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, 1997
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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 0-15649
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BALCOR REALTY INVESTORS 86-SERIES I
A REAL ESTATE LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Illinois 36-3327914
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2355 Waukegan Road
Bannockburn, IL 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
----
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Interest
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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 86-Series I 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 $59,791,000 from sales of Limited
Partnership Interests. The Registrant has retained cash reserves from the sale
of its real estate investments for contingencies which exist or may arise. The
Registrant's operations currently consist of interest income earned on
short-term investments and the payment of administrative expenses.
The Registrant utilized the net offering proceeds to acquire eight real
property investments and a minority joint venture interest in one additional
real property and has since disposed of all of these investments. 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 Partnership Agreement provides for the dissolution of the Registrant upon
the occurrence of certain events, including the disposition of all interests in
real estate. During 1996, the Registrant sold five properties. During 1997, the
Registrant sold its remaining property, the Lake Ridge Apartments. The
Registrant has retained a portion of the cash from the property sales to
satisfy obligations of the Registrant as well as establish a reserve for
contingencies. 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 and costs stemming from litigation involving the Registrant
including, but not limited to, the lawsuits discussed in "Item 3. Legal
Proceedings." In the absence of any such contingencies, the reserves will be
paid within twelve months of the last property being sold. In the event a
contingency continues to exist or arises, reserves may be held by the
Registrant for a longer period of time.
During January 1997, the Registrant sold the Lake Ridge Apartments in an all
cash sale for $5,400,000. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources" for additional information.
The Registrant no longer has an ownership interest in any real estate
investment. The General Partner is not aware of any material potential
liability relating to environmental issues or conditions affecting real estate
formerly owned by the Registrant.
The officers and employees of Balcor Partners-XIX, the General Partner of the
Registrant, and its affiliates perform services for the Registrant. The
Registrant currently has no employees engaged in its operations.
Item 2. Properties
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As of December 31, 1997, the Registrant did not own any properties.
In the opinion of the General Partner, the Registrant has obtained adequate
insurance coverage.
See Notes to Financial Statements for other information regarding former real
estate property investments.
Item 3. Legal Proceedings
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Masri vs. Lehman Brothers, Inc., et al.
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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, 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.
Plaintiffs' counsel has indicated an intent to withdraw this complaint.
Raymond Masri has joined as an additional plaintiff in the Lenore Klein matter
discussed below.
Klein, et al. vs. Lehman Brothers, Inc. et al.
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On August 30, 1996, a proposed class action complaint was filed, Lenore Klein,
et al. vs. Lehman Brothers, Inc., et al. (Superior Court of New Jersey, Law
Division, Union County, Docket No. Unn-L-5162-96). The complaint was amended on
each of October 18, 1996, December 5, 1997 and January 15, 1998. The
Registrant, additional limited partnerships which were sponsored by The Balcor
Company (together with the Registrant, the "Affiliated Partnerships"), The
Balcor Company, American Express Company, Lehman Brothers, Inc., Smith Barney,
Inc., American Express Financial Advisors, and other affiliated entities and
various individuals are named defendants in the action. The most recent amended
complaint, plaintiffs' Third 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 Affiliated Partnerships, the marketing of interests in the
Affiliated Partnerships and the acquisition of real properties for the
Affiliated Partnerships. The Third Amended Complaint seeks judgment for
compensatory damages equal to the amount invested in the Affiliated
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 Affiliated 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 1997.
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, 1997, the number of record holders of Limited Partnership
Interests of the Registrant was 5,032.
Item 6. Selected Financial Data
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Year ended December 31,
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1997 1996 1995 1994 1993
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Total income $196,047 $9,793,385 $16,504,017 $16,104,170 $15,556,850
Loss before gain
on sales of
properties,
affiliates
participation in
joint ventures and
extraordinary
items (270,825) (2,556,051)(1,270,197) (1,284,604) (1,466,532)
Net income (loss) 396,165 29,092,474 (1,357,201) (1,284,604) (185,093)
Net income (loss)
per Limited
Partnership
Interest- Basic
and Diluted 6.47 481.70 (22.47) (21.27) (3.06)
Total assets 2,260,714 17,991,055 64,231,391 64,717,186 67,387,602
Mortgage notes
payable None 4,210,138 74,196,579 73,208,295 74,429,557
Distributions
per Limited
Partnership
Interest (A) 177.50 119.00 2.50 None None
(A) These amounts include distributions of Original Capital of $172.50 and
$114.00 per Limited Partnership Interest during 1997 and 1996, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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Operations
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Summary of Operations
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Balcor Realty Investors 86 - Series I A Real Estate Limited Partnership (the
"Partnership") sold five properties during 1996 and its remaining property
during 1997. The Partnership recognized gains in 1997 and 1996 in connection
with the sales. The gain related to the 1997 property sale was significantly
lower than the total gains related to the 1996 property sales. As a result, the
Partnership recognized lower net income during 1997 as compared to 1996. The
Partnership recognized net income during 1996 as a result of the gains on sales
of properties as compared to a net loss during 1995. No material events
occurred during 1995 which significantly impacted the net loss of the
Partnership. Further discussion of the Partnership's operations is summarized
below.
1997 Compared to 1996
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The Partnership sold the Lake Ridge Apartments during 1997 and sold the Pines
of Cloverlane, Lakeside, Brighton Townhomes, Lakeville and Cedar Crest
apartment complexes during 1996. As a result, rental and service income,
interest expense on mortgage notes payable, depreciation, amortization of
deferred expenses, property operating expense, real estate taxes and property
management fees decreased during 1997 as compared to 1996. The Partnership
recognized gains in connection with the 1997 and 1996 sales totaling $828,751
and $37,198,777, respectively.
Interest income on short-term investments decreased in 1997 as compared to 1996
due to higher average cash balances in 1996 resulting from the investment of
sales proceeds prior to distribution to Limited Partners.
