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, 1996
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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 0-14351
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BALCOR REALTY INVESTORS 85-SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Illinois 36-3327917
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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 Realty Investors 85-Series II A Real Estate Limited Partnership (the
"Registrant") is a limited partnership formed in 1984 under the laws of the
State of Illinois. The Registrant raised $83,936,000 from sales of Limited
Partnership Interests. The Registrant's operations consist exclusively of
investment in and operation of real property, and all information included in
this report relates to this industry segment.
The Registrant utilized the net offering proceeds to acquire thirteen real
property investments and a minority joint venture interest in one additional
property. The Registrant disposed of twelve of these properties and the
minority joint venture interest as of December 31, 1996. The Registrant owns
the remaining property described under "Item 2. Properties." The Partnership
Agreement provides that the proceeds of any sale or refinancing of the
Registrant's properties will not be reinvested in new acquisitions.
The Registrant's remaining property faces various levels of competition for
retention of its tenants from similar types of properties in the vicinity in
which it is located. The Registrant has no plans to change the current use of
or to renovate its remaining property.
Real estate values, especially for good quality, well located property,
increased significantly during 1996 due to a combination of readily available
capital, low interest rates, and decreased vacancy rates resulting from steady
demand and an acceptable level of new construction. While 1996 proved to be an
excellent year to sell real estate, projected yields by buyers on new
acquisitions have declined significantly due to competition and rising prices.
Although there will be variances by asset class and geographic area, the
investment climate is expected to remain strong for 1997. However, values could
begin to level off as they approach replacement cost triggering new
construction and an increase in capitalization rates.
The investment market for apartments was excellent during 1996 due to a
number of factors. Investor interest was strong, driven primarily by
institutions, as Real Estate Investment Trusts aggressively expanded their
portfolios and pension funds viewed apartments as an attractive asset
class due to their perceived low volatility and the emergence of large
professional property management companies. Operationally, existing
apartment properties registered on a national basis occupancy in the mid
90's and rental rate increases of 3-4% in 1996. While above the rate of
inflation, the rate of rental growth in 1996 was below that of the
previous two years suggesting that the apartment cycle may have plateaued,
especially as the impact of new construction in many areas is being felt.
While 1997 is projected to be another solid year, values should begin to
level off as capitalization rates move upward continuing a trend which
began during the second half of 1996.
The remaining property, Steeplechase Apartments, is subject to certain
competitive conditions in the market it is located. See "Item 7. Liquidity and
Capital Resources" for additional information.
During 1996, the Registrant sold the Forest Ridge - Phase II, Country Oaks,
Chestnut Ridge - Phase I, Hunters Glen, Marbrisa, Willow Bend Lake and Park
Crossing apartment complexes. During 1996, the Registrant and an affiliate also
sold the Rosehill Pointe Apartments, in which the Partnership held a minority
joint venture interest. The Registrant has entered into a contract for the sale
of its remaining property, the Steeplechase Apartments. The timing of the
termination of the Registrant and final distribution of cash will depend upon
the nature and extent of liabilities and contingencies which exist or may
arise. Such contingencies may include legal and other fees stemming from
litigation involving the Partnership including, but not limited to, the
lawsuits discussed in "Item 3. Legal Proceedings." In the absence of any such
contingency, the reserves will be paid within twelve months of the last
property being sold. In the event a contingency arises, reserves may be held
by the Registrant for a longer period of time.
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 June 1996, the Registrant sold the Forest Ridge - Phase II Apartments in
an all cash sale for $11,100,000. During June 1996, the Registrant and an
affiliate sold the Rosehill Pointe Apartments in an all cash sale for
$20,700,000. During September 1996, the Registrant sold the Country Oaks,
Chestnut Ridge - Phase I and Hunters Glen apartment complexes in all cash sales
for $8,250,000, $5,513,400 and $9,100,000, respectively. During October 1996,
the Registrant sold the Marbrisa and Willow Bend Lake apartment complexes in
all cash sales for $7,800,000 and $14,350,000, respectively. During November
1996, the Registrant sold the Park Crossing Apartments in an all cash sale for
$11,350,000. See "Item 7. Liquidity and Capital Resources" for additional
information.
The Registrant has entered into a contract for the sale of its remaining
property, the Steeplechase Apartments for a sale price of $10,100,000. See
"Item 1. Other Information" for additional information.
The Registrant, by virtue of its ownership of real estate, 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 Partners-XVII, the General Partner of the
Registrant, and its affiliates perform services for the Registrant. The
Registrant currently has no employees engaged in its operations.
Other Information
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Steeplechase Apartments
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As previously reported, on November 20, 1996, the Registrant contracted to sell
Steeplechase Apartments, Lexington-Fayette, Kentucky, to an unaffiliated party,
Infinity Acquisitions, L.L.C., an Illinois limited liability company. The
agreement of sale was terminated by the purchaser on December 2, 1996 and was
subsequently reinstated on December 20, 1996. The sale price is $10,100,000.
The closing of the sale has been extended to March 27, 1997.
Item 2. Properties
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As of December 31, 1996, the Registrant owned in fee simple the Steeplechase
Apartments located in Lexington-Fayette, Kentucky. This property is a 296-unit
apartment complex located on approximately 16 acres. See Note 2 of Notes to
the Financial Statements for additional information.
The average occupancy rates and effective average rent per unit for each of the
last five years for the remaining property owned by the Registrant at December
31, 1996, are described below.
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
Steeplechase
Apartments
Occupancy rate 93% 94% 95% 95% 95%
Effective rent $541 $528 $514 $494 $479
Apartment units in this property are rented with leases of one year or less,
with no tenant occupying greater than ten percent of the property. Real estate
taxes incurred in 1996 for this property totaled $77,949.
The Federal tax basis of the Registrant's property totaled $8,581,391 as of
December 31, 1996. For Federal income tax purposes, the acquisition cost of
this property is depreciated over its useful life of 18 years, using the ACRS
method. Other minor assets are depreciated over their applicable recovery
periods.
Steeplechase Apartments is held subject to mortgage financing as described in
more detail in Note 5 of Notes to the Financial Statements.
In the opinion of the General Partner, the Registrant provided for adequate
insurance coverage for its real estate investment property.
See Notes to Financial Statements for other information regarding this real
property investment.
Item 3. Legal Proceedings
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Proposed class action
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On February 29, 1996, a proposed class action complaint was filed, Raymond
Masri vs. Lehman Brothers, Inc., et al., Case No. 96/103727 (Supreme Court of
the State of New York, County of New York). The Registrant, additional limited
partnerships which were sponsored by The Balcor Company, three limited
partnerships sponsored by the predecessor of Lehman Brothers, Inc. (together
with the Registrant and the affiliated partnerships, the "Defendant
Partnerships"), Lehman Brothers, Inc. and Smith Barney Holdings, Inc. are
defendants. The complaint alleges, among other things, common law fraud and
deceit, negligent misrepresentation and breach of fiduciary duty relating to
the disclosure of information in the offering of limited partnership interests
in the Defendant Partnerships. The complaint seeks judgment for compensatory
damages equal to the amount invested in the Defendant Partnerships by the
proposed class plus interest accrued thereon; general damages for injuries
arising from the defendants' alleged actions; recovery from the defendants of
all profits received by them as a result of their alleged actions relating to
the Defendant Partnerships; exemplary damages; attorneys' fees and other costs.
The defendants intend to vigorously contest this action. No class has been
certified as of this date. The Registrant believes it has 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.
Proposed class action
- ---------------------
On August 30, 1996, a proposed class action complaint was filed, Lenore Klein
vs. Lehman Brothers, Inc., et al., Superior Court of New Jersey, Law Division,
Union County, Docket No. Unn-L-5162-96). The Registrant, additional limited
partnerships which were sponsored by The Balcor Company (together with the
Partnership, the "Affiliated Partnerships"), American Express Company, Lehman
Brothers, Inc., additional limited partnerships sponsored by the predecessor of
Lehman Brothers, Inc. (together with the Registrant and the Affiliated
Partnerships, the "Defendant Partnerships") and Smith Barney Holdings, Inc. are
the named defendants in the action. The complaint was amended on October 18,
1996 to add additional plaintiffs. The amended complaint alleges, among other
things, common law fraud and deceit, negligent misrepresentation, breach of
contract, breach of fiduciary duty and violation of certain New Jersey statutes
relating to the disclosure of information in the offering of limited
partnership interests in the Defendant Partnerships. The amended complaint
seeks judgment for compensatory damages equal to the amount invested in the
Defendant Partnerships by the proposed class plus interest; general damages for
injuries arising from the defendants' alleged actions; equitable relief,
including rescission, on certain counts; punitive damages; treble damages on
certain counts; recovery from the defendants of all profits received by them as
a result of their alleged actions relating to the Defendant Partnerships;
attorneys' fees and other costs.
