline in net loss in 1996, is primarily attributable
to the reduction in property operating expenses and other expense
categories resulting from the sale of Country Place Village I.
Excluding a $232,402 gain on the sale of the property, the
Partnership generated a loss from operations of $344,924 for the
year ended December 31, 1995.
- Net cash provided by operating activities increased in 1996
due to the decline in net loss, as discussed above, and the
release of the remaining funds from Creekside Oaks' replacement
reserve account. Pursuant to the refinancing of the Creekside
Oaks mortgage loan, the lender required that the Partnership
place funds in an escrow account for various repairs. Upon
completion of the repairs and an inspection by the lender the
balance of the account, totaling $354,675, was returned to the
Partnership.
Cash Distributions
Per Limited Partnership Unit
1996 1995
Special Distributions* $ _ $ 20.00
First Quarter 2.25 2.25
Second Quarter 2.25 2.25
Third Quarter 2.25 2.25
Fourth Quarter 2.25 2.25
Total $ 9.00 $ 29.00
* On August 17, 1995, the Partnership paid a special cash
distribution totaling $20 per Unit, reflecting a return of
capital from the net proceeds of the sale of Country Place
Village I and Partnership cash reserves.
Consolidated Balance Sheets
At December 31,At December 31, 1996 1995
Assets
Investments in real estate:
Land $ 5,744,972 $ 5,744,972
Buildings and improvements 23,525,644 23,442,403
29,270,616 29,187,375
Less accumulated depreciation (11,874,334) (10,931,382)
17,396,282 18,255,993
Cash and cash equivalents 962,290 710,686
Restricted cash 317,268 651,661
Other assets, net of accumulated
amortization of $197,977 in 1996 and
$135,458 in 1995 243,940 312,359
Total Assets $18,919,780 $19,930,699
Liabilities and Partners' Capital (Deficit)
Liabilities:
Mortgages payable $11,769,703 $11,968,504
Accounts payable and accrued expenses 127,810 137,945
Due to general partners and affiliates 17,931 17,449
Security deposits 106,353 106,218
Distribution payable 200,000 200,000
Total Liabilities 12,221,797 12,430,116
Partners' Capital (Deficit):
General Partners (565,129) (485,103)
Limited Partners (80,000 units outstanding) 7,263,112 7,985,686
Total Partners' Capital 6,697,983 7,500,583
Total Liabilities and Partners' Capital $18,919,780 $19,930,699
Consolidated Statement of Partners' Capital (Deficit)
For the years ended December 31, 1996, 1995 and 1994
General Limited
Partners Partners Total
Balance at December 31, 1993 $ (573,343) $ 11,053,568 $ 10,480,225
Net Income 3,732 33,593 37,325
Distributions (48,889) (440,000) (488,889)
Balance at December 31, 1994 (618,500) 10,647,161 10,028,661
Net Income (Loss) 228,953 (341,475) (112,522)
Distributions (95,556) (2,320,000) (2,415,556)
Balance at December 31, 1995 (485,103) 7,985,686 7,500,583
Net Loss (26) (2,574) (2,600)
Distributions (80,000) (720,000) (800,000)
Balance at December 31, 1996 $ (565,129) $ 7,263,112 $ 6,697,983
Consolidated Statements of Operations
For the years ended December 31, 1996 1995 1994
Income
Rental $ 4,264,370 $ 4,448,549 $ 4,669,676
Interest and other 63,467 67,819 48,289
Total Income 4,327,837 4,516,368 4,717,965
Expenses
Property operating 2,222,474 2,515,717 2,262,915
Depreciation and amortization 1,005,471 1,099,215 1,163,239
Interest 920,596 1,023,479 1,110,434
General and administrative 181,896 222,881 144,052
Total Expenses 4,330,437 4,861,292 4,680,640
Income (loss) from operations (2,600) (344,924) 37,325
Gain on sale of property _ 232,402 _
Net Income (Loss) $ (2,600) $ (112,522) $ 37,325
Net Income (Loss) Allocated:
To the General Partners $ (26) $ 228,953 $ 3,732
To the Limited Partners (2,574) (341,475) 33,593
$ (2,600) $ (112,522) $ 37,325
Per limited partnership unit
(80,000 outstanding)
Income (loss) from operations $(.03) $(4.27) $.42
Gain on sale of property _ _ _
Net Income (Loss) $(.03) $(4.27) $.42
Consolidated Statements of Cash Flows
For the years ended December 31, 1996 1995 1994
Cash Flows From Operating Activities:
Net Income (loss) $ (2,600) $ (112,522) $ 37,325
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 1,005,471 1,099,215 1,163,239
Gain on sale of property _ (232,402) _
