1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1995
Commission File Number 1-9525
INCOME OPPORTUNITY REALTY TRUST
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(Exact Name of Registrant as Specified in Its Charter)
California 94-6578120
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10670 North Central Expressway, Suite 300, Dallas, Texas 75231
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(Address of Principal Executive Offices) (Zip Code)
(214) 692-4700
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(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------------------ ------------------------
Shares of Beneficial Interest,
no par value American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of March 1, 1996, the Registrant had 767,044 shares of beneficial interest
outstanding. Of the total shares outstanding 383,818 were held by other than
those who may be deemed to be affiliates, for an aggregate value of $7,532,428
based on the last trade as reported on the American Stock Exchange on March 1,
1996. The basis of this calculation does not constitute a determination by the
Registrant that all of such persons or entities are affiliates of the
Registrant as defined in Rule 405 of the Securities Act of 1933, as amended.
Documents Incorporated by Reference:
NONE
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INDEX TO
ANNUAL REPORT ON FORM 10-K
PART I Page
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Item 1. Business............................................. 3
Item 2. Properties........................................... 7
Item 3. Legal Proceedings.................................... 13
Item 4. Submission of Matters to a Vote of Security
Holders........................................... 15
PART II
Item 5. Market for the Registrant's Shares of Beneficial
Interest and Related Shareholder Matters.......... 15
Item 6. Selected Financial Data.............................. 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 19
Item 8. Financial Statements and Supplementary Data.......... 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............... 70
PART III
Item 10. Trustees, Executive Officers and Advisor of the
Registrant........................................ 70
Item 11. Executive Compensation............................... 79
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................ 81
Item 13. Certain Relationships and Related Transactions....... 82
PART IV
Item 14. Exhibits, Consolidated Financial Statements,
Schedules and Reports on Form 8-K................. 85
Signature Page................................................... 88
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PART I
ITEM 1. BUSINESS
Income Opportunity Realty Trust (the "Trust" or "Registrant") is a California
business trust organized pursuant to a declaration of trust dated December 14,
1984, and amended and restated as of May 27, 1987 (as amended through the date
hereof, the "Declaration of Trust"). The Trust commenced operations on April
10, 1985. The Trust has elected to be treated as a Real Estate Investment
Trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of
1986, as amended. The Trust has, in the opinion of the Trust's management,
qualified for federal taxation as a REIT for all periods since May 1, 1985.
The Trust is a self-liquidating trust and is scheduled, unless and until the
Trust's shareholders decide on a contrary course of action, to begin
liquidation of its assets prior to October 24, 1996. The Trust's Board of
Trustees has approved a proposal to convert the Trust from a California
business trust into a Nevada corporation. The Trust's shareholders will vote
on this proposal at a special meeting of shareholders scheduled to be held
March 15, 1996. The approval of such proposal will convert the Trust from a
fixed life trust into a perpetual life corporation. Approval requires the vote
of a majority of the Trust's shareholders entitled to vote. As of the February
7, 1996 record date for the special meeting, the Trust's advisor and its
affiliates held shares representing 48% of the shares then outstanding. Such
parties intend to vote their shares for the proposal in accordance with the
recommendation of the Trust's Board of Trustees. Accordingly, the Trust's
management anticipates that the proposal will be approved and the Trust will be
converted into a perpetual life corporation following the special meeting.
The Trust's real estate at December 31, 1995, consisted of seven properties,
one of which is a foreclosed property held for sale, and an interest in a
partnership which owns five properties. Since commencing operations on April
10, 1985 through December 31, 1995, the Trust has funded twelve mortgage loans,
only one of which remained outstanding at December 31, 1995. No mortgage loans
were funded during 1995. In addition, the Trust has an interest in a
partnership which holds two wraparound mortgage loans. The Trust's real estate
and mortgage loan portfolios are more fully discussed in ITEM 2. "PROPERTIES."
Business Plan
The Trust's primary business and only industry segment is investing in equity
interests in real estate through direct acquisitions, partnerships and
financing real estate and real estate related activities through investments in
mortgage loans. Since October 24, 1991, the Trust, under the terms of its
Declaration of Trust, has been prohibited from reinvesting the net cash
proceeds from the sale or refinancing of any of its properties. The Trust's
real estate is located in the Pacific, Southeast, Southwest and Midwest regions
of the continental United States. Information regarding the real estate and
mortgage note receivable portfolios of the Trust is set forth in ITEM
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ITEM 1. BUSINESS (Continued)
Business Plan (Continued)
2. "PROPERTIES," and in Schedules III and IV to the Consolidated Financial
Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
The Trust's business is not seasonal. The Trust has previously pursued and
intends to pursue in the future, if the proposal to convert the Trust into a
perpetual life corporation is approved, a balanced investment policy, seeking
both current income and capital appreciation. Since October 1991, the Trust's
plan of operation has been to continue to service the mortgage note receivable
that it holds and to manage its real estate for income and long-term
appreciation for the benefit of its shareholders. Under the Declaration of
Trust, the Trust is prohibited from reinvesting the net cash proceeds from the
sale or refinancing of any of its properties. The Trust's investment strategy
in 1996, if the proposal to convert the Trust into a perpetual life corporation
is approved, will be to finance its presently unencumbered commercial
properties reinvesting the proceeds to acquire "Class A" apartment and
commercial properties in keeping with the current class of properties in the
Trust's real estate portfolio. The Trust does not expect, however, that it
will seek to fund or acquire new mortgage loans. It may, however, originate
mortgage loans in conjunction with providing purchase money financing of a
property sale. The Trust also intends to continue its strategy of maximizing
each property's operating income by aggressive property management through
closely monitoring expenses while at the same time making property renovations
and/or improvements where appropriate. While such expenditures increase the
amount of revenue required to cover operating expenses, the Trust's management
believes that such expenditures are necessary to maintain or enhance the value
of the Trust's properties.
Management of the Trust
Although the Trust's Board of Trustees is directly responsible for managing the
affairs of the Trust and for setting the policies which guide it, the
day-to-day operations of the Trust are performed by Basic Capital Management,
Inc. ("BCM" or the "Advisor"), a contractual advisor under the supervision of
the Trust's Board of Trustees. The duties of the Advisor currently include,
among other things, locating, investigating, evaluating and recommending real
estate and mortgage note sales opportunities for the Trust. If the proposal to
convert the Trust into a perpetual life corporation is approved, it is expected
that in the future the Advisor will recommend new investments and financing and
refinancing sources to the Trust. The Advisor also serves as a consultant in
connection with the Trust's business plan, and if the proposal to convert the
Trust into a perpetual life corporation is approved, future investment policy
decisions made by the Trust's Board of Trustees.
BCM is a company owned by a trust for the benefit of the children of Gene E.
Phillips. Mr. Phillips served as a Trustee of the Trust until December 31,
1992. Mr. Phillips also served as a director of BCM until December 22, 1989,
and as Chief Executive Officer of BCM until September
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ITEM 1. BUSINESS (Continued)
Management of the Trust (Continued)
1, 1992. Mr. Phillips serves as a representative of his children's trust which
owns BCM and, in such capacity, has substantial contact with the management of
BCM and input with respect to its performance of advisory services to the
Trust. BCM is more fully described in ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS
AND ADVISOR OF THE REGISTRANT - The Advisor."
BCM has been providing advisory services to the Trust since March 28, 1989.
Renewal of BCM's advisory agreement with the Trust was approved by the Trust's
shareholders at the Trust's annual meeting of shareholders held on March 7,
1995. BCM also serves as advisor to Continental Mortgage and Equity Trust
("CMET") and Transcontinental Realty Investors, Inc. ("TCI"). The Trustees of
the Trust are also trustees of CMET and directors of TCI and the officers of
the Trust are also officers of CMET and TCI. Mr. Phillips is a general partner
of Syntek Asset Management, L.P. ("SAMLP"), the general partner of National
Realty, L.P. ("NRLP") and National Operating, L.P. ("NOLP"), the operating
partnership of NRLP. BCM performs certain administrative functions for NRLP
and NOLP on a cost-reimbursement basis. BCM also serves as advisor to American
Realty Trust, Inc. ("ART"). Mr. Phillips served as a director and Chairman of
the Board of ART until November 16, 1992. Randall M. Paulson, President of the
Trust, also serves as President of CMET, TCI, BCM and as the President and a
director of Syntek Asset Management, Inc. ("SAMI"), the managing general
partner of SAMLP. The officers of the Trust are also officers of ART. As of
March 1, 1996, ART and TCI each owned approximately 27% and 22% of the Trust's
outstanding shares of beneficial interest and BCM owned approximately 42% of
ART's outstanding shares of common stock.
Since February 1, 1990, affiliates of BCM have provided property management
services to the Trust. Currently Carmel Realty Services, Ltd. ("Carmel, Ltd.")
provides such property management services. Carmel, Ltd. subcontracts with
other entities for the provision of the property-level management services to
the Trust. The general partner of Carmel, Ltd. is BCM. The limited partners
of Carmel, Ltd. are (i) Syntek West, Inc. ("SWI"), of which Mr. Phillips is the
sole shareholder, (ii) Mr. Phillips, and (iii) a trust for the benefit of the
children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level
management and leasing of one of the Trust's office buildings and the
commercial properties owned by a real estate partnership in which the Trust and
TCI are partners to Carmel Realty, Inc. ("Carmel Realty"), which is a company
owned by SWI. Carmel Realty is entitled to receive property and construction
management fees and leasing commissions in accordance with the terms of its
property-level management agreement with Carmel, Ltd.
Carmel Realty is also entitled to receive real estate brokerage commissions in
accordance with the terms of a nonexclusive brokerage agreement as discussed in
ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR TO THE REGISTRANT - The
Advisor."
The Trust has no employees. Employees of the Advisor render services to the
Trust.
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ITEM 1. BUSINESS (Continued)
Competition
The real estate business is highly competitive and the Trust competes with
numerous entities engaged in real estate activities (including certain entities
described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Related
Party Transactions"), some of which may have greater financial resources than
those of the Trust. The Trust's management believes that success against such
competition is dependent upon the geographic location of the property, the
performance of the property managers in areas such as marketing, collection and
the ability to control operating expenses, the amount of new construction in
the area and the maintenance and appearance of the property. Additional
competitive factors with respect to commercial properties are the ease of
access to the property, the adequacy of related facilities, such as parking,
and sensitivity to market conditions in setting rent levels. With respect to
apartments, competition is also based upon the design and mix of the units and
the ability to provide a community atmosphere for the tenants. The Trust's
management believes that general economic circumstances and trends and new or
renovated properties in the vicinity of each of the Trust's properties are also
competitive factors.
To the extent that the Trust seeks to sell any of its properties, the sales
prices for such properties may be affected by competition from other real
estate entities and financial institutions also attempting to sell their
properties located in areas in which the Trust's properties are located.
As described above and in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS" - Related Party Transactions," the officers and Trustees of the
Trust also serve as officers, directors or trustees of certain other entities,
each of which is also advised by BCM, and each of which has business objectives
similar to the Trust's. The Trust's Trustees, officers and Advisor owe
fiduciary duties to such other entities as well as to the Trust under
applicable law.
In addition, also as described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS - Certain Business Relationships," the Trust also competes with
other entities which are affiliates of the Advisor and which may have
investment objectives similar to the Trust's and that may compete with the
Trust in selling, leasing and financing real estate and, if the proposal to
convert the Trust into a perpetual life corporation is approved, in acquiring
real estate related investments. In resolving any potential conflicts of
interest which may arise, the Advisor has informed the Trust that it intends to
continue to exercise its best judgment as to what is fair and reasonable under
the circumstances in accordance with applicable law.
Certain Factors Associated with Real Estate and Related Investments
The Trust is subject to all the risks incident to ownership and financing of
real estate and interests therein, many of which relate to the general
illiquidity of real estate investments. These risks include, but are not
limited to, changes in general or local economic
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ITEM 1. BUSINESS (Continued)
Certain Factors Associated with Real Estate and Related Investments
(Continued)
conditions, changes in interest rates and the availability of permanent
mortgage financing which may render the sale or refinancing of a property
difficult or unattractive and which may make debt service more burdensome,
changes in real estate and zoning laws, increases in real estate taxes, federal
or local economic or rent controls, floods, earthquakes, hurricanes and other
acts of God, and other factors beyond the control of the Trust's management or
Advisor. The illiquidity of real estate investments generally may impair the
ability of the Trust to respond promptly to changing circumstances. The
Trust's management believes that such risks are partially mitigated by the
diversification by geographical region and property type of the Trust's real
estate portfolio.
ITEM 2. PROPERTIES
The Trust's principal offices are located at 10670 North Central Expressway,
Suite 300, Dallas, Texas 75231. In the opinion of the Trust's management, the
Trust's offices are suitable and adequate for its present operations.
Details of the Trust's real estate and mortgage notes receivable portfolios at
December 31, 1995, are set forth in Schedules III and IV, respectively, to the
Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA." The discussions set forth below under the headings "Real
Estate" and "Mortgage Loans" provide certain summary information concerning the
Trust's real estate and mortgage note receivable portfolios.
The Trust's real estate portfolio consists of properties held for investment,
investments in partnerships and a foreclosed property held for sale. The Trust
holds a fee simple title to all of the properties in its real estate portfolio.
The foreclosed property held for sale was obtained through foreclosure of the
collateral securing a mortgage note receivable. The discussion set forth below
under the heading "Real Estate" provides certain summary information concerning
the Trust's real estate and further summary information with respect to the
Trust's properties held for investment, a foreclosed property held for sale and
investments in partnerships.
The Trust's real estate is geographically diverse. At December 31, 1995, the
Trust held equity investments in apartments and office buildings in the
Pacific, Southwest, Southeast and Midwest regions of the continental United
States, as shown more specifically in the table under "Real Estate" below. The
majority of the Trust's properties, however, are located in California and
Texas. At December 31, 1995, the Trust held one wraparound mortgage note
receivable, secured by a shopping center in Joliet, Illinois.
At December 31, 1995, three of the Trust's properties, Plumtree Apartments,
Porticos Apartments and Saratoga Office Building each exceeded 10% of the
Trust's total assets. At December 31, 1995, 80% of the Trust's assets consisted
of real estate held for investment, 2%
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ITEM 2. PROPERTIES (Continued)
consisted of a foreclosed property held for sale, 4% consisted of a mortgage
note and interest receivable and 5% consisted of investments in partnerships.
The remaining 9% of the Trust's assets at December 31, 1995, were cash, cash
equivalents and other assets. The percentage of the Trust's assets invested in
any one category is subject to change and that no assurance can be given that
the composition of the Trust's assets in the future will approximate the
percentages listed above. See ITEM 1. "BUSINESS - Business Plan."
[THIS SPACE INTENTIONALLY LEFT BLANK.]
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ITEM 2. PROPERTIES (Continued)
To continue to qualify for federal taxation as a REIT under the Internal
Revenue Code of 1986, as amended, the Trust is required, among other things, to
hold at least 75% of the value of its total assets in real estate assets,
government securities, cash and cash equivalents at the close of each quarter
of each taxable year.
Geographic Regions
The Trust has divided the continental United States into the following
geographic regions.
Northeast region comprised of the states of Connecticut, Delaware,
Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania,
Rhode Island and Vermont, and the District of Columbia. The Trust has no
properties in this region.
Southeast region comprised of the states of Alabama, Florida, Georgia,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia. The
Trust has 1 commercial property in this region.
Southwest region comprised of the states of Arizona, Arkansas, Louisiana,
New Mexico, Oklahoma and Texas. The Trust has 3 apartments in this region.
Midwest region comprised of the states of Illinois, Indiana, Iowa, Kansas,
Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio,
South Dakota, West Virginia and Wisconsin. The Trust has 1 apartment in
this region.
Mountain region comprised of the states of Colorado, Idaho, Montana,
Nevada, Utah and Wyoming. The Trust has no properties in this region.
Pacific region comprised of the states of California, Oregon and
Washington. The Trust has 1 apartment and 1 commercial property in this
region.
Real Estate
At December 31, 1995, over eighty percent of the Trust's assets were invested
in real estate, located throughout the continental United States, either on a
leveraged or nonleveraged basis. The Trust's real estate portfolio consists
of properties held for investment, investments in partnerships and a foreclosed
property held for sale.
Types of Real Estate Investments. The Trust's real estate consists of
apartments and commercial properties (office buildings) or similar properties
having established income-producing capabilities. In selecting real estate for
investment, the location, age and type of property, gross rentals, lease terms,
financial and business standing of tenants, operating expenses, fixed charges,
land values and physical
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ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
condition were considered. The Trust has acquired properties subject to, or
assumed, existing debt and has mortgaged, pledged or otherwise obtained
financing for its properties. Since October 1991, the Trust, pursuant to the
terms of its Declaration of Trust, has been prohibited from reinvesting the net
cash proceeds from the sale or refinancing of any of its properties and is
required to distribute to its shareholders such net cash proceeds, in excess of
amounts required for renovations and/or improvements to its properties. If the
proposal to convert the Trust into a perpetual life corporation is approved,
such prohibition on reinvesting the net proceeds of sales or refinancings will
be eliminated. See ITEM 1. "BUSINESS."
At December 31, 1995, the Trust had no properties on which significant capital
improvements were in process.
In the opinion of the Trust's management, the properties owned by the Trust are
adequately covered by insurance.
The following table sets forth the percentages, by property type and geographic
region, of the Trust's real estate at December 31, 1995.
Commercial
Region Apartments Properties
--------- ---------- ----------
Pacific...................... 16% 79%
Southwest.................... 50 -
Southeast.................... - 21
Midwest...................... 34 -
---- ----
100% 100%
The foregoing table is based solely on the number of apartment units and
commercial square footage owned by the Trust and does not reflect the value of
the Trust's investment in each region. See Schedule III to the Consolidated
Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA" for a more detailed description of the Trust's real estate.
Properties Held for Investment. Set forth below is the Trust's owned real
estate and the monthly rental rate for apartments and the average annual
rental rate for office buildings and occupancy thereof at December 31, 1995,
1994 and 1993:
Rent Per
Square Foot Occupancy
Units/ -------------------------- -----------------------
Property Location Square Footage 1995 1994 1993 1995 1994 1993
- ----------------- -------------- --------------- ------ ------ ------ ------ ------ ------
Apartments
Eastpoint Mesquite, TX 126 units/
113,138 sq. ft. $.62 .60 .59 99% 99% 96%
Plumtree Martinez, CA 116 units/
97,734 sq. ft. .92 .90 .90 99% 92% 92%
Porticos Milwaukee, WI 256 units/
269,036 sq. ft. .86 .86 .84 94% 91% 94%
Treehouse San Antonio, TX 106 units/
88,957 sq. ft. .75 .71 .67 94% 98% 93%
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ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
Rent Per
Square Foot Occupancy
Units/ ------------------------- -----------------------
Property Location Square Footage 1995 1994 1993 1995 1994 1993
- ----------------- -------------- --------------- ------ ------ ------ ------ ------ ------
Office Buildings
Saratoga Saratoga, CA 89,825 sq. ft. 19.07 18.11 17.92 100% 92% 85%
Town Center Boca Raton, FL 24,518 sq. ft. 7.77 7.65 7.01 100% 100% 100%
Occupancy presented here and throughout this ITEM 2. is without reference to
whether leases in effect are at, below or above market rates.
