As filed with the SEC on . Registration No. 33-86780
----------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
Post-Effective Amendment No. 10
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
PRUCO LIFE INSURANCE COMPANY
in respect of
PRUCO LIFE VARIABLE CONTRACT
REAL PROPERTY ACCOUNT
(Exact Name of Registrant)
c/o PRUCO LIFE INSURANCE COMPANY
213 Washington Street
Newark, New Jersey 07102-2992
(800) 778-2255
(Address and telephone number of principal executive offices)
-------------
Thomas C. Castano
Assistant Secretary
Pruco Life Insurance Company
213 Washington Street
Newark, New Jersey 07102-2992
(800) 778-2255
(Name, address, and telephone number of agent for service)
Copy to:
Jeffrey C. Martin
Shea & Gardner
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036
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CROSS REFERENCE SHEET
(as required by Form S-1)
S-1 Item Number and Caption Location
- --------------------------- --------
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Cover
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front Cover
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Prospectus Cover; Summary; Risk Factors
4. Use of Proceeds..................................... Investment Policies; Current Real Estate-Related
Investments; Management's Discussion and Analysis of
Financial Condition and Results of Operations
5. Determination of Offering Price..................... Not Applicable
6. Dilution............................................ Not Applicable
7. Selling Security Holders............................ Not Applicable
8. Plan of Distribution................................ Distribution of the Contracts
9. Description of Securities to be Registered.......... Prospectus Cover; General Information about Pruco Life
Insurance Company, Pruco Life Variable Contract Real
Property Account, The Prudential Variable Contract Real
Property Partnership, and The Investment Manager; The Real
Property Account's Unavailability to Certain Contracts;
Valuation of Contract Owners' Participating Interests;
Charges; Restrictions on Withdrawals; Restrictions on
Contract Owners' Investment in the Real Property Account
10. Interests of Named Experts and Counsel.............. Not Applicable
11. Information With Respect to the
Registrant.......................................... General Information about Pruco Life Insurance Company,
Pruco Life Variable Contract Real Property Account, The
Prudential Variable Contract Real Property Partnership,
and The Investment Manager; Investment Policies; Current
Real Estate-Related Investments; Management's Discussion
and Analysis of Financial Condition and Results of
Operations; Per Share Investment Income and Capital
Changes; Investment Restrictions; Conflicts of Interest;
Valuation of Contract Owners' Participating Interests;
Financial Statements; Litigation; State Regulation;
Federal Income Tax Considerations
12. Disclosure of Commission Position on Indemni-
fication for Securities Act Liabilities............. Not Applicable
PART I
INFORMATION REQUIRED IN PROSPECTUS
PROSPECTUS
May 1, 2003
PRUCO LIFE
VARIABLE CONTRACT
REAL PROPERTY ACCOUNT
This prospectus is attached to two other prospectuses. The first describes
either a variable annuity contract or a variable life insurance contract (the
"Contract") issued by Pruco Life Insurance Company ("Pruco Life," "us," "we," or
"our"), a stock life insurance company that is a wholly-owned subsidiary of The
Prudential Insurance Company of America ("Prudential"). The second prospectus
describes several investment options available under that variable contract
through The Prudential Series Fund, Inc. (the "Series Fund"). The Series Fund is
registered under the Investment Company Act of 1940 as an open-end, diversified
management investment company. The Series Fund consists of separate investment
portfolios that are mutual funds, each with a different investment policy and
objective.
This prospectus describes the Pruco Life Variable Contract Real Property Account
(the "Real Property Account"), an additional available investment option.
Although it is not a mutual fund, in many ways it is like a mutual fund. Instead
of holding a diversified portfolio of securities, such as stocks or bonds, it
consists mainly of a portfolio of commercial and residential real properties.
Pruco Life determines the price of a "share" or, as we call it, a "participating
interest" in this portfolio of properties, just as it does for the other
investment options. It is based upon our best estimate of the fair market value
of the properties and other assets held in this portfolio. The portion of your
"Contract Fund" (the total amount invested under the Contract) that you allocate
to this investment option will change daily in value, up or down, as the fair
market value of these real properties and other assets change.
The risks of investing in real property are different from the risks of
investing in mutual funds. See RISK FACTORS, page 10. Also, your ability to
withdraw or transfer your investment in this option is not as freely available
as it is for the other investment options. See RESTRICTIONS ON WITHDRAWALS, page
17.
Please read this prospectus and keep it for future reference.
The Securities and Exchange Commission ("SEC") maintains a Web site
(http://www.sec.gov) that contains material incorporated by reference and other
information regarding registrants that file electronically with the SEC.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Pruco Life Insurance Company
213 Washington Street
Newark, New Jersey 07102-2992
Telephone: (800) 778-2255
PRPA-1 Ed 5-2003
PROSPECTUS CONTENTS
Page
PER SHARE INVESTMENT INCOME, CAPITAL CHANGES AND SELECTED RATIOS..............1
SUMMARY.......................................................................2
Investment of The Real Property Account Assets.............................2
Investment Objectives......................................................2
Risk Factors...............................................................2
Charges....................................................................3
Availability to Pruco Life Contracts.......................................3
GENERAL INFORMATION ABOUT PRUCO LIFE INSURANCE COMPANY, PRUCO LIFE
VARIABLE CONTRACT REAL PROPERTY ACCOUNT, THE PRUDENTIAL VARIABLE CONTRACT
REAL PROPERTY PARTNERSHIP, AND THE INVESTMENT MANAGER.........................3
Pruco Life Insurance Company...............................................3
Pruco Life Variable Contract Real Property Account.........................4
The Prudential Variable Contract Real Property Partnership.................4
The Investment Manager.....................................................5
INVESTMENT POLICIES...........................................................5
Overview...................................................................5
Investment in Direct Ownership Interests in Real Estate....................5
Investments in Mortgage Loans..............................................6
Investments in Sale-Leasebacks.............................................8
General Investment and Operating Policies..................................8
CURRENT REAL ESTATE-RELATED INVESTMENTS.......................................9
Properties.................................................................9
RISK FACTORS.................................................................10
Liquidity of Investments..................................................10
General Risks of Real Property Investments................................10
Reliance on The Partners and The Investment Manager.......................11
INVESTMENT RESTRICTIONS......................................................12
DIVERSIFICATION REQUIREMENTS.................................................12
CONFLICTS OF INTEREST........................................................12
THE REAL PROPERTY ACCOUNT'S UNAVAILABILITY TO CERTAIN CONTRACTS..............14
VALUATION OF CONTRACT OWNERS' PARTICIPATING INTERESTS........................14
BORROWING BY THE PARTNERSHIP.................................................16
CHARGES......................................................................16
RESTRICTIONS ON WITHDRAWALS..................................................17
RESTRICTIONS ON CONTRACT OWNERS' INVESTMENT IN THE REAL PROPERTY ACCOUNT.....17
FEDERAL INCOME TAX CONSIDERATIONS............................................17
DISTRIBUTION OF THE CONTRACTS................................................18
STATE REGULATION.............................................................18
ADDITIONAL INFORMATION.......................................................18
EXPERTS......................................................................18
LITIGATION...................................................................18
REPORTS TO CONTRACT OWNERS...................................................19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................................19
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................28
FINANCIAL STATEMENTS.........................................................29
FINANCIAL STATEMENTS OF PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT...A1
FINANCIAL STATEMENTS OF THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY
PARTNERSHIP..................................................................B1
PER SHARE INVESTMENT INCOME, CAPITAL CHANGES AND SELECTED RATIOS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following information on per share investment income, capital changes and
selected ratios has been provided for your information. This page should be read
in conjunction with the financial statements and notes thereto of The Prudential
Variable Contract Real Property Partnership included in this prospectus.
01/01/2002 01/01/2001 01/01/2000 01/01/1999 01/01/1998
to to to to to
12/31/2002 12/31/2001 12/31/2000 12/31/1999 12/31/1998
---------- ---------- ---------- ---------- ----------
Revenue from real estate and improvements $ 3.22 $ 2.71 $ 2.32 $ 2.08 $ 2.07
Equity in income of real estate partnership $ 0.03 $ 0.08 $ 0.08 $ 0.01 $ 0.00*
Dividend income from real estate investment trusts $ 0.00* $ 0.24 $ 0.18 $ 0.12 $ 0.06
Interest on short-term investments $ 0.06 $ 0.03 $ 0.13 $ 0.16 $ 0.16
---------- ---------- ---------- ---------- ----------
TOTAL INVESTMENT INCOME $ 3.31 $ 3.06 $ 2.71 $ 2.37 $ 2.29
---------- ---------- ---------- ---------- ----------
Investment Management fee $ 0.30 $ 0.30 $ 0.28 $ 0.26 $ 0.25
Real Estate Taxes $ 0.35 $ 0.30 $ 0.25 $ 0.25 $ 0.20
Administrative expense $ 0.41 $ 0.28 $ 0.25 $ 0.21 $ 0.17
Operation expense $ 0.64 $ 0.60 $ 0.44 $ 0.37 $ 0.34
Interest expense $ 0.24 $ 0.20 $ 0.07 $ 0.01 $ 0.00
Minority interest in consolidated partnership $ 0.04 $ 0.02 $ 0.00* $ 0.00* $ 0.00
---------- ---------- ---------- ---------- ----------
TOTAL INVESTMENT EXPENSES $ 1.98 $ 1.70 $ 1.29 $ 1.10 $ 0.96
---------- ---------- ---------- ---------- ----------
NET INVESTMENT INCOME $ 1.33 $ 1.36 $ 1.42 $ 1.27 $ 1.33
---------- ---------- ---------- ---------- ----------
Net realized gain (loss) on real estate investments
sold or converted $ 0.05 ($ 0.02) $ 0.27 ($ 0.00)* $ 0.26
---------- ---------- ---------- ---------- ----------
Change in unrealized gain (loss) on real estate
investments ($ 1.07) ($ 0.26) $ 0.23 ($ 0.68) $ 0.15
Minority interest in unrealized gain (loss) on
investments $ 0.02 $ 0.00* $ 0.04 ($ 0.00)* $ 0.00
---------- ---------- ---------- ---------- ----------
Net unrealized gain (loss) on real estate investments ($ 1.09) ($ 0.26) $ 0.19 ($ 0.68) $ 0.15
---------- ---------- ---------- ---------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ($ 1.04) ($ 0.28) $ 0.46 ($ 0.68) $ 0.41
========== ========== ========== ========== ==========
Net change in share value $ 0.29 $ 1.08 $ 1.88 $ 0.59 $ 1.74
Share value at beginning of period $ 23.82 $ 22.74 $ 20.86 $ 20.27 $ 8.53
---------- ---------- ---------- ---------- ----------
Share value at end of period $ 24.11 $ 23.82 $ 22.74 $ 20.86 $ 20.27
========== ========== ========== ========== ==========
Ratio of expenses to average net assets(1) 8.34% 7.26% 6.07% 5.33% 4.99%
Ratio of net investment income to average net assets(1) 5.59% 5.93% 6.49% 6.12% 6.97%
Number of shares outstanding at
end of period (000's) 8,193 8,922 9,831 10,472 11,848
All per share calculations are based on weighted average shares outstanding.
Per share information presented herein is shown on a basis consistent with the
financial statements as discussed in Note 2J on page B7.
(1) Average net assets are calculated based on an average of ending monthly net
assets.
*Per Share amount less than $0.01 (rounded)
1 - Real Property
SUMMARY
This Summary provides a brief overview of the more significant aspects of the
Real Property Account. We provide further detail in the subsequent sections of
this prospectus.
The Real Property Account is a separate account of Pruco Life Insurance Company
("Pruco Life") created pursuant to Arizona insurance law. Under that law, the
assets of the Real Property Account are not chargeable with liabilities arising
out of any other business of Pruco Life. Owners of certain variable life
insurance and variable annuity contracts issued by Pruco Life may allocate a
portion of their net premiums or purchase payments, or transfer a portion of
their Contract Fund, to the Real Property Account. Values and benefits under the
Contracts will thereafter reflect the investment experience of the Real Property
Account. Contract owners, not Pruco Life, bear the risks and rewards of the
investment performance of the Real Property Account to the extent of the
Contract owner's Contract Fund invested in the Real Property Account. This
prospectus is attached to and should be read in conjunction with the prospectus
for the Contract you selected.
Investment of The Real Property Account Assets
The Real Property Account assets are invested primarily in income-producing real
estate through The Prudential Variable Contract Real Property Partnership (the
"Partnership") which is a general partnership that was established by Prudential
and two of its wholly-owned subsidiaries, Pruco Life Insurance Company ("Pruco
Life") and Pruco Life Insurance Company of New Jersey ("Pruco Life of New
Jersey"). See The Prudential Variable Contract Real Property Partnership, page
4. Currently Prudential serves as the investment manager of the Partnership.
Prudential acts through Prudential Investment Management, Inc. See The
Investment Manager, page 5. The Partnership invests at least 65% of its assets
in direct ownership interests in:
1. income-producing real estate;
2. participating mortgage loans (mortgages providing for participation
in the revenues generated by, or the appreciation of, the underlying
property, or both) originated for the Partnership; and
3. real property sale-leasebacks negotiated on behalf of the
Partnership.
The large majority of these real estate investments will be in direct ownership
interests in income producing real estate, such as office buildings, shopping
centers, apartments, industrial properties or hotels. The Partnership may also
invest up to 5% of its assets in direct ownership interests in agricultural
land. Approximately 10% of the Partnership's assets will be held in cash or
invested in liquid instruments and securities. The remainder of the
Partnership's assets may be invested in other types of real estate related
investments, including non-participating mortgage loans and real estate
investment trusts.
Investment Objectives
The investment objectives of the Partnership are to:
1. preserve and protect the Partnership's capital;
2. compound income by reinvesting investment cash flow; and
3. over time, increase the income amount through appreciation in the
value of permitted investments and, to a lesser extent, through
mortgage loans and sale-leaseback transactions.
There is no assurance that the Partnership's objectives will be attained. See
INVESTMENT POLICIES, page 5.
Risk Factors
Investment in the Real Property Account, and thereby, participation in the
investment experience of the Partnership, involves significant risks. See RISK
FACTORS, page 10. These include the risk of fluctuating real estate values and
the risk that the appraised or estimated values of the Partnership's real
property investments will not be realized upon their disposition. Many of the
Partnership's real estate investments will not be quickly convertible into cash.
Therefore, the Real Property Account should be viewed as a long-term investment.
See RESTRICTIONS ON WITHDRAWALS, page 17.
Pruco Life and the investment manager have taken steps to ensure that the Real
Property Account and Partnership will be sufficiently liquid to satisfy all
withdrawal or loan requests promptly (within seven days), see Liquidity of
2 - Real Property
Investments, page 10. Prudential's management of the Partnership is subject to
certain conflicts of interest, including the possible acquisition of properties
from Prudential Financial affiliates. See CONFLICTS OF INTEREST, page 12.
Charges
The Partnership pays a daily investment management fee which amounts to 1.25%
per year of the average daily gross assets of the Partnership. The Partnership
also compensates the investment manager for providing certain accounting and
administrative services. See CHARGES, page 16. The portion of your Contract Fund
allocated to the Real Property Account is subject to the same Contract charges
as the portion of your Contract Fund allocated to The Prudential Series Fund,
Inc. (the "Series Fund"). The Series Fund is the underlying funding vehicle for
the other variable investment options available to Contract owners. You should
read the Contract prospectus for a description of those charges.
Availability to Pruco Life Contracts
The Real Property Account is currently available to purchasers of Pruco Life's
Variable Appreciable Life(R) Insurance Contracts, Variable Life Insurance
Contracts, Discovery(R) Life Plus Contracts, and Discovery(R) Plus Contracts. It
is not available on Contracts that are purchased in connection with IRAs,
Section 403(b) annuities, and other tax-qualified plans, that are subject to the
Employee Retirement Income Security Act of 1974 ("ERISA") or to the prohibited
transaction excise tax provisions of the Internal Revenue Code. See THE REAL
PROPERTY ACCOUNT'S UNAVAILABILITY TO CERTAIN CONTRACTS, page 14. For example, a
Variable Appreciable Life Contract owner who elects to invest part of his or her
net premiums in the Pruco Life Variable Appreciable Account, a separate account
of Pruco Life registered as a unit investment trust under the Investment Company
Act of 1940, and part in the Real Property Account, will be subject to the same:
(1) monthly sales charges; (2) risk charges; (3) administrative charges; (4)
insurance charges; and (5) contingent deferred sales charges without regard to
what portion is invested in the Pruco Life Variable Appreciable Account and what
portion is invested in the Real Property Account. The Real Property Account has
established different subaccounts, relating to the different types of variable
Contracts that may participate in the Real Property Account. These subaccounts
provide the mechanism and maintain the records whereby these different Contract
charges are made.
This prospectus may only be offered in jurisdictions in which the offering is
lawful. No person is authorized to make any representations in connection with
this offering other than those contained in this prospectus.
GENERAL INFORMATION ABOUT PRUCO LIFE INSURANCE
COMPANY, PRUCO LIFE VARIABLE CONTRACT REAL
PROPERTY ACCOUNT, THE PRUDENTIAL VARIABLE
CONTRACT REAL PROPERTY PARTNERSHIP, AND THE
INVESTMENT MANAGER
Pruco Life Insurance Company
Pruco Life Insurance Company ("Pruco Life") is a stock life insurance company,
organized in 1971 under the laws of the State of Arizona. It is licensed to sell
life insurance and annuities in the District of Columbia, Guam, and in all
states except New York. These Contracts are not offered in any state in which
the necessary approvals have not been obtained.
Pruco Life is a wholly-owned subsidiary of The Prudential Insurance Company of
America ("Prudential"), a New Jersey stock life insurance company that has been
doing business since 1875. Prudential is an indirect wholly-owned subsidiary of
Prudential Financial, Inc. ("Prudential Financial"), a New Jersey insurance
holding company. As Pruco Life's ultimate parent, Prudential Financial exercises
significant influence over the operations and capital structure of Pruco Life
and Prudential. However, neither Prudential Financial, Prudential, nor any other
related company has any legal responsibility to pay amounts that Pruco Life may
owe under the contract or policy.
Pruco Life's consolidated financial statements appear in either the attached
Contract prospectus or in the statement of additional information for the
Contract prospectus, which is available upon request.
3 - Real Property
Pruco Life Variable Contract Real Property Account
The Pruco Life Variable Contract Real Property Account (the "Real Property
Account") was established on August 27, 1986 under Arizona law as a separate
investment account. The Real Property Account meets the definition of a
"separate account" under the federal securities laws. The Real Property Account
holds assets that are separated from all of Pruco Life's other assets. The Real
Property Account is used only to support the variable benefits payable under the
Contracts that are funded by the real estate investment option.
The Contract obligations to Contract owners and beneficiaries are general
corporate obligations of Pruco Life. Pruco Life is also the legal owner of the
Real Property Account assets. Pruco Life will maintain assets in the Real
Property Account with a total market value at least equal to the amounts
credited under the real estate option to all the Contracts participating in the
Real Property Account. These assets may not be charged with liabilities which
arise from any other business that Pruco Life conducts. In addition to these
assets, the Real Property Account's assets may include funds contributed by
Pruco Life, and reflect any accumulations of the charges Pruco Life makes
against the Real Property Account. See Valuation of Contract Owner's
Participating Interests, page 14.
Pruco Life will bear the risks and rewards of the Real Property Account's
investment experience to the extent of its investment in the Real Property
Account. Pruco Life may withdraw or redeem its investment in the Real Property
Account at any time. We will not make any such redemption if it will have a
materially adverse impact on the Real Property Account. Accumulations of charges
will be withdrawn on a regular basis.
Unlike the other separate accounts funding the Contracts, the Real Property
Account is not registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940 as an investment company. For state law
purposes, the Real Property Account is treated as a part or division of Pruco
Life. Contract owners have no voting rights with respect to the Real Property
Account. The Real Property Account is under the control and management of Pruco
Life. The Board of Directors and officers of Pruco Life are responsible for the
management of the Real Property Account. No salaries of Pruco Life personnel are
paid by the Real Property Account. Information regarding the directors and
officers of Pruco Life is contained in the attached prospectus for the Contract.
The financial statements of the Real Property Account begin on page A1.
The Prudential Variable Contract Real Property Partnership
The assets of the Real Property Account are invested in The Prudential Variable
Contract Real Property Partnership (the "Partnership"). The Partnership, a
general partnership organized under New Jersey law on April 29, 1988, was formed
through an agreement among The Prudential Insurance Company of America, Pruco
Life Insurance Company, and Pruco Life Insurance Company of New Jersey, to
provide a means for assets allocated to the real estate investment option under
certain variable life insurance and variable annuity contracts issued by the
respective companies to be invested in a commingled pool. This was done to
provide greater diversification of investments and lower transaction costs than
would be possible if the assets were separately invested by each company. All
amounts allocated to the Real Property Account are contributed by Pruco Life to
the Partnership. Pruco Life's general partnership interest in the Partnership is
held in the Real Property Account.
The initial contributions to the Partnership were made on April 29, 1988.
Prudential contributed $100,000 in cash to the Partnership; Pruco Life of New
Jersey contributed $100,000 in cash to the Partnership; and Pruco Life
contributed the real estate and other assets held in its real estate separate
account, which had been actively investing in real estate for more than a year.
