AN APPRAISAL OF
A LIMITED PARTNERSHIP INTEREST
IN
BALCOR PENSION INVESTORS - III
SKOKIE, ILLINOIS
AS OF MARCH 31, 1996
Valuation Counselors
May 8, 1996
Balcor Mortgage Advisors - III
The Balcor Company
Bannockburn Lake Office Plaza
2355 Waukegan Road, Suite A200
Bannockburn, Illinois 60015
Attention: Mr. John K. Powell, Jr. - First Vice President
Gentlemen:
In accordance with your request, we are pleased to submit our opinion of the
Value of a Limited Partnership Interest in:
Balcor Pension Investors - III
(An Illinois Limited Partnership)
as of March 31, 1996.
The term "Value" is defined as follows:
The amount, in dollars, which a Limited Partnership Interest in Balcor
Pension Investors - III is worth to an investor who owns the Interest with
the intention of holding it to maturity, who fully understands the
complexities of the investment, and has an interest in the potential
interest income and capital appreciation of the Limited Partnership
Interest. The valuation does not represent the amount that would be
received by a holder of a Limited Partnership Interest should he/she
decide to liquidate the Interest prior to the maturity of the Partnership.
The value is subject to the terms and limiting conditions set forth in
this report.
At present it is anticipated that Balcor Pension Investors - III will close by
the end of 1998.
Based on our analyses and conclusions set forth in this report, the estimated
Value of a Limited Partnership Interest in Balcor Pension Investors - III, as
of March 31, 1996, was in the rounded amount of:
$196.00
=======
Adjusted Original Capital per Limited Partnership Interest, as of March 31,
1996, was $282.92.
-------
For the quarter ended June 30, 1995, the value of a Limited Partnership
Interest was reduced $23.00, mainly the result of a distribution of $25.00 per
Limited Partnership Interest as a Return of Capital in April 1995.
For the quarter ended September 30, 1995, the value of a Limited Partnership
Interest decreased $29.00 as a result of a distribution of $31.94 per Limited
Partnership Interest as a Return of Capital in July 1995, an increase of $1.2
million in the allocated value of Perimeter 400 asset, an increase of $1.5
million in the value of the Woods asset, and a decrease of $2.3 million in the
value of the Seafirst Financial Center mortgage loan.
For the quarter ended December 31, 1995, the value of a Limited Partnership
Interest decreased $56.00 mainly due to a distribution in October, 1995 of
$52.18 per Limited Partnership Interest as a Return of Capital and a
distribution of $11.00 per Limited Partnership Interest vs. a normal
distribution of $4.00 per Limited Partnership Interest as a Return on Capital,
as of September 30, 1995. The value of the assets remained substantially the
same.
For the quarter ended March 31, 1996, the value of a Limited Partnership
Interest decreased $24.00 due mainly to a distribution of $22.96 per Limited
Partnership Interest as a Return of Capital.
It is noted that this is prior to any distributions to the Limited Partners
under the Early Investment Incentive Fund. The present value of a Unit of the
Early Investment Incentive Fund, as of March 31, 1996, was in the rounded
amount of:
(1) Early Investors on or before September 30, 1982 $17.00
======
(2) Early Investors purchasing units between
October 1, 1982 and December 31, 1982 $17.00
------
Some of the funds received from prepayments and/or excess funds have been
invested in first mortgage loans vis-a-vis wrap-around mortgage loans. The cash
flows from these first mortgage loans are discounted at a risk rate somewhat
less than the rate used for wrap-around mortgage loans to compensate for the
lower risk.
The variable components in the total Value of a Limited Partnership Interest
and their values, as estimated by Valuation Counselors Group, Inc./Darby &
Associates Joint Venture (Schedule E), are as follows:
Net Investment in Loans Receivable $16,253,952
Unamortized Portion of the Offering Expenses 1,582,230
Real Estate Owned 25,198,063
A copy of this report is retained in our files, together with the information
from which the report was compiled.
Respectfully submitted,
/s/Raymond Ghelardi /s/Clement H. Darby
Valuation Counselors Group, Inc. Darby & Associates
Raymond Ghelardi Clement H. Darby
Managing Director President
REG/CHD/ded
cc: Ms. Mary J. Mojica
Ms. Jayne Kosik
Ms. Jane Cody
Ms. Terri Thompson
TABLE OF CONTENTS
Statement of Facts and Limiting Conditions
Introduction
Payments to the Limited Partners and General Partner
Valuation of a Limited Partnership Interest
Valuation of "The Net Investment in Loans Receivable"
(1) Discussion of Risk Rates
(2) The Present Value of the Return on Funds Advanced
and the Return of Principal
(3) The Present Value of the Equity Buildup and Accrued
Interest
(4) The Present Value of the "Kickers"
(5) The Present Value of the Note Receivable
Conclusions of Value of the "Net Investment in Loans Receivable"
Valuation of the "Real Estate Acquired Through Foreclosure"
Calculation of the Unamortized Portion of the Offering Expenses
Calculation of the Value of a Limited Partnership Interest in
Balcor Pension Investors - III
Calculation of an Interest in the Early Investment Incentive Funds
Schedule
A Distributions to the Limited Partnership
B-1 Unadjusted Balance Sheet of Balcor Pension
Investors - III as of March 31, 1996
B-2 Statements of Income and Expenses for the quarters
ended March 31, 1996 and 1995
B-3 Statements of Cash Flows for the quarters ended
March 31, 1996 and 1995
C Loan Portfolio Summary
D-1 Real Estate Asset Summary
D-2 Real Estate Appraisal Projections
E Adjusted Balance Sheet of Balcor Pension
Investors - III as of March 31, 1996
STATEMENT OF FACTS AND LIMITING CONDITIONS
Valuation Counselors Group, Inc./Darby & Associates Joint Venture strives to
clearly and accurately disclose the assumptions and limiting conditions that
directly affect an appraisal analysis, opinion or conclusion. In order to
assist the reader in interpreting this report, such assumptions are set forth
as follows:
Valuation Counselors Group, Inc./Darby & Associates Joint Venture reserves the
right to make adjustments to the analysis, opinion and conclusions set forth in
the report as deemed necessary by consideration of additional or more reliable
data that subsequently may become available.
No opinion is rendered as to legal fee, property title or mortgage notes
related to the appraised assets, which are assumed to be good and marketable.
It is assumed that no opinion is intended in matters that require legal,
engineering or other professional advice which has been or will be obtained
from professional sources; the valuation report will not be used for guidance
in professional matters exclusive of the appraisal and valuation discipline.
Information furnished by others is presumed to be reliable, and where so
specified in the report, has been verified; however, no responsibility, whether
legal or otherwise, is assumed for its accuracy and cannot be guaranteed as
being certain. All facts and data set forth in the report are true and accurate
to the best of the Appraiser's knowledge and belief. No single item of
information was completely relied upon to the exclusion of other information.
All financial data, operating histories and other data relating to income and
expenses attributed to the assets and the Partnerships have been provided by
Management or its representatives and have been accepted without further
verification except as specifically stated in the report.
It should be specifically noted that the valuation assumes the appraised assets
will be competently managed and maintained by financially sound owners over the
expected period of ownership except where noted, specifically in assets during
the period of foreclosure where Balcor may not have control. This appraisal
engagement does not entail an evaluation of management's effectiveness, nor are
we responsible for future marketing efforts and other management or ownership
actions upon which actual results will depend.
Neither the report nor any portions thereof, especially any conclusions as to
value, the identity of the appraiser or Valuation Counselors Group, Inc./Darby
& Associates Joint Venture shall be disseminated to the public through public
relations media, news media, sales media, prospectus or any other public means
of communications without the prior written consent and approval of Valuation
Counselors Group, Inc./Darby & Associates Joint Venture. The date of the
valuation to which the value estimate conclusion applies is set forth in the
report.
The preponderance of working paper support for this valuation is maintained in
the offices of management, Balcor Mortgage Advisors.
Neither the fees nor any of the terms and conditions of the appraisal
assignments given to Valuation Counselors Group, Inc./Darby & Associates Joint
Venture by Balcor Mortgage Advisors are contingent upon the values reported.
No independent investigation of the fair market value of the underlying real
estate assets has been made by Valuation Counselors Group, Inc./Darby &
Associates Joint Venture. We have reviewed the real estate appraisals for
reasonableness, but have assumed the real estate appraisals obtained by Balcor
Mortgage Advisors are independent and accurate. Valuation Counselors assumes
responsibility for real estate appraisals prepared by their own staff.
No independent investigation of the terms and conditions of the mortgage loans
made by Balcor Pension Investors - III has been made. We have relied on data
furnished to us by Balcor Mortgage Advisors and the validity of the information
was assumed to be correct.
In the event that this appraisal is used as basis to set a market price for a
Limited Partnership Interest in Balcor Pension Investors - III, no
responsibility is assumed for the seller's inability to obtain a purchaser at
the value reported herein.
