<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]*
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ................ TO ................
COMMISSION FILE NUMBER 0-9211
NATIONAL INCOME REALTY TRUST
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 94-2537061
- ----------------------------------------------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
280 PARK AVENUE, EAST BUILDING, 20TH FLOOR, NEW YORK, NY 10017
- -------------------------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code (212) 949-5000
Securities Registered Pursuant to Section 12 (b) of the Act:
NONE
Securities Registered Pursuant to Section 12 (g) of the Act:
SHARES OF BENEFICIAL INTEREST, NO PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
As of March 10, 1995, the Registrant had 3,178,267 shares of beneficial
interest outstanding. Of the total shares outstanding, 2,167,543 were held by
other than those who may be deemed to be affiliated, for an aggregate value of
$25,468,630 based on the last trade as reported by the National Association of
Securities Dealers Automated Quotations System on March 10, 1995. The basis of
this calculation does not constitute a determination by the Registrant that all
of such persons or entities are affiliates of the Registrant as defined in rule
405 of the Securities Act of 1933, as amended.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
* Fee paid previously with original filing.
1
<PAGE> 2
INDEX TO
ANNUAL REPORT ON FORM 10-K/A
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Page
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PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
PART II
Item 5. Market for Registrant's Shares of Beneficial
Interest and Related Shareholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
PART III
Item 10. Trustees, Executive Officers and Advisor of the
Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . 78
PART IV
Item 14. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
</TABLE>
2
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PART I
ITEM 1. BUSINESS
General
National Income Realty Trust (the "Trust" or the "Registrant") is a California
business trust organized pursuant to a declaration of trust dated October 31,
1978, and amended and restated as of June 15, 1987 (as amended through the date
hereof, the "Declaration of Trust"). The Trust commenced operations on March
27, 1979. The Trust elected to be treated as a Real Estate Investment Trust
("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986,
as amended. The Trust has, in the opinion of the Trust's management, qualified
for federal taxation as a REIT for each year subsequent to December 31, 1978.
The Trust's real estate at December 31, 1994 consisted of 44 properties held
for investment, 8 properties held for sale, and investments in three real
estate partnerships reported on the equity method (owning 32 industrial
buildings, two office buildings and a 300 unit apartment property).
Business Plan and Investment Policy
The Trust's business and only industry segment is investing in real estate
through direct acquisitions, partnerships and, to a lesser extent, financing
real estate and real estate related activities through mortgage loans. The
Trust's real estate investments are located throughout the continental United
States, with concentrations in Florida, California, Texas, Maryland, Tennessee
and Colorado. Information regarding the real estate and mortgage notes
receivable portfolios of the Trust is set forth in ITEM 2. "PROPERTIES" and in
Schedules III and IV to the Consolidated Financial Statements included at ITEM
8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA".
The Trust's business is not seasonal. The Trust has determined to pursue a
balanced investment policy, seeking both current income and capital
appreciation. The Trust's plan of operation is to continue to make long-term
equity investments in real estate, with an emphasis on older, middle market,
multifamily properties. The type of investments made by the Trust will depend
upon the availability of suitable investment opportunities. In general, the
Trust intends to be an aggressive and opportunistic investor, focusing on the
leveraged acquisition of older apartment complexes. Geographically, the
acquisitions are expected to be concentrated in areas where the Trust presently
owns property. The Trust will also continue to seek to sell selected assets
where the obtainable prices justify their disposition. With respect to
properties acquired through foreclosure, the Trust intends to enhance the value
of properties acquired through foreclosure through renovations and, when
possible, to finance such properties with first mortgages. The Trust also
intends to pursue its rights vigorously with respect to mortgage notes that are
in default.
Management of the Trust
The Trust's Board of Trustees is responsible for managing the affairs of the
Trust and for setting the policies which guide it; however, the day-to-day
management of the Trust and implementation of these defined policies are
performed by Tarragon Realty Advisors, Inc. ("Tarragon" or the "Advisor") under
the supervision of the Trust's Board of Trustees. The duties of the Advisor
include, among other things, locating, investigating, evaluating and
recommending real estate investment and sales opportunities, as well as
financing and refinancing sources for the Trust. The Advisor also serves as a
consultant in connection with the business plan and investment policy decisions
made by the Trust's Board of Trustees.
3
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ITEM 1. BUSINESS (Continued)
Management of the Trust (Continued)
Tarragon has provided advisory services to the Trust since April 1, 1994 under
an advisory agreement, dated February 15, 1994, approved by the Trust's Board
of Trustees. William S. Friedman, President, Chief Executive Officer and
Trustee of the Trust, serves as a Director and Chief Executive Officer of
Tarragon. Tarragon is owned by Lucy N. Friedman, Mr. Friedman's wife, and John
A. Doyle, who serves as a Director, President and Chief Operating Officer of
Tarragon and Executive Vice President of the Trust. The Friedman and Doyle
families together own approximately 32% of the outstanding shares of the Trust.
A majority of the Officers of the Trust are also officers of Tarragon.
Basic Capital Management ("BCM") served as the Trust's advisor from March 28,
1989 through March 31, 1994 when BCM resigned as advisor to the Trust. Mr.
Friedman was President of BCM until May 1, 1993. BCM is beneficially owned by
a trust for the benefit of the children of Gene E. Phillips, who served as a
Trustee of the Trust until December 31, 1992.
Tarragon and BCM are more fully described in ITEM 10. "TRUSTEES, EXECUTIVE
OFFICERS AND ADVISOR OF THE REGISTRANT - The Advisor".
The Trust has no employees. Employees of Tarragon render services to the
Trust.
Property Management
Since April 1, 1994, Tarragon has provided property management services to the
Trust for a fee of 4.5% of the monthly gross rents collected on apartment
properties and of 1.5% to 4% of the monthly gross rents collected on commercial
properties. Tarragon subcontracts with other entities for the provision of
most of the property-level management services to the Trust.
From February 1, 1990 until March 31, 1994, affiliates of BCM provided property
management services to the Trust for a fee of 5% or less of the monthly gross
rents collected on the properties under management. In many cases, these
affiliates of BCM subcontracted with other entities for the provision of the
property-level management services to the Trust at various rates, as more fully
described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
Through March 31, 1994, affiliates of BCM also received real estate brokerage
commissions in accordance with the terms of a non-exclusive brokerage agreement
as discussed in ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT - The Advisor."
Competition
The Trust's plan of operation for 1995 is to continue to improve the quality of
its properties through a consistent capital investment program and, to the
extent surplus funds and attractive investments are available, to acquire
additional moderate income, ten to twenty-five year old, multifamily properties
in areas where the Trust currently owns and operates multifamily properties.
The Trust's objective subsequent to consummating a property acquisition is to
improve occupancy levels and rents through capital improvements and intensive
management efforts. The Trust has not experienced any significant differences
in competition in the various regions of the United States in which it invests.
<R/>
4
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ITEM 1. BUSINESS (Continued)
Competition (Continued)
Management believes that ownership of properties in which the Trust invests is
highly fragmented among individuals, partnerships, public and private
corporations and other real estate investment trusts and that no particularly
dominant entities exist in the market for such properties. At any given time, a
significant number of multifamily properties are available for purchase where
the Trust's properties are concentrated. Management believes that there is and
will continue to be a strong demand for well maintained, affordable housing in
the markets in which it operates. Management believes that the factors
discussed above provide a market where a sufficient number of attractive
investment opportunities will be available to allow the Trust to implement its
business plan. However, since the success of any multifamily real estate
investment is impacted by other factors outside the control of the Trust,
including general demand for apartment housing, interest rates, operating
costs and the ability to attract and retain qualified property managers, there
can be no assurances that the Trust will be successful in the implementation of
its business plan.
<R/>
Certain Factors Associated with Real Estate and Related Investments
The Trust is subject to all the risks incident to ownership and financing of
real estate and interests therein, many of which relate to the general
illiquidity of real estate investments. These risks include, but are not
limited to, changes in general or local economic conditions, changes in
interest rates and the availability of permanent mortgage financing which may
render the acquisition, sale or refinancing of a property difficult or
unattractive and which may make debt service burdensome, changes in real estate
and zoning laws, increases in real estate taxes, federal or local economic or
rent controls, floods, earthquakes and other acts of God and other factors
beyond the control of the Trust or Tarragon. The illiquidity of real estate
investments generally may impair the ability of the Trust to respond promptly
to changing circumstances. The Trust's management believes that such risks are
partially mitigated by the diversification by geographic region and property
type of the Trust's real estate and mortgage notes receivable portfolios.
However, to the extent new equity investments are concentrated in any
particular region, the advantages of geographic diversification will be
mitigated.
ITEM 2. PROPERTIES
The Trust's principal offices are located at 280 Park Avenue, East Building,
20th Floor, New York, New York 10017. In the opinion of the Trust's
management, the Trust's offices are suitable and adequate for its present
operations.
Details of the Trust's real estate and mortgage notes receivable portfolios at
December 31, 1994, are set forth in Schedules III and IV, respectively, to the
Consolidated Financial Statements and NOTE 2. "NOTES AND INTEREST RECEIVABLE"
and NOTE 4. "REAL ESTATE AND DEPRECIATION" of the Notes to the Consolidated
Financial Statements, all included at ITEM 8. "FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA". The discussions set forth below under the headings "Real
Estate" and "Mortgage Loans" provide certain summary information concerning the
Trust's real estate and mortgage notes receivable portfolios.
5
<PAGE> 6
ITEM 2. PROPERTIES (Continued)
At December 31, 1994, 85.3% of the Trust's assets consisted of equity
investments in real estate, 5.1% consisted of investments in partnerships and
4.6% consisted of mortgage notes and interest receivable. The remaining 5.0%
of the Trust's assets at December 31, 1994, were cash, cash equivalents and
other assets. It should be noted, however, that the percentage of the Trust's
assets invested in any one category at any particular time is subject to change
and no assurance can be given that the composition of the Trust's assets in the
future will approximate the percentages listed above.
At December 31, 1994, the Trust held mortgage notes receivable secured by real
estate located in several geographic regions of the continental United States,
with a concentration in the Southeast, as shown more specifically in the table
under "Mortgage Loans" below. The Trust's real estate is also geographically
diverse. At December 31, 1994, the Trust held investments in apartments and
commercial real estate in each of the geographic regions of the continental
United States, although its apartments are concentrated in the Southeast, as
shown more specifically in the table under "Real Estate" below.
To continue to qualify for federal taxation as a REIT under the Internal
Revenue Code of 1986, as amended, the Trust will, among other things, be
required to hold at least 75% of the value of its total assets in real estate
assets, government securities, cash and cash equivalents at the close of each
quarter of each taxable year.
Geographic Regions
The Trust has divided the continental United States into the following six
geographic regions.
[MAP]
[Northeast region comprised of the states of Connecticut, Delaware, Maine,
Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania,
Rhode Island and Vermont, and the District of Columbia.
Southeast region comprised of the states of Alabama, Florida, Georgia,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia.
Southwest region comprised of the states of Arizona, Arkansas, Louisiana, New
Mexico, Oklahoma and Texas.
Midwest region comprised of the states of Illinois, Indiana, Iowa, Kansas,
Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South
Dakota, West Virginia and Wisconsin.
Mountain region comprised of the states of Colorado, Idaho, Montana, Nevada,
Utah and Wyoming.
Pacific region comprised of the states of California, Oregon and Washington.]
[This space intentionally left blank.]
6
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ITEM 2. PROPERTIES (Continued)
Real Estate
At December 31, 1994, the Trust's real estate portfolio consisted of 52
properties, 44 of which are held for investment. The remaining eight
properties, primarily obtained through foreclosure of the Trust's mortgage
notes receivable, are held for sale. The Century Centre II Office Building
located in San Mateo, California exceeds 10% of the Trust's assets. Ten of the
Trust's properties and the Trust's entire mortgage portfolio are held free and
clear. All other Trust properties are pledged to secure first mortgage debt
totaling $135.2 million at December 31, 1994.
Types of Real Estate Investments. The Trust's real estate consists of
apartments and commercial properties, primarily office buildings and shopping
centers, or similar properties having established income-producing
capabilities. In selecting real estate, the location, age and type of
property, gross rentals, lease terms, financial and business standing of
tenants, operating expenses, fixed charges, land values and physical condition
are considered. The Trust may acquire properties subject to, or assume,
existing debt and may mortgage, pledge or otherwise obtain financing for a
portion of its real estate. The Trust's Board of Trustees may alter the types
of and criteria for selecting new equity investments and for obtaining
financing without a vote of shareholders to the extent such policies are not
governed by the Declaration of Trust.
Although the Trust has typically invested in developed real estate, the Trust
intends to invest increasing amounts in major apartment renovations and new
construction or development either directly or in partnership with unaffiliated
partners. To the extent that the Trust invests in construction and development
projects, the Trust would be subject to business risks, such as cost overruns
and delays, associated with such higher risk activities. The Trust purchased
the unoccupied Woodlake Run Apartments, in Fort Worth, Texas, in December 1994.
The Trust plans to rehabilitate and expand the property with funds from the
general working capital of the Trust, at an estimated cost of $5.0 million, and
anticipates it will be completed by the end of 1996.
In the opinion of the Trust's management, the real estate owned by the Trust is
adequately covered by insurance.
The following table sets forth the percentages, by property type and geographic
region, of the Trust's real estate (other than the unimproved land and a
single-family residence described below) at December 31, 1994.
<TABLE>
<CAPTION>
Commercial
Region Apartments Properties
--------- ----------- ----------------
<S> <C> <C>
Northeast . . . . . . . . . . . . . . . . . . . . . 9.3% - %
Southeast . . . . . . . . . . . . . . . . . . . . . 36.4 31.5
Southwest . . . . . . . . . . . . . . . . . . . . . 21.5 11.3
Midwest . . . . . . . . . . . . . . . . . . . . . . 11.3 34.4
Mountain . . . . . . . . . . . . . . . . . . . . . . 15.2 3.6
Pacific . . . . . . . . . . . . . . . . . . . . . . 6.3 19.2
----- -----
100.0% 100.0%
</TABLE>
The foregoing table is based solely on the number of apartment units and amount
of commercial square footage owned by the Trust and does not reflect the value
of the Trust's investment in each region. The Trust also owns one parcel of
unimproved land of 46.27 acres located in the Southeast region and one
single-family residence located in the Southwest region.
7
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ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
A summary of activity in the Trust's owned real estate portfolio during 1994 is
as follows:
<TABLE>
<S> <C>
Owned properties in real estate portfolio
at January 1, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 *
Properties obtained through foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Properties purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Owned properties in real estate portfolio ---
at December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
===
</TABLE>
_______________
* Includes an office/retail center which is now reported separately as an
office building and a retail center.
[This space intentionally left blank.]
8
<PAGE> 9
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
Properties Held for Investment. Set forth below are the Trust's properties
held for investment and the annual net rental revenue for apartments and
commercial properties and occupancy thereof at December 31, 1994 and 1993. Net
rental revenue represents gross revenue per property, net of all rental losses,
including rental concessions.
<TABLE>
<CAPTION>
Net
Rental
Revenue Occupancy
Rentable Square --------------------- ---------------------
Property Location Units Footage 1994 1993 1994 1993
- ---------------- -------------- ------------ ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
APARTMENTS
- ----------
Bayfront Houston, TX 200 172,720 $ 1,071 $ 1,044 95% 97%
Bay West Bradenton, FL 299 323,774 1,787 1,586 95% 92%
Bryan Hill Bethany, OK 232 193,500 152 (A) 97% (A)
Carlyle Towers Detroit, MI 163 247,850 1,420 1,380 91% 88%
Cornell Los Angeles, CA 55 30,150 324 363 100% 84%
Creekwood North Altamonte Springs, FL 180 166,500 887 841 91% 89%
Cross Creek Lexington, KY 144 102,258 774 735 97% 93%
Diamond Loch Fort Worth, TX 138 139,354 734 741 95% 92%
Dunhill/Devonshire Denver, CO 480 324,000 1,295 806 70% 55%
Fenway Hall Los Angeles, CA 53 27,175 243 286 85% 92%
Flannery House Baton Rouge, LA 120 143,450 566 550 86% 93%
Forest Oaks Lexington, KY 154 132,460 150 (A) 98% (A)
Heather Hills Temple Hills, MD 459 401,029 3,622 3,758 94% 95%
Huntington Green West Town, PA 80 80,240 541 393 91% 93%
Kirklevington Lexington, KY 126 99,080 627 624 97% 92%
Lake Point Memphis, TN 540 540,160 2,236 1,304 82% 92%
Mariposa Manor Los Angeles, CA 41 19,710 37 (A) 81% (A)
Martins Landing Lakeland, FL 236 207,704 225 (A) 96% (A)
Palm Court Miami, FL 144 125,280 918 860 97% 97%
Park Dale Gardens Dallas, TX 224 206,640 998 908 93% 88%
Pheasant Pointe Sacramento, CA 215 178,666 1,233 1,190 91% 87%
Pinecrest Ft. Lauderdale, FL 323 226,065 2,669 2,434 94% 92%
Plaza Hills Kansas City, MO 66 67,464 411 383 97% 100%
Prado Bay Miami, FL 123 109,756 907 861 96% 95%
Sandstone Denver, CO 278 187,450 1,088 1,048 85% 97%
Spring Pines Houston, TX 136 118,430 575 557 83% 88%
Summit on the Lake Fort Worth, TX 198 138,262 736 (A) 95% (A)
Woodcreek Denver, CO 120 99,622 797 707 96% 98%
Woodcreek Jacksonville, FL 260 199,484 1,233 1,260 95% 93%
----- --------- -------- -------- --- ---
5,787 5,008,233 $ 28,256 $ 24,619 90% 89%
===== ========= ======== ======== === ===
OFFICE BUILDINGS
- ----------------
Century Centre II San Mateo, CA - 171,256 $ 2,850 $ 3,148 91% 97%
Emerson Center Atlanta, GA - 126,979 705 641 51% 46%
NW O'Hare Des Plaines, IL - 128,562 1,171 1,124 65% 64%
Rancho Sorrento San Diego, CA - 146,839 1,528 1,140 76% 70%
------- --------- --------- --- ---
573,636 $ 6,254 $ 6,053 72% 71%
======= ========= ========= === ===
</TABLE>
_____________________________________________________
(A) Property acquired during 1994.
9
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ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
<TABLE>
<CAPTION>
Net
Rental
Revenue Occupancy
Rentable Square ------------------ ------------------
Property Location Units Footage 1994 1993 1994 1993
- ---------------- -------------- --------- ------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
SHOPPING CENTERS
- ----------------
Emerson Center Atlanta, GA - 17,733 $ 121 $ 86 89% 31%
K-Mart Plaza(A) Charlotte, NC - 117,200 85 218 3% 100%
K-Mart Plaza(B) Kansas City, MO - 84,180 258 259 100% 100%
K-Mart Plaza Temple Terrace, FL - 63,887 235 234 100% 100%
K-Mart Plaza(C) Thomasville, GA - 55,552 164 165 100% 100%
Lakeview Mall Manitowoc, WI - 224,613 425 434 70% 69%
Midland Plaza Midland, MI - 30,650 135 151 100% 100%
Midway Mills Carrollton, TX - 72,065 715 649 97% 86%
Northside Mall Gainesville, FL - 139,337 656 669 99% 100%
Southgate Waco, TX - 94,675 314 313 73% 79%
------- ------- ------- --- ---
899,892 $ 3,108 $ 3,178 76% 88%
======= ======= ======= === ===
LAND HELD FOR IMPROVEMENTS
- --------------------------
Woodlake Run Fort Worth, TX - - - - - -
</TABLE>
Occupancy presented above and throughout this ITEM 2. is without reference to
whether leases in effect are at, below or above market rates.
- --------------
(A) Lease expired January 1994 and at December 31, 1994, had not been
re-leased.
(B) K-Mart vacated premises. Rent is being paid in accordance with the lease
which expires November 1999.
(C) Lease expires September 2004. During the first quarter of 1995, K-Mart moved
out and sublet the space to two tenants.
10
<PAGE> 11
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
Properties Held for Sale. Set forth below are the Trust's properties held for
sale (primarily obtained through foreclosure), except for a single-family
residence, and the annual net rental revenue for apartments and commercial
properties and occupancy thereof at December 31, 1994 and 1993. Net rental
revenue represents gross revenue per property, net of rental losses.