Increase (decrease) in cash arising
from changes in operating assets and
liabilities:
Fundings to restricted cash (327,279) (361,130) (407,336)
Release of restricted cash 661,672 488,797 409,471
Other assets 5,900 _ 6,310
Accounts payable and accrued expenses (10,135) 10,996 (56,862)
Due to general partners and affiliates 482 (2,462) 912
Security deposits 135 (26,992) (2,961)
Net cash provided by operating activities 1,333,646 863,500 1,150,098
Cash Flows From Investing Activities:
Net proceeds from sale of property _ 1,522,242 _
Additions to real estate (83,241) (199,476) (114,067)
Net cash provided by (used for) investing
activities (83,241) 1,322,766 (114,067)
Cash Flows From Financing Activities:
Distributions (800,000) (2,460,001) (244,444)
Mortgage principal payments (198,801) (199,366) (199,306)
Receipt of deposit on mortgage refinancing _ _ 72,058
Mortgage fees _ _ (39,283)
Net cash used for financing activities (998,801) (2,659,367) (410,975)
Net increase (decrease) in cash and cash
equivalents 251,604 (473,101) 625,056
Cash and cash equivalents, beginning
of year 710,686 1,183,787 558,731
Cash and cash equivalents, end of year $ 962,290 $ 710,686 $1,183,787
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 920,596 $ 1,023,479 $1,110,434
Supplemental Disclosure of Non-Cash
Financing Activities: In connection with the sale of Country Place Village I
in 1995, the $2,051,078 mortgage obligation on the property was assumed by
the buyer, thereby releasing the Partnership from its mortgage obligation.
Notes to the Consolidated Financial Statements
December 31, 1996, 1995 and 1994
1. Organization
Hutton/ConAm Realty Investors 2 (the "Partnership") was organized
as a limited partnership under the laws of the State of
California pursuant to a Certificate and Agreement of Limited
Partnership (the "Partnership Agreement") dated
December 17, 1981, as amended and restated October 8, 1982. The
Partnership was formed for the purpose of acquiring and operating
certain types of residential real estate. The General Partners
of the Partnership are RI 2 Real Estate Services Inc., an
affiliate of Lehman Brothers Inc. (see below), and ConAm Property
Services II, Ltd. ("ConAm"), an affiliate of Continental American
Properties, Ltd (the "General Partners"). The Partnership will
continue until December 31, 2010 unless sooner terminated
pursuant to the terms of the Partnership Agreement.
On July 31, 1993, Shearson Lehman Brothers Inc. sold certain of
its domestic retail brokerage and asset management businesses to
Smith Barney, Harris Upham & Co. Incorporated ("Smith Barney").
Subsequent to the sale, Shearson Lehman Brothers Inc. changed its
name to Lehman Brothers Inc. ("Lehman Brothers"). The
transaction did not affect the ownership of the General Partners.
However, the assets acquired by Smith Barney included the name
"Hutton." Consequently, effective January 13, 1994, the Hutton
Real Estate Services V, Inc. general partner changed its name to
"RI 2 Real Estate Services, Inc."
On March 15, 1996, based upon, among other things, the advice of
legal counsel, Skadden, Arps, Slate, Meagher & Flom, the General
Partners adopted a resolution that states, among other things, if
a Change of Control (as defined below) occurs, the General
Partners may distribute the Partnership's cash balances not
required for its ordinary course day-to-day operations. "Change
of Control" means any purchase or offer to purchase more than 10%
of the Units that is not approved in advance by the General
Partners. In determining the amount of the distribution, the
General Partners may take into account all material factors. In
addition, the Partnership will not be obligated to make any
distribution to any partner and no partner will be entitled to
receive any distribution until the General Partners have declared
the distribution and established a record date and distribution
date for the distribution.
2. Significant Accounting Policies
Financial Statements The consolidated financial statements
include the accounts of the Partnership and its affiliated
ventures. The effect of transactions between the Partnership and
its ventures have been eliminated in consolidation.
