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DRAFT 10/14/96
TO: The Limited Partners of Hall Institutional Mortgage Fund Limited
Partnership
Enclosed is a copy of the consent solicitation statement (the "Solicitation
Statement") relating to the solicitation of written consents of the limited
partners (the "Limited Partners") of Hall Institutional Mortgage Fund Limited
Partnership, an Arizona limited partnership (the "Partnership"), (i) to sell
substantially all of the non-cash assets of the Partnership to an affiliate
thereof (the "Sale Transaction") for a purchase price of $1,600,000 (the
"Purchase Price") and (ii) to subsequently dissolve, terminate and wind up the
Partnership (the "Dissolution").
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE AND FORWARD THE ENCLOSED CONSENT CARD
PROMPTLY IN THE ENCLOSED ENVELOPE.
Due to the importance of the actions for which consent is solicited, you should
read the entire Solicitation Statement carefully before returning the consent
card mailed to you with this Solicitation Statement.
Regardless of the number of units of interests in the Partnership ("Units") you
hold, it is important that your Units be voted. After you have received and
read the Solicitation Statement, we urge you to fill in, date, sign and mail
the consent card promptly.
Please note that capitalized terms in this letter unless otherwise defined
herein shall have the same meaning as set forth in the Solicitation Statement.
In order to help you understand some of the basic information outlined in the
Solicitation Statement, we have prepared the following summary of important
facts discussed in this Solicitation Statement.
Purpose
The purpose of the Solicitation Statement is to provide information to you
regarding the proposed Sale Transaction and Dissolution and to ascertain
whether the Limited Partners are in favor of, or opposed to, the Sale
Transaction and Dissolution. The Sale Transaction involves the sale of the
Partnership's remaining receivables and the Dissolution involves
the subsequent termination of the Partnership by the conversion of all the
Partnership's assets to cash and the distribution of the cash to the
Partnership's Limited Partners. The completion of such a sale and liquidation
is contingent upon approval by a majority of the Limited Partner Unit
ownership. The Partnership will enter into the Sale Transaction and subsequent
Dissolution if the Limited Partners holding a majority of the Units held by all
Limited Partners, who are not affiliates of the Partnership, vote in favor of
the Sale Transaction and Dissolution.
Projected Cash Distribution
Assuming that the Limited Partners vote to approve the Sale Transaction and
Dissolution, the distribution is projected to be approximately $1,370 per Unit
of Limited Partnership interest. This distribution would be a one-time,
all-cash distribution and is anticipated to occur prior to December 31, 1996.
Basis for Sale Transaction and Dissolution
The underlying reasons for the Sale Transaction and Dissolution are summarized
as follows:
First, as discussed in the section entitled "Special Factors" in the
Solicitation Statement, recent modifications to the Partnership's loan
portfolio may have jeopardized the Partnership's prior reliance on certain
exemptions to registration under the Investment Company Act of 1940.
Consequently, if the Partnership does not liquidate, it may have to register as
a reporting company under the Investment Company Act of 1940. This may not be
possible
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The Limited Partners of
Hall Institutional Mortgage Fund Limited Partnership
______________, 1996
Page 2
given the limited purpose of the Partnership and even if possible, would
require substantial additional administrative burdens, which, as noted above,
the General Partner is attempting to minimize.
Second, the General Partner has been looking for a method of accommodating a
number of Limited Partners who have, over the past few years, requested an
opportunity to effectively sell their ownership interests.
Third, the General Partner has been looking for a method to avoid the
administrative cost and burden resulting from the Partnership's status as a
public company and the administrative cost increases that have occurred due to
the number of pension and profit sharing plans which previously owned Units who
have terminated their plans, necessitating the allocation of fractional
interests to all of their related employees.
The General Partner has obtained an independent third-party appraisal and
fairness opinion of the Partnership's notes receivable and the Sale
Transaction, respectively. After reviewing the terms of the proposed Sale
Transaction in relation to the appraised value of the Specific Loans, the
General Partner considers the Sale Transaction to be fair to the Limited
Partners.
Consequences of Disapproving the Sale Transaction and Dissolution
If the Proposal is not approved, the Partnership will continue to own the
Specific Loans and will continue to receive payments thereon, if any. The
Partnership may then be required to use its assets to register under the 1940
Act. See "Special Factors -- The Proposal." In such event, it is currently
the intention of the General Partner to seek an alternative buyer for the
Specific Loans; however, it is highly unlikely that the General Partner will be
able to arrange for an alternative sale of the Specific Loans at a favorable
price or on terms which are as or more favorable than those offered by
Purchaser, or on terms which are otherwise acceptable to the Partnership. The
obligor on each Specific Loan is a partnership controlled by the Purchaser, and
a majority of such properties owned by such partnerships are managed by
affiliates of the Purchaser; therefore, because the Affiliated Borrowers are
affiliates of the Purchaser, the Purchaser would derive more benefit from the
purchase of the Specific Loans than would an unaffiliated third party.
Sale of Units Outside Sale Transaction
There is currently no secondary market for Limited Partner Units to the
knowledge of the General Partner.
Therefore, if the Limited Partners holding a majority of the Units held by all
Limited Partners, who are not affiliates of the Partnership, vote for the
Proposal, the Partnership will proceed with the Sale Transaction and
Dissolution as described in the Solicitation Statement. Therefore, it is very
important that all Limited Partners vote their Units.
Voting Procedures
Enclosed in your package is a consent card. This card permits you to vote for,
against or abstain from voting for the Proposal. Simply check the appropriate
box and send this consent card to the Partnership's administrative agent,
MAVRICC Management Systems, Inc., in the enclosed return envelope.
Questions associated with the Solicitation Statement, voting, Unit ownership,
or any other questions in connection with the contemplated Proposal, should be
referred to MAVRICC Management Systems, Inc. ("MAVRICC") at the phone number
and address indicated in the Solicitation Statement. If MAVRICC is unable to
answer your questions, you may direct your questions to Hall Financial Group,
Inc., 750 N. St. Paul Street, Suite 200, Attention: Mark Blocher, at (214)
953-1155; fax (214) 953-1160.
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The Limited Partners of
Hall Institutional Mortgage Fund Limited Partnership
______________, 1996
Page 3
PLEASE DO NOT SEND IN YOUR CERTIFICATE FOR UNITS WITH YOUR CONSENT FORM. We
will notify you when to submit your Units.
Sincerely,
HALL PENSION FUND ASSOCIATES,
GENERAL PARTNER
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PRELIMINARY COPY
SOLICITATION STATEMENT DRAFT 10/14/96
HALL INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP
4455 East Camelback Road, Suite A-200
Phoenix, Arizona 85018
(602)840-0060
SOLICITATION OF CONSENTS TO SELL CERTAIN LOANS OF THE PARTNERSHIP AND
DISSOLVE, TERMINATE AND WIND UP THE PARTNERSHIP
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INTRODUCTION
Hall Institutional Mortgage Fund Limited Partnership, an Arizona
limited partnership (the "Partnership"), is soliciting consents of the limited
partners ("Limited Partners") holding units ("Units") of Limited Partner
interests in the Partnership of the following proposal (the "Proposal"): (i)
the sale of substantially all of the non-cash assets of the Partnership (the
"Sale Transaction") to Hall Financial Group, Inc., a Delaware corporation and
affiliate of the Partnership ("Purchaser"), for a purchase price of $1,600,000
(the "Purchase Price") and (ii) the dissolution, termination and winding up of
the Partnership (the "Dissolution"). If the Proposal is approved by the
requisite consent of the Limited Partners, the Sale Transaction will close on
or around _______________, 1996 and the Dissolution will occur as soon as
practicable thereafter. After repayment of the Partnership's indebtedness and
liabilities incurred for this Sale Transaction and Dissolution, net proceeds
from the Sale Transaction will aggregate approximately $3,500,000, or
approximately $1,370 per Unit. The Partnership anticipates that the
distribution will occur prior to December 31, 1996, and that a taxable loss
resulting from the Dissolution and sale of the assets will be recognized in
1996, and the Partnership will be dissolved, terminated and wound up in
accordance with the terms of the Partnership's Amended and Restated Certificate
and Agreement of Limited Partnership (the "Partnership Agreement").
Pursuant to the Partnership Agreement, the adoption of the Proposal
requires the consent of the Limited Partners of record holding a majority of
the outstanding Units (a "majority in interest"). As of October 1, 1996, there
were 2,552 Units outstanding and approximately 633 holders of record.
THE BOARD OF DIRECTORS (THE "BOARD") OF HALL APARTMENT ASSOCIATES,
INC., THE MANAGING GENERAL PARTNER OF THE PARTNERSHIP (THE "MANAGING GENERAL
PARTNER"), BELIEVES THAT THE PROPOSAL IS FAIR TO AND IN THE BEST INTEREST OF
THE LIMITED PARTNERS. THE BOARD HAS RECEIVED A WRITTEN OPINION FROM ITS
FINANCIAL ADVISER, PRINCIPAL FINANCIAL SECURITIES, INC., DATED AS OF AUGUST 6,
1996, THAT THE CONSIDERATION TO BE RECEIVED BY THE PARTNERSHIP IN CONNECTION
WITH THE SALE TRANSACTION IS FAIR TO THE PARTNERSHIP FROM A FINANCIAL POINT OF
VIEW AS OF THAT DATE. YOU SHOULD NOTE THAT THE PURCHASER IS AN AFFILIATE OF
THE PARTNERSHIP, HALL PENSION FUND ASSOCIATES (THE "GENERAL PARTNER") AND THE
MANAGING GENERAL PARTNER, WHEN DETERMINING YOUR VOTE. IN VIEW OF THIS
AFFILIATION, THE BOARD RECOMMENDS THAT YOU ANALYZE THE SALE TRANSACTION
CAREFULLY PRIOR TO CASTING YOUR VOTE.
The approximate date on which this Solicitation Statement is being
mailed to Limited Partners is ______________, 1996. Only Limited Partners who
are holders of record of Units at the close of business on ________________,
1996 (the "Record Date") will be entitled to submit consent cards with respect
to the Proposal. The deadline for the receipt of consent cards is
_________________, 1996 at ______ p.m., Washington, D.C. time, (the "Expiration
Date"). However, the Proposal will be deemed adopted and effective on the date
(the "Approval Date") when the Partnership has received executed consent cards
consenting to the Proposal from the Limited Partners holding a majority in
interest of the Units outstanding on the Record Date and from the Limited
Partners of a majority in interest of the Units outstanding who are not
affiliates of the Partnership on the Record Date.
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THE TRANSACTIONS DESCRIBED HEREIN HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE
FAIRNESS OR MERITS OF SUCH TRANSACTIONS, NOR UPON THE ACCURACY OR ADEQUACY OF
THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
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Limited Partners may revoke any previously submitted consent with
respect to the Proposal by delivering written notice of revocation to the
Partnership prior to the earlier of the Approval Date or the Expiration Date.
Any duly executed consent card on which a consent or indication of withholding
of consent is not indicated (except broker non-votes expressly indicating a
lack of discretionary authority to consent) will be deemed a consent to the
Proposal. An abstention from voting on the Proposal will effectively count as
a negative vote with respect to such Proposal.
No persons have been authorized to give any information or to make
any representation other than the representations contained in this
Solicitation Statement in connection with the consents solicited hereby and, if
given or made, such information or representation must not be relied upon as
having been authorized by the Partnership, the General Partner, the Managing
General Partner or any other person.
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TABLE OF CONTENTS
SPECIAL FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Effect of Approval of the Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consent of Limited Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Effect on Partnership and Limited Partners if Proposal is not Approved . . . . . . . . . . . . . . . . . . . 5
Appraisal Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Fairness of the Sale Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
MATERIAL TERMS OF THE SALE TRANSACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The Asset Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Regulatory Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
The Purchaser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
CERTAIN INFORMATION CONCERNING THE PARTNERSHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
General Partner and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Rights and Powers of Limited Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Term and Dissolution of the Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Description of the Partnership's Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Description of the Partnership's Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . 15
Specific Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ESTIMATE OF ALLOCATIONS AND DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Sale Transaction and Dissolution of Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Income Tax Consequences to Tax-Exempt Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
INTERESTS OF CERTAIN PERSONS IN TRANSACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
MARKET FOR UNITS AND RELATED MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
VOTING PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SOLICITATION COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
INCORPORATION BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SCHEDULE I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Certain Information Regarding the Executive Officers
and the Directors of the Managing General Partner . . . . . . . . . . . . . . . 28
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INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Annex A Valuation Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Annex B Fairness Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
Annex C Asset Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1
FORM OF BALLOT
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SPECIAL FACTORS
Summarized in this Solicitation Statement are certain provisions of
the Partnership Agreement. Such summaries are qualified in their entirety by
reference to the full text of the Partnership Agreement, which has been
provided previously to the Limited Partners and copies of which may be obtained
without charge upon request to the Partnership at the address set forth under
"Incorporation by Reference." Certain sections of this Solicitation Statement,
including "Special Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains various forward looking
statements, which represent the Partnership's expectations or beliefs
concerning future events. The Partnership cautions that these statements are
further qualified by important factors that could cause actual results to
differ materially from those in the forward looking statements, including
without limitation, the improvement or decline of the real estate market,
and/or a change in interest rates. In addition, these statements are further
qualified by important factors that could cause actual results to differ
materially from those in the forward looking statements, including without
limitation, change in demand for the apartment units owned directly or
indirectly by Affiliated Borrowers (as defined below), the effect of economic
conditions, the effect of severe weather or natural disasters and the effect of
competitive pressures from other apartment complexes.
THE PROPOSAL
Background and Purpose of the Proposal. The decision by the Managing
General Partner to pursue the Sale Transaction and subsequent Dissolution of
the Partnership is the result of several considerations, including, among other
things: (i) the desire to provide Limited Partners with a means of liquidating
their investment in the Units; (ii) the desire to reduce the administrative
cost and burden resulting from the Partnership's status as a public company
under Section 12(g) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"); and, (iii) more importantly, the desire to avoid additional
administrative cost and burden that would be required to register and maintain
the Partnership as an investment company under the Investment Company Act (the
"1940 Act"), which might otherwise be required as a result of recent
restructurings of the Specific Loans (as defined below) that may have the
effect of precluding the Partnership from continuing to rely on the 1940 Act
exemption that was previously available to it.
The most pressing impetus for the decision by the Managing General
Partner to undertake the actions for which consent is hereby solicited is the
possible loss of its exemption from registration under the 1940 Act as a result
of the recent restructurings of the Specific Loans beginning in 1995. Until
that time, each of the original loans made by the Partnership ("Specific
Loans") was secured by a subordinated mortgage on the real property owned by an
affiliate of the Purchaser (an "Affiliated Borrower"). The fact that the
Partnership held a security interest, albeit a subordinate one, in the real
property underlying each Specific Loan allowed the Partnership to be excluded
from the definition of "investment company" under the 1940 Act, which excludes
most companies that are primarily engaged in purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate.
The principal reason the Partnership decided to restructure each of
the Specific Loans was the mutual desire of each Affiliated Borrower and the
Partnership to take advantage of a general decline in interest rates by paying
off the Affiliated Borrower's senior mortgage and entering into another senior
mortgage with a new lender to profit from a reduction in the interest rate then
governing the prior senior secured debt. An important secondary reason for
refinancing the Affiliated Borrowers' senior mortgages was to obtain an
extension of the maturity date of each senior loan. It was the Partnership's
position that by restructuring the Specific Loans and refinancing the related
senior secured debt, the Affiliated Borrowers would be in a stronger position
to repay their obligations to the Partnership. However, each of the new senior
lenders required that the Partnership release its subordinate security interest
in the real estate previously securing both the primary loan and the relevant
Specific Loan. The promissory note underlying each Specific Loan was amended
from a nonrecourse obligation to a recourse obligation of the Affiliated
Borrower.
Although the Partnership believes that the restructurings have
materially enhanced its position as a subordinated creditor, the release of its
security interest in the real estate relating to the Specific Loans means that
the Partnership may possibly be considered to be an investment company for
purposes of the 1940 Act. As there
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are likely no exemptions to the 1940 Act that would permit the Partnership to
continue to operate with the Specific Loans as currently structured, the
Managing General Partner believes that the Partnership must either liquidate or
register as an investment company under the 1940 Act. The latter alternative,
in the opinion of the Managing General Partner, is untenable in view of the
limited purpose of the Partnership and the significant administrative burden
that registration would entail.
In the absence of registration under the 1940 Act, the Partnership
cannot continue to operate with its present structure without possibly exposing
itself to liability under the 1940 Act. The 1940 Act prohibits investment
companies that do not qualify for an exemption from registration from
continuing to engage in interstate commerce. Accordingly, the Managing General
Partner believes that the continued operation of the Partnership with its
present asset structure is not a feasible alternative.
Apart from the 1940 Act registration issue, the Managing General
Partner believes that there are important independent considerations supporting
the decision to proceed with the Sale Transaction and Dissolution of the
Partnership. In fact, for several years, the General Partner has considered
taking the Partnership "private" in order to eliminate the costs associated
with having the Units registered under the Exchange Act and to provide an
opportunity to Limited Partners who would like to liquidate at least part of
their Units. In recent years, the number of record holders of Units has been
increasing due to the dissolution of qualified plans and trusts and other tax
exempt entities that previously held Units and the distribution of Units from
such entities to the individual participants in such entities. This increase
has added to the already burdensome administrative cost and effort involved in
maintaining the public status of the Partnership under the Exchange Act. There
has not, however, been a corresponding increase in the market for Units, as to
which there continues to be no established secondary market. At the same time,
an increasing number of Limited Partners have expressed a desire to liquidate
their Units. The Managing General Partner believes that the Sale Transaction
and subsequent Dissolution will serve at once to ease the administrative burden
of the Partnership resulting from its public status and provide Limited
Partners with the opportunity to liquidate their Units for cash.
Until 1995, however, neither the General Partner nor any of its
affiliates had sufficient liquidity to accomplish such goals, and no contacts,
negotiations or transactions to dissolve the Partnership or to take the
Partnership private were entered into or occurred. In early 1995, as a result
of the improvement of the real estate industry, the Purchaser had sufficient
liquidity to help the General Partner obtain some of its goals while allowing
the Purchaser to make, in Purchaser's judgment, an attractive investment in the
Partnership or its assets. In order to assess the value of its assets, the
Partnership retained Bryan E. Humphries and Associates (the "Appraiser") in
January 1995 to appraise the properties securing the Specific Loans. The
appraisals made by the Appraiser are described below in "Fairness of the Sale
Transaction."
The original proposal considered by the Board was the possibility of a
tender offer by the Purchaser (the "Tender Offer") without a subsequent
Dissolution. As a result of the steady recovery of the real estate industry,
the Purchaser by then had accumulated sufficient liquidity to undertake the
Tender Offer without reliance upon third party borrowings. In addition to
enabling the Partnership to obtain some of its goals, the Purchaser viewed the
Units as an attractive investment.
In June 1995, the Purchaser settled upon the Tender Offer structure to
give Limited Partners the option of retaining their Units or selling them for
cash. The Purchaser decided to make a tender offer for no more than 49.9% of
the Units to avoid triggering a deemed dissolution of the Partnership for tax
purposes. A deemed dissolution of the Partnership would result in an
adjustment of the Limited Partners' tax bases in their Units which, in turn,
would create adverse tax consequences for the Limited Partners. The Purchaser
engaged the Appraiser in October 1995 to value the Partnership's assets and
assist it in determining a range of values for the Units. The Appraiser
delivered a valuation report to the Purchaser dated October 12, 1995 (the
"October Valuation Report"), a copy of which has been filed as an exhibit to
the Partnership's Transaction Statement on Schedule 13E-3 filed with the
Commission ("Schedule 13E-3"). The October Valuation Report will be made
available for inspection and copying at the principal executive offices of the
Managing General Partner by any Limited Partner or his representative. The
October Valuation Report assigned an undiscounted value of $4,292,500 to the
Partnership's assets and a range of values for the Partnership assets of
between $2,378,000 to $2,960,000. The Purchaser paid the Appraiser $1,000 for
the Valuation Report.
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The Managing General Partner ultimately rejected the Tender Offer
alternative because of the need to conclusively resolve the 1940 Act
registration issue. Because the Purchaser could not tender for more than 49.9%
of the Units without adverse tax consequences to the Limited Partners, a Tender
Offer would unlikely result in the Units being held by less than 100 investors,
which would afford an exemption to the 1940 Act registration requirements.
Sale Transaction. If the Proposal is approved, the Managing General
Partner will sell to Purchaser the remaining Specific Loans (as defined
herein) and the Brambletree Restructuring Advance (as defined below) which
comprise substantially all of the Partnership's non-cash assets, for the
Purchase Price. See "Material Terms of the Sale Transaction."
Provision for Liabilities. Pursuant to the Partnership Agreement, all
distributions in connection with the Sale Transaction are subject to the
payment of Partnership expenses and to the maintenance of reasonable working
capital reserves deemed sufficient for Partnership business by the Managing
General Partner. In connection with the Sale Transaction, provision will be
made for the payment of all debts and liabilities of the Partnership, including
expenses to be incurred in the Sale Transaction and Dissolution, prior to the
distribution of the proceeds from the Sale Transaction. See the Financial
Statements included elsewhere herein for the liabilities of the Partnership as
shown on the balance sheet of the Partnership as of June 30, 1996.
The Managing General Partner will set aside approximately $35,000 of
the net proceeds of the Sale Transaction to meet anticipated liabilities of the
Partnership. Although the Managing General Partner believes that such amount
will be adequate to pay the liabilities of the Partnership, it is possible that
intervening events and circumstances beyond the control of the Partnership will
render such provisions insufficient or inadequate. There can be no assurance,
therefore, that the Limited Partners will receive aggregate distributions equal
to $3,500,000 as currently anticipated, and it is possible that the occurrence
of such intervening events could affect the timing and amount of such
distributions to the Limited Partners. See "-- Allocations and Distribution
Following Dissolution."
Effect of Sale Transaction on Purchaser's Interest in the Net Book
Value and Net Earnings of the Partnership. The Sale Transaction will have no
effect on the Purchaser's interest in the net book value of the Partnership,
and there will be no net earnings of the Partnership upon completion of the
Sale Transaction.
Allocations and Distributions Following Dissolution. Upon the
consummation of the Sale Transaction, the Managing General Partner will cause
to be prepared a statement setting forth the assets and liabilities of the
Partnership as of the date of Dissolution, and such statement shall be
furnished to all partners. After discharging all debts and liabilities of the
Partnership or making provision therefor, all remaining cash will be
distributed in accordance with the terms of the Partnership Agreement as
summarized below. A table estimating these allocations and distributions
appears elsewhere herein. See "Chart -- Estimate of Allocations and
Distributions."
The Partnership Agreement provides that following Dissolution of the
Partnership, the net profits and net losses, as determined in accordance with
the accounting methods of the Partnership followed for federal income tax
purposes, will be allocated as follows:
(a) net profits will be allocated 99% to the Limited Partners and 1%
to the General Partner;
(b) net losses will be allocated among Limited Partners and the
General Partner in proportion to the positive balances in their respective
capital accounts; provided, however, that all net losses will be allocated to
the General Partner if the allocation of such net losses to the Limited
Partners would result in their having negative capital account balances; and
(c) net profits and net losses allocable to successive holders of
Units during 1996 will be divided among such holders based upon the number of
fiscal quarters such holders were deemed to be holders of such Units, without
regard to whether the Partnership's operations during a particular fiscal
quarter produced profits or losses. Notwithstanding the foregoing, allocations
of net profits or net losses attributable to a transaction generating surplus
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funds will be allocated to holders of Units as of the first day of the fiscal
quarter in which the Partnership receives such surplus funds.
The Partnership Agreement provides that upon the liquidation and
dissolution of the Partnership, distributions will be made to Limited Partners
and the General Partner in an amount equal to their respective capital
accounts. Distributions of operational cash or surplus funds generated during
a fiscal quarter will be made quarterly by the fifteenth day of the month
following such fiscal quarter; provided, however, that the General Partner, in
the exercise of reasonable discretion, may determine to retain in the
Partnership all or any part of the funds available for distributions to meet
the working capital needs of the Partnership. All distributions made with
respect to a fiscal quarter will be made to those persons owning Units as of
the close of the first day of such fiscal quarter.
If upon liquidation and dissolution of the Partnership, the capital
account of the General Partner reflects a deficit balance, the General Partner
will contribute to the Partnership an amount equal to the lesser of (a) any
deficit balance in the General Partner's capital account or (b) 1.01% of the
difference between the capital contributions of the Limited Partners (deemed to
be $5,000 per Unit, regardless of any volume purchase discounts provided at the
time of investment in the Partnership) and the capital contribution of the
General Partner ($100).
The Partnership Agreement provides that the allocations and
distributions provided for in the Partnership Agreement as set forth above were
expressly consented to by each Limited Partner and the General Partner as a
condition to becoming a partner.
The distribution of the proceeds from the Sale Transaction is expected
to occur as soon as practicable after the consummation of the Sale Transaction
in December 1996. From and after the consummation of the Sale Transaction, the
Managing General Partner intends to invest the net proceeds from the Sale
Transaction in short term obligations, the earnings from which will also be
distributed pursuant to the Partnership Agreement upon the Dissolution.
Assuming that the Limited Partners approve the Proposal and the
consummation of the Sale Transaction occurs in December 1996, it is estimated
that the aggregate net cash proceeds available for distribution will be
approximately $3,500,000 (or approximately $1,370 per Unit), plus interest
thereon. The aggregate proceeds distributable will include simple interest
accrued from the date of the consummation of the Sale Transaction to the date
of the Dissolution. The aggregate proceeds distributable will be net of
accrued and unpaid expenses of the Partnership as of the date such proceeds are
distributed. Based on such aggregate amounts, and after the Partnership's
provision for repayment of the liabilities of the Partnership, it is estimated
that an amount equal to approximately $1,370 per Unit will be distributed to
each of the Limited Partners. See "Chart -- Estimate of Allocations and
Distributions."
The partners will be subject to federal income tax on the income (if
any) resulting from the Sale Transaction. See the Financial Statements
included elsewhere herein and "Federal Income Tax Consequences" below.
EFFECT OF APPROVAL OF THE PROPOSAL
If the Proposal is approved and consummated, the Partnership will
dispose of substantially all of its assets (other than cash and certain other
rights) and will wind up and terminate. The General Partner will cease to
manage the Specific Loans, will have no further rights to receive reimbursement
for out-of-pocket expenses in connection with the Partnership, and will
discontinue all operations. The registrations of the Units under the Exchange
Act will be terminated, and the Partnership will no longer be subject to the
reporting requirements thereof and will cease filing information with the
Commission.
Upon completion of the winding up of the Partnership, the Managing
General Partner will file such certificates and documents as may be required to
effectuate and evidence the Dissolution of the Partnership, and the Partnership
Agreement will be formally terminated. The Managing General Partner expects to
terminate the Partnership on or before December 31, 1996.
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CONSENT OF LIMITED PARTNERS
The Partnership Agreement provides that the adoption of the Proposal
requires the consent in writing of Limited Partners who own a majority in
interest of the total outstanding Units. In addition, the Partnership is
structuring the Proposal so that the consent in writing of a majority in
interest of Limited Partners who are not affiliates of the Partnership is
required. As of the Record Date, there were 2,552 Units outstanding. The
General Partner owns 22 Units, and Purchaser owns 20 Units. Both such parties
intend to consent to the Proposal. Therefore, Limited Partners who are not
affiliates of the Partnership holding at least 1,256 Units must consent to the
Proposal.
If Limited Partners owning more than a majority in interest of the
total outstanding Units consent to the Sale Transaction and the Dissolution,
and Limited Partners who are not affiliates of the Partnership owning more than
a majority in interest of the total outstanding Units consent to the Sale
Transaction and the Dissolution, Limited Partners who do not join in such
consent will nevertheless be bound by the decision to sell the Specific Loans
and dissolve, terminate and wind up the Partnership. An abstention from
consenting to the Proposal will effectively count as a negative vote with
respect to such Proposal. Broker non-votes expressly indicating a lack of
discretionary authority to consent also will effectively count as a negative
vote with respect to the Proposal.
EFFECT ON PARTNERSHIP AND LIMITED PARTNERS IF PROPOSAL IS NOT APPROVED
If the Proposal is not approved, the Partnership will continue to own
the Specific Loans and will continue to receive payments thereon, if any. The
Partnership will then be required to use its assets to register under the 1940
Act. Failure to do so could result in significant liability. See "Special
Factors -- The Proposal." In such event, it is currently the intention of the
General Partner to seek an alternative buyer for the Specific Loans; however,
it is highly unlikely that the General Partner will be able to arrange for an
alternative sale of the Specific Loans at a favorable price or on terms which
are as or more favorable than those offered by Purchaser, or on terms which are
otherwise acceptable to the Partnership. The obligor on each Specific Loan is
a partnership controlled by the Purchaser, and a majority of such properties
owned by such partnerships are managed by affiliates of the Purchaser;
therefore, because the affiliated borrowers are affiliates of the Purchaser
("Affiliated Borrowers"), the Purchaser would derive more benefit from the
purchase of the Specific Loans than would an unaffiliated third party.
APPRAISAL RIGHTS
The Limited Partners will not be entitled to any dissenters' or
appraisal rights under the Partnership Agreement or Arizona law with respect to
the transactions described in the Solicitation Statement, and will not
voluntarily be granted such rights by the Partnership or Purchaser.
FAIRNESS OF THE SALE TRANSACTION
Inasmuch as the Purchaser is an affiliate of the Partnership, the
Board believes that it should abstain from making any recommendation to Limited
Partners concerning the Proposal. However, the Board believes that the Sale
Transaction is fair and in the best interest of the Limited Partners, and,
based on the Fairness Opinion (as defined below) of Principal Financial
Securities, Inc., an investment banking firm, the Board believes the Purchase
Price is fair, from a financial point of view, to the Partnership. The General
Partner and the Managing General Partner would indirectly benefit if the
Specific Loans were sold at the lowest possible sale price to Purchaser.
Despite this conflict of interest, the Board believes that its compliance with
the terms of the Partnership Agreement in connection with the Sale Transaction
and its reliance on the Valuation Report, as described below, and the Fairness
Opinion, as described below, will ensure fairness of the Sale Transaction.
Procedural Fairness. The Board believes the Sale Transaction is
procedurally fair due to (i) the submission of the Sale Transaction to the vote
of the Limited Partners for approval of the Sale Transaction; (ii) the fact
that no affiliate of the Partnership holds a majority in interest of the Units;
and (iii) the requirement that Limited Partners who hold a majority of the
Units who are not affiliates of the Partnership approve the Proposal. The Sale
Transaction was unanimously approved by the Board, all members of which are
employees of the Purchaser, and
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no unaffiliated representative was retained to act on behalf of the
unaffiliated security holders for purposes of negotiating the Sale Transaction
or preparing a report concurring the fairness of the Sale Transaction, other
than the Fairness Opinion.
The Board's belief that the Sale Transaction is fair to and in the
best interest of the Limited Partners is also based on its consideration of the
following factors, all of which it believes support its determination: (a) the
illiquidity of the units; (b) the inability of the General Partner to obtain
management fees or to charge additional fees; (c) a third party's lack of
control over the Affiliated Borrowers and lack of financial or other interest
in the Affiliated Borrowers; and (d) the Purchaser's familiarity with the
properties of the Affiliated Borrowers and the terms and conditions of such
properties.
Fairness of the Purchase Price; Independent Third Party Valuations.
The Board believes that the Purchase Price reflects a fair value for the
Specific Loans based on the following independent third party valuations.
Principal Financial Securities, Inc. in conducting its valuation, performed the
following financial and comparative analyses: (i) going concern analysis and
(ii) liquidation analysis.
a. Valuation Report. In addition to the factors discussed
above, the Board also considered the Valuation Report (the "Valuation Report")
prepared in March 1996 by Bryan E. Humphries and Associates (the "Appraiser")
in connection with the General Partner's consideration of certain alternatives
to liquidating the Limited Partners' investments in the Partnership. See the
Valuation Report attached hereto as Exhibit A. The Valuation Report contains a
summary of the appraisals that the Appraiser performed on each property in
which an Affiliated Borrower has an interest and a valuation of each of the
Specific Loans, as well as the qualifications of the Appraiser. These
appraisals are filed with the Commission as an exhibit to Schedule 13E-3 and
are available for review and copying by Limited Partners during normal business
hours at the executive offices of the Managing General Partner.
The cash flows in the appraisals were prepared by the Appraiser and
were used in the valuation of the Specific Loans. Each appraisal was based on
a combination of three approaches: the income approach, the market value
approach and the cost approach.
Actual sales comparables were used in the market value approach in the
appraisal. The appraised values were then used in the valuation of the Units.
Capitalization rates used in the income approach ranged from 9.5% to
10.5%, and the discount rate ranged from 11.5% to 12.5%. In the real estate
industry, capitalization rates are considered appropriate in the range from
9.5% to 10.5%. Capitalization rates used in the Valuation Report vary
depending on the age of the property, the location, the size and the tenant
profile. Newer, well located properties will have lower capitalization rates
and older, poorly located properties will have higher capitalization rates.
The discount rates, which are an estimation of the amount of return that an
investor would seek to earn on its investment, ranged from 11.5% to 12.5% on
each property. The discount rate gives the Appraiser a range of values based
upon the income stream of the properties.
