UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
-----------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- -----------------
Commission File number
----------------------------
Berkshire Income Realty, Inc.
- -------------------------------------------------------------------------------
Massachusetts 32-0024337
- ------------------------------------------ -----------------------------------
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization
One Beacon Street, Boston, Massachusetts 02108
- ---------------------------------------------------------- -------------------
(Address of principal executive (Zip code)
offices)
(Registrant's telephone number, including area code) (617) 523-7722
---------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-3 of the Act)
Yes [ ] No [X]
Aggregate market value of voting securities held by non-affiliates: Not
Applicable.
There were 100 shares of Class B common stock outstanding as of March 31, 2003.
Documents incorporated by reference: None
TABLE OF CONTENTS
ITEM NO. DESCRIPTION PAGE NO.
PART I
1. BUSINESS 2
1A. RISK FACTORS 3
2. PROPERTIES 12
3. LEGAL PROCEEDINGS 12
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS 13
6. SELECTED FINANCIAL DATA 14
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 23
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES 23
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 24
11. EXECUTIVE COMPENSATION 26
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS 27
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 29
14. CONTROLS AND PROCEDURES 30
PART IV
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K 31
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this report, including information with
respect to our future business plans, constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. For this purpose, any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements, subject to a number of risks and uncertainties that
could cause actual results to differ significantly from those described in this
report. These forward-looking statements include statements regarding, among
other things, our business strategy and operations, future expansion plans,
future prospects, financial position, anticipated revenues or losses and
projected costs, and objectives of management. Without limiting the foregoing,
the words "may," "will," "should," "could," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of such terms and other comparable terminology are intended to identify
forward-looking statements. There are a number of important factors that could
cause our results to differ materially from those indicated by such
forward-looking statements. These factors include, but are not limited to,
changes in economic conditions generally and the real estate and bond markets
specifically, legislative/regulatory changes (including changes to laws
governing the taxation of real estate investment trusts ("REITs")), availability
of capital, interest rates and interest rate spreads, changes in generally
accepted accounting principles and policies and guidelines applicable to REITs,
those set forth in Part I, Item 1A. "Risk Factors" and other risks and
uncertainties as may be detailed from time to time in our public announcements
and SEC filings.
PART I
ITEM 1. BUSINESS
As used herein, the terms "we", "us' or the "Company" refer to Berkshire
Income Realty, Inc. (the "Company"), a Maryland corporation, organized on July
19, 2002. The Company intends to acquire, own and operate multi-family
residential properties. The Company has no operating history to date.
The Company filed a registration statement on Form S-11 with the Securities
and Exchange Commission, which was declared effective on January 9, 2003, with
respect to offers (the "Offering") to exchange its 9% Series A Cumulative
Redeemable Preferred Shares ("Preferred Shares") for interests ("Interests") in
the following six mortgage funds: Krupp Government Income Trust, Krupp
Government Income Trust II, Krupp Insured Mortgage Limited Partnership, Krupp
Insured Plus Limited Partnership, Krupp Insured Plus II Limited Partnership,
Krupp Insured Plus III Limited Partnership (collectively, the "Mortgage Funds").
For each Interest in the Mortgage Funds that is validly tendered and not
withdrawn in the Offering, the Company will exchange its Preferred Shares based
on an exchange ratio applicable to each Mortgage Fund. Unless extended, the
Offering is scheduled to expire on April 2, 2003.
Simultaneous with the completion of the Offering, KRF Company, L.L.C.,
("KRF Company"), an affiliate of the Company, will contribute its ownership
interests in five multi-family residential properties (the "Properties") to
Berkshire Income Realty-OP, L.P. (the "Operating Partnership") in exchange for
common limited partner interests in the Operating Partnership. Concurrent with
the completion of the Offering, KRF Company will contribute cash to the Company
in exchange for common stock of the Company in an amount equal to 1% of the fair
value of total net assets of the Operating Partnership. This amount will be
contributed to the Company's wholly owned subsidiary, BIR GP, L.L.C., who will
then contribute the cash to the Operating Partnership in exchange for the sole
general partner interest in the Operating Partnership. The Company will
contribute the Interests tendered in the Offering to the Operating Partnership
in exchange for preferred limited partner interests in the Operating
Partnership. At the completion of the Offering, the Operating Partnership will
be the successor to the Berkshire Income Realty Predecessor Group (the
"Predecessor"). The owners of the Properties (KRF and affiliates), and the
activities conducted with respect to the Properties, are collectively referred
to as the Predecessor.
-2-
On March 20, 2003, our common stockholder, KRF Company, through a newly
created affiliate, Gables of Texas Limited Partnership ("Gables") acquired The
Gables Apartments, a 140-unit multi-family apartment complex located in Houston,
Texas for a purchase price of approximately $6,925. On March 25, 2003, the audit
committee of our board of directors approved the Company's purchase of the
entire equity interest in Gables from KRF Company for a purchase price no
greater than the amount tendered for the property (including, equity payments,
transfer taxes, financing and closing costs as applicable). This transaction is
expected to be consummated shortly after the closing of the Offering.
We intend to own all of our operating assets through the Operating
Partnership and qualify as a REIT for federal income tax purposes.
Upon the completion of the Offering, we will be subject to various
environmental laws and governmental regulations.
The Company does not have any employees. Its day-to-day business will be
managed by an affiliate of KRF Company, L.L.C., Berkshire Property Advisors (the
"Berkshire Advisor"), which has been retained pursuant to the advisory services
agreement described under Item 13. Our properties will be managed by BRI OP
Limited Partnership pursuant to property management agreements described under
Item 13.
Our principal executive offices are located at One Beacon Street, Suite
1500, Boston, Massachusetts 02108 and our telephone number at that address is
(617) 523-7722.
We are required to file annual, quarterly, and current reports, and other
documents with the Securities and Exchange Commission (SEC) under the Securities
Exchange Act of 1934 (the Exchange Act). The public may read and copy any
materials that we file with the SEC at the SEC's Public Reference Room at 450
Fifth Street, NW, Washington, DC 20549. The public may obtain information on the
operation of the Public Reference Room by calling SEC at 1-800-SEC-0330. Also,
the SEC maintains an Internet website that contains reports, proxy and
information statements, and other information regarding issuers, including the
Company, that file electronically with the SEC. The public can obtain any
documents that we file with the SEC at http://www.sec.gov.
ITEM 1A. RISK FACTORS
The following risk factors should be read carefully in connection with
evaluating our business and the forward-looking statements contained in this
report and other statements we or our representatives make from time to time.
Any of the following risks could materially adversely affect our business, our
operating results, our financial condition and the actual outcome of matters as
to which forward-looking statements are made in this report. In connection with
the forward-looking statements that appear in this report, you should also
carefully review the cautionary statement referred to under "Special Note
Regarding Forward-Looking Statements."
Risk Factors Relating to the Company
We are a newly formed company with no operating history upon which to
evaluate our likely performance.
Although key personnel of our advisor, Berkshire Advisor, have had
extensive experience making real estate investments, we and Berkshire Advisor
are newly formed entities with no operating history upon which to evaluate our
likely performance. We cannot assure you that we will be able to implement our
business plan successfully.
-3-
Maintenance of our Investment Company Act exemption imposes limits on our
operations.
We intend to conduct our operations so as not to be required to register as
an investment company under the Investment Company Act of 1940. We believe that
there are exemptions under the Investment Company Act that are applicable to us.
The assets that we may acquire are limited by the provisions of the Investment
Company Act and the exemption on which we rely. In addition, we could, among
other things, be required either to change the manner in which we conduct our
operations to avoid being required to register as an investment company, or to
register as an investment company. Either of these could have an adverse effect
on us and the market price for our publicly traded securities. For example, one
exception from the definition of an "investment company" we believe we could
rely on would require us to manage our assets such that no more than 40% of our
total assets (exclusive of government securities and cash) are invested in
"investment securities". Generally speaking, "investment securities" are all
securities except securities issued by majority-owned operating company
subsidiaries and government securities. To be able to continue to rely on this
exception in the event the value of our investment securities were to increase
relative to our total assets, we may need to sell certain investment securities
that we otherwise would not want to sell. On the other hand, we may be required
to hold other non-investment security assets, such as some of our real property
assets, that we may otherwise want to sell in order to avoid increasing the
value of our investment securities relative to our total assets.
Certain Federal Income Tax Risks
Our failure to qualify as a REIT would result in higher taxes and reduced
cash available for distribution to our stockholders.
We intend to operate in a manner that will allow us to qualify as a REIT
for federal income tax purposes. Although we believe that we will be organized
and will operate in this manner, no assurance can be given that we will be able
to operate so as to qualify as a REIT under the Internal Revenue Code of 1986,
as amended (the "Code"), or to remain so qualified. Qualification as a REIT
involves the application of highly technical and complex provisions of the Code
for which there are only limited judicial or administrative interpretations. The
determination of various factual matters and circumstances not entirely within
our control may affect our ability to qualify as a REIT. The complexity of these
provisions and of the applicable income tax regulations under the Code is
greater in the case of a REIT that holds its assets through a partnership, such
as we will. Moreover, our qualification as a REIT will depend upon the
qualification of certain of our investments as REITs. In addition, we cannot
assure you that legislation, new regulations, administrative interpretations or
court decisions will not significantly change the tax laws with respect to the
qualification as a REIT or the federal income tax consequences of this
qualification. However, we are not aware of any proposal currently being
considered by Congress to amend the tax laws in a manner that would materially
and adversely affect our ability to operate as a REIT.
If for any taxable year we fail to qualify as a REIT, we would not be
allowed a deduction for distributions to our stockholders in computing our
taxable income and would be subject to federal income tax (including any
applicable alternative minimum tax) on our taxable income at regular corporate
rates. In addition, we would normally be disqualified from treatment as a REIT
for the four taxable years following the year of losing our REIT status. This
would likely result in significant increased costs to us. Any corporate tax
liability could be substantial and would reduce the amount of cash available for
distribution to our stockholders and for investment, which in turn could have an
adverse impact on the value of, and trading prices for, our publicly traded
securities.
Although we intend to operate in a manner designed to qualify as a REIT,
future economic, market, legal, tax or other considerations may cause our board
of directors and the holders of our common stock to determine that it is in our
best interest to revoke our REIT election.
-4-
We believe that our operating partnership will be treated for federal
income tax purposes as a partnership and not as a corporation or an association
taxable as a corporation. If the Internal Revenue Service were successfully to
determine that our operating partnership were properly treated as a corporation,
our operating partnership would be required to pay federal income tax at
corporate rates on its net income, its partners would be treated as stockholders
of the operating partnership and distributions to partners would constitute
dividends that would not be deductible in computing the operating partnership's
taxable income. In addition, we would fail to qualify as a REIT, with the
resulting consequences described above.
REIT distribution requirements could adversely affect our liquidity.
To obtain the favorable tax treatment for REITs qualifying under the Code,
we generally will be required each year to distribute to our stockholders at
least 90% of our real estate investment trust taxable income, determined without
regard to the deduction for dividends paid and by excluding net capital gains.
We will be subject to a 4% nondeductible excise tax on the amount, if any, by
which distributions paid by us with respect to any calendar year are less than
the sum of: (1) 85% of our ordinary income for the calendar year; (2) 95% of our
capital gain net income for the calendar year, unless we elect to retain and pay
income tax on those gains; and (3) 100% of our undistributed amounts from prior
years.
Failure to comply with these requirements would result in our income being
subject to tax at regular corporate rates.
We intend to pay out our income to our stockholders in a manner intended to
satisfy the distribution requirement and to avoid corporate income tax and the
4% excise tax. Differences in timing between the recognition of income and the
related cash receipts or the effect of required debt amortization payments could
require us to borrow money or sell assets to pay out enough of our taxable
income to satisfy the distribution requirement and to avoid corporate income tax
and the 4% excise tax in a given year.
Legislative or regulatory action could adversely affect holders of our
securities.
In recent years, numerous legislative, judicial and administrative changes
have been made to the federal income tax laws applicable to investments in REITs
and similar entities. Additional changes to tax laws are likely to continue to
occur in the future, and we cannot assure you that any such changes will not
adversely affect the taxation of a holder of our securities.
Risk Factors Relating to Our Business
Operating risks and lack of liquidity may adversely affect our investments
in real property.
Varying degrees of risk affect real property investments. The investment
returns available from equity investments in real estate depend in large part on
the amount of income earned and capital appreciation generated by the related
properties as well as the expenses incurred. If our assets do not generate
revenue sufficient to meet operating expenses, including debt service and
capital expenditures, our income and ability to service our debt and other
obligations will be adversely affected. Some significant expenditures associated
with an investment in real estate, such as mortgage and other debt payments,
real estate taxes and maintenance costs, generally are not reduced when
circumstances cause a reduction in revenue from the investment. In addition,
income from properties and real estate values are also affected by a variety of
other factors, such as interest rate levels, governmental regulations and
applicable laws and the availability of financing.
-5-
Equity real estate investments, such as ours, are relatively illiquid. This
illiquidity limits our ability to vary our portfolio in response to changes in
economic or other conditions. We cannot assure you that we will recognize full
value for any property that we are required to sell for liquidity reasons. Our
inability to respond rapidly to changes in the performance of our investments
could adversely affect our financial condition and results of operations.
Our properties are subject to all operating risks common to apartment
ownership in general. These risks include: our ability to rent units at the
properties; competition from other apartment communities; excessive building of
comparable properties that might adversely affect apartment occupancy or rental
rates; increases in operating costs due to inflation and other factors, which
increases may not necessarily be offset by increased rents; increased affordable
housing requirements that might adversely affect rental rates; inability or
unwillingness of residents to pay rent increases; and future enactment of rent
control laws or other laws regulating apartment housing, including present and
possible future laws relating to access by disabled persons or the right to
convert a property to other uses, such as condominiums or cooperatives. If
operating expenses increase, the local rental market may limit the extent to
which rents may be increased to meet increased expenses without decreasing
occupancy rates. If any of the above occurred, our ability to meet our debt
service and other obligations could be adversely affected.
We may renovate our properties, which would involve additional operating
risks.
We expect to be working on the renovation of multi-family properties that
we may acquire. We may also acquire completed multi-family properties. The
renovation of real estate involves risks in addition to those involved in the
ownership and operation of established multi-family properties, including the
risks that specific project approvals may take longer to obtain than expected,
that construction may not be completed on schedule or budget and that the
properties may not achieve anticipated rent or occupancy levels.
We may not be able to pay the costs of necessary capital improvements on
our properties, which could adversely affect our financial condition.
We anticipate funding any required capital improvements on our properties
using cash flow from operations, cash reserves or additional financing if
necessary. However, the anticipated sources of funding may not be sufficient to
make the necessary improvements. If our cash flow from operations and cash
reserves prove to be insufficient, we might have to fund the capital
improvements by borrowing money. If we are unable to borrow money on favorable
terms, or at all, we may not be able to make necessary capital improvements,
which could harm our financial condition.
Our tenants-in-common or future joint venture partners may have interests
or goals that conflict with ours, which may restrict our ability to manage some
of our investments and adversely affect our results of operations.