Real Estate Investments Real estate investments are recorded at
cost less accumulated depreciation which includes the initial
purchase price of the property, legal fees, acquisition and
closing costs.
Leases are accounted for under the operating method. Under this
method, revenue is recognized as rentals are earned and expenses
(including depreciation) are charged to operations when incurred.
Leases are generally for terms of one year or less.
Depreciation is computed using the straight-line method based
upon the estimated useful lives of the properties. Maintenance
and repairs are charged to operations as incurred. Significant
betterments and improvements are capitalized and depreciated over
their estimated useful lives.
For assets sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any
resulting gain or loss is reflected in income for the period.
Accounting for Impairment In March 1995, the Financial
Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("FAS 121"), which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flow estimated
to be generated by those assets are less than the assets'
carrying amount. FAS 121 also addresses the accounting for long-
lived assets that are expected to be disposed of. Assets held for
disposition are recorded at the lessor of carrying value or fair
market value less costs to sell. The Partnership adopted FAS 121
in the fourth quarter of 1995.
Fair Value of Financial Instruments Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments" ("FAS 107"), requires that the Partnership
disclose the estimated fair values of its financial instruments.
Fair values generally represent estimates of amounts at which a
financial instrument could be exchanged between willing parties
in a current transaction other than in forced liquidation.
Fair value estimates are subjective and are dependent on a number
of significant assumptions based on management's judgment
regarding future expected loss experience, current economic
conditions, risk characteristics of various financial
instruments, and other factors. In addition, FAS 107 allows a
wide range of valuation techniques, therefore, comparisons
between entities, however similar, may be difficult.
Other Assets - Included in other assets are deferred mortgage costs
incurred in connection with obtaining financing on four of the
Partnership's properties. Such costs are amortized over the term
of the loans.
Offering Costs - Costs relating to the sale of limited partnership
units were deferred during the offering period and charged to the
limited partners' capital accounts upon the consummation of the
public offering.
Income Taxes - No provision for income taxes has been made in the
financial statements since income, losses and tax credits are
passed through to the individual partners.
Cash and Cash Equivalents - Cash equivalents consists of short-
term highly liquid investments which have maturities of three
months or less from the date of issuance. The carrying amount
approximates fair value because of the short maturity of these
instruments. Cash and cash equivalents include security deposits
of $71,545 and $79,936 at December 31, 1996 and 1995,
respectively, restricted under certain state statutes.
Restricted Cash - Restricted cash consists of escrows for real
estate taxes, casualty insurance, and replacement reserves as
required by the first mortgage lender in the amount of $317,268
and $651,661 at December 31, 1996 and 1995, respectively.
Concentration of Credit Risk - Financial instruments which
potentially subject the Partnership to a concentration of credit
risk principally consist of cash and cash equivalents in excess
of the financial institutions' insurance limits. The Partnership
invests available cash with high credit quality financial
institutions.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Reclassifications - Certain prior year amounts have been
reclassified to conform to the current year's presentation.
3. The Partnership Agreement
The Partnership Agreement provides that net cash from operations,
as defined, will be distributed quarterly, 90% to the limited
partners and 10% to the General Partners.
Net loss and all depreciation will be allocated 99% to the
limited partners and 1% to the General Partners. Net income will
generally be allocated in accordance with the distribution of net
cash from operations.
Net proceeds from sales or refinancing will be distributed 99% to
the limited partners and 1% to the General Partners until each
limited partner has received an amount equal to his adjusted
capital value (as defined) and an annual, cumulative 7% return
thereon. The balance, if any, will be distributed 85% to the
limited partners and 15% to the General Partners. Gain from
sales will be allocated to each partner having a negative capital
account balance, pro-rata, to the extent of such negative
balance. Thereafter, such gain will be allocated in accordance
with the distribution of net proceeds from sale or refinancing,
with the balance allocated to the limited partners.
4. Real Estate Investments
Real estate investments consist of four residential apartment
complexes acquired through investments in joint ventures as
follows:
Apartment Date Purchase
Property Name Units Location Acquired Price
Creekside Oaks 120 Jacksonville, FL 11/18/83 $5,960,045
Ponte Vedra Beach
Village I 122 Ponte Vedra Beach, FL 2/10/84 6,804,000
Rancho Antigua 220 Scottsdale, AZ 3/8/84 10,873,757
Village at the
Foothills I 60 Tucson, AZ 2/27/85 3,623,741
To each venture, the Partnership contributed the apartment
projects as its initial capital contribution.