In December 1995, the Trust refinanced the mortgage debt secured by the
Treehouse Apartments in San Antonio, Texas in the amount of $2.9 million. The
Trust received net cash of $939,000 after the payoff of $1.9 million in
existing mortgage debt, and the payment of various closing costs associated
with the refinancing. The new mortgage bears interest at 7.75% per annum,
requires monthly payments of principal and interest of $21,905 and matures
January 1, 2006. The Trust paid a mortgage brokerage and equity refinancing
fee of $29,000 to BCM based on the $2.9 million refinancing.
Also in December 1995, the Trust refinanced the mortgage debt secured by the
Eastpoint Apartments in Mesquite, Texas in the amount of $3.4 million. The
Trust received net cash of $1.4 million after the payoff of $1.9 million in
existing mortgage debt, and the payment of various closing costs associated
with the refinancing. The new mortgage bears interest at 7.75% per annum,
requires monthly payments of principal and interest of $24,358 and matures
January 1, 2006. The Trust paid a mortgage brokerage and equity refinancing
fee of $34,000 to BCM based on the $3.4 million refinancing.
Foreclosed Property Held for Sale. Set forth below is the Trust's foreclosed
property held for sale and monthly rental rate and occupancy thereof at
December 31, 1995:
Rent Per
Square Foot Occupancy
Units/ ------------------------- -----------------------
Property Location Square Footage 1995 1994 1993 1995 1994 1993
- ----------------- -------------- --------------- ------ ------ ------ ------ ------ ------
Apartment
Spanish Trace Irving, TX 136 units/
137,682 Sq. Ft. $.46 $ * $ * 95% * *
- -------------------
* Recorded as an insubstance foreclosure December 31, 1994.
In November 1993, the Trust placed the $1.1 million wraparound mortgage note,
secured by the Spanish Trace Apartments in Irving, Texas, on nonperforming,
nonaccrual status. The Trust recorded the property as an insubstance
foreclosure as of December 31, 1994 and accepted a deed in lieu of foreclosure
on March 2, 1995. The Trust did not incur a loss on foreclosure in excess of
reserves previously established.
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ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
Partnership Properties. Set forth below are the properties owned by a
partnership in which the Trust is an equity investee and the monthly rental
rate for apartments and the average annual rental rate for commercial
properties and occupancy thereof at December 31, 1995, 1994 and 1993:
Rent Per
Square Foot Occupancy
Units/ ------------------------- -------------------------
Property Location Square Footage 1995 1994 1993 1995 1994 1993
- ----------------- -------------- --------------- ------ ------ ------ ------ ------ ------
Apartments
Inwood Greens Houston, TX 126 units/
105,960 sq. ft. $.44 $.43 $.42 93% 91% 94%
Oaks of Inwood Houston, TX 198 units/
167,872 sq. ft. .43 .43 .41 91% 90% 87%
Office Building
MacArthur Mills Carrollton, TX 53,472 sq. ft. 7.60 6.99 9.04 95% 88% 99%
Shopping Centers
Chelsea Square Houston, TX 70,275 sq. ft. 9.51 8.67 8.38 77% 78% 69%
Summit at
Bridgewood Fort Worth, TX 48,696 sq. ft. 9.27 8.92 9.58 63% 62% 68%
The Trust owns a 36.3% general partner interest and TCI owns a 63.7% combined
general and limited partner interest in Tri-City Limited Partnership which in
turn owns the five properties listed above. See ITEM 8. "FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA." In July 1995, Tri-City obtained first mortgage
financing of $1.4 million secured by the previously unencumbered MacArthur
Mills Office Park. The mortgage bears interest at 9.32% per annum, requires
monthly payments of principal and interest of $12,186 and matures August 1,
2005. The Trust received $486,000 of the net financing proceeds. In
conjunction with the financing, Tri-City paid a mortgage brokerage and equity
refinancing fee of $14,000 to BCM, based on the $1.4 million financing. In
1995, the Trust made no advances to the partnership but did receive $218,000 in
operating distributions from the partnership.
Mortgage Loans
Prior to 1991, a substantial portion of the Trust's assets had been invested in
mortgage notes receivable secured by income-producing real estate. The Trust's
mortgage notes have included first mortgage loans, wraparound mortgage loans
and junior mortgage loans. The Trust expects that even if the proposal to
convert the Trust into a perpetual life corporation is approved, that it will
not seek to fund or acquire mortgage loans, other than those which it may
originate in conjunction with providing purchase money financing of a property
sale. See ITEM 1. "BUSINESS". BCM, in its capacity as a mortgage servicer,
services the Trust's mortgage note.
During 1995, the Trust funded no new mortgage loans and made no additional
advances on its existing mortgage loan.
Wraparound Mortgage Loans. A wraparound mortgage loan, sometimes called an
all-inclusive loan, is a mortgage loan having an original principal
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ITEM 2. PROPERTIES (Continued)
Mortgage Loans
amount equal to the outstanding balance under the prior existing mortgage
loan(s) plus the amount actually advanced under the wraparound mortgage loan.
At December 31, 1995, the Trust's mortgage notes receivable portfolio consisted
of one performing wraparound mortgage note, with an outstanding balance of $2.0
million, secured by a shopping center in Joliet, Illinois.
Partnership mortgage loans. The Trust owns a 40% general partner interest and
TCI owns a 60% general partner interest in Nakash Income Associates ("NIA").
NIA in turn owns two wraparound mortgage notes receivable, one of which is
secured by the Green Hills Shopping Center ("Green Hills") in Onandaga, New
York. The shopping center in turn is owned by Green Hills Associates ("GHA").
In July 1995, GHA informed NIA that it had determined that further investment
in Green Hills was not justified, and further that it has offered to deed the
property back to the first lienholder in lieu of foreclosure. As GHA has no
other assets, the wraparound note receivable held by NIA will become
uncollectible, and therefore, NIA recorded a provision for loss of $1.5 million
to write its wraparound note receivable down to the balance of the first lien
mortgage. The Trust's equity share of the loss was $600,000. The property has
been placed in receivership and foreclosure is anticipated on or about March
29, 1996.
In September 1995, the Trust received notice from NIA that its other wraparound
note receivable had been modified in conjunction with the modification of the
underlying note payable. NIA recorded a provision for loss of $212,000 on such
modification of which the Trust's equity share was $85,000.
ITEM 3. LEGAL PROCEEDINGS
Olive Litigation
In February 1990, the Trust, together with CMET, National Income Realty Trust
("NIRT") and TCI, three real estate entities with, at the time, the same
officers, directors or trustees and advisor as the Trust, entered into a
settlement of a class and derivative action entitled Olive et al. v. National
Income Realty Trust et al., in the United States District Court for the
Northern District of California, relating to the operation and management of
each of such entities. On April 23, 1990, the Court granted final approval of
the terms of the settlement.
On May 4, 1994, the parties entered into a Modification of Stipulation of
Settlement dated April 27, 1994 (the "Modification") which settled subsequent
claims of breaches of the settlement which were asserted by the plaintiffs and
modified certain provisions of April 1990 settlement. The Modification was
preliminarily approved by the court July 1, 1994. Final court approval of the
Modification was entered on December 12, 1994. The effective date of the
Modification was January 11, 1995.
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ITEM 3. LEGAL PROCEEDINGS (Continued)
Olive Litigation (Continued)
The Modification, among other things, provided for the addition of three new
unaffiliated members to the Trust's Board of Trustees and set forth new
requirements for the approval of any transactions with affiliates until April
28, 1999. In addition, BCM, the Trust's advisor, Gene E. Phillips and William
S. Friedman, who served as President and Trustee of the Trust until February
24, 1994, President of BCM until May 1, 1993 and director of BCM until December
22, 1989, agreed to pay a total of $1.2 million to the Trust, CMET, NIRT and
TCI, of which the Trust's share is $150,000. As of March 1, 1996, the Trust
had received payments totaling $119,000. The remaining $31,000 is to be paid
in monthly installments through August 1, 1996.
Under the Modification, the Trust, CMET, NIRT, TCI and their shareholders
released the defendants from any claims relating to the plaintiffs'
allegations. The Trust, CMET, NIRT and TCI also agreed to waive any demand
requirement for the plaintiffs to pursue claims on behalf of each of them
against certain persons or entities. The Modification also requires that any
shares of the Trust held by Messrs. Phillips, Friedman or their affiliates
shall be (i) voted in favor of the reelection of all current members of the
Trust's Board of Trustees that stand for reelection during the two calendar
years following the effective date of the Modification and (ii) voted in favor
of all new members of the Trust's Board of Trustees appointed pursuant to the
terms of the Modification that stand for reelection during the three calendar
years following the effective date of the Modification.
Pursuant to the terms of the Modification, certain related party transactions
which the Trust may enter into prior to April 28, 1999, require the unanimous
approval of the Trust's Board of Trustees. In addition, such related party
transactions are to be discouraged and may only be entered into in exceptional
circumstances and after a determination by the Trust's Board of Trustees that
the transaction is in the best interests of the Trust and that no other
opportunity exists that is as good as the opportunity presented by such
transaction.
For purposes of the Modification requirements, the term "related party
transaction" means and includes (i) any transaction between or among the Trust
or CMET, NIRT or TCI or any of their affiliates or subsidiaries; (ii) any
transaction between or among the Trust, its affiliates or subsidiaries and the
Advisor, Mr. Phillips, Mr. Friedman or any of their affiliates; and (iii) any
transaction between or among the Trust or any of its affiliates or subsidiaries
and a third party with whom the Advisor, Mr. Phillips, Mr. Friedman or any of
their affiliates has an ongoing or contemplated business or financial
transaction or relationship of any kind, whether direct or indirect, or has had
such a transaction or relationship in the preceding one year.
The Modification requirements for related party transactions do not apply to
direct contractual agreements for services between the Trust and the Advisor or
one of its affiliates, (including the Advisory Agreement, the Brokerage
Agreement and the property management con-
14
15
ITEM 3. LEGAL PROCEEDINGS (Continued)
Olive Litigation (Continued)
tracts). These agreements, pursuant to the specific terms of the Modification,
require the prior approval by two-thirds of the Trustees of the Trust, and if
required, approval by a majority of the Trust's shareholders. The Modification
requirements for related party transactions also do not apply to joint ventures
between or among the Trust and CMET, NIRT or TCI or any of their affiliates or
subsidiaries and a third party having no prior or intended future business or
financial relationship with Mr. Phillips, Mr. Friedman, the Advisor, or any
affiliate of such parties. Such joint ventures may be entered into on the
affirmative vote of a majority of the Trustees of the Trust.
The Modification also terminated a number of the provisions of the settlement,
including the requirement that the Trust, CMET, NIRT and TCI maintain a Related
Party Transaction Committee and a Litigation Committee of their respective
Boards. The court retains jurisdiction to enforce the Modification.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of the Trust's shareholders is scheduled to be held on March
15, 1996. At such meeting the Trust's shareholders will be presented with a
proposal to convert the Trust, currently a California business trust with a
finite life, into a Nevada corporation with a perpetual life.
_________________________
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF BENEFICIAL INTEREST AND
RELATED SHAREHOLDER MATTERS
The Trust's shares of beneficial interest are traded on the American Stock
Exchange ("AMEX") under the symbol "IOT". The following table sets forth the
high and low prices for the Trust's shares of beneficial interest as reported
on the AMEX.
QUARTER ENDED HIGH LOW
- ------------------ -------- -------
March 31, 1996
(through March 1, 1996)............ $ 19 5/8 $ 19 5/8
March 31, 1995......................... 20 3/8 19
June 30, 1995.......................... 20 19
September 30, 1995..................... 20 5/8 19
December 31, 1995...................... 20 19
15
16
ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF BENEFICIAL INTEREST AND
RELATED SHAREHOLDER MATTERS (Continued)
QUARTER ENDED HIGH LOW
- ------------------ -------- -------
March 31, 1994......................... $ 20 $ 15 1/8
June 30, 1994.......................... 20 7/8 18 1/4
September 30, 1994..................... 20 3/4 17 1/2
December 31, 1994...................... 19 5/8 17 1/2
As of March 1, 1996 the closing price of the Trust's shares of beneficial
interest on the AMEX was $19.63 per share.
As of March 1, 1996, the Trust's shares of beneficial interest were held by
2,177 holders of record.
In January 1993 the Trust's Board of Trustees approved the resumption of
regular quarterly distributions. The Trust paid quarterly distributions in
1995 and 1994 as follows:
Amount
Per
Date Declared Record Date Payable Date Share
- ---------------- ----------------- ----------------- ------
March 3, 1995 March 15, 1995 March 31, 1995 $.15
May 22, 1995 June 15, 1995 June 30, 1995 .15
August 25, 1995 September 15, 1995 September 30, 1995 .15
November 30, 1995 December 15, 1995 December 31, 1995 .15
February 15, 1994 March 1, 1994 March 21, 1994 $.15
May 6, 1994 June 1, 1994 June 15, 1994 .15
August 24, 1994 September 15, 1994 September 30, 1994 .15
December 1, 1994 December 15, 1994 December 30, 1994 .15
The Trust reported to the Internal Revenue Service that 100% of the
distributions paid in 1995 and 1994 represented a return of capital.
On December 5, 1989, the Trust's Board of Trustees approved a share repurchase
program. The Trust's Board of Trustees has authorized the Trust to repurchase
a total of 100,000 of its shares of beneficial interest pursuant to such
program. Through March 1, 1996, the Trust has repurchased 92,352 shares
pursuant to such program at a cost to the Trust of $1.6 million. The Trust
repurchased none of its shares of beneficial interest 1995. In 1996, through
March 1, 1996, the Trust has repurchased 24,400 of its shares of beneficial
interest at a cost to the Trust of $484,000.
On March 24, 1989, the Trust distributed one share purchase right for each
outstanding share of beneficial interest of the Trust. On December 10, 1991,
the Trust's Board of Trustees voted to redeem the rights having determined that
the they were no longer necessary to protect the Trust from coercive tender
offers. On February 10, 1992, the rights were redeemed, the Trust's
shareholders receiving $.04 for each Right. In connection with such
redemption, Messrs. Phillips and Friedman and
16
17
ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF BENEFICIAL INTEREST AND
RELATED SHAREHOLDER MATTERS (Continued)
their affiliates, who owned approximately 12% of the Trust's outstanding shares
of beneficial interest at the time, agreed not to acquire more than 40% of the
Trust's outstanding shares of beneficial interest without the prior action of
the Trust's Board of Trustees to the effect that they do not object to such
increased ownership.
In August 1994, Mr. Phillips and his affiliates, primarily ART and TCI, owned
approximately 39.8% of the Trust's outstanding shares of beneficial interest.
This shareholder group desired to purchase additional shares of the Trust and
requested that the Trust's Board of Trustees consider the elimination of the
limitation on the percentage of shares which may be acquired by the shareholder
group. The Board of Trustees reviewed the limitation and determined that, due
to the fact that Mr. Friedman is no longer affiliated with the shareholder
group, and had disposed of any shares of the Trust which he or his affiliates
may have owned, the limitation should no longer apply to Mr. Friedman or his
affiliates. The Board of Trustees also determined that there was no reason to
object to the purchase of additional shares of the Trust by the shareholder
group and on August 23, 1994, the Trust's Board of Trustees adopted a
resolution to the effect that they do not object to the acquisition of up to
49% of the Trust's outstanding shares of beneficial interest by Mr. Phillips
and his affiliates. In determining total ownership, shares of beneficial
interest of the Trust owned by Mr. Friedman and his affiliates are no longer
to be included. Pursuant to this action, Mr. Phillips and his affiliates may
not acquire more than 49% of the Trust's outstanding shares of beneficial
interest without the prior action of the Trust's Board of Trustees to the
effect that they do not object to such increased ownership. At March 1, 1996,
Mr. Phillips and his affiliates, primarily ART and TCI, owned approximately 50%
of the Trust's outstanding shares of beneficial interest. The increase in
ownership above 49% is the result of the Trust repurchasing its shares of
beneficial interest in 1996.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
17
18
ITEM 6. SELECTED FINANCIAL DATA
For the Years Ended December 31,
--------------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ------------ ------------ ------------- -------------
(dollars in thousands, except per share)
EARNINGS DATA
Income..................... $ 7,919 $ 6,852 $ 7,113 $ 6,593 $ 6,750
Expense.................... 8,825 7,139 7,044 7,063 15,803
----------- ------------ ------------ ------------- -------------
Income (loss) before
(loss) on sale of
real estate and
extraordinary gain........ (906) (287) 69 (470) (9,053)
(Loss) on sale of real
estate.................... - - - (81) -
Extraordinary gain......... - - 806 - 4,765
----------- ------------ ------------ ------------- -------------
Net income (loss).......... $ (906) $ (287) $ 875 $ (551) $ (4,288)
=========== ============ ============ ============= =============
PER SHARE DATA
Income (loss) before
extraordinary gain........ $ (1.14) $ (.36) $ .09 $ (.64) $ (9.97)
Extraordinary gain......... - - 1.00 - 5.25
----------- ------------ ------------ ------------- -------------
Net income (loss).......... $ (1.14) $ (.36) $ 1.09 $ (.64) $ (4.72)
=========== ============ ============ ============= =============
Distributions per share.... $ .60 $ .60 $ .50 $ - $ 1.44
Weighted average
shares outstanding........ 791,444 791,444 804,716 864,321 907,665
December 31,
--------------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ------------ ------------ ------------- -------------
(dollars in thousands, except per share)
BALANCE SHEET DATA
Notes and interest
receivable................ $ 1,986 $ 1,974 $ 2,983 $ 2,922 $ 2,583
Real estate held for sale
Foreclosed................ 845 15,878 15,121 15,387 16,946
Other..................... - 25,157 25,710 26,259 26,833
Real estate held for
investment................ 39,480 - - - -
Total assets............... 49,169 49,035 50,127 51,275 52,401
Notes and interest
payable................... 22,682 20,717 21,354 22,447 22,651
Redeemable shares of
beneficial interest....... - - - - 6,062
Shareholders' equity....... 24,191 25,572 26,334 26,380 20,904
Book value per share....... $ 30.57 $ 32.31 $ 33.27 $ 30.52 $ 30.14
18
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Income Opportunity Realty Trust (the "Trust") was formed to invest in mortgage
loans on real estate, including first, wraparound and junior mortgage loans,
and in equity interests in real estate through acquisitions, leases and
partnerships. The Trust was organized on December 14, 1984 and commenced
operations on April 10, 1985.
Under its Declaration of Trust, the Trust is a self-liquidating trust and is
scheduled, unless and until the Trust's shareholders decide on a contrary
course of action, to begin liquidation of its assets prior to October 24, 1996.