One or more of our properties that we acquire may be owned through
tenancies-in-common or by joint venture partnerships between us and the seller
of the property, an independent third party or another investment entity
sponsored by our affiliates. Our investment through tenancies-in-common or in
joint venture partnerships that own properties may, under certain circumstances,
involve risks that would not otherwise be present. For example, our
tenant-in-common or joint venture partner may experience financial difficulties
and may at any time have economic or business interests or goals that are
inconsistent with our economic or business interests or our policies or goals.
In addition, actions by, or litigation involving, any tenant-in-common or joint
venture partner might subject the property owned through a tenancy-in-common or
by the joint venture to liabilities in excess of those contemplated by the terms
of the tenant-in-common or joint venture agreement. Also, there is a risk of
impasse between the parties since generally either party may disagree with a
proposed transaction involving the property owned through a tenancy-in-common or
joint venture and impede any proposed action, including the sale of other
disposition of the property.
-6-
Our inability to dispose of a property we may acquire in the future without
the consent of a tenant-in-common or joint venture partner would increase the
risk that we would be unable to dispose of the property, or dispose of it
promptly, in response to economic or other conditions. The inability to respond
promptly to changes in performance of the property could adversely affect our
financial condition and results of operations.
We will face significant competition and we may not compete successfully.
We will face significant competition in seeking investments. We will be
competing with several other companies, including other REIT's, insurance
companies and other investors, such as investment funds and entities formed with
investment objectives similar to ours, including companies that may be
affiliated with Berkshire Advisor. Some of our competitors will have greater
financial and other resources than we will have and may have better
relationships with lenders and sellers, and we may not be able to compete
successfully for investments.
We plan to borrow, which may adversely affect our return on our investments
and may reduce income available for distribution.
Where possible, we will seek to borrow funds to increase the rate of return
on our investments and to allow us to make more investments than we otherwise
could. Borrowing by us presents an element of risk if the cash flow from our
properties and other investments is insufficient to meet our debt service and
other obligations. A property encumbered by debt increases the risk that the
property will operate at a loss and may ultimately be forfeited upon foreclosure
by the lender. Loans that do not fully amortize during the term, such as
"bullet" or "balloon-payment" loans, present refinancing risks. Variable rate
loans increase the risk that the property may become unprofitable in adverse
economic conditions. Loans that require guaranties, including full principal and
interest guaranties, master leases, debt service guaranties and indemnities for
liabilities such as hazardous waste, may result in significant liabilities for
us.
Under our current investment policies, we may not incur indebtedness such
that at the time we incur indebtedness our ratio of debt to total assets, at
fair market value, exceeds 75%. However, we may reevaluate our borrowing
policies from time to time, and our board of directors may change our investment
policies without the consent of our stockholders. At December 31, 2002, our
ratio of debt to total assets, at fair market value, was 65%.
Our insurance on our real estate may not cover all losses.
We carry comprehensive liability, fire, extended coverage and rental loss
insurance covering all of our properties, with policy specifications and insured
limits that we believe are adequate and appropriate under the circumstances.
Some types of losses, such as from terrorism, are uninsurable or not
economically insurable. In addition, many insurance carriers are excluding
asbestos-related claims and most mold-related claims from standard policies,
pricing asbestos and mold endorsements at prohibitively high rates or adding
significant restrictions to this coverage. Because of our inability to obtain
specialized coverage at rates that correspond to the perceived level of risk, we
have not obtained insurance for acts of terrorism or asbestos-related claims or
all mold-related risks. We continue to evaluate the availability and cost of
additional insurance coverage from the insurance market. If we decide in the
future to purchase insurance for terrorism, asbestos or mold, the cost could
have a negative impact on our results of operations. If an uninsured loss or a
loss in excess of insured limits occurs on a property, we could lose our capital
invested in the property, as well as the anticipated future revenues from the
property and, in the case of debt that is recourse to us, we would remain
obligated for any mortgage debt or other financial obligations related to the
property. Any loss of this nature would adversely affect us.
-7-
Environmental compliance costs and liabilities with respect to our real
estate may adversely affect our results of operations.
Our operating costs may be affected by our obligation to pay for the cost
of complying with existing environmental laws, ordinances and regulations, as
well as the cost of complying with future legislation with respect to the
assets, or loans secured by assets, with environmental problems that materially
impair the value of the assets. Under various federal, state or local
environmental laws, ordinances and regulations, an owner of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
located on or in the property. The laws often impose liability without regard to
whether the owner knew of, or was responsible for, the presence of the hazardous
or toxic substances. The costs of any required remediation or removal of these
substances may be substantial. In addition, the owner's liability as to any
property is generally not limited under these laws, ordinances and regulations
and could exceed the value of the property and/or the aggregate assets of the
owner. The presence of hazardous or toxic substances, or the failure to
remediate properly, may also adversely affect the owner's ability to sell or
rent the property or to borrow using the property as collateral. Under these
laws, ordinances and regulations, an owner or any entity who arranges for the
disposal of hazardous or toxic substances, such as asbestos, at a disposal
facility may also be liable for the costs of any required remediation or removal
of the hazardous or toxic substances at the facility, whether or not the
facility is owned or operated by the owner or entity. In connection with the
ownership of the initial properties or the disposal of hazardous or toxic
substances, we may be liable for any of these costs.
Other federal, state and local laws may impose liability for the release of
hazardous material, including asbestos-containing materials, into the
environment, or require the removal of damaged asbestos containing materials in
the event of remodeling or renovation, and third parties may seek recovery from
owners of real property for personal injury associated with exposure to released
asbestos-containing materials or other hazardous materials. We do not currently
have insurance for the asbestos-related claims. Recently there has been an
increasing number of lawsuits against owners and managers of multi-family
properties alleging personal injury and property damage caused by the presence
of mold in residential real estate. Some of these lawsuits have resulted in
substantial monetary judgments or settlements. We do not currently have
insurance for all mold-related risks. Environmental laws may also impose
restrictions on the manner in which a property may be used or transferred or in
which businesses may be operated, and these restrictions may require additional
expenditures. In connection with the ownership of properties, we may be
potentially liable for any of these costs. The cost of defending against claims
of liability or remediating contaminated property and the cost of complying with
environmental laws could materially adversely affect our results of operations
and financial condition.
We have been notified of the presence of asbestos in certain structural
elements in our properties, which is being addressed in accordance with various
operations and maintenance plans. The asbestos operations and maintenence plans
require that all structural elements that contain asbestos must not be
disturbed. In the event the asbestos containing elements are or will be
disturbed either through accident, such as a fire, or as a result of planned
renovations at the property, those elements would require removal by a licensed
contractor, who would provide for containment and disposal in an authorized
landfill. The property manager of our properties has been directed to work
proactively with licensed ablation contractors whenever there is question
regarding possible exposure.
We are not aware of any environmental liability relating to our properties
that we believe would have a material adverse effect on our business, assets or
results of operations. Nevertheless, it is possible that there are material
environmental liabilities of which we are unaware with respect to our
properties. Moreover, no assurance can be given that future laws, ordinances or
regulations will not impose material environmental liabilities or that the
current environmental condition of our properties will not be affected by
residents and occupants of our properties or by the uses or condition of
properties in the vicinity of our properties, such as leaking underground
storage tanks, or by third parties unrelated to us.
-8-
Our failure to comply with various regulations affecting our properties
could adversely affect our financial condition.
Various laws, ordinances, and regulations affect multi-family residential
properties, including regulations relating to recreational facilities, such as
activity centers and other common areas. We believe that each of our properties
will have all material permits and approvals to operate its business.
Our multi-family residential properties must comply with Title II of the
Americans with Disabilities Act (the ADA) to the extent that such properties are
"public accommodations" and/or "commercial facilities" as defined by the ADA.
Compliance with the ADA requires removal of structural barriers to handicapped
access in certain public areas of such of our properties where such removal is
"readily achievable." The ADA does not, however, consider residential properties
to be public accommodations or commercial facilities, except to the extent
portions of such facilities, such as a leasing office, are open to the public.
We believe that our properties will comply in all material respects with all
present requirements under the ADA and applicable state laws. Noncompliance with
the ADA could result in imposition of fines or an award of damages to private
litigants. The cost of defending against any claims of liability under the ADA
or the payment of any fines or damages could adversely affect our financial
condition.
The Fair Housing Act (the FHA) requires, as part of the Fair Housing
Amendments Act of 1988, apartment communities first occupied after March 13,
1990 to be accessible to the handicapped. Noncompliance with the FHA could
result in the imposition of fines or an award of damages to private litigants.
We believe that our properties that are subject to the FHA are in compliance
with such law. The cost of defending against any claims of liability under the
FHA or the payment of any fines or damages could adversely affect our financial
condition.
We face risks associated with property acquisitions.
We intend to acquire additional properties in the future, either directly
or by acquiring entities that own properties. These acquisition activities are
subject to many risks. We may acquire properties or entities that are subject to
liabilities or that have problems relating to environmental condition, state of
title, physical condition or compliance with zoning laws, building codes, or
other legal requirements. In each case, our acquisition may be without any
recourse, or with only limited recourse, with respect to unknown liabilities or
conditions. As a result, if any liability were asserted against us relating to
those properties or entities, or if any adverse condition existed with respect
to the properties or entities, we might have to pay substantial sums to settle
or cure it, which could adversely affect our cash flow and operating results.
However, some of these liabilities may be covered by insurance. In addition, we
intend to perform customary due diligence regarding each property or entity we
acquire. We also intend to obtain appropriate representations and indemnities
from the sellers of the properties or entities we acquire, although it is
possible that the sellers may not have the resources to satisfy their
indemnification obligations if a liability arises. Unknown liabilities to third
parties with respect to properties or entities acquired might include:
liabilities for clean-up of undisclosed environmental contamination; claims by
tenants, vendors or other persons dealing with the former owners of the
properties; liabilities incurred in the ordinary course of business; and claims
for indemnification by general partners, directors, officers and others
indemnified by the former owners of the properties.
-9-
Risk Factors Relating to Our Management
We are dependent on Berkshire Advisor and may not find a suitable
replacement at the same cost if Berkshire Advisor terminates the advisory
services agreement.
We have entered into a contract with Berkshire Advisor (which we refer to
as the advisory services agreement) under which Berkshire Advisor is obligated
to manage our portfolio and identify investment opportunities consistent with
our investment policies and objectives, as our board of directors may adopt from
time to time. Although our board has continuing exclusive authority over our
management, the conduct of our affairs and the management and disposition of our
assets, our board initially has delegated to Berkshire Advisor, subject to the
supervision and review of our board, the power and duty to make decisions
relating to the day-to-day management and operation of our business. We will
generally utilize officers of Berkshire Advisor to provide our services and will
employ only a few individuals as our officers, none of whom will be compensated
by us for their services to us as our officers. We believe that our success
depends to a significant extent upon the experience of Berkshire Advisor's
officers, whose continued service is not guaranteed. We have no separate
facilities and are completely reliant on Berkshire Advisor, which has
significant discretion as to the implementation of our operating policies and
strategies. We face the risk that Berkshire Advisor will terminate the advisory
services agreement and we may not find a suitable replacement at the same cost
with similar experience and ability. However, we believe that so long as KRF
Company, L.L.C., which is an affiliate of Berkshire Advisor, continues to own a
significant amount of our common stock, it is unlikely that Berkshire Advisor
will terminate the advisory services agreement. Although KRF Company currently
owns all of our common stock, we cannot assure you that KRF Company will
continue to do so.
Our relationship with Berkshire Advisor may lead to general conflicts of
interest that adversely affect the interests of holders of our Series A
Preferred Stock.
Berkshire Advisor is an affiliate of KRF Company, which owns all of our
common stock. All of our directors and executive officers, other than our three
independent directors, are also officers or directors of Berkshire Advisor. As a
result, our advisory services agreement with Berkshire Advisor was not
negotiated at arm's-length and its terms, including the fees payable to
Berkshire Advisor, may not be as favorable to us as if it had been negotiated
with an unaffiliated third party. Asset management fees and acquisition fees for
new investments are payable to Berkshire Advisor under the advisory services
agreement regardless of the performance of our portfolio and may create
conflicts of interest. Conflicts of interest also may arise in connection with
any decision to renegotiate, renew or terminate our advisory services agreement.
In order to mitigate these conflicts, the renegotiation, renewal or termination
of the advisory services agreement will require the approval of the audit
committee of our board of directors.
Our property manager, an affiliate of Berkshire Advisor, in most cases will
provide on-site management services for our properties. Our directors that are
affiliates of our property manager might be subject to conflicts of interest in
their dealings with our property manager. In order to mitigate these conflicts,
the renegotiation, renewal or termination of the property management agreements
will require the approval of the audit committee of our board of directors.
Berkshire Advisor and its affiliates may engage in other businesses and
business ventures, including business activities relating to real estate or
other investments, whether similar or dissimilar to those made by us, or may act
as advisor to any other person or entity (including other REITs). The ability of
Berkshire Advisor and its officers and employees to engage in these other
business activities will reduce the time Berkshire Advisor spends managing us.
Berkshire Advisor and its affiliates will have conflicts of interest in the
allocation of management and staff time, services and functions among us and its
other investment entities presently in existence or subsequently formed.
However, under our advisory services agreement with Berkshire Advisor, Berkshire
Advisor is required to devote sufficient resources as may be required to
discharge its obligations to us under the advisory services agreement.
-10-
Our advisory services agreement with Berkshire Advisor provides that
neither Berkshire Advisor nor any of its affiliates will be obligated to present
to us all investment opportunities that come to their attention, even if any of
those opportunities might be suitable for investment by us. It will be within
the sole discretion of Berkshire Advisor to allocate investment opportunities to
us as it deems advisable. However, it is expected that, to the extent possible,
the resolution of conflicting investment opportunities between us and others
will be based upon differences in investment objectives and policies, the makeup
of investment portfolios, the amount of cash and financing available for
investment and the length of time the funds have been available, the estimated
income tax effects of the investment, policies relating to leverage and cash
flow, the effect of the investment on diversification of investment portfolios
and any regulatory restrictions on investment policies.
We have adopted policies to ensure that Berkshire Advisor does not enter
into investments on our behalf involving its affiliates that could be less
favorable to us than investments involving unaffiliated third parties. For
example, any transaction between us and Berkshire Advisor or any of its
affiliates will require the prior approval of the audit committee of our board
of directors. Members of the audit committee are required under our bylaws to be
unaffiliated with Berkshire Advisors and its affiliates. We cannot assure you
that these policies will be successful in eliminating the influence of any
conflicts.
Our board of directors has approved investment guidelines for Berkshire
Advisor, but will not approve each multi-family residential property investment
decision made by Berkshire Advisor within those guidelines.
Berkshire Advisor is authorized to follow investment guidelines adopted
from time to time by our board of directors in determining the types of assets
it may decide to recommend to our board of directors as proper investments for
us. Our board of directors will periodically review our investment guidelines
and our investment portfolio. However, Berkshire Advisor may make investments in
multi-family residential property on our behalf within the board approved
guidelines without the approval of our board of directors. In addition, in
conducting periodic reviews, the board of directors will rely primarily on
information provided by Berkshire Advisor.
We may change our investment strategy without stockholder consent, which
could result in our making different and potentially riskier investments.
We may change our investment strategy at any time without the consent of
our stockholders, which could result in our making investments that are
different from, and possibly riskier than, our initial plan to primarily
acquire, own and operate multi-family residential properties. In addition, the
methods of implementing our investment policies may vary as new investment
techniques are developed. A change in our investment strategy may increase our
exposure to interest rate and real estate market fluctuations.