Those assets had an estimated market value of $91,538,737 on that date. Each
Partner is entitled to its respective proportionate share of all income, gains,
and losses of the Partnership.
The Partnership assets are valued on each business day. The value of each
Partner's interest will fluctuate with the investment performance of the
Partnership. In addition, the Partners' interests are proportionately
readjusted, at the current value, on each day when a Partner makes a
contribution to, or withdrawal from, the Partnership. When you choose to
allocate a portion of your net premiums or purchase payments, or transfer a
portion of your Contract Fund, to the Real Property Account, Pruco Life will
contribute that amount to the Partnership as a capital contribution. It will
correspondingly increase the Real Property Account's interest in the
Partnership. Values and benefits under the Contract will thereafter vary with
the performance of the Partnership's investments. For more information on how
the value of your interest in the Real Property Account and the value of the
Partnership's investments are calculated, see VALUATION OF CONTRACT OWNERS'
PARTICIPATING INTERESTS, page 14.
Contract owners have no voting rights with respect to the Partnership
operations. The financial statements of the Partnership begin on page B1.
4 - Real Property
The Investment Manager
Currently, Prudential Investment Management, Inc. ("PIM") acts as investment
manager of the Partnership. PIMs invests in and manages real estate equities and
mortgages for the general account and separate accounts of Prudential Financial
affiliates, and other third party accounts.
PIM, on behalf of the general account, and separate accounts of Prudential
Financial affiliates, and other third party accounts, is one of the largest real
estate investors in North America. PIM and Prudential Financial affiliates
participate in real estate ventures through public and private partnerships. As
of December 31, 2002, PIM managed $29.5 billion of net domestic real estate
mortgages and equities of which $19.0 billion is in Prudential's general account
and $10.5 billion is in separate accounts and other third party accounts.
Statement value for general account assets is recorded at depreciated cost and
for assets in separate accounts and other third party accounts at market value.
For a discussion of how the Partnership's real estate-related investments are
valued, see VALUATION OF CONTRACT OWNERS' PARTICIPATING INTERESTS, page 14.
PIM has organized its real estate activities into separate business units within
Prudential's Global Asset Management Group. Prudential Real Estate Investors
(PREI) is the unit responsible for the investments of the Real Property
Partnership. PREI's investment staff is responsible for both general account and
third party account real estate investment management activities.
PREI provides investment management services on a domestic basis and also acts
as part of a global team providing these services to institutional investors
worldwide. PREI is headquartered in Parsippany, New Jersey and has 5 field
offices across the United States. As of December 31, 2002, PREI had under
management approximately 30.8 million net rentable square feet of office real
estate, 15.3 million net rentable square feet of industrial real estate, 12.7
million net rentable square feet of retail real estate, 4,797 hotel rooms, and
29,524 multifamily residential units.
Various divisions of Prudential Financial may provide PREI with services that
may be required in connection with the Partnership's investment management
agreement. The mortgage operation currently manages and administers a portfolio
of mortgage loans totaling approximately $36.3 billion. The aforementioned data
does not include TMW assets under management.
INVESTMENT POLICIES
Overview
The Partnership has an investment policy of investing at least 65% of its assets
in direct ownership interests in income-producing real estate and participating
mortgage loans. The largest portion of these real estate investments are direct
ownership interests in income-producing real estate, such as office buildings,
shopping centers, hotels, apartments, or industrial properties. Approximately
10% of the Partnership's assets are generally held in cash or invested in liquid
instruments and securities although the Partners reserve discretion to increase
this amount to meet partnership liquidity requirements. The remainder of the
Partnership's assets are invested in other types of real estate-related
investments, including real estate investment trusts.
Investment in Direct Ownership Interests in Real Estate
Acquisition. The Partnership's principal investment policy involves acquiring
direct ownership interests in existing (including newly constructed)
income-producing real estate, including office buildings, shopping centers,
apartment buildings, industrial properties, and hotels. The Partnership may also
invest up to 5% of its assets in direct ownership interests in agricultural
land. Property acquisitions will generally be carried out by the real estate
acquisition offices in PREI's network of field offices located in Parsippany,
New Jersey, Atlanta, Georgia, Chicago, Illinois and Los Angeles, California. A
field office or an affiliate of Prudential Financial supervises the management
of properties in all of PIM's accounts.
Proposals to acquire properties for the Partnership are usually originated by a
field office. They are reviewed and approved by the Investment Management
Committee of PREI. Depending upon the size of the acquisition and other factors,
a proposed real estate investment may also be submitted for review to the
Investment Committee of the Board of Directors of Prudential.
5 - Real Property
Although percentage limitations on the type and location of properties that may
be acquired by the Partnership have not been established, the Partnership plans
to diversify its investments through the type of property acquired and its
geographic location. The Partnership's investments will be maintained to meet
the Internal Revenue Code diversification requirements. See General Investment
and Operating Policies, page 8.
In order for the Partnership to meet its stated objectives, it will have to
acquire properties that generate more cash than needed to pay its gross
operating expenses. To do this, a substantial portion of the Partnership's
assets will be invested in properties with operating histories that include
established rent and expense schedules. However, the Partnership may also
acquire recently constructed properties that may be subject to agreements with
sellers providing for certain minimum levels of income. Upon the expiration of
or default under these agreements, there is no assurance that the Partnership
will maintain the level of operating income necessary to produce the return it
was previously experiencing. The Partnership may purchase real property from
Prudential Financial or its affiliates under certain conditions. See CONFLICTS
OF INTEREST, page 12.
The property acquired by the Partnership is usually real estate which is ready
for use. Accordingly, the Partnership is not usually subject to the development
or construction risks inherent in the purchase of unimproved real estate. From
time to time, however, the Partnership may invest in a developmental real estate
project that is consistent with the Partnership's objectives. The Partnership
will then be subject to those risks.
The Partnership will often own the entire fee interest in an acquired property,
but it may also hold other direct ownership interests. These include, but are
not limited to, partnership interests, limited liability company interests,
leaseholds, and tenancies in common.
Property Management and Leasing Services. The Partnership usually retains a
management company operating in the area of a property to perform local property
management services. A field office or other affiliate of Prudential Financial
will usually: (1) supervise and monitor the performance of the local management
company; (2) determine and establish the required accounting information to be
supplied; (3) periodically inspect the property; (4) review and approve property
operating budgets; and (5) review actual operations to ensure compliance with
budgets. In addition to day-to-day management of the property, the local
management company will have responsibility for: (1) supervision of any on-site
personnel; (2) negotiation of maintenance and service contracts; (3) major
repair advice; (4) replacements and capital improvements; (5) the review of
market conditions to recommend rent schedule changes; and (6) creation of
marketing and advertising programs to obtain and maintain good occupancy rates
by responsible tenants. The local management company fees will reduce the cash
flow from the property to the Partnership.
The Partnership usually retains a leasing company to perform leasing services on
any property with actual or projected vacancies. The leasing company will
coordinate with the property management company to provide marketing and leasing
services for the property. When the property management company is qualified to
handle leasing, it may also be hired to provide leasing services. Leasing
commissions and expenses will reduce the cash flow from the property to the
Partnership.
PREI may, on behalf of the Partnership, hire a Prudential Financial affiliate to
perform property management or leasing services. The affiliate's services must
be provided on terms competitive with unaffiliated entities performing similar
services in the same geographic area. See CONFLICTS OF INTEREST, page 12.
Annually, the field office which oversees the management of each property owned
by the Partnership will, together with the local property management firm,
develop a business plan and budget for each property. It will consider, among
other things, the projected rollover of individual leases, necessary capital
expenditures and any expansion or modification of the use of the property. The
approval of an officer of PREI is required. The field office will also
periodically report the operating performance of the property to PREI.
Investments in Mortgage Loans
Types of Mortgage Loans
The Partnership is authorized to invest in mortgage loans, including
conventional mortgage loans that may pay fixed or variable rates of interest and
mortgage loans that have a "participation" (as defined below). The Partnership
will not make mortgage loans to Prudential Financial affiliates.
The Partnership intends to give mortgage loans on: (1) commercial properties
(such as office buildings, shopping centers, hotels, industrial properties, and
office showrooms); (2) agricultural properties; and (3) residential properties
(such as garden apartment complexes and high-rise apartment buildings). These
loans are usually secured by properties with income-producing potential based on
historical or projected data. Usually, they are not personal obligations of the
borrower and are not insured or guaranteed.
6 - Real Property
1. First Mortgage Loans. The Partnership will primarily make first mortgage
loans secured by mortgages on existing income-producing property. These loans
may provide for interest-only payments and a balloon payment at maturity.
2. Wraparound Mortgage Loans. The Partnership also may make wraparound mortgage
loans on income-producing properties which are already mortgaged to unaffiliated
entities. A wraparound mortgage loan is a mortgage with a principal amount equal
to the outstanding balance of the prior existing mortgage plus the amount to be
advanced by the lender under the wraparound mortgage loan, thereby providing the
property owner with additional funds without disturbing the existing loan. The
terms of wraparound mortgage loans made by the Partnership require the borrower
to make all principal and interest payments on the underlying loan to the
Partnership, which will then pay the holder of the prior loan. Because the
existing first mortgage loan is preserved, the lien of the wraparound mortgage
loan is junior to it. The Partnership will make wraparound mortgage loans only
in states where local applicable foreclosure laws permit a lender, in the event
of the borrower's default, to obtain possession of the property which secures
the loan.
3. Junior Mortgage Loans. The Partnership may also invest in other junior
mortgage loans. Junior mortgage loans will be secured by mortgages which are
subordinate to one or more prior liens on the real property. They will
generally, but not in all cases, provide for repayment in full prior to the end
of the amortization period of the senior mortgages. Recourse on such loans will
include the real property encumbered by the Partnership's mortgage and may also
include other collateral or personal guarantees by the borrower.
The Partnership will generally make junior or wraparound mortgage loans only if
the senior mortgage, when combined with the amount of the Partnership's mortgage
loan, would not exceed the maximum amount which the Partnership would be willing
to commit to a first mortgage loan and only under such circumstances and on such
property as to which the Partnership would otherwise make a first mortgage loan.
4. Participations. The Partnership may make mortgage loans which, in addition to
charging a base rate of interest, will include provisions permitting the
Partnership to participate (a "participation") in the economic benefits of the
underlying property. The Partnership would receive a percentage of: (1) the
gross or net revenues from the property operations; and/or (2) the increase in
the property value realized by the borrower, such as through sale or refinancing
of the property. These arrangements may also grant the Partnership an option to
acquire the property or an undivided interest in the property securing the loan.
When the Partnership negotiates the right to receive additional interest in the
form of a percentage of the gross revenues or otherwise, the fixed cash return
to the Partnership from that investment will generally be less than would
otherwise be the case. It is expected that the Partnership will be entitled to
percentage participations when the gross or net revenues from the property
operations exceed a certain base amount. This base amount may be adjusted if
real estate taxes or similar charges are increased. The form and extent of the
additional interest that the Partnership receives will vary with each
transaction depending on: (1) the equity investment of the owner or developer of
the property; (2) other financing or credit obtained by the owner or developer;
(3) the fixed base interest rate on the mortgage loan by the Partnership; (4)
any other security arrangement; (5) the cash flow and pro forma cash flow from
the property; and (6) market conditions.
The Partnership intends to use this additional interest as a hedge against
inflation. It assumes that as prices increase in the economy, the rental prices
on properties, such as shopping centers or office buildings, will increase and
there should be a corresponding increase in the property value. There is no
assurance that additional interest or increased property values will be
received. In that event, the Partnership will be entitled to receive only the
fixed portion of its return.
Standards for Mortgage Loan Investments
In making mortgage loans, the investment manager will consider relevant real
property and financial factors, including: (1) the location, condition, and use
of the underlying property; (2) its operating history; (3) its future
income-producing capacity; and (4) the quality, experience, and creditworthiness
of the unaffiliated borrower.
Before the Partnership makes a mortgage loan, the investment manager analyzes
the fair market value of the underlying real estate. In general, the amount of
each mortgage loan made by the Partnership will not exceed, when added to the
amount of any existing indebtedness, 80% of the estimated or appraised value of
the property mortgaged.
Dealing With Outstanding Loans
The Partnership may sell its mortgage loans prior to maturity if it is deemed
advisable by the investment manager and consistent with the Partnership's
investment objectives. The investment manager may also: (1) extend the maturity
of any mortgage loan made by the Partnership; (2) consent to a sale of the
property subject to a mortgage loan or finance the purchase of a property by
making a new mortgage loan in connection with the sale of a property (either
with or without requiring the repayment of the mortgage loan); (3) renegotiate
the terms of a mortgage loan; and (4) otherwise deal with the mortgage loans of
the Partnership.
7 - Real Property
Investments in Sale-Leasebacks
A portion of the Partnership's investments may consist of real property
sale-leaseback transactions ("leasebacks"). In this type of transaction, the
Partnership will purchase land and income-producing improvements on the land and
simultaneously lease the land and improvements, generally to the seller, under a
long-term lease. Leasebacks may be for very long periods and may provide for
increasing payments from the lessee.
Under the terms of the leaseback, the tenant will operate, or provide for the
operation of, the property and generally be responsible for the payment of all
costs, including: (1) taxes; (2) mortgage debt service; (3) maintenance and
repair of the improvements; and (4) insurance. In some cases, the Partnership
may also grant the lessee an option to acquire the land and improvements from
the Partnership after a period of years. The option exercise price would be
based on the fair market value of the property, as encumbered by the lease, the
increase in the gross revenues from the property or other objective criteria
reflecting the increased value of the property.
In some leaseback transactions, the Partnership may only purchase the land under
an income-producing building and lease the land to the building owner. In such
cases, the Partnership may seek, in addition to base rents in its leasebacks,
participations in the gross revenues from the building in a form such as a
percentage of the gross revenues of the lessee above a base amount (which may be
adjusted if real property taxes increase or for other events). The Partnership
may invest in leasebacks which are subordinate to other interests in the land,
buildings, and improvements, such as a first mortgage, other mortgage, or lien.
In those situations, the Partnership's leaseback interest will be subject to
greater risks.
The Partnership will only acquire a property for a leaseback transaction if the
purchase price is equal to not more than 100% of the estimated or appraised
property value. The Partnership may dispose of its leasebacks when deemed
advisable by the investment manager and consistent with the Partnership's
investment objectives.
General Investment and Operating Policies
The Partnership does not intend to invest in any direct ownership interests in
properties, mortgage loans or leasebacks in order to make short-term profits
from their sale, although in exceptional cases, the investment manager may
decide to do so in the best interests of the Partnership. The Partnership may
dispose of its investments whenever necessary to meet its cash requirements or
when it is deemed to be desirable by the investment manager because of market
conditions or otherwise. The Partnership will reinvest any proceeds from the
disposition of assets (and any cash flow from operations) which are not
necessary for the Partnership's operations and which are not withdrawn by the
Partners in order to make distributions to investors pursuant to the variable
contracts issued by the Partners, or to Prudential to return its equity
interests pursuant to this prospectus. The proceeds will be reinvested in
investments consistent with the Partnership's investment objectives and
policies.
In making investments in properties, mortgage loans, leasebacks or other real
estate investments, the Partnership will rely on the investment manager's
analysis of the investment and will not receive an independent appraisal prior
to acquisition. The Partnership expects, however, that all the properties it
owns, and most mortgage loans it holds, will be appraised or valued annually by
an independent appraiser who is a member of a nationally recognized society of
appraisers. Each appraisal will be maintained in the Partnership records for at
least five years. It should be noted that appraised values are opinions and, as
such, may not represent the true worth or realizable value of the property being
appraised.
The Partnership usually purchases properties on an unleveraged basis. The
properties acquired will typically be free and clear of mortgage debt
immediately after their acquisition. The Partnership may, however, acquire
properties subject to existing mortgage loans. In addition, the Partnership may
mortgage or acquire properties partly with the proceeds of purchase money
mortgage loans, up to 80% of the property value. Although this is not usually
done, the Partnership may do so if the investment manager decides that it is
consistent with its investment objectives. When the Partnership mortgages its
properties, it bears the expense of mortgage payments. See BORROWING BY THE
PARTNERSHIP, page 16.
The Partnership may also invest a portion of its assets in non-participating
mortgage loans, real estate limited partnerships, limited liability companies,
real estate investment trusts, and other vehicles whose underlying investment is
in real estate.
The Partnership's investments will be maintained in order to meet the
diversification requirements set forth in regulations under the Internal Revenue
Code (the "Code") relating to the investments of variable life insurance and
variable annuity separate accounts. In order to meet the diversification
requirements under the regulations, the Partnership will meet the following
test: (1) no more than 55% of the assets will be invested in any one investment;
(2) no more than 70% of the assets will be invested in any two investments; (3)
no more than 80% of the assets will be
8 - Real Property
invested in any three investments; and (4) no more than 90% of the assets will
be invested in any four investments. All interests in the same real property
project are treated as a single investment. The Partnership must meet the above
test within 30 days of the end of each calendar quarter. To comply with the
diversification requirements of the State of Arizona, the Partnership will limit
additional investments in any one parcel or related parcels to an amount not
exceeding 10% of Partnership's gross assets, as of the prior fiscal year end.
In managing the assets of the Partnership, the investment manager will use its
discretion in determining whether to foreclose on defaulting borrowers or to
evict defaulting tenants. The investment manager will decide which course of
action is in the best interests of the Partnership in maintaining the value of
the investment.
Property management services are usually required for the Partnership's
investments in properties which are owned and operated by the Partnership, but
usually will not be needed for mortgage loans owned by the Partnership, except
for mortgage servicing. It is possible, however, that these services will be
necessary or desirable in exercising default remedies under a foreclosure on a
mortgage loan. The investment manager may engage, on behalf of the Partnership,
Prudential Financial affiliated or unaffiliated entities to provide these
additional services to the Partnership. The investment manager may engage
Prudential Financial affiliates to provide property management, property
development services, loan servicing or other services if and only if the fees
paid to an affiliate do not exceed the amount that would be paid to an
independent party for similar services rendered in the same geographic area. See
CONFLICTS OF INTEREST, page 12.
The investment manager will manage the Partnership so that the Real Property
Account will not be subject to registration under the Investment Company Act of
1940. This requires monitoring the proportion of the Partnership's assets to be
placed in various investments.
CURRENT REAL ESTATE-RELATED INVESTMENTS
The current principal real estate-related investments held by the Partnership
are described below. Many of these investments were originated by, and
previously held in, The Prudential Real Property Account of Pruco Life Insurance
Company (the "Pruco Life Account"), a separate account established to fund the
real estate investment option under variable contracts issued by Pruco Life.
Prior to the formation of the Partnership, the Pruco Life Account followed the
same investment policies as those followed by the Partnership. Pruco Life
contributed the assets held in the Pruco Life Account to the Partnership as its
initial capital contribution to the Partnership.
Properties
The Partnership owns the following properties as of December 31, 2002.
1. Office Properties
The Partnership owns office properties in Lisle and Oakbrook Terrace,
Illinois; Brentwood, Tennessee; and Beaverton, Oregon. Total square
footage owned is approximately 482,000 of which 57% or 273,000 square feet
are leased between 1 and 10 years. The Partnership's Morristown, New
Jersey property, which had approximately 85,000 square feet, was sold on
October 26, 2000.
2. Apartment Complexes
The Partnership owns apartment complexes in Atlanta, Georgia and Raleigh,
North Carolina. There are a total of 490 apartment units available of
which 89% or 435 units are leased. Leases range from month to month to one
year. In addition, on September 17, 1999, the Partnership invested in an
apartment complex located in Jacksonville, FL. This joint venture
investment has a total of 458 units available of which 411 units or 90%
are occupied. Leases range from month-to-month to one year. Also, on
February 15, 2001, the Partnership invested in four apartment complexes
located in Gresham/Salem, OR. This joint venture investment has a total of
492 units available of which 452 units or 92% are occupied. Leases range
from month-to-month to one year.
3. Retail Property
The Partnership owns a shopping center in Roswell, Georgia. The property
is located approximately 22 miles north of downtown Atlanta on a 30 acre
site. The square footage is approximately 316,000 of which 93% or 294,000
square feet is leased between 1 and 10 years. On September 30, 1999 the
Partnership invested in a retail portfolio located in the Kansas City, MO
and KS areas. This joint venture investment has approximately 503,000 of
net rentable square feet of which 87% or 437,000 square feet is leased
between 1 and 20 years. On May 17, 2001, the Partnership invested in a
retail center located in the Hampton, VA. This joint venture investment
has approximately 175,000 of net rentable square feet of which 100% is
leased between 1 and 20 years. On November 27, 2002, the Partnership
invested in a retail center located in the Ocean City, MD. This joint
venture investment has approximately 162,000 of net rentable square feet
of which 99% or 160,000 square feet is leased between 1 and 20 years.
9 - Real Property
4. Industrial Properties
The Partnership owns warehouses and distribution centers in Aurora,
Colorado and Salt Lake City, Utah. Total square footage owned is
approximately 460,000 of which 76% or 350,000 square feet are leased
between 1 and 10 years. The Partnership's Bolingbrook, IL property, which
had approximately 225,000 square feet, was sold on September 12, 2002.
5. Investment in Real Estate Trust
The Partnership liquidated its entire investment in REIT shares during
December 2001.