The reader of this valuation report should be fully conversant with the terms
and conditions of Balcor Pension Investors - III Limited Partnership as set
forth in the Prospectus, other related documents, and the prior appraisals of a
Limited Partnership Interest in Balcor Pension Investors - III.
We have discussed the current status and condition of the mortgage loans and
real estate owned with the management of Balcor Mortgage Advisors and have
accepted their comments as being factual.
INTRODUCTION
Balcor Pension Investors - III ("BPI - III") is a Partnership formed on October
22, 1982, pursuant to the Uniform Limited Partnership Act of the State of
Illinois. The Partnership serves as an investment vehicle for qualified
pension, profit sharing and other retirement trusts; bank commingled trust
funds for qualified pension and profit sharing plans; Individual Retirement
Accounts and HR-10 Plans; government and pension and retirement trusts; and
other organizations intended to be exempt from Federal Income Tax. The Limited
Partnership provides for Balcor Mortgage Advisors - II to be the General
Partner. The sale of the Limited Partnership Interests were at $500 per
interest up to a maximum of 260,000 interests. The offering period, during
which interests were sold by Balcor Pension Investors - III, commenced August
20, 1982, and ran until November 10, 1982. As of November 10, 1982, the closing
date, 237,476 Limited Partnership Interests had been sold.
The Partnership's investment objective is to make wrap-around mortgage loans,
and, to a lesser extent, make other junior mortgage loans and first mortgage
loans. As of March 31, 1996, the loan portfolio consisted of five wrap-around
mortgage loans. Unfunded monies totaling $5,755,822(1) were invested in
short-term money market instruments and in demand deposit bank accounts. In the
quarter ended March 31, 1996, $5,436,000 was distributed as a Return of
Capital. In addition, the Partnership has two real estate assets acquired
through foreclosure and two investments in joint ventures with an affiliate.
The Lakeview I-5, Elmwood Plantation and Gazebo Apartments mortgage loans were
paid off in the quarter ended November 30, 1985. In December 1985, the Valley
Apartment Complex mortgage loan was paid off for $3,702,000. The loan was
valued at $5,027,000. On May 8, 1986, the Del Amo mortgage loan was prepaid in
full in the amount $10,511,632. On August 21, 1986, the $3,200,000 West Point
Mobile Home mortgage loan was prepaid in the amount of $3,749,458. The Ten W.
Jackson mortgage loan was paid off on February 12, 1987, with net funds
received of $4,711,155.
In December 1985, Hines/Red Man Associates defaulted on the Red Man Plaza
Office Building mortgage loan. On February 22, 1986, the Partnership accepted a
deed in lieu of foreclosure and the asset was carried at the amount of the
first mortgage, $5,183,779. The value had been reduced to $4,800,000. The
Partnership had not met debt service payments on the mortgage loan secured by
the property since January 1988. The underlying lender filed foreclosure. In
July 1988, the Partnership wrote off its investment in Redman Plaza Office
Building.
The Candlewyck, Pepper Square and One Way Place Apartment mortgage loans were
in default and the Partnership acquired title to the properties on November 4,
1986. On July 16, 1990, One Way Place Apartments was sold for $5,250,000 with
the Partnership receiving cash of $1,453,543 and the purchaser assuming the
existing underlying mortgage. Candlewyck Apartments was sold during August 1995
for $10 million, netting the Partnership $6,072,257.
On December 30, 1985, the Partnership funded a $6,501,516 wrap-around mortgage
loan on the Colony Apts. in Mount Prospect, IL. On December 31, 1985, the
Partnership advanced an additional $1,300,000 loan to the Woods and received a
$139,500 note for additional interest incurred. In September 1986, the
Partnership funded a $6,600,000 mortgage loan on North Morris MHP. On December
8, 1986, the Camelot Manor Estates MHP mortgage loan of $5.1 million was
funded. On August 25, 1989, the loan was prepaid in the amount of
$5,307,628.20.
In the quarter ended August 31, 1987, the Partnership received the deed in lieu
of foreclosure on the $8,000,000 Corporate Campus Office Building mortgage loan
and the $8,500,000 Orchards Shopping Center mortgage loan. The Orchards
Shopping Center was appraised at $8,200,000 as of December 31, 1990. On
November 1, 1991, the underlying lender on the Orchards Shopping Center
exercised its option to call the mortgage note collateralized by the property
due and payable. As a result, the Partnership repaid the note in the amount of
$3,292,426. In the quarter ended September 30, 1992, a new underlying mortgage
on the Orchards Shopping Center was granted in the amount of $3,000,000. On
September 29, 1994, the Orchards Office Building was sold for proceeds of
$1,200,000, though the Partnership has retained possession of the Orchards
Shopping Center. The Partnership recognized a loss of $468,294 in the third
quarter of 1994 for financial statement purposes. As of March 31, 1996, the
remaining property was valued at $6,874,646. Corporate Campus was carried at
$6,000,000 but on September 22, 1988, the property was sold for $6,800,000,
payable $1,500,000 in cash and $5,300,000 in the form of a purchase money note,
and subsequently is carried again as a mortgage loan valued at $2,800,000 based
on an offer by the borrower to prepay the mortgage at a discount.
The Park Central Office Building Mortgage Loan was prepaid on November 30,
1987, for $6,861,703, which was $800,000 greater than the previous quarter's
valuation.
The Villa Verde Apartments were acquired through foreclosure on January 20,
1989, and was valued at $6.4 million as of February 6, 1990. On November 22,
1993, the property was sold for a price of $5,425,000, with net sale proceeds
of $1,141,943 to the Partnership after costs of the sale and buyer's assumption
of the first mortgage. There was a partial paydown of $625,000 on the Woods
Apartments mortgage loan. On August 7, 1990, the Stemmons Center mortgage loan
became Real Estate Owned and this Partnership's interest is valued at
$3,326,276 based on 1996 projected cash flow. Rivergate A&B became Real Estate
Owned on December 4, 1989, and was carried at $7.0 million. The underlying
mortgage was paid off on March 9, 1990. On October 1, 1990, Rivergate
Apartments was sold for $7,250,000 with the Partnership receiving a cash down
payment of $1,812,500 and a promissory note secured by a first mortgage for
$5,437,500. The property was carried as a mortgage loan vis-a-vis Real Estate
Owned. The loan matured on October 1, 1995, and was paid off on December 1,
1995, for $5,290,391, or $646,000 more than its value as of September 30, 1995.
In the quarter ended June 30, 1989, the Partnership sold Pepper Square
Apartments for $4,300,000 and took back a $3,300,000 wrap-around note with
funds advanced of $1,141,044. The Kensington MHP prepaid $7,115,403, leaving a
balance of a second mortgage loan of $800,000.
In the quarter ended September 30, 1989, the Camelot Manor mortgage loan was
prepaid in the amount of $5,307,628.
In December 1990, the Borrower of the $37,000,000 loan collateralized by the
Perimeter 400 Center office building advised the lenders, consisting of the
Partnership and three affiliated partnerships, that it could no longer make
future debt service payments. As a result, the partnerships purchased the
property at a price equal to the outstanding loan amount less amounts held in
escrow. The partnerships acquired title to the Property on February 7, 1991.
The Partnership had funded $4,692,683 (12.62%) of this loan. The property was
appraised at $28,500,000, thus equating to $3,618,000 for the subject
Partnership Interest. It was revalued, as of March 31, 1996, at $4,367,115
based on its projected 1996 cash flow.
The loan collateralized by the Airport I & II Industrial Park matured on
January 1, 1991. On March 8, 1991, the Partnership received a payoff of
$2,002,929 which was $257,000 greater than the December 31, 1990, valuation.
For the quarter ended December 31, 1991, the Woods Apts., Carmel on Providence
and the Crossings Shopping Center mortgage loans were reduced to the amount of
funds advanced. In the quarter ended June 30, 1992, Crossing Shopping Center
became Real Estate Owned. It was sold on January 31, 1995, netting $776,490 to
the Partnership after paying off the underlying mortgage. On July 5, 1994, The
Woods Apts. became Real Estate Owned and is valued at $10,630,026 based on an
appraisal as of October 1995. Carmel on Providence has been operating under an
approved bankruptcy plan of reorganization since June 22, 1993.
For the quarter ended December 31, 1992, Bannockburn Executive Center mortgage
loan was reduced $1,104,283 to $4,500,000 based on a modification. The property
has been operating under an approved bankruptcy plan of reorganization since
March 20, 1995 and the mortgage loan is valued at $4,744,444 as of March 31,
1996.
The Kensington MHP mortgage loan was sold for $700,000 in the quarter ended
March 31, 1993.
For the quarter ended June 30, 1993, the value of the Riverview Office Building
was reduced to $2,100,000. On September 20, 1993, the Partnership sold the
property for a gross price of $2,100,000 and net proceeds of $1,900,000,
resulting in a loss of $200,000.
On November 2, 1993, the Airport Plaza III mortgage loan paid off in the amount
of $1,800,474. This was $127,457 less than the June 30, 1993 valuation.