-11-
ITEM 2. PROPERTIES
As of December 31, 2002, the entities comprising the Predecessor owned five
multi-family apartment communities containing an aggregate of 2,539 apartment
units.
A summary of the multi-family communities owned by the Predecessor as of
December 31, 2002 is presented below. Schedule III included in Item 15 to this
report contains additional detailed information with respect to individual
properties and is incorporated by reference herein.
Description Location Year Total Controlling 2002
Acquired Units Interest Occupancy
- ---------------------- ------------- --------- ------- ----------- ---------
Century Cockeysville,
Maryland 1984 468 75.82% 95%
Dorsey's Forge Columbia,
Maryland 1983 251 91.38% 97%
Hannibal Grove Columbia,
Maryland 1983 316 91.38% 96%
Seasons of Laurel Laurel,
Maryland 1985 1,088 100.00% 96%
Walden Pond Houston,
Texas 1983 416 100.00% 97%
-------
Total 2,539
=======
All of the properties in the above table are encumbered by mortgages.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Company or the
Predecessor, and no such proceedings are known to be contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-12-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no established public trading market for our outstanding common
stock, all of which is held by KRF Company, L.L.C. No dividends have been paid
on our common stock to date.
After the Offering is completed, we will issue shares of our 9% Series A
Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock"), which we
expect will be listed on the American Stock Exchange under the symbol "BIR"
Holders of the Series A Preferred Stock will be entitled to receive cumulative
quarterly distributions, payable in arrears, in the amount of $0.5625 per share
on February 15, May 15, August 15 and November 15 of each year.There are
currently no outstanding shares of Series A Preferred Stock.
-13-
ITEM 6. SELECTED FINANCIAL DATA
The following tables show selected financial data regarding the financial
position and operating results of Berkshire Income Realty Predecessor Group. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Berkshire Income Realty Predecessor Group" for a discussion of the
entities that comprise Berkshire Income Realty Predecessor Group, which is
deemed to be our predecessor for accounting purposes. You should read the
following financial data in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Berkshire Income
Realty Predecessor Group," and the financial statements of Berkshire Income
Realty Predecessor Group (including the related notes). See the "Index to
Financial Statements and Financial Statement Schedule" on page 34 to this
report.
The Predecessor Group
December 31,
------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
Operating Data:
Revenue $ 25,902 $ 24,897 $ 23,342 $ 21,760 $ 20,910
Depreciation 5,284 4,751 5,011 5,700 6,017
Income (loss) before minority
interest 3,476 (3,179) (905) (595) (46)
Net income (loss) 788 (3,664) (864) (595) (46)
Balance Sheet Data, at year end:
Real estate, before accumulated
depreciation $ 173,160 $ 170,367 $ 135,072 $ 110,581 $ 108,391
Real estate, after accumulated
depreciation 85,157 87,648 57,104 37,624 41,134
Cash and cash equivalents 4,766 3,990 7,899 1,780 1,259
Total assets 95,432 96,613 72,387 44,482 46,829
Total long term obligations 105,828 76,799 72,568 57,618 58,554
Minority interest - 619 1,385 - -
Owners' equity (deficit) (12,878) 17,352 (11,505) (19,250) (13,512)
Other Data:
Cash flow (used in) provided by
operating activities $ 9,043 $ (6,008) $ 6,592 $ 6,328 $ 4,306
Cash flow (used in) provided by
investing activities (3,079) (33,081) (24,032) (2,458) (1,646)
Cash flow (used in) provided by
financing activities (5,188) 35,180 23,559 (3,349) (2,634)
-14-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF BERKSHIRE INCOME REALTY PREDECESSOR GROUP
You should read the following discussion in conjunction with the Berkshire
Income Realty Predecessor Group combined financial statements and their related
notes and other financial information included elsewhere in this report.
The entities comprising Berkshire Income Realty Predecessor Group are
deemed to be our predecessors for accounting purposes. Because we do not yet
have any operations, the following discussion relates to Berkshire Income Realty
Predecessor Group. Please also see the accompanying Berkshire Income Realty
Predecessor Group combined financial statements and related notes for a more
detailed discussion of the accounting methods used in preparing the financial
information for Berkshire Income Realty Predecessor Group.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements including those
concerning management's expectations regarding the future financial performance
and future events. These forward-looking statements involve significant risk and
uncertainties, including those described herein. Actual results may differ
materially from those anticipated by such forward-looking statements. All dollar
amounts are in thousands unless otherwise indicated.
Overview
At December 31, 2002 and 2001, KRF Company, an affiliate of Berkshire
Income Realty, Inc., through its subsidiaries, KRF 3 Acquisition Company, L.L.C.
and KR5 Acquisition, L.L.C., which we collectively refer to as KRF, held
controlling interests in five multi-family apartment communities consisting of
2,539 units, which we refer to as the "initial properties". KRF Company is an
affiliate of The Berkshire Group and is controlled by Douglas and George Krupp.
KRF acquired the initial properties during 2000 and 2001 through the acquisition
of limited partner interests from affiliates of The Berkshire Group also
controlled by George and Douglas Krupp, namely, Krupp Realty Limited
Partnership-V and Krupp Realty Fund, Ltd.-III, and through the purchase of real
estate from certain affiliates of The Berkshire Group namely, Maryland
Associates Limited Partnership and Krupp Realty Fund, Ltd.-IV, which we refer to
collectively as the Affiliates. The acquisition of the limited partner interests
or real estate from the Affiliates has been accounted for using purchase
accounting based upon the cash paid for the interests, which was at fair value
and in excess of book value of the initial properties. The step up in basis for
the five properties, Century, Dorsey's Forge, Hannibal Grove, Seasons of Laurel
and Walden Pond, was $12,214, $3,404, $5,914, $26,241, and $8,322, respectively.
The owners of the initial properties and the activities conducted with
respect to the initial properties are collectively referred to as Berkshire
Income Realty Predecessor Group or the Predecessor.
The Predecessor has been engaged in the business of acquiring, owning and
operating multi-family residential real estate, including the initial
properties. Each of the initial properties has been managed by affiliates of the
Predecessor for over 15 years. The initial properties include Century, Dorsey's
Forge, Hannibal Grove, Seasons of Laurel and Walden Pond .
Critical Accounting Policies
The discussion below describes what we believe are the critical accounting
policies that affect the Predecessor's more significant judgments and the
estimates used in the preparation of its combined financial statements. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and judgments that affect the reported amounts of assets and liabilities,
revenues and expenses, and related disclosures of contingent assets and
liabilities in the Predecessor's combined financial statements and related
notes. We believe that the following critical accounting policies affect
significant judgments and estimates used in the preparation of the Predecessor's
combined financial statements:
-15-
Principles of Combination
The combined financial statements include the accounts of the initial
properties extracted from the books and records of KRF and the Affiliates. To
the extent parties not affiliated with The Berkshire Group have an equity
interest in the initial properties, this interest is accounted for as minority
interest in the accompanying combined financial statements. Allocations of
income, losses and distributions are made to each minority shareholder based
upon its share of the allocations. Losses in excess of each minority
shareholder's investment basis are allocated to the Predecessor. Distributions
to each minority shareholder in excess of its investment basis are recorded in
the Predecessor's combined statements of operations as minority interest.
Impairment of Long-Lived Assets
Effective January 1, 2002, the Predecessor adopted the provisions of SFAS
No. 144, Accounting for the Impairment or Disposal of Long Lived Assets, which
supercedes SFAS No. 121. SFAS No. 144 requires that long-lived assets that are
to be disposed of by sale be measured at the lower of the book value or fair
value less cost to sell. SFAS No. 144 retains the requirements of SFAS No. 121
regarding impairment loss recognition and measurement. In addition, it requires
that one accounting model be used for long-lived assets to be disposed of by
sale and broadens the presentation of discontinued operations to include more
disposal transactions. SFAS No.144 is effective for fiscal years beginning after
December 15, 2001. This statement has not had a material effect on the
Predecessor's financial condition, results of operations or cash flows.
Capital Improvements
The Predecessor's policy is to capitalize costs related to the acquisition,
rehabilitation and improvement of properties. Capital improvements are costs
that increase the value and extend the useful life of an asset. Ordinary repair
and maintenance costs that do not extend the useful life of the asset are
expensed as incurred. Costs incurred on a lease turnover due to normal wear and
tear by the resident are expensed on the turn. Recurring capital improvements
typically include: appliances, carpeting and flooring, HVAC equipment,
kitchen/bath cabinets, site improvements and various exterior building
improvements. Non-recurring upgrades include kitchen/bath upgrades, new roofs,
window replacements and the development of on site fitness, business and
community centers.
The Predecessor is required to make subjective assessments as to the useful
lives of its properties and improvements for purposes of determining the amount
of depreciation to reflect on an annual basis. These assessments have a direct
impact on the Predecessor's net income.
Revenue Recognition
The initial properties are leased under terms of leases with terms of
generally one year or less. Rental revenue is recognized when earned. Recoveries
from tenants for utility expenses are recognized in the period the applicable
costs are incurred. Other income, which consists primarily of income from
damages, laundry, cable, phone, pool, month to month tenants, relet fees and pet
fees are recognized when earned.
-16-
Results of Operations
Comparison of the year ended December 31, 2002 to the year ended December 31,
2001
Rental income increased $643, or 2.79%, to $23,699. The increase was a
result of an increase of 6.36% in the weighted average rental rates, offset by a
decrease in overall physical occupancy from 97.35% to 95.99%.
Interest income decreased $163, or 30.58%, to $370. The decrease was a
result of lower average cash on hand during 2002 as compared to 2001 as well as
decreases in interest rates on short-term cash investments.
Utility reimbursements increased $335, or 190.34%, to $511. This increase
was primarily the result of the Predecessor's implementation of a reimbursable
utilities billing system for water and sewer charges. The reimbursable utilities
billing system program was introduced in mid 2001 and stabilized around November
of 2001.
Other income, which consists primarily of income from damages, laundry,
cable, phone, pool, month to month tenants, relet fees and pet fees decreased
$208, or 18.72%, to $903. This decrease varied within each of the properties.
Operating expenses, which consists primarily of payroll, employee benefits,
advertising and leasing expenses, utilities and property insurance, increased
$254, or 4.65%, to $5,717. The increase was primarily the result of significant
increases in the Predecessor's insurance costs as insurance premiums rose after
the tragic events of September 11, 2001. Additionally, utility costs increased
as a result of increases in billing rates for electric service at the
properties. We are reviewing options that may lower the cost of insurance but
cannot make any assurances that these options will be implemented or will result
in noticeable changes to insurance expense.
Management fees increased $415, or 32.22%, to $1,703. The increase was
primarily related to the implementation of advisory fees on Walden Pond and
Seasons Apartments subsequent to their restructuring in the third and fourth
quarters of 2001.
Depreciation expense increased $533, or 11.22%, to $5,284. The increase was
primarily a result of the Seasons of Laurel step-up in basis due to the purchase
of the property from an affiliate in July 2001. In 2002 the Predecessor
recognized a full year of depreciation on this step-up in basis versus only a
half year in 2001.
Interest expense decreased by $694, or 12.21%, to $4,988. The decrease was
primarily a result of the refinancing of the Seasons of Laurel note to a lower
variable rate in 2001 and then to a fixed rate in July 2002, which was lower
than the fixed rate in place for the first half of 2001.
Participating interest decreased by $6,591, or 100%, to $0 in 2002. The
decrease relates to the refinancing of the Seasons of Laurel note in 2001, when
a former note which included participating interest was paid off.
Comparison of the year ended December 31, 2001 to the year ended December 31,
2000
Rental income increased $1,187 or 5.43%, to $23,056. The increase was a
result of an increase of 5.28% in the weighted average rental rates, plus the
effect of an increase in overall physical occupancy from 96.93% to 97.35%.
Interest income decreased $68, or 11.31%, to $533. The decrease was a
result of lower average cash on hand during 2001 as compared to 2000.
-17-
Utility reimbursements increased $176, or 100%, to $176. This increase was
the result of the Predecessor's implementation of a reimbursable utilities
billing system for water and sewer charges. The reimbursable utilities billing
system program was introduced in mid 2001 and stabilized around November of
2001.
Other income increased $329, or 42.07%, to $1,111. The increase was
primarily attributable to an increase in the assessments charged to an unrelated
property that borders the Century property for use of Century's pool and
clubhouse facilities and an increase in month-to-month premiums charged to
tenants who have not signed a lease at Seasons.
Operating expenses, which consist primarily of property payroll,
advertising, leasing expenses, utilities and property insurance decreased $6, or
..11%, to $5,463. Operating expenses decreased as a result of decreases in
payroll and utilities expenses, which were partially offset by increases in
advertising and property insurance expense. Payroll expense decreased as a
result of decreases in group insurance costs. In 2001, the Predecessor
consolidated insurance providers, which resulted in significant savings.
Utilities decreased as a result of decreases in gas prices. Advertising expense
increased as a result of increases in advertisements in real estate
publications. Property insurance expense increased as a result of increases in
insurance premiums. The Predecessor expects insurance costs to continue to
increase as a result of changes in the insurance industry that resulted from the
terrorist attacks of September 11, 2001.
Maintenance expense increased $147, or 8.18%, to $1,944. The increase in
maintenance expense was primarily the result of increases in non-recurring
repairs and maintenance. Non-recurring repairs and maintenance increased
$158,000, or 38.91%, as a result of increases in expenditures for drywall and
plumbing repairs. The expenditures were not considered to be capital
expenditures.
Interest expense decreased $1,522, or 21.13%, to $5,682. Interest expense
decreased primarily as a result of the refinancing of Seasons and Walden Pond
Apartments. The refinancing resulted in a decrease in the interest rate on
Seasons from 10% to a variable interest rate of approximately 3%. The
refinancing of Walden Pond resulted in a significant reduction in the principal
balance outstanding as compared to the previous mortgage.
Liquidity and Capital Resources
Capital Expenditures, Distributions, Cash Flow and Indebtedness
We expect our principal liquidity demands to be capital improvements and
repairs and maintenance for the initial properties, acquisition of additional
properties (including The Gables Apartments), repayment of indebtedness and,
after the completion of the Offering, distributions to the holders of our
preferred stock.
We intend to meet our short-term liquidity requirements through net cash
flows provided by operating activities and, after the completion of the
Offering, through distributions of income on the Interests tendered in the
Offering. In order to qualify as a REIT, we are required to make dividend
distributions, other than capital gain dividends, to our shareholders each year
in the amount of at least 90% of our REIT taxable income (computed without
regard to the dividends paid deduction and our net capital gain and subject to
certain other potential adjustments) for all tax years. We consider our ability
to generate cash to be adequate to meet all operating requirements and make
distributions to our stockholders in accordance with the provisions of the code
applicable to REITs.
Upon completion of the Offering, we intend to seek a line of credit
secured, at least in part, by the Interests tendered in the Offering. We expect
to use this line of credit primarily as a source of capital for the acquisition
of new properties.
-18-
To the extent that we do not satisfy our long-term liquidity requirements
through net cash flows provided by operating activities and, upon the completion
of the Offering, through distributions of income on the Interests tendered in
the Offering, we intend to satisfy these requirements through refinancing or
establishing secondary financing on our real estate investments and through
advances on our proposed line of credit.