On July 20, 1995, the Partnership sold Country Place Village I to
an institutional buyer (the "Buyer"), which was unaffiliated with
the Partnership. The selling price was determined by arm's
length negotiations between the Partnership and the Buyer.
Country Place Village I was sold for $3,665,000, which includes
the assumption of the mortgage payable on Country Place Village I
by the Buyer in the amount of $2,051,078. The Partnership
received net proceeds of $1,522,242.
On August 17, 1995, the Partnership paid a special distribution
of $1,600,000 to the partners. The special distribution was
comprised of net proceeds from the sale of Country Place Village
I and Partnership cash reserves. The transaction resulted in a
gain on sale of $232,402 which included a $69,926 write off of
unamortized mortgage fees. The gain was allocated in accordance
with the Partnership Agreement.
The joint venture agreement of Rancho Antigua substantially
provides that:
a.Net cash from operations will be distributed 100% to the
Partnership until it has received an annual, noncumulative
12% return on its adjusted capital contribution. Any
remaining balance will be distributed 60% to the Partnership
and 40% to the co-venturer.
b.Net income of the joint venture and gain from sale will be
allocated basically in accordance with the distribution of
net cash from operations, as defined, and net proceeds from
sales, respectively. All net losses will be allocated 98% to
100% to the Partnership depending on the joint venture
agreement.
c.Net proceeds from a sale or refinancing will be distributed
100% to the Partnership until it has received an amount equal
to 120% of its adjusted capital contribution and an annual,
cumulative 12% return on its adjusted capital contribution.
Thereafter, the Partnership will receive approximately 50% to
75% of the balance depending on the joint venture agreement.
The joint venture agreements and limited partnership agreements
of Country Place Village I, Creekside Oaks, Ponte Vedra Beach
Village I and Village at the Foothills I substantially provide
that:
a.Available cash from operations will be distributed 100% to
the Partnership until it has received an annual, non-
cumulative preferred return, as defined. Any remaining
balance will be distributed 99% to the Partnership and 1% to
the corporate General Partners.
b.Net income will be allocated first, proportionately to
partners with negative capital accounts, as defined, until
such capital accounts, as defined, have been increased to
zero. Then, to the Partnership up to the amount of any
payments made on account of its preferred return; thereafter,
99% to the Partnership and 1% to the corporate General
Partners. All losses will be allocated first, to the
partners with positive capital accounts, as defined, until
such accounts have been reduced to zero. Then 99% to the
Partnership and 1% to the corporate General Partners.
c.Income from a sale will be allocated first, to the
Partnership until the Partnership's capital accounts, as
defined, are equal to the fair market value of the ventures'
assets at the date of the amendments. Then, any remaining
balance will be allocated 99% to the Partnership and 1% to
the corporate General Partners. Net proceeds from a sale or
refinancing will be distributed first to the partners with a
positive capital account balance, as defined; thereafter, 99%
to the Partnership and 1% to the corporate General Partners.
5. Mortgages Payable
On October 28, 1993, the extended maturity date, the Partnership
obtained replacement financing on its Creekside Oaks, Ponte Vedra
Beach I, Rancho Antigua and Country Place Village I properties
from The Penn Mutual Life Insurance Company ("Penn Mutual") and a
subsidiary, both unaffiliated parties. Total proceeds of
$14,450,000 were received and collateralized by Mortgages and
Security Agreements and Assignments of Rents and Leases
Agreements encumbering the respective properties. Each of the
loans is a non-recourse loan with periodic payments of principal
and interest based on a twenty-five year amortization schedule
with the balance of the principal due at maturity. On July 20,
1995, County Place Village I was sold and the underlying
mortgage, in the amount of $2,051,078, was assumed by the Buyer.
During 1996, Penn Mutual transferred the first mortgage loans of
Creekside Oaks and Ponte Vedra Beach I to Midland Loan Services
under the existing terms, and Rancho Antigua to GE Capital Asset
Management Corp. under the existing terms. Mortgages payable at
December 31, 1996, consist of the following first mortgage loans:
Interest Maturity
Property Principal Rate Date
Creekside Oaks $ 2,525,483 7.75% 11/01/2000
Ponte Vedra Beach Village I $ 3,812,050 7.75% 11/01/2000
Rancho Antigua $ 5,432,170 7.75% 11/01/2000
Partnership cash reserves were also used to pay refinancing
expenses of $491,095 and fund escrows of $995,372. The escrowed
funds are applied to the payment of taxes, insurance and repairs
and improvements.