The Trust's Declaration of Trust also requires the distribution to the Trust's
shareholders of (i) the net cash proceeds from sale or refinancing of equity
investments received by the Trust, and (ii) the net cash proceeds from the
satisfaction of mortgage notes receivable received after October 24, 1996. The
Trust's Board of Trustees has approved a proposal to convert the Trust from a
California business trust into a Nevada corporation. The Trust's shareholders
will vote on this proposal at a special meeting of shareholders scheduled to be
held March 15, 1996. The approval of such proposal will convert the Trust from
a fixed life trust into a perpetual life corporation. Approval requires the
vote of a majority of the Trust's shareholders entitled to vote. As of the
February 7, 1996 record date for the special meeting, the Trust's advisor and
its affiliates held shares representing 48% of the shares then outstanding.
Such parties intend to vote their shares for the proposal in accordance with
the recommendation of the Trust's Board of Trustees. Accordingly, the Trust's
management anticipates that the proposal will be approved and the Trust will be
converted into a perpetual life corporation following the special meeting.
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 1995 aggregated $3.0 million compared
with $232,000 at December 31, 1994. The Trust's principal sources of cash have
been and will continue to be property operations, proceeds from property sales
and refinancings, collection of mortgage notes receivable and partnership
distributions. The Trust anticipates that it will have sufficient cash in 1996
to meet its various cash requirements including the payment of distributions,
debt service obligations and property renovation and/or improvement costs. If
the proposal to convert the Trust into a perpetual life corporation is
approved, the Trust expects that it will finance its currently unencumbered
office buildings, using the net proceeds to fund property acquisitions.
In December 1995, the Trust refinanced the mortgages secured by two of its
apartment complexes receiving net refinancing proceeds of $2.1 million after
the payoff of $3.8 million in existing mortgage debt.
Scheduled principal payments on notes payable of $375,000 are due in 1996.
19
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
The Trust owns a 36.3% general partner interest and Transcontinental Realty
Investors, Inc. ("TCI") owns a 63.7% combined general and limited partner
interest in the Tri-City Limited Partnership ("Tri-City"). In 1995, the Trust
received $218,000 in distributions from Tri-City's operating cash flow and
$486,000 from its financing cash flow. In 1995, the Trust also received
$80,000 in distributions from and made $20,000 in contributions to Nakash
Income Associates ("NIA"). The Trust owns a 40% general partner interest and
TCI owns a 60% general partner interest in NIA.
The Trust has paid regular quarterly distributions since 1993. In each of 1995
and 1994, the Trust paid distributions to shareholders totaling $475,000 ($.60
per share). In March 1996, the Trust's Board of Trustees approved an increase
in the Trust's quarterly distribution rate from $.15 per share to $.20 per
share or $.80 per share on an annualized basis. The Trust expects it will make
distributions totaling $633,000 in 1996.
On a quarterly basis, the Trust's management reviews the carrying values of the
Trust's mortgage note receivable and properties. Generally accepted accounting
principles require that the carrying value of an asset cannot exceed the lower
of its cost or its estimated net realizable value. In those instances in which
estimates of net realizable value of the Trust's assets are less than the
carrying value thereof, at the time of evaluation, a provision for loss is
recorded by a charge against earnings. Estimated net realizable value of the
Trust's mortgage note receivable is based on management's review and evaluation
of the collateral property securing such note. The property review generally
includes selective property inspections, a review of the property's current
rents compared to market rents, a review of the property's expenses, a review
of maintenance requirements, discussions with the manager of the property and a
review of properties in the surrounding area.
Results of Operations
1995 COMPARED TO 1994. For the year 1995, the Trust incurred a net loss of
$906,000, as compared with a net loss of $287,000 in 1994. The primary factor
contributing to the Trust's net loss was an increase in equity in losses of
partnerships of $830,000, as discussed in detail below.
Rents in 1995, were $7.7 million, as compared to $6.6 million in 1994. Of this
increase, $567,000 is due to the March 2, 1995 foreclosure of the Spanish Trace
Apartments, $360,000 is due to an increase in occupancy at one of the Trust's
office buildings from 92% to 100% and $115,000 is due to an increase in
occupancy at one of the Trust's apartment complexes from 91% to 94%. Rents are
expected to increase in 1996 due to anticipated increases in rental rates at
the Trust's properties.
20
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Property operations expense for the year ended December 31, 1995 was $4.0
million as compared to $3.4 million for 1994. This increase is primarily due
to the foreclosure of the Spanish Trace Apartments.
Equity in income (loss) of partnerships was a loss of $744,000 in 1995 compared
to income of $86,000 in 1994. The equity loss for 1995 is primarily due to a
modification of a wraparound mortgage note receivable and underlying note
payable by Nakash Income Associates ("NIA"), a partnership in which the Trust
has a 40% general partner interest and to the writedown of a wraparound
mortgage note receivable to the balance of the underlying mortgage payable also
by NIA. The Trust's equity share of the loss on the note modification was
$85,000 and its equity share of the note writedown was $601,000. See NOTE 5.
"INVESTMENT IN EQUITY METHOD PARTNERSHIPS."
Interest income decreased from $294,000 in 1994 to $231,000 in 1995. This
decrease is attributable to the foreclosure of the Spanish Trace Apartments.
Interest income in 1996 is expected to approximate that in 1995. See NOTE 2.
"NOTES AND INTEREST RECEIVABLE".
Interest expense and depreciation in 1995 approximated that of 1994. If the
proposal to convert the Trust into a perpetual life corporation is approved by
the Trust's shareholders, it is anticipated that the Trust will finance its
presently unencumbered office buildings using the net proceeds to acquire
additional properties on a leveraged basis, which will result in both increased
interest expense and depreciation in 1996.
Advisory fee expense decreased from $367,000 in 1994 to $316,000 in 1995. The
decrease is attributable to the refund of a portion of the advisory fee due to
the operating expenses of the Trust exceeding the limitation as provided in the
Trust's Declaration of Trust. The advisory fee will increase in 1996 if the
Trust acquires additional properties, increasing its gross assets, the basis
for such fee.
General and administrative expenses for 1995 increased to $699,000 from
$555,000 in 1994. The increase is primarily due to legal fees incurred related
to the proposed conversion of the Trust into a perpetual life corporation, and
to increased Trustee fees.
1994 COMPARED TO 1993. For the year 1994, the Trust had a net loss of
$287,000, as compared with net income of $875,000 in 1993. The Trust's 1993
net income included an extraordinary gain of $806,000 on the early payoff of
mortgage debt. The primary factors contributing to the Trust's 1994 net loss
are discussed in the following paragraphs.
Rents in 1994 were $6.6 million, as compared to $6.8 million in 1993. Of this
decrease, $137,000 is due to reduced common area maintenance recovery at the
Saratoga Office Center due to a decrease in occupancy from an average of 87%
in 1993 to an average of 84% in 1994.
21
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Property operations expense in 1994 was $3.4 million, comparable to the $3.4
million for 1993. Increases of $192,000 attributable to increased personnel,
cleaning and replacement expenses at two of the Trust's apartment complexes,
were offset by a decrease of $133,000 at the Trust's office buildings due to
decreases in real estate taxes, cleaning and leasing expenses.
Equity in income of partnerships was $86,000 in 1994, as compared to $203,000
in 1993. The decrease is attributable to an increase in repair expenses
representing the deductible portion of a fire loss at one of the Tri-City
apartment complexes.
Interest income of $294,000 for 1994 approximated the $308,000 in 1993.
Interest expense and depreciation in 1994 approximated that in 1993.
The advisory fee was $367,000 in 1994 as compared to $447,000 in 1993. The
decrease is due to the Trust having paid a net income incentive fee in 1993,
while no such fee was paid in 1994.
General and administrative expenses were $555,000 in 1994 as compared to
$700,000 in 1993. The decrease is due to a decrease in legal fees associated
with the Olive litigation which was settled in 1994. See NOTE 15. "COMMITMENTS
AND CONTINGENCIES."
In 1993, the Trust recognized an extraordinary gain of $806,000 on the early
payoff of the mortgage secured by the Porticos Apartments. The Trust reported
no such gain in 1994.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, the Trust may be potentially liable for removal or remediation
costs, as well as certain other potential costs, relating to hazardous or toxic
substances (including governmental fines and injuries to persons and property)
where property-level managers have arranged for the removal, disposal or
treatment of hazardous or toxic substances. In addition, certain environmental
laws impose liability for release of asbestos-containing materials into the
air, and third parties may seek recovery from the Trust for personal injury
associated with such materials.
The Trust's management is not aware of any environmental liability relating to
the above matters that would have a material adverse effect on the Trust's
business, assets or results of operations.
Inflation
The effects of inflation on the Trust's operations are not quantifiable.
Revenues from property operations fluctuate proportionately with inflationary
increases and decreases in housing costs. Fluctuations in
22
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Inflation (Continued)
the rate of inflation also affect the sale values of properties and,
correspondingly, the ultimate realizable value of the Trust's real estate and
notes receivable portfolios. Inflation also has an effect on the Trust's
earnings from short-term investments.
For the years 1993, 1994 and 1995, the Trust elected and in the opinion of the
Trust's management qualified, to be taxed as a Real Estate Investment Trust
("REIT") as defined under Sections 856 through 860 of the Internal Revenue Code
of 1986, as amended (the "Code"). To continue to qualify for federal taxation
as a REIT under the Code, the Trust is required to hold at least 75% of the
value of its total assets in real estate assets, government securities, cash
and cash equivalents at the close of each quarter of each taxable year. The
Code also requires a REIT to distribute at least 95% of its REIT taxable income
plus 95% of its net income from foreclosure property, all as defined in Section
857 of the Code, on an annual basis to shareholders.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121 - "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of."
As discussed above, the Trust is currently a self liquidating trust. However,
the Trust's management expects that the Trust's shareholders will approve the
conversion of the Trust to a perpetual life corporation at a special meeting of
the Trust's shareholders to be held on March 15, 1996. In contemplation of
such approval the Trust's management has classified all of the Trust's
properties, except for the foreclosed Spanish Trace Apartments, as held for
investment as of December 31, 1995.
SFAS No. 121 requires that long-lived assets be considered impaired "...if the
sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset." If impairment exists,
an impairment loss shall be recognized, by a charge against earnings, equal to
"...the amount by which the carrying amount of the asset exceeds the fair value
of the asset." If impairment of a long-lived asset is recognized, the carrying
amount of the asset shall be reduced by the amount of the impairment, shall be
accounted for as the asset's "new cost" and such new cost shall be depreciated
over the asset's remaining useful life.
SFAS No. 121 further requires that long-lived assets held for sale "...be
reported at the lower of carrying amount or fair value less cost to sell." If
a reduction in a held for sale asset's carrying amount to fair value less cost
to sell is required, a provision for loss shall be recognized by a charge
against earnings. Subsequent revisions, either upward or downward, to a held
for sale asset's estimated fair value less cost to sell shall be recorded as an
adjustment to the asset's carrying
23
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Recent Accounting Pronouncements (Continued)
amount, but not in excess of the asset's carrying amount when originally
classified as held for sale. A corresponding charge against or credit to
earnings is to be recognized. Long-lived assets held for sale are not to be
depreciated. SFAS No. 121 is effective for fiscal years beginning after
December 15, 1995.
The Trust's management estimates that if the Trust had adopted SFAS No. 121
effective January 1, 1995, the Trust would have recorded no depreciation in
1995 applicable to the Spanish Trace Apartments, the Trust's reported net loss
for 1995 would have decreased by $20,000 and that a provision for loss to
reduce any Trust property's carrying amount to its respective fair value
less cost to sell would not have been required. The Trust adopted SFAS No. 121
effective January 1, 1996.
24
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
INCOME OPPORTUNITY REALTY TRUST
Report of Independent Certified Public Accountants......... 27
Consolidated Balance Sheets -
December 31, 1995 and 1994.............................. 28
Consolidated Statements of Operations -
Years Ended December 31, 1995, 1994 and 1993............ 29
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1995, 1994 and 1993............ 30
Consolidated Statements of Cash Flows -
Years Ended December 31, 1995, 1994 and 1993............ 31
Notes to Consolidated Financial Statements................. 33
Schedule III - Real Estate and Accumulated Depreciation.... 46
Schedule IV - Mortgage Loans on Real Estate............... 48
TRI-CITY LIMITED PARTNERSHIP
Report of Independent Certified Public Accountants......... 50
Balance Sheets - December 31, 1995 and 1994................ 51
Statements of Operations -
Years ended December 31, 1995, 1994 and 1993............ 52
Statements of Partners' Equity -
Years ended December 31, 1995, 1994 and 1993............ 53
Statements of Cash Flows -
Years ended December 31, 1995, 1994 and 1993............ 54
Notes to Financial Statements.............................. 55
Schedule III - Real Estate and Accumulated Depreciation.... 58
25
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
PAGE
----
NAKASH INCOME ASSOCIATES
Report of Independent Certified Public Accountants......... 60
Balance Sheets - December 31, 1995 and 1994................ 61
Statements of Operations -
Years ended December 31, 1995, 1994 and 1993............ 62
Statements of General Partners' Equity -
Years ended December 31, 1995, 1994 and 1993............ 63
Statements of Cash Flows -
Years ended December 31, 1995, 1994 and 1993............ 64
Notes to Financial Statements.............................. 65
Schedule IV - Mortgage Loans on Real Estate................ 68
All other schedules are omitted because they are not required, are not
applicable or the information required is included in the Financial Statements
or the notes thereto.
26
27
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Trustees of
Income Opportunity Realty Trust
We have audited the accompanying consolidated balance sheets of Income
Opportunity Realty Trust and Subsidiaries as of December 31, 1995 and 1994 and
the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
We have also audited the schedules listed in the accompanying index. These
financial statements and schedules are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
schedules are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and schedules. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements and schedules.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Income
Opportunity Realty Trust and Subsidiaries as of December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
Also, in our opinion, the schedules referred to above present fairly, in all
material respects, the information set forth therein.
BDO SEIDMAN, LLP
Dallas, Texas
March 1, 1996
27
28
INCOME OPPORTUNITY REALTY TRUST
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------------
1995 1994
--------------- ---------------
(dollars in thousands)
Assets
Notes and interest receivable,
performing.................................................... $ 1,986 $ 1,974
Foreclosed real estate held for sale, net of
accumulated depreciation ($20 in 1995 and $1,128
in 1994)...................................................... 966 15,999
Real estate held for sale, net of accumulated
depreciation ($3,927 in 1994)................................. - 25,157
Less - allowance for estimated losses.......................... (121) (121)
--------------- ---------------
2,831 43,009
Real estate held for investment, net of accumulated
depreciation ($6,087 in 1995)................................. 39,480 -
Investment in partnerships..................................... 2,472 3,980
Cash and cash equivalents...................................... 2,988 232
Other assets (including $90 in 1995 and $44 in
1994 from affiliates)......................................... 1,398 1,814
--------------- ---------------
$ 49,169 $ 49,035
=============== ===============
Liabilities and Shareholders' Equity
Liabilities
Notes and interest payable..................................... $ 22,682 $ 20,717
Other liabilities (including $243 in 1995 and $407
in 1994 to affiliates)........................................ 2,296 2,746
--------------- ---------------
24,978 23,463
Commitments and contingencies
Shareholders' equity
Shares of beneficial interest, no par value;
authorized shares, unlimited; issued and
outstanding 791,444 shares in 1995 and 1994................... 3,347 3,347
Paid-in capital................................................ 62,093 62,093
Accumulated distributions in excess of accumulated
earnings...................................................... (41,249) (39,868)
--------------- ---------------
24,191 25,572
--------------- ---------------
$ 49,169 $ 49,035
=============== ===============
The accompanying notes are an integral part of these
Consolidated Financial Statements.
28
29
INCOME OPPORTUNITY REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
------------------------------------------------------------
1995 1994 1993
---------------- ---------------- ---------------
(dollars in thousands, except per share)
Income
Rents...................................... $ 7,688 $ 6,558 $ 6,805
Interest................................... 231 294 308
---------------- ---------------- ---------------
7,919 6,852 7,113
Expenses
Property operations (including $156
in 1995, $146 in 1994 and $133 in
1993 to affiliates)..................... 4,035 3,425 3,382
Equity in loss (income) of
partnerships............................ 744 (86) (203)
Interest................................... 1,979 1,911 1,7690
Depreciation............................... 1,052 967 949
Advisory fee to affiliate.................. 316 367 447
General and administrative
(including $140 in 1995, $158 in
1994 and $160 in 1993 to
affiliate).............................. 699 555 700
---------------- ---------------- ---------------
8,825 7,139 7,044
---------------- ---------------- ---------------
Income (loss) before extraordinary
gain....................................... (906) (287) 69
Extraordinary gain.......................... - - 806
---------------- ---------------- ---------------
Net income (loss)........................... $ (906) $ (287) $ 875
================ ================ ===============
Earnings per share
Income (loss) before extraordinary
gain....................................... $ (1.14) $ (.36) $ .09
Extraordinary gain.......................... - - 1.00
---------------- ---------------- ---------------
Net income (loss)........................... $ (1.14) $ (.36) $ 1.09
================ ================ ===============
Weighted average shares of
beneficial interest used in
computing earnings per share............... 791,444 791,444 804,716
================ ================ ===============
The accompanying notes are an integral part of these
Consolidated Financial Statements.
29
30
INCOME OPPORTUNITY REALTY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Shares of Distributions
Beneficial Interest in Excess of
------------------------ Paid-in Accumulated Sharehoders'
Shares Amount Capital Earnings Equity
-------- ------------ ------------- -------------- --------------
(dollars in thousands)
Balance, January 1, 1993 864,321 $ 3,457 $ 62,498 $ (39,575) $ 26,380
Repurchase of shares of
beneficial interest........ (72,877) (110) (405) - (515)
Distributions ($.50 per
share)..................... - - - (406) (406)
Net income.................... - - - 875 875
-------- ------------ ------------- -------------- --------------
Balance, December 31,
1993....................... 791,444 3,347 62,093 (39,106) 26,334
Distributions ($.60 per
share)..................... - - - (475) (475)
Net (loss).................... - - - (287) (287)
-------- ------------ ------------- -------------- --------------
Balance, December 31,
1994....................... 791,444 3,347 62,093 (39,868) 25,572
Distributions ($.60 per
share)..................... - - - (475) (475)
Net (loss).................... - - - (906) (906)
-------- ------------ ------------- -------------- --------------
Balance, December 31,
1995....................... 791,444 $ 3,347 $ 62,093 $ (41,249) $ 24,191
======== ============ ============= ============== ==============
The accompanying notes are an integral part of these
Consolidated Financial Statements.