On June 1, 1994, the loan collateralized by the Continental Park Office
Building was prepaid at a discount for proceeds to the Partnership of
$4,741,104.
On July 5, 1994, a sub-tier of Balcor Pension Investors - III took title to the
Woods Apts.
On November 22, 1994, the North Morris MHP mortgage was paid off in the amount
of $7,235,628.
On August 1, 1995, the Colony Apartments mortgage loan was paid off in the
amount of $8,510,982, or approximately $339,000 greater than the last
valuation.
The stated objectives of Balcor Pension Investors - III are as follows:
1.Preservation and protection of Limited Partners' capital;
2.Provide the Limited Partners with regular quarterly cash
distributions;
3.Provide the Limited Partners with additional cash distributions
through the receipt of deferred interest; and
4.Maximize cash distributions over the life of the Partnership estimated
to be 12 to 15 years) through the receipt of additional interest in the form of
equity participations.
In the wrap-around mortgage portion of the portfolio, the intent is to generate
a higher total return on investment through the "equity buildup" portion of a
wrap-around mortgage whereby there is a spread in the principal reduction
between the wrap-around mortgage and the underlying mortgage loans. Although
there is a mathematical buildup of this equity during the life of the loan, the
material benefit of the equity buildup normally is not realized until the
maturity of the wrap-around loan - which usually occurs in a period of from ten
to fifteen years from the initial funding of the loan. In addition, there are
potential additional earnings available from a participation in the future
gross income as well as a participation in the appreciated value on which
Balcor Pension Investors - III has made mortgage loans to date. These potential
earnings are commonly known as "kickers."
(1) Source: Balcor Pension Investors - III Balance Sheet as of March 31, 1996,
Schedule B-1. The Net Investment in Loans Receivable includes funds advanced as
well as earned equity buildup and earned accrued interest, discounted to a
present value, and miscellaneous adjustments.
PAYMENTS TO THE LIMITED PARTNERS AND GENERAL PARTNER
The Limited Partnership, Balcor Pension Investors - III, is a partial
self-liquidating real estate investment fund. As of March 31, 1996, the
Partners' capital was invested in five real estate loans with the last loan
maturing in September 1998. Interest income and amortization, as well as
interests in gross income of certain properties, after deducting the General
Partners' expenses, income and reserves, is distributed to the Limited Partners
under certain formulae, terms and conditions set forth in the Limited
Partnership Agreements and described in the summary in the previous section.
The remaining Limited Partners' capital, equity buildup and interests in the
appreciation of certain properties is distributed to the Limited Partners upon
the maturity and/or the successful payoff of the loans. The Partnership also
owns two real estate properties acquired through foreclosure and two
investments in joint ventures with an affiliate.
The Prospectus of Balcor Pension Investors - III indicated that during the
offering period, which expired on November 10, 1982, as well as during the term
of the Partnership, distributions are to be made to the investors. The
following schedule sets forth the actual distributions made to the Partnership
to date.
SCHEDULE A
DISTRIBUTIONS TO THE LIMITED PARTNERSHIP
Number of Annual
Effective Date Interests Rate Amount Paid
2/28/83 237,476 8.80% $2,612,360
5/31/83 237,476 8.80 2,612,236
8/31/83 237,476 8.80 2,612,236
11/30/83 237,476 8.80 2,612,236
2/29/84 237,476 9.00 2,671,605
5/31/84 237,476 9.20 2,730,974
8/31/84 237,476 9.20 2,730,974
11/30/84 237,476 9.60 2,849,712
2/28/85 237,476 9.80 2,909,081
5/31/85 237,476 10.00 2,968,450
8/31/85 237,476 10.00 2,968,450
11/30/85 237,476 10.00 2,968,450
2/28/86 237,476 10.00 2,968,450
5/31/86 237,476 10.00 2,968,450
8/31/86 237,476 26.00 7,717,970
11/31/86 237,476 10.00 2,968,450
2/28/87 237,476 10.00 2,968,450
5/31/87 237,476 6.48 1,923,555
6/87 237,476 - 748,049
($3.15 per Interest as a Return of Capital)
8/31/87 237,476 7.65 2,256,022
9/87 237,476 - 415,583
($1.75 per Interest as a Return of Capital)
12/31/87 237,476 4.52 1,329,866
1/88 237,476 5,936,900
($25.00 per Interest as a Return of Capital)
3/31/88 237,476 4.76 1,329,866
Number of Annual
Effective Date Interests Rate Amount Paid
6/30/88 237,476 5.11% $1,424,856
9/30/88 237,476 5.96 1,662,332
10/88 237,476 1,246,749
($5.25 per Interest as a Return of Capital)
12/31/88 237,476 5.59 1,543,594
1/89 237,476 4,749,520
($20.00 per Interest as a Return of Capital)
3/31/89 237,476 5.84 1,543,594
6/30/89 237,476 7.19 1,899,808
7/89 237,476 2,256,022
($9.50 per Interest as a Return of Capital)
9/30/89 237,476 7.35 1,899,808
12/31/89 237,476 7.35 1,899,808
3/31/90 237,476 16.08 4,155,831
6/30/90 237,476 6.89 1,781,070
9/30/90 237,476 6.89 1,781,070
10/90 237,476 - 831,166
($3.50 per Interest as a Return of Capital)
12/31/90 237,476 6.95 1,781,070
3/31/91 237,476 6.95 1,781,070
6/30/91 237,476 6.95 1,781,070
9/30/91 237,476 6.95 1,781,070
12/31/91 237,476 6.95 1,781,070
3/31/92 237,476 4.63 1,187,380
6/30/92 237,476 4.63 1,187,380
9/30/92 237,476 4.63 1,187,380
12/31/92 237,476 4.63 1,187,380
3/31/93 237,476 4.63 1,187,380
6/30/93 237,476 4.63 1,187,380
9/30/93 237,476 4.63 1,187,380
12/31/93 237,476 3.70 949,904
1/94 237,476 1.39 356,214
($1.50 per Interest as a Return on Capital)
3/31/94 237,476 3.70 949,904
4/94 237,476 - 4,001,471
($16.85 per Interest as a Return of Capital)
6/30/94 237,476 3.86 949,904
9/30/94 237,476 3.86 949,904
12/31/94 237,476 3.86 949,904
3/31/95 237,476 3.86 949,904
4/95 237,476 - 5,936,900
($25.00 per Interest as a Return of Capital)
6/30/95 237,476 4.10 949,904
($4.00 per Interest)
7/95 237,476 - 7,585,639
($31.94 per Interest as a Return of Capital)
9/30/95 237,476 12.29 2,612,236
($11.00 per Interest)
10/95 237,476 - 12,391,746
($52.18 per Interest as a Return of Capital)
12/31/95 237,476 5.23 949,904
($4.00 per Interest)
Number of Annual
Effective Date Interests Rate Amount Paid
1/96 237,476 - 5,453,076
($22.96 per Interest as a Return of Capital)
3/31/96 237,476 5.66% 949,904
($4.00 per Interest)
The Partnership Agreement provides that the General Partner will receive
mortgage placement fees (points) and standby loan commitment fees paid by
borrowers, subject to certain limitations, when the Partnership funds mortgage
loans or issues commitments to fund mortgage loans. The General Partner will
service the Partnership's mortgages and will receive a mortgage servicing fee,
payable not more frequently than monthly, at an annual rate equal to 1/4 of 1%
of the amounts advanced by the Partnership and outstanding from time to time.
The General Partner is also reimbursed for certain expenses incurred in the day
to day operations of the Partnership.
All profits and losses of the Partnership are allocated 99% to the capital
accounts of the Limited Partners and 1% to the capital accounts of the General
Partner. To the extent that cash flow (as defined in the Partnership Agreement)
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, described as follows:
Early Investment Incentive Fund:
Twenty-five per cent of the General Partner's share shall be set aside in
the Early Investment Incentive Fund hereinafter described for payment to
Early Investors if necessary for them to receive on dissolution of the
Partnership a return of their Original Capital plus a Cumulative Return
determined as follows: (i) for Interests purchased on or before September
30, 1982, the greater of 20% per year, subject to increase from time to
time in the sole discretion of the General Partner, or 4% per year above
the Average Composite AA Bond Yield as measured by Standard & Poor's ("AA
Bond Yield") in effect as of December 31, 1982; and (ii) for Interests
purchased between October 1, 1982, and December 31, 1982, the greater of
18% per year, subject to increase from time to time in the sole discretion
of the General Partner, or 2% per year above the AA Bond Yield in effect
as of December 31, 1982. The AA Bond Yield was 13.99% as of August 12,
1982, and is published periodically in various Standard and Poor's
publications. After Early Investors have received such return the amount
remaining in the Early Investors Incentive Fund will be distributed 90% to
all Limited Partners and 10% to the General Partner. In the event that on
dissolution of the Partnership, cash available for distribution and the
amount in the Early Investment Incentive Fund are not sufficient to return
to Early Investors their Original Capital plus the Cumulative Return, the
amount of any funds in the Early Investment Incentive fund will be
distributed first to all Early Investors until they shall have received a
Cumulative Return to equal to the rate described in period (ii) above, and
then to those Early Investors who purchased Interests in period (i) above.
