SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Amendment No. 4
Filed by the Registrant |_|
Filed by a Party other than the Registrant |X|
Check the appropriate box:
|X| Preliminary Proxy Statement |_| Confidential, for Use of the
|_| Definitive Proxy Statement Commission Only (as permitted
|_| Definitive Additional Materials by Rule 14a-6(e)(2))
|_| Soliciting Material Pursuant to Rule
14a-11(c) or Rule 14a-12
PROMETHEUS INCOME PARTNERS, a California limited partnership
(Name of Registrant as Specified in Its Charter)
PROMETHEUS DEVELOPMENT CO., INC., a California corporation
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|_| No fee required.
|X| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Units of limited partner interest
(2) Aggregate number of securities to which transaction applies: 15,544
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
$1,445. The per unit price is equal to the merger consideration
to be received per limited partner unit in the registrant. The
Merger consideration is estimated based on certain financial
information as of December 31, 2000 and is subject to adjustment
as set forth herein.
(4) Proposed maximum aggregate value of transaction: $22,461,080 1
(5) Total Fee Paid: $4,493
|X| Fee paid previously with preliminary materials.
|X| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid: $4,493
(2) Form, Schedule or Registration Statement no.: preliminary Schedule 14A
(3) Filing Party: Prometheus Development Co., Inc.
(4) Date Filed: June 28, 2000 and February 28,2001
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PROMETHEUS INCOME PARTNERS
To the limited partners of Prometheus Income Partners-YOUR VOTE IS VERY
IMPORTANT
You are cordially invited to attend a meeting of the limited partners of
Prometheus Income Partners. At the meeting, holders of the units of limited
partner interests in Prometheus Income Partners will consider and vote on the
proposals of Prometheus Development Co., Inc., Prometheus Income Partners'
general partner, described in the accompanying notice of meeting and proxy
statement.
The primary substantive proposal to be voted upon at the meeting is the
proposed merger of PIP Acquisition, LLC with and into Prometheus Income
Partners. PIP Acquisition is a wholly owned subsidiary of PIP Partners -
General, LLC, which is an affiliate of the general partner of the partnership
and the owner of 18.2% of the outstanding units. Prometheus Income Partners, PIP
Partners and Prometheus Development Co. are all under the common control of
Sanford Diller, who is also the principal beneficial owner of these entities. As
more fully described below and in the accompanying proxy statement, in the
proposed transaction, if approved and consummated, each limited partner of
Prometheus Income Partners other than PIP Partners will be entitled to receive
an amount calculated as the effective liquidation value of the units they hold,
which amount will be at least $1,200 per unit. The calculation will be based on
an independent appraisal of the partnership's apartment properties and will
factor in the actual costs to repair existing construction defects in these
properties and the net recovery (if any) in litigation currently being pursued
by the partnership relating to these defects in these properties. A
non-refundable advance on the merger consideration will be paid to the limited
partners (other than PIP - General) in the amount of $1,200 per unit promptly
following the approval and consummation of the merger. This amount represents a
current estimate of the liquidation value of each limited partnership unit as
calculated in accordance with the partnership's agreement of limited
partnership, net of the estimated costs to repair existing defects and a reserve
of currently restricted cash. Because the actual costs to repair these defects
and the ultimate outcome of the litigation at this point is unknown, the balance
of the merger consideration (if any) will be paid promptly following completion
of repairs of the existing construction defects in the partnership's properties
and final resolution of the pending litigation; however, the partnership has
entered into settlement agreements as to certain aspects of the litigation
which, if approved by the required courts, would result in a net recovery to the
partnership of $5.6 million. After the merger, PIP Partners will hold all of the
units. A majority of the units (50% or more), or 9,498 Units, must be voted in
favor of the merger proposal for the proposal to be approved.
The merger consideration will be fixed at the sum each limited
partnership unit would receive under the partnership's partnership agreement
upon liquidation (the "Liquidation Value") after giving effect to (i) the sale
of the partnership's rental properties for the market value thereof as
determined by a recently obtained independent appraisal, (ii) the repayment in
full of the existing mortgages on these properties (together with any prepayment
penalty in respect of such repayment), (iii) the repair of existing construction
defects in these properties for a value equal to the ultimate cost to the
partnership of these repairs and (iv) the net recovery by the partnership (if
any) in litigation being prosecuted by the partnership with respect to those
construction defects. As of the date of the attached proxy statement, any
attempt to put a value on the cost of these repairs and the associated
litigation would be mere conjecture and potentially unfair to the
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limited partners; although the partnership has entered into settlement
agreements as to certain aspects of this litigation, these settlements
agreements are subject to court approval, which is uncertain. Accordingly, the
ultimate amount of the merger consideration will be fixed and paid when the
defects have been repaired and the litigation has been finally resolved.
The date, time and place of the meeting are as follows:
August 13, 2001
1:30 p.m., local time
[Location]
In connection with the proposed merger, please note that:
o Prometheus Income Partners, PIP Partners, PIP Acquisition and
Prometheus Development Co. are all under the common control of
Sanford Diller. The interests of these entities are different from
and in substantial conflict with those of the limited partners.
Because of the relationship among Prometheus Development Co. (the
partnership's general partner), PIP Partners and PIP Acquisition, the
merger and all of the proposed transactions related to the merger as
discussed in this document are not the product of arm's-length
negotiation between unaffiliated parties. PIP Acquisition and PIP
Partners are making this offer with a view to ultimately making a
profit and, therefore, there is a conflict that is described more
fully in the accompanying materials between their desire to acquire
your units at a relatively lower price and your desire to sell your
units at a relatively higher price.
o The Liquidation Value was determined on the basis of an independent
appraisal of the market value of the partnership's properties. This
appraised market value could be greater than or less than the amount
for which these properties could be sold at any given time.
o If the merger occurs, you will not receive any future distributions
from operating cash flow of Prometheus Income Partners or upon any
sale or refinancing of the properties owned by it. You will, however,
be entitled to receive the deferred component of the merger
consideration (if any) calculated as set forth above and in the
accompanying materials.
o Even if current cash reserves together with any recovery in pending
litigation are insufficient to cover the actual cost of repair of
existing construction defects, you will not be required to return any
portion of the $1,200 advance on the merger consideration initially
to be paid to you in respect of each unit held by you.
o Due to construction defects in the partnership's properties and
pending recovery (if any) in the litigation regarding the defects,
there have been no cash distributions since 1996, although Prometheus
Income Partners has generated income to the limited partners on which
the limited partners may have been subject to income tax. The general
partner estimates that as of March 31, 2001, these tax liabilities
approximated $145 per unit owned by each limited partner, assuming
their prior use of all passive
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activity losses generated by the partnership, that the maximum
marginal income tax rates for an individual resident in California
would be applicable and that such income would be treated for this
purpose as ordinary income. As a result of the merger, the limited
partners will retain no interest in the partnership. Thus, after the
current fiscal year of Prometheus Income Partners, there will be no
additional tax liability for the limited partners with respect to the
partnership, and PIP Partners - General, as holder of all interests
in the partnership, will bear all risk of loss to the partnership's
properties.
o There is only a sporadic secondary trading market in the units. To
the best of Prometheus Income Partners' knowledge, the highest sale
price in the last two years in the secondary market was $601 per
unit, other than a recent block purchase by PIP Partners for $1,200
per unit and a recent tender offer for a limited number of units at
$650 and $800 per unit.
For further information on the factors considered by Prometheus
Development Co. in approving the merger, please see the disclosure beginning on
page 27 of the accompanying proxy statement.
The merger will provide you with the opportunity to liquidate your
investment in Prometheus Income Partners for cash at a price and on terms that
Prometheus Development Co. believes are fair to the limited partners. If the
transaction occurs, the reporting obligations of the partnership under the
federal securities laws are expected to cease, although you will receive
periodic status reports on the construction defects, the repairs performed and
to be performed, and the conduct of the litigation. Unlike in a liquidation of
Prometheus Income Partners, the merger will not require limited partners to
continue to hold interests in Prometheus Income Partners until all contingent
liabilities have been settled.
The merger will not happen unless limited partners holding greater than
50% of the units approve the merger proposal. PIP Partners has agreed to vote
neutrally with respect to the merger proposal, meaning that PIP Partners will
vote its units for or against the proposal in the same proportion as the total
number of units voted by unaffiliated limited partners. For example, if
unaffiliated limited partners holding 67% of the units voted in person or by
proxy vote for the merger proposal, then PIP Partners will vote only 67% of its
units for the merger proposal. PIP Partners intends to vote all of its units for
the adjournment proposal described in the accompanying notice of meeting and
proxy statement.
The enclosed Proxy Statement is dated July __, 2001 and is first being
mailed to limited partners on or about July 16, 2001. Only limited partners who
held their units at the close of business on July 16, 2001 will be entitled to
vote at the meeting.
Prometheus Development Co., considering, among other factors, that the
limited partners will be able to liquidate their interests in Prometheus Income
Partners, has determined that the transaction is fair to the partnership and its
limited partners and recommends that you vote for the merger proposal and for
the adjournment proposal. A vote for the merger proposal is a vote to have PIP
Acquisition merge with and into Prometheus Income Partners, and to pay the
Liquidation Value, including the advance thereon of $1,200 per unit to each
limited partner
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(other than PIP Partners) in respect of the units held by them. A vote for the
adjournment proposal is a vote to allow Prometheus Development Co. the
discretion, in the event that insufficient proxies or votes for the merger
proposal have been received or cast to approve the merger, to adjourn the
meeting to allow Prometheus Development Co. to continue to solicit proxies.
The enclosed Proxy Statement explains in detail the terms of the
proposed transaction and related matters. Please carefully review and consider
all of this information.
The approval of the merger is an important decision for Prometheus
Income Partners and its limited partners. Whether or not you plan to attend the
meeting, please complete, date, sign and promptly return the accompanying proxy
in the enclosed self-addressed stamped envelope. Returning your proxy does NOT
deprive you of your right to attend the meeting and to vote in person.
Your vote is important. If you return your proxy, you do not have to
attend the meeting in order to vote your units.
On behalf of the general partner, I thank you for your support and
appreciate your consideration of these matters.
Prometheus Development Co., Inc.,
a California corporation
/s/ John J. Murphy
------------------------
By: John J. Murphy
Title: Vice President
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the transaction, passed upon the
merits or fairness of this transaction or passed upon the accuracy or adequacy
of the disclosure contained in this document. Any representation to the contrary
is a criminal offense.
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PROMETHEUS INCOME PARTNERS
NOTICE OF MEETING OF LIMITED PARTNERS
Notice is hereby given that a meeting of the limited partners of
Prometheus Income Partners, a California limited partnership, will be held at
1:30 p.m., local time, on August 13, 2001, at [Location].
The purposes of the meeting are:
1. To consider and vote on a proposal to approve the Agreement and Plan
of Merger dated as of June 22, 2000 (as amended and restated as of May 31, 2001)
by and among Prometheus Income Partners, PIP Partners - General, LLC, a
California limited liability company, and PIP Acquisition, LLC, a California
limited liability company and a wholly owned subsidiary of PIP Partners, each an
affiliate of Prometheus Development Co., Inc. (the general partner of Prometheus
Income Partners), pursuant to which (a) PIP Acquisition will be merged with and
into Prometheus Income Partners and (b) each outstanding limited partner unit of
Prometheus Income Partners (other than units held by PIP Partners) will be
converted into the right to receive the deemed liquidation value of the units
they hold in accordance with the partnership's partnership agreement based on an
independent appraisal of the market value of the partnership's apartment
properties and after giving effect to the repair of existing construction
defects in these properties and any recovery in litigation currently being
pursued to the partnership relating to these defects in these properties. The
merger consideration is payable in cash at the time these defects in the
partnership's properties have been repaired and this litigation has been
resolved. A non-refundable cash advance on the merger consideration in the
amount of $1,200 per unit will be payable promptly following approval and
consummation of the merger. Approval of this proposal will also constitute
approval of all of the transactions contemplated by the merger, including the
merger of PIP Acquisition with and into Prometheus Income Partners.
2. To consider and vote on a proposal to permit Prometheus Development
Co., the general partner of Prometheus Income Partners, to adjourn the meeting
to permit further solicitation of proxies in the event that there are not
sufficient votes at the time of the meeting to approve the merger proposal.
3. To transact such other business as may properly come before the
meeting or any adjournment or postponement of the meeting.
These items of business are described in this Proxy Statement. Only
limited partners of Prometheus Income Partners of record at the close of
business on July 16, 2001, the record date, are entitled to notice of and to
vote at the meeting. You may vote in person at the meeting, even if you have
returned a proxy. If you return your proxy, you do not have to attend the
meeting in order to vote your units.
If the merger proposal is approved and the merger is consummated,
limited partners will have no dissenter's or appraisal rights with respect to
the merger.
By: Prometheus Development Co., Inc.,
a California corporation
/s/ John J. Murphy
-----------------------------
By: John J. Murphy
Title: Vice President
Redwood City, California
July __, 2001
Whether or not you plan to attend the meeting, we urge you to complete,
date, sign and promptly return the accompanying proxy in the enclosed
self-addressed stamped envelope. Returning your proxy does NOT deprive you of
your right to attend the meeting and to vote your units in person.
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PROXY STATEMENT
of
PROMETHEUS DEVELOPMENT CO., INC.
Dated July _, 2001
QUESTIONS AND ANSWERS ABOUT THE TRANSACTION
The following questions and answers are intended to provide brief
answers to some commonly asked questions. These questions and answers do not,
and are not intended to, address all questions that may be important to you.
Q: What is the transaction?
A: The transaction is a statutory merger whereby PIP Acquisition, LLC, a
wholly owned subsidiary of PIP Partners - General, LLC and an affiliate
of Prometheus Development Co., Inc., the general partner of Prometheus
Income Partners, will merge into Prometheus Income Partners. If a
majority of the units of limited partner interest of Prometheus Income
Partners are voted for transaction and the other conditions to the
transaction described below are satisfied, PIP Acquisition will merge
into Prometheus Income Partners, and you will be entitled to receive
merger consideration in the sum equal to the deemed liquidation value of
the units you hold in accordance with the partnership's partnership
agreement based on an independent appraisal of the market value of the
partnership's apartment properties and after giving effect to the repair
of existing construction defects in these properties and any recovery in
pending litigation being pursued by the partnership relating to those
defects. This deemed liquidation value is referred to in this proxy
statement as the "Liquidation Value." Following the merger, you will no
longer be a limited partner of Prometheus Income Partners. Instead, PIP
Partners will hold all of the outstanding units.
Q: How will the Liquidation Value be determined?
A: The Liquidation Value will be fixed at the sum each limited partnership
unit would receive under the partnership's partnership agreement upon
liquidation after giving effect to (i) the sale of the partnership's
rental properties for the market value thereof as determined by a
recently obtained independent appraisal, (ii) the repayment in full of
the existing mortgages on these properties (together with any prepayment
penalty in respect of such repayment), (iii) the repair of existing
construction defects in these properties for a value equal to the
ultimate cost to the partnership of these repairs and (iv) the net
recovery by the partnership (if any) in litigation being prosecuted by
the partnership with respect to these construction defects. As of the
date of the attached proxy statement, any attempt to put a value on the
cost of these repairs and the associated litigation would be mere
conjecture and potentially unfair to the limited partners. Accordingly,
the ultimate amount of the merger consideration will be fixed and paid
when the defects have been repaired and the litigation has been finally
resolved. The partnership has entered into settlement agreements as to
certain aspects of this litigation which, if approved by the required
courts, would result in a net recovery to the partnership of $5.6
million. Recovery under these or any other litigation settlements will
be included in calculating the net recovery in the litigation described
above for the purpose of calculating the final merger consideration.
Q: When will the merger consideration be paid?
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A: An advance on the merger consideration will be paid to the limited
partners (other than PIP Partners) in the amount of $1,200 per unit
promptly following the approval and consummation of the merger. This
amount represents a current estimate of the Liquidation Value, net of
currently restricted cash and a reserve for the repairs in the amount
estimated by the partnership necessary to repair known defects. If the
Liquidation Value as finally determined exceeds the amount of this
advance, a final payment of the balance of the Liquidation Value will be
paid promptly following repair of the existing construction defects in
the partnership's properties and the final resolution of the pending
litigation regarding these defects. Even if the Liquidation Value as
finally determined is less than the amount paid as an advance to the
limited partners, the limited partners will not be required to return
any part of such advance. PIP Partners, which currently holds 3,451
units (18.2% of the outstanding units), will not receive any merger
consideration in respect of the units it holds at the time of the
merger.
Q: What are the principal benefits to the limited partners of the
transactions?
A: The principal benefits include:
o Upon the completion of the transaction, the limited partners, other
than PIP Partners, will receive the Liquidation Value, in cash, in
exchange for each of their units and, accordingly, those limited
partners would no longer bear the risks inherent in the ownership and
operation of real property through Prometheus Income Partners. This
price has been fixed based on an independent appraisal of the market
value of partnership's apartment properties. The minimum amount of
the merger consideration to be paid to the limited partners is $400
greater than the price paid for units in recent transactions of which
Prometheus Development Co. is aware, other than a privately
negotiated purchase of a large block of units by PIP Partners.
o The merger will discontinue the recognition by the limited partners
of undistributed income for tax purposes (other than with respect to
the deferred cash portion of the merger consideration, if any, to be
paid following completion of repairs and final resolution of the
pending litigation) and will allow limited partners to receive cash
to at least partially pay tax liabilities previously incurred with
respect to undistributed income of Prometheus Income Partners. The
properties of the partnership have significant construction defects.
Because of the need to accumulate cash reserves to satisfy
obligations to the mortgageholders on Prometheus Income Partners'
properties with respect to these defects, and the need determined by
Prometheus Development Co. for additional cash reserves to fix these
defects, no distributions to limited partners have been made since
1996, yet the limited partners have continued to recognize income
with respect to the units and may have incurred tax liabilities in
respect thereof. The general partner estimates that as of March 31,
2001, these tax liabilities approximated $145 per unit owned by each
limited partner, assuming their prior use of all passive activity
losses generated by the partnership, that the maximum marginal income
tax rates for an individual resident in California would be
applicable and that such income would be treated for this purpose as
ordinary income. The property manager of the partnership's
properties, an affiliate of the general partner,
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has been paid certain fees and reimbursed certain expenses under its
management contract during this period.
o You will no longer bear the risk that the cost to repair construction
defects in the partnership's properties will exceed current estimates
of, and cash reserves for, these amounts.
o You will not longer bear the risk of loss of the partnership's
properties through fire, earthquake or condemnation.
o You will retain the potential benefit of recovery in pending
litigation.
o You will receive at least $1,200 in cash for each unit you hold,
regardless of any adverse outcome in pending litigation, costs in
excess of current estimates to repair existing defects, any adverse
outcome in certain claims currently being pursued against the
partnership and any reduction in the value of the partnership's
properties.
Q: What are the principal detriments to the limited partners of the
transactions?
A: The principal detriments include:
o No representative unaffiliated with Prometheus Development Co. (the
general partner) has been retained to act solely on behalf of limited
partners for the purposes of negotiating the terms of the merger.
Prometheus Income Partners, PIP Partners, PIP Acquisition and
Prometheus Development Co. are all under the common control of
Sanford Diller. The interests of these entities are different from
and in substantial conflict with those of the unaffiliated limited
partners. Because of the relationship among Prometheus Development
Co., PIP Partners and PIP Acquisition, the merger and all of the
proposed transactions related to the merger as discussed in this
document are not the product of arm's-length negotiation between
unaffiliated parties. PIP Acquisition and PIP Partners are making
this offer with a view to ultimately making a profit and, therefore,
there is a conflict that is described more fully below between their
desire to acquire your units at a relatively lower price and your
desire to sell your units at a relatively higher price.
o Following the merger, the limited partners, other than PIP Partners,
will cease to participate in future earnings or growth, if any, of
Prometheus Income Partners or benefit from increases, if any, in the
value of the partnership or its properties.
o Limited partners do not have any dissenters' rights or other rights
of appraisal under the state law which governs Prometheus Income
Partners, the partnership agreement of Prometheus Income Partners or
otherwise in connection with the merger proposal. Therefore,
dissenting limited partners do not have the right to have their units
independently appraised if they disapprove of the merger.
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The limited partners will forego alternatives to the merger. These
alternatives might include a separate sale of all of the assets of
Prometheus Income Partners (which could be for more or less than the
appraised market value of the partnership's properties on the basis
of which the merger consideration was calculated) and subsequent
liquidation of Prometheus Income Partners, other possible PIP
Partners acquisitions of units or the continuation of Prometheus
Income Partners under its current ownership structure.
o There is no assurance that there will be any recovery in pending
litigation, that any such recovery will exceed actual costs to repair
existing construction defects, or that any further merger
consideration will be distributed beyond the initial advance of
$1,200 per unit.
Q: Why doesn't Prometheus Income Partners just sell all of its properties
and liquidate?
A: Prometheus Development Co. believes that the merger provides the limited
partners with an opportunity to dispose of their investment in
Prometheus Income Partners more quickly than would likely occur in a
liquidation of Prometheus Income Partners' properties. Unlike in a
liquidation, the merger proposal will not require limited partners to
continue to hold interests in Prometheus Income Partners until all
contingent and other liabilities of Prometheus Income Partners have been
settled.
In addition, in a liquidation it is uncertain what price the limited
partners would receive. Prometheus Development Co. does not believe that
the underlying properties would be fairly valued in the market due to
the current construction defects affecting the properties and the
uncertainty of recovery in litigation with respect to these construction
defects. Prometheus Development Co. and PIP Partners believe that a
third-party would apply a greater discount to the value of the units as
a result of pending litigation than that applied by PIP Partners, in
part because PIP Partners and Prometheus Development Co. believe they
are in a better position to prevail in this litigation than a third
party would likely be, in part because Prometheus Development Co. and
its affiliates have more experience and knowledge about this litigation
and the underlying properties and can better estimate the risks inherent
in this litigation and the likelihood of the partnership prevailing.
Q: How was the amount that I will receive for my units determined?
A: Prometheus Development Co., and PIP Partners, PromHill, The DNS Trust,
Helen Diller and Sanford Diller, as the acquiring parties, obtained an
independent appraisal of the partnership's properties based on sales
comparisons of similar properties and capitalization of the income
generating capabilities of these property and without regard to existing
defects. This appraisal determined the combined market value of these
properties to be $68,900,000. The merger consideration was fixed at the
value the holder of each limited partnership unit would be entitled to
receive for each unit if the partnership were liquidated immediately
following a sale of these properties at the appraised market value after
giving effect to each of the following:
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o the repayment (including any prepayment penalties) of existing
mortgages on these properties.
o the cost to repair existing construction defects in these properties.
o the net recovery (if any) by the partnership in litigation being
pursued in respect of these construction defects.
o reconciliation of other assets and liabilities of the partnership
on the date of the merger.
Prometheus Development Co. and the acquiring parties considered this
methodology to be the fairest way to determine the merger considering
given the inherent uncertainties in determining the actual cost to
repair existing defects and in determining the value of pending
litigation. This calculation retains for the limited partners their
economic interest in any recovery in pending litigation, and also
retains for them the benefit if the cost of repairs proves to be less
than current estimates.
Q: What do I get if the merger takes place?
A: Following the merger of Prometheus Income Partners and PIP Partners, you
will be entitled to receive the Liquidation Value for each unit you
hold. Beyond this amount you will have no right to receive additional
distributions from Prometheus Income Partners, including any
distributions of current cash reserves if these reserves were to become
available for distribution at some point in the future or the proceeds
the partnership will receive it if prevails in the pending litigation
(other than as these items are considered in calculation of the
Liquidation Value). If Prometheus Income Partners does not participate
in the merger, you will continue to have the current right to receive
distributions, if any, in accordance with the partnership agreement of
Prometheus Income Partners when cash becomes available for distribution.
Please note that cash distributions to limited partners were suspended
in 1996. The terms of the mortgages on Prometheus Income Partners'
properties require that a security account be maintained for each
property to cover contingent liabilities with respect to construction
defects in these properties. These security accounts are additional
collateral for the lender, and total, as of March 31, 2001,
approximately $5,713,000. The liquidation and distribution of these
accounts to limited partners, in whole or part and if at all, would be
unlikely prior to the final resolution of the pending litigation and
repair of construction defects. In addition, pursuant to its discretion
under the partnership agreement of Prometheus Income Partners,
Prometheus Development Co. currently maintains an additional reserve
account totaling as of March 31, 2001 approximately $3,932,000 to cover
additional contingent liabilities related to construction defects. After
the merger, the limited partners will have no rights to any eventual
liquidation of these accounts other than as such accounts are considered
in the calculation of the Liquidation Value on the effective date of the
Merger.
Q: What is the status of the construction defects and the related
litigation?
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A: The hardboard siding used at both properties owned by Prometheus Income
Partners is failing to perform as expected. Moisture has accumulated in
the walls of the apartment projects through a combination of
construction defects and endemic problems with the hardboard siding,
causing rot and decay in the wood, framing and siding. In addition to
the hardboard siding problems, routine roofing inspection has uncovered
failing roof substrate at dormer roof assemblies for both properties
owned by Prometheus Income Partners. This has been sufficient to cause
deflection and decay of the roof and its structural support, requiring
replacement.
Two lawsuits have been filed by Prometheus Income Partners, one for each
property. The total claimed damages for both properties currently is
approximately $19.6 million. A claim has also been filed by one of the
defendants in these lawsuits against the partnership. The general
partner does not believe there is a substantial risk of recovery against
the partnership on this claim, but there is no assurance a judgment will
not be rendered against the partnership based on this claim.
The partnership has entered into settlement agreements with certain
defendants in these lawsuits providing for a net recovery to the
partnership of $5.6 million. However, these settlements are subject to
court approval, and there is no assurance such approval will be
obtained.
PIP Partners and Prometheus Development Co. believe that the general
partner is in a better position to continue to litigate these lawsuits
than an unaffiliated third party because of its experience in similar
disputes. Affiliates of the general partner are owners of properties
involved in five other similar lawsuits. One of these suits was
successfully litigated. Despite this experience, there remains a
significant risk that Prometheus Income Partners will not be completely
successful in its lawsuits.
Q: Does the transaction require the vote of the limited partners?
A: Yes. Approval of the merger proposal by the limited partners is a
condition to Prometheus Income Partners' participation in the merger.
The affirmative vote of the limited partners holding more than 50% of
the units outstanding as of July 16, 2001, is required to approve the
merger proposal. The record date is the date fixed by Prometheus
Development Co. to determine the limited partners entitled to vote at
the meeting.
PIP Partners has agreed to vote neutrally with respect to the merger
proposal, meaning that PIP Partners will vote its units for or against
the proposal in the same proportion as the total number of units voted
by unaffiliated limited partners. For example, if unaffiliated limited
partners holding 67% of the units voted in person or by proxy vote for
the merger proposal, then PIP Partners will vote only 67% of its units
for the merger proposal. PIP Partners intends to vote all of its units
for the adjournment proposal described in the accompanying notice of
meeting and this proxy statement.
Q: If the limited partners approve the merger, is it certain that
Prometheus Income Partners will participate in the merger?
-6-
A: No. Prometheus Income Partner's participation in the merger is subject
to several other closing conditions, including: obtaining any required
consent to the merger from the partnership's lender on terms
satisfactory to PIP Acquisition and PIP Partners, if necessary; the
partnership's having generally unencumbered title to its properties
except for known existing encumbrances; and no material adverse effect
of any recent occurrences on the properties or the partnership. In
addition, PIP Partners must have adequate resources to pay the merger
consideration. PIP Partners believes that it has or will have such
resources.
Limited partners should be aware that the satisfaction or waiver of each
of the closing conditions is a condition to Prometheus Income Partners'
participation in the transaction. Therefore, it is possible that the
failure of the partnership to satisfy a condition could cause the
transaction to fail to close. The parties to the Third Amended and
Restated Agreement and Plan of Merger dated as of May 31, 2001 by and
among Prometheus Income Partners, PIP Partners and PIP Acquisition also
have the right to terminate the transaction in its entirety by mutual
agreement, but do not have any current intention of doing so.
Q: What happens if I vote against the merger proposal?
A: If you vote against the merger proposal, but holders of more than 50% of
the units in Prometheus Income Partners outstanding as of the record
date vote for the merger proposal and Prometheus Income Partners
participates in the transaction, you will be required to give up your
units and entitled to receive the Liquidation Value in cash (including
an immediate non-refundable advance of $1,200 per unit thereon) for each
of your units. If you fail to return your proxy or mark "ABSTAIN" on
your proxy, the effect will be the same as a vote against the merger
proposal.
Q: Do limited partners have dissenters' or appraisal rights in connection
with the merger?
A: No. Limited partners are not entitled to exercise dissenters' rights or
other rights of appraisal in connection with the merger.
Q: When do you expect the merger to be completed?
A: We are working to complete the merger as quickly as possible. We expect
to complete the merger as soon as practicable following the meeting, or
within ten days of the meeting.
Q: What are the tax consequences of the merger to the limited partners?
A: In general, a limited partner will recognize gain or loss on the
conversion of units into cash as a result of the merger. This gain or
loss will be equal to the difference between the limited partner's
"amount realized" from the merger and the limited partner's adjusted tax
basis in the units converted. The "amount realized" will be a sum equal
to the amount of the initial advance payment ($1,200 per unit) on the
merger consideration, the amount of the deferred payment of the merger
consideration with respect to the litigation and construction defect
repairs (if any), plus the amount of Prometheus Income
-7-
Partners' liabilities allocable to the units as determined under Section
752 of the Internal Revenue Code.
This gain or loss should be treated as capital gain or loss. However, a
portion of this gain or loss that is attributable to "unrealized
receivables" (which includes recapture of some previous depreciation
deductions) and "inventory items" (as defined in section 751 of the
Internal Revenue Code of 1986 as amended) may be treated as ordinary
income or ordinary loss.
Because the merger consideration is uncertain as to the ultimate amount,
the timing of the gain or loss associated with the deferred payment (if
any) and ultimately the overall tax treatment of the amount realized is
uncertain.
Under the so-called "open transaction" doctrine, no current tax
consequence attaches to the receipt of an item of property whose fair
market value cannot be reasonably determined. Limited partners may wish
to consult their tax advisors concerning the possible applicability of
the open transaction doctrine to the receipt of the deferred payment. If
the open transaction doctrine were applicable to this deferred payment,
(i) the payment would not be taken into account in determining a limited
partner's gain upon receipt of the merger consideration and any gain
would be limited to the extent the amount realized with respect to the
advance payment exceeds the limited partner's tax basis; (ii) the
limited partner would take no tax basis in the deferred payment; and
(iii) amounts thereafter received by virtue of the deferred payment will
be treated partially as interest and the balance as capital gain or loss
to the extent it differs from any remaining basis in the limited
partner's units.
It is the position of the Internal Revenue Service, reflected by
Treasury Regulations, that only in "rare and extraordinary cases" is the
value of the property so uncertain that open transaction treatment is
available. Accordingly, the Internal Revenue Service may require a
limited partner to allocate his tax basis in the Partnership units, in
general, over a 15 year period (or a shorter period if it is certain
that no further payments will be received). Under this scenario, it
would be possible for a limited partners to recognize significant
capital gain upon the receipt of the advance payment and potentially
recognize a significant capital loss (subject to significant limitations
as to usage) in the year the deferred payment is actually received.
Due to the lack of available precedent and the inherently factual nature
of the question, tax counsel are not able to express any view as to the
availability of open transaction reporting in respect of the deferred
payment. Accordingly, holders are urged to consult their tax advisors
regarding the issue.
Q: What other matters will be voted on at the meeting?
A: In addition to asking you to vote on the merger proposal, we are asking
you to consider and vote on a proposal to permit Prometheus Development
Co. to adjourn the meeting to permit further solicitation of proxies in
the event that there are not sufficient votes at the time of the meeting
to approve the merger proposal.
-8-
A vote for the merger proposal is not also a vote for the adjournment
proposal. You must vote separately on each proposal. The affirmative
vote of limited partners holding more than 50% of the units present in
person or by proxy at the meeting is required to approve the adjournment
proposal. If you fail to return your proxy and do not vote in person at
the meeting, it will have no effect on the adjournment proposal. If you
mark "ABSTAIN" on your proxy and do not vote in person at the meeting,
the effect will be the same as a vote against the adjournment proposal.
Approval of the adjournment proposal by the limited partners is not a
condition to Prometheus Income Partners' participation in the merger.
Approval of the adjournment proposal by the limited partners will permit
the adjournment of the meeting to solicit additional proxies in the
event that there are not sufficient votes at the time of the meeting to
approve the merger proposal.
Prometheus Development Co. recommends that you vote for the adjournment
proposal. PIP Partners intends to vote all of its units in favor of the
adjournment proposal.
Other than the merger proposal and the adjournment proposal, Prometheus
Development Co. does not expect to ask you to vote on any other matters
at the meeting. However, if matters other than the merger proposal and
the adjournment proposal are properly brought before the meeting, or any
adjournments or postponements of the meeting, the persons appointed as
proxies will have discretion to vote or act on those matters according
to their best judgment.
Q: What do I need to do now?
A: Please complete, date and sign your proxy and then return it in the
enclosed envelope as soon as possible so that your units may be
represented at the meeting.
Q: Can I fax my proxy vote?
A: Yes. First complete, date and sign your proxy. Then fax the proxy to
[Fax Number].
Q: May I change my vote after I have mailed my signed proxy?
A: Yes. Just send in a later dated, signed proxy prior to the meeting or
attend the meeting and vote in person. Taking either of these steps will
revoke any previously submitted proxy. You may also revoke any
previously submitted proxy by written notice to Prometheus Development
Co. prior to the meeting. Additional proxy cards are available from
MacKenzie Partners, Inc., Prometheus Development Co.'s proxy solicitor
for the meeting.
Q: When can I expect to receive payment for my units?
A: After the consummation of the merger, Prometheus Income Partners will
send you a letter of transmittal. Upon receipt of a completed letter of
transmittal from you, a check for $1,200 per unit you own at that time
will be mailed to you. A check for the balance of the Liquidation Value
(if any) will be mailed to you promptly following the completion of the
repairs of the construction defects and the final resolution of pending
litigation.
-9-
WHO CAN HELP ANSWER YOUR QUESTIONS?
If you have more questions about the transaction or would like
additional copies of this Proxy Statement, you should contact:
MacKenzie Partners, Inc.
156 Fifth Avenue
New York, NY 10010
(800) 322-2885
proxy@mackenziepartners.com
-10-
SUMMARY
This summary highlights selected information included in this Proxy
Statement. This summary may not contain all of the information that is important
to you. To understand the merger proposal and the proposed merger fully and for
a more complete description of the legal terms of the merger and other
considerations that may be important to you, you should read carefully this
entire document and the other documents to which we have referred you. The terms
of the merger are contained in the merger agreement, a copy of which is attached
to this Proxy Statement as Appendix A, and which is incorporated in this Proxy
Statement by reference.
Parties to the Transaction
Prometheus Income Partners
Background. Prometheus Income Partners, a California limited
partnership, was formed on April 15, 1985. Prometheus Development Co., Inc., a
California corporation, is the general partner of the partnership. The principal
business of Prometheus Income Partners is to invest in, construct, hold,
operate, and ultimately sell two residential rental properties in Santa Clara,
California: Alderwood Apartments and Timberleaf Apartments. Prometheus Income
Partners is governed by the California Revised Limited Partnership Act and its
Second Amended and Restated Limited Partnership Agreement, dated October 1,
1992, a copy of which is attached to this Proxy Statement as Appendix B.
The principal investment objectives of Prometheus Income Partners are to
preserve and protect Prometheus Income Partners' capital, to obtain capital
appreciation from the sale of its properties, and, beginning in 1987, to provide
"tax sheltered" distributions of cash from operations due to the cost recovery
and other non-cash tax deductions available to Prometheus Income Partners.
No public trading market exists or is expected to be established for the
units, although an informal secondary market for trading in units has developed.
Prometheus Development Co. is aware of three brokers who quote prices in units,
and through which a small number of units, usually less than 1% of issued and
outstanding units, are traded each year. Historically, limited liquidity has
been provided in this market due to occasional purchases of units by PIP
Partners - General, an affiliate of the General Partner of the partnership, and
others unaffiliated with the general partner directly from limited partners and
through these brokers. PIP Partners has purchased these units to increase its
equity stake in Prometheus Income Partners. Other than the tender offers
disclosed below under the caption "Recent Tender Offers" beginning on page 51,
PIP Partners never solicited offers from others to sell their units, but instead
responded from time to time to limited partners who expressed interest in
selling their units. PIP Partners has acquired a total of 3,451 units, all since
January 1, 1997.
The principal executive offices of Prometheus Income Partners are
located at 350 Bridge Parkway, Redwood City, California 94065-1517, telephone
number 650-596-5393.
Construction Defects; Reserve Accounts. The hardboard siding used at
both Alderwood and Timberleaf is failing to perform as expected. This has
resulted in certain construction
-11-
defects in the partnership's properties. Prometheus Development Co. has learned
that this has occurred in a number of similar projects throughout the United
States. Two lawsuits, one for each property, have been filed by Prometheus
Income Partners against parties it believes to be responsible for these and
other construction defects. The partnership has entered into settlement
agreements with certain defendants in these lawsuits providing for a net
recovery to the partnership of $5.6 million. However, these settlements are
subject to court approval, and there is no assurance such approval will be
obtained.
Under Prometheus Income Partners' financing arrangements, it is required
to maintain a security account with respect to each property to fund correction
of defects in the properties. Prior to the refinancing, quarterly cash
distributions to the limited partners were suspended in 1996, and this cash was
reserved for contingent liabilities with respect to construction defects. This
cash was then deposited into security accounts as additional collateral for the
lender who provided the funds for the refinancing. Cash held in these security
accounts was $3,304,000 and $2,409,000 for Alderwood and Timberleaf,
respectively, as of March 31, 2001.
Principal Unitholders. Other than PIP Partners, which owns 18.2% of the
outstanding units, no person of record owns or is known by Prometheus Income
Partners to own beneficially more than 5% of the outstanding units.
Prometheus Development Co., Inc. a California corporation, is the
general partner of Prometheus Income Partners. The principal business of
Prometheus Development Co. is acting as general partner of limited partnerships
and managing their real estate. All of the outstanding shares of capital stock
of Prometheus Development Co. are held by Sanford N. Diller and Helen P. Diller
as Trustees of The DNS Trust. Although Helen Diller has the same rights as
Sanford Diller with respect to the management of The DNS Trust and Prometheus
Development Co., Ms. Diller is not involved in the operations of The DNS Trust
or any of the other entities described in this document. Instead, Mr. Diller
ultimately controls and manages these entities.
The principal executive offices of Prometheus Development Co. are
located at 350 Bridge Parkway, Redwood City, California 94065-1517, telephone
number 650-596-5393.
PIP Partners - General, LLC
PIP Partners - General, LLC was formed in 1996 to acquire and hold
units. PIP Partners - General conducts no other business. PromHill, Inc., a
corporation owned and controlled by Sanford N. Diller, is the Manager of PIP
Partners. 99% of the member interests of PIP Partners - General are held by
Sanford N. Diller and Helen P. Diller as Trustees of The DNS Trust, and 1% of
these interests are held by Jaclyn Safier, the Dillers' daughter. The DNS Trust
is also the sole shareholder of Prometheus Development Co. Thus, Mr. Diller
controls Prometheus Development Co., PromHill, The DNS Trust and PIP Partners -
General.
PIP Partners - General initially acquired units in a tender offer
described below. Since that time, PIP Partners -General has acquired additional
units. In June 2000, PIP Partners - General purchased 1,487.5 units from Prom
Investment Partners, a third party unaffiliated with Prometheus Development Co.,
PIP Partners - General or Mr. Diller, and two investment funds (Liquidity Fund
Growth--Plus Partners, a California limited partnership and Liquidity Fund
-12-
Appreciation and Income Partners, a California limited partnership) affiliated
with Prom Investment Partners but also unaffiliated with Prometheus, PIP
Partners - General or Mr. Diller for $1,200 per unit. The similarity of the name
of Prom Investment Partners does not reflect any affiliation with Prometheus
Development Co. or any of its affiliates; the use of such nomenclature is common
in the investment community. This purchase price was arrived at pursuant to
arm's-length negotiations. Under its agreement with Prom, if PIP Partners -
General acquires additional units prior to June 2002 for a price greater than
$1,200 per unit, PIP Partners has agreed to pay Prom such excess with respect to
each unit purchase by PIP Partners - General from Prom.
The principal executive offices of PIP Partners - General are located at
350 Bridge Parkway, Redwood City, California 94065-1517, telephone number
650-596-5393.
PIP Acquisition
PIP Acquisition, LLC is a newly formed California limited liability
company which was organized by PIP Partners in connection with the merger. PIP
Partners owns all of the member interests in PIP Acquisition. Thus, The DNS
Trust and Sanford Diller ultimately control PIP Acquisition. The principal
executive offices of PIP Acquisition are located at 350 Bridge Parkway, Redwood
City, California 94065-1517, telephone number 650-596-5393.
For a more complete description of the parties involved in the merger and the
construction defects and the litigation related to them, please see the
disclosure under the caption "The Parties" beginning on page 47.
Effects of the Transaction
In the merger, if approved and consummated, PIP Acquisition will merge
with and into Prometheus Income Partners. Each unit in Prometheus Income
Partners will be converted at the effective time of the merger into the right to
receive merger consideration. The merger consideration will be fixed at the sum
each limited partnership unit would receive under the partnership's partnership
agreement upon liquidation after giving effect to (i) the sale of the
partnership's rental properties for the market value thereof as determined by a
recently obtained independent appraisal, (ii) the repayment in full of the
existing mortgages on these properties (together with any prepayment penalty in
respect of such repayment), (iii) the repair of existing construction defects in
these properties for a value equal to the ultimate cost to the partnership of
these repairs and (iv) the net recovery by the partnership (if any) in
litigation being prosecuted by the partnership with respect to these
construction defects. As of the date of this proxy statement, any attempt to put
a value on the cost of the repairs and the associated litigation would be mere
conjecture and potentially unfair to the limited partners. Accordingly, the
ultimate amount of the merger consideration will be fixed and paid when the
defects have been repaired and the litigation has been finally resolved. The
partnership has entered into settlement agreements as to various aspects of the
litigation which, if approved by the required courts, would result in a net
recovery to the partnership of $5.6 million. Recovery under these or any other
litigation settlements will be included in calculating the net recovery in the
litigation described above for the purpose of calculating the final merger
consideration. The liquidation value per limited
-13-
partnership unit calculated as set forth above is referred to in this proxy
statement as the "Liquidation Value."
An advance on the Liquidation Value will be paid to the limited partners
(other than PIP Partners- General) in the amount of $1,200 per unit promptly
following the approval and consummation of the merger. This amount represents a
current estimate of the Liquidation Value, net of currently restricted cash and
a reserve for the repairs in the amount estimated by the partnership to be
necessary to repair known defects. If the Liquidation Value as finally
determined exceeds the amount of this advance, a final payment of the balance of
the Liquidation Value will be paid promptly following repair of the existing
construction defects in the partnership's properties and the final resolution of
the pending litigation regarding these defects. If the Liquidation Value as
finally determined is less than the amount paid as an advance to the limited
partners, the limited partners will not be required to return such advance. PIP
Partners - General, which currently holds 3,451 units (18.2% of the outstanding
units), will not receive any merger consideration in respect of the units it
holds at the time of the merger.
Following completion of the transaction, the current limited partners
other than PIP Partners will no longer have any interest in, and will not be
limited partners of, Prometheus Income Partners and, therefore, will not
participate in Prometheus Income Partners' future earnings and potential growth.
PIP Partners will become the owner of all outstanding units. Following the
completion of the transaction, Prometheus Income Partners expects to cease to be
a reporting company and the units will cease to be registered under the
Securities Exchange Act of 1934, although you will receive periodic status
reports on the construction defects, the repairs performed and to be performed,
and the conduct of the litigation.
Fairness of the Merger
Each of Prometheus Development Co., PIP Partners, PromHill, PIP
Acquisition, The DNS Trust, and the Dillers believes the terms of the merger to
be fair to the partnership and its limited partners. For a discussion of the
fairness of the merger, please see the discussion under the caption "Fairness of
the Transaction" beginning on page 29.
The Meeting
The meeting of limited partners of Prometheus Income Partners will be
held at 1:30 p.m., local time, on August 13, 2001, at [location]. At the
meeting, limited partners will be asked to consider and vote on the merger
proposal. In addition, Prometheus Development Co. is asking the limited partners
to consider and vote on a proposal to permit Prometheus Development Co. to
adjourn the meeting to permit further solicitation of proxies in the event that
there are not sufficient votes at the time of the meeting to approve the merger
proposal. The merger agreement provides that Prometheus Development Co. will
recommend the adjournment of the meeting for ten days if on the date of the
meeting Prometheus Income Partners has not received duly executed proxies that
constitute a sufficient number of votes to approve the merger proposal. However,
if proxies representing enough votes to defeat the merger proposal regardless of
the number of additional votes later cast in favor of the proposal have been
submitted, the meeting will not be adjourned to permit further solicitation.
-14-
Other than the merger proposal and the adjournment proposal, Prometheus
Development Co. does not expect to ask the limited partners to vote on any other
matters at the meeting. However, if matters other than the merger proposal and
the adjournment proposal are properly brought before the meeting, or any
adjournments or postponements of the meeting, the persons appointed as proxies
will have discretion to vote or act on those matters according to their best
judgment.
As of the record date, PIP Partners beneficially owned an aggregate of
3,451 units, representing in the aggregate approximately 18.2% of the units
outstanding on the record date. Pursuant to the Third Amended and Restated
Agreement and Plan of Merger entered into among the partnership, PIP Partners
and PIP Acquisition, PIP Partners has agreed to vote neutrally with respect to
the merger proposal, meaning that PIP Partners will vote its units for or
against the proposal in the same proportion as the total number of units voted
by the other limited partners. For example, if unaffiliated limited partners
holding 67% of the units voted in person or by proxy vote for the merger
proposal, then PIP Partners will vote 67% of its units for the merger proposal.
PIP Partners intends to vote all of its units for the adjournment proposal
described in the accompanying notice of meeting and proxy statement.
To be approved, a majority of units, or 9,498 units, must be voted in
favor of the merger proposal. Based on the following computations, and because
PIP Partners has agreed to vote the units held by it for and against the
transaction in the same proportion as the votes actually cast by limited
partners unaffiliated with PIP Partners, limited partners unaffiliated with PIP
Partners holding a minimum of 6,047 units cast their votes in favor of the
proposal for it to be possible that the proposal will be approved, and if
limited partners unaffiliated with PIP Partners holding at least 7,772 units (a
majority of the units held by limited partners not affiliated with PIP Partners)
vote in favor of the proposal then the proposal will be approved.
o If limited partners unaffiliated with PIP Partners holding only 6,047
units vote at the Meeting, and all of these votes are cast for the
merger proposal, then pursuant to the Agreement and Plan of Merger,
PIP Partners will be obligated to vote all of its 3,451 units in
favor of the proposal. Thus, a total of 9,498 votes will be cast in
favor of the proposal, and the proposal will be approved.
o If limited partners unaffiliated with PIP Partners holding 15,544
units (all of the outstanding units held by unaffiliated limited
partners) vote at the Meeting, and 7,772 of these votes are in favor
of the proposal, PIP Partners will be obligated to vote 1,726 units
in favor of the proposal and 1,725 units against the proposal. Thus,
a total of 9,498 votes will be cast in favor of the proposal, and the
proposal will be approved.
Record Date; Voting Power
Prometheus Development Co. has fixed the close of business on July 16,
2001, as the record date for determination of the limited partners entitled to
notice of and to vote at the meeting and any adjournment or postponement of the
meeting. As of the record date, there were 18,995 units, including those units
held by PIP Partners, issued and outstanding and held of record by ______
holders. Holders of record of units are entitled to one vote for each unit that
-15-
they hold on the merger proposal, the adjournment proposal and any other matter
that may properly come before the meeting.
Quorum; Vote Required
The necessary quorum for the transaction of business at the meeting is
the presence in person or by proxy of limited partners holding a majority of the
units outstanding on the record date. For purposes of determining the presence
of a quorum, proxies marked "ABSTAIN" will be counted as present at the meeting.
The affirmative vote of limited partners holding greater than 50% of the
units outstanding on the record date is required to approve the merger proposal.
The affirmative vote of limited partners holding more than 50% of the units
present in person or by proxy at the meeting is required to approve the
adjournment proposal. Because PIP Partners has agreed to vote its shares in the
same proportion as the other limited partners, the merger can be approved
without the affirmative vote of at least a majority of the units held by the
limited partners unaffiliated with Prometheus Development Co., PIP Partners and
Mr. Diller if a number of these holders do not vote in person or by proxy at the
meeting. For example, if unaffiliated limited partners holding 33% of the units
(and no others), which constitute less than a majority of the units held by
non-affiliates, were to vote at the meeting and all such units were voted in
favor of the merger, these votes, together with the affirmative vote of the
units held by PIP Partners, would be sufficient to approve the merger.
A vote for the merger proposal is not also a vote for the adjournment
proposal. You must vote separately on each proposal.
If you mark "ABSTAIN" on your proxy and do not vote in person at the
meeting, the effect will be the same as a vote against the merger proposal. If
you fail to return your proxy and do not vote in person at the meeting, as a
result of the agreement of PIP Partners to vote as have the voting limited
partners, the effect on the merger proposal will depend on how other limited
partners vote. If you fail to return your proxy, your units will have no effect
on the outcome of the adjournment proposal. If you mark "ABSTAIN" on your proxy
and do not vote in person at the meeting, the effect will be the same as a vote
against the adjournment proposal. If you sign and return your proxy but do not
give instructions on your proxy, your units will be voted for the merger
proposal and for the adjournment proposal.
Approval of the merger proposal by the limited partners is a condition
to Prometheus Income Partners' participation in the merger. Therefore, if we do
not receive votes for the merger proposal from limited partners holding greater
than 50% of the units (including those units held by PIP Partners and voted as
described above), the merger proposal will not be approved and Prometheus Income
Partners will not participate in the merger. Approval of the adjournment
proposal by the limited partners is not a condition to Prometheus Income
Partners' participation in the merger. Approval of the adjournment proposal by
the limited partners will permit the adjournment of the meeting to solicit
additional proxies in the event that there are not sufficient votes at the time
of the meeting to approve the merger proposal.
Changing Your Vote
-16-
You may revoke your proxy at any time before it is voted at the meeting
(1) by sending in a later dated, signed proxy, (2) by written notice of
revocation to Prometheus Development Co., or (3) by attending the meeting and
voting in person.
-17-
Structure of the Transaction
The following depicts the current ownership and control structure of the
partnership:
Pre-Transaction
---------------
-------------------------
| |
| Sanford Diller and |
| Helen Diller |
| |
-------------------------
|
| 100%, as trustees
|
-------------------------
| |
| DNS Trust |
| And Family | -----------------
| | | |
------------------------- | Jaclyn Safier |
100% | | |
| -----------------
---------------------------------- | 1%
| | 99% |
| | ------------------
| | |
- ------------------------ --------------------
| | | |
| Prometheus | | PIP Partners - |
| Development Co. | | General |
| | | |
- ------------------------ --------------------
| |
| |
| | 100%
| |
| -------------------- ---------------- ----------------
| | | | | | |
| | PIP Acquisition | | Limited | | Limited |
| | | | Partner(1) | ...... | Partner(x) |
| | | | | | |
| -------------------- ---------------- ----------------
| | | |
| | 18% | 81% |
| | | |
-------------------------- -----------------------------------------------
| |
| 1%(*) | 99%
| |
-------------------------
| |
| Prometheus Income |
| Partners |
| |
-------------------------
* Prometheus Development Co.'s interest is a
general partner interest, as more fully
described under the caption "The Partnership
Agreement of Prometheus Income Partners"
beginning on page 52.
-18-
Assuming Prometheus Income Partners approves the merger proposal and
participates in the merger, the following figures depict the structure of the
transaction and the ownership interest of the parties to the transaction:
Post-Transaction
------------------------
| |
| Sanford Diller and |
| Helen Diller |
| |
------------------------
|
| 100%, as trustees
|
------------------------
| |
| DNS Trust |
| And Family |
| | -----------------
------------------------ | |
| | Jaclyn Safier |
| | |
------------------------------------------------------------------- -----------------
| | |
| 100% | 99% | 1%
| | |
- ------------------------ --------------------
| | | |
| Prometheus | | PIP Partners - |
| Development Co. | | General |
| | | |
- ------------------------ --------------------
| |
| 1%(*) | 99%
| |
-------------------------- ---------------------------------
| |
| |
| |
-------------------------
| |
| Prometheus Income |
| Partners |
| |
-------------------------
* Prometheus Development Co.'s interest is a
general partner interest, as more fully
described under the caption "The Partnership
Agreement of Prometheus Income Partners"
beginning on page 52.
-19-
Conflicts of Interest
In considering the recommendations of each of Prometheus
Development Co., Prometheus Income Partners, PIP Partners, PromHill, The DNS
Trust, Helen Diller and Sanford Diller, limited partners should be aware that
PIP Partners, PromHill, The DNS Trust, Helen Diller and Sanford Diller, as the
acquiring parties of units, have interests in the transaction or relationships
that present actual or potential conflicts of interest in connection with the
transaction. Prometheus Income Partners, PIP Partners, PIP Acquisition,
PromHill, The DNS Trust and Prometheus Development Co. are all under the common
control of Sanford Diller. The interests of these entities are different from
and in substantial conflict with those of the limited partners. Because of the
relationship among Prometheus Development Co., PIP Partners and PIP Acquisition,
the merger and all of the proposed transactions related to the merger as
discussed in this document are not the product of arm's-length negotiation
between unaffiliated parties. PIP Acquisition and PIP Partners are making this
offer with a view to ultimately making a profit and, therefore, there is a
conflict that is described more fully in the accompanying materials between
their desire to acquire your units at a relatively lower price and your desire
to sell your units at a relatively higher price.
The transaction has been initiated and structured by Prometheus
Development Co. and individuals who are managers of Prometheus Development Co.
The transaction provides some benefits to the affiliates of Prometheus
Development Co. that are in conflict with the benefits provided to the limited
partners. Sanford Diller, as the natural person ultimately controlling both
Prometheus Development Co. and PIP Partners, has an economic interest separate
from that of the limited partners in structuring the transaction to maximize the
benefits to PIP Partners in seeking to realize future profits from the
partnership that the current limited partners will not participate in if the
merger is consummated, although PIP Partners will not receive the merger
consideration.
Prometheus Income Partners currently has no officers. After the merger,
Prometheus Development Co. believes that all of the persons who currently are
officers and employees of Prometheus Development Co. will continue to be
officers and employees of Prometheus Development Co., although none of these
individuals has entered into a written agreement to remain with Prometheus
Development Co.
Conditions to the Transaction
The obligations of PIP Acquisition, PIP Partners and Prometheus Income
Partners to effect the merger are subject to the fulfillment or waiver of the
following conditions:
o No court or other governmental entity shall have issued an order
that prohibits consummation of the merger, restricts the operations
of Prometheus Income Partners or PIP Acquisition which would result
in a material adverse effect, or instituted any proceeding seeking
any similar type of order.
o All material approvals from governmental entities necessary for the
consummation of the merger shall have been obtained.
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o PIP Partners having obtained the financing necessary to pay the
merger consideration.
The obligations of Prometheus Income Partners are further subject to the
condition or waiver by Prometheus Income Partners at or prior to the effective
date of the merger that the representations and warranties of PIP Partners shall
be true and correct.
The obligations of PIP Acquisition and PIP Partners are further subject
to the conditions or waiver at or prior to the effective date of the merger
that:
o the representations and warranties of Prometheus Income Partners are
true and correct at and as of the closing date;
o if necessary, the holder of indebtedness of Prometheus Income
Partners consents to the merger on terms acceptable to PIP
Partners; and
o there is no material adverse change in the assets, business,
financial condition or prospects of Prometheus Income Partners.
The merger may be terminated at any time prior to the effective date of
the merger:
o by the mutual written consent of Prometheus Income Partners and PIP
Partners;
o in the event of a material breach of the Agreement if not cured
within thirty (30) days; or
o by PIP Partners or Prometheus Income Partners if the merger has not
yet been consummated on or before August 31, 2001.
Consideration and Financing
All costs and expenses incurred in connection with the transaction will
be paid by PIP Partners. These include an estimated $4,000 in SEC filing fees,
$250,000 in legal fees, $15,000 in accounting fees, $20,000 in solicitation
costs and fees, and $15,000 in printing costs. In addition:
o PIP Partners will pay cash consideration to the limited partners
other than PIP Partners in the amount of the Liquidation Value,
including a non-refundable advance thereon of $1,200 per unit; and
o PIP Partners may be required to pay certain fees relating to mortgage
debt of Prometheus Income Partners. Under the terms of its current
financing, the partnership may have to pay to its lenders an
assumption fee of approximately $261,000 upon consummation of the
merger if the merger is deemed to be a transfer of the partnership's
properties under the applicable loan documents. Any consent or other
fees to be paid by the partnership as a result of the merger will not
be deducted from the $1,200 advance payment to be made at the time of
the merger, but would be deducted from future liquidating
distributions (if any) to be paid as part of the merger consideration
following completion of the litigation and repair of the existing
defects.
-21-
The source of the merger consideration to be paid by PIP Partners to the
limited partners will be a contribution of funds from Sanford N. Diller, who
ultimately controls PIP Partners, or an entity controlled by Mr. Diller. Mr.
Diller intends to use cash available on hand, or, if insufficient cash is
available, he intends to borrow such funds from an entity controlled by Mr.
Diller from existing capital resources of such entity which has agreed to make
the funds available without recourse to the consideration paid to the limited
partners in the merger. Such borrowing, if needed, will be personally guaranteed
by Mr. Diller. Such borrowings will be repaid upon maturity out of current
resources of Mr. Diller and the DNS Trust.
Proxy Solicitation
Proxies are being solicited by and on behalf of Prometheus Development
Co., as general partner of Prometheus Income Partners. In addition to
solicitation by mail, Prometheus Development Co. and the officers and directors
of Prometheus Development Co. may solicit proxies by telephone, facsimile,
electronic mail, regular mail or delivery service. No additional compensation
will be paid to these persons for these solicitation services. Pursuant to a
letter agreement dated June 20, 2001 between MacKenzie Partners, Inc. and
Prometheus Development Co., MacKenzie agreed to distribute this Proxy Statement
to limited partners, provide information with respect to the merger to limited
partners, and provide advisory services to Prometheus Development Co. with
respect to the merger. Prometheus Development Co. agreed to pay MacKenzie a fee
of $9,500 plus out-of-pocket expenses incurred by MacKenzie in rendering these
services.
Accounting Treatment
PIP Partners will account for the transaction under the "purchase"
method of accounting in accordance with generally accepted accounting
principles.
Federal Income Tax Consequences
In general, a limited partner will recognize gain or loss on the
conversion of units into cash as a result of the merger. This gain or loss will
be equal to the difference between the limited partner's "amount realized" from
the merger and the limited partner's adjusted tax basis in the units converted.
The "amount realized" will be a sum equal to the amount of the initial advance
payment ($1,200 per unit) on the merger consideration, the amount of the
deferred payment of the merger consideration with respect to the litigation and
construction defect repairs (if any), plus the amount of Prometheus Income
Partners' liabilities allocable to the units as determined under Section 752 of
the Internal Revenue Code.
This gain or loss should be treated as capital gain or loss. However, a
portion of this gain or loss that is attributable to "unrealized receivables"
(which includes recapture of some previous depreciation deductions) and
"inventory items" (as defined in section 751 of the Internal Revenue Code of
1986 as amended) may be treated as ordinary income or ordinary loss.
Because the merger consideration is uncertain as to the ultimate amount,
the timing of the gain or loss associated with the deferred payment (if any) and
ultimately the overall tax treatment of the amount realized is uncertain.
-22-
Under the so-called "open transaction" doctrine, no current tax
consequence attaches to the receipt of an item of property whose fair market
value cannot be reasonably determined. Limited partners may wish to consult
their tax advisors concerning the possible applicability of the open transaction
doctrine to the receipt of the deferred payment. If the open transaction
doctrine were applicable to this deferred payment, (i) the payment would not be
taken into account in determining a limited partner's gain upon receipt of the
merger consideration and any gain would be limited to the extent the amount
realized with respect to the advance payment exceeds the limited partner's tax
basis; (ii) the limited partner would take no tax basis in the deferred payment;
and (iii) amounts thereafter received by virtue of the deferred payment will be
treated partially as interest and the balance as capital gain or loss to the
extent it differs from any remaining basis in the limited partner's units.
It is the position of the Internal Revenue Service, reflected by
Treasury Regulations, that only in "rare and extraordinary cases" is the value
of the property so uncertain that open transaction treatment is available.
Accordingly, the Internal Revenue Service may require a limited partner to
allocate his tax basis in the Partnership units, in general, over a 15 year
period (or a shorter period if it is certain that no further payments will be
received). Under this scenario, it would be possible for a limited partners to
recognize significant capital gain upon the receipt of the advance payment and
potentially recognize a significant capital loss (subject to significant
limitations as to usage) in the year the deferred payment is actually received.
Due to the lack of available precedent and the inherently factual nature
of the question, tax counsel are not able to express any view as to the
availability of open transaction reporting in respect of the deferred payment.
Accordingly, holders are urged to consult their tax advisors regarding the
issue.
You should consult your tax advisor as to the particular tax
consequences of the transaction.
The transaction, as structured, will permit PIP Partners, and its
members (the DNS Trust and Ms. Safier), to defer substantial tax liability that
would be incurred if the partnership's properties were disposed of in a taxable
sale followed by a liquidation of the partnership. This tax liability will be
deferred until these properties are eventually sold or PIP Partners sells its
equity interests in the partnership.
Counsel to Prometheus Development Co. has not opined on any tax-related
matters related to the merger.
Prometheus Development Co. believes that a limited partner who held
units from the date of initial of offering of the units, where there are no
unusual circumstances, will have funds sufficient to pay any tax liability
assessed as a result of the merger and other tax liabilities previously incurred
with respect to which no distributions have been made.
-23-
SUMMARY SELECTED FINANCIAL DATA OF THE PARTNERSHIP
The following table sets forth a summary of certain financial data for
Prometheus Income Partners.
The selected financial and operating data of Prometheus Income Partners
for the three months ended March 31, 2001 and March 31, 2000 are derived from
unaudited financial statements of Prometheus Income Partners which, in the
opinion of Prometheus Development Co., include all adjustments (consisting only
of normal recurring items) necessary for a fair presentation of Prometheus
Income Partners' financial position and results of operations. The results set
forth for the three months ended March 31, 2001 and March 31, 2000 are not
necessarily indicative of results to be expected for a full year.
This summary should be read in conjunction with Prometheus Income
Partners' financial statements and notes thereto appearing in Prometheus Income
Partners' Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 and
in Prometheus Income Partners' Annual Report on Form 10-K for the year ended
December 31, 2000, which are included with this Proxy Statement and incorporated
by reference.
