AS FILED WITH THE SEC ON ____________________. REGISTRATION NO. 33-86780
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM S-1
POST-EFFECTIVE AMENDMENT NO. 4
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
PRUCO LIFE INSURANCE COMPANY
IN RESPECT OF
PRUCO LIFE VARIABLE CONTRACT
REAL PROPERTY ACCOUNT
(Exact Name of Registrant)
C/O PRUCO LIFE INSURANCE COMPANY
213 WASHINGTON STREET
NEWARK, NEW JERSEY 07102-2992
(800) 437-4016
(Address and telephone number of principal executive offices)
----------------------
THOMAS C. CASTANO
ASSISTANT SECRETARY
PRUCO LIFE INSURANCE COMPANY
213 WASHINGTON STREET
NEWARK, NEW JERSEY 07102-2992
(800) 437-4016
(Name, address, and telephone number of agent for service)
Copy to:
JEFFREY C. MARTIN
SHEA & GARDNER
1800 MASSACHUSETTS AVENUE, N.W.
WASHINGTON, D.C. 20036
----------------------
CROSS REFERENCE SHEET
(AS REQUIRED BY FORM S-1)
S-1 ITEM NUMBER AND CAPTION LOCATION
- --------------------------- --------
1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus................ Cover
2. Inside Front and Outside Back
Cover Pages of Prospectus......... Inside Front Cover
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges........................... Prospectus Cover; Summary; Risk
Factors
4. Use of Proceeds................... Investment Policies; Current
Real Estate-Related Investments;
Management's Discussion and
Analysis of Financial Condition
and Results of Operations
5. Determination of Offering Price... Not Applicable
6. Dilution.......................... Not Applicable
7. Selling Security Holders.......... Not Applicable
8. Plan of Distribution.............. Distribution of the Contracts
9. Description of Securities to be
Registered........................ Prospectus Cover; General
Information about Pruco Life
Insurance Company, Pruco Life
Variable Contract Real Property
Account, The Prudential Variable
Contract Real Property
Partnership, and The Investment
Manager; The Real Property
Account's Unavailability to
Certain Contracts; Valuation of
Contract Owners' Participating
Interests; Charges; Restrictions
on Withdrawals; Restrictions on
Contract Owners' Investment in
the Real Property Account
10. Interests of Named Experts and
Counsel........................... Not Applicable
11. Information With Respect to the
Registrant........................ General Information about Pruco
Life Insurance Company, Pruco
Life Variable Contract Real
Property Account, The Prudential
Variable Contract Real Property
Partnership, and The Investment
Manager; Investment Policies;
Current Real Estate-Related
Investments; Management's
Discussion and Analysis of
Financial Condition and Results
of Operations; Per Share
Investment Income and Capital
Changes; Investment
Restrictions; Conflicts of
Interest; Valuation of Contract
Owners' Participating Interests;
Financial Statements;
Litigation; State Regulation;
Federal Income Tax
Considerations
12. Disclosure of Commission
Position on Indemnification for
Securities Act Liabilities........ Not Applicable
PROSPECTUS
MAY 1, 1998
PRUCO LIFE
VARIABLE CONTRACT
REAL PROPERTY ACCOUNT
This prospectus describes the real estate investment option that Pruco Life
Insurance Company ("Pruco Life"), a stock life insurance company that is a
wholly-owned subsidiary of The Prudential Insurance Company of America
("Prudential"), offers in connection with the funding of benefits under certain
variable life insurance and variable annuity contracts (the "Contracts") it
issues. These Contracts are described in different prospectuses, and this
prospectus is attached to the prospectus for the type of Contract selected.
Although the Contracts vary in their terms, each provides that owners may
allocate all or part of their net premiums or purchase payments to the Pruco
Life Variable Contract Real Property Account (the "Real Property Account"), a
separate account of Pruco Life. The assets of the Real Property Account are
invested entirely through The Prudential Variable Contract Real Property
Partnership (the "Partnership") which is a general partnership established by
Pruco Life, Prudential and Pruco Life Insurance Company of New Jersey ("Pruco
Life of New Jersey") to provide for investment of assets allocated to the real
property investment option under variable contracts issued by those companies.
Through the Partnership, the assets of the Real Property Account will be
invested primarily (at least 65%) in direct ownership interests in income-
producing real property such as office buildings, shopping centers, apartments,
industrial properties, agricultural land or hotels, participating mortgage loans
originated by the Partnership, and real property sale-leaseback transactions
negotiated on behalf of the Partnership. It is expected that typically the
large majority of these real estate investments will be in direct ownership
interests in real estate, including but not limited to fee interests, general
partnership interests, leaseholds, and tenancies in common. Apart from a
portion of the Partnership's assets (normally 10-15%) invested in short-term or
intermediate-term debt instruments for liquidity purposes, the remainder of the
Partnership's assets may be invested in other types of real estate-related
investments, including primarily conventional, non-participating mortgage loans
and real estate investment trusts. Values under the Contracts, with respect to
the portion of the Contract owner's Contract fund allocated to the Real Property
Account, will vary with the performance of the Real Property Account's
investments through the Partnership.
The investment objectives of the Real Property Account and Partnership are to:
(i) preserve and protect capital; (ii) provide for compounding of income as a
result of reinvestment of cash flow from investments; and (iii) provide for
increases over time in the amount of such income through appreciation in the
value of assets. There can be no assurance, of course, that these investment
objectives will be met.
------------------------------
THIS OFFERING INVOLVES CERTAIN RISK FACTORS. INVESTMENT IN THE REAL PROPERTY
ACCOUNT INVOLVES A SIGNIFICANT DEGREE OF RISK, ATTRIBUTABLE IN PART TO THE FACT
THAT THE ASSETS HELD IN THE PARTNERSHIP MAY NOT BE READILY SALABLE ON
COMMERCIALLY REASONABLE TERMS. SEE RISK FACTORS, PAGE 10. THE ASSETS OF THE
REAL PROPERTY ACCOUNT AND PARTNERSHIP WILL NOT BE AS LIQUID AS THE INVESTMENTS
GENERALLY MADE BY VARIABLE LIFE INSURANCE AND VARIABLE ANNUITY SEPARATE ACCOUNTS
(SEE LIQUIDITY OF INVESTMENTS, PAGE 10) AND THE ABILITY OF THE CONTRACT OWNER TO
WITHDRAW OR TRANSFER PORTIONS OF HIS OR HER CONTRACT FUND ALLOCATED TO THE REAL
PROPERTY ACCOUNT MAY BE SUBJECT TO CERTAIN RESTRICTIONS. SEE RESTRICTIONS ON
WITHDRAWALS, PAGE 17. MOREOVER, THE INVESTMENTS AND OPERATION OF THE REAL
PROPERTY ACCOUNT AND PARTNERSHIP MAY BE SUBJECT TO CERTAIN CONFLICTS OF
INTEREST. SEE CONFLICTS OF INTEREST, PAGE 13.
------------------------------
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE. IT IS ATTACHED TO
A CURRENT PROSPECTUS FOR THE RELATED VARIABLE CONTRACT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRUCO LIFE INSURANCE COMPANY
213 Washington Street
Newark, New Jersey 07102-2992
Telephone: (800) 437-4016
PRPA-1 Ed 5-98
PROSPECTUS CONTENTS
PAGE
PER SHARE INVESTMENT INCOME, CAPITAL CHANGES
AND SELECTED RATIOS .................................................... 1
SUMMARY ..................................................................... 2
GENERAL INFORMATION ABOUT PRUCO LIFE INSURANCE COMPANY, PRUCO LIFE VARIABLE
CONTRACT REAL PROPERTY ACCOUNT, THE PRUDENTIAL VARIABLE CONTRACT REAL
PROPERTY PARTNERSHIP, AND THE INVESTMENT MANAGER ....................... 3
PRUCO LIFE INSURANCE COMPANY ........................................... 3
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT ..................... 3
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP ............. 4
THE INVESTMENT MANAGER ................................................. 4
INVESTMENT POLICIES ......................................................... 5
OVERVIEW ............................................................... 5
INVESTMENT IN DIRECT OWNERSHIP INTERESTS IN REAL ESTATE ................ 5
INVESTMENTS IN MORTGAGE LOANS .......................................... 6
INVESTMENTS IN SALE-LEASEBACKS ......................................... 8
GENERAL INVESTMENT AND OPERATING POLICIES ................................... 8
CURRENT REAL ESTATE-RELATED INVESTMENTS ..................................... 9
PROPERTIES ............................................................. 9
RISK FACTORS ................................................................ 10
LIQUIDITY OF INVESTMENTS ............................................... 10
GENERAL RISKS OF REAL PROPERTY INVESTMENTS ............................. 11
RELIANCE ON THE PARTNERS AND THE INVESTMENT MANAGER .................... 12
INVESTMENT RESTRICTIONS ..................................................... 12
CONFLICTS OF INTEREST ....................................................... 13
THE REAL PROPERTY ACCOUNT'S UNAVAILABILITY TO CERTAIN CONTRACTS ............. 14
VALUATION OF CONTRACT OWNERS' PARTICIPATING INTERESTS ....................... 14
BORROWING BY THE PARTNERSHIP ................................................ 16
CHARGES ..................................................................... 16
RESTRICTIONS ON WITHDRAWALS ................................................. 17
RESTRICTIONS ON CONTRACT OWNERS' INVESTMENT IN THE REAL PROPERTY ACCOUNT .... 18
FEDERAL INCOME TAX CONSIDERATIONS ........................................... 18
DISTRIBUTION OF THE CONTRACTS ............................................... 18
STATE REGULATION ............................................................ 18
ADDITIONAL INFORMATION ...................................................... 18
EXPERTS ..................................................................... 19
LITIGATION .................................................................. 19
YEAR 2000 COMPLIANCE ........................................................ 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................................. 20
FINANCIAL STATEMENTS ........................................................ 25
FINANCIAL STATEMENTS OF PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT .. A1
FINANCIAL STATEMENTS OF THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY
PARTNERSHIP ............................................................ B1
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
The Registrant is subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance therewith files reports and other
information with the Securities and Exchange Commission. All reports and
information filed by the Registrant can be inspected and copied at the Public
Reference Section of the Commission at 450 Fifth Street, Room 1024, N.W.,
Washington, D.C. 20549, and at certain of its regional offices: Midwestern
Regional Office, CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago,
IL 60661-2511; Northeastern Regional Office SEC, 7 World Trade Center, Suite
1300, New York, NY 10048.
REPORTS TO CONTRACT OWNERS
Pruco Life will mail to each Contract owner who elects to allocate a portion of
his or her Contract fund to the Real Property Account an annual report
containing audited financial statements for the Partnership and an annual
statement showing the status of his or her Contract fund and such other
information as may be required by applicable regulation or law.
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
PER SHARE INVESTMENT INCOME, CAPITAL CHANGES AND SELECTED RATIOS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following information on per share investment income, capital changes and
selected ratios has been audited by Price Waterhouse LLP, independent
accountants (1997 and 1996 figures) and Deloitte & Touche LLP, independent
auditors (1995 and prior figures). Both unqualified auditors' reports are
included in this prospectus. This page should be read in conjunction with the
financial statements and notes thereto of The Prudential Variable Contract Real
Property Partnership included in this prospectus.
01/01/97 01/01/96 01/01/95 01/01/94 01/01/93
to to to to to
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
--------- ---------- ---------- ---------- ----------
Rent from properties $ 1.8216 $ 1.9173 $ 1.6387 $ 1.2754 $ 1.1659
Income from interest in properties $ 0.0367 $ 0.0510 $ 0.0527 $ 0.1838 $ 0.2139
Interest on mortgage loans $ 0.0000 $ 0.0000 $ 0.0000 $ 0.0082 $ 0.0755
Dividend income from real estate investment trusts $ 0.0134 $ 0.0000 $ 0.0000 $ 0.0000 $ 0.0000
Interest from short-term investments $ 0.1946 $ 0.1795 $ 0.2199 $ 0.1226 $ 0.0549
--------- ---------- ---------- ---------- ----------
INVESTMENT INCOME $ 2.0663 $ 2.1478 $ 1.9113 $ 1.5900 $ 1.5102
========= ========== ========== ========== ==========
Investment management fee $ 0.2229 $ 0.2097 $ 0.1936 $ 0.1786 $ 0.1673
Real estate tax expense $ 0.1864 $ 0.1991 $ 0.1602 $ 0.1399 $ 0.1465
Administrative expenses $ 0.1963 $ 0.1569 $ 0.1484 $ 0.1103 $ 0.1187
Operating expenses $ 0.2782 $ 0.2442 $ 0.1546 $ 0.1332 $ 0.1209
Interest expense $ 0.0186 $ 0.0412 $ 0.0381 $ 0.0255 $ 0.0236
--------- ---------- ---------- ---------- ----------
EXPENSES $ 0.9024 $ 0.8511 $ 0.6949 $ 0.5875 $ 0.5770
========= ========== ========== ========== ==========
NET INVESTMENT INCOME $ 1.1639 $ 1.2967 $ 1.2164 $ 1.0025 $ 0.9332
========= ========== ========== ========== ==========
Net realized loss on investments sold $ 0.0258 ($ 0.1323) $ 0.0000 $ (0.0966) $ (0.1816)
Net unrealized gain/(loss) on investments $ 0.6903 ($ 0.2695) $ 0.0581 $ 0.2169 $ 0.0152
--------- ----------- ---------- ---------- ----------
NET REALIZED AND UNREALIZED
GAIN/(LOSS) ON INVESTMENTS $ 0.7162 ($ 0.4018) $ 0.0581 $ 0.1203 $ (0.1664)
--------- ----------- ---------- ---------- ----------
Net increase/(decrease) in share value $ 1.8800 $ 0.8949 $ 1.2745 $ 1.1228 $ 0.7668
Share Value at beginning of period $ 16.6486 $ 15.7537 $ 14.4792 $ 13.3564 $ 12.5896
--------- ----------- ---------- ---------- ----------
Share Value at end of period $ 18.5286 $ 16.6486 $ 15.7537 $ 14.4792 $ 13.3564
========= =========== ========== ========= =========
Ratio of expenses to average net assets 5.16% 5.26% 4.62% 4.27% 4.44%
Ratio of net investment income to
average net assets 6.66% 8.01% 8.08% 7.29% 7.17%
Number of shares outstanding at
end of period (000's) 11,848 11,848 12,037 12,241 13,031
All calculations are based on average month-end shares outstanding where
applicable.
Per share information presented herein is shown on a basis consistent with the
financial statements as discussed in Note 1G on page B10.
1 - Real Property
SUMMARY
This prospectus describes the Pruco Life Variable Contract Real Property Account
(the "Real Property Account"), a separate account of Pruco Life Insurance
Company ("Pruco Life") created pursuant to Arizona insurance law. See PRUCO LIFE
INSURANCE COMPANY, page 3 and PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY
ACCOUNT, page 3. Under that law, the assets of the Real Property Account are not
chargeable with liabilities arising out of any other business of Pruco Life.
Owners of certain variable life insurance and variable annuity contracts issued
by Pruco Life may allocate a portion of their net premiums or purchase payments,
or transfer a portion of the total amount invested under their Contracts (known
as the "Contract fund"), to the Real Property Account, and values and benefits
under the Contracts will thereafter reflect the investment experience of the
Real Property Account. Contract owners, not Pruco Life, bear the risks and
rewards of the investment performance of the Real Property Account to the extent
of the Contract owner's Contract fund invested in the Real Property Account.
This prospectus is attached to and should be read in conjunction with the
prospectus for the type of Contract selected.
The assets of the Real Property Account are invested through The Prudential
Variable Contract Real Property Partnership (the "Partnership"), which invests
primarily in income-producing real estate. See THE PRUDENTIAL VARIABLE CONTRACT
REAL PROPERTY PARTNERSHIP, page 4. The Prudential Insurance Company of America
("Prudential"), the parent of Pruco Life and a mutual insurance company
organized under the laws of New Jersey, is the investment manager of the
Partnership. See THE INVESTMENT MANAGER, page 4. The Partnership invests at
least 65% of its assets in direct ownership interests in income-producing real
estate, participating mortgage loans (mortgages providing for participation in
the revenues generated by, or the appreciation of, the underlying property, or
both) originated for the Partnership, and real property sale-leasebacks
negotiated by Prudential on behalf of the Partnership. It is expected that
typically the large majority of these real estate investments will be in direct
ownership interests in income producing real estate, such as office buildings,
shopping centers, apartments, industrial properties or hotels. The Partnership
may also invest up to 5% of its assets in direct ownership interests in
agricultural land. A small portion of the Partnership's assets (ordinarily 10-
15%) will be invested in short-term or intermediate-term marketable debt
securities. The remainder of the Partnership's assets may be invested in other
types of real estate-related investments, including conventional, non-
participating mortgage loans and real estate investment trusts. The investment
objectives of the Partnership are to: (i) preserve and protect the Partnership's
capital; (ii) provide for compounding of income as a result of reinvestment of
cash flow from investments; and (iii) provide for increases over time in the
amount of such income through appreciation in the value of acquired real
property and, to a lesser extent, through mortgage loans and sale-leaseback
transactions. See INVESTMENT POLICIES, page 5. There is no assurance that
sufficient suitable investments will be found or that the Partnership's
objectives will be attained.
Investment in the Real Property Account, and thereby, participation in the
investment experience of the Partnership, involves significant risks. See RISK
FACTORS, page 10. These include the risk of fluctuating real estate values and
the risk that the appraised or estimated values of the Partnership's real
property investments will not be realized upon their disposition. Many of the
Partnership's real estate investments will not be quickly convertible into cash
through disposition on commercially reasonable terms. The Real Property Account
should therefore be viewed only as a long-term investment. See RESTRICTIONS ON
WITHDRAWALS, page 17. For certain other risk factors associated with the Real
Property Account, see RISK FACTORS, page 10.
Pruco Life has taken steps to ensure that the Real Property Account and
Partnership will be sufficiently liquid to satisfy all withdrawal or loan
requests promptly (within 7 days). The Partnership will normally maintain 10-
15% of its assets in short-term and intermediate-term marketable debt
instruments and will have income streams from its real property investments,
mortgage loans, and leasebacks. Moreover, the Partnership may borrow funds for
liquidity purposes, if necessary. See BORROWING BY THE PARTNERSHIP, page 16.
There are currently in force limitations on transfers out of the Real Property
Account. See RESTRICTIONS ON WITHDRAWALS, page 17.
Prudential's management of the Partnership is subject to certain conflicts of
interest, including the possible acquisition of properties from affiliates. See
CONFLICTS OF INTEREST, page 13.
Prudential generally charges the Partnership a daily fee for investment
management which amounts to 1.25% per year of the average daily gross assets of
the Partnership. The Partnership also compensates Prudential for providing
certain accounting and administrative services to the Partnership. See CHARGES,
page 16.
Contract owners who select the real property investment option will also be
subject to the same Contract charges with respect to the portion of their
Contract fund allocated to the Real Property Account as they are with respect to
the portion of their Contract fund allocated to a separate account that invests
in The Prudential Series Fund, Inc. (the "Series Fund"), the underlying funding
vehicle for the other variable investment options available to Contract owners.
The particular Contract prospectus should be consulted for a description of
those charges. The Real Property Account is currently available to purchasers
of Pruco Life's Variable APPRECIABLE LIFE(R) Insurance Contracts, Variable Life
Insurance Contracts, DISCOVERY(R) Life Plus Contracts, and DISCOVERY(R) Plus
Contracts,
2 - Real Property
except for Contracts, such as those purchased in connection with IRAs, Section
403(b) annuities, and other tax-qualified plans, that are subject to the
Employee Retirement Income Security Act of 1974 ("ERISA") or to the prohibited
transaction excise tax provisions of the Internal Revenue Code. See THE REAL
PROPERTY ACCOUNT'S UNAVAILABILITY TO CERTAIN CONTRACTS, page 14. A Variable
APPRECIABLE LIFE Contract owner, for example, who elects to invest part of his
or her net premiums in the Pruco Life Variable Appreciable Account and part in
the Real Property Account will be subject to the same sales load charges, the
same risk charges, the same administrative charges, the same insurance charges,
and the same deferred sales charges without regard to what portion is invested
in the Pruco Life Variable Appreciable Account and what portion is invested in
the Real Property Account. The Real Property Account has established different
subaccounts, relating to the different types of variable Contracts that may
participate in the Real Property Account, and these subaccounts provide the
mechanism and maintain the records whereby these different Contract charges are
made.