As of December 31, 2002, approximately 96% of the Predecessor's mortgage
obligations was under fixed interest rates. The weighted average rate of
interest on mortgage debt was 5.8%. As described below, the Predecessor has
taken advantage of the low interest rate market to fix rates on the vast
majority of its mortgage debt. We believe that this limits the exposure to
changes in interest rates, minimizing the effect on our financial condition,
results of operations and cash flows.
Acquisitions
On March 20, 2003, our common stockholder, KRF Company, through a newly
created affiliate, Gables of Texas Limited Partnership ("Gables") acquired The
Gables Apartments, a 140-unit multi-family apartment complex located in Houston,
Texas for a purchase price of approximately $6,925. On March 25, 2003, the audit
committee of our board of directors approved the Company's to purchase of the
entire equity interest in Gables from KRF Company for a purchase price no
greater than the amount tendered for the property (including, equity payments,
transfer taxes, financing and closing costs as applicable). This transaction is
expected to be consummated shortly after the closing of the Offering.
Mortgage Debt Refinancing
On July 31, 2002, the mortgage note payable on Seasons of Laurel was
refinanced with a $52,500 non-recourse mortgage note payable, which was
collateralized by the property. The interest rate on the note was fixed at
5.74%. The mortgage note matures on August 1, 2009, at which time the remaining
principal and accrued interest are due. The note may be prepaid, with a
prepayment penalty, at any time with 30 days notice. The Predecessor used the
proceeds from the refinancing to repay the existing mortgage note and accrued
interest on the property of approximately $36,412, to pay closing costs of
approximately $280, to fund escrows required by the lender of approximately $862
and to pay a prepayment penalty of approximately $363. The remaining proceeds
were distributed to the members of the Predecessor.
On April 1, 2002, the mortgage notes payable on Dorsey's Forge and Hannibal
Grove were refinanced with $10,635 and $16,145 non-recourse mortgage notes
payable, respectively, which were collateralized by the related properties. The
interest rates on the notes were fixed at 5.96%. The notes mature on April 1,
2007, at which time the remaining principal and accrued interest are due. The
notes may be prepaid, with a prepayment penalty, at any time with 30 days
notice. The Predecessor used the proceeds from the refinancing on Dorsey's Forge
and Hannibal Grove to repay the existing mortgage notes and accrued interest of
approximately $6,011 and $10,444, respectively, to pay closing costs of
approximately $91 and $122, respectively, and to fund escrows required by the
lender of approximately $15 and $54, respectively. The Predecessor also
recognized an approximate $323 extraordinary loss resulting from the prepayment
penalty upon the early principal repayment and write-off of unamortized deferred
financing costs for Dorsey's Forge and Hannibal Grove. The remaining proceeds
were distributed to the members of the Predecessor.
-19-
Mortgage Debt Refinancing, Continued
On April 1, 2002, the mortgage note payable on Century was refinanced with
a $22,800 non-recourse mortgage notes payable, which was collateralized by the
property. The interest rate on the note was fixed at 5.96%. The note matures on
April 1, 2007, at which time the remaining principal and accrued interest are
due. The note may be prepaid, with a prepayment penalty, at any time with 30
days notice. The Predecessor used the proceeds from the refinancing on Century
to repay the existing mortgage note and accrued interest of approximately
$19,219, to pay closing costs of approximately $162 and to fund escrows required
by the lender of approximately $29. The Predecessor also recognized an
approximate $287 extraordinary loss resulting from the prepayment penalty upon
the early principal repayment and write-off of unamortized deferred financing
costs for Century. The remaining proceeds were distributed to the members of the
Predecessor.
On November 14, 2001, the Predecessor obtained a $4,500 non-recourse
mortgage note payable, which is collateralized by the property on Walden Pond.
The Predecessor used the proceeds from the note to purchase the property from
Krupp Realty Fund, Ltd. -IV.
Contractual Obligations
The primary obligations of the Predecessor relate to its borrowings under
the mortgage notes payable. The $106 million in mortgage notes payable have
varying maturities ranging from 5 to 7 years. The principal payments on the
mortgage notes payable for the years subsequent to December 31, 2002 are as
follows: $1,320 - 2003, $1,399 - 2004, $1,482 - 2005, $1,571 - 2006, $47,455 -
2007 and $52,603 - thereafter.
Environmental Issues
There are no recorded amounts resulting from environmental liabilities, as
there are no known contingencies with respect to environmental liabilities.
During the past 18 months, the Predecessor has refinanced each of the initial
properties. As part of the refinancing process, the lenders obtained
environmental audits of each of the initial properties. The Predecessor was not
advised by the lenders as to any material liability for site restoration or
other costs that may be incurred with respect to the sale or disposal of any of
the initial properties.
Recent Accounting Pronouncements
In August of 2001, the Financial Accounting Standards Board, which we refer
to as the FASB, issued Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes
SFAS No. 121. SFAS No. 144 requires that long-lived assets that are to be
disposed of by sale be measured at the lower of the book value or fair value
less cost to sell. SFAS No. 144 retains the requirements of SFAS No. 121
regarding impairment loss recognition and measurement. In addition, it requires
that one accounting model be used for long-lived assets to be disposed of by
sale and broadens the presentation of discontinued operations to include more
disposal transactions. SFAS No.144 is effective for fiscal years beginning after
December 15, 2001. This statement has not had a material effect on the
Predecessor's financial condition, results of operations or cash flows.
In May of 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
as of April 2002, which rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, among others. As a result of the rescission of SFAS No.
4, gains or losses from extinguishment of debt are not necessarily considered
extraordinary. SFAS No. 145 is effective for fiscal years beginning after May
15, 2002. The impact of adopting this statement will require the Predecessor in
2003 to reclassify its extraordinary loss into continuing operations in the
accompanying statements of operations.
-20-
Recent Accounting Pronouncements, Continued
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred and that an entity's commitment to an exit plan, by itself, does not
create a present obligation to others that meets the definition of a liability.
This Statement also establishes that fair value is the objective for initial
measurement of the liability. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The impact of adopting
this statement is not expected to be material to the Predecessor's financial
condition, results of operations or cash flows.
On November 25, 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, and Interpretation of
FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34.
FIN 45 clarifies the requirements of SFAS No. 5, Accounting for Contingencies,
relating to a guarantors accounting for, and disclosure of, the issuance of
certain types of guarantees. The disclosure requirements of FIN 45 are effective
for the Predecessor as of December 31, 2002, and require disclosure of the
nature of the guarantee, the maximum potential amount of future payments that
the guarantor could be required to make under the guarantee, and the current
amount of the liability, if any, for the guarantor's obligations under the
guarantee. The recognition requirements of FIN 45 are to be applied
prospectively to guarantees issued or modified after December 31, 2002. The
Predecessor has reviewed the provisions of FIN 45 and believes that the impact
of the adoption will not be material to its financial position, results of
operations or cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities. The objective of this
interpretation is to provide guidance on how to identify a variable interest
entity ("VIE") and determine when the assets, liabilities, noncontrolling
interests, and results of operation of a VIE need to be included in a company's
consolidated financial statements. A company that holds variable interests in an
entity will need to consolidate the entity if the company's interest in the VIE
is such that the company will absorb a majority of the VIE's expected losses
and/or receive a majority of the entity's expected residual returns, if they
occur. FIN 46 also requires additional disclosures by primary beneficiaries and
other significant variable interest holders. The provisions of this
interpretation became effective upon issuance. The Predecessor is currently
assessing the impact, if any, the interpretation will have on its financial
position, results of operations or cash flows.
Inflation and Economic Conditions
Substantially all of the leases at the initial properties are for a term of
one year or less, which enables the Predecessor to seek increased rents for new
leases or upon renewal of existing leases. These short-term leases minimize the
potential adverse effect of inflation on rental income, although residents may
leave without penalty at the end of their lease terms and may do so if rents are
increased significantly.
Historically, real estate has been subject to a wide range of cyclical
economic conditions, which affect various real estate sectors and geographic
regions with differing intensities and at different times. In 2001 and 2002 and
continuing into 2003, many regions of the United States experienced varying
degrees of economic recession and certain recessionary trends, such as the cost
of obtaining sufficient property and liability insurance coverage, short-term
interest rates, and a temporary reduction in occupancy. In light of this, we
will continue to review our business strategy, however, we believe that given
our property type, garden style residential apartment communities, and the
geographic regions in which the initial properties are located, we do not
anticipate any changes in our strategy or material effects on our financial
performance.
-21-
Property Renovations
In April 2003, the Predecessor expects to begin a significant renovation
project at Seasons of Laurel. This project was based on the results of a limited
renovation and capital improvement project conducted at Seasons of Laurel in an
initial group of 31 test units to determine the feasibility and benefits of a
broader renovation and improvement plan. The project is expected to take
approximately 36 months and cost approximately $7,000, or $7 per unit. The
renovations will include replacing and upgrading kitchens and bathrooms and
modifying kitchens in certain unit types to provide for a breakfast bar and a
more open environment between the kitchen and the main living area. Based on the
initial test units the renovations are expected to result in an increase in
rental income of approximately $1 per unit per year. The project calls for
renovating 30 units per month. We currently expect to fund the initial stages of
the project from existing cash reserves. Other capital sources, which may
include proceeds from refinancing, are expected to be utilized during the final
years of the project. We are implementing systems to continuously monitor the
return on our investment versus the projected return and are prepared to scale
back or stop the renovations if the increase in rental income that is actually
achieved no longer supports the project. We currently do not expect to fund any
significant portion of the project using cash flows from operations.
At this time there are no other plans to renovate any of the other existing
properties, however, the Predecessor regularly evaluates the cost and benefit of
renovations, including limited test renovation projects, at all its properties
and future renovations could be initiated if these evaluations indicated
reasonable or significant benefits. We will also expect to undertake renovations
in properties where competition from unrelated properties requires more than
ordinary maintenance to maintain occupancy and/or rental rates.
Competition
The Predecessor competes with other multi-family apartment community owners
and operators and other real estate companies in seeking properties for
acquisition and in attracting potential residents. The Predecessor's properties
are in developed areas where there are other properties of the same type, which
directly compete for residents. The Predecessor believes that its focus on
resident service and satisfaction gives it an edge when competing against other
communities for tenants. The Predecessor does not believe that new construction
in the areas around its properties will have a significant impact on its ability
to maintain occupancy or its ability to increase rental rates and minimize
operating expenses as these new construction generally require higher rental
rates.
Market Environment
The markets in which the Predecessor operates could be characterized as
stable, with moderate levels of job growth over the last few years. During 2001
and continuing through 2002, many regions of the United States have experienced
an economic recession of varying degrees. This economic recession has led to
negative job growth for both the country as a whole and markets in which the
Predecessor owns properties.
Most of the Predecessor's properties are located in markets where zoning
restrictions, scarcity of land, and high construction costs create significant
barriers to new development.
In the future, changes in zoning restrictions and deflation in the markets
in which the Predecessor currently owns properties or in markets in which the
Predecessor may enter, could reduce or eliminate some of the barriers to new
development, which could have an adverse affect on the Predecessor's financial
condition, results of operations or cash flows.
-22-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Predecessor's primary market risk is interest rate risk.
At December 31, 2002, approximately $101,419 of the Predecessor's long-term
debt had fixed interest rates. The fair value of these instruments is affected
by changes in market interest rates. The following table presents principal cash
flows 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 as of December 31, 2002 was
the FHLMC Reference Bill plus 1.74%. FHLMC is the Federal Home Loan Mortgage
Corporation. The FHLMC Reference Bills are unsecured general corporate
obligations.
Mortgage Debt, Including Current Portion
(In Thousands)
Fair
2003 2004 2005 2006 2007 Thereafter Total Value
-------- ------ ------ ------ -------- -------- -------- ---------
Fixed Rate $ 1,247 $1,323 $1,403 $1,489 $ 47,368 $ 48,589 $101,419 $ 101,419
Average
Interest Rate 5.65% 5.65% 5.65% 5.65% 5.65% 5.65%
Variable Rate $ 73 $ 76 $ 79 $ 82 $ 395 $ 3,704 $ 4,409 $ 4,409
The table above reflects the mortgage notes payable as of December 31, 2002.
In connection with the financing of Seasons Apartments in July of 2001, the
Predecessor also entered into an interest rate cap agreement in the notional
amount of $37,000 with a termination date of July 20, 2003. The agreement
provides for a rate cap of 6.65%. The Predecessor holds the derivative for the
purposes of hedging against exposure to changes in the future cash flows
attributable to increases in the interest rate. However, the instrument does not
qualify as an effective hedge for accounting purposes. As a result of the
nominal cost and fair value of the interest rate cap, the premium paid for the
interest rate cap agreement is being amortized over the term of the interest
rate cap agreement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Financial Statements and Financial Statement Schedule" on
page 33 to this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-23-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers and directors as of December 31, 2002 are as
follows:
Name and age Position or Offices Held
--------------------------------- ------------------------------------
George D. Krupp (58) Chairman of the Board of Directors
David C. Quade (59) President, Chief Financial Officer
and Director
Randolph G. Hawthorne (53) Director
Robert M. Kaufman (53) Director
Richard B. Peiser (54) Director
Frank Apeseche (45) Vice President, Treasurer
Wayne H. Zarozny (44) Vice President, Controller
Christopher M. Nichols (38) Vice President
Scott D. Spelfogel (42) Vice President, Secretary
George D. Krupp, Director and Chairman of the Board of Berkshire Income
Realty since July 19, 2002. Mr. Krupp is also the co-founder and Vice-Chairman
of our affiliate, The Berkshire Group, an integrated real estate and financial
services firm engaged in real estate acquisitions, property management,
investment sponsorship, mortgage banking, financial management and ownership of
three operating companies through private equity investments. Mr. Krupp has held
the position of Vice-Chairman and previously, Co-Chairman, since The Berkshire
Group was established as The Krupp Companies in 1969. Mr. Krupp was an
instructor of history at the New Jewish High School in Waltham, Massachusetts
from September of 1997 to May 2002. Mr. Krupp attended the University of
Pennsylvania and Harvard University Extension School and holds a Master's degree
in History from Brown University. Mr. Krupp also serves on the Board of
Directors of Boston Symphony and Combined Jewish Philanthropies.
David C. Quade, Director, President and Chief Financial Officer of
Berkshire Income Realty since July 19, 2002. Since December of 1998, Mr. Quade
has been Executive Vice President and Chief Financial Officer of The Berkshire
Group, an affiliate of Berkshire Income Realty. During that period, he led the
efforts to acquire, finance and asset manage the initial properties being
contributed by KRF Company in connection with the offer. Previously, Mr. Quade
was a Principal and Executive Vice President and Chief Financial Officer of
Leggat McCall Properties from 1981-1998, where he was responsible for strategic
planning, corporate and property financing and asset management. Before that,
Mr. Quade worked in senior financial capacities for two New York Stock Exchange
listed real estate investment trusts, North American Mortgage Investors and
Equitable Life Mortgage and Realty Investors. He also worked at Coopers &
Lybrand. He has a Professional Accounting Program degree from Northwestern
University Graduate School of Business. Mr. Quade also holds a Bachelor of
Science degree and a Master of Business Administration degree from Central
Michigan University. Mr. Quade also serves as Chairman of the Board of Directors
of the Marblehead/Swampscott YMCA and Director of the North Shore YMCA.
