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
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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
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Commission file number 0-11699
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BALCOR PENSION INVESTORS-IV
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(Exact name of registrant as specified in its charter)
Illinois 36-3202727
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2355 Waukegan Road
Bannockburn, Illinois 60015
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 267-1600
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Interests
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(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
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Balcor Pension Investors-IV (the "Registrant") is a limited partnership formed
in 1982 under the laws of the State of Illinois. The Registrant raised
$214,803,000 from sales of Limited Partnership Interests. The Registrant's
operations have consisted of servicing wrap-around mortgage loans and, to a
lesser extent, servicing other junior mortgage loans and first mortgage loans.
The Registrant also currently operates seven properties acquired through
foreclosure and holds a minority joint venture interest in one additional
property. All financial information included in this report relates to this
industry segment.
The Registrant originally funded thirty-eight loans. A portion of Mortgage
Reductions generated by repayments was reinvested in four additional loans and
a portion was used to make special distributions to Limited Partners. The
remainder was added to working capital reserves. As a result of the repayments,
foreclosures and write-offs of forty-one loans, the Registrant has one loan in
its portfolio as of December 31, 1995. Fourteen properties were acquired
through foreclosure and one loan was reclassified to an investment in joint
venture with affiliates. The Registrant has since disposed of seven of these
properties and has seven properties and an investment in joint venture 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.
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 properties. 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.
During September 1995, the Registrant received a discounted prepayment of the
Colonial Coach Mobile Home Park first mortgage loan. See Item 7. Liquidity and
Capital Resources for additional information.
During December 1995, the Registrant repaid the $618,684 mortgage note payable
on the Glendale Fashion Center. 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-III, 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
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As of December 31, 1995, the Registrant owns the seven properties described
below:
Location Description of Property
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Chapel Hill, North Carolina Colony Apartments: a 197-unit apartment complex
located on approximately 13.6 acres.
Tampa, Florida Del Lago Apartments: a 193-unit apartment complex
located on approximately 12 acres.
Glendale, California Glendale Fashion Center: a shopping center
containing 294,360 square feet located on
approximately 6.7 acres.
Grand Rapids, Michigan North Kent Mall: a shopping center containing
167,401 square feet located on approximately 19
acres.
St. Petersburg, Florida Palm View Apartments: a 304-unit apartment
complex located on approximately 22 acres.
Pompano Beach, Florida Pelican Pointe Apartments: a 300-unit apartment
complex located on approximately 13 acres.
Evansville, Indiana Regency Club Apartments: a 232-unit apartment
complex located on approximately 18 acres.
Certain of these properties are held subject to various mortgage loans.
The Registrant also holds a minority joint venture interest in the
Perimeter 400 Center Office Building located in Fulton County, Georgia. See
Note 7 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
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Williams class action
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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
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No matters were submitted to a vote of the Limited Partners of the Registrant
during 1995.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
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Matters
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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 31,624.
Item 6. Selected Financial Data
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Year ended December 31,
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1995 1994 1993 1992 1991
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Total income $3,754,827 $3,546,138 $5,515,124 $2,531,773 $4,267,207
Recovery of losses
on loans None None 1,277,805 None None
Provision for losses
on loans, real
estate and
accrued interest
receivable 1,414,270 None 1,277,805 5,750,000 8,969,116
Income (loss) before
net gain on sales
of assets 1,339,538 2,241,206 2,761,569 (4,599,843) (6,022,076)
Net income (loss) 1,339,538 3,411,752 2,885,608 (4,599,843) (6,022,076)
Net income (loss)
per average number
of Limited Part-
nership Interests
outstanding 3.10 7.84 6.58 (10.44) (13.51)
Total assets 52,279,629 61,470,589 67,655,261 70,105,484 80,000,225
Mortgage notes
payable 10,419,008 11,316,222 14,410,060 11,975,262 13,095,811
Distributions per
Limited Partner-
ship Interest(A) 21.13 14.05 16.75 8.25 70.50
(A) These amounts include distributions of original capital of $6.13, $8.55,
$15.00 and $54.00 per Limited Partnership Interest for the years 1995, 1994,
1993 and 1991, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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Operations
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Summary of Operations
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Balcor Pension Investors-IV (the "Partnership") recognized a provision of
$1,344,000 related to the Glendale Fashion Center during 1995, which was the
primary reason for the decrease in net income during 1995 as compared to 1994.
In addition, the Partnership recognized a gain on the sale of the Republic Park
Office Building during 1994 which further contributed to the decrease in net
income during 1995 as compared to 1994 and was the primary reason for the
increase in net income during 1994 as compared to 1993. Participation income
received in connection with the 1993 repayment of the Lantana Cascades loan
partially offset the increase during 1994 as compared to 1993. Further
discussion of the Partnership's operations is summarized below.
