<PAGE> 1
As filed with the Securities and Exchange Commission on August 1, 1996
Registration No. 333-
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
(EXACT NAME OF REGISTRANT AS SPECIFIED IN GOVERNING INSTRUMENTS)
24 FRANK LLOYD WRIGHT DRIVE
P.O. BOX 544
ANN ARBOR, MICHIGAN 48106-0544
(800) 522-7832
(Address and telephone number of principal executive offices)
W. ROSS MARTIN
CHIEF FINANCIAL OFFICER
24 FRANK LLOYD WRIGHT DRIVE
P.O. BOX 544
ANN ARBOR, MICHIGAN 48106-0544
(800) 522-7832
(Name, address and telephone number of agent for service)
Copies to:
JOEL J. MORRIS, ESQ.
JEFFREY L. FORMAN, ESQ.
JAFFE, RAITT, HEUER & WEISS,
PROFESSIONAL CORPORATION
ONE WOODWARD AVENUE, SUITE 2400
DETROIT, MICHIGAN 48226
(313) 961-8380
____________________
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under The
Securities Act of 1933, check the following box. [x]
____________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=============================================================================================================================
Title of each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities Being Registered Registered (1) Offering Price Per Unit Aggregate Offering Price Registration Fee
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units of Limited $1,000 (minimum purchase
Partnership Interest 30,000 2 units) $30,000,000 $10,345
=============================================================================================================================
</TABLE>
(1) Includes an amount of units which may be issued pursuant to the
Registrant's Distribution Reinvestment Plan equal to the difference
between 30,000 units and the number of units sold in the offering.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 2
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item Number and Caption Location or Heading in Prospectus
----------------------- ---------------------------------
<S> <C> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus . . . . . . Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus . . . . . . . . . . . . . . . Inside Front Cover Page; Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges . . . . . . . . . . . Outside Front Cover Page; Summary of the Partnership and
the Offering; Risk Factors
4. Determination of Offering Price . . . . . . . . . . Not Applicable
5. Dilution . . . . . . . . . . . . . . . . . . . . . . Not Applicable
6. Selling Security Holders . . . . . . . . . . . . . . Not Applicable
7. Plan of Distribution . . . . . . . . . . . . . . . . Plan of Distribution; Distribution Reinvestment Plan Summary
8. Use of Proceeds . . . . . . . . . . . . . . . . . . Estimated Use of Proceeds
9. Selected Financial Data . . . . . . . . . . . . . . Not Applicable
10. Management's Discussion and Analysis ofFinancial
Condition and Results of Operations . . . . . . . Management's Discussion and Analysis of Financial Condition
11. General Information as to Registrant . . . . . . . . Summary of the Partnership and the Offering; Management
12. Policy with Respect to Certain Activities . . . . . Summary of the Partnership and the Offering; Investment
Objectives and Policies; Reports to Limited Partners
13. Investment Policies of Registrant . . . . . . . . . Summary of the Partnership and the Offering; Investment
Objectives and Policies
14. Description of Real Estate . . . . . . . . . . . . . Summary of the Partnership and the Offering; Investment
Objectives and Policies
15. Operating Data . . . . . . . . . . . . . . . . . . . Not Applicable
16. Tax Treatment of Registrant and its Security
Holders . . . . . . . . . . . . . . . . . . . . . . Tax Aspects of the Offering
17. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters . . Summary of Partnership Agreement
18. Description of Registrant's Securities . . . . . . . Summary of the Partnership and the Offering
19. Legal Proceedings . . . . . . . . . . . . . . . . . Not Applicable
20. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . Not Applicable
21. Directors and Executive Officers . . . . . . . . . . Management
22. Executive Compensation . . . . . . . . . . . . . . . Compensation Table
23. Certain Relationships and Related Transactions . . . Not Applicable
24. Selection, Management and Custody of
Registrant's Investments . . . . . . . . . . . . . Summary of Partnership and the Offering; Conflicts of Interest;
Management
25. Policies with Respect to Certain Transactions . . . Investment Objectives and Policies
26. Limitations of Liability . . . . . . . . . . . . . . Risk Factors; Summary of Partnership Agreement
27. Financial Statements and Information . . . . . . . . Financial Statements
28. Interests of Named Experts and Counsel . . . . . . . Not Applicable
29. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities . . Not Applicable
</TABLE>
<PAGE> 3
Subject to Completion
Prospectus dated ___________, 1996
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
(a Delaware limited partnership)
$2,000,000 Minimum Offering of Units of Limited Partnership Interest
$1,000 per Unit
Minimum Investment - 2 Units
(except as set forth under "Who Should Invest")
Captec Franchise Capital Partners L.P. IV, a Delaware limited partnership
(the "Partnership"), hereby offers up to 30,000 units (the "Maximum Number of
Units") of limited partnership interest (the "Units") at $1,000 per Unit (the
"Offering"). The Partnership will acquire income-producing commercial real
properties ("Properties") and equipment ("Equipment"), which will be leased on
a "triple net" basis primarily to operators of national chain and nationally
franchised fast-food, family style and dinner house restaurants as well as
other franchised or chain businesses such as specialty retail businesses. The
Partnership also intends to acquire Properties that may be leased on a "double
net" (the Partnership being responsible for the maintenance of the roof,
exterior walls, and/or parking lot for such Properties) or "triple net" basis
to prominent national and regional retail concerns (the "Retail Concerns"). The
Partnership intends to use not less than 75%, but not more than 90%, of Net
Offering Proceeds to acquire Properties and up to 25%, but not less than 10%,
to acquire Equipment. Of the 75% of Net Offering Proceeds that the Company
intends to use to acquire Properties, the Company does not intend to use more
than 25% of such proceeds to acquire Properties to be leased to Retail
Concerns. The Partnership's actual portfolio may differ from these estimates
initially and/or during the life of the Partnership. The Property leases are
expected to provide for a base minimum annual rent, with provisions for fixed
increases on specific dates or indexation of rent to indices such as the
Consumer Price Index and/or percentage rents. Equipment will be leased only
pursuant to Full Payout Leases. No Properties or Equipment will be acquired by
the Partnership unless and until lease commitments satisfactory to the General
Partners are obtained. The General Partners anticipate that Properties and
Equipment will be sold within seven to ten years and five to seven years,
respectively, from the date of acquisition. For definitions of certain
capitalized terms used herein but not defined in the text, see Section 2 of the
Partnership's agreement of limited partnership (the "Partnership Agreement")
attached hereto as Exhibit A.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Public Sales Proceeds to the
Offering Price Commission(2) Partnership (3)(4)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit (Minimum
Subscription: 2 Units)(1) $1,000 $80 $920
Minimum(1) $2,000,000 $160,000 $1,840,000
Maximum(1) $30,000,000 $2,400,000 $27,600,000
</TABLE>
(Footnotes on following pages)
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THERE IS PRESENTLY NO ESTABLISHED MARKET FOR THE UNITS AND THERE ARE
LIMITATIONS ON THE TRANSFERABILITY OF THE UNITS. See "Summary of Partnership
Agreement - Restrictions on Transfer of Units."
AN INVESTMENT IN THE PARTNERSHIP INVOLVES CERTAIN RISKS, SOME OF WHICH ARE
SUMMARIZED BELOW. See also "Risk Factors."
The date of this Prospectus is ___________, 1996
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities had been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of securities in
any State in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
<PAGE> 4
- - Although the investment objectives and policies for Partnership investments
are described herein, as of the date of this Prospectus the Partnership has
not yet identified specific Properties and/or Equipment for investment. See
"Risk Factors - Unspecified Fund" and "Investment Objectives and Policies."
- - The rights of Limited Partners to participate in the management of the
Partnership are limited and, therefore, most major decisions regarding the
Partnership and its operation will be made by the General Partners. See
"Risk Factors - Dependence on General Partners; Lack of Experience."
- - There will be limited ability to resell or liquidate an investment in the
Units and various restrictions on transfers of Units, including a requirement
that the Managing General Partner consent to the transfer. See "Risk Factors
- Lack of Liquidity - Limited Transferability," and "Summary of Partnership
Agreement - Restriction on Transfer of Units."
- - Should the Partnership be funded with less than the maximum amount of net
proceeds from this Offering, the diversification of the Partnership's
portfolio will be diminished. See "Risk Factors - Subscription for Less Than
the Maximum Number of Units." See also "Investment Objectives and Policies."
- - The General Partners and their Affiliates will be subject to various
conflicts of interest in managing the Partnership. See "Conflicts of
Interest."
The principal investment objectives of the Partnership will be: (i)
preservation and protection of capital; (ii) distribution of current cash flow
generated by the Partnership's leases; (iii) capital appreciation of
Partnership Properties; (iv) generation of increased income and protection
against inflation through required escalations of base rents or participation
in the gross revenues of the lessees of Partnership Properties; and (v)
deferral of taxation of a portion of Partnership cash distributions for Limited
Partners. The Partnership's overall objectives will be to maximize long term
returns with its Properties and to enhance short-term returns with its
Equipment. There can be no assurance that these objectives will be attained.
See "Investment Objectives and Policies."
The date of this Prospectus is __________ , 1996.
____________________
ii
<PAGE> 5
_____________________
(Footnotes to cover page)
(1) The Offering is being made on a "best efforts, part or none" basis by
selected broker-dealers (the Participating Dealers") who are members of the
National Association of Securities Dealers, Inc. (the "NASD"). The minimum
subscription is two Units ($2,000). The minimum subscription for Minnesota and
South Carolina investors is two and one-half Units ($2,500). Tax Exempt
Investors who are residents of Minnesota may have minimum subscriptions of two
Units ($2,000). Residents of Nebraska must have minimum subscriptions of five
Units ($5,000). The minimum subscription for Tax Exempt Investors who are
residents of Nebraska is two Units ($2,000). The Offering is conditioned upon
the sale of a minimum of 2,000 Units (the "Minimum Number of Units") by the
close of business one year after the effective date of this Prospectus (the
"Termination Date"). All funds received from subscribers will be deposited in
a special interest bearing escrow bank account at Michigan National Bank in
Farmington Hills, Michigan (the "Escrow Agent"), and no disbursements will be
made from the escrow account to the Partnership until cleared funds
representing subscriptions for the Minimum Number of Units have been deposited.
If cleared funds representing subscriptions for the Minimum Number of Units are
not deposited with the Escrow Agent by the Termination Date, no Units offered
hereby will be sold and the Escrow Agent will refund all funds promptly to the
subscribers in full, without deduction, with interest (net of escrow expenses)
from principal, and the Offering will be terminated. If cleared funds
representing subscriptions for the Minimum Number of Units are deposited with
the Escrow Agent by the Termination Date, the General Partners may extend the
Offering to a date no later than two years after the effective date of this
Prospectus (the "Extended Termination Date"), subject, however, to
requalification in certain states. There can be no assurance that
requalification will be granted in all states.
(2) Subject to sale of the Minimum Number of Units, the Partnership will pay
selling commissions equal to 8% of the gross proceeds (subject to certain
volume purchase adjustments) of the Offering (the "Gross Proceeds") to
Participating Dealers for Units sold by them. In addition, the General
Partners will pay an additional selling commission equal to 1% of Gross
Proceeds to Participating Dealers from Units sold until the Minimum Number of
Units is sold. This additional commission will be paid by the General Partners
out of the Non-Accountable Expense Allowance.
(3) Gross Proceeds to the Partnership are before deducting the reimbursement
to the General Partners from the Partnership for their non-accountable expenses
(the "Non-Accountable Expense Allowance") related to the Offering in an amount
equal to 2% of Gross Proceeds. See "Plan of Distribution."
(4) Gross Proceeds to the Partnership are before deducting other Organization
and Offering Expenses, expected to equal approximately 3% of Gross Proceeds.
See "Use of Proceeds," "Compensation Table" and "Plan of Distribution." The
General Partners may reimburse Participating Dealers and their registered
representatives for accountable bona fide due diligence expenses including, but
not limited to, due diligence meetings, third party reports, and travel, in an
amount of up to 0.5% of Gross Proceeds from such amounts.
The General Partners, their Affiliates, and Participating Dealers may
purchase up to 10% of the Units, net of selling commissions, but otherwise on
the same terms as purchasers who are not Affiliates. Purchase of Units by the
General Partners and their Affiliates will not be counted toward sale of the
Minimum Number of Units. Any Units purchased by them will be for investment
purposes only and not with a view toward resale. See "Plan of Distribution."
UNITS PURCHASED BY THE GENERAL PARTNERS OR THEIR AFFILIATES WILL NOT BE VOTED
ON MATTERS PERTAINING TO THE REMOVAL OR ELECTION OF THE GENERAL PARTNERS. ON
ALL OTHER MATTERS UNITS WILL BE VOTED BY THE GENERAL PARTNERS OR THEIR
AFFILIATES IN THEIR DISCRETION AND MAY, ACCORDINGLY, BE VOTED CONTRARY TO THE
VOTES OF UNAFFILIATED LIMITED PARTNERS
The General Partners will distribute to each Limited Partner: (i) annual
reports containing the Partnership's audited financial statements (within 120
days after the close of each fiscal year); (ii) a quarterly financial highlight
report of the Partnership's performance; and (iii) upon the request of a
Limited Partner, quarterly reports containing the Partnership's unaudited
financial statements (within 60 days after the close of each fiscal quarter).
See "Reports to Limited Partners."
THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. ANY REPRESENTATIONS TO
THE CONTRARY AND ANY PREDICTIONS, WRITTEN OR ORAL, AS TO THE AMOUNT OR
CERTAINTY OF ANY PRESENT OR FUTURE CASH BENEFIT OR TAX CONSEQUENCES WHICH MAY
FLOW FROM AN INVESTMENT IN THE PARTNERSHIP IS PROHIBITED.
iii
<PAGE> 6
UNTIL NINETY DAYS AFTER THE EFFECTIVE DATE OF THE PROSPECTUS, ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
iv
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY OF THE PARTNERSHIP AND THE OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Partnership and the General Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Terms of the Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Who Should Invest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Partnership Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Partnership Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Compensation to General Partners and their Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Limited Partners' Share of Cash Flow and
Net Sale or Refinancing Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Depreciation Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Borrowing Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Reports to Limited Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Termination of Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Statements of Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Fiscal Year of Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Distribution Reinvestment Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Right to Tender Units for Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Partnership Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Transferability of the Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Glossary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ESTIMATED USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
COMPENSATION TABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
CONFLICTS OF INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Compensation for the Time and Service of the General Partners . . . . . . . . . . . . . . . . . . . . . . . . . 12
Resolution of Conflicting Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Property and Equipment Management Services Will be Rendered by the General Partners or their Affiliates . . . . 13
Receipt of Fees and Other Compensation by the General Partners and their Affiliates . . . . . . . . . . . . . . 13
Non-Arm's-Length Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Prior Business Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Legal Counsel for the Partnership and the General Partners is the Same Law Firm . . . . . . . . . . . . . . . . 14
Indirect Ownership of Properties and/or Equipment with Affiliates . . . . . . . . . . . . . . . . . . . . . . . 14
Conflicts with Affiliated Lessors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Tax Matters Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
FIDUCIARY RESPONSIBILITIES OF THE GENERAL PARTNER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Factors Affecting Ownership of Properties and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Single-Use Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Lack of Liquidity - Limited Transferability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Risks From Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
v
<PAGE> 8
<TABLE>
<S> <C>
Availability of Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Risks Relating to Creditworthiness of Lessees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Delays in Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Usury Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Dependence on General Partners; Lack of Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Lack of Independent Counsel for Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Assets to Secure Acquisition-Related Indebtedness and Unrelated Business Taxable Income . . . . . . . . . . . . 24
Subscription for Less Than the Maximum Number of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Unspecified Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Possible Loss of Limited Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Uninsured Losses; Costs and Availability of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Acquiring Properties Under Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Hazardous Waste and Environmental Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Resale of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Loss on Dissolution and Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Risk of Recharacterization of Sale and Leaseback Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 27
Risk of Joint Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Indemnification of General Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Partnership Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Investments by Qualified Pension and Profit-Sharing Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
General Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Parent Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Types of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Investment Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Lessee Creditworthiness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Sale or Disposition of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Change in Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Joint Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Certain Investment Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Appraisals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Return of Uninvested Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Other Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
PRIOR OFFERINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
WHO SHOULD INVEST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Foreign Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
HOW TO SUBSCRIBE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Escrow and Closing Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
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DISTRIBUTION REINVESTMENT PLAN SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
RIGHT TO TENDER UNITS FOR PURCHASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
TAX ASPECTS OF THE OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Partnership Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Taxation of Limited Partners on Profits or Losses of the Partnership . . . . . . . . . . . . . . . . . . . . . . 50
Taxation of Cash Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Limitations on Deductibility of Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Deductibility of Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Tax Treatment of the Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Imputed Rental Income Under Section 467 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Recapture of Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Method of Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Deductibility of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Allocations of Profits or Losses to Incoming Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Allocations of Profits and Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Potential Application of Section 183 of the Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Refinancing of Partnership Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Sale or Foreclosure of Partnership Properties or Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Sale or Transfer of Partnership Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
No Section 754 Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Dissolution of Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Other Possible Tax Consequences to Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Partnership Tax Returns and Tax Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Registration With the Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Tax Aspects for Foreign Individuals and Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Impact on Qualified Tax-Exempt Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Proposed Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
State and Local Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
ERISA CONSIDERATIONS FOR QUALIFIED PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Plan Assets -- Exemption Under the DOL Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Publicly Offered Security Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Other Protective Measures Available to the General Partners . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Plan Asset Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Valuation Reports to Qualified Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
SUMMARY OF PARTNERSHIP AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
The Responsibilities of the General Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Liability of Limited Partners-Nonassessability of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Terms and Dissolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Restrictions on Transfer of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Voting Rights of Limited Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Indemnification of the General Partners by the Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
REPORTS TO LIMITED PARTNERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
SALES LITERATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
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LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-i
PRIOR PERFORMANCE TABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P-i
LIMITED PARTNERSHIP AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EXHIBIT A
SUBSCRIPTION INSTRUCTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
SUBSCRIPTION AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EXHIBIT B
DISTRIBUTION REINVESTMENT PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EXHIBIT C
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SUMMARY OF THE PARTNERSHIP AND THE OFFERING
The following is a summary intended solely to supply, in a non-technical form,
pertinent facts and highlights from the material contained in the body of this
Prospectus. More detailed information may be found in the remainder of this
Prospectus and the Exhibits hereto.
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The Partnership and the General Partners Captec Franchise Capital Partners L.P. IV is a recently formed Delaware limited
partnership. The General Partners of the Partnership are Captec Franchise Capital
Corporation IV, a Michigan corporation, and Patrick L. Beach (the "General Partners").
The offices of the Partnership and the General Partners are located at 24 Frank Lloyd
Wright Drive, P.O. Box 544, Ann Arbor, Michigan 48106-0544 (telephone (800) 522-7832).
Captec Franchise Capital Corporation IV will act as the managing general partner (the
"Managing General Partner"). Captec Franchise Capital Corporation IV is a wholly-owned
subsidiary of Captec Financial Group, Inc. See "Management."
Terms of the Offering The Partnership is offering its Units for sale on a "best efforts, part or none"
basis, which means that the broker-dealers participating in the Offering are under no
obligation to purchase any Units and, therefore, no specified amount is guaranteed to be
raised. However, no Units will be sold unless collected funds representing subscriptions
for at least 2,000 Units (the "Minimum Number of Units") are received by the close of
business one year after the effective date of this Prospectus, at a price of $1,000 per
Unit. Subscribers for Units must purchase a minimum of two Units ($2,000). The minimum
subscription for Minnesota and South Carolina investors is two and one-half Units
($2,500). Tax Exempt Investors who are residents of Minnesota may have minimum
subscriptions of two Units ($2,000). Residents of Nebraska must have minimum
subscriptions of five Units ($5,000). The minimum subscription for Tax Exempt Investors
who are residents of Nebraska is two Units ($2,000). The Offering is being made by
broker-dealers who are members of the National Association of Securities Dealers, Inc.
Pending sale of the Minimum Number of Units, subscribers' funds will be forwarded to
Michigan National Bank, Farmington Hills, Michigan, as escrow agent (the "Escrow Agent")
and will be held by the Escrow Agent in one or more interest-bearing accounts. Interest
(net of escrow expenses) will be paid to subscribers if collected funds representing
subscriptions for the Minimum Number of Units are not deposited with the Escrow Agent by
the Termination Date; otherwise such amounts will be paid to the Partnership. See "Plan
of Distribution."
Who Should Invest The section of the Prospectus entitled "Who Should Invest" describes minimum income
and/or net worth requirements that various states impose on investors, as well as a
detailed explanation of other limitations which investors must address prior to
subscription. See "Who Should Invest."
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Risk Factors Investment in the Units involves various risks which are described in detail in the
"Risk Factors" section of the Prospectus. The following is a summary of what the General
Partners believe are the most significant risks related to an investment in Units.
Investment Risks:
- Although the investment objectives and policies for Partnership investments
are described herein, as of the date of this Prospectus, the Partnership has not
yet identified specific Properties and/or Equipment for investment;
- Should the Partnership be funded with less than the maximum amount of Net
Offering Proceeds, the diversification of the Partnership's portfolio will be
diminished; and
- The Partnership may retain its investments for longer than the projected seven
to ten year and five to seven year holding periods, respectively, for
Properties and Equipment.
Partnership Risks:
- There are various restrictions on transfers, including a requirement that the
Managing General Partner consent to all transfers, and only a limited
secondary market for the Units is expected to develop, if at all;
- Limited Partners must rely on the General Partners to manage the Partnership and
its operations, except in certain limited situations;
- There will be conflicts of interest among the Partnership and the General
Partners and their Affiliates; and
- If matters are submitted to a vote of Limited Partners, Limited Partners will be
bound by the vote of Limited Partners owning a majority of the Partnership's
outstanding Units even if they do not vote with the majority.
Tax Risks:
- The Partnership could be treated as a "corporation" for tax purposes, which
would require the Partnership to pay tax on its income, thereby decreasing
the amount of cash available for distribution and preventing Partners from using
Partnership losses and/or deductions, if any, to reduce their taxable income
from other sources;
- The income, gain and losses from the Partnership's Properties and/or Equipment
could be recharacterized as "portfolio" rather than "passive" which would
prevent the Limited Partners from using such income and gain to offset passive
losses from other
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sources and using such losses to offset passive income from other sources; and
- Future legislative, judicial or administrative changes to the tax laws (or the
interpretation thereof) could adversely affect and could possibly be applied
retroactively to events occurring before such changes go into effect.
Use of Proceeds The Partnership will invest 83% of each dollar raised in Properties and Equipment and
will use the remainder to pay selling commissions, fees and expenses related to the
Offering, the selection and acquisition of Properties and Equipment, and costs of
organizing the Partnership. See "Estimated Use of Proceeds" for the Partnership's
estimate as to its uses of the proceeds of this Offering. See also "Compensation Table"
regarding compensation to be received by the General Partners and their Affiliates from
the Partnership, including that portion to be paid from the proceeds of this Offering.
Partnership Business The Partnership will acquire income-producing commercial real estate ("Properties")
and equipment ("Equipment") which will be leased on a "triple net" basis primarily to
operators of national chain and nationally franchised fast-food, family style and dinner
house restaurant, as well as other franchised or chain business such as specialty retail
businesses. The Partnership also intends to acquire Properties that may be leased on a
"double net" (the Partnership being responsible for the maintenance of the roof,
exterior walls, and/or parking lot for such Properties) or "triple net" basis to
prominent national and regional retail concerns (the "Retail Concerns"). The Partnership
expects to use not less than 75%, but not more than 90%, of Net Offering Proceeds to
acquire Properties and up to 25%, but not less than 10%, to acquire Equipment, but the
Partnership's actual portfolio may differ from these estimates initially and/or during
the life of the Partnership. The Properties generally will be leased on terms which
provide for a base minimum annual rent with fixed increases on specific dates or
indexation of rent to indices such as the Consumer Price Index and/or percentage rents.
The Equipment will be leased only pursuant to Full Payout Leases.
Partnership Objectives The principal investment objectives of the Partnership will be: (i) preservation and
protection of capital; (ii) distribution of cash flow generated by the Partnership's
leases; (iii) capital appreciation of Partnership Properties; (iv) generation of
increased income and protection against inflation through required escalations of base
rents or participation in gross revenues of lessees of Partnership Properties; and (v)
deferral of taxation of Partnership cash distributions for Limited Partners. The
Partnership's overall objectives will be to maximize long term returns with its
Properties and to enhance short term returns with its Equipment. There can be no
assurance that these objectives will be attained. See "Investment Objectives and
Policies." These objectives may not be attained because, among other reasons, no
Properties or Equipment have yet been identified for purchase, and due to competition
for suitable investments, the Partnership may not be able to acquire Properties and/or
Equipment meeting its investment criteria. See "Risk Factors - Competition" and "Risk
Factors - Unspecified Fund."
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Compensation to General Partners and
their Affiliates The General Partners and their Affiliates will receive fees and other compensation
in connection with the investment, management and ultimate disposition of the
Partnership's assets. See "Compensation Table.
Limited Partners' Share of Cash Flow and
Net Sale or Refinancing Proceeds Cash Flow will be distributed 99% to the Limited Partners and 1% to the General
Partners; provided, however, that the General Partners' 1% of Cash Flow shall be
subordinated each year to receipt by the Limited Partners of aggregate distributions
equal to a 10% per annum cumulative, non-compounded preferred return on their Adjusted
Investment (the "Current Preferred Return"). Distributions of Cash Flow will be made on
a quarterly basis and those Limited Partners holding ten or more Units may elect to have
their distributions made on a monthly basis. An Investor electing to receive monthly
distributions will receive three monthly distributions beginning with the payment date
rather than receiving the full distribution on the payment date.
Net Sale or Refinancing Proceeds generally will be distributed 90% to the Limited
Partners and 10% to the General Partners; provided, however, that the General Partners'
10% of Net Sale or Refinancing Proceeds shall be subordinated to receipt by the Limited
Partners of aggregate distributions of Cash Flow and Net Sale or Refinancing Proceeds
equal to a 10.5% per annum cumulative, non-compounded return on their Adjusted
Investment (the "Performance Preferred Return") plus aggregate distributions of Net Sale
or Refinancing Proceeds in an amount equal to the Limited Partners' Original
Contributions. See "Compensation Table" for a discussion of real estate and equipment
liquidation fees which may be paid to the General Partners or their Affiliates upon the
sale of Partnership Properties and/or Equipment. An investor's Current Preferred Return
and Performance Preferred Return will be calculated from the first day of the month
following the month in which such investor is admitted to the Partnership as a Limited
Partner.
Acquisitions No Properties or Equipment have yet been acquired or identified for possible
acquisition. At such time during the Offering as the General Partners believe a
reasonable probability exists that specified Properties or Equipment representing 10% of
expected Net Offering Proceeds will be acquired, this Prospectus will be supplemented to
disclose the pending acquisition. See "Estimated Use of Proceeds," "Risk Factors" and
"Investment Objectives and Policies."
Depreciation Method For Properties, generally straight-line over 39.0 years under the modified
Accelerated Cost Recovery System. For Equipment, generally the 200% declining balance
method over three, five or seven years under the modified Accelerated Cost Recovery
System. See "Investment Objectives and Policies" and "Tax Aspects of the
Offering-Depreciation."
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Borrowing Policy The Partnership intends to incur mortgage or secured indebtedness to acquire
Properties and Equipment using leverage, on a portfolio basis, by borrowing from banks,
other institutional lenders or private lenders and may in the future, borrow funds to
finance improvements to existing Properties. In no event will aggregate mortgage or
other secured indebtedness exceed an amount equal to 35% of the sum of Gross Proceeds
plus the aggregate amount of Partnership indebtedness secured by Partnership Assets
(approximately 40% of the aggregate purchase prices of all Properties and Equipment)
when incurred. Notwithstanding the foregoing, the Partnership may incur indebtedness on
single Properties or Equipment packages equal to up to 80% of the purchase price thereof
so long as aggregate portfolio indebtedness does not exceed the above-referenced
amount. Borrowings for acquisition or improvement will cause Tax-Exempt Investors to
recognize unrelated business taxable income, although they will be allowed to offset
such income with deductions related thereto. See "Investment Objectives and
Policies-Borrowing" and "Tax Aspects of the Offering-Impact on Qualified Tax-Exempt
Investors."
Reports to Limited Partners The General Partners will submit annual reports to the Limited Partners containing
audited financial information, as well as quarterly financial highlight reports
concerning the Partnership's operations.
Tax Matters The Partnership has received an opinion of counsel from Jaffe, Raitt, Heuer & Weiss,
P.C. as to its status as a partnership for federal income tax purposes and certain other
federal income tax matters, but such opinions are not binding upon the Internal Revenue
Service (the "Service" or the "IRS"). The Partnership will not apply for a ruling from
the Service that it will be classified as a partnership rather than an association
taxable as a corporation for federal income tax purposes. AN INVESTMENT IN THE
PARTNERSHIP WILL GENERATE UNRELATED BUSINESS TAXABLE INCOME FOR TAX-EXEMPT INVESTORS.
See "Tax Aspects of the Offering."
Termination of Partnership The Partnership intends to dispose of its Properties between approximately the
seventh and tenth years after it commences operations, with a view toward liquidation of
the Partnership. As Equipment will be leased under Full Payout Leases with average terms
of five to seven years and is expected to have limited residual value (approximately 10%
of original contract purchase prices) at the end of such leases, it is anticipated that
Equipment generally will be sold to the lessee at the end of the lease term for fair
market value, which is expected to be minimal. The Partnership Agreement provides that
the Partnership shall terminate December 31, 2025, unless sooner terminated.
Statements of Value Limited Partners will receive a report of the estimated current value of the Units
prepared annually by the Managing General Partner based upon the Managing General
Partner's estimate of the amount which would be received if the Partnership's Properties
and Equipment were sold as of the close of the Partnership's fiscal year and if such
proceeds (without reduction for selling expenses), together with other Partnership
funds, were distributed in liquidation of the Partnership. Absent
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significant increases or decreases in the value of assets, the net asset value of
each Unit will be deemed to be $1,000 for the first three annual statements of value
following termination of the Offering; thereafter, the value of the Units will be based
on an annual valuation, subject to quarterly adjustment in the General Partners'
discretion. See "ERISA Considerations for Qualified Plans - Valuation Reports to
Qualified Plans." See "Reports to Limited Partners."
Fiscal Year of Partnership The Partnership's fiscal year will be a calendar year.
Distribution Reinvestment Plan A distribution reinvestment plan will be available for those Limited Partners who
may wish to participate, pursuant to which Limited Partners may cause distributions from
the Partnership, other affiliates of the General Partners, and other sources to be
automatically reinvested in Units. See "Distribution Reinvestment Plan Summary" and "Tax
Aspects of the Offering."
Right to Tender Units for Purchase Beginning in calendar year 1998, but in no event prior to the closing of the Offering,
Limited Partners shall have the right, subject to certain limitations, to tender their
Units to the Partnership for repurchase. See "Right to Tender Units for Purchase."
Partnership Agreement Investors should particularly be aware of the following contained in the Partnership
Agreement:
- Voting rights: Limited Partners owning a majority of the
outstanding Units have the right to: (i) amend the Partnership Agreement,
subject to certain limitations; (ii) dissolve the Partnership; (iii) remove the
General Partners with or without cause and approve admission of replacement
General Partners; and (iv) approve or disapprove the sale of all or
substantially all of the assets of the Partnership other than in connection with
a dissolution of the Partnership. Limited Partners owning 10% of the outstanding
Units may request the General Partners to call a meeting for the purpose of
voting on any of the foregoing matters. All Limited Partners will be bound by
the vote of Limited Partners owning a majority of the outstanding Units, even if
they do not vote with the majority.
- Changes in investment objectives and policies: The General Partners
cannot change the investment objectives of the Partnership unless an amendment
to the Agreement is made, which would require the approval of the Limited
Partners owning a majority of the outstanding Units. The General Partners may,
however, change investment policies if deemed to be in the best interest of the
Partnership.
- Partnership Books and Records: The books and records of the
Partnership will be kept at the principal office of the Partnership (24 Frank
Lloyd Wright Drive, P.O. Box 544, Ann Arbor, Michigan 48106-0544) and will be
available for examination by any Limited Partner or his representative during
reasonable business hours. The Partnership Agreement
</TABLE>
6
<PAGE> 17
<TABLE>
<S> <C>
also states that any Limited Partner or his representative is entitled to
receive a copy of the list of names and addresses of all Limited Partners in the
Partnership upon the payment of the cost of duplication and mailing.
Transferability of the Units Limited Partners may be able to sell Units in a limited secondary market, subject to
various restrictions, including the consent of the General Partners. There is no
assurance that any secondary market will develop.
See "Summary of Partnership Agreement - Restrictions on Transfer of the Units" and
"Reports to Limited Partners."
Glossary of Terms For definitions of terms used in this Prospectus, see Section 2 of the Partnership
Agreement, included as Exhibit A to this Prospectus.
</TABLE>
ESTIMATED USE OF PROCEEDS
The following table sets forth the estimated use of Gross Proceeds.(1)
<TABLE>
<CAPTION>
Minimum Maximum
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Gross Proceeds: $2,000,000 100.00% $30,000,000 100.00%
---------- ------ ----------- ------
Organization and Offering Expenses:
Selling Commissions(2) 160,000 8.00 2,400,000 8.00
Non-Accountable Expense
Allowance 40,000 2.00 600,000 2.00
Other Organization and
Offering Expenses(3) 60,000 3.00 900,000 3.00
---------- ---- ------- ----
$ 260,000 13.00% $3,900,000 13.00%
---------- ----- ---------- -----
Amount Available for
Investment $1,740,000 87.00% $26,100,000 87.00%
---------- ----- ----------- -----
Cash Payments for
Purchase of Assets 1,660,000 83.00 24,900,000 83.00
Acquisition Fees and
Expenses (4) 80,000 4.00 1,200,000 4.00
Working Capital
Reserves (5) -- -- -- --
Proceeds Expended $1,740,000 87.00% $26,100,000 87.00%
Organization and Offering
Expenses (3) $ 260,000 13.00% $ 3,900,000 13.00%
----------- ------ ------------ -----
Total Application of
Gross Proceeds $2,000,000 100.00% $30,000,000 100.00%
---------- ------ ----------- ------
</TABLE>
___________________________
(1) These figures represent the Partnership's current estimates concerning
the use of proceeds of the Offering. All proceeds of the Offering will be held
in trust by the Partnership for the benefit of the Limited Partners, to be used
only for the purposes set forth above and will not be commingled with any other
funds.
(2) The Partnership will pay selling commissions equal to 8% of Gross
Proceeds (subject to certain volume purchase discounts) to Participating
Dealers for Units sold by such Participating Dealers. The General Partners and
their Affiliates may purchase Units at prices which are net of selling
commissions, but otherwise on the same terms as other investors. Units
purchased by the General Partners or their Affiliates will be for investment
purposes only and not with a view toward resale. The General Partners will
receive the Non-Accountable Expense Allowance to cover other Offering Expenses
including an additional selling commission equal to 1% of Gross Proceeds that
will be paid to Participating Dealers for all Units
7
<PAGE> 18
sold prior to the sale of the Minimum Number of Units. See "Conflicts of
Interest" and "Plan of Distribution."
(3) In addition to selling commissions and the Non-Accountable Expense
Allowance, Organization and Offering Expenses include: (a) legal, accounting,
escrow, filing and other fees incurred in connection with the organization and
formation of the Partnership and Offering; and (b) reimbursements to the
General Partners and their Affiliates for the salaries and direct expenses of
their officers and employees while directly engaged in organizing the
Partnership and marketing the Units. (See "Compensation Table.") Organization
and Offering Expenses may include certain expenses that are not characterized
as organizational expenses for tax purposes. (See "Tax Aspects of the Offering
- - Deductibility of Fees.") The General Partners will receive reimbursement for
actual Organization and Offering Expenses which, when added to Organization and
Offering Expenses paid by the Partnership, may not exceed an amount equal to 3%
of Gross Proceeds (excluding selling commissions and the Non-Accountable
Expense Allowance, but including up to 0.5% for accountable bona fide due
diligence expenses of Participating Dealers and their registered
representatives).
The General Partners have guaranteed payment of Organization and
Offering Expenses (including selling commissions and the Non-Accountable
Expense Allowance) which exceed 13% of Gross Proceeds. Payment of expenses
pursuant to this guarantee will be without recourse to, or reimbursement by,
the Partnership.
(4) Acquisition Fees include: all fees and commissions paid or payable to
any person by any person (whether designated as real estate commissions,
finder's fees or similar fees) in connection with the Partnership's acquisition
of Properties and Equipment. The General Partners or Affiliates will receive
Acquisition Fees equal to the lesser of: (a) 4% of Gross Proceeds plus an
additional .0677% (the "Debt Fee") for each 1% of indebtedness (calculated as
the aggregate amount of Partnership indebtedness secured by Partnership Assets
as a percentage of the aggregate Purchase Prices of such Assets) incurred in
acquiring Properties and/or Equipment, but in no event will Acquisition Fees
exceed 5% of the aggregate Purchase Prices of Properties and Equipment; or (b)
compensation customarily charged in arm's-length transactions by others
rendering similar services as an on-going activity in the same geographic
location and for comparable property or equipment. Although the Debt Fee is
included within the definition of Acquisition Fees for purposes of calculating
the 5% limitation, the Debt Fee will be paid out of the proceeds received from
such indebtedness rather than from Gross Proceeds. The General Partners will
pay all Acquisition Expenses from amounts received as Acquisition Fees.
Acquisition Expenses include: surveys, appraisals, title and escrow fees,
legal and accounting fees and expenses, computer use related expenses,
environmental and asbestos audits and travel and communication expenses
incurred in the selection and acquisition of Properties and Equipment. Based on
previous experience, the General Partners believe that the Acquisition Expenses
will approximate 1% of Gross Proceeds.
Lessees will generally be required to pay Affiliates of the General
Partners for certain costs incurred in connection with lease transactions,
including commitment fees, which typically approximate 1% to 2% of the
transaction amount. Although such costs are not paid by the Partnership, they
will be included in the limitations on Front-End Fees.
(5) Since most of the Partnership's leases will be on a "triple net" basis,
it is not anticipated that a permanent reserve for maintenance and repairs will
be established. However, to the extent the Partnership has insufficient funds
for such purposes, the General Partners will advance to the Partnership an
aggregate amount of up to 1% of the Gross Proceeds for maintenance and repairs.
See "Investment Objectives and Policies - Investment Standards."
8
<PAGE> 19
COMPENSATION TABLE
The agreements and arrangements as to compensation and sharing of
profits, losses and distributions among the General Partners, their Affiliates
and the Partnership were not determined by arm's-length negotiations, although
the General Partners believe that such agreements and arrangements approximate
those which would be arrived at through arm's length negotiations. See
"Conflicts of Interest." The following table discloses all compensation which
may be received from the Partnership, directly or indirectly, by the General
Partners and their Affiliates.
<TABLE>
<CAPTION>
TYPE OF ESTIMATED MINIMUM AND
COMPENSATION COMPENSATION MAXIMUM DOLLAR AMOUNT
------------ ------------ ---------------------
<S> <C> <C>
Offering Stage
- --------------
Non-Accountable Expense An amount equal to 2% of An amount equal to 2% of Gross
Allowance (payable to the Gross Proceeds. Proceeds.
General Partners and/or their
Affiliates)
An amount equal to up to 3%
Other Organization and of Gross Proceeds, as An amount equal to up to 3% of
Offering Expenses reimbursement for actual Gross Proceeds, as reimbursement
(reimbursable to the General Organization and Offering for actual Organization and
Partners and/or their Expenses paid by the General Offering Expenses paid by the
Affiliates) Partners. General Partners.
Acquisition Stage:
- -----------------
Acquisition Fees and Expenses An amount equal to the lesser Actual amount depends on number
(payable to the General of: (i) 4.00% of Gross of Units sold, indebtedness
Partners or an Affiliate) Proceeds plus an additional incurred and Acquisition
.0677% for each 1% of Expenses. Minimum: $80,000
indebtedness incurred in (assuming sale of Minimum Number
acquiring Properties and/or of Units); Maximum: $1,200,000
Equipment (such additional (assuming sale of Maximum Number
.0677% fee to be paid out of of Units) (in each case not
the proceeds from such including the additional .0677%
indebtedness), but in no fee paid from loan proceeds and
event will Acquisition Fees before reduction for payment of
exceed 5% of the aggregate Acquisition Expenses). (3)
Purchase Prices of Properties
and Equipment; or (ii)
compensation customarily
charged in arm's-length
transactions by others
rendering similar services as
an on-going activity in the
same geographical location
and for comparable property
and/or equipment.
Operational Stage:
- -----------------
Subordinated Asset Management Subordinated asset management Actual amount depends on results
Fee (payable to General fee for managing Properties of operations and, therefore,
Partners or an Affiliate) and Equipment subject to cannot be determined at the
"triple net" leases not to present time.(4)
exceed the lesser of:
(i) fees which are
competitive for similar
services in the geographical
location where the Properties
and/or Equipment are located;
or (ii) 1% of the gross
rental revenues derived from
Partnership Properties and/or
Equipment. Payment of such
fees shall be subordinated to
receipt by the Limited
Partners of their 10% Current
Preferred Return.(4)
</TABLE>
9
<PAGE> 20
<TABLE>
<CAPTION>
TYPE OF ESTIMATED MINIMUM AND
COMPENSATION COMPENSATION MAXIMUM DOLLAR AMOUNT
------------ ------------ ---------------------
<S> <C> <C>
Interest in Profits, Losses The Limited Partners will Actual amount depends on results
and Cash Flow (payable to the receive 99% and the General of operations and, therefore,
General Partners) Partners will receive 1% of cannot be determined at the
Cash Flow; provided, however, present time. (5)
that the General Partners' 1%
of Cash Flow shall be
subordinated to receipt by
the Limited Partners of their
10% Current Preferred Return.
Profits and losses from
operations are allocated in
accordance with the ratio of
distributions of Cash Flow
attributable to such year,
although in no event will the
General Partners be allocated
less than 1% of profits and
losses in any year.
Reimbursable Expenses Certain expenses incurred by Actual amounts cannot be
(payable to the General the General Partners and determined at the present
Partners and their their Affiliates will be time.(6)(7)
Affiliates) reimbursed by the
Partnership.
Liquidation Stage:
- -----------------
Interest in Net Sale or Limited Partners will receive Actual amounts to be received
Refinancing Proceeds (payable 90% and the General Partners depend upon the sale price of
to General Partners) will receive 10% of the Net Partnership Properties and
Sale or Refinancing Proceeds; Equipment and, therefore, cannot
provided, however, that the be determined at the present
General Partners' 10% of Net time.(5)
Sale or Refinancing Proceeds
shall be subordinated to
receipt by the Limited
Partners of aggregate
distributions from all
sources equal to the 10.5%
Performance Preferred Return
on their Adjusted Investment
plus aggregate distribution
of Net Sales or Refinancing
Proceeds in an amount equal
to 100% of their Original
Contributions.
Real Estate Liquidation Fees The lesser of: (i) 3% of the Actual amounts to be received
(payable to an Affiliate) sale price of the Property; depend upon the sale price of
or (ii) 50% of the real Partnership Properties and,
estate commission customarily therefore, cannot be determined
charged for similar services at the present time.
in the locale of the Property
being sold, provided however
that payment of said
Liquidation Fee shall be
subordinated to receipt by
the Limited Partners of
aggregate distributions from
all sources equal to the
10.5% Performance Preferred
Return on their Adjusted
Investment plus aggregate
distributions of Net Sale or
Refinancing proceeds equal to
100% of their Original
Contributions.
Equipment Liquidation Fee Fees for the resale of Actual amounts depend on sale
(payable to an Affiliate) Equipment equal to the lesser price of Partnership Equipment
of (i) 3% of the sale price and, therefore, cannot be
of Equipment; or (ii) Fees determined at the present time.
customarily charged for
similar services in the
locale of the Equipment being
sold.
- --------------------------
</TABLE>
(1) The General Partners will receive a Non-Accountable
Expense Allowance equal to 2% of Gross Proceeds for expenses related to the
offering and sale of Units.
(2) The General Partners and their Affiliates will be
reimbursed for actual Organization and Offering Expenses (excluding selling
commissions and the Non-Accountable Expense Allowance, but including up to 0.5%
of Gross Proceeds as reimbursement for accountable bona fide due
10
<PAGE> 21
diligence expenses of Participating Dealers and their registered
representatives) in an amount equal to up to 3% of Gross Proceeds less amounts
paid by the Partnership.
(3) The General Partners have agreed to pay all
Acquisition Expenses out of amounts received by them as payment for Acquisition
Fees. The Partnership intends to commit 83% of Gross Proceeds to Investments
in Assets. The Partnership will also pay the Debt Fee (.0677% for each 1% of
indebtedness (calculated as the aggregate amount of Partnership indebtedness
secured by Partnership Assets as a percentage of the aggregate Purchase Prices
of such Assets)) to the General Partners or their Affiliates, but such fee
shall be paid out of the proceeds received from such indebtedness (as opposed
to out of Gross Proceeds). However, the Acquisition Fees (which include the
Debt Fee) may not exceed 5% of the aggregate Purchase Prices of Properties
and/or Equipment and the Acquisition Fees payable to the General Partners or
their Affiliates will be reduced if and to the extent required to comply with
the foregoing requirement.
Lessees will generally be required to pay Affiliates of the General
Partners for certain costs incurred in connection with lease transactions,
including commitment fees which typically approximate 1% to 2% of the
transaction amount. Although such costs are not paid by the Partnership, they
will be included in the limitations on Front-End Fees.
(4) In the event of a default under a triple net lease
which requires the Partnership to assume operations of a Property and/or
Equipment, such operation will be managed by an Affiliate of the General
Partners. In such event, the Affiliate would be entitled to an unsubordinated
management fee equal to 5% of gross revenues generated by the Property and/or
Equipment plus reimbursement for on-site expenses.
(5) The Current Preferred Return is defined as aggregate
distributions of Cash Flow equal to a cumulative, non-compounded 10% per annum
return on Limited Partners' Adjusted Investment. The Performance Preferred
Return is defined as aggregate distributions of Cash Flow and Net Sale or
Refinancing Proceeds equal to a cumulative, non-compounded 10.5% per annum
return on the Limited Partners' Adjusted Investment.
(6) (a) The General Partners also will receive reimbursement
for: (i) the actual cost to the General Partners or their Affiliates of goods
and materials used for and by the Partnership if obtained from unaffiliated
parties; and (ii) "Administrative Services" (as hereinafter defined) necessary
for the prudent operation of the Partnership. The amounts charged to the
Partnership for services performed pursuant to clause (ii) above will not
exceed the lesser of: (1) the actual cost of such services; or (2) 90% of the
amount which the Partnership would be required to pay to unaffiliated parties
for comparable services. The Partnership's annual report to the Limited
Partners, will include an itemized breakdown of the services performed and the
amount reimbursed to the General Partners or their Affiliates pursuant to
clause (ii) above, which information shall be verified by the independent
public accountants retained by the Partnership. "Administrative Services"
include services such as typing, record keeping, preparation and dissemination
of Partnership reports, preparation and maintenance of records regarding
Limited Partners, preparation and dissemination of responses to investor
inquiries and other communications with investors and any other record keeping
required for Partnership purposes.
(b) In extraordinary circumstances, the General Partners
and their Affiliates may provide other goods and services to the Partnership if
all of the following criteria are met: (i) the goods or services must be
necessary to the prudent operation of the Partnership and provision therefore
must be set forth in a written contract which may only be modified in any
material respect by the vote of a majority in interest of Limited Partners and
shall be terminable upon 60 days notice; (ii) the compensation, price or fee
must be equal to the lesser of (A) 90% of the compensation, price or fee the
Partnership would be required to pay to unaffiliated parties who are rendering
comparable services or selling or leasing comparable goods on competitive terms
in the same geographic location, or (B) the actual cost thereof; or
11
<PAGE> 22
(iii) if at least 95% of gross revenues attributable to the business of
rendering such services or selling or leasing such goods are derived from
persons other than Affiliates, the compensation, price or fee charged by an
unaffiliated person who is rendering comparable services or selling or leasing
comparable goods on competitive terms in the same geographic location. In
addition, any such payment will be subject to the further limitation described
in paragraph (c) below. Extraordinary circumstances shall be presumed only when
in the good faith belief of the General Partners there is an emergency
situation requiring immediate action by the General Partners or their
Affiliates and the goods or services are not immediately available from
unaffiliated parties. Services which may be performed in such extraordinary
circumstances include emergency maintenance of Partnership assets, janitorial
and other related services due to strikes or lock-outs, emergency tenant
evictions and repair services which require immediate action. Notwithstanding
the foregoing, the General Partners and their Affiliates also may be reimbursed
for actual expenses incurred when extraordinary on site action is required.
(c) No reimbursement will be permitted to the General
Partners or their Affiliates for items such as rent, depreciation, utilities,
capital equipment and other administrative items; and the salaries, fringe
benefits, travel expenses and other administrative items allocated to any
controlling persons of the General Partners, their Affiliates or any other
supervisory personnel. Permitted reimbursements include salaries and related
salary expenses for personnel, other than controlling persons, which could be
performed directly for the Partnership by unaffiliated parties such as legal,
accounting, transfer agent, data processing and duplication. Controlling
persons, for purposes of this section, include, but are not limited to,
persons, irrespective of their title, who perform functions for the General
Partners similar to those of: (1) chairman or member of the board of
directors; (2) president; (3) executive vice president; or (4) those entities
or individuals holding 5% or more of the stock of the Managing General Partner
or (5) a person having the power to direct or cause the direction of the
Managing General Partner, whether through ownership of voting securities, by
contract or otherwise. The General Partners believe that the employees of the
General Partners, their Affiliates and controlling persons who will perform
services for the Partnership for which reimbursement is allowed pursuant to
clause (b)(iii) above, have the experience and educational background, in their
respective fields of expertise, appropriate for the performance of such
services.
(7) The General Partners will not be compensated by the
Partnership for services other than those which have been disclosed in this
Compensation Table.
CONFLICTS OF INTEREST
The Partnership will be subject to various conflicts of interest
arising out of its relationship with the General Partners and their Affiliates.
The agreements and arrangements, including those relating to compensation,
between the Partnership and the General Partners and their Affiliates are not
the result of arm's-length negotiations. Where conflicts arise from anticipated
transactions with the General Partners or their Affiliates, the policies and
limitations described below have been adopted. With respect to the conflicts of
interest described herein, the General Partners and their Affiliates will
endeavor to balance the interests of the Partnership with the interests of the
General Partners and their Affiliates in making any determination.
1. Compensation for the Time and Service of the General Partners.
The Partnership will rely on the General Partners and their Affiliates for the
daily operation of the Partnership and the management of its assets. The
General Partners and their Affiliates will have conflicts of interest in
allocating management time, services and functions between various future
partnerships which they may organize or serve, as well as other business
ventures in which they are, or may in the future, be involved. The General
Partners and their Affiliates believe they have and, with respect to future
entities will have, sufficient personnel to be fully capable of discharging
their responsibility to all partnerships and entities to which they are
responsible.
12
<PAGE> 23
2. Resolution of Conflicting Opportunities. The officers and
directors of the Managing General Partner are also officers and directors of
one or more entities which engage in the brokerage, sale, operation or
management of real estate and/or equipment. The General Partners and their
Affiliates may engage in other business ventures of various types for their own
accounts or for the accounts of others, including other limited partnerships,
and neither the Partnership nor any Limited Partner shall be entitled to any
interest in these ventures; however, the General Partners and their Affiliates
will be obligated to present to the Partnership any investment opportunity
which comes to their attention if such opportunity is of a character which
might be suitable for the Partnership, subject to consideration of the factors
hereinafter set forth. Some of these entities have or with respect to future
entities, may have, investment objectives similar or substantially identical to
those of the Partnership. In determining whether a particular property or
equipment package is suitable for acquisition by an entity or by the
Partnership, the Managing General Partner will consider various factors,
including: (i) whether the cash required for a particular acquisition is more
or less than the amount that would be appropriate for the entity to commit to
an investment; (ii) whether the nature of the potential cash flow to be derived
from the particular property or equipment package will conform with the
entity's investment objectives; (iii) whether that entity already owns
properties or equipment purchased from the same seller or involving the same
franchise; (iv) whether the property or equipment would satisfy that entity's
objective of geographic diversification; (v) whether the method of acquiring
the property or equipment can be structured to meet the Partnership's principal
investment objectives; (vi) whether the property is being acquired in a
transaction together with other properties not suitable for acquisition by that
entity; (vii) the estimated income tax effects of the purchase on each entity;
and (viii) the length of time since that entity has made an investment. Such
conflicts will be resolved in the best judgment of the Managing General
Partner. If, based on the foregoing criteria, the Managing General Partner
determines that acquisition of a particular property or equipment package is
equally appropriate for more than one entity affiliated with the General
Partners, the entity which was first formed or which has had its funds
available for investment for the longest period will make the acquisition. The
foregoing provisions are not intended to relieve the General Partners of their
fiduciary obligations to the Partnership. See "Prior Offerings," regarding one
prior program which had funds available for acquisitions as of the date of this
Prospectus.
It is believed that the aforementioned factors, together with the
obligation of the General Partners and their Affiliates to present to the
Partnership any investment opportunity which could be suitable for the
Partnership, should limit any competition or conflicts with respect to the
purchase of properties by other partnerships and the Partnership.
3. Property and Equipment Management Services Will be Rendered by
the General Partners or their Affiliates. It is anticipated that Captec
Financial Group, Inc. ("Captec"), the parent of the Managing General Partner
and of which Mr. Beach is a director, officer and majority shareholder, may
provide property and equipment management services for the Partnership. In such
case, the General Partners believe that Captec would render management services
to the Partnership on a competitive basis in a manner consistent with customary
business practices. See "Compensation Table." The General Partners believe
that Captec has sufficient personnel and other required resources to discharge
all responsibilities to the various properties that Captec manages and will
manage in the future.
The property management agreement to be entered into between the
Partnership and Captec will be on terms no less favorable to the Partnership
than those customary for similar services by independent firms in the relevant
geographic area. See "Compensation Table." The property management agreement
will provide for termination by a majority vote of the Limited Partners,
without penalty, upon 60 days prior written notice.
4. Receipt of Fees and Other Compensation by the General Partners
and their Affiliates. In connection with this Offering and throughout all
stages of the Partnership, the General Partners and their Affiliates will
receive the compensation as described in "Compensation Table." All of the
General Partners' fees with the exception of Acquisition Fees have been
subordinated to receipt by the Limited Partners of
13
<PAGE> 24
preferential distributions. Acquisition Fees will be payable whether or not
funds are available for distribution to the Limited Partners. The General
Partners may, under certain circumstances, benefit from the continued holding
of Partnership Properties and/or Equipment, while investors may be better
served by a sale or other disposition of such Properties and/or Equipment.
Furthermore, the receipt of certain fees and reimbursements is dependent upon
the ability of the General Partners to timely invest Net Offering Proceeds.
Therefore, the interest of the General Partners in receiving such fees may
conflict with the interest of the Limited Partners. The General Partners and
their Affiliates believe that their actions and decisions will be made in a
manner consistent with their fiduciary duty to the Partnership. See
"Compensation Table."
5. Non-Arm's-Length Agreements. The agreements and arrangements,
including those relating to compensation, between the Partnership and the
General Partners or any of their Affiliates will not be the result of
arm's-length negotiations, although the General Partners believe that such
agreements and arrangements will approximate those which would be arrived at
through arm's-length negotiations. While the Partnership will make no loans to
the General Partners or their Affiliates, the Partnership may borrow money from
the General Partners or their Affiliates, but only on such terms as to interest
rate, security, fees and other charges at least as favorable to the Partnership
as are charged by unaffiliated lending institutions in the same locality on
comparable loans for the same purpose. The General Partners and their
Affiliates are not prohibited from providing services to, and otherwise dealing
or doing business with, persons (for example, franchisees), who may deal with
the Partnership, although there are no present arrangements with respect
thereto. However, the Partnership Agreement prohibits receipt of rebates or
"give-ups" or participation in any reciprocal business arrangements which would
have the effect of circumventing any of the provisions of the Partnership
Agreement.
6. Prior Business Relationships. The Partnership may purchase
Properties and/or Equipment from certain sellers from whom the General Partners
or their Affiliates have purchased Properties and/or Equipment in the past and
from whom they may purchase Properties and/or Equipment in the future.
Additionally, the General Partners and their Affiliates may have engaged in, or
in the future may engage in, transactions with franchisors of franchisees who
will lease Partnership Properties and/or Equipment, and/or with the franchisees
themselves. In the event the Partnership enters into transactions with such
persons, the General Partners will experience a conflict between the current
interests of the Partnership and their interests in preserving the ongoing
business relationship. In all such matters, the General Partners must act in a
manner consistent with their fiduciary obligations to the Partnership. See
"-Resolution of Conflicting Opportunities" in this Section and "Management."
7. Legal Counsel for the Partnership and the General Partners is
the Same Law Firm. Jaffe, Raitt, Heuer & Weiss, P.C. is acting as general
counsel to the Partnership and as special counsel to the General Partners and
certain of their Affiliates with respect to all matters relating to the
Offering and federal and state securities laws and federal income tax laws.
Such firm is not acting as counsel for the Limited Partners or any potential
investor; therefore, such persons are urged to consult their own counsel.
There is a possibility that in the future the interests of the various
parties may become adverse. Under the Code of Professional Responsibility of
the legal profession, such counsel may be precluded from representing any one
or all of said parties in such case. If any situation arises in which the
interests of the Partnership appear to be in conflict with those of the General
Partners or their Affiliates, additional counsel may be retained by one or more
of the parties to assure that their interests are adequately protected.
Moreover, should such a conflict not be readily apparent, counsel may
inadvertently act in derogation of the interest of certain parties.
8. Indirect Ownership of Properties and/or Equipment with
Affiliates. The General Partners may cause the Partnership to acquire an
interest in Properties and/or Equipment through a joint venture or general
partnership with an entity affiliated with the General Partners. In such
instance, the General Partners or their Affiliates will have a fiduciary duty
to both the Partnership and the other entity which participates in the joint
venture. This may result in an impasse in decision-making since generally none
of the Affiliated
14
<PAGE> 25
joint venturers would have full control over the joint venture. In addition,
there is a potential risk that while one joint venturer may have the right to
purchase the other joint venturer's interest in the event of a proposed sale,
it may not have the resources to do so. In order to minimize the likelihood of
a conflict between these fiduciary duties, the Partnership Agreement provides
guidelines for investments in such joint ventures in various respects. See
"Investment Objectives and Policies - Joint Ventures."
9. Conflicts with Affiliated Lessors. For the purpose of
providing further geographic and market diversity, the Partnership will not
invest in both Properties and Equipment to be leased at the same location.
Thus, if the Partnership invests in a Property, the lessee will be required to
lease Equipment from another party; and if the Partnership invests in
Equipment, the lessee will be required to lease its Property from another
party. In some cases, Affiliates of the General Partners may provide this
additional financing for the lessee under a separate lease with the lessee.
This may create a conflict of interest should the lessee have limited funds to
satisfy its obligations.
10. Tax Matters Partner. Pursuant to the Partnership Agreement,
the Managing General Partner will be the "tax matters partner" and, as a
result, may make various determinations which are binding on all of the
Partners. It is possible that issues could arise in which the General Partners
or their Affiliates might benefit if the Managing General Partner were to take
positions as "tax matters partner" that were not in the best interest of the
Limited Partners. Since the impact of such determinations on the General
Partners and their Affiliates may be substantially different in certain
circumstances from the impact on the Limited Partners, the Managing General
Partner may be subject to a conflict of interest in acting as the "tax matters
partner." Although the Managing General Partner has absolute discretion with
respect to its decisions as the "tax matters partner," it will attempt to
resolve the conflict by utilizing its best judgment so as to protect the
interests of all Partners.
