1
EXHIBIT 10
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- 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: 0-15463
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MENDIK REAL ESTATE LIMITED PARTNERSHIP
--------------------------------------
Exact name of registrant as specified in its charter
New York 11-2774249
- ------------------------------ ------------------
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
Attn: Andre Anderson
3 World Financial Center, 29th Floor, New York, New York 10285
- -------------------------------------------------------- -----
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: (212) 526-3237
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
-------------------------------------
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 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 ]
State the aggregate market value of the voting stock held by non- affiliates of
the registrant: Not applicable.
Documents Incorporated by Reference: None
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INDEPENDENT AUDITORS' REPORT
The Partners
Mendik Real Estate Limited Partnership:
We have audited the consolidated financial statements of Mendik Real Estate
Limited Partnership (a New York limited partnership) and consolidated venture as
listed in the accompanying index. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedule as listed in the accompanying index. These consolidated financial
statements and financial statement schedule are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
consolidated 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mendik Real Estate
Limited Partnership and consolidated venture as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
March 20, 1998
F-1
3
MENDIK REAL ESTATE LIMITED PARTNERSHIP
AND CONSOLIDATED VENTURE
==============================================================================================
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, AT DECEMBER 31,
1997 1996
- ----------------------------------------------------------------------------------------------
ASSETS
Real estate investments:
Land $ -- $ 17,528,163
Building and improvements -- 85,279,508
------------------------------
-- 102,807,671
------------------------------
Properties held for disposition 119,791,043 16,200,000
Cash and cash equivalents 4,786,697 4,727,720
Restricted cash 7,041,844 960,489
U.S. Treasuries and Agencies -- 2,121,910
Rent and other receivables
net of allowance for doubtful accounts of
$118,611 in 1997 and 1996 903,270 1,192,114
Deferred rent receivable 11,191,096 10,453,202
Other assets, net of accumulated amortization of
$4,941,591 in 1997 and $6,577,521 in 1996 8,426,941 7,994,965
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 152,140,891 $ 146,458,071
==============================================================================================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 1,572,939 $ 1,859,961
Deferred income 5,904,654 6,550,650
Due to affiliates 2,956,140 2,907,737
Security deposits payable 1,116,249 960,489
Accrued interest payable 727,944 799,315
Mortgages payable 71,500,000 71,500,000
Notes payable to affiliates 2,230,000 2,230,000
-------------------------------
Total Liabilities 86,007,926 86,808,152
-------------------------------
Minority interest 21,445,577 20,075,882
-------------------------------
Partners' Capital (Deficit):
General Partners (419,783) (470,917)
Limited Partners (395,169 units outstanding) 45,107,171 40,044,954
-------------------------------
Total Partners' Capital 44,687,388 39,574,037
- ----------------------------------------------------------------------------------------------
Total Liabilities and Partners' Capital $ 152,140,891 $ 146,458,071
==============================================================================================
See accompanying notes to the consolidated financial statements.
F-2
4
MENDIK REAL ESTATE LIMITED PARTNERSHIP
AND CONSOLIDATED VENTURE
==================================================================================================
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------
INCOME
Rental $ 36,189,134 $ 36,301,921 $ 33,334,516
Interest 245,160 247,094 214,049
-----------------------------------------------
Total Income 36,434,294 36,549,015 33,548,565
- --------------------------------------------------------------------------------------------------
EXPENSES
Property operating 20,827,352 20,118,066 19,938,170
Depreciation and amortization 5,246,432 11,257,102 10,199,677
Interest 6,162,361 7,225,953 8,796,859
General and administrative 636,071 449,216 395,434
(Recovery of) provision for valuation allowance
on property held for disposition (2,920,968) 5,411,536 --
Loss on write-down of real estate investments -- 59,491,089 --
-----------------------------------------------
Total Expenses 29,951,248 103,952,962 39,330,140
- --------------------------------------------------------------------------------------------------
Income (loss) before minority interest
and extraordinary item 6,483,046 (67,403,947) (5,781,575)
Minority interest share of (income) loss in
consolidated venture (1,369,695) 20,312,264 1,146,881
-----------------------------------------------
Income (loss) before extraordinary item 5,113,351 (47,091,683) (4,634,694)
- --------------------------------------------------------------------------------------------------
EXTRAORDINARY ITEM
Gain on retirement of debt -- -- 16,247,734
- --------------------------------------------------------------------------------------------------
Net Income (Loss) $ 5,113,351 $ (47,091,683) $ 11,613,040
==================================================================================================
NET INCOME (LOSS) ALLOCATED:
To the General Partners $ 51,134 $ (470,917) $ 1,487,096
To the Special Limited Partner -- -- 471,998
To the Limited Partners 5,062,217 (46,620,766) 9,653,946
- --------------------------------------------------------------------------------------------------
$ 5,113,351 $ (47,091,683) $ 11,613,040
==================================================================================================
Per limited partnership unit
(395,169 outstanding):
Net income (Loss) before extraordinary item $ 12.81 $ (117.97) $ (11.61)
-----------------------------------------------
Net Income (Loss) $ 12.81 $ (117.97) $ 24.43
- --------------------------------------------------------------------------------------------------
===========================================================================================
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
SPECIAL
LIMITED GENERAL LIMITED
PARTNERS PARTNERS PARTNER TOTAL
- -------------------------------------------------------------------------------------------
Balance at December 31, 1994 $ 77,011,774 $(1,487,096) $(471,998) $ 75,052,680
Net income 9,653,946 1,487,096 471,998 11,613,040
- -------------------------------------------------------------------------------------------
Balance at December 31, 1995 86,665,720 -- -- 86,665,720
Net loss (46,620,766) (470,917) -- (47,091,683)
- -------------------------------------------------------------------------------------------
Balance at December 31, 1996 40,044,954 (470,917) -- 39,574,037
Net income 5,062,217 51,134 -- 5,113,351
- -------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 45,107,171 $ (419,783) $ -- $ 44,687,388
===========================================================================================
See accompanying notes to the consolidated financial statements.
