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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO SECTION 14(D)(4)
OF THE SECURITIES EXCHANGE ACT OF 1934
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CARLYLE REAL ESTATE LIMITED
PARTNERSHIP-VII
(NAME OF SUBJECT COMPANY)
CARLYLE REAL ESTATE LIMITED
PARTNERSHIP-VII
(NAME OF PERSON FILING STATEMENT)
LIMITED PARTNERSHIP INTERESTS
(TITLE OF CLASS OF SECURITIES)
143099307
(CUSIP NUMBERS OF CLASSES OF SECURITIES)
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GARY NICKELE
JMB REALTY CORPORATION
900 NORTH MICHIGAN AVENUE
CHICAGO, ILLINOIS 60611
(312) 440-4800
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICES AND
COMMUNICATIONS ON BEHALF OF THE PERSON(S) FILING STATEMENT)
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ITEM 1. SECURITY AND SUBJECT COMPANY
The subject company is Carlyle Real Estate Limited Partnership-VII, an
Illinois limited partnership (the "Partnership"). The address of the principal
executive offices of the Partnership and JMB Realty Corporation, a Delaware
corporation and the Corporate General Partner of the Partnership ("JMB"), is
900 North Michigan Avenue, Chicago, Illinois 60611. The title of the class of
equity securities to which this statement relates is the outstanding limited
partnership interests (the "Interests") of the Partnership.
ITEM 2. TENDER OFFER OF THE BIDDER
This statement (the "Statement") relates to the offer by Accelerated High
Yield Institutional Fund 1, L.P.; MacKenzie Fund VI, LTD.; MacKenzie Specified
Income Fund, L.P.; MP Income Fund 13, LLC; JDF & Associates, LLC; Steven Gold;
and Moraga Gold, LLC (collectively, the "Purchasers"), disclosed on a Tender
Offer Statement on Schedule 14D-1 dated July 31, 1998 (the "Purchasers'
Schedule 14D-1") to purchase from the holders of Interests ("Interestholders")
any and all of the Interests at a purchase price of $30 per Interest, net to
the seller in cash, without interest, upon the terms and subject to the
conditions set forth in the Offer to Purchase dated July 31, 1998 (the
"Purchasers' Offer to Purchase"), and the related Letter of Transmittal
(collectively with the Purchasers' Offer to Purchase, the "Offer"), copies of
which are attached to the Purchasers' Schedule 14D-1.
The principal business address of the Purchasers other than JDF &
Associates, LLC and Steven Gold is 1640 School Street, Moraga, California
94556. The principal business address of JDF & Associates, LLC is 118 Glynn
Way, Houston, Texas 77056, and the principal business address of Steven Gold
is Four Embarcadero, Suite 3610, San Francisco, California 94111.
ITEM 3. IDENTITY AND BACKGROUND
(a)(1) The name and address of the Partnership, which is the person filing
this Statement, are set forth in Item 1 above.
(b)(1) Pursuant to the Partnership's Amended and Restated Agreement of
Limited Partnership (the "Partnership Agreement", filed as Exhibit (c)(1)
hereto), JMB is the Corporate General Partner of the Partnership. All of the
outstanding shares of JMB are owned directly or indirectly by its officers,
directors, members of their families and their affiliates. JMB has
responsibility for the operation of the Partnership. The Associate General
Partner of the Partnership is AGPP Associates, L.P., an Illinois limited
partnership with JMB as its sole general partner. The limited partners of the
Associate General Partner are generally current and former officers and
directors of JMB, members of their families and their affiliates. Except as
described below or in the Partnership's annual report on Form 10-K with
respect to the year ended December 31, 1997, a copy of which is on file with
the Securities and Exchange Commission (the "Partnership's 10-K"), there are
no material contracts, agreements, arrangements or understandings or any
actual or potential material conflicts of interest between JMB or its
affiliates, on the one hand, and the Partnership, its executive officers,
directors or affiliates, on the other hand. Capitalized terms not otherwise
defined herein are used as defined in the Partnership Agreement.
Reference is made to the notes to the consolidated financial statements set
forth in the Partnership's 10-K, which are incorporated herein by reference
(and a copy of which has been filed as Exhibit (c)(2) to this Statement) for a
description of certain material contracts, agreements (including the
Partnership Agreement), arrangements and understandings between (i) the
Partnership and (ii) the General Partners and their respective executive
officers, directors, partners and affiliates.
The Partnership made a distribution in May 1998 from operating cash flow and
sales proceeds in the aggregate amount of $22,155,000. Pursuant to the terms
of the Partnership Agreement, Interestholders received approximately
$18,900,000 as their share of this distribution ($1,050 per Interest) and the
General Partners received approximately $3,255,000 as their share of this
distribution. In addition, the Partnership expects to make
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a final liquidating distribution in December 1998 of between $815,000 and
$1,650,000, based upon its estimate of the likely expense of winding down the
Partnership's affairs (which assumes that there are no claims made for breach
of the representations, warranties and covenants made by the Partnership in
connection with the sale of its sole remaining real property interest). Based
on this estimate, Interestholders would receive between approximately $720,000
and $1,440,000 as their share of the final liquidating distribution ($40 to
$80 per Interest), and the General Partners would receive between
approximately $95,000 and $211,000 as their share of the final liquidating
distribution.