RISK FACTORS
There are certain risk factors that you should consider before allocating a
portion of your net premiums or purchase payments, or transferring a portion of
your Contract Fund, to the Real Property Account. These include valuation risks,
(see VALUATION OF CONTRACT OWNERS' PARTICIPATING INTERESTS, page 14), certain
conflicts of interest, (see CONFLICTS OF INTEREST, page 12), as well as the
following risks:
Liquidity of Investments
Because the Real Property Account will, through the Partnership, invest
primarily in real estate, its assets will not be as liquid as the investments
generally made by separate accounts of life insurance companies funding variable
life insurance and variable annuity contracts. The Partnership will, however,
hold approximately 10% of its assets in cash and invested in liquid securities.
The primary purposes for such investments are to meet the expenses involved in
the operation of the Partnership and to allow it to have sufficient liquid
assets to meet any requests for withdrawals from the Real Property Account. Such
withdrawals would be made in order to meet requested or required payments under
the Contracts. The Partnership may also borrow funds to meet liquidity needs.
See BORROWING BY THE PARTNERSHIP, page 16.
We have taken steps to ensure that the Partnership will be liquid enough to meet
all anticipated withdrawals by the Partners to meet the separate accounts'
liquidity requirements. It is possible that the Partnership may need to dispose
of a real property or mortgage loan investment promptly in order to meet such
withdrawal requests.
General Risks of Real Property Investments
By participating in the Real Property Account and thereby in the investment
performance of the Partnership, you will be subject to many of the risks of real
property investments. These include:
1. Risks of Ownership of Real Properties. The Partnership will be subject to the
risks inherent in the ownership of real property such as fluctuations in
occupancy rates and operating expenses and variations in rental schedules. It
may be adversely affected by general and local economic conditions, the supply
of and demand for properties of the type in which the Partnership invests,
zoning laws, and real property tax rates. Operation of property in which the
Partnership invests will primarily involve rental of that property to tenants.
The financial failure of a tenant resulting in the termination of their lease
might cause a reduction in the cash flow to the Partnership. If a lease is
terminated, there is no assurance that the Partnership will be able to find a
new tenant for the property on terms as favorable to the Partnership as those
from the prior tenant. Investments in hotels are subject to additional risk from
the daily turnover and fluctuating occupancy rates of hotel rooms and the
absence of long-term tenants.
The Partnership's properties will also be subject to the risk of loss due to
certain types of property damage (such as from nuclear power plant accidents and
wars) which are either uninsurable or not economically insurable.
2. Risks of Mortgage Loan Investments. The Partnership's mortgage loan
investments will be subject to the risk of default by the borrowers. In this
event the Partnership would have the added responsibility of foreclosing on or
pursuing other remedies on the underlying properties to protect the value of its
mortgage loans. A borrower's ability to meet its mortgage loan payments will be
dependent upon the risks generally inherent to the ownership of real property.
Mortgage loans made by the Partnership will generally not be personal
obligations of the borrowers. The Partnership will only rely on the value of the
underlying property for its security. Mechanics', materialmen's, government, and
other liens may have or obtain priority over the Partnership's security interest
in the property.
In addition, the Partnership's mortgage loan investments will be subject to
prepayment risks. If the terms of the mortgage loans permit, mortgagors may
prepay the loans, thus possibly changing the Partnership's return.
10 - Real Property
Junior mortgage loans (including wraparound mortgage loans) will be subject to
greater risk than first mortgage loans, since they will be subordinate to liens
of senior mortgagees. In the event a default occurs on a senior mortgage, the
Partnership may be required to make payments or take other actions to cure the
default (if it has the right to do so) in order to prevent foreclosure on the
senior mortgage and possible loss of all or portions of the Partnership's
investment. "Due on sale" clauses included in some senior mortgages,
accelerating the amount due under the senior mortgage in the case of sale of the
property, may be applied to the sale of the property upon foreclosure by the
Partnership of its junior mortgage loan.
The risk of lending on real estate increases as the proportion which the amount
of the mortgage loan bears to the fair market value of the real estate
increases. The Partnership usually does not make mortgage loans of over 80% of
the estimated or appraised value of the property that secures the loan. There
can be no assurance, that in the event of a default, the Partnership will
realize an amount equal to the estimated or appraised value of the property on
which a mortgage loan was made.
Mortgage loans made by the Partnership may be subject to state usury laws. These
laws impose limits on interest charges and possible penalties for violation of
those limits, including restitution of excess interest, unenforceability of
debt, and treble damages. The Partnership does not intend to make mortgage loans
at usurious rates of interest. Uncertainties in determining the legality of
interest rates and other borrowing charges under some statutes could result in
inadvertent violations, in which case the Partnership could incur the penalties
mentioned above.
3. Risks with Participations. The Partnership may seek to invest in mortgage
loans and leasebacks with participations, which will provide the Partnership
with both fixed interest and additional interest based upon gross revenues, sale
proceeds, and/or other variable amounts. If the interest income received by the
Partnership is based, in part, on a percentage of the gross revenues or sale
proceeds of the underlying property, the Partnership's income will depend on the
success in the leasing of the underlying property, the management and operation
of such property by the borrower or lessee and upon the market value of the
property upon ultimate disposition. If the Partnership negotiates a mortgage
loan with a lower fixed interest rate and an additional percentage of the gross
revenues or eventual sale proceeds of the underlying property, and the
underlying property fails to generate increased revenues or to appreciate, the
Partnership will have foregone a potentially greater fixed return without
receiving the benefit of appreciation. State laws may limit participations. In
the event of the borrower's bankruptcy, it is possible that as a result of the
Partnership's interest in the gross revenues or sale proceeds, a court could
treat the Partnership as a partner or joint venturer with the borrower, and the
Partnership could lose the priority its security interest would have been given,
or be liable for the borrower's debts. The Partnership will structure its
participations to avoid being characterized as a partner or joint venturer with
the borrower.
4. Risks with Sale-Leaseback Transactions. Leaseback transactions typically
involve the acquisition of land and improvements thereon and the leaseback of
such land and improvements to the seller or another party. The value of the land
and improvements will depend, in large part, on the performance and financial
stability of the lessee and its tenants, if any. The tenants' leases may have
shorter terms than the leaseback. Therefore, the lessee's future ability to meet
payment obligations to the Partnership will depend on its ability to obtain
renewals of such leases or new leases upon satisfactory terms and the ability of
the tenants to meet their rental payments to the lessee.
PREI investigates the stability and creditworthiness of lessees in all
commercial properties it may acquire, including leaseback transactions. However,
a lessee in a leaseback transaction may have few, if any, assets. The
Partnership will therefore rely for its security on the value of the land and
improvements. When the Partnership's leaseback interest is subordinate to other
interests in the land or improvements, such as a first mortgage or other lien,
the Partnership's leaseback will be subject to greater risk. A default by a
lessee or other premature termination of the leaseback may result in the
Partnership being unable to recover its investment unless the property is sold
or leased on favorable terms. The ability of the lessee to meet its obligations
under the leaseback, and the value of a property, may be affected by a number of
factors inherent in the ownership of real property which are described above.
Furthermore, the long-term nature of a leaseback may, in the future, result in
the Partnership receiving lower average annual rentals. However, this risk may
be lessened if the Partnership obtains participations in connection with its
leasebacks.
Reliance on The Partners and The Investment Manager
You do not have a vote in determining the policies of the Partnership or the
Real Property Account. You also have no right or power to take part in the
management of the Partnership or the Real Property Account. The investment
manager alone, subject to the supervision of the Partners, will make all
decisions with respect to the management of the Partnership, including the
determination as to what properties to acquire, subject to the investment
policies and restrictions. Although the Partners have the right to replace the
investment manager, it should be noted that Prudential, Pruco Life, Pruco Life
of New Jersey, and the investment manager are wholly-owned subsidiaries of
Prudential Financial.
11 - Real Property
The Partnership will compete in the acquisition of its investments with many
other individuals and entities engaged in real estate activities, including the
investment manager and its affiliates. See CONFLICTS OF INTEREST, page 12. There
may be intense competition in obtaining properties or mortgages in which the
Partnership intends to invest. Competition may result in increased costs of
suitable investments.
Since the Partnership will continuously look for new investments, you will not
be able to evaluate the economic merit of many of the investments which may be
acquired by the Partnership. You must depend upon the ability of the investment
manager to select investments.
INVESTMENT RESTRICTIONS
The Partnership has adopted certain restrictions relating to its investment
activities. These restrictions may be changed, if the law permits, by the
Partners. Pursuant to these restrictions, the Partnership will not:
1. Make any investments not related to real estate, other than liquid
instruments and securities.
2. Engage in underwriting of securities issued by others.
3. Invest in securities issued by any investment company.
4. Sell securities short.
5. Purchase or sell oil, gas, or other mineral exploration or
development programs.
6. Make loans to the Partners, any of their affiliates, or any
investment program sponsored by such parties.
7. Enter into leaseback transactions in which the lessee is Prudential,
Pruco Life, Pruco Life of New Jersey, their affiliates, or any
investment program sponsored by such parties.
8. Borrow more than 33"% (pursuant to California state requirements) of
the value of the assets of the Partnership (based upon periodic
valuations and appraisals). See VALUATION OF CONTRACT OWNERS'
PARTICIPATING INTERESTS, page 14.
DIVERSIFICATION REQUIREMENTS
The Partnership's investments are maintained so as to meet the diversification
requirements set forth in Treasury Regulations issued pursuant to Section 817(h)
of the Internal Revenue Code relating to the investments of variable life
insurance and variable annuity separate accounts. Section 817(h) requires, among
other things, that the partnership will have no more than 55% of the assets
invested in any one investment, no more than 70% of the assets will be invested
in any two investments, no more than 80% of the assets will be invested in any
three investments, and no more than 90% of the assets will be invested in any
four investments. To comply with requirements of the State of Arizona, the
Partnership will limit additional investments in any one parcel or related
parcels to an amount not exceeding 10% of the Partnership's gross assets as of
the prior fiscal year.
CONFLICTS OF INTEREST
The investment manager, will be subject to various conflicts of interest in
managing the Partnership. PIM invests in real estate equities and mortgages for
the general account of Prudential Financial affiliates and for third parties,
including through separate accounts established for the benefit of qualified
pension and profit-sharing plans. PIM also manages, or advises in the management
of, real estate equities and mortgages owned by other persons. In addition,
affiliates of Prudential Financial are general partners in publicly offered
limited partnerships that invest in real estate equities and mortgage loans.
Prudential Financial and its affiliates may engage in business activities which
will be competitive with the Partnership. Moreover, the Partnership may purchase
properties from Prudential Financial or its affiliates.
The conflicts involved in managing the Partnership include:
1. Lack of Independent Negotiations between the Partnership and The Investment
Manager. All agreements and arrangements relating to compensation between the
Partnership and the investment manager, or any affiliate of Prudential Financial
will not be the result of arm's-length negotiations.
12 - Real Property
2. Competition by the Partnership with Prudential Financial's Affiliates for
Acquisition and Disposition of Investments. Prudential Financial affiliates are
involved in numerous real estate investment activities for their general
account, their separate accounts, and other entities. They may involve
investment policies comparable to the Partnership's and may compete with the
Partnership for the acquisition and disposition of investments. Moreover,
additional accounts or affiliated entities may be formed in the future with
investment objectives similar to those of the Partnership. In short, existing or
future real estate investment accounts or entities managed or advised by
Prudential Financial affiliates may have the same management as the Partnership
and may be in competition with the Partnership regarding real property
investments, mortgage loan investments, leasebacks, and the management and sale
of such investments. Prudential Financial affiliates are not obligated to
present to the Partnership any particular investment opportunity, regardless of
whether the opportunity would be suitable for investment by the Partnership.
Prudential Financial affiliates have, however, adopted procedures to distinguish
between equity investments available for the Partnership as opposed to the other
programs and entities described above. If investment accounts or entities
managed by Prudential Financial affiliates have investment objectives and
policies similar to the Partnership and are in the market to acquire properties
or make investments at the same time as the Partnership, the following
procedures will be followed to resolve any conflict of interest. The Investment
Allocation Procedure ("IAP") has been established to provide a reasonable and
fair procedure for allocating real estate investments among the several accounts
managed by Prudential Real Estate Investors ("PREI"). The IAP is administered by
an Allocation Committee composed of the Managing Directors, Portfolio
Management. Allocation decisions are made by vote of the Allocation Committee,
and are approved by the Chief Executive Officer of PREI ("CEO"). Sufficient
information on each investment opportunity is distributed to all portfolio
managers, who each indicate to the Allocation Committee their account's interest
in the opportunity. Based on such expressions of interest, the Allocation
Committee allocates the investment opportunity to an account (and may also
determine a back-up account or accounts to receive the allocation in the event
the account, which is first allocated the opportunity, fails to pursue the
investment for any reason) after giving appropriate consideration to the
following factors and with the goal of providing each account a fair allotment
of investment opportunities: (1) the investment opportunity's conformity with an
account's investment criteria and objectives (including property type, size and
location, diversification, anticipated returns, investment structure, etc.); (2)
the amount of funds available for investment (in total and by property type) by
an account; (3) the length of time such funds (in total and by property type)
have been available for investment; (4) any limitations or restrictions upon the
availability of funds for investment; (5) the absolute and relative (to amount
of funds available) amount of funds invested and committed for the account; (6)
whether funds available for investment are discretionary or non-discretionary,
particularly in relation to the timing of the investment opportunity; (7) an
account's prior dealings or investments with the seller, developer, lender or
other counterparty; and (8) other factors which the Allocation Committee feel
should be considered in fairness to all accounts participating in the IAP.
If an account which has been allocated an investment opportunity does not
proceed with the acquisition, and either (i) no back-up account has been
determined by the Allocation Committee, or (ii) all accounts which were deemed
back-up accounts do not proceed with the acquisition, the opportunity may be
reallocated to another account by the Allocation Committee. If an investment
opportunity is appropriate for more than one account, the Allocation Committee
may (subject to the CEO's approval) permit the sharing of the investment among
accounts which permit such sharing. Such division of the investment opportunity
may be accomplished by separating properties (in a multi-property investment),
by co-investment, or otherwise.
3. Competition with the Partnership from Affiliates for the Time and Services of
Common Officers, Directors, and Management Personnel. As noted above, PIM and
Prudential Financial affiliates are involved in numerous real estate investment
activities. Accordingly, many of the personnel of PIM and Prudential Financial
affiliates who will be involved in performing services for the Partnership have
competing demands on their time. Conflicts of interest may arise with respect to
allocating time among such entities and the Partnership. The directors and
officers of Prudential Financial and affiliates will determine how much time
will be devoted to the Partnership affairs. Prudential Financial believes it has
sufficient personnel to meet its responsibilities to all entities to which it is
affiliated.
4. Competitive Properties. Some properties of affiliates may be competitive with
Partnership properties. Among other things, the properties could be in
competition with the Partnership's properties for prospective tenants.
5. Lessee Position. It is possible that Prudential Financial or its affiliates
may be a lessee in one or more of the properties owned by the Partnership. The
terms of such a lease will be competitive with leases with non-affiliated third
parties. The Partnership limits the amount of space that an affiliate of
Prudential may rent in a property owned by the Partnership.
6. Use of Affiliates to Perform Additional Services for the Partnership. The
Partnership may engage Prudential Financial affiliates to provide additional
services to the Partnership, such as real estate brokerage, mortgage servicing,
property management, leasing, property development, and other real
estate-related services. The Partnership may utilize the services of such
affiliates and pay their fees, as long as the fees paid to an affiliate do not
exceed the amount that would be paid to an independent party for similar
services rendered in the same geographic area.
13 - Real Property
7. Joint Ventures with Affiliates. The Partnership may enter into investments
through joint ventures with Prudential Financial, its affiliates, or investment
programs they sponsor. The Partnership may enter into such a joint venture
investment with an affiliate only if the following conditions are met: (1) the
affiliate must have investment objectives substantially identical to those of
the Partnership; (2) there must be no duplicative property management fee,
mortgage servicing fee or other fees; (3) the compensation payable to the
sponsor of the affiliate must be no greater than that payable to the
Partnership's investment manager; (4) the Partnership must have a right of first
refusal to buy if such affiliate wishes to sell the property held in the joint
venture; and (5) the investment of the Partnership and the affiliate in the
joint venture must be made on the same terms and conditions (although not the
same percentage). In connection with such an investment, both affiliated parties
would be required to approve any decision concerning the investment. Thus, an
impasse may result in the event the affiliated joint venture partners disagree.
However, in the event of a disagreement regarding a proposed sale or other
disposition of the investment, the party not desiring to sell would have a right
of first refusal to purchase the affiliated joint venture partner's interest in
the investment. If this happens, it is possible that in the future the joint
venture partners would no longer be affiliated. In the event of a proposed sale
initiated by the joint venture partner, the Partnership would also have a right
of first refusal to purchase the joint venture partner's interest in the
investment. The exercise of a right of first refusal would be subject to the
Partnership's having the financial resources to effectuate such a purchase.
If the Partnership invests in joint venture partnerships which own properties,
instead of investing directly in the properties themselves, they may be subject
to risks not otherwise present. These risks include risks associated with the
possible bankruptcy of the Partnership's co-venturer or such co-venturer at any
time having economic or business interests or goals which are inconsistent with
those of the Partnership.
8. Purchase of Real Property From Prudential Financial or Affiliates. The
Partnership may acquire properties owned by Prudential Financial or its
affiliates, subject to compliance with special conditions designed to minimize
the conflicts of interests. The Partnership may purchase property satisfying the
Partnership's investment objectives and policies from an affiliate only if: (1)
the applicable insurance regulators approve the Partnership's acquisition of
real property from Prudential Financial or affiliates to the extent such
approval is required under applicable insurance regulations; (2) the Partnership
acquires the property at a price not greater than the appraised value, with the
appraisal being conducted by a qualified, unaffiliated appraiser; (3) a
qualified and independent real estate adviser (other than the appraiser) reviews
the proposed acquisition and provides a letter of opinion that the transaction
is fair to the Partnership; and (4) the affiliate has owned the property at
least two years, the cost paid by the affiliate is established, and any increase
in the proposed purchase price over the cost to the affiliate is, in the opinion
of the independent real estate adviser, explicable by material factors
(including the passage of time) that have increased the value of the property.
THE REAL PROPERTY ACCOUNT'S UNAVAILABILITY TO CERTAIN CONTRACTS
Pruco Life has determined that it is in the best interest of Contract owners
participating in the Real Property Account to provide the Real Property Account
with the flexibility to engage in transactions that may be prohibited if the
Real Property Account accepts funds under Contracts subject to ERISA or the
prohibited transaction excise tax provisions of the Internal Revenue Code.
Accordingly, owners of Pruco Life Contracts that are purchased in connection
with: (1) IRAs; (2) tax deferred annuities subject to Section 403(b) of the
Code; (3) other employee benefit plans which are subject to ERISA; or (4)
prohibited transaction excise tax provisions of the Code, may not select the
Real Property Account as one of the investment options under their Contract. By
not offering the Real Property Account as an investment option under such
contracts, Pruco Life is able to comply with state insurance law requirements
that policy loans be made available to Contract owners.
VALUATION OF CONTRACT OWNERS' PARTICIPATING INTERESTS
A Contract owner's interest in the Real Property Account will initially be the
amount they allocated to the Real Property Account. Thereafter, that value will
change daily. The value of a Contract owner's interest in the Real Property
Account at the close of any day is equal to its amount at the close of the
preceding day, multiplied by the "net investment factor" for that day arising
from the Real Property Account's participation in the Partnership, plus any
additional amounts allocated to the Real Property Account by the Contract owner,
and reduced by any withdrawals by the Contract owner from the Real Property
Account and by the applicable Contract charges recorded in that Contract's
subaccount. Some of the charges will be made: (1) daily; (2) on the Contract's
monthly anniversary date; (3) at the
14 - Real Property
end of each Contract year; and (4) upon withdrawal or annuitization.
Periodically Pruco Life will withdraw from the Real Property Account an amount
equal to the aggregate charges recorded in the subaccounts.
The "net investment factor" is calculated on each business day by dividing the
value of the net assets of the Partnership at the end of that day (ignoring, for
this purpose, changes resulting from new contributions to or withdrawals from
the Partnership) by the value of the net assets of the Partnership at the end of
the preceding business day. The value of the net assets of the Partnership at
the end of any business day is equal to the sum of all cash held by the
Partnership plus the aggregate value of the Partnership's liquid securities and
instruments, the individual real properties and the other real estate-related
investments owned by the Partnership, determined in the manner described below,
and an estimate of the accrued net operating income earned by the Partnership
from properties and other real estate-related investments, reduced by the
liabilities of the Partnership, including the daily investment management fee
and certain other expenses attributable to the operation of the Partnership. See
CHARGES, page 16.
The Partnership may invest in various liquid securities and instruments. These
investments will generally be carried at their market value as determine by a
valuation method which the Partners deem appropriate for the particular type of
liquid security or instrument.
