As filed with the Securities and Exchange Commission on June 27, 2002
Registration No. __________
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-11
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ABIC REALTY FUND I, L.P.
(Name of registrant)
9520 NORTH MAY AVENUE ABIC REALTY CORPORATION
SUITE 330 9520 NORTH MAY AVENUE
OKLAHOMA CITY, OKLAHOMA 73120 SUITE 330
(405) 302-6434 OKLAHOMA CITY, OKLAHOMA 73120
(405) 302-6434
(Address, including the zip code (Name, address, including zip code
& telephone number, including and telephone number, including
area code of Registrant's area code of agent for service)
principle executive office)
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Copy to:
AMY WATERS
ATTORNEY AT LAW
109 E. FRANKLIN STREET
WAXAHACHIE, TEXAS 75165
(972) 938-9090
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Approximate date of commencement of proposed sale to public: As soon as
practicable after the effective date of this Registration Statement.
If this form is filed to register additional securities for an offering pursuant
to Rule 462 (b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462 (C) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462 (d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
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Title of each Amount Proposed Maximum Proposed Amount of
Class of Securities to be Offering Price Maximum Aggregate Registration
To be Registered Registered Per Unit Offering Price Fee
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Units of Limited $40,000,000 100% $40,000,000 $3,680.00
Partnership Interest
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</Table>
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall hereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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ABIC REALTY FUND I, L.P.
$100,000 MINIMUM OFFERING
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Units of Limited Partnerships Interest
At a purchase price of $10.00 per Unit
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ABIC Realty Fund I, L.P. (the "Partnership") is a Texas limited
partnership, which has been formed to acquire and operate commercial real estate
properties. The properties will be acquired on an all-cash basis, and will
generally include properties which have been constructed and have operating
histories. The Partnership may also include newly constructed properties with
limited or no operating histories and properties which are under development or
construction. The General Partner of the Partnership is ABIC Realty Corporation,
a Texas corporation. ABIC Realty Fund I, L.P. will conduct its business pursuant
to a limited partnership agreement.
The Partnership's business objectives are to purchase and operate a
portfolio of income producing real estate properties that: (i) pay quarterly
cash distributions to its investors at an increasing rate over time, that for
taxable investors may be partially free from current taxation; and (ii) increase
in value over time (the "Partnership Properties"). The Partnership cannot assure
that these business objectives will be attained.
The Partnership is offering for sale to the public a minimum of 10,000
up to a maximum of 4,000,000 units of limited partnership interest (the "Units")
at a purchase price of $10.00 per Unit. The minimum purchase is 200 Units
($2,000). The participating broker-dealers must sell a minimum of 10,000 Units
if any are sold. The broker-dealers are required to use only their best efforts
to sell the 4,000,000 Units. The purchasers of the Units will become the Limited
Partners of the Partnership. The offering will commence upon the effective date
of this Prospectus and will continue until and terminate upon the earlier of (i)
________ 31, 2003, or (ii) the date on which all $40,000,000 in Units of ABIC
Realty Fund I, L.P. have been sold. Proceeds of the Offering will be held in an
escrow bank account until subscriptions for at least $100,000 (10,000 Units)
have been received and accepted by the General Partner. If 10,000 Units have not
been sold within 180 days after the effective date of this Offering, the
Offering will be terminated and subscribers' funds will be promptly refunded.
AN INVESTMENT IN UNITS INVOLVES SIGNIFICANT RISKS INCLUDING THE FOLLOWING:
* In order to comply with certain Internal Revenue Services requirements
allowing income from the Partnership to be treated as passive income at the
Partner level, future transferability of the Units has been restricted to
the safe harbor levels set forth in Treasury Regulations. Accordingly, the
liquidity of the Units is restricted.
* The Partnership will be subject to market risks associated with investments
in real estate. The Partnership cannot predict the future value of its
Properties, or how much cash it will receive from the lessees of its
Properties. Accordingly, the extent to which the Limited Partners will
receive cash distributions and realize potential appreciation on real
estate investments will depend upon fluctuating market conditions.
* The number of properties that the Partnership will acquire and
diversification of its investments will be reduced to the extent that less
than the maximum number of Units are sold.
* The Partnership does not own any properties, and the General Partner has
not yet identified any properties in which there is a reasonable
probability the Partnership will invest. Accordingly, investors will not
have the opportunity to evaluate the properties that the Partnership will
acquire and must rely totally upon the General Partner with respect to the
acquisition of properties.
* Some of the proceeds available for investment in real properties may be
invested in the acquisition and construction of undeveloped properties,
which would involve risks relating to the builder's ability to control
construction costs, failure to perform, or failure to build in conformity
with plan specifications and timetables.
FOR A DISCUSSION OF THE RISK FACTORS CONCERNING THIS INVESTMENT, SEE "RISK
FACTORS" AT PAGE 5.
THE PARTNERSHIP IS NOT A MUTUAL FUNDS OR ANY OTHER TYPE OF INVESTMENT COMPANY
AND IS NOT REGISTERED OR SUBJECT TO REGULATION UNDER THE INVESTMENT COMPANY ACT
OF 1940.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PROSPECTIVE INVESTORS ARE ENCOURAGED TO READ THE ENTIRE PROSPECTUS.
<Table>
<Caption>
PRICE TO BROKER COMMISSIONS PROCEEDS TO
PUBLIC & EXPENSES(1) PARTNERSHIP
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PER UNIT $ 10.00 $ 0.75 $ 9.25
TOTAL MINIMUM $ 100,000.00 $ 7,500.00 $ 92,500.00
TOTAL MAXIMUM $40,000,000.00 $3,000,000.00 $37,000,000.00
</Table>
(1) The Partnership will pay Selling Commissions in the amount of 7.5% of
the gross offering proceeds to soliciting broker-dealers that are
members of the National Association of Securities Dealers, Inc. who
participate in the Offering. The General Partner may pay the
broker-dealers for expenses incurred for due diligence purposes and
non-accountable expenses up to 1% of the gross offering proceeds. The
Partnership will pay to the General Partner 6% of the gross offering
proceeds to reimburse registration, legal, accounting, printing,
marketing and other out-of-pocket fees as well as general,
administrative and overhead expenses borne by the General Partner in
connection with this Offering and the organization of the Partnership.
THE DATE OF THIS PROSPECTUS IS __________, 2002
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
SUMMARY OF THE OFFERING...............................................................3
RISK FACTORS..........................................................................5
Investment Risks.............................................................6
Real Estate Risks............................................................6
Federal Income Tax Risks.....................................................7
Risks Relating to Retirement Plan Investors..................................8
WHO SHOULD INVEST - SUITABILITY STANDARDS.............................................9
DESCRIPTION OF THE UNITS.............................................................10
ESTIMATED USE OF PROCEEDS............................................................11
COMPENSATION OF THE GENERAL PARTNER..................................................12
CONFLICTS OF INTEREST................................................................13
MANAGEMENT...........................................................................13
INVESTMENT OBJECTIVES AND CRITERIA...................................................14
REAL PROPERTY INVESTMENTS............................................................16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................................17
INVESTMENT BY TAX-EXEMPT ENTITIES AND ERISA
CONSIDERATIONS.......................................................................17
FEDERAL INCOME TAX CONSEQUENCES......................................................19
SUMMARY OF PARTNERSHIP AGREEMENT.....................................................29
DISTRIBUTIONS AND ALLOCATIONS........................................................30
REPORTS TO INVESTORS.................................................................32
PLAN OF DISTRIBUTION.................................................................32
SUPPLEMENTAL SALES MATERIAL..........................................................33
LEGAL MATTERS........................................................................33
EXPERTS..............................................................................33
ADDITIONAL INFORMATION...............................................................33
GLOSSARY.............................................................................33
INDEPENDENT AUDITOR'S REPORT.........................................................37
FINANCIAL STATEMENTS.................................................................38
EXHIBIT A - FORM OF LIMITED PARTNERSHIP AGREEMENT OF ABIC REALTY FUND I, L.P........A-1
EXHIBIT B - FORM OF SUBSCRIPTION AGREEMENT AND SIGNATURE PAGE.......................B-1
</Table>
2
SUMMARY OF THE OFFERING
THIS SECTION SUMMARIZES CERTAIN INFORMATION CONTAINED IN OTHER SECTIONS OF THIS
PROSPECTUS AND IS INTENDED FOR QUICK REFERENCE ONLY. THIS IS NOT A COMPLETE
DESCRIPTION OF THE INVESTMENT. POTENTIAL INVESTORS SHOULD READ AND EVALUATE THE
FULL TEXT OF THIS PROSPECTUS IN ORDER TO EVALUATE AN INVESTMENT IN THE
PARTNERSHIP.
ABIC REALTY FUND I, L.P. ABIC Realty Fund I, L.P. is a Texas limited
partnership whose principal place of
business and registered office is located at
the office of the General Partner, 9520
North May Avenue, Suite 330, Oklahoma City,
Oklahoma 73120. The telephone number is
(405) 302-6434. ABIC Realty Fund I, L.P. is
referred to in this Prospectus as the
"Partnership." The Partnership has been
formed to acquire and operate commercial
real estate properties, all to be acquired
on an all-cash basis. The Partnership
expects all real estate properties acquired
will be located in growing population urban
and suburban areas of the southern and
southwestern United States.
GENERAL PARTNER: ABIC Realty Corporation, a Texas
corporation, is the General Partner and will
make all investment and operating decisions
for the Partnership.
SECURITIES OFFERED: A minimum of 10,000 Units (the "Minimum
Offering") up to a maximum of 4,000,000
Units (the "Maximum Offering") in the
Partnership are being offered at $10 per
Unit.
TERMS OF THE OFFERING: The offering of Units of ABIC Realty Fund I,
L.P. (the "Offering") will commence upon the
date of this Prospectus and will continue
until and terminate upon the earlier of (i)
___________, 2003 or (ii) the date on which
all $40,000,000 in Units of ABIC Realty Fund
I, L.P. have been sold. The subscription
proceeds from the Offering will be held in
an escrow bank account until subscriptions
for at least $100,000 (10,000 Units) have
been received and accepted by the General
Partner. If 10,000 Units have not been sold
within 180 days after the effective date of
this Offering, the Offering will be
terminated and subscribers' funds will be
promptly refunded.
REAL ESTATE
PROPERTIES TO BE ACQUIRED: The Partnership plans to acquire, on an
all-cash basis, and operate commercial real
estate properties which have an operating
history, including, without limitation,
office buildings, shopping centers, business
industrial parks and other commercial and
industrial properties. The Partnership may
also acquire properties under construction
or development, newly constructed
properties, or properties which have been
recently constructed and have limited or no
operating histories. As of the date of this
Prospectus, the Partnership has neither
purchased nor contracted to purchase any
properties, nor has the General Partner
identified any properties in which there is
a reasonable probability that the
Partnership will invest. The Partnership
expects all properties acquired will be
located in growing population urban and
suburban areas of the southern and
southwestern United States.
BUSINESS OBJECTIVES: The Partnership's business objectives are to
purchase and operate a portfolio of income
producing real estate properties that: (i)
pay quarterly cash distributions to its
investors at an increasing rate over time,
that for taxable investors may be partially
free from current taxation; and (ii)
increase in value over time (the
"Partnership Properties"). No assurance can
be given that these business objectives will
be attained.
ESTIMATED USE OF
PROCEEDS OF OFFERING: It is anticipated that approximately 86.5%
of the proceeds of this Offering will be
invested in Properties.
FUTURE CASH DISTRIBUTIONS
TO PARTNERS: Holders of Units will be entitled to receive
periodic preferential cash distributions of
operating cash flow (the "Preferred Return")
and will be entitled to receive a
preferential cash return on the sale of the
Partnership Properties.
Distributions of Net Cash from Operations
will be distributed first to Limited
Partners holding Units until they have
received their 7% Preferred Return. Although
there can be no assurance that Net Cash From
Operations will be sufficient to make
additional distributions, any remaining Net
Cash Flow from Operations will be
distributed to the General Partner until it
has received, aggregating all prior periods'
distributions, distributions totaling 25% of
the Preferred Return paid to the Limited
Partners, aggregating all prior periods
distributions. Thereafter distributions of
Net Cash from Operations shall be 80% to
Limited Partners on a per unit basis and 20%
to the General Partner. If, in any year, Net
Cash from Operations is insufficient to pay
the Limited Partners their full 7% Preferred
Return, the unpaid portion shall accrue and
be payable in future periods prior to the
General Partner receiving any distributions.
Distributions of Non-Liquidating Net Sale
Proceeds and Liquidating Distributions will,
in the event there are any unpaid accrued
Preferred Returns, first be applied toward
any unpaid accrued Preferred Returns and
then to the General Partner until it has
received, aggregating all prior periods'
distributions, an amount equal to 25% of the
Limited Partners' Preferred Return. After
all Preferred Returns have been paid,
distributions will then be made to the
Limited Partners in an amount equal to their
Net Capital Contributions, and then to the
General Partner in an amount equal to its
Capital Contribution. Thereafter, in the
case of Non-Liquidating Net Sale Proceeds,
distributions will be 80% to Limited
Partners and 20% to the General Partner. In
the case of Liquidating Distributions, the
distributions will be in accordance with
Capital Accounts after Gain on Sale in
excess of depreciation deductions has been
allocated
3
80% to Limited Partners and 20% to General
Partners and gain equal to prior period
depreciation deductions has been allocated
to the respective Limited Partner that was
allocated the deduction.
NO ASSURANCE CAN BE MADE AS TO THE TIMING OR
AMOUNT OF CASH DISTRIBUTIONS TO THE
PARTNERS.
RISK FACTORS: Investment in the Units involves various
risks including the following:
In order to comply with certain Internal
Revenue Services requirements allowing
income from the Partnership to be treated as
passive income at the Partner level, future
transferability of the Units has been
restricted to the safe harbor levels set
forth in Treasury Regulations. Accordingly,
the liquidity of the Units is restricted.
Limited Partners will have limited voting
rights and, therefore, will have minimal
control over the Partnership's operations.
The Limited Partners must rely on the
General Partner, who will have full
responsibility for the management of the
Partnership.
The net worth of the General Partner is
approximately $300,000. The net worth of the
General Partner may be relevant to
evaluating the abilities of the General
Partner to fulfill its financial obligations
and responsibilities to the Partnership.
The number of properties that the
Partnership will acquire and diversification
of its investments will be reduced to the
extent that less than the Maximum Offering
amount is raised. Lack of diversification of
the Partnership's investments may increase
the risks associated with an investment in
the Units.
This Offering involves payment of certain
fees to the General Partner which have not
been determined on an arm's-length basis.
The Partnership will be subject to market
risks associated with investments in real
estate, which means that both the amounts of
cash the Partnership will receive from the
lessees of the Partnership Properties, and
the future value of the Properties cannot be
predicted. Accordingly, the extent to which
investors will receive cash distributions
and realize potential appreciation on real
estate investments will be dependent upon
fluctuating market conditions.
The Partnership does not own any real
property and the General Partner has not
identified any properties in which there is
a reasonable probability that the
Partnership will invest. Accordingly,
investors will not have the opportunity to
evaluate the properties that the Partnership
will acquire and must rely totally upon the
ability of the General Partner with respect
to the acquisition of properties.
Up to 15% of the proceeds available for
investment in real properties may be
invested in the acquisition and construction
of undeveloped properties that are not
expected to produce income within two years
of the acquisition. Any such investments
would involve risks relating to the
builder's ability to control construction
costs, failure to perform, or failure to
build in conformity with plan specifications
and timetables, thus potentially subjecting
the Partnership to cost overruns and time
delays for properties under construction.
Increased costs of newly constructed
properties may have the effect of reducing
returns to Limited Partners, while
construction delays may have the effect of
delaying distributions of cash flow from
operations.
The Partnership is authorized to borrow
amounts up to 40% of the total purchase
price of Partnership Properties in order to
finance the maintenance and repairs or
improvements of Partnership Properties under
certain conditions; provided, however that
the Partnership will be acquiring properties
only on an all-cash basis and the General
Partner does not intend to cause the
Partnership to borrow any funds to acquire
properties. Partnership borrowing could
reduce future cash distribution and/or
subject certain properties to possible
adverse consequences in the event of any
failure by the Partnership to make required
payments. The General Partner does not
believe that limited borrowing against the
Partnership will result in any adverse
consequences to the Limited Partners.
SEE THE "RISK FACTORS" SECTION OF THIS
PROSPECTUS FOR FURTHER DISCUSSION OF THE
RISK FACTORS RELATING TO AN INVESTMENT IN
THE UNITS, AT PAGE 5.
CONFLICTS OF INTEREST
OF GENERAL PARTNER: The General Partner may in the future
organize additional real estate partnerships
or ventures. As a result, investors should
be aware that the General Partner would have
to allocate time between the Partnership and
other such activities and may in the future
have various conflicts of interest. Fees
payable to the General Partner or its
Affiliates in connection with Partnership
transactions involving the purchase,
management and sale of Partnership
Properties are not the result of
arm's-length negotiations and will be
payable regardless of the quality of the
property acquired or the services provided
to the Partnership.
4
GENERAL PARTNER FEES
AND REIMBURSEMENTS: The General Partner will receive
compensation and fees for services and/or
reimbursement of cost and expenses relating
to this Offering and in connection with the
investment and management of the
Partnership's assets which are not the
result of arm's-length negotiations. The
most significant items are:
OFFERING AND ORGANIZATIONAL COSTS: The
Partnership will pay the General Partner 6%
of the gross offering proceeds to reimburse
registration, legal, accounting, printing,
marketing and other out-of-pocket fees as
well as allocated general, administrative
and overhead expenses borne by the General
Partner for costs and services in connection
with the Offering and the organization of
the Partnership.
ACQUISITION AND ADVISORY FEE: The
Partnership will pay the General Partner a
fee of 3% of gross offering proceeds in
connection with the election, valuation and
acquisition of properties, in addition to
reimbursement of actual costs and expenses
for the acquisition of properties. These
fees shall be payable ratably on a monthly
basis as properties are acquired.
PROPERTY SUPERVISION FEE: The Partnership
will pay to the General Partner an ongoing
property supervision fee in the amount of 2%
annually of the amount of funds invested in
properties, payable on a monthly basis.
PROPERTY MANAGEMENT AND LEASING SERVICE: The
General Partner generally will utilize
independent third party property management
and leasing companies and shall cause the
Partnership to employ a property management
and leasing company (which may, when
necessary, be an Affiliate of the General
Partner) to perform professional property
management and leasing services for the
Partnership. In the event the property
management and leasing company is an
Affiliate of the General Partner, the
compensation payable to such Affiliate shall
not exceed fees which would be charged by
persons who are not affiliated with the
General Partner rendering comparable
services in the same geographic area.
PARTNERSHIP MANAGEMENT AND INVESTOR
ADMINISTRATION: A Partnership management fee
shall be paid monthly to the General Partner
in an amount equal to 1/12th of 1% of the
aggregate amount of Limited Partner
subscriptions. An Investor Administration
Fee shall be paid monthly at 1/12th of 1% of
the aggregate amount of Limited Partner
subscriptions.
REAL ESTATE SALES COMMISSIONS: In connection
with the sales of Partnership Properties,
the General Partner generally will utilize
independent third-party real estate
companies. If the sales agent is affiliated
with the General Partner, commissions shall
not exceed fees which would be charged by
persons who are not affiliated with the
General Partner rendering comparable
services in the same geographic area.
The General Partner may receive other items
of incidental expense reimbursement during
the term of the Partnership.
PARTNERSHIP TERM: The Partnership will continue in existence
until December 31, 2030 or until all the
Partnership Properties have been sold. The
Partnership will be liquidated upon the
ultimate disposition of the Partnership
Properties, which the General Partner
currently anticipates will occur a minimum
of ten to twenty years after acquisition of
the last Partnership Property is completed.
RISK FACTORS
THE PURCHASE OF UNITS INVOLVES A NUMBER OF RISK FACTORS. INVESTORS
SHOULD CONSIDER THE FOLLOWING RISK FACTORS AS WELL AS ALL OF THE OTHER
INFORMATION INCLUDED IN THIS PROSPECTUS BEFORE INVESTING IN THE UNITS:
INVESTMENT RISKS
LIMITED TRANSFERABILITY AND LACK OF LIQUIDITY OF THE UNITS. In order to
comply with certain Internal Revenue Services requirements allowing income from
the Partnership to be treated as passive income at the Partner level, future
transferability of the Units has been restricted to a level no greater than the
trading levels allowed under the safe harbor Regulations promulgated under IRC
Code Section 7704 (see Federal Income Tax Consequences-Publicly Traded
Partnerships). The Units will not be listed on any exchange, and it is not
anticipated that a public trading market will develop for the Units.
Accordingly, the Units are expected to have limited liquidity. Certain state
regulatory agencies may impose certain restrictions relating to the number of
Units which may be transferred by a Limited Partner, and may require that the
suitability standards for initial purchasers of the Units be applied to
assignees as a condition to their substitution as Limited Partners. The
Partnership Agreement limits transferability by providing that that any transfer
which may cause the Partnership to be classified as a "publicly traded
partnership" shall be deemed void and shall not be recognized by the
Partnership. Because of the fact that the classification of the Partnership as a
"publicly traded partnership" may decrease the value of the Units, the General
Partner intends to exercise fully its rights to prohibit transfers of Units
which could cause the Partnership to be classified as a "publicly traded
partnership."
SUBSTANTIAL RELIANCE ON THE GENERAL PARTNER. All decisions with respect
to the management of the Partnership will be made exclusively by the General
Partner. The Limited Partners will have no right or power to take part in the
management of the Partnership.
NET WORTH OF THE GENERAL PARTNER. The General Partner has represented
that it has a net worth of approximately $300,000. The net worth of the General
Partner may be relevant in evaluating the ability of the General Partner to
fulfill its obligations and responsibilities to the Partnership.
5
LIMITATIONS OF RIGHTS OF THE LIMITED PARTNERS. The Partnership is a
limited partnership formed under the laws of the State of Texas, and
accordingly, the rights of the Limited Partners are limited to rights provided
either under Texas law or contained in the Partnership Agreement. In this
regard, the Partnership Agreement provides that Limited Partners may exercise
only certain limited voting rights.
POSSIBLE LACK OF DIVERSIFICATION RESULTING FROM SUBSCRIPTIONS FOR LESS
THAN THE MAXIMUM NUMBER OF UNITS. To the extent that less than the Maximum
Offering amount is raised, the diversification of the Partnership's investments
will be decreased and the extent to which the Partnership's profitability will
be affected by any one of its investments will increase.
POTENTIAL LIABILITY OF LIMITED PARTNERS. A Limited Partner's liability,
in general, will be limited to the amount he agrees to contribute to the capital
of the Partnership plus his share of any undistributed profits and assets.
OFFERING PRICE ARBITRARILY ESTABLISHED. The selling price of the Units
offered hereby was determined arbitrarily by the General Partner and bears no
relationship to any established criteria for valuing issued or outstanding units
of limited partnership interest or other ownership interests at the present
time.
COMPENSATION TO THE GENERAL PARTNER. The General Partner and/or its
Affiliates will perform services for the Partnership in connection with the sale
of Units, the selection and acquisition of Partnership Properties, the ongoing
supervision of Partnership Properties, and ultimately in the sale of the
Properties, and will receive substantial compensation from the Partnership in
consideration for these services. The amount of such compensation has not been
determined in arm's-length negotiations.
NO ASSURANCE OF CASH DISTRIBUTIONS. There is no assurance as to when or
whether sufficient cash will be available for distribution to the Limited
Partners from either Net Cash From Operations or Sale Proceeds. The Partnership
bears all expenses incurred in its operations, which are deducted from cash
funds generated by operations prior to computing the amount of Net Cash From
Operations to be distributed to the Limited Partners and General Partner. In
addition, the General Partner, in its discretion, may retain any portion of such
funds for working capital purposes of the Partnership. Although gains from the
sales of properties typically represent a substantial portion of any profits
attributable to a real estate investment, there can be no assurance as to the
ability of the Partnership to realize gains on the resale of its Properties,
and, in any event, distribution of such proceeds should not be expected to occur
during the early years of Partnership operations. Sales of Properties developed
by the Partnership generally will not occur until after completion of the
purchase, development and/or construction of the Properties and a period of
ownership of several years thereafter. Further, receipt of the full proceeds of
such sales may be extended over a substantial period of time following the
sales. In addition, the amount of taxable gain allocated to a Limited Partner
with respect to the sale of a Partnership Property could exceed the cash
proceeds received from such sale.
REAL ESTATE RISKS
FLUCTUATING FINANCIAL PERFORMANCE OF LEASED PROPERTIES. Partnership
Properties will include leased industrial and commercial properties, and the
Partnership will be subject to economic problems incident to the ownership and
operation of these types of properties, including (i) changes in the general
economic climate resulting in increased operating costs; (ii) changes in local
conditions such as an oversupply of space or reduction in demand for real
estate; (iii) competition from other available space; and (iv) changes in laws
and governmental regulations governing real estate usage, zoning and taxes. The
fluctuations in net income of the Partnership may primarily be due to tenant
turnover, resulting in increased vacancies and the requirement to expend funds
for tenant refurbishments, and increases in administrative and other operating
expenses. Because of the cyclical nature of the real estate market, such
decreases in net income of the Partnership could occur at any time. There are no
assurances that Partnership Properties will not experience substantial
fluctuating financial performance.
POTENTIAL ADVERSE ECONOMIC AND REGULATORY CHANGES. Real estate
investments are relatively illiquid compared to other financial assets, and this
illiquidity will limit the ability of the Partnership to quickly change its
portfolio. Sales of Partnership Properties will be subject to factors such as
changes in general economic or local conditions, changes in supply of or demand
for similar or competing properties in an area, changes in interest rates,
availability of permanent mortgage funds, and changes in tax, real estate,
environmental and zoning laws, all of which may render the sale of a Property
difficult or unattractive. Periods of high interest rates and tight money supply
may make the sale of Properties more difficult. For these and other reasons, no
assurance of profitable operation or realization of gains from the sales of
Partnership Properties can be given.
UNSPECIFIED PROPERTY OFFERING. This offering is commonly referred to as
a "blind pool" offering in that the General Partner will not pre-identify any
properties in which there is a reasonable probability that the Partnership will
invest. Investors must rely upon the ability of the General Partner with respect
to the investment and management of the unspecified properties and will not have
an opportunity to evaluate for themselves the relevant economic, financial and
other information regarding the specific properties in which the proceeds of
this Offering will be invested. Accordingly, the risk of investing in the Units
may be increased. While the Partnership is required to obtain an independent
appraisal for each property purchased reflecting an appraised value at least
equal to the purchase price paid for such property, it should be noted that
appraisals are merely estimates of value and should not be relied upon as
precise measures of true worth or realizable value. No assurance can be given
that the Partnership will be successful in obtaining suitable investments or
that, if investments are made, the objectives of the Partnership will be
achieved.
DEVELOPMENT AND CONSTRUCTION OF UNIMPROVED PROPERTIES. The Partnership
may invest some of the net Offering proceeds in the acquisition and development
of properties upon which it will develop and construct improvements at a fixed
contract price, provided that the Partnership may not invest more than 15 % of
the net offering proceeds available for investment in properties which are not
expected to produce income within two years of their acquisition. In this
regard, the Partnership will be subject to risks relating to the builder's
ability to control construction costs or to build in conformity with plans,
specifications and timetables. The builder's failure to perform may necessitate
legal action by the Partnership to rescind its purchase or the construction
contract or to compel performance. Performance may also be affected or delayed
by conditions beyond the builder's control. Delays in completion of construction
could also give lessees the right to terminate pre-construction leases for space
at a newly developed project. Additional risks may be incurred where the
Partnership makes periodic progress payments or other advances to such builders
prior to completion of construction. However, the Partnership will make such
payments only after having received a certification from an independent
architect or an independent engineer, or both, as to the percentage of the
project which has been completed, and as to the dollar amount of the
construction then completed. Factors such as those discussed above can result in
increased costs of a project.
6
In addition, the Partnership will be subject to normal lease-up risks relating
to newly constructed projects. Furthermore, the price to be paid for a property
upon which improvements are to be constructed or completed, which price is
normally agreed upon at the time of acquisition, must be based upon projections
of rental income and expenses or fair market value of the property upon
completion of construction, which are not certain until after a number of months
of actual operation.
COMPETITION FOR INVESTMENTS. The Partnership will experience
competition for real property investments from individuals, corporations and
bank and insurance company investment accounts, as well as other real estate
investment partnerships, real estate investment trusts and other entities
engaged in real estate investment activities. Competition for investments may
have the effect of increasing costs and reducing returns to Limited Partners.
POTENTIAL ADVERSE EFFECTS OF DELAYS IN INVESTMENTS. Delays that may
take place in the selection, acquisition and development of properties could
adversely affect the return to a Limited Partner as a result of corresponding
delays in the commencement of distributions to Limited Partners and in the
availability of income tax deductions for depreciation and amortization. Also,
where properties are acquired prior to the commencement of construction or
during the early stages of construction, it will typically take several months
to complete construction and rent available space.
UNCERTAINTY OF TIMING AND MARKET CONDITIONS ON FUTURE DISPOSITION OF
PROPERTIES. The Partnership generally will hold the various Partnership
Properties until such time as the General Partner determines that the sale or
other disposition appears to be advantageous to achieve the Partnership's
investment objectives or until it appears that such objectives will not be met.
The General Partner intends to sell Properties acquired for development after
holding such Properties for a minimum period of several years from the date the
development is completed, and intends to sell existing income-producing
Properties within several to twenty years after their acquisition. However, the
General Partner may exercise its discretion as to whether and when to sell a
Property, and the Partnership will have no obligation to sell Properties at any
particular time. It is impossible to predict with any certainty the various
market conditions affecting real estate investments which will exist at any
particular time in the future. Due to the uncertainty of market conditions,
which may affect the future disposition of Partnership Properties, there are no
assurances that the Partnership will be able to sell its Properties at a profit
in the future. Accordingly, the timing of liquidation of the Partnership and the
extent to which Limited Partners will receive cash distributions and realize
potential appreciation on real estate investments will be dependent upon
fluctuating market conditions.
ENVIRONMENTAL MATTERS. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be liable for the cost of removal or remediation
of hazardous or toxic substances on, under or in such property. Such laws often
impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances.
Environmental laws also may impose restrictions on the manner in which property
may be used or businesses may be operated, and these restrictions may require
expenditures. Environmental laws provide for sanctions in the event of
noncompliance and may be enforced by governmental agencies or, in certain
circumstances, by private parties. In connection with the acquisition and
ownership of the Partnership Properties, the Partnership may be potentially
liable for such costs. The cost of defending against claims of liability, of
compliance with environmental regulatory requirements or of remediating any
contaminated Property could materially adversely affect the business, assets or
results of operations of the Partnership and, consequently, amounts available
for distribution to the Limited Partners.
FEDERAL INCOME TAX RISKS
AN INVESTMENT IN UNITS INVOLVES CERTAIN MATERIAL INCOME TAX RISKS. EACH
PROSPECTIVE PURCHASER OF UNITS IS URGED TO CONSULT WITH HIS OWN TAX ADVISOR WITH
RESPECT TO THE FEDERAL (AS WELL AS STATE AND FOREIGN) TAX CONSEQUENCES OF AN
INVESTMENT IN UNITS. THE PARTNERSHIP WILL NOT SEEK ANY RULINGS FROM THE INTERNAL
REVENUE SERVICE (THE "IRS") REGARDING ANY OF THE TAX ISSUES DISCUSSED HEREIN.
POTENTIAL LOSS OF PARTNERSHIP TAX STATUS. The ability to obtain the
income tax attributes anticipated from an investment in Units of the Partnership
depends upon the classification of the Partnership as a partnership for federal
income tax purposes and not as an association taxable as a corporation. If the
Partnership were reclassified as an association taxable as a corporation, its
net income would be taxable, all items of income, gain, loss, deduction and
credit would be reflected only on its tax returns and would not be passed
through to the Limited Partners, and distributions to the Limited Partners would
be treated as ordinary dividend income to the extent of earnings and profits of
the Partnership. In such event, cash distributions to Limited Partners would be
reduced, and the potential tax liability of Limited Partners with respect to
distributions received from the Partnership would be increased.
POTENTIAL PUBLICLY TRADED PARTNERSHIP CLASSIFICATION. If a secondary
trading market develops for the Units and trading of Units exceeds a certain
level, the IRS may determine that the Partnership is a "publicly traded
partnership" and, hence, taxed as a corporation. As discussed in the previous
paragraph, such a determination would have a very detrimental impact on the
Partnership. If such a determination were made by the IRS, taxation as a
corporation might be avoided if 90% of the Partnership's income is '"qualifying
income" such as rents, interest and dividends. However, even if taxation as a
corporation were avoided because 90% of the Partnership's income is "qualifying
income", the income will be considered portfolio income and, hence, would not be
available to offset passive losses. The IRS has promulgated regulations that set
forth safe harbor provisions which allow for a minimal level of public trading
on the secondary market without classification as a 'publicly traded
partnership". Due to the complex nature of such safe harbor provisions and the
lack of interpretive guidance with respect to such provisions, and because any
determination in this regard will necessarily be based upon future facts not yet
in existence at this time, no assurances can be given that the Partnership will
not, at some time in the future, be treated as a publicly traded partnership.
POSSIBILITY OF IRS CHALLENGE TO ALLOCATIONS OF PROFIT AND LOSS. No
assurance can be given that the IRS will not successfully challenge the
allocations in the Partnership Agreement and reallocate items of income, gain,
loss, deduction and credit. Such a challenge could result in certain of the tax
benefits to Limited Partners being reduced or eliminated.
POTENTIAL DEALER STATUS. In the event the Partnership were deemed for
tax purposes to be a "dealer" (one who holds property primarily for sale to
customers in the ordinary course of business) with respect to one or more
Partnership Properties, any gain recognized upon a sale of such real property
would be taxable as ordinary income and would constitute Unrelated Business
Taxable Income (UBTI) to Limited Partners who are tax-exempt entities. The issue
of dealer status is dependent upon facts which will not be known until the time
a property is sold or held for sale. Therefore, it is impossible to predict
whether the Partnership will be considered to hold any or all of its properties
primarily for sale, to customers in the ordinary course of business.
7
POSSIBILITY OF DISALLOWANCE OF DEDUCTIBILITY OF FEES AND EXPENSES PAID
BY THE PARTNERSHIP. Disallowance by the IRS of any material portion of the fees
and expenses payable by the Partnership would result in an increase in the
taxable income of the Partnership allocable to its Partners with no associated
increase in Net Cash From Operations. Since the appropriate classification of
fees and expenses paid by the Partnership into proper categories and the
determination of whether certain fees and expenses are ordinary and necessary
and reasonable in amount depends upon facts relating to and existing at the
times the services are to be rendered to the Partnership, it is impossible to
predict the probable outcome if the IRS were to challenge the deductibility or
timing of deduction or amortization of those fees and expenses.
CHARACTERIZATION OF SALE-LEASEBACK TRANSACTIONS. In the event that the
Partnership enters into any sale transaction, which is characterized as a
financing, the Partnership would likely lose depreciation and cost recovery
deductions with respect to the property purchased and income generated from such
property would be deemed portfolio income, which could not be offset by passive
losses. Although the General Partner will use its best efforts to structure any
such sale-leaseback transaction such that the lease will be characterized as a
"true lease" and the Partnership will be treated as the owner of the property in
question for federal income tax purposes, the Partnership will not seek an
advance ruling from the IRS or obtain an opinion of counsel that it will be
treated as the owner of any leased properties for federal income tax purposes.