Income projections from information in the appraisals pertaining to
cash flows from the operations of the properties were used to value the
Specific Loans. The income projections were used in valuing the Specific
Loans, because the properties were not likely to be sold in the near future due
to the fact that such properties had been refinanced with first mortgages
containing severe prepayment penalties, or were included in the NHP
Transaction. See "Certain Information Concerning the Partnership--Specific
Loans."
A range of discounts was then applied to each of the Partnerships'
Specific Loans based upon the Appraiser's judgment as to the value of a
Specific Loan. Major factors in determining the discount included the ability
of each Unitholder to sell its Units in the Partnership where it did not have
control of the property as well as the risk and the liquidity of each of the
Partnership assets.
The valuation of the Specific Loans assumes that all the properties
would be held for five years and allocated the cash flows based upon the terms
of a hypothetical sale to NHP, Inc. or based on operations. A
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discount rate of 40%-60% was used on a property-by-property basis. In order
for the Partnership to receive any funds, each of the properties needed to be
held for five years based upon the assumptions of the narrative cash flow.
Under the priority payment system (the order or priority of cash flow payments
of the specific property to the Partnership), little funds would be available
to the Partnership unless the property was held for a period of time and
appreciated. Presumption of assumptions in a five-year cash flow added
considerable risk to the present value of the Partnership Lender Interest (as
defined in the Valuation Report); consequently, the Partnership interest was
discounted on average 40%-60% on a property-by-property basis. The Partnership
does not have expertise in the valuation of limited partnership units; however,
the Partnership does believe that the capitalization rates and discount rates
used by the Appraiser were appropriate.
The Appraiser was selected by the Partnership due to previous
appraisals prepared by the Appraiser for Affiliates of the Purchaser and the
Appraiser's knowledge in this type of valuation. Bryan E. Humphries and
Associates specializes in the real estate valuation and services business. The
Partnership paid the Appraiser $30,750 for the appraisals and $1,500 for the
valuation of the Specific Loans. The Purchaser paid the Appraiser $1,000 for
the October Valuation Report which would have been used in the Tender Offer.
b. Fairness Opinion. Principal Financial Securities, Inc.
("Principal Financial") was retained by the Managing General Partner to serve
as financial advisor to the Board with respect to the Sale Transaction. On
September 17, 1996, Principal Financial delivered its oral opinion to the
Board, that as of the date of its opinion, the Purchase Price to be received by
the Partnership pursuant to the Sale Transaction is fair from a financial point
of view to the Partnership. Principal Financial also delivered its written
opinion dated August 6, 1996, to the same effect (the "Fairness Opinion"),
which includes a description of the procedures followed, documents reviewed,
matters considered, the scope of review undertaken and the assumptions made in
arriving at its conclusions. The full text of such written opinion is attached
to this Solicitation Statement as Exhibit B, which Limited Partners are urged
to read in its entirety. For purposes of its opinion, Principal Financial
relied upon and assumed, without independent verification, the accuracy,
completeness and fairness of all of the financial and other information that
was received by Principal Financial from public sources or provided to
Principal Financial by the Managing General Partner or any of its
representatives. Principal Financial also assumed, with respect to the
financial projections supplied to Principal Financial for the properties
relating to the Specific Loans, that all such information was reasonably
derived on bases reflecting the best currently available estimates and
judgments of the Managing General Partner's management as to the future
operating and financial performance of such properties. Such projections are
attached as Exhibit (b)(4) to the Schedule 13E-3. Principal Financial did not
make an independent evaluation or appraisal of the assets of the Partnership or
the Affiliated Borrowers.
Discussion of Opinion of Financial Advisor. The Managing General
Partner retained Principal Financial to render financial advisory and
investment banking services to the Board with respect to the Sale Transaction.
No limitations were imposed by the Board upon Principal Financial with respect
to the investigations made or the procedures followed by it in rendering its
opinion.
At the September 17, 1996 meeting of the Board, Principal Financial
delivered its oral opinion that the consideration to be received in the Sale
Transaction by the Partnership's Limited Partners is fair, from a financial
point of view, to the Partnership. Principal Financial also delivered its
Fairness Opinion. The full text of the Fairness Opinion, which sets forth the
assumptions made, procedures followed and matters considered, is incorporated
herein by reference. As set forth therein, Principal Financial relied upon and
assumed the accuracy and completeness of information supplied or otherwise made
available to it and has not independently verified such information, and
Principal Financial did not make or obtain an independent evaluation or
appraisal of the assets of the Partnership or the Affiliated Borrowers.
LIMITED PARTNERS ARE URGED TO READ THE FAIRNESS OPINION IN ITS
ENTIRETY.
In arriving at its opinion, Principal Financial considered such
financial and other factors as it deemed appropriate under the circumstances,
including among other things: (1) the Asset Purchase Agreement (as defined
below); (2) Promissory Notes detailing the terms of the Specific Loans; (3)
Debtors Second Amended Plan of Reorganization filed by Hall Brambletree
Associates; (4) historical operating and financial results of the properties
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associated with the Specific Loans for the twelve month periods ended December
31, 1993, 1994, 1995 and the period ended June 25, 1996; (5) internal operating
and financial projections of the properties associated with the Specific Loans
including projected statements of operations for the twelve month periods
ending December 31, 1996, 1997, 1998, 1999, and 2000; (6) the independent
analyses of the market value, as of February 1, 1996, of the Managing General
Partner's loans receivable interest, performed by the Appraiser on March 20,
1996 and provided to Principal Financial by the management of the Managing
General Partner; (7) the financial terms, to the extent publicly available, of
certain comparable transactions, which are similar in certain respects to the
Sale Transaction, including the discounts assigned to the valuation of
fractional ownership positions in closely held companies; (8) the tour of the
five properties located in Albuquerque, New Mexico (Phoenix Square/Midtree
Apartments, Candlewick/Northtree Apartments, The Lake/Lanetree Apartments, Los
Altos Towers/Twintree Apartments, and The Villas/Coachtree Apartments) and the
Brambletree Apartments located in Garland, Texas; (9) discussions with members
of senior management of the Managing General Partner relating to the operations
and future business prospects of the properties associated with the Specific
Loans, and the rental housing markets in which such properties are located; and
(10) such other information, financial studies and analyses, and financial,
economic and market criteria as Principal Financial deemed relevant. Based
upon these factors, Principal Financial believed the Purchase Price to be fair
from a financial point of view to the Partnership. Principal Financial used a
going concern analysis and liquidation analysis in arriving at its
determination. These two methods were discussed by Principal Financial in its
oral report to the Board (discussed below).
In delivering it oral opinion and making its presentations to the
Board of Directors, Principal Financial presented certain financial and
comparative analyses, and such other factors that it deemed relevant. These
analyses included:
(i) Going Concern Analysis. Principal Financial provided a
discussion of the methodology and procedures used to determine
the fairness from a financial point of view of the Purchase
Price. Principal Financial advised that two of its employees
traveled to each of the five properties in Albuquerque, New
Mexico, and one of the properties in Garland, Texas.
Principal Financial advised that it commenced its analysis by
using the cash flow models provided by the Partnership.
Principal Financial then adjusted the rental increases and
expenses to reflect what it determined was appropriate for the
market at that time. Principal Financial specifically
mentioned that it reduced the rental increases in the
Albuquerque market due to the extensive availability of
apartments in the market and the prediction that rental
increases would consequently be minimal in the near term.
Principal Financial then stated its net operating income
("NOI") projections for six years and assumed a five year
holding period for each property. The projected sale price
for each property was determined by dividing an assumed
capitalization rate into the year six NOI generated by the
property. Principal Financial stated that it believed that B+
property would sell at slightly below a 10% capitalization
rate. (A B+ property for purposes of real property evaluation
constitutes a property which is other than new, but is
situated in an excellent location). Principal Financial
stated that it did not believe that any of the properties
reviewed would be categorized as a B+, primarily due to their
age and locations, and therefore assumed an 11% capitalization
rate for all of the properties, except the Brambletree
Apartments. Principal Financial assumed a 10% capitalization
rate for Brambletree because it is newer, has a more stable
and higher occupancy rate, and is in a more desirable location
than the other properties. Principal Financial then stated,
that based upon its cash flow analysis and applying a discount
factor, the value of the Specific Loans would possess a range
of value between $1.1 million to $1.59 million. This analysis
was based on a going concern valuation of the Specific Loans.
(ii) Liquidation Analysis. Principal Financial then stated that in
order to evaluate whether the $1.1 million to $1.59 million
range of value was fair from a financial point of view to the
Partnership it performed a current liquidation analysis. That
analysis required Principal Financial to analyze a sale of
each of the properties and assume a distribution of the sales
proceeds according to each property's priority schedule of
payments. Based upon this analysis, Principal Financial
concluded that, after payment to those parties with priority
ahead of the Partnership, remaining proceeds available to pay
the Partnership's interest in the properties would be zero
making the value of the receivables zero. Thus, Principal
Financial stated that its view of the $1.6 million Purchase
Price was fair from a financial point of view to the
Partnership.
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The Board further questioned Principal Financial as to whether there
were any limitations regarding Principal Financial's due diligence or
assumptions used in the determination of the value of the Specific Loans, and
Principal Financial stated that there were no such limitations.
This summary set forth above does not purport to be a complete
description of the Fairness Opinion or Principal Financial's oral presentation
to the Board. The preparation of a fairness opinion is a complex process and
not necessarily susceptible to partial analysis or summary description.
Principal Financial believes that its analyses must be considered as a whole
and that selecting portions of its analyses and of the factors considered by
it, without considering all factors and analyses, could create a misleading
view of the processes underlying its opinion. In its analyses, Principal
Financial made numerous assumptions with respect to general business and
economic conditions and other matters, many of which are beyond the
Partnership's control. Any estimates contained in such analyses, (including
the Fairness Opinion), are not necessarily indicative of actual values, which
may be significantly more or less favorable than as set forth therein.
Analyses based upon forecast of future results are not necessarily indicative
of actual future results, which may be significantly more or less favorable
than suggested by such analyses. Principal Financial's estimates concerning
the value of the Sale Transaction does not necessarily reflect the prices at
which the Specific Loans could be sold.
The foregoing description of the Fairness Opinion is qualified by
reference to the full text of such report which is attached as Exhibit B hereto
and is available for inspection and copying by any Limited Partner or a
representative of such person who has been so designated in writing, at the
principal executive offices of the Partnership, and which may also be obtained
in the manner described under "AVAILABLE INFORMATION."
Pursuant to the engagement letter dated June 21, 1996, between the
Managing General Partner, the Purchaser, and Principal Financial, the Managing
General Partner and the Purchaser have agreed: (1) that the Managing General
Partner shall reimburse Principal Financial for its reasonable legal and out of
pocket expenses incurred by Principal Financial in connection with the
engagement as and when they are incurred; (2) that the Managing General Partner
also agrees to indemnify and hold harmless Principal Financial against any
losses, claims, damages or liabilities to which Principal Financial may become
subject in connection with the services or matters that are the subject of the
engagement, except for losses, claims, damages or liabilities resulting
primarily and directly from Principal Financial's gross negligence or willful
misconduct as determined by a court in a final judgment wherein the court has
jurisdiction over such matters. The Managing General Partner has further
agreed that if the indemnity is unavailable or insufficient to hold Principal
Financial harmless, then the Managing General Partner will contribute such
amounts paid or payable by Principal Financial as a result of such losses,
claims, damages or liabilities in proportion to the benefits received by the
Managing General Partner and its Limited Partners and the Partnership and its
Limited Partners on the one hand, and Principal Financial, on the other hand;
the Managing General Partner has also agreed to indemnify or pay Principal
Financial, in circumstances in which the Managing General Partner or the
Partnership is a party to or subject of any judicial or administrative
proceeding or investigation in connection with the Sale Transaction, and, in
connection therewith, Principal Financial testifies or otherwise presents
evidence or makes submissions as to Principal Financial's performance of its
obligations under the engagement letter; in such circumstances, the Managing
General Partner has agreed to pay Principal Financial $250 per person per hour
for time expended and a minimum of $1,000 per day per person in the event of
court testimony or presentation of evidence, plus out of pocket expenses and
all reasonable fees and expenses of any counsel engaged by Principal Financial
in connection therewith; (3) the Managing General Partner has agreed to pay
Principal Financial compensation for the delivery of the Fairness Opinion and
other services thereunder, in the amount of $50,000, $25,000 of which was paid
by the Managing General Partner upon the execution of the engagement letter,
and $25,000 of which was paid by the Managing General Partner upon the date
Principal Financial delivered the Fairness Opinion. The Managing General
Partner also agreed to reimburse Principal Financial for all reasonable out of
pocket expenses incurred in connection with providing the Fairness Opinion and
serving as financial advisor to the Board, which reimbursements were not to
exceed $5,000 without prior written permission from the Managing General
Partner.
Principal Financial is a nationally recognized investment banking firm
engaged in the valuation of companies and their securities in connection with
business reorganizations, private placements, negotiated underwritings, mergers
and acquisitions, and valuations for estate, corporate and other purposes. The
Board
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selected Principal Financial based on such expertise and Principal Financial's
past performance of various investment banking services for the Purchaser
including a fairness opinion which Principal Financial delivered in February,
1995 to the Purchaser's board of directors on the price of the Purchaser's
stock to be sold, for which services Principal Financial received customary
fees. The Purchaser and Craig Hall also maintain investment accounts with
Principal Financial, and, therefore, are familiar with Principal Financial's
services.
Discussion of Opinion of Board. Based upon the Valuation Report and
Principal Financial's oral presentation to the Board and the Fairness Opinion,
the Board believes that the Sale Transaction is fair, primarily based upon a
going concern value and liquidation value evaluation.
Book Value Analysis. The Board also gave weight to a net book value
approach for the Units and believes the Sale Transaction is fair pursuant to
this approach because the Limited Partners will receive a distribution
approximating the net book value of each unit.
Historical Market Analysis. Consideration was not given to market
value, as the Board believes no market for the Units exists, and for similar
reasons, consideration was not given to historical market prices as there has
been no market for the Units since the formation of the Partnership.
The Board also considered the purchase price in the Stuart Drug
Transaction, as discussed below, in arriving at the determination that the Sale
Transaction is fair.
MATERIAL TERMS OF THE SALE TRANSACTION
THE ASSET PURCHASE AGREEMENT
The Sale Transaction will be effected pursuant to the asset purchase
agreement between the Partnership and the Purchaser dated as of October 15,
1996, (the "Asset Purchase Agreement") and one or more assignment and
assumption agreements. The Asset Purchase Agreement contains the terms
described below and is attached hereto as Exhibit C.
Consideration. In exchange for the Partnership's non-cash assets,
Purchaser will pay the Purchase Price to the Partnership and shall deliver an
assignment and assumption agreement to the Purchaser which requires the
Purchaser to assume certain of the liabilities and obligations of the
Partnership and all the rights of the Partnership under the Specific Loans.
Representations and Warranties. The Asset Purchase Agreement contains
customary representations and warranties relating to the organization and
standing of the parties thereto, the power and authority of the parties to
effect the Sale Transaction, due authorization and enforceability of the Asset
Purchase Agreement and the parties' obtaining of all requisite consents and
approvals.
Access. The Asset Purchase Agreement provides that Purchaser shall
have full opportunity to make such investigations as it shall desire to make of
the affairs of the Partnership in connection with the Sale Transaction. The
Partnership shall permit Purchaser and its counsel, accountants, auditors, and
other representatives reasonable access to the properties, books and records,
contracts and commitments of the Partnership until such time as Purchaser
reasonably deems necessary to facilitate the transition of ownership.
Consents. Pursuant to the Asset Purchase Agreement, the Partnership
and Purchaser have agreed to use their best efforts to obtain prior to closing
of the Sale Transaction all consents necessary in connection therewith and
shall assist and cooperate with each other in obtaining such consents.
Conditions to Closing. The Asset Purchase Agreement states that the
closing of the Sale Transaction is subject to certain conditions, including (i)
all representations and warranties of the parties shall be true, complete and
accurate in all material respects as of the date when made and as of the
closing date, except for changes
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expressly permitted by the Asset Purchase Agreement; (ii) the parties shall
have complied in all material respects with all agreements, obligations and
conditions required to be performed or complied with prior to closing; (iii)
there shall be no effective injunction, writ, preliminary restraining order or
any order of any nature issued by a court of competent jurisdiction restraining
or prohibiting the Sale Transaction; (iv) all material licenses, permits,
consents, approvals and authorizations from third parties, including the
requisite consent from the Limited Partners, shall have been obtained; and (v)
as a condition to the obligations of the Partnership, the Fairness Opinion
shall have been delivered to the Managing General Partner.
Termination. The Asset Purchase Agreement may be terminated at any
time prior to the closing of the Sale Transaction by mutual agreement of the
Partnership and Purchaser or if any conditions precedent shall not be satisfied
as of the closing.
ACCOUNTING TREATMENT
The Sale Transaction will be accounted for as a sale of the assets of
the Partnership.
INDEMNIFICATION
The Partnership Agreement provides that except in the case of
negligence or misconduct, the General Partner and its affiliates, or agents
acting on their behalf, will not be liable, responsible or accountable in
damages or otherwise to the Partnership or any of the Limited Partners for any
action or inaction, the effect of which may cause or result in loss or damage
to the Partnership, if such course or inaction was undertaken in good faith to
promote the best interests of the Partnership. The General Partner and its
affiliates or agents will be entitled to be indemnified by the Partnership
against and to be released by the Limited Partners from any liability or loss,
as a result of any claim or legal proceeding relating to any action or inaction
concerning the activities of the Partnership, except in the case where the
General Partner or its affiliates or agents are guilty of bad faith,
negligence, misconduct, or reckless disregard of duty, provided such action or
inaction was undertaken in good faith to promote the best interests of the
Partnership. However, neither the General Partner nor any officer, director,
employee, agent, subsidiary or assign of the General Partner or its affiliates,
the Affiliated Borrowers, or the Partnership will be indemnified from any
liability, loss, or damage incurred by them in connection with (i) any claim
involving allegations that the Securities Act of 1933, as amended (the
"Securities Act"), or any state securities law was violated by any of such
parties unless such parties seeking indemnification are successful in defending
such action and such indemnification is specifically approved by a court of law
or any liability imposed by law, including liability for fraud, bad faith or
negligence.
If a claim is made against the General Partner or its agents or
affiliates in connection with such parties' actions on behalf of the
Partnership with respect to the Sale Transaction, the General Partner expects
that it, as well as its affiliates and agents, will seek to be indemnified by
the Partnership with respect to such claim. As a result of these
indemnification rights, a Limited Partner's remedy with respect to claims
against the General Partner or its affiliates relating to their respective
involvement in the Sale Transaction could be more limited than the remedy which
might have been available absent the existence of these rights in the
Partnership Agreement. A successful claim for indemnification would reduce the
amount of Partnership cash available for distributions to the Limited Partners
by the amount paid.
REGULATORY PROCEEDINGS
Other than the filing of a Certificate of Cancellation with the
Secretary of State of Arizona and certain filings with the Commission to
deregister the Units, the Partnership is not aware of any approval or other
action by any domestic or foreign governmental or administrative agency that
would be required prior to the consummation of the Sale Transaction or any
license or other regulatory permit which appears to be material to its business
and that might be adversely affected by the proposed Sale Transaction or the
Dissolution. Should any approval or action be required, it is the
Partnership's present intention that such approval or action would be sought.
There is, however, no present intent to delay the tendered Sale Transaction
pending the outcome of any such action or receipt of such approval. There can
be no assurance that any such approval or action, if needed, would be obtained,
or,
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if obtained, that it would be obtained without substantial conditions, or that
adverse consequences might not result to the Partnership's businesses or that
certain parts of the Partnership's businesses might not have to be disposed of
or held separate or other substantial conditions complied with in order to
obtain such approval or other action. Following the Dissolution and
deregistration of the Units under Section 12(g) of the Exchange Act, the
Partnership's obligations to file reports pursuant to Section 15(d) of the
Exchange Act will terminate.
THE PURCHASER
The Purchaser is Hall Financial Group, Inc., a Delaware corporation.
The principal executive offices of the Purchaser are located at 750 North St.
Paul Street, Suite 200, Dallas, Texas 75201. The Purchaser's primary business
is the management as general partner of limited partnerships which own interests
in rental and nonrental real estate and investing in such limited partnerships
as a limited partner. The Purchaser is obtaining the $1,600,000 Purchase Price
from its own working capital.
Craig Hall, the President and Chief Executive Officer of the
Purchaser, owns 93% of the outstanding capital stock of the Purchaser. Craig
Hall owns 100% of the outstanding capital stock of the Managing General Partner
and over 90% of the limited partnership interests in the General Partner and
Hall 1985 (as defined below).
The Purchaser was a defendant in a binding arbitration together with
another affiliate of the Purchaser, Hall Securities Corporation, in a case
styled William F. Lowden and Karen M. Lowden, Plaintiffs (collectively, the
"Plaintiffs") v. Blaine P. Swint, Swint Financial Management and Insurance
Marketing Corp. (collectively, "Swint"), Hall Securities Corporation, Fund
Capital, Inc., Hall Financial Group, Inc. and Does One through Ten inclusive in
the Superior Court of the State of California in and for the City and County of
Contra Costa, No. C93-00820 (the "Lawsuit"). The arbitration award (the
"Award") was entered on September 21, 1994 against the Purchaser and Hall
Securities Corporation (collectively, the "Hall Defendants") in the amount of
$307,482 for compensatory damages for breach of fiduciary duty pursuant to the
NASD Rules of Fair Practice based upon the Hall Defendant's determined
responsibility for Swint's failure to properly advise the Plaintiffs regarding
investments as limited partners in three of the Purchaser's properties, Hall
Bayoutree Associates, Hall Falltree Associates, and Hall Northtree Associates.
The arbitration panel, consisting of one arbitrator, found that Swint, acting
as broker-dealer for the Hall Defendants, had encouraged the Plaintiffs to
invest beyond their economic capacity in the Purchaser's properties and that
the investments were unsuitable for the Plaintiffs because they did not meet
the economic requirements for investment in any of the properties. The
arbitrator found that Swint made misstatements and misrepresentations in
inducing the Plaintiffs to invest and that the Hall Defendants were negligent
in supervising Swint regarding its advice to the Plaintiffs. The arbitrator
found the Hall Defendants liable for Swint's actions based upon a theory of
respondeat superior, in that Swint was acting as an agent for the Hall
Defendants in Swint's capacity as broker-dealer on behalf of the Hall
Defendants. The arbitrator awarded the Plaintiffs their original investment as
well as pre-judgment interest but declined to award punitive damages as the
Plaintiffs had failed to prove malice. The Purchaser has paid the damages in
full to the Plaintiffs.
CERTAIN INFORMATION CONCERNING THE PARTNERSHIP
GENERAL
The Partnership is an Arizona limited partnership that was formed in
1984 for the purpose of providing second lien mortgages to the Affiliated
Borrowers. The purpose of the Partnership as stated in the Partnership
Agreement is to make loans to the Affiliated Borrowers and to engage in
activities incidental to such loans. The principal executive offices of the
Partnership are located at 4455 East Camelback Road, Suite A-200, Phoenix,
Arizona 85018 and the telephone number is (602) 840-0060.
The Partnership's current primary business is the collection of the
Specific Loans previously loaned to Affiliated Borrowers which upon origination
were secured by deeds of trust or mortgages on income-producing real
properties. At the time each loan from the Partnership to an Affiliated
Borrower was originated, such loan was secured by a second lien on real
property owned by an Affiliated Borrower (except for the Arrowtree
Reorganization
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Advance and the Brambletree Restructuring Advance), which was previously
approved by the first lien holders. All of the properties originally securing
Specific Loans are apartment complexes.
The loan-to-value ratios of all real properties which secured Specific
Loans at their origination were supported by appraisals prepared at the time of
acquisition by independent appraisers who were members in good standing of the
American Institute of Real Estate Appraisers. Such appraisals are held by the
Affiliated Borrowers and are available for inspection and duplication by the
Limited Partners at the offices of the Managing General Partner.
In the late 1980's and early 1990's there was a national decline in
apartment rental rates and real estate values. This decline caused numerous
partnerships owning apartment properties, including each of the Affiliated
Borrowers, to go into default on both second and first mortgages. Each of the
Affiliated Borrowers to which the Partnership currently has a Specific Loan has
reorganized under Chapter 11 of the Bankruptcy Code. In connection with each
bankruptcy plan of reorganization, the Partnership has restructured each of the
seven remaining loans it holds, one to each of seven Affiliated Borrowers.
None of the Affiliated Borrower's confirmed bankruptcy plans require the
Affiliated Borrower to make current payments on its Specific Loans; instead,
the Partnership is to be repaid from its pro rata share of future available
cash flow, refinance or sales proceeds from each property. There can be no
assurance that any of the Specific Loans will be paid in full.
As of December 31, 1995, $5,489,683 in principal amount of Specific
Loans was outstanding, $4,576,000 of which had been reserved through bad debt
provisions. As of June 30, 1996, an aggregate of $4,576,000 in principal
amount of Specific Loans was outstanding, $4,576,000 of which had been reserved
through bad debt provisions.
GENERAL PARTNER AND MANAGEMENT
The Partnership's General Partner is Hall Pension Fund Associates, a
Texas general partnership, whose primary business consists solely of managing
and controlling the Partnership as a general partner. The general partner of
the General Partner is Hall 1985 Management Associates Limited Partnership, a
Texas limited partnership ("Hall 1985"), and the general partner of Hall 1985
is Hall Apartment Associates, Inc., a Texas corporation or the Managing
General Partner. The current primary business of Hall 1985 is managing and
controlling limited partnerships that own an interest in rental real estate,
and the current primary business of the Managing General Partner is managing
and controlling partnerships as a general partner which are general
partnerships in other affiliated partnerships which own an interest in real
estate. The principal executive offices of the General Partner, Hall 1985 and
the Managing General Partner are located at 750 N. St. Paul Street, Suite 200,
Dallas, Texas 75201-3247 and the telephone number is (214) 953-1155. The
General Partner has full and complete charge of all affairs of the Partnership,
and the management and control of the Partnership's business rests exclusively
with the General Partner, subject to the terms of the Partnership Agreement.
The Partnership does not directly employ any persons on a full-time basis. All
persons rendering services on behalf of the Partnership are affiliates of the
General Partner. Such employees are not paid directly by the Partnership, and
the Partnership does not reimburse the General Partner or affiliates for these
services.
RIGHTS AND POWERS OF LIMITED PARTNERS
The Limited Partners may not take part in the control of the business
or affairs of the Partnership and have no voice in the management or operations
of the Partnership. Their lack of a voice in management and control is
necessary to limit liability in excess of their investment in the Partnership
and their share of undistributed profits from the Partnership. The Limited
Partners, among other things: (i) share all profits, losses and distributions
of the Partnership in accordance with the Partnership Agreement; (ii) have
their liability for the operations of the Partnership limited to the amount of
their capital contributions to the Partnership; (iii) have the right to obtain
upon request certain reports and disclosures to federal and state regulatory
and administrative bodies; (iv) receive financial statements, income tax
information and certain other information pertaining to the operations of the
Partnership; (v) have the right to assign their Units to the extent and as
provided in Article V of the Partnership Agreement; (vi) have the right to
dissolution and winding up of the Partnership by decree of court as provided
for in the Arizona Uniform Limited Partnership Act; (vii) have the right to
vote to amend certain provisions of the
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Partnership Agreement upon the affirmative vote of a majority in interest of
the Limited Partners; (viii) have the right to dissolve the Partnership upon an
affirmative vote of a majority in interest of the Limited Partners; (ix) have
the right to remove the General Partner upon an affirmative vote of a majority
in interest of the Limited Partners; and (x) have the right to elect additional
general partners, elect substitute general partners and elect to continue the
Partnership following an Event of Withdrawal, as defined in the Limited
Partnership Agreement, involving the sole remaining general partner of the
Partnership upon the consent of all Limited Partners.
Upon the Dissolution, the Limited Partners will no longer have an
interest in the Partnership's assets and business and will be giving up all
their rights under the Partnership Agreement.
TERM AND DISSOLUTION OF THE PARTNERSHIP
The Partnership Agreement provides that the Partnership will continue
until the earlier of (a) December 31, 2014; (b) the date on which all of the
loans funded by the Partnership are repaid or otherwise disposed of and all
other assets converted to cash; (c) the date on which the Partnership is
voluntarily dissolved by the vote or written consent of the Limited Partners
owning a majority in interest of the Units; (d) the date of an Event of
Withdrawal of the general partner; or (e) the date on which any event occurs
that requires dissolution of the Partnership under the Arizona Uniform Limited
Partnership Act. Notwithstanding the above, the Partnership may be dissolved
at an earlier date upon the occurrence of any of the contingencies referenced
in (b), (c), (d) or (e) above.
DESCRIPTION OF THE PARTNERSHIP'S BUSINESS
The Partnership is an Arizona limited partnership organized in 1984
pursuant to a limited partnership agreement under the Arizona Uniform Limited
Partnership Act.
The Partnership filed its registration statement with the Securities
and Exchange Commission on Form S-11 on January 18, 1985 pursuant to the
Securities Act of 1933 (File No. 2-04249).
At completion of the offering of the Units on September 5, 1985, the
Partnership had received and accepted subscriptions for an aggregate of 2,568
Units ($12,835,600). All investors were admitted as limited partners in 1985.
The Partnership will not borrow funds for the purpose of making loans
to the Affiliated Borrowers. However, if the working capital reserves
established for the Partnership are not adequate to provide for the
Partnership's liquidity needs, the Partnership may borrow funds for such
purpose.
The Partnership is prohibited from purchasing real property, directly
or indirectly, except as may be necessary to protect the Partnership against
the foreclosure of a prior lien on property pledged as security for a Specific
Loan.
The purpose of the Partnership is to originate loans to the Affiliated
Borrowers and to engage in activities incidental to such loans. Any change in
the purpose of the Partnership will require an amendment of the partnership
agreement which may be done only with the approval of Limited Partners owning a
majority of the outstanding Units held by all Limited Partners. However,
Limited Partners have no voting rights with respect to the implementation of
the Partnership's objectives and policies, such implementation being the sole
responsibility of the General Partner.
Prior to the Partnership making a Specific Loan, an Affiliated
Borrower provided the Partnership with a mortgagee's or owner's title insurance
policy or commitment to evidence priority of the lien securing the Specific
Loan and title to the mortgaged real properties.
The Affiliated Borrowers used junior mortgages or "all inclusive"
(sometimes called "wraparound") notes and deeds of trust to purchase
properties. An all-inclusive note is a note for an amount which includes the
then existing balance of a loan which the seller owes to its lender. In a
wraparound note structure, the deed of trust or mortgage securing the existing
loan remains as a first lien against a property and the "all-inclusive" deed of
trust
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becomes a junior or secondary encumbrance. An Affiliated Borrower obligated on
a wraparound note is required to pay the monthly amount of the all-inclusive
note to the seller, and the seller, in turn, is obligated to make the payments
required by the existing note to its lender.
Those Specific Loans which were secured by real property had senior
mortgages that did not provide for the amortization of the entire principal
amount of such loans or a substantial portion thereof prior to maturity. The
ability of the Affiliated Borrowers to repay the outstanding principal amount
of these senior loans at maturity was dependent upon the Affiliated Borrowers'
ability to sell the properties or to obtain adequate refinancing, which were
dependent upon economic conditions in general and the value of the underlying
properties in particular.
The Specific Loans to the Affiliated Borrowers were also balloon notes
in that the terms of repayment do not provide for full amortization of the
principal. In addition, terms of the Specific Loans permit a portion of the
interest due to remain unpaid and to accrue until maturity.
The General Partner obtained, at its expense, at the time each
Specific Loan was originated, a letter of opinion issued by an independent and
qualified adviser to the effect that each Specific Loan was fair and at least
as favorable to the Partnership as a loan to an unaffiliated borrower in
similar circumstances.
There was no restriction upon the amount (as a percentage of total
loans) that the Partnership may advance to Affiliated Borrowers as a group.
Through December 31, 1995, the Partnership had made Specific Loans in
the amount of $10,571,000 to twelve Affiliated Borrowers that used these funds
to purchase or pay off existing indebtedness on twelve apartment complexes.
The Partnership's gross receipts are dependent upon each Affiliated Borrower's
ability to pay interest and principal on its respective Specific Loan. As of
December 31, 1995, $5,489,683 in principal of Specific Loans is outstanding,
$4,576,000 of which has been reserved through bad debt provisions and all of
which have been modified. See "Specific Loans."
The Partnership does not directly employ any persons on a full-time
basis. All persons rendering services on behalf of the Partnership are
affiliates of the General Partner. Such employees were not paid directly by
the Partnership.
DESCRIPTION OF THE PARTNERSHIP'S PROPERTIES
The Partnership does not own or lease any real property.
LEGAL PROCEEDINGS
The Partnership is not a party to any material legal proceedings.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by reference to, the Partnership's Financial
Statements and notes thereto included elsewhere in this Solicitation Statement.
Capital Resources And Liquidity
The Partnership's primary sources of liquidity are repayments of
principal and interest from the NHP Transaction Partnerships, as defined below,
and repayments of principal and interest from Affiliated Borrowers that have
refinanced their mortgages. Liquidity is also maintained with cash the
Partnership holds as working capital reserves.