The value of the individual real properties and other real estate-related
investments, including mortgages, acquired by the Partnership will be determined
as follows. Each property or other real estate-related investment acquired by
the Partnership will initially be valued at its purchase price. In acquiring a
property or other real estate-related investment, PIM will not obtain an
independent appraisal but will instead rely on its own analysis of the
investment's fair market value. Thereafter, all properties and most real
estate-related investments will ordinarily be appraised by an independent
appraiser at least annually. At least every three months, PIM will review each
property or other real estate-related investments and adjust its valuation if it
concludes there has been a change in the value of the property or other real
estate-related investment since the last valuation. The revised value will
remain in effect and will be used in each day's calculation of the value of the
Partnership's assets until the next review or appraisal. It should be noted that
appraisals are only estimates and do not necessarily reflect the realizable
value of an investment.
The estimated amount of the net operating income of the Partnership from
properties and other real estate-related investments will be based on estimates
of revenues and expenses for each property and other real estate-related
investments. Annually, PIM will prepare a month-by-month estimate of the
revenues and expenses ("estimated net operating income") for each property and
other real estate-related investments owned by the Partnership. Each day PIM
will add to the value of the assets, as determined above, a proportionate part
of the estimated net operating income for the month. In effect, PIM will
establish a daily accrued receivable of the estimated net operating income from
each property and other real estate-related investments owned by the Partnership
(the "daily accrued receivable"). On a monthly basis, the Partnership will
receive a report of actual operating results for each property and other real
estate-related investments ("actual net operating income"). Such actual net
operating income will be recognized on the books of the Partnership and the
amount of the then-outstanding daily accrued receivable will be correspondingly
adjusted. In addition, as cash from a property or other real estate-related
investment is actually received by the Partnership, receivables and other
accounts will be appropriately adjusted. Periodically, but at least every three
months, PIM will review its prospective estimates of net operating income in
light of actual experience and make an adjustment to such estimates if
circumstances indicate that such an adjustment is warranted. PIM follows this
practice of accruing estimated net operating income from properties and other
real estate-related investments because net operating income from such
investments is generally received on an intermittent rather than daily basis,
and the Partners believe it is more equitable to participating Contract owners
if such net operating income is estimated and a proportionate amount is
recognized daily. Because the daily accrual of estimated net operating income is
based on estimates that may not turn out to reflect actual revenue and expenses,
Contract owners will bear the risk that this practice will result in the
undervaluing or overvaluing of the Partnership's assets.
PIM may adjust the value of any asset held by the Partnership based on events
that have increased or decreased the realizable value of a property or other
real estate-related investment. For example, adjustments may be made for events
indicating an impairment of a borrower's or a lessee's ability to pay any
amounts due or events which affect the property values of the surrounding area.
There can be no assurance that the factors for which an adjustment may be made
will immediately come to the attention of PIM. Additionally, because the
evaluation of such factors may be subjective, there can be no assurance that
such adjustments will be timely made in all cases where the value of the
Partnership's investments may be affected. All adjustments made to the valuation
of the Partnership's investments, including adjustments to estimated net
operating income, the daily accrued receivable, and adjustments to the valuation
of properties and other real estate-related investments, will be on a
prospective basis only.
The above method of valuation of the Partnership's assets may be changed,
without the consent of Contract owners, should the Partners determine that
another method would more accurately reflect the value of the Partnership's
investments. Changes in the method of valuation could result in a change in the
Contract Fund values which may have either an adverse or beneficial effect on
Contract owners. Information concerning any material change in the valuation
method will be given to all Contract owners in the annual report of the
operations of the Real Property Account.
15 - Real Property
Although the above-described valuation methods have been adopted because the
Partners believe they will provide a reasonable way to determine the fair market
value of the Partnership's investments, there may well be variations between the
amount realizable upon disposition and the Partnership's valuation of such
assets. Contract owners may be either favorably or adversely affected if the
valuation method results in either overvaluing or undervaluing the Partnership's
investments. If a Contract owner invests in the Real Property Account at a time
in which the Partnership's investments are overvalued, the Contract owner will
be credited with less of an interest than if the value had been correctly
stated. A Contract owner withdrawing from the Real Property Account during such
time will receive more than he or she would if the value had been correctly
stated, to the detriment of other Contract owners. The converse situation will
exist if the Partnership's assets are undervalued.
BORROWING BY THE PARTNERSHIP
The Partnership may borrow for Partnership purposes, including to meet its
liquidity requirements and the leveraging of currently-owned property to buy new
property, subject to a maximum debt to value ratio of 33"% (pursuant to
California state requirements) based on the aggregate value of all Partnership
assets. The Partnership will bear the cost of all such borrowings. The Real
Property Account, and Contract owners participating in it, will bear a portion
of any borrowing costs equal to their percentage interest in the Partnership.
Moreover, although the Partnership will generally make unleveraged investments,
it reserves the right to borrow up to 80% of the value of a property (with the
value of a property determined as explained under VALUATION OF CONTRACT OWNERS'
PARTICIPATING INTERESTS, page 14). Increasing the Partnership's assets through
leveraged investments would increase the compensation paid to PIM since its
investment management fee is a percentage of the Partnership's gross assets. Any
borrowing by the Partnership would increase the Partnership's risk of loss. It
could also inhibit the Partnership from achieving its investment objectives
because the Partnership's payments on any loans would have to be made regardless
of the profitability of its investments.
CHARGES
Pursuant to the investment management agreement, the Partnership pays a daily
investment management fee which is equal to an effective annual rate of 1.25% of
the average daily gross assets of the Partnership. Certain other expenses and
charges attributable to the operation of the Partnership are also charged
against the Partnership. In acquiring an investment, the Partnership may incur
various types of expenses paid to third parties, including but not limited to,
brokerage fees, attorneys' fees, architects' fees, engineers' fees, and
accounting fees. After acquisition of an investment, the Partnership will incur
recurring expenses for the preparation of annual reports, periodic appraisal
costs, mortgage servicing fees, annual audit charges, accounting and legal fees,
and various administrative expenses. These expenses will be charged against the
Partnership's assets. Some of these operating expenses represent reimbursement
of the investment manager for the cost of providing certain services necessary
to the operation of the Partnership, such as daily accounting services,
preparation of annual reports, and various administrative services. The
investment manager charges the Partnership mortgage loan servicing fees pursuant
to the standards outlined in item 6 under CONFLICTS OF INTEREST, page 12. In
addition to the various expenses charged against the Partnership's assets, other
expenses such as insurance costs, taxes, and property management fees will
ordinarily be deducted from rental income, thereby reducing the gross income of
the Partnership.
As explained earlier, charges to the Contracts will be recorded in the
corresponding subaccounts of the Real Property Account. From time to time, Pruco
Life will withdraw from the Real Property Account an amount equal to the
aggregate amount of these charges. Aside from the charges to the Contracts,
Pruco Life does not charge the Real Property Account for the expenses involved
in the Real Property Account's operation. The Real Property Account will,
however, bear its proportionate share of the charges made to the Partnership as
described above.
The Partnership is not a taxable entity under the provisions of the Internal
Revenue Code. The income, gains, and losses of the Partnership are attributed,
for federal income tax purposes, to the Partners in the Partnership. The
earnings of the Real Property Account are, in turn, taxed as part of the
operations of Pruco Life. Pruco Life is currently not charging the Real Property
Account for company federal income taxes. Pruco Life may make such a charge in
the future.
Under current laws Pruco Life may incur state and local taxes (in addition to
premium taxes) in several states. At present, Pruco Life does not charge these
taxes against the Contracts or the Real Property Account, but Pruco Life may
decide to charge the Real Property Account for such taxes in the future.
16 - Real Property
RESTRICTIONS ON WITHDRAWALS
Before allocating any portion of your net premium or purchase payments, or
transferring any portion of your Contract Fund, to the Real Property Account,
you should be aware that withdrawals from the Real Property Account may have
greater restrictions than the other variable investment options available under
the Contracts. Pruco Life reserves the right to restrict transfers into or out
of the Real Property Account. Apart from the limitations on transfers out of the
Real Property Account described below, Pruco Life will only restrict transfers
out of the Real Property Account if there is insufficient cash available to meet
Contract owners' requests and prompt disposition of the Partnership's
investments to meet such requests could not be made on commercially reasonable
terms.
Pruco Life will pay any death benefit, cash surrender value, withdrawal or loan
proceeds within seven days after receipt at a Pruco Life Service Office of all
the documents required for such a payment. Other than the death benefit, which
is determined as of the date of death for life insurance products, the amount
will be determined as of the date of receipt of the request.
The funds necessary to pay any death benefit, cash surrender value, withdrawal
or loan proceeds funded by the Real Property Account will normally be obtained,
first, from any cash flows into the Real Property Account on the day the funds
are required. If, on the day the funds are required, cash flows into the Real
Property Account are less than the amount of funds required, Pruco Life will
seek to obtain such funds by withdrawing a portion of its interest in the
Partnership. The Partnership will normally obtain funds to meet such a
withdrawal request from its net operating income and from the liquid securities
and instruments it holds. If the Partners determine that these sources are
insufficient to meet anticipated withdrawals from the Partnership, the
Partnership may use a line of credit or otherwise borrow up to 33"% (pursuant to
California state requirements) of the value of the Partnership's assets. See
BORROWING BY THE PARTNERSHIP, page 16. If the Partners determine that such a
borrowing by the Partnership would not serve the best interests of Contract
owners, Pruco Life may, in the event of a Contract loan or withdrawal, rather
than take the amount of any loan or withdrawal request proportionately from all
investment options under the Contract (including the Real Property Account),
take any such loan or withdrawal first from the other investment options under
the Contract.
Transfers from the Real Property Account to the other investment options
available under the Contract are currently permitted only during the 30-day
period beginning on the Contract anniversary. The maximum amount that may be
transferred out of the Real Property Account each year is the greater of: (a)
50% of the amount invested in the Real Property Account or (b) $10,000. Such
transfer requests received prior to the Contract anniversary will be effected on
the Contract anniversary. Transfer requests received within the 30-day period
beginning on the Contract anniversary will be effected as of the end of the
valuation period in which a proper written request or authorized telephone
request is received. The "valuation period" means the period of time from one
determination of the value of the amount invested in the Real Property Account
to the next. Such determinations are made when the value of the assets and
liabilities of the Partnership is calculated, which is generally at 4:00 p.m.
Eastern time on each day during which the New York Stock Exchange is open.
Transfers into or out of the Real Property Account are also subject to the
general limits under the Contracts.
RESTRICTIONS ON CONTRACT OWNERS' INVESTMENT IN THE REAL PROPERTY ACCOUNT
As explained earlier, identification and acquisition of real estate investments
meeting the Partnership's investment objectives is a time-consuming process.
Because the Real Property Account and the Partnership are managed so they will
not become investment companies subject to the Investment Company Act of 1940,
the portion of the Partnership's assets that may be invested in securities, as
opposed to non-securities real estate investments, is strictly limited. For
these reasons, Pruco Life reserves the right to restrict or limit Contract
owners' allocation of funds to the Real Property Account. Any such restrictions
are likely to take the form of restricting the timing, amount and/or frequency
of transfers into the Real Property Account and/or precluding Contract owners
who have not previously selected the Real Property Account from allocating a
portion of their net premiums or purchase payments to the Real Property Account.
FEDERAL INCOME TAX CONSIDERATIONS
The federal income tax treatment of Contract benefits is described briefly in
the attached prospectus for the particular Contract you selected. Pruco Life
believes that the same principles will apply with respect to Contracts funded in
whole or part by the Real Property Account. The Partnership's conformity with
the diversification standards for the investments of variable life insurance and
variable annuity separate accounts is essential to ensure that treatment. See
General Investment and Operating Policies, page 8. Pruco Life urges you to
consult a qualified tax adviser.
17 - Real Property
Under the Internal Revenue Code, the Partnership is not a taxable entity and any
income, gains or losses of the Partnership are passed through to the Partners,
including Pruco Life, with respect to the Real Property Account. The Real
Property Account is not a separate taxpayer for purposes of the Internal Revenue
Code. The earnings of the Real Property Account are taxed as part of the
operations of Pruco Life. No charge is currently being made to the Real Property
Account for company federal income taxes. We may make such a charge in the
future, see CHARGES, page 16.
DISTRIBUTION OF THE CONTRACTS
As explained in the attached prospectus for the Contracts, Pruco Securities
Corporation, a wholly-owned subsidiary of Prudential Financial, acts as the
principal underwriter of the Contracts. Consult that prospectus for information
about commission scales and other facts relating to sale of the Contracts.
STATE REGULATION
Pruco Life is subject to regulation and supervision by the Department of
Insurance of the State of Arizona, which periodically examines its operations
and financial condition. It is also subject to the insurance laws and
regulations of all jurisdictions in which it is authorized to do business.
Pruco Life is required to submit annual statements of its operations, including
financial statements, to the insurance departments of the various jurisdictions
in which it does business to determine solvency and compliance with local
insurance laws and regulations.
In addition to the annual statements referred to above, Pruco Life is required
to file with Arizona and other jurisdictions a separate statement with respect
to the operations of all its variable contract accounts, in a form promulgated
by the National Association of Insurance Commissioners.
ADDITIONAL INFORMATION
Pruco Life has filed a registration statement with the Securities and Exchange
Commission ("SEC") under the Securities Act of 1933, relating to the offering
described in this prospectus. This prospectus does not include all of the
information set forth in the registration statement. Certain portions have been
omitted pursuant to the rules and regulations of the SEC. All reports and
information filed by Pruco Life can be inspected and copied at the Public
Reference Section of the Commission at 450 Fifth Street, Room 1024, N.W.,
Washington, D.C. 20549, and at certain of its regional offices: Midwestern
Regional Office, 175 West Jackson Boulevard, Suite 900, Chicago, IL 60604;
Northeastern Regional Office SEC, 233 Broadway, New York, NY 10279, or by
telephoning (800) SEC-0330.
The SEC maintains a Web site (http://www.sec.gov) that contains material
incorporated by reference and other information regarding registrants that file
electronically with the SEC.
Further information may also be obtained from Pruco Life. The address and
telephone number are on the cover of this prospectus.
EXPERTS
The financial statements of the Partnership as of December 31, 2002 and 2001 and
for each of the three years in the period ended December 31, 2002, the financial
statement schedules of the Partnership as of December 31, 2002 and the financial
statements of the Real Property Account as of December 31, 2002 and 2001 and for
each of the three years in the period ended December 31, 2002 included in this
prospectus have been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting. PricewaterhouseCoopers LLP's
principal business address is 1177 Avenue of the Americas, New York, New York
10036.
LITIGATION
No litigation is pending, and no litigation is known to be contemplated by
governmental authorities, that would have an adverse material effect upon the
Real Property Account or the Partnership.
18 - Real Property
REPORTS TO CONTRACT OWNERS
If you allocate a portion of your Contract Fund to the Real Property Account,
Pruco Life will mail you an annual report containing audited financial
statements for the Partnership and an annual statement showing the status of
your Contract Fund and any other information that may be required by applicable
regulation or law.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All of the assets of the Real Property Account (the "Account") are invested in
the Prudential Variable Contract Real Property Partnership (the "Partnership").
Correspondingly, the liquidity, capital resources and results of operations for
the Real Property Account are contingent upon the Partnership. Therefore, all of
management's discussion of these items is at the Partnership level. The partners
in the Partnership are The Prudential Insurance Company of America, Pruco Life
Insurance Company, and Pruco Life Insurance Company of New Jersey (collectively,
the "Partners").
The following analysis of the liquidity and capital resources and results of
operations of the Partnership should be read in conjunction with the Financial
Statements and the related Notes to the Financial Statements included elsewhere
herein.
Liquidity and Capital Resources
As of December 31, 2002, the Partnership's liquid assets consisting of cash and
cash equivalents were $18.6 million, a decrease of $8.0 million from $26.6
million at December 31, 2001. This decrease was primarily due to distributions
to the Partners of $16.1 million during 2002 offset by an increase in net cash
flows from operations and the sale of the industrial property located in
Bolingbrook, IL on September 12, 2002. Sources of liquidity include net cash
flow from property operations and interest from short-term investments.
The Partnership's investment policy allows up to 30% investment in cash and
short-term obligations, although the Partnership generally holds approximately
10% of its assets in cash and short-term obligations. At December 31, 2002, 8.1%
of the Partnership's assets consisted of cash and short term obligations.
In 1986, Prudential committed to fund up to $100 million to enable the
Partnership to acquire real estate investments. Contributions to the Partnership
under this commitment have been utilized for property acquisitions, and returned
to Prudential on an ongoing basis from contract owners' net contributions and
other available cash. The amount of the commitment had been reduced by $10
million for every $100 million in current value net assets of the Partnership.
As of December 31, 2002, Prudential's equity interest in the Partnership, on a
cost basis, under this commitment (held through the Real Property Accounts) was
$44 million. Prudential did not make any contributions under this commitment
during the 2002 fiscal year. This commitment terminated on December 31, 2002.
The Partnership made $16.1 million in distributions to the Partners during 2002,
and $18.0 million in distributions, during 2001. Additional distributions may be
made to the Partners during 2003 based upon the percentage of assets invested in
short-term obligations, taking into consideration anticipated cash needs of the
Partnership including potential property acquisitions, property dispositions and
capital expenditures. Management anticipates that its current liquid assets and
ongoing cash flow from operations will satisfy the Partnership's needs over the
next twelve months and the foreseeable future.
The Partnership completed one real estate acquisition during the year. The
Partnership acquired a controlling interest in a 161,600 square foot retail
center based in Ocean City, MD. The Partnership funded $0.5 million during 2002
as part of this acquisition. A $7.4 million mortgage was also assumed in
connection with this transaction. During the first twelve months of 2002, the
Partnership spent approximately $2.6 million in capital expenditures.
Approximately $1.3 million was associated with the development and expansion of
the retail center located in Hampton, VA. The remaining $1.3 million balance was
primarily associated with the HVAC upgrade at the office building located in
Lisle, IL, roof replacement at the office building located in Oakbrook Terrace,
IL, lobby upgrades at the one of the Brentwood, TN office buildings, and tenant
improvements at the other Brentwood, TN office building. The Partnership also
increased its investment in real estate partnerships by approximately $2.9
million in connection with the development and expansion of a retail center
located in Kansas City, MO.
Results of Operations
The following is a brief year-to-date comparison of the Partnership's results of
operations for the periods ended December 31, 2002, 2001, and 2000.
19 - Real Property
2002 vs. 2001
The following table presents a year-to-date comparison of the Partnership's
sources of net investment income, and realized and unrealized gains or losses by
investment type.
Twelve Months Ended
December 31,
2002 2001
------------ ------------
Net Investment Income:
Office properties $ 4,837,432 $ 4,766,035
Apartment complexes 3,089,744 3,735,912
Retail property 3,612,435 2,950,333
Industrial properties 1,429,036 545,003
Equity in income of real estate 276,206 686,801
partnership
Dividend income from real
estate investment trust -- 2,157,647
Other (including interest income,
investment mgt fee, etc.) (2,380,810) (2,491,425)
------------ ------------
Total Net Investment Income $ 10,864,043 $ 12,350,306
------------ ------------
Net Unrealized Loss on
Real Estate Investments:
Office properties ($ 6,785,006 ($ 777,380)
Apartment complexes (856,188) 415,417
Retail property (808,736) (94,504)
Industrial properties 177,573 (2,105,641)
Interest in real estate properties (638,838) 226,024
------------ ------------
Total Net Unrealized Loss on Real Estate
Investments (8,911,195) (2,336,084)
------------ ------------
Net Realized Gain (Loss) on
Real Estate Investments:
Industrial properties 395,110 --
Real estate investment trust (1,578) (211,665)
------------ ------------
393,532 (211,665)
------------ ------------
Net Realized and Unrealized Loss
------------ ------------
on Real Estate Investments ($ 8,517,663) ($ 2,547,749)
------------ ------------
The Partnership's net investment income for the year ended December 31, 2002 was
$10.9 million, a decrease of $1.5 million from $12.4 million when compared to
the corresponding period in 2001. The Partnership's liquidation of its
investment in REIT stocks during the fourth quarter last year resulted in no
dividend income being received in 2002. Additionally, the occupancy at one of
the Brentwood, TN properties has decreased to 0% from 100% due to the move-out
of the single tenant.
Equity in income of real estate partnership was $0.3 million for the twelve
months of 2002, a decrease of $0.4 million, or 59.8%, from $0.7 million in the
corresponding period in 2001. This decrease is due to a decrease in revenue
associated with expansion of the existing grocery store anchor that commenced
during the fourth quarter of 2001. It is anticipated that upon completion, both
occupancy and rental rates will increase.
20 - Real Property
Dividend income from real estate investment trusts decreased approximately $2.2
million, or 100.0%, during the twelve months of 2002 compared to the
corresponding period in 2001. These decreases were due to the Partnership's
liquidation of its investment in REIT stocks during the 4th quarter of 2001.
Interest on short-term investments increased approximately $0.2 million or 53.6%
for the year ended December 31, 2002 due primarily to higher average cash
balance when compared to the corresponding period in 2001.
Administrative expense increased $0.8 million, or 32.8%, in the twelve months of
2002 compared to the corresponding period in 2001. These increases were
primarily due to the Partnership's acquisition of a portfolio of apartment
complexes located in Gresham and Salem, OR in 2001, a retail center located in
Hampton, VA in 2001, and a retail center located in Ocean City, MD in 2002.