F-3
5
MENDIK REAL ESTATE LIMITED PARTNERSHIP
AND CONSOLIDATED VENTURE
========================================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $ 5,113,351 $(47,091,683) $ 11,613,040
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Loss on write-down of real estate investments -- 59,491,089 _
Depreciation 3,913,361 9,602,450 8,793,974
Amortization 1,333,071 1,654,652 1,405,703
Gain on retirement of debt -- -- (16,247,734)
Minority interest share of income (loss) in
consolidated venture 1,369,695 (20,312,264) (1,146,881)
(Recovery of) provision for valuation allowance
on property held for disposition (2,920,968) 5,411,536 --
Net premium (discount) amortization - U.S. Treasuries
and Agencies 53,777 (25,350) 50,092
Increase (decrease) in cash arising from changes
in operating assets and liabilities:
Restricted cash (155,760) 104,966 1,045,662
Rent and other receivables 288,844 (254,013) (164,073)
Deferred rent receivable (737,894) (2,750,852) 4,911,038
Other assets (1,199,438) (872,529) (3,856,650)
Accounts payable and accrued expenses 1,082,764 19,797 21,014
Deferred income (645,996) (980,097) 7,396,633
Due to affiliates 48,403 277,389 894,286
Security deposits payable 155,760 (104,966) (103,135)
Accrued interest payable (71,371) 177,461 634,388
----------------------------------------------
Net cash provided by operating activities 7,627,599 4,347,586 15,247,357
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Restricted cash - replacement reserve (5,925,595) -- --
Additions to real estate (1,775,765) (6,391,539) (5,619,234)
Accounts payable - real estate assets (1,369,786) 280,402 (1,156,444)
Acquisition of U.S. Treasuries and Agencies (492,602) (3,021,038) (3,574,183)
Redemption of U.S. Treasuries and Agencies 2,560,735 3,383,272 4,074,449
----------------------------------------------
Net cash used for investing activities (7,003,013) (5,748,903) (6,275,412)
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgage and notes payable 65,000,000 1,455,476 2,113,688
Payments of principal on mortgage and notes payable (65,000,000) -- (11,750,000)
Mortgage refinancing costs (565,609) -- --
----------------------------------------------
Net cash provided by (used for) financing activities (565,609) 1,455,476 (9,636,312)
- --------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 58,977 54,159 (664,367)
Cash and cash equivalents, beginning of period 4,727,720 4,673,561 5,337,928
----------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,786,697 $ 4,727,720 $ 4,673,561
========================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 6,233,732 $ 7,048,492 $ 8,015,003
- --------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
F-4
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MENDIK REAL ESTATE LIMITED PARTNERSHIP
AND CONSOLIDATED VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1. ORGANIZATION
Mendik Real Estate Limited Partnership (the "Partnership") was organized as a
limited partnership under the laws of the State of New York pursuant to a
Certificate and Agreement of Limited Partnership dated and filed October 30,
1985 (the "Partnership Agreement"), as amended, and subsequently amended and
restated on February 25, 1986. The Partnership was formed for the purpose of
acquiring, maintaining and operating income producing commercial office
buildings in the Greater New York metropolitan area. The general partners of the
Partnership are Mendik RELP Corporation and NYRES1 (see below). The Partnership
will continue until December 31, 2025, unless sooner terminated in accordance
with the terms of the Partnership Agreement. The Partnership offered Class A
units to taxable investors and Class B units to tax exempt investors.
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. The transaction did not
affect the ownership of the general partners. However, the assets acquired by
Smith Barney included the name "Hutton." Consequently, effective October 22,
1993, Hutton Real Estate Services XV, Inc., a general partner, changed its name
to NY Real Estate Services 1 Inc. ("NYRES1") to delete any reference to
"Hutton." On January 16, 1997, Mendik Corporation, a general partner, was
renamed Mendik RELP Corporation.
2. LIQUIDITY
During the twelve months ended December 31, 1997, the Partnership funded
operating costs, the cost of tenant improvements, leasing commissions, and
building capital improvements from the following sources: (i) cash flow
generated by the property located at Two Park Avenue, New York, New York (the
"Park Avenue Property"), the Partnership's leasehold interest in 550/600
Mamaroneck Avenue, Harrison, New York (the "Saxon Woods Corporate Center") and
the Partnership's leasehold interest in the property located at 330 West 34th
Street, New York, New York (the "34th Street Property"), (ii) Partnership
reserves, (iii) the deferral of property management fees and leasing commissions
with respect to certain of the properties by Mendik Management Company Inc., an
affiliate of Mendik RELP Corporation ("Mendik Management"), and (iv) the
deferral of interest payments on the NYRES1 Loan (see the section captioned "The
34th Street Property" in Note 6 - Mortgage and Notes Payable for a further
description of the NYRES1 Loan). Because certain properties may be sold, it is
expected that funds from certain of these sources may be reduced or unavailable
in the future.
Park Avenue Property - The costs of leasing space at the property are being
funded with existing property cash flow and reserves maintained by Two Park
Company, the joint venture that owns the Park Avenue Property. Pursuant to the
new Park Avenue mortgage loan, as discussed below, as of December 31, 1997, the
Partnership had placed approximately $6.0 million in a reserve account to fund
the costs of future leasing commissions and tenant improvements.
The Park Avenue Property currently generates, and is expected to generate over
the near term, sufficient cash flow to cover operating expenses and current debt
service. The Park Avenue Property was subject to nonrecourse financing totaling
$65 million which was scheduled to mature in December 1998, however, the lender
had the right to accelerate the maturity upon six-months notice. In order to
address the risk of such acceleration, Two Park Company refinanced the existing
loan in April 1997. Under the new mortgage, which matures on March 1, 2000,
interest is payable at a floating rate (LIBOR plus 150 basis points), which
should reduce debt service costs (assuming short-term LIBOR rates remain
stable). Additionally, there will be no prepayment penalty (other than in
connection with breakage costs of any LIBOR contract), in the event Two Park
Company repays the full amount due under the mortgage prior to maturity.
F-5
7
MENDIK REAL ESTATE LIMITED PARTNERSHIP
AND CONSOLIDATED VENTURE
The Partnership owns an approximate 60% general partnership interest in Two Park
Company. The remaining 40% interest in Two Park Company is owned by B & B Park
Avenue L.P. ("B&B"), of which Mendik RELP Corporation was a general partner. On
December 13, 1996, FW/Mendik REIT LLC, an affiliate of Mendik RELP Corporation,
entered into a contract with the partners that owned substantially all of the
interest in B&B to acquire their interest in B&B. The closing under the contract
took place on April 15, 1997. Following the closing, FW/Mendik REIT LLC conveyed
its interest in B&B to an affiliate of Vornado Realty Trust ("Vornado"), a real
estate investment trust whose shares of stock are traded on the New York Stock
Exchange. The conveyance to the affiliate of Vornado was in connection with the
consolidation of Vornado and Mendik Management Company Inc. and certain of its
affiliates, which consolidation was also consummated on April 15, 1997.
Major tenants at the Park Avenue Property are The Times Mirror Company Inc.,
which leases approximately 292,000 square feet (approximately 31% of the total
leaseable area in the Property) under leases expiring on September 30, 2010, and
Smith Barney, Inc. Smith Barney, Inc. leases approximately 100,000 square feet
(approximately 11% of the total leaseable area in the Property) under a lease
expiring on May 30, 1998. Smith Barney has vacated its space, and as a result,
the Partnership has entered into another lease agreement with a subtenant of
Smith Barney for 20,000 square feet. Smith Barney continues to remain current on
its rental payments to the Partnership in accordance with the terms of its
existing lease. In addition, the Partnership recently executed a lease agreement
with United Way, effective June 1, 1998. United Way will occupy the bulk of the
space (60,572 square feet) that was previously occupied by Smith Barney, Inc. at
rental rates higher than the Smith Barney lease.
The property was 97% and 98% occupied at December 31, 1997 and 1996,
respectively.