As noted above, 25% of the General Partner's share of Cash Flow shall be
set aside in the Early Investment Incentive Fund when and as distributions
in Cash Flow are made to the Limited Partners and the General Partner.
The amounts in the Early Investment Incentive Fund will be kept separate
and apart from other Partnership funds and may be utilized to repurchase
Interests from Limited Partners as set forth under "Description of the
Partnership Agreement - Repurchase of Interest." To the extent that the
amounts in the Early Investment Incentive Fund are not so utilized, it is
intended that such amounts shall, pending their distribution to Early
Investors, Limited Partners and the General Partners as described above,
be temporarily invested in United States government securities, securities
issued or guaranteed by United States government agencies, certificates of
deposit and time or demand deposits in state or national bankers'
acceptances, savings and loan association deposits or deposits in members
of the Federal Home Loan Bank System, commercial paper, securities of
mutual funds which invest exclusively in "money market" instruments with
maturities generally not exceeding one year, and other similar
investments.
VALUATION OF A LIMITED PARTNERSHIP INTEREST
The methodology used in estimating the Value of a Limited Partnership Interest
in Balcor Pension Investors - III is based upon substituting the estimated
value of the mortgage loan portfolio in place of the "Net Investment in Loans
Receivable" as shown on the March 31, 1996, Balance Sheet of Balcor Pension
Investors - III. In addition, the unamortized portion of the Offering Expenses
is added to the Assets on the same Balance Sheet. The amortization is
calculated by reducing the total Offering Expenses, as set forth in the
financial statements, on a straight line basis, quarterly, to the expiration
date of the loan portfolio. For financial reporting purposes, Balcor Pension
Investors - III initially deducted the total Offering Expenses from the
proceeds of the Limited Partnership Interest. Where equities exist, they are
included in the Balance Sheet (Schedule E) at their market value based on
independent real estate appraisals or estimates based on the cash flows of the
properties. Schedules D-1 and D-2 summarize the calculations of Partnership
Asset Values for the Real Estate Acquired Through Foreclosure.
Future General Partner fees and related expenses are not present valued as an
expense because of their unpredictability but rather are taken as a charge in
the quarter incurred.
Valuation Counselors Group, Inc./Darby & Associates Joint Venture has been
retained by Balcor Mortgage Advisors - III to estimate the Value of a Limited
Partnership Interest in Balcor Pension Investors - III on a quarterly basis.
In order to accomplish this, we valued the "Net Investment in Loans Receivable"
as well as calculated the "Unamortized Portion of the Offering Expenses."
Cash and Investments in Certificates of Deposit and Marketable Securities are
considered short term investments since eventually all but a working capital
reserve will be funded in real estate loans and real estate owned or returned
to the investor. Consequently, they remain in the valuation at face value in
both Schedules B-1 and E.
A simplified version of the Balance Sheet of Balcor Pension Investors - III,
prepared by Balcor Mortgage Advisors - III, before the aforementioned
adjustments, is on the following Schedule B-1. Schedules B-2 and B-3 are
Statements of Income and Expense.
SCHEDULE B-1
UNADJUSTED BALANCE SHEET
BALCOR PENSION INVESTORS - III
AS OF MARCH 31, 1996
(UNAUDITED)
Assets
Cash and Cash Equivalents $ 5,755,822
Escrow Deposits 92,692
Accounts and Accrued Interest Receivable 67,206
Prepaid Expense 7,723
Deferred Expenses 18,746
Interest Receivable on Notes, Short-term
Investments and First Mortgages 56,817
Allowance for Potential Loan Losses (13,508,028)
Net Investment in Loans Receivable 21,826,818
Investments in joint ventures with an affiliate
(Stemmons and Perimeter 400) 13,567,996
Discount on Loans Receivable (347,233)
Real Estate Acquired through Foreclosure
(Woods and Orchards Center) 14,815,014
-----------
Total Assets $42,353,573
===========
Liabilities
Accounts payable $ 180,779
Accrued Liabilities-principally real
estate taxes and Escrow 228,334
Due to Affiliates 43,280
Other Liabilities-principally escrow 254,437
Security Deposits 87,617
Mortgage Notes Payable (Orchards Center) 1,655,741
-----------
Total Liabilities $ 2,450,188
Partners' Capital
(237,476 Limited Partnership Interests) 39,903,385
------------
Total Liabilities and Partners' Capital $ 42,353,573
============
SCHEDULE B-2
BALCOR PENSION INVESTORS-III
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF INCOME AND EXPENSES
for the quarters ended March 31, 1996 and 1995
(UNAUDITED)
1996 1995
-------------- ---------------
Income:
Interest on loans receivable $ 1,367,431 $ 1,972,025
Less interest on loans
payable - underlying mortgages 819,181 1,017,165
-------------- ---------------
Net interest income on loans receivable 548,250 954,860
Income from operations of
real estate held for sale 380,734 609,896
Participation in income
of joint ventures with affiliates 136,648 128,524
Interest on short-term investments 100,650 294,255
-------------- ---------------
Total income 1,166,282 1,987,535
-------------- ---------------
Expenses:
Administrative 89,558 193,061
-------------- ---------------
Total expenses 89,558 193,061
-------------- ---------------
Income before gain on sale of real estate 1,076,724 1,794,474
Gain on sale of real estate 717,900
-------------- ---------------
Net income $ 1,076,724 $ 2,512,374
============== ===============
Net income allocated to General Partner $ 80,754 $ 188,428
============== ===============
Net income allocated to Limited Partners $ 995,970 $ 2,323,946
============== ===============
Net income per average number of Limited
Partnership Interests outstanding
(221,386 in 1996 and 227,268 in 1995) $ 4.50 $ 10.23
============== ===============
Distribution to General Partner $ 79,159 $ 79,159
============== ===============
Distribution to Limited Partners $ 5,968,540 $ 909,069
============== ===============
Distribution per Limited Partnership
Interests outstanding $ 26.96 $ 4.00
============== ===============
SCHEDULE B-3
BALCOR PENSION INVESTORS-III
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
for the quarters ended March 31, 1996 and 1995
(UNAUDITED)
1996 1995
-------------- ---------------
Operating activities:
Net income $ 1,076,724 $ 2,512,374
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of real estate (717,900)
Participation in income of
joint ventures with affiliates (136,648) (128,524)
Amortization of deferred expenses 3,124 3,124
Net change in:
Escrow deposits 34,312 226,496
Escrow deposits - restricted 899,929
Accounts and accrued
interest receivable 98,394 (8,684)
Prepaid expenses 24,174
Accounts payable 79,324 (31,776)
Due to affiliates 7,269 42,357
Other liabilities (51,342) (1,150,396)
Security deposits (2,231) (3,184)
-------------- ---------------
Net cash provided by operating activities 1,133,100 1,643,816
-------------- ---------------
Investing activities:
Distributions from joint
venture partners - affiliates 16,501
Collection of principal payments
on loans receivable 11,019
Additions to real estate (20,324)
Proceeds from sale of real estate 856,240
Costs incurred in connection
with sale of real estate (79,750)
-------------- ---------------
Net cash provided by investing activities 16,501 767,185
-------------- ---------------
Financing activities:
Distribution to Limited Partners (5,968,540) (909,069)
Distribution to General Partner (79,159) (79,159)
Increase in cash and cash equivalents -
Early Investment Incentive Fund (470,311) (67,891)
Principal payments on underlying
loans payable (210,167) (287,578)
Principal payments on mortgage
notes payable (10,550) (54,950)
-------------- ---------------
Net cash used in financing activities (6,738,727) (1,398,647)
-------------- ---------------
Net change in cash and cash equivalents (5,589,126) 1,012,354
Cash and cash equivalents at beginning
of period 11,344,948 18,445,509
-------------- ---------------
Cash and cash equivalents at end of period $ 5,755,822 $ 19,457,863
============== ===============
VALUATION OF "THE NET INVESTMENT IN LOANS RECEIVABLE"
The value of the "Net Investment in Loans Receivable" (the loan portfolio) is
equal to the present value of the various income and equity components of the
loan portfolio, discounted at current market rates of interest, commensurate
with the risks, as of March 31, 1996.
The income and equity components of the loan portfolio are as follows:
(1) The present value of the average annual rate of return on funds
advanced (cash received) over the life of the loans,
(2) The present value of the funds advanced, due at maturity,
(3) The present value of the equity buildup for wrap-around mortgage
loans and accrued interest, and
(4) The present value of the "kicker" income, i.e., a share in the future
gross income, and the appreciated value, "equity kicker," in certain
properties.
(1) Discussion of Risk Rates
The discount rate applied to the cash flow mathematically expresses risk. Risk
represents the uncertainty related to achievement of the prospective cash
flows. The primary components of risk exposure in fixed income securities are
interest rate risk, inflation risk, market risk, liquidity risk and risk of
default. As previously discussed, the valuation of the assets in question have
been predicated upon the present valuing of the components of the loan
portfolio. Therefore, determination of an appropriate risk rate is essential in
the valuation of the net investment in loans receivable.
