SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14D-9
Solicitation/Recommendation Statement Pursuant to Section 14(d)(4) of the
Securities Exchange Act of
1934
BALCOR REALTY INVESTORS 85-SERIES III
A REAL ESTATE LIMITED PARTNERSHIP
(Name of Subject Company)
BALCOR REALTY INVESTORS 85-SERIES III
A REAL ESTATE LIMITED PARTNERSHIP
(Name of Person(s) Filing Statement)
Limited Partnership Interests
(Title of Class of Securities)
N/A
(CUSIP Number of Class of Securities)
Thomas E. Meador
Chairman
The Balcor Company
Bannockburn Lake Office Plaza
2355 Waukegan Road, Suite A200
Bannockburn, Illinois 60015
(708) 267-1600
(Name, Address and Telephone Number of Person
Authorized to Receive Notice and Communications on
Behalf of the Person(s) Filing Statement)
Copy To:
Michael P. Morrison, Esq.
Hopkins & Sutter
Three First National Plaza, Suite 4100
Chicago, Illinois 60602
(312) 558-6600
Item 1. Security and Subject Company
The name of the subject partnership is Balcor Realty Investors 85-Series III A
Real Estate Limited Partnership, an Illinois limited partnership (the
"Partnership"). The address of the Partnership's principal executive offices
is 2355 Waukegan Road, Suite A200, Bannockburn, Illinois 60015. The
Partnership's sole general partner is Balcor Partners-XVIII, an Illinois
general partnership (the "General Partner"). The title of the class of equity
securities to which this statement relates is the Partnership's limited
partnership interests (the "Units"). (The holder of any Unit is hereinafter
referred to as a "Limited Partner".)
Item 2. Tender Offer of the Bidder
This statement relates to the unsolicited tender offer by Walton Street Capital
Acquisition Co., L.L.C., a Delaware limited liability company ("Walton
Street"), to purchase up to 45% (but not more than 45%) of the Units at a
purchase price of $164 per Unit, net to the seller in cash, without interest,
upon the terms and subject to the conditions set forth in the Offer to
Purchase, dated November 16, 1995 (the "Offer to Purchase"), and the related
letter of transmittal (which together constitute the "Offer"). The Offer is
disclosed in a Tender Offer Statement on Schedule 14D-1 dated November 16, 1995
as filed with the Securities and Exchange Commission (the "Commission"), as
amended by Amendment No. 1 to Schedule 14D-1 filed with the Commission on
November 21, 1995 ("Amendment No. 1"). The Offer to Purchase states that the
address of the principal executive office of Walton Street is 900 North
Michigan Avenue, Suite 1900, Chicago, Illinois 60611.
Item 3. Identity and Background
(a) The name and business address of the Partnership, which is the person
filing this statement, are set forth in Item 1 above.
(b)(1) The Partnership and its affiliates have the following material
contracts, agreements, arrangements and understandings and actual or potential
conflicts of interest with the Partnership and its affiliates:
The General Partner owns a nominal interest in the Partnership and, subject to
certain preferential rights of the Limited Partners, the General Partner is
entitled to a certain percentage of the cash flows of the Partnership resulting
from the operations of the Partnership's properties. In addition, also subject
to certain preferential rights of the Limited Partners, the General Partner is
entitled to a certain percentage of the net cash proceeds realized by the
Partnership from the sale or refinancing of the Partnership's properties.
These preferential rights of the Limited Partners subordinate the General
Partner's right to receive such distributions to the receipt by Limited
Partners of their original capital plus an agreed upon rate of return. Due to
such subordination, the General Partner does not expect to receive any
distributions from the Partnership in connection with the operations of the
Partnership or the sale or refinancing of any of the Partnership's properties.
The General Partner does expect to continue to be reimbursed by the Partnership
for certain administrative expenses incurred by the General Partner in
connection with its management of the Partnership's business. A partner of the
General Partner, The Balcor Company (the "Company"), funds certain other
administrative expenses of the General Partner that are not reimbursed by the
Partnership.
(b)(2) The Partnership and its affiliates have the following material
contracts, agreements, arrangements and understandings and actual or potential
conflicts of interest with Walton Street, Insignia, or either of their
affiliates:
The ownership of a substantial number of Units by any person presents a
potential conflict of interest between such person on the one hand and the
General Partner and any non-tendering Limited Partners on the other hand. If
the transactions contemplated in the Offer were to be consummated, Walton
Street could own a substantial number of Units. The ownership of a large block
of Units by Walton Street would enable Walton Street to significantly influence
decisions of the Partnership with respect to certain Partnership matters.
Holders of a majority of the outstanding Units are entitled to vote to take any
of the following actions: (i) remove the General Partner; (ii) elect or approve
of a successor to any removed or withdrawn General Partner; (iii) dissolve the
Partnership; and (iv) amend the Partnership's partnership agreement. In order
to amend certain provisions of the Partnership's partnership agreement approval
by the General Partner as well as an affirmative vote by the holders of a
majority of the outstanding Units is required. Similarly, General Partner
consent and an affirmative vote by the holders of a majority of the outstanding
Units is required to sell all or substantially all of the assets of the
Partnership in a single transaction or a series of transactions. Limited
Partners holding more than 10% of the Units are entitled to call a meeting at
which these matters may be submitted to a vote of the Limited Partners.