-24-
Randolph G. Hawthorne, Director of Berkshire Income Realty since October
15, 2002. Mr. Hawthorne is currently the Principal of a private investment and
consulting firm known as RGH Ventures and has served as such since January of
2001. Mr. Hawthorne is also the Development Vice Chair of the Multi-Family
Council Gold Flight and the National Multi Housing Council, which he led as the
Chairman from 1996-1997. He also presently serves on the Board of Directors of
the National Housing Conference and The Boston Home and currently serves as an
independent member of the Advisory Board of Berkshire Mortgage Finance, an
affiliate of Berkshire Income Realty. Mr. Hawthorne has previously served as
President of the National Housing and Rehabilitation Association and served on
the Editorial Board of the Tax Credit Advisor and Multi-Housing News. From
1973-2001, Mr. Hawthorne was a Principal and Owner of Boston Financial, a full
service real estate firm, which was acquired in 1999 by Lend Lease, a major
global real estate firm, which continues to be the largest U.S. manager of
tax-exempt real estate assets. During his 28 years with Boston Financial and
then Lend Lease, Mr. Hawthorne served in a variety of senior leadership roles
including on the Boston Financial Board of Directors. Mr. Hawthorne holds a
Master of Business Administration degree from Harvard University and a Bachelor
of Science degree from the Massachusetts Institute of Technology. In addition,
Mr. Hawthorne was a Trustee of The Berkshire Theatre Festival and the Austen
Riggs Foundation.
Robert M. Kaufman, Director of Berkshire Income Realty since October 15,
2002. Mr. Kaufman is currently the President and Chief Operating Officer of
Phoenix Ltd., a private investment firm, and has held this position since
October of 2002. Mr. Kaufman was a founder and the Chief Executive Officer of
Medeview, Inc., a healthcare technology company, from 2000-2002. From 1996-1999,
Mr. Kaufman served as Chief Executive Officer of a senior housing company known
as Carematrix Corp. and in 1999 served as a consultant to Carematrix Corp. Prior
to that, Mr. Kaufman worked for Coopers & Lybrand, LLP (now known as
PricewaterhouseCoopers, LLP), an international accounting and consulting firm,
from 1972-1996. During his tenure at Coopers & Lybrand, he was a partner from
1982-1996 primarily servicing real estate and healthcare industry clients and
served as a member of the National Board of Partners. In addition, while a
partner at Coopers & Lybrand, Mr. Kaufman was a member of the Mergers and
Acquisitions and Real Estate Groups, the Associate Chairman of the National
Retail and Consumer Products Industry Group and was a National Technical
Consulting Partner. Mr. Kaufman received his Bachelor of Arts from Colby College
and his Master of Business Administration degree from Cornell University.
Richard B. Peiser, Director of Berkshire Income Realty since October 15,
2002. Mr. Peiser is currently the Michael D. Spear Professor of Real Estate
Development at Harvard University and has worked in that position since 1998.
Mr. Peiser is also a member of the Department of Urban Planning and Design in
the Harvard University Graduate School of Design and has served as such since
1998. Before joining the faculty of Harvard University in 1998, Mr. Peiser
served as Director of the Lusk Center for Real Estate Development from 1987-1998
as well as Founder and Academic Director of the Master of Real Estate
Development Program at the University of Southern California from 1986-1998. Mr.
Peiser has also worked as a real estate developer and consultant since 1978. In
addition, Mr. Peiser has published numerous articles relating to various aspects
of the real estate industry. Mr. Peiser taught at Southern Methodist University
from 1978-1984, the University of Southern California from 1985-1998 and at
Stanford University in the fall of 1981. Mr. Peiser has been a trustee of the
Urban Land Institute since 1997, a Faculty Associate of the Eliot House since
1998 and a Director of the firm American Realty Advisors since 1998.
Additionally, Mr. Peiser served as a faculty representative on the Harvard
University Board of Overseer's Committee on Social Responsibility from 1999-2002
and has been a co-editor of the Journal of Real Estate Portfolio Management
during 2002. Mr. Peiser holds a Bachelor of Arts degree from Yale University, a
Master of Business Administration degree from Harvard University and a Ph.D. in
land economics from Cambridge University.
-25-
Frank Apeseche, Vice President and Treasurer of Berkshire Income Realty
since July 19, 2002. He is also President and Managing Partner of The Berkshire
Group, an affiliate of Berkshire Income Realty. Mr. Apeseche was President and
Chief Executive Officer of our affiliate, BG Affiliates, from 1995-2000. Mr.
Apeseche was Chief Financial Officer of The Berkshire Group from 1993-1995 and
Vice President and Treasurer of Berkshire Realty Income, Inc. from 1993-1994.
Mr. Apeseche was the Chief Planning Officer of the Berkshire Group from
1986-1993. Before joining The Berkshire Group in 1986, Mr. Apeseche was a
manager with ACCENTURE (formerly Anderson Consulting) where he specialized in
providing technology solutions to Fortune 500 clients. He received a Bachelor of
Arts degree with distinction from Cornell University and a Master of Business
Administration degree with Honors from the University of Michigan.
Wayne H. Zarozny, Vice President and Corporate Controller of Berkshire
Income Realty since July 19, 2002. He currently serves and has served as the
Vice President and Corporate Controller of The Berkshire Group, an affiliate of
Berkshire Income Realty, since 1997. Mr. Zarozny has held several positions
within The Berkshire Group since joining the Company in 1986 and is currently
responsible for accounting, financial reporting and treasury activities. Before
joining The Berkshire Group, he was an audit supervisor for Pannell Kerr Forster
International and on the audit staff of Deloitte, Haskins and Sells in Boston.
He received a Bachelor of Science degree from Bryant College, a Master of
Business Administration degree from Clark University and is a Certified Public
Accountant.
Christopher M. Nichols, Vice President of Berkshire Income Realty since
July 19, 2002. He currently holds the position of Senior Financial Analyst and
Asset Manager for The Berkshire Group, an affiliate of Berkshire Income Realty.
Mr. Nichols joined The Berkshire Group in 1999 as the Assistant Corporate
Controller. Before joining the Company, Mr. Nichols served as the Accounting
Manager and then as the Corporate Controller for Mac-Gray Corporation from
1997-1999, a New York Stock Exchange listed company. At Mac-Gray, Mr. Nichols
had primary oversight of the accounting and financial reporting systems. Mr.
Nichols worked as a Senior Staff Auditor for Mullen & Company from 1994-1997. He
has Associate Degrees in Computer Information Systems and in Electrical
Engineering, a Bachelor of Science degree in Accountancy from Bentley College
and is a Certified Public Accountant.
Scott D. Spelfogel, Vice President and Secretary of Berkshire Income Realty
since July 19, 2002. He currently serves and has served as Senior Vice President
and General Counsel to The Berkshire Group, an affiliate of Berkshire Income
Realty, since 1996. Before that, he served as Vice President and Assistant
General Counsel. Before joining The Berkshire Group in November of 1988, he was
in private practice in Boston. He received a Bachelor of Science degree in
Business Administration from Boston University, a Juris Doctor degree from
Syracuse University's College of Law and a Master of Laws degree in Taxation
from Boston University Law School. He is admitted to the bar in Massachusetts
and New York.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
During and with respect to the year ended December 31, 2002, none of the
Company's executive officers, directors and 10% beneficial owners were obligated
to file reports pursuant to Section 16 (a) of the Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION
Except for our independent directors identified below, our executive
officers and directors are not compensated by us for their services to us as
officers and directors. However, certain of our officers and directors will be
compensated by our advisor, Berkshire Property Advisors, L.L.C. ("Berkshire
Advisor"), for their services to Berkshire Advisor after the commencement of our
operations.
Independent directors of the Company are compensated at the rate of $30,000
per year for service and receive reimbursement for their travel expenses. There
were no other arrangements to compensate the directors in 2002.The Company paid
Randolph G. Hawthorne, Robert M. Kaufman and Richard B. Peiser director's fees
in the amount of $7,500 per person in connection with its December 2002 board of
directors meeting.
-26-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our equity securities as of March 31, 2003 by (1) each person who
is known by us to beneficially own five percent or more of any class of our
equity securities, (2) each of our directors and executive officers and (3) all
of our directors and executive officers as a group. The address for each of the
persons named in the table is One Beacon Street, Suite 1500, Boston,
Massachusetts 02108.
Shares of
Class B
Common Percentage and Class of Common
Name of Beneficial Owner Stock Stock Owned (1)
- ------------------------------------- ---------- ------------------------------
George Krupp 100(2) 100% of Class B common stock
Douglas Krupp 100(3) 100% of Class B common stock
The Douglas Krupp 1980 Family Trust 100(4) 100% of Class B common stock
The George Krupp 1980 Family Trust 100(5) 100% of Class B common stock
Krupp Family Limited Partnership-94 100(6) 100% of Class B common stock
KRF Company, L.L.C. 100 100% of Class B common stock
David C. Quade - -
Randolph G. Hawthorne - -
Robert M. Kaufman - -
Richard B. Pieser - -
All directors and officers as a group 100(7) 100% of Class B common stock
(1) No shares of our Class A common stock or any other class of our equity
securities was issued and outstanding as of March 31, 2003.
(2) Includes 100 shares owned by KRF Company, L.L.C. The Krupp Family Limited
Partnership--94 owns 100% of the limited liability company interests in KRF
Company, L.L.C. The general partners of Krupp Family Limited
Partnership--94 are George Krupp and Douglas Krupp, who each own 50% of the
general partnership interests in Krupp Family Limited Partnership--94. By
virtue of their interests in The Krupp Family Limited Partnership--94,
George Krupp and Douglas Krupp may each be deemed to beneficially own the
100 shares of Class B common stock owned by KRF Company. George Krupp is
also a director of Berkshire Income Realty, Inc.
(3) Includes 100 shares owned by KRF Company, L.L.C. that may be deemed to be
beneficially owned by Douglas Krupp, as described in footnote (2). (4)
Includes 100 shares owned by KRF Company, L.L.C. The Krupp Family Limited
Partnership--94 owns 100% of the limited liability company interests in KRF
Company. The Douglas Krupp 1980 Family Trust owns 50% of the limited
partnership interests in Krupp Family Limited Partnership--94. By virtue of
its interest in The Krupp Family Limited Partnership--94, The Douglas Krupp
1980 Family Trust may be deemed to beneficially own the 100 shares of Class
B common stock owned by KRF Company, L.L.C. The trustees of the Douglas
Krupp 1980 Family Trust are Paul Krupp, Lawrence Silverstein and Vincent
O'Reilly. The trustees share control over the power to dispose of the
assets of the trust and thus each may be deemed to beneficially own the 100
shares of Class B common stock owned by KRF Company, L.L.C.; however, each
of the trustees disclaims beneficial ownership of all of those shares that
are or may be deemed to be beneficially owned by Douglas Krupp or George
Krupp.
-27-
(5) Includes 100 shares owned by KRF Company, L.L.C. The Krupp Family Limited
Partnership--94 owns 100% of the limited liability company interests in KRF
Company. The George Krupp 1980 Family Trust owns 50% of the limited
partnership interests in Krupp Family Limited Partnership--94. By virtue of
its interest in The Krupp Family Limited Partnership--94, The George Krupp
1980 Family Trust may be deemed to beneficially own the 100 shares of Class
B common stock owned by KRF Company, L.L.C. The trustees of the George
Krupp 1980 Family Trust are Paul Krupp and Lawrence Silverstein. The
trustees share control over the power to dispose of the assets of the trust
and thus each may be deemed to beneficially own the 100 shares of Class B
common stock owned by KRF Company, L.L.C.; however, each of the trustees
disclaims beneficial ownership of all of those shares that are or may be
deemed to be beneficially owned by Douglas Krupp or George Krupp.
(6) Includes 100 shares owned by KRF Company, L.L.C. Krupp Family Limited
Partnership--94 owns 100% of the limited liability company interests in KRF
Company, L.L.C. By virtue of its interest in KRF Company, L.L.C., Krupp
Family Limited Partnership--94 is deemed to beneficially own the 100 shares
of Class B common stock owned by KRF Company, L.L.C.
(7) Includes 100 shares owned by KRF Company, L.L.C. that may be deemed to be
beneficially owned by George Krupp, as described in footnote (2).
Under our charter, we are authorized to issue 10,000,000 shares of our
common stock, of which 5,000,000 shares have been classified as Class A Common
Stock and 5,000,000 shares have been classified as Class B Common Stock. As of
December 31, 2002, we had 100 shares of our Class B common stock outstanding,
all of which were owned by KRF Company, and no outstanding shares of Class A
Common Stock. At or before the completion of the Offering, we intend to issue
additional shares of our Class B common stock to KRF Company, at a price of
$1.00 per share. There is no established public trading market for our common
stock.
Each share of Class B Common Stock entitles the holder to ten votes per
share, and each share of Class A Common Stock entitles the holder to one vote
per share, on all matters to be submitted to the stockholders for vote. Each
share of Class B Common Stock is convertible, at the option of the holder at any
time, into one share of Class A Common Stock. The exclusive voting power for all
purposes (including amendments to the charter) is vested in the holders of our
common stock. We may not issue shares of our Class A Common Stock unless the
issuance has been approved by the affirmative vote of the holders of a majority
of the shares of our outstanding Class B Common Stock.
The holders of our common stock are entitled to receive ratably such
distributions as may be authorized from time to time on our common stock by our
board of directors in its discretion from funds legally available for such
distribution. In the event of our liquidation, dissolution, winding-up or
termination, after payment of all debt and other liabilities, each holder of our
common stock is entitled to receive, ratably with each other holder of our
common stock, all our remaining assets available for distribution to the holders
of our common stock. Holders of our common stock have no subscription,
redemption, appraisal or preemptive rights.
Under Maryland law, a Maryland corporation generally cannot dissolve, amend
its charter, merge, sell all or substantially all of its assets, engage in a
share exchange or engage in similar transactions outside the ordinary course of
business, unless approved by the affirmative vote of stockholders holding at
least two thirds of the shares entitled to vote on the matter. However, a
Maryland corporation may provide in its charter for approval of these matters by
a lesser percentage, but not less than a majority of all of the votes entitled
to be cast on the matter. Our charter provides for approval of these matters by
the affirmative vote of a majority of the votes entitled to be cast on the
matter.
The holders of our common stock have the exclusive right (except as
otherwise provided in our charter) to elect or remove directors. The outstanding
shares of our common stock are fully paid and nonassessable.
-28-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Fees
We have entered into an advisory services agreement with Berkshire Advisor.
George Krupp, one of our directors, together with his brother Douglas Krupp,
indirectly owns all of the membership interests in Berkshire Advisor. Under the
advisory services agreement, Berkshire Advisor will be entitled to receive an
annual asset management fee equal to 0.40% of the purchase price of real estate
properties, as adjusted from time to time to reflect the then current fair
market value of the properties. The purchase price is defined as the capitalized
basis of an asset under GAAP, including renovation or new construction costs,
costs of acquisition or other items paid or received that would be considered an
adjustment to basis. The purchase price does not include acquisition fees and
capital costs of a recurring nature. Berkshire Advisor may propose adjustments
to the acquisition fee, subject to the approval of the audit committee of our
board of directors. The asset management fee will be payable with respect to the
initial properties to be contributed to us by our affiliate at the completion of
the Offering, but not with respect to the Interests acquired by us in the
Offering. Berkshire Advisor may propose adjustments to the asset management fee,
subject to the approval of the audit committee of our board of directors.