Interest expense increased $0.2 million, or 12.0%, in the twelve months of 2002
compared to the corresponding period in 2001. This increase was primarily due to
the Partnership's assumption of a $9.0 million and a $10.3 million mortgage loan
in conjunction with the acquisition of a controlling interest in a portfolio of
apartment complexes located in Gresham and Salem, OR and a retail center located
in Hampton, VA in 2001. There was also the additional assumption of a $7.4
million mortgage loan in conjunction with the acquisition of a controlling
interest in a retail center located in Ocean City, MD in 2002.
The Partnership experienced a net unrealized loss of $8.9 million for the year
ended December 31, 2002 compared to a net unrealized loss of $2.3 million during
the corresponding period in 2001. The unrealized losses during 2002 were
experienced in the office, apartment and retail sectors. The office properties
recorded an unrealized loss of $6.8 million primarily due to the buildings
located in Brentwood, TN and Oakbrook Terrace, IL, where softening market
conditions have resulted in reductions in market rental rates and increased
leasing costs. In total, the apartment complexes in the portfolio experienced
unrealized losses totaling $0.9 million for the twelve months of 2002. Weaker
demand caused by higher rates of unemployment and a favorable interest rate
environment for homebuyers has resulted in lower short-term occupancy and income
projections. The retail sector also experienced a net unrealized loss of $0.8
million primarily due to uncertainty about a lease renewal by a major tenant.
Office Properties
Net investment income from property operations for the office sector increased
approximately $0.1 million, or 1.5%, for the year ended December 31, 2002 when
compared to the corresponding period in 2001.
The five office properties owned by the Partnership experienced a net unrealized
loss of approximately $6.8 million during the twelve months of 2002. The
Oakbrook Terrace, IL property experienced a net unrealized loss of approximately
$3.3 million primarily due to softening market conditions and the lease
expiration of a major tenant. One of the Brentwood, TN properties experienced a
net unrealized loss of approximately $1.4 million primarily due to the move-out
of the single tenant at the property in July 2002. Though occupancy increased by
4%, the other Brentwood, TN property experienced a net unrealized loss of
approximately $1.3 million primarily due to softening market conditions. The
Lisle, IL property experienced a net unrealized loss of approximately $0.6
million primarily due to impending tenant rollover and softening market
conditions. The office property located in Beaverton, OR experienced an
unrealized loss of approximately $0.1 million due to lower market rental rates
and the near-term lease expiration of one of the tenants.
The five office properties owned by the Partnership experienced a net unrealized
loss of approximately $0.8 million during the twelve months of 2001. One of the
Brentwood, TN properties experienced a net unrealized loss of approximately $0.7
million primarily due to the near-term expiration and expected move-out of the
single tenant at the property in July 2002. The Beaverton, OR and the Lisle, IL
office properties experienced a net unrealized loss of approximately $0.4
million and $0.2 million, respectively, primarily due to softening market
conditions. Offsetting these unrealized losses was an unrealized gain of
approximately $0.6 million at the office property located in Oakbrook Terrace,
IL. This unrealized gain was attributable to the signing of two new leases,
which brought the leased area from 55% to 79%.
Occupancy at one of the Brentwood, TN office properties increased from 74% at
December 31, 2001 to 78% at December 31, 2002. The other Brentwood, TN office
property decreased from 100% at December 31, 2001 to 0% at December 31, 2002.
Occupancy at the Lisle, IL and Beaverton, OR office properties remained
unchanged at 100% at December 31, 2001 and 2002. Occupancy at the Oakbrook
Terrace, IL decreased from 79% at December 31, 2001 to 27% at December 31, 2002.
As of December 31, 2002 all vacant spaces were being marketed.
Apartment Complexes
Net investment income from property operations for the apartment sector was $3.1
million for the year ended December 31, 2002, a decrease of $0.6 million, or
17.3%, when compared to the corresponding period in 2001.
21 - Real Property
These decreases were primarily due to a decrease in average occupancy at the
Atlanta, GA apartment complex. Average occupancy for the Atlanta, GA apartment
complex was 90% and 83% for the year ended December 31, 2001 and 2002,
respectively. Additionally, rental concessions have been made in order to
increase and/or maintain the occupancy thus resulting in lower revenue at all
the apartment complexes.
The apartment complexes owned by the Partnership experienced a net unrealized
loss of $0.9 million for the year ended December 31,2002 compared to a net
unrealized gain of $0.4 million for the year ended December 31, 2001. Of the
unrealized loss experienced in the twelve months of 2002, $1.3 million was
experienced at the apartment complex located in Atlanta, GA. This unrealized
loss was due to softening market conditions. The apartment complex located in
Jacksonville, FL experienced an unrealized loss of $0.2 million due to slightly
higher expense estimates and softening market conditions. The apartment
portfolio located in Gresham/Salem, OR, also experienced a net unrealized loss
of $0.1 million primarily due to increases in operating expense levels and
softening market conditions. Offsetting these losses, the apartment complex
located in Raleigh, NC experienced an unrealized gain of $0.7 million due to a
reduced estimate of rent concessions and a reduction in certain operating
expenses.
The apartment complexes owned by the Partnership experienced a net unrealized
gain of $0.4 million for the twelve months ended December 31,2001. The majority
of the unrealized gain experienced in 2001 was primarily due to the Atlanta, GA
apartment complex that experienced an increase in value of $0.9 million due to
sub-metering of the apartments for water usage and lower real estate taxes than
previously estimated. The apartment complex portfolio located in Gresham and
Salem, OR also experienced an increase in value of $0.4 million due to the
completion of capital improvements and the reduction of administrative expense
estimates. Offsetting these unrealized gains was the apartment complex located
in Raleigh, NC, which experienced a net unrealized loss of $0.5 million due to a
decrease in occupancy. The apartment complex in Jacksonville, FL also
experienced a decrease in value of $0.4 million due to higher replacement
reserve expenses, higher operating expense projections, and slightly lower
market rent estimates.
Occupancy at the Atlanta, GA complex increased from 83% at December 31, 2001 to
90% at December 31, 2002. Occupancy at the Raleigh, NC complex increased from
82% at December 31, 2001 to 88% at December 31, 2002. Occupancy at the apartment
complex in Jacksonville, FL increased from 88% at December 31, 2001 to 90% at
December 31, 2002. Occupancy at the Gresham and Salem, OR apartment complexes
decreased from 93% at December 31, 2001 to 92% at December 31, 2002. As of
December 31, 2002, all available vacant units were being marketed.
Retail Properties
Net investment income for the Partnership's retail properties was approximately
$3.6 million for the year ended December 31, 2002, and approximately $2.9
million for the year ended December 31, 2001. The increase in the year-to-date
net investment income for the retail sector is primarily due to the May 2001
acquisition of the retail center located in Hampton, VA and the November 2002
acquisition of the retail center located in Ocean City, MD.
The retail properties experienced a net unrealized loss of $0.8 million for the
year ended December 31, 2002 and a net unrealized loss of $0.1 million for the
year ended December 31, 2001. The retail center located in Roswell, GA
experienced a net unrealized loss of $1.7 million for the twelve months of 2002
due to the risk that a major tenant will not renew its lease, coupled with lower
market rents. Partially offsetting this loss, the retail center located in
Hampton, VA experienced an unrealized gain of $0.9 million due to the addition
of 20,000 rentable square feet and an increase in occupancy.
The retail properties experienced a net unrealized loss of $0.1 for the twelve
months ended December 31, 2001. The retail center located in Roswell, GA
experienced a loss of $0.6 million for 2001 due to increased capital
expenditures and a slight drop in occupancy. Offsetting this unrealized loss was
an unrealized gain of $0.5 million resulting from the market value appraisal
received on the newly acquired retail center located in Hampton, VA.
Occupancy at the retail center in Hampton, VA remained unchanged at 100% at
December 31, 2001 and 2002. Occupancy at the shopping center located in Roswell,
GA increased from 92% at December 31, 2001 to 93% at December 31, 2002.
Occupancy at the retail center in Ocean City, MD was 99% at December 31, 2002.
As of December 31, 2002, all vacant spaces were being marketed.
Industrial Properties
Net investment income from property operations for the industrial properties
increased from $0.5 million for year ended December 31, 2001 to $1.4 million for
the corresponding period ended December 31, 2002. The majority of this increase
was due to higher revenues at the properties located in Bolingbrook, IL and Salt
Lake City, UT. On September 12, 2002 the industrial property located in
Bolingbrook, IL was sold for a realized gain of $0.4 million.
22 - Real Property
Average occupancy for the Bolingbrook, IL industrial property was 24% and 79%
for the year ended December 31, 2001 and nine months ended September 30, 2002,
respectively.
The industrial properties owned by the Partnership experienced a net unrealized
gain of approximately $0.2 million for the year ended December 31, 2002 compared
to a net unrealized loss of approximately $2.1 million in 2001. The majority of
the unrealized gain in 2002 was attributable to the Aurora, CO industrial
property. This gain of approximately $0.5 million was due to an increase in
market rents. Offsetting this unrealized gain was the Salt Lake City, UT
facility, which experienced a net unrealized loss of $0.3 million due to capital
expenditures at the property that were not reflected as an increase in market
value and softening market conditions.
The three industrial properties owned by the Partnership experienced a net
unrealized loss of approximately $2.1 million for the twelve months ended
December 31, 2001. The majority of the unrealized loss in 2001 was attributable
to the Salt Lake City, UT industrial property. This loss of approximately $1.3
million was due to a decrease in market rents. The Bolingbrook, IL facility
experienced a loss of $0.9 million due to a decrease in rental rates and
softening market conditions.
The occupancy at the Salt Lake City, Utah property remained unchanged at 77% at
December 31, 2001 and 2002. The Aurora, CO property's occupancy rate remained
unchanged at 75% at December 31, 2001 and 2002. As of December 31, 2002, all
vacant spaces were being marketed.
Equity in Income of Real Estate Partnership
During the year ended December 31, 2002, income from the investment located in
Kansas City, KS and MO amounted to $0.3 million, a decrease of 59.8% from $0.7
million at December 31, 2001. The decrease in the year-to-date equity in income
of real estate partnership is due to a decrease in revenue associated with
expansion of the existing grocery store anchor that commenced during the fourth
quarter 2001. It is anticipated that upon completion, both occupancy and rental
rates will increase.
The equity investment experienced a net unrealized loss of $0.6 million and a
net unrealized gain of $0.2 million for the years ended December 31, 2002 and
2001, respectively. The unrealized loss of $0.6 million for the year ended
December 31, 2002 was primarily due to renovations from the expansion of the
existing grocery store anchor that have not been reflected yet in the market
value of the property. The unrealized gain of $0.2 million for the twelve months
ended December 31, 2001 was primarily due to the addition of a tenant that will
provide a substantial amount of income to the center in rent and the addition of
new space to house this tenant.
The retail portfolio located in Kansas City, KS and MO had an average occupancy
of 90% at December 31, 2001, which decreased to 87% at December 31, 2002. As of
December 31, 2002, all vacant spaces were being marketed.
Real Estate Investment Trusts
The Partnership's investment in REITS was liquidated at the end of the fourth
quarter of 2001.
During the twelve months ended December 31, 2001, the Partnership's remaining
investment in REITS recognized a realized loss of $0.2 million due to the sale
of the Partnership's remaining investment in REITs.
Other
Other net investment income increased $0.1 million during the year of 2002
compared to the corresponding period in 2001. Other net investment income
includes interest income from short-term investments, investment management
fees, and expenses not related to property activities. The increase in 2002 is
primarily due to an increase in interest income from short-term investments
offset by a decrease in management fees due to the Partnership's liquidation of
its entire investment in REIT shares.
2001 vs. 2000
The following table presents a year-to-date comparison of the Partnership's
sources of net investment income and realized and unrealized gains or losses by
investment type.
23 - Real Property
Twelve Months Ended December 31,
2001 2000
------------ ------------
Net Investment Income:
Office properties $ 4,766,035 $ 5,356,934
Apartment complexes 3,735,912 3,446,245
Retail property 2,950,333 2,772,438
Industrial properties 545,003 1,257,146
Equity in income of real estate 686,801 791,596
partnership
Dividend income from real
estate investment trust 2,157,647 1,744,611
Other (including interest income,
Investment management fee, etc.) (2,491,425) (1,730,853)
------------ ------------
Total Net Investment Income $ 12,350,306 $ 13,638,117
============ ============
Net Unrealized (Loss) Gain on
Real Estate Investments:
Office properties ($ 777,380) ($ 2,434,245)
Apartment complexes 415,417 2,717,915
Retail property (94,504) (264,300)
Industrial properties (2,105,641)
(935,721)
Interest in real estate properties 226,024 140,614
Real estate investment trust -- 2,618,815
============ =========
(2,336,084) 1,843,078
------------ ------------
Net Realized (Loss) Gain on
Real Estate Investments:
Office properties -- $ 186,920
Apartment complexes -- --
Industrial properties -- --
Interest in real estate properties -- --
Real estate investment trust (211,665) 2,457,024
------------ ------------
(211,665) 2,643,944
------------ ------------
Net Realized and Unrealized (Loss)
------------ ------------
Gain on Real Estate Investments ($ 2,547,749) $ 4,487,022
============ ============
The Partnership's net investment income for the twelve months ended December 31,
2001 was $12.4 million, a decrease of $1.3 million from the corresponding period
in the prior year. This decrease was primarily due to the sale of an office
property located in Morristown, NJ in the fourth quarter of 2000.
Equity in income of real estate partnership was $0.7 million for the twelve
months of 2001, a decrease of $0.1 million, or 13.2%, from $0.8 million in the
corresponding period in 2000. The decrease is primarily due to a temporary
decrease in rental rates at the retail portfolio located in Kansas City, KS and
MO when compared to the prior year.
Dividend income from real estate investment trusts amounted to approximately
$2.2 million for the twelve months ended December 31, 2001, an increase of
approximately $0.4 million, or 23.7%, from approximately $1.7 million in the
corresponding period in 2000. This increase was primarily due to an increase in
the amount invested in REIT stocks subsequent to the 3rd quarter 2000.
24 - Real Property
Interest on short-term investments decreased approximately $1.0 million or 76.9%
for the twelve months ended December 31, 2001 due primarily to a significantly
lower average cash balance compared to the corresponding period in 2000. Cash,
cash equivalents, and marketable securities maintained during the twelve months
ended December 31, 2001 averaged approximately $13.0 million when compared to
the twelve months ended December 31, 2000 when the average was approximately
$19.1 million.
Operating expenses increased $0.9 million, or 21.4%, in the twelve months of
2001 compared to the corresponding period in 2000. These increases were
primarily due to the Partnership's acquisition of a controlling interest in the
two investments discussed previously.
Interest expense increased $1.0 million, or 142.4%, in the twelve months of 2001
compared to the corresponding period in 2000. These increases were primarily due
to the Partnership's assumption of a $9.0 million and a $10.3 million mortgage
loan in conjunction with the acquisition of a controlling interest in the two
investments discussed previously.
Minority interest in consolidated partnerships increased $0.1 million, or
1,256.4%, for the twelve months ended December 31, 2001. These increases were
due to the Partnership's acquisition of a controlling interest in the two
investments discussed previously.
Office Properties
Net investment income from property operations for the office sector decreased
approximately $0.6 million, or 11.0%, for the twelve months ended December 31,
2001 when compared to the corresponding period in 2000. This was primarily due
to the sale of the Morristown, NJ office center in October 2000.
The five office properties owned by the Partnership experienced a net unrealized
loss of approximately $0.8 million during the twelve months of 2001. One of the
Brentwood, TN properties experienced a net unrealized loss of approximately $0.7
million primarily due to the near-term expiration and expected move-out of the
single tenant at the property in July 2002. The Beaverton, OR and the Lisle, IL
office properties experienced a net unrealized loss of approximately $0.4
million and $0.2 million, respectively, primarily due to softening market
conditions. Offsetting these unrealized losses was an unrealized gain of
approximately $0.6 million at the office property located in Oakbrook Terrace,
IL. This unrealized gain was attributable to the signing of two new leases,
which brought the leased area from 55% to 79%.
The office properties owned by the Partnership experienced a net unrealized loss
of approximately $2.4 million during 2000. During 2000, the Oakbrook Terrace, IL
property decreased $1.6 million in value due to a lease termination associated
with 45% of the space and weaker market conditions. One of the Brentwood, TN
office properties also experienced a net unrealized loss of approximately $0.8
million primarily due to capital expenditures on the property that were not
reflected as an increase in market value.
Occupancy at one of the Brentwood, TN office properties decreased from 95% at
December 31, 2000 to 74% at December 31, 2001, while occupancy at the other
Brentwood, TN location remained unchanged at 100%. Occupancy at the Lisle, IL
office property increased from 88% at December 31, 2000 to 100% at December 31,
2001. Occupancy at the Beaverton, OR property remained unchanged at 100%.
Occupancy at the Oakbrook Terrace, IL property decreased from 100% at December
31, 2000 to 79% at December 31, 2001. As of December 31, 2001 all vacant spaces
were being marketed.
Apartment Complexes
Net investment income from property operations for the apartment sector was $3.7
million for the twelve months ended December 31, 2001, an increase of $0.3
million, or 8.4%, when compared to the corresponding period in 2000. This
increase was primarily due to the acquisition of the controlling interest in the
apartment complex portfolio located in Gresham and Salem, OR.
The apartment complexes owned by the Partnership experienced a net unrealized
gain of $0.4 million for the twelve months ended December 31, 2001 compared to a
net unrealized gain of $2.7 million for the twelve months ended December 31,
2000. The majority of the unrealized gain experienced in 2001 was primarily due
to the Atlanta, GA apartment complex that experienced an increase in value of
$0.9 million due to sub-metering of the apartments for water usage and lower
real estate taxes than previously estimated. The apartment complex portfolio
located in Gresham and Salem, OR also experienced an increase in value of $0.4
million due to the completion of capital improvements and the reduction of
administrative expense estimates. Offsetting these unrealized gains was the
apartment complex located in Raleigh, NC, which experienced a net unrealized
loss of $0.5 million due to a decrease in occupancy. The apartment complex in
Jacksonville, FL also experienced a decrease in value of $0.4 million due to
higher replacement reserve expenses, higher operating expense projections, and
slightly lower market rent estimates.
25 - Real Property
The apartment complexes owned by the Partnership experienced a net unrealized
gain of $2.7 million in 2000. The largest share of the unrealized gain for 2000
or $1.7 million was experienced by the apartment complex located in Atlanta, GA
primarily due to increases in rental rates, stabilized occupancy, and lower
operating expense estimates. The apartment complex located in Raleigh, NC also
experienced a net unrealized gain of $0.2 million due to increases in rental
rates.
The occupancy at the Raleigh, NC complex decreased from 92% at December 31, 2000
to 82% at December 31, 2001. Occupancy at the Atlanta, GA complex decreased from
98% at December 31, 2000 to 83% at December 31, 2001. Occupancy at the apartment
complex in Jacksonville, FL decreased from 91% at December 31, 2000 to 88% at
December 31, 2001. Occupancy at the Gresham and Salem, OR apartment complexes
averaged approximately 93% at December 31, 2001. As of December 31, 2001, all
available vacant spaces were being marketed.
Retail Properties
Net investment income for the Partnership's retail properties located in
Roswell, GA and Hampton, VA was approximately $3.0 million for the twelve months
ended December 31, 2001 and approximately $2.8 million for the twelve months
ended December 31, 2000. The increase is primarily due to the acquisition of the
controlling interest in the 154,540 square foot retail center based in Hampton,
VA.
The retail properties experienced a net unrealized loss of $0.1 million and a
net unrealized loss of $0.3 million for the twelve months ended December 31,
2001 and 2000, respectively. The retail center located in Roswell, GA
experienced a loss of $0.6 million for 2001 due to increased capital
expenditures and a slight drop in occupancy. Offsetting this unrealized loss was
an unrealized gain of $0.5 million resulting from the market value appraisal
received on the newly acquired retail center located in Hampton, VA.
The unrealized loss experienced in 2000 was due to the Roswell, GA property due
to lower income projections, coupled with capital expenditures that did not
increase the market value of the property.
Occupancy at the shopping center located in Roswell, GA decreased from 97% at
December 31, 2000 to 92% at December 31, 2001. The newly acquired retail center
in Hampton, VA had an occupancy of 99% at December 31, 2001. As of December 31,
2001, all vacant spaces were being marketed.
Industrial Properties
Net investment income from property operations for the industrial properties
decreased from $1.3 million for the twelve months ended December 31, 2000 to
$0.5 million for the corresponding period ended December 31, 2001. The majority
of these decreases were due to decreased occupancy at the properties located in
Bolingbrook, IL and Salt Lake City, UT. Even though the Salt Lake City, UT
location increased occupancy for the year, the new tenants did not move in until
the end of the third quarter and there was significant vacancy at the
Bolingbrook, IL facility for a portion of 2001.
The three industrial properties owned by the Partnership experienced a net
unrealized loss of approximately $2.1 million for the twelve months ended
December 31, 2001 compared to a net unrealized loss of approximately $0.9
million in 2000. The majority of the unrealized loss in 2001 was attributable to
the Salt Lake City, UT industrial property. This loss of approximately $1.3
million was due to a decrease in market rents. The Bolingbrook, IL facility
experienced a loss of $0.9 million due to a decrease in rental rates and
softening market conditions.
