UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
------------- -------------
Commission file number 0-11129
-------
BALCOR PENSION INVESTORS-III
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Illinois 36-3164211
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2355 Waukegan Road
Bannockburn, Illinois 60015
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 267-1600
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Interests
-----------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ X ]
PART I
Item 1. Business
- ----------------
Balcor Pension Investors-III (the "Registrant") is a limited partnership formed
in 1982 under the laws of the State of Illinois. The Registrant raised
$118,738,000 from sales of Limited Partnership Interests. The Registrant's
operations consisted of investment in wrap-around mortgage loans and, to a
lesser extent, other junior mortgage loans and first mortgage loans. The
Registrant also currently operates two properties acquired through foreclosure,
and holds minority joint venture interests in two additional properties. All
financial information included in this report relates to this industry segment.
The Registrant originally funded thirty-two loans collateralized by
twenty-eight properties. A portion of Mortgage Reductions generated by
repayments was reinvested in five additional loans. The remainder was added to
working capital reserves. As a result of repayments, foreclosures and
wrap-around notes received as a portion of the sale price for three property
dispositions, the Registrant has five loans in its portfolio as of December 31,
1995. Eleven properties were acquired through foreclosures and two loans were
reclassified to investment in joint ventures with affiliates. The Registrant
sold nine of these properties and has two properties and two investments in
joint ventures with affiliates in its portfolio as of December 31, 1995. See
Item 2. Properties for additional information.
Operationally, existing apartment properties continued to register occupancy
percentages in the 90s, with average rents rising at an annual rate of between
3 and 4 percent. Apartments are still considered one of the top real estate
asset classes in terms of performance. However, some markets are experiencing
new construction of rental units which, if unrestrained, could impact the
performance of existing properties. Most of the new construction is aimed at
the two segments of the rental market which are growing the fastest: low-income
households and upper-income households who prefer to rent rather than own. Of
all the major asset classes, apartments typically display the least volatility
in terms of property values.
Shopping centers are the most troubled asset class in real estate currently.
Unlike other asset classes, construction of power shopping centers, those with
a preponderance of "big box" retailers, occurred at a brisk pace during the
early 1990s, and now a shake-out of retailers is taking place. Retailers posted
lackluster sales in 1995, particularly in the latter half of the year, and
similar results are expected for 1996. The slight rise in interest rates in
1995 also contributed to low sales growth in interest rate sensitive sectors
such as automobiles and home furnishings. Nevertheless, retail properties are
particularly unique, and those with strong tenant alignments should better
weather the current slowdown. In the long-term, however, retail real estate is
also vulnerable to technological changes (e.g. home shopping) which could
drastically alter the retail distribution system.
With virtually no new construction over the past few years, the national office
market has experienced consistently rising occupancy rates and, recently,
rising rental rates. Investor interest has also returned, typically preferring
suburban buildings over their downtown counterparts. Except for properties
built for a specific tenant, the economic feasibility of new construction in
most markets is still several years away. Build-to-suit construction for large
companies currently in leased space could restrict office appreciation rates
over the next few years. In addition, increased vacancies could result from
companies who restructure their workforce in order to reduce their occupancy
costs.
The General Partner believes that the market for multifamily housing properties
has become increasingly favorable to sellers of these properties. As a result
the General Partner is exploring an acceleration of its strategy to sell the
Registrant's residential property. Additionally, the General Partner will
explore the sale of its commercial properties over the next year if market
conditions are favorable.
Activity for the purchase of limited partnership interests ("tender offers")
has increased in real estate limited partnerships generally. Many of these
tender offers have been made by investors seeking to make a profit from the
purchase of the interests. In the event a tender offer is made for interests in
the Registrant, the General Partner will issue a response to Limited Partners
expressing the General Partner's opinion regarding the offer. Certain
administrative costs will be incurred to respond to a tender offer. The General
Partner cannot predict with any certainty what impact a tender offer will have
on the operations or management of the Registrant.
In November 1993, the Registrant placed the Bannockburn Executive Plaza loan in
default and the borrower filed for protection under the U.S. Bankruptcy Code.
In February 1995, a plan of reorganization related to this loan was confirmed
by the Bankruptcy Court. See Item 7. Liquidity and Capital Resources for
additional information.
During 1995, the Registrant received repayments on two loans receivable. See
Item 7. Liquidity and Capital Resources for additional information.
During 1995, the Registrant sold two properties. See Item 7. Liquidity and
Capital Resources for additional information.
The Registrant, by virtue of its ownership of real estate acquired through
foreclosure, is subject to federal and state laws and regulations covering
various environmental issues. Management of the Registrant utilizes the
services of environmental consultants to assess a wide range of environmental
issues and to conduct tests for environmental contamination as appropriate.
The General Partner is not aware of any potential liability due to
environmental issues or conditions that would be material to the Registrant.
The officers and employees of Balcor Mortgage Advisors-II, the General Partner
of the Registrant, and its affiliates perform services for the Registrant. The
Registrant currently has no employees engaged in its operations.
Item 2. Properties
- ------------------
As of December 31, 1995, the Registrant owns the two properties described
below:
Location Description of Property
- -------- -----------------------
Loveland, Colorado * Orchards Shopping Center: a shopping center
containing 167,779 square feet located on
24.01 acres.
Austin, Texas The Woods Apartments: a 278-unit apartment
complex located on 13 acres.
* This property is held subject to a mortgage loan.
The Registrant also holds minority joint venture interests in the
Brookhollow/Stemmons Office Building located in Dallas, Texas, and the
Perimeter 400 Center Office Building located in Fulton County, Georgia. See
Note 9 of Notes to Financial Statements for additional information.
In the opinion of the General Partner, the Registrant has provided for adequate
insurance coverage for its real estate investment properties.
See Notes to Financial Statements for other information regarding real property
investments.
Item 3. Legal Proceedings
- -------------------------
Williams class action
- -------------------------
In February 1990, a proposed class-action complaint was filed, Paul Williams
and Beverly Kennedy, et al. vs. Balcor Pension Investors, et al., Case No.:
90-C-0726 (U.S. District Court, Northern District of Illinois). The Registrant,
the General Partner, seven affiliated limited partnerships (together with the
Registrant, the "Related Partnerships") and other affiliates are the
defendants. The complaint alleges violations of Federal securities laws as to
the adequacy and accuracy of disclosure of information in the offering of
limited partnership interests in the Related Partnerships and alleges breach of
fiduciary duty, fraud, negligence and violations under the Racketeer Influenced
and Corrupt Organizations Act. The complaint seeks compensatory and punitive
damages. The defendants subsequently filed a counterclaim asserting claims of
fraud and breach of warranty against certain plaintiffs, as well as a request
for declaratory relief regarding the defendants' rights to be indemnified for
their expenses incurred in defending the litigation. The defendants seek to
recover for damage to their reputations and business as well as costs and
attorneys' fees in defending the claims.
In May 1993, the Court issued an order denying the plaintiffs' motion for class
certification based principally on the inadequacy of the individual plaintiffs
representing the proposed class. However, the Court gave plaintiffs leave to
propose new individual class representatives. Upon the defendants' motion, the
Court ordered plaintiffs' counsel to pay $75,000 to the defendants and $25,000
to the Court for costs incurred with the class certification motion, which
amounts continue to be outstanding.
In July 1994, the Court granted plaintiffs' motion certifying a class relating
to the Federal securities fraud claims. The class certified by the Court
includes only the original investors in the Related Partnerships. The
defendants filed a motion for reconsideration in opposition to the class
certification, which was denied in December 1994. The Court approved the Notice
of Class Action in August 1995 which was sent to potential members of the class
in September 1995.
The defendants intend to continue vigorously contesting this action. Management
of each of the defendants believes they have meritorious defenses to contest
the claims. It is not determinable at this time whether or not an unfavorable
decision in this action would have a material adverse impact on the Registrant.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
No matters were submitted to a vote of the Limited Partners of the Registrant
during 1995.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- -------------------------------------------------------------------------
Matters
- -------
There has not been an established public market for Limited Partnership
Interests and it is not anticipated that one will develop. For information
regarding previous distributions, see Financial Statements, Statements of
Partners' Capital, and Item 7. - Liquidity and Capital Resources, below.
As of December 31, 1995, the number of record holders of Limited Partnership
Interests of the Registrant was 10,640.