Annual maturities of mortgage notes principal over the next four
years are as follows:
Year Amount
1997 $ 214,768
1998 232,016
1999 250,650
2000 11,072,269
Total $ 11,769,703
Based on the borrowing rates currently available to the
Partnership for mortgage loans with similar terms and average
maturities, the fair value of long-term debt approximates
carrying value.
6. Transactions With Related Parties
The following is a summary of fees earned and reimbursable
expenses for the years ended December 31, 1996, 1995, and 1994,
and the unpaid portion at December 31, 1996:
Unpaid at
December 31, Earned
1996 1996 1995 1994
RI 2 Real Estate Services Inc.:
Out-of-pocket expenses $ _ $ 807 $ 2,577 $ 1,390
ConAm and affiliates:
Property operating salaries _ 323,312 336,760 345,626
Property management fees 17,931 213,281 223,677 233,152
Total $ 17,931 $ 537,400 $563,014 $ 580,168
7. Reconciliation of Financial Statement and Tax Information
The following is a reconciliation of the net income (loss) for
financial statement purposes to net income (loss) for federal
income tax purposes for the years ended December 31, 1996, 1995
and 1994:
1996 1995 1994
Net income (loss) per financial
statements $ (2,600) $ (112,522) $ 37,325
Tax basis joint venture net
loss in excess of GAAP basis
joint venture net income (loss) (193,019) (233,232) (270,609)
Gain on sale of property for tax
purposes in excess of gain per
financial statements _ 1,536,333 _
Other 1,397 (5,457) (1,438)
Taxable net income (loss) $ (194,222) $ 1,185,122 $ (234,722)
The following is a reconciliation of partners' capital for
financial statement purposes to partners' capital for federal
income tax purposes as of December 31, 1996, 1995 and 1994:
1996 1995 1994
Partners' capital per financial
statements $ 6,697,983 $ 7,500,583 $ 10,028,661
Adjustment for cumulative
difference between tax basis
loss and income (loss) per
financial statements (4,984,975) (4,793,353) (6,090,997)
Partners' capital per tax return $ 1,713,008 $ 2,707,230 $ 3,937,664
8. Distributions Paid
Cash distributions, per the consolidated statements of partners'
capital are recorded on the accrual basis, which recognizes
specific record dates for payments within each calendar year.
The consolidated statements of cash flows recognize actual cash
distributions paid during the calendar year. The following table
discloses the annual differences as presented on the consolidated
financial statements:
Distributions Distributions
Payable Distributions Distributions Payable
Beginning of Year Declared Paid December 31
199 6 $ 200,000 $ 800,000 $ 800,000 $ 200,000
1995 244,445 2,415,556 2,460,001 200,000
1994 _ 488,889 244,444 244,445
Report of Independent Accountants
To the Partners of
Hutton/ConAm Realty Investors 2:
We have audited the consolidated balance sheets of Hutton/ConAm
Realty Investors 2, a California limited partnership, and
Consolidated Ventures as of December 31, 1996 and 1995, and the
related consolidated statements of operations, partners' capital
(deficit) and cash flows for each of the three years in the
period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Hutton/ConAm Realty Investors 2, a
California limited partnership, and Consolidated Ventures as of
December 31, 1996 and 1995, and the consolidated results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
February 14, 1997
Net Asset Valuation
Comparison of Acquisition Costs to Appraised Value and
Determination of Net Asset Value Per $280 Unit at December 31,
1996 (Unaudited)
Acquisition Cost
(Purchase Price Partnership's
Plus General Share of
Partners' December 31,
Date of Acquisition 1996 Appraised
Property Acquisition Fees) Value (1)
Creekside Oaks 11-18-83 $ 6,238,445 $ 5,200,000
Ponte Vedra Beach Village I 02-10-84 7,123,950 7,800,000
Rancho Antigua 03-08-84 11,446,176 12,100,000
Village at the Foothills I 02-27-85 3,756,741 2,300,000
$ 28,565,312 $ 27,400,000
Cash and cash equivalents 1,279,558
Other assets 4,283
$ 28,683,841
Less:
Total liabilities (12,221,797)
Partnership Net Asset Value (2) $ 16,462,044
Net Asset Value Allocated:
Limited Partners $ 16,222,566
General Partners 239,478
$ 16,462,044
Net Asset Value Per Unit
(80,000 units outstanding) $202.78
(1) This represents the Partnership's share of the December 31,
1996 Appraised Values which were determined by an independent
property appraisal firm.