Financial theory dictates the necessity of incremental return resulting from
incremental risk. Accordingly, the typical risk/return tradeoff indicates that
investors should demand greater rates of return as the perceived riskiness of
the asset or security increases. In examining an investment situation, a
hypothetical investor would weigh the perceived level of risk against the
return expected from the subject investment. In determining the required rate
of return or discount rate on a particular asset or investment, the
hypothetical investor would also consider returns available from alternative
investment opportunities such as government securities, corporate bonds,
mortgages, real estate and common stock, if applicable.
The subject assets consist of a self-liquidating real estate investment fund
with investments in both real estate loans with varying maturities and real
estate assets. Accordingly, in determining an appropriate risk rate associated
with the subject assets, we have considered alternative and comparable rates of
return in the lending and real estate marketplace as indicated by such sources
as the Wall Street Journal, Real Estate Research Corporation Real Estate
Report, Investment Dealers Digest, Corporate Financing Week, American Council
of Life Insurance Investment Bulletin and the National Association of Real
Estate Investment Trusts.
The following table presents yield rates associated with various types of
government and corporate securities as indicated by the March 29,1996 and
January 3, 1996 Wall Street Journals.
Yield Rates as Indicated by the Wall Street Journal
Security First Quarter 1996 Fourth Quarter 1995
Three Month U.S. Treasury Bills 4.99% 5.04%
Six Month U.S. Treasury Bills 4.97% 5.03%
Prime Rate 8.25% 8.50%
Ten Year U.S. Treasury Bonds 6.60% 5.64%
Twenty Year U.S. Treasury Bonds 6.90% 6.02%
Corporate Bonds
Aaa, Aa 6.72% to 7.60% 6.02% to 6.96%
A, Baa 6.95% to 7.91% 6.23% to 7.31%
Ba, C 9.8% 9.7%
Collateralized Mortgage
Obligations
10 Year 7.90% 6.94%
20 year 8.05% 7.17%
Additionally, information from Moody's Corporate Bond Survey and the Investment
Dealer's Digest indicates the corporate original issue Real Estate Mortgage
Investment Conduit (REMIC) yields from 1988 to 1995 ranged from 7% to 11.3% for
obligations with terms in excess of ten years. A yield difference of one to
three points was exhibited within multiple class REMIC issues where accrued
interest payments did not commence on the (higher yielding) security until
senior class notes were paid in full. A short-term issuance collateralized by
elderly living properties exhibited a four point yield differential between
classes.
According to information from the Mortgage-Based Securities Letter, REMIC
issuances in 1994 have decreased substantially from the levels exhibited during
1992 and 1993. Reportedly, many REMIC underwriters and investors incurred
losses due to price corrections in the derivative mortgage securities market.
The price decline was believed to be attributable to several factors including
rising interest rates, increased volatility, average-life extension and lack of
liquidity. According to the Wall Street Journal, new issues of mortgage-backed
securities were down 57% in 1994 as compared to the prior year.
In addition to the previously noted yields on various market securities, we
have also considered mortgage rates associated with various types of commercial
real estate properties. This data is relevant in that it provides an indication
of rates of return associated with similar types of investments. These
statistics have been extracted from the December 29, 1995 and October 1, 1995
editions of the Investment Bulletin published by the American Council of Life
Insurance, is as follows:
Averages
Contract Interest
Rate
Type of Loan
Property Type Third Quarter Second Quarter
1995 1995
FIXED RATE-FIXED TERM 7.83% 8.23%
Apartment 7.64% 8.13%
Office Building 7.98% 8.23%
Retail 7.79% 8.17%
Industrial 7.84% 8.21%
Other Commercial 7.73% 8.47%
Yield With
Fees
Type of Loan
Property Type Third Quarter Second Quarter
1995 1995
FIXED RATE-FIXED TERM 7.85% 8.24%
Apartment 7.67% 8.15%
Office Building 8.00% 8.24%
Retail 7.81% 8.18%
Industrial 7.85% 8.22%
Other Commercial 7.74% 8.51%
Maturity
(Years/Months)
Type of Loan
Property Type Third Quarter Second Quarter
1995 1995
FIXED RATE-FIXED TERM 11/06 11/02
Apartment 10/11 10/09
Office Building 10/0 09/07
Retail 13/05 13/06
Industrial 10/08 10/00
Other Commercial 11/04 12/02
Additionally, we have considered expected capitalization rates and internal
rates of return extracted from "Korpacz Real Estate Investor Surveys, First
Quarter 1996". For comparative purposes, we have also presented similar data
extracted from "Korpacz Real Estate Investor Surveys, Fourth Quarter 1995".
National Market Indicators: First Quarter 1996
Retail Office
(National Regional (Central Business
Malls) District)
Range Average Range Average
Free and Clear Equity IRR 10.00%-14.00% 11.50% 10.00%-15.00% 12.10%
Free and Clear Equity Cap
Rate 6.25%-11.00% 8.11% 8.00%-12.50% 9.58%
Terminal Cap Rate 7.00%-11.00% 8.56% 8.25%-12.00% 9.62%
Office National
(National Suburban) Industrial
Range Average Range Average
Free and Clear Equity IRR 10.00%-14.00% 11.90% 9.00%-14.00% 11.27%
Free and Clear Equity Cap
Rate 8.00%-11.00% 9.47% 7.25%-13.00% 9.29%
Terminal Cap Rate 8.50%-12.00% 9.68% 8.00%-11.00% 9.51%
National
Apartment
Range Average
Free and Clear Equity IRR 10.50%-13.00% 11.38%
Free and Clear Equity Cap
Rate 7.50%-10.50% 8.97%
Terminal Cap Rate 8.00%-11.00% 9.29%
National Market Indicators: Fourth Quarter 1995
Retail Office
(National Regional (Central Business
Malls) District)
Range Average Range Average
Free and Clear Equity IRR 10.00%-14.00% 11.55% 10.00%-15.00% 12.15%
Free and Clear Equity Cap
Rate 6.25%-11.00% 7.86% 7.50%-12.50% 9.52%
Terminal Cap Rate 7.00%-11.00% 8.45% 8.25%-12.00% 9.63%
Office National
(National Suburban) Industrial
Range Average Range Average
Free and Clear Equity IRR 10.00%-15.00% 12.04% 9.00%-14.00% 11.31%
Free and Clear Equity Cap
Rate 8.00%-11.50% 9.57% 7.25%-13.00% 9.36%
Terminal Cap Rate 8.50%-12.00% 9.75% 8.00%-11.00% 9.58%
National
Apartment
Range Average
Free and Clear Equity IRR 10.00%-13.00% 11.50%
Free and Clear Equity Cap
Rate 7.50%-10.50% 8.99%
Terminal Cap Rate 8.00%-11.00% 9.31%
Our discount rates have been selected based upon the returns exhibited on
alternative securities and real estate properties as previously presented, in
conjunction with the attributes of the subject assets.
Risk Measurement in Real Estate
As previously discussed, the primary components of risk exposure for fixed
income securities include interest rate risk, inflation risk, market risk,
liquidity risk and default risk. For real estate, these risks are similar and
can be segmented into two categories. The first is systematic risk which
includes all risks external to the property. The remaining risks can be
categorized as nonsystematic risk and includes all risks directly related to
the property. Generally, systematic risk affects the overall market as a whole
and is often referred to as market risk. However, nonsystematic risk is
generally more attributable to the property specifics. Nonsystematic risk can
be further broken down into risk relative to the immediate neighborhood or
local market with the residual risks being unique to the property.
When viewing an investment in a single property, the systematic overall market
risk, the nonsystematic local market risk and the nonsystematic unique property
risks must be weighed in the derivation of an appropriate risk rate (discount
rate) to be applied to anticipated cash flows. The overall market risks would
include such factors which effect the market as a whole. Among these factors
would be the level of interest rates, the economic condition of the nation,
federal tax incentives related to real estate and the expected inflation rate.
Each of these factors can have a direct effect on real estate throughout the
nation.
Nonsystematic local market risks are those that effect a regional area or
neighborhood and are not part of the overall market risk. There are many types
of possible local market risks. Some examples of local market risk include
fluctuations in the local economy, changes in transportation systems, local
crime rates and over building. These local market risks may be severe enough to
override the effects of the overall market risk.
Property unique risks are those which effect the subject property in a manner
more specific than the local market risks. Many of the property unique risks
are similar to the local market risks but are more significant for the subject
property. Some examples of property specific risks would include dependence on
single industries or tenants, crime frequency on the property, changes in
immediate traffic patterns, changes in adjacent zoning or adjacent property
conditions and unanticipated capital improvement requirements. These property
specific risks may have a material impact on the property but may not be
reflected in the local market risks.