As of and For the Three
As of and For the Year Ended December 31, Months Ended March 31,
----------------------------------------- -----------------------
2000 1999 1998 1997 1996 2001 2000
---- ---- ---- ---- ---- ---- ----
(Unaudited, In thousands, except per unit amounts)
------------------------------------------------
Income Statement Data:
Total revenues (1)... $7,247 $6,106 $5,991 $5,558 $4,997 $2,065 $1,660
Operating expenses.. 1,421 1,400 1,807 1,104 1,310 391 360
----- ----- ----- ----- ------ ----- -----
Gross profit......... 5,826 4,706 4,184 4,454 3,687 1,674 1,300
Other expenses(2)(3)(4) 3,417 3,275 3,288 3,977 3,860 888 841
----- ----- ----- ----- ------ ----- -----
Net income........... $2,409 $1,431 $ 896 $ 477 ($ 173) $ 786 $ 459
===== ====== ===== ===== ======= ===== =====
Net income allocated to
limited partners..... $2,385 $1,417 $ 887 $472 $ (171) $778 $ 454
====== ====== ==== ====== ==== =====
Net income per limited
partnership unit (5) $ 126 $75 $47 $25 $(9) $ 41 $ 24
===== === === === ==== ==== ====
Balance Sheet Data:
Real estate (6)...... 21,977 22,105 22,328 22,573 22,929 21,881 22,016
Total Assets (7)..... 31,088 28,873 27,830 27,016 25,259 31,769 29,296
Total Liabilities
(8).................. 26,318 26,512 26,900 26,982 25,702 26,213 26,476
Partners' equity..... 4,770 2,361 930 34 (443) 5,556 2,320
limited partners'
equity............... 5,124 2,739 1,322 435 (38) 5,901 2,792
limited partners' equity
per limited partner unit
(5).................. $270 $ 144 $70 $ 23 ($2) $ 311 $ 146
(1) Consists principally of rental and interest income.
(2) Includes payments to general partner and affiliates of $372,000, $300,000,
$303,000, $278,000 and $265,000 for 2000, 1999, 1998, 1997 and 1996,
respectively, and $97,000 and $77,000 for the three months ended March 31, 2001
and 2000, respectively, consisting in each case principally of property
management and construction management fees.
-24-
(3) Includes payments to general partner and affiliates of $572,000, $481,000,
$475,000, $391,000 and $378,000 for 2000, 1999, 1998, 1997 and 1996,
respectively, and $141,000 and $116,000 for the three months ended March 31,
2001 and 2000, respectively, consisting principally of reimbursements for
operating and administrative expenses incurred by such persons, consisting
principally of property payroll taxes, insurance and payroll processing fees,
postage, copying costs, professional services, personnel training and marketing
costs.
(4) Includes interest and amortization expense, depreciation and general and
administrative expense.
(5) Based on weighted average number of units outstanding during the applicable
period.
(6) Consists of land, buildings and improvements and accumulated depreciation.
(7) Includes cash and cash equivalents, restricted cash, and deferred financing
costs, net of accumulated amortization.
(8) Includes notes payable.
-25-
BACKGROUND
Reasons for the Merger
Since at least as early as 1997, limited partners from time to time have
been contacting Prometheus Development Co. to express dissatisfaction with the
economic situation of Prometheus Income Partners, including the lack of current
distributions, the current recognition of taxable income and the lack of
appreciation of the saleable value of the limited partnership units. These
contacts became increasingly frequent throughout 2000, such that the general
partner was being contacted by limited partners regarding these issues at least
weekly. Many of these limited partners have informed Prometheus Development Co.
that they (or the beneficial owners they represent) are individuals who invested
in Prometheus Income Partners as part of their retirement planning, and that
these limited partners believe that the recent economics of the units are
unsatisfactory for this purpose. Several limited partners also have expressed
concern over the potential impact of construction defects and the related
litigation. These contacts always have been initiated by or on behalf of the
limited partners and have not included any general or specific proposal by the
limited partners for providing liquidity. The general partner has felt
constrained in discussing various matters with the limited partners because it
is limited as a practical matter in the information it can provide to limited
partners due to the regulation of disclosure under the Securities Exchange Act
and the pendency of litigation involving the partnership.
Increasingly, limited partners were asking for information on how to
sell their units; and while trading activity in the units in secondary markets
had been increasing, volume remained and remains low. While the general partner
on the one hand, and PIP Partners, PromHill, The DNS Trust, Helen Diller and
Sanford Diller, on the other hand as the parties seeking to acquire beneficial
ownership of the units in the merger (PIP Partners, PromHill, the DNS Trust and
Mr. and Mrs. Diller are sometimes refered to collectively in this proxy
statement as the "acquiring parties") believe in the long-term profitability of
the business of Prometheus Income Partners, they recognize the risks involved
and the expressed interests of many limited partners to sell their units. PIP
Partners and other unaffiliated parties periodically have purchased units in the
secondary trading market. Please see the discussion under the caption "The
Parties - Prometheus Income Partners - Recent Transactions" beginning on page
58. As a practical and regulatory matter, the number of units that can be
purchased by PIP Partners and other parties in these sporadic transactions is
severely limited. Thus despite these occasional purchases, the current market
for units is thin and illiquid. See the discussion under the caption "Additional
Information Concerning Units" beginning on page 76 for the details of these
purchases in the secondary market. While the general partner can not value the
units with accuracy or precision due to uncertainties related to substantial
construction defects and the uncertainty of pending litigation, the general
partner believes that private and market purchases from limited partners had and
would continue to involve a substantial discount from the value of the units as
derived from the underlying market value of the partnership's property given the
substantial defects therein, with or without ascribing any value to the pending
litigation. In reaching such conclusion, the general partner also considered its
experience as to the substantial discount real estate professionals impose in
instances where substantial construction defects exist and the relatively little
value these professionals ascribe to the potential for litigation recoveries.
For these reasons, in July 1999 the general partner began investigating
available alternatives to
-26-
provide liquidity for the limited partners at a fair price. At that time, the
general partner considered a variety of options for achieving liquidity for the
limited partners, including principally those discussed below. In general,
discussion regarding these matters involved Mr. Diller, John Murphy, a Vice
President of the general partner, and Vicki Mullins, also a Vice President of
the general partner. In reviewing these options, the general partner deemed it
important to reduce the substantial costs associated with managing an entity
that is a reporting company under the Exchange Act with over 1,000 limited
partners. By reducing the number of limited partners to one and ultimately
eliminating the need of quarterly and annual filings under the Exchange Act, the
partnership estimates it will save $100,000 annually in legal, accounting,
administrative and other costs. This savings was factored in to the
determination of the price PIP Partners is willing to pay for units and the
structure of potential transactions PIP was willing to consider. In considering
acceptable transaction structures, PIP Partners also considered the elimination
of fiduciary duties of the General Partner to unaffiliated parties.
In June 1999, Prom Investment Partners, LLC, a limited partner not
affiliated with the general partner or any of the acquiring parties, contacted
the partnership by requesting pleadings and other court filings regarding the
construction defect litigation and copies of the mortgage notes for each of the
partnership's properties. Prometheus Development Co. sent to Prom Investment
Partners the mortgage notes, but directed it to the public record for the court
filings, and shortly thereafter it inquired whether Prom Investment Partners
would be interested in selling its units. In or about October 1999, Prom
Investment Partners contacted Mr. Murphy regarding the interest of the general
partner or its affiliates in buying Prom Investment Partners' units. No
agreement as to the possible terms of the proposed sale was reached at that
time.
In January 2000, the general partner began investigating in greater
detail potential alternatives for providing limited partner liquidity involving
an acquisition of units by an affiliate of the general partner.
In or about March 2000, PIP Partners contacted Prom Investment Partners
regarding a possible sale of units. Prom Investment Partners proposed a sale at
a price per unit higher than the price per unit to which Prom Investment
Partners and PIP Partners eventually agreed. PIP Partners evaluated this
proposal in light of internal valuations and forecasts. In April 2000, Prom
Investment Partners agreed with PIP Partners that Prom Investment Partners,
together with certain of its affiliates, would sell all of their units to PIP
Partners at a price of $1,200 per unit. However, pursuant to this agreement, if
PIP Partners acquires any units from any other person within two years following
the date of this purchase at a purchase price greater than $1,200 per unit, PIP
Partners agreed to pay Prom Investment Partners and its affiliates the excess of
the price paid over $1,200 per unit for each unit purchased from them by PIP
Partners. PIP Partners completed its purchase of 1,487.5 units from Prom
Investment Partners and two of its affiliated investment funds on June 20, 2000.
In May 2000, Prometheus Development Co., PIP Partners, Messrs. Diller
and Murphy and Ms. Mullins, on behalf of the various affiliates they
represented, revisited the alternatives discussed below and for the reasons set
forth below decided to proceed with a merger in structure identical to the
merger but in which the consideration to be paid with respect to each unit would
be fixed at $1,200. They based the $1,200 in cash to be offered by PIP Partners
for each unit each limited partner holds on various factors including their
estimate of the fair market value of
-27-
the underlying real estate properties at $55,050,280, the potential for an
increase or decrease in that value, the effects of the pending litigation and
the likelihood of success in that litigation on the value of Prometheus Income
Partners, the transaction costs incurred as part of the merger, the tax
consequences of the merger to PIP Partners and the illiquidity of the units.
They also gave substantial weight to the fact that Prom Investment Partners, an
unaffiliated third party with substantial real estate experience, agreed to
accept $1,200 per unit for a substantial block of units.
In June 2000 and September 2000, Prometheus Development Co. and the
acquiring parties filed preliminary proxy solicitation and related materials
with the Securities and Exchange Commission relating to a proposed merger
involving merger consideration fixed at $1,200 per unit.
In October 2000, the general partner and the acquiring parties reviewed
the partnership's financial performance for the nine months ended September 30,
2000 and compared these results to previously projected results upon which they
based in part their original evaluation of the fairness to the limited partners
of the originally proposed fixed consideration of $1,200 per share. In fact,
actual results for this period materially exceeded projected performance.
Because of this, in order to establish a more fair and independent basis upon
which to value the limited partnership units, the general partner and the
acquiring parties determined to obtain an independent appraisal of the market
value of the partnership's real estate properties. By letter dated November 22,
2000, the general partner informed the limited partners that it was seeking such
appraisal and would reevaluate the merger and the merger consideration in light
of this appraisal.
In December 2000, the general partner and the acquiring parties received
an appraisal of the partnership's real estate properties, a copy of which is
attached hereto as Appendix C. For a more complete description of this
appraisal, please see the disclosure under the caption "Appraisal" beginning on
page 68. This appraisal valued these properties at $68,900,000, substantially in
excess of the $55,050,280 previously estimated by the general partner and relied
upon, in part, in assessing the fairness of the merger consideration as
previously proposed. Based on this appraisal, the general partner and the
acquiring parties reconsidered the merger consideration being offered and
potential alternatives to the transaction.
The general partner and the acquiring parties reconsidered the
alternatives discussed below and determined that the reasons for previously
having made the decision not to pursue such alternatives continued to apply. The
general partner and the acquiring parties then determined to offer to recommend
to the limited partners the merger in which the Liquidation Value, calculated
based upon the independently appraised market value, would be offered to the
limited partners. The acquiring parties could have sought to recalculate a fixed
price offer based on the appraisal. As noted in the preceding paragraphs and
below, there are substantial uncertainties in calculating such a value.
Previously, the general partner and the acquiring parties believed that the sale
of a substantial block of units to Prom Partners, who are sophisticated real
estate professionals, provided independent market validation of the values
ascribed by the acquiring parties to these uncertainties. Given the length of
time that has passed since that sale by Prom Partners, general partner and the
acquiring parties no longer were comfortable that such sale provided such
validation. Accordingly, they made the determination that offering the
-28-
deemed liquidation value, calculated based on the appraised value as set forth
above and below (with minimum proceeds to the limited partners equal to the
previously offered fixed merger consideration of $1,200) to be the fairest and
most prudent course of action.
Fairness of the Transaction
For the reasons set forth below, each of Prometheus Development Co.,
Inc., PromHill, Inc., PIP Partners - General, LLC, PIP Acquisition, LLC, The DNS
Trust and the Dillers has separately concluded that the transaction is both
substantively and procedurally fair to the limited partners, notwithstanding
that no unaffiliated purchaser of the units or the partnership's properties was
sought. In reaching such conclusion, as discussed more fully below, these
parties considered principally the following factors:
o Appraised Value. The merger consideration is derived from the market
value of the partnership's properties, as determined based on an independent
third-party appraisal of these properties.
o Current and Historical Market Prices. Since January 1, 1998, the
maximum price paid for units in the secondary market was $601. This does not
include the sale of units pursuant to recent tender offers at $650 and $800 per
unit or PIP Partners' recent block purchase for $1,200. Please see the
disclosure under the captions "Recent Transactions" beginning on page 58 and
"Additional Information Concerning Units" beginning on page 76. Prometheus
Development Co. and the acquiring parties believe the there has been no
significant change in the trading price of the units despite the improved
financial condition of Prometheus Income Partners because the market for the
units is not liquid and due to the uncertain status of the construction defects
and related litigation.
o Net Book Value. As of March 31, 2001, limited partners' equity per
unit was $311, substantially below the minimum consideration offered. See
"Summary Selected Financial Data of the Partnership" beginning on page 24.
o Liquidation Value. The merger consideration constitutes an
approximation of the liquidation value of the units based on a deemed sale of
the partnership's properties at their appraised market value, after giving
effect to the net proceeds (if any) realized from the litigation (including
under the pending settlements) and the costs to repair existing construction
defects, which the general partner and the acquiring parties believe would be
discounted from the purchase price any potential purchaser of the partnership's
properties would pay for them. In fact, the payment of the non-refundable
advance protects the limited partners against having the liquidation value
reduced if the actual cost to repair existing defects would be greater than
current estimates and no recovery of such costs is obtained in the litigation.
The general partner and each of the acquiring parties believes, as discussed
below, that it is impossible to quantify the present value of the litigation
with any accuracy, and thus preserving for the limited partners the right to
participate in any net proceeds from such litigation in excess of the actual
costs to repair the defects is the fairest way to deal with this issue.
-29-
o Recent Block Sale. The merger consideration will be not less than the
$1,200 per unit accepted by a sophisticated unaffiliated third parties in a
recent block purchase of shares by PIP General.
o Going Concern Value. The acquiring parties believe that companies in
the business of owning and operating real estate rental properties are generally
valued in the market based on the underlying liquidation value of those
properties, rather than a separate going concern value for the company itself.
However, the independent appraisal is based in part on the income approach and
direct capitalization (as described under the caption "Appraisal" on pages 69
through 73), which the general partner and the acquiring parties believe give
due consideration and effect to the value of the partnership as a going concern,
rather than solely based on an abstract liquidation value of the properties. As
such, they believe basing the merger consideration on the appraisal gives fair
and adequate consideration to the going concern value of the partnership.
Each of the general partner and the acquiring parties believe that the
transaction is procedurally and substantively fair to the limited partners
because the merger consideration is based on an independent appraisal of the
partnership's properties and gives due effect to the two principal circumstances
further affecting the value of units, those being the construction defects and
the outcome of pending litigation, and not accounted for in such appraisal.
These parties believe that these factors are central to a determination of the
fair value of the units. Any attempt to put a value at this time on the ultimate
cost of these repairs and the associated litigation would be mere conjecture and
potentially unfair to the limited partners.
Notwithstanding that certain aspects of the partnership's litigation
have been settled, subject to court approval (which approval may not be
obtained), the uncertainty of recovery in litigation is particularly significant
to a valuation of the units and the price an unaffiliated third party would be
willing to pay for units. The general partner and the acquiring parties believe
that the uncertainty of recovery (and the unlikelihood of the partnership being
made whole for all costs of repair it has and continues to incur), together with
the existence of known and potentially unknown construction defects in the
partnership's properties, substantially decrease the price an unaffiliated party
would pay for a substantial block of units. While the partnership has sought and
continues to seek full recovery for known defects, the value of such litigation
remains speculative. With respect to any litigation, there ultimately are
questions as to probability of success, issues regarding proof of damages, and,
ultimately, the cost of litigation, including attorneys' fees (including, in
this case, contingent attorneys' fees to be paid out of any recovery). In
addition, due to the time necessary for the process to run its course (including
the possibility of appeal), any potential recovery must be discounted to present
value. While the settlements entered into to date do provide for some net
recoveries to the partnership (and, if approved by the required courts, will be
included in calculating the net litigation recovery), these recoveries are
substantially less than the partnership would receive if it ultimately had or
would prevail in full in this litigation for all amounts sought therein. Given
all of these uncertainties, the general partner and the acquiring parties
believe that the most fair course of action would be to preserve for the limited
partners the economic benefit of the net recovery (if any) in the litigation.
The acquiring parties also believe the determination of the merger
consideration and the proposed transaction were procedurally fair to the limited
partners even though there are no
-30-
persons in the position of "independent directors" or other unaffiliated
representatives to act solely on behalf of the limited partners unaffiliated
with the general partner and the acquiring parties. The appraisal was conducted
by a party unaffiliated with and independent of the general partner and the
acquiring parties. The appraisal was conducted in accordance with applicable
professional standards, as noted therein. By being based in part on the income
approach and direct capitalization (as described under the caption "Appraisal"
on pages 69 through 73), the acquiring parties believe the appraisal gives due
consideration and effect to the value of the partnership as a going concern,
rather than solely based in the liquidation value of the properties. Finally,
the method for calculating the deemed liquidation value of the partnership based
on the independently appraised value of its properties gives due and objective
consideration and effect to those factors not reflected in the appraisal,
primarily cash on hand, the outcome of the litigation and the cost to repair the
defects in these properties.
By virtue of having obtained an independent appraisal of the market
value of the partnership's real estate properties and considered alternatives
for realizing upon that market value, the general partner and the acquiring
parties believe that the determination of the merger consideration to be paid is
procedurally fair to the limited partners. They also believe the merger
consideration to be substantively fair to the limited partners by virtue of
having used this appraisal to determine a liquidation value of the partnership
and basing the merger consideration thereon, while preserving for the limited
partners the economic benefits of any net litigation recovery and limiting their
exposure to the risk that the costs to repair the partnership's properties could
exceed current estimates or available resources or that such defects or other
circumstances could adversely affect the partnership or the use of its
properties.
In concluding that the transaction is fair to the limited partners, the
general partner and the acquiring parties further considered in detail the
positive and negative factors discussed below, the evaluation of which, in the
view of each of the general partner and the acquiring parties, supported its
conclusions regarding the fairness of the transaction. The general partner and
the acquiring parties also considered the positive and negative factors
discussed below with respect to the alternatives to the transaction. In the view
of the general partner and the acquiring parties, the negative factors were not
sufficient, either individually or in the aggregate, to outweigh the benefits of
the proposed transaction in the form of the merger to the limited partners.
Positive Factors Considered
In determining that the merger is fair to the limited partners and in
recommending approval of the merger, the general partner and the acquiring
parties each considered the following factors which they believe support their
respective determinations regarding the fairness of the transaction and
recommendations:
o The limited partners will be able to liquidate their investments.
No significant market for the sale of units currently exists or is
expected to develop in which limited parties can liquidate their
investments. Upon the completion of the transaction, the limited
partners, other than PIP Partners, will be entitled to receive cash
approximating the fair value of the units in exchange for their units
and, accordingly, those limited
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partners will no longer bear the risks inherent in the ownership of
the properties through the partnership.
o The merger consideration each limited partner will receive is based
on the market value of the partnership's properties as determined by
independent appraisal. The general partner and the acquiring parties
believe this validates the fairness of the price to be paid in the
merger. The true market value of the partnership's properties could
be greater than the appraised market value.
o The merger consideration being offered is substantially equivalent to
the amount the limited partners would receive upon the liquidation of
the partnership's underlying properties at current market values. It
also preserves for the limited partners the economic benefits of any
net litigation recovery (including pursuant to the existing
conditional settlements) and limits their exposure to the risk that
the costs to repair the partnership's properties could exceed current
estimates or available resources or that such defects or other
circumstances could adversely affect the partnership or the use of
its properties.
o Based on their experience as to the substantial discount real estate
professionals impose in instances where substantial construction
defects exist and the relatively low value these professionals
ascribe to the potential for litigation recoveries, the general
partner and the acquiring parties believe that the presence of
significant construction defects and the uncertainty of success in
litigation in which Prometheus Income Partners is involved would
cause the partnership and/or its properties to be sold at a price
less than the merger consideration. The general partner believes that
because of its experience in pursuing construction defect litigation
and its familiarity with the partnership's properties, it is in a
better position to achieve a better result in these matters than
unaffiliated third parties--and thus it discounts the value of the
properties less than would these other parties. Because of the
possibility of an additional deferred payment of the merger
consideration, this experience ultimately will inure to the benefit
of the limited partners.
o Ultimately, the known and unknown construction defects will have to
be repaired to maintain the continued viability of the partnership's
properties as income producing assets. There can be no assurance that
the partnership will be successful in litigation to recover the costs
of these repairs, or that it will be so in a timely manner. As a
result, established reserves, together with the amounts recovered in
this litigation, if any, may be insufficient to fund these repairs in
a timely manner. If the partnership does not have sufficient cash to
fund these repairs as required, the partnership would have to obtain
additional capital resources to fund these repairs. This could result
in substantial cost to the partnership or substantial dilution of the
limited partners' interests in the partnership. There is no assurance
capital resources would be available to the partnership on
commercially reasonable terms. If not, then the partnership would
have to consider other alternatives, such as a sale of the properties
at what the general partner believes would then be substantially
depressed prices. If the merger is consummated, the limited partners
would no longer bear the risks of these uncertainties.
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o The minimum cash price to be received by the limited partners per
unit is over $500 greater than the highest price paid in open market
transactions for units over the past two years.
o PIP Partners did not require Prometheus Income Partners to make
significant representations, warranties or covenants with respect to
its past, present or future operations or profitability, the
construction defect litigation or the construction defects
themselves. Accordingly, there is little risk that the merger will
not be consummated if approved by the unit holders.
o Pursuant to the Agreement and Plan of Merger, PIP Partners has agreed
to vote its units for or against the merger in the same proportion as
the unaffiliated limited partners who vote on the merger at the
meeting. This means that the merger will be approved only if a
majority of those unaffiliated limited partners voting on the
transaction vote for the merger.
o The merger will allow limited partners to receive cash to at least
partially pay tax liabilities related to income recognized since 1997
(the partnership having recognized a loss in 1996) with respect to
undistributed partnership income that has been reserved for
conditional liabilities related to the construction defects. It is
uncertain whether and when Prometheus Income Partners will be able to
make distributions of income to the limited partners under its credit
agreements or otherwise, given the status of construction defects in
its properties and the construction defects litigation. Commencing
with the tax year following the tax year in which the closing of the
transaction occurs, the limited partners will not incur income for
tax purposes with respect to which they have received no
corresponding cash distribution.
o If the merger is not consummated, the limited partners would continue
to own units. This likely would be true for the foreseeable future
because there is no assurance that in the absence of a liquidation
the limited partners would have a liquidity event with respect to
their units until the expiration of the term of Prometheus Income
Partners under its partnership agreement. The general partner would
be under no obligation to seek a sale of the properties prior to the
expiration of the partnership's term. Therefore, the limited partners
would continue to be exposed to the risks inherent in the ownership
of real property, such as fluctuations in occupancy rates, operating
expenses and rental rates, which in turn may be affected by general
and local economic conditions, the supply and demand for properties
of the type owned by Prometheus Income Partners and federal and local
laws and regulations affecting the ownership and operation of real
estate. Although the properties owned by the partnership have
experienced positive rental growth and high occupancy for the last
few years, there still exists a risk of a downturn in these trends in
the future. These factors could also adversely impact any future
price at which the units or the partnership's properties could be
sold. If the merger is consummated, the limited partners would no
longer have their units subject to the risk of the real property
ownership and operation, including the uncertainty of recovery in the
construction defects litigation; or the risks of substantial loss of
use of the partnership's properties as a result of existing defects
or otherwise.
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o The non-refundable advance on the merger consideration of $1,200 per
unit, without giving effect to any deferred payment of merger
consideration, represents a multiple of 9.5x annual net income of the
partnership per limited partner unit for the most recently completed
fiscal year ended December 31, 2000.
o Although the partnership typically has experienced year-to-year
revenue and income growth, the potential for continued income growth
beyond the horizon of the current remaining terms on existing leases
is uncertain. In recent years (including the most recently concluded
fiscal year), the partnership's properties have had occupancy rates
of approximately 99%. Continued growth in income thus would have to
be derived from increases in rental rates or reductions in costs.
While the geographic areas in which the partnership's properties are
located have generally experienced increases in rental rates over the
last few years, such rates are subject to change based on a variety
of factors, including general economic conditions in such areas. In
fact, since December 31, 2000, the partnership has experienced
decreases in occupancy and rental rates in both of its properties.
There can be no assurance that prior levels in these rates will
reoccur.
Overall, the general partner and each of the acquiring parties believe
these factors combine to give limited partners the opportunity to realize their
investment at a fair price that would not be afforded through other alternatives
while eliminating the risks of loss that would be attendant to retaining limited
partnership interests in a real estate limited partnership fraught with
substantial uncertainties of litigation and structural defects.
Negative Factors Considered
Each of the general partner and the acquiring parties also considered
the following negative factors:
o PIP Partners, PIP Acquisition and Prometheus Development Co. are all
under the common control of Sanford Diller and, therefore, Prometheus
Development Co. has substantial conflicts of interest with respect to
the approval of the merger. The merger consideration was determined
without any arms-length negotiations between PIP Partners and either
Prometheus Development Co. or any other person acting independently
on behalf of the limited partners. In structuring the transaction,
only Prometheus Development Co. represented the interests of the
limited partners.
o PIP Partners is making this offer with a view to making a profit and,
therefore, there is a conflict between PIP Partners desire to
purchase your units at a low price and your desire to sell your units
at a high price. PIP Partners believes that it can profit from its
ownership of the partnership notwithstanding the prevailing risks and
uncertainties. Affiliates of Prometheus Development Co. will hold
100% of the units if the transaction is completed. Consequently,
affiliates of Prometheus Development Co. will continue to have the
opportunity to benefit from any future earnings growth and increases
in the value of Prometheus Income Partners and its properties.
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o There has been no independent evaluation of the terms of the merger,
no independent committee has reviewed the merger and no independent
opinion as to the fairness of the merger consideration has been
obtained.
o Prometheus Development Co. has not contacted any third-party
unaffiliated with the Prometheus Development Co. concerning a
possible sale of the partnership's underlying properties to that
third-party, a tender offer by that third-party for the units for
cash, or any other acquisition of units by that third-party.
o The limited partners will not have the benefit for tax purposes of
future losses (if any) of Prometheus Income Partners, including any
losses related to construction defects, to offset other sources of
income.
o Following the transaction, the limited partners, other than PIP
Partners, will cease to participate in future earnings or growth, if
any, of Prometheus Income Partners or benefit from increases, if any,
in the value of Prometheus Income Partners or its properties.
o If limited partners owning more than 50% of the units vote for the
merger proposal, their approval will bind all limited partners.
Therefore, a limited partner may vote against the merger proposal and
nevertheless have its units converted into the right to receive cash
in the merger if the requisite vote of the limited partners is
obtained.
o Limited partners do not have any dissenters' rights or other rights
of appraisal under the state law which governs Prometheus Income
Partners, the partnership agreement of Prometheus Income Partners or
otherwise in connection with the merger proposal. Therefore,
dissenting limited partners do not have the right to have their units
independently appraised if they disapprove of the merger or the
merger consideration.
o The limited partners will not be able to benefit from potential
alternatives to the merger. These alternatives include a separate
sale of all of the assets of Prometheus Income Partners and
subsequent liquidation of Prometheus Income Partners, other possible
acquisitions of units or the continuation of Prometheus Income
Partners under its current ownership structure.
o If the merger occurs, you will not receive any future distributions
from operating cash flow of Prometheus Income Partners, if and when
reinstituted, or upon a sale or refinancing of the properties owned
by Prometheus Income Partners.
o Affiliates of Prometheus Development Co. have a separate economic
interest in structuring the transaction to achieve favorable tax
treatment. Limited partners will recognize gain or loss on the
conversion of their units into cash in the merger.
o The obligations of PIP Partners are subject to the condition that the
holder of indebtedness of Prometheus Income Partners consents to the
merger on terms acceptable to PIP Partners. There is no assurance
that this consent will be obtained on terms acceptable to PIP
Partners.
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o The merger may be approved even though a majority of the units held
by limited partners unaffiliated with Prometheus Development Co. do
not approve the merger. This is because PIP Partners will vote its
units according to the percentage of units voting in person or by
proxy at the meeting in favor of the merger. Thus, units not voted at
the meeting will not be taken into account by PIP Partners in
determining the percentage of its own units to be voted in favor of
the merger.
o If the merger is deemed a transfer of the partnership's properties,
the partnership would have to pay to its lenders a transfer fee of
$261,881, which would reduce the total merger consideration to be
paid for each unit (although not below $1,200).
In the view of the general partner and the acquiring parties, these
negative factors were not sufficient, either individually or in the aggregate,
to outweigh the benefits of the proposed transaction to the limited partners.
In evaluating the fairness of the transaction, the general partner and
the acquiring parties also considered the information on weighted average
private sales prices for units of which it was aware. Over the past two years,
other than the recent block purchase by PIP Partners, units have been sold for
between $495 and $601 (this does not include the sale of units pursuant to
recent tender offers at $650 and $800 per unit), far less than the minimum
merger consideration of $1,200 per unit. However, none of the acquiring parties
placed significant emphasis or weight on these prices and ranges and none
considered these prices and ranges to be material factors in making their
determinations and recommendations because, at present, there is no established
public trading market for the units, nor is one expected to develop. Moreover,
liquidity is limited to sporadic private sales which generally involve a
relatively small percentage of the units outstanding. Each of the general
partner and the acquiring parties believes that the fair value of the units
(based on the potential value of Prometheus Income Partners' real estate, and
the anticipated outcome of the litigation as discussed below) is substantially
higher than recent trading prices.
Regarding the price being paid, these persons believe the lack of a
significant change in the trading price of the units as the financial condition
of Prometheus Income Partners has improved reflects the weak market for the
units. In a more efficient market, they believe that recent trading prices would
be higher than they currently are. However, even then, the uncertain status of
the construction defect litigation in which Prometheus Income Partners is
involved reduces the possibility that Prometheus Income Partners will be able to
dispose of its properties at a fair price, thus reducing the possibility that
the limited partners will be able to liquidate their units other than through
this merger or a similar transaction in the foreseeable future. The general
partner and the acquiring parties have decided to go forward with the merger
because the merger would allow the limited partners to liquidate their units at
a fair price despite these concerns.
Alternatives to the Transaction Considered
The decision to pursue the merger, and, in part, the assessment by the
general partner and the acquiring parties of the fairness of the merger,
included a review of different alternatives
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identified as having the potential to achieve the investment objectives of
limited partners as expressed to the general partner. They considered three
alternatives to the merger:
o liquidation of Prometheus Income Partners through a sale of its
properties and distribution of the net cash proceeds of the
liquidation;
o a negotiated tender offer by PIP Partners - General for a percentage
of the units; and
o continuation of the business of Prometheus Income Partners, with
Prometheus Income Partners continuing to be owned by the current
limited partners, including PIP Partners.
The general partner did not consider any other form of transaction in
which the limited partners would receive anything other than cash (including the
deferred cash right included in the merger consideration). Discussion of these
alternatives were limited to Mr. Diller, Mr. Murphy, Ms. Mullins and the
partnership's legal advisors.
Liquidation
One alternative to the transaction considered was to liquidate
Prometheus Income Partners' assets, distribute the net cash proceeds of the
liquidation to the partners and then dissolve Prometheus Income Partners. The
general partner and the acquiring parties determined that Prometheus Income
Partners should not pursue this alternative for the reasons discussed below.
Because of the negative factors discussed below, they did not deem it warranted
to solicit expressions of interest regarding the purchase of the properties of
Prometheus Income Partners.
In a liquidation, Prometheus Development Co. would market the
partnership's properties and, if a potential purchaser were interested in
purchasing Alderwood or Timberleaf or both, Prometheus Development Co. would
negotiate and enter into an agreement for the sale of the property or
properties. Prometheus Development Co. would be required to obtain the approval
of limited partners holding at least 50% of the units before the sale could
close. If the limited partners approved the sale of both properties and these
sales were closed, Prometheus Development Co. would proceed to liquidate the
partnership in accordance with the provisions of the partnership agreement of
Prometheus Income Partners and applicable law, subject to final resolution of
the pending litigation or the making of other arrangements with respect thereto.
Pursuant to the partnership agreement of Prometheus Income Partners, net
proceeds from a sale and liquidation would be distributed in the following order
to the extent of the funds are available:
(1) To the payment of current partnership obligations,
liabilities and expenses.
(2) To the setting up of reserves that the general partner
deems necessary for the payment of partnership debts or liabilities,
whether then payable or not yet payable, including any contingent or
unforeseen liabilities or obligations.
(3) In proportion to, and to the extent of, the positive
capital account balances of the partners.
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(4) 100% to the limited partners until each limited partner
has received an amount equal to a preferred percentage return on its
invested capital plus the limited partners' remaining invested capital.
(5) A disposition fee of up to 3% of the sales price to the
general partner.
(6) The balance:
(a) 85% to the limited partners; and
(b) 15% to the general partner.
Benefits of liquidation. Prometheus Development Co. considered the
primary benefits of a sale and liquidation to be the following:
o Upon the completion of a liquidation, the limited partners would
be entitled to receive cash in exchange for their units and,
accordingly, limited partners would no longer bear the risks inherent
in the ownership of the properties through Prometheus Income
Partners, including the uncertainty of recovery in the construction
defects litigation resulting in uncertainty as to whether the
partnership will have adequate funds to make necessary repairs to its
properties.
o A liquidation would not take place unless greater than 50% of the
units vote for the transaction. This procedure grants the limited
partners in the aggregate the opportunity to choose whether to
liquidate their interests or veto the transaction.
o In the absence of a sale of one or both properties, it is unclear
whether and when Prometheus Income Partners would be able to make
distributions of income to the limited partners, given the status of
construction defects in the properties and the uncertainties involved
in the construction defects litigation.
o Commencing with the tax year following the tax year in which the
closing of a liquidation occurs, the limited partners would no longer
need to include in their federal and state income tax returns the
various items of income, loss, deduction and credit as previously
reported on Schedule K-1s delivered by Prometheus Income Partners and
would not incur income for tax purposes with respect to which they
have received no cash distribution.
Disadvantages of Liquidation. The general partner and the acquiring
parties also considered the following disadvantages of liquidating Prometheus
Income Partners:
o Based on their experience as to the substantial discount real
estate professionals impose in instances where substantial structural
construction defects exist and the relatively little value these
professionals ascribe to the potential for litigation recoveries, the
general partner and the acquiring parties believe that the presence
of significant construction defects and the litigation in which
Prometheus Income Partners is involved would cause the partnership
and/or its properties to be sold at a price per unit substantially
less than the merger consideration. The general partner
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believes that because of its experience in pursuing construction
defect litigation and its familiarity with the partnership's
properties, it is in a better position to achieve a better result in
these matters than unaffiliated third parties--and thus it discounts
the value of the properties less than would these other parties.
o There can be no assurance that Prometheus Development Co. would be
able to sell Prometheus Income Partners' properties for prices that
would result in a distribution to the limited partners that is equal
or greater than the consideration they would receive in the merger.
Any distribution of proceeds from the sale of the properties would be
subject to the prior satisfaction of the partnership's liabilities.
Given the outstanding defects in these properties, there is no
assurance that the price at which the properties could be sold would
be sufficient to satisfy the partnership's liabilities.
o A potential purchaser could require the limited partners to place all
or a substantial portion of the purchase price in escrow pending the
outcome of the construction defect litigation and repair of
construction defects, and, if an unfavorable outcome of the
litigation occurred or the cost to repair construction defects were
in excess of current estimates, might require some of the funds in
escrow to be returned to the purchaser.
o So long as the existing construction defects remain, the existing
loans would not be assumable by a buyer of the properties.
o The limited partners would likely give up any rights to receive the
funds currently kept in reserve for the construction defects or any
potential payoff on the construction defect litigation.
o Until the properties of Prometheus Income Partners are sold and the
partnership is liquidated and terminated, limited partners would
continue to receive Schedule K-1s from Prometheus Income Partners,
and Prometheus Income Partners would continue to have SEC reporting
obligations.
o Limited partners do not have any dissenters' rights or other rights
of appraisal under the state law which governs Prometheus Income
Partners, the partnership agreement of Prometheus Income Partners or
otherwise in connection with a sale and liquidation. Therefore,
dissenting limited partners would not have the right to have their
units independently appraised if they disapprove of the liquidation.
o The limited partners would not be able to benefit from the
alternatives to a liquidation. These alternatives include the merger,
other possible acquisitions of units or the continuation of
Prometheus Income Partners under its current ownership structure.
o No assurance can be given that a liquidation would be consummated.
o If a liquidation occurred, the limited partners would not receive any
future distributions from operating cash flow of Prometheus Income
Partners if and when
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reinstituted, the liquidation of the security accounts, upon a sale
or refinancing of the properties owned by Prometheus Income Partners,
or upon the dissolution of Prometheus Income Partners.
Tender Offer
Another alternative to the transaction considered by the general partner
and the acquiring parties was to make a cash tender offer for the units. In a
tender offer, those limited partners who tendered their units, and whose units
were accepted for purchase, would realize most of the benefits the limited
partners would receive in the merger.
The primary benefit the merger offers which is not offered by a tender
offer is that, due to the legal structure of Prometheus Income Partners, as a
practical matter PIP Partners would be restricted in the number of units it
could acquire by way of tender offer. Importantly, if more than 50% of the units
are transferred in any given year, Prometheus Income Partners would suffer
adverse tax consequences as a result of a reassessment of its properties,
estimated by the general partner to result in the payment of additional property
taxes of approximately $160,000 annually and subject to further ordinary course
annual adjustments. In addition, if PIP Partners held more than 50% of the
units, it would essentially be unable under applicable law to purchase the
balance of the units at a later date, and thus unable to provide the other
limited partners with liquidity, unless it held more than 90% of the units.
Thus, PIP Partners might not be able to offer liquidity to all limited partners
who desired liquidity. In addition, a discount would be applied to the price
paid due to the costs inherent in continuing to have minority partners. Another
significant benefit to the merger versus a tender offer is that following a
tender offer Prometheus Income Partners might continue to be required to satisfy
its current reporting obligations pursuant to SEC rules. Also, in a tender
offer, it likely would be impracticable to provide the limited partners with a
continuing economic interest in the potential litigation recovery.
The primary advantage to pursuing a tender offer versus the merger is
that those limited partners who do not wish to tender their units are not
required to do so. In the merger, if a majority of the units are voted in favor
of the merger and the merger takes place, each limited partner other than PIP
Partners will be entitled to receive the merger consideration for each unit each
limited partner holds. In a tender offer, those limited partners not tendering
their units would retain those units.
The general partner also considered soliciting third party interest in
making a tender offer for the units. However, for the reasons set forth above as
to why the general partner and the acquiring parties believe the partnership's
properties would be undervalued in a sale, they believe the units would be
similarly undervalued in the price a third party would be willing to pay in a
tender offer. This is particularly true because there would be no mechanism
available in connection with a tender offer to escrow a part of the purchase
price to cover contingent liabilities of the partnership.
Continued Ownership of Prometheus Income Partners
Benefits of continued ownership. Another alternative to the transaction
considered by the general partner and the acquiring parties was to continue
Prometheus Income Partners in
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accordance with its existing business plan, with Prometheus Income Partners
continuing to be owned by the limited partners. This will be the result if
Prometheus Income Partners does not participate in the merger. The general
partner and the acquiring parties considered the primary benefits of continuing
the business of Prometheus Income Partners to be as follows:
o Limited partners of Prometheus Income Partners would continue to
have the right to receive distributions of net cash flow arising from
operations and the sale or refinancing of Prometheus Income Partners'
properties if and when Prometheus Development Co. determines that
there were adequate reserves for contingent and other liabilities.
o Continued ownership of Prometheus Income Partners by the limited
partners affords the limited partners with the opportunity to
participate in any future appreciation in the partnership's
properties.
o As discussed above, the general partner believes that the presence of
significant construction defects and the litigation in which
Prometheus Income Partners is involved would cause the partnership
and/or its properties to be sold at a disproportionate discount from
their fair market value.
o The limited partners would be able to benefit from potential future
transactions involving the sale of the units. These alternatives
include a future merger or tender offer at a higher price, although
there can be no assurance that an opportunity with respect to future
transactions would materialize.
Disadvantages of Continued Ownership. The general partner and the
acquiring parties also considered the relative disadvantages to the limited
partners of continuing Prometheus Income Partners under its current business
plan, as follows:
o The availability of future commercially reasonable opportunities
to provide liquidity to the limited partners is highly speculative.
While the general partner may from time to time consider various
alternatives for limited partner liquidity, including a sale of the
partnership's properties if and when commercially reasonable to do
so, the limited partners will not have any assurance of when or if
another liquidation transaction will occur until the expiration of
the term of Prometheus Income Partners under its partnership
agreement. The general partner would be under no obligation to seek a
sale of the properties prior to the expiration of the partnership's
term. While a sale of one or both properties could be effected well
in advance of such date, the general partner is required to act in
the best interests of the partnership in evaluating whether or not to
pursue and consummate such sale based on circumstances that prevail
from time to time.
o Continued ownership by the limited partners would fail to secure the
benefits to the limited partners that are expected to result from the
transaction, including providing immediate liquidity to the limited
partners of their investment. At present, there is no established
public trading market for the units and liquidity opportunities
generally
-41-
are limited to sporadic private sales. To date, these sales are at a
price far less than the merger consideration and typically involve
only a very limited number of units.
o The limited partners would continue to own units and therefore would
continue to be exposed to the risks inherent in the ownership of real
property, such as fluctuations in occupancy rates, operating expenses
and rental rates, which in turn may be affected by general and local
economic conditions, the supply and demand for properties of the type
owned by Prometheus Income Partners and federal and local laws and
regulations affecting the ownership and operation of real estate. The
financial results of the partnership are materially dependent on
occupancy rates and rental rates. The partnership's properties
currently are operating at a 99% average occupancy rate. Growth in
performance will thus be dependent upon increases in rental rates.
Although the properties owned by the partnership and the rental
market where the properties are located have experienced positive
rental growth and high occupancy for the last few years, there still
exists a risk of a downturn in these trends in the future.
o As discussed above, the known and unknown construction defects will
have to be repaired to maintain the continued viability of the
partnership's properties as income producing assets. Notwithstanding
the existing settlements of certain aspects of this litigation, each
of which remains subject to court approval, there can be no assurance
that the partnership will be successful in litigation to recover the
costs of these repairs, or that it will be so in a timely manner. As
a result, established reserves, together with the amounts recovered
in this litigation, if any, may be insufficient to fund these repairs
in a timely manner. If the partnership does not have sufficient cash
to fund these repairs as required, the partnership would have to
obtain additional capital resources to fund these repairs. This could
result in substantial cost to the partnership or substantial dilution
of the limited partnership's interests in the partnership. There is
no assurance capital resources would be available to the partnership
on commercially reasonable terms. If not, then the partnership would
have to consider other alternatives, such as a sale of the properties
at what the general partner believes to be substantially depressed
prices. If the merger is consummated, the limited partners would no
longer bear the risks of these uncertainties.
o Until the properties of Prometheus Income Partners are sold and the
partnership is liquidated and terminated, limited partners would
continue to receive Schedule K-1s from the partnership, and the
partnership would continue to have SEC reporting obligations.
o The limited partners would be forced to continue to pay taxes on
partnership income which is not being distributed due to contractual
and anticipated cash reserve requirements.
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THE MEETING
Time, Date and Place
This Proxy Statement is being furnished to limited partners of
Prometheus Income Partners in connection with the solicitation of proxies by and
on behalf of Prometheus Development Co., as general partner of Prometheus Income
Partners, for use at the meeting of limited partners to be held at 1:30 p.m.,
local time, on August 13, 2001, at [location], and at any adjournments or
postponements of the meeting.
Matters to be Considered
At the meeting, the limited partners will be asked to consider and vote
on the merger proposal and the adjournment proposal and to consider any other
matters as may properly come before the meeting. A vote for the merger proposal
is not also a vote for the adjournment proposal. You must vote separately on
each proposal.
Approval of the merger proposal by the limited partners is a condition
to Prometheus Income Partners' participation in the merger.
Approval of the adjournment proposal will permit the adjournment of the
meeting to solicit additional proxies in the event that there are not sufficient
votes at the time of the meeting to approve the merger proposal. The merger
provides that Prometheus Development Co. will recommend the adjournment of the
meeting for ten days if on the date of the meeting Prometheus Income Partners
has not received duly executed proxies which, when added to the number of votes
represented in person at the meeting by persons who at that time intend to vote
for the merger proposal, will constitute a sufficient number of votes to approve
the merger proposal. However, if limited partners holding greater than a
majority of the outstanding units have indicated their intention to vote
against, and have submitted duly executed proxies voting against, the merger
proposal, the merger does not require Prometheus Development Co. to recommend
adjournment of the meeting. Approval of the adjournment proposal by the limited
partners is not a condition to Prometheus Income Partners' participation in the
transaction.
Other than the merger proposal and the adjournment proposal, Prometheus
Development Co. does not expect to ask the limited partners to vote on any other
matters at the meeting. However, if matters other than the merger proposal and
the adjournment proposal are properly brought before the meeting, or any
adjournments or postponements of the meeting, the persons appointed as proxies
will have discretion to vote or act on those matters according to their best
judgment.
Recommendations of the General Partner and the Acquiring Parties
Prometheus Development Co., Prometheus Income Partners, PIP Partners,
PIP Acquisition, PromHill, The DNS Trust, Helen Diller and Sanford Diller,
considering, among other factors, the opportunity for the limited partners to
achieve liquidity, have each determined, as discussed and for the reasons set
forth above, that the merger is procedurally and substantively fair to
Prometheus Income Partners and all of its limited partners who are unaffiliated
with the acquiring parties. Accordingly, these parties have approved the merger
and the transactions
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contemplated by the merger, and each of these parties recommends that limited
partners of Prometheus Income Partners vote for the merger proposal and for the
adjournment proposal.
Record Date; Voting Power
Prometheus Development Co. has fixed the close of business on July 16,
2001, as the record date for determination of the limited partners entitled to
notice of and to vote at the meeting and any adjournment or postponement of the
meeting. Only holders of record of units at the close of business on July 16,
2001 are entitled to notice of and to vote at the meeting. As of the record
date, there were 18,995 units in Prometheus Income Partners outstanding and held
of record by ____ holders of record. Holders of record of units are entitled to
one vote for each unit that they hold on the merger proposal, the adjournment
proposal and any other matter that may properly come before the meeting.
Quorum
The necessary quorum for the transaction of business at the meeting is
the presence in person or by proxy of limited partners holding a majority of the
units in Prometheus Income Partners outstanding on the record date. For purposes
of determining the presence of a quorum, proxies marked "ABSTAIN" will be
counted by Prometheus Development Co. as present at the meeting.
In the event that there are insufficient votes present at the meeting to
constitute a quorum, and proxies and votes for the merger proposal represent
fewer than 50% of the units, the units for which proxies have been received
marked in favor of the adjournment proposal may be voted to adjourn the meeting
to a later date. Notice of the adjourned meeting need not be given if the time
and place of the adjourned meeting is announced at the meeting, the adjournment
is for not more than forty-five days from the date of the original meeting and
no new record date is set.
Vote Required
A vote for the merger proposal is not also a vote for the adjournment
proposal. You must vote separately on each proposal. The affirmative vote of
limited partners holding greater than 50% of the units outstanding on the record
date is required to approve the merger proposal. The affirmative vote of limited
partners holding more than 50% of the units present in person or by proxy at the
meeting is required to approve the adjournment proposal.
Limited partners are urged to complete, date, sign and promptly return
the enclosed proxy. All properly executed proxies received by Prometheus
Development Co. prior to the meeting that are not revoked will be voted at the
meeting in accordance with the instructions indicated on the proxies.
If you mark "ABSTAIN" on your proxy and do not vote in person at the
meeting, the effect will be the same as a vote against the merger proposal. If
you fail to return your proxy and do not vote in person at the meeting, as a
result of the agreement of PIP Partners to vote as have the voting limited
partners, the effect on the merger proposal will depend on how other limited
partners vote. If you fail to return your proxy, your units will have no effect
on the outcome of the adjournment proposal. If you mark "ABSTAIN" on your proxy
and do not vote in person at
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the meeting, the effect will be the same as a vote against the adjournment
proposal. If you sign and return your proxy but do not give instructions on your
proxy, your units will be voted for the merger proposal and for the adjournment
proposal.
Approval of the merger proposal by the limited partners is a condition
to Prometheus Income Partners' participation in the merger. Therefore, if we do
not receive votes for the merger proposal from limited partners holding greater
than 50% of the units, the merger proposal will not be approved and Prometheus
Income Partners will not participate in the merger.
Approval of the adjournment proposal by the limited partners is not a
condition to Prometheus Income Partners' participation in the transaction.
Approval of the adjournment proposal by the limited partners will permit the
adjournment of the meeting to solicit additional proxies in the event that there
are not sufficient votes at the time of the meeting to approve the merger
proposal.
Changing Your Vote
You may revoke your proxy at any time before it is voted at the meeting
(1) by sending in a later dated, signed proxy, (2) by written notice of
revocation to Prometheus Development Co. or (3) by attending the meeting and
voting in person.
Solicitation of Proxies
Proxies are being solicited by and on behalf of Prometheus Development
Co., as general partner of Prometheus Income Partners. In addition to
solicitation by mail, Prometheus Development Co. and the officers and directors
of Prometheus Development Co., principally Mr. Murphy and Ms. Mullins, may
solicit proxies by telephone, telegram or facsimile transmission. No additional
compensation will be paid to these persons for these solicitation services.
Prometheus Income Partners will request that brokerage firms, fiduciaries and
other custodians forward copies of this Proxy Statement and the enclosed form of
proxy to the beneficial owners of units held of record by them, and Prometheus
Income Partners will reimburse those brokerage firms, fiduciaries and other
custodians for their reasonable expenses incurred in forwarding this material.
Prometheus Income Partners has retained persons to aid it in the solicitation.
Pursuant to a letter agreement dated June 20, 2001 between MacKenzie Partners,
Inc. and Prometheus Development Co., MacKenzie Partners agreed to distribute
this Proxy Statement to limited partners, provide information with respect to
the merger to limited partners, and provide advisory services to Prometheus
Development Co. with respect to the merger. Prometheus Development Co. agreed to
pay MacKenzie Partners a fee of $9,500 plus out-of-pocket expenses incurred by
MacKenzie in rendering these services.
The matters to be considered at the meeting are of great importance to
Prometheus Income Partners and to the limited partners. Please read and
carefully consider the information presented in this Proxy Statement and the
other documents to which we have referred you and complete, date, sign and
promptly return the enclosed proxy. Completed proxies should be returned as soon
as possible. You may return your proxy as follows:
by regular mail, in the enclosed postage-paid envelope, to:
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MacKenzie Partners, Inc.
156 Fifth Avenue
New York, NY 10010
(800) 322-2885
proxy@mackenziepartners.com
or by fax to:
[Phone]
List of Limited Partners
Under the federal securities laws, a limited partner who is entitled to
vote at the meeting may request in writing a list of the other limited partners
entitled to vote at the meeting to enable the requesting limited partner to mail
soliciting materials to the other limited partners. Alternatively, a limited
partner of Prometheus Income Partners who is entitled to vote at the meeting may
request that Prometheus Income Partners mail copies of any proxy statement, form
of proxy or other soliciting material furnished by the requesting limited
partner to the other limited partners. The requesting limited partner must
reimburse Prometheus Income Partners for Prometheus Income Partners' reasonable
expenses incurred in connection with performing these services. Any requests
referred to in this paragraph should be made in writing to: Prometheus
Development Co., Inc., 350 Bridge Parkway, Redwood City, California 94065-1517.
At the time of making the request, the requesting limited partner must,
if its units are held through a nominee, provide Prometheus Income Partners with
a statement from the nominee or other independent third party confirming the
limited partner's beneficial ownership. In addition, the requesting limited
partner must provide Prometheus Income Partners with an affidavit or similar
document that:
o identifies the proposal that will be the subject of the limited
partner's solicitation;
o states that the limited partner will not use the list for any purpose
other than to solicit limited partners with respect to the same
action for which Prometheus Income Partners is soliciting votes; and
o states that the limited partner will not disclose the information
provided to it to any person other than a beneficial owner for whom
the request was made and an employee or agent to the extent necessary
to effectuate the communication or solicitation.
Upon termination of any solicitation by the requesting limited partner,
the requesting limited partner must return to Prometheus Income Partners,
without keeping any copies, the information provided by Prometheus Income
Partners and any information derived from that information. A limited partner is
only entitled to the foregoing information with respect to Prometheus Income
Partners.
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The partnership agreement of Prometheus Income Partners provides that a
current list of limited partners is open to inspection, examination and copying
by a limited partner of Prometheus Income Partners or that limited partner's
duly authorized representative at all reasonable times.
THE PARTIES
Prometheus Income Partners
Background
Prometheus Income Partners, a California limited partnership, was formed
on April 15, 1985, under the California Revised Limited Partnership Act, for the
purpose of acquiring the Alderwood and Timberleaf properties. Prometheus
Development Co., Inc., a California corporation, is the general partner of
Prometheus Income Partners. The principal business of Prometheus Income Partners
is to invest in, construct, hold, operate, and ultimately sell its properties.
The principal investment objectives of the partnership are to preserve and
protect its capital, to obtain capital appreciation from the sale of its
properties, and, beginning in 1987, to provide "tax sheltered" distributions of
cash from operations due to the cost recovery and other non-cash tax deductions
available to it.
With the proceeds of two bank loans, an affiliate of Prometheus
Development Co. purchased the Timberleaf site from an unaffiliated third party
in January 1985. With the proceeds of another bank loan, Prometheus Development
Co. leased the Alderwood site from a local school district with a purchase
option in April 1985. Ownership of Timberleaf and the interest under the
Alderwood lease subsequently were transferred to the partnership.
Beginning in February 1987 through December 1987, Prometheus Income
Partners offered and sold 19,000 limited partnership units for $19,000,000. The
sale of these units was registered under the Securities Act of 1933, as amended,
pursuant to a Registration Statement that was declared effective on February 12,
1987; the offering and sale of the units was completed in December 1987. The net
proceeds of that offering, together with the proceeds of additional bank loans,
were used to satisfy the construction loans with respect to the Alderwood and
Timberleaf properties and to exercise the purchase option for the Alderwood land
site.
Prometheus Income Partners is engaged solely in the business of real
estate investment. The business of the partnership is not seasonal. The
partnership does not engage in foreign operations or derive revenues from
foreign sources. Prometheus Income Partners has no employees, officers or
directors. Prometheus Real Estate Group, Inc., a California corporation,
previously known as Prom Management Group, Inc., a California corporation doing
business as Maxim Property Management, the majority of which is beneficially
owned by Mr. Diller, employs all of the personnel for the operation of
Prometheus Income Partners' properties pursuant to a Management and Operating
Agreement, dated as of October 1, 1992, by and between Prometheus Income
Partners and Prometheus Real Estate Group. The senior management personnel of
Prometheus Real Estate Group also act in these capacities for certain other real
estate partnerships in which Mr. Diller and other officers of Prometheus
Development Co. hold interests. Prometheus Real Estate Group receives various
fees and reimbursement of
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various expenses from Prometheus Income Partners under the Management and
Operating Agreement.
Prometheus Income Partner's investments in real property are affected
by, and subject to, the general competitive conditions of the residential real
estate rental market in the Santa Clara area. Its properties are located in an
area that contains numerous other competitive residential rental properties. The
income of the properties may be affected by various factors outside the
partnership's control. For example, changes in the supply of rental properties,
population shifts, the availability of mortgage funds or changes in zoning laws
could affect apartment rental rates. It is also possible that some form of rent
control may be legislated at the state or local level. Expenses of operating the
properties, such as administrative and maintenance costs and real estate taxes,
are subject to change due to inflation, supply factors or legislation. These
increases in expenses may be offset by increases in rental rates, although these
increases may be limited due to market conditions or other factors as discussed
above. Certain expenses, such as debt service, are at fixed rates and are not
affected by inflation. Prometheus Development Co. is unable to predict the
effect, if any, of these events on the future operations of Prometheus Income
Partners. There is no assurance there will be a ready market for the sale of the
properties or, if sold, that a sale could be made on favorable terms.
Properties
Prometheus Income Partners owns the two residential, income-producing
properties, Alderwood and Timberleaf, both in Santa Clara, California. The City
of Santa Clara, with a population of approximately 104,000, is the third largest
city in Santa Clara County, commonly referred to as Silicon Valley, is
approximately 47 miles south of San Francisco, encompasses 1,300 square miles
and has a population of approximately 1.7 million people, making it the most
populous of the nine counties in the greater San Francisco Bay Area.
The Alderwood luxury garden apartment complex is located at 900 Pepper
Tree Lane in Santa Clara, California. Construction began in November 1985 and
was fully completed by December 31, 1986. Lease-up activities began in November
1986 and continued through the third quarter of 1987. The complex contains 234
apartment units housed in 19 two-story buildings on a 9.4 acre site. Covered and
uncovered parking for 468 cars is provided. The Timberleaf luxury garden
apartment complex is located at 2147 Newhall Street in Santa Clara, California.
Construction began in November 1985 and was fully completed by December 31,
1986. The complex contains 124 apartment units housed in nine buildings of two
or three stories on a five acre site. Covered and uncovered parking for 248 cars
is provided.
Alderwood and Timberleaf are encumbered by first mortgage liens, which
secure promissory notes payable as of March 31, 2001 in the amount of
$16,151,000 and $9,148,000, respectively. The Notes bear interest at the rate of
6.99% per annum for Alderwood, and 7.09% per annum for Timberleaf, and mature in
2007. The Notes, if prepaid more than thirty (30) days from maturity, may be
subject to a prepayment penalty.
Construction Defects; Litigation
Construction Defects
--------------------
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In June 1996, Prometheus Development Co. learned that the hardboard
siding used at both Alderwood and Timberleaf was beginning to fail. That was the
first indication of potential product failure at these properties, and the
general partner commissioned a survey of the sites.
On June 26, 1996, experts conducted the first visual inspection of
Alderwood with respect to the defects on behalf of Prometheus Income Partners.
Throughout 1997 and 1998, the partnership inspected and investigated Alderwood
with respect to the construction defects, and in March and November 1998,
various defendants inspected and investigated Alderwood as well. Similarly, on
July 11, 1996 experts conducted the first visual inspection of Timberleaf.
Additional investigations took place in 1997, 1998 and 2000.
As of the dates of these inspections, moisture had accumulated in the
walls of these projects through a combination of construction defects and
endemic problems with the hardboard siding. Sufficient moisture over time causes
rot and decay in the wood, framing and siding which necessitates repairs which,
in some cases, are structural in nature. Rot and decay, which form inside the
wall, are not visible, and until rot and decay have caused changes in the
physical appearance of the exterior of the buildings, it is difficult to
ascertain all the locations where rot and decay exist. On September 23, 1996,
Prometheus Income Partners filed two lawsuits against the siding manufacturer,
the general contractor, the subcontractors and the architects, one for each of
its properties, regarding problems at the properties stemming from the hardboard
siding. Each of these persons has denied responsibility for the defects. In
October 1997, a cross-claim was filed by one of the defendants in each of these
lawsuits against the partnership seeking relief against other parties to the
litigation if either filing party is found liable in the litigation. This cross
claim was tendered to the partnership's insurance carrier, counsel for whom has
denied all allegations. The general partner does not believe there is a
substantial risk of recovery against the partnership on this claim, but there is
no assurance a judgment will not be rendered against the partnership based on
this claim.
As part of the inspections discussed above, certain structural issues
caused by the defects in the hardboard siding were uncovered at Alderwood and
Timberleaf and were rebuilt as part of an immediate repair process. Prometheus
Development Co. subsequently determined that additional immediate repairs were
necessary, which, with the exception of roof repairs noted below, have been
completed. Prometheus Development Co. continues to monitor the condition of the
property to look for any other signs of rot and decay that would necessitate
immediate attention and repair.
In addition to the hardboard siding problems, in September 1999 routine
roofing inspection uncovered failing roof substrate at dormer roof assemblies
for Alderwood and Timberleaf. Prometheus Development Co. traced the cause of
this roofing problem to inadequate venting of the roof space. Inadequate venting
leads to condensation in roof areas. This has been sufficient to cause
deflection and decay of the roof and its structural support, requiring
replacement. Prometheus Development Co. has received design specifications for
remedial roof repairs and has completed a prototype repair of four dormer roof
assemblies. A bid based on the approved scope for additional dormer roof repair
as recommended by our engineer is currently being reviewed and once fully
negotiated will be executed. These repairs will begin as soon as possible.
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Based on information currently available to the general partner, damages
and economic loss appear to be in the range of $19-$20 million.
Since 1997, both cases have been under the supervision of a Special
Master who is appointed and empowered by the court to assist in resolving the
cases. Investigations and other subsequent discoveries have been ordered by the
Special Master on behalf of both plaintiffs and defendants in an effort to come
to a settlement. Destructive investigation, completed under the order of the
Special Master in March 1998 for Alderwood and May 1998 for Timberleaf, has
produced a preliminary issues list which the Special Master will use in
attempting to prompt a settlement from the defendants. This information is
protected by the Special Master and is not for general distribution. Additional
testing and investigations have been conducted periodically on the properties
and continue to be performed from time to time.
The first settlement conference supervised by the Special Master was
held on March 11, 1997 among the various defendants and Prometheus Income
Partners. Since then, there have been conferences with respect to Timberleaf in
May, June, September and December 1997, April, June, August, October and
December 1998, and February, June and October 1999. There have also been
conferences with respect to Alderwood in January, March, April, September,
October and November of 1999. None of these conferences produced a settlement,
and so on May 5, 2000, the judge ordered another mandatory settlement conference
to be held on August 16, 2000. No settlement was reached at this conference. A
trial date has been set for Timberleaf on May 14, 2001, and Alderwood's trial is
set to commence immediately thereafter.
On March 26, 2001, the partnership reached a settlement with one of
several principal defendants in the two lawsuits. Under the terms of this
settlement, this defendant has agreed to pay an aggregate of $3.58 million for
the full and final settlement of the claims against it. Of this amount, the
partnership would receive a net amount of approximately $2.3 million, after
payment of attorneys' fees, costs and a litigation management fee of 3% of the
gross settlement to an affiliate of the general partner and the acquiring
parties. This settlement is subject to the approval of the court and the
approval of interconnected settlements in related lawsuits by the respective
courts in which such suits are being tried.
On May 22, 2001, the partnership reached a settlement with the remaining
defendants in the litigation relating to the partnership's Timberleaf apartment
property. Under the terms of the Timberleaf settlement, the remaining defendants
have agreed to pay an aggregate of $4.86 million to the partnership for the full
and final settlement of the claims against them. Of this amount, the partnership
will receive a net amount of approximately $3.3 million, after payment of
attorneys' fees, costs and a litigation management fee of 3% of the gross
settlement to an affiliate of the partnerships general partner. This settlement
is subject to the approval of the court.
The partnership intends to continue to pursue vigorously its claims
against the remaining defendants in the litigation regarding the Company's
Alderwood apartment property.
The terms of the mortgages on the properties require that a security
account be maintained for each property to cover contingent liabilities with
respect to defects in the properties' hardboard siding. These security accounts
are additional collateral for the lender,
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and total, as of March 31, 2001, approximately $5,713,000. Because there is no
current prospect for settling the hardboard siding litigation or of refinancing
the properties to remove these covenants, there are no current prospects for the
liquidation and distribution of these accounts to limited partners.
In addition to the security accounts mandated under the partnerships'
financing arrangements, Prometheus Development Co. has determined that it is in
the best interest of the partnership to continue building reserves for the
potential cost of dealing with known and unknown construction defects.
Prometheus Development Co. currently maintains an additional account totaling as
of March 31, 2001 approximately $3,932,000, which is primarily intended to cover
additional contingent liabilities related to the construction defects and other
matters.