FIDUCIARY RESPONSIBILITIES OF THE GENERAL PARTNER
The General Partners are accountable to the Partnership and to the
Limited Partners as fiduciaries and consequently must exercise good faith and
integrity in handling Partnership affairs. Where the question has arisen,
courts have held that a limited partner may institute legal action on behalf of
himself and all other similarly situated limited partners (a class action) to
recover damages for a breach by a general partner of his fiduciary duty or on
behalf of the limited partnership (a derivative action) to recover damages for
the partnership from third parties or from general partners. Moreover, the
Delaware Revised Uniform Limited Partnership Act specifically permits limited
partners to bring such derivative actions under certain circumstances. In
addition: (i) limited partners may have the right, subject to procedural and
jurisdictional requirements, to bring a partnership class action in federal
courts to enforce their rights under the federal securities laws; and (ii)
limited partners who have suffered losses in connection with the purchase or
sale of their limited partnership interests may be able to recover such losses
from a general partner where the losses result from a violation by the general
partner of the anti-fraud provisions of the federal securities laws. Since this
area of the law is rapidly developing and changing, investors who have
questions concerning the duties of the General Partners should consult with
their own counsel.
Neither the General Partners nor any of their Affiliates have the
authority to permit receipt of rebates or "give-ups" or permit the General
Partners or any Affiliate to participate in any reciprocal business
arrangements which would have the effect of circumventing any of the provisions
of the Partnership Agreement.
The Partnership Agreement provides that the Partnership shall
indemnify the General Partners and their Affiliates for any loss arising out of
their acts or omissions in connection with the business of the Partnership, to
the maximum extent permitted by law, subject to the limitations set forth in
Section 20 of the Partnership Agreement. As a result of the above arrangements,
a purchaser of Units offered hereby may be entitled to a more limited right of
action than he would otherwise have had absent the limitation in the
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Partnership Agreement. A successful claim for such indemnification could
deplete the Partnership's assets by the amount paid.
IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION,
INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, (THE "ACT"), IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS
THEREFORE, UNENFORCEABLE.
Section 17 of the Partnership Agreement provides that the General
Partners and their Affiliates may engage in or possess an interest in any other
business or venture of every nature and description. However, see "Conflicts of
Interest-Resolution of Conflicting Opportunities."
RISK FACTORS
Purchase of the Units offered hereby involves various substantial Risk
Factors set forth elsewhere herein. Prospective purchasers should consider,
among others, the following factors:
1. Factors Affecting Ownership of Properties and Equipment.
Investment in Properties and Equipment leased to Retail Concerns and chain and
franchised restaurants, may be affected by adverse changes in general or local
economic or market conditions, increased costs of energy or products,
competitive factors, fuel shortages, quality of management, ability of a
franchisor to support the operators of its franchises, limited alternative uses
for buildings and equipment (if any), changing consumer habits, condemnation or
uninsured losses, changing demographics and traffic patterns, inability to
remodel outmoded Properties as required by the franchise or lease agreement,
voluntary termination by a lessee of its obligations under a lease, and other
factors. Both the ability of the lessees to pay rent on a timely basis and the
amount of the rent (which is the principal source of the Partnership's income
and which, with respect to Properties, may be partially dependent on the
lessee's gross sales) are affected by general economic conditions within the
franchise restaurant, chain restaurant, and retail industries. These conditions
include those described above, as well as possible changes in consumer
preferences and increases in the number and location of restaurants, service
type businesses and competing retail businesses in the area where Partnership
Properties or Equipment are located. The failure of a particular franchise
concept or a franchisor's inability to support its franchisees could materially
affect the ability of a number of franchisees to make lease payments and might
result in a decrease in Partnership net income. This in turn would affect the
ability of the Partnership to service its debt obligations, the amount of Cash
Flow available for distribution to the Limited Partners, and could ultimately
affect the Partnership's ability to sell a Property. In the event of
termination of a lease or of a franchise agreement between a lessee and a
particular franchisor, the Partnership may not be able to lease that Property
or Equipment on the same terms and may, as a result, incur a loss. The
Partnership will not be a party to any franchise agreement between a franchisor
and a lessee and such agreement could therefore be modified or cancelled
without notice to, or the prior consent of, the Partnership. Further, although
the Partnership intends, in general, to dispose of Partnership Properties
between approximately the seventh and tenth years after the Partnership
commences operations, lessees have no obligation to purchase the Property they
lease and there can be no assurance that the Partnership will be able to sell
such Properties at all or for a profit. Laws regulating the franchise industry
in various states may adversely affect the ability of the Partnership to
enforce contractual agreements or obtain remedies on default which might
otherwise be available.
Except for some Property leases with Retail Concerns, the Partnership
intends to acquire Properties and Equipment under long-term "triple net" lease
agreements to lessees and would, therefore, be subject to the risk that lessees
may be unable to meet their lease payments. A default by the lessee or other
premature termination of a lease agreement could, depending on the size of the
Property and/or Equipment and the General Partners' ability to successfully
find a substitute tenant or obtain lease insurance, have an adverse effect on
the financial position of the Partnership and particularly on distributions of
Cash Flow. See "-Risks Relating to Creditworthiness of Lessees" in this
Section. Should the Partnership acquire a
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leasehold interest in a Property, and the lessee were to default on its
obligations pursuant to the lease agreement, the Partnership may be responsible
for the payment of rent due to the owner of the leasehold interest, which
rental payments would reduce Cash Flow.
The Partnership anticipates that some Properties leased to the Retail
Concerns may be leased on a "double net" basis that will provide that the
Partnership will be responsible for the maintenance of the roof, exterior
walls, and/or parking lot of the Property. Thus, the Partnership bears the
risk that the cost of such maintenance may be higher than anticipated. This
increased cost would have an adverse effect on the financial position of the
Partnership and particularly on distributions of Cash Flow.
2. Single-Use Properties. Certain of the Properties may be
designed or built primarily for a particular tenant or a specific type of use.
If the Partnership is holding such a Property upon the termination of the lease
and the tenant fails to renew, or such tenant otherwise defaults on its lease
obligations, the Property may not be readily marketable to a new tenant without
substantial capital improvements or remodeling. Such improvements might require
expenditure of Partnership funds otherwise available for distribution or
require the sale of such Property at a below-market price. Additionally, even
if a market for the Property exists, it may remain vacant until a new lessee is
located. Although industry publications indicate that real growth in
restaurant sales and service-type business revenues throughout the franchise
industry are expected to increase gradually over the next few years, there can
be no assurance that franchised restaurants and/or businesses will not
experience adverse changes in the future. Such adverse changes could occur as a
result of greater consolidation, increased competition, possible oversupply
within a franchise segment or other factors not presently foreseeable. It is
also possible that such factors could cause adverse changes in the business of
the Retail Concerns.
3. Lack of Liquidity - Limited Transferability. There is no
established market for the Units, and because there are expected to be only a
limited number of investors and significant restrictions on the transferability
of Units, it is not likely that a market in the Units will develop. The Units
cannot be transferred or assigned to persons who fail to meet the minimum
purchase requirements and suitability standards imposed by certain states on
transferees. See "Summary of the Partnership and the Offering - Who Should
Invest." Accordingly, a Purchaser of Units must be willing to bear the
economic risk of investment in the Units for an indefinite period of time.
Units may be transferred only pursuant to a written assignment and the assignee
may be substituted as a Limited Partner only after the consent of the General
Partners have been given. In order to facilitate transfers to the extent
possible, however, the General Partners may, within the limit of applicable
laws and regulations, either purchase the Units directly or assist investors in
locating purchasers. The General Partners and the Partnership are not
obligated, but reserve the right, to purchase Units from the Limited Partners.
See "Summary of Partnership Agreement."
4. Tax Consequences. There are various federal income tax risks
associated with an investment in the Partnership. In addition to continuing
Internal Revenue Service (the "Service") re-examination of the tax treatment of
partnerships and real estate investments, substantial changes have been made to
the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
thereunder in recent years. Many of these changes substantially affect the tax
treatment traditionally available from real estate investments. Although the
provisions of the Code relevant to an investment in the Partnership are
generally described in "Tax Aspects of the Offering," each potential investor
is strongly urged to consult his own tax advisor concerning the effects of
federal income tax law on an investment in the Partnership and on his
individual tax situation.
Among the various risks associated with the federal income tax aspects
of the Offering of which investors should be aware are:
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Partnership Status. The Partnership will not apply for a
ruling from the Service that it will be treated as a partnership for federal
income tax purposes. Although Jaffe, Raitt, Heuer & Weiss, P.C., counsel to the
Partnership, has rendered its opinion that the Partnership will more likely
than not be treated as a partnership for federal income tax purposes, such
opinion is not binding on the Service.
Investors should recognize that many of the advantages and economic
benefits of an investment in the Partnership depend upon the continued
classification of the Partnership as a partnership (rather than as an
association taxable as a corporation) for federal income tax purposes, and a
change in this classification would require the Partnership to pay a corporate
level tax on its income which would reduce Cash Flow, prevent the flow-through
of tax benefits, if any, for use on Limited Partners' tax returns and require
that distributions be treated as dividends, which would together reduce the
yield from an investment in the Partnership. In addition, such a change in the
Partnership's tax status during the life of the Partnership could be treated by
the Service as a taxable event, in which event the Limited Partners could have
tax liability without receiving a cash distribution from the Partnership to
enable them to pay such tax liability. The continued treatment of the
Partnership as a partnership is dependent on the present law and regulations,
which are subject to change, and on the Partnership's ability to continue to
satisfy a variety of criteria.
Possible Audit of Tax Returns. The Service is giving
substantial attention to the audit of limited partnerships. An audit of the
Partnership's income tax information returns may result in an audit of the
returns of the Limited Partners. Such an examination could result in
adjustments to items that are both related and unrelated to an investment in
the Partnership, which could result in the imposition of various penalties and
interest on the deficiency. Interest rates on tax deficiencies are determined
four times each year at the average adjusted prime rate for the preceding three
month period and the rate is 9% per annum for the period from July 1, 1996
through September 30, 1996. In addition, there is an increased interest rate
on tax deficiencies attributable to "tax motivated transactions," which may
include an investment in the Partnership.
The Code also provides various rules governing adjustments to
partnership items. These rules provide for a unified proceeding at the
partnership level for both administrative and judicial proceedings. The
determination resulting from the unified proceeding will be binding on all
Limited Partners. See "Tax Aspects of the Offering - Other Possible Tax
Consequences to Investors" and "Tax Aspects of the Offering - Partnership Tax
Returns and Tax Information."
Limitation of Opinion of Counsel. Jaffe, Raitt, Heuer & Weiss,
P.C., having considered all of the material federal tax issues, has given its
opinion confirming as accurate the opinions attributed to it in "Tax Aspects of
the Offering - Opinion of Counsel," regarding the likely favorable outcome on
the merits of issues if such issues are challenged by the Service. An opinion
of counsel involves an application of the federal income tax law in effect on
the date of the Prospectus to the facts known by such counsel from existing
documents, further investigation or representations of the General Partners. In
addition, at the time the Partnership acquires Properties, Jaffe, Raitt, Heuer
& Weiss, P.C. will issue its opinion as to material tax issues associated with
such acquisitions.
For the reasons described in greater detail below, Jaffe, Raitt, Heuer
& Weiss, P.C. is of the view that it is not now possible, nor will it become
possible prior to the termination of the Offering, for it to reach a judgment
as to the probable outcome on the merits (either favorable or unfavorable) of
the following federal income tax issues and, accordingly, it expresses no
opinion with respect to: (a) whether the Partnership will be deemed a "dealer"
in real estate or equipment at the time of the sale or other disposition of the
Partnership's Properties or Equipment, thereby resulting in the entire gain
from such sale or other disposition being treated as ordinary income, rather
than capital gain, and causing Limited Partners that are tax-exempt entities to
recognize unrelated business taxable income; (b) whether a Limited Partner will
be deemed a "dealer" in limited partnership interests at the time of sale or
other disposition of his Units thereby resulting in the entire gain from such
sale or other disposition being treated as ordinary income; (c) whether the
amount of the Partnership's allocation between land and depreciable
improvements will be substantiated
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for depreciation or cost recovery purposes, which could reduce the depreciation
deductions of the Partnership; (d) whether any of the Properties will
constitute "tax-exempt use properties" due to the leasing of space in the
Properties to tax-exempt entities or the admission of Limited Partners that are
tax-exempt entities, which would require the Partnership to depreciate all or a
portion of its properties over 40 years using the straight-line method; and (e)
whether the Partnership could qualify for the "90% of gross income" exception
if the Partnership were characterized as publicly traded. In addition, please
review "Tax Aspects of the Offering" for a complete discussion of these and
other limitations to, and restrictions on, the opinions of Jaffe, Raitt, Heuer
& Weiss, P.C.
Possible Disallowance of Deductions on Factual or Other
Grounds. The availability, timing and amount of various deductions taken by the
Partnership will depend not only upon general legal principles but also upon
various determinations relating to particular real property investments, which
are subject to potential controversy on factual or other grounds. See "Tax
Aspects of the Offering - Opinion of Counsel," "Tax Aspects of the Offering -
Limitations on Deductibility of Losses," "Tax Aspects of the
Offering-Deductibility of Fees" and "Tax Aspects of the Offering -
Depreciation." There can be no assurance, therefore, that some of the
deductions claimed by the Partnership will not be challenged by the Service. If
the Service successfully challenges a substantial portion of the deductions to
be taken by the Partnership, the tax benefits of an investment in the
Partnership may be adversely affected.
Classification of Partnership Income. The 1986 Act created
Section 469 of the Code which allows a partner to deduct losses from "passive
activities" only against income from "passive activities." Based on the
language of Section 469 of the Code, the legislative history thereof and the
proposed and temporary Regulations issued to date, Jaffe, Raitt, Heuer & Weiss,
P.C. is of the opinion that it is more likely than not that the income or loss
attributable to owning the Properties and Equipment will be characterized as
"passive" rather than "portfolio". However, because Congress granted the
Service broad authority to promulgate legislative Regulations in this area, and
because of the "triple net" nature of the leases the Partnership will enter
into, there is a possibility that the Partnership's income or loss from the
Properties and Equipment could be characterized as portfolio. Under Section
469 of the Code the Partnership's investment income from sources other than the
Properties and Equipment will be characterized as portfolio and passive losses
cannot be used to offset portfolio income. Therefore, it is possible that a
Limited Partner could be allocated portfolio income and passive loss from the
Partnership in the same year, and that the loss could not be used to offset the
income. The ability of a Limited Partner to use losses from a passive activity
is dependent upon such Limited Partner's other items of income or loss and,
therefore, the benefit of such items will depend on each Partner's tax
situation. Finally, if the Partnership is characterized as publicly traded, but
is taxed as a partnership because it qualifies for an exemption, its income
cannot be used to offset passive losses from other partnerships, but the
precise characterization and use of such income or loss is uncertain. See "Tax
Aspects of the Offering - Taxation of Cash Distributions."
Possible Federal Income Tax Liability In Excess of Sale or
Refinancing Proceeds or Operating Cash Flow. Investors should be aware that the
federal income tax on a Limited Partner's allocable share of the Partnership's
taxable income may exceed the Cash Flow or Net Sale or Refinancing Proceeds
distributed to such Limited Partner from the Partnership. Therefore, it is
possible that the Partners may have to use funds from sources other than the
Partnership to pay their tax liability. In addition, the gain from a Limited
Partner's sale of his Units may exceed the cash proceeds from the sale. See
"Tax Aspects of the Offering - Sale or Foreclosure of Partnership Properties or
Equipment."
Possible Taxability of Cash Distributions to Limited Partners.
A Limited Partner's share of Partnership cash distributions is subject to
federal income taxation only to the extent such distributions exceed a Limited
Partner's tax basis in his Units at the time of the distribution. Additionally,
cash distributions which exceed the amount to which a Limited Partner is
considered "at-risk" with respect to the activity will cause a recapture of
previous losses, if any. There is a risk that a Limited Partner may not have
sufficient basis or amounts "at-risk" to prevent cash distributions from being
taxable. See "Tax Aspects of the Offering - Taxation of Cash Distributions."
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Possible Reallocation of Profits or Losses. The Service could
challenge the allocation among the General Partners and Limited Partners of
income, gains, losses, deductions and credits in the Partnership Agreement as
lacking substantial economic effect or as not being allocated in accordance
with the Partners' interests in the Partnership and, therefore, possibly
allocate a different share of such items to the Limited Partners. To the extent
that such challenges to the allocation of various items were upheld, the tax
treatment of the investment for such Limited Partner could be adversely
affected. In addition, such a reallocation during the life of the Partnership
could result in the understatement of income for taxable Limited Partners which
could result in the imposition of interest and penalties. Due to the complex
rules in the Regulations, each acquisition of a Partnership Property could
affect the validity of the Partnership's allocations. Although Jaffe, Raitt,
Heuer & Weiss, P.C. has provided its opinion that it is more likely than not
that substantially all of the allocations of profits and losses provided in the
Partnership Agreement either have economic effect or are in accordance with the
Limited Partners' interests in the Partnership, an opinion of counsel is not
binding on the Service. See "Tax Aspects of the Offering - Allocations of
Profits and Losses."
Possible "Dealer" Status of Partnership or Limited Partners.
Because the Partnership has not been organized to operate as a "dealer" in real
property or equipment, any gains from the sale or other disposition of
Partnership Properties or Equipment are anticipated to be treated as long-term
capital gains to the extent the gain exceeds any required recapture of
previously taken depreciation deductions. If the Partnership were deemed to be
a "dealer" in real property or equipment at the time of a sale or other
disposition of Partnership Properties or Equipment, any gain or loss on the
sale or other disposition of such property would be treated as ordinary income
or loss. There are several distinctions between capital gain and ordinary
income, including: (i) a maximum rate of 28% on long term capital gains as
opposed to a maximum rate of 39.6% on other income or gains and; (ii) that the
characterization of the Partnership as a "dealer" could have an adverse impact
on Limited Partners that are tax-exempt entities by causing such gain to be
characterized as unrelated business taxable income ("UBTI"). See "Tax Aspects
of the Offering - Impact on Qualified Tax-Exempt Investors." Also, if a
Limited Partner is a "dealer" in real estate or equipment, there is a
possibility that his share of any gain or loss could be treated as ordinary
income or loss, even if the Partnership were not deemed to be a "dealer."
Because the determination of "dealer" status is based upon the facts existing
at the time of sale of the specific property, Jaffe, Raitt, Heuer & Weiss, P.C.
is unable to render an opinion (either favorable or unfavorable) as to the
probable outcome on this issue. However, the General Partners intend to
operate the Partnership so as to minimize the possibility of dealer treatment.
See "Tax Aspects of the Offering - Sale or Foreclosure of Partnership
Properties or Equipment."
Leases. Due to the "triple net" nature of most of the leases
the Partnership intends to enter into and the other terms of the sales
agreements, the Service may assert that the Partnership is not the owner of its
Properties and Equipment for federal income tax purposes, which would result in
a disallowance of depreciation and interest deductions and a corresponding
increase in income or decrease in losses allocated to the Limited Partners. The
Partnership intends to utilize lease agreements under which it will be deemed
to be the owner of the Properties and Equipment for federal income tax
purposes, and based on the anticipated terms of the leases, Jaffe, Raitt, Heuer
& Weiss, P.C. is of the opinion that the Partnership will more likely than not
be considered the owner of the Properties and Equipment, although this opinion
could vary based on the actual terms of the leases. See "Tax Aspects of the
Offering - Tax Treatment of the Leases."
Alternative Minimum Tax. Prospective investors are cautioned
to evaluate the effect of the deductions resulting from their investment in the
Partnership, particularly the special allocation of depreciation deductions, on
the total amount of their tax preference items. The Limited Partners must
include their distributive share of the Partnership's items of tax preference,
if any, in their total items of tax preference for purposes of computing the
alternative minimum tax.
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Possible Legislative or Other Actions Changing Anticipated Tax
Consequences. Prospective investors should recognize that the present federal
income tax treatment of an investment in a limited partnership may be modified
by legislative, judicial or administrative action at any time and that any such
action may affect investments and commitments previously entered into before
such change. The rules dealing with federal income taxation are constantly
under review by the Service, resulting in revisions of its Regulations and
revised interpretations of established concepts. Recent legislation granted the
Service the right to promulgate legislative and/or interpretive Regulations in
many areas. In addition, the Service is paying increased attention to the
proper application of the tax laws to partnerships, including partnerships
investing in real estate and equipment.
IN VIEW OF THE COMPLEXITY OF THE TAX ASPECTS OF THE OFFERING,
PARTICULARLY IN LIGHT OF THE FACT THAT CERTAIN OF THE TAX ASPECTS OF THE
OFFERING WILL NOT BE THE SAME FOR ALL INVESTORS, PROSPECTIVE INVESTORS ARE
STRONGLY ADVISED TO CONSULT THEIR TAX ADVISORS WITH SPECIFIC REFERENCE TO THEIR
OWN TAX SITUATION PRIOR TO INVESTMENT IN THE PARTNERSHIP.
5. Risks From Leverage. The General Partners anticipate that a
portion of the Partnership's Assets will be acquired by using leverage. The use
of leverage, while intended to provide a greater rate of return to the Limited
Partners by permitting the Partnership to acquire Properties and Equipment of
greater aggregate cost than would acquisition on an all-cash basis, also
increases the Partnership's exposure to loss, since such borrowings generally
will be secured by liens on Partnership Properties and Equipment, collateral
assignments of the leases of the respective Properties or Equipment and the
rents therefrom. In particular, if the lessee of Partnership Property or
Equipment fails to promptly pay the rent due under the lease of such Property
and/or Equipment or if the Managing General Partner or an Affiliate acting as
remarketing agent for the Partnership, subsequent to a default, is unable to
re-lease Property or Equipment for a term concomitant with the remaining term
of the borrowing, or for an aggregate rent which is sufficient to amortize such
borrowing, the Partnership may be unable to service such borrowing, which could
result in a foreclosure or levy on such Property and/or Equipment, a loss to
the Partnership and a substantial reduction of the return to the Limited
Partners on their investment in the Units. Although the Partnership does not
intend to utilize financing that does not provide for the amortization of all
or substantially all of the principal amount thereof prior to maturity, it is
possible that such "balloon" financing may be used. These "balloon" loans
involve greater risks than mortgage loans where the principal amount is fully
amortized over the term of the loan since the ability of the Partnership to
repay at maturity the outstanding principal of a balloon loan may be dependent
upon the Partnership's ability to obtain adequate refinancing, which ability
would in turn be dependent upon economic conditions in general and the value of
the underlying properties in particular. There is no assurance that the
Partnership would be able to refinance such balloon loans at maturity. Further,
a significant decrease in the value of underlying property could result in the
inability to obtain sufficient refinancing at maturity and loss of a property
by the Partnership through foreclosure. To the extent that the Partnership uses
balloon loans, the Partnership's ability to build up equity through the
reduction of loan principal will be more difficult. Lenders could also require
restrictions on future borrowings, distributions and operating policies after
such an event, as well as cross-collateralization of Partnership indebtedness.
Loans may also be made on a recourse basis which would entitle the lender to
look to the Partnership for payment. See also "-Assets to Secure
Acquisition-Related Indebtedness and Unrelated Business Taxable Income" in this
Section.
6. Availability of Financing. Fluctuations in interest rates may
adversely affect the availability and cost of borrowings related to Properties
and/or Equipment. The Partnership may attempt to acquire Properties and/or
Equipment using leverage during periods when interest rates are high, making an
acquisition using indebtedness relatively unattractive. Many loans become
immediately due upon the sale of a property, thus making it impossible for the
Partnership to acquire Properties using a seller's financing. In such cases, it
may be necessary to renegotiate the terms of any such financing with the
seller's lenders on terms less favorable than those given the seller, to obtain
new financing if available, refrain from purchasing additional properties
pending sale of additional Units or to forego acquisition.
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7. Risks Relating to Creditworthiness of Lessees. The Partnership
will require prospective lessees to demonstrate either: (i) that they meet the
Partnership's financial stability and credit requirements, or (ii) that an
entity which does meet those requirements guarantees the lease. The Partnership
may also lease Properties to certain lessees who do not meet such requirements,
but only if they can insure a negotiated portion of their rental obligations
(generally expected to be 80%) for a portion of the lease term if the lessee
defaults during a specified time period. The Partnership will not acquire
Properties or Equipment unless the lessee has either satisfied the conditions
set forth in (i) or (ii) above, or obtained a satisfactory commitment for such
insurance. See "Investment Objectives and Policies-Lessee Creditworthiness."
However, certain risks to the Partnership will remain notwithstanding these
requirements. For example, the financial condition of a lessees or a guarantor
may deteriorate over time to a degree which causes it to default on its
obligation to maintain Property and/or Equipment and pay requisite taxes and
insurance premiums and/or default on its payment obligations to the
Partnership. Additionally, there can be no assurance, even if a commitment for
rent insurance were obtained, that the insurance policy would be issued when
the lease obligations are incurred, or that insurance from another carrier
would be available in such case. In addition, typical policies provide for
various conditions, contingencies and limitations that could impair the
Partnership's right to receive insurance proceeds in the event of a default
under the lease, and some policies may be cancelled or rendered unenforceable
during their term, or the insurer could become financially incapable of paying
claims. As a result, prospective investors should not regard such insurance as
a complete indemnity against damage or loss connected with defaults under the
subject leases. The General Partners have been advised that no insurers were
issuing such policies as of the date of this Prospectus. Accordingly, no
assurance can be given that such insurance could be obtained, even if the
Partnership were willing to accept it in lieu of satisfaction of its
creditworthiness standards. It is anticipated that all lessees will meet the
creditworthiness or guaranty requirements, and that no Partnership leases will
be covered by Rent Guaranty Insurance.
8. Delays in Delivery. Acquisition or delivery of individual
Equipment packages to be acquired by the Partnership may be delayed due to
labor problems, strikes, work stoppages, the unavailability to the manufacturer
of parts or raw materials, or other delays in the shipment, transport or
installation of such Equipment. Any such delay could result in a delay in the
commencement of income from such Equipment. Delay in the delivery of Equipment
could also result in the Partnership's losing a favorable lease or borrowing
terms for such Equipment.
9. Usury Laws. Triple net leases have on occasion been held by
the courts to be loans subject to state usury laws. Penalties, including loss
of interest and treble damages, may be imposed upon persons who violate such
usury laws. The Partnership will structure leases and re-leases of its
Properties and Equipment in such a manner as intended to avoid application of
usury laws of the applicable states. However, a transaction which the
Partnership believes to be exempt from the usury laws could be found to be a
loan which violates a usury law in a judicial forum.
10. Dependence on General Partners; Lack of Experience. The
success of the Partnership will depend to a large extent on the quality of the
management provided by the General Partners and the management agent. In
addition, the General Partners will have sole control over virtually all
aspects of the Partnership's operations, and the Limited Partners will have no
right to participate in the management of the Partnership. The Limited Partners
have no voting rights, except that a majority of the Limited Partners may amend
certain aspects of the Partnership Agreement, dissolve the Partnership, remove
the General Partners, elect a new General Partner or approve or disapprove of
the sale of all or substantially all of the Partnership's Assets. See "Summary
of Partnership Agreement." Although Mr. Patrick L. Beach, the President of the
Managing General Partner, and his Affiliates individually or with others, have
sponsored prior private programs and two prior public programs, only two of
those programs had investment objectives similar to those of the Partnership
and have become operational. See "Prior Offerings" and the "Prior Performance
Tables". The General Partners and their Affiliates believe, but can provide no
assurances, that they have amassed sufficient expertise to allow them to
successfully complete this Offering and operate the Partnership.
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The Managing General Partner is recently formed and has a minimal net
worth. Patrick L. Beach, the individual General Partner, had a net worth at
December 31, 1994 in excess of $2,800,000, a significant portion of which was
illiquid. Substantially all of Mr. Beach"s net worth is derived from his
ownership interest in shares of common stock of Captec Financial Group, Inc.
According to an accountants' review report, Mr. Beach's investment in Captec
Financial Group, Inc., amounting to $3,283,000 (70% of his total assets) as of
December 31, 1994 has been recorded at estimated current value as determined by
management of Captec Financial Group, Inc. in the absence of a readily
ascertainable current market value for Captec Financial Group, Inc.'s common
stock. Because of the inherent subjectivity of the assumptions used in the
valuation, the estimated current value may differ significantly from the amount
that would have been used had a ready market for the investment existed at
December 31, 1994, and the difference could be material. Mr. Breach believes
that he could borrow funds secured by his assets without having to liquidate
them, to meet his Partnership obligations if any were to arise.
Mr. Beach is currently involved as a defendant in a lawsuit filed in
the Circuit Court for the County of Washtenaw, Michigan. The suit was filed by
guarantors of a defaulted loan made to City Centre Partners Limited Partnership
("City Centre") and by limited partners of City Centre against Mr. Beach by
virtue of Mr. Beach being the General Partner of City Centre. Mr. Beach
believes the lawsuit to be without merit and intends to vigorously defend this
lawsuit.
Plaintiffs instituted the action against Mr. Beach in July, 1993. The
action arose out of the following circumstances: In 1988, Mr. Beach was a
co-owner of the City Centre office building in Ann Arbor, Michigan. During
1988, City Centre entered into an agreement with Mr. Beach and the other
owners for the purchase of the City Centre Building. City Centre was unable to
obtain financing in time to close the purchase according to schedule. At City
Centre's request Mr. Breach agreed to extend the deadline for closing the
purchase and to help City Centre obtain the necessary financing. In return,
City Centre agreed to pay Mr. Beach an additional $50,000 and to make him a
general partner in City Centre, which would enable him to have greater control
in collecting the sums due him under the parties' purchase agreement. Mr.
Beach was a general partner in City Centre from 1988 through July 20, 1990. As
the result of Mr. Beach's intervention, Comerica Bank ("Comerica") loaned City
Centre $600,000 for the purchase of the City Centre Building. As security for
the loan, Comerica required City Centre to execute a mortgage note and required
the limited partners and general partners, including Mr. Beach, to guarantee
the note. On July 20 1990, Mr. Beach withdrew from City Centre and assigned
his partnership interest to BRG Management, Inc. The Assignment of Partnership
Interest Agreement (the "Assignment Agreement") provided that Mr. Beach would
not be liable for any partnership obligations arising after July 20, 1990, the
date of the Assignment Agreement. Specifically, the uncontroverted affidavit
of Mr. Beach states that the parties understood the Assignment Agreement to
mean that Mr. Beach would not be responsible for any default on the mortgage
note which occurred after his withdrawal from City Centre.
At the time that Mr. Beach withdrew from City Centre, the limited
partnership was current in its payment of the mortgage note. Under the terms
of the mortgage note, City Centre had no obligation to repay the note prior to
maturity unless two events occurred: (1) City Centre defaulted on the note and
(2) Comerica exercised its option to accelerate the sums due under the note.
Over one year after Mr. Beach withdrew from City Centre, City Centre defaulted
in payment of the mortgage note. Comerica subsequently elected to accelerate
all sums due under the note and collected all amounts owing under the note from
the plaintiffs, who were guarantors under the note. After plaintiffs had paid
off the note, Comerica stamped the note "PAID". Four months after Comerica
received full payment, it assigned the note to plaintiffs. Comerica's rights
to recover under the note, in the opinion of Mr. Beach, were extinguished by
full payment prior to the assignment, so that the assignment could not and did
not transfer any rights to the plaintiffs.
Count I of plaintiff's complaint alleges that as assignees of the
mortgage note, they are entitled to recover the full amount of the note for Mr.
Beach. Count II of the complaint alleges that plaintiffs are entitled to
recover from Mr. Beach under the theories of indemnification and contribution.
Based on the above facts, Mr. Beach moved for summary disposition on August 25,
1994. Plaintiffs likewise filed a
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motion for summary disposition. After advising the parties that the Court had
not read their briefs, the Court allowed the parties five minutes for oral
argument. The Court subsequently issued a written opinion granting plaintiffs'
motion for summary disposition, asserting that (i) despite the payoff of the
note, the subsequent assignment was a valid assignment and created a
contribution or indemnity obligation of Mr. Beach; and (ii) the payments made
by the plaintiffs as guarantors of the note were not solely guaranty
obligations subject to contract claims outside the Partnership, but rather,
were payments for the benefit of the Partnership, creating an indemnity
obligation by Mr. Beach. Mr. Beach has filed a claim of appeal and the trial
court has granted Mr. Beach's motion to stay the judgment during the pendency
of his appeal. Mr. Beach believes that the decision will be reversed on
appeal. The Court's stay precludes the plaintiffs from taking action to
collect the judgment during the pendency of the appeal. Briefings on the issues
have been filed by both parties, who are awaiting a decision of the appellate
court.
Should the plaintiffs prevail in such action, it could have a
material, adverse impact upon Mr. Beach's net worth. However, Mr. Beach is of
the opinion that even if the plaintiffs were to prevail and obtain final
judgment, that his current assets can be applied in such a manner as to satisfy
the judgment and still retain a net worth of in excess of $1,000,000.
11. Competition. The Partnership will compete in the acquisition
of Property and Equipment with many other entities engaged in real estate and
equipment investment activities, some of which have greater assets than the
Partnership. In addition, the number of entities and the amount of funds
available for investment in Properties of a type suitable for investment by the
Partnership may increase, resulting in increased competition for such
investments and possible increases in the prices paid therefore. As it is
anticipated that some of the Partnership's Property leases may entitle the
Partnership to participate in gross receipts of lessees above fixed minimum
amounts, the success of the Partnership may depend in part on the ability of
those lessees to compete with similar businesses in the vicinity.
12. Lack of Independent Counsel for Investors. The investors in
this Offering have not been separately represented by independent counsel in
the formulation of this program. The attorneys, accountants and other experts
who have performed services for the Partnership have also performed the same or
similar services for some of the General Partners and their Affiliates. See
"Conflicts of Interest."
13. Assets to Secure Acquisition-Related Indebtedness and
Unrelated Business Taxable Income. The Partnership intends to acquire
Properties and Equipment using indebtedness which will be secured by such
Properties and Equipment. The Partnership also may subsequently incur secured
indebtedness relating to its Properties in order to finance improvements or to
obtain Net Sale or Refinancing Proceeds for distributions to Limited Partners.
Such activities are expected to cause a portion of the Partnership income
allocable to tax-exempt entities or organizations to be treated as unrelated
business taxable income. Secured indebtedness with respect to a particular
Property or Equipment package will not exceed 80% of the Purchase Price
thereof. In no event will such indebtedness exceed an amount equal to 35% of
the sum of Gross Proceeds plus the aggregate amount of Partnership indebtedness
secured by Partnership Assets (approximately 40% of the aggregate Purchase
Price of Assets) on a portfolio basis when incurred. See "Tax Aspects of the
Offering-Impact on Qualified Tax-Exempt Investors." Incurring indebtedness
increases the risk of possible loss. If the Partnership defaults on its secured
indebtedness, the lender may foreclose and the Partnership could lose its
investment in the Property or Equipment. Any such foreclosure would be treated
as a sale of the Property or Equipment for a price equal to the outstanding
secured indebtedness, and if the outstanding secured indebtedness exceeds the
basis of the Property or Equipment to the Partnership, the foreclosure could
generate taxable income without generating distributable cash. Although the
Partnership will attempt to utilize only non-recourse indebtedness, there can
be no assurance that such financing will be available. See "Investment
Objectives and Policies-Borrowing."
14. Subscription for Less Than the Maximum Number of Units. The
Partnership may commence operations upon sale of 2,000 Units ($2,000,000). The
potential profitability of the Partnership and its ability to diversify its
investments could be adversely affected by sale of less than the Maximum
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Number of Units. Specifically, in the event the Partnership sells only the
Minimum Number of Units, it expects to purchase approximately three Properties
and five Equipment packages, whereas with the Maximum Number of Units and
maximum financing, it expects to purchase approximately 20 Properties and 30
Equipment packages. However, as higher or lower prices for individual
Properties and Equipment packages are possible, the Partnership may acquire
greater or lesser numbers of Properties and/or Equipment packages. In the event
that only the Minimum Number of Units is sold, the success of the Partnership
will be based upon the performance of a more limited number of Properties
and/or Equipment packages, operating in potentially fewer markets. Generally,
lessees of Partnership Properties will provide at their own expense, all
furniture, fixtures and equipment, although in some cases the Partnership may
lease some or all of such furniture, fixtures and equipment to the lessee. In
such event, the Equipment would have to be leased under a separate lease with
an unrelated third party.
15. Unspecified Fund. Since the Partnership has no specified
investments, it presents increased risks and uncertainties to investors. An
investor has no information to assist him in his investment decision as to the
identification or location of specific Properties or Equipment, operating
histories of assets or leases, lease terms or other relevant economic and
financial data of the assets to be purchased by the Partnership. Since the
Partnership has not yet determined the specific Properties or Equipment it will
acquire, a delay in time may occur between the purchase of a Unit and the
Partnership's investment in Properties and Equipment which could result in a
delay in receipt of benefits, if any, to the investors.
If, during the Offering, the General Partners believe a reasonable
probability exists that the Partnership will acquire Properties or Equipment
representing 10% or more of expected Net Offering Proceeds (i.e., an agreement
in principle is negotiated or a letter of intent is signed), the Partnership
will issue a supplement to this Prospectus setting forth certain details
concerning such proposed acquisition. Acquisitions of Properties and/or
Equipment subject only to agreements in principle or letters of intent require
negotiation of final binding agreements, and there can be no assurance that any
such Properties and/or Equipment will be acquired on the same terms as
described in the agreements in principle or letters of intent. In addition,
Properties and/or Equipment which are acquired by the Partnership prior to the
termination of the Offering may not be retained unless sufficient Units in
excess of the required Minimum Number of Units are sold. In the event any
Properties and/or Equipment which are subject only to agreements in principle
or letters of intent are not acquired, or any Properties and/or Equipment which
the Partnership acquires prior to the termination of the Offering are not
retained, other Properties and/or Equipment acquired in substitution therefor
may be materially different in a number of respects.
16. Possible Loss of Limited Liability. The Partnership Agreement
provides certain rights for the holders of a majority of the Units to remove
and replace the General Partners, amend the Partnership Agreement in certain
respects, approve the sale of all or substantially all of the Partnership's
Assets and dissolve the Partnership. There is some uncertainty under present
law as to whether the exercise of these rights under certain circumstances
could cause the Limited Partners to be deemed to be general partners of the
Partnership under applicable laws, with a resulting loss of limited liability.
It should be noted that due to present and possible future uncertainties in
this area of partnership law, it may be difficult or impossible to obtain an
opinion of counsel to the effect that the Limited Partners may conduct certain
activities or exercise certain rights without jeopardizing their status as
Limited Partners. If the Limited Partners were deemed to be general partners of
the Partnership, they would be generally liable for Partnership obligations
which could be satisfied out of their personal assets. See "Summary of
Partnership Agreement."
In addition, the General Partners will seek to minimize the risks
presented by the possibility of general liability by, for example, attempting
to maintain adequate umbrella insurance coverage against liability for personal
injury and property damage occasioned by activities of the Partnership to the
extent not covered by policies carried by lessees for the benefit of the
Partnership. In connection with Property and Equipment acquisitions, the
Partnership will attempt to utilize security arrangements, such as mortgages or
deeds of trust, providing recourse only against the Properties or Equipment
constituting the security.
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17. Uninsured Losses; Costs and Availability of Insurance. Each
lessee shall be responsible for arranging for or acquiring comprehensive
insurance for Properties and Equipment acquired by the Partnership, including
casualty, liability, fire and extended coverage as is customarily obtained for
similar Properties and Equipment in amounts which the General Partners
determine are sufficient to cover reasonably foreseeable losses. However, there
are certain types of losses (generally of a catastrophic nature, such as
earthquakes, floods and wars) which are either uninsurable or not economically
insurable. Should such a disaster impact, or cause the destruction of, Property
and/or Equipment owned by the Partnership, the Partnership could lose both its
invested capital and anticipated profits from such property. See "Investment
Objectives and Policies-Investment Standards."
18. Acquiring Properties Under Construction. The Partnership
intends primarily to acquire existing Properties but under certain
circumstances may acquire the site on which a particular Property is to be
built prior to commencement of construction of the Property. It is intended
that investments in such Properties shall not exceed 10% of the Gross Proceeds
of the offering at any point in time. To the extent that the Partnership
acquires Property on which improvements are to be constructed or completed, the
Partnership may be subject to certain risks in connection with the builder's
ability to control construction costs or to build in conformity with plans,
specifications, and timetables. Although the Partnership expects to acquire
such Properties on a turnkey basis, the builder's failure to perform may still
necessitate legal action by the Partnership to rescind its purchase of a
Property (which may not be possible in the case of certain Property where the
site is purchased prior to completion), to compel performance, or to sue for
damages. Any such legal action may result in increased costs to the
Partnership. The Partnership will, however, obtain either a payment and
performance bond or a guarantee of performance for any Property which has not
been constructed at the time the Partnership acquires a particular Property.
Furthermore, in any case in which improvements are to be constructed or
completed, or in which a Property is not yet in operation, the Partnership will
be subject to the additional risks of such Properties, including the risks of
delays in completion and the resulting delay in receipt of rental income and
the risk that the franchise will not be as successful as existing franchises in
established locations or the Retail Store will not be as successful as existing
stores of such retail concern in established locations.
19. Hazardous Waste and Environmental Liens. Recent federal and
state statutes impose liability on property owners or operators for the
clean-up or removal of hazardous substances found on their property.
Additionally, such statutes allow the government to place liens for such
liabilities against affected properties, which liens will be senior in priority
to other liens. State and federal laws in this area are constantly evolving,
and the Partnership intends to monitor such laws and take commercially
reasonable steps to protect itself from the impact thereof, including obtaining
environmental audits of each Property acquired. However, there can be no
assurance that the Partnership will be fully protected from the impact of such
laws, or that such environmental audits will disclose the presence of all
hazardous wastes actually present at the Property.
20. Resale of Properties. The General Partners intend to use their
best efforts to sell Partnership Properties for cash and either subject to, or
upon assumption of, the then outstanding mortgages. Alternatively, the
Partnership may provide financing to purchasers. In the event the Partnership
finds it necessary or desirable to provide such financing, liquidation of the
Partnership may be delayed beyond the time of disposition of its Properties
until any such loans are repaid or otherwise liquidated, and there can be no
assurance that any purchaser receiving purchase money financing from the
Partnership will be able to meet his or its obligations to the Partnership. See
"Investment Objectives and Policies-Sale or Disposition of Assets."
21. Loss on Dissolution and Termination. In the event of a
dissolution or termination of the Partnership, the proceeds realized from the
liquidation of assets, if any, will be distributed to Limited Partners, but
only after the satisfaction of claims of creditors. Accordingly, a Limited
Partner's ability to recover all of his investment under such circumstances
will depend on the amount of funds so realized and claims to be satisfied
therefrom.
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22. Risk of Recharacterization of Sale and Leaseback Transactions.
The Partnership intends to enter into sale and leaseback transactions, pursuant
to which the Partnership may purchase a Property and/or Equipment from an
entity and lease such Property and/or Equipment to such entity. In the event of
the bankruptcy of such a lessee, a transaction structured as a sale and
leaseback may be recharacterized as either a financing or as a joint venture,
which may result in adverse consequences to the Partnership. For example, if
the transaction is recharacterized as a loan, the lessor can be forced to take
a repayment of its principal, thereby losing the benefit of any rent
participation payments it would otherwise be entitled to receive. Similar
adverse consequences can result if the transaction is recharacterized as a
joint venture between the lessor and lessee. As this is an evolving area of the
law, the Partnership intends to monitor such laws and take commercially
reasonable steps to protect itself from any potential adverse impact thereof.
23. Risk of Joint Ventures. Some of the Partnership's investments
may be owned by joint venture partnerships between the Partnership and another
partnership sponsored by Affiliates of the General Partners. Investments in
joint venture partnerships which own properties may involve risks not otherwise
present, including, for example, the risk that the Partnership's co-venturer
might become bankrupt, that such co-venturer may at any time have economic or
business interests or goals which are inconsistent with the interests or goals
of the Partnership or that such co-venturer may be in a position to take action
contrary to the Partnership's instructions, requests, policies or objectives.
Among other things, actions by such co-venturer might subject property owned by
the joint venture to liabilities in excess of those contemplated by the terms
of the joint venture or other adverse consequences. See "Investment Objectives
and Policies-Joint Ventures."
24. Indemnification of General Partners. The General Partners
shall have no liability to, and are held harmless and indemnified by, the
Partnership for certain actions taken by it in good faith and without
negligence or misconduct. As a result, the Partnership and the Limited Partners
may have more limited rights against the General Partners than they would
otherwise have under common law and, furthermore, may be obligated to fund the
defense of the General Partners in certain cases. See "Fiduciary
Responsibilities of the General Partners" and "Summary of Partnership Agreement
- - Indemnification of the General Partners by the Partnership."
25. Partnership Reserves. The General Partners do not intend to
initially establish working capital reserves. Thus, if amounts are required to
meet any unanticipated cash needs of the Partnership, the General Partners
would have to obtain financing from either affiliated or unaffiliated sources
to service such cash needs. However, there is no assurance that such sums would
be available when needed.
26. Investments by Qualified Pension and Profit-Sharing Trusts. In
considering an investment in the Partnership with a portion of the assets of a
trust or a pension or profit-sharing plan qualified under Section 401(a) of the
Code and exempt from tax under Section 501(a), a fiduciary should consider:
(i) whether the investment satisfies the diversification requirements of
Section 404(a)(3) of the Employee Retirement Income Security Act of 1974
("ERISA"); and (ii) whether the investment is prudent, since Units are not
freely transferable and there will not be a market in which he can sell or
otherwise dispose of the Units. The General Partners have not, and will not,
evaluate whether an investment in the Partnership is suitable for any
particular plan, but, subject to the disclosure included therein, will accept
such entities as Limited Partners if an entity meets the suitability standards.
An investment in the Partnership is expected to produce some UBTI
which may cause a Limited Partner that is a tax-exempt entity to pay a tax on
the income it is allocated by the Partnership if the total UBTI of such
tax-exempt Limited Partner exceeds $1,000. In addition, if the Partnership
incurs indebtedness to acquire or improve properties, it is likely that the
tax-exempt Limited Partners would recognize UBTI. See "Tax Aspects of the
Offering - Impact on Qualified Tax-Exempt Investors."
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Limited Partners will be provided with an annual statement of value
reporting the value of each Unit based upon an estimated amount they would
receive if Partnership Properties and Equipment were sold as of the close of
the Partnership's fiscal year and if such proceeds (without reduction for
selling expenses), together with the other funds of the Partnership were
distributed in liquidation of the Partnership. Notwithstanding the foregoing,
absent significant increases or decreases in the value of assets, it is
anticipated that the net asset value of each Unit will be deemed to be $1,000
for the first three annual statements of value following termination of the
Offering.
Finally, fiduciaries of tax-exempt Limited Partners should be aware
that the Department of Labor has adopted final regulations (the "DOL
Regulations") under 29 C.F.R. Part 2550 at Section 2550.401(b)-1 pursuant to
ERISA, which provide that an investment in a partnership by a Qualified Plan
may be deemed an investment by a Qualified Plan in the underlying assets of the
Partnership (the "Plan Assets"). If the Partnership were subject to these
rules, an investment by a Qualified Plan in the Partnership could result in a
violation by the fiduciary of several provisions of ERISA, including an
improper delegation of the duty of the fiduciary to manage the Plan Assets and
a failure to hold the Plan Assets in trust. However, the DOL Regulations
contain exemptions from the treatment of limited partnership assets as Plan
Assets. Although there can be no absolute assurance that the Partnership
Agreement and the terms of the Offering have been structured so that the
exemptions contained in the DOL Regulations would apply to the Partnership, the
General Partners will use their best efforts to structure the sales of the
Units and the operations of the Partnership to attempt to qualify under at
least one of the various exemptions. Accordingly, an investment by a Qualified
Plan in Units should not be deemed an investment in the assets of the
Partnership. See "ERISA Considerations for Qualified Plans."
MANAGEMENT
1. General Partners
The General Partners of the Partnership are Captec Franchise Capital
Corporation IV, a Michigan corporation formed in July of 1996 (the "Managing
General Partner") and Patrick L. Beach, an individual. Captec Franchise
Capital Corporation IV will serve as the Managing General Partner. The
Managing General Partner intends to commence operations concurrently with
commencement of Partnership operations. The Managing General Partner is a
wholly-owned subsidiary of Captec Financial Group, Inc. ("Captec") (for
additional information regarding Captec, see "-Parent Company" in this
Section).
The principal officers and directors of the Managing General Partner
are:
Patrick L. Beach Chairman of the Board of Directors, President and
Chief Executive Officer
W. Ross Martin Director, Senior Vice President, Treasurer, Secretary
and Chief Financial Officer
The offices of the Partnership and the General Partners are located at
24 Frank Lloyd Wright Drive, P.O. Box 544, Ann Arbor, Michigan 48108-0544,
telephone (800) 522-7832. Biographies for the officers and directors of the
Managing General Partner and Mr. Beach (who is also an officer and director of
the Managing General Partner) are set forth below.
Patrick L. Beach (age 40) is the Chairman of the Board of Directors,
President and Chief Executive Officer of the Managing General Partner, Captec,
Captec Franchise Capital Corporation II ("Captec II") and Captec Franchise
Capital Corporation III ("Captec III"). Mr. Beach is the President of Captec
Acceptance Leasing Corporation, a Michigan corporation which serves as the
originator of leases for Captec Franchise Leasing N.V. See also "- Parent
Company" in this Section regarding services provided by Captec to Captec
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Franchise Leasing N.V. Mr. Beach attended the University of Michigan and
graduated from its School of Business Administration in 1977 with a Bachelor of
Business Administration degree. From 1977 until 1980 he was employed by the
HydraMatic Division of General Motors Corp., where he served in various
manufacturing related positions including process engineering and production
supervision. From March 1980 until February 1981 he served as Production
Manager for Quick Industries, Inc. of Jackson, Michigan with responsibility for
purchasing and production management for five plastics manufacturing plants in
five states. In February 1981, Mr. Beach resigned from his previous position to
found Captec. He is responsible for the day to day management of Captec and its
Affiliates. Mr. Beach also served as Chairman and President of Illiana
Printing, Inc., the master franchisor for American Speedy Printing Centers,
Inc. in the states of Illinois and Indiana, from 1989 until it was sold in
1991. He also served as Chairman of Wendy's of San Diego, Inc., a 27 - unit
franchisee of Wendy's International, from 1986 until it was sold in 1990. See -
"Risk Factors - Dependence on General Partners; Lack of Experience."
Mr. Beach is currently involved as a defendant in a lawsuit filed in
the Circuit Court for the County of Washtenaw, Michigan. The suit was filed by
guarantors of a defaulted loan made to City Centre Partners Limited Partnership
("City Centre") and by limited partners of City Centre against Mr. Beach by
virtue of Mr. Beach being the general partner of City Centre. Mr. Beach
believes the lawsuit to be without merit and intends to vigorously defend this
lawsuit. See "Risk Factors - Dependence on General Partners; Lack of
Experience."
W. Ross Martin (age 35) is a Director, Vice President, Treasurer and
Chief Financial Officer of the Managing General Partner, Captec II, and Captec
III, and a Director, Senior Vice President, and Chief Financial Officer of
Captec. Mr. Martin graduated in 1982 from the University of Michigan School of
Business Administration with a Bachelor of Business Administration degree. He
is also a Certified Public Accountant. From 1982 until 1985, he was employed by
Deloitte Haskins & Sells, most recently as senior consultant in that firm's
Emerging Business Services practice. Mr. Martin joined Captec in 1985 as
Controller and was promoted to Vice President - Finance in 1986 and Chief
Financial Officer in 1994. He is responsible for the treasury, corporate
finance and strategic planning duties of Captec as well as overseeing the
Accounting and Finance Departments.
2. Parent Company.
Captec Financial Group, Inc. ("Captec") was founded in 1981 and its
headquarters are located in Ann Arbor, Michigan. During the early years,
Captec was a small ticket, general equipment lessor. Since that time, Captec
has increasingly focused its efforts on the franchise, chain restaurant and
specialty retail customers. Captec currently provides equipment lease
financing, real estate net lease financing, mortgage loan financing and
construction financing. Captec currently has 54 employees and is managed by
its President and senior officers who have aggregate leasing experience of
nearly 50 years.
At March 31, 1996, Captec and its affiliates (including off-balance
sheet managed funds) had combined debt and equity capital resources of
approximately $400 million. Included in this total are three separate
facilities totalling $180 million. As of ______, 1996, the current portfolio
under management consists of 44% equipment leases, 36% triple-net leased real
estate and 20% mortgage loans.
The principal officers of Captec are:
Patrick L. Beach Chairman, President and Chief Executive Officer
George R. Beach Director and Senior Vice President
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W. Ross Martin Director and Senior Vice President - Finance, and
Chief Financial Officer
Gary A. Bruder Director and Senior Vice President -
Administration
H. Reid Sherard Director, and Senior Vice President - Sales and
Marketing
Thomas B. Jahncke Senior Vice President - Securities, National
Sales Director
Biographical information for Messrs. Beach (Patrick), and Martin is
set forth above. Biographical information for the other officers of Captec is
set forth below.
George R. Beach (age 70) is a Director and Senior Vice President of
Captec. Mr. Beach received a Juris Doctorate from the University of Detroit in
1952, and was engaged in the private practice of law through 1970 in Jackson,
Michigan. From 1970 through 1975, he was employed as Vice President and General
Counsel of a national credit life insurance operation, and served as a director
of a related company based in the United Kingdom during this time. From 1975
until joining Captec in 1981, Mr. Beach was engaged in the private practice of
law in Burlingame, California. Mr. Beach is responsible for managing Captec's
Portfolio Management Department as well as serving as general counsel to
Captec. Mr. Beach is Patrick L. Beach's father.
Gary A. Bruder (age 42) joined Captec in May of 1995 as Senior Vice
President-Administration. Mr. Bruder manages Captec's Documentation
Department and co-manages its Credit Department. In addition, he is
responsible for office management functions. In this role, he is responsible
for day-to-day back office operations of the Company, particularly overseeing
the processing of new financing transactions. Prior to joining Captec, Mr.
Bruder practiced law for fifteen years as a principal of the 250 person law
firm of Miller, Canfield, Paddock & Stone, P.L.C. and served as the Resident
Director of the Ann Arbor office of this law firm. Mr. Bruder holds a Juris
Doctorate from Wayne State University Law School and a Bachelor of Architecture
Degree from the University of Michigan School of Architecture.
H. Reid Sherard (age 48) joined Captec in July 1994 as Senior Vice
President - Sales and Marketing. He manages the sales & marketing department
which is responsible for the origination and acquisition activities related to
Captec's equipment and real estate financing products. Mr. Sherard was
previously employed by Franchise Finance Corporation of America from 1986 to
1994, holding several positions including Vice President, Acquisitions. In
that capacity, he directed the real estate marketing and closing activities of
that company and was responsible for the acquisition of over one half billion
dollars of net leased restaurant properties. Prior to that, he was employed
for five years by the National Bank of Georgia, most recently as Group Vice
President, Regional Manager, for eight years prior by the South Carolina
National Bank, and for three prior years at American Lease Plans, Inc. Mr.
Sherard graduated from Charleston Southern University in 1970 with a Bachelor
of Science in Business Administration degree.
Thomas B. Jahncke (age 50) joined Captec in May 1995 as Senior Vice
President - Securities, National Sales Director. He manages the securities
department and is also responsible for wholesaling for the Northeast territory.
Mr. Jahncke has been involved in the real estate and finance industry for over
25 years serving as a Mortgage Loan Officer, Principal and Chief Executive
Officer of a NASD Broker/Dealer and President of an investment marketing firm.
Mr. Jahncke received a BS from Cornell University and an MBA - Finance/Real
Estate from the University of Michigan Business School.
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INVESTMENT OBJECTIVES AND POLICIES
1. General. The Partnership intends to acquire income-producing
commercial Properties and Equipment which will be leased on a "triple net"
basis primarily to operators of national chain and nationally franchised
fast-food, family style and dinner house restaurants as well as other
franchised and chain businesses such as specialty retail businesses. The
Partnership also intends to acquire Properties that will be leased on a "double
net" (the Partnership being responsible for the maintenance of the roof,
exterior walls, and/or parking lot for such Properties) or "triple net" basis
to various Retail Concerns. The Partnership intends to use not less than 75%,
but not more than 90%, of Net Offering Proceeds, to acquire Properties and up
to 25%, but not less than 10%, to acquire Equipment. Of the 75% of Net
Offering Proceeds that the Company intends to use to acquire Properties, the
Company does not intend to use more than 25% of such proceeds to acquire
Properties to be leased to Retail Concerns. The Partnership's actual portfolio
may differ from these estimates initially and/or during the life of the
Partnership. The principal investment objectives of the Partnership, with
respect to such Properties and Equipment are:
(i) preservation and protection of capital;
(ii) distribution of current cash flow from the
Partnership's leases;
(iii) capital appreciation of Partnership Properties;
(iv) generation of increased income and protection against
inflation through escalations in the base rent or
participation in gross revenues of the lessees of
Partnership Properties; and
(v) deferral of the taxation of a portion of Partnership
cash distributions for Limited Partners.
The Partnership's objectives with respect to Properties will be to
maximize long term returns, with Equipment intended to enhance short term
returns. There can be no assurances these objectives will be attained.
2. Types of Investments. Although no franchises have been
selected for investment and no agreements to purchase Properties or Equipment
will be entered into until after the date of this Prospectus, the Partnership
expects to acquire Properties primarily for lease to franchisors and/or
franchisees of national fast food, dinner house and family-style restaurant
franchises such as Applebee's, Arby's, Boston Market, Burger King, KFC
(formerly known as Kentucky Fried Chicken), Chili's, Denny's, Golden Corral
Family Steakhouses, Hardees, Pizza Hut, Taco Bell, T.G.I. Friday's and Wendy's.
The Partnership expects to acquire Equipment for lease to major national and
regional retail concerns and franchisors and/or franchisees of the
above-referenced restaurant franchises as well as franchisors, franchisees, and
operators of other franchised or chain businesses. In selecting specific
franchises, the General Partners will consider the following:
- - Franchisor's Operating History--including a review of the franchise
offering circular, the financial condition of the franchisor, a study
of the historical failure rates experienced by the franchise, and
consideration of the number of years in the business of franchising;
- - Evaluation & Survey of "Average" Franchisees - A review of selected
"average" franchisee financial statements and a survey of franchisees;
- - Evaluation of Franchisor's Ability to Compete - A review of the direct
competition of the franchisor with regard to the ability of the
franchisor to remain competitive in the market;
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- - Number of Franchise Locations & Growth Plans.
Again, although no Retail Concerns have been selected for investment
and no agreements to purchase Properties will be entered into until after the
date of this Prospectus, the Partnership expects to acquire Properties for
lease to national and regional Retail Concerns. The Partnership anticipates
that these leases will be for 10-25 year terms. The Partnership expects to
enter into leasing arrangements with Retail Concerns such as Blockbuster Video,
Hollywood Video, Borders Books, Office Max, Staples, Pier 1 Imports, and
Michaels.
The Property leases are expected to provide for a base minimum annual
rent, with provisions for fixed increases on specific dates or indexation of
rent to indices such as the Consumer Price Index and/or percentage rents.
Equipment will be leased pursuant to Full Payout Leases. The General Partners
estimate that with respect to Properties, approximately 30% to 50% of the
Partnership's investment will be allocated to the cost of land and
approximately 50% to 70% will be allocated to the cost of the building. The
success of a particular franchise concept, as well as the franchisor's ability
to support its franchisees, or the success of a particular Retail Store concept
will affect the income which the Partnership derives from its Properties and
Equipment.