The Partnership recognized other income during 1997 primarily in connection
with refunds of prior years' insurance premiums relating to the Partnership's
properties.
The Partnership paid to the lenders participation fees of $467,557 and
$1,377,156 in connection with the 1996 sales of the Lakeside and Brighton
Townhomes apartment complexes, respectively. The lender participations
represent additional interest paid to the lenders calculated as a percentage of
the sales price in excess of amounts specified in the loan agreements.
Administrative expenses decreased in 1997 as compared to 1996 primarily due to
lower legal and portfolio management fees. Additional consulting, printing and
postage costs were incurred in 1996 in connection with a response to a tender
offer also contributed to the decreases in 1997.
In connection with the sale of the Pines of Cloverlane Apartments in 1996, the
Partnership established an escrow account to provide for certain costs the
purchaser may incur at the property related to Pittsfield Township, Michigan
inspections and subsequent improvements at the property. The purchaser has been
reimbursed $60,094 out of the escrow funds to cover such costs. The Partnership
recognized these payments as other expenses in 1997.
The Lakeville and Cedar Crest apartment complexes were owned through joint
ventures with affiliates. As a result of the sales, affiliates' participation
in income from joint venture ceased in 1996. The Partnership's participation in
1996 includes its share of the gains on the sales.
In connection with the sale of the Lake Ridge Apartments in 1997, the
Partnership paid $126,222 in prepayment penalties and wrote off the remaining
unamortized deferred financing fees of $35,539. In connection with the sales of
the Pines of Cloverlane, Cedar Crest and Lakeville Resort apartment complexes
in 1996, the Partnership wrote off the remaining unamortized deferred financing
fees of $531,135, of which $195,204 represents the affiliates' share from the
Cedar Crest and Lakeville Resort apartment complexes. These amounts were
recognized as debt extinguishment expenses and classified as extraordinary
items for financial statement purposes.
1996 Compared to 1995
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The sales of five properties during 1996 resulted in decreases in rental and
service income, interest expense on mortgage notes payable, depreciation,
amortization of deferred expenses, property operating expenses, real estate
taxes and property management fees during 1996 as compared to 1995.
Higher average cash balances due to the investment of the proceeds from the
property sales prior to distribution to Limited Partners in April and October
1996, resulted in an increase in interest income on short-term investments
during 1996 as compared to 1995.
The Partnership incurred higher legal and consulting costs in connection with a
response to a tender offer during the fourth quarter of 1995. During 1995 the
Partnership also reimbursed the General Partner for legal fees previously
advanced by the General Partner with respect to a lawsuit which was dismissed.
As a result, administrative expenses decreased during 1996 as compared to 1995.
The Lakeville Resort and Cedar Crest apartment complexes were owned through
joint ventures with affiliates. As a result of the affiliates' share of the
gains recognized from the property sales during 1996, affiliates' participation
in income from joint ventures increased during 1996 as compared to 1995.
In connection with the 1995 Lakeville Resort Apartments refinancing, the
Partnership recognized an extraordinary debt extinguishment expense of $145,393
relating to the write off of the remaining unamortized deferred expenses on the
mortgage note, of which $58,521 represented the affiliate's share.
Liquidity and Capital Resources
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The cash position of the Partnership as of December 31, 1997 decreased by
approximately $10,885,000 as compared to December 31, 1996 primarily due to the
January and April 1997 distributions of sale proceeds to Limited Partners which
were partially offset by the net proceeds received from the sale of the Lake
Ridge Apartments in January 1997. Net cash used in operating activities of
approximately $200,000 during 1997 consisted primarily of the loss generated
from operations of the Lake Ridge Apartments prior to its sale, the payment of
expenses related to properties sold in 1996 and the payment of administrative
expenses which were partially offset by interest income earned on short-term
investments. Cash provided by investing activities of approximately $5,203,000
consisted of the net proceeds received from the sale of the Lake Ridge
Apartments. Cash used in financing activities consisted of distributions of
approximately $10,613,000 to Limited Partners, the repayment of the Lake Ridge
Apartments' mortgage note payable of approximately $4,210,000 and distributions
to joint venture partners - affiliates of approximately $1,065,000. In
addition, in January 1998 the Partnership made a distribution of $253,715 of
remaining available Net Cash Proceeds to Limited Partners, as further discussed
below.
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 five properties. During 1997,
the Partnership sold its remaining property, the Lake Ridge Apartments. The
Partnership has retained a portion of the cash from the property sales to
satisfy obligations of the Partnership as well as establish a reserve for
contingencies. 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 and costs 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 contingencies, the reserves will be
paid within twelve months of the last property being sold. In the event a
contingency continues to exist or arises, reserves may be held by the
Partnership for a longer period of time.
In January 1997, the Partnership sold the Lake Ridge Apartments in an all cash
sale for $5,400,000. From the proceeds of the sale, the Partnership paid
$4,123,938 and $86,200 to the third party mortgage holders in full satisfaction
of the first and second mortgage loans, paid $196,656 in selling costs and also
paid $126,222 in prepayment penalties. The remaining available proceeds were
distributed to Limited Partners in April 1997. See Note 11 of Notes to
Financial Statements for additional information.
In connection with the sale of the Pines of Cloverlane Apartments in 1996, the
Partnership established an escrow account of $335,000 to provide for certain
costs the purchaser may incur related to Pittsfield Township, Michigan
inspections and subsequent improvements at the property. The purchaser has been
reimbursed $60,094 out of the escrow funds to cover such costs. The term of the
escrow is six years, although a settlement is expected to be negotiated by
1999. It is not determinable at this time if the Partnership will receive the
remaining amounts in the escrow account.