The extent and magnitude of the construction defects continues to worsen
with time. Prometheus Development Co. believes that Prometheus Income Partners
can no longer wait for the cases to be resolved and has authorized the start of
repairs using the cash reserve funds currently held. As of March 31, 2000,
Prometheus Income Partners has spent approximately $1,667,000 on emergency
repairs and litigation expenditures. Assuming that the litigation is not
successfully resolved, over the next twelve months the partnership anticipates
spending approximately $1,900,000 to $2,400,000 on additional urgent repairs. It
is anticipated that funds held in reserve are not adequate to repair the entire
project, so completion of the most critical projects will be prioritized. The
cost of pursuing litigation also is significant. Prometheus Development Co.
cannot predict or estimate what amounts, if any, will be recovered through
litigation.
Recent Tender Offers
The following are the sole tender offers that have been made for units.
Beginning in 1996, competing tender offers were made for units. One
tender offer from Prom Investment Partners commenced in December 1996. In
response to that offer, PIP Partners made a similar offer, which commenced in
January 1997. An aggregate 2,750.5 units were tendered to and purchased by these
bidders per unit - 1,430 to PIP Partners and 1,320.5 to Prom Investment
Partners, or 7.5283% and 6.9518% of the total outstanding units, respectively.
Under the terms of the partnership agreement, the transfers were effective as of
April 1, 1997. All units were purchased pursuant to these offers for $495 per
unit.
During 1998, Bond Purchase, LLC, a third party not affiliated with PIP
Partners, Prometheus Development Co. or Mr. Diller, made an unsuccessful offer
to purchase units. The offer was for less than 5% of outstanding units and
nominal legal costs were incurred by Prometheus Income Partners. On October 16,
1998 Bond Purchase, LLC cancelled its transfer request and no units were
acquired by it.
On June 27, 2000, Everest Management, LLC, a third party not affiliated
with PIP Partners, Prometheus Development Co. or Mr. Diller, made a tender offer
for up to 2% of the units, or 379 units, for $650 per unit. This tender expired
by its terms on July 31, 2000. On October 1, 2000 and January 1, 2001, Everest
Properties was admitted as a limited partner with respect to 289 units and 15
units, respectively, that were tendered pursuant to this tender offer.
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On March 5, 2001, Everest Management, LLC made another tender offer for
up to 1.6% of the units, or 300 units, for $800 per unit. This tender originally
was set to expire by its terms on March 30, 2001 and subsequently was extended
by Everest to April 20, 2001. The general partner has been advised by Everest
that 639.5 units were tendered pursuant to this offer.
The Partnership Agreement of Prometheus Income Partners
Pursuant to the partnership agreement of Prometheus Income Partners,
Prometheus Development Co. is the sole general partner of the partnership. All
of the outstanding shares of the general partner are owned by The DNS Trust. Mr.
Sanford N. Diller and Mrs. Helen Diller are the sole trustees and beneficiaries
of The DNS Trust. Mr. Diller is also President, Secretary and a director of the
general partner. The DNS Trust is also the principal beneficial owner of PIP
Partners - General; thus, PIP Partners and the partnership are affiliates. The
general partner has responsibility for all aspects of the partnership's
operations. The partnership agreement of Prometheus Income Partners contains
provisions relating to the rights and obligations of the general partner, the
limited partners and the partnership, including without limitation, the
financial arrangement between the general partner and the partnership.
The partnership agreement provides, and, as parties thereto, the limited
partners agree, that the general partner and its affiliates have the right to
contract with or otherwise deal with the partnership subject in certain cases to
the approval of the limited partners.
Subject to certain limitations contained in the partnership agreement,
the partnership is to distribute quarterly all distributable cash from
operations as follows:
(1) initially 100% to the limited partners until the limited
partners have received a sum each year equal to a 10% simple annual rate
of return on their investment;
(2) after the receipt by the limited partners of this 10% return,
100% to the general partner until the general partner has received 5% of
the aggregate cash distributed to the limited partners in that year; and
(3) thereafter, 95% to the limited partners and 5% to the general
partner.
The partnership agreement provides that cash received from the sale or
refinancing of the properties would be used or distributed to the extent funds
are available as follows:
(1) to the payment of current partnership obligations,
liabilities and expenses;
(2) to the setting up of reserves which the general partner may
deem necessary for partnership debts or liabilities, whether payable or
not yet payable, including any contingent or unforeseen liabilities or
obligations; and
(3) 100% to the limited partners until each limited partner has
received an amount equal to:
(a) the excess of a 10% annual simple rate of return on
the limited partners' investment (plus an amount necessary to
provide limited partners
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subscribing for units on or prior to June 1, 1987, an 11% annual
simple rate of return for calendar 1988 on invested capital) less
the sum of all previous cash distributions during the term of the
partnership other than distributions of invested capital;
(b) the limited partners' remaining invested capital; and
(c) to the general partner a commission fee of up to 3% of
the proceeds of a sale of a property (see below for a more
complete explanation of this commission).
(4) The balance: 85% to the limited partners, 15% to the general
partner.
However, distributions of net proceeds from a sale or refinancing
arising from the termination of Prometheus Income Partners would be distributed
first in proportion to, and to the extent of, the positive capital account
balances of the limited partners and the general partner and then as set forth
above.
The commission the general partner is entitled to receive as set forth
above is equal to the lesser of (a) 3% of gross sale price of the property and
(b) one-half of the competitive real estate brokerage commission which would be
charged by unaffiliated parties rendering similar services. However, all real
estate brokerage commissions or similar fees payable to all persons involved in
the sale of a property may not exceed 6% of the sales price.
The partnership agreement further provides for the allocation of the net
profits and net losses among the general partner and the limited partners.
If, immediately prior to the dissolution and termination of the
partnership, the general partner's capital account has a deficit balance and the
partnership's assets available for distribution upon dissolution and termination
are insufficient to provide distributions to limited partners equal to their
aggregate invested capital, the general partner shall be obligated to contribute
to the partnership that amount of capital if any equal to the lesser of:
o an amount sufficient to restore its capital account to zero
and
o 1.01% of the aggregate capital contributions of the limited
partners, less any capital previously contributed by the general
partner.
If Prometheus Development Co. ceases to be the general partner of the
partnership upon the occurrence of certain terminating events, including
withdrawal, removal as a result of the majority vote of the limited partners,
bankruptcy, reorganization or dissolution and termination of Prometheus
Development Co., then the partnership will, at its election, either
o purchase Prometheus Development Co.'s interest; or
o convert to that of a special limited partnership interest.
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Upon conversion of its interest to that of a special limited partner,
Prometheus Development Co. would retain the same rights to profits, losses, and
distributions as before the terminating event and would be entitled to the
voting rights accorded other limited partners. If Prometheus Development Co.'s
interest is repurchased, it would receive from the partnership the then present
value of its interest in the partnership, determined by agreement of Prometheus
Development Co. and the partnership. If the parties cannot agree, the purchase
price would be determined in accordance with the then current rules of the
American Arbitration Association, with the expense of arbitration borne equally
by the parties. If the termination of Prometheus Development Co. was voluntary,
the method of payment for its interest would be under a non-interest bearing
unsecured, promissory note with principal payable from distributions which
Prometheus Development Co. otherwise would have received under this Agreement if
it had remained as general partner. If the termination is involuntary, the
method of payment would be a promissory note bearing interest at the reference
rate of the bank specified by Prometheus Development Co., with equal payments of
principal and interest over a term of five years.
Prometheus Income Partners is permitted to engage in various
transactions involving Prometheus Development Co. and its affiliates, as more
fully described in the partnership agreement.
The partnership agreement provides that Prometheus Income Partners will
reimburse its general partner, or its affiliates for:
o the actual cost to the general partner or its affiliates of
goods and materials used for or by the partnership and obtained from
entities which are not affiliated with the general partner;
o expenses for specified administrative services;
o other administrative services, provided that these services
are necessary to the prudent operation of the partnership; and
o funds advanced to the partnership by the general partner or
its affiliates pursuant to the management agreement.
However, no reimbursement for administrative services is permitted for
services for which the general partner or its affiliates receive a separate fee,
and the amount of these expenses may not exceed the lesser of:
o the actual cost of these services; and
o 90% of the amount which Prometheus Income Partners would be
required to pay to independent third parties for comparable services.
For 2000 and 2001 to date, Prometheus Development Co. or its affiliates,
other than the management company (which was entitled to additional
reimbursements under the partnership's management agreement), did not receive
any reimbursement for direct or other administrative and out-of-pocket expenses.
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The partnership agreement exculpates the general partner, its officers,
directors and affiliates from liabilities to Prometheus Income Partners and
indemnifies the general partner, its officers, directors and affiliates against
liability to third parties resulting from its or their acts or omissions, so
long as the conduct was in the best interests of the partnership, except in the
event these liabilities or losses resulted from misconduct or negligence (gross
or ordinary). As a result of the exculpation and indemnification provisions, a
limited partner may be entitled to a more limited right of action than he or she
would otherwise have if these provisions were not included in the partnership
agreement.
For further information regarding the partnership agreement of
Prometheus Income Partners, review the partnership agreement of Prometheus
Income Partners, filed as Appendix B hereto.
Repurchase Rights
Pursuant to the partnership agreement the general partner may allocate
up to 10% of distributable cash from operations on an annual basis for the
repurchase of units from limited partners. During its existence, the partnership
may repurchase only up to 5% of the outstanding units, although the general
partner may increase the percentage of units eligible for repurchase. The
repurchase price is equal to 80% of the value of the units repurchased, as
determined by the general partner, utilizing a sales/liquidation analysis that
is based on independent appraisals. As noted elsewhere in this document, the
general partner believes the current repurchase price as so calculated would be
substantially below the merger consideration. Repurchases are required to be
made on a first come, first served basis. On January 1, 1994, the partnership
acquired five units from a limited partner pursuant to these repurchase rights
at a price of $309 per unit. The valuation method used for this repurchase did
not follow the provisions set forth in the partnership agreement. Instead, the
partnership and the limited partner agreed to a valuation method which is used
by real estate brokers in the area the properties were located, based upon an
estimated market value of the properties, less debt prepayment penalties and a
discount as provided in the partnership agreement
Prometheus Income Partners made no repurchases under this Limited
Liquidity Plan during the years ended December 31, 2000, 1999, 1998 and 1997 and
has made no repurchases thereunder to date in 2001. Prometheus Income Partners
has not repurchased units because of the lack of availability of cash for such
purpose after the establishment of the reserves described above.
Financing
Each of the properties is subject to a Loan Agreement and a Deed of
Trust, Security Agreement and Fixture Filing with Assignment of Rents in
connection with certain debt incurred by the partnership as part of the
refinancing of the properties in 1997. Under these documents, the partnership
has issued a non-recourse Note with respect to each property, secured by a first
deed of trust. These Notes bear fixed interest of 6.99% for Alderwood, and 7.09%
for Timberleaf. No immediate plans have been made to repay these Notes.
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The terms of the Notes require, among other things, that the partnership
maintain a security account with respect to each property. These security
accounts are additional collateral for the lender. Cash held in these security
accounts was $3,304,000 and $2,409,000 for Alderwood and Timberleaf,
respectively, as of March 31, 2001. On an annual basis, for each property, the
partnership is obligated to contribute an amount 10% of the current value of the
security account to the security account . If the total cash flow for a property
is less than the required contribution, Prometheus Income Partners may
contribute an amount equal to the total cash flow, but will be obligated to
continue to deposit all cash flow into the security accounts until the total
deposits equals the required contribution.
If the construction defects repairs are not completed by December 2002,
or every two years thereafter, and insufficient cash has been accumulated to
cure the defects based upon the lender's determination of the cost, then all
cash flow shall be deposited into each applicable security account, as
necessary, to fully fund the cost of construction. If the projected cash flow is
insufficient to satisfy this deficiency contribution, then Prometheus Income
Partners has 60 days to fund the shortage over the projected cash flow. No
withdrawals are permitted from the security accounts except to cure the siding
defects. The lender shall have the right to hire its own consultants to review,
approve and inspect the construction. All reasonable fees and expenses incurred
by the lender shall be paid by the partnership.
If the litigation is not settled by December 2002, and the partnership
has then met all its obligations under the Notes, then the date for completion
of required repairs shall be extended 18 months from the earlier of the pending
settlement date or the last day for filing an appeal. Should construction not be
completed by the completion date due to an act of force majeure, the completion
date can be further extended to complete the construction work.
Cash and cash equivalents not being held by the lender are comprised of
cash invested in market rate, checking and investment accounts. Cash balances
were approximately $3,568,000, $1,942,000 and $1,183,000 as of December 31,
2000, 1999 and 1998, respectively. As of March 31, 2001, the cash balance was
$3,932,000. The reinstatement and level of future distributions, if and when
reinstituted, will be dependent on several factors, including the degree of
damage caused by the construction defects, determination of liability for
potential costs and expenses of dealing with the construction defect problems,
and continued stabilized operations at the properties.
Restriction Under Loan Documents. Prometheus Income Partners agreed to
maintain insurance for the properties, maintain the properties in good order,
not to transfer the properties, not seek to change the zoning of the properties,
and not to operate the properties as condominiums or cooperatives.
With respect to transfers, the loan documents may limit mergers
involving the partnership, unless the consent of the lender is obtained. A
violation of these provisions may allow the lender thereunder to, among other
things, accelerate the payment of all principal and interest and charge
Prometheus Income Partners as a prepayment penalty. If the consummation of the
merger confers upon the lender the right to accelerate the loans, PIP Partners
will seek to obtain the consent of the lender. PIP Partners intends to enter
into discussions with the lender to determine if the lender will grant consent,
if required, and, if so, on what terms. If an acceptable
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agreement can be concluded, any fee incurred with respect to obtaining this
consent will be paid by PIP Partners. However, Prometheus Income Partners has
not entered into any discussions to date and does not intend to do so until it
distributes the proxy materials to the limited partners.
Distributions
Distributions to limited partners began with the quarter ending
September 29, 1987. The limited partners collectively received aggregate
distributions of distributable cash from Operations in 1995 of approximately
$1,550,000 (or $81.60 per unit) and approximately $375,000 in 1996 ($19.74 per
unit). Cash distributions were suspended in 1996. No distributions were made for
1996, 1997, 1998, 1999 or 2000 or to date in 2001.
Quarterly distributions have been suspended in order to continue
building reserves for the potential cost of dealing with the construction defect
problems. Had these reserves not been necessary, the general partner estimates
that the distributions from 1996 through March 31, 2001 would have approximated
an aggregate of $8,600,000, or $553 per limited partner unit. At this time, the
general partner cannot predict when distributions will resume; however, it is
Prometheus Development Co.'s current intention to resume distributions as soon
as reasonably possible and prudent. The reinstatement and level of future
distributions, if and when reinstituted, will be dependent on several factors,
including the degree of damage caused by construction defects, determination of
liability for potential costs and expenses of dealing with the construction
defects, and continued stabilized operations at the properties.
Executive Officers
Prometheus Income Partners has no directors or executive officers. For
informational purposes only, the following are the names and additional
information relating to controlling persons, directors, executives and senior
management of Prometheus Development Co. After the merger, all of the persons
who currently are officers and employees of Prometheus Development Co. will
continue to be officers and employees of Prometheus Development Co.
Sanford N. Diller. Age 73. President, Secretary and sole Director. Mr.
Diller supervises the acquisition, disposition and financial structuring of
properties. Mr. Diller founded Prometheus Development Co., and effectively
controls all of its outstanding stock. Mr. Diller received his undergraduate
education at the University of California at Berkeley and his Doctor of
Jurisprudence from the University of San Francisco. He has been an attorney
since 1953. Since the mid 1960's, he has been involved in the development and/or
acquisition of more than 70 properties, totaling more than 13,000 residential
units and over 2,000,000 square feet of office space.
Vicki R. Mullins. Age 41. Vice President. Ms. Mullins' responsibilities
include supervising all property operations, information systems and finance, as
well as managing the disposition and financial structuring of properties. Ms.
Mullins came to Prometheus Development Co. in March 1994 from The Irvine Company
where she spent seven years as Vice President of Finance and Accounting, and
Director of Internal Controls. Prior to the Irvine Company, she spent six years
with Ernst & Young as an audit manager. Ms. Mullins is a
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Certified Public Accountant and holds a B.S. degree in Accounting with honors
from the University of Illinois.
John J. Murphy. Age 39. Vice President. Mr. Murphy's responsibilities
include managing all financial, accounting and reporting activities, and
insurance. Mr. Murphy came to Prometheus Development Co. in January 1995 from
KPMG Peat Marwick where he spent seven years and was a Senior Manager. He is a
Certified Public Accountant and holds a B.S. degree in Accounting with honors
from the University of San Francisco.
Helen Diller. Age 71. Trustee of The DNS Trust. Ms. Diller has not been
employed for the past five years. She is not involved in the management of The
DNS Trust or any of the other entities described in this document.
Prometheus Income Partners does not pay or employ directly any officers
or directors. Compensation to executives and employees of Prometheus Development
Co. is not based on the operations of Prometheus Income Partners. Prometheus
Real Estate Group, the property manager of the partnership's properties, and its
affiliates receive a management fee as compensation for services rendered and
reimbursement of certain partnership expenses.
During the last five years, none of the above has been convicted in a
criminal proceeding excluding traffic violations or similar misdemeanors, nor
have any of the above been a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of this proceeding
was or is subject to a judgment, decree or final order enjoining future
violations of, or prohibiting or mandating activities subject to, federal or
state securities laws or finding any violation with respect to these laws. All
of the above are U.S. citizens.
Principal Unitholders
Other than PIP Partners, which as of May 31, 2001 owns 18.2% of the
outstanding units, no person of record owns or is known by the Registrant to
directly own beneficially more than 5% of the outstanding units. 99% of the
membership interests of PIP Partners are held by Sanford N. Diller and Helen P.
Diller as Trustees of The DNS Trust, and 1% of these interests are held by
Jaclyn B. Safier. Thus, through PIP Partners, Mr. Diller, Mrs. Diller and The
DNS Trust indirectly beneficially own these units.
Prometheus Development Co. owns no units. However, Prometheus
Development Co., pursuant to the partnership agreement of Prometheus Income
Partners, has discretionary control over most of the decisions made for
Prometheus Income Partners. In addition, Mr. Diller, the holder of 99% of the
outstanding equity of Prometheus Development Co., beneficially holds 18.2% of
the units through PIP Partners, as described above, and is the sole executive
officer of Prometheus Development Co. who beneficially owns units.
Following the merger, PIP Partners will own all of the units.
Recent Transactions
In 1994, a total of five units were repurchased by Prometheus Income
Partners from a limited partner unaffiliated with Prometheus Development Co.
pursuant to the repurchase
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program established under the partnership agreement and described above under
the caption "Repurchase Rights" beginning on page 55. Since 1994, Prometheus
Income Partners has made no repurchases under this Limited Liquidity Plan,
principally due to the lack of availability of cash for such purpose after the
establishment of the reserves described above.
The current market for units is thin and illiquid. Prometheus
Development Co. is aware of three companies who quote prices for units, and
through which a small number of units, usually less than 1% of issued and
outstanding units, are traded each year. When the partnership is contacted by a
limited partner regarding the possible sale of units, the partnership identifies
these three companies, whom the partnership believes are brokers, to the limited
partner and provides contact information. The partnership also indicates the
interest of PIP Partners in acquiring units.
PIP Partners acquired 7.5283% of the outstanding units in 1997. During
1998, 1999 and 2000, PIP Partners acquired 0.716%, 1.2371%, and 0.855% of
outstanding units, respectively at prices ranging from $495 to $550 per unit. In
June 2000, PIP Partners purchased 1,487.5 units from Prom Investment Partners
and two of its affiliates (Liquidity Fund Growth--Plus Partners, a California
limited partnership and Liquidity Fund Appreciation and Income Partners, a
California limited partnership), for $1,200 per unit. This purchase price was
arrived at pursuant to arm's-length negotiations between PIP Partners and Prom
Investment Partners. PIP Partners is controlled by The DNS Trust, and Sanford
and Helen Diller.
On February 17, 2000, a limited partner unaffiliated with Prometheus
Development Co. contacted Prometheus Income Partners requesting information on
how to dispose of its units. Prometheus Income Partners responded with an
information letter describing the secondary market for units. On April 11, 2000,
the limited partner initiated a transaction whereby it would sell 2.5 units to
PIP Partners at a price of $525 per unit. The transaction was confirmed and the
funds were disbursed to the limited partner on May 1, 2000, and these units were
transferred on July 1, 2000.
Other than as described above and under the caption "Background -
Reasons for the Merger" beginning on page 26, neither PIP Partners, Prometheus
Development Co. nor any party affiliated with either of them has made any effort
to purchase or sell units or been willing to buy or sell units. However, PIP
Partners has contacted the three companies mentioned above and asked these
companies to contact it when units become available for purchase.
PIP Partners - General, LLC
PIP Partners - General, LLC was formed in 1996 to make a tender offer
for units as described above under the caption "Recent Tender Offers" on page
51. The DNS Trust is also the sole shareholder of Prometheus Development Co.
Since that time, PIP Partners has acquired additional units. PIP Partners
conducts no other business. It is controlled by The DNS Trust and Sanford
Diller, who also control Prometheus Development Co. The Manager of PIP Partners
is PromHill, Inc., a California corporation which is beneficially owned by The
DNS Trust. PromHill is solely in the business of acting as a manager of limited
liability companies and a general partner of partnerships affiliated with the
general partner. The DNS Trust beneficially owns 99% of the interests in PIP
Partners. The sole director of the Manager is Sanford N. Diller,
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who is also the President, Secretary and the sole director of Prometheus
Development Co. Vicki R. Mullins and John J. Murphy are also executive officers
of the Manager. The principal executive offices of PIP Partners - General are
located at 350 Bridge Parkway, Redwood City, California 94065-1517, telephone
number 650-596-5393.
PIP Acquisition
PIP Acquisition, LLC is a newly formed California limited liability
company which was organized by PIP Partners in connection with the transactions
contemplated by the merger. PIP Acquisition is a nonsubstantive transitory
merger vehicle that will be merged out of existence at the effective time of the
merger. Accordingly, it is not expected to have significant assets or
liabilities other than those arising under the merger or to engage in any
activities other than those incident to its formation and the merger. PIP
Acquisition is a wholly owned subsidiary of PIP Partners. It is controlled by
The DNS Trust and Sanford Diller, the same entities who control Prometheus
Development Co. The principal executive offices of the PIP Acquisition are
located at 350 Bridge Parkway, Redwood City, California 94065-1517, telephone
number 650-596-5393.
THE MERGER
Effects of the Merger on Prometheus Income Partners
If the merger proposal is approved by the limited partners and
Prometheus Income Partners participates in the transaction, then the effects of
the transaction with respect to Prometheus Income Partners will be as follows:
o Limited partners other than PIP Partners - General will receive
the Liquidation Value in cash for each unit, $1,200 of which will be
paid promptly following the consummation of the merger and the
balance of which (if any) will be paid following repair of existing
construction defects and final resolution of the associated
litigation. The current limited partners of Prometheus Income
Partners other than PIP Partners will no longer have any interest in
and will not be limited partners and, therefore, will not participate
in Prometheus Income Partners' future earnings and potential growth.
o Prometheus Development Co. will own the general partner interest in
Prometheus Income Partners and PIP Partners will own all of the
outstanding units. Sanford Diller, Helen Diller and Jaclyn Safier
will thus hold all of the equity of Prometheus Income Partners.
o Prometheus Development Co. intends to seek deregistration of the
units under the Exchange Act, and, if deregistration is obtained, all
SEC reporting obligations of Prometheus Income Partners will cease
pursuant to Section 12(g)(4) and 15(d) of the Exchange Act, because
the units will be held by fewer than 300 persons. No future
transaction would be subject to Rule 13e-3 of the Exchange Act.
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o Limited partners will receive final Schedule K-1s from Prometheus
Income Partners after the closing of the transaction and thereafter
will no longer receive Schedule K-1s from Prometheus Income Partners.
o PIP Partners intends to continue to retain all senior management of
Prometheus Development Co. to continue to manage Prometheus Income
Partners.
No Dissenters' Rights
If limited partners owning more than 50% of the units vote for the
merger proposal, this approval will bind all limited partners. Limited partners
do not have any dissenters' rights or other rights of appraisal, under the Act
which governs Prometheus Income Partners, the partnership agreement of
Prometheus Income Partners or otherwise, in connection with the merger.
Therefore, dissenting limited partners do not have the right to have an
appraisal of Prometheus Income Partners to confirm the fair market value of
their units if they disapprove of the action of the limited partners that voted
for the merger proposal.
Federal Income Tax Consequences
The following summary is a general discussion of some of the federal
income tax consequences that are relevant to limited partners. This summary is
based on the Internal Revenue Code of 1986, as amended, applicable Treasury
regulations under the Internal Revenue Code, administrative rulings, practice
and procedures and judicial authority, all as effective as of the date of the
transaction. All of the foregoing are subject to change or alternative
construction with possible retroactive effect, and any change or alternative
construction could affect the continuing accuracy of this summary. This summary
does not discuss all aspects of federal income taxation that may be relevant to
a particular limited partner in light of that limited partner's specific
circumstances or to limited partners subject to special treatment under federal
income tax laws, including except where otherwise noted, foreign persons,
dealers in securities, banks, insurance companies and tax-exempt organizations.
In addition, except as otherwise expressly indicated, this summary does not
describe any aspect of state, local, foreign or other tax laws.
Each limited partner should consult its tax advisor as to the particular
tax consequences to that limited partner of the transaction.
Taxable Gain or Loss
In general, a limited partner will recognize gain or loss on the
conversion of units into cash as a result of the merger. This gain or loss will
be equal to the difference between the limited partner's "amount realized" from
the merger and the limited partner's adjusted tax basis in the units converted.
The "amount realized" will be a sum equal to the amount of the initial advance
payment ($1,200 per unit) on the merger consideration, the amount of the
deferred payment of the merger consideration (if any) ultimately paid with
respect to the litigation and construction defect repairs ultimately received by
the limited partner for the units in the merger, plus the amount of Prometheus
Income Partners' liabilities allocable to the units as determined
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under Section 752 of the Internal Revenue Code. In general, a limited partner's
initial tax basis in its units equals its cash investment in Prometheus Income
Partners, increased by that limited partner's share of Prometheus Income
Partner's non-recourse liabilities at the time the units were acquired.
Prometheus Development Co. is not in a position to determine the tax basis for
each of the limited partners.
A limited partner's initial basis is generally increased by:
o that limited partner's share of Partnership taxable income
including its allocable share of taxable income for the year in which
the merger occurs, and
o any increases in that limited partner's share of non-recourse
liabilities of Prometheus Income Partners.
A limited partner's initial basis is generally decreased (but not below
zero) by:
o that limited partner's share of Partnership cash distributions,
o any decreases in that limited partner's share of non-recourse
liabilities of Prometheus Income Partners,
o that limited partner's share of losses of Prometheus Income Partners
including an allocable share of tax loss for the year in which the
merger occurs, and
o that limited partner's share of nondeductible expenditures of
Prometheus Income Partners that are not chargeable to capital.
If a limited partner's adjusted tax basis is less than its share of
Prometheus Income Partners' non-recourse liabilities, including the effect of
net loss allocations and/or distributions exceeding the cost of its units, that
limited partner's gain will exceed the cash proceeds it receives pursuant to the
merger.
Timing of Gain or Loss
Because the merger consideration includes a deferred payment, which is
uncertain as to amount, the tax treatment of the advance payment and the
deferred payment is uncertain.
Under the so-called "open transaction" doctrine, no current tax
consequence attaches to the receipt of an item of property whose fair market
value cannot be reasonably determined. Limited partners may wish to consult
their tax advisors concerning the possible applicability of the open transaction
doctrine to the receipt of the deferred payment. If the open transaction
doctrine were applicable to the deferred payment, (i) the payment would not be
taken into account in determining a limited partner's gain upon receipt of the
merger consideration and any gain would be limited to the extent the amount
realized with respect to the Advance Payment exceeds the limited partner's tax
basis; (ii) the limited partner would take no tax basis in the deferred payment;
and (iii) amounts thereafter received by virtue of the deferred payment will be
treated partially as interest and the balance as capital gain or loss to the
extent it differs from any remaining basis in the limited partner's units.
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It is the position of the Internal Revenue Service, reflected by
Treasury Regulations, that only in "rare and extraordinary cases" is the value
of the property so uncertain that open transaction treatment is available.
Accordingly, the Internal Revenue Service may require a limited partner to
allocate his tax basis in the Partnership units, in general, over a 15 year
period (or a shorter period if it is certain that no further payments will be
received). Under this scenario, it would be possible for a limited partner to
recognize significant capital gain upon the receipt of the advance payment and
potentially recognize a significant capital loss (subject to significant
limitations as to usage) in the year the deferred payment is actually received.
Due to the lack of available precedent and the inherently factual nature
of the question, tax counsel are not able to express any view as to the
availability of open transaction reporting in respect of the deferred payment.
Accordingly, holders are urged to consult their tax advisors regarding the
issue.
Character of Gain or Loss
Except as described below, the gain or loss recognized by a limited
partner upon receipt of cash in the merger will generally be treated as a
capital gain or loss if the units were held by the limited partner as a capital
asset. This capital gain or loss will be treated as long-term capital gain or
loss if the limited partner's holding period for the units exceeds one year.
If any portion of the amount realized by a limited partner is
attributable to "unrealized receivables," which includes recapture of certain
depreciation deductions previously taken, or "inventory items," as defined in
Section 751 of the Internal Revenue Code, then a portion of the limited
partner's gain or loss may be ordinary rather than capital. In addition, a
limited partner will be allocated its pro rata share of Prometheus Income
Partners' taxable income or loss for the year in which the merger occurs, and
therefore, will recognize ordinary income or loss in an amount equal to its
allocable share of Prometheus Income Partners' ordinary income or loss. As
described above, this allocation by Prometheus Income Partners to the limited
partner for the year in which the merger occurs will affect the limited
partner's tax basis in its units and, therefore, the taxation of the amount of
that limited partner's taxable gain or loss upon the conversion of its units
into cash in the merger.
Passive Activity Losses
Under Section 469 of the Internal Revenue Code, a non-corporate taxpayer
or personal service corporation generally can deduct "passive activity losses"
in any year only to the extent of the person's passive activity income for that
year. Closely-held corporations may not offset these losses against so-called
"portfolio" income. Substantially all post-1986 losses of limited partners from
Prometheus Income Partners should be considered passive activity losses. limited
partners may have "suspended" passive losses from Prometheus Income Partners
(i.e., post-1986 net taxable losses in excess of statutorily permitted
"phase-in" amounts which have not been used to offset income from other passive
activities) which may be available to shelter gain from the receipt of cash in
the merger in the manner described below.
Limited partners that recognize a gain on the conversion of their units
into cash in the merger will be entitled to use their current and "suspended"
passive activity losses (if any) from
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Prometheus Income Partners and other passive sources to offset that gain.
limited partners that recognize a loss on the conversion of their units into
cash in the merger will be entitled to deduct that loss currently (subject to
other applicable limitations) against the sum of their passive activity income
from Prometheus Income Partners for that year (if any) plus any passive activity
income from other sources for that year. The balance of any "suspended" losses
from Prometheus Income Partners that were not otherwise utilized against passive
activity income as described in the two preceding sentences will no longer be
suspended and will therefore be deductible (subject to any other applicable
limitations) by that limited partner against any other income of that limited
partner for that year, regardless of the character of that income. Accordingly,
limited partners should consult their tax advisors concerning whether, and the
extent to which, they have available suspended passive activity losses from
Prometheus Income Partners or other investments that may be used to offset gain
from the conversion of their units into cash in the merger.
Information Reporting, Backup Withholding and FIRPTA
A limited partner whose units are converted into cash in the merger must
file an information statement with its federal income tax return for the year in
which the merger occurs which provides the information specified in Treasury
Regulation Section 1.751-1(a)(3).
Limited partners (other than tax-exempt persons, corporations and some
foreign persons) may be subject to 31% backup withholding unless they provide a
taxpayer identification number and certify that the taxpayer identification
number is correct or properly certify that they are awaiting a taxpayer
identification number. See the instructions to the letter of transmittal which
will be sent to you after the merger is completed.
Gain realized by a foreign limited partner on the conversion of units
into cash in the merger will be subject to federal income tax under the Foreign
Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under the FIRPTA
provisions of the Internal Revenue Code, the transferee of an interest held by a
foreign person in a partnership which owns United States real property generally
is required to deduct and withhold 10% of the amount realized on the
disposition. Amounts withheld would be creditable against a foreign limited
partner's federal income tax liability and, if in excess thereof, a refund could
be obtained from the Internal Revenue Service by filing a United States income
tax return. See the instructions to the letter of transmittal which will be sent
to you after the merger is completed.
Consequences to a Tax-Exempt Limited Partner
Although certain entities are generally exempt from federal income
taxation, these tax-exempt entities (including individual retirement accounts
(an "IRA")) are subject to federal income tax on any "unrelated business taxable
income" ("UBTI"). UBTI generally includes, among other things, income (other
than, in the case of property which is not "debt-financed property," interest,
dividends, real property rents not dependent upon income or profits, and gain
from disposition of non-inventory property) derived by certain trusts (including
IRAs) from a trade or business or by certain other tax-exempt organizations from
a trade or business, the conduct of which is not substantially related to the
exercise of the organization's charitable, educational or other exempt purpose
and income to the extent derived from debt-financed
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property. Subject to certain exceptions, "debt-financed property" is generally
any property which is held to produce income and with respect to which there is
an "acquisition indebtedness" at any time during the taxable year. Acquisition
indebtedness is generally indebtedness incurred by a tax-exempt entity directly
or through a partnership:
(a) on acquiring or improving a property;
(b) before acquiring or improving a property if the
indebtedness would not have been incurred but for this
acquisition or improvement; or
(c) after acquiring or improving a property if the
indebtedness would not have been incurred but for this PIP
Partners - General or improvement and the incurrence of
this indebtedness was reasonably foreseeable at the time
of the PIP Partners - General or improvement.
To the extent Prometheus Income Partners holds debt-financed property or
inventory or other assets as a dealer, a tax-exempt limited partner (including
an IRA) could realize UBTI on the conversion of a unit to cash. In addition, a
tax-exempt limited partner will realize UBTI upon the conversion of a unit to
cash, if the limited partner held its units as inventory or otherwise as dealer
property, or acquired its units with acquisition indebtedness. However, any UBTI
recognized by a tax-exempt limited partner as a result of a conversion of a unit
to cash, in general, may be offset by the limited partner's net operating loss
carryover (determined without taking into account any amount of income or
deduction which is excluded in computing UBTI), subject to applicable
limitations.
Anticipated Accounting Treatment
Prometheus Income Partners will account for the transaction under the
"purchase" method of accounting in accordance with generally accepted accounting
principles.
Regulatory Requirements
Except for the filing of the certificate of merger with the Secretary of
State of the State of California pursuant to the Act, after the approval of the
merger proposal and compliance with federal and state securities laws, neither
PIP Partners nor Prometheus Development Co. is aware of any material United
States federal or state or foreign governmental regulatory requirement necessary
to be complied with or approval that must be obtained in connection with the
transaction.
THE MERGER AGREEMENT
This section of the Proxy Statement describes various aspects of the
proposed transaction, including material provisions of the merger agreement. The
merger agreement was amended and restated as of September 29, 2000 and again as
of January 31, 2001 to restructure the transaction and to extend the deadline
for consummating the merger to April 30, 2001. The Merger Agreement was further
amended and restated as of May 31, 2001 to extend such deadline to August 31,
2001. A copy of the Third Amended and Restated Merger Agreement is attached to
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this Proxy Statement as Appendix A, and is incorporated in this Proxy Statement
by reference. Limited partners are urged to read carefully the merger agreement
in its entirety.
Parties to the Merger
For a description of the parties to the transaction, the disclosure
under the caption "Summary - Parties to the Transaction" beginning on page 11
hereto.
Structure; Consideration
The transaction is a statutory merger whereby PIP Acquisition, an
affiliate of Prometheus Development Co. and wholly owned subsidiary of PIP
Partners, will merge into Prometheus Income Partners.
If the partnership participates in the transaction, you will become
entitled to receive the Liquidation Value for each of your units, and you will
no longer be a limited partner of Prometheus Income Partners. The current holder
of the equity of PIP Acquisition, PIP Partners, who is an affiliate of
Prometheus Development Co., will hold all of the units. Member interests in PIP
Acquisition will be converted on a one-for-one basis into units.
Calculation of Liquidation Value
The Liquidation Value with respect to each unit will be equal to the
cash sum that would be distributed to the holder of such unit in accordance with
the partnership agreement had the partnership been liquidated on the effective
date of the merger, after giving effect to (1) the purchase of the Alderwood
Apartments and the Timberleaf Apartments for $68,900,000 less 2% representing
estimated costs of sale, minus (2) the principal balance due (including the
prepayment penalty in the amount of $2,800,000 that may be due on sale) and any
accrued but unpaid interest on the mortgages secured by deeds of trust on the
partnership's properties on the effective date of the merger, plus (3) the net
recovery in the construction defect litigation (as described below including any
net recoveries pursuant to the existing conditional settlements), less (4) the
payment by the partnership of the actual cost of repairs to the properties for
the construction defects (as described below).
The net litigation recovery will be equal to the proceeds of the
partnership's litigation of the construction defect matters (including any net
recoveries pursuant to the existing conditional settlements or any other
settlements in this litigation) actually received by the partnership or its
successors in interest, after (a) deducting (1) all costs and expenses of
attorneys and other experts, other than such costs or expenses, if any, paid
before the effective date of the merger, (2) all other out-of-pocket costs and
expenses of this litigation paid by the partnership after the effective date of
the merger, (3) a litigation management fee payable to Prometheus Development
Co. (the general partner) or an affiliate thereof (in lieu of any other
revenue-based fee on the gross proceeds of the Litigation) equal to 3% of such
gross proceeds, (4) any obligations paid or incurred as a result of any cross
complaint, counter suit or other lawsuit relating to or arising out of this
litigation and (5) federal, state or local tax liabilities, if any, due and
payable by the partnership and/or its then existing partners with respect to
such proceeds and (b) adding interest actually earned, if any, on such proceeds
following receipt by the partnership.
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The relevant construction defects are those construction defects
relating to hardboard siding, roofing systems or otherwise existing on the
effective date of the merger, or caused by or arising out of such defects,
including, but not limited to, lost rents caused by or arising out of the repair
of any such defects and are further described by way of illustration, but not by
way of limitation, to include removal and replacement of hardboard siding,
removal and replacement of building paper, removal and replacement of sheer ply,
removal and replacement of damaged structural framing, removal and replacement
of deck flashing and waterproof membranes, removal and replacement of damaged
roofing and underlayment substrate and framing members, removal and replacement
of flashing and sealants related to waterproofing, removal and replacement of
decorative trim, removal and replacement of window flashing, removal and
re-setting or replacement of windows, sliding glass doors, construction design
and engineering as required for the above-referenced items, construction
management, paint and paint preparation.
The following table sets forth as of December 31, 2000 the acquiring
parties' calculation of the estimated liquidation value of the partnership,
assuming no recovery in the litigation and that the costs to repair existing
defects were the $19.6 million currently estimated:
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Appraised Value $ 68,900,000
Less 2% selling cost (1,378,000)
-----------
Net sales price 67,522,000
Outstanding Mortgage (25,879,000)
Estimated costs to repair (19,600,000)
Less prepayment penalty (2,800,000)
-----------
Available proceeds 19,243,000
Unrestricted cash 3,568,000
---------
Amount available
for distribution $22,811,000*
==========
Number of units outstanding: 18,995
======
Amount available for
distribution per unit: $1,201*
======
*Does not include (1) approximately $5,713,000 in restricted cash (or
$298 per unit) held as of March 31, 2001 pending repair of the partnership's
properties or (2) approximately $5,600,000 (or $296 per unit) that would be
received by the partnership upon and subject to court approval of existing
partial settlements in the construction defect litigation.
There is no assurance there will be any recovery in pending litigation.
The cost to repair existing defects could be greater or less than the estimated
amount.
By way of example then, if there were no net recovery in the litigation
and the cost of repair of the existing construction defects equaled the estimate
of $19.6 million, the total deferred cash consideration to be paid would be
equal to the liquidating share of the limited partners in restricted cash
reserved for the making of repairs as of the closing date. Based on restricted
cash of $5,713,000 as of March 31, 2001, an additional $298 would be paid with
respect to each limited partnership unit in such circumstances if the actual
cost of repairs equaled the current estimate and the net litigation recovery
equaled those costs of repair. The actual net litigation recovery may be equal
to, greater than or less than the cost to repair the existing construction
defects. The deferred cash component of the merger consideration, if any, will
depend on the relative amounts of such recovery and such costs. Even if the net
litigation recovery plus the amount of restricted cash held by the partnership
at the effective date of the merger are insufficient to cover the costs of
repair of the existing defects, which would have the effect of reducing the
Liquidation Value below the amount of the advance to be paid on the merger
consideration ($1,200 per unit), the limited partners will not be required to
return any part of such advance.
Closing of the Transaction
The closing of the transaction will take place at a time and on a date
which will be no later than twenty business days after the later of satisfaction
or waiver of all conditions precedent
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to the closing of the transaction set forth in the merger, including the
approval of the merger proposal. PIP Acquisition shall be merged with and into
Prometheus Income Partners. Prometheus Income Partners shall succeed to all of
the assets and liabilities of PIP Acquisition.
Consent of Lender
PIP Partners - General will pay any and all fees with respect to
obtaining consent to the transaction by Prometheus Income Partners' lender, if
necessary, but does not anticipate any fees will be required.
Payment of Merger Consideration
Following the effective time of the merger, upon receipt by Prometheus
Development Co. of a letter of transmittal from a limited partner, the limited
partner will be entitled to receive a check in an amount equal to the product
obtained by multiplying the number of units held by that limited partner by
Liquidation Value. Each holder of a unit shall cease to have any rights with
respect thereto, except the right to receive the merger consideration.
Expenses
PIP Partners - General will pay all charges and expenses relating to the
merger. These include an estimated $4,000 in SEC filing fees, $250,000 in legal
fees, $15,000 in accounting fees, $20,000 in solicitation costs and fees, and
$15,000 of printing costs. None of the payment agent, Prometheus Development
Co., nor any of their respective affiliates will be liable to any limited
partner for any merger consideration delivered to a public official pursuant to
any applicable abandoned property, escheat or similar law.
Representations and Warranties
Prometheus Income Partners represented and warranted that:
o Prometheus Income Partners is duly organized and existing as a
limited partnership in good standing with full power and authority to
conduct its business, and has the power and authority to execute and
deliver this merger and consummate the transactions contemplated by
that document, subject to the approval of the limited partners.
o Other than potentially with respect to the partnership's financing
arrangements, the execution, delivery and performance of the merger
does not conflict with any mortgage, result in the creation of any
lien, or otherwise adversely affect the rights or privileges of
Prometheus Income Partners.
o Other than certain mortgages, taxes and liens not yet due and
payable, covenants, conditions and restrictions of record, Prometheus
Income Partners has good and marketable title to all of Prometheus
Income Partners' assets free and clear of all liens.
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o Other than the construction defects litigation discussed in this
document, Prometheus Income Partners is involved in no material
litigation.
PIP Acquisition and PIP Partners - General represented and warranted
that:
o Each of them is duly organized and existing as a limited liability
company in good standing with full power and authority to conduct its
business, and has the power and authority to execute and deliver the
merger and consummate the transactions contemplated by that document.
o PIP Partners has adequate funds available out of current resources to
pay the $1,200 in cash for each unit to all holders of units (other
than PIP Partners - General). While as of the date of the merger
agreement PIP Partners had such funds, at the time the merger is
consummated, PIP Partners may need to have acquired additional
financing to complete the merger. Please see the disclosure under the
caption "Consideration and Financing" beginning on page 21.
Certain Covenants
Prometheus Income Partners agreed to hold a meeting of the limited
partners at which the limited partners will have the opportunity to vote their
units for or against the transactions contemplated by this Agreement. PIP
Partners agreed to vote its units for or against the transactions contemplated
by this Agreement in the same proportion as the total number of units voted by
limited partners unaffiliated with PIP Partners.
Conditions
The obligations of PIP Acquisition, PIP Partners and Prometheus Income
Partners to effect the merger are subject to the fulfillment or waiver of the
following conditions:
o No court or other governmental entity shall have issued an order that
prohibits consummation of the merger, restricts the operations of
Prometheus Income Partners or PIP Partners which would result in a
material adverse effect, or instituted any proceeding seeking any
similar order.
o All material approvals (if any) from governmental entities necessary
for the consummation of the merger shall have been obtained.
o PIP Partners having obtained the financing necessary to pay the
merger consideration.
The obligations of Prometheus Income Partners are further subject to the
condition (or waiver by Prometheus Income Partners) at or prior to the effective
date of the merger that the representations and warranties of PIP Acquisition
and PIP Partners shall be true and correct, and the merger shall have been
approved by the limited partners. If a material condition to the merger is
waived by the partnership, the general partner and the acquiring parties intend
to resolicit the approval of the transaction by the limited partners. If a
material condition to the merger is waived by the acquiring parties, the general
partner and the acquiring parties do not intend to resolicit the approval of the
transaction by the limited partners.
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The obligations of PIP Acquisition and PIP Partners are further subject
to the conditions (or waiver by PIP Acquisition) at or prior to the effective
date of the merger that the representations and warranties of Prometheus Income
Partners set forth in this document shall be true and correct at and as of the
closing date, and the holders of the deeds of trust referred to in the merger
consent to the merger on terms acceptable to PIP Partners, and there is no
material adverse change in the assets, business, financial condition or
prospects of Prometheus Income Partners.
Termination
The Merger Agreement may be terminated at any time prior to the
effective date of the merger by the mutual written consent of Prometheus Income
Partners and PIP Partners - General upon written notice given to the other party
of a material breach of the Agreement if not cured within thirty (30) days, or
by PIP Partners or Prometheus Income Partners if the merger has not yet been
consummated on or before August 31, 2001.
APPRAISAL
The general partner engaged CB Richard Ellis, an independent
appraiser ("Appraiser"), to appraise the real properties owned by the
Partnership as of December 5, 2000.
Experience of Appraiser. Since its founding, Appraiser has provided
information, research, appraisal, and consulting services to clients throughout
the United States, including major New York Stock Exchange firms and insurance
companies and over seventy companies engaged in the management and operation of
partnerships and real estate investment trusts. The activities of Appraiser
include financial advisory services, asset and securities valuations, industry
and company research and analysis, litigation support and expert witness
services, and due diligence investigations in connection with both publicly
registered and privately placed securities transactions.
2000 Portfolio Appraisal
Summary of Methodology. At the request of the general partner, Appraiser
evaluated the real estate on a summary basis utilizing the sales comparison and
income approach to valuation. Appraisers typically use up to three approaches in
valuing real property:
o the cost approach;
o the income approach; and
o the sales comparison approach.
The type and age of a property, lease terms, market conditions and the quantity
and quality of data affect the applicability of each approach in a specific
appraisal situation.
The value estimated by the cost approach incorporates separate estimates
of the value of the unimproved site and the value of improvements, less observed
physical wear and tear and functional or economic obsolescence. The income
approach estimates a property's capacity to
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produce income through an analysis of the rental stream, operating expenses, net
income and estimated residual value. Net income may then be processed into a
value through either direct capitalization or discounted cash flow analysis, or
a combination of these two methods. The sales comparison approach involves a
comparative analysis of the subject property with other similar properties that
have sold recently or that are currently offered for sale in the market.
The cost approach was considered to be less reliable than the income
approach given the primary criteria used by buyers of the type of property
appraised in the Appraisal.
In conducting the Appraisal, representatives of Appraiser reviewed and
relied upon, without independent verification, certain information supplied by
the property managers, general partner and the partnership, including, but not
limited to: lease abstracts and information relating to the creditworthiness of
tenants; financial schedules of current lease rates, income, expenses, capital
expenditures, reserve requirements, cash flow and related financial information;
property descriptive information and rent able square footage, information
relating to the condition of each property, including any deferred maintenance,
capital budgets, status of ongoing or newly planned property additions,
reconfigurations, improvements and other factors affecting the physical
condition of the property improvements; and information relating to renewal and
purchase options.
Representatives of Appraiser also performed site inspections of all of
the properties. In the course of these site visits, the physical facilities of
the properties were inspected and information on the local market, the subject
property and the tenant was gathered. Where necessary, information gathered
during the site visits was supplemented by information provided by management,
telephonic surveys and reviews of published information.
In addition, Appraiser discussed with management of the properties, the
condition of each property (including any deferred maintenance, renovations,
reconfigurations and other factors affecting the physical condition of the
improvements), competitive conditions in net lease property markets, tenant
credit trends affecting the properties, certain lease and financing terms, and
historical and anticipated lease revenues and expenses. Appraiser also reviewed
historical operating statements, and 2001 operating budgets for the Partnership
and/or the properties.
Appraiser also reviewed the acquisition criteria and parameters used by
real estate investors utilizing published information and information derived
from interviews with buyers, owners and managers of similar leased properties.
Sales Approach. The Sales Comparison Approach is a method of comparing
the subject property to recent sales and/or listings of similar types of
properties located near the subject or in competing areas. Each of these sales
must be analyzed to establish the elements of similarity. The reliability of
this technique depends on (1) the degree of similarity between the subject and
the comparable properties; (2) the length of time since the comparable sales
were consummated; (3) the accuracy of the date of the comparable sales; and (4)
the absence of unusual conditions affecting the comparable sale or the subject
property.
Each comparable sale is adjusted and compared to the subject property
giving due consideration to the following potential adjustments, each in
accordance with valuation practices
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generally accepted in the real estate industry. These elements of adjustment
considered in this Appraisal consisted principally of:
o the nature of the real property rights conveyed;
o financing terms;
o conditions to the sale;
o prevailing market conditions;
o actual location; and
o physical characteristics.
Among these elements of comparison, conditions of sale reflect an adjustment if
the sale is not an arms-length transaction or to account for special credits,
concessions and similar distinguishing characteristics. Adjustments for
financing terms involve conversion of the transaction price of the comparable
sale into its cash equivalent or modification to reflect the financing of the
subject property. Market conditions reflect an adjustment in the change in the
prices paid for real property due to changes in the particular market over time.
Within the subject area there were three properties that were determined
to be appropriate comparable sales transactions. The following sets forth the
actual value per unit for each of these properties and the indicated value per
apartment unit in these properties as adjusted for the factors noted above:
Unadjusted Indicated Value
Value Per Unit Per Unit
---------------- -----------------
Arios-Apartments, Cupertino CA $230,846 $208,223
Villa De Anza, Cupertino CA $258,333 $214,416
Waterford Place Apartments, San Jose CA $210,084 $194,118
Based on the indicated value range, a price per unit near the middle of
the range, as adjusted based on the factors described above, was deemed by the
Appraiser to be the most appropriate for the subject properties. This price was
further adjusted to reflect deferred maintenance on Alderwood and Timberleaf in
the aggregate amounts of $2,242,000 and $1,250,000, respectively. The deferred
maintenance adjustment is an estimate of price reduction a buyer of a property
would request due to maintenance issues noted during the due diligence and
inspection period afforded buyers of real estate, but does not include any
adjustment with respect to the cost (estimated or otherwise) to repair existing
construction defects. Accordingly the following is a summary of the Sales
Comparison Approach:
Value per unit Total Value
-------------- -----------
Alderwood $191,282 $44,760,000
Timberleaf $191,532 $23,750,000
The sales used in this analysis were considered by the Appraiser to be
comparable to the subject, and the required adjustments for differences were
based on the application of the types of adjustments described above, which were
deemed by the Appraiser to be based upon reasonable and well-supported
rationale.
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Income Approach. The Income Approach reflects the subject's
income-producing capabilities. The Income Approach is based on the direct
capitalization method, which is applied to determine the value of the simple
interest in each property based upon the lease that encumbers the property. This
approach is based on the assumption that value is created by the expectation of
benefits to be derived in the future. The Income Approach is applicable to the
subject properties leased in the open market. Market participants are currently
analyzing properties based on their income generating capability. Therefore, the
Income Approach is considered to be a reasonable and substantiated value
indicator and has been heavily weighted in the final value indicator and has
been heavily weighted in the final value estimates by CB Richard Ellis, Inc. The
value indicated by the income approach represents the amount an investor would
probably pay for the expectation of receiving the net cash flow from the
property during the subject lease term and the proceeds from the ultimate sale
of the property.
Direct capitalization is a method used to convert a single year's
estimated stabilization net operating income into a value indicated utilizing an
overall capitalization rate. The capitalization rate was determined based on
three different techniques. The following table summarizes the results.
Overall Capitalization Conclusion
Source
- ------
Comparable Sales 8.50%
National Investor Survey 8.50%
Market Participants 8 to 9%
CB Richard Ellis, Inc. Estimate 8.5%
The Income Approach calculates an indicated stabilized value by dividing
the stabilized net operating income by the capitalization rate. The stabilized
net operating income "Going-In Operating Income" is determined by taking the
effective gross income less the estimated operating expenses and reserves for
replacement. Effective gross income is determined by estimating market rates for
the various apartment unit floor plans with similar units in comparable projects
to arrive at the potential rental income for the subject. The effective gross
income will also consider loss to lease, vacancy, collection loss, and rent
concession, if any. In estimating the operating expenses, the actual operating
history has been analyzed, along with expense data from industry publications
and comparable apartment properties. Reserves for replacement of physical assets
that wear out or need replacement over time have been estimated based on
discussion with knowledgeable market participants who indicate a range of $150
to $500 per unit for comparable properties. CB Richard Ellis estimated $400 for
the subject properties.
The final industry standard adjustment to calculate value is an
adjustment to the indicated stabilizing value for deferred maintenance. This
adjustment was $2,242,000 and $1,250,000 for Alderwood and Timberleaf,
respectively.
Summary Of Appraisal Valuation Parameters
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Alderwood Timberleaf
Going-In Net Operating Income $4,055,350 $2,095,868
Capitalization Rate 8.5% 8.5%
Estimated Value less Deferred Maintenance $45,500,000 $23,400,000
Conclusion as to Value. Based on the valuation methodology described
above, Appraiser estimated the value of each of the properties as follows:
Alderwood Timberleaf Total
Cost Approach N/A N/A N/A
Sales Comparison Approach $44,760,000 $23,750,000 $68,510,000
Income Capitalization Approach $45,500,000 $23,400,000 $68,900,000
Reconciled Value $45,500,000 $23,400,000 $68,900,000
The Cost Approach typically results in a reliable value
indication when there is evidence for an estimate of replacement cost and there
is minimal depreciation contributing to a loss in value of the subject property.
Because the partnership's properties have been materially depreciated, the
reliability of the Cost Approach with respect to these properties was considered
to be substantially diminished. Accordingly, Cost Approach analysis was not
performed by the Appraiser.
Ultimately, as between the Sales Comparison Approach and the
Income Capitalization Approach, the Appraiser determined that the Income
Capitalization Approach was the most reliable indicator of the value of the
Alderwood and Timberleaf properties. This conclusion was based principally on
the fact that the subject properties are income-producing properties leased on a
unit-by-unit basis in the open market. The Appraiser believed that the fact that
the values derived through application of the Sales Approach did not differ
materially from those derived by application of the Income Capitalization
Approach further substantiated the reliance on the Income Capitalization
Approach valuation method in determining the final appraised value of the
subject properties.
Based on the foregoing, the values of the subject properties were
appraised as follows:
Location Value Conclusion
-------- ----------------
Alderwood $45,500,000
Timberleaf $23,400,000
Assumptions, Limitations and Qualifications of the 2000 Portfolio
Appraisal.
Appraiser utilized certain assumptions to determine the appraised
value of the properties. Principally, in addition to the assumptions described
above, the Appraisal assumes that the owner of the property has good and
marketable title of the subject properties and that the subject properties are
free from material defects and in good condition appropriate to their
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intended use as residential rental properties. See the appraisal for a complete
description of the assumptions, limiting conditions and qualifications
applicable to the Appraisal.
The Appraisal represents Appraiser's opinion of the value of the
portfolios of properties as of December 5, 2000 in the context of the
information available on such date. Events occurring after the valuation date
could affect the properties or the assumptions used in preparing the Appraisal.
Appraiser has no obligation to update the Appraisal on the basis of subsequent
events. In connection with the preparation of the Appraisal, Appraiser was not
engaged to, and consequently did not, prepare a written report or compendium of
its analysis for internal or external use by the Partnerships beyond the
analysis set forth in Appendix C.
Compensation and Material Relationships. The Partnership paid
Appraiser an aggregate fee of $6,000 for preparing the Appraisal. In addition,
Appraiser is entitled to reimbursement for reasonable legal, travel and
out-of-pocket expenses incurred in preparing the Appraisal, and is entitled to
indemnification against certain liabilities, including certain liabilities under
federal securities laws. The fee was negotiated between the general partner and
Appraiser and payment thereof is not dependent upon completion of any
transaction.
PIP Partners selected CB Richard Ellis, Inc. to appraise the
partnership's properties because it is a nationally recognized real
estate firm engaged in the appraisal of residential income properties
and has substantial experience in transactions similar to the merger.
The fee paid to the Appraiser was fixed and not dependent in any respect
on the outcome of the Appraisal.
CB Richard Ellis has, in the past, provided appraisal services to PIP
Partners - General, the partnership, the general partner and certain of their
affiliates and may continue to do so, and has received, and may receive,
customary fees for the rendering of these services. During the last two years,
affiliates of PIP Partners paid to CB Richard Ellis approximately $166,000
consisting of approximately $38,000 in appraisal fees (for properties other than
those of the partnership) and approximately $128,000 in leasing commissions as
compensation for CB Richard Ellis obtaining tenants for various commercial
properties. Other than the payment of these fees and commissions from time to
time, CB Richard Ellis has no interest, as an equity holder or otherwise, in
Prometheus Income Partners, the acquiring parties or the merger
CB Richard Ellis has, in the past, provided appraisal services to PIP
Partners - General, the partnership, the general partner and certain of their
affiliates and may continue to do so, and has received, and may receive,
customary fees for the rendering of these services.
ADDITIONAL INFORMATION CONCERNING UNITS
As of July 16, 2001, there were 18,995 units outstanding and _____
holders of record of those units.
Except as described below, privately negotiated sales and sales through
intermediaries currently are the only means available to a limited partner to
liquidate an investment in units because the units are not listed or traded on
any exchange or quoted on any NASDAQ list or system. High and low sales prices
of units may be obtained through certain entities such as
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Partnership Profiles, Inc., an independent, third-party source which reports
this type of information; however, the gross sales prices reported by
Partnership Profiles, Inc. do not necessarily reflect the net sales proceeds
received by sellers of units, which typically are reduced by commissions and
other secondary market transaction costs to amounts less than the reported
prices. The most recent data reported by Partnership Profiles, Inc. (an
independent third party source which reports sale information) indicates that 80
units traded in the period from October 1999 through March 2000 at per unit
prices between $532 and $558 with a weighted average price of $538.50 per unit.
The table below sets forth the high and low sales prices from April 1998
through March 2001 for all sales of units as reported to Prometheus Development
Co. on a quarterly basis (other than pursuant to the tender offers described
above under the caption "Recent Tender Offers"):
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Trading Prices
Period Amount High Low
------ ------ ---- ---
1998 2nd Quarter 50 units $495 $495
3rd Quarter 116 units $505 $450
4th Quarter No Trades
1999 1st Quarter 85 units $601 $500
2nd Quarter 79 units $503 $500
3rd Quarter 20 units $530 $503
4th Quarter 131 units $530 $530
2000 1st Quarter 100 units $550 $550
2nd Quarter 60 units $525 $525
3rd Quarter No Trades
4th Quarter No Trades
2001 1st Quarter No Trades
The table below sets forth the number of units purchased and the prices
paid by PIP Partners - General from April 1998 through March 31, 2001 (other
than pursuant to the tender offers described above under the caption "Recent
Tender Offers"):
Period Amount Trading Price
------ ------ -------------
1998 2nd Quarter 50 units $495
3rd Quarter 96 units $495
4th Quarter No Trades
1999 1st Quarter 55 units $503
2nd Quarter 29 units $503
3rd Quarter 10 units $503
4th Quarter 131 units $530
2000 1st Quarter 100 units $550
2nd Quarter 60 units $525
3rd Quarter No Trades
4th Quarter No Trades
2001 1st Quarter No Trades
The units currently are registered under Section 12(g) of the
Exchange Act, which means, among other things, that Prometheus Income Partners
is required to file periodic reports with the Securities and Exchange Commission
and to comply with the Commission's proxy rules. The parties expect that the
consummation of the merger will cause the units to cease to be registered under
Section 12(g)(4) of the Exchange Act because the units will be held by fewer
than 300 persons.
Principal Holders of Units
As of July 16, 2001, PIP Partners - General held 18.2% of the
outstanding units, or 3,451 units. 99% of the member interests of PIP Partners
are held by Sanford N. Diller and Helen P. Diller as Trustees of The DNS Trust,
and 1% of these interests are held by Jaclyn P. Safier, the
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Diller's daughter. No other units were beneficially held by Prometheus
Development Co., Prometheus Income Partners, PIP Partners, PIP Acquisition, or
any officers, directors, employees and affiliates of Prometheus Development Co.,
Prometheus Income Partners, PIP Partners or PIP Acquisition. No other person was
known to Prometheus Development Co. to own beneficially 5% or more of the
outstanding units.
Other than the past contacts, transactions and negotiations described in
this Proxy Statement, no contacts, transactions or negotiations concerning a
merger, consolidation, acquisition, tender offer or other acquisition of units,
election of directors or sale or other transfer of a material amount of assets
of Prometheus Income Partners which are known by Prometheus Income Partners to
have been entered into or to have occurred in the past two years between any
affiliates of Prometheus Income Partners or between Prometheus Income Partners
or any of its affiliates and any person who is not affiliated with Prometheus
Income Partners and who would have a direct interest in those matters.
Contracts, Arrangements and Understandings
Except for the merger agreement and the partnership agreement, none of
Prometheus Income Partners, Prometheus Development Co., PIP Acquisition or PIP
Partners - General or any of the named persons, has any arrangement, contract,
relationship or understanding with any person with respect to any units,
including any arrangement, contract, relationship or understanding concerning
the transfer or the voting of any units, any joint venture, any loan or option
arrangement, any put or call, any guarantee of a loan, any guarantee against
loss, or any giving or withholding of any authorization, consent or proxy.
Plans or Proposals
Except as generally described in this Proxy Statement, none of
Prometheus Income Partners, Prometheus Development Co., PIP Partners - General,
PIP Acquisition, or any of the natural persons named in this document, has any
plan or proposal regarding any action or transaction which is to occur after the
transaction to which this Proxy Statement relates and which relates to or would
result in any extraordinary corporate transaction involving Prometheus Income
Partners, any sale or transfer of a material amount of Prometheus Income
Partners' assets, any change in Prometheus Income Partners' management, any
material change in Prometheus Income Partners' present distribution rate or
policy or indebtedness or capitalization, or any other material change in
Prometheus Income Partners' structure or business.
CERTAIN FINANCIAL PROJECTIONS AND VALUATIONS OF THE PARTNERSHIP
Prometheus Income Partners does not as a matter of course publicly
disclose internal budgets, valuations, plans, estimates, forecasts or
projections as to future revenues, earnings or other financial information. The
projected financial data set forth below reflect information which was contained
in projections prepared by Prometheus Development Co. These projections were
based upon a variety of estimates and assumptions; the material ones are set
forth below. The estimates and assumptions underlying the projections involved
judgments with respect to, among other things, future economic, competitive, and
financial market conditions and future business decisions which may not be
realized and are inherently subject to significant business,
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economic and competitive uncertainties, all of which are difficult to predict
and many of which are beyond the control of Prometheus Income Partners. While
Prometheus Development Co. believes these estimates and assumptions are
reasonable, there can be no assurance that the projections will be accurate, and
actual results may vary materially from those shown. In light of the
uncertainties inherent in forward-looking information of any kind, the inclusion
of these projections in this document should not be regarded as a representation
by Prometheus Income Partners, Prometheus Development Co. or any other person
that the anticipated results will be achieved and limited partners are cautioned
not to place undue reliance on this information.