Acquisition of a Property to be used as a restaurant franchise
typically involves an investment of between $500,000 and $3,500,000, while the
cost of a Property for a Retail Concern typically involves an investment of
$1.5 million to $4.0 million. Acquisition of Equipment for a franchised
restaurant typically involves an investment of approximately $200,000 to
$750,000. The Partnership therefore expects to purchase approximately 20
Properties and 30 Equipment packages, assuming that the Maximum Number of Units
is sold, 80% of Net Offering Proceeds are allocated to purchase Properties and
leverage equal to 35% of the sum of Gross Proceeds and the aggregate amount of
Partnership indebtedness secured by Partnership Assets (approximately 40% of
the aggregate Purchase Prices of Partnership Assets) is used to acquire
Properties and/or Equipment. Under the same assumptions, if only the Minimum
Number of Units is purchased, the Partnership expects only to purchase
approximately three Properties and five Equipment packages. As higher or lower
prices for individual Properties and Equipment packages are possible, the
Partnership may acquire greater or lesser numbers of Properties and/or
Equipment packages. See "Risk Factors - Subscription for Less Than the Maximum
Number of Units."
The Partnership will commit not less than 83.0% of Gross Proceeds to
Investments in Assets. The Partnership will also pay the Debt Fee (.0677% for
each 1% of indebtedness (calculated as the aggregate amount of Partnership
indebtedness secured by Partnership Assets as a percentage of the aggregate
Purchase Prices of such Assets)) to the General Partners or their Affiliates,
but such fee shall be paid out of the proceeds received from such indebtedness
(as opposed to out of Gross Proceeds). However, the Acquisition Fees (which
include the Debt Fee) may not exceed 5% of the aggregate Purchase Prices of
Properties and/or Equipment and the Acquisition Fees payable to the General
Partners will be reduced if and to the extent required to comply with the
foregoing requirement.
Properties will be selected for acquisition based on an examination
and evaluation by the General Partners or an Affiliate of the potential value
of the site, the financial condition and business history of the proposed
lessee, the demographics of the area in which the Property is located or to be
located, the proposed purchase price and lease terms, geographic and market
diversification, and potential operating results. See "-Investment Standards"
in this Section. Similar analyses will be utilized in selecting Equipment. In
certain cases, the Partnership may become a co-venturer or general partner in a
joint venture or general partnership which will own a Property or Equipment.
The Partnership may also acquire Property through the acquisition of
substantially all of the interests of an entity which in turn owns a Property.
The Partnership may participate in sale-leaseback transactions, but expects to
do so only with respect to Properties and then only when the Property has an
established track record. The Partnership anticipates that only fee interests
in real property will be acquired, although other interests (including
acquisitions of buildings, with the underlying land being subject to a
long-term ground lease) may be acquired if it is deemed to be advantageous to
the Partnership. See "-Joint Ventures" in this Section. In each such case, the
Partnership's cost to purchase an
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interest in such Property and/or Equipment would decrease and the total number
of Properties and/or Equipment which the Partnership would be able to acquire
will increase. See "Risk Factors - Risk of Joint Ventures."
The General Partners or an Affiliate will negotiate a lease agreement
with the lessee before a Property or Equipment package is acquired. For the
purpose of providing further geographic and market diversity, the Partnership
will not invest in both Properties and Equipment to be leased at the same
location. Thus, if the Partnership invests in Property, the lessee will be
required to lease Equipment from another party; and if the Partnership invests
in Equipment, the lessee will be required to lease its Property from another
party. In some cases, affiliates of the General Partners may provide this
additional financing for the lessee under a separate lease with the lessee.
Some lease agreements may be negotiated to provide the lessee with the
opportunity to purchase the Property and/or Equipment under certain conditions,
either at fair market value or through a right of first refusal to purchase the
Property and/or Equipment at a bona fide price offered by a third party. See
"Conflicts of Interest - Resolution of Conflicting Opportunities."
The Partnership intends primarily to acquire existing Properties but
under certain circumstances may acquire the site on which a particular Property
is to be built prior to commencement of construction of the Property.
Investments in such Properties shall not exceed 10% of the Gross Proceeds of
the offering at any point in time. The Partnership may also participate in the
construction or development of Properties or render services in connection with
such development or construction, but expects to do so only in the case of
Retail Concerns or when the franchisee is operating other existing franchises.
Where remodeling is required for a building occupied by a lessee, the
Partnership typically will pay a negotiated maximum amount, based on the
lessee's estimate of the cost of remodeling, either upon completion or in
installments commencing prior to completion. In such instances, the Partnership
will also have the right to review the lessee's books during and following
completion of the remodeling to verify actual costs. In the event of
substantial disparity between estimated and actual costs, an adjustment in
purchase price may be negotiated.
The General Partners and their Affiliates may purchase Property and
Equipment in their own name, and assume loans in connection therewith and
temporarily hold title thereto for the purpose of facilitating the acquisition
of such Property and/or Equipment, borrowing money or obtaining financing for
the Partnership, or any other purpose related to the business of the
Partnership, in accordance with the terms set forth in the Partnership
Agreement. For purposes hereof, such temporary holding period will not,
however, exceed 12 months measured from the date of acquisition by the General
Partners or their Affiliates.
3. Investment Standards. In making investments, the General
Partners will consider relevant factors, including the condition and proposed
use of the Property and/or Equipment, income-producing capacity, the financial
condition of the lessee, and with respect to Properties, the prospects for
long-term appreciation. In no event will Property or Equipment be acquired
unless a satisfactory lease commitment has been obtained from a suitable lessee
as further described below.
In selecting specific Properties and lessees, the General Partners
typically will require the following:
(i) Base annual rent will provide a specified minimum
return on the contract purchase price of the Property; the majority of the
leases will provide for fixed increases on specific dates or indexation of
rents to indices such as the Consumer Price Index. Leases may also provide for
percentage rents calculated to provide rents equal to a percentage of the
lessee's gross sales if greater than the base rent; and
(ii) The initial lease will have a term of between seven
and twenty years.
In selecting specific Equipment, the General Partners typically will
require the following:
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(i) Full Payout Leases providing for fixed rents
structured to return 100% of the cost of the Equipment plus yield a return
equivalent to market interest rates over the lease term; and
(ii) The leases are expected to have terms of five to
seven years with residual values of Equipment at the end of such terms expected
to be minimal (approximately 10% of original cost).
The terms and conditions of any lease entered into by the Partnership
with regard to a tenant may vary substantially from those described herein.
However, predominantly all of the leases for franchise Properties are expected
to be "triple net" Leases, which means that the lessees will be required to pay
all real estate and other taxes and assessments, utilities, insurance and costs
of maintenance and repairs. Leases for Retail Concerns may be on a "double
net" basis that will require the Partnership to be responsible for the
maintenance of the roof, exterior walls, and/or parking lot for such
Properties.
The standard purchase agreement under which a Property will be
acquired by the Partnership will provide, in most instances, as a contingency
to closing, that: (i) the lessee has demonstrated that it satisfies the
Partnership's credit worthiness and other criteria; or (ii) the lease is
guaranteed by an entity meeting certain net worth and credit criteria
determined solely by the General Partners. The Partnership also may lease
Properties to certain lessees who do not meet such criteria if they obtain a
commitment for the issuance of a policy of rental guaranty insurance
satisfactory to the Partnership by a reputable and financially stable carrier.
No Properties or Equipment will be purchased by the Partnership unless a
satisfactory lease commitment has been obtained from a lessee who meets one of
the alternatives discussed above. See "-Lessee Creditworthiness" in this
Section.
Lessees will be required to maintain liability insurance covering the
Property leased. The third party liability coverage will insure, among others,
the Partnership and the General Partners. Additionally, lessees will be
required to maintain property insurance naming the Partnership as the insured
for fire and other casualty losses in an amount equal to the full value of the
Property subject to the lease. In general, leases will permit assignment or
subleasing with the Partnership's prior written consent, but the original
lessee will remain fully liable under the lease unless the assignee meets
certain income and net worth tests.
If the Partnership desires to sell Property or Equipment pursuant to a
bona fide offer, the lessee of that Property or Equipment may have the right to
purchase such Property or Equipment for the same price, and on the same terms
and conditions, as contained in the offer. In certain cases, the lessee may
also have the right to repurchase Property or Equipment from the Partnership at
specific times during the lease term at a purchase price equal to appraised
value at the time of sale. The Partnership does not anticipate entering into
purchase agreements or leases which allow the seller or lessee to acquire
Property or Equipment at any price below its fair market value. Although
capital appreciation of Partnership Properties is an investment objective,
Partnership Equipment is expected to have minimal residual value (approximately
10% of the original cost) at the end of the lease terms.
The leases are generally expected to provide that the following events
will, among others, constitute a default under the Lease:
(i) Insolvency or bankruptcy of the lessee, provided the lessee
will have the right, under certain circumstances, to cure such default;
(ii) Failure by the lessee to make timely payment of rent or other
charges due and payable under the Lease, if such failure continues for a
specified period of time after notice from the Partnership of such failure;
(iii) Failure by the lessee to pay all applicable taxes and
assessments, maintenance, repair, utility and insurance costs; and to maintain
all Property and/or Equipment in good order and repair; and
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(iv) Failure by the lessee to comply with any of its other
obligations under the lease if such failure (for example, the discontinuance of
operations of a leased Property) continues for a specified period of time.
Upon default by the lessee, the Partnership would have the right under
the lease and under most state laws to evict the lessee and/or repossess
Equipment, re-lease the Property or Equipment to others and hold the lessee
responsible for any deficiency in the minimum lease payments. Similarly, if the
Partnership determines not to re-lease the Property or Equipment, it could sell
the Property or Equipment, although it is not anticipated the Partnership will
sell any Property prior to seven to ten years after the commencement of the
Lease on such Property. In general, the lessee will remain liable for all rent
due under the Lease to the extent not paid by a new lessee.
A discontinuance of operations and, therefore, a default, may occur
even if the particular location is profitable because even profitable locations
are occasionally converted to alternative or more profitable uses.
4. Lessee Creditworthiness. The General Partners and their
Affiliates have developed specific standards for determining the
creditworthiness of potential lessees of Partnership Properties and Equipment.
The Partnership will condition the purchase of each Property and/or Equipment
package upon the lessee's ability to demonstrate that it satisfies the
Partnership's creditworthiness standards and other criteria or the lease is
guaranteed by an entity meeting certain net worth and credit criteria
determined by the General Partners. In addition, franchisees to whom the
Partnership leases Properties must be established multi-unit operators having a
minimum of three existing units.
5. Borrowing. The Partnership intends to incur mortgage or
secured indebtedness to acquire Properties and/or Equipment by borrowing from
banks, other institutional lenders or private lenders and may, in the future,
borrow funds to finance improvements to existing Properties. The Partnership
Agreement limits the amount of mortgage or other secured indebtedness which may
be incurred with respect to acquisition of any single Property or Equipment
package to 80% of its Purchase Price and with respect to subsequent financing
or refinancing to 80% of appraised value provided, however, that in no event
will aggregate mortgage or other secured indebtedness exceed an amount equal to
35% of the sum of Gross Proceeds and the aggregate amount of Partnership
indebtedness secured by Partnership Assets (approximately 40% of the aggregate
Purchase Prices of Partnership Assets) when incurred. The Partnership will
endeavor to obtain level payment financing, meaning that the amount of debt
service payable would be substantially the same each year, although some
financing may provide for a so-called "balloon" payment. It is anticipated that
such financing may be obtainable only on a recourse basis and that in some
instances cross-collateralization of Partnership Assets may be required. As
with non-recourse financing, the Limited Partners would have no personal
liability for such indebtedness.
The Partnership's borrowing policy was established to limit borrowing
to a level which is believed to be generally beneficial for all Limited
Partners when comparing the potential economic and tax benefits against the
increased risks associated with leverage. See "-Sale or Disposition of Assets"
in this Section. However, such indebtedness may cause the income or gain
allocated to tax-exempt Limited Partners to be taxed as unrelated business
taxable income. See "Tax Aspects of the Offering - Impact on Qualified
Tax-Exempt Investors."
6. Sale or Disposition of Assets. The General Partners anticipate
that if market conditions permit, they will commence sale of Partnership
Properties within seven to ten years after acquisition. As Equipment will be
leased under Full Payout Leases with average terms of five to seven years and
is expected to have limited residual value at the end of such lease terms, it
is anticipated that Equipment generally will be sold to the lessee at the end
of lease terms for minimal amounts (approximately 10% of original cost). In no
event will the Partnership reinvest Net Sale or Refinancing Proceeds received
commencing four years after the date on which the Partnership terminates this
Offering. It is expected that
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leases of certain Properties may give the lessee the right to purchase the
Property seven to ten years after the date of the lease at the Property's fair
market value as determined by an independent appraisal at the time of sale.
Additionally, certain leases may grant the lessee an option to purchase a
percentage interest in the Property at a price based on the fair market value
as determined by an independent appraisal at the time the option is exercised.
See "-Investment Standards" in this Section. The determination of whether
particular Properties or Equipment should be sold or otherwise disposed of will
be made after consideration of relevant factors, including performance or
projected performance of the Property or Equipment and market conditions, with
a view toward achieving the principal investment objectives of the Partnership.
The Partnership's general policy will be to sell Properties and/or
Equipment on an all cash basis. However, under certain circumstances a purchase
money obligation secured by a lien on the Property or Equipment may be taken as
part payment and there are no limitations or restrictions on the Partnership
taking such purchase money obligations. The terms of payment to the Partnership
will be affected by custom in the area in which the Property or Equipment is
located and the then prevailing economic conditions. To the extent the
Partnership receives notes and other property in lieu of cash, such proceeds
(other than any interest payable thereon) will be excluded from Net Sale or
Refinancing Proceeds until and to the extent the notes or other property are
actually paid, sold, refinanced or otherwise disposed of and, therefore, the
distribution of the proceeds of a sale to the Limited Partners may be delayed
until such time. In some cases, the Partnership may receive payments (cash and
other property) in the year of sale in an amount less than the selling price,
with subsequent payments being spread over a number of years. It is possible
that such purchase money obligations would be structured to provide for a
"balloon" payment of the entire balance of principal at maturity.
7. Change in Investment Policies. The Limited Partners have no
voting rights with respect to the establishment or implementation of the
investment objectives and policies of the Partnership, all of which are the
responsibility of the General Partners. However, the General Partners cannot
modify the principal investment objectives described herein under the caption
"Investment Objectives and Policies" without first obtaining the written
consent or approval of the Limited Partners controlling a majority of the
Units.
8. Joint Ventures. The Partnership may invest in partnerships or
joint venture arrangements with persons formed by the General Partners or any
of their Affiliates if all of the following conditions are met: (i) the two
partnerships or entities have substantially identical investment objectives;
(ii) the Partnership will not incur any duplicate property management or other
fees; (iii) the compensation to the General Partners and their Affiliates must
be substantially identical in both partnerships or entities; (iv) the
Partnership must have a right of first refusal to buy the interest of the other
joint venture partner if said other partner wishes to sell the property held by
such joint venture; and (v) the investment by each such joint venture partner
must be on substantially the same terms and conditions. The Partnership's
ability to enter into such a joint venture with another person formed by the
General Partners or their Affiliates may be important if the Partnership wishes
to acquire an interest in a specified property but does not have sufficient
funds (or, at the time it enters into a commitment to acquire a specified
property, cannot determine whether it will have sufficient funds) to acquire
the entire property.
The Partnership may invest in partnerships or joint venture
arrangements with persons other than Affiliated partnerships only under the
following conditions: (a) there are no duplicate property management or other
fees; (b) the investment of each entity is on substantially the same terms and
conditions; (c) the Partnership obtains a controlling interest in the
partnership or joint venture; and (d) the Partnership must have a right of
first refusal to buy if its joint venture partner wishes to sell the Property
or Equipment held in such joint venture.
It should be noted that except when the Partnership has a controlling
interest in a joint venture, there is a potential risk of an impasse on joint
venture decisions and there can be no assurance that the Partnership will have
sufficient financial resources to exercise its right of first refusal.
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9. Certain Investment Limitations. The Partnership will not: (i)
issue Units in exchange for Property or Equipment or in ways other than
pursuant to the terms of the Offering; (ii) issue senior securities except
notes to banks or financial institutions; (iii) make loans to the General
Partners, their Affiliates or other persons; (iv) invest in or underwrite the
securities of other issuers (provided, however, that the Partnership may
temporarily invest Partnership funds in short-term, highly liquid investments,
where there is appropriate safety of principal); (v) operate in such a manner
as to be classified as an "investment company" for purposes of the Investment
Company Act of 1940; (vi) invest in real estate mortgages except in connection
with the disposition of one or more of the Properties; (vii) purchase or lease
any Property or Equipment from the General Partners or their Affiliates except
for a purchase of Property or Equipment which such persons have temporarily
purchased and held title to on behalf of the Partnership, and then only at
their cost (including their cost of carrying the Property and/or Equipment
during such interim period); (viii) sell or lease Property or Equipment to the
General Partners or their Affiliates; (ix) engage in the purchase and sale (or
turnover) of investments other than as set forth in this Prospectus; or (x)
repurchase the Units other than as described in "Right to Tender Units for
Purchase."
10. Appraisals. All Property acquisitions made by the Partnership
will be supported by an appraisal prepared by a competent, independent
appraiser who is a member in good standing of the American Institute of Real
Estate Appraisers prior to the purchase of the Property. The contract purchase
price of each Property will not exceed its appraised value. It should be noted,
however, that appraisals are estimates of value and should not be relied on as
measures of true worth or realizable value. The appraisal will be maintained in
the Partnership's records for at least five years and copies of such appraisals
will be available for review by Limited Partners upon their request.
11. Return of Uninvested Proceeds. Any proceeds of this Offering
which have not been invested in Property or Equipment or held as reasonable
working capital reserves within the later of: (i) 24 months after the original
effective date of this Prospectus; or (ii) 12 months after the termination of
the Offering, will be returned to the Limited Partners. All funds released to
the Partnership from the escrow account after sale of the Minimum Number of
Units will be available for the general use of the Partnership until the
expiration of the period discussed above. Funds will not be segregated or held
separate from other funds of the Partnership pending investment.
Prior to sale of the Minimum Number of Units, subscription proceeds
will be held in escrow and invested in federally insured bank accounts (e.g.,
money market deposit accounts), short-term certificates of deposit, short-term
government securities and any other investments permitted under Rule 15c2-4 of
the Securities Exchange Act of 1934, as amended. Pending investment in
suitable Properties and/or Equipment, the Partnership will invest Net Offering
Proceeds in United States government securities, certificates of deposit of
banks having assets in excess of $100,000,000, bank repurchase agreements
covering the securities of the United States government or governmental
agencies, bankers' acceptances, commercial paper rated A or better by Moody's
Investors Service, Inc. and/or money market funds having assets in excess of
$100,000,000 or any combination of the same or similar investments.
12. Other Policies. In determining whether to purchase a
particular Property or Equipment package, the Partnership may first obtain an
option to purchase such Property or Equipment. The amount paid for the option,
if any, usually would be subject to forfeiture unless the Property or Equipment
were purchased and normally would be credited against the purchase price if the
Property were purchased.
The Partnership is not a real estate investment trust and, therefore,
is not subject to the restrictions on its activities imposed on real estate
investment trusts qualified under the Code.
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PRIOR OFFERINGS
The information in the section of this Prospectus entitled Prior
Performance Tables contains summary information concerning operations on two
prior public programs, Captec Franchise Capital Partners L.P. II ("Captec L.P.
II") and Captec Franchise Capital Partners L.P. III ("Captec L.P. III"), which
had investment objectives that were substantially similar to those of the
Partnership. These programs were sponsored by Captec Franchise Capital
Corporation II and Captec Franchise Capital Corporation III, respectively, each
an affiliate of Captec Financial Group, Inc. which is the parent of Captec
Franchise Capital Corporation IV and certain of its Affiliates. Captec L.P. II
terminated its offering on May 6, 1994. A total of $1,940,500 was raised from
194 investors in Captec L.P. II. As of July 31, 1996, Capec L.P. II had
invested its net capital from the sale of limited partnership units together
with proceeds from issuance of a note payable, in two net leased real estate
properties for a total cost of $1,852,202 and four equipment packages for a
total cost of $547,069. Captec L.P. II purchased the land and building
comprising a Taco Cabana restaurant located in Las Vegas, Nevada and acquired a
partial interest through a joint venture in the land and building comprising a
Kenny Rogers Roasters restaurant located in Tampa, Florida. Equipment packages
were purchased to be used in the following franchised restaurants: Checkers
Drive-In Restaurant located in Kissimmee, Florida; Popeye's Restaurant located
in Savannah, Georgia; Schlotzsky Deli located in Huntsville, Alabama; and
Italian Oven located in Ashland, Kentucky.
Captec L.P. III commenced the offering of up to 20,000 Units on August
12, 1994 and broke impound with the minimum number of units on January 24,
1995. As of ________, 1996, Captec L.P. III had accepted subscriptions for
_________ Units and funds totaling $___________ from _____ investors. As of
__________, 1996, Captec L.P. III has invested in the following land and
buildings: Boston Market, Raleigh, North Carolina; Applebee's Neighborhood
Grill & Bar, Mt. Vernon, Illinois; Church's Chicken, San Antonio, Texas; Red
Robin Burger & Spirits Emporium, Grapevine, Texas; and Boston Market, Ewing
Township, New Jersey. All of the property purchased is leased on a
"triple-net" basis. Captec L.P. III has purchased the following Equipment as
of __________, 1996: Red Robin Burger & Spirits Emporium, Ft. Collins,
Colorado; Kenny Rogers Roasters, Chattanooga, Tennessee; Checkers Drive-In
Restaurant, Marlow Heights, Maryland; Kenny Rogers Roasters, Phoenix, Arizona;
Arby's Restaurant, Greenville, North Carolina; Denny's Restaurant, Lakeland,
Florida; Checkers Drive-In Restaurant, N. Palm Harbor, Florida; Denny's
Restaurant, Crystal River, Florida; and Denny's Restaurants in various
locations in the state of Oregon.
It should be noted that although Captec Financial Group, Inc. and its
affiliates have had significant experience in and related to the franchise
industry, only two of these programs had investment objectives similar to those
of the Partnership and neither involved the leasing of Properties to Retail
Concerns as opposed to franchisees. See "Management." Captec Franchise Capital
Partners L.P. I, a private limited partnership with investment objectives
similar to those of the Partnership, withdrew its offering upon commencement of
the offering by Captec L.P. II. Investors should note that by acquiring Units
in the Partnership, they will not be acquiring any interest in the prior
program referenced in the Prior Performance Tables.
WHO SHOULD INVEST
GENERAL
An investment in Units involves certain risks and is suitable only as
a long-term investment for persons of adequate financial means who have no
immediate need for liquidity in their investment. Units will be sold only to
persons who represent in writing: (i) that they have a net worth (excluding
home, home furnishings and automobiles) of at least $45,000 and that (without
regard to their investment herein) they have an annual income of at least
$45,000 or that they have a net worth (excluding home, home furnishings and
automobiles) of at least $150,000 or (ii) that they are purchasing in a
fiduciary capacity for a person
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who meets such conditions. In addition to meeting the net worth requirements
outlined above, Pennsylvania residents' purchase of Units may not exceed 10% of
the greater of his/her net worth or annual gross income (lower of current or
estimated).
All investors, including Tax-Exempt Investors such as Individual
Retirement Accounts ("IRA") established under Section 408 of the Internal
Revenue Code of 1986, as amended (the "Code"), and qualified employee pension
or profit-sharing trusts, Keogh Plan Trusts and other entities generally exempt
from federal income taxation (such as charitable, religious, scientific or
educational organizations), must purchase a minimum of two Units ($2,000). The
minimum subscription for Minnesota, North Carolina and South Carolina investors
is two and one-half Units ($2,500). Residents of Nebraska must have minimum
subscriptions of five Units ($5,000). The minimum subscriptions for Tax Exempt
Investors who are residents of Nebraska is two Units ($2,000). In the case of
sales to fiduciary accounts, the suitability standards set forth above must be
met by either the beneficiary, the fiduciary account or the person who directly
or indirectly supplied the funds for the purchase of the Units. An investment
in the Partnership may generate unrelated business taxable income for
Tax-Exempt Investors.
The Participating Dealer Sales Agreements between the Partnership and
Participating Dealers require such broker-dealers to make diligent inquiries as
required by law of all prospective purchasers in order to ascertain whether a
purchase of Units is suitable for such person and to transmit promptly to the
Partnership the fully completed subscription documentation and any other
supporting documentation reasonably required by the General Partners. By
executing the subscription agreement (the "Subscription Agreement"), tendering
payment for Units and by acceptance of the confirmation of purchase or delivery
of the Units, an investor represents that it satisfies any applicable
suitability standards.
In addition, each broker-dealer will, by completing the Subscription
Agreement, acknowledge its determination that the Units are a suitable
investment for the investor, and will be required to represent and warrant its
compliance with applicable laws requiring the determination of the suitability
of the Units as an investment for the subscriber. The Partnership and/or any
Participating Dealer may not complete a sale of Units to Nebraska residents
until at least five business days after the date the Nebraska residents receive
a final Prospectus. The Partnership will, in addition to the foregoing,
coordinate the processes and procedures utilized by the Participating Dealers
and, where necessary, implement such additional reviews and procedures deemed
necessary to assure the adherence by investors to the suitability standards set
forth herein.
The Partnership will use its best efforts to structure the acquisition
of Properties and Equipment so as to minimize the risk that Tax-Exempt
Investors will realize unrelated business taxable income. Nevertheless, there
can be no assurance that the Partnership will successfully acquire Properties
and Equipment or structure particular activities so as to minimize the risk of
unrelated business taxable income.
FOREIGN INVESTORS
The anticipated activities of the Partnership will likely constitute a
United States trade or business and a permanent establishment within the
meaning of the Internal Revenue Code (the "Code") and income tax treaties
between the United States and foreign jurisdictions (the "Tax Treaties"). A
foreign investor who qualifies will be required to file a United States tax
return and pay United States taxes at regular United States rates on his share
of any Partnership net income. However, a foreign investor will be subject to
tax and withholding on the Partnership's rental income from the ownership of
Properties and Equipment. Tax treaties between the United States and the
foreign investor's country could eliminate or reduce the withholding
requirement. See "Tax Aspects of the Offering - Tax Aspects for Foreign
Individuals and Corporations."
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HOW TO SUBSCRIBE
Except as described below, an investor who meets the qualifications
set forth above may subscribe for Units by completing and executing (or in the
case of fiduciary accounts, the person authorized to sign on such investors
behalf) the Subscription Agreement, a copy of which is included herein as
Exhibit B and delivering it to the Participating Dealer whose name appears
thereon, together with a check payable to "Michigan National Bank, Escrow Agent
for Captec Franchise Capital Partners L.P. IV" prior to the sale of the Minimum
Number of Units, or "Captec Franchise Capital Partners L.P. IV" after the sale
of the Minimum Number of Units, in the amount of the full purchase price of the
Units for which he wishes to subscribe. Complete instructions are included in
this Prospectus on page I-1. For additional information, see "Plan of
Distribution."
PLAN OF DISTRIBUTION
GENERAL
The Offering is being made on a "best efforts, part or none" basis
through broker-dealers who are members of the National Association of
Securities Dealers, Inc. (the "Participating Dealers"). The Offering is
conditioned upon sale of the Minimum Number of Units prior to the close of
business one year after the effective date of this Prospectus (the "Termination
Date"). Should the Minimum Number of Units be sold by the Termination Date, the
General Partners may extend the Offering to a date not later than the earlier
to occur: (i) sale of all Units offered hereby; or (ii) two years after the
effective date of this Prospectus (the "Extended Termination Date"). After the
Minimum Number of Units is sold, the Partnership will schedule interim closings
at which subscribers will be admitted as Limited Partners on at least a monthly
basis.
The Offering is made pursuant to agreements among the General
Partners, the Partnership and the Participating Dealers pursuant to which the
Participating Dealers are acting as agents of the Partnership for the purpose
of offering and selling Units. The Units are being offered on a "best efforts,
part or none" basis, which means that Participating Dealers are not obligated
to purchase any Units but are required only to use their best efforts to sell
Units to investors.
COMPENSATION
The Partnership will pay selling commissions equal to 8% of Gross
Proceeds to Participating Dealers for Units sold by them. The General Partners
also will pay an additional selling commission equal to 1% of Gross Proceeds to
Participating Dealers from Units sold until the Minimum Number of Units is
sold. Participating Dealers and their registered representatives may also
receive up to 0.5% of Gross Proceeds as reimbursement for bona fide due
diligence expenses. The General Partners will receive a Non-Accountable Expense
Allowance in an amount equal to 2% of Gross Proceeds to cover certain expenses
relating to the offer and sale of Units (including the additional 1% selling
commission payable until the Minimum Number of Units is sold). In no event will
sales commissions, the Non-Accountable Expense Allowance, Organization and
Offering Expenses, wholesaling salaries and expenses and expenses of sales
seminars, exceed in the aggregate, 13% of Gross Proceeds.
The General Partners, their Affiliates, and Participating Dealers may
purchase up to 10% of the Units, net of any selling commissions but otherwise
on the same terms as purchasers who are not Affiliates. Purchase of Units by
the General Partners and their Affiliates will not be counted for purposes of
reaching the Minimum Number of Units. Any purchases by the General Partners
will be for investment purposes only and not with a view toward resale.
Investors will not have a right to withdraw and receive a return of their
contributions. Neither the General Partners nor any of their Affiliates will
directly or indirectly pay or award any compensation to a third party engaged
as an investment adviser as inducement to advise favorably
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<PAGE> 51
toward investment in the Partnership. In addition, the selling commissions to
Participating Dealers will be reduced on sales of 501 or more Units in
accordance with the following Schedule:
<TABLE>
<CAPTION>
Dollar Amount Purchased Investor's Purchase Price Selling Commission Per Unit
----------------------- ------------------------- ---------------------------
Per Unit Percent Dollar Amount
-------- ------- -------------
<S> <C> <C> <C>
$1,000 - $500,000 $1,000 8.0% $80.00
$501,000 - $750,000 $980 6.0% $60.00
$751,000 - $1,000,000 $970 5.0% $50.00
$1,001,000 - $1,500,000 $960 4.0% $40.00
$1,501,000 - $2,000,000 $950 3.0% $30.00
$2,001,000 and above $940 2.0% $20.00
</TABLE>
The purchaser of such Units will be credited with such reduced
commission and the net proceeds to the Partnership will not be affected by the
discount. Subscriptions may be combined for purposes of determining the volume
discounts applicable to subscriptions from a purchaser.
INDEMNIFICATION
The Partnership has agreed to indemnify the Participating Dealers and
the Participating Dealers have agreed to indemnify the General Partners and the
Partnership against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Act") In the opinion of the Securities
and Exchange Commission, indemnification for liabilities under the Act is
against public policy and therefore unenforceable. The Participating Dealers
may be deemed to be underwriters as that term is defined in the Act.
ESCROW AND CLOSING ARRANGEMENTS
Persons desiring to purchase Units will be required to complete, in
full, and execute the Subscription Agreement and other related subscription
documents, (collectively referred to as the "Subscription Documents") which are
included with this Prospectus and deliver such Subscription Documents, together
with a check made payable to "Michigan National Bank, Escrow Agent for Captec
Franchise Capital Partners L.P. IV" for the full purchase price of the Units
for which they are subscribing to their Participating Dealers who will then
forward such documents to the Escrow Agent. Each subscriber will be required
to comply with his state's requirements, if any, as to Minimum Number of Units
purchased and/or financial qualifications of purchasers. See "Who Should
Invest."
Subscription proceeds will be held by the Escrow Agent in federally
insured bank accounts, short-term certificates of deposit, short-term
government securities and any other investments permitted under Rule 15c2-4 of
the Securities Exchange Act of 1934, as amended, pending the sale of the
Minimum Number of Units.
Prior to the sale of the Minimum Number of Units, the Escrow Agent
will concurrently forward a copy of all Subscription Documents to the General
Partners. After receipt of the Subscription Documents from the Escrow Agent
(prior to the sale of the Minimum Number of Units) or directly from a proposed
investor (after the sale of the Minimum Number of Units), the General Partners
will promptly determine whether they accept or reject each subscription. The
General Partners have the unconditional right to accept or reject any
subscription within ten days after receipt by the General Partners of a copy of
the Subscription Documents. Subject to such right, subscriptions will be
accepted by the General Partners in the chronological order in which they are
received. If the General Partners reject any subscription prior to the
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<PAGE> 52
sale of the Minimum Number of Units, it will cause the Escrow Agent to promptly
return to such subscriber the funds paid by him and deposited with the Escrow
Agent pursuant to such Subscription Documents, without deduction, within ten
days after receipt of the Subscription Documents by the General Partners. If
the General Partners reject any subscription after the sale of the Minimum
Number of Units, they will promptly return to such subscriber the funds paid by
him pursuant to such Subscription Documents, without deduction, within ten days
after receipt of the Subscription Documents by the General Partners.
If the Minimum Number of Units is not sold by the Termination Date,
all monies held in escrow shall be returned in full, without deduction to
subscribers by the Escrow Agent along with any interest earned thereon (subject
to deductions for back-up withholding, if applicable). If at least the Minimum
Number of Units is sold, the funds, with interest, will be paid to the
Partnership for application to Partnership purposes, and those subscribers
whose subscriptions have been accepted as of the date on which such funds are
delivered to the Partnership will be admitted as Limited Partners, on at least
a monthly basis. Subscriptions for Units which are accepted by the General
Partners shall be irrevocable, unless fewer than the Minimum Number of Units is
sold in this Offering.
DISTRIBUTION REINVESTMENT PLAN SUMMARY
The Partnership has adopted a distribution reinvestment plan (the
"Reinvestment Plan") which will be available to Limited Partners. The
Reinvestment Plan is designed to enable Limited Partners to have their
distributions from Cash Flow (the "Distributions") from the Partnership, other
affiliates of the General Partners, and other sources invested in additional
Units should an investor so desire. The Partnership or an unaffiliated third
party will act as agent for those investors who wish to participate in the
Reinvestment Plan (the "Participants"). Funds raised through the Reinvestment
Plan will be used by the Partnership to purchase additional Properties and/or
Equipment or will be added to working capital. The following is a summary of
the principal terms of the Reinvestment Plan. A copy of the Reinvestment Plan
is included as part of this Prospectus as Exhibit C.
During the Offering and after sale of the requisite Minimum Number of
Units, the Partnership, as agent for the Participants in the Reinvestment Plan,
will use Distributions otherwise payable to Participants to purchase additional
Units for such Participants, if permitted under state securities laws, through
the Participating Dealers registered in the Participant's state of residence
(either being referred to hereunder as the "Reinvestment Agent").
Distributions shall be invested promptly following the receipt date
with respect thereto, and in no event later than 60 days from the payment date,
in the Units to the extent that they are available. All such investments of
Distributions in Units will be effected by amendment of the Partnership
Agreement to reflect the issuance of additional Units to Participants.
Distributions, if any, will be timed to coordinate with scheduled amendments to
the Partnership Agreement such that no Distributions are held pending
investment in Units pursuant to the Reinvestment Plan. Units will be purchased
at the public offering price and commissions equal to 8% of the Unit purchase
price will be paid to the Participating Dealer of record at the date of
distribution. In addition, the General Partners or an Affiliate will be paid
all fees attributable to the sale of Units as set forth in the Compensation
Table. In connection with the receipt of such commissions, the Participating
Dealer assumes the responsibility for blue sky compliance and performance of
due diligence responsibilities and will ascertain whether the Participants
continue to meet the suitability standards of their state of residence with
respect to each investment.
If a Participant's Distribution is not large enough to buy a full
Unit, the Partnership will credit the Participant's account with fractional
Units, computed to five decimal places. As availability of Units will be
contingent upon the number of Units sold pursuant to the Offering, the sale of
which Units, to the extent Subscription Agreements are accepted prior to a
distribution date, shall take priority over the sale of Units
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<PAGE> 53
pursuant to the Reinvestment Plan, there can be no guaranty that sufficient
Units will be available for purchase under the Reinvestment Plan. Units will
be allocated among Participants on a pro rata basis.
Participants will be charged an Administrative Services charge for
expenses incurred in connection with the Reinvestment Plan. If, in their sole
discretion, the General Partners determine that additional service charges are
appropriate, the Participants will be notified and provided an opportunity to
modify their participation in the Reinvestment Plan.
Units received pursuant to the Reinvestment Plan will have the same
rights and be treated in the same manner as those issued pursuant to the
Offering. See "Summary of Partnership Agreement."
Following the reinvestment, each Participant will be sent a statement
and accounting showing the Distributions received, the Administrative Services
charge, and the number and price of Units purchased. Taxable Participants may
incur a tax liability for Partnership income allocated to them even though they
have elected not to receive their Distributions in cash but rather to have
their Distributions invested in Units pursuant to the Reinvestment Plan. Tax
information for income earned on Units under the Reinvestment Plan for the
calendar year will be sent to each Participant by the Partnership.
Investors may become Participants at any time by completing the
appropriate authorization form which will be available from the Partnership.
Participation in the Reinvestment Plan will start with the next Distribution
payable after receipt by the Partnership of a Participant's authorization or
subscription. Notwithstanding the foregoing, residents of states which would
require the Partnership to register as a broker-dealer, may not participate in
the Reinvestment Plan. In addition, residents of California must be able to
satisfy the suitability standards imposed by California at the time of each
purchase pursuant to the Reinvestment Plan, and satisfaction thereof must be
reconfirmed by the California resident's Participating Dealer. See "Who Should
Invest." A Participant will be able to terminate his participation in the
Reinvestment Plan at any time without penalty by delivering written notice to
the Partnership. If a Participant terminates his participation, the Partnership
will send him the certificates evidencing the Units in his account. No service
charge will be charged by the Partnership for a termination.
Experience with the operations of this Reinvestment Plan may indicate
that amendments to the terms of the Reinvestment Plan are desirable.
Accordingly, the Partnership reserves the right to amend any aspect of the
Reinvestment Plan effective with respect to any Distribution paid subsequent to
the notice, provided that the notice is sent to Participants at least 30 days
before the record date for a Distribution. The Partnership also reserves the
right to terminate the Reinvestment Plan, particularly if the operations of the
Reinvestment Plan increase the possibility that the Partnership will be
considered "publicly traded" or to assign its obligations under the
Reinvestment Plan to an unaffiliated entity which will act as independent agent
for Participants for any reason at any time, by sending written notice of such
termination or assignment to all Participants.
The General Partners reserve the right to prohibit Tax-Exempt
Investors from participating in the Plan if such participation would cause the
underlying assets of the Partnership to constitute "plan assets." See "ERISA
Considerations for Qualified Plans." The General Partners may terminate the
participation of any Participant or prohibit a Limited Partner from becoming a
Participant if the Limited Partner ceases to meet a state's suitability
standard for reinvestment or if participation would not be in compliance with
applicable blue sky laws.
For discussion of certain possible tax consequences of reinvestment in
the Reinvestment Plan, see "Tax Aspects of the Offering."
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<PAGE> 54
RIGHT TO TENDER UNITS FOR PURCHASE
Commencing in 1998, but in no event prior to the closing of the
Offering, and subject to certain conditions discussed in the Partnership
Agreement, the Partnership will repurchase a Limited Partner's Unit(s) upon the
written request of the Limited Partner. During 1998 the repurchase price will
be equal to 85% of the tendering Limited Partner's Adjusted Capital
Contribution and during 1999 the repurchase price will be equal to 90% of the
tendering Limited Partner's Adjusted Capital Contribution. Starting in 2000
and in each year thereafter the repurchase price will be equal to 100% of the
Adjusted Capital Contribution of the tendering Limited Partner less (i) any Net
Proceeds of Sale previously distributed to such Limited Partner and not applied
to a reduction of Adjusted Capital Contributions and (ii) one-half of all prior
distributions of Net Cash Flow to such Limited Partner. For Units purchased in
the secondary market after the closing of the Offering, Net Cash Flow per Unit
shall be deemed to be equal to the amount of Net Cash Flow per Unit that would
have been paid to an Investor that purchased a Unit at the mid-point of the
Offering. Limited Partners desiring to have their Units repurchased will be
required to submit to the General Partners notification on a form supplied by
the General Partners of the number of Units for which they are requesting
repurchase. The notification must be postmarked either after February 1 but
before March 1 (the "February Redemption Period") or after August 1 but before
September 1 (the "August Redemption Period"; collectively, the "Redemption
Periods") in the year of repurchase. During 1998, no more than 1/2% of the
outstanding Units (as of January 1, 1998) will be redeemed during any
Redemption Period, and for years after 1998, no more than 1% of the outstanding
Units (as of January 1 for the relevant year) will be redeemed during any
Redemption Period. In each case, repurchase requests with the earliest
postmarks will be honored first. Units tendered during the February Redemption
Period and August Redemption Period will be repurchased on April 1 and October
1, respectively, of each year, and any Limited Partner who tenders Units that
are not repurchased must retender the Units in succeeding Redemption Periods if
he or she wants the request considered. The Partnership is not obligated to
repurchase any Units(s) if the annualized Net Cash Flow for the three (3)
months prior to the Redemption Period is less than 10% per annum of the
Adjusted Investment or such repurchases would impair the capital of the
Partnership. Repurchases will be funded out of either (i) Partnership revenues
otherwise distributable to Limited Partners or (ii) Partnership borrowings. No
assurances can be given that such revenues or borrowings will be available or
that the Partnership will be able to repurchase any or all of the Units
tendered. A repurchase will result in less Net Cash Flow or Net Proceeds of
Sale being distributed to remaining Limited Partners in the year of repurchase,
but will not result in a reduction of taxable income or gains to such Limited
Partners. In addition, a repurchase may result in certain adverse tax
consequences to the tendering Limited Partner. See "Tax Aspects of the
Offering - Sale or Transfer of Partnership Units."
TAX ASPECTS OF THE OFFERING
The following is a summary of the material federal income tax issues
arising from an investment in the Partnership based on the Partnership's
anticipated activities of the Partnership. This summary, to the extent it
pertains to partnerships in general, is also relevant to the tax treatment of
joint venture partnerships through which the Partnership may invest in
particular properties. However, it is not possible to predict the effect of the
provisions discussed in this summary on each Limited Partner's personal tax
liability since the tax implications of an investment in the Partnership will
vary for different Limited Partners. THUS, THE FOLLOWING ANALYSIS IS NOT
INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING AND PROSPECTIVE LIMITED
PARTNERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH SPECIFIC REFERENCE TO
THEIR OWN TAX SITUATION. See "Risk Factors - Tax Consequences."
This summary has been prepared by the General Partners based, in large
part, upon the opinions of counsel to the Partnership, Jaffe, Raitt, Heuer &
Weiss, P.C. See "-Opinion of Counsel" in this Section. The opinions of Jaffe,
Raitt, Heuer & Weiss, P.C., however, are not binding upon the Internal Revenue
Service (the "Service") and no assurance can be given that the Service may not
successfully challenge
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<PAGE> 55
various tax positions the Partnership will take based on such opinions.
Moreover, this discussion and the opinions of Jaffe, Raitt, Heuer & Weiss,
P.C., are based on the law in effect on the date of this Prospectus, including
the Internal Revenue Code of 1986, as amended to date (the "Code"), regulations
promulgated under the Code (the "Regulations"), published rulings and
administrative determinations of the Service and court decisions. No assurance
can be given that future legislative, administrative or judicial changes will
not significantly modify, or cause to be no longer valid, the statements or
opinions of counsel expressed herein. In addition, the Service may promulgate
Regulations which could alter, perhaps significantly, the Service's
interpretation of portions of the Code which impact on the Partnership. Any
such changes might be applied retroactively with respect to transactions
occurring prior to the effective date of such changes. See "-Proposed
Legislation" in this Section.
There have been several recent changes to the Code, including the Tax
Reform Act of 1986 (the "1986 Act"), the Revenue Act of 1987 (the "1987 Act")
the Technical and Miscellaneous Revenue Act of 1988 (the "1988 Act"), the
Revenue Reconciliation Act of 1989 (the "1989 Act"), the Revenue Reconciliation
Act of 1990 and the Revenue Reconciliation Act of 1993 (the "1993 Act") (the
1993 Act, and together with the 1986 Act, the 1987 Act, the 1988 Act, the 1989
Act and the 1990 Act, the "Acts"). These amendments to the Code create
extensive changes to the tax system, many of which changes affect an investment
in the Partnership. The Acts grant to the Service significant authority to
create interpretive and legislative Regulations on many of the new provisions,
and because the Service has not issued such Regulations, Jaffe, Raitt, Heuer &
Weiss, P.C. is unable to provide certainty on several issues. The provisions of
the Acts are complex and will have a different effect on each Limited Partner
and, therefore, each prospective Limited Partner should consult with his own
tax advisor as to the impact of such changes on his overall tax situation.
OPINION OF COUNSEL
Jaffe, Raitt, Heuer & Weiss, P.C., having considered the material tax
issues, has issued its opinion, subject to certain assumptions, representations
and undertakings, that the statements in this Prospectus are accurate regarding
the likely favorable outcome on the merits of the tax issues described below.
The Partnership intends to acquire, either in its own name or through joint
venture partnerships, existing, free-standing, income producing retail and
industrial real properties (singly, a "Property" and collectively, the
"Properties") and equipment ("Equipment" - when used in this section of the
Prospectus, the term "properties" shall refer to both Properties and Equipment)
with the capital raised through the Offering. The Partnership intends to
purchase the Properties subject to long-term "triple net" leases using leverage
of up to 50% on an aggregate portfolio basis. It is anticipated that
indebtedness incurred in acquiring Properties will be retired as soon as
sufficient proceeds of the Offering become available.
The material tax issues on which Jaffe, Raitt, Heuer & Weiss, P.C. is
able to render an opinion of counsel as of the date of this Prospectus include:
(i) the status of the Partnership as a partnership for federal
income tax purposes;
(ii) whether the Partnership will be treated as a "publicly traded
partnership";
(iii) whether the Partnership will be considered engaged in a
passive activity or activities with regard to the ownership and leasing
operations of the Properties and Equipment, under the statutory language of
Section 469 of the Code, the legislative history thereof and the temporary
Regulations issued to date, and will, therefore, allocate passive income and
loss to the Limited Partners;
(iv) the economic effect of the allocation of profits and losses
under the Agreement so long as the allocations do not cause or increase deficit
balances in the Limited Partners' Capital Accounts (determined as described in
this Prospectus); the substantiality of such economic effect (page 67); and the
reasonableness of allocations to incoming Limited Partners;
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<PAGE> 56
(v) the propriety of the Partnership's intended tax treatment of
the fees it anticipates paying to the General Partners and their Affiliates,
although Jaffe, Raitt, Heuer & Weiss, P.C. is unable to render an opinion as to
the reasonableness of the amounts paid;
(vi) whether based on the anticipated terms of the purchase
agreements and the leases for the Properties, as represented by the General
Partners, the Partnership will be considered the owner of the Properties and
Equipment for federal income tax purposes;
(vii) whether the Partnership's use of the accrual method of
accounting will be respected;
(viii) whether, based on the representations of the General Partners
and those of the Limited Partners contained in their Subscription Agreements,
the Partnership and/or the Limited Partners will be engaged in an activity for
profit; and
(ix) whether, under current law, substantially more than half of
the material tax benefits, in terms of their financial impact on a typical
investor in the Partnership, more likely than not will be realized if
challenged by the Service.
The opinion further states that the summary of federal income tax
consequences set forth in this Prospectus under the headings "Risk Factors-Tax
Consequences" and "Tax Aspects of the Offering" have been reviewed by counsel
and, that to the extent such summaries involve matters of law, counsel is of
the opinion, unless otherwise noted to the contrary, that such statements of
law are more likely than not correct under the Code, the Regulations and the
existing interpretations thereof.
The opinion of Jaffe, Raitt, Heuer & Weiss, P.C. is based upon the
facts described in this Prospectus and upon the facts as they have been
represented by the General Partners to Jaffe, Raitt, Heuer & Weiss, P.C., or
determined by it as of the date of the opinion. Any alteration of the facts may
adversely affect the opinions rendered therein. Furthermore, the opinion of
Jaffe, Raitt, Heuer & Weiss, P.C. is based upon existing law and applicable
current and proposed Regulations, current published administrative positions of
the Service contained in revenue rulings, revenue procedures and judicial
decisions, which are subject to change either prospectively or retroactively,
and any such changes could cause the opinions to change.
For the reasons described more fully below at the pages noted, Jaffe,
Raitt, Heuer & Weiss, P.C. is of the view that it is not possible, nor will it
become possible prior to the termination of the Offering, for it to reach a
conclusion (either favorable or unfavorable) as to the probable outcome on the
merits of the following federal income tax issues and accordingly, it expresses
no opinion, with respect to: (a) whether the Partnership will be considered a
"dealer" in real estate or equipment at the time of the sale or other
disposition of the Properties or the Equipment, which would cause the entire
gain from such sale or other disposition to be treated as ordinary income and
cause Limited Partners that are tax-exempt entities to recognize unrelated
business taxable income ("UBTI"); (b) whether a Limited Partner will be deemed
to be a "dealer" in limited partnership interests at the time of sale or other
disposition of his Units, which would result in the entire gain from such sale
or other disposition being treated as ordinary income; (c) whether the
Partnership's apportionment of the purchase price and expenses between land and
depreciable improvements for the Properties will be substantiated for cost
recovery purposes; and (d) whether the Properties or Equipment will constitute
"tax-exempt use properties" due to the leasing of space at the Properties to
tax-exempt entities and/or the admission of Limited Partners that are
tax-exempt entities, either of which would cause the Partnership to depreciate
a portion of the Properties or Equipment using the straight-line method of
depreciation.
The Partnership will use the capital raised through this Offering to
acquire Properties and Equipment. Therefore, Jaffe, Raitt, Heuer & Weiss, P.C.
cannot opine at this time on the application of the law to the specific facts
which will exist when the Properties or Equipment are acquired. When the
General
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Partners enter into agreements to acquire specific Properties or Equipment or
to enter into joint ventures with other parties to acquire Properties or
Equipment, Jaffe, Raitt, Heuer & Weiss, P.C. will, if requested by the
Partnership, make due inquiry of all facts relating to the transaction which it
feels have material tax consequences to the Partnership, including the terms of
the acquisition and the payment of fees to various parties. The General
Partners anticipate that any such opinion delivered to the Partnership upon
entering into joint ventures or the acquisition of specific Properties and/or
Equipment during the Offering period will address the following issues, if
material, and determine whether:
(i) any joint venture partnership through which the Partnership
may invest in a specific Property and/or Equipment should be considered a
"partnership" for federal income tax purposes;
(ii) the basis of each Limited Partners in his Units will be
increased by any financing incurred in the course of entering into a joint
venture or a specific Property and/or Equipment acquisition.
(iii) each Limited Partner will have sufficient amounts "at-risk",
including qualified non-recourse financing (if any), to deduct (without
considering the other limitations in the Code) losses allocated from the
Properties and/or Equipment in excess of their cash contributions to the
Partnership;
(iv) the Partnership or joint venture will be considered engaged in
a "passive activity" with regard to owning and operating such specific Property
and/or Equipment, so that it will produce passive income or loss;
(v) the Partnership's or the joint venture's intended tax
treatment of any fees which will be paid to the seller or brokers in connection
with the acquisition of a specific Property and/or Equipment is proper;
(vi) the Partnership or joint venture will be considered the owner
of the specific Property and/or Equipment for tax purposes;
(vii) the Partnership's or the joint venture's contemplated method
of depreciation or cost recovery for the specific Property and/or Equipment is
proper;
(viii) the specific Property or Equipment will constitute tax-exempt
use property;
(ix) any loans or other financing provided by the General Partners
or any other lender will constitute debt;
(x) loans incurred by the Partnership or any joint venture to
acquire the specific Property and/or Equipment will be subject to the original
issue discount provisions; and
(xi) the indebtedness incurred in acquiring a specific Property
and/or Equipment will constitute non-recourse indebtedness for purposes of
Section 704(b), the application of the "safe harbor" to the allocations
attributable to such indebtedness and the effect of such acquisition and
financing on the Partnership's allocations.
PARTNERSHIP STATUS
Many of the tax benefits from an investment in the Partnership depend
on the Partnership being classified as a partnership for federal income tax
purposes rather than as an association taxable as a corporation. NO TAX RULING
WILL BE SOUGHT FROM THE SERVICE AS TO THE TAX STATUS OF THE PARTNERSHIP AS A
PARTNERSHIP. The General Partners, however, have received the opinion of Jaffe,
Raitt, Heuer & Weiss, P.C. that the Partnership will more likely than not be
considered a partnership for federal income tax purposes, and that the Limited
Partners will be subject to tax as partners
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pursuant to Subchapter K of the Code. Unlike a tax ruling, the opinion of
counsel represents only such counsel's best legal judgment and has no binding
effect or official status of any kind. Thus, in the absence of a ruling from
the Service, there can be no assurance that the Service will not attempt to
characterize the Partnership as a corporation for federal income tax purposes.
If the Service were to prevail on this issue, many of the tax benefits expected
from an investment in the Partnership, would not be available, which would
substantially reduce the effective yield from an investment in the Partnership.
On May 10, 1996, the Service issued proposed regulations to provide a
simple elective approach for classifying business organizations. However, the
rules will not be effective until the regulations are finalized. In addition,
the new rules would not apply to entities classified as a corporation as a
result of Section 7704 of the Code. Accordingly, the new regulatory scheme
when it becomes final is not anticipated to substantially effect the below
discussion of why the Partnership believes that it will more likely than not be
considered a partnership for federal income tax purposes.
The opinion of Jaffe, Raitt, Heuer & Weiss, P.C. assumes compliance
from the date of formation of the Partnership throughout the term of its
existence with the following conditions:
(i) the Partnership and each Limited Partner therein will have the
objective of carrying on business for profit and dividing the gains therefrom:
(ii) the General Partners have a substantial net worth as described
in "Management" and at all times the General Partners will maintain an
aggregate net worth of at least $250,000;
(iii) the General Partners will have at least a one percent (1%)
interest in each material item of Partnership income, gain, loss, deduction or
credit at all times during the term of Partnership;
(iv) the Partnership's activities will be conducted strictly in
accordance with the terms of the Agreement, the provisions of the Delaware
Revised Uniform Limited Partnership Act and other applicable Delaware law, and
that the Partnership has taken, and will take, all necessary action which may
be required under state or local law to conduct business in Delaware as a
limited partnership, as contemplated by the Agreement; and
(v) no election will be made by the Partnership to be excluded
from the provisions of Subchapter K of the Code.
The opinion of Jaffe, Raitt, Heuer & Weiss, P.C. is based, in part, on
Regulation Section 301.7701-2 which provides that an entity will be treated as
"an association taxable as a corporation" for federal income tax purposes if it
has more corporate characteristics than non-corporate characteristics. The
corporate characteristics which the Regulations indicate are material in
distinguishing between partnerships and corporations are: (a) continuity of
life; (b) liability for debts limited to property owned by the entity (limited
liability); (c) centralization of management; and (d) free transferability of
interests. If an organization possesses more than two of the four corporate
attributes, the organization will be characterized by the Service as a
corporation for federal income tax purposes.
In Larson v. Comm'r, 66 T.C. 159 (1976) and Zuckman v. U.S., 524 F.2d
729 (Ct. Cl. 1975) courts have confirmed that the test in the Regulations is
the proper test for determining whether an entity should be treated as a
partnership for tax purposes. In Announcement 88-118 and Revenue Ruling ("Rev.
Rul.") 88-76, the Service again applied the test in the Regulations to
determine the federal income tax classification of an entity, and stated that
in applying the test in the Regulations, "equal weight must be given to each of
the four corporate characteristics." In addition, the Service announced that
it would not attempt to apply an objective general partner net worth standard
as a substantive rule for all partnerships, or as a requirement for an advance
determination for partnerships that do not have a sole corporate general
partner.
Jaffe, Raitt, Heuer & Weiss, P.C. is of the opinion that it is more
likely than not that the Partnership will not possess more than two of the four
corporate characteristics enumerated in the Regulations and, therefore, the
Partnership will be taxed as a partnership and not as an association taxable
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as a corporation. The Partnership will not possess the corporate
characteristics of continuity of life, limited liability and free
transferability of interests, although it will possess the corporate
characteristic of centralized management and, therefore, the non-corporate
characteristics predominate over the corporate characteristics. If the Service
amends the Regulations or if the Partnership does not act as anticipated, it is
possible that the Partnership might not qualify as a partnership under such
amended Regulations.
Under certain circumstances, an entity can obtain from the Service an
advance determination of whether it constitutes a partnership for federal
income tax purposes. In order to obtain such a ruling, an entity must meet all
of the substantive requirements set out in Revenue Procedure ("Rev. Proc.")
89-12, 1989 C.B. 798, which modifies and supersedes several previously issued
revenue procedures. Based upon the representations of the General Partners
regarding the anticipated activities of the Partnership and a review of the
Agreement, the Partnership will not meet all of the requirements of Rev. Proc.
89-12. Therefore, if the Partnership sought an advance ruling as to its
partnership status for tax purposes (which it does not intend to do), it would
not be able to obtain such a ruling. However, failure to qualify for a ruling
will not necessarily prevent the Partnership from being considered a
partnership for federal income tax purposes, because Rev. Proc. 89-12
explicitly states that the operating rules contained therein "are not intended
to be substantive rules for the determination of partner and partnership status
and are not to be applied upon audit of taxpayer's returns."
In addition to the foregoing, a "publicly traded partnership," as
defined in Section 7704 of the Code is taxed as a corporation, unless 90% or
more of its income constitutes "qualifying income." The Units will not be
traded on an established market, and the General Partners have represented that
they will not facilitate the creation of the equivalent of a secondary market
by providing readily available liquidity opportunities. In addition, in
Regulation Section 1.7704-1(c)(3), the Service set forth "safe harbors" to
exempt partnerships from publicly traded status. Regulation Section 1.7704-1(f)
states that although occasional purchases of interests by a partnership or the
general partner will not constitute public trading, a regular plan of
redemption or repurchase may constitute public trading when holders of
interests have readily available and ongoing opportunities to dispose of their
interests. While not totally clear whether the Repurchase Plan constitutes a
"readily available and ongoing opportunity" to dispose of Units, Counsel is of
the opinion that it is more likely than not that the Repurchase Plan should be
so characterized because of the inordinate length of time between tender and
sale, the establishment of a purchase price at least sixty days after tender,
the limited annual availability to tender Units, the overall 2% limit on
repurchases under the Repurchase Plan and the General Partners' representation
that the sum of all Partnership interests in capital or profits disposed of
during any taxable year will not exceed two percent (2%) of all Partnership
interests in capital or profits. Therefore, as of the date hereof, and based on
the aforementioned representations, as well as the expected terms of the
Offering and the Repurchase Plan, Counsel is of the opinion that it is more
likely than not that the Units will not be publicly traded and that the
Partnership will not be subject to corporate taxation under Section 7704 of the
Code because the Partnership will qualify for one of the safe harbors created
in the Regulations and because the Units will not be publicly traded under the
statutory language. However, later activities by the Partnership or any of the
Partners, as well as future Regulations, could alter this conclusion.