1995 Compared to 1994
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Amounts received from the discounted repayment of a residual note related to
the Independence Green loan prepayment and from the release of the
Partnership's interest in the three remaining Oppenheimer hotels were
recognized as interest income during 1994 and were the primary reason for the
decrease in interest income on loans receivable during 1995 as compared to
1994.
The Partnership has one loan on non-accrual status at December 31, 1995 which
is collateralized by the Stonehaven South Apartments. For non-accrual loans,
income is recorded only as cash payments are received from the borrowers. The
funds advanced by the Partnership for this non-accrual loan are approximately
$2,800,000, representing approximately 1.46% of original funds advanced.
During 1995, the Partnership received cash payments of interest income of
approximately $111,000 on this loan. Under the terms of the original loan
agreement, the Partnership would have received approximately $375,000 of
interest income during 1995.
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(c) 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 a provision of
$70,270 related to the Colonial Coach loan during 1995 and wrote-off allowances
of $320,270 in connection with the prepayment of the loan at a discount. In
addition, during 1995, the Partnership recognized a provision of $1,344,000
related to the Glendale Fashion Center to provide for the change in the
estimate of the fair value of this property. The Partnership did not recognize
any provisions during 1994 related to its loans or real estate held for sale.
Participation in income of joint venture with affiliates represents the
Partnership's 15.37% share of the operations of the Perimeter 400 Center Office
Building. During 1995, the Partnership also recognized $102,211 as its share of
the recovery of a provision related to the change in the estimate of the fair
value of this property. As a result, participation in income of joint venture
with affiliates increased during 1995 as compared to 1994.
The Partnership's remaining loan bears interest at a contractually-fixed
interest rate. This loan also provides for additional interest in the form of a
participation, consisting of a share in the capital appreciation of the
property collateralizing 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 1995 in connection with the Stonehaven South Apartments
loan. There was no participation income received in 1994.
In April 1995, the Partnership received insurance proceeds of $710,155 related
to earthquake damage incurred at the Glendale Fashion Center which has been
recognized as other income.
Legal fees incurred in connection with the foreclosures of Glendale Fashion
Center and North Kent Mall during 1994 were the primary reason for the decrease
in administrative expenses in 1995 as compared to 1994.
1994 Compared to 1993
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The foreclosures of the North Kent Mall and the Glendale Fashion Center in
January and March 1994, respectively, and the repayment of the Lantana Cascades
Mobile Home Park loan in October 1993 were the primary reasons for the decrease
in net interest income on loans receivable during 1994 as compared to 1993.
Amounts received from the discounted repayment of a residual note related to
the Independence Green loan prepayment and from the release of the
Partnership's interest in the three remaining Oppenheimer hotels were
recognized as interest income during 1994 and partially offset the above
decrease.
The Partnership had one loan on non-accrual status at December 31, 1994, which
is collateralized by the Stonehaven South Apartments. During 1994, the
Partnership received cash payments of interest income of approximately $115,000
on this loan. Under the terms of the original loan agreement, the Partnership
would have received approximately $375,000 of interest income during 1994.
The Partnership recognized a recovery of $1,277,805 in 1993 related to its
loans. In addition, during 1993, the Partnership recognized a provision of
$1,277,805 related to the Partnership's real estate held for sale to provide
for changes in the estimate of the fair value of the Glendale Fashion Center.
Operations of real estate held for sale represent the net operations of those
properties acquired by the Partnership through foreclosure. At December 31,
1994, the Partnership was operating seven properties. Original funds advanced
by the Partnership totaled approximately $30,200,000 for these seven real
estate investments. The Partnership acquired the North Kent Mall in January
1994 and the Glendale Fashion Center in March 1994, which generated income.
Operations improved at the Palm View Apartments due to increased occupancy
resulting from the completion of exterior painting and other improvements at
the property during 1993. The Partnership completed a major repair program at
the Colony Apartments during 1993 which also resulted in improved occupancy and
overall operations for 1994. Rental income increased at the Pelican Pointe
Apartments due to increased rental rates. Interest expense decreased at the
Pelican Pointe and Del Lago apartment complexes due to the repayment of the
mortgage notes. The majority of the improvement in operations at the Pelican
Pointe Apartments, however, was offset by the completion of exterior painting
during the fourth quarter of 1994. Finally, the Shadows Apartments and the
Republic Park Office Building, which were generating income, and the 240 E.
Ontario Office Building, which operated at a loss, were sold in April 1993,
February 1994, and June 1993, respectively. The combined effect of these events
resulted in an increase in income from the operations of the Partnership's
properties during 1994 as compared to 1993.