The defendants intend to vigorously contest this action. No class has been
certified as of this date. The Registrant believes it has 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 1996.
PART II
Item 5. Market for the 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 distributions, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
As of December 31, 1996, the number of record holders of Limited Partnership
Interests of the Registrant was 7,348.
Item 6. Selected Financial Data
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Year ended December 31,
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1996 1995 1994 1993 1992
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Total income $13,452,971 $13,107,902 $12,877,418 $13,143,237 $14,216,484
Income (loss)
before gain on
sale of properties
and extra-
ordinary items 1,835,074 (1,479,430) (2,019,363) (2,299,675) (2,647,166)
Net income (loss) 27,848,238 (1,479,430) (2,019,363) 1,348,884 (2,647,166)
Net income (loss)
per Limited
Partnership
Interest 328.46 (17.45) (23.82) 15.91 (31.22)
Total assets 18,507,810 51,038,768 52,186,795 54,690,993 65,783,386
Mortgage notes
payable 7,249,433 53,469,385 53,346,903 57,225,506 65,457,125
Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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Operations
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Summary of Operations
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During 1996, Balcor Realty Investors 85-Series II A Real Estate Limited
Partnership (the "Partnership") sold seven properties and recognized
significant gains on these sales. The Partnership also recognized its share of
the gain on the June 1996 sale of the Rosehill Pointe Apartments, which was
owned by a joint venture consisting of the Partnership and an affiliate. These
events resulted in the recognition of net income during 1996 as compared to a
net loss during 1995 and 1994. Improved property operations at several of the
properties owned by the Partnership was the primary reason the net loss
decreased during 1995 as compared to 1994. Further discussion of the
Partnership's operations is summarized below.
1996 Compared to 1995
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Rental and service income decreased in 1996 as compared to 1995 primarily due
to the sales of the Forest Ridge - Phase II, Country Oaks, Chestnut Ridge -
Phase I, Hunters Glen, Marbrisa, Willow Bend Lake, and Park Crossing apartment
complexes during 1996.
Higher average cash balances due to the investment of the proceeds from the
property sales prior to distribution to Limited Partners in January 1997,
resulted in an increase in interest income on short-term investments during
1996 as compared to 1995.
Rosehill Pointe Apartments, in which the Partnership held a minority joint
venture interest, was sold during June 1996. As a result of the Partnership's
share of the gain recognized during 1996 in connection with the sale, income
from participation in joint venture with an affiliate increased in 1996 when
compared to 1995. In connection with the sale, the Partnership also recognized
its share of debt extinguishment expense of $20,945 which is classified as an
extraordinary item.
Interest expense on mortgage notes payable decreased in 1996 as compared to
1995 primarily due to the repayment of mortgage loans with proceeds from the
property sales.
The repayment of the General Partner loans during 1996 along with lower
interest rates resulted in a decrease in interest expense on short-term loans
from affiliate during 1996 as compared to 1995.
Depreciation expense decreased in 1996 as compared to 1995 due to the 1996
property sales.
Amortization of deferred expenses related to mortgage loans on properties
decreased in 1996 as compared to 1995 due to the 1996 property sales.
Property operating expenses decreased during 1996 as compared to 1995 due to
the property sales. This decrease of approximately $807,000 was partially
offset by increased repair and maintenance expenditures in 1996 at the Hunters
Glen Apartments of approximately $133,000 relating to basin work and painting
in preparation for the sale.
Real estate tax expense decreased during 1996 as compared to 1995 due to the
property sales.
Property management fees decreased in 1996 as compared to 1995 due to the
property sales.
Higher professional fees resulted in an increase in administrative expenses
during 1996 when compared to 1995.
The Partnership sold the Forest Ridge - Phase II, Country Oaks, Chestnut Ridge
- - Phase I, Hunters Glen, Marbrisa, Willow Bend Lake, and Park Crossing
apartment complexes and recognized gains totaling $25,641,050 during 1996.
As a result of the 1996 property sales, the Partnership wrote-off the remaining
unamortized deferred expenses in the amount of $709,329. In addition, in
connection with the sales of the Chestnut Ridge - Phase I, Hunters Glen, Willow
Bend Lake and Park Crossing apartment complexes, the Partnership paid $804,428
in prepayment penalties. These amounts were recognized as an extraordinary item
and classified as debt extinguishment expenses during 1996.
In connection with the sale of the Chestnut Ridge - Phase I Apartments, the
Partnership recognized an extraordinary gain on forgiveness of debt of
$1,864,919 in 1996.
1995 Compared to 1994
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The Partnership was able to achieve higher rental rates at most of the
Partnership's properties in 1995. As a result, rental and service income
increased at these properties during 1995 as compared to 1994.
Rental income increased at the Rosehill Pointe Apartments due to higher rental
rates, resulting in participation in income of joint venture with an affiliate
during 1995 as compared to participation in loss of joint venture with an
affiliate in 1994.
During 1994, the Partnership reached a settlement with defendants in the
litigation relating to the Park Crossing Apartments and received $300,000 in
settlement of all claims due to the Partnership.
In connection with the 1994 refinancing of certain of the properties' mortgage
loans, the Partnership retired $2,274,269, including deferred interest, and
replaced $4,215,546 of affiliate mortgage notes payable related to the Chestnut
Ridge - Phase I and Forest Ridge - Phase II apartment complexes with proceeds
from both third party mortgage loans and short-term loans from the General
Partner. As a result, interest expense on mortgage notes payable decreased and
interest expense on short-term loans from affiliates increased during 1995 as
compared to 1994. The Partnership paid a prepayment penalty of $54,805 in
connection with the Country Oaks Apartments refinancing in June 1995 which
partially offset the decrease in interest expense on mortgage notes payable.
Due to the refinancing of the mortgage loans collateralized by Chestnut Ridge -
Phase I in 1994, the Partnership wrote-off the remaining unamortized deferred
expenses related to the previous loan. As a result, amortization of deferred
expenses decreased during 1995 as compared to 1994.
Professional fees incurred in 1994 related to refinancings and legal fees
relating to the Park Crossing Apartments settlement incurred in 1994 resulted
in a decrease in administrative expenses during 1995 as compared to 1994.
Liquidity and Capital Resources
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The cash position of the Partnership increased by approximately $11,332,000 as
of December 31, 1996 when compared to December 31, 1995 primarily as a result
of the proceeds received in connection with the property sales in 1996. The
Partnership's cash used in operating activities of approximately $306,000 was
primarily due to the operations of its properties and interest income on
short-term investments, which were offset by administrative expenses and the
payment of accrued interest on short-term loans from an affiliate. Cash
provided by investing activities of approximately $61,724,000 consisted of
proceeds received in connection with the sales of the Forest Ridge - Phase II,
Country Oaks, Chestnut Ridge - Phase I, Hunters Glen, Marbrisa, Willow Bend
Lake, and Park Crossing apartment complexes, net of selling costs, plus net
distributions received from the joint venture with an affiliate, which
primarily represent the Partnership's share of the proceeds from the sale of
Rosehill Pointe Apartments. Cash used in financing activities of approximately
$50,086,000 consisted primarily of the repayment in full of approximately
$11,901,000 of loans payable to an affiliate and the repayment of mortgage
notes payable of approximately $38,272,000 with proceeds from property sales.
In January 1997, the Partnership made a distribution from sales proceeds to
Limited Partners as discussed below.
The Partnership classifies the cash flow performance of its properties as
either positive, a marginal deficit or a significant deficit, each after
consideration of debt service payments, unless otherwise indicated. A deficit
is considered to be significant if it exceeds $250,000 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. During 1996 and
1995, Steeplechase Apartments generated positive cash flow. As of December 31,
1996, the occupancy rate at the property was 96%.
The Forest Ridge - Phase II Apartments, which was sold in June 1996, generated
positive cash flow prior to its sale in 1996 and generated a marginal deficit
during 1995. The Chestnut Ridge - Phase I Apartments, which was sold in
September 1996, generated a marginal deficit prior to its sale in 1996 and
during 1995. The Hunters Glen and Country Oaks apartment complexes, which were
sold in September 1996, both generated positive cash flow prior to their sales
in 1996 and during 1995. The Marbrisa and Willow Bend Lake apartment
complexes, which were sold in October 1996, both generated positive cash flow
prior to their sales in 1996 and during 1995. The Park Crossing apartment
complex, which was sold in November 1996, generated positive cash flow prior to
its sale in 1996 and during 1995. The Rosehill Pointe Apartments, in which the
Partnership held a minority joint venture interest, was sold in June 1996 and
generated positive cash flow prior to its sale in 1996 and during 1995.