The Partnership Agreement exculpates the General Partners and their
respective officers, directors and partners from liabilities to the
Partnership and indemnifies the General Partners and each partner of the
Associate General Partner against liability to third parties resulting from
its or their acts or omissions, unless such action or omission was performed
fraudulently or in bad faith or constituted negligence (gross or ordinary). As
a result of the exculpation and indemnification provisions, an Interestholder
may be entitled to a more limited right of action than he or she would
otherwise have if such provisions were not included in the Partnership
Agreement.
JMB entered into Indemnification Agreements, effective June 1, 1996, with
each of the members of the Special Committee (the "Special Committee") formed
by the Board of Directors of JMB to consider offers for Interests (each such
member, individually an "Indemnitee"), which provide that, subject to certain
provisions of the Indemnification Agreements, in the event an Indemnitee is,
or becomes a party to, or witness or other participant in, or is threatened to
be made a party to, or witness or other participant in, any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative, investigative or other, by reason of (or arising in part out
of) an Indemnifiable Event (as hereinafter defined), JMB will indemnify such
Indemnitee from and against any and all expenses, judgments, fines, penalties
and amounts paid in settlement incurred or suffered by the Indemnitee to the
fullest extent permitted by law. The rights to receive indemnification and the
advancement of expenses under the Indemnification Agreements are not exclusive
of any other rights to which any Indemnitee may be entitled under any statute,
the Partnership Agreement or otherwise. "Indemnifiable Event," as used in the
Indemnification Agreements, means any event or occurrence related to the fact
that Indemnitee is or was a director, officer, employee or agent of JMB, or is
or was serving at the request of JMB as a director, officer, employee,
trustee, agent or fiduciary of another corporation, partnership, joint
venture, employee benefit plan, trust or other enterprise or by reason of
anything done or not done by Indemnitee in any such capacity.
The obligation of JMB to make indemnification payments is subject to the
condition that Independent Legal Counsel (as hereinafter defined) shall not
have determined in a written opinion that Indemnitee is not permitted to be
indemnified under applicable law. If the Independent Legal Counsel determines
that Indemnitee substantively would not be entitled to indemnification under
applicable law, Indemnitee has the right to commence arbitration proceedings
to determine his right to indemnification. Otherwise any determination by such
Counsel shall be conclusive and binding on JMB and the Indemnitee.
"Independent Legal Counsel" is defined as an attorney or firm of attorneys
selected by Indemnitee and approved by JMB who shall not have otherwise
performed services for JMB or Indemnitee within the last five years. The fees
of any Independent Legal Counsel are to be borne by JMB.
The Indemnification Agreements provide that if requested by Indemnitee, JMB
shall advance within two business days any and all expenses of Indemnitee. If
and to the extent that Independent Legal Counsel determines that Indemnitee is
not permitted to be indemnified under applicable law, JMB shall be entitled to
be reimbursed, provided that if Indemnitee exercises his right to have such
issue determined by arbitration or other legal proceedings his obligation to
reimburse JMB shall be deferred pending the outcome of such arbitration or
proceedings.
The by-laws of JMB also provide that its officers, directors, employees and
other agents shall be indemnified by JMB to the fullest extent permitted under
Delaware law, whether acting in their capacities as officers, directors,
employees or other agents of JMB or serving, at the request of JMB, as an
officer, director, employee, fiduciary or other agent of another corporation,
partnership or other entity.
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(b)(2) The Purchasers have reported in the Purchasers' Offer to Purchase
that affiliates of the Purchasers hold 313 Interests or approximately 1.74% of
the total outstanding Interests.
In May 1998 the Purchasers commenced a tender offer (the "Prior Offer") for
up to 2,700 Interests (approximately 15% of the outstanding Interests) at a
purchase price of $800 per Interest. The Special Committee determined that the
Purchasers' Prior Offer was inadequate and not in the best interests of
Interestholders. Accordingly, the Partnership recommended that Interestholders
reject the Purchasers' Prior Offer and not tender their Interests pursuant to
such Prior Offer. At the end of May 1998 the Partnership made a distribution
to Interestholders of $1,050 per Interest. On June 5, 1998, the Purchasers
amended their Prior Offer (the "Amended Prior Offer") to (i) increase the
number of Interests sought to include all of the outstanding Interests, (ii)
reduce the purchase price to $20 per Interest, and (iii) extend the expiration
date under the Purchasers' Amended Prior Offer to June 30, 1998. The Special
Committee determined that the Purchasers' Amended Prior Offer was inadequate
and not in the best interests of Interestholders. Accordingly, the Partnership
recommended that Interestholders reject the Purchasers' Amended Prior Offer
and not tender their Interests pursuant to such Amended Prior Offer.
The Purchasers state in their Offer, "As a result of the consummation of the
Offer, the Purchaser may be in a position to significantly influence all
Partnership decisions on which [Interestholders] may vote." The Letter of
Transmittal (the "Letter of Transmittal") included as part of the Offer
purports to provide the Purchasers (or their designees) with a proxy to vote
the Interests of an Interestholder who sells his or her Interests pursuant to
the Offer. Under the Partnership Agreement, Limited Partners of the
Partnership may vote on certain specified matters. In order for the Purchasers
to vote any Interests that they acquire pursuant to the Offer, the Purchasers
must either hold valid proxies to vote such Interests (assuming the Interests
may be voted by proxy) or must be admitted to the Partnership as substituted
Limited Partners with respect to such Interests. The Partnership Agreement
does not specify whether the Interests of a Limited Partner may be voted by
proxy, and in any event the Corporate General Partner has not decided whether
it would recognize the purported proxy in the Letter of Transmittal under the
circumstances provided for therein. Furthermore, under the Partnership
Agreement, the admission of the Purchasers as substituted Limited Partners
with respect to any Interests they acquire pursuant to the Offer depends upon,
among other things, the written consent of the Corporate General Partner,
which may be granted or denied in the sole and absolute discretion of the
Corporate General Partner, and the Corporate General Partner reserves the
right to refuse to admit any or all of the Purchasers as substituted Limited
Partners of the Partnership with respect to any or all Interests acquired
pursuant to the Offer. Under the Partnership Agreement, "The rights of an
assignee who does not become a substituted Limited Partner, by reason on non-
consent thereto by the Corporate General Partner, shall be limited to receipt
of his share of cash distributions and Partnership profits or losses . . . ."