Accordingly, no assurance can be given that any such transaction would not be
re-characterized as a financing transaction for federal income tax purposes.
APPLICABILITY OF ANTI-ABUSE RULES. In December 1994, the IRS adopted
Regulations setting forth "anti-abuse" rules under Code provisions applicable to
partnerships which rules authorize the Commissioner of Internal Revenue to
recast transactions involving the use of partnerships to either reflect the
underlying economic arrangement or to prevent the use of a partnership to
circumvent the intended purpose of a provision of the Code. In this regard, the
General Partner is unaware of any facts or circumstances which would cause the
IRS to exercise its authority to recast any transaction entered into by the
Partnership; however, the applicability of such rules to the Partnership's
activities is very uncertain, and no assurance can be given that the
Commissioner would not, in the future, attempt to recast or restructure certain
of the Partnership's activities or transactions.
POTENTIAL APPLICATION OF ALTERNATIVE MINIMUM TAX. The application of
the alternative minimum tax to a Limited Partner could reduce certain tax
benefits associated with the purchase of Units in the Partnership. The effect of
the alternative minimum tax upon a Limited Partner depends upon his particular
overall tax situation, and each Limited Partner should consult with and must
rely upon his own tax advisor with respect to the possible application of the
alternative minimum tax provisions of the Code.
AUDIT RISK, INTEREST AND PENALTIES. The IRS may audit the federal
income tax returns of the Partnership. Any audit of the Partnership could also
result in an audit of a Limited Partner's own tax return causing adjustments of
items unrelated to an investment in the Partnership, as well as an adjustment to
various Partnership items. In the event of any such adjustments, a Limited
Partner might incur attorneys' fees, court costs and other expenses contesting
protested deficiencies asserted by the IRS, in addition to interest on the
underpayment and certain penalties from the date the tax originally was due. In
addition, in the event of an audit, the tax treatment of all Partnership items
would be determined at the Partnership level in a single proceeding rather than
in separate proceedings with each Partner, and the General Partner is primarily
responsible for contesting federal income tax adjustments proposed by the IRS.
In this connection, the General Partner may extend the statute of limitations as
to all Partners, and in certain circumstances, may bind the Limited Partners to
a settlement with the IRS.
STATE AND LOCAL TAXATION AND REQUIREMENTS TO WITHHOLD STATE TAXES. The
state in which a Limited Partner is a resident may impose an income tax upon his
share of taxable income of the Partnership. Further, states in which the
Partnership will own Partnership Properties may impose income taxes upon a
Limited Partner's share of the Partnership's taxable income allocable to any
Partnership Property located in that state. In addition, many states have
implemented or are implementing programs to require partnerships to withhold and
pay state income taxes owed by non-resident partners relating to income
producing properties located in their states, and the Partnership may be
required to withhold state taxes from cash distributions otherwise payable to
Limited Partners. In the event the Partnership is required to withhold state
taxes from cash distributions otherwise payable to Limited Partners, the amount
of the Net Cash From Operations otherwise payable to such Limited Partners may
be reduced. In addition, such collection and filing requirements at the state
level may result in increases in the Partnership's administrative expenses,
which would have the effect of reducing cash available for distribution to the
Limited Partners. Prospective Limited Partners are urged to consult with their
own tax advisors with respect to the impact of applicable state and local taxes
and state tax withholding requirements on an investment in the Partnership.
POTENTIAL LEGISLATIVE OR REGULATORY ACTION. In recent years, numerous
legislative, judicial and administrative changes have been made in the
provisions of the federal income tax laws applicable to investments similar to
an investment in Units in the Partnership. Such changes are likely to continue
to occur in the future, and no assurances can be given that any such changes
will not adversely affect the taxation of a Limited Partner. Any such changes
could have an adverse effect on an investment in Units in the Partnership or on
the market value or the resale potential of Partnership Properties. Each
investor is urged to consult with his own tax advisor with respect to the status
of legislative, regulatory or administrative developments, and proposals and
their potential effect on an investment in the Units. It should also be noted
that, the Tax Opinion assumes that no legislation will be enacted, which will be
applicable to an investment in Units in the Partnership.
RISKS RELATING TO RETIREMENT PLAN INVESTORS
In considering an investment in Units of a portion of the assets of a
Retirement Plan, the plan fiduciary should consider applicable provisions of the
Code and the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), including in particular the following factors (i) whether the
investment is made in accordance with the plan documents and instruments
governing such plan, including the plan's investment policy; (ii) whether the
investment satisfies the prudence and diversification requirements of Sections,
404(a)(1)(B) and 404(a)(1)(C) of ERISA; (ill) whether the investment will result
in sufficient liquidity for the plan; (iv) the need to value the assets of the
plan annually; and (v) whether the investment would constitute a prohibited
transaction under Section 406 of ERISA or Section 4975 of the Code.
PLAN ASSETS RISK. While the General Partner does not intend that the
assets of the Partnership will be deemed to be assets of the Qualified Plans
investing as Limited Partners ("Plan Assets") and has used its best efforts to
structure the Partnership so that the assets of the Partnership will not be
deemed to be Plan Assets, in the event that the assets of the Partnership were
deemed to be Plan Assets, the General Partner would be considered to be a plan
fiduciary
8
and certain contemplated transactions described herein may be deemed to be
"prohibited transactions" subject to excise taxation under the Code.
Additionally, if the assets of the Partnership were deemed to be Plan Assets,
the standards of prudence and other provisions of ERISA would extend (as to all
plan fiduciaries) to the General Partner with respect to investments made by the
Partnership. The Partnership has not requested an opinion of counsel regarding
whether or not the assets of the Partnership would constitute Plan Assets under
ERISA nor has it obtained or sought any rulings from the U.S. Department of
Labor regarding classification of the Partnership's assets as Plan Assets.
However, existing U.S. Department of Labor Regulations defining Plan Assets for
purposes of ERISA contain exemptions from the treatment of assets of a limited
partnership as Plan Assets. While there can be no assurance that the Partnership
Agreement and the Offering have been structured so that the exemptions in such
regulations would apply to the Partnership, the General Partner intends to use
its best efforts to take such actions as may be required to insure that the
assets of the Partnership will not be deemed to be Plan Assets. Accordingly, an
investment by a Qualified Plan in Units should not be deemed an investment in
the assets of the Partnership, but no representations or warranties of any kind
can be made regarding the consequences of an investment in Units by Qualified
Plans in this regard. Plan fiduciaries are urged to consult with and rely upon
their own advisors with respect to ERISA issues which, if decided adversely to
the Partnership, could result in prohibited transactions, the imposition of
excise taxation and the imposition of co-fiduciary liability under the
provisions of ERISA in the event of actions undertaken by the Partnership which
are deemed to be non-prudent investments or prohibited transactions. In the
event the Partnership's assets constitute Plan Assets or certain transactions of
the Partnership constitute "prohibited transactions" under ERISA or the Code and
no exemption for such transactions is obtainable by the Partnership, the General
Partner has the right, but not the obligation (upon notice to all Limited
Partners, but without the consent of any Limited Partner), to (i) terminate the
Offering of Units, (ii) compel a termination and dissolution of the Partnership
or (iii) restructure the Partnership's activities to the extent necessary to
comply with any exception in the Department of Labor Regulations or any
prohibited transaction exemption granted by the Department of Labor or any
condition which the Department of Labor, might impose as a condition to granting
a prohibited transaction exemption.
MINIMUM DISTRIBUTION REQUIREMENTS. Any potential investor who intends
to purchase Units in his Individual Retirement Account ("IRA") and any trustee
of an IRA or other fiduciary of a Retirement Plan considering an investment in
Units should consider particularly the limited liquidity of an investment in the
Units as it relates to applicable minimum distribution requirements under the
Code. If the Units are still held and the Partnership Properties have not yet
been sold at such time as mandatory distributions are required to commence to an
IRA beneficiary or Qualified Plan participant, applicable provisions of the Code
and Regulations may require that a distribution in kind of the Units be made to
the IRA beneficiary or Qualified Plan participant. Any such distribution in kind
of Units must be included in the taxable income of the IRA beneficiary or
Qualified Plan participant for the year in which the Units are received at the
fair market value of the Units without any corresponding cash distributions with
which to pay the income tax liability arising out of any such distribution.
UNRELATED BUSINESS TAXABLE INCOME ("UBTI"). The Partnership will not
incur indebtedness to acquire Partnership Properties. Accordingly, it is not
intended or anticipated that the Partnership will generate income derived from
an unrelated trade or business, which is generally referred to as "UBTI."
Notwithstanding the foregoing, the General Partner has limited authority to
borrow funds equal to 40% of the total purchase price of Partnership Properties
which are deemed necessary Partnership operating purposes in the event of
unforeseen or unexpected circumstances in which the working capital reserves and
other case resources available to the Partnership are insufficient for the
maintenance and repair of Properties or for the protection or replacement of the
Partnership's assets, or to finance improvements of its properties to protect
capital previously invested in a property, to protect the value of the
Partnership's investment in a property, or to make a property more attractive
for sale or lease. In the event that it does become necessary to borrow funds
and the IRS determined that those borrowings constituted "acquisition
indebtedness" or the IRS determined that the Partnership Properties were held
primarily for sale to customers in the ordinary course of business, the income
related thereto would be UBTI. Although the General Partner will use its best
efforts to avoid characterization of the Partnership's income as UBTI, some risk
remains that the Partnership may generate UBTI in connection with any such
financing or in the event that the Partnership were deemed to be a "dealer" in
real property (one who holds real estate primarily for sale to customers in the
ordinary course of business).
WHO SHOULD INVEST - SUITABILITY STANDARDS
Investment in the Partnership is suitable only as a long-term
investment for persons of substantial means. It may be difficult to resell Units
because of the restrictions on transferability contained in the Partnership
Agreement and because no public market for the Units currently exists or is
anticipated to develop. In addition, it is contemplated that properties to be
purchased by the Partnership will be held for several to twenty years.
If the investor is an individual (including an individual beneficiary
of a purchasing IRA), or if the investor is a fiduciary (such as a trustee of a
trust or corporate pension or profit sharing plan, or other tax-exempt
organization, or a custodian under a Uniform Gifts to Minors Act), such
individual or fiduciary, as the case may be, must represent that he meets
certain requirements, as set forth in the Subscription Agreement, including the
following:
(i) that such individual (or in the case of fiduciary, that the
fiduciary account or the donor who directly or indirectly supplies the
funds to purchase unit) may not invest more than 10% of the investors
net worth (excluding home, furnishings, and automobiles); and
(ii) that such individual (or, in the case of a fiduciary, that the
fiduciary account or the donor who directly or indirectly supplies the
funds to purchase the Units) has a minimum annual gross income of
$45,000 and a net worth (excluding home, furnishings and automobiles)
of not less than $45,000; or
(iii) that such individual (or, in the case of a fiduciary, that the
fiduciary account or the donor who directly or indirectly supplies the
funds to purchase the Units) has a net worth (excluding home,
furnishings and automobiles) of not less than $150,000.
Transferees will also be required to comply with applicable standards,
except for intra-family transfers and transfers made by gift, inheritance or
family dissolution.
The minimum purchase is 200 Units ($2,000.00). No transfers will be
permitted of less than the minimum purchase, nor may a Limited Partner transfer,
fractionalize or subdivide such Units so as to retain less than such minimum
number thereof. For purposes of satisfying the minimum investment requirement
for Retirement Plans, unless otherwise prohibited by state law, a husband and
wife may jointly contribute funds from their separate Individual Retirement
Accounts ("IRAs"), provided that each such contribution is made in increments of
at least $1,000. It should be noted, however, that an investment
9
in the Partnership will not, in itself, create a Retirement Plan for any
investor and that, in order to create a Retirement Plan, an investor must comply
with all applicable provisions of the Code. After an investor has purchased the
minimum investment, any additional investments must be made in increments of at
least $1,000.00.
Various states may have suitability standards for individual investors
and subsequent transferees different from those set by the Partnership.
By executing the Subscription Agreement and Subscription Agreement
Signature Page (collectively, the "Subscription Agreement"), an investor
represents to the General Partner that he meets the foregoing applicable
suitability standards.
DESCRIPTION OF THE UNITS
UNITS
Each Unit shall have a purchase price of $10.00 per Unit, and, when
issued, will be fully paid and non-assessable. Holders of Units will become
Limited Partners of the Partnership and will be entitled to receive annual
distributions of Net Cash From Operations and Non-Liquidating Sale Proceeds
generated by the Partnership following the payment of certain fees and expenses.
SUMMARY OF DISTRIBUTIONS
Following is a summary of the Partnership's allocation of current cash
flow distributions and the net proceeds from the sale or exchange of Partnership
Properties:
CASH DISTRIBUTIONS. Distributions of Net Cash From Operations (defined
generally as the Partnership's Net Cash Flow from Operations less any reserves
and after payment of property supervision, management, leasing fees and all
costs of properties and partnership operations) will be distributed as follows:
1. Distributions of Net Cash from Operations will be distributed,
first, to Limited Partners holding Units until they have
received their 7% Preferred Return.
2. Although there can be no assurance that Net Cash From
Operations will be sufficient to make additional
distributions, any remaining Net Cash Flow from Operations
will be distributed to the General Partner until it has
received, aggregating all prior periods distributions,
distributions totaling 25% of the Preferred Return paid to the
Limited Partners, aggregating all prior periods distributions.
Thereafter distributions of Net Cash from Operations shall be
80% to Limited Partners on a per unit basis and 20% to the
General Partner. If, in any year, Net Cash from Operations is
insufficient to pay the Limited Partners their full 7%
Preferred Return, the unpaid portion shall accrue and be
payable in future periods prior to the General Partner
receiving any distributions.
NON-LIQUIDATING NET SALE PROCEEDS. Net Sale Proceeds (generally the net
proceeds from any sale or exchange of Partnership Properties less appropriate
reserves) will be distributed as follows:
1. If there are any unpaid accrued Preferred Returns, to the
Limited Partners until each Limited Partner has received all
Preferred Returns due;
2. Then, to the General Partner until it has received,
aggregating all prior periods distributions, distributions
totaling 25% of the Preferred Return paid to the Limited
Partners, aggregating all prior periods distributions;
3. To the Limited Partners on a per Unit basis until each Limited
Partner has received or has been deemed to have received
distributions, thereunder equal to its Net Capital
Contribution at the beginning of the quarter;
4. Then, to the General Partner until the General Partner has
received distributions totaling 100% of its Capital
Contributions;
5. Thereafter, 80% to the Limited Partners on a per Unit basis
and 20% to the General Partner.
LIQUIDATION PROCEEDS. Upon liquidation, the Partnership shall convert
all assets to cash and pay all debts and liabilities other than indebtedness to
Partners and adequate reserves shall be established as deemed necessary by the
General Partner. Thereafter proceeds shall be distributed as follows:
1 If there are any unpaid accrued Preferred Returns, to the
Limited Partners until each Limited Partner has received all
Preferred Returns due;
2 Then, to repay any Partnership debt owed to Limited Partners;
3 Then, to the Limited Partners until each Limited Partner has
received distributions equal to his Net Capital Contribution
at the beginning of the quarter;
4 Then, to repay any Partnership debt owed to the General
Partners;
5 Then, to the General Partner until it has received,
aggregating all prior periods distributions, distributions
totally 25% of the Preferred Return paid to the Limited
Partners, aggregating all prior periods distributions;
10
6 Then pro rata in accordance with Capital Accounts until
Capital Accounts have a zero balance, and then 80% to the
Limited Partners and 20% to the General Partner. The
distributions in accordance with Capital Accounts after Gain
on Sale in excess of depreciation deductions has been
allocated 80% to Limited Partners and 20% to General Partners
and gain equal to prior period depreciation deductions has
been allocated to the respective Limited Partner that was
allocated the deduction.
NO ASSURANCE CAN BE GIVEN AS TO THE TIMING OR AMOUNT OF ANY CASH
DISTRIBUTIONS TO THE LIMITED PARTNERS.
SUMMARY OF ALLOCATIONS
Following is a summary of the allocation of the Partnership's taxable
income, loss and gain on sale of Partnership Properties:
NET INCOME. The Partnership's Net Income (defined generally as the net
income of the Partnership for federal income tax purposes, including any income
exempt from tax, but excluding all deductions for depreciation, amortization and
any net gain on the sale of assets) will be allocated each year in the same
proportions, and to the extent that, Net Cash From Operations is distributed or
deemed distributed to the Partners. To the extent the Partnership 's Net Income
in any year exceeds Net Cash From Operations, such excess Net Income will be
allocated 80% to Limited Partners holding Units during such year and 20% to the
General Partner.
NET LOSS, DEPRECIATION, AMORTIZATION AND COST RECOVERY DEDUCTIONS.
Deductions for depreciation, amortization and cost recovery and the
Partnership's Net Loss (defined generally as the net loss of the Partnership for
federal income tax purposes, but excluding all deductions for depreciation,
amortization and cost recovery) for each fiscal year will be allocated as
follows:
1. 99% to Limited Partners holding Units during such year and 1%
to the General Partner until each such Partner's Capital
Account (defined generally as the sum of Capital Contributions
and income allocated to a Partner less the sum of
distributions paid and losses allocated to a Partner) of all
such Partners are reduced to zero;
2. Thereafter, all such deductions will be allocated to the
General Partner, which, at that time, would be the only
Partner having an economic risk of loss.
GAIN ON SALE. Gain on Sale (defined generally as the net taxable income
or gain from all sales or exchanges of Partnership Properties during the fiscal
year) will be allocated first, pursuant to the qualified income offset provision
contained in the Partnership Agreement, if applicable, then to Partners having
negative capital accounts, if any, until negative capital accounts have been
restored to zero, then to the Limited Partners and General Partner pro rata in
amounts equal to the deductions for depreciation and amortization allocated to
each such Partner in connection with the specific Partnership Property and
thereafter, 80% to the Limited Partners and 20% to the General Partner.
ESTIMATED USE OF PROCEEDS
The following table sets forth information concerning the estimated use
of the gross proceeds of this Offering. Many of the amounts set forth below
represent the best estimate of the General Partner since they cannot be
precisely calculated at this time. The percentage of the gross offering proceeds
available for investment in Partnership Properties is estimated to be
approximately 86.5%.
ABIC REALTY FUND I, L.P.
<Table>
<Caption>
MINIMUM OFFERING MAXIMUM OFFERING
------------------- ----------------------
Amount Percent Amount Percent
-------- ------- ----------- -------
Gross offering proceeds $100,000 100% $40,000,000 100%
Less Public Offering Expenses:
Selling Commissions 7,500 7.5% 3,000,000 7.5%
Organization and Offering Expenses(1) 6,000 6% 2,400,000 6%
Amount Available for Investment:(2) 86,500 86.5% 34,600,000 86.5%
</Table>
(Footnotes to "ESTIMATED USE OF PROCEEDS")
(1) The Partnership will pay Selling Commissions in the amount of 7.5% of
the gross offering proceeds to licensed soliciting broker-dealers that
are members of the National Association of Securities Dealers, Inc. who
are hereafter engaged by the Partnership. The General Partner may also
pay broker-dealers participating in this Offering for expenses incurred
for due diligence purposes and non-accountable expenses up to 1% of the
gross offering proceeds. The Partnership will pay to the General
Partner 6% of the gross offering proceeds to reimburse registration,
legal, accounting, printing, marketing and other out of pocket fees as
well as general, administrative and overhead expenses relating to the
Offering and organization of the Partnership borne by the General
Partner.
(2) Until required in connection with the acquisition and development of
properties, substantially all of the net proceeds of the Offering and,
thereafter, the working capital reserves of the Partnership, may be
invested in short-term, highly-liquid investments including government
obligations, bank certificates of deposit, short-term debt obligations
and interest-bearing accounts.
11
COMPENSATION OF THE GENERAL PARTNER
The following table indicates the compensation and fees (including
reimbursement of expenses) to be paid by the Partnership to the General Partner
during the organization, acquisition and development, operation and liquidation
stages of the Partnership.
<Table>
<Caption>
$$ Amount for $$ Amount for
Minimum Offering Maximum Offering
(10,000 units) (4,000,000 units)
Type Of Compensation Form of Compensation $100,000 $40,000,000
- -------------------- -------------------- ---------------- -----------------
ORGANIZATIONAL AND OFFERING STAGE
Organization and 6% of gross offering proceeds to reimburse registration, $6,000 $2,400,000
Offering Expenses legal, accounting, printing and other out-of-pocket expenses
and general and administrative expenses and overhead borne
by the General Partner in connection with this Offering and
the organization of the Partnership.
ACQUISITION AND DEVELOPMENT STAGE
Acquisition 3% of gross offering proceeds to be paid ratably on a monthly $3,000 $1,200,000
Advisory Fee basis as properties are acquired, in connection with the
election, valuation and acquisition of properties, in addition
to reimbursement of actual costs and expenses incurred in the
acquisition of properties.
OPERATIONAL STAGE
Property Supervision Fee The Partnership will pay to the General Partner an ongoing N/A N/A
property supervision fee in the amount of 2% annually of funds
amount invested in properties payable on a monthly basis.
Property Management The General Partner generally will utilize independent third N/A N/A
and Leasing Fees party property management and leasing companies and shall cause
the Partnership to employ a property management and leasing
company (which may, when necessary, be an Affiliate of the
General Partner) to perform professional property management and
leasing services for the Partnership. In the event the property
management and leasing company is an Affiliate of the General
Partner, the compensation payable to such Affiliate shall not
exceed fees which would be charged by persons who are not
affiliated with the General Partner rendering comparable services
in the same geographic area.
Partnership A Partnership administration fee shall be paid monthly to the N/A N/A
Administration General Partner at 1/12th of 1% of the aggregate amount of
and Investor Limited Partner subscriptions. An Investor administration fee
Administration Fees shall be paid monthly at 1/12th of 1% of the aggregate amount of
Limited Partner subscriptions.
Cash Distributions Net Cash from Operations will be distributed first to Limited N/A N/A
Partners holding Units until they have received their Preferred
Return. Remaining Net Cash Flow from Operations will be
distributed to the General Partner until it has received
distributions totaling 25% of the Preferred Return paid to the
Limited Partners, to include all prior periods distributions.
Thereafter distributions of Net Cash from Operations shall be 80%
to Limited Partners on a per Unit basis and 20% to the General
Partner. If, in any year, Net Cash from Operations is
insufficient to pay the Limited Partners their Preferred Return,
the unpaid portion shall accrue and be payable in future periods
prior to the General Partner receiving any distributions.
LIQUIDATION STAGE
Real Estate Commissions In connection with the sales of Partnership Properties, the N/A N/A
General Partner generally will utilize independent third-party
real estate companies to facilitate property sales. In the event
the sales agent is affiliated with the General Partner,
commissions shall not exceed fees which would be charged by
persons who are not affiliated with the General Partner rendering
comparable services in the same geographic area.
</Table>
12
<Table>
<Caption>
$$ Amount for $$ Amount for
Minimum Offering Maximum Offering
(10,000 units) (4,000,000 units)
Type Of Compensation Form of Compensation $100,000 $40,000,000
- -------------------- -------------------- ---------------- -----------------
Non-Liquidating Net Sale Distributions of Non-Liquidating Net Sale Proceeds and N/A N/A
Proceeds and Liquidating Liquidating Distributions will first be applied toward any unpaid
Distributions accrued Limited Partner Preferred Returns and then to the General
Partner until it has received, aggregating all prior periods'
distributions, an amount equal to 25% of the Limited Partners'
Preferred Return. After all Preferred Returns have been paid,
distributions will then be made to the Limited Partners in an
amount equal to their Net Capital Contributions and then to the
General Partner in an amount equal to its Capital Contribution.
Thereafter, distributions will be 80% to Limited Partners and 20%
to the General Partner.
</Table>
The General Partner and its Affiliates may receive or the Partnership
may pay directly other items of incidental expense incurred during the
organizational, acquisition and development, operation and liquidation stages of
the Partnership.
CONFLICTS OF INTEREST
The Partnership is subject to various conflicts of interest arising out
of its relationship with the General Partner and/or its Affiliates, including
the following.
1. RECEIPT OF FEES AND OTHER COMPENSATION BY GENERAL PARTNER
AND/OR AFFILIATES. Partnership transactions involving the
purchase and sale of Partnership Properties may result in the
receipt of commissions, fees and other compensation by the
General Partner and/or its Affiliates, including due diligence
and Acquisition Fees, property supervision fees, property
management and leasing fees, real estate commissions, and
participation in distributions of Net Cash From Operations,
Non-liquidating Net Sale Proceeds and Liquidating
Distributions. The General Partner has considerable discretion
with respect to all decisions relating to the terms and timing
of all Partnership transactions. Therefore, the General
Partner may have conflicts of interest concerning certain
actions taken on behalf of the Partnership. The agreements and
arrangements among the Partnership and the General Partner
have been established by the General Partner, and the General
Partner believes the amounts to be paid thereunder to be
reasonable under the circumstances. However, said agreements
and arrangements were not negotiated on an arm's-length basis.
2. LACK OF SEPARATE REPRESENTATION. The Partnership and the
General Partner may have the same legal counsel in connection
with this Offering, and legal counsel may in the future act as
counsel to the Partnership and the General Partner. There is a
possibility that in the future the interests of the various
parties may be subject to conflict of interest.
3. TAX AUDITS. In the event of an audit of the federal income tax
returns of the Partnership by the IRS, it is possible that the
interests of the General Partner in such tax audit could
become inconsistent with or adverse to the interests of
Limited Partners.
MANAGEMENT
THE GENERAL PARTNER
The General Partner is ABIC Realty Corporation, a Texas corporation
formed for the purpose of organizing, operating and managing long- term real
estate investment programs. Other than formation and pre-capitalization planning
for the Partnership, the General Partner has no prior operations. As of the date
of this Prospectus, the General Partner is capitalized with approximately
$300,000 ($250,000 in cash and certain pre-formation costs of the Partnership
totaling approximately $70,000). The executive offices of ABIC Realty
Corporation are located at 9520 North May Avenue, Suite 330, Oklahoma City,
Oklahoma 733120. The telephone number is (405) 302-6434.
The sole officer and director and the consultants of ABIC Realty
Corporation are as follows:
<Table>
<Caption>
Name Age Position
- ---- --- --------
Michael R. Marshall 53 President, Secretary-Treasurer, and Director
Carroll D. Blake 65 Acquisition and Operations Consultant
William C. Blake 39 Property Administration
C.C. Collie 79 Acquisition and Operations Consultant
David B Christofferson 53 Corporate Finance and Legal Consultant
</Table>
MICHAEL R. MARSHALL. Since 1971 Mr. Marshall has been a practicing certified
public accountant and a corporate financial consultant. He is currently
President of Settlers Capital Corporation, an Oklahoma corporation which has
principally specialized in assisting companies in the placement of finance
transactions. Additionally, Mr. Marshall was from 1982 to 1989 President of
Settlers Corporation, an Oklahoma corporation which specialized in acquisition,
management and liquidation of distressed loans and other assets of distressed
financial institutions. Mr. Marshall has more than 20 years experience as a
participating investor and originator of various secured lending transactions
and in structuring, monitoring, management and liquidation of various
asset-backed investment and lending transactions. From 1971 through 1977 Mr.
Marshall was employed by Coopers and Lybrand, an international firm of certified
public accountants, in various capacities, including as general practice manager
of the Oklahoma City office.
13
Mr. Marshall has been the principal officer of U.S. Automobile
Acceptance 1995-I, Inc. (1995-I) and U.S. Automobile Acceptance SNP-III, Inc.
(SNP-III), both investment corporations which purchased and collected extremely
high yield/high risk sub-prime credit consumer finance contracts. These consumer
finance contracts did not perform as initially planned and the related two
publicly registered high yield/high risk securitization note offerings have not
performed as planned. These investment corporations discontinued purchasing
consumer finance contracts and adopted orderly liquidation plans and have been
following the liquidation plans since early 1999. The investment corporations
were placed in Chapter 7 Bankruptcies by their Indenture Trustee. The
bankruptcies of these corporations were subsequently dismissed and orderly
collections and liquidation of these corporations is continuing. As of May 31,
2002, the investors of 1995-I have been repaid approximately $6,500,000 (which
represents approximately 65% of amounts initially invested by 1995-I investors),
and the investors of SNP-III have been repaid approximately $14,500,000 (which
represents approximately 60% of amounts initially invested by SNP-III
investors.) The programs were non-recourse except as to the specific assets of
each of the individual investment corporations. There are no investor lawsuits,
federal or state securities actions or any other legal actions against 1995-I,
SNP-III, Mr. Marshall or any other affiliate entity. Mr. Marshall is continuing
to oversee the collections and orderly liquidation of these investment entities.
Mr. Marshall holds a Bachelor of Business Administration Degree in
Accounting, which was obtained in 1971 from Texas A&M University and is a
certified public accountant. Mr. Marshall expects to devote substantially all of
his time to the business activities of ABIC Realty Corporation.
CARROLL D. BLAKE. From 1962 to 1976 Mr. Blake was employed by the Federal
Reserve Bank in Dallas, Texas in various capacities including Manager of the
Loan Department, Bank Relations Officer, Assistant Secretary of the Board of
Directors, and as an alternate Federal Reserve Agent. From 1976 to 1991 Mr.
Blake served as President of several banks located in Texas and since 1991 has
been President of a loan brokerage company, loan originator and manager of a
consumer loan servicing and collection company located in Mesquite, Texas. Mr.
Blake has substantial experience as an originator and investor in various
commercial real estate transactions. Mr. Blake is a graduate of Texas Tech
University where he obtained a Bachelor Degree in Business Administration in
1960. Mr. Blake intends to devote most of his time to the business affairs of
ABIC Realty Corporation.
WILLIAM C. BLAKE is the son of Carroll D. Blake. From 1986 through 1989 Mr.
Blake was a broker of real estate loans for properties located principally in
Texas. Subsequently, for two years Mr. Blake was a Vice-President and compliance
officer for a Texas bank. Since 1991 Mr. Blake has worked with his father in a
loan brokerage company and as the operations and collections supervisor of a
consumer loan servicing and collection company. Mr. Blake is a graduate of
Southern Methodist University, where he obtained a Bachelors Degree in Economics
in 1985. Mr. Blake plans initially to devote approximately one half of his time
assisting ABIC Realty Corporation.
C.C. COLLIE will serve as a consultant to the General Partner. He was formerly a
commercial real estate developer and property manager for various real estate
properties located in Texas, Arkansas, New Mexico, Colorado and California. In
addition Mr. Collie has served as President and/or Vice-President and on the
Board of Directors for several mortgage companies and banks located in Arkansas
and Texas. Mr. Collie is a Rotarian and has previously served as a District
Governor of Rotary International. Mr. Collie was a certified property manager
for more than twenty years and holds a Bachelor of Science Degree from Wharton
School of Finance, University of Pennsylvania, and a Master of Science Degree,
University of North Texas. Mr. Collie expects to spend less than one-third of
his time assisting ABIC Realty Corporation.
DAVID B. CHRISTOFFERSON will serve as corporate finance and legal consultant to
the General Partner. Mr. Christofferson until recently was Executive
Vice-President and General Counsel for Esenjay Exploration Inc., a publicly
traded oil and gas company, located in Houston, Texas. Mr. Christofferson was,
from 1982-1989, Vice-President and General Counsel of Settlers Capital
Corporation and Settlers Corporation and was involved in assisting with the
business, corporate finance and legal matters. Mr. Christofferson has
substantial experience in structuring and monitoring asset-backed transactions,
and from 1974-1981 served as a commercial lending officer for several Oklahoma
banks. Mr. Christofferson received his Bachelors Degree in Finance in 1971 and a
Juris Doctorate Magna Cum Laude in 1974 from the University of Oklahoma. Mr.
Christofferson will devote less than one-third of his time to the business of
ABIC Realty Corporation and will function as in-house legal counsel, assisting
with offering structure, corporate finance matters, contract review and
acquisition planning.
MANAGEMENT
The General Partner of the Partnership, ABIC Realty Corporation, will
be responsible for the direction and management of the Partnership, including
acquisition, construction, property management and supervision of third party
managers and leasing agents.
Property Management. Management of the Partnership Properties is the
responsibility of the General Partner. However, the General Partner plans to
contract or subcontract property management and leasing to third parties.
INVESTMENT OBJECTIVES AND CRITERIA
GENERAL
The Partnership has been formed to acquire and operate commercial real
estate properties, which generally have been constructed and have operating
histories, but may also acquire and operate newly constructed properties with
limited or no operating histories and properties which are under development or
construction. The properties will be acquired on an all-cash basis. The
Partnership's business objectives are to purchase and operate a portfolio of
income producing real estate properties that: (i) pay quarterly cash
distributions to its investors at an increasing rate over time, that for taxable
investors may be partially free from current taxation; and (ii) increase in
value over time. (the "Partnership Properties") No assurance can be given that
these business objectives will be attained.
14
ACQUISITION AND INVESTMENT POLICIES
The Partnership will seek to invest the net Offering proceeds available
for investment on an all cash basis in the acquisition of commercial real estate
properties, which have generally been previously constructed and have operating
histories. The Partnership may also invest in newly constructed properties with
limited or no operating histories, and properties which are under development or
construction. While not limited to such investments, the General Partner will
generally seek to invest in commercial properties such as office buildings,
shopping centers, and industrial properties, the space in which has been leased
or preleased to one or more tenants.
Investment in unimproved or non-income producing property may not
exceed 15 % of the net Offering proceeds available for investment in properties.
A property which is expected to produce income within two years of its
acquisition will not be considered a non-income producing property.
The Partnership will seek to invest in properties that will satisfy a
primary objective of providing distributions of cash flow to investors that will
increase over time. Due to the fact that a significant factor in the valuation
of income-producing real properties is their potential for future income, the
General Partner anticipates that the majority of properties acquired by the
Partnership will satisfy both attributes of providing potential for capital
appreciation and providing increasing over time distributions of cash flow to
investors. To the extent feasible, the General Partner will strive to invest in
a diversified portfolio of properties that will satisfy the Partnership's
investment objectives.
Investment in property generally will take the form of fee title. The
Partnership may purchase properties and lease them back to the sellers of such
properties. While the General Partner will use its best efforts to structure any
such sale-leaseback transaction such that the lease will be characterized as a
"true lease" and so that the Partnership will be treated as the owner of the
property for federal income tax purposes, no assurance can be given that the IRS
will not challenge such characterization. In the event that any such
sale-leaseback transaction is re-characterized as a financing transaction for
federal income tax purposes, deductions for depreciation relating to such
property would be disallowed or significantly reduced.
The Partnership is not limited as to the geographic area where it may
conduct its operations, but the General Partner prefers to invest in properties
located in growing population urban and suburban areas of the southern and
southwestern United States.
There are no specific limitations on the number or size of properties
to be acquired by the Partnership or on the percentage of net proceeds of this
Offering which may be invested in a single property. The number and mix of
properties acquired will depend upon real estate and market conditions and other
circumstances existing at the time the Partnership is acquiring its properties
and the amount of the net proceeds of this Offering.
In making investment decisions for the Partnership, the General Partner
will consider relevant real property and financial factors, including the
location of the property, its suitability for any development contemplated or in
progress, its income-producing capacity, the prospects for long-range
appreciation, its liquidity and income tax considerations. In this regard, the
General Partner will have substantial discretion with respect to the selection
of specific Partnership investments.