Berkshire Advisor will also be entitled to receive an acquisition fee equal to
1% of the purchase price (as defined above) of any new property acquired
directly or indirectly by us. The Berkshire Group, which is indirectly owned by
Douglas and George Krupp, received advisory fees for asset management services
relating to the initial properties aggregating approximately $233 for 2000, $186
for 2001 and $407 for 2002. In addition, The Berkshire Group received advisory
fees related to the refinancings of Dorsey's Forge, Hannibal Grove, Century and
Seasons of Laurel totaling approximately $255 during 2002.
BRI OP Limited Partnership ("BRI OP"), an affiliate of The Berkshire Group,
currently acts as property manager with respect to the initial properties and,
upon the completion of the Offering, will continue to do so under its existing
property management agreements. Douglas and George Krupp indirectly own general
and limited partner interests in Berkshire Realty Holdings, L.P., the parent of
BRI OP, which is owned in joint venture with unaffiliated third parties. Under
the property management agreement, BRI OP will be entitled to receive a property
management fee, payable monthly, equal to 5% of the gross rental receipts,
including rentals and other operating income, received each month with respect
to the initial properties. The total amount of property management fees paid to
BRI OP under the property management agreements relating to the initial
properties was $1,042 for 2000, $1,102 for 2001 and $1,296 for 2002.
Under the advisory services agreement and the property management
agreements, Berkshire Advisor and BRI OP, respectively, will be reimbursed at
cost for all out-of-pocket expenses incurred by them, including the actual cost
of goods, materials and services that are used in connection with the management
of us and our properties. Berkshire Advisor also will be reimbursed for
administrative services rendered by it that are necessary for our prudent
operation, including legal, accounting, data processing, transfer agent and
other necessary services.
Douglas and George Krupp indirectly own all of the membership interests in
KRF Company, L.L.C. KRF Company has entered into a contribution and sale
agreement with our operating partnership and a subsidiary of our operating
partnership under which our operating partnership will acquire all of KRF
Company's interests in the initial properties upon the completion of the
Offering in exchange for common limited partner interests in our operating
partnership. The value of these interests, which was determined based on third
party appraisals and after deducting all indebtedness on the properties, is
approximately $53,000, and is subject to final adjustments pending the
consummation of the transaction. The obligations of the parties under the
contribution and sale agreement are conditioned upon the completion of the
Offering.
-29-
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Within the 90 days prior to the date of this report, the Company carried
out an evaluation under the supervision and with the participation of the
Company's management, including the President and Chief Financial Officer, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) of the
Securities Exchange Act) . Based upon that evaluation, the President and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms.
(b) Changes in internal controls.
None.
-30-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) See "Index to Financial Statements and Financial Statement Schedule" on
page 33 to this report.
(b) No reports on Form 8-K were filed by the Registrant during the last quarter
of the period covered by this report.
-31-
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K,
Continued
(c) Exhibits:
Number and Description Under Regulation S-K
The following reflects all applicable exhibits required under Item 601 of
Regulation S-K:
3.1 Form of Articles of Amendment and Restatement of the Registrant (to be
entered into upon the closing of the Offering). Incorporated by reference
to exhibit no. 3.1 to the Registrant's Registration Statement on Form S-11
(Registration No. 333-98571).
3.2 Bylaws of the Registrant. Incorporated by reference to exhibit no. 3.2 to
the Registrant's Registration Statement on Form S-11 (Registration No.
333-98571).
3.3 Articles of Incorporation of the Registrant. Incorporated by reference to
exhibit no. 3.1 to the Registrant's Registration Statement on Form S-11
filed on August 22, 2002 (Registration No. 333-98571).
10.1 Form of Amended and Restated Agreement of Limited Partnership of Berkshire
Income Realty- OP, L.P. Incorporated by reference to exhibit no. 10.1 to
the Registrant's Registration Statement on Form S-11 (Registration No.
333-98571).
10.2 Form of Contribution and Sale Agreement among KRF Company, L.L.C., KRF GP,
Inc., Berkshire Income Realty-OP, L.P. and BIR Sub, L.L.C. Incorporated by
reference to exhibit no. 10.2 to the Registrant's Registration Statement on
Form S-11 (Registration No. 333-98571).
10.3 Form of Advisory Services Agreement between the Registrant and Berkshire
Real Estate Advisors, L.L.C. Incorporated by reference to exhibit no. 10.3
to the Registrant's Registration Statement on Form S-11 (Registration No.
333-98571). 10.4 Property Management Agreement between KRF3 Acquisition
Company, L.L.C. and BRI OP Limited Partnership dated January 1, 2002.
Incorporated by reference to exhibit no.
10.4 to the Registrant's Registration Statement on Form S-11 (Registration No.
333-98571).
10.5 Property Management Agreement between Walden Pond Limited Partnership and
BRI OP Limited Partnership dated January 1, 2002. Incorporated by reference
to exhibit no. 10.5 to the Registrant's Registration Statement on Form S-11
(Registration No. 333-98571).
10.6 Property Management Agreement between KRF5 Acquisition Company, L.L.C. and
BRI OP Limited Partnership dated January 1, 2002. Incorporated by reference
to exhibit no. 10.6 to the Registrant's Registration Statement on Form S-11
(Registration No. 333-98571).
10.7 Property Management Agreement between KRF3 Acquisition Company, L.L.C. and
BRI OP Limited Partnership dated January 1, 2002. Incorporated by reference
to exhibit no. 10.7 to the Registrant's Registration Statement on Form S-11
(Registration No. 333-98571).
10.8 Property Management Agreement between Seasons of Laurel, L.L.C. and BRI OP
Limited Partnership dated January 1, 2002. Incorporated by reference to
exhibit no. 10.8 to the Registrant's Registration Statement on Form S-11
(Registration No. 333-98571).
10.9 Form of Letter Agreement between Georgeson Shareholder Communications Inc.,
Georgeson Shareholder Securities Corporation and the Registrant.
Incorporated by reference to exhibit no. 10.9 to the Registrant's
Registration Statement on Form S-11 (Registration No. 333-98571).
10.10Waiver and Standstill Agreement, dated as of August 22, 2002, by and among
Krupp Government Income Trust, Krupp Government Income Trust II, the
Registrant and Berkshire Income Realty-OP, L.P. Incorporated by reference
to exhibit no. 10.10 to the Registrant's Registration Statement on Form
S-11 (Registration No. 333-98571).
10.11* Letter amending Waiver and Standstill Agreement, dated March 5, 2003,
among Krupp Government Income Trust, Krupp Government Income Trust II, the
Registrant and Berkshire Income Realty-OP, L.P.
21.1 Subsidiaries of the Registrant. Incorporated by reference to exhibit no.
21.1 to the Registrant's Registration Statement on Form S-11 (Registration
No. 333-98571).
99.1*Certification of Principal Executive Officer pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2*Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed herewith
-32-
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
BERKSHIRE INCOME REALTY, INC.
Page
Report of Independent Accountants - - - - - - - -- - - - - - - - - - - - 34
Balance Sheet at December 31, 2002 - - - - - - - - - - - - - - - - - - - 35
Notes to Balance Sheet - - - - - - - - - - - - - -- - - - - - - - - - - 36
BERKSHIRE INCOME REALTY PREDECESSOR GROUP
Report of Independent Accountants - - - - - - - -- - - - - - - - - - - - 37
Combined Balance Sheets at December 31, 2002 and 2001 - - - - - - - - - 38
Combined Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000 - - - -- - - - - - - - - - - - 39
Combined Statements of Changes in Owners' Equity (Deficit) for the
Years Ended December 31, 2002, 2001 and 2000 - - - - - - - - - - 40
Combined Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000 - - - - - - - - - - - - - - - - 41
Notes to Combined Financial Statements - - - - - - - - - - - - - - - - - 42
Schedule III - Real Estate and Accumulated Depreciation at
December 31, 2002 - - - - - - - - - - -- - - - - - - - - - - - - 52
-33-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Berkshire Income Realty, Inc.:
In our opinion, the accompanying balance sheet presents fairly, in all
material respects, the financial position of Berkshire Income Realty, Inc. (the
"Company") at December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. This financial statement is
the responsibility of the Company's management; our responsibility is to express
an opinion on this financial statement based on our audit. We conducted our
audit of this statement 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 balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall balance sheet presentation. We believe that our audit of
the balance sheet provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 25, 2003
-34-
BERKSHIRE INCOME REALTY, INC.
BALANCE SHEET
At December 31, 2002
ASSETS
Assets:
Cash $ 100
----------
Total assets $ 100
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities: $ -
Stockholder's Equity
Preferred stock, liquidation preference $25.00
per share, 5,000,000 shares authorized,
0 shares issued and outstanding -
ClassA common stock, $.01 par value, 5,000,000
shares authorized, 0 shares issued and
outstanding -
ClassB common stock, $.01 par value, 5,000,000 shares
authorized, 100 shares issued and outstanding 1
Additional paid in capital 99
----------
Total liabilities and stockholder's equity $ 100
==========
The accompanying notes are an integral part of
this balance sheet.
-35-
BERHSHIRE INCOME REALTY, INC.
NOTES TO BALANCE SHEET
1. ORGANIZATION AND FORMATION
Berkshire Income Realty, Inc. (the "Company "), a Maryland corporation, was
organized on July 19, 2002. The Company intends to acquire, own and operate
multi-family residential properties. The Company has no operating history to
date.
The Company filed a registration statement on Form S-11 with the Securities
and Exchange Commission with respect to its offers (the "Offering") to exchange
its 9% Series A Cumulative Redeemable Preferred Shares ("Preferred Shares") for
interests ("Interests") in the following six mortgage funds: Krupp Government
Income Trust, Krupp Government Income Trust II, Krupp Insured Mortgage Limited
Partnership, Krupp Insured Plus Limited Partnership, Krupp Insured Plus II
Limited Partnership, Krupp Insured Plus III Limited Partnership (collectively,
the "Mortgage Funds"). For each Interest in the Mortgage Funds that is validly
tendered and not withdrawn in the Offering, the Company will exchange its
Preferred Shares based on an exchange ratio applicable to each Mortgage Fund.
The registration statement was declared effective on January 9, 2003.
Simultaneous with the completion of the Offering, KRF Company, LLC ("KRF
Company"), an affiliate of the Company, will contribute its ownership interests
in five multi-family residential properties (the "Properties") to Berkshire
Income Realty-OP, L.P. (the "Operating Partnership") in exchange for common
limited partner interests in the Operating Partnership. Prior to the Offering,
KRF Company contributed $100 in exchange for 100 shares of common stock of the
Company. Concurrent with the completion of the Offering, KRF Company will
contribute cash to the Company in exchange for common stock of the Company in an
amount equal to 1% of the fair value of total net assets of the Operating
Partnership. This amount will be contributed to the Company's wholly owned
subsidiary, BIR GP, L.L.C., who will then contribute the cash to the Operating
Partnership in exchange for the sole general partner interest in the Operating
Partnership. At the completion of the Offering, the Operating Partnership will
be the successor to the Berkshire Income Realty Predecessor Group (the
"Predecessor"). The merger of the separate businesses into the Company and the
Operating Partnership is considered a purchase business combination with the
Predecessor being the accounting acquirer. Accordingly, the acquisition or
contribution of the various Predecessor interests will be accounted for at their
historical cost. The acquisition of the Interests will be accounted for using
purchase accounting based upon the fair value of the Interests acquired.
INCOME TAXES
Upon completion of the Offering, the Company intends to make an election to
be taxed as a real estate investment trust ("REIT") under the Internal Revenue
Code. As a REIT, the Company is required to distribute at least 90% of its REIT
taxable income to its shareholders to maintain its REIT status. REITs are
subject to a number of organizational and operational requirements. If the
Company fails to qualify as a REIT in any taxable year, the Company will be
subject to Federal income tax on its taxable income at regular corporate tax
rates. Even if the Company qualifies for taxation as a REIT, the Company may be
subject to state and local taxes on its income and property and to Federal
income and excise taxes on its undistributed income.
-36-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners and Members of
Berkshire Income Realty Predecessor Group:
In our opinion, the combined financial statements present fairly, in all
material respects, the financial position of Berkshire Income Realty Predecessor
Group (the "Predecessor") 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. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related combined financial statements. These financial statements and
financial statement schedule are the responsibility of the Predecessor's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule 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 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 provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 25, 2003
-37-
BERKSHIRE INCOME REALTY PREDECESSOR GROUP
COMBINED BALANCE SHEETS
December 31,
------------------------
2002 2001
---------- ----------
(In Thousands)
ASSETS
Multi-family apartment communities, net of
accumulated depreciation of $88,003 and $82,719,
respectively $ 85,157 $ 87,648
Cash and cash equivalents 4,766 3,990
Cash restricted for tenant security deposits 776 811
Replacement reserve escrow 291 5
Prepaid expenses and other assets 3,410 1,834
Due from affiliate - 1,738
Deferred expenses, net of accumulated amortization
of $155 and $171, respectively 1,032 587
---------- ----------
Total assets $ 95,432 $ 96,613
========== ==========
LIABILITIES AND OWNERS' EQUITY (DEFICIT)
Liabilities:
Mortgage notes payable $ 105,828 $ 76,799
Accrued expenses and other liabilities 1,643 1,041
Tenant security deposits 839 802
---------- ----------
Total liabilities 108,310 78,642
Minority interest - 619
Owners' equity (deficit) (12,878) 17,352
---------- ----------
Total liabilities and owners' equity
(deficit) $ 95,432 $ 96,613
========== ==========
The accompanying notes are an integral part of these
combined financial statements.
-38-
BERKSHIRE INCOME REALTY PREDECESSOR GROUP
COMBINED STATEMENTS OF OPERATIONS
Years Ended December 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
(In Thousands)
Revenue:
Rental $ 23,699 $ 23,056 $ 21,869
Interest 370 533 601
Utility reimbursements 511 176 -
Other 903 1,111 782
---------- ---------- ----------
Total revenue 25,483 24,876 23,252
Expenses:
Operating 5,717 5,463 5,469
Maintenance 1,883 1,944 1,797
Real estate taxes 1,771 1,679 1,674
General and administrative 661 657 714
Management fees 1,703 1,288 1,275
Depreciation 5,284 4,751 5,011
Interest 4,988 5,682 7,204
Participating note interest - 6,591 1,013
---------- ---------- ----------
Total expenses 22,007 28,055 24,157
Income (loss) before minority
interest and extraordinary loss
from early extinguishment of debt 3,476 (3,179) (905)
Minority interest (1,520) 228 517
---------- ---------- ----------
Income (loss) before extraordinary
loss from early extinguishment of
debt 1,956 (2,951) (388)
Extraordinary loss from early
extinguishment of debt (1,168) (713) (476)
---------- ---------- ----------
Net income (loss) $ 788 $ (3,664) $ (864)
========== ========== ==========
The accompanying notes are an integral part of these
combined financial statements.