In addition, under the terms of the Offer, the Purchasers are seeking to
purchase all outstanding Interests of the Partnership. Pursuant to the
Partnership Agreement, no assignment of an Interest will be effective if such
assignment would, in the opinion of counsel for the Corporate General Partner,
result in the termination of the Partnership for purposes of the then-
applicable provisions of the Internal Revenue Code (which termination may
occur when 50% or more of the total interests in the Partnership capital and
profits is transferred by sale or exchange in a twelve-month period).
Depending upon the number of Interests tendered pursuant to the Offer, sales
of Interests on the secondary market for the period following completion of
the Offer may be limited. The Partnership will not process any requests for
transfers of Interests during a twelve-month period that, in the opinion of
counsel for the Corporate General Partner, would cause a tax termination. For
this purpose, during the period from July 1, 1997 to June 30, 1998, transfers
of approximately 310 (approximately 1.7%) of the Interests were effected.
Because of the tax-related transfer restrictions, in no event will an
aggregate of 50% or more of the Interests be acquired pursuant to the Offer
(reduced to the extent of any prior transfers of Interests within the
preceding twelve months unless such previously transferred Interests can be
traced to Interests accepted for purchase under the Offer). Thus, it is
possible that only a portion of the Interests tendered could be purchased
pursuant to the Offer.
Except as set forth herein, to the knowledge of JMB, there are no material
contracts, agreements, arrangements or understandings or any actual or
potential material conflicts of interest between the Partnership,
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JMB or its affiliates, on the one hand, and the Purchasers, or their
respective executive officers, directors or affiliates, on the other hand.
ITEM 4. THE SOLICITATION OR RECOMMENDATION
(a) Following the Partnership's receipt of the Offer, the Special Committee
of the Board of Directors of JMB met to review and consider the Offer. Based
on its analysis, including consideration of the factors discussed below, the
Special Committee has determined that the Offer is inadequate and not in the
best interests of Interestholders. Accordingly, the Partnership recommends
that Interestholders reject the Offer and not tender their Interests pursuant
to the Offer.
(b) The Special Committee concluded that, in view of the fact that the
Partnership has sold all of its interests in real estate and is in liquidation
and that its assets are primarily cash or cash equivalents, it would not be
meaningful or cost-effective to have a financial advisor prepare a current
valuation of the Partnership's business and assets or the value of an Interest
or to express an opinion with regard to the adequacy of the Offer.
Accordingly, no financial advisor was requested to render, or has rendered,
any such valuation or opinion in connection with the Offer. The Special
Committee reached the conclusions set forth in Item 4(a) after considering a
variety of factors, including, but not limited to, the following:
(i) On April 8, 1998, the Partnership sold its sole remaining real
property interest. The Partnership expects to make a final liquidating
distribution in December 1998. Based upon its estimate of the likely
expense of winding down its affairs (which assumes that there are no claims
made for breach of the representations, warranties and covenants made by
the Partnership in connection with the sale of its sole remaining real
property interest), the Partnership expects to make a distribution to
Interestholders of between approximately $40 to $80 per Interest in
December 1998.
(ii) The Purchasers are making the Offer with a view to making a profit.
Accordingly, there is a conflict of interest between their desire to
purchase the Interests at a low price and Interestholders' desire to obtain
the maximum cash return for their Interests.
(iii) The Partnership believes that the Interests are an illiquid
investment whose full value generally can only be realized by an
Interestholder who retains his or her Interests through the liquidation of
the Partnership. In this regard, the Partnership has sold its sole
remaining real property interest and, pursuant to Section 17.2 of the
Partnership, is dissolved. Under Section 18.1 of the Partnership Agreement,
JMB, as the Corporate General Partner, is required to wind up the affairs
of the Partnership, subject to the discretion of the Corporate General
Partner to determine the time, manner and terms of the sale of any
Partnership property (e.g., securities investments) and the right of the
Corporate General Partner, pursuant to Section 18.2 of the Partnership
Agreement, to set up such reserves as it may deem reasonably necessary for
any contingent or unforeseen liabilities or obligations of the Partnership.
It is expected that the Partnership will complete its liquidation and wind
up its affairs during 1998. In such event, 1998 would be the last year for
which an Interestholder would receive a Form K-1 from the Partnership.
(iv) The Offer price of $30 per Interest is between approximately 38% and
75% of the high and low ends of the range of the amount that the
Partnership expects to distribute to Interestholders in December 1998.
ITEM 5. PERSONS RETAINED, EMPLOYED, OR TO BE COMPENSATED
Neither the Partnership or any person acting on its behalf has employed,
retained, or compensated or intends to employ, retain or compensate any other
person or class of persons to make solicitations or recommendations to
Interestholders on its behalf concerning the Offer.