The Partnership will obtain independent appraisals for each property in
which it invests, and the purchase price of each such property will not exceed
its appraised value. However, the General Partner will rely on its own
independent analysis and not on such appraisals in determining whether to invest
in a particular property. It should be noted that appraisals are estimates of
value and should not be relied upon as measures of true worth or realizable
value.
The Partnership's obligation to close the purchase of any investment
will generally be conditioned upon the delivery and verification of certain
documents from the seller or developer, including, where appropriate, plans and
specifications, environmental reports, surveys, evidence of marketable title
(subject only to such liens and encumbrances as are acceptable to the General
Partner), unaudited financial statements covering recent operations of any
properties having operating histories, title insurance policies and opinions of
counsel in certain circumstances. The Partnership will not close the purchase of
any property unless and until it obtains an environmental assessment (a minimum
of a Phase I review) for each property purchased and the General Partner is
generally satisfied with the environmental status of the property.
In determining whether to purchase a particular property, the
Partnership may, in accordance with customary practices, obtain an option on
such property. The amount paid for an option, if any, is normally surrendered if
the property is not purchased and is normally credited against the purchase
price if the property is purchased.
In purchasing, leasing and developing real properties, the Partnership
will be subject to risks generally incident to the ownership of real estate,
including changes in general economic or local conditions, changes in supply of
or demand for similar or competing properties in an area, changes in interest
rates and availability of permanent mortgage funds which may render the sale of
a property difficult or unattractive, and changes in tax, real estate,
environmental and zoning laws. Periods of high interest rates and tight money
supply may make the sale of properties more difficult. The Partnership may
experience difficulty in keeping the properties fully leased due to tenant
turnover, general overbuilding or excess supply in the market area. Development
of real properties is subject to risks relating to the builder's ability to
control construction costs or to build in conformity with plans, specifications
and timetables.
DEVELOPMENT AND CONSTRUCTION OF PROPERTIES
The Partnership may invest certain of the net proceeds available for
investment in properties on which improvements are to be constructed or
completed, although the Partnership may not invest in excess of 15% of the net
offering proceeds available for investment in Properties which are not expected
to produce income within two years of their acquisition. To help ensure
performance by the builders of properties which are under construction,
completion of properties under construction generally shall be guaranteed at the
price contracted either by an adequate completion bond or performance bond. In
appropriate circumstances, however, the General Partner may rely upon the
substantial net worth of the contractor or developer, or a personal guarantee
accompanied by financial statements showing a substantial net worth provided by
an Affiliate of the person entering into the construction or development
contract, as an alternative to a completion bond or performance bond.
15
The Partnership may make periodic progress payments or other cash
advances to developers and builders of its properties prior to completion of
construction only upon receipt of an architect's certification as to the
percentage of the project then completed and as to the dollar amount of the
construction then completed. The Partnership intends to use such additional
controls on its disbursements to builders and developers, as it deems necessary
or prudent.
The Partnership may directly employ one or more project managers to
plan, supervise and implement the development of any unimproved properties which
it may acquire. Such persons may be compensated directly by the Partnership.
TERMS OF LEASES AND LESSEE CREDITWORTHINESS
The terms and conditions of any lease entered into by the Partnership
with regard to a tenant may vary substantially. However, whenever possible,
leases will be what is generally referred to as "triple net" leases, which means
that the lessee will be required to pay or reimburse the Partnership for all
real estate taxes, sales and use taxes, special assessments, utilities,
insurance and building repairs as well as lease payments.
BORROWING POLICIES
The Partnership will acquire properties on an all-cash basis. However,
in order to give the General Partner flexibility in the management of the
Partnership, the Partnership Agreement authorizes the Partnership to borrow
funds (a) for Partnership operating purposes in the event of unexpected
circumstances in which the Partnership's working capital reserves and other cash
resources available to the Partnership become insufficient for the maintenance
and repair of Partnership Properties or for the protection or replacement of the
Partnership's assets, and (b) in order to finance improvement of and
improvements to properties, when the General Partner deems such improvements to
be necessary or appropriate to protect the capital previously invested in the
properties, to protect the value of the Partnership's investment in a particular
property, or to make a particular property more attractive for sale or lease.
The Partnership cannot borrow funds for any other purposes. The aggregate amount
of Partnership borrowings at any given time may not exceed 40% of the total
purchase price of Partnership Properties.
DISPOSITION POLICIES
The Partnership anticipates that prior to its termination and
dissolution, all of the Partnership Properties will be sold. The Partnership
intends to hold the various Properties in which it invests until such time as
sale or other disposition appears to be advantageous to achieve the
Partnership's investment objectives or until it appears that such objectives
will not be met. In deciding whether to sell a Property, the Partnership will
consider factors such as potential capital appreciation, Cash Flow, and federal
income tax considerations, including possible adverse federal income tax
consequences to the Limited Partners. The General Partner anticipates that the
Partnership will sell existing income-producing Properties within several to
twenty years after acquisition and will sell Property acquired for development
within several to twenty years from the date of completion of such development.
However, the General Partner may exercise its discretion as to whether and when
to sell a property, and the Partnership will have no obligation to sell
properties at any particular time.
Although not required to do so, the Partnership will generally seek to
sell its properties for all cash. The Partnership may, however, accept terms of
payment from a buyer, which include purchase money obligations, secured by
mortgages as partial payment, depending upon then prevailing economic conditions
customary in the area, which the property being sold is located, credit of the
buyer and available financing alternatives. Some properties sold by the
Partnership may be sold on the installment basis under which only a portion of
the sales price will be received in the year of sale, with subsequent payments
spread over a number of years. In such event, the full distribution by the
Partnership of the net proceeds of any sale may be delayed until the notes are
paid, sold or financed.
OTHER POLICIES
In an attempt to qualify for the 90% qualified income exception to the
treatment of the Partnership as a publicly traded partnership taxable as a
corporation under Section 7704 of the Code, the General Partner intends to
operate the Partnership such that at all times more than 90% of the gross income
of the Partnership will be derived from interest, real property rents (excluding
rents which are contingent on the profits of the lessees and rents from rental
of personal property) and gains from the sale of real property.
REAL PROPERTY INVESTMENTS
As of the date of this Prospectus, the Partnership has not acquired or
contracted to acquire any specific real properties. The General Partner will
continually evaluate various potential property investments and engage in
discussions and negotiations with sellers, developers and potential tenants
regarding the purchase and development of properties for the Partnership. At
such time during the negotiations for a specific property as the General Partner
believes that a reasonable probability exists that the Partnership will acquire
such property, this Prospectus will be supplemented to disclose the negotiations
and pending acquisition. This will normally occur on the signing of a legally
binding purchase agreement for the acquisition of a specific property, but may
occur before or after such signing or upon the satisfaction or expiration of
major contingencies in any such purchase agreement, depending on the particular
circumstances surrounding each potential investment. IT SHOULD BE UNDERSTOOD
THAT THE INITIAL DISCLOSURE OF ANY PROPOSED ACQUISITION CANNOT BE RELIED UPON AS
AN ASSURANCE THAT THE PARTNERSHIP WILL ULTIMATELY CONSUMMATE SUCH PROPOSED
ACQUISITION NOR THAT THE INFORMATION PROVIDED CONCERNING THE PROPOSED
ACQUISITION WILL NOT CHANGE BETWEEN THE DATE OF SUCH SUPPLEMENT AND ACTUAL
PURCHASE.
It is intended that the proceeds of this Offering will be invested in
properties in accordance with the Partnership's investment policies. In the
event that all of the Units offered hereby are sold, it is anticipated that the
Partnership will invest in 10 to 20 properties. Funds available for investment
in Partnership Properties which are not expended or committed to the acquisition
or development of specific real properties on the later of the fourth
anniversary of the effective date of the Registration Statement or the third
year after the termination of the Offering and not reserved for working capital
purposes will be returned to the Limited Partners.
Adequate insurance coverage will be obtained for all properties in
which the Partnership will invest.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As of the date of this Prospectus, the Partnership had not yet
commenced active operations. The Partnership will not commence active operations
until it has received and accepted subscriptions for a minimum of 10,000 Units
($100,000). Following achievement of such funding level, subscription proceeds
may be released to the Partnership from escrow and applied to the payment or
reimbursement of selling commissions and other Organization and Offering
Expenses. The Partnership will experience a relative increase in liquidity as
additional subscriptions for Units are received, and a relative decrease in
liquidity as net Offering proceeds are expended in connection with the
acquisition, development and operation of Partnership Properties.
As of the initial date of this Prospectus, the Partnership has not
entered into any arrangements creating a reasonable probability that any
specific property will be acquired by the Partnership. The number of Partnership
Properties to be acquired by the Partnership will depend upon the number of
Units sold and the resulting amount of the net proceeds available for investment
in properties available to the Partnership.
The General Partner is not aware of any material trends or
uncertainties, favorable or unfavorable, other than national economic conditions
affecting real estate generally, which may be reasonably anticipated to have a
material impact on either capital resources or the revenues or income to be
derived from the operation of Partnership Properties.
INVESTMENT BY TAX-EXEMPT ENTITIES AND
ERISA CONSIDERATIONS
While the General Partner has attempted to structure the Partnership in
such a manner that it will be an attractive investment vehicle for Qualified
Plans, IRAs and other tax-exempt entities, in considering an investment in the
Partnership of a portion of the assets of a Retirement Plan, the plan's
fiduciary should consider all applicable provisions of the Code and ERISA. In
this regard, IRAs which are not sponsored or endorsed by an employer or by an
employee organization or Keogh Plan under which only partners or a sole
proprietor are participants generally are not subject to the provisions of
ERISA; however, fiduciaries of such accounts should review carefully the
exceptions set forth below. In general, Qualified Plan fiduciaries should
consider: (i) whether the investment is in accordance with the documents and
instruments governing such Qualified Plan; (ii) whether the investment satisfies
the prudence and diversification requirements of Sections 404(a)(1)(B) and
404(a)(1)(C) of ERISA; (iii) whether the investment will result in UBTI to the
Qualified Plan (or to an investing IRA, Keogh Plan or other tax-exempt entity)
(see "FEDERAL INCOME TAX CONSEQUENCES - INVESTMENT BY QUALIFIED PLANS AND OTHER
TAX-EXEMPT ENTITIES"); (iv) whether there is sufficient liquidity for the
Qualified Plan after taking this investment into account; (v) the need to value
the assets of the Qualified Plan annually; and (vi) whether the investment would
constitute or give rise to a prohibited transaction under either Section 406 of
ERISA or Section 4975 of the Code.
ERISA also requires generally that the assets of employee benefit plans
be held in trust and that the trustee, or a duly authorized investment manager
(within the meaning of Section 3(38) of ERISA), have exclusive authority and
discretion to manage and control the assets of the plan. Persons who are
fiduciaries of employee benefit plans subject to ERISA have certain duties
imposed on them by ERISA and, as noted above, certain transactions between an
employee benefit plan and the parties in interest with respect to such plan
(including fiduciaries) are prohibited. Similar prohibitions apply to Retirement
Plans under the Code and IRAs and Keogh Plans covering only self-employed
individuals, which are not subject to ERISA, are, nevertheless, subject to the
prohibited transaction rules under the Code. For purposes of both ERISA and the
Code, any person who exercises any authority or control with respect to the
management or disposition of the assets of a Retirement Plan is considered to be
a fiduciary of such Retirement Plan (subject to certain exceptions not here
relevant).
Potential investors who intend to purchase Units in their IRAs and any
trustee of an IRA or other fiduciary of a Retirement Plan considering an
investment in Units should take into consideration the limited liquidity of an
investment in the Units as it relates to applicable minimum distribution
requirements under the Code for the IRA or other Retirement Plan. If the Units
are still held in the IRA or Retirement Plan and the Partnership Properties have
not yet been sold at such time as mandatory distributions are required to
commence to the IRA beneficiary or Qualified Plan participant, applicable
provisions of the Code and Regulations will likely require that a distribution
in kind of the Units be made to the IRA beneficiary or Qualified Plan
participant. Any such distribution in kind of Units must be included in the
taxable income of the IRA beneficiary or Qualified Plan participant for the year
in which the Units are received at the then current fair market value of the
Units without any, corresponding cash distribution with which to pay the income
tax liability arising out of any such distribution.
PLAN ASSETS - GENERALLY
ERISA provides a comprehensive statutory scheme regarding the
investment in and management of a plan's assets. While the General Partner has
used its best efforts to structure the Partnership so that the assets of the
Partnership will not be deemed to be assets of the Retirement Plans investing as
Limited Partners ("Plan Assets"), in the event that the assets of the
Partnership were deemed to be Plan Assets, the General Partner would be
considered to be a plan fiduciary under ERISA (and the Code), and certain
contemplated transactions between the Partnership and the General Partner may be
deemed to be "prohibited transactions." Additionally, if the assets of the
Partnership are deemed to be Plan Assets, the standards of prudence and other
provisions of Title I of ERISA applicable to investments by Retirement Plans
would extend (as to all plan fiduciaries) to the General Partner with respect to
investments made by the Partnership.
PLAN ASSETS - CURRENT LAW
The definition of Plan Assets was addressed initially by the Department
of Labor in 1975 by the adoption of Interpretive Bulletin 75-2, which provided
that the assets of a corporation or partnership in which an employee benefit
plan invested would not generally be treated as assets of such plan. The
Department stated that:
17
Generally, investment by a plan in securities (within the meaning of
section 3(20) of the Employee Retirement Income Security Act of 1974) of a
corporation or partnership will not, solely by reason of such investment, be
considered to be an investment in the underlying assets of such corporation or
partnership so as to make such assets of the entity "plan assets" and thereby
make a subsequent transaction between the party in interest and the corporation
or partnership a prohibited transaction under Section 406 of the Act.
On November 13, 1986, the Department of Labor issued final regulations
(the "Plan Asset Regulations") relating to the definition of Plan Assets, which
became effective generally for the characterization of assets in investments
made after March 13, 1987. The Plan Asset Regulations adopt the general
statement regarding Plan Assets set forth in Interpretive Bulletin 75-2;
however, the Plan Asset Regulations further provide that assets of investment
entities in which Retirement Plans make equity investments will be treated as
assets of such plans unless such investments are in publicly offered securities,
are in securities offered by an investment company registered under the
Investment Company Act of 1940, or come within one of the specific exemptions
set forth below. As the Partnership is not a registered investment company, the
exemptions contained in the Plan Asset Regulations which may apply to the
Partnership include (i) investments in "publicly offered securities" (generally
interests which are freely transferable, widely-held and registered with the
Securities and Exchange Commission); (ii) investments in interests in "real
estate operating companies;" and (iii) investments in which equity participation
by "benefit plan investors" is not significant. The Plan Asset Regulations
provide that equity participation in an entity would be "significant" if at any
time 25% or more of the value of any class of equity interest is held by benefit
plan investors. The term "benefit plan investors" is broadly defined to include
any employee pension or welfare benefit plan, whether or not subject to ERISA,
any plan described in Section 4975(e)(1) of the Code and any entity whose
underlying assets include Plan Assets by reason of plan investment in the
entity. The General Partner does not anticipate that the Partnership will
qualify for the exemption described in (iii) above.
EXEMPTIONS UNDER PLAN ASSET REGULATIONS
As noted above, if a Retirement Plan acquires "publicly offered"
securities, the assets of the issuer are not deemed to be Plan Assets. Under the
Plan Asset Regulations, the definition of publicly offered securities requires
that such securities must be "widely-held," "freely transferable" and must
satisfy certain registration requirements under federal securities laws.
Although the Partnership should satisfy the registration requirements under this
definition, the determinations of whether a security is "widely-held" and
"freely transferable" are inherently factual matters. The Plan Asset Regulations
provide that a class of securities will be "widely-held" if it is held by 100 or
more persons. Accordingly, to preserve the ability of the Partnership to qualify
for this exemption, the General Partner may suspend the offering of Units to
Retirement Plans, if upon the closing of the Minimum Offering less than 100
persons have acquired Units and, in such case, would continue the offering to
Retirement Plans only after at least 100 persons have acquired of Units.
With respect to the "freely transferable" requirement, the Plan Asset
Regulations provide several examples of restrictions on transferability with
respect to offerings in which the minimum investment is $10,000 or less which,
absent unusual circumstances, will not, either alone or in any combination,
cause the rights of ownership to be considered not "freely transferable." The
allowed restrictions are based upon restrictions commonly found in public real
estate limited partnerships, which are imposed to comply with state and federal
law to assure continued eligibility for favorable tax treatment, and to avoid
certain practical administrative problems. The Partnership Agreement is intended
to satisfy the freely transferable requirement with respect to the Units. It
should be noted in this regard, however, that because certain adverse tax
consequences can result if the Partnership were to be characterized as a
"publicly traded partnership" under Section 7704 of the Code (see "FEDERAL
INCOME TAX CONSEQUENCES" -"Publicly Traded Partnerships"), certain additional
restrictions on the transferability of Units have been incorporated into the
Partnership Agreement which are intended to prevent such reclassification of the
Partnership as a publicly traded partnership (the "Section 7704 Restrictions").
In this regard, the Plan Asset Regulations provide specifically that any
"restriction on, or prohibition against, any transfer or assignment which would
either result in a termination or reclassification of the entity for federal or
state tax purposes" will ordinarily not alone or in combination with other
restrictions affect a finding that securities are "freely transferable." The
Plan Asset Regulations were promulgated prior to the enactment of Section 7704
of the Code, however, and accordingly, the incorporation of the Section 7704
Restrictions into the Partnership Agreement may have the effect of making the
"publicly offered securities" exemption unavailable to the Partnership.
On the other hand, if the Department of Labor interprets the Section
7704 Restrictions in the Partnership Agreement consistently with the specific
exemption language in the Plan Asset Regulations set forth above, the
Partnership should qualify for the publicly offered securities exemption
contained in the Plan Asset Regulations. However, because of the factual nature
of the determination and lack of guidance as to the meaning of the term "freely
transferable," particularly in light of the Section 7704 Restrictions, there can
be no assurance that the Partnership will, in fact, qualify for this exemption.
Even if the Partnership were not to qualify for the "publicly offered
securities" exemption, the Plan Asset Regulations also provide an exemption from
the Plan Assets definition with respect to securities issued by a "real estate
operating company." An entity is a real estate operating company if, during the
relevant valuation periods defined in the Plan Asset Regulations, at least 50%
of its assets (other than short-term investments pending long-term commitment or
distribution to investors) valued at cost, are invested in real estate which is
managed or developed and with respect to which the Partnership has the right to
participate substantially in the management or development activities. The
Partnership intends to devote more than 50% of its assets to management and
development of real estate; however, an example contained in the Plan Asset
Regulations indicates that, although some management and development activities
maybe performed by independent contractors rather than by the entity itself, if
over one-half of the entity's properties are acquired subject to long-term
leases under which substantially all management and maintenance activities with
respect to the properties are the responsibility of the lessees thereof, then
the entity is not eligible for the real estate operating company exemption.
In an attempt to comply with the real estate operating company
exemption under the Plan Asset Regulations, the General Partner intends to
structure the management and development activities of the Partnership such that
at all times more than 50% of the Partnership's assets are invested in
multi-tenant properties with individually negotiated leases whereby maintenance
of the common areas and general maintenance activities with respect to such
properties will be the Partnership's responsibility and not passed through to
the lessees of such properties. See "INVESTMENT OBJECTIVES AND CRITERIA." Due to
the uncertainty of the application of the standards set forth in the examples in
the Plan Asset Regulations, however, there can be no assurance as to the
Partnership's ability to qualify for the real estate operating company
exemption.
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PLAN ASSET CONSEQUENCES - PROHIBITED TRANSACTION EXCISE TAX
If the Partnership were deemed to hold Plan Assets, additional issues
relating to the "Plan Assets" and "prohibited transaction" concepts of ERISA and
the Code arise by virtue of the General Partner's ownership of interests in the
Partnership and the possible relationship between the General Partner or the
Partnership and any Retirement Plan which may purchase Units. Section 406 of
ERISA and Section 4975 of the Code prohibit Retirement Plans from engaging in
certain transactions with specified parties involving Plan Assets. These parties
are referred to as "parties in interest," as defined in Section 3(14) of ERISA,
and as "disqualified persons," as defined in Section 4975(e)(2) of the Code.
These definitions include "persons providing services to the plan" and certain
of their affiliates. Thus, if the General Partner's interest in the Partnership
were deemed to exceed certain threshold levels set forth in the Code and ERISA,
the Partnership itself could be deemed to be a disqualified person and an
investment in Units could be a prohibited transaction; however, the General
Partner does not believe such thresholds have been exceeded with respect to
their interest in the Partnership or that the Partnership should otherwise be
deemed to be a party in interest or a disqualified person. Further, any
transaction between the Partnership and a party in interest or disqualified
person with respect to an investing Retirement Plan could be a prohibited
transaction if the Partnership were deemed to hold Plan Assets.
In addition, if the Partnership is deemed to hold Plan Assets, the
General Partner could be characterized as a "fiduciary" with respect to such
assets, and would thus be a "party in interest" under ERISA and a "disqualified
person" under the Code with respect to investing Retirement Plans. If such
relationship were to exist, various transactions between the General Partner and
the Partnership could constitute prohibited transactions because a fiduciary may
not deal with Plan Assets in its own interest or represent a person whose
interests are adverse to those of the plan in a transaction involving Plan
Assets. In addition, it could be argued that, because the General Partner shares
in certain Partnership distributions and tax allocations in a manner
disproportionate to its Capital Contribution to the Partnership, the General
Partner is being compensated directly out of Plan Assets rather than the
Partnership assets in exchange for the provision of services, i.e.,
establishment of the Partnership and making it available as an investment to
Retirement Plans. If this were the case, absent a specific exemption applicable
to the transaction, a prohibited transaction could be deemed to have occurred
between investing Retirement Plans and the General Partner.
If it is determined by the Department of Labor or the IRS that a
prohibited transaction has occurred, the General Partner and any party in
interest that has engaged in any such prohibited transaction would be required
to eliminate the prohibited transaction by reversing the transaction and make
good to the Retirement Plan any loss resulting from the Prohibited transaction.
In addition, each party in interest would be liable to pay an excise tax equal
to 5% of the amount involved in the transaction for each year in which the
transaction remains uncorrected. Moreover, if the fiduciary or party in
interest, does not correct the transaction within a specified period, the party
in interest could also be liable for an additional excise tax in an amount equal
to 100% of the amount involved. Plan fiduciaries who make the decision to invest
in Units could, under certain circumstances, be liable as co-fiduciaries for
actions taken by the Partnership or the General Partner.
Special rules apply to an investing IRA. If the Partnership were deemed
to be a party in interest or disqualified person, as described above, the
tax-exempt status of the IRA could be lost by reason of such investment because
a transaction between the Partnership and the account would be deemed under
Section 4975 of the Code to constitute a prohibited transaction.
It should be noted that even if the assets of the Partnership are
deemed, as the General Partner anticipates, not to be Plan Assets, under the
Plan Asset Regulations, Interpretive Bulletin 75-2 indicates that in certain
circumstances an investment in the Partnership by a Retirement Plan may still be
a prohibited transaction. For example, if a Retirement Plan may, by reason of
its investment, compel the Partnership to invest in a property or engage in
transactions which such Retirement Plan could not enter into directly under the
prohibited transaction rules, then the provisions of Interpretive Bulletin 75-2
and the Plan Asset Regulations would not have precluded re-characterization of
such investment as a prohibited transaction. The General Partner has represented
in that regard that no such arrangements will be entered into with investing
Retirement Plans, and therefore it is unlikely that these provisions of
Interpretive Bulletin 75-2 would be invoked by the Department of Labor.
ANNUAL VALUATION
Fiduciaries of Retirement Plans are required to determine annually the
fair market value of the assets, such Retirement Plans, typically, as of the
close of a plan's fiscal year. To enable the fiduciaries of Retirement Plans
subject to the annual reporting requirements of ERISA to prepare reports
relating to an investment in the Partnership, Limited Partners will be furnished
with an annual statement of estimated Unit value. This annual statement will
report the estimated value of each Unit based upon the estimated amount a Unit
holder would receive if all Partnership assets were sold as of the close of the
Partnership's fiscal year for their estimated values and such proceeds (without
reduction for selling expenses), together with the other funds of the
Partnership, were distributed in liquidation of the Partnership. Such estimated
values will be based upon annual appraisals of Partnership Properties performed
by the General Partner, and no independent appraisals will be obtained. However,
the General Partner is required to obtain the opinion of an independent third
party stating that its estimates of value are reasonable and were prepared in
accordance with appropriate methods for valuing real estate. For the first three
full fiscal years following the termination of the Offering, the value of a Unit
will be deemed to be $10.00, and no valuations will be performed. The estimated
value per Unit will be reported to Limited Partners in the Partnership's next
annual or quarterly report on Form 10-K or 10-Q sent to the Limited Partners for
the period immediately following completion of the valuation process. There can
be no assurance that the estimated value per Unit will actually be realized by
the Partnership or by the Limited Partners upon liquidation (in part because
estimates do not necessarily indicate the price at which properties could be
sold and because no attempt will be made to estimate the expenses of selling any
property).
FEDERAL INCOME TAX CONSEQUENCES
IT IS ASSUMED THAT AN INVESTMENT IN THE PARTNERSHIP WILL BE BASED UPON
AN EXPECTATION OF PROFITS AND THAT THE LIMITED PARTNER FULLY UNDERSTANDS THAT HE
MUST PAY FEDERAL INCOME TAX ON HIS PRO RATA SHARE OF THAT PROFIT. THE FULL
IMPLICATIONS OF FEDERAL , STATE AND LOCAL LAWS WHICH MAY AFFECT THE TAX
CONSEQUENCES OF PARTICIPATING IN THE PARTNERSHIP ARE TOO COMPLEX AND NUMEROUS TO
BE DESCRIBED HEREIN IN DETAIL. ACCORDINGLY, EACH PROSPECTIVE INVESTOR SHOULD
SATISFY HIMSELF AS TO THE INCOME AND OTHER TAX CONSEQUENCES OF PARTICIPATING IN
THE PARTNERSHIP BY OBTAINING ADVICE FROM HIS OWN TAX ADVISOR.
19
Potential investors should note that this discussion does not fully
address the tax issues specific to corporations, tax exempt entities subject to
Subchapter F of the Code, including pension plans, profit sharing plans, IRAs
and other tax exempt retirement plans, and foreign taxpayers subject to
Subchapter N of the Code. Nor does it address state, local, and foreign tax
considerations. This discussion addresses the major federal tax consequences to
individuals of an investment in Units.
The following discussion is intended to summarize all of the federal
income tax considerations material to an investment in the Partnership. This
summary is based upon the Code; Treasury Regulations (including Temporary and
Proposed Regulations) promulgated thereunder ("Regulations"), current positions
of the Internal Revenue Service (the "IRS") contained in revenue rulings and
revenue procedures, other current administrative positions of the IRS and
existing judicial decisions in effect as of the date of this Prospectus.
Investors should note that it is not feasible to comment on all aspects of
federal, state and local tax laws that may affect each Limited Partner in the
Partnership. The federal income tax considerations discussed below are
necessarily general in nature, and their application may vary depending upon a
Limited Partner's particular circumstances. No representations are made as to
state and local tax consequences. Further, the Partnership does not intend to
request a ruling from the IRS with respect to any of the federal income tax
matters discussed below, and on certain matters no ruling could be obtained even
if requested.
Investors should also note that a great deal of uncertainty exists with
respect to certain recently enacted and amended provisions of the Code. There
can be no assurance that the present federal income tax laws applicable to
Limited Partners and the operation of the Partnership will not be further
changed prospectively or retroactively by additional legislation, by new
Regulations, by judicial decisions or by administrative interpretations, any of
which could adversely affect a Limited Partner, nor is there any assurance that
there will not be a difference of opinion as to the interpretation or
application of current federal income tax laws as discussed herein.
FOR THE FOREGOING REASONS, EACH PROSPECTIVE INVESTOR IS URGED TO
CONSULT WITH HIS OWN TAX ADVISOR WITH RESPECT TO THE FEDERAL, STATE AND LOCAL
INCOME TAX CONSEQUENCES ARISING FROM THE PURCHASE OF UNITS. NOTHING IN THIS
PROSPECTUS (OR ANY PRIOR OR SUBSEQUENT COMMUNICATION FROM THE GENERAL PARTNER,
ITS AFFILIATES, EMPLOYEES OR ANY PROFESSIONAL ASSOCIATED WITH THIS OFFERING) IS
OR SHOULD BE CONSTRUED AS LEGAL OR TAX ADVICE TO A POTENTIAL INVESTOR IN THE
PARTNERSHIP. INVESTORS SHOULD BE AWARE THAT THE IRS MAY NOT AGREE WITH ALL TAX
POSITIONS TAKEN BY THE PARTNERSHIP AND THAT LEGISLATIVE, ADMINISTRATIVE OR
JUDICIAL DECISIONS MAY REDUCE OR ELIMINATE ANTICIPATED TAX BENEFITS OF AN
INVESTMENT IN THE PARTNERSHIP.
PROSPECTIVE INVESTORS WHO ARE FIDUCIARIES OF RETIREMENT PLANS SHOULD
CAREFULLY READ "INVESTMENT BY TAX-EXEMPT ENTITIES AND ERISA CONSIDERATIONS" AND
"INVESTMENT BY QUALIFIED PLANS AND OTHER TAX-EXEMPT ENTITIES" IN THIS SECTION AS
WELL AS CONSULT THEIR OWN TAX AND ERISA ADVISORS.
The discussion below is directed primarily to individual taxpayers who
are citizens of the United States. Accordingly, persons who are trusts,
corporate investors in general, corporate investors that are subject to
specialized rules (such as Subchapter S corporations) and any potential investor
who is not a United States citizen are cautioned to consult their own personal
tax advisors before investing in the Partnership.
GENERAL PRINCIPALS OF PARTNERSHIP TAXATION
Assuming the Partnership is treated as a partnership for tax purposes,
it will not be an entity subject to federal income tax. Instead, it will file an
annual information return with the IRS. Each Limited Partner will be required to
report on his federal income tax return his distributive share of each item of
Partnership income, gain, loss, deduction and credit, if any. Each Partner's
distributive share of such items will be determined in accordance with the
allocations made in the Partnership Agreement, provided such allocations are
recognized for federal income tax purposes. Each partner will be subject to tax
on his distributive share of Partnership income even if no cash is distributed.
The amount of any loss or deduction which a Partner may utilize in computing his
federal income tax liability is limited to his adjusted basis. Additionally, in
the case of individuals and certain closely held corporations, losses will also
be limited to the amount "at risk" and the amount of income and loss from other
passive activities.
Limited Partners are required to report Partnership items on their
individual returns in the same manner as the items were treated on the
Partnership return. If a Limited Partner chooses to report an item
inconsistently, the Limited Partner must give notice to the Service that he is
reporting the item inconsistently.
The receipt of a cash distribution from the Partnership by a Limited
Partner in respect of, but not in liquidation of, his Units generally will not
generate the recognition of gain or loss for federal income tax purposes except
to the extent that the cash distribution exceeds the Limited Partner's basis in
his Unit. Cash distributions will reduce a Limited Partner's basis and amounts
at risk" by the amount of the cash distribution. To the extent that a cash
distribution is in excess of basis, the gain recognized will be taxable in
accordance with the rules discussed below which govern the sale of Units.
Each potential investor must be mindful that partnership information
returns are audited more frequently by the Service than individual returns. The
Partnership will claim all deductions for federal income tax purposes which it
reasonably believes it is entitled to claim. However, there can be no assurance
that such deductions will not be contested or, if contested, will not be
disallowed by the Service. Final disallowance or reallocation of any claimed
deductions could adversely affect the Partners. Although the Partnership does
not intend to take an aggressive position on any issue, an audit of any
deduction is entirely possible. Such an audit could result in an audit of a
Partner's tax return in which items in addition to Partnership items would be
examined by the Service.
In the event that the Partnership, for any reason, were to be treated
for federal income tax purposes as a corporation, the Partners of the
Partnership would be treated as stockholders with the following results, among
others: (i) the Partnership would become a taxable entity subject to the federal
income tax imposed on corporations; (ii) items of income, gain, loss, deduction
and credit would be accounted for by the Partnership on its federal income tax
return and would not flow through to the Partners; and (iii) distributions of
cash would generally be treated as dividends taxable to the Partners at ordinary
income rates, to the extent of current or accumulated earnings and profits, and
would not be deductible by the Partnership in computing its income tax.
20
The remaining summary of federal income tax consequences in this
Section assumes that the Partnership will be classified as a partnership for
federal income tax purposes.
PUBLICLY TRADED PARTNERSHIPS
The General Partner will not create any market for the resale of Units
nor will the Partnership be listed on any trading exchange. However, there are
certain secondary markets in which similar registered limited partnership
interests do trade and trading of Units in those markets could take place even
without any actions by the General Partner. If trading of Units in the
Partnership were to rise above safe harbor limits, there may be negative tax
consequences to the Partnership and Limited Partners. If the Partnership is
classified as a "publicly traded partnership" and 90% of more of its income is
not considered "qualifying income" the Partnership will be taxable as a
corporation (see "Partnership Status Generally" above). If the Partnership is
classified as a publicly traded partnership and 90% of more of its income is
"qualifying income", while avoiding being treated as a corporation, the
Partnership's income will be considered portfolio income rather than passive
income (see "Passive Loss Limitations" below).
A publicly traded partnership is generally defined under Section 7704
of the Code as any partnership whose interests are traded on an established
securities market or are readily tradable on a secondary market or the
substantial equivalent thereof. On November 29, 1995, the IRS issued final
Regulations (the "Section 7704 Regulations") which provide guidance in
ascertaining whether a partnership is traded on an established securities market
or is readily tradable on a secondary market or the substantial equivalent
thereof and also set forth certain safe harbor exclusions from classification as
a publicly traded partnership.
The Section 7704 Regulations contain definitions of what constitutes an
established securities market and a secondary market or the substantial
equivalent thereof and what transfers may be disregarded in determining whether
such definitions are satisfied with respect to the activities of a partnership.
The Section 7704 Regulations further provide certain safe harbors (the
"secondary market safe harbors") which, after taking into consideration all
transfers other than those deemed disregarded, may be satisfied in order to
avoid classification of such transfers as being made on a secondary market or
the substantial equivalent thereof. One of the secondary market safe harbors
provides that interests in a partnership will not be considered tradeable on a
secondary market or the substantial equivalent thereof if the sum of the
partnership interests transferred during any taxable year, other than certain
disregarded transfers, does not exceed 2% of the total interest in the
partnership's capital or profits. Disregarded transfers include, among other
things, transfers by gift, transfers at death, transfers between family members,
distributions from a qualified retirement plan and block transfers, which are
defined as transfers by a partner during any 30 calendar day period of
partnership units representing more than 2% of the total interest in a
partnership's capital or profits. Another safe harbor from the definition of a
publicly traded partnership dealing with redemption and repurchase agreements is
also provided in the Section 7704 Regulations. Unlike Notice 88-75, however, the
Section 7704 Regulations provide that the failure to satisfy a safe harbor
provision under the Regulations will not cause a partnership to be treated as a
publicly traded partnership if, after taking into account all facts and
circumstances, partners are not readily able to buy, sell or exchange their
partnership interests in a manner that is comparable, economically, to trading
on an established securities market.