The Partnership's ability to pay distributions to the general and
limited partners was, prior to the NHP Transaction, materially affected by the
non-payment of interest on the loans owed by Affiliated Borrowers. It has not
yet been determined whether there will be distributions from operations in 1996
as a result of the NHP
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Transaction and certain Affiliated Borrowers' refinancing of their underlying
debts. As of June 30, 1996, certain of the Affiliated Borrowers were not
making payments to the Partnership. Accordingly, during the first six and
three months of 1996, the Partnership deferred $300,656 and $150,328
respectively of accrued interest income. The Partnership expects to continue
to defer a majority of the accrued interest quarterly through December 31,
1996. Interest accrued on Lanetree Associates Limited Partnership is being
recognized as income as a result of the December 31, 1995 analysis of
collectibility of mortgage notes receivable and the NHP Transaction.
Results of Operations
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
The Partnership recorded net (loss) and income of $(421,310), and
$25,575 for the six months ended June 30, 1996 and 1995, respectively. During
the first six and three months of 1996, $45,557 and $5,678, respectively, of
interest income was earned on short-term investments. In the three month
period ending June 30, 1996, the Partnership incurred professional fees of
approximately $31,000 related to analyzing the value of the mortgage
receivables. Accounting fees of approximately $5,500 relating to the December
31, 1995, audit were also incurred in the second quarter of 1996. Due to an
updated analysis, the Partnership recorded $470,000 as bad debt expense in the
second quarter of 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
During the year ended December 31, 1994, a distribution of $2,083 (of
which $1,367 had been previously accrued) was paid to the General Partner. No
distributions were made in 1995 or 1993.
For the years ended December 31, 1995, 1994 and 1993, the Partnership
recorded income of $1,767,691, $1,915,487 and $75,166, respectively. The
Partnership performs a detailed analysis of the collectibility of its
receivables considering the Affiliated Borrowers' future cash flows from
operations and proceeds from the ultimate sale of the Affiliated Borrowers'
assets as well as the independent appraisals obtained on these assets (to the
extent available). As a result, the Partnership reversed a portion of the
allowance for doubtful receivables and allowance for doubtful interest of
$293,683 and $1,359,703, respectively, in 1995. In addition, the Partnership
deferred interest income on non-performing notes aggregating $673,397, $849,228
and $971,098 in 1995, 1994 and 1993, respectively. Total deferred interest and
allowance for doubtful interest receivables at December 31, 1995 was
$3,928,180. Additional interest deferrals were required to the extent real
estate markets deteriorated further or remained depressed.
Future gross revenues and cash flow were substantially reduced as a
result of loan modifications and defaults by certain Affiliated Borrowers.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
During the years ended December 31, 1994 and 1992, distributions of
$2,083 (of which $1,367 had been previously accrued) and $968, respectively,
were paid to the General Partner. No distributions were made in 1993.
For the years ended December 31, 1994, 1993, and 1992, the Partnership
recorded income/(losses) of $1,915,487, $75,166, and $(718,811), respectively.
The Partnership performs a detailed analysis of the collectibility of its
receivables considering the Affiliated Borrowers' future cash flows from
operations and proceeds from the ultimate sale of the Affiliated Borrowers'
assets as well as the independent appraisals obtained on these assets (to the
extent available). As a result, the Partnership reversed a portion of the
allowance for doubtful receivables and allowance for doubtful interest of
$615,645 and $1,488,973, respectively, in 1994. The Partnership also reserved
the Arrowtree Reorganization Advance, as described below, of $181,000. In
addition, the Partnership deferred interest income on non-performing notes
aggregating $849,228, $971,098 and $1,398,801 in 1994, 1993 and 1992,
respectively. Total deferred interest and allowance for doubtful interest
receivables at December 31,
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1994 was $4,807,586. Additional interest deferrals were required to the extent
real estate markets deteriorated further or remained depressed.
Future gross revenues and cash flow were substantially reduced as a
result of loan modifications and defaults by certain Affiliated Borrowers.
Subsequent Events
Subsequent to June 30, 1996, the Partnership restructured the
Brambletree Specific Loan, as discussed below. See "Specific Loans." The
Partnership advanced Brambletree approximately $442,000 to refinance its first
lien mortgage, and the Partnership released its second lien mortgage as a
consequence of the refinancing.
SPECIFIC LOANS
As of December 31, 1995, the Partnership had Specific Loans
outstanding to seven Affiliated Borrowers, all of which have been restructured.
The following is a summary of the current status of each Specific Loan.
BRAMBLETREE. Hall Brambletree Associates ("Brambletree"), an
Affiliated Borrower, owns an apartment property that secures a first lien
mortgage payable to Federal National Mortgage Association ("FNMA") in the
principal amount of $5,910,086 with $892,620 of accrued interest as of June 30,
1996. The Appraiser appraised the property on February 2, 1995 at $6,500,000.
The Partnership held a second lien mortgage in the principal amount of
$1,751,000 with $715,319 of accrued interest as of June 30, 1996.
Brambletree informed the Partnership and the Purchaser that the FNMA
mortgage was refinanced on August 9, 1996. The original FNMA mortgage carried
a 10% interest rate. The amount owed to FNMA including principal and interest
was approximately $7,100,000. The first mortgage was scheduled to mature in
November of 1998. On August 9, 1996, the FNMA loan to Brambletree was
refinanced, and Brambletree received a loan in the principal amount of
$6,105,000 from AMRESCO Capital Corporation ("AMRESCO"). The loan bears
interest at 8.24% per annum, matures on September 1, 2006 and is payable in
monthly payments of $45,843.37. FNMA, pursuant to this refinancing, received
principal in the amount of $5,910,086.09 and a deferred interest payment of
$892,620. The incentive recapture fee of $295,624.00 was waived. The
refinancing required an advance from the Partnership in the amount of
approximately $442,000 which is based on the Partnership's pro rata share of
sale and refinance proceeds (the "Brambletree Restructuring Advance"). Such a
loan from the Partnership required the approval of the Limited Partners of the
Partnership, which was not obtained from the Limited Partners. The
Partnership's Brambletree Restructuring Advance to Brambletree will accrue
interest at 2% over the prime rate and will be payable out of the first
available proceeds from any future sale, refinance or cash flow of the property
in the same ratio as it was loaned between the Partnership and the Purchaser.
This will allow Brambletree to extend the first mortgage an additional 8 years
and lower the amount of monthly debt service approximately $3,000. The loan is
subject to prepayment penalty based on the expected yield to maturity at the
time of prepayment. In connection with the refinancing, the Partnership
released its second lien mortgage.
MIDTREE. Until its November 1995 refinancing, the apartment property
owned by Midtree Associates, Ltd. ("Midtree") was security for a first lien
mortgage payable to Aetna Life Insurance Company ("Aetna") and a second lien
mortgage payable to the Partnership.
The Midtree property was offered for sale from November 1994 to May
1995. The offering price was $5,800,000, but no offer to purchase the Midtree
property was received during the six months that it was offered for sale.
Because the Aetna loan was originally scheduled to mature on August 1, 1995, on
June 19, 1995, the general partner of Midtree applied for a loan in the amount
of $4,500,000 with Greenpark Financial to refinance the Midtree property. In
conjunction with that application, the property was appraised for $6,300,000 by
Brooks, Lomax & Fletcher, Inc. on August 6, 1995. Greenpark did not issue a
loan commitment, and the loan was never closed. In connection with its
valuation of the Partnership, the Appraiser appraised the Midtree property at
$5,200,000 as of January 27, 1995. As of June 30, 1996, the principal amount
of the Partnership's Specific Loan was $410,000 with $614,109 accrued interest.
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The Aetna loan to Midtree which originally matured August 1, 1995 was
extended to November 1, 1995, at which time it was refinanced, and Midtree
received a first lien mortgage loan in the amount of $4,200,000 from Paine
Webber Real Estate Securities Inc. ("Paine Webber"). The loan bears interest
at 8.1% annually and is payable on a 30-year amortization over a seven-year
term, and is subject to a prepayment penalty based on the expected yield to
maturity at the time of repayment. The interest rate on the first mortgage
lien was reduced from 12% to 8.1% by the refinancing. There were no proceeds
available to the Partnership from the refinancing.
As a condition to making the loan to Midtree, Paine Webber required
the release of the Partnership's second lien. Because the Midtree property
could not be refinanced with a second lien mortgage, the Partnership's second
lien nonrecourse mortgage was converted into a recourse unsecured loan to
Midtree without any other change in its terms. The Partnership was benefited
by the refinance because without the refinancing, the first lien mortgage would
have been foreclosed, and the Partnership would have lost the Midtree
receivable.
NORTHTREE. Until its refinancing in January 1996, the property owned
by Northtree Associates Ltd. ("Northtree") was security for a first lien
mortgage payable to Aetna and a second lien mortgage payable to the
Partnership.
From November 1994 to May 1995, Northtree offered its property for
sale at $7,200,000, but received no acceptances thereof. To take advantage of
favorable interest rates, on June 19, 1995, the general partner of Northtree
applied for a loan to refinance the Northtree property with Greenpark
Financial. In conjunction with the application, the property was appraised by
Greenpark Financial for $7,710,000 on August 6, 1995. The loan was not closed,
because Greenpark Financial did not issue a commitment. The Appraiser
appraised the Northtree property on January 27, 1995 at $6,300,000. As of June
30, 1996, the principal amount of the Partnership's Specific Loan was $460,000,
with $840,185 accrued interest.
On January 19, 1996, the Aetna loan to Northtree was refinanced, and
Northtree received a loan in the principal amount of $5,000,000 from AIG Life
Insurance Company ("AIG"). The loan bears interest at 7.58% per annum, matures
in seven years, and is payable on a 22 year amortization. The loan has a yield
to maturity prepayment penalty based on the expected yield to maturity at the
time of repayment. No proceeds were paid to the Partnership at the time the
loan was funded. Because AIG would not allow a second lien mortgage, the
Partnership released its lien on the Northtree property, and its nonrecourse
second lien mortgage was converted to a recourse unsecured loan without any
other change in its terms. The Partnership benefited from the Northtree
refinance because the interest rate on the first lien mortgage was reduced from
11% to 7.58%.
ARROWTREE. Until its refinancing in January 1996, the Hall Seven
Trails Associates ("Arrowtree") property was security for a first lien mortgage
to The Prudential Insurance Company of America which bore interest at 9% per
annum.
The Arrowtree Reorganization Advance, a loan of $181,000 made by the
Partnership to Arrowtree as part of Arrowtree's bankruptcy plan of
reorganization, was paid off in March 1996. As of June 30, 1996, the
Partnership had one loan outstanding to Arrowtree. The Appraiser appraised the
Arrowtree property on February 20, 1995 at $3,300,000. As of June 30, 1996,
there was no principal amount outstanding on the Arrowtree Specific Loan and
$547,237 in accrued interest outstanding.
On January 19, 1996, the Prudential loan was refinanced by a first
lien mortgage loan from Paine Webber in the principal amount of $2,750,000
bearing interest at 7.57%. This loan is for a term of 10 years, with monthly
payments based on amortization of 25 years. It has a prepayment penalty based
on the expected yield to maturity at the time of a prepayment. In connection
with the refinancing, the Partnership released its lien in exchange for
approximately $1,100,000 from the refinancing proceeds leaving a balance of
$547,237 in accrued interest, which amount does not bear interest, is not
secured by the Arrowtree property and is payable out of future cash flow,
refinance or sales proceeds.
NHP TRANSACTION PARTNERSHIPS. On February 10, 1995, three of the
Affiliated Borrowers entered into a transaction (the "NHP Transaction") with
affiliates of NHP, Inc. and Paine Webber whereby those Affiliated
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Borrowers' properties were contributed to three newly formed limited
partnerships (the "New LPs") by the respective Affiliated Borrower in exchange
for a limited partnership interest in its respective New LP and a certain
amount of cash. As a result of this transaction, Lanetree Associates Limited
Partnership ("Lanetree"), Twintree Associates Limited Partnership ("Twintree")
and Coachtree Associates Limited Partnership ("Coachtree" and together with
Lanetree and Twintree, the "NHP Transaction Partnerships") each hold a limited
partnership interest in its respective New LP of which affiliates of NHP, Inc.
and Paine Webber are general partners. As part of the transaction, the senior
mortgage of each property involved in the transaction was paid in full, and the
liens on each property securing such mortgage and the liens securing the second
mortgage held by the Partnership were released. In addition, as part of the
NHP Transaction, each NHP Transaction Partnership received cash at closing, and
is entitled to a defined priority equity amount in the New LPs (the "Preferred
Equity") and an annual return on the Preferred Equity of 6% per annum provided
that all of the New LPs have been paid in full at the end of each calendar
quarter ("Operation Participation Proceeds"). In the event all of the New LPs
have not been paid in full for Operational Participation Proceeds at the end of
each calendar quarter, the annual return on the Preferred Equity in calculating
Operation Participation Proceeds increases to 9% per annum (hereafter referred
to as a "Non-Major Default"). In addition to Operational Participation
Proceeds, each NHP Transaction Partnership is entitled to a priority return of
the Preferred Equity and any accrued and unpaid Operational Participation
Proceeds upon refinancing or sale of the properties over other equity classes
and a 20% participation in net proceeds available from sale or refinance after
payment of the Preferred Equity and any accrued and unpaid Operational
Participation Proceeds ("Sale or Refinance Participation Proceeds"). Lanetree
distributed $569,419 to the Partnership in March 1995 in partial payment of its
loan obligation to the Partnership from proceeds it received at closing of the
transaction. There were not sufficient proceeds at closing (after the payment
of priority repayments) to distribute funds to the Partnership from Coachtree
or Twintree. However, the NHP Transaction Partnerships remain obligated to the
Partnership pursuant to each partnership's bankruptcy plan. Prior to the NHP
Transaction, the Partnership had a secured non-recourse note from each of the
NHP Transaction Partnerships. As a result of the NHP Transaction, the
Partnership now has an unsecured recourse note with respect to each of the
partnerships. The terms of the Preferred Equity held by the NHP Transaction
Partnerships provide that certain amounts as determined by a formula be paid to
the NHP Transaction Partnerships not later than December 10, 2000. NHP, Inc.
has the option to pay the Preferred Equity amounts due the NHP Transaction
Partnerships at an earlier date at a discounted amount. By way of example, if
NHP, Inc. exercises its option on or before November 7, 1996, it would result
in the following estimated final payments, excluding Sale or Refinance
Participation Proceeds and assuming a Non-Major default has not occurred, to
the Partnership from each of the NHP Transaction Partnerships:
Coachtree: $ 177,960
Lanetree : $1,167,626
Twintree : $ 381,815
If NHP, Inc. does not exercise its option, excluding Sale or Refinance
Participation Proceeds and assuming a Non-Major default has not occurred, the
amounts the Partnership would receive on December 10, 2000, excluding any
Operational Participation Proceeds, is estimated to be:
Coachtree: $ 334,743
Lanetree: $1,167,626
Twintree: $ 561,409
As of April 8, 1996, a Non-Major Default had occurred in the NHP
Transaction.
The following properties were all part of the NHP Transaction. As
such the Partnership receives payments from the NHP Transaction Partnerships
return on Preferred Equity and a share of any net proceeds from a sale or
refinance of the properties.
LANETREE. On February 10, 1995, Lanetree entered into the NHP
Transaction whereby The Lakes Apartments was contributed to a New LP ("NHP
Lanetree"). As a part of the NHP Transaction, Lanetree received cash at
closing, and a limited partnership interest in NHP Lanetree. Lanetree is
entitled to a priority return over certain other classes of equity in NHP
Lanetree of $3,279,878 (the Preferred Equity), a 6% annual return on its
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27
Preferred Equity, a 20% participation in net proceeds available from ongoing
operations of NHP Lanetree after payment of operating expenses and the 6%
return on the Preferred Equity and a 20% participation in net proceeds
available from sale or refinance of The Lakes Apartments by NHP Lanetree after
payment of debts, costs of any transaction and payments of the Preferred
Equity. As of June 30, 1996, the principal amount on the Partnership's
Specific Loan was $620,000, with $522,819 accrued interest.
COACHTREE. On February 10, 1995, Coachtree entered into the NHP
Transaction whereby The Villas Apartments was contributed to a New LP ("NHP
Coachtree"). As a part of the NHP Transaction, Coachtree received cash at
closing, and a limited partnership interest in NHP Coachtree. Coachtree is
entitled to a priority return over certain other classes of equity in NHP
Coachtree of $1,118,164 (the Preferred Equity), a 6% annual return on its
Preferred Equity, a 20% participation in net proceeds available from ongoing
operations of NHP Coachtree after payment of operating expenses and the 6%
return on the Preferred Equity and a 20% participation in net proceeds
available from sale or refinance of The Villas Apartments by NHP Coachtree
after payment of debts, costs of any transaction and payments of the Preferred
Equity. As of June 30, 1996, the principal amount on the Partnership's
Specific Loan was $615,000, with $1,174,080 accrued interest.
TWINTREE. On February 10, 1995, Twintree entered into the NHP
Transaction whereby Los Altos Towers was contributed to a New LP ("NHP
Twintree"). As a part of the NHP Transaction, Twintree received cash at
closing, and a limited partnership interest in NHP Twintree. Twintree is
entitled to a priority return over certain other classes of equity in NHP
Twintree of $1,403,626 (the Preferred Equity), a 6% annual return on its
Preferred Equity, a 20% participation in net proceeds available from ongoing
operations of NHP Twintree after payment of operating expenses and the 6%
return on the Preferred Equity and a 20% participation in net proceeds
available from sale or refinance of Los Altos Towers by NHP Twintree after
payment of debts, costs of any transaction and payments of the Preferred
Equity. As of June 30, 1996, the principal amount on the Partnership's
Specific Loan was $720,000, with $1,390,280 accrued interest.
All the first lien mortgage loans that currently encumber the
properties in which Affiliated Borrowers still have an interest have
substantial prepayment penalties which are in effect for approximately five to
10 years. While the NHP Transaction gives NHP an option to pay the Preferred
Equity to the NHP Partnerships at an earlier date, some of the underlying
mortgages prohibit the sale of the properties and/or have significant potential
prepayment penalties for earlier retirement of the debt. Therefore, NHP could
not exercise its option without coming up with cash to pay off the Preferred
Equity or sell the property. Accordingly, the properties could only be sold if
the lender approved a purchaser to assume the debt.
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SELECTED FINANCIAL DATA
Set forth below is a summary of certain consolidated financial
information with respect to the Partnership excerpted or derived from the
information contained in the Partnership's Annual Report on Form 10-K for the
Year Ended December 31, 1995 (the "Partnership's 1995 10-K") and the
Partnership's Quarterly Report on Form 10-Q for the Six Months ended June 30,
1996 (the "Partnership's 10-Q"). A copy of the financial statements set forth
in the Partnership's 1994 and 1995 10-K and the Partnership's 10-Q, as of June
30, 1996 are reproduced elsewhere in this Solicitation Statement. More
comprehensive financial information is in such reports, and the following
summary is qualified in its entirety by reference to such reports and all of
the financial information and notes contained therein.
Six Months
Ended Year Ended
June 30, December 31,
-------------------------- -----------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Assets $3,646,410 $2,332,630 $4,068,564 $2,313,283 $419,287 $384,801 $1,129,729
Revenue 98,984 78,631 177,535 26,524 125,494 37,942 60,941
Operating and 50,294 53,056 [63,230] 34,655 50,328 53,876 99,469
Other
Expenses
Bad Debt 470,000 -- (1,653,386) (1,923,618) -- 702,877 4,600,000
Expense
(Reversal)
Net Income (421,310) 25,575 1,767,691 1,915,487 75,166 (718,811) (4,638,528)
(Loss)
Funds 113,744 525,631 1,127,726 (27,222) 36,886 (38,391) (203,639)
provided by
(used in)
operations
after
distributions
to Partners
Net Income (164) 9 681 [746] 29 (280) (1,806)
(Loss) per
Unit
Distributions 0 0 0 0 0 0 0
per Unit
Weighted 2,568 2,568 2,568 2,568 2,568 2,568 2,568
average
number of
Units
outstanding
Book Value 1,406 897 1,569 887 149 120 399
per Unit
No ratio of earnings to fixed charges appears because this ratio is
inapplicable as the Partnership has no fixed charges.
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29
ESTIMATE OF ALLOCATIONS AND DISTRIBUTIONS
Set forth below is a summary of the discharge of the debts and
liabilities of the Partnership or making provision therefore and the assets of
the Partnership based upon approval of the Proposal and the distribution per
Unit to the Limited Partners upon completion of the Sale Transaction and
Dissolution.
Assets
------
Partnership's cash reserve . . . . . . . . . . . . . . . . . $ 2,080,000
(as of September 30, 1996)
Sale of Partnership's Assets . . . . . . . . . . . . . . . . 1,600,000
------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,680,000
Anticipated Expenses Prior to Distribution
-------------------------------------------
Legal and Accounting . . . . . . . . . . . . . . . . . . . . $ 75,000
------------
Printing, Mailing, Depository, Distribution . . . . . . . . 11,000
Solicitation Expenses . . . . . . . . . . . . . . . . . . . 1,000
Finalization Set Aside . . . . . . . . . . . . . . . . . . . 35,000
Reserve For Unknown Expenses . . . . . . . . . . . . . . . . $ 22,646
------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 144,646
------------
Net Available . . . . . . . . . . . . . . . . . . . . . . . $ 3,535,354
------------
Distribution to General Partner . . . . . . . . . . . . . . $ 35,354
------------
Distribution to Limited Partners . . . . . . . . . . . . . . $ 3,500,000
------------
Total Distributions . . . . . . . . . . . . . . . . . . . . $ 3,535,354
------------
Distribution per Unit to Limited Partners . . . . . . . . . $ 1,370
------------
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30
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following summary is a general discussion of certain of the
federal income tax consequences of the sale of all of the assets of the
Partnership and the subsequent dissolution, termination and winding up of the
Partnership. This summary is based on the Internal Revenue Code of 1986 (the
"Code"), applicable Treasury regulations thereunder, administrative rulings,
practice and procedures, and judicial authority, all as of the date of this
Solicitation Statement. All of the foregoing are subject to change, and any
such change could affect the continuing accuracy of this summary. This summary
does not discuss all aspects of federal income taxation that may be relevant to
a particular Limited Partner in light of such Limited Partner's specific
circumstances or to certain types of Limited Partners subject to special
treatment under the federal income tax laws (for example, foreign persons,
dealers in securities, banks, insurance companies, and tax-exempt
organizations), nor does it describe any aspects of state, local, foreign or
other tax laws. A sale of the assets of the Partnership and the termination,
winding up and liquidation of the Partnership will be taxable transactions for
federal income tax purposes, and also may be taxable transactions under
applicable state, local, foreign and other tax laws. LIMITED PARTNERS SHOULD
CONSULT THEIR RESPECTIVE TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO
EACH SUCH LIMITED PARTNER OF THE SALE OF THE ASSETS OF THE PARTNERSHIP AND THE
SUBSEQUENT DISSOLUTION, TERMINATION AND WINDING UP OF SUCH PARTNERSHIP.
SALE TRANSACTION AND DISSOLUTION OF PARTNERSHIP
In general, in computing its federal income tax liability for the tax
year in which the assets of the Partnership are sold, each Limited Partner will
be required to take into account its allocable share of any gain or loss from
the sale of the Partnership's properties. The amount of any gain should be
treated as capital gain, except to the extent that gain is attributable to (i)
accrued unpaid interest, including original issue discount, or (ii) market
discount (in certain cases). Any loss from the sale should be treated as
capital loss. A Limited Partner may deduct losses allocated by the Partnership
only to the extent of its adjusted tax basis in its Limited Partnership
interest.
Upon the Dissolution of the Partnership and the distribution of
proceeds from the Sale Transaction, a Limited Partner could, depending on its
own tax situation, recognize additional gain or loss, to the extent that the
sum of the cash received and the reduction in such Limited Partner's share of
Partnership nonrecourse liabilities (if any) is greater than or less than its
adjusted tax basis in its Units. Generally, a Limited Partner's basis in its
Units is equal to the amount of cash contributed by such Limited Partner to the
Partnership, increased by profits allocated to such Units and such Limited
Partner's proportionate share of Partnership liabilities, and decreased by
losses allocated to such Limited Partner's Units and all distributions with
respect to such Units. For this purpose, the Limited Partner's adjusted basis
in its Units is increased by such Limited Partner's share of any gain and
reduced by its share of any loss recognized from the sale of the Partnership
assets. Any additional gain or loss recognized by a Limited Partner on the
Dissolution of the Partnership will generally be treated as capital gain or
loss if such Limited Partner's Unit was held by the Limited Partner as a
capital asset.
Any loss reportable by a Limited Partner as a result of the
transactions contemplated herein and any suspended passive activity losses from
prior years that are attributable to the Partnership will generally be
deductible in the year of complete liquidation of a Limited Partner's interest
in the Partnership without regard to the passive activity loss limitations.
Any net income or gains reportable by a Limited Partner as a result of the
transactions contemplated herein should generally be considered "portfolio
income" that cannot be offset against passive activity losses from other
sources.
A Limited Partner (other than tax-exempt persons, corporations, and
certain foreign individuals) who tenders its Units may be subject to 31% backup
withholding unless such Limited Partner (a) is a corporation or comes within
certain other exempt categories or (b) provides a correct taxpayer
identification number ("TIN"), certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A Limited Partner who does not provide the Partnership with
its correct TIN may
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31
be subject to penalties imposed by the IRS. In order to avoid the imposition
of 31% backup withholding on distributions in liquidation of a Limited
Partner's Units, each Limited Partner will be required to provide to the
Partnership a completed Form W-9 (or, if appropriate, Form W-8), or other
acceptable evidence showing that the Limited Partner is not subject to backup
withholding.
INCOME TAX CONSEQUENCES TO TAX-EXEMPT ORGANIZATIONS
U.S. tax exempt organizations, including qualified pension and profit
sharing trusts and individual retirement accounts, are generally exempt from
U.S. federal income taxation. However, such organizations are subject to
taxation on their "unrelated business taxable income" ("UBTI"), as defined
under Section 512 of the Code. UBTI includes income from most business
operations; however, as a general matter, it does not include gains or losses
from the sale, exchange, or other disposition of property (other than stock in
trade or other property of a kind which would be includible in inventory if on
hand at the end of a tax year or property held primarily for sale to customers
in the ordinary course of business). Further, tax exempt organizations will be
subject to federal income taxation on a portion of any gains derived from
property with respect to which there is acquisition indebtedness. As a general
matter, provided that a Limited Partner which is a tax exempt organization has
not, directly or indirectly, financed the acquisition or carrying of its Units,
any gain attributable to a disposition of its Units should be exempt from
federal income tax. Partners which are tax exempt organizations are strongly
urged to consult their own tax advisors with regard to the foregoing UBTI
aspects of the sale of the Partnership's assets and the subsequent dissolution,
termination and winding up of the Partnership.
EACH LIMITED PARTNER IS STRONGLY URGED TO CONSULT ITS OWN TAX ADVISOR
WITH RESPECT TO THE TAX CONSEQUENCES OF THE SALE TRANSACTION AND THE SUBSEQUENT
DISSOLUTION ON SUCH LIMITED PARTNER'S PARTICULAR TAX SITUATION.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is no individual known by the General Partner to be the
beneficial owner of more than 5% of the Partnership's outstanding Units. The
General Partner holds 22 Units (.8%), and the Purchaser holds 20 Units (.8%).
The General Partner and the Purchaser intend to consent to the Proposal. See
Schedule I.
INTERESTS OF CERTAIN PERSONS IN TRANSACTION
In considering the proposal, Limited Partners should be aware that the
Managing General Partner, the General Partner and the Partnership are all
affiliates of the Purchaser.
The Partnership Agreement provides that in addition to reimbursements
for expenses of the Partnership, the General Partner and/or its affiliates and
third parties receive certain underwriting commissions, syndication costs and
registration expenses in the aggregate amount of $1,869,299 and a 1% interest
in the Partnership and the distributions made to the partners. In addition,
for acting as real estate broker in connection with the purchase of certain
properties by Affiliated Borrowers, the General Partner and/or its affiliates
may receive a real estate brokerage commission in an amount which does not
exceed the lesser of the standard real estate commission in the area in which
the property is located or 6% of the purchase price thereof. In connection
with the sale of such properties or any portion thereof, the General Partner or
its affiliates are entitled to receive commissions payable from the net sale of
the proceeds received, but not in excess of the lesser of 50% of the standard
real estate commission in the area in which the property is located or 3% of
the sales price thereof. The commission payable to the General Partner or its
affiliates by the Affiliated Borrowers upon the sale of the property shall be
repaid to the Partnership to the extent that the Limited Partners do not
receive total distributions from the Partnership of an amount equal to 100% of
their capital contributions plus an amount equal to 10% per annum cumulative
return on their capital contributions less any prior distributions made to them
or the prior owners of their Units. All Affiliated Borrowers filed Chapter 11
Bankruptcy proceedings, and included in each of these Affiliated Borrower's
bankruptcy plans is a provision which entitles the Purchaser to a fee not to
exceed 5% of the total sales price of any of the properties owned by the
Affiliated Borrowers in connection with the Purchaser's services in arranging
the sale of
24
32
such properties. A majority of the Limited Partners of each of the Affiliated
Borrowers must approve such a sale, including the Purchaser's fee, as a
condition to the closing of such a sale.
Craig Hall, the President and Chief Executive Officer of the
Purchaser, owns 93% of the outstanding capital stock of the Purchaser. Craig
Hall owns 100% of the outstanding capital stock of the Managing General Partner
and over 90% of the limited partnership interests in the General Partner and
Hall 1985.
Except as set forth in this Solicitation, neither the Purchaser, nor
Craig Hall has any contract, arrangement, understanding or relationship with
any other person with respect to any securities of the Partnership including,
but not limited to, any contract, arrangement, understanding or relationship
concerning the transfer or the voting of any such securities, joint ventures,
loan or option arrangements, puts or calls, guaranties of loans, guaranties
against loss or the giving or withholding of proxies.
Except as set forth in this Solicitation Statement, there have been no
contracts, negotiations or transactions since January 1, 1991 between the
Purchaser or Craig Hall on the one hand and the Partnership or its affiliates
on the other hand, concerning: a merger, consolidation or acquisition; a tender
offer or other acquisition of securities; an election of directors, other than
the annual solicitation of proxies of stockholders; or a sale or other transfer
of a material amount of assets.
On August 27, 1996, Purchaser purchased 20 Units of the Partnership
from Stuart Drug and Surgical Supply Employee Pension Trust DTD, a Limited
Partner of the Partnership, for an aggregate purchase price of $26,000 (the
"Stuart Drug Transaction"). Except as set forth in this Solicitation
Statement, none of the General Partner, Hall 1985, the Managing General
Partner, Craig Hall, or, to the best of the Partnership's knowledge, any of the
other executive officers and directors of the Managing General Partner has
effected any other transaction in the Units during the past 60 days.
MARKET FOR UNITS AND RELATED MATTERS
There is no established trading market for the Units, and it is not
anticipated that any market will develop in the future. As a result of this
factor as well as others, the market value of a Unit may be substantially less
than the pro rata net book value attributable to a Unit.
On August 27, 1996, Purchaser purchased 20 Units of the Partnership
from Stuart Drug and Surgical Supply Employee Pension Trust DTD, a Limited
Partner of the Partnership, for an aggregate purchase price of $26,000 (the
"Stuart Drug Transaction"). Except as set forth in this Solicitation
Statement, none of the General Partner, Hall 1985, the Managing General
Partner, Craig Hall, or, to the best of the Partnership's knowledge, any of the
other executive officers and directors of the Managing General Partner has
effected any other transaction in the Units during the past 60 days.
During 1986, the General Partner purchased 22 Units in the Partnership
for an aggregate purchase price of $98,648. Except for such transaction and
the Stuart Drug Transaction, the Purchaser is unaware of any trading of the
Units since the initial offering in which the price was $5,000 per Unit. As of
October 15, 1996, there were 633 holders of Units. No distributions have been
made to the Limited Partners during the past two years. A total of $1,925 in
distributions have been made since the initial offering of the Units.
VOTING PROCEDURES
GENERAL
Each Limited Partner shall be entitled to one vote for each Unit owned
of record by such Limited Partner on the Record Date. Approval of the Proposal
requires the affirmative consent of Limited Partners holding a majority in
interest of the Units (a minimum of 1,277 Units outstanding on the Record
Date). A duly executed
25
33
consent card on which a consent or an indication of withholding consent is not
indicated will be deemed a consent to the Proposal, except that broker
non-votes (Units held by a broker or nominee for which a consent card is
submitted but with respect to which such broker or nominee expressly indicates
that it does not have discretionary authority to consent to the Proposal) will
be treated as negative votes. Abstentions also will be treated effectively as
negative votes.
The Solicitation Statement is accompanied by a separate consent card.
Consent cards should be completed, signed and returned promptly to the address
specified below in this Solicitation Statement. A self-addressed, prepaid
envelope for return of the consent cards is included with this Solicitation
Statement:
Address: MAVRICC Management Systems, Inc. ("MAVRICC")
P. O. Box 7090
Troy, Michigan 48007
Telephone No.: (810) 614-4500
Fax No.: (810) 614-4536
Any Limited Partner delivering a consent card pursuant to the
Solicitation Statement may revoke his, her or its consent with respect to the
Proposal at any time prior to the earlier of the Approval Date or the
Expiration Date by delivering written notice of such revocation to MAVRICC, at
the above-indicated address. Such written notice must be received by MAVRICC
prior to the earlier of the Approval Date or the Expiration Date.