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES
(a) Neither the Partnership nor JMB has effected any transactions in the
Interests during the past 60 days. JMB is not aware of any transactions in the
Interests during the past 60 days by any of its executive officers, directors,
affiliates, or subsidiaries.
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(b) Neither JMB, nor, to the knowledge of JMB, any of its executive
officers, directors, or subsidiaries intends to tender Interests owned by them
in the Offer.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY
(a) No negotiation is being undertaken or is underway by the Partnership or
JMB in response to the Offer that relates to or would result in any
extraordinary transaction involving, or a purchase, sale or transfer of a
material amount of assets by, or any tender offer for or other acquisition of
securities by or of, the Partnership or any subsidiary of the Partnership, or
any material change in the present capitalization or dividend policy of the
Partnership.
(b) None.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED
In a report on Form 8-K dated as of April 8, 1998, the Partnership reported
[in part] as follows:
"Carlyle Real Estate Limited Partnership-VII (the "Partnership") was a
partner in Oakridge Associates, a California general partnership (the
"Venture") with an unaffiliated venture partner, TrizecHahn Centers, Inc.
(the "Venture Partner"). The Venture owned a leasehold interest in the land
and improvements known as Oakridge Mall in San Jose, California (the
"Property"). ........ In March 1998, the Partnership and the Venture Partner
reached an agreement in principle to sell the Partnership's interest in the
Venture to the Venture Partner. On April 8, 1998, the Partnership sold its
interest to the Venture Partner. At the time of the sale, Oakridge Mall was
94% occupied. The purchase price of the interest was $31,950,000
($20,700,000 plus the assumption of the Partnership's share of the mortgage
loan of approximately $11,250,000). The Partnership received approximately
$20,900,000 in cash at closing including a distribution of previously
undistributed cash flow from operations of approximately $494,000 and
adjustments for prorations and closing costs but before consideration of
certain costs of sale incurred by the Partnership, including a sale
commission, if any, due to the General Partner. Pursuant to the sale
agreement, a cash reserve of $250,000 was established to pay for certain
costs that may be incurred related to certain maintenance items at the
Property. Any funds remaining in the cash reserve at December 1, 1998 will
be distributed one-half to the Partnership and one-half to the Venture
Partner. As a result of this transaction, the Partnership recognized a gain
of approximately $23,000,000 for financial reporting purposes and expects
to realize a gain of approximately $24,000,000 for Federal income tax
purposes in 1998. In addition, in connection with the sale of the
Partnership's interest in the Venture and as is customary in such
transactions, the Partnership agreed to certain representations, warranties
and covenants with a stipulated survival period which expires December 1,
1998. Although it is not expected, the Partnership may ultimately have some
liability under such representations, warranties and covenants which are
limited to actual damages and shall in no event exceed $1,000,000.
Additionally, the Partnership provided a representation regarding its title
relating to its Partnership Interest in the Venture. Such representation is
for the full sale price of the interest and also expires December 1, 1998.
"The Partnership Agreement provides that the net sale proceeds be
distributed 85% to the Limited Partners and 15% to the General Partners."
"The Partnership's interest in the Venture was its only remaining
investment and due to its sale, the Partnership intends to wind up its
affairs and liquidate by year end. The Partnership will distribute it
remaining cash after payment of expenses and liabilities."
Secondary market sales activity for the Interests, including privately
negotiated sales, has been limited and sporadic. The Partnership's 10-K states
that "there is no public market for Interests, and it is not anticipated that
a public market for Interests will develop." Privately negotiated sales and
sales through intermediaries currently are the only means available to an
Interestholder to liquidate an investment in Interests (other than offers to
purchase, including the Offer) because the Interests are not listed or traded
on any exchange or quoted on any Nasdaq list or system. High and low sales
prices of Interests may be obtained through certain entities or
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publications such as Partnership Spectrum, an independent, third-party source
which reports such information; however, the gross sales prices reported by
Partnership Spectrum do not necessarily reflect the net sales proceeds
received by sellers of Interests, which typically are reduced by commissions
and other secondary market transaction costs to amounts less than the reported
prices.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<C> <S> <C>
(a)(1) Letter, dated August 11, 1998 from the Partnership to its
Interestholders.
(c)(1) Amended and Restated Agreement of Limited Partnership
(previously filed with the Securities and Exchange
Commission as Exhibit 3-B to the Partnership's Form 10-K
Report for its fiscal year ended December 31, 1993 (File No.
0-8915) filed on March 25, 1994 and hereby incorporated
herein by reference).
(c)(2) Pages from the Partnership's 10-K that are referred to
herein.
</TABLE>
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SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Carlyle Real Estate
LimitedPartnership--VII
By:
JMB Realty Corporation
Corporate General Partner of
the Partnership
/s/ Judd D. Malkin
By: _________________________________
Name: Judd D. Malkin
Title: Chairman
Dated: August 11, 1998
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NO.
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<C> <S> <C>
(a)(1) Letter, dated August 11, 1998 from the Partnership to its
Interestholders.
(c)(1) Amended and Restated Agreement of Limited Partnership,
(previously filed with the Securities and Exchange
Commission as Exhibit 3-B to the Partnership's Form 10-K
Report for its fiscal year ended December 31, 1993 (File No.
0-8915) filed on March 25, 1994 and hereby incorporated
herein by reference).
(c)(2) Pages from the Partnership's 10-K that are referred to
herein.