30
31
INCOME OPPORTUNITY REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
-----------------------------------------------
1995 1994 1993
-------------- ------------- -------------
(dollars in thousands)
Cash Flows from Operating Activities
Rents collected................................ $ 7,685 $ 6,694 $ 6,703
Interest collected............................. 219 282 248
Interest paid.................................. (1,816) (1,828) (1,748)
Payments for property operations
(including $156 in 1995, $146 in 1994
and $133 in 1993 to affiliate).............. (3,776) (2,973) (3,739)
Advisory fee paid to affiliate................. (316) (371) (449)
General and administrative expenses paid
(including $140 in 1995, $158 in 1994
and $160 in 1993 to affiliates)............. (851) (792) (380)
Funding of partnerships........................ (20) (145) (92)
Distributions from partnerships operating
cash flow................................... 298 408 478
Escrow funding................................. (131) - (608)
Other.......................................... 88 (331) 825
-------------- ------------- -------------
Net cash provided by operating
activities............................ 1,380 944 1,238
Cash Flows from Investing Activities
Real estate improvements....................... (341) (184) (134)
-------------- ------------- -------------
Net cash (used in) investing activities..... (341) (184) (134)
Cash Flows from Financing Activities
Proceeds from notes payable.................... 6,300 - 10,500
Payments on notes payable...................... (4,300) (635) (11,009)
Debt issue costs............................... (294) - (237)
Distributions from partnerships financing
cash flow................................... 486 - -
Distributions to shareholders.................. (475) (475) (406)
Repurchase of shares of beneficial
interest.................................... - - (515)
-------------- ------------- -------------
Net cash provided by (used in)
financing activities.................. 1,717 (1,110) (1,667)
Net increase (decrease) in cash and
cash equivalents............................... 2,756 (350) (563)
Cash and cash equivalents, beginning of year 232 582 1,145
-------------- ------------- -------------
Cash and cash equivalents, end of year.......... $ 2,988 $ 232 $ 582
============== ============= =============
The accompanying notes are an integral part of these
Consolidated Financial Statements.
31
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INCOME OPPORTUNITY REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31,
-----------------------------------------------
1995 1994 1993
-------------- ------------- -------------
(dollars in thousands)
Reconciliation of net income (loss) to net
cash provided by operating activities
Net income (loss).................................. $ (906) $ (287) $ 875
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities
Depreciation and amortization................ 1,238 955 890
Extraordinary gain........................... - - (806)
Equity in loss (income) of partnerships 744 (86) (203)
Funding of partnerships...................... (20) (145) (92)
Distributions from partnerships
operating cash flow....................... 298 408 478
(Increase) decrease in other assets.......... (287) (198) 119
(Decrease) in interest payable............... (35) (3) (3)
Increase (decrease) in other
liabilities............................... 348 300 (20)
-------------- ------------- -------------
Net cash provided by operating
activities........................ $ 1,380 $ 944 $ 1,238
============== ============= =============
Schedule of noncash investing and financing
activities
Forgiveness of notes payable through
discount on early payoff of mortgage............ $ - $ - $ 806
Carrying value of real estate obtained
through insubstance foreclosure in
satisfaction of note receivable with a
carrying value of $990.......................... - 990 -
The accompanying notes are an integral part of these
Consolidated Financial Statements.
32
33
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements of Income Opportunity Realty
Trust and consolidated entities(the "Trust") have been prepared in conformity
with generally accepted accounting principles, the most significant of which
are described in NOTE 1. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES." These,
along with the remainder of the Notes to Consolidated Financial Statements, are
an integral part of these Consolidated Financial Statements. The data
presented in the Notes to Consolidated Financial Statements are as of December
31 of each year and for the year then ended, unless otherwise indicated.
Dollar amounts in tables are in thousands, except per share amounts.
Certain balances for 1994 and 1993 have been reclassified to conform to the
1995 presentation.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Trust business. Income Opportunity Realty Trust ("IORT"), is
a California business trust organized on December 14, 1984. The Trust may hold
interests in real estate through direct ownership, leases and partnerships and
it may also invest in mortgage loans on real estate, including first,
wraparound and junior mortgage loans.
The Trust is a self-liquidating trust and is scheduled, unless and until the
Trust's shareholders decide on a contrary course of action, to begin
liquidation of its assets prior to October 24, 1996. The Trust's Declaration
of Trust also requires the distribution to the Trust's shareholders of (i) the
net cash proceeds from sale or refinancing of equity investments received by
the Trust, and (ii) after October 24, 1996 the net cash proceeds received from
the satisfaction of mortgage notes receivable.
The Trust's Board of Trustees has approved a proposal to convert the Trust from
a California business trust into a Nevada corporation. The Trust's
shareholders will vote on this proposal at a special meeting of shareholders
scheduled to be held March 15, 1996. The approval of such proposal will
convert the Trust from a fixed life trust into a perpetual life corporation.
Approval requires the vote of a majority of the Trust's shareholders entitled
to vote. As of the February 7, 1996 record date for the special meeting the
Trust's advisor and its affiliates held shares representing 48% of the shares
then outstanding. Such parties intend to vote their shares for the proposal in
accordance with the recommendation of the Trust's Board of Trustees.
Accordingly, the Trust's management anticipates that the proposal will be
approved and the Trust will be converted into a perpetual life corporation
following the special meeting.
The Trust's management does not believe that the Trust's status as a
liquidating Trust impaired the carrying value of the Trust's assets because
liquidation was expected to be carried out in an orderly fashion.
33
34
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Basis of consolidation. The Consolidated Financial Statements include the
accounts of IORT and subsidiaries and partnerships which it controls. All
intercompany transactions and balances have been eliminated.
Accounting estimates. In the preparation of the Trust's Consolidated Financial
Statements in conformity with generally accepted accounting principles it was
necessary for the Trust's management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the Consolidated Financial
Statements and the reported amounts of revenues and expenses for the year then
ended. Actual results could differ from these estimates.
Interest recognition on notes receivable. It is the Trust's policy to cease
recognizing interest income on notes receivable that have been delinquent for
60 days or more. In addition, accrued but unpaid interest income is only
recognized to the extent that the net realizable value of the underlying
collateral exceeds the carrying value of the receivable.
Allowance for estimated losses. Valuation allowances are provided for
estimated losses on notes receivable considered to be impaired. Impairment is
considered to exist when it is probable that all amounts due under the terms of
the note will not be collected. Valuation allowances are provided for
estimated losses on notes receivable to the extent that the Trust's investment
in the note exceeds the Trust's estimate of net realizable value of the
collateral securing such note, or fair value of the collateral if foreclosure
is probable.
Foreclosed real estate held for sale. Foreclosed real estate is initially
recorded at new cost, defined as the lower of original cost or fair value minus
estimated costs of sale. If a reduction in a held for sale asset's carrying
amount to fair value less cost to sell is required, a provision for loss is
recognized by a charge against earnings. Subsequent revisions, either upward
or downward, to a held for sale asset's fair value less cost to sell shall be
recorded as an adjustment to the asset's carrying amount, but not in excess of
the assets carrying amount when originally classified or held for sale. A
corresponding charge or credit to earnings is to be recognized.
Real estate and depreciation. Real estate is carried at the lower of cost or
fair value, except for foreclosed properties held for sale, which are recorded
initially at the lower of original cost or fair value minus estimated costs of
sale. Depreciation is provided by the straight-line method over the estimated
useful lives of the assets, which range from 3 to 40 years.
Present value discounts. The Trust provides for present value discounts on
notes receivable that have interest rates that differ substantially
34
35
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
from prevailing market rates and amortizes such discounts by the interest
method over the lives of the related notes. The factors considered in
determining a market rate for notes receivable include the borrower's credit
standing, nature of the collateral and payment terms of the note.
Revenue recognition on the sale of real estate. Sales of real estate are
recognized when and to the extent permitted by Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real Estate" ("SFAS No.
66"). Until the requirements of SFAS No. 66 for full profit recognition have
been met, transactions are accounted for using either the deposit, the
installment sale, the cost recovery or the financing method, whichever is
appropriate.
Investment in noncontrolled partnerships. The Trust uses the equity method to
account for investments in partnerships which it does not control. Under the
equity method, the Trust's initial investment, recorded at cost, is increased
by the Trust's proportionate share of the partnership's operating income and
additional advances and decreased by the Trust's proportionate share of the
partnership's operating losses and distributions received.
Fair value of financial instruments. The Trust used the following assumptions
in estimating the fair value of its note receivable and notes payable. For its
note receivable, which is performing, the fair value was estimated by
discounting future cash flows using current interest rates for similar loans.
The estimated fair value presented does not purport to represent the amount to
be ultimately realized by the Trust. The amount ultimately realized may vary
significantly from the estimated fair value presented. For notes payable the
fair value was estimated using yearend interest rates for mortgages with
similar terms and maturities.
Cash equivalents. For purposes of the Consolidated Statements of Cash Flows,
the Trust considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.
Earnings per share. Income (loss) per share of beneficial interest is computed
based upon the weighted average number of shares of beneficial interest
outstanding during each year.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
35
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INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. NOTES AND INTEREST RECEIVABLE
Notes and interest receivable consisted of the following:
1995 1994
---------------------------------- ---------------------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
--------------- ------------- ------------- --------------
Note Receivable
Performing............... $ 2,028 $ 2,000 $ 1,989 $ 2,000
=============== =============
Interest.................... 17 17
Unamortized discount........ (31) (43)
------------- -------------
$ 1,986 $ 1,974
============= =============
The Trust does not recognize interest income on nonperforming notes receivable.
For the years 1994 and 1993, unrecognized interest income on nonperforming
notes receivable aggregated $121,000 and $86,000, respectively. The Trust's
single note receivable was performing throughout 1995.
The Trust's single note receivable at December 31, 1995, matures in 1998 and
bears interest at 10.0% per annum.
In April 1992, the Trust sold the Spanish Trace Apartments in Irving, Texas
with the Trust providing $1.1 million of purchase money financing in the form
of a wraparound mortgage note. In November 1993, the Trust placed the
wraparound mortgage note on nonperforming, nonaccrual status. In December
1993, the borrower filed for bankruptcy protection. The Trust recorded the
property as an insubstance foreclosure as of December 31, 1994. The Trust
accepted a deed in lieu of foreclosure on March 2, 1995. The Trust did not
incur a loss on foreclosure as the fair value of the property, less estimated
costs of sale, exceeded the principal balance of the note receivable.
NOTE 3. REAL ESTATE AND DEPRECIATION
As further described in NOTE 1. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Organization and Trust business", the Trust is scheduled, unless and until the
shareholders decide on a contrary course of action, to begin liquidation of its
assets prior to October 24, 1996.
The Trust's Board of Trustees has approved a proposal to convert the Trust from
a California business trust into a Nevada corporation. The Trust's
shareholders will vote on this proposal at a special meeting of shareholders
scheduled to be held March 15, 1996. The approval of such proposal will
convert the Trust from a fixed life trust into a perpetual life corporation.
Approval requires the vote of a majority of the Trust's shareholders entitled
to vote. As of the February 7, 1996 record date for the special meeting, the
Trust's advisor and its affiliates held shares representing 48% of the shares
then outstanding. Such parties intend to vote their shares for the proposal in
accordance
36
37
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3. REAL ESTATE AND DEPRECIATION (Continued)
with the recommendation of the Trust's Board of Trustees. Accordingly, the
Trust's management anticipates that the proposal will be approved and the Trust
will be converted into a perpetual life corporation following the special
meeting. In contemplation of such approval the Trust's management has
classified all of the Trust's properties, except for the foreclosed Spanish
Trace Apartments, as held for investment as of December 31, 1995.
As discussed in NOTE 2. "NOTES AND INTEREST RECEIVABLE", as of December 31,
1994, the Trust recorded the insubstance foreclosure of the Spanish Trace
Apartments.
NOTE 4. ALLOWANCE FOR ESTIMATED LOSSES
Activity in the allowance for estimated losses was as follows:
1995 1994 1993
--------------- --------------- --------------
Balance January 1,.......... $ 121 $ 121 $ 121
Amounts charged off........ - - -
--------------- --------------- --------------
Balance December 31,........ $ 121 $ 121 $ 121
=============== =============== ==============
NOTE 5. INVESTMENT IN EQUITY METHOD PARTNERSHIPS
The Trust's investments in equity method partnerships consisted of the
following:
1995 1994
--------------- ---------------
Tri-City Limited Partnership ("Tri-City")... $ 2,226 $ 2,852
Nakash Income Associates ("NIA")............ 246 1,128
--------------- ---------------
$ 2,472 $ 3,980
=============== ===============
The Trust uses the equity method to account for its 36.3% general partner
interest in Tri-City, which owns five properties in Texas. Transcontinental
Realty Investors, Inc. ("TCI") owns a combined 63.7% general and limited
partner interest in Tri-City. As of March 1, 1996, TCI owned approximately
22% of the Trust's outstanding shares of beneficial interest.
In July 1995, Tri-City obtained first mortgage financing of $1.4 million,
secured by a previously unencumbered office building in Dallas, Texas. The
Trust received $486,000 of the net financing proceeds.
The Trust also uses the equity method to account for its 40% general partner
interest in NIA. TCI owns the remaining 60% general partner interest in NIA.
NIA owns two wraparound mortgage notes receivable, one of which is secured by a
shopping center in Onandaga, New York. In July 1995, the owner of the shopping
center informed NIA that it had determined that further investment in the
shopping center was not justified and further
37
38
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. INVESTMENT IN EQUITY METHOD PARTNERSHIPS (Continued)
that it has offered to deed the property back to the first lien holder in lieu
of foreclosure making the wraparound note receivable held by NIA uncollectible.
NIA recorded a provision for loss of $1.5 million to write its wraparound note
receivable down to the balance of the first lien mortgage. The Trust's equity
portion of the loss is $601,000. The property has been placed in receivership
and foreclosure is anticipated on or about March 29, 1996.
In September 1995, the Trust received notice from NIA that the other of its
wraparound notes receivable had been modified in conjunction with the
modification of the underlying note payable. NIA recorded a provision for loss
of $212,000 on such modification of which the Trust's equity share is $85,000.
Set forth below are summarized financial data for the partnerships the Trust
accounts for using the equity method:
1995 1994
--------------- ---------------
Notes receivable................................... $ 2,597 $ 4,099
Real estate, net of accumulated
depreciation ($3,395 in 1995 and $2,586
in 1994).......................................... 10,363 10,757
Other assets....................................... 307 587
Notes payable...................................... (4,143) (2,634)
Other liabilities.................................. (569) (791)
--------------- ---------------
Partners' capital.................................. $ 8,555 $ 12,018
=============== ===============
1995 1994 1993
--------------- --------------- ---------------
Rents........................ $ 2,478 $ 2,380 $ 2,409
Interest income.............. 319 349 397
Interest expense............. (259) (283) (317)
Property operations expense.. (1,587) (1,656) (1,528)
Depreciation................. (607) (605) (583)
Provision for losses......... (1,714) - -
--------------- --------------- ---------------
Net (loss) income............ $ (1,370) $ 185 $ 378
=============== =============== ===============
The Trust's equity share of the above net (loss) income for 1995, 1994 and 1993
was $(552,000), $102,000 and $219,000, respectively, before amortization of
property acquisition costs discussed below.
The Trust's share of the above partnership's capital was $3.1 million in 1995
and $3.6 million in 1994.
The excess of the Trust's investment over its respective share of the equity in
the underlying net assets of the partnerships relates principally to the
remaining unamortized property acquisition costs of $180,000 in 1995 and
$373,000 in 1994. These amounts are being amortized over the remaining
estimated useful lives of the properties.
38
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INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6. NOTES AND INTEREST PAYABLE
Notes and interest payable consisted of the following:
1995 1994
---------------------------------- --------------------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
-------------- ------------- --------------- -------------
Notes payable................... $ 22,289 $ 22,580 $ 19,408 $ 20,580
============== ===============
Interest payable................ 102 137
------------- -------------
$ 22,682 $ 20,717
============= =============
Scheduled notes payable principal payments are due as follows:
1996.................................... $ 375
1997.................................... 421
1998.................................... 5,920
1999.................................... 375
2000.................................... 392
Thereafter.............................. 15,097
-------------
$ 22,580
=============
Mortgage notes payable at December 31, 1995, bear interest at rates ranging
from 7.75% to 9.75% and mature between 1998 and 2006. These notes are
collateralized by deeds of trust on real estate with a net carrying value of
$24.7 million.
In December 1995, the Trust refinanced the mortgage debt secured by the
Treehouse Apartments in San Antonio, Texas and the Eastpoint Apartments in
Mesquite, Texas in the aggregate amount of $6.3 million. The Trust received
net cash of $2.3 million after the payoff of $3.8 million in existing mortgage
debt, and the payment of various closing costs associated with the
refinancings. The new mortgages bear interest at 7.75% per annum, require
monthly payments of principal and interest and mature January 1, 2006.
NOTE 7. DISTRIBUTIONS
In January 1993, the Trust resumed the payment of regular quarterly
distributions to shareholders. In 1995 and 1994, the Trust paid distributions
of $.60 per share and in 1993 $.50 per share totaling $475,000, $475,000 and
$406,000, respectively.
The Trust reported to the Internal Revenue Service that 100% of the
distributions paid in 1995 and 1994 represented a return on capital and 100% of
the distributions paid in 1993 represented ordinary income.
NOTE 8. RENTS UNDER OPERATING LEASES
The Trust's operations include the leasing of office buildings. The leases
thereon expire at various dates through 2000. The following is
39
40
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. RENTS UNDER OPERATING LEASES (Continued)
a schedule of minimum future rents on non-cancelable operating leases as of
December 31, 1995:
1996............................... $ 1,826
1997............................... 1,140
1998............................... 532
1999............................... 344
2000............................... 70
--------------
$ 3,912
==============
NOTE 9. ADVISORY AGREEMENT
Basic Capital Management, Inc. ("BCM" or the "Advisor") has served as advisor
to the Trust since March 28, 1989. BCM is a company owned by a trust for the
benefit of the children of Gene E. Phillips. Mr. Phillips served as a Trustee
of the Trust until December 31, 1992, and as a director of BCM until December
22, 1989, and as Chief Executive Officer of BCM until September 1, 1992. Mr.
Phillips serves as a representative of his children's trust which owns BCM and,
in such capacity, has substantial contact with the management of BCM and input
with respect to its performance of advisory services to the Trust.
At the Trust's annual meeting of shareholders held on March 7, 1995, the
renewal of the Trust's Advisory Agreement with BCM through the next annual
meeting of the Trust's shareholders was approved. Subsequent renewals of the
Trust's Advisory Agreement with BCM require the approval of the Trust's
shareholders.
Under the Advisory Agreement, the Advisor is required to formulate and submit
annually for approval by the Trust's Board of Trustees a budget and business
plan for the Trust containing a twelve-month forecast of operations and cash
flow, a general plan for asset sales, foreclosure and borrowing activity. The
Advisor is required to report quarterly to the Trust's Board of Trustees on the
Trust's performance against the business plan. In addition, all transactions
by the Trust shall require prior approval by the Trust's Board of Trustees,
unless they are explicitly provided for in the approved business plan or are
made pursuant to authority expressly delegated to the Advisor by the Trust's
Board of Trustees.