Investments in individual property would reflect three groups of risks
including the systematic overall market risks, the nonsystematic local market
risks and the nonsystematic property unique risks. However, modern portfolio
theory recognizes that through investment diversification, the nonsystematic
risks associated with the local market and the unique attributes of the
property can be reduced. Furthermore, with sufficient diversification, a
portfolio can virtually eliminate nonsystematic risk.
The benefits of portfolio diversification are reflected in the improvement of
the portfolio's return-risk ratio. The return-risk ratio measures the return of
the investment relative to the volatility of the return. Generally, the
volatility of return is measured by the standard deviation of the return over a
period of time. Therefore, the return-risk ratio is simply the return of the
investment divided by the standard deviation of the return.
As an example of the application of this ratio, assume that portfolio A invests
in only one type of property in one local market and experiences an average
annual return of 13% over fifteen years with a standard deviation of return of
17%. The return-risk ratio is computed to be 0.76 (13% divided by 17%).
Portfolio A's risk-return ratio can then be compared to the ratio of other
portfolios to evaluate the level of return relative to the risk taken.
To illustrate, assume portfolio B invests in a wide variety of property types
in a numerous geographical regions and only generated an annual return of 12%
over fifteen years. However, the standard deviation of return was only 13%.
The return-risk ratio is computed to be 0.86 (12% divided by 13%). Even though
portfolio A's return exceeded portfolio B's return, the superior return was not
enough to offset the increase in risk. Therefore, an investor would likely
prefer an investment in Portfolio B.
It should be noted, however, that with the reduction in the volatility of
returns, modern portfolio theory also recognizes that there is a reduction in
the level of potential return. This is because that volatility generally
provides the opportunity for added returns. This is the basis for the axiom
that greater risk equals greater reward. However, an investor generally
requires that the increase in risk is offset by an increase in potential
return. Conversely, if an investor is looking for a lower risk, the investor
would expect lower returns.
In the instant case, the discount rates selected for the appraisal of
individual properties which are expected to be sold in the near future reflect
all the systematic and nonsystematic risks associated with each individual
property. The discount rates are derived considering overall market factors,
local market factors and property unique factors. However, for those properties
which are valued as real estate investments on the basis of their cash flows,
the discount rate applied reflects the benefits of reduced nonsystematic risks
through portfolio diversification. These benefits include the offsetting of
local market risks and property unique risks of each property with the local
market risks and property unique risks of the other properties in the
portfolio. As a result, the volatility of returns for each property is offset
by the volatility of returns of the other properties in the portfolio. The
discount rates applied to the latter category of properties are derived from
market data on portfolio returns, which reflect the dichotomies described
above.
(2) The Present Value of the Return on Funds Advanced and the Return of
Principal
Schedule C lists the five mortgage loans funded as of December 31, 1995, with
total funds advanced of $14,824,865.
In order to determine the present value of the return on funds advanced, the
interest due in each loan in each year to maturity was calculated on the basis
of the average annual rate of return on funds advanced. This interest was
discounted to a current present value at a market rate of interest. After
reviewing various market rates in effect as of March 31, 1996, including those
set forth in (1) Discussion of Risk Rates, as well as others, and recognizing
the present rates of similar new mortgage loans, we have concluded that a rate
of 10.25% is commensurate for the risk of the first mortgage loans in this Fund
and 11.00% for second mortgage loans and wrap-around mortgage loans.
The present value of the funds advanced is the present value of the principal
of each loan at maturity, discounted to a present value at 10.25% and 11.00% as
indicated. This information is summarized in Schedule C, which follows a later
section of this report.
The total present value of the principal and interest on the mortgage loans in
this Partnership, as of March 31, 1996, is:
$14,743,155
===========
(3) The Present Value of the Equity Buildup and Accrued Interest
The value of the equity buildup for the wrap-around mortgage loans and accrued
interest is the present value of a known contract amount of monies to be
received at a specific future date. As the loans begin to mature, there is an
increasing amount of equity buildup and accrued interest actually earned and
less equity buildup and accrued interest still to be earned in the future. The
area of judgment in valuing the equity buildup and accrued interest is in the
selection of the discount rates commensurate with the risks. Because equity
buildup and accrued interest are contract amounts to be received the same as
cash interest received and repayment of principal, the same discount rate
applies to all mortgage loans, i.e., 11.00% on wrap-around mortgage loans and
11.00% and 10.25% on accrued interest where indicated.
Schedule C, which follows, includes summaries of the present value of the
equity buildup and accrued interest, by loan, as of March 31, 1996. They
indicated the total amount of funds advanced for each loan, the equity buildup
of the wrap-around mortgage loans and accrued interest discounted at 11.00% and
10.25%. In addition any adjustments to the value of specific mortgage loans
are indicated on Schedule C.
In certain loans the accrued interest payment is effected by the income kicker
wherein the loan agreement calls for the kicker income first to be applied
against accrued interest. The net effect is an increase in the present value of
the accrued interest of the loan as a result of the accelerated payment of the
accrued interest instead of payment at maturity.
The totals are summarized as follows:
Present Value of the Equity Buildup $1,201,153
Present Value of the Accrued Interest 309,644
----------
Total $1,510,797
==========
(4) The Present Value of the Income and Equity Kickers
On most of the loans Balcor Mortgage Advisors - II initially negotiated
kickers, or additional payments to Balcor Pension Investors - III, contingent
upon the achievement of certain levels of gross income and/or market value. In
some cases Balcor Pension Investors - III is to receive a percent of the gross
income over a specified amount of gross income to be achieved in the future.
There is no assurance that the achievement levels will be attained, nor is
there any assurance that the payments due will be received in whole and on a
timely basis. In other more predictable cases, the percentage share of gross
income may be collected on next year's revenues. Other kickers include
situations where Balcor Pension Investors - III is to receive a percentage of
the proceeds in a sale or refinancing of the property over a stated market or
appraised value.
In estimating the present value of the income kickers where they exist we have
taken the estimated 1991 gross income for each loan subject to an income kicker
and projected the gross income at a compound rate of 4% to the maturity date of
the mortgage loan unless a particular set of circumstances on a mortgage loan
dictate a lower growth rate. The annual projected gross income was compared
with the terms and conditions of the income kicker provision of each loan and,
where payments were due in future years, that amounts were discounted at 15.00%
on first mortgage loans and 18.00% on wrap-around mortgage loans to a present
value. The risk rates of 15.00% on first mortgage loans and 18.00% on
wrap-around mortgage loans are commensurate with the ability of the properties
to achieve their income goals and for Balcor Pension Investors - III to receive
payment.
A different valuation methodology was used to determine the present value of
the equity kickers where they exist. Income was increased at 4% on the
properties unless a particular set of circumstances on a mortgage loan dictate
a lower growth rate. Taxes, insurance, utilities and other expenses were
increased at 4%. To compute the value of the property the resultant net cash
flow from each property was capitalized at 10.25%. The resultant values were
discounted at 15.00% and 18.00% to a present value. This risk rate represents
the degree of risk of the properties to achieve their projected market values
and for Balcor Pension Investors - III to receive payment.
The value of many of the kickers originally included in the mortgage loans have
been deleted on the problem loans and those valued at funds advanced. As of
March 31, 1996, no value was ascribed to the kickers.
(5) The Present Value of the Notes Receivable
On August 31, 1983 the Greentree Village Apartments property was sold by Green
Tree Associates, Ltd. to T.M. Partners, Ltd. As a result of the sale, Balcor
received $1,291,000 of Sale Interest Proceeds. A Promissory Note in the amount
of $1,291,000 was signed for the Sale Interest to be paid as follows:
a) $433,000 due March 1, 1985 (Paid)
b) Balance of $858,000 due at April 1, 1995 (Maturity)
The Note is in default and we have elected not to assign any value to the Note.
As part of the sale of Elmwood Plantations, Balcor received a Note in the
amount of $400,000, payable as follows:
$100,000 October 31, 1986 (unpaid)
150,000 October 31, 1987 (unpaid)
150,000 October 31, 1988 (unpaid)
The Note maker filed for bankruptcy and, consequently, there is no value to the
Note.