</TABLE>
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CARLYLE REAL ESTATE LIMITED PARTNERSHIP--VII
900 NORTH MICHIGAN AVENUE
CHICAGO, ILLINOIS 60611
(312) 440-4800
August 11, 1998
Dear Interestholders:
A group that includes affiliates of MacKenzie Patterson, Inc. has commenced
a tender offer (the "Offer") to acquire all of the outstanding limited
partnership interests (the "Interests") in Carlyle Real Estate Limited
Partnership--VII (the "Partnership") at a purchase price of $30 per Interest.
The Board of Directors of JMB Realty Corporation ("JMB"), the Corporate
General Partner of the Partnership, has formed a special committee (the
"Special Committee") consisting of certain Directors of JMB to consider and
respond to offers for Interests that may be received, including the Offer. THE
SPECIAL COMMITTEE HAS DETERMINED THAT THE OFFER IS INADEQUATE AND NOT IN THE
BEST INTERESTS OF INTERESTHOLDERS. ACCORDINGLY, THE PARTNERSHIP RECOMMENDS
THAT INTERESTHOLDERS REJECT THE OFFER AND NOT TENDER THEIR INTERESTS.
The Special Committee recommends that you consider the following, together
with the information in the Partnership's Schedule 14D-9 accompanying this
letter, in connection with the Offer:
. On April 8, 1998, the Partnership sold its sole remaining real property
interest. The Partnership expects to make a final liquidating
distribution of between $40 and $80 per Interest, based upon its estimate
of the likely expense of winding down the Partnership's affairs (which
assumes that there are no claims made for breach of the representations,
warranties and covenants made by the Partnership in connection with the
sale of its sole remaining real property interest). IF YOU SELL YOUR
INTERESTS PURSUANT TO THE OFFER YOU WILL NOT RECEIVE THE BENEFIT OF THIS
DISTRIBUTION.
. The Offer price of $30 per Interest is between approximately 38% and 75%
of the high and low ends of the range of the amount that the Partnership
expects to distribute in December 1998.
. In a letter to Interestholders soliciting their Interests, the Purchasers
emphasize that there are no guarantees as to the timing or amount of the
anticipated final liquidating distribution to Interestholders. Although
the Partnership cannot guarantee that it will wind up its affairs and
terminate in 1998, the Partnership currently knows of no reason why it
will not be able to terminate in 1998. In such event, 1998 would be the
last year for which Interestholders would receive Form K-1's from the
Partnership for their tax reporting. Similarly, while the Partnership
cannot guarantee the amount of a final liquidating distribution to
Interestholders, taking into account all reasonable costs and expenses of
winding up the Partnership and even assuming that the Partnership incurs
some liability for breach of its representations, warranties and
covenants made in connection with the sale of its sole remaining real
property interest, the Partnership currently expects to distribute to
Interestholders a minimum of $40 per Interest in December 1998.
If you have tendered your Interests pursuant to the Offer, you may wish to
withdraw your Interests by complying with the requirements of Section 4 of the
Offer to Purchase, as amended to date. If you wish to retain your Interests
and have not already tendered them pursuant to the Offer, you need not take
any action. You should consult with your personal tax advisor and financial
consultant prior to accepting any offer and tendering your Interests.
On behalf of the Special Committee.
Very truly yours,
Carlyle Real Estate Limited
Partnership--VII
By: JMB Realty Corporation
Corporate General Partner
LOGO
By:
Judd D. Malkin, Chairman
<PAGE>
EXHIBIT (c)(2)
CARLYLE REAL ESTATE LIMITED PARTNERSHIP - VII
AND CONSOLIDATED VENTURE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
OPERATIONS AND BASIS OF ACCOUNTING
GENERAL
The Partnership holds (through a joint venture) an equity investment in a
shopping center in San Jose, California. Business activities consist of rentals
to a variety of retail companies, and the ultimate sale or disposition of such
real estate. The Partnership currently expects to conduct an orderly liquidation
of its remaining investment and wind up its affairs not later than December 31,
1999, perhaps in 1998, barring any unforeseen economic developments.
The accompanying consolidated financial statements include the accounts of
the Partnership and its consolidated venture, Oakridge Associates
("Oakridge"), in which the Partnership has certain preferential claims and
rights, as discussed below. The effect of all transactions between the
Partnership and the consolidated venture has been eliminated in the consolidated
financial statements.
The Partnership's records are maintained on the accrual basis of accounting
as adjusted for Federal income tax reporting purposes. The accompanying
consolidated financial statements have been prepared from such records after
making appropriate adjustments where applicable to reflect the Partnership's
accounts in accordance with generally accepted accounting principles ("GAAP")
and to include the accounts of the venture as described above. Such GAAP and
consolidation adjustments are not recorded on the records of the Partnership.
The net effect of these items for the years ended December 31, 1997 and 1996 is
summarized as follows:
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<TABLE>
<CAPTION>
1997 1996
---------------------------- --------------------------
TAX BASIS TAX BASIS
GAAP BASIS (UNAUDITED) GAAP BASIS (UNAUDITED)
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Total assets............................. $25,211,227 3,279,035 24,881,744 2,919,787
Partners' capital accounts
(deficit):
General partners..................... (1,306,890) (1,345,360) (1,372,930) (1,388,326)
Limited partners..................... 2,092,400 1,222,278 507,428 191,085
Net earnings (loss):
General partners..................... 66,040 42,966 26,248 25,942
Limited partners..................... 1,584,972 1,031,193 629,964 589,061
Net earnings (loss) per
limited partnership
1nterest................................ 88.03 57.27 34.99 32.72
=========== ========== ========== ==========
</TABLE>
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The net earnings (loss) per limited partnership interest is based upon the
number of limited partnership interests outstanding at the end of each year
(18,005). Deficit capital accounts will result, through the duration of the
Partnership, in net gain for financial and Federal income tax purposes.