In the event that the Partnership is characterized as publicly traded,
an exception from taxation as a corporation exists for a publicly traded
partnership which meets the "90% of gross income" exception. An entity
qualifies for this exception if 90% or more of its gross income consists of
"qualifying income", which is defined as interest, dividends, real property
rents, gain from the disposition of real property, gain from the disposition of
capital assets or property described in Section 1231(b) of the Code, and income
and gains from certain natural resource activities. Although real property
rents that include a fixed percentage or percentages of receipts or sales
constitute qualifying income, rentals from equipment leasing would not
constitute qualifying income for purposes of this exception. Due to the
inherently factual nature of the ability to qualify for the exception, Jaffe,
Raitt, Heuer & Weiss, P.C. is unable to opine at this time, either favorably or
unfavorably, on whether the Partnership could qualify for this exception.
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In the event the Partnership were classified as an association taxable
as a corporation, under the test in the Regulations or the publicly traded
partnership rules, all items of income, gain, loss, deduction and credit of the
Partnership would be included only on its corporate tax returns and would not
be passed through to the Limited Partners. Therefore, losses and deductions
from the Partnership could not be utilized to offset income from other sources
on the Limited Partners' individual tax returns. In addition, the Partnership
would have to pay income tax on its income, thereby reducing the cash available
for distribution to the Limited Partners. Cash distributions to the Limited
Partners would be treated as dividends to the extent of current or accumulated
earnings and profits of the Partnership. The effect of the foregoing would be
to substantially reduce the effective yield on an investment in the
Partnership. Finally, such a change in the status of the Partnership for
federal income tax purposes in the future would be treated by the Service as a
taxable event, in which event the Limited Partners could have tax liability
without receiving a cash distribution from that Partnership to enable them to
pay their increased tax liability.
The Partnership does not expect to seek a ruling that any of the joint
venture partnerships through which it may hold an interest in Properties or
Equipment will be treated as a partnership for federal income tax purposes. If
the Partnership enters into a joint venture, it expects to receive an opinion
of counsel that under existing federal income tax laws and Regulations such
joint venture will be characterized as a partnership, but such opinion of
counsel is not binding upon the Service. In the event such joint venture were
treated as a corporation for federal income tax purposes, the adverse
consequences described above could occur.
TAXATION OF LIMITED PARTNERS ON PROFITS OR LOSSES OF THE PARTNERSHIP
A partnership is not a taxable entity for federal income tax purposes.
Instead, each partner must report his allocable share (as determined by the
partnership agreement) of the partnership's recognized income, gains, losses,
deductions, credits and items of tax preference, whether such partner receives
any cash distributions during his taxable year. See "Allocations of Profits and
Losses" in this Section. Thus, a partner's tax liability may exceed the cash
distributed to him in a particular year, or he could be allocated losses while
receiving a cash distribution. The characterization of an item of profit or
loss (e.g., as capital gain or ordinary income) is determined at the
partnership level and should be reported by each partner in accordance with
such characterization.
TAXATION OF CASH DISTRIBUTIONS
Cash distributions from a partnership are unrelated to partnership
income, if any, as determined for federal income tax purposes or under
generally accepted accounting principles. Therefore, cash distributions can be
made even if the Partnership suffers a loss. Additionally, there can be no
assurance that Partnership operations will result in cash distributions
sufficient to allow the Limited Partners to pay the income tax resulting from
the income they are allocated.
Cash distributions, either deemed, as described below, or actual,
reduce a partner's tax basis in his interest, and will not result in tax unless
the amount of the distribution exceeds the partner's basis in his interest at
the time of the distribution. Any distributions in excess of a partner's basis
will be taxable to such partner as though it were a gain on the sale or
exchange of his interest in the partnership. In addition, Section 751 of the
Code could cause a partner to recognize gain upon a distribution even if the
amount of the distribution does not exceed the partner's basis in his interests
if the partnership holds substantially appreciated inventory or unrealized
receivables. See "-Sale or Foreclosure of Partnership Properties or Equipment"
and "-Sale or Transfer of Partnership Units" in this Section.
Under Section 752 of the Code, a partner will receive a "deemed" cash
distribution at the time his share of partnership non-recourse liabilities
declines. A deemed cash distribution has the same effect as an actual cash
distribution in that it decreases a partner's basis in his partnership interest
and can trigger gain to the extent that such cash distribution, whether deemed
or actual, exceed the partner's basis in his interest
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at the time of the distribution. A deemed cash distribution can result from
either: (i) a decreases in a partnership's total non-recourse indebtedness,
such as retirement of a loan, replacing a non-recourse loan with a loan that is
"recourse" under the rules described below; and/or (ii) a decrease in a
partner's percentage share of the non-recourse liabilities pursuant to the
rules discussed below. An increase in a partner's share of a partnership's
non-recourse liabilities will be treated as a deemed cash contribution and will
increase a partner's basis in his interest.
The Partnership intends to acquire Properties and Equipment using
leverage of up to 50% on an aggregate portfolio basis and, with respect to any
individual Property or Equipment, the Partnership will not use leverage greater
than 80% of the cost of acquisition. The General Partners have represented that
they will use their best efforts so that indebtedness incurred by the
Partnership to acquire Properties and/or Equipment, if any, will be
non-recourse so as to be includible in a Limited Partner's basis in his Units.
There can be no assurance, however, that such financing will be available to
the Partnership. If no such financing is incurred, the acquisition of
Properties or Equipment will have no effect on a Limited Partner's basis in his
Units, but if indebtedness is incurred and it is non-recourse in nature and
held by a non-partner, it will increase a Limited Partner's basis in his Units
when incurred, and decrease his basis when retired. Although the General
Partners do not expect that the Partnership will allocate losses to the Limited
Partners in excess of their capital contributions or that Cash Flow
distributions to a Limited Partner will exceed profits allocated to the Limited
Partner by more than the Limited Partner's Capital Contribution, in the event
that either of the above occur, the repayment of any Partnership loans could
trigger gain to the Limited Partners.
The taxation of cash distributions is also affected by the "at-risk"
rules in Section 465 of the Code. Under these rules, cash distributions will
trigger the recognition of income if the limited partner had previously claimed
losses and if such distributions exceed the amount a partner has "at-risk" in
the partnership, which is equal to the amount the partner invests in the
activity, increased by all gain previously recognized, and decreased by all
losses and cash distributions. In addition, a limited partner in a partnership
owning real estate is considered "at-risk" to the extent of his allocable share
of any "qualified non-recourse financing" (as defined in Section 465(b)(6)(B)
of the Code). With respect to financing the Properties, the General Partners
intend to obtain indebtedness which is "qualified non-recourse financing" to
the extent that such financing is available, commercially reasonable and
economically beneficial to the Partnership and the Partners. If the Partnership
acquires Properties or Equipment without incurring any indebtedness or uses
financing which is not "qualifying non-recourse financing," such acquisitions
will have no effect on the amount to which the Limited Partners are considered
"at-risk." Any interim financing used to acquire the Properties or Equipment
until additional proceeds of the Offering are received could increase the
Limited Partners' amount "at-risk" until the debt is retired. The retirement of
such interim debt could cause the taxation of cash distributions if the Limited
Partner has an insufficient "at risk" amount.
LIMITATIONS ON DEDUCTIBILITY OF LOSSES
The ability of a partner to deduct his allocable share of the net
losses of a partnership against income from other sources is limited by the
partner's tax basis in his partnership interest, the "at-risk" limitation and
the "passive loss" limitation rule.
Basis Limitation. A partner may deduct his allocable share of
partnership losses only to the extent of his tax basis in his partnership
interest at the end of the year. A partner's initial tax basis for his
partnership interest is the amount of cash and the adjusted basis of property
contributed by the partner. A partner's tax basis is thereafter increased by:
(i) the amount of any additional cash contributions; (ii) his distributable
share of partnership profits; and (iii) the partner's pro rata share of such
partnership's non-recourse liabilities. In addition, under rev. Rul. 77-309,
1977-2 C.B. 216, a partner's basis will include not only his pro rate share of
partnership non-recourse liabilities, but also non-recourse liabilities of any
partnership in which the partnership is a partner. A partner's basis in his
partnership interest is decreased
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by the amount of his distributable share of net losses of the partnership and
the amount of any distributions, either deemed or actual, made to the partner
as a result of his ownership of an interest in the partnership.
The Service has issued final and temporary Regulations which define
whether a partnership liability is non-recourse and, therefore, includible in
the basis of each partner, or recourse, and includible only in the basis of the
partner who bears the risk on such liability. Under the Regulations, a
liability is only considered non-recourse to the extent that no partner or
person "related" to the partner bears the economic risk of loss. All other
liabilities, including a portion of an otherwise non-recourse liability on
which a partner or related party bears a risk of loss, are considered recourse.
Under the Regulations, a partner is considered to bear the economic risk of
loss for a liability to the extent that the partner, or a person related to
such partner, would be ultimately obligated, under all arrangements and
agreements among the partners, to pay a creditor or contribute funds to the
partnership in the event that: (i) all of the partnership's liabilities were
due and payable; (ii) the partnership allocated all gain that resulted from the
disposition; and (iii) there was a "constructive liquidation" of the
partnership so that there were no funds to pay such liabilities. A person is
considered related to a partner for purposes of these rules if he were deemed
to be related under Sections 267 or 707(b)(1) of the Code if such sections used
an 80% or more test rather than a 50% or more test. If a partner is entitled to
reimbursement for any amounts he pays to creditors or contributes to the
partnership, then such partner is not considered to bear the economic risk of
loss to the extent of his right to reimbursement.
In a departure from the prior Regulations, the Regulations require
that the non-recourse liabilities of a partnership be allocated among the
partners, for inclusion in their bases: (i) first, to reflect the partner's
share of any partnership "minimum gain," (see "- Allocations of Profits and
Losses" in this Section); (ii) second, to reflect the partners' shares of any
tax gain that would be allocated to the partners under Section 704(c) of the
Code (which deals with contribution of appreciated property to the partnership)
if the partnership disposed of all of its property solely in full satisfaction
of such liabilities; and (iii) finally, any excess, in proportion to the
partners' interests in partnership profits, a term which is not defined in the
Regulations. The Regulations state that the partnership agreement may specify
the partners' interest in partnership profit that will be used for allocating
excess non-recourse liabilities, so long as such allocation is reasonably
consistent with allocations (which have substantial economic effect) of some
significant item of partnership income or gain. Under the Agreement, profit
allocations will vary depending upon whether profits are from operations or the
disposition of Properties or Equipment, and the Agreement specifically
indicates that the Partnership will apportion any excess non-recourse
liabilities based on the percentage used to allocate operating profit, although
there can be no assurance that this method will be respected. The General
Partners have represented that they will use their best efforts so that
indebtedness incurred by the Partnership to acquire Properties and/or
Equipment, if any, will be non-recourse so as to be includible in a Limited
Partner's basis in his Units. There can be no assurance, however, that such
financing will be available to the Partnership.
At-Risk Limitation. A limited partner may deduct allocable losses only
to the extent that he is at-risk in a partnership, as determined under Section
465 of the Code. The 1986 Act extended the at-risk rules to real estate
activities and, therefore, the amount of losses an investor in a real estate
transaction can deduct on his individual income tax return is now limited to
the amount the taxpayer has actually placed "at-risk" in that activity and,
therefore, could actually lose in that activity. In Rev. Rul. 77-311, 1977-2
C.B. 216, the Service indicated that for at-risk purposes the real estate
activities of one partnership are attributed to one of its partners that is
also a partnership.
Under Section 465 of the Code, a taxpayer is considered "at-risk" for
the amount of money and the adjusted basis of property he contributes, plus any
amounts borrowed for use in the activity to the extent the taxpayer is liable
for such debt. In addition, the 1986 Act created an exception for entities
engaged in holding real estate which allows an investor to be considered
"at-risk" for his proportionate share of all "qualified non-recourse
financing," as defined in Section 465(b)(6)(B) of the Code. The General
Partners have represented that the Properties will be financed with
indebtedness which qualifies as "qualified
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non-recourse financing" to the extent that such financing is available,
commercially reasonable and economically beneficial to the Partnership and the
Limited Partners.
Section 465(c)(2)(B) of the Code requires that the Partnership
aggregate its Equipment leasing activities with respect to Equipment placed in
service during the same taxable year. Therefore, the at-risk rules will be
applied to the net taxable income or loss with respect to Equipment which is
placed in service during the same taxable year. This could limit a Limited
Partner's ability to deduct losses with respect to certain items of Equipment
even though he must recognize income with respect to other items of Equipment.
The General Partners do not anticipate the Limited Partners being
allocated losses in excess of their amounts at risk. Counsel, however, is
unable to opine as to what impact, if any, the at-risk rules will have on a
Limited Partner because it can not now be known whether qualified non-recourse
financing will be obtained, the amount, if any, of losses which will be
allocable to Limited Partners, and what effect, if any, the timing of placing
Equipment into service will have on allocations to the Limited Partners.
Passive Loss Limitation. Even if a partner has sufficient basis and
amounts at-risk to claim the deductions and losses allocated to him by a
partnership, Section 469 of the Code provides that a taxpayer may only deduct
losses or use credits from a passive activity against income from that or other
passive activities. Losses from a passive activity cannot be used to offset
income from non-passive sources, a category which includes salary or business
income, interest, dividends, capital gains and other forms of "portfolio
income," as defined in Section 469(e) of the Code, or "non-passive" income as
defined in the Regulations. Any passive losses that cannot be used in any year
are carried forward indefinitely to offset passive income in the future,
including, but not limited to, the income resulting from the sale of property
used in the passive activity, or the sale by a taxpayer of his interests in the
passive activity. Upon a complete disposition of an interest in a passive
activity, any suspended loss from the activity, after offsetting the gain
recognized upon the disposition of the entire interest, can be used to offset
income from all sources in an order set out in Section 469 of the Code.
The limitation applies to losses from a "passive activity," which is
defined as any activity which involves a trade or business in which the
taxpayer does not materially participate. For purposes of these new provisions,
the definition of "trade or business" is expanded to include all rental
activities and activities not normally encompassed by such definition. Under
Section 469 of the Code and the proposed and temporary Regulations issued to
date, limited partners are not considered to materially participate in the
activities of a partnership and, therefore, the Limited Partners will not be
considered to materially participate in the activities of the Partnership.
Portfolio and "non-passive" income earned within an activity is stated
and allocated separately from the passive income and maintains its character as
portfolio income, which income cannot be offset by passive losses, including
those produced by the same passive activity. In addition, guaranteed payments
must be treated as portfolio income by recipients. Expenses that are clearly
and directly allocable to portfolio income, even if such income is from a
partnership which is otherwise engaged in a passive activity, produces
portfolio deductions, which are miscellaneous itemized deductions subject to
the 2% floor (see, -"-Deductibility of Fees" in this Section), rather than
reducing passive income. Until the Offering proceeds are fully invested in
Properties and Equipment, the Partnership will produce portfolio income and
passive losses, which cannot offset each other and, therefore, the Partners may
have tax liability even though the overall activities of the Partnership
reflect a loss. In addition, to the extent that any of the leasing activities
of the partnership are treated as sales or financing transactions for tax
purposes, the interest component of such sales or financing would be treated as
portfolio income. See, "-Tax Treatment of the Leases" in this Section.
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The Service has issued proposed and temporary passive activity
Regulations which define the term "activity," which is important for
determining a taxpayer's level of involvement in a particular activity and
whether the taxpayer has disposed of the activity which would allow the use of
suspended losses from such activity. Despite complex rules which treat each
basic business operation, or "undertaking" as a separate "activity" and then
require the aggregation and/or segregation of various types of activities, the
Regulations allow taxpayers to organize rental real estate operations into one
or more activities in any manner in which taxpayers "find convenient or
advantageous." A rental real estate activity is defined as a rental undertaking
in which at least 85% of the unadjusted basis of the property rented to
customers is real property. Despite this freedom, taxpayers may not fragment or
aggregate the rental real estate operations in a manner that is inconsistent
with the treatment in prior taxable years, or the treatment of such operations
by the pass-through which it is held.
The General Partners will apply the aggregation and fragmentation
rules applicable to rental real estate activities in a manner which is
beneficial to the Partnership as a whole, and the Partners in general, and will
weigh the benefits of fragmenting the operations into separate activities
against the increased administrative costs which such treatment would entail.
The Partnership will consider treating each Property as a separate activity so
that the sale of any Property will allow the Partners to utilize any suspended
losses related to such Property that are not otherwise used in offsetting
income resulting from such sale. In addition, the investment of funds not
otherwise invested in Properties will constitute a single separate activity.
The Partnership intends to acquire the Properties and Equipment, and
rent them to unaffiliated third parties, under "triple net" leases in which the
lessees bear substantially all of the costs associated with ownership. Because
Section 469(c)(2) of the Code states that a passive activity includes "any
rental activity," it appears that the Partnership will be engaged in a "passive
activity" as to such rental activities. However, the Service is authorized
under Section 469(1)(3) of the Code to promulgate Regulations which could
require net income from an otherwise passive activity to be treated as
"non-passive." The 1986 Conference Report includes several examples of
instances when the Regulations should apply, including ground rents which
produce income without significant expenses, and related party leases with
respect to property used in a trade or business, and further indicates that the
given examples are not an exclusive list. Although it could be argued that the
Partnership's contemplated activities in leasing the Properties or Equipment
contain attributes which are similar to attributes of the activities contained
in the examples cited above, they clearly do not fall within such examples. In
addition, the proposed and temporary Regulations issued to date under Section
469 of the Code do not mandate, or otherwise indicate, that the Partnership's
anticipated ownership and leasing of the Properties or Equipment should be
recharacterized as a "portfolio" activity or as otherwise producing
"nonpassive" income or loss.
Therefore, based on the language in Section 469 of the Code, the
examples cited in the Conference Report and the Blue Book, and the proposed,
temporary and final Regulations issued to date, Jaffe, Raitt, Heuer & Weiss,
P.C. is of the opinion that the Partnership's activities in acquiring the
Properties or Equipment and leasing them in the contemplated manner will more
likely than not be characterized as a passive activity producing passive income
or loss for the Limited Partners. However, the Partnership's income from the
investment of Offering proceeds not invested in Properties or Equipment will be
characterized as portfolio income. The Service has indicated that it will issue
additional Regulations on this topic in the near future, and must finalize the
proposed and temporary Regulations issued to date. To the extent that such
Regulations differ from or extend the language and examples in the Code, the
Conference Report and the proposed and temporary Regulations, this opinion may
have to be revised, possibly with an adverse effect on certain Limited
Partners. In particular, the Service has indicated that it will monitor and
possibly prescribe additional Regulations to prevent taxpayer attempts to
structure investments that have economic characteristics similar to portfolio
investments, but which produce passive income. The Service indicated that it
considered recharacterizing income attributable to a preferred or guaranteed
return to investors, but the example in question dealt with a type of preferred
return in which one class of investors
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received a preferred return even though it contributed the same amount of
capital as the other group of investors, a type of return which differs from
the Cumulative Preferred Return.
Each taxpayer must aggregate income and losses from all passive
activities in which he invests, other than publicly traded partnerships, to
determine whether any particular loss from a passive activity can be deducted
in each taxable year. Passive income from the Partnership will offset passive
losses from other sources, including losses from other partnerships. Any unused
losses from passive activities are carried forward and applied against future
passive activity income, including any income from the termination of the
activity or the taxpayer's disposition of his interest therein. Accordingly,
because the current deductibility of passive losses is determined at the
individual Limited Partner level, Jaffe, Raitt, Heuer & Weiss, P.C. is unable
to render an opinion as to whether the Partnership's losses, if any, will be of
any current tax benefit to any Limited Partner. Each Limited Partner is urged
to consult his individual tax advisor to determine the effect of this provision
on his personal tax situation.
Under Section 469(k) of the Code, the net income of a publicly traded
partnership which is not treated as a corporation because it qualifies for the
90% of gross income exception, is not treated as passive income for purposes of
applying the passive income and loss rules. This section requires that the
passive income and loss rules be applied separately as to the tax items of each
publicly traded partnership so that the losses of a publicly traded partnership
can only offset future passive income from that particular partnership, and not
from any other publicly traded partnership or other passive activity. This
language, in effect, treats each publicly traded partnership as its own
separate tax category. Therefore, in the unlikely event that the Partnership is
characterized as "publicly traded," the Limited Partners will not be able to
offset their income or losses from the Partnership against their income or loss
from other sources, including from other publicly traded partnerships.
DEDUCTIBILITY OF FEES
Jaffe, Raitt, Heuer & Weiss, P.C. is of the opinion that it is more
likely than not that, subject to the limitations discussed below, a deduction
is available under Code Sections 162, 167, 168 or 212 for reasonable amounts
paid or accrued by the Partnership, or any joint venture or partnership of
which the Partnership is a member, as property and partnership management fees,
tax advice fees, investor services fees and, under Code Section 709, for
reasonable amounts paid or incurred by the Partnership for organizational fees
for the taxable years in which the services to which such fees are attributable
are performed, or in the taxable years over which the asset created by such
services is properly amortizable. However, because the issue of reasonableness
is factual, and because the services in question are scheduled to be performed
in the future, Jaffe, Raitt, Heuer & Weiss, P.C. is unable to render an opinion
as to whether these fees will in fact be deductible or, if deductible, will be
deductible in the periods anticipated by the General Partners. There can be no
assurance that the Service will not contend that such amounts are not
deductible in the years paid, but, rather relate to future years, that they
represent costs of acquiring the Properties or Equipment or that they
constitute organizational expenses, syndication expenses or other
non-deductible payments of the Partnership.
To be fully deductible by the Partnership, expenditures, whether made
to affiliated or unaffiliated parties, must be ordinary and necessary business
expenditures which are reasonable in amount. The Service might seek to
challenge the deduction of any fees on the grounds that they exceed the
reasonable value of the services for which they were paid, particularly if paid
to the General Partners or Affiliates, or on other factual grounds. Ordinarily
payments made to a partner for services rendered are governed by the same rules
as payments to unaffiliated parties. Although the amount of some of the fees
payable by the Partnership were not determined by arm's-length negotiations,
the General Partners believe that the amounts of these fees are comparable to
fees that would be charged by third parties for similar services. Jaffe,
Raitt, Heuer & Weiss, P.C., however, is unable to render an opinion as to the
reasonableness of such fees because of the inherently factual nature of this
issue.
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In addition, the Service could assert that the payment of fees to the
General Partners constitute a distribution from the Partnership to a Partner.
If the payments are treated as Partnership distributions then such payments
would not be deductible, would not be includible in the bases of the Properties
and/or could result in a reallocation of the Partnership's profits and losses
reflecting such disproportionate distributions, which in either case would
result in an increase in income or a decrease in losses allocable to the
Limited Partners.
Section 709 of the Code provides that a partnership or partner cannot
deduct amounts paid or incurred to organize a partnership or to promote the
sale of (or to sell) an interest in a partnership, but a partnership may elect
to amortize and deduct organizational expenses over a period of not less than
60 months. Syndication expenses incurred to obtain capital contributions to a
partnership are to be treated as capital expenditures, and may not be
amortized. Consequently, the Partnership will not deduct fees and expenses
relating to the syndication of the Partnership and the sale of Units to its
Limited Partners. Such syndication fees and expenses are anticipated to include
the selling commissions amounting to 8% of the dollar amount of Units sold,
payable to Participating Dealers. The Partnership will elect to amortize the
organizational fees and expenses over a period of 60 months. Such
organizational expenses, which consist of legal, accounting and miscellaneous
expenses, are anticipated to include an amount of up to 3% of Gross Proceeds.
Jaffe, Raitt, Heuer & Weiss, P.C. has advised the General Partners that the
Partnership's intended treatment of the aforementioned organizational expenses
is proper and that any challenges by the Service will more likely than not be
resolved in favor of the Partnership, although Jaffe, Raitt, Heuer & Weiss,
P.C. does not opine as to the reasonableness of the amount of such fees.
The Partnership may incur fees for tax and financial advice and
services. Such fees are deductible under Section 162 of the Code as ordinary
and necessary business expenses or under Section 212 of the Code as expenses
for the production of income. There can be no assurance that the Service will
not reclassify all or part of these disbursements as organizational expenses,
syndication expenses or other non-deductible expenses.
Under Section 461 of the Code, an accrual basis taxpayer cannot claim
a deduction for an expense until economic performance occurs. A deduction would
not be allowed for a liability to pay for services under a contract until such
services are performed. In addition, Section 267 of the Code provides that an
accrual basis taxpayer may not take a deduction for an expense paid to a
related party (a term which includes partners of a partnership and certain
affiliates of such partners) unless such related party includes such item in
taxable income. Section 404(b) of the Code provides a similar restriction on
the deductibility of payments made to employees and independent contractors,
except that the deduction will be allowed if the payment is delayed no more
than 2-1/2 months into the following year. The General Partners represent that
the Partnership will not take deductions for accrued and unpaid expenses in
years prior to the time the party rendering the services properly includes such
amount in income.
The General Partners have represented to Jaffe, Raitt, Heuer & Weiss,
P.C. that the possible fees: (i) are reasonable in light of the anticipated
services to be rendered and obligations undertaken in exchange for such fees
during the years such fees are accrued by the Partnership; (ii) are ordinary
and necessary business expenses or are expenses incurred for the production of
income; and (iii) do not represent compensation in connection with the
acquisition of the Properties. Based upon the General Partners' representations
as to the reasonableness of asset management fees, Jaffe, Raitt, Heuer & Weiss,
P.C. has advised the General Partners that the asset management fees in amounts
not to exceed those set forth in this Prospectus to be paid to an Affiliate of
the General Partners, will properly be deductible when paid by the Partnership,
and any challenge to such deduction by the Service will more likely than not be
resolved in favor of the Partnership although Jaffe, Raitt, Heuer & Weiss, P.C.
does not opine as to the reasonableness of such fees.
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To the extent the Partnership is considered to produce passive income
or passive loss, the Partnership's expenses will be a component of such income
or loss. However, if the Partnership were considered to produce portfolio
income or loss, the expenses would be separately allocated as expenses incurred
for the production of income, which are treated as miscellaneous itemized
deductions. In addition, expenses which are clearly and directly allocable to
portfolio income produced by a partnership, even if the Partnership is
otherwise engaged in a passive activity, can not be taken into consideration in
determining passive income or loss, and instead constitute miscellaneous
itemized deductions. A recent pronouncement from the Service allows a
partnership to apportion its expenses between passive and portfolio based on
any reasonable method, pending issuance of Regulations by the Service. An
individual Limited Partner can only deduct miscellaneous itemized deductions to
the extent that the aggregate amount of such deductions, from all sources
including the Partnership, exceeds 2% of that individual's adjusted gross
income, and, therefore, the full deductibility of any fees characterized as
miscellaneous itemized deductions will depend on the individual tax situation
of each Limited Partner.
TAX TREATMENT OF THE LEASES
The availability to Limited Partners of their respective shares of
Partnership depreciation deductions with respect to a particular item of
Equipment or Property depends, in part, upon the classification of the lease
(the "Lease") of that Equipment or Property as a lease of property of which the
Partnership is the owner, rather than as a sale, financing or refinancing
arrangement.
Whether the Partnership is the owner of each item of Equipment or
Property and whether each of the Leases is a lease for federal income tax
purposes depends upon complicated questions of fact and law. In Frank Lyon
Company v. U.S., 435 U.S. 561 (1978), the Supreme Court held that a purported
lessor will be treated as the owner of the leased property for income tax
purposes if there is "a genuine multiple-party transaction with economic
substance which is compelled or encouraged by business or regulatory realities
is imbued with tax-independent considerations, and is not shaped solely by
tax-avoidance features that have meaningless labels attached." As long as the
lessor "retains significant and genuine attributes of the traditional lessor
status, the form of the transaction adopted by the parties governs for tax
purposes." Thus, the Court rejected the IRS' attempt to recharacterize the
sale and lease back transaction as a financing arrangement despite rent
payments that were merely sufficient to amortize third party debt, a purchase
option at a price that would be sufficient only to pay off the debt and to
return to the lessor its equity investment plus 6% interest and a renewal
option at an insubstantial rental rate. The Court concluded that where the
lessor has a downside risk of loss and can establish that sufficient upside
potential exists to provide a return of capital and more than an
inconsequential return on its investment, separate and apart from tax
considerations, the transaction will be recognized for tax purposes,
particularly where there are business motivations for structuring the
transaction as a lease, rather than as a financing arrangement or sale.
For example, in Dunlap v. Comm'r, 74 T.C. 1377 (1980), the Tax Court
upheld a taxpayer's characterization of a real estate transaction as a sale and
lease back despite rental payments under a 25-year net lease that approximated
the sum of the purported lessor's principal and interest expenses. The Tax
Court found that the taxpayer's residual interest in the property provided a
sufficient potential for gain. However, in Hilton v. Comm'r, 74 T.C. 305
(1980), the Tax Court recharacterized a sale and lease back as a financing
arrangement and distinguished Lyon based on the following findings: (1) the
rent in Hilton was not sufficient to completely amortize the mortgage
principal; (2) the rent in Hilton was not based on fair market rental value;
(3) in Hilton, no funds were paid by the buyer-lessor to the seller-lessee; (4)
the taxpayer in Hilton could not dispose of its interest in the property at a
profit; and (5) the organizations that owned the property in Hilton were formed
solely for purposes of the transaction and did not have real substance.
In Rice's Toyota World, Inc. v. Comm'r, 81 T.C. 184 (1983), affirmed
on this issue, 752 F.2d 89 (4th Cir. 1985), the Tax Court reaffirmed its
position that the recognition of leveraged leasing transactions for income tax
purposes is predicated on the owner having made an investment that will be
recovered with a profit apart from tax benefits. The Tax Court denied all
deductions, even to the extent of the purported
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owner's out-of-pocket equity participation, on the grounds that under the
owner's most favorable appraisals of residual value and at a zero discount
rate, the owner would not recover the original cash equity.
In Estate of Thomas v. Comm'r, 84 T.C. 412 (1985), the Tax Court held
that a partnership which leased computer equipment was the owner of the
equipment for tax purposes, in part because it retained a significant benefit
and burden with respect to the equipment. That is, the partnership had a
reasonable opportunity for a profit because the equipment's residual value was
projected to be substantially in excess of the equity invested in the
equipment. On the other hand, the partnership bore the risk that its equity
investment could be lost. The Tax Court concluded that the partnership was the
owner of the equipment for tax purposes, even though the equipment was subject
to a net lease and the rent payments under the lease were sufficient only to
make payments on the indebtedness incurred to purchase the equipment so that
there would be little cash flow during the term of the lease. The Tax Court
also commented that it is reasonable and normal for investors to take the tax
consequences of a proposed transaction into account if the transaction has
economic substance apart from tax savings.
In Torres v. Comm'r, 88 T.C. 72 (1987), the Tax Court held that a
partnership which purchased and leased back computer equipment was the owner
for tax purposes since (i) it paid approximately fair market value for the
equipment; (ii) at the time of its purchase, the equipment had an expected
useful life in excess of the lease back term; (iii) the equipment could
reasonably be expected to have a significant residual value at the end of the
lease back term; (iv) the partnership had title to the equipment; (v) the
parties treated the transaction as a sale and lease back of the computer
equipment; (vi) the lessee's option to purchase upon the expiration of the
lease term was for a price equal to the equipment's then fair market value; and
(vii) the partnership had a reasonable possibility of recouping its investment
in the equipment plus a substantial profit solely by looking to the income
potential residual value of the equipment.
In numerous other more recent cases, the Tax Court has relied on Lyon in
upholding the characterization of certain transactions as leases after focusing
on the following factors:
(i) the presence of purchase options and their relationship to the
original cost of the property and the rental payments during the lease period;
(ii) the economic viability of the transaction apart from tax
considerations;
(iii) other business factors influencing the form of the
transaction;
(iv) where the lease is for all or substantially all of the
remaining useful life of the property, the relationship between the costs of
the ownership over the term of the lease and the rental payments; and
(v) the ultimate ownership of the property upon termination of the
lease.
See, e.g., Goldwasser v. Comm'r , 56 T.C.M. 606 (1988); Levy v. Comm'r,
91 T.C. 838 (1988); Lamb v. Comm'r, 56 T.C.M. 511 (1988); and Young v. Comm'r,
56 T.C.M. 174 (1988).
Based on the anticipated terms of the Leases related to Property to be
entered into by the Partnership as represented by the General Partners and
discussed in greater detail in "Investment Objectives and Policies - Investment
Standards," Jaffe, Raitt, Heuer & Weiss, P.C. is of the opinion that it is more
likely than not that the Partnership will be treated as the owner of the
Properties for federal income tax purposes, although no assurance can be
provided until the Properties are acquired. The General Partners intend to
structure the acquisition and leases of Properties to insure that the
Partnership will be treated as the owner of such properties for federal income
tax purposes.
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In determining whether the Leases relating to Equipment are true
leases for federal income tax purposes, consideration must be given to the
criteria set forth by the IRS in Rev. Rul. 55-540, 1955-2 C.B. 39, Rev. Proc.
75-21, 1975-1 C.B. 715, Rev. Proc. 75-28. 1975-1 C.B. 752 and Rev. Proc. 76-30,
1976-2 C. .B. 647, for determining whether purported leases will qualify for
federal income tax purposes as leases rather than as sales, financing or
refinancing transactions. For example, under Rev. Proc. 75-21 and Rev. Proc
75-08, the IRS will issue an advance ruling that a lease qualifies as such for
tax purposes only if: (i) the lessor represents and demonstrates that at the
time the lease is entered into, the leased equipment reasonably will, at the
end of the initial term of the lease, have a residual value (ignoring
inflation) of at least 20% of its original cost and a remaining useful life of
the longer of one year or 20% of its originally estimated useful life; (ii) any
option to purchase leased equipment or renew the lease for such equipment will
be at the fair market value of such equipment determined at the time the option
is exercised; (iii) the aggregate rentals to be received over the lease term,
plus the estimated residual value of the leased equipment, will exceed its
purchase price (including acquisition fees and interest indebtedness) plus
operation expenses during the lease term; (iv) aggregate rentals over the lease
term will exceed, by a reasonable amount, aggregate disbursements (i.e., debt
service, if any, and operating expenses) paid in connection with ownership of
the leased equipment; (v) the lessor initially incurs, and maintains over the
lease term, a minimum "at-risk" investment (either equity or recourse
indebtedness) of at least 20% of the cost of the equipment; and (vi) the lessee
may not lend to the lessor any of the funds necessary to acquire the property,
or guarantee any indebtedness created in connection with the acquisition of the
property by the lessor. Further, the IRS will not issue an advance ruling that
a lease qualifies as such unless it is established that the leased property is
not "limited use property," i.e., that the use of the property at the end of
the lease term by the lessor or some person other than the lessee or related
persons is commercially feasible.
As presently anticipated, the Leases could not receive a favorable
advance ruling under the above requirements. The advance ruling requirements,
however, are merely guidelines and do not determine, as a matter of substantive
law, whether a particular transaction constitutes a lease of equipment for
federal income tax purposes, and courts have held that transactions not
otherwise satisfying the guidelines were in fact leases for federal income tax
purposes. It is anticipated that, except where the General Partners determine
it is more advantageous that a transaction not qualify as a lease for tax
purposes, substantially all of the Leases will be treated by the Partnership as
leases for tax purposes. However, the Partnership will not request a ruling
from the IRS that the Leases qualify as such for tax purposes, nor is it
expected that the General Partners will in all instances obtain the advice of
tax counsel with respect to the Leases. Moreover, the General Partners may
determine that the Partnership should enter into Leases on such terms that
their tax treatment would be questionable. Counsel has reviewed the standard
form of master equipment lease agreement to be used by the Partnership and
believes, assuming the other relevant economic criteria are satisfied as to a
Lease involving a particular item of Equipment, that the terms of such master
lease agreement form generally would support a determination that a Lease
embodying such form would qualify as a lease for federal income tax purposes so
long as any purchase or renewal options granted pursuant to such Lease are at
fair market value determined at the time of exercise. Whether a Lease is a true
lease will be determined under all of the circumstances, but the possibility of
a challenge by the IRS by reason of such fixed price or rental options is
increased. Should a Lease be recharacterized as a sale, financing or
refinancing transaction for federal income purposes, a portion of the income of
the Partnership under such Lease, equivalent to interest in respect of the
Lease, would be ordinary gain or interest income, without offset for cost
recovery deductions, generally resulting in increased amounts of taxable income
in the initial years of the Lease. Such interest income would be portfolio
income and thus would not be available to offset any passive activity losses of
the Partnership. See "Limitations on Deductibility of Losses-Passive Loss
Limitation" in this Section.
The IRS intensified its efforts to audit so-called "tax shelters,"
including partnerships engaged in equipment leasing activities similar to those
of the Partnership. In its instructions to examiners auditing equipment leasing
transactions, the IRS has placed significant emphasis on determining whether
lease transactions reflect economic reality without regard to anticipated tax
benefits. Examiners are instructed, for
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example, to determine whether the present value of the future rent stream, plus
the present value of the anticipated residual value of a piece of equipment,
exceeds the present value of the lessor's investment in the equipment,
determined without regard to anticipated tax benefits (the so-called "present
value test"), or whether the lessor's rate of return on a particular equipment
lease, disregarding anticipated tax benefits, is at least equal to the lessor's
alternative investment rate (the so-called "rate of return test"). The IRS has
not taken the position that the failure to meet either one or both of the
foregoing tests necessarily results in the recharacterization of an equipment
lease as a sale, financing or refinancing transaction (and indeed has issued
pronouncements to the contrary), but has instructed IRS agents to question the
proper characterization of purported equipment lease transactions where the
tests are not met. The General Partners anticipate that all the Equipment
Leases will meet both the "rate of return test" and the "present value test."
However, there can be no assurance that all or any of the Equipment Leases will
meet these tests.
IMPUTED RENTAL INCOME UNDER SECTION 467
The Code requires that rents under a "Section 467 Rental Agreement"
involving total payments in excess of $250,000 be reported for federal income
tax purposes on an accrual basis regardless of the lessee's or lessor's method
of accounting. A Section 467 Rental Agreement includes any rental agreement for
the use of tangible property under which there is at least one amount allocable
to the use of property during a calendar year, which amount is to be paid after
the close of the calendar year following the calendar year in which such use
occurs, or there are increases in the amount to be paid as rent under the
agreement. Section 467 of the Code requires that the lessor take into income
during a given year, in addition to any accrued rental payments, imputed
interest on rental amounts not paid by the close of the calendar year following
the calendar year to which the rental relates. In certain deferred rental
payment situations, this could result in more taxable income to the Partnership
and the Limited Partners during the early part of a Lease term.
Section 467 of the Code also provides that, in certain situations,
increasing rental payments will be leveled for federal income tax purposes;
that is, the parties will be required to take into account annually a constant
rental amount and imputed interest on rental amounts from prior years deemed
unpaid. The required rent leveling would apply if (i) a Section 467 Rental
Agreement provides for increasing rents, (ii) the lease is either part of a
sale-leaseback arrangement or for a term in excess of 75% of the statutory
recovery period for the property subject to the lease and (iii) a principal
purpose for the increasing rents is the avoidance of federal income tax. The
IRS has been directed to prescribe Treasury Regulations providing that rents
will not be leveled where the lease is structured in accordance with certain
accepted commercial practices, such as basing rent increases on a consumer
price index, on the lessee's receipts or on payments made to unrelated third
parties. Section 467 of the Code provides that the IRS will promulgate Treasury
Regulations establishing rules for decreasing rentals comparable to those for
increasing rentals. Because the applicability of rent leveling to the Leases
depends on facts not presently known, no opinion of Counsel is available on
this issue. If rent leveling were required with respect to any Leases, it might
result in more taxable income to the Limited Partners during the early part of
each such Lease term.
Even if rent payments under a Section 467 Rental Agreement are not
leveled (because, for example, no tax avoidance purpose is found), a lessor
disposing of property subject to certain types of lease arrangements (including
leasebacks and certain long-term leases) during the lease term may be required
to recognize a portion of the gain on the disposition as ordinary income,
rather than capital gain, to the extent that rental income reported by the
lessor is less than the amount that would have been reported by the lessor if
the rentals had been determined on a constant rental basis. Thus, if the
Partnership disposes of any Equipment during the term of a Lease with respect
to which it has not reported rentals on a constant basis, the Limited Partners
may have to recognize part of the gain on the disposition as ordinary income,
over and above any depreciation recapture income. The General Partners expect
to structure the Leases so as to avoid any adverse tax consequences under the
imputed rent rules except to the extent this treatment is precluded by business
factors.
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DEPRECIATION
Current provisions of the Code, together with present interpretations
thereof, will permit the Partnership, as an owner of improved real property and
equipment used in a trade or business, or held for the production of income, to
claim depreciation or cost recovery deductions over time based on the entire
cost of such depreciable property, plus certain capitalized costs related to
the acquisition of the Properties and Equipment, but, in the case of the
Properties, not including the value of the underlying land, even if such
Properties are financed largely with borrowed funds. There can be, however, no
assurance that future legislation or administrative action will not impair the
ability of the Partnership to depreciate its assets in the manner presently
contemplated by the General Partners.
In certain circumstances, the Service can disregard all or a portion
of the debt used to acquire property and thereby reduce the depreciable basis
of the property and hence reduce the depreciation deductions available to the
owners of the property. Courts have decreased the basis of property when the
purchase price for such property substantially exceeded its fair market value,
particularly if the seller was related to the buyer and if the purchase price
is paid primarily with non-recourse indebtedness. See, for example, Estate of
Franklin v. Comm'r, 544 F.2d 1045 (9th Cir. 1976). The Partnership may acquire
the Properties and the Equipment with non-recourse indebtedness. The use of
non-recourse indebtedness may provide for an increase in the possibility that
the purchase price of a property exceeds such property's fair market value. The
General Partners, however, have represented that they will use their best
efforts to assure that the cost of any property purchased will not exceed the
valuation of such property.
Under Section 168 of the Code, qualifying property will be depreciated
using a method set forth in that section over a statutorily determined recovery
period. Under the Code, real property placed in service after May 12, 1993,
must generally be depreciated by using the straight-line method over 27 1/2
years for residential real estate or 39 years for nonresidential real estate.
The deductions claimed in the year in which real estate is placed in service
are based on the number of months remaining in such year, although a taxpayer
is allowed only one half of one month's deduction for the month the property is
placed in service.
Tangible personal property placed in service after December 31, 1986,
is placed in a class of either three, five, seven or ten years. In addition to
adding the seven year class of property, the 1986 Act also changed the
depreciation method for personal property from the 150% declining balance
method to the 200% declining balance method for property placed in service
after December 31, 1986. It is expected that the tangible personal property to
be acquired by the Partnership will be classified as either three, five or
seven year property, depending on the nature of the assets and when they are
acquired, and will be depreciated using the statutory percentages which
approximate the 200% declining balance method, with a change to the
straight-line method at the time which maximizes the deduction. It should be
noted that use of the 200% declining balance method will result in a tax
preference item of purposes of the alternative minimum tax. See "-Other
Possible Tax Consequences to Investors-" "Alternative Minimum Tax on
Individuals" and "-Alternative Minimum Tax on Corporations" in this Section.
The recovery allowance with respect to any Equipment acquired by the
Partnership during its initial year of operation will be reduced. In Rev.
Proc. 89-15, 1989-1 C.B. 816, the IRS provided rules for computing the
depreciation allowance when personal property is placed in service in a short
taxable year. In general, Rev. Proc. 89-15 provides that if a partnership
acquires equipment during a taxable year that is shorter than a full twelve
months, the depreciation allowance for the year of acquisition is pro-rated
based on the number of months, or in some instances the number of days, in the
short taxable year. The unrecovered portion of the first year allowance will be
recovered in the next taxable year and a portion of the second taxable year's
recovery allowance will be available in the third year, etc. until the last
portion of the recovery deduction is allowed in the year following the last
year of the recovery period (i.e., the fourth year for 3-year property and the
sixth year for 5-year property).
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If, during any taxable year, the aggregate bases of Equipment placed
in service by a Limited Partner, directly and indirectly through the
Partnership, during the last three months of such taxable year exceeds 40% of
the aggregate bases of personal property placed in service during such taxable
year by the Limited Partner, the mid-quarter convention will be applicable to
all personal property placed in service during such taxable year by such
Limited Partner. The mid-quarter convention treats all personal property placed
in service during any quarter of a taxable year (or disposed of during any
quarter of a taxable year) as placed in service (or disposed of) at the
mid-point of such quarter. The effect of the mid-quarter convention may be to
reduce the amount of depreciation allowable as a deduction by a Limited Partner
during such taxable year.
Despite the foregoing, Section 168(g) of the Code may affect the
amount of depreciation deductions the Partnership can claim in any given year.
Section 168(g) of the Code requires the use of the straight-line method over a
40 year life for most real property and 12 years for most personal property, if
such property is "tax-exempt use property." However, in the case of any
tangible personal property which is "tax-exempt use property" subject to a
lease, the recovery period shall in no event be less than 125% of the lease
term.
In the case of a partnership, property held by the partnership becomes
"tax-exempt use property" if such partnership has both taxable entities and
tax-exempt entities as partners and if any allocations to such tax-exempt
entities are not "qualified allocations." Under Section 168(h)(2), "tax exempt
entities" include not only qualified plans and entities under Section 501 of
the Code, but also foreign persons and entities. These rules also apply in a
tiered partnership situation, and therefore, if a partnership with tax-exempt
partners is a partner in a partnership that owns depreciable property, a
portion of such property will be tax-exempt use property unless the allocations
of both partnerships are qualified allocations.
The Limited Partners are allocated different percentages of income or
loss depending on if the preferred returns have been paid and whether the
income is from operations or the sale of Properties or Equipment. Accordingly,
the Partnership's allocations do not constitute "qualified allocations" and,
therefore, a portion of the Partnership's "tax-exempt use property" equal to
the total of the percentage of allocations to each tax-exempt entity partner (a
term which also includes certain foreign persons) using the highest share such
partners could receive, must be recovered on a straight-line basis over a 40
year period in the case of real property, and must be recovered on a
straight-line basis over 12 years or, if longer, 125% of the lease term, in the
case of equipment. It is unclear the extent to which tax-exempt entities will
acquire Units, and, therefore, Jaffe, Raitt, Heuer & Weiss, P.C. is unable to
determine whether and to what extent this provision will affect the deductions
of the Partnership.
However, in the case of a tax-exempt organization, if its
proportionate share of the Equipment is predominantly used in a trade or
business the income from which is subject to the unrelated business income tax
imposed under Section 511 of the Code, it will not be considered a tax-exempt
entity for purposes of Section 168(h)(6) of the Code and accelerated
depreciation deductions with respect to its proportionate share of such
Equipment will still be available. Thus, because Limited Partners which are
tax-exempt organizations will be required to report their equipment leasing
income from the Partnership as unrelated business taxable income (see "-Impact
on Qualified Tax-Exempt Investors" in this Section), the Limited Partners'
ability to depreciate the Equipment under the 200% declining balance method
over its recovery period should not be adversely affected by such tax-exempt
organizations' investing in the Partnership.
While a foreign person or entity is generally classified as a
"tax-exempt entity" under Section 168(h)(2) of the Code, Section 168(h)(2)(B)
provides that a foreign partner will not be considered a "tax-exempt entity" if
more than 50% of the gross income from its proportionate share of partnership
property is subject to U.S. income tax. As noted below, while the matter is not
totally clear, it is likely that foreign Limited Partners will be deemed to be
engaged in a U.S. trade or business by reason of their investment in the
Partnership. See "-Tax Aspects for Foreign Individuals and Corporations" in
this Section. In addition, while many of the tax treaties to which the U.S. is
a party require that a nonresident alien individual or foreign corporation
maintain a permanent establishment in the U.S. in order to be subject to
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U.S. federal income taxation, foreign Limited Partners will be deemed to
maintain a permanent establishment in the U.S. by reason of the Partnership's
maintenance of an office in the U.S. Thus, it is likely that foreign Limited
Partners will be taxable in the U.S. on their distributive shares of net
Partnership taxable income under the normal rates applicable to U.S. taxpayers.
However, it is possible that certain foreign Limited Partners will not be able
to satisfy the 50% threshold because of certain exclusions or exemptions which
may be applicable to their proportionate shares of Partnership gross income.
Thus, the possibility exists that certain foreign Limited Partners will be
considered "tax-exempt entities" for purposes of Section 168(h)(6) of the Code
and that a portion of the Property or Equipment will have to be depreciated on
a straight-line basis over a period longer than the otherwise applicable
recovery period. It is not anticipated, however, that the treatment of foreign
Limited Partners as "tax-exempt entities" for purposes of Section 168(h)(6) of
the Code will have a material adverse effect on the tax consequences of an
investment in the Partnership.
In addition, if more than 35% of a piece of real property is leased to
tax-exempt entities and such property is subject to a "disqualified lease," the
real property will be considered tax-exempt use property to the extent such
property is leased to tax-exempt entities. A property is subject to a
disqualified lease if leased to a tax-exempt entity and is either: (i) subject
to tax-exempt financing; (ii) subject to a purchase option by the lessee for a
fixed price; (iii) has a lease term in excess of 20 years; or (iv) has been
purchased from the lessee or a party related to the lessee.
Since the Code now prescribes the recovery period which a taxpayer may
elect to use for its depreciable assets, the Service may not, in an audit,
challenge that recovery period, thus eliminating a dispute which frequently
arose between the Service and taxpayers under prior law. There are, however,
some remaining issues relating to the computation of depreciation with respect
to which there may be uncertainty. These include, for example, the allocation
of costs between depreciable and non-depreciable property and real and personal
property, the inclusion of certain capitalized fees in the depreciable basis of
the properties, and the proper time for commencing depreciation, that is, when
the improvements are first placed in service. There can be no assurance that
the positions taken by the Partnership with respect to these matters will be
sustained by the courts if challenged by the Service.
RECAPTURE OF DEPRECIATION
If depreciation previously deducted by a taxpayer is "recaptured," it
is taxed at ordinary income rates. Depreciation recapture is limited to the
amount of gain realized upon the sale or other disposition of the asset. The
1986 Act eliminated the recapture provisions for real property placed in
service after December 31, 1986 and, therefore, there should be no recapture
related to the real property portion of the Properties, although recapture
remains for the personal property components of the Properties and the
Equipment. Under the 1993 Act, for individuals, long-term capital gains income
is subject to a maximum marginal tax rate of 28% while ordinary income is
subject to a maximum marginal tax rate of 39.6%.
METHOD OF ACCOUNTING
In general, a partnership may compute its taxable income in accordance
with the method of accounting used by the partnership in keeping its books and
records, provided that such method of accounting, in the opinion of the
Service, "clearly reflects income." A partnership may adopt any permissible
method of accounting by computing its taxable income in accordance with such
method on its first income tax return.
The General Partners intend to cause the Partnership to maintain its
books and records, and report its income for tax purposes, on the accrual
method of accounting. Generally, under the accrual method of accounting, income
is reported when the taxpayer's right to receive the income becomes
ascertainable regardless of when the cash is received, and deductions are
claimed in the year such expenses become fixed and determinable regardless of
when paid. The determination to elect the accrual method of accounting is
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based upon the General Partners' determination that, for federal income tax
purposes, the accrual method of accounting will most clearly reflect the
Partnership's income. In addition, the 1986 Act mandates the use of the accrual
method for an entity such as the Partnership. Jaffe, Raitt, Heuer & Weiss,
P.C. is of the opinion that it is more likely than not that the Partnership's
use of the accrual method of accounting will be respected. For other
restrictions on the application of the accrual method of accounting, see
"-Deductibility of Fees" in this Section.
DEDUCTIBILITY OF INTEREST
Although the Code does not define the term, courts and the Service
have long defined "interest" as amounts which a person has agreed to pay for
the use or forbearance of money. Under the accrual method of accounting which
the Partnership will adopt, interest (and all other expenses) is deductible in
the tax year in which all events occur which establish the fact of the
liability giving rise to deduction and the amount thereof can be determined
with reasonable accuracy.
The amendments made by the 1986 Act place a stricter limitation on the
deductibility of all interest not incurred in connection with the taxpayer's
trade or business, other than interest on indebtedness secured by the
taxpayer's residences. Interest incurred for personal purposes will be
non-deductible, while interest incurred to purchase or carry property for
investment ("investment interest") will be deductible to the extent of net
investment income. Under the passive loss rules, interest incurred in the
course of a passive activity is not considered investment interest, but instead
constitutes a deduction which decreases the passive income or increases the
passive loss from the activity. However, interest incurred in acquiring an
interest in a passive activity, including interest that a Limited Partner
incurred by borrowing to acquire his Units, will be treated as investment
interest "to the extent attributable to portfolio income," which is a concept
that has not been clearly defined under the Section 469 Regulations, and the
remainder will be treated as part of the passive loss.
Additionally, the Service has issued temporary Regulations which
provide that the character of interest expense deductions depends on the use of
the borrowed funds. Although the proposed Regulations do not deal with interest
tracing of proceeds distributed by pass-through entities, it appears that if a
partnership borrows money or refinances a loan and distributes a portion of the
proceeds to its partners, the classification of the interest on such debt by
the partners will depend on how each partner uses the distributed funds.
Therefore, a partnership has to separately allocate among its partners the
portion of the interest expense on the loan attributable to the distributed
amounts, and the partners will deduct such funds based on how they use the
distributed funds. If a partner invests the distributed funds in another
passive activity, the interest deductions on the entire amount of the loan will
be treated as a component of the partnership's passive income or loss. However,
if the partner invests the distributed funds in a "portfolio" activity (such as
stocks, interest earning accounts, etc.), the interest will constitute
investment interest which can only offset portfolio income, and cannot offset
the partnership's passive income. Finally, if the partner uses the distributed
funds for personal purposes, the interest will be non-deductible subject to the
phase-in rules. If the Partnership in fact makes a distribution covered by
these rules, the General Partners anticipate that a detailed description of the
possible consequences will accompany such distribution.
ALLOCATIONS OF PROFITS OR LOSSES TO INCOMING PARTNERS
Items of income, gain, loss, deduction or credit recognized by a
partnership are allocated to those partners who are partners for tax purposes
under the partnership agreement at the time of recognition. In determining
whether items of income or loss have been recognized prior to a partner's entry
into a partnership, a partnership may either prorate items according to the
portion of the year for which a partner was a partner, or, in effect, separate
the partnership year into two or more segments and allocate income, loss or
special items in each segment among the persons who were partners during that
segment.
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The Agreement provides that profits and losses allocated to a Limited
Partner will be apportioned according to the ratio of Units owned by each of
them on a daily basis. The Partnership's allocations of profits and losses
among Limited Partners is intended to comply with Section 706 of the Code as
amended by the Tax Reform Act of 1984 (the "1984 Act"). The method adopted by
the Partnership was adopted for convenience of administration and is not
expected to create any distortion of allocations to any Limited Partners.
The Code does not clearly permit this particular method of allocation.
In an effort to prevent undue complexity, the Conference Committee Report to
the 1984 Act provides that the authorized Regulations will allow partnerships
to use a convention under which partners admitted prior to the sixteenth day of
a month are treat by partners for that entire month and partners admitted on or
after the sixteenth day of the month are treated as partners beginning on the
first day of the following month. However, an exchange on the floor of the
Senate between Senators Armstrong and Dole during debate on the 1984 Act lends
support to the use of a monthly convention which allows partners admitted any
time during the month to be treated as entering as of the first day of that
month. 130 Congressional Record S8418 (daily ed. June 27, 1984).
Jaffe, Raitt, Heuer & Weiss, P.C. is of the opinion that there is a
reasonable basis to conclude that the Partnership's method of allocation
complies with the Code and will be respected if challenged by the Service.
However, because of the lack of clear authority on this issue, no assurance can
be given that the Service would not prevail on such a challenge. For example,
in Internal Revenue News Release IR 84-129, December 13, 1984, the Service
stated it would adopt a semi-monthly convention as a permitted method of
allocation of income or loss to incoming partners. Although the adoption of the
semi-monthly convention as a permitted method of allocation to incoming
partners would not prohibit the Partnership's monthly convention, it would
provide support to a Service position holding the monthly allocation method
invalid. If the Partnership's monthly allocation method is held to be invalid,
Limited Partners admitted after the fifteenth day of any month may not be
allocated profit or loss for that month.
ALLOCATIONS OF PROFITS AND LOSSES
The profits and losses of the Partnership for tax purposes will be
determined as of the end of each fiscal year and will be allocated among the
Limited Partners in accordance with the terms of Section 11 of the Agreement.
Generally, operating profits and losses of the Partnership for tax purposes
will be allocated among the Partners based on the percentage of total
Partnership cash distributions received by the Partners attributable to such
year, although the General Partners will in all events be allocated at least 1%
of each Partnership tax attribute. While it is not anticipated that the
cumulative losses and deductions from Partnership operations that are allocated
to the Limited Partners will exceed the gross proceeds of this Offering, it is
possible that the total amount of such allocations and distributions will
exceed the gross proceeds, thus causing deficit balances in the Limited
Partners' Capital Accounts.
Profits and losses for tax purposes attributable to a sale or
refinancing of any Properties will be allocated pursuant to Paragraph 11.1.2 of
the Agreement, which generally provides for profits to be allocated first to
restore any deficit Capital Accounts balances, allocated in the same ratio as
the deficit in a Partner's Capital Account bears to the aggregate of all such
deficits. Any remaining profits are allocated first, to the Limited Partners
until their Capital Account balances equal the amount of their Adjusted
Investment; second, to the Limited Partners until their aggregate Capital
Account balances equal an amount determined by adding the amount of the
Performance Preferred Return to the amount of the aggregate Original
Contributions and subtracting from such sum the aggregate amounts of all
Distributions to Limited Partners; third, to the General Partners in such
amounts as are necessary to cause the aggregate Capital Account balances of the
General Partners to be in a percentage ratio of 12% of all Partnership Capital
Account balances of all Partners; fourth, to the Limited Partners in such
amounts as are necessary to cause the aggregate Capital Account balances of the
Limited Partners to be in a percentage ratio of 88% of all Partnership Capital
Account balances of all Partners; fifth, to the General Partners in an amount
equal to
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its contributions of capital to the Partnership; and, thereafter, 88% to the
Limited Partners and 12% to the General Partners.
Losses from the sale, exchange or other disposition of the
Partnership's property are allocable to the Partners to the extent that their
Capital Accounts exceed their Adjusted Investments, next to the Partners to
reduce the balance of their Capital Accounts to zero, and the balance of such
losses 99% to the Limited Partners and 1% to the General Partners.
A partner's distributive share of income, gain, loss, deduction or
credit is generally determined by the provisions of the partnership agreement.
Under Section 704(b)(2) of the Code an allocation of income, gain, loss,
deduction or credit (or item thereof) in the partnership agreement may be
disregarded if the allocation does not have "substantial economic effect." If
the allocation is found to be without "substantial economic effect," a
partner's share of the item will be determined on the basis of his "interest in
the partnership" which is determined by taking into account all the facts and
circumstances relating to the interest, including the partner's obligations
with respect to contributions, his interest in profits, losses and cash flow,
and his rights to distributions of capital on liquidation. The Regulations
under Section 704(b) of the Code state that the allocation of partnership
profits and losses will be respected if the allocation has substantial economic
effect, or if, taking into account all facts and circumstances, the allocation
is in accordance with the partner's interest in the partnership.
Allocations of partnership profits and losses generally will have
substantial economic effect only if: (i) the allocation is reflected in the
partners' capital accounts and such capital accounts are maintained in
accordance with Regulation Section 1.704-1(b)(2)(iv); (ii) liquidation proceeds
are, throughout the term of the partnership, to be distributed in accordance
with the partners' capital account balances; and (iii) any partner having a
deficit capital account balance following the distribution of liquidation
proceeds is required to restore the amount of such deficit to the partnership,
which amount will be distributed to partners having positive capital account
balances or paid to creditors. The economic effect of an allocation will be
substantial "if there is a reasonable possibility that the allocation (or
allocations) will substantially affect the dollar amounts to be received by the
partners from the partnership, independent of tax consequences."