GENERAL INFORMATION ABOUT PRUCO LIFE
INSURANCE COMPANY, PRUCO LIFE VARIABLE
CONTRACT REAL PROPERTY ACCOUNT, THE
PRUDENTIAL VARIABLE CONTRACT REAL
PROPERTY PARTNERSHIP, AND THE INVESTMENT
MANAGER
PRUCO LIFE INSURANCE COMPANY
Pruco Life Insurance Company ("Pruco Life") is a stock life insurance company,
organized in 1971 under the laws of the State of Arizona. It is licensed to
sell life insurance and annuities in the District of Columbia, Guam, and in all
states except New York. These Contracts are not offered in any state in which
the necessary approvals have not yet been obtained.
Pruco Life is a wholly-owned subsidiary of Prudential, a mutual insurance
company founded in 1875 under the laws of the State of New Jersey. Prudential
is currently considering reorganizing itself into a stock company. This form of
reorganization, known as demutualization, is a complex process that may take two
or more years to complete. No plan of demutualization has been adopted yet by
the Company's Board of Directors. Adoption of a plan of demutualization would
occur only after enactment of appropriate legislation in New Jersey and would
have to be approved by Company policyholders and appropriate state insurance
regulators. Throughout the process, there will be a continuing evaluation by
the Board of Directors and management of the Company as to the desirability of
demutualization. The Board of Directors, in its discretion, may choose not to
demutualize or to delay demutualization for a time.
Should Prudential convert to a stock company, the allocation of stock, cash or
other benefits to policyholders and Contract owners would be made in accordance
with procedures set forth in the plan of demutualization. In recent
demutualizations, policyholders and contract owners of the converting mutual
insurer have been eligible to receive consideration while policyholders and
contract owners of the insurer's stock subsidiaries have not. It has not yet
been determined whether any exceptions to that general approach will be made
with respect to policyholders and Contract owners of Prudential's subsidiaries,
including the Pruco Life insurance companies.
As of December 31, 1997, Prudential has invested over $442 million in Pruco Life
in connection with Pruco Life's organization and operation. Prudential intends
from time to time to make additional capital contributions to Pruco Life as
needed to enable it to meet its reserve requirements and expenses in connection
with its business. However, Prudential is under no obligation to make such
contributions and its assets do not back the benefits payable under the
Contract. Pruco Life's consolidated financial statements appear in either the
attached Contract prospectus or in the statement of additional information for
the Contract prospectus, which is available upon request.
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
The Pruco Life Variable Contract Real Property Account (the "Real Property
Account") was established on August 27, 1986 under Arizona law as a separate
investment account. The Account meets the definition of a "separate account"
under the federal securities laws. The Real Property Account holds assets that
are segregated from all of Pruco Life's other assets. The Real Property Account
is used only to support those variable benefits payable under the Contracts that
are funded by the real estate investment option.
The obligations to Contract owners and beneficiaries arising under the Contracts
are general corporate obligations of Pruco Life. Pruco Life is also the legal
owner of the assets in the Real Property Account. Pruco Life will maintain
assets in the Real Property Account with a total market value at least equal to
the amounts credited under the real estate option to all the Contracts
participating in the Real Property Account. These assets may not be
3 - Real Property
charged with liabilities which arise from any other business Pruco Life
conducts. In addition to these assets, the Real Property Account's assets may
include funds contributed by Pruco Life, and may include accumulations of the
charges Pruco Life makes against the Real Property Account.
Pruco Life will bear the risks and rewards of the Real Property Account's
investment experience to the extent of its investment in the Real Property
Account. Pruco Life may withdraw or redeem its investment in the Real Property
Account at any time, but will not make any such redemption unless it is
satisfied that the redemption will not have a materially adverse impact on the
Real Property Account. Accumulations of charges will be withdrawn on a regular
periodic basis.
Unlike the other separate accounts funding the Contracts, the Real Property
Account is not registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940 as an investment company. For state
law purposes the Real Property Account is treated as a part or division of Pruco
Life. Contract owners have no voting rights with respect to the Real Property
Account. The Real Property Account is under the control and management of Pruco
Life, and the Board of Directors and officers of Pruco Life are responsible for
the management of the Real Property Account. No salaries of Pruco Life
personnel are paid by the Real Property Account. Information regarding the
directors and officers of Pruco Life is contained in the attached prospectus for
the Contract. The financial statements of the Real Property Account begin on
pages A1.
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
All amounts allocated to the Real Property Account are invested through The
Prudential Variable Contract Real Property Partnership (the "Partnership"), a
general partnership organized under New Jersey law on April 29, 1988. The only
partners in the Partnership (collectively, the "Partners") are Prudential, Pruco
Life and Pruco Life Insurance Company of New Jersey ("Pruco Life of New
Jersey"), an indirect wholly-owned subsidiary of Prudential. The Partnership
was established to provide a means for assets allocated to the real estate
investment options under variable life insurance and variable annuity contracts
issued by these three companies to be invested in a commingled pool, so as to
provide greater diversification of investments and lower transaction costs than
would be possible if such assets were separately invested by each company. All
amounts allocated to the Real Property Account are contributed by Pruco Life to
the Partnership. Pruco Life's general partnership interest in the Partnership
is held in the Real Property Account.
The initial contributions to the Partnership were made on April 29, 1988.
Prudential contributed $100,000 in cash to the Partnership; Pruco Life of New
Jersey contributed $100,000 in cash to the Partnership; and Pruco Life
contributed the real estate and other assets held in its real estate separate
account, which had been actively investing in real estate for more than a year.
Those assets had an estimated market value of $91,538,737 on that date. Each
Partner is entitled to its prospective proportionate share of all income, gains,
and losses of the Partnership.
The assets of the Partnership are valued on each business day and the value of
each Partner's interest will fluctuate with the investment performance of the
Partnership. In addition, the interests of the Partners are proportionately
readjusted, at the then current value, on each day when a Partner makes a
contribution to, or withdrawal from, the Partnership. When a Contract owner
chooses to allocate a portion of his or her net premiums or purchase payments,
or transfer a portion of his or her Contract fund, to the Real Property Account,
Pruco Life will contribute that amount to the Partnership as a capital
contribution, which will correspondingly increase the Real Property Account's
interest in the Partnership. Values and benefits under the Contract will
thereafter vary with the performance of the Partnership's investments. For
further discussion on how the value of a Contract owner's interest in the Real
Property Account and the value of the Partnership's investments are calculated,
see VALUATION OF CONTRACT OWNERS' PARTICIPATING INTERESTS, page 14.
Contract owners have no voting rights with respect to the operations of the
Partnership. The financial statements of the Partnership begin on pages B1.
THE INVESTMENT MANAGER
Pursuant to an investment management agreement, the Partnership has retained
Prudential to act as investment manager of the Partnership. Prudential, on
behalf of its general account and separate account, is one of the largest real
estate investors in North America. Prudential has been making mortgage loans
since before 1900 and is one of the most experienced real estate mortgage
lenders in the United States. Prudential, through its affiliates, has a
nationwide staff to underwrite, originate, and service such loan activity. Its
network of field offices has direct working relationships with regional and
national real estate developers, brokers, managers, and investors providing
Prudential with mortgage investment opportunities on a national basis. Since
the early 1970's, Prudential's mortgage lending has been concentrated in the
commercial and agricultural markets. The urban commercial lending activities
include loans secured by apartment, office, and industrial buildings, hotels and
motels, and shopping centers.
4 - Real Property
At present, Prudential directly and through affiliates invests in and manages
real estate equities and mortgages for its general account and for several
separate accounts. Prudential and its affiliates also participate in real
estate ventures through public and private partnerships. As of December 31,
1997, Prudential owned or controlled $28.5 billion of net domestic real estate
mortgages and equities of which $19.6 billion is in the general account, $7.6
billion is in separate accounts and $1.3 billion is in subsidiaries. Statement
value for general account assets is recorded at depreciated cost and for
separate account assets at market value. For a discussion of how the
Partnership's real estate-related investments are valued, see VALUATION OF
CONTRACT OWNERS' PARTICIPATING INTERESTS, page 14.
Prudential has organized its real estate activities into separate business units
within Prudential's Private Asset Management Group. Prudential Real Estate
Investors (PREI) is the unit responsible for the investments of the Real
Property Partnership. Currently, PREI's investment staff is separate and
distinct from the staff handling Prudential's general account real estate
activities.
PREI provides investment management services on a domestic basis and also acts
as part of a global team providing these services to institutional investors
worldwide. PREI is headquartered in Parsippany, New Jersey and has 4 field
offices across the United States. As of December 31, 1997, PREI had under
management approximately 9.7 million net rentable square feet of office real
estate, 19.4 million net rentable square feet of industrial real estate, 6.0
million net rentable square feet of retail real estate, 4,316 hotel rooms and
17,079 multifamily residential units.
Various divisions of Prudential, such as the general account real estate
operation and the general account mortgage operation, may provide PREI with such
services as may be required in connection with the investment management
agreement regarding the Partnership. The mortgage operation currently manages a
portfolio of mortgage loans totaling approximately $17 billion.
Proposals to acquire properties for the Partnership are generally originated by
the field offices reviewed and approved by the Investment Management Committee
of PREI. Depending upon the size of the acquisition and other factors, a
proposed real estate investment may also be submitted for review to the Finance
Committee of the Board of Directors of Prudential.
INVESTMENT POLICIES
OVERVIEW
The Partnership has an investment policy of investing at least 65% of its assets
in direct ownership interests in income-producing real estate, participating
mortgage loans originated for the Partnership, and real property sale-leasebacks
negotiated by Prudential on behalf of the Partnership. It is expected that the
largest portion of these real estate investments will be in direct ownership
interests (including fee interests, general partnership interests, leaseholds,
and tenancies in common) in income-producing real estate, such as office
buildings, shopping centers, apartments, industrial properties or hotels. The
Partnership may also invest up to 5% of its assets in direct ownership interests
in agricultural land. From 10-15% of the Partnership's assets will ordinarily
be invested in short-term debt obligations of the type purchased by the Money
Market Portfolio of the Series Fund or in intermediate-term bonds of the type
invested in by the Diversified Bond Portfolio of the Series Fund. The Partners
reserve the right to increase this amount up to 30% of the Partnership's assets.
Such an increase in the portion invested in debt obligations could occur, for
example, because of property sales, a rapid influx of Contract owners' funds or
because of a perceived need to increase the Partnership's liquidity. The
remainder of the Partnership's assets may be invested in other types of real
estate-related investments, including primarily conventional, non-participating
mortgage loans and real estate investment trusts.
INVESTMENT IN DIRECT OWNERSHIP INTERESTS IN REAL ESTATE
ACQUISITION. The Partnership's principal investment policy involves acquiring
primarily direct ownership interests in existing (including newly constructed)
income-producing real estate, including office buildings, shopping centers,
apartments, industrial properties, and hotels. The Partnership may also invest
up to 5% of its assets in direct ownership interests in agricultural land.
Property acquisitions will generally be carried out by the real estate
acquisition offices in PREI's network of field offices located throughout the
continental United States. The field office or an affiliate of Prudential also
supervise the management of properties in all of Prudential's accounts. Proposed
investments identified by a field office are reviewed and approved by the
Investment Management Committee of PREI, and in the case of larger proposals, by
the Finance Committee of the Board of Directors of Prudential.
Although it has not been deemed appropriate to establish percentage limitations
on the type and location of properties that may be acquired by the Partnership,
the Partnership plans to diversify its investments both as to
5 - Real Property
the type of property acquired and its geographic location. Moreover, the
Partnership's investments will be maintained to meet the diversification
requirements of the Internal Revenue Code and the regulations thereunder. See
GENERAL INVESTMENT AND OPERATING POLICIES, page 8.
In order to attain the Partnership's stated objectives, it will be necessary for
the Partnership to acquire properties which will generate cash in excess of that
required to meet the gross operating expenses of the Partnership. To do this, a
substantial portion of the Partnership's assets will be invested in properties
with operating histories that include established rent and expense schedules.
However, the Partnership may also acquire recently constructed properties that
may be subject to agreements with sellers providing for certain minimum levels
of income. Upon the expiration of or default under these agreements, there can
be no assurance that the Partnership will be able to maintain the level of
operating income which is necessary to produce the return it was previously
experiencing. The Partnership may under certain conditions purchase real
property from Prudential or its affiliates. See CONFLICTS OF INTEREST, page 13.
The property acquired by the Partnership will generally be real estate which is
ready for use. Accordingly, the Partnership will not usually be subject to the
risks of development or construction inherent in the purchase of unimproved real
estate. From time to time, however, the Partnership may invest in a
developmental real estate project deemed consistent with the Partnership's
objectives, and the Partnership will then be subject to those risks.
While the Partnership will often own the entire fee interest in an acquired
property, it may also hold other direct ownership interests, including, but not
limited to, general partnership interests, limited liability company interests,
leaseholds, and tenancies in common.
Property Management and Leasing Services. It is anticipated that the
Partnership generally will retain a management company operating in the area of
a property to perform local property management services. Generally, a field
office or other affiliate of Prudential will supervise and monitor the
performance of the local management company, determine and establish the
required accounting information to be supplied, periodically inspect the
property, review and approve property operating budgets, and review actual
operations to ensure compliance with budgets. In addition to day-to-day
management of the property, the local management company will have
responsibility for supervision of any on-site personnel, negotiation of
maintenance and service contracts, advice regarding major repairs, replacements
and capital improvements, the review of market conditions to recommend desirable
changes in rent schedules, and the formulation of marketing and advertising
programs to obtain and maintain good occupancy rates by responsible tenants.
The fees of the local management company will reduce the cash flow from the
property to the Partnership.
It is anticipated that the Partnership will retain a leasing company to perform
leasing services on any property with actual or projected vacancies. The
leasing company will coordinate with the property management company to provide
marketing and leasing services with respect to the property. In some cases, the
property management company will be qualified to handle leasing and in those
cases a separate leasing company will not be hired. Leasing commissions and
expenses will reduce the cash flow from the property to the Partnership.
Prudential may, on behalf of the Partnership, hire an affiliate to perform
property management or leasing services, so long as the affiliate's services are
provided on terms competitive with those available from unaffiliated entities
performing comparable services in the same geographic area. See CONFLICTS OF
INTEREST, page 13.
Annually, the field office which oversees the management of each property owned
by the Partnership will, together with the local property management firm,
formulate a business plan and budget for each property. This plan and budget
will consider, among other things, the projected rollover of individual leases,
necessary capital expenditures and any expansion or modification of the use of
the property and will require the approval of an officer of PREI. The field
office will also report periodically to officers of PREI regarding the operating
performance of the property.
INVESTMENTS IN MORTGAGE LOANS
TYPES OF MORTGAGE LOANS. One of the Partnership's investment policies is the
making of mortgage loans. These will include conventional mortgage loans that
may pay fixed or variable rates of interest and, to the extent available,
mortgage loans that have a "participation" (as defined below). The Partnership
will not make mortgage loans to affiliates of Prudential.
The properties to be subject to the Partnership's mortgage loans are intended to
consist of commercial properties (such as office buildings, shopping centers,
hotels, industrial properties, and office showrooms), agricultural properties,
and residential properties (such as garden apartment complexes and high-rise
apartment buildings). The Partnership's mortgage loans will generally be
secured by properties with a demonstrable income-producing potential based on
historical or projected data. Such mortgage loans will generally not be
personal obligations of the borrower and will generally not be insured or
guaranteed by government agencies or otherwise.
6 - Real Property
1. FIRST MORTGAGE LOANS. It is expected that the Partnership will primarily
make first mortgage loans secured by mortgages on existing income-producing
property. Such first mortgage loans may provide for interest-only payments and
a balloon payment at maturity.
The yield on a traditional first mortgage loan has historically been less than
that of a wraparound mortgage loan on the same property. However, because of
recent innovations involving the terms and conditions of first mortgage loans,
such as the use of variable interest rates, equity participations and similar
devices, the yield on a first mortgage loan may, in certain instances, be
greater than that of a wraparound mortgage on the same property.
2. WRAPAROUND MORTGAGE LOANS. The Partnership also may make wraparound mortgage
loans on income-producing real properties which are already subject to prior
mortgage indebtedness to unaffiliated entities. A wraparound mortgage loan is a
mortgage having a principal amount equal to the outstanding balance under the
prior existing mortgage loan plus the amount actually to be advanced by the
lender under the wraparound mortgage loan, thereby providing the owner of a
property with additional funds without disturbing the existing loan. The terms
of any wraparound mortgage loans made by the Partnership will require the
borrower to make all principal and interest payments on the underlying loan to
the Partnership, which will in turn pay the holder of the prior loan. Because
the existing first mortgage loan is preserved, the lien of the wraparound
mortgage loan is necessarily junior to it. The Partnership will make wraparound
mortgage loans only in states where local applicable foreclosure laws permit a
lender, in the event of the borrower's default, to obtain possession of the
property which secures the loan, and it will be the policy of the Partnership to
file notices of default and attempt to obtain a court-appointed receiver where
appropriate as quickly as possible after any default.
3. JUNIOR MORTGAGE LOANS. The Partnership may also invest in other junior
mortgage loans. Junior mortgage loans will be secured by mortgages which are
subordinate to one or more prior liens on the real property and generally, but
not in all cases, will provide for repayment in full prior to the end of the
amortization period of the senior mortgages. Recourse on such loans will
include the real property encumbered by the Partnership's mortgage and
additionally may include other collateral or personal guarantees by the
borrower.
The Partnership will generally make junior or wraparound mortgage loans only if
the senior mortgage, when combined with the amount of the Partnership's mortgage
loan, would not exceed the maximum amount which the Partnership would be willing
to commit to a first mortgage loan and only under such circumstances and on such
property as to which the Partnership would otherwise make a first mortgage loan.
4. PARTICIPATIONS. The Partnership may seek to make mortgage loans which, in
addition to charging a base rate of interest, will include provisions permitting
the Partnership to participate (a "participation") in the economic benefits of
the underlying property through the receipt of additional interest in the form
of a percentage of the gross or net revenues derived from operation of the
property and/or of the increase in the value of the property realized by the
borrower, such as through sale or refinancing of the property. Such
arrangements may also involve the grant to the Partnership of an option to
acquire the property or an undivided interest in the property securing the loan.
To the extent that the Partnership negotiates the right to receive additional
interest in the form of a percentage of the gross revenues or otherwise, the
fixed cash return to the Partnership from such an investment will generally be
less than would otherwise be the case. It is expected that the Partnership
generally will be entitled to such percentage participations when the gross or
net revenues derived from operation of the property exceed a certain base
amount, which may be subject to adjustment upon an increase in real estate taxes
or similar charges. The form and extent of such additional interest to be
received by the Partnership will vary with each transaction depending on such
factors as the equity investment of the owner or developer of the property,
other financing or credit obtained by the owner or developer, the fixed base
interest rate on the mortgage loan by the Partnership, any other security
arrangement, the cash flow and pro forma cash flow from the property, and market
conditions.
The Partnership intends to utilize such additional interest as a hedge against
inflation on the assumption that as prices increase in the economy generally,
the rental prices obtained by properties, such as shopping centers or office
buildings, will increase and that there should be a corresponding increase in
the value of such properties. There can be no assurance that such additional
interest or increased values will in fact be received. In that event, the
Partnership would be entitled to receive only the fixed portion of its return.
STANDARDS FOR MORTGAGE LOAN INVESTMENTS. In making mortgage loans, the
investment manager will consider relevant real property and financial factors,
including the location, condition, and use of the underlying property, its
operating history, its future income-producing capacity and the quality,
experience, and creditworthiness of the unaffiliated borrower.