-39-
BERKSHIRE INCOME REALTY PREDECESSOR GROUP
COMBINED STATEMENTS OF CHANGES IN OWNERS' EQUITY (DEFICIT)
Balance at December 31, 2000 $ (11,505)
Net loss (3,664)
Distributions (5,462)
Contributions 37,983
----------
Balance at December 31, 2001 17,352
Net income 788
Distributions (31,343)
Contributions 325
----------
Balance at December 31, 2002 $ (12,878)
==========
The accompanying notes are an integral part of these
combined financial statements
-40-
BERKSHIRE INCOME REALTY PREDECESSOR GROUP
COMBINED STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
(In Thousands)
Cash flows from operating activities:
Net income (loss) $ 788 $ (3,664) $ (864)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Amortization of deferred financing
costs 168 126 134
Non-cash portion of extraordinary
loss from early extinguishment
of debt 447 713 180
Depreciation 5,284 4,751 5,011
Minority interest 1,521 (228) (517)
Increase (decrease) in cash
attributable to changes in assets
and liabilities:
Tenant security deposits, net 72 (124) (17)
Prepaid expenses and other
assets (1,576) 294 869
Accrued participating note
interest - (1,650) 1,013
Accrued expenses and other
liabilities 602 (4,488) 783
---------- ---------- ----------
Net cash provided by (used in)
operating activities 7,306 (4,270) 6,592
---------- ---------- ----------
Cash flows from investing activities:
Capital improvements (2,793) (732) (2,959)
Acquisition of real estate/limited
partnership interests - (34,563) (19,631)
Replacement reserve escrow (286) 2,214 (1,442)
---------- ---------- ----------
Net cash used in investing activities (3,079) (33,081) (24,032)
---------- ---------- ----------
Cash flows from financing activities:
Borrowings on mortgage notes payable 102,080 41,500 36,207
Principal payments on mortgage notes
payable (73,051) (37,269) (21,257)
Due from affiliate 1,738 (1,738) -
Deferred financing costs (1,060) (1,034) -
Contributions from owners 325 37,983 8,609
Distributions to owners (31,343) (5,462) -
Distributions to minority interest (2,140) (538) -
---------- ---------- ----------
Net cash (used in) provided by
financing activities (3,451) 33,442 23,559
---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents 776 (3,909) 6,119
Cash and cash equivalents at beginning
of year 3,990 7,899 1,780
---------- ---------- ----------
Cash and cash equivalents at end of
year $ 4,766 $ 3,990 $ 7,899
========== ========== ==========
Supplemental cash flow disclosure:
Capital improvements included in accrued
expenses and other liabilities $ 110 $ 26 $ 608
========== ========== ==========
The accompanying notes are an integral part of these
combined financial statements
-41-
BERKSHIRE INCOME REALTY PREDECESSOR GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in Thousands)
1. Organization and Basis of Presentation
KRF Company L.L.C., an affiliate of The Berkshire Group and controlled by
Douglas and George Krupp, through its subsidiaries KRF3 Acquisition
Company, L.L.C. and KR5 Acquisition, L.L.C ("KRF"), at December 31, 2002
and 2001 has controlling interests in five multifamily apartment
communities consisting of 2,539 units (the "Properties") as follows:
Controlling
Description Location Units Interest
------------------- ------------------------ ------- -----------
Century Cockeysville, Maryland 468 75.82%
Dorsey's Forge Columbia, Maryland 251 91.38%
Hannibal Grove Columbia, Maryland 316 91.38%
Seasons of Laurel Laurel, Maryland 1,088 100.00%
Walden Pond Houston, Texas 416 100.00%
KRF acquired the Properties during 2000 and 2001 through the acquisition of
limited partner units from certain affiliates of The Berkshire Group also
controlled by George and Douglas Krupp (See Note - 3) namely, Krupp Realty
Limited Partnership - V (Century), Krupp Realty Fund, Ltd. - III (Dorsey's
Forge and Hannibal Grove), and through the purchase of real estate from
certain affiliates of The Berkshire Group namely, Maryland Associates
Limited Partnership (Seasons of Laurel) and Krupp Realty Fund, Ltd. - IV
(Walden Pond); (collectively, the "Affiliates").
The activities of the Properties held by KRF and the Affiliates, the owners
of the Properties, are collectively referred to as the Berkshire Income
Realty Predecessor Group or the "Predecessor". The Properties have been
included in the financial statements of the Predecessor for all years
presented.
The accompanying financial statements have been presented on a combined
basis because KRF and the Affiliates are under common management and
control and because KRF and the Properties will be the subject of a
business combination with Berkshire Income Realty, Inc. which was formed in
2002 and intends to qualify as a real estate investment trust under the
Internal Revenue Code of 1986, as amended.
Due to the affiliation of the Predecessor, these financial statements have
been presented as a reorganization of entities under common control, which
is similar to the accounting for a pooling of interests. The acquisition or
transfer of the various Predecessor interests has been accounted for at
historical cost. The acquisition of limited partner interests in the
Affiliates has been accounted for using purchase accounting based on the
cash paid for the interests, resulting in an incremental increase in the
basis of the Predecessor's real estate.
During 2000, KRF Company L.L.C., the parent of KR5 Acquisition L.L.C.
("KR5"), obtained a $10,000 term loan facility (the "Loan") and utilized
the proceeds to make a capital contribution to KR5.
The Loan had a term of five years and a variable interest rate of either
the Prime Rate, as defined, or LIBOR, as defined, plus two percent. The
Loan was payable on an interest only basis until the first year anniversary
of closing; thereafter; quarterly payments of principal were required based
upon a five year, straight-line amortization schedule. Certain net
distributions made to KRF Company L.L.C. by KR5 related to the sale,
refinancing or other disposition of properties by KR5 were to be used to
prepay the Loan.
Continued
-42-
BERKSHIRE INCOME REALTY PREDECESSOR GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands)
1. Organization and Basis of Presentation, Continued
The Loan was collateralized by a first and only security interest in KRF
Company L.L.C.'s equity interest in KR5. An affiliate of KRF Company L.L.C.
granted a first and only security interest in certain assets, including its
rights and interests in certain advisory agreements. Such advisory
agreements provide for fees in excess of $2 million per year. In addition,
the Loan was guaranteed by Douglas Krupp, George Krupp and an affiliate of
KRF Company L.L.C.
The Loan was fully repaid on August 2, 2002. Pursuant to SAB Topic 5-J, the
Loan has not been reflected in the financial statements of the Predecessor.
All overhead costs of KRF and an allocation of the Affiliates' overhead
costs, based upon the number of units in the Properties to total units
owned by the Affiliates, have been reflected in the Predecessor's financial
statements for the periods presented. Management believes the basis for
allocating overhead costs is reasonable.
2. Significant Accounting Policies
Principles of Combination
The combined financial statements include the accounts of the Properties
extracted from the books and records of KRF and the Affiliates. To the
extent parties not affiliated with The Berkshire Group have an equity
interest in the Properties, such interest is accounted for as minority
interest in the accompanying financial statements. Allocations of income,
losses and distributions are made to minority shareholders based upon their
respective share of such allocations. Losses in excess of the minority
shareholder's investment basis are allocated to the Predecessor.
Distributions to the minority shareholder in excess of their investment
basis are recorded in the Predecessor's combined statement of operations as
minority interest.
Real Estate
Real estate assets are recorded at depreciated cost. Costs related to the
acquisition, rehabilitation and improvement of properties are capitalized.
Recurring capital improvements typically include: appliances, carpeting and
flooring, HVAC equipment, kitchen/bath cabinets, site improvements and
various exterior building improvements. Non-recurring upgrades include
kitchen/bath upgrades, new roofs, window replacements and the development
of on-site fitness, business and community centers.
Expenditures for ordinary maintenance and repairs are charged to operations
as incurred. Depreciation is computed on the straight-line basis over the
estimated useful lives of the assets, as follows:
Rental property 27.5 years
Improvements 5 to 20 years
Appliances, carpeting, and equipment 3 to 8 years
When property is sold, their costs and related depreciation are removed
from the accounts with the resulting gains or losses reflected in net
income or loss for the period.
Continued
-43-
BERKSHIRE INCOME REALTY PREDECESSOR GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands)
2. Significant Accounting Policies, Continued
Real Estate, Continued
Pursuant to Statement of Financial Accounting Standards Opinion No. 144,
Accounting for the Impairment or disposal of Long-Lived Assets, management
reviews its long-lived assets used in operations for impairment when there
is an event or change in circumstances that indicates an impairment in
value. An asset is considered impaired when the undiscounted future cash
flows are not sufficient to recover the assets carrying value. If such
impairment is present, an impairment loss is recognized based on the excess
of the carrying amount of the asset over its fair value. The Predecessor
records impairment losses and reduces the carrying amounts of assets held
for sale when the carrying amounts exceed the estimated selling proceeds
less the costs to sell. No such impairment losses have been recognized to
date.
Cash and cash equivalents
The Predecessor invests its cash primarily in deposits and money market
funds with commercial banks. All short-term investments with maturities of
three months or less from the date of acquisition are included in cash and
cash equivalents. The cash investments are recorded at cost, which
approximates current market values. The Predecessor has not experienced any
losses to date on its invested cash.
Concentration of Credit Risk
The Predecessor maintains cash deposits with major financial institutions,
which from time to time may exceed federally insured limits. The
Predecessor does not believe that this concentration of credit risk
represents a material risk of loss with respect to its financial position.
Restricted Cash
Restricted cash represents security deposits held by the Predecessor under
the terms of certain tenant lease agreements.
Escrows
Certain lenders require escrow accounts for capital improvements. The
escrows are funded from operating cash, as needed.
Deferred Expenses
Fees and costs incurred to obtain long-term financing have been deferred
and are being amortized over the terms of the related loans, on a method,
which approximates the effective interest method.
Partners'/Members' Capital Contributions, Distributions and Profits and
Losses
Partners'/Members' capital contributions, distributions and profits and
losses are allocated in accordance with the terms of individual partnership
and or limited liability company agreements.
Continued
-44-
BERKSHIRE INCOME REALTY PREDECESSOR GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands)
2. Significant Accounting Policies, Continued
Rental Revenue
The Properties are leased under terms of leases with terms of generally one
year or less. Rental revenue is recognized when earned. Recoveries from
tenants for utility expenses are recorded in the period the applicable
costs are incurred. Other income, which consists primarily of income from
damages, laundry, cable, phone, pool, month to month tenants, relet fees
and pet fees, is recognized when earned.
Income Taxes
No provision for income taxes is necessary in the financial statements of
the Predecessor since the Predecessor's statements combine the operations
and balances of partnerships and limited liability companies, none of which
are directly subject to income tax. The tax effect of its activities
accrues to the individual partners and or members of the respective entity.
Derivative Financial Instruments
The Predecessor entered into an interest rate cap agreement in 2001 to
economically hedge a certain mortgage note payable. The related note was
refinanced in 2002 and the interest rate cap agreement was terminated. The
Predecessor has not designated this instrument as an accounting hedge under
SFAS No. 133. Derivative financial instruments contain an element of risk
that counterparties may be unable to meet the terms of such agreements. The
Predecessor minimizes its risk exposure by limiting the counterparties to
major banks and investment bankers who meet established credit and capital
guidelines.
Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which supercedes SFAS No. 121. SFAS No.
144 requires that long-lived assets that are to be disposed of by sale be
measured at the lower of the book value or fair value less cost to sell.
SFAS No. 144 retains the requirements of SFAS No. 121 regarding impairment
loss recognition and measurement. In addition, it requires that one
accounting model be used for long-lived assets to be disposed of by sale
and broadens the presentation of discontinued operations to include more
disposal transactions. SFAS No.144 is effective for fiscal years beginning
after December 15, 2001. This statement has not had a material effect on
the Predecessor's financial condition, results of operations or cash flows.
In May 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002, which rescinds SFAS No. 4, Reporting Gains
and Losses from Extinguishment of Debt, among others. As a result of the
rescission of SFAS No. 4, gains or losses from extinguishment of debt are
not necessarily considered extraordinary. SFAS No. 145 is effective for
fiscal years beginning after May 15, 2002. The impact of adopting this
statement will require the Predecessor in 2003 to reclassify its
extraordinary loss into continuing operations in the accompanying
statements of operations.
Continued
-45-
BERKSHIRE INCOME REALTY PREDECESSOR GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands)
2. Significant Accounting Policies, Continued
Recent Accounting Pronouncements, Continued
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when
the liability is incurred and that an entity's commitment to an exit plan,
by itself, does not create a present obligation to others that meets the
definition of a liability. This Statement also establishes that fair value
is the objective for initial measurement of the liability. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December
31, 2002. The impact of adopting this statement is not expected to be
material to the Predecessor's financial condition, results of operations or
cash flows.
On November 25, 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others and Interpretation
of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation
No. 34. FIN 45 clarifies the requirements of SFAS No. 5, Accounting for
Contingencies, relating to a guarantors accounting for, and disclosure of,
the issuance of certain types of guarantees. The disclosure requirements of
FIN 45 are effective for the Predecessor as of December 31, 2002, and
require disclosure of the nature of the guarantee, the maximum potential
amount of future payments that the guarantor could be required to make
under the guarantee, and the current amount of the liability, if any, for
the guarantor's obligations under the guarantee. The recognition
requirements of FIN 45 are to be applied prospectively to guarantees issued
or modified after December 31, 2002. The Predecessor has reviewed the
provisions of FIN 45 and believes that the impact of the adoption will not
be material to its financial position, results of operations or cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities. The objective of this
interpretation is to provide guidance on how to identify a variable
interest entity ("VIE") and determine when the assets, liabilities,
noncontrolling interests, and results of operation of a VIE need to be
included in a company's consolidated financial statements. A company that
holds variable interests in an entity will need to consolidate the entity
if the company's interest in the VIE is such that the company will absorb a
majority of the VIE's expected losses and/or receive a majority of the
entity's expected residual returns, if they occur. FIN 46 also requires
additional disclosures by primary beneficiaries and other significant
variable interest holders. The provisions of this interpretation became
effective upon issuance. The Predecessor is currently assessing the impact,
if any, the interpretation will have on its financial position, results of
operations or cash flows.
Use of 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, contingent assets and liabilities at the
date of financial statements and revenue and expenses during the reporting
period. Such estimates include the allowance for depreciation and the fair
value of the accrued participating note interest. Actual results could
differ from those estimates.
Reclassifications
Certain reclassifications have been made to the 2001 and 2000 combined
financial statements to conform to the 2002 presentation.
Continued
-46-
BERKSHIRE INCOME REALTY PREDECESSOR GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands)
3. Multifamily Apartment Communities
The following summarizes the carrying value of the Predecessor's
multifamily apartment communities:
December 31,
------------------------
2002 2001
---------- ----------
Land $ 20,071 $ 20,071
Buildings, improvements and personal property 153,089 150,296
---------- ----------
Multi-family apartment communities 173,160 170,367
Accumulated depreciation (88,003) (82,719)
---------- ----------
Multi-family apartment communities, net $ 85,157 $ 87,648
========== ==========
The acquisition of the limited partner interests andproperties from the
Affiliates, which was at fair value and in excess of book value of the
Properties, has been accounted for using purchase accounting based upon the
cash paid for the interests. The following is a summary of the incremental
increase in the basis of the Predecessor's real estate as a result of the
acquisition of limited partner interests or real estate assets between the
Affiliates during 2001 and 2000:
December 31,
------------------------
2001 2000
---------- ----------
Century $ - $ 12,214
Dorsey's Forge - 3,404
Hannibal Grove - 5,914
Seasons of Laurel 26,241 -
Walden Pond 8,322 -
---------- ----------
Total $ 34,563 $ 21,532
========== ==========
Included in the 2000 increase in real estate basis is $1,901 of non-cash
contributions attributable to the minority interest member.