The 34th Street Property - The parcel of land underlying the 34th Street
Property is leased from an unaffiliated third party pursuant to a ground lease
with an initial term ending on December 31, 1999 that provides for annual lease
payments of $2.25 million through December 31, 1999. The ground lease may be
renewed in 1999 and thereafter at the option of the Partnership for successive
terms of 21, 30, 30, 30 and 39 years at annual rentals, determined at the
commencement of each renewal term, equal to 7% of the then-market value of the
land considered as if vacant, unimproved and unencumbered, valued at the highest
and best use under then-applicable zoning and other land use regulations as
office, hotel or residential property, but in no event less than the greater of
(i) $2.75 million or (ii) the base rent for any consecutive 12-month period
during the then- preceding renewal term. The Partnership was required to give
notice to renew the ground lease for an additional term of 21 years not later
than two years (December 31, 1997) prior to the expiration of the current terms
of the ground lease, which was scheduled to expire on December 31, 1999. In the
fourth quarter of 1997, the Partnership gave notice to the ground lessor of its
intention to renew the lease and was subsequently granted an extension on the
ground lease, under the same terms, until December 31, 2020.
In 1993, the Partnership signed a long-term lease with the City of New York for
approximately 47% of the Property's total leasable space in the 34th Street
Property. The term of the lease was originally scheduled to expire on February
28, 2001. During the first quarter of 1997, the Partnership reached an agreement
with the City of New York to amend and extend its existing lease at the Property
for a term of approximately 10 years from the previous scheduled expiration date
of February 28, 2001. In accordance with the terms of the lease amendment, the
City will have the right to terminate its lease in whole or in part at any time
after the fifth anniversary of the lease amendment, with a cancellation fee
equal to the then unamortized brokerage commissions and architectural fees paid
in connection with the lease amendment. Also in connection with the lease
amendment, the ground lessor has agreed to fund up to $100,000 in costs
associated with tenant improvement work that will be completed on the space
occupied by the City. The terms of the amended lease call for the City to make
annual base rental payments of approximately $5.4 million for the first five
years of the amended lease, approximately $5.9 million for years six through ten
of the amended lease, and approximately $6.5 million for years eleven through
fifteen of the amended lease. In addition, the City is required to pay its
proportionate share of increases in real estate taxes and operating expenses
over a predetermined base year amount.
F-6
8
MENDIK REAL ESTATE LIMITED PARTNERSHIP
AND CONSOLIDATED VENTURE
In May 1995, the Partnership successfully negotiated an agreement with the First
National Bank of Chicago ("FNBC") to reduce the amount needed to pay off the
34th Street Line of Credit for $1.75 million, compared to the outstanding debt
balance of approximately $18 million, including accrued interest. Since the
Partnership was not able to obtain financing from a third party, an agreement
was entered into with an affiliate of NYRES1 to lend the Partnership $1.75
million to payoff the 34th Street Line of Credit (the "NYRES1 Loan"). FNBC's
agreement to accept only $1.75 million in full satisfaction of the 34th Street
Line of Credit effectively meant that substantially all of the outstanding
principal balance of the loan was forgiven by FNBC. On June 26, 1995, the
Partnership completed the payoff of the 34th Street Line of Credit. The NYRES1
Loan bears interest at the prime rate less one and one-quarter percent and
matures upon the earlier of December 31, 2025 or the termination of the
Partnership. Accrued interest and principal are payable on a current basis to
the extent there is net cash flow available from the Property. The loan is an
unsecured obligation of the Partnership. No cash flow payments have been made on
the loan as of December 31, 1997.
In order to improve the 34th Street Property's cash flow, beginning in January
1992, Mendik Management voluntarily agreed to defer its management fees that
would otherwise have been payable with respect to the 34th Street Property. In
addition, Mendik Management agreed to defer its leasing commission with respect
to the signing of the long-term lease with the City of New York and any further
leasing commissions associated with additional leasing activity at the Property.
Through December 31, 1997, Mendik Management has deferred approximately
$2,111,719 in leasing commissions and management fees with respect to the 34th
Street Property. In connection with the NYRES1 Loan, these fees will continue to
be deferred. The Partnership's outstanding obligation to pay the management fees
to Mendik Management will bear interest at a rate per annum equal to the prime
rate of Morgan Guaranty Trust Company of New York less 1.25%. Principal and
interest will be payable on December 31, 2025, or such earlier date on which the
term of the Partnership terminates, subject to a mandatory repayment from the
net proceeds from the sale of any of the Properties, after repayment of all debt
secured by the Property sold.
The property was 100% and 92% occupied at December 31, 1997 and 1996,
respectively.
Saxon Woods Corporate Center - The Partnership expects that cash flow from the
Saxon Woods Corporate Center will cover operating expenses and debt service
obligations in 1998. The Saxon Woods Line of Credit is in the amount of up to
$6.5 million. Section 13(d) (xviii) of the Partnership Agreement prohibits the
Partnership from incurring indebtedness secured by a Property in excess of 40%
of the then-appraised value of such Property (or 40% of the value of such
Property as determined by the lender as of the date of financing or refinancing,
if such value is lower) (the "Borrowing Limitation"). With the signing of a new
lease in August 1996 for approximately 23% of available space at the 600
Mamaroneck building, an updated independent appraisal of the property was
completed during the second quarter of 1996, at which time the appraised value
of the property increased from $15.2 million at year-end 1995 to $16.6 million.
With the increase in the appraised value, the Partnership was able to draw down
the full amount of the credit facility without exceeding the Borrowing
Limitation. As of December 31, 1996, the Partnership had borrowed the full $6.5
million available under the Saxon Woods Line of Credit.
The indebtedness secured by the Saxon Woods Corporate Center was scheduled to
mature in September 1996. During the third quarter of 1996, the Partnership
obtained a one-year extension of the mortgage indebtedness to September 1997.
Subsequently, three, three-month extensions were obtained to facilitate a sale
of the property, with a maturity date of June 26, 1998.
The property was 99% and 97% occupied at December 31, 1997 and 1996,
respectively.
Stamford Property - On December 29, 1994, the Partnership transferred title to
the Stamford Property to the lender in lieu of foreclosure. The transfer
resulted in the loss of the Partnership's investment in the property; however,
the Partnership was not liable for accrued interest or the principal balance of
the mortgage not otherwise satisfied by transfer of the property.
F-7
9
MENDIK REAL ESTATE LIMITED PARTNERSHIP
AND CONSOLIDATED VENTURE
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING The accompanying financial statements have been prepared
on the accrual basis of accounting in accordance with generally accepted
accounting principles. Income is recognized as earned and expenses are recorded
as obligations are incurred.
CONSOLIDATION The consolidated financial statements include the accounts of
the Partnership and of Two Park Company, a joint venture in which the
Partnership owns an approximate 60% general partnership interest. The joint
venture was formed to own and operate a commercial office building. Intercompany
accounts and transactions between the Partnership and the venture have been
eliminated in consolidation.
IMPAIRMENT OF LONG-LIVED ASSETS 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"), requires the Partnership to assess its
real estate investments for impairment whenever events or changes in
circumstances indicate that the carrying amount of the real estate may not be
recoverable. Recoverability of real estate to be held and used is measured by a
comparison of the carrying amount of the real estate to future net cash flows
(undiscounted and without interest) expected to be generated by the real estate.
If the real estate is considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the real estate
exceeds the fair value of the real estate.