<TABLE>
<CAPTION>
Net
Rental
Revenue Occupancy
---------------- ----------------
Property Location Square Footage/Acres 1994 1993 1994 1993
- ---------------- ------------------ --------------------- ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
SHOPPING CENTERS
- ----------------
KMart Plaza Indianapolis, IN 101,424 $ (B) $ (B) (B) (B)
Mountain View Las Vegas, NV 20,092 216 217 100% 100%
Stewart Square Las Vegas, NV 39,600 339 404 85% 79%
Times Square Lubbock, TX 19,550 76 64 58% 55%
------- ------- ------- --- ---
180,666 $ 631 $ 685 82% 78%
======= ======= ======= === ===
LAND AND OTHER
- --------------
Orangeburg Anderson, SC 46 acres $ - $ - - -
Lake Highlands Dallas, TX (A) 27 (A) N/A
Pepperkorn Manitowoc, WI (A) 56 (A) N/A
------- -------
$ - $ 83
======= =======
</TABLE>
____________________________________________________________________________
(A) Property is shut down.
(B) Property acquired in December 1994 by deed in lieu of foreclosure.
(C) K-Mart vacated the premises. Lease, which expires October 1999, has been
assigned to the City of Indianapolis.
Partnership Properties. The Trust, in partnership with Continental Mortgage
and Equity Trust ("CMET"), owns Sacramento Nine ("SAC 9"), which currently owns
two office buildings in the vicinity of Sacramento, California. The Trust has
a 70% interest in the partnership. The SAC 9 partnership agreement requires
the consent of both the Trust and CMET for any material changes in the
operations of the partnership's properties, including sales, refinancings and
changes in the property manager. Therefore, the Trust is a noncontrolling
partner and accounts for its investment in the partnership under the equity
method.
The Trust and CMET are also partners in Income Special Associates ("ISA"), a
joint venture partnership in which the Trust has a 40% partnership interest.
ISA owns a 100% interest in Indcon, L.P. ("Indcon"), formerly known as Adams
Properties Associates ("APA"), which owns 32 industrial warehouses. The Trust
accounts for its investment in the Indcon partnership under the equity method.
On July 1, 1993, the Trust made an additional capital contribution to English
Village Partners, L.P. ("English Village") of $464,000 to increase its limited
partnership ownership interest to 49% and to acquire a 1% general partnership
interest in the partnership, which owns a 300-unit apartment property. The
Trust, as a noncontrolling partner, accounts for its investment in English
Village under the equity method.
11
<PAGE> 12
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
Set forth below are the Trust's investments in partnership properties and the
annual net rental revenue and occupancy thereof at December 31, 1994 and 1993.
Net rental revenue represents gross revenue per property, net of all rental
losses, including rental concessions.
<TABLE>
<CAPTION>
Net
Rental
Revenue Occupancy
Square ------------------- -----------------
Property Location Footage 1994 1993 1994 1993
- --------------- -------------- ----------- ------- ------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Sacramento Nine Rancho Cordova, CA 105,249 $1,141 $1,200 100% 100%
========= ====== ====== ==== ====
Indcon, L.P. Dallas, TX 424,813 $ 1,154 $ 1,314 100% 100%
San Antonio, TX 418,317 825 737 96% 100%
Atlanta, GA 1,585,728 2,732 2,536 96% 91%
Memphis, TN 653,852 1,168 822 91% 79%
--------- ------ ------ ---- ----
3,082,710 $5,879 $5,409 95% 91%
========= ====== ====== ==== ====
English Village Memphis, TN 364,680 $1,595 $1,458 95% 95%
========= ====== ====== ==== ====
</TABLE>
Mortgage Loans
At December 31, 1994, the Trust held 7 mortgage loans with an aggregate
outstanding balance of $15.9 million, secured by income-producing properties
located throughout the United States, one mortgage loan with an outstanding
balance of $256,000 secured by a retirement center in Tucson, Arizona, and 3
mortgage loans with an outstanding balance of $206,000 secured by single-family
residences located in the Southwest region of the United States, which together
with accrued interest, net of reserves, represented 4.6% of the Trust's assets
at such time.
Types of Properties Subject to Mortgages. The properties securing the Trust's
mortgage portfolio at December 31, 1994, consisted of apartments, office
buildings, shopping centers, single-family residences, a retirement home and
developed land. To the extent the Declaration of Trust does not control such
matters, the Trust's Board of Trustees may alter the types of mortgages in
which the Trust invests without a vote of the Trust's shareholders. In
addition to restricting the types of collateral and priority of mortgages, the
Declaration of Trust imposes certain restrictions on transactions with related
parties which limits the entities to which the Trust may make a mortgage, as
discussed in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
[This space intentionally left blank.]
12
<PAGE> 13
ITEM 2. PROPERTIES (Continued)
Mortgage Loans (Continued)
The following table sets forth the percentages (based on the note receivable
carrying value), by both property type and geographic region, of the properties
that serve as collateral for the Trust's outstanding mortgages at December 31,
1994. The table does not include the $206,000 in single-family mortgages or
the $256,000 mortgage secured by the retirement center.
<TABLE>
<CAPTION>
Collateral Properties
--------------------------------------------
Region Apartments Commercial Total
-------------- ---------- ---------- -------
<S> <C> <C> <C>
Southeast . . . . . . . . . . . . . . . . . . 2.5% 54.1% 56.6%
Southwest . . . . . . . . . . . . . . . . . . 5.9 32.3 38.2
Midwest . . . . . . . . . . . . . . . . . . . - 5.2 5.2
-------- -------- --------
8.4% 91.6% 100.0%
</TABLE>
A summary of activity in the Trust's mortgage notes receivable portfolio during
1994 is as follows:
<TABLE>
<S> <C>
Loans in mortgage portfolio at January 1, 1994 . . . . . . . 17
Loans foreclosed by the Trust . . . . . . . . . . . . . . . . (2)
Loans paid in full . . . . . . . . . . . . . . . . . . . . . . (3)
Loans sold . . . . . . . . . . . . . . . . . . . . . . . . . . (1)
----
Loans in mortgage portfolio at December 31, 1994 . . . . . 11
====
</TABLE>
The Trust's policy, at present, is to make mortgage loans only in connection
with, and to facilitate the sale or acquisition of, real estate. As existing
mortgages are paid off, the Trust's portfolio of mortgage notes receivable is,
accordingly, expected to continue to decline.
ITEM 3. LEGAL PROCEEDINGS
Olive Litigation
In February 1990, the Trust, together with CMET, Income Opportunity Realty
Trust ("IORT") and Transcontinental Realty Advisors, Inc. ("TCI"), three real
estate entities with, at the time, the same officers, directors or trustees and
advisor as the Trust, entered into a settlement of a class and derivative
action entitled Olive et al. v. National Income Realty Trust et al., relating
to the operation and management of each of the entities. On April 23, 1990,
the court granted final approval of the terms of the original settlement.
On May 4, 1994, the parties entered into a Modification of Stipulation of
Settlement dated April 27, 1994 (the "Modification"), which settled subsequent
claims of breaches of the settlement which were asserted by the plaintiffs and
modified certain provisions of the April 1990 settlement. The Modification was
preliminarily approved by the court on July 1, 1994 and final court approval
was entered on December 12, 1994. The effective date of the Modification is
January 11, 1995.
13
<PAGE> 14
ITEM 3. LEGAL PROCEEDINGS (Continued)
Olive Litigation (Continued)
The Modification, among other things, provided for the addition of at least
three new unaffiliated members to the Trust's Board of Trustees and set forth
new requirements for the approval of any transactions with affiliates over the
next five years. In accordance with the procedures set forth in the
Modification, Irving E. Cohen, Lance Liebman, Sally Hernandez-Pinero and L. G.
Schafran have been appointed to the Board. In addition, BCM, Gene E. Phillips
and William S. Friedman have agreed to pay a total of $1.2 million to the
Trust, CMET, IORT and TCI, of which the Trust's share is $150,000.
Under the Modification, the Trust, CMET, IORT, TCI and their shareholders
released the defendants from any claims relating to the plaintiffs'
allegations. The Trust, CMET, IORT and TCI also agreed to waive any demand
requirement for the plaintiffs to pursue claims on behalf of each of them
against certain persons or entities. The Modification also requires that any
shares of the Trust held by Messrs. Phillips, Friedman or their affiliates
shall be (i) voted in favor of the reelection of all current Board members that
stand for reelection during the two calendar years following the effective date
of the Modification and (ii) voted in favor of all new Board members appointed
pursuant to the terms of the Modification that stand for reelection during the
three calendar years following the effective date of the Modification.
The Modification also terminated a number of the provisions of the Stipulation
of Settlement, including the requirement that the Trust, CMET, IORT and TCI
maintain a Related Party Transaction Committee and a Litigation Committee of
their respective Boards. The court will retain jurisdiction to enforce the
Modification.
Also, see ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT" - Trustees for a description of the Modification as it relates to
certain changes in Members of the Board of Trustees, and see ITEM 13. "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS" under the subcaption "Restrictions on
Related Party Transactions" as to certain required levels of approval for
certain defined categories of transactions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the calendar year covered by this report, no
matter was submitted to a vote of security holders.
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF BENEFICIAL INTEREST AND
RELATED SHAREHOLDER MATTERS
The Trust's shares of beneficial interest, no par value (the "Shares" and each
a "Share"), are traded in the over-the-counter market on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system using
the symbol "NIRTS". Over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commissions, and may not
necessarily represent actual transactions. The following table sets forth the
high and low bid quotations of the Shares as reported by the NASDAQ system for
the periods indicated:
<TABLE>
<CAPTION>
1994 1993
------------------------ ------------------------
High Low High Low
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
First Quarter $ 12 3/4 $ 12 $ 7 3/4 $ 5 1/8
Second Quarter 12 1/2 12 8 1/4 7 3/4
Third Quarter 12 1/2 11 1/4 12 1/4 8 1/4
Fourth Quarter 11 5/8 11 5/8 14 1/4 12 1/4
</TABLE>
For the first quarter of 1995 through March 10, 1995, the high and low bid
quotations of the Shares, as reported by the NASDAQ system were $11 3/4 and
$11 5/8, respectively. Also as of March 10, 1995, the closing bid price of the
Shares was $11 3/4 per Share and there were 6,947 holders of record as of such
date.
Based on the performance of the Trust's properties, the Trust's Board of
Trustees, at their July 1993 meeting, voted to resume regular quarterly
distributions. The per share cash distributions paid in 1994 and 1993 were as
follows:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
First Quarter $ .15 $ -
Second Quarter .17 -
Third Quarter .17 .10
Fourth Quarter .18 .10
</TABLE>
The Trust also paid a 10% share dividend to its shareholders in each of 1994
and 1993.
During 1994 and 1993, the Trust repurchased 192,000 Shares and 280,038 Shares
at a total cost to the Trust of $2.3 million and $2.4 million, respectively. A
repurchase program was originally announced by the Trust on December 5, 1989,
authorizing the Trust to repurchase a total of 1,026,667 Shares, of which all
1,026,667 Shares had been repurchased as of August 1994. On May 19, 1994, the
Trust's Board of Trustees authorized the Trust to repurchase up to an
additional 300,000 Shares, of which 59,202 Shares were repurchased as of
December 31, 1994.
[This space intentionally left blank.]
15
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
EARNINGS DATA
Income . . . . . . . . . . . . . . . $ 40,135 $ 36,357 $ 30,047 $ 28,137 $ 29,487
Expense . . . . . . . . . . . . . . . (40,915) (40,370) (38,361) (33,890) (39,237)
---------- ---------- ---------- ---------- ----------
(Loss) before gain on
sale of real estate and
extraordinary gain . . . . . . . . (780) (4,013) (8,314) (5,753) (9,750)
Gain on sale of real estate . . . . . 385 945 - 462 5,934
Gain on sale of investments . . . . . 141 - - - -
---------- ---------- ---------- ---------- ----------
(Loss) from continuing operations . . (254) (3,068) (8,314) (5,291) (3,816)
Extraordinary gain . . . . . . . . . - 8,888 - 2,170 686
---------- ---------- ---------- ---------- ----------
Net income (loss) . . . . . . . . . . (254) 5,820 (8,314) (3,121) (3,130)
========== ========== ========== ========== ==========
EARNING PER SHARE DATA
(Loss) from continuing operations . . (.08) (.87) (2.16) (1.31) (.91)
Extraordinary gain . . . . . . . . . - 2.53 - .54 .16
---------- ---------- ---------- ---------- ----------
Net income (loss) . . . . . . . . . . $ (.08) $ 1.66 $ (2.16) $ (.77) $ (.75)
========== ========== ========== ========== ==========
Distributions (1) . . . . . . . . . . $ .67 $ .20 $ - $ 2.11 $ .33
Weighted average shares
outstanding (2) . . . . . . . . . 3,301,851 3,509,204 3,848,714 4,038,248 4,177,393
BALANCE SHEET DATA
Real estate . . . . . . . . . . . . . $ 185,936 $ 173,244 $ 167,883 $ 163,980 $ 153,763
Notes and interest receivable . . . . 16,271 19,394 30,611 28,870 28,564
Investments in partnerships . . . . . 11,026 11,804 12,583 17,027 17,213
Total assets . . . . . . . . . . . . 217,040 199,486 205,517 202,097 199,434
Notes, debentures and
interest payable . . . . . . . . . 138,316 114,351 123,263 108,939 97,363
Shareholders' equity . . . . . . . . 73,360 78,174 74,927 84,933 88,896
Book value per share (2) . . . . . . $ 22.81 $ 22.94 $ 20.31 $ 21.57 $ 21.79
</TABLE>
- -----------------------
(1) Distributions in 1994 and 1991 represented returns of capital. 1993
distributions were taxable to shareholders as ordinary income and 1990
distributions represent capital gains.
(2) Share and per share data have been restated to give effect to 10%
share dividends declared in September 1994 and July 1993 and the
one-for-three reverse share split effected March 26, 1990.
16
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA (Continued)
<R/>
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
OTHER DATA
Net income (loss) . . . . . . . . . . $ (254) $ 5,820 $ (8,314) $ (3,121) $ (3,130)
Gain on sale of real estate . . . . . (385) (945) - (462) (5,934)
Gain on sale of investments . . . . . (141) - - - -
Extraordinary gain . . . . . . . . . - (8,888) - (2,170) (2,170)
Equity income (loss) . . . . . . . . (105) 34 (204) 171 (410)
Depreciation. . . . . . . . . . . . . 4,992 4,639 3,982 3,842 4,739
Provision for losses . . . . . . . . - 1,390 2,400 - 2,860
Funds from operations-
equity affiliates. . . . . . . . . . 1,191 884 969 1,194 2,785
---------- ---------- ---------- ---------- ----------
FUNDS FROM OPERATIONS(1). . . . . . . $ 5,298 $ 2,934 $ (1,167) $ (546) $ 224
========== ========== ========== ========== ==========
- ------------------------
</TABLE>
<R/>
(1) Funds from operations, as defined by National Association of Real
Estate Investment Trusts ("NAREIT"), equals net income (loss)
(computed in accordance with generally accepted accounting
principles), excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures. Funds
from operations does not represent cash flow from operating activities
and should not be considered as an alternative to net income as an
indicator of the Trust's operating performance or to cash flow as a
measure of liquidity or the ability to pay dividends. "Funds from
operations - equity affiliates" is calculated to reflect funds from
operations in the same manner.
<R/>
[This space intentionally left blank.]
17
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
National Income Realty Trust (the "Trust") invests in real estate through
acquisitions, leases and partnerships and, to a lesser extent, in mortgages on
real estate. The Trust was organized on October 31, 1978 and commenced
operations on March 27, 1979.
The Trust's real estate portfolio at December 31, 1994 consisted of 52
properties located throughout the United States, with concentrations in the
Southeast, 8 of which are held for sale and 44 held for investment. These
properties consist of 30 apartment complexes, 14 shopping centers, 4 office
buildings, three parcels of land and one single-family residence. All of the
Trust's real estate, except ten properties, is pledged to secure first mortgage
notes payable.
The Trust's management plans to continue its successful efforts of enhancing
the long-term value of shareholder investments through efficient asset and
property management, as well as selective investments in underperforming
apartment properties in the same geographical regions that the Trust currently
operates. Additionally, management intends to raise capital through
refinancings and dispositions of certain assets and sustain and increase cash
distributions to shareholders after making adequate provisions for capital
investments of the Trust's existing portfolio and share repurchases.
Liquidity and Capital Resources
Cash and cash equivalents aggregated $3.5 million at December 31, 1994 compared
with $1.1 million at December 31, 1993. The Trust's principal sources of cash
have been and will continue to be property operations, proceeds from property
sales, the collection of mortgage notes receivable and borrowings. The Trust
expects that funds from operations, collection of mortgage notes receivable and
from anticipated external sources, such as property sales and refinancings,
will be sufficient to meet the Trust's various cash needs, including debt
service obligations, property maintenance and improvements and continuation of
regular distributions, as more fully discussed in the paragraphs below.
Operating Activities
The Trust's cash flow from property operations (rentals collected less payments
for property operating expenses) increased from $14.4 million in 1993 to $14.9
million for 1994. This increase is primarily attributable to two apartment
complexes acquired through foreclosure in 1993, and the acquisition of five
apartment complexes in 1994. This increase was partially offset by an increase
in property tax payments due to payment of prior year taxes in 1994. Property
tax payments totaled approximately $3.7 million in 1993 as compared to $5.0
million in 1994. Cash flows from property operations increased from $10.1
million in 1992 to $14.4 million in 1993. This increase in cash flow from
property operations is primarily attributable to four apartment complexes
purchased in November 1992 and two apartment complexes obtained through
foreclosure in March 1993.
The Trust's interest collected increased from $1.5 million in 1993 to $1.6
million in 1994. As described in Note 2. "NOTES AND INTEREST RECEIVABLE", the
Trust received $1.3 million in settlement of the Alder Creek mortgage note
receivable, of which $391,000 was recorded as interest collected, for a total
of $442,000 interest collected on the Alder Creek note during 1994 as compared
to $200,000 interest collected on the same note in 1993. The increase is
offset by a $213,000 decrease in interest collected due to the payoff or
foreclosure of three notes receivable in 1993 and three mortgage notes
receivable in 1994. Interest collected in 1992 totaled
18
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Operating Activities (Continued)
$2.1 million compared with $1.5 million in 1993. Of this decrease, $245,000 is
due to a note which was paid in full in March 1993 and $221,000 is due to
interest payments received in 1992 on a cash flow mortgage, but not received in
1993. Interest collections are expected to continue to decline in 1995 due to
the $2.4 million and $1.8 million in loans paid off in 1993 and 1994,
respectively.
Interest paid on the Trust's indebtedness increased from $9.3 million in 1993
to $9.8 million in 1994. Interest payments increased $554,000 due to mortgage
interest paid associated with the apartment complexes acquired in 1993 and
1994. Interest payments also increased by $438,000 due to five Trust
properties refinanced in 1994 and the Trust obtaining first mortgage financing
on one property in June 1993. The Trust refinanced five apartment properties,
one of which was acquired through foreclosure in 1993, with existing mortgage
debt of $15.8 million and obtained new first mortgage financing totaling $22.8
million during 1994. In June 1993, the Trust obtained financing on a
previously unencumbered property in the amount of $2.1 million. Also, in
November and December 1994, the Trust refinanced two additional, previously
unencumbered, properties and obtained first mortgage financing of $4.1 million.
Interest paid also increased due to mortgage payments on the first mortgage
secured by the Emerson Center Office Building, which commenced in June 1994,
increasing interest payments $165,000. These increases are partially offset by
a $129,000 decrease in the interest paid on the mortgage note payable secured
by the Pinecrest Apartments, due to a reduction in the variable interest rate.
Also, interest payments decreased due to the mortgage secured by the Century
Centre II Office Building, which was restructured in 1993 in accordance with
the confirmed Plan of Reorganization. See NOTE 7. "NOTES, DEBENTURES AND
INTEREST PAYABLE".
Interest paid increased from $7.7 million in 1992 to $9.3 million in 1993. Of
this increase, $1.3 million is due to interest paid on mortgages secured by
properties acquired by the Trust during 1992 and 1993 and an additional
$723,000 of the increase is attributable to interest paid on the mortgage
secured by the Century Centre II Office Building, on which the Trust made a
$1.0 million payment of accrued interest in accordance with the confirmed Plan
of Reorganization as discussed in NOTE 7. "NOTES, DEBENTURES AND INTEREST
PAYABLE." These increases were partially offset by a decrease in interest of
$314,000 due to the mortgage secured by Pinecrest Apartments, whose variable
interest rate decreased from 1992 to 1993.
Investing Activities
During 1994, the Trust acquired five apartment complexes, comprising over 1,000
units, in furtherance with management's objective of increasing the Trust's
multi-family portfolio. Three of the new properties, Bryan Hill, Forest Oaks
and Martins Landing, were acquired together when the Trust paid $300,000 in
cash to exercise its option, obtained in November 1992, to acquire the limited
partnerships which owned these properties. The properties were subject to
existing mortgage debt totaling $10.3 million, which was in default. In
November 1994, the Trust paid $1.1 million in cash to reinstate and bring
current two of the existing mortgages and anticipates reinstatement or payoff
of the third mortgage during the first half of 1995. The Trust recorded the
acquisitions in November 1994 when, at the same time, the Trust began recording
the operations of the three properties.