Continued
-47-
BERKSHIRE INCOME REALTY PREDECESSOR GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands)
4. Mortgage Notes Payable
Mortgage notes payable consisted of the following at December 31, 2002 and
2001:
Annual Final Annual
Collateralized Principal Interest Maturity Monthly Principal Interest
Property 2002 Rate Date Payment 2001 Rate
----------------- ------------ -------------- -------------- --------------- --------------- -------------
Century $ 22,613 5.96% Fixed April 1, 2007 $ 136 $ 19,188 1.74% plus
3 month
LIBOR
Dorsey's Forge 10,546 5.96% Fixed April 1, 2007 $ 63 6,004 1.59% plus
3 month
LIBOR
Hannibal Grove 16,013 5.96% Fixed April 1, 2007 $ 96 10,429 1.59% plus
3 month
LIBOR
Seasons of 52,247 5.74% Fixed Aug. 1, 2009 $ 306 36,678 Reference
Laurel Bill plus
0.95%
Walden Pond 4,409 Reference Dec. 1, 2008 $ 20 4,500 Reference
Bill plus Bill plus
1.74% 1.74%
------------ ---------------
Total $105,828 $ 76,799
============ ===============
Combined aggregate principal maturities of mortgage notes payable at
December 31, 2002 are approximately as follows:
2003 $ 1,320
2004 1,399
2005 1,482
2006 1,571
2007 47,455
Thereafter 52,603
--------------
$ 105,828
==============
Continued
-48-
BERKSHIRE INCOME REALTY PREDECESSOR GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands)
4. Mortgage Notes Payable, Continued
Interest rates on variable rate mortgage notes payable aggregating $4,409
and $76,799 were 2.98% at December 31, 2002 and ranged from 2.63% to 3.62%
at December 31, 2001. The 3 month LIBOR rate as of December 31, 2001 was
1.88%. The Federal Home Loan Mortgage Corporation Reference Bills
("Reference Bills") are uncollateralized general corporate obligations. The
Reference Bills rates as of December 31, 2002 and 2001 were 1.24% and
1.68%, respectively.
On April 27, 2000, the Predecessor completed the refinancing of the Century
mortgage note payable with a $19,500 non-recourse mortgage note payable.
The Predecessor used the proceeds from the refinancing to repay the
existing mortgage note of $10,657, to pay closing costs of $41, and to
purchase the outstanding limited partnership units of Krupp Realty Limited
Partnership-V. The Predecessor also recognized a $476 extraordinary loss
resulting from the prepayment penalty and the write-off of deferred
financing costs upon the early principal repayment of the mortgage note
payable, which is reflected in the statement of operations for the year
ended December 31, 2000.
On April 27, 2000, the Predecessor completed the refinancing of the
Dorsey's Forge and Hannibal Grove mortgage notes payable. Dorsey's Forge
and Hannibal Grove were refinanced with $6,103 and $10,604, respectively,
non-recourse mortgage notes payable. The Predecessor used the proceeds from
the refinancing to repay the existing mortgage notes on Dorsey's Forge and
Hannibal Grove of $4,170 and $5,672, respectively, to pay closing costs of
$108 and $149, respectively, and to purchase the outstanding limited
partnership units from Krupp Realty Fund, Ltd.-III.
On July 23, 2001, the Predecessor obtained a $37,000 non-recourse mortgage
note payable on Seasons of Laurel, which is collateralized by the property.
The Predecessor used the proceeds from the note to purchase the property
from Maryland Associates Limited Partnership. The Predecessor also
recognized a $713 extraordinary loss resulting from the write-off of
deferred financing costs related to the extinguished debt. In connection
with the financing, the Predecessor also entered into an interest rate cap
agreement in the notional amount of $37,000 with a termination date of July
20, 2003. The related note was refinanced in 2002 and the interest rate cap
agreement waas terminated. The agreement provided for a rate cap of 6.65%.
The Predecessor held the derivative for the purposes of hedging against
exposure to changes in the future cash flows attributable to increases in
the interest rate; however, the instrument did not qualify as an effective
hedge for accounting purposes. As a result of the nominal cost and fair
value of the interest rate cap, the premium paid for its interest rate cap
agreement is being amortized over the term of the interest rate cap
agreement. Such unamortized premium approximated $35 at December 31,
2001,and is included in deferred expenses in the accompanying balance
sheet.
Prior to July 23, 2001, the Predecessor had outstanding a first and second
non-recourse mortgage note payable on Seasons of Laurel, which was
collateralized by the property. The combined first and second mortgage
loans contained a preferred interest rate of 10%, subject to certain cash
flow limitations. Additionally, the Predecessor had a subordinate
promissory note payable that required participating payments to the holder
of the note, subject to cash availability, as defined. The holder of the
first and second mortgage notes payable and subordinate promissory note was
an affiliate of The Berkshire Group. The fair value of the participating
interest in the subordinate promissory note payable was deferred and
amortized into the accompanying statement of operations over the
subordinated promissory note's estimated life using the effective interest
rate method. For the year ended December 31, 2000, $1,013 of deferred
interest was amortized into the statement of operations, related to this
note. On July 23, 2001, concurrent with the refinancing of Seasons of
Laurel, the subordinate promissory note payable was paid off. As such, the
Predecessor recognized an additional $6,589 of interest on the subordinate
promissory note
Continued
-49-
BERKSHIRE INCOME REALTY PREDECESSOR GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands)
4. Mortgage Notes Payable, Continued
On November 14, 2001, the Predecessor obtained a $4,500 non-recourse
mortgage note payable, which is collateralized by the property on Walden
Pond. The Predecessor used the proceeds from the note to purchase the
property from Krupp Realty Fund, Ltd. - IV.
On April 1, 2002, the mortgage notes payable on Century, Dorsey's Forge,
and Hannibal Grove were refinanced with $22,800, $10,635, and $16,145,
respectively, non-recourse mortgage notes payable, which are collateralized
by the related properties. The interest rates on the notes are fixed at
5.96%. The notes mature on April 1, 2007, at which time the remaining
principal and accrued interest are due. The notes may be prepaid, subject
to a prepayment penalty, at any time within 30 days notice.
The Predecessor used the proceeds from the refinancing on Century, Dorsey's
Forge, and Hannibal Grove to repay the existing mortgage notes and accrued
interest of $19,219, $6,011 and $10,444, respectively, to pay closing costs
of $162, $91 and $122, respectively, and to fund escrows required by the
lender of $29, $15 and $54, respectively. The remaining cash of $11,357 was
distributed to the members. The Predecessor also recognized a $610
extraordinary loss resulting from the prepayment penalty upon the early
principal repayment and write-off of unamortized deferred financing costs
for Century, Dorsey's Forge and Hannibal Grove mortgage notes payable,
which is reflected in the statement of operations for the year ended
December 31, 2002.
On July 31, 2002, the mortgage note payable on Seasons of Laurel was
refinanced with a $52,500 non-recourse mortgage note payable, which is
collateralized by the property. The fixed interest rate on the note is
5.74%. The mortgage note matures on August 1, 2009, at which time the
remaining principal and accrued interest are due. The note may be prepaid,
subject to a prepayment penalty, at any time with 30 days notice. The
Predecessor used the proceeds from the refinancing to repay the existing
mortgage note and accrued interest of $36,412, to pay closing costs of
$280, to fund escrows required by the lender of $862. The remaining cash of
$14,579 was distributed to the members. The Predecessor also recognized a
$558 extraordinary loss resulting from the prepayment penalty upon the
early principal repayment and write-off of unamortized deferred financing
costs, which is reflected in the statement of operations for the year ended
December 31, 2002.
Cash paid for interest on the mortgage notes payable was $4,791, $17,086
and $6,209 for the years ended December 31, 2002, 2001 and 2000,
respectively.
5. Related Party Transactions
The Predecessor paid property management fees to an affiliate of the
Berkshire Group for management services. The fees are payable monthly at an
annual rate of 5% of the gross receipts from the properties under
management. The Predecessor also reimburses affiliates of the Berkshire
Group for certain expenses incurred in connection with the operation of the
properties, including salaries and administrative expenses.
The Predecessor paid asset management fees to an affiliate of the Berkshire
Group for asset management services.
Continued
-50-
BERKSHIRE INCOME REALTY PREDECESSOR GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands)
5. Related Party Transactions, continued
Amounts accrued or paid to The Berkshire Group's affiliates at December 31,
2002 and 2001 were as follows:
2002 2001
------------ ------------
Property management fees $ 1,296 $ 1,102
Expense reimbursements 234 413
Asset management fee 407 186
Salary reimbursements 2,188 1,877
------------ ------------
Charged to operations $ 4,125 $ 3,578
============ ============
Expense reimbursements due to affiliates of $115 and $73 are included in
accounts payable at December 31, 2002 and 2001, respectively.
Expense reimbursements due from affiliates of $48 and $1,732 are included
in prepaid expenses and other assets at December 31, 2002 and 2001,
respectively.
The Predecessor also paid an affiliate advisory fees of $255 related to the
refinancing of Dorsey's Forge, Hannibal Grove, Century and Seasons of
Laurel which are included in deferred expenses at December 31, 2002.
At December 31, 2001, due from affiliate included an amount temporarily
transferred to an affiliate to facilitate the investment of excess cash.
The amount was subsequently repaid in early 2002.
6. Selected Interim Financial Information (unaudited)
2002 Quarter Ended
----------------------------------------------------
March 31, June 30, September 30, December 31,
---------- ---------- ---------- ----------
Total revenue $ 6,279 $ 12,102 $ 18,889 $ 25,483
Income before
minority interest 105 2,493 3,028 3,476
Net income 11,996 624 423 788
2001 Quarter Ended
----------------------------------------------------
March 31, June 30, September 30, December 31,
---------- ---------- ---------- ----------
Total revenue $ 6,052 $ 11,941 $ 18,018 $ 24,876
Loss before
minority interest (284) (2,970) (4,942) (3,179)
Net loss (3,271) (2,856) (5,492) (3,664)
7. Subsequent Events
On March 20, 2003, our common stockholder, KRF Company, through a newly
created affiliate, Gables of Texas Limited Partnership acquired The Gables
Apartments, a 140-unit multi-family apartment complex apartment located in
Houston, Texas for a purchase price of approximately $6,925.
-51-
BERKSHIRE INCOME REALTY PRECESSOR GROUP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
(Dollars In Thousands)
Costs Capitalized Subsequent to
Initial Cost Acquisition
------------------------ -----------------------------------
Buildings and Basis
Description Location Land Buildings Improvements Step-up (Note 3)
- ------------------- ---------------- ---------- ---------- -------------- -----------------
Century Cockeysville, MD $ 1,050 $13,948 $ 7,327 $ 12,214
Dorsey's Forge Columbia, MD 341 4,522 3,673 3,404
Hannibal Grove Columbia, MD 520 6,884 5,953 5,914
Seasons of Laurel Laurel, MD 3,676 50,802 2,089 26,241
Walden Pond Houston, TX 906 12,040 3,334 8,322
---------- ---------- -------------- -----------------
Total $ 6,493 $ 88,196 $ 22,376 $ 56,095
========== ========== ============== =================
Land and Buildings and Accumulated Year Depreciable
Description Improvements Improvements Total Depreciation Acquired Lives
- -------------------- --------------- ---------------- ---------- --------------- ---------- ------------
Century $ 4,011 $ 30,528 $ 34,539 $ 17,222 1984 (1)
Dorsey's Forge 1,301 10,639 11,940 6,439 1983 (1)
Hannibal Grove 2,167 17,104 19,271 10,685 1983 (1)
Seasons of Laurel 9,673 73,135 82,808 40,785 1985 (1)
Walden Pond 2,919 21,683 24,602 12,872 1983 (1)
--------------- ---------------- ---------- ---------------
Total $ 20,071 $ 153,089 $173,160 $ 88,003
=============== ================ ========== ===============
(1) Depreciation of the buildings and improvements are calculated over the lives
ranging from 3-27.5 years.
A summary of activity for real estate and accumulated depreciation is as
follows:
Real Estate 2002 2001 2000
---------- ---------- ----------
Balance at beginning of year $ 170,367 $ 135,072 $ 110,581
Acquisitions and improvements 2,793 35,295 24,491
---------- ---------- ----------
Balance at end of year $ 173,160 $ 170,367 $ 135,072
========== ========== ==========
Accumulated Depreciation 2002 2001 2000
---------- ---------- ----------
Balance at beginning of year $ 82,719 $ 77,968 $ 72,957
Depreciation expense 5,284 4,751 5,011
---------- ---------- ----------
Balance at end of year $ 88,003 $ 82,719 $ 77,968
========== ========== ==========
The aggregate cost of the Predecessor's multifamily apartment communities for
federal income tax purposes was approximately $93,295 and the aggregate
accumulated depreciation was approximately $17,610 as of December 31, 2002.
-52-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Berkshire Income Realty, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Boston, Commonwealth of Massachusetts, on March 31, 2003.
BERKSHIRE INCOME REALTY, INC.
BY: /s/ David C. Quade
----------------------------------
NAME: David C. Quade
TITLE: President
Berkshire Income Realty, Inc., a Maryland corporation, and each person whose
signature appears below constitutes and appoints David C. Quade, with full power
to act as such person's true and lawful attorney-in-fact, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign this Annual Report on Form 10-K, and any and all
amendments to such Annual Report on Form 10-K and other documents in connection
therewith, and to file the same, with the Securities and Exchange Commission,
granting unto said attorney-in-fact, full power and authority to do and perform
each and every act and thing necessary or desirable to be done in and about the
premises, as fully and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact, or his
substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of Berkshire Income Realty,
Inc. and in the capacities and on the dates indicated.
Signature Title Date
/s/ George D. Krupp Chairman of the Board of March 31, 2003
- ----------------------------- Directors
George D. Krupp
/s/ David C. Quade President, Chief Financial March 31, 2003
- ----------------------------- Officer and Director (Principal Executive
David C. Quade Officer and Principal Financial Officer)
/s/ Robert M. Kaufman Director March 31, 2003
- -----------------------------
Robert M. Kaufman
/s/ Randolph G. Hawthorne Director March 31, 2003
- -----------------------------
Randolph G. Hawthorne
/s/ Richard B. Peiser Director March 31, 2003
- -----------------------------
Richard B. Peiser
/s/ Wayne H. Zarozny Vice President and Controller March 31, 2003
- ----------------------------- (Principal Accounting Officer)
Wayne H. Zarozny
-53-
CERTIFICATIONS
I, David C. Quade, as Principal Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Berkshire Income Realty,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
March 31, 2003 /s/David C. Quade
----------------------------
David C. Quade
Principal Executive Officer
-54-
I, David C. Quade, as Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Berkshire Income Realty,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
March 31, 2003 /s/David C. Quade
----------------------------
David C. Quade
Chief Financial Officer
-55-