The Advisory Agreement also requires prior approval of the Trust's Board of
Trustees for the retention of all consultants and third party professionals,
other than legal counsel. The Advisory Agreement provides that the Advisor
shall be deemed to be in a fiduciary relationship to the Trust's shareholders
and contains a broad standard governing the Advisor's liability for losses by
the Trust.
The Advisory Agreement provides for BCM to be responsible for the day-to-day
operations of the Trust and to receive an advisory fee comprised of a gross
asset fee of .0625% per month (.75% per annum) of the average
40
41
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. ADVISORY AGREEMENT (Continued)
of the gross asset value of the Trust (total assets less allowance for
amortization, depreciation or depletion and valuation reserves) and an annual
net income fee equal to 7.5% per annum of the Trust's net income.
The Advisory Agreement also provides for BCM to receive an annual incentive
sales fee. BCM or an affiliate of BCM is also to receive a mortgage brokerage
and equity refinancing fee for obtaining loans to the Trust or refinancing on
Trust properties and BCM is to receive reimbursement of certain expenses
incurred by it, in the performance of advisory services to the Trust.
Under the Advisory Agreement (as required by the Trust's Declaration of Trust)
all or a portion of the annual advisory fee must be refunded by the Advisor to
the Trust if the Operating Expenses of the Trust (as defined in the Trust's
Declaration of Trust) exceed certain limits specified in the Declaration of
Trust based on the book value, net asset value and net income of the Trust
during such fiscal year. The effect of this limitation was to require that BCM
refund $44,000 and $6,000, of the 1995 and 1994 annual advisory fee,
respectively. No refund was required in 1993.
Additionally, if the Trust were to request that BCM render services to the
Trust other than those required by the Advisory Agreement, BCM or an affiliate
of BCM will be separately compensated for such additional services on terms to
be agreed upon from time to time. As discussed in NOTE 10. "PROPERTY
MANAGEMENT," the Trust has hired Carmel Realty Services, Ltd. ("Carmel,
Ltd."), an affiliate of BCM, to provide property management for the Trust's
properties and, as discussed in NOTE 11. "REAL ESTATE BROKERAGE," the Trust has
engaged Carmel Realty, Inc. ("Carmel Realty"), also an affiliate of BCM, on a
non-exclusive basis, to provide brokerage services for the Trust.
BCM may only assign the Advisory Agreement with the prior consent of the Trust.
NOTE 10. PROPERTY MANAGEMENT
Carmel, Ltd., an affiliate of BCM, provides property management services to the
Trust for a fee of 5% or less of the monthly gross rents collected on the
properties under its management. Carmel, Ltd. subcontracts with other entities
for the property-level management services to the Trust at various rates. The
general partner of Carmel, Ltd. is BCM. The limited partners of Carmel, Ltd.
are (i) Syntek West, Inc. ("SWI"), of which Mr. Phillips is the sole
shareholder, (ii) Mr. Phillips and (iii) a trust for the benefit of the
children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level
management and leasing of one of the Trust's office buildings and the
commercial properties owned by Tri-City in which the Trust and TCI are partners
to Carmel Realty which is a company owned by SWI. Carmel Realty is
41
42
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. PROPERTY MANAGEMENT (Continued)
entitled to receive property and construction management fees and leasing
commissions in accordance with the terms of its property-level management
agreement with Carmel, Ltd.
NOTE 11. REAL ESTATE BROKERAGE
Carmel Realty, also an affiliate of BCM, provides brokerage services to the
Trust on a non-exclusive basis. Carmel Realty is entitled to receive a
commission for property sales by the Trust, in accordance with a sliding scale
of total fees to be paid by the Trust.
NOTE 12. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.
Fees and cost reimbursements to BCM, the Trust's advisor, and its affiliates:
1995 1994 1993
-------------- ------------- --------------
Fees
Advisory........................ $ 316 $ 367 $ 447
Brokerage commissions........... - - -
Mortgage brokerage and equity
refinancing.................. 63 - -
Property and construction
management and leasing
commissions*................. 156 146 133
-------------- ------------- --------------
$ 535 $ 513 $ 580
============== ============= ==============
Cost reimbursements.............. $ 140 $ 160 $ 145
============== ============= ==============
__________________________
* Net of property management fees paid to subcontractors, other than Carmel
Realty.
NOTE 13. INCOME TAXES
For the years 1995, 1994 and 1993, the Trust has elected and qualified to be
treated as a Real Estate Investment Trust ("REIT"), as defined in Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), and
as such, will not be taxed for federal income tax purposes on that portion of
its taxable income which is distributed to shareholders, provided that at least
95% of its REIT taxable income, plus 95% of its taxable income from foreclosure
property as defined in Section 857 of the Code, is distributed.
The Trust had a net loss for federal income tax purposes in 1995, 1994 and
1993; therefore, the Trust recorded no provision for income taxes.
The Trust's tax basis in its net assets differs from the amount at which its
net assets are reported for financial statement purposes, principally due to
the accounting for gains and losses on property
42
43
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13. INCOME TAXES (Continued)
sales, the difference in the allowance for estimated losses, depreciation on
owned properties and investments in joint venture partnerships. At December
31, 1995, the Trust's tax basis in its net assets exceeded its basis for
financial statement purposes by $5.6 million. As a result, aggregate future
income for income tax purposes will be less than such amount for financial
statement purposes and the Trust would be able to maintain its REIT status
without distributing 95% of its financial statement income. Additionally, at
December 31, 1995, the Trust had tax net operating loss carryforwards of $18.0
million expiring through the year 2010.
As a result of the Trust's election to be treated as a REIT for income tax
purposes and of its intention to distribute its taxable income, if any, in
future years, no deferred tax asset, liability or valuation allowance was
recorded.
NOTE 14. EXTRAORDINARY GAIN
In November 1993, the Trust recognized an extraordinary gain of $806,000 on the
early payoff of mortgage debt secured by the Porticos Apartments.
NOTE 15. COMMITMENTS AND CONTINGENCIES
Olive Litigation. In February 1990, the Trust, together with Continental
Mortgage and Equity Trust ("CMET"), National Income Realty Trust ("NIRT") and
TCI, three real estate entities with, at the time, the same officers, directors
or trustees and advisor as the Trust, entered into a settlement of a class and
derivative action entitled Olive et al. v. National Income Realty Trust et
al., relating to the operation and management of each of the entities. On
April 23, 1990, the Court granted final approval of the terms of the
settlement.
On May 4, 1994, the parties entered into a Modification of Stipulation of
Settlement dated April 27, 1994 (the "Modification") which settled subsequent
claims of breaches of the settlement which were asserted by the plaintiffs and
modified certain provisions of April 1990 settlement. The Modification was
preliminarily approved by the court July 1, 1994. Final court approval of the
Modification was entered on December 12, 1994. The effective date of the
Modification was January 11, 1995.
The Modification, among other things, provided for the addition of three new
unaffiliated members to the Trust's Board of Trustees and set forth new
requirements for the approval of any transactions with affiliates until April
28, 1999. In addition, BCM, the Trust's advisor, Gene E. Phillips and William
S. Friedman, who served as the President and Trustee of the Trust until
February 24, 1994, President of BCM until May 1, 1993 and director of BCM until
December 22, 1989, agreed to pay a total of $1.2 million to the Trust, CMET,
NIRT and TCI, of which the
43
44
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. COMMITMENTS AND CONTINGENCIES (Continued)
Trust's share is $150,000. As of March 1, 1996, the Trust had received
payments totaling $119,000. The remaining $31,000 is being paid in monthly
installments through August 1, 1996.
Under the Modification, the Trust, CMET, NIRT, TCI and their shareholders
released the defendants from any claims relating to the plaintiffs'
allegations. The Trust, CMET, NIRT and TCI also agreed to waive any demand
requirement for the plaintiffs to pursue claims on behalf of each of them
against certain persons or entities. The Modification also requires that any
shares of the Trust held by Messrs. Phillips, Friedman or their affiliates
shall be (i) voted in favor of the reelection of all current members of the
Trust's Board of Trustees that stand for reelection during the two calendar
years following the effective date of the Modification and (ii) voted in favor
of all new members of the Trust's Board of Trustees appointed pursuant to the
terms of the Modification that stand for reelection during the three calendar
years following the effective date of the Modification.
Pursuant to the terms of the Modification, certain related party transactions
which the Trust may enter into prior to April 28, 1999, require the unanimous
approval of the Trust's Board of Trustees. In addition, such related party
transactions are to be discouraged, may only be entered into in exceptional
circumstances and after a determination by the Trust's Board of Trustees that
the transaction is in the best interests of the Trust and that no other
opportunity exists that is as good as the opportunity presented by such
transaction.
For purposes of the Modification requirements, the term "related party
transaction" means and includes (i) any transaction between or among the Trust
or CMET, NIRT or TCI or any of their affiliates or subsidiaries; (ii) any
transaction between or among the Trust, its affiliates or subsidiaries and the
Advisor, Mr. Phillips, Mr. Friedman or any of their affiliates; and (iii) any
transaction between or among the Trust or any of its affiliates or
subsidiaries and a third party with whom the Advisor, Mr. Phillips, Mr.
Friedman or any of their affiliates has an ongoing or contemplated business or
financial transaction or relationship of any kind, whether direct or indirect,
or has had such a transaction or relationship in the preceding one year.
The Modification requirements for related party transactions do not apply to
direct contractual agreements for services between the Trust and the Advisor or
one of its affiliates, (including the Advisory Agreement, the Brokerage
Agreement and the property management contracts). These agreements, pursuant to
the specific terms of the Modification, require the prior approval by
two-thirds of the Trustees of the Trust, and if required, approval by a
majority of the Trust's shareholders. The Modification requirements for
related party transactions also do not apply to joint ventures between or among
the Trust and CMET, NIRT or TCI or any of their affiliates or subsidiaries
44
45
INCOME OPPORTUNITY REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. COMMITMENTS AND CONTINGENCIES (Continued)
and a third party having no prior or intended future business or financial
relationship with Mr. Phillips, Mr. Friedman, the Advisor, or any affiliate of
such parties. Such joint ventures may be entered into on the affirmative vote
of a majority of the Trustees of the Trust.
The Modification also terminated a number of the provisions of the settlement,
including the requirement that the Trust, CMET, NIRT and TCI maintain a Related
Party Transaction Committee and a Litigation Committee of their respective
Boards. The court retained jurisdiction to enforce the Modification.
Other Litigation. The Trust is also involved in various other lawsuits arising
in the ordinary course of business. The Trust's management is of the opinion
that the outcome of these lawsuits will have no material impact on the Trust's
financial condition, results of operations or liquidity.
45
46
SCHEDULE III
INCOME OPPORTUNITY REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
Cost
Capitalized
Subsequent to Gross Amounts of Which Carried
Initial Cost to Trust Acquisition at End of Year
-------------------------- ------------ ---------------------------------------
Building & Building & (1)
Property/Location Encumbrances Land Improvements Improvements Land Improvements Total
- ------------------------- ------------ ----------- ------------ ------------ ---------- ------------ ---------
(dollars in thousands)
Properties Held For Investment
APARTMENTS
Eastpoint................ $ 3,400 $ 1,181 $ 2,749 $ 374 $ 1,181 $ 3,123 $ 4,304
Mesquite, Texas
Plumtree................. 5,783 1,751 5,038 824 1,751 5,862 7,613
Martinez, California
Porticos................. 9,757 2,897 11,588 108 2,897 11,696 14,593
Milwaukee, Wisconsin
Treehouse................ 2,900 375 2,124 201 375 2,325 2,700
San Antonio, Texas
OFFICE BUILDINGS
Saratoga................. - 2,577 10,306 566 2,583 10,866 13,449
Saratoga, California
Town Center Plaza........ - 554 2,214 141 554 2,355 2,909
Boca Raton, Florida
Property Held for Sale
APARTMENT
Spanish Trace............ - 198 792 (5) 168 696 985
Irving, Texas
---------- ----------- ----------- ---------- ---------- -----------
$ 21,840 $ 9,533 $ 34,811 $ 2,088 $ 9,509 $ 36,923 46,553
========== =========== =========== ========== ========== ===========
Allowance for loss....... (121)
----------
$ 46,432
==========
Life on Which
Depreciation
In Latest
Statement
Accumulated Date of Date of Operation
Property/Location Depreciation Construction Acquired is Computed
- -------------------------- ------------ ------------ -------- -------------
(dollars in thousands)
Properties Held For Investment
APARTMENTS
Eastpoint................ $ 1,074 1985 01/86 5 - 40 years
Mesquite, Texas
Plumtree................. 1,773 1986 02/86 5 - 40 years
Martinez, California
Porticos................. 1,233 1973 11/91 40 years
Milwaukee, Wisconsin
Treehouse................ 421 1975 09/89 5 - 40 years
San Antonio, Texas
OFFICE BUILDINGS
Saratoga................. 1,268 1986 12/91 3 - 40 years
Saratoga, California
Town Center Plaza........ 318 1985 03/91 5 - 40 years
Boca Raton, Florida
Property Held for Sale
APARTMENT
Spanish Trace............ 20 1964 12/94 40 years
Irving, Texas
-----------
$ 6,107
===========
Allowance for loss.......
- -------------------------
(1) The aggregate cost for Federal income tax purposes is $46,919.
46
47
SCHEDULE III
(Continued)
INCOME OPPORTUNITY REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
1995 1994 1993
-------------- -------------- --------------
(dollars in thousands)
Reconciliation of Real Estate
Balance at January 1,................. $ 46,211 $ 45,040 $ 44,906
Additions
Improvements.................... 342 184 134
Foreclosure..................... - 990 -
Deductions
Other........................... - (3) -
-------------- ------------- --------------
Balance at December 31,............... $ 46,553 $ 46,211 $ 45,040
============== ============= ==============
Reconciliation of Accumulated
Depreciation
Balance at January 1,................. $ 5,055 $ 4,088 $ 3,139
Additions
Depreciation.................... 1,052 967 949
-------------- ------------- --------------
Balance at December 31,............... $ 6,107 $ 5,055 $ 4,088
============== ============= ==============
47
48
SCHEDULE IV
INCOME OPPORTUNITY REALTY TRUST
MORTGAGE LOANS ON REAL ESTATE
December 31, 1995
Final
Interest maturity Prior Face amount
Description rate date Periodic payment terms liens of mortgage
- ------------------------ -------- -------- ---------------------------------- ---------- -----------
(dollars in thousands)
WRAPAROUND MORTGAGE NOTE
Twin Oaks................... 10.00% 08/98 Monthly interest - only payments $ 739 $ 2,000
Secured by shopping due through maturity, at which ======== =========
center in Joliet, IL. time the entire principal balance
and all accrued and unpaid
interest are due.
Interest
Unamortized discount
Principal amount of
Carrying loans subject to
amounts delinquent principal
Description of mortgage (1) or interest
- ------------------------ --------------- --------------------
(dollars in thousands)
WRAPAROUND MORTGAGE NOTE
Twin Oaks................... $ 2,000 $ -
==========
Secured by shopping
center in Joliet, IL. 17
Interest (31)
----------
$ 1,986
Unamortized discount ==========
(1) The aggregate cost for Federal income tax purposes is $2,017.
48
49
SCHEDULE IV
(Continued)
INCOME OPPORTUNITY REALTY TRUST
MORTGAGE LOANS ON REAL ESTATE
1995 1994 1993
-------------- ------------- --------------
(dollars in thousands)
Balance at January 1,....... $ 2,000 $ 3,050 $ 3,050
Deductions
Foreclosure........... - (1,050) -
-------------- ------------- --------------
Balance at December 31,..... $ 2,000 $ 2,000 $ 3,050
============== ============= ==============
49
50
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners of
Tri-City Limited Partnership
Dallas, Texas
We have audited the accompanying balance sheets of Tri-City Limited Partnership
as of December 31, 1995 and 1994, and the related statements of operations,
partners' equity, and cash flows for the three years in the period ended
December 31, 1995. We have also audited the schedule listed in the
accompanying index. These financial statements and schedule are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and schedule
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements and schedule. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements and schedule.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tri-City Limited Partnership
at December 31, 1995 and 1994, and the results of its operations and its cash
flows for the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
Also in our opinion the schedule referred to above presents fairly in all
material respects, the information set forth therein.
BDO SEIDMAN, LLP
March 1, 1996
Dallas, TX
50
51
TRI-CITY LIMITED PARTNERSHIP
BALANCE SHEETS
December 31,
------------------------------------
1995 1994
--------------- ---------------
(dollars in thousands)
Assets
Real estate held for investment, net of accumulated
depreciation ($3,395 in 1995 and $2,788 in 1994)............ $ 10,250 $ 10,644
Cash and cash equivalents.................................... 175 19
Other assets (including $411 in 1994 from affiliates)........ 132 512
--------------- ---------------
$ 10,557 $ 11,175
=============== ===============
Liabilities and Partners' Equity
Notes and interest payable................................... $ 1,421 $ -
Other liabilities (including $222 in 1995 and $271 in
1994 to affiliates)......................................... 464 791
--------------- ---------------
1,885 791
Partners' equity
Limited Partner............................................. 6,698 6,698
General Partners............................................ 1,974 3,686
--------------- ---------------
8,672 10,384
--------------- ---------------
$ 10,557 $ 11,175
=============== ===============
The accompanying notes are an integral part of these financial statements.
51
52
TRI-CITY LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
------------------------------------------------------------
1995 1994 1993
---------------- ---------------- ---------------
(dollars in thousands)
Income
Rents..................................... $ 2,478 $ 2,380 $ 2,483
Other..................................... - - 100
---------------- ---------------- ---------------
2,478 2,380 2,583
Expenses
Property operations (including
$91 in 1995, $86 in 1994 and $57
in 1993 to affiliates)................. 1,565 1,572 1,661
Interest (including $27 in 1993 to
affiliates)............................ 62 - 27
Depreciation.............................. 607 654 632
General and administrative................ 18 14 28
---------------- ---------------- ---------------
2,252 2,240 2,348
---------------- ---------------- ---------------
Net income $ 226 $ 140 $ 235
================ ================ ===============
The accompanying notes are an integral part of these financial statements.
52
53
TRI-CITY LIMITED PARTNERSHIP
STATEMENT OF PARTNERS' EQUITY
Limited General
Partner Partners Total
---------------- ---------------- ---------------
(Dollars in thousands)
Balance, January 1, 1993............. $ 6,698 $ 5,011 $ 11,709
Distributions........................ - (1,000) (1,000)
Net income........................... - 235 235
---------------- ---------------- ---------------
Balance, December 31, 1993........... 6,698 4,246 10,944
Distributions........................ - (700) (700)
Net income........................... - 140 140
---------------- ---------------- ---------------
Balance, December 31, 1994........... 6,698 3,686 10,384
Distributions........................ - (1,938) (1,938)
Net income........................... - 226 226
---------------- ---------------- ---------------
Balance, December 31, 1995........... $ 6,698 $ 1,974 $ 8,672
================ ================ ===============
The accompanying notes are an integral part of these financial statements.