The Partnership Agreement limits Unit transfers of all types to
transfers of Units which satisfy an applicable safe harbor contained in the
Section 7704 Regulations (or any other applicable safe harbor from "publicly
traded partnership" status which may be adopted by the IRS). The General Partner
has represented that the Partnership will be operated strictly in accordance
with the Partnership Agreement and that it will void any transfers or
assignments of Units if it believes that such transfers or assignments will
cause the Partnership to be treated as a publicly traded partnership under the
Section 7704 Regulations or any Regulations adopted by the IRS in the future.
However, due to the complex nature of the safe harbor provisions
contained in the Section 7704 Regulations with respect to such provisions and
because any determination in this regard will necessarily be based upon future
facts not yet in existence at this time, no assurance can be I given that the
IRS will not challenge this conclusion or that the Partnership will not, at some
time in the future, be deemed to be a publicly traded partnership.
Even if the Partnership were deemed to be a publicly traded
partnership, Section 7704(c) of the Code provides an exception to taxation of an
entity as a corporation if 90% or more of the gross income of such entity for
each taxable year consists of qualifying income. Qualifying income includes
interest, real property rents and gain from the sale or other disposition of
real property. According to the legislative history of Section 7704, qualifying
income does not include real property rents which are contingent on the profits
of the lessees or income from the rental or lease of personal property. The
General Partner intends to operate the Partnership in such a manner as to
qualify for the 90% qualifying income exception. Investors should note, however,
that even if the Partnership satisfies the qualifying income exception, being
deemed to be a publicly traded partnership would result in certain other
material adverse tax consequences to Limited Partners, including the treatment
of net income of the Partnership as portfolio income rather than passive income.
ANTI-ABUSE RULES
In December 1994 the IRS adopted final Regulations setting forth
"anti-abuse" rules under the Code provisions applicable to partnerships, which
rules authorize the Commissioner of Internal Revenue to recast transactions
involving the use of partnerships either to reflect the underlying economic
arrangement or to prevent the use of a partnership to circumvent the intended
purpose of any provision of the Code. These rules generally apply to all
transactions relating to a partnership occurring on or after May 12, 1994, and
thus would be applicable to the Partnership's activities. If any of the
transactions entered into by the Partnership were to be recharacterized under
these rules, or the Partnership itself were to be recast as a taxable entity
under these rules, material adverse tax consequences to all of the Partners
would occur as otherwise described herein. In this regard, the General Partner
is not aware of any fact or circumstance which could cause the IRS to exercise
its authority under these rules to recast any of the transactions to be entered
into by the Partnership or to restructure the Partnership itself.
BASIS LIMITATIONS
A Limited Partner may not deduct his share of Partnership losses and
deductions in excess of the adjusted basis of his Partnership interest
determined as of the end of the taxable year. Losses which exceed a Limited
Partner's basis will not be allowed but may be carried over indefinitely and
claimed as a
21
deduction in a subsequent year to the extent that such Limited Partner's
adjusted basis in his Units has increased above zero. A Limited Partner's
adjusted basis in his Units will include his cash investment in the Partnership
along with his pro rata share of any Partnership liabilities as to which no
Partner is personally liable. A Limited Partner's basis in his Units will be
increased by his distributive share of the Partnership's taxable income and
decreased (but not below zero) by his distributive share of the Partnership's
losses. Cash distributions made to a Limited Partner will also reduce a Limited
Partner's basis in his Units and, to the extent of that basis will be considered
a return of capital. In the event that a Limited Partner has no remaining basis
in his Units, any excess cash distributions will generally be taxable to him as
gain from the sale of his Units.
PASSIVE LOSS LIMITATIONS
The Code substantially restricts the ability of many taxpayers
(including individuals, estates, trusts, certain closely-held corporations and
certain personal service corporations) to deduct losses derived from so called
"passive activities. " Passive activities generally include any activity
involving the conduct of a trade or business in which the taxpayer does not
materially participate (including the activity of a limited partnership in which
the taxpayer is a limited partner) and certain rental activities (including the
rental of real estate). It is more likely than not that a Limited Partner's
interest in the Partnership will be treated as a passive activity if such issue
were challenged by the IRS, litigated and judicially decided. Accordingly,
income and loss of the Partnership, other than interest or other similar income
earned on temporary investments and working capital reserves (which would
constitute portfolio income), will constitute passive activity income and
passive activity loss, as the case may be, to Limited Partners.
Generally, losses from passive activities are deductible only to the
extent of a taxpayer's income or gains from passive activities and will not be
allowed as an offset against other income, including salary or other
compensation for personal services, active business income or "portfolio
income," which includes non-business income derived from dividends, interest,
royalties, annuities and gains from the sale of property held for investment.
Passive activity losses that are not allowed in any taxable year are suspended
and carried forward indefinitely and allowed in subsequent years as an offset
against passive activity income in future years.
Upon a taxable disposition of a taxpayer's entire interest in a passive
activity to an unrelated party, suspended losses with respect to that activity
will then be allowed as a deduction against: (i) first, any remaining income or
gain from that activity including gain recognized on such disposition; (ii)
then, net income or gain for the taxable year from other passive activities; and
(iii) finally, any other non-passive income or gain. Regulations provide that
similar undertakings which are under, common control and owned by passthrough
entities such as partnerships are generally aggregated into a single activity.
Accordingly, it is unlikely that suspended passive activity losses derived from
a specific Partnership Property would be available to Limited Partners to offset
non-passive income from other sources until the sale or other disposition of all
Partnership Properties has been consummated or until the Unit is disposed of in
a taxable transaction to an unrelated party.
The Code provides that the passive activity loss rules will be applied
separately with respect to items attributable to each publicly traded
partnership. Accordingly, if the Partnership were deemed to be a publicly traded
partnership, Partnership losses, if any, would be available only to offset
future non-portfolio income of the Partnership. In addition, if the Partnership
were deemed to be a publicly traded partnership which is not treated as a
corporation because of the qualifying income exception, Partnership income would
generally be treated as portfolio income rather than passive income and, hence,
not available to be applied against passive losses from other activities.
AT RISK LIMITATIONS
The deductibility of Partnership losses is limited further by the "at
risk" limitations in the Code. Limited Partners who are individuals, estates,
trusts and certain closely-held corporations are not allowed to deduct
Partnership losses in excess of the amounts which such Limited Partners are
determined to have "at risk" at the close of the Partnership's year. Generally,
a Limited Partner's amount "at risk" will include the amount of his cash Capital
Contribution to the Partnership. A Limited Partner's amount "at risk" will be
reduced by his allocable share of Partnership losses and by Partnership
distributions and increased by his allocable share of Partnership income. Any
deductions which are disallowed under this limitation may be carried forward
indefinitely and utilized in subsequent years to the extent that a Limited
Partner's amount "at risk" is increased in those years.
ALLOCATIONS OF PROFIT AND LOSS
Allocations of Net Income, Net Loss, depreciation and amortization
deductions and Gain on Sale are described in this Prospectus. Investors should
note in this regard that the Partnership Agreement defines the terms "Net
Income" and "Net Loss" to mean the net income or loss realized or recognized by
the Partnership for a fiscal year, as determined for federal income tax
purposes, including any income exempt from tax, but excluding all deductions for
depreciation and amortization and Gain on Sale.
Generally, the Code provides that partnership items of income, gain,
loss, deduction and credit are allocated among partners as set forth in the
relevant partnership agreement pursuant to Section 704(a) of the Code. Section
704(b) provides, however, that if an allocation to a partner under the
partnership agreement of income, gain, loss, deduction or credit (or items
thereof) does not have substantial economic effect, such allocation will instead
be made in accordance with the partner's interest in the partnership (determined
by taking into account all facts and circumstances).
The Partnership has not received and does not intend to seek a ruling
with respect to whether its allocations of profits and losses will be recognized
for federal income tax purposes. The IRS may attempt to challenge the
allocations of profits and losses made by the Partnership. If any such challenge
were successful, Limited Partners' respective shares of taxable income or loss
could be altered to the detriment of some or all of the Limited Partners.
Regulations under Section 704(b) of the Code (the "Section 704(b)
Regulations") provide complex rules for determining (i) whether allocations will
be deemed to have economic effect; (ii) whether the economic effect of
allocations will be deemed to be substantial; (iii) and whether allocations not
having substantial economic effect will be deemed to be made in accordance with
a partner's interest in the partnership.
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The Section 704(b) Regulations provide generally that an allocation
will be considered to have economic effect if: (i) partners' capital accounts
are determined and maintained in accordance with the Section 704(b) Regulations;
(ii) upon the liquidation of the partnership, liquidating distributions are made
in accordance with the positive capital account balances of the partners after
taking into account all capital account adjustments for the year during which
such liquidation occurs; and (iii) the partnership agreement contains a
"qualified income offset" provision and the allocation in question does not
cause or increase a deficit balance in a partner's capital account at the end of
the partnership's taxable year.
The Partnership Agreement contains a "qualified income offset" if it
provides that a partner who unexpectedly receives an adjustment, allocation or
distribution of certain items which causes a deficit or negative capital account
balance (which means generally that the sum of losses allocated and cash
distributed to a partner exceeds the sum of his capital contributions to the
partnership and any income allocated to such partner), will be allocated items
of income and gain in an amount and manner sufficient to eliminate the deficit
balance as quickly as possible.
The Partnership Agreement (i) provides for the determination and
maintenance of Capital Accounts pursuant to the Section 704(b) Regulations, (ii)
provides that liquidation proceeds are to be distributed in accordance with
Capital Accounts, and (iii) contains a qualified income offset provision. The
qualified income offset provision in the Partnership Agreement along with
limitations on allocations of Net Loss and depreciation and amortization
deductions has the effect of prohibiting a Limited Partner from being allocated
items of loss or deduction which would cause his Capital Account to be reduced
below zero.
Even if the allocations of profits and losses of a partnership are
deemed to have economic effect under the Section 704(b) Regulations, however, an
allocation will not be upheld unless the economic effect of such allocation, is
"substantial." In this regard, the Section 704(b) Regulations generally provide
that the economic effect of an allocation is "substantial" if there is a
reasonable possibility that the allocation will affect the dollar amounts to be
received by partners from a partnership, independent of tax consequences. The
economic effect of an allocation is presumed not to be substantial if there is a
strong likelihood that the net adjustments to the partner's capital account for
any taxable year will not differ substantially from the net adjustments which
would have been made for such year in the absence of such allocation and the
total tax liability of the partners for such year is less than it would have
been in the absence of such allocations. The economic effect will also be
presumed not to be substantial where: (i) the partnership agreement provides for
the possibility that the allocation will be largely offset by one or more other
allocations; (ii) the net adjustments to the partners' capital accounts for the
taxable years to which the allocations relate will not differ substantially from
the net adjustments which would have been recorded in such partners' respective
capital accounts for such years if the original allocations and the offsetting
allocations were not contained in the partnership agreement; and (iii) the total
tax liability of the partners for such year is less than it would have been in
the absence of such allocations.
With respect to the foregoing provision, the Section 704(b) Regulations
state that original allocations and offsetting allocations will not be deemed to
not be substantial if, at the time the allocations become part of the
partnership agreement, there is a strong likelihood that the offsetting
allocations will not, in large part, be made within five years after the
original allocations are made. The Section 704(b) Regulations further state that
for purposes of testing substantiality, the adjusted tax basis of partnership
property will be presumed to be the fair market value of such property, and
adjustments to the adjusted tax basis of partnership property (such as
depreciation or cost recovery deductions) will be presumed to be matched by
corresponding changes in the property's fair market value.
If the allocations of profits and losses set forth in a partnership
agreement are deemed not to have substantial economic effect, the allocations
are then to be made in accordance with the partners' interests in the
partnership as determined by taking into account all facts and circumstances.
The Section 704(b) Regulations provide in this regard that a partner's interest
in a partnership will be determined by taking into account all facts and
circumstances relating to the economic arrangement of the partners, including:
(i) the partners' relative contributions to the partnership; (ii) the interests
of the partners in economic profits and losses (if different from those in
taxable income or loss); (iii) the interests of the partners in cash flow and
other nonliquidating distributions; and (iv) the rights of the partners to
distributions of capital upon liquidation.
The Partnership Agreement: (i) provides for the determination and
maintenance of Capital Accounts in accordance with the Section 704(b)
Regulations; (ii) provides that liquidation proceeds will be distributed to the
Partners in accordance with Capital Accounts, and (iii) contains a qualified
income offset provision, and assuming the accuracy of the representations of the
General Partner, including that the Partnership will be operated strictly in
accordance with the terms of the Partnership Agreement and that it is
anticipated that Partnership Properties will not be sold within five years of
acquisition, it is more likely than not that Partnership items of income, gain,
loss, deduction and credit will be allocated among the General Partner and the
Limited Partners substantially in accordance with the allocation provisions of
the Partnership Agreement.
RISK OF TAXABLE INCOME WITHOUT CASH DISTRIBUTIONS
A partner in a partnership is required to report his allocable share of
the partnership's taxable income on his personal income tax return regardless of
whether or not he has received any cash distributions from the partnership.
There are no assurances that a Limited Partner will not be allocated items of
Partnership income or gain in an amount which gives rise to an income tax
liability in excess of cash, if any, received from the Partnership for the tax
year in question, and investors are urged to consult with their personal tax
advisors in this regard.
INVESTMENT BY QUALIFIED PLANS AND OTHER TAX-EXEMPT ENTITIES
QUALIFIED PLANS AND OTHER TAX-EXEMPT ENTITIES SHOULD CONSULT THEIR OWN TAX
ADVISORS WITH REGARD TO THE TAX ISSUES UNIQUE TO SUCH ENTITIES, INCLUDING, BUT
NOT LIMITED TO, ISSUES RELATING TO CLASSIFICATION OF PARTNERSHIP ASSETS AS PLAN
ASSETS, UNRELATED BUSINESS TAXABLE INCOME AND REQUIRED DISTRIBUTIONS.
Although the General Partner has used its best efforts to structure the
Partnership's activities to avoid having the Partnership's income characterized
as UBTI, any person who is a fiduciary of an IRA, Keogh Plan, Qualified Plan or
other tax-exempt entity (collectively referred to as "Exempt Organizations")
considering an investment in the Units should be aware that if the Partnership
Properties are considered debt-financed properties or Partnership indebtedness
is considered acquisition indebtedness, then a portion of the income derived
from ownership of Units will be be UBTI, generally defined as income derived
from any unrelated trade or business carried on by a tax-exempt entity or a
partnership of which it is a member. A trustee of a charitable remainder trust
should be aware that if any portion of the income derived from its ownership of
Units is deemed to be UBTI, the trust will lose its exemption from income
taxation
23
with respect to all of its income for the tax year in question. (See "Investment
by Charitable Remainder Trusts" below.) A tax-exempt Limited Partner (other than
a charitable remainder trust) which has UBTI in any tax year from all sources of
more than $1,000 will be subject to taxation on such income.
Acquisition indebtedness includes: (i) indebtedness incurred in
acquiring or improving property; (ii) indebtedness incurred before the
acquisition or improvement of property if such indebtedness would not have been
incurred but for such acquisition of improvement; and (iii) indebtedness
incurred after the acquisition or improvement of property if such indebtedness
would not have been incurred but for such acquisition or improvement and the
incurrence of such indebtedness was reasonably foreseeable at the time of such
acquisition or improvement.
The Partnership will under no circumstances incur indebtedness to
acquire Partnership Properties. The Partnership's authority to incur
indebtedness thereafter may be exercised only in limited circumstances.
Specifically, the General Partner has the authority to incur indebtedness (i)
for Partnership operating purposes, in the event of unforeseen or unexpected
circumstances in which the Partnership's working capital reserves and other cash
resources available to the Partnership are deemed insufficient for the
maintenance and repair of Partnership Properties or for the protection or
replacement of the Partnership's assets, or (ii) in order to finance improvement
of and improvements to Partnership Properties at such time as the General
Partner may deem such improvements to be necessary or appropriate to protect
capital previously invested in such Partnership Properties, to protect the value
of the Partnership's investment in a particular Partnership Property, or to make
a particular Partnership Property more attractive for sale or lease.
The aggregate amount of Partnership borrowings shall at no time exceed 40% of
the total purchase price of Partnership Properties. While it is the intent of
the General Partners to have no borrowings, it is highly likely that any
borrowings for purposes of improvements will give rise to UBTI. Whether any
other borrowings would give rise to UBTI depends upon a variety of factors
including the timing of the borrowings as compared to the acquisitions of
Partnership Properties and the likelihood at the time of the acquisition that
borrowings would be necessary.
In the event that the Partnership did incure debt that gave rise to
UBTI, the portion of income or gain from debt-financed property" that will
constitute UBTI would be based upon the ratio of the "average acquisition
indebtedness" to the basis of the property. In computing the portion of gain
from a sale which constitutes UBTI, "average acquisition indebtedness" means the
highest amount of the acquisition indebtedness with respect to such property
during the 12 month period ending on the date of sale while, for determining the
portion of income from sources other than a sale, "average acquisition
indebtedness" means the average monthly level of acquisition indebtedness during
the taxable year for the year in which such income was recognized.
Any person who is a fiduciary of an Exempt Organization considering an
investment in Units. should also consider the impact of minimum distribution
requirements under the Code. The Code provides that certain minimum
distributions from Retirement Plans must be made commencing no later than the
April 1st following the calendar year during which the recipient attains age 70
1/2 . Accordingly, if Units are still held by Retirement Plans and Partnership
Properties have not yet been sold at such time as mandatory distributions are
required to commence to an IRA beneficiary or a Qualified Plan participant, it
is likely that a distribution in kind of the Units will be required to be made,
which distribution will be includable in the taxable income of said IRA
beneficiary or Qualified Plan participant for the year in which the Units are
received at the fair market value of the Units without any corresponding cash
distributions with which to pay the income tax liability arising out of any such
distribution. In certain circumstances, a distribution in kind of the Units may
be deferred beyond the date for required distributions, but only upon a showing
of compliance with the minimum distribution requirements of the Code by reason
of distributions from other Retirement Plans established for the benefit of the
recipient. Compliance with these requirements is complex, however, and potential
investors are urged to consult with and rely upon their individual tax advisors
with regard to all matters concerning the tax effects of distributions from
Retirement Plans. No assurances can be given that Partnership Properties will be
sold or otherwise disposed of in a fashion which would permit sufficient
liquidity in any Retirement Plan holding Units for the Retirement Plan to be
able to avoid making a mandatory distribution in kind of Units.
INVESTMENT BY CHARITABLE REMAINDER TRUSTS
A charitable remainder trust ("CRT") is a trust created to provide
income for the benefit of at least one non-charitable beneficiary for life or a
term of up to 20 years, with the property comprising the trust corpus then
transferred to a charitable beneficiary upon the expiration of the trust. Upon
the creation of a CRT, the grantor would normally be entitled to a charitable
income tax deduction equal to the current fair market value of the remainder
interest which will ultimately pass to charity. A CRT is also exempt from
federal income taxation if the trust is established and maintained in compliance
with highly complex rules contained in the Code and underlying Treasury
Regulations. Among these rules is a provision that if any portion of income
derived by a CRT is deemed to be UBTI, all of the CRT's income for the taxable
year in which UBTI is incurred, from whatever sources derived, will be subject
to income taxes at the trust level. As set forth above in "Investment by
Qualified Plans and Other Tax-Exempt Entities," the General Partner has used its
best efforts to structure the Partnership's activities to avoid having the
Partnership's income characterized as UBTI. However, in the event it becomes
necessary to incur indebtedness for improvement of Partnership Property any CRT
Limited Partner will have UBTI income and become subject to tax on all its
income. Additionally, as discussed above in "Investments by Qualified Plans and
Other Tax-Exempt Entities" , it is also possible that other borrowings could
give rise to UBTI. Additionally, if it was determined that the Partnership was a
dealer in the Partnership Properties, its income would be UBTI, causing any CRT
Limited Partner to be subject to tax on all its income.
DEPRECIATION
It is currently anticipated that the real property improvements
acquired or constructed by the Partnership and any personal property acquired by
the Partnership will be depreciated for tax purposes using the Alternative
Depreciation System set forth in the Code for partnerships (such as the
Partnership) having both taxable and tax exempt partners. Under that Alternative
Depreciation System, real property improvements will be depreciated on a
straight-line basis over a recovery period of 40 years, and personal property
acquired by the Partnership will be depreciated over a recovery period of 12
years on a straight-line basis.
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SYNDICATION AND ORGANIZATIONAL EXPENSES
Expenses incurred in connection with organizing the Partnership or
syndicating the Partnership must be capitalized. Syndication costs can not be
recovered through amortization. However, amounts which qualify as organizational
expenses may, if so elected, be amortized over 60 months.
Code Section 709 defines organizational expenses as expenses which are
1) incident to the creation of the partnership, 2) chargeable to capital account
and 3) of a character which, if expended incident to the creation of a
partnership having an ascertainable life, would be amortized over such life.
Only expenses related to the partnership's organization which meet all three
tests may be deductible. Examples of expenses which qualify as organization fees
amortizable over sixty months include legal fees incident to the organization of
the partnership including negotiating and preparing the partnership agreement,
accounting fees for services incident to the organization of the partnership,
and filing fees. Expenses connected with acquiring assets for the partnership or
transferring assets to the partnership, connected with the admission or removal
of partners other than at the initial organization, connected with contracts
related to the operation of the partnership or connected with the syndication of
the partnership do not meet the three tests and, accordingly, must be
capitalized.
Examples of nondeductible syndication expenses that must be capitalized
and are not subject to amortization include brokerage fees, legal fees of the
underwriter or placement agent and general partner for securities advise and for
advise related to the adequacy of tax disclosures to partners, accounting fees
for preparations of representations and projections to be included in the
offering material, printing costs of the other selling and promotional material.
Accordingly, the vast majority of the expenses connected with this offering must
be capitalized and will not be subject to any recovery through depreciation,
amortization or otherwise.
There are no assurances that the IRS will not attempt to recharacterize
as nondeductible syndication expenses certain costs and expenses which the
Partnership attempts to deduct or amortize over 60 months as organizational
expenses or start up expenses.
DEDUCTIBILITY OF ACQUISITION AND ADVISORY FEES AND PROPERTY MANAGEMENT AND
LEASING FEES
The Code recognizes three types of payments made to a partner by a
partnership. Those payments are (i) payments governed by Code Section 707(a)
made to a partner when he is acting in a capacity other than that of a partner;
(ii) distributions made to a partner in his capacity as a partner governed by
Code Section 731; and (iii) "guaranteed payments" governed by Code Section
707(c). Guaranteed payments are payments made to a partner for services or for
the use of capital without regard to the income of the partnership. For purposes
of determining gross income of the recipient and whether a payment is deductible
or must be capitalized, guaranteed payments are viewed as having been paid to a
non-partner.
It is anticipated that the Partnership may pay the General Partner an
Acquisition and Advisory Fee, a Property Supervision Fee, a Partnership
Management and Investor Administration Fee, and possibly a Property Management
and Leasing Fee and real estate commission on sale of Partnership Property.
The Acquisition and Advisory Fee, the Property Supervision Fee and the
Partnership Management and Investor Administration Fee are all payable to the
General Partner regardless of whether the Partnership has income. All three
items are calculated upon gross offering proceeds or funds expended for
acquisition of Property. The Acquisition and Advisory Fee is payable ratably as
properties are acquired as compensation for services related to the selection,
valuation and acquisition of Partnership Properties.
It is likely that the Acquisition and Advisory Fee will be considered a
payment made to a partner acting in a capacity other than that of a partner and
be considered a capital expenditure and added to the basis of the Partnership
Properties. Accordingly, it will not be deductible in computing net income or
loss.
The Property Supervision Fee and the Investor Administration Fee,
whether considered a guaranteed payment under Code Section 707(c) or as being
made to a third party under Code Section 707(a), relates to the ongoing
operations of the Partnership and should be deductible rather than capitalized.
In the event that such items are not considered deductible, it is likely that
and the intent of the General Partners, that they would be considered as a
distribution to the General Partner, reducing the taxable income allocable to
Limited Partners for tax purposes. Accordingly, in either instance, the Limited
Partners would be treated the same.
The Partnership Agreement also provides for a Property Management and
Leasing Fee or real estate commission paid to the General Partner or an
Affiliate in the event that such services are not provided by unrelated third
parties. In the event that such fees are paid, under the terms of the
Partnership Agreement, such fees are limited to the amounts that would be paid
for comparable services to unrelated parties in arm's length transactions. It is
anticipated that the IRS will recognize the fees as ordinary and necessary
business expenses payable to a non-partner and deductible by the Partnership
under Code Section 162.
However, it is possible that the IRS could disregard the existence of
the Affiliate and take the position that the Management and Leasing Fee and real
estate commission is in reality a payment made to the General Partner. The IRS
has held that a payment will be made without regard to income of the partnership
when it is based upon a percentage of gross rental revenues. In that case, the
Management and Leasing Fee or real estate commission could be viewed as a
guaranteed payment made to the General Partner. However, assuming the payment is
reasonable, it would be deductible by the Partnership regardless of the IRS's
recharacterization.
It is possible that the IRS could rule that the Management and Leasing
Fee or real estate commission is not reasonable compensation for the services
performed by the General Partner, instead the fee represents a disguised
distribution from the Partnership. In that case, the management fee would not be
deductible by the Partnership and taxable income would be increased accordingly.
However, it is the intent in such a case that the General Partner would be
allocated that increased amount of Partnership income to reflect the deemed
distribution and the Limited Partners would not be impacted.
25
Since the appropriate classification of fees and expenses paid by the
Partnership into their proper categories and a determination of whether certain
fees and expenses are ordinary and necessary and reasonable in amount depends
upon facts relating to and existing at the time the services are to be rendered
to the Partnership, it is impossible to predict to the probable outcome if the
IRS were to challenge the deductibility or the timing of deduction or
amortization of those fees and expenses, if such challenge to any or all of such
fees and expenses were to be litigated and judicially decided. Disallowance by
the IRS of any of these fees and expenses would result in an increase in the
taxable income of the Partnership and its Partners with no associated increase
in Net Cash From Operations. However, as stated above, in the event any such
items are deemed to be distributions to the General Partner, allocations of
taxable income will be adjusted to reflect such a determination.
ACTIVITIES NOT ENGAGED IN FOR PROFIT
Section 183 of the Code provides for the disallowance of deductions
attributable to activities "not engaged in for profit." The term "not engaged in
for profit," is defined as any activity other than an activity that constitutes
a trade or business or an activity that is engaged in for the production or
collection of income. In general, an activity will be considered as entered into
for profit where there is a reasonable expectation of profit in the future. The
determination of whether an activity is engaged in for profit is based upon the
facts and circumstances of each case.
Based upon the investment objectives of the Partnership and the
representation of the General Partner that the Partnership will be operated in a
business-like manner in all material respects and in accordance with the
Partnership Agreement and this Prospectus, and assuming the determination as to
whether the activities of the Partnership are activities entered into for profit
under Section 183 is made at the partnership level, it is more likely than not
that the activities contemplated by the Partnership will be considered
activities entered into for profit by the Partnership, if such issue were
challenged by the IRS, litigated and judicially decided. However, the IRS may
also apply Section 183 to Limited Partners notwithstanding any determination
made with respect to the Partnership in this regard, and since the test of
whether an activity is deemed to be engaged in for profit is based upon facts
and circumstances that exist from time to time, no assurance can be given that
Section 183 of the Code may not be applied in the future to disallow deductions
allocable to Limited Partners from Partnership operations. Accordingly,
prospective investors should consult with their own tax advisors regarding the
impact of Section 183 on their particular situations.
CHARACTERIZATION OF LEASES
The Partnership has the authority to purchase properties and lease them
back to the sellers of such properties pursuant to "sale-leaseback"
transactions. The tax benefits described herein associated with ownership of a
property, such as depreciation or cost recovery deductions, depend on having the
lease in any such leaseback transaction treated as a "true lease" under which
the Partnership is treated as the owner of the property for federal income tax
purposes, rather than having such transaction treated as a conditional sale of
the property or a financing transaction entered into with the seller.
While the General Partner will use its best efforts to structure any
such sale-leaseback transaction to insure that the lease will be characterized
as a "true lease," so that the Partnership will be treated as the owner of the
property in question for federal income tax purposes, the Partnership will not
seek an advance ruling from the IRS or obtain an opinion of counsel that it will
be treated as the owner of any leased properties for federal income tax
purposes. A determination by the IRS that the Partnership is not the owner of
leased properties could result in substantial adverse tax consequences,
including depriving Limited Partners of deductions for depreciation. In
addition, if a sale-leaseback transaction is recharacterized as a financing for
federal income tax purposes, any Partnership income derived from such leaseback
would be treated as interest which is portfolio income, rather than passive
activity income which may be offset by passive activity losses generated by the
Partnership or from investments in other passive activities.
PROPERTY HELD PRIMARILY FOR SALE
The Partnership has been organized for the purpose of acquiring and
developing real estate for investment and rental purposes. However, if the
Partnership were at any time deemed for tax purposes to be a "dealer" in real
property (one who holds real estate primarily for sale to customers in the
ordinary course of business), any gain recognized upon a sale of such real
property would be taxable as ordinary income, rather than as capital gain, and
would constitute UBTI to Limited Partners which are tax-exempt entities.
Under existing law, whether property is or was held primarily for sale
to customers in the ordinary course of business, must be determined from all the
facts and circumstances surrounding the particular property and sale in
question. The Partnership intends to acquire real estate and construct
improvements thereon for investment and rental only and to engage in the
business of owning and operating such improvements. The Partnership will make
sales thereof only as, in the opinion of the General Partner, are consistent
with the Partnership's investment objectives. Although the General Partner does
not anticipate that the Partnership will be treated as a dealer with respect to
any of its properties, there is no assurance that the IRS will not take a
contrary position. Because the issue is dependent upon facts which will not be
known until the time a property is sold or held for sale and due to the lack of
judicial authority in this area, it is impossible to predict whether the
Partnership will, be considered to hold any or all of its properties primarily
for sale to customers in the ordinary course of business.
SALES OF PARTNERSHIP PROPERTIES
Upon the sale of Partnership Properties, the Partnership will recognize
gain or loss to the extent that the amount realized is more or less than the
adjusted basis of the Partnership Property sold. The amount realized upon the
sale of a Partnership Property will generally be equal to the sum of the cash
received plus the amount of indebtedness encumbering the property, if any,
assumed by the purchaser or to which the property remains subject upon the
transfer of the property to the purchaser. The adjusted basis of Partnership
Property will in general be equal to the original cost of the property less
depreciation allowances allowed to the Partnership with respect to such
property.
26
Assuming that the Partnership is not deemed to be a dealer with respect
to its properties (see "Property Held Primarily for Sale" above), such gain or
loss will generally be taxable under Section 1231 of the Code. A Limited
Partner's share of the gains or losses resulting from the sale of Partnership
Properties would generally be combined with any other Section 1231 gains or
losses realized by the Limited Partner in that year from source other than the
Partnership, and the net Section 1231 gain or loss is generally treated as
long-term capital gain (subject to depreciation or cost recovery allowance
recapture, if any) or ordinary loss, as the case may be. Investors should be
aware that the amount of taxable gain allocated to a Limited Partner with
respect to the sale of Partnership Property may exceed the cash proceeds
received by such Limited Partner with respect to such sale.
SALES OF LIMITED PARTNERSHIP UNITS
A Limited Partner may be unable to sell any of his Units. In the event
that Units are sold, however, the selling Limited Partner will realize gain or
loss equal to the difference between the gross sale market price or proceeds
received from sale and the Limited Partner's adjusted tax basis in his Units.
Assuming the Limited Partner is not a "dealer" with respect to such Units and
has held the Unit for more than one year, his gain or loss will be long-term
capital gain or loss, except for that portion of any gain attributable to such
Limited Partner's share of the Partnership's "unrealized receivables" and
"substantially appreciated inventory," as defined in Section 751 of the Code,
which would be taxable as ordinary income.
DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP
The dissolution and liquidation of the Partnership will involve the
distribution to the Partners of the cash remaining after the sale of its assets,
if any, and after payment of all the Partnership's debts and liabilities. If a
Limited Partner receives cash in excess of the basis of his Units, such excess
will be taxable as a gain. If a Limited Partner were to receive only cash upon
dissolution and liquidation, he would recognize a loss to the extent, if any,
that the adjusted basis of his Units exceeded the amount of cash received. No
loss would be recognized if a Limited Partner were to receive property other
than money, unrealized receivables and substantially appreciated inventory (as
defined in Section 751 of the Code). There are a number of exceptions to these
general rules, including but not limited to, the effect of a special basis
election under Section 732(d) of the Code for a Limited Partner who may have
acquired his Partnership interest within the two years prior to the dissolution,
and the effects of distributing one kind of property to some Partners and a
different kind of property to others as determined under Section 751 (b) of the
Code. Because it is anticipated that only cash will be distributed upon
liquidation, each prospective investor should consult his own tax advisor for a
more detailed explanation of the tax consequences of receipt of assets other
than cash upon liquidation.
CAPITAL GAINS AND LOSSES
Ordinary income for individual taxpayers is currently taxed at a
maximum marginal rate of 39.6%, while long term capital gains are currently
taxed at a maximum marginal rate of 20%, except that that portion of long-term
capital gain attributable to the sale or exchange of depreciable real property
which constitutes recapture of depreciation will be taxed at a maximum marginal
rate of 25% rather than 20% . Capital losses may generally be used to offset
capital gains and, in addition, may be deductible against ordinary income on a
dollar-for-dollar basis up to a maximum annual deduction of $3,000 ($1,500 in
the case of a married individual filing a separate return). There is no
guarantee that capital gains will continue to be taxed at a lower rate than
ordinary income.
ELECTION FOR BASIS ADJUSTMENTS
Under Section 754 of the Code, partnerships may elect to adjust the
basis of partnership property upon the transfer of an interest in the
partnership so that the transferee of a partnership interest will be treated for
purposes of calculating depreciation and realizing gain as though he had
acquired a direct interest in the partnership's assets. However, as a result of
the complexities and added expense of the tax accounting required to implement
such an election, the General Partner does not intend to cause the Partnership
to make any such election on behalf of the Partnership. As a consequence,
depreciation available to a transferee of Units will be limited to the
transferor's share of the remaining depreciable basis of Partnership Properties,
and upon a sale of a Partnership Property, taxable income or loss to the
transferee of the Units will be measured by the difference between his share of
the amount realized upon such sale and his share of the Partnership's tax basis
in the property, which may result in greater tax liability to him than if a
Section 754 election had been made. In addition, the absence of such an election
by the Partnership may result in Limited Partners having greater difficulty in
selling their Units.
ALTERNATIVE MINIMUM TAX
Alternative minimum tax is payable to the extent that a taxpayer's
alternative minimum tax exceeds his regular federal income tax liability for the
taxable year. Alternative minimum tax for individual taxpayers is a percentage
of "alternative minimum taxable income" ("AMTI") in excess of certain exemption
amounts. The first, $175,000 of AMTI in excess of the exemption amount is taxed
currently at 26 %, and AMTI in excess of $175,000 over the exemption amount is
taxed currently at 28 %. Alternative minimum taxable income is generally
computed by adding what are called "tax preference items" to the taxpayer's
regular taxable income with certain adjustments. While it is not anticipated
that an investment in the Partnership will give rise to any specific tax
preference items, the amount of alternative minimum tax imposed depends upon
various factors unique to each particular taxpayer. Accordingly, each Limited
Partner should consult with his own personal tax advisor regarding the possible
application of the alternative minimum tax.