Prior to the Partnership's making any mortgage loan, the investment manager will
analyze the fair market value of the underlying real estate. In general, the
amount of each mortgage loan made by the Partnership will not exceed, when added
to the amount of any existing indebtedness, 80% of the estimated or appraised
value of the property mortgaged.
7 - Real Property
DEALING WITH OUTSTANDING LOANS. The Partnership may sell its mortgage loans
prior to maturity if such action is deemed advisable by the investment manager
and consistent with the Partnership's investment objectives. The investment
manager may also extend the maturity of any mortgage loan made by the
Partnership, consent to a sale of the property subject to a mortgage loan or
finance the purchase of a property by making a new mortgage loan in connection
with the sale of a property (either with or without requiring the repayment of
the mortgage loan), renegotiate the terms of a mortgage loan, and otherwise deal
with the mortgage loans of the Partnership.
INVESTMENTS IN SALE-LEASEBACKS
A portion of the Partnership's investments may consist of real property sale-
leaseback transactions ("leasebacks"). In a transaction of this type, the
Partnership will typically purchase land and income-producing improvements on
the land and simultaneously lease the land and improvements, generally to the
seller, under a long-term lease. Leasebacks may be for very long terms and may
provide for payments from the lessee in escalating amounts.
Generally, under the terms of the leaseback, the tenant will operate, or provide
for the operation of, the property and be responsible for the payment of all
costs, including taxes, mortgage debt service, maintenance and repair of the
improvements, and insurance. The Partnership may also, in some cases, grant to
the lessee an option to acquire the land and improvements from the Partnership
after a period of years. The option exercise price would generally be based
upon such factors as the fair market value of the property, as encumbered by the
lease, the increase in the gross revenues from the property or other objective
criteria reflecting the increased value of the property.
In some leaseback transactions, the Partnership may only purchase the land under
an income-producing building and lease the land to the owner of the building.
In such cases, the Partnership may seek, in addition to base rents in its
leasebacks, participations in the gross revenues from the building in a form
such as a percentage of the gross revenues of the lessee above a base amount
(which may be subject to adjustment upon an increase in real property taxes or
upon other events). The Partnership may invest in leasebacks which are
subordinated to other interests in the land, buildings, and improvements, such
as a first mortgage, other mortgage or lien. In those situations, the
Partnership's leaseback interest will be subject to greater risks.
The Partnership will only acquire a property for a leaseback transaction if the
purchase price is equal to not more than 100% of the estimated or appraised
value of the property. The Partnership may dispose of its leasebacks when
deemed advisable by the investment manager and consistent with the Partnership's
investment objectives.
GENERAL INVESTMENT AND OPERATING POLICIES
The Partnership does not intend to invest in any direct ownership interests in
properties, mortgage loans or leasebacks with a view to making short-term
profits from their sale. However, the Partnership may dispose of its
investments to the extent such disposition is necessary to meet its cash
requirements or where it is deemed to be desirable by the investment manager
because of market conditions or otherwise. Any proceeds from the disposition of
assets (and any cash flow from operations) which are not necessary for the
Partnership's operations and which are not withdrawn by the Partners in order to
make distributions pursuant to the variable contracts issued by the Partners
will be reinvested by the Partnership in investments consistent with the
Partnership's investment objectives and policies.
In making investments in properties, mortgage loans, leasebacks or other real
estate investments, the Partnership will rely on the investment manager's own
analysis of the investment and will not receive an independent appraisal prior
to acquisition. The Partnership expects, however, that all properties owned by
the Partnership, and most mortgage loans held by the Partnership, will be
appraised or valued on an annual basis by an independent appraiser who is a
member of a nationally recognized society of appraisers. Each such appraisal
shall be maintained in the records of the Partnership for at least 5 years. It
should be noted that appraised values are opinions and, as such, may not
represent the true worth or realizable value of the property being appraised.
The Partnership will ordinarily purchase properties on an unleveraged basis and
the properties acquired will typically be free and clear of mortgage
indebtedness immediately after their acquisition. The Partnership may, however,
acquire properties subject to existing mortgage loans. In addition, while the
Partnership will generally not mortgage its properties or acquire properties
partly with the proceeds of purchase money mortgage loans, it may do so up to
75% of the value of the property where the investment manager deems such action
consistent with the Partnership's investment objectives. Where the Partnership
does mortgage its properties, it will, of course, bear the expense of mortgage
payments. See BORROWING BY THE PARTNERSHIP, page 16.
In addition to the types of real estate investments previously discussed, the
Partnership may also invest a portion of its assets in real estate limited
partnerships and shares of real estate investment trusts.
The Partnership's investments will be maintained so as to meet the
diversification requirements set forth in Treasury Regulations issued pursuant
to Section 817(h) of the Internal Revenue Code (the "Code") relating to the
investments of variable life insurance and variable annuity separate accounts.
In order to meet the diversification
8 - Real Property
requirements under the regulations, the Partnership will meet the following
test: no more than 55% of the assets will be invested in any one investment, no
more than 70% of the assets will be invested in any two investments, no more
than 80% of the assets will be invested in any three investments, and no more
than 90% of the assets will be invested in any four investments. All interests
in the same real property project are treated as a single investment. The
Partnership must meet the above test within 30 days of the end of each calendar
quarter. To comply with the diversification requirements of the State of
Arizona, the Partnership will limit additional investments in any one parcel or
related parcels to an amount not exceeding 10% of Partnership assets.
In managing the assets of the Partnership, Prudential will use its discretion in
determining whether to foreclose on defaulting borrowers or to evict defaulting
tenants. Such determination will depend on the course of action Prudential
concludes will be in the best interests of the Partnership in maintaining the
value of the investment.
Property management services generally will be required in connection with the
Partnership's investments in properties which are owned and operated by the
Partnership but usually will not be needed with respect to mortgage loans owned
by the Partnership, except for mortgage servicing. It is possible, however,
that such services will be necessary or desirable in exercising default remedies
under a foreclosure on a mortgage loan. Prudential may engage on behalf of the
Partnership affiliated or unaffiliated entities to provide such additional
services to the Partnership. Prudential may engage its affiliates to provide
property management, property development services, loan servicing or other
services if and only if the fees paid to an affiliate do not exceed the amount
that would be paid to an independent party for similar services rendered in the
same geographic area. See CONFLICTS OF INTEREST, page 13.
Finally, Prudential will manage the Partnership so that the Real Property
Account will not be subject to registration under the Investment Company Act of
1940 (the "1940 Act"). This will require monitoring the proportion of the
Partnership's assets to be placed in various investments so that the Real
Property Account does not become subject to the 1940 Act.
CURRENT REAL ESTATE-RELATED INVESTMENTS
The current principal real estate-related investments held by the Partnership
are described below. Many of these investments were originated by, and
previously held in, The Prudential Real Property Account of Pruco Life Insurance
Company (the former name of the Real Property Account). Prior to the formation
of the Partnership, the Real Property Account followed the same investment
policies as those followed by the Partnership. Pruco Life contributed the
assets held in the Real Property Account to the Partnership as its initial
capital contribution to the Partnership.
Properties
1. OFFICE FACILITY IN LISLE, ILLINOIS
The property is a four-story office building on 5.6 acres of land. It was
constructed in 1985 and contains approximately 102,000 square feet of leasable
space. The facility is located at 750 Warrenville Road in the Corporetum Office
Park in Lisle, Illinois, 25 miles west of downtown Chicago. At December 31,
1997 the property was 37% leased.
2. APARTMENT COMPLEX IN ATLANTA, GEORGIA
Brookwood Valley Apartments is a garden apartment complex located approximately
3 miles north of downtown Atlanta. It consists of eight three-story buildings
containing a total of 240 units. Construction of the 7.1 acre site was
completed in 1987. At December 31, 1997 the property was 99% leased.
3. WAREHOUSE FACILITY IN POMONA, CALIFORNIA
The Partnership owns six industrial buildings on approximately 28 acres in
Pomona, California. The site is approximately 30 miles east of downtown Los
Angeles. The buildings were constructed between 1982 and 1984 and contain
approximately 531,000 square feet of leasable space. The property was 100%
leased at December 31, 1997. The land, previously a ground lease, was
purchased in 1997.
4. SHOPPING CENTER IN ROSWELL, GEORGIA
King's Market shopping center was constructed in 1988. It is located
approximately 22 miles north of downtown Atlanta on a 30 acre site. It contains
approximately 300,000 square feet of rentable space. At December 31, 1997 it
was 96% leased.
5. OFFICE FACILITY IN MORRISTOWN, NEW JERSEY
This four-story suburban office building was constructed in 1981 and contains
83,000 rentable square feet. It is located on a 5.1 acre site, approximately 30
miles west of New York City. At December 31, 1997 it was 99% leased.
9 - Real Property
6. WAREHOUSE FACILITY IN BOLINGBROOK, ILLINOIS
This single-story warehouse was completed in 1989. It contains 224,640 rentable
square feet. It is located approximately 20 miles southwest of downtown
Chicago. The entire facility is leased to the Gillette Company under a lease
expiring in October, 2000.
7. APARTMENT COMPLEX IN FARMINGTON HILLS, MICHIGAN
Indian Creek Apartments consists of fifteen two-story buildings containing 156
two-bedroom and 40 one-bedroom units. It was constructed in 1988 and is located
approximately 20 miles northwest of Detroit. At December 31, 1997, the property
was 93% leased.
8. APARTMENT COMPLEX IN RALEIGH, NORTH CAROLINA
Dunhill Trace consists of fourteen two and three story apartment buildings. It
was constructed and acquired in June, 1995 and located on a 16.2 acre site in
Northwest Raleigh, North Carolina. At December 31, 1997 it was 91%
leased.
9. OFFICE FACILITY IN NASHVILLE, TENNESSEE
Westpark is a 97,000 square foot office center located in suburban Nashville,
Tennessee. The property was constructed in 1982. At December 31, 1997 the
building was 100% leased.
10. OFFICE FACILITY IN OAKBROOK TERRACE, ILLINOIS
Oakbrook Terrace Corporate Center is a 123,000 square foot building located in a
western suburb of Oakbrook Terrace, Illinois. At December 31, 1997 the
property is 100% leased.
11. OFFICE FACILITY IN BEAVERTON, OREGON
This three story office building was completed in 1995. It contains
approximately 72,000 square feet of rentable space. The building is located on
a 3.89 acre land parcel in Beaverton, Oregon. At December 31, 1997 the building
was 100% leased.
12. WAREHOUSE CENTER IN SALT LAKE CITY, UTAH
This one story warehouse-distribution facility was completed in 1997. It
contains approximately 182,500 square feet of rentable space. The building is
located on a 9.605 acre land parcel in Salt Lake City, Utah. At December 31,
1997 the building was vacant.
13. DISTRIBUTION CENTER IN AURORA, COLORADO
This industrial complex consists of two separate buildings completed in 1997.
It contains approximately 278,000 square feet of rentable space. The building
is located on an approximate 16 acre land parcel in Aurora, Colorado. At
December 31, 1997 the building was vacant.
14. OFFICE FACILITY IN BRENTWOOD, TENNESSEE
This two story office facility was completed in 1987. It contains approximately
97,000 square feet of rentable space. The building is located on a 6.96 acre
land parcel in Brentwood, Tennessee. At December 31, 1997 the building was 100%
leased.
RISK FACTORS
There are certain risk factors that a Contract owner should consider before
allocating a portion of his or her net premiums or purchase payments, or
transferring a portion of his or her Contract fund, to the Real Property
Account, so as to participate in the real estate-related investments held by the
Partnership. These include valuation risks, see VALUATION OF CONTRACT OWNERS'
PARTICIPATING INTERESTS, page 14, certain conflicts of interest, see CONFLICTS
OF INTEREST, page 13, as well as the following risks:
LIQUIDITY OF INVESTMENTS
Because the Real Property Account will, through the Partnership, invest
primarily in real estate, its assets will not be as liquid as the investments
generally made by separate accounts of life insurance companies funding variable
life insurance and variable annuity contracts. The Partnership will, however,
hold 10-15% of its assets in the form of marketable short-term or intermediate-
term debt securities. The primary purposes for such investments are to meet the
expenses involved in the operation of the Partnership and to allow it to have
sufficient liquid assets to meet any requests for withdrawals from the Real
Property Account to meet requested or required payments under the Contracts.
The Partnership may also borrow funds to meet liquidity needs. See BORROWING BY
THE PARTNERSHIP, page 16.
Pruco Life and Prudential have taken steps to ensure that the Partnership will
be sufficiently liquid to meet all anticipated withdrawals by the Partners to
meet the separate accounts' liquidity requirements, but it is nonetheless
possible that the Partnership may need to dispose of a real property or mortgage
loan investment promptly in order to meet such withdrawal requests.
10 - Real Property
GENERAL RISKS OF REAL PROPERTY INVESTMENTS
By participating in the Real Property Account and thereby in the investment
performance of the Partnership, a Contract owner will be subject to many of the
risks of real property investments. These include:
1. RISKS OF OWNERSHIP OF REAL PROPERTIES. The Partnership will be subject to
the risks inherent in the ownership of real property such as fluctuations in
occupancy rates and operating expenses and variations in rental schedules, which
in turn may be adversely affected by general and local economic conditions, the
supply of and demand for properties of the type in which the Partnership
invests, zoning laws, and real property tax rates. Operation of property in
which the Partnership invests will primarily involve rental of that property to
tenants. The financial failure of a tenant resulting in the termination of such
tenant's lease might cause a reduction in the cash flow to the Partnership. In
the event of termination of any lease, there can be no assurance that the
Partnership would be able to find a new tenant for the property on terms as
favorable to the Partnership as obtained from the prior tenant. Investments in
hotels are subject to additional risk inherent in the daily turnover and
fluctuating occupancy rates of hotel rooms and the absence of long-term tenants.
The Partnership's properties will also be subject to the risk of loss due to
certain types of property damage (such as that resulting from nuclear power
plant accidents and wars) which are either uninsurable or not economically
insurable.
2. RISKS OF MORTGAGE LOAN INVESTMENTS. The Partnership's mortgage loan
investments will be subject to the risk of default by the borrowers, in which
event the Partnership would have the added responsibility of foreclosing on or
pursuing other remedies on the underlying properties to protect the value of its
mortgage loans. A borrower's ability to meet its mortgage loan payments will be
dependent upon the risks generally incident to the ownership of real property.
Mortgage loans made by the Partnership will generally not be personal
obligations of the borrowers, and the Partnership will accordingly be relying
solely on the value of the underlying property for its security. Mechanics',
materialmen's, government, and other liens may have priority over the
Partnership's security interest in the property.
In addition, the Partnership's mortgage loan investments will generally be
subject to prepayment risks. If the terms of the mortgage loans so permit,
mortgagors may prepay the loans, thus possibly changing the Partnership's
return.
Junior mortgage loans (including wraparound mortgage loans) will be subject to
greater risk than first mortgage loans, since they will be subordinate to liens
of senior mortgagees. In the event a default occurs on a senior mortgage, the
Partnership may be required to make payments or take other actions to cure the
default (if it has the right to do so) in order to prevent foreclosure on the
senior mortgage and possible loss of all or portions of the Partnership's
investment. "Due on sale" clauses included in some senior mortgages,
accelerating the amount due under the senior mortgage in the case of sale of the
property, may be deemed to apply to the sale of the property upon foreclosure by
the Partnership of its junior mortgage loan.
The risk of lending on real estate increases as the proportion which the amount
of the mortgage loan bears to the fair market value of the real estate
increases. The Partnership will generally not make mortgage loans in excess of
80% of the estimated or appraised value of the property that secures the loan.
There can be no assurance, however, that in the event of a default, the
Partnership will realize an amount equal to the estimated or appraised value of
the property on which a mortgage loan was made.
Mortgage loans made by the Partnership may be subject to state usury laws
imposing limits on interest charges and possible penalties for violation of
those limits, including restitution of excess interest, unenforceability of
debt, and treble damages. The Partnership does not intend to make mortgage
loans at usurious rates of interest, but uncertainties in determining the
legality of rates of interest and other borrowing charges under some statutes
could result in inadvertent violations, in which case the Partnership could
incur the penalties mentioned above.
3. RISKS WITH PARTICIPATIONS. The Partnership may seek to invest in mortgage
loans and leasebacks with participations, which will provide the Partnership
with both fixed interest and additional interest based upon gross revenues, sale
proceeds, and/or other variable amounts. To the extent that the interest income
received by the Partnership is based, in part, on a percentage of the gross
revenues or sale proceeds of the underlying property, the Partnership's income
will be dependent upon the success in the leasing of the underlying property,
the management, and operation of such property by the borrower or lessee and
upon the market value of the property upon ultimate disposition. If the
Partnership negotiates a mortgage loan with a lower fixed interest rate and an
additional percentage of the gross revenues or eventual sale proceeds of the
underlying property, and the underlying property fails to generate increased
revenues or to appreciate, the Partnership will have foregone a potentially
greater fixed return without receiving the benefit of appreciation. In
addition, there may be limitations on participations as a result of applicable
state law. It is also possible that as a result of the Partnership's interest
in the gross revenues or sale proceeds, a court in the event of the borrower's
bankruptcy could possibly treat the Partnership as a partner or joint venturer
with the borrower, and the Partnership could, accordingly, lose the priority
11 - Real Property
its security interest would otherwise have been given, or be liable for the
debts of the borrower. The Partnership will seek to structure its participations
to avoid being characterized as a partner or joint venturer with the borrower.
4. RISKS WITH SALE-LEASEBACK TRANSACTIONS. In leaseback transactions, which
typically involve the acquisition of land and improvements thereon and the
leaseback of such land and improvements to the seller or another party, the
value of the land and improvements will depend, in large part, on the
performance and financial stability of the lessee and its tenants, if any. The
lessee's leases with its tenants may have shorter terms than the leaseback and,
accordingly, the lessee's future ability to meet payment obligations to the
Partnership will depend on its ability to obtain renewals of such leases or new
leases upon satisfactory terms and the ability of the tenants to meet their
rental payments to the lessee.
PREI investigates the stability and creditworthiness of lessees in all
commercial properties it may acquire, including leaseback transactions.
However, a lessee in a leaseback transaction may have few, if any, assets. The
Partnership will therefore be required to rely on the value of the land and the
improvements for its security. When the Partnership's leaseback interest is
subordinate to other interests in the land or improvements, such as a first
mortgage or other lien, the Partnership's leaseback will be subject to greater
risk. A default by a lessee or other premature termination of the leaseback may
result in the Partnership being unable to recover its investment unless the
property is sold or leased on favorable terms. The ability of the lessee to
meet its obligations under the leaseback, and the value of a property, may be
affected by a number of factors inherent in the ownership of real property which
are described above. Furthermore, the long-term nature of a leaseback may, in
the future, result in the Partnership receiving annual rentals below what it
might then be receiving under prevailing market conditions. However, such risk
may be materially reduced to the extent the Partnership is able to obtain
participations in connection with its leasebacks.
RELIANCE ON THE PARTNERS AND THE INVESTMENT MANAGER
A Contract owner does not have a vote in determining the policies of the
Partnership or the Real Property Account and will have no right or power to take
part in the management of the Partnership or the Real Property Account. The
investment manager alone, subject to the supervision of the Partners, will make
all decisions with respect to the management of the Partnership, including the
determination as to what properties to acquire, subject to the investment
policies and restrictions. Although the Partners will have the right to replace
Prudential as the investment manager, it should be noted that Pruco Life is a
direct wholly-owned subsidiary of Prudential, and Pruco Life of New Jersey is an
indirect wholly-owned subsidiary of Prudential.
The Partnership will compete in the acquisition of its investments with many
other individuals and entities engaged in real estate activities, including the
investment manager and its affiliates. See CONFLICTS OF INTEREST, page 13. There
may be intense competition in obtaining properties or mortgages of the type in
which the Partnership intends to invest and competition may result in increases
in the costs of suitable investments.
Since the Partnership will continuously look for new investments, Contract
owners will be unable to evaluate for themselves the economic merit of many of
the investments which may be acquired by the Partnership and must depend solely
upon the ability of the investment manager to select investments.