Under the Agreement and pursuant to the General Partners'
representation as to maintenance of the Capital Accounts, requirements (i) and
(ii) will be satisfied. Because the Limited Partners have no obligation under
the Agreement to fund deficit Capital Account balances upon liquidation, other
than obligations resulting from the requirement to make initial Capital
Contributions, requirement (iii) will not be satisfied.
The Regulations provide an alternate test for economic effect if
requirement (iii) is not met. Under the alternate test, an allocation will have
economic effect if such allocation does not cause or increase a deficit balance
in such partner's capital account and the partnership agreement contains a
"qualified income offset." For purposes of this alternate test, capital
accounts must be adjusted for, among other items, distributions of cash in
excess of income which "are reasonably expected to occur" in future taxable
years. A partnership agreement contains a "qualified income offset" if it
requires that a partner, who unexpectedly receives a cash distribution in
excess of any offsetting increases in his capital, or an allocation of certain
specifically enumerated deductions which cause a deficit balance in such
partner's capital account, be allocated items of income to eliminate such
deficit balance as quickly as possible.
The Agreement contains a "qualified income offset." There is no fixed
or specifically anticipated schedule of cash distributions to the Limited
Partners from the Partnership, a fact which indicates that there are not cash
distributions which are "reasonably expected to occur." Jaffe, Raitt, Heuer &
Weiss, P.C. is of the opinion that it is more likely than not that allocations
which do not cause or increase deficit balances in the Limited Partners'
Capital Accounts (determined in accordance with the provisions of the alternate
economic effect test discussed above) will have economic effect. Because the
Partnership anticipates acquiring Properties and Equipment and will structure
its operations to minimize deductions, and because
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any funds not used to acquire Properties or Equipment will be invested to
produce income, the amount of income or loss that will be realized by the
Partnership is unclear, and therefore, it is unclear whether any Limited
Partner's Capital Account balance will ever be negative. Further, it is
possible that once the Capital Account balances of all Limited Partners become
negative, the Regulations will require the Partnership to allocate all of the
Partnership's losses and depreciation deductions to the General Partners.
In the situation where allocations cause deficit balances in the
partners' capital accounts and, therefore, do not have substantial economic
effect, the Regulations again indicate that such losses and deductions should
be allocated to the partners who bear the risk of loss on such debt. The
Regulations focus on the type of indebtedness incurred by the partnership to
fund the losses or which encumbers its property. Additional rules apply to
allocations attributable to non-recourse debt. Debt is classified as recourse
or non-recourse based upon whether any partner or person related to any partner
bears the ultimate risk of loss with respect to such debt. Therefore, debt will
be classified as non-recourse to the extent that no partner or person related
to a partner bears the ultimate risk of loss on such debt. With regard to
allocations attributable to recourse debt, if requirements (i) and (ii),
described above, are met, the determination of whether the partner allocated
the loss for tax purposes actually bears the economic loss is based on a
comparison of how the proceeds of partnership liquidation would be distributed
if the partnership's property was sold for its book value (essentially,
adjusted basis) at the end of the year proceeding such allocation and the end
of the year in which such allocation occurs (the "Certain Determinations
Test"). If the allocation of tax loss has actually affected the distribution of
liquidation proceeds, then the allocation is in accordance with such partner's
interest in the partnership. If all Properties and Equipment of the Partnership
were sold for their book values, as required under the Regulations discussed
above, the indebtedness incurred (if any), whether recourse or non-recourse,
should be retired and, therefore, the General Partners should not bear any risk
in excess of that borne by the Limited Partners.
The Regulations provide that allocation of losses or deductions
attributable to non-recourse debt ("non-recourse allocations") do not have
substantial economic effect, since the creditor, and not the partners, bears
the economic burden of such losses. The Regulations also indicate that
indebtedness held by a Partner will be treated as recourse indebtedness. The
Regulations do, however, contain a "safe harbor" under which non-recourse
allocations will be deemed to be made in accordance with the partners'
interests in the partnership. This "safe harbor" is available if: (a) such
allocations are reflected in partners' capital accounts and liquidation
proceeds are distributed in accordance with such capital accounts; (b) the
partnership agreement provides that non-recourse allocations are reasonably
consistent with other allocations, which have substantial economic effect, of
some other significant partnership item attributable to property securing the
non-recourse liability; (c) the partnership agreement contains either: (1)
requirement (iii) of the substantial economic effect test, described above; or
(2) a "minimum gain chargeback;" and (d) all other material allocations are
recognized as being in accordance with a partner's interest in the partnership.
Non-recourse allocations are defined as the next increase in
partnership "minimum gain" for each taxable year. Minimum gain is defined as
the difference between the non-recourse liabilities securing a property and the
adjusted basis of such property. A "minimum gain chargeback" provides that in
any year in which there is a net decrease in minimum gain, partners with
deficit capital accounts will be allocated gross income to restore such deficit
capital accounts. The Regulations also provide that a partner's share of
minimum gain is treated as satisfying requirement (iii) above, to the extent of
such minimum gain. The Regulations also provide that debt held by any partner
or guaranteed by any partner will not be treated as non-recourse and losses and
deductions attributable thereto will also be allocated to such partner.
The Agreement contains a minimum gain chargeback, and so long as the
Limited Partners do not have negative Capital Account balances, the allocations
can have negative Capital Account balances, the allocations can have
substantial economic effect. Accordingly, non-recourse allocations that arise
before the Capital Account balances became negative could meet the "safe
harbor" described above. However, the determination of allocations from any
particular property is based upon the debt structure of such property.
Accordingly, Counsel is unable to determine the extent to which any property
will generate non-recourse
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allocations or whether there will be sufficient minimum gain at the time (if
ever) the Limited Partners' Capital Accounts become negative.
The economic effect of an allocation will generally be substantial if
the allocation substantially affects the dollar amounts to be received by the
partners from the partnership. However, an allocation which reduces the total
tax liability of all of the partners but either: (i) does not result in a
substantial difference in the respective capital account balances of each of
the partners at the end of the year ("shifting allocations"); or (ii) will be
largely offset by one or more other allocations within a period of five years
("transitory allocations"), will not have substantial economic effect.
Furthermore, if there is a strong likelihood that the after-tax economic
consequences of no partner will, in present value terms, be substantially
diminished compared to the after-tax consequences had the allocation not been
contained in the partnership agreement, the economic effect of the allocation
will not be substantial.
Once the Limited Partners' Capital Account balances become negative
the allocations will be honored if they are in accordance with the Limited
Partners interests in the Partnership, which is a subjective determination
based on several factors in the Regulations including: (i) relative
contributions to the Partnership; (ii) interests in economic profits and
losses; (iii) interests in cash flow and other non-liquidating distributions;
and (iv) rights to liquidating distributions. The allocations of profit and
loss from operations are in the same ratio as distributions of Cash Flow. In
addition, the percentages for allocating profits and distributing cash from
sales or refinancings are approximately the same. Finally, because all
allocations increase or decrease the Partners' Capital Account balances, they
affect the cash distributions ultimately received by the Partners. Based on the
foregoing, Jaffe, Raitt, Heuer & Weiss, P.C. is of the opinion that it is more
likely than not that substantially all of the allocations which cause negative
Capital Account balances will be considered in accordance with the Limited
Partners' interests in the Partnership, except if the Partnership incurs
"recourse" debt or other debt for which not all Partners bear the risk of loss.
Many factors will determine whether the Limited Partners Capital Accounts will
become negative, including: (i) the amount of capital contributed by the
Limited Partners; (ii) the taxable income or loss produced by the Properties or
Equipment; (iii) the amount of depreciation related to the Properties or
Equipment; and (iv) the cash distributed to the Limited Partners. Many of these
factors are based on facts not ascertainable as of the date of the Prospectus
and, therefore, it is unclear when, if ever, the Limited Partners will have
negative Capital Account balances.
In conclusion, Jaffe, Raitt, Heuer & Weiss, P.C. is of the opinion
that based upon, and subject to, the assumptions set forth above that it is
more likely than not:
(i) that the allocations of profit and loss which do not cause deficit
balances in the Limited Partners' Capital Accounts (determined in accordance
with the requirements of the Regulations) have economic effect and that such
economic effect will be substantial; and
(ii) substantially all of the other allocations of profit and loss
attributable to Properties or Equipment will be considered in accordance with
the Partners' interests in the Partnership and, therefore, will be given effect
for federal income tax purposes.
The Regulations will require future interpretation and clarification
through rulings or judicial decisions and there is no assurance that the
Regulations will not be interpreted by the Service in a manner adverse to the
Limited Partners. The General Partners may, under certain circumstances, amend
the Agreement: (i) to cause the allocations of Partnership profits and losses
contained in the Agreement to have substantial economic effect in accordance
with future interpretations of the Regulations under Section 704 of the Code or
any other statutory provision or regulation relating to such allocations; or
(ii) to cause the provisions of the Agreement to comply with any applicable
federal legislation enacted or regulations issued after the date of the
Agreement. If the allocations of profits and losses are modified due to future
interpretations or based on subsequent events (such as incurring indebtedness),
such modified allocations
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could have an impact on the amount of income and deductions allocated, and
ultimately the cash distributed, to the Limited Partners.
Finally, in the event that any creditor of the Partnership is entitled
to a percentage of the profits of the Partnership of a particular property or
the net sales proceeds from a property, such creditor may be recharacterized as
an equity participant in the Partnership. If this occurs, the Partnership's
allocation of profits and losses could be adversely affected, because the
"creditor", as a holder of an interest in the Partnership, would be allocated
profits and losses which would otherwise be allocated to the Limited Partners.
POTENTIAL APPLICATION OF SECTION 183 OF THE CODE
Under Section 183 of the Code, deductions that a taxpayer derives from
"activities not engaged in for profit" are allowed only to the extent of the
gross income derived by the taxpayer from the activity, less amounts that are
deductible irrespective of a profit motive. Whether a profit motive exists is a
question of fact that depends on the actual intent of the Limited Partner as
evidenced by the presence of objective facts. No investor should become a
Limited Partner unless his objective is to secure an economic profit,
determined without regard to any tax benefits that may be received. In
addition, deductions can be denied if the Partnership is not engaged in an
activity for profit. The Code contains an objective test of profit motive which
the partnership should meet, based on its anticipated activities. Based upon
the profit motive of the Partnership and the Limited Partners, as represented
to counsel by the General Partners, Jaffe, Raitt, Heuer & Weiss, P.C. is of the
opinion that any such application of Section 183 by the Service to the
Partnership is more likely than not to be resolved in favor of the Partnership.
REFINANCING OF PARTNERSHIP PROPERTY
No gain or loss is recognized by a partnership upon the refinancing of
a non-recourse loan, so long as the new loan is non-recourse and equals or
exceeds the unpaid balance of the hold loan. In addition, no gain or loss will
be recognized if a partnership encumbers a property with a loan at a time
following its acquisition. Any financing or refinancing proceeds distributed to
the Limited Partners which occurs because a new non-recourse loan is obtained
which equals or exceeds the unpaid balance of the old loan will not constitute
taxable income to the Limited Partners receiving the distributions if at the
time of distribution the distributee's tax basis in his Units equals or exceeds
the amount distributed. The deductibility of the interest on the loan and the
funds which were distributed to the Limited Partners, will depend on how the
Limited Partners use the funds. See "Deductibility of Interest" in this
Section. To the extent the amount of any new non-recourse loan is less than the
amount of the existing non-recourse loan, or is refinanced with a mortgage that
is recourse to the Partnership or any Limited Partner, the Limited Partners
will be treated as having received a deemed cash distribution from the
Partnership, possibly causing the Limited Partners to recognize gain even
though they would receive no cash. See "- Taxation of Cash Distributions" in
this Section.
SALE OR FORECLOSURE OF PARTNERSHIP PROPERTIES OR EQUIPMENT
Under Section 1001 of the Code, gain for federal income tax purposes
is equal to the difference between the amount "realized" by a taxpayer on the
sale or exchange, and the taxpayer's basis in the property sold. In addition,
the amount realized by a taxpayer includes the principal amount of any debt for
which the taxpayer is relieved by the sale or to which the property was
subject. Therefore, the gain realized by the Partnership upon the sale or
exchange of a Property or Equipment, which includes a foreclosure of any
mortgage or lien on such Property or Equipment, will be measured by the
difference between: (i) the proceeds, if any, realized upon the sale, plus the
principal amount of, and any accrued interest on, any continuing mortgages and
other indebtedness of the Partnership, or to which the Property or Equipment
thereof is subject; and (ii) the Partnership's adjusted basis in such Property
or Equipment at the time of the sale or exchange.
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It is anticipated that the Properties or Equipment will constitute
"Section 1231 assets" (i.e., property used in a trade or business and held for
the holding period applicable to long-term capital gain), unless it is
determined that the Partnership is a "dealer" in real estate for federal income
tax purposes. A Limited Partner's proportionate share of gains or losses from
the sale of such assets will be combined with any other Section 1231 gains or
losses incurred by that Limited Partner in that year. Section 1231 gains are
treated as ordinary income to the extent of Section 1231 losses recognized by a
Limited Partner during the previous five year period, to the extent such
Section 1231 losses have not already been "recaptured" by such Limited Partner.
If Section 1231 gains exceed Section 1231 losses, such gains and losses are
treated as net long-term capital gains. If Section 1231 losses exceed Section
1231 gains, such losses are treated as ordinary losses.
In the event that Property or Equipment is deemed to be held for sale
to customers in the ordinary course of the Partnership's trade or business
("dealer property"), the gain or loss on the sale or other disposition of such
Property or Equipment will be taxed as ordinary income or loss, rather than
capital gain. Also, if a Limited Partner were a "dealer" in real estate or
equipment, his share of any gain or loss could be treated as ordinary income or
loss, even if the Partnership were not deemed to be a "dealer." The
Partnership intends to hold the Properties and Equipment for the production of
rental income and has not been organized to operate as a "dealer" in real
property or equipment, nor does it presently intend to hold property for sale
to customers in the ordinary course of its trade or business. If the
Partnership conducts its operations as it presently contemplates, the General
Partners believe the Properties and Equipment should not be classified as
"dealer properties" and the Partnership should not be classified as a "dealer"
in real estate or equipment at the time it sells the Properties or Equipment.
However, because the determination of "dealer" status is based upon the facts
existing at the time of the sale of a property. Jaffe, Raitt, Heuer & Weiss,
P.C. is unable to render an opinion (either favorable or unfavorable) as to the
probable outcome of this issue.
Under the Code, capital gains income is subject to a maximum marginal
tax rate of 28% while ordinary income is subject to a maximum marginal tax rate
of 39.6%. However, the mechanisms of computing net capital losses remain. In
addition, income realized by Limited Partners that are tax-exempt entities from
the sale of "dealer" property will be taxed as UBTI.
In general, involuntary transfers of the Partnership's property (such
as a mortgage foreclosure) would have the same effect as a sale. If there is a
foreclosure or other involuntary disposition, the Partnership will recognize
taxable gain to the extent that its adjusted basis for the property is less
than the amount of the mortgage discharged by the foreclosure or other
involuntary disposition, the partnership will recognize taxable gain to the
extent that its adjusted basis for the property is less than the amount of the
mortgage discharged by the foreclosure or other involuntary disposition, and
the Partners would recognize taxable income without receiving cash with which
to pay the tax. Because any foreclosure is likely to produce substantial
taxable gain, such an event may have serious adverse tax consequences for an
Unit Holder. Under certain other circumstances, the net cash proceeds
distributed from the sale or other disposition of Property or Equipment may not
be sufficient to pay the tax liabilities of a Limited Partner resulting from
such event. Such circumstances might include: (i) the sale of property from
which a Limited Partner's share of cash proceeds is significantly less than his
share of gain from federal income tax purposes, which could occur if the
Property or Equipment is sold subject to non-recourse debt and if the basis of
the Property or Equipment is low; and (ii) the sale of property at a time when
all or part of the net proceeds therefrom may have to be utilized by the
Partnership to meet other obligations.
If the taxpayer sells property which is not "dealer property", and
receives cash and indebtedness from the buyer, the gain from such sale will
qualify for the installment method, which allows the seller to recognize the
gain from the sale as the cash related to the indebtedness is received. Despite
this general rule, following the 1987 Act, a seller who utilizes the
installment method is required to pay interest to the Service with respect to a
deferred tax attributable to such installment obligations if the aggregate face
amount of all such installment obligations held by the taxpayer exceeds
$5,000,000. Although these new rules do not deal with the question of
pass-through entities, such as the Partnership, the 1987 Conference Report
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indicates that Regulations will treat the installment obligations of a
partnership as though they were held directly by the partners "in proportion to
each partner's share in the partnership." Therefore, if the Partnership sells
Property or Equipment using the installment method, it appears that each
Partner will aggregate his proportionate share of the Partnership's installment
obligations along with such Partner's installment obligations from other
sources to determine if he exceeds the $5,000,000 limit. In addition, if the
Partnership pledges the installment obligation as security for other
indebtedness, the net proceeds of the loan are treated as a payment on the
pledged installment obligation and, therefore, gain would be recognized under
the installment method.
SALE OR TRANSFER OF PARTNERSHIP UNITS
Gain recognized by a Limited Partner, who is not a "dealer' in
securities or partnership interests, on the sale of a Unit which has been held
for more than the applicable holding period will generally be treated as
long-term capital gain. Under the Code, capital gains income is subject to a
maximum marginal tax rate of 28% while ordinary income is subject to a maximum
marginal tax rate of 39.6%. (See "-Other Possible Tax Consequences to
Investors--Capital Gain and Loss Provisions" in this Section). In computing
such gain, the selling Limited Partner's allocable share of existing
non-recourse indebtedness is included for the purposes of determining both the
selling Limited Partner's tax basis in his Units (as adjusted for income, loss
and cash distributions) and the amount of proceeds realized upon such a sale or
transfer. That portion of the selling Limited Partner's amount realized which
is allocable to "substantially appreciated inventory items" and "unrealized
receivables," as defined in Section 751 of the Code ("Section 751 Property"),
will be treated as ordinary income regardless of whether such sale or exchange
produced a profit or loss and, therefore, income could be recognized even if
there was a loss upon the sale. "Unrealized receivables" includes potential
depreciation recapture. Due to potential depreciation recapture relating to
Equipment, a significant amount realized on the disposition of Units could be
ordinary income. If the amount allocable to unrealized receivables were to
exceed the total gain realized or if such Limited Partner were to incur a loss
on the sale, he would nonetheless be required to recognize ordinary income
equal to such allocable amount, with an offsetting capital loss. Additionally,
the transferor of a Unit must provide the Partnership with notice of such
transfer or be subject to various penalties.
In addition, final Regulations require a partnership to prepare an
information from any time there is a sale or exchange of any interest in a
partnership which has Code Section 751 property. Section 6050K of the Code
requires the transferor Limited Partner to notify the Partnership of the
transfer, and the Partnership is then required to furnish a notice to each
transferor and transferee. The information return (Form 8308) will be attached
to the Partnership's informational tax return each year.
NO SECTION 754 ELECTION
If a partnership files an election under Section 754 of the Code (a
"Section 754 Election") and a partner transfers his interest, the basis of the
partnership's property, with respect to the transferee partner only, is either
increased or decreased by the difference between the purchase price for his
partnership interest and his proportionate share of the partnership's adjusted
basis for all partnership property. Any increase or decrease resulting from
such adjustment is allocated among the partnership's assets in accordance with
rules established under Section 755 of the Code, which results in an increase
or decrease in depreciation deductions with respect to the transferee partner.
After such adjustment has been made, the transferee partner's share of the
adjusted basis of the partnership's property is equal to the adjusted basis of
his partnership interest.
The Partnership does not presently intend to file a Section 754
Election to adjust the bases of Partnership property following the transfer of
a Unit because of the cost and tax accounting complexities such an election
could entail. In the absence of a Section 754 Election, a transferee Limited
Partner will be subject to tax upon a portion of the proceeds which, as to such
taxpayer, constitutes a return of his purchase price for his Unit. This will
occur because, in the absence of a Section 754 Election, the
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Partnership's tax basis in the Properties and Equipment will not be changed
following the transfer of the Unit to take into account any changes in the
fair market value of the Properties and Equipment, and the amount of gain
recognized by the Partnership and allocated to the Partners, including
the transferee of the Unit, will be based on this unchanged basis figure.
However, the transferee of the Unit will be able to take this difference into
account through either less income or a greater loss upon the liquidation of
the Partnership.
DISSOLUTION OF PARTNERSHIP
In the event of a dissolution of the Partnership prior to the expiration
of its term, the Partnership might be required to liquidate all of its
Properties during a limited period of time. This might cause the Partnership to
sustain substantial economic losses in terms of the original cost of the
Properties or Equipment. Nevertheless, the Partnership wold be required to
recognize taxable income on such sales to the extent the selling price exceeds
the Partnership's adjusted tax basis in the Properties or Equipment. See
"-Sale or Foreclosure of partnership Properties or Equipment" in this Section.
Under Section 708(b) of the Code, if at any time no part of the business
of the Partnership continues to be carried on by any of the Partners, or if
within a 12-month period there is a sale or exchange of 50% or more of the
total interests in Partnership capital and profit, a termination of the
Partnership occurs and the taxable year of the Partnership would close. Upon
such a termination, the Properties or Equipment acquired by the
Partnership would be treated as distributed to the Partners, resulting in
gain or loss to the Partners without necessarily receiving a cash
distribution. Following the deemed distribution, contribution of the same
Properties and Equipment in the form of undivided interest, would be deemed
to be made to a new partnership or to an association taxable as a
corporation. The Properties and Equipment owned by the Partnership might have
a different basis in the hands of the new partnership.
OTHER POSSIBLE TAX CONSEQUENCES TO INVESTORS
The following is a summary of certain provisions of the Code which, while
they are generally not peculiar to the Partnership, may affect an investor
depending on his individual circumstances, such as, for example, his tax
bracket, the amount of his capital gains or losses and the character and
type of his other investments.
Miscellaneous Deductions. Section 67 of the Code imposes a limitation on
the allowance of miscellaneous itemized deductions. Miscellaneous itemized
deductions of noncorporate taxpayers now are allowable only to the extent
they exceed a "floor" of two percent of a taxpayer's adjusted gross income.
The applicable Treasury Regulations also prevent taxpayers from indirectly
deducting, through a pass-through entity such as a partnership, expenses which
would not be deductible by reason of the two percent floor if paid or
incurred directly by such taxpayers. Among the deductions subject to the two
percent floor are those for expenditures related to investment income or
property, which are deductible under Section 212 of the Code. It is possible
that the IRS could take the position that some or all of the deductions
claimed by the Partnership for expenses incurred in connection with its
activities should be treated as deductions which are subject to the two
percent limitation.
Capital Gain and Loss Provisions. Under the Code, net capital gain
(long-term capital gain less short-term capital loss) of individuals is
subject to a maximum marginal tax rate of 28% while ordinary income is subject
to a maximum marginal tax rate of 39.6%. In addition, the amount of ordinary
income against which net capital losses may be deducted by an individual is
limited in each year to the lesser of taxable income or $3,000. A corporation is
taxed on net capital gain at the regular tax rates applicable to corporations.
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Alternative Minimum Tax On Individuals. A non-corporate taxpayer will
be liable for the alternative minimum tax for any year in which such tax
exceeds the taxpayer's regular tax. The base of the alternative minimum tax
(alternative minimum taxable income) is taxable income as specifically
computed in this provision plus specified preferences. In addition, in
determining the deductions allowable in computing alternative minimum taxable
income, interest paid or incurred is deductible, but only to the extent of a
Limited Partner's "qualified net investment income" which is generally
investment income less investment expense. Interest paid or incurred to
purchase or carry a limited partnership interest is not allowable in
computing adjusted gross income for purposes of the expanded alternative
minimum tax unless such interest meets the above qualifications.
Additionally, the passive loss rules of the regular tax apply to the
alternative minimum tax, thereby imposing the same limitations and
allowances. For personal property placed in service after 1986, depreciation
which is otherwise computed for regular tax purposes using the 200% declining
balance method must be computed on the basis of the 150% declining balance
method for AMT purposes. In addition, in computing alternative minimum
taxable income, real property must be depreciated over a 40 year useful life.
The alternative minimum tax rate is 26% on alternative minimum
taxable income (above the exemption amount) of up to $175,000 and on the
excess of such amount the exemption amount is: (i) $40,000 in the case of a
joint return; (ii) $20,000 in the case of an individual who is not married;
and (iii) $20,000 in the case of a married individual who files a separate
return or an estate or trust, which exemptions are reduced by 25 cents for
each dollar of alternative minimum taxable income in excess of $150,000 for
married taxpayers filing jointly, $112,500 for single taxpayers and $75,000
for married taxpayers filing separately. A taxpayer will pay the higher of
his regular tax or the alternative minimum tax. The impact, if any, of
Partnership tax preference items allocated to each Limited Partner will
depend on the particular Limited Partner's overall tax situation. THE EXTENT,
IF ANY, TO WHICH A CORPORATE OR NON-CORPORATE PARTNER COULD BE SUBJECT TO THE
ALTERNATIVE MINIMUM TAX WILL DEPEND UPON HIS PERSONAL TAX SITUATION. EACH
INVESTOR IS THEREFORE URGED TO CONSULT HIS PERSONAL TAX ADVISOR WITH RESPECT
TO THE POSSIBLE EFFECT OF SUCH TAX ON HIM.
Alternative Minimum Tax on Corporations. An alternative minimum tax
is imposed on corporations (other than Subchapter S corporations) annually at
the current rate of 20% of the amount by which the corporation's alternative
minimum taxable income exceeds $40,000, phased out for alternative minimum
taxable income in excess of $150,000. In computing alternative minimum taxable
income, only 40-year straight-line depreciation on real property can be used,
but this will not cause an alteration because the Partnership anticipates
electing such 40-year method. Additional preference items include 75% of the
difference between "adjusted current earnings" and alternative minimum
taxable income for years beginning after 1989.
PARTNERSHIP TAX RETURNS AND TAX INFORMATION
The tax return filed by the Partnership may be audited by the Service.
Adjustments (if any) resulting from such an audit could result in an audit
of the Limited Partners' own returns. Any such audit of the Limited Partners'
tax returns could result in adjustments to both Partnership and
non-Partnership items of income, gain, loss, deduction or credit.
The Code generally provides that partnership income, gain, loss,
deductions and credits reported by partners can be adjusted only through a
unified partnership proceeding, rather than through separate proceedings
with each partner. Section 6223 provides for certain notice
requirements of the unified administrative proceeding and the right of
certain partners to participate in the proceeding including any settlement
resulting therefrom. An exception to the notice requirement exists for any
partner with less than a 1% profit interest in a partnership having more
than 100 partners. However, a group of partners who together have a 5% profit
interest may designate a member of the group to receive notice from the
Service on behalf of the group. Otherwise, the less than 1% partners will
receive notice through a designated "tax
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matters partner" determined by the General Partners. The Managing General
Partner will be designated as the tax matters partner. The tax matters
partner may enter into settlement agreements that may be binding on non-notice
Limited Partners. The tax matters partner also has the authority to
extend the statute of limitations for assessment as to all Limited
Partners (even if their profits interest is 1% or greater) and to determine
the judicial forum where the Service's proposed adjustment will be litigated.
If the Tax Court is not chosen, the Service can assess a proposed deficiency
immediately against all Limited Partners. Failure of the tax matters partner
to keep each Limited Partners informed of the administrative and judicial
proceeding does not affect the applicability or adjustment to the
non-notified Limited Partners. The new law also provides for consolidated
judicial proceedings.
Limited Partners will be charged interest and may be required to
pay penalties with respect to any deficiencies assessed by the Service.
Section 6621 of the Code provides that the interest rate on underpayments of
federal income tax will be determined quarterly, and is compounded daily. The
rate for the period from July 1, 1996 to September 30, 1996 is 9% per annum.
Under the 1989 Act, several penalty provisions were consolidated
into one accuracy-related penalty. This new penalty is equal to 20% of any
underpayment of tax resulting from negligence of disregard of the rules and
Regulations, substantial underpayments of tax, substantial valuation
overstatements, substantial overstatement of pension liabilities, and
substantial estate or gift tax valuation understatements. An underpayment is
defined as the amount by which any tax exceeds the excess of the sum of tax
shown on the tax return plus any tax assessed or collected without
assessment over any amount credited, refunded or repaid a taxpayer on the
ground that the tax imposed was less than the excess described above.
The 20% penalty applies to any substantial understatement of income tax.
Generally, a substantial understatement is defined as an understatement in tax
exceeding the greater of 10% of the tax required to be shown on the return
or $5,000. The penalty generally does not apply where the taxpayer's
position is supported by a reasonable basis for taking such position as to
any item, the relevant facts of which are adequately disclosed in the return.
In the case of "tax shelters," however, mere disclosure of the relevant
facts of an item on the return will not abate the penalty. Furthermore, the
"substantial authority" exception will not apply to "tax shelters" unless the
taxpayer also reasonably believed that the tax treatment of such item was more
likely than not the proper treatment. For purposes of these exceptions, a "tax
shelter" includes a partnership if the principal purpose of such
partnership is the avoidance or evasion of federal income tax. The 1989 Act
expanded the list of authorities upon which taxpayers may rely as
"substantial authority" and requires the Service to develop a list of popular
positions for which it believes there is not "substantial authority."
The Partnership will provide tax information to the Limited Partners
within 75 days following the close of each fiscal year.
REGISTRATION WITH THE SERVICE
Entities classified as "tax shelters" must register with the Service and
provide each investor with a tax shelter registration number, which will be
issued by the Service. Under Section 6111 of the Code and temporary
Regulations issued thereunder, an entity must register if the ratio of
deductions generated by the entity (computed without regard to income earned by
the entity) and 350% of the credits available to the entity, to the
investment in the entity by the investor equals or exceeds 2:1. A general
partner is considered an investor if its allocable share of profits and losses
exceeds 2% of the Partnership's profits and losses. However, entities in
which all projections and representations indicate that gross income will
exceed gross deductions during each of the first five years of the investment
are considered projected income investments and are exempted from the
registration requirements.
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The General Partners do not intend to register the Partnership
with the Service under Section 6111 of the Code because the General
Partners believe that the gross income of the Partnership is anticipated to
equal or exceed its gross deductions at the end of each of the
Partnership's first five tax years. In addition, it is possible that the tax
shelter ratio of the Partnership will not exceed 2:1 during any of the first
five tax years. Any penalties that might stem from this failure to register
would be imposed on the General Partners as the organizers of the
investment and, therefore, would not have any direct adverse impact on the
Limited Partners or their investment in the Partnership. However, listing the
Partnership's activities on an individual Limited Partner's tax return
without a registration number could increase the possibility of scrutiny of
such return by the Service.
TAX ASPECTS FOR FOREIGN INDIVIDUALS AND CORPORATIONS
The Partnership's anticipated activities will cause it to be treated as
being engaged in a United States trade or business and foreign persons (i.e.,
nonresident aliens, foreign corporations, foreign Partnerships and other
foreign investors) who become Limited Partners will, therefore, also be
considered to be engaged in a trade or business within the United States and
such activities will probably be deemed to be conducted through a permanent
establishment. In such case, the foreign person will be taxable on this
allocable share of the Partnership's income under the normal rules applicable
to United States taxpayers and will be subject to all the federal and state
income tax return filing requirements.
In addition to the requirement that foreign persons pay tax on their
United States source income, foreign persons who hold Units will be subject to
withholding rules which will require the Partnership to withhold with respect to
distributions of cash and allocations of income to them. Under the rules
created in the Foreign Investment and Real Property Tax Act ("FIRPTA"),
as modified by the 1986 Act, the Partnership is required to withhold a portion
of the proceeds from the sale of any United States Real Property Interests
("USRPIs"). In addition, under Section 1446 of the Code, the Partnership is
required to withhold based on the income of the Partnership which is
considered to be effectively connected with a U.S. trade or business. Under
Section 897 of the Code, as enacted in FIRPTA, gain from the sale of USRPIs
will be treated as effectively connected with a U.S. trade or business.
In order to clarify the withholding requirements for partnerships
holding USRPIs, the Service issued Rev. Proc. 89-31,1989-1 C.B. 895 and
Rev. Proc. 92-66, 1992-2 C.B. 428, which requires a domestic partnership to
withhold an "applicable percentage" of all effectively connected taxable income
allocable to its foreign partners, expressly including any partnership
income treated as "effectively connected" pursuant to Section 897 of the Code.
For this purpose, "applicable percentage" means the highest rate of tax
imposed under the Code. In addition, Rev. Proc. 89-31 expressly states
that if a domestic partnership complies with the requirements under Rev.
Proc. 89-31, it will be deemed to have satisfied the FIRPTA withholding
requirements. Rev. Proc. 89-31 further indicates that a partnership should take
into account all treaty provisions and reciprocal agreements in determining
the amount of a partnership's effectively connected taxable income allocable to
its foreign partners. Finally, in the unlikely event that the Units were to be
listed on an exchange or become regularly traded on an established securities
market, Rev. Proc. 89-31 requires that the Partnership withhold similarly from
foreign Limited Partners distributions, unless the Partnership expressly
elected to instead be subject to a similar withholding requirement based on
income.
The Partnership's withholding obligation extends to all persons who
are not able to provide the Partnership with a certification of
non-foreign status, which certification must be renewed every three years. In
addition, each Limited Partner has an obligation to notify the Partnership if
it becomes a foreign person.
Regulation Section 1.1445-8 provides that a person that : (1) is a
nominee; (2) receives a distribution attributable to a disposition of USRPIs
by a publicly traded limited partnership; (3) receives a distribution for
payment to any foreign person or on the account of any foreign person; and (4)
receives notice, as described below, shall be required to withhold in accordance
with the general rules of Section 1445(e)(1) of the Code. Such nominee becomes a
withholding agent. In order to require the nominee to
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become the withholding agent, rather than the Partnership, the Partnership
must satisfy certain notice requirements. The notice requirement is satisfied
by giving notice of a distribution that is attributable to a disposition of a
USRPI in accordance with Sections 10(b)-17(b)(1) or (3) of the Securities
Exchange Act of 1934. The Partnership intends to provide such notice upon
all distributions attributable to USRPIs for all Units held by nominees
on behalf of foreign persons. Rev. Proc. 89-31 applies these same nominee
rules to partnerships whose interests are regularly traded on an established
exchanged. In such situation, the Partnership will not withhold from the
distribution as it will become the obligation of the nominee to so withhold.
The Agreement provides that any tax required to be withheld with respect
to a Limited Partner will be charged to that Partner's capital account as if
such tax had been distributed to such Partner. The General Partners will have
the right: (i) to make a loan to such Limited Partner, at a rate of interest
subject to the limitations of the Agreement, in an amount equal to the tax
required to be withheld to the extent that cash is needed to make such
withholding payment attributable to that Limited Partner; and (ii) retain
appropriate portions of the Limited Partner's distribution until any
withholding obligations relating to that Limited Partner are satisfied.
IMPACT ON QUALIFIED TAX-EXEMPT INVESTORS
Under Section 501, qualified pension, profit-sharing and stock bonus
plans, Keogh Plans and Individual Retirement Accounts (collectively "Qualified
Plans") are generally exempt from federal income tax on the income
they earn. The discussion contained in this section of the Prospectus applies
in the same fashion to other entities which are exempt from federal income
tax under Sections 401 or 501 of the Code as if they were Qualified
Plans. Any income earned by a Qualified Plan which is not substantially
related to the exercise or performance of the Qualified Plan's particular
tax-exempt purpose is treated as unrelated business taxable income
("UBTI"). However, certain earnings from "investment-type" sources, such
as dividends, interest, royalties, sales of non-inventory property and certain
forms of rent are specifically exempted from taxation as UBTI, even if
earned outside of the Qualified Plan's tax-exempt function. The gross
amount of UBTI incurred by a Qualified Plan is offset by the deductions that
are directly connected to the activity producing the UBTI, and each Qualified
Plan is entitled to an annual $1,000 deduction.
The tax consequences of the income of the Partnership will be determined
as though the income was earned directly by the Partners, including any
Qualified Plan that becomes a Limited Partner. Therefore, if the Partnership
is considered a "dealer" in real property or equipment, the gain from the
Partnership's investment in Properties or Equipment which is allocated to the
Qualified Plan will be UBTI. In addition, if the Partnership invests in
and owns "debt-financed property" a portion of a Qualified Plan's
distributive share of the Partnership's taxable income (including capital
gain) that is attributable to any such debt-financed Property, will also
generate UBTI. For purposes of computing the portion of income treated as UBTI
or the amount of gain or loss to be taken into account on a sale or
other disposition of debt-financed property, the taxpayer applies a ratio of
(A) the "average acquisition indebtedness" related to such property, to (B)
the average amount of the adjusted basis of such property. The term "average
acquisition indebtedness" means, in the case of a sale or disposition, the
highest amount of the acquisition indebtedness with respect to such property
during the 12-month period ending with the date of the sale or other
disposition, and in all other cases, such term means the average monthly level
of debt during that taxable year.
Notwithstanding the tax-exempt status of the Qualified Plan, any UBTI
recognized by a Qualified Plan is subject to federal income tax at the tax
rates imposed on corporations or trusts, depending on the character of the
particular tax-exempt entity. In addition to the tax on UBTI, the Qualified
Plan will also be subject to the alternative minimum tax and recapture
of depreciation provisions. Any UBTI income resulting from the sale of
debt-financed property will be treated as capital gain to the extent that it
would be treated as such by an organization not exempt from taxation. If a
tax-exempt entity realized net UBTI losses for a year, such losses may be
carried forward against UBTI produced in later years from the activities
or assets producing the loss. Even if a portion of the income of a
tax-exempt entity is UBTI, income from other investments that is not UBTI will
continue to be exempt from federal income tax. Thus,
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the realization of any UBTI from the Partnership generally would not affect
the exempt status of the entity. For certain types of tax-exempt entities,
however, the receipt of any UBTI may have very adverse consequences. For
example, if a charitable remainder annuity trust or a charitable remainder
unitrust (as defined in Section 664 of the Code) receives any UBTI during the
year, all of its income from all sources in that year will be taxable. In
addition to being subject to possible federal income taxation, any UBTI may
be subject to state and local income taxation, which may differ from federal
income taxation in method of computation and amount.
The Partnership anticipates that the majority of its income will be
interest, rents from real property and equipment leasing, and gains from the
sales of such real property and equipment. The rental income from equipment
leasing will constitute UBTI. The gain or loss from the sale of the Equipment
will qualify for an exception from UBTI treatment, except to the extent that
the Partnership incurs indebtedness to acquire or improve the Equipment
or such sale is deemed to be made in the ordinary course of the Partnership
trade or business and such Equipment is deemed to be held primarily for sale. In
addition, any interest income the Partnership recognizes will qualify for an
exemption from UBTI treatment. With regard to leasing the Properties, the
Partnership intends to receive not only base rents, but also additional
rents from the lessees of the Properties based on the percentage of the
lessee's gross sales. Under Section 512(b)(3)(B)(ii) of the Code such
percentage rents should be excluded from treatment as UBTI.
Regulation Section 1.512(b)-1(c)(2)(ii)(b) states that the rental of
personal property will be considered incidental to the rental of the real
property associated therewith, and hence exempt from UBTI treatment, if
the portion of the rental payment attributable to the personal property
constitutes 10% or less of the total rental payments on such property for the
year. The General Partners expect that the amount attributable to any
personal property rented with the Properties will constitute 10% or less of
the rental payments received on each Property. Qualified Plans will recognize
UBTI from leasing of the Properties or upon the sales thereof to the extent
that the Partnership incurs indebtedness to acquire or improve the Properties,
or incurs indebtedness that would not have been incurred "but for" the
acquisition or improvement of the Properties, (possibly including debt
which might be incurred in the future), and such indebtedness is not retired
before a tax year in which the debt-financed property produces taxable
income or more than 12 months before the debt-financed property is sold.
In conclusion, based on the General Partners'
representations as to the anticipated activities of the Partnership,
all rental income derived from equipment leasing will constitute UBTI.
Although the income generated by the Properties, including gain on the
eventual sale of the Properties, should not constitute UBTI unless and to
the extent that such Properties constitute debt-financed property. However, if
the Partnership incurs indebtedness to improve the Properties, or incurs
indebtedness secured by the Properties at the time of acquisition or shortly
thereafter, it is likely that such indebtedness would be characterized as
acquisition indebtedness which would produce UBTI if it is on the Property
during a tax year in which income is recognized, or during the 12-month period
prior to sale.
PROPOSED LEGISLATION
In recent years, members of Congress, governmental agencies and the
executive branch of the federal government have proposed a number of changes
in the federal income tax laws. Such proposals have varied widely in
their scope and in their likely effect on taxpayers investing in real
property and leasing activities. Some of these proposals would, if adopted,
have the overall effect of reducing the tax benefits presently associated with
investments like the Units. Several proposals have been made recently which
would alter, in some cases radically, the treatment of tax-exempt entities and
which could potentially lead to substantial changes in the taxation of those
Limited Partners that are tax-exempt entities.
It is not possible to predict if any proposals will be enacted into
law or the effect on each investor. In addition, the Service regularly issues
Regulations and pronouncements which could affect an investment in the
Partnership. Each investor is urged to consult with his own tax advisor as
to the possible effect of tax reform proposals upon his particular tax
situation.
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STATE AND LOCAL TAXES
In addition to the federal income tax aspects described above,
prospective Limited Partners should consider potential state tax
consequences of an investment in the Partnership. Each Limited Partner is
advised to consult his own tax advisor to determine if the state in which
he is a resident imposes a tax upon his share of the income or loss of the
Partnership. In addition, a Limited Partner may be required to file an income
tax or other return in those states where the Partnership acquires real
property. A Limited Partner may be taxable on income derived from sources
within a particular state (including capital gains on the sale of properties)
regardless of whether the Partnership sustains losses from properties located
outside that particular state and regardless of the amount of such losses,
even though such losses equal or exceed the income derived from sources
within that particular state or the total operations of the Partnership
result in a net loss. Although most states do not impose a tax on
tax-exempt entities, Limited Partners that are tax-exempt entities are urged
to consult their advisors on this question.
The Partnership will advise each Limited Partner of his share of
income or loss to be reported to each of the states where the Partnership
owns property. Personal exemptions, computed in various ways, are allowed
by the various states and may reduce the amount of tax owed to a particular
state. The Partnership may be required to withhold state taxes from
distributions to the Limited Partners in some instances. At the present time,
certain states have not adopted the favorable federal installment sale or
accelerated depreciation rules. Thus, it is possible that investors in some
states will be unable to defer part of the gain upon an installment sale of
Partnership property or take advantage of the higher deductions available
under ACRS on their state income tax returns. In such cases, future gains
and net income for state tax purposes will be correspondingly less than
for federal tax purposes.
To the extent that a non-resident Limited Partner pays tax to a state by
virtue of Partnership operations within that state, he may be entitled to a
deduction or credit against tax owed to his state of residence with respect
to the same income, and should consult his tax advisor in this regard. In
addition, payment of state taxes constitutes a deduction for federal income tax
purposes, if the taxpayer itemizes deductions.
THE FOREGOING ANALYSIS IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX
PLANNING. IT IS NOT POSSIBLE TO PREDICT THE EFFECT OF THE TAX LAWS ON
INDIVIDUAL INVESTORS IN THE PARTNERSHIP. ACCORDINGLY, EACH POTENTIAL LIMITED
PARTNER IS URGED TO SEEK, AND SHOULD DEPEND UPON, THE ADVICE OF HIS TAX
ADVISORS WITH RESPECT TO THIS INVESTMENT IN THE PARTNERSHIP, WITH SPECIFIC
REFERENCE TO HIS OWN TAX SITUATION AND POTENTIAL CHANGES IN THE APPLICABLE
LAWS.
ERISA CONSIDERATIONS FOR QUALIFIED PLANS
In considering whether to invest a portion of the assets of a Qualified
Plan in the Partnership, fiduciaries should consider, in addition to other
things: (i) whether investing in the Partnership is in accordance with the
documents and instruments governing such Qualified Plan; (ii) whether the
investment satisfies the diversification requirements of Section
404(a)(1)(C) of ERISA, if applicable; (iii) whether the investment
will result in unrelated business taxable income to the Qualified Plan (iv)
whether the investment provides sufficient liquidity; (v) the need for
periodic valuation of the assets of the Qualified Plan; and (vi) whether the
investment is prudent. The General Partners have not, and will not, evaluate
whether an investment in the Partnership is suitable for any particular
plan or investor, but, subject to the disclosure included therein, will
accept such entities as Limited Partners if they meet the suitability
standards.
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ERISA and the Code prohibit parties in interest (including fiduciaries)
of the Qualified Plan from engaging in various acts of self-dealing. To
prevent a possible violation of these self-dealing rules, the General
Partners and their Affiliates may not permit the purchase of Units with assets
of any Qualified Plan (including a Keogh Plan or IRA) if they: (i)
have investment discretion with respect to the assets of the Qualified Plan; or
(ii) regularly give individualized investment advice which serves as the
primary basis for the investment decisions made with respect to such assets.
PLAN ASSETS -- EXEMPTION UNDER THE DOL REGULATIONS
On November 13, 1986, the Department of Labor ("DOL") issued Regulations
(the "DOL Regulations") which discuss when the assets of a partnership
or other entity are considered to be assets of the Qualified Plans that
invest therein ("Plan Assets") and also contain a number of exemptions from
Plan Asset status. The Partnership intends to rely on at least one of
these exemptions.
PUBLICLY OFFERED SECURITY EXEMPTION
One exemption, which is available for entities such as the Partnership,
is the "publicly offered security" exemption. An entity will qualify for
this exemption if the security is: (i) part of a class of securities which
are registered under the Securities Exchange Act of 1934, as amended (the
"1934 Act"), or sold as part of an offering pursuant to an effective
registration statement under the Securities Act of 1933 so long as the
securities are subsequently registered under the 1934 Act within the designated
time frame; (ii) widely held; and (iii) freely transferable. Under the DOL
Regulations, a class of securities will be considered widely held if it is
owned by 100 or more investors who are independent of the issuer and of each
other.
Although the determination of whether a class of securities is considered
freely transferable is based on all the facts and circumstances of the
situation, the DOL Regulations indicate that if the minimum investment is
$10,000 or less, the existence of certain restrictions (similar to those
contained in Section 12 of the Agreement) should not prevent a security
from being considered freely transferable. The DOL Regulations state that a
restriction or prohibition on transfers or assignments that would result in a
termination or reclassification of an entity for tax purposes will not, alone
or in combination with the other enumerated restrictions, ordinarily prevent
a security from being considered freely transferable. In Opinion 89-14A
(August 2, 1989), the DOL held that transfer restrictions designed to avoid a
partnership's being classified as "publicly traded" under Code Section 7704,
including restrictions designed to ensure compliance with the safe
harbors in IRS Notice 88-75, are the type of restrictions which will not
prevent securities from being considered freely transferable. Therefore, the
fact that the General Partners have indicated that they will attempt to prevent
a market from developing so that the Partnership will not be considered
"publicly traded" will not alone prevent the Units from being considered
freely transferable. The explanation accompanying the DOL Regulations
states that if the minimum investment is $10,000 or less, the securities are
"likely to be widely distributed," and, therefore, are presumed to be freely
transferable. The General Partners have represented that it is likely that
there will be 100 or more independent investors and that they will use their
best efforts to ensure that there will be the requisite number of independent
investors. Based on these representations and the other facts surrounding the
Offering, and assuming that the Partnership will register under the Securities
Exchange Act of 1934, as amended, within 120 days of the end of its fiscal
year, Jaffe, Raitt, Heuer & Weiss, P.C. is of the opinion that the
Partnership will more likely than not meet the publicly offered security
exemption.
OTHER PROTECTIVE MEASURES AVAILABLE TO THE GENERAL PARTNERS.
There can be no assurance that the Partnership will qualify for exemption
from Plan Asset status under the DOL Regulations. However, the General
Partners will use their best efforts to qualify for an exemption under the
DOL Regulations. In order to help ensure that the Partnership will not be
deemed to hold Plan Assets or otherwise be engaged in prohibited transactions,
and if an exemption for such
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transactions could not be obtained from the DOL, the General Partners have
the right (upon notice to all investors but without the consent of any
investor): (a) to restructure the Partnership's activities to the
extent necessary to comply with any exemption in DOL Regulations, including
limiting the number of Units which Qualified Plans or other benefit plan
investors could hold, discontinuing sales to such investors after a given date;
(b) to terminate the offering or to compel a dissolution and termination of
the Partnership; and/or (c) to alter the activities of the Partnership
in order to qualify for a prohibited transaction exemption from the DOL.
PLAN ASSET CONSEQUENCES
If the Partnership were to be deemed to hold Plan Assets, additional
issues relating to the Plan Assets and "prohibited transaction" concepts of
ERISA and the Code arise by virtue of the General Partners' ownership of an
interest in the Partnership and the possible relationship between the General
Partners and any Qualified Plan which may purchase Units. Section 406 of ERISA
and Section 4975(c) of the Code prohibit Qualified Plans from engaging in
certain transactions with specified parties involving plan assets. One of the
transactions prohibited is the furnishing of services between a plan and a
"party in interest" or a "disqualified person." Included in the definition
of party in interest under Section 3(14) of ERISA and the definition of
disqualified person in Section 4975(e) of the Code are fiduciaries
and "persons providing services to the plan." Thus, transactions between the
Partnership and a party in interest or disqualified person of an invested
Qualified Plan could be a prohibited transaction if the Partnership were
deemed to hold Plan Assets.
In addition, in the event that the Partnership were deemed to hold plan
assets, and if the General Partners or certain entities and individuals
related to the General Partners had previously provided services to an
investing Qualified Plan, then the General Partners could be characterized
as a "party in interest" under ERISA and a "disqualified person" under the
Code with respect to such Qualified Plan. If such relationships exists,
various transactions between the General Partners or their Affiliates and
the Partnership could constitute prohibited transactions. In addition, it
could be argued that, because the General Partners share in Partnership
distributions and tax allocations in a manner disproportionate to their
capital contributions to the Partnership, the General Partners are being
compensated directly out of plan assets rather than Partnership assets in
exchange for the provision of services. If this were the case, absent a
specific exemption applicable to the transaction, a prohibited transaction
could be determined to have occurred between the Qualified Plan and the
General Partners. Finally, because the General Partners receive fees from
the Partnership directly and not as compensation from the Qualified Plans, it
could be argued that if the Partnership were deemed to hold plan assets, a
prohibited transaction would occur.
If the Partnership's assets were Plan Assets and if it were determined by
the DOL that the acquisition of a Unit by a Qualified Plan or the
operation of the Partnership by the General Partners constitute a prohibited
transaction, then the General Partners and/or any party in interest that has
engaged in any such prohibited transaction would be required to: (i) restore
to the Qualified Plan for any profit it realized on the transaction; and (ii)
indemnify the Qualified Plan for any losses suffered by the Qualified Plan as a
result of such investment. In addition, each party in interest involved may be
liable to pay an excise tax equal to 5% of the "amount involved" in the
transaction for each year during which the transaction remains uncorrected,
and be required to eliminate the prohibited transaction by reversing the
transaction. Moreover, if the fiduciary or party in interest is ordered to
correct the transaction by either the Service or the DOL and such transaction
is not corrected within a 90-day period, the party in interest involved could
also be liable for an additional excise tax in an amount equal to 100% of the
amount involved, for each taxable year commencing with the year in which the 90
period expires and ending with the year in which the prohibited transaction
is corrected. Plan fiduciaries who make the decision to invest in Units
could, under certain circumstances, be liable as co-fiduciaries for actions
taken by the Partnership, its General Partners or any fiduciary.
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With respect to investing IRA's, the tax-exempt status of the account
could be lost if the investment constituted a prohibited transaction
under Section 408(e)(2) of the Code by reason of the Partnership engaging
in a prohibited transaction with the individual who established the IRA or
his beneficiary. If the IRA were to lose its tax-exempt status, the
other above-described penalties for prohibited transactions would not apply.
VALUATION REPORTS TO QUALIFIED PLANS
Commencing with the year ended December 31, 1996, the Partnership
will provide Qualified Plans with an annual valuation of Units within 120 days
after the end of each fiscal year of the Partnership which is intended to
satisfy the requirements of ERISA. However, during the first three years
of Partnership operations, the Units are expected to be valued at their
initial offering price. Such valuations will be made by the General
Partners or their designees.
ALL FIDUCIARIES ARE ENCOURAGED TO CONSULT THEIR TAX AND LEGAL ADVISORS
FOR THE QUALIFIED PLANS THEY REPRESENT TO ASSURE THAT AN INVESTMENT IN THE
PARTNERSHIP IS APPROPRIATE.
SUMMARY OF PARTNERSHIP AGREEMENT
The rights and obligations of the Partnership's Partners will be
governed by the Partnership Agreement which is set out in its entirety at the
end of this Prospectus as Exhibit A. Prospective investors should study
the Partnership Agreement carefully before subscribing for Units. The
following and other statements in this Prospectus concerning the
Partnership Agreement and related matters merely outline certain provisions
of, and do not purport to be complete or in any way modify or amend, the
Partnership Agreement.
THE RESPONSIBILITIES OF THE GENERAL PARTNERS
Subject to certain express restrictions set forth in the Partnership
Agreement, the Managing General Partner has the exclusive management and
control of all aspects of the business of the Partnership and, except for
certain limited voting rights and other powers contained in the Partnership
Agreement, the Limited Partners shall not have any authority to transact
business for, or participate in the management activities and decisions of,
the Partnership.
In addition, the Managing General Partner has been designated the
"Tax Matters Partner" under Paragraph 14.7 of the Partnership Agreement to
manage administrative tax proceedings conducted at the Partnership level by the
Service with respect to Partnership matters. Any Partner has the right to
participate in such administrative proceedings relating to the determination of
Partnership items at the Partnership level. Expenses of such administrative
proceedings undertaken by the Tax Matters Partner will be paid for out of
Partnership assets. Each Limited Partner who elects to participate in such
proceedings will be responsible for any expenses incurred by such Limited
Partner in connection with such participation. Further, the cost of any
adjustments to a Limited Partner and the cost of any resulting audits or
adjustments of a Limited Partner's tax return will be born solely by the
affected Limited Partner. See "Conflicts of Interest-Tax Matters Partner."
LIABILITY OF LIMITED PARTNERS-NONASSESSABILITY OF UNITS
A Limited Partner's capital is subject to the risks of the Partnership's
business. No Limited Partner is permitted to take any part in the control of
the business as a Limited Partner and no Limited Partner may be assessed to
provide additional capital at any time. Under the Delaware Act, a Limited
Partner, as such, will not be liable for obligations of the Partnership in
excess of his contribution to the capital of the
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Partnership and his share of the undistributed profits and assets of the
Partnership (and for the return of distributions made to him in violation of
the Delaware Act as discussed below) unless he is also a General Partner or,
in addition to the exercise of his rights and powers as a Limited Partner, he
takes part in the control of the business of the Partnership. However, since
the limited partnership statutes of certain states in which the Partnership
may do business do not expressly grant or deny certain voting rights and
other powers which may be exercised by Limited Partners, it may be argued that,
under the laws of such states, the existence of such rights and powers
under the Partnership Agreement with respect to the operation of the
Partnership's business may cause Limited Partners in such states to be deemed
to have taken part in the control of the Partnership business.
The acceptance of the foregoing argument by a court would subject all
or some of the Limited Partners to general liability and could make them liable
with the General Partners for any civil judgement which could not be satisfied
by the Partnership's assets.
Furthermore, subject to the obligation of a Limited Partner to repay to
the Partnership distributions made to him in violation of the Delaware
Act, as discussed below, at such time a person (who is not also a General
Partner and does not take part in the control of the business of the
Partnership) is admitted or substituted as a Limited Partner, such person
should not be legally obligated for the liabilities of the Partnership in an
amount in excess of his contribution to the capital of the Partnership
(or in the case of a substituted Limited Partner, such contribution of his
predecessor-in-interest) and his share of the undistributed profits and assets
of the Partnership. The Delaware Act provides that the Partnership shall not
make any distribution to any Limited Partner to the extent that, at the time
of the distribution and after giving effect to the distribution, all
liabilities of the Partnership, other than liabilities to the General
Partners and the Limited Partners on account of their Partnership interests
and liabilities for which the recourse of creditors is limited to specified
assets of the Partnership, exceed the fair value of the Partnership's assets,
except that the fair value of assets that are subject to a liability for
which the recourse of creditors is limited shall be included in the assets of
the Partnership only to the extent that the fair value of those assets exceeds
that liability. A Limited Partner who receives a distribution in violation of
the Delaware Act prohibition and who knows at the time of the distribution
that the distribution violates this prohibition, will be liable to the
Partnership for the amount of the distribution. A Limited Partner who receives a
distribution in violation of the Delaware Act prohibition and who does not
know at the time of the distribution that the distribution violates this
prohibition shall not be liable to the Partnership for the amount of the
distribution. Unless otherwise agreed, a Limited Partner who receives a
distribution from the Partnership has no liability under the Delaware Act
for the amount of the distribution after the expiration of three years from the
date of the distribution.
The Partnership Agreement precludes the Limited Partners from making
any claims against the General Partners, or any of their agents or
employees, for any act done on behalf of the Partnership, unless any such
act is the result of negligence, misconduct or breach of any fiduciary
duty imposed upon the General Partners by law, or under certain circumstances,
involves securities law violations.
TERMS AND DISSOLUTION
The Partnership will continue for a maximum period ending December 31,
2026, but may be dissolved at an earlier date if certain contingencies
occur. Limited Partners may not withdraw from the Partnership prior to
dissolution, but may assign their Units to others. The contingencies whereby
the Partnership may be dissolved are as follows:
(a) withdrawal, removal, adjudication of bankruptcy, insolvency,
dissolution or other cessation to exist as a legal entity of the last
remaining General Partner, unless within 90 days of the date of such event
and effective as of the date of such event, the Limited Partners by
unanimous vote, elect a successor General Partner and elect to continue the
business of the Partnership;
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(b) a Majority Vote (which may, but need not be, solicited by the
General Partners) in favor of dissolution and termination of the Partnership; or
(c) the sale or other disposition of all Assets held by the Partnership
and the receipt of final payment with respect to all investments.
Upon dissolution of the Partnership, the Managing General Partner must
take a full account of the Partnership's assets and liabilities, and shall
promptly liquidate any remaining Partnership assets and the proceeds of
liquidation will first be applied to the payment of obligations of the
Partnership to creditors, including Partners who are creditors, to the extent
permitted by law, but excluding secured creditors whose obligations
will be assumed or otherwise transferred on the liquidation of Partnership
assets; and second, to the Partners pursuant to the provisions of Paragraph
18.2.2 of the Partnership Agreement, after allowance for the expenses of
liquidation and the setting up of any reserves for contingencies which the
Managing General Partner considers necessary. Any remaining proceeds will
then be distributed to the Partners in the same manner as Net Sale or
Refinancing Proceeds.
RESTRICTIONS ON TRANSFER OF UNITS
There is no established market for the Units, and because there are
expected to be only a limited number of investors and significant restrictions
on the transferability of Units, it is not likely that a public market in the
Units will develop. Sales, exchanges, assignments, transfers and other
dispositions of Units are subject to the following restrictions: (1) any
sale, assignment, transfer, exchange or other disposition must be in
compliance with and supported by an opinion of counsel acceptable to the
Managing General Partner (if the Managing General Partner in its sole
discretion deems it advisable to require such opinion) that it is in
compliance with the rules of any other applicable governmental authority
including suitability provisions and exemption from the registration
requirements of the applicable securities laws; (2) no such Units may be sold,
assigned or exchanged if such Units, when added to the total of all Units
sold or exchanged within the period of twelve (12) consecutive months prior
to the proposed date of sale or exchange, would, in the opinion of
counsel to the Partnership, result in the termination of the Partnership
under Internal Revenue Code Section 708 unless the Partnership and the
transferring holder shall have received a ruling by the Service that the
proposed sale or exchange will not cause such termination; and (3) no
assignment of Units by a Limited Partner may be made unless the Managing
General Partner determines, in its sole discretion, that the Partnership
would be able to satisfy either the 5% or 2% "safe harbors" contained in
Advance Notice 88-75 or in corresponding regulations, or the Partnership has
received an opinion of counsel satisfactory to the Managing General Partner
or a favorable ruling from the IRS that such transfer would not result in
the Partnership being classified as a "Publicly-traded Partnership" for federal
income tax purposes.