During 1996, the Partnership sold the Forest Ridge - Phase II, Country Oaks,
Chestnut Ridge - Phase I, Hunters Glen, Marbrisa, Willow Bend Lake and Park
Crossing apartment complexes. During 1996, the General Partner also sold the
Rosehill Pointe Apartments, in which the Partnership held a minority joint
venture interest. The Partnership has entered into a contract for the sale of
its remaining property, the Steeplechase Apartments, for a sale price of
$10,100,000. The timing of the termination of the Partnership and final
distribution of cash will depend upon the nature and extent of liabilities and
contingencies which exist or may arise. Such contingencies may include legal
and other fees stemming from litigation involving the Partnership including,
but not limited to the lawsuits discussed in "Item 3. Legal Proceedings." In
the absence of any such contingency, the reserves will be paid within twelve
months of the last property being sold. In the event a contingency arises,
reserves may be held by the Partnership for a longer period of time.
The Rosehill Pointe Apartments was owned by a joint venture consisting of the
Partnership and an affiliate. In June 1996, the joint venture sold the property
in an all cash sale for $20,700,000. From the proceeds of the sale, the joint
venture paid $15,537,677 to the third party mortgage holder in full
satisfaction of the first mortgage loan, and paid $170,250 in selling costs.
The net proceeds of the sale were $4,992,073, of which $1,915,958 was the
Partnership's share. Pursuant to the terms of the sale, $500,000 of the
proceeds were retained by the joint venture until October 1996. The full amount
of the holdback was released in October 1996. The Partnership's share of the
remaining proceeds was used to repay a portion of the General Partner loan. See
Note 7 of Notes to Financial Statements for additional information.
In June 1996, the Partnership sold the Forest Ridge - Phase II Apartments
complex in an all cash sale for $11,100,000. From the proceeds of the sale,
the Partnership paid $7,870,116 to the third party mortgage holder in full
satisfaction of the first mortgage loan, and paid $126,000 in selling costs.
Pursuant to the terms of the sale, $500,000 of the proceeds were retained by
the Partnership until October 1996. The full amount of the holdback was
released in October 1996. The remaining proceeds were used to repay a portion
of the General Partner loan. See Note 10 of Notes to Financial Statements for
additional information.
In September 1996, the Partnership sold the Country Oaks Apartments for
$8,250,000. The purchaser of the Country Oaks Apartments took title subject to
the existing first mortgage in the amount of $5,946,893. From the proceeds of
the sale, the Partnership paid $154,436 in selling costs. The remaining
proceeds were used to repay a portion of the General Partner loan in October
1996. See Note 10 of Notes to Financial Statements for additional information.
In September 1996, the Partnership sold the Chestnut Ridge - Phase I Apartments
in an all cash sale for $5,513,400. From the proceeds of the sale, the
Partnership paid $3,629,161 to the third party mortgage holder in full
satisfaction of the first mortgage loan, paid $199,601 in selling costs and
$181,458 in prepayment penalties, resulting in the Partnership receiving net
proceeds of $1,503,180 from the sale. However, the terms of the 1994
refinancing of this property provided that minimum net proceeds of $1,646,000
were to be received from the sale of this property. As a result, $142,820 was
contributed to the Partnership through an increase to the balance of the junior
loan outstanding from The Balcor Company ("TBC"). Pursuant to the terms of the
sale, $250,000 of the proceeds were retained by the Partnership until December
1996. The full amount of the holdback was released in December 1996. The
remaining proceeds were used to repay a portion of the General Partner loan in
October 1996. See Notes 10 and 12 of Notes to Financial Statements for
additional information.
In September 1996, the Partnership sold the Hunters Glen Apartments in an all
cash sale for $9,100,000. From the proceeds of the sale, the Partnership paid
$4,541,552 to the third party mortgage holder in full satisfaction of the first
mortgage loan, paid $270,215 in selling costs and $90,832 in prepayment
penalties. Pursuant to the terms of the sale, $500,000 of the proceeds were
retained by the Partnership until January 1997. The full amount of the holdback
was released in January 1997. A portion of the remaining proceeds was used to
repay a portion of the General Partner loan in October 1996 and the remainder
was distributed to the Limited Partners in January 1997. See Note 10 of Notes
to Financial Statements for additional information.
In October 1996, the Partnership sold the Marbrisa Apartments in an all cash
sale for $7,800,000. From the proceeds of the sale, the Partnership paid
$5,361,230 to the third party mortgage holder in full satisfaction of the first
mortgage loan, and paid $325,361 in selling costs. Pursuant to the terms of the
sale, $500,000 of the proceeds were retained by the Partnership until February
1997. The full amount of the holdback was released in February 1997. The
remainder of the proceeds were distributed to the Limited Partners in January
1997. See Note 10 of Notes to Financial Statements for additional information.
In October 1996, the Partnership sold the Willow Bend Lake Apartments in an all
cash sale for $14,350,000. From the proceeds of the sale, the Partnership paid
$9,737,486 to the third party mortgage holder in full satisfaction of the first
mortgage loan, paid $366,660 in selling costs and $389,499 in prepayment
penalties. Pursuant to the terms of the sale, $250,000 of the proceeds were
retained by the Partnership until February 1997. The full amount of the
holdback was released to the Partnership in February 1997. The remainder of the
proceeds were distributed to the Limited Partners in January 1997. See Note 10
of Notes to Financial Statements for additional information.
In November 1996, the Partnership sold the Park Crossing Apartments in an all
cash sale for $11,350,000. From the proceeds of the sale, the Partnership paid
$7,131,987 to the third party mortgage holder in full satisfaction of the first
mortgage loan, paid $191,995 in selling costs and $142,639 in prepayment
penalties. The majority of the remaining proceeds were distributed to the
Limited Partners in January 1997. See Note 10 of Notes to Financial Statements
for additional information.
Steeplechase Apartments is located in Lexington, Kentucky, in the southeast
sub-market. This area offers a wide range of pricing at its various apartment
complexes. Steeplechase's pricing positions it toward the upper end of the
market. Approximately 1,500 new units were completed in the sub-market in 1996,
which has had a softening effect on occupancy and rental rates at Steeplechase
Apartments. In 1996, the property's average occupancy was 93%; the southeast
sub-market's average occupancy was 91%.
During January 1997, the Partnership made its initial cash distribution and
paid $9,232,960 ($110 per Interest) to the holders of Limited Partnership
Interests representing a special distribution of Net Cash Proceeds from the
sales of the Hunters Glen, Marbrisa, Willow Bend Lake and Park Crossing
apartment complexes. To date, Limited Partners have received cash distributions
of Net Cash Proceeds of $110 per $1,000 interest, as well as certain tax
benefits. The Partnership will distribute available proceeds from the sale of
the Steeplechase Apartments in 1997. In light of results to date, investors
will not recover a substantial portion of their original investment.
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
- ---------------------------------------------------
See Index to Financial Statements and Financial Statement Schedule in this
Form 10-K.
The supplemental financial information specified by Item 302 of Regulation S-K
is not applicable.
The net effect of the differences between the financial statements and the tax
returns is summarized as follows:
December 31, 1996 December 31, 1995
----------------------- -------------------------
Financial Tax Financial Tax
Statements Returns Statements Returns
---------- --------- ---------- ---------
Total assets $18,507,810 $16,292,048 $51,038,768 $30,235,662
Partners' capital
(deficit):
General Partner (643,026) (169,038) (921,508) (14,587,833)
Limited Partners 11,121,829 17,169,649 (16,228,370) (16,576,162)
Net income (loss):
General Partner 278,482 14,418,795 (14,794) (38,483)
Limited Partners 27,569,756 33,965,368 (1,464,636) (2,212,271)
Per Limited Part-
nership Interest 328.46 404.66 (17.45) (26.36)
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
- --------------------
There have been no changes in or disagreements with accountants on any matter
of accounting principles, practices or financial statement disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
(a) Neither the Registrant nor Balcor Partners-XVII, its General Partner, has a
Board of Directors.
(b, c & e) The names, ages and business experiences of the executive officers
and significant employees of the General Partner of the Registrant are as
follows:
TITLE OFFICERS
----- --------
Chairman, President and Chief Thomas E. Meador
Executive Officer
Senior Vice President Alexander J. Darragh
Senior Vice President James E. Mendelson
Senior Vice President John K. Powell, Jr.
Managing Director, Chief Jayne A. Kosik
Financial Officer, Treasurer
and Assistant Secretary
Thomas E. Meador (age 49) 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 (age 42) 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.
James E. Mendelson (age 34) joined Balcor in July 1984 and is responsible for
Balcor's property sales activities. He also has supervisory responsibility
for Balcor's accounting, financial, treasury, investor services and
investment administration functions. From 1989 to 1995, Mr. Mendelson was
Vice President - Transaction Management and Vice President - Senior
Transaction Manager and had responsibility for various asset management
matters relating to real estate investments made by Balcor, including
negotiations for the restructuring of mortgage loan investments. Mr.
Mendelson received his M.B.A. degree from the University of Chicago.
John K. Powell, Jr. (age 46) 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 function. 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.