Therefore, such ownership by Walton Street may increase the likelihood that any
one or more of these actions may be taken by the Partnership. Such actions may
conflict with the General Partner's intentions and/or any non-tendering Limited
Partner's desires with respect to these Partnership matters.
As of November 4, 1994, an affiliate of Insignia Financial Group, Inc.
("Insignia") entered into property management and leasing agreements with
respect to the properties owned by the Partnership (collectively, the "Property
Management Agreements", the form of which is attached hereto as Exhibit (c)).
The execution of the Property Management Agreements was part of a larger
transaction involving, in relevant part, the purchase of certain assets of an
affiliate of the Company, including interests under property management
agreements with respect to virtually all of the properties owned by the
Partnership and various other partnerships affiliated with the Company. The
Property Management Agreements, which are terminable at the option of either
party upon 60 days' prior written notice, provide for annual fees of 5% of
gross operating receipts to be paid to Insignia. As discussed in Item 7 below,
Walton Street and Insignia have entered into an agreement pursuant to which
Walton Street will assign its right to purchase all of the Units tendered in
response to the Offer to a joint-venture partnership in which Walton Street
owns a 75% interest and Insignia owns a 25% interest. Pursuant to an Agreement
as to Subject Partnerships filed as an exhibit to Amendment No. 1, Walton
Street has agreed not to directly or indirectly terminate, seek to terminate,
cause the termination of, reduce the compensation then payable under, or
otherwise interfere in any way with the Property Management Agreements, unless
Insignia or its affiliates engage in gross negligence, intentional misconduct,
fraud or material breach in performance of their obligations thereunder. As a
result of these contractual arrangements, both Walton Street and Insignia may
have a conflict of interest with the General Partner and the non-tendering
Limited Partners. Additionally, in its role as manager of the Partnership's
properties, Insignia has access to information which is not generally provided
to the Limited Partners, and in some instances it may receive information prior
to the General Partner.
If the General Partner is removed as General Partner by the Limited Partners at
some future date, such removal may adversely impact the employment needs of the
Company.
Except as set forth in (b)(1) and (b)(2) above, there are no material
contracts, agreements, arrangements or understandings, or any actual or
potential conflicts of interest between the Partnership or any of its
affiliates and: (i) the General Partner, its executive officers, directors, or
affiliates; or (ii) Walton Street or Insignia, or either of their executive
officers, directors or affiliates.
Item 4. The Solicitation and Recommendation
(a) The General Partner recommends that holders of the Units reject the Offer
and not tender any of their Units to Walton Street. A copy of a letter to the
holders of Units communicating the General Partner's recommendation is filed
herewith as Exhibit (d) and is incorporated herein by reference.
(b) The General Partner believes that Walton Street's offering price of $164
per Unit is inadequate. The General Partner's financial advisor, Alex. Brown &
Sons Incorporated ("Alex. Brown"), has advised the General Partner that the
current liquidation value (as defined below) for each Unit is between $302 and
$389 (see Exhibit (e) hereto). Alex. Brown's definition of current liquidation
value ("A.B. Value") assumes an orderly liquidation of the remaining assets of
the Partnership over twelve months. The Offer is below the A.B. Value per
Unit. The General Partner believes that Walton Street's primary motivation in
making its offer is Walton Street's desire to capitalize on the significant
disparity between the fair market value of the assets held by the Partnership
and the price that Walton Street is offering to Limited Partners. By accepting
the Offer, Limited Partners may not be able to fully realize the value of the
Units.
(c) The Partnership has six remaining properties. The General Partner intends
to conduct an orderly liquidation of those assets over the next four to five
year period, although the timing of the liquidation may be lengthened or
shortened in response to changing market conditions, economic factors, interest
rates and unforseen events.
(d) As of December 31, 1995, the General Partner estimates that the
Partnership will have cash reserves of approximately $4,720,000, or $80 per
Unit. This amount represents approximately 49% of the Offer price. The
General Partner currently anticipates making a quarterly distribution to the
Limited Partners in January 1996 in the amount of $7.50 per Unit, with the
Partnership retaining the remainder of these cash reserves for working capital
for continued operations.
(e) In general, acceptance of Walton Street's offer will constitute a taxable
event to Limited Partners. To the extent applicable to a Limited Partner's
personal situation, a sale of Units in the Partnership may cause a Limited
Partner to recognize taxable income. Each Limited Partner should consult his
or her personal tax and legal advisors prior to accepting the Offer and
tendering Units. For further information on this subject, see Item 8 below.