Historical and projected financial performance of the partnership are
substantially dependent on occupancy rates and rental rates. In recent years
(including the most recently concluded fiscal year), the partnership's
properties have had occupancy rates of approximately 99%. Since December 31,
2000, the partnership has experienced decreases in occupancy and rental rates in
both of its properties. There can be no assurance that prior levels in these
rates will reoccur, that current occupancy rates will be maintained or that
growth rates will not decrease or increase in the future.
Except as required by law, Prometheus Income Partners does not intend to
update or otherwise revise any of the projections set forth below. The
information set forth below should be read together with the information
contained in Prometheus Income Partners' Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001 and its Annual Report on Form 10-K for the year
ended December 31, 2000, which are being mailed with this Proxy Statement to all
limited partners, and the other information included or incorporated by
reference in this Proxy Statement.
The financial information for 2000 and 1999 is provided for comparison
purposes only. All numbers are in thousands of dollars, and are unaudited.
2001 Estimate 2000 1999
------------- ----- ----
Total Revenues $ 7,891 $ 7,247 $ 6,106
Total Operating Expenses 6,958 4,838 4,675
----- ----- -----
Net Income $ 933 $ 2,409 $ 1,431
=== ===== =====
Net Cash Flow $ 2,751 $ 2,324 $ 1,327
Beginning Cash (Including 10,290 6,500 5,173
Restricted Cash) ------ ----- -----
Ending Cash (Including $ 13,041 $ 8,824 $ 6,500
Restricted Cash) ====== ======= =====
While the partnership is seeking full recovery for known defects, the
value of pending litigation is speculative. With respect to any litigation,
there ultimately are questions as to
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probability of success, issues regarding proof of damages, and, ultimately, the
cost of litigation, including attorneys' fees (including in this case contingent
attorneys' fees to be paid out of any recovery). In addition, due to the time
necessary for the process to run its course (including the possibility of
appeal), any potential recovery must be discounted to present value. While the
general partner and each of the acquiring parties believe the litigation to be
valuable, they believe it is impossible to reasonably quantify a value for the
litigation.
RELATED SECURITY HOLDER MATTERS
Because the merger may be considered a "going private" transaction,
Prometheus Income Partners, PIP Partners - General, PromHill, Inc., Prometheus
Development Co., Sanford N. Diller And Helen P. Diller as Trustees of The DNS
Trust, Helen P. Diller and Sanford N. Diller have filed a Schedule 13E-3 with
the SEC with respect to the transaction. Therefore, each of them has been
included as a filing person on this Schedule 13E-3. The Schedule 13E-3 requires
the persons filing the Schedule 13E-3 to furnish certain additional information
with respect to transactions of the filing persons involving Prometheus Income
Partners or the units.
FORWARD-LOOKING STATEMENTS
This Proxy Statement and the documents incorporated by reference contain
certain forward-looking statements regarding the operations and business of
Prometheus Income Partners. Statements in this document that are not historical
facts are "forward-looking statements." These forward-looking statements include
those relating to:
o Prometheus Income Partners' future business prospects;
o the outcome of current litigation;
o possible acquisitions; and
o projected revenues, working capital, liquidity, capital needs,
interest costs and income.
The words "estimate," "project," "intend," "expect" and similar
expressions are intended to identify forward-looking statements. These
forward-looking statements are found at various places throughout this Proxy
Statement. Wherever they occur in this Proxy Statement or in other statements
attributable to Prometheus Income Partners, Prometheus Development Co.,
forward-looking statements are necessarily estimates reflecting best judgments.
However, these statements still involve a number of risks and uncertainties that
could cause actual results to differ materially from those suggested by the
forward-looking statements. This forward-looking statements should, therefore,
be considered in light of various important factors, including those set forth
in this Proxy Statement and other factors set forth from time to time in
Prometheus Income Partners' reports and other information filed with the SEC.
You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. Prometheus Income Partners
disclaims any intent or obligation to update forward-looking statements, except
as required by law. Moreover, Prometheus Income Partners, through senior
management of Prometheus Development Co. may from time to time make
forward-
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looking statements about the matters described in this document or other matters
concerning Prometheus Income Partners.
Prometheus Income Partners does not as a matter of course make available
any projections, forecasts, internal budgets, plans or estimates as to future
performance, revenues, earnings or other financial information, and the
forecasts set forth above are included in this proxy statement only because the
forecasts contained in projections prepared by Prometheus Development Co. prior
to or in the course of the inception of or in the course of this transaction.
These forecasts were not prepared with a view to disclosure to any person or in
compliance with Generally Accepted Accounting Principles or standards regarding
projections and forecasts. These forecasts were prepared solely for internal use
and are subjective in many respects and thus susceptible to various
interpretations and periodic revision based on actual experience and business
developments. The estimates and assumptions underlying the projections involved
judgments with respect to, among other things, future economic, competitive, and
financial market conditions, contingencies and future business decisions which
may not be realized and are inherently subject to significant financial, market,
business, economic and competitive uncertainties, all of which are difficult to
predict and many of which are beyond the control of Prometheus Income Partners.
While Prometheus Development Co. believes these estimates and
assumptions are reasonable, there can be no assurance that the projections will
be accurate, and actual results may vary materially from those shown. These
projections were based upon a variety of estimates and assumptions, the material
ones of which are set forth above. The forecast of 2001 performance was
completed in November 2000. Due to the passage of time and changes in
circumstances, many of the assumptions on which they were based may no longer be
valid. It is expected that there will be differences between the actual and
forecast results and that the actual results may be materially higher or lower
than those projected. Inclusion of the foregoing forecasts should not be
regarded as an indication that Prometheus Income Partners, PIP Acquisition,
Prometheus Development Co. or PIP Partners - General considers it an accurate
prediction of future events. In light of the uncertainties inherent in
forward-looking information of any kind, the inclusion of these projections in
this document should not be regarded as a representation by Prometheus Income
Partners, Prometheus Development Co., PIP Acquisition or PIP Partners - General
or any other person that the anticipated results will be achieved and limited
partners are cautioned not to place undue reliance on this information.
LIMITED PARTNER PROPOSALS
If the merger of Prometheus Income Partners is consummated, there will
be no limited partners of Prometheus Income Partners other than PIP Partners -
General. If the transaction is not consummated with respect to Prometheus Income
Partners, limited partners would continue to be entitled to participate in
future meetings in accordance with the terms of the partnership agreement of
Prometheus Income Partners. Other than the meeting scheduled to consider and
vote on the merger proposal, there are no meetings scheduled, and Prometheus
Development Co. cannot predict when, if ever, future meetings may be called.
Meetings may be called upon notice by Prometheus Development Co. to the limited
partners or by notice to Prometheus Development Co. by limited partners holding
at least 10% of the outstanding units. Any proposals by limited partners
intended to be presented at a meeting must be received by Prometheus Income
Partners
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not less than 60 nor more than 90 days prior to this meeting, provided that, in
the event that Prometheus Income Partners gives less than 10 days' notice or
prior public disclosure of the date of the meeting, notice must be received by
Prometheus Income Partners no later than the close of business on the tenth day
following this notice or prior public disclosure. For a limited partner to bring
other business before a meeting, timely notice must be received by Prometheus
Income Partners within the time limits described above. This notice must include
a description of the proposed business, the reasons therefore, and other
specific matters. In each case, the notice must be given to Prometheus Income
Partners at Prometheus Income Partners' principal address. Any limited partner
desiring a copy of the partnership agreement of Prometheus Income Partners will
be furnished a copy without charge upon written request to Prometheus Income
Partners.
WHERE YOU CAN FIND MORE INFORMATION
As required by law, Prometheus Income Partners files reports, proxy
statements and other information with the Commission. You can read and copy
these materials at the public reference facilities maintained by the Commission
at:
Room 1024
450 Fifth Street, N.W.
Washington, D.C. 20549
and at the following regional offices of the Commission:
7 World Trade Center
13th Floor
New York, New York 10048
and
Suite 1400
500 West Madison Street
Chicago, Illinois 60661.
For further information concerning the Commission's public reference
rooms, you may call the Commission at 1-800-SEC-0330. Some of this information
may also be accessed on the World Wide Web through the SEC's Internet address at
"http://www.sec.gov."
Copies of the Schedule 13E-3 may be read and copied at the public
reference facilities maintained by the Commission, which facilities are listed
above, or may be accessed on the World Wide Web through the Commission's
Internet address at "http://www.sec.gov." Copies of the Schedule 13E-3 and
copies of the documents listed in above are also available for inspection and
copying at the principal executive offices of Prometheus Income Partners during
its regular business hours by any interested limited partner of Prometheus
Income Partners or a representative of that limited partner who has been so
designated in writing.
You should rely only on the information contained in (or incorporated by
reference into) this Proxy Statement in connection with your consideration of
the merger proposal. Neither Prometheus Development Co. nor Prometheus Income
Partners has authorized anyone to give
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any information different from the information contained in (or incorporated by
reference into) this Proxy Statement. This Proxy Statement is dated July __,
2001. You should not assume that the information contained in this Proxy
Statement is accurate as of any later date, and the mailing of this Proxy
Statement to limited partners shall not create any implication to the contrary.
ANNUAL REPORT AND QUARTERLY REPORT
Prometheus Income Partner's Annual Report on Form 10-K for the year
ended December 31, 2000 (not including exhibits to that report) and Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001 are being mailed with
this Proxy Statement to all limited partners.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Commission allows us to "incorporate by reference" the information
we file with them, which means that we can disclose important information to you
by referring you to those documents. The information incorporated by reference
is an important part of this Proxy Statement. We incorporate by reference the
documents listed below:
o Annual Report on Form 10-K for the year ended December 31, 2000,
including the financial statements set forth in that document;
o Quarterly Report on Form 10-Q for the quarter ended March 31, 2001,
including the financial statements set forth in that document; and
o Current Reports on Form 8-K dated May 22, 2001, April 2, 2001, March
12, 2001 and March 5, 2001, respectively.
We will mail these filings within one business day to any person,
including any beneficial owner, to whom this Proxy Statement is delivered, at no
cost, upon written or oral request to 350 Bridge Parkway, Redwood City,
California 94065-1517.
All documents filed by us with the SEC under section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, after the date hereof
and before the date of our meeting are incorporated by reference into and will
be a part of this proxy statement from the date of filing of these documents.
OTHER MATTERS
Prometheus Income Partners does not know of any matter other than those
described in this Proxy Statement that will be presented for action at the
meeting. If other matters properly come before the meeting, the persons named as
proxies intend to vote the units represented by those proxies in accordance with
the judgment of Prometheus Development Co.
Any copies of any written instructions, forms or other materials related
to oral solicitations of proxies will be filed as exhibits to this document.
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Prometheus Development Co. has made no provision to grant limited
partners unaffiliated with Prometheus Development Co. access to the corporate
files of Prometheus Development Co., nor to provide counsel to any unaffiliated
limited partners at Prometheus Development Co.'s expense.
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APPENDIX A
Third Amended and Restated Agreement and Plan of Merger
THIRD AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
This Third Amended and Restated Agreement and Plan of Merger (this
"Agreement") is entered into as of May 31, 2001, by and among Prometheus Income
Partners, a California limited partnership (the "Partnership"), PIP Partners -
General, LLC, a California limited liability company ("PIP General"), and PIP
Acquisition, LLC, a California limited liability company and a wholly-owned
subsidiary of PIP General ("Acquisition").
WHEREAS, the parties desire to merge Acquisition with and into the
Partnership (the "Merger") on the terms and conditions hereinafter set forth and
in accordance with the provisions of Sections 15678.1-.9 of the California
Revised Uniform Limited Partnership Act, as amended (the "Act") and Sections
17550-17556 of the Beverly-Killea Limited Liability Company Act (the "LLC Act");
WHEREAS, Acquisition has been formed for such purpose and the parties
entered into that certain Agreement and Plan of Merger dated June 22, 2000
providing for the Merger (the "Original Agreement"), the Amended and Restated
Agreement and Plan of Merger, dated as of September 29, 2000 (the "First Amended
Agreement") and the Second Amended and Restated Agreement and Plan of Merger,
dated as of January 31, 2001 (the "Second Amended Agreement");
WHEREAS, the parties wish to amend and restate the Original Agreement,
the First Amended and the Second Amended Agreement as hereinafter provided; and
NOW, THEREFORE, BE IT RESOLVED, that in consideration of the mutual
covenants and agreements contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
ARTICLE I
TERMS OF MERGER
Acquisition shall be merged with and into the Partnership in a statutory
merger in accordance with the Act and the LLC Act on the terms and subject to
the conditions set forth in this Agreement.
ARTICLE II
EFFECT OF MERGER
On the "Effective Date" (as defined below):
(1) Acquisition shall be merged with and into the Partnership;
(2) the Partnership shall possess all the rights, privileges, immunities
and franchises of Acquisition, and all property, real, personal and mixed, and
debts due on whatever account, and every other interest belonging to or due to
Acquisition (including, but not limited to, liability for any fees or franchise
taxes due and owing to the Secretary of State of California as of the Effective
Date) shall be deemed to be transferred to and vested in the Partnership,
without further act, deed or transfer;
(3) the Partnership shall thenceforth be responsible for and subject to
all of the debts, liabilities and obligations of Acquisition in the same manner
as if the Partnership had itself incurred them;
(4) any claim, existing action, or proceeding pending by or against
Acquisition may be prosecuted to judgment by the Partnership; and
(5) neither the rights of creditors nor any liens upon the property of
Acquisition shall be impaired by the Merger;
The "Effective Date" shall be the date following the satisfaction of the
conditions set forth in Article VIII hereof on which a Certificate of Merger is
filed with the Secretary of State of the State of California in accordance with
the Act and the LLC Act, which date shall be not greater than twenty days
following the approval of the Merger by the limited partners of the Partnership
(the "Limited Partners").
ARTICLE III
MANNER AND BASIS OF CONVERTING INTERESTS
As of the Effective Date, by virtue of the Merger and without any action
on the part of any party hereto:
(1) Each limited partner interest in the Partnership (each, a "Unit")
outstanding immediately prior to the Effective Date (other than any such Unit
held by PIP General) shall be converted into and shall become (a) the right to
receive cash in an amount equal to $1,200 (the "Initial Merger Consideration")
upon surrender of a duly executed letter of transmittal by the holder of such
Unit in form and substance reasonably satisfactory to PIP General and (b) the
right to receive on the Distribution Date (the "Deferred Consideration Right")
additional consideration, if any, calculated pursuant to the formula set forth
in Exhibit 2-1, less the $1,200 payable upon the Effective Date (such amounts,
together, the "Merger Consideration"). Regardless of the amount of the Merger
Consideration, in no event shall any limited partner be required to return to
the Partnership or the General Partner any portion of the Initial Merger
Consideration. The "Distribution Date" shall be the later of (i) the completion,
as determined in good faith by
2
the General Partner, of repairs of the Construction Defects (as defined in
Exhibit 2-1) or (ii) the receipt of the proceeds from or other termination of
the lawsuits filed by the Partnership on September 23, 1996, as amended, revised
or consolidated, including related actions, against the hardboard siding
manufacturer and others, each being entitled Prometheus Income Partners v.
Weyerhauser Co., et al., in the Santa Clara County, California, Superior Court,
as Cases No. CV 760935 (Timberleaf) and CV 760934 (Alderwood) (the
"Litigation").
The Deferred Consideration Right shall be non-voting and shall
not bear interest. It shall be non-transferable except by will, intestate
succession or operation of law and shall not be represented by any certificate
or instrument. Any purported transfer of the Deferred Consideration Right in
violation hereof shall be null and void, ab initio. As of the Effective Date,
each Unit (other than Units held by PIP General) shall no longer be outstanding
and shall automatically be cancelled and retired and shall cease to exist, and
the holder of such Unit shall cease to have any rights with respect thereto
(including but not limited to any ownership interest in the Partnership or any
right to participate in the income of the Partnership) except the right to
receive the Merger Consideration.
(2) As of the Effective Date, each member interest in Acquisition issued
and outstanding as of the Effective Date shall be converted into one
newly-issued Unit.
ARTICLE IV
CHARTER DOCUMENTS; GENERAL PARTNER
(1) The Certificate of Limited Partnership and Second Amended and
Restated Limited Partnership Agreement of the Partnership dated October 1, 1992
(the "Partnership Agreement"), each as in effect on the Effective Date, shall be
the charter documents of the Partnership until duly amended or changed in
accordance with the Partnership Agreement and the Act.
(2) Subject to and in accordance with the Partnership Agreement,
Prometheus Development Co., Inc. will continue as the general partner of the
Partnership.
(3) From and after the Effective Date, the Partnership shall bear all
risk of loss of the Properties (as defined in Exhibit 2-1).
ARTICLE V
PARTNERSHIP REPRESENTATIONS AND WARRANTIES
The Partnership hereby represents and warrants that:
(1) The Partnership has been duly organized and is existing as a limited
partnership in good standing under the laws of the State of California with full
power and authority to own and lease its properties and to conduct its business
as currently conducted.
3
(2) The Partnership has the power and authority to execute and deliver
this Agreement, to consummate the transactions contemplated hereby and to
perform its obligations under this Agreement. The execution and delivery by it
of this Agreement, and the consummation of the transactions contemplated hereby,
have been duly authorized by all necessary action by the Partnership other than
the approval of Limited Partners holding at least 50% of the issued and
outstanding Units. This Agreement (assuming the due authorization, execution and
delivery hereof by the other parties hereto) constitutes the legal, valid and
binding obligation of the Partnership, enforceable against it in accordance with
the terms hereof.
(3) Other than as follows, the execution, delivery and performance of
this Agreement and the consummation of the transactions will not (i) conflict
with or result in a breach or violation of any terms or provision of, or
constitute a default under (with or without notice or passage of time, or both),
or otherwise give any person a basis for accelerated or increased rights or
termination or nonperformance under, any indenture, mortgage, deed of trust,
loan or credit agreement, lease, license or other agreement or instrument to
which the Partnership is a party or by which the Partnership or its assets is
bound or affected, (ii) result in the violation of the provisions of the
formation documents of the Partnership or any legal requirement applicable to or
binding upon the Partnership, (iii) result in the creation or imposition of any
lien upon any property or asset of the Partnership, (iv) require the consent of
any person to the transactions contemplated hereby that has not heretofore been
obtained other than the consent of the Limited Partners and of The Prudential
Insurance Company of America or (v) otherwise adversely affect the contractual
or other legal rights or privileges of the Partnership:
(a) Deed of Trust, Security Agreement and Fixture Filing
with Assignment of Rents and Proceeds dated as of December 23,
1997, with respect to Alderwood; and
(b) Deed of Trust, Security Agreement and Fixture Filing
with Assignment of Rents and Proceeds dated as of December 23,
1997, with respect to Timberleaf.
(4) Other than as follows, or as otherwise disclosed in this Agreement
as of the date of this Agreement, the Partnership has good and marketable title
to all of the Partnership's assets free and clear of all liens:
Mortgages and liens not yet due and payable, covenants,
conditions and estrictions of record
(5) Other than the Litigation, as of the date of this Agreement, neither
the Partnership nor its assets is involved in material litigation.
4
ARTICLE VI
VOTING OF UNITS
(1) The Partnership hereby covenants and represents that as promptly as
practicable following the date hereof it shall hold a meeting (the "Meeting") of
the Limited Partners at which the Limited Partners will have the opportunity to
vote their Units for or against the transactions contemplated by this Agreement.
(2) At the Meeting, PIP General hereby covenants and represents that it
shall vote its Units for or against the transactions contemplated by this
Agreement in the same proportion as the total number of Units voted by Limited
Partners unaffiliated with PIP General or the General Partner.
(3) The Partnership shall use reasonable commercial efforts to obtain
the approval of the Merger by the Limited Partners at the Meeting.
ARTICLE VII
PIP GENERAL AND ACQUISITION REPRESENTATIONS AND WARRANTIES
Each of PIP General and Acquisition hereby represents and warrants that:
(1) Such party has been duly organized and is existing as a limited
liability company in good standing under the State of California with full power
and authority to own and lease its properties and to conduct its business as
currently conducted.
(2) Such party has the power and authority to execute and deliver this
Agreement, to consummate the transactions contemplated hereby and to perform its
obligations under this Agreement. The execution and delivery by such party of
this Agreement, and the consummation by it of the transactions contemplated
hereby, have been duly authorized by all necessary limited liability company
action. This Agreement (assuming the due authorization, execution and delivery
hereof by the other parties hereto) constitutes the legal, valid and binding
obligation of such party, enforceable against it in accordance with the terms
hereof.
(3) Such party's execution, delivery and performance of this Agreement
and the consummation by it of the transactions contemplated hereby will not (i)
conflict with or result in a breach or violation of any terms or provision of,
or constitute a default under (with or without notice or passage of time, or
both), or otherwise give any person a basis for accelerated or increased rights
or termination or nonperformance under, any indenture, mortgage, deed of trust,
loan or credit agreement, lease, license or other agreement or instrument to
which such party is a party or by which it or its assets is bound or affected,
(ii) result in the violation of the provisions of the formation documents of
such party or any legal requirement applicable to or binding upon such party,
(iii) result in the creation or imposition of any lien upon any property or
asset of such party,
5
(iv) require the consent of any person to the transactions contemplated hereby
that has not heretofore been obtained or (v) otherwise adversely affect the
contractual or other legal rights or privileges of such party.
ARTICLE VIII
COVENANTS OF PIP GENERAL
(1) The Partnership shall, within 45 days after the end of each calendar
quarter, commencing with the calendar quarter next following the Effective Date,
mail to each former Unit holder a written description, as would be required if
the Partnership were a reporting entity under Section 12(g) of the Securities
Exchange Act of 1934, of material developments in the Litigation, the amount of
the Net Litigation Recovery (as defined in Exhibit 2-1), if any, and the
restricted cash reserves of the Partnership existing on the Effective Date, the
actual costs and expenses incurred for litigation and/or repairs, the estimated
cost, determined from time to time in good faith by PIP General, to complete the
repair of the Construction Defects and the estimated time to complete such
repairs, and such other information required by law.
(2) The Partnership shall deposit the Net Litigation Recovery, if any,
in a separate bank account and shall reasonably account to the former Unit
holders on a quarterly basis, as set forth above, on the use of such proceeds.
(3) PIP General and Acquisition shall use their reasonable best efforts
to promptly seek and consummate the financing necessary to pay the Initial
Merger Consideration.
ARTICLE IX
CONDITIONS
(1) The obligations of each party hereto to effect the Merger shall be
subject to the fulfillment (or waiver by each party hereto) at or prior to the
Effective Date of the following conditions:
(a) No court or other governmental entity of competent
jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, judgment, decree,
injunction or other order (whether temporary, preliminary or
permanent) (i) that is in effect and prohibits consummation of
the Merger or any other transactions with respect to any party
hereto expressly contemplated by this Agreement, or (ii) that is
enacted, issued, promulgated, enforced or entered after the date
of this Agreement and, in any such case, is in effect and imposes
restrictions on any party hereto with respect to the business
operations thereof that would result in a material adverse effect
on the assets, business, financial condition or prospects thereof
(clauses (i) and (ii),
6
collectively, and "Order"), and no governmental entity shall have
instituted any proceeding or threatened to institute any
proceeding seeking any such Order, and no other person shall have
instituted any proceeding seeking any such Order which is
reasonably likely to succeed.
(b) All material actions by, and all consents, approvals,
orders or authorizations from, or filings with, governmental
entities of competent authority necessary for the consummation of
the Merger or any other transactions expressly contemplated by
this Agreement shall have been obtained or made, as the case may
be.
(2) The obligations of the Partnership to effect the Merger and the
other transactions relating to the Partnership which are contemplated by this
Agreement to be performed by it are further subject to the condition (or waiver
by the Partnership) that:
(a) the representations and warranties of PIP General and
Acquisition set forth herein shall be true and correct at and as
of the closing date; and
(b) this agreement and the transactions contemplated
hereby shall have been approved and adopted by the requisite
approval of the Limited Partners.
(3) The obligations of PIP General and Acquisition to effect the Merger
and the other transactions contemplated by this Agreement which are to be
performed by it are further subject to the conditions (or waiver by PIP General
and Acquisition) that:
(a) the representations and warranties of the Partnership
set forth herein shall be true and correct at and as of the
closing date;
(b) the holders of the deeds of trust referred to in
Article V, Section 3 above, consent (if necessary) to the Merger
on terms acceptable to PIP General and Acquisition;
(c) there has been no material adverse change, from and
after the date hereof, in the assets, business, financial
condition or prospects of the Partnership; and
(d) the financing necessary to pay the Initial Merger
Consideration has been obtained and has been consummated or is
simultaneously consummated herewith upon terms acceptable to PIP
General and Acquisition.
7
ARTICLE X
TERMINATION
This Agreement may be terminated at any time prior to the Effective Date
(regardless of whether or not the requisite approvals of the Limited Partners
have been obtained) as follows:
(1) by the mutual written consent of the Partnership, PIP General and
Acquisition;
(2) by the Partnership, on the one hand, or PIP General and Acquisition,
on the other hand, upon written notice given to the other if any judgment,
injunction, order, decree or action by any governmental entity of competent
authority preventing the consummation of the transactions contemplated by this
Agreement shall have become final and nonappealable;
(3) by PIP General or Acquisition upon written notice given to the
Partnership, upon a material breach on the part of the Partnership of any
representation, warranty, covenant, obligation or agreement of the Partnership
set forth herein that is not curable or, if curable, is not cured within thirty
(30) days after written notice of such breach is given by PIP General or
Acquisition to the Partnership;
(4) by the Partnership upon written notice given to PIP General or
Acquisition, upon a material breach on the part of PIP General or Acquisition of
any representation, warranty, covenant, obligation or agreement of PIP General
or Acquisition set forth herein that is not curable or, if curable, is not cured
within thirty (30) days after written notice of such breach is given by the
Partnership to PIP General or Acquisition; or
(5) by PIP General, Acquisition or the Partnership if the Merger has not
yet been consummated on or before August 31, 2001.
ARTICLE XI
MISCELLANEOUS
(1) The parties hereto each agree to do, execute, acknowledge and
deliver all such further acts, instruments and assurances, and to take all such
further action, including, without limitation, the execution and filing of such
instruments in the State of California and any other State as should be
necessary or desirable to carry out this Agreement and to consummate and effect
the Merger.
(2) This Agreement shall be governed by and construed in accordance with
the laws of California.
8
(3) All of the representations, warranties, covenants, agreements and
undertakings set forth in this Agreement or in any instrument delivered pursuant
to this Agreement confirming the representations, warranties, covenants,
agreements and undertakings set forth in this Agreement shall terminate as of
the Effective Date, and shall have no further force or effect.
(4) Whether or not the transactions contemplated by this Agreement are
consummated, all costs and expenses incurred in connection with this Agreement,
including, without limitations, the fees, expenses and disbursements of counsel,
financial advisors and accountants, shall be paid by PIP General and/or
Acquisition.
(5) None of the General Partner, PIP General, Acquisition or any payment
agent retained in connection herewith, nor any of their respective affiliates,
will be liable to any Limited Partner for any Merger Consideration delivered to
a public official pursuant to any applicable abandoned property, escheat or
similar law.
9
IN WITNESS WHEREOF, the Partnership, PIP General and Acquisition have
each caused this Agreement to be effective as of the date and the year first
written above.
PROMETHEUS INCOME PARTNERS,
a California Limited Partnership
By: PROMETHEUS DEVELOPMENT CO.,
INC., a California Corporation, its General
Partner
By:
-----------------------------------
Name:
-----------------------------
Title:
----------------------------
PIP ACQUISITION, LLC, a California Limited Liability
Company
By: PROMHILL, INC., a California Corporation,
its Manager
By:
-----------------------------------
Name:
-----------------------------
Title:
----------------------------
PIP PARTNERS - GENERAL, LLC, a California Limited
Liability Company
By: PROMHILL, INC., a California Corporation,
its Manager
By:
-----------------------------------
Name:
-----------------------------
Title:
----------------------------
10
EXHIBIT 2-1
-----------
The "Merger Consideration" with respect to each Unit is equal to the
cash sum that would be distributed to the holder of such Unit in accordance with
the Partnership Agreement had the Partnership been liquidated on the Effective
Date, after giving effect to (1) the purchase of the Alderwood Apartments and
the Timberleaf Apartments, two residential rental properties in Santa Clara,
California, owned by the Partnership (the "Properties") for $68,900,000 less 2%
representing estimated costs of sale, minus (2) the principal balance due
(including the prepayment penalty that would be due on sale) and any accrued but
unpaid interest on the mortgages secured by deeds of trust on the Properties on
the Effective Date, plus (3) the "Net Litigation Recovery," as defined below,
less (4) the payment by the Partnership of the actual cost of repairs to the
Properties for "Construction Defects," as defined below.
The "Net Litigation Recovery" is equal to the proceeds of the Litigation
actually received by the Partnership or its successors in interest, after (a)
deducting (1) all costs and expenses of attorneys and other experts, other than
such costs or expenses, if any, paid before the Effective Date, (2) all other
out-of-pocket costs and expenses of the Litigation paid by the Partnership after
the Effective Date, (3) a litigation management fee payable to the General
Partner or an affiliate thereof (in lieu of any other revenue-based fee on the
gross proceeds of the Litigation) equal to 3% of such gross proceeds, (4) any
obligations paid or incurred as a result of any cross complaint, counter suit or
other lawsuit relating to or arising out of the Litigation, (5) federal, state
or local tax liabilities, if any, due and payable by the Partnership and/or its
then existing partners with respect to such proceeds and (b) adding interest
actually earned, if any, on such proceeds following receipt by the Partnership.
"Construction Defects" are those construction defects relating to
hardboard siding, roofing systems or otherwise existing on the Effective Date,
or caused by or arising out of such defects, including, but not limited to, lost
rents caused by or arising out of the repair of any such defects and are further
described by way of illustration, but not by way of limitation, to include
removal and replacement of hardboard siding, removal and replacement of building
paper, removal and replacement of sheer ply, removal and replacement of damaged
structural framing, removal and replacement of deck flashing and waterproof
membranes, removal and replacement of damaged roofing and underlayment substrate
and framing members, removal and replacement of flashing and sealants related to
waterproofing, removal and replacement of decorative trim, removal and
replacement of window flashing, removal and re-setting or replacement of
windows, sliding glass doors, construction design and engineering as required
for the above-referenced items, construction management, paint and paint
preparation.
APPENDIX B
Second Amended and Restated Limited Partnership Agreement of the Partnership
SECOND AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT OF
PROMETHEUS INCOME PARTNERS
A CALIFORNIA LIMITED PARTNERSHIP
THIS SECOND AMENDED AND RESTATED LIMITED PARTNERSHIP
AGREEMENT is made by and among Prometheus Development Co., Inc.,
a California corporation, as the General Partner, and Prom XX,
Inc., a California corporation, as the Initial Limited Partner,
and the parties admitted as Limited Partners.
RECITALS
Alderwood Apartments, Ltd., a California Limited Partnership
(the "Partnership"), was organized under the California Revised
Limited Partnership Act and under a Limited Partnership
Agreement, dated as of April 15, 1985 (the "Original Agreement"),
with Prometheus Partners-Alderwood Apartments, Ltd., a California
Limited Partnership, as its general partner. Prometheus
Development Co., Inc. was added as a general partner of the
Partnership on September 2, 1986. Upon the withdrawal of the
Partnership's original general partner, Prometheus Development
Co., Inc. became the sole general partner of the Partnership on
September 4, 1986. The Partnership's name was changed to
Prometheus Development/Income Partners, a California Limited
Partnership, in September 1986. In December 1986, the
Partnership's name was changed to Prometheus Income Partners, a
California Limited Partnership.
The General Partner and the Initial Limited Partner entered
into the First Amended and Restated Limited Partnership
Agreement, dated as of September 19, 1986 (the "Amended
Agreement"), under which the Original Agreement was amended to
provide for the public sale of Units.
The General Partner has contributed $1,000 to the capital of
the Partnership. The Initial Limited Partner has contributed $10
to the capital of the Partnership and shall withdraw as a Limited
Partner and have its interest redeemed at cost upon the admission
of additional Limited Partners.
The Partnership plans to develop, to hold, and ultimately to
sell two multi-family apartment complexes located in Santa Clara,
California. The principal investment objectives of the
Partnership are to preserve and protect the Partnership's
capital, to obtain capital appreciation from the effective
management and sale of the Properties, and to provide "tax
sheltered" distributions of cash from operations beginning in
1987.
The Partners now desire to amend and restate the Amended
Agreement.
NOW, THEREFORE, the Partnership's amended and restated
partnership agreement is set forth in its entirety as follows:
ARTICLE 1
DEFINITIONS
As used in this Agreement, the following terms have the
definitions hereinafter indicated. These terms shall supersede
and replace any other definitions contained in the California
Revised Limited Partnership Act.
"Acquisition Expenses" shall mean expenses including but not
limited to legal fees and expenses, travel and communication
expenses, costs of appraisals, accounting fees and expenses,
title insurance, and miscellaneous expenses related to selection
and acquisition of the Properties.
"Acquisition Fees" shall mean the total of all fees and
commissions paid by any party in connection with the purchase of
the Properties by the Partnership, including real estate
commissions, selection fees, development fees, non-recurring
management fee or any fee of a similar nature, however
designated.
"Act" shall mean the California Revised Limited Partnership
Act, as amended from time to time.
"Affiliate" shall mean (i) any Person or entity directly or
indirectly controlling, controlled by or under common control
with another Person or entity, (ii) any Person or entity owning
or controlling 10% or more of the outstanding voting securities
of such other entity, (iii) any officer, director or partner of
such entity, and (iv) any company for which such Person or entity
acts as an officer, director, trustee or partner.
"Agreement" shall mean this Second Amended and Restated
Limited Partnership Agreement as it may be amended or restated
from time to time.
"Assignee" shall mean a person who has acquired a beneficial
interest in one or more Units from a Limited Partner or an
assignee thereof but who is not a Substituted Limited Partner.
"Broker/Dealers" shall refer to the NASD registered broker-
dealer firms which have entered into a Selling Agreement with the
Principal Distributor for the sale of Units.
"Capital Contributions" shall mean $1,000 per Unit for all
Units sold including those sold net of underwriting commissions
and the Distributor Fee pursuant to Section 3.5 of the Agreement.
"Certificate(s) of Limited Partnership" shall mean the
document, and any amendments thereto, required to be executed by
the General Partner and/or Limited Partners and filed in the
Office of the California Secretary of State, and in the
appropriate governmental offices or county recorders of other
states in which the Partnership may do business, in order to
create the Partnership and to obtain and preserve the limitations
on personal liability of the Limited Partners under applicable
law.
"Completion Date" shall mean the date on which the offering
of Units terminates, which shall be the earlier of (a) the date
all of the Units are sold, (b) February 12, 1988, unless the
offering is extended by the General Partner for up to an
additional 12 months, or (c) the date the General Partner, in its
sole discretion, terminates the offering.
"Completion Guaranty" shall mean the guaranty of the General
Partner to the Partnership, pursuant to Section 6.11 of the
Agreement, that the Properties will be completed free and clear
of all financing and construction liens (except any liens secured
by deeds of trust described in the Prospectus) at a total cost
not to exceed approximately $28,807,000, exclusive of negative
cash flow associated with lease-up expenses and the first year of
operations.
"Completion Guaranty Fee" shall mean a fee equal to $600,000
payable to the General Partner in consideration for the
Completion Guaranty.
"Control Person" shall mean those persons who perform a
function similar to the chairman of the board or a member of the
board of directors, executive management (such as the president,
vice president, corporate secretary or treasurer), senior
management (such as the vice president of an operating division
who reports directly to executive management), or a person
holding 5% or more equity interest in the General Partner or its
Affiliates or having the power to direct or control the direction
of the General Partner or its Affiliates, whether through
ownership of voting securities, by contract or otherwise.
"Cost of Partnership Property" shall mean the total
consideration paid to acquire a Property, whether paid to the
seller, the General Partner or any other person, including cash
and all liens and mortgages on the Property but excluding points
and prepaid interest and the "Cost Of All Partnership Properties"
shall be the sum total of the "Cost of Partnership Property" for
each Property.
"Credit Enhancement" shall mean a credit instrument
including but not limited to a bond from a AAA insurance company,
a forward commitment from a lender or a letter of credit
satisfactory to and for the benefit of the lender of the
permanent financing insuring that the loans secured by the
Properties will be paid within a specified period after the
permanent financing is funded.
"Distributable Cash from Operations" shall mean the funds
provided from Partnership operations, excess Working Capital
Reserves and interest on the Partnership's cash and investments,
without deduction for non-cash expenses (such as depreciation and
amortization and any accrued debt service not yet payable), but
after deducting cash funds used to pay all other expenses, debt
payments, capital improvements and repairs, replacements, and
after provision for Working Capital Reserves.
"Distributions" (whether or not this term is capitalized)
shall mean any cash distributed to the Partners arising from
their interests in the Partnership but shall not include any
compensation to the General Partner or its Affiliates or any
Partnership expense reimbursements.
"Distributor Fee" shall mean the fee equal to 1% of gross
offering proceeds which is payable to the Principal Distributor.
"Drexel" shall mean Drexel Burnham Lambert Incorporated, the
investment banker which may provide permanent financing for the
Properties.
"Effective Gross Collections" shall mean all funds collected
from the Properties, including rents, security deposits and
furniture rentals, and revenues from carport, storage and
laundry.
"Escrow Agent" shall mean Security Pacific National Bank,
333 S. Beaudry, Los Angeles, California.
"Financial Forecast" shall mean the forecast included in the
Prospectus as Exhibit A.
"Front-End Fees" shall mean any fee, commission or expense
paid by any party for any services to the Partnership during the
Partnership's organization and acquisition phase, including
Organization and Offering Expenses, investment advisory fees,
Acquisition Fees, Acquisition Expenses, Initial Partnership
Management Fee, Completion Guaranty Fee, Initial Property
Management Fee and similar fees however designated.
"General Partner" shall mean Prometheus Development Co.,
Inc., a California corporation, in its capacity as the general
partner of the Partnership, or the successor general partner of
the Partnership.
"Gross Offering Proceeds" (whether or not this term is
capitalized) shall mean the aggregate amount of cash contributed
to the Partnership by purchasers of Units before deduction of
underwriting commissions and the Distributor Fee or any other
fees, received on or before the Completion Date. For purposes of
calculating underwriting commissions and the Distribution Fee,
Gross Offering Proceeds shall not include the proceeds from any
Units sold net of underwriting commissions and the Distributor
Fee.
"IRA" shall mean an Individual Retirement Account.
"Incentive Priority Return" shall mean the amount in
addition to the 10% Priority Return necessary to provide an 11%
simple return for the period from January 1, 1988 through
December 31, 1988, on the Invested Capital of each Limited
Partner who subscribes for Units on or before June 1, 1987, or
any later date determined at the discretion of the General
Partner. This return shall be paid out of Net Proceeds from Sale
or Refinancing.
"Initial Lease-Up Fee" shall mean that one-time fee equal to
$106,000 payable to the General Partner pursuant to Section
7.5(d) of the Agreement for obtaining initial tenants for the
Properties.
"Initial Limited Partner" shall mean Prom XX, Inc., a
California corporation, in its capacity as the initial limited
partner of the Partnership.
"Initial Partnership Management Fee" shall mean that fee
equal to $291,000 payable to the General Partner, pursuant to
Section 7.3 of the Agreement, for organizing the Partnership,
arranging for and negotiating construction financing, arranging
for and negotiating permanent financing, obtaining (in connection
with the permanent financing) a Credit Enhancement satisfactory
to the lender of the permanent financing, insuring that the
Partnership will meet certain obligations, selecting and
supervising professionals to perform services for the
Partnership, establishing Partnership accounts, including an
escrow account for use in connection with the offering of the
Units, and establishing a reporting system for submitting tax
information and periodic reports to the Limited Partners and
regulatory authorities.
"Initial Property Management Fee" shall mean the excess of
the Property Management Fee earned during the Lease-Up Period
over 5% of the Effective Gross Collections for such period.
"Internal Revenue Code" shall mean the Internal Revenue Code
of 1986, as amended from time to time.
"Invested Capital" for a Limited Partner shall mean that
Limited Partner's Capital Contributions less the sum of all
distributions (but not distributions of Distributable Cash from
Operations) made to the Limited Partner and any prior owners of
the Units.
"Investment in Properties" shall mean the amount of Gross
Offering Proceeds paid or allocated to the purchase, development,
construction or improvement of Properties, Working Capital
Reserves not in excess of 5% of the Gross Offering Proceeds and
any other cash payments such as interest and taxes but excluding
Front-End Fees.
"Lease-Up Period" shall mean the period commencing on the
date certificates of occupancy are issued with respect to the
Properties' units and terminating on the date the aggregate
occupancy rate of the Properties is equal to 50% or more.
"Lender" shall mean the commercial or institutional lender
which will provide permanent financing or construction financing
for the Properties.
"Limited Partners" shall mean the Initial Limited Partner
and any other persons who are admitted to the Partnership as
additional or Substituted Limited Partners. Reference to a
"Limited Partner" shall be to any one of the Limited Partners.
"Loan Commitment Guaranty" shall mean the obligation of the
General Partner through December 31, 1991, to loan sufficient
funds or to arrange for a loan of funds to the Partnership to
cover any Operating Deficit for any calendar quarter.
"Majority Vote" shall mean the vote of Limited Partners who
are entitled to vote, consent or act and are holders of record of
a majority of the outstanding Units.
"Net Proceeds from Sale or Refinancing" shall mean, unless
otherwise specified (i) the net cash funds or proceeds (including
lump sum prepayments by buyers) resulting from the financing,
refinancing or sale of Partnership assets, after deduction of all
expenses incurred in connection therewith, including any real
estate commissions (and the Subordinated Property Disposition
Interest) and brokerage fees paid to third parties, plus (ii) all
net cash proceeds subsequently received on any installment
payments on promissory notes and/or installment contracts held by
the Partnership in connection with the sale of Partnership assets
after payment of or provision for any underlying indebtedness
related to assets sold plus cash reserves and working capital on
hand, less (iii) such amounts for Working Capital Reserves and
other reserves as the General Partner deems necessary for future
Partnership operations.
"Net Profits" and "Net Losses" shall mean the profits and
losses of the Partnership determined in accordance with
accounting methods followed for federal income tax purposes.
"Operating Deficit" shall mean for any period the excess of
(i) all expenses from ongoing operations excluding the effect of
non-operating, extraordinary or capital items of the Partnership
paid in cash (which excludes non-cash expenses such as
depreciation, amortization and any accrued debt service not yet
payable) less (ii) the sum of funds provided from Partnership
operations, Working Capital Reserves and interest on the
Partnership's cash and short term investments.
"Organization and Offering Expenses" shall mean those
expenses incurred in connection with the registration of the
Units and the subsequent offer and sale of the Units under
applicable federal and state securities laws (or exemptions
therefrom), including underwriting commissions and the Distribu-
tor Fee, and any other expenses actually incurred and directly
related to the qualification, offer and sale of Units including
without limitation such expenses as: (i) registration and
qualification fees, filing fees and taxes, (ii) the costs of
printing, amending, supplementing and distributing the
Registration Statement and Prospectus, (iii) the costs of
obtaining regulatory clearance, (iv) the costs of printing and
distributing sales materials used in connection with the offer
and sale of Units, (v) the costs related to investor and
Broker/Dealer sales meetings, (vi) accounting and legal fees
incurred by the Partnership in connection with any of the
foregoing, and (vii) escrow fees.
"Partners" shall mean the General Partner and the Limited
Partners, collectively, and reference to a "Partner" shall be to
any one of the Partners.
"Partnership" shall mean Prometheus Income Partners, a
California Limited Partnership.
"Person" (whether or not this term is capitalized) shall
mean any natural person, partnership, corporation, association or
other legal entity.
"Principal Distributor" shall mean Prometheus Capital, Inc.,
a California corporation.
"Principal Distributor Agreement" shall mean that certain
agreement between the Principal Distributor and the Partnership
concerning the sale of the Units.
"Properties" shall mean both the Alderwood Apartments and
the Timberleaf Apartments, as more specifically described in the
Prospectus. "Property" shall mean one of the Properties.
"Property Management Fee" shall mean the fee payable to the
General Partner, pursuant to Section 7.5 of the Agreement, for
the ordinary property management services related to the
Properties.
"Prospectus" shall mean the final prospectus as filed by the
Partnership with the Securities and Exchange Commission pursuant
to Rule 424(b) and as supplemented from time to time.
"Proxy" shall mean a written authorization signed by a
Partner or the Partner's attorney-in-fact giving another person
the power to vote with respect to the interest of that Partner.
"Signed" for the purposes of this definition means the placing of
Partner's name on the proxy (whether by manual signature,
typewriting, telegraphic transmission, or otherwise) by the
Partner or Partner's attorney-in-fact.
"Qualified Plan" shall mean any trust established pursuant
to the terms of a Keogh plan or corporate pension, profit sharing
or stock bonus plan which meets the requirements of Section 401
et seq. of the Internal Revenue Code.
"Reference Rate" shall mean the rate of interest announced
from time to time by a specified bank as its "reference rate,"
"prime rate" or comparable rate. For purposes of the interest
rate reimbursements described herein, interest will be compounded
daily on a 360-day year.
"Registration Statement" shall mean the Registration
Statement on Form S-11 (Reg. No. 33-9164), as amended, filed by
the Partnership with the Securities and Exchange Commission for
the registration of the Units.
"Selling Agreement" shall mean that certain Selling
Agreement between the Principal Distributor and a Broker/Dealer
relating to the offer and sale of Units.
"Subordinated Property Disposition Interest" shall mean an
amount to be paid to the General Partner upon sale or exchange of
a Property in the amount up to 3% of the gross sales price of a
Property, subordinated as indicated in Section 7.8(a) of the
Agreement.
"Subscriber" shall mean a person who has completed a
subscription agreement and submitted it together with payment for
the number of Units being purchased to the General Partner.
"Subscription Agreement" shall mean the prescribed
subscription agreement, a form of which is included as Exhibit D
to the Prospectus, which must be executed as a condition
precedent to becoming a Limited Partner.
"Substituted Limited Partner" shall mean an assignee of a
Limited Partner or a substituted Limited Partner who is admitted
at the discretion of the General Partner, as a Limited Partner
pursuant to Section 11.5 of the Agreement.
"10% Priority Return" shall mean a 10% per annum cumulative
simple preferred return on the Invested Capital of each Limited
Partner, computed from the last day of the calendar quarter in
which the Limited Partner was admitted to the Partnership.
"Unit" shall mean a unit of limited partnership interest in
the Partnership.
"Working Capital Reserves" shall mean the reserve cash
necessary for the Partnership to meet its ongoing operating
expenses as well as any other anticipated cash obligations
whether of a capital nature or otherwise. All additions to and
reductions from Working Capital Reserves shall be determined at
the sole discretion of the General Partner.
ARTICLE 2
GENERAL PROVISIONS
2.1 Formation of the Partnership
The parties hereto confirm that the Partnership was
formed under the Act with such variations and terms as provided
in this Agreement.
2.2 Name of the Partnership
The name of the Partnership shall be "Prometheus
Income Partners, a California Limited Partnership," or such other
name as shall be selected from time to time by the General
Partner upon written notice to the Limited Partners.
2.3 Purposes
Subject to the limitations set forth in this
Agreement, the purposes of the Partnership are to develop and
hold the Properties as an investment; to raise capital for the
foregoing; to develop, manage, operate, lease, alter, improve and
maintain the Properties; to acquire additional personal property
and construct or renovate such additional real estate
improvements on the Properties as are appropriate to the
operation of the Properties; to act in all other respects as the
owner of the Properties; to finance and refinance by mortgage or
unsecured loan or any combination thereof; ultimately to sell,
transfer, exchange or otherwise dispose of part or all of the
Properties; and to conduct such other activities as may be
necessary or incidental to or desirable in connection with the
foregoing.
2.4 Principal Place of Business and Office of the
Partnership
The principal place of business and office of the
Partnership shall be located at 20300 Stevens Creek Boulevard,
Suite 100, Cupertino, California 95014, or such other place or
places as the General Partner may from time to time designate by
notice to the Limited Partners. In addition, the Partnership may
maintain such other offices as the General Partner deems
advisable.
2.5 Term
The Partnership shall commence upon the filing with
the California Secretary of State of the Certificate of Limited
Partnership and shall continue until December 31, 2016, unless
sooner dissolved and terminated pursuant to the provisions of
Article 13 hereof.
2.6 General Partner
The name and place of business of the General Partner
is as follows:
Prometheus Development Co., Inc.
20300 Stevens Creek Boulevard, Suite 100
Cupertino, California 95014
2.7 Certificate of Limited Partnership
The General Partner has caused to be filed a
Certificate of Limited Partnership with the California Secretary
of State in accordance with the terms of the Act.
2.8 Other Acts/Filings
The Partners and Assignees shall from time to time
execute or cause to be executed all such certificates, fictitious
business name statements, and other documents, and do or cause to
be done all such filings, recordings, publishings, and other acts
as the General Partner may deem necessary or appropriate to
comply with the requirements of law for the formation and
operation of the Partnership in all jurisdictions in which the
Partnership shall desire to conduct business.
2.9 Agent for Service of Process
The agent for service of process for the Partnership
in California shall be Stephen R. Koch or such other eligible
individual California resident or corporation qualified to act as
an agent for service of process as the General Partner shall
designate.
ARTICLE 3
CAPITAL CONTRIBUTIONS AND RELATED MATTERS
3.1 Capital Contributions by the General Partner
The General Partner has contributed $1,000 to the
capital of the Partnership in consideration of its interest in
the Partnership. Except as provided in Section 5.7, the General
Partner shall not be required to make any additional
contributions to the Partnership or to reimburse any other
Partner.
3.2 Capital Contributions by the Initial Limited Partner
and the Limited Partners
(a) Initial Limited Partner. The Initial Limited
Partner has contributed the sum of $10 to the capital of the
Partnership. Upon the admission of additional Limited Partners
pursuant to Section 3.2(b), the Initial Limited Partner's
interest shall be redeemed at cost and the Initial Limited
Partner shall have no further interest in the Partnership.
(b) Initial Offering. The Partnership intends to
offer for subscription up to 19,000 Units for the price of $1,000
per Unit, subject to Section 3.5, and admit each person who
subscribes for at least five Units (two Units if the person
subscribing is an IRA or Qualified Plan) as an additional Limited
Partner in the Partnership, subject to the provisions of Section
3.4 of this Agreement; provided, however, that the General
Partner, in its sole discretion, may waive the minimum Unit
purchase requirement with respect to any investor, provided that
any initial investor (other than an IRA or a Qualified Plan)
shall purchase no less than 2.5 Units ($2,500). Each purchaser
shall contribute $1,000 per Unit, subject to Section 3.5, to the
capital of the Partnership, payable in full in cash upon
subscription.
3.3 No Action or Consent Necessary by Limited Partners
for Admission of Other Limited Partners
No action or consent by Limited Partners shall be
required in connection with the admission of new or Substituted
Limited Partners to the Partnership. Only the consent of the
General, Partner is necessary for the admission or substitution
of any Limited Partners to the Partnership.
3.4 Subscriptions and Admission
(a) The General Partner shall admit as Limited
Partners Subscribers who have been accepted and who submitted
subscriptions on or before the Completion Date, and amend any
documents necessary for admission, not later than (i) 15 days
after the release from escrow of the Subscriber's funds to the
Partnership or (ii) the last day of each calendar month.
Subscriptions will be accepted or rejected by the Partnership
within 30 days of their receipt; if rejected, all funds shall be
returned to the Subscriber within 10 business days of the
decision to reject.
(b) Initially, subscriber funds shall be deposited in
an escrow account at Security Pacific National Bank, and Security
Pacific National Bank, shall be the Escrow Agent. While held in
such account, subscription funds shall be invested in
permissible, short-term, highly liquid investments in which there
is appropriate safety of principal. Subscription funds shall not
be released from the escrow account until subscriptions for at
least 4,000 Units have been received, accepted and deposited in
such account. After this minimum amount has been received, at
the sole discretion of the General Partner, the subscription
funds may be released to the Partnership from the escrow account.
In any event, no subscription funds will be released from the
escrow account until such funds equal at least $4,000,000. The
General Partner, at its discretion, may terminate the offering of
Units at any time prior to the release of subscription funds from
the escrow account to the Partnership. If the $4,000,000 minimum
is not received prior to the Completion Date or the offering is
terminated prior to the release of subscription funds from the
escrow account, subscription funds together with any interest
earned thereon shall be returned promptly to the investors.
After 4,000 or more Units have been sold and the General Partner
has requested the release of the Subscribers' funds from the
escrow account, investors shall be admitted to the Partnership.
After release of the Subscribers' funds from the escrow account,
subsequent subscriptions shall be deposited in a Partnership
account and any interest earned thereon shall remain in the
Partnership.
(c) The General Partner may decline to accept any
Subscriber for Units for any reason. If rejected, all
subscription monies shall be returned to the Subscriber promptly.
3.5 Purchase of Units by General Partner and Related
Parties
The purchase of Units by the General Partner, its
Affiliates, certain of its agents, Broker/Dealers, and their
employees shall be net of any underwriting commissions and the
Distributor Fee. Any such Units purchased by the General
Partner, its Affiliates, certain of its agents, Broker/Dealers,
or their employees shall be held as Limited Partner Units and be
entitled to all rights as such. If the subscription funds are
released to the Partnership in accordance with Section 3.4(b),
the General Partner or its Affiliates shall be obligated to
purchase any Units remaining unsold on the Completion Date. The
General Partner and its Affiliates shall hold all Units they
purchase for investment purposes and not for resale.
3.6 Assessments or Additional Contributions
Units are nonassessable, and no Limited Partner shall
be required to make additional contributions to the capital of
the Partnership in excess of the Limited Partner's subscription.
3.7 No Withdrawal of Contributions
No Limited Partner shall have the right to withdraw a
contribution to the Partnership.
3.8 Return of Capital
There is no agreement for or time set for the return
of any contribution of any Limited Partner. To the extent funds
are available therefor, the General Partner may return
contributions out of operating revenue or out of proceeds of sale
or refinancing or any other assets of the Properties, after
reserving sufficient funds for payment of debts, working capital,
contingencies, replacements, and withdrawals of capital, if any,
and to the extent of available funds, the General Partner shall
return said capital at dissolution and termination, as set forth
in this Agreement.
3.9 No Interest on Capital Contributions
No Partner shall be entitled to interest of any kind
on account of a Capital Contribution.
3.10 No Priority
Except as otherwise provided in this Agreement, no
limited Partner shall have priority over any other Limited
Partner as to return of contributions, allocations of income,
gain, loss, deduction, credit, or as to distributions.
3.11 Securities Laws
To accomplish the purposes of this Article, the
General Partner is hereby authorized to do all things necessary
to admit Limited Partners, including, but not limited to,
registering the Units for sale with the Securities and Exchange
Commission, qualifying the Units for sale with state securities
regulatory authorities or perfecting exemptions from
qualification, and entering into such underwriting or agency
arrangements for the offer and sale of Units upon such terms and
conditions as the General Partner may deem advisable.
3.12 Temporary Investment of Partnership Capital
Proceeds from the sale of Units and other Partnership
funds shall be held in one or more Partnership accounts for the
exclusive use of the Partnership and may be temporarily invested
in (a) obligations with a maturity of one year or less that are
issued or insured by the United States government or its
agencies, (b) repurchase agreements covering such governmental
obligations, (c) certificates of deposit and banker's acceptances
issued by banks having a net worth of at least $50,000,000, (d)
investment grade commercial paper, (e) bank accounts, or (f)
money market funds. Any interest thereon shall inure to the
benefit of the Partnership, and the Limited Partners shall not
receive interest on funds contributed by them.
3.13 Investment in Properties
The Partnership shall apply to Investment in Properties a
minimum percentage of Gross Offering Proceeds which is equal to
the greater of:
(a) 80% of the Gross Offering Proceeds reduced by
.1625% for each 1% of indebtedness encumbering the Properties; or
(b) 67% of the Gross Offering Proceeds.
The "percentage of indebtedness encumbering Partnership
Properties" is the percentage resulting when the indebtedness on
the Properties (whether the debt is on a Property when purchased
or placed on Property at the time of purchase) is divided by the
Cost of All Partnership Properties excluding Front-End Fees.
ARTICLE 4
TAX ALLOCATIONS
4.1 Definitions
For purposes of this Article 4, the following phrases shall
have the meanings indicated below:
"Minimum Gain" shall have the meaning ascribed in the
Treasury Regulations under Section 704(b) of the Internal Revenue
Code, i.e., generally, the excess, if any, of the outstanding
balance of nonrecourse liabilities to which the Properties are
subject over the Partnership's adjusted basis in the Properties
for tax purposes. Should such definition of "minimum gain" be
changed, the General Partner may, in its discretion and without
the consent of the Limited Partners, modify the definition of
"Minimum Gain" contained herein to effectuate the intent of the
Partners as expressed in Section 4.2.
"Operating Net Profits" and "Operating Net Losses" shall
mean Net Profits and Net Losses other than Net Profits and Net
Losses realized on sales or other, dispositions of the
Properties.
4.2 General Rule
It is the intention of the Partners that each Partner's
distributive share of tax items shall be determined and allocated
in accordance with the allocation provisions of this Agreement to
the fullest extent permitted by Sections 704(b) and (c) of the
Internal Revenue Code. Therefore, if the Partnership is advised
by counsel or its accountants that the allocation provisions of
this Agreement are unlikely to be respected for federal income
tax purposes, the General Partner is granted the authority in
Section 15.2 to amend the allocation provisions of this Agreement
to the extent deemed necessary by counsel or its accountants to
effect the plan of allocations and distributions of Distributable
Cash from Operations and Net Proceeds from Sale or Refinancing
provided in this Agreement. The General Partner shall have the
discretion to adopt and revise such rules, conventions and
procedures as it believes appropriate with respect to the
admission of Limited Partners to reflect Partners' interests in
the Partnership at the close of the year.
4.3 Allocation to Initial Limited Partner
During the period that the Initial Limited Partner is the
only Limited Partner in the Partnership, Net Profits and Net
Losses shall be allocated 1% to the General Partner and 99% to
the Initial Limited Partner. Thereafter, Net Profits and Net
Losses shall generally be allocated as set forth in Sections 4.4
to 4.8.
4.4 Net Profits and Net Losses from Operations
(a) If Distributable Cash from Operations is
distributed during the year in question, Operating Net Profits
shall be allocated among the General Partner and the Limited
Partners in proportion to the Distributable Cash from Operations
distributed to them, provided that in no event will the Limited
Partners receive an allocation in excess of 99% of the Operating
Net Profits. If no cash is distributed during the year in
question, Operating Net Profits shall be allocated 99% to the
Limited Partners and 1% to the General Partner.
(b) Operating Net Losses shall be allocated 1% to the
General Partner and 99% to the Limited Partners.
4.5 Net Profits and Net Losses on Sale or Other
Disposition of a Property
(a) Net Profits realized on sale or other disposition
of either or both of the Properties shall be allocated and
capital account balances determined prior to any distribution of
Net Proceeds from Sale or Refinancing. Such Net Profits shall be
allocated first 99% to the Limited Partners and 1% to the General
Partner until the capital account balances of the Limited
Partners in the aggregate equal the amount of Net Proceeds from
Sale or Refinancing which would be distributable to the Limited
Partners pursuant to Section 5.4(c)(1) before any distribution
could be made pursuant to Section 5.4(c)(2); second if the
Partnership does not treat the Subordinated Property Disposition
Interest as deductible or includible in the basis of the Property
to which it relates, an amount of Net Profits equal to such
Subordinated Property Disposition Interest shall be allocated to
the General Partner; and thereafter 85% to the Limited Partners
and 15% to the General Partner. With respect to Net Profits
allocated to the Limited Partners, if a Limited Partner's capital
account balance (on a per Unit basis) equals the amount of Net
Proceeds from Sale or Refinancing which must be distributed to
such Limited Partner before a distribution can be made under
Section 5.4(c)(2) while other Limited Partners' capital account
balances are less than such amount on a per Unit basis, the
portion of Net Profits, if any, that would otherwise be allocated
to the Limited Partner whose capital account balance equals such
amount shall be instead allocated to Limited Partners whose
capital accounts are less than such amounts.
(b) Notwithstanding the provisions of Section 4.5(a),
upon the sale or disposition of a Property, before allocating Net
Profits under Section 4.5(a), (i) Net Profits up to an amount
equal to the sum of the negative capital account balances of the
Partners having negative capital account balances shall be
allocated to the Partners having negative capital account
balances in the ratio that the negative capital account balance
of each bears to the aggregate negative capital account balances,
and (ii) Net Profits thereafter shall be allocated pursuant to
Section 4.5(a).
(c) Net Losses realized on sale of either or both of
the Properties shall be allocated first to Partners with positive
capital accounts, in the proportion that the capital account
balance of each bears to the aggregate capital account balances
of all Partners with positive capital accounts, and thereafter
99% to the Limited Partners and 1% to the General Partner.
4.6 Allocation of Nonrecourse Deductions and Minimum Gain
Chargeback
Allocations under this Agreement of nonrecourse deductions,
as defined in Treasury Regulation Section 1.704-1(b)(4)(iv), are
intended to be made in accordance with the Regulations under
Section 704(b) of the Internal Revenue Code. In the event the
General Partner shall determine that it is advisable to modify
the allocations contained in this Agreement to comply with such
Regulations, the General Partner is authorized hereby to make
such modifications. If there is a net decrease in Minimum Gain
during a taxable year, all Partners with a deficit capital
account balance at the end of such year (excluding from each
Partner's deficit capital account balance any amount that such
Partner is obligated to restore under this Agreement as well as
any addition thereto pursuant to the next to last sentence of
Treasury Regulation Section 1.704-1(b)(4)(iv)(f) computed with
respect to the amount of Minimum Gain after such net decrease)
will be allocated, before any other allocation is made of
Partnership items for such taxable year, items of income and gain
for such year (and, if necessary, subsequent years) in the amount
and in the proportions needed to eliminate such deficits as
quickly as possible. For purposes of the preceding sentence,
Partners' capital accounts shall be reduced for the items
described in Treasury Regulation Sections 1.704-
1(b)(2)(ii)(d)(4), (5), and (6). The Minimum Gain chargeback
allocated in any taxable year shall consist first of gains
recognized from the disposition of items of Partnership Property
subject to one or more nonrecourse liabilities of the Partnership
to the extent of the decrease in Minimum Gain attributable to the
disposition of such items of Property, with the remainder of such
Minimum Gain chargeback, if any, made up of a pro rata portion of
the Partnership's other items of income and gain for that year.
If, however, such gains exceed the amount of the Minimum Gain
chargeback, a proportional share of each such gain shall
constitute a part of the Minimum Gain chargeback.
4.7 Provisional Allocation
In the event that an amount claimed by the Partnership,
which constitutes a deductible expense in any tax year of the
Partnership, is treated as a payment made to a Partner in his
capacity as a member of the Partnership for income tax purposes,
income and gain of the Partnership for such year shall first be
allocated to the recipient of such payment and no deductions and
losses of the Partnership shall be allocated thereto.
4.8 Special Allocations
Notwithstanding any other provision of this Agreement to the
contrary:
(a) Operating Net Losses allocable to the Limited
Partners shall be first allocated to any Limited Partner whose
capital account balance is greater in amount than the capital
account balance of any other Limited Partner, until such time as
the balance in each Limited Partner's capital account on a per
Unit basis equals the balance in the capital account of every
other Limited Partner, and thereafter among all Limited Partners
on a per Unit basis.