19
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Investing Activities (Continued)
In March 1994, the Trust purchased the Summit on the Lake Apartments located in
Fort Worth, Texas for $675,000 in cash, and the property is subject to an
existing first mortgage of $3.7 million, which matures September 2007. The
Trust purchased the unoccupied Woodlake Run Apartments, also in Fort Worth,
Texas, in December 1994 for $836,000 in cash. The Trust plans to rehabilitate
and expand the property, at an estimated cost of $5.0 million, and anticipates
it will be completed by the end of 1996. The Trust paid Tarragon acquisition
commissions of $184,000 based on the purchase price of the above properties.
The Trust has also entered into contracts totaling $9.1 million for the
purchase of four other apartment properties in Dallas, Texas; Miami, Florida;
Baton Rouge, Louisiana; and Los Angeles, California. If acquired, the Trust
expects to finance a majority of the purchase price through first mortgage
financing. Each pending acquisition is in a market in which the Trust
presently participates.
The Trust did not purchase any properties during 1993. The Trust acquired four
properties and two notes receivable during 1992, for which the Trust paid $1.2
million in cash, with the remainder financed through the assumption of
mortgages totaling $13.2 million.
The Trust made $2.5 million of capital improvements to its properties in 1994
compared to $2.8 million in 1993 and $4.6 million in 1992. Capital improvement
expenditures are anticipated to total $3.4 million in 1995, of which $2.2
million was escrowed with lenders at December 31, 1994. In addition, the Trust
received $1.3 million in cash as settlement of the Alder Creek mortgage note
receivable, of which $856,000 was recorded against the Trust's carrying value
and the remaining as interest income, as discussed above. See NOTE 2. "NOTES
AND INTEREST RECEIVABLE". The Trust also received payments of $913,000 in
satisfaction of two other mortgage notes receivable during 1994. The Trust
received $2.4 million in cash as payment in full and other principal payments
on the Trust's mortgage notes receivable during 1993 and $2.2 million as
payment in full and other principal payments on the Trust's mortgage notes
receivable during 1992.
The Trust and Continental Mortgage and Equity Trust ("CMET") are partners in
Income Special Associates ("ISA"), a joint venture partnership in which the
Trust has a 40% interest in earnings, losses and distributions. ISA in turn
owns a 100% interest in Indcon, L.P. ("Indcon"), formerly known as Adams
Properties Associates, which owns 32 industrial warehouses. In May 1994,
Indcon sold a warehouse for $4.4 million. Indcon received $2.2 million in
cash, of which the Trust's equity share was $871,000. At different times
during 1994, three current Trustees and three former Trustees of the Trust
concurrently served as Trustees of CMET. The Trust received $410,000 and
$368,000 in net cash from the sale of three foreclosed properties during 1993
and 1992, respectively.
In June 1994, the Trust sold 15,000 shares of beneficial interest of CMET for
$210,000. At December 31, 1994, the Trust owned 39,500 shares of beneficial
interest of CMET, which had a market value at that date of $593,000. Such
shares were sold during the first quarter of 1995 for $593,000, and, as a
result, the Trust recorded a gain on sale of investments of $411,200.
During 1993, Sacramento Nine ("SAC 9"), a partnership in which the Trust owns a
70% interest, sold 3 of its office buildings for $2.5 million in cash, of which
the Trust's equity share was $1.7 million.
20
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Financing Activities
During 1994, the Trust obtained first mortgage financing on seven Trust
properties totaling $26.9 million, receiving net cash proceeds of $9.4 million
after the payoff of $15.8 million in existing debt ($7.0 million of which would
have matured during 1994). The remainder of the financing proceeds were used
to fund escrows for replacements and repairs and to pay closing costs
associated with the refinancing. In addition, the Trust made other mortgage
note payments of $4.1 million during 1994, including the first mortgage
principal payoffs of $143,000 secured by the Stewart Square Shopping Center,
and $940,000 secured by the Mountain View Shopping Center, both in Las Vegas,
Nevada.
In November 1994, the Trust extended the maturity date of the $732,000 mortgage
note payable secured by the Sandstone Apartments for two years to November
1996. In addition, during 1994 the Trust extended the maturity date of the
$3.1 million mortgage note secured by Rancho Sorrento Business Park to August
2000. The note was originally scheduled to mature in August 1995.
In June 1993, the Trust obtained first mortgage financing secured by the
Bayfront Apartments in the amount of $2.1 million, of which the Trust received
net cash of $1.8 million from the financing proceeds.
In October 1992, the Trust borrowed $1.6 million from a bank secured by a $1.6
million unsecured note receivable of the Trust. The note payable was paid in
full on its maturity date in March 1993 from the collection of the note
receivable.
Principal payments on the Trust's mortgage notes payable of $7.3 million are
due in 1995, of which $2.3 million represents the principal portion of the
regular monthly mortgage payments and $5.0 million represents balloon payments
on mortgages maturities. It is the Trust's intention to either pay the
mortgages when due or seek to extend the due dates one, two or more years while
attempting to obtain long-term financing. However, while management is
confident of its ability to acquire refinancing as needed, there is no
assurance that the Trust will continue to be successful in its efforts in this
regard.
As scheduled, in January 1995, the Trust paid $236,000 in full payment of the
mortgage note payable secured by the Lakeview Mall.
During 1994, the Trust repurchased 192,000 of its shares of beneficial interest
at a cost to the Trust of $2.3 million, and during 1993, the Trust repurchased
280,038 of its shares of beneficial interest at a cost of $2.4 million. On May
19, 1994, the Trust's Board of Trustees approved an authorization for the Trust
to repurchase up to 300,000 additional shares of beneficial interest through
open market or negotiated transactions, of which 59,202 shares have been
purchased as of December 31, 1994.
[This space intentionally left blank.]
21
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations
Based on the performance of the Trust's properties, the Trust's Board of
Trustees voted in July 1993 to resume the payment of regular quarterly
distributions to shareholders. The Trust paid distributions totaling $2.2
million or $0.67 per share during 1994 and $617,000 or $0.20 per share to its
shareholders in 1993. The Trust also paid a 10% share dividend to its
shareholders in 1994 and 1993.
On a quarterly basis, the Trust's management reviews the carrying value of the
Trust's mortgages, properties held for investment and properties held for sale.
Generally accepted accounting principles require that the carrying value of an
investment held for sale cannot exceed the lower of its cost or its estimated
net realizable value. In those instances in which estimates of net realizable
value of the Trust's properties are less than the carrying value thereof at the
time of evaluation, a provision for loss is recorded by a charge against
operations. The estimate of net realizable value of the mortgage loans is
based on management's review and evaluation of the collateral properties
securing the mortgage loans. The review generally includes selective property
inspections, a review of the property's current rents compared to market rents,
a review of the property's expenses, a review of the maintenance requirements,
discussions with the manager of the property and a review of the surrounding
area.
1994 COMPARED TO 1993. For the year ended December 31, 1994, the Trust's
operating loss significantly decreased from $4.0 million in 1993 to $780,000 in
1994. The primary factors contributing to this decrease are discussed in the
following paragraphs. In addition, due to a 1993 extraordinary gain of $8.9
million, the Trust reported net income of $5.8 million for the year ended
December 31, 1993 as compared with a net loss of $254,000 for the year ended
December 31, 1994.
Net rental income (rental income less property operating expenses) increased
from $14.6 million for the year ended December 31, 1993 to $16.1 million for
the year ended December 31, 1994. Of this increase, $537,000 is attributable
to five apartment complexes acquired during 1994, one of which was foreclosed
by the Trust, and an additional $577,000 is due to the two apartment complexes
acquired through foreclosure in March 1993. Net rental income increased
$426,000 for Trust properties held in both 1993 and 1994. While occupancy
levels remained stable for these properties from 1993 to 1994, the Trust
increased rental rates $1.3 million on these Trust properties, primarily
apartment properties in the Southeast and Mountain regions of the United
States. This increase was offset by a $674,000 increase in operating expenses
due to 1994 repair and maintenance expenditures as compared to 1993, in an
effort to upgrade the properties in order to increase occupancy and rent levels
in 1995.
Interest income increased from $1.6 million for the year ended December 31,
1993 to $1.7 million for the year ended December 31, 1994. As more fully
described in NOTE 2. "NOTES AND INTEREST RECEIVABLE", interest income related
to the Alder Creek mortgage note receivable increased $354,000 primarily due to
the 1994 settlement of this note balance. This increase was partially offset
by a decrease of interest income of $208,000 related to the payoff or
foreclosure of three notes receivable in 1993 and 1994.
Interest expense increased from $9.7 million for the year ended December 31,
1993 to $10.5 million for the year ended December 31, 1994. Interest expense
increased $739,000 related to the apartment complexes acquired during 1993 and
1994. Additionally, the refinancing of six properties in 1994 and one property
in 1993 increased interest expense by $384,000. Partially offsetting these
increases was a $200,000 decrease in the interest expense on the mortgage
secured by the Pinecrest Apartments due to a reduction in the variable interest
22
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
rate during 1993. The Trust also ceased accruing interest on the mortgage note
secured by the Pepperkorn Building in April 1994 due to pending litigation,
accounting for a $151,000 decrease in interest expense.
Depreciation expense increased from $4.6 million for the year ended December
31, 1993 to $5.0 million for the year ended December 31, 1994. Of this
increase, $184,000 relates to the two properties acquired through foreclosure
in 1993 and the seven properties acquired during 1994, two of which were also
acquired through foreclosure. Depreciation expense also increased due to
improvements made to Trust properties of $2.8 million in 1993 and $2.5 million
in 1994.
Advisory fees to Basic Capital Management, Inc. ("BCM") were $468,000 in 1994
and $1.5 million in 1993. Advisory fees to Tarragon were $909,000 in 1994.
Under the BCM advisory agreement, the Trust paid a monthly fee equal to .0625%
per month of the average gross asset value of the Trust. In addition, the
Trust paid BCM an incentive fee equal to 7.5% per annum of the Trust's net
income for each year which BCM provided services. Under the Tarragon advisory
agreement, the Trust paid a base annual advisory fee of $100,000 plus an
incentive fee equal to 16% per annum of funds from operations, as defined in
the new advisory agreement dated February 15, 1994. Under each of the advisory
agreements (as required by the Trust's Declaration of Trust), all or a portion
of the annual advisory fee must be refunded by the advisor to the Trust if the
operating expenses of the Trust (as defined in the Trust's Declaration of
Trust) exceed certain limits based on the book value, net asset value and the
net income of the Trust during such fiscal year. The operating expenses of the
Trust did not exceed such limitation in 1994, 1993 or 1992.
General and administrative expenses increased from $1.8 million for the year
ended December 31, 1993 to $1.9 million for the year ended December 31, 1994.
This increase is due to an increase in cost reimbursements to Tarragon during
1994 as compared to reimbursements to BCM during 1993. Partially offsetting
this increase is a reduction in legal fees related to the Olive litigation, as
more fully discussed in NOTE 15. "COMMITMENTS AND CONTINGENCIES".
For the year ended December 31, 1994, the Trust reported gains on sales of real
estate of $385,000 related to the sale of a warehouse by Indcon in May 1994.
In addition, the Trust recognized a gain on the sale of investments of $141,000
related to the sale of the 15,000 shares of beneficial interest of CMET.
1993 COMPARED TO 1992. For the year ended December 31, 1993, the Trust's
operating loss decreased from $8.3 million in 1992 to $4.0 million in 1993, as
more fully discussed in the following paragraphs. Additionally, as the result
of an extraordinary gain of $8.9 million recorded in 1993, the Trust reported
net income of $5.8 million for the year ended December 31, 1993.
Net rental income (rental income less property operating expenses) increased
from $9.4 million in 1992 to $14.6 million in 1993. Of this increase, $1.3
million is due to four apartment complexes acquired in November 1992 and an
additional $654,000 is due to two apartment complexes obtained through
foreclosure in 1993. An additional $618,000 is due to a decrease in the
amortization of free rent at the Century Centre II Office Building and $295,000
is due to a decrease in replacements at Park Dale Gardens, the renovation of
which was completed in 1992. The remaining increase is due to increased
occupancy and rental rates at the Trust's apartment complexes, primarily in the
Southeast and Southwest regions, and overall expense control at certain of the
Trust's apartment and commercial properties.
23
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Interest income decreased from $2.5 million in 1992 to $1.6 million in 1993.
Of this decrease, $553,000 is due to loans which were placed on nonaccrual
status or loans on which the collateral securing the loan was foreclosed in
1993. In addition, a decrease of $245,000 is due to a note which was paid in
full in March 1993 and a decrease of $221,000 is due to interest payments
received in 1993 compared to 1992 on a mortgage where interest is recognized on
the cash flow basis.
The Trust's equity in income (losses) of partnerships was income of $204,000 in
1992 compared to a loss of $34,000 in 1993. This decrease in operating results
is primarily due to the sale of three properties by the SAC 9 partnership in
the second quarter of 1993.
Interest expense decreased from $10.4 million in 1992 to $9.7 million in 1993.
A decrease of $1.2 million is attributable to a reduction in the interest rate
on the first mortgage secured by the Century Centre II Office Building and the
purchase of the second mortgage at a significant discount. An additional
decrease of $163,000 is due to a reduction in the variable interest rate on the
note payable secured by Pinecrest Apartments and $414,000 is due to interest
expense on the underlying note payable associated with one of the Trust's
wraparound mortgage notes receivable, which was foreclosed and immediately sold
in 1993. These decreases were partially offset by an increase of $857,000 due
to interest expense recorded on mortgages secured by four apartment complexes
which were acquired in November 1992 and an additional $416,000 is attributable
to interest expense recorded on the underlying mortgage secured by a property
acquired through foreclosure in March 1993. See NOTE 7. "NOTES, DEBENTURES AND
INTEREST PAYABLE."
Depreciation expense increased from $4.0 million in 1992 to $4.6 million in
1993, primarily due to the acquisition of four apartment complexes in November
1992 and two additional apartment complexes acquired through foreclosure in
March 1993.
Advisory fees increased from $1.4 million in 1992 to $1.5 million in 1993, as a
result of an increase in the average monthly gross assets of the Trust,
calculated in accordance with the terms of the advisory agreement.
General and administrative expenses decreased from $2.2 million in 1992 to $1.8
million in 1993. Of this decrease, $250,000 is due to a reduction in legal
fees, an additional $123,000 is related to the Trust's March 1992 annual
meeting of shareholders and the February 1992 Rights redemption and $198,000 is
due to a decrease in professional fees related to the reduced level of property
acquisitions in 1993 compared to 1992.
In 1993, the Trust expensed $1.0 million for the issuance of a $1.0 million
convertible subordinated debenture to John A. Doyle, Executive Vice President
of the Trust, in exchange for his 10% participation in the profits of the
Consolidated Capital Properties II ("CCP II") assets, which were acquired in
November 1992. This participation was granted as consideration for Mr. Doyle's
services to the Trust in connection with the acquisition of the CCP II
portfolio. See NOTE 7. "NOTES, DEBENTURES AND INTEREST PAYABLE."
For 1993, the Trust recorded a provision for losses of $1.4 million to provide
for estimated losses on one of the Trust's properties held for sale and one of
the Trust's first lien mortgage notes. A provision for losses of $2.4 million
was recorded in 1992 to reserve against certain junior mortgage notes
receivable.
24
<PAGE> 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
For the year ended December 31, 1993, the Trust recognized gains on sales of
real estate of $851,000 related to the sale of three properties by SAC 9 and
$94,000 on the sale of the Plaza Jardin Office Building, one of the CCP II
assets. No gains on sales of real estate were recognized in 1992.
Also for the year 1993, the Trust recorded an extraordinary gain on the
forgiveness of debt of $8.9 million related to the discounted purchase of the
second lien mortgage secured by Century Centre II Office Building, which was
purchased by the Trust for $300,000 as part of a bankruptcy Plan of
Reorganization. The Trust recorded no extraordinary gain in 1992.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, the Trust may be potentially liable for removal or remediation
costs, as well as certain other potential costs relating to hazardous or toxic
substances (including governmental fines and injuries to persons and property)
where property-level managers have arranged for the removal, disposal or
treatment of hazardous or toxic substances. In addition, certain environmental
laws impose liability for release of asbestos-containing materials into the
air, and third parties may seek recovery from the Trust for personal injury
associated with such materials.
The Trust's management is not aware of any environmental liability relating to
the above matters that would have a material adverse effect on the Trust's
business, assets or results of operations.
Inflation
The effects of inflation on the Trust's operations are not quantifiable.
Revenues from property operations fluctuate proportionately with increases and
decreases in housing costs. Fluctuations in the rate of inflation also affect
the sales values of properties, mortgage interest rates and, correspondingly,
the ultimate gains to be realized by the Trust from property sales. Inflation
also has an effect on the Trust's earnings from short-term investments.
Tax Matters
For the years ended December 31, 1994, 1993 and 1992, the Trust elected, and in
the opinion of the Trust's management, qualified to be taxed as a Real Estate
Investment Trust ("REIT") as defined under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the "Code"). The Code requires a
REIT to distribute at least 95% of its REIT taxable income plus 95% of its net
income from foreclosure property, as defined in Section 857 of the Code, on an
annual basis to shareholders.
Recent Accounting Pronouncements
In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 114 - "Accounting by Creditors
for Impairment of a Loan", which amends SFAS No. 5 - "Accounting for
Contingencies" and SFAS No. 15 - "Accounting by Debtors and Creditors for
Troubled Debt Restructurings". The statement requires that notes receivable be
considered impaired when "based on current information and events, it is
probable that a creditor will be unable to collect all amounts due, both
principal and
25
<PAGE> 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Recent Accounting Pronouncements (Continued)
interest, according to the contractual terms of the loan agreement".
Impairment is to be measured either on the present value of expected future
cash flows discounted at the note's effective interest rate or, if the note is
collateral dependent, on the fair value of the collateral. In October 1994,
the FASB issued SFAS No. 118 - "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosure", which amends SFAS No. 114. SFAS No.
118 eliminates the income recognition provisions of SFAS No. 114, substituting
disclosure of the creditor's policy of income recognition on impaired notes.
SFAS No. 114 and SFAS No. 118 are both effective for fiscal years beginning
after December 15, 1994. The Trust's management has not fully evaluated the
effects of implementing these statements, but expects that they will not affect
the Trust's interest income recognition policy but may require the
classification of certain otherwise performing loans as impaired.
[This space intentionally left blank.]
26
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Public Accountants . . . . . . . . . . . . . . . . 28
Consolidated Balance Sheets -
December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . 30
Consolidated Statements of Operations -
Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . 31
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . 32
Consolidated Statements of Cash Flows -
Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . 33
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 36
Schedule III - Real Estate and Accumulated Depreciation . . . . . . . . 54
Schedule IV - Mortgage Loans on Real Estate . . . . . . . . . . . . . . . 59
</TABLE>
All other schedules are omitted because they are not required, are not
applicable or the information required is included in the Consolidated
Financial Statements or the notes thereto.
27
<PAGE> 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Trustees of National Income Realty Trust
We have audited the accompanying consolidated balance sheet of National Income
Realty Trust and Subsidiaries as of December 31, 1994, and the related
statements of operations, shareholders' equity and cash flows for the year then
ended. These financial statements and the schedules referred to below are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and schedules 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 statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements and
schedules. 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 statements referred to above present fairly, in
all material respects, the financial position of National Income Realty Trust
and subsidiaries as of December 31, 1994, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The Supplemental Schedules III, and IV are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Dallas, Texas
March 24, 1995
28
<PAGE> 29
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Trustees of National Income Realty Trust
We have audited the accompanying consolidated balance sheet of National Income
Realty Trust and Subsidiaries as of December 31, 1993 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the two years in the period ended December 31, 1993. We have also
audited the schedules listed in the accompanying index. These financial
statements and schedules are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits 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 statements and
schedules are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and schedules. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements and schedules.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated statements referred to above present fairly,
in all material respects, the consolidated financial position of National
Income Realty Trust and Subsidiaries as of December 31, 1993, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1993, in conformity with generally
accepted accounting principles.
Also, in our opinion, the schedules referred to above present fairly, in all
material respects, the information set forth therein.