Item 6. Selected Financial Data
- -------------------------------
Year ended December 31,
-----------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
Total income $7,464,674 $7,904,391 $6,125,896 $6,728,618 $8,254,515
Recovery of losses
on loans, real
estate and
accrued interest
receivable 756,370 None None None None
Provision for
losses on loans,
real estate and
accrued inter-
est receivable 756,370 600,000 2,720,000 3,750,000 3,215,500
Income before net
gains on sales
of assets 6,001,706 6,379,013 2,541,797 2,166,157 4,458,722
Net income 8,542,352 6,498,855 3,141,300 2,166,157 4,458,722
Net income per
average number of
Limited Partner-
ship Interests
outstanding 34.90 26.35 12.68 8.72 17.87
Total assets 48,074,826 77,868,675 81,568,277 86,628,240 87,612,905
Mortgage notes
payable 1,666,291 7,153,074 8,436,279 10,997,864 9,234,008
Distributions per
Limited Partner-
ship Interest(A) 132.12 34.35 20.00 22.50 30.00
(A) These amounts include distributions of original capital of $109.12 and
$16.85 per Limited Partnership Interest for the years 1995 and 1994,
respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and
- -----------------------------------------------------------------------
Results of Operations
- ---------------------
Operations
- ----------
Summary of Operations
- ---------------------
During 1995 and 1994, Balcor Pension Investors-III (the "Partnership") sold two
properties and received repayments on four loans. The Partnership also acquired
The Woods Apartments through foreclosure in July 1994. The combined effect of
these events, especially the recognition of gains on the sales of the
properties, resulted in an increase in net income during 1995 as compared to
1994.
The provision for potential losses on loans, real estate and accrued interest
receivable was lower during 1994 as compared to 1993. In addition, during 1993,
the Partnership recognized its share of a loss provision related to a decline
in the fair value of a property in which it holds a minority joint venture
interest. The combined effect of these events resulted in an increase in net
income during 1994 as compared to 1993. Further discussion of the Partnership's
operations is summarized below.
1995 Compared to 1994
- ---------------------
The repayment of the Colony Apartments loan in August 1995, the prepayment of
the Continental Park and North Morris Estates loans in June and November 1994,
respectively, and the foreclosure of The Woods Apartments in July 1994 resulted
in a decrease in net interest income on loans receivable during 1995 as
compared to 1994.
The Partnership has two non-accrual loans at December 31, 1995 which are
collateralized by Carmel on Providence Apartments and Bannockburn Executive
Plaza. For non-accrual loans, income is recorded only as cash payments are
received from the borrower. The funds advanced by the Partnership for these two
loans total approximately $6,200,000, representing approximately 6% of original
funds advanced. During 1995, the Partnership received cash payments of net
interest income totaling approximately $346,000 on the Carmel on Providence
loan. The Partnership would have received approximately $295,000 of net
interest income under the terms of the original loan agreement. Of the net
interest income received, $48,000 relates to costs incurred by the Partnership
prior to the borrower's bankruptcy filing, which have been added to the
principal of the loan and which accrue interest, payable by the borrower on a
quarterly basis. In addition, $564,000 was received on the Bannockburn
Executive Plaza loan in 1995. This loan originally matured in January 1994 but
was subsequently extended to December 1997.
Provisions are charged to income when the General Partner believes an
impairment has occurred, either in a borrower's ability to repay the loan or in
the value of the collateral property. Determinations of fair value are made
periodically on the basis of performance under the terms of the loan agreement
and assessments of property operations. Determinations of fair value represent
estimations based on many variables which affect the value of real estate,
including economic and demographic conditions. See Note 2(d) of Notes to
Financial Statements for further information regarding the Partnership's
accounting policies related to the determination of the fair value of its loans
and real estate held for sale. The Partnership recognized provisions of
$756,370 and $600,000 in 1995 and 1994, respectively, related to certain of its
loans. In addition, during 1995, the Partnership recognized recoveries of
$756,370 related to certain other loans to provide for changes in the estimate
of their fair value. During 1995, allowances of $1,070,329 related to the
Colony loan were written off in connection with the repayment of the loan and
during 1994 allowances of $3,715,406 related to the Continental Park loan were
written off in connection with the repayment of the loan at a discount.
Operations of real estate held for sale represent the net operations of those
properties acquired by the Partnership through foreclosure. At December 31,
1995, the Partnership was operating The Woods Apartments and the Orchards
Shopping Center. Original funds advanced by the Partnership total approximately
$6,678,000 for these properties. The Partnership acquired The Woods Apartments
in July 1994, and this property generated income during 1995. In addition,
operations improved at the Orchards Shopping Center during 1995 due to
increased occupancy levels and decreased interest expense resulting from the
paydown of the first mortgage loan in connection with the sale of the Orchards
Office Building in September 1994. The combined effect of these events resulted
in an increase in income from real estate held for sale during 1995 as compared
to 1994. The 1995 sales of the Crossings Shopping Center and the Candlewyck
Apartments, which were generating income, partially offset the above increase.
Participation in income of joint ventures with affiliates represents the
Partnership's 27.5% and 12.68% shares of income from the Brookhollow/Stemmons
and Perimeter 400 Center office buildings, respectively. During 1995, the
Partnership recognized $247,500 and $84,322 as its share of the recovery of
provisions related to the change in the estimates of the fair values of the
Brookhollow/Stemmons and Perimeter 400 Center office buildings, respectively,
which resulted in an increase in the participation in income during 1995 as
compared to 1994. Increased reimbursements from tenants for real estate taxes,
common area maintenance and tenant construction at the Brookhollow/Stemmons
Office Building also contributed to the increase in income.
Proceeds received in connection with the 1995 and 1994 loan repayments and
property sales were invested when received and resulted in an increase in
interest income on short-term investments during 1995 as compared to 1994.
Higher average interest rates earned on short-term investments also contributed
to the increase. Portions of these proceeds were distributed to Limited
Partners in 1995 and January 1996.
The Partnership's loans generally bear interest at contractually-fixed interest
rates. Some loans also provide for additional interest in the form of
participations, usually consisting of either a share in the capital
appreciation of the property securing the Partnership's loan and/or a share in
the increase of the gross income of the property above a certain level.
Participation income was recognized during 1994 in connection with the North
Morris Estates and Carmel on Providence loans.
Decreases in legal expenses and reduced mortgage servicing fees due to the
repayment of four loans during 1995 and 1994 and the foreclosure of The Woods
Apartments in 1994 resulted in a decrease in administrative expenses during
1995 as compared to 1994.
During 1995, the Partnership recognized gains of $717,900 and $1,822,746 in
connection with the sales of the Crossings Shopping Center and the Candlewyck
Apartments, respectively. During 1994, the Partnership recognized a gain of
$119,842 on the sale of the Orchards Office Building.
1994 Compared to 1993
- ---------------------
Increased interest income was received from the borrowers of the Bannockburn
Executive Plaza, Carmel on Providence and The Woods loans during 1994. In
addition, the Partnership purchased The Woods underlying loan in December 1993
which reduced interest expense on loans payable. Finally, the Partnership
received additional interest and a prepayment fee in connection with the North
Morris Estates loan repayment in November 1994. As a result, net interest
income on loans receivable increased during 1994 as compared to 1993. The
prepayment of the Airport III Industrial Park and the Continental Park loans in
November 1993 and June 1994, respectively, reduced interest income which
partially offset this increase.
The Partnership had two non-accrual loans at December 31, 1994 which are
collateralized by Carmel on Providence Apartments and Bannockburn Executive
Plaza. The funds advanced by the Partnership for these two loans total
approximately $6,200,000, representing approximately 6% of original funds
advanced. During 1994, the Partnership received cash payments of net interest
income totaling approximately $244,000 on the Carmel on Providence loan. The
Partnership would have received approximately $288,000 of net interest income
under the terms of the original loan agreement. In addition, $585,000 was
received on the Bannockburn Executive Plaza loan. This loan originally matured
in January 1994 but was subsequently extended to December 1997.
The Partnership recognized a provision of $2,000,000 related to its loans in
1993. In addition, during 1993, the Partnership recognized a provision of
$720,000 related to the Partnership's real estate held for sale to provide for
changes in the estimate of the fair value of the Riverview Office Building.
At December 31, 1994, the Partnership was operating the Candlewyck and The
Woods apartment complexes and the Crossings and Orchards shopping centers.
Original funds advanced by the Partnership totaled approximately $14,378,000
for these properties. Operating expenses decreased at the Crossings Shopping
Center due to decreased maintenance and repair expense and decreased real
estate tax expense resulting from a reduction in the assessed property value.