INVESTMENT RESTRICTIONS
The Partnership has adopted certain restrictions relating to its investment
activities. These restrictions may be changed, if the law permits, by the
Partners. Pursuant to these restrictions, the Partnership will not:
1. Make any investments not related to real estate, other than short-term or
intermediate-term debt instruments.
2. Engage in underwriting of securities issued by others.
3. Invest in securities issued by any investment company.
4. Sell securities short.
5. Purchase or sell oil, gas or other mineral exploration or development
programs.
6. Make loans to the Partners or any of their affiliates or any investment
program sponsored by such parties.
7. Enter into leaseback transactions in which the lessee is Prudential, Pruco
Life, Pruco Life of New Jersey or their affiliates or any investment
program sponsored by such parties.
8. Borrow more than 50% of the value of the assets of the Partnership (based
upon periodic valuations and appraisals). See VALUATION OF CONTRACT OWNERS'
PARTICIPATING INTERESTS, page 14.
12 - Real Property
CONFLICTS OF INTEREST
Prudential, as the investment manager, will be subject to various conflicts of
interest in managing the Partnership. Prudential invests in real estate equities
and mortgages for its own general account and for a number of separate accounts
for qualified pension and profit-sharing plans. Prudential also manages, or
advises in the management of, real estate equities and mortgages owned by other
persons. In addition, affiliates of Prudential are general partners in publicly
offered limited partnerships that invest in real estate equities and mortgage
loans. Prudential and its affiliates may engage in additional business
activities which will be competitive with the Partnership. Moreover, the
Partnership may purchase properties from Prudential or its affiliates.
The conflicts involved in managing the Partnership include:
1. LACK OF INDEPENDENT NEGOTIATIONS BETWEEN THE PARTNERSHIP AND PRUDENTIAL. All
agreements and arrangements relating to compensation between the Partnership and
Prudential or any affiliate of Prudential will not be the result of arm's-length
negotiations.
2. COMPETITION BY THE PARTNERSHIP WITH PRUDENTIAL'S AFFILIATES FOR ACQUISITION
AND DISPOSITION OF INVESTMENTS. Prudential and its affiliates are involved in
numerous real estate investment activities for Prudential's own general account,
its separate accounts, and other entities, many of which may involve investment
policies comparable to those of the Partnership and thus may compete with the
Partnership for the acquisition and disposition of investments. Moreover,
additional accounts or affiliated entities may be formed in the future with
investment objectives similar, in whole or part, to those of the Partnership.
In short, existing or future real estate investment accounts or entities managed
or advised by Prudential or its affiliates may have the same management as the
Partnership and may be in competition with the Partnership regarding real
property investments, mortgage loan investments, leasebacks, and the management
and sale of such investments. Prudential and its affiliates are not obligated
to present to the Partnership any particular investment opportunity, regardless
of whether such opportunity is of a character that might be suitable for
investment by the Partnership.
Prudential and its affiliates have, however, adopted certain procedures for the
purpose of distinguishing between equity investments available for the
Partnership as opposed to the other programs and entities described above. To
the extent that investment accounts or entities managed by Prudential or its
affiliates have investment objectives and policies similar to the Partnership
and are in the market to acquire properties or make investments at the same time
as the Partnership, the following procedures will be followed to resolve any
conflict of interest. Prudential will seek to locate through its contacts and
business relationships an adequate supply of equity investments for all of the
accounts and other entities which are managed by Prudential and its affiliates
and to allocate such investments equitably among such accounts and entities
based upon their respective investment goals and requirements. In those
situations where the aggregate demand by all such accounts and entities exceeds
the amount of equity investments then available, allocations will be made based
upon such factors as currently available cash flow of particular portfolios,
existing financing on the property, estimated future cash flow of such
portfolios, the effect of the acquisition on diversification of each portfolio,
and other relevant legal or investment policy factors. The use of such a system
is monitored to ensure that equitable treatment of all investment accounts and
entities is achieved.
3. COMPETITION WITH THE PARTNERSHIP FROM AFFILIATES FOR THE TIME AND SERVICES OF
COMMON OFFICERS, DIRECTORS, AND MANAGEMENT PERSONNEL. As noted above,
Prudential and its affiliates are involved in numerous real estate investment
activities. Accordingly, many of the personnel of Prudential and its affiliates
who will be involved in performing services for the Partnership have competing
demands on their time. Thus, conflicts of interest may arise with respect to
allocating time among such entities and the Partnership. The directors,
officers, and other personnel of Prudential and affiliates will devote such time
to the affairs of the Partnership as the officers and directors determine in
their sole discretion, exercised in good faith. Prudential believes it has
sufficient personnel to discharge its responsibilities to all entities to which
it is responsible.
4. COMPETITIVE PROPERTIES. Some properties of affiliated entities may be
competitive with properties in which the Partnership has an interest. Among
other things, such properties could be in competition with the Partnership's
properties for prospective tenants.
5. LESSEE POSITION. It is possible that Prudential or its affiliates may have a
lessee's position in one or more of the properties owned by the Partnership. In
the case of any such lease, however, the terms of such lease will be competitive
with leases of space in such properties entered into with non-affiliated third
parties, and the Partnership currently follows a practice of limiting the amount
of space that an affiliate of Prudential may rent in a property owned by the
Partnership.
6. USE OF AFFILIATES TO PERFORM ADDITIONAL SERVICES FOR THE PARTNERSHIP. The
Partnership may engage entities affiliated with Prudential to provide additional
services to the Partnership, such as real estate brokerage, mortgage servicing,
property management, leasing, property development, and other real estate-
related services. The
13 - Real Property
Partnership may utilize the services of such affiliates and pay their fees, so
long as the fees paid to an affiliate do not exceed the amount that would be
paid to an independent party for similar services rendered in the same
geographic area.
7. JOINT VENTURES WITH AFFILIATES. The Partnership may enter into investments
through joint ventures with Prudential or its affiliates or investment programs
they sponsor. The Partnership may enter into such a joint venture investment
with an affiliate only if the following conditions are met: (i) such affiliate
must have investment objectives substantially identical to those of the
Partnership; (ii) there must be no duplicative property management fee, mortgage
servicing fee or other fees; (iii) the compensation payable to the sponsor of
such affiliate must be no greater than that payable to the Partnership's
investment manager; (iv) the Partnership must have a right of first refusal to
buy if such affiliate wishes to sell the property held in the joint venture; and
(v) the investment of the Partnership and the affiliate in the joint venture
must be made on substantially the same terms and conditions (although not the
same percentage). In connection with such an investment, both affiliated
parties would be required to approve any decision concerning the investment.
Thus, an impasse may result in the event the affiliated joint venture partners
disagree. However, in the event of a disagreement regarding a proposed sale or
other disposition of the investment, the party not desiring to sell would have a
right of first refusal to purchase the affiliated joint venture partner's
interest in the investment. In the event of such an investment, there exists
the possibility under limited circumstances that at some future time the joint
venture partners would no longer be affiliated. In such a case, in the event of
a proposed sale initiated by the joint venture partner, the Partnership would
also have a right of first refusal to purchase the joint venture partner's
interest in the investment. The exercise of a right of first refusal would be
subject to the Partnership's having the financial resources to effectuate such a
purchase, and there can be no assurance that it would have such resources.
The investment by the Partnership in joint venture partnerships which own
properties, instead of investing directly in the properties themselves, may
under certain circumstances involve risks not otherwise present, including, for
example, risks associated with the possible bankruptcy of the Partnership's co-
venturer or such co-venturer at any time having economic or business interests
or goals which are inconsistent with the business interests or goals of the
Partnership.
8. PURCHASE OF REAL PROPERTY FROM PRUDENTIAL OR AFFILIATES. The Partnership may
acquire properties owned by Prudential or its affiliates, subject to compliance
with special conditions designed to minimize the conflicts of interests. The
Partnership may purchase property satisfying the Partnership's investment
objectives and policies from an affiliate only if: (i) the applicable insurance
regulators approve the principle of permitting the Partnership to acquire real
property from Prudential or affiliates; (ii) the Partnership acquires the
property at a price not greater than the appraised value, with the appraisal
being conducted by a qualified, unaffiliated appraiser; (iii) the affiliate has
owned the property at least 2 years, the cost paid by the affiliate is
established, and any increase in the proposed purchase price over the cost to
the affiliate is, in the opinion of the independent real estate advisor
mentioned in the next provision, explicable by reference to material factors
(including the passage of time) that have in fact increased the value of the
property; and (iv) a qualified and independent real estate advisor (other than
the appraiser) reviews the proposed acquisition and provides a letter of opinion
that the transaction is fair to the Partnership.
THE REAL PROPERTY ACCOUNT'S UNAVAILABILITY TO CERTAIN CONTRACTS
Pruco Life has determined that it is in the best interest of Contract owners
participating in the Real Property Account to provide the Real Property Account
with the flexibility to engage in transactions that may be prohibited if the
Real Property Account accepts funds under Contracts subject to ERISA or the
prohibited transaction excise tax provisions of the Internal Revenue Code.
Accordingly, owners of Pruco Life Contracts that are purchased in connection
with IRAs, tax deferred annuities subject to Section 403(b) of the Code, or
other employee benefit plans which are subject to ERISA or to the prohibited
transaction excise tax provisions of the Code, may not select the Real Property
Account as one of the investment options under their Contract. By not offering
the Real Property Account as an investment option under such contracts, Pruco
Life is able to comply with state insurance law requirements that policy loans
be made available to Contract owners.
VALUATION OF CONTRACT OWNERS' PARTICIPATING INTERESTS
A Contract owner's interest in the Real Property Account will initially be the
amount allocated to the Real Property Account in accordance with the Contract
owner's instructions. Thereafter, that value will change daily. The value
14 - Real Property
of a Contract owner's interest in the Real Property Account at the close of any
day is equal to its amount at the close of the preceding day, multiplied by the
"net investment factor" for that day arising from the Real Property Account's
participation in the Partnership, plus any additional amounts allocated to the
Real Property Account by the Contract owner, and reduced by any withdrawals by
the Contract owner from the Real Property Account and by the applicable Contract
charges recorded in that Contract's subaccount. Some of the charges will be made
daily, some on the Contract's monthly anniversary date, some at the end of each
Contract year, and some upon withdrawal or annuitization. Periodically Pruco
Life will withdraw from the Real Property Account an amount equal to the
aggregate charges recorded in the subaccounts.
The "net investment factor" is calculated on each business day by dividing the
value of the net assets of the Partnership at the end of that day (ignoring, for
this purpose, changes resulting from new contributions to or withdrawals from
the Partnership) by the value of the net assets of the Partnership at the end of
the preceding business day. The value of the net assets of the Partnership at
the end of any business day is equal to the sum of the value of the
Partnership's short-term and intermediate-term debt instruments, the value of
the individual real properties and other real estate-related investments owned
by the Partnership, determined in the manner described below, and an estimate of
the accrued net operating income earned by the Partnership from properties and
other real estate-related investments, reduced by the liabilities of the
Partnership, including the daily investment management fee and certain other
expenses attributable to the operation of the Partnership. See CHARGES, page
16.
The Partnership's short-term debt investments (obligations of 1 year's maturity
or less) will be of the type that may be held by the Series Fund's Money Market
Portfolio and will be valued on an amortized cost basis. This means that each
obligation will be valued initially at its purchase price and thereafter by
amortizing any discount or premium uniformly to maturity. This method of
valuation almost always results in a value that is extremely close to market
value. In the event of a sizable change in interest rates, the value determined
by this method may be more or less than market value. If this should occur, the
Partners will consider whether an appropriate adjustment should be made in the
valuation of these obligations. The Partnership's intermediate-term bonds will
be of the type that may be held by the Series Fund's Diversified Bond Portfolio
and will be valued utilizing an independent pricing service to determine
valuations for normal institutional size trading units of such securities. The
pricing service considers such factors as security prices, yields, maturities,
call features, ratings, and developments relating to specific securities in
arriving at securities valuations.
The value of the individual real properties and other real estate-related
investments, including mortgages, acquired by the Partnership will be determined
as follows. Each property or other real estate-related investment acquired by
the Partnership will initially be valued at its purchase price. In acquiring a
property or other real estate-related investment, Prudential will not obtain an
independent appraisal but will instead rely on its own analysis of the
investment's fair market value. Thereafter, all properties and most real
estate-related investments will ordinarily be appraised by an independent
appraiser no less frequently than annually. At least every 3 months, Prudential
will review each property or other real estate-related investments and make an
adjustment to its valuation if there is reason to conclude that there has been a
change in the value of the property or other real estate-related investment
since the last valuation. The revised value will remain in effect and will be
used in each day's calculation of the value of the Partnership's assets until
the next review or appraisal. It should be noted that appraisals are only
estimates and do not necessarily reflect the realizable value of an
investment.
The estimated amount of the net operating income of the Partnership from
properties and other real estate-related investments will be based on estimates
of revenues and expenses for each property and other real estate-related
investments. Annually Prudential will prepare a month-by-month estimate of the
revenues and expenses ("estimated net operating income") for each property and
other real estate-related investments owned by the Partnership. Each day
Prudential will add to the value of the assets as determined above a
proportionate part of the estimated net operating income for the month. In
effect, Prudential will establish a daily accrued receivable of the estimated
net operating income from each property and other real estate-related
investments owned by the Partnership (the "daily accrued receivable"). On a
monthly basis, the Partnership will receive a report of actual operating results
for each property and other real estate-related investments ("actual net
operating income"). Such actual net operating income will be recognized on the
books of the Partnership and the amount of the then-outstanding daily accrued
receivable will be correspondingly adjusted. In addition, as cash from a
property or other real estate-related investment is actually received by the
Partnership, receivables and other accounts will be appropriately adjusted.
Periodically, but at least every 3 months, Prudential will review its
prospective estimates of net operating income in light of actual experience and
make an adjustment to such estimates if circumstances indicate that such an
adjustment is warranted. Prudential follows this practice of accruing estimated
net operating income from properties and other real estate-related investments
because net operating income from such investments is generally received on an
intermittent rather than daily basis, and the Partners believe it is more
equitable to participating Contract owners if such net operating income is
estimated and a proportionate amount thereof recognized daily. Because the
daily accrual of estimated net operating income is based on estimates that
15 - Real Property
may not turn out to reflect actual revenue and expenses, Contract owners will
bear the risk that this practice will result in the undervaluing or overvaluing
of the Partnership's assets.
The value of any asset held by the Partnership may be adjusted by Prudential at
any time based upon events which come to the attention of Prudential affecting a
property or other real estate-related investment that Prudential believes has
increased or decreased its realizable value. For example, adjustments may be
made for events indicating an impairment of a borrower's or a lessee's ability
to pay any amounts due or events which affect the property values of the
surrounding area. There can be no assurance that the factors for which an
adjustment may be made will immediately come to the attention of Prudential.
Additionally, because the evaluation of such factors may be subjective, there
can be no assurance that such adjustments will be timely made in all cases where
the value of the Partnership's investments may be affected. All adjustments
made to the valuation of the Partnership's investments, including adjustments to
estimated net operating income, the daily accrued receivable, and adjustments to
the valuation of properties and other real estate-related investments, will be
on a prospective basis only.
The above method of valuation of the Partnership's assets may be changed,
without the consent of Contract owners, should the Partners determine that
another method would more accurately reflect the value of the Partnership's
investments. Changes in the method of valuation could result in a change in the
Contract fund values which may have either an adverse or beneficial effect on
both existing Contract owners and new purchasers of Contracts. Information
concerning any material change in the valuation method will be given to all
Contract owners in the annual report of the operations of the Real Property
Account.
Although the above-described valuation methods have been adopted because the
Partners believe they will provide a reasonable way to determine the fair market
value of the Partnership's investments, there may well be variations between the
amount realizable upon disposition and the Partnership's valuation of such
assets. Contract owners may be either favorably or adversely affected if the
valuation method results in either overvaluing or undervaluing the Partnership's
investments. If a Contract owner invests in the Real Property Account at a time
in which the Partnership's investments are overvalued, the Contract owner will
be credited with less of an interest than if the value had been correctly
stated. A Contract owner withdrawing from the Real Property Account during such
time will receive more than he or she would if the value had been correctly
stated, to the detriment of other Contract owners. The converse situation will
exist if the Partnership's assets are undervalued.
BORROWING BY THE PARTNERSHIP
The Partnership may borrow to meet its liquidity requirements, and the
Partnership will bear the cost of all such borrowings. Thus, the Real Property
Account, and Contract owners participating in it, will bear a portion of any
such borrowing costs equal to their percentage interest in the Partnership.
Moreover, although the Partnership will generally make unleveraged investments,
it reserves the right to borrow up to 75% of the value of a property (with the
value of a property determined as explained under VALUATION OF CONTRACT OWNERS'
PARTICIPATING INTERESTS, page 14). Increasing the Partnership's assets through
leveraged investments would result in increasing the compensation paid to
Prudential since its investment management fee is calculated as a percentage of
the Partnership's gross assets. Moreover, any borrowing by the Partnership
would increase the Partnership's risk of loss and could inhibit the Partnership
from achieving its investment objectives because the Partnership's payments on
any loans would have to be made regardless of the profitability of the
Partnership's investments. The aggregate indebtedness of the Partnership for
all purposes will not exceed 50% of the value of the Partnership's assets.
CHARGES
Pursuant to an investment management agreement, Prudential charges the
Partnership a daily investment management fee which is equal to an effective
annual rate of 1.25% of the average daily gross assets of the Partnership.
Certain other expenses and charges attributable to the operation of the
Partnership are also charged against the Partnership. Thus, in acquiring an
investment, the Partnership may incur various types of expenses paid to third
parties, including but not limited to, brokerage fees, attorneys' fees,
architects' fees, engineers' fees, and accounting fees. After acquisition of an
investment, the Partnership will incur recurring expenses for such things as the
preparation of annual reports, periodic appraisal costs, mortgage servicing
fees, annual audit charges, accounting and legal fees, and various
administrative expenses. These expenses will be charged against the
Partnership's assets. Some of these operating expenses represent reimbursement
of Prudential for the cost of providing certain services necessary to the
operation of the Partnership, such as daily accounting services, preparation of
annual reports, and various administrative services. Moreover, Prudential
charges the Partnership mortgage loan servicing fees pursuant to the standards
outlined in item 6 under CONFLICTS OF INTEREST, page 13. In addition to the
various expenses charged against the Partnership's assets, other expenses such
as insurance
16 - Real Property
costs, taxes, and property management fees will ordinarily be deducted from
rental income, thereby reducing the gross income of the Partnership.
As explained above, charges made pursuant to the Contracts will be recorded in
the corresponding subaccounts of the Real Property Account. From time to time,
Pruco Life will withdraw from the Real Property Account an amount equal to the
aggregate amount of such charges. Aside from these charges pursuant to the
Contracts, Pruco Life makes no charges to the Real Property Account for the
expenses involved in operation of the Real Property Account, although the Real
Property Account will, of course, bear its proportionate share of the charges
made to the Partnership which are described above.
The Partnership is not a taxable entity under the provisions of the Internal
Revenue Code. Rather, the income, gains, and losses of the Partnership are
attributed, for federal income tax purposes, to the Partners in the Partnership,
including Pruco Life with respect to the Real Property Account. The earnings of
the Real Property Account are, in turn, taxed as part of the operations of Pruco
Life. No charge is being made currently to the Real Property Account for company
federal income taxes. Pruco Life will review periodically the question of a
charge to the Real Property Account for company federal income taxes
attributable to the Contracts. Such a charge may be made in future years for
any federal income taxes attributable to the Contracts.
Under current laws Pruco Life may incur state and local taxes (in addition to
premium taxes) in several states. At present, these taxes are not significant
and they are not charged against the Contracts or the Real Property Account. If
there is a material change in applicable state or local tax laws, the imposition
of any such taxes upon Pruco Life that are attributable to the Real Property
Account may result in a corresponding charge against the Real Property Account.