BDO Seidman
Dallas, Texas
March 25, 1994
29
<PAGE> 30
NATIONAL INCOME REALTY TRUST
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1994 1993
-------------- --------------
Assets (dollars in thousands)
------
<S> <C> <C>
Real Estate
Held for investment, net of accumulated depreciation
($38,532 in 1994 and $33,535 in 1993) . . . . . . . . . . . . . $ 179,086 $ 154,748
Held for sale, net of accumulated depreciation
($895 in 1994 and $2,293 in 1993) . . . . . . . . . . . . . . . 6,850 18,496
------------ ------------
185,936 173,244
Less - allowance for estimated losses . . . . . . . . . . . . . . (700) (4,621)
------------ ------------
185,236 168,623
Notes and interest receivable
Performing . . . . . . . . . . . . . . . . . . . . . . . . . . 14,762 15,990
Nonperforming, nonaccruing . . . . . . . . . . . . . . . . . . . 1,509 3,404
------------ ------------
16,271 19,394
Less - allowance for estimated losses . . . . . . . . . . . . . . (6,274) (6,485)
------------ ------------
9,997 12,909
Investments in partnerships . . . . . . . . . . . . . . . . . . . 11,026 11,804
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . 3,484 1,060
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . 3,222 2,136
Investment in marketable equity securities of affiliate . . . . . 593 702
Other assets (including $82 in 1994 and $261 in 1993
from affiliates) . . . . . . . . . . . . . . . . . . . . . . . 3,482 2,252
------------ ------------
$ 217,040 $ 199,486
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Liabilities
Notes, debentures and interest payable (including
$1.0 million in 1994 and 1993 to affiliates) . . . . . . . . . $ 138,316 $ 114,351
Other liabilities (including $133 in 1994 and $248 in 1993
to affiliates) . . . . . . . . . . . . . . . . . . . . . . . . 5,364 6,961
------------ ------------
143,680 121,312
Commitments and contingencies . . . . . . . . . . . . . . . . . .
Shareholders' equity
Shares of beneficial interest, no par value; authorized
shares, unlimited; 3,216,267 and 3,126,116 shares
outstanding (after deducting 287,875 and 85,250
shares held in treasury) . . . . . . . . . . . . . . . . . . . 9,657 9,387
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 275,178 274,515
Accumulated distributions in excess of
accumulated earnings . . . . . . . . . . . . . . . . . . . . . (211,887) (206,180)
Unrealized gains on marketable equity securities . . . . . . . . 412 452
------------ ------------
73,360 78,174
------------ ------------
$ 217,040 $ 199,486
============ ============
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
30
<PAGE> 31
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------
1994 1993 1992
-------------- -------------- --------------
(dollars in thousands, except per share)
<S> <C> <C> <C>
Income
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,309 $ 34,825 $ 27,373
Interest (including $415 in 1992 from affiliates) . . . . . 1,721 1,566 2,470
Equity in income (losses) of partnerships . . . . . . . . . 105 (34) 204
------------ ------------ ------------
40,135 36,357 30,047
Expenses
Property operations (including $285 in 1994,
$360 in 1993 and $270 in 1992 to affiliates) . . . . . . 22,166 20,228 17,935
Interest . . . . . . . . . . . . . . . . . . . . . . . . . 10,457 9,734 10,431
Depreciation . . . . . . . . . . . . . . . . . . . . . . . 4,992 4,639 3,982
Provision for losses . . . . . . . . . . . . . . . . . . . - 1,390 2,400
Profit participation buyout . . . . . . . . . . . . . . . . - 1,000 -
Advisory fee to affiliate . . . . . . . . . . . . . . . . . 909 - -
Advisory fee to prior advisor . . . . . . . . . . . . . . . 468 1,537 1,381
General and administrative (including $999 in 1994,
$627 in 1993 and $621 in 1992 to affiliate) . . . . . . 1,923 1,842 2,232
------------ ------------ ------------
40,915 40,370 38,361
------------ ------------ ------------
(Loss) before gain on sale of real estate
and extraordinary gain . . . . . . . . . . . . . . . . . . (780) (4,013) (8,314)
Gain on sale of real estate . . . . . . . . . . . . . . . . . 385 945 -
Gain on sale of investments . . . . . . . . . . . . . . . . . 141 - -
------------ ------------ ------------
(Loss) from continuing operations . . . . . . . . . . . . . . (254) (3,068) (8,314)
Extraordinary gain . . . . . . . . . . . . . . . . . . . . . - 8,888 -
------------ ------------ ------------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $ (254) $ 5,820 $ (8,314)
============ ============ ============
Earnings per share
(Loss) from continuing operations . . . . . . . . . . . . . . $ (.08) $ (.87) $ (2.16)
Extraordinary gain . . . . . . . . . . . . . . . . . . . . . - 2.53 -
------------ ------------ ------------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $ (.08) $ 1.66 $ (2.16)
============ ============ ============
Weighted average shares of beneficial interest
used in computing earnings per share . . . . . . . . . . . 3,301,851 3,509,204 3,848,714
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
31
<PAGE> 32
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Shares of Distributions
Beneficial Interest in Excess of
----------------------------- Paid-in Accumulated
Shares Amount Capital Earnings
------------ ------------ ------------ --------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Balance, January 1, 1992 . . . . . . . . . . . . 3,382,294 $ 10,156 $ 274,839 $ (200,062)
Repurchase of shares of beneficial interest . . . (249,669) (749) (840) -
Redemption of share purchase rights . . . . . . . - - (103) -
Net (loss) . . . . . . . . . . . . . . . . . . . - - - (8,314)
---------- ---------- ---------- -----------
Balance, December 31, 1992 . . . . . . . . . . . 3,132,625 9,407 273,896 (208,376)
Repurchase of shares of beneficial interest . . . (280,038) (840) (1,568) -
Cash distributions ($0.20 per share) . . . . . . - - - (617)
Share distributions . . . . . . . . . . . . . . . 273,529 820 2,187 (3,007)
Unrealized gains on marketable
equity securities . . . . . . . . . . . . . . - - - -
Net income . . . . . . . . . . . . . . . . . . . - - - 5,820
---------- ---------- ---------- -----------
Balance, December 31, 1993 . . . . . . . . . . . 3,126,116 9,387 274,515 (206,180)
Repurchase of shares of beneficial interest . . . (192,000) (576) (1,771) -
Cash distributions ($0.67 per share) . . . . . . - - - (2,173)
Share distributions . . . . . . . . . . . . . . . 282,151 846 2,434 (3,280)
Unrealized gains on marketable
equity securities . . . . . . . . . . . . . . - - - -
Realized gains on marketable equity
securities . . . . . . . . . . . . . . . . . . - - - -
Net (loss) . . . . . . . . . . . . . . . . . . . - - - (254)
---------- ---------- ---------- -----------
Balance, December 31, 1994 . . . . . . . . . . . 3,216,267 $ 9,657 $ 275,178 $ (211,887)
========== ========== ========== ===========
<CAPTION>
Unrealized
Gains on
Marketable
Equity Shareholders'
Securities Equity
---------- ------------
(dollars in thousands)
<S> <C> <C>
Balance, January 1, 1992 . . . . . . . . . . . . $ - $ 84,933
Repurchase of shares of beneficial interest . . . - (1,589)
Redemption of share purchase rights . . . . . . . - (103)
Net (loss) . . . . . . . . . . . . . . . . . . . - (8,314)
---------- ----------
Balance, December 31, 1992 . . . . . . . . . . . - 74,927
Repurchase of shares of beneficial interest . . . - (2,408)
Cash distributions ($0.20 per share) . . . . . . - (617)
Share distributions . . . . . . . . . . . . . . . - -
Unrealized gains on marketable
equity securities . . . . . . . . . . . . . . 452 452
Net income . . . . . . . . . . . . . . . . . . . - 5,820
---------- ----------
Balance, December 31, 1993 . . . . . . . . . . . 452 78,174
Repurchase of shares of beneficial interest . . . - (2,347)
Cash distributions ($0.67 per share) . . . . . . - (2,173)
Share distributions . . . . . . . . . . . . . . . - -
Unrealized gains on marketable
equity securities . . . . . . . . . . . . . . 101 101
Realized gains on marketable equity
securities . . . . . . . . . . . . . . . . . . (141) (141)
Net (loss) . . . . . . . . . . . . . . . . . . . - (254)
---------- ----------
Balance, December 31, 1994 . . . . . . . . . . . $ 412 $ 73,360
========== ==========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
32
<PAGE> 33
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------
1994 1993 1992
------------ ------------ ------------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Rentals collected . . . . . . . . . . . . . . . . . . . $ 37,938 $ 35,105 $ 28,155
Interest collected . . . . . . . . . . . . . . . . . . . 1,602 1,515 2,093
Interest paid . . . . . . . . . . . . . . . . . . . . . (9,782) (9,253) (7,712)
Payments for property operations (including
$285 in 1994, $360 in 1993 and $270
in 1992 to affiliates) . . . . . . . . . . . . . . . . (23,012) (20,685) (18,028)
General and administrative expenses paid
(including $966 in 1994, $627 in 1993
and $621 in 1992 to affiliates) . . . . . . . . . . . (1,803) (1,412) (2,142)
Advisory fee paid to affiliate . . . . . . . . . . . . . (860) - -
Advisory fee paid to prior advisor . . . . . . . . . . . (468) (1,537) (1,454)
Distributions from partnerships'
operating cash flow . . . . . . . . . . . . . . . . . - - 1,023
Deferred borrowing costs . . . . . . . . . . . . . . . . (1,258) (185) (18)
Other . . . . . . . . . . . . . . . . . . . . . . . . . - 397 187
------------ ------------ ------------
Net cash provided by operating activities . . . . . . 2,357 3,945 2,104
------------ ------------ ------------
Cash Flows from Investing Activities
Acquisition of real estate (including $125
in 1992 to affiliates) . . . . . . . . . . . . . . . . (3,019) - (642)
Real estate improvements . . . . . . . . . . . . . . . . (2,507) (2,835) (4,556)
Proceeds from sale of real estate . . . . . . . . . . . - 410 368
Collections on notes receivable . . . . . . . . . . . . 1,841 2,431 2,156
Fundings of notes receivable . . . . . . . . . . . . . . - (329) (666)
Proceeds from sale of investments . . . . . . . . . . . 210 - -
Distributions from partnerships'
investing cash flow . . . . . . . . . . . . . . . . . 871 1,746 825
Investments in (distributions to) partnerships . . . . 727 (151) -
------------ ------------ ------------
Net cash provided by (used in)
investing activities . . . . . . . . . . . . . . . . . (1,877) 1,272 (2,515)
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
33
<PAGE> 34
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------
1994 1993 1992
------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Financing Activities
Payments on notes payable . . . . . . . . . . . . . . . (19,904) (4,782) (1,727)
Proceeds from notes payable . . . . . . . . . . . . . . 26,913 1,961 2,140
Repair escrow deposits, net . . . . . . . . . . . . . . (545) (61) (252)
Distributions to shareholders . . . . . . . . . . . . . (2,173) (617) -
Repurchase of shares of beneficial
interest . . . . . . . . . . . . . . . . . . . . . . . (2,347) (2,408) (1,589)
Redemption of share purchase rights . . . . . . . . . . - - (103)
Distribution from partnership's
financing cash flows . . . . . . . . . . . . . . . . . - - 2,800
------------- ------------- -------------
Net cash provided by (used in)
financing activities . . . . . . . . . . . . . . . . . 1,944 (5,907) 1,269
------------- ----------- -------------
Net increase (decrease) in cash and
cash equivalents . . . . . . . . . . . . . . . . . . . 2,424 (690) 858
Cash and cash equivalents, beginning of year . . . . . . . 1,060 1,750 892
------------- ------------- -------------
Cash and cash equivalents, end of year . . . . . . . . . . $ 3,484 $ 1,060 $ 1,750
============= ============= =============
Reconciliation of net income (loss) to net cash
provided by operating activities
Net income (loss) . . . . . . . . . . . . . . . . . . $ (254) $ 5,820 $ (8,314)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Gain on sale of real estate . . . . . . . . . . . . . (385) (945) -
Gain on sale of investments . . . . . . . . . . . . . (141) - -
Extraordinary gain . . . . . . . . . . . . . . . . . . - (8,888) -
Depreciation and amortization . . . . . . . . . . . . 4,992 4,660 3,975
Provision for losses . . . . . . . . . . . . . . . . . - 1,390 2,400
Profit participation buyout . . . . . . . . . . . . . - 1,000 -
Equity in losses of partnerships . . . . . . . . . . . (105) 34 -
(Increase) in interest receivable . . . . . . . . . . (119) (25) (333)
(Increase) decrease in other assets . . . . . . . . . (791) 659 1,169
Increase (decrease) in other liabilities . . . . . . . (1,385) 89 21
Increase in interest payable . . . . . . . . . . . . . 545 151 2,367
Cash distributions received in excess of equity
in current period earnings of partnerships . . . . - - 819
------------- ------------- -------------
Net cash provided by operating activities . $ 2,357 $ 3,945 $ 2,104
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
34
<PAGE> 35
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------
1994 1993 1992
-------------- -------------- --------------
(dollars in thousands)
<S> <C> <C> <C>
Schedule of noncash investing activities
Carrying value of real estate acquired through
foreclosure (in satisfaction of notes receivable
with a carrying value of $727 in 1994, $5,891
in 1993 and $91 in 1992) . . . . . . . . . . . . . . . . . . $ 3,392 $ 10,118 $ 91
Note receivable from sale of real estate . . . . . . . . . . . - - 550
Notes payable from acquisition of real
estate and notes receivable . . . . . . . . . . . . . . . . 16,436 6,651 13,485
Foreclosure of wraparound mortgage note and
concurrent sale, with buyer assuming
underlying note payable . . . . . . . . . . . . . . . . . . - 3,410 -
Permanent write-down of real estate
held for investment . . . . . . . . . . . . . . . . . . . . - 1,952 5,185
Issuance of convertible subordinated
debentures (in exchange for profits
participation) . . . . . . . . . . . . . . . . . . . . . . . - 1,000 -
Forgiveness of notes payable (through abandonment
of real estate in 1992 and deed-in-lieu of
foreclosure of real estate with a carrying value
of $1,529 in 1992) . . . . . . . . . . . . . . . . . . . . . - - 1,529
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
35
<PAGE> 36
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements of National Income Realty
Trust and Subsidiaries (the "Trust") have been prepared in conformity with
generally accepted accounting principles, the most significant of which are
described in NOTE 1. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES". These,
along with the remainder of the Notes to Consolidated Financial Statements, are
an integral part of the Consolidated Financial Statements. The data presented
in the Notes to Consolidated Financial Statements are as of December 31 of each
year and for the year then ended, unless otherwise indicated. Dollar amounts
in tables are in thousands, except per share amounts.
Certain balances for 1992 and 1993 have been reclassified to conform to the
1994 presentation.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Trust business. National Income Realty Trust ("NIRT"), is a
California business trust organized on October 31, 1978. The Trust was formed
to invest in real estate, including commercial and apartment properties and, to
a lesser extent, to finance real estate through mortgage notes. Since 1991,
the Trust has sought only to make equity investments and accordingly, its
mortgage note receivable portfolio represents a diminishing portion of the
Trust's assets.
Basis of consolidation. The Consolidated Financial Statements include the
accounts of NIRT and partnerships and subsidiaries which it controls. All
intercompany transactions and balances have been eliminated.
Foreclosed real estate. Foreclosed real estate is initially recorded at new
cost, defined as the lower of the Trust's note receivable carrying value or
fair value of the collateral property minus estimated costs of sale.
Properties are depreciated in accordance with the Trust's established
depreciation policies. See "Real estate and depreciation" below.
At least annually, all properties held for sale are reviewed by the Trust's
management and a determination is made if the held for sale classification
remains appropriate. The following are among the factors considered in
determining that a change in classification to held for investment is
appropriate: (i) the property has been held for at least one year; (ii) Trust
management has no intent to dispose of the property within the next twelve
months; (iii) the property is a "qualifying asset" as defined in the Internal
Revenue Code of 1986, as amended; (iv) property improvements have been funded;
and (v) the Trust's financial resources are such that the property can be held
long-term. The subsequent classification of property previously held for sale
to held for investment does not result in a restatement of previously reported
revenues, expenses or net income (loss).
Real estate and depreciation. Real estate is carried at the lower of cost or
estimated net realizable value. The Trust capitalizes property improvements
and major rehabilitation projects which increase the value of the respective
property and have a useful life greater than one year, except for individual
expenditures less than $10,000 which are not part of a planned renovation
project. Prepaid leasing commissions are included in the carrying value of the
Trust's real estate and amortized on the straight-line method over the related
lease term. Such amortization is included in property operating expenses.
Depreciation is provided for by the straight-line method over the estimated
useful lives of the assets, which range from 5 to 40 years.
36
<PAGE> 37
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interest recognition on notes receivable. It is the Trust's policy to cease
recognizing interest income on notes receivable that have been delinquent for
60 days or more. In addition, accrued but unpaid interest income is only
recognized to the extent that the net realizable value of the underlying
collateral exceeds the carrying value of the receivable.
Allowance for estimated losses. Valuation allowances are provided for
estimated losses on properties and mortgage notes receivable to the extent that
the investment in the properties or notes exceeds the Trust's estimate of net
realizable value of the property or collateral securing each note, or fair
value of the collateral if foreclosure is probable. In estimating net
realizable value, consideration is given to the current estimated property or
collateral value adjusted for costs to complete or improve, hold or dispose.
The provision for losses is based on estimates, and actual losses may vary from
current estimates. Such estimates are reviewed periodically and any additional
provision determined to be necessary is charged against earnings in the period
in which it can be reasonably estimated.
The Trust's management also reviews the Trust's properties held for investment
for impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. This review generally
consists of a review of the properties' cash flow, current and projected market
conditions, as well as any changes in general and local economic conditions. If
an impairment loss exists based on the results of this review, a loss is
recognized by a charge against current earnings and a corresponding reduction
in the respective asset's carrying value. The amount of this impairment loss is
equal to the amount by which the carrying value of the property exceeds the
estimated fair value.
Present value premiums/discounts. The Trust provides for present value
premiums and discounts on notes receivable or payable that have interest rates
that differ substantially from prevailing market rates and amortizes such
premiums and discounts by the effective interest method over the lives of the
related notes. The factors considered in determining a market rate for
receivables include the borrower's credit standing, nature of the collateral
and payment terms of the note.
Cash equivalents. The Trust considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash equivalents.
Restricted cash. Restricted cash represents the Trust's escrow accounts, held
by the lenders on certain of the Trust's mortgage notes payable, for taxes,
insurance and property repairs.
Other Assets. Other assets consist primarily of tenant accounts receivable and
deferred borrowing costs. Deferred borrowing costs are amortized over the
terms of the related loan agreements and included in interest expense.
Revenue recognition on the sale of real estate. Sales of real estate are
recognized when and to the extent permitted by Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real Estate" ("SFAS No.
66"). Until the requirements of SFAS No. 66 for full profit recognition have
been met, transactions are accounted for using either the deposit, installment,
cost recovery or the financing method, whichever is appropriate.
37
<PAGE> 38
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in noncontrolled partnerships. The Trust uses the equity method to
account for investments in partnerships which the Trust does not control.
Under the equity method, the Trust's initial investment is increased by the
Trust's proportionate share of the partnership's operating income and
additional advances and decreased by the Trust's proportionate share of the
partnership's operating losses and distributions received.
Marketable equity securities. Marketable equity securities are considered to
be available-for-sale and are carried at fair value, defined as year end
closing market value. Net unrealized holding gains and losses are reported as
a separate component of shareholders' equity.
Earnings per share. Income (loss) per share of beneficial interest (the
"Shares" and each a "Share") is computed based upon the weighted average number
of Shares outstanding during each year.
Fair value of financial instruments. The carrying value of the Trust's cash
and cash equivalents approximate fair value. The Trust has used the following
assumptions in estimating the fair value of its notes receivable and notes
payable. For performing notes receivable, the fair value was estimated by
discounting future cash flows using current interest rates for similar loans.
For nonperforming notes receivable, the estimated fair value of the Trust's
interest in the collateral property was used. For notes payable, the fair
value was estimated using current rates for mortgages with similar terms and
maturities. The estimated fair values presented do not purport to present
amounts to be ultimately realized by the Trust. The amounts ultimately
realized may vary significantly from the estimated fair values presented.
Concentration of Credit Risk. Financial instruments which potentially subject
the Trust to credit risk consist primarily of cash and cash equivalents,
accounts receivable and notes receivable. The Trust restricts investment of
cash and cash equivalents to federally insured accounts or to high credit
quality financial institutions. Credit risk on accounts receivable is
generally diversified due to the large number of tenants in the Trust's
properties. The Trust's notes receivable are generally secured by real estate,
but the Trust could be subject to a loss on its notes receivable if the
carrying amount of the note receivable exceeds the fair value of the collateral
property . See NOTE 2. "NOTES AND INTEREST RECEIVABLE".