Participation in income (loss) of joint venture with affiliates represents the
Partnership's 15.37% share of the operations of the Perimeter 400 Center Office
Building. The Partnership incurred significant leasing costs at the property
during 1993 which resulted in higher occupancy levels and improved operations
at the property during 1994. As a result, the Partnership recognized a
participation in income of joint venture with affiliates during 1994 as
compared to a participation in loss during 1993.
Participation income was received during 1993 in connection with the Lantana
Cascades loan repayment.
As a result of higher average cash balances available for investment and higher
interest rates earned on short-term investments, interest income on short-term
investments increased during 1994 as compared to 1993.
Decreased legal fees incurred in connection with the loans on non-accrual
status and lower data processing costs caused administrative expenses to
decrease during 1994 as compared to 1993. This decrease was partially offset by
an increase in accounting and portfolio management fees during 1994 as compared
to 1993.
During 1994, the Partnership recognized a gain of $1,170,546 on the sale of the
Republic Park Office Building. During 1993, the Partnership recognized a net
gain of $124,039 on the sales of the Shadows Apartments, the 240 E. Ontario
Office Building and the land related to the University Office Building.
Liquidity and Capital Resources
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The cash position of the Partnership decreased as of December 31, 1995 when
compared to December 31, 1994 primarily due to the special distributions made
to Limited Partners in July and October 1995. The Partnership received cash
flow from its operating activities. Operating cash flow of approximately
$1,000,000 was generated from interest income earned on its investment in loans
receivable and short-term interest bearing instruments and cash flow generated
by the Partnership's properties held for sale, net of administrative expenses.
The receipt of approximately $710,000 of insurance proceeds related to
earthquake damage incurred at the Glendale Fashion Center also contributed to
the cash flow from operating activities. The Partnership received funds of
approximately $850,000 from investing activities relating primarily to the
prepayment of the Colonial Coach Mobile Home Park first mortgage loan. The
Partnership used cash to fund its financing activities which consisted
primarily of the payment of distributions totaling approximately $8,600,000 to
the Limited Partners and the General Partner, repurchases of Limited
Partnership Interests at a cost of approximately $730,000, the repayment of the
$618,684 Glendale Fashion Center mortgage note payable and the payment of
principal of approximately $279,000 on the mortgage notes payable.
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. A deficit is
considered to be significant if it exceeds $250,000 annually or 20% of the
property's rental and service income. 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. The Del Lago, Pelican Pointe and Regency Club apartment complexes do
not have underlying debt. During 1995, six of the Partnership's seven
properties generated positive cash flow and during 1994, all seven properties
generated positive cash flow. The Perimeter 400 Office Building, a property in
which the Partnership holds a minority joint venture interest, also generated
positive cash flow during 1995 and 1994.
The Glendale Fashion Center operated at a significant cash flow deficit during
1995 and at positive cash flow during 1994. The Partnership acquired the Center
through foreclosure in March 1994. The current occupancy level is 6%. The
Partnership's current strategy is to market the property for sale in 1996 as a
redevelopment project. The Partnership acquired North Kent Mall through
foreclosure in January 1994 and is in the process of completing the upgrading
and repositioning of the property in its market for future sale. The current
occupancy level of this Mall is 58%. As of December 31, 1995, the occupancy
rates of the Partnership's residential properties ranged from 96% to 98% except
for the Del Lago and Regency Club apartment complexes which had occupancy rates
of 90% and 88%, 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 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 properties. 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 the borrower may seek prepayment of the
Partnership's loan whereas rising interest rates decrease the yields on the
loan and make prepayment less likely.
In September 1995 the Partnership and an affiliated partnership (together, the
"Participants") accepted a discounted prepayment of the Colonial Coach mobile
home park loan receivable due to the diminished value of the property. The
Atlanta mobile home park market experienced softness due to slower industrial
job growth and the availability of cheap land in the west and south submarkets
of Atlanta. This resulted in declining net operating income at the property.
The Partnership received $927,080 representing its share of proceeds.
Certain of the Partnership's properties held for sale are owned through the use
of third-party mortgage loan financing and, therefore, the Partnership is
subject to the financial obligations required by such loans. See Note 6 of
Notes to Financial Statements for information concerning outstanding balances,
maturity dates, interest rates, and other terms related to each of these
mortgage loans. The Partnership has only one loan maturing, a mortgage loan of
approximately $2,073,000 collateralized by the North Kent Mall, which matures
within the next two years. The Partnership is currently reviewing its options
and may use cash reserves to repay the mortgage loan at maturity or sell the
property to satisfy the obligation.
During December 1995, the Partnership used a portion of its cash reserves to
repay the $618,684 Glendale Fashion Center first mortgage loan.