The Lakeville Resort Apartments was owned by a joint venture consisting of the
Partnership and an affiliate. During October 1996, the joint venture sold the
property. Pursuant to the sale agreement for the property, $500,000 of the sale
proceeds was retained by the joint venture and was unavailable for distribution
until February 1997, at which time the funds were released in full. The
Partnership's share of the proceeds was $298,750.
The Cedar Crest Apartments was owned by a joint venture consisting of the
Partnership and an affiliate. During November 1996, the joint venture sold the
property. Pursuant to the sale agreement for the property, $500,000 of the sale
proceeds was retained by the joint venture and was unavailable for distribution
until March 1997, at which time the funds were released in full. The
Partnership's share of the proceeds was $481,800.
The Partnership made distributions totaling $177.50, $119.00 and $2.50 per
Interest in 1997, 1996 and 1995, respectively. See Statement of Partners'
Capital for additional information. Distributions were comprised of $5.00 per
Interest of Net Cash Receipts and $172.50 per Interest of Net Cash Proceeds in
1997, $5.00 per Interest of Net Cash Receipts and $114.00 per Interest of Net
Cash Proceeds in 1996 and $2.50 per Interest of Net Cash Receipts in 1995.
In January 1998, the Partnership made a distribution of $253,715 ($4.24 per
Interest) to Limited Partners representing a distribution of remaining
available Net Cash Proceeds. Including the January 1998 distribution, Limited
Partners have received distributions of Net Cash Receipts of $12.50 and Net
Cash Proceeds of $290.74, totaling $303.24 per $1,000 Interest, as well as
certain tax benefits. No distributions are anticipated to be made prior to the
termination of the Partnership. However, after paying final partnership
expenses, any remaining cash reserves will be distributed. Limited Partners
will not recover a substantial portion of their original investment.
Item 8. Financial Statements and Supplementary Data
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See Index to Financial Statements in this Form 10-K.
The supplemental financial information specified by Item 302 of Regulation S-K
is not applicable.
The net effect of the differences between the financial statements and the tax
returns is summarized as follows:
December 31, 1997 December 31, 1996
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Financial Tax Financial Tax
Statements Returns Statements Returns
---------- --------- ---------- ---------
Total assets $2,260,714 9,805,387 $17,991,055 $25,183,206
Partners' capital
(deficit) accounts:
General Partner (316,961) (316,961) (326,247) (54,002)
Limited Partners 2,497,404 10,091,535 12,723,428 19,418,332
Net income (loss):
General Partner 9,286 (312,031) 290,925 912,765
Limited Partners 386,879 1,286,106 28,801,549 44,242,112
Per Limited Part-
nership Interest 6.47(A) 21.51 481.70(A) 739.95
(A) Amount represents basic and diluted net income per Limited Partnership
Interest.
Item 9. Changes in and Disagreements with Accountants on Accounting and
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Financial Disclosure
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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
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(a) Neither the Registrant nor Balcor Partners-XIX, its General Partner, has a
Board of Directors.
(b, c & e) The names, ages and business experience of the executive officers
and significant employees of the General Partner of the Registrant are as
follows:
TITLE OFFICERS
Chairman, President and Chief Thomas E. Meador
Executive Officer
Senior Vice President Alexander J. Darragh
Senior Vice President John K. Powell, Jr.
Senior Managing Director, Chief Jayne A. Kosik
Financial Officer, Treasurer
and Assistant Secretary
Thomas E. Meador (age 50) 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 member of the board of directors 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 43) joined Balcor in September 1988 and is
responsible for real estate advisory services for Balcor and American Express
Company. Mr. Darragh received masters' degrees in Urban Geography from Queen's
University and in Urban Planning from Northwestern University.
John K. Powell Jr. (age 47) 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 is a member of the board of directors of The Balcor Company. 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 40) 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 Senior 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 1997.
Item 11. Executive Compensation
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The Registrant paid $2,005 in 1997 with respect to one of the executive
officers and directors of Balcor Partners - XIX, 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. The other
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 information relating to transactions with affiliates.
Item 12. Security Ownership of Certain Beneficial Owners and Management
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(a) The following entity is the sole Limited Partner which owns beneficially
more than 5% of the outstanding Limited Partnership Interests of the
Registrant:
Name and Amount and
Address of Nature of
Beneficial Beneficial Percent
Title of Class Owner Ownership of Class
- -------------- ---------------- ---------------- ----------------
Limited WIG 86-I 1,996 3.34%
Partnership Partners Limited
Interests Chicago, Partnership
Illinois Interests
Limited Metropolitan 1,526 2.55%
Partnership Acquisition VII, L.L.C. Limited
Interests Greenville, Partnership
South Carolina Interests
While WIG 86-I Partners and Metropolitan Acquisition VII, L.L.C. individually
own less than 5% of the Interests, for purposes of this Item 12, WIG 86-I
Partners is an affiliate of Metropolitan Acquisition VII, L.L.C. and,
collectively, they own 5.89% of the Interests.
(b) Balcor Partners-XIX 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
Interests 215 Interests Less than 1%
Relatives of the officers and affiliates of the partners of the General Partner
own an additional 42 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
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(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 additional information relating
to transactions with affiliates.
(c) No management person is indebted to the Registrant.
(d) The Registrant has no outstanding agreements with any promoters.
PART IV
Item 14. Exhibits and Reports on Form 8-K
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(a)
(1 & 2) See Index to Financial Statements in this Form 10-K.
(3) Exhibits:
(3) The Amended and Restated Agreement and Certificate of Limited Partnership
is set forth as Exhibit 3 to Amendment No. 1 to Registrant's Registration
Statement on Form S-11 dated December 16, 1985 (Registration No. 33-361), and
said Agreement and Certificate is incorporated herein by reference.