SOLICITATION COSTS
The Partnership will pay for all costs and expenses, including legal
fees, incurred in connection with the preparation, filing and distribution of
this Solicitation Statement and all accompanying or supplementary documents.
The Partnership will reimburse brokers, dealers commercial banks and trust
companies for customary handling and mailing expenses incurred in connection
with forwarding this Solicitation Statement to the Limited Partners. It is
estimated that the following expenses will be incurred by the Partnership in
connection with this Proposal:
Expenses Amount
-------- ------
Fairness Opinion Expenses . . . . . . . . . . . . $ 55,000
Legal and Accounting . . . . . . . . . . . . . . . 75,000
Printing Mailing, Depository, Distribution . . . . 11,000
Filing Fees . . . . . . . . . . . . . . . . . . . 700
Solicitation Expenses . . . . . . . . . . . . . . 1,000
--------
Total . . . . . . . . . . . . . . . . . . . . . . $142,700
--------
The solicitation of written consents may be undertaken by the
directors, officers, employees and agents of the Managing General Partner, the
General Partner or the Partnership, such directors, officers, employees and
agents of the Managing General Partner, the General Partner or the Partnership
will not be additionally compensated, but will be reimbursed for reasonable
out-of-pocket expenses, if any, in connection with such solicitation. Further,
the Partnership has hired MAVRICC to assist in the solicitation of the written
consents, and shall pay MAVRICC an estimated fee of $12,000 for such
assistance. Solicitation may be made by mail, telephone, telegraph, facsimile
transmission or personal interview.
AVAILABLE INFORMATION
The Partnership is subject to the informational requirements of the
Exchange Act and in accordance therewith, files reports, proxy statements and
other information with the Commission. Such reports, proxy statements and
other information filed by the Partnership may be inspected at, and upon
payment of the Commission's customary charges, copies may be obtained from, the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Such reports, proxy statements and other
26
34
information are also available for inspection and copying at prescribed rates
at the Commission's regional offices located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. The Commission also maintains a site on
the World Wide Web at http://www.sec.gov that contains reports, proxies and
information statements and other information regarding registrants that file
electronically.
The Partnership will provide without charge to each person to whom a
copy of this Solicitation Statement is delivered, upon written or oral request
of such person and by first class mail or other equally prompt means, a copy of
any or all of the documents incorporated by reference herein, other than
exhibits to such documents (unless such exhibits are specifically incorporated
by reference in such documents). Requests should be directed to:
Address: MAVRICC Management Systems, Inc.
P. O. Box 7090
Troy, Michigan 48007
Telephone No.: (810) 614-4500
Fax No.: (810) 614-4536
Any questions regarding the Proposal or any of the statements
contained herein should be directed to MAVRICC at the above indicated address.
Should MAVRICC be unable to assist, direct questions to Hall Financial Group,
Inc., 750 N. St. Paul Street, Suite 200, Dallas, Texas 75201-3247; Attention:
Mark Blocher. Telephone: (214) 953-1155; Fax: (214) 953-1160.
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35
SCHEDULE I
CERTAIN INFORMATION REGARDING THE EXECUTIVE OFFICERS
AND THE DIRECTORS OF THE MANAGING GENERAL PARTNER
DIRECTORS AND EXECUTIVE OFFICERS OF THE MANAGING GENERAL PARTNER. The
name, business address, position with the Managing General Partner, present
principal occupation or employment and five-year employment history of each of
the directors and executive officers of the Managing General Partner are set
forth below. Also set forth below are the aggregate number of Units
beneficially owned by each such person and the percentage of ownership of the
Units such beneficial ownership represents. Unless otherwise indicated below,
the business address of each person listed is 750 North St. Paul Street,
Dallas, Texas 75234. Unless otherwise indicated, each occupation set forth
opposite an individual's name refers to employment with the Managing General
Partner. All officers serve at the pleasure of the Board. Each director and
executive officer listed below is a citizen of the United States. Directors
are identified by an asterisk. As of October 15, 1996, the General Partner
owns 22 Units, and pursuant to the Stuart Drug Transaction, the Purchaser owns
20 Units as of August 27, 1996.
AGGREGATE
PRESENT PRINCIPAL NUMBER OF
OCCUPATION AND EMPLOYMENT/ UNITS PERCENT
NAME AND MATERIAL POSITIONS HELD BENEFICIALLY OF
BUSINESS ADDRESS DURING THE PAST FIVE YEARS OWNED(A) CLASS CITIZENSHIP
- ---------------- -------------------------- -------- ----- -----------
Craig Hall* Director since formation 42 1.65% United States
Janet Carlson Secretary since formation 0 - Great Britain
Donald Braun President and Treasurer since 0 United States
formation
Larry E. Levey* Vice President since formation 0 United States
Director since June 21, 1996
* Director
(a) As shown in the Partnership's records at October 15, 1996, there were
2,552 Units outstanding.
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36
INDEX TO FINANCIAL STATEMENTS
HALL INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP
Financial Statements
(Unaudited)
June 30, 1996
Financial Statements:
Balance Sheets ................................................ F-3
Statements of Operations ...................................... F-4
Statement of Partners' Equity ................................. F-5
Statement of Cash Flows ....................................... F-6
Notes to Financial Statements ................................. F-7
HALL INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP
Financial Statements
December 31, 1995
Report of Independent Accountants ...................................... F-12
Financial Statements:
Balance Sheets ................................................ F-13
Statement of Operations ....................................... F-14
Statement of Partners' Equity ................................. F-15
Statement of Cash Flows ....................................... F-16
Notes to Financial Statements ................................. F-17
HALL INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP
Financial Statements
December 31, 1994
Report of Independent Accountants ...................................... F-27
Financial Statements:
Balance Sheets ................................................ F-28
Statement of Operations ....................................... F-29
Statement of Partners' Equity ................................. F-30
Statements of Cash Flows ...................................... F-31
Notes to Financial Statements ................................. F-32
F-1
37
HALL INSTITUTIONAL MORTGAGE FUND
FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996
F-2
38
HALL INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP
BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995 (NOTE 1)
June 30, December 31,
1996 1995
---------------- ---------------
(Unaudited)
ASSETS
- ------
Cash and cash equivalents (Note 2) $ 2,540,468 $ 1,332,041
Mortgage notes receivable, net of an allowance for doubtful
receivables of $4,576,000 and $4,576,000 at June 30, 1996
and December 31, 1995, respectively (Note 3) - 1,094,683
Accrued interest receivable, net of deferred interest of
$4,698,836 and $3,928,180 at June 30, 1996 and
December 31, 1995, respectively (Note 3) 1,105,192 1,639,890
Deferred charges, net 750 1,950
----------- ------------
$ 3,646,410 $ 4,068,564
=========== ============
LIABILITIES AND PARTNERS' EQUITY
- --------------------------------
Accounts payable $ 1,503 $ 9
Deferred revenue (Notes 1 and 4) - 2,338
----------- ------------
1,503 2,347
----------- ------------
Partners' equity:
Limited partners - 2,568 units outstanding
at June 30, 1996 and December 31, 1995 3,611,206 4,028,303
General partner 33,701 37,914
----------- ------------
3,644,907 4,066,217
----------- ------------
$ 3,646,410 $ 4,068,564
=========== ============
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE BALANCE SHEETS.
F-3
39
HALL INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP
UNAUDITED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (NOTE 1)
For the Three For the Six For the Three For the Six
Months Ended Months Ended Months Ended Months Ended
June 30, 1996 June 30, 1996 June 30, 1995 June 30, 1995
------------- ------------- ------------- -------------
Revenues:
Interest (Note 2) $ 63,232 $ 96,646 $ 39,415 $ 72,433
Loan origination fees - 2,338 3,099 6,198
------------- ------------- ------------- ----------
63,232 98,984 42,514 78,631
------------- ------------- ------------- ----------
Expenses:
Operating 43,154 49,094 47,166 51,856
Bad Debt 470,000 470,000 - -
Amortization 600 1,200 600 1,200
------------- ------------- ------------- ----------
513,754 520,294 47,766 53,056
------------- ------------- ------------- ----------
Net income (loss) $ (450,522) $ (421,310) $ (5,252) $ 25,575
============= ============= ============= ==========
Net income (loss) allocable to
limited partners $ (446,017) $ (417,097) $ (5,199) $ 25,319
Net income (loss) allocable to
general partner (4,505) (4,213) (53) 256
------------- ------------- ------------- ----------
Net income (loss) $ (450,522) $ (421,310) $ (5,252) $ 25,575
============= ============= ============= ==========
Net income (loss) per limited
partnership unit $ (175) $ (164) $ (2) $ 9
============= ============= ============= ==========
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
F-4
40
HALL INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
FOR THE YEAR ENDED DECEMBER 31, 1995 (NOTE 1)
General Limited
Partner Partners Total
------------- ----------- ------------
Balance, December 31, 1994 $ 20,237 $ 2,278,289 $ 2,298,526
Net income 17,677 1,750,014 1,767,691
------------- ----------- ------------
Balance, December 31, 1995 37,914 4,028,303 4,066,217
Net income (4,213) (417,097) (421,310)
------------- ----------- ------------
Balance, June 30, 1996 $ 33,701 $ 3,611,206 $ 3,644,907
============= =========== ============
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
F-5
41
HALL INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP
UNAUDITED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (NOTE 1)
1996 1995
------------ ------------
Cash Flows From Operating Activities
Receipt of interest on Specific Loans and
short-term investments $ 161,344 $ 577,516
Payment of operating costs (47,600) (51,885)
------------ ------------
Net cash provided by operating
activities, net of distributions 113,744 525,631
Cash Flows From Financing Activities
Payment of Loans to Affiliated Borrowers 1,094,683 -
------------ ------------
Net cash from financing activities 1,094,683 -
------------ ------------
Cash and cash equivalents, beginning of
year 1,332,041 204,315
------------ ------------
Cash and cash equivalents, end of period $ 2,540,468 $ 729,946
============ ============
RECONCILIATION OF NET INCOME TO CASH PROVIDED BY
OPERATING ACTIVITIES:
Net income $ (421,310) $ 25,575
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization expense 1,200 1,200
Decrease in accrued interest receivable 534,698 505,084
Increase (decrease) in accounts payable 1,494 (30)
Decrease in deferred revenue (2,338) (6,198)
------------ ------------
Net cash provided by operating
activities, net of distributions $ 113,744 $ 525,631
============ ============
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
F-6
42
HALL INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES:
In the opinion of management, the accompanying audited and unaudited
financial statements contain all adjustments necessary to present fairly
the financial position of Hall Institutional Mortgage Fund Limited
Partnership (the "Partnership"), as of June 30, 1996 and December 31,
1995, and the results of operations and changes in financial position for
the six months ended June 30, 1996 and 1995. The general partner of the
Partnership is Hall Pension Fund Associates and the general partner of
Hall Pension Fund Associates is Hall 1985 Management Associates (the
"Managing General Partner").
For a summary of additional significant accounting policies and other
matters, see the notes to financial statements of the Partnership which
are included in the Annual Report of Form 10-K for the year ended December
31, 1995.
(2) ACCRUED INTEREST RECEIVABLE:
The original loans made by the Partnership were to affiliated partnerships
("Affiliated Borrowers") which at the time of origination were secured
only by a subordinate lien on the mortgaged real property which was
pledged as security ("Specific Loans"). All of the Specific Loans have
been modified and do not require payment of interest until either sale or
refinancing of the Affiliated Borrower's real property or in some
instances to the extent cash flow is available from the Affiliated
Borrowers after the payment in full of the Affiliated Borrower's first
lien mortgage or other amounts having priority. Certain of the
Partnership's loans, through restructure and reorganization of Affiliated
Borrowers, are in full or part subordinated to the return of equity in
addition to being subordinate to senior indebtedness of the Affiliated
Borrower. Accordingly, in the first six and three months of 1996, the
Partnership accrued interest of $351,745 and $178,064 respectively, of
which $300,656 and $150,328 was deferred.
In February 1995, three of the Affiliated Borrowers entered into a
transaction with affiliates of NHP, Inc., Paine Webber and Hall Financial
Group, Inc. whereby the properties were transferred to separate limited
partnerships (the "New LPS") by the respective Affiliated Borrowers (the
"NHP Transaction"). As a result of the NHP Transaction, Lanetree
Associates Limited Partnership, Twintree Associates Limited Partnership
and Coachtree Associates Limited Partnership ("NHP Transaction
Partnerships") each hold a limited partnership interest in its respective
New LP in which affiliates of NHP, Inc. and Paine Webber are general
partners. As part of the NHP Transaction, the senior mortgage for each
property involved in the NHP Transaction was paid in full. In addition, as
part of the NHP Transaction, each NHP Transaction Partnership received
cash at closing, and is entitled to a defined priority equity amount in
the New LPS (the "Preferred Equity") and an annual return on the Preferred
Equity of 6% per annum provided that all of the New LPS have been paid in
full at the end of each calender quarter ("Operational Participation
Proceeds"). In the event all of the New LPS have not been paid in full
F-7
43
for Operational Participation Proceeds at the end of each calender
quarter, the annual return on the Preferred Equity in calculating
Operational Participation Proceeds increases to 9% per annum (hereafter
referred to as a "Non-Major Default"). In addition to Operational
Participation Proceeds, each NHP Transaction Partnership is entitled to a
priority return of the Preferred Equity and any accrued and unpaid
Operational Participation Proceeds upon refinancing or sale of the
properties over other equity classes and a 20% participation in net
proceeds available from sale or refinancing after payment of the Preferred
Equity and any accrued and unpaid Operational Participation Proceeds
("Sale or Refinancing Participation Proceeds"). As a condition of the NHP
Transaction, the Partnership was required to release its second lien
positions and retain unsecured loans from the NHP Transaction Partnerships
for the remaining balances on their respective Specific Loans. The
remaining balances on the NHP Transaction Partnerships' Specific Loans
have the same economic and payment terms as prior to the NHP Transaction.
Lanetree Associates Limited Partnership distributed $569,419 to the
Partnership in March 1995 in partial payment of its loan obligation to the
Partnership from proceeds it received at closing of the NHP Transaction.
There were not sufficient proceeds at closing (after the payment of
priority repayments) to distribute funds to the Partnership from Coachtree
Associates Limited Partnership or Twintree Associates Limited Partnership.
However, the NHP Transaction Partnerships remain obligated to the
Partnership pursuant to each partnership's Bankruptcy Plan. The terms of
the Preferred Equity held by the NHP Transaction Partnerships provide that
defined amounts be paid not later than December 10, 2000. NHP, Inc. has
the option to pay the Preferred Equity amounts due the NHP Transaction
Partnerships at an earlier date at a discounted amount. If NHP, Inc.
exercises its option within twenty-one months of the original transaction
date, or November 7, 1996, it would result in the following estimated
payments, excluding Sale or Refinancing Participation Proceeds and
assuming a Non-Major Default has not occurred, to the Partnership from
each of the NHP Transaction Partnerships:
Coachtree . . . . . . . . . . . . . . . $177,960
Lanetree . . . . . . . . . . . . . . . . $1,167,626
Twintree . . . . . . . . . . . . . . . . $381,815
The amounts the Partnership would receive on December 10, 2000, excluding
Sale or Refinancing Participation Proceeds and assuming a Non-Major
Default has not occurred, is estimated to be:
Coachtree . . . . . . . . . . . . . . . $334,743
Lanetree . . . . . . . . . . . . . . . . $1,167,626
Twintree . . . . . . . . . . . . . . . . $561,409
In April 1996, a Non-Major Default had occurred in the NHP Transaction.
During the first three months of 1996, two Affiliated Borrowers, Lanetree
Associates Limited Partnership and Hall Seven Trails Associates
("Arrowtree"), repaid accrued interest to the Partnership of $71,512 and
$44,274, respectively. In the second quarter of 1996, based on an updated
analysis management increased the reserve for accrued interest receivable
by $470,000.
F-8
44
(3) DISTRIBUTIONS TO PARTNERS:
There were no partner distributions paid during the first six months of
1996.
(4) MORTGAGE NOTES RECEIVABLE:
In January 1996, Northtree Associates Limited Partnership ("Candlewick"),
an Affiliated Borrower, refinanced the Candlewick apartments' mortgages.
The property was refinanced with a new $5.0 million first lien mortgage
which accrues interest at 7.58% with principal and interest payments due
monthly based on a 22-year amortization schedule through maturity on
February 1, 2003. As a condition of the refinancing agreement, the
Partnership was required to release its second lien position and retain an
unsecured recourse promissory note from Candlewick for the remaining
balance on Candlewick's Specific Loan. The remaining balance on the
Candlewick Specific Loan has the same economic terms as prior to the
refinancing. The Partnership believes it was in its best interest to
release its second lien position to allow the refinancing to consummated,
thereby decreasing Candlewick's first lien mortgage interest rate and
extending the maturity date.
During the first quarter of 1996, Arrowtree refinanced its mortgages. As
part of the overall refinancing, the property was transferred to Arrowtree
Properties, Ltd. ("New Arrowtree"), with Arrowtree retaining a 99%
interest in New Arrowtree. The property was refinanced with a new $2.75
million first lien mortgage which accrues interest at 7.57% with principal
and interest payments due monthly. The refinancing allowed Arrowtree to
repay the Partnership in full the $181,000 of principal and $44,274 of
accrued interest on a loan the Partnership made to Arrowtree pursuant to
the 1994 restructuring of Arrowtree's first lien mortgage. Arrowtree also
made a partial payment of $914,000 on Arrowtree's Specific Loan. As a
condition of the refinancing agreement, the Partnership was required to
release its second lien position and retain an unsecured recourse
promissory note from Arrowtree for the remaining balance on Arrowtree's
Specific Loan. The remaining balance on the Arrowtree Specific Loan has
the same economic and payment terms as prior to the refinancing.
The Partnership updated an analysis of the collectibility of its mortgage
notes receivable at December 31, 1995. The Partnership reversed bad debt
reserves totaling $1,653,386 during 1995 primarily based on interest
payments received during 1995 the principal and interest payments received
in connection with the Arrowtree refinancing discussed above.
(5) INVESTMENT ACT OF 1940:
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. In February 1996, the
Partnership's attorneys advised the Partnership that the release of the
second lien positions on certain of the loan receivables could cause the
Partnership to be treated as an investment company under the 1940
Investment Company Act (the "1940 Act") by the Securities and Exchange
Commission. The Partnership cannot become an investment company under the
1940 Act because it is in conflict with its partnership agreement
F-9
45
and the purpose of the original offering. Certain securities regulations
which may be applicable to the Partnership complicate the determination of
the best alternative for future operations of the Partnership. Although
there can be no assurances with respect to the outcome, the Partnership
intends to use its best efforts to implement the alternative that provides
the maximum benefit to its limited partners, while maintaining compliance
with all applicable securities regulations. The alternatives currently
being evaluated, if implemented, may require the Partnership to seek
limited partner approval. If such limited partner approval is required,
proxy statements will be sent to the limited partners which will request
their votes regarding certain aspects of the alternative proposed.
The accompanying financial statements have not been prepared on the
liquidation basis of accounting, as it is not determinable if an immediate
liquidation of the Partnership will be required. This uncertainty raises
substantial doubt about the Partnership's ability to continue as a going
concern. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
F-10
46
HALL INSTITUTIONAL MORTGAGE FUND
FINANCIAL STATEMENTS
DECEMBER 31, 1995
F-11
47
REPORT INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Hall Institutional Mortgage Fund Limited Partnership:
We have audited the accompanying balance sheets of Hall Institutional Mortgage
Fund Limited Partnership (an Arizona limited partnership) as of December 31,
1995 and 1994, and the related statements of operations, partners' equity and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements and the schedule referred to below are the
responsibility of the management of Hall Institutional Mortgage Fund Limited
Partnership (the "Partnership"). 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 are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hall Institutional Mortgage
Fund Limited Partnership as of December 31, 1995 and 1994, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As further discussed in Note 7
to the financial statements, in February 1996, the Partnership learned that
certain transactions it had entered into during 1995 had caused the Partnership
to be in violation of the 1940 Investment Company Act (the "1940 Act"). The
Partnership is applying for an exemption under the 1940 Act and is planning to
solicit the approval of the partners concerning alternatives to liquidate the
Partnership. One of the alternatives would require an immediate liquidation of
all Partnership assets and subsequent dissolution. The accompanying financial
statements have not been prepared on the liquidation basis of accounting, as it
is not determinable if an immediate liquidation of the Partnership will be
required. This uncertainty raises substantial doubt about the Partnership's
ability to continue as a going concern. The accompanying financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule XII is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not
part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in our audit of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
/s/Arthur Andersen LLP
Dallas, Texas,
April 8, 1996
F-12
48
HALL INSTITUTIONAL MORTGAGE FUND
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994 (NOTE 1)
ASSETS 1995 1994
---------- ----------
Cash and cash equivalents (Note 2) $1,332,041 $ 204,315
Mortgage notes receivable, net of an allowance for
doubtful receivables of $4,576,000 and $5,571,770
in 1995 and 1994, respectively (Note 3) 1,094,683 615,645
Accrued interest receivable, net of deferred interest
and an allowance for doubtful interest receivable
of $3,928,180 and $4,826,539 in 1995 and
1994, respectively (Note 3) 1,639,890 1,488,973
Deferred charges, net 1,950 4,350
---------- ----------
$4,068,564 $2,313,283
========== ==========
LIABILITIES AND PARTNERS' EQUITY
Accounts payable $ 9 $ 23
Deferred revenue (Notes I and 4) 2,338 14,734
---------- ----------
2,347 14,757
Partners' equity
Limited partners - 2,568 units outstanding
at December 3 1, 1995 and 1994 4,028,303 2,278,289
General Partner 37,914 20,237
---------- ----------
4,066,217 2,298,526
---------- ----------
$4,068,564 $2,313,283
========== ==========
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE BALANCE SHEETS.
F-13
49
HALL INSTITUTIONAL MORTGAGE FUND
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (NOTE 1)
Revenues: 1995 1994 1993
----------- ----------- -----------
Interest (Notes 3 and 4) $ 165,139 $ 8,596 $ 8,311
Gain on debt settlement (Note 3) -- -- 75,000
Loan origination fees (Note 4) 12,396 17,928 42,183
----------- ----------- -----------
177,535 26,524 125,494
----------- ----------- -----------
Expenses:
Operating 60,830 32,255 47,928
Bad debt reversal (Note 3) (1,653,386) (1,923,618) --
Amortization 2,400 2,400 2,400
----------- ----------- -----------
(1,590,156) (1,888,963) 50,328
----------- ----------- -----------
Net income $ 1,767,691 $ 1,915,487 $ 75,166
=========== =========== ===========
Net income allocable to
limited partners $ 1,750,014 $ 1,896,332 $ 74,414
Net income allocable to
General Partner 17,677 19,155 752
----------- ----------- -----------
Net income $ 1,767,691 $ 1,915,487 $ 75,166
=========== =========== ===========
Net income per limited
partnership unit $ 681 $ 738 $ 29
=========== =========== ===========
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
F-14
50
HALL INSTITUTIONAL MORTGAGE FUND
STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (NOTES 1 AND 5)
General Limited
Partner Partners Total
----------- ----------- -----------
Balance, December 31, 1992 $ 1,046 $ 307,543 $ 308,589
Net income 752 74,414 75,166
----------- ----------- -----------
Balance, December 31, 1993 1,798 381,957 383,755
Distributions (716) -- (716)
Net income 19,155 1,896,332 1,915,487
----------- ----------- -----------
Balance, December 31, 1994 20,237 2,278,289 2,298,526
Net income 17,677 1,750,014 1,767,691
----------- ----------- -----------
Balance, December 31, 1995 $ 37,914 $ 4,028,303 $ 4,066,217
=========== =========== ===========
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
F-15
51
HALL INSTITUTIONAL MORTGAGE FUND
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (NOTE 1)
1995 1994 1993
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Receipt of interest on Specific Loans
and short-term investments $ 1,188,570 $ 8,596 $ 8,311
Proceeds from debt settlement -- -- 75,000
Distribution paid -- (2,083) --
Payment of operating costs (60,844) (33,735) (46,425)
----------- ----------- -----------
Net cash provided by (used in) operating activities,
net of distributions 1,127,726 (27,222) 36,886
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Loans to Affiliated Borrowers -- -- (181,000)
----------- ----------- -----------
Net cash used in financing activities -- -- (181,000)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 1,127,726 (27,222) (144,114)
Cash and cash equivalents, beginning of year 204,315 231,537 375,651
----------- ----------- -----------
Cash and cash equivalents, end of year $ 1,332,041 $ 204,315 $ 231,537
=========== =========== ===========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Net income $ 1,767,691 $ 1,915,487 $ 75,166
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Bad debt reversal (1,653,386) (1,923,618) --
Amortization expense 2,400 2,400 2,400
Decrease in partner distributions payable -- (1,367) --
Payment of prior year distribution -- (716) --
Amortization of deferred revenue (12,396) (17,928) (42,183)
Decrease in accrued interest receivable 1,023,431 -- --
Increase (decrease) in accounts payable (14) 1,480) 1,503
----------- ----------- -----------
Net cash provided by (used in) operating
activities, net of distributions $ 1,127,726 $ (27,222) $ 36,886
=========== =========== ===========
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
F-16
52
HALL INSTITUTIONAL MORTGAGE FUND
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Hall Institutional Mortgage Fund, an Arizona limited partnership (the
"Partnership"), was formed on October 12, 1984. The general partner of the
Partnership is Hall Pension Fund Associates (the "General Partner") and
the general partner of Hall Pension Fund Associates is Hall 1985
Management Associates Limited Partnership (the "Managing General
Partner").The Partnership has invested in subordinated mortgages with
affiliated partnerships (the "Affiliated Borrowers") which were primarily
secured by income-producing real estate. The investments were made during
1985, 1986 and 1987 (except for the Arrowtree Loan hereinafter defined).
The limited partners in the Partnership are primarily qualified pension,
profit sharing and other retirement trusts and plans, commingled trust
funds managed by banks for such trusts, government pension and retirement
trusts, individual retirement accounts, Keogh plans, certain endowment
funds and other institutional investors intended to be exempt from federal
income taxation. The Partnership also accepted nontax-exempt investors
who desired current taxable income from mortgage investments in real
estate.
BASIS OF PRESENTATION -
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP"). The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
REVENUE RECOGNITION -
Interest income derived from mortgage notes receivable is deferred to the
extent the underlying mortgage notes receivable are determined, by the
Managing General Partner, to be either partially or completely
uncollectible. If in future periods such mortgage notes receivable and
related interest are deemed to be collectible, the deferred interest
income will be recognized. Deferred interest is classified in the
accompanying balance sheets as a reduction in accrued interest receivable.
INCOME TAXES -
The Partnership is not subject to federal, state, or local income taxes
and, accordingly, none have been provided in the accompanying financial
statements. Such taxes are the responsibility of the partners and are,
therefore, included in their individual tax returns.
F-17
53
LOAN ORIGINATION FEE -
A 3 percent loan origination fee was earned by the Partnership on each
participating mortgage loan made. This revenue was initially deferred and
is being recognized ratably over the life of the specific related loans.
AMORTIZATION OF ORGANIZATION COSTS -
Organization costs are amortized on a straight-line basis over twelve
years.
ALLOCATION OF PROFIT AND LOSS -
Partnership net profits are allocated 99 percent to the limited partners
and 1 percent to the General Partner. Net losses are allocated to the
limited partners and General Partner in proportion to the positive
balances in their capital accounts. However, all net losses will be
allocated to the General Partner if the allocation to the limited partners
would result in a negative capital account balance for the limited
partners.
DISTRIBUTIONS OF DISTRIBUTABLE CASH FROM OPERATIONS
AND SURPLUS FUNDS -
Distributable cash from operations and surplus funds, as defined, is
allocated 99 percent to the limited partners and 1 percent to the General
Partner. However, the General Partner, exercising reasonable discretion,
may retain in the Partnership all or any part of the funds available for
distributions to meet the working capital needs of the Partnership (see
Note 2).
NET INCOME PER LIMITED PARTNERSHIP UNIT -
Net income per limited partnership unit ("Unit") is computed by dividing
net income allocated to the limited partners by the weighted average
number of Units outstanding. Per Unit information has been computed based
on 2,568 Units outstanding in 1995, 1994 and 1993.
(2) CASH AND CASH EQUIVALENTS:
Cash and cash equivalents at December 31, 1995 and 1994, consisted of the
following:
1995 1994
---------- ----------
Cash $ 55,804 $ 44,898
Certificates of deposit/Money
Market account 1,276,237 159,417
---------- ----------
$1,332,041 $ 204,315
========== ==========
F-18
54
Under the terms of the partnership agreement, the General Partner is
required to maintain in the Partnership reasonable cash reserves for
working capital and contingencies in an amount of not less than 1% of
invested capital, as defined. The Partnership maintained the required
working capital reserve at December 31, 1995 and 1994.
(3) MORTGAGE NOTES RECEIVABLE:
The Partnership's loans to Affiliated Borrowers are nonrecourse
obligations of the Affiliated Borrowers and certain of the loans are
secured by a subordinate lien on the mortgaged real property which is
pledged as security. The Partnership has released its second lien position
on certain of the loans to Affiliated Borrowers (see below and Notes 6 and
7). All loans, except a certain amount advanced to Hall Seven Trails
Associates, as more fully discussed hereafter (the "Arrowtree Loan"), made
by the Partnership to the Affiliated Borrowers were subject at the time of
origination to the rights and restrictions set out in a specified loan
agreement ("Model Loan Agreement") and two specified forms of notes
("Participating Notes"). Such loans are hereafter referred to as "Specific
Loans". As described hereinafter,all of the Specific Loans set out in the
Model Loan Agreement and the Participating Notes have been modified
subsequent to their origination. As a result of a detailed analysis the
Partnership performs on the estimated values of the underlying assets
relating to and impacting the collectibility of the Specific Loans, as
hereafter described, certain amounts of the Specific Loans have been
reserved through bad debt provisions. The following table describes the
terms and status of outstanding Specific Loans at December 31, 1994 and
1995:
Outstanding Principal
Loan Amount Property
Borrower 1994 1995 Location Accrue Status
- -------- ---- ---- -------- ------ ------
Arrowtree $ 850,000 $ 913,683 Okemos, MI (A) Modified
Brambletree 1,751,000 1,751,000 Garland, TX 7.00% Modified
Twintree 720,000 720,000 Albuquerque, NM 8.00% Modified
Midtree 410,000 410,000 Albuquerque, NM 8.00% Modified
Fawntree 550,000 -- Albuquerque, NM N/A Retired
Lanetree 620,000 620,000 Albuquerque, NM 8.00% Modified
Candlewick 460,000 460,000 Albuquerque, NM 8.00% Modified
Coachtree 615,000 615,000 Albuquerque, NM 8.00% Modified
---------- ----------
$5,976,000 $5,489,683
========== ==========
(A) Arrowtree's Specific Loan accrual rate is equal to the principal
payments Arrowtree makes on its first lien mortgage.
The Partnership periodically reviews the amount of reserves which are
necessary on both its mortgages and interest receivables. Previously, the
process of reviewing the amount of reserves was based on the current
market value of each Affiliated Borrower's asset holdings and where the
Partnership stands in relation to the Affiliated Borrower's other
creditors. Effective January 1, 1995, the Partnership adopted Statement of
Financial Accounting Standards No. 114, "Accounting by
F-19
55
Creditors for Impairment of a Loan" (SFAS #114). SFAS #114 required the
Partnership to evaluate its mortgage notes for impairment based on a
measurement of the present value of expected future cash flows, the loans
observable market price, or the fair value of the loans collateral if the
loan is collateral dependent. In accordance with SFAS # 114, the
Partnership obtained a third-party appraisal of its mortgages and interest
receivables which estimated values of the Partnership's mortgages and
interest receivables ranging from $1,275,000 - $1,600,000, exclusive of
amounts received in connection with the Arrowtree refinancing (see Note
8). The accompanying financial statements reflect the results of the
receivables appraised values at December 31, 1995, and is based on the
upper end of the valuation range.
The resulting appraised valuations were based on the discounted cash flow
analysis' of the underlying properties (discounted at 12%) assuming a
five-year holding period with a sale occurring at the end of the fifth
year. The total discounted cash flows were further discounted (at 50%-60%)
to compensate for the risk associated with owning a minority
non-controlling equity interest which the Partnership is deemed to possess
as a lender to each of the Affiliated Borrowers.
For the years ended December 31, 1995 and 1994, respectively, the
Partnership reversed bad debt reserves totaling $1,653,386 and $1,923,618.
The amounts reversed during 1995 were primarily based on interest payments
received during the year on previously reserved amounts and the expected
principal payments to be received in connection with the Arrowtree
refinancing discussed in Note 8. The amounts reversed during 1994 were
based upon management's process of reviewing the necessary reserves as
discussed above and resulted from the increased values of the properties
that collateralized the mortgage notes at that time. There was no change
in the reserve during 1993.