53
54
TRI-CITY LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
-----------------------------------------------
1995 1994 1993
-------------- ------------- -------------
(dollars in thousands)
Cash Flows from Operating Activities
Rents collected.................................. $ 2,480 $ 2,428 $ 2,514
Interest paid.................................... (48) - (33)
Payments for property operations (including
$91 in 1995, $86 in 1994 and $57 in 1993
to affiliates)................................ (1,785) (1,541) (1,509)
Other............................................ 7 (10) (31)
-------------- ------------- -------------
Net cash provided by operating activities..... 654 877 941
Net Cash (Used In) Investment Activities
Real estate improvements......................... (213) (278) (275)
Cash Flows from Financing Activities
Proceeds from notes payable...................... 1,415 - -
Payments on notes payable........................ (5) - (778)
Debt issue costs................................. (79) - -
Advance (to) from affiliate...................... 322 (108) 126
Distributions.................................... (1,938) (700) (1,000)
-------------- ------------- -------------
Net cash (used in) financing activities....... (285) (808) (1,652)
Net increase (decrease) in cash and cash
equivalents...................................... 156 (209) (986)
Cash and cash equivalents, beginning of period.... 19 228 1,214
-------------- ------------- -------------
Cash and cash equivalents, end of period.......... $ 175 $ 19 $ 228
============== ============= =============
Reconciliation of net income to net cash
provided by operating activities
Net income....................................... $ 226 $ 140 $ 336
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 610 654 653
Decrease in other assets................... 20 41 26
Increase (decrease) in accrued interest.... 11 - (6)
Increase (decrease) in other liabilities... (213) 42 (68)
-------------- ------------- -------------
Net cash provided by operating
activities.............................. $ 654 $ 877 $ 941
============== ============= =============
The accompanying notes are an integral part of these financial statements.
54
55
TRI-CITY LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
The accompanying Financial Statements of Tri-City Limited Partnership (the
"Partnership") have been prepared in conformity with generally accepted
accounting principles, the most significant of which are described in NOTE 1.
"SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES." These, along with the remainder
of the Notes to Financial Statements, are an integral part of these Financial
Statements. The data presented in the Notes to Financial Statements are as of
December 31 of each year and for the year then ended, unless otherwise
indicated. Dollar amounts in tables are in thousands.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and purpose. Tri-City Limited Partnership, a Texas partnership,
was organized on June 29, 1989. The purpose of the Partnership is to acquire,
hold for investment, improve, lease, operate, and sell or otherwise dispose of
real estate, and to engage in any and all activities related or incidental
thereto.
Income Opportunity Realty Trust ("IORT") and Transcontinental Realty Investors,
Inc. ("TCI") are partners in the Partnership. IORT is a publicly held real
estate investment trust whose shares are traded on the American Stock Exchange.
TCI is also a publicly held real estate investment trust whose shares are
traded on the New York Stock Exchange. Basic Capital Management, Inc. ("BCM")
serves as advisor to IORT and TCI.
The percentages of ownership of the Partnership are as follows:
General Limited
Partner Partner Total
------- ------- -------
TCI........................... 23.59% 40.11% 63.70%
IORT.......................... 36.30% - 36.30%
------ ------ -------
59.89% 40.11% 100.00%
====== ====== =======
Allocations of profits and distributions are made in accordance with the
partnership agreement.
Accounting estimates. In the preparation of the Partnership's Financial
Statements in conformity with generally accepted accounting principles it was
necessary for the Partnership's management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the Financial Statements and
the reported amounts of revenues and expenses for the year then ended. Actual
results could differ from these estimates.
Real estate and depreciation. Real estate is carried at the lower of cost or
fair value. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets, which range from four to forty years.
55
56
TRI-CITY LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair values of financial instruments. The Partnership estimated the fair value
of its note payable using yearend interest rates for mortgages with similar
terms and maturities.
Cash and cash equivalents. The Partnership considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
Income taxes. The Partnership is taxed as such for federal income tax
purposes. The Partnership has no current year income tax expense or deferred
taxes. Taxable income is included in the respective tax returns of the
partners.
NOTE 2. NOTES AND INTEREST PAYABLE
Note and interest payable consisted of the following:
1995
-------------------------------
Estimated
Fair Book
Value Value
------------- -------------
Note payable.................... $ 1,497 $ 1,410
=============
Interest payable................ 11
-------------
$ 1,421
=============
Scheduled principal payments are due as follows:
1996.................................... $ 15
1997.................................... 17
1998.................................... 19
1999.................................... 20
2000.................................... 25
Thereafter.............................. 1,314
-------------
$ 1,410
=============
In July 1995, the Partnership obtained first mortgage financing of $1.4 million
secured by the previously unencumbered MacArthur Mills Office Park in Dallas,
Texas. The mortgage bears interest at 9.32% per annum, requires monthly
payments of principal and interest of $12,186 and matures August 1, 2005. The
Partnership distributed the net cash of $1.3 million received from the
financing to the partners.
NOTE 3. RELATED PARTY TRANSACTIONS
Property Management Fees. Carmel Realty Services, Ltd. ("Carmel, Ltd."), an
affiliate of BCM, provides property management services for a fee of 5% of the
monthly gross rents collected on the properties under its management. Carmel,
Ltd. subcontracts with other entities for
56
57
TRI-CITY LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 3. RELATED PARTY TRANSACTIONS (Continued)
property level management services to the Partnership's apartment complexes at
various rates. Carmel, Ltd. subcontracts the property-level management and
leasing of the Partnership's commercial properties to Carmel Realty, Inc., also
an affiliate of BCM.
Leasing commissions. As compensation for providing leasing and rent-up
services to a Partnership property, Carmel, Ltd. or an affiliate shall be paid
a reasonable leasing commission.
Construction supervision. As compensation for oversight of major renovations
and refurbishments, Carmel, Ltd. or an affiliate shall be paid a construction
supervision fee.
Mortgage brokerage and equity refinancing fees. As compensation for obtaining
loans for the Partnership, BCM or an affiliate of BCM is to receive a mortgage
brokerage and equity refinancing fee.
Fees to BCM, Carmel, Ltd. and their affiliates are as follows:
1995 1994 1993
----------- ---------- -----------
Property management fees*.......... $ 77 $ 75 $ 39
Leasing commissions................ 7 3 18
Constructions supervision fees..... 7 8 -
Mortgage brokerage and equity
refinancing fee................. 14 - -
----------- ---------- -----------
$ 105 $ 86 $ 57
=========== ========== ===========
- -----------------------------
* Net of property management fees paid to subcontractors, other than Carmel,
Ltd.
NOTE 4. RENTS UNDER OPERATING LEASES
The Partnership's operations include the leasing of an office building and two
shopping centers. The leases thereon expire at various dates through 2005.
The following is a schedule of future minimum rents on noncancelable operating
leases as of December 31, 1995:
1996................................... $ 1,069
1997................................... 865
1998................................... 602
1999................................... 489
2000................................... 440
Thereafter............................. 1,014
-------------
$ 4,479
=============
57
58
SCHEDULE III
TRI-CITY LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
Cost
Capitalized
Initial Cost to Subsequent to Gross Amounts of Which Carried
the Partnership Acquisition at End of Year
------------------------ ------------ ------------------------------
Building & Building & (1)
Property/Location Encumbrances Land Improvements Improvements Land Improvements Total
- ------------------------- ------------ ------- ------------ ------------ ----- ------------ ---------
(dollars in thousands)
APARTMENTS
Oaks of Inwood............. $ - $ 522 $ 1,486 $ (120)(2) $ 493 $1,395 $ 1,888
Houston, TX
Inwood Greens.............. - 319 957 (152)(2) 286 838 1,124
Houston, TX
SHOPPING CENTERS
Chelsea Square............. - 562 3,185 697 562 3,882 4,444
Houston, TX
Summit at Bridgewood....... - 408 2,314 782 408 3,096 3,504
Fort Worth, TX
OFFICE BUILDING
MacArthur Mills............ 1,410 239 1,353 1,093 264 2,421 2,685
Carrollton, TX
------- ------- ---------- ------- ------ ------ --------
$ 1,410 $ 2,050 $ 9,295 2,300 $2,013 11,632 $ 13,645
======= ======= ========== ======= ====== ====== ========
<Captiion>
Life on Which
Depreciation
In Latest
Statement
Accumulated Date of Date of Operation
Property/Location Depreciation Construction Acquired is Computed
- ------------------------- ------------ ------------ -------- -------------
(dollars in thousands)
APARTMENTS
Oaks of Inwood............. $ 243 1979 06/89 40 years
Houston, TX
Inwood Greens.............. 156 1980 06/89 40 years
Houston, TX
SHOPPING CENTERS
Chelsea Square............. 932 1985 06/89 5 - 40 years
Houston, TX
Summit at Bridgewood....... 1,019 1985 06/89 5 - 40 years
Fort Worth, TX
OFFICE BUILDING
MacArthur Mills............ 1,046 1986 06/89 4 - 40 years
------
Carrollton, TX $3,396
======
_______________________
(1) The aggregate cost for federal income tax purposes is approximately
$13,917.
(2) Write down of property to estimated net realizable value.
58
59
SCHEDULE III
(Continued)
TRI-CITY LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
1995 1994 1993
--------------- -------------- ---------------
(dollars in thousands)
Reconciliation of Real Estate
Balance at January 1,............... $ 13,432 $ 13,154 $ 12,879
Additions
Improvements.................. 213 278 275
--------------- -------------- ---------------
Balance at December 31,............. $ 13,645 $ 13,432 $ 13,154
=============== ============== ===============
Reconciliation of Accumulated Depreciation
Balance at January 1,............... $ 2,788 $ 2,134 $ 1,502
Additions
Depreciation.................. 607 654 632
--------------- -------------- ---------------
Balance at December 31,............. $ 3,395 $ 2,788 $ 2,134
=============== ============== ===============
59
60
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners of
Nakash Income Associates
Dallas, Texas
We have audited the accompanying balance sheets of Nakash Income Associates as
of December 31, 1995 and 1994, and the related statements of operations,
partners' equity/(deficit), and cash flows for the three years in the period
ended December 31, 1995. We have also audited the schedule listed in the
accompanying index. These financial statements and schedule are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and schedule
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements and schedule. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements and schedule.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nakash Income Associates at
December 31, 1995 and 1994, and the results of its operations and its cash
flows for the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
Also in our opinion, the schedule referred to above presents fairly, in all
material respects, the information set forth herein.
BDO SEIDMAN, LLP
March 1, 1996
Dallas, TX
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NAKASH INCOME ASSOCIATES
BALANCE SHEETS
December 31,
-----------------------------------
1995 1994
-------------- --------------
(dollars in thousands)
Assets
Notes and interest receivable............................. $ 2,597 $ 4,099
Land...................................................... 113 113
Other assets (including $56 in 1994 from affiliates)...... - 56
-------------- --------------
$ 2,710 $ 4,268
============== ==============
Liabilities and Partners' Equity
Notes and interest payable................................ $ 2,733 $ 2,633
Other liabilities (including $94 in 1995 to affiliates)... 94 -
-------------- --------------
2,827 2,633
General partners' equity/(deficit)........................ (117) 1,635
-------------- --------------
$ 2,710 $ 4,268
============== ==============
The accompanying notes are an integral part of these financial statements.
61
62
NAKASH INCOME ASSOCIATES
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
-----------------------------------------------------------
1995 1994 1993
--------------- --------------- --------------
(dollars in thousands)
Income
Interest........................ $ 319 $ 348 $ 323
Other........................... - - 9
--------------- --------------- --------------
319 348 332
Expenses
Interest........................ 197 283 289
General and administrative...... 4 20 -
Provision for losses............ 1,714 - -
--------------- --------------- --------------
1,915 303 289
--------------- --------------- --------------
Net income (loss)................ $ (1,596) $ 45 $ 43
=============== =============== ==============
The accompanying notes are an integral part of these financial statements.
62
63
NAKASH INCOME ASSOCIATES
STATEMENT OF GENERAL PARTNERS' EQUITY/(DEFICIT)
General
Partners
------------
(dollars in
thousands)
Balance, January 1, 1993................................... $ 1,579
Contributions.............................................. 123
Distributions.............................................. (271)
Net income................................................. 42
---------------
Balance, December 31, 1993................................. 1,473
Contributions.............................................. 310
Distributions.............................................. (193)
Net income................................................. 45
---------------
Balance, December 31, 1994................................. 1,635
Distributions.............................................. (200)
Contributions.............................................. 44
Net loss................................................... (1,596)
---------------
Balance, December 31, 1995................................. $ (117)
===============
The accompanying notes are an integral part of these financial statements.
63
64
NAKASH INCOME ASSOCIATES
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
----------------------------------------------
1995 1994 1993
------------- ----------- ------------
(dollars in thousands)
Cash Flows from Operating Activities
Interest received................................ $ 258 $ 348 $ 242
Interest paid.................................... (197) (283) (219)
Other............................................ 147 (117) 108
------------- ------------ ------------
Net cash provided by (used in) operating
activities................................. 208 (52) 131
Cash Flows from Financing Activities
Payments on notes payable........................ (52) (65) (49)
Distributions.................................... 200 (193) (205)
------------- ----------- ------------
Net cash (used in) financing activities....... (252) (258) (254)
Cash Flows from Investing Activities
Contributions.................................... 44 310 123
Net increase (decrease) in cash and cash
equivalents...................................... - - -
Cash and cash equivalents, beginning of period.... - - -
------------- ------------ ------------
Cash and cash equivalents, end of period.......... $ - $ - $ -
============= ============ ============
Reconciliation of net income (loss) to net
cash provided by operating activities
Net income (loss)................................ $ (1,596) $ 45 $ 43
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Provision for losses....................... 1,714 - -
Decrease (increase) in other assets........ 136 (97) 17
Increase (decrease) in other liabilities... (46) - 71
------------- ------------ ------------
Net cash provided by operating
activities........................... $ 208 $ (52) $ 131
============= ============ ============
The accompanying notes are an integral part of these financial statements.
64
65
NAKASH INCOME ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
The accompanying Financial Statements of Nakash Income Associates (the
"Partnership") have been prepared in conformity with generally accepted
accounting principles, the most significant of which are described in NOTE 1.
"SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES." These, along with the remainder
of the Notes to Financial Statements, are an integral part of these Financial
Statements. The data presented in the Notes to Financial Statements are as of
December 31 of each year and for the year then ended, unless otherwise
indicated. Dollar amounts in tables are in thousands.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and purpose. Nakash Income Associates, a Georgia partnership, was
organized on September 21, 1989. The purpose of the Partnership is to acquire,
hold for investment, improve, lease, operate, and sell or otherwise dispose of
real estate, and to engage in any and all activities related or incidental
thereto.
Income Opportunity Realty Trust ("IORT") and Transcontinental Realty Investors,
Inc. ("TCI") are 40% and 60% general partners, respectively, in the
Partnership. IORT is a publicly held real estate investment trust whose shares
are traded on the American Stock Exchange. TCI is also a publicly held real
estate investment trust whose shares are traded on the New York Stock Exchange.
Basic Capital Management, Inc. ("BCM") serves as advisor to IORT and TCI.
Allocations of profits and distributions are made in accordance with the
partnership agreement.
Accounting estimates. In the preparation of the Partnership's Financial
Statements in conformity with generally accepted accounting principles it is
necessary for the Partnership's management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the Financial Statements and
the reported amounts of revenues and expenses for the year then ended. Actual
results could differ from these estimates.
Fair values of financial instruments. The Partnership estimated the fair value
of its notes payable using yearend interest rates for mortgages with similar
terms and maturities.
Impairment of notes receivable. Notes receivable are considered impaired when
the value of the collateral property is estimated to be less than the note
balance. Impairments are recorded as a direct write down of the note balance.
Income taxes. The Partnership is taxed as such for federal income tax
purposes. The Partnership has no current year income tax expense or deferred
taxes. Taxable income is included in the respective tax returns of the
partners.
65
66
NAKASH INCOME ASSOCIATES
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 2. NOTES AND INTEREST RECEIVABLE
Notes and interest receivable consists of the following:
1995 1994
--------------------------------- -------------------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
-------------- ------------ ------------ ------------
Notes receivable
Performing................ $ 2,343 $ 3,273 $ 7,915 $ 9,591
Nonperforming............. 1,478 1,695 - -
-------------- ------------ ------------ ------------
$ 3,821 4,968 $ 7,915 9,591
============== ============
Unamortized (discounts)... (2,371) (5,492)
------------ ------------
$ 2,597 $ 4,099
============ ============
In 1995, the wraparound mortgage note receivable secured by the Green Hills
Shopping Center in Onandaga, New York was placed in nonperforming status, when
the borrower informed the Partnership that it has offered to deed the property
back to the first lienholder in lieu of foreclosure. The Partnership recorded
a provision for loss of $1.5 million to write down the wraparound note
receivable to the amount of underlying debt. The property has been placed in
receivership and foreclosure is anticipated to occur on or about March 29,
1996.
The Partnership modified the note receivable secured by a Wal-Mart building in
Maulden, Missouri, in connection with the modification of the underlying note
payable. See NOTE 4. "NOTES AND INTEREST PAYABLE." The note receivable
balance was increased by $212,000, which is the amount by which the payable was
increased. The Partnership recorded a loss of $212,000 as the Partnership
determined that the value of the collateral property could not support the
higher receivable balance.
Notes receivable at December 31, 1995, mature from 2011 through 2013 and bear
interest at a variable rate. The Partnership only recognizes income to the
extent that the underlying debt is paid.
NOTE 3. REAL ESTATE
The Partnership's real estate consists solely of a 40 acre parcel of
undeveloped land in Onandaga, New York.
NOTE 4. NOTES AND INTEREST PAYABLE
Notes and interest payable consisted of the following:
1995 1994
--------------------------------- -------------------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
-------------- ------------ ------------ ------------
Notes payable........... $ 2,716 $ 2,733 $ 2,802 $ 2,634
============== ============ ============ ============
66
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NAKASH INCOME ASSOCIATES
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 4. NOTES AND INTEREST PAYABLE (Continued)
In July 1995, the note payable secured by a Wal-Mart building in Maulden,
Missouri was modified. The principal balance was increased $212,000 to $1.0
million. The modified mortgage bears interest at 10.625%, requires monthly
payments of principal and interest of $10,446 and matures May 1, 1996. The
Partnership intends to extend the note at its May 1, 1996 maturity.
The other note payable in the principal amount of $1.7 million is considered
due and payable in 1996 as it is the intention of the borrower to return the
property to the lender. The property has been placed in receivership and
foreclosure is anticipated to occur on or about March 29, 1996. See NOTE 2.
"NOTES AND INTEREST RECEIVABLE."