PENALTIES
Under Section 6662 of the Code, a 20% penalty is imposed on any portion
of an underpayment of tax attributable to a "substantial understatement of
income tax." In general, a "substantial understatement of income tax" will exist
if the actual income tax liability of the taxpayer exceeds the income tax
liability, shown on his return by the greater of 10% of the actual income tax
liability or $5,000. Unless the understatement is attributable to a "tax
shelter," the amount of an understatement is reduced by any portion of such
understatement which is attributable to (i) the income tax treatment of any item
shown on the return if there is "substantial authority" for the taxpayer's
treatment of such item on his return or (ii) any item with respect to which the
taxpayer adequately discloses on his return the relevant facts affecting the
item's income tax treatment. In the case of a "tax shelter," which is defined in
Section 6662 of the Code as a partnership or other entity that has as its
principal purpose the avoidance or evasion of federal income tax, this reduction
in the understatement only will apply in cases where, in addition to having
"substantial authority" for treatment of the item in question, the taxpayer
reasonably believed that the income tax treatment of that item was more likely
than not the proper treatment.
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Although the Partnership is not intended to be a so-called "tax
shelter," it is possible that it may be considered a tax shelter for purposes of
Section 6662 of the Code and that certain Partnership tax items could be
considered tax shelter items within the meaning of Section 6662. The Regulations
under Section 6662 provide that an entity will be deemed to be a tax shelter if
the tax avoidance or evasion in motive exceeds all other motives. Based on the
investment objectives of the Partnership, the General Partner believes there are
substantial grounds for a determination that the Partnership does not constitute
a tax shelter. However, because the issue is dependent upon facts relating to
future Partnership operations, the acquisition and disposition of Partnership
Properties and other factual determinations which are not known at this time, it
is impossible to predict whether an investment in the Partnership will be
considered a tax shelter for purposes of Section 6662 of the Code.
In addition to the substantial understatement penalty, Section 6662 of
the Code also imposes a 20 % penalty on any portion of an underpayment of tax
(i) attributable to any substantial valuation misstatement (generally where the
value or adjusted basis of a property claimed on a return is 200% or more of the
correct value or adjusted basis), or (ii) attributable to negligence, defined as
any failure to make a reasonable attempt to comply with the Code, or a careless,
reckless or intentional disregard of federal income tax rules or regulations.
TAX SHELTER REGISTRATION
Any entity deemed to be a "tax shelter," as defined in Section 6111 of
the Code, is required to register with the IRS. Regulations under Section 6111
define a "tax shelter" as an investment in connection with which an investor can
reasonably infer from the representations made that the "tax shelter ratio" may
be greater than 2 to 1 as of the close of any of the first five years ending
after the date in which the investment is offered for sale. The "tax shelter
ratio" is generally determined by dividing the investor's share of the aggregate
deductions derived from the investment, determined without regard to income, by
the amount of the investor's capital contributions.
The Partnership is not intended to constitute a "tax shelter." Further;
the General Partner has represented that, in the absence of events which are
unlikely to occur, the aggregate amount of deductions derived from any Limited
Partner's investment in the Partnership, determined without regard to income,
will not exceed twice the amount of any such Limited Partner's investment in the
Partnership as of the close of any year in the Partnership's first five calendar
years.
Based upon the authority of the Regulations under Section 6111 and the
representations of the General Partner that, in the absence of events which are
unlikely to occur, the "tax shelter ratio" with respect to an investment in the
Partnership will not exceed 2 to 1 for any investor as of the close of any year
in the Partnership's first five calendar years, it is more likely than not the
Partnership is not currently required to register as a tax shelter with the IRS
under Section 6111 of the Code prior to the offer and sale of the Units.
AUDITS
The IRS has undertaken an intensified audit program with respect to
partnerships and partnership returns. An audit of the Partnership generally
should not affect the Units.
In the event of an audit of the Partnership's tax return, the General
Partner will take primary responsibility for contesting federal income tax
adjustments proposed by the IRS, to extend the statute of limitations as to all
Partners and, in certain circumstances to bind the Limited Partners to such
adjustments. Although the General Partner will attempt to inform each Limited
Partner of the commencement and disposition of any such audit or subsequent
proceedings, Limited Partners should be aware that their participation in
administrative or judicial proceedings relating to Partnership items will be
substantially restricted. An audit of the Partnership could result in
substantial legal and accounting fees required to be paid to substantiate the
reporting positions taken, and any such fees would reduce the cash otherwise
available for distribution to the Limited Partners. Any such audit may result in
adjustments to the tax returns of the Partnership which would require
adjustments to each Limited Partner's personal income tax return and may require
such, Limited Partners to pay additional taxes plus interest, compounded daily.
In addition, any audit of a Limited Partner's return could result in adjustments
of other items of income and deductions not related to the Partnership.
FOREIGN INVESTORS AS LIMITED PARTNERS
As a general matter, foreign investors may purchase Units in the
Partnership. A foreign investor who purchases Units and becomes a Limited
Partner in the Partnership will generally be required to file a United States
tax return on which he must report his distributive share of the Partnership's
items of income, gain, loss, deduction and credit, and pay United States federal
income tax at regular United States tax rates on his share of any net income,
whether ordinary or capital gains. A foreign investor may also be subject to tax
on his distributive share of the Partnership's income and gain in his country of
nationality or residence or elsewhere. In addition, cash distributions of Net
Cash From Operations or Sale Proceeds otherwise payable to a foreign investor
from the Partnership or amounts payable upon the sale of a foreign investor's
Units may be reduced by United States tax withholdings made pursuant to
applicable provisions of the Code.
FOREIGN INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO THE
EFFECT OF BOTH THE UNITED STATES TAX LAWS AND FOREIGN LAWS ON AN INVESTMENT IN
THE PARTNERSHIP AND THE POTENTIAL THAT THE PARTNERSHIP WILL BE REQUIRED TO
WITHHOLD FEDERAL INCOME TAXES FROM AMOUNTS OTHERWISE PAYABLE TO FOREIGN
INVESTORS.
TAX LEGISLATION AND REGULATORY PROPOSALS
Significant tax legislation has been recently enacted that altered the
federal income tax laws as they relate to an investment in the Partnership.
Administrative and judicial interpretation of those changes is uncertain at this
time. Additionally, legislative proposals continue to be made which could
significantly alter the anticipated tax treatment of an investment in the
Partnership. It is impossible at this time, however, to predict whether or in
what form any such legislation will be enacted. EACH PROSPECTIVE INVESTOR IS
URGED TO CONSULT HIS OWN TAX ADVISOR WITH RESPECT TO HIS OWN TAX SITUATION, THE
EFFECT OF ANY LEGISLATIVE, REGULATORY OR ADMINISTRATIVE DEVELOPMENTS OR
PROPOSALS ON AN INVESTMENT IN UNITS IN THE PARTNERSHIP, OR OTHER POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
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STATE AND LOCAL TAXES
In addition to the federal income tax aspects described above,
prospective investors should consider potential state and local tax consequences
of an investment in the Partnership. This Prospectus makes no attempt to
summarize the state and local tax consequences to an investor in those states in
which the Partnership may own properties or carry on activities, and each
investor is urged to consult his own tax advisor on all matters relating to
state and local taxation, including the following: (i) whether the state in
which he resides will impose a tax upon his share of the taxable income of the
Partnership, (ii) whether an income tax or other return must also be filed in
those states where the Partnership will own properties, and (iii) whether he
will be subject to state income tax withholding in states where the Partnership
will own properties.
Because the Partnership will conduct its activities and own properties
in different taxing jurisdictions, an investment in the Partnership may impose
upon a Limited Partner the obligation to file annual tax returns in a number of
different states or localities, as well as the obligation to pay taxes to a
number of different states or localities. Additional costs incurred in having to
prepare various state and local tax returns, as well as the additional state and
local tax which may be payable, should be considered by prospective investors,
in deciding whether to make an investment in the Partnership.
It should be noted that, many states have implemented or are in the
process of implementing programs to require partnerships to withhold and pay
state income taxes owed by non-resident partners relating to income-producing
properties located in their states. In the event that the Partnership is
required to withhold state taxes from cash distributions otherwise payable to
Limited Partners, the amount of the Net Cash From Operation otherwise payable to
such: Limited Partners would likely be reduced. In addition, such collection and
filing requirements at the state level may result in increases in the
Partnership's administrative expenses which would likely have the effect of
reducing returns to the Limited Partners. (See "RISK FACTORS.")
EACH PROSPECTIVE PURCHASER OF UNITS IS URGED TO CONSULT WITH HIS OWN
TAX ADVISOR WITH RESPECT TO THE IMPACT OF APPLICABLE STATE AND LOCAL TAXES ON
HIS PROPOSED INVESTMENT IN THE PARTNERSHIP.
SUMMARY OF PARTNERSHIP AGREEMENT
The Partnership is a Texas limited partnership whose General Partner is
ABIC Realty Corporation, a Texas corporation. The rights and obligations of the
Partners in the Partnership will be governed by the Partnership Agreement. The
following statements are intended to supplement other statements in this
Prospectus concerning the Partnership Agreement and related matters, are
intended to be a summary only, and since they do not purport to be complete, are
qualified in their entirety by reference to the Partnership Agreement.
POWERS OF THE GENERAL PARTNER
The General Partner has full, exclusive and complete authority and
discretion in the management and control of the business of the Partnership.
Limited Partners have no right or power to take part in the management of, or to
bind, the Partnership.
LIABILITIES OF THE LIMITED PARTNERS
The Partnership was organized as a limited partnership under Texas law.
Investors whose subscriptions are accepted by the General Partner will be
admitted as Limited Partners. Under Texas law, Limited Partners have no personal
liability for Partnership debts or obligations in excess of their Capital
Contributions.
OTHER ACTIVITIES OF THE GENERAL PARTNER
The General Partner may engage in or possess interests in other
business ventures of any kind for its own account, including, without
limitation, the syndication, ownership or management of other real estate. It
shall incur no liability to the Partnership, or to the Limited Partners, as a
result of engaging in any other business or venture.
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS;
NONASSESSABILITY OF UNITS
Limited Partners are not permitted to participate in the management and
control of the business of the Partnership, and may not transact any business in
the name of the Partnership. Pursuant to the Partnership Agreement, each Limited
Partner appoints the General Partner, with full power and substitution, as his
lawful attorneys-in-fact to act in his name, place, and stead: (i) to amend the
Certificate of Limited Partnership and the Partnership Agreement, including
amendments necessary to properly reflect allocations of profits and losses as
may be required for tax purposes; and (ii) to take any further action which, the
General Partner deems necessary or advisable in connection with the foregoing.
Units acquired by Limited Partners pursuant to the Partnership
Agreement will be fully paid and non-assessable. No Limited Partner has the
right to withdraw all or any portion of his Capital Contribution until the full
and complete winding up and liquidation of the business of the Partnership. No
Limited Partner will be liable for any debts or obligations of the Partnership
in excess of his Capital Contribution.
ANNUAL AUDITS
Annual audits of the Partnership's affairs will be conducted by such
firm of independent certified public accountants as may from time to time be
engaged by the Partnership. Copies of annual audits will be provided to each
limited partner.
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TRANSFERABILITY OF UNITS
There are a number of restrictions on the transferability of Units.
Except for intra-family transfers and transfers by gift, inheritance or family
dissolution, no Units may be transferred unless the proposed transferee meets
the minimum suitability standards set forth in this Prospectus. Investors
transferring less than all of their Units must transfer a number of Units such
that, after the transfer, both the transferor and transferee shall own no less
than the minimum number of Units required to be purchased by an investor, unless
such transfer is made on behalf of a Retirement Plan, or by gift, inheritance,
intra-family transfer, family dissolution or to an affiliate. Payment of a
transfer fee in an amount sufficient to cover transfer costs, as established by
the General Partner, is a condition to effectiveness of a transfer. All
transfers of Units must be pursuant to documentation satisfactory in form and
substance to the General Partner, including, without limitation, confirmation by
the transferee that the transferee has been informed of all pertinent facts
relating to the liquidity and marketability of the Units. Additional
restrictions on transfers of Units are imposed under the securities laws of
various states upon the residents of such states. Further, no Unit may be sold,
assigned or exchanged if the sale of such Unit when added to the total of all
other sales or exchanges of Units within the period of 12 consecutive months
prior to the proposed date of sale or exchange would, in the opinion of counsel
for the Partnership, result in the termination of the Partnership under Section
708 of the Code (dealing with transfers of 50 % or more of the outstanding
interests of a partnership) unless the Partnership and the transferring holder
shall have received a ruling from the IRS that the proposed sale or exchange
will not cause such a termination.
In addition to the foregoing restrictions, the Partnership Agreement
contains substantial restrictions on the transfer or assignment of Units in
order to prevent the Partnership from being deemed a "publicly traded
partnership." These restrictions are those described in the Section 7704
Regulations, the most significant of which prohibits the transfer during any
taxable year of more than 2% of the total interest in the Partnership's capital
or profits excluding transfers by gift, transfers at death, transfers between
family members, distributions from a qualified retirement plan and block
transfers, which are defined as transfers by a partner during any 30 calendar
day period of partnership interests representing more than 2 % of the total
interest in a partnership's capital or profits. Further, the Partnership
Agreement provides that any transfer or assignment of Units which the General
Partner believes will cause the Partnership to be treated as a publicly traded
partnership will be void ab initio and will not be recognized by the
Partnership.
An assignee of Units shall not become a substituted Limited Partner in
place of his assignor unless the assignee shall have expressly agreed to become
a party to the Partnership Agreement. An assignee of Units who does not become a
substituted Limited Partner shall be entitled to receive distributions
attributable to the Units properly transferred to him, but shall not have any of
the other rights of a Limited Partner, including the right to vote as a Limited
Partner and the right to inspect and copy the Partnership's books. Assignments
of Units are restricted similarly to transfers of Units.
PARTNERSHIP BORROWING
The General Partner is prohibited from borrowing to finance the
acquisition, construction or ownership of the Partnership's Properties. However,
the Partnership may incur debt for the following limited purposes: (a) in the
event of unforeseen circumstances in which the Partnership's working capital
reserves and other cash resources available to the Partnership are insufficient
for operating purposes; and (b) in order to finance property improvements, when
the General Partner deems such improvements to be necessary or appropriate to
protect the capital previously invested in the properties, to protect the value
of the Partnership's investment in a particular property or to make a particular
property more attractive for sale or lease. The aggregate amount of Partnership
borrowings at any given time may not exceed 40% of the total purchase price of
Partnership Properties.
DISSOLUTION AND TERMINATION
The Partnership is to continue until December 31, 2030, but may under
certain circumstances be dissolved earlier as provided in the Partnership
Agreement. (Article VI.) The Partnership will be dissolved upon: (a) the sale or
disposition of all interests in real property and other assets of the
Partnership; (b) the effective date of the occurrence of an Event of Withdrawal
of the General Partner unless, however, within 120 days from such event, 66 2/3
% interest of the Limited Partners elect to continue the business of the
Partnership; or (c) the happening of any other event causing the dissolution of
the Partnership under the laws of Texas.
In addition to the foregoing events, the General Partner may also
terminate the Offering, compel a termination and dissolution of the Partnership,
or restructure the Partnership's affairs, upon notice to all Limited Partners
but without the consent of any Limited Partner, if upon the advice of counsel to
the Partnership, either (a) the Partnership's assets constitute "Plan Assets,"
as such term is defined for purposes of ERISA, or (b) any of the transactions
contemplated in the Partnership Agreement constitute "prohibited transactions"
under ERISA.
In the event the Partnership is dissolved, the assets of the
Partnership shall be converted to cash. The General Partner shall be given a
reasonable amount of time to collect any notes receivable with respect to the
sale of Partnership assets and to collect any other outstanding debts. All cash
on hand shall be distributed first to creditors to satisfy debts and liabilities
of the Partnership other than loans or advances made by Partners to the
Partnership, including the establishment of reserves deemed reasonably necessary
to satisfy contingent or unforeseen liabilities or obligations of the
Partnership. Any remaining cash will then be used to repay loans or advances
made by any of the Partners to the Partnership and to pay any fees due the
General Partner. The balance, if any, shall be distributed among the Partners in
accordance with the positive balance in their Capital Accounts as of the date of
distribution. Upon completion of the foregoing distributions, the Partnership
shall be terminated.
DISTRIBUTIONS AND ALLOCATIONS
DISTRIBUTIONS OF NET CASH FROM OPERATIONS
Net Cash From Operations (defined in the Partnership Agreement to mean
generally the Partnership's cash flow from operations after payment of all
operating expenses and adjustments for reserves), if any, will be distributed in
each year as follows and in the following priority:
(i) First, to Limited Partners holding Units on a per Unit basis
until they have received a 7% annual return on their Net
Capital Contributions (defined in the Partnership Agreement to
mean generally the amount of cash contributed to the
Partnership reduced by prior distributions of net proceeds
from any sale or exchange of Partnership Properties);
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(ii) Then, to the General Partner until it has received an amount
equal to 25 % of the total amount thus far distributed; and
Then, 80% to Limited Partners holding Units and 20% to the
General Partner.
The General Partner shall not incur any liability as a result
of its determination to distribute Net Cash From Operations, even though such
distribution may result in the Partnership's retaining insufficient funds for
the operation of its business, provided its determination was made in good faith
and not as a result of its negligence or misconduct.
The Partnership Agreement prohibits the General Partner from making any
distributions of Net Cash From Operations out of Capital Contributions.
Distributions of Net Cash From Operations will be allocated among the Limited
Partners in accordance with Participating Percentages and as provided in Code
Section 706. A transferee of Units will be deemed the owner of such Units as of
the first day of the quarter following the quarter during which the transfer
occurred and therefore, will not participate in distributions made with respect
to the quarter in which such transfer occurs. Distributions of Net Cash From
Operations will be made on a quarterly basis.
NON-LIQUIDATING NET SALE PROCEEDS. Net Sale Proceeds (generally the net
proceeds from any sale or exchange of Partnership Properties less appropriate
reserves) will be distributed as follows:
1. If there are any unpaid accrued Preferred Returns, to the
Limited Partners until each Limited Partner has received all
Preferred Returns due;
2. Then, to the General Partner until it has received,
aggregating all prior periods distributions, distributions
totally 25% of the Preferred Return paid to the Limited
Partners, aggregating all prior periods distributions;
3. To the Limited Partners on a per Unit basis until each Limited
Partner has received or has been deemed to have received
distributions hereunder equal to its Net Capital Contribution
at the beginning of the quarter;
4. Then, to the General Partner until the General Partner has
received distributions totaling 100% of its Capital
Contributions;
5. Thereafter, 80% to the Limited Partners on a per Unit basis
and 20% to the General Partner.
LIQUIDATION PROCEEDS. Upon liquidation, the Partnership shall convert
all assets to cash and pay all debts and liabilities other than indebtedness to
Partners and adequate reserves shall be established as deemed necessary by the
General Partner. Thereafter proceeds shall be distributed as follows:
6. If there are any unpaid accrued Preferred Returns, to the
Limited Partners until each Limited Partner has received all
Preferred Return due;
7. Then, to repay any Partnership debt owed to Limited Partners;
8. Then, to the Limited Partners until each Limited Partner has
received distributions equal to his Net Capital Contribution
at the beginning of the quarter.
9. Then, to repay any Partnership debt owed to the General
Partners;
10. Then, to the General Partner until it has received,
aggregating all prior periods distributions, distributions
totally 25% of the Preferred Return paid to the Limited
Partners, aggregating all prior periods distributions;
11. Then pro rata in accordance with Capital Accounts until
Capital Accounts have a zero balance, and then 80% to the
Limited Partners and 20% to the General Partner. The
distributions in accordance with Capital Accounts after Gain
on Sale in excess of depreciation deductions has been
allocated 80% to Limited Partners and 20% to General Partners
and gain equal to prior period depreciation deductions has
been allocated to the respective Limited Partner that was
allocated the deduction.
Potential investors should be aware that their share of distributions
of Sale Proceeds may be less than their Net Capital Contributions unless the
Partnership's aggregate Sale Proceeds are sufficient to fund the amount required
to repay aggregate Net Capital Contributions to all Limited Partners.
RETURN OF UNUSED CAPITAL CONTRIBUTIONS
Funds not expended, committed or reserved for working capital purposes
by the later of the fourth anniversary of the effective date of the Registration
Statement or three years after the termination of the Offering will be returned
proportionately to Limited Partners. For purposes of the foregoing, funds will
be deemed to have been committed and will not be returned to the extent that
such funds would be required to complete the acquisition of Partnership
Properties with respect to which contract agreements in principle or letters of
understanding have been executed, regardless of whether such property is
actually acquired. Any funds reserved in order to make contingent payments in
connection with the acquisition of any Partnership Property will be treated as
committed whether or not any such payments are actually made.
PARTNERSHIP ALLOCATIONS
Partnership allocations are as follows:
31
NET INCOME. The Partnership's Net Income (defined generally as the net
income of the Partnership for federal income tax purposes, including any income
exempt from tax, but excluding all deductions for depreciation, amortization and
any net gain on the sale of assets) will be allocated each year in the same
proportions, and to the extent that, Net Cash From Operations is distributed or
deemed distributed to the Partners. To the extent the Partnership 's Net Income
in any year exceeds Net Cash From Operations, such excess Net Income will be
allocated 80% to Limited Partners holding Units during such year and, 20% to the
General Partner.
NET LOSS, DEPRECIATION, AMORTIZATION AND COST RECOVERY DEDUCTIONS.
Deductions for depreciation, amortization and cost recovery and the
Partnership's Net Loss (defined generally as the net loss of the Partnership for
federal income tax purposes, but excluding all, deductions for depreciation,
amortization and cost recovery) for each fiscal year will be allocated as
follows:
1. 99% to Limited Partners holding Units during such year and 1 %
to the General Partner until each such Partner's Capital
Account (defined generally as the sum of Capital Contributions
and income allocated to a Partner less the sum of
distributions paid and losses allocated to a Partner) of all
such Partners are reduced to zero;
2. Thereafter, all such deductions will be allocated to the
General Partner, who, at that time, would be the only Partner
having any economic risk of loss.
GAIN ON SALE. Gain on Sale (defined generally as the net taxable income
or gain from all sales or exchanges of Partnership Properties during the fiscal
year) will be allocated first, pursuant to the qualified income offset provision
contained in the Partnership Agreement, if applicable, then, to Partners having
negative capital accounts, if any, until negative capital accounts have been
restored to zero, then to the Limited Partners and General Partner pro rata in
amounts equal to the deductions for depreciation and amortization allocated to
each such partner in connection with the specific Partnership Property and
thereafter, 80% to the Limited Partners and 20% to the General Partners.
The Partnership Agreement contains a "qualified income offset"
provision which provides that in the event that any Partner receives an
adjustment, allocation or distribution of certain items which causes a deficit
or negative balance in such Partner's Capital Account, such Partner will be
allocated items of income or gain (consisting of a pro rata portion of each item
of Partnership income, including gross income, and gain for such year) in an
amount and manner sufficient to eliminate such deficit balance as quickly as
possible. The intent of the foregoing provision is to prohibit allocations of
losses or distributions of cash to a Limited Partner which would cause his
Capital Account to become negative (which would occur in the event that the
aggregate amount of losses allocated and cash distributed to such Limited
Partner exceeded the sum of his Capital Contributions plus any income allocated
to him) or, in the event such allocation or distribution did cause his Capital
Account to become negative, such Limited Partner would be allocated income or
gain in an amount necessary to bring his Capital Account back to zero.
THE QUALIFIED INCOME OFFSET PROVISION MAY RESULT IN INCOME BEING
SPECIALLY ALLOCATED TO LIMITED PARTNERS EVEN IN A FISCAL YEAR WHEN THE
PARTNERSHIP HAS A NET LOSS FROM OPERATIONS OR FROM THE SALE OF PROPERTY.
Income, losses and distributions of cash relating to Units which are
acquired directly from the Partnership during the Offering will be allocated
among the Limited Partners on a pro rata basis based on the number of days such
Units have been owned by such Limited Partner.
REPORTS TO INVESTORS
Within 75 days after the end of each fiscal year of the Partnership,
the General Partner will deliver to each Limited Partner and any assignee such
information as is necessary for the preparation of his federal income tax return
and state income or other tax returns with regard to jurisdictions, in which
Partnership Properties are located. Within 120 days after the end of the
Partnership's fiscal year, the General Partner will deliver to each Limited
Partner and any assignee an annual report which includes financial statements of
the Partnership, audited by independent certified public accountants. and
prepared in accordance with generally accepted accounting principles. Such
financial statements will include a profit and loss statement, a balance sheet
of the Partnership, a cash flow statement, a statement of changes in Partners'
capital, and any materials required to be filed with the Securities and Exchange
Commission.
For as long as the Partnership is required to file quarterly reports on
Form 10-Q with the Securities and Exchange Commission, financial information
substantially similar to the financial information contained in each such report
shall be sent to the Limited Partners within 60 days after the end of such
quarter. Whether or not such reports are required to be filed, each Limited
Partner will be furnished within 60 days after the end of each of the first
three quarters of the Partnership's fiscal year, an unaudited financial report
for that period including a profit and loss statement, a balance sheet and a
cash flow statement.
The Partnership will distribute annually to Limited Partners a report
on the estimated value of each Unit. Such estimated value will be based upon
annual appraisals of Partnership Properties performed by the General Partner and
not by an independent appraiser. The General Partner is, however, required to
obtain the opinion of an independent third party that its estimate of the value
of each Unit is reasonable and was prepared in accordance with appropriate
methods for valuing real estate. For the first three full fiscal years following
the year in which the Offering of Units terminates the value of the Units will
be deemed to be their initial purchase price of $10.00, and no valuation of
Partnership Properties will be performed.
PLAN OF DISTRIBUTION
This Prospectus relates to the offering of Units of Limited Partnership
Interest in ABIC Realty Fund I, L.P. A minimum of 10,000 Units and a maximum of
4,000,000 Units are being offered to the public through registered
broker-dealers which are members of the National Association of Securities
32
Dealers, Inc.. The Units are being offered at a price of $10.00 per Unit on a
"best efforts" basis (which means generally that the broker-dealers will be
required to use only their best efforts to sell the Units and have no firm
commitment or obligation to purchase any of the Units).
Payment for Units should be made by check payable to ABIC Realty Fund
I, L.P. Subscriptions will be effective only upon acceptance by the General
Partner, and the General Partner may reserve the right to reject any
subscription in whole or in part.
Subscription proceeds will be placed in an interest-bearing account
until such subscriptions aggregating at least $100,000 have been received and
accepted by the General Partner (the "Minimum Offering"). Subscription proceeds
will be invested in obligations of, or obligations guaranteed by, the United
States government or bank money market accounts, or certificates of deposit of
national or state banks that have deposits insured by the Federal Deposit
Insurance Corporation (including certificates of deposit of any bank acting as
depository or custodian for any such funds), directed by the General Partner.
If the Minimum Offering of ABIC Realty Fund I, L.P. has not been
received and accepted by 180 days after the affective date of the offering, this
Offering will be terminated. No later than fifteen business days after
termination of the Offering, the General Partner will refund and return all
monies to subscribers. During the period in which subscription proceeds are held
in escrow, interest earned thereon will be allocated among subscribers on the
basis of the respective amounts of their subscriptions and the number of days
that such amounts were on deposit. Such interest net of escrow expenses will be
paid to subscribers upon the termination of the escrow period.
Initial subscribers may be admitted to the Partnership and the payments
transferred from escrow to the Partnership at any time after the Partnership has
received and accepted the Minimum Offering. Certain states may impose different
requirements than those set forth herein. Any such additional requirements will
be set forth in a supplement to this Prospectus.
The offering of Units of ABIC Realty Fund I, L.P. will commence upon
the effective date of this Prospectus and will continue until and terminate upon
the earlier of (i) __________________, or (ii) the date on which all $40,000,000
in Units of ABIC Realty Fund I, L.P. have been sold.
SUPPLEMENTAL SALES MATERIAL
In addition to this Prospectus, the Partnership may utilize certain
sales material in connection with the Offering of the Units, although such
material may only be used when accompanied by or preceded by the delivery of
this Prospectus. In certain jurisdictions, some or all of such sales material
may not be available. This material may include information relating to this
Offering, property brochures and articles and publications concerning real
estate. In addition, the sales material may contain certain quotes from various
publications without obtaining the consent of the author or the publication for
use of the quoted material in the sales material.
The Offering of Units in the Partnership is made only by means of this
Prospectus. Although the information contained in such sales material does not
conflict with any of the information contained in this Prospectus, such material
does not purport to be complete, and should not be considered a part of this
Prospectus or the Registration Statement of which this Prospectus is a part, or
as incorporated by reference in this Prospectus or said Registration Statement
or as forming the basis of the Offering of the Units.
LEGAL MATTERS
Certain matters relating to the legality of the Units will be passed
upon by Amy Waters, Attorney, Waxahachie, Texas. The discussion of the federal
income tax considerations relating to the Units has been passed upon by Julia K.
Swisher, Austin, Texas.
EXPERTS
The financial statements of f ABIC Realty Fund I, L.P. included in this
Prospectus have been audited by Tyson Hopkins, independent certified public
accountant, Oklahoma City, Oklahoma. These financial statements as well as his
report have been included in reliance upon the report and authority of such firm
as an expert in auditing and accounting.
ADDITIONAL INFORMATION
The Partnership has filed with the Securities and Exchange Commission
(the "Commission"), Washington D.C., a Registration Statement under the
Securities Act of 1933, as amended, with respect to the Units offered pursuant
to this Prospectus. This Prospectus does not contain all the information set
forth in the Registration Statement and the exhibits related thereto filed with
the Commission, reference to which is hereby made. Copies of the Registration
Statement and exhibits related thereto, as well as periodic reports and
information filed by Partnership, may be obtained upon payment of the fees
prescribed by the Commission, or may be examined at offices of the Commission
without charge, at (i) the public reference facilities in Washington, D.C. at
Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information with regard to registrants that file
electronically with the Commission. The address of such site is
http://www.sec.gov.
GLOSSARY
The following are definitions of certain terms used in this Prospectus
and not otherwise defined herein in the Partnership Agreement:
"ABIC REALTY CORPORATION" means ABIC Realty Corporation, a Texas
corporation, which is the General Partner of the Partnership.
33
"ACQUISITION EXPENSES" means expenses incurred in connection with the
selection and acquisition of properties, whether or not acquired, including, but
not limited to, legal fees and expenses, travel, communications expenses, costs
of appraisals, nonrefundable option payments on property not acquired,
accounting fees and expenses and title insurance and other miscellaneous costs
and expenses relating to the selection and acquisition of properties.
"ACQUISITION FEES" means the total of all fees and commissions paid by
any party to any person in connection with the purchase, development or
construction of property by the Partnership, including Acquisition and Advisory
Fees payable to the General Partner , real estate brokerage commissions,
investment advisory fees, finder's fees, selection fees, development fees,
construction fees, nonrecurring management fees, any other fees of a similar
nature, however designated, except development fees and construction fees paid a
person not affiliated with the Sponsor in connection with the actual development
or construction of a Real Estate Property.
"AFFILIATE" means (i) any person directly or indirectly controlling,
controlled by or under common control with the General Partner, (ii) any person
owning or controlling 10% or more of the outstanding voting securities of the
General Partner, (iii) any officer, director or partner of the General Partner,
and (iv) if such other person is officer, director or partner, any company for
which such person acts in any such capacity.
"CAPITAL ACCOUNT" means the account established for each Partner
pursuant to the Partnership Agreement. Each Partner's Capital Account shall be
determined in accordance with Treasury Regulations Section 1.704-1(b). Capital
Accounts generally will be adjusted as follows. Each Partner's Capital Account
shall be credited with: (i) the amount of the cash contributed to the
Partnership by distributive share of Partnership income and gain; and each
Partner's Capital Account shall be debited with: his distributive share of
Partnership losses and deductions or items thereof; and (iv) the cash
distributed to him.
"CAPITAL CONTRIBUTION" means the amount of cash contributed to the
capital.
"CASH FLOW" means cash funds derived from operations of the
Partnership, including without limitation interest and investment income, but
excluding Capital Contributions, and without deduction for depreciation or
amortization, after deducting funds used to pay or to provide for the payment of
all operating expenses of the Partnership and each Partnership Property and debt
service, if any, capital improvements and replacements.
"CODE" means the Internal Revenue Code of 1986, as amended.
"GAIN ON SALE" means the taxable income or gain for federal income tax
purposes in the aggregate for each fiscal year from the sale or exchange of all
or any portion of a Partnership asset after netting losses from such sales or
exchanges against the gains from such transactions.
"INVESTMENT IN PROPERTIES" means the amount of Capital Contributions
actually paid or allocated to the purchase, development, construction or
improvement of properties acquired by the Partnership, including the purchase of
properties, working capital reserves allocable thereto and other cash payments
such as interest and taxes.
"IRA" means an Individual Retirement Account established pursuant to
Section 408 of the Code.
"LIQUIDATING DISTRIBUTIONS" means the net cash proceeds received by the
Partnership from (a) the sale, exchange, condemnation, eminent domain taking,
casualty or other disposition of substantially all of the assets of the
Partnership or the last remaining assets of the Partnership or (b) a liquidation
of the Partnership's assets in connection with a dissolution of the Partnership,
after (i) payment of all expenses of such sale, exchange, condemnation, eminent
domain taking, casualty, other disposition or liquidation, including real estate
commissions, if applicable, (ii) the payment of any outstanding indebtedness and
other liabilities of the Partnership, (iii) amounts used to restore any such
assets of the Partnership, and (iv) any amounts set aside as reserves which
General Partner in its sole discretion may deem necessary or desirable.
"MINIMUM OFFERING" means the receipt and acceptance by the General
Partner of subscriptions aggregating at least $100,000 in offering proceeds.
"NET CAPITAL CONTRIBUTION" means, with respect to any Partner, the
Partner's Capital Contribution as reduced from time to time by distributions
constituting a return of unused capital or of Non-liquidating Net Sale Proceeds.
"NET CASH FROM OPERATIONS" shall mean Cash Flow, less adequate cash
reserves for other obligations of the Partnership, including, but not limited
to, payments for property supervision, management, leasing and all other costs
of properties and partnership operation.
"NET INCOME" or "NET LOSS" means the net income or loss realized or
recognized by the Partnership a fiscal year, as determined for federal income
tax purposes, including any income exempt from tax, but excluding all deductions
for depreciation and amortization and Gain on Sale.
"NET WORTH" means, except where otherwise provided herein, the excess
of total assets over total liabilities as determined by generally accepted
accounting principles, except that if any of such assets have been depreciated,
then the amount of depreciation relative to any particular asset may be added to
the depreciated cost of such as to compute total assets, provided that the
amount of depreciation may be added only to the extent that the amount resulting
after adding such depreciation does not exceed the fair market value of such
asset.
"NON-LIQUIDATING NET SALE PROCEEDS" means the net cash proceeds
received by the Partnership from a sale, exchange, condemnation, eminent domain
taking, casualty or other disposition of assets of the Partnership, which does
not constitute substantially all of the remaining assets of the Partnership,
after (i) the payment of all expenses of such sale, exchange, condemnation,
eminent domain taking, casualty, sale or other disposition, including estate
commissions, if applicable, (ii) the payment of any outstanding indebtedness and
other Partnership liabilities relating to such assets, (iii) any amounts used to
restore any such assets of the Partnership, and (iv) any amounts set aside as
reserves which the General Partner in its sole discretion may deem necessary or
desirable.