The preparation of financial statements in accordance with GA&P requires
the Partnership to make estimates and assumptions that affect the reported or
disclosed amount of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Statement of Financial Accounting Standards No. 95 requires the Partnership
to present a statement which classifies receipts and payments according to
whether they stem from operating, investing or financing activities. The
required information has been segregated and accumulated according to the
classifications specified in the pronouncement. The Partnership records amounts
held in U.S. Government obligations at cost, which approximates market. For the
purposes of these statements, the Partnership's policy is to consider all such
amounts held with original maturities of three months or less ($3,219,670 and
$2,979,126 at December 31, 1997 and 1996, respectively) as cash equivalents,
which includes investments in commercial paper and an institutional mutual fund
which holds U.S. Government obligations. Remaining amounts, if any, (generally
with original maturities of one year or less) are reflected as short-term
investments being held to maturity.
Deferred expenses consist primarily of commitment fees incurred in
connection with the acquisition and financing of the Partnership's sole
operating property along with lease commissions paid on the Partnership's sole
operating property. Deferred loan fees and leasing fees are amortized using the
straight-line method over the terms stipulated in the related agreements.
Although certain leases of the Partnership provide for tenant occupancy
during periods for which no rent is due and/or increases in minimum lease
payments over the term of the lease, the Partnership accrues rental income for
the full period of occupancy on a straight-line basis.
No provision for State or Federal income taxes has been made as the
liability for such taxes is that of the Partners rather than the Partnership.
However, in certain instances, the Partnership has been or may be required under
applicable law to remit directly to the tax authorities amounts representing
withholding from distributions paid to Partners.
The Partnership has or had acquired, either directly or through joint
ventures, eight apartment complexes and four shopping centers. All of the
properties have been sold or disposed of, except one shopping center. The
remaining investment property owned at December 31, 1997 is operating. The cost
of the remaining investment property represents the total cost to the
Partnership and its venture, plus miscellaneous acquisition costs.
Depreciation on the Partnership's remaining property has been provided over
the estimated useful lives of its various components as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Building and improvements (new)-
straight-line or 150% declining-balance . . . . . . 5-40
Building and improvements (used)-
125% declining-balance or
straight-line . . . . . . . . . . . . . . . . . . . 5-40
====
</TABLE>
The investment property is pledged as security for the long-term debt, for
which there is no recourse to the Partnership.
28
<PAGE>
Maintenance and repair expenses are charged to operations as incurred.
Significant betterments and improvements are capitalized and depreciated over
their estimated useful lives.
The Partnership adopted Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" ("SFAS 121") as required in the first quarter of 1996. SFAS 121
requires that the Partnership record an impairment loss on its property to be
held for investment whenever its carrying value cannot be fully recovered
through estimated undiscounted future cash flows from its operations and sale.
The amount of the impairment loss to be recognized would be the difference
between the property's carrying value and the property's estimated fair value.
The Partnership's policy is to consider a property to be held for sale or
disposition when the Partnership has committed to a plan to sell such property
and active marketing activity has commenced or is expected to commence in the
near term. In accordance with SFAS 121, any property identified as "held for
sale or disposition" is no longer depreciated. Adjustments for impairment loss
for such property (subsequent to the date of adoption of SFAS 121) are made in
each period as necessary to report these properties at the lower of carrying
value or fair value less costs to sell. The adoption of SFAS 121 did not have
any effect on the Partnership's financial position, results of operations or
liquidity.
As the venture had committed to a plan to sell the Partnership's remaining
property, the property was classified as held for sale as of December 31, 1996,
and therefore, is not subject to continued depreciation beginning January 1,
1997. The results of operations of the Partnership's remaining property included
in the accompanying consolidated financial statements were net income of
$3,398,168, $1,440,046 and $1,939,659 for the years ended December 31, 1997,
1996 and 1995, respectively.
During the second quarter of 1997, Statements of Financial Accounting
Standards No. 128 ("Earnings per Share") and No. 129 ("Disclosure of
Information about Capital Structure") were issued. These standards became
effective for reporting periods after December 15, 1997. As the Partnership's
capital structure only has general and limited partnership interests, the
Partnership will not experience any significant impact on its consolidated
financial statements.
The Partnership at December 31, 1997 is a party to one operating joint
venture agreement. Pursuant to such agreement, the Partnership made initial
capital contributions of $3,352,642 (before legal and other acquisition costs
and its share of operating deficits as discussed below). In general, the joint
venture partner, who was the seller of the property investment being acquired,
made no cash contributions to the venture, but its retention of an interest in
the property, through the joint venture, was taken into account in determining
the purchase price of the Partnership's interest (which was determined by arm's-
length negotiations). Under certain circumstances, either pursuant to the
venture agreement or due to the Partnership's obligation as a general partner,
the Partnership may be required to make additional cash contributions to the
venture.
The Partnership has acquired, through the one remaining venture, one
regional shopping mall. The joint venture partner (who was primarily responsible
for constructing the property) was to contribute any excess of cost over the
aggregate amount available from Partnership contributions and financing and, to
the extent such funds exceeded the aggregate costs, was to retain such excesses.
The venture property has been financed under the long-term debt arrangement as
described below.