Jayne A. Kosik (age 39) joined Balcor in August 1982 and, as Chief Financial
Officer, is responsible for Balcor's financial, human resources and treasury
functions. From June 1989 until October 1996, Ms. Kosik had supervisory
responsibility for accounting functions relating to Balcor's public and
private partnerships. She is also Treasurer and a Managing Director of The
Balcor Company. Ms. Kosik is a Certified Public Accountant.
(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 1996.
Item 11. Executive Compensation
- -------------------------------
The Registrant paid $1,366 in 1996 with respect to one of the executive
officers and directors of Balcor Partners-XVII, the General Partner. The
Registrant has not paid and does not propose to pay any remuneration to the
remaining executive officers and directors of the General Partner. Certain of
these remaining 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 Partners-XVII 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
Interest 1,235 Interests 1.47%
Relatives and affiliates of the partners and officers of the General Partner
own 26 additional Interests.
(c) The Registrant is not aware of any arrangements, the operation of which may
result in a change of control of the Registrant.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
(a & b) See Note 4 of Notes to Financial Statements for information relating to
the Partnership Agreement and the allocation of distributions and profits and
losses.
See Note 9 of Notes to Financial Statements for information relating to
transactions with affiliates.
(c) No management person is indebted to the Registrant.
(d) The Registrant has no outstanding agreements with any promoters.
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
- ------------------------------------------------------------------------
(a)
(1 & 2) See Index to Financial Statements and Financial Statement Schedule in
this Form 10-K.
(3) Exhibits:
(3) The Amended and Restated Agreement and Certificate of Limited Partnership
set forth as Exhibit 3 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-11 dated March 12, 1985 (Registration No. 2-95000) is
incorporated herein by reference.
(4) Subscription Agreement set forth as Exhibit 4.1 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-11 dated March 12, 1985
(Registration No. 2-95000) and Form of Confirmation regarding Interests in the
Registrant set forth as Exhibit 4.2 to the Registrant's Report on Form 10-Q for
the quarter ended June 30, 1992 are incorporated herein by reference.
(10) Material Contracts:
(a)(i) Agreement of Sale and attachment thereto relating to the sale of the
Forest Ridge - Phase II apartment complex, Arlington, Texas previously filed as
Exhibit 2 to the Registrant's Report on Form 8-K dated April 23, 1996 is
incorporated herein by reference.
(ii) Master Amendment and Agreement relating to the sales of the Forest Ridge -
Phase II, apartment complex, Arlington, Texas and Rosehill Pointe apartment
complex, Lenexa, Kansas previously filed as Exhibit 2(b)(i) to the Registrant's
Report on Form 8-K dated May 31, 1996 is incorporated herein by reference.
(iii) Master Amendment and Agreement #2 dated May 22, 1996 relating to the
sales of the Forest Ridge - Phase II, apartment complex, Arlington, Texas and
Rosehill Pointe apartment complex, Lenexa, Kansas previously filed as Exhibit
2(b)(ii) to the Registrant's Report on Form 8-K dated May 31, 1996 is
incorporated herein by reference.
(b)(i) Agreement of Sale relating to the sale of the Hunter's Glen Apartments,
St. Louis County, Missouri previously filed as Exhibit 2(a) to the Registrant's
Report on Form 8-K dated June 28, 1996 is incorporated herein by reference.
(ii) Letter Agreement dated June 28, 1996, relating to the sale of Hunter's
Glen apartment complex, St. Louis County, Missouri, previously filed as Exhibit
99 to the Registrant's Report on Form 8-K dated July 15, 1996 is incorporated
herein by reference.
(iii) Letter Agreement dated August 2, 1996, relating to the sale of Hunter's
Glen apartment complex, St. Louis County, Missouri previously filed as Exhibit
10(b)(iii) to the Registrant's Report on Form 10-Q for the quarter ended June
30, 1996 is incorporated herein by reference.
(iv) Letter Agreement dated August 16, 1996 relating to the sale of Hunter's
Glen Apartments previously filed as Exhibit (99)(d) to the Registrant's Report
on Form 8-K dated August 16, 1996 is incorporated herein by reference.
(c)(i) Agreement of Sale and attachment thereto relating to the sale of Willow
Bend Lake Apartments, East Baton Rouge Parish, Louisiana previously filed as
Exhibit 2 to the Registrant's Report on Form 8-K dated September 30, 1996 is
incorporated herein by reference.
(ii) First Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of Willow Bend Lake Apartments, East Baton Rouge Parish, Louisiana,
previously filed as Exhibit (10)(c)(ii) to the Registrant's Report on Form 10-Q
for the quarter ended September 30, 1996 is incorporated herein by reference.
(iii) Second Amendment to Agreement of Sale and Escrow Agreement relating to
the sale of Willow Bend Lake Apartments, East Baton Rouge Parish, Louisiana,
previously filed as Exhibit (10)(c)(iii) to the Registrant's Report on Form
10-Q for the quarter ended September 30, 1996 is incorporated herein by
reference.
(d)(i) Agreement of Sale and letter agreements thereto relating to the sale of
Marbrisa apartment complex, Hillsborough County, Florida previously filed as
Exhibit 2(a) to the Registrant's Report on Form 8-K dated July 15, 1996 is
incorporated herein by reference.
(ii) First Amendment to Agreement of Sale dated August 16, 1996 relating to the
sale of Marbrisa Apartments, Hillsborough County, Florida, previously filed as
Exhibit (99)(a)(i) to the Registrant's Report on Form 8-K dated August 16, 1996
is incorporated herein by reference.
(iii) Letter Agreement dated August 20, 1996 relating to the sale of Marbrisa
Apartments, Hillsborough County, Florida, previously filed as Exhibit
(99)(a)(ii) to the Registrant's Report on Form 8-K dated August 16, 1996 is
incorporated herein by reference.
(iv) Letter Agreements relating to the sale of Marbrisa Apartments,
Hillsborough County, Florida, previously filed as Exhibit (99)(b) to the
Registrant's Report on Form 8-K dated September 30, 1996 is incorporated herein
by reference.
(e)(i) Agreement of Sale dated September 3, 1996 relating to the sale of
Chestnut Ridge - Phase I Apartments, Fort Worth, Texas previously filed as
Exhibit 2 to the Registrant's Report on Form 8-K dated August 16, 1996 is
incorporated herein by reference.
(ii) Letter Agreement relating to the sale of Chestnut Ridge - Phase I
Apartments, Fort Worth, Texas, previously filed as Exhibit (99)(a) to the
Registrant's Report on Form 8-K dated September 30, 1996 is incorporated herein
by reference.
(f)(i) Agreement of Sale and attachment thereto relating to the sale of Park
Crossing Apartments, Gwinnett County, Georgia previously filed as Exhibit 2(a)
to the Registrant's Report on Form 8-K dated September 16, 1996 is incorporated
herein by reference.
(ii) First Amendment to Agreement of Sale relating to the Sale of Park Crossing
Apartments, Gwinnett County, Georgia previously filed as Exhibit 2(b) to the
Registrant's Report on Form 8-K dated September 16, 1996 is incorporated herein
by reference.
(iii) Letter relating to the sale of Park Crossing Apartments, Gwinnett County,
Georgia previously filed as Exhibit 2(c) to the Registrant's Report on Form 8-K
dated September 16, 1996 is incorporated herein by reference.
(g)(i) Agreement of Sale and attachment thereto relating to the sale of
Steeplechase Apartments, Lexington-Fayette, Kentucky previously filed as
Exhibit (2)(i) to the Registrant's Report on Form 8-K dated December 20, 1996,
is incorporated herein by reference.
(ii) Due Diligence Termination Notice relating to the sale of Steeplechase
Apartments, Lexington-Fayette, Kentucky previously filed as Exhibit (2)(ii) to
the Registrant's Report on Form 8-K dated December 20, 1996, is incorporated
herein by reference.
(iii) Reinstatement of, and First Amendment to, Agreement of Sale, relating to
the sale of Steeplechase Apartments, Lexington-Fayette, Kentucky previously
filed as Exhibit (2)(iii) to the Registrant's Report on Form 8-K dated December
20, 1996, is incorporated herein by reference.
(iv) Letter Agreement dated December 20, 1996, relating to the sale of
Steeplechase Apartments, Lexington-Fayette, Kentucky previously filed as
Exhibit (2)(iv) to the Registrant's Report on Form 8-K dated December 20, 1996,
is incorporated herein by reference.
(v) Letter Agreement dated January 22, 1997 relating to the sale of
Steeplechase Apartments, Lexington-Fayette, Kentucky, is attached hereto.
(27) Financial Data Schedule of the Registrant for 1996 is attached hereto.
(b) Reports on Form 8-K: A Current Report on Form 8-K dated December 20, 1996
was filed reporting a contract to sell Steeplechase Apartments, located in
Lexington-Fayette, Kentucky.
(c) Exhibits: See Item 14(a)(3) above.