(4) Form of Subscription Agreement set forth as Exhibit 4.1 to Amendment No. 1
of the Registrant's Registration Statement on Form S-11 dated December 16, 1985
(Registration No. 33-361), and Form of Confirmation regarding Interests in the
Partnership set forth as Exhibit 4.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1992 are incorporated herein by
reference.
(10) Material Contracts:
(a)(i) The Agreement of Sale and attachment thereto relating to the sale of
Pines of Cloverlane Apartments previously filed as Exhibit 2 to the
Registrant's Current Report on Form 8-K dated January 25, 1996 is incorporated
herein by reference.
(ii) First, Second and Third Amendments to Agreement of Sale relating to the
sale of Pines of Cloverlane Apartments previously filed as Exhibits (10)(ii),
(10)(iii) and (10)(iv), respectively, to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995 is incorporated herein by
reference.
(b) The Agreement of Sale and attachment thereto relating to the sale of the
Lakeside Apartments previously filed as Exhibit 2 to the Registrant's Current
Report on Form 8-K dated February 21, 1996 is incorporated herein by reference.
(c)(i) The Agreement of Sale and attachment thereto relating to the sale of the
Lakeville Resort Apartments previously filed as Exhibit 2 to the Registrant's
Current Report on Form 8-K dated April 23, 1996 is incorporated herein by
reference.
(ii) Master Amendment and Agreement dated May 22, 1996 relating to the sale of
Lakeville Resort Apartments, Petaluma, California, previously filed as Exhibit
(10)(c)(ii) to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996 is incorporated herein by reference.
(iii) Master Amendment and Agreement #2 dated May 22, 1996 relating to the sale
of Lakeville Resort Apartments, Petaluma, California, previously filed as
Exhibit (10)(c)(iii) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 is incorporated herein by reference.
(iv) Letter Agreements dated May 22, 1996 and July 8, 1996 relating to the sale
of Lakeville Resort Apartments, Petaluma, California, previously filed as
Exhibit (10)(c)(iv) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 is incorporated herein by reference.
(v) Letter Agreements dated August 20, 1996, September 19, 1996 and September
30, 1996 relating to the sale of Lakeville Resort Apartments, Petaluma,
California, previously filed as Exhibit (99)(a) to the Registrant's Current
Report on Form 8-K dated August 16, 1996 are incorporated herein by reference.
(d)(i) The Agreement of Sale relating to the sale of Brighton Townhomes
Apartments previously filed as Exhibit (10)(v) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996 is incorporated herein
by reference.
(ii) First Amendment to Agreement of Sale and Escrow Agreement dated May 31,
1996 relating to the sale of Brighton Townhomes, Washington County, Oregon,
previously filed as Exhibit (10)(d)(ii) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996 is incorporated herein by
reference.
(iii) Letter of Termination dated June 12, 1996 relating to the sale of
Brighton Townhomes, Washington County, Oregon, previously filed as Exhibit
(10)(d)(iii) to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996 is incorporated herein by reference.
(iv) Reinstatement and Second Amendment to Agreement of Sale and Escrow
Agreement June 13, 1996 relating to the sale of Brighton Townhomes, Washington
County, Oregon, previously filed as Exhibit (10)(d)(iv) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 is
incorporated herein by reference.
(v) Letter of Extension dated July 8, 1996 relating to the sale of Brighton
Townhomes, Washington County, Oregon, previously filed as Exhibit (10)(d)(v) to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996 is incorporated herein by reference.
(e) The Agreement of Sale and attachment thereto relating to the sale of Cedar
Crest Apartments, Overland Park, Kansas, previously filed as Exhibit (2) to the
Registrant's Current Report on Form 8-K dated August 16, 1996 incorporated
herein by reference.
(27) Financial Data Schedule of the Registrant for 1997 is attached hereto.
(b) Reports on Form 8-K: No reports were filed on Form 8-K during the quarter
ended December 31, 1997.
(c) Exhibits: See Item 14(a)(3) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BALCOR REALTY INVESTORS 86-SERIES I
A REAL ESTATE LIMITED PARTNERSHIP
By: /s/ Jayne A. Kosik
-------------------------------
Jayne A. Kosik
Senior Managing Director and Chief
Financial Officer (Principal
Accounting Officer)
of Balcor Partners-XIX, the
General Partner
Date: March 30, 1998
---------------
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-XIX,
/s/Thomas E. Meador the General Partner March 30, 1998
- -------------------- --------------
Thomas E. Meador
Senior Managing Director and Chief
Financial Officer (Principal
Accounting Officer) of
Balcor Partners-XIX,
/s/Jayne A. Kosik the General Partner March 30, 1998
- -------------------- --------------
Jayne A. Kosik
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants
Financial Statements:
Balance Sheets, December 31, 1997 and 1996
Statements of Partners' Capital (Deficit), for the years ended December 31,
1997, 1996 and 1995
Statements of Income and Expenses, for the years ended December 31, 1997, 1996
and 1995
Statements of Cash Flows, for the years ended December 31, 1997, 1996 and 1995
Notes to Financial Statements
Financial Statement Schedules are omitted for the reason that they are
inapplicable or equivalent information has been included elsewhere herein.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Balcor Realty Investors 86-Series I
A Real Estate Limited Partnership:
We have audited the financial statements of Balcor Realty Investors 86-Series I
A Real Estate Limited Partnership (An Illinois Limited Partnership) as listed
in the Index of this Form 10-K. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Balcor Realty Investors
86-Series I A Real Estate Limited Partnership at December 31, 1997 and 1996,
and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
As described in Note 2 to the financial statements, the partnership agreement
provides for the dissolution of the Partnership upon disposition of all its
real estate interests. As of December 31, 1997, the Partnership has disposed of
all of its remaining real estate interests. Upon resolution of the litigation
described in Note 13 to the financial statements, the Partnership intends to
cease operations and dissolve.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
March 24, 1998
BALCOR REALTY INVESTORS 86 - SERIES I
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
------------- -------------
Cash and cash equivalents $ 1,972,846 $ 12,857,731
Escrow deposits 274,906 533,283
Accounts and accrued interest receivable 12,962 171,078
Prepaid expenses 14,178
Deferred expenses, net of accumulated
amortization of $39,380 in 1996 35,799
------------- -------------
2,260,714 13,612,069
------------- -------------
Investment in real estate:
Land 1,045,776
Buildings and improvements 5,789,366
-------------
6,835,142
Less accumulated depreciation 2,456,156
-------------
Investment in real estate, net of
accumulated depreciation 4,378,986
------------- -------------
$ 2,260,714 $ 17,991,055
============= =============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 52,096 $ 133,372
Due to affiliates 28,175 117,361
Accrued liabilities, principally
real estate taxes 35,921
Security deposits 32,222
Mortgage note payable 4,210,138
------------- -------------
Total liabilities 80,271 4,529,014
------------- -------------
Affiliate's participation in
joint venture 1,064,860
-------------
Commitments and contingencies
Limited Partners' capital (59,791
Interests issued and outstanding) 2,497,404 12,723,428
The accompanying notes are an integral part of the financial statements.