REAL ESTATE INVESTMENTS Prior to September 30, 1997, real estate investments
which consist of buildings, were recorded at cost, less accumulated depreciation
and impairment writedowns. Cost included the initial purchase price of the
properties plus closing costs, acquisition and legal fees, and capital
improvements. Depreciation of the buildings was computed using the straight-line
method over an estimated useful life of 20 to 35 years. Depreciation of personal
property was computed using the straight-line method over an estimated useful
life ranging from 5 to 10 years. Tenant improvements were amortized using the
straight-line method over the respective lease terms.
At December 31, 1997 and 1996, the Partnership completed reviews of
recoverability of the carrying amount of each property and related accounts
based upon an estimate of undiscounted cash flows expected to result from each
property's use and eventual disposition. Based upon the reviews completed at
December 31, 1996, the Partnership wrote down the value of its real estate
investments and related assets in accordance with FAS 121.
PROPERTY HELD FOR DISPOSITION The Saxon Woods property, Two Park Avenue
property, and 330 West 34th Street property were reclassified as "properties
held for disposition" following the decision to pursue negotiations for a
potential sale of these properties. The properties are recorded at the lower of
amortized cost or their estimated fair value less costs to sell at December 31,
1997. Based upon the reviews completed at December 31, 1997, the Partnership
recovered part of the provision for valuation allowance on the property held for
disposition (Saxon Woods) at December 31, 1996. (See Note 5).
CASH EQUIVALENTS Cash equivalents consist 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.
RESTRICTED CASH Restricted cash consists of a reserve to fund the cost of
certain future leasing activity pursuant to the new mortgage loan on the Two
Park Avenue property and tenant security deposits.
MARKETABLE SECURITIES Marketable securities, which consisted of United States
Treasury securities and Agencies, were carried at amortized cost, which
approximated market.
CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject
the Partnership to a concentration of credit risk principally consist of cash in
excess of the financial institutions' insurance limits. The Partnership invests
available cash with high credit quality financial institutions.
F-8
10
MENDIK REAL ESTATE LIMITED PARTNERSHIP
AND CONSOLIDATED VENTURE
RENTAL INCOME Rental income is recognized as earned under the leases.
Accordingly, as certain leases of the Partnership provide for tenant occupancy
during periods for which no rent or reduced rent is due, the Partnership accrues
rental income for the full period of occupancy on a straight-line basis over the
related lease terms.
The Partnership has determined that all leases associated with the rental of
space at the investment properties are operating leases.
LEASING COSTS Leasing costs are capitalized and amortized using the straight
line-method over the respective lease terms.
MORTGAGE COSTS Mortgage costs are capitalized and amortized over the term of
the mortgage notes payable.
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.
INCOME TAXES The Partnership allocates all profits, losses and other taxable
items to the individual partners. No provision for income taxes is made in the
financial statements as the liabilities for such taxes are those of the partners
rather than the Partnership.
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 income and expenses during the reporting
period. Management's review of recoverability of the carrying amounts of real
estate investments and related accounts is one such estimate. Actual results
could differ from those estimates.
NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT Net income (loss) per limited
partnership unit is based upon the limited partnership units outstanding during
the year and the net income (loss) allocated to the limited partners in
accordance with the terms of the Partnership Agreement.
4. THE PARTNERSHIP AGREEMENT
Taxable income for any fiscal year shall be generally allocated in substantially
the same manner as net cash from operations then 85% to the limited partners,
14% to the special limited partner and 1% to the general partners, except that
depreciation allocated to the limited partners will be allocated solely to the
Class A units. Tax losses for any fiscal year will generally be allocated to the
limited partners and special limited partner to the extent of their positive
capital accounts and then 99% to the limited partners and 1% to the general
partners.
The Times Mirror Lease Prepayment and the gain on retirement of the 34th Street
Property debt have been treated as capital transactions for purposes of
allocation under the Partnership Agreement. Accordingly, only the Class A
limited partners, the special limited partner and the general partners have
received an allocation of income; Class B limited partners received no
allocation from these transactions.
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MENDIK REAL ESTATE LIMITED PARTNERSHIP
AND CONSOLIDATED VENTURE
The Partnership Agreement provides that the net cash from operations, as
defined, for each fiscal year will be distributed on a quarterly basis, 99% to
the limited partners and 1% to the general partners (as defined) until each
limited partner has received an amount equal to an 8% annual preferred return.
The net cash from operations will then be distributed, 99% to the special
limited partner, Bernard H. Mendik, and 1% to Mendik Corporation until the
special limited partner has received his special preferred return (as defined).
Thereafter, net cash from operations will be distributed 85% to the limited
partners, 14% to the special limited partner and 1% to the general partners.
Net proceeds from sales or refinancings will be distributed first to the limited
partners until each limited partner has received an 8% cumulative annual return
(as defined) and then an additional amount equal to his adjusted capital
contribution (as defined). Second, the net proceeds from sale or refinancing
will be distributed 99% to the special limited partner and 1% to the Mendik RELP
Corporation until the special limited partner has received any shortfall on his
special cumulative return (as defined). Third, the net proceeds will be
distributed to the general partners until the general partners have received
their deferred incentive shares (as defined). Thereafter, net proceeds will be
distributed 75% to the limited partners, 20.33% to the special limited partner
and 4.67% to the general partners. Liquidating proceeds will be distributed to
the Partners in proportion to and to the extent of the positive capital account
balances of the Partners.
If, upon dissolution of the Partnership, the general partners have a negative
capital account, they shall contribute capital equal to the amount of the
deficit. In no event, however, shall the required capital contribution exceed
1.01% of the total capital contributed by the limited partners less all prior
contributions by the general partners.
5. REAL ESTATE INVESTMENTS
The major tenants described at each of the properties below represented 45% of
the Partnership's rental income in 1997.
THE PARK AVENUE PROPERTY In 1987, the Partnership indirectly acquired from an
affiliate an approximate 60% general partnership interest in a joint venture,
Two Park Company, formed in 1986 for the purpose of acquiring and operating a
parcel of land located at Two Park Avenue, New York, New York, together with the
28- story office building and related improvements located thereon containing
approximately 947,000 net rentable square feet (based on current standards of
measurement). The affiliate acquired such interest to facilitate the acquisition
by the Partnership. Two Park Company acquired the Park Avenue Property in 1986
from an unaffiliated seller for approximately $151.5 million, $60 million of
which was financed by a first mortgage loan. The Partnership acquired its
interest by contributing $61,868,264 in cash, and assuming its share of the $60
million loan secured by a first mortgage on the property. The remaining 40%
interest in Two Park Company is currently owned by B & B Park Avenue L.P., of
which Mendik RELP Corporation is a general partner. The sole stockholder of the
other general partner was also the lender of the mortgages secured by the Park
Avenue Property. Pursuant to the partnership agreement of Two Park Company, each
partner has the right to implement "buy-sell" provisions. If either one of the
partners in Two Park Company exercises its buy-sell rights, then the other
partner could be compelled either to sell its interest in Two Park Company to
such other partner, for the purchase price set forth in the partnership
agreement of Two Park Company. In addition, under the partnership agreement of
Two Park Company, if either partner receives a bona fide offer to purchase its
interest in Two Park Company (which such partner is willing to accept), such
partner must give the other partner a right of first refusal to purchase its
partnership interest on the same terms and conditions as the bona fide offer. On
December 13, 1996, FW/Mendik REIT LLC, an affiliate of Mendik RELP Corporation,
entered into a contract with the partners that own substantially all of the
interest in B & B Park Avenue L.P. to acquire their interest in B & B Park
Avenue L.P. The closing under the contract took place on April 15, 1997.