Pursuant to the Partnership Agreement, the Limited Partners agree to
provide all information with respect to proposed assignments which the
Managing General Partner deems necessary in order to determine whether the
assignment occurred on a secondary market or the substantial equivalent
thereof. As a result of these provisions, Limited Partners who purport to
sell, transfer, assign, or otherwise dispose of their Units except as set
forth herein, may continue to receive all cash distributions, and may be
allocated all Net Income and Net Loss, of the Partnership, notwithstanding
any such action. Conversely, persons who purport to acquire Units from
original Limited Partners within such period may not receive any such
distributions or allocations.
Limited Partners generally will not be permitted to transfer less than 10
Units, unless such transfer constitutes a transfer of all Units held by a
transferor. Additional restrictions on transfers of Units are imposed under
the securities laws of some states, including a limitation to transferees who
meet certain investment suitability standards similar to those described under
"Who Should Invest." As referenced above, the Partnership will require that
such standards are met before agreeing to any transfers of Units.
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VOTING RIGHTS OF LIMITED PARTNERS
Limited Partners have no right to participate in the management or
control of the Partnership's business. However, Limited Partners have been
granted certain voting rights which are set forth in Paragraph 15.1 of the
Partnership Agreement. The Limited Partners have the right by Majority Vote to:
(a) remove a General Partner;
(b) elect a new General Partner;
(c) terminate and dissolve the Partnership pursuant to Article 18 of
the Partnership Agreement;
(d) amend the Partnership Agreement, provided such amendment is
not for any of the purposes set forth in Paragraph 14.2.15 of the Partnership
Agreement.
The General Partners must obtain the approval of the Limited Partners (by
Majority Vote) prior to:
(a) effecting a material change in the Partnership's investment
objectives;
(b) assigning a General Partner's interest in the Partnership,
except as otherwise provided in Paragraph 16.5 of the Partnership Agreement;
(c) extending the term of the Partnership; or
(d) selling all or Substantially All of the Assets of the Partnership
in a single sale or in multiple sales in the same 12-month period, except in
connection with the liquidation and winding up of the business of the
Partnership upon its termination and dissolution or in the ordinary course of
business and except that the General Partners may sell Assets aggregating up to
66-2/3% of the Limited Partners' Original Contribution in any 12-month period
without a vote of the Limited Partners.
Paragraph 14.4.25 of the Partnership Agreement requires that Limited
Partners owning at least two-thirds of the Units then outstanding approve
any transaction or series of transactions that the Partnership enters into
that directly or indirectly, through acquisition or otherwise involves
the combination, merger, conversion or reorganization of the Partnership or
the Partnership with other entities ("Roll-Up Transaction"). Further, Paragraph
14.4.25 of the Partnership Agreement cannot be changed or eliminated without
the consent of the Limited Partners owning at least two-thirds of the Units
then outstanding. Paragraph 14.4.25 of the Partnership Agreement is intended
to provide the Limited Partners with increased control over the occurrence of
this type of transaction.
The Partnership Agreement also sets forth certain restrictions
in regard to a Roll-Up Transaction. Initially, the Partnership Agreement
requires that an appraisal of all Partnership assets shall be obtained
from a competent independent expert in connection with a proposed Roll-Up
Transaction. In addition, the Partnership Agreement provides Limited Partners
who vote "no" in connection with a proposed Roll-Up Transaction the choice
of: (i) accepting the securities of the roll-up entity offered in the
proposed Roll-Up Transaction; or (ii) one of the following: (A) remaining as
Limited Partners in the Partnership and preserving their interests therein on
the same terms and conditions as existed previously; or (B) receiving cash
in an amount equal to the Limited Partners' pro rata share of the
appraised value of the net assets of the Partnership. The Partnership
Agreement also restricts the ability of the Partnership to engage in
a Roll-Up Transaction which would adversely affect the democracy or voting
rights of the Limited Partners or would materially impede or frustrate the
accumulation of the shares by any purchaser of the securities of a roll-up
entity. The Partnership Agreement also restricts the ability of the
Partnership to participate in a proposed Roll-Up Transaction in which the
Limited Partners' rights of access to records would be less than
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currently provided under the Partnership Agreement, or which would require
the Partnership to bear the costs of a proposed Roll-Up Transaction which
is not approved by the Limited Partners.
Paragraph 15.1.2 of the Partnership Agreement provides that with respect
to any Units owned by the General Partners or their Affiliates, the General
Partners or their Affiliates may not vote or consent on matters submitted to the
Limited Partners regarding the removal of a General Partner or regarding any
transaction between the Partnership and the General Partners or their
Affiliates. In determining the existence of the requisite percentage and
interest of Units necessary to approve a matter on which the General Partners
or their Affiliates may not vote or consent any Units owned by the
General Partners or their Affiliates shall not be included.
MEETINGS
The Managing General Partner may at any time call a meeting of Limited
Partners or call for a vote, without a meeting of the Limited Partners, on
matters on which they are entitled to vote, and shall be required to call for
such meeting or vote following receipt of a written request therefor of
holders of 10% or more of the outstanding Units.
INDEMNIFICATION OF THE GENERAL PARTNERS BY THE PARTNERSHIP
The Partnership Agreement provides that the General Partners shall have no
liability to the Partnership or to any Partner for any loss suffered by the
Partnership which arises out of any action or inaction of the General
Partners or Affiliates of the General Partners if the General Partners or their
Affiliates, in good faith determined that such course of conduct was in the best
interests of the Partnership and such course of conduct did not constitute
negligence or misconduct by the General Partners or their Affiliates. The
General Partners shall be indemnified by the Partnership against any
losses, judgments, liabilities, expenses and amounts paid in settlement of
any claims sustained by them in connection with the Partnership, provided that
the same were not the result of negligence or misconduct on the part of the
General Partners, and the General Partners determined, in good faith, that such
course of conduct was in the best interests of the Partnership and did not
constitute negligence or misconduct by the General Partners. Any such
indemnification is recoverable only from the assets of the Partnership and not
from the Limited Partners.
Notwithstanding the above, the General Partners and any person acting
as a broker-dealer shall not be indemnified for any losses, liabilities or
expenses arising from or out of an alleged violation of federal or state
securities laws unless: (i) there has been a successful adjudication on the
merits of each count involving alleged securities law violations as to the
particular indemnitee; or (ii) such claims have been dismissed with
prejudice on the merits by a court of competent jurisdiction as to the
particular indemnitee; or (iii) a court of competent jurisdiction approves
a settlement of claim against a particular indemnitee and such
indemnification is approved by the court. Further, in any claim for
indemnification for federal or state securities law violations, the party
seeking indemnification shall, prior to requesting indemnification, place
before the court the position of the Securities and Exchange Commission and
the positions of certain states, including California, with respect to the
issue of indemnification for securities law violations.
The Partnership shall not incur the cost of that portion of any insurance,
other than public liability insurance, which insures any party against any
liability the indemnification of which is prohibited by the terms of the
Partnership Agreement.
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REPORTS TO LIMITED PARTNERS
The General Partners will keep, or cause to be kept, full and true books
of account on an accrual basis of accounting, in accordance with generally
accepted accounting principles ("GAAP"). All of such books of account,
together with a copy of the Certificate of Limited Partnership and any
amendments thereto, will at all times be maintained at the principal office of
the Partnership, and will be open to inspection, examination and duplication
at reasonable times by the Limited Partners or their agents. Limited
Partners may receive, upon request, a list of the names and addresses of all
of the Limited Partners from the Partnership by mail. See Paragraph 13.1 of
the Partnership Agreement.
The General Partners will submit to each Limited Partner audited
annual reports of the Partnership within 120 days following the close of
each fiscal year. These annual reports will contain the following: (1)
audited financial statements; and (2) an audited report setting forth
Distributions per Unit during such year, which report shall separately
identify Distributions from: (i) Cash Flow during the period; (ii) Cash Flow
during a prior period which had been held as reserves; (iii) annual net
rental revenues on a per Property basis; (iv) Net Sale or Refinancing
Proceeds; and (v) reserves, if any, established from Gross Proceeds.
The annual report will also contain a statement of compensation and fees
paid by the Partnership to the General Partners and their Affiliates
including an itemized presentation of expense reimbursements to the General
Partners and their Affiliates or any other transactions between the
Partnership and the General Partners or their Affiliates, which information
shall be verified by the independent public accountants retained by the
Partnership. The method of verification shall at a minimum provide: (i) a
review of the time records of individual employees, the costs of whose
services are reimbursed; and (ii) a review of the specific nature of the work
performed by each such employee. The additional costs of such verification will
be itemized by such accountants and may be reimbursed to the General Partners
and their Affiliates by the Partnership to the extent that such reimbursement,
when added to the cost for administrative services rendered, does not exceed
the competitive rate for such services.
In addition, each Limited Partner will receive a quarterly financial
highlight report of the Partnership's performance. Upon request, unaudited
quarterly reports containing information required by Form 10-Q will be mailed
to a Limited Partner not later than 60 days after the close of each of the
first three fiscal quarters of each fiscal year.
Within 60 days following the close of any calendar quarter during the
Offering in which the Partnership has acquired a Property, a report will
be submitted to each Limited Partner containing: (1) the location and a
description of the general character of the Property acquired during the
quarter; (2) the present or proposed use of such Property and its suitability
and adequacy for such use; (3) the terms of any material lease affecting
the Property; (4) the proposed method of financing, if any, including estimated
down payment, leverage ratio, prepaid interest, balloon payment(s), prepayment
penalties, "due-on-sale" or encumbrance clauses and possible adverse effects
thereof and similar details of the proposed financing plan; and (5) a
statement that title insurance has been or will be obtained on the Property
acquired, unless the seller has agreed to provide indemnification to the
Partnership substantially equivalent to that which would be available under a
title policy and the seller has represented to the General Partners that it has
a rating by Moody's of AA or better or by Standard and Poor's of AA or
better. In addition, during the Offering, the Prospectus will be supplemented,
at such time as the General Partners believe a reasonable probability
exists that a property will be acquired involving the use of 10% or more, on
a cumulative basis, of the Net Proceeds of this Offering.
After the last acquisition, the General Partners shall, upon request, send
to the Commissioner of Corporations of the State of California a schedule,
verified under the penalty of perjury, reflecting: (i) each acquisition
made; (ii) the purchase price paid; (iii) the aggregate of all Acquisition
Fees paid on each transaction; and (iv) a computation showing compliance with
the Partnership Agreement. The Partnership shall, upon request, submit to
the Commissioner of Corporations of the State of California or to any of
the
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various state securities administrators any report or statement required to
be distributed to Limited Partners pursuant to the Partnership Agreement or
any applicable law or regulation.
The Partnership's United States Partnership Income Tax Informational
Return (and any applicable state income tax information returns) will
be prepared by the accountants regularly retained by the Partnership,
and appropriate tax information will be submitted to the Limited Partners
within 75 days following the end of each fiscal year of the Partnership. A
reconciliation between GAAP and income tax information will not be provided to
the Limited Partners, however, such reconciliation will be available in the
office of the Partnership for inspection and review by any interested Limited
Partner.
SALES LITERATURE
In addition to and apart from this Prospectus, the Partnership
will use certain supplemental sales material in connection with the
offering of the Units. This material, prepared by the General Partners,
includes a brochure describing the General Partners and their Affiliates, the
objectives of the Partnership, and pictures and summary descriptions of
properties similar to those to be acquired by the Partnership. The brochure
will be accompanied or preceded by this Prospectus. Business reply cards,
introductory letters and seminar invitation forms may be sent to Participating
Dealers for their internal use. The Partnership may also respond to
specific questions from Participating Dealers and prospective investors. No
person has been authorized to prepare for, or furnish to, a prospective
investor any sales literature other than: (i) that described herein or
in a supplement hereto; and (ii) newspaper advertisements or
solicitations of interest limited to identifying the Offering and the
location of sources of further information.
Use of any sales materials is conditioned upon the filing with and, if
required, clearance by appropriate regulatory agencies. Such clearance
(if provided), however, does not indicate that the regulatory agency
allowing the use of the materials has passed on the merits of the
Offering or the adequacy or accuracy of the materials.
This Offering is made only by means of this Prospectus. Except as
described herein, the Partnership has not authorized the use of
supplemental literature or sales material in connection with this
Offering. Although it is believed that the information contained in such
literature does not conflict with any of the information set forth in
this Prospectus, such material does not purport to be complete, and should
not be considered as a part of this Prospectus, or as incorporated in this
Prospectus by reference, or as forming the basis of the Offering described
herein.
LEGAL MATTERS
Legal matters in connection with the Units offered hereby, the formation of
the Partnership and its status as a limited partnership for federal income
purposes have been passed upon, by Jaffe, Raitt, Heuer & Weiss, P.C., 444 North
Michigan Avenue, Chicago, Illinois 60611, counsel to the Partnership.
Additionally, the statements under the caption "Tax Aspects of the Offering" and
elsewhere as they relate to federal income tax matters and the statements under
the caption "ERISA Considerations for Qualified Plans" have been reviewed by
Jaffe, Raitt, Heuer & Weiss, P.C. Jaffe, Raitt, Heuer & Weiss, P.C. does not
purport to represent Limited Partners or potential investors, who should consult
their own counsel. See "Conflicts of Interest-Legal Counsel for the Partnership
and the General Partners in the Same Law Firm."
87
<PAGE> 98
EXPERTS
Balance sheets of the Partnership and of the Managing General Partner, each
as of July 30, 1996, included in this Prospectus, have been included in reliance
on the reports of Coopers & Lybrand, L.L.P., independent accounts, given on the
authority of that firm as experts in accounting and auditing.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
As of the date of this Prospectus, the Partnership has not yet had any
operations. The Partnership intends to utilize the proceeds of this Offering as
set forth under "Estimated Use of Proceeds" to acquire existing,
income-producing commercial properties and equipment which will be leased on a
"triple-net" basis primarily to operators of national chain and nationally
franchised fast-food, family style and dinner house restaurants as well as other
franchised service-type businesses. The Partnership also intends to acquire
Properties that will be leased on a "double net" basis (the Partnership being
responsible for the maintenance of the roof, exterior walls, and/or parking lot
for such Properties) to various Retail Concerns that are operating at least ten
other store locations. The Property leases are expected to provide for a base
minimum annual rent, with provisions for fixed increases on specific dates or
indexation of rent to indices such as the Consumer Price Index and/or percentage
rents. Equipment will be leased only pursuant to Full Payout Leases. The
Partnership may incur secured indebtedness in connection with the acquisition of
its Properties and/or Equipment.
LIQUIDITY
Once substantially all of the Partnership's funds have been applied as
intended, the Partnership expects to require limited amounts of liquid assets
since the form of lease which it intends to use for its Properties and Equipment
will require lessees to pay all taxes and assessments, most repairs and
insurance premiums. Moreover, the lessees will be required, in most instances,
to maintain, for the joint benefit of the Partnership and lessee, casualty
insurance. The General Partners expect that the cash flow to be generated by the
Partnership's Properties and Equipment will be adequate to pay operating
expenses and provide distributions to Limited Partners.
Net Offering Proceeds, together with leverage of up to 35% of the sum of
Gross Proceeds and the aggregate amount of Partnership indebtedness secured by
Partnership Assets (approximately 40% of the aggregate purchase prices of
Partnership Assets) when incurred, will provide funds to enable the Partnership
to purchase Properties and Equipment. See "Investment Objectives and Policies."
RESULTS OF OPERATIONS
The General Partners are not aware of any known trends or uncertainties,
other than national or regional economic conditions, which reasonably may be
expected to have a material impact, favorable or unfavorable, on revenues or
income from the acquisition and operation of Properties and/or Equipment other
than those referred to herein.
CAPITAL RESOURCES
As of the date of this Prospectus, the Partnership has not yet acquired any
Properties or Equipment. The number of Properties and/or the amount of Equipment
to be acquired will depend upon the number of Units sold in the Offering. The
General Partners are not aware of any material trends, favorable or unfavorable,
in either capital resources or the outlook for long-term cash generation, nor do
they expect any material changes in the availability and relative cost of such
capital resources, other than as referred to herein.
88
<PAGE> 99
ADDITIONAL INFORMATION
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto with respect to the offer and
sale of Units which the Partnership has filed with the Securities and Exchange
Commission, and which may be inspected and copied at the Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Regional Offices of
the Securities and Exchange Commission at 500 West Madison Street, Fourteenth
Floor, Chicago, Illinois 60661 and 26 Federal Plaza, Room 1102, New York, New
York 10278. This material, as well as copies of all other documents filed with
the Securities and Exchange Commission, may be obtained from the Public
Reference Section of the Securities and Exchange Commission, Washington, D.C.
20549 upon payment of the fee prescribed by the Securities and Exchange
Commission.
89
<PAGE> 100
INDEX TO FINANCIAL STATEMENTS
Page(s)
------
Captec Franchise Capital Partners L.P. IV
Report of Independent Accountants F-2
Financial Statement:
Balance Sheet F-3
Notes to Balance Sheet F-4 through F-5
Captec Franchise Capital Corporation IV
Report of Independent Accountants F-7
Financial Statement:
Balance Sheet F-8
Notes to Balance Sheet F-9
F-i
<PAGE> 101
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
REPORT ON AUDIT OF BALANCE SHEET
AS OF JULY 30, 1996
F-1
<PAGE> 102
Report of Independent Accountants
To the Board of Directors of
Captec Franchise Capital Corporation IV
Managing General Partner of
Captec Franchise Capital Partners L.P. IV:
We have audited the accompanying balance sheet of Captec Franchise Capital
Partners L.P. IV as of July 30, 1996. This financial statement is the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting financial statement amounts and disclosures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of Captec Franchise Capital
Partners L.P. IV as of July 30, 1996, in conformity with generally accepted
accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Detroit, Michigan
July 31, 1996
F-2
<PAGE> 103
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
BALANCE SHEET
July 30, 1996
ASSETS
<TABLE>
<S> <C>
Cash $300
----
Total assets $300
====
LIABILITIES & PARTNERS' CAPITAL
Total liabilities -
Partners' Capital:
Limited partners' capital accounts $100
General partners' capital account 200
----
Total partners' capital 300
----
Total liabilities & partners' capital $300
====
</TABLE>
The accompanying notes are an integral part of the balance sheet.
F-3
<PAGE> 104
Captec Franchise Capital Partners L.P. IV
Notes to Balance Sheet
1. THE PARTNERSHIP:
Captec Franchise Capital Partners L.P. IV (the "Partnership"), a Delaware
limited partnership, was organized on July 23, 1996 for the purpose of
acquiring income-producing commercial real properties and equipment
leased on a "triple net" or "double net" basis, primarily to operators of
national and regional franchised businesses, principally restaurants, as
well as national and regional retail chains. The Partnership has not
commenced operations.
The General Partners of the Partnership are Captec Franchise Capital
Corporation IV (the "Corporation"), a wholly owned subsidiary of Captec
Financial Group, Inc. ("Captec"), and Patrick L. Beach, an individual,
hereinafter collectively referred to as the Sponsors. Patrick L. Beach
is also the Chairman of the Board of Directors, President and Chief
Executive Officer of the Corporation and Captec. The General Partners
have each contributed $100 in cash to the Partnership as a capital
contribution.
The Partnership anticipates undertaking a public offering of limited
partnership interests ("Units") in 1996. A minimum of 2,000 Units and a
maximum of 30,000 Units, priced at $1,000 per Unit, will be offered on a
"best efforts, part or none" basis.
The initial Limited Partner of the Partnership is Patrick L. Beach. Mr.
Beach has contributed $100 to the capital of the Partnership and has
received 0.1 Unit. Upon admission to the Partnership of any other
Limited Partner, the initial Limited Partner may withdraw from the
Partnership, in which case his 0.1 Unit shall be redeemed for $100.
2. ORGANIZATION AND OFFERING EXPENSES:
Organization and offering expenses, excluding selling commissions, will
be paid initially by the Sponsors and/or their affiliates and reimbursed
by the Partnership in an amount equal to up to three percent (3%) of the
gross proceeds of the offering (less any amounts paid directly by the
Partnership). The Sponsors are liable for all expenses of the offering
and for the general obligations of the Partnership if no Units are sold
(i.e., if subscriptions are not received for the minimum number of
Units). In addition, the Sponsors and/or their affiliates will be paid a
non-accountable expense allowance by the Partnership in an amount equal
to two percent (2%) of the gross proceeds of the offering.
The Sponsors have also guaranteed payment of organization and offering
expenses which exceed 13% of the gross proceeds of the offering.
F-4
<PAGE> 105
Captec Franchise Capital Partners L.P. IV
Notes to Balance Sheet
3. OMISSION OF INAPPLICABLE FINANCIAL STATEMENTS:
The Partnership was organized in July 1996, but has not commenced
operations. As no revenues or expenses have been incurred, no Statement
of Operations, Statement of Partners' Capital or Statement of Cash Flows
are included for the Partnership.
F-5
<PAGE> 106
CAPTEC FRANCHISE CAPITAL CORPORATION IV
REPORT ON AUDIT OF BALANCE SHEET
AS OF JULY 30, 1996
F-6
<PAGE> 107
Report of Independent Accountants
To the Board of Directors of
Captec Franchise Capital Corporation IV:
We have audited the accompanying balance sheet of Captec Franchise Capital
Corporation IV as of July 30, 1996. This financial statement is the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting financial statement amounts and disclosures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of Captec Franchise Capital
Corporation IV as of July 30, 1996, in conformity with generally accepted
accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Detroit, Michigan
July 31, 1996
F-7
<PAGE> 108
CAPTEC FRANCHISE CAPITAL CORPORATION IV
BALANCE SHEET
July 30, 1996
ASSETS
<TABLE>
<S> <C>
Cash $ 900
Investment in partnership 100
------
Total assets $1,000
======
LIABILITIES & STOCKHOLDERS' EQUITY
Total liabilities 0
Stockholders' equity:
Common stock, no par value; 60,000 shares authorized;
1,000 shares issued and outstanding $1,000
------
Total stockholders' equity 1,000
------
Total liabilities & stockholders' equity $1,000
======
</TABLE>
The accompanying notes are an integral part of the balance sheet.
F-8
<PAGE> 109
Captec Franchise Capital Corporation IV
Notes to Balance Sheet
1. ORGANIZATION:
Captec Franchise Capital Corporation IV (the "Corporation") is a Michigan
corporation organized on July 22, 1996. The Corporation was formed for
the purpose of serving as the managing general partner of Captec
Franchise Capital Partners L.P. IV (the "Partnership"), a Delaware
limited partnership.
The Corporation is a wholly owned subsidiary of Captec Financial Group,
Inc. ("Captec"). Captec has paid $1,000 in cash to the Corporation for
the purchase of 1,000 shares of common stock of the Corporation. As a
general partner of the Partnership, the Corporation has contributed $100
to the capital of the Partnership. Patrick L. Beach is also a general
partner of the Partnership and is the Chairman of the Board of Directors,
President and Chief Executive Officer of the Corporation and Captec.
Each general partner has a 0.5 percent share in the Partnership's net
income or loss.
The Partnership anticipates undertaking a public offering of limited
partnership interests ("Units") in 1996. A minimum of 2,000 Units and a
maximum of 30,000 Units, priced at $1,000 per Unit, will be offered on a
"best efforts, part or none" basis.
Affiliates of the Corporation are expected to provide various services to
the Partnership and will be paid certain fees for such services as
specified in the Partnership Agreement.
2. OMISSION OF INAPPLICABLE FINANCIAL STATEMENTS:
The Corporation was organized in July 1996, but has not commenced
operations. As no revenues or expenses have been incurred, no Statement
of Operations, Statement of Stockholders' Equity or Statement of Cash
Flows are included for the Corporation.
F-9
<PAGE> 110
PRIOR PERFORMANCE TABLES
P-i
<PAGE> 111
TABLE I
PRIOR PERFORMANCE EXPERIENCE IN RAISING AND INVESTING FUNDS
<TABLE>
<CAPTION>
Captec Franchise Captec Franchise
Capital Partners Capital Partners
L.P. II(a) L.P. III(a)
----------------- -----------------
<S> <C> <C>
Dollar amount offered $7,500,000 $20,000,000
Dollar amount raised (100%) $1,940,500 $20,000,000
Less offering expenses:
Selling Commissions 8.0% 8.0%
Organizational expenses 3.0% 3.0%
Other (non-accountable allowance 2.0% 2.0%
Reserves 0.0% 0.0%
Percent Available for Investment 87.0% 87.0%
Acquisition Costs:
Cash down payment 123.6% __._%
Acquisition fees 6.2% __._%
Acquisition expenses 0.0% 0.0%
Total acquisition costs 129.8% __._%
Percentage leverage 33.0% 0.0%
Date offering begin May 7, 1992 August 12, 1994
Length of offering (months) 24 24
Months to invest 90% of amount
available for investment 4 (b)
</TABLE>
_________________________
(a) Captec Franchise Capital Partners L.P.II ("Captec II") and
Captec Franchise Capital Partners L.P. III ("Captec III") are
each public programs with investment objectives similar to those
of the Partnership.
(b) Captec III closed its offering on __________, 1996 having
raised $20,000,000 from ________ investors. Captec III has
purchased the land and building of _________ properties for a
purchase price of $____________ and twelve equipment packages
for $__________. Captec III has $___________ of uninvested
proceeds ($_____________ net of commissions), on an unleveraged
basis, to invest in property and equipment.
P-1
<PAGE> 112
TABLE II
PRIOR PERFORMANCE COMPENSATION TO SPONSOR
<TABLE>
Captec Franchise
Capital Partners L.P. II (a)
-----------------------------
<S> <C> <C>
Date offering commenced May 7, 1992
Dollar amount raised $1,940,500
Amount paid to sponsor from
proceeds of offering:
Offering expenses $252,265
Acquisition fees
- real estate commissions 0
- advisory fees 0
- other $119,953
Other
Dollar amount of cash 1994 1995
generated from operations ---- ----
before deducting payments to sponsor $179,410 $256,554
Amount paid to sponsor from operations:
Property management fees 0 0
Partnership management fees 0 0
Reimbursements 0 0
Leasing commissions 0 0
Other 0 0
Dollar amount of property sales and
refinancing before deducting payments to
sponsor:
Cash 0 0
Notes 0 0
Amount paid to sponsor from property
sales and financing
Real estate commissions 0 0
</TABLE>
- ------------------------------
(a) Captec Franchise Capital Partners L.P. II is a public program
with investment objectives similar to those of the Partnership.
P-2
<PAGE> 113
TABLE II
PRIOR PERFORMANCE COMPENSATION TO SPONSOR
<TABLE>
<CAPTION>
Captec Franchise
Capital Partners
L.P. III(a)
------------------
<S> <C>
Date offering commenced April 17, 1994
Dollar amount raised $_______
Amount paid to sponsor from proceeds
of offering:
Offering Expenses $______(b)
Acquisition fees
- real estate commissions 0
- advisory fees 0
- other $________(b)
Other 0
1995
----
Dollar amount of cash generated from $346,827
operations before deducting payments
to sponsor
Amount paid to sponsor from operations:
Property management fees 0
Partnership management fees 0
Reimbursements 0
Leasing commissions 0
Other 0
Dollar amount of property sales and
refinancing before deducting payments
to sponsor:
Cash 0
Notes 0
Amount paid to sponsor from property
sales and refinancing 0
Real estate commissions 0
</TABLE>
- ------------------------------
(a) Captec Franchise Capital Partners L.P. III is a public program
with investment objectives similar to those of the Partnership.
(b) As of ___________, 1996.
P-3
<PAGE> 114
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
CAPTEC II
<TABLE>
<CAPTION>
1994 1995
------- --------
<S> <C> <C>
Gross revenues $169,837 $349,675
Profit on sale of properties 0 0
Interest income 30,3250
Less: Operating expenses (6,443) (9,568)
Interest expense (14,309) (83,553)
Depreciation (15,377) (28,462)
-------- --------
Net income - GAAP basis $164,033 $228,092
======== ========
Taxable Income
- from operations $126,606 $111,079
======== ========
- from gain on sale $0 $0
======== ========
Cash generated from operations $179,410 $256,554
Cash generated from sales 0 0
Cash generated from refinancing 0 0
-------- --------
Cash generated from operations,
sales and refinancing 179,410 256,554
Less cash distributions to investors: (a)
- from operating cash flow (136,988) (177,618)
- from sales and refinancing 0 0
- from other: reduction of net
investment in financing leases (6,957) (69,282)
-------- --------
Cash generated (deficiency) after cash
distributions 35,465 9,654
Special items (not including sales and
refinancing):
- Partners' capital contributions, net
of offering costs 1,688,135 0
- Proceeds from borrowings 831,000 0
- Purchase of real estate for operating
leases (2,271,562) 326,760
- Purchase of equipment for financing
leases (149,139) (425,284)
- Reduction of net investment in
financing leases 6,957 69,282
- Principal payments of debt obligations (6,133) (39,099)
- Increase in other assets (69,886) (7,837)
- Increase in other liabilities 22,187 36,753
------- -------
Cash generated (deficiency) after cash
distributions and special items $87,024 ($29,771)
======= ========
</TABLE>
P-4
<PAGE> 115
TABLE III (CONTINUED)
OPERATING RESULTS OF PRIOR PROGRAMS
CAPTEC II
<TABLE>
<CAPTION>
1994 1995
------- --------
<S> <C> <C>
Tax and Distribution Data per $1,000 Invested:
Federal Income Tax Results:
Ordinary income (loss)
- from operations $67 $57
- from recapture 0 0
Capital gain (loss) 0 0
Cash Distributions to Investors: (a)
Source (on a GAAP basis):
- Investment income $77 $127
- Return of capital 0 0
Source (on a cash basis)
- Sales 0 0
- Refinancing 0 0
- Operations $73 $91
- Other: reduction of net investment in
financing leases 4 36
Amount (in percentage terms) remaining
invested in program properties at the end
of the last year reported in the Table 100% 100%
</TABLE>
P-5
<PAGE> 116
TABLE III (CONTINUED)
OPERATING RESULTS OF PRIOR PROGRAMS
CAPTEC III
<TABLE>
<CAPTION>
1995
-------
<S> <C>
Gross revenues $359,018
Profit on sale of properties 0
Interest income 10,928
Less: Operating expenses (23,119)
Interest expense 0
Depreciation (33,978)
--------
Net income - GAAP basis $312,849
========
Taxable Income
- from operations $63,498
=======
- from gain on sale $0
=======
Cash generated from operations $346,827
Cash generated from sales 0
Cash generated from refinancing 0
--------
Cash generated from operations,
sales and refinancing 346,827
Less cash distributions to investors: (a)
- from operating cash flow (289,426)
- from sales and refinancing 0
- from other: reduction of net
investment in financing leases (121,674)
--------
Cash generated (deficiency) after cash
distributions (64,273)
Special items (not including sales and
refinancing):
- Partners' capital contributions,
net of offering costs 6,437,467
- Purchase of real estate for operating
leases (3,403,260)
- Purchase of equipment for financing
leases (2,001,275)
- Reduction of net investment in
financing leases 121,674
- Increase in other assets (53,560)
- Increase in other liabilities 55,034
----------
Cash generated (deficiency) after cash
distributions and special items $1,091,807
==========
</TABLE>
P-6
<PAGE> 117
TABLE III (CONTINUED)
OPERATING RESULTS OF PRIOR PROGRAMS
CAPTEC III
<TABLE>
<CAPTION>
1995
-------
<S> <C>
Tax and Distribution Data per $1,000 Invested:
Federal Income Tax Results:
Ordinary income (loss)
- from operations $16
- from recapture 0
Capital gain (loss) 0
Cash Distributions to Investors: (a)
Source (on a GAAP basis):
- Investment income $81
- Return of capital 26
Source (on a cash basis)
- Sales 0
- Refinancing 0
- Operations $75
- Other: reduction of net investment in
financing leases 32
Amount (in percentage terms) remaining
invested in program properties at the end
of the last year reported in the Table 100%
--------
(a) Cash distributions are paid quarterly, 15 days after the end
of the quarter. Distributions indicated above correspond to
the reporting period, but the last of the quarterly
distributions included in the total were actually paid in
the following period.
</TABLE>
P-7
<PAGE> 118
EXHIBIT A
AGREEMENT OF LIMITED PARTNERSHIP
<PAGE> 119
AGREEMENT OF LIMITED PARTNERSHIP
OF
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
<PAGE> 120
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
INDEX
<TABLE>
<CAPTION>
Page
<S><C> <C>
1. NAME AND PLACE OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
2. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
3. PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-9
4. TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-9
5. GENERAL PARTNERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-10
6. LIMITED PARTNERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-10
7. PARTNERSHIP CAPITAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-11
8. LIABILITY OF LIMITED PARTNERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-12
9. COMPENSATION TO THE GENERAL PARTNERS AND THEIR AFFILIATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-12
10. PARTNERSHIP EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-15
11. ALLOCATION OF INCOME AND LOSS AND DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-17
12. TRANSFERABILITY OF UNITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-22
13. BOOKS, RECORDS, ACCOUNTINGS AND REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-25
14. RIGHTS, AUTHORITY, POWERS, RESPONSIBILITIES AND
DUTIES OF THE MANAGING GENERAL PARTNER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-27
15. RIGHTS AND POWERS OF THE LIMITED PARTNERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-39
16. REMOVAL, BANKRUPTCY OR DISSOLUTION OF A GENERAL PARTNER AND TRANSFER OF A GENERAL PARTNER'S INTEREST . . . . . . . . A-41
17. CERTAIN TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-43
18. TERMINATION AND DISSOLUTION OF THE PARTNERSHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-43
19. SPECIAL POWER OF ATTORNEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-44
20. LIABILITY AND INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-46
</TABLE>
<PAGE> 121
<TABLE>
<S> <C> <C>
21. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-47
</TABLE>
<PAGE> 122
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
AGREEMENT OF LIMITED PARTNERSHIP
AGREEMENT of LIMITED PARTNERSHIP ("Partnership Agreement") entered into as of
the ___ day of __________, 1996, by and among Captec Franchise Capital
Corporation IV, a Michigan corporation (the "Managing General Partner") and
Patrick L. Beach (the "Individual General Partner"), as General Partners and
Patrick L. Beach as the Initial Limited Partner (the "Initial Limited
Partner"), with offices at 24 Frank Lloyd Wright Drive, P.O. Box 544, Ann
Arbor, Michigan 48106-0544, and Patrick L. Beach, as the Initial Limited
Partner, with offices at 24 Frank Lloyd Wright Drive, P.O. Box 544, Ann Arbor,
Michigan 48106-0544.
WHEREAS, the Managing General Partner, the Individual General Partner and the
Initial Limited Partner formed a limited partnership under the laws of the
State of Delaware on February 18, 1994 by filing a Certificate of Limited
Partnership (the "Certificate") with the Delaware Secretary of State to be
governed by this Partnership Agreement;
NOW, THEREFORE, in consideration of mutual promises made herein, the parties
hereto hereby agree as follows:
1. NAME AND PLACE OF BUSINESS
The name of the limited partnership to be governed hereby is Captec Franchise
Capital Partners L.P. IV (the "Partnership"). Its registered office in Delaware
is The Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware
19801. The Partnership's registered agent at that address is The Corporation
Trust Company. The Managing General Partner shall have full power and authority
to change the Partnership's registered office or registered agent. The
Partnership's principal place of business is 24 Frank Lloyd Wright Drive, P.O.
Box 544, Ann Arbor, Michigan 48106-0544, or such other place as the Managing
General Partner may hereafter determine. The General Partners shall from time
to time execute or cause to be executed the Certificate and all such
certificates (including limited partnership and fictitious name certificates)
or other documents or cause to be done all such filing, recording, publishing
or other acts as may be necessary or appropriate to comply with the
requirements for the formation and the operation of a limited partnership under
the laws of the State of Delaware and for the purpose of establishing and
protecting the limited liability of the Limited Partners, under the laws of any
other jurisdiction in which the Partnership may conduct business.
2. DEFINITIONS
The following terms used in this Partnership Agreement shall (unless
otherwise expressly provided herein or unless the context otherwise requires)
have the following respective meanings:
"Acquisition Expenses" shall mean expenses, including but not limited to
credit reports, escrow fees, appraisal reports, attorneys' fees and title
insurance, accountants' fees and miscellaneous expenses, and travel and
communication expenses related to selection and acquisition of investments,
whether or not acquired.
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"Acquisition Fees" shall mean the total of all fees and commissions paid by
any Person to any Person, including the General Partners and their Affiliates
in connection with the selection, evaluation, acquisition, construction, and/or
development of, Property or Equipment by the Partnership, whether or not
acquired, including but not limited to, real estate commissions, selection
fees, finder's fees, Development Fees, nonrecurring management fees, consulting
fees, payments for covenants not to compete, guarantee fees, financing fees or
other similar fees or commissions, however designated and however treated for
tax or accounting purposes, or any fees of a similar nature, however
designated. As used herein, "Development Fee" shall mean a fee for packaging
of a Partnership's property, including negotiating and approving plans, and
undertaking to assist in obtaining zoning and necessary variances and necessary
financing for the specific property, either initially or at a later date.
"Act" shall mean the Securities Act of 1933, as amended.
"Additional Closing Date" shall mean each date between the Initial Closing
Date and the Final Closing Date on which a closing for Units sold pursuant to
the Prospectus occurs.
"Adjusted Investment" shall mean the Original Contributions attributable to a
Unit, reduced by the total amount of Net Sale or Refinancing Proceeds
distributed.
"Adjusted Net Asset Value" shall mean the book value of all Assets minus all
liabilities of the Partnership.
"Affiliate" of a Person shall mean: (i) any Person directly or indirectly
controlling, controlled by or under common control with another Person; (ii)
any Person owning or controlling 10% or more of the outstanding voting
securities of such other Person; (iii) any officer, director, trustee, or
partner of such Person; and (iv) if such other Person is an officer, director
or partner, any company for which such Person acts in any such capacity.
Notwithstanding the foregoing, the term Affiliate shall not apply to any Person
who shall serve solely as an independent director, trustee or partner of the
General Partners or of an Affiliate of the General Partners nor shall a partner
in a partnership or joint venture with (a) the Partnership or (b) an Affiliate
of the General Partners, shall be deemed an Affiliate of the General Partners
solely by virtue of such relationship.
"Appraised Value" shall mean the value of any real property according to an
appraisal made by an independent qualified appraiser who is a member in good
standing of the American Institute of Real Estate Appraisers (an MAI
appraiser).
"Assets" means collectively all Partnership Properties and Equipment.
"Capital Account" shall mean, with respect to any Partner, the Capital
Account maintained for such Partner in accordance with the following
provisions:
(i) to each Partner's Capital Account there shall be credited such
Partner's Original Contribution, such Partner's distributive share of Income,
and any items in the
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nature of income or gain that are specifically allocated to such Partner, and
the amount of any Partnership liabilities that are assumed by such Partner or
that are secured by any Partnership property distributed to such Partner.
(ii) to each Partner's Capital Account there shall be debited the amount of
cash and the Gross Asset Value of any Partnership property distributed to
such Partner pursuant to any provision of this Partnership Agreement, such
Partner's distributive share of losses, and any items in the nature of
expenses or losses that are specifically allocated to such Partner, and the
amount of any liabilities of such Partner that are assumed by the Partnership
or that are secured by any property contributed by such Partner to the
Partnership.
In the event any interest in the Partnership is transferred in accordance
with the terms of this Partnership Agreement, the transferee shall succeed to
the Capital Account of the transferor to the extent it relates to the
transferred interest. In the event the Gross Asset Values of Partnership
assets are adjusted pursuant hereto, the Capital Accounts of all Partners shall
be adjusted simultaneously to reflect the aggregate net adjustment.
The foregoing provisions and the other provisions of this Partnership
Agreement relating to the maintenance of Capital Accounts are intended to
comply with Treasury Regulation Section 1.704-1(b), and shall be interpreted
and applied in a manner consistent with such Regulations. In the event the
Managing General Partner shall determine that it is prudent to modify the
manner in which the Capital Accounts, or any debits or credits thereto, are
computed in order to comply with such Regulations, the Managing General Partner
may make such modification. The Managing General Partner shall adjust the
amounts debited or credited to Capital Accounts with respect to (a) any
property contributed to the Partnership or distributed to the Partners; and (b)
any liabilities that are secured by such contributed or distributed property or
are assumed by the Partnership or the Partners in the event the Managing
General Partner shall determine such adjustments are necessary or appropriate
pursuant to Treasury Regulation Section 1.704-1(b) (2) (iv). The Managing
General Partner also shall make any appropriate modifications in the event
unanticipated events might otherwise cause this Partnership Agreement not to
comply with Treasury Regulations Section 1.704-1(b).
"Capital Contribution" shall mean the Original Contribution.
"Cash Flow" means, with respect to any period, all cash receipts derived from
payments of all forms of income on Assets held by the Partnership including all
rents from and other revenues paid in connection with Partnership Assets (as
distinguished from Original Contributions and exclusive of any Net Sale or
Refinancing Proceeds), without deduction for depreciation, plus amounts, if
any, from reserves attributable to such cash receipts with respect to any prior
period, if no longer deemed necessary for Partnership operations, less cash
receipts used to pay operating expenses and to repurchase any Units or set
aside from such cash receipts by the Managing General Partner for working
capital reserves.
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"Certificate" shall mean the Certificate of Limited Partnership of Captec
Franchise Capital Partners L.P. IV as filed with the Secretary of State of the
State of Delaware, and all amendments thereto.
"Closing Date" shall mean each date designated by the General Partners on
which subscribers for Units are admitted as Limited Partners as a result of
purchases occurring during the offering period.
"Code" shall mean the Internal Revenue Code of 1986, as amended, or
corresponding provisions of subsequent revenue laws.
"Current Preferred Return" shall mean a cumulative, noncompounded return
equal to ten percent (10%) per annum on a Limited Partner's Adjusted
Investment, calculated to commence on the first day of the month following the
month in which the Limited Partner is admitted to the Partnership as a Limited
Partner.
"Delaware Act" shall mean the Delaware Revised Uniform Limited Partnership
Act as in effect and as it may be amended.
"Depreciation" shall mean, for each fiscal year or other period, an amount
equal to the depreciation, amortization, or other cost recovery deduction
allowable with respect to an asset for such year or other period, except that
if the Gross Asset Value of an asset differs from its adjusted basis for
federal income tax purposes at the beginning of such year or other period,
Depreciation shall be an amount which bears the same ratio to such beginning
Gross Asset Value as the federal income tax depreciation, amortization, or
other cost recovery deduction for such year or other period bears to such
beginning adjusted tax basis.
"Disposition" shall mean any Partnership transaction with respect to Property
or Equipment not in the ordinary course of its business including, without
limitation, sales, exchanges, or other dispositions of Property or Equipment
held by the Partnership, and recoveries of damage awards and insurance proceeds
with respect to Property or Equipment.
"Distributions" shall mean any cash or other property distributed to the
Limited Partners and the General Partners arising from their interests in the
Partnership, but shall not include any payments to the Managing General Partner
under the provisions of Sections 9 or 10.
"Equipment" shall mean any equipment acquired for lease by the Partnership,
whether directly or indirectly through a nominee, agent, partnership, trust,
joint venture or otherwise, but does not include leases.
"Final Closing Date" shall mean the date on which the last closing for Units
sold pursuant to the Prospectus occurs.
"Front-End Fees" shall mean fees and expenses paid by any party for any
services rendered in connection with and during the Partnership's
organizational or acquisition phase
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including Organizational and Offering Expenses, Acquisition Fees, Acquisition
Expenses and any other similar fees.
"Full Payout Lease" shall mean a lease under which the present value of
non-cancelable rental payments payable during the initial term of the lease is
at least sufficient to permit a lessor to recover the purchase price of
equipment.
"General Partners" shall mean Captec Franchise Capital Corporation IV and
Patrick L. Beach in their respective capacities as general partners of the
Partnership, or any other Person, corporation or other entity which succeeds
either of them in such capacity, as well as any additional general partners.
"Gross Asset Value" shall mean, with respect to any asset, the asset's
adjusted basis for federal income tax purposes, except as follows:
(i) The initial Gross Asset Value of any asset contributed by a Partner
to the Partnership shall be the gross fair market value of such asset, as
determined by the contributing Partner and the Partnership;
(ii) The Gross Asset Values of all Partnership assets shall be adjusted to
equal their respective gross fair market values, as determined by the
Managing General Partner, as of the following times: (a) the acquisition of
an additional interest in the Partnership by any new or existing Partner in
exchange for more than the Original Contribution; (b) the distribution by
the Partnership to a Partner of more than a de minimus amount of Partnership
property other than money, unless all Partners receive simultaneous
distributions of undivided interests in the distributed property in
proportion to their interests in the Partnership; and (c) the termination of
the Partnership for federal income tax purposes pursuant to Code Section
708(b) (I) (B); and
(iii) If the Gross Asset Value of an asset has been determined or adjusted
pursuant to subparagraph (i) or subparagraph (ii) hereof, such Gross Asset
Value shall thereafter be adjusted by the Depreciation taken into account
with respect to such asset for purposes of computing taxable income and
loss.
"Gross Proceeds" shall mean the total proceeds from the sale of Units before
deductions for Front-End Fees.
"Individual General Partner" shall mean Patrick L. Beach in his capacity as
the individual general partner of the Partnership.
"Initial Closing Date" shall mean the date on which the first closing for
Units sold pursuant to the Prospectus occurs.
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"Initial Limited Partner" shall mean Patrick L. Beach in his capacity as the
initial limited partner.
"Investment in Assets" shall mean the amount of Gross Proceeds used to
invest in Property and/or Equipment, including working capital reserves
allocable thereto and other cash payments, but excluding Front-End Fees.
"Limited Partners" shall mean the Initial Limited Partner and any other
Persons who are admitted to the Partnership as additional or substituted
Limited Partners. Reference to a "Limited Partner" shall refer to any one of
them.
"Limited Partnership Interests" shall mean the ownership interest of a
Partner in the Partnership from time to time, including the right of such
Partner to any and all benefits to which such Partner may be entitled as
provided in this Partnership Agreement and in the Delaware Act, together with
the obligations of such Partner to comply with all the terms and provisions of
this Partnership Agreement and of the Delaware Act.
"Majority Vote" shall mean the affirmative vote of the holders of more than
50% of the outstanding Units.
"Managing General Partner" shall mean Captec Franchise Capital Corporation
IV, or its successors and assigns in its or their capacity as the managing
general partner of the Partnership.
"Minimum Number of Units" shall mean 2,000 Units.
"Net Income or Loss From Annual Operations" shall mean the income or loss for
the Partnership's calendar year computed under the accrual method of accounting
for purposes of the federal income tax (excluding any income or loss
attributable to a Disposition or involuntary conversion of any of the
Partnership Property).
"Net Income or Loss From Other Than Annual Operations" shall mean the income
or loss for the Partnership's calendar year computed under the accrual method
of accounting for purposes of the federal income tax arising from (i) a
Disposition or (ii) any other transaction not included in the determination of
Net Income or Loss From Annual Operations.
"Net Offering Proceeds" shall mean the total Gross Proceeds less
Organizational and Offering Expenses.
"Net Sale or Refinancing Proceeds" shall mean receipts from Dispositions or
refinancing of Partnership Properties or Equipment plus amounts, if any, from
reserves attributable to prior Dispositions if no longer deemed necessary for
Partnership operations, less the following:
(i) the amount paid or to be paid in connection with or as an expense of
such Disposition or refinancing;
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(ii) the amount necessary for the payment of all debts and obligations of
the Partnership including, but not limited to, fees to the Managing General
Partner or its Affiliates and amounts, if any, required to be paid to,
arising from or otherwise related to the particular Disposition or
refinancing; and
(iii) any amount set aside by the Managing General Partner for working
capital reserves from such receipts.
"Organizational and Offering Expenses" shall mean all expenditures classified
as syndication expenses pursuant to Code Section 709 and Treasury Regulation
Section 1.709-2(b), including, but not limited to, all those expenses incurred
in connection with the formation, qualification and registration of the
Partnership and in marketing, distributing and processing Units, including any
selling commissions and discounts under applicable federal and state law, and
any other expenses actually incurred and directly related to the offering and
sale of Units, including such expenses as: (a) fees and expenses paid to
attorneys in connection with the offering, (b) securities jurisdictional fees,
filing fees and taxes, (c) the costs of qualifying, printing, amending,
supplementing, mailing and distributing the Partnership's Prospectus including
telephone and telegraphic costs, (d) the costs of qualifying, printing,
amending, supplementing, mailing and distributing sales materials used in
connection with the issuance of Units, including telephone and telegraphic
costs, (e) remuneration of officers and employees of the General Partners and
its Affiliates and the Partnership while directly engaged in marketing,
distributing, processing and establishing records of Units and establishing
records and paying selling commissions, (f) accounting and legal fees and
expenses incurred in connection therewith by the General Partners or its
Affiliates, (g) reimbursements for accountable bona fide costs of due diligence
incurred by Participating Dealers and their registered representatives and (h)
the 2% non-accountable expense allowance payable to the General Partners
pursuant to Section 9.1 hereof.
"Original Contribution" shall mean the amount of $1,000 for each Unit, which
amount shall be attributed to such Unit in the hands of subsequent holders
thereof, less the return of any amount of uninvested funds returned pursuant to
Paragraph 11.10 hereof.
"Participating Dealers" shall mean those broker-dealers who as members of the
National Association of Securities Dealers, Inc. who are participating in the
public offering of the Units.
"Partners" shall mean collectively the General Partners and the Limited
Partners, and reference to a "Partner" shall be to any one of the Partners.
"Partnership" shall mean the limited partnership created under this Partnership
Agreement and any successor thereto.
"Partnership Agreement" shall mean this agreement of limited Partnership, as
amended and restated, and all amendments thereto.
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"Partnership List" shall mean an alphabetical list of the names, addresses
and business telephone numbers of the Limited Partners along with the number of
units held by each.
"Performance Preferred Return" shall mean a cumulative, noncompounded return
equal to ten and one-half percent (10.5%) per annum on a Limited Partner's
Adjusted Investment, calculated to commence on the first day of the month
following the month in which the Limited Partner is admitted to the Partnership
as a Limited Partner.
"Person" shall mean any natural person, partnership, corporation, association
or other legal entity.
"Property" or "Properties" shall mean the real estate, together with the
buildings improvements, fixtures and Personal property associated therewith
(but excluding Equipment), acquired or to be acquired, by the Partnership.
"Prospectus" shall mean the prospectus contained in the registration
statement filed with the Securities and Exchange Commission for the
registration of the Units under the Securities Act of 1933, as amended, in the
final form in which said prospectus is filed with said Commission and as
thereafter supplemented.
"Purchase Prices" shall mean (i) the invoice price or contract price at which
the Partnership acquired Property and/or Equipment from the manufacturer or a
third party seller, or an amount no greater than the invoice price or contract
price, at which an Affiliate of the Partnership, acquired Property and/or
Equipment. The Purchase Price of Equipment and/or Property shall include
Acquisition Fees (except for purpose of the calculation of such Fees) and all
debt secured by liens and security interests on the Property and/or Equipment,
but shall exclude points and prepaid interest.
"Roll-Up Entity" shall mean a partnership, real estate investment trust,
corporation, trust or other entity that would be created or would survive after
the successful completion of a proposed Roll-Up Transaction.
"Roll-Up Transaction" shall mean any transaction or series of transactions
that directly or indirectly, through acquisition or otherwise, involve the
combination, merger or conversion of the Partnership.
"Qualified Plans" shall mean qualified pension, profit sharing and other
employee retirement benefit plans (including Keogh [H.R. 10] plans) and trusts,
bank commingled trust funds for such plans and individual retirement accounts.
"Sponsor" shall mean any Person directly or indirectly instrumental in
organizing, wholly or in part, the Partnership or who will manage or
participate in the management of the Partnership and any Affiliate of such
Person, but does not include (i) any Person whose only relationship with the
Partnership or the General Partners is that of an asset manager whose only
compensation from the Partnership is as such, and (ii) wholly-independent third
parties such as
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attorneys, accountants and underwriters whose only compensation from the
Partnership is for professional services rendered in connection with the
offering of Units or the operations of the Partnership. A Person may also be a
Sponsor of the Partnership by: (i) taking the initiative, directly or
indirectly, and founding or organizing the business or enterprise of the
Partnership, either alone or in conjunction with one or more other Persons;
(ii) receiving a material participation in the Partnership in connection with
the founding or organizing of the business of the Partnership, in consideration
of services or property, or both the services and property; (iii) having a
substantial number of relationships and contacts with the Partnership; (iv)
possessing significant rights to control Partnership property; (v) receiving
fees for providing services to the Partnership which are paid on a basis that
is not customary in the industry; and (vi) providing goods or services to the
Partnership on a basis which was not negotiated at arms-length with the
Partnership.
"Substantially All of the Assets" shall mean, unless the context otherwise
dictates, assets representing 66-2/3% or more of the net book value of all of
the Partnership's Assets as of the end of the most recently completed fiscal
quarter.
"Tax-Exempt Entities" shall mean Qualified Plans and other entities exempt
from federal income taxation, such as endowment funds and foundations and
charitable, religious, scientific or educational organizations.
"Termination Date" shall mean one year after the effective date of the
Partnership's Prospectus.
"Unit" shall mean the ownership interest of the Limited Partners in the
Partnership.
3. PURPOSE
The principal purpose of the Partnership is to acquire, hold, lease,
mortgage, operate, sell or otherwise dispose of (i) Properties and Equipment
which will be leased on a "triple net" basis primarily to operators of national
chain and nationally franchised fast-food, family style and dinner house
restaurants as well as other franchised or chain businesses such as specialty
retail, and (ii) Properties which will be leased on a "double net" (with the
Partnership being responsible for maintenance of the roof, exterior walls
and/or parking lot) or "triple net" basis to prominent franchised or chain
national retail concerns which are operating at least ten other store
locations; and to take any and all actions and to engage in any other business
in which a limited partnership may lawfully engage under the laws of the state
which, in the opinion of the Managing General Partner, are incidental to the
foregoing or are necessary or appropriate to the accomplishment of the purposes
of the partnership.
4. TERM
The Partnership was formed as of the day of filing of the Certificate of the
Partnership with the Delaware Secretary of State and shall continue until the
31st day of December 2026, unless previously terminated in accordance with the
provisions of this Partnership Agreement.
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5. GENERAL PARTNERS
5.1 Capital Contributions. Captec Franchise Capital Corporation IV, and
Patrick L. Beach in their capacities as General Partners, have each contributed
$100 in cash to the Partnership. At all times during the existence of the
Partnership, the General Partners shall have a present and continuing interest
in Net Income or Loss From Other Than Annual Operations and Distributions
according to the provisions of Section 11.
5.2 Capital Accounts. The Partnership shall establish for each General
Partner a Capital Account (to be maintained in accordance with appropriate
provisions of federal income tax law, including Treasury Regulation Section
1.704-1(b)). In the event any interest in the Partnership is transferred in
accordance with the terms of this Partnership Agreement, the transferee shall
succeed to the Capital Account of the transferor to the extent it relates to
the transferred interest. In the event the Gross Asset Values of Partnership
assets are adjusted for purposes of computing income or loss, the Capital
Accounts of all General Partners shall be adjusted simultaneously to reflect
the aggregate net adjustment as if the Partnership recognized gain or loss
equal to the amount of such aggregate net adjustment. Loans by any General
Partner to the Partnership shall not be considered contributions to the capital
of the Partnership.
5.3 Reserves. Since the Partnership's leases will be on a "triple net"
basis, it is not anticipated that a permanent reserve for maintenance and
repairs will be established. However, to the extent the Partnership has
insufficient funds for such purposes, the General Partners will advance to the
Partnership an aggregate amount of up to 1% of the Gross Proceeds for
maintenance and repairs.
6. LIMITED PARTNERS
6.1 Initial Limited Partner. The Initial Limited Partner has contributed the
sum of $100 to the capital of the Partnership and has received 1/10 Unit. The
1/10 Unit of the Initial Limited Partner shall be redeemed immediately
following the admission to the Partnership of any other Limited Partner in
return for the sum of $100, whereupon the Initial Limited Partner shall
withdraw as a Limited Partner.
6.2 Capital Accounts. The Partnership shall establish for each Limited
Partner a Capital Account (to be maintained in accordance with appropriate
provisions of federal income tax law, including Treasury Regulation Section
1.704-1(b)). In the event any interest in the Partnership is transferred in
accordance with the terms of this Partnership Agreement, the transferee shall
succeed to the Capital Account of the transferor to the extent it relates to
the transferred interest. In the event the Gross Asset Values of Partnership
assets are adjusted for purposes of computing income or loss, the Capital
Accounts of all Limited Partners shall be adjusted simultaneously to reflect
the aggregate net adjustment as if the Partnership recognized gain or loss
equal to the amount of such aggregate net adjustment. Loans by any Limited
Partner to the Partnership shall not be considered contributions to the capital
of the Partnership.
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6.3 Authorization of Sale of Units. The Partnership is authorized to issue
not more than 30,000 Units (including the 1/10 Unit held by the Initial Limited
Partner, which 1/10 Unit shall be available for sale upon withdrawal of said
Initial Limited Partner). The Persons purchasing such Units shall contribute
the purchase price to the capital of the Partnership. The General Partners,
their Affiliates and Participating Dealers may purchase up to ten per cent
(10%) of the authorized Units net of any selling commissions but otherwise on
the same terms as other purchasers.
6.4 Escrow of Original Contributions and Commencement of Partnership
Operations. All Original Contributions shall be received by the Partnership in
trust, and shall be deposited in an escrow account in any financial institution
designated by the Managing General Partner as escrow agent for the Original
Contributions. If the Minimum Number of Units is not sold on or before one
year after the effective date of the Partnership's Prospectus (the "Termination
Date"), all monies held in escrow shall be returned to subscribers with any
interest earned thereon (subject to deductions for back-up withholding, if
applicable). If the Minimum Number of Units is sold by the Termination Date,
all monies held in escrow together with any interest earned thereon will be
distributed promptly by the escrow agent to the Partnership on the Initial
Closing Date, and all selling commissions then due and payable shall be paid to
the participating broker-dealers by the Partnership, as agent for the
purchasers of Units, and the Managing General Partner may, in its sole
discretion continue the offering for a period to end not later than (i) the
sale of all Units offered by the Prospectus or (ii) two years after the
effective date of the Prospectus. After the Initial Closing Date, investors
shall be admitted as Limited Partners on at least a monthly basis.
Subscriptions shall be accepted or rejected by the General Partners within
thirty (30) days of their receipt; if rejected, all funds shall be returned to
the investor within ten (10) business days after rejection. Investors whose
subscriptions are accepted by the General Partners shall be admitted to the
Partnership at the time their names are shown on the books and records of the
Partnership as Limited Partners.
6.5 No Assessments or Additional Contributions. The Units are non-assessable
and no Limited Partner shall be required to make additional contributions to
the capital of the Partnership.
7. PARTNERSHIP CAPITAL
7.1 Withdrawal of Capital. No Partner shall have the right to withdraw, or
receive any return of, his Capital Contribution, except as specifically
provided herein. Except as provided in Paragraph 6.1, no Limited Partner shall
have priority over any other Limited Partner, as to the return of his Capital
Contribution or as to profits, losses or distributions.