On November 1, 1995, Midtree Associates, Ltd. ("Midtree") refinanced the
Midtree apartments' mortgages. The first lien mortgage in place prior to
the refinancing had an original maturity date of August 1, 1995, but was
extended to allow Midtree time to secure the refinancing proceeds. As part
of the overall refinancing, the property was transferred to Phoenix Square
Associates., Ltd. ("New Midtree"), with Midtree retaining a 99% interest
in New Midtree. The property was refinanced with a new $4.2 million first
lien which accrues interest at 8.1 % through maturity on November 1, 2002.
Monthly principal and interest payments are based on a 30-year
amortization schedule. As a condition of the refinancing, the Partnership
was required to release its second lien position and retain an unsecured
loan from Midtree for the remaining balance on Midtree's Specific Loan.
The remaining balance on the Midtree Specific Loan has the same economic
and payment terms as prior to the refinancing. The Partnership believes it
was in its best interest to agree to release its second lien position
pursuant to the refinancing. By doing so, Midtree was able to avoid
foreclosure on its underlying property from the original first lien holder
and reduce the interest rate on the first lien from 12%.
Hall Seven Trails Associates ("Arrowtree") completed an agreement with
Prudential Insurance Company ("Prudential") in 1994 regarding
restructuring its first lien encumbrance on which Arrowtree had been in
default since March 1, 1989. The agreement with Prudential required
Arrowtree to raise $345,000 in cash and funding commitments (the "New
Capital") to fund a capital improvement escrow account, pay the lender's
administrative costs, and to bring debt service current
F-20
56
under its new terms. Arrowtree issued a capital call to equity investors
and raised approximately $171,000 of the New Capital. The Partnership
loaned Arrowtree $181,000 ("Arrowtree Reorganization Advance") with such
funds being used by Arrowtree as part of the New Capital. The Arrowtree
Reorganization Advance accrues interest at 10% compounded monthly,
beginning January 1, 1994. Interest and principal on the Arrowtree
Reorganization Advance was deferred and reserved, respectively, in 1994.
Pursuant to the Partnership's analysis of the collectibility of
receivables from the Affiliated Borrowers, a portion of this reserve was
reversed in 1995. In 1994, the Partnership modified its Specific Loan from
Arrowtree to agree with various modifications called. for as part of the
agreement with Prudential and in the Arrowtree plan of reorganization (the
"1994 Arrowtree Modification"). The 1994 Arrowtree Modification provided
that repayment of the principal portion of Arrowtree's Specific Loan and
the repayment of the Arrowtree Reorganization Advance and its related
accrued interest is subordinate to Prudential receiving their entire first
lien and related accrued interest. The interest portion of Arrowtree's
Specific Loan, in addition to being subordinate to Prudential, is also
subordinate to the repayment of all the New Capital contributed by equity
investors plus a 10% annual preference on such funds. The Partnership
believes it was in its best interest to have consented to the 1994
modification of the first lien, to have consented to the 1994 Arrowtree
Modification, and to make the Arrowtree Reorganization Advance. As a
result of these events, the Partnership was able to retain its second lien
on the property since the first lien was not assumable by the Partnership
and the Partnership did not have the capability of paying off the first
lien. As of December 31, 1995, the Arrowtree Reorganization Advance was
secured by the Partnership's second lien on the property.
A plan of reorganization (the "Plan") for Hall Brambletree Associates
("Brambletree") was confirmed on May 19, 1993. According to the Plan, the
principal and interest of $2,037,324 due to the Partnership on its
mortgage note receivable will bear interest at 7% per annum beginning
January 1, 1993, Property cash flow and sale and refinance proceeds will
be allocated first to the investors who provided additional equity of
$250,000 to Brambletree as part of the Plan (the "Participating
investors"),plus a 12% annual preference, then 50% to the Participating
Investors and 50% to Hall Financial Group, Inc. ("HFGI") and the
Partnership to be shared pro rata until HFGI and the Partnership are paid
in full, and then 100% to the Participating Investors.
The Partnership, Hall Buckingham Associates ("Buckingham"), and
Buckingham's senior mortgage holder signed an agreement on July 15, 1993
wherein the Partnership released Buckingham of its mortgage note
receivable in return for consideration of $75,000. The Partnership
recognized a $75,000 gain on debt settlement in 1993 since the Buckingham
mortgage note had been fully reserved in prior periods.
Fawntree Associates, Ltd. ("Fawntree"), an Affiliated Borrower, was sold
for $6,400,000 on June 15, 1995. After the satisfaction of all claims
having priority over the Partnership, Fawntree distributed $582,682 to the
Partnership per the terms on the Fawntree Specific Loan. The Partnership
had previously reserved the entire amount of the Fawntree Specific Loan.
As a result of the sale of the property in 1995 and related payment to the
Partnership, the Partnership reversed the reserve related to the repayment
and wrote off the remaining accrued but unpaid interest of $397,408 and
principal balance of $550,000 against the related reserves.
F-21
57
In February 1995, three of the Affiliated Borrowers entered into a
transaction with affiliates of NHP, Inc., Paine Webber and HFGI whereby
the properties were transferred to separate limited partnerships (the
"New LPs") by the respective Affiliated Borrower (the "NHP Transaction").
As a result of the NHP Transaction, Lanetree Associates Limited
Partnership, Twintree Associates Limited Partnership and Coachtree
Associates Limited Partnership ("NHP Transaction Partnerships") each hold
a limited partnership interest in its respective New LP in which
affiliates of NHP, Inc. and Paine Webber are general partners. As part of
the NHP Transaction, the senior mortgage for each property involved in
the NHP Transaction was paid in full. In addition, as part of the NHP
Transaction, each NHP Transaction Partnership received cash at closing,
and is entitled to a defined priority equity amount in the New LPs (the
"Preferred Equity") and an annual return on the Preferred Equity of 6%
per annum provided that all of the New LPs have been paid in full at the
end of each calendar quarter ("Operational Participation Proceeds"). In
the event all of the New LPs have not been paid in full for Operational
Participation Proceeds at the end of each calendar quarter, the annual
return on the Preferred Equity in calculating Operational Participation
Proceeds increases to 9% per annum (hereafter referred to as a "Non-Major
Default"), In addition to Operational Participation Proceeds, each NHP
Transaction Partnership is entitled to a priority return of the Preferred
Equity and any accrued and unpaid Operational Participation Proceeds upon
refinancing or sale of the properties over other equity classes and a 20%
participation in net proceeds available from sale or refinancing after
payment of the Preferred Equity and any accrued and unpaid Operational
Participation Proceeds ("Sale or Refinancing Participation Proceeds").
Lanetree Associates Limited Partnership distributed $569,419 to the
Partnership in March 1995 in partial payment of its loan obligation to
the Partnership from proceeds it received at closing of the NHP
Transaction. There were not sufficient proceeds at closing (after the
payment of priority repayments) to distribute funds to the Partnership
from Coachtree Associates Limited Partnership or Twintree Associates
Limited Partnership. However, the NHP Transaction Partnerships remain
obligated to the Partnership pursuant to each partnership's Bankruptcy
Plan. The terms of the Preferred Equity held by the NHP Transaction
Partnerships provided that defined amounts be paid not later than
December 10, 2000. NHP, Inc. has the option to pay the Preferred Equity
amounts due the NHP Transaction Partnerships at an earlier date at a
discounted amount. If NHP, Inc. exercises its option within twenty-one
months of the original transaction date, or November 7, 1996, it would
result in the following estimated payments, excluding Sale or Refinancing
Participation Proceeds and assuming a Non-Major Default has not occurred,
to the Partnership from each of the NHP Transaction Partnerships:
Coachtree $ 177,960
Lanetree $1,167,626
Twintree $ 381,815
F-22
58
The amounts the Partnership would receive on December 10, 2000, excluding
Sale or Refinancing Participation Proceeds and assuming a Non-Major
Default has not occurred, is estimated to be:
Coachtree $ 334,743
Lanetree $1,167,626
Twintree $ 561,409
As of April 8, 1996, a Non-Major Default had occurred in the NHP
Transaction.
(4) TRANSACTIONS WITH AFFILIATES:
Loan origination fees of $12,396, $17,928 and $42,183 were recognized in
1995, 1994 and 1993, respectively. In 1995, pursuant to the Partnership's
analysis of the collectibility of receivables from the Affiliated
Borrowers, interest income of $128,670 was recognized on the Specific Loan
from Lanetree Associates Limited Partnership. No interest income was
recognized on Specific Loans in 1994 or 1993. The interest income is net
of deferred interest of $673,397, $849,228, and $971,098 on non-performing
mortgage notes receivable in 1995, 1994 and 1993, respectively.
The General Partner, the Managing General Partner and the Affiliated
Borrowers are all affiliates of HFGI whose majority shareholder is Mr.
Craig Hall. As is more fully discussed in the Partnership's Annual Report
on Form 10-K, Part II, Item 7, certain of the limited partnerships
affiliated with HFGI have experienced cash flow deficits due primarily to
overbuilding and poor economic conditions in the market areas in which
they operate. Certain of these cash flow deficits have been and are being
funded by HFGI. HFGI may be unwilling or unable to provide additional cash
deficit funding to the Affiliated Borrowers and there can be no assurance
such funding will be available from other sources.
(5) DISTRIBUTIONS TO PARTNERS:
During the year ended December 31, 1994, distributions of $2,083 (of which
$1,367 had been previously accrued) were paid to the General Partner. No
distributions were made in 1995 or 1993. Such distributions were made in
accordance with the partnership agreement which requires quarterly
distributions of Partnership distributable cash flow, as defined.
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires the Partnership to disclose
the estimated fair values of its financial instruments.
The carrying amount of the Partnership's cash and cash equivalents
approximates its fair value due to the short maturity of these
instruments. The Partnership's mortgage note receivables and accrued
interest receivables have been recorded at their estimated fair value
based upon an independent third-party appraisal (see Note 3).
F-23
59
(7) INVESTMENT ACT OF 1940:
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. In February 1996, the
Partnership's attorneys advised the Partnership that the release of the
second lien positions on certain of the loan receivables could cause the
Partnership to be treated as an investment company under the 1940
Investment Company Act (the "1940 Act") by the Securities and Exchange
Commission. The Partnership cannot become an investment company under the
1940 Act because it is in conflict with its partnership agreement and the
purpose of the original offering. The Partnership, however, is in the
process of applying for a "no action" letter from the Securities and
Exchange Commission based on the position that the 1940 Act provides for
an exemption for companies not to be considered investment companies if
they adopt a plan of liquidation. In the original offering, it was
anticipated that when the loans were repaid, the funds would be
distributed back to the unit holders rather than being allowed to be
reinvested. Therefore, based upon the Partnership's original partnership
documents, the intent was to have a liquidating fund after all the initial
loans were made. In order to adopt a liquidating plan, a proxy will be
sent to each unit holder for their vote. Under the liquidation plan proxy,
the unit holders will be asked to choose one of two alternatives. A
majority vote (over 50%) for either alternative will determine the
treatment of all unit holders.
The first alternative would be an immediate liquidation of the Partnership
based on a sale of all the loans receivable to HFGl for $1.6 million. This
amount was determined by taking the highest range of value as determined
by an independent third party appraisal. The proceeds from the sale of the
loans receivable plus the cash on hand will then be distributed to the
unit holders based upon their percentage interest. The Partnership would
then be dissolved.
The second alternative is to make a distribution to the unit holders from
current funds available and to collect whatever additional loan proceeds
are realized over a five year period of time. Any Partnership loan
receivables which are still outstanding at the end of the five years will
be appraised by an independent third party appraiser and the Partnership
will then offer for sale the remaining loan receivables from the
Partnership at such appraised value. The proceeds from the sale of the
loans at the end of five years, as well as any remaining cash on hand will
then be distributed pro rata to the unit holders of the Partnership and
the Partnership will be terminated.
Management expects a proxy statement will be sent out within 90 days from
March 31, 1996 to all unit holders, as well as a request for a no action
letter from the Securities and Exchange Commission.
The accompanying financial statements have not been prepared on the
liquidation basis of accounting, as it is not determinable if an immediate
liquidation of the Partnership will be required. This uncertainty raises
substantial doubt about the Partnership's ability to continue as a going
concern. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
F-24
60
(8) SUBSEQUENT EVENTS:
in January 1996, Northtree Associates Limited Partnership ("Candlewick")
refinanced the Candlewick apartments' mortgages. The property was
refinanced with a new $5.0 million first lien mortgage which accrues
interest at 7.58% with principal and interest payments due monthly based
on a 22-year amortization schedule through maturity on February 1, 2003.
As a condition of the refinancing agreement, the Partnership was required
to release its second lien position and retain an unsecured loan from
Candlewick for the remaining balance on Candlewick's Specific Loan. The
remaining balance on the Candlewick Specific Loan has the same economic
terms as prior to the refinancing. The Partnership believes it was in its
best interest to release its second lien position to allow the refinancing
to be consummated, thereby decreasing Candlewick's first lien mortgage
interest rate and extending the maturity date.
In January 1996, the Arrowtree apartments' mortgages were refinanced. As
part of the overall refinancing, the property was transferred to Arrowtree
Properties, Ltd. ("New Arrowtree"), with Arrowtree retaining a 99%
interest in New Arrowtree. The property was refinanced with a new $2.75
million first lien mortgage which accrues interest at 7.57% with principal
and interest payments due monthly. The refinancing allowed Arrowtree to
repay the Partnership in full the principal and accrued interest on the
Arrowtree Reorganization Advance and to make a partial payment of
approximately $913,000 on Arrowtree's Specific Loan. As a condition of the
refinancing agreement, however, the Partnership was required to release
its second lien position and retain an unsecured loan from Arrowtree for
the remaining balance on Arrowtree's Specific Loan. The remaining balance
on the Arrowtree Specific Loan has the same economic and payment terms as
prior to the refinancing.
F-25
61
HALL INSTITUTIONAL MORTGAGE FUND
FINANCIAL STATEMENTS
DECEMBER 31, 1994
F-26
62
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Hall Institutional Mortgage Fund:
We have audited the accompanying balance sheets of Hall Institutional Mortgage
Fund (an Arizona limited partnership) as of December 31, 1994 and 1993, and the
related statements of operations, partners' equity, and cash flows for each of
the three years in the period ended December 31, 1994. These financial
statements and schedule referred to below are the responsibility of the
management of Hall Institutional Mortgage Fund. 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 are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hall Institutional Mortgage
Fund as of December 31, 1994 and 1993, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1994, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule XII is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not
part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/Arthur Andersen LLP
Dallas, Texas,
April 15, 1995
F-27
63
HALL INSTITUTIONAL MORTGAGE FUND
BALANCE SHEETS
DECEMBER 31, 1994 AND 1993 (NOTE 1)
ASSETS 1994 1993
- ------ ------------ --------
Cash and cash equivalents (Note 2) $ 204,315 $ 231,537
Mortgage notes receivable, net of an allowance for
doubtful receivables of $5,390,770 and $5,976,000
in 1994 and 1993, respectively (Note 3) 615,645 --
Accrued interest receivable, net of deferred
interest and an allowance for doubtful interest
receivable of $4,807,586 and $6,139,271 in 1994
and 1993, respectively (Note 3) 1,488,973 --
Note and interest receivable, net of deferred interest
of $18,953 and an allowance for doubtful receivable
of $181,000 in 1994 (Note 3) -- 181,000
Deferred charges, net 4,350 6,750
---------- ----------
$2,313,283 $ 419,287
========== ==========
LIABILITIES AND PARTNERS' EQUITY
Amounts due to affiliates $ 23 $ 1,503
Partner distributions payable (Note 5) -- 1,367
Deferred revenue (Notes 1 and 4) 14,734 32,662
---------- ----------
14,757 35,532
Partners' equity 2,298,526 383,755
---------- ----------
$2,313,283 $ 419,287
========== ==========
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE BALANCE SHEETS.
F-28
64
HALL INSTITUTIONAL MORTGAGE FUND
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (NOTE 1)
Revenues: 1994 1993 1992
----------- ----------- -----------
Interest (Notes 3 and 4) $ 8,596 $ 8,311 $ 13,594
Gain on debt settlement (Note 3) -- 75,000 --
Loan origination fees (Note 4) 17,928 42,183 24,348
----------- ----------- -----------
26,524 125,494 37,942
----------- ----------- -----------
Expenses:
Operating 32,255 47,928 51,476
Bad debt expense (reversal) (Note 3) (1,923,618) -- 702,877
Amortization 2,400 2,400 2,400
----------- ----------- -----------
(1,888,963) 50,328 756,753
----------- ----------- -----------
Net income (loss) $ 1,915,487 $ 75,166 $ (718,811)
=========== =========== ===========
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
F-29
65
HALL INSTITUTIONAL MORTGAGE FUND
STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (NOTES 1 AND 5)
General Limited
Partner Partners Total
----------- ----------- -----------
Balance, December 31, 1991 $ 3,484 $ 1,023,916 $ 1,027,400
Net loss (2,438) (716,373) (718,811)
----------- ----------- -----------
Balance, December 31, 1992 1,046 307,543 308,589
Net income 752 74,414 75,166
----------- ----------- -----------
Balance, December 31, 1993 1,798 381,957 383,755
Distributions (716) -- (716)
Net income 19,155 1,896,332 1,915,487
----------- ----------- -----------
Balance, December 31, 1994 $ 20,237 $ 2,278,289 $ 2,298,526
=========== =========== ===========
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
F-30
66
HALL INSTITUTIONAL MORTGAGE FUND
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (NOTE 1)
1994 1993 1992
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Receipt of interest on Specific Loans
and short-term investments $ 8,596 $ 8,311 $ 13,594
Proceeds from debt settlement -- 75,000 --
Distribution paid (2,083) -- (968)
Payment of operating costs (33,735) (46,425) (51,017)
----------- ----------- -----------
Net cash provided by (used in) operating
activities, net of distributions (27,222) 36,886 (38,391)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Loans to Affiliated Borrowers -- (181,000) --
----------- ----------- -----------
Net cash used in financing activities -- (181,000) --
----------- ----------- -----------
Net decrease in cash and cash equivalents (27,222) (144,114) (38,391)
Cash and cash equivalents, beginning of year 231,537 375,651 414,042
----------- ----------- -----------
Cash and cash equivalents, end of year $ 204,315 $ 231,537 $ 375,651
=========== =========== ===========
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ 1,915,487 $ 75,166 $ (718,811)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Bad debt expense (reversal) (1,923,618) -- 702,877
Amortization expense 2,400 2,400 2,400
Decrease in partner distributions payable (1,367) -- (968)
Payment of prior year distribution (716) -- --
Amortization of deferred revenue (17,928) (42,183) (24,348)
Decrease in other assets -- -- 1,260
Increase (decrease) in amounts due to affiliates (1,480) 1,503 (801)
----------- ----------- -----------
Net cash provided by (used in) operating
activities, net of distributions $ (27,222) $ 36,886 $ (38,391)
=========== =========== ===========
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
F-31
67
HALL INSTITUTIONAL MORTGAGE FUND
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Hall Institutional Mortgage Fund, an Arizona limited partnership (the
"Partnership"), was formed on October 12, 1984. The general partner of the
Partnership is Hall Pension Fund Associates and the general partner of Hall
Pension Fund Associates is Hall 1985 Management Associates Limited
Partnership (the "Managing General Partner"). The Partnership has invested
in subordinated mortgages with affiliated partnerships (the "Affiliated
Borrowers") secured primarily by income-producing real estate. The
investments were made during 1985, 1986 and 1987 (except for the Arrowtree
Loan hereinafter defined). The limited partners in the Partnership are
primarily qualified pension, profit sharing and other retirement trusts and
plans, commingled trust funds managed by banks for such trusts, government
pension and retirement trusts, individual retirement accounts, Keogh plans,
certain endowment funds and other institutional investors intended to be
exempt from federal income taxation. The Partnership also accepted
nontax-exempt investors who desired current taxable income from mortgage
investments in real estate.
REVENUE RECOGNITION -
Interest income derived from mortgage notes receivable is deferred to the
extent the underlying mortgage notes receivable are determined, by the
Managing General Partner, to be either partially or completely
uncollectible. If in future periods such mortgage notes receivable and
related interest are deemed to be collectible, the deferred interest income
will be recognized. Deferred interest is classified in the accompanying
balance sheets as a reduction in interest receivable.
INCOME TAXES -
The Partnership is not subject to federal, state, or local income taxes
and, accordingly, none have been provided in the accompanying financial
statements. Such taxes are the responsibility of the partners and are,
therefore, included in their individual tax returns.
LOAN ORIGINATION FEE -
A 3 percent loan origination fee was earned by the Partnership on each
participating mortgage loan made. This revenue was initially deferred and
is being recognized ratably over the life of the specific related loans.
F-32
68
AMORTIZATION OF ORGANIZATION COSTS -
Organization costs are amortized on a straight-line basis over twelve
years.
ALLOCATION OF PROFIT AND LOSS -
Partnership net profits are allocated 99 percent to the limited partners
and 1 percent to the General Partner. Net losses are allocated to the
limited partners and General Partner in proportion to the positive balances
in their capital accounts. However, all net losses will be allocated to the
General Partner if the allocation to the limited partners would result in a
negative capital account balance for the limited partners.
DISTRIBUTIONS OF DISTRIBUTABLE CASH FROM OPERATIONS AND SURPLUS FUNDS -
Distributable cash from operations and surplus funds, as defined, is
allocated 99 percent to the limited partners and 1 percent to the General
Partner. However, the General Partner, exercising reasonable discretion,
may retain in the Partnership all or any part of the funds available for
distributions to meet the working capital needs of the Partnership (see
Note 2).
(2) CASH AND CASH EQUIVALENTS:
Cash and cash equivalents at December 31, 1994 and 1993, consisted of the
following:
1994 1993
-------- --------
Cash $ 44,898 $129,214
Certificates of deposit 159,417 102,323
-------- --------
$204,315 $231,537
======== ========
Under the terms of the partnership agreement, the General Partner is
required to maintain in the Partnership reasonable cash reserves for
working capital and contingencies in an amount of not less than 1% of
invested capital, as defined. The Partnership maintained the required
working capital reserve at December 31, 1994 and 1993.
(3) MORTGAGE NOTES RECEIVABLE:
The Partnership's loans to Affiliated Borrowers are nonrecourse obligations
of the Affiliated Borrowers and are secured only by a subordinate lien on
the mortgaged real property which is pledged as security. All loans, except
a certain amount advanced to Hall 7 Trails Associates, as more fully
discussed hereafter (the "Arrowtree Reorganization Advance"), made by the
Partnership to the Affiliated Borrowers were subject at the time of
origination to the rights and restrictions set out in a specified loan
agreement ("Model Loan Agreement") and two specified forms of notes
F-33
69
("Participating Notes"). Such loans are hereafter referred to as "Specific
Loans". As described hereinafter, all of the Specific Loans set out in the
Model Loan Agreement and the Participating Notes have been modified
subsequent to their origination. The Specific Loans had an additional
interest provision whereby the Affiliated Borrower would pay the
Partnership 15% of the amount by which the sales price of the property
pledged as security exceeded the original purchase price of such property
upon the repayment of the loan or sale of the property, respectively
("Additional Interest"). As a result of a detailed analysis the Partnership
performs on the estimated values of the underlying assets relating to and
impacting the collectibility of the Specific Loans, as hereafter described,
certain amounts of the Specific Loans have been reserved through bad debt
provisions. The following table describes the terms and status of
outstanding Specific Loans at December 31, 1994:
Outstanding
Principal
Loan Property
Borrower Amount Location Pay Accrue Status
- -------- ----------- -------- --- ------ ------
Arrowtree $ 850,000 Okemos, MI (A) (A) Modified
Brambletree 1,751,000 Garland, TX 0.00% 7.00% Modified
Twintree 720,000 Albuquerque, NM 0.00% 8.00% Modified
Midtree 410,000 Albuquerque, NM 0.00% 8.00% Modified
Fawntree 550,000 Albuquerque, NM 0.00% 8.00% Modified
Lanetree 620,000 Albuquerque, NM 0.00% 8.00% Modified
Candlewick 460,000 Albuquerque, NM 0.00% 8.00% Modified
Coachtree 615,000 Albuquerque, NM 0.00% 8.00% Modified
---------------
$ 5,976,000
===============
(A) Arrowtree's Specific Loan accrual rate is equal to the principal
payments Arrowtree makes on its first lien mortgage.
None of the six Affiliated Borrowers located in New Mexico (the "New Mexico
Affiliated Borrowers") have made required interest payments since February
1988. In February 1992, the New Mexico Affiliated Borrowers filed for
protection under Chapter 11 of the Federal Bankruptcy Code in the Northern
District of Texas. In December 1992, a plan of reorganization was confirmed
for the New Mexico Affiliated Borrowers. The plan of reorganization for the
New Mexico Affiliated Borrowers modified the Participating Notes owed to
the Partnership as follows: (1) interest will accrue at the rate of 8% per
annum until repayment but no payments are due until a sale or refinancing;
(2) upon the sale or refinancing cash proceeds will be paid in the
following priority: (a) to repay any amount owing on the first lien
mortgage ("Senior Mortgage") on each property; (b) repay capital
contributions made by the limited partners of the New Mexico Affiliated
Borrowers which were made pursuant to the plan of reorganization plus a 12%
preferential return; and (c) 50% to the New Mexico Affiliated Borrower's
limited partners and 50% split pro-rata to the Partnership and Hall
Financial Group, Inc. ("HFGI"), an affiliate of the General Partner, to the
extent each party has outstanding loans.
Hall 7 Trails Associates ("Arrowtree") completed an agreement with
Prudential Insurance Company
F-34
70
("Prudential") in 1994 regarding the restructure of the first lien
encumbrance on which Arrowtree had been in default since March 1, 1989. The
agreement with Prudential required Arrowtree to raise $345,000 in cash and
funding commitments (the "New Capital") to fund a capital improvement
escrow account, pay the lender's administrative costs, and to bring debt
service current under its new terms. Arrowtree issued a capital call to
equity investors and raised approximately $171,000 of the New Capital. The
Partnership loaned Arrowtree $181,000 ("Arrowtree Loan") with such funds
being used by Arrowtree as part of the New Capital. The Arrowtree Loan
accrues interest at 10% compounded monthly beginning January 1, 1994.
Interest and principal on the Arrowtree Loan was deferred and reserved,
respectively, in 1994. The Partnership modified its Specific Loan from
Arrowtree to agree with various modifications called for as part of the
agreement with Prudential and in the Arrowtree plan of reorganization.
Repayment of the principal portion of Arrowtree's Specific Loan and the
repayment of the Arrowtree Loan and its related accrued interest is
subordinate to Prudential receiving their entire first lien and related
accrued interest. The interest portion of Arrowtree's Specific Loan, in
addition to being subordinate to Prudential, is also subordinate to the
repayment of all the New Capital contributed by equity investors plus a 10%
annual preference on such funds. The Partnership believes it was in it's
best interest to have consented to the modification of the first lien, to
have consented to the modification of its second lien, and to loan
additional monies to Arrowtree. As a result of these events, the
Partnership was able to retain it's second lien on the property since the
first lien is not assumable by the Partnership and the Partnership did not
have the capability of paying off the first lien. The Arrowtree Loan is
secured by the Partnership's second lien on the property.
A plan of reorganization (the "Plan") for Brambletree was confirmed on May
19, 1993. According to the Plan, the principal and interest of $2,037,324
due to the Partnership on its mortgage note receivable will bear interest
at 7% per annum beginning January 1, 1993. Property cash flow, sale and
refinance proceeds will be allocated first to the investors who provided
additional equity of $250,000 to Brambletree as part of the Plan (the
"Participating Investors"), plus a 12% annual preference, then 50% to the
Participating Investors and 50% to HFGI and the Partnership to be shared
prorata until HFGI and the Partnership are paid in full, and then 100% to
the Participating Investors.
The Partnership, Hall Buckingham Associates ("Buckingham"), and
Buckingham's senior mortgage holder signed an agreement on July 15, 1993.
Per the agreement, the Partnership released Buckingham of its mortgage note
receivable in return for consideration of $75,000. The Partnership
recognized a $75,000 gain on debt settlement in 1993 since the Buckingham
mortgage note had been fully reserved in prior periods.
At December 31, 1992 the Partnership fully reserved all the Specific Loans
based on an analysis as to the collectibility of these loans. As a result,
a provision for doubtful mortgage notes receivable and accrued interest
receivable of $702,877 was recorded in 1992. The Partnership updated its
analysis on the collectibility of the Specific Loans on December 31, 1994
and as a result of the Subsequent Event described in Note 6, reversed
$2,104,618 of the allowances for doubtful receivables and interest.
(4) TRANSACTIONS WITH AFFILIATES:
F-35
71
Loan origination fees of $17,928, $42,183 and $24,348 were recognized in
1994, 1993 and 1992, respectively. Only cash received from the Affiliated
Borrowers for interest payments on the Specific Loans is recognized as
income. No interest income on Specific Loans from Affiliated Borrowers was
recognized in 1994, 1993 or 1992. The interest income is net of deferred
interest of $849,228, $971,098, and $1,398,801 on nonperforming mortgage
notes receivable in 1994, 1993 and 1992, respectively. Additionally, the
Partnership reversed $691,940 of deferred interest against the related
accrued interest receivable to comply with the Arrowtree restructure of its
first lien.
The General Partner, the Managing General Partner and the Affiliated
Borrowers are all affiliates of HFGI whose majority shareholder is Mr.
Craig Hall. As is more fully discussed in the Partnership's Annual Report
on Form 10-K, Part II, Item 7, a significant number of the limited
partnerships affiliated with HFGI have experienced cash flow deficits due
primarily to overbuilding and poor economic conditions in the market areas
in which they operate. Certain of these cash flow deficits have been and
are being funded by HFGI. HFGI may be unwilling or unable to provide
additional cash deficit funding to the Affiliated Borrowers and there can
be no assurance such funding will be available from other sources.
(5) DISTRIBUTIONS TO PARTNERS:
During the years ended December 31, 1994 and 1992, distributions of $2,083
(of which $1,367 had been previously accrued) and $968, respectively, were
paid to the general partner. No distributions were made in 1993. Such
distributions were made in accordance with the partnership agreement which
requires quarterly distributions of Partnership distributable cash flow, as
defined. It is anticipated there will be some distributions from operations
in 1995 as a result of the Subsequent Event herein after described (see
Note 6).
(6) SUBSEQUENT EVENT:
In February 1995, three of the New Mexico Affiliated Partnerships entered
into a transaction with affiliates of NHP, Inc. and Paine Webber whereby
the properties were transferred to separate limited partnerships (the "New
LP's") by the respective Affiliated Borrower. As a result of this
transaction, Lanetree Associates Limited Partnership, Twintree Associates
Limited Partnership and Coachtree Associates Limited Partnership ("NHP
Transaction Partnerships") each hold a limited partnership interest in its
respective New LP in which affiliates of NHP, Inc. and Paine Webber are
general partners. As part of the transaction, the senior mortgage for each
property involved in the transaction was paid in full. In addition, as part
of the transaction, each NHP Transaction Partnership received cash at
closing, and is entitled to a defined priority equity amount in the New
LP's (the "Preferred Equity"), a 6% annual return on the Preferred Equity,
a 20% participation in net proceeds available after payment of expenses and
the 6% annual return on the Preferred Equity ("Participation Proceeds"),
and a priority return of the Preferred Equity upon refinancing or sale of
the properties over other equity classes. Lanetree Associates Limited
Partnership distributed $569,419 to the Partnership in March 1995 in
partial payment of its loan obligation to the Partnership from proceeds it
received at closing of the transaction. There were not sufficient proceeds
at closing (after the payment of priority repayments) to distribute funds
to the Partnership from Coachtree Associates Limited Partnership or
Twintree Associates Limited Partnership. However, the NHP Transaction
F-36
72
Partnerships remain obligated to the Partnership pursuant to each partnership's
Bankruptcy Plan. The terms of the Preferred Equity held by the NHP Transaction
Partnerships provide that defined amounts be paid not later than December 10,
2000. NHP, Inc. has the option to pay the Preferred Equity amounts due the NHP
Transaction Partnerships at an earlier date at a discounted amount. If NHP, Inc.
exercises its option within six months, it would result in the following
estimated payments to the Partnership from each of the NHP Transaction
Partnerships:
Coachtree $180,937
Lanetree $1,057,915
Twintree $278,827
If it is exercised within twenty-one months, payments would be:
Coachtree $291,902
Lanetree $1,096,747
Twintree $394,639
The amounts the Partnership would receive on December 10, 2000, excluding any
Participation Proceeds, is estimated to be:
Coachtree $871,539
Lanetree $1,096,747
Twintree $912,103
F-37
73
ANNEX A
74
ANNEX A
March 20, 1996
Hall Financial Group
750 North St. Paul, Suite 200
Dallas, Texas 75201
Attention: Mr. Larry Levey
Reference: Valuation of the Loans Receivable Interest in Hall Institutional
Mortgage Fund
Gentlemen:
Bryan E. Humphries & Associates performed narrative "As Is" market value
appraisals on seven apartment complexes in early 1995. The cash flows contained
within the appraisals will be used to facilitate the estimation of the market
value of Hall Institutional Mortgage Fund (HIMF) loan receivable interest in the
seven properties. The analysis of this letter will estimate the market value of
HIMF's loan receivables as of 2/1/96. The valuations will use cash flow analysis
presented in 1995 appraisals of the seven properties.
The following chart lists the properties, appraisal date and appraised "As Is"
Market Value.