Operating expenses also decreased at the Orchards Shopping Center due to the
completion of roof repairs during 1993. In addition, the Partnership acquired
The Woods Apartments in July 1994, which generated income. Finally, the
Riverview Office Building and the Villa Verde Apartments, which generated
income, were sold in September and November 1993, respectively. The combined
effect of these events resulted in an increase in income from real estate held
for sale during 1994 as compared to 1993.
Participation in income (loss) of joint ventures with affiliates represents the
Partnership's 27.5% and 12.68% shares of income (loss) from the
Brookhollow/Stemmons and Perimeter 400 Center office buildings, respectively.
During 1993, the Partnership recognized its share of a loss provision related
to a decline in the fair value of the Brookhollow/Stemmons Office Building.
This, combined with decreased leasing costs and increased average occupancy
levels and rental rates at the Perimeter 400 Center Office Building during
1994, were the primary reasons for the recognition of income during 1994 as
compared to a loss in 1993.
Proceeds were received in 1993 in connection with the settlement of the
Kensington loan, the refinancing of the Villa Verde loan and the sales of the
Riverview Office Building, Villa Verde Apartments and vacant land adjacent to
the Orchards Shopping Center. A portion of these proceeds were distributed in
April 1994. The remainder of these proceeds, along with the proceeds received
in 1994 from the prepayment of the Continental Park and North Morris Estates
loans and the sale of the Orchards Office Building, were invested in short-term
interest-bearing instruments. This, along with higher interest rates resulted
in an increase in interest income on short-term investments during 1994 as
compared to 1993.
Participation income was recognized during 1993 in connection with the Airport
III Industrial Park, North Morris Estates and Carmel on Providence loans.
An increase in accounting and portfolio management fees resulted in an increase
in administrative expenses during 1994 as compared to 1993. This increase was
partially offset by a decrease in legal fees and mortgage servicing fees
resulting from the prepayment of the Airport III Industrial Park, Continental
Park and North Morris Estates loans and the foreclosure of The Woods Apartments
During 1993, the Partnership recognized a net gain totaling $599,503 on the
sales of the vacant land adjacent to the Orchards Shopping Center, the
Riverview Office Building and the Villa Verde Apartments.
Liquidity and Capital Resources
- -------------------------------
The cash position of the Partnership decreased as of December 31, 1995 when
compared to December 31, 1994 primarily due to special distributions made to
Limited Partners in April, July and October 1995. The Partnership generated
cash flow totaling approximately $5,256,000 from its operating activities
primarily as a result of the net interest income earned on its loans
receivable, the operations of its properties, and the interest received on its
short-term investments, net of the payment of administrative expenses. The
Partnership received funds from investing activities primarily due to the
receipt of proceeds of approximately $13,591,000 related to the repayment of
the Colony and Rivergate loans and proceeds of approximately $10,394,000
related to the sales of the Crossings Shopping Center and Candlewyck
Apartments. The Partnership's financing activities consist of the payment of
distributions totaling approximately $30,292,000 to the Partners, the repayment
of the mortgage notes payable of approximately $3,546,000 related to the sale
of Candlewyck Apartments, repurchases of Limited Partnership Interests at a
cost of approximately $1,426,000 and principal payments on underlying loans and
mortgage notes payable totaling approximately $1,135,000. The Partnership also
made a special distribution to Limited Partners from Mortgage Reductions in
January 1996 as described below.
The Partnership classifies the cash flow performance of its properties as
either positive, a marginal deficit or a significant deficit, each after
consideration of debt service payments unless otherwise indicated. The
Partnership defines cash flow generated from its properties as an amount equal
to the property's revenue receipts less property related expenditures, which
include debt service payments. During 1995 and 1994, the Orchards Shopping
Center and The Woods Apartments generated positive cash flow. The Crossings
Shopping Center, which was sold in January 1995, generated positive cash flow
during 1994 and prior to its sale in 1995. However, the Candlewyck Apartments,
which was sold in August 1995, generated positive cash flow in 1994 and a
marginal deficit prior to its sale in 1995. The Brookhollow/Stemmons and
Perimeter 400 Center office complexes, properties in which the Partnership
holds minority joint venture interests, generated positive cash flow during
1995 and 1994.
As of December 31, 1995, The Woods Apartments and the Orchards Shopping Center
have occupancy rates of 93% and 83%, respectively. Many rental markets continue
to remain extremely competitive; therefore, the General Partner's goals are to
maintain high occupancy levels, while increasing rents where possible, and to
monitor and control operating expenses and capital improvement requirements at
the properties. The General Partner will also examine the terms of the mortgage
loan collateralized by one of its properties, and may refinance or, in certain
instances, use Partnership reserves to repay the loan.
The General Partner believes that the market for multifamily housing properties
has become increasingly favorable to sellers of these properties. As a result,
the General Partner is exploring an acceleration of its strategy to sell the
Partnership's residential property. Additionally, the General Partner will
explore the sale of its commercial properties over the next year if market
conditions are favorable.
Changing interest rates can impact real estate values in several ways.
Generally, declining interest rates may lower the cost of capital allowing
buyers to pay more for a property whereas rising interest rates may increase
the cost of capital and lower the price of real estate. Lower interest rates
may increase the probability that borrowers may seek prepayment of the
Partnership's loans whereas rising interest rates decrease the yields on the
loans and make prepayment less likely.
Certain borrowers have failed to make payments when due to the Partnership for
more than ninety days and, accordingly, these loans have been placed on
non-accrual status (income is recorded only as cash payments are received). The
General Partner has negotiated with some of these borrowers regarding
modifications of the loan terms and has instituted foreclosure proceedings
under certain circumstances. Such foreclosure proceedings may be delayed by
factors beyond the General Partner's control such as bankruptcy filings by
borrowers and state law procedures regarding foreclosures. Further, certain
loans made by the Partnership have been restructured to defer and/or reduce
interest payments where the properties collateralizing the loans were
generating insufficient cash flow to support property operations and debt
service.
During February 1995, a plan of reorganization related to the Bannockburn
Executive Plaza loan was confirmed by the Bankruptcy Court effective March
1995. Pursuant to the plan, the maturity date of the loan was extended to
December 1, 1997 and the loan will continue to bear interest at 14.5% per annum
with a pay rate of 9% per annum. The maturity of the underlying loan was also
extended to December 1, 1997, and the borrower was required to pay $232,031
directly to the holder of the underlying loan to reduce the principal balance
of the loan. In addition, the borrower is required to remit all excess cash
flow from property operations on a monthly basis directly to the holder of the
underlying loan to further reduce the principal balance of the loan. Excess
cash flow of $189,628 was remitted to the holder of the underlying loan during
1995.
In August 1995, the borrower of the $16,750,000 Colony Apartments wrap-around
loan repaid the loan. The Partnership received proceeds of approximately
$8,301,516 which is comprised of the funds advanced on the loan ($6,501,516)
and the amount representing the difference between the funds advanced by the
Partnership and the outstanding principal balance on the underlying loan in
accordance with the original loan terms. In addition, the borrower repaid the
underlying mortgage note payable which had a balance of $7,378,155. Allowances
in the amount of $1,070,329 were written off in connection with the repayment
of the loan.
In October 1995, the Rivergate Apartments first mortgage loan matured and in
December 1995, the borrower repaid the loan. The Partnership received proceeds
of $5,255,154 which represented the outstanding principal balance of the loan.
In January and August 1995, the Partnership sold the Crossings Shopping Center
and the Candlewyck Apartments in all cash sales for $2,650,000 and $10,000,000,
respectively. The purchaser of the Crossings Shopping Center took title to the
property subject to the existing $1,793,760 first mortgage loan. From the
proceeds of the Candlewyck sale, the Partnership repaid the outstanding amounts
due under the first, second, and third mortgage loans, which totaled
$3,545,699. See Note 12 of Notes to Financial Statements for additional
information.
Distributions to Limited Partners can be expected to fluctuate for various
reasons. Generally, distributions are made from Cash Flow generated by interest
and other payments made by borrowers under the Partnership's mortgage loans.
Loan prepayments and repayments can initially cause Cash Flow to increase as
prepayment premiums and participations are paid; however, thereafter
prepayments and repayments will have the effect of reducing Cash Flow. If such
proceeds are distributed, Limited Partners will have received a return of
capital and the dollar amount of Cash Flow available for distribution
thereafter can be expected to decrease. Distribution levels can also vary as
loans are placed on non-accrual status, modified or restructured and, if the
Partnership has taken title to properties through foreclosure or otherwise, as
a result of property operations.