(b) In no event shall any losses be allocated to any
Limited Partner whose capital account has been reduced to zero
(unless such Limited Partner agrees to make up any negative
balance in his capital account) until the capital accounts of all
Limited Partners have been reduced to zero. If any Limited
Partner's capital account has been reduced to zero at any time
when any other Limited Partners' capital accounts have positive
balances, any such losses shall be allocated among such Limited
Partners with positive capital account balances in the proportion
which such positive balances bear to each other (for purposes of
determining proportionality such positive capital account
balances shall be determined as of the date of such allocation).
After the capital accounts of all Partners have been reduced to
zero, losses shall again be allocated as otherwise provided in
this Agreement, except that in no event shall losses be allocated
to any Limited Partner if such allocation would not be recognized
under Section 704 of the Internal Revenue Code and such losses
shall be reallocated first to Limited Partners with respect to
whom such allocation would be recognized and thereafter to the
General Partner.
(c) Any recapture under Section 1245 or Section 1250
of the Internal Revenue Code shall be allocated to those Partners
who were allocated the deductions to which such recapture
relates.
(d) In the event any of the Partners receive an
adjustment, allocation or distribution described in Treasury
Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) or (6) which
results in a deficit in the capital account balance of such
Partners, such Partners shall be allocated 100% of all items of
income or gain to the extent of the lesser of (i) the amount of
such adjustment, allocation or distribution, or (ii) the deficit
in such Partner's capital account balance, pro rata in accordance
with such amount.
(e) Nondeductible, nonamortizable syndication
expenses (other than underwriting commissions and the
Distributor Fee) shall be allocated 100% to the Limited
Partners and divided among such Limited Partners from time to
time so that to the extent possible an equal amount of such
expenses is allocated to each Unit. Underwriting commissions
and the Distributor Fee shall be allocated directly to the
Limited Partner with respect to whose Units such commissions and
fees were actually charged.
ARTICLE 5
DISTRIBUTIONS OF CASH
5.1 Prior to Admission of Additional Limited Partners
During the period that the initial Limited Partner is
the only limited partner in the Partnership, all distributions of
cash shall be made at the sole discretion of the General Partner
and shall be made 1% to the General Partner and 99% to the
Initial Limited Partner.
5.2 Subsequent to Admission of Additional Limited Partners
After the period specified in Section 5.1, Partnership
distributions shall be made in the manner set forth in Sections
5.3 and 5.4.
5.3 Distributions of Cash from Operations
Distributable Cash from Operations shall be distributed
quarterly and initially shall be distributed 100% to the Limited
Partners until the Limited Partners have received a sum each year
equal to a 10% Priority Return, as determined from time to time;
provided, however, that Distributable Cash from Operations
realized by the Partnership during 1987 shall be apportioned
among the Limited Partners in a manner which reflects the number
of days in 1987 after the date on which the Escrow Agent or the
General Partner received a Limited Partner's Capital
Contribution. The Incentive Priority Return will be distributed
from Net Proceeds from Sale or Refinancing. After the receipt by
the Limited Partners of a 10% Priority Return, Distributable Cash
from Operations shall be distributed 100% to the General Partner
until the General Partner has received 5% of the aggregate cash
distributed to the Limited Partners in that year pursuant to the
first sentence of this Section 5.3. Thereafter, Distributable
Cash from Operations shall be distributed 95% to the Limited
Partners and 5% to the General Partner in that year.
5.4 Distributions of Net Proceeds from Sale or Refinancing
Net Proceeds from Sale or Refinancing shall be utilized or
distributed in the following priority (to the extent funds are
available):
(a) To the payment of current Partnership
obligations, liabilities and expenses.
(b) To the setting up of reserves which the General
Partner may, in its sole discretion, deem necessary for
Partnership debts or liabilities, whether payable or not yet
payable, including any contingent or unforeseen liabilities or
obligations. Such reserves may be held for disbursement by the
General Partner in the Partnership bank account or delivered to
an independent escrow holder selected by the General Partner to
be held for the purpose of disbursing such reserves in payment of
any of the Partnership's contingent liabilities or liabilities
not yet due. At such time as the General Partner shall
determine, any balance remaining in such reserves shall be
distributed in accordance with this Section 5.4.
(c) The balance shall be distributed to Partners in
the following order:
(1) 100% to the Limited Partners until each
Limited Partner has received an amount equal to (i) the excess of
(A) a 10% Priority Return, less (B) the sum of all previous cash
distributions during the term of the Partnership other than
distributions of Invested Capital pursuant to this Section
5.4(c)(1), (ii) if applicable to a Limited Partner, an Incentive
Priority Return and (iii) the Limited Partners' remaining
Invested Capital. Notwithstanding the foregoing, the General
Partner shall be entitled to its Subordinated Property
Disposition Interest upon the sale of either or both of the
Properties, as subordinated in the manner set forth in Section
7.8 (a).
(2) The balance:
(A) 85% to the Limited Partners; and
(B) 15% to the General Partner.
(3) Notwithstanding the foregoing provisions of
this Section 5.4, distributions of Net Proceeds from Sale or
Refinancing arising from the termination of the Partnership
(which term shall, for this purpose, mean the sale or other
disposition of both of the Properties) shall (after all Net
Profits from such sale or other disposition have been allocated
pursuant to Article 4) be distributed first in proportion to, and
to the extent of, the positive capital account balances of the
Partners, and thereafter as set forth above.
5.5 Consent to Distributions
Any distribution made to a Partner pursuant to this
Agreement shall be deemed to be consented to by the Partners.
5.6 Capital Accounts
Individual capital accounts shall be maintained for each
Partner. Each Partner's capital account shall consist of such
Partner's original contribution of capital increased by such
Partner's (a) additional contributions of capital, and (b)
allocable share of Partnership income and gains (including income
exempt from tax) and decreased by such Partner's share of (c)
distributions, (d) allocable share of Partnership losses, and (e)
expenditures of the Partnership not deductible in computing its
taxable income and not properly added to the tax basis of any
Partnership asset. The foregoing provisions and the other
provisions of this Agreement relating to capital accounts are
intended to comply with applicable Treasury Regulations
promulgated under Section 704 of the Internal Revenue Code and
shall be interpreted and applied in a manner consistent with such
Regulations. In the event the General Partner shall determine it
is advisable to modify the manner in which the capital accounts,
or any credits or debits thereto, are computed in order to comply
with such Regulations, the General Partner may make such
modifications, provided such modification is not likely to have a
material effect on the amounts distributed to any Partner
pursuant to Article 5 hereof upon dissolution of the Partnership.
5.7 General Partner's Obligation to Make Up Negative
Capital Account
If, immediately prior to the dissolution and termination of
the Partnership, the General Partner's capital account has a
deficit balance and the Partnership assets available for
distribution upon dissolution and termination are insufficient to
provide distributions to Limited Partners equal to their Invested
Capital, the General Partner shall be obligated to contribute to
the Partnership that amount of capital (if any) equal to the
lesser of (a) an amount sufficient to restore its capital account
to zero, or (b) 1.01% of the aggregate Capital Contributions of
the Limited Partners, less any capital previously contributed by
the General Partner.
5.8 Limited Partners' Share of Allocations and
Distributions
Except as otherwise provided in this Agreement, allocations
of income, gain, loss, deduction, credit, and distributions to
the Limited Partners as a group shall be further allocated and
distributed among the Limited Partners in proportion to the ratio
of the number of Units owned by the Limited Partner to the total
outstanding Units as of the relevant dates of determining such
allocations and distributions. Units held by the General Partner
or its Affiliates will be treated similarly.
Allocations of tax items shall be determined using an
interim closing of the books as of the date Limited Partners are
deemed admitted pursuant to such convention or other method as
the General Partner shall select for the Partnership.
5.9 Allocation Between Assignor and Assignee
The portion of the income, gain, loss, deductions and
credits of the Partnership for any fiscal year of the Partnership
during which a Unit is assigned by a Limited Partner (or by an
Assignee or successor in interest to a Limited Partner) that is
allocable in respect of such Unit shall be apportioned between
the assignor and the assignee of the Unit on the basis of the
number of days during such fiscal year that each is the owner
thereof, without regard to (a) the results of Partnership
operations before or after the effective date of the assignment,
or (b) any distributions made to the Partners before or after the
effective date of the assignment; provided, however, that (i)
gain or loss on the sale or other disposition of either or both
of the Properties shall be allocated to the owner of the Unit on
the date of such sale or other disposition, (ii) distributions of
Net Proceeds from Sale or Refinancing shall be made to the owner
of record of the Unit on the date of the sale or refinancing,
(iii) the General Partner may in its sole discretion modify the
foregoing allocation in any reasonable manner required or
permitted by the Internal Revenue Code or applicable regulations
or rulings thereunder. The effective date of an assignment of a
Unit shall be as designated by the General Partner pursuant to
Section 11.3(b).
5.10 Timing of Distributions
Quarterly distributions, if any, will be made to holders of
record as of the last day of the respective quarter.
Distributions will be made without regard to the number of days
during the quarter that a person is a Limited Partner.
5.11 Limitations on Distributions
The Partnership may be restricted from making distributions
under the terms of notes, mortgages or other types of debt
obligations which it may issue or assume in conjunction with
borrowed funds, and notwithstanding the provisions of this
Article 5, distributions may also be restricted or suspended,
whenever the General Partner determines, in its absolute
discretion, that such action is in the best interests of the
Partnership. All distributions are subject to the payment of
Partnership expenses and the maintenance of reasonable reserves.
ARTICLE 6
MANAGEMENT OF THE PARTNERSHIP
6.1 Management Powers of the General Partner
The Partnership shall be managed by the General Partner.
Subject only to the limitations specifically contained in this
Agreement, the General Partner shall have the full, exclusive and
absolute right, power and authority to manage and control the
Partnership and the property, assets and business thereof. The
General Partner shall have all of the rights, powers and
authority conferred upon it by law or under other provisions of
this Agreement. Without limiting the generality of the
foregoing, such powers include the right, in the General
Partner's sole discretion, on terms and conditions determined by
the General Partner, subject only to the provisions of Section
6.2. to:
(a) Acquire, purchase, renovate, improve, and own the
Properties and any other property or assets that the General
Partner determines are necessary or appropriate or in the best
interests of the business of the Partnership, and to acquire and
exercise options for the purchase of any such property;
(b) Construct buildings and make other improvements
on the real estate owned by the Partnership;
(c) Borrow money (including but not limited to sums
under the mortgage loans for the Properties and any Credit
Enhancement required in connection with the permanent financing),
issue evidences of indebtedness in connection therewith,
refinance, increase the amount of, modify, amend or change the
terms of, or extend the time for the payment of, any indebtedness
or obligation of the Partnership, secure such indebtedness by
mortgage, deed of trust, pledge or other lien on Partnership
assets, and prepay in whole or in part, refund, refinance,
increase, modify, consolidate, or extend the maturity of, any
indebtedness or obligation of the Partnership;
(d) Cause the Partnership and itself as General
Partner to offer and sell Units through the Principal Distributor
which shall engage the Broker/Dealers to assist in the sale of
Units;
(e) Pay all expenses, underwriting commissions and
the Distributor Fee incurred in connection with the sale of
Units;
(f) Sell, exchange, lease or otherwise dispose of the
real estate and other property and assets owned by the
Partnership, or any part thereof, or any interest therein;
(g) Enter into any partnership agreement or joint
venture with any person acceptable to the General Partner and
which is engaged in any business or transaction in which the
Partnership is authorized to engage in; provided, however, that
the Partnership shall have a controlling interest in such other
venture and duplicate property management or other fees shall not
be paid with respect to such venture. The Partnership shall not
be permitted to invest in a joint venture arrangement with
another partnership formed by the General Partner or its
Affiliates unless (i) such other partnership has investment
objectives which are substantially identical with those of the
Partnership, (ii) the compensation of the sponsor of the other
partnership should be substantially identical with the
Partnership's compensation of the General Partner and its
Affiliates, (iii) the Partnership has a right of first refusal to
buy the property owned by the venture if the other partnership
desires to sell, and (iv) the investment of each partnership in
the venture is on substantially the same terms and conditions;
(h) Sue on, defend or compromise any and all claims
or liabilities in favor of or against the Partnership and to
submit any or all such claims or liabilities to arbitration
(including without limitation claims of the Partnership in
respect of unpaid Capital Contributions, or amounts which may be
required to be returned to the Partnership);
(i) File applications, communicate and otherwise deal
with any and all governmental agencies having jurisdiction over,
or in any way affecting, the Partnership's assets or any part
thereof or any other aspect of the Partnership business;
(j) Make or revoke any election permitted the
Partnership by any taxing authority;
(k) Maintain such insurance coverage for public
liability, fire and casualty, and any and all other insurance
necessary or appropriate to the business of the Partnership
(including without limitation errors and omission insurance,
subject to the limitations of Section 6.7(e), the policy for
which shall be considered the sole property of the General
Partner), in such amount and of such type, as it shall determine
from time to time;
(l) Determine whether or not to apply any insurance
proceeds for either Property to the restoration of such Property
or to distribute the same;
(m) Retain legal counsel, auditors and other
professionals in connection with the Partnership business and to
pay therefor such remuneration as the General Partner may deem
reasonable and proper;
(n) Retain other services of any kind or nature in
connection with the Partnership business and to pay therefor such
remuneration as the General Partner may deem reasonable and
proper;
(o) Employ persons in connection with the Partnership
business on such terms and for such compensation as the General
Partner may deem reasonable and proper, subject however to the
limitations set forth in Article 7 and provided that any
agreements for services with the General Partner or its
Affiliates shall be terminated immediately on the dissolution of
the Partnership;
(p) Negotiate and conclude agreements on behalf of
the Partnership with respect to any of the rights, powers and
authority conferred upon the General Partner;
(q) Purchase, lease, rent, or otherwise acquire or
obtain the use of machinery, equipment, tools, materials, and all
other kinds and types of real or personal property that may in
any way be deemed necessary, convenient, or advisable in
connection with carrying on the business of the Partnership;
(r) Guaranty the payment of money or the performance
of any contract or obligation by any person, firm, or corporation
on behalf of the Partnership;
(s) Alter, improve, repair, raze, refurbish, replace
and rebuild either or both Properties;
(t) Repurchase Units on behalf of the Partnership in
accordance with Section 11.7 if such purchase does not impair the
capital or operation of the Partnership;
(u) Act directly or through Affiliates, under non-
exclusive listings, as a real estate broker for the purchase and
sale of the Properties, and enter into listing agreements or
other agreements with third party brokers with regard to the
acquisition and disposition of Partnership assets;
(v) File tax returns on behalf of the Partnership and
elect such methods of cost recovery or make any other tax
elections or determinations as the General Partner shall deem
desirable;
(w) Enter into the transactions described in or
contemplated by the Prospectus;
(x) Amend this Agreement pursuant to the terms of any
Power of Attorney from Limited Partners or pursuant to the terms
of this Agreement;
(y) Require in any or all Partnership contracts that
the General Partner and its Affiliates shall not have any
personal liability thereon and that the person or entity
contracting with the Partnership is to look solely to the
Partnership assets for satisfaction, and to require the
satisfaction of contracts on which the General Partner and its
Affiliates have personal liability prior to contracts on which
they have no such personal liability;
(z) Execute, acknowledge, and deliver any and all
instruments, on behalf of the Partnership or otherwise, which it
shall deem necessary or appropriate to effectuate the rights,
authority and power of the General Partner, and to take all such
action in connection therewith as it shall in its discretion deem
necessary or appropriate;
(aa) Hold each of the Properties in its own name or in
the name of an Affiliate thereof (and assume loans in connection
therewith) and temporarily hold title thereto for the purpose of
facilitating the development of the Properties, the borrowing of
money or the obtaining of financing by the Partnership, or for
any other purpose related to the business of the Partnership;
provided that each of the Properties is purchased by the
Partnership for a purchase price no greater than the cost of such
Property to the General Partner; and provided further that there
is no difference in the interest rates of the loans secured by
the Properties at the time acquired by the General Partner and
the time acquired by the Partnership nor any other benefit
arising out of the transaction to the General Partner.
(bb) Make or arrange long-term and short-term loans,
including loans from its Affiliates, to the Partnership, receive
interest or other financing charges or fees, provided that the
interest charges or fees are not in excess of amounts charged by
third party financing institutions on comparable loans for the
same purpose or, if the funds for a loan are obtained by the
General Partner or one of its Affiliates from a lending
institution, the rate and other fees which the General Partner or
its Affiliates is required to pay the lending institution;
(cc) Execute, deliver and perform under the mortgage
loans, the Credit Enhancement, and related documents; and
(dd) Perform any and all other acts the General
Partner deems necessary or appropriate to the Partnership
business.
6.2 Restrictions on General Partner
The General Partner, without the approval of a Majority Vote
of Limited Partners or such other vote as may be specified, shall
have no authority to:
(a) Do any act in contravention of this Agreement;
(b) Confess a judgment against the Partnership;
(c) Possess Partnership property or assign rights to
Partnership property, for other than a Partnership purpose;
(d) Perform any act (other than an act required by
this Agreement or any act performed in good faith reliance upon
counsel's opinion) which would, at the time such act occurs,
subject any Limited Partner to liability as a general partner in
any jurisdiction; provided, however, that no such act shall be
performed without first obtaining the approval of any Limited
Partner who may be subjected to general partner liability as a
result of the act;
(e) Use Distributable Cash from Operations or Net
Proceeds from Sale or Refinancing to acquire real property;
(f) Commingle, or cause the Partnership to commingle,
Partnership funds with those of any other person or entity except
the funds of other limited partnerships sponsored by the General
Partner or its Affiliates held in an account or accounts
established and maintained for the purpose of making
disbursements to (i) Partners and creditors of the Partnership
and to the holders of Units and (ii) partners and creditors of
such other limited partnership; provided, however, that any such
accounts shall be structured and maintained in such a manner that
Partnership funds are protected from claims of such other
partnerships and their creditors;
(g) Cause the Partnership to purchase, sell, assign
or lease either or both of the Properties, including a purchase
from or a sale or lease to the General Partner or its Affiliates,
except for the assignment of the Properties by Affiliates of the
General Partner to the Partnership and the leasing of the rental
units of the Properties as set forth in the Prospectus;
(h) Directly or indirectly pay or award any finder's
fees, commissions, or other compensation to any person engaged by
a potential investor for investment advice as an inducement to
such advisor to advise the purchaser regarding the purchase of
Units; provided, however, that the General Partner shall not be
prohibited from paying underwriting commissions, the Distributor
Fee, other normal commissions, sales incentives, or from
reimbursing accountable expenses incurred in connection with the
offering in accordance with Section 7.1, in an aggregate amount
of up to 10% of the Gross Offering Proceeds (plus up to .5% of
the Gross Offering Proceeds for due diligence expenses) payable
to the Principal Distributor, which may reallow some or all of
the underwriting commissions, Distributor Fee and due diligence
expenses to the Broker/Dealers;
(i) Cause the Partnership to enter into any agreement
with the General Partner or its Affiliates unless that agreement
is subject to termination without penalty by the Partnership upon
notice of sixty (60) days or less;
(j) Receive a rebate or participate in any reciprocal
business arrangements which would enable it to do so;
(k) Cause the Partnership to exchange Units for
property;
(l) Cause the Partnership to loan money to the
General Partner or its Affiliates;
(m) Cause the Partnership to invest in a limited
partnership interest of another partnership;
(n) Cause the Partnership to enter into any loans
secured by either or both of the Properties if the outstanding
principal and accrued and unpaid interest under the Partnership's
secured loans, including the principal under the contemplated
loan, would exceed 80% of the then current value of its
Properties; or
(o) Provide or cause its Affiliates to provide
insurance brokerage services to the Partnership.
6.3 Limited Partners Have No Management Powers
The Limited Partners shall have no voice or participation in
the management of the Partnership business, and no power to bind
the Partnership or to act on behalf of the Partnership in any
manner whatsoever, except by specifically authorized voting
rights contained in this Agreement.
6.4 General Partner's Duty to Devote Time
The General Partner shall devote such time and attention to
the business of the Partnership as it shall determine, in the
exercise of its reasonable judgment, to be necessary for the
conduct of the Partnership business; provided, however, that the
General Partner shall not be required to devote full time and
attention to the Partnership or to its business.
6.5 General Partner May Engage in Other Activities
The General Partner and its officers, directors,
shareholders, agents, employees and Affiliates shall have the
right to engage in any other business (including, but not limited
to, acting as a partner in other partnerships formed for the
purpose of investing in real estate) and to compete, directly or
indirectly, with the business of the Partnership, and neither the
Partnership nor any Partners shall have any rights or claims as a
result of such activities. Furthermore, the General Partner
shall not be obligated to share any business opportunities with
the Partnership or with the Limited Partners. The Partners
hereby waive any and all rights and claims which they may
otherwise have against the General Partner and its officers,
directors, shareholders, agents, employees and Affiliates as a
result of any such activities.
6.6 Dealing with the Partnership
Except as limited by Section 6.2, the General Partner and
any Affiliates shall have the right to contract or otherwise deal
with the Partnership for the sale or lease of property, the
rendition of services and other purposes, and to receive payments
and fees from the Partnership in connection therewith as the
General Partner shall determine, provided that such payments or
fees for services, other than those specifically covered in
Article 7, shall be equal to the lesser of (i) the cost to the
General Partner and its Affiliates for providing such services,
or (ii) 90% of the competitive price which would be charged by
independent parties providing similar services in the same or a
comparable geographic location, and provided that such agreements
are terminable upon no more than 60 days' notice.
6.7 Liability and Indemnity
(a) General. The Partnership, its receiver or its
trustee, shall indemnify the General Partner and its Affiliates
against and save them harmless from any loss, (including, but not
limited to, attorneys' fees and court costs), suffered by the
Partnership which arises out of any action or inaction of the
General Partner or its Affiliates, if the General Partner or its
Affiliates have determined, in good faith, that such course of
conduct was in the best interest of the Partnership and that such
course of conduct did not constitute negligence or misconduct of
the General Partner or its Affiliates. The General Partner and
its Affiliates shall be indemnified by the Partnership against
any losses, judgments, liabilities, expenses and amounts paid in
settlement of any claims sustained by them in connection with the
Partnership, provided that the same were not the result of
negligence or misconduct on the part of the General Partner or
its Affiliates.
(b) Partnership Assets Must First Be Used. All
judgments against the Partnership and the General Partner or
Affiliates wherein the General Partner or such other persons are
entitled to indemnification, must first be satisfied from
Partnership assets before the General Partner or such other
persons are responsible for these obligations.
(c) No Presumption. The termination of any action,
suit or proceeding by judgment or settlement shall not, of
itself, create a presumption that the General Partner or its
Affiliates are not entitled to indemnification or are not
entitled to the protection afforded by this Section 6.7.
(d) Securities Laws. Notwithstanding Section 6.7(a),
the General Partner and its Affiliates and any person acting as a
Broker/Dealer shall not be indemnified for any losses,
liabilities or expenses arising from or out of an alleged
violation of federal or state securities laws unless (i) there
has been a successful adjudication on the merits of each count
involving alleged securities law violations as to the particular
indemnitee, or (ii) such claims have been dismissed with
prejudice on the merits by a court of competent jurisdiction as
to the particular indemnitee, or (iii) a court of competent
jurisdiction approved a settlement of the claims against a
particular indemnitee. In any claim for indemnification of
federal or state securities law violations, the party seeking
indemnification shall place before the court the position of the
Securities and Exchange Commission and the Massachusetts state
securities commission with respect to the issue of
indemnification for securities law violations.
(e) Insurance. The Partnership shall not incur the
cost of that portion of any insurance other than public liability
insurance, which insures any party against any liability for
which indemnification is prohibited under this Section 6.7.
(f) Advances from Partnership. The advance of
Partnership funds to the General Partner or its Affiliates for
legal expenses and other costs incurred as a result of a legal
action is permissible only if (i) the legal action relates to the
performance of duties or services by the General Partner or its
Affiliates, (ii) the legal action is initiated by a third party
who is not a Limited Partner, and (iii) the General Partner and
its Affiliates undertake to repay the advanced funds to the
Partnership in cases in which they would not be entitled to
indemnification.
6.8 Reserves
The Partnership shall maintain reasonable reserves for
normal repairs, replacements, working capital, and contingencies
in an initial amount to be determined by the General Partner,
which may be increased or decreased from time to time as
determined by the General Partner.
6.9 Fiduciary Duty of the General Partner
The General Partner shall have fiduciary responsibility for
the safekeeping and use of all funds and assets of the
Partnership, whether or not in its possession or control, and it
shall not employ, or permit another to employ, such funds or
assets in any manner except for the benefit of the Partnership.
6.10 Loan Commitment Guaranty
The General Partner shall lend or arrange to lend to the
Partnership as provided in the Loan Commitment Guaranty Agreement
the amount of any Operating Deficit for any calendar quarter for
the period beginning January 1, 1987 through December 31, 1991.
Such a loan shall be made within 15 days after the Operating
Deficit for the quarter is determined, and shall bear interest at
the rate then charged to the Partnership by its principal lender
and shall be repaid when funds are available to the Partnership.
6.11 Completion Guaranty
The General Partner guaranties pursuant to the Completion
Guaranty Agreement that the Properties will be completed free and
clear of all financing and construction liens (except any liens
secured by deeds of trust described in the Prospectus) at a total
cost to the Partnership not to exceed approximately $28,807,000,
including the purchase price of the Properties, but excluding
negative cash flow associated with lease-up expenses and the
first year of operations. This guaranty shall survive the
admission of Limited Partners to the Partnership. The General
Partner does not warrant compliance with the conditions or
standards of the construction agreements with respect to the
Properties.
ARTICLE 7
COMPENSATION AND REIMBURSEMENT OF
EXPENSES TO THE GENERAL PARTNER
AND ITS AFFILIATES
The General Partner and its Affiliates shall be entitled to
receive as a cost of the Partnership each and all of the
following amounts as fees, compensation, and reimbursement in
addition to their rights to reimbursement of ongoing expenses as
set forth in Article 14.
7.1 Reimbursement of Expenses
(a) Organization and Offering Expenses. To the
extent that Organization and Offering Expenses and services were
paid or furnished by the General Partner or its Affiliates rather
than from Partnership funds, the General Partner or its
Affiliates shall receive a reimbursement for all such expenses
and services. The Partnership shall not be required to pay or
reimburse the General Partner or any Affiliate of the General
Partner for Organization and Offering Expenses which exceed
fifteen percent (15%) of the Gross Offering Proceeds as of the
Completion Date.
(b) Other Expenses. The Partnership shall reimburse
the General Partner or its Affiliates for the actual cost to the
General Partner or its Affiliates (or pay directly the actual
cost) of goods and materials used for or by the Partnership and
obtained from entities unaffiliated with the General Partner.
The Partnership shall also pay or reimburse the General Partner
or its Affiliates for expenses incurred in connection with the
provision of administrative services necessary to the prudent
operation of the Partnership, provided that such reimbursement
shall be at the lower of (i) actual cost to the General Partner
or its Affiliates, or (ii) 90% of the competitive price which
would be charged by independent parties for comparable
administrative services in the same geographical location.
(c) Nonreimbursable Expenses. The General Partner
will pay and will not be reimbursed by the Partnership for the
following expenses: (i) salaries, fringe benefits, travel
expenses and other administrative items of individuals who are
Control Persons of the General Partner or its Affiliates, (ii)
those overhead expenses of the General Partner or its Affiliates
which include their rent, depreciation, utilities and capital
equipment, (iii) Organization and Offering Expenses in excess of
15% of Gross Offering Proceeds, (iv) expenses related to the
performance of those services for which the General Partner or
its Affiliates are entitled to compensation by way of the
Property Management Fee, Initial Partnership Management Fee,
Completion Guaranty Fee or Subordinated Property Disposition
Interest and (v) all other expenses which are unrelated to the
business of the Partnership.
7.2 Reimbursement for Sums Advanced to the Partnership
To the extent that the General Partner or its Affiliates
have advanced or will advance funds to the Partnership, the
General Partner or its Affiliates shall be reimbursed for such
funds.
7.3 Initial Partnership Management Fee
In consideration for organizing the Partnership, arranging
for and negotiating construction financing, arranging for and
negotiating permanent financing, obtaining (in connection with
the permanent financing) a Credit Enhancement satisfactory to the
lender of the permanent financing, selecting and supervising
professionals to perform services for the Partnership,
establishing Partnership accounts, including an escrow account
for use in connection with the offering of Units, and
establishing a reporting system for submitting tax information
and periodic reports to the Limited Partners and regulatory
authorities, the General Partner shall receive an Initial
Partnership Management Fee of $291,000, which shall be payable
proportionately from Capital Contributions and any remaining
balance due on the Completion Date.
7.4 Completion Guaranty Fee
The General Partner shall receive a Completion Guaranty Fee,
in consideration for the Completion Guaranty, in the amount of
$600,000 payable proportionately from Capital Contributions and
any remaining balance due on the Completion Date; provided,
however, that in no event shall such fee exceed 90% of the
competitive price which would be charged by a non-Affiliate for
rendering similar services in the same or a comparable geographic
location.
7.5 Property Management Fee; Initial Lease-Up Fee
(a) The General Partner shall act as the property
manager and shall receive a Property Management Fee equal to five
percent (5%) of the Effective Gross Collections in managing the
Properties including acting as a liaison with tenants and
monitoring and supervising the following services: (i) collection
of rentals, (ii) payment of all mortgages, (iii) obtaining and
maintaining appropriate insurance for the Properties, (iv)
leasing activities, (v) property inspection and maintenance, (vi)
accounting, services, (vii) legal services, (viii) tax
calculations and payments, (ix) bookkeeping services and (x)
similar ordinary management services necessary for the orderly
management of the Properties. However, during the Lease-Up
Period of the Properties, the Property Management Fee shall equal
the greater of (A) five percent (5%) of the Effective Gross
Collections or (B) one-half (1/2) of five percent (5%) of the
Effective Gross Collections assuming the Properties were leased
at their market rates. Additional sums shall also be payable to
the General Partner for performing certain extraordinary
services, including without limitation data processing services,
payroll services and collections with respect to the Properties.
(b) In addition, the General Partner shall receive,
to the extent that the manager performs services outside the
normal and customary services provided by independent third party
property managers, reimbursement for direct salary expenses of
employees performing such services. The provision of such
services does not constitute part of the duties or obligations of
the General Partner in its capacity as General Partner of the
Partnership.
(c) The Property Management Fee shall be paid monthly
to the General Partner, or any unaffiliated property management
firm which the General Partner in its sole discretion may select.
To the extent that the Partnership has insufficient cash to pay
the Property Management Fee in any amount, the fee shall be
accrued and paid as soon as the Partnership has sufficient cash
available.
(d) The Property Manager shall also receive a one-
time Initial Lease-Up Fee of $106,000 for extraordinary services
provided during the lease-up of the Properties, including but not
limited to establishing a marketing plan, maintaining on-site
personnel, showing units and interviewing and evaluating
prospective tenants. The Initial Lease-Up Fee shall be paid
monthly from rental revenues, prorated over the period commencing
with the completion of the Properties and continuing until the
Properties are 95% occupied. In no event shall the Initial
Lease-Up Fee exceed 90% of the competitive price which would be
charged by a non-Affiliate for rendering similar services in the
same or a comparable geographic location.
7.6 Share of Distributable Cash from Operations
The General Partner shall receive its share of Distributable
Cash from Operations as set forth in Sections 5.1 and 5.3.
7.7 Subordinated Property Disposition Interest
For brokerage services in connection with the sale of a
Property, the Partnership shall pay the General Partner a
Subordinated Property Disposition Interest. The Subordinated
Property Disposition Interest shall equal the lesser of: (i) a
percentage of the gross sales price of a Property equal to
onehalf of the percentage rate customarily charged for similar
services by unaffiliated parties that render the same services as
an ongoing public activity in the same geographic location for
comparable property, or (ii) three percent (3%) of the gross
sales price of a Property. The Subordinated Property Disposition
Interest shall be payable upon the close of escrow of the sale of
each Property; provided, however, that payment shall be
subordinated as provided in Section 7.8(a). Notwithstanding the
foregoing to the contrary, the aggregate commissions paid to all
persons for the sale of the Properties, whether or not they are
Affiliates of the General Partner, shall not exceed six percent
(6%) of the selling price of each Property, but otherwise there
is no limitation on or subordination of real estate commissions
paid to non-Affiliates. Any Subordinated Property Disposition
Interest not paid to the General Partner due to a lack of
available cash shall be a liability of the Partnership and shall
be paid when cash becomes available.
7.8 Fees and Share Upon Sale or Refinancing
The General Partner shall receive the following items of
distribution and compensation:
(a) Upon the sale of a Property, the Subordinated
Property Disposition Interest will be subordinated to the return
to the Limited Partners of the portion of their Invested Capital
attributable to the Property sold plus a 10% Priority Return and,
as appropriate, the Incentive Priority Return on the average
daily balance of Invested Capital attributable to the Property
sold. A Limited Partner's portion of Invested Capital
attributable to the Property sold will be calculated by
multiplying his Invested Capital by a fraction, the numerator of
which shall equal the cost of the Property sold and the
denominator of which shall equal the cost of both of the
Properties; provided, however, that the Subordinated Property
Disposition Interest shall not be paid to the General Partner
until the Limited Partners have received at least a 6% cumulative
simple return on their total Invested Capital.
(b) Upon a sale or a refinancing of a Property, its
share of Net Proceeds from Sale or Refinancing as set forth in
Section 5.4.
7.9 Loans by the General Partner to the Partnership
The General Partner or its Affiliates may, but are not
obligated to (except as set forth in Section 6.10), loan or
advance funds to the Partnership, and receive interest or other
financing charges or fees, provided that the interest charges or
fees are not in excess of amounts charged by third party
financing institutions on comparable loans for the same purpose
or, if the funds for a loan are obtained by the General Partner
from a lending institution, the rate and other fees which the
General Partner is required to pay to the lending institution.
In no event shall the General Partner or its Affiliates charge
the Partnership a prepayment charge or penalty in connection with
any loans or advances to the Partnership from the General Partner
or its Affiliates.
7.10 Fees Payable on Cessation as the General Partner
If the General Partner ceases to be the General Partner
pursuant to Section 12.1, any fee, commission, or reimbursement
of expenses payable according to the provisions of this Agreement
which is then accrued, but not yet paid, shall be paid by the
Partnership to the General Partner or, if appropriate, an
Affiliate thereof, in cash, within 30 days of the date the
General Partner ceases to be the General Partner.
ARTICLE 8
BOOKS, RECORDS, ACCOUNTS AND REPORTS
8.1 Books and Records
(a) The Partnership shall continuously maintain an
office in the State of California, at which the following books
and records shall be kept:
(1) A current list of the full name and last
known business or residence address of each Partner set forth in
alphabetical order together with the contribution and the share
in profits and losses of each Partner;
(2) A copy of the Certificate of Limited
Partnership and all certificates of amendments thereto, together
with executed copies of any powers of attorney pursuant to which
any such certificate has been executed;
(3) Copies of the Partnership's federal, state,
and local income tax or information returns and reports, if any,
for the six most recent taxable years;
(4) Copies of this Agreement and all amendments
thereto;
(5) Financial statements of the Partnership for
the six most recent fiscal years;
(6) The Partnership's books and records for at
least the current and past three fiscal years; and
(7) Copies of each appraisal of the Properties.
(b) The Partnership shall also maintain at its
principal office such additional books and records as are
necessary for the operation of the Partnership.
8.2 Limited Partners' Rights Regarding Books, Records and
Tax Information
(a) Upon the request of a Limited Partner, the
General Partner shall promptly deliver to the Limited Partner, at
the expense of the Partnership, a copy of the items set forth in
Sections 8.1(a)(1), (2), and (4).
(b) Each Limited Partner or any person designated by
a Limited Partner to act on his behalf has the right upon
reasonable request:
(1) To inspect and copy during normal business
hours, at the Limited Partner's expense, any of the Partnership's
records required to be kept of the Partnership; and
(2) To obtain from the General Partner promptly
after becoming available, at the Limited Partner's expense, a
copy of the Partnership's federal, state and local income tax or
information returns for each year.
(b) The General Partner shall promptly furnish to a
Limited Partner a copy of any amendment to this Agreement
executed by the General Partner pursuant to a power of attorney
from the Limited Partner.
(c) The General Partner shall send to each Partner
within 75 days after the end of each taxable year such
information as is necessary to complete federal and state income
tax or information returns.
8.3 Accounting Basis and Fiscal Year
The Partnership's books and records (a) shall be kept on a
basis chosen by the General Partner in accordance with the
accounting methods followed by the Partnership for federal income
tax purposes, (b) shall reflect all Partnership transactions, (c)
shall be appropriate and adequate for the Partnership's business
and for the carrying out of all provisions of this Agreement, and
(d) shall be closed and balanced the end of each Partnership
fiscal year. The fiscal year of the Partnership shall be the
calendar year, unless otherwise determined by the General
Partner.
8.4 Reports
(a) Annual Statements. The General Partner shall
have prepared at least annually, at Partnership expense: (i)
annual financial statements including a balance sheet, statement
of income or loss, statement of partners' equity, statement of
changes in financial position and a cash flow statement, all of
which, except the cash flow statement, shall be prepared in
accordance with generally accepted accounting principles and
accompanied by an auditor's report containing an opinion of an
independent certified public accountant; (ii) Partnership
information necessary in the preparation of the Limited Partners'
federal and state income tax returns; (iii) a report of the
activities of the Partnership during the period covered by the
report; (iv) a statement as to the reimbursements received during
the year by the General Partner and its Affiliates from the
Partnership, including a verification of the allocation of the
costs to the Partnership by independent certified public
accountants; (v) a tabular comparison of the results from
operations with the Financial Forecast; and (vi) a report
identifying distributions from (A) Distributable Cash from
Operations of that year, (B) Distributable Cash from Operations
of prior years, and (C) Net Proceeds from Sale or Refinancing and
other sources. Copies of the financial statements and reports
shall be distributed to each Limited Partner within 120 days
after the close of each taxable year of the Partnership;
provided, however, that all Partnership information necessary in
the preparation of the Limited Partners' federal income tax
returns shall be distributed to each Limited Partner not later
than 75 days after the close of each fiscal year of the
Partnership.
(b) Quarterly Reports. The General Partner shall
cause to be prepared quarterly, at Partnership expense, a report
containing: (i) a statement of the compensation received by the
General Partner and its Affiliates during the quarter from the
Partnership, which statement shall set forth the services
rendered by the General Partner and its Affiliates and the amount
of fees received; (ii) a balance sheet which may be unaudited;
(iii) a statement of income for the quarter then ended, which may
be unaudited; (iv) a cash flow statement for the quarter then
ended, which may be unaudited; and (v) other relevant
information. Copies of the statements shall be distributed to
each Limited Partner within 60 days after the end of each
quarterly period. The information required by Form 10-Q (if
required to be filed with the Securities and Exchange Commission)
will be supplied to each Limited Partner within 45 days after the
end of each quarterly period.
(c) Unaudited Financial Statements. Until the
Partnership is registered under Section 12(g) of the Securities
Exchange Act of 1934, as amended, the General Partner shall cause
to be prepared, at Partnership expense, a semi-annual report
covering the first six months of Partnership operations in each
calendar year, and semi-annually thereafter, unaudited financial
statements (consisting of a balance sheet, a statement of income
or loss for the first six-month period and a statement of cash
flow for the first six-month period) and a statement of other
pertinent information regarding the Partnership and its
activities during the six-month period covered by the report.
Copies of the statements and other pertinent information shall be
distributed to each Limited Partner within 60 days after the
close of the six-month period covered by the report of the
Partnership. If the Partnership has more than 35 Limited
Partners, Limited Partners representing at least five percent
(5%) of the Units may make a written request to the General
Partner for an income statement of the Partnership for the
initial three-month, six-month, or nine-month period of the
current fiscal year ended more than 30 days prior to the date of
the request and a balance sheet of the Partnership as of the end
of that period. The statement shall be delivered or mailed to
the Limited Partners making the request within 30 days
thereafter. Copies of the financial statements, if any, filed
with the Securities and Exchange Commission shall be distributed
to each Limited Partner within 60 days after the close of the
quarterly period covered by the report of the Partnership.
(d) General Partner's Certificate. The financial
statements referred to in this Section 8.4 which are unaudited
shall be accompanied by a certificate of the General Partner that
such financial statements were prepared without audit from the
books and records of the Partnership.
8.5 Tax Returns
The General Partner, at Partnership expense, shall cause to
be prepared income tax returns for the Partnership and shall
further cause such returns to be timely filed with the
appropriate authorities.
8.6 Filings with Regulatory Agencies
The General Partner, at Partnership expense, shall cause to
be prepared and timely filed with appropriate federal and state
regulatory and administrative bodies, all reports required to be
filed with such entities under then current applicable laws,
rules and regulations. Any Limited Partner shall be provided
with a copy of any such report upon request at such Limited
Partner's expense.
8.7 Tax Matters Partner
The General Partner is hereby designated as the "tax matters
partner" of the Partnership in accordance with Section 6231(a)(7)
of the Internal Revenue Code and is authorized, at the
Partnership's sole cost and expense, to represent the Partnership
and each Limited Partner in connection with all examinations of
the Partnership affairs by tax authorities, including resulting
administrative and judicial proceedings, and to expend
Partnership funds for professional services and costs connected
therewith. Each Limited Partner agrees to cooperate with the
General Partner and to do or refrain from doing any and all
things reasonably required by the General Partner to conduct such
proceeding. The General Partner shall have the right to settle
any audits without the consent of the other Partners and to take
any and all other actions on behalf of the Partners or the
Partnership in connection with any tax audit or judicial review
proceeding to the extent permitted by applicable law and
regulations.
ARTICLE 9
CERTAIN MATTERS AND VOTING RIGHTS AFFECTING LIMITED PARTNERS
9.1 Limitations
No Limited Partner shall (a) have the authority or power in
his capacity as a Limited Partner to act as agent for or on
behalf of the Partnership or any other Partner, to do any act
which would be binding on the Partnership or any other Partner,
or to incur any expenditures on behalf of or with respect to the
Partnership, (b) have any of his obligations to make
contributions or to return distributions compromised except upon
approval of the General Partner, or as otherwise required by
Section 15666 of the Act, (c) have any right to demand or receive
property other than money upon distribution from the Partnership,
or (d) be compelled to accept a distribution of any asset in kind
from the Partnership in lieu of a proportionate distribution of
money being made to other Partners.
9.2 Liability of Limited Partners
The liability of each Limited Partner (in the capacity as a
Limited Partner) for the losses, debts and obligations of the
Partnership shall be limited to the Limited Partner's Capital
Contribution, and the Limited Partner's share of any
undistributed assets of the Partnership; provided, however, that
under applicable partnership law, a Limited Partner may, under
certain circumstances, be required to return to the Partnership
amounts previously distributed to such Limited Partner for the
benefit of Partnership creditors, with interest. Any such
obligation to return distributions and pay interest shall be the
sole obligation of the Limited Partners and not of the General
Partner.
9.3 Voting Rights
(a) Limited Partners shall have the right, by
Majority Vote to take the following actions:
(1) Amend this Agreement, subject to the
conditions contained in Article 15 hereof;
(2) Dissolve and wind up the Partnership;
(3) Remove the General Partner;
(4) Approve or disapprove the sale of either or
both of the Properties, except in the orderly liquidation and
winding up of the Partnership upon its dissolution;
(5) Admit a general partner or elect to
continue the business of the Partnership after the removal of the
General Partner where there is no remaining general partner; and
(6) Elect to continue the business of the
Partnership as set forth in Section 13.2(b).
(b) The unanimous approval of all the Limited
Partners shall be required for the admission of a general partner
or the election to continue the business of the Partnership after
the general partner ceases to be a general partner (other than by
removal) where there is no remaining general partner.
(c) Notwithstanding any provision contained in the
Act to the contrary, the Limited Partners shall have no voting
rights other than as expressly set forth in this Agreement.
ARTICLE 10
MEETINGS
10.1 Place of Meetings
Meetings of the Partners may be held at any place within or
outside of California, at a time and place convenient to the
Limited Partners, as determined by the General Partner.
10.2 Calling of Meetings
A meeting of the Partners may be called by the General
Partner or by Limited Partners holding more than ten percent
(10%) of the outstanding Units for any matters on which the
Limited Partners may vote.
10.3 Notices
(a) Whenever Partners are required or permitted to
take any action at a meeting, a written notice of the meeting
shall be given not less than 15, nor more than 60 days before the
date of the meeting to each Partner entitled to vote at the
meeting. The notice shall state the place, date, and hour of the
meeting and the general nature of the business to be transacted,
and no other business may be transacted.
(b) Notice of a Partners' meeting or any report shall
be given either personally or by mail or other means of written
communication, addressed to the Partner at the address of the
Partner appearing on the books of the Partnership or given by the
Partner to the Partnership for the purpose of notice, or, if no
address appears or is given, at the place where the principal
executive office of the Partnership is located or by publication
at least once in a newspaper of general circulation in the county
in which the principal executive office is located. The notice
or report shall be deemed to have been given at the time when
delivered personally or deposited in the mail or sent by other
means of written communication. An affidavit of mailing of any
notice or report in accordance with the provisions of this
Article, executed by the General Partner, shall be prima facie
evidence of the giving of the notice or report.
If any notice or report addressed to the Partner at the
address of the Partner appearing on the books of the Partnership
is returned to the Partnership by the United States Postal
Service marked to indicate that the United States Postal Service
is unable to deliver the notice or report to the Partner at the
address, all future notices or reports shall be deemed to have
been duly given without further mailing if they are available for
the Partner at the principal executive office of the Partnership
for a period of one year from the date of the giving of the
notice or report to all other Partners.
(c) Upon written request to the General Partner by
any person entitled to call a meeting of Partners, the General
Partner shall provide, within 10 days from the date the request
is received, the Partners entitled to vote with a notice of the
meeting specifying that the meeting will be held at the time
requested by the person calling the meeting, not less than 15 nor
more than 60 days after the receipt of the request.
10.4 Adjournment
When a Partners' meeting is adjourned to another time or
place, notice need not be given of the adjourned meeting if the
time and place thereof are, announced at the meeting at which the
adjournment is taken. At the adjourned meeting the Partnership
may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than 45 days or
if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be
given to each Partner of record entitled to vote at the meeting
in accordance with this Article 10.
10.5 Waiver of Notice and Consent to Meeting
The transactions of any meeting of Partners, however called
and noticed, and wherever held, are as valid as though had at a
meeting duly held after regular call and notice, if a quorum is
present either in person or by proxy, and if, either before or
after the meeting, each of the Persons entitled to vote, not
present in person or by proxy, signs a written waiver of notice
or a consent to the holding of the meeting or an approval of the
minutes thereof. All waivers, consents, and approvals shall be
filed with the Partnership records or made a part of the minutes
of the meeting. Attendance of a person at a meeting shall
constitute a waiver of notice of the meeting, except when the
person objects, at the beginning of the meeting to the
transaction of any business because the meeting is not lawfully
called or convened and except that attendance at a meeting is not
a waiver of any right to object to the consideration of matters
required to be included in the notice of the meeting but not so
included, if the objection is expressly made at the meeting.
Neither the business to be transacted at nor the purpose of any
meeting of Partners need be specified in any written waiver of
notice, except as provided in Section 10.6.
10.6 Validity of Vote for Certain Matters
Any Partner approval at a meeting, other than unanimous
approval by those entitled to vote, pursuant to Section 9.3
hereof, shall be valid only if the general nature of the proposal
so approved was stated in the notice of meeting or in any written
waiver of notice.
10.7 Quorum
(a) A majority of the Units held by Limited Partners
represented in person or by proxy shall constitute a quorum at a
meeting of Partners.
(b) The Partners present at a duly called or held
meeting at which a quorum is present may continue to transact
business until adjournment notwithstanding the withdrawal of
enough Partners to leave less than a quorum, if any action taken
(other than adjournment) is approved by the requisite vote
necessary under Section 9.3.
(c) In the absence of a quorum, any meeting of
Partners may be adjourned from time to time by the vote of a
majority of the outstanding Units held by Limited Partners
represented either in person or by proxy, but no other business
may be transacted, except as provided in Section 10.7(b).
10.8 Action Without a Meeting
Any action which may be taken at any meeting of the Partners
may be taken without a meeting if a consent in writing, setting
forth the action so taken, shall be signed by Partners having not
less than the minimum number of votes that would be necessary to
authorize or take that action at a meeting at which all entitled
to vote thereon were present and voted. In the event the Limited
Partners are requested to consent on a matter without a meeting,
each Partner shall be given notice of the matter to be voted upon
in the same manner as described in Section 10.3. In the event the
General Partner, or Limited Partners representing more than ten
percent (10%) of the Units, request a meeting for the purpose of
discussing or voting on the matter, the notice of a meeting shall
be given in accordance with Section 10.3 and no action shall be
taken until the meeting is held. Unless delayed in accordance
with the provisions of the preceding sentence, any action taken
without a meeting shall be effective 15 days after the required
minimum number of voters have signed the consent, however, the
action will be effective immediately if the General Partner and
Limited Partners holding at least ninety percent (90%) of the
outstanding Units have signed the consent.
10.9 Use of Proxies
The use of proxies in connection with this Article 10 will
be governed in the same manner as in the case of corporations
formed under the California General Corporation Law.
10.10 Record Date
In order that the Partnership may determine the Partners of
record entitled to notices of meeting or to vote, or entitled to
receive any distribution or to exercise any rights in respect of
any other lawful action, the General Partner, or Limited Partners
holding more than ten percent (10%) of the outstanding Units, may
fix, in advance, a record date, which is not more than 60 nor
less than 15 days prior to the date of the meeting and not more
than 60 days prior to any other action. If no record date is
fixed:
(a) The record date for determining Partners entitled
to notice of or to vote at a meeting of Partners shall be at the
close of business on the business day next preceding the day on
which notice is given or, if notice is waived, at the close of
business on the business day next preceding the day on which the
meeting is held.
(b) The record date for determining Partners entitled
to give consent to Partnership action in writing without a
meeting shall be the day on which the first written consent is
given.
(c) The record date for determining Partners for any
other purpose shall be at the close of business on the day on
which the General Partner adopts it, or the 60th day prior to the
date of the other action, whichever is later.
(d) The determination of Partners of record entitled
to notice of or to vote at a meeting of Partners shall apply to
any adjournment of the meeting unless the General Partner, or the
Limited Partners who called the meeting, fix a new record date
for the adjourned meeting, but the General Partner, or the
Limited Partners who called the meeting, shall fix a new record
date if the meeting is adjourned for more than 45 days from the
date set for the original meeting.
ARTICLE 11
ASSIGNMENT OF INTERESTS;
SUBSTITUTED LIMITED PARTNERS; LIMITED LIQUIDITY PLAN
11.1 Sale, Transfer, or Assignment of Interest of the
General Partner
The General Partner may not sell or transfer all or any Part
of its general partnership interest (not including any Units it
holds) in the Partnership except in connection with the merger,
consolidation, or reorganization of the General Partner into
another entity or the transfer of ownership of the ownership
interest in the General Partner or the assumption of the rights
and duties of the General Partner or by another entity in
connection with any such transaction or as set forth in Article
7. The General Partner may also hold Units, the sale or transfer
of which is subject to Section 11.2. Notwithstanding the
foregoing, the General Partner may assign any part of its
interest in subordinated distributions under Section 5.4(c) to
any person or entity.
11.2 Assignment of Units
A Limited Partner may not sell, transfer, assign, pledge, or
otherwise dispose of any or a part of his Units (whether
voluntarily or by operation of law) (hereinafter collectively
referred to as an "assignment"), except as follows and as set
forth in Section 11.7:
(a) A Limited Partner may assign one or more of his
Units if in compliance with this Section 11.2 and Sections 11.5
or 11.6. No consent or approval of any of the Limited Partners
shall be required for such assignment.
(b) Any assignment must be by a written instrument,
in a form satisfactory to the General Partner and accepted by it,
which instrument has been duly executed by the assignor of such
Units. A Limited Partner shall notify the General Partner of an
assignment or transfer by operation of law of a beneficial
interest in any Units which occurs without a transfer of record
ownership.
(c) An Assignee shall be required to pay a reasonable
sum to reimburse the Partnership and the General Partner in
connection with such assignment, with such sum to be determined
by the General Partner in its sole discretion. The sum shall be
intended to cover any legal fees, accounting fees, overhead
charges, and other fees or expenses incurred by the Partnership
and its counsel as a result of any such assignment.
(d) The General Partner may require an opinion of
counsel, in form and substance satisfactory to it in its sole
discretion, by counsel experienced in securities laws matters,
covering (i) that the proposed assignment will be in compliance
with applicable securities laws, rules and regulations, and (ii)
such other matters as may be determined by the General Partner in
its sole discretion. The fee for such counsel shall be paid by
the assignor.
Any purported assignment of Units which is not in compliance
with this Agreement is hereby declared to be null and void and of
no force or effect whatsoever.
11.3 Assignee's Rights
(a) An assignment of a Unit does not entitle the
Assignee to become or to exercise any rights of a Partner. An
assignment entitles the Assignee to receive, to the extent
assigned, only the distributions and allocation of profits and
losses to which the assignor would be entitled after the
effective date of assignment as set forth below. A Limited
Partner remains a Partner upon assignment of all or part of the
Limited Partner's Units, subject to the possibility of the
Assignee becoming a Substituted Limited Partner pursuant to
Section 11.5.
(b) The "effective date" of an assignment shall be
that date specified in the written instrument whereby the General
Partner consents to the assignment, which date shall not be later
than the first day of the quarter following receipt by the
General Partner of a written notice of assignment and the
fulfillment of all conditions precedent to such assignment
provided for in this Agreement. Notwithstanding anything to the
contrary contained in this Agreement, the Partnership and the
General Partner shall be entitled to treat an assignor or
transferor of Units as the absolute owner thereof in all
respects, and shall incur no liability for allocations of income,
gain, loss, deductions, credits, or distributions made to such
assignor or transferor until the effective date of an assignment
shall have passed.
11.4 No Assignment Allowed Under Certain Circumstances
Anything herein contained to the contrary notwithstanding,
no Limited Partner shall have the right, without express written
approval from the General Partner, to assign his Units, or any
portion thereof, if such assignment would result (directly or
indirectly) in the (a) termination of the Partnership for tax
purposes; (b) violation of the Securities Act of 1933 or any
rules or regulations thereunder, or any applicable state
securities laws or any rules or regulations thereunder; (c)
violation of any investment representation given by such Limited
Partner in connection with his acquisition of Units; (d)
treatment of the Partnership as an association taxable as a
corporation; or (e) acquisition by an Assignee who is a resident
alien, non-resident alien, sellers or related parties of the
sellers of the Properties, or holder of a mortgage loan on the
Properties.
11.5 Substituted Limited Partners
(a) An Assignee shall not become a Substituted
Limited Partner unless the General Partner gives its express
written consent to such substitution (which consent may not be
unreasonably withheld) and receives such instruments and
documents, and a reasonable transfer fee, as the General Partner
shall require.
(b) The assignor Limited Partner shall cease to be,
and the Assignee shall become, a Limited Partner, as to the Units
so assigned, as of the date on which the Assignee has satisfied
the requirements set forth above and as of the date of
effectiveness.
(c) The General Partner is hereby authorized to do
all things necessary to effect the admission of any such
Substituted Limited Partner, including, but not limited to, the
filing of an amended Certificate of Limited Partnership (if
necessary), and each Limited Partner hereby agrees (and each
Substituted Limited Partner, upon the execution of the
instruments referred to in Section 11.5(a), shall be deemed to
have agreed) that he shall, at the request of the General
Partner, execute and deliver any such amended Certificate of
Limited Partnership.
(d) Unless and until any Assignee, transferee, heir
or legatee becomes a Substituted Limited Partner, his status and
rights shall be limited to the rights of an Assignee. An
Assignee who does not become a Substituted Limited Partner shall
have no right to inspect the Partnership's books or to vote on
any of the matters on which a Limited Partner would be entitled
to vote. An Assignee who has become a Substituted Limited
Partner has, to the extent the assignor's Units are assigned, the
rights and powers, and is subject to the restrictions and
liabilities, of a Limited Partner under this Agreement. In no
event, however, is an assignor released from the assignor's
liabilities, if any, to the Partnership pursuant to Sections
15622(d), 15652 and 15666 of the Act.
(e) The General Partner shall cause this Agreement
and any separate Certificate of Limited Partnership (if required
by law) to be amended to reflect the substitution of Limited
Partners at least once in each fiscal quarterly period of the
Partnership.
(f) Any person admitted to the Partnership as a
Substituted Limited Partner shall be subject to and bound by all
the provisions of this Agreement as if originally a party to this
Agreement.
11.6 Death, Incompetency or Bankruptcy of a Limited Partner
The death, adjudication of incompetency or bankruptcy of a
Limited Partner shall not dissolve the Partnership. If a Limited
Partner who is an individual dies or a court of competent
jurisdiction adjudges the Limited Partner to be incompetent to
manage the Limited Partner's personal property, the Limited
Partner's executor, administrator, guardian, conservator, or
other legal representative may exercise all the Limited Partner's
rights for the purposes of settling the Limited Partner's estate
or administering the Limited Partner's property. The executor,
administrator, guardian, conservator, or other legal
representative, as applicable, of the deceased, incompetent or
bankrupt Limited Partner shall nevertheless continue to be liable
for all of his obligations as a Limited Partner.
11.7 Limited Liquidity Plan
Commencing on January 1, 1989, and each year thereafter, the
Limited Partners shall have the option to have their Units
repurchased by the Partnership or a person designated by the
Partnership subject to the terms and conditions set forth in this
Section 11.7.
(a) Purchase Price. The purchase price of any Units
repurchased by the Partnership or person designated by the
Partnership pursuant to this Section 11.7 shall equal 80% of the
value of such Units as established by the General Partner. The
General Partner shall use a sales/liquidation analysis of the
Partnership to establish the value of the Units. Such analysis
shall determine the net proceeds from a sale of the Properties,
based on independent appraisals, adjusted for Working Capital
Reserves, increased by the book value of other Partnership assets
and decreased by Partnership debts, obligations and disposition
costs. The General Partner shall then determine, in accordance
with the provisions of Sections 5.3 and 5.4, the amount of such
proceeds which would be distributed to any Limited Partner
requesting repurchase. This amount shall be the established
value of a Limited Partner's Units, of which a Limited Partner
would receive 80% if his Units are repurchased.
(b) Appraisal. Upon receipt of a repurchase request
from a Limited Partner, the Partnership shall have the Properties
appraised by an independent M.A.I. appraiser; provided, however,
that if the Properties have been appraised at any time during the
12 months preceding the repurchase request, the General Partner,
in its sole discretion, may elect to use either or both of the
prior appraisals and forego the reappraisal of either or both of
the Properties. The purchase of Units under this plan shall be
suspended during any period when one or both of the Properties
are being reappraised. The expense of the appraisals shall be
borne by the Partnership.
(c) Exercise. Repurchases shall be made on a
quarterly basis. A Limited Partner shall provide the Partnership
with written notice of the election to have his Units
repurchased. The repurchase shall be made in the calendar
quarter following the quarter in which the notice is received by
the Partnership. The Partnership shall, if necessary, have one
or both of the Properties appraised, calculate the value of the
Units and provide the Limited Partner notice of the purchase
price for his Units no later than 45 days prior to the date the
repurchase is scheduled to occur. The Limited Partner shall have
30 days to confirm or revoke his repurchase election. If no
notice is received within this period, the Limited Partner shall
be deemed to have revoked the repurchase election. If in any
quarter the requests for repurchase exceed the funds available
for repurchase, priority shall be given to the requests in the
order in which they were received by the Partnership. If a
Limited Partner's request for repurchase is not satisfied in a
given quarter, such Partner's priority based on the date his
request was received shall carry over to subsequent quarters.
Any Limited Partners electing not to proceed will be given
priority in the order in which their elections are received in
any subsequent quarter.
(d) Funding. Each quarter the General Partner shall
review the requests for repurchase and based on the number of
requests, allocate up to 10% of the Distributable Cash from
Operations for the purpose of making repurchases. Any funds set
aside for repurchases which are not used in the quarter so
allocated shall be promptly distributed with the next
distribution to the Partners in accordance with Section 5.3.
(e) Limitations. The Partnership shall not
repurchase in the aggregate more than 5% of the outstanding Units
(exclusive of Units owned by the General Partner, its Affiliates
or their employees) as of the Completion Date; provided, however,
the General Partner, at its discretion, may increase the
percentage of Units eligible for repurchase on a temporary or
permanent basis. In addition, repurchases shall not be made if
they would result in a "termination" of the Partnership within
the meaning of Section 708(b) of the Internal Revenue Code.
ARTICLE 12
TERMINATION OF THE GENERAL PARTNER
12.1 Cessation of the General Partner
(a) The General Partner shall cease to be the General
Partner of the Partnership only upon the happening of any of the
following events (hereinafter referred to as a "Terminating
Event" and the General Partner affected as the "Terminated
General Partner"):
(1) The General Partner withdraws from the
Partnership:
(2) The General Partner is removed as the
General Partner of the Partnership pursuant to Section 9.3(a)(3);
(3) Ninety (90) days after the Limited Partners
have received written notification (which notification shall be
given by the General Partner as prompted, as practicable) that an
order for relief against the General Partner has been entered
under Chapter 7 of the federal bankruptcy law, or that the
General Partner (i) has made a general assignment for the benefit
of creditors, (ii) has filed a voluntary petition under the
federal bankruptcy law, (iii) has filed a petition or answer
seeking for the General Partner any bankruptcy, reorganization,
arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any statute, law, or regulation, (iv) has
filed an answer or other pleading admitting or failing to contest
the material allegations of a petition filed against the General
Partner in any proceeding of this nature, or (v) has sought,
consented to, or acquiesced in the appointment of a trustee,
receiver, or liquidator of the General Partner or of any or all
substantial part of the General Partner's properties;
(4) Ninety (90) days after the Limited Partners
have received written notification (which notification shall be
given by the General Partner as promptly as practicable) of one
of the following events: (i) commencement of any proceeding
against the General Partner seeking reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar
relief under any statute, law, or regulation, and the proceeding
has not been dismissed, or (ii) if within 60 days after the
appointment without the General Partner's consent or acquiescence
of a trustee, receiver, or liquidator of the General Partner or
of any or all substantial part of the General Partner's
properties, the appointment is not vacated or stayed, or within
60 days after the expiration of any such stay, the appointment is
not vacated; and
(5) The dissolution and termination of the
General Partner.
(b) Upon a Terminating Event where the business of
the Partnership is continued, the interest of the Terminated
General Partner in the Partnership shall be converted or
purchased as set forth in Section 12.2 below.
(c) Upon a Terminating Event, the agency relationship
between the Partnership and the Terminated General Partner shall
be terminated, and the Terminated General Partner shall have no
liability for any debts or liabilities of the Partnership
incurred after the Terminating Event.
12.2 Conversion or Purchase of Interest of Former General
Partner
(a) If the business of the Partnership continues
after a Terminating Event, the Terminated General Partner's
interest shall, at the election of the Partnership, either (i)
convert to that of a special limited partner interest or (ii) be
purchased by the Partnership. Whether the General Partner's
interest is converted or repurchased, the Partnership shall pay
all amounts then accrued and owing to the General Partner and its
Affiliates. The Partnership shall provide notice of its election
under this Section 12.2 to the Terminated General Partner within
30 days from the date of the election to continue its business.
If notice is not so provided, the Terminated General Partner's
interest shall be converted. Upon conversion of its interest to
that of a special Limited Partner, the Terminated General Partner
shall retain the same rights to profits, losses, and
distributions as before the Terminating Event and shall be
entitled to the voting rights accorded other Limited Partners.