The Partnership made four distributions totaling $21.13, $14.05, and $16.75 per
interest in each of 1995, 1994, and 1993, respectively. See Statement of
Partner's Capital for additional information. Distributions were comprised of
$5.00 of Cash Flow and $16.13 of Mortgage Reductions in 1995, $5.50 of Cash
Flow and $8.55 of Mortgage Reductions in 1994 and $1.75 of Cash Flow and $15.00
of Mortgage Reductions in 1993. The distributions of Mortgage Reductions in
1995 resulted from prior loan repayments and property sales. The distributions
of Mortgage Reductions in 1994 resulted from the repayment of the Lantana
Cascades loan, the sale of the land related to the University Office Building
and the sale of the Republic Park Office Building. The distributions of
Mortgage Reductions in 1993 resulted from the prepayment of The Bluffs loan,
the sale of the Haystack Apartments and the refinancing of the Colony
Apartments. Cash Flow distributions decreased in 1995 from 1994 and increased
in 1994 from 1993 due to the cash flow requirements of the Partnership.
In January 1996, the Partnership paid a distribution of $429,606 ($1.00 per
Interest) to the holders of Limited Partnership Interests representing the
regular quarterly distribution of Cash Flow for the fourth quarter of 1995. To
date, Limited Partners have received cash distributions totaling $573.23 per
$500 Interest. Of this amount, $322.10 represents Cash Flow from operations and
$251.13 represents a return of Original Capital. In January 1996, the
Partnership also paid $35,801 to the General Partner as its distributive share
of Cash Flow distributed for the fourth quarter of 1995 and made a contribution
to the Early Investment Incentive Fund of $11,934.
The Partnership expects to continue making quarterly cash distributions;
however, the level of such future distributions will be dependent upon the cash
flow generated by the receipt of mortgage payments and operations of the
Partnership's properties held for sale, less administrative expenses. The
General Partner believes the Partnership has retained an appropriate amount of
working capital to meet current cash or liquidity requirements which may occur.
During 1995 the General Partner used amounts placed in the Early Investment
Incentive Fund to repurchase 5,932 Interests from Limited Partners at a total
cost of $731,709.
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 sales 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 Supplementary Data
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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
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Financial Disclosure
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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
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(a) Neither the Registrant nor Balcor Mortgage Advisors-III, its General
Partner, has a Board of Directors.
(b, c & e) The names, ages and business experience of the executive officers
and significant employees of the General Partner of the Registrant are as
follows:
TITLE OFFICERS
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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 9 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-III and its officers and partners own as a group
the following Limited Partnership Interests of the Registrant:
Amount
Beneficially
Title of Class Owned Percent of Class
-------------- ------------- ----------------
Limited Partnership 20 Interests Less than 1%
Interests
Relatives and affiliates of the partners and officers of the General Partner do
not own any additional Interests.
(c) The Registrant is not aware of any arrangements, the operations 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 profit and
losses.
See Note 9 of Notes to Financial Statements for additional 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 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 Amended and
Restated Certificate of Limited Partnership, previously filed as Exhibits 3(a)
and 3(b) to Amendment No. 2 to the Registrant's Registration Statement on
Form S-11 dated February 23, 1983 (Registration No. 2-80287) and to the
Registrant's Registration Statement dated April 8, 1983 (Registration No.
2-82952), are incorporated herein by reference.
(4) Form of Confirmation regarding Interests in the Registrant set forth as
Exhibit 4 to the Registrant's Report on Form 10-Q for the quarter ended
June 30, 1992 (Commission File No. 0-11699) is incorporated herein by
reference.
(10) Agreement of Sale relating to the sale of Republic Park One Office
Building, Aurora, Colorado, previously filed as Exhibit (2) to the Registrant's
Current Report on Form 8-K dated February 2, 1994 is 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. 0-11699) 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. 0-11699).