BALCOR PENSION INVESTORS III SCHEDULE C
LOAN PORTFOLIO SUMMARY
AS OF: 31-Mar-96
DISCOUNT RATES: WRAPS
FIRSTS
DATE DATE DISCOUNTING
LOAN OF OF TERM
DEAL TYPE FUNDING MATURITY (IN QUARTERS)
----------------------------------------------------------------
1,3,5 BANNOCKBURN EXEC. CTR. WRAP 16-Sep-82 01-Dec-97 7.00
2 SEAFIRST FIN. CENTER WRAP 26-Oct-82 01-Nov-97 7.00
4,5 CARMEL ON PROVIDENCE WRAP 23-Dec-82 31-Dec-97 7.00
4 CORPORATE CAMPUS WRAP 22-Sep-88 01-Sep-98 10.00
6 PEPPER SQUARE WRAP 16-Jun-89 01-Jun-96 1.00
NET TO LIMITED PARTNERS
1. Valued at less than the amount of Funds Advanced.
2. Valued at the amount of the funds Advanced.
3. Value based on a modification.
4. Modified.
5. In bankruptcy.
6. Former Real Estate Owned.
DISCOUNT RATES: WRAPS 11.00% 11.00%
FIRSTS 10.25% 10.25%
CURRENT DISCOUNTED DISCOUNTED
FUNDS FUNDS DEBT
DEAL ADVANCED ADVANCED SERVICE
---------------------- ------------------------------------
BANNOCKBURN EXEC. CTR. 5,027,736 4,158,145 586,299
SEAFIRST FIN. CENTER 5,034,396 5,034,396 0
CARMEL ON PROVIDENCE 1,244,285 1,029,075 297,863
CORPORATE CAMPUS 2,604,683 2,800,000 0
PEPPER SQUARE 913,765 913,765 13,365
------------------------------------
14,824,865 13,935,381 897,527
LESS: GP 10% SHARE 89,753
LESS: GP 5% SHARE (on Loans
Valued at Funds Outstanding) 0
-------------------------
NET TO LIMITED PARTNERS 13,935,381 807,774
=========================
DISCOUNT RATES: WRAPS 11.00% 11.00% 11.00%
FIRSTS 10.25% 10.25% 10.25%
DISCOUNTED DISCOUNTED
EQUITY DISCOUNTED ACCRUED
DEAL BUILD-UP NOTES INTEREST
---------------------- ------------------------------------
BANNOCKBURN EXEC. CTR. 0 0 0
SEAFIRST FIN. CENTER 0 0 0
CARMEL ON PROVIDENCE 746,745 0 344,049
CORPORATE CAMPUS 0 0 0
PEPPER SQUARE 587,870 0 0
------------------------------------
1,334,615 0 344,049
LESS: GP 10% SHARE 133,461 0 34,405
LESS: GP 5% SHARE (on Loans
Valued at Funds Outstanding)
------------------------------------
NET TO LIMITED PARTNERS 1,201,153 0 309,644
====================================
DISCOUNT RATES: WRAPS 18.00% 18.00%
FIRSTS 15.00% 15.00%
DISCOUNTED DISCOUNTED TOTAL
INCOME EQUITY CURRENT
DEAL KICKERS KICKERS VALUATION
---------------------- ------------------------------------
BANNOCKBURN EXEC. CTR. 0 0 4,744,444
SEAFIRST FIN. CENTER 0 0 5,034,396
CARMEL ON PROVIDENCE 0 0 2,417,731
CORPORATE CAMPUS 0 0 2,800,000
PEPPER SQUARE 0 0 1,515,000
------------------------------------
0 0 16,511,571
LESS: GP 10% SHARE 0 0 257,619
LESS: GP 5% SHARE (on Loans
Valued at Funds Outstanding) 0
------------------------------------
NET TO LIMITED PARTNERS 0 0 16,253,952
====================================
CONCLUSIONS OF VALUE OF THE
"NET INVESTMENT IN LOANS RECEIVABLE"
The value of the "Net Investment in Loans Receivable" is the sum of the present
values of the various components of the loans described in the foregoing
sections of this report. Our conclusions are summarized as follows:
(1) The Present Value of the Return on Funds
Advanced and Return of Principal $14,743,155
(2) The Present Value of the Equity Buildup
and Accrued Interest 1,510,797
(3) The Present Value of the Income and Equity
Kickers 0
(4) Notes Receivable 0
-----------
Total Value of the "Net Investment in
Loans Receivable" as of March 31, 1996 $16,253,952
===========
VALUATION OF THE "REAL ESTATE ACQUIRED THROUGH FORECLOSURE"
Balcor Pension Investors - III began in 1982 as a Limited Partnership with an
investment objective to make mortgage loans. Because of the general decline in
the real estate market over the past several years, it was necessary for the
Partnership to acquire a number of the assets, secured by the mortgage loans,
through foreclosure or accepting the deed in lieu of foreclosure. As of March
31, 1996, the Partnership owned two Real Estate Assets Acquired Through
Foreclosure and two investments in joint ventures with an affiliate. Several
have been sold or liquidated prior to this date. On September 20, 1993, the
Riverview Office Building was sold for $1,900,000 and on November 22, 1993, the
Villa Verdi Apartments were sold for $5,425,000. On January 30, 1995, the
Crossings Shopping Center was sold for $776,490 of net proceeds to the
Partnership. On August 23, 1995, the Candlewyck Apartments were sold for net
proceeds of $6,072,257.
In arriving t an estimate of the value of each asset a number of factors were
considered. Important to the analysis was the Partnership's policy on the
assets as to whether an asset would be retained until the maturity of the
Partnership or sold in the near-term. The decision to sell in the near-term
might be on the basis that there is no long-term potential for the asset to
materially increase in value or that substantial dollars might be necessary to
renovate and repair the asset. Also, the Partnership may have received an offer
to purchase the property for a price that would be difficult to refuse, based
on the factors known at this time. The decision to hold until the maturity of
the Partnership indicates it is to be considered as an investment and the
assumption that the asset will grow in value.
Schedule D-1 lists the four Real Estate Assets in Balcor Pension Investors -
III presently owned by the Partnership. The first column indicates the Asset
Present Value without regard to potential payments to the General Partner. The
remaining columns set forth the calculations to determine if their is Excess
Value, and, if so, what is due the General Partner. The last column is the
Partnership Asset Value, which is equal to the Asset Present Value minus the
General Partner Share of Excess. The Partnership Asset Value includes the
Underlying Mortgage, where applicable, since the underlying mortgage is
deducted later in Schedule E - Liabilities.
Schedule D-2 is a summary of the calculations of the Asset Present Value for
each real estate asset in Balcor Pension Investors - III. Perimeter 400 Center
and Stemmons Center, which are also held by several affiliated Partnerships,
have been valued on the basis of 1996 projected cash flows. Orchards Center and
The Woods Apts. have been valued on the basis of their latest appraised value.
This was done because it is expected that this Partnership will be closed in
1998 because of the mortgage loan maturities, so it is not reasonable to assume
that the real estate assets will be held beyond that period for long term
investment value. Since the affiliated Partnerships holdings of portions of
Perimeter 400 Center will close later than Balcor Pension Investors - III, it
is assumed that Balcor Pension Investors - III's portion may be sold to an
affiliated Partnership in order to preserve its long term value.
SCHEDULE D-1
Real Estate Asset Summary
BALCOR PENSION INVESTORS III ASSET
PRESENT LESS: LESS:
VALUE UNDERLYING FUNDS EXCESS
PROPERTY 31-Mar-96 MORTGAGE OUTSTANDING VALUE
- --------------------------------------------------------------------------
Orchards S.C.
(Office Bldg sold 9/29/94) 7,000,000 1,655,741 4,090,719 1,253,540
Perimeter 400 Center(12.62%) 4,367,115 0 4,692,683 (325,568)
Stemmons (27.50%) 3,326,276 0 7,700,000 (4,373,724)
Woods Apartments 11,100,000 0 6,400,259 4,699,741
----------------------------------------------
25,793,391 1,655,741 22,883,661 1,253,989
GENERAL
PARTNER
SHARE OF NET PARTNERSHIP
EXCESS EXCESS ASSET VALUE
PROPERTY AT 10% VALUE 31-Mar-96
- ---------------------------------------------------------------
Orchards S.C.
(Office Bldg sold 9/29/94) 125,354 1,128,186 6,874,646
Perimeter 400 Center(12.62%) 0 (325,568) 4,367,115
Stemmons (27.50%) 0 (4,373,724) 3,326,276
Woods Apartments 469,974 4,229,767 10,630,026
-----------------------------------
595,328 658,661 25,198,063
SCHEDULE D-2
Real Esate Appraisal Projections
BALCOR PENSION INVESTORS III
REO - Discounted Cash Flow Analysis as of: 31-Mar-96
PROJECTION SOURCE: APPRAISAL PROJECTIONS
DISCOUNT RATES:
Net Cash Receipts 10.00%
Residual Value 10.50%
Sales Commission 2.50%(on Gross Price)
Quarter Factor (for formula reference) 1
ACTUAL ACTUAL ACTUAL ACTUAL
1992 1993 1994 1995
Net Cash Receipts ----------------------------------------
Reo Investments
Orchards S.C.