34
"OFFERING" means the offering and sale of the Units pursuant to the
terms and conditions of Prospectus.
"ORGANIZATION AND OFFERING EXPENSES" means those expenses incurred in
connection with organizing Partnership, preparing the Partnership for
registration and subsequently offering and distributing the Units to the public,
including without limitation, legal and accounting fees, sales commissions paid
to broker-dealers in connection with the distribution of the Units and all
advertising and out of pocket expenses.
"PARTNERS" means, collectively, the General Partner and the Limited
Partners.
"PARTNERSHIP" means ABIC Realty Fund I, L.P., the Texas limited
partnership which is organized pursuant to the Partnership Agreement.
"PARTNERSHIP AGREEMENT" means the Agreement of Limited Partnership of
ABIC Realty Fund I, L.P.
"PARTNERSHIP PROPERTY" or "PARTNERSHIP PROPERTIES" or "PROPERTY" means
any and all land and improvements as may be purchased or constructed by the
Partnership and all repairs, replacements or renewals thereof, together with all
personal property acquired by the Partnership which is from time to time located
thereon or specifically used in connection therewith.
"PREFERRED RETURN" shall mean the 7% per annum cumulative but
non-compound return on Limited Partners' Net Capital Contributions which is
distributed to Limited Partners quarterly prior to any distributions to the
General Partner and prior to any distributions that are allocated 20 % to the
General Partner and 80% to the Limited Partners, said Preferred Return being
calculated quarterly on the basis of the Net Capital Contribution at the
beginning of the quarter the distribution is being made.
"PROPERTY MANAGEMENT AND LEASING FEE" means the fee payable for
day-to-day professional property management and leasing services rendered in
connection with the Partnership Properties.
"QUALIFIED PLAN" means a qualified sole proprietorship, partnership or
corporate pension or profit sharing plan established under Section 401(a) of the
Code.
"REGISTRATION STATEMENT" means the Registration Statement filed by the
Partnership with the Securities and Exchange Commission pursuant to the
Securities Act of 1933, as amended, in order to register the Units for sale to
the public.
"RETIREMENT PLANS" means Individual Retirement Accounts ("IRAs")
established under Section 408 of the Code and Qualified Plans.
"SALE PROCEEDS" means, collectively, Non-liquidating Net Sale Proceeds
and Liquidating Distributions.
"SPONSOR" means any individual, partnership, corporation or other legal
entity which (i) is directly or indirectly instrumental in organizing, wholly or
in part, the Partnership, (ii) will manage or participate in the management of
the Partnership, and any Affiliate of any such person, other than a person whose
only relationship with the Partnership is that of an independent property
manager, whose only compensation is as such, (iii) takes the initiative,
directly or indirectly, in founding or organizing the Partnership, either alone
or in conjunction with one or more other persons, (iv) receives a material
participation in the Partnership in connection with the founding or organizing
of the business of the Partnership, in consideration of services or property, or
both services and property, (v) has a substantial number of relationships and
contacts with the Partnership, (vi) possesses significant rights to control
Partnership Properties, (vii) receives fees for providing services to the
Partnership which are paid on a basis that is not customary in the industry, or
(viii) provides goods or services to the Partnership on a basis which was not
negotiated at arm's-length with the Partnership. Based upon the foregoing,
Sponsors of the Partnership include the General Partner.
"UBTI" means unrelated business taxable income, as that term is defined
in Sections 511 through 514 of the Code.
"UNIT" means a Unit of limited partnership interest held by a Limited
Partner.
"UNUSED CAPITAL CONTRIBUTIONS" means so much of the Capital
Contributions of Partners which are not required to acquire property and
improvements thereon with respect to which contracts, agreements in principle or
letters of understanding have been executed within the later of four years
following the effective date of the Registration Statement or three years after
the termination of the Offering of the Units.
35
INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
Independent Auditors' Report ............................................. 37
Balance Sheet, June 6, 2002 .............................................. 38
Statement of Changes in Partner's Capital ................................ 39
Notes to Financial Statements ............................................ 40
</Table>
36
[TYSON HOPKINS LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To ABIC Realty Fund I, L.P.
I have audited the accompanying balance sheet of ABIC Realty Fund I, L.P. (a
Texas Limited Partnership and developmental stage enterprise, the "Partnership")
as of June 6, 2002, and the related statement of changes in partner's capital
for the period from Partnership formation on May 17, 2002 through June 6, 2002.
These financial statements are the responsibility of the Partnership. My
responsibility is to express an opinion on these financial statements based on
my audit.
I conducted my audit in accordance with generally accepted audit standards.
Those standards require that I 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.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ABIC Realty Fund I, L.P. as of
June 6, 2002, and the changes in partner's capital for the period from
Partnership formation on May 17, 2002 through June 6, 2002 in conformity with
generally accepted accounting principals.
TYSON HOPKINS
Certified Public Accountant
Oklahoma City, Oklahoma
June 6, 2002
37
ABIC REALTY FUND I, L.P.
(a Texas Limited Partnership and development stage enterprise)
BALANCE SHEET
As of June 6, 2002
<Table>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $11,100
OTHER ASSETS
Offering costs 61,000
Organization costs 800
-------
TOTAL ASSETS $72,900
=======
LIABILITIES AND PARTNERSHIP CAPITAL
COMMITMENTS (Notes B and C)
LIABILITIES
Due to General Partner, ABIC Realty Corporation $71,800
PARTNERSHIP CAPITAL
Initial General Partner Contribution 1,000
Initial Limited Partner Contribution 100
-------
Total Partnership Capital 1,100
-------
TOTAL LIABILITIES AND PARTNERSHIP CAPITAL $72,900
=======
</Table>
See accompanying notes to financial statements
38
ABIC REALTY FUND I, L.P.
(a Texas Limited Partnership and development stage enterprise)
STATEMENT OF CHANGES IN PARTNER'S CAPITAL
For the period from formation on May 17, 2002 through June 6, 2002
<Table>
<Caption>
Initial Initial
General Limited
Partner Partner
Contribution Contribution Total
------------ ------------ ------
Balance Prior to
Formation on May 17, 2002 0 0 0
June 2002, Initial Capital Contribution $1,000 $ 100 $1,100
------ ------ ------
Balances, June 6, 2002 $1,000 $ 100 $1,100
------ ------ ------
</Table>
See accompanying notes to financial statements
39
ABIC REALTY FUND I, L.P.
(a Texas Limited Partnership and developmental stage enterprise)
NOTES TO FINANCIAL STATEMENTS
NOTE A - DESCRIPTION OF BUSINESS
General
ABIC Realty Fund I, L.P. (the "Partnership") was formed on May 17, 2002 as a
Texas Limited Partnership to purchase and operate a portfolio of income
producing real estate properties that: (i) pay quarterly cash distributions to
its investors at an increasing rate over time, that for taxable investors may be
partially free from current taxation; and (ii) increase in value over time. (the
"Partnership Properties") No assurance can be given that these business
objectives will be attained. The General Partner of the Partnership is ABIC
Realty Corporation, a Texas corporation. The Partnership plans to file a
Registration Statement with the Securities and Exchange Commission and various
state security boards with respect to its offering of up to $40,000,000 of
Limited Partnership Units (the "Units"). Upon completion of the review process
of the various federal and state regulatory authorities the Partnership will at
that time begin the Limited Partnership Unit offering. Thereafter, the
Partnership will initiate its principal business operations only after a minimum
of $100,000 in Unit subscriptions is received.
The Partnership's fiscal year will end on December 31.
DEVELOPMENTAL STAGE ENTERPRISE
The Partnership is considered to be in the "developmental stage" as
substantially all of its efforts have been expended in establishing the new
business and planned principal operations have not commenced. In addition, as
the Partnership has incurred no expenses since inception, statements of income
and cash flows are not applicable.
NOTE B - SALE OF LIMITED PARTNERSHIP UNITS
The Partnership plans to offer on a "best efforts basis" up to $40,000,000 of
Limited Partnership Units. The Units will be offered though licensed
broker-dealers. The broker-dealers will be paid commissions equaling 7.5% of the
proceeds of the Unit sale and up to 1% of the gross offering proceeds for
non-accountable expenses. Additionally, the Partnership will pay an additional
6% of the Unit proceeds to it's General Partner, as reimbursement of
registration, legal, accounting, printing, marketing and other out-of-pocket
expenses and allocated general and administrative overhead relating to the
offering and the organization of the Partnership which will be initially borne
by the General Partner and for services provided by the General Partner in
connection with the offering and organization of the Partnership. The remainder
of the Limited Partner Unit sale proceeds will be used to purchase commercial
real estate properties, acquired on an all-cash basis, including properties,
which generally have been constructed and have operating histories. ABIC Realty
Fund I, L.P. will conduct its business pursuant to a limited partnership
agreement. Investor subscription funds are to be held in an escrow bank account
until $100,000 in subscriptions have been received by the Partnership.
40
NOTE C - RISKS AND UNCERTAINTIES
Limited Partnership Investors will incur various risks and uncertainties
including, but not limited to, all market risks generally associated with real
estate investments and concentration of assets since the Partnership will invest
only in commercial real estate properties and all Properties are expected to be
located in urban and suburban areas of southern and southwestern United States.
Limited Partners have limited voting rights and must rely on the General
Partner, who will have full responsibility for the management of the
Partnership. The number of properties that the Partnership will acquire and
diversification of its investments will be reduced to the extent that less than
the maximum offering amount is raised. Additionally, due to certain federal
income considerations liquidity of the Limited Partnership Units will be
restricted.
NOTE D - RELATED PARTY TRANSACTIONS
The total General Partner Initial Capital Contribution is $1,000. All offering
and organization costs will be paid by the General Partner and if the offering
is successfully completed, the Partnership will pay 6% of the proceeds of the
offering to the General Partner as described in Note B. Pre-offering cost
incurred by the General Partner prior to June 6, 2002 is approximately $62,000.
These costs have been recorded as a liability and capitalized as an asset on the
balance sheet of the Partnership. The Partnership and its Properties will be
managed and administrated on behalf of the Partnership by the General Partner.
Fees to be paid to the General Partner have not been negotiated on and arms
length basis. The General Partner intends to subcontract a portion of its duties
to qualified third-party property managers and real estate brokers.
41
EXHIBIT A
FORM OF AMENDED AND RESTATED AGREEMENT
OF LIMITED PARTNERSHIP OF
ABIC REALTY FUND I, L.P.
ABIC REALTY FUND I, L.P.
TABLE OF CONTENTS TO PARTNERSHIP AGREEMENT
<Table>
I FORMATION A - 2
II NAME A - 2
III DEFINITIONS A - 2
IV BUSINESS A - 5
V NAMES AND ADDRESSES OF PARTNERS A - 5
VI TERM A - 6
VII PRINCIPAL AND REGISTERED OFFICE AND REGISTERED AGENT A - 6
VIII CAPITAL CONTRIBUTIONS A - 6
IX DISTRIBUTIONS A - 7
X ALLOCATIONS A - 9
XI MANAGEMENT OF THE PARTNERSHIP A - 10
XII SERVICES TO PARTNERSHIP BY GENERAL PARTNER A - 13
XIII TRANSACTIONS BETWEEN GENERAL PARTNER AND THE PARTNERSHIP A - 14
XIV INDEPENDENT ACTIVITIES OF PARTNERS A - 14
XV BOOKS, REPORTS, FISCAL AND TAX MATTERS A - 14
XVI RIGHTS AND LIABILITIES OF THE LIMITED PARTNERS A - 15
XVII WITHDRAWAL OF GENERAL PARTNER;
ASSIGNABILITY OF PARTNER'S PARTNERS' INTEREST A - 15
XVIII LOANS TO PARTNERSHIP A - 16
XIX POWER OF ATTORNEY, CERTIFICATES AND OTHER DOCUMENTS A - 16
XX DISSOLUTION AND TERMINATION OF THE PARTNERSHIP A - 18
XXI DISTRIBUTION ON TERMINATION OF PARTNERSHIP A - 18
XXII GENERAL PROVISIONS A - 19
</Table>
A-1
FORM OF AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
ABIC REALTY FUND I, L.P.
THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP is made and
entered into effective as of the_____ day of _________, 2002, by ABIC REALTY
CORPORATION, a Texas corporation, as the General Partner, and Settlers Capital
Corporation, an Oklahoma corporation, as the Initial Limited Partner, and those
parties who from time to time become Limited Partners as provided in this
Agreement, as the Limited Partners.
WHEREAS, on May 17, 2002, a Certificate of Limited Partnership was
filed with the Secretary of State of the State of Texas, pursuant to which the
General Partner and the Initial Limited Partner formed a limited partnership
(the "Partnership") under the Texas Revised Limited Partnership Act, (the
"Act"); and
WHEREAS, the parties hereto desire to amend, restate and supersede in
its entirety the original partnership agreement pursuant to the terms and
provisions of this Amended and Restated Agreement of Limited Partnership.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and conditions herein contained, the parties hereto hereby agree, and
the limited partnership agreement of the Partnership shall hereafter be restated
and amended in its entirety, as follows:
ARTICLE I
FORMATION
The General Partner has executed and filed a Certificate of Limited
Partnership dated May 17, 2002 with the Secretary of State of the State of Texas
in accordance with the provisions of Section 2.01 of the Act, pursuant to which
the parties hereto have previously formed the Partnership.
ARTICLE II
NAME
The business of the Partnership shall be conducted under the name of
"ABIC REALTY FUND I, L.P." or such other name as the General Partner shall
hereafter designate in its discretion from time to time.
ARTICLE III
DEFINITIONS
"ABIC REALTY CORPORATION" shall mean ABIC Realty Corporation, a Texas
corporation, as the General Partner.
"ABIC REALTY FUND I, L.P." shall mean ABIC Realty Fund I, L.P., a Texas
limited partnership, the "Partnership".
"ACT" shall mean the provisions of the Texas Revised Limited
Partnership Act.
"ACQUISITION EXPENSES" shall mean expenses, including, but not limited
to, legal fees and expenses, travel and communications expenses, costs of
appraisals, nonrefundable option payments on property not acquired, accounting
fees and expenses, title insurance and miscellaneous expenses related to
selection and acquisition of properties, whether or not acquired.
"ACQUISITION FEES" shall mean the total of all fees and commissions
paid by any party to any Person in connection with the purchase, development or
construction of property by the Partnership, including the Acquisition and
Advisory Fees payable to the General Partner or its Affiliates, real estate
brokerage commissions, investment advisory fees, finder's fees, selection fees,
Development Fees, Construction Fees, nonrecurring management fees, or any other
fees of a similar nature, however designated, but excluding any Development Fees
and Construction Fees paid to a Person not affiliated with the Sponsor in
connection with the actual development or construction of a property.
"ACQUISITION AND ADVISORY FEE" shall mean the fee payable to the
General Partner or its Affiliates for performing acquisition and advisory
services in connection with the review and evaluation of potential real property
acquisitions for the Partnership.
"ADDITIONAL LIMITED PARTNERS" shall refer to all persons who are
admitted as Limited Partners pursuant to the provisions hereof.
"AFFILIATE" shall mean (a) any Person directly or indirectly
controlling, controlled by or under common control with the General Partner, (b)
any Person owning or controlling 10% or more of the outstanding voting
securities of the General Partner, (c) any officer, director or partner of the
General Partner, and (d) if such other Person is an officer, director or
partner, any company for which the General Partner acts in any such capacity.
"AGREEMENT" shall mean this Agreement of Limited Partnership as
amended, modified or supplemented from time to time.
"ASSIGNEE" shall mean a Person who has acquired a Limited Partner's
beneficial interest in one or more Units and has not become a substituted
Limited Partner.
A-2
"CAPITAL ACCOUNT" shall mean the account established and maintained for
each Partner.
"CAPITAL CONTRIBUTION" shall mean, in the case of the General Partner,
the aggregate amount of cash contributed by the General Partner to the
Partnership and, in the case of a Limited Partner, the gross amount of
investment in the Partnership by such Limited Partner, which shall be an amount
equal to $10.00 multiplied by the number of Units purchased by such Limited
Partner.
"CASH FLOW" shall mean cash funds from operations of the Partnership,
including without limitation rental income, interest and other investment income
but excluding Capital Contributions and without deduction for depreciation or
amortization, after deducting funds used to pay or to provide for the payment of
all operating expenses of the Partnership and each Partnership Property and debt
service, if any, capital improvements and replacements but not including any
proceeds from the sale, exchange or other disposition of Partnership Property.
"CERTIFICATE" shall mean the Certificate of Limited Partnership filed
by the General Partner with the Secretary of State of Texas dated May 17, 2002.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"CONSTRUCTION FEES" shall mean any fees or other remuneration for
acting as general contractor, prime or subcontractor and/or construction manager
to construct, supervise and/or coordinate improvements in connection with the
actual development or construction of a Partnership Property.
"DEVELOPMENT FEES" shall mean any fees or other remuneration for the
packaging of a Partnership Property, including negotiating and approving plans,
assisting in obtaining zoning and necessary variances for a specific property,
and related matters.
"EVENT OF WITHDRAWAL" shall occur, as to the General Partner:
(a) upon the dissolution, death or permanent disability of the
General Partner;
(b) if the General Partner should:
(i) make an assignment for the benefit of the creditors;
(ii) file a voluntary petition in bankruptcy;
(iii) be adjudicated a bankrupt or insolvent;
(iv) file a petition or answer speaking for himself or
itself in the reorganization, arrangement,
composition, readjustment, liquidation, dissolution
or similar relief under any statute, law or
regulation;
(v) file an answer or other pleading admitting or failing
to contest the material allegations of the petition
filed against him or it in any proceeding of this
nature; or
(vi) seek, consent to or acquiesce in the appointment of a
trustee, receiver or liquidator of such General
Partner of all or a substantial part of his or its
property; or
(c) upon
(i) the filing of a certificate of dissolution of the
General Partner or the revocation of the General
Partner's charter and lapse of 90 days after notice
to the General Partner of revocation without
reinstatement of its charter;
(ii) the expiration of 120 days after the commencement of
any proceeding against the General Partner seeking
reorganization, arrangement composition,
readjustment, liquidation, dissolution or similar
relief under any statute, law or regulation, if the
proceeding has not been dismissed; or
(iii) the expiration of 90 days after the appointment
without such General Partner's consent or
acquiescence of a trustee, receiver or liquidator of
such General Partner or of all or any substantial
part of its properties, the appointment of which is
not vacated or stayed within 90 days after such an
appointment.
If an Event of Withdrawal shall occur with respect to the General
Partner, the Event of Withdrawal shall not be effective until 120 days after the
event giving rise to the Event of Withdrawal has occurred.
"EXPIRATION DATE" shall mean the date on which the Offering terminates
as provided in the Prospectus.
"GAIN ON SALE" shall mean the taxable income or gain for federal income
tax purposes (including gain exempt from tax) in the aggregate for each fiscal
year from the sale, exchange or other disposition of all or any portion of a
Partnership asset after netting losses from such sales, exchanges or other
dispositions against the gains from such transactions.
"GENERAL PARTNER" shall refer to ABIC Realty Corporation or any other
Person or Persons who succeed it in that capacity.
"GROSS REVENUES" shall mean all amounts actually collected as rents or
other charges for the use and occupancy of Partnership Properties, but shall
exclude interest and other investment income of the Partnership and proceeds
received by the Partnership from a sale, exchange, condemnation, eminent domain
taking, casualty or other disposition of assets of the Partnership.
"IRS" means Internal Revenue Service.
A-3
"INDEPENDENT EXPERT" shall mean a Person with no material current or
prior business or personal relationship with the Sponsor or General Partner who
is engaged to a substantial extent in the business of rendering opinions
regarding the value of assets of the type held by the Partnership and who is
qualified to perform such work.
"INVESTMENT IN PROPERTIES" shall mean the amount of Capital
Contributions actually paid or allocated to the purchase, development,
construction or improvement of properties acquired by the Partnership (including
the purchase of properties, working capital reserves allocable thereto and other
cash payments such as interest and taxes).
"LIMITED PARTNERS" shall refer to the Initial Limited Partner, the
Additional Limited Partners and to all other Persons who are admitted to the
Partnership as additional or substituted Limited Partners.
"LIQUIDATING DISTRIBUTIONS" shall mean the funds available for
distribution from net cash proceeds received by the Partnership from (a) the
sale, exchange, condemnation, eminent domain taking, casualty or other
disposition of substantially all of the assets of the Partnership or the last
remaining assets of the Partnership or (b) a liquidation of the Partnership's
assets in connection with a dissolution of the Partnership, after (i) payment of
all expenses of such sale, exchange, condemnation, eminent domain taking,
casualty or other disposition or liquidation, including real estate commissions,
if applicable, (ii) the payment of any outstanding indebtedness and other
liabilities of the Partnership, (iii) any amounts used to restore any such
assets of the Partnership, and (iv) any amounts set aside as reserves which the
General Partner in its sole discretion may deem necessary or desirable.
"MINIMUM GAIN" shall have the meaning set forth in Treasury Regulations
Section 1.704-2(d).
"MINIMUM OFFERING" shall mean the receipt and acceptance by the General
Partner of subscriptions for Units aggregating at least $100,000 in offering
proceeds.
"MINIMUM OFFERING EXPIRATION DATE" shall be as specified in the
prospectus.
"NASAA GUIDELINES" shall mean the Statement of Policy Regarding Real
Estate Programs of the North American Securities Administrators Association,
Inc., as amended.
"NET CAPITAL CONTRIBUTION" shall mean, with respect to any Partner, the
Partner's Capital Contribution as reduced from time to time by distributions to
such Partner constituting a return of capital under Section 8.10 or by
distributions to such Partner of Non-liquidating Net Sale Proceeds under Section
9.2(c) and (d) and Liquidating Distributions under Section 9.3(d) which are
returns of capital.
"NET CASH FROM OPERATIONS" shall mean Cash Flow, less adequate cash
reserves for other obligations of the Partnership, including, but not limited
to, payments for property supervision, management, leasing and all other costs
of properties and partnership operation.
"NET INCOME" or "NET LOSS" shall mean the net income or loss realized
by the Partnership for a fiscal year, as determined for federal income tax
purposes, including any income exempt from tax, but excluding all deductions for
depreciation, amortization and Gain on Sale.
"NON-LIQUIDATING NET SALE PROCEEDS" shall mean the net cash proceeds
received by the Partnership from a sale, exchange, condemnation, eminent domain
taking, casualty or other disposition of assets of the Partnership, which does
not constitute substantially all of the remaining assets of the Partnership,
after (a) payment of all expenses of such sale, exchange, condemnation, eminent
domain taking, casualty or other disposition, including real estate commissions,
if applicable, (b) the payment of any outstanding indebtedness and other
Partnership liabilities relating to such assets, (c) any amounts used to restore
any such assets of the Partnership, and (d) any amounts set aside as reserves
which the General Partner in its sole discretion may deem necessary or
desirable.
"OFFERING" shall mean the offering and sale of Units to the public
pursuant to the terms and conditions set forth in the Prospectus.
"ORGANIZATION AND OFFERING EXPENSES" shall mean those expenses incurred
in connection with the organization of the Partnership and the offering of Units
of the Partnership, as indicated in the Prospectus.
"PARTICIPATING PERCENTAGE" shall mean at any given time, as to each
holder of a Unit or Units, the percentage of that Person's Unit or Units to the
total Units being measured and shall be determined by dividing the total number
of Units held by such Person by the total number of outstanding Units.
"PARTNERS" shall refer collectively to the General Partner and to the
Limited Partners, and reference to a "Partner" shall be to any one of the
Partners.
"PARTNERSHIP" shall refer to the limited partnership created under this
Agreement.
"PARTNERSHIP PROPERTY" OR "PARTNERSHIP PROPERTIES" OR "PROPERTY" shall
mean any and all land and improvements purchased or constructed by the
Partnership and all repairs, replacements or renewals thereof, together with all
personal property acquired by the Partnership which is from time to time located
thereon or specifically used in connection therewith.
"PERSON" shall mean any natural person, partnership, corporation,
association, or other legal entity, including without limitation, qualified
pension and profit sharing trusts.
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"PREFERRED RETURN" shall mean the 7% per annum cumulative but
non-compound return on Limited Partners' Net Capital Contributions which is
distributed to Limited Partners quarterly prior to any distributions to the
General Partner, said Preferred Return being calculated quarterly on the basis
of the Net Capital Contribution at the beginning of the quarter the distribution
is being made.
"PROPERTY SUPERVISION FEE" shall mean the fee payable to the General
Partner for supervising property management companies and leasing companies.
"PROSPECTUS" shall mean the prospectus used by the Partnership in
connection with its offer and sale of Units pursuant to a Registration Statement
filed under the Securities Act of 1933, as amended.
"PURCHASE PRICE" shall mean the sum of the prices paid for all
properties by the Partnership (including all Acquisition Fees, liens and
mortgages on the properties, but excluding points and prepaid interest) plus all
costs of improvements, if any, reasonably and properly allocable to the
properties.
"REGISTRATION STATEMENT" shall mean the registration statement filed by
the Partnership with the Securities and Exchange Commission pursuant to the
Securities Act of 1933, as amended, in order to register the Units for sale to
the public.
"RETIREMENT PLANS" shall mean Individual Retirement Accounts
established under Section 408 of the Code and Keogh or corporate pension or
profit sharing plans established under Section 401(a) of the Code.
"SALE DATE" shall mean the day on which the Partnership realizes any
gain or loss from the sale, exchange or other disposition of Partnership assets
which it is required to allocate to the Partners.
"SPONSOR" shall mean any individual, partnership, corporation or other
legal entity which (i) is directly or indirectly instrumental in founding or
organizing, wholly or in part, the Partnership, either alone or in conjunction
with one of more other Persons, other than an outside accountant or attorney
acting as such and receiving arm's length compensation, (ii) will manage or
participate in the management of the Partnership, and any Affiliate of any such
Person, other than a Person whose only relationship with the Partnership is that
of an independent property manager, whose only compensation is as such, (iii)
receives a material participation in the Partnership in connection with the
founding or organizing of the business of the Partnership, in consideration of
services or property, or both services and property, (iv) has a substantial
number of relationships and contacts with the Partnership, (v) possesses
significant rights to control Partnership Properties, (vi) receives fees for
providing services to the Partnership which are paid on a basis that is not
customary in the industry, or (vii) provides goods or services to the
Partnership on a basis which was not negotiated at arm's-length with the
Partnership.
"TREASURY REGULATIONS" shall mean the Income Tax Regulations
promulgated under the Code by the United States Treasury Department.
"UNIT" shall mean the limited partnership interest entitling the holder
thereof to all rights and benefits under this Agreement including, but not
limited to an interest in the income, loss, distributions and capital of the
Partnership to be allocated to holders of Units. All Units, shall represent a
Capital Contribution of $10.00 each (irrespective of the fact that because of
discounts in sales commissions and other fees under certain circumstances,
certain Units may be sold and issued for a gross consideration of less than
$10.00 per Unit), shall be issued as fully paid and non-assessable and shall
have the same rights, privileges and preferences.
ARTICLE IV
BUSINESS
4.1 PURPOSE. The principal purpose of the Partnership is to acquire,
develop, construct, own, operate, improve, lease and otherwise manage for
investment purposes, either alone or in association with others, a diversified
portfolio of income-producing commercial or industrial properties as shall, from
time to time, be acquired by the Partnership and to engage in any or all general
business activities related to or incidental to such principal purpose.
4.2 OBJECTIVES. The business of the Partnership shall to purchase and
operate a portfolio of real estate properties that:
(a) Pay cash distributions to it's investors at an
increasing rate over time, that for taxable investors
may be partially free from current taxation; and
(b) Increase in value over time.
ARTICLE V
NAMES AND ADDRESSES OF PARTNERS
The name of the General Partner is ABIC Realty Corporation, a Texas
corporation. The name of the Initial Limited Partner is Settlers Capital
Corporation. The business address of the General Partner is 9520 North May
Avenue, Suite 330, Oklahoma City, Oklahoma 73120. The business address of the
Initial Limited Partner is 9520 North May Avenue, Suite 330, Oklahoma City,
Oklahoma 73120. The names and addresses of all the Additional Limited Partners
shall be set forth in the books and records of the Partnership.
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ARTICLE VI
TERM
The Partnership term commenced upon the filing of the Certificate and
shall continue until December 31, 2030, unless sooner terminated as hereinafter
provided.
ARTICLE VII
PRINCIPAL AND REGISTERED OFFICE AND REGISTERED AGENT
The principal office of the Partnership shall be 9520 North May Avenue,
Suite 330, Oklahoma City, Oklahoma 73120. The General Partner may from time to
time change the principal place of business and, in such event, shall notify the
Limited Partners in writing of the change and the effective date of such change.
The registered agent for the Partnership shall be Amy Waters and the registered
address shall be 109 E. Franklin Street, Waxahachie, Texas 75165.
ARTICLE VIII
CAPITAL CONTRIBUTIONS
8.1 CAPITAL ACCOUNTS. A separate Capital Account shall be maintained
for each Partner. The Capital Accounts of the Partners shall be determined and
maintained throughout the term of the Partnership in accordance with the capital
accounting rules of Treasury Regulations Section 1.704-1(b), as it may be
amended or revised from time to time. In the event there is a determination that
the Agreement conflicts with the Treasury Regulations, that particular provision
of the Agreement will be superseded by the Treasury Regulations.
8.2 GENERAL PARTNER. The General Partner shall make an initial Capital
Contribution of $1,000 to the Partnership.
8.3 GENERAL PARTNER PURCHASE OF UNITS. The Capital Contributions of the
General Partner, together with the Capital Contribution of the Initial Limited
Partner, shall constitute the initial capital of the Partnership and shall not
entitle the General Partner to any Units. The General Partner may, in its
discretion, make additional Capital Contributions to the capital of the
Partnership in exchange for the purchase of Units. The General Partner who
purchases Units shall continue, in all respects, to be treated as the General
Partner but shall receive the income, losses and cash distributions with respect
to any Units purchased by such General Partner on the same basis as other
Partners may receive with respect to their Units. Units purchased by the General
Partner or its Affiliates shall not be entitled to vote on any transaction
requiring Limited Partner approval.
8.4 INITIAL LIMITED PARTNER. The Initial Limited Partner shall
contribute $100 in cash to the Partnership and agrees that his interest shall
automatically be redeemed for $100 upon the admission of any Additional Limited
Partners to the Partnership.
8.5 LIMITED PARTNER CONTRIBUTIONS. The General Partner is authorized
and directed to raise capital for the Partnership as provided in the Prospectus
by offering and selling not more than an aggregate of 4,000,000 Units as
follows:
(a) Each Unit shall be issued for a purchase price of
$10.00.
(b) Except as set forth below, the minimum purchase of
Units shall be 200 Units (or such greater minimum
number of Units as may be required under applicable
state or federal laws). In addition, after
subscribers have satisfied the minimum purchase
requirements, the minimum additional investment in
the Partnership shall not be less than 100 Units. The
suitability standards set forth in the Prospectus
will not be decreased with respect to any investment
in Units of the Partnership.
(c) The General Partner may refuse to accept
subscriptions for Units and contributions tendered
therewith for any reason whatsoever. Subscriptions
shall be so accepted or rejected by the General
Partner within 30 days of their receipt. If rejected,
all funds will be returned to the subscriber within
ten business days. Once accepted, such subscription
amounts shall be deposited within two business days
to a Partnership account.
(d) Each Unit sold to a subscriber shall be fully paid
and non-assessable.
8.6 ADMISSION OF LIMITED PARTNERS. No action or consent by any Limited
Partners shall be required for the admission of Additional Limited Partners to
the Partnership, provided that the Partnership may not issue more than 4,000,000
Units. Until the receipt and acceptance by the Partnership of the Minimum
Offering, funds of subscribers for Units shall be held in an escrow account.
Such funds shall not be released from escrow, and no subscribers for Units shall
be admitted to the Partnership unless and until the receipt and acceptance by
the Partnership of the Minimum Offering. At any time thereafter, the Capital
Contributions of such subscribers may be released directly to the Partnership,
provided that such subscribers shall be admitted to the Partnership on the day
on which the subscriptions from such Persons are accepted by the Partnership.
Subscriptions from subsequent subscribers shall be accepted or rejected within
30 days of receipt by the Partnership, and if rejected, all funds shall be
returned to subscribers within fifteen business days. Subsequent subscribers
shall be deemed admitted as Limited Partners of the Partnership on the day on
which the subscriptions from such Persons are accepted by the Partnership.
No Person shall be admitted as a Limited Partner under this Offering
who has not executed and delivered to the Partnership the Subscription Agreement
specified in the Prospectus, together with such other documents and instruments
as the General Partner may deem necessary or desirable to effect such admission,
including, but not limited to, the written acceptance and agreement by such
Person to be bound by the terms and conditions of this Agreement.
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8.7 MINIMUM CAPITALIZATION. The Offering will terminate if the
Partnership has not received and accepted subscriptions for the Minimum Offering
on or before the Minimum Offering Expiration Date.
8.8 ESCROW. Until subscriptions for the Minimum Offering are received
and accepted by the General Partner, or until the Minimum Offering Expiration
Date, whichever first occurs, all subscription proceeds shall be held in an
escrow account separate and apart from all other funds and invested in
obligations of, or obligations guaranteed by, the United States government, or
bank money-market accounts or certificates of deposit of national or state banks
that have deposits insured by the Federal Deposit Insurance Corporation
(including certificates of deposit of any bank acting as a depository or
custodian for any such funds). All moneys tendered by Persons whose
subscriptions are rejected shall be returned, without interest, to such Persons
promptly after such rejection. If subscriptions for the Minimum Offering are not
received and accepted before the Minimum Offering Expiration Date, those
subscriptions and funds in escrow on such date plus interest earned, less escrow
expenses shall be returned to the subscribers.
8.9 PUBLIC OFFERING. Except as otherwise provided in this Agreement,
the General Partner shall have sole and complete discretion in determining the
terms and conditions of the offer and sale of Units and is hereby authorized and
directed to do all things which it deems to be necessary, convenient,
appropriate and advisable in connection therewith, including, but not limited to
the preparation and filing of the Registration Statement with the Securities and
Exchange Commission and the securities commissioners (or similar agencies or
officers) of such jurisdictions as the General Partner shall determine, and the
execution or performance of agreements with selling agents and others concerning
the marketing of the Units, all on such basis and upon such terms as the General
Partner shall determine.
8.10 RETURN AND WITHDRAWAL OF CAPITAL.
(a) Any proceeds of the Offering of the Units not
invested or committed to the acquisition or
development of specific real properties within the
later of four years from the effective date of the
Registration Statement or three years after the
termination of the Offering (except for necessary
operating expenses and any reserves) shall be
distributed pro rata to the Limited Partners as a
return of capital. For purposes of the foregoing,
funds will be deemed to have been committed and will
not be distributed to the extent such funds would be
required to acquire property with respect to which
contracts, agreements in principle or letters of
understanding have been executed, regardless of
whether such property is actually acquired, and to
the extent such funds have been reserved to make
contingent payments in connection with the
acquisition, development or improvement of any
property, whether or not any such payments are made.
(b) No Partner, including a withdrawing Partner, shall
have any right to withdraw or make a demand for
withdrawal of any such Partner's Capital Contribution
until the full and complete winding up and
liquidation of the business of the Partnership unless
such withdrawal is provided for herein.