(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-IV
By: /s/Brian D. Parker
----------------------------------
Brian D. Parker
Senior Vice President, and Chief
Financial Officer (Principal Accounting
and Financial Officer) of Balcor Mortgage
Advisors-III, 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
Advisors-III, the General
/s/Thomas E. Meador 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-III, 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
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Balcor Pension Investors-IV
We have audited the accompanying balance sheet of Balcor Pension Investors-IV
(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 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-IV 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-IV
We have audited the accompanying balance sheet of Balcor Pension Investors-IV
(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-IV 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-IV
(AN ILLINOIS LIMITED PARTNERSHIP)
BALANCE SHEETS
December 31, 1995 AND 1994
ASSETS
1995 1994
------------- --------------
Cash and cash equivalents $ 4,220,385 $ 11,860,415
Cash and cash equivalents - Early
Investment Incentive Fund 148,230 157,547
Escrow deposits 838,807 771,879
Accounts and accrued interest receivable 230,107 99,115
Prepaid expenses 144,818 19,901
Deferred expenses, net of accumulated
amortization of $58,586 in 1995 and
$36,058 in 1994 124,107 146,635
------------- --------------
5,706,454 13,055,492
------------- --------------
Investment in loans receivable:
Loans receivable - first mortgages 1,657,786 3,037,096
Less:
Allowance for potential loan loss 250,000
------------- --------------
Net investment in loans receivable 1,657,786 2,787,096
Real estate held for sale (net of allowance
of $2,621,805 in 1995 and $1,277,805 in
1994) 40,692,114 41,518,106
Investment in joint venture with affiliates 4,223,275 4,109,895
------------- --------------
46,573,175 48,415,097
------------- --------------
$ 52,279,629 $ 61,470,589
============= ==============
LIABILITIES AND PARTNERS' CAPITAL
Accounts and accrued real estate taxes
payable $ 535,761 $ 747,113
Due to affiliates 44,376 124,148
Other liabilities (principally security
deposits) 288,363 289,249
Mortgage notes payable 10,419,008 11,316,222
------------- --------------
Total liabilities 11,287,508 12,476,732
------------- --------------
Limited Partners' capital (429,606
Interests issued and outstanding) 53,167,282 60,358,770
Less Interests held by Early Investment
Incentive Fund (34,915 in 1995 and
28,983 in 1994) (8,613,130) (7,881,421)
------------- --------------
44,554,152 52,477,349
General Partner's deficit (3,562,031) (3,483,492)
------------- --------------
Total partners' capital 40,992,121 48,993,857
------------- --------------
$ 52,279,629 $ 61,470,589
============= ==============
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-IV
(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 $ 56,303,546 $ (3,696,239) $ 59,999,785
Repurchase of 3,167 Limited
Partnership Interests (440,264) (440,264)
Cash distributions (A) (6,862,985) (62,651) (6,800,334)
Net income for the year
ended December 31, 1993 2,885,608 216,421 2,669,187
-------------- -------------- --------------
Balance at December 31, 1993 51,885,905 (3,542,469) 55,428,374
Repurchase of 3,206 Limited
Partnership Interests (439,439) (439,439)
Cash distributions (A) (5,864,361) (196,904) (5,667,457)
Net income for the year
ended December 31, 1994 3,411,752 255,881 3,155,871
-------------- -------------- --------------
Balance at December 31, 1994 48,993,857 (3,483,492) 52,477,349
Repurchase of 5,932 Limited
Partnership Interests (731,709) (731,709)
Cash distributions (A) (8,609,565) (179,004) (8,430,561)
Net income for the year
ended December 31, 1995 1,339,538 100,465 1,239,073
-------------- -------------- --------------
Balance at December 31, 1995 $ 40,992,121 $ (3,562,031) $ 44,554,152
============== ============== ==============
(A) Summary of cash distributions paid per Limited Partnership Interest:
1995 1994 1993
-------------- -------------- --------------
First Quarter $ 1.50 $ 5.00 $ 1.75
Second Quarter 1.50 6.05 5.00
Third Quarter 13.24 1.50 5.00
Fourth Quarter 4.89 1.50 5.00
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-IV
(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 $ 195,982 $ 756,808 $ 3,241,345
Less interest on loans
payable - underlying
mortgages 666,718
-------------- -------------- --------------
Net interest income on
loans receivable 195,982 756,808 2,574,627
Income from operations of
real estate held for
sale 1,852,555 1,885,863 374,948
Participation in income
(loss) of joint
venture with
affiliates 425,111 324,624 (32,660)
Participation income 6,636 849,169
Interest on short-term
investments 564,388 578,843 471,235
Recovery of losses on loans 1,277,805
Other income 710,155
-------------- -------------- --------------
Total income 3,754,827 3,546,138 5,515,124
-------------- -------------- --------------
Expenses:
Provision for potential
losses on loans and real
estate 1,414,270 1,277,805
Administrative 1,001,019 1,304,932 1,475,750
-------------- -------------- --------------
Total expenses 2,415,289 1,304,932 2,753,555
-------------- -------------- --------------
Income before net gain on
sales of real estate 1,339,538 2,241,206 2,761,569
Net gain on sales of real
estate 1,170,546 124,039
-------------- -------------- --------------
Net income $ 1,339,538 $ 3,411,752 $ 2,885,608
============== ============== ==============
Net income allocated to
General Partner $ 100,465 $ 255,881 $ 216,421
============== ============== ==============
Net income allocated to
Limited Partners $ 1,239,073 $ 3,155,871 $ 2,669,187
============== ============== ==============
Net income per average
number of Limited
Partnership interests
outstanding (399,267,
402,745 and 405,785 for
the years ended December
31, 1995, 1994 and 1993,
respectively) $ 3.10 $ 7.84 $ 6.58
============== ============== ==============
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-IV
(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 $ 1,339,538 $ 3,411,752 $ 2,885,608
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Net gain on sales of