RESTRICTIONS ON WITHDRAWALS
Before allocating any portion of his or her net premium or purchase payments, or
transferring any portion of his or her Contract fund, to the Real Property
Account, a Contract owner should be aware that withdrawal of an investment in
the Real Property Account may be subject to greater restrictions than an
investment in the other variable investment options available under the
Contracts. Pruco Life reserves the right to restrict transfers into or out of
the Real Property Account. Apart from the routine limitations on transfers out
of the Real Property Account described below, Pruco Life will exercise its right
to restrict transfers out of the Real Property Account only if there appears to
be insufficient cash available to meet Contract owners' requests and prompt
disposition of the Partnership's investments to meet such requests could not be
made on commercially reasonable terms.
Pruco Life will pay any death benefit, cash surrender value, withdrawal or loan
proceeds within 7 days after receipt at a Pruco Life Service Office of all the
documents required for such a payment. Other than the death benefit, which is
determined as of the date of death, the amount will be determined as of the date
of receipt of the request.
The funds necessary to pay any death benefit, cash surrender value, withdrawal
or loan proceeds funded by the Real Property Account will normally be obtained,
first, from any cash flows into the Real Property Account on the day such funds
are required. If, on the day such funds are required, cash flows into the Real
Property Account are less than the amount of funds required, Pruco Life will
seek to obtain such funds by withdrawing a portion of its interest in the
Partnership. The Partnership will normally obtain funds to meet such a
withdrawal request from its net operating income and from the short-term and
intermediate-term debt obligations it holds. If the Partners determine that
these sources are insufficient to meet anticipated withdrawals from the
Partnership, the Partnership may use a line of credit or otherwise borrow up to
50% of the value of the Partnership's assets. See BORROWING BY THE PARTNERSHIP,
page 16. In the event that Pruco Life and the other Partners in the Partnership
determine that such a borrowing by the Partnership would not best serve the
interests of Contract owners, Pruco Life may, in the event of a Contract loan or
withdrawal, rather than taking the amount of any loan or withdrawal request
proportionately from all investment options under the Contract (including the
Real Property Account), take any such loan or withdrawal first from the other
investment options under the Contract.
Transfers from the Real Property Account to the other investment options
available under the Contract are currently permitted only during the 30-day
period beginning on the Contract anniversary. The maximum amount that may be
transferred out of the Real Property Account each year is the greater of: (a)
50% of the amount invested in the Real Property Account or (b) $10,000. Such
transfer requests received prior to the Contract anniversary will be effected on
the Contract anniversary. Transfer requests received within the 30-day period
beginning on the Contract anniversary will be effected as of the end of the
valuation period in which a proper written request or authorized telephone
request is received. The "valuation period" means the period of time from one
determination of the value of the amount invested in the Real Property Account
to the next. Such determinations are made when the value of the assets and
liabilities of the Partnership is calculated, which is generally at 4:15 p.m.
New York City time on each day during which the New York Stock Exchange is open.
Transfers into or out of the Real Property Account are also subject to the
general limits under the Contracts regarding transfers.
17 - Real Property
RESTRICTIONS ON CONTRACT OWNERS'
INVESTMENT IN THE REAL PROPERTY ACCOUNT
As noted earlier, identification and acquisition of real estate investments
meeting the Partnership's investment objectives is a time-consuming process.
Moreover, because the Real Property Account and the Partnership are managed so
as to ensure that they will not become investment companies subject to the
Investment Company Act of 1940, the portion of the Partnership's assets that may
be invested in securities, as opposed to non-securities real estate investments,
is strictly limited. For these reasons, Pruco Life reserves the right to
restrict or limit Contract owners' allocation of funds to the Real Property
Account. Any such restrictions are likely to take the form of restricting the
timing, amount and/or frequency of transfers into the Real Property Account
and/or precluding Contract owners who have not previously selected the Real
Property Account from allocating a portion of their net premiums or purchase
payments to the Real Property Account.
FEDERAL INCOME TAX CONSIDERATIONS
The tax treatment of variable Contract owners is described briefly in the
attached prospectus for the particular variable life insurance or variable
annuity Contract selected. Pruco Life believes that the same principles will
apply with respect to Contracts funded in whole or part by the Real Property
Account. The Partnership's conformity with the diversification standards for
the investments of variable life insurance and variable annuity separate
accounts is essential to ensure that treatment. See GENERAL INVESTMENT AND
OPERATING POLICIES, page 8. Each individual is urged to consult a qualified tax
advisor.
Under the Internal Revenue Code, the Partnership is not a taxable entity and any
income, gains or losses of the Partnership are passed through to the Partners,
including Pruco Life, with respect to the Real Property Account. The Real
Property Account is not a separate taxpayer for purposes of the Internal Revenue
Code. The earnings of the Real Property Account are taxed as part of the
operations of Pruco Life. No charge is being made currently to the Real
Property Account for company federal income taxes. Pruco Life will review
periodically the question of a charge to the Real Property Account for company
federal income taxes attributable to the Contracts. Such a charge may be made
in future years for any federal income taxes attributable to the Contracts, see
CHARGES, page 16.
DISTRIBUTION OF THE CONTRACTS
As explained in the attached prospectus for the Contracts, Pruco Securities
Corporation, an indirect, wholly-owned subsidiary of Prudential, acts as the
principal underwriter of the Contracts. Consult that prospectus for information
about commission scales and other facts relating to sale of the Contracts.
STATE REGULATION
Pruco Life is subject to regulation and supervision by the Department of
Insurance of the State of Arizona, which periodically examines its operations
and financial condition. It is also subject to the insurance laws and
regulations of all jurisdictions in which it is authorized to do business.
Pruco Life is required to submit annual statements of its operations, including
financial statements, to the insurance departments of the various jurisdictions
in which it does business to determine solvency and compliance with local
insurance laws and regulations.
In addition to the annual statements referred to above, Pruco Life is required
to file with Arizona and other jurisdictions a separate statement with respect
to the operations of all its variable contract accounts, in a form promulgated
by the National Association of Insurance Commissioners.
ADDITIONAL INFORMATION
A registration statement has been filed with the SEC under the Securities Act of
1933, relating to the offering described in this prospectus. This prospectus
does not include all of the information set forth in the registration statement.
Certain portions have been omitted pursuant to the rules and regulations of the
SEC. The omitted information may, however, be obtained from the SEC's principal
office in Washington, D.C., upon payment of a prescribed fee.
18 - Real Property
Further information may also be obtained from Pruco Life's office. The address
and telephone number are set forth on the cover of this prospectus.
EXPERTS
The financial statements of the Real Property Account and the Partnership
included in this prospectus, the per share information included on page 1 of
this prospectus, and the related financial statement schedules included
elsewhere in the registration statement for the years ending December 31, 1996
and December 31, 1997 have been audited by Price Waterhouse LLP, independent
accountants, as stated in their reports appearing herein and elsewhere in the
registration statement. Such financial statements, per share information, and
financial statement schedules have been included herein and elsewhere in the
registration statement in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing. Price Waterhouse LLP's
principal business address is 1177 Avenue of the Americas, New York, New York
10036.
The financial statements of the Real Property Account and the Partnership
included in this prospectus, the per share information included on page 1 of
this prospectus, and the related financial statement schedules included
elsewhere in the registration statement for the years prior to 1996 have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein and elsewhere in the registration statement. Such
financial statements, per share information, and financial statement schedules
have been included herein and elsewhere in the registration statement in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing. Deloitte & Touche LLP's principal business address is
Two Hilton Court, Parsippany, New Jersey 07054-0319.
On March 12, 1996, Deloitte & Touche LLP was replaced as the independent
accountants of Pruco Life. There have been no disagreements with Deloitte &
Touche LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, if not resolved to
the satisfaction of the accountant, would have caused them to make a reference
to the matter in their reports.
LITIGATION
No litigation is pending, and no litigation is known to be contemplated by
governmental authorities, that would have an adverse material effect upon the
Real Property Account or the Partnership.
YEAR 2000 COMPLIANCE
The services provided to the Contract owners by Pruco Life and Prusec depend on
the smooth functioning of their respective computer systems. The year 2000,
however, holds the potential for a significant disruption in the operation of
these systems. Many computer programs cannot distinguish the year 2000 from the
year 1900 because of the way in which dates are encoded. Left uncorrected, the
year "00" could cause systems to perform date comparisons and calculations
incorrectly that in turn could compromise the integrity of business records and
lead to serious interruption of business processes.
Prudential, Pruco Life and Prusec's ultimate corporate parent, identified this
issue as a critical priority in 1995 and has established quality assurance
procedures including a certification process to monitor and evaluate enterprise-
wide conversion and upgrading of systems for "Year 2000" compliance. Prudential
has also initiated an analysis of potential exposure that could result from the
failure of major service providers such as suppliers, custodians and brokers, to
achieve Year 2000 compliance. Prudential expects to complete its adaptation,
testing and certification of software for Year 2000 compliance by December 31,
1998. During 1999, Prudential plans to conduct additional internal testing, to
participate in securities industry-wide test efforts and to complete major
service provider analysis and contingency planning.
The expenses of Prudential's Year 2000 compliance are allocated across its
various businesses, including those businesses not engaged in providing services
to Contract owners. Accordingly, while the expense is substantial in the
aggregate, it is not expected to have a material impact on Pruco Life's
abilities to meet its contractual commitments to Contract owners.
Prudential believes that it is well positioned to achieve the necessary
modifications and mitigate Year 2000 risks. However, if such efforts are not
completed on a timely basis, the Year 2000 issue could have a material adverse
impact on Prudential's operations, those of its subsidiary and affiliate
companies and/or the Account. Moreover, there can be no assurance that the
measures taken by Prudential's external service providers will be sufficient to
avoid any material adverse impact on Prudential's operations or those of its
subsidiary and affiliate companies.
19 - Real Property
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion covers the operations of The Prudential Variable
Contract Real Property Partnership and should be considered in conjunction with
the PER SHARE TABLE appearing on page 1 - Real Property and the financial
statements and notes thereto, commencing on page B1 - Real Property.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Partnership's liquid assets consisting of cash,
cash equivalents and marketable securities (excluding the Partnership's shares
in Meridian Industrial Trust REIT) were $26,851,981. This is a decrease of
$18,312,867 from $45,164,848 at December 31, 1996. The decrease is due
primarily to the acquisition of five real estate investments in 1997 totaling
$37,417,479. This decrease was partially offset by: (1) the sale of the
Partnership's interest in a portfolio of industrial properties located in
Jacksonville, FL for net proceeds of $6,272,330, (2) operations of the
Partnership's properties, and (3) interest income received from the
Partnership's short term investments. Sources of liquidity include net cash
flow from property operations, interest from short term investments, and
dividends on REIT shares.
Prudential has committed to fund up to $100 million to enable the Partnership to
acquire real estate investments. Contributions to the Partnership under this
commitment are utilized for property acquisitions, and returned to Prudential
on an ongoing basis from Contract owners' net contributions. The amount of the
commitment is reduced by $10 million for every $100 million in current value net
assets of the Partnership. The amount available for future investment is
approximately $47 million as of December 31, 1997.
The Partnership will generally invest 10-15% of its assets in cash and short-
term obligations to maintain liquidity; however, its investment policy allows up
to 30% investment in cash and short term obligations. At December 31, 1997,
12.06% of the Partnership's assets consisted of cash, cash equivalents and
marketable securities (excluding REIT shares).
The Partners made no withdrawals in 1997. Withdrawals may be made during 1998
based upon the percentage of assets invested in short term obligations. The
withdrawals should also take into consideration anticipated cash needs of the
Partnership including potential property acquisitions, property dispositions and
capital expenditures. Management anticipates that current liquid assets and
ongoing cash flows from operations will satisfy the Partnership's needs over the
next twelve months and the foreseeable future.
In 1997, the Partnership made acquisitions aggregating $37,417,479 consisting of
the following: an industrial building in Salt Lake City, UT for $5,388,134; an
industrial complex in Aurora, CO for $8,540,585; land under an existing
industrial complex already owned by the Partnership in Pomona, CA for
$4,000,000; an office building in Brentwood, TN for $9,488,755; and 506,894
shares of Meridian Industrial REIT for $10,000,005. These acquisitions were
funded entirely by the Partnership's cash reserves.
During 1997, the Partnership made $1,311,864 in capital expenditures for tenant
alterations, leasing commissions, land improvements and building improvements.
The most significant transaction was $378,959 for tenant alterations and leasing
commissions at the office property located in Lisle, IL, which related to a new
lease signed with Pitney Bowes. Other significant capital expenditures included
tenant alterations and leasing commissions throughout the properties owned by
the Partnership. The office property located in Brentwood, TN accounted for
$212,983 of the total tenant alterations and leasing commissions. Approximately
$104,000 was for tenant alterations and leasing commissions related to a new
lease with Service Experts.
Budgeted capital expenditures for 1998 are approximately $8.5 million. Of this
amount, $7.3 million is budgeted for tenant improvements and leasing
commissions. Four of the Partnership's properties account for the majority of
these leasing related capital expenditures. The Lisle, IL office property is
budgeted to expend $3.2 million in leasing related capital expenditures. This
property, which was previously leased in its entirety to a single tenant, is
expected to require $2.8 million in tenant improvements, and $0.5 million in
leasing commissions to re-establish 100% occupancy. At the Salt Lake City, UT
industrial property, management anticipates $1.0 million of capital to be
expended in its effort to lease the currently vacant property. Of the total
capital to be expended at this property, $0.8 million is projected for tenant
improvements and $0.2 million is anticipated for leasing commissions. At the
Aurora, CO industrial property, management anticipates spending $1.7 million in
its effort to lease this vacant property. Of the total capital to be expended
$1.4 million is projected for tenant improvements and $0.3 million is
anticipated for leasing commissions. Management anticipates expending $0.9
million for leasing related capital expenditures at the Morristown, NJ office
building. It is anticipated that Smith Barney, a major tenant in the building,
will vacate their offices. To secure a new tenant, $0.5 million in tenant
improvements, and $0.4 million in leasing commissions will be necessary. All of
these projected expenditures relate to prospective leases
20 - Real Property
and are based upon reasonable costs. The actual amount of such expenditures will
depend upon the number of new leases signed, the actual needs of the particular
construction or repair, and the timing of lease executions.
Other major capital projects planned for 1998 include the following:
reconstruction of the lobby and common areas at the Lisle, IL office building
($0.6 million); refurbishment and upgrading the heating ventilation and air
conditioning system at this same property ($0.2 million); residing and painting
the exterior on the Atlanta, GA residential community ($0.1 million); and
reconfiguration of the traffic flow in and around the Atlanta, GA retail
property ($0.1 million).
RESULTS OF OPERATIONS
The following is a brief comparison of the Partnership's results of operations
for the years ended December 31, 1997, 1996 and 1995.
1997 VS. 1996
The Partnership's net investment income for 1997 was $13,789,747, a decrease of
$1,629,771 from net investment income of $15,419,518 in 1996. This decrease is
the result of the factors discussed below.
Income from property operations, including income from interest in properties,
was $14,651,366 in 1997, a decrease of $1,410,043 from $16,061,406 in 1996.
This decrease, in income, was primarily due to the results of sales of two
portfolio properties, and an increased vacancy in a third property. Decrease in
income for $1,646,337 resulted from the sales of the Flint, MI office park, and
the Azusa, CA industrial center; while an increased vacancy in the Lisle, IL
office property accounted for another $673,119. The effects of the decrease in
income from these properties were partially offset by $342,829 due to the
acquisitions of a new office property in Brentwood, TN and 506,894 REIT shares.
Rent from properties was $21,582,968 in 1997, a decrease of $1,216,726 from
$22,799,694 in 1996. The majority of this decrease is attributable to
properties held for a full year in 1996 and sold during 1997. Also contributing
to the decrease was a decrease in rent collected at the Lisle, IL office
property which became 100% vacant in the fourth quarter.
Income from interest in properties relates to the Partnership's 50% co-
investment in several warehouse properties (the Unit warehouses). Income from
this source decreased from $606,558 in 1996 to $435,296 in 1997, for a total
decrease of $171,262. The primary reason for the decrease was due to the sale
of the Partnership's interest in these properties on September 30, 1997.
Dividend income from real estate investment trusts totaled $158,154. The
506,894 shares of Meridian Industrial REIT were acquired on September 24, 1997.
Administrative expenses on the Statement of Operations includes property
operations and the administration of the Partnership. Property administrative
expenses in 1997 were $2,009,449, an increase of $355,564 from $1,653,885 in
1996. This increase was primarily due to the acquisition of three new
properties, plus a full year of administrative expenses for a property acquired
at the end of 1996.
Property operating expenses for 1997 were $3,296,350, an increase of $391,730
from $2,904,620 in 1996. In 1997, this increase was primarily due to a full year
ownership of the office property in Beaverton, OR and expenses incurred for new
acquisitions, including the industrial buildings in Salt Lake City, UT and
Aurora, CO. These three properties contributed $274,530 to the increased
operating expenses. The acquisition of the office building in Brentwood, TN
contributed $103,234.
Real estate taxes for 1997 were $2,208,972, a decrease of $158,432 from
$2,367,404 in 1996. This decrease was primarily due to the sale of the office
building located in Flint, MI in December 1996, which resulted in a decrease of
$162,701; and the sale of the industrial property in Asuza, CA in April 1996,
which resulted in a decrease of $51,149. These decreases were partially offset
by increased real estate taxes at the office property in Oakbrook Terrace, IL of
$50,513, and an increase of $40,908 at the industrial property in Bolingbrook,
IL.
Administrative expense related to the Partnership was $316,705 in 1997, an
increase of $105,157 from $211,548 in 1996.
The investment management fee for 1997 was $2,640,470, an increase of $146,241
from the 1996 management fee of $2,494,229. This fee is computed at 1.25% of
gross assets which were significantly higher in 1997 than 1996.
The following is a comparison of the Partnership's property results of
operations and realized and unrealized gains or losses, by investment type, for
the twelve months ended December 31, 1997 and December 31, 1996.
21 - Real Property
OFFICE PROPERTIES
Net investment income from property operations for the office properties in 1997
was $5,329,310. This was a decrease of $488,187 (8.4%) from $5,817,497 in 1996.
The decrease was primarily due to the sale of an office building in Flint, MI
which accounts for $1,001,711 of the decrease; and lowered rental income at the
Lisle, IL office property which accounts for $673,119 of the decrease. These
factors are offset by owning an office building in Beaverton, OR for a full year
($833,643), and the acquisition of the second office property in Brentwood, TN
($194,851). For office properties held for the comparable period, net
investment income increased by $318,674 (6.5%) from $4,877,349 in 1996, to
$5,196,023 in 1997.
The office properties owned by the Partnership experienced a net unrealized gain
of $1,897,749 in 1997. The largest net unrealized gain was attributable to the
office property in Oakbrook Terrace, IL and was due to the improving office
market conditions in suburban Chicago. The Morristown, NJ and the Brentwood, TN
office properties also experienced net unrealized gains of $557,241 and
$576,381, respectively. Unrealized losses of $28,285 at the Summit Building in
Beaverton, OR , and $13,602 at the Lisle, IL office property offset these
gains.
The Partnership acquired a second office property in Brentwood, TN. The 97,378
square foot suburban office building was acquired on September 15, 1997 for
$9,488,755. This property was 100% occupied at the time of acquisition.
Occupancy at the Beaverton, OR, Oakbrook Terrace, IL and Brentwood, TN
properties remained unchanged from December 31, 1996 at 100%. Occupancy at the
Morristown, NJ property increased from 93% to 100%, while occupancy dropped from
100% at the Lisle, IL office property at December 31, 1996 to 37% at year end
1997. As of December 31, 1997, all vacant spaces are being marketed.
APARTMENT COMPLEXES
Net investment income from apartment property operations was $3,888,263 in 1997,
a decrease of $37,487 from $3,925,750 in 1996.
The three apartment communities owned by the Partnership experienced a net
unrealized gain of $1,053,061 during 1997. The Atlanta, GA property was the
largest contributor to the gain as it appreciated $1,392,186. This gain was
attributable to increased rental rates and occupancy. The Farmington Hills, MI
property also had a net unrealized gain of $80,839 due to increased rental
rates. The Raleigh, NC community had a net unrealized loss of $328,481 due to
the appraisal assumptions concerning above market rentals expiring and
subsequently renewing at lower market rates.
Weighted average occupancy at the Partnership's residential communities
increased from 93.1%, as of December 31, 1996, to 94.3% as of December 31, 1997.