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Page 2
================================================================================================================================
APPRAISAL "AS IS"
APARTMENT NO. UNITS AGE DATE MARKET VALUE
- --------------------------------------------------------------------------------------------------------------------------------
1. Arrowtree 114 1972 02/20/95 $3,300,000
4568 Blackstone
Okemos, Michigan
- --------------------------------------------------------------------------------------------------------------------------------
2. Brambletree 236 1983 02/02/95 $6,500,000
1802 Apollo Road
Garland, Texas
- --------------------------------------------------------------------------------------------------------------------------------
3. Phoenix Square (Midtree) 122 1976 01/27/95 $5,200,000
7000 Phoenix Avenue, NE
Albuquerque, New Mexico
- --------------------------------------------------------------------------------------------------------------------------------
4. Candlewick (Northtree) 184 1978 01/27/95 $6,300,000
3011 Jane Place, NE
Albuquerque, New Mexico
- --------------------------------------------------------------------------------------------------------------------------------
5. The Lakes (Lanetree) 298 1979 01/31/95 $11,800,000
4800 San Mateo Lane, NE
Albuquerque, New Mexico
- --------------------------------------------------------------------------------------------------------------------------------
6. Los Altos Towers (Twintree) 185 1978 01/30/95 $7,600,000
9125 Copper Avenue, NE
Albuquerque, New Mexico
- --------------------------------------------------------------------------------------------------------------------------------
7. The Villa (Coachtree) 195 1969 01/27/95 $6,800,000
1111 Cardenas Drive, SE
Albuquerque, New Mexico
================================================================================================================================
HIMF is basically a lender to all seven properties. As a lender, HIMF has a
minority equity interest and no management control of the property. Partial
interest similar to HIMF are typically discounted to compensate for the risk
associated with a minority position and lack of management control.
Various professional articles have been written on valuing partial interests
which indicate discounts up to 50% and more for various partial interest
situations. Of the articles researched regarding valuation of partial interest,
one article surveyed firms which purchase partnership interest. Please note
chart on the following page.
The valuation within this letter deals with the loan receivable interest of
HIMF, however, the interest more closely parallels a partial partnership
interest than traditional mortgage loan in which the property is security for
the loan and a specific constant payment stream is predetermined. The HIMF loans
have no security and the payments are based upon a priority system. Thus, the
loans are treated much the same as a participation or partial partnership
interest. For this reason, our analysis will focus on analyzing the appropriate
discounted of
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March 20, 1996
Page 3
partial partnership interests. The type of methodology used in valuing partial
partnership interest in deemed consistent with a valuation of HIMF loans
receivable interest.
===========================================================================================================================
SUMMARY OF TRANSACTION TYPES PURCHASED BY FIVE INDUSTRIAL FIRMS(1)
- ---------------------------------------------------------------------------------------------------------------------------
TRANSACTION TYPES PURCHASED
- ---------------------------------------------------------------------------------------------------------------------------
PUBLIC DISCOUNT* PRIVATE DISCOUNT
- ---------------------------------------------------------------------------------------------------------------------------
Liquidity Fund Yes 20%-30% Yes 20%-50%
Emeryville, California
- ---------------------------------------------------------------------------------------------------------------------------
Partnership Securities Exchange Yes 20%-30% Yes 30%-45%
Oakland, California
- ---------------------------------------------------------------------------------------------------------------------------
MacKenzie Securities Yes 20%-45% Yes 30%-50%
San Francisco, California
- ---------------------------------------------------------------------------------------------------------------------------
Equity Resources No Yes 30%-40%
Cambridge, Massachusetts
- ---------------------------------------------------------------------------------------------------------------------------
Realty Repurchase Yes 17%-26% No
San Francisco, California
- ---------------------------------------------------------------------------------------------------------------------------
*These ranges are approximate. The exact rate depends on each particular
partnership.
===========================================================================================================================
The ranges of the chart are primarily dependent upon location quality,
operational cash flow, partnership history and investment type. Items which had
less of a significant impact were future appreciation and property size. Another
significant variable affecting the discount was the partnership age. The older
the partnership indicated typically greater stability and a better operating
history, resulting in a smaller discount.(2)
Another way of determining discounts for fractional interest is by examining
minority interest discounts for REITS and real estate operating companies. This
is accomplished by comparing the appraised value of the assets owned to the
company's market value based on its stock price.(3) For the period 1982 through
1987 the discount for operating companies ranged from +/-20% to 30% while the
discount for REITS ranged from +/-10% to 20%. The discount was greater in poor
real estate market years when the perceived risk in holding real estate was the
greatest. The discount for the REITS was lower than operating companies because
the majority of the cash flow is paid to the shareholders, thus, they control
how this cash is used.(4)
In 1971, the SEC published the Institutional Investor Study Report. This study
compared the price of Rule 144 stock with prices of unrestricted stock
transactions for 338 transactions. The SEC study empirically supports the
concept of discounts for lack of marketability.(6) However, this study did
indicate that large dollar transactions which fell within the top 10% in dollar
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March 20, 1996
Page 4
revenues and earnings and market value indicated the least discount, +/- 5% to
15%.(7) The Subject is considered to fall within such a transaction.
Another source of determining discounts of fractional interest of partnerships
is to examine the actual sales of these transactions. When considering the price
a buyer would pay for a fractional interest in a limited partnership, it is wise
to be aware that buyers are few and far between. The limited partnership
secondary market exhibits all of the features of a classic buyer's market.
Accordingly, investors typically expect to earn an internal rate of return (IRR)
of 20% on each dollar invested in an average-risk, non trophy real estate
limited partnership.(8)
The two best sources for recent trade data are Secondary Spectrum, a newsletter
that tracks recent trades among approximately 200 of the largest public
partnerships, and Investment Advisor magazine.(9) One sampling from these
publications shows that the real estate partnership IRRs demanded by buyers in
mid-1991 range from 17% for the most stable and conservative partnerships, to
25% for partnerships that generate positive cash flow but are making no cash
distributions.
Brad Davidson in his article on fractional partnership interest, constructs a
chart separating the various items of risk associated with fractional interest.
A percentage based upon his research is also assigned to each, ranging from the
perceived least risky partnership interests to the most risky. The chart which
follows displays this continuum.
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Page 5
========================================================================================================================
FACTORS THAT AFFECT THE
PARTNERSHIP(10) MOST ACTIVE NEUTRAL LEASE ATTRACTIVE
- ------------------------------------------------------------------------------------------------------------------------
Relative risk of the 3% 7% 10%
partnership's asset(s)
- ------------------------------------------------------------------------------------------------------------------------
Historical consistency of 3% 6% 9%
earnings
- ------------------------------------------------------------------------------------------------------------------------
Condition of the 2% 3% 5%
partnership asset(s)
- ------------------------------------------------------------------------------------------------------------------------
Partnership market's 2% 3% 4%
growth potential
- ------------------------------------------------------------------------------------------------------------------------
Portfolio diversification 1% 1% 2%
- ------------------------------------------------------------------------------------------------------------------------
Strength of the 1% 1% 2%
partnership's management
- ------------------------------------------------------------------------------------------------------------------------
FACTORS THAT AFFECT THE FRACTIONAL INTEREST
- ------------------------------------------------------------------------------------------------------------------------
Magnitude of the 2% 4% 7%
fractional interest
- ------------------------------------------------------------------------------------------------------------------------
Liquidity of the interest 2% 4% 6%
- ------------------------------------------------------------------------------------------------------------------------
Ability to influence 0% 1% 1%
management
- ------------------------------------------------------------------------------------------------------------------------
Ease of asset analysis 0% 0% 1%
- ------------------------------------------------------------------------------------------------------------------------
Aggregate discount 16% 30% 47%
========================================================================================================================
Historically, the IRS has been involved in valuing many factional interest
partnerships. Obviously, the taxpayer is attempting to reduce tax liability by
showing the greatest discount, thus, the results of any IRS survey might
indicate a greater discounting than typical.
For IRS cases, the customarily accepted range of a fractional interest discount
is approximately 20% to 40%. This range has been sustained in a number of tax
court memoranda.(11)
A recently published article by Mark S. Thompson, PhD. sites studies of the
secondary market that has arisen for interests in investment partnerships as a
basis for estimating partial interest discounts. The 1992 and 1993 studies by
Partnership Profiles, Inc. revealed average discounts of 44% and 46%,
respectively for public partnership interests. These vehicles typically have
unit sizes of $500 to $1,000 and hundreds or thousands of individual investors
in each partnership. The article also states that numerous court rulings and IRS
testimony have supported discounts of 50% and more from prorated asset values in
the valuation of fractional
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March 20, 1996
Page 6
holdings. The authors conclude that the two main sources of partial interest
price reductions are illiquidity and lack of control.(12)
In April 1995, Bryan E. Humphries and Associates surveyed various local real
estate professionals for their opinions on the discount of a partial interest in
a partnership that owned a Class A apartment community. Those surveyed included:
Capital Consultants Realty Services, Inc. (Roland Freeman), The Worthing
Companies (Stephen Church), Don Cummins (Miller Commercial), Capital Realty
Group, Inc. (Bob Lankford) and G.E. Capital (Margaret Pawel) and Brian O'Boyle
(O'Boyle Properties). The majority of those surveyed represented a principal's
viewpoint.
The majority of the principals surveyed indicated a discount would be required
for the purchase of the fractional interest in a property if control of the
property were not available. Subjective estimates ranged typically from 80% to
90% of total value would be paid for the partial interest with one respondent
indicating the discount could be up to 50%.
Most of the above survey data relates to large investor grade properties or
pools of properties. HIMF has a loan receivable interest in seven separate
properties located in three different markets. Thus, the risk associated with
individual properties is diversified. However, unlike typical ownership
interests, proportionate shares of cash flows are not distributed equally to
each property. The order or priority of cash flow payments of the properties to
HIMF adds considerable risk to the value of the lender interest. This payment
structure varies greatly between properties.
Properties #1, #3 and #4 were refinanced in late 1995 - early 1996 with more
favorable financing. The funds from refinancing were used to satisfy the
original first lien and for Arrowtree any remaining funds went toward HIMF Wrap
Equity (P&I) and HIMF Capital (P&I). Due to a high loan to value ratio, property
#2 Brambletree was not refinanced. However, due to improving apartment market
conditions and favorable financing terms, Brambletree will be assumed to be
refinanced in year two of the cash flow.
For properties #1-#4, the HIMF value will be based upon the same cash flow
parameters used in the narrative appraisals. The valuation is as of 2/1/96
whereas the appraisal cash flows began used for estimating the first year
proforma for each property. The same growth parameters used for the first five
years of the cash flow will be applied to the additional year.
Properties #5 - #7 were involved in a transaction completed in February 1995
with affiliates of National Housing partnership, Paine Webber and Hall Financial
Group, Inc. wherein the old Hall ownership partnership each transferred their
property to a new partnership ("New LP"). Each old Hall Partnership received
cash at closing and retained an interest in the corresponding New LP. The old
Hall partnership (of which HIMF is a portion) is to receive a preferred return
plus 20% of the cash flow after debt service and preferred return. Additionally,
the old partnership has the potential to receive a portion or all of its senior
equity upon sale at some
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March 20, 1996
Page 7
time in the future. As of the date of the narrative appraisals, all of these
properties contained total debt relatively close to the estimated values.
The following chart shows this relationship:
==========================================================================================================================
APARTMENT ESTIMATED VALUE TOTAL 1, 2, & 3 LIENS
- --------------------------------------------------------------------------------------------------------------------------
Coachtree $ 6,800,000 $ 6,439,573
- --------------------------------------------------------------------------------------------------------------------------
Lanetree $11,800,000 $11,193,025
- --------------------------------------------------------------------------------------------------------------------------
Twintree $ 7,600,000 $ 8,238,032
==========================================================================================================================
A prudent investor in an upward trending apartment market such as the Subjects
would consider a holding period for the properties to maximize the old and new
partnership values as the properties' NOI and values increase. Additionally,
based upon the priority payments system of each property, the new partnership
would realize only limited funds at sale if the property were sold based upon a
1995 value. For properties #5 - #7, the same five-year holding period used in
the narrative appraisals' cash flows will be analyzed for the HIMF value. As
with properties #1 - #4, to account for the one year differential in valuation,
the actual 1995 Profit & Loss Statements will be used in estimating the year one
proformas of the cash flows. Similar parameters used in years 2-6 of the
appraisal cash flows will be applied in the HIMF Valuation.
The cash flows of each property is further discussed as follows.
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Page 8
#1 ARROWTREE APARTMENTS
(Please note cash flow analysis following this letter)
1. The discounted cash flow analysis is based upon a five-year holding
period with reversion occurring at the end of the fifth year (annual
year-end analysis).
2. Rental adjustments to market at lease expiration with no rental
increase projected for the first year. A 4% rental increase is
projected for years 2 through 6. With little new construction in the
area and continued stable employment, continued upward pressure on
occupancy and rental rates is anticipated. Based on IREM data, since
1978 rents in the Lansing area have increased at a compounded growth
rate of +/- 5% to 6%. For the period 1988 to 1993, IREM indicates rents
have increased at a compounded rate of +/- 2.5% to 5%. For our
analysis, 4% will be used for years 2-6.
3. First-year vacancy collection loss in the discounted cash flow was
projected based upon actual 1995 operating data. Vacancy/collection
loss is projected to be 7% also for Years 2 through 6.
4. A deduction of $30,000 will be made for the PW of the environmental O&M
Program.
5. First-year operating expenses are based upon actual 1995 data for the
Subject. With the exception of management expense, which is calculated
as a percentage of annual effective gross income, each operating
expense category is projected to increase at an annual rate of 4%
during years two through six of the cash flow. IREM data indicates
since 1978 expenses in the Lansing area have increased on a compounded
basis at 4% to 5%. For the period 1988 to 1993, IREM indicated this
compounded growth to be 2% to 4%.
6. The projected sixth-year net income is capitalized at a rate of 11%.
This calculation results in the projected reversion sale price at the
end of the fifth year. Selling expenses of 3.0% are deducted from the
reversion sale price. The reversion rate used in this analysis is based
upon 1) overall capitalization rates (net operating income cash
equivalent sale price) extracted from recent sales of apartment
complexes in the Lansing area, 2) a national real estate investment
survey published by Peter F. Korpacz and Associates, and 3) a debt
coverage ratio analysis based on data provided by an American Council
of Life Insurance survey.
7. The annual cash flows are discounted into present worth over a range of
discount rates (10.0% to 14.0%). A Scott Stahl, Burbach Survey
indicates a discount rate for apartment complexes of 11% - 13% while
the Peter F. Korpacz survey indicates a discount rate of 11.73%.
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Lien Parameters
1. 1st Lien $2,750,000 note to Paine Webber @ 7.57%, 25-year
amortization (PMT $20,447.64 monthly). The note
balloons 1/16/2005.
Lien Payment
Upon sale at the end of the fifth year. The first payment from the sale proceeds
is the principal balance of Lien #1. Any remaining funds from sale go toward
priorities.
Priority Payments
Priority #1 Capital Call from Investors of $171,875
Priority #2 HIMF wrap debt deferred of $547,237.
Priority #3 HFGI advances (P&I) of $120,560.
Priority #4 Any remaining cash flow is disbursed to the
investors.
Total HIMF Cash Flow The same discount rate (+/- 12%) deemed
appropriate in our narrative appraisal is
considered appropriate for the PW of
the HIMF payments. Thus, the undiscounted
value of the HIMF Interest is $326,800,
say $325,000.
Discounting
Based upon the previous discussions of purchases of fractional partnership
interest, a 20% to 30% discount is considered appropriate for an equally
distributed minority ownership interest in which the minority interest does not
have management control. However, for HIMF to receive any funds requires the
property be held for five years based upon the assumptions of the narrative cash
flow. Under the Priority payment system described, little funds would be
available to HIMF unless the property was held for a period of time and
appreciated. Presumption of assumptions in a five-year cash flow adds
considerable risk to the Present Value of the HIMF Lender Interest. For our cash
flow analysis, the HIMF interest will be discounted 50% to 60% for both
scenarios.
Discounted value range of the HIMF Interest in the Arrowtree Apartments is, Say,
$130,000 - $165,000.
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Page 10
#2 BRAMBLETREE APARTMENTS
(Please note cash flow analysis following this letter)
1. The discounted cash flow analysis is based upon a five-year holding
period with reversion occurring at the end of the fifth year (annual
year-end analysis).
2. Rental adjustments to market at lease expiration with no rental
increase projected for the first year. A 4% rental increase is
projected for Years 2 through 6. With no new construction in the area
and continued job growth in the metroplex, continued upward pressure on
occupancy and rental rates is anticipated.
3. First-year vacancy collection loss in the discounted cash flow was
projected based upon actual 1995 operating data. Vacancy/collection
loss is projected to be 7% also for Years 2 through 6.
4. First-year operating expenses are based upon actual 1995 data for the
Subject. A 13-year IREM study in the Dallas area indicates a compounded
expense growth rate of 4.62%. With the exception of management expense,
which is calculated as a percentage of annual effective gross income,
each operating expense category is projected to increase at an annual
rate of 4.0% during Years 2 through 6 of the discounted cash flow. A
management expense of 5.0% of effective gross income will be applied to
the cash flow.
5. The projected sixth-year net income is capitalized at a rate of 10.5%.
This calculation results in the projected reversions sale price at the
end of the fifth year. Selling expenses of 3.0% are deducted from the
reversion sale price. The reversion rate used in this analysis is based
upon 1) overall capitalization rates (net operating income cash
equivalent sale price) extracted from recent sales of apartment
complexes in the Dallas/Fort Worth area, (2) a real estate investment
survey published by Peter F. Korpacz and Associates, and (3) a
quarterly real estate investment survey published by Newmarket Group.
6. The annual cash flows are discounted into present worth over a range of
discount rates (10.0% to 14.0%). The Miller Group Survey data shown
earlier in this section indicates a discount rate for apartment
complexes of 11.2% while the Peter F. Korpacz survey indicates a
discount rate of 11.73%.
Lien Parameters
1. 1st Lien $7,050,180 10% I.O. due 11/1/98
The described loan is based upon an original principle note amount of $5,910,000
with an annual 10% I.O. payment. This is a cash flow loan where the difference
between $7,050,180 and $5,910,000 is deferred interest. As the real estate
market improves and cash flow improves, the amount of deferred interest is
decreased. Currently, the first lien holder (FNMA) would
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March 20, 1996
Page 11
discount the first lien $295,624 if the property were refinanced. FNMA has
$134,208 in escrow and the partnership has $175,000 cash available for
refinancing. The partnership believes the property could be refinanced at 75% of
value at an interest rate of 175 basis points above the seven-year treasury note
rate (+/- 7.75%) with a 25-year amortization. For the second year of the cash
flow analysis, the property is assumed to be refinanced based upon a value of
$7,000,000. Any additional funds required for refinancing funded through a
capital call of 66.1% to HMIF and 33.9% to HFGI. Refinancing funds are shown as
follows.
FMNA 1st Lien $ 7,050,180
First Year Cash Flow Deferred Interest Deduction -38,278
FMNA Discount -295,624
Escrow -134,208
Cash -175,000
-----------
$ 6,407,118
New Loan Amount -5 250 000
-----------
Fund Required for Refinancing, 66.1% HIMF 33.9% HFGI $ 1,157,118
Lien Payment
Upon sale at the end of the fifth year. The first payment from the sale proceeds
is the principal balance of the new loan. Any remaining funds from sale go
toward priorities.
Priority Payments
Priority #1 Repayment 66.1% to HIMF and 33.9% to HFGI
of $1,157,118 required to refinance the FNMA
lien.
Priority #2 Prorata division of cash flow and reversion of
16.95% to HFGI, 33.05% to HMIF and 50% to
LP/GP.
Total HIMF Cash Flow The same discount rate (+/- 12%) deemed
appropriate in our narrative appraisal is
considered appropriate for the PW of the
HIMF payments. Thus, the undiscounted value
of the HIMF Interest is $222,682, say
$225,000.
Discounting
Based upon the previous discussions of purchases of fractional partnership
interest, a 20% to 30% discount is considered appropriate for an equally
distributed minority ownership interest in which the minority interest does not
have management control. However, for HIMF to
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receive any funds requires the property be held for five years based upon the
assumptions of the narrative cash flow. Under the Priority payment system
described, little funds would be available to HIMF unless the property was held
for a period of time and appreciated. Presumption of assumptions in a five-year
cash flow adds considerable risk to the Present Value of the HIMF Lender
Interest. For our cash flow analysis, the HIMF interest will be discounted 50%
to 60%.
Discounted value range of the HIMF Interest in the Brambletree Apartments is,
Say, $90,000 - $110,000.
#3 PHOENIX SQUARE APARTMENTS (MIDTREE)
(Please note cash flow analysis following this letter)
1. The discounted cash flow analysis is based upon a five-year holding
period with reversion occurring at the end of the fifth year (annual
year-end analysis).
2. Rental adjustments to market at lease expiration with no rental
increase projected for the first year. A 4% rental increase is
projected for Years 2 through 6. Although recent increases have been
high, new construction should slow the increases somewhat.
3. First-year vacancy collection loss in the discounted cash flow was
projected based upon actual 1995 Profit & Loss data. Vacancy collection
loss is projected to be 7% also for Years 2 through 6.
4. First-year operating expenses are based upon the projections located
earlier in this section. With the exception of management expense,
which is calculated as a percentage of annual effective gross income,
each operating expense category is projected to increase at an annual
rate of 4% during years two through six of the cash flow. The 4% growth
is consistent with historical IREM compounded annual expense growth.
5. The projected sixth-year net income is capitalized at a rate of 11.00%.
This calculation results in the projected reversion sale price at the
end of the fifth year. Selling expenses of 3.0% are deducted from the
reversion sale price. The reversion rate used in this analysis is
based upon 1) overall capitalization rates (net operating income cash
equivalent sale price) extracted from recent sales of apartment
complexes in the Albuquerque area, (2) a national real estate
investment survey published by Peter F. Korpacz and Associates, and
(3) real estate investment survey published by Scott Stahl; Burbach
and 4) a debt coverage ratio analysis based on data provided by an
American Council of Life Insurance survey.
6. The annual cash flows are discounted into present worth over a range of
discount rates (10.0% to 14.0%). A Scott Stahl, Burbach Survey
indicates a discount rate for apartment complexes of 11% - 13% while
the Peter F. Korpacz survey indicates a discount rate of 11.73%.
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Lien Parameters
1. 1st Lien $4,200,000 Note to Paine Webber @ 8.1%, 30 year
amortization (PMT $31,111.40/monthly). The note
balloons 11/1/2002.
Lien Payment
Upon sale at the end of the fifth year. The first payment from the sale proceeds
is the principal balance of the new loan. Any remaining funds from sale go
toward priorities.
Priority Payments
Priority #1 HFGI post bankruptcy note of $462.
Priority #2 LP Capital & Preferred of $349,792
Priority #3 Prorata payment of cash flows and reversion
to HFGI (16.7%), HIMF (33.3%) and LP/GP (50%).
Total HIMF Cash Flow The same discount rate (+/- 12% deemed
appropriate in our narrative appraisal is
considered appropriate for the PW of the HIMF
payments. Thus, the undiscounted value of the
HIMF Interest is $416,448, say $415,000.
Discounting
Based upon the previous discussions of purchases of fractional partnership
interest, a 20% to 30% discount is considered appropriate for an equally
distributed minority ownership interest in which the minority interest does not
have management control. However, for HIMF to receive any funds requires the
property be held for five years based upon the assumptions of the narrative cash
flow. Under the Priority payment system described, little funds would be
available to HIMF unless the property held for a period of time and appreciated.
Presumption of assumptions in a five-year cash flow adds considerable risk to
the Present Value of the HIMF Lender Interest. For our cash flow analysis, the
HIMF interest will be discounted 50% to 60%.
Discounted value range of the HIMF Interest in the Phoenix Square Apartments is,
Say, $165,000 - $210,000.
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#4 CANDLEWICK APARTMENTS (NORTHTREE)
(Please note cash flow analysis following this letter)
1. The discounted cash flow analysis is based upon a five-year holding
period with reversion occurring at the end of the fifth year (annual
year-end analysis).
2. Rental adjustments to market at lease expiration with no rental
increase projected for the first year. A 4% rental increase is
projected for Years 2 through 6. With no new construction in the area
and continued job growth in the metroplex, continued upward pressure on
occupancy and rental rates is anticipated.
3. First-year vacancy collection loss in the discounted cash flow was
projected based upon the actual 1995 Profit & Loss Statement for the
property. Vacancy/collection loss is projected to be 7% also for Years
2 through 6.
4. First-year operating expenses are based upon the actual 1995 Profit &
Loss Statement of the property. With the exception of management
expense, which is calculated as a percentage of annual effective gross
income, each operating expense category is projected to increase at an
annual rate of 4% during years two through six of the cash flow. The 4%
growth is consistent with historical IREM compounded annual expense
growth.
5. Deferred maintenance in the form of roof repairs will be made in our
analysis. For year 1, $75,000 will be deducted, for year 2, $50,000
will be deducted.
6. The projected sixth-year net income is capitalized at a rate of 11.50%.
This calculation results in the projected reversions sale price at the
end of the fifth year. Selling expenses of 3.0% are deducted from the
reversion sale price. The reversion rate used in this analysis is based
upon 1) overall capitalization rates (net operating income cash
equivalent sale price) extracted from recent sales of apartment
complexes in the Albuquerque area, (2) a real estate investment survey
published by Peter F. Korpacz and Associates, and (3) real estate
investment survey published by Scott Stahl, Barbach and 4) a debt
coverage ratio analysis based on data provided by an American Council
of Life Insurance survey.
7. The annual cash flows are discounted into present worth over a range or
discount rates (10.0% to 14.0%). A Scott Stahl, Burbach Survey
indicates a discount rate for apartment complexes of 11% - 13% while
the Peter F. Korpacz survey indicates a discount rate of 11.73%.
Lien Parameters
1. 1st Lien $5,000,000 note to Paine Webber @ 7.58%, 22 year
amortization (payment $39,999 monthly). The note
balloons 11/19/2003.
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Lien Payment
Upon sale at the end of the fifth year. The first payment from the sale proceeds
is the principal balance of the new loan. Any remaining funds from sale go
toward priorities.
Priority Payments
Priority #1 HFGI post petition
Debt of $145,398 plus the cost of a lost
lawsuit of $307,482 total $452,880.
Priority #2 Prorata share of cash flow and reversion,
50% to HIMF and 50% to LP/GP.
Total HIMF Cash Flow The same discount (+/- 12%)
deemed appropriate in our narrative
appraisal is considered appropriate for the
PW of the HIMF payments. Thus, the
undiscounted value of the HIMF Interest is
$841,185, say $840,000.
Discounting
Based upon the previous discussions of purchases of fractional partnership
interest, a 20% to 30% discount is considered appropriate for an equally
distributed minority ownership interest in which the minority interest does not
have management control. However, for HIMF to receive any funds requires the
property be held for five years based upon the assumptions of the narrative cash
flow. Under the Priority payment system described, little funds would be
available to HIMF unless the property was held for a period of time and
appreciated. Presumption of assumptions in a five-year cash flow adds
considerable risk to the Present Value of the HIMF Lender Interest. For our cash
flow analysis, the HIMF interest will be discounted 50% to 60%.
Discounted value range of the HIMF Interest in the Candlewick Apartments is,
Say, $335,000 - $420,000.
#5 THE LAKES (LANETREE)
(Please Note the cash flow analysis following this letter)
Cash Flow Assumption
1. The discounted cash flow analysis of the first scenario is based upon a
five year holding period with reversion occurring at the end of the
fifth year (annual year-end analysis).
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The parameters of the cash flow are identical to the one used in the
1st quarter 1995 narrative appraisal. First year proforma closely
follows actual 1995 Profit & Loss data.
2. For the cash flow, rental adjustments to market are made at lease
expiration with no rental increase projected for the first year. A 4%
rental increase is projected for Years 2 through 6.
3. First-year vacancy collection loss in the discounted cash flow is based
on actual 1995 Profit & Loss data. Vacancy/collection loss is projected
to be 5% also for years 2 through 6.
4. With the exception of management expense, which is calculated as a
percentage of annual effective gross income, each operating expense
category is projected to increase at an annual rate of 4% during years
two through six of the cash flow.
5. The projected sixth-year net income is capitalized at a rate of 11.50%
his calculation results in the projected reversion sale price at the
end of the fifth year. Selling expenses of 3.0% are deducted from the
reversion sale price.
Lien Parameters
1. 1st Lien $9,051,184 @ 8.37% Interest Only
2. 2nd Lien $925,659 @ 9.66% Interest Only
3. 3rd Lien (PW Mortgage) $1,216,186 @ 9.66% Interest only for years 1 and
2, years 3-6 a $58,004 principal reduction in the middle of the year.
4. Senior Equity - a 6% (Preferred Return) interest only payment from cash
flow. After all liens are paid, including the 6% (Preferred Return),
senior equity is entitled to 20% of the available cash flows. The sum
of the 6% Preferred Return and the 20% payment of available cash flow
are the funds available to Priority Payments. Total Senior Equity is
$3,279,878.
Lien Payment
Upon sale at the end of the fifth year. The first payment from the sales
proceeds is for the principal balance of Liens 1, 2 and 3. Any remaining funds
from sale go toward the balance of the Senior Equity. The balance paid to Senior
Equity becomes a portion of the funds available for priority payments.
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Priority Payments
Priority #2 No payments
Priority #3 Prorata payment of HFGI (11%), HMIF (39%)
and LP/GP (50%) of cash flow and reversion over
the holding period up to $2,678,642.
Priority #4 Payment of remaining $34,147 (1st Scenario) and
$781,398 (2nd Scenario), of cash flow to LP/GP.
Total HIMF Cash Flow The same discount rate (+/- 12%)
deemed appropriate in our narrative appraisal is
considered appropriate for the PW of the HIMF
payments. Thus, the undiscounted value of the HIMF
Interest is $688,988, say $690,000.
Discounting
Based upon the previous discussions of purchases of fractional partnership
interest, a 20% to 30% discount is considered appropriate for an equally
distributed minority ownership interest in which the maturity interest does not
have management control. However, for HIMF to receive any funds requires the
property be held for five years based upon the assumptions of the narrative cash
flow. Under the Priority payment system described, little funds would be
available to HIMF unless the property was held for a period of time and
appreciated. Presumption of assumptions in a five-year cash flow adds
considerable risk to the Present Value of the HIMF Lender Interest. For our cash
flow analysis, the HIMF interest will be discounted 50% to 60%.
Discounted value range of the HIMF Interest in the Lakes (Lanetree), Say,
$275,000 - $345,000.
#6 LOS ALTOS TOWERS (TWINTREE)
(Please note the cash flow analyses following this letter)
Cash Flow Assumption
1. The discounted cash flow analysis of the first scenario is based upon a
five year holding period with reversion occurring at the end of the
fifth year (annual year-end analysis). The parameters of the cash flow
are identical to the one used in the 1st quarter 1995 narrative
appraisal. First year proforma closely follows actual 1995 Profit &
Loss data.
2. For the cash flow, rental adjustments to market are made at lease
expiration with no rental increase projected for the first year. A 4%
rental increase is projected for Years 2 through 6.
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3. First-year vacancy collection loss in the discounted cash flow is based
on actual 1995 Profit & Loss data. Vacancy/collection loss is projected
to be 5% also for years 2 through 6.
4. With the exception of management expense, which is calculated as a
percentage of annual effective gross income, each operating expense
category is projected to increase at an annual rate of 4% during years
two through six of the cash flow.
5. The projected sixth-year net income is capitalized at a rate of 11.50%.
This calculation results in the projected reversion sale price at the
end of the fifth year. Selling expenses of 3.0% are deducted from the
reversion sale price.
Lien Parameters
1. 1st Lien, $5,852,629 @ 8.37% Interest Only
2. 2nd Lien $600,152 @ 9.66% Interest Only
3. 3rd Lien (PW Mortgage) $785,251 @ 9.66% Interest only for years 1 and
2, years 3-6 a $37,452 principal reduction in the middle of the year.
4. Senior Equity - a 6% (Preferred Return) interest only payment from cash
flow. After all liens are paid, including the 6% (Preferred Return),
senior equity is entitled to 20% of the available cash flows. The sum
of the 6% Preferred Return and the 20% payment of available cash flow
are the funds available to Priority Payments. Total Senior Equity is
$1,403,626.
Lien Payment
Upon sale at the end of the fifth year. The first payment from the sales
proceeds is for the principal balance of Liens 1, 2 and 3. Any remaining funds
from sale go toward the balance of the Senior Equity. The balance paid to Senior
Equity becomes a portion of the funds available for priority payments.
Priority Payments
Priority #2 Limited partnership capital and preferred
payment of $170,301.
Priority #3 HFGI payment of $378,265 for post position
debt and deferred commission of $185,734.
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Priority #4 Prorata payment of HFGI (10%), HIMF (40%)
and LP/GP (50%) of cash flow and reversion over
the holding period up to $4,694,818.
Total HIMF Cash Flow The same discount rate (+/- 12%) deemed appropriate
in our narrative appraisal is considered appropriate
for the PW of the HIMF payments. Thus, the
undiscounted value of the HIMF Interest is $363,771,
say $365,000.