real estate (1,170,546) (124,039)
Participation in
(income) loss of
joint venture with
affiliates (425,111) (324,624) 32,660
Recovery of losses on
loans (1,277,805)
Provision for
potential losses on
loans and real estate 1,414,270 1,277,805
Accrued interest
income due at
maturity (152,718)
Collection of accrued
interest income due
at maturity 1,015,000
Amortization of
deferred expenses 22,528 22,528 13,530
Net change in:
Escrow deposits (89,988) 107,671 (132,721)
Escrow deposits -
restricted 232,452 (228,203)
Accounts and accrued
interest receivable (130,992) 414,510 32,380
Prepaid expenses (124,917)
Other assets 78,538 (9,812)
Accounts and accrued
real estate taxes
payable (211,352) 19,696 (446,122)
Due to affiliates (79,772) 37,403 14,857
Other liabilities (886) (255,976) 50,049
-------------- ------------ ------------
Net cash provided by
operating activities 1,713,318 2,573,404 2,950,469
-------------- ------------ ------------
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-IV
(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 with
affiliates $ (19,473) $ (127,990)
Distributions from joint
venture with affiliates $ 311,731 324,937 24,271
Collection of principal
payments on loans
receivable 1,059,040 107,207 6,110,965
Additions to real estate (143,008) (150,000) (170,502)
Proceeds from sales of
real estate 3,250,000 5,870,000
Costs incurred in
connection with sales
of real estate (244,360) (371,962)
Costs incurred in
connection with real
estate acquired through
foreclosure (375,000) (350,174)
-------------- -------------- --------------
Net cash provided by
investing activities 852,763 2,918,137 11,334,782
-------------- -------------- --------------
Financing activities:
Distributions to Limited
Partners (8,430,561) (5,667,457) (6,800,334)
Distributions to General
Partner (179,004) (196,904) (62,651)
Change in cash and cash
equivalents - Early
Investment Incentive
Fund 9,317 121,431 (102,611)
Repurchase of Limited
Partnership Interests (731,709) (439,439) (440,264)
Principal payments on
underlying loans payable (229,227)
Repayment of underlying
loan payable (1,970,263)
Principal payments on
mortgage notes payable (278,530) (255,365) (199,351)
Proceeds from mortgage
note refinancings 6,331,013
Repayment of mortgage
notes payable (618,684) (2,838,473) (8,963,704)
Funding of capital
improvement escrows (1,309,675)
Release of capital
improvement escrows 23,060 727,995 100,650
Payment of deferred
expenses (182,693)
-------------- -------------- --------------
Net cash used in financing
activities (10,206,111) (8,548,212) (13,829,110)
-------------- -------------- --------------
Net change in cash and cash
equivalents (7,640,030) (3,056,671) 456,141
Cash and cash equivalents at
beginning of year 11,860,415 14,917,086 14,460,945
-------------- -------------- --------------
Cash and cash equivalents
at end of year $ 4,220,385 $ 11,860,415 14,917,086
============== ============== ==============
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-IV
(An Illinois Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. Nature of the Partnership's Business:
Balcor Pension Investors-IV (the "Partnership") is engaged principally in the
operation of residential and retail real estate, and, to a lesser extent,
investment in 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) 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 Partnership's management, 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 provided for participation by the Partnership in
increases in value of the collateral property when the loan was 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 owned and held for sale is reflected in
the accompanying Statements of Income and Expenses net of related direct
operating expenses.
(c) 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.
(d) Under certain circumstances, the Partnership has accepted promissory notes
in satisfaction of a borrower's obligations for certain fees upon prepayment of
a loan as required by the loan agreement. These fees include, among other
things, prepayment premiums and participations in the borrower's equity in the
collateral property. The Partnership's policy is to record such income on a
cash basis as payments required under the terms of the promissory notes are
received.
(e) Investment in joint venture with affiliates represents the Partnership's
15.37% interest, under the equity method of accounting, in a joint venture 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 joint venture
income or loss.
(f) Deferred expenses consist of financing fees which are amortized over the
terms of the respective 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 incurrred.
(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 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 by one issuer of commercial paper.
(k) The Partnership is not liable for Federal income taxes and 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) Several reclassifications have been made to the previously reported 1994
and 1993 financial statements to conform with the classifications used in 1995
including a reclassification of mortgage servicing fees to administrative
expenses. These reclassifications have not changed the 1994 or 1993 results.
3. Partnership Agreement:
The Partnership was organized on October 21, 1982; however, operations did not
commence until 1983. The Partnership Agreement provides for Balcor Mortgage
Advisors-III to be the General Partner and for the admission of Limited
Partners through the sale of up to 450,000 Limited Partnership Interests at
$500 per Interest, 429,606 of which were sold on or prior to June 2, 1983, the
termination date of the offering. For financial statements 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 the Early Investment
Incentive Fund (the "Fund") for payment on dissolution of the Partnership to
those investors who subscribed prior to August 31, 1983 ("Early Investors") if
necessary for them to receive a return of their Original Capital plus a
specified Cumulative Return based on the date of investment. Amounts, if any,
remaining in the Fund after Early Investors have received such returns will be
distributed 90% to all Limited Partners and 10% to the General Partner.