The occupancy at the Atlanta, GA and Farmington Hills, MI communities improved
from 93% and 89%, respectively, as of December 31, 1996 to 99% and 93%,
respectively, at year end 1997. The occupancy at the Raleigh, NC community
slipped from 97% at the end of 1996 to 91% as of December 31, 1997.
RETAIL PROPERTIES
Net investment income for the Partnership's retail properties decreased to
$2,758,995 in 1997, from $3,129,390 in 1996. This decrease was primarily due to
decreased occupancy at the shopping center earlier in the year. Revenues
decreased by $299,474 and expenses increased by $70,920 from the prior year.
The retail center had an unrealized gain of $1,109,099. This was a result of
changes in the assumed capital needs of the property, and the leasing of vacant
spaces in the third and fourth quarters which stabilized future cash flows and
brought occupancy back up to 96%.
The shopping center was 96% occupied as of December 31, 1997, unchanged from the
prior year. Currently, there are three vacant suites. All vacant spaces are
being marketed.
INDUSTRIAL PROPERTIES
Net investment income from industrial property operations was $2,526,820 in
1997, a decrease of $661,949 from $3,188,769 in 1996. The primary reason for
the decline was the sale of the industrial complex in Azusa, CA, in April 1996,
which accounted for $644,625 of the decrease. The sale of the Partnership's
investment in the Jacksonville, FL industrial properties, in September 1997,
also contributed to the decline in net investment income. For properties held
for comparable periods in 1996 and 1997, net investment income increased from
$1,941,812 to $2,042,184, respectively.
The Partnership acquired three industrial properties in 1997. The first
acquisition was a 182,500 square foot building in Salt Lake City, UT for
$5,388,134. The second acquisition was a two building 277,500 square foot
22 - Real Property
facility in Aurora, CO for $8,540,585. As of December 31, 1997, both properties
were vacant. The third acquisition was land under the Partnership's existing
Pomona CA, industrial complex. The Partnership acquired the land under a
purchase option for $4,000,000.
The industrial properties (including the recently purchased land) had $1,901,523
of net unrealized appreciation in 1997. The largest single gain of $1,740,917
was attributable to the purchase of the land under the Pomona, CA property. The
Salt Lake City, UT and Aurora, CO properties experienced $38,133 and $140,585
negative net appreciation as a result of softer market conditions.
As of December 31, 1997, occupancy at the Partnership's Pomona, CA and
Bolingbrook, IL, industrial properties remained unchanged from December 31, 1996
at 100%. As of December 31, 1997, both the Salt Lake City, UT and Aurora, CO
properties were 100% vacant. As of December 31, 1997, all vacant spaces were
being marketed.
The Partnership sold its interest in the Jacksonville, FL warehouses for net
sales proceeds of $6.3 million, resulting in a gain of $284,581.
The Partnership also acquired 506,894 shares of Meridian Industrial Trust for
$10,000,005 on September 24, 1997. Meridian is a self administered and self-
managed equity real estate investment trust engaged in owning, operating, and
leasing high quality, modern industrial properties nationwide. As of December
31, 1997, these shares experienced a $2,523,800 net unrealized gain and
generated $147,978 in net investment income these shares were purchased in a
private transaction at a favorable, below-market price.
1996 VS. 1995
The Partnership's net investment income for 1996 was $15,419,518, an increase of
$699,247 (4.8%) from net investment income of $14,720,271 in 1995. The increase
was primarily due to higher net income from property operations ($1,455,941),
offset by a higher management fee ($152,351) and lower interest income from
short-term investments ($526,479).
Income from property operations, including income from interest in properties,
was $16,061,409 for 1996. This was an increase of $980,119 (6.5%) from
$15,081,290, in 1995. This was primarily due to increased rent from properties
(approximately $2,973,000). The increase was offset by increased operating
expenses (approximately $1,034,000) and real estate taxes (approximately
$429,000).
Rent from properties for 1996 increased by $2,972,650 (15.0%) to $22,799,694
from $19,827,044 for 1995. A large portion of this was the result of properties
that were acquired during 1995 and held for the full year of 1996. This
increase in revenue totaled approximately $4,367,000. These additional revenues
were primarily offset by the sale of the Azusa industrial building which
resulted in approximately $1,092,000 reduction in revenues from last year and
the Roswell, GA shopping center which accounted for a decrease of approximately
$214,000 due to lower percentage rents in 1996 and decreased occupancy.
Income from interest in properties relates to the Partnership's 50% co-
investment in several warehouses (the Unit warehouses). Income from this source
decreased approximately $31,624 (4.9%) from $638,183 in 1995 to $606,558 in
1996. The reduction is the result of GATX vacating a portion of its space in
October and the space not being re-leased.
Administrative expenses on the Statement of Operations includes property
operations and the administration of the Partnership. Property administrative
expenses for 1996 were $1,653,934. This was $78,271 (5.0%) higher than the
$1,575,663 for 1995. The increase was primarily due to a full year of
administrative expenses of approximately $234,000 from the Nashville, TN office
building, Oakbrook Terrace, IL office facility and the Raleigh, NC apartment
complex. The increase was partially offset by the sale of two 1996 properties
totaling approximately $130,000.
Property operating expenses for 1996 were $2,904,620 compared to $1,870,183 for
1995, an increase of $1,034,437 (55%). This increase was primarily due to a
full year of operating expenses totaling approximately $943,000 related to the
Raleigh, Oakbrook Terrace and Nashville properties, all of which were acquired
in 1995. Increases were also due to the Morristown office property incurring
window repairs of approximately $21,000, and an increase to its grounds contract
for approximately $59,000 offset by lower repairs and maintenance expenses
totaling $23,000. The Atlanta and the Farmington Hills apartments had increases
totaling approximately $57,000 for 1996 apartment make-ready due to higher
turnover as compared to 1995.
Real estate taxes for 1996 were $2,367,404, an increase of $429,314 (22.2%) from
$1,938,090 for 1995. The increase was primarily due to a full year of real
estate tax expenses totaling approximately $572,000 related to the Raleigh,
Oakbrook Terrace and Nashville properties. At the Morristown office building,
real estate taxes increased by approximately $32,000. These increases were
offset by decreases of approximately $106,000, as a result of the Azusa and
Flint properties being sold in 1996. Real estate taxes at the Farmington Hills
apartments decreased approximately $26,000 due to last year's tax appeal.
23 - Real Property
Administrative expenses related to the Partnership totaled $211,499 for 1996.
This is an increase of $7,930 (3.6%) from $219,429 for 1995.
The investment management fee for 1996 was $2,494,229. This was $152,351
(6.5%) higher than the 1995 fee of $2,341,878. The fee is computed at 1.25% of
gross assets. During 1996, gross assets were slightly higher than the prior
year due to cash flows retained by the Partnership and increased market values
of the real estate investments.
The following is a brief comparison of the Partnership's property results of
operations and realized and unrealized gains or losses, by investment type, for
the twelve months ended December 31, 1996 and December 31, 1995.
During 1996, the Partnership recognized an unrealized loss of $3,211,436 on its
real estate investments. This represents 1.9% of the value of the investments at
December 31, 1995. The retail center experienced the largest unrealized loss,
of approximately $3,787,000. The offices had a net unrealized loss of
approximately $560,000. The industrial properties had a net unrealized loss of
approximately $75,000 offset by the apartments' net unrealized gains of
approximately $1,210,000.
Occupancy at the Partnership's properties at December 31, 1996 was generally
lower than at December 31, 1995. During 1996, the Partnership acquired a 72,109
square feet office building in Beaverton, Oregon. At December 31, 1996, the
Beaverton office building was 100% occupied by five tenants and there are no
expirations in 1997.
OFFICE PROPERTIES
The Lisle, IL office had an unrealized loss of approximately $1,700,000 (14.7%
of its year-end 1995 value). This was caused by R.R. Donnelley (sole-tenant) not
renewing its lease, which expired September 1997, and the anticipated expenses
that would be incurred in order to re-lease the building in 1997. The Morristown
property experienced an unrealized gain of approximately $409,000 (4.3% of its
December 31, 1995 value), due to improved market conditions in the Northern NJ
market. The Nashville office experienced an unrealized gain of approximately
$166,000. The increase represented 1.9% of its year-end 1995 value. The rise in
value reflects the expectations of continued high occupancy and the potential
for higher rental rates in the future. The Oakbrook Terrace office building had
an increase of $565,000 (4.5% of its December 31, 1995 value). This was the
result of two tenant rent increases that occurred in 1996.
Occupancy at the Lisle, IL office building remained at 100% during 1996. R.R.
Donnelley had given notice they will be vacating their space in 1997. The
Oakbrook Terrace office building continued its 99% occupancy. The Nashville
office building occupancy remained at 99%. During 1996, a total of 25,394
square feet was re-leased, leaving a vacant space of 1,350 square feet. During
1997, at the Nashville office building, 11,966 square feet expired. Occupancy
at the Morristown office decreased from 98% to 93% as of December 31, 1996.
There are four vacant suites totaling 9,583 square feet. During 1996, Mutual of
Omaha renewed their lease of 5,479 square feet and Sprint Spectrum signed a two
month temporary agreement for 4,010 square feet, while Chase Home Mortgage
vacated their suite of 4,010 square feet. During 1997, at the Morristown office
building, a total of 15,753 square feet was up for renewal. All vacant spaces
are currently being marketed.
APARTMENT COMPLEXES
The Partnership's Atlanta apartment complex had an unrealized gain of
approximately $1,083,000 (8.6% of its year-end 1995 value), and the Farmington
Hills apartment complex had an unrealized gain of approximately $477,000 (3.4%
of its year-end 1995 value). These increases were primarily the result of
higher rental rates and occupancy than were previously projected for these
properties. The luxury garden apartment complex in Raleigh had an unrealized
loss of approximately $350,000 (2.0% of its year-end 1995 value). The property
had experienced lowered loss of occupancy but recovered to a December 31, 1996
occupancy of 97%.
Occupancy at the Atlanta and the Farmington Hills apartments decreased from 97%
and 98% at December 31, 1995 to 93% and 88%, in 1996. Occupancy at the Raleigh
apartments increased from 95% at December 31, 1995 to 97% at the end of 1996.
All vacant apartments were being marketed as of December 31, 1996.
RETAIL PROPERTIES
The Partnership's sole retail property in Roswell, GA, had an unrealized loss of
$3,786,554 (11.8% of its December 31, 1995 value). This was due to increased
competition in the local market resulting in downward pressure on rental rates
and occupancy. Occupancy at the Roswell center decreased from 99% at December
31, 1995 to 96% at December 31, 1996, a loss of 3%. During 1996, a total of
10,464 square feet expired and 4,127 square feet
24 - Real Property
was renewed. Shepherd's Staff Christian Book Store leased 6,100 square feet. Two
tenants leasing a total of 6,100 square feet have vacated prior to their lease
expiration. At December 31, 1996 a total of 10,464 square feet remained vacant.
Several lease proposals were in negotiation, while all other vacant spaces were
being marketed.
INDUSTRIAL PROPERTIES
The Bolingbrook warehouse had the largest unrealized loss of this property type,
approximately $300,000 (4.1% of its year-end 1995 value). Gillette, a tenant of
the entire property, indicated that they needed additional space and will
relocate at the expiration of their lease in 2000. The Pomona property had an
unrealized gain of approximately $175,000 (1.0% of its year-end 1995 value), as
a result of signing leases that maintained the property occupancy at 100%. The
market values of the four Unit warehouses, in which the Partnership owns a 50%
interest at the end of 1996, had an unrealized gain of approximately $50,000
(0.9% of their December 31, 1995 value).
Occupancy at the Pomona warehouse remained at 100%. During 1996, a total of
234,292 square feet expired and was re-leased. The most significant renewal was
SCI signing an amendment to their lease to extend the term for five years.
During 1997, JB Engineering's 49,697 square feet lease expired. Occupancy at
the Bolingbrook warehouse also remained at 100%. Gillette's lease of this
entire facility will expire in the year 2000, at which time they will relocate.
At the Unit warehouses, occupancy decreased from 100% in 1995 to 85% in 1996.
GATX vacated its space in October and the space has not been leased. All vacant
spaces are being marketed as of December 31, 1996.
During 1996, the Partnership sold its Azusa, CA industrial property and its
Flint, MI office building. The sale of these two properties resulted in a
realized loss of $1,573,147. The Flint, MI property had the largest loss of
$1,094,521 (16.7% of its year-end 1995 value). This was the result of both the
uncertain economic outlook and leasing demand in Flint, MI, as well as the
physical condition of the property. The Azusa property had a realized loss of
$478,627 (3.2% of its year-end 1995 value). The gross sales price of the
property was $15,250,000 and the net proceeds were $14,697,789.
FINANCIAL STATEMENTS
Following are financial statements and independent auditors' reports of the Real
Property Account, as well as financial statements and independent auditors'
reports of the Partnership.
25 - Real Property
FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
STATEMENTS OF NET ASSETS
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
Investment in shares of The Prudential Variable Contract
Real Property Partnership (Note 3) $ 109,495,293 $ 98,385,259
----------------- -----------------
----------------- -----------------
NET ASSETS, representing:
Equity of Contract Owners (Note 4) $ 86,228,329 $ 86,185,085
Equity of Pruco Life Insurance Company 23,266,964 12,200,174
----------------- -----------------
$ 109,495,293 $ 98,385,259
----------------- -----------------
----------------- -----------------
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
INVESTMENT INCOME:
Net Investment Income from Partnership Operations $ 6,877,876 $ 7,717,055 $ 7,492,843
EXPENSES:
Charges to Contract Owners for Assuming Mortality Risk and
Expense Risk and for Administration (Note 5) 542,738 555,553 561,431
----------------- ----------------- -----------------
NET INVESTMENT INCOME 6,335,138 7,161,502 6,931,412
----------------- ----------------- -----------------
Net Change in Unrealized Gain (Loss) on Investments in Partnership 4,079,515 (1,609,406) 320,146
Net Realized Gain (Loss) on Sale of Investments in Partnership 152,643 (787,318) 0
----------------- ----------------- -----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 10,567,296 4,764,778 7,251,558
----------------- ----------------- -----------------
CAPITAL TRANSACTIONS:
Net Withdrawals by Contract Owners (Note 7) (8,564,665) (6,242,414) (5,278,643)
Net Contributions by Pruco Life Insurance Company 9,107,403 3,797,967 2,840,074
----------------- ----------------- -----------------
NET INCREASE/(DECREASE) IN NET ASSETS
RESULTING FROM CAPITAL TRANSACTIONS 542,738 (2,444,447) (2,438,569)
----------------- ----------------- -----------------
TOTAL INCREASE/(DECREASE) IN NET ASSETS 11,110,034 2,320,331 4,812,989
NET ASSETS:
Beginning of year 98,385,259 96,064,928 91,251,939
----------------- ----------------- -----------------
End of year $ 109,495,293 $ 98,385,259 $ 96,064,928
----------------- ----------------- -----------------
----------------- ----------------- -----------------
SEE NOTES TO FINANCIAL STATEMENTS ON PAGE A2 THROUGH A5
A1 - Real Property
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
For the Year Ended December 31, 1997
NOTE 1: GENERAL
Pruco Life Variable Contract Real Property Account (the "Real Property Account")
was established on August 27, 1986 and commenced business September 5, 1986.
Pursuant to Arizona law, the Real Property Account was established as a separate
investment account of Pruco Life Insurance Company ("Pruco Life"), a wholly-
owned subsidiary of The Prudential Insurance Company of America ("Prudential").
The assets of the Real Property Account are segregated from Pruco Life's other
assets. The Real Property Account is used to fund benefits under certain
variable life insurance and variable annuity contracts issued by Pruco Life.
These products are Variable Appreciable Life Insurance ("VAL"), Variable Life
Insurance ("VLI"), Discovery Life ("SPVA"), and Discovery Life Plus
("SPVL").
The assets of the Real Property Account are invested in The Prudential Variable
Contract Real Property Partnership (the "Partnership"). The Partnership is
organized under New Jersey law and is registered under the Securities Act of
1933. The Partnership is the investment vehicle for assets allocated to the
real property option under certain variable life insurance and annuity
contracts. The Real Property Account, along with The Prudential Variable
Contract Real Property Account and the Pruco Life of New Jersey Variable
Contract Real Property Account, are the sole investors in the Partnership.
The Partnership has a policy of investing at least 65% of its assets in direct
ownership interests in income-producing real estate and participating mortgage
loans.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF ACCOUNTING
The financial statements are prepared in conformity with generally accepted
accounting principles (GAAP). The preparation of the financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
B. INVESTMENT IN PARTNERSHIP INTEREST
The investment in the Partnership is based on the Real Property Account's
proportionate interest of the Partnership's market value. At December 31, 1997
and 1996 the Real Property Account's interest in the Partnership was 49.9% or
5,909,534 shares.
C. INCOME RECOGNITION
Net investment income and realized and unrealized gains and losses are
recognized daily. Amounts are based upon the Real Property Account's
proportionate interest in the Partnership.
A2 - Real Property
D. EQUITY OF PRUCO LIFE INSURANCE COMPANY
Pruco Life maintains a position in the Real Property Account for property
acquisitions and capital expenditure funding needs. The position is also
utilized for liquidity purposes including unit purchases and redemptions,
Partnership share transactions, and expense processing. The position does not
have an effect on the Contract owner's account or the related unit value.
NOTE 3: INVESTMENT INFORMATION FOR THE PRUDENTIAL VARIABLE CONTRACT REAL
PROPERTY PARTNERSHIP
The investment in the Partnership, the number of shares held by the Account in
the Partnership, the Partnership share value and the aggregate cost of
investments in the Accounts' shares held at December 31, 1997 and 1996 were as
follows:
1997 1996
---- ----
INVESTMENT: $109,495,293 $98,385,259
SHARE VALUE: $18.52861 $16.64859
SHARES OUTSTANDING: 5,909,534 5,909,534
COST: $63,772,990 $63,772,990
NOTE 4: CONTRACT OWNER UNIT INFORMATION
Outstanding Contract owner units, unit values and total value of Contract owner
equity at December 31, 1997 and 1996 were as follows:
1997:
- ----
VAL VLI SPVA SPVL TOTAL
--- --- ---- ---- -----
CONTRACT OWNER
UNITS OUTSTANDING: 43,201,206 2,762,300 744,092 3,231,823 49,939,421
UNIT VALUE: $ 1.73358 $ 1.78248 $ 1.61267 $ 1.61267
CONTRACT OWNER EQUITY: $74,892,746 $4,923,744 $1,199,975 $5,211,864 $86,228,329
1996:
- ----
VAL VLI SPVA SPVL TOTAL
--- --- ---- ---- -----
CONTRACT OWNER
UNITS OUTSTANDING: 47,536,835 2,921,917 1,156,632 3,613,319 55,228,703
UNIT VALUE: $ 1.56700 $ 1.60720 $ 1.46726 $ 1.46726
CONTRACT OWNER EQUITY: $74,490,221 $4,696,105 $1,697,080 $5,301,679 $86,185,085
NOTE 5: CHARGES AND EXPENSES
A. MORTALITY RISK AND EXPENSE RISK CHARGES
Mortality risk and expense charges are determined daily using an effective
annual rate of 0.6%, 0.35%, 0.9% and 0.9% for VAL, VLI, SPVA and SPVL,
respectively. Mortality risk is that life insurance contract owners may not
live as long as estimated or annuitants may live longer than estimated and
expense risk is that the cost of issuing and administering the
A3 - Real Property
policies may exceed the estimated expenses. For the years ended December 31,
1997 and 1996 the amount of these charges paid to Pruco Life was $519,417 and
$530,117, respectively.
B. ADMINISTRATIVE CHARGES
Administrative charges are determined daily using an effective annual rate of
0.35% for SPVA and SPVL. Administrative charges include costs associated with
issuing the Contract, establishing and maintaining records, and providing
reports to Contract owners. For the years ended December 31, 1997 and 1996 the
amount of these charges paid to Pruco Life was $23,321 and $25,436,
respectively.