If the Terminated General Partner's interest is repurchased, it
shall receive from the Partnership the then present value of its
interest in the Partnership, determined by agreement of the
Terminated General Partner and the Partnership. If such parties
cannot agree, the purchase price shall be determined in
accordance with the then current rules of the American
Arbitration Association, with the expense of arbitration borne
equally by the parties. If the termination of the Terminated
General Partner was voluntary, the method of payment for its
interest shall be under a non-interest bearing unsecured,
promissory note with principal payable from distributions which
the Terminated General Partner otherwise would have received
under this Agreement if it had remained as General Partner. If
the termination is involuntary, the method of payment shall be
under a promissory note bearing interest at the Reference Rate of
the bank specified by the Terminated General Partner, with equal
payments of principal and interest over a term of five years.
(b) If a Terminating Event Occurs and the business of
the Partnership is not continued, then the Partnership shall be
terminated and its assets distributed in accordance with Article
13.
12.3 Withdrawal by the General Partner
(a) The General Partner may withdraw from the
Partnership only upon providing the Limited Partners with 60
days' notice of its intent to withdraw, obtaining Majority Vote
of the Limited Partners consenting to such withdrawal and upon
the appointment of a successor general Partner by Majority Vote
of the Limited Partners.
(b) A withdrawal by the General Partner under the
conditions stated above shall not act as a breach of this
Agreement. In the event of a withdrawal by the General Partner
meeting the requirements of this Section 12.3, the withdrawing
General Partner shall be entitled to have his interest purchased
or converted to that of a special Limited Partner in accordance
with Section 12.2.
12.4 Termination of Executory Contracts With the General
Partner or Affiliates
Upon a Terminating Event as set forth in Section 12.1, all
executory contracts between the Partnership and the Terminated
General Partner or any Affiliate thereof may be terminated by the
Partnership effective upon 60 days prior written notice of such
termination to the party so terminated. The Terminated General
Partner or any Affiliate thereof may also terminate and cancel
any such executory contract effective upon 60 days prior written
notice to the Partnership.
12.5 Reports After Removal
Within 90 days after the Limited Partners have voted to
remove the General Partner, the General Partner shall have
Prepared, at Partnership expense, unaudited financial statements
(balance sheet, statement of income or loss, statement of
Partners' equity, and statement of changes in financial position)
Prepared in accordance with generally accepted accounting
principles and shall cause such statements to be mailed to the
Limited Partners as soon as possible after receipt thereof.
ARTICLE 13
DISSOLUTION AND TERMINATION OF THE PARTNERSHIP
13.1 Dissolution
The Partnership shall be dissolved and its affairs shall be
wound up upon the happening of the first to occur of the
following:
(a) Upon the General Partner ceasing to be the
general partner of the Partnership as set forth in Section 12.1
(a) hereof (other than by removal) unless (i) there is at least
one other General Partner and all other remaining General
Partner(s) elect to continue the business of the Partnership or
(ii) all Limited Partners agree to continue the business of the
Partnership and to admit one or more General Partners pursuant to
the voting right set forth in Section 9.3(b);
(b) On a date designated by vote of the limited
Partners pursuant to the exercise of the voting right set forth
in Section 9.3(a)(2);
(c) The sale or other disposition of all of the
Partnership's assets and the receipt in cash of the proceeds
thereof;
(d) Upon entry of a decree judicial dissolution; or
(e) On December 31, 2016.
13.2 Continuation of the Business of the Partnership
The business of the Partnership may be continued as follows:
(a) If the General Partner ceases to be a general
partner of the Partnership, any then remaining General Partner,
without the necessity for the consent of the Limited Partners,
shall have the right to continue the business of the Partnership.
(b) In all other events where a dissolution his
occurred, upon a Majority Vote of the Limited Partners consenting
to the continuation of the business of the Partnership, except
that if the General Partner ceases to be the general partner of
the Partnership (other than by removal) and there is no remaining
General Partner, the admission of a new General Partner or the
election to continue the business of the Partnership shall
require the unanimous consent of all Limited Partners.
13.3 Liquidation
(a) In the event of dissolution as provided in
Section 13.1, if there has been no election to continue the
Partnership as provided for in this Agreement and following any
sale of the Partnership's real or personal property, the liquid
assets of the Partnership shall be distributed as follows:
(1) All of the Partnership's debts and
liabilities to persons (including Partners to the extent
permitted by law) shall be paid and discharged, but excluding
secured creditors whose obligations will be assumed or otherwise
transferred on the liquidation of Partnership assets and any
reserve deemed necessary by the General Partner for the payment
of such debts shall be set aside; and
(2) The balance of such assets of the
Partnership shall be distributed to the Partners in amounts equal
to the Partners' positive balances in their capital accounts and
otherwise in accordance with Article 5.
(b) Upon dissolution, each Limited Partner shall look
solely to the assets of the Partnership for the return of his
Invested Capital, and shall be entitled only to a cash
distribution of Partnership property and assets in return
thereof. If the Partnership property remaining after the payment
or discharge of the debts and liabilities of the Partnership is
insufficient to return the Invested Capital of each Limited
Partner, such Limited Partner shall have no recourse against any
other Limited Partner or against the General Partner, except to
the extent provided in Section 5.7. The winding up of the
affairs of the Partnership and the distribution of its assets
shall be conducted exclusively by the General Partner, who is
hereby authorized to do any and all acts and things authorized by
law for these purposes. In the event of dissolution or
bankruptcy of the General Partner or removal of the General
Partner by the Limited Partners and there is a failure to appoint
a new General Partner, the winding up of the affairs of the
Partnership and the distribution of its assets shall be conducted
by the remaining General Partner, if any, or by such person as
may be selected by a Majority Vote of the Limited Partners, which
person is hereby authorized to do any and all acts and things
authorized by law for these purposes.
(c) In the event the Partnership is "liquidated"
within the meaning of Treasury Regulation Section 1.704-
1(b)(2)(ii)(g), (i) distributions shall be made pursuant to
Section 13.3 to the Partners who have positive capital accounts
in compliance with Treasury Regulation Section
1.7041(b)(2)(ii)(b)(2), and (ii) if the General Partner's capital
account has a deficit balance (after giving effect to all
contributions, distributions, and allocations for all taxable
years, including the year during which such liquidation occurs),
the General Partner shall contribute to the capital of the
Partnership the amount necessary to restore such deficit balance
in compliance with Section 5.7. Distributions pursuant to the
preceding sentence may be distributed to a trust established for
the benefit of the Partners for the purposes of liquidating
Partnership assets, collecting amounts owed to the Partnership,
and paying any contingent or unforeseen liabilities or
obligations of the Partnership or of the General Partner arising
out of or in connection with the Partnership. The assets of any
such trust shall be distributed to the Partners from time to
time, in the reasonable discretion of the General Partner, in the
same proportions as the amount distributed to such trust by the
Partnership would otherwise have been distributed to the Partners
pursuant to this Agreement.
13.4 Cancellation of Certificate of Limited Partnership
Upon the completion of the distribution of Partnership
assets as provided in this Article 13 and the termination of the
Partnership, the General Partner or other person acting as
liquidator (or the Limited Partners, if necessary) shall cause
the Certificate of Limited Partnership of the Partnership to be
cancelled and shall take such other actions as may be necessary
to legally terminate the Partnership.
ARTICLE 14
PARTNERSHIP EXPENSES
14.1 Reimbursement to General Partner
The Partnership shall reimburse the General Partner for
those items specifically set forth in Article 7.
14.2 Payment of Expenses of the Partnership
All of the ongoing Partnership expenses shall be billed
directly to and paid by the Partnership. The Partnership's
expenses will include the following:
(a) Organization and Offering Expenses (subject to
the limitation in Section 7.1).
(b) Expenses connected with the Properties, which may
include, but are not limited to: (i) expenses in connection with
the acquisition, development, financing, refinancing and
disposition of the Properties; (ii) expenses in connection with
the replacement, alteration, repair, remodeling, refurbishment,
and leasing of the Properties; (iii) direct salary expenses for
employees, other than Control Persons, of the General Partner or
its Affiliates performing services outside the normal scope of
activities required by the General Partner; (iv) all operational
costs of the Properties, including taxes, utilities, insurance,
cost of maintenance and repair, mortgage payments, and all costs
of borrowed money, taxes, and assessments on Partnership property
and other taxes applicable to the Partnership; (v) all costs
associated with the sale of the Properties, including the costs
of servicing any seller financing; (vi) legal, accounting, audit,
appraisal, engineering and other fees; and (vi) fees and expenses
paid to independent contractors, mortgage bankers, brokers and
servicers, leasing agents, consultants, on-site managers, real
estate brokers, insurance brokers, and other agents.
(c) Expenses of Partnership administration, including
all accounting, documentation, professional, asset management,
and reporting expenses of the Partnership, which may include, but
are not limited to: (i) preparation and documentation of
Partnership bookkeeping, accounting, and audits; (ii) preparation
and documentation of budgets, economic surveys, cash flow
projections, and working capital requirements; (iii) preparation
and documentation of Partnership state and federal tax returns;
(iv) printing, engraving, and other expenses and taxes incurred
in connection with the issuance, distribution, transfer,
registration, and recording of documents evidencing ownership of
Units or in connection with the business of the Partnership; (v)
expenses of insurance as required in connection with the business
of the Partnership; (vi) expenses in connection with
distributions made by the Partnership to, and communications,
bookkeeping and clerical work necessary in maintaining relations
with limited Partners, including the cost of printing and mailing
to such persons reports of the Partnership and of preparation of
proxy statements and solicitations of proxies in connection
therewith; (vii) expenses in connection with preparing and
mailing reports required to be furnished to Limited Partners for
investor, tax reporting, or other purposes, or expenses
associated with furnishing reports to Limited Partners which the
General Partner deems to be in the best interests of the
Partnership; (viii) expenses of revising, amending, converting,
modifying, or terminating the Partnership; (ix) costs incurred in
connection with any litigation in which the Partnership is
involved as well as any examination, investigation, or other
proceedings conducted by any regulatory agency of the
Partnership, including legal and accounting fees incurred in
connection therewith; (x) costs of any computer equipment or
services used for or by the Partnership; (xi) costs of any
accounting, statistical, or bookkeeping equipment necessary for
the maintenance of the books and records of the Partnership;
(xii) costs of preparation and dissemination of informational
material and documentation relating to potential sale,
refinancing, or other disposition of Partnership property; (xiii)
supervision and expenses of professionals employed by the
Partnership in connection with any of the foregoing, including
attorneys, accountants, and appraisers; and (xiv) other
Partnership administration expenses.
(d) Other costs or expenses necessary or advisable
for the operation of the business of the Partnership.
ARTICLE 15
AMENDMENTS OF PARTNERSHIP DOCUMENTS
15.1 Amendments in General
Except as otherwise provided in this Agreement, this
Agreement may be amended only with the consent of the General
Partner and by a Majority Vote of the Limited Partners.
15.2 Amendments Without Consent of Limited Partners
In addition to any amendments otherwise authorized herein,
amendments may be made to this Agreement from time to time by the
General Partner, without the consent of any of the Limited
Partners, which (a) add to the representations, duties or
obligations of the General Partner or surrender any right or
power granted to the General Partner herein, for the benefit of
the Limited Partners; (b) correct any error, resolve any
ambiguity, or supplement any provision which may be inconsistent
with another provision hereof, or make any other provision with
respect to matters or questions arising under this Agreement that
is not inconsistent with the provisions of this Agreement; (c)
delete or add any provision of this Agreement required to be so
deleted or added by the Securities Exchange Commission or any
state securities commission or similar governmental authority for
the benefit or protection of the Limited Partners; (d) amend this
Agreement and any Certificate of Limited Partnership (if
required) to admit Limited Partners pursuant to Article 3 and
Section 11.5; (e) reflect reductions in the Capital Contributions
of the Limited Partners resulting from a return of capital; (f)
amend this Agreement upon advice of counsel or accountants that
the provisions contained herein are unlikely to be given effect
for federal income tax purposes, to the minimum extent necessary;
any such new allocation shall not give rise to any claim or cause
of action by any Limited Partner or Assignee; (g) elect for the
Partnership to be governed by any successor California statute
governing limited partnerships; (h) would make an amendment
desirable to effectuate the intent of the Partners, as long as
any Partner who is adversely affected in any material respect by
such an amendment consents to the amendment if there occurs any
change in the law governing limited partnerships; (i) makes any
change necessary or advisable in the discretion of the General
Partner to cause the Partnership to be treated as a partnership
for federal income tax purposes, and (j) makes any other change
which does not adversely affect the rights of the Limited
Partners or Assignees in any material respect; provided, however,
that the General Partner shall not have the right under this
subsection 15.2(j) to amend Articles 4, 5, 6 or 9, or Article 7,
if the amendment would increase the General Partner or its
Affiliates compensation or reimbursements.
15.3 Amendments Needing Consent of Affected Partners
Notwithstanding any other provision of this Agreement,
without the consent of the Partner or Partners to be adversely
affected by any amendment to this Agreement, this Agreement may
not be amended to (a) convert a Limited Partner's interest into a
General Partner's interest, (b) modify the limited liability of a
Limited Partner, (c) increase, add or alter any obligation of the
General Partner, (d) adversely affect the status of the
Partnership as a partnership for federal income tax purposes, or
(e) otherwise modify the compensation, distributions, or rights
of reimbursement to which the General Partner is entitled or
affect the duties of the General Partner or the indemnification
to which the General Partner and its Affiliates are entitled
under Section 6.7.
15.4 Amendments to Certificates of Limited Partnership
(a) The General Partner shall cause to be filed with
the California Secretary of State, within 30 days after the
happening of any of the following events, an amendment to the
Certificate of Limited Partnership reflecting the occurrence of
any of the following events:
(1) A change in the name of the Partnership;
(2) A change in either of the following:
(i) The street address of the
Partnership's principal executive office.
(ii) If the principal executive office is
not in California, the street address of an office in California;
(3) A change in the address of or withdrawal of
the General Partner, or a change in the address of the agent for
service of process, unless a corporate agent is designated, or
appointment of a new agent for service of process;
(4) The admission of a General Partner and that
Partner's address; and
(5) The discovery by the General Partner of any
false or erroneous material statement contained in the
Certificate of Limited Partnership.
(b) Any Certificate of Limited Partnership filed or
recorded in jurisdictions other than California shall be amended
as required by applicable law.
(c) The Certificate of Limited Partnership may also
be amended at any time in any other manner deemed appropriate by
the General Partner.
15.5 Amendments After Change of Law
This Agreement and any other Partnership documents may be
amended and refiled, if necessary, by the General Partner without
the consent of the Limited Partners if there occurs any change
that permits or requires an amendment of this Agreement under the
Act or of any other Partnership document under applicable law, so
long as no Partner is adversely affected in any material respect
(or consent is given by such Partner).
ARTICLE 16
MISCELLANEOUS PROVISIONS
16.1 Notices
(a) Any written notice, offer, demand or
communication required or permitted to be given by any provision
of this Agreement shall be deemed to have been sufficiently given
for all purposes if delivered personally to the party to whom the
same is directed or if sent by certified mail addressed (i) if to
the General Partner, to the principal place of business and
office of the Partnership specified in this Agreement and (ii) if
to a Limited Partner, to such Limited Partner's address as set
forth on his Subscription Agreement or any other address provided
to the General Partner by such Limited Partner.
(b) Any such notice that is sent by certified mail
shall be deemed to be given two (2) days after the date on which
the same is mailed.
(c) The General Partner may change its address for
purposes of this Agreement by giving written notice of such
change to the Limited Partners, and any Limited Partner may
change his address for purposes of this Agreement by giving
written notice of such change to the General Partner, in the
manner hereinbefore provided for the giving of notices.
16.2 Article and Section Headings
The Article and Section headings in this Agreement are
inserted for convenience and identification only and are in no
way intended to define or limit the scope, extent or intent of
this Agreement or any of the provisions hereof.
16.3 Construction
Whenever the singular number is used herein, the same shall
include the plural; and the neuter, masculine and feminine
genders shall include each other. If any language is stricken or
deleted from this Agreement, such language shall be deemed never
to have appeared herein and no other implication shall be drawn
therefrom. The language in all parts of this Agreement shall be
in all cases construed according to its fair meaning and not
strictly for or against the General Partner or the Limited
Partners.
16.4 Severability
If any covenant, condition, term or provision of this
Agreement is illegal, or if the application thereof to any Person
or in any circumstance shall to any extent be judicially
determined to be invalid or unenforceable, the remainder of this
Agreement, or the application of such covenant, condition, term
or provision to Persons or in circumstances other than those to
which it is held invalid or unenforceable, shall not be affected
thereby, and each covenant, condition, term and provision of this
Agreement shall be valid and enforceable to the fullest extent
permitted by law.
16.5 Governing Law
This Agreement shall be construed and enforced in
accordance with, and governed by, the internal laws of the State
of California.
16.6 Counterparts
This Agreement may be executed in one or more counterparts
each of which shall, for all purposes, be deemed an original and
all of such counterparts, taken together, shall constitute one
and the same Agreement binding on all of the Partners.
16.7 Entire Agreement
This Agreement constitutes the entire agreement of the
parties. All prior agreements among the parties, whether written
or oral, are merged herein and shall be of no force or effect.
This Agreement cannot be changed, modified or discharged orally
but only by an agreement in writing. There are no
representations, warranties, or agreements other than those set
forth in this Agreement, the Subscription Agreement, or the
Prospectus, if any.
16.8 Cross-References
All cross-references in this Agreement, unless specifically
directed to another Agreement or document, refer to provisions in
this Agreement.
16.9 Power of Attorney to the General Partner
(a) Each Limited Partner hereby irrevocably makes,
constitutes, and appoints the General Partner and any person
designated by it, with full substitution, its agent and attorney-
in-fact in his name, place and stead, to make, execute, swear to
and acknowledge, amend, file, record and deliver the following
documents and any other documents deemed by the General Partner
necessary for the business of the Partnership: (i) any
Certificate of Limited Partnership, required or permitted to be
filed on behalf of the Partnership, and any and all certificates
as necessary to qualify or continue the Partnership as a limited
partnership or partnership wherein the Limited Partners thereof
have limited liability in the states where the Partnership may be
doing business, and all instruments which effect a change or
modification of the Partnership in accordance with this
Agreement; (ii) this Agreement and any amendments thereto in
accordance with this Agreement; (iii) any other instrument which
is now or which may hereafter be required or advisable to be
filed for or on behalf of the Partnership; (iv) any agreement to
secure payment of additional contributions due from that Limited
Partner; (v) any document which may be required to effect the
continuation of the Partnership, the admission of an additional
or Substituted Limited Partner, or the dissolution and
termination of the Partnership (provided such continuation,
admission or dissolution and termination is in accordance with
the terms of this Agreement), or to reflect any reductions in
amount of contributions of Partners; (vi) any document,
instrument, application, certificate, or order required to be
made, executed, acknowledged, or sworn to in connection with the
withdrawal or receipt from escrow of any cash of a Limited
Partner in connection with his purchase of Units, consistent with
the Prospectus; in each case having the power to execute such
instruments on his behalf, whether the undersigned approved of
such action or not; and (vii) any additions, deletions and
corrections to the Subscription Agreement which does not
adversely affect the position of the Limited Partners.
(b) This Power of Attorney is a special Power of
Attorney coupled with an interest, and shall not be revoked and
shall survive the assignment, delivery, or transfer by the
undersigned of all or part of his interest in the Partnership
and, being coupled with an interest, shall survive the death or
disability or cessation of the existence as a legal entity of the
undersigned, except that where the assignee has been approved by
said attorney, as General Partner of the Partnership, for
admission to the Partnership as a Substituted Limited Partner,
this Power of Attorney shall survive the delivery of such
assignment for the sole purpose of enabling said attorney to
execute, acknowledge and file any instrument necessary to
effectuate said substitution.
(c) Each Limited Partner hereby gives and grants to
his said attorney full power and authority to do and perform each
and every act and thing whatsoever requisite, necessary or
appropriate to be done in or in connection with this Power of
Attorney as fully to all intents and purposes as he might or
could do if personally present, hereby ratifying all that his
said attorney shall lawfully do or cause to be done by virtue of
this Power of Attorney.
(d) The existence of this Power of Attorney shall not
preclude execution of any such instrument by the undersigned
individually on any such matter. A person dealing with the
Partnership may conclusively presume and rely on the fact that
any such instrument executed by such agent and attorney-in-fact
is authorized, regular and binding without further inquiry.
(e) This Power of Attorney may be exercised by an
officer of the General Partner by a facsimile signature of such
officer, or by listing all of the Limited Partners executing any
instrument with a single signature of one of the officers of the
General Partner acting as attorney-in-fact for all of them.
16.10 Further Assurances
The Limited Partners shall execute and deliver such further
instruments and do such further acts and things as may be
required to carry out the intent and purposes of this Agreement.
16.11 Successors and Assigns
Subject in all respects to the limitations on
transferability contained herein, this Agreement shall be binding
upon, and shall inure to the benefit of, the heirs,
administrators, personal representatives, successors and assigns
of the respective parties hereto.
16.12 Waiver of Action for Partition
Each of the parties hereto irrevocably waives during the
term of the Partnership and during the period of its liquidation
following any dissolution, any right that he may have to maintain
any action for partition with respect to any of the assets of the
Partnership.
16.13 Creditors
None of the provisions of this Agreement shall be for the
benefit of or enforceable by any of the creditors of the
Partnership or the Partners.
16.14 Remedies
The rights and remedies of the Partners hereunder shall not
be mutually exclusive, and the exercise by any Partner of any
right to which he is entitled shall not preclude the exercise of
any other right he may have.
16.15 Authority
Each individual executing this Agreement on behalf of a
partnership, corporation, or other entity warrants that he is
authorized to do so and that this Agreement will constitute the
legally binding obligation of the entity which he represents.
16.16 Tax Elections
The General Partner shall cause the Partnership to make all
elections required or permitted to be made for income tax
purposes in such manner as the General Partner in its sole
discretion deems appropriate or necessary. However, it is not
anticipated that the General Partner will elect, in accordance
with Section 754 of the Internal Revenue Code, to adjust the
basis of the Partnership property as described in Sections 734
and 743 of the Internal Revenue Code.
16.17 Signatures
The signature of the General Partner shall be sufficient to
bind the Partnership to any agreement or on any document,
including, but not limited to, documents drawn or agreements made
in connection with the acquisition or disposition of any assets.
16.18 Withholding Taxes
In the event that the Partnership is obligated to withhold
taxes with respect to any Partner:
(a) Any tax required to be withheld shall be charged
to that Partner's capital account as if the amount of such tax
had been distributed to such Partner;
(b) The General Partner shall have the right to make
a loan to such Partner in an amount equal to the amount of tax
required to be withheld to the extent that cash is needed to make
the withholding payments attributable to that Partner; and
(c) The General Partner may retain appropriate
portions of a Partner's distributions until any withholding
obligations relating to that Partner are satisfied and may apply
such distributions to any loan made pursuant hereto.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of ________________, 1987.
GENERAL PARTNER:
Prometheus Development Co., Inc., a California corporation
By /S/ SANFORD N. DILLER
Sanford N. Diller
President
INITIAL LIMITED PARTNER:
Prom XX, Inc., a California corporation
By /S/ SANFORD N. DILLER
Sanford N. Diller
President
ADDITIONAL LIMITED PARTNERS
Pursuant to Signatures on Subscription Agreement
Upon admission of the additional
Limited Partners set forth in
Schedule A, the Initial Limited
Partner hereby withdraws as a Partner
of the Partnership upon redemption
for the cost of its interest.
Prom XX, Inc.,
a California corporation
By /S/ SANFORD N. DILLER
Sanford N. Diller
President
John Ghio
Page 2
APPENDIX C
Appraisal of CB Richard Ellis, Inc.
CB RICHARD ELLIS
COMPLETE APPRAISAL
SUMMARY REPORT
OF
ALDERWOOD AND TIMBERLEAF APARTMENTS
900 Pepper Tree & 2147 Newhall Street
Santa Clara, Santa Clara County, California
CBREI File No. 00-931
DATE OF VALUE
DECEMBER 5, 2000
PREPARED FOR
John Ghio
PROMETHEUS INCOME PARTNERS, A CALIFORNIA LIMITED
PARTNERSHIP
350 Bridge Parkway
Redwood City, California 94065
PREPARED BY
CB RICHARD ELLIS, INC.
VALUATION & ADVISORY SERVICES
350 Sansome Street, Suite 840
San Francisco, California 94104
December 14, 2000
John Ghio
PROMETHEUS INCOME PARTNERS, A CALIFORNIA LIMITED PARTNERSHIP
350 Bridge Parkway
Redwood City, California 94065
RE: Appraisal of ALDERWOOD AND TIMBERLEAF APARTMENTS
900 Pepper Tree & 2147 Newhall Street
Santa Clara, Santa Clara County, California
CBREI File No. 00-931
Dear Mr. Ghio:
At your request and authorization, CB Richard Ellis, Inc. has prepared a
Complete Appraisal presented in a summary appraisal report of the market value
in the referenced real property.
The subject is comprised of two garden apartment buildings. Alderwood Apartment
is a 234 unit apartment complex built in 1986 situated on a 9.42 acre site in
Santa Clara, Santa Clara County, California. Currently the property is 99%
occupied. Timberleaf Apartments is a 124 units apartment complex built in 1986
situated on a 4.94 acre site in Santa Clara, Santa Clara County, California.
Currently it is 99% occupied. The subject is more fully described, legally and
physically within the enclosed report.
Data, information, and calculations leading to the value conclusion are
incorporated in the report following this letter. The report, in its entirety,
including all assumptions and limiting conditions, is an integral part of and
inseparable from this letter.
Based on the analysis contained in the following report, the market value of the
subject is concluded as follows:
- --------------------------------------------------------------------------------
MARKET VALUE CONCLUSION
- --------------------------------------------------------------------------------
Location Appraisal Premise Interest Appraised Date of Value Value Conclusion
- ------------------------------------------------------------------------------------------------------------------------------------
Alderwood As Is Fee Simple December 5, 2000 $45,500,000
Timber leaf As Is Fee Simple December 5, 2000 $23,400,000
- ------------------------------------------------------------------------------------------------------------------------------------
Source: CB Richard Ellis, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
The following appraisal sets forth the most pertinent data gathered, the
techniques employed, and the reasoning leading to the opinion of value. The
analyses, opinions and conclusions were developed based on, and this report has
been prepared in conformance with, our interpretation of the guidelines and
recommendations set forth in the Uniform Standards of Professional Appraisal
Practice (USPAP), the requirements of the Code of Professional Ethics and
Standards of Professional Appraisal Practice
John Ghio
Page 2
of the Appraisal Institute, The Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA), Title XI Regulations.
The report is for the sole use of the client; however, client may provide only
complete, final copies of the appraisal report in its entirety (but not
component parts) to third parties who shall review such reports in connection
with loan underwriting or securitization efforts. Appraiser is not required to
explain or testify as to appraisal results other than to respond to the client
for routine and customary questions. Please note that our consent to allow an
appraisal report prepared by CB Richard Ellis, Inc. or portions of such report,
to become part of or be referenced in any public offering, the granting of such
consent will be at our sole discretion and, if given, will be on condition that
we will be provided with an Indemnification Agreement and/or Non-Reliance
letter, in a form and content satisfactory to us, by a party satisfactory to us.
We do consent to your submission of the reports to rating agencies, loan
participants or your auditors in its entirety (but not component parts) without
the need to provide us with an Indemnification Agreement and/or Non-Reliance
letter.
It has been a pleasure to assist you in this assignment. If you have any
questions concerning the analysis, or if CB Richard Ellis, Inc. can be of
further service, please contact us.
Respectfully submitted,
CB RICHARD ELLIS, INC.
VALUATION & ADVISORY SERVICES
/s/ Susan R. Mullahey /s/ Elizabeth Champagne
- ------------------------------------ -----------------------------------
Susan R. Mullahey Elizabeth Champagne, MAI
Senior Real Estate Analyst Senior Managing Director
California Cert. AG010520 California Cert. AG025144
Phone: 415-986-7259 Phone: 415-986-7395
Fax: 415-986-6862 Fax: 415-986-6862
Email: smullahey@cbrichardellis.com Email: echampagne@cbrichardellis.com
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS CERTIFICATION OF THE APPRAISAL
- --------------------------------------------------------------------------------
Certification of the Appraisal
We certify to the best of our knowledge and belief:
1. The statements of fact contained in this report are true and correct.
2. The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions and are our personal,
impartial and unbiased professional analyses, opinions, and conclusions.
3. We have no present or prospective interest in or bias with respect to the
property that is the subject of this report and have no personal interest
in or bias with respect to the parties involved with this assignment.
4. Our engagement in this assignment was not contingent upon developing or
reporting predetermined results.
5. Our compensation for completing this assignment is not contingent upon the
development or reporting of a predetermined value or direction in value
that favors the cause of the client, the amount of the value opinion, the
attainment of a stipulated result, or the occurrence of a subsequent event
directly related to the intended use of this appraisal, such as the
approval of a loan.
6. This appraisal assignment was not based upon a requested minimum valuation,
a specific valuation , or the approval of a loan.
7. Our analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the Uniform Standards of Professional
Appraisal Practice of The Appraisal Foundation and the requirements of the
Code of Professional Ethics and the Standards of Professional Appraisal
Practice of the Appraisal Institute. In addition, this report conforms to
the requirements of the Financial Institutions Reform, Recovery, and
Enforcement Act (FIRREA).
8. The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
9. Elizabeth Champagne, MAI has completed the requirements of the continuing
education program of the Appraisal Institute.
10. Susan R. Mullahey has and Elizabeth Champagne, MAI has not made a personal
inspection of the property that is the subject of this report.
11. No one provided professional assistance to the persons signing this report.
12. Susan R. Mullahey and Elizabeth Champagne, MAI have extensive experience in
the appraisal/review of similar property types.
13. Susan R. Mullahey and Elizabeth Champagne, MAI are currently certified in
the state where the subject is located.
14. Valuation and Advisory Services operates as an independent economic entity
within CB Richard Ellis, Inc. Although other employees of CB Richard Ellis,
Inc. divisions may be contacted as a part of our routine market research
investigations, absolute client confidentiality and privacy are maintained
at all times with regard to this assignment without conflict of interest.
/s/ Susan R. Mullahey /s/ Elizabeth Champagne
- ------------------------------------ -----------------------------------
Susan R. Mullahey Elizabeth Champagne, MAI
Senior Real Estate Analyst Senior Managing Director
California Cert. AG010520 California Cert. AG025144
- --------------------------------------------------------------------------------
i
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS SUBJECT PHOTOGRAPHS
- --------------------------------------------------------------------------------
Subject Photographs
[photo of property - Alderwood]
- --------------------------------------------------------------------------------
"TYPICAL VIEW OF THE SUBJECT - ALDERWOOD"
- --------------------------------------------------------------------------------
[photo of property - Timberleaf]
- --------------------------------------------------------------------------------
"TYPICAL VIEW OF THE SUBJECT - TIMBERLEAF"
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ii
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS SUMMARY OF SALIENT FACTS
- --------------------------------------------------------------------------------
Summary of Salient Facts
Property Name Alderwood Apartments
Location 900 Pepper Tree Lane, Santa Clara
California
Acessor's Parcel Number 290-26-009
Highest and Best Use
As Though Vacant Aparment
As Improved Aparment
Property Rights Appraised Fee Simple
Land Area 9.42 AC 410,422 SF
Excess Land Area 0.00 AC 0 SF
Improvements
Number of Buidlings 19
Number of Stories 2
Gross Buidling Area 195,000 SF
Net Rentable Area 187,514 SF
Number of Units 234
Average Unit Size 801 SF
Year Built 1986
Condition Good
Estimated Exposure Time 12 Months
Financial Indicators
Current Overall Occupancy 99.1%
Stabilized Overall Occupancy 95.0%
Estimated Lease-up Period 0 Months
Overall Capitalization Rate 8.50%
Discount Rate 12.00%
Terminal Capitalization Rate 11.00%
Stabilized Operating Data Total Per Unit
---------------- ---------------
Effective Gross Income $5,613,835 $23,991
Operating Expenses $1,558,485 $6,660
Expense Ratio 27.76%
Net Operating Income $4,055,350 $17,331
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iii
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS SUMMARY OF SALIENT FACTS
- --------------------------------------------------------------------------------
Summary of Salient Facts
Property Name Timberleaf Apartments
Location 2147 Newhall Street, Santa Clara, California
Acessor's Parcel Number 269-58-057
Highest and Best Use
As Though Vacant Aparment
As Improved Aparment
Property Rights Appraised Fee Simple
Land Area 4.94 AC 215,186 SF
Improvements
Number of Buidlings 9
Number of Stories 2&3
Gross Buidling Area 107,000 SF
Net Rentable Area 100,052 SF
Number of Units 124
Average Unit Size 807 SF
Year Built 1986
Condition Good
Estimated Exposure Time 12 Months
Financial Indicators
Current Overall Occupancy 100.0%
Stabilized Overall Occupancy 95.0%
Estimated Lease-up Period 0 Months
Overall Capitalization Rate 8.50%
Discount Rate 12.00%
Terminal Capitalization Rate 11.00%
Stabilized Operating Data Total Per Unit
---------------- ---------------
Effective Gross Income $2,975,096 $23,993
Operating Expenses $879,228 $7,091
Expense Ratio 29.55%
Net Operating Income $2,095,868 $16,902
- --------------------------------------------------------------------------------
iv
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS TABLE OF CONTENTS
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
CERTIFICATION OF THE APPRAISAL..............................................i
SUBJECT PHOTOGRAPHS........................................................ii
TYPICAL VIEW OF THE SUBJECT - TIMBERLEAF...................................ii
SUMMARY OF SALIENT FACTS..................................................iii
TABLE OF CONTENTS...........................................................v
INTRODUCTION................................................................1
AREA ANALYSIS...............................................................6
NEIGHBORHOOD ANALYSIS......................................................10
MARKET ANALYSIS............................................................12
SITE ANALYSIS..............................................................19
IMPROVEMENT ANALYSIS.......................................................21
TAX AND ASSESSMENT DATA....................................................22
HIGHEST AND BEST USE.......................................................23
APPRAISAL METHODOLOGY......................................................25
SALES COMPARISON APPROACH..................................................26
INCOME CAPITALIZATION APPROACH.............................................30
RECONCILIATION OF VALUE....................................................36
ASSUMPTIONS AND LIMITING CONDITIONS........................................37
ADDENDA
A Glossary of Terms
A Additional Photographs
A Improved Comparable Sales
A Rent Comparables
A Demographics
- --------------------------------------------------------------------------------
v
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS INTRODUCTION
- --------------------------------------------------------------------------------
INTRODUCTION
PROPERTY IDENTIFICATION
The subject's street address is 900 Pepper Tree & 2147 Newhall Street, in Santa
Clara, Santa Clara County, California.
OWNERSHIP AND PROPERTY HISTORY
Title to the property is currently vested in the name of Prometheus Income
Partners, who acquired title to the property in 1987 for an undisclosed amount.
There have been no ownership transfers of the property in the last three years.
As of the date of value, the subject is not being marketed for sale.
DATE OF INSPECTION
The subject was inspected on December 8, 2000.
DATE OF VALUE
The date of value is December 8, 2000.
DATE OF REPORT
The date of report is the date indicated on the letter of transmittal.
PURPOSE OF THE APPRAISAL
The purpose of this appraisal is to estimate the market value of the subject
property. Market value is defined as follows:
The most probable price which a property should bring in a competitive and open
market under all conditions requisite to a fair sale, the buyer and seller each
acting prudently and knowledgeably, and assuming the price is not affected by
undue stimulus. Implicit in this definition is the consummation of a sale as of
a specified date and the passing of title from seller to buyer under conditions
whereby:
buyer and seller are typically motivated;
both parties are well informed or well advised, and acting in what they consider
their own best interests;
a reasonable time is allowed for exposure in the open market;
payment is made in terms of cash in U.S. dollars or in terms of financial
arrangements comparable thereto; and
- --------------------------------------------------------------------------------
1
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS INTRODUCTION
- --------------------------------------------------------------------------------
the price represents the normal consideration for the property sold unaffected
by special or creative financing or sales concessions granted by anyone
associated with the sale. 1
PREMISE OF THE APPRAISAL
The premise of this appraisal valuation is "as is" on the date of value.
TERMS AND DEFINITIONS
The Glossary of Terms in the Addenda provides definitions for terms that are,
and may be used in this appraisal.
INTENDED USE AND USER OF REPORT
This appraisal is to aid in internal decisions by the client, Prometheus Income
Partners, a California Limited Partnership.
PROPERTY RIGHTS APPRAISED
The interest appraised represents the fee simple estate.
APPRAISAL DEVELOPMENT AND REPORTING PROCESS
The following steps were completed by CB Richard Ellis, Inc. for this
assignment:
1. identified the subject property;
2. understood the intended use of the report;
3. applied appropriate appraisal methodology;
4. analyzed the comparable data to arrive at a probable range of value via each
approach to value used in this report;
5. reconciled the results of each approach into a reasonable and defensible
final estimate of value for the subject, as defined herein; and
6. estimated a reasonable exposure time and marketing time associated with the
value estimate.
To develop the opinion of value, CB Richard Ellis, Inc. performed a Complete
Appraisal as defined by the Uniform Standards of Professional Appraisal Practice
(USPAP). This means that no departures from Standard 1 were invoked. In this
Complete Appraisal, CB Richard Ellis, Inc. used all appropriate approaches to
value. Furthermore, the value conclusion reflects all known information about
the subject, market conditions, and available data.
This appraisal of the subject has been presented in the form of a Summary
Report, which is intended to comply with the reporting requirements set forth
under Standards Rule 2-2(b) of the USPAP. That is,
- -------------------------
1 The definition of market value is taken from Uniform Standards of Professional
Appraisal Practice adopted by the Appraisal Standards Board of The Appraisal
Foundation, 1997 Edition. This definition is also compatible with the OTS, RTC,
FDIC, NCUA, and the Board of Governors of the Federal Reserve System definition
of market value. This definition is compatible with the definition of market
value contained in The Dictionary of Real Estate Appraisal, Third Edition.
- --------------------------------------------------------------------------------
2
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS INTRODUCTION
- --------------------------------------------------------------------------------
this report incorporates, a summary of explanation of the data, reasoning and
analysis which were used to develop the opinion of value. This report also
includes summary descriptions of the subject and the market for the property
type.
SPECIAL APPRAISAL INSTRUCTIONS
There have been no special appraisal instructions for this assignment.
EXPOSURE TIME
Exposure time is not intended to be a prediction of a date of sale or a one-line
statement. Instead, it is an integral part of the appraisal analysis and is
based on one or more of the following:
o statistical information about days on the market
o information gathered through sales verification
o interviews of market participants.
The reasonable exposure period is a function of price, time, and use. It is not
an isolated estimate of time alone. Exposure time is different for various types
of real estate and under various market conditions.
Exposure time is the estimated length of time the property would have been
offered prior to a hypothetical market value sale on the effective date of
appraisal. It is a retrospective estimate based on an analysis of recent past
events, assuming a competitive and open market. It assumes not only adequate,
sufficient, and reasonable time but also adequate, sufficient, and reasonable
marketing effort. Exposure time is therefore interrelated with appraisal
conclusion of value.
In consideration of these factors, we have analyzed the following:
o exposure periods of comparable sales revealed during the course of this
appraisal;
o the CB Richard Ellis, Inc. National Investor Survey; and
o knowledgeable real estate professionals.
The following table presents the information derived from these sources:
----------------------------------------------------------------------
EXPOSURE TIME INFOMATION - APARTMENT PROPERTIES
----------------------------------------------------------------------
Exposure Time (Months)
Data source Range Average
----------------------------------------------------------------------
Comparable Sales Data 3.0 - 9.0 6.0
National Investor Survey, Fourth Quarter 1999
Class A Properties 3.0 - 12.0 6.0
Class B Properties 3.0 - 12.0 6.8
Class C Properties 3.0 - 18.0 11.6
Local Market Professionals 6.0 - 12.0 9.0
----------------------------------------------------------------------
Source: CB Richards Ellis, Inc.
----------------------------------------------------------------------
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3
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ALDERWOOD AND TIMBERLEAF APARTMENTS INTRODUCTION
- --------------------------------------------------------------------------------
Based on the foregoing analysis, an exposure time of 12 months is reasonable,
defensible, and appropriate. CB Richard Ellis, Inc. assumes the subject would
have been competitively priced and aggressively promoted regionally.
MARKETING TIME
Marketing time is the period a prospective investor would forecast to sell the
subject property immediately after the date of value, at the value estimated.
The marketing time is an estimate of the number of months it will require to
sell the subject from the date of value, into the future. The anticipated
marketing time is essentially a measure of the perceived level of risk
associated with the marketability, or liquidity, of the subject property. The
marketing time estimate is based on the data used in estimating the reasonable
exposure time, in addition to an analysis of the anticipated changes in market
conditions following the date of appraisal.
The future price for the subject (at the end of the marketing time) may or may
not equal the appraisal estimate. The future price depends on unpredictable
changes in the physical real estate, demographic and economic trends, real
estate markets in general, supply/demand characteristics for the property type,
and many other factors.
Based on the premise that present market conditions are the best indicators of
future performance, a prudent investor will forecast that, under the conditions
described above, the subject will require a marketing time of 12 months.
- --------------------------------------------------------------------------------
4
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ALDERWOOD AND TIMBERLEAF APARTMENTS AREA ANALYSIS
- --------------------------------------------------------------------------------
[Area Map]
"Regional Map"
"Subject Alderwood"
"Subject Timberleaf"
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5
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ALDERWOOD AND TIMBERLEAF APARTMENTS AREA ANALYSIS
- --------------------------------------------------------------------------------
AREA ANALYSIS
CITY OF SANTA CLARA
Overview
The City of Santa Clara is located in the northern portion of Santa Clara
County, approximately 50 miles south of San Francisco and 40 miles south of
Oakland. The City is bordered by Campbell to the south, Sunnyvale to the east,
Los Altos to the west, and San Jose to the east. Santa Clara encompasses 18.3
square miles. There is very little land available for development in Santa
Clara, the lack of which keeps new construction to a minimum.
Social Forces
Between 1980 and 1990, the population of Santa Clara increased 5.3%, from 88,924
to 93,672. In 1995 the population was estimated at 98,300. The city's population
is anticipated to rise to 103,700 by this year, and 109,300 by 2015, an increase
of 11.2% over 1995.
Santa Clara's total number of households is expected to rise 1.8% between 1995
and 2000, from 37,090 to 37,770. By 2020, it is anticipated to rise to 41,350,
an increase of 11.5% over the year 1995.
The following chart illustrates population growth projections by sector for the
City of Santa Clara.
------------------------------------------------------------------------------
SANTA CLARA DEMOGRAPHICS
1990 - 2020
------------------------------------------------------------------------------
1990 1995 2000 2010 2020
------------------------------------------------------------------------------
Population 93,672 98,300 103,700 105,700 109,300
Mean Household Income (1995 $'s) $60,521 $61,700 $67,000 $78,000 $86,700
Households 36,665 37,090 37,770 39,310 41,350
Average Household Size 2.49 2.59 2.69 2.64 2.59
------------------------------------------------------------------------------
Source: ABAG, Projections 2000
------------------------------------------------------------------------------
ECONOMIC FORCES
The following table shows the major employers in the City of Santa Clara.
- --------------------------------------------------------------------------------
6
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ALDERWOOD AND TIMBERLEAF APARTMENTS AREA ANALYSIS
- --------------------------------------------------------------------------------
----------------------------------------------------------------------
MAJOR EMPLOYERS IN SANTA CLARA
----------------------------------------------------------------------
Employer Business Employees
----------------------------------------------------------------------
Hewlett Packard Computers & Components 2,000 +
IBM Computers & Components 2,000 +
Intel Corporation Semiconductors 2,000 +
Digital Equipment Semiconductors 1,000 - 2,000
Integrated Device Technology Computer Components 1,000 - 2,000
----------------------------------------------------------------------
Source: Santa Clara Chamber of Commerce
----------------------------------------------------------------------
Between 1980 and 1990, total employment in Santa Clara increased 3.0%, from
99,901 to 102,940 jobs. By 1995 this had dropped to 100,490. Total employment is
projected to grow 50.5% by 2010, to approximately 151,280 jobs. By 2020 total
employment is anticipated to reach 161,850 jobs, an increase of 7.0% over the
year 2010. Santa Clara's employment presently constitutes approximately 12.1% of
the county's total employment.
The following chart illustrates employment growth projections by sector for the
City of Santa Clara between 1990 and 2020.
--------------------------------------------------------------------------
EMPLOYMENT GROWTH PROJECTIONS 1990-2020
City of Santa Clara
--------------------------------------------------------------------------
1995-2020
1990 1995 2010 2020 % Change
--------------------------------------------------------------------------
Agriculture/Mining 270 260 300 290 (3.3%)
Manufacturing/Wholesale 54,040 49,140 67,320 68,600 39.6%
Retail 12,010 11,510 16,390 17,220 49.6%
Service 26,230 29,210 50,810 58,680 100.9%
Other 10,390 10,370 16,460 17,060 64.5%
--------------------------------------------------------------------------
TOTAL 102,940 100,490 151,280 161,850 61.1%
--------------------------------------------------------------------------
Sources: ABAG, Projections 2000
--------------------------------------------------------------------------
Spending, Income and Inflation
Mean household income, measured in constant 1995 dollars, rose approximately
15.7% between 1980 and 1990, from $52,305 to $60,521. In 1995 it was estimated
at $61,300. Mean household income is anticipated to rise 34.3% by the year 2010
to $82,300 and 44.4% by 2020 to $88,500.
The following table presents historical and projected mean household incomes in
1990 dollars for the City of Santa Clara and Santa Clara County.
- --------------------------------------------------------------------------------
7
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ALDERWOOD AND TIMBERLEAF APARTMENTS AREA ANALYSIS
- --------------------------------------------------------------------------------
------------------------------------------------------------------------------
SANTA CLARA COUNTY HOUSEHOLD INCOME
------------------------------------------------------------------------------
95-20
Area 1980 1990 1995 2010 2020 % Chg
------------------------------------------------------------------------------
Santa Clara County $57,803 $70,262 $74,300 $97,200 $105,300 41.7%
City of Santa Clara $52,305 $60,521 $61,300 $82,300 $88,500 44.4%
------------------------------------------------------------------------------
Sources: Projections 2000, ABAG
------------------------------------------------------------------------------
Real Estate
As previously indicated, Santa Clara is almost completely built-out with only a
limited amount of available land for new construction. The city encompasses
37,873 dwelling units, approximately 45% of which are single family detached
homes. Santa Clara is adjacent to the upscale communities of Cupertino and Los
Altos, which are primarily single family residential developments. The upscale
residential communities in and around Santa Clara have helped the overall
economic health of the area which also promotes the growth of local commercial
services.
- --------------------------------------------------------------------------------
8
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ALDERWOOD AND TIMBERLEAF APARTMENTS NEIGHBORHOOD ANALYSIS
- --------------------------------------------------------------------------------
[Neighborhood Map]
"Neighborhood Map"
"Subject Alderwood"
"Subject Timberleaf"
- --------------------------------------------------------------------------------
9
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ALDERWOOD AND TIMBERLEAF APARTMENTS NEIGHBORHOOD ANALYSIS
- --------------------------------------------------------------------------------
NEIGHBORHOOD ANALYSIS
LOCATION
The neighborhood is located in the City of Santa Clara. The City of Santa Clara
is located in center of Santa Clara County.
BOUNDARIES
The neighborhood boundaries are detailed as follows:
North: El Camino Real
South: Interstate 280
East: Interstate 880
West: Lawrence Expressway
LAND USE
Land uses within the subject neighborhood consist of a harmonious mixture of
commercial and residential development. The immediate area surrounding the
subject is a newer area of development, consisting primarily of residential uses
with much of the development being built during the 1970s and 1980s. The
majority of the single-family residential development within a one mile radius
of the subject may be described as tract homes in the $350,000-$500,000 price
range.
GROWTH PATTERNS
Growth patterns have occurred primarily along primary commercial thoroughfares
such as El Cmaino Real, Homestead Road, Meridian Road, San Tomas Expressway and
Lawrence Expressway.
ACCESS
Primary access to the subject neighborhood is provided by Interstate 280 and 880
as well as San Tomas and Lawrence Expressway.
DEMOGRAPHICS
Population growth and new household formations have been on an upward trend
within the subject neighborhood.
Selected neighborhood demographics in a one-, three-, and five-mile radius from
the subject are shown in the following table:
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10
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ALDERWOOD AND TIMBERLEAF APARTMENTS NEIGHBORHOOD ANALYSIS
- --------------------------------------------------------------------------------
-----------------------------------------------------------------------
SELECTED NEIGHBORHOOD DEMGRAPHICS
-----------------------------------------------------------------------
1 mile 3 miles 5 miles
-----------------------------------------------------------------------
Population
2003 Estimate 25,933 208,230 549,770
1998 Estimate 24,696 198,110 521,228
1990 Census 21,189 164,666 424,158
1998 - 2003 % Change 5.0% 5.1% 5.5%
Households
2003 Estimate 10,558 84,122 206,746
1998 Estimate 9,991 79,587 194,998
1990 Census 9,216 72,996 177,110
1998 - 2003 % Change 5.7% 5.7% 6.0%
2003 Median Household Income $42,256 $36,901 $36,952
1998 Median Household Income $69,529 $66,455 $74,610
1998 Average Household Income $53,878 $55,126 $61,726
1990 Average Home Value $263,185 $263,232 $277,331
1990 % College Graduates 68.8% 48.8% 44.1%
-----------------------------------------------------------------------
Source: Claritas, Inc.
-----------------------------------------------------------------------
We are only showing one set of demographics, however, the sites are located
relatively close and have basically similar demographics.
CONCLUSION
As shown above, the population within the subject neighborhood has shown growth
over the past five years. The neighborhood currently has a strong income
demographic profile. The outlook for the neighborhood is for good performance
with improvement over the next several years. As a result, the demand for
existing developments is expected to be strong.
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11
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ALDERWOOD AND TIMBERLEAF APARTMENTS MARKET ANALYSIS
- --------------------------------------------------------------------------------
MARKET ANALYSIS
Bay Area Multifamily Market
The Bay Area includes nine counties including Alameda, Contra Costa, Marin,
Napa, San Francisco, San Mateo, Santa Clara, Solano, and Sonoma. The statistical
data presented subsequently is based on figures compiled and published by
Realdata, Inc. on a semi-annual basis.
Historical Vacancy: Vacancy rates for multifamily properties in the Bay Area
have remained relatively stable since 1986, rarely rising above 5 percent. The
overall vacancy rate for the Bay Area as of December 1998 was 3.41 percent. The
following table summarizes the multifamily market vacancy rates in the Bay Area.
- --------------------------------------------------------------------------------
BAY AREA MULTIFAMILY
VACANCY
- --------------------------------------------------------------------------------
June
County 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Avg.
- ------------------------------------------------------------------------------------------------------------------------------
Alameda 3.1% 3.7% 2.6% 5.2% 4.8% 3.4% 3.2% 3.4% 3.7% 2.7% 2.2% 3.5%
Contra Costa 3.7% 4.0% 2.7% 6.0% 5.7% 5.1% 4.8% 4.4% 3.5% 2.6% 2.2% 4.1%
Marin 2.4% 5.6% 3.1% 2.6% 3.2% 3.6% 2.6% 3.4% 3.2% 2.7% 2.6% 3.2%
Napa 1.6% 2.5% 1.2% 3.1% 2.9% 4.2% 2.5% 3.2% 2.2% 0.9% 1.3% 2.3%
San Francisco 6.2% 3.2% 3.3% 4.9% 4.1% 3.1% 3.7% 3.3% 2.8% 2.2% 1.5% 3.5%
San Mateo 2.8% 3.5% 1.6% 3.8% 3.4% 3.3% 2.9% 4.4% 4.7% 2.1% 2.2% 3.2%
Santa Clara 2.6% 2.7% 3.4% 4.9% 4.0% 2.2% 2.6% 2.8% 3.8% 3.3% 2.2% 3.1%
Solano 2.7% 2.8% 2.2% 4.8% 5.1% 5.0% 4.6% 4.3% 4.0% 2.1% 2.9% 3.7%
Sonoma 2.2% 3.2% 4.1% 5.4% 6.0% 5.0% 3.6% 3.2% 2.8% 2.0% 4.7% 3.8%
- ------------------------------------------------------------------------------------------------------------------------------
Average 3.2% 3.3% 2.9% 5.0% 4.5% 3.4% 3.3% 3.5% 3.4% 2.8% 2.3% 3.4%
- ------------------------------------------------------------------------------------------------------------------------------
Source: RealData, Inc.
- --------------------------------------------------------------------------------
The average vacancy rate in 1999 in Santa Clara County was 2.3%; the rate
decreased further to 2.2% as of June 2000. This rate is lower than the Bay Area
market average of 2.3%, and also lower than the ten-year average vacancy rate
within the county of 3.1%.
Rents: Rents in the Bay Area were generally stable from 1992 through 1994 and
increased rapidly from 1995 through 1999. Overall, the peak full year for rental
increases was 1996 when the average overall rent increase in the Bay Area was
13.9 percent. The following table summarizes historical rental increases by
county.
- --------------------------------------------------------------------------------
12
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ALDERWOOD AND TIMBERLEAF APARTMENTS MARKET ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BAY AREA HISTORIC MULTIFAMILY RENT INCREASES
- --------------------------------------------------------------------------------
June
County 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Avg.
- ------------------------------------------------------------------------------------------------------------------------------
Alameda 4.2% 1.7% 1.6% 1.8% 1.0% 2.0% 12.0% 9.5% 7.1% 5.3% 21.7% 4.6%
Contra Costa 5.4% 2.6% 1.4% 1.1% -0.1% 3.3% 7.5% 6.2% 9.8% 9.5% 12.6% 5.4%
Marin 6.3% 3.7% 1.7% -3.3% 4.3% 3.6% 7.7% 11.4% 10.0% 5.8% 7.4% 5.3%
Napa 9.4% 3.9% -5.4% 0.3% 1.0% 1.2% 3.7% 5.8% 7.9% 7.2% 7.7% 3.9%
San Francisco 8.4% 3.4% -2.0% 1.1% 1.7% 2.6% 20.5% 15.6% 14.0% 7.2% 24.4% 8.8%
San Mateo 5.1% 3.3% 0.9% 3.2% 1.9% 4.4% 18.8% 7.1% 10.8% 7.9% 28.5% 8.4%
Santa Clara 4.3% 3.3% -0.7% 2.7% 0.1% 10.2% 17.5% 10.7% 3.0% 7.0% 24.1% 7.5%
Solano 7.0% 4.1% 1.6% -0.6% 0.6% 0.0% 2.5% 4.2% 7.2% 8.8% 6.1% 3.8%
Sonoma 7.4% 3.5% 1.2% -0.6% -1.2% 2.4% 5.9% 7.7% 10.0% 5.6% 12.4% 4.9%
- ------------------------------------------------------------------------------------------------------------------------------
Average 5.6% 3.4% 0.3% 1.0% 0.9% 5.9% 13.9% 9.9% 8.8% 7.0% 20.9% 7.1%
- -------------------------------------------------------------------------------------------------------------------------------
Source: RealData, Inc.
- --------------------------------------------------------------------------------
Rental increases in Santa Clara County have historically been above the overall
market average. They were positive in all years except 1992, averaging 7.5% per
year. As evidenced in the table, many Bay Area markets experienced rapid rent
increases in 1996 through 1999, with San Francisco leading the group for the
first three of those four years. Overall, rents in the Bay Area increased by
20.9% during the first half of 2000, led by large increases in San Francisco, as
well as Alamea, San Mateo and Santa Clara Counties.
Apartment rental rates in Santa Clara County are higher on average than rents
Bay Area-wide. The following table summarizes rental rates per square foot
within San Francisco and the Bay Area.
- --------------------------------------------------------------------------------
RENTAL RATES PER SQUARE FOOT
APARTMENTS
JUNE 2000
- --------------------------------------------------------------------------------
Area Studio 1B/1B 2B/1B 2B/1+B 3B/1B 3B/1+B 4B/1+B Avg.
- --------------------------------------------------------------------------------
Santa Clara County $2.66 $2.26 $1.96 $2.00 $1.27 $1.97 $1.69 $2.11
S. F. Bay Area $2.48 $2.00 $1.66 $1.76 $1.39 $1.72 $1.18 $1.85
- --------------------------------------------------------------------------------
Source: RealData, Inc.
- --------------------------------------------------------------------------------
The average rental rate per square foot as of June 2000 in Santa Clara County
was $2.11 compared to $1.85 for the overall Bay Area. The expanding employment
base in the area has kept demand at a high level and the market has been able to
maintain substantial rental increases. Average rents have increased by 20.9% in
the Bay Area, and 24.1% in Santa Clara since year-end 1999.
Santa Clara Multifamily Market
The subject is in the City of Santa Clara. The historical average vacancy rate
in the City of Santa Clara is slightly lower than that of the County and the Bay
Area average. The following table depicts historical vacancy rates for the
multifamily market in the City of Santa Clara compared to the overall County.
- --------------------------------------------------------------------------------
13
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ALDERWOOD AND TIMBERLEAF APARTMENTS MARKET ANALYSIS
- --------------------------------------------------------------------------------
------------------------------------------------------------
SANTA CLARA MULTIFAMILY VACANCY
------------------------------------------------------------
12/98 6/99 12/99 Avg.
------------------------------------------------------------
Santa Clara 3.90% 3.08% 3.45% 3.27%
County 4.64% 3.84% 3.63% 3.74%
------------------------------------------------------------
Source: Realdata, Inc.
------------------------------------------------------------
Rents
Rents in Santa Clara and the County have moved significantly in the period
surveyed. Apartment rental rates in Santa Clara are lower on average than rents
countywide. The following table summarizes rental rates per square foot within
Santa Clara and the County.
- --------------------------------------------------------------------------------
BAY AREA RENTAL RATES PER SQUARE FOOT
APARTMENTS
- --------------------------------------------------------------------------------
Area Studio 1B/1B 2B/1B 2B/1+B 3B/1B 3B/1+B 4B/1+B Avg.
- --------------------------------------------------------------------------------
County $2.02 $1.68 $1.48 $1.51 $1.05 $1.45 $1.52 $1.58
Santa Clara $1.67 $1.69 $1.38 $1.55 --- $1.43 --- $1.57
- --------------------------------------------------------------------------------
Source: Realdata, Inc.
- --------------------------------------------------------------------------------
Historic Housing Supply
The construction of new housing units in Santa Clara County reached a decade low
in 1992, with the development of an estimated 2,836 units. Multifamily
construction had been the dominant unit of construction through the 1980s,
however, the development of single family housing has become more prevalent in
the 1990s. The following table summarizes the historical permit activity in
Santa Clara since 1988.
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14
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ALDERWOOD AND TIMBERLEAF APARTMENTS MARKET ANALYSIS
- --------------------------------------------------------------------------------
-----------------------------------------------
BUILDING PERMITS
SANTA CLARA COUNTY
-----------------------------------------------
Year Single Multi Total
-----------------------------------------------
1988 3,676 2,789 6,465
1989 2,548 2,311 4,859
1990 1,675 3,646 5,321
1991 1,663 2,102 3,765
1992 1,693 1,143 2,836
1993 1,822 1,617 3,439
1994 2,127 1,827 3,954
1995 2,199 1,285 3,484
1996 4,043 3,459 7,502
1997 4,367 4,443 8,810
1998 3,911 3,615 7,526
1999 3,353 3,690 7,043
9 yr Avg. 2,756 2,661 5,417
5 yr Avg. 3,575 3,298 6,873
-----------------------------------------------
Source: Northern California Real Estate Report
-----------------------------------------------
As can be seen in the preceding table, the nine-year average permit issuance is
5,417 units per year. This increases to 6,873 per year based on a five-year
average.
According to this historical permit activity, multifamily permits have accounted
for 44% of residential permits issued on a five-year average and 48% of total
permits based on an nine-year average. Single family housing has accounted for
56% based on a five-year average and 52% based on a nine-year average. The
following chart summarizes the data of single family and multifamily housing
permit issuances.
---------------------------------------------------
SANTA CLARA COUNTY HISTORICAL
PERMIT ACTIVITY
---------------------------------------------------
9 Yr Avg 5 Yr Avg
---------------------------------------------------
Single Family Dwellings: 52% 56%
Multifamily Dwellings: 48% 44%
---------------------------------------------------
Total 100% 100%
---------------------------------------------------
Source: Northern California Real Estate Report
---------------------------------------------------
These statistics will be utilized to determine future demand for housing in
Santa Clara County.
Demand Analysis
Demand for housing in the local area is related to employment growth and
convenient access to nearby freeways, and shopping areas, as well as the
desirable quality of the surrounding neighborhood.
- --------------------------------------------------------------------------------
15
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ALDERWOOD AND TIMBERLEAF APARTMENTS MARKET ANALYSIS
- --------------------------------------------------------------------------------
According to forecasts prepared by the Association of Bay Area Governments
(ABAG), the population of Santa Clara County will grow by a total of 14.9%
between 2000 and 2020. This represents approximately 13,070 new residents per
year. Employment growth for the same period is projected to be 22.5%. The growth
of employment over population in the county will keep demand for housing high.
In addition, strict zoning ordinances, condominium conversions, and the lack of
available developable land should continue to ensure high residential
occupancies and limited construction within developed neighborhoods. ABAG has
projected that between 2000 and 2020, the Santa Clara County housing market will
require 126,030 new dwelling units.
According to the historical permit activity, multifamily permits have accounted
for 44% of residential permits issued since 1995 and single family housing
permits accounted for 56% of the total. Projections by the Association of Bay
Area Government indicate that between 2000 and 2020 an average of 4,893 new
housing units will be required annually.
-------------------------------------------------
SANTA CLARA COUNTY HOUSEHOLD PROJECTIONS
-------------------------------------------------
Avg. Annual
2000 2020 Change
-------------------------------------------------
Households 567,080 664,930 4,893
-------------------------------------------------
Source: ABAG, Projections 2000
-------------------------------------------------
Based on historical permit activity, 44% of the additions to supply were
multifamily and 56% were single family. If these statistics remain constant, an
average of 2,153 multifamily units will be required annually (44% x 4,893) and
2,740 single-family units will be required annually (56% x 4,893). Between 1988
and 1999, an average of 2,756 single-family units and 2,661 multifamily housing
units were added to supply on an annual basis totaling 5,417 units, slightly
more than the projected requirements. Based on permit information, it appears
that construction activity has responded to the strong economic conditions.
CONCLUSION
The area apartment market and the local submarket are exhibiting increasing
rents and increasing occupancy rates, and absorption rates have been positive
over the past year. Considering the recent trends in absorption and the
prospects for new construction, the local market area should maintain a
stabilized occupancy position, with increasing rental rates over the next two to
three years, and the long term projection is for moderate growth.
- --------------------------------------------------------------------------------
16
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ALDERWOOD AND TIMBERLEAF APARTMENTS SITE ANALYSIS
- --------------------------------------------------------------------------------
[Site Map]
"Site Map"
"Compiled in conformance with Sec. 327
of the Revenue and Taxation Code
effective date March 1, 1990
Alfred E. Carlson - Assessor"
- --------------------------------------------------------------------------------
17
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ALDERWOOD AND TIMBERLEAF APARTMENTS SITE ANALYSIS
- --------------------------------------------------------------------------------
[Site map 2]
"Site Map 2"
"Compiled in conformance with Sec. 327
of the Revenue and Taxation Code
effective date March 1, 1990
Alfred E. Carlson - Assessor"
- --------------------------------------------------------------------------------
18
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ALDERWOOD AND TIMBERLEAF APARTMENTS SITE ANALYSIS
- --------------------------------------------------------------------------------
SITE ANALYSIS
The following is for Alderwood:
- --------------------------------------------------------------------------------
SITE SUMMARY AND ANALYSIS
- --------------------------------------------------------------------------------
Physical Description
Net Site Area 9.42 Acres 410,422 Sq. Ft.