(2) The Net Asset Value assumes a hypothetical sale at December
31, 1996 of all the Partnership's properties at a price based
upon their value as a rental property as determined by an
independent property appraisal firm, and the distribution of
the proceeds of such sale, combined with the Partnership's
cash after liquidation of the Partnership's liabilities, to
the Partners.
Limited Partners should note that appraisals are only estimates
of current value and actual values realizable upon sale may be
significantly different. A significant factor in establishing an
appraised value is the actual selling price for properties which
the appraiser believes are comparable. In addition, the
appraised value does not reflect the actual costs which would be
incurred in selling the properties. As a result of these factors
and the illiquid nature of an investment in Units of the
Partnership, the variation between the appraised value of the
Partnership's properties and the price at which Units of the
Partnership could be sold may be significant. Fiduciaries of
Limited Partners which are subject to ERISA or other provisions
of law requiring valuations of Units should consider all relevant
factors, including, but not limited to Net Asset Value per Unit,
in determining the fair market value of the investment in the
Partnership for such purposes.
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1996
Residential Property: Ponte Vedra Village at the
Consolidated Ventures: Creekside Oaks Beach Village 1 Rancho Antigua Foothills Total
Location Jacksonville, FL Ponte Vedra Scottsdale,AZ Tucson, AZ na
Beach, FL
Construction date 1982 1983 1984 1984 na
Acquisition date 11-18-83 02-10-84 03-08-84 02-27-85 na
Life on which
depreciation in latest
income statements is
computed (3) (3) (3) (3) na
Encumbrances $2,525,483 $3,812,050 $ 5,432,170 $ _ $11,769,703
Initial cost to
Partnership:
Land 400,317 1,015,028 3,490,498 798,823 5,704,666
Buildings and
improvements 5,854,636 6,181,290 7,975,346 3,005,280 23,016,552
Costs capitalized
subsequent to acquisition:
Land, buildings
and improvements 281,499 155,430 100,653 11,816 549,398
Gross amount at which
carried at close of
period:
Land $ 403,193 $ 1,045,472 $ 3,497,484 $ 798,823 $ 5,744,972
Buildings and
improvements 6,133,259 6,306,276 8,069,013 3,017,096 23,525,644
$6,536,452 $7,351,748 $11,566,497 $ 3,815,919 $29,270,616
Accumulated depreciation $3,120,894 $3,204,928 $ 4,123,039 $ 1,425,473 $11,874,334
(1) Represents aggregate cost for both financial reporting and Federal income
tax purposes.
(2) The amount of accumulated depreciation for Federal income tax
purposes is $20,769,311.
(3) Buildings and improvements - 25 years; personal property - 10
years.
A reconciliation of the carrying amount of real estate and
accumulated depreciation for the years ended
December 31, 1996, 1995, and 1994 follows:
1996 1995 1994
Real estate investments:
Beginning of year $29,187,375 $34,056,223 $33,942,156
Additions 83,241 199,476 114,067
Dispositions _ (5,068,324) _
End of year $29,270,616 $29,187,375 $34,056,223
Accumulated depreciation:
Beginning of year $10,931,382 $11,699,378 $10,612,843
Depreciation expense 942,952 1,029,336 1,086,535
Dispositions _ (1,797,332) _
End of year $11,874,334 $10,931,382 $11,699,378
Report of Independent Accountants
Our report on the consolidated financial statements of
Hutton/ConAm Realty Investors 2, a California Limited
Partnership, and Consolidated Ventures has been incorporated by
reference in this Form 10-K from the Annual Report to unitholders
of Hutton/ConAm Realty Investors 2 for the year ended December
31, 1996. In connection with our audits of such financial
statements, we have also audited the related financial statement
schedule listed in the index of this Form 10-K.
In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
February 14, 1997