BALCOR REALTY INVESTORS 86 - SERIES I
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
BALANCE SHEETS
December 31, 1997 and 1996
LIABILITIES AND PARTNERS CAPITAL
(Continued)
1997 1996
------------- -------------
General Partner's deficit (316,961) (326,247)
------------- -------------
Total partners' capital 2,180,443 12,397,181
------------- -------------
$ 2,260,714 $ 17,991,055
============= =============
The accompanying notes are an integral part of the financial statements.
BALCOR REALTY INVESTORS 86 - SERIES I
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
for the years ended December 31, 1997, 1996 and 1995
Partners' Capital (Deficit) Accounts
-------------- ------------- --------------
General Limited
Total Partner Partners
-------------- ------------- --------------
Balance at December 31, 1994 $ (8,073,482) $ (603,600) $ (7,469,882)
Cash distributions to Limited
Partners (A) (149,478) (149,478)
Net loss for the year
ended December 31, 1995 (1,357,201) (13,572) (1,343,629)
-------------- ------------- --------------
Balance at December 31, 1995 (9,580,161) (617,172) (8,962,989)
Cash distributions to Limited
Partners (A) (7,115,132) (7,115,132)
Net income for the year
ended December 31, 1996 29,092,474 290,925 28,801,549
-------------- ------------- --------------
Balance at December 31, 1996 12,397,181 (326,247) 12,723,428
Cash distribution to Limited
Partners (A) (10,612,903) (10,612,903)
Net income for the year
ended December 31, 1997 396,165 9,286 386,879
-------------- ------------- --------------
Balance at December 31, 1997 $ 2,180,443 $ (316,961) $ 2,497,404
============== ============= ==============
(A) Summary of distributions per Limited Partnership Interest:
1997 1996 1995
-------------- ------------- --------------
First Quarter $ 165.00 $ 2.50 None
Second Quarter 12.50 74.00 None
Third Quarter None 2.50 None
Fourth Quarter None 40.00 $ 2.50
The accompanying notes are an integral part of the financial statements.
BALCOR REALTY INVESTORS 86 - SERIES I
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
STATEMENTS OF INCOME AND EXPENSES
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
-------------- ------------- --------------
Income:
Rental and service $ 2,484 $ 9,578,314 $ 16,418,264
Interest on short-term
investments 159,550 215,071 85,753
Other income 34,013
-------------- ------------- --------------
Total income 196,047 9,793,385 16,504,017
-------------- ------------- --------------
Expenses:
Interest on mortgage
notes payable 37,810 3,512,383 6,558,223
Lender participations 1,844,713
Depreciation 4,393 1,459,148 2,791,655
Amortization of deferred
expenses 260 52,094 117,694
Property operating 151,488 3,698,151 5,350,302
Real estate taxes 1,870 683,574 1,422,161
Property management fees 1,113 501,502 816,124
Administrative 209,844 597,871 718,055
Other expense 60,094
-------------- ------------- --------------
Total expenses 466,872 12,349,436 17,774,214
-------------- ------------- --------------
Loss before gain on sales of
properties, affiliates'
participation in joint
ventures and extraordinary
items (270,825) (2,556,051) (1,270,197)
Gain on sales of properties 828,751 37,198,777
Affiliates' participation in
income from joint ventures (5,214,321) (132)
-------------- ------------- --------------
Income (loss) before
extraordinary items 557,926 29,428,405 (1,270,329)
-------------- ------------- --------------
Extraordinary items:
Debt extinguishment expense (161,761) (531,135) (145,393)
Affiliates' participation in
debt extinguishment expense 195,204 58,521
-------------- ------------- --------------
Total extraordinary items (161,761) (335,931) (86,872)
-------------- ------------- --------------
Net income (loss) $ 396,165 $ 29,092,474 $ (1,357,201)
============== ============= ==============
The accompanying notes are an integral part of the financial statements.