(d) Financial Statement Schedule: See Index to Financial Statements and
Financial Statement Schedule in this Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of l934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BALCOR REALTY INVESTORS 85-SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
By:/s/Jayne A. Kosik
--------------------------------
Jayne A. Kosik
Managing Director and Chief
Financial Officer (Principal
Accounting and Financial Officer)
of Balcor Partners-XVII, the
General Partner
Date: March 26, 1997
--------------
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 Partners-XVII,
/s/Thomas E. Meador the General Partner March 26, 1997
- -------------------- --------------
Thomas E. Meador
Managing Director and Chief
Financial Officer (Principal
Accounting and Financial Officer)
of Balcor Partners XVII, the General
/s/Jayne A. Kosik Partner March 26, 1997
- -------------------- --------------
Jayne A. Kosik
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Report of Independent Accountants
Financial Statements:
Balance Sheets, December 31, 1996 and 1995
Statements of Partners' Capital (Deficit), for the years ended December 31,
1996, 1995 and 1994
Statements of Income and Expenses, for the years ended December 31, 1996, 1995
and 1994
Statements of Cash Flows, for the years ended December 31, 1996, 1995 and 1994
Notes to Financial Statements
Financial Statement Schedule:
III - Real Estate and Accumulated Depreciation, as of December 31, 1996
Financial Statement Schedules, other than that listed, are omitted for the
reason that they are inapplicable or equivalent information has been included
elsewhere herein. Audited Financial Statements for significant subsidiary
investment in joint venture are omitted since the property was sold and the
Partnership is in its liquidation phase.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Balcor Realty Investors 85-Series II
A Real Estate Limited Partnership:
We have audited the financial statements and the financial statement schedule
of Balcor Realty Investors 85-Series II A Real Estate Limited Partnership (An
Illinois Limited Partnership) as listed in the index of this Form 10-K. These
financial statements and the financial statement schedule are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements and the financial statement
schedule 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 Realty Investors
85-Series II A Real Estate Limited Partnership at December 31, 1996 and 1995,
and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
As described in Note 2 to the financial statements, the Partnership Agreement
provides for the dissolution of the Partnership upon the disposition of all its
real estate interests. The Partnership is presently marketing for sale its
remaining real estate asset. Upon disposition of its remaining real estate
asset and resolution of the litigation described in Note 15 to the financial
statements, the Partnership intends to cease operations and dissolve.
/s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
March 24, 1997
Chicago, Illinois
BALCOR REALTY INVESTORS 85 - SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
BALANCE SHEETS
December 31, 1996 and 1995
ASSETS
1996 1995
-------------- --------------
Cash and cash equivalents $ 12,457,760 $ 1,125,457
Escrow deposits 82,469 1,693,209
Accounts and accrued interest receivable 532,365 143,573
Prepaid expenses 19,833 137,929
Deferred expenses, net of accumulated
amortization of $113,839 in 1996 and
$429,418 in 1995 140,314 1,013,846
-------------- --------------
13,232,741 4,114,014
-------------- --------------
Investment in real estate:
Land 1,436,769 10,525,187
Buildings and improvements 7,276,630 62,537,549
-------------- --------------
8,713,399 73,062,736
Less accumulated depreciation 3,438,330 26,137,982
-------------- --------------
Investment in real estate, net of
accumulated depreciation 5,275,069 46,924,754
-------------- --------------
$ 18,507,810 $ 51,038,768
============== ==============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Loans payable - affiliate $ 11,900,605
Accounts payable $ 633,881 142,159
Due to affiliates 114,934 756,004
Accrued liabilities, principally interest
and real estate taxes 480,390
Security deposits 30,759 233,034
Loss in excess of investment in joint
venture with an affiliate 1,207,069
Mortgage notes payable - affiliate 1,673,215
Mortgage notes payable 7,249,433 51,796,170
-------------- --------------
Total liabilities 8,029,007 68,188,646
-------------- --------------
Commitments and Contingencies
Limited Partners' capital (deficit)
(83,936 Interests issued and outstanding) 11,121,829 (16,228,370)
General Partner's deficit (643,026) (921,508)
-------------- --------------
Total Partners' capital (deficit) 10,478,803 (17,149,878)
-------------- --------------
$ 18,507,810 $ 51,038,768
============== ==============
The accompanying notes are an integral part of the financial statements.
BALCOR REALTY INVESTORS 85 - SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
for the years ended December 31, 1996, 1995, and 1994
Partners' Capital (Deficit) Accounts
---------------------------------------------
General Limited
Total Partner Partners
--------------- -------------- --------------
Balance at December 31, 1993 $ (13,651,085) $ (886,520) $ (12,764,565)
Net loss for the year
ended December 31, 1994 (2,019,363) (20,194) (1,999,169)
--------------- -------------- --------------
Balance at December 31, 1994 (15,670,448) (906,714) (14,763,734)
Net loss for the year
ended December 31, 1995 (1,479,430) (14,794) (1,464,636)
--------------- -------------- --------------
Balance at December 31, 1995 (17,149,878) (921,508) (16,228,370)
Deemed distribution to
Limited Partners (A) (219,557) (219,557)
Net income for the year
ended December 31, 1996 27,848,238 278,482 27,569,756
--------------- -------------- --------------
Balance at December 31, 1996 $ 10,478,803 $ (643,026) $ 11,121,829
=============== ============== ==============
(A) This amount represents a state withholding tax paid on behalf of
Limited Partners relating to the gain on the sale of Park Crossing
Apartments.
The accompanying notes are an integral part of the financial statements.
BALCOR REALTY INVESTORS 85 - SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
STATEMENTS OF INCOME AND EXPENSES
for the years ended December 31, 1996, 1995, and 1994
1996 1995 1994
------------- -------------- --------------
Income:
Rental and service $ 10,194,675 $ 13,021,575 $ 12,521,580
Interest on short-term
investments 229,901 65,886 67,424
Participation in income
(loss) of joint venture
with an affiliate 3,070,292 20,441 (11,586)
Settlement income 300,000
--------------- -------------- --------------
Total income 13,494,868 13,107,902 12,877,418
--------------- -------------- --------------
Expenses:
Interest on mortgage notes
payable 3,629,339 4,899,174 5,138,352
Interest on short-term loans
from affiliate 477,434 815,156 572,915
Depreciation 1,461,603 1,885,984 1,885,983
Amortization of deferred
expenses 164,203 209,065 274,282
Property operating 3,975,275 4,649,658 4,716,555
Real estate taxes 747,563 988,743 1,039,756
Property management fees 517,242 644,856 626,989
Adminstrative 645,238 494,696 641,949
--------------- -------------- --------------
Total expenses 11,617,897 14,587,332 14,896,781
--------------- -------------- --------------
Income (loss) before gain on
sales of properties and
extraordinary items 1,876,971 (1,479,430) (2,019,363)
Gain on sales of properties 25,641,050
--------------- -------------- --------------
Income (loss) before
extraordinary items 27,518,021 (1,479,430) (2,019,363)
--------------- -------------- --------------
Extraordinary items:
Debt extinguishment expenses (1,513,757)
Gain on forgiveness of debt 1,864,919
Participation in debt
extinguishment expense
from joint venture with
an affiliate (20,945)
---------------
Total extraordinary items 330,217
--------------- -------------- --------------
Net income (loss) $ 27,848,238 $ (1,479,430) $ (2,019,363)
=============== ============== ==============
The accompanying notes are an integral part of the financial statements.
BALCOR REALTY INVESTORS 85 - SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
STATEMENTS OF INCOME AND EXPENSES
for the years ended December 31, 1996, 1995, and 1994
(Continued)
1996 1995 1994
------------- -------------- --------------
Income (loss) before
extraordinay items allocated
to General Partner $ 275,180 $ (14,794) $ (20,194)
=============== ============== ==============
Income (loss) before
extraordinary items allocated
to Limited Partners $ 27,242,841 $ (1,464,636) $ (1,999,169)
=============== ============== ==============
Income (loss) before
extraordinary items per
Limited Partnership Interest
(83,936 Interests issued and
outstanding) $ 324.57 $ (17.45) $ (23.82)
=============== ============== ==============
Extraordinary items allocated
to General Partner $ 3,302 $ None $ None
=============== ============== ==============
Extraordinary items allocated
to Limited Partners $ 326,915 $ None $ None
=============== ============== ==============
Extraordinary items per
Limited Partnership Interest
(83,936 issued and
outstanding) $ 3.89 $ None $ None
=============== ============== ==============
Net income (loss) allocated
to General Partner $ 278,482 $ (14,794) $ (20,194)
=============== ============== ==============
Net income (loss) allocated
to Limited Partners $ 27,569,756 $ (1,464,636) $ (1,999,169)
=============== ============== ==============
Net income (loss) per Limited
Partnership Interest
(83,936 issued and $ 328.46 $ (17.45) $ (23.82)
outstanding) =============== ============== ==============
The accompanying notes are an integral part of the financial statements.