7.2 Return of Capital. Under circumstances requiring a return of any
Capital Contribution, no Partner shall have the right to receive property other
than cash.
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8. LIABILITY OF LIMITED PARTNERS
8.1 No Personal Liability. Limited Partners shall not be bound by, or be
personally liable for, the expenses, liabilities or obligations of the
Partnership, and no Limited Partner shall be required to lend funds to the
Partnership or to make any further Capital Contribution to the Partnership.
8.2 Obligation to Refund Prior Distributions. If the Partnership does not
have sufficient assets to discharge its liabilities, and under the Delaware
Act, Limited Partners are liable to the Partnership for previous Distributions
as determined by court of competent jurisdiction, then notwithstanding the
provisions of this Partnership Agreement, such Limited Partner shall be
required to repay all or any part of such Distributions, such obligation shall
be the obligation of such Limited Partner and not the obligation of the General
Partners.
9. COMPENSATION TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The General Partners and their Affiliates will receive compensation from the
Partnership only as specified by Sections 9, 10, 11, and Paragraphs 14.2.7 and
14.2.8 hereof. Front-End Fees shall be reduced to the extent necessary to
comply with Paragraph 14.6 hereof.
9.1 Securities Commissions. Participating Dealers, including Affiliates of
the General Partners will receive selling commissions in an amount equal to
8.0% of the Gross Proceeds attributable to all Units placed by them directly,
subject to volume discounts. An additional amount not exceeding 0.5% fo such
Gross Proceeds may be paid to prospective Participating Dealers by the General
Partners from amounts received by them for Organizational and Offering Expenses
for accountable expenses incurred in connection with due diligence activities
of such prospective Participating Dealers and their registered representatives.
9.2 Non-Accountable Expense Allowance. The General Partners and/or their
Affiliates shall receive a non-accountable expense allowance from the
Partnership (the "Non-Accountable Expense Allowance"), aggregating 2.0% of
Gross Proceeds.
9.3 Organizational and Offering Expenses. The Managing General Partner or
an Affiliate shall be reimbursed for all Organizational and Offering Expenses
up to a maximum amount equal to 3.0% of Gross Proceeds, (less amounts paid
directly by the Partnership), excluding selling commissions and the
Non-Accountable Expense Allowance referenced in Paragraph 9.2 hereof, but
including amounts paid to participating dealers as accountable bona fide due
diligence expenses in an amount not exceeding 0.5% of Gross Proceeds.
9.4 Acquisition Fees and Expenses. The General Partners or an Affiliate
shall receive Acquisition Fees equal to the lesser of (1) 4.0% of Gross
Proceeds plus an additional .0677% ("Debt Fee") for each 1% of indebtedness
(calculated as the aggregate amount of Partnership indebtedness secured by
Partnership Assets as a percentage of the aggregate Purchase Prices of such
Assets) incurred in acquiring Properties and/or Equipment, but in no event
shall Acquisition Fees exceed 5.0% of the aggregate Purchase Prices of
Properties and/or Equipment; or (2)
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compensation customarily charged in arm's-length transactions by others
rendering similar services as an on-going activity in the same geographic
location for property or equipment comparable to the Property or Equipment to
be purchased by the Partnership. Although the Debt Fee is included within the
definition of Acquisition Fees in calculating the 5.0% limitation, the Debt Fee
will be paid out of the proceeds of indebtedness rather than from Gross
Proceeds. The General Partners or an Affiliate shall pay all Acquisition
Expenses from amounts received as Acquisition Fees.
9.5 Asset Management Fees. The Managing General Partner or an Affiliate
shall receive an asset management fee equal to the lesser of competitive fees
for similar services in the same geographic location or 1.0% of gross rental
revenues from Partnership Properties and Equipment. Such asset management fee
shall be payable on a monthly or quarterly basis as determined by the Managing
General Partner, provided however, that such fees will accrue and be
subordinated to receipt by the Limited Partners of their Current Preferred
Return. Notwithstanding the foregoing, in the event of a default under a
triple net lease which requires the Partnership to assume operations of a
Property and/or Equipment, such operations will be managed by an Affiliate of
the General Partners. In such event, the Affiliate will be entitled to an
unsubordinated management fee equal to 5% of gross revenues generated by the
Property and/or Equipment plus reimbursement for on-site expenses.
9.6 Equipment Liquidation Fees. The Partnership may pay an Affiliate of the
General Partner a liquidation fee for the resale of Equipment in an amount
equal to 3.0% of the contract sales price of the Equipment.
9.7 Real Estate Liquidation Fees. The Partnership may pay an Affiliate of
the General Partners a liquidation fee for the resale of real estate in an
amount equal to the lesser of (a) fifty percent (50%) of the real estate
commission customarily charged for similar services in the locale of the
Property being sold or (b) three percent (3%) of the gross sales price of a
Property. Such fees shall accrue and be subordinated to receipt by the Limited
Partners of aggregate Distributions equal to a 12% per annum cumulative,
non-compounded return on their Adjusted Investment plus aggregate distributions
of Net Sale or Refinancing Proceeds equal to 100% of their Original
Contributions. Notwithstanding anything to the contrary herein, neither the
General Partners nor any of their Affiliates shall have an exclusive listing in
connection with the sale of a Property by the Partnership. There is neither
limitation nor subordination as to any real estate commission paid to entities
unaffiliated with the General Partners.
9.8 Payment of Fees. Should a General Partner be removed from the
Partnership, any portion of any of the foregoing fees or any other fee or
reimbursement payable under this Partnership Agreement which is then due but
not yet paid, shall be paid by the Partnership to the General Partner or their
Affiliates, as the case may be, in cash within thirty (30) days of the date of
removal as stated in the written notice of removal, unless such amount is
included in the purchase price of the General Partners' interest in the
Partnership as determined under Paragraph 16.3 hereof.
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9.9 Other Goods and Services. In extraordinary circumstances, the General
Partners and their Affiliates may provide other goods and services to the
Partnership if all of the following criteria are met: (i) the goods or services
must be necessary to the prudent operation of the Partnership; (ii) the
compensation, price or fee must be equal to the lesser of 90% of the
compensation, price or fee the Partnership would be required to pay to
unaffiliated parties who are rendering comparable services or selling or
leasing comparable goods on competitive terms in the same geographic location,
or 90% of the compensation, price or fee charged by the General Partners or
their Affiliates for rendering comparable services or selling or leasing
comparable goods on competitive terms; or (iii) if at least 95% of gross
revenues attributable to the business of rendering such services or selling or
leasing such goods are derived from Persons other than Affiliates, the
compensation, price or fee charged by an unaffiliated Person who is rendering
comparable services or selling or leasing comparable goods on competitive terms
in the same geographic location; (iv) the goods and services must be provided
pursuant to a written contract which may be modified in any material respect
only by the vote of a majority in interest of the Limited Partners and shall be
terminable without penalty on 60 days notice; and (v) the General Partners must
receive at least 33% of gross revenues for such goods and services from Persons
other than Affiliates. In addition, any such payment shall be subject to the
further limitation described in Paragraph 10.2 below. Extraordinary
circumstances shall be presumed only when in the good faith belief of the
General Partners there is an emergency situation requiring immediate action by
the General Partners or their Affiliates and the goods or services are not
immediately available from unaffiliated parties. Services which may be
performed in such extraordinary circumstances include emergency maintenance of
Partnership assets, janitorial and other related services due to strikes or
lock- outs, emergency tenant evictions and repair services which require
immediate action.
The Partnership or an Affiliate may provide insurance brokerage services in
connection with obtaining insurance on the Property so long as the cost of
providing such service, including the cost of the insurance, is no greater than
the lowest quote obtained from two unaffiliated insurance agencies and the
coverage and terms are likewise comparable. In no event may such services be
provided by the Partnership or an Affiliate unless they are independently
engaged in the business of providing such services to other than Affiliates and
at least 75% of their insurance brokerage service gross revenue is derived from
other than Affiliates.
The General Partners will not provide construction services to the
Partnership. The Partnership will obtain either a payment and performance bond
or a guaranty of performance for any Property which has not been constructed at
the time the Partnership acquires a particular Property.
9.10 Reimbursements. The General Partners shall also receive reimbursement
for (i) the actual cost to the General Partners or their Affiliates of goods
and materials used for and by the Partnership if obtained from unaffiliated
parties; and (ii) administrative services (as hereinafter defined) necessary
for the prudent operation of the Partnership. The amounts charged to the
Partnership for services performed pursuant to clause (ii) above shall not
exceed the lesser of: (l) the actual cost of such services; or (2) 90% of the
amount which the Partnership would be required to pay to unaffiliated parties
for comparable services. The Partnership's annual report
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to the Limited Partners shall include an itemized breakdown of the services
performed and the amount reimbursed to the General Partners or their Affiliates
pursuant to clause (ii) above, which information shall be verified by the
independent public accountants retained by the Partnership. "Administrative
services" for purposes of this Paragraph 9.10 include only services such as
typing, record keeping, preparation and dissemination of Partnership reports,
preparation and maintenance of records regarding Limited Partners, preparation
and dissemination of responses to investor inquiries and other communications
with investors and any other record keeping required for Partnership purposes.
Notwithstanding the foregoing, the General Partners and their Affiliates also
may be reimbursed for actual expenses incurred when extraordinary on site
action is required.
10. PARTNERSHIP EXPENSES
10.1 Partnership Obligations. Except as otherwise contemplated by Section 9
hereof, the Partnership shall pay all expenses of the Partnership (which
expenses may be billed directly to the Partnership) which may include, but are
not limited to:
10.1.1 all costs of personnel employed by the Partnership;
10.1.2 all costs of borrowed money, taxes and assessment on
Partnership assets and other taxes applicable to the
Partnership;
10.1.3 except as otherwise provided in Paragraph 15.2.4,
fees and expenses of professionals retained by the Partnership
in connection with any of the foregoing, including without
limitation, attorneys, accountants, consultants and
appraisers;
10.1.4 printing, engraving and other expenses and taxes
incurred in connection with the issuance, distribution,
transfer, registration and recording of documents evidencing
ownership of an interest in the Partnership or in connection
with the business of the Partnership;
10.1.5 fees and expenses paid to independent contractors,
appraisers, mortgage bankers, brokers and servicers, leasing
agents, consultants, on-site managers, real estate brokers,
insurance brokers, consultants and other agents;
10.1.6 expenses in connection with the acquisition,
disposition, alteration, repair, remodeling, refurbishment,
leasing, initial financing, refinancing and operation of
Partnership Properties (including the costs and expenses of
insurance premiums, real estate brokerage and leasing
commissions and of maintenance of such Property as and if
necessary); provided, however, that nothing contained herein
shall be construed to permit payment of construction or
Development Fees to the General Partners or their Affiliates;
10.1.7 the cost of insurance as required in connection with
the business of the Partnership; provided, however, that
nothing contained herein shall be construed
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to permit payment of insurance costs of Affiliates or employees
of the General Partners;
10.1.8 expenses of organizing, revising, amending,
converting, modifying or terminating the Partnership;
10.1.9 the cost of preparation and dissemination of the
informational material and documentation relating to
Partnership operations;
10.1.10 the cost incurred in connection with any litigation
in which the Partnership is involved, as well as in the
examination, investigation or other proceedings conducted by
any regulatory agency of the Partnership, including legal and
accounting fees incurred in connection therewith;
10.1.11 the cost of any computer equipment or services used
for or by the Partnership; and
10.1.12 the cost of any accounting, statistical or
bookkeeping equipment necessary for the maintenance of the
books and records of the Partnership.
10.2 Notwithstanding anything herein and except as contemplated by
Paragraph 9.3 hereof, to the contrary, neither the General Partners nor their
Affiliates shall be entitled to reimbursement for:
10.2.1 rent or depreciation, utilities, capital equipment,
other administrative items;
10.2.2 services for which the General Partners or their
Affiliates are entitled to be compensated by way of a separate
fee; and
10.2.3 salaries, fringe benefits, travel expenses, and other
administrative items incurred or allocated to any controlling
Persons of the General Partners or their Affiliates.
Controlling Persons, for purposes of this Paragraph 10.3
includes but is not limited to any Person, whatever his title,
who performs functions for a General Partner similar to those
of:
(a) Chairman or member of the Board of Directors;
(b) President;
(c) Executive Vice-President;
(d) Those Persons holding 5% or more of the stock
of the Managing General Partner; or
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(e) A Person having the power to direct or cause
the direction of the Managing General
Partner, whether through the ownership of
voting securities, by contract, or otherwise.
11. ALLOCATION OF INCOME AND LOSS AND DISTRIBUTIONS
11.1 Allocation of Income and Loss. The income and loss of the
Partnership for purposes of the federal income tax shall be allocated among the
Partners in accordance with this Paragraph 11.1. For purposes of this Section
11, Limited Partners shall mean and include all Limited Partners, other than
the Initial Limited Partner.
11.1.1 Net Income or Loss From Annual Operations. Net Income
or Loss From Annual Operations shall be allocated 99% to the
Limited Partners and 1% to the General Partners.
11.1.2 Net Income From Other Than Annual Operations. Net
Income From Other Than Annual Operations shall be allocated to
the Capital Accounts of the Partners prior to the distribution
of Net Sale or Refinancing Proceeds and cash from reserves
deemed no longer necessary for Partnership operations as
follows:
(a) First, Net Income in an amount equal to the
aggregate deficit in the Partners' Capital Accounts,
if any, shall be allocated to each Partner in the
same ratio as the deficit in such Partner's Capital
Account bears to the aggregate of all such Partners'
deficit Capital Accounts;
(b) Second, to and among the Limited Partners
until each Limited Partner's Capital Account balance
equals the sum of his Performance Preferred Return
and his Original Contribution less the aggregate
amount of Distributions to each Limited Partner;
(c) Third, to the General Partners in such
amounts as are necessary to cause the aggregate
Capital Account balances of the General Partners to
be in a percentage ratio of 10% of all Partnership
Capital Account balances of all Partners;
(d) Fourth, to the Limited Partners in such
amounts as are necessary to cause the aggregate
Capital Account balances of the Limited Partners to
be in a percentage ratio of 90% of all Partnership
Capital Account balances of all Partners;
(e) Fifth, to the General Partners in an amount
equal to their contributions of capital to the
Partnership;
(f) Thereafter, the balance of the Net Income, if
any, shall be allocated 90% to the Limited Partners
and 10% to the General Partners.
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11.1.3 Net Loss From Other Than Annual Operations. Net Loss
From Other Than Annual Operations shall be allocated to the
Capital Accounts of the Partners prior to the distribution of
Net Sale or Refinancing Proceeds and cash from reserves deemed
no longer necessary for Partnership operations, as follows:
(a) First, to the Partners having positive
Capital Accounts in proportion to and to the extent
of their positive Capital Account balances, until all
positive Capital Account balances shall be reduced to
zero;
(b) Second, the balance of such losses shall be
allocated to those Partners bearing the ultimate risk
of law related to such losses in accordance with
Treasury Regulations promulgated pursuant to Code
Section 704.
11.1.4 Unexpected Allocations. In the event any Partner
unexpectedly receives any adjustments, allocations, or
distributions described in Treasury Regulation Section
1.704-1(b)(2)(ii)(d) (4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-
1(b)(2)(ii)(d)(6), which causes or increases a deficit balance
in such Partner's Capital Account shall be specially allocated
items of income and gain in an amount and manner sufficient to
eliminate such deficit balance as quickly as possible.
11.1.5 Minimum Gain. Notwithstanding the foregoing, if
there is a net decrease in the Partnership's "minimum gain"
(as defined in Section 1.704-1(b)(4)(iv)(c) of the
Regulations) during a Partnership taxable year, all Partners
with deficit Capital Account balances, following an adjustment
for items described in Section 1.704-1(b)(4)(iv)(e) at the end
of such year, shall be allocated, before any other allocation
is made under Code Section 704(b), items of income and gain
for such years (and, if necessary, subsequent years) in the
amount and in the proportions needed to eliminate such
deficits as quickly as possible. Such allocation shall be
interpreted in a manner to conform with Section
1.704-1(b)(4)(iv) of the Regulations.
11.2 Apportionment of Income and Loss. That portion of Net Income
and Loss From Annual Operations allocated to the Limited Partners shall be
apportioned among those Persons owning Units at any time during each calendar
month in proportion to allocation factors calculated by multiplying their
respective Units by the number of days in such calendar month that they were
the owners of record of such Units. To the extent that any discrepancies in
Capital Accounts (as determined on a per Unit basis) arise among the Limited
Partners during the offering period, then, in the sole discretion of the
Managing General Partner, allocations of Net Income and Loss From Annual
Operations and/or Distributions shall first be made at the close of the
offering period or as soon as possible thereafter so as to equalize the Capital
Accounts of each Limited Partner on a per Unit basis, with any excess allocated
in the manner described herein.
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11.3 Compliance With Allocation Laws. It is the intent of the
Partners that each Partner's distributive share of income, gain, loss,
deduction, or credit (or item thereof) shall be determined and allocated in
accordance with this Section 11 to the fullest extent permitted by Section
704(b) of the Code. In order to preserve and protect the determinations and
allocations provided for in this Section 11, the Managing General Partner is
authorized and directed to allocate income, gain, loss, deduction, or credit
(or any item thereof) arising in any year differently than otherwise provided
for in this Section 11 to the extent that allocating income, gain, loss,
deduction, or credit (or any item thereof) in the manner provided for in this
Section 11 would cause the determinations and allocations of each Partner's
distributive share of such items not to be permitted by Section 704(b) of the
Code and Treasury Regulations promulgated thereunder. Any allocation made
pursuant to this Paragraph 11.3 shall be deemed to be a complete substitute for
any allocation otherwise provided for in this Section 11 and no amendment of
this Partnership Agreement or approval of any Partner shall be required.
In making any allocation (the "New Allocation") under this Paragraph
11.3, the Managing General Partner is authorized to act only after having been
advised by counsel to the Partnership that, under Section 704(b) of the Code
and the Treasury Regulations thereunder (i) the New Allocation is necessary,
and (ii) the New Allocation is the minimum modification of the allocations
otherwise provided for in this Section 11 necessary in order to assure that,
either in the then current year or in any preceding year, each Partner's
distributive share of income, gain, loss, deduction, or credit (or any item
thereof) is determined and allocated in accordance with this Section 11 to the
fullest extent permitted by Section 704(b) of the Code and the Treasury
Regulations thereunder.
If the Managing General Partner is required by this Paragraph 11.3 to
make any New Allocation in a manner less favorable to the Limited Partners than
is otherwise provided for in Section 11, then the Managing General Partner is
authorized and directed, insofar as he is permitted to do so by Code Section
704(b), to allocate income, gain, loss, deduction or credit (or any item
thereof) arising in later years in such manner so as to bring the proportion of
income, gain, loss, deduction, or credit (or any item thereof) allocated to the
Limited Partners as nearly as possible to the proportion otherwise contemplated
by this Section 11.
11.4 Tax Allocation: Code Section 704(c). In accordance with Code
Section 704(c) and the Treasury Regulations thereunder, income, gain, loss and
deduction with respect to any property contributed to the capital of the
Partnership shall, solely for tax purposes, be allocated among the Partners so
as to take account of any variation between the adjusted basis of such property
to the Partnership for federal income tax purposes and its initial Grass Asset
Value.
In the event the Gross Asset Value of any Partnership property is
adjusted, subsequent allocations of income, gain, loss and deduction with
respect to such asset shall take account of any variation between the adjusted
basis of such asset for federal income tax purposes and its Gross Asset Value
in the same manner as under Code Section 704(c) and the Treasury Regulations
thereunder.
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In the event of a combined taxable disposition of property pursuant to
which gain is to be allocated under this Paragraph 11.4 and other property the
gain from which is not allocated under this Paragraph 11.4, the gain to be
allocated under this Paragraph 11.4 in any calendar year shall bear the same
relationship to the total gain to be recognized in such year as the total gain
to be allocated under this Paragraph 11.4 from the disposition of the
properties bears to the total gain to be allocated from the disposition of the
properties.
Any elections or other decisions relating to such allocations shall be
made by the Managing General Partner in any manner that reasonably reflects the
purpose and intention of this Partnership Agreement. Allocations pursuant to
this Paragraph 11.4 are solely for purposes of federal, state and local taxes
and shall not affect, or in any way be taken into account in computing, any
Partner's capital account or share of Income, Losses, other items or
distributions pursuant to any provision of this Partnership Agreement.
11.5 Distributions of Cash Flow. Distributions of Cash Flow shall
be apportioned 99% to the Limited Partners and 1% to the General Partners,
provided, however, in each calendar year, to the extent distributions of Cash
Flow to the Limited Partners are insufficient to provide them with their
Current Preferred Return, then the General Partners' distribution amounts will
be paid over to the Limited Partners and will accrue and be payable to the
General Partners in a subsequent year after Limited Partners have received
distributions of Cash Flow in an amount equal to their Current Preferred
Return, or if there are insufficient distributions of Cash Flow, then the
General Partners' accrued amount shall be deemed to be fees owed to the General
Partners for purposes of determining Net Sale or Refinancing Proceeds. Such
distributions of Cash Flow shall be apportioned quarterly among the Limited
Partners of record as of a record date declared within thirty (30) days after
the end of each quarter and shall be paid no less frequently than quarterly.
Limited Partners owning at least ten (10) Units may elect to receive their
quarterly distributions on a monthly basis, in which event their quarterly
distributions shall be paid in three (3) consecutive equal monthly installments
commencing on the quarterly distribution date. Such installment shall be paid
to Limited Partners of record as of the record date for quarterly
distributions. Cash Flow shall not be reinvested in Properties or Equipment.
11.6 Net Sale or Refinancing Proceeds and Reserves. Distributions
of Net Sale or Refinancing Proceeds shall be apportioned among the Limited
Partners in the same manner as Cash Flow and shall be distributed 90% to the
Limited Partners and 10% to the General Partners; provided, however, that the
General Partners' 10% of Net Sale or Refinancing Proceeds shall be subordinated
to receipt by the Limited Partners of Distributions from all sources in an
amount equal to their Performance Preferred Return plus aggregate distributions
of Net Sale or Refinancing Proceeds in an amount equal to Limited Partners'
Original Contributions.
11.7 Liquidating Distributions. Unless otherwise required by the
Delaware Act, the net cash proceeds of a sale, exchange or other disposition of
all or Substantially All of the Assets of the Partnership constituting a
dissolution of the Partnership shall be distributed in accordance with the
Partners Capital Account balances. Notwithstanding anything herein to the
contrary, the Partnership shall not distribute assets in kind.
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11.8 General Partners' Interest. In no event will the General
Partners be allocated less than 1% of Net Income or Loss From Annual Operations
for tax purposes. To the extent that the Partnership shall be entitled to any
deduction for federal income tax purposes as a result of any interest in Net
Income, Net Loss and Distributions granted to the General Partners, such
deduction shall be allocated for federal income tax purposes to the General
Partners. As among the General Partners, the allocations of profit and loss and
Distributions of Cash Flow and Net Sale or Refinancing Proceeds, shall be
divided as they may mutually agree from time to time, without the need for
consent of the Limited Partners.
11.9 Consent to Allocation Method. The methods hereinabove set
forth by which Distributions and allocations of Net Income and Loss From Annual
Operations and Net Income and Loss From Other Than Annual Operations are made
and apportioned are hereby expressly consented to by each investor as an
express condition to becoming a Partner.
11.10 Unutilized Net Proceeds. In the event that any portion of the
Net Proceeds is not invested or committed for investment within the later of
twenty-four (24) months from the date of the Prospectus or twelve (12) months
after the offering has terminated (except for any amounts set aside for
operating expenses or reserves), such portion of the Net Proceeds shall be
distributed to the investors who purchased Units as a return of capital without
reduction for Front-End Fees which would have been payable to the General
Partners or their Affiliates if such funds had been committed to investment.
For purposes of this Paragraph 11.10, funds shall be deemed to have been
committed to investment and will not be returned to the extent written
agreements in principle or letters of understanding were at any time executed,
regardless of whether any such investment may or may not be consummated, and to
the extent any funds have been reserved to make contingent payments in
connection with any Asset regardless of whether any such payments may or may
not be made.
11.11 Escheat of Distributions. If, upon the termination and
dissolution of the Partnership, there remains outstanding on the books of the
Partnership a material amount of Distribution checks which have not been
negotiated for payment by Limited Partners, the Managing General Partner may,
if deemed to be in the best interests of the Partnership, cause such amounts to
be redistributed pro rata to Limited Partners of record on such final
distribution date who have previously cashed all of their Distribution checks;
provided, however, that the Partnership shall not be liable for any subsequent
claims for payment of such redistributed Distributions. The Managing General
Partner is not required to make such a redistribution, in which case such
amounts will eventually escheat to the state or as otherwise required in
accordance with appropriate statutory authority. Notwithstanding the
foregoing, unclaimed funds of Persons who, for purposes of the Partnership's
records are Ohio residents, shall be distributed in accordance with the Ohio
unclaimed funds statute in effect as of the date on which the Partnership shall
have unclaimed funds.
11.12 Section 709 Expenses. Syndication and other nondeductible and
non-amortizable expenses, as defined in Code Section 709, shall be allocated
to, and under the capital account maintenance rules reduce, the Capital
Accounts of the Partners actually incurring such expense.
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11.13 Withholding Taxes. In the event that the Partnership is
required to pay any withholding tax or other liability or obligation to any
state, federal or foreign taxing authority that arises because of any act or
status of any Limited Partner, including (but not limited to) the status of a
Limited Partner (or the Person owning such Unit), as a foreign Person under the
Code, and such tax or liability attributable to any year is in excess of the
distributions attributable to such Limited Partner for such year, the
Partnership shall pay such funds on behalf of such Limited Partner, and such
payment shall constitute a loan to such Limited Partner bearing interest at the
First Chicago NBD Bank prime rate and payable in full from the next
distribution of Net Sale or Refinancing Proceeds. Each Partner hereby grants
the Partnership a security interest in all Net Sale or Refinancing Proceeds
distributable to such Limited Partner or with respect to such Units in the
amount of the loan discussed in this Paragraph 11.13 and the Partnership shall
have a right of set-off against any such distributions of Net Sale or
Refinancing Proceeds. Any tax required to be withheld with respect to a
Limited Partner will be charged to that Limited Partner's Capital Account as if
such tax had been distributed to such Partner.
11.14 Distribution Reinvestment Plan. The Partnership has adopted a
Distribution Reinvestment Plan pursuant to which Limited Partners may elect to
have their distributions of Cash Flow, together with distributions from
Affiliates of the General Partner and other sources, applied to the purchase of
Units after sale of the Minimum Number of Units and prior to termination of the
offering of Units. The Distribution Reinvestment Plan is set forth in Exhibit 2
attached hereto.
12. TRANSFERABILITY OF UNITS
12.1 Restrictions on Transfers of Units by Limited Partners. A
Limited Partner may assign his Units only by a duly executed, written
instrument of assignment, the terms of which are not in contravention of any of
the provisions of this Partnership Agreement. The Partnership need not
recognize for any purpose any assignment of the Units of a Limited Partner
unless there shall have been filed with the Partnership and recorded on the
Partnership's books a duly executed and acknowledged counterpart of such
written instrument of assignment, and such instrument evidences the written
acceptance by the assignee of all of the terms and provisions of this
Partnership Agreement, represents that such assignment was made in accordance
with all applicable laws and regulations and in all other respects is
satisfactory in form and substance to the Managing General Partner.
Notwithstanding the foregoing, no Limited Partner may sell, assign, transfer or
exchange any Units:
12.1.1 if in the opinion of counsel for the Partnership such
sale, assignment, transfer or exchange may result, when
considered with all other sales, assignments, transfers and
exchanges of Units in the Partnership within the previous
twelve (12) months, in the Partnership being considered to
have been terminated within the meaning of Code Section 708
unless the Partnership and the transferring holder shall have
received a ruling by the Service that the proposed sale or
exchange will not cause such termination;
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12.1.2 if counsel for the Partnership shall be of the
opinion that such sale, assignment, transfer or exchange might
cause a violation of applicable federal and state securities
laws. In connection therewith, Limited Partners may be
required to furnish an opinion of counsel satisfactory to
counsel to the Partnership that such sale, assignment,
transfer or exchange complies with applicable federal and
state securities laws;
12.1.3 if the transferor or the transferee would hold Units
representing an Original Contribution of less than $5,000
unless 100% of the transferor's Units are being transferred to
such transferee, except for transfers by gift or inheritance,
intra- family transfers, transfers resulting from family
dissolutions and transfers to Affiliates; or
12.1.4 if the Managing General Partner determines in its
sole discretion that such assignment would prevent the
Partnership from being able to satisfy either the 2% or 5%
"safe harbors" contained in Service Advance Notice 88-75 or in
corresponding regulations or the Partnership has received an
opinion of counsel or a favorable service ruling that such
transfer would not result in the Partnership being classified
as a "publicly-traded partnership" for federal income tax
purposes.
Any attempted sale, assignment, transfer or exchange in contravention
of the provisions of this Paragraph shall, in the sole discretion of the
Managing General Partner, be voided and deemed ineffectual and shall not bind
or be recognized by the Partnership.
12.2 Special Exercise of the Rights of a Limited Partner. If a
Limited Partner dies, his executor, administrator or trustee, or, if he is
adjudicated incompetent, his committee, guardian or conservator, or if he
becomes bankrupt, the trustee or receiver of his estate, shall have all the
rights of a Limited Partner for the purpose of settling or managing his estate
and such power as the decedent or incompetent possessed to assign all or any
part of his Units and to join with the assignee thereof in satisfying
conditions precedent to such assignee becoming a substituted Limited Partner.
The death, dissolution, adjudication of incompetence or bankruptcy of a Limited
Partner shall not dissolve the Partnership.
12.3 Substituted Limited Partner. No Person shall have the right to
become a substituted Limited Partner in place of his assignor unless all of the
conditions set forth in Paragraph 12.1 are satisfied and:
12.3.1 the Limited Partner and his assignee shall execute
and acknowledge such other instruments as the Managing General
Partner may deem necessary or desirable to effect such
substitution, including (a) the written acceptance and
adoption by the assignee of the provisions of this Partnership
Agreement, as the same may be amended and his execution,
acknowledgment; (b) delivery to the Managing General Partner
of a special power of attorney, the form and content of which
are described herein; and (c) a statement that the assignee is
acquiring the
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Units for investment purposes only and not with an intent of further
distribution of the Units.
12.3.2 a transfer fee of $100 (which may be increased in the
discretion of the Managing General Partner) shall have been
paid to the Partnership to cover all reasonable expenses
connected with such substitution.
12.4 Consent. By executing or adopting this Partnership Agreement,
each Limited Partner hereby consents to the admission of substituted Limited
Partners by the Managing General Partner, in accordance with the foregoing.
12.5 Effective Date; Records. No attempted transfer of Units or
substitution shall be effective, and the Partnership and the Managing General
Partner shall be entitled to treat the assignor of such Units as the absolute
owner thereof in all respects, and shall incur no liability for allocations of
Net Income, Net Loss or Distributions or transmittal of reports and notices
required to be given to Limited Partners hereunder which are made in good faith
to such assignor, until the "effective date", which shall be the first day of
the calendar month following completion (no later than five (5) days prior to
the beginning of such month) of the requirements set forth in Paragraphs 12.1
and 12.3 above. The Managing General Partner shall cause the records of the
Partnership and this Partnership Agreement to be amended to reflect the
admission and/or substitution of substituted Limited Partners as of the first
day of any month following the satisfaction of the conditions set forth in
Paragraph 12.3.
12.6 Right to Tender Units for Purchase. Commencing in 1998 or the
closing of the offering of Units for sale, whichever occurs later, the
Partnership shall repurchase any part or all of a Limited Partner's Units at
his written request, upon the following terms and subject to the following
restrictions:
12.6.1 The repurchase price shall be an amount equal to (i)
85% of the tendering Limited Partner's Adjusted Capital
Contribution, if the repurchase occurs in 1998, (ii) 90% of
the tendering Limited Partner's Adjusted Capital Contribution,
if the repurchase occurs in 1999, and (iii) 100% of the
tendering Limited Partner's Adjusted Capital Contribution less
(A) any Net Proceeds of Sale previously distributed in respect
of such Units and not applied to a reduction of Adjusted
Capital Contributions and (B) one-half of all prior
distributions of Net Cash Flow in respect of such Units, if
the repurchase occurs in 2000 or thereafter; distributions of
Net Cash Flow in respect of Units purchased in the secondary
market after the closing of the Offering shall be calculated
as if such Units had been issued at the mid-point of the
offering of Units;
12.6.2 Limited Partners desiring to have their Units
repurchased must submit to the General Partners notification
of the number of Units for which they are requesting
repurchase, on a form supplied by the General Partners; the
notification must be postmarked either after February 1 but
before March 1 (the "February Redemption Period") or after
August 1 but before September 1 (the "August
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Redemption Period"; collectively, the "Redemption Periods") in
the year of repurchase;
12.6.3 During 1998, no more than 1/2% of the outstanding
Units (as of January 1, 1998) will be redeemed during either
Redemption Period, and thereafter no more than 1% of the
outstanding Units (as of January 1 for the relevant year) will
be redeemed during any Redemption Period;
12.6.4 Repurchase requests with the earliest postmarks will
be honored first; Units tendered during the February
Redemption Period and August Redemption Period will be
repurchased on the April 1 and October 1, respectively,
thereafter; any such Units tendered during a Redemption Period
which are not repurchased will not be eligible for repurchase
following a subsequent Redemption Period unless re-tendered in
such Redemption Period;
12.6.5 The Partnership shall not be obligated to repurchase
any Units if the Partnership's annualized Net Cash Flow for
the three (3) months prior to the Redemption Period,
calculated on an annualized basis, is less than 10% of the
Adjusted Investment at the beginning of such period;
12.6.6 The Partnership shall not be obligated to repurchase
any Units unless the Managing General Partner determines in
his sole discretion that funds are available for that purpose
from Partnership revenues otherwise distributable to Limited
Partners or Partnership borrowings and that such repurchase
will not impair the capital or the operations of the
Partnership.
13. BOOKS, RECORDS, ACCOUNTINGS AND REPORTS
13.1 Location of Records; Copies. The Partnership's books and
records, the Partnership Agreement and any amendments thereto and any separate
certificate of limited partnership and any amendments thereto shall be
maintained at the principal office of the Partnership or such other place as
the Managing General Partner may determine and shall be open to inspection and
examination of Limited Partners or their duly authorized representatives at all
reasonable times. The Limited Partners shall receive copies of this Partnership
Agreement and any amendments hereto and the certificate of limited partnership
and any amendments thereto, upon a request in writing to the Managing General
Partner and payment of any necessary duplication fees.
An alphabetical list of the names, addresses, and business telephone
numbers of the Limited Partners along with the number of Units held by each of
them (the "Partnership List") shall be maintained as part of the books and
records of the Partnership and shall be available for inspection by any Limited
Partner or its designated agent at the principal office of the Partnership upon
the request of the Limited Partner. The Partnership List shall be updated at
least quarterly to reflect changes in the information contained therein. A
copy of the Partnership List shall be mailed to any Limited Partner requesting
the Partnership List within ten days after receipt of the request. The copy of
the Partnership List shall be printed in alphabetical order, on white paper,
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and in a readily readable type size (in no event smaller than ten-point type).
A reasonable charge for copy work may be charged by the Partnership. The
purposes for which a Limited Partner may request a copy of the Partnership List
include, without limitation, matters relating to the Limited Partner's voting
rights under the Partnership Agreement, and the exercise of the Limited
Partner's rights under federal proxy laws. If the General Partners, or an
Affiliate having charge of the Partnership List, neglect or refuse to exhibit,
produce or mail a copy of the Partnership List as requested, the General
Partners or the Affiliate shall be liable to any Limited Partner requesting the
list for the costs, including attorneys' fees,' incurred by that Limited
Partner for compelling the production of the Partnership List, and for actual
damages suffered by any Limited Partner by reason of such refusal or neglect.
It shall be a defense that the actual purpose and reason for the request for
inspection or for a copy of the Partnership List is to secure such list of
Limited Partners or other information for the purpose of selling such list or
copies thereof, or of using the same for a commercial purpose other than in the
interest of the applicant as a Limited Partner relative to the affairs of the
Partnership. The Managing General Partner may require that the Limited Partner
requesting the Partnership List to represent that the Partnership List is not
requested for a commercial purpose unrelated to the Limited Partner's interest
in the Partnership. The remedies provided hereunder to Limited Partners
requesting copies of the Partnership List are in addition to and shall not in
any way limit, other remedies available to Limited Partners under federal laws
or the laws of any state. The Partnership shall maintain a record of the
information obtained to indicate that a Limited Partner meets the suitability
standards employed in connection with the offer and sale of Units and a
representation that the purchaser is purchasing for his own account, or, in
lieu of such representation, information indicating that the party for whose
account the purchase is made meets such suitability standards.
13.2 Reports on Acquisitions. Within sixty (60) days after the end
of each quarter and until Net Offering Proceeds shall be fully invested, the
Managing General Partner shall cause to be prepared and distributed to each
Person who was a Limited Partner at any time during the quarter then ended, a
special report of all acquisitions describing the terms of such investment, and
the amount of Net Offering Proceeds which then remains unexpended, stated in
terms of both dollar amount and percentage.
13.3 Tax Information. Within seventy-five (75) days after the end
of each fiscal year, the Managing General Partner shall send to each Person who
was a Limited Partner on the first day of any month during the year then ended,
such tax information as shall be necessary for the preparation by such Person
of his federal income tax return. A reconciliation between generally accepted
accounting principles and income tax information will not be provided to the
Limited Partners, however, such reconciliation will be available in the office
of the Partnership for inspection and review by any interest Limited Partner.
13.4 Annual Reports. Within one hundred twenty (120) days after the
end of each fiscal year, the Managing General Partner shall send to each Person
who was a Limited Partner on the last day of the year then ended: (i) audited
financial statements of the Partnership, and (ii) an audited report showing
Distributions per Unit during such year, which report shall separately identify
Distributions from: (a) Cash Flow generated during the year; (b) Cash Flow
generated during prior periods which had been held as reserves; (c) cash from
initial working capital
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reserves; (d) annual net rental revenues on a per Property bases; and (e) Net
Sale or Refinancing Proceeds. The annual report shall also include a
break-down of the costs reimbursed to the General Partners, which report shall
have been verified by the Partnership's accountants to ensure that the
allocation of costs to the Partnership is appropriate, which verification shall
at a minimum provide for (i) a review of the time records of individual
employees, the cost of whose services were reimbursed; and (ii) a review of the
specific nature of the work performed by each such employee. The annual report
shall also include, at Partnership expense, commencing with the Partnership's
first fiscal year of operations or portion thereof, a statement of compensation
and fees paid by the Partnership to the General Partners and their Affiliates,
including an itemized presentation of expense reimbursements to the General
Partners and their Affiliates or any other transactions between the Partnership
and the General Partners or their Affiliates, which information shall be
verified by the independent public accountants retained by the Partnership.
The method of verification shall at a minimum provide: (i) a review of the time
records of individual employees the costs of whose services are reimbursed; and
(ii) a review of the specific nature of the work performed by each such
employee during such year.
13.5 Quarterly Reports. The Managing General Partner shall
prepare, at Partnership expense, commencing with the first fiscal quarter after
the Initial Closing Date, a quarterly report covering each of the first three
quarterly fiscal year periods of partnership operations in each fiscal year,
unaudited financial statements and containing the information regarding the
Partnership and its activities required by Form 10-Q. Copies of such
statements and other pertinent information shall be distributed to each Limited
Partner within sixty (60) days after the close of the quarterly period covered
by the report of the Partnership.
14. RIGHTS, AUTHORITY, POWERS, RESPONSIBILITIES AND DUTIES OF THE MANAGING
GENERAL PARTNER
14.1 Services of Managing General Partner. The Managing General
Partner shall only be responsible for the following services to the
Partnership:
14.1.1 supervising the organization of the Partnership and
the offering and sale of Units;
14.1.2 arranging for (a) the identification of suitable
investments for the Partnership; (b) a review of the
significant factors in deciding whether or not to make a
particular investment; and (c) the making of a final
investment decision;
14.1.3 supervising Partnership management, which includes:
(a) establishing policies for the operation of the
Partnership; (b) causing the Partnership's agents or employees
to arrange for the provision of services necessary to the
operation of the Partnership (including any necessary property
management, accounting and legal services and services
relating to distributions by the Partnership); (c) when
necessary or appropriate, approving actions to be taken by the
Partnership; (d) providing advice, consultation, analysis and
supervision with respect to the functions of the Partnership
in making or acquiring investments (including
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compliance with federal, state and local regulatory
requirements and procedures); (e) executing documents on
behalf of the Partnership and (f) making all decisions as to
accounting matters; and
14.1.4 approving the terms of Dispositions, including
establishing the terms of, and arranging for, any such
transactions.
14.2 Powers of Managing General Partner. The conduct of the
Partnership's business shall be controlled solely by the Managing General
Partner in accordance with this Partnership Agreement. The Managing General
Partner shall have the fiduciary responsibility for the safekeeping and use of
all funds and assets of the Partnership, whether or not in the Managing General
Partner's possession or control. The Managing General Partner shall have all
authority, rights and powers conferred by law and those required or appropriate
to the management of the Partnership's business which, by way of illustration
but not by way of limitation, shall, subject only to the provisions of
Paragraph 14.4 following, include the right, authority and power:
14.2.1 to offer and sell Units to the public directly or
through any Affiliate of the Managing General Partner or any
other broker-dealer who is a member of the National
Association of Securities Dealers, Inc. and is authorized to
sell Units and to employ personnel, agents and dealers for
such purpose;
14.2.2 to invest Net Offering Proceeds temporarily prior
to investment in Assets in short-term, highly liquid
investments determined by the Managing General Partner, in its
sole discretion, to have appropriate safety of principal;
14.2.3 to make or purchase Assets or interests therein in
its own name or in the name of a nominee, a trust or otherwise
and temporarily hold title thereto for the purpose of
facilitating such origination or acquisition or for any other
purpose related to the business of the Partnership; provided
that in the event of the acquisition of such Assets by the
Partnership from the Managing General Partner or its
Affiliates, (i) the purchase price paid by the Partnership may
not exceed the cost of the Assets to the Affiliated seller
thereof plus all closing costs and Acquisition Fees paid by
the Partnership and (ii) no compensation or other benefit may
accrue to the Managing General Partner or its Affiliates
except as otherwise permitted herein and except that they may
be reimbursed for the cost of carrying the investment;
accordingly, all income generated and expenses associated with
Assets so acquired shall be treated as belonging to the
Partnership; in no event shall the Partnership purchase Assets
from the Managing General Partner or its Affiliates if the
Managing General Partner or its Affiliates have held the
Assets for a period in excess of twelve (12) months prior to
commencement of the Partnership's offering; furthermore, the
General Partners or their Affiliates may not sell Assets to
the Partnership pursuant to this subparagraph if the cost of
the Assets exceeds the funds reasonably anticipated to be
available to the Partnership to purchase the Assets.
Notwithstanding the foregoing, no assets or interests therein
may be purchased from affiliated Programs. As used herein,
"Program"
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shall be defined as: a limited or general partnership, joint
venture, unincorporated association or similar organization
other than a corporation formed and operated for the primary
purpose of investment in and the operation of or gain from a
interest in real property including such entities formed to
make or invest in mortgage loans.
14.2.4 to originate, acquire, hold, lease, exchange,
foreclose on, sell, dispose of and otherwise deal with all or
any part of Partnership Assets (including the grant of
easements or servitudes thereon) in such amounts and upon such
terms, including by private contract or at public sale, as the
Managing General Partner deems in its sole discretion to be in
the best interests of the Partnership;
14.2.5 on behalf of the Partnership, to employ Persons in
the operation and management of the business of the
Partnership including, but not limited to, agents, employees,
managers, accountants, attorneys, consultants and others, on
such terms and for such compensation as the Managing General
Partner shall determine, subject, however, to the limitations
with respect thereto as set forth in Section 9, and provided
that agreements with the Managing General Partner or its
Affiliates for the services set forth in Section 9 shall
contain the terms and limitations as to fees and expenses as
set forth in Section 9 and provided further that any of such
agreements shall be terminated immediately upon dissolution of
the Partnership under Paragraph 18.1;
14.2.6 to open accounts and deposit and maintain funds in
the name of the Partnership in banks or savings and loan
associations;
14.2.7 to allow the Partnership to borrow money from the
General Partners or their Affiliates on a short-term basis, at
any time and from time to time and in connection therewith to
pay interest and other financing charges or fees which shall
not exceed the interest and other financing charges or fees
which would be charged by unrelated lending institutions on
comparable loans for the same purpose. Except as permitted by
this Paragraph 14.2.8, the General Partners and their
Affiliates shall be prohibited from providing financing to the
Partnership. Furthermore, on loans made available by a
General Partner or its Affiliates, the General Partner and its
Affiliates shall not receive interest or similar charges or
fees in excess of those charged by unrelated lending
institutions on comparable loans for the same purpose in the
locality. There shall be no prepayment penalty on any loan by
the General Partners to the Partnership. Nothing herein shall
be construed as prohibiting a bona fide prepayment provision
in the financing agreement. An "all-inclusive" or
"wraparound" note and deed of trust (the "all-inclusive note"
herein) may be used to finance the purchase of property by the
Partnership from the General partners or their Affiliates only
if the following conditions are complied with: (i) the General
Partners or their Affiliates under the all-inclusive note
shall not receive interest on the amount of the underlying
encumbrance included in the all inclusive note in excess of
that payable to the
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lender on that underlying encumbrance; (ii) the Partnership
shall receive credit on its obligation under the all-inclusive
note for payments made directly on the underlying encumbrance;
and (iii) a paying agent, ordinarily a bank, escrow company or
savings and loan association, shall collect payments (other
than any initial payment of prepaid interest or loan points not
to be applied to the underlying encumbrance) on the
all-inclusive note and make disbursement therefrom to the
holder of the underlying encumbrance prior to making any
disbursement to the holder of the all-inclusive note, subject
to the requirements of subparagraph (i) above, or, in the
alternative, all payments on the all-inclusive and underlying
note shall be made directly by the Partnership. In no event,
however, shall the General Partners or any of their Affiliates
provide permanent financing to the Partnership for any of the
Partnership's Properties. Additionally, to the extent that the
Partnership has insufficient funds to fund working capital
reserves, the General Partners shall advance to the Partnership
an aggregate amount of up to 1% of the offering proceeds for
this purpose, with interest and other financing charges or fees
to be paid consistently with the foregoing;
14.2.8 to prepare or cause to be prepared reports,
statements and other relevant information for distribution to
the Limited Partners, including annual and quarterly reports.
The Partnership shall, upon request, provide to the state
securities administrator any report or statement required to
be distributed to the Limited Partners;
14.2.9 to require in all Partnership obligations that the
General Partners shall not have any personal liability thereon
and that the Person or entity contracting with the Partnership
is to look solely to the Partnership and its assets for
satisfaction, and in the event that any such obligations have
personal liability, the General Partners may require their
satisfaction prior to contracts without such personal
liability; provided, however, that the inclusion of the
aforesaid provisions shall not materially affect the cost of
the service or material being supplied and all Partnership
obligations are satisfied in accordance with prudent business
practices as to time and manner of payment;
14.2.10 to cause the Partnership to make or revoke any of
the elections permitted by the Code;
14.2.11 to select as its accounting year a calendar year or
such fiscal year as approved by the Internal Revenue
Service;
14.2.12 to determine the appropriate accounting method or
methods to be used by the Partnership in maintaining its books
and records;
14.2.13 to assure any Person dealing with the Partnership
or the General Partners that he may rely upon a certificate
signed by the Managing General Partner as authority with
respect to: (a) the identity of the General Partners or any
Limited
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Partners; (b) the existence or nonexistence of any fact or
facts which constitute a condition precedent to acts by the
General Partners or in any other manner germane to the affairs
of the Partnership; (c) the Persons who are authorized to
execute and deliver any instrument or document of the
Partnership; or (d) any act or failure to act by the
Partnership or as to any other matter whatsoever involving the
Partnership or any Partner;
14.2.14 (a) to take such steps as the Managing General
Partner determines are advisable or necessary in order to
preserve the tax status of the Partnership as a pass-through
entity for federal income tax purposes including, without
limitation, imposing additional restrictions on transfers of
Units (provided such restrictions on transfers do not cause
the Partnership's assets to be deemed to be "plan assets" with
respect to investors which are Qualified Plans) or (b) to
compel a dissolution and termination of the Partnership or
restructuring of the Partnership's activities to the extent
necessary (i) to comply with any exemption in final plan asset
regulations adopted by the Department of Labor, including, but
not limited to, establishing a fixed percentage of Units
permitted to be held by Qualified Plans or other tax-exempt
investors or discontinuing sales to such entities after a
given date, in the event that either (A) the assets of the
Partnership constitute "plan assets" for purposes of ERISA or
(B) the transactions contemplated hereunder constitute
prohibited transactions under ERISA or the Code and an
exemption for such transactions is not obtainable from the
Department of Labor or (ii) to obtain a prohibited transaction
exemption from the Department of Labor.
14.2.15 in addition to any amendments otherwise authorized
herein, to amend this Partnership Agreement from time to time
without the approval of the Limited Partners,
(a) to add to the representations, duties or
obligations of the Managing General Partner or its
Affiliates or surrender any right or power granted
to the Managing General Partner or its Affiliates
herein, for the benefit of the Limited Partners;
(b) to cure any ambiguity, to correct or
supplement any provision herein which may be
inconsistent with law or with any other provision
herein, or to add any other provisions with respect
to matters or questions arising under this
Partnership Agreement which will not be
inconsistent with law or with the provisions of
this Partnership Agreement;
(c) to delete or add any provision of this
Partnership Agreement required to be so deleted or
added by the staff of the Securities and Exchange
Commission or by a state securities commissioner or
similar such official, which addition or deletion
is deemed by such commission or official to be for
the benefit or protection of the Limited Partners;
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(d) to change the name of the Partnership to any
lawful name which it may select;
(e) to reflect the addition or substitution of
Limited Partners or the reduction of capital
accounts upon the return of capital to Partners or
to reflect the admission of additional General
Partners (who may be admitted without the consent
of the Limited Partners);
(f) to amend the provisions of Section 11 of this
Partnership Agreement or any other provisions of
this Partnership Agreement if, in the opinion of
counsel to the Partnership and the General
Partners, such modification is necessary to (i)
cause the allocations and Distributions contained
in Section 11 to have substantial economic effect
in accordance with the most recently proposed or
final regulations relating to Section 704 of the
Code or any other statutory provision or regulation
relating to such allocations or (ii) cause the
periodic allocations to be respected, such as on a
monthly basis, under Section 706 of the Code or any
other statute or provision or regulation relating
to such periodic allocations or (iii) cause the
provisions of this Partnership Agreement to comply
with any applicable federal legislation enacted
after the date of this Partnership Agreement;
provided, however, no such amendment shall be
effected unless, in the opinion of counsel, such
amendment does not adversely affect the rights or
interests of any of the Limited Partners;
(g) to make any amendments that the Managing
General Partner reasonably believes are appropriate
to lessen the possibility that Units would be "plan
assets," as that term is used in ERISA, and to
maintain the status of the Partnership as a
pass-through entity for federal income tax
purposes;
(h) to alter the division of profit and loss
allocations among the General Partners and of
Distribution rights among the General Partners in
accordance with Paragraph 11.5 hereof; and
(i) to substitute any entity for the Individual
General Partner, provided such substituted General
Partner either (a) in the opinion of counsel to the
Partnership, complies with Paragraph 14.9 hereof,
or (b) has a liquid net worth of at least 10% of
the Adjusted Investments, as of the date of such
substitution or the general partner(s) of such
substituted General Partner (if a partnership) or
the substituted General Partner (if an individual),
shall have a net worth, independent of any
investment in the Partnership of at least 10% of
the Adjusted Investments as of the date of such
substitution.
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14.2.16 to borrow money from banks and other financial
institutions and for sums so borrowed issue a promissory note
(or any other evidence of indebtedness) as a General Partner
of this Partnership, and secure repayment thereof by pledging,
mortgaging or granting a security interest in all or any part
of the Partnership assets. No such Person loaning money to
the Partnership shall be bound to verify the validity,
expediency or propriety of such borrowing.
14.2.17 to execute, acknowledge and deliver any and all
instruments to effectuate all of the foregoing, and to take
all such action in connection therewith as the Managing
General Partner shall deem necessary or appropriate.
14.3 General Rights and Powers. The General Partners shall, except
as otherwise provided in this Partnership Agreement, have all the rights and
powers and shall be subject to all the restrictions and liabilities of a
partner in a partnership without limited partners.
14.4 Limitations. Neither the General Partners nor any of their
Affiliates shall have the authority to:
14.4.1 cause the Partnership to enter into contracts with
the General Partners or their Affiliates which would bind the
Partnership after the removal, adjudication of bankruptcy or
insolvency of the last remaining General Partner or continue
the business with Partnership assets after the occurrence of
such event;
14.4.2 alter the primary purpose of the Partnership as
set forth in Section 3;
14.4.3 cause the Partnership to invest in any Assets
through joint ventures or general partnerships with a publicly
registered Affiliate unless: (a) the affiliated program has
investment objectives and policies substantially identical to
those of the Partnership; (b) no duplicate management fees are
paid; (c) the compensation paid to the Sponsor by the
Partnership and the Affiliate is substantially identical with
regard to each program; (d) the Affiliated program makes its
investments on substantially the same terms and conditions as
the Partnership, although the amounts invested do not have to
be comparable; and (e) the Partnership has a right of first
refusal to purchase the investment if the other program wishes
to sell the investment;
14.4.4 cause the Partnership to invest in any Asset with
unaffiliated parties through joint ventures or general
partnerships except on substantially the same terms and
conditions (although not necessarily the same percentage
interest) as such unaffiliated parties; provided, however,
that no such investment shall be entered into by the
Partnership (i) if it involves the payment of duplicative
property management or other fees which would have the effect
of circumventing any of the restrictions on and prohibited
transactions involving conflicts of interest contained in this
Partnership Agreement, and (ii) unless the Partnership
acquires a con-trolling interest in such joint venture or
partnership. For purposes of the
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above, "controlling interest" means an equity interest
possessing the power to direct or cause the direction of the
management and policies of the partnership or joint venture,
including the authority to: (a) review all contracts entered
into by the partnership or joint venture that will have a
material effect on its business or assets, (b) cause a sale or
refinancing of the property or its interest therein subject in
certain cases where required by the partnership or joint
venture agreement, to limits as to time, minimum amounts and/or
a right of refusal by the joint venture partner or consent of
the joint venture partner; (c) approve budgets and major
capital expenditures, subject to a stated minimum amount; (d)
veto any sale or refinancing of the property, or alternatively,
to receive a specified preference on sale or refinancing
proceeds; and (e) exercise a right of first refusal on any
desired sale or refinancing by the joint venture partner of its
interest in the assets except for the transfer to an Affiliate
of the joint venture partner.
14.4.5 cause the Partnership to exchange Units for
Partnership Property;
14.4.6 cause the Partnership to invest in limited
partnerships, unless such investment is as a general partner
and is substantially identical to a direct purchase of the
underlying property (i.e., where the investment includes the
purchase of substantially all of the interests of such
partnership) or the investment is in a joint venture. In both
cases such investment must (i) be on terms which entail the
acquisition of a "controlling interest" as defined elsewhere
herein; (ii) prohibit the payment of duplicative fees and
otherwise limit compensation to that permitted by Section 9
hereof; and (iii) otherwise comply with the limitations on
dealings with Affiliated parties as set forth in this
Partnership Agreement;
14.4.7 invest in junior trust deeds or similar
obligations, except that junior trust deeds or similar
obligations may be taken back from purchasers of Properties
and/or Equipment in connection with the sale thereof by the
Partnership;
14.4.8 take any action with regard to any property owned
through another entity or partnership which they would not
have been empowered to take had the Partnership owned the
property directly;
14.4.9 do any act in contravention of this Partnership
Agreement or which would, in the opinion of the Managing
General Partner, make it impossible to carry on the ordinary
business of the Partnership;
14.4.10 perform any act (other than an act required by this
Partnership Agreement or any act taken in good faith reliance
upon counsel's opinion) which would, at the time such act
occurred, subject any Limited Partner to liability as a
general partner in any jurisdiction;
14.4.11 employ, or permit the employment of, the funds or
assets of the Partnership in any manner except for the
exclusive benefit of the Partnership;
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14.4.12 commingle Partnership funds with those of any other
Person or entity;
14.4.13 operate the Partnership in such a manner as to have
the Partnership classified as an "investment company" for
purposes of the Investment Company Act of 1940;
14.4.14 except as specifically provided for in Section
14.2.2 or another provision of this Partnership Agreement,
cause the Partnership to invest in or underwrite the
securities of other issuers for any purposes;
14.4.15 cause the Partnership to invest in real estate
contracts of sale unless such contracts of sale are in
recordable form and are appropriately recorded in the chain of
title;
14.4.16 cause the Partnership to invest in Property unless
it first obtains an owner's title insurance policy or
commitment as to the condition of title or its equivalent and
an appraisal prepared by an independent MAI appraiser;
14.4.17 cause the Partnership to invest in unimproved real
property (except that such prohibition will not apply to an
interest in unimproved, non-income-producing real estate
acquired as part of an investment so long as such unimproved
real property constitutes less than 10% of Gross Proceeds);
14.4.18 give an exclusive right to sell or exclusive
employment to sell any property for the Partnership to a
General Partner or any Affiliate;
14.4.19 permit receipt by a General Partner or any
Affiliate of any rebates or "give-ups" or permit a General
Partner or any Affiliate to participate in any reciprocal
business arrangements which would have the effect of
circumventing any of the provisions of this Partnership
Agreement;
14.4.20 make loans to a General Partner or any Affiliate or
other Person;
14.4.21 directly or indirectly pay or award any finder's
fee, commission, or other compensation to any Person engaged
by a potential investor for investment advice as an inducement
to such advisor to advise the purchase of Units; provided,
however, that this provision shall not prohibit payment by the
Partnership of normal sales commissions to registered
broker-dealers or other properly licensed Persons (including
an Affiliate of a General Partner) in connection with the
offering and sale of Units;
14.4.22 purchase or lease property from or sell or lease
property to the General Partners or any of their Affiliates
except as contemplated by Paragraphs 14.2.3 and 14.4.3 hereof;
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14.4.23 permit the Limited Partners to contract away the
fiduciary duty owed to the Limited Partners under common
law; or
14.4.24 following the termination of the Offering, allow
the total amount of secured indebtedness with respect to a
particular Property or Equipment package to exceed 80% of the
Purchase Price thereof; in no event will such indebtedness
exceed an amount equal to 35% of the sum of Gross Proceeds
plus the aggregate amount of Partnership indebtedness secured
by Partnership Assets (approximately 40% of the aggregate
Purchase Price of Assets) on a portfolio basis when incurred;
14.4.25 enter into any "Roll-Up Transaction" without the
consent of Limited Partners owning at least two-thirds of the
Units then outstanding as used herein, "Roll-Up Transaction"
shall mean any transaction or series of transactions that
directly or indirectly, through acquisition or otherwise,
involve the combination, merger, or conversion of the
Partnership; this paragraph 14.4.25 cannot be amended or
deleted from the Partnership Agreement without the consent of
the Limited Partners owning at least two-thirds of the Units
then outstanding;
(a) in connection with a proposed Roll-Up
Transaction, an appraisal of all Partnership assets
shall be obtained from a competent "independent
expert"; "independent expert", as used herein,
shall mean a Person with no material current or
prior business or personal relationship with the
Sponsor or its Affiliates who is engaged to a
substantial extent in the business of rendering
opinions regarding the value of assets of the type
held by the Partnership, and who is qualified to
perform such work; if the appraisal will be
included in a prospectus used to offer the
securities of a "Roll-Up Entity," the appraisal
shall be filed with the Securities and Exchange
Commission, and with such states as may require, an
exhibit to the registration statement of the
"Roll-Up Entity"; a "Roll-Up Entity" shall mean a
partnership, real estate investment trust,
corporation, trust or other entity that would be
created or would survive after the successful
completion of a proposed Roll-Up Transaction; the
Partnership's assets shall be appraised on a
consistent basis; the appraisal shall be based on a
evaluation of all relevant information, and shall
indicate the value of the Partnership's assets as
of the date immediately prior to the announcement
of the proposed Roll-Up Transaction; the appraisal
shall assume an orderly liquidation of the
Partnership's assets over a 12 month period; the
terms of the engagement of the independent expert
shall clearly state that the engagement is for the
benefit of the Partnership and its Limited
Partners; a summary of the appraisal, indicating
all material assumptions underlying the appraisal,
shall be included in a report to the Limited
Partners in connection with a proposed Roll-Up
Transaction; accordingly, if such appraisal is
included in the Partnership's prospectus, the
Partnership shall be subject to
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liability for violation of Section 11 of the
Securities Act of 1933, as amended and comparable
provisions under state laws for any material
misrepresentations or material omissions in the
appraisal;
(b) in connection with a proposed Roll-Up
Transaction, the Person sponsoring the Roll-Up
Transaction shall offer to the Limited Partners who
vote "no" on the proposal the choice of: (i)
accepting the securities of the Roll-Up Entity
offered in the proposed Roll-Up Transaction; or
(ii) one of the following: (A) remaining as Limited
Partners in the Partnership and preserving their
interest therein on the same terms and conditions
as existed previously; or (B) receiving cash in an
amount equal to the Limited Partner's pro-rata
share of the appraised value of the net assets of
the Partnership;
(c) the Partnership shall not participate in any
proposed Roll-Up Transaction which would result in
Limited Partners having democracy rights in the
Roll-Up Entity which are less than those provided
for under paragraph 15.1; if the Roll-Up Entity is
a corporation, the voting rights of the Limited
Partners shall correspond to the voting rights
provided for in paragraph 15.1 to the greatest
extent possible;
(d) the Partnership shall not participate in any
proposed Roll-Up Transaction which includes
provisions that would operate to materially impede
or frustrate the accumulation of shares by any
purchaser of the securities of the Roll-Up Entity
(except to the minimum extent necessary to preserve
the tax status of the Roll-Up Entity); the
Partnership shall not participate in any proposed
Roll-Up Transaction which would limit the ability
of a Limited Partner to exercise the voting rights
of its securities of the Roll-Up Entity on the
basis of the number of Units held by that Limited
Partner;
(e) the Partnership shall not participate in any
proposed Roll-Up Transaction in which the Limited
Partner's rights of access to the records of the
Roll-Up Entity would be less than those provided
for under paragraph 13.1;
(f) the Partnership shall not participate in any
proposed Roll-Up Transaction in which any of the
cost of the Roll-Up Transaction would be borne by
the Partnership if the Roll-Up Transaction is not
approved by the Limited Partners;
14.4.26 issue Units in exchange for Property or Equipment
or in ways other than pursuant to the terms set forth in the
Prospectus;
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14.4.27 issue securities senior to the Units except notes
to banks and other financial institutions;
14.4.28 invest in real estate mortgages except in
connection with the disposition of one or more of the
Properties;
14.4.29 engage in the purchase and sale (or turnover) of
investments other than as set forth in the Prospectus; or
14.4.30 repurchase the Units, except as provided in Section
12.6.