38
<PAGE> 39
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. NOTES AND INTEREST RECEIVABLE
Notes and interest receivable consisted of the following:
<TABLE>
<CAPTION>
1994 1993
----------------------------------- ---------------------------------
Estimated Net Estimated Net
Fair Book Fair Book
Value Value Value Value
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Notes receivable
Performing . . . . . . . . . . $ 14,614 $ 14,838 $ 16,985 $ 16,046
Nonperforming, nonaccruing . . 1,475 1,475 3,137 3,370
-------------- -------------- ------------- --------------
$ 16,089 16,313 $ 20,122 19,416
============== =============
Deferred gain . . . . . . . . . . . (153) (153)
Interest receivable . . . . . . . . 111 131
-------------- --------------
16,271 19,394
Allowance for estimated losses . . (6,274) (6,485)
-------------- --------------
$ 9,997 $ 12,909
============== ==============
</TABLE>
The Trust does not recognize interest income on nonperforming notes receivable.
Notes receivable are considered to be nonperforming when they become 60 days or
more delinquent. For the years 1994, 1993 and 1992, unrecognized interest
income on nonperforming notes totaled $470,000, $654,000 and $867,000,
respectively. Interest income on nonperforming notes receivable was recorded
to the extent of cash received of $555,000, $215,000 and $252,000 during 1994,
1993 and 1992, respectively.
Notes receivable at December 31, 1994 mature from 1995 through 2016, with
interest rates ranging from 5.7% to 18% and an effective weighted average
interest rate on performing notes of 6.9%. Notes receivable are generally
nonrecourse and are generally collateralized by real estate. Scheduled
principal maturities of $10.2 million are due in 1995, including $1.2 million
related to two mortgage notes receivable classified as nonperforming at
December 31, 1994, as more fully discussed below.
In September 1994, the Trust agreed to a discounted settlement of a previously
nonperforming first mortgage loan with a carrying value of $856,000 and a legal
balance of $1.5 million at such date. The Trust received payments totaling
$1.3 million in cash and released all of the collateral securing the mortgage
loan.
In December 1994, the Trust reached a settlement regarding three nonperforming
wraparound mortgage notes with an aggregate carrying value of $1.3 million,
which represented the Trust's net equity in these notes. All three loans are
secured by shopping centers, net leased to a major national tenant. The Trust
recorded no losses on this settlement in excess of previously established
reserves, as more fully discussed below.
The Trust accepted a deed in lieu of foreclosure on the $430,000 mortgage loan,
secured by a K-Mart Shopping Center in Indianapolis, Indiana and subject to an
existing first lien mortgage of $1.8 million. This mortgage note accrues
interest at 9.75% per annum, calls for monthly principal and interest payments
of $21,800 and matures September 2006.
39
<PAGE> 40
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. NOTES AND INTEREST RECEIVABLE (Continued)
Also, the Trust sold the wraparound mortgage note secured by the K-Mart
Shopping Center in Racine, Wisconsin for $100,000 and, in accordance with the
terms of the sale, received $50,000 in cash in January 1995. The Trust
accepted an unsecured promissory note which bears interest at 8% per annum and
matures May 1996 for the remaining $50,000 balance.
Additionally, the Trust restructured the wraparound mortgage secured by the
K-Mart Shopping Center in Fairbault, Minnesota. At December 31, 1994, the
carrying value of this note was $276,000 and represented the Trust's net equity
in this note. Under the terms of the restructured agreement, interest will
accrue at the rate of 7.58% per annum and the Trust is to receive monthly
principal and interest payments equal to the lesser of (i) $20,140 or (ii) the
amount by which, on an annual basis, the shopping center rents less certain
fees and expenses exceeds the amounts due under the first mortgage loan. The
Trust expects the payments due under this note will be approximately $2,000 per
year. Any deferred amounts shall accrue to the principal balance of the note
and be payable upon maturity in January 2003, at which time the first mortgage
will have been fully amortized.
At December 31, 1994, the Trust continues to classify the $1.0 million first
mortgage loan, secured by the Casa Bonita Apartments in Paris, Texas, as
nonperforming. The Trust obtained a judgment against the three individual
guarantors of this note and continues to negotiate with the borrowers on a
discounted payout of the judgment. Regardless of these negotiations, the Trust
does not anticipate incurring any additional loss, as the note has been
previously fully reserved.
The Trust also continues to classify the $256,000 junior mortgage note secured
by a retirement center in Tucson, Arizona as nonperforming at December 31,
1994. The borrower on this note, Eldercare Housing Foundation, and the Trust
are negotiating a settlement of the outstanding note balance. The Trust does
not anticipate incurring a loss on this note in excess of previously
established reserves. Ted P. Stokely, a former Trustee of the Trust, was
employed as a real estate consultant for Eldercare from April 1992 to December
1993.
The Trust also received payment in full on two other mortgage loans during 1994
and three mortgage loans during 1993 totaling $913,000 and $2.4 million,
respectively. The Trust foreclosed on one additional mortgage loan with a
carrying value of $297,000 in 1994 and three mortgage loans with principal
balances totaling $6.2 million in 1993. These transactions resulted in no loss
to the Trust in 1994 or 1993 as all losses had been previously provided. See
NOTE 4. "REAL ESTATE AND DEPRECIATION."
In May 1993, the Trust foreclosed on the Plaza Jardin mortgage receivable.
Immediately following the foreclosure, the Trust sold the property for $200,000
in cash subject to the $3.3 million underlying mortgage. The Trust recognized
a $94,000 gain on the sale of the property.
40
<PAGE> 41
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3. ALLOWANCE FOR ESTIMATED LOSSES
Activity in the allowance for estimated losses was as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Balance January 1, . . . . . . . . . . . . . . $ 11,106 $ 12,240 $ 15,936
Provision for losses . . . . . . . . . . . . . - 1,390 2,400
Reclassed to other assets . . . . . . . . . . . (179) - -
Amounts charged off . . . . . . . . . . . . . . (3,953) (2,524) (6,096)
---------- ---------- ----------
Balance December 31, . . . . . . . . . . . . . $ 6,974 $ 11,106 $ 12,240
========== ========== ==========
</TABLE>
NOTE 4. REAL ESTATE AND DEPRECIATION
In December 1994, the Trust's management performed a review of the Trust's real
estate portfolio and reclassified the following apartment properties from
properties held for sale to properties held for investment: Lake Point,
Huntington Green and Mariposa Manor.
In 1994, the Trust paid $300,000 in cash to exercise its option, which was
obtained in November 1992, to acquire, through a transfer of general partner
interests and stock of limited partners, certain limited partnerships which own
three residential properties. Bryan Hill Apartments (232 units) in Bethany,
Oklahoma; Forest Oaks Apartments (154 units) in Lexington, Kentucky; and
Martins Landing Apartments (236 units) in Lakeland, Florida were subject to
existing first mortgage debt totaling $10.3 million, which was then in default.
The Trust submitted proposals to the Department of Housing and Urban
Development ("HUD") to reinstate the existing mortgages through contributions
from the Trust and the application of certain escrow balances, as well as,
requesting the transfer of physical assets. In November 1994, the Trust was
granted approval for the transfer of physical assets pending curing the
mortgage delinquencies, which was completed by the Trust on two of the three
properties with a $1.1 million cash payment. The Trust anticipates making
additional payments to cure or payoff the other mortgage loan default. In
conjunction with the additional contributions, the Trust recorded the
acquisition of the three properties in November 1994. See NOTE 7. "NOTES,
DEBENTURES AND INTEREST PAYABLE" for a more detailed discussion of the related
mortgage notes.
In March 1994, the Trust purchased the Summit on the Lake Apartments (198
units) located in Fort Worth, Texas for $675,000 in cash and the property is
subject to an existing first mortgage of $3.7 million. This nonrecourse
mortgage has an effective interest rate of 8.6% per annum, requires monthly
principal and interest payments of approximately $31,000 and matures September
2007. In connection with the acquisition, the Trust paid $176,000 of real
estate brokerage and acquisition commissions, based upon the $4.4 million
purchase price of the property, to Tarragon Realty Advisors, Inc. ("Tarragon"),
the Trust's advisor. William S. Friedman, the President and a Trustee of the
Trust, serves as Director and Chief Executive Officer of Tarragon. Tarragon is
owned by Lucy N. Friedman, Mr. Friedman's wife, and John A. Doyle, who serves
as Director, President and Chief Operating Officer of Tarragon, and Executive
Vice President of the Trust. The Friedman and Doyle families own approximately
32% of the outstanding shares of the Trust.
41
<PAGE> 42
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE AND DEPRECIATION (Continued)
In September 1994, the Trust recorded the acquisition of the Mariposa Manor
Apartments, obtained through a deed in lieu of foreclosure on a $297,000
nonperforming second lien mortgage note receivable. The property, a 41 unit
apartment complex in Los Angeles, California, had an estimated fair value of
$1.1 million as of the date of acquisition and is subject to an existing
$788,000 first lien mortgage, which was modified and assumed on a nonrecourse
basis by the Trust. The modified note initially accrues interest at 6% per
annum and, thereafter, is periodically adjusted based on a defined variable
rate plus 3.25% per annum, with the highest note interest rate not to exceed
15.5% per annum. Initial monthly principal and interest payments of $5,000 are
called for under the provisions of this note which matures April 1, 2002. The
Trust has included this property in "Real Estate - Held for investment" in the
Consolidated Financial Statements.
In December 1994, the Trust purchased the Woodlake Run Apartments, a 185-unit,
vacant complex in Fort Worth, Texas for $836,000 in cash. The Trust intends to
rehabilitate and expand the property at an approximate cost of $5.0 million,
with completion estimated by 1996. In connection with the acquisition, the
Trust paid Tarragon an $8,400 acquisition commission based on the purchase
price of the property.
Also in December 1994, the Trust obtained the K-Mart Shopping Center in
Indianapolis, Indiana through a deed in lieu of foreclosure of a $430,000
nonperforming note receivable, as more fully discussed in NOTE 2. "NOTES AND
INTEREST RECEIVABLE". The shopping center, net leased to K-Mart, had an
estimated fair value of $2.3 million as of the date of acquisition and is
encumbered by an existing $1.8 million first lien mortgage. The nonrecourse
mortgage note accrues interest at 9.75%, calls for monthly principal and
interest payments of $21,800 and matures in September 2006. The Trust included
this property in "Real Estate - Held for sale" in the Consolidated Financial
Statements.
In January 1993, the Trust ceased operations at the Lake Highland Apartments in
Dallas, Texas due to a change in zoning of the property. The Trust was not
able to operate the property as an apartment complex in the future and,
therefore, has demolished the apartment buildings. The $3.9 million carrying
value of the property was charged against previously established reserves.
Negotiations are ongoing to sell the land and, based on the land value under
current zoning, the Trust does not anticipate incurring a loss.
In March 1993, the Trust recorded the insubstance foreclosure of Lake Point
Apartments in Memphis, Tennessee and Huntington Green Apartments in West Town,
Pennsylvania. Lake Point Apartments, a 540-unit complex, had an estimated fair
value of $8.3 million at the date of foreclosure. In connection with this
insubstance foreclosure, the Trust recorded the $6.7 million mortgage payable
secured by the property. Huntington Green Apartments, an 80-unit complex, had
an estimated fair value (minus estimated costs of sale) of $1.8 million at the
date of foreclosure. These foreclosures resulted in no losses to the Trust in
excess of previously established reserves.
[This space intentionally left blank.]
42
<PAGE> 43
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE AND DEPRECIATION (Continued)
In 1993, the State of Wisconsin commenced eminent domain proceedings to acquire
the Pepperkorn Building, located in Manitowoc, Wisconsin, for highway
development. The State of Wisconsin's initial offer was $175,000, which is
being appealed by the Trust. There is no assurance that the Trust's appeal
will be successful or of the amount, if any, of additional compensation that it
may receive. In addition, the Trust ceased making the required monthly
payments on the $1.0 million note payable issued in connection with the
original 1991 acquisition of the Pepperkorn Building. The matter is presently
in litigation and a tentative trial date has been scheduled for June 1995.
Based on the information presently available, the Trust does not anticipate
incurring any losses in excess of previously established reserves.
NOTE 5. INVESTMENT IN EQUITY METHOD PARTNERSHIPS
The Trust's investment in equity method partnerships consisted of the
following:
<TABLE>
<CAPTION>
1994 1993
--------- ----------
<S> <C> <C>
Sacramento Nine ("SAC 9") . . . . . . . . . . . . . . . . . . . . $ 2,179 $ 2,296
Indcon, L.P. ("Indcon") . . . . . . . . . . . . . . . . . . . . . 8,670 9,460
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 48
--------- ---------
$ 11,026 $ 11,804
========= =========
</TABLE>
The Trust, in partnership with Continental Mortgage and Equity Trust ("CMET"),
owns SAC 9, which currently owns two office buildings in the vicinity of
Sacramento, California. The Trust has a 70% interest in the partnership's
earnings, losses and distributions. The SAC 9 partnership agreement requires
unanimous consent of both the Trust and CMET for any material changes in the
operations of the partnership's properties, including sales, refinancings and
changes in property management. The Trust, as a noncontrolling partner,
accounts for its investment in the partnership under the equity method. At
different times during 1994, three current Trustees and three former Trustees
of the Trust concurrently served as trustees of CMET.
In April 1993, SAC 9 sold one of its office buildings for $1.2 million. SAC 9
received $123,000 in cash, of which the Trust's equity share was $86,000, after
the payoff of an existing first mortgage with a principal balance of $685,000.
SAC 9 provided $356,000 of purchase money financing. The note receivable bears
interest at a rate of 9% per annum, requires monthly payments of principal and
interest and matures in June 1998. SAC 9 recognized a gain of $59,000 on the
sale, of which the Trust's equity share was $41,000.
In June 1993, SAC 9 sold two other of its office buildings. One was sold for
$1.3 million in cash, of which the Trust's equity share was $910,000. SAC 9
recognized a gain of $437,000 on the sale, of which the Trust's equity share
was $306,000. The other office building was sold for $2.0 million. SAC 9
received $1.1 million in cash, of which the Trust's equity share was $750,000,
and provided $887,000 of purchase money financing. One note receivable with a
principal balance of $410,000 bore interest at a variable interest rate,
required monthly interest only payments and was paid in full in September 1994.
A second note receivable with a principal balance of $477,000 bore interest at
10% per annum, and all principal and accrued interest were paid in October
1993. SAC 9 recognized a gain of $720,000 on the sale, of which the Trust's
equity share was $504,000.
43
<PAGE> 44
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. INVESTMENT IN EQUITY METHOD PARTNERSHIPS (Continued)
The Trust and CMET are also partners in Income Special Associates ("ISA"), a
joint venture partnership in which the Trust has a 40% interest in earnings,
losses and distributions. ISA in turn owns a 100% interest in Indcon, L.P.
("Indcon"), formerly known as Adams Properties Associates, which owned 32
industrial warehouses at December 31, 1994. The Trust, as a noncontrolling
partner, accounts for its investment in Indcon using the equity method.
In May 1994, Indcon sold a warehouse located in Dallas, Texas for $4.4 million
in cash. Indcon received net cash of $2.2 million, of which the Trust's equity
share was $871,000, after the payoff of the existing first mortgage. Indcon
recognized a gain on the sale of $962,000, of which the Trust's equity share
was $385,000. In connection with the sale, a brokerage commission of $26,100
was paid to Tarragon.
In November 1992, the Trust acquired all of the general and limited partnership
interests in CCP II, whose assets included a 23% limited partnership interest
in English Village Partners, L.P. ("English Village"). English Village owns a
300 unit apartment complex located in Memphis, Tennessee. On July 1, 1993, CCP
II made an additional capital contribution to English Village of $464,000 to
increase its limited partnership ownership interest to 49% and to acquire a 1%
general partnership interest in the partnership. The Trust continues to
account for its investment in English Village under the equity method.
Set forth below are summarized financial data for all partnerships the Trust
accounts for using the equity method (unaudited):
<TABLE>
<CAPTION>
1994 1993
----------- ----------
<S> <C> <C>
Real estate, net of accumulated depreciation
($20,222 in 1994 and $18,909 in 1993) . . . . . . . . . . . . . . $ 50,152 $ 54,254
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,046 6,574
Notes payables . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,199) (33,069)
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . (435) (1,309)
---------- ----------
Partners' capital . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,564 $ 26,450
========== ==========
</TABLE>
<TABLE>
<CAPTION>
1994 1993 1992
---------- --------- ---------
<S> <C> <C> <C>
Rentals . . . . . . . . . . . . . . . . . . . . . $ 8,917 $ 8,556 $ 7,567
Depreciation . . . . . . . . . . . . . . . . . . . (2,541) (2,119) (1,697)
Property operations . . . . . . . . . . . . . . . (3,585) (3,520) (2,937)
Interest . . . . . . . . . . . . . . . . . . . . . (3,059) (3,448) (2,973)
---------- --------- ---------
(Loss) before gain (loss) on sale of real
estate . . . . . . . . . . . . . . . . . . . . (268) (531) (40)
Gain (loss) on sale of real estate . . . . . . . . 962 1,216 (100)
---------- --------- ---------
Net income (loss) . . . . . . . . . . . . . . . . $ 694 $ 685 $ (140)
========== ========== ========
</TABLE>
[This space intentionally left blank.]
44
<PAGE> 45
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6. INVESTMENTS IN MARKETABLE SECURITIES
At December 31, 1993, the Trust owned 54,500 shares of beneficial interest of
CMET, purchased through open market transactions, at a total cost to the Trust
of $250,000. In June 1994, the Trust sold 15,000 shares of beneficial interest
of CMET for $210,000 and, as a result, recorded a $141,000 gain on sale of
investments in the second quarter of 1994. At December 31, 1994, the market
value of the remaining 39,500 shares held by the Trust was $593,000. These
shares represented 1.35% of the outstanding shares of beneficial interest of
CMET at such time.
NOTE 7. NOTES, DEBENTURES AND INTEREST PAYABLE
Notes, debentures and interest payable consisted of the following:
<TABLE>
<CAPTION>
1994 1993
--------------------------- ---------------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Notes, debentures payable . . . . . . . . $ 131,326 $ 136,247 $ 104,943 $ 112,347
========== ==========
Interest payable . . . . . . . . . . . . 2,107 1,985
Unamortized premium/
(discounts) . . . . . . . . . . . . . (38) 19
---------- ----------
$ 138,316 $ 114,351
========== ==========
</TABLE>
Notes payable at December 31, 1994 bear interest at rates ranging from 4.2% to
19.7% and mature from 1995 through 2022. These notes payable are nonrecourse
and are collateralized by deeds of trust on real estate with a carrying value
of $176.4 million.
During 1994, the Trust obtained first mortgage financing on seven Trust
properties totaling $26.9 million, receiving net cash proceeds of $9.4 million
after the payoff of $15.8 million in existing debt ($7.0 million of which
matured in 1994). The remainder of the financing proceeds were used to fund
escrows for replacements and repairs and to pay closing costs associated with
the refinancings. In June 1993, the Trust obtained first mortgage financing
secured by the Bayfront Apartments in the amount of $2.1 million, of which the
Trust received net cash of $1.8 million from the financing proceeds. In
connection with these financings, the Trust paid commissions of $103,000 to BCM
and $83,000 to Tarragon, based upon the new $26.9 million mortgage loans.
[This space intentionally left blank.]
45
<PAGE> 46
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. NOTES, DEBENTURES AND INTEREST PAYABLE (Continued)
These transactions are illustrated in the following table:
<TABLE>
<CAPTION>
NEW LOAN OLD LOAN
------------------------------------ ---------------------------------------
Refinancing Refinancing Mortgage Interest Debt Mortgage Interest Debt
Property Date Proceeds Balance Rate Service (e) Balance Rate Service (e)
- -------- ---------- ---------- ----------- ------ ----------- ---------- ------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994
----
Bay West Jan-94 $ 1,009 $ 5,100 8.89% $ 42,416 $ 3,843 10.50% $ 44,004
Carlyle Towers Mar-94 2,263 4,500 (a) 9.25% 33,750 2,182 8.00% 30,830
Woodcreek CO Mar-94 1,153 3,000 (b) 9.25% 22,500 1,738 9.50% 17,928
Lake Point Sep-94 (309) 7,165 9.36% 61,900 6,576 10.76% 63,502
Palm Court Nov-94 1,335 3,000 9.67% 26,562 1,417 9.50% 17,254
Prado Bay Nov-94 2,837 3,000 (c) 9.00% 22,500 - - -
Plaza Hills Dec-94 1,108 1,145 (d) 10.50% 12,789 - - -
---------- ----------- ------ --------- ---------- ------ ----------
$ 9,396 $ 26,910 9.28% $ 222,417 $ 15,756 10.06% $ 173,518
========== =========== ====== ========= ========== ====== ==========
1993
----
Bayfront Jun-93 $ 1,800 $ 2,100 8.99% $ 16,773 $ - - $ -
========== ========== ====== ========= ========== ====== ==========
</TABLE>
(a) Interest accrues at the London Interbank Offering Rate ("LIBOR") plus
3.25% per annum. Future payments will equal the greater of accrued
interest or $33,750 per month.