Discounting
Based upon the previous discussions of purchases of fractional partnership
interest, a 20% to 30% discount is considered appropriate for an equally
distributed minority ownership interest in which the minority interest does not
have management control. However, for HIMF to receive any funds requires the
property be held for five years based upon the assumptions of the narrative cash
flow. Under the Priority payment system described, little funds would be
available to HIMF unless the property was held for a period of time and
appreciated. Presumption of assumptions in a five-year cash flow adds
considerable risk to the Present Value of the HIMF Lender Interest. For our cash
flow analysis, the HIMF interest will be discounted 50% to 60%.
Discounted value range of the HIMF Interest in the Los Altos Towers (Twintree)
Apartments is say $145,000 - $180,000.
#7 THE VILLAS (COACHTREE)
(Please note cash flow analysis following this letter)
Cash Flow Assumption
1. The discounted cash flow analysis of the first scenario is based upon a
five year holding period with reversion occurring at the end of the
fifth year (annual year-end analysis). The parameters of the cash flow
are identical to the one used in the first quarter 1995 narrative
appraisal. First year proforma closely follows actual 1995 Profit &
Loss data.
2. For the cash flow, rental adjustments to market are made at lease
expiration with no rental increase projected for the first year. A 4 %
rental increase is projected for Years 2 through 6.
3. First-year vacancy collection loss in the discounted cash flow is based
on actual 1995 Profit & Loss data. Vacancy/collection loss is projected
to be 5% also for years 2 through 6.
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4. With the exception of management expense, which is calculated as a
percentage of annual effective gross income, each operating expense
category is projected to increase at an annual rate of 4% during years
two through six of the cash flow.
5. The projected sixth-year net income is capitalized at a rate of 11.50%.
This calculation results in the projected reversion sale price at the
end of the fifth year. Selling expenses of 3.0% are deducted from the
reversion sale price.
Lien Parameters
1. 1st Lien $5,211,560 @ 8.37% Interest Only
2. 2nd Lien $528,948 @ 9.66% Interest Only
3. 3rd Lien (PW Mortgage) $699,065 @ 9.66% Interest only for years 1 and
2, years 3-6 a $33,341 principal reduction in the middle of the year.
4. Senior Equity - a 6% (Preferred Return) interest only payment from cash
flow. After all liens are paid, including the 6% (Preferred Return),
senior equity is entitled to 20% of the available cash flows. The sum
of the 6% Preferred Return and the 20% payment of available cash flow
are the funds available to Priority Payments. Total Senior Equity is
$1,118,164.
Lien Payment
Upon sale at the end of the fifth year. The first payment from the sale proceeds
is the principal balance of Liens 1, 2 and 3. Any remaining funds from sale go
toward the balance of the Senior Equity. The balance paid to Senior Equity
becomes a portion of the funds available for priority payments.
Priority Payments
Priority #2 Limited partnership capital and preferred
payment of $38,320.
Priority #3 HFGI payment of $186,934 for post position
debt.
Priority #4 HFGI payment of $249,533 for deferred
commission of 3%.
Priority #5 Payment of $118,481 of post petition deferred
accrued interest to HFGI.
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Priority #6 Prorata payment of HFGI (5%), HIMF (45%) and
LP/GP (50%) of cash flow and reversion over the
holding period up to $3,559,008.
Total HIMF Cash Flow The same discount rate (+/- 12%) deemed
appropriate in our narrative appraisal is
considered appropriate for the PW of the HIMF
payments. Thus, the undiscounted value of the
HIMF Interest is $336,998, say $340,000.
Discounting
Based upon the previous discussions of purchases of fractional partnership
interest, a 20% to 30% discount is considered appropriate for an equally
distributed minority ownership interest in which the minority interest does not
have management control. However, for HIMF to receive any funds requires the
property be held for five years based upon the assumptions of the narrative cash
flow. Under the Priority payment system described, little funds would be
available to HIMF unless the property was held for a period of time and
appreciated. Presumption of assumptions in a five-year cash flow adds
considerable risk to the Present Value of the HIMF Lender Interest. For our cash
flow analysis, the HIMF interest will be discounted 40% to 60% for both
scenarios.
Discounted value range of the HIMF Interest in The Villas (Coachtree) Apartments
is, say $135,000-$170,000.
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SUMMARY
The following chart summarizes the HIMF Mortgage loans receivable value as a
total dollar amount and as a range discounted for the risk associated with the
fractional interests previously described.
==================================================================================================================
UNDISCOUNTED DISCOUNTED HIMF VALUE
NO. NAME HIMF VALUE RANGE
- ------------------------------------------------------------------------------------------------------------------
1 Arrowtree Apartments $ 325,000 $ 130,000 - $ 165,000
- ------------------------------------------------------------------------------------------------------------------
2 Brambletree Apartments $ 225,000 $ 90,000 - $ 110,000
- ------------------------------------------------------------------------------------------------------------------
3 Phoenix Square (Midtree) Apartments $ 415,000 $ 165,000 - $ 210,000
- ------------------------------------------------------------------------------------------------------------------
4 Candlewick (Northtree Apartments $ 840,000 $ 335,000 - $ 420,000
- ------------------------------------------------------------------------------------------------------------------
5 The Lakes (Lanetree) Apartments $ 690,000 $ 275,000 - $ 345,000
- ------------------------------------------------------------------------------------------------------------------
6 Los Altos Towers (Twintree) $ 365,000 $ 145,000 - $ 180,000
Apartments
- ------------------------------------------------------------------------------------------------------------------
7 The Villas (Coachtree) Apartments $ 340,000 $ 135,000 - $ 170,000
- ------------------------------------------------------------------------------------------------------------------
TOTAL UNDISCOUNTED VALUE OF HIMF LOANS $3,200,000
RECEIVABLE VALUE
- ------------------------------------------------------------------------------------------------------------------
TOTAL DISCOUNTED VALUE RANGE OF HIMF INTEREST $1,275,000 - $1,600,000
==================================================================================================================
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We appreciate the opportunity to be of service and hope you find the enclosed
useful.
Respectfully submitted,
BRYAN E. HUMPHRIES & ASSOCIATES
Bryan E. Humphries, MAI
President
BEH/wpc
Attachments: Footnotes, Cash Flows - All Properties
97
Arrowtree Apartments -- HIMF Value "As Is" Discounted Cash Flow
Dobie Rd., Okemos, Michigan
ASSUMPTIONS FROM MARKET ANALYSIS EXPENSES PER SF
- -------------------------------- -------- ------
Management..................... $ 38,114 $ 0.30
Gross Rental Income ........... $ 813,360 Payroll 86,162 $ 0.68
No Units....................... 114 Taxes 81,346 $ 0.64
Other Income................... $ 22,016 Insurance 16,456 $ 0.13
Stabilized Occupancy........... 93.00% Utilities 56,048 $ 0.44
Total Square Feet.............. 126,294 M/R & Res 137,199 $ 1.09
Expense Growth Rate............ 4.00% Adv. Pro. 24,263 $ 0.19
Resale Cap Rate................ 11.00% Admin. 22,480 $ 0.18
--------- ---------
TOTAL $ 462,068 $ 3.65
TIME PERIOD YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6
- ------------------------------- ---------- --------- --------- ---------- ---------- --------
Total Rental Income............ $ 813,360 $ 845,894 $ 879,730 $ 914,919 $ 951,516 $ 989,577
% Increase..................... 0.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Other Income................... $ 22,016 $ 22,897 $ 23,813 $ 24,765 $ 25,756 $ 26,786
% Increase..................... 0.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Gross Potential Income......... $ 835,376 $ 868,791 $ 903,543 $ 939,684 $ 977,272 $1,016,363
Vacancy Rate................... 5.00% 7.00% 7.00% 7.00% 7.00% 7.00%
Vacancy Loss................... $ (41,775) $ (60,815) $ (63,248) $ (65,778) $ (68,409) $ (71,145)
---------- --------- --------- ---------- ----------- --------
Effective Gross Income......... $ 793,601 $ 807,976 $ 840,295 $ 873,906 $ 908,863 $ 945,218
Total Expenses................. $ (462,068) $(480,551) $(499,773) $ (519,764) $ (540,554) $ (562,176)
Per/Sq. Ft..................... $ (3.66) $ (3.81) $ (3.96) $ (4.12) $ (4.28) $ (4.45)
---------- --------- --------- ---------- ----------- ----------
Net Operating Income........... $ 331,533 $ 327,425 $ 340,522 $ 354,142 $ 368,309 $ 383,042
Less: Deferred Maintenance
O&M Program Cost............. $ (30,000)
Less: 1st Lien................. $ (245,371) $(245,371) $(245,371) $ (245,371) $ (245,371)
Reversion-- 11.00%............. $ 3,482,197
Selling Expense @ 3.00% $ (104,466)
Less: 1st Lien Principal....... $(2,524,777)
---------- --------- --------- ---------- -----------
Fund Available for Priorities.. $ 56,162 $ 82,054 $ 95,151 $ 108,771 $ 975,892
---------- --------- --------- ---------- -----------
Less: 1st Priority
Capital Call from Investors.. $ (56,162) $(82,054) $ (33,659)
Less: 2nd Priority
HIMF Deferred Interest....... $(61,493) $(108,771) $ (376,973)
Less: 3rd Priority
HFGI Advances (P&I).......... $ (120,560)
Less: 4th Priority
Cash Flow to Investors....... $ (478,358)
Net Cash Flow.................. $ 0 $ 0 $ 0 $ 0 $ 0
---------- --------- --------- ---------- -----------
Total HIMF Cash Flow........... $ 0 $ 0 $ 61,493 $ 108,771 $ 376,973
========== ========= ========= ========== ===========
Discount Rate.................. 11.00% 11.50% 12.00% 12.50% 13.00% 13.50%
---------- --------- --------- ---------- ----------- ----------
PW of HIMF Cash Flow........... $ 340,329 $ 333,479 $ 326,800 $ 320,287 $ 313,935 $ 307,739
Discounted @ 50%............. $ 170,165 $ 166,740 $ 163,400 $ 160,143 $ 156,967 $ 153,870
Discounted @ 60%............. $ 136,132 $ 133,392 $ 130,720 $ 128,115 $ 125,574 $ 123,096
1
98
BRAMBLETREE -- HIMF VALUE "AS IS" DISCOUNTED CASH FLOW
1802 APOLLO RD.
GARLAND, TEXAS
- ---------------------------------------------------------------------------------------------------------------------------------
NET RENTABLE AREA 196,440 OPERATING EXPENSES (YEAR ONE) PER SF
NUMBER OF UNITS 236
STABILIZED OCCUPANCY 93.00% MANAGEMENT $ 71,313 $0.36
EXPENSE GROWTH RAT 4.00% REAL ESTATE TAXES $ 109,135 $0.56
RESALE CAP RATE 10.50% INSURANCE $ 26,173 $0.13
UTILITIES $ 95,347 $0.49
MAINTENANCE/REPAIRS $ 227,195 $1.16
GENERAL/ADMIN $ 59,019 $0.30
PAYROLL $ 130,920 $0.67
--------- -----
TOTAL OPERATING EXPENSES $ 719,102 $3.66
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6
- ----------------------------------- ----------- ---------- ---------- ----------- ----------- ---------
Rental Income $ 1,442,914 $ 1,500,631 $ 1,560,656 $ 1,623,082 $ 1,688,005 $ 1,755,526
% Increase 0.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Plus: Other Income 24,198 25,166 26,173 27,219 28,308 29,441
% Increase 0.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Gross Potential Income $ 1,467,112 $ 1,525,796 $ 1,586,828 $ 1,650,301 $ 1,716,314 $ 1,784,966
Less: Vacancy/Collection Loss (118,732) (106,806) (111,078) (115,521) (120,142) (124,948)
----------- ----------- ----------- ----------- ----------- -----------
% of Gross Potential Income 8.09% 7.00% 7.00% 7.00% 7.00% 7.00%
Effective Gross Income $ 1,348,380 $ 1,418,991 $ 1,475,750 $ 1,534,780 $ 1,596,172 $ 1,660,018
Total Operating Expenses $ (719,102) $ (747,866) $ (777,781) $ (808,892) $ (841,248) $ (874,898)
----------- ----------- ----------- ----------- ----------- -----------
Per/Sq. Ft $ (3.66) $ (3.81) $ (3.96) $ (4.12) $ (4.28) $ (4.45)
Net Operating Income $ 629,278 $ 671,125 $ 697,970 $ 725,888 $ 754,924 $ 785,121
Less: 1st Lien FNMA $ (591,000)
Cash Flow PMT-1st Lien $ (38,278)
Less: New First Lien $ (398,203) $ (398,203) $ (398,203) $ (398,203)
Cash Flow $ 0 $ 272,922 $ 299,767 $ 327,685 $ 356,721
Reversion @ 10.50% $ 7,477,342
Less: Selling Expense @ 3.00% $ (224,320)
Less: New Lien Principal $(5,290,514)
===========
$ 1,962,508
Cash Flow with Reversion $ 0 $ 272,922 $ 299,767 $ 327,685 $ 2,319,229
Less: 1st Priority
HIMF/HFGI Refinancing Payback
66.1% HIMF From Cash Flow $ 0 $ (180,401) $ (198,146) $ (216,600) $ (169,708)
33.9% HFGI From Cash Flow $ 0 $ (92,520) $ (101,621) $ (111,085) $ (87,036)
Funds Available for 2nd Priority $ 0 $ 0 $ 0 $ 0 $ 2,062,484
(Cash Flow & Reversion)
Less: 2nd Priority
HFGI Pro Rata (16.95%) $ 0 $ 0 $ 0 $ 0 $ (349,591)
HMIF Pro Rata (33.05%) $ 0 $ 0 $ 0 $ 0 $ (681,651)
----------- ----------- ----------- ----------- -----------
LP/GP Pro Rata (50%) $ 0 $ 0 $ 0 $ 0 $(1,031,242)
HIMF 1st Lien Refinancing Cost $ 764,854
-----------
Total HIMF Cash Flow $ (764,854) $ 180,401 $ 198,146 $ 216,600 $ 851,359
=========== =========== =========== =========== ===========
Discount Rate 11.00% 11.50% 12.00% 12.50% 13.00%
----------- ----------- ----------- ----------- -----------
PW of HIMF Cash Flow $ 250,164 $ 236,234 $ 222,683 $ 209,499 $ 196,672
Discounted @ 50% $ 125,082 $ 118,117 $ 111,341 $ 104,749 $ 98,336
Discounted @ 60% $ 100,065 $ 94,493 $ 89,073 $ 83,800 $ 78,669
2
99
PHOENIX SQUARE -- HIMF VALUE "AS IS" DISCOUNTED CASH FLOW
7000 PHOENIX AVE., NE
ALBUQUERQUE, NEW MEXICO
NET RENTABLE AREA 116,345 OPERATING EXPENSES (YEAR ONE) PER SF
NUMBER OF UNITS 122
FIRST YEAR OCCUPANCY 95.00% MANAGEMENT $ 39,138 $0.34
EXPENSE GROWTH RATE 4.00% AD/PROMOTION $ 24,850 $0.21
RESALE CAP RATE 11.00% REAL ESTATE TAXES $ 50,268 $0.43
INSURANCE $ 15,572 $0.13
UTILITIES $ 32,697 $0.28
MAINTENANCE/REPAIRS $ 116,463 $1.00
GENERAL/ADMIN. $ 28,313 $0.24
PAYROLL $ 78,709 $0.68
--------- -----
TOTAL OPERATING EXPENSES $ 386,010 $3.32
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6
- -------------------------------------- ----------- ---------- ---------- ----------- ----------- ---------
Rental Income.......................... $ 921,670 $ 958,537 $ 996,878 $ 1,036,753 $ 1,078,224 $ 1,121,352
% Increase............................. 0.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Plus: Other Income.................... 30,947 32,185 33,472 34,811 36,204 37,652
% Increase............................. 0.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Gross Potential Income................. $ 952,617 $ 990,722 $1,030,351 $ 1,071,565 $ 1,114,427 $ 1,159,004
Less: Vacancy/Collection Loss.......... (69,107) (49,536) (51,518) (53,578) (55,721) (57,950)
% of Gross Potential Income............ 7.25% 5.00% 5.00% 5.00% 5.00% 5.00%
----------- ---------- ---------- --------- --------- ------------
Effective Gross Income................. $ 883,510 $ 941,186 $ 978,833 $ 1,017,986 $ 1,058,706 $ 1,101,054
Less Operating Expenses................ $ (386,010) $ (401,450) $ (417,508) $ (434,209) $ (451,577) $ (469,640)
Per Square Foot........................ $ (3.32) $ (3.45) $ (3.59) $ (3.73) $ (3.88) $ (4.04)
Net Operating Incom.................... $ 497,500 $ 539,735 $ 561,325 $ 583,778 $ 607,129 $ 631,414
Less: 1st Lien-- ATENA................. $ (373,337) $ (373,337) $ (373,337) $ (373,337) $ (373,337)
Reversion @ 11.00%..................... $ 5,740,126
Less: Selling Expense @ 3.00%.......... $ (172,204)
Less: 1st Lien Balance................. $(3,996,571)
Net Reversion.......................... $ 1,571,351
===========
Cash Flow with Reversion............... $ 124,163 $ 166,398 $ 187,988 $ 210,441 $ 1,805,143
Less: 1st Priority
HFGI Post Petition Loan.............. $ (462)
Less: 2nd Priority
LP Capital & Preferred............... $ (123,701) $ (166,398) $ (59,592)
Less: 3rd Priority
HFGI Prorata (16.7%)................. $ (21,382) $ (35,073) $ (300,856)
HIMF Prorata (33.3%)................. $ (42,765) $ (70,147) $ (601,714)
---------- ----------- -----------
LP/GP Prorata (50%).................. $ (64,148) $ (105,221) $ (902,573)
Net Cash Flow ......................... $ 0 $ 0 $ 0 $ 0 $ 0
Total HIMF Cash Flow................... $ 0 $ 0 $ 42,765 $ 70,147 $ 601,714
=========== ========== ========== =========== ===========
Discount Rate.......................... 11.00% 11.50% 12.00% 12.50% 13.00% 14.00%
----------- ---------- ---------- ----------- ----------- -----------
PW of HIMF Cash Flow................... $ 434,565 $ 425,388 $ 416,448 $ 407,736 $ 399,247 $ 382,909
Discounted @ 50%..................... $ 217,283 $ 212,694 $ 208,224 $ 203,868 $ 199,623 $ 191,455
Discounted @ 60%..................... $ 173,826 $ 170,155 $ 166,579 $ 163,094 $ 159,699 $ 153,164
3
100
CANDLEWICK -- HIMF VALUE "AS IS" DISCOUNTED CASH FLOW
3011 JANE PLACE, NE
ALBUQUERQUE, NEW MEXICO
NET RENTABLE AREA 128,830 OPERATING EXPENSES (YEAR ONE) PER SF
NUMBER OF UNITS 184
FIRST YEAR OCCUPANCY 95.00% MANAGEMENT $ 48,675 $0.38
EXPENSE GROWTH RATE 4.00% AD/PROMOTION $ 31,823 $0.25
RESALE CAP RATE 11.00% REAL ESTATE TAXES $ 64,783 $0.50
INSURANCE $ 18,809 $0.15
UTILITIES $ 34,937 $0.27
MAINTENANCE/REPAIRS $ 115,940 $0.90
GENERAL/ADMIN. $ 29,048 $0.23
PAYROLL $ 105,551 $0.82
--------- -----
TOTAL OPERATING EXPENSES $ 449,566 $3.49
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6
- -------------------------------------- ----------- ---------- ---------- ----------- ----------- ---------
Rental Income.......................... $ 1,126,305 $ 1,171,357 $ 1,218,211 $ 1,266,940 $ 1,317,618 $ 1,370,322
% Increase............................. 0.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Plus: Other Income.................... 36,860 38,334 39,868 41,462 43,121 44,846
% Increase............................. 0.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Gross Potential Income................. $ 1,163,165 $ 1,209,692 $ 1,258,079 $ 1,308,402 $ 1,360,739 $ 1,415,168
Less: Vacancy/Collection Loss.......... (44,838) (60,485) (62,904) (65,420) (68,037) (70,758)
% of Gross Potential Income............ 3.85% 5.00% 5.00% 5.00% 5.00% 5.00%
----------- ----------- ----------- ------------ ----------- -----------
Effective Gross Income................. $ 1,118,327 $ 1,149,207 $ 1,195,175 $ 1,242,982 $ 1,292,702 $ 1,344,410
Less Operating Expenses................ $ (449,566) $ (467,549) $ (486,251) $ (505,701) $ (525,929) $ (546,966)
Per Square Foot........................ $ (3.49) $ (3.63) $ (3.77) $ (3.93) $ (4.08) $ (4.25)
Net Operating Income................... $ 668,761 $ 681,658 $ 708,925 $ 737,282 $ 766,773 $ 797,444
Less: Deferred Maintenance............. $ (75,000) $ (50,000)
Less: 1st Lien - Atena................. $ (479,988) $ (479,988) $ (479,988) $ (479,988) $ (479,988)
Reversion @ 11.50%..................... $ 6,934,295
Less: Selling Expense @ 3.00%.......... $ (208,029)
Less: 1st Lien Balance................. $(4,388,366)
Net Reversion.......................... $ 2,337,900
===========
Cash Flow & Reversion.................. $ 113,773 $ 151,670 $ 228,937 $ 257,294 $ 2,624,685
Less: 1st Priority
HFGI Post Petition Loan.............. $ (113,773) $ (151,670) $ (187,436)
Lawsuit (4145398+$307482)
Less: 2nd Priority
HIMF Prorata (50%)................... $ (20,750) $ (128,647) $(1,312,342)
LP/GP Prorata (50%) ................. $ (20,750) $ (128,647) $(1,312,342)
Net Cash Flow ......................... $ 0 $ 0 $ 0 $ 0 $ 0
Total HIMF Cash Flow................... $ 0 $ 0 $ 20,750 $ 128,647 $ 1,312,342
=========== =========== =========== ============ ===========
Discount Rate.......................... 11.00% 11.50% 12.00% 12.50% 13.00% 14.00%
----------- ----------- ----------- ------------ ----------- -----------
Maket Value Range...................... $ 878,727 $ 859,708 $ 841,185 $ 823,144 $ 805,569 $ 771,765
Discounted @ 50%..................... $ 439,364 $ 429,854 $ 420,593 $ 411,572 $ 402,785 $ 385,882
Discounted @ 60%..................... $ 351,491 $ 343,883 $ 336,474 $ 329,258 $ 322,228 $ 308,706
4
101
THE LAKES (LANETREE) -- HIMF VALUE "AS IS" DISCOUNTED CASH FLOW
4800 SAN MATEO LANE, NE
ALBUQUERQUE, NEW MEXICO
NET RENTABLE AREA 232,462 OPERATING EXPENSES (YEAR ONE) PER SF
NUMBER OF UNITS 298
FIRST YEAR OCCUPANCY 95.00% MANAGEMENT $ 84,488 $0.36
EXPENSE GROWTH RATE 4.00% AD/PROMOTION $ 47,244 $0.20
RESALE CAP RATE 11.50% REAL ESTATE TAXES $ 80,658 $0.35
INSURANCE $ 44,519 $0.19
UTILITIES $ 81,362 $0.35
MAINTENANCE/REPAIRS $ 218,736 $0.94
GENERAL/ADMIN. $ 30,431 $0.13
PAYROLL $ 118,380 $0.81
--------- -----
TOTAL OPERATING EXPENSES $ 774,818 $3.33
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6
- -------------------------------------- ----------- ---------- ---------- ----------- ----------- ---------
Rental Income.......................... $ 2,068,778 $ 2,151,529 $ 2,237,590 $ 2,327,094 $ 2,420,178 $ 2,516,985
% Increase............................. 0.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Plus: Other Income.................... 127,781 132,892 138,208 143,736 149,486 155,465
% Increase............................. 0.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Gross Potential Income................. $ 2,196,559 $ 2,284,421 $ 2,375,798 $ 2,470,830 $ 2,569,663 $ 2,672,450
Less: Vacancy/Collection Loss.......... (214,210) (114,221) (118,790) (123,542) (128,483) (133,622)
% of Gross Potential Income............ 9.75% 5.00% 5.00% 5.00% 5.00% 5.00%
----------- ----------- ----------- ----------- ----------- ------------
Effective Gross Income................. $ 1,982,349 $ 2,170,200 $ 2,257,008 $ 2,347,289 $ 2,441,180 $ 2,538,827
Total Operating Expenses............... $ (774,818) $ (805,811) $ (838,043) $ (871,565) $ (906,427) $ (942,685)
Per Square Foot........................ $ (3.33) $ (3.47) $ (3.61) $ (3.75) $ (3.90) $ (4.06)
----------- ----------- ----------- ------------ ----------- ------------
Net Operating Incom.................... $ 1,207,531 $ 1,364,390 $ 1,418,985 $ 1,475,724 $ 1,534,753 $ 1,596,143
Less: 1st Lien ........................ $ (757,584) $ (757,584) $ (757,584) $ (757,584) $ (757,584)
Less: 2nd Lien......................... $ (89,419) $ (89,419) $ (89,419) $ (89,419) $ (89,419)
Less: 3rd Lien (PW Mtg.)............... $ (117,483) $ (117,483) $ (172,685) $ (167,082) $ (161,480)
Reversion @ 11.50%..................... $13,879,503
Less: Selling Expense @ 3.00%.......... $ (416,385)
Less: 1st Lien Principal .............. $(9,051,184)
Less: 2nd Lien Principal............... $ (925,659)
Less: 3rd Line Pirncipal (PW Mgt)...... $(1,042,170)
-----------
Net Reversion to Senior Equity......... $ 2,444,105
===========
Cash Flow (net of Reversion)........... $ 243,045 $ 399,904 $ 399,277 $ 461,639 $ 526,270
Hall-Lanetree Pre/Cf Payments
6% Preference of $3279878............ $ 243,045 $ 196,793 $ 196,793 $ 196,793 $ 196,793
20% of Cash Flow..................... $ 0 $ 40,622 $ 40,497 $ 52,969 $ 65,895
Reversion-- Senior Equity............ $ 2,444,105
Funds Available to Priorities.......... $ 243,045 $ 237,415 $ 237,290 $ 249,762 $ 2,706,793
(Hall-Lanetree CF & Rev)
Less: 2nd Priority..................... $ 0
Less: 3rd Priority
HFGI Pro Rata (10.8%)................ $ (28,735) $ (26,116) $ (26,102) $ (27,474) $ (200,204)
HMIF Pro Rata (39.2%)................ $ (94,788) $ (92,592) $ (92,543) $ (97,407) $ (709,814)
LP/GP Pro Rata (50%)................. $ (121,523) $ (118,708) $ (118,645) $ (124,881) $ (910,019)
Less: 4th Prioroity
HFGI Post/Pre Petition Debt.......... $ (193,662)
Cash Flow ............................. $ (0) $ (0) $ (0) $ (0) $ 693,094
Total HIMF Cash Flow................... $ 94,788 $ 92,592 $ 92,543 $ 97,407 $ 709,814
=========== =========== =========== ============ ===========
Discount Rate.......................... 11.00% 11.50% 12.00% 12.50% 13.00% 14.00%
----------- ----------- ----------- ------------ ----------- ------------
PW of HIMF Cash Flow................... $ 713,616 $ 701,151 $ 688,988 $ 677,118 $ 665,533 $ 643,186
Discounted @ 50%..................... $ 356,808 $ 350,575 $ 344,494 $ 338,559 $ 332,767 $ 321,593
Discounted @ 60%..................... $ 285,446 $ 280,460 $ 275,595 $ 270,847 $ 266,213 $ 257,274
5
102
Los Altos Tower (Twintree) -- HIMF Value"As Is" Discounted Cash Flow
9125 Copper Ave., NE
Albuquerque, New Mexico
- ----------------------------------------------------------------------------------------------------------------------------------
Net Rentable Area..................... 170,635 Operating Expenses (Year One) Per SF
Number of Units....................... 185 Management $ 51,708 $0.30
Stabilized Occupancy.................. 95.00% Ad/Promotion $ 20,893 $0.12
Expense Growth Rate................... 4.00% Real Estate Taxes $ 69,395 $0.41
Resale Cap Rate....................... 11.00% Insurance $ 24,619 $0.14
Utilities $ 51,191 $0.30
Maintenance/Repairs $ 148,706 $0.87
General/Admin. $ 32,529 $0.19
Payroll $ 111,920 $0.66
---------- -----
Total Operating Expenses $ 510,961 $2.99
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6
- ----------------------- ---------- ---------- ---------- ---------- ----------- --------
Rental Income......................... $1,324,439 $1,377,417 $1,432,513 $1,489,814 $ 1,549,406 $1,611,383
% Increase................. 0.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Plus: Other Income.................... $ 70,985 $ 73,824 $ 76,777 $ 79,848 $ 83,042 $ 86,634
% Increase................. 0.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Gross Potential Income................ $1,395,424 $1,451,241 $1,509,291 $1,569,662 $ 1,632,449 $1,697,747
Less: Vacancy/Collection Loss......... (195,277) (72,562) (75,465) (78,483) (81,622) (84,887)
% of Gross Potential
Income................... 13.99% 5.00% 5.00% 5.00% 5.00% 5.00%
Effective Gross Income................ $1,200,147 $1,378,679 $1,433,826 $1,491,179 $ 1,550,826 $1,612,859
Total Operating Expenses.............. $ (510,961) $ (531,399) $ (552,665) $ (574,762) $ (597,752) $ (621,662)
Per/Sq. Ft................. $ (2.99) $ (3.11) $ (3.24) $ (3.37) $ (3.50) $ (3.64)
---------- ---------- ---------- ---------- ----------- ----------
Net Operating Income.................. $ 689,186 $ 847,279 $ 881,171 $ 916,417 $ 953,074 $ 991,197
Less: 1st Lien........................ $ (489,865) $ (489,865) $ (489,865) $ (489,865) $ (489,865) $ (489,865)
Less: 2nd Lien........................ $ (57,975) $ (57,975) $ (57,975) $ (57,975) $ (57,975) $ (57,975)
Less: 3rd Lien (PW Mtg)............... $ (75,855) $ (75,855) $ (111,498) $ (107,880) $ (104,263) $ (113,307)
Reversion-- 11.00%.................... $ 9,010,883
Less Selling Expense @ 3.00%.......... $ (270,326)
Less: 1st Lien Principal.............. $(5,852,629)
Less: 2nd Lien Principal.............. $ (600,152)
Less: 3rd Lien Principal (PW Mtg)..... $ (672,895)
----------
Net Reversion to Senior Equity........ $ 1,614,881
Cash Flow (Net of Reversion........... $ 65,491 $ 223,584 $ 221,833 $ 260,697 $ 300,971
Hall-Twintree Pre/CF Payments
6% Preference @ $1403626.............. $ 65,491 $ 84,218 $ 84,218 $ 84,218 $ 84,218
20% of Cash Flows..................... $ 0 $ 27,873 $ 27,523 $ 35,296 $ 43,351
Reversion 6% to 20% Pre/CF............ $ 1,614,881
Funds Available to Priorities......... $ 65,491 $ 112,091 $ 111,741 $ 119,514 $ 1,742,449
(Hall-Twintree CF & Rev)
Less: 2nd Priority-Cap & Pref......... $ (65,491) $ (104,810)
Less: 3rd Priority-Post Petition Debt
Debt & Def Com 2% $185734.. $ (7,281) $ (111,741) $ (119,514) $ (139,729)
Less: 4th Priority
HFGI Post/Pre Pet.