67
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SCHEDULE IV
NAKASH INCOME ASSOCIATES
MORTGAGE LOANS ON REAL ESTATE
December 31, 1995
Final
Interest Maturity Prior Face Amount
Description Rate Date Periodic Payment Terms Liens of Mortgage
- ------------------------ -------- -------- ---------------------------------- --------- -----------
(dollars in thousands)
WRAPAROUND MORTGAGE LOANS
GREEN HILLS................. Variable 10/2011 Note receivable bearing interest at 1,690 $6,318
Secured by a shopping center prime plus 1%. Principal and interest
located in Onandaga, NY due at maturity.
MOUNTAIN HOME............... Variable 07/2013 Note receivable bearing interest at 1,043 3,273
Secured by a shopping center prime plus 1%. Principal and unpaid
located in Malden, MO interest due at maturity.
------ ------
$2,733 $9,591
====== ======
Principal Amount of
Carrying Loans Subject to
Amounts Delinquent Principal
Description of Mortgage or Interest
- ------------------------ -------------- --------------------
(dollars in thousands)
WRAPAROUND MORTGAGE LOANS
GREEN HILLS................. $1,695 $1,695
Secured by a shopping center
located in Onandaga, NY
MOUNTAIN HOME............... 3,273 -
Secured by a shopping center
located in Malden, MO
------ ------
4,968 $1,695
======
Unamortized discount (2,371)
------
$2,597
======
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SCHEDULE IV
(Continued)
NAKASH INCOME ASSOCIATES
MORTGAGE LOANS ON REAL ESTATE
1995 1994 1993
-------------- ------------- --------------
(dollars in thousands)
Balance at January 1,.................. $ 4,099 $ 4,099 $ 4,099
Deductions
Writedown of impaired loans...... (1,502) - -
-------------- ------------- --------------
Balance at December 31,................ $ 2,597 $ 4,099 $ 4,099
============== ============= ==============
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70
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
__________________________
PART III
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
Trustees
The affairs of Income Opportunity Realty Trust (the "Trust" or the
"Registrant") are managed by a Board of Trustees. The Trustees are elected at
the annual meeting of shareholders or appointed by the incumbent Board of
Trustees and serve until the next annual meeting of shareholders or until a
successor has been elected or approved.
The Trustees of the Trust are listed below, together with their ages, terms of
service, all positions and offices with the Trust or its advisor, Basic Capital
Management, Inc. ("BCM" or the "Advisor"), their principal occupations,
business experience and directorships with other companies during the last five
years or more. The designation "Affiliated", when used below with respect to a
Trustee, means that the Trustee is an officer, director or employee of the
Advisor or an officer or employee of the Trust. The designation "Independent"
when used below with respect to a Trustee, means that the Trustee is neither an
officer or employee of the Trust nor a director, officer or employee of the
Advisor, although the Trust may have certain business or professional
relationships with such Trustee as discussed in ITEM 13. "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS - Certain Business Relationships."
JOHN P. PARSONS: Age 67, Trustee (Independent) (since January 1995).
Chairman and Chief Executive Officer (since 1984) of Pierpont
Corporation; Director of Zentrum Holdings Limited (NZ) (since 1984),
the Pickford Foundation (since 1980), International Divertissments,
Ltd. (since 1986), and Lifehouse International, Ltd.(since 1990);
Trustee (since January 1995) of Continental Mortgage and Equity Trust
("CMET"); and Director (since January 1995) of Transcontinental Realty
Investors, Inc. ("TCI").
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71
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Trustees (Continued)
BENNETT B. SIMS: Age 63, Trustee (Independent) (since April 1990).
Producer (since January 1994) for Blue Train Pictures; Author (since
1964); Screen and Television Writer (since 1960); Independent
Marketing Consultant (since 1980) for various companies; Professor of
Dramatic Writing (since September 1987) at Tisch School of the Arts,
New York University; Trustee (April 1990 to August 1994) of National
Income Realty Trust ("NIRT"); Trustee (December 1992 to August 1994)
of Vinland Property Trust ("VPT"); Trustee (since April 1990) of
CMET; and Director (since April 1990) of TCI.
TED P. STOKELY: Age 62, Trustee (Independent) (since April 1990)
and Chairman of the Board (since January 1995).
General Manager (since January 1995) of ECF Senior Housing
Corporation, a nonprofit corporation; General Manager (since January
1993) of Housing Assistance Foundation, Inc., a nonprofit corporation;
Part-time unpaid Consultant (since January 1993) and paid Consultant
(April 1992 to December 1992) of Eldercare Housing Foundation
("Eldercare"), a nonprofit corporation engaged in the acquisition of
low income and elderly housing; President (April 1992 to April 1994)
of PSA Group (real estate management and consulting); Executive Vice
President (1987 to 1991) of Key Companies Inc., a publicly traded
company that develops, acquires and sells water and minerals; Trustee
(April 1990 to August 1994) of NIRT; Trustee (since April 1990) and
Chairman of the Board (since January 1995) of CMET; and Director
(since April 1990) and Chairman of the Board (since January 1995) of
TCI.
MARTIN L. WHITE: Age 56, Trustee (Independent) (since January 1995).
Chairman and Chief Executive Officer (since 1993) of North American
Trading Company Ltd.; President and Chief Operating Officer (since
1992) of Community Based Developers, Inc.; Development Officer and
Loan Manager (1986 to 1992) of the City of San Jose, California; Vice
President and Director of Programs (1967 to 1986) of Arpact, Inc., a
government contractor for small business development and trade;
Trustee (since January 1995) of CMET; and Director (since January
1995) of TCI.
EDWARD G. ZAMPA: Age 61, Trustee (Independent) (since January 1995).
General Partner (since 1976) of Edward G. Zampa and Company; Trustee
(since January 1995) of CMET; and Director (since January 1995) of
TCI.
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ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Board Committees
The Trust's Board of Trustees held 13 meetings during 1995. For such year, no
incumbent Trustee attended fewer than 75% of the aggregate of (i) the total
number of meetings held by the Trust's Board of Trustees during the period for
which he had been a Trustee and (ii) the total number of meetings held by all
committees of the Board of Trustees on which he served during the period that
he served.
The Trust's Board of Trustees has an Audit Committee, the function of which is
to review the Trust's operating and accounting procedures. The current members
of the Audit Committee, all of whom are Independent Trustees, are Messrs.
Parsons (Chairman), Stokely and White. The Audit Committee met twice during
1995.
In June 1995, the Trust's Board of Trustees authorized the creation of a
Relationship with Advisor Committee, a Board Development Committee and a
Corporate Vision Committee. The current members of the Relationship with
Advisor Committee are Messrs. Parsons and Zampa. The Relationship with Advisor
Committee reviews and reports to the Trust's Board of Trustees on the services
provided to the Trust by the Advisor and its affiliates and the terms of any
engagement or compensation of the Advisor or its affiliates. The Relationship
with Advisor Committee met once in 1995. The Board Development Committee
reviews and reports to the Trust's Board of Trustees on the membership,
compensation and functions of the Board of Trustees. The current members of
the Board Development Committee are Messrs. Sims and White. The Board
Development Committee held no meetings in 1995. The Corporate Vision Committee
is to review and report to the Trust's Board of Trustees on the Trust's
short-term and long-term strategic objectives. As of March 1, 1996, the
members had not been appointed to the Corporate Vision Committee.
The Trust's Board of Trustees does not have Nominating or Compensation
Committees.
Executive Officers
The following persons currently serve as executive officers of the Trust:
Randall M. Paulson, President; Bruce A. Endendyk, Executive Vice President;
and Thomas A. Holland, Executive Vice President and Chief Financial Officer.
Their positions with the Trust are not subject to a vote of shareholders.
Their ages, terms of service, all positions and
[THIS SPACE INTENTIONALLY LEFT BLANK.]
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ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Executive Officers (Continued)
offices with the Trust or BCM, other principal occupations, business
experience and directorships with other companies during the last five years or
more are set forth below.
RANDALL M. PAULSON: Age 49, President (since August 1995) and Executive Vice
President (January 1995 to August 1995).
President (since August 1995) and Executive Vice President (January
1995 to August 1995) of CMET, TCI and Syntek Asset Management, Inc.
("SAMI"), the managing general partner of Syntek Asset Management,
L.P. ("SAMLP"), which is the general partner of National Realty, L.P.
("NRLP") and National Operating, L.P. ("NOLP") and (October 1994 to
August 1995) of BCM; Director (since August 1995) of SAMI; Executive
Vice President (since January 1995) of American Realty Trust, Inc.
("ART"); Vice President (1993 to 1994) of GSSW, LP, a joint venture of
Great Southern Life and Southwestern Life; Vice President (1990 to
1993) of Property Company of America Realty, Inc.; President (1990) of
Paulson Realty Group; President (1983 to 1989) of Johnstown Management
Company; and Vice President (1979 to 1982) of Lexton-Ancira.
BRUCE A. ENDENDYK: Age 47, Executive Vice President (since January 1995).
President (since January 1995) of Carmel Realty, Inc. ("Carmel
Realty"), a company owned by Syntek West, Inc. ("SWI"); Executive Vice
President (since January 1995) of BCM, SAMI, ART, CMET and TCI;
Management Consultant (November 1990 to December 1994); Executive Vice
President (January 1989 to November 1990) of Southmark Corporation
("Southmark"); President and Chief Executive Officer (March 1988 to
January 1989) of Southmark Equities Corporation; and Vice
President/Resident Manager (December 1975 to March 1988) of Coldwell
Banker Commercial/Real Estate Services in Houston, Texas.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
73
74
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Executive Officers (Continued)
THOMAS A. HOLLAND: Age 53, Executive Vice President and Chief Financial
Officer (since August 1995) and Senior Vice President and Chief Accounting
Officer (July 1990 to August 1995).
Executive Vice President and Chief Financial Officer (since August
1995) and Senior Vice President and Chief Accounting Officer (July
1990 to August 1995) of BCM, SAMI, ART, CMET and TCI; Senior Vice
President and Chief Accounting Officer (July 1990 to February 1994) of
NIRT and VPT; Vice President and Controller (December 1986 to June
1990) of Southmark; Vice President-Finance (January 1986 to December
1986) of Diamond Shamrock Chemical Company; Assistant Controller (May
1976 to January 1986) of Maxus Energy Corporation (formerly Diamond
Shamrock Corporation); Trustee (August 1989 to June 1990) of Arlington
Realty Investors; and Certified Public Accountant (since 1970).
Officers
Although not executive officers of the Trust, the following persons currently
serve as officers of the Trust: Robert A. Waldman, Senior Vice President,
Secretary and General Counsel and Drew D. Potera, Treasurer. Their positions
with the Trust are not subject to a vote of shareholders. Their ages, terms
of service, all positions and offices with the Trust or BCM, other principal
occupations business experience and directorships with other companies during
the last five years or more are set forth below.
ROBERT A. WALDMAN: Age 43, Senior Vice President and General Counsel (since
January 1995); Vice President (December 1990 to January 1995) and Secretary
(since December 1993).
Senior Vice President and General Counsel (since January 1995), Vice
President (December 1990 to January 1995) and Secretary (since
December 1993) of CMET and TCI; Senior Vice President and General
Counsel (since January 1995), Vice President (January 1993 to January
1995) and Secretary (since December 1989) of ART; Senior Vice
President and General Counsel (since November 1994), Vice President
and Corporate Counsel (November 1989 to November 1994), and Secretary
(since November 1989) of BCM; Senior Vice President and General
Counsel (since January 1995), Vice President (April 1990 to January
1995) and Secretary (since December 1990) of SAMI; Vice President
(December 1990 to February 1994) and Secretary (December 1993 to
February 1994) of NIRT and VPT; Director (February 1987 to October
1989) and General Counsel and Secretary (1985 to October 1989) of Red
Eagle Resources Corporation (oil and gas); Assistant General Counsel,
Senior Staff Attorney and Staff Attorney (1981 to 1985) of Texas
International Company (oil and gas); and Staff Attorney (1979 to 1981)
of Iowa Beef Processors, Inc.
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75
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Officers (Continued)
DREW D. POTERA: Age 36, Treasurer (since December 1990).
Treasurer (since December 1990) of CMET and TCI; Treasurer (since
August 1991) and Assistant Treasurer (December 1990 to August 1991) of
ART; Vice President, Treasurer and Securities Manager (since July
1990) of BCM; Vice President and Treasurer (since February 1992) of
SAMI; Treasurer (December 1990 to February 1994) of NIRT and VPT; and
Financial Consultant with Merrill Lynch, Pierce, Fenner & Smith
Incorporated (June 1985 to June 1990).
In addition to the foregoing officers, the Trust has several vice presidents
and assistant secretaries who are not listed herein.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Under the securities laws of the United States, the Trust's Trustees, executive
officers, and any persons holding more than ten percent of the Trust's shares
of beneficial interest are required to report their ownership of the Trust's
shares and any changes in that ownership to the Securities and Exchange
Commission (the "Commission"). Specific due dates for these reports have been
established and the Trust is required to report any failure to file by these
dates during 1995. All of these filing requirements were satisfied by its
Trustees and executive officers and ten percent holders. In making these
statements, the Trust has relied on the written representations of its
incumbent Trustees and executive officers and its ten percent holders and
copies of the reports that they have filed with the Commission.
The Advisor
Although the Trust's Board of Trustees is directly responsible for managing the
affairs of the Trust and for setting the policies which guide it, the
day-to-day operations of the Trust are performed by a contractual advisor under
the supervision of the Trust's Board of Trustees. The duties of the advisor
include, among other things, locating, investigating, evaluating and
recommending real estate and mortgage note sales opportunities to the Trust.
The advisor also serves as a consultant to the Trust's Board of Trustees in
connection with the business plan.
BCM has served as the Trust's advisor since March 1989. BCM is a company of
which Messrs. Paulson, Endendyk and Holland serve as executive officers. BCM
is owned by a trust for the benefit of the children of Gene E. Phillips. Until
September 1, 1992, Mr. Phillips served as a director of BCM, and until December
22, 1989, as Chief Executive Officer of BCM. Gene E. Phillips serves as a
representative of his children's trust which owns BCM and, in such capacity,
has substantial contact with the management of BCM and input with respect to
BCM's performance of advisory services to the Trust.
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ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
At the Trust's annual meeting of shareholders held on March 7, 1995, the
Trust's shareholders approved the renewal of the Trust's Advisory Agreement
with BCM through the next annual meeting of the Trust's shareholders.
Subsequent renewals of the Trust's Advisory Agreement with BCM require the
approval of the Trust's shareholders.
Under the Advisory Agreement, the Advisor is required to formulate and submit
annually for approval by the Trust's Board of Trustees a budget and business
plan for the Trust. The Advisor is required to report quarterly to the Trust's
Board of Trustees on the Trust's performance against the business plan. In
addition, all transactions by the Trust shall require prior approval by the
Trust's Board of Trustees, unless they are explicitly provided for in the
approved business plan or are made pursuant to authority expressly delegated to
the Advisor by the Trust's Board of Trustees.
The Advisory Agreement also requires prior approval of the Trust's Board of
Trustees for the retention of all consultants and third party professionals,
other than legal counsel.
The Advisory Agreement provides for BCM to be responsible for the day-to-day
operations of the Trust and to receive an advisory fee comprised of a gross
asset fee of .0625% per month (.75% per annum) of the average of the gross
asset value of the Trust (total assets less allowance for amortization,
depreciation or depletion and valuation reserves) and an annual net income fee
equal to 7.5% per annum of the Trust's net income.
The Advisory Agreement also provides for BCM to receive an annual incentive
sales fee equal to 10% of the amount, if any, by which the aggregate sales
consideration for all real estate sold by the Trust during such fiscal year
exceeds the sum of: (i) the cost of each such property as originally recorded
in the Trust's books for tax purposes (without deduction for depreciation,
amortization or reserve for losses), (ii) capital improvements made to such
assets during the period owned by the Trust, and (iii) all closing costs,
(including real estate commissions) incurred in the sale of such property;
provided, however, no incentive fee shall be paid unless (a) such real estate
sold in such fiscal year, in the aggregate, has produced an 8% simple annual
return on the Trust's net investment including capital improvements, calculated
over the Trust's holding period before depreciation and inclusive of operating
income and sales consideration and (b) the aggregate net operating income from
all real estate owned by the Trust for each of the prior and current fiscal
years shall be at least 5% higher in the current fiscal year than in the prior
fiscal year.
Under the Advisory Agreement, BCM or an affiliate of BCM is also to receive a
mortgage brokerage and equity refinancing fee for obtaining loans to the Trust
or refinancing on Trust properties equal to the lesser of (i) 1% of the amount
of the loan or the amount refinanced or (ii) a brokerage or refinancing fee
which is reasonable and fair under
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77
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
the circumstances; provided, however, that no such fee shall be paid on loans
from BCM or an affiliate of BCM without the approval of the Trust's Board of
Trustees. No fee shall be paid on loan extensions.
Under the Advisory Agreement, BCM is to receive reimbursement of certain
expenses incurred by it, in the performance of advisory services to the Trust.
Under the Advisory Agreement (as required by the Trust's Declaration of Trust)
all or a portion of the annual advisory fee must be refunded by the Advisor to
the Trust if the Operating Expenses of the Trust (as defined in the Trust's
Declaration of Trust) exceed certain limits specified in the Declaration of
Trust based on the book value, net asset value and net income of the Trust
during such fiscal year. The effect of this limitation was to require that BCM
refund $44,000 and $6,000 of the 1995 and 1994 annual advisory fee,
respectively. No refund was required in 1993.
Additionally, if the Trust were to request that BCM render services to the
Trust other than those required by the Advisory Agreement, BCM or an affiliate
of BCM will be separately compensated for such additional services on terms to
be agreed upon from time to time. As discussed below, under "Property
Management", the Trust has hired Carmel Realty Services, Ltd. ("Carmel, Ltd."),
an affiliate of BCM, to provide management for the Trust's properties and, as
discussed below, under "Real Estate Brokerage" the Trust has engaged Carmel
Realty, also an affiliate of BCM, on a non-exclusive basis to provide brokerage
services for the Trust.
BCM may only assign the Advisory Agreement with the prior consent of the Trust.
The directors and principal officers of BCM are set forth below.
MICKEY N. PHILLIPS: Director
RYAN T. PHILLIPS: Director
RANDALL M. PAULSON: President
MARK W. BRANIGAN: Executive Vice President
OSCAR W. CASHWELL: Executive Vice President
BRUCE A. ENDENDYK: Executive Vice President
THOMAS A. HOLLAND: Executive Vice President and Chief
Financial Officer
COOPER B. STUART: Executive Vice President
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ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
CLIFFORD C. TOWNS, JR: Executive Vice President, Finance
ROBERT A. WALDMAN: Senior Vice President, Secretary and
General Counsel
DREW D. POTERA: Vice President, Treasurer and Securities
Manager
Mickey N. Phillips is Gene E. Phillips' brother and Ryan T. Phillips is Gene E.
Phillips' son. Gene E. Phillips serves as a representative of the trust
established for the benefit of his children which owns BCM and, in such
capacity, has substantial contact with the management of BCM and input with
respect to its performance of advisory services to the Trust.