The three industrial properties owned by the Partnership experienced a net
unrealized loss of approximately $0.9 million in 2000. The majority of the
decrease for 2000 was attributable to the Aurora, CO industrial property, which
had a loss of approximately $0.7 million due to more conservative assumptions
regarding rental rates, lease-up time and terminal capitalization rates used by
the appraiser. In addition, capital expenditures were incurred at the property
that were not reflected as an increase in market value. The industrial property
located in Bolingbrook, IL experienced an unrealized loss of $0.4 million in
2000. This loss was due to the expiration of the single tenant lease with no
replacement tenant being signed as of yet. The space was leased during the
fourth quarter of 2000 on a temporary basis, and partially leased at the end of
2001 to a different temporary tenant.
The occupancy at the Bolingbrook, IL property decreased from 100% at December
31, 2000 to 98% at December 31, 2001. The occupancy at the Salt Lake City, Utah
property increased from 34% at December 31, 2000 to 77% at December 30, 2001.
The Aurora, CO property's occupancy rate remained unchanged at 75% at December
31, 2000 and 2001. As of December 31, 2001, all vacant spaces were being
marketed.
26 - Real Property
Equity in Income of Real Estate Partnership
During the twelve months ended December 31, 2001, income from the investment
located in Kansas City, KS and MO amounted to $0.7 million, a decrease of 13.2%
from $0.8 million at December 31, 2000. The decrease is primarily due to a
temporary decrease in rental rates.
The equity investment experienced a net unrealized gain of $0.2 million and $0.1
million for the twelve months ended December 31, 2001 and 2000, respectively.
The unrealized gain of $0.2 million for the twelve months ended December 31,
2001 was primarily due to the addition of a tenant that will provide a
substantial amount of income to the center in rent and the addition of new space
to house this tenant.
The retail portfolio located in Kansas City, KS and MO had an average occupancy
of 90% at December 31, 2001, which remained unchanged from December 31, 2000. As
of December 31, 2001, all vacant spaces were being marketed.
Real Estate Investment Trusts
During the twelve months ended December 31, 2001, the Partnership's remaining
investment in REITS recognized a realized loss of $0.2 million due to the sale
of the Partnership's remaining investment in REITs. The Partnership recognized a
net realized gain of $2.5 million in 2000 primarily due to the sale of the
Partnership's remaining investment in Prologis REIT shares and sales of other
REIT investments.
The Partnership recognized an unrealized gain of $2.6 million on investments in
REITs for the twelve months ended December 31, 2000, which reflects changes in
the market value of REIT shares held by the Partnership.
Other
Other net investment income decreased approximately $0.8 million during the
twelve months ended December 31, 2001 when compared to the corresponding period
in 2000. Other net investment income includes interest income from short-term
investments, investment management fees, and expenses not related to property
activities. The decreases discussed above were primarily due to interest income
on short-term investments, which decreased primarily as a result of the
Partnership maintaining a significantly lower cash balance when compared to the
corresponding periods last year coupled with a decrease in interest rates.
Information Concerning Forward-Looking Statements
Certain statements contained in Management's Discussion and Analysis may be
considered forward-looking statements. Words such as "expects", "believes",
"anticipates", "intends", "plans", or variations of such words are generally
part of forward-looking statements. Forward-looking statements are made based
upon management's current expectations and beliefs concerning future
developments and their potential effects upon the Partnership. There can be no
assurance that future developments affecting the Partnership will be those
anticipated by management. There are certain important factors that could cause
actual results to differ materially from estimates or expectations reflected in
such forward-looking statements including without limitation, changes in general
economic conditions, including the performance of financial markets and interest
rates; market acceptance of new products and distribution channels; competitive,
regulatory or tax changes that affect the cost or demand for the Partnership's
products; and adverse litigation results. While the Partnership reassesses
material trends and uncertainties affecting its financial position and results
of operations, it does not intend to review or revise any particular
forward-looking statement referenced in this Management's Discussion and
Analysis in light of future events. Readers should consider the information
referred to above when reviewing any forward-looking statements contained in
this Management's Discussion and Analysis.
Inflation
The Partnership's leases with a majority of its commercial tenants provide for
recoveries of expenses based upon the tenant's proportionate share of, and/or
increases in, real estate taxes and certain operating costs, which may reduce
the Partnership's exposure to increases in operating costs resulting from
inflation.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the application of
accounting policies that often involve a significant degree of judgment.
Management, on an ongoing basis, reviews critical estimates and assumptions. If
management determines, as a result of its consideration of facts and
circumstances that modifications in assumptions and estimates are appropriate,
27 - Real Property
results of operations and financial position as reported in the Consolidated
Financial Statements may change significantly.
The following sections discuss critical accounting policies applied in preparing
our financial statements that are most dependent on the application of estimates
and assumptions.
Valuation of Investments
Real Estate Investments - The Partnership's investments in real estate are
initially valued at their purchase price. Thereafter, real estate investments
are reported at their estimated market values based upon appraisal reports
prepared by independent real estate appraisers (members of the Appraisal
Institute or an equivalent organization) within a reasonable amount of time
following acquisition of the real estate and no less frequently than annually
thereafter. The Chief Real Estate Appraiser of Prudential Investment Management
is responsible to assure that the valuation process provides objective and
accurate market value estimates.
The purpose of an appraisal is to estimate the market value of real estate as of
a specific date. Market value has been defined as the most probable price for
which the appraised real estate will sell in a competitive market under all
conditions requisite for a fair sale, with the buyer and seller each acting
prudently, knowledgeably, and for self interest, and assuming that neither is
under undue duress.
Real estate partnerships are valued at the Partnership's equity in net assets as
reflected in the partnership's financial statements with properties valued as
described above.
As described above, the estimated market value of real estate and real estate
related assets is determined through an appraisal process. These estimated
market values may vary significantly from the prices at which the real estate
investments would sell since market prices of real estate investments can only
be determined by negotiation between a willing buyer and seller. Although the
estimated market values represent subjective estimates, management believes
these estimated market values are reasonable approximations of market prices and
the aggregate value of investments in real estate is fairly presented as of
December 31, 2002 and 2001.
Investment in Real Estate Investment Trusts - Shares of real estate investment
trusts (REITs) are generally valued at their quoted market price. These values
may be adjusted for discounts relating to restrictions, if any, on the future
sale of these shares, such as lockout periods or limitations on the number of
shares which may be sold in a given time period. Any such discounts are
determined by the Chief Real Estate Appraiser.
Other Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. The Partnership's exposure to market rate risk for changes
in interest rates relates to about 29.45% of its investment portfolio consisting
primarily of short-term fixed rate commercial paper and fixed and variable
interest rate debt. The Partnership does not use derivative financial
instruments. By policy, the Partnership places its investments with high quality
debt security issuers, limits the amount of credit exposure to any one issuer,
limits duration by restricting the term, and holds investments to maturity
except under rare circumstances.
The table below presents the amounts and related weighted interest rates of the
Partnership's cash equivalents and short-term investments at December 31, 2002:
28 - Real Property
Estimated Market
Maturity Value Average
(in $ millions) Interest Rate
---------------------------------------------------------------------------
Cash equivalents 0-3 months $18.6 1.15%
Short-term 3-12 months $0 N/A
investments
The table below discloses the Partnership's fixed and variable rate debt as of
December 31, 2002. Approximately $25.9 million of the Partnership's long-term
debt bears interest at fixed rates and therefore the fair value of these
instruments is affected by changes in market interest rates. The following table
presents principal cash flows (in thousands) based upon maturity dates of the
debt obligations and the related weighted-average interest rates by expected
maturity dates for the fixed rate debt. The interest rate on the variable rate
debt is equal to the 6-month Treasury rate plus 1.565%. It is subject to a
maximum of 11.345% and a minimum of 2.345%. The interest rate on the variable
rate debt as of December 31, 2002 was 3.235%.
Debt (in $ thousands), Estimated
including current portion 2003 2004 2005 2006 2007 Thereafter Total Fair Value
- ------------------------- ---- ---- ---- ---- ---- ---------- ----- ----------
Average Fixed Interest Rate 7.43% 7.46% 7.47% 7.16% 7.18% 6.75% 7.79%
Fixed Rate $671 $719 $ 774 $ 8,477 $588 $14,626 $25,855 $26,851
Variable Rate 231 242 250 9,121 -- -- 9,844 9,589
-----------------------------------------------------------------------------------------
Total Mortgage Loans Payable $902 $961 $1,024 $17,598 $588 $14,626 $35,699 $36,440
The Partnership is exposed to market risk from tenants. While the Partnership
has not experienced any significant credit losses, in the event of a significant
rising interest rate environment and/or economic downturn, defaults could
increase and result in losses to the Partnership, which would adversely affect
its operating results and liquidity.
FINANCIAL STATEMENTS
Following are financial statements and independent accountant's reports of the
Real Property Account, as well as financial statements and independent
accountant's reports of the Partnership.
29 - Real Property
FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 2002 and 2001
2002 2001
--------- ---------
ASSETS
Investment in The Prudential Variable Contract
Real Property Partnership .............................. $101,048,531 $108,557,379
------------ ------------
Net Assets................................................. $101,048,531 $108,557,379
============ ============
NET ASSETS, representing:
Equity of contract owners ................................. $ 75,909,090 $ 78,352,169
Equity of Pruco Life Insurance Company .................... 25,139,441 30,205,210
------------ ------------
$101,048,531 $108,557,379
============ ============
Units outstanding............................................. 46,460,669 50,243,768
============ ============
STATEMENTS OF OPERATIONS
For the years ended December 31, 2002, 2001 and 2000
2002 2001 2000
--------- --------- ---------
INVESTMENT INCOME
Net investment income from Partnership operations............. $ 5,952,587 $ 6,766,150 $ 7,521,480
----------- ----------- -----------
EXPENSES
Charges to contract owners for assuming mortality risk and
expense risk and for administration ....................... 474,986 486,471 481,819
--------- --------- ---------
NET INVESTMENT INCOME......................................... 5,477,601 6,279,679 7,039,661
--------- --------- ---------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net change in unrealized gain (loss) on investments
in Partnership ............................................... (4,882,490) (1,302,684) 978,929
Realized gain (loss) on sale of investments in Partnership.... 215,623 (115,961) 1,458,147
--------- --------- ---------
NET GAIN (LOSS) ON INVESTMENTS................................ (4,666,867) (1,418,645) 2,437,076
--------- --------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.................................. $ 810,734 $ 4,861,034 $ 9,476,737
=========== =========== ===========
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 2002, 2001 and 2000
2002 2001 2000
--------- --------- ---------
OPERATIONS
Net investment income......................................... $ 5,477,601 $ 6,279,679 $ 7,039,661
Net change in unrealized gain (loss) on investments in Partnership (4,882,490) (1,302,684) 978,929
Net realized gain (loss) on sale of investments in Partnership 215,623 (115,961) 1,458,147
------------ ------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.................................. 810,734 4,861,034 9,476,737
------------ ------------ ------------
CAPITAL TRANSACTIONS
Net withdrawals by contract owners ........................... (2,895,970) (3,384,921) (7,012,328)
Net withdrawals by Pruco Life Insurance Company............... (5,423,612) (5,445,898) (7,662,472)
------------ ------------ ------------
NET DECREASE IN NET ASSETS
RESULTING FROM CAPITAL TRANSACTIONS........................ (8,319,582) (8,830,819) (14,674,800)
------------ ------------ ------------
TOTAL DECREASE IN NET ASSETS.................................. (7,508,848) (3,969,785) (5,198,063)
NET ASSETS
Beginning of year.......................................... 108,557,379 112,527,164 117,725,227
------------ ------------ ------------
End of year................................................ $101,048,531 $108,557,379 $112,527,164
============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A2 THROUGH A5.
A1 - Real Property
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
DECEMBER 31, 2002
NOTE 1: GENERAL
Pruco Life Variable Contract Real Property Account (the "Real Property Account")
was established on August 27, 1986 and commenced business September 5, 1986.
Pursuant to Arizona law, the Real Property Account was established as a separate
investment account of Pruco Life Insurance Company ("Pruco Life"), a
wholly-owned subsidiary of The Prudential Insurance Company of America
("Prudential"). The assets of the Real Property Account are segregated from
Pruco Life's other assets. The Real Property account is used to fund benefits
under certain variable life insurance and variable annuity contracts issued by
Pruco Life. These products are Appreciable Life ("VAL"), Variable Life ("VLI"),
Discovery Plus ("SPVA"), and Discovery Life Plus ("SPVL").
The assets of the Real Property Account are invested in The Prudential Variable
Contract Real Property Partnership (the "Partnership"). The Partnership is
organized under New Jersey law and is registered under the Securities Act of
1933. The Partnership is the investment vehicle for assets allocated to the real
estate investment option under certain variable life insurance and annuity
contracts. The Real Property Account, along with The Prudential Variable
Contract Real Property Account and the Pruco Life of New Jersey Variable
Contract Real Property Account, are the sole investors in the Partnership. These
financial statements should be read in conjunction with the financial statements
of the Partnership.
The Partnership has a policy of investing at least 65% of its assets in direct
ownership interests in income-producing real estate and participating mortgage
loans.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF ACCOUNTING
The accompanying financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America ("GAAP"). The
preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
and disclosures. Actual results could differ from those estimates.
B. INVESTMENT IN PARTNERSHIP INTEREST
The investment in the Partnership is based on the Real Property Account's
proportionate interest of the Partnership's market value. At December 31, 2002
and 2001 the Real Property Account's interest in the Partnership was 54.8% or
4,190,321 shares and 54.8% or 4,556,749 shares respectively.
C. INCOME RECOGNITION
Net investment income and realized and unrealized gains and losses are
recognized daily. Amounts are based upon the Real Property Account's
proportionate interest in the Partnership.
D. EQUITY OF PRUCO LIFE INSURANCE COMPANY
Pruco Life maintains a position in the Real Property Account for property
acquisitions and capital expenditure funding needs. The position is also
utilized for liquidity purposes including unit purchases and redemptions,
Partnership share transactions, and expense processing. The position does not
have an effect on the contract owner's account or the related unit value.
NOTE 3: INVESTMENT INFORMATION FOR THE PRUDENTIAL VARIABLE CONTRACT REAL
PROPERTY PARTNERSHIP
The number of shares (rounded) held by the Real Property Account in the
Partnership and the Partnership net asset value per share (rounded) at December
31, 2002 and 2001 were as follows:
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
NUMBER OF SHARES (ROUNDED): 4,190,321 4,556,749
NET ASSET VALUE PER SHARE (ROUNDED): $24.11 $23.82
A2 - Real Property
NOTE 4: CHARGES AND EXPENSES
A. MORTALITY RISK AND EXPENSE RISK CHARGES
Mortality risk and expense risk charges are determined daily using an effective
annual rate of 0.6%, 0.35%, 0.9% and 0.9% for VAL, VLI, SPVA, SPVL,
respectively. Mortality risk is that life insurance contract owners may not live
as long as estimated or annuitants may live longer than estimated and expense
risk is that the cost of issuing and administering the policies may exceed
related charges by Pruco Life.
B. ADMINISTRATIVE CHARGES
Administrative charges are determined daily using an effective annual rate of
0.35% applied daily against the net assets representing equity of contract
owners held in each subaccount for SPVA and SPVL. Administrative charges include
costs associated with issuing the contract, establishing and maintaining
records, and providing reports to contract owners.
C. COST OF INSURANCE AND OTHER RELATED CHARGES
Contract owner contributions are subject to certain deductions prior to being
invested in the Real Property Account. The deductions for VAL and VLI are (1)
state premium taxes; (2) sales charges which are deducted in order to compensate
Pruco Life for the cost of selling the contract and (3) transaction costs,
applicable to VAL, are deducted from each premium payment to cover premium
collection and processing costs. Contracts are also subject to monthly charges
for the costs of administering the contract to compensate Pruco Life the
guaranteed minimum death benefit risk.
D. DEFERRED SALES CHARGE
A deferred sales charge is imposed upon the surrender of certain variable life
insurance contracts to compensate Pruco Life for sales and other marketing
expenses. The amount of any sales charge will depend on the number of years that
have elapsed since the contract was issued. No sales charge will be imposed
after the sixth and tenth year of the contract for SPVL and VAL, respectively.
No sales charge will be imposed on death benefits.
E. PARTIAL WITHDRAWAL CHARGE
A charge is imposed by Pruco Life on partial withdrawals of the cash surrender
value for VAL. A charge equal to the lesser of $15 or 2% will be made in
connection with each partial withdrawal of the cash surrender value of a
contract.
NOTE 5: TAXES
Pruco Life is taxed as a "life insurance company" as defined by the Internal
Revenue Code. The results of operations of the Real Property Account form a part
of Prudential's consolidated federal tax return. Under current federal law, no
federal income taxes are payable by the Real Property Account. As such, no
provision for the tax liability has been recorded in these financial statements.
A3 - Real Property
NOTE 6: NET WITHDRAWALS BY CONTRACT OWNERS
Contract owner activity for the real estate investment option in Pruco Life's
variable insurance and variable annuity products for the years ended December
31, 2002, 2001 and 2000 were as follows:
2002:
- -----
VAL VLI SPVA SPVL TOTAL
----------- --------- -------- --------- -----------
Contract Owner Net Payments: $ 4,401,046 $ 330,648 $ 0 $ 310 $ 4,732,004
Policy Loans: (1,591,647) (5,015) 0 (56,057) (1,652,719)
Policy Loan Repayments and Interest: 2,046,010 58,158 0 125,801 2,229,969
Surrenders, Withdrawals, and
Death Benefits: (4,311,328) (325,555) (64,882) (322,558) (5,024,323)
Net Transfers To Other Subaccounts
or Fixed Rate Option: (41,683) (8,788) 27,098 (67,553) (90,926)
Administrative and Other Charges: (2,879,240) (183,223) 0 (27,512) (3,089,975)
----------- --------- -------- --------- -----------
NET WITHDRAWALS BY CONTRACT OWNERS $(2,376,842) $(133,775) $(37,784) $(347,569) $(2,895,970)
=========== ========= ======== ========= ===========
2001:
- -----
VAL VLI SPVA SPVL TOTAL
----------- --------- -------- --------- -----------
Contract Owner Net Payments: $ 4,273,765 $ 380,615 $ (13) $ (1,874) $ 4,652,493
Policy Loans: (1,856,054) (86,464) 0 (78,500) (2,021,018)
Policy Loan Repayments and Interest: 1,881,095 63,019 0 176,382 2,120,496
Surrenders, Withdrawals, and
Death Benefits: (3,953,623) (285,065) (34,082) (341,668) (4,614,438)
Net Transfers To Other Subaccounts
or Fixed Rate Option: (492,261) (17,950) (19,027) 56,745 (472,493)
Administrative and Other Charges: (2,837,147) (183,877) 0 (28,937) (3,049,961)
----------- --------- -------- --------- -----------
NET WITHDRAWALS BY CONTRACT OWNERS $(2,984,225) $(129,722) $(53,122) $(217,852) $(3,384,921)
=========== ========= ======== ========= ===========
2000:
- -----
VAL VLI SPVA SPVL TOTAL
----------- --------- -------- --------- -----------
Contract Owner Net Payments: $ 4,470,287 $ 397,335 $ 0 $ (61) $ 4,867,561
Policy Loans: (2,018,495) (73,712) 0 (77,275) (2,169,482)
Policy Loan Repayments and Interest: 1,849,555 72,675 0 152,141 2,074,371
Surrenders, Withdrawals, and
Death Benefits: (4,314,085) (266,353) (70,733) (401,369) (5,052,540)
Net Transfers To Other Subaccounts
or Fixed Rate Option: (3,377,546) (145,822) (7,622) (171,284) (3,702,274)
Administrative and Other Charges: (2,823,304) (176,525) (65) (30,070) (3,029,964)
----------- --------- -------- --------- -----------
NET WITHDRAWALS BY CONTRACT OWNERS $(6,213,588) $(192,402) $(78,420) $(527,918) $(7,012,328)
=========== ========= ======== ========= ===========
NOTE 7: UNIT ACTIVITY
Transactions in units for the years ended December 31, 2002, 2001 and 2000 were
as follows:
2002:
- -----
VAL VLI SPVA SPVL
---------- -------- ------- --------
Company Contributions: 1,898,876 Contract Owner Contributions: 2,978,887 181,776 81 76,633
Company Redemptions: (4,334,318) Contract Owner Redemptions: (4,071,866) (240,790) (19,328) (253,050)
2001:
- -----
VAL VLI SPVA SPVL
---------- -------- ------- --------
Company Contributions: 1,963,552 Contract Owner Contributions: 2,853,710 202,651 0 121,966
Company Redemptions: (4,396,929) Contract Owner Redemptions: (4,247,981) (261,094) (27,100) (233,493)
2000:
- -----
VAL VLI SPVA SPVL
---------- -------- ------- --------
Company Contributions: 4,000,283 Contract Owner Contributions: 2,890,088 216,712 13 72,083
Company Redemptions: (7,722,351) Contract Owner Redemptions: (6,033,092) (309,042) (43,494) (362,852)
A4 - Real Property
NOTE 8: PURCHASES AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments in the
Partnership for the years ended December 31, 2002, 2001 and 2000 were as
follows:
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- ----------------- -----------------
PURCHASES: $0 $0 $0
SALES: $(8,794,568) $(9,317,290) $(15,156,619)
NOTE 9: FINANCIAL HIGHLIGHTS
Pruco Life Insurance Company (the "Company") sells a number of variable annuity
and variable life insurance products. These products have unique combinations of
features and fees that are charged against the contract owner's account balance.