Following the closing, FW/Mendik REIT LLC conveyed its interest in B & B Park
Avenue L.P. to an affiliate of Vornado Realty Trust ("Vornado"), a real estate
investment trust whose shares of stock are traded on the New York Stock
Exchange. The conveyance to the affiliate of Vornado was in connection with the
consolidation of Vornado and Mendik Management Company Inc. and certain of its
affiliates, which consolidation was also consummated on April 15, 1997.
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MENDIK REAL ESTATE LIMITED PARTNERSHIP
AND CONSOLIDATED VENTURE
At December 31, 1997, the appraised fair value of the property was $123,000,000,
and the appraised value of the property net of the minority interest was
$73,431,000. At December 31, 1996, the property's fair value was appraised at
$110,000,000, and the appraised value of the property net of the minority
interest was $65,670,000.
Major tenants at the Park Avenue Property are The Times Mirror Company Inc.,
which leases approximately 292,000 square feet (approximately 31% of the total
leaseable area in the Property) under leases expiring on September 30, 2010, and
Smith Barney, Inc. Smith Barney, Inc. leases approximately 100,000 square feet
(approximately 11% of the total leaseable area in the Property) under a lease
expiring on May 30, 1998. Smith Barney has vacated its space, and as a result,
the Partnership has entered into another lease agreement with a subtenant of
Smith Barney for 20,000 square feet. Smith Barney continues to remain current on
its rental payments to the Partnership in accordance with the terms of its
existing lease. In addition, the Partnership recently executed a lease agreement
with United Way, effective June 1, 1998. United Way will occupy the bulk of the
space (60,572 square feet) that was previously occupied by Smith Barney, Inc. at
rental rates higher than the Smith Barney lease. Times Mirror Company and Smith
Barney represented 23% and 12%, respectively, of the property's total rental
income in 1997.
At December 31, 1997 and 1996, the Partnership completed reviews of
recoverability of the carrying amount of the Park Avenue Property and related
accounts based upon estimated undiscounted cash flows expected to result from
the property's use and eventual disposition. As of December 31, 1995, it was
management's intention to hold the property for long-term investment and,
therefore, management concluded that the sum of the undiscounted future cash
flow estimated to be generated over the investment's holding period was greater
than its carrying value. In light of the continued improvements in the Midtown
Manhattan commercial real estate market during 1996, management anticipated
positioning the property for sale over the next 12 to 24 months, and concluded
that the sum of the undiscounted future cash flow estimated to be generated by
the property over this shorter holding period was less than its carrying value.
As a result, the Partnership recorded a write-down in 1996, before consideration
of the minority interest's share of the write-down, of approximately $54,800,000
to reduce the property's carrying value to its 1996 estimated fair value of
$110,000,000. The fair value was obtained from an appraisal report prepared by
an independent appraiser.
Due to the Partnership's intention to market the Park Avenue Property for sale,
the Property was reclassified as "Property held for disposition," effective
September 30, 1997, in accordance with the provisions of Statement of Financial
Accounting Standards No. 121.
The 34th Street Property In 1987, the Partnership acquired the leasehold
interest in the 34th Street Property, an eighteen-story structure containing
approximately 637,000 net rentable square feet (based on current standards of
measurement) from an affiliate of the Partnership. The building was purchased
from the affiliate for the purpose of facilitating the acquisition by the
Partnership. The purchase price of $35,611,400 consisted of the purchase price
to the affiliate plus the acquisition and closing costs and costs associated
with carrying the property. The building is situated on a 46,413 square foot
site.
The parcel of land underlying the 34th Street Property is leased from an
unaffiliated third party pursuant to a ground lease with an initial term ending
on December 31, 1999 that provided for annual lease payments of $1.25 million
through December 31, 1991 and requires annual lease payments of $2.25 million
for the remaining eight years. The ground lease may be renewed at the option of
the Partnership for successive terms of 21, 30, 30, 30 and 39 years at annual
rentals, determined at the commencement of each renewal term, equal to 7% of the
then-market value of the land considered as if vacant, unimproved and
unencumbered, valued at the highest and best use under then-applicable zoning
and other land use regulations as office, hotel or residential property, but in
no event less than the greater of (i) $2.75 million or (ii) the base rent for
any consecutive 12-month period during the then-preceding renewal term. The
Partnership was required to give notice to renew the ground lease for an
additional term of 21 years not later than two years (December 31, 1997) prior
to the expiration of the current term of the ground lease which is scheduled to
expire on December 31, 1999.
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MENDIK REAL ESTATE LIMITED PARTNERSHIP
AND CONSOLIDATED VENTURE
In the fourth quarter of 1997, the Partnership gave notice to the ground lessor
of its intention to renew the lease and was subsequently granted an extension on
the ground lease, under the same terms, until December 31, 2020. The property's
appraised value at December 31, 1997, based on two separate appraisal techniques
which differ in their treatment of the ground lease valuation, ranged from
approximately $7,600,000 to $11,000,000. The property's value was appraised at
$4,000,000 at December 31, 1996.
Major tenants at the 34th Street property are the City of New York and Props for
Today. The City of New York which leases approximately 300,000 square feet (47%
of the total leasable area in the property). The term of the lease was
originally scheduled to expire on February 28, 2001. During the first quarter
of 1997, the Partnership reached an agreement with the City of New York to amend
and extend its existing lease at the Property for a term of 10 years from the
previous scheduled expiration date. In accordance with the terms of the lease
amendment, the City will have the right to terminate its lease in whole or in
part at any time after the fifth anniversary of the lease amendment, with a
cancellation fee equal to the then unamortized brokerage commissions and
architectural fees paid in connection with the lease amendment. Also in
connection with the lease amendment, the ground lessor has agreed to fund up to
$100,000 in costs associated with tenant improvement work that will be completed
on the space occupied by the City. Props for Today leases 95,118 square feet
(15% of the total leasable area) under a lease expiring December 31, 2006. The
City and Props for Today represented approximately 77% and 7%, respectively, of
the property's total rental income in 1997.
At December 31, 1997 and 1996, the Partnership completed reviews of
recoverability of the carrying amount of the 34th Street Property and related
accounts based upon estimated undiscounted cash flows expected to result from
the property's use and eventual disposition. As of December 31, 1995, it was
management's intention to hold the property for long-term investment and,
therefore, management concluded that the sum of the undiscounted future cash
flow estimated to be generated over the investment's holding period was greater
than its carrying value. In 1996, management anticipated holding the property
for 12 to 24 months and concluded that the sum of the undiscounted future cash
flow estimated to be generated by the property over this shorter holding period
was less than its carrying value. As a result, the Partnership recorded a
write-down of approximately $4,700,000 to reduce the property's carrying value
to its estimated value of $4,000,000, which represents the property's appraised
value as of December 31, 1996. The value was obtained from an appraisal report
prepared by an independent appraiser.