29
<PAGE>
INVESTMENT PROPERTY
OAKRIDGE MALL
The Partnership is a general partner in the Oakridge Associates Ltd.
venture with the seller of the property.
Pursuant to the venture agreement, beginning January 1, 1983, any net cash
flow is to be and has been distributed equally to the Partnership and the
seller. The Partnership has a preferred position (related to the Partnership's
cash investment in the venture) with respect to distributions of sale or
refinancing proceeds from the venture. Once the preferred position has been
satisfied, any excess sale or refinancing proceeds from the venture are to be
distributed so that the Partnership and the venture partner equally share the
proceeds.
Venture operating profits and losses are allocated to the venture partners
generally in proportion to their distributions of net cash flow. In 1997, 1996
and 1995, profits and losses were allocated 50% to the Partnership and 50% to
the venture partner. An affiliate of the venture partner manages the property
pursuant to an agreement which provides for a management fee calculated at a
percentage of certain types of income.
The Partnership has been in discussions with potential buyers for the
Oakridge Shopping Mall (on behalf of the venture) or the Partnership's interest
in the property.
In March 1998, an agreement in principle was reached to sell the
Partnership's interest in the property to the venture partner. If the sale is
consummated on the proposed terms, the Partnership would recognize a gain for
financial reporting and Federal income tax purposes. There can be no assurances
that the sale will be consummated under the terms of the agreement or under any
other terms.
In October 1990, the Partnership and its Oakridge venture partner finalized
negotiations with the lessors to amend the ground lease at the Oakridge Mall by
adding a "purchase option" provision. The price for obtaining the purchase
option was $2,000,000. The Partnership and its venture partner funded their
respective 50% shares of these costs from the cash flow of the property. The
option (which may be exercised five years after the death of both lessors)
provides for the price of the land to be determined by a formula related to
ground rent paid during the most recent few years of the lease, and is payable
in addition to the cost of the purchase option discussed above.
In February 1995, Oakridge refinanced the existing mortgage loan secured by
the property (which had a balance of approximately $14,165,000 at the February
1995 closing) in the amount of $27,000,000. The mortgage loan was scheduled to
mature in February 1998, however, the venture exercised its option to extend the
loan for six months to August 1998. Accordingly, the mortgage loan has been
classified as current in the accompanying consolidated financial statements at
December 31, 1997. Such short-term extension is currently considered adequate
given the venture's current property sale plans. However, if the venture is
unsuccessful in selling the property before the current loan maturity date, the
venture would seek an additional loan extension from the current lender or would
seek to refinance the mortgage loan.
At the February 1995 refinancing, the venture received approximately
$4,300,000 in net proceeds (after payoff of the existing loan including a
prepayment penalty of approximately $708,000 and closing costs). These proceeds
were utilized for capital expenditures, including the replacement of the roof,
and previously deferred maintenance at the mall. Such refinancing resulted in
recognition of an extraordinary item of $782,020 (including deferred mortgage
costs and accrued interest), of which the Partnership's share was $391,010. The
lender held back $8,000,000 of the loan proceeds for the construction of an
expansion and remodeling of the mall which commenced in April 1995 and was
completed in 1996. As a result
30
<PAGE>
of the venture completing the renovation and remodel of the mall in 1996,
approximately $2,800,000 of excess proceeds from the refinancing was released
from escrow by the lender. Additionally, after the venture's review of the
requirements for operating reserves, repairs and deferred maintenance projects,
the remaining loan proceeds of $4,294,143 were distributed to the partners of
the venture. As a result of this distribution of refinancing proceeds, the
Partnership's preferential position in the venture, as discussed above, was
satisfied. Accordingly, any additional distributions of sale or refinancing
proceeds will be allocated equally to the partners of the venture.
Nordstrom (which owned its own store) left the center in March 1995.
Nordstrom assigned, transferred and conveyed its interest in its land, building
and Reciprocal Easement Agreement ("REA") to Sears Roebuck and Co. which
opened its new store on October 28, 1995. The Nordstrom closing and Sears
Roebuck and Co. opening did not have a significant adverse impact on the
operations of the mall. The property's other anchor tenants, Montgomery Ward and
R.H. Macy, are also subject to the REA. The REA requirement for each anchor
tenant to operate a department store under it's specific name expired in August
1993 and in addition, the REA requirement for each anchor tenant to operate a
department store under any name expires in August 1998. The Partnership and its
joint venture partner have decided not to pursue extensions of the operating
covenants in the REA until such time, if ever, that negotiations for such
extensions are deemed to be in the best interest of Oakridge.
LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
9.19% mortgage note; secured
by the Oakridge Mall Shopping
Center in San Jose, California;
balance payable in monthly
installments of $310,165
(including interest) until
maturity in August 1998......................... $23,002,015 24,532,837
Less current portion of
long-term debt............................ 23,002,015 1,530,822
----------- ----------
Total long-term debt........................ $ -- 23,002,015
=========== ==========
Five year maturities of long-term debt are summarized as follows:
1998........................................... $23,002,015
1999........................................... --
2000........................................... --
2001........................................... --
2002........................................... --
===========
</TABLE>
PARTNERSHIP AGREEMENT
Pursuant to the terms of the Partnership Agreement, net profits or losses
of the Partnership from operations are allocated 96% to the Limited Partners and
4% to the General Partners. Profits from the sale or refinancing of investment
properties will be allocated to the General Partners in an amount equal to the
greater of any cash distributions of the proceeds of any such sale or
refinancing (as described below) or 1% of the profits from the sale or
refinancing. Losses from the sale or refinancing of investment properties will
be allocated 1% to the General Partners. The remaining sale or refinancing
profits and losses will be allocated to the Limited Partners.