The Partnership made four distributions totaling $132.12, $34.35 and $20.00 per
Interest in 1995, 1994 and 1993, respectively. See Statement of Partners'
Capital for additional information. Distributions were comprised of $23.00 of
Cash Flow and $109.12 of Mortgage Reductions in 1995 and $17.50 of Cash Flow
and $16.85 of Mortgage Reductions in 1994 and $20.00 of Cash Flow in 1993. The
distribution of Mortgage Reductions in 1995 and 1994 resulted from loan
repayments and property sales. Cash Flow distributions increased between 1995
and 1994 due to the payment of a special distribution of $7.00 per Interest
from Cash Flow reserves in October 1995. Cash Flow distributions decreased in
1994 from 1993 due to the loan repayments and property sales.
In January 1996, the Partnership paid $6,402,354 to Limited Partners
representing the quarterly distribution for the fourth quarter of 1995 of $4.00
of Cash Flow per Interest and a special distribution of $22.96 per Interest,
representing Mortgage Reductions received primarily from the Rivergate loan
repayment. The Partnership also paid $79,159 to the General Partner as its
distributive share of the Cash Flow distributed for the fourth quarter of 1995
and $26,386 as its contribution to the Early Investment Incentive Fund.
Including the January 1996 distribution, the Partnership has distributed
$667.88 per $500 Interest, of which $450.80 represents Cash Flow from
operations and $217.08 represents a return of Original Capital.
The Partnership expects to continue making cash distributions from the Cash
Flow generated by the receipt of mortgage payments and from property
operations, less payments on the underlying loans and administrative expenses.
The General Partner believes the Partnership has retained an appropriate amount
of working capital to meet cash or liquidity requirements which may occur.
During 1995, the General Partner on behalf of the Partnership used amounts
placed in the Early Investment Incentive Fund to repurchase 5,882 Interests
from Limited Partners at a total cost of $1,426,239.
In 1995, the Financial Accounting Standards Board issued Statement No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" which establishes accounting standards for impairment of
long lived assets and long lived assets to be disposed of. This statement has
been adopted by the Partnership as of January 1, 1995, and did not have a
material impact on the financial position or results of operations of the
Partnership.
Inflation has several types of potentially conflicting impacts on real estate
investments. Short-term inflation can increase real estate operating costs
which may or may not be recovered through increased rents and/or sale prices
depending on general or local economic conditions. In the long-term, inflation
can be expected to increase operating costs and replacement costs and may lead
to increased rental revenues and real estate values.
Item 8. Financial Statements and Financial Statement Schedules and
- ------------------------------------------------------------------
Supplementary Data
- ------------------
See Index to Financial Statements in this Form 10-K.
The supplemental financial information specified by Item 302 of Regulation S-K
is not applicable.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
- --------------------
On September 14, 1995 the Registrant approved the engagement of Coopers &
Lybrand L.L.P. as its independent auditors for the fiscal year ending December
31, 1995 to replace the firm of Ernst & Young LLP, who were dismissed as
auditors of the Registrant effective September 14, 1995. The General Partner of
the Registrant approved the change in auditors.
The reports of Ernst & Young LLP on the Registrant's financial statements for
the past two fiscal years did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope, or
accounting principles.
In connection with the audits of the Registrant's financial statements for each
of the two fiscal years ended December 31, 1994, and in the subsequent interim
period, there were no disagreements with Ernst & Young LLP on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures which, if not resolved to the satisfaction of Ernst &
Young LLP would have caused Ernst & Young LLP to make reference to the matter
in their report.
PART III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
(a) Neither the Registrant nor Balcor Mortgage Advisors-II, its General
Partner, has a Board of Directors.
(b, c & e) The names, ages and business experiences of the executive officers
and significant employees of the General Partner of the Registrant are as
follows:
TITLE OFFICERS
----- --------
Chairman, President and Chief Thomas E. Meador
Executive Officer
Senior Vice President Alexander J. Darragh
Senior Vice President Josette V. Goldberg
Senior Vice President Alan G. Lieberman
Senior Vice President, Chief Brian D. Parker
Financial Officer, Treasurer
and Assistant Secretary
Senior Vice President John K. Powell, Jr.
Thomas E. Meador (July 1947) joined Balcor in July 1979. He is Chairman,
President and Chief Executive Officer and has responsibility for all ongoing
day-to-day activities at Balcor. He is a Director of The Balcor Company. He is
also Senior Vice President of American Express Company and is responsible for
its real estate operations worldwide. Prior to joining Balcor, Mr. Meador was
employed at the Harris Trust and Savings Bank in the commercial real estate
division where he was involved in various lending activities. Mr. Meador
received his M.B.A. degree from the Indiana University Graduate School of
Business.
Alexander J. Darragh (February 1955) joined Balcor in September 1988 and is
responsible for due diligence analysis and real estate advisory services for
Balcor and American Express Company. He also has supervisory responsibility for
Balcor's environmental matters. Mr. Darragh received masters' degrees in Urban
Geography from Queen's University and in Urban Planning from Northwestern
University.
Josette V. Goldberg (April 1957) joined Balcor in January 1985 and has primary
responsibility for all human resources matters. In addition, she has
supervisory responsibility for Balcor's MIS functions. Ms. Goldberg has been
designated as a Senior Human Resources Professional (SHRP).
Alan G. Lieberman (June 1959) joined Balcor in May 1983 and is responsible for
Balcor's property sales and capital markets functions. Mr. Lieberman is a
Certified Public Accountant.
Brian D. Parker (June 1951) joined Balcor in March 1986 and, as Chief Financial
Officer and Chief Accounting Officer, is responsible for Balcor's financial,
legal and treasury functions. He is a Director of The Balcor Company. Mr.
Parker is a Certified Public Accountant and holds an M.S. degree in Accountancy
from DePaul University.
John K. Powell Jr. (June 1950) joined Balcor in September 1985 and is
responsible for portfolio and asset management matters relating to Balcor's
partnerships. Mr. Powell also has supervisory responsibility for Balcor's risk
management and investor services functions. He received a Master of Planning
degree from the University of Virginia. Mr. Powell has been designated a
Certified Real Estate Financier by the National Society for Real Estate Finance
and is a full member of the Urban Land Institute.
(d) There is no family relationship between any of the foregoing officers.
(f) None of the foregoing officers or employees are currently involved in any
material legal proceedings nor were any such proceedings terminated during the
fourth quarter of 1995.
Item 11. Executive Compensation
- -------------------------------
The Registrant has not paid and does not propose to pay any remuneration to the
executive officers and directors of the General Partner. Certain of these
officers receive compensation from The Balcor Company (but not from the
Registrant) for services performed for various affiliated entities, which may
include services performed for the Registrant. However, the General Partner
believes that any such compensation attributable to services performed for the
Registrant is immaterial to the Registrant. See Note 8 of Notes to Financial
Statements for the information relating to transactions with affiliates.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
(a) No person owns of record or is known by the Registrant to own beneficially
more than 5% of the outstanding Limited Partnership Interests of the
Registrant.
(b) Balcor Mortgage Advisors-II and its officers own as a group or individually
the following Limited Partnership Interests of the Registrant:
Amount
Beneficially
Title of Class Owned Percent of Class
-------------- ------------- ----------------
Limited Partnership
Interest 5 Interests Less than 1%
Relatives and affiliates of the officers and partners of the General Partner do
not own any additional interests.
(c) The Registrant is not aware of any arrangement, the operation of which may
result in a change of control of the Registrant.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
(a, b) See Note 3 of Notes to Financial Statements for information relating to
the Partnership Agreement and the allocation of distributions and profits and
losses.
See Note 8 of Notes to Financial Statements for information relating to
transactions with affiliates.
(c) No management person is indebted to the Registrant.
(d) The Registrant has no outstanding agreements with any promoters.
PART IV
Item 14. Exhibits, Financial Statements and Financial Statement Schedules,
- --------------------------------------------------------------------------
and Reports on Form 8-K
- -----------------------
(a)
(1 & 2) See Index to Financial Statements in this Form 10-K.
(3) Exhibits:
(3) The Amended and Restated Agreement of Limited Partnership, and the Amended
and Restated Certificate of Limited Partnership of Balcor Pension
Investors-III, previously filed as Exhibits 3(a) and 3(b), respectively, to
Amendment No. 2 to the Registrant's Registration Statement on Form S-11 dated
May 20, 1982 (Registration No. 2-75938), and as Exhibits 3(a) and 3(b),
respectively, to the Registrant's Registration Statement on Form S-11 dated
November 2, 1982 (Registration No. 2-80123), are hereby incorporated herein by
reference.