8.11 INTEREST ON CAPITAL CONTRIBUTIONS. No interest shall be paid on
any Capital Contributions.
8.12 OWNERSHIP BY LIMITED PARTNER OF INTEREST IN AFFILIATES OF GENERAL
PARTNER. No Limited Partner (other than the General Partner, in the event that
he or it is also a Limited Partner) shall at any time, either directly or
indirectly, own any stock or other interest in any Affiliate of the General
Partner if such ownership, by itself or in conjunction with the stock or other
interest owned by other Limited Partners would, in the opinion of counsel for
the Partnership, jeopardize the classification of the Partnership as a
partnership for federal income tax purposes. The General Partner shall be
entitled to make such reasonable inquiry of the Limited Partners and prospective
Limited Partners, as is required to establish compliance by the Limited
Partners, with the provisions of this Section.
8.13 DEFICIT CAPITAL ACCOUNTS. The Limited Partners shall not be
required to reimburse the Partnership or any other Partner for deficiencies in
their Capital Accounts.
ARTICLE IX
DISTRIBUTIONS
9.1 NET CASH FROM OPERATIONS. Net Cash From Operations for each quarter
shall be distributed to the Partners as follows:
(a) First, to the Limited Partners until each of such
Limited Partners has received distributions which,
when added to prior Preferred Return distributions
under this subsection and subsections 9.2 (a) and
9.3(b), equal 7% per annum of his Net Capital
Contribution from the date he was admitted to the
Partnership through the end of said quarter. For
example, if the cumulative (but not compound) 7% per
annum preferred distribution to Limited Partners from
the date of admission into the Partnership through
the end of the quarter is $100 and $90 has previously
been distributed to pursuant to this subsection and
subsections 9.2 (a) and 9.3(b), then the first $10 of
distributions of Net Cash From Operations shall be
distributed to the Limited Partners as a Preferred
Return. In the event that in any quarter the amount
of such distributions is less than the Preferred
Return for that quarter, the deficiency shall be
accrued, but shall not itself accrue interest, and
shall be paid when funds become available.
(b) Then, to the General Partner until it has received
distributions of Net Cash From Operations with
respect to such quarter equal to 25% of the total
distributions under Subsection 9.1(a) with respect to
such quarter; and
(c) Thereafter, 80% to the Limited Partners on a per Unit
basis, and 20% to the General Partner.
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The General Partner shall not incur any liability as a result of its
determination to distribute Net Cash From Operations, even though such
distribution may result in the Partnership's retaining insufficient funds for
the operation of its business, provided its determination was made in good faith
and not as a result of its negligence or misconduct.
9.2 NON-LIQUIDATING NET SALE PROCEEDS. Non-Liquidating Net Sale
Proceeds, after the payment of all Partnership debts and liabilities and the
establishment of any reserves which the General Partner in its sole discretion
may deem reasonably necessary or desirable, shall be distributed to the Partners
as follows:
(a) In the event that, after distributions of Net Cash
Flow from Operations for the relevant quarter, there
remains any unpaid accrued 7% per annum Preferred
Return, then, to the Limited Partners until each
Limited Partner has received or has been deemed to
have received under subsections (9.1(a), 9.2 (a) and
9.3(b), an amount equal to his Preferred Return from
the date he (or the initial holder of his Units if
said Units have been previously transferred) was
admitted to the Partnership through the end of said
quarter.
(b) Then, to the General Partner until it has received
distributions equal to 25% of the total distributions
under Subsection 9.2(a).
(c) To the Limited Partners on a per Unit basis until
each Limited Partner has received or has been deemed
to have received distributions hereunder equal to its
Net Capital Contribution at the beginning of the
quarter.
(d) Then, to the General Partner until the General
Partner has received distributions totaling 100% of
its Net Capital Contributions at the beginning of the
quarter;
(e) Thereafter, 80% to the Limited Partners on a per Unit
basis and 20% to the General Partner.
9.3 LIQUIDATION OR DISSOLUTION. Upon liquidation or dissolution of the
Partnership, the assets of the Partnership shall be converted to cash. The
Partnership shall be given adequate time to collect any notes received with
respect to the sale of such assets and collect any other debts outstanding. All
cash shall be applied and distributed as follows:
(a) All of the debts and liabilities of the Partnership,
except indebtedness to Limited Partners, shall first
be paid and satisfied or adequate provision,
including the setting up of any reserves which the
General Partner in its sole discretion deems
reasonably necessary or desirable, shall be made for
the payment or satisfaction thereof,
(b) In the event that, after any distributions of Net
Cash Flow from Operations for the relevant quarter,
there remains any unpaid accrued 7% per annum
Preferred Return, then, to the Limited Partners until
each Limited Partner has received or has been deemed
to have received under subsections 9.1(a), 9.2 (a)
and 9.3(b), an amount equal to his Preferred Return
from the date he (or the initial holder of his Units
if the Units have been previously transferred) was
admitted to the Partnership through the end of said
quarter.
(c) Any indebtedness of the Partnership to Limited
Partners
(d) To the Limited Partners on a per Unit basis until
each Limited Partner has received or has been deemed
to have received distributions hereunder equal to its
Net Capital Contribution at the beginning of the
quarter
(e) All indebtedness of the Partnership to the General
Partner.
(f) Then, to the General Partner until it has received
distributions equal to 25% of the total distributions
under Subsection 9.3(b).
(g) After payment of all obligations as indicated in this
Section, the balance of the assets of the Partnership
shall be distributed pro rata in accordance with
Capital Accounts after adjusting such Capital
Accounts for all transactions through the date of
distribution until such Capital Accounts have a zero
balance, and then 80 % to the Limited Partners and
20% to the General Partner.
Upon dissolution, each Limited Partner shall look solely to the assets
of the Partnership for the return of his investment, and if the Partnership
Property remaining after payment or discharge of the debts and liabilities of
the Partnership, including debts and liabilities owed to one or more of the
Partners is insufficient to return the aggregate Capital Contributions of each
Limited Partner, such Limited Partners shall have no recourse against the
General Partner or any other Limited Partner.
9.6 DISTRIBUTION DATES. Periodic Partnership distributions will be made
within 30 days after the end of each calendar quarter, or, at the discretion of
the General Partner, more frequently. All distributions made to Limited Partners
pursuant to this Article IX shall be paid to those Persons who were Limited
Partners or Assignees thereof who are owners of record, as of the last day of
the calendar quarter for which the distribution is being made (the "Allocation
Date").
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ARTICLE X
ALLOCATIONS
10.1 NET LOSS. Net Loss for each quarter shall be allocated to the
Partners as follows:
(a) 99% to the Limited Partners with respect to such
accounting period on a per Unit basis, and 1% to the
General Partner until the Capital Accounts of all
such Partners have been reduced to zero;
(b) Then, 100% to the General Partner.
Notwithstanding the foregoing, in any fiscal year with respect to which
the Partnership incurs an aggregate Net Loss, interest income of the Partnership
shall be specially allocated to the Limited Partners with respect to the full
year on a per Unit basis, and Net Loss of the Partnership for the full year
shall be determined without regard to such interest income.
10.2 DEPRECIATION AND AMORTIZATION. All deductions for depreciation and
amortization for each applicable accounting period shall be allocated to the
Partners as follows:
(a) 99% to the Limited Partners with respect to such
accounting period on a per Unit basis, and 1% to the
General Partner until the Capital Accounts of all
such Partners have been reduced to zero;
(b) Then, 100% to the General Partner.
This Section 10.2 notwithstanding, all Net Loss and Net Income for each
fiscal year shall be allocated to the Partners in the manner provided in
Sections 10.1 and 10.3 hereof and shall be reflected in each Partner's Capital
Account as of the last day of such fiscal year before any allocation of
depreciation and amortization deductions is made to the Partners under this
Section.
10.3 NET INCOME. Subject to the Qualified Income Offset provisions of
Section 10.5 hereof, Net Income for each quarter shall be allocated to the
Partners as follows:
(a) To the General Partner and the Limited Partners with
respect to such accounting period on a per Unit
basis, in the same proportion as, and to the extent
that, Net Cash From Operations is distributed or
deemed distributed to them under Section 9.1 hereof
with respect to such accounting period; and
(b) Then, to the extent Net Income exceeds the actual
distribution of Net Cash From Operations with respect
to such accounting period, such excess Net Income
shall be allocated 80% to the Limited Partners with
respect to such accounting period on a per Unit
basis, and 20% to the General Partner.
10.4 GAIN ON SALE. Gain on Sale of a Partnership Property for each
quarter shall be allocated to the Partners as follows:
(a) First, to the extent applicable, pursuant to the
Qualified Income Offset provisions of Section 10.5
hereof;
(b) Then, to those Partners having negative Capital
Accounts, if any, in the ratio that the negative
Capital Account of each Partner having a negative
Capital Account bears to the aggregate amount of
negative Capital Accounts of all such Partners until
all negative Capital Accounts have been restored to
zero;
(c) Then, to the Limited Partners and the General Partner
in amounts equal to the deductions for depreciation
and amortization allocated to each Partner pursuant
to Section 10.2 hereof with respect to the specific
Partnership Property, the sale, exchange or other
disposition of which resulted in the allocation of
Gain on Sale hereunder
(d) Then, to the Limited Partners and General Partners
pro rata until each Partner has been allocated an
amount of gain from the sale of the Partnership
Property equal to the amount of any distributions of
proceeds of the sale of the Partnership Property
under Sections 9.2(a), 9.2(b), 9.3(b) and 9.3(f).
(e) Thereafter, 80% to the Limited Partners on a per Unit
basis and 20% to the General Partner.
10.5 QUALIFIED INCOME OFFSET. Notwithstanding any provision to the
contrary contained herein, in the event that any Partner receives an adjustment,
allocation or distribution described in Treasury Regulations Section
1.704-(b)(2)(ii)(d)(4), (5) or (6) which causes a deficit balance in such
Partner's Capital Account, such Partner will be allocated items of income or
gain (consisting of a pro rata portion of each item of Partnership income,
including gross income, and gain for such year) in an amount and manner
sufficient to eliminate such deficit balance as quickly as possible, all in
accordance with Treasury Regulations Section 1.704-1(b)(2)(ii)(d). It is the
intent of the Partners that the foregoing provision constitutes a "Qualified
Income Offset," as defined in Treasury Regulations Section 1. 704- 1
(b)(2)(ii)(d), and the foregoing provision shall in all events be interpreted so
as to constitute a valid "Qualified Income Offset.")
10.6 ALLOCATION AMONG LIMITED PARTNERS. Except as otherwise provided in
this Article X, all allocations made to the Limited Partners as a group under
this Article X shall be apportioned among the Limited Partners according to each
Limited Partner's Participating Percentage. If, however, Limited Partners are
admitted to the Partnership pursuant to Article VIII on different dates during
any fiscal year, such allocations under this Article X for such fiscal year
(and, if necessary, subsequent years) shall be divided among the Persons who own
Units from time to time during such year in accordance with Section 706 of the
Code, using any conventions permitted by law and selected by the General
Partner, in its sole discretion.
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10.7 ITEM PRORATIONS. Any fiscal year of the Partnership in which the
Partnership realizes any Gain on Sale shall be divided into multiple accounting
periods, the first of which shall begin on the first day of such fiscal year and
shall end on the Sale Date, and the second of which shall begin on the day
following such Sale Date and shall end on the following Sale Date, if any, and
if no further Sale Date occurs, then on the last day of such fiscal year. Any
Net Income realized by the Partnership in any of such accounting periods shall
be allocated to the Partners in the manner provided in Section 10. 3 hereof as
if such accounting period were a complete fiscal year of the Partnership. Any
Net Loss, depreciation, amortization or cost recovery deductions incurred by the
Partnership in any of such accounting periods shall be allocated to the Partners
in the manner provided in Sections 10.1 and 10.2 hereof as if such accounting
period were a complete fiscal year of the Partnership. The Net Income, Net Loss,
depreciation and amortization deductions so allocated to the Partners shall be
reflected in their respective Capital Accounts before any Gain on Sale realized
by the Partnership during such accounting period is allocated to the Partners
under Section 10.4 hereof.
10.8 ALLOCATIONS IN RESPECT TO TRANSFERRED UNITS. If any Units are
transferred during any fiscal year, all items attributable to such Units for
such year shall be allocated between the transferor and the transferee by taking
into account their varying interests during the year in accordance with Section
706(d) of the Code, utilizing any conventions permitted by law and selected by
the General Partner, in its sole and absolute discretion. Solely for purposes of
making such allocations, the Partnership shall recognize the transfer of such
Units as of the end of the calendar quarter during which it receives written
notice of such transfer, provided that, if the Partnership does not receive a
written notice stating the date such Units were transferred and such other
information as may be required by this Agreement or as the General Partner may
reasonably require within 30 days after the end of the year during which the
transfer occurs, then all such items shall be allocated to the Person who,
according to the books and records of the Partnership, on the last day of the
year during which the transfer occurs, was the owner of the Units. The General
Partner and the Partnership shall incur no liability for making allocations in
accordance with the provisions of this Section, whether or not the General
Partner or the Partnership has knowledge of any transfer of ownership of any
Units.
10.9 DISPUTES. Except with respect to matters as to which the General
Partner is granted discretion hereunder, the opinion of the independent public
accountants retained by the Partnership from time to time shall be final and
binding with respect to all disputes and uncertainties as to all computations
and determinations required to be made under Articles IX and X hereof (including
but not limited to any computations and determinations in connection with any
distribution or allocation pursuant to a dissolution and liquidation).
ARTICLE XI
MANAGEMENT OF THE PARTNERSHIP
11.1 MANAGEMENT. The General Partner shall conduct the business of the
Partnership, devoting such time thereto as it, in its sole discretion, shall
determine to be necessary to manage Partnership business and affairs in an
efficient manner.
11.2 POWERS OF THE GENERAL PARTNER. The General Partner shall have full
charge of overall management, conduct and operation of the Partnership, and
shall have the authority to act on behalf of the Partnership in all matters
respecting the Partnership, its business and its property, and without limiting
in any manner the foregoing authority:
(a) To do on behalf of the Partnership all things which,
in its sole judgment, are necessary, proper or
desirable to carry out the Partnership's business,
including, but not limited to, the right, power and
authority: (i) to execute all agreements and other
documents necessary to implement the purposes of the
Partnership, to take such action as may be necessary
to consummate the transactions contemplated hereby
and by the Prospectus, and to make all reasonably
necessary arrangements to carry out the Partnership's
obligations in connection therewith; (ii) to employ,
oversee and dismiss from employment any and all
employees, agents, independent contractors, real
estate managers, contractors, engineers, architects,
developers, designers, brokers, attorneys and
accountants; (iii) to sell, exchange or grant an
option for the sale of all or substantially all or
any portion of the real and personal property of the
Partnership, at such price or amount for cash,
securities or other property and upon such other
terms as the General Partner, in its sole discretion,
deem proper; (iv) to let or lease all or any portion
of the Partnership Properties for any purpose and
without limit as to the term thereof, whether or not
such term (including renewal terms) shall extend
beyond the date of the termination of the Partnership
and whether or not the portion so leased is to be
occupied by the lessee or, in turn, subleased in
whole or in part to others; (v) to create, by grant
or other, easements and servitudes; (vi) to borrow
money and incur indebtedness; provided, however, the
Partnership shall not be permitted to incur any
indebtedness except as authorized in Section 11.3(e)
hereof, (vii) to draw, make, accept, endorse, sign
and deliver any notes, drafts or other negotiable
instruments or commercial paper; (viii) to execute
such agreements and instruments as may be necessary;
in its discretion, to operate, manage and promote the
Partnership assets and business; (ix) to construct,
alter, improve, repair, raze, replace or rebuild all
or any portion of the Partnership Properties; (x) to
submit to arbitration any claim, liability or dispute
involving the Partnership (provided that such claims
will be limited to actions against the Partnership
not involving securities claims by the Limited
Partners and provided further that no claim,
liability or dispute of a Limited Partner will be
subject to mandatory arbitration); (xi) to compromise
any claim or liability due to the Partnership; (xii)
to execute, acknowledge or verify and file any
notification, application, statement and other filing
which the General Partner considers either required
or desirable to be filed with any state or federal
securities administrator or commission; (xiii) to
make any tax elections to be made by the Partnership;
(xiv) to place record title to any of its assets in
the name of a nominee, agent or a trustee; (xv) to do
any or all of the foregoing, discretionary or
otherwise, through agents selected by the General
Partner, whether compensated or uncompensated by the
Partnership; (xvi) to execute and file or record all
instruments and documents which are deemed by the
General Partner to be necessary to enable the
Partnership properly and legally to do business in
the State of Texas or any other jurisdiction deemed
advisable (xvii) at the appropriate time, to register
the Units with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934; and
(xix) to do any or all of the foregoing for such
consideration and upon such other terms or conditions
as the General Partner, in its discretion, determines
to be appropriate.
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(b) Notwithstanding anything contained herein to the
contrary, subject to the provisions contained in
Section 16.2 hereof, to amend this Agreement without
the consent or vote of any of the Limited Partners:
(i) to reflect the addition or substitution of
Limited Partners or the reduction of Capital Accounts
upon the return of capital to Partners; (ii) to add
to the representations, duties or obligations of the
General Partner or its Affiliates or surrender any
right or power granted herein to the General Partner
or its Affiliates for the benefit of the Limited
Partners; (iii) to cure any ambiguity, to correct or
supplement any provision herein which may be
inconsistent with any other provision herein, or to
add any other provision with respect to matters or
questions arising under this Agreement which will not
be inconsistent with the provisions of this
Agreement; (iv) to delete or add any provision from
or to this Agreement requested to be so deleted or
added by the staff of the Securities and Exchange
Commission or by the staff of any state regulatory
agency, the deletion or addition of which provision
is deemed by the staff of any such regulatory agency
to be for the general benefit or protection of the
Limited Partners; and (v) to attempt to have the
provisions of this Agreement comply with federal
income tax law and regulations thereunder.
(c) To possess and exercise, as may be required, all of
the rights and powers of the general partner as more
particularly provided by the Act.
(d) To execute, acknowledge and deliver any and all
instruments and take such other steps as are
necessary to effectuate the foregoing. The General
Partner may execute any such instruments on behalf of
the Partnership.
11.3 LIMITATIONS ON POWERS OF THE GENERAL PARTNER. The General Partner
shall observe the following policies in connection with Partnership operations:
(a) Pending initial investment of its funds, or to
provide a source from which to meet contingencies,
including, without limitation, the working capital
reserve, the Partnership may temporarily invest its
funds in short-term, highly liquid investments where
there is appropriate safety of principal, such as
government obligations, bank or savings and loan
association certificates of deposit, short-term debt
obligations and interest-bearing Accounts.
(b) The Partnership shall not acquire unimproved or
non-income producing property, except in amounts and
upon terms which can be financed by the Offering
proceeds or from Cash Flow, and provided investment
in such properties shall not exceed 15% of net
Offering proceeds invested in Properties. Properties
shall not be considered non-income producing if they
are expected to produce income within two years after
their acquisition.
(c) All real property acquisitions must be supported by
an appraisal that shall be prepared by a competent,
independent appraiser. The Purchase Price paid by the
Partnership for each property shall not exceed the
appraised value of such property.
(d) The General Partner shall not have the authority to
incur indebtedness that is secured by the Partnership
Properties or assets, except as specifically
authorized pursuant to Section 11.3(e) below.
(e) The General Partner shall have the authority to
borrow funds (i) for Partnership operating purposes,
in the event of unforeseen or unexpected
circumstances in which the Partnership's working
capital reserves and other cash resources available
to the Partnership are deemed insufficient for the
maintenance and repair of Partnership Properties or
for the protection or replacement of the
Partnership's assets, or (ii) in order to finance
improvement of and improvements to Partnership
Properties at such time as the General Partner may
deem such improvements to be necessary or appropriate
to protect capital previously invested in such
Partnership Properties, to protect the value of the
Partnership's investment in a particular Partnership
Property, or to make a particular Partnership
Property more attractive for sale or lease, provided,
however, that the aggregate amount of Partnership
borrowings shall at no time exceed 40% of the total
purchase price of Partnership Properties.
(f) The completion of improvements which are to be
constructed or are under construction on Partnership
Property shall be guaranteed at the price contracted
either by an adequate completion bond or by other
satisfactory assurances, provided, however, that such
other satisfactory assurances shall include at least
one of the following: (i) a written personal
guarantee of one or more of the general contractor's
principals accompanied by the financial statements of
such guarantor indicating a substantial net worth;
(ii) a written fixed price contract with a general
contractor that has a substantial net worth; (iii) a
retention of a reasonable portion of the Purchase
Price as a potential offset to such Purchase Price in
the event the seller does not perform in accordance
with the purchase and sale agreement; or (iv) a
program of disbursements control which provides for
direct payments to subcontractors and suppliers.
(g) The Partnership shall make no construction loans to
builders of Partnership Properties and shall make no
periodic progress or other advance payments to such
builders unless the Partnership has first received an
architect's or engineer's certification as to the
percentage of the project which has been completed
and as to the dollar amount of the construction then
completed.
(h) The Partnership shall not acquire property in
exchange for Units.
(i) The Partnership shall not obtain nonrecourse
financing from a Limited Partner or any party
affiliated with a Limited Partner.
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(j) The Partnership's business purposes and objectives,
as set forth in Article IV, shall not be changed
unless approved by 66 2/3 % of the Limited Partners.
(k) The Partnership shall not invest in junior trust
deeds and other similar obligations.
(l) The funds of the Partnership shall not be commingled
with the funds of any other Person.
(m) The General Partner hereby agrees that it shall not
initiate a transaction wherein the Partnership is
merged or consolidated with another partnership or
corporation, and the General Partner shall not be
authorized to merge or consolidate the Partnership
with any other partnership or corporation or to
convert the Partnership to a real estate investment
trust unless first obtaining a vote of 66 2/3 % of
the Limited Partners to any such transaction.
(n) The General Partner shall not enter into any leases
in respect of the Partnership Properties that contain
provisions for determining rent that are based upon
the income, receipts or other profitability of the
lessee or which constitute a lease of an entire
building which, in turn, will be substantially
subleased by the lessee to sub-lessees.
(o) List, recognize or facilitate the trading of Units
(or any interest therein) on any "established
securities market (or the equivalent thereof)" within
the meaning of Section 7704 of the Code, or permit
any of its Affiliates to take such actions, if as a
result thereof, the Partnership would be treated for
federal income tax purposes as an association taxable
as a corporation or taxed as a "publicly traded
partnership;" or
(p) Create for the Units (or any interest therein) a
"secondary market (or the equivalent thereof)" within
the meaning of Section 7704 of the Code or otherwise
permit, recognize or facilitate the trading of any
such Units (or any interest therein) on any such
market or permit any of its Affiliates to take such
actions, if as a result thereof, the Partnership
would be treated for federal income tax purposes as
an association taxable as a corporation or taxed as a
"publicly traded partnership."
11.4 EXPENSES OF THE PARTNERSHIP. Whenever possible the Partnership's
expenses shall be billed directly to and paid by the Partnership. The General
Partner may be paid or reimbursed for the administrative and other services,
costs or expenses necessary to the operation of the Partnership and its
properties.
(a) The Partnership shall pay all operational and
administrative expenses of the Partnership, which may
include, but are not limited to: (A) all costs of
personnel employed by the Partnership or directly
involved in the business of the Partnership,
including Persons who may also be employees of the
General Partner or its Affiliates, including but not
limited to, salaries and other employee-related
expenses, travel and other out-of-pocket expenses of
such personnel which are directly related to a
particular Partnership Property; (B) all costs of
borrowed money, taxes and assessments on Partnership
Properties and other taxes applicable to the
Partnership; (C) legal, accounting, audit, brokerage
and other fees; (D) fees and expenses paid to
independent contractors, brokers and servicers,
leasing agents, consultants, on-site managers, real
estate brokers, mortgage brokers, insurance brokers
and other agents; (E) expenses in connection with the
disposition, replacement, alteration, repair,
remodeling, refurbishment, leasing and operation of
Partnership Properties (including the costs and
expenses of foreclosures, legal and accounting fees,
insurance premiums, real estate brokerage and leasing
commissions and maintenance connected with such
Property); and (F) any expenses of independent
appraisers, market analysts or other such Persons not
affiliated with the General Partner who may be
engaged to evaluate potential real estate
acquisitions and developments by or on behalf of the
Partnership.
(b) The Partnership shall pay all accounting,
documentation, professional and reporting expenses of
the Partnership, which may include, but are not
limited to: (A) preparation and documentation of
Partnership bookkeeping, accounting and audits; (B)
preparation and documentation of budgets, economic
surveys, Cash Flow projections and working capital
requirements; (C) preparation and documentation of
Partnership federal and state tax returns; (D)
printing, engraving and other expenses and documents
evidencing ownership of an interest in the
Partnership or in connection with the business of the
Partnership; (E) expenses of insurance as required in
connection with the business of the Partnership,
including, without limitation, life and disability
insurance with respect to the General Partner; (F)
expenses in connection with distributions made by the
Partnership to, and communications, bookkeeping and
clerical work necessary in maintaining relations with
Limited Partners, including the costs of printing and
mailing to such Persons certificates for the Units
and reports of the Partnership, and of preparing
proxy statements and soliciting proxies in connection
therewith; (G) expenses in connection with preparing
and mailing reports required to be furnished to
Limited Partners for investing, tax reporting or
other purposes, including reports required to be
filed with the Securities and Exchange Commission and
other federal or state regulatory agencies, or
expenses associated with furnishing reports to
Limited Partners which the General Partner deems to
be in the best interests of the Partnership; (H)
expenses of revising, amending, converting, modifying
or terminating the Partnership; (I) costs incurred in
connection with any litigation in which the
Partnership is involved as well as any examination,
investigation or other proceedings conducted of the
Partnership by any regulatory agency, including legal
and accounting fees incurred in connection therewith;
(J) costs of any computer equipment or services used
for or by the Partnership; (K) costs of any
accounting, statistical or bookkeeping equipment
necessary for the maintenance of the books and
records of the Partnership; (L) costs of preparation
and dissemination of information and documentation
relating to potential sale, financing or other
disposition of Partnership Properties; and (M)
supervision and expenses of professionals employed by
the Partnership in connection with any of the
foregoing, including attorneys, accountants and
appraisers.
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(c) The General Partner shall receive a fixed
reimbursement amount in the amount of 6% of the gross
proceeds of the Offering of Units to reimburse the
General Partner for all Organization and Offering
Expenses other than commissions and expenses paid to
broker-dealers and other underwriting compensation.
Said Organization and Offering Expenses include, but
are not limited to, registration, legal, accounting,
printing, marketing and other out of pocket fees and
expenses and general and administrative and overhead
relating to the offering and organization cost of the
Partnership borne by the general partner and services
by the General Partner in connection with the
offering and organization of the Partnership.
(d) The Partnership shall pay all underwriting
compensation, including broker-dealer selling
commissions, payable in the amount of 7.5% of the
gross proceeds of the Offering of Units, plus a
maximum of 1% of the gross proceeds of the Offering
of Units for reimbursement of due diligence and non
accountable expenses incurred by such broker-dealers
to be paid out of Organization and Offering Expenses.
(e) The General Partner and its affiliates may receive or
the Partnership may pay directly other items of
incidental expenses incurred during the
organizational, acquisition and development,
operation and liquidation stages of the Partnership.
11.5 LIMITATION ON LIABILITY OF THE GENERAL PARTNER; INDEMNIFICATION OF
THE GENERAL PARTNER. Neither the General Partner nor any of its Affiliates
(hereinafter, an "Indemnified Party") shall be liable, responsible or
accountable in damages or otherwise to any other Partner, the Partnership, its
receiver or trustee (the Partnership, its receiver or trustee are hereinafter
referred to as "Indemnitors") for, and the Indemnitors agree to indemnify, pay,
protect and hold harmless each Indemnified Party (on the demand of such
Indemnified Party) from and against any and all liabilities, obligations,
losses, damages, actions, judgments, suits, proceedings, reasonable costs,
reasonable expenses and disbursements (including, without limitation, all
reasonable costs and expenses of defense, appeal and settlement of any and all
suits, actions or proceedings instituted against such Indemnified Party or the
Partnership and all reasonable costs of investigation in connection therewith)
(collectively referred to as "Liabilities" for the remainder of this Section)
which may be imposed on, incurred by, or asserted against such Indemnified Party
or the Partnership in any way relating to or arising out of any action or
inaction on the part of the Partnership or on the part of such Indemnified Party
in connection with services to or on behalf of the Partnership (and with respect
to an Indemnified Party which is an Affiliate of the General Partner for an act
which the General Partner would be entitled to indemnification if such act were
performed by it) which such Indemnified Party in good faith determined was in
the best interest of the Partnership. Notwithstanding the foregoing, each
Indemnified Party shall be liable, responsible and accountable, and neither the
Partnership nor any Indemnitor shall be liable to an Indemnified Party, for any
portion of such Liabilities which resulted from such Indemnified Party's (i) own
fraud, negligence, misconduct or knowing violation of law, (ii) breach of
fiduciary duty to the Partnership or any Partner, or (iii) breach of this
Agreement, regardless of whether or not any such act was first determined by the
Indemnified Party, in good faith, to be in the best interest of the Partnership.
If any action, suit or proceeding shall be pending against the Partnership or
any Indemnified Party relating to or arising out of any such action or inaction,
such Indemnified Party shall have the right to employ, at the reasonable expense
of the Partnership, separate counsel of such Indemnified Party's choice in such
action, suit or proceeding. The satisfaction of the obligations of the
Partnership under this Section shall be from and limited to the assets of the
Partnership and no Limited Partner shall have any personal liability on account
thereof.
ARTICLE XII
SERVICES TO PARTNERSHIP BY GENERAL PARTNER
12.1 ACQUISITION AND ADVISORY SERVICES. The General Partner or its
Affiliates shall perform acquisition and advisory services in connection with
the review and evaluation of potential real property acquisitions for the
Partnership, which services shall include, but shall not be limited to, an
analysis of: (a) the geographic market in which any such property is located,
including market demand analyses; (b) the physical condition of any existing
structures, appurtenances and service systems; (c) the availability of
contractors and engineers; (d) zoning and other governmental restrictions
applicable to the use or development of the property; and (e) income and expense
forecasts. In consideration for such services, including services rendered with
respect to properties which are considered for acquisition by the Partnership
but are not acquired, the General Partner and its Affiliates shall be paid
Acquisition and Advisory Fees in an amount of 3 % of Capital Contributions
payable ratably as properties are acquired. In addition to such fees, the
Partnership shall bear any expenses of independent appraisers, market analysts
or other such Persons not affiliated with the General Partner who may be engaged
to evaluate potential real estate acquisitions and developments by or on behalf
of the Partnership.
12.2 PROPERTY SUPERVISION FEES. The General Partner and/or an Affiliate
shall supervise Property Management and Leasing Companies and/or agents and
shall be paid a Property Supervision Fee in the amount of 2% annually of the
amount of Investment in Properties. The Property Supervision fees shall be
payable monthly.
12.3 PROPERTY MANAGEMENT AND LEASING SERVICES. The General Partner may
retain independent third party property management and leasing companies and
shall cause the Partnership to employ a property management and leasing company
(which may be an Affiliate of the General Partner) to perform professional
property management and leasing services for the Partnership. In the event the
property management and leasing company is an Affiliate of the General Partner,
the compensation payable to such Affiliate shall not exceed fees which would be
charged by Persons who are not affiliated with the General Partner rendering
comparable services in the same geographic area.
12.4 REAL ESTATE COMMISSIONS ON RESALE OF PROPERTIES. The General
Partner and its Affiliates may perform real estate brokerage services for the
Partnership in connection with the resale of property by the Partnership,
provided that the compensation therefore to the General Partner or its
Affiliates in connection with the sale of a particular property shall not exceed
the reasonable, customary and competitive real estate brokerage commission
normally and customarily paid for the sale of a comparable property in light of
the size, type and location of the property. The aggregate real estate
commission paid to all parties involved in the sale of a Partnership Property
shall not exceed the reasonable, customary and competitive real estate brokerage
commission normally and customarily paid for the sale of a comparable property
in light of the size, type and location of the property.
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12.5 MANAGEMENT AND INVESTOR ADMINISTRATION. The General Partner shall
receive monthly fees of 1/12th of 1% of the aggregate amount of Limited Partner
subscriptions for providing partnership management services to the Partnership
and 1/12th of 1% of Limited Partner subscription for an Investor administration
fee.
12.6 TREATMENT AS DISTRIBUTION TO GENERAL PARTNER. In the event that
any of the payments set forth in Sections 12.1 through 12.6 above are determined
to be distributions to the General Partner rather than payments in a capacity
other than a partner and taxable income is increased as a result thereof, the
General Partner shall be allocated an additional amount of taxable income (or
less taxable loss) so that the Limited Partners shall be allocated the same
amount of taxable income as if the payment had been deemed made to a third
party.
ARTICLE XIII
TRANSACTIONS BETWEEN THE GENERAL PARTNER AND THE PARTNERSHIP
13.1 SALES AND LEASES TO THE PARTNERSHIP. The Partnership may purchase
properties or portions of properties in which the General Partner or its
Affiliates have an interest or from any entity in which the General Partner or
its Affiliates have an interest. Additionally, the General Partner or its
Affiliates may temporarily enter into contracts relating to investment
properties to be assigned to the Partnership prior to closing or may purchase
property in their own names and temporarily hold title thereto for the purpose
of facilitating the acquisition of such property for the Partnership, provided
that said properties are purchased by the Partnership for a price no greater
than the cost of such property to the General Partner or its Affiliates
(including closing and carrying costs).
ARTICLE XIV
INDEPENDENT ACTIVITIES OF PARTNERS
Any of the Partners may engage in or possess an interest in other
business ventures of every nature and description, independently or with others,
including, but not limited to, the ownership, financing, leasing, management,
syndication, brokerage and development of real property of any kind whatsoever
(including properties which may be similar to those owned by the Partnership),
and neither the Partnership nor any of the Partners shall have any right by
virtue of this Agreement in and to such independent ventures or to the income or
profits derived therefrom. In the event that the Partnership, the General
Partner or any Affiliate or any entity formed or managed by the General Partner
or its Affiliates is in the market for similar properties, the General Partner
will review the investment portfolio of each partnership and each such
affiliated entity and will decide which entity will acquire a particular
property on the basis of such factors as, among others, anticipated cash flow,
the effect of the purchase price on diversification of the portfolio of each
such entity, the estimated income tax effects of the purchase on each such
entity, the amount of funds which each such entity has available for investment,
and the length of time funds of each such entity have been available for
investment.
ARTICLE XV
BOOKS, REPORTS, FISCAL AND TAX MATTERS
15.1 BOOKS. The General Partner shall maintain full and complete books
and records for the Partnership at its principal office. The books of account
for financial accounting purposes shall be kept in accordance with generally
accepted accounting principles. The books of account for income tax purposes
shall be kept on cash or an accrual basis, as determined in the discretion of
the General Partner. In addition, the General Partner shall maintain an
alphabetical list of the names, addresses and business telephone numbers of the
Limited Partners of the Partnership along with the number of Units held by each
of them (the "Participant List"). The Participant List shall be updated at least
quarterly to reflect changes in the information contained therein.