Item 5. Persons Retained, Employed or to Be Compensated
The Partnership has retained Alex. Brown for the limited purpose of estimating
the current liquidation value of the Units. The General Partner wanted an
independent third party to perform this function so that Unit holders could
make an informed decision regarding the Offer. The Partnership has agreed to
pay Alex. Brown a fee of $75,000 plus (i) $5,000 for each Partnership asset and
(ii) out of pocket expenses incurred by Alex. Brown in connection with the
performance of these duties up to an aggregate amount of $20,000. In addition,
Alex. Brown has received a $4,345.00 retainer fee from the Partnership.
Neither the Company nor any person acting on its behalf has retained any other
person to make solicitations or recommendations to holders of Units in
connection with the Offer.
Item 6. Recent Transactions and Intent with Respect to Securities
(a) To the best of the General Partner's knowledge, no transactions in the
Units have been effected during the past 60 days by the Partnership, the
General Partner or any partner, executive officer, director, affiliate or
subsidiary of either such entity.
(b) To the best of the General Partner's knowledge, none of the Partnership,
the General Partner, the Company or any partner, executive officer, director,
affiliate or subsidiary of each such entity presently intends to tender any
Units that are held of record or beneficially owned by such persons pursuant to
the Offer.
Item 7. Certain Negotiations and Transactions by the Subject Company
(a) No negotiations are being undertaken or are underway by the Partnership in
response to the Offer which relate to or would result in: (1) an extraordinary
transaction such as a merger or reorganization involving the Partnership or any
affiliate controlled by the Partnership; (2) a purchase, sale or transfer of a
material amount of assets by the Partnership or any affiliate controlled by the
Partnership; or (3) any material change in the present capitalization or
distribution policy of the Partnership.
On November 18, 1995, counsel for the Partnership received a bidder's notice
from Insignia on behalf of one of its affiliates requesting the Partnership's
limited partner list and contemplating the commencement of a tender offer for
Units of the Partnership. The Partnership delivered the limited partner list
to Insignia on November 20, 1995. Insignia manages virtually all of the
Company's multi-family residential properties including the Partnership's
properties. In Amendment No. 1 to Schedule 14D-1, filed with the Commission by
Walton Street on November 21, 1995, Walton Street disclosed that it had entered
into an agreement with Insignia pursuant to which, among other things, Walton
Street would assign its right to purchase all of the Units tendered in response
to the Offer to a joint-venture partnership in which Walton Street owns a 75%
interest and Insignia owns a 25% interest.
(b) There are no transactions, General Partner resolutions, agreements in
principle or signed contracts in response to the Offer that relate to or would
result in one or more of the events referred to in Item 7(a).
Item 8. Additional Information to be Furnished
Tendering Limited Partners will recognize gain on the sale of a Unit pursuant
to the Offer to the extent that the amount realized (the sum of the cash Offer
price plus the share of Partnership liabilities allocated to the Unit) exceeds
the Limited Partner's adjusted tax basis in such Unit. Notably, any gain
realized by a Limited Partner may possibly be offset by "suspended" passive
activity losses, if any, from the Partnership or from other passive activities.
In the event a Limited Partner realizes a loss on disposition such loss may be
deductible only to the extent permitted under the passive activity loss rules
and other applicable limitations. If a Limited Partner sells all Units (and
such Units have not been aggregated for purposes of the passive loss rules with
activities not currently being sold), any passive activity loss recognized on
the sale and any suspended passive activity losses from the Partnership (to the
extent not used to offset any gain recognized on the sale) will no longer be
subject to the passive activity loss limitation, and therefore should be
deductible by such Limited Partner from other income, subject to any other
applicable limitations (including at-risk limitations and tax basis
limitations).
Under the Internal Revenue Code of 1986, as it reads on the date hereof,
individuals and corporations are taxed on net capital gain (defined as the
excess of net long-term capital gain over net short-term capital loss) at
maximum rates of 28% and 35%, respectively. A bill passed by Congress in
November 1995 would allow individuals a deduction equal to 50% of net capital
gain (resulting in an effective rate of 19.8% in the case of an individual in
the highest 39.6% rate bracket) in lieu of the 28% maximum rate, and reduce the
maximum rate for corporations to 28%. It is uncertain whether any change in
the taxation of capital gains and losses will ultimately be enacted, and if so,
what the changes and their effective dates will be. Nonetheless, Limited
Partners should consider the possibility of changes in the taxation of capital
gains and losses in evaluating the Offer.
In addition, other considerations could affect your tax liability, including
but not limited to, alternative minimum taxes, state income taxes and other
considerations.
Item 9. Material to be Filed as Exhibits
(a) Letter to Investors, dated November 17, 1995.
(b) Press release, dated November 16, 1995.
(c) Form of Property Management and Leasing Agreement.
(d) Letter to Investors, dated November 30, 1995.
(e) Alex. Brown Valuation Letter.
Signature. After reasonable inquiry and to the best of my knowledge and
belief, I certify that the information set forth in this statement is true,
complete and correct.
Dated: November 30, 1995 BALCOR REALTY INVESTORS 85-SERIES III
A REAL ESTATE LIMITED PARTNERSHIP
By: Balcor Partners-XVIII, its general partner
By: The Balcor Company, a partner
/s/Thomas E. Meador
Thomas E. Meador, Chairman