14.5 No Personal Liability. The General Partners shall have no
personal liability for the repayment of the Original Contributions of any
Limited Partner or to repay the Partnership any portion or all of any negative
balance in its capital account, except as otherwise provided in Section 20.
14.6 Accounting Matters. The Managing General Partner shall make
all decisions as to accounting matters in connection with the accounting
methods adopted by the Partnership in accordance with generally accepted
accounting principles and procedures applied on a consistent basis and shall
make all decisions with respect to tax accounting matters in accordance with
tax accounting principles. The Managing General Partner may rely on the
Partnership's independent certified public accountants to determine whether
such decisions are in accordance with generally accepted accounting principles.
14.7 Tax Matters Partner. The Managing General Partner is hereby
designated as the "Tax Matters Partner" in accordance with Section 6231(a) (7)
of the Code and, in connection therewith and in addition to all other powers
given thereunder, shall have all other powers needed to fully perform hereunder
including, without limitation, the power to retain all attorneys and
accountants of its choice and the right to settle any audits without the
consent of the Limited Partners. The designation made in this Paragraph 14.7
is hereby expressly consented to by each Partner as an express condition to
becoming a Partner.
14.8 Funds and Assets. The Managing General Partner shall have a
fiduciary responsibility for the safekeeping and use of all funds and assets of
the Partnership, whether or not in its immediate possession or control, and
shall not employ, or permit another to employ, such funds or assets in any
manner except for the exclusive benefit of the Partnership.
14.9 Net Worth of Individual General Partner. The Individual
General Partner and any successor Individual General Partner shall use his best
efforts to meet the requirements, necessary to assure that the Partnership will
be classified as a partnership for federal income tax purposes, of the Code, as
interpreted from time to time by the Internal Revenue Service, or any successor
thereto, any other agency of the federal government or courts of law.
14.10 Preservation of Tax Status. The Managing General Partner
shall use its best efforts to take such actions as are necessary to preserve
the Partnership's status as a partnership
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or other pass-through entity for tax purposes in light of any amendments to the
Code or administrative or judicial interpretations thereof.
15. RIGHTS AND POWERS OF THE LIMITED PARTNERS
15.1 Voting Rights.
15.1.1 The Limited Partners by Majority Vote may, without
the concurrence of the General Partners, vote to:
(a) remove a General Partner in accordance with
Section 16 (provided that the General Partners,
insofar as they may act as Limited Partners due to
the ownership of Units of the Partnership, will
abstain from voting Units held by them with regard
to removal of a General Partner);
(b) elect a new General Partner;
(c) terminate and dissolve the Partnership
pursuant to Section 18; and
(d) amend the Partnership Agreement, provided
such amendment is not for any of the purposes set
forth in Paragraph 14.2.15 of the Partnership
Agreement.
15.1.2 The General Partners must obtain the approval of
the Limited Partners by Majority Vote prior to:
(a) effecting a material change in the
Partnership's investment objectives or policies;
(b) assigning a General Partner's interest in the
Partnership, except as otherwise provided in
Paragraph 16.5 of this Agreement;
(c) extending the term of the Partnership; or
(d) selling all or Substantially All of the
Assets of the Partnership in a single sale, or in
multiple sales in the same twelve-month period,
except in the liquidation and winding-up of the
business of the Partnership upon its termination
and dissolution or in the ordinary course of
business and except that the Managing General
Partner may sell Assets in any twelve-month period
without a vote, provided the aggregate book value
amount of such Asset does not exceed 66-2/3% of the
Original Contributions of the Limited Partners;
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15.1.3 In determining the existence of the requisite
percentage in interest of Units necessary to approve the
matters set forth in Sections 15.1.1 and 15.1.2, Units owned
by the General Partners or their Affiliates shall not be
included.
15.1.4 A Limited Partner shall be entitled to cast one
vote for each Unit which he owns, as at a meeting, in person,
by written proxy or by a signed writing directing the manner
in which he desires that his votes be cast, which writing must
be received by the Managing General Partner prior to such
meeting, or (b) without a meeting, by a signed writing
directing the manner in which he desires that his votes be
cast, which writing must be received by the Managing General
Partner prior to the date upon which the votes of Limited
Partners are to be counted. Units owned by the General
Partners and their Affiliates may not be voted by, nor may the
General Partners and their Affiliates consent with respect to
such Units, on matters submitted to the Limited Partners
regarding the removal of a General Partner or regarding any
transaction between the Partnership and the General Partners
and their Affiliates. In determining the existence of the
requisite percentage and interest of Units necessary to
approve a matter on which the General Partners and their
Affiliates may not vote or consent, any Units owned by the
General Partners and their Affiliates shall not be included.
15.2 Meetings. Meetings of the Limited Partners for any purpose
may be called by the Managing General Partner at any time and shall be called
by the Managing General Partner within ten (10) days after receipt of a written
request for such a meeting signed by ten percent (10%) or more in interest of
the Limited Partners as of the date of receipt of such written request. Any
such request shall state the purpose of the proposed meeting and the matters
proposed to be acted upon thereat. Meetings shall be held at the principal
office of the Partnership or at such other place as may be designated by the
Managing General Partner so long as such meeting is held at a time and place
convenient to Limited Partners.
15.3 Consent Without a Meeting. The Managing General Partner may
and, upon receipt of a request in writing signed by ten percent (10%) or more
in interest of the Limited Partners, the Managing General Partner shall, submit
any matter upon which the Limited Partners are entitled to act, to the Limited
Partners for a vote by written consent without a meeting. For purposes of
obtaining a written vote under this Partnership Agreement, the Managing General
Partner may require a written response within a specified time, but not less
than fifteen (IS) days and no more than sixty (60) days from receipt of said
request, and the failure of a Limited Partner to file such a written response
within such time shall constitute a vote which is consistent with the Managing
General Partner's recommendation with respect to such proposal so long as a
quorum is otherwise obtainable.
15.4 Notice of Meeting. Notification of any meeting to be held
pursuant to Paragraph 15.3 shall be given not less than fifteen (15) days nor
more than sixty (60) days after receipt of a request in writing signed by ten
percent (10%) or more in interest of the Limited Partners by the Managing
General Partner, to each Limited Partner at its record address, or at such
other address which he may have furnished in writing to the Managing General
Partner. Such
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notification shall state the place, date and hour of the meeting, and shall
indicate that the notification is being issued at or by the direction of the
Partner or Partners calling the meeting. The notification shall state the
purpose or purposes of the meeting. For the purpose of determining the Limited
Partners entitled to vote at any meeting of the Limited Partners, or any
adjournment thereof, or to vote by written consent without a meeting, the
Managing General Partner or the Limited Partners requesting such meeting or
vote may fix, in advance, a date as the record date for any such determination
of Limited Partners. Such date shall not be more than sixty (60) days nor less
than ten (10) days before any such meeting or submission of a matter to the
Limited Partners for a vote by written consent. If a meeting is adjourned to
another time or place, and if an announcement of the adjournment of time or
place is made at the meeting, it shall not be necessary to give notification of
the adjourned meeting. The presence in person or by proxy of a majority in
interest of the Limited Partners shall constitute a quorum at meetings of the
Limited Partners; provided, however, that if there be no such quorum, holders
of a majority in interest of the Units so present or so represented may adjourn
the meeting from time to time without further notification, until a quorum
shall have been obtained. No notification of the time, place or purpose of any
meeting of Limited Partners need be given to any Limited Partner who attends in
person or is represented by proxy, except for a Limited Partner attending a
meeting for the express purpose of objecting at the beginning of the meeting to
the transaction of any business on the ground that the meeting is not lawfully
called or convened, or to any Limited Partner entitled to such notification
who, in writing, executed and filed with the records of the meeting, either
before or after the time thereof, waives such notification.
15.5 Proxies. The laws of the State of Delaware pertaining to the
validity and use of corporate proxies shall govern the validity and use of
proxies given by Limited Partners.
15.6 Conduct of Meeting. At each meeting of Limited Partners, the
Managing General Partner shall appoint such officers and adopt such rules for
the conduct of such meeting as the Managing General Partner shall deem
appropriate.
15.7 Limitations. No Limited Partner shall have the right or power
to: (i) bring an action for partition against the Partnership or (ii) cause the
termination and dissolution of the Partnership by court decree or otherwise,
except as set forth in this Partnership Agreement or as provided by law. Other
than upon the termination and dissolution of the Partnership as provided by
this Partnership Agreement, there has been no time agreed upon when the
contribution of each Limited Partner may be returned.
16. REMOVAL, BANKRUPTCY OR DISSOLUTION OF A GENERAL PARTNER AND TRANSFER
OF A GENERAL PARTNER'S INTEREST
16.1 Removal. The General Partners may be removed from the
Partnership upon a Majority Vote. Written notice of the removal of the General
Partners shall be served either by certified or by registered mail, return
receipt requested, or by personal service. Such notice shall set forth the date
upon which the removal is to become effective.
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16.2 Sale of Interest. Upon the removal, adjudication of
bankruptcy, dissolution or other cessation to exist of either of the General
Partners ("Terminated Partner"), the interest of such Terminated Partner in the
Net Income, Net Loss and Distributions of the Partnership may be purchased by a
successor General Partner (elected by Majority Vote of the Limited Partners)
for a purchase price determined according to the provisions of Paragraph 16.3.
Effective as of the removal, withdrawal, dissolution or other departure of the
Managing General Partner from the Partnership, should the Individual General
Partner remain as a General Partner of the Partnership, the Individual General
Partner shall assume all rights, obligations and responsibilities of the
Managing General Partner.
16.3 Purchase Price. If a successor General Partner is elected as
provide din Section 16.2, it shall acquire the interest of the Terminated
Partner for a purchase price equal to the fair market value of the Terminated
Partner's interest in the Partnership, determined by agreement between the
Terminated Partner and the successor General Partner or, if they cannot agree,
by arbitration in accordance with the then current rules of the American
Arbitration Association in Detroit, Michigan. The cost of any such required
arbitration shall be borne equally by the Terminated General Partner and the
Partnership. For this purpose, the fair market value of the interest of the
Terminated Partner shall be deemed to be the amount the Terminated Partner
would receive upon dissolution and termination of the Partnership under
Paragraph 18.2.1 assuming such dissolution or termination occurred on the date
of the dissolving event and assuming the assets of the Partnership were sold
for their then fair market value without compulsion of the Partnership to sell
such assets. Payment shall be made by a promissory note at the announced prime
rate of interest of the bank at which the majority of the Partnership's cash is
on deposit as of the date of determination of the fair market value of the
Terminated Partner's interest in the Partnership. Such promissory note shall
be for a term of five (5) years, or such other period as may be agreed upon
between the Terminated Partner and the acquiring Partner, shall be secured by
the acquiring Partner's assignment of the future Distributions by the
Partnership to the acquiring Partner, and shall be a full recourse obligation
of the acquiring Partner. The principal amount of said promissory note
together with accrued interest shall be payable in equal fully amortizing
installments until such time as the principal amount together with accrued
interest is paid in full. Notwithstanding anything to the contrary herein,
said promissory note, if not previously paid in full, shall become due and
payable in full by the acquiring Partner at such time as the Partnership is
finally wound up and liquidated.
16.4 No Voluntary Dissolution or Withdrawal. Until the dissolution
of the Partnership, the General Partners shall not take any voluntary steps to
dissolve themselves or to voluntarily withdraw from the Partnership. Nothing
in this Partnership Agreement shall be deemed to limit the ability of a General
Partner to transfer, pledge or hypothecate its interest in the Partnership to
third parties and no such action shall constitute a withdrawal from the
Partnership.
16.5 No Limitation on Merger or Reorganization. Nothing in this
Partnership Agreement shall be deemed to prevent the merger or reorganization
of the Managing General Partner into or with any other corporation, partnership
or other entity, or the transfer of all the capital stock or partnership
interests of the Managing General Partner and the assumption of the
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rights and duties of the Managing General Partner by, in the case of a merger,
reorganization or consolidation, the surviving corporation or partnership or by
operation of law.
17. CERTAIN TRANSACTIONS
The General Partners, any Limited Partner, any Affiliates, any
shareholder, officer, director, partner or employee thereof, or any Person
owning a legal or beneficial interest therein, may engage in or possess an
interest in any other business or venture of every nature and description,
independently or with others including, but not limited to, the ownership,
financing, leasing, operation, management, brokerage and development of real
property. Except as set forth in the Prospectus, neither the General Partners
nor any Affiliate of the General Partners shall be obligated to present any
particular investment opportunity to the Partnership, even if such opportunity
is of a character which, if presented to the Partnership, could be taken by the
Partnership and each of them shall have the right to make for its own account
(individually or as trustee) or to recommend to others any such particular
investment opportunity. The General Partners shall not be required to devote
all of their time or business efforts to the affairs of the Partnership, but
shall devote so much of such time and attention to the Partnership as is
reasonably necessary and advisable to manage the affairs of the Partnership to
the best advantage of the Partnership.
18. TERMINATION AND DISSOLUTION OF THE PARTNERSHIP
18.1 Terminating Events. The Partnership shall be terminated and
dissolved upon the earliest to occur of the following:
18.1.1 the withdrawal, removal, adjudication of
bankruptcy, insolvency, dissolution or other cessation of
existence as a legal entity (collectively, the "Withdrawal")
of the last remaining General Partner unless, within ninety
(90) days of the date of such event, the Limited Partners by a
majority vote (unless a unanimous vote is required under the
Delaware Act) elect to continue the business of the
Partnership and elect a successor General Partner as of the
date of the Withdrawal;
18.1.2 a Majority Vote (which may, but need not be
solicited by the General Partner) in favor of dissolution and
termination of the Partnership;
18.1.3 the expiration of the term of the Partnership; or
18.1.4 the disposition of all assets held by the
Partnership receipt of final payment with respect to all
investments.
18.2 Liquidation and Distribution of Assets. Upon a dissolution
and termination of the Partnership for any reason, the Managing General Partner
shall take full account of the Partnership's assets and liabilities, shall
liquidate the assets as promptly as is consistent with
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obtaining the fair value thereof, and shall apply and distribute the proceeds
therefrom in the following order:
18.2.1 first, to the payment of creditors of the
Partnership but excluding secured creditors whose obligations
will be assumed or otherwise transferred on the liquidation of
Partnership assets; and
18.2.2 second, after allowance for the expenses of
liquidation and the setting up of any reserves for
contingencies which the Managing General Partner considers
necessary, to the Partners in proportion to and to the extent
of the positive balances in their Capital Accounts, after Net
Income arising from a Disposition and Net Loss has been
allocated in accordance with Paragraph 11.1 hereof.
18.2.3 notwithstanding anything to the contrary, the
Managing General Partner has the right to defer liquidation
if, in the opinion of the Managing General Partner, the sale
of Partnership assets in liquidation would result in a
material underrealization on the Partnership's assets.
18.2.4 notwithstanding anything herein to the contrary,
the Partnership shall not make any distributions in kind.
18.3 Additional Terminating Event. In addition to the events
described in Paragraph 18.1, the Managing General Partner may also compel a
termination and dissolution of the Partnership, upon notice to all Limited
Partners but without the consent of any Limited Partner, if, in the opinion of
counsel to the Partnership, either (i) the Partnership's assets constitute
"plan assets," as such term is defined for purposes of ERISA, or (ii) any of
the transactions contemplated hereunder constitute "prohibited transactions"
under ERISA and no exemption for such transactions is obtainable from the
United States Department of Labor.
19. SPECIAL POWER OF ATTORNEY
19.1 By completing and signing the Partnership's Subscription
Documents or any transfer form, each Limited Partner grants to the General
Partners and to each officer of the Managing General Partner and their
designees and each of them a power of attorney irrevocably making, constituting
and appointing each of them with full power of substitution and resubstitution,
as its or their attorney-in-fact with full power and authority to act in its or
their name on its or their behalf to execute complete and/or correct in a
manner consistent with the Prospectus and the Partnership Agreement and to
execute, acknowledge, swear to and file the following documents, subject to all
of the provisions of the Partnership Agreement:
19.1.1 the Partnership Agreement, the Certificate, and any
separate certificates of limited partnership to be filed in
the appropriate public offices in the State of Delaware (and
any other state for which the General Partners shall deem it
advisable to file, upon advice of counsel) and in such form as
shall be necessary under the laws of such state to give effect
to the provisions of the Partnership
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Agreement and to preserve the character of the Partnership as a
limited partnership, and any amended Certificate, including any
amendment to the Certificate or to the Partnership Agreement to
reflect the admission of additional General or Limited Partners
in accordance with the terms of the Partnership Agreement or
the substitution of a Limited Partner or General Partner in
accordance with the provisions of the Partnership Agreement;
19.1.2 any other instrument or document which the General
Partners deem to be in the best interests of the Partnership
to file and which is not inconsistent with this Partnership
Agreement;
19.1.3 any document which may be required in connection
with borrowings by the Partnership, including, without
limitation, documents required by any financial institution;
19.1.4 any documents which may be required in connection
with any filings with state securities commissions or other
state authorities;
19.1.5 any document necessary or appropriate in order to
qualify the Partnership to transact business in any state, or
to reconstitute the Partnership as provided in Paragraph
21.10.
19.1.6 any amendment to this Partnership Agreement which
in the opinion of the General Partners does not adversely
impact the interests of the Limited Partners, or is necessary
to clarify any ambiguities, misstatements or omissions from
this Partnership Agreement;
19.1.7 any instruments or other documents necessary to
effect any of the amendments to this Partnership Agreement in
accordance with Paragraph 14.2.15 hereof.
19.2 The power of attorney granted by each Limited Partner:
19.2.1 is a special power of attorney coupled with an
interest which is irrevocable and shall survive and not be
affected by the death, incompetency, disability or incapacity
of the granting Limited Partner;
19.2.2 may be exercised by the attorney-in-fact appointed
as set forth in Paragraph 19.1 hereof either by signing
separately as attorney-in-fact for the Limited Partners or,
after listing all of the Limited Partners executing any
instrument, by a single signature of such attorney-in-fact for
all of them; and
19.2.3 shall survive the delivery of an assignment by a
Limited Partner of the whole or any portion of his Units
except that, where the assignee thereof has been approved by
the Managing General Partner for admission to the Partnership
as a
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substituted Limited Partner, this power of attorney given by the
assignor shall survive the delivery of such assignment for the sole
purpose of enabling the General Partners and each officer of the
Managing General Partner and their designees and each of them to
execute, acknowledge, swear to and file any instrument or document
necessary to effect such substitution.
19.3 Each Limited Partner is fully aware that he and each other
Limited Partner have executed this power of attorney, and that each Limited
Partner will rely on the effectiveness of such powers with a view to the
orderly administration of the Partnership's affairs.
20. LIABILITY AND INDEMNIFICATION
20.1 The General Partners and their Affiliates shall have no
liability to the Partnership or to any Partner for any loss suffered by the
Partnership which arises out of any action or inaction of a General Partner or
the Affiliate of a General Partner if the General Partners or the Affiliates,
in good faith, determined that such course of conduct was in the best interests
of the Partnership and such course of conduct did not constitute negligence or
misconduct of the General Partner or the Affiliate. The General Partners shall
not be liable because of any taxing authorities disallow or adjust any income,
nor shall the General Partners be liable for actions taken or not taken in
accordance with the provisions of this Partnership Agreement, provided that the
same were not the result of negligence, breach of contract or misconduct.
Furthermore, the General Partners shall not have any liability for the
repayment of Capital Contributions of the Limited Partners except as provided
in this Partnership Agreement, nor shall the General Partners be obligated,
except as required by law, to make additional Capital Contributions or advances
to the Partnership. The General Partners and their Affiliates shall be
indemnified by the Partnership against any losses, judgments, liabilities,
expenses and amounts paid in settlement of any claims sustained by them in
connection with the Partnership, provided that the same were not the result of
negligence or misconduct on the part of the General Partners or their
Affiliates, provided however, that such indemnification shall be recoverable
only out of the assets of the Partnership and not from the Limited Partners,
provided further, that the General Partners or their Affiliates, in good faith,
determine that their course of conduct was in the best interest of the
Partnership.
20.1.1 Notwithstanding the above, the General Partners and
their Affiliates and any Person acting as a broker-dealer
shall not be indemnified for any losses, liabilities or
expenses arising from or out of an alleged violation of
federal or state securities laws unless (i) there has been a
successful adjudication on the merits of each count involving
alleged securities law violations as to the particular
indemnitee, or (ii) such claims have been dismissed with
prejudice on the merits by a court of competent jurisdiction
as to the particular indemnitee or (iii) a court of competent
jurisdiction approves a settlement of the claims against a
particular indemnitee and finds that indemnification of the
settlement and related costs should be made.
20.1.2 In any claim for indemnification for federal or
state securities law violations, the party seeking
indemnification shall place before the court the
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position of the Securities and Exchange Commission and the
positions of certain state securities divisions, including
California, Oklahoma and Tennessee, and in such other states in
which the claimants allege Units were offered or sold, with
respect to the issue of indemnification for securities law
violations.
20.1.3 The Partnership shall not pay for any insurance
covering liability of the General Partners and their
Affiliates for actions or omissions for which indemnification
is not permitted hereunder; provided, however, that nothing
contained herein shall preclude the Partnership from
purchasing and paying for such types of insurance, including
extended coverage liability and casualty and workers
compensation, as would be customary for any Person owning
comparable assets and engaged in a similar business from
naming the General Partners and their Affiliates as additional
insured parties thereunder, provided that such addition does
not add to the premiums payable by the Partnership.
20.1.4 The provision of advances from Partnership funds to
the General Partners or their Affiliates for legal expenses
and other costs incurred as a result of any legal action
initiated against a General Partner by a Limited Partner of
the Partnership is prohibited.
20.1.5 The provision of advances from Partnership funds to
the General Partners or their Affiliates for legal expenses
and other costs incurred as a result of a legal action is
permissible if the following three conditions are satisfied:
(1) the legal action relates to acts or omissions with respect
to the performance of duties or services by General Partners
or their Affiliates on behalf of the Partnership; (2) the
legal action is initiated by a third party who is not a
Limited Partner of the Partnership; and (3) the General
Partners or their Affiliates undertake to repay the advanced
funds to the Partnership in cases in which they would not be
entitled to indemnification under Paragraph 20.1 hereof.
21. MISCELLANEOUS
21.1 Counterparts. This Partnership Agreement may be executed in
several counterparts and as so executed shall constitute one Partnership
Agreement, binding on all of the parties hereto, notwithstanding that all of
the parties are not signatories to the original or the same counterpart.
21.2 Binding Provisions. The terms and provisions of this
Partnership Agreement shall be binding upon and shall inure to the benefit of
the successors and assigns of the respective Partners.
21.3 Severability. In the event any phrase, sentence or paragraph
of this Partnership Agreement is declared by a court of competent jurisdiction
to be void, such phrase, sentence or paragraph shall be deemed severed from the
remainder of the Partnership Agreement and the balance of the Partnership
Agreement shall remain in effect.
A-47
<PAGE> 169
21.4 Notice. All notices under this Partnership Agreement shall be
in writing and shall be given to the party entitled thereto by personal service
or by mail, posted to the address maintained by the Partnership for such Person
or at such other address as he may specify in writing.
21.5 Headings. Titles or captions contained in this Partnership
Agreement are inserted only as a matter of convenience and for reference. Such
titles and captions in no way define, limit, extend or describe the scope of
this Partnership Agreement nor the intent of any provision hereof.
21.6 Meanings. Whenever required by the context hereof, the
singular shall include the plural, and vice-versa; the masculine gender shall
include the feminine and neuter genders, and vice-versa; and the word "Person"
shall include a corporation, partnership, firm or other form of association.
21.7 List of Partners. The names, addresses and Original
Contributions of the Partners shall be set forth on Exhibit 1 attached hereto,
which exhibit shall be updated by the Managing General Partner as Partners are
admitted to or withdraw from the Partnership, by amendments to this Agreement.
A current copy of Exhibit 1 shall be maintained at the principal place of
business of the Partnership.
21.8 Governing Law. Notwithstanding the place where this
Partnership Agreement may be executed by any of the parties hereto, the parties
expressly agree that all the terms and provisions hereof shall be construed
under the laws of the State of Delaware and that the Delaware Act, as amended,
shall govern the partnership aspects of this Partnership Agreement.
21.9 Other Jurisdictions. In the event the business of the
Partnership is carried on or conducted in states in addition to the State of
Delaware, then the parties agree that this Partnership shall exist under the
laws of each state in which business is actually conducted by the Partnership,
and they severally agree to execute such other and further documents as may be
required or requested in order that the Managing General Partner legally may
qualify this Partnership in such states. The power of attorney granted to the
Managing General Partner in Section 20 shall constitute the authority of the
Managing General Partner to perform the ministerial duty of qualifying this
Partnership under the laws of any state in which it is necessary to file
documents or instruments of qualification. A Partnership office or principal
place of business in any state, including the State of Michigan, may be
designated from time to time by the Managing General Partner.
21.10 Power to Reconstitute. In the event that the State of
Delaware amends its Revised Uniform Limited Partnership Act in any manner which
precludes the Partnership, at any time, from obtaining an opinion of tax
counsel to the effect that the Partnership will be treated as a pass-through
entity for federal income tax purposes and not as an association taxable as a
corporation, then the Managing General Partner may, in its sole discretion,
reconstitute the Partnership under the laws of another state.
A-48
<PAGE> 170
IN WITNESS WHEREOF, the parties hereto have executed this Partnership
Agreement of Limited Partnership as of the date first above written.
GENERAL PARTNERS:
CAPTEC FRANCHISE CAPITAL CORPORATION IV
By:
---------------------------
Patrick L. Beach
President and
Chief Executive Officer
---------------------------
Patrick L. Beach
INITIAL LIMITED PARTNER:
By:
---------------------------
Patrick L. Beach
A-49
<PAGE> 171
EXHIBIT 1
NAMES, ADDRESSES AND ORIGINAL INVESTMENTS OF THE PARTNERS
A-50
<PAGE> 172
EXHIBIT 2
DISTRIBUTION REINVESTMENT PLAN
A-51
<PAGE> 173
SUBSCRIPTION INSTRUCTIONS
<PAGE> 174
SUBSCRIPTION INSTRUCTIONS
Please follow these instructions carefully. Failure to do so may result in
the rejection of your subscription.
1. Complete the Subscription Agreement marked "Signature Page." All
information requested must be included on the Signature Page. If the Units are
to be held in joint ownership both purchasers must complete the information
required in Items 3 and 4. If interests are being acquired by a partnership,
trust, corporation or other entity, special instructions should be obtained
from the Partnership.
2. Taxpayer Identification Number Certification. In October 1983, the
Internal Revenue Service ("IRS") enacted specific legislation affecting all
accounts which paid reportable escrow or dividend interest and certain other
payments after January 1, 1984. The Partnership, as payor, must generally
withhold 20% of your taxable interest or dividends if you, as payee: (1) fail
to furnish the Partnership with your certified, correct Taxpayer Identification
Number ("TIN"); and (2) fail to certify that you are not subject to backup
withholding under Section 3406(a)(1)(C) of the Code. Under Section
3406(a)(1)(C) of the Code, the IRS will notify a payee that he or she is
subject to backup withholding because he or she has underreported interest or
dividends or was required to, but failed to, file a return which would have
included a reportable interest or dividend payment. For most individual
taxpayers, the TIN is the social security number.
Effect of Backup Withholding. Subscribers should note that while backup
withholding may be imposed on payments of escrow interest on subscription
funds, under current legislation, backup withholding is generally inapplicable
to partnership distributions. There is no assurance that this will not change
in the future. To prevent backup withholding of your taxable interest or
distributions, the certified, correct TIN of the record owner of the account
must appear in Item 3 on the front of the Signature Page. If more than one name
is on the account (e.g., Joint Tenants), the TIN should be that of the first
name listed in the Signature Page. The person whose TIN is listed must SIGN and
DATE the certification as true, correct and complete under the penalty of
perjury.
Payees Subject to Backup Withholding: If you have been notified by the IRS
that you are subject to backup withholding under Section 3406(a)(1)(C) of the
Code, you should strike out the language under #(3) of the certification and
still sign to certify under penalty of perjury that this is your true, correct
and complete TIN. While a subscriber will still be subject to backup
withholding, completion of the certification in the foregoing manner eliminates
the risk that penalties may be imposed by the IRS on the subscriber for failing
to make such certification. Refer to the back of the IRS Form W-9 or consult
your local office of the IRS for a complete listing of such penalties.
Information concerning payees exempt from backup withholding can be found
on the IRS Form W-9 or can be obtained from the IRS. The major payee
exceptions from backup withholding, but not from taxpayer identification
requirements, are: (1) corporations; (2) financial institutions; (3)
organizations exempt from tax under Section 501(a) or IRAs; (4) real estate
investment trusts; and (5) registered dealers in securities or commodities
registered in the United States or in a possession of the United States. If
your account is exempt, insert your TIN, write "EXEMPT" under it and still sign
the certification as indicated above. Failure to sign the certification will
result in imposition of backup withholding.
IF THE SUBSCRIBER DOES NOT HAVE A TAXPAYER IDENTIFICATION NUMBER, he
should obtain Form SS-5 for a Social Security Number, or Form SS-4 for an
Employer ID Number from his local office of the Social Security Administration
or the IRS. IF THE SUBSCRIBER HAS APPLIED FOR A TAXPAYER IDENTIFICATION NUMBER
and has not yet received it, he should write "APPLIED FOR" in the certification
section and SIGN THE FORM (after first striking out the language under #(1) of
the certification) certifying under penalty of perjury that he is not subject
to backup withholding under section 3406(a)(1)(C). The subscriber should also
understand that if he does not provide a TIN to the payor
I-1
<PAGE> 175
within 60 days, the payor is required to withhold 20% of all reportable
payments thereafter until a certified TIN is provided. Upon the processing of
his order, the subscriber will be sent another form with which to certify that
he has mailed or delivered an application to receive a TIN to the appropriate
IRS or Social Security Administration Office or that he intends to mail or
deliver one in the near future.
3. Fill in the information required in each of the Items 1-9:
Item 1: Enter date of execution, number of Units
being purchased, and the dollar amount of
investment.
Item 2: Check type of ownership.
Item 3: Enter the name, Tax Identification or Social
Security Number of the Registered Owner and
sign where indicated.
Item 4: Enter the residential address of the
Registered Owner.
Item 5: Enter the custodian or trust company address,
if applicable.
Item 6: Enter the mailing address for checks if
different from that listed in Item 4 or 5, as
applicable.
Item 7: Investor must initial the two spaces
indicating they have received a prospectus
and that they meet suitability requirements.
Item 8: Check this box if you wish to have monthly
distributions.
Item 9: Check this box if you wish to participate in
the Distribution Reinvestment Program.
4. The Signature Page of the Subscription Agreement, together with a
check or money order for the full purchase price of the Units subscribed for
payable to "Michigan National Bank, Escrow Agent for Captec Franchise Capital
Partners L.P. IV" or should be delivered or mailed to your broker-dealer.
IMPORTANT! A minimum investment of $2,000 (two Units) is required for all
investors. The minimum subscription for Minnesota and South Carolina investors
is two and one-half Units ($2,500). Tax Exempt Investors who are residents of
Minnesota may have minimum subscriptions of two Units ($2,000). Residents of
Nebraska must have minimum subscriptions of five Units ($5,000). The minimum
subscription for Tax Exempt Investors who are residents of Nebraska is two
Units ($2,000). Units may be purchased only by persons meeting the standards
set forth under "Who Should Invest" in the Prospectus.
I-2
<PAGE> 176
EXHIBIT B
SUBSCRIPTION AGREEMENT
<PAGE> 177
CAPTEC FRANCHISE CAPITAL PARTNERS, L.P. IV
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
1. Subscription. The undersigned hereby agrees to purchase that number of Units
indicated upon the signature page of this Subscription Agreement and Power of
Attorney (the "Subscription Agreement") in a limited partnership known as
Captec Franchise Capital Partners L.P. IV (the "Partnership") and to pay the
amount therefore in cash or check payable to "Michigan National Bank, Escrow
Agent for Captec Franchise L.P. IV". This Subscription Agreement and the
accompanying payment are to be delivered to the dealer whose name appears on
the signature page of the Subscription Agreement for deposit in trust to a
segregated account for the benefit of the Partnership and the subscriber. The
Units subscribed for herein shall not be deemed issued to the undersigned nor
shall the undersigned own any Units subscribed for herein or be deemed to be a
Limited Partner until: (i) the undersigned has personally executed (or in the
case of fiduciary accounts, the person authorized to sign on such investors
behalf) this Subscription Agreement and initialed EACH of the representations;
(ii) the undersigned has fully paid the capital contribution required for the
Units for which the investor has subscribed; (iii) the General Partners have
accepted the investor's subscription; and (iv) the General Partners have
accepted subscriptions for the Minimum Number of Units as set forth in the
Prospectus of the Partnership, dated ____________, 1996 (the "Prospectus"). If
the undersigned has not paid for the Units for which they have subscribed, the
General Partners, at their option, may forthwith terminate this subscription
and this Subscription Agreement. In the event the offering is terminated in
accordance with the provisions described in the Prospectus, the Escrow Agent
will cause the subscription amount to be returned to the undersigned, in full,
with interest, less escrow expenses, and the undersigned shall have no further
interest in the Partnership.
2. Adoption of Limited Partnership Agreement. The undersigned hereby intends
that his signature hereon shall constitute a subscription for the number of
Units specified on the signature page of this Subscription Agreement, as well
as a specific acceptance and adoption of each and every provision of the
document designated as the Agreement of Limited Partnership of Captec Franchise
Capital Partners L.P. IV, a form of which is attached to the Prospectus and is
incorporated and made a part hereof by this reference (the "Partnership
Agreement'), and hereby agrees to be bound and governed by the provisions of
said Partnership Agreement..
3. Limitation of Assignment. The undersigned acknowledges that the Units may be
assigned only as provided in the Partnership Agreement and that the issuance of
any certificate representing the Units will be subject to the following legend
condition imposed by the rules of the Commissioner of Corporations of the State
of California.
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFORE, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
The undersigned further specifically acknowledges the restrictions on
resale, transfer or assignment of the Units set forth in the Prospectus under
"Risk Factors-Lack of Liquidity-Limited Transferability" and "Summary of
Partnership Agreement-Restrictions on Transfer of Units" therein. The
undersigned specifically acknowledges the Units are being acquired for the
investor's own account and for the purpose of earning an economic profit
thereon, without regard to any federal income tax benefits resulting from
ownership of the Units.
If executing this Subscription Agreement in a representative or fiduciary
capacity, the undersigned acknowledges individually that they have full power
and authority to execute and deliver this Subscription Agreement on behalf of
the subscribing individual, ward, partnership, trust, estate, corporation or
other entity for whom they are executing this Subscription Agreement, and that
such individual, ward, partnership, trust, estate, corporation or other entity
had full right and power to execute, deliver and perform pursuant to this
Subscription Agreement and become a Limited Partner in the Partnership.
4. Special Power of Attorney. The undersigned hereby irrevocably makes,
constitutes and appoints the General Partners and any person designated by
either of them, as their true and lawful attorney with full power of
substitution, for them and in their name, place and stead for their use and
benefit to make, execute acknowledge, file and record:
(a) A Certificate of Limited Partnership under the laws of the State of
Delaware, the Partnership Agreement, a Certificate of Cancellation of the
Partnership and any and all amendments and restatements thereof;
(b) Any certificate or other instrument which may be required to be filed
by the Partnership under the laws of the State of Delaware (or any other
jurisdiction in which the General Partners shall deem it advisable to file,
upon advice of counsel or otherwise);
(c) All instruments relating to the admission, withdrawal or substitution
of any partner;
(d) Any and all such other instruments as may be deemed necessary or
desirable by the General Partners to carry out fully the provisions of the
Partnership Agreement in accordance with its terms;
(e) Any and all amendments or modifications of the instruments described
in paragraph a, b or c above; and
(f) Any revision or structural changes necessary to comply with the
Regulations promulgated by the Department of Labor regarding plan asset
characterizations.
The foregoing grant of authority:
(i) is a special power of attorney coupled with an interest, is
irrevocable and shall survive and not be affected by the death, liability,
incapacity, dissolution, bankruptcy or termination of the undersigned, and is
limited to those matters herein set forth;
(ii) shall survive the delivery of an assignment by a Limited Partner
of all or any portion of their Units, except that where the assignee thereof
has been approved by the Managing General Partner for admission to the
Partnership as a substituted Limited Partner, the power of attorney of the
assignor Limited Partner shall survive the delivery of such assignment for the
sole purpose of enabling any of such attorneys to execute, acknowledge, file
and record any and all instruments necessary to effect such substitution; and
(iii) may be exercised by any of such attorneys for each Limited
Partner by a facsimile signature or by listing all of the Limited Partners
executing any instrument with a single signature of any of such attorneys
acting as attorney-in-fact for all of them.
5. Additional Suitability Requirements. Residents of Iowa must
personally sign the Subscription agreement.
<PAGE> 178
CAPTEC FRANCHISE CAPITAL PARTNERS, L.P. IV
SIGNATURE PAGE
MAKE CHECKS PAYABLE TO: MICHIGAN NATIONAL BANK ESCROW AGENT FOR CAPTEC
FRANCHISE CAPITAL PARTNERS L.P. IV
IN WITNESS WHEREOF, I have executed this subscription on
this______________________day of ____________________, 19_______.
Number of Units_____________________Amount of Investment ($1,000 x Number of
Units) $_____________________________________
<TABLE>
<S> <C> <C> <C>
___IRA ___Individual ___Corporation ___Trust
___Joint Tenants ___Community Property ___Pension/Profit Sharing Plan ___KEOGH
___Partnership ___Tenants in Common ___Uniform Gift to Minors Act ___Other (Specify)
</TABLE>
Under the penalties of perjury, I certify that the number provided herein
is my true, correct and complete Tax Identification Number.
[ ] Please check if you are subject to a 20% backup withholding under the
provisions of Sections 3406(a)(1)(C) of the Internal Revenue Code. ANY
CHANGES MADE TO THIS SIGNATURE PAGE MUST BE INITIALED BY THE INVESTOR.
<TABLE>
<S> <C>
- ------------------------------------ ------------------------------------
Print Name of Custodian or Trustee Tax Identification Number
- ------------------------------------ ------------------------------------
Print Name(s) of Registered Owner Social Security Number
- ------------------------------------ ------------------------------------
Print Name(s) of Registered Owner Social Security Number
X------------------------------------ X------------------------------------
X------------------------------------ X------------------------------------
Investor's Signature or Authorized Signature Investor's Signature or Authorized Signature
(Custodian or Trustee) (Custodian or Trustee)
INVESTOR(S) LEGAL Street Address: Day Telephone:
RESIDENCE
City: State: Zip Code:
CUSTODIAN OR TRUST Street Address: Day Telephone:
COMPANY ADDRESS
City: State: Zip Code:
MAILING ADDRESS Company or Bank Name: Account
Number:
FOR CHECKS
(if different
from above) Street Address:
City: State: Zip Code:
</TABLE>
WARRANTIES AND REPRESENTATIONS. The investor hereby warrants and represents the
following by INITIALING EACH STATEMENT:
________ The investor acknowledges receipt of the Partnership's Prospectus
(initial)
_________ The investor has a net worth (excluding home, home furnishings and
automobiles) of at least $150,000; or the investor has a net worth
(excluding home, home (initial) furnishings and automobiles) of at
least $45,000 and, (without regard to the investment herein) the
investor has an annual income of at least $45,000; or the investor is
purchasing in a fiduciary capacity for a person that meets such
conditions.
/ / Please check here if you would like your cash flow distributions from the
Partnership or other sources reinvested during the Offering pursuant to
the Distribution Reinvestment Plan.
/ / Please check here if you have acquired ten (10) or more Units and wish to
receive monthly distributions. By making this election, you will receive
three equal monthly distributions beginning with the payment date rather
than receiving the full distribution on the payment date.
TO BE COMPLETED BY BROKER/DEALER
The registered representative hereby undertakes by his signature that
he has made a determination in compliance with the provisions of Appendix F to
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. that the offering of Units in the Partnership is suitable for the investor
and that he has disclosed to such investor the lack of liquidity and
marketability of the Units as stated in the "Who Should Invest" section of the
Prospectus
Registered Representative____________________________________
Brokerage Firm Name__________________________________________
Address______________________________________________________
City____________________________State_________ Zip___________
Business Phone_______________________________________________
<PAGE> 179
X____________________
Signature of Registered Representative
MAIL COPY WITH CHECK PAYABLE TO: MICHIGAN NATIONAL BANK, ESCROW AGENT FOR
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV, Mail Code 10-90, 27777 Inkster Road,
Farmington Hills, MI 48334.
MAIL THIS ORIGINAL FORM and all other documents to Captec Franchise Capital
Partners L.P. IV, 24 Frank Lloyd Wright Drive, P.O. Box 544, Ann Arbor,
Michigan 48106-0544.
DEPOSIT DATE _____/_____/_____
<PAGE> 180
EXHIBIT C
DISTRIBUTION REINVESTMENT PLAN
<PAGE> 181
DISTRIBUTION REINVESTMENT PLAN
Captec Franchise Capital Partners L.P. IV, a Delaware limited partnership
(the "Partnership") governed under the Limited Partnership Agreement dated as
of _______________, 1996, (the "Agreement"), by and among Captec Franchise
Capital Corporation IV and Patrick L. Beach (the "General Partners"), and
Patrick L. Beach, the Initial Limited Partner, has adopted a Distribution
Reinvestment Plan (the "Reinvestment Plan"), the terms and conditions of which
are set forth below. Capitalized terms contained herein shall have the same
meanings set forth in the Agreement unless otherwise defined or the context
otherwise indicates.
1. As agent for the participants in the Reinvestment Plan (the
"Participants"), the Partnership or an unaffiliated third party will apply all
distributions of Cash Flow during the offering period, paid with respect to
Units, interests in other affiliates of the General Partners held by each
Participant, and other sources (the "Distributions"), including distributions
paid with respect to any full or fractional Units acquired under the
Reinvestment Plan, to the purchase of Units for said Participants directly, if
permitted under state securities laws and, if not, through participating
dealers registered in the Participant's state of residence (either being
referred to herein as the "Reinvestment Agent") as hereunder described.
A participating dealer, or in the event there is no participating
dealer, the Partnership, assumes the responsibility for Blue Sky compliance and
performance of due diligence responsibilities and will ascertain whether the
Participants continue to meet the suitability standards of their state of
residence with respect to each reinvestment. Additionally, the Participating
Dealers involved in the Reinvestment Plan must obtain in writing an agreement
from the client by which the client agrees to the payment of compensation to
the Participating Dealer in connection with said client's reinvestment.
Units will be purchased at the public offering price and commissions
equal to 8% of the Unit purchase price will be paid to the Participating Dealer
who originated the Participant's investment in the Partnership. In addition,
the General Partners or an Affiliate will be paid the Non-Accountable Expense
Allowance. In connection with the receipt of such commissions, Participating
Dealers will be required, at least annually, to review the performance of the
Partnership, the General Partners and their affiliates to determine whether
continued participation in the Plan is consistent with their clients'
investment intent and to affirmatively determine whether continued
participation is suitable for their clients.
Subsequent to the sale of the Minimum Number of Units and prior to
the Termination Date, Distributions paid by the Partnership will be reinvested
in Units for the Participants promptly following the payment date with respect
thereto and in no event later than 60 days from such receipt to the extent such
Distributions are available or distributed to the Limited Partners at the
public offering price to the extent Units are available. All such investments
of Distributions in Units will be effected by amendment of the Partnership
Agreement to reflect the issuance of additional Units to Participants.
Distributions, if any, will be timed to coordinate with scheduled amendments of
the Partnership Agreement such that no Distributions are held pending
investment in Units pursuant to the Reinvestment Plan. If a Participant's
Distribution is not large enough to buy a full Unit, he will be issued a
fractional Unit, computed to one decimal place and will receive the balance of
the Distribution (if more than $1.00) in cash. Participants will not be
permitted to contribute amounts in excess of their Distributions to purchase
Units under the Reinvestment Plan. If sufficient Units for all Participants are
not available, the Partnership will allocate available Units (or fractional
Units) to Participants' accounts on a pro rata basis.
2. Limited Partners may become Participants in the Reinvestment Plan at
any time by completing the appropriate authorization form available from the
Partnership. Participation in the Reinvestment Plan will start with the next
Distribution payable after receipt of a Participant's authorization, provided
it is received before the record date for that Distribution.
3. The Partnership shall have no responsibility or liability as to the
value of the Partnership's Units or may change the value of the Units acquired
for a Participant's account or as to the rate of return or value of the
interest-bearing accounts or securities in which a Participant's Distributions
may be invested.
<PAGE> 182
4. The Partnership will distribute to Participants proxy solicitation
materials, if any, which relate to Units held in the Reinvestment Plan and the
voting procedures will comply with the Partnership Agreement.
5. The Partnership will mail to each Participant a statement and
accounting showing the Distributions received, the number of Units purchased,
as soon as practicable after all Distributions paid on any payment date with
respect thereto have been invested. Tax information for income earned on Units
and the investment of funds under the Reinvestment Plan for the calendar year
will be sent to each Participant by the Partnership.
6. No Participant shall have any right to draw checks or drafts against
his account or to give instructions to the Partnership except as expressly
provided herein.
7. Participants will be charged for ministerial services incurred in
connection with the administration of the Reinvestment Plan.
8. Taxable Participants may incur a tax liability for Partnership income
allocated to them even though they have elected not to receive their
Distributions in cash but rather to have their Distributions held in their
account under the Reinvestment Plan.
9. A Participant may terminate an account at any time, without charge,
by written notice to the Partnership at 24 Frank Lloyd Wright Drive, P.O. Box
544, Ann Arbor, Michigan 48106-0544, or such other address as may be specified
by the Partnership. To be effective for any Distribution, such notice must be
received at least 10 days before the record date for such payment. The
Partnership may terminate a Participant's individual participation in the
Reinvestment Plan or the Reinvestment Plan itself at any time by written notice
mailed to a Participant, or to all Participants, as the case may be, at the
address or addresses shown on their account. Upon termination of the
Reinvestment Plan, or upon termination of an individual Participant's
involvement in the Reinvestment Plan, the Partnership will send to each
Participant certificates evidencing the Units in such Participant's account.
If a Participant disposes of all Units registered on the books of the
Partnership in his name, the Partnership will, by written notice mailed to the
Participant, determine from the Participant the disposition to be made of the
Units in the Participant's account with the Partnership. If the Partnership
does not receive instructions from the Participant within 60 days of such
notice, it may, in its discretion, terminate the Participant's further
participation in the Reinvestment Plan or continue to reinvest the
Distributions paid in respect of the Units in the account until otherwise
notified in writing.
10. The Partnership shall not be liable for any act done in good faith,
or for any good faith omission to act, including, without limitation, any
claims of liability: (a) arising out of failure to terminate a Participant's
account upon such Participant's death prior to receipt of notice in writing of
such death and (b) with respect to the time and the prices at which Units are
purchased or sold for a Participant's account.
11. Each Participant agrees to notify the Partnership promptly in writing
of any change of address. Notices to the Participant may be given by letter
addressed to the Participant at his last address of record with the
Partnership.
12. These terms and conditions of the Reinvestment Plan may be amended or
supplemented by the General Partners in their sole discretion at any time by
mailing an appropriate notice at least 30 days prior to the effective date
thereof to each Participant at his last address of record. Such amendment or
supplement shall be deemed conclusively accepted by each Participant except
those Participants from whom the Partnership receives written notice of
termination prior to the effective date thereof.
13. This Reinvestment Plan and a Participant's election to participate in
the Reinvestment Plan shall be governed by the laws of the State of Delaware.
The Partnership may terminate the Reinvestment Plan by giving 10 days prior
written notice to each Participant at his last address of record.
Notwithstanding the foregoing, the Reinvestment Plan will terminate
concurrently with the Offering.
<PAGE> 183
CAPTEC
FINANCIAL GROUP, INC.
TELEPHONE (313) 994-5505
TELECOPIER (313) 994-1376
<PAGE> 184
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the approximate amount of the fees and
expenses (other than underwriting commissions and discounts) payable in
connection with the issuance and distribution of Units assuming 30,000 Units
are sold.
<TABLE>
<S> <C>
Securities and Exchange Commission, registration fee . . . . . . . . . . . . . . . . . . . . . . $10,345
NASD filing fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _____
Printing and Mailing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Accountants (fees and expenses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _____
Blue Sky fees and expenses (including legal fees) . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Legal fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,000
Sales Activities and Seminars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900,000
Due Diligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $_____
</TABLE>
ITEM 32. RECENT SALE OF UNREGISTERED SECURITIES.
The Partnership has sold .1 Units for $100 to Patrick L. Beach in order
that Mr. Beach may become the initial Limited Partner and permit the filing of
a Certificate of Limited Partnership. This sale was made pursuant to the
exemption contained in Section 4(2) of the Securities Act of 1933, as amended
(the "Act"), as a transaction not involving any public offering.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under the Partnership Agreement, neither the General Partners nor any
affiliate of the General Partners will be liable, responsible, accountable in
damages or otherwise to the Partnership or to any Limited Partners for any
action taken or failure to act on behalf of the Partnership within the
authority granted to them by the Partnership Agreement provided that the
General Partners or such Person believed in good faith that the course of
conduct which caused the loss or liability was in the best interest of the
Partnership and such liability or loss was not the result of negligence or
misconduct by such Person. The Partnership will indemnify the General Partners
and their Affiliates against any losses, judgments, liabilities, expenses and
amounts paid in settlement of any claims sustained by them on behalf of the
Partnership within the scope of the authority conferred on them by the
Partnership Agreement or by law or in furtherance of the Partnership's
interests, provided that the same were not the result of negligence or
misconduct on the part of the General Partners or their Affiliates and the
General Partners have determined in good faith that the conduct was in the best
interest of the Partnership.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
(b) Financial Statement Schedule
Report of Independent Accountants
Schedule XI -- Real Estate and Accumulated Depreciation
(c) Exhibits - See Exhibit Index following signature page
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ITEM 36. UNDERTAKINGS.
The Registrant hereby undertakes as follows:
(a) to file a sticker supplement pursuant to Rule 424(c) under the Act
during the distribution period describing each property not identified in the
Prospectus at such time as there arises a reasonable probability that such
property will be acquired and to consolidate all such stickers into a post-
effective amendment filed at least once every three months, with the information
contained in such amendment provided simultaneously to the existing Limited
Partners. Each sticker supplement will disclose all compensation and fees
received by the General Partners or their Affiliates in connection with any such
acquisition. Audited financial statements meeting the requirements of Rule 3-14
of Regulation S-X for properties acquired during the distribution period will
only be filed with the post-effective amendment. Offers and sales of the Units
may continue after the filing of a post-effective amendment containing the
information previously disclosed in sticker supplements to the Prospectus, as
long as the information disclosed in a current sticker supplement accompanying
the Prospectus is as complete as the information contained in the post-effective
amendment;
(b) to submit all sales literature to the staff of the Commission as
supplemental literature prior to its use;
(c) (i) to file any prospectuses required by Section 10(a)(3) as
post-effective amendments to the Registration Statement; (ii) that for the
purpose of determining any liability under the Act each such post-effective
amendment may be deemed to be a new registration statement relating to the
securities offered therein and the offering of such securities at that time may
be deemed to be the initial bona fide offering thereof; (iii) that all
post-effective amendments will comply with the applicable forms, rules and
regulations of the Commission in effect at the time such post-effective
amendments are filed; and (iv) to remove from registration by means of a
post-effective amendment any of the securities being registered which remain at
the termination of the offering;
(d) to file, after the end of the distribution period, a current report
on Form 8-K to reflect each commitment (i.e., the signing of a binding purchase
agreement) made involving the use of 10% or more (on a cumulative basis) of the
net proceeds of the offering and to provide the information contained in such
report to the Limited Partners at least once each quarter after the
distribution period of the offering has expired. The report to Limited
Partners will contain the financial statements required by Rule 3-14 of
Regulation S-X, or, at the discretion of the Registrant, a summary of the full
financial statements with a statement that the full financial statements will
be sent upon request;
(e) to provide to the Limited Partners the financial statements
(excluding schedules) required by Form 10-K for the first full fiscal year of
operations of the Partnership;
(f) to send to each Limited Partner at least on an annual basis a
detailed statement of any transactions with the General Partners or their
Affiliates, and of fees, commissions, compensation and other benefits paid or
accrued to the General Partners or their Affiliates for the fiscal year
completed, showing the amount paid or accrued to each recipient and the
services performed;
(g) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in this registration statement. Notwithstanding the
S-2
<PAGE> 186
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value securities offered would not
exceed that which was registered) and any deviation from the low
or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table set forth in this registration
statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this registration
statement or any material change to such information in this
registration statement;
(h) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the Securities offered herein, and
the offering of such Securities at that time shall be deemed to be the initial
bona fide offering thereof;
(i) To remove from registration by means of a post- effective amendment
any of the securities being registered which remain unsold at the termination
of the offering;
(j) That, for the purpose of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed a part of
this Registration Statement as of the time it was declared effective; and
(k) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering.
(l) insofar as indemnification for liabilities arising under the Act may
be permitted to the General Partners and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a General Partner or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by
such General Partners and the controlling persons in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
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<PAGE> 187
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all the requirements of filing on Form S-11 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of Ann Arbor, State of Michigan, on August 1, 1996.
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
By: Captec Franchise Capital Corporation IV,
General Partner
By: /s/ Patrick L. Beach
---------------------------------------
Patrick L. Beach
Chairman of the Board, President and
Chief Executive Officer
By: /s/ Patrick L. Beach
---------------------------------
Patrick L. Beach, General Partner
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below, hereby constitutes and appoints Patrick L. Beach and W. Ross Martin, or
any of them, his attorneys-in- fact and agents, with full power of substitution
and resubstitution for him in any and all capacities, to sign any or all
amendments or post-effective amendments to this Registration Statement, and to
file the same, with exhibits thereto and other documents in connection
therewith or in connection with the registration of the Units under the
Securities Act of 1933, with the Securities and Exchange Commission, granting
unto each of such attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary in connection
with such matters as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that each of such
attorneys-in-fact and agents or his substitute or substitutes may do or cause
to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement was signed by the following persons in the
capacities and on the dates indicated:
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV, General Partner
By: Captec Franchise Capital Corporation IV,
/s/ Patrick L. Beach Chairman of the Board, August 1,1996
------------------------ President and Chief
Patrick L. Beach Executive Officer
/s/ W. Ross Martin Director, Senior Vice July 31,1996
------------------------ President, Treasurer,
W. Ross Martin Secretary, and Chief
Financial Officer (principal
financial officer and
principal accountingofficer)
S-4
<PAGE> 188
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
No. Description Page
------ ----------- ------------
<S> <C> <C>
1.1* Proposed Form of Participating Dealer Agreement
3.1 Agreement of Limited Partnership of the
Partnership (included in prospectus)
3.2* Articles of Incorporation of Captec Franchise
Capital Corporation IV (the General Partner)
3.3* Bylaws of Captec Franchise Capital Corporation IV
3.4* Certificate of Limited Partnership
3.5* Certificate of Limited Partnership Interest
5.1* Opinion letter of Jaffe, Raitt, Heuer & Weiss,
Professional Corporation, regarding the
validity of the securities being registered
8.1* Opinion Letter of Jaffe, Raitt, Heuer & Weiss,
Professional Corporation, regarding tax matters
10.1* Proposed Form of Escrow Agreement
23.1* Consent of Jaffe, Raitt, Heuer & Weiss, P.C.
(included in Exhibits 5.1 and 8.1)
23.2 Consent of Coopers & Lybrand, L.L.P.
24.1 Power of Attorney (included on signature page)
</TABLE>
*To be filed by amendment.
S-5
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-11 of our
reports dated July 31, 1996 on our audits of the balance sheets of Captec
Franchise Capital Partners L.P. IV and Captec Franchise Capital Corporation IV.
We also consent to the reference to our firm under the caption "Experts".
/s/ COOPERS & LYBRAND L.L.P.
Detroit, Michigan
July 31, 1996