Primary Road Frontage Pepper Tree Lane 729 Feet
Secondary Road Frontage Lucia Drive 390 Feet
Excess Land Area None
Shape Rectangular
Topography Level
Zoning District R-3 1&D Low Density Multi-Family
Flood Map Panel No. 060350 0005D
Flood Zone B
Adjacent Land Uses Residential
Comparative Analysis Rating
------
Access Average
Visibility Average
Functional Utility Average
Traffic Volume Average
Adequacy of Utilities Average
Landscaping Average
Drainage Assumed adequate
Utilities Provider Adequacy
-------- --------
Water City of Santa Clara Yes
Sewer City of Santa Clara Yes
Natural Gas PG&E Yes
Electricity PG&E Yes
Telephone Pacific Bell Yes
Mass Transit Bus system Yes
Other Yes No Unknown
--- -- -------
Detrimental Easements X
Encroachments X
Deed Restrictions X
Reciprocal Parking Rights X
Common Ingress/Egress X
- --------------------------------------------------------------------------------
Source: Various sources compiled by CB Richard Ellis, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
19
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ALDERWOOD AND TIMBERLEAF APARTMENTS SITE ANALYSIS
- --------------------------------------------------------------------------------
The following is for Timberleaf:
- --------------------------------------------------------------------------------
SITE SUMMARY AND ANALYSIS
- --------------------------------------------------------------------------------
Physical Description
Net Site Area 4.94 Acres 215,186 Sq. Ft.
Primary Road Frontage Timberleaf 400 Feet
Secondary Road Frontage None
Excess Land Area None
Shape Irregular
Topography Level
Zoning District R3-25D- Medium Density Multifamily
Flood Map Panel No. 060350 0005D
Flood Zone Bus system
Adjacent Land Uses Residential uses
Comparative Analysis Rating
------
Access Average
Visibility Average
Functional Utility Average
Traffic Volume Average
Adequacy of Utilities Average
Landscaping Average
Drainage Assumed adequate
Utilities Provider Adequacy
-------- --------
Water City of Santa Clara Yes
Sewer City of Santa Clara Yes
Natural Gas PG&E Yes
Electricity PG&E Yes
Telephone Pacific Bell Yes
Mass Transit Bus system Yes
Other Yes No Unknown
--- -- -------
Detrimental Easements X
Encroachments X
Deed Restrictions X
Reciprocal Parking Rights X
Common Ingress/Egress X
- --------------------------------------------------------------------------------
Source: Various sources compiled by CB Richard Ellis, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
20
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS SITE ANALYSIS
- --------------------------------------------------------------------------------
CONCLUSION
The site is well located and afforded average access and visibility from roadway
frontage. The size of the site is typical for the area and use, and there are no
known detrimental uses in the immediate vicinity. Overall, there are no known
factors which are considered to prevent the site from development to its highest
and best use, as if vacant, or adverse to the existing use of the site.
- --------------------------------------------------------------------------------
21
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS IMPROVEMENT ANALYSIS
- --------------------------------------------------------------------------------
IMPROVEMENT LAYOUT (NOT A FACING PAGE)
Replace this page with the indicated exhibit.
- --------------------------------------------------------------------------------
22
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ALDERWOOD AND TIMBERLEAF APARTMENTS IMPROVEMENT ANALYSIS
- --------------------------------------------------------------------------------
IMPROVEMENT ANALYSIS
The following chart depicts the subject's unit mix and building area.
Alderwood:
- --------------------------------------------------------------------------------
IMPROVEMENT SUMMARY
- --------------------------------------------------------------------------------
Number of Buildings 19
Number of Stories 2
Gross Building Area 195,000 SF
Net Rentable Area 187,514 SF
Number of Units 234
Average Unit Size 801 SF
- --------------------------------------------------------------------------------
Percent of Unit Size
Unit Mix Comments No. of Units Total (SF) NRA (SF)
- --------------------------------------------------------------------------------
1BR/1BA One bed/one bath 120 51.3% 700 84,000
2BR/1.75BA Two bed/one 3/4 bath 114 48.7% 1,000 114,000
- --------------------------------------------------------------------------------
Total/Average: 234 100.0% 846 198,000
- --------------------------------------------------------------------------------
Source: CB Richards Ellis, Inc.
- --------------------------------------------------------------------------------
Timberleaf:
- --------------------------------------------------------------------------------
IMPROVEMENT SUMMARY
- --------------------------------------------------------------------------------
Number of Buildings 9
Number of Stories 2&3
Gross Building Area 107,000 SF
Net Rentable Area 100,052 SF
Number of Units 124
Average Unit Size 807 SF
- --------------------------------------------------------------------------------
No. of Percent of Unit Size
Unit Mix Comments Units Total (SF) NRA (SF)
- --------------------------------------------------------------------------------
1BR/1BA One bed/one bath 60 48.4% 700 42,000
2BR/1.75BA Two bed/one 3/4 bath 64 51.6% 1,000 64,000
- --------------------------------------------------------------------------------
Total/Average: 124 100.0% 855 106,000
- --------------------------------------------------------------------------------
Source: CB Richards, Inc.
- --------------------------------------------------------------------------------
Building plans and specifications were not provided for the preparation of this
appraisal. The following is a description of the subject improvements and basic
construction features derived from CB Richard Ellis, Inc.'s physical inspection.
- --------------------------------------------------------------------------------
23
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS IMPROVEMENT ANALYSIS
- --------------------------------------------------------------------------------
There is some deferred maintenance for a replacement of both project's roof and
siding that are deducted from the values herein. The costs were provided by the
borrower and we have relied upon these figures. We reserve the right to amend
our value conclusions if the cost to cure is different than utilized herein.
CONCLUSION
The improvements are considered to be in average overall condition and are
considered to be typical for the age and location in regard to improvement
design and layout, as well as interior and exterior amenities. Overall, there
are no known factors which could be considered to adversely impact the
marketability of any of the subject units or the overall property.
- --------------------------------------------------------------------------------
24
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS TAX AND ASSESSMENT DATA
- --------------------------------------------------------------------------------
TAX AND ASSESSMENT DATA
In California, all real property is assessed at 100% of full cash value (which
is interpreted to mean market value of the fee simple estate interest) as
determined by the County Assessor. Generally a reassessment occurs only when a
property is sold (or transferred) or when new construction occurs (as
differentiated from replacing existing construction). Assessments for properties
that were acquired before the tax year 1975/76 were stabilized as of the tax
year 1975/76. Property taxes are limited by State law to 1% of the assessed
value plus voter-approved obligations. If no sale (or transfer) occurs or no new
building takes place, assessments may not increase by more than 2% annually.
Taxes are payable in two equal installments, which become delinquent after
December 10 and April 10, respectively.
The following table summarizes the current assessed value and property taxes for
the subject.
Alderwood:
- ------------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSESSMENT AND TAX INFORMATION: 2000-2001
- ------------------------------------------------------------------------------------------------------------------------------------
Assessed Value Total Taxes
- ------------------------------------------------------------------------------------------------------------------------------------
Personal Total Special
Parcel # Land Improvements Property Total Tax Rate Tax 1 Assessments 2 Total Tax
290-26-009 $7,612,283 $14,656,417 $76,639 $22,345,339 1.0605% $236,966.54 $71.30 $237,037.84
- ------------------------------------------------------------------------------------------------------------------------------------
1 Applies to real estate only. Taxes on personal property, improvement
fixtures, etc., if any, are excluded from the analysis.
2 Special assessments include bond payments and/or other taxes that do not vary
according to assessed value.
Source: Subject property tax bill and public records.
- --------------------------------------------------------------------------------
Compiled by: CB Richard Ellis Valuation and Advisory Services.
- --------------------------------------------------------------------------------
Timberleaf:
- ------------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSESSMENT AND TAX INFORMATION: 2000-2001
- ------------------------------------------------------------------------------------------------------------------------------------
Assessed Value Total Taxes
- ------------------------------------------------------------------------------------------------------------------------------------
Personal Total Special
Parcel # Land Improvements Property Total Tax Rate Tax 1 Assessments 2 Total Tax
269-58-057 $3,725,157 $7,707,556 $41,979 $11,474,692 1.0605% $121,683.33 $349.38 $122,032.71
- ------------------------------------------------------------------------------------------------------------------------------------
1 Applies to real estate only. Taxes on personal property, improvement
fixtures, etc., if any, are excluded from the analysis.
2 Special assessments include bond payments and/or other taxes that do not vary
according to assessed value.
Source: Subject property tax bill and public records.
- --------------------------------------------------------------------------------
Compiled by: CB Richard Ellis Valuation and Advisory Services.
- --------------------------------------------------------------------------------
The subject property's special assessments consist of vector control, traffic
mitigation, flood control and open space district funds.
Tax and Assessment Conclusion: CB Richard Ellis Valuation and Advisory Services
assumes that all taxes are current. If the subject sold for the value estimated
in this report, a reassessment at that value would most likely occur, with tax
increases limited to 2% annually thereafter until the property is sold again.
The consequences of this reassessment have been considered in the appropriate
valuation sections.
- --------------------------------------------------------------------------------
25
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
HIGHEST AND BEST USE
In appraisal practice, the concept of highest and best use represents the
premise upon which value is based. The four criteria the highest and best use
must meet are:
o legal permissibility;
o physical possibility;
o financial feasibility; and
o maximum profitability.
Highest and best use analysis involves assessing the subject both as if vacant
and as improved.
AS VACANT
Legal Permissibility
The legally permissible uses were discussed in detail in the site analysis and
zoning sections of this report.
Physical Possibility
The physical characteristics of the subject site were discussed in detail in the
site analysis. Overall, a wide range of legally permissible uses would be
physically possible.
Financial Feasibility
The financial feasibility of a specific property is market driven, and is
influenced by surrounding land uses. Based on the subject's specific location
and physical characteristics, multi-family residential development of the site
in a manner which is complimentary to the surrounding land uses would represent
the most likely financially feasible option.
Current market conditions and development activity indicate development of the
site with a multi-family residential use would be economically feasible at this
time.
Maximum Profitability
The use which results in the maximum profitability of the site is beyond the
scope of this assignment. The recipient of the property's productivity (e.g.,
the lender, equity investor, the public, etc.) greatly determines what the use
should be. Regardless, the use for the subject should conform to the
neighborhood trends and be consistent with existing land uses.
CONCLUSION: HIGHEST AND BEST USE AS VACANT
Based on the foregoing analysis, the highest and best use of the site as though
vacant would be for multi-family residential development.
- --------------------------------------------------------------------------------
26
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
AS IMPROVED
Legal Permissibility
The subject site was approved for apartment development and the improvements are
a legally conforming use.
Physical Possibility
The subject improvements were discussed in detail in the Improvement Analysis.
The layout and positioning of the improvements are functional for apartment use
based on comparison to neighborhood properties.
Financial Feasibility
The financial feasibility for an apartment property is based on the amount of
rent which can be generated, less operating expenses required to generate that
income; if a residual amount exists then the land is being to a productive use.
As will be indicated in the Income Capitalization Approach, the subject is
capable of producing a positive net cash flow and continued utilization of the
improvements for apartment is considered financially feasible.
Maximum Profitability
The maximally profitable use of the subject as improved should conform to
neighborhood trends and be consistent with existing land uses. Although several
uses may generate sufficient revenue to satisfy the required rate of return on
investment and provide a return on the land, the single use that produces the
highest price or value is typically the highest and best use. However, the
recipient of the property's productivity greatly determines what actual use
maximizes profitability. It appears there are no alternative uses of the
existing improvements which would produce a higher net income and/or value over
time than the current use.
CONCLUSION: HIGHEST AND BEST USE AS IMPROVED
Based on the foregoing, the highest and best use of the property as improved is
consistent with the existing use, as an apartment development.
- --------------------------------------------------------------------------------
27
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS APPRAISAL METHODOLOGY
- --------------------------------------------------------------------------------
APPRAISAL METHODOLOGY
In appraisal practice, an approach to value is included or omitted based on its
applicability to the property type being valued and the quality and quantity of
information available.
COST APPROACH
The Cost Approach is based upon the proposition the informed purchaser would pay
no more for the subject than the cost to produce a substitute property with
equivalent utility. This approach is particularly applicable when the property
being appraised involves relatively new improvements which represent the highest
and best use of the land or when relatively unique or specialized improvements
are located on the site and for which there exist few sales or leases of
comparable properties.
SALES COMPARISON APPROACH
The Sales Comparison Approach utilizes sales of comparable properties, adjusted
for differences, to indicate a value for the subject. Valuation is typically
accomplished using physical units of comparison such as price per square foot,
price per unit, price per floor, etc., or economic units of comparison such as
gross rent multiplier. Adjustments are applied to the physical units of
comparison derived from the comparable sale. The unit of comparison chosen for
the subject is then used to yield a total value. Economic units of comparison
are not adjusted, but rather analyzed as to relevant differences, with the final
estimate derived based on the general comparisons.
INCOME CAPITALIZATION APPROACH
The Income Capitalization Approach reflects the subject's income-producing
capabilities. This approach is based on the assumption that value is created by
the expectation of benefits to be derived in the future. Specifically estimated
is the amount an investor would be willing to pay to receive an income stream
plus reversion value from a property over a period of time. The two common
valuation techniques associated with the Income Capitalization Approach are
direct capitalization and the discounted cash flow (DCF) analysis.
METHODOLOGY APPLICABLE TO THE SUBJECT
In valuing the subject, only the Sales Comparison and Income Capitalization
Approaches are applicable and have been used.
- --------------------------------------------------------------------------------
28
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
SALES COMPARISON APPROACH
The following table summarizes the most comparable data utilized in the analysis
with a comparable map presented on the following page. A more detailed
description of each transaction is included in the Addenda.
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF COMPARABLE APARTMENT SALES
- ------------------------------------------------------------------------------------------------------------------------------------
Transaction Year No. Avg. Unit Adj. Sale Price Per NOI Per
No. Name Type Date Built Units Size Price Unit Occ. Unit OAR
1 Arioso Apartments, Sale Jan-00 1999 201 1,015 $46,400,000 $230,846 68% $16,759 7.26%
Cupertino, CA
2 Villa De Anza, Sale Nov-00 1969 120 1,147 $31,000,000 $258,333 0% $15,500 6.00%
Cupertino, CA
3 Waterford Place Apt., Escrow Dec-00 1999 238 923 $50,000,000 $210,084 98% $17,857 8.50%
San Jose, CA
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Source: CB Richard Ellis, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
29
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
[Map]
"Sales Map"
"Subject Alderwood"
"Subject Timberleaf"
"Sale 1"
"Sale 2"
"Sale 3"
- --------------------------------------------------------------------------------
30
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
ANALYSIS OF IMPROVED SALES
Sale One sold during construction with values increasing since that time. The
average unit size is superior to the subject. The effective age is superior to
the subject. Sale Two just sold. The cap rate is based on income in place that
was below market, but will roll over the next year. The cap rate based on
contract rates was closer to 8.5%. The average unit size is superior to the
subject, while the effective age was inferior. Sale Three is in escrow,
scheduled to close in December 2000. The effective age of the project and
average unit size is superior to the subject.
SUMMARY OF ADJUSTMENTS
Based on the foregoing discussions, the following table presents the adjustments
warranted to each sale, as compared to the subject. The following adjustment
grid implies a level of accuracy which may not exist in the current market.
However, the grid has been included in order to illustrate the magnitude of the
warranted adjustments. Use of an adjustment grid in making quantitative
adjustments is only appropriate and reliable when the extent of adjustment for
each particular factor is well supported and the dollar or percentage adjustment
is derived through either paired sales analysis or other data relevant to the
market. In instances where paired sales and market data is not readily
available, the appraiser must use his best judgment to make a reasonable
estimate for the appropriate warranted adjustment.
- --------------------------------------------------------------------------------
31
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
APARTMENT SALES ADJUSTMENT GRID
- --------------------------------------------------------------------------------
ALDERWOOD
Comparable Number 1 2 3 Subject
Transaction Type Sale Sale Escrow ---
Transaction Date Jan-00 Nov-00 Dec-00 ---
Year Built 1999 1969 1999 1986
No. Units 201 120 238 234
Avg. Unit Size 1,015 1,147 923 801
Adjusted Sale Price $46,400,000 $31,000,000 $50,000,000 ---
Price Per Unit $230,846 $258,333 $210,084 ---
Occupancy 68% 100% 98% 95%
NOI Per Unit $16,759 $15,500 $17,857 $17,331
OAR 7.26% 6.00% 8.50% ---
- --------------------------------------------------------------
Adj. Price Per Unit $230,846 $258,333 $210,084
- --------------------------------------------------------------
Conditions of Sale 0% 0% 0%
Market Conditions (Time) 10% 0% 5%
- --------------------------------------------------------------
Subtotal $253,931 $258,333 $220,588
- --------------------------------------------------------------
Age/Quality/Condition -5% 5% -5%
Location 0% 0% 0%
Average Unit Size -13% -22% -7%
Floor Plate 0% 0% 0%
Amenities 0% 0% 0%
- --------------------------------------------------------------
Total Other Adjustments -18% -17% -12%
- --------------------------------------------------------------
Indicated Value Per Unit $208,223 $214,416 $194,118
- --------------------------------------------------------------
- --------------------------------------------------------------------------------
Source: CB Richard Ellis, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
32
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
APARTMENT SALES ADJUSTMENT GRID
- --------------------------------------------------------------------------------
TIMBERLEAF
Comparable Number 1 2 3 Subject
Transaction Type Sale Sale Escrow ---
Transaction Date Jan-00 Nov-00 Dec-00 ---
Year Built 1999 1969 1999 1986
No. Units 201 120 238 124
Avg. Unit Size 1,015 1,147 923 807
Adjusted Sale Price $46,400,000 $31,000,000 $50,000,000 ---
Price Per Unit $230,846 $258,333 $210,084 ---
Occupancy 68% 100% 98% 95%
NOI Per Unit $16,759 $15,500 $17,857 $16,902
OAR 7.26% 6.00% 8.50% ---
- ------------------------------------------------------------------
Adj. Price Per Unit $230,846 $258,333 $210,084
- ------------------------------------------------------------------
Conditions of Sale 0% 0% 0%
Market Conditions (Time) 10% 0% 5%
- ------------------------------------------------------------------
Subtotal $253,931 $258,333 $220,588
- ------------------------------------------------------------------
Age/Quality/Condition -5% 5% -5%
Location 0% 0% 0%
Average Unit Size -13% -22% -7%
Floor Plate 0% 0% 0%
Amenities 0% 0% 0%
- ------------------------------------------------------------------
Total Other Adjustments -18% -17% -12%
- ------------------------------------------------------------------
Indicated Value Per Unit $208,223 $214,416 $194,118
- ------------------------------------------------------------------
- --------------------------------------------------------------------------------
Source: CB Richard Ellis, Inc.
- --------------------------------------------------------------------------------
SALES COMPARISON APPROACH CONCLUSION
Based on the preceding discussions of each comparable and the foregoing
adjustment analysis, a price per unit indication near the middle of the range
indicated by the comparables is the most appropriate for the subject.
The following table presents the estimated value for the subject as indicated by
the Sales Comparison Approach.
- --------------------------------------------------------------------------------
33
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
-------------------------------------------------------------
SALES COMPARISON APPROACH
-------------------------------------------------------------
ALDERWOOD
Total Units X Value Per Unit = Value
-------------------------------------------------------------
234 X $200,000 = $46,800,000
234 X $210,000 = $49,140,000
-------------------------------------------------------------
VALUE CONCLUSION
Indicated Stabilized Value $47,000,000
Deferred Maintenance ($2,241,853)
Lease-Up Discount $0
Excess Land Value $0
Value Indication $44,758,147
Rounded $44,760,000
Value Per Unit $191,282
-------------------------------------------------------------
Source: CB Richard Ellis, Inc.
-------------------------------------------------------------
-------------------------------------------------------------
SALES COMPARISON APPROACH
-------------------------------------------------------------
TIMBERLEAF
Total Units X Value Per Unit = Value
-------------------------------------------------------------
124 X $200,000 = $24,800,000
124 X $210,000 = $26,040,000
-------------------------------------------------------------
VALUE CONCLUSION
Indicated Stabilized Value $25,000,000
Deferred Maintenance ($1,249,931)
Lease-Up Discount $0
Value Indication $23,750,069
Rounded $23,750,000
Value Per Unit $191,532
-------------------------------------------------------------
Source: CB Richard Ellis, Inc.
-------------------------------------------------------------
- --------------------------------------------------------------------------------
34
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS INCOME CAPITALIZATION APPROACH
- --------------------------------------------------------------------------------
INCOME CAPITALIZATION APPROACH
The following table summarizes the most comparable data utilized in the analysis
with a comparable map presented on the following page. A more detailed
description of each comparable is included in the Addenda.
- --------------------------------------------------------------------------------
SUMMARY OF COMPARABLE APARTMENT RENTALS
- --------------------------------------------------------------------------------
Comp. Year No. Rent Per
No. Name Location Built Units Unit Occ.
- --------------------------------------------------------------------------------
1 Los Padres Village 2250 Monroe Street, 1986 245 $2,005 96%
Santa Clara, CA
2 Summerwood 444 Saratoga Ave., 1970 468 $2,000 99%
Santa Clara, CA
3 Laguna Clara 3131 Homestead Road, 1971 264 $1,993 98%
Santa Clara, CA
4 Marina Cove 3480 Granada Ave., 1975 292 $2,161 98%
Santa Clara, CA
- --------------------------------------------------------------------------------
Source: CB Richard Ellis, Inc.
- --------------------------------------------------------------------------------
Details on the rental comparables are included in the addenda.
SUBJECT QUOTED RENTS
The following table depicts the subject's unit mix and quoted rental rates.
- --------------------------------------------------------------------------------
QUOTED RENTS - ALDERWOOD
- --------------------------------------------------------------------------------
No. of Unit Unit Quoted Rent
Type Units Size (SF) Occ. Rents Per SF
- --------------------------------------------------------------------------------
1BR/1BA 120 700 SF 99% $1,960 $2.80
2BR/1.75BA 114 1,000 SF 99% $2,450 $2.45
- --------------------------------------------------------------------------------
Total/Average: 234 846 SF 99% $2,199 $2.60
- --------------------------------------------------------------------------------
Source: CB Richard Ellis, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
QUOTED RENTS - TIMBERLEAF
- --------------------------------------------------------------------------------
No. of Unit Unit Quoted Rent
Type Units Size (SF) Occ. Rents Per SF
- --------------------------------------------------------------------------------
1BR/1BA 60 700 SF 100% $1,960 $2.80
2BR/1.75BA 64 1,000 SF 98% $2,400 $2.40
- --------------------------------------------------------------------------------
Total/Average: 124 855 SF 100% $2,187 $2.56
- --------------------------------------------------------------------------------
Source: CB Richard Ellis, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
35
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS INCOME CAPITALIZATION APPROACH
- --------------------------------------------------------------------------------
[Rental Map]
"Rental Map"
"Rental 1 2250 Monroe"
"Rental 2 444 Saratoga"
"Rental 3 3131 Homestead"
"Rental 4 3480 Granada"
"Subject Alderwood"
"Subject Timberleaf"
ESTIMATE OF MARKET RENT
In order to estimate the market rates for the various floor plans, the subject
unit types have been compared with similar units in the comparable projects. The
following is a discussion of each unit type.
One-Bedroom Units
---------------------------------------------------------
SUMMARY OF COMPARABLE RENTALS
ONE BEDROOM UNITS
---------------------------------------------------------
Rental Rates
Comparable Size $/Mo. $/SF
---------------------------------------------------------
Summerwood 825 SF $1,870 $2.27
Laguna Clara 823 SF $1,875 $2.28
Laguna Clara 754 SF $1,840 $2.44
Los Padres Village 716 SF $1,791 $2.50
Marina Cove 792 SF $1,995 $2.52
Laguna Clara 712 SF $1,840 $2.58
Marina Cove 720 SF $1,925 $2.67
Marina Cove 725 SF $1,945 $2.68
Subject - Alderwood 700 SF $1,960 $2.80
Subject - Timberleaf 700 SF $1,960 $2.80
---------------------------------------------------------
Soume: CB Richard Ellis, Inc.
---------------------------------------------------------
The subject's quoted rental rates are higher than the range indicated by the
rent comparables. The subject's rent roll indicates that a majority of the
occupied one bedroom units are leased at below the quoted rates, which is
indicative of recent rental increases which have taken effect. The most recent
leases of one bedroom units have been signed at the quoted rates. Considering
the available data, monthly market rent for the subject units is estimated at
the quoted rates. It is above the comparables, but recent leasing activity
indicates these rents are achievable.
- --------------------------------------------------------------------------------
36
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS INCOME CAPITALIZATION APPROACH
- --------------------------------------------------------------------------------
Two-Bedroom Units
------------------------------------------------------------------
SUMMARY OF COMPARABLE RENTALS
TWO BEDROOM UNITS
------------------------------------------------------------------
Rental Rates
Comparable Size $/Mo. $/SF
------------------------------------------------------------------
Summerwood 1,120 SF $2,130 $1.90
Laguna Clara 1,158 SF $2,305 $1.99
Laguna Clara 1,072 SF $2,155 $2.01
Summerwood 970 SF $2,000 $2.06
Marina Cove 1,051 SF $2,350 $2.24
Marina Cove 1,144 SF $2,600 $2.27
Marina Cove 1,056 SF $2,450 $2.32
Marina Cove 900 SF $2,145 $2.38
Los Padres Village 858 SF $2,051 $2.39
Subject - Timberleaf 1,000 SF $2,400 $2.40
Subject - Aiderwood 1,000 SF $2,450 $2.45
Los Padres Village 913 SF $2,326 $2.55
Los Padres Village 946 SF $2,466 $2.61
------------------------------------------------------------------
Source: CB Richard Ellis, Inc.
------------------------------------------------------------------
The subject's quoted rental rates are within the range indicated by the rent
comparables. The subject's rent roll indicates that a majority of the occupied
two bedroom units are leased at below the quoted rates, which is indicative of
recent rental increases which have taken effect. The most recent leases of two
bedroom units have been signed at the quoted rates. Considering the available
data, monthly market rent for the subject units is estimated the quoted rates.
MARKET RENT CONCLUSIONS
Based on the foregoing analysis and discussion, the following is the estimate of
potential rental income for the subject:
- --------------------------------------------------------------------------------
37
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS INCOME CAPITALIZATION APPROACH
- --------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
MARKET RENT CONCLUSIONS - ALDERWOOD
------------------------------------------------------------------------------------------------------------------
No. Unit Monthly Rent Annual Rent Annual
Units Unit Type Size Total SF $/Unit $/SF PRI $/Unit $/SF Total
------------------------------------------------------------------------------------------------------------------
120 1BR/1BA 700 SF 84,000 SF $1,960 $2.80 $235,200 $23,520 $33.60 $2,822,400
114 2BR/1.75BA 1,000 SF 114,000 SF $2,450 $2.45 $279,300 $29,400 $29.40 $3,351,600
------------------------------------------------------------------------------------------------------------------
234 846 SF 198,000 SF $2,199 $2.60 $514,500 $26,385 $31.18 $6,174,000
------------------------------------------------------------------------------------------------------------------
Soume: CB Richard Ellis, Inc.
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
MARKET RENT CONCLUSIONS - TIMBERLEAF
------------------------------------------------------------------------------------------------------------------
No. Unit Monthly Rent Annual Rent Annual
Units Unit Type Size Total SF $/Unit $/SF PRI $/Unit $/SF Total
------------------------------------------------------------------------------------------------------------------
60 1BR/1BA 700 SF 42,000 SF $1,960 $2.80 $117,600 $23,520 $33.60 $1,411,200
64 2BR/1.75BA 1,000 SF 64,000 SF $2,400 $2.40 $153,600 $28,800 $28.80 $1,843,200
------------------------------------------------------------------------------------------------------------------
124 855 SF 106,000 SF $2,187 $2.56 $271,200 $26,245 $30.70 $3,254,400
------------------------------------------------------------------------------------------------------------------
Source: CB Richard Ellis, Inc.
------------------------------------------------------------------------------------------------------------------
RENT ADJUSTMENTS
Rent adjustments are sometimes necessary to account for differences in rental
rates applicable to different units within similar floor plans due to items such
as location within the property, view, and level of amenities. These rental
adjustments may be in the form of rent premiums or rent discounts. In the case
of the subject, rent adjustments are not applicable.
POTENTIAL RENTAL INCOME CONCLUSION
Within this analysis, potential rental income is estimated based on market
rental rates over the next twelve months in addition to any applicable rent
adjustments. This method of calculating potential rental income is most
prevalent in the local market and is consistent with the method used to derive
overall capitalization rates from the comparable sales data. This shown later in
the direct cap.
RENT ROLL ANALYSIS
The rent roll analysis serves as a cross check to the estimate of market rent
for the subject. The collections shown on the rent roll include rent premiums
and/or discounts. A copy of the rent roll are included in the addenda.
LOSS TO LEASE
Within the local market, buyers and sellers typically recognize a reduction in
potential rental income due to the difference between market and contract rental
rates. In this market, lease rates are typically flat and are anticipated to
roll to market every 6 to 12 months on average. As a result, actual collections
typically lag behind market rates by approximately 6 to 12 months. Based on an
annual rent growth rate estimated at 5 to 10%, the loss to lease associated with
the subject property is estimated at 5%. This method of calculating rental
income is most prevalent in the local market and
- --------------------------------------------------------------------------------
38
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS INCOME CAPITALIZATION APPROACH
- --------------------------------------------------------------------------------
is consistent with the method used to derive overall capitalization rates from
the comparable sales data.
VACANCY AND COLLECTION LOSS
The subject's estimated stabilized occupancy rate was previously analyzed and
discussed in the Market Analysis (including an analysis of collection loss). The
subject's historical and projected vacancy is detailed as follows:
-------------------------------------------------------
VACANCY AND COLLECTION LOSS
-------------------------------------------------------
Year % PGI
-------------------------------------------------------
1999 5%
2000 (9 Mos. Annualized*) 5%
2001 Budget 0%
CB Richard Ellis, Inc. Estimate 5%
-------------------------------------------------------
Source: Operating Statements
-------------------------------------------------------
RENT CONCESSIONS
Rent concessions are currently not prevalent in the local market nor are they
present at the subject property.
EFFECTIVE GROSS INCOME
The subject's historical and pro forma effective gross income is detailed as
follows:
Alderwood:
-------------------------------------------------------
EFFECTIVE GROSS INCOME
-------------------------------------------------------
Year Total % Change
-------------------------------------------------------
1999 $3,854,480 ---
2000 (9 Mos. Annualized*) $4,300,404 12%
2001 Budget $5,101,646 19%
CB Richard Ellis, Inc. Estimate $5,613,835 10%
-------------------------------------------------------
Source: Operating Statements
-------------------------------------------------------
Timberleaf
- --------------------------------------------------------------------------------
39
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS INCOME CAPITALIZATION APPROACH
- --------------------------------------------------------------------------------
-------------------------------------------------------
EFFECTIVE GROSS INCOME
-------------------------------------------------------
Year Total % Change
1998 $1,926,554 ---
1999 $1,980,845 3%
2000 (9 Mos. Annualized*) $2,233,631 13%
2001 Budget $2,659,116 19%
CB Richard Ellis, Inc. Estimate $2,975,096 12%
-------------------------------------------------------
Soume: Operating Statements
-------------------------------------------------------
OPERATING EXPENSE ANALYSIS
In estimating the operating expenses for the subject, the actual operating
history has been analyzed, along with expense data from IREM and comparable
apartment properties (not presented herein). The following table presents the
available operating expense history for the subject.
- --------------------------------------------------------------------------------------------------------------------------
OPERATING HISTORY - Alderwood
- --------------------------------------------------------------------------------------------------------------------------
2000 (9 Mos. 2001
Year-Occupancy 1998 95% 1999 95% Annualized*) 95% Budget 100%
Total $/Unit Total $/Unit Total $/Unit Total $/Unit
------------------ ------------------- ---------------------- --------------------
Income
Rental Income $3,698,110 $15,804 $3,747,035 $16,013 $4,253,607 $18,178 $5,070,250 $21,668
Retained Deposits 13,818 59 19,036 81 18,188 78 17,032 73
Other Income 98,063 419 88,409 378 28,609 122 14,364 61
------------------ ------------------- ---------------------- --------------------
Effective Gross Income $3,809,991 $16,282 $3,854,480 $16,472 $4,300,404 18,378 $5,101,646 $21,802
Expenses
Real Estate Tax $231,040 $987 $233,764 $999 $234,765 $1,003 $240,253 $1,027
Property Insurance 56,048 240 51,271 219 60,629 259 68,771 294
Utilities 130,038 556 127,689 546 125,357 536 123,411 527
Non-Revenue Units - - - - - - - -
Repairs and Maintenance 81,950 350 84,429 361 77,168 330 89,336 382
Landscaping 46,306 198 45,530 195 43,160 184 48,486 207
Administrative 79,379 339 80,811 345 80,449 344 83,973 359
Payroll 206,280 882 222,096 949 265,461 1,134 284,647 1,216
Management Fee 201,662 862 198,534 848 221,275 946 269,512 1,152
Reserves for Replacement - - - - - - - -
------------------ ------------------- ---------------------- --------------------
Operating Expenses $1,032,703 $4,413 $1,044,124 $4,462 $1,108,265 $4,736 1,208,389 $5,164
------------------ ------------------- ---------------------- --------------------
Net Operating Income $2,777,288 11,869 $2,810,356 $12,010 $3,192,139 $13,642 $3,893,257 $16,638
* January - September
- --------------------------------------------------------------------------------------------------------------------------
Source: Operating statements
- --------------------------------------------------------------------------------------------------------------------------
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40
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ALDERWOOD AND TIMBERLEAF APARTMENTS INCOME CAPITALIZATION APPROACH
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING HISTORY - Timberleaf
- ------------------------------------------------------------------------------------------------------------------------------------
2000 (9 Mos. 2001
Year-Occupancy 1998 95% 1999 95% Annualized*) 95% Budget 100%
------------------- -------------------- ----------------------- --------------------
Total $/Unit Total $/Unit Total $/Unit Total $/Unit
------------------- -------------------- ----------------------- --------------------
Income
Rental Income $1,877,321 $15,140 $1,926,889 $15,539 $2,198,799 $17,732 $2,636,890 $21,265
Retained Deposits Income 5,186 42 9,559 77 16,421 132 11,828 95
Other Income 44,047 355 44,397 358 18,411 148 10,398 84
------------------- -------------------- ---------------------- --------------------
Effective Gross Income $1,926,554 $15,537 $1,980,845 $15,975 $2,233,631 $18,013 $2,659,116 $21,444
Expenses
Real Estate Taxes $118,949 $959 $120,359 $971 $120,636 $973 $123,456 $996
Property Insurance 30,108 243 29,851 241 32,680 264 36,991 298
Utilities 71,722 578 73,471 593 73,061 589 74,804 603
Mon-Revenue Units - - - - - - - -
Repairs and Maintenance 60,510 488 49,806 402 55,308 446 54,239 437
Landscaping 29,044 234 27,669 223 25,925 209 27,630 223
Administrative 68,493 552 63,974 516 58,405 471 63,562 513
Payroll 145,949 1,177 156,291 1,260 158,119 1,275 174,900 1,410
Management Fee 100,924 814 101,715 820 144,275 1,164 145,275 1,172
Reserves for Replacement - - - - - - - -
------------------- -------------------- ----------------------- --------------------
Operating Expenses $625,699 5,046 $623,136 $5,025 $668,409 $5,390 $700,857 $5,652
------------------- -------------------- ----------------------- --------------------
Net Operating Income $1,300,855 $10,491 $1,357,709 $10,949 $1,565,221 $12,623 $1,958,259 $15,792
* January - September
- ------------------------------------------------------------------------------------------------------------------------------------
Source: Operating statements
- ------------------------------------------------------------------------------------------------------------------------------------
Reserves for Replacement
Reserves for replacement have been estimated based on discussions with
knowledgeable market participants who indicate a range from $150 to $500 per
unit for comparable properties. We estimated $400 for the subject.
DIRECT CAPITALIZATION
Direct capitalization is a method used to convert a single year's estimated
stabilized net operating income into a value indication. The following
subsections represent different techniques for deriving an overall
capitalization rate for direct capitalization.
Comparable Sales
The OAR's confirmed for the comparable sales analyzed in the Sales Comparison
Approach are as follows:
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41
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ALDERWOOD AND TIMBERLEAF APARTMENTS INCOME CAPITALIZATION APPROACH
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMPARABLE CAPITALIZATION RATES
- --------------------------------------------------------------------------------
Sale Sale Price Pro Forma
Sale Date $/Unit Occupancy OAR
1 Jan-00 $230,846 68% 7.26%
2 Nov-00 $258,333 100% 6.00%
3 Dec-00 $210,084 98% 8.50%
- --------------------------------------------------------------------------------
Indicated OAR: 8.50%
- --------------------------------------------------------------------------------
Source: CB Richard Ellis, Inc.
- --------------------------------------------------------------------------------
Based on the subject's current occupancy level and its competitive position in
the local market versus the comparables, an OAR in the upper portion of the
range indicated by the comparables is considered appropriate.
Published Investor Surveys
The results of the most recent National Investor Survey, published by CB Richard
Ellis, Inc., are summarized in the following table.
- --------------------------------------------------------------------------------
OVERALL CAPITALIZATION RATES - APARTMENT
- --------------------------------------------------------------------------------
Investor Survey OAR Range Average
Class A 8.0% - 9.8% 8.5%
Class B 8.3% - 10.0% 9.2%
Class C 8.5% - 12.0% 9.9%
- --------------------------------------------------------------------------------
Indicated OAR: 8.50%
- --------------------------------------------------------------------------------
Source: CB Richard Ellis, Inc. National Investor Survey, Fourth Quarter 1999
The subject is considered to be a Class A/B property. Because of the subject's
location, an OAR near the middle to lower end of the range indicated in the
preceding table is considered appropriate.
Market Participants
Market participants noted cap rates rising in the market for proforma rents due
to the increase in rental rates from January of over 35% year to date. Most
noted rates around 8.0 to 9.0%.
CAPITALIZATION RATE CONCLUSION
The following table summarizes the OAR conclusions.
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42
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ALDERWOOD AND TIMBERLEAF APARTMENTS INCOME CAPITALIZATION APPROACH
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OVERALL CAPITALIZATION RATE - CONCLUSION
- --------------------------------------------------------------------------------
Source Indicated OAR
Comparable Sales 8.50%
National Investor Survey 8.50%
Market Participants 8 to 9.0%
CB Richard Ellis, Inc. Estimate 8.50%
- --------------------------------------------------------------------------------
Source: CB Richard Ellis, Inc.
- --------------------------------------------------------------------------------
DIRECT CAPITALIZATION SUMMARY
A summary of the direct capitalization of the subject at stabilized occupancy is
illustrated in the following table.
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43
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ALDERWOOD AND TIMBERLEAF APARTMENTS INCOME CAPITALIZATION APPROACH
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIRECT CAPITALIZATION SUMMARY - Alderwood
- --------------------------------------------------------------------------------
Income $/Unit/Yr Total
-----------------------------
Potential Rental Income $26,385 $6,174,000
Loss to Lease 5.00% (1,319) (308,700)
Vacancy and Collection Loss 5.00% (1,253) (293,265)
-----------------------------
Net Rental Income $23,812 $5,572,035
Retained Deposits 60 14,000
Other Income 128 30,000
Vacancy and Collection Loss 5.00% (9) (2,200)
-----------------------------
Effective Gross Income $23,991 $5,613,835
Expenses
Real Estate Taxes $2,063 $482,661
Property Insurance 294 68,796
Utilities 540 126,360
Non-Revenue Units 0 -
Repairs and Maintenance 382 89,388
Landscaping 207 48,438
Administrative 359 84,006
Payroll 1,216 284,544
Management Fee 5.00% 1,200 280,692
Reserves for Replacement 400 93,600
-----------------------------
Operating Expenses $6,660 $1,558,485
-----------------------------
Operating Expense Ratio 27.76%
Net Operating Income $17,330.56 $4,055,350
OAR / 8.50%
--------------
Indicated Stabilized Value $47,710,004
Deferred Maintenance (2,241,853)
Lease-Up Discount -
--------------
Value Indication $45,468,151
Rounded $45,500,000
Value Per Unit $194,308
-----------------------------
Matrix Analysis Cap Rate Value
-----------------------------
8.25% $46,913,900
8.50% $45,468,200
8.75% $44,105,000
- --------------------------------------------------------------------------------
Source: CB Richard Ellis, Inc.
- --------------------------------------------------------------------------------
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44
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ALDERWOOD AND TIMBERLEAF APARTMENTS INCOME CAPITALIZATION APPROACH
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIRECT CAPITALIZATION SUMMARY - Timberleaf
- --------------------------------------------------------------------------------
Income $/Unit/Yr Total
---------- --------------
Potential Rental Income $26,245 $3,254,400
Loss to Lease 5.00% (1,312) (162,720)
Vacancy and Collection Loss 5.00% (1,247) (154,584)
---------- --------------
Net Rental Income $23,686 $2,937,096
Retained Deposits 81 10,000
Other Income 242 30,000
Vacancy and Collection Loss 5.00% (16) (2,000)
---------- --------------
Effective Gross Income $23,993 $2,975,096
Expenses
Real Estcite Taxes $2,007 $248,858
Property Insurance 298 36,952
Utilities 603 74,772
Non-Revenue Units 0 -
Repairs and Maintenance 437 54,188
Landscaping 223 27,652
Administrative 513 63,612
Payroll 1,410 174,840
Management Fee 5.00% 1,200 148,755
Reserves for Replacement 400 49,600
---------- --------------
Operating Expenses $7,091 $879,288
---------- --------------
Operating Expense Ratio 29.55%
Net Operating Income $16,902.16 $2,095,868
OAR / 8.50%
--------------
Indicated Stabilized Value $24,657,265
Deferred Maintenance (1,249,931)
Lease-Up Discount -
--------------
Value Indication $23,407,334
Rounded $23,400,000
Value Per Unit $188,769
-----------------------------
Matrix Analysis Cap Rate Value
-----------------------------
8.25% $24,154,500
8.50% $23,407,300
8.75% $22,702,800
- --------------------------------------------------------------------------------
Source: CB Richard Ellis, Inc.
- --------------------------------------------------------------------------------
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45
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ALDERWOOD AND TIMBERLEAF APARTMENTS INCOME CAPITALIZATION APPROACH
- --------------------------------------------------------------------------------
CONCLUSION OF INCOME CAPITALIZATION APPROACH
The conclusions via the valuation methods employed for this approach are as
follows:
- --------------------------------------------------------------------------------
INCOME CAPITALIZATION APPROACH VALUES
- --------------------------------------------------------------------------------
Direct Capitalization Method
Alderwood $45,500,000
Timberleaf $23,400,000
- --------------------------------------------------------------------------------
Source: CB Richard Ellis, Inc.
- --------------------------------------------------------------------------------
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46
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ALDERWOOD AND TIMBERLEAF APARTMENTS RECONCILIATION OF VALUE
- --------------------------------------------------------------------------------
RECONCILIATION OF VALUE
The value indications from the approaches to value are summarized as follows:
-----------------------------------------------------------------
SUMMARY OF VALUE CONCLUSIONS
-----------------------------------------------------------------
As Is As Is
Alderwood Timberleaf
-----------------------------------------------------------------
Cost Approach N/A N/A
-----------------------------------------------------------------
Sales Comparison Approach $23,750,000 $44,760,000
Income Capitalization Approach $23,400,000 $45,500,000
Reconciled Value $23,400,000 $45,500,000
-----------------------------------------------------------------
Source: CB Richard Ellis, Inc.
-----------------------------------------------------------------
The Cost Approach typically gives a reliable value indication when there is
evidence for the replacement cost estimate and when there is minimal
depreciation contributing to a loss in value which must be estimated.
Considering the amount of depreciation present in the property, the reliability
of the Cost Approach is somewhat diminished. Therefore, the Cost Approach is
considered less applicable to the subject and is not used herein.
In the Sales Comparison Approach, the subject property is compared to similar
properties that have been sold recently or for which listing prices or offers
are known. The sales used in this analysis are considered fairly comparable to
the subject, and the required adjustments were based on reasonable and well
supported rationale. In addition, market participants are currently analyzing
purchase prices on investment properties as they relate to available substitutes
in the market. Therefore, the Sales Comparison Approach is considered to provide
a reliable value indication and has been given emphasis in the final value
reconciliation.
The Income Capitalization Approach is applicable to the subject property since
it is an income producing property leased in the open market. Market
participants are currently analyzing properties based on their income generating
capability. Therefore, the Income Capitalization Approach is considered to be a
reasonable and substantiated value indicator and has been heavily weighted in
the final value estimate.
Based on the foregoing, the market value of the subject has been concluded as
follows:
- --------------------------------------------------------------------------------
MARKET VALUE CONCLUSION
- --------------------------------------------------------------------------------
Location Appraisal Premise Interest Appraised Date of Value Value Conclusion
- --------------------------------------------------------------------------------
Alderwood As Is Fee Simple December 5, 2000 $45,500,000
Timberleaf As Is Fee Simple December 5, 2000 $23,400,000
- --------------------------------------------------------------------------------
Source: CB Richard Ellis, Inc.
- --------------------------------------------------------------------------------
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47
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ALDERWOOD AND TIMBERLEAF APARTMENTS ASSUMPTIONS AND LIMITING CONDITIONS
- --------------------------------------------------------------------------------
ASSUMPTIONS AND LIMITING CONDITIONS
Unless otherwise specifically noted in the body of the report, it is assumed
that title to the property or properties appraised is clear and marketable and
that there are no recorded or unrecorded matters or exceptions to total that
would adversely affect marketability or value. CB Richard Ellis, Inc. is not
aware of any title defects nor has it been advised of any unless such is
specifically noted in the report. CB Richard Ellis, Inc., however, has not
examined title and makes no representations relative to the condition thereof.
Documents dealing with liens, encumbrances, easements, deed restrictions,
clouds and other conditions that may affect the quality of title have not been
reviewed. Insurance against financial loss resulting in claims that may arise
out of defects in the subject property's title should be sought from a
qualified title company that issues or insures title to real property.
Unless otherwise specifically noted in the body of this report, it is assumed:
that the existing improvements on the property or properties being appraised
are structurally sound, seismically safe and code conforming; that all
building systems (mechanical/electrical, HVAC, elevator, plumbing, etc.) are
in good working order with no major deferred maintenance or repair required;
that the roof and exterior are in good condition and free from intrusion by
the elements; that the property or properties have been engineered in such a
manner that the improvements, as currently constituted, conform to all
applicable local, state, and federal building codes and ordinances. CB Richard
Ellis, Inc. professionals are not engineers and are not competent to judge
matters of an engineering nature. CB Richard Ellis, Inc. has not retained
independent structural, mechanical, electrical, or civil engineers in
connection with this appraisal and, therefore, makes no representations
relative to the condition of improvements. Unless otherwise specifically noted
in the body of the report: no problems were brought to the attention of CB
Richard Ellis, Inc. by ownership or management; CB Richard Ellis, Inc.
inspected less than 100% of the entire interior and exterior portions of the
improvements; and CB Richard Ellis, Inc. was not furnished any engineering
studies by the owners or by the party requesting this appraisal. If questions
in these areas are critical to the decision process of the reader, the advice
of competent engineering consultants should be obtained and relied upon. It is
specifically assumed that any knowledgeable and prudent purchaser would, as a
precondition to closing a sale, obtain a satisfactory engineering report
relative to the structural integrity of the property and the integrity of
building systems. Structural problems and/or building system problems may not
be visually detectable. If engineering consultants retained should report
negative factors of a material nature, or if such are later discovered,
relative to the condition of improvements, such information could have a
substantial negative impact on the conclusions reported in this appraisal.
Accordingly, if negative findings are reported by engineering consultants, CB
Richard Ellis, Inc. reserves the right to amend the appraisal conclusions
reported herein.
Unless otherwise stated in this report, the existence of hazardous material,
which may or may not be present on the property was not observed by the
appraisers. CB Richard Ellis, Inc. has no knowledge of the existence of such
materials on or in the property. CB Richard Ellis, Inc., however, is not
qualified to detect such substances. The presence of substances such as
asbestos, urea formaldehyde foam insulation, contaminated groundwater or other
potentially hazardous materials may affect the value of the property. The
value estimate is predicated on the assumption that there is no such material
on or in the property that would cause a loss in value. No responsibility is
assumed for any such conditions, or for any expertise or engineering knowledge
required to discover them. The client is urged to retain an expert in this
field, if desired.
We have inspected, as thoroughly as possible by observation, the land;
however, it was impossible to personally inspect conditions beneath the soil.
Therefore, no representation is made as to these matters unless specifically
considered in the appraisal.
All furnishings, equipment and business operations, except as specifically
stated and typically considered as part of real property, have been
disregarded with only real property being considered in the report unless
otherwise stated. Any existing or proposed improvements, on or off-site, as
well as any alterations or repairs considered, are assumed to be completed in
a workmanlike manner according to standard practices based upon the
information submitted to CB Richard Ellis, Inc. This report may be subject to
amendment upon re-inspection of the subject property subsequent to repairs,
modifications, alterations and completed new construction. Any estimate of
Market Value is as of the date indicated; based upon the information,
conditions and projected levels of operation.
It is assumed that all factual data furnished by the client, property owner,
owner's representative, or persons designated by the client or owner to
supply said data are accurate and correct unless otherwise specifically noted
in the appraisal report. Unless otherwise specifically noted in the appraisal
report, CB Richard Ellis, Inc. has no reason to believe that any of the data
furnished contain any material error. Information and data referred to in
this paragraph include, without being limited to, numerical street addresses,
lot and block numbers, Assessor's Parcel Numbers, land dimensions, square
footage area of the land, dimensions of the improvements, gross building
areas, net rentable areas, usable areas, unit count, room count, rent
schedules, income data, historical operating expenses, budgets, and related
data. Any material error in any of the above data could have a substantial
impact on the conclusions reported. Thus, CB Richard Ellis, Inc. reserves the
right to amend conclusions reported if made aware of any such error.
Accordingly,
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48
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ALDERWOOD AND TIMBERLEAF APARTMENTS ASSUMPTIONS AND LIMITING CONDITIONS
- --------------------------------------------------------------------------------
the client-addressee should carefully review all assumptions, data, relevant
calculations, and conclusions within 30 days after the date of delivery of
this report and should immediately notify CB Richard Ellis, Inc. of any
questions or errors.
The date of value to which any of the conclusions and opinions expressed in this
report apply, is set forth in the Letter of Transmittal. Further, that the
dollar amount of any value opinion herein rendered is based upon the
purchasing power of the American Dollar on that date. This appraisal is based
on market conditions existing as of the date of this appraisal. Under the
terms of the engagement, we will have no obligation to revise this report to
reflect events or conditions which occur subsequent to the date of the
appraisal. However, CB Richard Ellis, Inc. will be available to discuss the
necessity for revision resulting from changes in economic or market factors
affecting the subject.
CB Richard Ellis, Inc. assumes no private deed restrictions, limiting the use of
the subject property in any way.
Unless otherwise noted in the body of the report, it is assumed that there are
no mineral deposit or subsurface rights of value involved in this appraisal,
whether they be gas, liquid, or solid. Nor are the rights associated with
extraction or exploration of such elements considered unless otherwise stated
in this appraisal report. Unless otherwise stated it is also assumed that
there are no air or development rights of value that may be transferred.
CB Richard Ellis, Inc. is not aware of any contemplated public initiatives,
governmental development controls, or rent controls that would significantly
affect the value of the subject.
The estimate of Market Value, which may be defined within the body of this
report, is subject to change with market fluctuations over time. Market value
is highly related to exposure, time promotion effort, terms, motivation, and
conclusions surrounding the offering. The value estimate(s) consider the
productivity and relative attractiveness of the property, both physically and
economically, on the open market.
Any cash flows included in the analysis are forecasts of estimated future
operating characteristics are predicated on the information and assumptions
contained within the report. Any projections of income, expenses and economic
conditions utilized in this report are not predictions of the future. Rather,
they are estimates of current market expectations of future income and
expenses. The achievement of the financial projections will be affected by
fluctuating economic conditions and is dependent upon other future occurrences
that cannot be assured. Actual results may vary from the projections
considered herein. CB Richard Ellis, Inc. does not warrant these forecasts
will occur. Projections may be affected by circumstances beyond the current
realm of knowledge or control of CB Richard Ellis, Inc.
Unless specifically set forth in the body of the report, nothing contained
herein shall be construed to represent any direct or indirect recommendation
of CB Richard Ellis, Inc. to buy, sell, or hold the properties at the value
stated. Such decisions involve substantial investment strategy questions and
must be specifically addressed in consultation form.
Also, unless otherwise noted in the body of this report, it is assumed that no
changes in the present zoning ordinances or regulations governing use,
density, or shape are being considered. The property is appraised assuming
that all required licenses, certificates of occupancy, consents, or other
legislative or administrative authority from any local, state, nor national
government or private entity or organization have been or can be obtained or
renewed for any use on which the value estimates contained in this report is
based, unless otherwise stated.
This study may not be duplicated in whole or in part without the specific
written consent of CB Richard Ellis, Inc. nor may this report or copies hereof
be transmitted to third parties without said consent, which consent CB Richard
Ellis, Inc. reserves the right to deny. Exempt from this restriction is
duplication for the internal use of the client-addressee and/or transmission
to attorneys, accountants, or advisors of the client-addressee. Also exempt
from this restriction is transmission of the report to any court, governmental
authority, or regulatory agency having jurisdiction over the party/parties for
whom this appraisal was prepared, provided that this report and/or its
contents shall not be published, in whole or in part, in any public document
without the express written consent of CB Richard Ellis, Inc. which consent CB
Richard Ellis, Inc. reserves the right to deny. Finally, this report shall not
be advertised to the public or otherwise used to induce a third party to
purchase the property or to make a "sale" or "offer for sale" of any
"security", as such terms are defined and used in the Securities Act of 1933,
as amended. Any third party, not covered by the exemptions herein, who may
possess this report, is advised that they should rely on their own
independently secured advice for any decision in connection with this
property. CB Richard Ellis, Inc. shall have no accountability or
responsibility to any such third party.
Any value estimate provided in the report applies to the entire property, and
any pro ration or division of the title into fractional interests will
invalidate the value estimate, unless such pro ration or division of interests
has been set forth in the report.
The distribution of the total valuation in this report between land and
improvements applies only under the existing program of utilization. Component
values for land and/or buildings are not intended to be used in conjunction
with any other property or appraisal and are invalid if so used.
The maps, plats, sketches, graphs, photographs and exhibits included in this
report are for illustration purposes only and are to be utilized only to
assist in visualizing matters discussed within this report. Except as
specifically stated, data
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49
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ALDERWOOD AND TIMBERLEAF APARTMENTS ASSUMPTIONS AND LIMITING CONDITIONS
- --------------------------------------------------------------------------------
relative to size or area of the subject and comparable properties has been
obtained from sources deemed accurate and reliable. None of the exhibits are
to be removed, reproduced, or used apart from this report.
No opinion is intended to be expressed on matters which may require legal
expertise or specialized investigation or knowledge beyond that customarily
employed by real estate appraisers. Values and opinions expressed presume that
environmental and other governmental restrictions/conditions by applicable
agencies have been met, including but not limited to seismic hazards, flight
patterns, decibel levels/noise envelopes, fire hazards, hillside ordinances,
density, allowable uses, building codes, permits, licenses, etc. No survey,
engineering study or architectural analysis has been made known to CB Richard
Ellis, Inc. unless otherwise stated within the body of this report. If the
Consultant has not been supplied with a termite inspection, survey or
occupancy permit, no responsibility or representation is assumed or made for
any costs associated with obtaining same or for any deficiencies discovered
before or after they are obtained. No representation or warranty is made
concerning obtaining these items. CB Richard Ellis, Inc. assumes no
responsibility for any costs or consequences arising due to the need, or the
lack of need, for flood hazard insurance. An agent for the Federal Flood
Insurance Program should be contacted to determine the actual need for Flood
Hazard Insurance.
Acceptance and/or use of this report constitutes full acceptance of the
Contingent and Limiting Conditions and special assumptions set forth in this
report. It is the responsibility of the Client, or client's designees, to read
in full, comprehend and thus become aware of the aforementioned contingencies
and limiting conditions. Neither the Appraiser nor CB Richard Ellis, Inc.
assumes responsibility for any situation arising out of the Client's failure
to become familiar with and understand the same. The Client is advised to
retain experts in areas that fall outside the scope of the real estate
appraisal/consulting profession if so desired.
CB Richard Ellis, Inc. assumes that the subject property analyzed herein will be
under prudent and competent management and ownership; neither inefficient or
super-efficient.
It is assumed that there is full compliance with all applicable federal, state,
and local environmental regulations and laws unless noncompliance is stated,
defined and considered in the appraisal report.
No survey of the boundaries of the property was undertaken. All areas and
dimensions furnished are presumed to be correct. It is further assumed that no
encroachments to the realty exist.
The Americans with Disabilities Act (ADA) became effective January 26, 1992.
Notwithstanding any discussion of possible readily achievable barrier removal
construction items in this report, CB Richard Ellis, Inc. has not made a
specific compliance survey and analysis of this property to determine whether
it is in conformance with the various detailed requirements of the ADA. It is
possible that a compliance survey of the property together with a detailed
analysis of the requirements of the ADA could reveal that the property is not
in compliance with one or more of the requirements of the ADA. If so, this
fact could have a negative effect on the value estimated herein. Since CB
Richard Ellis, Inc. has no specific information relating to this issue, nor is
CB Richard Ellis, Inc. qualified to make such an assessment, the effect of any
possible non-compliance with the requirements of the ADA was not considered in
estimating the value of the subject property.
Client shall not indemnify Appraiser or hold Appraiser harmless unless and only
to the extent that the Client misrepresents, distorts, or provides incomplete
or inaccurate appraisal results to others, which acts of the Client
proximately result in damage to Appraiser. The Client shall indemnify and hold
Appraiser harmless from any claims, expenses, judgments or other items or
costs arising as a result of the Client's failure or the failure of any of the
Client's agents to provide a complete copy of the appraisal report to any
third party. In the event of any litigation between the parties, the
prevailing party to such litigation shall be entitled to recover from the
other reasonable attorney fees and costs.
The report is for the sole use of the client; however, client may provide only
complete, final copies of the appraisal report in its entirety (but not
component parts) to third parties who shall review such reports in connection
with loan underwriting or securitization efforts. Appraiser is not required to
explain or testify as to appraisal results other than to respond to the client
for routine and customary questions. Please note that our consent to allow an
appraisal report prepared by CB Richard Ellis, Inc. or portions of such
report, to become part of or be referenced in any public offering, the
granting of such consent will be at our sole discretion and, if given, will be
on condition that we will be provided with an Indemnification Agreement and/or
Non-Reliance letter, in a form and content satisfactory to us, by a party
satisfactory to us. We do consent to your submission of the reports to rating
agencies, loan participants or your auditors in its entirety (but not
component parts) without the need to provide us with an Indemnification
Agreement and/or Non-Reliance letter.
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50
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ALDERWOOD AND TIMBERLEAF APARTMENTS ADDENDA
- --------------------------------------------------------------------------------
ADDENDA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS ADDENDUM A GLOSSARY OF TERMS
- --------------------------------------------------------------------------------
ADDENDUM A
GLOSSARY OF TERMS
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS ADDENDUM A GLOSSARY OF TERMS
- --------------------------------------------------------------------------------
assessed value Assessed value applies in ad valorem taxation and refers to the
value of a property according to the tax rolls. Assessed value may not conform
to market value, but it is usually calculated in relation to a market value
base. (+)
cash equivalency The procedure in which the sale prices of comparable
properties sold with atypical financing are adjusted to reflect typical market
terms.
contract, coupon, face, or nominal rent The nominal rent payment specified in
the lease contract. It does not reflect any offsets for free rent, unusual
tenant improvement conditions, or other factors that may modify the effective
rent payment.
coupon rent
See Contract, Coupon, Face, or Nominal Rent
effective rent 1) The rental rate net of financial concessions such as periods
of no rent during a lease term; may be calculated on a discounted basis,
reflecting the time value of money, or on a simple, straight-line basis. ++ 2)
The economic rent paid by the lessee when normalized to account for financial
concessions, such as escalation clauses, and other factors. Contract, or
normal, rents must be converted to effective rents to form a consistent basis
of comparison between comparables.
face rent
See Contract, Coupon, Face, or Nominal Rent
fee simple estate Absolute ownership unencumbered by any other interest or
estate, subject only to the limitations imposed by the governmental powers of
taxation, eminent domain, police power, and escheat. (++)
floor area ratio (FAR) The relationship between the above-ground floor area of
a building, as described by the building code, and the area of the plot on
which it stands; in planning and zoning, often expressed as a decimal, e.g., a
ratio of 2.0 indicates that the permissible floor area of a building is twice
the total land area; also called building-to-land ratio. (++)
full service lease A lease in which rent covers all operating expenses.
Typically, full service leases are combined with an expense stop, the expense
level covered by the contract lease payment. Increases in expenses above the
expense stop level are passed through to the tenant and are known as expense
pass-throughs.
going concern value Going concern value is the value of a proven property
operation. It includes the incremental value associated with the business
concern, which is distinct from the value of the real estate only. Going
concern value includes an intangible enhancement of the value of an operating
business enterprise which is produced by the assemblage of the land, building,
labor, equipment, and marketing operation. This process creates an
economically viable business that is expected to continue. Going concern value
refers to the total value of a property, including both real property and
intangible personal property attributed to the business value. (+)
gross building area (GBA) The sum of all areas at each floor as measured to
the exterior walls.
insurable value Insurable Value is based on the replacement and/or
reproduction cost of physical items that are subject to loss from hazards.