15.2 REPORTS. The General Partner shall prepare or cause to be prepared
the following reports:
(a) ANNUAL REPORT. Within 120 days after the end of each
fiscal year, an annual report shall be sent to all
the Limited Partners and Assignees which shall
include (i) a balance sheet as of the end of such
fiscal year, together with a profit and loss
statement, a statement of cash flows and a statement
of Partners' capital for such year, (i) beginning for
the fourth fiscal year, the an estimate of fair
market value of Partnership Properties and an
estimated value per Unit and (iii) any materials
required to be filed with the Securities and Exchange
Commission. All annual financial statements shall be
prepared in accordance with generally accepted
accounting principles and shall be accompanied by an
auditor's report containing an opinion of the
independent certified public accountant for the
Partnership. All estimates of Unit value shall
contain an opinion of an independent third party that
the estimates of value are reasonable and were
prepared in accordance with appropriate methods for
valuing real estate.
(b) QUARTERLY REPORTS. If and for as long as the
Partnership is required to file quarterly reports on
Form 10-Q with the Securities and Exchange
Commission, financial information substantially
similar to the financial information contained in
each such report for a quarter shall be sent to the
Limited Partners within 60 days after the end of such
quarter. Whether or not such reports are required to
be filed, each Limited Partner will be furnished
within 60 days after the end of each of the first
three quarters of each Partnership fiscal year an
unaudited financial report for that quarter including
a profit and loss statement, a balance sheet and a
cash flow statement. Such reports shall also include
such other information as is deemed reasonably
necessary by the General Partner to advise the
Limited Partners of the affairs of the Partnership.
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(c) TAX INFORMATION. There shall be sent to all the
Limited Partners and Assignees all information
necessary for the preparation of each Limited
Partner's federal income tax return and state income
and other tax returns in regard to jurisdictions
where Partnership Properties are located.
(d) OTHER REPORTS. The General Partner shall cause to be
prepared and timely filed with appropriate federal
and state regulatory and administrative bodies all
reports to be filed with such entities under then
currently applicable laws, rules and regulations.
Such reports shall be prepared on the accounting or
reporting basis required by such regulatory bodies.
15.3 TAX ELECTIONS. No election shall be made by the Partnership or any
Partner to be excluded from the application, of the provisions of Subchapter K
of the Code or from any similar provisions of state or local income tax laws.
15.4 BANK ACCOUNTS. The cash funds of the Partnership shall be
deposited in commercial bank account(s) at such banks or other institutions
insured by the Federal Deposit Insurance Corporation as the General Partner
shall determine. The General Partner in conformity with this Agreement therefrom
shall make disbursements. The funds of the Partnership shall not be commingled
with the funds of any other Person.
15.5 INSURANCE. The Partnership shall at all times maintain
comprehensive insurance, including fire, liability and extended coverage
insurance in amounts determined by the General Partner to be adequate for the
protection of the Partnership. In addition, the Partnership shall carry
appropriate worker's compensation insurance and such other insurance with
respect to the real property owned by it as shall be customary for similar
property, similarly located, from time to time.
15.6 TAX MATTERS. The General Partner may or may not, in its sole and
absolute discretion, make any or all decisions and/or elections which it is
entitled to make on behalf of the Partnership and the Partners for federal,
state and local tax purposes.
ARTICLE XVI
RIGHTS AND LIABILITIES OF THE LIMITED PARTNERS
16.1 POWERS OF THE LIMITED PARTNERS. The Limited Partners shall take no
part in the management of the business or transact any business for the
Partnership and shall have no power to sign for or bind the Partnership;
provided, however, that the Limited Partners, by a 66 2/3% Vote shall have the
right to elect a new General Partner upon the occurrence of an Event of
Withdrawal or death of the General Partner or any successor General Partner;
16.2 LIMITED LIABILITY. No Limited Partner shall be liable for any
debts or obligations of the Partnership in excess of his or its Capital
Contribution.
ARTICLE XVII
WITHDRAWAL OF THE GENERAL PARTNER;
ASSIGNABILITY OF PARTNERS' INTERESTS
17.1 WITHDRAWAL OF THE GENERAL PARTNER; ADMISSION OF SUCCESSOR OR
ADDITIONAL GENERAL PARTNER.
(a) With the consent of the General Partner and a 66 2/3
% Vote of the Limited Partners after being given 90
days written notice, the General Partner may at any
time designate one or more Persons to be additional
or successor General Partners, with such
participation in such General Partner's interest as
such General Partner and such successor or additional
General Partners may agree upon, provided that the
interests of the Limited Partners shall not be
affected thereby.
(b) Any voluntary withdrawal by any General Partner from
the Partnership or any sale, transfer or assignment
by such General Partner of his interest in the
Partnership shall be effective only upon the
admission of the new General Partner.
17.2 LIMITED PARTNERS' INTEREST. Except as specifically provided in
this Article XVII, none of the Limited Partners shall sell, transfer, encumber
or otherwise dispose of, by operation of law or otherwise, all or any part of
his or its interest in the Partnership. No assignment shall be valid or
effective unless in compliance with the conditions contained in this Agreement,
and any unauthorized transfer or assignment shall be void ab initio.
17.3 RESTRICTIONS ON TRANSFERS.
(a) No Unit may be transferred, sold, assigned or
exchanged if the transfer or sale of such Unit, when
added to the total of all other transfers or sales of
Units within the period of 12 consecutive months
prior to the proposed date of sale or exchange,
would, in the opinion of counsel for the Partnership,
result in the termination of the Partnership under
Section 708 of the Code unless the Partnership and
the transferring holder shall have received a ruling
from the IRS that the proposed sale or exchange will
not cause such termination.
(b) No transfer or assignment may be made if, as a result
of such transfer, a Limited Partner (other than one
transferring all of his Units) will own fewer than
the minimum number of Units required to be purchased
under Section 8.5(b) hereof, unless such transfer is
made on behalf of a Retirement Plan, or such transfer
is made by gift, inheritance, intra-family transfer,
family dissolution or to an Affiliate.
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(c) No transfer or assignment of any Unit may be made if
counsel for the Partnership is of the opinion that
such transfer or assignment would be in violation of
any state securities or "Blue Sky" laws (including
investment suitability standards) applicable to the
Partnership.
(d) No Limited Partner may transfer or assign any Units
or beneficial ownership interests therein (whether by
sale, change, repurchase, redemption, pledge,
hypothecation or liquidation), and any such purported
transfer shall be void ab initio and shall not be
recognized by the Partnership or be effective for any
purpose unless (i) the General Partner determines, in
its sole discretion, that the Partnership would be
able to satisfy the secondary market safe harbor
provision for partnerships with in excess of 90% of
income from real estate sources as set forth in
Treasury Regulations Section 1.7704-1 (or any other
applicable safe harbor from publicly traded
partnership status related to income which may be
adopted by the IRS) for the Partnership's taxable
year in which such transfer otherwise would be
effective, or (ii) the Partnership has received an
opinion of counsel satisfactory to the General
Partner or a favorable IRS ruling that any such
transfer will not result in the Partnership's being
taxable as a corporation for federal income tax
purposes. The Limited Partners agree to provide all
information with respect to a proposed transfer that
the General Partner deems necessary or desirable in
order to make such determination, including but not
limited to, information as to whether the transfer
occurred on a secondary market (or the substantial
equivalent thereof).
(e) Any purported transfer or assignment not satisfying
all of the foregoing conditions shall be void ab
initio, and no purported transfer or assignment shall
be of any effect unless all of the foregoing
conditions have been satisfied.
17.4 SUBSTITUTED LIMITED PARTNERS. Except as otherwise provided in this
Agreement, an Assignee of the whole or any portion of a Limited Partner's
interest in the Partnership shall not have the right to become a substituted
Limited Partner in place of his assignor unless (a) the assignment instrument
shall have been in form and substance satisfactory to the General Partner; and
(b) the Assignee shall have accepted, adopted and approved in writing all of the
terms and provisions of this Agreement, as the same may have been amended.
Assignees of Units will be recognized by the Partnership as substituted Limited
Partners as of the commencement of the first fiscal quarter of the Partnership
following the fiscal quarter which includes the effective date of the assignment
and in which the foregoing conditions are satisfied, notwithstanding the time
consumed in preparing the documents necessary to effectuate the substitution.
17.5 ASSIGNMENT OF LIMITED PARTNERSHIP INTEREST WITHOUT SUBSTITUTION.
Subject to the transfer restrictions of Section 17.3, a Limited Partner shall
have the right to assign all or part of such Limited Partner's interest in Units
by a written instrument of assignment. The assigning Limited Partner shall
deliver to the General Partner a written instrument of assignment in form and
substance satisfactory to the General Partner, duly executed by the assigning
Limited Partner or his personal representative or authorized agent, including an
executed acceptance by the Assignee of all the terms and provisions of this
Agreement and the representations of the assignor and Assignee that the
assignment was made in accordance with all applicable laws and regulations
(including investment suitability requirements). Said assignment shall be
accompanied by such assurance of genuineness and effectiveness and by such
consents or authorizations of any governmental or other authorities as may be
reasonably required by the General Partner. The Partnership shall recognize any
such assignment not later than the last day of the calendar month following
receipt of notice of the assignment and all required documentation, and an
Assignee shall be entitled to receive distributions and allocations from the
Partnership attributable to the Partnership interest acquired by reason of any
such assignment from and after the first day of the fiscal quarter following the
fiscal quarter in which the assignment of such interest is recognized. The
Partnership and the General Partner shall be entitled to treat the assignor of
such Partnership interest as the absolute owner thereof in all respects, and
shall incur no liability for distributions made in good faith to such assignor,
until such time as the written instrument of assignment has been received by the
Partnership and recorded on its books.
17.6 WITHDRAWAL OF LIMITED PARTNER. Except as otherwise specifically
permitted by this Agreement, no Limited Partner shall be entitled to withdraw or
retire from the Partnership.
17.7 DEATH, LEGAL INCOMPETENCY OR DISSOLUTION OF LIMITED PARTNER. Upon
the death, legal incompetency or dissolution of a Limited Partner, the estate,
personal representative, guardian or other successor in interest of such Limited
Partner shall have all of the rights and be liable for all the obligations of
the Limited Partner in the Partnership to the extent of such Limited Partner's
interest therein, subject to the terms and conditions of this Agreement, and
with the prior written consent of the General Partner which may be withheld at
its sole discretion, may be substituted for such Limited Partner.
17.8 ELIMINATION OR MODIFICATION OF RESTRICTIONS. Notwithstanding any
of the foregoing provisions of this Article XVII, the General Partner may amend
this Agreement to eliminate or modify any restriction on substitution or
assignment at such time as the restriction is no longer necessary.
ARTICLE XVIII
LOANS TO PARTNERSHIP
18.1 AUTHORITY TO BORROW. The General Partner shall cause the
Partnership to purchase and own all Partnership Properties on an un-leveraged
basis, and the Partnership shall not incur any indebtedness except for loans
that are authorized pursuant to Section 11.3(e) hereof.
ARTICLE XIX
POWER OF ATTORNEY, CERTIFICATES AND OTHER DOCUMENTS
19.1 POWER OF ATTORNEY. Each Limited Partner, by becoming a Limited
Partner and adopting this Agreement, constitutes and appoints the General
Partner and any successor to the General Partner as his true and lawful
attorney-in-fact, in his name, place and stead, from time to time:
A-16
(a) To execute, acknowledge, swear to, file and/or record
all agreements amending this Agreement that may be
appropriate:
(i) To reflect a change of the name or the
location of the principal place of business
of the Partnership;
(ii) To reflect the disposal by any Limited
Partner of his interest in the Partnership,
or any Units constituting a part thereof, in
any manner permitted by this Agreement and
any return of the Capital Contribution of a
Limited Partner (or any part thereof)
provided for by this Agreement;
(iii) To reflect a Person's becoming a Limited
Partner of the Partnership as permitted by
this Agreement;
(iv) To reflect a change in any provision of this
Agreement or the exercise by any Person of
any right or rights hereunder not requiring
the consent of said Limited Partner;
(v) To reflect the addition or substitution of
Limited Partners or the reduction of Capital
Accounts upon the return of capital to
Partners;
(vi) To add to the representations, duties or
obligations of the General Partner or its
Affiliates or surrender any right or power
granted to the General Partner or its
Affiliates herein for the benefit of the
Limited Partners;
(vii) To cure any ambiguity, to correct or
supplement any provision herein which may be
inconsistent with law or with any other
provision herein, or to make any other
provision with respect to matters or
questions arising under this Agreement which
will not be inconsistent with law or with
the provisions of this Agreement;
(viii) To delete, add or modify any provision to
this Agreement required to be so deleted,
added or modified by the staff of the
Securities and Exchange Commission, the
National Association of Securities Dealers,
Inc. or by a State Securities Commissioner
or similar such official, which addition,
deletion or modification is deemed by such
Commission or official to be for the benefit
or protection of the Limited Partners;
(ix) To make all filings as may be necessary or
proper to provide that this Agreement shall
constitute, for all purposes, an agreement
of limited partnership under the laws of the
State of Texas as they may be amended from
time to time;
(x) To eliminate or modify any restriction on
substitution or assignment contained in
Article XVII at such time as the restriction
is no longer necessary.
(b) To execute, acknowledge, swear to, file or record
such certificates, instruments and documents as may
be required by, or may be appropriate under, the laws
of any state or other jurisdiction, or as may be
appropriate for the Limited Partners to execute,
acknowledge, swear to, file or record to reflect:
(i) Any changes or amendments of this Agreement,
or pertaining to the Partnership, of any
kind referred to in paragraph (a) of this
Section 19. 1; or
(ii) Any other changes in, or amendments of, this
Agreement, but only if and when the consent
of 66 2/3 % or other required percentage of
the Limited Partners has been obtained.
Each of such agreements, certificates, instruments and documents shall
be in such form as the General Partner and legal counsel for the Partnership
shall deem appropriate. Each Limited Partner hereby authorizes the General
Partner to take any further action which the General Partner shall consider
necessary or convenient in connection with any of the foregoing, hereby giving
said attorney-in-fact full power and authority to do and perform each and every
act and thing whatsoever requisite, necessary or convenient to be done in and
about the foregoing as fully as said Limited Partner might or could do if
personally present and hereby ratifies and confirms all that said
attorney-in-fact shall lawfully do or cause to be done by virtue hereof. The
power hereby conferred shall be deemed to be a power coupled with an interest in
recognition of the fact that each of the Partners under this Agreement will be
relying upon the power of the General Partner to act as contemplated by this
Agreement in any filing and other action by them on behalf of the Partnership,
and shall survive the bankruptcy, death, adjudication of incompetence or
insanity, or dissolution of any Person hereby giving such power and the transfer
or assignment of all or any part of the Units of such Person; provided, however,
that in the event of the transfer by a Limited Partner of all of his Units, the
foregoing power of attorney of a transferor Limited Partner shall survive such
transfer only until such time as the transferee shall have been admitted to the
Partnership as a substituted Limited Partner and all required documents and
instruments shall have been duly executed, sworn to, filed and recorded to
effect such substitution.
19.2 REQUIRED SIGNATURES. Any writing to amend this Agreement to
reflect the addition of a Limited Partner need be signed only by the General
Partner, by the Limited Partner who is disposing of his interest in the
Partnership, if any, and by the Person to be substituted or added as a Limited
Partner. The General Partner may sign for either or both of said Limited
Partners as their attorney-in-fact pursuant to paragraph (a) of Section 19.1
hereof. Any writing to amend this Agreement to reflect the removal or withdrawal
of the General Partner in the event the business of the Partnership is continued
pursuant to the terms of this Agreement need be signed only by the new General
Partner.
19.3 ADDITIONAL DOCUMENTS. Each Partner, upon the request of the
others, agrees to perform any further acts and execute and deliver any further
documents that may be reasonably necessary to carry out the provisions of this
Agreement.
A-17
ARTICLE XX
DISSOLUTION AND TERMINATION OF THE PARTNERSHIP
20.1 DISSOLUTION. Except as otherwise provided in this Section 20.1, no
Partner shall have the right to cause dissolution of the Partnership before the
expiration of the term for which it is formed. The Partnership shall be
dissolved and terminated upon the happening of any of the following events:
(a) The expiration of the term of the Partnership as
specified in Article VI hereof,
(b) The entry of a decree of judicial dissolution by a
court of competent jurisdiction provided that the
foregoing should not apply if the Partnership files a
voluntary petition seeking reorganization under the
bankruptcy laws;
(c) The retirement or withdrawal of the General Partner
unless the Limited Partners, within 120 days from the
date of such event, elect by 66 2/3 % vote to
continue the business of the Partnership and elect a
new General Partner;
(d) The effective date of an Event of Withdrawal of the
General Partner unless the Limited partners within
120 days from the date of such event, elect by 66 2/3
% vote to continue the business of the Partnership
and elect a new General Partner;
(e) The sale or other disposition of all of the interests
in real estate (including, without limitation,
purchase money security interests and interests in
joint ventures or other entities owning interests in
real estate) of the Partnership; or
(f) The election by the General Partner to terminate the
Partnership, without the consent of any Limited
Partner, in the event that either (i) the
Partnership's assets constitute "plan assets," as
such term is defined for purposes of ERISA, or (ii)
any of the transactions contemplated by this
Agreement constitute a "prohibited transaction" under
ERISA or the Code and no exemption for such
transaction is obtainable from the United States
Department of Labor or the General Partner determines
in its discretion not to seek such an exemption.
The Partnership shall not be dissolved or terminated by the admission
of any new Limited Partner or by the withdrawal, expulsion, death, insolvency,
bankruptcy or disability of a Limited Partner.
20.2 LIMITED PARTNERS' RIGHT TO CONTINUE THE BUSINESS OF THE
PARTNERSHIP. Upon the occurrence of an event specified in Section 20.1 above,
with respect to the General Partner, the Limited Partners shall have a right
prior to the effective date of the occurrence of any such event to elect to
continue the business of the Partnership pursuant to the provisions of this
Section 20.3. The effective date of the events specified in paragraphs (c) and
(d) of Section 20.1 above shall be 120 days after the date of any such event. In
the case of the occurrence of an event specified in paragraphs (c) or (d) of
Section 20.1 above, the Limited Partners may elect, by 66 2/3 % vote within 120
days from the date of such event, to continue the business of the Partnership
and elect one or more new General Partners. The new General Partner or General
Partners so elected shall execute, deliver, acknowledge and record an amendment
to the Certificate and such other documents and instruments as may be necessary
or appropriate to effect such change.
20.3 PAYMENT TO WITHDRAWN GENERAL PARTNER. Upon the Event of Withdrawal
or other removal, withdrawal or retirement of the General Partner, the
Partnership shall be required to pay such General Partner any amounts then
accrued and owing to such General Partner under this Agreement. The method of
payment to the General Partner must be fair and must protect the solvency and
liquidity of the Partnership. In addition, the Partnership shall have the right,
but not the obligation, to terminate the General Partner's interest in
Partnership income, losses, distributions and capital upon payment to it of an
amount equal to the value of its interest in Partnership income, losses,
distributions and capital on the date of such retirement, removal or Event of
Withdrawal. Such interest shall be computed taking into account the General
Partner's economic interest in the Partnership under Articles IX and X hereof,
and shall be based upon the market value of the assets of the Partnership
determined as if such assets were sold on the date of such Event of Withdrawal,
retirement, withdrawal or removal. In the event such General Partner (or its
representative) and the Partnership cannot mutually agree upon such value within
90 days following such withdrawal, such value shall be determined by arbitration
before a panel of three appraisers, one of whom shall be selected by such
General Partner (or its representative) and one by the Partnership, and the
third of whom shall be selected by the two appraisers so selected by the
parties. Such arbitration shall take place in Dallas, Texas and shall be in
accordance with the rules and regulations of the American Arbitration
Association then in force and effect. The expense of arbitration shall be borne
equally by such General Partner and the Partnership. Payment to such General
Partner of the value of its interest in Partnership income, losses,
distributions and capital shall be made by the delivery of a promissory note
coming due in not less than five years and bearing interest at the rate of 10%
per annum, with principal and interest payable annually in equal installments.
ARTICLE XXI
DISTRIBUTION ON TERMINATION OF PARTNERSHIP
21.1 LIQUIDATION DISTRIBUTION. Upon a dissolution and final termination
of the Partnership, the General Partner (or if there is no remaining General
Partner, any other Person selected by the Limited Partners) shall take account
of the Partnership assets and liabilities, and the assets shall be liquidated as
promptly as is reasonable with obtaining the fair market value thereof, and the
proceeds therefrom, to the extent sufficient therefore, shall be applied and
distributed in accordance with Section 9.3.
21.2 TIME OF LIQUIDATION. A reasonable time shall be allowed for the
orderly liquidation of the assets of the Partnership and the discharge of
liabilities to creditors so as to minimize the losses upon liquidation.
A-18
21.3 LIQUIDATION STATEMENT. Each of the Partners shall be furnished
with a statement prepared or caused to be prepared by the General Partner, which
shall set forth the assets and liabilities of the Partnership as of the date of
complete liquidation. Upon compliance with the foregoing distribution plan, the
Limited Partners shall cease to be such and the General Partner, as the sole
remaining Partner of the Partnership, shall execute, acknowledge and cause to be
filed a Certificate of Cancellation of the Partnership.
21.4 NO LIABILITY FOR RETURN OF CAPITAL. The General Partner shall not
be personally liable for the return of all or any part of the Capital
Contributions of the Limited Partners. Any such return shall be made solely from
Partnership assets.
21.5 NO RIGHT OF PARTITION. The Partners and Assignees shall have no
right to receive Partnership Property in kind, nor shall such Partners or
Assignees have the right to partition the Partnership Property, whether or not
upon the dissolution and termination of the Partnership.
21.6 PRIORITY; RETURN OF CAPITAL. Except as provided in this Agreement,
no Limited Partner shall have priority over any other Limited Partner either as
to the return of Capital Contributions or as to allocations of income and losses
or payments of distributions. Other than upon the dissolution and termination of
the Partnership as provided by this Agreement, there has been no time agreed
upon when the Capital Contribution of each Limited Partner is to be returned.
21.7 ESCHEAT OF DISTRIBUTIONS. If, upon termination and dissolution of
the Partnership, there remains outstanding on the books of the Partnership
(after a reasonable period of time determined in the sole discretion of the
General Partner) a material amount of distribution checks which have not been
negotiated for payment by the Limited Partners, the General Partner may, if
deemed to be in the best interest of the Partnership, cause such amounts to be
redistributed pro rata to Limited Partners of record on such final distribution
date who have previously cashed all of their distribution checks; provided,
however, that neither the General Partner nor the Partnership shall be liable
for any subsequent claims for payment of such redistributed distributions. The
General Partner is not required to make such redistribution, in which case such
amounts may eventually escheat to the appropriate state. ARTICLE XXII
GENERAL PROVISIONS
22.1 NOTICES. Except as otherwise provided herein, any notice, payment,
distribution or other communication which shall be required to be given to any
Partner in connection with the business of the Partnership shall be in writing
and any such notice shall become effective the earlier of (a) upon personal
delivery thereof, including by overnight mail and Courier service, or (b) four
days after it shall have been mailed by United States mail, first class with
postage prepaid; in each case, if to a Limited Partner, addressed to the last
address furnished for such purpose by the Limited Partner to whom it is
authorized to be given as of the time sent for delivery or as of the time of
such mailing, and if to the General Partner or the Partnership, at the principal
office of the Partnership, or at such other address as such General Partner may
hereafter specify in a notice duly given as provided herein.
22.2 SURVIVAL OF RIGHTS. This Agreement shall be binding upon and inure
to benefit of the Partners and their respective heirs, legal representatives,
successors and assigns.
22.3 HEADINGS. The captions of the articles and sections of this
Agreement are for convenience only and shall not be deemed part of the text of
this Agreement.
22.4 AGREEMENT IN COUNTERPARTS. This Agreement, or any Amendment
hereto, may be executed in counterparts each of which shall be deemed an
original Agreement, and all of which shall constitute one agreement by each of
the Partners hereto on the dates respectively indicated in the acknowledgements
of said Partners, notwithstanding that all of the Partners are not signatories
to the original or the same counterpart, to be effective as of the day and year
first above written.
22.5 GOVERNING LAW. This Agreement shall be governed and construed
according to the laws in the state of Texas and laws governing Texas
Partnerships and the jurisdiction for legal actions shall be in the State of
Texas, Dallas County.
22.6 TIME. Time is of the essence in this Agreement.
22.7 PRONOUNS. All pronouns and any variations thereof shall be deemed
to refer to the masculine, feminine or neuter, singular or plural, as the
identity of the person or Persons may require.
22.8 SEPARABILITY OF PROVISIONS. Each provision of this Agreement shall
be considered separable and if for any reason any provision or provisions hereof
are determined to be invalid and contrary to any existing or future law, such
invalidity shall not impair the operation, or affect those portions, of this
Agreement, which are valid.
A-19
IN WITNESS WHEREOF, the undersigned hereby execute this Amended and Restated
Agreement of Limited Partnership under seal as of the date and year first above
written.
SETTLERS CAPITAL CORPORATION:
By:
-------------------------------
(Signature)
President
GENERAL PARTNER
ABIC REALTY CORPORATION
Attest:
By: By:
------------------------------- -------------------------------
(Signature)
Name: President
----------------------------
Title:
--------------------------- -------------------------------
(Signature)
A-20
EXHIBIT B
FORM OF SUBSCRIPTION AGREEMENT
AND SIGNATURE PAGE
ABIC REALTY FUND I, L.P.
ABIC REALTY FUND I, L.P.
SUBSCRIPTION AGREEMENT - LIMITED PARTNERSHIP UNITS
The Investor named below, by payment of a check payable to ABIC REALTY FUND I,
L.P. - Escrow Account hereby subscribes for limited partnership units ("the
Units") indicated below (minimum purchase of 200 units at a purchase price of
$10 per unit. Minimum investment is $2000) of ABIC REALTY FUND I, L.P. Units may
be purchased in increments of $1,000. By such payment, the named Investor
further acknowledges receipt of the Prospectus and any Supplement and the
Subscription Agreement, the terms of which govern the investment in the limited
partnership units being subscribed for hereby.
<Table>
A. INVESTMENT: (1) Amount of limited partnership units purchased $
--------------------------
(2) [ ] Initial Purchase [ ] Additional Purchase Date of Investor's check: / /
------- ------- -------
B. REGISTRATION:
(3) Registered Owner: [ ] Mr. [ ] Mrs. [ ] Ms. [ ] MD. [ ] PhD. [ ] Other
--------------------------------------
Name:
-----------------------------------------------------------------------------------------------------------------
(4) Co-owner: [ ] Mr. [ ] Mrs. [ ] Ms. [ ] MD. [ ] PhD. [ ] Other
--------------------------------------
Name:
-----------------------------------------------------------------------------------------------------------------
(5) Mailing Address: City, State & Zip:
-------------------------------------- ------------------------------------------
(6) Residence Address (if different from above):
--------------------------------------------------------------------------
(7) Birth Date: / / (8) Birth Date Co-Owner: / /
------- ------- ------- ------- ------- -------
(9) Please indicate Citizenship Status: (10) Social Security #: / /
------- -------- -------
[ ] U.S. Citizen [ ] Other Co-Owner SS #: / /
------- -------- -------
(11) Telephone #: (Home) ( ) - Corporate or Custodial
---- ----- -------- Taxpayer ID #: / /
------- -------- -------
(Office) ( ) -
---- ----- --------
C. OWNERSHIP: [ ] Individual Ownership [ ] IRA or Keogh [ ] Joint Tenants with Rights of Survivorship
[ ] Trust/Date of Trust Established Pension/Trust / / (S.E.P.) [ ] Tenants in Common
------ ------- ------
[ ] Tenants by the Entirety [ ] Corporate Ownership [ ] Partnership [ ] Other
----------------------------
D. SIGNATURES: By signing below, I/we represent that I/we meet the suitability standards set forth in the Prospectus under
"Suitability Standards."
Signatures - Registered Owner: Co-Owner:
-------------------------------------- ------------------------------------------
E. Print Names of Custodian
or Trustee: Authorized Signature:
------------------------------------------- ------------------------------------------
Date: - - Witness Signature:
------ ------ ------ ----------------------------------------------------------------------
F. PAYMENT SHOULD BE SENT TO (IF DIFFERENT THAN REGISTERED OWNER):
Name: c/o:
--------------------------------------------------------------- -----------------------------------------------
Address: Account Number:
------------------------------------------------------------ ------------------------------------
City, State & Zip: Telephone Number: ( ) -
-------------------------------------------------- ------ ------- ----------------
G. BENEFICIAL OWNER(S): All reports and financial statements will normally be sent to the registered owner at the address in
Section B. If reports and financial statements are to be sent to the Beneficial Owner of an IRA or Keogh, insert name of the
Beneficial Owner.
Name of Beneficial Owner Only: Telephone Number: ( ) -
--------------------------------------- ------ ------- ----------------
Address: City, State & Zip:
------------------------------------------------------------ ---------------------------------
H. BROKER-DEALER/REGISTERED REPRESENTATIVE DATA: ALL LINES MUST BE COMPLETED. ANY MISSING SIGNATURES MAY DELAY PROCESSING
OF THIS ORDER.
Broker-Dealer NASD Firm Name: Telephone Number: ( ) -
--------------------------------------- ------ ------- ----------------
Main Office Address: City, State & Zip:
------------------------------------------------ ---------------------------------
Print or Type name of Broker-Dealer, Principal or other Authorized -Signature:
----------------------------------------------
Authorized Signature: Date: - -
------------------------------------------------------------ ------ ------ ----------------
Print or Type Name of Registered Representative:
----------------------------------------------------------------------------
Signature: Telephone Number: ( ) -
---------------------------------------------------------- ------ ------- ----------------
Branch Office Address: City, State & Zip:
---------------------------------------------- ---------------------------------
=============================================================================================================================
MAIL TO: ABIC Realty Fund I, L.P. - 9520 North May Avenue, Suite 330, Oklahoma City, Oklahoma 73120
(405) 302-6434 FAX(405) 302-6407
=============================================================================================================================
</Table>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
All expenses, including all allocated general and
administrative and overhead expenses, related to the Offering or the
organization of the Partnership will be borne by the General Partner, ABIC
Realty Corporation. The Partnership will reimburse the General Partner for all
or a part of such expenses through a payment by the Partnership to the General
Partner of a fee of 6% of the gross Offering proceeds.
The following table sets forth a reasonable itemized statement
of all anticipated out-of-pocket and overhead expenses (subject to future
contingencies) to be incurred in connection with the distribution of the
securities being registered, reflecting the minimum and maximum subscription
amounts:
<Table>
<Caption>
MINIMUM MAXIMUM
---------- -----------
SEC Registration Fee $ 3,680 $ 3,860
Printing and Engraving Expenses 5,000 120,000
Legal Fees and Expenses 45,000 90,000
Escrow Fees 5,000 10,000
Marketing and Due Diligence Expenses 3,000 400,000
Accounting Fees and Expenses 20,000 40,000
Blue Sky Fees and Expenses 10,000 80,000
Miscellaneous 5,000 70,000
TOTAL $96,680.00 $813,860.00
</Table>
ITEM 32. SALES TO SPECIAL PARTIES
None
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
None
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation of ABIC Realty Corporation
("Articles") provide for indemnification of Directors in accordance with the
Texas Business Corporation Act. Article Six of the Articles provides as follows:
A director of the Corporation is not liable to the Corporation
or its shareholders for monetary damages for an act or omission in the
director's capacity as a director, except that this Article Six does not
eliminate or limit the liability of a director for:
(i) a breach of a director's duty of loyalty to the Corporation or
its shareholders;
(ii) an act or omission not in good faith or that involves
intentional misconduct or a knowing violation of the law;
(iii) a transaction from which a director received an improper
benefit, whether or not the benefit resulted from an action
taken within the scope of the director's office;
(iv) an act or omission for which the liability of a director is
expressly provided for by statute; or
(v) an act related to an unlawful stock purchase or payment of a
dividend.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED
Not applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements are included as Exhibit A to the
Prospectus, including:
(i) Independent Auditor's Report
(ii) Balance Sheet of ABIC Realty Fund I, L.P.
(iii) Statement of Changes in Partner's Capital of
ABIC Realty Fund I, L.P.
(iv) Notes to Financial Statements
II-1
(b) Exhibits - The following Exhibits are filed as part
of the Registration Statement:
<Table>
<Caption>
Exhibit No. Identification of Exhibit
- ----------- -------------------------
4.1 The Form of Limited Partnership Agreement is Exhibit A to the Prospectus.
5.1* Opinion of Amy Waters, Attorney, regarding the legality of the securities issued
8.1* Opinion of Julia K. Swisher, Attorney, as to certain tax matters
10.1* Form of Broker-Dealer Selling Agreement
23.1* Consent of Amy Waters, Attorney at Law (included in her opinion as Exhibit 5)
23.2* Consent of Julia K. Swisher, Attorney at Law (included in her opinion as Exhibit 8)
23.3 Consent of Tyson Hopkins, CPA
</Table>
- ---------
* To be filed by amendment
ITEM 37. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers
or sales are being made, a post-effective
amendment to this Registration Statement:
(i) To include any prospectus required
by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any
facts or events arising 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.
Notwithstanding the foregoing, any
increase or decrease in volume of
securities offered (if the total
dollar value of securities offered
would not exceed that which was
registered) and any deviation from
the low or high end of the
estimated maximum offering range
may be reflected in the form of
prospectus filed with the
Commission pursuant to Rule 424(b)
if, in the aggregate, the changes
in volume and price represent no
more than a 20% change in the
maximum aggregate offering price
set forth in the "Calculation of
Registration Fee" table in the
effective registration statement.
(iii) 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;
(2) That, for the purpose of determining any
liability under the Securities Act of 1933,
each such post-effective amendment shall be
deemed to be a new registration statement
relating to the securities offered therein,
and the offering of such securities at that
time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the
securities being registered which remain
unsold at the termination of the offering.
(b) To file a sticker supplement pursuant to Rule 424(c)
under the Securities Act of 1933 during the Offering
period describing each property not previously
identified at such time as there arises a reasonable
probability that such property will be acquired, with
the information contained in such sticker provided
simultaneously to the existing Limited Partners. Each
sticker supplement should disclose all compensation
and fees received by the General Partner and/or its
Affiliates in connection with any such acquisition.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-11 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the city of Oklahoma City, State of Oklahoma, on the 21st
day of June, 2002.
ABIC Realty Fund I, L.P.
By: ABIC Realty Corporation, General Partner
By: /s/ MICHAEL R. MARSHALL
------------------------------------
Michael R. Marshall, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacity and on the date indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ MICHAEL R. MARSHALL
- ----------------------- President, Secretary-Treasurer & Director June 21, 2002
Michael R. Marshall of ABIC Realty Corporation, General Partner
</Table>
II-3
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
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4.1 The Form of Amended and Restated Agreement of Limited
Partnership is Exhibit A to the Prospectus.
5.1* Opinion of Amy Waters, Attorney, regarding the legality of
the securities issued
8.1* Opinion of Julia K. Swisher, Attorney, as to certain tax matters
10.1* Form of Broker-Dealer Selling Agreement
23.1* Consent of Amy Waters, Attorney at Law (included in her
opinion as Exhibit 5.1)
23.2* Consent of Julia K. Swisher, Attorney at Law (included in her
opinion as Exhibit 8.1)
23.3 Consent of Tyson Hopkins, CPA
</Table>
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* To be filed by amendment