Property Management
Since February 1, 1990, affiliates of BCM have provided property management
services to the Trust. Currently, Carmel, Ltd. provides such property
management services for a fee of 5% or less of the monthly gross rents
collected on the properties under its management. Carmel, Ltd. subcontracts
with other entities for the provision of the property-level management services
to the Trust at various rates. The general partner of Carmel, Ltd. is BCM.
The limited partners of Carmel, Ltd. are (i) SWI, of which Mr. Phillips is the
sole shareholder, (ii) Mr. Phillips and (iii) a trust for the benefit of the
children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level
management and leasing of one of the Trust's office buildings and the
commercial properties owned by a real estate partnership in which the Trust and
TCI are partners to Carmel Realty which is a company owned by SWI. Carmel
Realty is entitled to receive property and construction management fees and
leasing commissions in accordance with its property-level management agreement
with Carmel, Ltd.
Real Estate Brokerage
Since December 1, 1992, Carmel Realty has been engaged, on a non-exclusive
basis, to provide brokerage services for the Trust. Carmel Realty is entitled
to receive a real estate brokerage commission for property sales by the Trust
in accordance with the following sliding scale of total fees to be paid by the
Trust: (i) maximum fee of 5% on the first $2.0 million of any sales
transaction of which no more than 4% would be paid to Carmel Realty or
affiliates; (ii) maximum fee of 4% on transaction amounts between $2.0 million
- - $5.0 million of which no more than 3% would be paid to Carmel Realty or
affiliates; (iii) maximum fee of 3% on transaction amounts between $5.0 million
- - $10.0 million of which no more than 2% would be paid to Carmel Realty or
affiliates; and, (iv) maximum fee of 2% on transaction amounts in excess of
$10.0 million of which no more than 1 1/2% would be paid to Carmel Realty or
affiliates.
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ITEM 11. EXECUTIVE COMPENSATION
The Trust has no employees, payroll or benefit plans and pays no compensation
to the executive officers of the Trust. The executive officers of the Trust
who are also officers or employees of BCM, the Trust's Advisor, are compensated
by the Advisor. Such executive officers of the Trust perform a variety of
services for the Advisor and the amount of their compensation is determined
solely by the Advisor. BCM does not allocate the cash compensation of its
officers among the various entities for which it serves as advisor. See ITEM
10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT - The Advisor"
for a more detailed discussion of the compensation payable to BCM by the Trust.
The only remuneration paid by the Trust is to the Trustees who are not officers
or directors of BCM or its affiliated companies. The Independent Trustees (i)
review the business plan of the Trust to determine that it is in the best
interest of the Trust's shareholders, (ii) review the Trust's contract with the
advisor, (iii) supervise the performance of the Trust's advisor and review the
reasonableness of the compensation which the Trust pays to its advisor in terms
of the nature and quality of services performed, (iv) review the reasonableness
of the total fees and expenses of the Trust and (v) select, when necessary, a
qualified independent real estate appraiser to appraise properties acquired by
the Trust. Until January 1, 1995, the Independent Trustees received
compensation in the amount of $5,000, plus reimbursement for expenses. In
addition, each Independent Trustee received (i) $1,250 per year for each
committee of the Board of Trustees on which he served, (ii) $1,000 per year for
each committee chairmanship, and (iii) $1,000 per day for any special services
rendered by him to the Trust outside of his ordinary duties as Trustee, plus
reimbursement of expenses.
On June 9, 1995, the Trust's Board of Trustees revised the compensation to be
paid to Independent Trustees effective as of January 1, 1995. Each Independent
Trustee shall receive compensation in the amount of $15,000 per year, plus
reimbursement for expenses and the Chairman of the Board shall receive $1,500
per year for serving in such position. In addition, each Independent Trustee
shall receive an additional fee of $1,000 per day for any special services
rendered by him to the Trust outside of his ordinary duties as Trustee, plus
reimbursement of expenses.
During 1995, $98,622 was paid to the Independent Trustees in total Trustees'
fees for all services including the base annual fee for service during the
period January 1, 1995 through December 31, 1995, and 1995 special service
fees, as follows: Geoffrey C. Etnire, $13,187; Harold Furst, Ph.D., $15,000;
John P. Parsons, $16,275; Bennett B. Sims, $11,202; Ted P. Stokely, $12,625;
Martin L. White, $15,333; and Edward G. Zampa, $15,000.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
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ITEM 11. EXECUTIVE COMPENSATION (Continued)
Performance Graph
The following performance graph compares the cumulative total shareholder
return on the Trust's shares of beneficial interest with the Standard & Poor's
500 Stock Index ("S&P 500 Index") and the National Association of Real Estate
Investment Trusts, Inc. Hybrid REIT Total Return Index ("REIT Index"). The
comparison assumes that $100 was invested on December 31, 1990 in the Trust's
shares of beneficial interest and in each of the indices and further assumes
the reinvestment of all distributions. Past performance is not necessarily an
indicator of future performance.
[CHART]
================================================================================
1990 1991 1992 1993 1994 1995
- --------------------------------------------------------------------------------
THE TRUST 100 248 281 708 949 978
- --------------------------------------------------------------------------------
S&P 500 INDEX 100 131 141 155 157 215
- --------------------------------------------------------------------------------
REIT INDEX 100 139 162 197 204 251
================================================================================
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners. The following table sets
forth the ownership of the Trust's shares of beneficial interest, both
beneficially and of record, both individually and in the aggregate for those
persons or entities known by the Trust to be beneficial owners of more than 5%
of its shares of beneficial interest as of the close of business on March 1,
1996.
Amount and Nature
Name and Address of of Beneficial Percent of
Beneficial Owner Ownership Class (1)
- --------------------------- ---------------------- ----------
Transcontinental Realty
Investors, Inc. 170,750 22.3%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231
American Realty Trust, Inc. 205,151 26.7%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231
___________________________
(1) Percentages are based upon 767,044 shares of beneficial interest
outstanding at March 1, 1996.
Security Ownership of Management. The following table sets forth the ownership
of the Trust's shares of beneficial interest, both beneficially and of record,
both individually and in the aggregate for the Trustees and executive officers
of the Trust as of the close of business on March 1, 1996.
Amount and Nature
of Beneficial Percent of
Name of Beneficial Owner Ownership Class (1)
- -------------------------- --------------------- ----------
All Trustees and Executive 383,226 (2) 50.0%
Officers as a group
(8 individuals)
___________________________
(1) Percentage is based upon 767,044 shares of beneficial interest
outstanding at March 1, 1996.
(2) Includes 170,750 shares owned by TCI of which the Trustees may be deemed
to be beneficial owners by virtue of their positions as directors of TCI
and 205,151 shares owned by ART and 7,325 shares owned by BCM, of which
the executive officers of the Trust may be deemed to be beneficial owners
by virtue of their positions as executive officers of ART and BCM. The
Trust's Trustees and executive officers disclaim beneficial ownership of
such shares. Each of the directors of ART may be deemed to be beneficial
owners
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(Continued)
of the shares owned by ART by virtue of their positions as directors
of ART. Each of the directors of BCM may be deemed to be beneficial
owners of the shares owned by BCM by virtue of their positions as
directors of BCM. The directors of ART and BCM disclaim such
beneficial ownership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Business Relationships
In February 1989, the Trust's Board of Trustees voted to retain BCM as the
Trust's advisor. See ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT - The Advisor." BCM is a company of which Messrs. Paulson, Endendyk
and Holland serve as executive officers. Gene E. Phillips served as a director
of BCM until December 22, 1989, and as Chief Executive Officer of BCM until
September 1, 1992. BCM is owned by a trust for the benefit of the children of
Mr. Phillips. Mr. Phillips serves as a representative of his children's trust
which owns BCM and, in such capacity, has substantial contact with the
management of BCM and input with respect to BCM's performance of advisory
services to the Trust.
Since February 1, 1991, affiliates of BCM have provided property management
services to the Trust. Currently, Carmel, Ltd. provides such property
management services. The general partner of Carmel, Ltd. is BCM. The limited
partners of Carmel, Ltd. are (i) SWI, of which Mr. Phillips is the sole
shareholder, (ii) Mr. Phillips and (iii) a trust for the benefit of the
children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level
management and leasing of one of the Trust's office buildings and the
commercial properties owned by a real estate partnership in which the Trust and
TCI are partners to Carmel Realty, which is a company owned by SWI.
Prior to December 1, 1992, affiliates of BCM provided brokerage services to the
Trust and received brokerage commissions in accordance with the advisory
agreement. Since December 1, 1992, the Trust has engaged, on a non-exclusive
basis, Carmel Realty to perform brokerage services for the Trust. Carmel
Realty is a company owned by SWI.
The Trustees and officers of the Trust also serve as trustees or directors and
officers of CMET and TCI. The Trustees owe fiduciary duties to such entities
as well as to the Trust under applicable law. CMET and TCI have the same
relationship with BCM as the Trust. Mr. Phillips is a general partner of
SAMLP, the general partner of NRLP and NOLP. BCM performs certain
administrative functions for NRLP and NOLP on a cost-reimbursement basis. BCM
also serves as advisor to ART. Mr. Phillips served as Chairman of the Board
and as a director of ART until November 16, 1992. Messrs. Paulson, Endendyk
and Holland serve as executive officers of ART.
From April 1992 to December 31, 1992, Mr. Stokely was employed as a paid Real
Estate Consultant and since January 1993 as a part-time unpaid Consultant for
Eldercare, a nonprofit corporation engaged in the
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83
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Certain Business Relationships (Continued)
acquisition of low income and elderly housing. Eldercare has a revolving loan
commitment from SWI, of which Mr. Phillips is the sole shareholder. Eldercare
filed for bankruptcy protection in July 1993 and was dismissed from bankruptcy
on October 12, 1994. Eldercare again filed for bankruptcy protection in May
1995.
Related Party Transactions
Historically, the Trust has engaged in and may continue to engage in business
transactions, including real estate partnerships, with related parties. The
Trust's management believes that all of the related party transactions
represented the best investments available at the time and were at least as
advantageous to the Trust as could have been obtained from unrelated third
parties.
As more fully described in ITEM 2. "PROPERTIES - Real Estate," the Trust is a
partner with TCI in the Tri-City Limited Partnership and Nakash Income
Associates.
In 1995, the Trust paid BCM and its affiliates $316,000 in advisory fees,
$63,000 in mortgage brokerage and equity refinancing fees, and $156,000 in
property management and construction supervision fees (net of property
management fees paid to subcontractors, other than Carmel Realty). In
addition, as provided in the Advisory Agreement, BCM received cost
reimbursements from the Trust of $140,000 in 1995. No brokerage commissions
were paid to BCM or its affiliates in 1995.
Restrictions on Related Party Transactions
The Trust's Declaration of Trust provides that:
the Trustees shall not "make any loan to the Sponsor of the Trust, or its
affiliates except as to loans...which have been approved by a majority of
the independent trustees and reviewed and determined to be commercially
reasonable by an independent expert" and that the Trustees shall not
"purchase, sell or lease any real properties to or from the Sponsor of
its affiliates, including any investor program in or of which the Sponsor
may also be a general partner of sponsor" except that "the Trust may form
joint ventures or partnerships with affiliates for the acquisition,
development or lease of real property or the funding of mortgage loans."
Moreover, the Trust's Declaration of Trust also provides:
The Trust shall not purchase or lease, directly or indirectly, any real
property or purchase any mortgage from the Advisor or any affiliated
person....
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Restrictions on Related Party Transactions (Continued)
The Trust's Declaration of Trust further provides that:
the Trust shall not, directly or indirectly, engage in any transaction
with any Trustee, officer, or employee of the Trust or any director,
officer, or employee of the Advisor, or of any company or other
organization of which any of the foregoing is an affiliate, except for .
. . transactions with the Advisor or affiliates thereof involving loans,
real estate brokerage services, mortgage brokerage services, real
property management services, the servicing of mortgages, the leasing of
personal property, or other services, provided such transactions are on
terms not less favorable to the Trust than the terms on which non-
affiliated parties are then making similar loans or performing similar
services for comparable entities in the same area and are not entered
into on an exclusive basis with such person; provided, however, that any
transaction . . . may be entered into only upon approval by affirmative
vote or consent of a majority of the Trustees who are not interested in
or affiliates of any person who is interested in the transaction.
The Trust's Declaration of Trust defines "Affiliate" as follows:
[A]s to any person, any other person who owns beneficially, directly or
indirectly, 1% or more of the outstanding capital stock, shares, or
equity interests of such person or of any other person which controls, is
controlled by, or is under common control with, such person or is an
officer, retired officer, director, employee, partner, or trustee
(excluding noninterested trustees not otherwise affiliated with the
entity) of such person or of any other person which controls, is
controlled by, or is under common control with, such person.
From 1990 until January 11, 1995, all related party transactions that the Trust
entered into were required to be reviewed by the Related Party Transaction
Committee of the Trust's Board of Trustees to determine whether such
transactions were (i) fair to the Trust and (ii) were permitted by the Trust's
governing documents. Each of the members of the Related Party Transaction
Committee was an Independent Trustee who was not an officer, director, or
employee of BCM, the Trust's advisor, and was not an officer or employee of the
Trust. The Related Party Transaction Committee was terminated by the Trust's
Board of Trustees on January 11, 1995.
Pursuant to the terms of the Modification of Stipulation of Settlement in the
Olive Litigation, as more fully discussed in ITEM 3. "LEGAL PROCEEDINGS -
Olive Litigation," which became effective on January 11, 1995, certain related
party transactions which the Trust may enter into prior to April 28, 1999,
require the unanimous approval of the Trust's Board of Trustees. In addition,
such related party transactions are to be discouraged may only be entered into
in exceptional circumstances and after a determination by the Trust's Board of
Trustees that the trans-
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Restrictions on Related Party Transactions (Continued)
action is in the best interests of the Trust and that no other opportunity
exists that is as good as the opportunity presented by such transaction.
The Modification requirements for related party transactions do not apply to
direct contractual agreements for services between the Trust and the Advisor or
one of its affiliates, (including the Advisory Agreement, the Brokerage
Agreement and the property management contracts). These agreements, pursuant
to the specific terms of the Modification, require the prior approval by
two-thirds of the Trustees of the Trust, and if required, approval by a
majority of the Trust's shareholders. The Modification requirements for
related party transactions also do not apply to joint ventures between or among
the Trust and CMET, NIRT or TCI or any of their affiliates or subsidiaries and
a third party having no prior or intended future business or financial
relationship with Mr. Phillips, Mr. Friedman, the Advisor, or any affiliate of
such parties. Such joint ventures may be entered into on the affirmative vote
of a majority of the Trustees of the Trust. See ITEM 3. "LEGAL PROCEEDINGS -
Olive Litigation."
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements
INCOME OPPORTUNITY REALTY TRUST
Report of Independent Certified Public Accountants
Consolidated Balance Sheets - December 31, 1995 and 1994
Consolidated Statements of Operations -
Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows -
Years Ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
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ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
TRI-CITY LIMITED PARTNERSHIP
Report of Independent Certified Public Accountants
Balance Sheets - December 31, 1995 and 1994
Statements of Operations -
Years Ended December 31, 1995, 1994 and 1993
Statements of Partners' Equity -
Years Ended December 31, 1995, 1994 and 1993
Statements of Cash Flows -
Years Ended December 31, 1995, 1994 and 1993
Notes to Financial Statements
NAKASH INCOME ASSOCIATES
Report of Independent Certified Public Accountants
Balance Sheets - December 31, 1995 and 1994
Statements of Operations -
Years Ended December 31, 1995, 1994 and 1993
Statements of General Partners' Equity -
Years Ended December 31, 1995, 1994 and 1993
Statements of Cash Flows -
Years Ended December 31, 1995, 1994 and 1993
Notes to Financial Statements
2. Financial Statement Schedules
INCOME OPPORTUNITY REALTY TRUST
Schedule III - Real Estate and Accumulated Depreciation
Schedule IV - Mortgage Loans on Real Estate
TRI-CITY LIMITED PARTNERSHIP
Schedule III - Real Estate and Accumulated Depreciation
NAKASH INCOME ASSOCIATES
Schedule IV - Mortgage Loans on Real Estate
All other schedules are omitted because they are not applicable or because the
required information is shown in the Financial Statements or the
Notes thereto.
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ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
3. Exhibits
The following documents are filed as Exhibits to this Report:
Exhibit
Number Description
- ------- ---------------------------------------------------------------------
3.0 Second Amended and Restated Declaration of Trust (incorporated by
reference to the Registrant's Current Report on Form 8-K dated
August 14, 1987).
3.1 Amendment No. 1 to the Second Amended and Restated Declaration of
Trust (incorporated by reference to the Registrant's Current Report
on Form 8-K dated September 18, 1991).
3.2 Restated Trustees' Regulations dated as of April 21, 1989
(incorporated by reference to the Registrant's Current Report on
Form 8-K dated May 9, 1989).
3.3 Amendment No. 2 to the Second Amended and Restated Declaration of
Trust, dated as of August 24, 1993 (incorporated by reference to
Exhibit No. 3.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993).
10.0 Advisory Agreement dated as of March 7, 1995, between Income
Opportunity Realty Trust and Basic Capital Management, Inc.
(incorporated by reference to Exhibit No. 10.1 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994).
10.2 Brokerage Agreement dated as of February 11, 1994, between Income
Opportunity Realty Trust and Carmel Realty, Inc., (incorporated by
reference to Exhibit No. 10.3 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993).
10.3 Brokerage Agreement dated as of February 11, 1995, between Income
Opportunity Realty Trust and Carmel Realty, Inc. (incorporated by
reference to Exhibit No. 10.4 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994).
10.4 Brokerage Agreement dated as of February 11, 1996, between Income
Opportunity Realty Trust and Carmel Realty, Inc., filed herewith.
27.0 Financial Data Schedule, filed herewith.
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INCOME OPPORTUNITY REALTY TRUST
Dated: March 13, 1996 By: /s/ Randall M. Paulson
--------------------------------- ----------------------------------
Randall M. Paulson
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
By: /s/ John P. Parsons By: /s/ Martin L. White
----------------------------------- ----------------------------------
John P. Parsons Martin L. White
Trustee Trustee
By: /s/ Bennett B. Sims By: /s/ Edward G. Zampa
----------------------------------- ----------------------------------
Bennett B. Sims Edward G. Zampa
Trustee Trustee
By: /s/ Ted P. Stokely
-----------------------------------
Ted P. Stokely
Trustee
By: /s/ Thomas A. Holland
-----------------------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Dated: March 13, 1996
---------------------------------
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INCOME OPPORTUNITY REALTY TRUST
EXHIBITS TO
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 1995
Exhibit
Number Description Page
- ------- ----------------- ----
10.4 Brokerage Agreement dated as of February 90
11, 1996, between Income Opportunity
Realty Trust and Carmel Realty, Inc.
27.0 Financial Data Schedule. 97
89