Due to the Partnership' s intention to market the 34th Street Property for sale,
the Property was reclassified as "Property held for disposition," effective
September 30, 1997, in accordance with the provisions of Statement of Financial
Accounting Standards No. 121.
THE SAXON WOODS CORPORATE CENTER In 1986, the Partnership acquired the
leasehold interest in Saxon Woods Corporate Center, two office buildings located
in Harrison, New York containing an aggregate of approximately 232,000 net
rentable square feet (based on current standards of measurement) from an
affiliate of the Partnership. The building was purchased from the affiliate for
the purpose of facilitating the acquisition by the Partnership. The purchase
price of $21,282,805 was paid from the proceeds of the Partnership's offering
and consisted of the purchase price to the affiliate plus the acquisition and
closing costs and costs associated with carrying the property. The buildings are
situated on a 15.28 acre site which is subject to two ground leases, each of
which terminates in September 2027 and provides the lessee with the option to
renew for two 25-year periods and one 39-year period. Each ground lease provides
for an annual net rental of $170,000 with an increase of $20,000 every five
years, commencing January 2001. The property's value was appraised at
$20,500,000 at December 31, 1997, compared to $16,700,000 at December 31, 1996.
Major tenants at the Saxon Woods Corporate Center are: Commodity Quotations
which leases 27,915 square feet (approximately 12% of the total leasable area)
under leases expiring September 30, 2002; Icon Capital Corp., which leases
29,040 square feet (13% of the total leasable area) under a lease expiring
November 30, 2004; and AllState, which leases approximately 29,000 square feet
(13% of the total leasable
F-12
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MENDIK REAL ESTATE LIMITED PARTNERSHIP
AND CONSOLIDATED VENTURE
area), under a lease expiring February 28, 2007. Commodity Quotations, Icon
Capital Corp. and AllState represented approximately 29%, 13% and 22% of the
property's rental income in 1997.
At December 31, 1997 and 1996, the Partnership completed reviews of
recoverability of the carrying amount of the property and related accounts based
upon estimated undiscounted cash flows expected to result from the property's
use and eventual disposition. As of December 31, 1995, it was management's
intention to hold the property for long-term investment and therefore management
concluded that the sum of the undiscounted future cash flow estimated to be
generated over the investment's holding period was greater than its carrying
value. As a result of the Partnership's intention to pursue a sale of the
property during 1997 and in accordance with FAS 121, the Partnership
reclassified the property on the Partnership's balance sheet as property held
for disposition at December 31, 1996. The carrying value of the property was
reduced as of December 31, 1996 from the prior carrying value of approximately
$21,600,000 to $16,200,000. The valuation allowance was based on management's
assessment of the estimated fair market value of the property as of December 31,
1996. The determination of fair market value of the property as of that date was
based upon the most recent independent appraisal of the property, less estimated
costs to sell. As of December 31, 1997, the Partnership recorded a recovery of
the provision for valuation allowance to increase the carrying value of the
property held for disposition to $20,000,000, the property's appraised value
less estimated costs to sell at December 31, 1997.
THE STAMFORD PROPERTY In 1985, the Partnership acquired the Stamford Property,
a ten-story office building containing approximately 220,000 net rentable square
feet (based on current standards of measurement) and an attached parking garage
located on 1351 Washington Blvd. in Stamford, Connecticut. The purchase price of
the property was $31,250,000. The property was transferred to the lender in lieu
of a foreclosure sale on December 29, 1994.
6. MORTGAGE AND NOTES PAYABLE
THE PARK AVENUE PROPERTY On September 18, 1987, the Partnership acquired its
interest in the Park Avenue Property by contributing $61,868,264 in cash, and
assuming its share of the $60 million loan secured by a first mortgage on the
property. On June 15, 1989, Two Park Company placed a second mortgage on the
Park Avenue Property in the amount of $10,000,000. Interest only was payable in
monthly installments at a rate of 10.791% through June 15, 1992 and thereafter
at the rate of 10.625% through December 19, 1998 at which time the full amount
of principal and any accrued interest would have been due and payable. In
November 1995, the Partnership prepaid, without penalty, the $10,000,000 second
mortgage. On December 26, 1990, Two Park Company placed a third mortgage on the
Park Avenue Property in the amount of $5,000,000. Interest was payable in
monthly installments at a rate of 11.5% through its maturity date of December
19, 1998 at which time the full amount of principal and any accrued interest was
due and payable.
The $65 million Park Avenue Property mortgage was scheduled to mature in
December 1998, however, the lender had the right to accelerate the maturity upon
six-months notice. In order to address the risk of such acceleration, Two Park
Company refinanced the existing mortgage loan in April 1997. Under the new
mortgage, which matures on March 1, 2000, interest is payable at a floating rate
(LIBOR plus 150 basis points). Additionally, there is no prepayment penalty
(other than in connection with breakage costs of any LIBOR contract), in the
event Two Park Company repays the full amount due under the mortgage loan prior
to maturity.
THE 34TH STREET PROPERTY The Partnership had a $30,000,000 credit facility in
the form of a first mortgage secured by the Partnership's leasehold interest on
the 34th Street Property (the "34th Street Line of Credit") with FNBC. The
lender agreed to advance amounts under the credit facility up to 40% of the
lesser of the appraised value of the 34th Street Property or the value thereof
as determined by the lender. The credit facility was scheduled to mature on May
31, 1997. As of December 31, 1992, $15,000,000 had been advanced under the 34th
Street Line of Credit. As a result of the default on the loan and the decline in
the appraised value of the 34th Street Property, the Partnership was prevented
from borrowing any additional funds.
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MENDIK REAL ESTATE LIMITED PARTNERSHIP
AND CONSOLIDATED VENTURE
In May 1995, the Partnership successfully negotiated an agreement with the FNBC
to reduce the amount needed to pay off the 34th Street Line of Credit to $1.75
million compared to the property's outstanding debt balance of approximately $18
million, including accrued interest. Concurrently, an agreement was entered into
with an affiliate of NYRES1 to lend the Partnership the $1.75 million unsecured
loan needed to complete the payoff of the 34th Street Line of Credit prior to
June 30, 1995 (the "NYRES1 Loan"). FNBC's agreement to accept only $1.75 million
in full satisfaction of the 34th Street Line of Credit effectively meant that
substantially all of the outstanding principal balance of the loan was forgiven
by FNBC. On June 26, 1995, the Partnership completed the payoff of the 34th
Street Line of Credit and the Partnership retained its interest in the property.
The NYRES1 Loan bears interest at the prime rate less one and one-quarter
percent. Payments of accrued interest and principal will be payable on a current
basis to the extent there is net cash flow available from the 34th Street
property. To the extent that interest has not been paid on a current basis from
the property's cash flow, any net proceeds realized from the conveyance or
refinancing of the 34th Street Property or any of the Partnership's other
properties will be used to pay accrued interest and principal on the loan. No
cash flow payments have been made on the NYRES1 Loan as of December 31, 1997.