(b) Interest accrues at LIBOR plus 3.25% per annum. Future payments will
equal the greater of accrued interest or $22,500 per month.
(c) Interest accrues at LIBOR plus 3% per annum, with LIBOR capped at 9% per
annum. Future payments will be interest only until July 1995 and
thereafter accrued interest plus principal reduction of $6,250.
(d) Interest accrues at the Bank's Base Rate, as defined in the deed of
trust, plus 2% per annum. Future payments will be accrued interest plus
principal reduction of $2,770 until February 1996 and thereafter accrued
interest plus principal reduction of $3,075.
(e) Debt service amounts represent average monthly debt service.
Scheduled principal payments on notes payable are due as follows:
<TABLE>
<S> <C>
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,250
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,508
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,048
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,747
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,757
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,937
-----------
$ 136,247
===========
</TABLE>
In November 1994, the $732,000 first mortgage secured by the Sandstone
Apartments, which matured in 1994, was extended to November 1996. In December
1994, the Trust modified the $3.1 million mortgage note secured by the Rancho
Sorrento Business Park, which was scheduled to mature in August 1995. The
modification extended the maturity by five years to August 2000 and reduced the
interest rate from 10% to 9% per annum.
Also during 1994, the Trust paid in full the mortgages totaling $1.1 million
secured by the Stewart Square Shopping Center and the Mountain View Shopping
Center, both in Las Vegas, Nevada.
46
<PAGE> 47
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. NOTES, DEBENTURES AND INTEREST PAYABLE (Continued)
In October 1991, after determining that further investment in the Century
Centre II Office Building could not be justified without a substantial
modification of the mortgage debt, the property was placed in bankruptcy. A
plan of reorganization (the "Plan") was filed with the bankruptcy court in
March 1993 and the bankruptcy court confirmed the Plan in November 1993. The
Plan reduced the interest rate on the $21 million first mortgage to 1.5% above
LIBOR, which currently results in an interest rate of 7.6% per annum. The
reduced interest rate was retroactively applied as of October 15, 1991. The
Plan also extended the note's maturity from November 1993 to November 1995,
with three consecutive one-year extension options.
In conjunction with confirmation of the Plan, in December 1993, the Trust paid
the lender $1.0 million in cash for accrued and unpaid interest, 1993 property
taxes and the associated closing costs. The Trust also pledged one of its
properties held for sale, Stewart Square Shopping Center, as additional
collateral on the first mortgage. In accordance with the terms of the Plan,
the Trust has maintained a $200,000 escrow balance, held with the lender,
during 1994. Additionally pursuant to the Plan, in 1993, the Trust acquired
the $7.5 million second mortgage plus all accrued but unpaid interest of $1.7
million, for $300,000 cash. As a result, the Trust recognized an extraordinary
gain of $8.9 million in connection with the debt modification and discounted
debt purchase.
In 1992, the Trust acquired all of the general and limited partnership interest
in Consolidated Capital Properties II ("CCP II") for $2.6 million. CCP II's
assets included cash of $1.6 million, four apartment complexes, a partnership
interest, a note receivable participation and a note receivable. In December
1993, the Trust issued Mr. John A. Doyle, Executive Vice President of the
Trust, a $1.0 million convertible subordinated debenture, in exchange for the
participation interest held, as consideration for his services to the Trust in
connection with the acquisition of the CCP II portfolio. This debenture bears
interest at a rate of 6% per annum, matures in December 1999 and is convertible
into 84,615 Shares.
NOTE 8. DISTRIBUTIONS
The Trust's Board of Trustees voted at their July 1993 meeting to resume the
payment of regular quarterly distributions. The first quarterly distribution
of $.10 per Share and a 10% share dividend was paid on September 1, 1993 to
shareholders of record on August 16, 1993. On December 21, 1993, the Trust
paid a distribution of $.10 per Share to shareholders of record on December 6,
1993.
On August 17, 1994, the Trust's Board of Trustees approved the payment of a 10%
share dividend, which was paid September 21, 1994 to shareholders of record on
September 1, 1994. As a result of the share dividend, an additional 282,151
shares were issued. The Trust also paid cash distributions during 1994
totaling $2.2 million or $0.67 per share.
No distributions were declared or paid in 1992.
The Trust reported to the Internal Revenue Service that 100% of the
distribution paid in 1993 was taxable to Trust shareholders as ordinary income
and 100% of the 1994 distribution represented a return of capital.
47
<PAGE> 48
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. ADVISORY AGREEMENT
Although the Trust's Board of Trustees is directly responsible for managing the
affairs of the Trust and for setting the policies which guide it, the
day-to-day operations of the Trust are performed by a contractual advisory firm
under the supervision of the Trust's Board of Trustees. The duties of the
advisor include, among other things, locating, investigating, evaluating and
recommending real estate and mortgage note investment and sales opportunities,
as well as financing and refinancing sources for the Trust. The advisor also
serves as a consultant in connection with the business plan and investment
policy decisions made by the Trust's Board of Trustees.
On February 10, 1994, the Trust's Board of Trustees selected Tarragon to
replace BCM as the Trust's advisor. Since April 1, 1994, Tarragon has provided
advisory services to the Trust under an advisory agreement. Mr. Friedman,
President, Chief Executive Officer and Trustee of the Trust, serves as a
Director and Chief Executive Officer of Tarragon. Tarragon is owned by Lucy N.
Friedman, Mr. Friedman's wife, and Mr. Doyle, who serves as a Director,
President and Chief Operating Officer of Tarragon and Executive Vice President
of the Trust. The Friedman and Doyle families together own approximately 32%
of the outstanding shares of the Trust.
Basic Capital Management ("BCM") served as the Trust's advisor from March 1989
to March 31, 1994. Mr. Friedman was President of BCM until May 1, 1993. BCM
is beneficially owned by a trust for the benefit of the children of Mr. Gene
Phillips, who served as a Trustee of the Trust until December 31, 1992. BCM
resigned as advisor to the Trust effective March 31, 1994.
The provisions of the Trust's Advisory Agreement with Tarragon are
substantially the same as those of the BCM advisory agreement except for the
annual base advisory fee and the elimination of the net income fee. The
Tarragon advisory agreement calls for an annual base advisory fee of $100,000
plus an incentive advisory fee equal to 16% of the Trust's adjusted funds from
operations before deduction of the advisory fee. Adjusted funds from
operations is defined as net income (loss) before gains or losses from the
sales of properties and debt restructurings, plus depreciation and
amortization, plus any loss due to the write-down or sale of any real property
or mortgage loan acquired prior to January 1, 1989. Tarragon receives
commissions of 1% based upon (i) acquisition cost of real estate, (ii) mortgage
loans acquired, and (iii) mortgage loans obtained or refinanced. Tarragon is
also entitled to receive an incentive fee equal to 10% of the amount, if any,
by which sales consideration exceeds a defined amount.
Also under the advisory agreement, Tarragon is to receive reimbursement of
certain expenses incurred by it in the performance of the advisory services to
the Trust. Under the advisory agreement (as required by the Trust's
Declaration of Trust), all or a portion of the annual advisory fee must be
refunded by the advisor to the Trust if the Operating Expenses of the Trust (as
defined in the Trust's Declaration of Trust) exceeds certain limits specified
in the Declaration of Trust based on the book value, net asset value and net
income of the Trust during such fiscal year.
For additional information on compensation paid to Tarragon, see ITEM 10.
"TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT - The Advisor".
48
<PAGE> 49
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. PROPERTY MANAGEMENT
Since April 1, 1994, Tarragon has provided property management services to the
Trust for a fee of 4.5% of the monthly gross rents collected on apartment
properties and of 1.5% to 4% of the monthly gross rents collected on commercial
properties. Tarragon subcontracts with other entities for the provision of
much of the property-level management services for the Trust.
From February 1, 1990 through March 31, 1994, affiliates of BCM provided, under
contracts approved by the Trust's Board of Trustees, property management
services to the Trust for a fee of 5% or less of the monthly gross rents
collected on the properties under management. Carmel, Ltd. provided such
property management services. In many cases, Carmel, Ltd. subcontracted with
other entities for the provision of some of the property-level management
services to the Trust at various rates (generally 4%). The general partner of
Carmel, Ltd. is BCM. The limited partners of Carmel, Ltd. are (i) Syntek West,
Inc. ("SWI"), of which Mr. Phillips is the sole shareholder, (ii) Mr. Phillips,
and (iii) a trust for the benefit of the children of Mr. Phillips. Carmel,
Ltd. subcontracted the property-level management and leasing of several of the
Trust's commercial properties to Carmel Realty, Inc. which is owned by SWI.
NOTE 11. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.
Fees and cost reimbursements to Tarragon and BCM are as follows:
<TABLE>
<CAPTION>
Tarragon BCM
----------- ---------------------------------------------
1994 1994 1993 1992
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Fees
Advisory $ 909 $ 468 $ 1,537 $ 1,381
Real estate and mortgage
brokerage commissions 267 103 21 298
Property management and
leasing commissions* 285 112 360 270
----------- ----------- ----------- ----------
$ 1,461 $ 683 1,918 $ 1,949
=========== =========== =========== ==========
Cost Reimbursements $ 999 $ 140 $ 627 $ 621
=========== =========== =========== ==========
_______________
</TABLE>
* Net of property management fees paid to subcontractors.
NOTE 12. INCOME TAXES
For the years 1994, 1993 and 1992, the Trust has elected and qualified to be
treated as a Real Estate Investment Trust ("REIT"), as defined in Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), and
as such, will not be taxed for federal income tax purposes on that portion of
its taxable income which is distributed to shareholders, provided that at least
95% of its REIT taxable income, plus 95% of its taxable income from foreclosure
property as defined in Section 857 of the Code, is distributed. See NOTE 8.
"DISTRIBUTIONS."
49
<PAGE> 50
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. INCOME TAXES (Continued)
The Trust had a net loss for federal income tax purposes in 1994, 1993 and
1992; therefore, the Trust recorded no provision for income taxes.
The Trust's tax basis in its net assets differs from the amount at which its
net assets are reported for financial statement purposes, principally due to
the accounting for gains and losses on property sales, the difference in the
allowance for estimated losses, depreciation on owned properties and
investments in joint venture partnerships. At December 31, 1994, the Trust's
tax basis in its net assets exceeded its basis for financial statement purposes
by $55.3 million. As a result, aggregate future income for income tax purposes
will be less than such amount for financial statement purposes, and the Trust
will be able to maintain its REIT status without distributing 95% of its
financial statement income. Additionally, at December 31, 1994, the Trust had
a tax net operating loss carryforward of $42 million expiring through 2007.
As a result of the Trust's election to be treated as a REIT for income tax
purposes and of its intention to distribute its taxable income, no deferred tax
asset, liability or valuation allowance was recorded.
NOTE 13. RENTALS UNDER OPERATING LEASES
The Trust's rental operations include the leasing of office buildings and
shopping centers. The leases thereon expire at various dates through 2005.
The following is a schedule of minimum future rentals on non-cancelable
operating leases as of December 31, 1994:
<TABLE>
<S> <C>
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,019
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,657
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,343
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,425
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,081
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,848
--------
$ 33,373
========
</TABLE>
NOTE 14. EXTRAORDINARY GAIN
In 1993, the Trust acquired the $7.5 million second mortgage secured by its
Century Center II Office Building for $300,000. In addition, the first lien
holder retroactively reduced the interest rate on the debt owed by the Trust.
The Trust recognized an extraordinary gain of $8.9 million in connection with
the debt modification and discounted debt purchase. See NOTE 7. "NOTES,
DEBENTURES AND INTEREST PAYABLE."
NOTE 15. COMMITMENTS AND CONTINGENCIES
Olive Litigation. In February 1990, the Trust, together with CMET, Income
Opportunity Realty Trust ("IORT") and Transcontinental Realty Investors, Inc.
("TCI"), three real estate entities with, at the time, the same officers,
directors or trustees and advisor as the Trust, entered into a settlement of a
class and derivative action entitled Olive et al. v. National Income Realty
Trust et al., relating to the operation and management of each of the entities.
On April 23, 1990, the court granted final approval of the terms of the
original settlement.
50
<PAGE> 51
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. COMMITMENTS AND CONTINGENCIES (Continued)
On May 4, 1994, the parties entered into a Modification of Stipulation of
Settlement dated April 27, 1994 (the "Modification"), which settled subsequent
claims of breaches of the settlement which were asserted by the plaintiffs and
modified certain provisions of the April 1990 settlement. The Modification was
preliminarily approved by the court on July 1, 1994 and final court approval
was entered on December 12, 1994. The effective date of the Modification is
January 11, 1995.
The Modification, among other things, provided for the addition of at least
three new unaffiliated members to the Trust's Board of Trustees and set forth
new requirements for the approval of any transactions with affiliates over the
next five years. In accordance with the procedures set forth in the
Modification, Irving E. Cohen, Lance Liebman, Sally Hernandez-Pinero and L. G.
Schafran have been appointed to the Board. In addition, BCM, Gene E.
Phillips and William S. Friedman have agreed to pay a total of $1.2 million to
the Trust, CMET, IORT and TCI, of which the Trust's share is $150,000.
Under the Modification, the Trust, CMET, IORT, TCI and their shareholders
released the defendants from any claims relating to the plaintiffs'
allegations. The Trust, CMET, IORT and TCI also agreed to waive any demand
requirement for the plaintiffs to pursue claims on behalf of each of them
against certain persons or entities. The Modification also requires that any
shares of the Trust held by Messrs. Phillips, Friedman or their affiliates
shall be (i) voted in favor of the reelection of all current Board members that
stand for reelection during the two calendar years following the effective date
of the Modification and (ii) voted in favor of all new Board members appointed
pursuant to the terms of the Modification that stand for reelection during the
three calendar years following the effective date of the Modification.
The Modification also terminated a number of the provisions of the Stipulation
of Settlement, including the requirement that the Trust, CMET, IORT and TCI
maintain a Related Party Transaction Committee and a Litigation Committee of
their respective Boards. The court will retain jurisdiction to enforce the
Modification.
Other litigation. The Trust is also involved in various lawsuits arising in
the ordinary course of business. The Trust's management is of the opinion that
the outcome of these lawsuits would have no material impact on the Trust's
financial condition.
NOTE 16. SUBSEQUENT EVENTS
In January 1995, the Trust agreed to a modification of the terms of a $1.5
million first mortgage note receivable, secured by 4.5 acres of land (subject
to a ground lease) in Dallas, Texas. The Trust released part of the land
securing the loan, approximately a 15,000 square foot parcel, and in exchange
the ground lease was terminated. In addition, the interest rate was increased
to 18% per annum and the maturity date was shortened 20 months to January 1996.
Also in January 1995, the Trust obtained first mortgage financing on both the
Cross Creek Apartments in Lexington, Kentucky and the Woodcreek Apartments in
Jacksonville, Florida. The Trust received aggregate net refinancing proceeds
of $1.8 million after the payoff of $3.6 million in existing debt. The
remaining refinancing proceeds were used to fund escrows for replacements and
repairs and to pay closing costs associated with the refinancings. The Trust
paid Tarragon mortgage brokerage and equity refinancing fees of $58,000 related
to these refinancings, as more fully described below.
51
<PAGE> 52
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16. SUBSEQUENT EVENTS (Continued)
Cross Creek Apartments secures a $2.0 million nonrecourse mortgage loan which
bears interest at 9.8% per annum, calls for monthly principal and interest
payments of $17,850 and matures in February 2000. Woodcreek Apartments secures
a $3.8 million nonrecourse mortgage loan that bears interest at 9.7% per annum,
calls for monthly principal and interest payments of $33,810 and matures in
February 2005.
In February 1995, the Trust purchased the Park Side Apartments, a 39-unit
apartment complex in Los Angeles, California for $376,000 in cash. In
connection with acquisition, the Trust paid Tarragon a real estate commission
of $3,750.
In January and February 1995, the Trust sold the remaining 39,500 shares of
beneficial interest of CMET for $593,000 and recorded a gain on sale of
investments of $411,200.
NOTE 17. QUARTERLY RESULTS OF OPERATIONS
The following is a tabulation of the quarterly results of operations for the
years ended December 31, 1994 and 1993 (unaudited):
<TABLE>
<CAPTION>
First Second Third Fourth
1994 Quarter Quarter Quarter Quarter
- ------------------------------------------------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Income . . . . . . . . . . . . . . . . . . . $ 9,587 $ 9,843 $ 10,231 $ 10,474
Expenses . . . . . . . . . . . . . . . . . . . (9,821) (10,297) (10,413) (10,384)
---------- ---------- ---------- ----------
Income (loss) before gain on sale of
real estate . . . . . . . . . . . . . . . . . . (234) (454) (182) 90
Gain on sale of real estate . . . . . . . . . . . - 385 - -
Gain on sale of investment . . . . . . . . . . . - 141 - -
---------- ---------- ---------- ----------
Net income (loss) . . . . . . . . . . . . . . . . $ (234) $ 72 $ (182) $ 90
========== ========== ========== ==========
Earnings Per Share
Income (loss) before gain on sale of
real estate . . . . . . . . . . . . . . . . $ (.07) $ (.14) $ (.06) $ .03
Gain on sale of real estate . . . . . . . . . . . - .12 - -
Gain on sale of investment . . . . . . . . . . . - .04 - -
---------- ---------- ---------- ----------
Net income (loss) . . . . . . . . . . . . . . . . $ (.07) $ .02 $ (.06) $ .03
========== ========== ========== ==========
Weighted average shares of beneficial
interest used in computing earnings
per share . . . . . . . . . . . . . . . . . . . 3,376,103 3,310,002 3,277,642 3,245,358
========== ========== ========== ==========
</TABLE>
52
<PAGE> 53
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 17. QUARTERLY RESULTS OF OPERATIONS (Continued)
<TABLE>
<CAPTION>
First Second Third Fourth
1993 Quarter Quarter Quarter Quarter
- ------------------------------------------------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Income . . . . . . . . . . . . . . . . . . . . . $ 8,530 $ 8,998 $ 9,286 $ 9,543
Expenses . . . . . . . . . . . . . . . . . . . . (9,447) (9,496) (9,718) (11,709)
---------- ---------- ---------- ----------
(Loss) before gain on sale of real
estate and extraordinary gain . . . . . . . . . (917) (498) (432) (2,166)
Gain on sale of real estate . . . . . . . . . . . - 945 - -
Extraordinary gain . . . . . . . . . . . . . . . - - - 8,888
---------- ---------- ---------- ----------
Net income (loss) . . . . . . . . . . . . . . . . $ (917) $ 447 $ (432) $ 6,722
========== ========== ========== ==========
Earnings Per Share
(Loss) before gain on sale of
real estate and extraordinary
gain . . . . . . . . . . . . . . . . . . . . . . $ (.25) $ (.14) $ (.12) $ (.63)
Gain on sale of real estate . . . . . . . . . . . - .27 - -
Extraordinary gain . . . . . . . . . . . . . . . - - - 2.60
---------- ---------- ---------- ----------
Net income (loss) . . . . . . . . . . . . . . . . $ (.25) $ .13 $ (.12) $ 1.97
========== ========== ========== ==========
Weighted average shares of beneficial
interest used in computing earnings
per share . . . . . . . . . . . . . . . . . . . 3,632,498 3,512,362 3,486,562 3,423,022
========== ========== ========== ==========
</TABLE>
Fourth quarter results include a charge against earnings of $1.4 million to
provide for estimated losses on one of the Trust's properties held for sale and
one of the Trust's first lien notes receivable. In addition, $1.0 million was
charged to operations in the fourth quarter in connection with the issuance of
a $1.0 million convertible subordinated debenture in exchange for the buyout of
the CCP II profit participation. See NOTE 7. "NOTES, DEBENTURES AND INTEREST
PAYABLE."
[This space intentionally left blank.]
