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 86 - SERIES I
A REAL ESTATE LIMITED PARTNERSHIP
(Name of Subject Company)
BALCOR REALTY INVESTORS 86 - SERIES I
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
(847) 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 86 - Series
I 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-XIX, 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 Metropolitan
Acquisition VII, L.L.C., a Delaware limited liability company ("Metropolitan"),
to purchase up to approximately 30% of the Units at a purchase price of $155
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 March 11,
1996 (the "Offer to Purchase"), and the related Assignment of Partnership
Interest (which, together with the Offer to Purchase constitutes the "Offer").
The Offer is disclosed in a Tender Offer Statement on Schedule 14D-1 dated
March 11, 1996 as filed with the Securities and Exchange Commission (the
"Commission"). The Offer states that the address of the principal executive
office of Metropolitan is One Insignia Financial Plaza, Greenville, South
Carolina 29601.
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 such 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 and any property sales. During the year ended December 31, 1995, the
General Partner received $231,750 from the Partnership for reimbursement of
such expenses. 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 Metropolitan, or its 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, Metropolitan
could own a substantial number of Units. The ownership of a large block of
Units by Metropolitan would enable Metropolitan 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 related 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 Metropolitan may increase or decrease
the likelihood that any one or more of these actions may or may not be taken by
the Partnership. The taking or not taking of 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"), which is the ultimate parent entity of Metropolitan, 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)(1)). 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 on a monthly basis. The Property Management Agreements may be
terminated by the purchasers of the Partnership's properties as the properties
are sold.
As a result of this contractual arrangement, Metropolitan may have a
conflict of interest with the General Partner and the non-tendering Limited
Partners. Because of its affiliation with Insignia, Metropolitan may have an
interest in the Partnership continuing to pay the monthly property management
fees described above to Insignia. Sales of the Partnership's properties would
result in Insignia's loss of these fees if the purchaser of the properties were
to elect to terminate the Property Management Agreements for the properties.
As discussed above, any sale of all or substantially all of the Partnership's
properties in a single transaction or series of related transactions requires
the approval of the holders of a majority of the outstanding Units. Therefore,
Metropolitan may have a conflict of interest with any non-tendering Limited
Partner who may find such a sale desirable or with the General Partner if the
General Partner were to recommend such sale to the Limited Partners.
An affiliate of Insignia has acted as a broker in connection with the sale
of one of the Partnership's properties and has acted as a broker in connection
with the sale of properties by other partnerships affiliated with the Company.
In connection with such sales, Insignia's affiliate received commissions which
were customary in the industry. Such affiliate of Insignia may be engaged in
the future by the Partnership or other partnerships affiliated with the Company
to provide similar services in connection with property sales.
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) Metropolitan or its executive officers, directors or
affiliates.
Item 4. The Solicitation and Recommendation
(a) The General Partner is expressing no opinion and is remaining neutral
with respect to the Offer.
(b) The General Partner is not making a recommendation with respect to
the Offer because (i) on the one hand, the General Partner recognizes that
Metropolitan is making the Offer with a view to making a profit at the expense
of the Limited Partners and (ii) on the other hand, the Offer provides Limited
Partners who desire immediate cash with the opportunity to immediately
liquidate their investment in the Partnership. Although the General Partner is
not making a recommendation with respect to the Offer, the General Partner
believes that the Limited Partners should consider the following factors in
making their own decision of whether to accept or reject the Offer:
1. The Partnership's November 30, 1995 letter to Limited Partners
indicated that the Alex. Brown & Sons Incorporated ("Alex. Brown") current
liquidation value per Unit ranged from $209 to $273. Alex. Brown's
definition of current liquidation value assumes an orderly liquidation of
the remaining properties of the Partnership over twelve months. Adjusting
for property sales, projected cash on hand and other working capital as of
March 31, 1996, the Alex. Brown value range has been adjusted by the
General Partner to $196 to $257 ("Alex. Brown Adjusted Value"). The
Metropolitan offering price represents, respectively, 79% and 60% of the
low end and the high end of the Alex. Brown Adjusted Value range.
2. In the Partnership's November 30, 1995 letter to Limited
Partners, the General Partner indicated that its strategy was to sell the
Partnership's remaining assets over the next four to five years. The
General Partner also stated that the timing of the liquidation could be
lengthened or shortened due to changes in market conditions, economic
factors, interest rates and unforeseen events. Since November, 1995, the
General Partner believes that the market for multifamily housing
properties has become increasingly favorable to sellers of these
properties. This belief is based on the results of the sales and
marketing activities of the Partnership as described below and based upon
the similar results of such activities by various other partnerships
affiliated with the Company. These favorable market conditions are in
part attributable to the increasing strength of the capital markets and
the re-entry of REITs into the acquisition market. Since the November 30,
1995 letter, the Partnership has sold two of its properties. Of its
remaining four properties, the General Partner (i) has entered into a
letter of intent to sell one of the properties; (ii) is actively marketing
one of the properties for sale; and (iii) if the market remains favorable,
intends to begin actively marketing more of the remaining properties for
sale. If the current market conditions for sales remain favorable and the
General Partner can obtain appropriate sales prices, the Partnership's
liquidation strategy may be accelerated.