The NYRES1 Loan matures upon the earlier of December 31, 2025 or the termination
of the Partnership. In connection with the NYRES1 Loan, Mendik Management agreed
to continue to defer its management fees and leasing commissions associated with
any additional leasing activity that would otherwise have been payable with
respect to the property.
THE SAXON WOODS CORPORATE CENTER - In September 1991, the Partnership
established a non-recourse line of credit of $6,500,000 secured by a first
leasehold mortgage on the property located at 550/600 Mamaroneck Avenue,
Harrison, New York (the "Saxon Woods Property"). The Saxon Woods Line of Credit
had a term of five (5) years at the rate of 2.5% per annum in excess of LIBOR.
During the third quarter of 1996, the Partnership obtained from the lender a
one-year extension of the maturity of the mortgage to September 1997.
Subsequently, three, three-month extensions were obtained to facilitate a sale
of the property, with a maturity date of June 26, 1998. In addition, the
Partnership is required to pay 1/2% per annum on the undrawn balance of the
Saxon Woods Line of Credit. As additional security for the repayment of the
Saxon Woods Line of Credit, the Partnership deposited $500,000 with the lender,
which deposit was used by the Partnership to pay operating expenses in
connection with the Saxon Woods Property prior to borrowing any sums under the
Saxon Woods Line of Credit for operating expenses. The Saxon Woods Line of
Credit provided the Partnership with a source of funds to pay for those
improvements necessary to lease additional space at the property.
As a result of the property's increased occupancy level due to significant
leasing activity during the year, an updated independent appraisal of the
property was completed during the second quarter of 1996, at which time the
appraised value of the property increased from $15.2 million at year-end 1995 to
$16.6 million. With the increase in the appraised value, the Partnership was
able to draw down the full amount of the credit facility without exceeding the
Borrowing Limitation. As of December 31, 1996, the Partnership had borrowed the
full $6.5 million available under the Saxon Woods Line of Credit.
Mortgages notes payable at December 31, 1997 and 1996 are summarized as follows:
1997 1996
- --------------------------------------------------------------------------------------------
Secured by Park Avenue Property, bearing interest at a blended
rate of 8.16% in 1997 and 10.05% in 1996 $65,000,000 $65,000,000
Secured by Saxon Wood Corporate Center, bearing interest at
a blended rate of 8.72% in 1997 and 8.32% in 1996 6,500,000 6,500,000
- --------------------------------------------------------------------------------------------
$71,500,000 $71,500,000
==========================
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MENDIK REAL ESTATE LIMITED PARTNERSHIP
AND CONSOLIDATED VENTURE
Notes payable at December 31, 1997 and 1996 are summarized as follows:
1997 1996
- ----------------------------------------------------------------------------------
Note payable to an affiliate of NYRES1, unsecured,
bearing interest at prime rate less 1.25% $1,750,000 $1,750,000
Note payable to NYRES1, unsecured, bearing interest at
prime rate less 1.25% 330,000 330,000
Note payable to Mendik RELP Corporation, unsecured,
bearing interest at prime rate less 1.25% 150,000 150,000
- ----------------------------------------------------------------------------------
$2,230,000 $2,230,000
========================
The following summarizes the scheduled maturities of the Partnership's mortgages
and notes payable:
YEAR AMOUNT
------------------------------------------------------
1998 $ 6,500,000
1999 --
2000 65,000,000
2001 --
2002 --
Thereafter 2,230,000
------------------------------------------------------
$ 73,730,000
============
Based on the borrowing rates currently available to the Partnership for mortgage
loans with similar average maturities, the fair value of long-term debt
approximates carrying value.
7. RENTAL INCOME UNDER OPERATING LEASES
Based upon the leases currently in effect, future minimum rental payments from
operating leases of the Partnership's properties (which are not cancelable by
their terms) as of December 31, 1997 are as follows:
Year Amount
-------------------------------------------------------
1998 $ 31,021,617
1999 30,294,162
2000 28,943,169
2001 29,206,989
2002 22,799,591
Thereafter 123,840,565
-------------------------------------------------------
$266,106,093
============
In addition to the minimum rental amounts, substantially all of the leases
provide for escalation charges to tenants for operating costs, real estate taxes
and electricity. For the years ended December 31, 1997, 1996, and 1995, these
amounts were $2,790,259, $2,793,437, and $2,712,976, respectively, which amounts
are included in rental income.
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MENDIK REAL ESTATE LIMITED PARTNERSHIP
AND CONSOLIDATED VENTURE
8. TRANSACTIONS WITH GENERAL PARTNERS AND AFFILIATES
Certain cash and cash equivalents reflected on the Partnership's consolidated
balance sheets were on deposit with an affiliate of a general partner during a
portion of 1996 and all of 1995. As of December 31, 1996 and throughout 1997, no
cash and cash equivalents were on deposit with an affiliate of a general partner
or the Partnership.
The following is a summary of the amounts paid or accrued to the general
partners and their affiliates during the years ended December 31, 1997, 1996 and
1995 and all balances unpaid at December 31, 1997:
DUE TO/(FROM) AFFILIATES
AT DECEMBER 31, PAID OR ACCRUED
--------------------------------
1997 1997 1996 1995
- ------------------------------------------------------------------------------------
Management fees and building
personnel salaries (A) $1,841,153 $1,459,012 $1,279,660 $1,171,005
Leasing commissions (B) 1,037,195 310,557 170,981 347,488
Cleaning and related
services (C)(D) -- 4,660,182 4,106,631 4,127,071
Security (E) -- 389,606 425,855 366,322
Administrative salaries
and expenses (F) 77,792 206,431 -- --
- ------------------------------------------------------------------------------------
$2,956,140 $7,025,788 $5,983,127 $6,011,886
====================================================
(A) Mendik Management receives fees for the management of the Partnership's
Properties and is reimbursed for the cost of on-site building
management staff. Salaries and benefits for building personnel, which
have remained under the payroll of Mendik Management, for the years
ended December 31, 1997, 1996 and 1995 totalled $498,232, $487,796, and
$438,616, respectively. Management fees paid or payable to Mendik
Management totalled $960,780, $791,864, and $732,389 for the years
ended December 31, 1997, 1996 and 1995, respectively. These amounts are
included in the table. Certain management fees included in the above
amounts are being deferred as discussed in Note 6.
(B) Mendik Management has agreed to limit the payment of its leasing
commissions at any property in any year to not more than 3% of the
gross operating revenues of the property in such year less leasing
commissions paid to other brokers in connection with that property in
such year. Any excess will be deferred but is payable only if and to
the extent such limit is not exceeded in the year paid. As of December
31, 1997, there were unpaid commissions with accrued interest, on a
consolidated basis, of approximately $1,037,195 as a result of deferred
leasing commissions from the 34th Street property, the Saxon Woods
Corporate Center and the Park Avenue property. Certain leasing
commissions are being deferred as per the loan modifications discussed
in Note 6.
(C) Building Maintenance Service LLC ("BMS"), an affiliate of Mendik
Corporation, performs cleaning and related services at the properties.