(4) Form of Subscription Agreement, previously filed as Exhibit 4(a) to
Amendment No. 2 to the Registrant's Registration Statement on Form S-11 dated
May 20, 1982 (Registration Statement No. 2-75938) and as previously filed as
Exhibit 4(a) to Registrant's Registration Statement on Form S-11 dated
November 2, 1982 (Registration No. 2-80123), and Form of Confirmation regarding
Interests in the Registrant set forth as Exhibit 4.2 to the Registrant's Report
on Form 10-Q for the quarter ended June 30, 1992 (Commission File No. 0-11129)
are incorporated herein by reference.
(16) Letter from Ernst & Young LLP dated September 19, 1995 regarding the
change in the Registrant's certifying accountant previously filed as Exhibit 16
to the Registrant's Report on Form 8-K/A dated October 27, 1995 (Commission
File No. 0-11129) is hereby incorporated herein by reference.
(27) Financial Data Schedule of the Registrant for 1995 is attached hereto.
(b) Reports on Form 8-K: A Current Report on Form 8-K/A dated October 27, 1995,
amending the Current Report on Form 8-K dated September 19, 1995 reporting a
change in the Registrant's certifying accountant, was filed (Commission File
No. 0-11129).
(c) Exhibits: See Item 14(a)(3) above.
(d) Financial Statement Schedules: None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BALCOR PENSION INVESTORS-III
By: /s/Brian D. Parker
-------------------------------------
Brian D. Parker
Senior Vice President, and Chief
Financial Officer (Principal Accounting
and Financial Officer) of Balcor
Mortgage Advisors-II, the General Partner
Date: March 29, 1996
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- ---------------------- ------------------------------------------------
President and Chief Executive
Officer (Principal Executive
Officer) of Balcor Mortgage
/s/Thomas E. Meador Advisors-II, the General Partner March 29, 1996
-------------------- --------------
Thomas E. Meador
Senior Vice President, and Chief
Financial Officer (Principal
Accounting and Financial
Officer) of Balcor Mortgage
/s/Brian D. Parker Advisors-II, the General Partner March 29, 1996
- -------------------- --------------
Brian D. Parker
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants
Report of Independent Auditors
Financial Statements:
Balance Sheets, December 31, 1995 and 1994
Statements of Partners' Capital, for the years ended December 31, 1995, 1994
and 1993
Statements of Income and Expenses, for the years ended December 31, 1995, 1994
and 1993
Statements of Cash Flows, for the years ended December 31, 1995, 1994 and 1993
Notes to Financial Statements
Financial Statement Schedules are omitted for the reason that they are
inapplicable or equivalent information has been included elsewhere herein.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Balcor Pension Investors-III:
We have audited the accompanying balance sheet of Balcor Pension Investors-III
(An Illinois Limited Partnership) as of December 31, 1995 and the related
statements of partners' capital, income and expenses, and cash flows for the
year then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 also 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 audit provides 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 Balcor Pension Investors-III
at December 31, 1995, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
March 27, 1996
REPORT OF INDEPENDENT AUDITORS
To the Partners of
Balcor Pension Investors-III:
We have audited the accompanying balance sheet of Balcor Pension Investors-III
(An Illinois Limited Partnership) as of December 31, 1994 and the related
statements of partners' capital, income and expenses, and cash flows for each
of the two years in the period ended December 31, 1994. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements 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 Balcor Pension Investors-III
at December 31, 1994, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
March 6, 1995
BALCOR PENSION INVESTORS-III
(AN ILLINOIS LIMITED PARTNERSHIP)
BALANCE SHEETS
December 31, 1995 and 1994
ASSETS
1995 1994
------------- -------------
Cash and cash equivalents $ 11,344,948 $ 18,445,509
Cash and cash equivalents - Early
Investment Incentive Fund 302,437 21,171
Escrow deposits 127,004 427,562
Escrow deposits - restricted 899,929
Accounts and accrued interest receivable 222,417 286,756
Prepaid expenses 31,897
Deferred expenses, net of accumulated
amortization of $40,618 in 1995 and
$28,120 in 1994 21,870 34,368
------------- -------------
12,050,573 20,115,295
------------- -------------
Investment in loans receivable:
Loans receivable - wrap-around
and first mortgages 53,030,966 75,491,676
Less:
Loans payable - underlying mortgages 33,761,548 42,548,988
Allowance for potential loan losses 3,943,630 5,013,959
------------- -------------
Net investment in loans receivable 15,325,788 27,928,729
Real estate held for sale 14,214,705 23,801,567
Investment in joint ventures with affiliates 6,483,760 6,023,084
------------- -------------
36,024,253 57,753,380
------------- -------------
$ 48,074,826 $ 77,868,675
============= =============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 101,455 $ 119,483
Due to affiliates 36,011 110,862
Other liablilities, principally real
estate taxes and escrow deposits 534,113 1,541,327
Security deposits 89,848 120,870
Mortgage notes payable 1,666,291 7,153,074
------------- -------------
Total liabilities 2,427,718 9,045,616
------------- -------------
Limited Partners' capital (237,476
Interests issued) 52,908,205 74,843,430
Less Interests held by Early Investment
Incentive Fund (16,090 at December 31,1995
and 10,208 at December 31,1994) (6,040,849) (4,614,610)
------------- -------------
46,867,356 70,228,820
General Partner's deficit (1,220,248) (1,405,761)
------------- -------------
Total partners' capital 45,647,108 68,823,059
------------- -------------
$ 48,074,826 $ 77,868,675
============= =============
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-III
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' CAPITAL
for the years ended December 31, 1995, 1994 and 1993
Partners' Capital (Deficit) Accounts
-------------- -------------- -------------
General Limited
Total Partner Partners
-------------- -------------- -------------
Balance at December 31, 1992 $ 73,140,058 $ (1,386,661) $ 74,526,719
Repurchase of 956 Limited
Partnership Interests (351,782) (351,782)
Cash distributions to:
Limited Partners (A) (4,584,286) (4,584,286)
General Partner (395,792) (395,792)
Net income for the year
ended December 31, 1993 3,141,300 235,598 2,905,702
-------------- -------------- -------------
Balance at December 31, 1993 70,949,498 (1,546,855) 72,496,353
Repurchase of 1,316 Limited
Partnership Interests (434,007) (434,007)
Cash distributions to:
Limited Partners (A) (7,844,967) (7,844,967)
General Partner (346,320) (346,320)
Net income for the year
ended December 31, 1994 6,498,855 487,414 6,011,441
-------------- -------------- -------------
Balance at December 31, 1994 68,823,059 (1,405,761) 70,228,820
Repurchase of 5,882 Limited
Partnership Interests (1,426,239) (1,426,239)
Cash distributions to:
Limited Partners (A) (29,836,901) (29,836,901)
General Partner (455,163) (455,163)
Net income for the year
ended December 31, 1995 8,542,352 640,676 7,901,676
-------------- -------------- -------------
Balance at December 31, 1995 $ 45,647,108 $ (1,220,248) $ 46,867,356
============== ============== =============
(A) Summary of cash distributions paid per Limited Partnership Interest:
1995 1994 1993
-------------- -------------- -------------
First Quarter $ 4.00 $ 5.50 $ 5.00
Second Quarter 29.00 20.85 5.00
Third Quarter 35.94 4.00 5.00
Fourth Quarter 63.18 4.00 5.00
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-III
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF INCOME AND EXPENSES
for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
-------------- -------------- -------------
Income:
Interest on loans receivable $ 7,163,288 $ 10,162,922 $ 10,535,990
Less interest on loans
payable - underlying
mortgages 3,700,302 4,280,261 4,916,217
-------------- -------------- -------------
Net interest income on loans
receivable 3,462,986 5,882,661 5,619,773
Income from operations of
real estate held for sale 1,478,073 804,434 599,785
Participation in income
(loss) of joint ventures
with affiliates 859,887 438,608 (482,783)
Interest on short-term
investments 907,358 543,293 283,425
Participation income 235,395 105,696
Recovery of losses on loans,
real estate and accrued
interest receivable 756,370
-------------- -------------- -------------
Total income 7,464,674 7,904,391 6,125,896
-------------- -------------- -------------
Expenses:
Provision for potential
losses on loans, real
estate and accrued interest
receivable 756,370 600,000 2,720,000
Administrative 706,598 925,378 864,099
-------------- -------------- -------------
Total expenses 1,462,968 1,525,378 3,584,099
-------------- -------------- -------------
Income before gain on sales
of real estate 6,001,706 6,379,013 2,541,797
Gain on sales of real
estate 2,540,646 119,842 599,503
-------------- -------------- -------------
Net income $ 8,542,352 $ 6,498,855 $ 3,141,300
============== ============== =============
Net income allocated to
General Partner $ 640,676 $ 487,414 $ 235,598
============== ============== =============
Net income allocated to
Limited Partners $ 7,901,676 $ 6,011,441 $ 2,905,702
============== ============== =============
Net income per average number
of Limited Partnership
Interests outstanding
(226,389 in 1995, 228,132 in
1994 and 229,084 in 1993) $ 34.90 $ 26.35 $ 12.68