NOTE 6: TAXES
Pruco Life is taxed as a "life insurance company" as defined by the Internal
Revenue Code and the operations of the Real Property Account form a part of
Pruco Life's consolidated federal tax return. Under current federal law, no
federal income taxes are payable by the Real Property Account. As such, no
provision for tax liability has been recorded in these financial statements.
NOTE 7: NET WITHDRAWALS BY CONTRACT OWNERS
Contract owner activity for the Pruco Life products for the year ended December
31, 1997, was as follows:
VAL VLI SPVA SPVL TOTAL
--- --- ---- ---- -----
CONTRACT OWNER NET PAYMENTS: $ 7,135,438 $ 547,314 $ (363) $ 2,354 $ 7,684,743
POLICY LOANS: (2,744,920) (127,090) 0 (133,268) (3,005,278)
POLICY LOAN REPAYMENTS AND INTEREST: 2,059,190 78,708 0 120,176 2,258,074
SURRENDERS, WITHDRAWALS, AND DEATH
BENEFITS: (4,877,439) (403,603) (563,563) (345,999) (6,190,604)
ADMINISTRATIVE AND OTHER CHARGES: (4,187,469) (195,020) 0 (35,677) (4,418,166)
NET TRANSFERS FROM/TO OTHER
SUBACCOUNTS OR FIXED RATE OPTIONS: (4,465,593) (170,032) (73,121) (184,688) (4,893,434)
----------- --------- -------- --------- -----------
NET WITHDRAWALS $ (7,080,793) $ (269,723) $ (637,047) $ (577,102) $ (8,564,665)
============== ============= =========== =========== =============
NOTE 8: UNIT ACTIVITY
Transactions in units for the years ended December 31, 1997 and 1996 were as
follows:
1997:
- ----
VAL VLI SPVA SPVL
--- --- ---- ----
CONTRACT OWNER CONTRIBUTIONS: 5,838,667.266 382,652.262 3,449.116 109,431.697
CONTRACT OWNER REDEMPTIONS: (10,155,002.145) (542,172.570) (415,988.975) (490,928.090)
1996:
- ----
VAL VLI SPVA SPVL
--- --- ---- ----
CONTRACT OWNER CONTRIBUTIONS: 8,645,307.336 458,122.783 38.930 206,238.829
CONTRACT OWNER REDEMPTIONS: (12,105,073.163) (505,821.944) (242,465.876) (596,341.418)
A4 - Real Property
NOTE 9: PURCHASES AND SALES OF INVESTMENTS
There were no purchases or sales of investments in the Partnership during the
year ended December 31, 1997. For the year ended December 31, 1996, the
aggregate costs of purchases and sales of investments in the Partnership were
$0 and $3,000,000, respectively.
A5 - Real Property
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of the
Pruco Life Variable Contract Real Property Account
and the Board of Directors of
Pruco Life Insurance Company
In our opinion, the accompanying statements of net assets and the related
statements of operations and changes in net assets present fairly, in all
material respects, the financial position of Pruco Life Variable Contract Real
Property Account at December 31, 1997 and 1996, and the results of its
operations and the changes in its net assets for the years then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of Pruco Life Insurance Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of shares owned in The Prudential Variable Contract Real Property
Partnership at December 31, 1997 and 1996, provide a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
New York, New York
March 20, 1998
A6 - Real Property
INDEPENDENT AUDITORS' REPORT
To the Partners of
Pruco Life Variable Contract Real Property Account
Newark, New Jersey
We have audited the accompanying statements of operations and changes in net
assets of Pruco Life Variable Contract Real Property Account ("Real Property
Account") for the year ended December 31, 1995. These financial statements are
the responsibility of the Real Property Account's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations and changes in net assets of Pruco Life
Variable Contract Real Property Account for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Parsippany, New Jersey
March 1, 1996
A7 - Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31,
------------------------------------
1997 1996
-------------- --------------
ASSETS
REAL ESTATE INVESTMENTS - At estimated market value:
Real estate and improvements
(cost: 12/31/97 -- $201,670,248; 12/31/96 -- $177,082,291) $ 181,317,624 $ 151,074,276
Interest in properties at estimated market value
(cost:12/31/97--$0; 12/31/96--$6,133,157) 0 5,850,000
Real estate investment trust (cost: 12/31/97 -- $10,000,005;
12/31/96 -- $0) 12,523,805 0
--------------- ---------------
Total real estate investments 193,841,429 156,924,276
MARKETABLE SECURITIES - At estimated market value
(cost: 12/31/97 -- $13,939,000; 12/31/96 -- $24,345,000) 13,971,421 24,426,644
CASH AND CASH EQUIVALENTS 12,880,560 20,738,204
DIVIDEND RECEIVABLE 146,999 0
ACCRUED INVESTMENT INCOME AND OTHER ASSETS
(net of allowance for uncollectible accounts: 12/31/97 --
$68,000; 12/31/96 -- $56,000) 1,904,726 2,066,916
--------------- ---------------
Total assets $ 222,745,135 $ 204,156,040
=============== ===============
LIABILITIES AND PARTNERS' EQUITY
OBLIGATION UNDER CAPITAL LEASE 0 $ 4,072,677
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 1,842,027 1,640,360
DUE TO AFFILIATES 832,922 719,200
OTHER LIABILITIES 538,413 467,009
--------------- ---------------
Total liabilities 3,213,362 6,899,246
--------------- ---------------
PARTNERS' EQUITY 219,531,773 197,256,794
--------------- ---------------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 222,745,135 $ 204,156,040
=============== ===============
NUMBER OF SHARES OUTSTANDING AT END OF PERIOD 11,848,275 11,848,275
=============== ===============
SHARE VALUE AT END OF PERIOD $ 18.53 $ 16.65
=============== ===============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B8 THROUGH B11
B1 - Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
------------- ------------- -------------
INVESTMENT INCOME:
Revenues from real estate and improvements $ 21,582,968 $ 22,799,694 $ 19,827,044
Income from interest in properties 435,296 606,558 638,183
Dividend income from real estate investment trusts 158,184 0 0
Interest on short-term investments 2,305,364 2,134,386 2,660,865
-------------- -------------- --------------
Total investment income 24,481,812 25,540,638 23,126,092
-------------- -------------- --------------
INVESTMENT EXPENSES:
Investment management fee 2,640,470 2,494,229 2,341,878
Real estate taxes 2,208,972 2,367,404 1,938,090
Administrative expense 2,326,155 1,865,433 1,795,092
Operating expense 3,296,350 2,904,620 1,870,183
Interest expense 220,118 489,434 460,578
-------------- -------------- --------------
Total investment expenses 10,692,065 10,121,120 8,405,821
-------------- -------------- --------------
NET INVESTMENT INCOME 13,789,747 15,419,518 14,720,271
-------------- -------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net proceeds from real estate investments
sold 6,297,422 20,497,789 0
Less: Cost of real estate investments sold 6,274,539 26,610,932 0
Realization of prior years' unrealized
gain on real estate investments sold (283,157) (4,539,996) 0
-------------- -------------- --------------
Net gain (loss) realized on real estate
investments sold 306,040 (1,573,147) 0
-------------- -------------- --------------
Change in unrealized gain (loss) on real estate
investments 8,179,192 (3,211,436) 661,623
-------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 8,485,232 (4,784,583) 661,623
-------------- -------------- --------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 22,274,979 $ 10,634,935 $ 15,381,894
============== ============== ==============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B8 THROUGH B11
B2 - Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
------------- ------------- -------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS:
Net investment income $ 13,789,747 $ 15,419,518 $ 14,720,271
Net gain (loss) realized on real estate
investments sold 306,040 (1,573,147) 0
Net unrealized gain (loss) from real estate
investments 8,179,192 (3,211,436) 661,623
-------------- -------------- --------------
Net increase in net assets resulting from
operations 22,274,979 10,634,935 15,381,894
-------------- -------------- --------------
NET DECREASE IN NET ASSETS RESULTING
FROM CAPITAL TRANSACTIONS:
Withdrawals by partners
(Shares: 1997 -- 0; 1996 -- 188,409;
1995 -- 204,350) 0 (3,000,000) (3,000,000)
-------------- -------------- --------------
Net decrease in net assets resulting from
capital transactions 0 (3,000,000) (3,000,000)
-------------- -------------- --------------
NET INCREASE IN NET ASSETS 22,274,979 7,634,935 12,381,894
NET ASSETS - Beginning of year 197,256,794 189,621,859 177,239,965
-------------- -------------- --------------
NET ASSETS - End of year $219,531,773 $197,256,794 $189,621,859
============== ============== ==============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B8 THROUGH B11
B3 - Real Property Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations $ 22,274,979 $ 10,634,935 $ 15,381,894
Adjustments to reconcile net increase in net assets
resulting from operations to net cash provided by
operating activities:
Net realized and unrealized (gain) loss on
investments (8,485,232) 4,784,583 (661,623)
(Increase) decrease in:
Dividend receivable (146,999) 0 0
Accrued investment income and other assets 162,190 (323,611) 474,790
(Decrease) increase in:
Obligation under capital lease (72,677) 190,256 77,585
Accounts payable and accrued expenses 201,667 (502,254) 1,337,548
Due to affiliates 113,722 36,405 58,589
Other liabilities 71,404 (197,060) 18,156
-------------- -------------- --------------
Net cash flows from operating activities 14,119,054 14,623,254 16,686,939
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from real estate investments
sold 6,297,422 20,497,789 0
Acquisition of real estate property (23,417,474) (10,713,722) (36,774,343)
Acquisition of real estate investment trust (10,000,005) 0 0
Improvements and additional costs on prior purchases:
Additions to real estate owned (1,311,864) (997,893) (1,050,197)
Additions to real estate partnerships 0 0 (24,415)
Sale (purchase) of marketable securities 10,455,223 (13,894,489) 5,292,044
-------------- -------------- --------------
Net cash flows from investing activities (17,976,698) (5,108,315) (32,556,911)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Withdrawals by partners 0 (3,000,000) (3,000,000)
Principal payments on capital lease obligation (4,000,000) 0 0
-------------- -------------- --------------
Net cash flows from financing activities (4,000,000) (3,000,000) (3,000,000)
-------------- -------------- --------------
NET CHANGE IN CASH AND CASH
EQUIVALENTS (7,857,644) 6,514,939 (18,869,972)
CASH AND CASH EQUIVALENTS - Beginning of year 20,738,204 14,223,265 33,093,237
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS - End of year $ 12,880,560 $ 20,738,204 $ 14,223,265
============== ============== ==============
SUPPLEMENTAL INFORMATION:
Cash paid during the year for interest $ 220,118 $ 376,450 $ 376,450
============== ============== ==============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B8 THROUGH B11
B4 - Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
DECEMBER 31,1997 DECEMBER 31, 1996
-------------------------------- --------------------------------
ESTIMATED ESTIMATED
MARKET MARKET
COST VALUE COST VALUE
----------------------------------------------------------------------
REAL ESTATE AND IMPROVEMENTS (PERCENT OF NET ASSETS) 82.6% 76.6%
Location Description
- --------------------------------------------------------------------------------------------------------------------------------
Lisle, IL Office Building $17,916,983 $10,278,959 $17,524,421 $9,900,000
Atlanta, GA Garden Apartments 15,446,293 15,100,000 15,396,738 13,707,814
Pomona, CA Warehouse 23,637,049 19,504,612 23,456,751 17,553,849
Roswell, GA Retail Shopping Center 31,858,198 29,547,042 31,754,073 28,333,818
Morristown, NJ Office Building 18,931,914 10,805,918 18,797,224 10,113,986
Bolingbrook, IL Warehouse 8,948,028 7,100,000 8,948,028 7,100,000
Farmington Hills, MI Garden Apartments 13,641,971 14,805,258 13,623,952 14,706,400
Raleigh, NC Garden Apartments 15,804,860 16,525,751 15,762,951 16,854,252
Nashville, TN Office Building 8,613,828 9,611,329 8,379,326 8,800,436
Oakbrook Terrace, IL Office Complex 12,725,366 14,100,000 12,725,105 13,290,000
Beaverton, OR Office Complex 10,728,285 10,700,000 10,713,722 10,713,721
Salt Lake City, UT Industrial Building 5,388,134 5,350,000 0 0
Aurora, CO Industrial Building 8,540,585 8,400,000 0 0
Brentwood, TN Office Complex 9,488,755 9,488,755 0 0
----------------------------------------------------------------------
$201,670,248 $181,317,624 $177,082,291 $151,074,276
======================================================================
INTEREST IN PROPERTIES (PERCENT OF NET ASSETS) 0.0% 3.0%
Location Description
- --------------------------------------------------------------------------------------------------------------------------------
Jacksonville, FL Warehouse/Distribution $0 $0 $1,317,453 $1,225,000
Jacksonville, FL Warehouse/Distribution 0 0 1,002,448 1,000,000
Jacksonville, FL Warehouse/Distribution 0 0 1,442,894 1,325,000
Jacksonville, FL Warehouse/Distribution 0 0 2,370,362 2,300,000
-------------- ------------- ------------- -------------
$0 $0 $6,133,157 $5,850,000
============== ============= ============= =============
REAL ESTATE TRUST (PERCENT OF NET ASSETS) 5.7% 0.0%
- --------------------------------------------------------------------------------------------------------------------------------
Meridian REIT Shares (506,894 shares) $10,000,005 $12,523,805 $0 $0
============== ============= ============= =============
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------------- --------------------------------
ESTIMATED ESTIMATED
FACE MARKET FACE MARKET
AMOUNT VALUE AMOUNT VALUE
----------------------------------------------------------------------
MARKETABLE SECURITIES (PERCENT OF NET ASSETS) 6.4% 12.4%
Description
- --------------------------------------------------------------------------------------------------------------------------------
Marketable Securities $13,939,000 $13,971,421 $24,345,000 $24,426,644
============== ============= ============= =============
CASH AND CASH EQUIVALENTS (PERCENT OF NET ASSETS) 5.9% 10.5%
Description
- --------------------------------------------------------------------------------------------------------------------------------
Commercial Paper and Cash $12,918,158 $12,880,560 $20,804,826 $20,738,204
============== ============= ============= =============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B8 THROUGH B11
B5 - Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
-------------------------------
FACE ESTIMATED
AMOUNT MARKET VALUE
------------ ------------
MARKETABLE SECURITIES (PERCENT OF NET ASSETS) 6.4%
International Lease Finance Corp., 5.92%, January 15, 1998 $500,000 $499,083
Smith Barney Holding Inc., 5.70%, January 28, 1998 1,304,000 1,285,475
Suntrust Banks, 8.875%, February 1, 1998 1,500,000 1,517,880
Chase Manhattan Bank, 5.75%, February 10, 1998 2,000,000 2,000,000
Beneficial Corp., 9.125%, February 15, 1998 700,000 705,948
Citicorp, 10.15%, February 15, 1998 200,000 207,324
General Motors Acceptance Corp., 5.9%, February 19, 1998 985,000 994,545
General Motors Acceptance Corp., 5.9875%, February 23, 1998 1,300,000 1,299,363
American General Finance Corp., 7.25%, March 1, 1998 500,000 507,880
Commercial Credit Co., 5.7%, March 1, 1998 375,000 375,199
Associates Corp. of North America, 7.3%, March 15, 1998 400,000 406,635
International Lease Finance Corp., 5.75%, March 15, 1998 400,000 399,940
Morgan Guaranty Trust Co., 5.85%, March 16, 1998 500,000 499,855
Royal Bank of Canada, 5.91%, June 17, 1998 2,000,000 1,998,853
FCC National Bank, 5.75281%, July 2, 1998 1,025,000 1,024,202
General Mills Inc., 5.38%, July 8, 1998 250,000 249,238
------------- -------------
TOTAL MARKETABLE SECURITIES $13,939,000 $13,971,421
============= =============
CASH AND CASH EQUIVALENTS (PERCENT OF NET ASSETS) 5.9%
Barnett Bank, Inc., 6.70%, January 2, 1998 $1,235,000 $1,234,540
American Greetings Corp., 6.26%, January 5, 1998 1,250,000 1,247,179
Xerox Capital, 5.85%, January 6, 1998 1,000,000 995,775
Nike Inc., 6.10%, January 8, 1998 1,215,000 1,213,353
Paccar Financial Corp., 5.85%, January 9, 1998 1,000,000 996,100
Pitney Bowes Credit Corp., 6.00%, January 13, 1998 750,000 747,375
Merrill Lynch & Co., Inc. 5.85%, January 15, 1998 1,000,000 994,313
Bank of Montreal, 5.90%, January 16, 1998 1,000,000 1,000,000
Countrywide Home Loan, Inc., 5.85%, January 22, 1998 1,000,000 993,175
General Electric Capital Corp., 5.74%, February 9, 1998 1,000,000 990,593
------------- -------------
TOTAL CASH EQUIVALENTS 10,450,000 10,412,402
CASH 2,468,158 2,468,158
------------- -------------
TOTAL CASH AND CASH EQUIVALENTS $12,918,158 $12,880,560
============= =============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B8 THROUGH B11
B6 - Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
----------------------------------
FACE ESTIMATED
AMOUNT MARKET VALUE
--------------- --------------
MARKETABLE SECURITIES (PERCENT OF NET ASSETS) 12.4%
PNC Bank, 5.48%, January 6, 1997 $2,200,000 $2,199,643
Wells Fargo, 5.54%, January 28, 1997 2,300,000 2,300,446
Sears Roebuck Acceptance Corp, 7.48%, February 19, 1997 100,000 102,187
General Motors Acceptance Corp, 5.88%, February 27, 1997 105,000 107,143
Sears Roebuck Acceptance Corp,7.72%, February 27, 1997 800,000 812,000
Dean Witter Discover & Co., 5.75%, March 6,1997 500,000 500,387
General Motors Acceptance Corp, 5.74%, March 18, 1997 1,200,000 1,201,344
Sears Discover Credit Corp, 7.81%, March 18, 1997 1,150,000 1,164,548
American Home Products, 6.88%, April 15, 1997 2,000,000 2,019,323
Ford Motor Credit, 5.90%, May 5, 1997 1,400,000 1,405,337
Ford Motor Credit, 5.90%, May 5, 1997 350,000 350,875
Ford Motor Credit, 9.15%, May 7, 1997 500,000 515,010
Key Bank NA, 5.58%, May 14, 1997 900,000 899,130
American Express Centurion Bank, 5.58%, June 10, 1997 2,300,000 2,299,862
Associates Corp of North America, 7.05%, June 30, 1997 600,000 604,766
Bank One Columbus, 5.58%, July 1, 1997 1,110,000 1,108,812
Associates Corp of North America, 5.88%, August 15, 1997 1,230,000 1,230,744
Key Bank of New York, 4.82%, September 4, 1997 1,300,000 1,298,740
Bank One Milwaukee, NA, 5.26%, October 8, 1997 1,000,000 1,002,870
Morgan Guaranty Trust Co., 5.38%, November 14, 1997 1,000,000 999,271
Norwest Financial Inc., 6.50%, November 15, 1997 300,000 302,286
Norwest Corp., 5.55%, November 21, 1997 2,000,000 2,001,922
---------------- ---------------
TOTAL MARKETABLE SECURITIES $24,345,000 $24,426,644
================ ===============
CASH AND CASH EQUIVALENTS (PERCENT OF NET ASSETS) 10.5%
Gateway Fuel Corp, 7.15%, January 2, 1997 $2,177,000 $2,176,135
Bell Atlantic Financial Services, 5.50%, January 14, 1997 2,650,000 2,638,664
Pioneer Hi-Bred Intl, 5.47%, January 15, 1997 1,200,000 1,194,712
Bank of Montreal, 5.43%, January 27, 1997 2,300,000 2,300,000
Canadian Imperial Bank, 5.39%, January 27, 1997 2,400,000 2,400,000
HJ Heinz Co., 5.46%, January 29, 1997 2,370,000 2,354,184
General Electric Capital Corp, 5.34%, February 3, 1997 2,300,000 2,279,871
Bankers Trust Co., 5.35%, February 20, 1997 2,000,000 2,007,723
Colonial PL Co Note, 5.60%, February 21, 1997 800,000 792,658
Colonial PL Co Note, 5.35%, March 4, 1997 783,000 773,109
General Electric Capital Corp., 5.45%, March 14, 1997 300,000 296,321
---------------- ---------------
TOTAL CASH EQUIVALENTS 19,280,000 19,213,378
CASH 1,524,826 1,524,826
---------------- ---------------
TOTAL CASH AND CASH EQUIVALENTS $20,804,826 $20,738,204
================ ===============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B8 THROUGH B11
B7 - Real Property
NOTES TO FINANCIAL STATEMENTS OF
PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FOR YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
GENERAL
On April 29, 1988, Prudential Variable Contract Real Property Partnership (the
"Partnership"), a general partnership organized under New Jersey law, was formed
through an agreement among Prudential Insurance Company of America
("Prudential"), Pruco Life Insurance Company ("Pruco Life"), and Pruco Life
Insurance Company of New Jersey ("Pruco Life of New Jersey"). The Partnership
was established as a means by which assets allocated to the real estate
investment option under certain variable life insurance and variable annuity
contracts issued by the respective companies could be invested in a commingled
pool. The partners in the Partnership are Prudential, Pruco Life and Pruco Life
of New Jersey.