BALCOR REALTY INVESTORS 86 - SERIES I
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
STATEMENTS OF INCOME AND EXPENSES
for the years ended December 31, 1997, 1996 and 1995
(Continued)
1997 1996 1995
-------------- ------------- --------------
Income (loss) before
extraordinary items
allocated to General Partner $ 12,578 $ 294,284 $ (12,703)
============== ============= ==============
Income (loss) before
extraordinary items
allocated to Limited Partners $ 545,348 $ 29,134,121 $ (1,257,626)
============== ============= ==============
Income (loss) before
extraordinary items per
Limited Partnership
Interest (59,791 issued
and outstanding) - Basic and
Diluted $ 9.12 $ 487.26 $ (21.03)
============== ============= ==============
Extraordinary items allocated
to General Partner $ (3,292) $ (3,359) $ (869)
============== ============= ==============
Extraordinary items allocated
to Limited Partners $ (158,469) $ (332,572) $ (86,003)
============== ============= ==============
Extraordinary items per Limited
Partnership Interest (59,791
issued and outstanding) -
Basic and Diluted $ (2.65) $ (5.56) $ (1.44)
============== ============= ==============
Net income (loss) allocated to
General Partner $ 9,286 $ 290,925 $ (13,572)
============== ============= ==============
Net income (loss) allocated to
Limited Partners $ 386,879 $ 28,801,549 $ (1,343,629)
============== ============= ==============
Net income (loss) per Limited
Partnership Interest (59,791
issued and outstanding) -
Basic and Diluted $ 6.47 $ 481.70 $ (22.47)
============== ============= ==============
The accompanying notes are an integral part of the financial statements.
BALCOR REALTY INVESTORS 86 - SERIES I
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
-------------- ------------- --------------
Operating activities:
Net income (loss) $ 396,165 $ 29,092,474 $ (1,357,201)
Adjustments to reconcile net
income (loss) to net cash
(used in) provided by
operating activities:
Gain on sales of properties (828,751) (37,198,777)
Debt extinguishment expense 35,539 531,135 145,393
Affiliates' participation
in debt extinguishment
expense (195,204) (58,521)
Affiliates' participation
in income from joint
ventures 5,214,321 132
Depreciation of properties 4,393 1,459,148 2,791,655
Amortization of deferred
expenses 260 52,094 117,694
Net change in:
Escrow deposits 258,377 983,862 (262,415)
Accounts and accrued
interest receivable 158,116 (165,221) 61,179
Prepaid expenses 14,178 214,951 (229,129)
Accounts payable (81,276) 14,366 (50,354)
Due to affiliates (89,186) 88,538 (45,644)
Accrued liabilities (35,921) (294,149) 160,196
Security deposits (32,222) (388,502) (19,490)
-------------- ------------- --------------
Net cash (used in) provided by
operating activities (200,328) (590,964) 1,253,495
-------------- ------------- --------------
Investing activities:
Proceeds from sales of
properties 5,400,000 72,178,128
Payment of selling costs (196,656) (1,575,774)
Funding of escrow in connection
with sale of property (335,000)
-------------- -------------
Net cash provided by investing
activities 5,203,344 70,267,354
-------------- -------------
The accompanying notes are an integral part of the financial statements.
BALCOR REALTY INVESTORS 86 - SERIES I
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
(Continued)
1997 1996 1995
-------------- ------------- --------------
Financing activities:
Distributions to Limited
Partners (10,612,903) (7,115,132) (149,478)
Capital contributions by joint
venture partners - affiliate 374,657
Distributions to joint venture
partner - affiliate (1,064,860) (2,670,607) (328,376)
Issuance of mortgage notes
payable 20,932,600
Repayment of mortgage notes
payable (4,210,138) (48,345,344) (18,728,280)
Principal payments on
mortgage notes payable (845,225) (1,216,036)
Payment of deferred expenses (499,868)
Funding of improvement escrows (1,604,551)
Release of improvement escrows 1,064,551
-------------- ------------- --------------
Net cash used in financing
activities (15,887,901) (57,911,757) (1,219,332)
-------------- ------------- --------------
Net change in cash and cash
equivalents (10,884,885) 11,764,633 34,163
Cash and cash equivalents at
beginning of year 12,857,731 1,093,098 1,058,935
-------------- ------------- --------------
Cash and cash equivalents at
end of year $ 1,972,846 $ 12,857,731 $ 1,093,098
============== ============= ==============
The accompanying notes are an integral part of the financial statements.
BALCOR REALTY INVESTORS 86-SERIES I
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. Nature of the Partnership's Business:
Balcor Realty Investors 86-Series I A Real Estate Limited Partnership (the
"Partnership") has retained cash reserves from the sale of its real estate
investments for contingencies which exist or may arise. The Partnership's
operations currently consist of interest income earned on short-term
investments and the payment of administrative expenses.
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 five properties. During 1997,
the Partnership sold its remaining property, Lake Ridge Apartments. The
Partnership has retained a portion of the cash from the property sales to
satisfy obligations of the Partnership as well as establish a reserve for
contingencies. 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 and costs stemming from litigation involving the Partnership
including, but not limited to, the lawsuits discussed in Note 13 of Notes to
Financial Statements. In the absence of any such contingencies, the reserves
will be paid within twelve months of the last property being sold. In the event
a contingency continues to exist or 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 was computed using the straight-line and accelerated
methods. Rates used in the determination of depreciation were based upon the
following estimated useful lives:
Years
-----
Buildings and improvements 20 to 30
Furniture and fixtures 5
Maintenance and repairs were charged to expense when incurred. Expenditures for
improvements were charged to the related asset account.
As properties were sold, the related costs and accumulated depreciation were
removed from the respective accounts. Any gain or loss on disposition was
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 recorded its investments in real estate at the lower of cost or
fair value, and periodically assessed, but not less than on an annual basis,
possible impairment to the value of its properties. The General Partner
estimated the fair value of its properties based on the current sale price less
estimated closing costs. Under SFAS 121, the General Partner determined that no
impairment in value had occurred prior to the sales of the properties. The
General Partner considered 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 indicated otherwise.
(d) Deferred expenses consisted of financing fees which were amortized over the
terms of the respective loan agreements. Upon sale, any remaining balance was
recognized as debt extinguishment expense and classified as an extraordinary
item.
(e) 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.
(f) For financial statement purposes, in previous years, partners were
allocated income and loss in accordance with the provisions in the Partnership
Agreement. In order for the capital accounts of the General Partner and
Limited Partners to appropriately reflect their remaining economic interests as
provided for in the Partnership Agreement, income allocations between the
partners have been adjusted for financial statement purposes in 1997.