Amounts placed in the 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,
the Fund repurchased 5,932 Interests at a cost of $731,709. All repurchases of
Interests have been made at 90% 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 such repurchased Interests are paid to the Fund. To
the extent that amounts in the Fund are not utilized to repurchase Interests,
such amounts are invested in short-term interest-bearing instruments with
interest thereon being earned by the Fund.
4. Investment in Loans Receivable:
The Stonehaven South Apartments loan receivable had a balance of $1,657,786 and
$1,789,746 at December 31, 1995 and 1994, respectively. Current monthly
payments of $20,041 are due representing an interest rate of 11.25%. The loan
matures in 1997. This loan has been classified as non-accrual at December 31,
1995 and 1994 due to the borrower's noncompliance with the original terms of
the loan agreement.
The Colonial Coach Mobile Home Park loan receivable which was funded by the
Partnership and an affiliate (together, the "Participants") had a balance of
$1,247,350 at December 31, 1994. The Partnership participated ratably in
approximately 12% of the loan amount and interest income. The loan was
scheduled to mature in July 1998; however, in September 1995, the borrower
prepaid this $1,247,350 loan at a discount due to the diminished value of the
property. The Partnership received $927,080 as its share of the proceeds which
represented a portion of the funds advanced on the loan. The Partnership
wrote-off the remaining balance of $320,270 against the previously established
allowance for potential loan losses.
The Stonehaven South Apartments loan receivable, due to its non-accrual status,
and the Colonial Coach Mobile Home Park loan receivable, due to the
restructuring of its monetary terms prior to its prepayment, are hereinafter
referred to as impaired loans. The impaired loans totaled $1,657,786 and
$3,037,096 at December 31, 1995 and 1994, respectively. The impaired loan of
$1,657,786 had no allowance for losses in 1995. The impaired loan of $1,247,350
had a related allowance for losses of $250,000 in 1994 and the impaired loan of
$1,789,746 had no allowance for losses in 1994.
Interest income relating to impaired loans would have been approximately
$461,000 in 1995, $505,000 in 1994 and $505,000 in 1993. Net interest income
from impaired loans included in the accompanying Statements of Income and
Expenses amounted to approximately $164,000 in 1995 ($176,000 cash basis),
$203,000 (cash basis and accrual basis) in 1994 and $227,000 in 1993.
The average recorded investments in impaired loans during the years ended
December 31, 1995 and December 31, 1994 were approximately $2,347,441 and
$3,090,700, 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 $ 250,000 $ 250,000 $ 1,527,805
Provision charged to
income 70,270 None None
Recovery of provision
previously charged to income None None ( 1,277,805)
Direct write-off of losses
against allowance (320,270) None None
------------ ----------- -----------
Balance at the end of
the year None $ 250,000 $ 250,000
============ =========== ===========
Real Estate Held for Sale:
Balance at beginning of
year $ 1,277,805 $ 1,277,805 None
Provision charged to
income 1,344,000 None $ 1,277,805
------------ ----------- -----------
Balance at the end of
the year $ 2,621,805 $ 1,277,805 $ 1,277,805
============ =========== ===========
6. Mortgage Notes Payable:
Mortgage notes payable at December 31, 1995 and 1994 consisted of the
following:
Carrying Carrying
Amount of Amount of Current Current Final Estimated
Notes at Notes at Monthly Interest Maturity Balloon
Property 12/31/95 12/31/94 Payments Rate Date Payment
- ---------------- -------- -------- -------- -------- ------- -------
Apartment Complexes:
Colony $3,404,764 $3,428,771 $23,363 7.50% 2028 None
Palm View 2,806,520 2,831,112 22,118 8.54 1998 $2,740,000
Shopping Centers:
North Kent Mall 2,149,142 2,355,703 35,126 9.50 1996 2,073,000
823,767 847,137 9,617 11.00 2010 None
Glendale Fashion
Center 1,234,815 1,234,815 9,261 9.00 1999 1,235,000
618,684(A)
----------- -----------
Total $10,419,008 $11,316,222
=========== ===========
(A) This loan was repaid in December 1995.
All of Partnership's mortgage loans described above require current monthly
payments of principal and interest, except for the Glendale Fashion Center
mortgage loan which requires interest only payments. Real estate held for sale
with an aggregate carrying value of $25,069,383 at December 31, 1995 was
pledged as collateral for repayment of mortgage loans.