Valued at Appraised Value (11/94)
NOI B4 TI/LC/Capital 0 0 0 0
TI/LC/Capital 0 0 0 0
----------------------------------------
Net Cash Receipts 0 0 0 0
GROWTH RATE 1.04
CAPPED VALUE @ 9.00%
Perimeter 400 Center (12.62%)
Balcor Internal Projections
NOI B4 TI/LC/Capital 0 240,956 336,312 429,849
TI/LC/Capital 0 300,095 94,131 153,523
----------------------------------------
Net Cash Receipts 0 (59,139) 242,181 276,327
GROWTH RATE 1.04
CAPPED VALUE @ 9.00%
Stemmons (27.50%)
Balcor Internal Projections
NOI B4 TI/LC/Capital 0 0 0 251,070
TI/LC/Capital 0 0 0 124,458
----------------------------------------
Net Cash Receipts 0 0 0 126,612
GROWTH RATE 1.04
CAPPED VALUE @ 9.00%
Woods Apartments
Valued at Appraised Value(10/95)
NOI B4 TI/LC/Capital 0 0 0 0
TI/LC/Capital 0 0 0 0
----------------------------------------
Net Cash Receipts 0 0 0 0
GROWTH RATE 1.04
CAPPED VALUE @ 9.00%
TOTAL NCR FROM INVESTMENTS 0 (59,139) 242,181 402,938
Total Net Cash Receipts PV
Total Residual Value PV
TOTAL PRESENT VALUES Budget Pro-ject Pro-ject Pro-ject
1996 1997 1998 1999
----------------------------------------
Orchards S.C.
Valued at Appraised Value (11/94)
NOI B4 TI/LC/Capital 0 0 0 0
TI/LC/Capital 0 0 0 0
----------------------------------------
Net Cash Receipts 0 0 0 0
GROWTH RATE 1.04
CAPPED VALUE @ 9.00%
Perimeter 400 Center (12.62%)
Balcor Internal Projections
NOI B4 TI/LC/Capital 426,033 374,987 434,100 0
TI/LC/Capital 107,024 72,921 66,869 0
----------------------------------------
Net Cash Receipts 319,009 302,067 0
GROWTH RATE 1.04
CAPPED VALUE @ 9.00% 4,635,883
Stemmons (27.50%)
Balcor Internal Projections
NOI B4 TI/LC/Capital 271,951 307,905 300,690 331,124
TI/LC/Capital 68,858 0 39,467 0
----------------------------------------
Net Cash Receipts 203,092 307,905 261,223
GROWTH RATE 1.04
CAPPED VALUE @ 9.00% 3,587,176
Woods Apartments
Valued at Appraised Value(10/95)
NOI B4 TI/LC/Capital 0 0 0 0
TI/LC/Capital 0 0 0 0
----------------------------------------
Net Cash Receipts 0 0 0 0
GROWTH RATE 1.04
CAPPED VALUE @ 9.00%
TOTAL NCR FROM INVESTMENTS 522,101 609,972 261,223 0
Pro-ject Pro-ject Pro-ject Pro-ject
2000 2001 2002 2003
----------------------------------------
Orchards S.C.
Valued at Appraised Value (11/94)
NOI B4 TI/LC/Capital 0 0 0 0
TI/LC/Capital 0 0 0 0
----------------------------------------
Net Cash Receipts 0 0 0 0
GROWTH RATE 1.04
CAPPED VALUE @ 9.00% 0
Perimeter 400 Center (12.62%)
Balcor Internal Projections
NOI B4 TI/LC/Capital 0 0 0 0
TI/LC/Capital 0 0 0 0
----------------------------------------
Net Cash Receipts 0 0 0 0
GROWTH RATE 1.04
CAPPED VALUE @ 9.00%
Stemmons (27.50%)
Balcor Internal Projections
NOI B4 TI/LC/Capital 0 0 0 0
TI/LC/Capital 0 0 0 0
----------------------------------------
Net Cash Receipts
GROWTH RATE 1.04
CAPPED VALUE @ 9.00%
Woods Apartments
Valued at Appraised Value(10/95)
NOI B4 TI/LC/Capital 0 0 0 0
TI/LC/Capital 0 0 0 0
----------------------------------------
Net Cash Receipts 0 0 0 0
GROWTH RATE 1.04
CAPPED VALUE @ 9.00% 0
TOTAL NCR FROM INVESTMENTS 0 0 0 0
Asset PV as of
31-Mar-96
----------
Orchards S.C.
Valued at Appraised Value (11/94)
NOI B4 TI/LC/Capital 0 NCR Present Value
TI/LC/Capital 7,000,000 Residual Present Value
----------
Net Cash Receipts 7,000,000 Appraised Value
GROWTH RATE 1.04
CAPPED VALUE @ 9.00%
Perimeter 400 Center (12.62%)
Balcor Internal Projections
NOI B4 TI/LC/Capital 478,012 NCR Present Value
TI/LC/Capital 3,889,103 Residual Present Value
----------
Net Cash Receipts 4,367,115 Appraised Value
GROWTH RATE 1.04
CAPPED VALUE @ 9.00%
Stemmons (27.50%)
Balcor Internal Projections
NOI B4 TI/LC/Capital 602,902 NCR Present Value
TI/LC/Capital 2,723,374 Residual Present Value
----------
Net Cash Receipts 3,326,276 Appraised Value
GROWTH RATE 1.04
CAPPED VALUE @ 9.00%
Woods Apartments
Valued at Appraised Value(10/95)
NOI B4 TI/LC/Capital 0 NCR Present Value
TI/LC/Capital 11,100,000Residual Present Value
----------
Net Cash Receipts 11,100,000Appraised Value
GROWTH RATE 1.04
CAPPED VALUE @ 9.00%
1,080,914 Total NCR PV
24,712,477Total Residual PV
----------
25,793,391TOTAL PRESENT VALUES
CALCULATION OF THE UNAMORTIZED PORTION
OF THE OFFERING EXPENSES
The unamortized portion of the offering expenses of Balcor Pension Investors -
III, as of March 31, 1996, is calculated on a straight line basis over the life
of the mortgage loan portfolio as follows:
Total Offering Expenses through March 31, 1996 - $10,917,327
-----------
Quarterly Amortization based on a total of 60 quarters - $181,955
--------
Unamortized Portion as of December 31, 1992 - $3,639,127
Remaining quarters as of December 31, 1992 (adjusted) - 23
Revised quarterly amortization - $158,223
Unamortized Portion as of March 31, 1996 = $3,639,127 - 2,056,897 =
$1,582,230
==========
(10 Remaining Quarters)
CALCULATION OF THE VALUE OF A LIMITED PARTNERSHIP INTEREST
IN BALCOR PENSION INVESTORS - III
The calculation of the Value of a Limited Partnership Interest in Balcor
Pension Investors - III calls for the substitution of the value of the assets
appraised for the related accounting numbers. The following Schedule E, which
is Schedule B-1 modified for the values of the appraised assets, summarizes the
calculations.
SCHEDULE E
ADJUSTED BALANCE SHEET
BALCOR PENSION INVESTORS - III
AS OF MARCH 31, 1996
(UNAUDITED)
Assets
Cash and Cash Equivalents $ 5,755,822
Escrow Deposits 92,692
Accounts and Accrued Interest Receivable 67,206
Prepaid Expenses 7,723
Deferred Expenses 18,746
Interest Receivable on Notes, Short-term
Investments, and First Mortgages 56,817
Net Investment in Loans Receivable 16,253,952 (1)
Unamortized Portion of Offering Expenses 1,582,230
Real Estate Acquired Through Foreclosure 25,198,063 (2)
-----------
Total Assets $49,033,251
===========
Liabilities
Total Liabilities, including Mortgage Notes
Payable of $1,655,741 (Orchards S/C) $ 2,450,188
Partners Capital, adjusted for Value
(237,476 Limited Partnership Interests) 46,583,063
-----------
Total Liabilities and Partners' Capital $49,033,251
===========
(1)From Schedule C.
(2)From Schedule D-1.
The Value of a Limited Partnership Interest in Balcor Pension Investors - III,
March 31, 1996 =
Partners' Capital, Adjusted for Value of the Assets
-------------------------------------------------- =
Number of Partnership Interests
$46,583,063
----------- = $196.16
237,476 =======
Rounded $196.00
=======
CALCULATION OF THE INTERESTS IN THE
EARLY INVESTMENT INCENTIVE FUND ("FUND")
As described in an earlier section of this report, the Partnership Agreement
provides that, under certain terms and conditions, 2.5% of the cash flow
distributed be set aside in the Early Investment Incentive Fund for payment, on
dissolution of the Partnership, to two classes of investors who purchased
Interests (1) on or before September 30, 1982, and (2) between October 1, 1982
and December 31, 1982. There were 158,937 Interests purchased prior to
September 30, 1982 and 78,539 Interests purchased between October 1, 1982 and
December 31, 1982.
The valuation is based on the sum of (1) the present value of the Early
Investors' 25% share in the General Partners' 10% share of certain designated
earnings of the Partnership, (2) the Early Investors Capital as of March 31,
1996, and (3) the present value of the future earnings from repurchased
interests. This value is then distributed to the two classes of Early Investors
pro rata on the basis of the preferred return.
General Partners' 10% Share of the 3/31/96
Valuation $ 257,619
Early Investor 25% Share 64,405
Early Investor Capital @ 3/31/96 3,929,661
Present Value of Future Earnings on Repurchased
Shares 157,093
----------
$4,151,159
==========
Value Per Unit
Investors Level 1 $17.48
======
Investors Level 2 $17.48
======
Rounded Value Per Unit
Investors Level 1 $17.00
======
Investors Level 2 $17.00
======