53
<PAGE> 54
SCHEDULE III
NATIONAL INCOME REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1994
<TABLE>
<CAPTION>
COST (3)
CAPITALIZED
SUBSEQUENT GROSS AMOUNTS OF WHICH CARRIED
INITIAL COST TO TRUST TO AT END OF YEAR
--------------------- ACQUISITION ------------------------------
BUILDINGS AND ------------ BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL (1)
- ----------- ------------ ---- ------------- ------------ ---- ------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
PROPERTIES HELD FOR INVESTMENT
Apartments
- ----------
Bayfront . . . . . . . . . $ 2,066 $ 457 $ 2,052 $ 414 $ 457 $ 2,466 $ 2,923
Houston, TX
Bay West . . . . . . . . . 5,047 891 3,566 160 891 3,726 4,617
Bradenton, FL
Bryan Hill . . . . . . . . 2,216 447 1,803 - 447 1,803 2,250
Bethany, OK
Carlyle Towers . . . . . . 4,369 559 5,939 202 559 6,141 6,700
Southfield, MI
Cornell . . . . . . . . . . 1,541 822 1,183 17 822 1,200 2,022
Los Angeles, CA
Creekwood . . . . . . . . . 2,223 532 2,127 (72) 532 2,055 2,587
Altamonte, FL
Crosscreek . . . . . . . . 964 221 883 13 221 896 1,117
Lexington, KY
Diamond Loch . . . . . . . 1,883 380 2,791 368 380 3,159 3,539
North Richland Hills, TX
Dunhill/Devonshire . . . . - 429 1,718 (696) 173 1,278 1,451
Denver, CO
Fenway Hall . . . . . . . . 1,349 461 1,460 - 461 1,460 1,921
Los Angeles, CA
Flannery House . . . . . . 582 897 2,608 570 897 3,178 4,075
Baton Rouge, LA
Forest Oaks . . . . . . . . 3,329 691 2,685 - 691 2,685 3,376
Lexington, KY
Heather Hills . . . . . . . 16,087 643 14,562 4,657 765 19,097 19,862
Temple Hills, MD
Huntington Green . . . . . - 446 1,336 112 446 1,448 1,894
West Town, PA
Kirklevington . . . . . . . 2,483 490 1,961 147 490 2,108 2,598
Lexington, KY
Lake Point . . . . . . . . 7,152 2,075 6,225 66 2,075 6,291 8,366
Memphis, TN
Mariposa . . . . . . . . . 785 225 901 7 225 908 1,133
Los Angeles, CA
Martins Landing . . . . . . 4,571 1,038 4,201 - 1,038 4,201 5,239
Lakeland, FL
Palm Court . . . . . . . . 3,000 599 2,393 124 599 2,517 3,116
North Miami, FL
<CAPTION>
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
ACCUMULATED DATE OF DATE OF OPERATIONS
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
- ----------- ------------ ------------ -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
PROPERTIES HELD FOR INVESTMENT
Apartments
- ----------
Bayfront . . . . . . . . . $ 676 1971 Feb-87 5 - 40 years
Houston, TX
Bay West . . . . . . . . . 242 1974 Nov-92 5 - 40 years
Bradenton, FL
Bryan Hill . . . . . . . . 3 1970 Nov-94 5 - 40 years
Bethany, OK
Carlyle Towers . . . . . . 1,125 1970 Nov-88 5 - 40 years
Southfield, MI
Cornell . . . . . . . . . . 151 1929 Apr-90 5 - 40 years
Los Angeles, CA
Creekwood . . . . . . . . . 111 1973 Nov-92 5 - 40 years
Altamonte, FL
Crosscreek . . . . . . . . 53 1966 Nov-92 5 - 40 years
Lexington, KY
Diamond Loch . . . . . . . 789 1978 Oct-85 5 - 40 years
North Richland Hills, TX
Dunhill/Devonshire . . . . 315 1969 Mar-89 5 - 40 years
Denver, CO
Fenway Hall . . . . . . . . 174 1929 Apr-90 5 - 40 years
Los Angeles, CA
Flannery House . . . . . . 949 1922 Mar-84 5 - 40 years
Baton Rouge, LA
Forest Oaks . . . . . . . . 18 1971 Nov-94 5 - 40 years
Lexington, KY
Heather Hills . . . . . . . 6,167 1976 May-86 5 - 40 years
Temple Hills, MD
Huntington Green . . . . . 77 1963 Mar-93 5 - 40 years
West Town, PA
Kirklevington . . . . . . . 125 1975 Nov-92 5 - 40 years
Lexington, KY
Lake Point . . . . . . . . 283 1974 May-93 5 - 40 years
Memphis, TN
Mariposa . . . . . . . . . 6 1924 Sep-94 5 - 40 years
Los Angeles, CA
Martins Landing . . . . . . 8 1973 Nov-94 5 - 40 years
Lakeland, FL
Palm Court . . . . . . . . 352 1971 Oct-89 5 - 40 years
North Miami, FL
</TABLE>
54
<PAGE> 55
SCHEDULE III
(Continued)
NATIONAL INCOME REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1994
<TABLE>
<CAPTION>
COST (3)
CAPITALIZED
SUBSEQUENT GROSS AMOUNTS OF WHICH CARRIED
INITIAL COST TO TRUST TO AT END OF YEAR
----------------------- ACQUISITION ------------------------------------
BUILDINGS AND ------------ BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL(1)
- ----------- ------------ ---- -------------- ------------ ---- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
PROPERTIES HELD FOR INVESTMENT
Apartments (Continued)
- -----------
Park Dale . . . . . . 1,312 354 1,416 68 531 1,307 1,838
Dallas, TX
Pheasant Pointe . . . 5,887 810 8,073 159 789 8,253 9,042
Sacramento, CA
Pinecrest . . . . . . 8,530 3,612 8,427 5,155 3,612 13,582 17,194
Ft. Lauderdale, FL
Plaza Hills . . . . . 1,145 253 1,195 261 253 1,456 1,709
Kansas City, MO
Prado Bay . . . . . . 3,000 614 3,482 611 614 4,093 4,707
North Bay Village, FL
Sandstone . . . . . . 732 619 1,444 906 619 2,350 2,969
Denver, CO
Spring Pines . . . . - 371 1,486 35 371 1,521 1,892
Houston, TX
Summit on the Lake . 3,672 895 3,582 3 895 3,585 4,480
Ft. Worth, TX
Woodcreek . . . . . . 2,962 913 3,193 (718) 690 2,698 3,388
Denver, CO
Woodcreek . . . . . . 2,575 472 4,976 754 451 5,751 6,202
Jacksonville, FL
Woodlake Run . . . . - 752 92 - 752 92 844
Ft. Worth, TX
Office Buildings
- ----------------
Century Center II . . 21,000 7,098 29,869 (5,616) 5,321 26,030 31,351
San Mateo, CA
Emerson Center . . . 4,030 131 8,781 (1,087) 1,048 6,777 7,825
Atlanta, GA
NW O'Hare . . . . . . 1,352 1,990 7,965 (2,492) 1,104 6,359 7,463
Des Plaines, IL
Rancho Sorrento . . . 3,131 1,251 12,901 (1,805) 968 11,379 12,347
San Diego, CA
</TABLE>
<TABLE>
<CAPTION>
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
ACCUMULATED DATE OF DATE OF OPERATIONS
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
- ----------- ------------ ------------ -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
PROPERTIES HELD FOR INVESTMENT
Apartments (Continued)
- -----------
Park Dale . . . . . . 122 1975 Dec-91 5 - 40 years
Dallas, TX
Pheasant Pointe . . . 2,047 1985 Sep-86 5 - 40 years
Sacramento, CA
Pinecrest . . . . . . 1,355 1965 Jul-90 5 - 40 years
Ft. Lauderdale, FL
Plaza Hills . . . . . 206 1967 Oct-91 5 - 40 years
Kansas City, MO
Prado Bay . . . . . . 467 1966 Oct-90 5 - 40 years
North Bay Village, FL
Sandstone . . . . . . 265 1969 Mar-90 5 - 40 years
Denver, CO
Spring Pines . . . . 323 1964 Feb-88 5 - 40 years
Houston, TX
Summit on the Lake . 76 1986 Mar-94 5 - 40 years
Ft. Worth, TX
Woodcreek . . . . . . 884 1980 Aug-86 5 - 40 years
Denver, CO
Woodcreek . . . . . . 1,732 1975 Nov-86 5 - 40 years
Jacksonville, FL
Woodlake Run . . . . - 1970 Dec-94 5 - 40 years
Ft. Worth, TX
Office Buildings
- ----------------
Century Center II . . 7,467 1986 Nov-86 5 - 40 years
San Mateo, CA
Emerson Center . . . 3,116 1974 Jul-86 5 - 40 years
Atlanta, GA
NW O'Hare . . . . . . 2,695 1972 Apr-86 5 - 40 years
Des Plaines, IL
Rancho Sorrento . . . 3,682 1980 May-86 5 - 40 years
San Diego, CA
</TABLE>
55
<PAGE> 56
SCHEDULE III
(Continued)
NATIONAL INCOME REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1994
<TABLE>
<CAPTION>
COST (3)
CAPITALIZED
SUBSEQUENT GROSS AMOUNTS OF WHICH CARRIED
INITIAL COST TO TRUST TO AT END OF YEAR
----------------------- ACQUISITION ------------------------------------
BUILDINGS AND ------------ BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL(1)
- ----------- ------------ ---- -------------- ------------ ---- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
PROPERTIES HELD FOR INVESTMENT
Shopping Centers
- ----------------
Emerson Center . . . 1,245 - 363 - - 363 363
Atlanta, GA
K-Mart . . . . . . . 1,323 571 1,333 - 571 1,333 1,904
Charlotte, NC
K-Mart . . . . . . . 1,145 802 1,871 - 802 1,871 2,673
Kansas City, MO
K-Mart Plaza . . . . 1,515 689 1,608 - 689 1,608 2,297
Temple Terrace, FL
K-Mart . . . . . . . 1,195 497 1,159 - 497 1,159 1,656
Thomasville, GA
Lakeview Centre . . . 236 513 2,050 347 341 2,569 2,910
Manitowoc, WI
Midland Plaza . . . . 297 321 748 - 321 748 1,069
Midland, MI
Midway Mills . . . . 2,988 588 2,365 1,308 1,227 3,034 4,261
Carrollton, TX
Northside Center . . 2,103 1,591 3,712 57 1,591 3,769 5,360
Gainsville, FL
Southgate . . . . . . 1,385 578 2,430 80 602 2,486 3,088
Waco, TX ------- ------ ------- ------ ------ ------- -------
132,407 38,588 174,915 4,115 36,828 180,790 217,618
------- ------ ------- ------ ------ ------- -------
</TABLE>
<TABLE>
<CAPTION>
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
ACCUMULATED DATE OF DATE OF OPERATIONS
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
- ----------- ------------ ------------ -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
PROPERTIES HELD FOR INVESTMENT
Shopping Centers
- ----------------
Emerson Center . . . 78 1974 Jul-86 5 - 40 years
Atlanta, GA
K-Mart . . . . . . . 102 1977 Dec-91 5 - 40 years
Charlotte, NC
K-Mart . . . . . . . 143 1977 Dec-91 5 - 40 years
Kansas City, MO
K-Mart Plaza . . . . 122 1979 Dec-91 5 - 40 years
Temple Terrace, FL
K-Mart . . . . . . . 88 1974 Dec-91 5 - 40 years
Thomasville, GA
Lakeview Centre . . . 767 1968 Apr-87 5 - 40 years
Manitowoc, WI
Midland Plaza . . . . 57 1976 Dec-91 5 - 40 years
Midland, MI
Midway Mills . . . . 570 1986 Oct-91 5 - 40 years
Carrollton, TX
Northside Center . . 304 1977 Dec-91 5 - 40 years
Gainsville, FL
Southgate . . . . . . 240 1959 Jul-91 5 - 40 years
Waco, TX ------
38,532
------
</TABLE>
[This space intentionally left blank.]
56
<PAGE> 57
SCHEDULE III
(Continued)
NATIONAL INCOME REALTY TRUST
REAL ESTATE ACCUMULATED DEPRECIATION
DECEMBER 31, 1994
<TABLE>
<CAPTION>
COST (3)
CAPITALIZED
SUBSEQUENT GROSS AMOUNTS OF WHICH CARRIED
INITIAL COST TO TRUST TO AT END OF YEAR
----------------------- ACQUISITION ------------------------------------
BUILDINGS AND ------------ BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL(1)
- ----------- ------------ ---- -------------- ------------ ---- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
PROPERTIES HELD FOR SALE
Shopping Centers
- ----------------
KMart . . . . . . . . 1,820 451 1,808 - 451 1,808 2,259
Indianapolis, IN
Mountain View . . . . - 118 578 227 140 783 923
Las Vegas, NV
Stewart Square . . . - 294 1,460 612 294 2,072 2,366
Las Vegas, NV
Times Square . . . . - 125 499 13 125 512 637
Lubbock, TX
Other
- -----
Pepperkorn . . . . . 1,020 300 928 - 300 928 1,228
Manitowoc, WI
Snyder Residence . . - - 39 - - 39 39
Gilbert, AZ
Orangeburg, SC . . . - 123 - - 123 - 123
Lake Highlands (2) . - 737 3,782 (4,349) 170 - 170
Dallas, TX -------- ------- -------- ------- ------- -------- --------
2,840 2,148 9,094 (3,497) 1,603 6,142 7,745
-------- ------- -------- ------- ------- -------- --------
$135,247 $40,736 $184,009 $ 618 $38,431 $186,932 225,363
======== ======= ======== ======= ======= ========
Allowance for
estimated losses . (700)
--------
$224,663
========
<CAPTION>
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
ACCUMULATED DATE OF DATE OF OPERATIONS
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
- ----------- ------------ ------------ -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
PROPERTIES HELD FOR SALE
Shopping Centers
- ----------------
KMart . . . . . . . . 5 1974 Dec-94 5 - 40 years
Indianapolis, IN
Mountain View . . . . 187 1971 Oct-87 5 - 40 years
Las Vegas, NV
Stewart Square . . . 549 1971 Oct-87 5 - 40 years
Las Vegas, NV
Times Square . . . . 77 1985 Jul-89 5 - 40 years
Lubbock, TX
Other
- -----
Pepperkorn . . . . . 77 Jul-91 5 - 40 years
Manitowoc, WI
Snyder Residence . . -
Gilbert, AZ
Orangeburg, SC . . . - N/A Jun-89 N/A
Lake Highlands (2) . - 1965 Jun-86 5 - 40 years
Dallas, TX
-------
895
-------
$39,427
=======
</TABLE>
___________________________
(1) The aggregate cost for federal income tax purposes is $217,348.
(2) Basis charged against reserve previously provided.
(3) Represents property improvements and write-down of properties to
estimated net realizable value.
57
<PAGE> 58
SCHEDULE III
(Continued)
NATIONAL INCOME REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
(dollars in thousands)
<S> <C> <C> <C>
Reconciliation of Real Estate
Balance at January 1, . . . . . . . . . . . . . . . . . $ 209,072 $ 199,127 $ 191,562
Additions
Acquisitions and improvements . . . . . . . . . 18,221 2,835 15,390
Foreclosures . . . . . . . . . . . . . . . . . . 3,384 10,118 91
Deductions
Sales . . . . . . . . . . . . . . . . . . . . . - (1,056) (1,083)
Deeds given in lieu of foreclosure . . . . . . . - - (1,648)
Write-downs due to permanent impairment . . . . (5,314) (1,952) (5,185)
---------- ---------- ----------
Balance at December 31, . . . . . . . . . . . . . . . . $ 225,363 $ 209,072 $ 199,127
========== ========== ==========
Reconciliation of Accumulated Depreciation
Balance at January 1, . . . . . . . . . . . . . . . . . $ 35,828 $ 31,244 $ 27,582
Additions
Depreciation . . . . . . . . . . . . . . . . . . 4,992 4,639 3,982
Deductions
Sale of real estate . . . . . . . . . . . . . . - (55) (320)
Write-off due to permanent impairment . . . . . (1,393) - -
---------- ---------- ----------
Balance at December 31, . . . . . . . . . . . . . . . . $ 39,427 $ 35,828 $ 31,244
========== ========== ==========
</TABLE>
58
<PAGE> 59
SCHEDULE IV
NATIONAL INCOME REALTY TRUST
MORTGAGE LOANS ON REAL ESTATE
December 31, 1994
<TABLE>
<CAPTION>
Principal Amount of
Carrying Loans Subject to
Interest Maturity Prior Face Amount Amounts Delinquent Principal
Description Rate Date Periodic Payment Terms Liens of Mortgage of Mortgage(1) or Interest
- ------------------------- -------- -------- ---------------------- ----- ----------- -------------- --------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
FIRST MORTGAGE LOANS
Jackson Square 5.70% Dec-95 Monthly payments of $ - $ 8,000 $ 8,568 $ -
- -------------- interest only of the
$8.0 million construction lesser of $39,583 or
loan secured by a net cash flow.
shopping center in
Jackson, MS.
Greentree Village 10.00% May-96 Monthly payments of - 3,625 3,575 -
- ----------------- interest only at 10%
$3.6 million mortgage to through April 1991,
loan secured by a Prime + 2% 10.5% through April 1994;
shopping center 2% in excess of the
in Flagstaff, AZ. Citibank, N.A. reference
rate not in excess of
13.5% through April 1996.
Sherwood Trust 15.00% Sep-97 Monthly payments of - 1,400 1,539 -
- -------------- interest only at 12%.
$1.4 million mortgage
secured by 4.5 acres
of land in Dallas, TX.
Casa Bonita 18.00% Jun-88 Monthly payments of - 1,000 943 943
- ----------- interest only.
$1 million mortgage
secured by apartments
in Paris, TX.
Pioneer Office Bldg. 7.50% Apr-97 Monthly payments of - 550 550 -
- -------------------- interest at 7.5% through
$.6 million mortgage to April 1994; 8.5% through
secured by office 9.50% April 1995; 9.5%
building in Milwaukee, thereafter to maturity.
WI.
Other Residential 7.50% Nov-07 Monthly payments of - 220 206 -
- ----------------- to to principal and interest.
3 mortgage loans 11.00% Nov-16
secured by single-
family homes located
in AZ.
</TABLE>
59
<PAGE> 60
SCHEDULE IV
(Continued)
NATIONAL INCOME REALTY TRUST
MORTGAGE LOANS ON REAL ESTATE
December 31, 1994
<TABLE>
<CAPTION>
Principal Amount of
Carrying Loans Subject to
Interest Maturity Prior Face Amount Amounts Delinquent Principal
Description Rate Date Periodic Payment Terms Liens of Mortgage of Mortgage(1) or Interest
- ------------------------- -------- -------- ------------------------------ ------- ----------- -------------- --------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
WRAPAROUND MORTGAGE LOANS
K-Mart, Fairbault 7.58% Jan-03 Monthly payments of principal $ 1,045 $ 2,600 $ 276 $ 276
- ----------------- and interest.
$2.6 million mortgage
loan secured by shopping
center in Fairbault, MN.
JUNIOR MORTGAGE LOANS
Villa Maria 14.00% Nov-95 Monthly interest only payments 2,000 230 256 256
- ----------- of $2,683.
$230,000 mortgage loan
secured by retirement
center in Tuscon, AZ.
PARTICIPATION INTEREST
Creekwood 10.25% Nov-95 Monthly principal and interest $ 1,822 $ 1,000 $ 400 $ -
- --------- payments of $4,525.
$1 million participation
in note secured by
apartments in Altamonte
Springs, FL.
------- ------- ------- ------
$ 4,867 $18,625 16,313 $1,475
======= ======= ======
Interest receivable 111
Deferred gains (153)
-------
16,271
Allowance for estimated losses (6,274)
-------
$ 9,997
=======
</TABLE>
_______________________
(1) The aggregate cost for federal income tax purposes is $16,420.
60
<PAGE> 61
SCHEDULE IV
(Continued)
NATIONAL INCOME REALTY TRUST
MORTGAGE LOANS ON REAL ESTATE
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Balance at January 1, . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,416 $ 30,765 $ 28,800
Additions
Fundings and acquisitions of notes receivable . . . . . . . . . - 329 3,844
Notes from sales of foreclosed properties . . . . . . . . . . . - - 550
Amortization of discount . . . . . . . . . . . . . . . . . . . . - 7 31
Accrued interest shortfall and participation . . . . . . . . . . 50 47 66
Deductions
Collections of principal . . . . . . . . . . . . . . . . . . . . (1,841) (2,431) (2,156)
Foreclosures . . . . . . . . . . . . . . . . . . . . . . . . . . (727) (9,301) (289)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (585)(1) - (81)
---------- ---------- ----------
Balance at December 31, . . . . . . . . . . . . . . . . . . . . . . . . $ 16,313 $ 19,416 $ 30,765
========== ========== ==========
</TABLE>
(1) Note receivable carrying value in excess of sales price. Remaining amount
reclassed to other assets.