The Partnership has a policy of investing at least 65% of its assets in direct
ownership interests in income-producing real estate and participating mortgage
loans.
The Partnership's investments are valued on a daily basis, consistent with the
Partnership Agreement. On each day during which the New York Stock Exchange is
open for business, the net assets of the Partnership are valued using the
estimated market value of its investments as described in Notes 1A and 1B below,
plus an estimate of net investment income from operations reduced by any
liabilities of the Partnership.
The periodic adjustments to property values described in Notes 1A and 1B below
and the corrections of previous estimates of net investment income are made on a
prospective basis. There can be no assurance that all such adjustments and
estimates will be made timely.
Shares of the Partnership are sold to Prudential Variable Contract Real Property
Account, Pruco Life Variable Contract Real Property Account and Pruco Life of
New Jersey Variable Contract Real Property Account (the "Real Property
Accounts") at the current share value of the Partnership's net assets. Share
value is calculated by dividing the estimated market value of net assets of the
Partnership as determined below by the number of shares outstanding. A Contract
owner participates in the Partnership through interests in the Real Property
Accounts.
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A: REAL ESTATE OWNED AND INTEREST IN PROPERTIES - The Partnership's
investments in real estate owned and interests in properties are
initially valued at their purchase price. Thereafter, real estate
investments are reported at their estimated market values based upon
appraisal reports prepared by independent real estate appraisers
(members of the Appraisal Institute) which are ordinarily obtained on
an annual basis. The property valuations are reviewed internally at
least every three months and adjusted if there has been a change in
the value of the property since the last valuation.
The Chief Appraiser of Prudential Insurance Company Comptroller's
Department Valuation Unit (Valuation Unit) is responsible to assure
that the valuation process provides independent and accurate market
value estimates. In the interest of maintaining and monitoring the
independence and accuracy of the appraisal process,
B8 - Real Property
NOTES TO FINANCIAL STATEMENTS OF
PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FOR YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
the Comptroller of Prudential has appointed a third party firm to act
as the Appraisal Management Firm. The Appraisal Management Firm, among
other responsibilities, approves the selection and scheduling of
external appraisals; reviews and provides comments on a sample of
external and internal appraisals; assists in developing policies and
procedures and assists in the evaluation of the performance and
competency of external appraisers. The real estate valuations are
reviewed quarterly by the Valuation Unit and adjusted if there has
been any significant changes in circumstances related to the real
estate since the most recent independent appraisal.
The purpose of an appraisal is to estimate the market value of real
estate as of a specific date. Market value has been defined as the
most probable price for which the appraised real estate will sell in a
competitive market under all conditions requisite to fair sale, with
the buyer and seller each acting prudently, knowledgeably, and for
self interest, and assuming that neither is under undue duress. The
estimate of market value generally is a correlation of three
approaches, all of which require the exercise of subjective judgment.
The three approaches are: (1) current cost of reproducing the real
estate less deterioration and functional and economic obsolescence;
(2) discounting of a series of income streams and reversion at a
specified yield or by directly capitalizing a single year income
estimate by an appropriate factor; and (3) value indicated by recent
sales of comparable properties in the market space. In the
reconciliation of these three approaches, the one most heavily relied
upon is the one then recognized as the most appropriate by the
independent appraiser for the type of real estate in the market.
As described above, the estimated market value of real estate and real
estate related assets are determined through an appraisal process.
These estimated market values may vary significantly from the prices
at which the real estate investments would sell since market prices of
real estate investments can only be determined by negotiation between
a willing buyer and seller. Although the estimated market values
represent subjective estimates, management believes these estimated
market values are reasonable approximations of market prices and the
aggregate value of investments in real estate is fairly presented as
of December 31, 1997 and 1996.
B: INVESTMENTS IN REAL ESTATE INVESTMENT TRUSTS - Shares of real estate
investment trusts (REITs) are generally valued at their quoted market
price at December 31, 1997. These values may be discounted for
restrictions, if any, on the future sale of these shares, such as
lockout periods or limitations on the number of shares which may be
sold in a given time period. Any such discounts are determined by the
Valuations Unit.
C: REVENUE RECOGNITION - Rent from real estate is recognized when billed.
Revenue from certain real estate investments is net of all or a
portion of related real estate expenses and taxes, as lease
arrangements vary as to responsibility for payment of these expenses
between tenants and the Partnership. Since real estate is stated at
B9 - Real Property
NOTES TO FINANCIAL STATEMENTS OF
PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FOR YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
estimated market value, net income is not reduced by depreciation
expense. Dividend income is accrued at the ex-dividend date.
D: CASH AND CASH EQUIVALENTS - For purposes of the statement of cash
flows, all short-term investments with a maximum maturity of three
months and investments in money market funds with a maximum weighted
average maturity of three months are considered to be cash
equivalents. Cash equivalents are carried at market value. Cash of
$128,089 and $144,314 at December 31, 1997 and 1996, respectively, was
maintained by the properties for tenant security deposits and is
included in Other Assets on the Statements of Assets and Liabilities.
E: MARKETABLE SECURITIES - Marketable securities are highly liquid
investments with maturities of more than three months when purchased
and are carried at market value.
F: FEDERAL INCOME TAXES - The Partnership is not a taxable entity under
the provisions of the Internal Revenue Code. The income and capital
gains and losses of the Partnership are attributed, for federal
income tax purposes, to the Partners in the Partnership. The
Partnership may be subject to state and local taxes in jurisdictions
in which it operates.
G: MANAGEMENT'S USE OF ESTIMATES IN THE FINANCIAL STATEMENTS - 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 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.
NOTE 2: OBLIGATION UNDER CAPITAL LEASE
The Partnership maintained an interest in a leasehold estate consisting of six
one-story industrial warehouse buildings located in Pomona, California. In
conjunction with this interest, the Partnership assumed assignment of a ground
lease agreement expiring in November 2078 with no renewal options. The annual
ground lease payments after November 1994, and for each 10 year increment
thereafter, were subject to increase 50% of the increase in the Consumer Price
Index during the previous period. In 1995, the annual ground lease payment
increased by $126,450 to $376,450. The ground lease contained a purchase option
that exercisable from November 1994 to November 1997 at a fixed price of
$4,000,000. In August 1997, the Partnership exercised this purchase option.
NOTE 3: LEASING ACTIVITY
The Partnership leases space to tenants under various operating lease
agreements. These agreements, without giving effect to renewal options, have
expiration dates ranging from 1997 to
B10 - Real Property
NOTES TO FINANCIAL STATEMENTS OF
PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FOR YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
2010. At December 31, 1997, the aggregate future minimum base rental payments
under non-cancelable operating lease by year are:
Year Ending
December 31, (000's)
------------ ------------
1998 $ 12,877
1999 11,857
2000 10,221
2001 8,669
2002 6,834
Thereafter 11,916
------
Total $ 62,374
=======
NOTE 4: COMMITMENT FROM PARTNER
On January 9, 1990, Prudential committed to fund up to $100 million to enable
the Partnership to take advantage of opportunities to acquire attractive real
property investments whose cost is greater than the Partnership's then available
cash. Contributions to the Partnership under this commitment are utilized for
property acquisitions and returned to Prudential on an ongoing basis from
Contract owners' net contributions. Also, the amount of the commitment is
reduced by $10 million for every $100 million in estimated market value net
assets of the Partnership. The amount available under this commitment for
property purchases as of December 31, 1997 is approximately $47 million.
NOTE 5: RELATED PARTY TRANSACTIONS
Pursuant to an investment management agreement, Prudential charges the
Partnership a daily investment management fee at an annual rate of 1.25% of the
average daily gross asset valuation of the Partnership. For the years ended
December 31, 1997, 1996 and 1995 management fees incurred by the Partnership
were $2,640,470; $2,494,229; and $2,341,878, respectively.
The Partnership also reimburses Prudential for certain administrative services
rendered by Prudential. The amounts incurred for the years ended December 31,
1997, 1996 and 1995 were $115,346; $116,818; and $123,919, respectively, and are
classified as administrative expenses in the statements of operations.
The Partnership owned a 50% interest in four warehouse/distribution buildings in
Jacksonville, Florida (the Unit warehouses). The remaining 50% interest was
owned by Prudential and one of its subsidiaries. In September 1997, the Unit
warehouses were sold as part of an industrial package for cash of $12,544,659.
The partnership's share of the proceeds was $6,272,329.
The Partnership has contracted with PREMISYS Real Estate Services, Inc.
(PREMISYS), an affiliate of Prudential, sold by Prudential in 1997, to provide
property management services at the Unit warehouses. The property management fee
earned by PREMISYS, incurred by the Partnership and Prudential for the years
ended December 31, 1997, 1996 and 1995 was $32,175; $36,000; and $31,360,
respectively.
B11 - Real Property
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
February 20, 1998
To the Partners of Prudential
Variable Contract Real Property Partnership
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Prudential
Variable Contract Real Property Partnership (the "Partnership") at December 31,
1997 and 1996, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the management of the
Prudential Insurance Company of America; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
New York, New York
B12 - Real Property
INDEPENDENT AUDITORS' REPORT
To the Partners of
The Prudential Variable Contract Real Property Partnership
Newark, New Jersey
We have audited the accompanying statements of operations, changes in net assets
and cash flows of the Prudential Variable Contract Real Property Partnership
(the "Partnership") for the year ended December 31, 1995 and the per share data
and ratios for each of the three years in the period ended December 31, 1995.
These financial statements and the per share data and ratios are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements and the per share data and
ratios based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and per share data and ratios present
fairly, in all material respects, the results of operations, changes in net
assets and cash flows of The Prudential Variable Contract Real Property
Partnership for the year ended December 31, 1995 and the per share data and
ratios for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Parsippany, New Jersey
March 1, 1996
B13 - Real Property
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant, in conjunction with certain affiliates, maintains insurance on
behalf of any person who is or was a trustee, director, officer, employee, or
agent of the Registrant, or who is or was serving at the request of the
Registrant as a trustee, director, officer, employee or agent of such other
affiliated trust or corporation, against any liability asserted against and
incurred by him or her arising out of his or her position with such trust or
corporation.
Arizona, being the state of organization of Pruco Life Insurance Company
("Pruco"), permits entities organized under its jurisdiction to indemnify
directors and officers with certain limitations. The relevant provisions of
Arizona law permitting indemnification can be found in Section 10-850 et seq. of
the Arizona Statutes Annotated. The text of Pruco's By-law, Article VIII, which
relates to indemnification of officers and directors, is incorporated by
reference to Exhibit 3(ii) to its Form 10-Q, SEC File No. 33-37587, filed August
15, 1997.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 15. NOT APPLICABLE
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
--------
(1A) Distribution Agreement between Incorporated by reference to
Pruco Securities Corporation and Post-Effective Amendment No. 14 to
Pruco Life Insurance Company with Form S-6, Registration Statement No.
respect to the Pruco Life Variable 2-80513, filed March 1, 1990, on
Insurance Account. behalf of the Pruco Life Variable
Insurance Account.
(1B) Distribution Agreement between Incorporated by reference to Form
Pruco Securities Corporation and S-6, Registration Statement No.
Pruco Life Insurance Company with 2-89558, filed February 21, 1984, on
respect to the Pruco Life Variable behalf of the Pruco Life Variable
Appreciable Account Appreciable Account.
(1C) Distribution Agreement between Incorporated by reference to Form
Pruco Securities Corporation and S-1, Registration No. 33-86780, filed
Pruco Life Insurance Company with April 9, 1997, on behalf of the Pruco
respect to the Pruco Life Single Life Variable Contract Real Property
Premium Variable Life Account and Account.
Pruco Life Single Premium Variable
Annuity Account.
(3A) Articles of Incorporation of Incorporated by reference to Form
Pruco Life Insurance Company, as S-6, Registration No. 333-07451,
amended October 19, 1993. filed July 2, 1996, on behalf of the
Pruco Life Variable Appreciable
Account.
(3B) By-Laws of Pruco Life Insurance Incorporated by reference to Form
Company, as amended May 6, 1997. 10-Q, Registration No. 033-37587,
filed August 15, 1997, on behalf of
the Pruco Life Insurance Company.
II-1
(3C) Resolution of the Board of Incorporated by reference to Form
Directors establishing Pruco Life S-1, Registration No. 33-86780, filed
Variable Contract Real Property April 9, 1997, on behalf of the Pruco
Account. Life Variable Contract Real Property
Account.
(4A) Variable Life Insurance Contract. Incorporated by reference to
Pre-Effective Amendment No. 1 to Form
S-6, Registration Statement No.
2-80513, filed February 17, 1983, on
behalf of the Pruco Life Variable
Insurance Account.
(4B)(i) Revised Variable Appreciable Incorporated by reference to
Life Insurance Contract with fixed Post-Effective Amendment No. 5 to
death benefit. Form S-6, Registration Statement No.
2-89558, filed July 10, 1986, on
behalf of the Pruco Life Variable
Appreciable Account.
(4B)(ii) Revised Variable Appreciable Incorporated by reference to
Life Insurance Contract with Post-Effective Amendment No. 5 to
variable death benefit. Form S-6, Registration Statement No.
2-89558, filed July 10, 1986, on
behalf of the Pruco Life Variable
Appreciable Account.
(4C) Single Premium Variable Annuity Incorporated by reference to Form
Contract. S-1, Registration No. 33-86780, filed
April 9, 1997, on behalf of the Pruco
Life Variable Contract Real Property
Account.
(4D) Flexible Premium Variable Life Incorporated by reference to Form
Insurance Contract. S-1, Registration No. 33-86780, filed
April 9, 1997, on behalf of the Pruco
Life Variable Contract Real Property
Account.
(5) Opinion and Consent of Clifford Filed herewith.
E. Kirsch, Esq. as to the legality
of the securities being registered.
(10A) Investment Management Agreement Incorporated by reference to
between The Prudential Insurance Post-Effective Amendment No. 4 to
Company of America and The Registrant's Form S-1, Registration
Prudential Variable Contract Real Statement No. 33-8698, filed May 2,
Property Partnership. 1988.
(10B) Service Agreement between The Incorporated by reference to
Prudential Insurance Company of Registrant's Form S-1, Registration
America and The Prudential Statement No. 33-8698, filed
Investment Corporation. September 12, 1986.
(10C) Partnership Agreement of The Incorporated by reference to
Prudential Variable Contract Real Post-Effective Amendment No. 4 to
Property Partnership. Registrant's Form S-1, Registration
Statement No. 33-8698, filed May 2,
1988.
(22) Subsidiary Organizational Chart. Incorporated by reference to Form
S-1, Registration No. 33-86780, filed
April 9, 1997, on behalf of the Pruco
Life Variable Contract Real Property
Account.
(23A) Written consent of Price Filed herewith.
Waterhouse LLP, independent
accountants.
(23B) Written consent of Deloitte & Filed herewith.
Touche LLP, independent auditors.
II-2
(24B) Written consent of Clifford E. Incorporated by reference to Exhibit
Kirsch, Esq. (5) hereto.
(25) Powers of Attorney:
(A) W. Bethke, Ira J. Kleinman, M. Incorporated by reference to Form
Melzer, E. Milnes, I. Price 10-K, Registration No. 33-08698,
filed March 31, 1997 on behalf of the
Pruco Life Variable Contract Real
Property Account.
(B) J. Avery Incorporated by reference to
Post-Effective Amendment No. 2 to
Form S-6, Registration No. 333-07451,
filed June 25, 1997 on behalf of the
Pruco Life Variable Appreciable
Account.
(C) K. Sakaguchi Incorporated by reference to
Pre-Effective Amendment No. 1 to Form
N-4, Registration No. 333-06701,
filed September 12, 1996 on behalf of
the Pruco Life Flexible Premium
Variable Annuity Account.
(D) J. Schlomann Filed herewith.
(27) Financial Data Schedules Filed herewith.
(b) Financial Statement Schedules
-----------------------------
Schedule III-Real Estate Owned by The Filed herewith.
Prudential Variable Contract Real
Property Partnership.
Schedule IV-Mortgage Loans on Real Not Applicable.
Estate for The Prudential Variable
Contract Real Property Partnership.
ITEM 17. UNDERTAKINGS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned Registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that Section.
The undersigned Registrant hereby undertakes (a) to file any prospectuses
required by Section 10(a)(3) of the Securities Act of 1933 as Post-Effective
Amendments to this Registration Statement, (b) that for the purposes of
determining any liability under the 1933 Act, each such Post-Effective Amendment
may be deemed to be a new Registration Statement relating to the securities
offered therein and the offering of such securities at that time may be deemed
to be in the initial bona fide offering thereof, (c) to reflect in the
prospectus any facts or events after the effective date of the registration
statement (or the most recent Post-Effective Amendment thereof) which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement, (d) to include any material
information with respect to the plan of distribution not previously disclosed in
the registration statement or any material change to such information in the
registration statement, (e) to remove from registration by means of a Post-
Effective Amendment any of the securities being registered which remain unsold
at such time as the offering of such securities may be terminated.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Pruco Life Insurance
Company has duly caused this Post-Effective Amendment No. 4 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Newark, State of New Jersey, on the 8th day of April,
1998.
PRUCO LIFE INSURANCE COMPANY
In Respect of
PRUCO LIFE
VARIABLE CONTRACT REAL PROPERTY
ACCOUNT
By: /s/ Esther H. Milnes
-------------------------------
Esther H. Milnes
President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 4 to the Registration Statement has been signed below by the
following Directors and Officers of Pruco Life Insurance Company in the
capacities indicated on this 8th day of April, 1998.
SIGNATURE AND TITLE
-------------------
/s/ *
- ----------------------------------------------
Esther H. Milnes
President and Director
/s/ *
- ----------------------------------------------
James M. Schlomann
Chief Accounting Officer and Comptroller
/s/ * *By: /s/ Thomas C. Castano
- ---------------------------------------------- ------------------------
James J. Avery, Jr. Thomas C. Castano
Director (Attorney-in-Fact)
/s/ *
- ----------------------------------------------
William M. Bethke
Director
/s/ *
- ----------------------------------------------
Ira J. Kleinman
Director
/s/ *
- ----------------------------------------------
Mendel A. Melzer
Director
/s/ *
- ----------------------------------------------
I. Edward Price
Director
/s/ *
- ----------------------------------------------
Kiyofumi Sakaguchi
Director
II-4
EXHIBIT INDEX
Page
(a)(5) Opinion and Consent of Clifford E. Kirsch, Esq.as to the II-6
legality of the securities being registered.
(a)(23A) Written consent of Price Waterhouse LLP, independent II-7
accountants.
(a)(23B) Written consent of Deloitte & Touche LLP, independent II-8
auditors.
(25)(D) Power of Attorney II-9
(b) Financial Statement Schedules
Schedule III-Real Estate Owned by The Prudential Variable II-11
Contract Real Property Partnership.
(27.1) Financial Data Schedule for the Pruco Life Real Property II-13
Account.
(27.2) Financial Data Schedule for The Prudential Real Property II-14
Partnership.
II-5