Future annual maturities of the above mortgage loans payable during each of the
next five years are approximately as follows:
1996 $2,228,000
1997 86,000
1998 2,813,000
1999 1,303,000
2000 75,000
During the years ended December 31, 1995, 1994 and 1993, the Partnership
incurred interest expense on the mortgage loans payable of $1,093,543,
$1,038,164, and $1,157,238, respectively, and paid interest of $1,087,644,
$1,046,137, and $1,157,238, respectively.
7. Investment in Joint Venture with Affiliates:
In February 1991, the Partnership and three affiliates (the "Participants")
acquired title to the Perimeter 400 Center Office Building. Profits and
losses, and all capital contributions and distributions are allocated in
accordance with the Participants' original funding percentages. The
Partnership's sharing percentage is 15.37%. During 1995, the Partnership
recognized $102,211 as its share of the recovery of a provision related to the
change in the estimate of the fair value of this property which was recognized
in 1993. The recovery and the loss are included in the Partnership's
participation in income (loss) of joint venture with affiliates in 1995 and
1993, respectively. In addition, during 1995, 1994 and 1993, the Partnership
received distributions from this joint venture totaling $311,731, $324,937, and
$24,271, respectively. The Partnership also made contributions of $19,473 and
$127,990 to this joint venture during 1994 and 1993, respectively.
The following information has been summarized from the financial statements of
the joint venture:
1995
-----------
Net investment in
real estate as
of December 31 $26,541,734
Total liabilities
as of December 31 151,526
Total income 5,210,146
Net income before
recovery (provision) 2,100,844
Recovery (provision)
for potential loss 665,000
Net income (loss) 2,765,844
8. Real Estate Held For Sale:
The Partnership acquired the North Kent Mall and the Glendale Fashion Center
through foreclosure in 1994. These properties were classified as real estate
held for sale at December 31, 1993. The Partnership recorded the costs of the
properties at $15,849,638 in 1993. These amounts represented the outstanding
loan balances plus any accrued interest receivable. The Partnership increased
the bases of the properties by $375,000 and $350,265 during 1995 and 1994,
respectively, and decreased the bases by $45,552 during 1993 for certain other
receivables, liabilities, escrows, and costs recognized or incurred in
connection with the foreclosure. At the date of each foreclosure, the property
was transferred to real estate held for sale at its fair value, net of
allowances previously recorded.
9. 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 $ 9,339 $ 583 $ 16,438 $ 843 $ 51,587 $ 3,308
Property management fees None None 317,614 None 373,246 30,443
Reimbursement of expenses
to the General Partner,
at cost:
Accounting 75,855 7,116 86,815 34,741 74,940 6,193
Data processing 42,577 3,774 79,203 18,189 117,237 32,116
Investor communica-
tion 10,492 None 36,365 14,990 20,027 1,655
Legal 28,085 3,408 10,532 4,341 17,258 1,426
Portfolio management 178,478 29,487 100,282 39,124 112,764 10,458
Other 18,426 8 28,919 11,920 13,867 1,146
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 $62,243, $115,474, and $57,566 for 1995, 1994 and 1993,
respectively.
Allegiance Realty Group, Inc., an affiliate of the General Partner, managed six
of the Partnership's properties until the affiliate was sold to a third party
in November 1994.
10. Management Agreements:
As of December 31, 1995, all of the properties owned by the Partnership are
under management agreements with third-party management companies. These
management agreements provide for annual fees of 5% of gross operating receipts
for residential properties and 3% to 6% of gross operating receipts for
commercial properties.
11. Real Estate Sales:
The Partnership sold the Republic Park Office Building during 1994, and the
Shadows Apartments, 240 E. Ontario Office Building and the land related to the
University Office Building during 1993 in separate all cash sales aggregating
$3,250,000 and $5,870,000, respectively. From the proceeds of the sales, the
Partnership paid $976,572 and $1,247,224 in full satisfaction of the Shadows
and 240 E. Ontario first mortgage loans, respectively. The Republic Park Office
Building did not have underlying debt. The bases of the properties sold during
1994 and 1993 totaled $1,835,094 and $5,374,000, respectively. For financial
statement purposes, the Partnership recognized net gains of $1,170,546 and
$124,039 from the sales of real estate during 1994 and 1993, respectively.
12. 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
accruacy 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.
13. 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.
The fair value for the Partnership's investment in loan receivable is
$2,300,000. The carrying value is $1,657,786.
Mortgage notes payable: Based on borrowing rates available to the Partnership
at the end of 1995 for mortgage loans with similar terms and maturities, the
fair value of the 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.
14. Subsequent Event:
In January 1996, the Partnership made a distribution of $429,606 to the holders
of Limited Partnership Interests representing a regular quarterly distribution
of available Cash Flow of $1.00 per Interest for the fourth quarter of 1995.