============== ============== =============
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-III
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
-------------- -------------- -------------
Operating activities:
Net income $ 8,542,352 $ 6,498,855 $ 3,141,300
Adjustments to reconcile net
income to net cash provided
by operating activities:
Gain on sales of
real estate (2,540,646) (119,842) (599,503)
Participation in (income)
loss of joint
ventures with
affiliates (859,887) (438,608) 482,783
Recovery of losses on
loans, real estate and
accrued interest
receivable (756,370)
Provision for potential
losses on loans, real
estate and accrued
interest receivable 756,370 600,000 2,720,000
Amortization of deferred
expenses 12,498 12,498 254,853
Accrued interest income
due at maturity (201,260)
Collection of accrued
interest income due
at maturity 449,978
Net change in:
Escrow deposits 300,558 (52,534) 309,617
Escrow deposits -
restricted 899,929 338,709 (300,814)
Accounts and accrued
interest receivable 64,339 203,867 258,361
Prepaid expenses (31,897)
Accounts payable (18,028) (103,000) (628,108)
Due to affiliates (74,851) 48,261 7,298
Other liabilities (1,007,214) (178,291) 352,786
Security deposits (31,022) 47,120 (39,794)
-------------- -------------- -------------
Net cash provided by
operating activities 5,256,131 6,857,035 6,207,497
-------------- -------------- -------------
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-III
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1995, 1994 and 1993
(Continued)
1995 1994 1993
-------------- -------------- -------------
Investing activities:
Capital contributions to
joint venture partners -
affiliates $ (78,147) $ (316,577)
Distributions from joint
venture partners -
affiliates $ 399,211 227,855 4,294
Loan fundings (12,379)
Collection of principal
payments on loans
receivable 13,590,567 11,511,219 2,045,070
Additions to real estate (60,698) (256,770) (107,172)
Proceeds from sales of
real estate 10,856,240 1,200,000 3,736,019
Costs incurred in connection
with sales of real estate (461,794) (49,586) (325,277)
Costs incurred in connection
with real estate acquired
through foreclosure (40,471)
-------------- -------------- -------------
Net cash provided by investing
activities 24,323,526 12,514,100 5,023,978
-------------- -------------- -------------
Financing activities:
Distributions to Limited
Partners (29,836,901) (7,844,967) (4,584,286)
Distributions to General
Partner (455,163) (346,320) (395,792)
(Increase) decrease in cash
and cash equivalents -
Early Investment
Incentive Fund (281,266) 4,612 54,553
Payment of deferred expenses (172,580)
Repurchase of Limited
Partnership Interests (1,426,239) (434,007) (351,782)
Principal payments on
underlying loans payable (987,626) (1,178,094) (1,369,417)
Repayment of mortgage notes
payable (3,545,699) (4,798,550)
Proceeds from issuance of
mortgage note payable 4,298,400
Principal payments on
mortgage notes payable (147,324) (1,283,205) (334,887)
-------------- -------------- -------------
Net cash used in financing
activities (36,680,218) (11,081,981) (7,654,341)
-------------- -------------- -------------
Net change in cash and cash
equivalents (7,100,561) 8,289,154 3,577,134
Cash and cash equivalents at
beginning of year 18,445,509 10,156,355 6,579,221
-------------- -------------- -------------
Cash and cash equivalents
at end of year $ 11,344,948 $ 18,445,509 $ 10,156,355
============== ============== =============
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-III
(An Illinois Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. Nature of the Partnership's Business:
Balcor Pension Investors-III is engaged principally in the operation of
residential and retail real estate and investment in wrap-around and first
mortgage loans located in various markets within the United States.
2. Accounting Policies:
(a) The preparation of the financial statements in conformity with generally
accepted accounting principles requires the General Partner 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 vary from those estimates.
(b) The Partnership records wrap-around mortgage loans at the face amount of
the mortgage instrument which includes the outstanding indebtedness of the
borrower under the terms of the underlying mortgage obligations. The underlying
mortgage obligations are recorded as a reduction of the wrap-around mortgage
loan and the resulting balance represents the Partnership's net advance to the
borrower. The Partnership is responsible for making periodic payments to the
underlying mortgage lenders only to the extent that payments as required by the
wrap-around mortgage agreement are received by the Partnership from the
borrower.
(c) Income on loans is recorded as earned in accordance with the terms of the
related loan agreements. The accrual of interest is discontinued when a loan
becomes ninety days contractually delinquent or sooner when, in the opinion of
the General Partner, an impairment has occurred in the value of the collateral
property securing the loan. Income on non-accrual loans or loans which are
otherwise not performing in accordance with their terms is recorded on a cash
basis.
Various loan agreements provide for participation by the Partnership in
increases in value of the collateral property when the loan is repaid or
refinanced. In addition, certain loan agreements allow the Partnership to
receive a percentage of rental income exceeding a base amount. Participation
income is reflected in the accompanying Statements of Income and Expenses when
received.
Income from operations of real estate held for sale is reflected in the
accompanying Statements of Income and Expenses net of related direct operating
expenses.
(d) Loan losses on mortgage notes receivable are charged to income and an
allowance account is established when the General Partner believes the loan
balance will not be recovered. The General Partner assesses the collectibility
of each loan on a periodic basis through a review of the collateral property
operations, the property value and the borrower's ability to repay the loan.
Upon foreclosure, the loan, net of the allowance, is transferred to real estate
held for sale after the fair value of the property, less costs of disposal is
assessed. Upon the transfer to real estate held for sale, a new basis in the
property is established.
Effective January 1, 1995 the Partnership adopted Statement of Financial
Accounting Standards, No. 121 (SFAS 121), ("Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of"). Under SFAS 121,
the General Partner periodically assesses, but not less than on an annual
basis, the fair value of its real estate properties held for sale. The General
Partner estimates the fair value of its properties by dividing the property's
expected net operating income by a risk adjusted rate of return or by applying
a discounted cash flow analysis both of which consider economic and demographic
conditions in the market. Changes in the property's fair value is recorded by
an adjustment to the property allowance account and is recognized in the income
statement as an increase or decrease through recovery income or a provision for
loss in the period the change in fair value is determined. The General Partner
considers the methods referred to above to result in a reasonable measurement
of a property's fair value, unless other factors affecting the property's value
indicate otherwise.
(e) Investment in joint ventures with affiliates represents the Partnership's
percentage interests, under the equity method of accounting, in joint ventures
with affiliated partnerships. Under the equity method of accounting, the
Partnership records its initial investment at cost and adjusts its investment
account for additional capital contributions, distributions and its share of
income or loss.
(f) Deferred expenses consist of leasing commissions which are amortized over
the life of each respective lease, and financing fees which are amortized over
the terms of the respective loan agreements.
(g) Revenue is recognized on an accrual basis in accordance with generally
accepted accounting principles. Income from operating leases with significant
abatements and/or scheduled rent increases is recognized on a straight line
basis over the respective lease term. Service income includes reimbursements
from operating costs such as real estate taxes, maintenance and insurance and
is recognized as revenue in the period the applicable costs are incurred.
(h) The Financial Accounting Standard Board's Statement No. 107, "Disclosures
About Fair Value of Financial Instruments", requires disclosure of fair value
information about financial instruments for which it is practicable to estimate
that value. Since quoted market prices are not available for the Partnership's
financial instruments, fair values have been based on estimates using present
value techniques. These techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, may not be realized in
immediate settlement of the instrument. Statement No. 107 does not apply to all
balance sheet items and excludes certain financial instruments and all
non-financial instruments such as real estate and investment in joint ventures
from its disclosure requirements.
(i) The Partnership records repurchases of Interests by the Early Investment
Incentive Fund as a reduction of Limited Partners' Capital (see Note 3 of Notes
to Financial Statements). Cash and cash equivalents not yet utilized to
repurchase Interests, but which are part of the Early Investment Incentive
Fund, are classified as restricted assets of the Partnership.