Differences in the fee structures result in a variety of unit values, expense
ratios and total returns.
The following tables were developed by determining which products offered by
Pruco Life have the lowest and highest total return. The summary may not reflect
the minimum and maximum contract charges offered by the Company as contract
owners may not have selected all available and applicable contract options as
discussed in Note 1. The tables reflect contract owner units only.
AT DECEMBER 31, 2002 FOR THE YEAR ENDED DECEMBER 31, 2002
-------------------- ------------------------------------
EXPENSE TOTAL
UNITS UNIT VALUE NET ASSETS INVESTMENT RATIO** RETURN***
(000'S) LOWEST-HIGHEST (000'S) INCOME RATIO* LOWEST-HIGHEST LOWEST-HIGHEST
------- -------------- ------- ------------- -------------- --------------
34,771 $1.97263 to $2.27966 $75,909 5.59% 0.35% to 1.25% -0.03% to 0.87%
AT DECEMBER 31, 2001 FOR THE YEAR ENDED DECEMBER 31, 2001
-------------------- ------------------------------------
EXPENSE TOTAL
UNITS UNIT VALUE NET ASSETS INVESTMENT RATIO** RETURN***
(000'S) LOWEST-HIGHEST (000'S) INCOME RATIO* LOWEST-HIGHEST LOWEST-HIGHEST
------- -------------- ------- ------------- -------------- --------------
36,119 $1.97316 to $2.26011 $78,352 5.95% 0.35% to 1.25% 3.50% to 4.42%
The tables above reflect information for units held by contract owners. Pruco
Life also maintains a position in the Real Property Account, to provide for
property acquisitions and capital expenditure funding needs. Pruco Life held
11,689,343 and 14,124,785 units representing $25,139,441 and $30,205,210 of net
assets as of December 31, 2002 and 2001, respectively. Charges for mortality
risk, expense risk and administrative expenses are used to purchase additional
units in the account resulting in no impact to Pruco Life net assets. The total
return of the Pruco Life units was 1.22% to 1.22% and 4.75% to 4.77% for the
year ended December 31, 2002 and 2001, respectively.
* This amount represents the proportionate share of the net investment income
from the underlying Partnership divided by the total average assets of the
Account. This ratio excludes those expenses, such as mortality and expense
charges, that result in direct reductions in the unit values.
** These ratios represent the annualized contract expenses of the separate
account, consisting primarily of mortality and expense charges, for each period
indicated. The ratios include only those expenses that result in a direct
reduction to unit values. Charges made directly to contract owner accounts
through the redemption of units and expenses of the underlying Partnership are
excluded.
*** These amounts represent the total return for the periods indicated,
including changes in the value of the underlying Partnership, and reflect
deductions for all items included in the expense ratio. The total return does
not include any expense assessed through the redemption of units; inclusion of
these expenses in the calculation would result in a reduction in the total
return presented.
NOTE 10: RELATED PARTY FOOTNOTE
Prudential and its affiliates perform various services on behalf of the
Partnership in which the Account invests and may receive fees for the services
performed. These services include, among other things, shareholder
communications, preparation, postage, fund transfer agency and various other
record keeping and customer service functions.
A5 - Real Property
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of the
Pruco Life Variable Contract Real Property Account
and the Board of Directors of
Pruco Life Insurance Company
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of Pruco Life Variable Contract Real
Property Account at December 31, 2002 and 2001, and the results of its
operations and the changes in its net assets for the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the management of the Pruco Life Insurance Company; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of shares at December 31, 2002 with The Prudential Variable
Contract Real Property Partnership, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
March 25, 2003
A6 - Real Property
INDEX
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FINANCIAL STATEMENTS
Consolidated Statements of Assets and Liabilities -
December 31, 2002 and 2001 B1
Consolidated Statements of Operations -
Years Ended December 31, 2002, 2001 and 2000 B2
Consolidated Statements of Changes in Net Assets -
Years Ended December 31, 2002, 2001 and 2000 B3
Consolidated Statements of Cash Flows -
Years Ended December 31, 2002, 2001 and 2000 B4
Schedule of Investments - December 31, 2002 and 2001 B5
Notes to Financial Statements B6
Report of Independent Accountants B12
INDEX - Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001
------------ ------------
ASSETS
REAL ESTATE INVESTMENTS-- At estimated market value:
Real estate and improvements (cost: 12/31/2002-- $215,592,277;
12/31/2001-- $212,044,159)................................................ $196,631,183 $197,970,877
Real estate partnership (cost: 12/31/2002-- $9,931,394;
12/31/2001-- $7,026,540).................................................. 8,978,324 6,712,308
------------ ------------
Total real estate investments............................................. 205,609,507 204,683,185
CASH AND CASH EQUIVALENTS....................................................... 18,591,149 26,615,645
DIVIDEND RECEIVABLE............................................................. -- 28,455
OTHER ASSETS (net of allowance for uncollectible accounts: 12/31/2002-- $69,000;
12/31/2001-- $107,000)....................................................... 5,519,457 3,267,367
------------ ------------
Total assets.............................................................. $229,720,113 $234,594,652
============ ============
LIABILITIES
MORTGAGE LOANS PAYABLE.......................................................... 35,699,108 28,994,521
ACCOUNTS PAYABLE AND ACCRUED EXPENSES........................................... 3,092,098 3,469,242
DUE TO AFFILIATES............................................................... 907,503 896,134
OTHER LIABILITIES............................................................... 911,245 972,410
MINORITY INTEREST............................................................... 4,756,653 2,111,709
------------ ------------
Total liabilities......................................................... 45,366,607 36,444,016
------------ ------------
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY................................................................ 184,353,506 198,150,636
------------ ------------
Total liabilities and partners' equity.................................... $229,720,113 $234,594,652
============ ============
NUMBER OF SHARES OUTSTANDING AT END OF PERIOD................................... 7,644,848 8,317,470
============ ============
SHARE VALUE AT END OF PERIOD.................................................... $24.11 $23.82
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
B1 - Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2002 2001 2000
----------- ----------- ------------
INVESTMENT INCOME:
Revenue from real estate and improvements..................... $26,345,500 $24,339,631 $ 22,570,851
Equity in income of real estate partnership................... 276,209 686,801 791,596
Dividend income............................................... -- 2,157,647 1,744,611
Interest on short-term investments............................ 455,339 296,514 1,280,880
----------- ----------- ------------
Total investment income..................................... 27,077,048 27,480,593 26,387,938
----------- ----------- ------------
INVESTMENT EXPENSES:
Operating..................................................... 5,261,674 5,328,004 4,390,001
Investment management fee..................................... 2,486,639 2,694,130 2,705,589
Real estate taxes............................................. 2,824,719 2,652,956 2,498,065
Administrative................................................ 3,345,192 2,518,644 2,411,390
Interest expense.............................................. 1,989,473 1,776,701 732,991
Minority interest............................................... 305,308 159,852 11,785
----------- ----------- ------------
Total investment expenses................................... 16,213,005 15,130,287 12,749,821
----------- ----------- ------------
NET INVESTMENT INCOME........................................... 10,864,043 12,350,306 13,638,117
----------- ----------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON REAL ESTATE
INVESTMENTS:
Net proceeds from real estate investments sold................ 6,282,075 53,417,000 46,617,017
Less: Cost of real estate investments sold.................... 9,101,381 50,300,836 55,269,357
Realization of prior years' unrealized
(loss) gain on real estate investments sold............... (3,212,838) 3,327,829 (11,296,284)
----------- ----------- ------------
Net gain (loss) realized on real estate
investments sold............................................ 393,532 (211,665) 2,643,944
----------- ----------- ------------
Change in unrealized (loss) gain on real estate investments... (8,739,488) (2,311,404) 2,297,429
Less: Minority interest in unrealized gain on real estate
investments ................................................ 171,707 24,680 454,351
----------- ----------- ------------
Net unrealized (loss) gain on real estate investments........... (8,911,195) (2,336,084) 1,843,078
----------- ----------- ------------
NET REALIZED AND UNREALIZED (LOSS) GAIN
ON REAL ESTATE INVESTMENTS.................................... (8,517,663) (2,547,749) 4,487,022
----------- ----------- ------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............ $ 2,346,380 $ 9,802,557 $ 18,125,139
=========== =========== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
B2 - Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31,
------------------------------------------------
2002 2001 2000
------------ ------------ ------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS:
Net investment income......................................... $10,864,043 $12,350,306 $13,638,117
Net gain (loss) realized on real estate investments sold...... 393,532 (211,665) 2,643,944
Net unrealized (loss) gain from real estate investments....... (8,911,195) (2,336,084) 1,843,078
------------ ------------ ------------
Net increase in net assets resulting from operations........ 2,346,380 9,802,557 18,125,139
------------ ------------ ------------
NET DECREASE IN NET ASSETS RESULTING
FROM CAPITAL TRANSACTIONS:
Withdrawals by partners
(2002 -- 672,622; 2001 -- 758,443; and
2000-- 1,003,008 shares, respectively)...................... (16,143,510) (18,000,000) (22,000,000)
------------ ------------ ------------
Net decrease in net assets resulting from
capital transactions.................................... (16,143,510) (18,000,000) (22,000,000)
------------ ------------ ------------
NET DECREASE IN NET ASSETS...................................... (13,797,130) (8,197,443) (3,874,861)
NET ASSETS-- Beginning of year.................................. 198,150,636 206,348,079 210,222,940
------------ ------------ ------------
NET ASSETS-- End of year........................................ $184,353,506 $198,150,636 $206,348,079
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
B3 - Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------------
2002 2001 2000
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations................ $ 2,346,380 $ 9,802,557 $ 18,125,139
Adjustments to reconcile net increase in net assets
resulting from operations to net cash from operating activities:
Net realized and unrealized loss (gain) on real estate
investments 8,517,663 2,547,749 (4,487,022)
Equity in income of real estate partnership's
operations in excess of distributions......................... (53,459) (686,801) (791,596)
Minority interest in operating activities....................... 305,308 159,852 11,785
Bad debt expense................................................ 184,242 108,358 96,785
Decrease (increase) in:
Dividend receivable........................................... 20,802 213,886 (110,799)
Other assets.................................................. (2,436,336) (449,444) (169,489)
Decrease (increase) in:
Accounts payable and accrued expenses......................... (377,144) 951,424 (449,796)
Due to affiliates............................................. 11,369 8,700 17,957
Other liabilities............................................. (61,165) 303,201 143,316
------------ ------------ ------------
Net cash flows from operating activities............................ 8,457,660 12,959,482 12,386,280
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from real estate investments sold.................. 6,282,075 53,417,000 46,617,017
Acquisition of real estate...................................... (2,610,723) (14,582,383) --
Acquisition of real estate partnership.......................... -- -- --
Acquisition of real estate investment trust..................... -- (18,403,928) (34,157,332)
Improvements and additional costs on prior purchases:
Additions to real estate...................................... (2,629,708) (4,373,073) (4,215,157)
Additions to real estate partnership.......................... (2,851,395) (353,956) (7,060)
Sale (purchase) of marketable securities, net................... -- 4,916,494 (2,119,486)
------------ ------------ ------------
Net cash flows from investing activities........................ (1,809,751) 20,620,154 6,117,982
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Withdrawals by partners......................................... (16,143,510) (18,000,000) (22,000,000)
Principal payments on mortgage loans payable.................... (696,828) (437,588) (92,307)
Distributions to minority interest partners..................... (100,528) -- --
Contributions from minority interest partners................... 2,268,461 929,776 159,197
------------ ------------ ------------
Net cash flows from financing activities............................ (14,672,405) (17,507,812) (21,933,110)
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS............................. (8,024,496) 16,071,824 (3,428,848)
CASH AND CASH EQUIVALENTS-- Beginning of year....................... 26,615,645 10,543,821 13,972,669
------------ ------------ ------------
CASH AND CASH EQUIVALENTS-- End of year............................. $ 18,591,149 $ 26,615,645 $ 10,543,821
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
B4 - Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------------------- ------------------------------
ESTIMATED ESTIMATED
MARKET MARKET
COST VALUE COST VALUE
----------------------------- ------------------------------
REAL ESTATE AND IMPROVEMENTS--
PERCENTAGE OF NET ASSETS...................... 106.7% 99.9%
Location Description
- ----------------------------------------------------------------------------------------------------------------------
Lisle, IL Office Building.......... $22,857,236 $13,854,988 $22,561,428 $14,193,539
Atlanta, GA Garden Apartments........ 15,715,772 17,523,063 15,696,606 18,752,139
Roswell, GA Retail Shopping Center .. 32,895,282 24,903,969 32,878,304 26,625,833
Bolingbrook, IL Warehouse................ -- -- 9,039,620 5,826,782
Raleigh, NC Garden Apartments ....... 15,943,836 17,502,998 15,940,839 16,808,160
Brentwood, TN Office Building.......... 10,320,613 9,651,831 9,977,669 10,629,012
Oakbrook Terrace, IL Office Building.......... 14,205,396 11,213,142 14,015,481 14,359,009
Beaverton, OR Office Building.......... 11,890,209 10,800,005 11,989,204 10,988,123
Salt Lake City, UT Industrial Building...... 6,599,482 5,202,646 6,568,107 5,487,490
Aurora, CO Industrial Building...... 10,294,784 10,557,058 10,131,517 9,900,000
Brentwood, TN Office Building.......... 9,826,195 7,709,345 9,612,024 8,900,790
* Jacksonville, FL Garden Apartments........ 19,745,855 19,800,000 19,711,225 20,400,000
* Gresham/Salem, OR Garden Apartments........ 18,838,570 18,600,000 18,815,082 19,100,000
* Hampton, VA Retail Shopping Center... 16,446,909 19,300,000 15,107,053 16,000,000
* Ocean City, MD Retail Shopping Center... 10,012,138 10,012,138 -- --
--- -------- ------------ ------------ ------------
$215,592,277 $196,631,183 $212,044,159 $197,970,877
============ ============ ============ ============
REAL ESTATE PARTNERSHIP--
PERCENTAGE OF NET ASSETS...................... 4.9% 3.4%
Location Description
- ----------------------------------------------------------------------------------------------------------------------
Kansas City, KS; MO Retail Shopping Centers . $ 9,931,394 $ 8,978,324 $ 7,026,540 $ 6,712,308
=================================================================
*Real estate partnerships accounted for by the consolidation method.
DECEMBER 31, 2002 DECEMBER 31, 2001
------------------------ -----------------------
ESTIMATED ESTIMATED
FACE AMOUNT COST MARKET VALUE COST MARKET VALUE
----------- ----------- ------------ ----------- ------------
CASH AND CASH EQUIVALENTS--PERCENTAGE OF NET ASSETS.......... 10.1% 13.4%
Federal National Mortgage Assoc., 1.00%, January 02, 2003.... $ 6,928,000 $ 6,927,615 $ 6,927,615 $ -- $ --
Federal National Mortgage Assoc., 1.27%, January 17, 2003.... 1,218,000 1,217,055 1,217,055 -- --
Federal Home Loan Mortgage Corp., 1.27%, January 21, 2003.... 3,461,000 3,457,581 3,457,581 -- --
Federal National Mortgage Assoc., 1.27%, January 21, 2003.... 1,288,000 1,286,819 1,286,819 -- --
Federal National Mortgage Assoc., 1.22%, February 10, 2003... 1,000,000 998,611 998,611 -- --
Federal National Mortgage Assoc., 1.22%, February 13, 2003... 2,070,000 2,066,913 2,066,913 -- --
Federal Farm Credit Banks, 1.22%, February 14, 2003.......... 1,870,000 1,867,148 1,867,148 -- --
Federal Home Loan Mortgage 1.51%, January 2, 2002............ 25,334,000 -- -- 25,331,875 25,331,875
----------- ----------- ----------- ---------- -----------
TOTAL CASH EQUIVALENTS....................................... 17,835,000 17,821,742 17,821,742 25,331,875 25,331,875
CASH ....................................................... 769,407 769,407 769,407 1,283,770 1,283,770
----------- ----------- ---------- ----------- -----------
TOTAL CASH AND CASH EQUIVALENTS............................... $18,604,407 $18,591,149 $18,591,149 $26,615,645 $26,615,645
=========== =========== ========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
B5 - Real Property
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FOR YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
NOTE 1: ORGANIZATION
On April 29, 1988, The Prudential Variable Contract Real Property Partnership
(the "Partnership"), a general partnership organized under New Jersey law, was
formed through an agreement among The Prudential Insurance Company of America
("Prudential"), Pruco Life Insurance Company ("Pruco Life"), and Pruco Life
Insurance Company of New Jersey ("Pruco Life of New Jersey"). The Partnership
was established as a means by which assets allocated to the real estate
investment option under certain variable life insurance and variable annuity
contracts issued by the respective companies could be invested in a commingled
pool. The Partners in the Partnership are Prudential, Pruco Life and Pruco Life
of New Jersey.
The Partnership's policy is to invest at least 65% of its assets in direct
ownership interests in income-producing real estate and participating mortgage
loans.
The estimated market value of the Partnership's shares is determined daily,
consistent with the Partnership Agreement. On each day during which the New York
Stock Exchange is open for business, the net asset value of the Partnership is
estimated using the estimated market value of its assets, principally as
described in Notes 2A and 2B below, reduced by any liabilities of the
Partnership. The periodic adjustments to property values described in Notes 2A
and 2B below and other adjustments to previous estimates are made on a
prospective basis. There can be no assurance that all such adjustments to
estimates will be made timely.
Shares of the Partnership are held by The Prudential Variable Contract Real
Property Account, Pruco Life Variable Contract Real Property Account and Pruco
Life of New Jersey Variable Contract Real Property Account (the "Real Property
Accounts") and may be purchased and sold at the then current share value of the
Partnership's net assets. Share value is calculated by dividing the estimated
market value of net assets of the Partnership as determined above by the number
of shares outstanding. A contract owner participates in the Partnership through
interests in the Real Property Accounts.
Prudential Real Estate Investors ("PREI") is part of the Prudential Investment
Management unit ("PIM") and is a division of Prudential Investment Management,
Inc., a subsidiary of Prudential Financial Inc. PREI provides investment
advisory services to the Partnership's Partners pursuant to the terms of the
Advisory Agreement as described in Note 9.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A: BASIS OF PRESENTATION--The accompanying consolidated financial
statements are presented on the accrual basis of accounting. It is the
Partnership's policy to consolidate those real estate partnerships in
which it has a controlling financial interest. All significant
intercompany balances and transactions have been eliminated in the
consolidation.
B: REAL ESTATE INVESTMENTS--The Partnership's investments in real estate
are initially valued at their purchase price. Thereafter, real estate
investments are reported at their estimated market values based upon
appraisal reports prepared by independent real estate appraisers
(members of the Appraisal Institute or an equivalent organization)
within a reasonable amount of time following acquisition of the real
estate and no less frequently than annually thereafter. The Chief Real
Estate Appraiser of PIM is responsible to assure that the valuation
process provides objective and accurate market value estimates.
American Appraisal Associates (the "Appraisal Management Firm"), an
entity not affiliated with PIM, has been appointed by PIM to assist
the Chief Real Estate Appraiser in maintaining and monitoring the
objectivity and accuracy of the appraisal process.
Real estate partnerships are valued at the Partnership's equity in net
assets as reflected in the partnership's financial statements with
properties valued as described above.
B6 - Real Property
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FOR YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
As described above, the estimated market value of real estate and real
estate related assets is determined through an appraisal process.
These estimated market values may vary significantly from the prices
at which the real estate investments would sell since market prices of
real estate investments can only be determined by negotiation between
a willing buyer and seller. Although the estimated market values
represent subjective estimates, management believes these estimated
market values are reasonable approximations of market prices and the
aggregate value of investments in real estate is fairly presented as
of December 31, 2002, 2001, and 2000.
C: REVENUE RECOGNITION--Revenue from real estate is earned in accordance
with the terms of the respective leases. Revenue from certain real
estate investments is net of all or a portion of related real estate
expenses, as lease arrangements vary as to responsibility for payment
of these expenses between tenants and the Partnership. Since real
estate is stated at estimated market value, net income is not reduced
by depreciation or amortization expense.
D: EQUITY IN INCOME OF REAL ESTATE PARTNERSHIP--Equity in income from
real estate partnership operations represents the Partnership's share
of the current year's partnership income as provided for under the
terms of the partnership agreements. As is the case with wholly-owned
real estate, partnership net income is not reduced by depreciation or
amortization expense. Frequency of distribution of income is
determined by formal agreements or by the executive committee of the
partnership.
E: MORTGAGE LOANS PAYABLE--Mortgage loans payable are stated at the
principal amount of the obligation outstanding
F: CASH AND CASH EQUIVALENTS--For purposes of the Consolidated Statements
of Cash Flows, all short-term investments with an original maturity of
three months or less are considered to be cash equivalents. Cash
equivalents consist of investments in the Prudential Investment
Liquidity Pool offered and managed by an affiliate of Prudential
Financial Inc. and are accounted for at market value.
G: OTHER ASSETS--Cash of $237,732 and $160,635 at December 31, 2002 and
2001, respectively, was maintained by the properties for tenant
security deposits and is included in Other Assets on the Consolidated
Statements of Assets and Liabilities.
H: MARKETABLE SECURITIES--Marketable securities are highly liquid
investments with maturities of more than three months when purchased
and are carried at estimated market value.