31
<PAGE>
An amendment to the Partnership Agreement, effective January 1, 1991,
generally provides that notwithstanding any allocation contained in the
Agreement, if at any time profits are realized by the Partnership, any current
or anticipated event that would cause the deficit balance in absolute amount in
the Capital Account of the General Partners to be greater than their share of
the Partnership's indebtedness (as defined) after such event, then the
allocation of profits to the General Partners shall be increased to the extent
necessary to cause the deficit balance in the Capital Account of the General
Partners to be no less than their respective shares of the Partnership's
indebtedness after such event. In general, the effect of this amendment is to
allow the deferral of the recognition of taxable gain to the Limited Partners.
Pursuant to such provisions, the General Partners were allocated in 1996
additional amounts of gain for Federal income tax purposes. Such allocations had
no effect on total Partnership assets or results of operations.
The Partnership Agreement provides that the General Partners shall receive
as a distribution from the sale of a real property by the Partnership 6% of the
selling price, and that the remaining proceeds (net after expenses and retained
working capital) be distributed 85% to the Limited Partners and 15% to the
General Partners. However, the Limited Partners shall receive 100% of such net
sale proceeds until the Limited Partners (i) have received cash distributions of
sale or refinancing proceeds in an amount equal to the Limited Partners'
aggregate initial capital investment in the Partnership and (ii) have received
cumulative cash distributions from the Partnership's operations which, when
combined with sale or refinancing proceeds previously distributed, equal a 6%
annual return on the Limited Partners' average capital investment for each year
(their initial capital investment as reduced by sale or refinancing proceeds
previously distributed) commencing with the third fiscal quarter of 1978. The
Limited Partners have received cash distributions that satisfied the
requirements in (i) and (ii) above.
LEASES - AS PROPERTY LESSOR
At December 31, 1997, the Partnership and its consolidated venture's
principal asset is one shopping center. The Partnership has determined that all
leases relating to this property are properly classified as operating leases;
therefore, rental income is reported when earned and the cost of the property,
excluding cost of land, is depreciated over its estimated useful life. Leases
with shopping center tenants range from one to thirty years and provide for
fixed minimum rent and partial reimbursement of operating costs. In addition,
leases with shopping center tenants provide for additional rent based upon
percentages of tenants' sales volumes. A substantial portion of the ability of
retail tenants to honor their leases is dependent upon the retail economic
sector.
Minimum lease payments including amounts representing executory costs
(e.g.,taxes, maintenance, insurance) and any related profit in excess of
specific reimbursements, to be received in the future under the above operating
lease agreements relating to the shopping center, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 . . . . . . . . $ 6,387,773
1999 . . . . . . . . 5,743,192
2000 . . . . . . . . 4,894,754
2001 . . . . . . . . 4,426,709
2002 . . . . . . . . 3,881,238
Thereafter . . . . . . 10,688,519
-----------
Total . . . . . . $36,022,185
===========
</TABLE>
32
<PAGE>
Additional contingent rent (based on sales by property tenants) included in
rental income was as follows:
1995 . . . . . . . . $115,566
1996 . . . . . . . . 301,074
1997 . . . . . . . . 456,881
========
LEASES - AS PROPERTY LESSEE
The following lease agreement has been determined to be an operating lease.
The Oakridge venture owns a net leasehold interest in the land underlying
the San Jose, California shopping center expiring August 31, 2008, subject to
renewal for twelve five-year periods. The lease provides for an annual base rent
of $203,357. The lease provides that the venture pays real estate taxes
applicable to the leased land and the improvements situated thereon. The lease
also provides for additional annual percentage rent based upon the operations of
the shopping center. In October 1990, the Partnership and the joint venture
partner finalized negotiations with the lessor to amend the ground lease at
Oakridge Mall by adding a "purchase option" provision.
Minimum rental expense for 1997, 1996 and 1995 under the above operating
lease was $203,3S7 in each year. Additional rental expense under the above
operating lease was $1,092,293, $850,773 and $696,896 for 1997, 1996 and 1995,
respectively.
Future minimum rental commitments under the lease are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 . . . . . . . . $ 203,357
1999 . . . . . . . . 203,357
2000 . . . . . . . . 203,357
2001 . . . . . . . . 203,357
2002 . . . . . . . . 203,357
Thereafter. . . . . . 1,059,198
----------
$2,075,983
==========
TRANSACTIONS WITH AFFILIATES
Fees, commissions and other expenses required to be paid by the Partnership
to the General Partners and their affiliates as of December 31, 1997 and for the
years ended December 31, 1997, 1996 and 1995 are as follows:
UNPAID AT
DECEMBER 31,
1997 1996 1995 1997
------ ------ ------ ------------
<S> <C> <C> <C> <C>
Reimbursement (at
cost) for out-of-
pocket expenses . . . $ -- 5,716 10,445 --
------ ------ ------ ------
$ -- 5,716 10,445 --
====== ====== ====== ======
</TABLE>
The Limited Partners have received an amount from sale or refinancing
proceeds in excess of their initial capital investment plus any deficiency in a
6% cumulative annual return on their average capital investment. The General
Partners, therefore, are entitled to participate in sale and refinancing
proceeds to the extent of their previously deferred disposition fees earned on
the properties sold to date. All such fees, which total $940,488, were paid as
of December 31, 1997.
33