Insurable value is that portion of the value of an asset or asset group that
is acknowledged or recognized under the provisions of an applicable loss
insurance policy. This value is often controlled by state law and varies from
state to state. +
investment value Investment value is the value of an investment to a
particular investor based on his or her investment requirements. In contrast
to market value, investment value is value to an individual, not value in the
marketplace. Investment value reflects the subjective relationship between a
particular investor and a given investment. When measured in dollars,
investment value is the price an investor would pay for an investment in light
of its perceived capacity to satisfy his or her desires, needs, or investment
goals. To estimate investment value, specific investment criteria must be
known. Criteria to evaluate a real estate investment are not necessarily set
down by the individual investor; they may be established by an expert on real
estate and its value, that is, an appraiser. (+)
leased fee
See leased fee estate
leased fee estate An ownership interest held by a landlord with the right of
use and occupancy conveyed by lease to others. The rights of the lessor (the
leased fee owner) and the leased fee are specified by contract terms contained
within the lease. (++)
leasehold
See leasehold estate
leasehold estate The interest held by the lessee (the tenant or renter)
through a lease conveying the rights of use and occupancy for a stated term
under certain conditions. (++)
load factor The amount added to usable area to calculate the rentable area. It
is also referred to as a
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS ADDENDUM A GLOSSARY OF TERMS
- --------------------------------------------------------------------------------
"rentable add-on factor" which, according to BOMA, "is computed by dividing
the difference between the usable square footage and rentable square footage
by the amount of the usable area. Convert the figure into a percentage by
multiplying by 100.
market value "as if complete" on the appraisal date Market value as if
complete on the appraisal date is an estimate of the market value of a
property with all construction, conversion, or rehabilitation hypothetically
completed, or under other specified hypothetical conditions as of the date of
the appraisal. With regard to properties wherein anticipated market conditions
indicate that stabilized occupancy is not likely as of the date of completion,
this estimate of value should reflect the market value of the property as if
complete and prepared for occupancy by tenants.
market value "as is" on the appraisal date Market value "as is" on the
appraisal date is an estimate of the market value of a property in the
condition observed upon inspection and as it physically and legally exists
without hypothetical conditions, assumptions, or qualifications as of the date
of appraisal.
market value Market value is one of the central concepts of the appraisal
practice. Market value is differentiated from other types of value in that it
is created by the collective patterns of the market. Market value means the
most probable price which a property should bring in a competitive and open
market under all conditions requisite to a fair sale, the buyer and seller
each acting prudently and knowledgeably, and assuming the price is not
affected by undue stimulus. Implicit in this definition is the consummation of
a sale as of a specified date and the passing of title from seller to buyer
under conditions whereby: 1) A reasonable time is allowed for exposure in the
open market; 2) Both parties are well informed or well advised, and acting in
what they consider their own best interests; 3) Buyer and seller are typically
motivated; 4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and 5) The price represents
the normal consideration for the property sold unaffected by special or
creative financing or sales concessions granted by anyone associated with
the sale. (Section)
marketing period The time it takes an interest in real property to sell on the
market subsequent to the date of an appraisal. (++)
net lease Lease in which all or some of the operating expenses are paid
directly by the tenant. The landlord never takes possession of the expense
payment. In a Triple Net Lease all operating expenses are the responsibility
of the tenant, including property taxes, insurance, interior maintenance, and
other miscellaneous expenses. However, management fees and exterior
maintenance are often the responsibility of the lessor in a triple net lease.
A modified net lease is one in which some expenses are paid separately by the
tenant and some are included in the rent.
net rentable area (NRA) 1) The area on which rent is computed. 2) The Rentable
Area of a floor shall be computed by measuring to the inside finished surface
of the dominant portion of the permanent outer building walls, excluding any
major vertical penetrations of the floor. No deductions shall be made for
columns and projections necessary to the building. Include space such as
mechanical room, janitorial room, restrooms, and lobby of the floor. (*)
nominal rent
See Contract, Coupon, Face, or Nominal Rent
prospective future value "upon completion of construction" Prospective future
value "upon completion of construction" is the prospective value of a property
on the future date that construction is completed, based upon market
conditions forecast to exist, as of that completion date. The value estimate
at this stage is stated in current dollars unless otherwise indicated.
prospective future value "upon reaching stabilized occupancy" Prospective
future value "upon reaching stabilized occupancy" is the prospective value of
a property at a future point in time when all improvements have been
physically constructed and the property has been leased to its optimum level
of long-term occupancy. The value estimate at this stage is stated in current
dollars unless otherwise indicated.
reasonable exposure time The estimated length of time the property interest
being appraised would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of
the appraisal; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market. (++)
rent
See
full service lease
net lease
contract, coupon, face, or nominal rent
effective rent
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS ADDENDUM A GLOSSARY OF TERMS
- --------------------------------------------------------------------------------
shell space Space which has not had any interior finishing installed,
including even basic improvements such as ceilings and interior walls, as well
as partitions, floor coverings, wall coverings, etc..
Usable Area 1) The area actually used by individual tenants. 2) The Usable
Area of an office building is computed by measuring to the finished surface of
the office side of corridor and other permanent walls, to the center of
partitions that separate the office from adjoining usable areas, and to the
inside finished surface of the dominant portion of the permanent outer
building walls. Excludes areas such as mechanical rooms, janitorial room,
restrooms, lobby, and any major vertical penetrations of a multi-tenant floor.
(*)
use value Use value is a concept based on the productivity of an economic
good. Use value is the value a specific property has for a specific use. Use
value focuses on the value the real estate contributes to the enterprise of
which it is a part, without regard to the property's highest and best use or
the monetary amount that might be realized upon its sale. (+)
value appraised During the real estate development process, a property
typically progresses from a state of unimproved land to construction of
improvements to stabilized occupancy. In general, the market value associated
with the property increases during these stages of development. After reaching
stabilized occupancy, ongoing forces affect the property during its life,
including a physical wear and tear, changing market conditions, etc. These
factors continually influence the property's market value at any given point
in time. See also
market value "as is" on the appraisal date
market value "as if complete" on the appraisal date
prospective future value "upon completion of construction"
prospective future value "upon reaching stabilized occupancy"
- ---------------------------------------------------------------
+ The Appraisal of Real Estate, Eleventh Edition, Appraisal Institute, 1996.
++ The Dictionary of Real Estate Appraisal, Third Edition, 1993.
s. The Office of the Comptroller of the Currency, 12 CFR Part 34, Subpart C,
[omega]34.42(f), August 24, 1990. This definition is compatible with the
definition of market value contained in The Dictionary of Real Estate Appraisal,
Third Edition, and the Uniform Standards of Professional Appraisal Practice
adopted by the Appraisal Standards Board of The Appraisal Foundation, 1992
edition. This definition is also compatible with the OTS, RTC, FDIC, NCUA, and
the Board of Governors of the Federal Reserve System definition of market value.
* 1990 BOMA Experience Exchange Report, Income/Expense Analysis for Office
Buildings (Building Owners and Managers Association, 1990)
++ Statement on Appraisal Standard No. 6, Appraisal Standards Board of The
Appraisal Foundation, September 19, 1992.
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS ADDENDUM B ADDITIONAL PHOTOGRAPHS
- --------------------------------------------------------------------------------
ADDENDUM B
ADDITIONAL PHOTOGRAPHS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS ADDENDUM B ADDITIONAL PHOTOGRAPHS
- --------------------------------------------------------------------------------
[photo of courtyard]
"view of Alderwood"
[photo of kitchen]
"View of Alderwood kitchen"
[photo of living area]
"View of Alderwood Living Area"
[photo of bathroom]
"View of Alderwood bathroom"
[photo of pool]
"View of Timberleaf"
[photo of Timberleaf Kitchen]
"View of Timberleaf Kitchen"
[photo of Timberleaf living room] "View of Timberleaf
living room - second floor with vaulted ceilings"
[photo of Timberleaf bathroom]
"View of Timberleaf bathroom"
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS ADDENDUM C IMPROVED COMPARABLE SALES
- --------------------------------------------------------------------------------
ADDENDUM C
IMPROVED COMPARABLE SALES
- --------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
Summary Of Comparable Apartment Sales
----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
Sales Sales
Price Price
Sale Sale Year No. Avg Unit Occupancy Per Per
No. Name/Location Date Sale Price Built Units Size(SF) at Sale OER OAR SF Unit
===================================================================================================================================
1 Arioso Apartments 01/00 $46,400,000 1999 201 1,015 68% 30.80% 7.26% $227.38 $230,846
19608 Pruneridge
Avenue
Cupertino, CA
2 Villa De Anza 1 BR, 1 $31,000,000 1969 120 1,147 100% N/A 6.00% $225.23 $258,333
20200 Lucille Ave. BA00
Cupertino, CA
3 Waterford Place Apt. 12/00 $50,000,000 1999 238 923 98% N/A 8.50% $227.61 $210,084
1700 N. First Street
San Jose, CA
----------------------------------------------------------------------------------------------------------------------------------
Compiled by: CB Richard Ellis
- -----------------------------------------------------------------------------------------------------------------------------------
APARTMENT SALE 1
- -------------------------------------------------------------------------------
Location Data
Property Name: Arioso Apartments
Location: 19608 Pruneridge Avenue
City: Cupertino
County: Santa Clara
State/Zip: California
Assessor's Parcel No(s): 316-05-171
Atlas Reference: 832-F6
Physical Data
Type: Garden
Land Area: 6.43000 Acres
Gross Livable Area: 204,064 SF
Number of Units: 201
Average Unit Size: 1,015 SF
Year Built: 1999
# of Stories: 3
Condition: Excellent
Exterior Walls: Wood Frame/Stucco
Complex Amenities: pool, spa
Sale Data
Transaction Type: Sale
Date of Transaction: 01/00
Marketing Time: N/A
Grantor: SNK Realty
Grantee: Stonesfair Financial Corp.
Document No.: N/A Rec. Date:01/26/2000
Sale Price: $46,400,000
Financing: Market Terms
Cash Equivalent Price: $46,400,000
Required Capital Cost: $0
Adjusted Sale Price: $46,400,000
Verification: Broker
Unit Mix
----------------------------------------------------------------
Size
Unit Type No. Percentage (SF)
----------------------------------------------------------------
1 BR, 1 BA 18 8 534
1 BR, 1 BA 9 4 546
1 BR, 1 BA 36 17 792
1 BR, 1 BA 18 8 829
2 BR, 2 BA 56 27 1197
2 BR, 2 BA 4 1 1213
2 BR, 2 BA 60 29 1237
----------------------------------------------------------------
Totals 201 100 204,064
----------------------------------------------------------------
- --------------------------------------------------------------------------------
CB Richard Ellis
APARTMENT SALE 1
- -------------------------------------------------------------------------------
Financial Data
Assumptions & Forecast: Appraiser
Occupancy at Sale: 68%
Existing or Pro Forma Income: Pro Forma
TOTAL $ Unit
----- ------
Potential Gross Income: $5,126,616 $25,506
Vacancy and Credit Loss: $256,331 $1,275
Effective Gross Income: $4,870,285 $24,230
Expenses: $1,500,000 $7,462
Net Operating Income: $3,370,285 $16,768
Analysis
Buyers Underwriting Criteria: Direct Cap
Overall Capitalization Rate (OAR): 7.26 %
Projected IRR: N/A %
Effective Gross Multiplier (EGIM): 9.53
Operating Expense Ratio (OER): 30.80 %
Price Per Square Foot: $227.38
Price Per Unit: $230,846
Comments
Income is estimated based on late rental rates reported in December 1999.
The property went into contract prior to that date and these rents are
considered to be higher than the rents achievable at the time the price was
determined. Expenses are estimated at $7,500 per unit. There are 503
covered parking spaces situated in the underground garage. Rents range from
$1,850 to $2,900 per month, or $2.31 to $3.66 per square foot. Subsequent
tot he sale, the property achieved stabilized occupancy with a 1.0% vacancy
level.
- -------------------------------------------------------------------------------
CB Richard Ellis
APARTMENT SALE 2
- -------------------------------------------------------------------------------
Location Data
Property Name: Villa De Anza
Location: 20200 Lucille Ave.
City: Cupertino
County: Santa Clara
State/Zip: California 95014
Assessor's Parcel No(s): 316-02-094
Atlas Reference: 60-A3
Physical Data
Type: Garden
Land Area: 6.89000 Acres
Gross Livable Area: 137,640 SF
Number of Units: 120
Average Unit Size: 1,147 SF
Year Built: 1969
# of Stories: Two
Condition:
Exterior Walls: Stucco
Complex Amenities: Pool, Laundry, Clubhouse, BBQ
Sale Data
Transaction Type: Sale
Date of Transaction: 11/00
Marketing Time: N/A
Grantor: N/A
Grantee: N/A
Document No.: N/A
Sale Price: $31,000,000
Financing: Cash to Seller
Cash Equivalent Price: $31,000,000
Required Capital Cost: $0
Adjusted Sale Price: $31,000,000
Verification: Broker
Unit Mix
----------------------------------------------------------------
Size
Unit Type No. Percentage (SF)
----------------------------------------------------------------
2 BR, 2 BA 120 100 1147
----------------------------------------------------------------
Totals 120 100 137,640
----------------------------------------------------------------
- -------------------------------------------------------------------------------
CB Richard Ellis
APARTMENT SALE 2
- -------------------------------------------------------------------------------
Financial Data
Assumptions & Forecast: Broker
Occupancy at Sale: 100%
Existing or Pro Forma Income: Existing
TOTAL $ Unit
----- ------
Potential Gross Income: N/A N/A
Vacancy and Credit Loss: N/A N/A
Effective Gross Income: N/A N/A
Expenses: N/A N/A
Net Operating Income: $1,860,000 $15,500
Analysis
Buyers Underwriting Criteria: Direct Cap
Overall Capitalization Rate (OAR): 6.00%
Projected IRR: N/A%
Effective Gross Multiplier (EGIM): N/A
Operating Expense Ratio (OER): N/A %
Price Per Square Foot: $225.23
Price Per Unit: $258,333
Comments
- -------------------------------------------------------------------------------
CB Richard Ellis
APARTMENT SALE 3
- -------------------------------------------------------------------------------
Location Data
Property Name: Waterford Place Apt.
Location: 1700 N. First Street
City: San Jose
County: Santa Clara
State/Zip: California
Assessor's Parcel No(s): N/A
Atlas Reference: N/A
Physical Data
Type: Garden
Land Area: 5.17000 Acres
Gross Livable Area: 219,674 SF
Number of Units: 238
Average Unit Size: 923 SF
Year Built: 1999
# of Stories: 2 stories
Condition: Good
Exterior Walls: Wood Frame/Stucco
Complex Amenities:
Sale Data
Transaction Type: Escrow
Date of Transaction: 12/00
Marketing Time: N/A
Grantor: N/A
Grantee: N/A
Document No.: N/A
Sale Price: $50,000,000
Financing: Cash to Seller
Cash Equivalent Price: $50,000,000
Required Capital Cost: $0
Adjusted Sale Price: $50,000,000
Verification: Broker
Unit Mix
----------------------------------------------------------------
Size
Unit Type No. Percentage (SF)
----------------------------------------------------------------
Totals 100 N/A
----------------------------------------------------------------
- --------------------------------------------------------------------------------
CB Richard Ellis
APARTMENT SALE 3
- -------------------------------------------------------------------------------
Financial Data
Assumptions & Forecast: Broker
Occupancy at Sale: 98%
Existing or Pro Forma Income: Existing
TOTAL $ Unit
----- ------
Potential Gross Income: N/A N/A
Vacancy and Credit Loss: N/A N/A
Effective Gross Income: N/A N/A
Expenses: N/A N/A
Net Operating Income: $4,250,000 $17,857
Analysis
Buyers Underwriting Criteria:
Overall Capitalization Rate (OAR): 8.5%
Projected IRR: N/A%
Effective Gross Multiplier (EGIM): N/A
Operating Expense Ratio (OER): N/A%
Price Per Square Foot: $227.61.23
Price Per Unit: $210,084
Comments
- --------------------------------------------------------------------------------
CB Richard Ellis
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS ADDENDUM D RENT COMPARABLE
- --------------------------------------------------------------------------------
ADDENDUM D
RENT COMPARABLES
- --------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
Summary Of Comparable Apartment Rentals
--------------------------------------------------------------------------------------------------------
No. of Year Built Floor Size Rent / Rent /
No. Name / Location Units Occupancy Plan (Sqft) Month $ S.F. $
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
1 Los Padres Village 245 1986 1 BR, 1 BA 716 1791 2.50
2250 Monroe Street 96% 2 BR, 1 BA 858 2051 2.39
Santa Clara, CA 2 BR, 2 BA 913 2326 2.55
2 BR, 2 BA 946 2466 2.61
--------------------------------------------------------------------------------------------------------
2 Summerwood 468 1970 1 BR, 1 BA 825 1870 2.27
444 Saratoga Ave. 99% 2 BR, 1 BA 970 2000 2.06
Santa Clara, CA 2 BR, 2 BA 1120 2130 1.90
--------------------------------------------------------------------------------------------------------
3 Laguna Clara 264 1971 1 BR, 1 BA 712 1840 2.58
3131 Homestead Road 98% 1 BR, 1 BA 754 1840 2.44
Santa Clara, CA 1 BR, 1 BA 823 1875 2.28
2 BR, 1 BA 1072 2155 2.01
2 BR, 2 BA 1158 2305 1.99
--------------------------------------------------------------------------------------------------------
4 Marina Cove 292 1975 1 BR, 1 BA 720 1925 2.67
3480 Granada Ave 98% 1 BR, 1 BA 725 1945 2.68
Santa Clara, CA 1 BR, 1 BA 792 1995 2.52
2 BR, 1 BA 900 2145 2.38
2 BR, 2 BA 1051 2350 2.24
2 BR, 2 BA 1056 2450 2.32
2 BR, 2 BA 1144 2600 2.27
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
Compiled by: CB Richard Ellis
--------------------------------------------------------------------------------------------------------
APARTMENT RENT COMPARABLE 1
- --------------------------------------------------------------------------------
Location Data
Property Name: Los Padres Village
Location: 2250 Monroe Street
City: Santa Clara
County: Santa Clara
State/Zip: California 95050
Assessor's Parcel No(s): 224-33-012
Atlas Reference: N/A
Physical Data
Type: Garden
Number of Units: 245
Year Built: 1986
# of Stories: 2 & 3
Average Unit Size: 796 SF
Amenities:
Exterior Walls:
Condition:
Lease Data
Occupancy: 96%
Rent Premiums: None
Concessions: None
Typical Lease Term: 6 to 12 Months
Utilities included in Rent: None
Tenant Profile: N/A
Management Company: Archstone Communities
Phone No: (408)241-4600
Survey Date: 12/00
-------------------------------------------------------------------------
QUOTED MONTHLY RENT SCHEDULE
--------------------------------------------------------------------------
Unit Type No. Size Rent Rent
(SF) $ ($ PSF)
1 BR, 1 BA 145 716 1791 2.50
2 BR, 1 BA 16 858 2051 2.39
2 BR, 2 BA 60 913 2326 2.55
2 BR, 2 BA 24 946 2466 2.61
--------------------------------------------------------------------------
Totals / Averages 245 195,032 $2005 $2.52
--------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CB RICHARD ELLIS
APARTMENT RENT COMPARABLE 1
- --------------------------------------------------------------------------------
Comments
- --------------------------------------------------------------------------------
CB RICHARD ELLIS
APARTMENT RENT COMPARABLE 2
- --------------------------------------------------------------------------------
Location Data
Property Name: Summerwood
Location: 444 Saratoga Ave.
City: Santa Clara
County: Santa Clara
State/Zip: California 95050
Assessor's Parcel No(s): 294-04-019
Atlas Reference: N/A
Physical Data
Type: Garden
Number of Units: 468
Year Built: 1970
# of Stories: 2
Average Unit Size: 972 SF
Amenities:
Exterior Walls:
Condition:
Lease Data
Occupancy: 99%
Rent Premiums: None
Concessions: None
Typical Lease Term: 6 to 12 Months
Utilities included in Rent: None
Tenant Profile: N/A
Management Company: Hoffman Associates
Phone No: (408)241-1445
Survey Date: 12/00
--------------------------------------------------------------------------
QUOTED MONTHLY RENT SCHEDULE
--------------------------------------------------------------------------
Unit Type No. Size Rent Rent
(SF) $ ($ PSF)
--------------------------------------------------------------------------
1 BR, 1 BA 186 825 1870 2.27
2 BR, 1 BA 96 970 2000 2.06
2 BR, 2 BA 186 1120 2130 1.90
--------------------------------------------------------------------------
Totals / Averages 468 454,890 $2000 $2.06
--------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CB RICHARD ELLIS
APARTMENT RENT COMPARABLE 2
- --------------------------------------------------------------------------------
Comments
- --------------------------------------------------------------------------------
CB RICHARD ELLIS
APARTMENT RENT COMPARABLE 3
- -------------------------------------------------------------------------------
Location Data
Property Name: Laguna Clara
Location: 3131 Homestead Road
City: Santa Clara
County: Santa Clara
State/Zip: California 95051
Assessor's Parcel No(s): 224-24-044
Atlas Reference: N/A
Physical Data
Type: Garden
Number of Units: 264
Year Built: 1971
# of Stories: 2
Average Unit Size: 899 SF
Amenities:
Exterior Walls:
Condition:
Lease Data
Occupancy: 98%
Rent Premiums: None
Concessions: None
Typical Lease Term: 6 to 12 Months
Utilities included in Rent: None
Tenant Profile: N/A
Management Company: California RE Management
Phone No: (408)244-4450
Survey Date: 12/00
--------------------------------------------------------------------------
QUOTED MONTHLY RENT SCHEDULE
--------------------------------------------------------------------------
Size Rent Rent
Unit Type No. (SF) $ ($ PSF)
--------------------------------------------------------------------------
1 BR, 1 BA 24 712 1840 2.58
1 BR, 1 BA 68 754 1840 2.44
1 BR, 1 BA 85 823 1875 2.28
2 BR, 1 BA 20 1072 2155 2.01
2 BR, 2 BA 67 1158 2305 1.99
--------------------------------------------------------------------------
Totals / Averages 264 237,341 $1993 $2.22
--------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CB RICHARD ELLIS
APARTMENT RENT COMPARABLE 3
- -------------------------------------------------------------------------------
Comments
- --------------------------------------------------------------------------------
CB RICHARD ELLIS
APARTMENT RENT COMPARABLE 4
- -------------------------------------------------------------------------------
Location Data
Property Name: Marina Cove
Location: 3480 Granada Ave.
City: Santa Clara
County: Santa Clara
State/Zip: California 95051
Assessor's Parcel No(s): 290-58-021-0
Atlas Reference: N/A
Physical Data
Type: Garden
Number of Units: 292
Year Built: 1975
# of Stories: 2
Average Unit Size: 886 SF
Amenities:
Exterior Walls:
Condition:
Lease Data
Occupancy: 98%
Rent Premiums: None
Concessions: None
Typical Lease Term: 6 to 12 Months
Utilities included in Rent: None
Tenant Profile: N/A
Management Company: Essex Property Corporation
Phone No: (408)984-2331
Survey Date: 12/00
-------------------------------------------------------------------
QUOTED MONTHLY RENT SCHEDULE
-------------------------------------------------------------------
Unit Type No. Size Rent Rent
(SF) $ ($ PSF)
-------------------------------------------------------------------
1 BR, 1 BA 88 720 1925 2.67
1 BR, 1 BA 45 725 1945 2.68
1 BR, 1 BA 12 792 1995 2.52
2 BR, 1 BA 24 900 2145 2.38
2 BR, 2 BA 63 1051 2350 2.24
2 BR, 2 BA 36 1056 2450 2.32
2 BR, 2 BA 24 1144 2600 2.27
-------------------------------------------------------------------
Totals / Averages 292 258,774 $2161 $2.44
-------------------------------------------------------------------
- --------------------------------------------------------------------------------
CB RICHARD ELLIS
APARTMENT RENT COMPARABLE 4
- -------------------------------------------------------------------------------
Comments
- --------------------------------------------------------------------------------
CB RICHARD ELLIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[Photo of Property 1]
- --------------------------------------------------------------------------------
RENT 1
- --------------------------------------------------------------------------------
[Photo of Property 2]
- --------------------------------------------------------------------------------
RENT 2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[Photo of Entrance to Property 3]
- --------------------------------------------------------------------------------
RENT 3
- --------------------------------------------------------------------------------
[Photo of Property 4]
- --------------------------------------------------------------------------------
RENT 4
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS ADDENDUM E DEMOGRAPHICS
- --------------------------------------------------------------------------------
ADDENDUM E
DEMOGRAPHICS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Demographic Full Data Report
Area(s): Radius 1.0, Radius 3.0, Radius 5.0
- --------------------------------------------------------------------------------
900 PEPPER TREE LN Latitude: 37.341595
SANTA CLARA, CA 95051-5269 Longitude: -121.982025
Radius 1.0 Radius 3.0 Radius 5.0
================================================================================
POPULATION
2004 Projection 30,583 217,132 526,692
1999 Estimate 29,584 207,697 499,338
1990 Census 28,490 193,909 453,855
1980 Census 27,788 183,428 423,527
Growth 1980 to 1990 2.53% 5.71% 7.16%
1999 ESTIMATED POPULATION by RACE 29,584 207,697 499,338
White 73.01% 69.50% 38.89%
Black 2.31% 2.86% 2.98%
Asian & Pacific Islander 20.06% 21.84% 20.70%
Other Races 4.62% 5.81% 7.42%
Hispanic Origin (All Races) 16.44% 16.72% 19.27%
HOUSEHOLDS
2004 Projection 12,664 88,488 210,981
1999 Estimate 12,199 84,270 199,091
1990 Census 11,733 78,643 181,167
1980 Census 11,288 73,397 167,655
Growth 1980 to 1990 3.94% 7.15% 8.06%
1990 OCCUPIED HOUSING UNITS 11,733 78,643 181,167
Owner Occupied 50.18% 47.13% 49.29%
Renter Occupied 49.82% 52.87% 50.71%
Persons per Household 2.43 2.43 2.46
1999 ESTIMATED HOUSEHOLDS by INCOME 12,199 84,270 199,091
$150,000 or more 8.86% 10.07% 13.20%
$100,000 to $149,999 16.60% 16.41% 16.07%
$75,000 to $99,999 18.14% 16.79% 15.87%
$50,000 to $74,999 24.97% 22.03% 20.83%
$35,000 to $49,999 13.72% 13.08% 12.58%
$25,000 to $34,999 5.91% 7.44% 7.51%
$15,000 to $24,999 5.39% 6.73% 6.86%
$5,000 to $14,999 5.06% 5.91% 5.64%
Under $5,000 1.36% 1.54% 1.44%
Average Income per Household $77,687.78 $78,472.13 $84,302.49
Median Income per Household $68,592.06 $67,370.61 $69,166.43
Per Capita Income per Household $32,033.46 $31,871.07 $33,652.72
POPULATION by SEX 29,584 207,697 499,338
Male 50.38% 50.38% 50.52%
Female 49.62% 49.62% 49.48%
1990 MARITAL STATUS 23.966 162,192 377,141
Single Male 18.70% 19.44% 18.85%
Single Female 13.05% 13.63% 12.97%
Married 49.63% 48.23% 49.15%
================================================================================
Prepared on: Dec 15, 2000
(C) 1999 Claritas. All rights reserved. The information above has been
obtained from sources believed reliable. However, CB Richard Ellis Global
Research and Consulting has not verified it and makes no guarantee,
warranty or representation about it. It is your responsibility to
independently verify it.
Radius 1.0 Radius 3.0 Radius 5.0
================================================================================
Previously Married Male 6.51% 6.48% 6.71%
Previously Married Female 12.12% 12.21% 12.32%
1999 ESTIMATED POPULATION by Age 29,584 207,697 499,338
Under 5 Years 5.73% 6.02% 6.07%
5 to 9 Years 6.16% 6.36% 6.43%
10 to 14 Years 5.56% 5.91% 6.00%
15 to 17 Years 2.81% 2.83% 2.99%
18 to 20 Years 2.23% 3.16% 2.83%
21 to 24 Years 3.97% 4.23% 4.16%
25 to 29 Years 8.53% 8.58% 8.53%
30 to 34 Years 10.17% 9.96% 9.68%
35 to 39 Years 10.49% 10.14% 9.74%
40 to 49 Years 17.18% 16.74% 16.80%
50 to 59 Years 11.07% 10.75% 11.13%
60 to 64 Years 4.20% 3.74% 3.85%
65 to 69 Years 3.81% 3.37% 3.43%
70 to 74 Years 3.20% 3.01% 3.04%
75+ Years 4.88% 5.18% 5.32%
Median Age 37.30 36.45 36.70
Average Age 37.76 37.07 37.26
1999 HISPANIC POPULATION by RACE 4.863 34,725 96,244
White 70.39% 63.84% 59.80%
Black 0.63% 0.79% 0.90%
Asian & Pacific Islander 3.67% 3.53% 3.40%
Other 25.31% 31.84% 35.90%
1990 HISPANIC POPULATION by TYPE 28,490 193,909 453,855
Not Hispanic 88.00% 87.60% 85.73%
Mexican 7.87% 8.40% 10.32%
Puerto Rican 0.45% 0.38% 0.41%
Cuban 0.16% 0.19% 0.14%
Other Hispanic 3.52% 3.42% 3.40%
1999 ESTIMATED FEMALE POPULATION by AGE 14,679 103,065 247,087
Under 5 Years 5.68% 5.97% 6.02%
5 to 9 Years 6.08% 6.27% 6.37%
10 to 14 Years 5.44% 5.76% 5.88%
15 to 17 Years 2.72% 2.77% 2.91%
18 to 20 Years 2.19% 3.13% 2.74%
21 to 24 Years 3.77% 4.20% 4.08%
25 to 29 Years 7.54% 7.49% 7.50%
30 to 34 Years 9.06% 8.91% 8.66%
35 to 39 Years 10.16% 9.87% 9.40%
40 to 49 Years 17.24% 16.75% 16.84%
50 to 59 Years 11.59% 11.01% 11.33%
60 to 64 Years 4.48% 3.91% 4.06%
65 to 69 Years 4.11% 3.68% 3.76%
70 to 74 Years 3.65% 3.49% 3.51%
75+ Years 6.27% 6.77% 6.95%
Median Age 38.70 37.78 38.10
Average Age 39.12 38.44 38.65
================================================================================
Prepared on: Dec 15, 2000
(C) 1999 Claritas. All rights reserved. The information above has been
obtained from sources believed reliable. However, CB Richard Ellis Global
Research and Consulting has not verified it and makes no guarantee,
warranty or representation about it. It is your responsibility to
independently verify it.
Radius 1.0 Radius 3.0 Radius 5.0
================================================================================
1990 POPULATION by URBAN vs RURAL 28,628 193,738 453,873
Urban 100.00% 100.00% 100.00%
Rural 0.00% 0.00% 0.00%
1990 POPULATION by HOUSEHOLD TYPE 28,490 193,909 453,855
Family Households 77.52% 75.95% 76.99%
Non-Family Households 22.48% 22.60% 21.31%
Group Quarters 0.00% 1.45% 1.70%
1990 POPULATION 25+ by EDUCATION LEVEL 20,539 134,729 316,819
Elementary (0-8) 4.79% 4.51% 5.25%
Some High School (9-11) 8.08% 8.40% 8.73%
High School Graduate (12) 20.22% 19.47% 19.10%
Some College (13-15) 22.82% 23.59% 23.19%
Associates Degree Only 8.80% 8.64% 8.64%
Bachelors Degree Only 23.66% 23.11% 22.85%
Graduate Degree 11.63% 12.28% 12.24%
1990 POPULATION ENROLLED IN SCHOOL 7,124 51,997 117,516
Public Pre-Primary 4.54% 3.45% 3.47%
Private Pre-Primary 3.15% 2.99% 3.42%
Public Elementary/High School 39.65% 39.39% 43.06%
Private Elementary/High School 7.41% 5.27% 5.37%
College 45.25% 48.90% 44.68%
1990 POPULATION 16+ by EMPLOYMENT STATUS 23,824 160,451 372,864
Employed in Armed Forces 0.25% 0.49% 0.45%
Employed Civilians 71.79% 71.40% 70.55%
Unemployed Civilians 2.82% 3.01% 3.06%
Not in Labor Force 25.14% 25.10% 25.95%
1990 POPULATION 16+ by OCCUPATION 17,104 114,556 263,041
Executive & Managerial 18.44% 17.41% 18.03%
Professional Specialty 20.11% 21.35% 20.29%
Technical Support 6.61% 6.89% 6.55%
Sales 10.76% 10.82% 11.12%
Administrative Support 17.93% 16.98% 16.25%
Service: Private Household 0.14% 0.29% 0.27%
Service: Protective 1.55% 1.27% 1.24%
Service: Other 6.41% 6.73% 7.14%
Farming, Forestry, & Fishing 0.50% 0.78% 0.85%
Precision Production & Craft 9.64% 9.34% 9.58%
Machine Operator 4.47% 4.15% 4.32%
Transportation & Material Moving 1.49% 1.85% 2.07%
Laborers 1.96% 2.13% 2.29%
1990 FEMALES 16+ WITH CHILDREN 0-17 YEARS 11,944 80,240 185,810
Working with Child 0-5 Years 5.95% 5.44% 5.23%
Not Working with Child 0-5 Years 0.49% 0.37% 0.35%
Not in Labor Force with Child 0-5 Years 3.51% 3.37% 3.16%
Working with Child 6-17 Years 8.67% 9.07% 9.19%
Not Working with Child 6-17 Years 0.17% 0.22% 0.32%
================================================================================
Prepared on: Dec 15, 2000
(C) 1999 Claritas. All rights reserved. The information above has been
obtained from sources believed reliable. However, CB Richard Ellis Global
Research and Consulting has not verified it and makes no guarantee,
warranty or representation about it. It is your responsibility to
independently verify it.
Radius 1.0 Radius 3.0 Radius 5.0
================================================================================
Not in Labor Force with Child 6-17 Years 2.36% 2.68% 2.81%
Working with Child 0-5 & 6-17 Years 2.22% 2.51% 2.61%
Not Working with Child 0-5 & 6-17 Years 0.04% 0.11% 0.11%
Not in Labor Force with Child 0-5 & 6-17 Years 1.36% 1.71% 1.99%
Working with No Children 47.37% 46.73% 45.85%
Not Working with No children 2.09% 2.02% 1.98%
Not in Labor Force with No Children 25.77% 25.76% 26.40%
1990 FAMILIES by NUMBER OF WORKERS 7,336 48,325 113,228
No Workers 9.65% 8.69% 8.78%
One Worker 25.95% 26.50% 26.11%
Two Workers 49.46% 49.92% 50.31%
Three + Workers 14.94% 14.89% 14.81%
1990 POPULATION by TRANSPORTATION TO WORK 16,820 113,090 259,977
Drive Alone 83.60% 81.45% 81.09%
Car Pool 8.98% 9.57% 9.90%
Public Transportation 2.43% 2.48% 2.68%
Drive Motorcycle 0.51% 0.56% 0.56%
Walked Only 1.42% 2.27% 2.08%
Other Means 1.49% 1.50% 1.33%
Worked at Home 1.57% 2.18% 2.35%
1990 POPULATION by TRAVEL TIME TO WORK 16,820 113,090 259,977
Under 10 Minutes/Work at Home 10.71% 12.76% 13.12%
10 to 29 Minutes 68.10% 65.94% 63.31%
30 to 59 Minutes 18.65% 18.64% 20.66%
60 to 89 Minutes 1.83% 1.91% 2.10%
90+ Minutes 0.71% 0.75% 0.80%
Average Travel Time in Minutes 20 20 20
1990 HOUSEHOLDS by TYPE 11,733 78,643 181,167
Single Male 13.00% 13.16% 12.87%
Single Female 13.80% 14.04% 14.00%
Married Couple 47.54% 46.36% 47.40%
Other Family - Male Head 3.91% 4.29% 4.41%
Other Family - Female Head 9.79% 10.09% 9.95%
Non-Family - Male Head 7.23% 7.48% 7.01%
Non-Family - Female Head 4.74% 4.58% 4.37%
1990 HOUSEHOLDS WITH CHILDREN 3,158 22,058 52,154
Married Couple Family 73.81% 71.73% 72.11%
Other Family - Male Head 5.81% 6.30% 6.68%
Other Family - Female Head 18.73% 20.26% 19.58%
Non-Family 1.66% 1.71% 1.63%
1990 HOUSEHOLD by AGE by POVERTY STATUS 11,736 78,728 181,714
Above Poverty, Under Age 65 81.99% 80.57% 80.34%
Above Poverty, Age 65+ 13.34% 13.96% 14.45%
Below Poverty, Under Age 65 3.31% 4.18% 4.05%
Below Poverty, Age 65+ 1.36% 1.30% 1.15%
1990 HOUSEHOLDS by NUMBER OF VEHICLES 11,766 78,614 181,110
================================================================================
Prepared on: Dec 15, 2000
(C) 1999 Claritas. All rights reserved. The information above has been
obtained from sources believed reliable. However, CB Richard Ellis Global
Research and Consulting has not verified it and makes no guarantee,
warranty or representation about it. It is your responsibility to
independently verify it.
Radius 1.0 Radius 3.0 Radius 5.0
================================================================================
No Vehicles 4.90% 5.39% 5.53%
1 Vehicle 32.86% 33.64% 32.76%
2 Vehicles 40.97% 40.66% 40.51%
3+ Vehicles 21.28% 20.31% 21.20%
Estimated Total Vehicles 21,517 141,464 328,934
1990 HOUSING UNITS by OCCUPANCY STATUS 12,080 82,214 189,284
Occupied 97.12% 95.66% 95.71%
Vacant 2.88% 4.34% 4.29%
1990 VACANT UNITS 347 3,570 8,117
For Rent 58.96% 60.07% 62.05%
For Sale Only 15.11% 12.90% 12.86%
Seasonal 4.74% 4.73% 4.74%
Other 21.19% 22.29% 20.35%
1990 OWNER OCCUPIED PROPERTY VALUES 4,828 32,026 75,514
Under $25,000 0.18% 0.25% 0.24%
$25,000 to $49,999 0.57% 0.84% 0.78%
$50,000 to $74,999 0.22% 0.33% 0.43%
$75,000 to $99,999 0.47% 0.44% 0.49%
$100,000 to $149,999 2.44% 2.34% 2.38%
$150,000 to $199,999 6.90% 6.59% 6.36%
$200,000 to $299,999 47.42% 41.79% 37.13%
$300,000 to $399,999 31.83% 33.46% 28.90%
$400,000 to $499,999 8.05% 10.93% 13.09%
Over $500,000 1.92% 3.02% 10.20%
Median Property Value $282,729.26 $293,817.24 $307,561.52
1990 Rental Units 5,755 40,918 90,331
Median Rent $777.10 $738.35 $722.06
1990 HOUSING UNITS by # OF PERSONS IN UNIT 11,733 78,643 181,167
1 Person Units 26.79% 27.20% 26.87%
2 Person Units 35.57% 34.89% 34.90%
3 Person Units 18.02% 17.87% 17.44%
4 Person Units 11.90% 12.44% 12.59%
5 Person Units 5.02% 4.86% 4.94%
6 Person Units 1.51% 1.62% 1.84%
7+ Person Units 1.18% 1.11% 1.42%
1990 YEAR ROUND UNITS IN STRUCTURE 12,080 82,214 189,284
Single Units Detached 43.31% 43.85% 46.01%
Single Units Attached 9.26% 8.93% 8.30%
Double Units 2.08% 2.07% 2.16%
3 to 9 Units 14.34% 14.80% 14.30%
10 to 19 Units 8.33% 7.57% 7.67%
20 to 49 Units 7.62% 9.50% 8.72%
50+ Units 12.38% 11.16% 9.13%
Mobile Home or Trailer 1.38% 1.19% 2.82%
All Other 1.29% 0.93% 0.89%
Single/Multiple Unit Ratio 1.17 1.17 1.29
================================================================================
Prepared on: Dec 15, 2000
(C) 1999 Claritas. All rights reserved. The information above has been
obtained from sources believed reliable. However, CB Richard Ellis Global
Research and Consulting has not verified it and makes no guarantee,
warranty or representation about it. It is your responsibility to
independently verify it.
Radius 1.0 Radius 3.0 Radius 5.0
================================================================================
1990 HOUSING UNITS by YEAR BUILT 11,766 78,614 181,110
Built 1989 to March 1990 0.03% 0.56% 0.58%
Built 1985 to 1988 4.21% 5.59% 6.07%
Built 1980 to 1984 4.75% 5.36% 5.18%
Built 1970 to 1979 24.88% 23.19% 22.65%
Built 1960 to 1969 30.76% 30.50% 30.30%
Built 1950 to 1959 31.73% 27.36% 24.84%
Built 1940 to 1949 3.46% 4.74% 5.72%
Built 1939 or Earlier 0.17% 2.70% 4.67%
================================================================================
Prepared on: Dec 15, 2000
(C) 1999 Claritas. All rights reserved. The information above has been
obtained from sources believed reliable. However, CB Richard Ellis Global
Research and Consulting has not verified it and makes no guarantee,
warranty or representation about it. It is your responsibility to
independently verify it.
- --------------------------------------------------------------------------------
Demographic Full Data Report
Area(s): Radius 1.0, Radius 3.0, Radius 5.0
- --------------------------------------------------------------------------------
2147 NEWHALL ST. Latitude: 37.337914
SANTA CLARA, CA 95051-5886 Longitude: -121.939362
Radius 1.0 Radius 3.0 Radius 5.0
================================================================================
POPULATION
2004 Projection 25,933 208,230 549,770
1999 Estimate 24,696 198,110 521,228
1990 Census 22,758 181,736 473,578
1980 Census 21,189 164,666 424,158
Growth 1980 to 1990 7.41% 10.37% 11.65%
1999 ESTIMATED POPULATION by RACE 24,696 198,110 521,228
White 79.95% 69.11% 64.57%
Black 2.29% 3.98% 3.20%
Asian & Pacific Islander 9.16% 15.34% 19.41%
Other Races 8.61% 11.56% 12.83%
Hispanic Origin ( All Races) 23.28% 30.40% 29.27%
HOUSEHOLDS
2004 Projection 10,558 84,122 206,746
1999 Estimate 9,991 79,587 194,998
1990 Census 9,216 72,996 177,110
1980 Census 9,032 69,513 164,636
Growth 1980 to 1990 2.04% 5.01% 7.58%
1990 OCCUPIED HOUSING UNITS 9,216 72,996 177,110
Owner Occupied 43.71% 40.84% 48.37%
Renter Occupied 56.29% 59.16% 51.63%
Persons per Household 2.22 2.40 2.60
1999 ESTIMATED HOUSEHOLDS by INCOME 9,991 79,587 194,998
$150,000 or more 7.34% 6.26% 9.51%
$100,000 to $149,999 11.22% 11.80% 14.21%
$75,000 to $99,999 14.09% 14.10% 14.95%
$50,000 to $74,999 20.54% 22.43% 21.33%
$35,000 to $49,999 13.13% 15.07% 13.51%
$25,000 to $34,999 10.18% 10.03% 8.67%
$15,000 to $24,999 11.64% 9.38% 8.29%
$5,000 to $14,999 9.86% 8.86% 7.64%
Under $5,000 2.00% 2.06% 1.88%
Average Income per Household $69,529.10 $66,454.57 $74,610.07
Median Income per Household $53,878.47 $55,126.30 $61,725.57
Per Capita Income per Household $28,425.34 $27,146.13 $28,010.13
POPULATION by SEX 24,696 198,110 521,228
Male 48.69% 50.97% 50.98%
Female 51.31% 49.03% 49.02%
1990 MARITAL STATUS 19,901 151,420 387,102
Single Male 22.04% 21.06% 20.44%
Single Female 18.09% 14.49% 13.86%
Married 39.03% 43.40% 46.82%
================================================================================
Prepared on: Dec 15, 2000
(C) 1999 Claritas. All rights reserved. The information above has been
obtained from sources believed reliable. However, CB Richard Ellis Global
Research and Consulting has not verified it and makes no guarantee,
warranty or representation about it. It is your responsibility to
independently verify it.
Radius 1.0 Radius 3.0 Radius 5.0
================================================================================
Previously Married Male 6.44% 7.59% 6.72%
Previously Married Female 14.40% 13.46% 12.16%
1999 ESTIMATED POPULATION by Age 24,696 198,110 521,228
Under 5 Years 5.07% 6.51% 6.86%
5 to 9 Years 5.45% 6.77% 7.06%
10 to 14 Years 5.01% 6.16% 6.50%
15 to 17 Years 2.31% 2.91% 3.17%
18 to 20 Years 8.25% 3.27% 3.30%
21 to 24 Years 5.21% 4.30% 4.59%
25 to 29 Years 6.73% 8.82% 8.58%
30 to 34 Years 9.62% 10.60% 9.91%
35 to 39 Years 9.53% 10.46% 9.92%
40 to 49 Years 15.45% 16.29% 16.10%
50 to 59 Years 8.78% 9.32% 9.86%
60 to 64 Years 2.82% 3.16% 3.36%
65 to 69 Years 2.77% 2.92% 3.02%
70 to 74 Years 3.25% 2.79% 2.74%
75+ Years 9.75% 5.74% 5.01%
Median Age 36.23 35.32 35.01
Average Age 38.51 36.20 35.69
1999 HISPANIC POPULATION by RACE 5,749 60,233 152,575
White 63.21% 60.60% 54.39%
Black 0.51% 0.91% 0.84%
Asian & Pacific Islander 1.73% 2.46% 2.82%
Other 34.55% 36.03% 41.94%
1990 HISPANIC POPULATION by TYPE 22,758 181,736 473,578
Not Hispanic 83.21% 77.72% 77.38%
Mexican 12.35% 17.62% 18.26%
Puerto Rican 0.34% 0.51% 0.50%
Cuban 0.33% 0.19% 0.15%
Other Hispanic 3.76% 3.96% 3.72%
1999 ESTIMATED FEMALE POPULATION by AGE 12,672 97,125 255,507
Under 5 Years 4.86% 6.52% 6.88%
5 to 9 Years 5.23% 6.76% 7.06%
10 to 14 Years 4.61% 6.05% 6.43%
15 to 17 Years 2.20% 2.84% 3.14%
18 to 20 Years 8.05% 3.17% 3.22%
21 to 24 Years 4.88% 4.23% 4.42%
25 to 29 Years 6.13% 7.65% 7.51%
30 to 34 Years 8.92% 9.54% 8.95%
35 to 39 Years 8.98% 9.96% 9.50%
40 to 49 Years 14.42% 16.13% 16.09%
50 to 59 Years 8.44% 9.37% 10.02%
60 to 64 Years 2.84% 3.39% 3.58%
65 to 69 Years 3.13% 3.25% 3.34%
70 to 74 Years 3.89% 3.32% 3.22%
75+ Years 13.40% 7.82% 6.64%
Median Age 37.85 36.63 36.26
Average Age 40.89 37.76 37.02
================================================================================
Prepared on: Dec 15, 2000
(C) 1999 Claritas. All rights reserved. The information above has been
obtained from sources believed reliable. However, CB Richard Ellis Global
Research and Consulting has not verified it and makes no guarantee,
warranty or representation about it. It is your responsibility to
independently verify it.
Radius 1.0 Radius 3.0 Radius 5.0
================================================================================
1990 POPULATION by URBAN vs RURAL 22,727 181,989 473,942
Urban 100.00% 100.00% 100.00%
Rural 0.00% 0.00% 0.00%
1990 POPULATION by HOUSEHOLD TYPE 22,758 181,736 473,578
Family Households 61.58% 72.57% 77.22%
Non-Family Households 28.21% 24.02% 20.10%
Group Quarters 10.21% 3.41% 2.68%
1990 POPULATION 25+ by EDUCATION LEVEL 14,998 124,530 316,555
Elementary (0-8) 6.77% 8.64% 9.57%
Some High School (9-11) 10.39% 11.43% 10.89%
High School Graduate (12) 22.95% 20.96% 19.77%
Some College (13-15) 21.14% 22.78% 22.30%
Associates Degree Only 7.49% 7.96% 8.16%
Bachelors Degree Only 18.88% 18.96% 19.58%
Graduate Degree 12.38% 9.28% 9.73%
1990 POPULATION ENROLLED IN SCHOOL 7,295 47,482 126,839
Public Pre-Primary 2.00% 3.70% 3.51%
Private Pre-Primary 2.36% 2.32% 2.63%
Public Elementary/High School 22.03% 40.20% 44.60%
Private Elementary/High School 4.80% 4.97% 5.16%
College 68.81% 48.81% 44.09%
1990 POPULATION 16+ by EMPLOYMENT STATUS 19,748 149,822 382,712
Employed in Armed Forces 0.15% 0.19% 0.25%
Employed Civilians 61.89% 67.98% 68.59%
Unemployed Civilians 2.99% 3.57% 3.64%
Not in Labor Force 34.98% 28.26% 27.52%
1990 POPULATION 16+ by OCCUPATION 12,221 101,850 262,488
Executive & Managerial 15.29% 15.41% 15.36%
Professional Specialty 20.47% 17.12% 17.34%
Technical Support 5.00% 5.39% 5.86%
Sales 11.29% 10.63% 10.55%
Administrative Support 20.53% 17.52% 16.64%
Service: Private Household 0.33% 0.32% 0.33%
Service: Protective 1.37% 1.54% 1.50%
Service: Other 6.82% 9.24% 9.04%
Farming, Forestry, & Fishing 0.61% 1.15% 1.33%
Precision Production & Craft 8.73% 10.92% 11.04%
Machine Operator 4.03% 5.28% 5.57%
Transportation & Material Moving 2.82% 2.65% 2.44%
Laborers 2.70% 2.83% 2.99%
1990 FEMALES 16+ WITH CHILDREN 0-17 YEARS 10,328 74,339 188,372
Working with Child 0-5 Years 4.78% 5.37% 5.36%
Not Working with Child 0-5 Years 0.42% 0.47% 0.39%
Not in Labor Force with Child 0-5 Years 2.45% 3.44% 3.65%
Working with Child 6-17 Years 4.98% 7.79% 8.86%
Not Working with Child 6-17 Years 0.12% 0.43% 0.42%
Not in Labor Force with Child 6-17 Years 1.82% 2.43% 2.81%
================================================================================
Prepared on: Dec 15, 2000
(C) 1999 Claritas. All rights reserved. The information above has been
obtained from sources believed reliable. However, CB Richard Ellis Global
Research and Consulting has not verified it and makes no guarantee,
warranty or representation about it. It is your responsibility to
independently verify it.
Radius 1.0 Radius 3.0 Radius 5.0
================================================================================
Working with Child 0-5 & 6-17 Years 1.62% 2.27% 2.92%
Not Working with Child 0-5 & 6-17 Years 0.15% 0.13% 0.19%
Not in Labor Force with Child 0-5 & 6-17 1.52% 1.93% 2.39%
Years
Working with No Children 43.01% 44.89% 43.49%
Not Working with No children 1.94% 2.14% 2.16%
Not in Labor Force with No Children 37.19% 28.70% 27.37%
1990 FAMILIES by NUMBER OF WORKERS 4,990 42,392 112,694
No Workers 14.44% 10.37% 9.70%
One Worker 26.50% 28.00% 26.03%
Two Workers 49.07% 48.06% 48.77%
Three + Workers 10.00% 13.57% 15.49%
1990 POPULATION by TRANSPORTATION TO WORK 11,902 100,180 258,392
Drive Alone 73.89% 78.08% 78.03%
Car Pool 9.35% 10.83% 11.58%
Public Transportation 3.04% 4.06% 3.60%
Drive Motorcycle 0.48% 0.53% 0.52%
Walked Only 8.02% 2.80% 2.51%
Other Means 1.98% 1.44% 1.55%
Worked at Home 3.23% 2.27% 2.22%
1990 POPULATION by TRAVEL TIME TO WORK 11,902 100,180 258,392
Under 10 Minutes/Work at Home 19.15% 12.71% 12.41%
10 to 29 Minutes 60.97% 63.17% 60.86%
30 to 59 Minutes 17.22% 20.78% 23.20%
60 to 89 Minutes 1.88% 2.40% 2.60%
90+ Minutes 0.79% 0.94% 0.93%
Average Travel Time in Minutes 18 20 21
1990 HOUSEHOLDS by TYPE 9,216 72,996 177,110
Single Male 13.31% 14.27% 12.28%
Single Female 20.99% 16.06% 13.59%
Married Couple 39.21% 40.91% 46.26%
Other Family - Male Head 3.61% 4.99% 5.15%
Other Family - Female Head 9.16% 11.33% 11.17%
Non-Family - Male Head 8.05% 7.50% 7.13%
Non-Family - Female Head 5.67% 4.94% 4.43%
1990 HOUSEHOLDS WITH CHILDREN 1,977 19,995 55,096
Married Couple Family 69.12% 65.76% 69.62%
Other Family - Male Head 7.13% 8.18% 7.39%
Other Family - Female Head 21.55% 24.11% 21.26%
Non-Family 2.20% 1.94% 1.72%
1990 HOUSEHOLD by AGE by POVERTY STATUS 9,128 73,104 177,761
Above Poverty, Under Age 65 67.25% 76.69% 77.99%
Above Poverty, Age 65+ 24.45% 15.74% 14.54%
Below Poverty, Under Age 65 5.94% 5.65% 5.96%
Below Poverty, Age 65+ 2.36% 1.92% 1.50%
1990 HOUSEHOLDS by NUMBER OF VEHICLES 9,270 73,111 177,043
No Vehicles 11.46% 8.70% 7.25%
================================================================================
Prepared on: Dec 15, 2000
(C) 1999 Claritas. All rights reserved. The information above has been
obtained from sources believed reliable. However, CB Richard Ellis Global
Research and Consulting has not verified it and makes no guarantee,
warranty or representation about it. It is your responsibility to
independently verify it.
Radius 1.0 Radius 3.0 Radius 5.0
================================================================================
1 Vehicle 35.36% 35.93% 33.19%
2 Vehicles 35.08% 37.79% 38.85%
3+ Vehicles 18.10% 17.58% 20.71%
Estimated Total Vehicles 15,151 122,663 313,664
1990 HOUSING UNITS by OCCUPANCY STATUS 9,566 76,601 184,810
Occupied 96.35% 95.29% 95.83%
Vacant 3.65% 4.71% 4.17%
1990 VACANT UNITS 349 3,605 7,770
For Rent 52.70% 60.34% 57.95%
For Sale Only 19.34% 11.67% 15.10%
Seasonal 3.01% 3.31% 3.67%
Other 24.96% 24.67% 23.38%
1990 OWNER OCCUPIED PROPERTY VALUES 3,667 25,440 72,589
Under $25,000 0.40% 0.36% 0.37%
$25,000 to $49,999 0.56% 0.60% 0.75%
$50,000 to $74,999 0.45% 0.48% 0.44%
$75,000 to $99,999 1.02% 1.01% 0.99%
$100,000 to $149,999 4.41% 4.55% 4.28%
$150,000 to $199,999 10.19% 11.32% 10.26%
$200,000 to $299,999 52.21% 50.10% 42.55%
$300,000 to $399,999 17.50% 23.04% 28.19%
$400,000 to $499,999 6.49% 5.99% 8.75%
Over $500,000 6.76% 2.54% 3.42%
Median Property Value $263,185.38 $263,231.60 $277,331.00
1990 Rental Units 5,066 42,493 89,731
Median Rent $640.89 $663.29 $687.36
1990 HOUSING UNITS by # OF PERSONS IN UNIT 9,216 72,996 177,110
1 Person Units 34.30% 30.33% 25.87%
2 Person Units 34.61% 33.71% 33.06%
3 Person Units 15.64% 16.56% 17.45%
4 Person Units 9.70% 10.99% 12.78%
5 Person Units 3.58% 4.79% 5.70%
6 Person Units 1.23% 1.89% 2.52%
7+ Person Units 0.94% 1.72% 2.62%
1990 YEAR ROUND UNITS IN STRUCTURE 9,566 76,601 184,810
Single Units Detached 50.81% 39.69% 46.43%
Single Units Attached 4.89% 8.60% 9.05%
Double Units 3.55% 3.30% 3.01%
3 to 9 Units 13.96% 17.46% 14.45%
10 to 19 Units 8.59% 9.62% 7.93%
20 to 49 Units 9.50% 9.92% 7.84%
50+ Units 7.48% 9.55% 7.73%
Mobile Home or Trailer 0.07% 0.67% 2.45%
All Other 1.15% 1.18% 1.11%
Single/Multiple Unit Ratio 1.29 0.97 1.35
================================================================================
Prepared on: Dec 15, 2000
(C) 1999 Claritas. All rights reserved. The information above has been
obtained from sources believed reliable. However, CB Richard Ellis Global
Research and Consulting has not verified it and makes no guarantee,
warranty or representation about it. It is your responsibility to
independently verify it.
Radius 1.0 Radius 3.0 Radius 5.0
================================================================================
1990 HOUSING UNITS by YEAR BUILT 9,270 73,111 177,043
Built 1989 to March 1990 0.18% 0.31% 1.07%
Built 1985 to 1988 4.71% 5.76% 6.50%
Built 1980 to 1984 3.72% 5.11% 5.58%
Built 1970 to 1979 8.46% 19.14% 20.06%
Built 1960 to 1969 18.82% 24.25% 26.54%
Built 1950 to 1959 26.25% 25.18% 23.53%
Built 1940 to 1949 17.03% 9.26% 7.71%
Built 1939 or Earlier 20.83% 10.98% 9.01%
================================================================================
Prepared on: Dec 15, 2000
(C) 1999 Claritas. All rights reserved. The information above has been
obtained from sources believed reliable. However, CB Richard Ellis Global
Research and Consulting has not verified it and makes no guarantee,
warranty or representation about it. It is your responsibility to
independently verify it.
APPENDIX D
CONSENT OF CB RICHARD ELLIS, INC.
We hereby consent to the use of our name and to the description of our
Appraisal, dated December 14, 2000, under the caption "Appraisal" in, and to the
inclusion of such Appraisal as Appendix C to, the Proxy Statement of Prometheus
Income Partners.
Dated: July 18, 2001 CB RICHARD ELLIS, INC.
By: /s/ Elizabeth Champagne
------------------------
3
REVOCABLE PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE GENERAL PARTNER
The undersigned hereby appoints ________________, or any of them, with
full power of substitution, as attorneys, agents and proxies (the "Proxies") to
vote on behalf of the undersigned at the meeting of limited partners of
Prometheus Income Partners to be held at 1:30 p.m., local time, on _______
August 13, 2001, at [location], or any adjournment or postponement of the
meeting:
(1) Proposal to approve the Third Amended and Restated Agreement and
Plan of Merger dated as of May 31, 2001 by and among Prometheus Income Partners,
a California limited partnership, PIP Partners - General, LLC, a California
limited liability company, and PIP Acquisition, LLC, a California limited
liability company. This proposal, together with the merger and all of the
transactions contemplated by the merger agreement, is referred to in the
accompanying Proxy Statement as the "merger proposal." Approval of the merger
proposal will also constitute approval of all of the transactions contemplated
by the merger agreement.
|_|FOR |_|AGAINST |_|ABSTAIN
(2) Proposal to permit Prometheus Development Co. to adjourn the meeting
to permit further solicitation of proxies in the event that there are not
sufficient votes at the time of the meeting to approve the merger proposal. This
proposal is referred to in the accompanying Proxy Statement as the "adjournment
proposal."
|_|FOR |_|AGAINST |_|ABSTAIN
THE GENERAL PARTNER AND THE ACQUIRING PARTIES RECOMMEND A
VOTE FOR THE MERGER PROPOSAL AND FOR THE ADJOURNMENT PROPOSAL
This proxy when properly executed will be voted in the manner directed
in this document by the undersigned limited partner. If no direction is made on
this card, this proxy will be voted FOR the merger proposal and FOR the
adjournment proposal. This proxy also authorizes the proxies to vote at their
discretion on any other matter that may properly come before the meeting or any
adjournment or postponement thereof.
Instructions For Returning Proxy. Please mark, sign, date and return
this proxy promptly using the enclosed postage paid envelope or via facsimile,
to:
MacKenzie Partners, Inc.
156 Fifth Avenue
New York, NY 10010
[Fax]
By:
-----------------------------
Name:
----------------------
By:
-----------------------------
Name:
----------------------
Please sign exactly as name appears hereon. When units are held by joint
tenants, both should sign. When signing as an attorney, executor, administrator,
trustee or guardian, please give full title of the signer. If a corporation,
please sign name by President or other authorized officer. If a partnership,
please sign partnership name by authorized person.
Questions and Information. If you have questions regarding the merger
proposal or need assistance in completing your proxy, you may call:
MacKenzie Partners, Inc.
(800) 322-2885
Please mark address changes or corrections above. For all other
corrections or changes, please contact MacKenzie Partners, Inc. at the number
listed above.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY AS INSTRUCTED
ABOVE.
TABLE OF CONTENTS
Page
----
QUESTIONS AND ANSWERS ABOUT THE TRANSACTION.................................................1
WHO CAN HELP ANSWER YOUR QUESTIONS?........................................................10
SUMMARY 11
Parties to the Transaction.........................................................11
Prometheus Income Partners..................................................11
PIP Partners - General, LLC.................................................12
PIP Acquisition.............................................................13
Effects of the Transaction.........................................................13
Fairness of the Merger.............................................................14
The Meeting........................................................................14
Record Date; Voting Power...................................................15
Quorum; Vote Required.......................................................15
Changing Your Vote..........................................................16
Structure of the Transaction.......................................................18
Conditions to the Transaction......................................................19
Consideration and Financing........................................................20
Proxy Solicitation.................................................................21
Accounting Treatment...............................................................21
Federal Income Tax Consequences............................................................23
Reasons for the Merger.............................................................24
Fairness of the Transaction........................................................27
Positive Factors Considered.................................................29
Negative Factors Considered.................................................32
Alternatives to the Transaction Considered.........................................34
Liquidation.................................................................35
Tender Offer................................................................37
Continued Ownership of Prometheus Income Partners...........................38
THE MEETING................................................................................40
Time, Date and Place...............................................................40
Matters to be Considered...........................................................40
Recommendations of the General Partner and the Acquiring Parties...................41
Record Date; Voting Power..........................................................41
Quorum ............................................................................41
Vote Required......................................................................42
Changing Your Vote.................................................................42
-i-
Solicitation of Proxies............................................................43
List of Limited Partners...........................................................43
THE PARTIES................................................................................44
Prometheus Income Partners.........................................................44
Background..................................................................44
Properties..................................................................46
Construction Defects; Litigation...........................................................46
Recent Tender Offers........................................................48
The Partnership Agreement of Prometheus Income Partners.....................49
Repurchase Rights...........................................................52
Financing...................................................................53
Distributions...............................................................54
Executive Officers..........................................................54
Principal Unitholders.......................................................55
Recent Transactions.........................................................56
PIP Partners - General, LLC........................................................57
PIP Acquisition....................................................................57
THE MERGER.................................................................................57
Effects of the Merger on Prometheus Income Partners................................57
No Dissenters' Rights..............................................................58
Federal Income Tax Consequences....................................................58
Taxable Gain or Loss........................................................59
Timing of Gain or Loss......................................................60
Character of Gain or Loss...................................................60
Passive Activity Losses.....................................................61
Information Reporting, Backup Withholding and FIRPTA........................61
Consequences to a Tax-Exempt Limited Partner................................62
Anticipated Accounting Treatment...................................................62
Regulatory Requirements............................................................63
THE MERGER AGREEMENT.......................................................................63
Parties to the Merger..............................................................63
Structure; Consideration...........................................................63
Calculation of Liquidation Value...................................................63
Closing of the Transaction.........................................................65
-ii-
Consent of Lender..................................................................66
Payment of Merger Consideration....................................................66
Expenses...........................................................................66
Representations and Warranties.....................................................66
Certain Covenants..................................................................67
Conditions.........................................................................67
Termination........................................................................68
APPRAISAL..................................................................................68
2000 Portfolio Appraisal...........................................................68
Summary of Methodology.............................................................68
Income Approach....................................................................70
Conclusion as to Value.............................................................71
Assumptions, Limitations and Qualifications of the 2000 Portfolio Appraisal........71
Compensation and Material Relationships............................................71
ADDITIONAL INFORMATION CONCERNING UNITS....................................................72
Principal Holders of Units.........................................................73
Contracts, Arrangements and Understandings.........................................74
Plans or Proposals.................................................................74
CERTAIN FINANCIAL PROJECTIONS AND VALUATIONS OF THE PARTNERSHIP............................74
RELATED SECURITY HOLDER MATTERS............................................................76
FORWARD-LOOKING STATEMENTS.................................................................76
LIMITED PARTNER PROPOSALS..................................................................77
WHERE YOU CAN FIND MORE INFORMATION........................................................78
ANNUAL REPORT..............................................................................79
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................................79
OTHER MATTERS..............................................................................79
APPENDIX A Second Amended and Restated Agreement and Plan of Merger.....................1
APPENDIX B Second Amended and Restated Limited Partnership Agreement of Prometheus
Income Partners..............................................................1
APPENDIX C Appraisal of CB Richard Ellis, Inc...........................................2
Certification of the Appraisal..............................................................1
APPENDIX D CONSENT OF CB RICHARD ELLIS, INC.............................................3
REVOCABLE PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE GENERAL PARTNER....................1