I: FEDERAL INCOME TAXES--The Partnership is not a taxable entity under
the provisions of the Internal Revenue Code. The income and capital
gains and losses of the Partnership are attributed, for federal income
tax purposes, to the Partners in the Partnership. The Partnership may
be subject to state and local taxes in jurisdictions in which it
operates.
J: MANAGEMENT'S USE OF ESTIMATES IN THE FINANCIAL STATEMENTS--The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
B7 - Real Property
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FOR YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
K. NEW ACCOUNTING PRONOUNCEMENTS--In August 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." After careful consideration the
Partnership has concluded that SFAS No. 144 does not apply to
companies that follow the AICPA Audit and Accounting Guide, "Audits of
Investment Companies."
In April 2002, the FASB issued SFAS No. 145, which rescinded Statement
No. 4, "Reporting Gains and Losses from Extinguishment of Debt". SFAS
No. 145 is effective for fiscal years beginning after May 15, 2002.
The Partnership will adopt SFAS No. 145 on January 1, 2003. The
adoption of this statement is not expected to have a material effect
on the consolidated financial statements of the Prudential Variable
Contract Real Property Partnership.
FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities", ("FIN 46") was issued in January 2003. FIN 46 applies
immediately to variable interest entities created or for which an
interest is acquired after January 31, 2003. For all interests in
variable interest entities acquired before February 1, 2003, FIN 46
goes into effect for periods beginning after June 15, 2003. The
Partnership is evaluating the extent to which our equity investment
may need to be consolidated as a result of this Interpretation. The
Partnership's exposure to losses associated with this equity joint
venture is limited to its carrying value in this investment.
NOTE 3: DISCLOSURE OF SUPPLEMENTAL CASH FLOW INFORMATION AND NON-CASH INVESTING
AND FINANCING ACTIVITY
Cash paid for interest during the years ended December 31, 2002, 2001, and 2000
was $1,989,473, $1,776,701, and $732,991, respectively.
During the fourth quarter 2002, in conjunction with the acquisition of a real
estate investment, the Partnership assumed mortgage loan financing of $7.4
million.
During the first and second quarters of 2001, in conjunction with the
acquisition of two real estate investments, the Partnership assumed mortgage
loan financing of $9.0 million and $10.3 million, respectively.
NOTE 4: REAL ESTATE PARTNERSHIP
Real estate partnership is valued at the Partnership's equity in net assets as
reflected by the partnership's financial statements with properties valued as
indicated in Note 2B above. The partnership's combined financial position at
December 31, 2002 and 2001, and results of operations for the years ended
December 31, 2002, 2001, and 2000 are summarized as follows:
DECEMBER 31,
2002 2001
----------- -----------
Partnership Assets and Liabilities
Real Estate at estimated market value....... $31,300,000 $28,300,000
Other Assets................................ 1,643,304 1,877,122
----------- -----------
Total Assets................................ 32,943,304 30,177,122
----------- -----------
Mortgage loans payable...................... 20,389,498 20,648,892
Other Liabilities........................... 362,837 918,664
----------- -----------
Total Liabilities........................... 20,752,335 21,567,556
----------- -----------
Net Assets.................................. $12,190,969 $ 8,609,566
=========== ===========
Partnership's Share of Net Assets.............. $ 8,978,324 $ 6,712,308
=========== ===========
B8 - Real Property
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FOR YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
YEAR ENDED DECEMBER 31,
2002 2001 2000
---------- ---------- ----------
Partnership Operations
Rental Revenue...................................... $4,170,038 $4,497,459 $4,223,801
Real Estate Expenses and Taxes...................... 3,717,425 3,536,948 3,292,500
---------- ---------- ----------
Net Investment Income............................... $452,613 $960,511 $931,301
========== ========== ==========
Partnership's Share of Net Investment Income........... $276,209 $686,801 $791,596
========== ========== ==========
NOTE 5: MORTGAGE LOANS PAYABLE:
Debt includes mortgage loans payable as summarized below:
PARTNERSHIP DEBT PARTNERSHIP DEBT
AS OF 12/31/02 AS OF 12/31/01 AS OF 12/31/02
-------------------------- ------------------------- -----------------
PARTNERSHIP'S PARTNERSHIP'S
100% LOAN SHARE OF 100% LOAN SHARE OF INTEREST MATURITY
BALANCE LOAN BALANCE* BALANCE LOAN BALANCE* RATE** DATE
----------- ----------- ----------- ------------ -------- ------
MORTGAGES OF WHOLLY OWNED PROPERTIES & CONSOLIDATED PARTNERSHIPS
Jacksonville, FL $ 9,844,318 $ 9,527,331 $ 9,996,863 $ 9,293,084 3.24%*** 2006
Gresham/Salem, OR 8,657,061 8,657,061 8,863,334 8,493,733 7.97% 2006
Hampton, VA 9,804,475 7,782,793 10,134,324 8,709,438 6.75% 2018
Ocean City, MD 7,393,254 3,165,791 -- -- 7.24% 2008
- ----------------------------------------------------------------------------------------------------------------------
Total $35,699,108 $29,132,976 $28,994,521 $26,496,255
MORTGAGE LOANS ON EQUITY PARTNERSHIP
Kansas City, MO - Ten Quivira $ 6,864,726 $ 5,055,871 $ 6,946,631 $ 5,121,057 8.16% 2007
Kansas City, MO - Ten Quivira Parcel 987,524 727,311 999,306 736,688 8.16% 2007
Kansas City, MO - Cherokee Hill 3,172,260 2,336,369 3,212,174 2,368,015 7.79% 2007
Kansas City, KS - Devonshire 2,200,342 1,620,552 2,226,609 1,641,456 8.16% 2007
Kansas City, MO - Willow Creek 1,306,619 962,325 1,336,251 985,084 8.63% 2005
Kansas City, MO - Brywood Center 5,858,028 4,314,437 5,927,921 4,370,064 8.16% 2007
- ----------------------------------------------------------------------------------------------------------------------
Total $20,389,498 $15,016,865 $20,648,892 $15,222,363
Total Mortgage Loans Payable $44,149,841 $41,718,618 6.22%
* Represents the Partnership's interest in the loan based upon the estimated
percentage of net assets which would be distributed to the Partnership if
the partnership were liquidated at December 31, 2002 or 2001. It does not
represent the Partnership's legal obligation.
** The Partnership's weighted average interest rate at December 31, 2002 and
2001 were 6.42% and 7.28%, respectively. The weighted average interest rates
were calculated using the Partnership's annualized interest expense for each
loan (derived using the same percentage as that in (*) above) divided by the
Partnership's share of total debt.
*** Variable Rate Debt.
The interest rate on the variable rate debt is adjusted annually. The rate is
equal to the 6-month Treasury rate plus 1.565%. It is subject to a maximum of
11.345% and a minimum of 2.345%. At December 31, 2002 and 2001, the rate was
3.235 % and 5.735%, respectively. As of December 31, 2002, the mortgage loans
payable were payable as follows:
YEAR ENDING DECEMBER 31, (000'S)
--------
2003................................................... $ 902
2004................................................... 961
2005................................................... 1,024
2006................................................... 17,600
2007................................................... 588
Thereafter............................................. 14,624
--------
Total.................................................. $ 35,699
========
The mortgage loans payable are secured by real estate investments with an
estimated market value of $65,479,278.
B9 - Real Property
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
As of December 31, 2002, principal amounts of mortgage loans payable on the
equity partnership mature as follows:
100% LOAN BALANCE PARTNERSHIP'S SHARE
YEAR ENDING DECEMBER 31, (000'S) (000'S)
----------------- -------------------
2003................................ $ 1,911 $ 1,408
2004................................ 1,911 1,408
2005................................ 2,793 2,057
2006................................ 1,770 1,303
2007................................ 12,004 8,841
------- -------
Total............................... $20,389 $15,017
======= =======
Based on borrowing rates available to the Partnership at December 31, 2002 for
loans with similar terms and average maturities, the carrying value of the
Partnership's mortgages on the consolidated partnerships approximates its
estimated fair value. Different assumptions or changes in future market
conditions could significantly affect estimated market value.
NOTE 6: CONCENTRATION RISK OF REAL ESTATE INVESTMENTS
At December 31, 2002, the Partnership had real estate investments located
throughout the United States. The diversification of the account's holdings
based on the estimated market values and established NCREIF regions is as
follows:
ESTIMATED
MARKET VALUE
REGION REGION % (000'S)
----------- ------------
Southeast..................................... 39% $ 79,588
Mideast....................................... 22% 44,582
Pacific....................................... 14% 29,400
East North Central............................ 12% 25,068
Mountain...................................... 7% 15,760
West North Central............................ 4% 8,978
--------
Total......................................... $203,376
========
NOTE 7: LEASING ACTIVITY
The Partnership leases space to tenants under various operating lease
agreements. These agreements, without giving effect to renewal options, have
expiration dates ranging from 2003 to 2022. At December 31, 2002, the aggregate
future minimum base rental payments under non-cancelable operating leases by
year and in the aggregate are as follows:
YEAR ENDING DECEMBER 31, (000'S)
-------
2003.......................................... $11,665
2004.......................................... 9,647
2005.......................................... 8,996
2006.......................................... 8,035
2007.......................................... 7,087
Thereafter.................................... 21,101
-------
Total......................................... $66,531
=======
The above future minimum base rental payments exclude residential lease
agreements, which accounted for 24% of the Partnership's 2002 annual rental
income.
B10 - Real Property
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
NOTE 8: COMMITMENTS AND CONTINGENCIES
In 1986, Prudential committed to fund up to $100 million to enable the
Partnership to acquire real estate investments. Contributions to the Partnership
under this commitment have been utilized for property acquisitions, and were to
be returned to Prudential on an ongoing basis from contract owners' net
contributions and other available cash. The amount of the commitment has been
reduced by $10 million for every $100 million in current value net assets of the
Partnership. As of December 31, 2002, the cost basis of Prudential's equity
interest in the Partnership under this commitment (held through the Real
Property Accounts) was $44 million. Prudential did not make any contributions
during the 2002 fiscal year and terminated this commitment on December 31, 2002.
The Partnership is subject to various legal proceedings and claims arising in
the ordinary course of business. These matters are generally covered by
insurance. In the opinion of Prudential's management, the outcome of such
matters will not have a significant effect on the Partnership.
NOTE 9: OTHER RELATED PARTY TRANSACTIONS
Pursuant to an investment management agreement, Prudential charges the
Partnership a daily investment management fee at an annual rate of 1.25% of the
average daily gross asset valuation of the Partnership. For the years ended
December 31, 2002, 2001 and 2000 management fees incurred by the Partnership
were $2.5 million, $2.7 million, and $2.7 million for each of the three years,
respectively.
The Partnership also reimburses Prudential for certain administrative services
rendered by Prudential. The amounts incurred for the years ended December 31,
2002, 2001 and 2000 were $132,380; $118,972; and $116,630, respectively, and are
classified as administrative expenses in the Consolidated Statements of
Operations.
During the years ended December 31, 2002, 2001 and 2000, the Partnership made
the following distributions to the Partners:
YEAR ENDING DECEMBER 31, (000'S)
-------
2002................................. $16,143
2001................................. 18,000
2000................................. 22,000
NOTE 10: SUBSEQUENT EVENTS
On January 28, 2003, the Partnership sold the industrial center located in Salt
Lake City, UT for $5.8 million.
NOTE 11: FINANCIAL HIGHLIGHTS
FOR THE TWELVE MONTHS ENDED
-----------------------------------------
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
PER SHARE(UNIT) OPERATING PERFORMANCE:
Net Asset Value, beginning of period........................ $23.82 $22.74
INCOME FROM INVESTMENT OPERATIONS:
Net Investment income, before management fee................ $1.63 $1.66
Management fee.............................................. (0.30) (0.30)
Net realized and unrealized (loss) gain on investments...... (1.04) (0.28)
Net Increase in Net Assets Resulting from Operations..... 0.29 1.08
------ ------
NET ASSET VALUE, END OF PERIOD.............................. $24.11 $23.82
====== ======
TOTAL RETURN, BEFORE MANAGEMENT FEE (A):.................... 2.52% 6.14%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (in millions)..................... $184 $198
Ratios to average net assets (b):
Management Fee ....................................... 1.28% 1.27%
Net Investment Income, before Management Fee.......... 7.07% 7.45%
(a) Total Return is calculated by linking quarterly returns which are calculated using the formula below:
Net Investment Income + Net Realized and Unrealized Gains/(Losses)
------------------------------------------------------------------
Beg. Net Asset Value + Time Weighted Contributions - Time Weighted Distributions
(b) Average net assets are based on beginning of period net assets.
B11 - Real Property
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of The Prudential
Variable Contract Real Property Partnership:
In our opinion, the accompanying consolidated statements of assets and
liabilities, including the schedule of investments, and the related consolidated
statements of operations, of changes in net assets and of cash flows present
fairly, in all material respects, the financial position of The Prudential
Variable Contract Real Property Partnership (the "Partnership") at December 31,
2002 and 2001, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the management of The Prudential
Insurance Company of America; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 18, 2003
B12 - Real Property
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant, in connection with certain affiliates, maintains various
insurance coverages under which the underwriter and certain affiliated persons
may be insured against liability which may be incurred in such capacity, subject
to the terms, conditions, and exclusions of the insurance policies.
Arizona, being the state of organization of Pruco Life Insurance Company ("Pruco
Life"), permits entities organized under its jurisdiction to indemnify directors
and officers with certain limitations. The relevant provisions of Arizona law
permitting indemnification can be found in Section 10-850 et seq. of the Arizona
Statutes Annotated. The text of Pruco Life's By-law, Article VIII, which relates
to indemnification of officers and directors, is incorporated by reference to
Exhibit 3(ii) to its Form 10-Q, SEC File No. 33-37587, filed August 15, 1997.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 15. NOT APPLICABLE
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
(1A) Distribution Agreement between Pruco Securities Incorporated by reference to Post-Effective Amendment No.
Corporation and Pruco Life Insurance Company with respect to 14 to Form S-6, Registration Statement No. 2-80513, filed
the Pruco Life Variable Insurance Account. March 1, 1990, on behalf of the Pruco Life Variable
Insurance Account.
(1B) Distribution Agreement between Pruco Securities Incorporated by reference to Form S-6, Registration
Corporation and Pruco Life Insurance Company with respect to Statement No. 2-89558, filed February 21, 1984, on behalf
the Pruco Life Variable Appreciable Account. of the Pruco Life Variable Appreciable Account.
(1C) Distribution Agreement between Pruco Securities Incorporated by reference to Form S-1, Registration No.
Corporation and Pruco Life Insurance Company with respect to 33-86780, filed April 9, 1997, on behalf of the Pruco
the Pruco Life Single Premium Variable Life Account and Pruco Life Variable Contract Real Property Account.
Life Single Premium Variable Annuity Account.
(3A) Articles of Incorporation of Pruco Life Insurance Incorporated by reference to Form S-6, Registration No.
Company, as amended October 19, 1993. 333-07451, filed July 2, 1996, on behalf of the Pruco
Life Variable Appreciable Account.
(3B) By-Laws of Pruco Life Insurance Company, as amended May Incorporated by reference to Form 10-Q, Registration No.
6, 1997. 033-37587, filed August 15, 1997, on behalf of the Pruco
Life Insurance Company.
(3C) Resolution of the Board of Directors establishing Pruco Incorporated by reference to Form S-1, Registration No.
Life Variable Contract Real Property Account. 33-86780, filed April 9, 1997, on behalf of the Pruco
Life Variable Contract Real Property Account.
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(4A) Variable Life Insurance Contract. Incorporated by reference to Pre-Effective Amendment No.
1 to Form S-6, Registration Statement No. 2-80513, filed
February 17, 1983, on behalf of the Pruco Life Variable
Insurance Account.
(4B)(i) Revised Variable Appreciable Life Insurance Contract Incorporated by reference to Post-Effective Amendment No.
with fixed death benefit. 5 to Form S-6, Registration Statement No. 2-89558, filed
July 10, 1986, on behalf of the Pruco Life Variable
Appreciable Account.
(4B)(ii) Revised Variable Appreciable Life Insurance Contract Incorporated by reference to Post-Effective Amendment No.
with variable death benefit. 5 to Form S-6, Registration Statement No. 2-89558, filed
July 10, 1986, on behalf of the Pruco Life Variable
Appreciable Account.
(4C) Single Premium Variable Annuity Contract. Incorporated by reference to Form S-1, Registration No.
33-86780, filed April 9, 1997, on behalf of the Pruco
Life Variable Contract Real Property Account.
(4D)Flexible Premium Variable Life Insurance Contract. Incorporated by reference to Form S-1, Registration No.
33-86780, filed April 9, 1997, on behalf of the Pruco
Life Variable Contract Real Property Account.
(5) Opinion and Consent of Clifford E. Kirsch, Esq. as to the Filed herewith.
legality of the securities being registered.
(10A) Investment Management Agreement between Prudential Incorporated by reference to Post-Effective No. 16 to Form
Investment Management, Inc. and The Prudential Variable S-1, Registration No. 33-20083-01, filed April 10, 2003 on
Contract Real Property Partnership. behalf of the Prudential Variable Contract Real Property
Account.
(10B) Service Agreement between The Prudential Insurance Incorporated by reference to Form 10-K, Registration No.
Company of America and The Prudential Investment Corporation. 33-08698, filed September 12, 1986 on behalf of the Pruco
Life Variable Contract Real Property Account.
(10C) Partnership Agreement of The Prudential Variable Incorporated by reference to Form 10-K, Registration No.
Contract Real Property Partnership. 33-08698, filed May 2, 1988 on behalf of the Pruco Life
Variable contract Real Property Account.
(23A) Written consent of PricewaterhouseCoopers LLP, Filed herewith.
independent accountants.
(23B) Written consent of Clifford E. Kirsch, Esq. Incorporated by reference to Exhibit (5) hereto.
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(24) Powers of Attorney:
(A) Vivian L. Banta, Richard J. Carbone, Helen M. Galt, Incorporated by reference to Post-Effective Amendment No.
5 to Form S-6, Registration No. 333-85115, filed June 28,
2001 on behalf of the Pruco Life Variable Universal
Account.
(B) J. Avery
Incorporated by reference to Post-Effective Amendment No.
2 to Form S-6, Registration No. 333-07451, filed June 25,
1997 on behalf of the Pruco Life Variable Appreciable
Account.
(C) David R. Odenath, Jr., William J. Eckert, IV, Ronald
P. Joelson Incorporated by reference to Form N-4, Registration No.
333-52754, filed on December 26, 2000 on behalf of the
Pruco Life Flexible Premium Variable Annuity Account.
(b) Financial Statement Schedules
Schedule III-Real Estate Owned by The Prudential Filed herewith.
Variable Contract Real Property Partnership and
independent accountant's report thereon.
ITEM 17. UNDERTAKINGS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned Registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that Section.
The undersigned Registrant hereby undertakes (a) to file any prospectuses
required by Section 10(a)(3) of the Securities Act of 1933 as Post-Effective
Amendments to this Registration Statement, (b) that for the purposes of
determining any liability under the 1933 Act, each such Post-Effective Amendment
may be deemed to be a new Registration Statement relating to the securities
offered therein and the offering of such securities at that time may be deemed
to be in the initial bona fide offering thereof, (c) to reflect in the
prospectus any facts or events after the effective date of the registration
statement (or the most recent Post-Effective Amendment thereof) which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement, (d) to include any material
information with respect to the plan of distribution not previously disclosed in
the registration statement or any material change to such information in the
registration statement, (e) to remove from registration by means of a
Post-Effective Amendment any of the securities being registered which remain
unsold at such time as the offering of such securities may be terminated.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Pruco Life Insurance
Company has duly caused this Post-Effective Amendment No. 10 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Newark, State of New Jersey, on the 28th day of
March, 2003.
Pruco Life Insurance Company
In Respect of
Pruco Life
Variable Contract Real Property Account
By: /s/ Pamela A. Schiz
-----------------------------------
Pamela A. Schiz
Vice President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 10 to the Registration Statement has been signed below by the
following Directors and Officers of Pruco Life Insurance Company in the
capacities indicated on this 28th day of March, 2003.
Signature and Title
/s/ *
- ---------------------------------------
Vivian L. Banta
President, Chairperson, and Director
/s/ *
- ---------------------------------------
William J. Eckert, IV
Vice President and Chief
Accounting Officer
/s/ *
- ---------------------------------------
James J. Avery, Jr.
Director
/s/ *
- ---------------------------------------
Richard J. Carbone *By: /s/ Thomas C. Castano
Director ----------------------------------
Thomas C. Castano
/s/ * (Attorney-in-Fact)
- ---------------------------------------
Helen M. Galt
Director
/s/ *
- ---------------------------------------
Ronald P. Joelson
Director
/s/ *
- ---------------------------------------
David R. Odenath, Jr.
Director
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EXHIBIT INDEX
(a) (5) Opinion and Consent of Clifford E. Kirsch, Esq. as to the legality of
the securities being registered.
(23A) Written consent of PricewaterhouseCoopers LLP, independent
accountants.
(b) Financial Statement Schedules
Schedule III-Real Estate Owned by The Prudential Variable Contract Real
Property Partnership and independent accountant's report thereon.
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