BALCOR REALTY INVESTORS 85 - SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996, 1995, and 1994
1996 1995 1994
--------------- -------------- --------------
Operating activities:
Net income (loss) $ 27,848,238 $ (1,479,430) $ (2,019,363)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Gain on sales of
properties (25,641,050)
Debt extinguishment
expenses 709,329
Gain on forgiveness of
debt (1,864,919)
Participation in (income)
loss of joint venture
with an affiliate (3,070,292) (20,441) 11,586
Participation in debt
extinguishment expense
from joint venture
with an affiliate 20,945
Depreciation 1,461,603 1,885,984 1,885,983
Amortization of deferred
expenses 164,203 209,065 274,282
Deferred interest expense 196,599
Payment of deferred
interest expense (681,731)
Net change in:
Escrow deposits 1,119,748 (643,654) 178,438
Accounts and accrued
interest receivable (388,792) 40,002 165,810
Prepaid expenses 118,096 (137,929)
Accounts payable 491,722 (101,599) 150,525
Due to affiliates (641,070) 539,549 107,590
Accrued liabilities (431,506) 56,423 (10,388)
Security deposits (202,275) 4,461 (17,400)
--------------- -------------- --------------
Net cash (used in) or
provided by operating
activities (306,020) 352,431 241,931
--------------- -------------- --------------
Investing activities:
Redemption of restricted
investments 480,000
Distributions from joint
venture with an affiliate 1,997,578 125,528 93,467
Contribution to joint
venture with an affiliate (155,300)
Proceeds from sales of
properties 61,516,507
Payment of selling costs (1,634,268)
--------------- -------------- --------------
Net cash provided by
investing activities 61,724,517 605,528 93,467
--------------- -------------- --------------
The accompanying notes are an integral part of the financial statements.
BALCOR REALTY INVESTORS 85 - SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996, 1995, and 1994
(Continued)
1996 1995 1994
--------------- -------------- --------------
Financing activities:
Proceeds from issuance of
mortgage notes payable $ 6,010,000 $ 11,664,000
Repayment of mortgage notes
payable $ (38,271,532) (5,480,512) (9,389,731)
Proceeds from loans payable -
affiliate 85,000 827,114
Repayment of loans payable -
affiliate (11,900,605) (480,000) (1,499,140)
Proceeds from issuance of
mortgage notes payable -
affiliate 142,820
Repayment of mortgage notes
payable - affiliates (1,592,538)
Principal payments on
mortgage notes payable (328,312) (407,006) (344,788)
Funding of repair escrows (157,500) (287,150)
Releases from escrows 490,992 149,407 4,463
Payment of deferred expenses (152,840) (308,817)
Deemed distribution
to Limited Partners (219,557)
--------------- -------------- --------------
Net cash used in financing
activities (50,086,194) (433,451) (926,587)
--------------- -------------- --------------
Net change in cash and cash
equivalents 11,332,303 524,508 (591,189)
Cash and cash equivalents at
beginning of year 1,125,457 600,949 1,192,138
--------------- -------------- --------------
Cash and cash equivalents at
end of year $ 12,457,760 $ 1,125,457 $ 600,949
=============== ============== ==============
The accompanying notes are an integral part of the financial statements.
BALCOR REALTY INVESTORS 85-SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. Nature of the Partnership's Business:
Balcor Realty Investors 85-Series II A Real Estate Limited Partnership (the
"Partnership") is engaged principally in the operation of residential real
estate investment located in various markets within the United States. The
Partnership's remaining property is located in Lexington-Fayette, Kentucky.
2. Partnership Termination:
The Partnership Agreement provides for the dissolution of the Partnership upon
the occurrence of certain events, including the disposition of all interests in
real estate. During 1996, the Partnership sold the Forest Ridge - Phase II,
Country Oaks, Chestnut Ridge - Phase I, Hunters Glen, Marbrisa, Willow Bend
Lake and Park Crossing apartment complexes. During 1996, the General Partner
also sold the Rosehill Pointe Apartments, in which the Partnership held a
minority joint venture interest. The Partnership has entered into a contract to
sell its remaining property, the Steeplechase Apartments. The timing of the
termination of the Partnership and final distribution of cash will depend upon
the nature and extent of liabilities and contingencies which exist or may
arise. Such contingencies may include legal and other fees stemming from
litigation involving the Partnership including, but not limited to, the
lawsuits discussed in Note 15 of Notes to the Financial Statements. In the
absence of any such contingency, the reserves will be paid within twelve months
of the last property being sold. In the event a contingency arises, reserves
may be held by the Partnership for a longer period of time.
3. 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) Depreciation expense is computed using the straight-line method. Rates used
in the determination of depreciation are based upon the following estimated
useful lives:
Buildings and improvements 30 years
Furniture and fixtures 5 years
Maintenance and repairs are charged to expense when incurred. Expenditures for
improvements are charged to the related asset account.
Interest incurred while properties were under construction was capitalized.
As properties are sold, the related costs and accumulated depreciation are
removed from the respective accounts. Any gain or loss on disposition is
recognized in accordance with generally accepted accounting principles.
(c) 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
Partnership records its investments in real estate at the lower of cost or fair
value, and periodically assesses, but not less than on an annual basis,
possible impairment to the value of its properties. The General Partner
estimates the fair value of its remaining property based on the current
estimated sales price less estimated closing costs. In the event the General
Partner determines an impairment in value has occurred, and the carrying amount
of the real estate asset will not be recovered, a provision is recorded to
reduce the carrying basis of the property to its estimated fair value. The
General Partner considers the method 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) Deferred expenses consist of financing fees which are amortized over the
terms of the respective agreements. Upon sale, any remaining balance is
recognized as debt extinguishment expense and classified as an extraordinary
item.
(e) Investment in joint venture with an affiliate represented the recording of
the Partnership's 38.38% interest, under the equity method of accounting, in a
joint venture with an affiliated partnership. Under the equity method of
accounting, the Partnership recorded its initial investment at cost and
adjusted its investment account for additional capital contributions,
distributions and its share of joint venture income or loss. Depreciation
recognized in connection with the ownership of real estate by the joint venture
resulted in the Partnership's share of cumulative losses exceeding the net
amounts invested in the joint venture. This resulted in the classification of
the investment as "Loss in excess of investment in joint venture with an
affiliate" in the accompanying 1995 financial statements.
(f) 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.
(g) Revenue is recognized on an accrual basis in accordance with generally
accepted accounting principles.
(h) Cash and cash equivalents include all unrestricted, highly liquid
investments with an original maturity of three months or less. Cash is held or
invested in one financial institution.
(i) 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.
(j) A reclassification has been made to the previously reported 1994 financial
statements to conform with the classification used in 1996 and 1995. This
reclassification has not changed the 1994 results.
4. Partnership Agreement:
The Partnership was organized in October 1984. The Partnership Agreement
provides for Balcor Partners-XVII to be the General Partner and for the
admission of Limited Partners through the sale of up to 84,000 Limited
Partnership Interests at $1,000 per Interest, 83,936 of which were sold through
August 22, 1985, the termination date of the offering.
The Partnership Agreement generally provides that the General Partner will be
allocated 1% and the Limited Partners will be allocated 99% of the profits and
losses from operations. One hundred percent of Net Cash Receipts available for
distribution shall be distributed to the holders of Interests in proportion to
their participating percentages as of the record date for such distributions.
In addition, there shall be accrued for the benefit of the General Partner as
its distributive share from operations, an amount equivalent to approximately
1% of the total Net Cash Receipts being distributed, which will be paid only as
a part of the General Partner's share of Net Cash Proceeds. Under certain
circumstances, the General Partner may participate in the Net Cash Proceeds
from the sale or refinancing of Partnership properties. The General Partner's
participation is equal to 15% of further Net Cash Proceeds distributed after
holders of Interests have received a return of Original Capital plus any
deficiency in a Cumulative Distribution of 6% on Adjusted Original Capital, as
defined in the Partnership Agreement.