3. In response to the Offer, an unaffiliated third party has
contacted the General Partner to discuss the potential for a sale of all
or substantially all of the remaining properties of the Partnership.
These discussions are preliminary in nature and as of this time there are
significant disagreements between the parties as to contract terms. Due
to these disagreements, there can be no assurance that the General Partner
will continue contract negotiations with this third party.
The General Partner estimates that if the sale were to be
consummated to the unaffiliated third party at the preliminary price
discussed by the parties, the liquidating distribution that would be
received by the Limited Partners would be higher than the Metropolitan
offering price but would be lower than the high end of the Alex. Brown
Adjusted Value range. Any sale of all or substantially all of the
Partnership's assets would be contingent upon, among other things, the
approval of the holders of a majority of the outstanding Units as required
by the partnership agreement of the Partnership. Therefore, even if
negotiations continue and a mutually acceptable contract is agreed upon,
there can be no assurance that the sale will ultimately be consummated.
4. The Partnership expects to make a quarterly distribution of $74
per Unit in mid-April, 1996. In addition to the regular quarterly
distributions of cash flow, this distribution includes a portion of the
sales proceeds received from the property sales described above. Also,
please note that the amount of the distribution is included in the Alex.
Brown Adjusted Value range. For Limited Partners who elect to tender
Units to Metropolitan, this distribution will be deducted from
Metropolitan's offering price for such Units.
5. Acceptance of the Offer will constitute a taxable event to
Limited Partners. To the extent applicable to a Limited Partner's
personal situation, a sale of Units 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.
Item 5. Persons Retained, Employed or to Be Compensated
Neither the Company, the General Partner, nor any person acting on behalf
of either of them has retained any 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) Except as described below, 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.
In response to the Offer, an unaffiliated third party has
contacted the General Partner to discuss the potential for a sale of all
or substantially all of the remaining properties of the Partnership.
These discussions are preliminary in nature and as of this time there are
significant disagreements between the parties as to contract terms. Due
to these disagreements, there can be no assurance that the General Partner
will continue contract negotiations with this third party.
The General Partner estimates that if the sale were to be
consummated to the unaffiliated third party at the preliminary price
discussed by the parties, the liquidating distribution that would be
received by the Limited Partners would be higher than the Metropolitan
offering price but would be lower than the high end of the Alex. Brown
Adjusted Value range. Any sale of all or substantially all of the
Partnership's assets would be contingent upon, among other things, the
approval of the holders of a majority of the outstanding Units as required
by the partnership agreement of the Partnership. Therefore, even if
negotiations continue and a mutually acceptable contract is agreed upon,
there can be no assurance that the sale will ultimately be consummated.
(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
(a) Tax Discussion
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 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 loss recognized on the sale and
any suspended passive activity losses from the Partnership (to the extent not
used to offset gain recognized on the sale) should be deductible by such
Limited Partner against non-passive income, subject to any other applicable
limitations (including at-risk, tax basis, and capital loss limitations).
A bill passed by the U.S. Congress in November 1995, but vetoed by the
President, would have reduced the tax rate on long-term capital gains and
changed the treatment of long-term capital losses. Currently, 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.
Limited Partners should consider the possibility of such changes, as well as
other tax law changes, 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. Limited Partners should consult their personal tax and
legal advisors prior to accepting or rejecting the Offer.
(b) Class Action Lawsuit
On February 29, 1996, a class action complaint was filed, Raymond Masri
vs. Lehman Brothers, Inc., et al., Case No. 96/103727 (Supreme Court of the
State of New York, County of New York). The Partnership, additional limited
partnerships which were sponsored by the Company, three limited partnerships
sponsored by the predecessor of Lehman Brothers, Inc. (together with the
Partnership and the affiliated partnerships, the "Defendant Partnerships"),
Lehman Brothers, Inc. and Smith Barney Holdings, Inc. are defendants in the
lawsuit. The complaint alleges, among other things, common law fraud and
deceit, negligent misrepresentation and breach of fiduciary duty relating to
the disclosure of information in the offering of limited partnership interests
in the Defendant Partnerships. The complaint seeks judgment for compensatory
damages equal to the amount invested in the Defendant Partnerships by the
proposed class plus interest accrued thereon; general damages; recovery from
the defendants of all profits received by them as a result of their actions
relating to the Defendant Partnerships; exemplary damages; attorneys' fees and
other costs.
The defendants intend to vigorously contest this action. No class has
been certified as of this date. Management of each of the defendants believes
they have meritorious defenses to contest the claims. The outcome of the
proceedings relating to the Partnership is not determinable at this time.
Item 9. Material to be Filed as Exhibits
(a)(1) Letter to Investors, dated March 13, 1996.
(a)(2) Letter to Investors, dated March 22, 1996.
(c)(1) Form of Property Management and Leasing Agreement.
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: March 22, 1996 BALCOR REALTY INVESTORS 86 - SERIES I
A REAL ESTATE LIMITED PARTNERSHIP
By: Balcor Partners-XIX, its general partner
By: The Balcor Company, a partner
/s/ Thomas E. Meador
--------------------------
Thomas E. Meador, Chairman