(g) Cash and cash equivalents include all unrestricted, highly liquid
investments with an original maturity of three months or less. Cash is invested
or held primarily in one financial institution.
(h) 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.
(i) Revenue was recognized on an accrual basis in accordance with generally
accepted accounting principles.
(j) Statement of Financial Accounting Standards, No. 128, "Earnings per Share"
was adopted by the Partnership for the year-ended December 31, 1997 and has
been applied to all prior earnings periods presented in the financial
statements. Since the Partnership has no dilutive securities, there is no
difference between basic and diluted net income per Limited Partnership
Interest.
4. Partnership Agreement:
The Partnership was organized on October 1, 1984. The Partnership Agreement
provides for Balcor Partners-XIX to be the General Partner and for the
admission of Limited Partners through the sale of up to 250,000 Limited
Partnership Interests at $1,000 per Interest, 59,791 of which were sold on or
prior to July 31, 1986, the termination date of the offering.
The Partnership Agreement provides that the General Partner will be allocated
1% of the profits and losses and the Limited Partners will be allocated 99% of
the profits and losses. For financial statement purposes, in previous years,
partners were allocated income and loss in accordance with the provisions in
the Partnership Agreement. In order for the capital accounts of the General
Partner and Limited Partners to appropriately reflect their remaining economic
interests as provided for in the Partnership Agreement, income allocations
between the partners have been adjusted for financial statement purposes in
1997.
One hundred percent of Net Cash Receipts available for distribution have been
distributed to the holders of Interests in proportion to their Participating
Percentages as of the record date for such distributions. There was 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. The accrued amount would have been paid as part of the General
Partner's share of distributed Net Cash Proceeds. Under certain circumstances,
the General Partner would have participated in the Net Cash Proceeds of the
sale or refinancing of Partnership properties. The General Partner's
participation was limited to 15% of remaining Net Cash Proceeds after the
return of Original Capital plus any deficiency in the Cumulative Distribution
of 6% on Adjusted Original Capital to the holders of Interests. The General
Partner will not receive any distributions of Net Cash Receipts or Net Cash
Proceeds in accordance with these provisions.
5. Mortgage Note Payable:
As of December 31, 1996, the Partnership had a mortgage note payable
outstanding of $4,210,138 related to the Lake Ridge Apartments. This mortgage
note was repaid in connection with the sale of this property during 1997 as
further described in Note 11 of Notes to Financial Statements.
During 1997, 1996 and 1995, the Partnership incurred and paid interest expense
on mortgage notes payable of $37,810, $3,512,383 and $6,558,223, respectively.
6. Management Agreements:
The Partnership's properties were under management agreements with a
third-party management company prior to the sales of the properties. These
management agreements provided for annual fees of 5% of gross operating
receipts.
7. Affiliates' Participation in Joint Venture:
The Cedar Crest and Lakeville Resort apartment complexes were each owned by the
Partnership and an affiliate. Both properties were sold in 1996. Profits and
losses were allocated 96.36% to the Partnership and 3.64% to the affiliate for
Cedar Crest Apartments, and 59.75% to the Partnership and 40.25% to the
affiliate for Lakeville Resort Apartments. All assets, liabilities, income and
expense of the joint ventures were included in the financial statements of the
Partnership with the appropriate adjustment to profit or loss for each
affiliate's participation.
Pursuant to the terms of the sale for Lakeville Resort Apartments, the joint
venture was required to retain $500,000 of the sale proceeds until February
1997, at which time the funds were released in full. The affiliate's share of
the proceeds was $201,250. The affiliate also received a distribution of
$845,410, principally consisting of its share of repair escrows released during
1997. Pursuant to the terms of the sale for Cedar Crest Apartments, the joint
venture was required to retain $500,000 of the sale proceeds until March 1997,
at which time the funds were released in full. The affiliate's share of the
proceeds was $18,200.
Net (distributions) contributions of $(1,064,860), $(2,670,607) and $46,281
were made to joint venture partners during 1997, 1996 and 1995, respectively.
In addition, joint venture partners were allocated their pro rata share of the
gain on the sales of the Lakeville and Cedar Crest apartment complexes of
$4,877,854 and $334,258, respectively, in 1996.
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 1997 in the financial statements is $517,816 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
12/31/97 12/31/96 12/31/95
-------------- -------------- --------------
Paid Payable Paid Payable Paid Payable
------ ------- ------ ------- ------ -------
Reimbursement of expenses
to General Partner,
at cost:
Accounting $31,273 $6,185 $13,192 $18,021 $42,252 $2,280
Data processing 6,810 2,456 5,403 3,195 28,190 2,113
Investor communica-
tions None None None None 5,112 None
Legal 27,041 5,435 12,364 16,499 27,962 2,944
Portfolio management 59,210 14,099 52,663 71,103 105,436 12,199
Property sales admin-
istration 8,543 None 28,393 8,543 11,838 9,169
Other None None 118 None 10,960 118
The Partnership participated in an insurance deductible program with other
affiliated partnerships in which the program paid claims up to the amount of
the deductible under the master insurance policies for its properties. The
program was administered by an affiliate of the General Partner which received
no fee for administering the program; however, the General Partner was
reimbursed for program expenses. The Partnership paid premiums to the
deductible insurance program of $12,750 and $97,161 in 1996 and 1995,
respectively.
10. Other Expenses:
In connection with the sale of the Pines of Cloverlane Apartments in 1996, the
Partnership established an escrow account to provide for certain costs the
purchaser may incur at the property related to Pittsfield Township, Michigan
inspections and subsequent improvement at the property. The purchaser has been
reimbursed $60,094 out of the escrow funds to cover such costs. The Partnership
recognized these payments as other expenses in 1997.