(j) Cash and cash equivalents include all unrestricted, highly liquid
investments with an original maturity of three months or less. Cash and cash
equivalents are held or invested primarily in one issuer of commercial paper.
(k) The Partnership is not liable for Federal income taxes as each partner
recognizes his proportionate share of the Partnership income or loss in his tax
return; therefore, no provision for income taxes is made in the financial
statements of the Partnership.
(l) Mortgage servicing fees have been reclassified and are included in
administrative expenses during 1995. This reclassification has also been made
to the previously reported 1994 and 1993 financial statements to conform with
the classification used in 1995. This reclassification has not changed the 1994
and 1993 results.
3. Partnership Agreement:
The Partnership was organized on January 22, 1982. The Partnership Agreement
provides for Balcor Mortgage Advisors-II to be the General Partner and for the
admission of Limited Partners through the sale of Limited Partnership Interests
at $500 per Interest, 237,476 of which were sold on or prior to November 10,
1982, the termination date of the offering.
For financial statement purposes, profits and losses are allocated 92.5% to the
Limited Partners, of which 2.5% relates to the Early Investment Incentive Fund,
and 7.5% to the General Partner.
To the extent that Cash Flow is distributed, distributions will be made as
follows: (i) 90% of such Cash Flow will be distributed to the Limited Partners,
(ii) 7.5% of such Cash Flow will be distributed to the General Partner, and
(iii) 2.5% of such Cash Flow will be set aside in a separate account for
repurchase of Interests and for payment on dissolution of the Partnership to
investors who subscribed prior to December 31, 1982 ("Early Investors") if
necessary for them to receive an amount equal to their Original Capital plus a
specified cumulative return based on the date of investment. Amounts, if any,
remaining in the account after the Early Investors have received their
cumulative return will be distributed 90% to all Limited Partners and 10% to
the General Partner.
Amounts placed in the Early Investment Incentive Fund may, at the sole
discretion of the General Partner and subject to certain limitations as set
forth in the Partnership Agreement, be used to repurchase Interests from
existing Limited Partners. During 1995, 5,882 Interests were repurchased at a
cost of $1,426,239. All repurchases of Interests have been made at 95% of the
then current valuation of such Limited Partnership Interests at the previous
quarter end less any distributions made after the previous quarter end.
Distributions of Cash Flow and Mortgage Reductions pertaining to any
repurchased Interests are paid to the Early Investment Incentive Fund. To the
extent that amounts in the Early Investment Incentive Fund are not utilized to
repurchase Interests, such amounts are invested in short-term interest-bearing
instruments with earnings thereon credited to this account.
4. Investment in Loans Receivable:
Loans receivable and loans payable at December 31, 1995 consisted of the
following:
Loans Receivable
-------------------------------------------------
Current Current Original Final
Mortgage Monthly Interest Funding Maturity
Property Balances(A) Payments Rate Date Date
- -------------- ----------- -------- -------- ------- ---------
Wrap-around Mortgages:
Apartments:
Carmel on
Providence(B) $ 3,200,000 $ 34,333 12.875% 1982 1997
Pepper Square 3,300,000 27,500 10.00 1989 1996
Office Buildings:
Bannockburn
Executive Plaza
(B)(C) 8,305,966 75,750 9.00 1982 1997
Seafirst Financial
Center 32,425,000 268,955 9.95 1982 1997
Corporate Campus I 5,800,000 44,467 9.20 1988 1998
-----------
Total $53,030,966
===========
Loans Payable
---------------------------------------
Underlying Current Current Due
Mortgage Monthly Interest Date
Property Balances Payments Rate Loan
- -------------- ----------- -------- -------- -------
Apartments:
Carmel on Providence $1,243,826 $17,777 9.50% 1997
Pepper Square 1,827,184 19,760 9.25 1996
Office Buildings:
Bannockburn
Executive Plaza 3,485,138 44,677 9.75 1997
Seafirst Financial
Center 24,601,470 231,196 9.75 1997
Corporate Campus I 2,603,930 29,934 9.50 1998
-----------
Total $33,761,548
===========
(A) All loans are wrap-around mortgage loans.
(B) This loan is on non-accrual status; therefore income is recorded only as
cash payments are received from the borrower.
(C) During February 1995, a plan of reorganization was confirmed by the
Bankruptcy Court effective March 1995 which extended the maturity date of this
loan and the underlying mortgage loan payable to December 1997. This loan will
continue to bear interest at 14.5% per annum with a pay rate of 9% per annum
based on the outstanding principal. Unpaid interest will be waived by the
Partnership if this loan is repaid on or prior to maturity assuming no previous
uncured defaults. In addition, the borrower was required to pay $232,031
directly to the holder of the underlying loan. The borrower is also required to
remit all excess cash flow from property operations on a monthly basis directly
to the holder of the underlying loan to further reduce the principal balance of
the loan. Excess cash flow of $189,628 was remitted to the holder of the
underlying loan during 1995.
Loans which have been classified as non-accrual as a result of delinquency or
other noncompliance with terms of loan agreements aggregated $11,505,966 and
$11,927,625 at December 31, 1995 and 1994, respectively.
Under certain circumstances, the General Partner has entered into negotiations
with borrowers which resulted in a reduction of interest rates, periodic
payments or the modification of other loan terms. Loans whose monetary terms
have been restructured amounted to $38,225,000 at December 31, 1995 and 1994.
Non-accrual loans and loans which have been restructured are hereinafter
referred to as impaired loans.
Net interest income relating to all of the impaired loans except for The Woods
Apartments loan would have been approximately $2,025,000 in 1995, $1,915,000 in
1994 and $3,787,000 in 1993. Net interest income from impaired loans included
in the accompanying Statements of Income and Expenses amounted to approximately
$2,001,000 ($2,002,000 cash basis) in 1995, $1,958,000 ($1,877,000 cash basis)
in 1994 and $2,375,000 in 1993.
The Woods Apartments loan was placed on non-accrual status in 1988. During May
1992, an extension of the maturity of the loan receivable and underlying loan
was completed. The maturity dates were extended to June 1993 and July 1993,
respectively. The borrower failed to repay either of the loans and the
Partnership obtained title to the property through a non-judicial foreclosure
in July 1994. The Partnership received net interest income of approximately
$653,000 and $301,000 in 1994 and 1993, respectively.
Impaired loans totaled $49,730,966 and $50,152,625 at December 31, 1995 and
1994, respectively. Impaired loans of $41,425,000 had related allowances for
losses of $3,943,630, and the $8,305,966 impaired loan had no allowance for
losses in 1995. The impaired loan of $38,225,000 had a related allowance for
losses of $3,654,000 in 1994 and $11,927,625 of impaired loans had no
allowances for losses in 1994.
The average recorded investments in impaired loans during the years ended
December 31, 1995 and December 31, 1994 were approximately $49,942,000 and
$60,136,000, respectively.
5. Allowances for Losses on Loans and Real Estate Held for Sale:
Activity recorded in the allowances for losses on loans and real estate held
for sale during the three years ended December 31, 1995 is described in the
table below.
1995 1994 1993
------------ ------------- ------------
Loans:
Balance at beginning of
year $5,013,959 $ 8,129,365 $ 8,129,365
Recovery of provision
previously charged
to income (756,370) None None
Provision charged to
income 756,370 600,000 2,000,000
Direct write-off
of loans against
allowance (1,070,329) (3,715,406) (2,000,000)
------------- ------------ ------------
Balance at the end of
the year $3,943,630 $ 5,013,959 $ 8,129,365
============= ============ ============
Real Estate Held for Sale:
Balance at beginning of
year None None None
Provision charged to
income None None $ 720,000
Direct write-off of real
estate held for sale
against allowance None None (720,000)
------------ ------------- ------------
Balance at the end of
the year None None None
============ ============= ============
6. Mortgage Notes Payable:
The mortgage notes payable at December 31, 1995 and 1994 consisted of the
following:
Carrying Carrying
Amounts Amounts
of Notes of Notes Current Current Final Estimated
at at Monthly Interest Maturity Balloon
Property 12/31/95 12/31/94 Payments Rate Date Payment
- ---------------- ---------- --------- -------- -------- ------ ---------
Apartments:
Candlewyck (A) $1,313,768
1,065,228
1,274,175
Shopping Centers:
Crossings (B) 1,793,760
Orchards $1,666,291 1,706,143 $16,334 9.25% 1997 $1,587,000
---------- ----------
Total $1,666,291 $7,153,074
========== ==========
(A) In August 1995, this property was sold. See Note 12 of Notes to
Financial Statements for additional information.