Debt (10%)................. $ 0 $ 0 $ 0 $ 0 $ (160,272)
HMIF Debt Pro Rata (40%)... $ 0 $ 0 $ 0 $ 0 $ (641,088)
LP/GP Pro Rata (50%)....... $ 0 $ 0 $ 0 $ 0 $ (801,360)
Cash Flow .......................... $ 0 $ 0 $ 0 $ 0 $ 0
Total HIMF Cash Flow.................. $ 0 $ 0 $ 0 $ 0 $ (641,088)
========== ========== ========== ========== ===========
Discount Rate......................... 11.00% 11.50% 12.00% 12.50% 13.00% 14.00%
---------- ---------- ---------- ---------- ----------- ----------
PW of HIMF Cash Flow.................. $ 380,455 $ 372,000 $ 363,771 $ 355,758 $ 347,957 $ 332,961
Discounted @ 50%........... $ 190,227 $ 186,000 $ 181,885 $ 177,879 $ 173,978 $ 166,481
Discounted @ 60%........... $ 152,182 $ 148,800 $ 145,508 $ 142,303 $ 139,183 $ 133,184
6
103
The Villas (Coachtree)-- HIMF Value... "As Is" Discounted Cash Flow
1111 Cardenas Dr., SE
Albuquerque, New Mexico
- ---------------------------------------------------------------------------------------------------------------------------------
Net Rentable Area..................... 161,712 Operating Expenses (Year One) Per SF
Number of Units....................... 195 Management $ 52,904 $0.33
Stabilized Occupancy.................. 95.00% Ad/Promotion $ 18,144 $0.11
Expense Growth Rate................... 4.00% Real Estate Taxes $ 72,951 $0.45
Resale Cap Rate....................... 11.50% Insurance $ 24,152 $0.15
Utilities $ 51,748 $0.32
Maintenance/Repairs $ 164,274 $1.02
General/Admin. $ 21,253 $0.13
Payroll $ 109,516 $0.68
---------- -----
Total Operating Expenses $ 514,942 $3.18
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6
- ------------------------------------ ---------- ---------- ---------- ---------- ----------- --------
Rental Income......................... $1,266,608 $1,317,272 $1,369,963 $1,424,762 $ 1,481,752 $1,541,022
% Increase................. 0.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Plus: Other Income.................... $ 70,498 $ 73,318 $ 76,251 $ 79,301 $ 82,473 $ 85,772
% Increase................. 0.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Gross Potential Income................ $1,337,106 $1,390,590 $1,446,214 $1,504,062 $ 1,564,225 $1,626,794
Less: Vacancy/Collection Loss......... (132,571) (69,530) (72,311) (75,203) (78,211) (81,340)
% of Gross Potential
Income................... 9.91% 5.00% 5.00% 5.00% 5.00% 5.00%
---------- ---------- ---------- ---------- ----------- ----------
Effective Gross Income................ $1,204,535 $1,321,061 $1,373,903 $1,428,859 $ 1,486,014 $1,545,454
Total Operating Expenses.............. $ (514,942) $ (535,540) $ (556,961) $ (579,240) $ (602,409) $ (626,506)
Per/Sq. Ft................. $ (3.18) $ (3.31) $ (3.44) $ (3.58) $ (3.73) $ (3.87)
---------- ---------- ---------- ---------- ----------- ----------
Net Operating Income.................. $ 689,593 $ 785,521 $ 816,942 $ 849,620 $ 883,604 $ 918,949
Less: 1st Lien........................ $ (436,208) $ (436,208) $ (436,208) $ (436,208) $ (436,208)
Less: 2nd Lien........................ $ (51,096) $ (51,096) $ (51,096) $ (51,096) $ (51,096)
Less: 3rd Lien (PW Mtg)............... $ (67,530) $ (67,530) $ (99,261) $ (96,039) $ (92,818)
Reversion-- 11.50%.................... $ 7,990,857
Less Selling Expense @ 3.00%.......... $ (239,726)
Less: 1st Lien Principal.............. $(5,211,560)
Less: 2nd Lien Principal.............. $ (528,948)
Less: 3rd Lien Principal (PW Mtg)..... $ (599,042)
-----------
Net Reversion to Senior Equity........ $ 1,411,581
Cash Flow (Net of Reversion........... $ 134,759 $ 230,687 $ 266,377 $ 266,277 $ 303,482
Hall-Coachtree Pre/CF Payments
6% Preference @ $1118164.............. $ 67,090 $ 67,090 $ 67,090 $ 67,090 $ 67,090
20% of Cash Flows..................... $ 13,534 $ 32,719 $ 32,657 $ 39,837 $ 47,278
Reversion - Senior Equity............. $ 1,411,581
Funds Available to Priorities......... $ 80,624 $ 99,809 $ 99,747 $ 106,927 $ 1,525,949
(Hall-Coachtree CF & Rev)
Less: 2nd Priority-LP/GP
Capital & Pref............. $ (38,320)
Less: 3rd Priority-HFG
Post Petition.............. $ (42,304) $ (99,809) $ (44,821)
Less: 4th Priority-HFG
Def Comm @3%............... $ (54,927) $ (106,927) $ (87,679)
Less: 5th Priority-HFG Post
Petition Debt-Def
Accrued Int............... $ (118,481)
Less: 6th Priority-HFG Post
HFGI Pre-P Debt Pro
Rata (5%)................. $ 0 $ 0 $ 0 $ 0 $ (65,989)
HMIF Debt Pro Rata (45%)... $ 0 $ 0 $ 0 $ 0 $ (593,905)
LP/GP Pro Rata (50%)....... $ 0 $ 0 $ 0 $ 0 $ (659,895)
Cash Flow .......................... $ 0 $ 0 $ 0 $ 0 $ 0
Total HIMF Cash Flow.................. $ 0 $ 0 $ 0 $ 0 $ 593,905
========== ========== ========== ========== ===========
Discount Rate......................... 11.00% 11.50% 12.00% 12.50% 13.00% 14.00%
---------- ---------- ---------- ---------- ----------- ----------
PW of HIMF Cash Flow.................. $ 352,454 $ 344,622 $ 336,998 $ 329,575 $ 322,348 $ 308,456
Discounted @ 50%........... $ 176,227 $ 172,311 $ 168,499 $ 164,788 $ 161,174 $ 154,228
Discounted @ 60%........... $ 140,982 $ 137,849 $ 134,799 $ 131,830 $ 128,939 $ 123,382
7
104
ANNEX B
105
ANNEX B
the Principal
Financial PRINCIPAL FINANCIAL SECURITIES, INC.
Group Investment Bankers - Member New York Stock Exchange
August 6, 1996
The Board of Directors
Hall Apartment Associates, Inc.
General Partner
Hall Institutional Mortgage Fund, Ltd.
750 N. St. Paul, Suite 200
Dallas, Texas 75201-3247
Dear Sirs:
Principal Financial Securities, Inc. ("PFS") understands that Hall Institutional
Mortgage Fund Limited Partnership, an Arizona limited partnership (the "Fund"),
is contemplating entering into an asset purchase agreement (the "Agreement") to
be dated as of August 6, 1996 between Hall Financial Group, Inc., a Delaware
corporation (the "Purchaser"), or its affiliates, and the Fund in which the
Purchaser will agree to purchase from the Fund, and the Fund agrees to sell to
the Purchaser, seven loans receivable (the "Loans") owned by the Fund and made
to certain of its affiliates (the "Affiliated Borrowers"). Pursuant to the
Agreement, the Fund will sell, convey, assign, transfer and deliver to the
Purchaser the Loans in consideration of a purchase price equal to $1,600,000 in
cash (the "Purchase Price") to be delivered by the Purchaser to the Fund upon
closing (the "Transaction"). On behalf of the Board of Directors of Hall
Apartment Associates, Inc., the general partner of the Fund (the "Company"), you
have requested that PFS act as an independent investment banker for the purpose
of rendering an opinion (the "Opinion") to the Board of Directors of the Company
as to the fairness, from a financial point of view, of the consideration to be
received by the Fund as a result of the aforesaid Transaction.
In arriving at our Opinion, we have:
1. Reviewed the Agreement and certain related agreements in substantially
final form;
2. Reviewed the promissory notes detailing the terms of the Loans, in
which the Fund is to be repaid out of a proportionate share of: (i) the
net receipts from the operation of certain parcels of improved real
property, and the apartment complexes contained thereon (the
"Properties") owned by the Affiliated Borrowers or by National Housing
Partnership ("NHP"), of which certain of the Affiliated Borrowers are
limited partners, including the Lakes Apartments, the Los Altos Towers
Apartments, the Villa North and South Apartments, the Phoenix Square
Apartments, the Candlewick Apartments, all of which are located in
Bernallilo County, New Mexico, and the Arrowtree Apartments located in
Okemos County, Michigan, and (ii) the net proceeds from any refinance
or sale of the Properties that shall be applied to repayment of the
Loans;
The Fountain Place, P.O. Box 508, Dallas, Texas 75221-0508 (214) 880-9000
Formerly Eppler, Guerin & Turner, Inc. Founded 1952.
106
The Board of Directors
Hall Apartment Associates, Inc.
August 6, 1996
Page 2
3. Reviewed the 'Debtor's Second Amended Plan of Reorganization' (the
"Bankruptcy Plan") filed by an Affiliated Borrower, Hall Brambletree
Associates, a Texas limited partnership, (the "Debtor") in which the
Fund is assigned a proportionate share of the net operating cash flows
and the proceeds, if any, of a sale or refinancing of certain parcels
of improved real property, and the apartment complexes contained
thereon comprising the Brambletree Apartments (one of the Properties)
located in Garland, Texas;
4. Reviewed historical operating and financial results of the Properties
associated with the Loans for the twelve month periods ended December
31, 1993, 1994, and 1995, and the period ended June 25, 1996;
5. Reviewed certain internal operating and financial projections of the
Properties prepared by the Company including statements of operations
for the twelve month periods ending December 31, 1996, 1997, 1998,
1999, and 2000;
6. Reviewed an independent analysis of the market value, as of February 1,
1996, of the Fund's loans receivable interest, performed by Bryan E.
Humphries and Associates on March 20, 1996 and provided to us by the
management of the Company;
7. Reviewed the financial terms, to the extent publicly available, of
certain comparable transactions, which are similar in certain respects
to the Transaction, including the discounts assigned to the valuation
of fractional ownership positions in closely held companies;
8. Toured the five Properties located in Albuquerque, New Mexico (Phoenix
Square/Midtree Apartments, Candlewick/Northtree Apartments, The
Lakes/Lanetree Apartments, Los Altos Towers/Twintree Apartments, and
The Villas/Coachtree Apartments) and the Property located in Garland,
Texas (Brambletree Apartments), at which times we were escorted by a
property manager employed by the Company who reviewed local housing
market conditions, as well as current occupancy levels and future
business prospects for each of the Properties visited;
9. Met certain members of senior management of the Company to discuss the
operations and future business prospects of the Properties, and the
rental housing markets in which the Properties are located;
10. Considered such other information, financial studies and analyses, and
financial, economic and market criteria as we deemed relevant.
In rendering our Opinion, we have relied upon and assumed, without independent
verification, the accuracy, completeness and fairness of all of the financial
and other information that was received by us from public sources, or provided
to us by the Company or any of its representatives. With respect to the
financial projections supplied to us for the Properties, we have assumed that
all such information has been reasonably derived on bases reflecting the best
currently available estimates and judgments of the Company's management as to
the future operating and financial performance of the Properties. In addition,
we have not made an independent evaluation or appraisal of the assets of the
Fund or the Affiliated Borrowers. We have assumed that the Transaction will be,
in all respects, in compliance with all laws and regulations that are applicable
to the Fund, the Purchaser or the proposed Transaction.
107
The Board of Directors
Hall Apartment Associates, Inc.
August 6, 1996
Page 3
Our Opinion is based solely upon the information set forth herein as reviewed by
us and circumstances, including economic, market and financial conditions,
existing as of the date hereof. Events occurring after the date hereof could
material affect the assumptions used both in preparing this Opinion and in the
documents and projections reviewed by us. We have not undertaken to reaffirm or
revise this Opinion or otherwise comment upon any events occurring after the
date hereof.
We are not opining, and were not requested by you to opine, as to the fairness
of any aspect of the Transaction other than the consideration to be received by
the Fund as a result of the aforesaid Transaction. Our Opinion does not
constitute a recommendation to any Unitholder of the Fund as to how such
Unitholder should vote on the Transaction.
We have acted as financial advisor to the Board of Directors in connection with
the Transaction and will receive a fee for our services. It is understood that
the Opinion and any advice, written or oral, provided by PFS pursuant to this
letter will be solely for the information and assistance of the Board of
Directors of the Company in connection with their consideration of the
Transaction and are not to be used, circulated, quoted, or otherwise referred to
for any other purpose, nor is the Opinion or any such advice to be filed with,
included in or referred to in whole or in part in any prospectus, information or
proxy statement, tender offer document, filing, other document, or any
communication with the Fund's Unitholders except in each case with PFS's prior
written consent. We will consent to the use of and inclusion of the Opinion as
an exhibit to the Consent Solicitation Statement, and to the reference to PFS
and its procedures in preparing the Opinion in any above described document and
any other matters required to be disclosed by law, rule or regulation in or in
relation to the such document, provided we are furnished a copy of such document
reasonably in advance of the filing of the same with the SEC which makes use
thereof or reference thereto.
As a part of our investment banking business, we regularly issue fairness
opinions and are continually engaged in the valuation of companies and their
securities in connection with business reorganizations, private placements,
negotiated underwritings, mergers and acquisitions, and valuations for estate,
corporate and other purposes.
Based upon and subject to the foregoing, including the various assumptions and
limitations set forth herein, it is our opinion that on the date hereof, the
consideration to be received by the Fund pursuant to the Transaction is fair,
from a financial point of view, to the Fund.
Very truly yours,
/s/Principal Financial Securities, Inc.
PRINCIPAL FINANCIAL SECURITIES, INC.
108
ANNEX C
109
ANNEX C
ASSET PURCHASE AGREEMENT
between
HALL INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP
as Seller
and
HALL FINANCIAL GROUP, INC.
as Buyer
dated as of October 15, 1996
110
TABLE OF CONTENTS
Page
----
I. TRANSFER OF LOANS................................................................................... 1
Section 1.1 Loans to be Sold.................................................... 1
Section 1.2 Consideration....................................................... 1
Section 1.3 Closing............................................................. 2
Section 1.4 Deliveries by Seller................................................ 2
Section 1.5 Deliveries by Buyer................................................. 2
Section 1.6 Allocation of Purchase Price........................................ 2
II. REPRESENTATIONS AND WARRANTIES OF SELLER AND GENERAL
PARTNER........................................................................................... 2
Section 2.1 Organization and Good Standing...................................... 2
Section 2.2 Authorization....................................................... 3
Section 2.3 Consents and Approvals.............................................. 3
III. REPRESENTATIONS AND WARRANTIES OF BUYER.......................................................... 3
Section 3.1 Organization and Good Standing...................................... 3
Section 3.2 Authorization....................................................... 4
Section 3.3 Consents and Approvals.............................................. 4
IV. OTHER OBLIGATIONS OF SELLER AND BUYER............................................................. 4
Section 4.1 Survival of Representations......................................... 4
Section 4.2 Access.............................................................. 4
Section 4.3 Consents............................................................ 4
Section 4.4 Governmental Filings................................................ 5
Section 4.5 Covenant to Satisfy Conditions...................................... 5
V. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER....................................................... 5
Section 5.1 Representations and Warranties...................................... 5
Section 5.2 Performance......................................................... 5
Section 5.3 No Injunction....................................................... 5
Section 5.4 Consents and Approvals.............................................. 5
VI. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER..................................................... 5
Section 6.1 Representations and Warranties...................................... 6
Section 6.2 Performance......................................................... 6
Section 6.3 No Injunction....................................................... 6
Section 6.4 Consents............................................................ 6
Section 6.5 Fairness Opinion.................................................... 6
VII. TERMINATION OF AGREEMENT......................................................................... 6
Section 7.1 Termination of Agreement............................................ 6
(i)
111
VIII. MISCELLANEOUS................................................................................... 6
Section 8.1 Expenses, Taxes, Etc................................................ 6
Section 8.2 Further Assurances.................................................. 6
Section 8.3 Parties in Interest................................................. 7
Section 8.4 Entire Agreement, Amendments and Waiver............................. 7
Section 8.5 Headings............................................................ 7
Section 8.6 Notices............................................................. 7
Section 8.7 Governing Law....................................................... 7
Section 8.8 Third Parties....................................................... 8
Section 8.9 Counterparts........................................................ 8
(ii)
112
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "AGREEMENT"), dated as of August 6,
1996, is by and between Hall Financial Group, Inc., a Delaware corporation
("BUYER"), and Hall Institutional Mortgage Fund Limited Partnership, an Arizona
limited partnership ("SELLER").
INTRODUCTORY STATEMENT
This Agreement sets forth the terms and conditions upon which Buyer
agrees to purchase from Seller, and Seller agrees to sell to Buyer, loans made
by Seller to certain of its affiliates (the "LOANS").
Accordingly, in consideration of the preceding statement and the mutual
agreements, representations, warranties, covenants and conditions in this
Agreement, and for other good, valuable and binding consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
STATEMENT OF AGREEMENT
I. TRANSFER OF LOANS
Section 1.1 Loans to be Sold.
(a) Subject to the terms and conditions of this Agreement, at
the Closing provided for in Section 1.4 hereof (the "CLOSING"), Seller shall
sell, convey, assign, transfer and deliver to Buyer the Loans.
(b) Such sale, conveyance, assignment, transfer and delivery
shall be effected by delivery by Seller to Buyer of (i) the duly executed
instruments of assignment and assumption with respect to the Loans whereby Buyer
will be assigned all rights existing under the Loans and will assume all
liabilities existing under the Loans (the "INSTRUMENTS OF ASSIGNMENT AND
ASSUMPTION"); and (ii) such other good and sufficient instruments of conveyance
and transfer as shall be necessary to vest in Buyer good, valid and marketable
title to the Loans.
Section 1.2 Consideration. In consideration of the aforesaid sale,
conveyance, assignment, transfer and delivery of the Loans, Buyer shall deliver
at the Closing the following:
(a) a cash payment, certified check, official bank check or
wire transfer of federal or other immediately available funds in an
amount equal to $1,600,000 (the "PURCHASE PRICE"); and
113
Section 1.3 Closing. The Closing of the transactions contemplated by
this Agreement shall take place at the offices of Akin, Gump, Strauss, Hauer &
Feld, L.L.P., 1700 Pacific Avenue, Suite 4100, Dallas, Texas, at 9:00 a.m.
Dallas, Texas time, on ____________, 1996 (the "CLOSING DATE"). The Closing Date
may be postponed to such other date as Buyer and Seller may agree.
Section 1.4 Deliveries by Seller. At the Closing, Seller shall deliver
to Buyer (unless delivered previously), the following:
(a) the Instruments of Assignment and Assumption (to be
drafted by Buyer);
(b) all other general instruments of transfer, assignment and
conveyance in form and substance reasonably satisfactory to Buyer to evidence or
perfect the sale, transfer and conveyance of the Loans to Buyer; and
(c) executed counterparts of any consents or waivers required
to be obtained by Seller which are referred to in Section 5.4 hereof.
Section 1.5 Deliveries by Buyer. At the Closing, Buyer shall deliver to
Seller (unless delivered previously) the following:
(a) the cash payment, certified check, official bank check or
wire transfer of federal or other immediately available funds for the Purchase
Price;
II. REPRESENTATIONS AND WARRANTIES OF SELLER AND GENERAL PARTNER
Seller and Hall Apartment Associates, Inc. (the "MANAGING GENERAL
PARTNER"), a Texas corporation which is the general partner of Hall 1985
Management Associates Limited Partnership, a Texas limited partnership which is
the general partner of Hall Pension Fund Associates, a Texas limited partnership
and the general partner of the Partnership, hereby represent and warrant to
Buyer as follows:
Section 2.1 Organization and Good Standing. Seller is a limited
partnership duly formed, validly existing and in good standing as a limited
partnership under the laws of the State of Arizona. Managing General Partner is
a corporation duly incorporated, validly existing and in good standing under the
laws of the State of Texas. Each of Seller and Managing General Partner has the
power and authority to conduct business as it is now being conducted and to own
assets that it now owns.
2
114
Section 2.2 Authorization.
(a) Each such party has all requisite power and authority to
enter into, execute, deliver and consummate the transactions contemplated by
this Agreement and any instruments and agreements executed and delivered
pursuant to this Agreement (collectively, the "DOCUMENTS").
(b) The Board of Directors of Managing General Partner has
taken all action required by law or otherwise to authorize the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby, including the execution, delivery and consummation of the Documents.
Other than obtaining the requisite consent of its limited partners of Seller in
connection with the transactions contemplated hereby, no other act or proceeding
on the part of Seller or the Managing General Partner is necessary to authorize
this Agreement or any of the Documents or the transactions contemplated hereby
or thereby. This Agreement is, and each of the Documents, when executed and
delivered to Buyer by Managing General Partner, on behalf of Seller, will be, a
valid and binding obligation of Seller enforceable against it in accordance with
its terms, subject to bankruptcy, insolvency, reorganization and other laws and
judicial decisions of general applicability relating to or affecting creditors'
rights and to general principles of equity.
(c) Seller has previously delivered to Buyer true and complete
copies, certified by the Secretary or an Assistant Secretary of Managing General
Partner, of the resolutions duly and validly adopted by the Board of Directors
of Managing General Partner evidencing its authorization of the execution and
delivery of this Agreement and the Documents and the consummation of the
transactions contemplated hereby and thereby (which resolutions have not been
modified, revoked or rescinded in any respect).
Section 2.3 Consents and Approvals. Except as set forth in Schedule
2.3, Seller is not required to obtain, transfer or cause to be transferred any
material consent, approval, license, permit or authorization of, or make any
declaration, filing or registration with, any third party in connection with (a)
the execution and delivery by Managing General Partner, on behalf of Seller, of
this Agreement or any of the Documents or (b) the consummation by Seller and
Managing General Partner of the transactions contemplated hereby or thereby,
including but not limited to the sale of the Loans.
III. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller as follows:
Section 3.1 Organization and Good Standing. Buyer is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware, and has the power to conduct business as it is now being conducted
and to own assets that it now owns.
3
115
Section 3.2 Authorization.
(a) Buyer has all requisite corporate power and authority to
enter into, execute, deliver and consummate the transactions contemplated by
this Agreement and the Documents. The Board of Directors of Buyer has taken all
action required by law or otherwise to authorize the execution and delivery of
this Agreement and the Documents and the consummation of the transactions
contemplated hereby and thereby. No other corporate act or proceeding on the
part of Buyer is necessary to authorize this Agreement or any of the Documents
or the transactions contemplated hereby or thereby. This Agreement is a valid
and binding obligations of Buyer enforceable against Buyer in accordance with
its terms, subject to bankruptcy, insolvency, reorganization and other laws and
judicial decision of general applicability relating to or affecting creditors'
rights and to general principles of equity.
(b) Buyer has previously delivered to Seller true and complete
copies, certified by the Secretary or Assistant Secretary of Buyer, of the
resolutions duly and validly adopted by the Board of Directors of Buyer
evidencing its authorization of the execution and delivery of this Agreement,
the Documents and the consummation of the transactions contemplated hereby and
thereby (which resolutions have not been modified, revoked or rescinded in any
respect).
Section 3.3 Consents and Approvals. Except as set forth in Schedule
3.3, Buyer is not required to obtain any material consent, approval, license,
permit or authorization of, or make any declaration, filing or registration
with, any third party or any public body or authority in connection with the
execution and delivery by Buyer of this Agreement, the Documents, or the
consummation by Buyer of the transactions contemplated hereby or thereby.
IV. OTHER OBLIGATIONS OF SELLER AND BUYER
Section 4.1 Survival of Representations. All representations,
warranties, covenants and agreements made by any party to this Agreement or
pursuant hereto shall be true, complete and correct as of the date hereof and as
of the Closing Date as though such representations, warranties, covenants and
agreements were made at the Closing Date.
Section 4.2 Access. In order that Buyer may have full opportunity to
make such investigations as it shall desire to make of the affairs of Seller in
connection with the transactions contemplated by this Agreement, Seller shall
permit Buyer and its counsel, accountants, auditors and other representatives
reasonable access during normal business hours to all of the offices,
properties, books and records, contracts and commitments of Seller from the date
hereof until such time as Buyer reasonably deems necessary to facilitate the
transition of ownership.
Section 4.3 Consents. Seller and Buyer shall use their best efforts to
obtain prior to the Closing all consents necessary in connection with the
consummation of the transactions contemplated hereby, including, without
limitation, each of the consents, approvals, licenses, permits and
authorizations listed or referred to in Schedule 2.3 or in Schedule 3.3. Each
party agrees to assist and cooperate with the other in obtaining such consents,
including furnishing financial and other information as may reasonably be
requested by it or a third party.
4
116
Section 4.4 Governmental Filings. As soon as practicable, Seller and
Buyer shall make any and all filings and submissions to any governmental agency
which are required to be made in connection with the transactions contemplated
hereby. Seller shall furnish to Buyer and Buyer shall furnish to Seller such
information and assistance as the other party or parties may reasonably request
in connection with the preparation of any such filings or submissions.
Section 4.5 Covenant to Satisfy Conditions. Seller, on the one hand,
and Buyer, on the other hand, shall each use their respective best efforts to
insure that the conditions set forth in Articles V and VI hereof, respectively,
are satisfied, insofar as such matters are within their respective control.
V. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER
The obligations of Buyer under this Agreement are subject to the
satisfaction at or before the Closing of each of the following conditions, any
one or more of which may be waived by Buyer, in its sole discretion:
Section 5.1 Representations and Warranties. The representations and
warranties of Seller and Managing General Partner contained herein shall be
true, complete and accurate in all material respects as of the date when made
and as of the Closing Date as though such representations and warranties were
made as of such date, except for any changes expressly permitted by the terms of
this Agreement.
Section 5.2 Performance. Seller shall have performed and complied in
all material respects with all agreements, obligations and conditions required
by this Agreement to be so performed or complied with by it at or prior to the
Closing.
Section 5.3 No Injunction. On the Closing Date, there shall be no
effective injunction, writ, preliminary restraining order or any order of any
nature issued by a court of competent jurisdiction restraining or prohibiting
the consummation of the transactions contemplated hereby.
Section 5.4 Consents and Approvals. All material licenses, permits,
consents, approvals and authorizations of all third parties and governmental
bodies and agencies, including the requisite consent of Seller's limited
partners, shall have been obtained which are necessary in connection with the
execution and delivery by Managing General Partner, on behalf of Seller, of this
Agreement, and the consummation by Seller and Managing General Partner of the
transactions contemplated hereby.
VI. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER
The obligations of Seller under this Agreement are subject to the
satisfaction at or before the Closing, of each of the following conditions, any
one or more of which may be waived by Seller in its sole discretion:
5
117
Section 6.1 Representations and Warranties. The representations and
warranties of Buyer contained herein shall be true, complete and accurate in all
material respects as of the date when made and as of the Closing Date as though
such representations and warranties were made as of such date, except for any
changes expressly permitted by the terms of this Agreement.
Section 6.2 Performance. Buyer shall have performed and complied in all
material respects with all agreements, obligations and conditions required by
this Agreement to be so performed or complied with by it at or prior to the
Closing.
Section 6.3 No Injunction. On the Closing Date, there shall be no
effective injunction, writ, preliminary restraining order or any order of any
nature issued by a court of competent jurisdiction restraining or prohibiting
consummation of the transactions contemplated hereby.
Section 6.4 Consents. Seller shall have obtained the requisite consent
of its limited partners for the consummation by Seller and Managing General
Partner of the transactions contemplated hereby.
Section 6.5 Fairness Opinion. Managing General Partner shall have
received a written opinion from Principal Financial Securities, Inc. or any
other reputable investment banking firm that the Purchase Price is fair to
Seller from a financial point of view.
VII. TERMINATION OF AGREEMENT
Section 7.1 Termination of Agreement. This Agreement may be terminated:
(a) at any time prior to the Closing, by mutual agreement of
Seller and Buyer;
or
(b) on the Closing Date, by either party, if any conditions
precedent to such party's performance shall not have been satisfied on the
Closing Date.
VIII. MISCELLANEOUS
Section 8.1 Expenses, Taxes, Etc. Except as otherwise provided herein,
each of the parties hereto shall pay all fees and expenses incurred by it in
connection with the transactions contemplated by this Agreement.
Section 8.2 Further Assurances.
(a) From time to time (including after the Closing Date), at
Buyer's request and without further consideration, Seller shall execute and
deliver to Buyer such documents and take such other action as Buyer may
reasonably request in order to consummate more effectively the transactions
contemplated hereby.
(b) From time to time (including after the Closing Date), at
Seller's request and without further consideration, Buyer shall execute and
deliver such documents and take such
6
118
other action as Seller may reasonably request in order to consummate more
effectively the transactions contemplated hereby.
Section 8.3 Parties in Interest. This Agreement shall be binding upon,
inure to the benefit of, and be enforceable by the respective successors and
permitted assigns of the parties hereto. The rights and obligations of Buyer and
Seller hereunder may not be assigned without the consent of the other, except
that Buyer shall have the right to assign any or all of its rights and
obligations hereunder to any of its affiliates, provided that each such
affiliate assumes Buyer's obligations hereunder.
Section 8.4 Entire Agreement, Amendments and Waiver. This Agreement,
the exhibits, the schedules and other writings referred to herein which form a
part hereof shall constitute the entire understanding of the parties with
respect to its subject matter. This Agreement supersedes all prior negotiations,
agreements and understandings between the parties with respect to its subject
matter. This Agreement may be amended only by a written instrument duly executed
by the parties. Any condition to a party's obligations hereunder may be waived
in writing by such party to the extent permitted by law.
Section 8.5 Headings. The Article and Section headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of any provision of this Agreement.
Section 8.6 Notices. Any notices or other communications required or
permitted to be given hereunder shall be in writing and shall be sent to the
parties at the following addresses or at such other addresses as shall be
specified by the parties by like notice:
If to Buyer:
780 North St. Paul
Dallas, Texas 75234
If to Seller:
4455 East Camelback Road
Suite A-200
Phoenix, Arizona 85018
Such notices or other communications shall be deemed to have been duly given and
received (i) on the day of sending if sent by personal delivery, cable,
telegram, facsimile transmission or telex, (ii) on the next business day after
the day of sending if sent by Federal Express or other similar express delivery
service or (iii) on the fifth calendar day after the day of sending if sent by
registered or certified mail (return receipt requested).
SECTION 8.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS,
WITHOUT REGARD TO ITS CONFLICTS OF LAW RULES.
7
119
Section 8.8 Third Parties. Nothing herein expressed or implied is
intended or shall be construed to confer upon or give to any person other than
the parties hereto and their successor or permitted assigns, any rights or
remedies under or by reason of this Agreement.
Section 8.9 Counterparts. This Agreement may be executed simultaneously
in several counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the duly authorized officers of the parties hereto on the date
first above written.
SELLER
HALL INSTITUTIONAL MORTGAGE FUND LIMITED
PARTNERSHIP
By: Hall Pension Fund Associates, General Partner
By: Hall 1985 Management Associates Limited
Partnership, General Partner
By: Hall Apartment Associates, Inc.,
Managing General Partner
By: /s/Larry Levey
-----------------------------------
Print Name: Larry Levey
---------------------------
Print Title: Vice President
--------------------------
BUYER
HALL FINANCIAL GROUP, INC.
By: /s/Donald L. Braun
-----------------------------------------------------
Print Name: Donald L. Braun
------------------------------------------
Print Title: Chief Financial Officer
------------------------------------------
8
120
FORM OF BALLOT
121
FORM OF BALLOT
HALL INSTITUTIONAL MORTGAGE FUND
LIMITED PARTNERSHIP
CONSENT FORM
THIS CONSENT IS SOLICITED ON BEHALF OF HALL INSTITUTIONAL MORTGAGE FUND
LIMITED PARTNERSHIP BY ITS GENERAL PARTNER, HALL PENSION FUND ASSOCIATES. THIS
SOLICITATION OF CONSENTS EXPIRES ON ____________, 1996 UNLESS EXTENDED OR
TERMINATED EARLIER.
The Units represented by this Consent, when properly executed, will be
recorded as directed by the Unitholder. IF NO DIRECTION IS GIVEN, UNITS WILL BE
COUNTED AS GIVING CONSENT TO THE PROPOSAL (AS DEFINED BELOW). However, a Consent
returned by a broker or nominee on which such person expressly indicates lack of
discretionary authority to CONSENT to the Proposal will be treated as being
AGAINST the Proposal. Please note that an abstention will be counted as being
AGAINST the Proposal.
The undersigned, acting with regard to all Units held in HALL
INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP (the "Partnership") with respect
to which the undersigned is entitled to give his, her or its consent on the
Record Date, hereby consents, denies consent or abstains from consenting, all as
indicated on the reverse side hereof, to approve the proposal (the "Proposal")
(1) to sell certain loans of the Partnership to Hall Financial Group, Inc. and
(2) to dissolve, terminate and wind up the Partnership as described in the
Solicitation Statement dated ________________, receipt of which, together with
all amendments and supplements thereto, if any, is hereby acknowledged. Delivery
of this Consent, when properly executed, will revoke any consent, failure to
consent or abstention heretofore given with respect to such Units.
(PLEASE DATE AND SIGN ON REVERSE SIDE.)
122
/X/ PLEASE MARK VOTES
AS IN THIS EXAMPLE
1. TO APPROVE THE SALE OF CERTAIN LOANS OF THE
PARTNERSHIP TO HALL FINANCIAL GROUP, INC.
AND TO APPROVE THE DISSOLUTION, TERMINATION
AND WINDING UP OF THE PARTNERSHIP (check one
box).
Consent / / Against / / Abstain / /
PLEASE MARK, SIGN, DATE AND RETURN THIS
CONSENT PROMPTLY USING THE ENCLOSED PRE-PAID
ENVELOPE OR DELIVER TO: Hall Pension Fund
Associates c/o MAVRICC Management Systems,
Inc., P.O. Box 7090, Troy, Michigan 48007. If
you have any questions, please call (810)
614-4500. Facsimile copies of the Consent
Form, properly completed and duly executed,
will be accepted at (810) 614-4356.
YOU MAY REVOKE THIS CONSENT AT ANY TIME PRIOR TO
THE EARLIER OF THE APPROVAL DATE (AS DEFINED IN
670018 MTGI THE SOLICITATION STATEMENT) OR THE EXPIRATION
DATE (AS DEFINED IN THE SOLICITATION STATEMENT).
Please sign exactly as your name appears hereon.
Joint owners should each sign. When signing as
attorney, executor, administrator, trustee or
guardian, please give full title as such. If a
corporation, please sign in corporate name by
President or other authorized officer. If a
JOHN SAMPLE partnership, please sign in partnership name by
1234 MAIN STREET authorized person.
ANYTOWN, USA 12345
Please be sure to sign and date this Consent. /Date /
/ -----------------/
/ / / /
/-----------------------------------/ /------------------------------------/
/ / / /
Unitholder sign here Co-owner sign here
DETACH FORM
670018
JOHN SAMPLE
1234 MAIN STREET
ANYTOWN, USA 12345