5. Mortgage Notes Payable:
Mortgage notes payable at December 31, 1996 and 1995 consisted of the
following:
Carrying Carrying Current Final
Property Amount of Amount of Inter- Matur- Current Estimated
Pledged as Note at Notes at est ity Monthly Balloon
Collateral 12/31/96 12/31/95 Rate Date Payment Payment
- -------------- ---------- ---------- ------ ------ ------- ----------
Mortgage Notes Payable - Non-affiliates
Apartment Complexes
Chestnut Ridge I (a) None $3,648,475
Country Oaks(b)(d) None 5,983,640
Forest Ridge II(c)(d) None 7,894,311
Hunter's Glen(d) None 4,567,048
Marbrisa (d) None 5,404,320
Park Crossing (d) None 7,188,734
Steeplechase $7,249,433 7,312,127 9.13% 2001 $60,643 $6,893,000
Willow Bend Lake(d) None 9,797,515
----------- -----------
Subtotal $7,249,433 51,796,170
----------- -----------
Mortgage Notes Payable - Affiliates
Apartment Complexes
Chestnut Ridge I(a) None 1,673,215
----------- -----------
Subtotal None 1,673,215
----------- -----------
Total $7,249,433 $53,469,385
=========== ===========
(a) In March 1994, the Partnership completed the refinancing of these mortgage
loans. The original loans consisted of a $3,029,731 first mortgage loan from an
unaffiliated lender and a junior mortgage loan and an unsecured loan from
affiliates of the Partnership totaling $3,983,484, including deferred interest
of $450,185. The proceeds from the new first mortgage loan of $3,694,000 from
an unaffiliated lender were used to repay the previous first mortgage loan, the
deferred interest on the affiliated loans and $214,084 of the outstanding loans
from affiliates. As required by the unaffiliated lender, $1,646,000 of the
remaining balance of the affiliate loans was retired and replaced with a
General Partner loan and the remainder was re-characterized as a junior
nonrecourse loan of $1,473,215 and a preferred limited partnership interest of
$200,000 in the subsidiary partnership which holds title to the property, both
of which were included in mortgage notes payable - affiliates on the balance
sheet. The Limited Partners' position was unaffected by this conversion of a
portion of the affiliated loan to an equity position, as Limited Partners'
equity was subordinate to the preferred interest just as it was subordinated to
the affiliate loans prior to the re-characterization.
The affiliate loan and preferred equity interest were subordinate to the
Partnership's receipt of sale or refinancing proceeds in the amount of
$1,646,000. The property was sold in September 1996 and the mortgage note
payable - nonaffiliate was repaid with a portion of the proceeds. The junior
nonrecourse affiliate loan was increased by $142,820 in order to provide the
minimum net proceeds of $1,646,000 required from the sale of this property.
Subsequently, this $1,816,035 loan, along with accrued interest expense of
$48,884, was forgiven in connection with the sale. See Notes 10 and 12 of Notes
to the Financial Statements for additional information.
(b) In June 1995, this loan was refinanced. A portion of the proceeds from the
new $6,010,000 first mortgage loan were used to repay the existing first
mortgage loan of $5,480,512.
(c) In July 1994, the Partnership completed the refinancing of the mortgage
loans. The original loans consisted of a $6,360,000 first mortgage loan from an
unaffiliated lender and an unsecured loan from an affiliate of the Partnership
of $4,179,546, including deferred interest of $231,546. The proceeds from the
new first mortgage loan of $7,970,000 from an unaffiliated lender were used to
repay the previous first mortgage loan, the deferred interest on the affiliate
loan and $1,378,454 of the outstanding affiliate loan. As required by the
unaffiliated lender, the remaining $2,569,546 balance of the affiliate loan was
retired and replaced with a General Partner loan.
(d) This property was sold in 1996. See Note 10 of Notes to the Financial
Statements for additional information.
The Steeplechase Apartments' loan described above requires monthly payments of
principal and interest.
See Note 11 of Notes to Financial Statements for additional information on cash
collateral pledges.
Real estate with an aggregate carrying value of $5,275,069 at December 31, 1996
was pledged as collateral for repayment of the remaining mortgage loan.
Approximate principal maturities of the above mortgage note payable during the
next five years are as follows:
1997 $ 68,700
1998 75,200
1999 82,400
2000 90,200
2001 6,892,900
During the years ended December 31, 1996, 1995 and 1994, the Partnership
incurred and paid interest expense on nonaffiliated mortgage notes payable of
$3,510,851, $4,742,339 and $4,680,137, respectively.
6. Management Agreements:
As of December 31, 1996, the Partnership's remaining property was under a
management agreement with a third-party management company. This management
agreement provided for annual fees of 5% of gross operating receipts.
7. Investment in Joint Venture with an Affiliate:
The Rosehill Pointe Apartments was owned by a joint venture consisting of the
Partnership and an affiliate. The joint venture partner was an affiliate with
investment objectives similar to those of the Partnership. The Partnership and
the affiliate held participating percentages in the joint venture of 38.38% and
61.62%, respectively. In June 1996, the joint venture sold the property in an
all cash sale for $20,700,000. From the proceeds of the sale, the joint venture
paid $15,537,677 to the third party mortgage holders in full satisfaction of
the first and second mortgage loans, and paid $170,250 in selling costs. The
joint venture recognized a gain of $7,920,199 from the sale of this property,
of which $3,055,484 was the Partnership's share. During 1996, 1995 and 1994,
the Partnership received distributions of $1,997,578, $125,528 and $93,467,
respectively, and made a capital contribution of $155,300 to the joint venture
in 1996.
The following information has been summarized from the financial statements of
the joint venture:
1996
-----------
Total Income $4,967,399
Loss before gain on sale (15,995)
Gain on sale 7,920,199
Net income 7,904,204
8. Tax Accounting:
The Partnership keeps its books in accordance with the Internal Revenue Code,
rules and regulations promulgated thereunder and existing interpretations
thereof. The accompanying financial statements, which are prepared in
accordance with generally accepted accounting principles, will differ from the
tax returns due to the different treatment of various items as specified in the
Internal Revenue Code. The net effect of these accounting differences is that
the net income for 1996 in the financial statements is $20,265,925 less than
the tax income of the Partnership for the same period.
9. Transactions with Affiliates:
Fees and expenses paid and payable by the Partnership to affiliates are:
Year Ended Year Ended Year Ended
12/31/96 12/31/95 12/31/94
-------------- -------------- --------------
Paid Payable Paid Payable Paid Payable
------ ------- ------ ------- ------ -------
Property management fees None None None None $572,620 None
Reimbursement of expenses
to the General Partner
at cost:
Accounting $16,454 $16,162 $46,401 $2,528 70,337 $25,737
Data processing 8,080 3,487 42,184 2,976 54,271 15,312
Investor communica-
tions None None 6,252 None 19,725 5,681
Legal 13,521 13,243 30,317 3,090 14,649 8,055
Portfolio management 64,566 60,741 107,761 11,525 40,873 25,281
Other 21,302 21,301 11,185 1,304 17,062 4,912
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 expenses. The Partnership paid premiums to the deductible insurance program
of $16,968, $85,753 and $120,176 in 1996, 1995 and 1994, respectively.
Allegiance Realty Group, Inc., an affiliate of the General Partner, managed the
Partnership's properties, including the property in which the Partnership held
a minority joint venture interest, until the affiliate was sold to a third
party in November 1994.
The Partnership had a junior loan outstanding from The Balcor Company ("TBC"),
an affiliate of the General Partner, relating to the Chestnut Ridge - Phase I
Apartments. In September 1996, the junior loan was increased by $142,820 in
order to provide the minimum net proceeds required from the sale of this
property. Subsequently, this $1,816,035 loan, along with accrued interest of
$48,884 was forgiven in connection with the sale. See Notes 10 and 12 of Notes
to Financial Statements for additional information. During 1996, 1995 and 1994,
the Partnership incurred interest expense on the loan from The Balcor Company
of $118,488, $156,835 and $458,215 and paid interest expense of $130,580,
$175,241 and $943,347, respectively. As of December 31, 1995 interest expense
of $12,092 was payable and was included in accrued liabilities on the balance
sheet.
During 1996, the Partnership repaid the General Partner loan, which had an
outstanding balance of $11,900,605 plus interest expense payable of $734,581 at
December 31, 1995 with the proceeds received from the sales of properties. The
Partnership incurred interest expense of $477,434, $815,156 and $572,915 and
paid interest expense of $1,212,015, $212,052 and $480,500 on this loan during
1996, 1995 and 1994, respectively. Interest expense is computed at the American
Express Company cost of funds rate plus a spread to cover administrative costs.
10. Property Sales:
(a) In June 1996, the Partnership sold the Forest Ridge - Phase II Apartments
in an all cash sale for $11,100,000. From the proceeds of the sale, the
Partnership paid $7,870,116 to the third party mortgage holder in full
satisfaction of the first mortgage loan, and paid $126,000 in selling costs.
The basis of the property was $7,911,304, which is net of accumulated
depreciation of $4,265,862. For financial statement purposes, the Partnership
recognized a gain of $3,062,696 from the sale of this property.
(b) In September 1996, the Partnership sold the Country Oaks Apartments for
$8,250,000. The purchaser of the Country Oaks Apartments took title subject to
the existing first mortgage loan in the amount of $5,946,893. From the
proceeds of the sale, the Partnership paid $154,436 in selling costs. The basis
of the property was $4,191,573, which is net of accumulated depreciation of
$2,937,967. For financial statement purposes, the Partnership recognized a gain
of $3,903,991 from the sale of this property.