(B) In January 1995, this mortgage note payable was assumed by the purchaser
in connection with the sale of this property. See Note 12 of Notes to
Financial Statements for additional information.
The Partnership's loan described above requires current monthly payments of
principal and interest.
Real estate held for sale with an aggregate carrying value of $6,691,000 at
December 31, 1995 was pledged as collateral for repayment of the mortgage note.
During the years ended December 31, 1995, 1994 and 1993, the Partnership
incurred interest expense on mortgage notes payable of $463,817, $780,047, and
$1,531,785, respectively, and paid interest of $463,817, $780,047, and
$1,526,182, respectively.
Future annual maturities of the above mortgage note payable are approximately
as follows:
1996 $ 44,000
1997 1,622,000
7. Management Agreements:
As of December 31, 1995, both properties owned by the Partnership are under
management agreements with a third-party management company. These management
agreements provide for annual fees of 5% of gross operating receipts for the
residential property and 3% to 6% of gross operating receipts for the
commercial property.
8. Transactions with Affiliates:
Fees and expenses paid and payable by the Partnership to affiliates are:
Year Ended Year Ended Year Ended
12/31/95 12/31/94 12/31/93
-------------- -------------- --------------
Paid Payable Paid Payable Paid Payable
------ ------- ------ ------- ------ -------
Mortgage servicing fees $ 52,651 $ 2,392 $ 88,396 $ 4,839 $104,581 $ 8,437
Property management fees None None 238,090 None 333,195 18,262
Reimbursement of expenses
to the General Partner
at cost:
Accounting 61,773 8,041 74,803 30,698 71,203 5,880
Data processing 23,072 2,369 41,023 9,216 41,726 10,010
Investor communica-
tion 10,247 None 27,664 8,893 20,499 1,693
Legal 20,531 2,751 16,094 9,316 14,911 1,231
Portfolio management 116,877 20,400 84,441 38,103 62,738 16,384
Other 12,555 58 26,381 9,797 8,518 704
The Partnership participates in an insurance deductible program with other
affiliated partnerships in which the program pays claims up to the amount of
the deductible under the master insurance policies for its properties. The
program is administered by an affiliate of the General Partner who receives no
fee for administering the program; however, the General Partner is reimbursed
for program expenses. The Partnership paid premiums to the deductible insurance
program of $32,357, $46,538, and $31,861 for 1995, 1994 and 1993, respectively.
Allegiance Realty Group, Inc., an affiliate of the General Partner, managed all
of the Partnership's properties until the affiliate was sold to a third-party
in November 1994.
9. Investments in Joint Ventures with Affiliates:
In 1990 and 1991, the Partnership and certain affiliates acquired title to the
Brookhollow/Stemmons and Perimeter 400 Center office buildings, respectively.
Profits and losses, all capital contributions and distributions are allocated
in accordance with the participants' original funding percentages. The
Partnership's sharing percentages for the Brookhollow/Stemmons and Perimeter
400 Center office buildings are 27.5% and 12.68%, respectively. During 1993, the
Partnership recognized a loss of $771,873 as its share of the reduction in the
carrying values of the properties. During 1995, the Partnership recognized
$331,822 as its share of the recoveries of provisions related to the change in
the estimates of the fair value of the properties. These amounts are included
in the Partnership's participation in income (loss) of joint ventures with
affiliates. In addition, during 1995, 1994, and 1993 the Partnership received
distributions from these joint ventures totaling $399,111, $227,855, and
$4,294, respectively, and made contributions of $78,147 and $316,577 in 1994
and 1993, respectively.
The following information has been summarized from the financial statements of
the joint ventures:
1995 1994 1993
----------- ---------- ------------
Net investment in
real estate as
of December 31 $36,015,862 $34,174,946 $34,008,955
Total liabilities
as of December 31 451,150 391,765 510,366
Total income 7,588,538 7,319,405 6,834,797
Net income before
recovery (provision) 3,052,398 2,733,148 1,295,097
Recovery (provision)
for potential loss 1,565,000 None (3,165,000)
Net income (loss) 4,617,398 2,733,148 (1,869,903)
10. Real Estate Held for Sale:
The Partnership acquired The Woods Apartments through foreclosure in July 1994.
The Partnership recorded the cost of the property at $7,198,171. This amount
represented the outstanding loan balance plus accrued interest receivable. In
1994 the Partnership increased the basis of The Woods Apartments by $8,066 for
certain receivables, escrows and costs incurred in connection with the
foreclosure. At the date of foreclosure, the property was transferred to real
estate held for sale at its fair value, net of allowances previously recorded.
11. Discounted Prepayments of Loans Receivable:
(a) In August 1995, the borrower of the $16,750,000 Colony Apartments
wrap-around loan repaid the loan. The Partnership received proceeds of
approximately $8,301,516 and the borrower repaid the $7,378,155 underlying
mortgage loan. The remaining wrap-around loan receivable balance, net of the
underlying mortgage payable balance, were written off against the previously
established allowance for losses in connection with the prepayment of the loan.
(b) In June 1994, the borrower of the $12,767,949 Continental Park wrap-around
loan prepaid the loan at a discount. The Partnership received proceeds of
approximately $4,873,085 and the borrower repaid the $4,143,890 underlying
mortgage loan. The remaining wrap-around loan receivable balance, net of the
underlying mortgage payable balance, and escrow liabilities of $35,568 were
written off against the previously established allowance for potential loan
losses in connection with the prepayment of the loan.
12. Sale of Real Estate:
The Partnership sold the Crossings Shopping Center and Candlewyck Apartments
during 1995, the Orchards Office Building during 1994, and the Villa Verde
Apartments, Riverview Office Building and vacant land adjacent to the Orchards
Shopping Center during 1993 in separate all cash sales for $12,650,000,
$1,200,000 and $8,025,000, respectively. From the proceeds of the Candlewyck
Apartments sale, the Partnership paid $3,545,699 to the third party mortgage
holders in full satisfaction of the property's mortgage loans. From the
proceeds of the 1994 Orchards Office Building sale, the Partnership repaid
$1,000,000 of the first mortgage loan. The Partnership continues to own the
Orchards Shopping Center. The purchasers of the Crossings Shopping Center and
the Villa Verde Apartments took title subject to the existing first mortgage
loans which had balances of $1,793,760 and $4,288,981, respectively. The
carrying value of the real estate sold during 1995, 1994 and 1993 totaled
$9,647,560, $1,030,572 and $7,100,220, respectively. For financial statement
purposes, the Partnership recognized net gains of $2,540,646, $119,842 and
$599,503 from the sale of the real estate during 1995, 1994 and 1993,
respectively.
13. Contingency:
The Partnership is currently involved in a lawsuit whereby the Partnership, the
General Partner and certain affiliates have been named as defendants alleging
certain federal securities law violations with regard to the adequacy and
accuracy of disclosures of information concerning the offering of the Limited
Partnership Interests of the Partnership. The defendants continue to vigorously
contest this action. While a plaintiff class has been certified, no
determination of the merits have been made. It is not determinable at this time
whether or not an unfavorable decision in this action would have a material
adverse impact on the Partnership. Management of each of the defendants
believes that they have meritorious defenses to contest the claims.
14. Fair Value of Financial Instruments:
The carrying amounts and fair values of the Partnership's financial instruments
at December 31, 1995 are as follows:
The carrying value of cash and cash equivalents, accounts and accrued interest
receivable and accounts and accrued interest payable approximates fair value.
Based on borrowing rates available to the Partnership at the end of 1995 for
loans receivable and mortgage loans with similar terms and maturities, the fair
value of the loans receivable and mortgage notes payable approximates the
carrying value.
The fair value for the Partnership's investments in loans receivable and
mortgage notes payable was estimated using discounted cash flow analyses. The
discount rates were based upon rates at the end of 1995 comparable to those the
Partnership could receive or charge in the commercial real estate lending
market with terms and maturities comparable to the Partnership's loans
receivable and mortgage notes it presently holds.
15. Subsequent Event:
In January 1996, the Partnership paid $6,402,354 to Limited Partners
representing the regular quarterly distribution of available Cash Flow of $4.00
per Interest for the fourth quarter of 1995 and a special distribution of
$22.96 per Interest representing Mortgage Reductions received primarily from
the Rivergate loan repayment.