Such cleaning and related services are provided by BMS at its cost plus
an allocable share of overhead expenses. Cleaning and related services
payable to BMS totalled $3,625,689, $3,185,018, and $3,230,148 for the
years ended December 31, 1997, 1996 and 1995, respectively. The
salaries and benefits for the property engineering staff were $847,191,
$778,884, and $759,415 in 1997, 1996 and 1995, respectively. These
amounts are included in the table.
(D) BMS provides metal and marble cleaning services to the Partnership at
its cost plus an allocable share of overhead expenses, which were
$187,302, $142,729, and $137,508 in 1997, 1996 and 1995, respectively.
These amounts are included in the table.
(E) Guard Management Service Corporation, an affiliate of Mendik
Corporation, provides security services to the Partnership at its cost
plus an allocable share of overhead expenses, which in 1997,
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MENDIK REAL ESTATE LIMITED PARTNERSHIP
AND CONSOLIDATED VENTURE
1996 and 1995 totalled $389,606, $425,855, and $366,322, respectively.
These amounts are included in the table.
(F) Commencing January 1, 1997, NYRES1, a general partner, was reimbursed
for certain administrative salaries and expenses which were voluntarily
absorbed by affiliates of the NYRES1 general partner in prior periods,
were reimbursable to the NYRES1 general partner and its affiliate
9. LITIGATION
On February 6, 1996, a purported class action, Sword v. Lehman Brothers
Holdings, Inc., was commenced on behalf of, among others, all Investor Limited
Partners in the Circuit Court for Baltimore, Maryland against the Partnership,
Lehman Brothers Holdings, Inc., E.F. Hutton & Company, Inc. and others (the
"Defendants"). The complaint alleged that the Investor Limited Partners were
induced to purchase Units based upon misrepresentations and/or omitted
statements in the sales materials used in connection with the offering of Units
in the Partnership. The complaint alleged, inter alia, claims of fraud,
negligent misrepresentation and breach of fiduciary duty (the "Action"). On or
about March 21, 1996, the Defendants removed the Action to United States
District Court for the District of Maryland. On or about April 19, 1996, the
plaintiffs filed a motion to have the Action remanded back to state court. As of
that date, no discovery or other proceedings in the Action had commenced. After
the parties had entered into successive stipulations extending the time for the
Defendants to respond to plaintiffs motion to remand and/or respond to the
complaint, the Court stayed and administratively closed the case by order dated
June 6, 1997.
On October 18, 1996, a purported first consolidated and amended class action
complaint was filed in the Court of Chancery of the State of Delaware and for
New Castle County on behalf of all persons who purchased units in the
Partnership, among other investments. The complaint names NYRES1, Lehman
Brothers Inc. and others (the "Defendants"). This case consolidates previous
actions against the Defendants. The Partnership was not named as a defendant.
The complaint alleges, among other things, that the Unitholders were induced to
purchase Units based upon misrepresentation and/or omitted statements in the
sales materials used in connection with the offering of Units in the
Partnership. The complaint purports to assert a claim for breach of fiduciary
duty by the Defendants based on the foregoing.
On January 14, 1997, two individual investor limited partners commenced a
purported class action suit against NYRES1, Mendik RELP Corporation, B&B Park
Avenue, L.P. and Bernard Mendik in the Supreme Court of the State of New York
County of New York, on behalf of all persons holding limited partnership
interests in the Partnership. The complaint alleges that for reasons which
include purported conflicts of interest, the defendants breached their fiduciary
duty to the limited partners and the general partners of the Partnership also
breached their contractual duty to the limited partners. The plaintiffs further
allege that the proposed transfer of the 40% interest in Two Park Company (the
interest not owned by the Partnership) will result in a burden on the operation
and management of Two Park Avenue because the purchaser of the 40% interest will
have no fiduciary duty to the Partnership yet all decisions regarding any
proposed sale or refinancing of Two Park Avenue will require its consent, with
the result that, among other things, the transfer will prevent the Partnership
from negotiating for the sale of Two Park Avenue at better terms than a sale on
only the Partnership's approximate 60% interest. The complaint also alleges,
among other things, that the transfer of the 40% interest violates the
Partnership's rights of first refusal to purchase the interest being transferred
and fails to provide limited partners in the Partnership a comparable transfer
opportunity.
Shortly after the filing of the complaint, another limited partner represented
by the same attorneys filed an essentially identical complaint in the same
court. Among other things, both complaints claim that the purported class has
and will continue to suffer unspecified damages, and seek a declaration that the
suits are properly class actions, an accounting and certain injunctive relief
including an injunction enjoining the transfer of the 40% interest and a
judgment requiring either the liquidation of the Partnership and the appointment
of a receiver or an auction of Two Park Avenue. The time for defendants to
respond to the complaints and to certain discovery requests has not yet expired.
In the interim, plaintiff's counsel have requested an agreement to consolidate
the two actions and have stated that they may seek to amend the complaints in
unspecified ways, as well as to file a motion seeking a preliminary injunction.
The parties
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MENDIK REAL ESTATE LIMITED PARTNERSHIP
AND CONSOLIDATED VENTURE
to the litigation are presently negotiating a potential settlement of the action
that would result in the sale of the Park Avenue Property, the 34th Street
Property and Saxon Woods Corporate Center and in the liquidation and dissolution
of the Partnership. There can be no assurance that such a settlement can be
achieved. If there is no settlement and the actions proceed, the defendants
intend to vigorously defend the actions.
10. RECONCILIATION OF CONSOLIDATED FINANCIAL STATEMENT NET INCOME (LOSS) AND
PARTNERS' CAPITAL TO FEDERAL INCOME TAX BASIS NET INCOME (LOSS) AND PARTNERS'
CAPITAL
Reconciliation of consolidated financial statement net income (loss) to federal
income tax basis net income (loss) follows:
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------
Financial statement consolidated
net income (loss) $ 5,113,351 $(47,091,683) $ 11,613,040
Financial statement adjustments to real estate (2,920,968) 42,988,230 --
Tax basis depreciation over
financial statement depreciation (1,830,341) (72,357) (355,352)
Tax basis rental income over (under)
financial statement rental income 2,055,349 (819,983) (89,674)
Tax basis recognition of net income (loss) of
consolidated venture (under) over financial
statement recognition of income (loss) of
consolidated venture (2,568,478) 1,033,441 7,986,697
Other -- -- (95,214)
- -----------------------------------------------------------------------------------------------
Federal income tax basis net income (loss) $ (151,087) $ (3,962,352) $ 19,059,497
===============================================================================================
Reconciliation of financial statement partners' capital to federal income tax
basis partners' capital:
AS OF DECEMBER 31,
------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------
Financial statement basis partners' capital $ 44,687,388 $ 39,574,037 $ 86,665,720
Current year financial statement net
income (loss) over (under) Federal
income tax basis net income (loss) (5,264,438) 43,129,331 7,446,457
Cumulative financial statement net
income (loss) over cumulative Federal
income tax basis net income (loss) 91,955,853 48,826,522 41,380,065
- ---------------------------------------------------------------------------------------------
Federal income tax basis partners' capital $ 131,378,803 $131,529,890 $135,492,242
=============================================================================================
Because many types of transactions are susceptible to varying interpretations
under Federal and state tax laws and regulations, the amounts reported above may
be subject to change at a later date upon final determination by the taxing
authorities.
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