(c) In September 1996, the Partnership sold the Chestnut Ridge - Phase I
Apartments in an all cash sale for $5,513,400. From the proceeds of the sale,
the Partnership paid $3,629,161 to the third party mortgage holder in full
satisfaction of the first mortgage loan, paid $199,601 in selling costs and
$181,458 in prepayment penalties. The Partnership received net proceeds of
$1,503,180 from the sale. However, the terms of the 1994 refinancing of this
property provided that minimum net proceeds of $1,646,000 were to be received
from the sale of this property. As a result, $142,820 was contributed to the
Partnership through an increase to the balance of the junior loan outstanding
from TBC. The basis of the property was $4,336,015, which is net of accumulated
depreciation of $2,622,209. For financial statement purposes, the Partnership
recognized a gain of $977,784 from the sale of this property.
(d) In September 1996, the Partnership sold the Hunters Glen Apartments in an
all cash sale for $9,100,000. From the proceeds of the sale, the Partnership
paid $4,541,552 to the third party mortgage holder in full satisfaction of the
first mortgage loan, paid $270,215 in selling costs and $90,832 in prepayment
penalties. The basis of the property was $4,156,017, which is net of
accumulated depreciation of $2,403,728. For financial statement purposes, the
Partnership recognized a gain of $4,673,768 from the sale of this property.
(e) In October 1996, the Partnership sold the Marbrisa Apartments in an all
cash sale for $7,800,000. From the proceeds of the sale, the Partnership paid
$5,361,230 to the third party mortgage holder in full satisfaction of the first
mortgage loan and paid $325,361 in selling costs. The basis of the property was
$4,565,345, which is net of accumulated depreciation of $2,706,669. For
financial statements purposes, the Partnership recognized a gain of $2,909,294
from the sale of this property.
(f) In October 1996, the Partnership sold the Willow Bend Lake Apartments in an
all cash sale for $14,350,000. From the proceeds of the sale, the Partnership
paid $9,737,486 to the third party mortgage holder in full satisfaction of the
first mortgage loan, paid $366,660 in selling costs and $389,499 in prepayment
penalties. The basis of the property was $7,745,500, which is net of
accumulated depreciation of $4,896,205. For financial statements purposes, the
Partnership recognized a gain of $6,237,840 from the sale of this property.
(g) In November 1996, the Partnership sold the Park Crossing Apartments in an
all cash sale for $11,350,000. From the proceeds of the sale, the Partnership
paid $7,131,987 to the third party mortgage holder in full satisfaction of the
first mortgage loan, paid $191,995 in selling costs and $142,639 in prepayment
penalties. In addition, the Partnership paid a state withholding tax of
$219,557 on behalf of the Limited Partners relating to the gain on the sale of
the property which has been recorded as a deemed distribution for financial
statement purposes. The basis of the property was $7,282,328, which is net of
accumulated depreciation of $4,328,615. For financial statements purposes, the
Partnership recognized a gain of $3,875,677 from the sale of this property.
11. Restricted Investments:
During 1995, a restricted investment of $480,000, which partially
collateralized the Country Oaks mortgage loan, was released. The amount pledged
as collateral had been invested in short-term instruments pursuant to the terms
of the pledge agreement with the lending institution, and the accumulated
interest was paid to the Partnership upon release.
12. Extraordinary Items:
(a) In connection with the sales of properties during 1996, the Partnership
wrote-off the remaining unamortized deferred expenses in the amount of
$709,329. In addition, in connection with the sales of the Chestnut Ridge -
Phase I and Hunters Glen, Willow Bend Lake and Park Crossing apartment
complexes, the Partnership paid $804,428 in prepayment penalties. These amounts
were recognized as an extraordinary item and classified as debt extinguishment
expenses.
(b) In June 1996, the joint venture consisting of the Partnership and an
affiliate sold the Rosehill Pointe Apartments. In connection with the sale, the
joint venture wrote-off the remaining unamortized deferred expenses. The
Partnership's share of this amount of $20,945 was recognized as an
extraordinary item and classified as debt extinguishment expense.
(c) In connection with the sale of the Chestnut Ridge - Phase I Apartments, the
junior loan due to TBC, which had an outstanding balance of $1,864,919,
including accrued interest of $48,884, was forgiven which resulted in an
extraordinary gain on forgiveness of debt.
13. Settlement Income:
The Partnership had ongoing litigation with the seller and certain of its
principals and affiliates on claims under terms of the original management and
guarantee agreement on the Park Crossing Apartments. During 1994, the
Partnership accepted $300,000 as settlement in full on all remaining amounts
owed to the Partnership.
14. Fair Value of Financial Instruments:
The carrying amounts and fair values of the Partnership's financial instruments
at December 31, 1996 and 1995 are as follows:
The carrying amounts of cash and cash equivalents, accounts and accrued
interest receivable and accounts payable approximates fair value.
Based on borrowing rates available to the Partnership at the end of 1996 and
1995 for mortgage loans with similar terms and maturities, the fair value of
the mortgage notes payable approximates the carrying value.
15. Contingencies:
The Partnership is currently involved in two lawsuits whereby the Partnership
and certain affiliates have been named as defendants alleging substantially
similar claims involving certain federal securities law violations with regard
to the adequacy and accuracy of disclosures of information concerning, as well
as marketing efforts related to the offering of the Limited Partnership
Interests of the Partnership. The defendants continue to vigorously contest
these actions. A plaintiff class has not been certified in either action and,
no determinations of the merits have been made. It is not determinable at this
time whether or not an unfavorable decision in either action would have a
material adverse impact on the financial position, operations and liquidity of
the Partnership. The Partnership believes that it has meritorious defenses to
contest the claims.
16. Subsequent Event:
In January 1997, the Partnership made its first distribution to Limited
Partners of $9,232,960 ($110 per Interest) representing a special distribution
of Net Cash Proceeds from the 1996 property sales.
BALCOR REALTY INVESTORS 85-SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 1996
Col. A Col. B Col. C Col. D
- --------------------- -------- -------------------- ---------------------------------
Initial Cost Cost Adjustments
to Partnership Subsequent to Acquisition
-------------------- ---------------------------------
Buildings Carrying Reduction
Encum- and Im- Improve- Costs of Basis
Description brances Land provements ments (a) (b)
- --------------------- ------- -------- ------------ --------- --------- ---------
Steeplechase, 296-unit
apt. complex in
Lexington-Fayette, KY (e) $1,493,779 $7,106,221 None $447,095 $(333,696)
----------- ----------- -------- ---------- -----------
Total $1,493,779 $7,106,221 None $447,095 $(333,696)
=========== =========== ======== ========== ===========
BALCOR REALTY INVESTORS 85-SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 1996
(Continued)
Col. A Col. E Col. F Col. G Col. H Col. I
- ------------------ -------------------------------- -------- -------- ------ --------------
Gross Amounts at Which Life Upon
Carried at Close of Period Which Depre-
--------------------------- ciation in
Buildings Accumulated Date Date Latest Income
and Im- Total Deprecia- of Con- Acq- Statement
Description Land provements (c)(d) tion(d) struction uired is Computed
- ------------------- -------- ---------- ---------- --------- --------- ----- --------------
Steeplechase, 296-unit
apt. complex in
Lexington-Fayette,KY $1,436,769 $7,276,630 $8,713,399 $3,438,330 1985 1/85 (f)
----------- ----------- ----------- -----------
Total $1,436,769 $7,276,630 $8,713,399 $3,438,330
=========== =========== =========== ===========
BALCOR REALTY INVESTORS 85-SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
NOTES TO SCHEDULE III
(a) Consists of legal fees, appraisal fees, title costs, other related
professional fees and capitalized construction-period interest.
(b) Guaranteed income earned on properties under the terms of certain
management and guarantee agreements was recorded by the Partnership as a
reduction of the basis of the property to which the guaranteed income relates.
(c) The cost of land for Federal income tax purposes is $1,490,548 and the cost
of buildings and improvements for Federal income tax purposes is $7,090,843.
The total of these is $8,581,391.
(d) Reconciliation of Real Estate
-----------------------------
1996 1995 1994
---------- ---------- ----------
Balance at beginning of year $73,062,736 $73,062,736 $73,062,736
Reductions during the year:
Cost of properties sold (64,349,337) None None
----------- ----------- -----------
Balance at end of year $8,713,399 $73,062,736 $73,062,736
=========== =========== ===========
Reconciliation of Accumulated Depreciation
-------------------------------------------
1996 1995 1994
---------- ---------- ----------
Balance at beginning of year $26,137,982 $24,251,998 $22,366,015
Depreciation expense for
the year 1,461,603 1,885,984 1,885,983
Accumulated depreciation of
properties sold (24,161,255) None None
---------- ---------- ----------
Balance at end of year $3,438,330 $26,137,982 $24,251,998
=========== =========== ===========
(e) See description of Mortgage Notes Payable in Note 5 of Notes to Financial
Statements.
(f) Depreciation expense is computed based upon the following estimated useful
lives:
Years
-----
Buildings and improvements 30
Furniture and fixtures 5