11. Property Sales:
(a) In January 1997, the Partnership sold the Lake Ridge Apartments in an all
cash sale for $5,400,000. From the proceeds of the sale, the Partnership paid
$4,123,938 and $86,200 to the third party mortgage holder in full satisfaction
of the first and second mortgage loans, and paid $196,656 in selling costs and
$126,222 in prepayment penalties. The basis of the property was $4,374,593,
which is net of accumulated depreciation of $2,460,549. For financial statement
purposes, the Partnership recognized a gain of $828,751 from the sale of this
property.
(b) In March 1996, the Partnership sold the Pines of Cloverlane Apartments in
an all cash sale for $18,974,000. From the proceeds of the sale, the
Partnership paid $14,208,240 to the third party mortgage holder in full
satisfaction of the first mortgage loan, and paid $288,460 in selling costs.
The Partnership also funded an escrow of $335,000 to provide for certain costs
the purchaser may incur related to improvements at the property. The purchaser
has been reimbursed $60,094 out of the escrow funds to cover such costs. The
term of the escrow is six years, although a settlement is expected to be
negotiated by 1999. It is not determinable at this time if the Partnership will
receive the remaining amounts in the escrow account. The basis of the property
was $12,369,952, which is net of accumulated depreciation of $10,441,365. For
financial statement purposes, the Partnership recognized a gain of $6,315,588
from the sale of this property.
(c) In March 1996, the Partnership sold the Lakeside Apartments in an all cash
sale for $14,100,000. From the proceeds of the sale, the Partnership paid
$12,426,799 to the third party mortgage holder in full satisfaction of the
first mortgage loan, and paid $299,150 in selling costs and $467,557 in lender
participation. Lender participation represents additional interest paid to the
lender calculated as a percentage of the sales price in excess of amounts
specified in the loan agreement. The basis of the property was $9,316,152,
which is net of accumulated depreciation of $4,876,088. For financial
statement purposes, the Partnership recognized a gain of $4,484,698 from the
sale of this property.
(d) In August 1996, the Partnership sold the Brighton Townhomes Apartments in
an all cash sale for $11,150,000. From the proceeds of the sale, the
Partnership paid $6,858,644 to the third party mortgage holder in full
satisfaction of the first mortgage loan, and paid $221,925 in selling costs and
$1,377,156 in lender participation. Lender participation represents additional
interest paid to the lender calculated as a percentage of the sales price in
excess of amounts specified in the loan agreement. The basis of the property
was $5,575,515, which is net of accumulated depreciation of $3,326,331. For
financial statement purposes, the Partnership recognized a gain of $5,352,560
from the sale of this property.
(e) The Lakeville Resort Apartments was owned by a joint venture consisting of
the Partnership and an affiliate. The Partnership and the affiliate hold
participating percentages in the joint venture of 59.75% and 40.25%,
respectively. In October 1996, the joint venture sold the property in an all
cash sale for $27,200,000. The purchaser took title subject to the existing
first mortgage loan in the amount of $20,795,872. From the proceeds of the
sale, the joint venture paid $355,000 in selling costs. The basis of the
property was $15,083,209, which is net of accumulated depreciation of
$8,320,036. For financial statement purposes, the Partnership recognized a
gain of $11,761,791 from the sale of this property, of which $4,877,854 is the
minority joint venture partner's share.
(f) The Cedar Crest Apartments was owned by a joint venture consisting of the
Partnership and an affiliate. The Partnership and the affiliate hold
participating percentages in the joint venture of 96.36% and 3.64%,
respectively. In November 1996, the joint venture sold the property in an all
cash sale for $21,550,000. From the proceeds of the sale, the joint venture
paid $14,851,661 to the third party mortgage holder in full satisfaction of the
first mortgage loan, and paid $411,239 in selling costs. The basis of the
property was $11,854,621 which is net of accumulated depreciation of
$6,326,179. For financial statement purposes, the Partnership recognized a
gain of $9,284,140 from the sale of this property, of which $334,258 is the
minority joint venture partner's share.
12. Extraordinary Items:
(a) In connection with the sale of Lake Ridge Apartments in January 1997, the
Partnership wrote-off the remaining unamortized deferred financing fees related
to the property of $35,539 and paid $126,222 in prepayment penalties. These
amounts were recognized as debt extinguishment expense and classified as
extraordinary items.
(b) The Partnership wrote off the remaining unamortized deferred financing fees
in the amount of $531,135 as a result of the sales of the Pines of Cloverlane,
Cedar Crest and Lakeville Resort apartment complexes during 1996. This amount
was recognized as debt extinguishment expense and classified as extraordinary
items, of which $195,204 represents the affiliates' share.
(c) The Lakeville Resort Apartments was owned by a joint venture consisting of
the Partnership and an affiliate. In connection with the 1995 refinancing, the
Partnership wrote-off the remaining unamortized deferred loan fees relating to
the former mortgage note of $145,393. This amount was recognized as debt
extinguishment expense and classified as extraordinary items, of which $58,521
represents the affiliate's share.
13. 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 state securities and common law violations
with regard to the property acquisition process of the Partnership, and 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 or liquidity of
the Partnership. The Partnership believes it has meritorious defenses to
contest the claims.
14. Fair Value of Financial Instruments:
The carrying amounts and fair values of the Partnership's financial instruments
at December 31, 1997 and 1996 are as follows:
The carrying value of cash and cash equivalents, accounts and accrued interest
receivable and accounts payable approximates fair value.
Based on borrowing rate available to the Partnership at the end of 1996 for a
mortgage loan with similar terms and maturities, the fair value of the mortgage
note payable approximated the carrying value.
15. Subsequent Event:
During January 1998, the Partnership paid a distribution of $253,715 ($4.24 per
Interest) to Limited Partners representing a distribution of remaining
available Net Cash Proceeds.