61
<PAGE> 62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
As previously reported on Form 8-K filed May 26, 1994, and amended by Form
8-K/A on June 3, 1994, on May 19, 1994, the Trust's Board of Trustees selected
Arthur Andersen LLP to serve the Trust as its independent accountant to audit
the Trust's financial statements for the year ended December 31, 1994. BDO
Seidman served as the independent accountant previously engaged as the
principal accountant to audit the financial statements of the Trust for the
year ended December 31, 1993. The failure of the Board of Trustees to select
BDO Seidman as the Trust's independent accountant to audit the financial
statements for the year ending December 31, 1994 constituted BDO Seidman being
"dismissed" (as such term is used in Item 304 of Regulation S-K).
BDO Seidman's report on the Trust's financial statements for the year ended
December 31, 1993 did not contain any adverse opinion or disclaimer of opinion
and was not qualified or modified as to uncertainty, audit scope, or accounting
principles. During the year BDO Seidman served as independent accountants to
audit the financial statements of the Trust for the year ended December 31,
1993, and thereafter through the date hereof, the Trust has not had any
disagreement with BDO Seidman on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which
disagreement, if not resolved to the satisfaction of BDO Seidman, would have
caused BDO Seidman to make reference to the subject matter of the disagreement
in connection with its report.
The Trust provided BDO Seidman with a copy of the foregoing disclosure at the
same time as the filing of a current report on Form 8-K with the Commission and
requested such former accountant to furnish the Trust with a letter addressed
to the Commission stating whether BDO Seidman agreed with the statements made
by the Trust and, if not, stating the respects in which it did not agree on
May 26, 1994. BDO Seidman provided such letter for attachment to such report,
which letter confirmed such statement.
______________________________________
PART III
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
Trustees
The affairs of National Income Realty Trust (the "Trust" or the "Registrant")
are managed by an 8-member Board of Trustees. The Trustees are elected at the
annual meeting of shareholders or appointed by the incumbent Board of Trustees
and serve until the next annual meeting of shareholders or until a successor
has been elected or approved.
On May 4, 1994, the Trust, together with CMET, IORT and TCI, entered into a
Modification of Stipulation of Settlement dated April 27, 1994 (the
"Modification"), which settled subsequent claims of breaches of the settlement
which were asserted by plaintiffs and modified certain provisions of a 1990
settlement of the action styled Olive, et al v. National Income Realty Trust,
et al (the "Olive Case"). The original settlement, approved April 23, 1990 by
the Court, related to the operation and management of each of the entities.
The Modification was preliminarily approved by the court on July 1, 1994 and
final court approval was entered on December 12, 1994. The effective date of
the Modification is January 11, 1995.
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ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Trustees (Continued)
The Modification, among other things, provided for the resignation of certain
Trustees, the addition of at least three new, unaffiliated members to be
appointed to the Trust's Board of Trustees, and set forth new requirements for
approval of any transactions with affiliates over the next five years. Under
the Modification, the Trust, the other entities, and their shareholders released
the defendants from any claims relating to the plaintiffs' allegations. The
Trust and other entities also agreed to waive any demand requirement for
plaintiffs to pursue claims on behalf of each of them against certain persons or
entities. The Modification also requires that any shares of the Trust held by
Mr. Friedman or his affiliates shall be voted (i) in favor of the re-election of
all current Board members that stand for re-election during the two calendar
years following January 11, 1995, the effective date of the Modification, and
(ii) in favor of all new Board members appointed pursuant to the terms of the
Modification that stand for re-election during the three calendar years
following January 11, 1995. The Modification also terminated a number of
provisions of the original Stipulation of Settlement, including the requirement
that the Trust or the other entities maintain a Related Party Transaction
Committee and a Litigation Committee of the Board (see "Board Committees"
below).
In anticipation of the effectiveness of the Modification, the Trust did not
hold an Annual Meeting of Shareholders in 1994. John A. Doyle (a Trustee
since February 1994) resigned as a Trustee in April 1994, Ted. P. Stokely (a
Trustee since April 1990) resigned as a Trustee in August 1994, A. Bob Jordan
(a Trustee since October 1992) resigned as a Trustee in June 1994, Bennett B.
Sims (a Trustee since April 1990) resigned as a Trustee in August 1994, Willie
K. Davis (a Trustee since October 1988) retired as a Trustee in March 1995, and
Geoffrey C. Etnire (a Trustee since January 1993) ceased to be a Trustee in
March 1995. Carl B. Weisbrod (a Trustee since February 1994) was elected
Chairman of the Board on March 9, 1995, to replace William S. Friedman, who
remains as President, Chief Executive Officer and Trustee of the Trust. During
the period from May 1994 to March 1995, the Board appointed four new,
independent Trustees to replace a number of those who resigned and the number
of members of the Board of Trustees was decreased from ten at December 31,
1993, to eight at March 31, 1995. Independent Trustees appointed are Irving E.
Cohen (June 1994), Lance Liebman (March 1995), Sally Hernandez-Pinero (May
1994), and L. G. Schafran (March 1995). Messrs. Friedman, Johnston, Schrag and
Weisbrod have continued as Trustees.
The Trustees of the Trust are listed below, together with their ages, terms of
service, all positions and offices with the Trust, Tarragon or BCM, their
principal occupations, business experience and directorships with other
companies during the last five years or more. The designation "Affiliated",
when used below with respect to a Trustee, means that the Trustee is an
officer, director or employee of Tarragon or an officer or employee of the
Trust. The designation "Independent", when used below with respect to a
Trustee, means that the Trustee is neither an officer or employee of the Trust
nor a director, officer or employee of Tarragon, although the Trust may have
certain business or professional relationships with such Trustee as discussed
in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Certain Business
Relationships."
IRVING E. COHEN: Age 48, Trustee (Independent) (since June 1994).
Managing Director, CPR Group, a real estate consulting company (since
1994); Managing Partner, Fuller Corporate Realty Partners (from 1990
to 1994); Director of Real Estate Consulting Services, Price
Waterhouse (from 1989 to 1990); Special Advisor (from 1988 to 1989)
and Trustee (from 1985 to 1989), Mellon Participating Mortgage Trust;
and Executive Vice President, E.F. Hutton Properties, Inc. (from 1983
to 1987).
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ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Trustees (Continued)
WILLIAM S. FRIEDMAN: Age 51, Trustee (Affiliated).
Trustee (since March 1988), Chief Executive Officer (since December
1993), President (since December 1988), Acting Chief Financial Officer
(May 1990 to February 1991), Treasurer (August to September 1989) and
Acting Principal Financial and Accounting Officer (December 1988 to
August 1989) of the Trust and VPT; Trustee or Director (March 1988 to
February 1994), Chief Executive Officer (December 1993 to February
1994), President (December 1988 to February 1994), Acting Chief
Financial Officer (May 1990 to February 1991), Treasurer (August to
September 1989) and Acting Principal Accounting Officer (December 1988
to August 1989) of CMET, IORT and TCI; Director and Chief Executive
Officer (since December 1990) of Tarragon; President (February 1989 to
March 1993) and Director (February to December 1989) of BCM; General
Partner (1987 to March 1994) of Syntek Asset Management, L.P.
("SAMLP"), which is the General Partner of National Realty, L.P.
("NRLP") and National Operating, L.P. ("NOLP"); Director and President
(March 1989 to February 1994)) and Secretary (March 1989 to December
1990) of Syntek Asset Management, Inc. ("SAMI"), the Managing General
Partner of SAMLP and a corporation owned by BCM; President (1982 to
October 1990) of Syntek Investment Properties, Inc. ("SIPI"), which
has invested in, developed and syndicated real estate through its
subsidiaries and other related entities since 1973; Director and
President (1982 to October 1990) of Syntek West, Inc. ("SWI"); Vice
President (1984 to October 1990) of Syntek Finance Corporation;
Director (1981 to December 1992), President (July 1991 to December
1992), Vice President and Treasurer (January 1987 to July 1991) and
Acting Chief Financial Officer (May 1990 to February 1991) of American
Realty Trust, Inc. ("ART"); practicing Attorney (since 1971); Director
and Treasurer (November 1989 to February 1991) of Carmel Realty
Services, Inc. ("CRSI"); Limited Partner (January 1991 to December
1992) of Carmel Realty Services, Ltd. ("Carmel, Ltd.").
SALLY HERNANDEZ-PINERO: Age 42, Trustee (Independent) (since May 1994).
Of Counsel, Kalkines, Arky, Zall and Bernstein (since October 1994);
Chairwoman (February 1992 to April 1994) New York City Housing
Authority; Deputy Mayor (January 1990 to February 1992) for Finance
and Economic Development, City of New York; Commissioner/Chairwoman of
the Board of Directors (February 1988 to December 1989) Financial
Services Corporation of New York City; Member of the Board of
Directors (since July 1994) of Consolidated Edison; Member of the
Board of Directors (since April 1994) of Dime Savings Bank; Attorney
at Law (since 1978).
DAN L. JOHNSTON: Age 56, Trustee (Independent) (April 1990 to June 1990 and
since February 1991).
Partner in Johnston, Kaplan and Lombardi (since 1995); Attorney in
solo practice, New York, New York (since 1991); Director (since 1992)
of the Complex Drug Investigation and Prosecution Project for the
Jefferson Institute for Justice Studies; Chief Counsel, Subcommittee
on Criminal Justice, U.S. House of Representatives (June 1990 to
January 1991); Executive Director (1986 to 1990) of Prosecuting
Attorneys' Research Council, a nationwide organization of metropolitan
prosecutors which acts to further research to improve the
prosecutorial function; Consultant (February 1985 to June 1990) to the
Edna McConnell Clark Foundation, which supports efforts of District
Attorneys to reduce jail and prison overcrowding; Member (October 1987
to June 1990) of the Civilian Complaint Review
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<PAGE> 65
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Trustees (Continued)
Board of the New York City Police Department; Director or Trustee
(April 1990 to June 1990 and from February 1991 to January 1995) of
CMET, IORT and TCI; and Trustee (since December 1992) of VPT.
LANCE LIEBMAN: Age 53, Trustee (Independent) (since March 1995).
Dean and Lucy G. Moses Professor of Law (since 1991) Columbia Law
School, New York City; Professor of Law (1976 to 1991) and Associate
Dean (1981 to 1984) Harvard Law School; Lecturer on Law (1990) Tokyo
University Law Faculty, Japan; Director, Greater New York Insurance
Co. (both mutual and stock companies) (since 1991); Attorney at Law
(since 1967).
L. G. SCHAFRAN: Age 56, Trustee (Independent) (since March 1995).
Director (since 1993), Chairman of the Executive Committee, The Dart
Group (inclusive of the Dart Group Corporation, Truck Auto Corporation
and Crown Brooks Corporation) (since 1995); Managing General Partner
(since 1984) L.G. Schafran & Associates, a real estate investment and
development firm in New York City; Director, Publicker Industries
(since 1986) NYSE; Capsule Holdings Corp. (since 1986) NYSE; Oxigene,
Inc. (since 1993) OTC; and Director (since 1993) Glasstech, OTC.
RAYMOND V.J. SCHRAG: Age 49, Trustee (Independent) (since October 1988).
Attorney, New York, New York (since 1975); Trustee (1986 to December
1989) of Hidden Strength Mutual Funds; Trustee (since October 1988) of
VPT; and Director or Trustee (from October 1988 to August 1994) of
CMET, IORT and TCI.
CARL B. WEISBROD: Age 50, Trustee (Independent) (since February 1994).
President, Alliance for Downtown New York, Inc. (since 1994); Trustee
(since February 1994) of VPT; President and Chief Executive Officer
(April 1990 to 1994) of New York City Economic Development
Corporation; President (May 1987 to April 1990) of 42nd Street
Development Project, Inc., a subsidiary of the New York State Urban
Development Corporation; Executive Director (March 1986 to May 1987)
of Department of City Planning of the City of New York; and Executive
Director (July 1984 to March 1986) of City Volunteer Corps of the City
of New York.
Litigation and Claims Involving Mr. Friedman Related to Southmark Corporation
Until January 1989, William S. Friedman, the President, Chief Executive Officer
and a Trustee of the Trust, was an executive officer and director of Southmark
Corporation ("Southmark"), serving as Vice Chairman of the Board (since 1982),
Director (since 1980) and Secretary (since 1984) of Southmark. As a result of
a deadlock on Southmark's Board of Directors, Mr. Friedman and Gene E. Phillips
(who served as Trustee of the Trust until December 31, 1992) reached a series
of related agreements (later modified) with Southmark on January 17, 1989
(collectively, the "Separation Agreement"), whereby Messrs. Friedman and
Phillips resigned their position with Southmark and certain of Southmark's
subsidiaries and affiliates. Southmark filed a voluntary petition in
bankruptcy under Chapter 11 of the United States Bankruptcy Code on July 14,
1989. Subsequent to the filing
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<PAGE> 66
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Trustees (Continued)
of the Southmark bankruptcy, several lawsuits were filed against Southmark, its
former officers and directors (including Mr. Friedman) and others, alleging,
among other things, that such persons and entities misrepresented the financial
condition of Southmark. Mr. Friedman denied all of such allegations. Those
lawsuits in which Mr. Friedman was also a defendant were settled or dismissed
in 1993. The Trust was not a defendant in any of such lawsuits.
San Jacinto Savings Association. On November 30, 1990, San Jacinto Savings
Association ("SJSA"), a savings institution that had been owned by Southmark
since 1983, was placed under conservatorship of the Resolution Trust
Corporation ("RTC") by federal banking authorities. The Office of Thrift
Supervision ("OTS") also conducted a formal investigation of SJSA and its
affilitates. During late November 1994, Mr. Friedman entered into certain
agreements with the RTC and OTS settling all claims relating to his involvement
with SJSA. Pursuant to such arrangements, Mr. Friedman and certain other
respondents (including Mr. Phillips) agreed to pay restitution in the amount of
$20 million. Mr. Friedman consented to an order prohibiting him from
participating in the conduct of the affairs of an insured depository
institution without the prior written approval of the Director of OTS, and
agreed to submit certain information to the OTS on a periodic basis. Such
arrangements constitute an order limiting Mr. Friedman from engaging in a type
of business practice.
Board Committees
The Trust's Board of Trustees held eight meetings and acted by written consent
four times during 1994. For such year, no incumbent Trustee attended fewer
than 75% of the aggregate of (i) the total number of meetings held by the Board
of Trustees during the period for which he had been a Trustee and (ii) the
total number of meetings held by all committees of the Board of Trustees on
which he served during the periods that he served.
The Trust's Board of Trustees has an Audit Committee, the function of which is
to review the Trust's operating and accounting procedures. The current members
of the Audit Committee, all of whom are Independent Trustees, are Messrs.
Schrag (Chairman), Johnston and Weisbrod. The Audit Committee met one time
during 1994.
In March 1995, the Board established a permanent Advisory Review Committee to
monitor actions taken by the Advisor which have the potential for a conflict of
interest, in particular, decisions relating to the allocation of investment
opportunities between the Trust and other entities affiliated with the Advisor.
The Committee consists of Mr. Weisbrod (Chairman), Ms. Hernandez-Pinero and Mr.
Cohen.
Until February 1995, the Trust's Board of Trustees had a Related Party
Transaction Committee, which reviewed and made recommendations to the Board of
Trustees with respect to transactions involving the Trust and any other party
or parties related to or affiliated with the Trust, any of its Trustees or any
of their affiliates, and a Litigation Committee, which reviewed litigation
involving Messrs. Friedman and Phillips. Such committees were disbanded in
February 1995, and their responsibilities assumed by the Independent Trustees.
Messrs. Johnston (Chairman), Davis, Etnire, Schrag, Sims and Stokely, all of
whom were Independent Trustees, were the members of the Related Party
Transaction Committee, while Messrs. Johnston (Chairman), Etnire, Jordan,
Schrag, Sims and Stokely comprised the Litigation Committee. During 1994, the
Related Party Transaction Committee met three times and the Litigation
Committee met three times.
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ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Board Committees (Continued)
The Trust's Board of Trustees does not have Nominating or Compensation
Committees.
Executive Officers
The following persons currently serve as executive officers of the Trust:
William S. Friedman, President and Chief Executive Officer; John A. Doyle,
Executive Vice President; and Ivan Roth, Treasurer and Chief Financial Officer.
Their positions with the Trust are not subject to a vote of shareholders. The
age, terms of service, all positions and offices with the Trust, Tarragon or
BCM, other principal occupations, business experience and directorships with
other companies during the last five years or more of Mr. Friedman is set forth
above. Corresponding information regarding Messrs. Doyle and Roth is set forth
below.
JOHN A. DOYLE: Age 37, Executive Vice President (since February 1994)
Executive Vice President and Trustee (since February 1994) of VPT;
Director, President, Chief Operating Officer and 50% shareholder
(since February 1994) of Tarragon; President and Chairman of the Board
(since December 1993) of Investors General Acquisition Corp., which
owns 100% of the shares of Investor General, Inc.; Director, President
and Chief Executive Officer (since June 1992) of Garden Capital
Incorporated; Director and Chief Operating Officer (October 1990 to
December 1991) of ConCap Equities, Inc.; President, Chief Executive
Officer, Chief Operating Officer and sole Director (April 1989 to
October 1990) of Consolidated Capital Equities Corporation ("CCEC");
and Certified Public Accountant (since 1985).
IVAN ROTH: Age 59, Treasurer and Chief Financial Officer (since February
1994).
Treasurer and Chief Financial Officer (since February 1994) of VPT;
Treasurer (from February 1994 to November 1994) of Tarragon; Treasurer
(since February 1994) of Tarragon Capital Corporation; Treasurer and
Chief Financial Officer (1978 to 1992) of Servico, Inc.; Financial
Controller (1970 to 1978) of New York Motel Enterprises, Inc.; General
Manager (1968 to 1970) of Affiliated Financial Corporation; and
Certified Public Accountant (since 1968).
On September 19, 1990, Servico, Inc. filed a voluntary petition under Chapter
11 of the United States Bankruptcy Code and was reorganized effective August 5,
1992.
Officers
Although not executive officers of the Trust, the following persons currently
serve as officers of the Trust: John C. Stricklin, Senior Vice President -
Real Estate; Chris Clinton - Senior Vice President; Todd Minor - Senior Vice
President; Katie Jackson - Vice President and Chief Accounting Officer; and
Mary Montagnino, Secretary. Their positions with the Trust are not subject to
a vote of shareholders. Their ages, terms of services, all positions and
offices with the Trust, Tarragon or BCM, other principal occupations, business
experience and directorships with other companies during the last five years or
more are set forth below:
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ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Officers (Continued)
JOHN C. STRICKLIN: Age 48, Senior Vice President - Real Estate (since May
1994).
Vice President - Real Estate (from February 1994 to April 1994) of the
Trust; Vice President - Real Estate (since January 1994) of VPT;
Executive Vice President (since February 1994) of Tarragon; Vice
President (June 1992 to January 1994) of Carmel Realty, Inc.; Real
Estate Broker (June 1989 to May 1992) with Carmel, Ltd.; Executive
Vice President (June 1980 to May 1989) of Windsor Financial
Corporation; and Vice President (June 1975 to June 1980) of Syntek
Corporation.
CHRIS W. CLINTON: Age 47, Senior Vice President - Commercial Asset Management
(since March 1994).
Senior Vice President - Commercial Asset Management (since March 1994)
of VPT; Senior Vice President (since March 1994) of Tarragon; Vice
President (October 1988 to March 1994) of the Trust, ART, CMET, IORT,
TCI, VPT and BCM.
TODD C. MINOR: Age 36, Senior Vice President - Finance (since March 1994 and
from July 1993 to January 1994).
Senior Vice President - Finance (since March 1994 and from July 1993
to January 1994) of VPT; Senior Vice President (since March 1994) of
Tarragon; Senior Vice President - Finance (from July 1993 to March
1994) of BCM, ART, CMET, IORT and TCI; Vice President (from January
1989 to July 1993) of BCM and (from April 1991 to July 1993) of the
Trust, ART, CMET, IORT, TCI and VPT.
KATIE JACKSON: Age 33, Vice President and Chief Accounting Officer (since
March 1994).
Vice President and Chief Accounting Officer (since March 1994) of VPT
and Tarragon; Accounting Manager for BCM (October 1990 to March 1994);
Financial Analyst of DSC Communications Corp. (August 1987 to October
1990); Certified Public Accountant (since 1988).
MARY E. MONTAGNINO: Age 36, Secretary (since February 1994).
Secretary (since February 1994) of VPT; Secretary and Paralegal (since
February 1994) of Tarragon; Paralegal (1989 to February 1994) of BCM.
In addition to the foregoing officers, the Trust has other officers who are not
listed herein.
Compliance with Section 16(a) of the Securities and Exchange Act of 1934
Under the securities laws of the United States, the Trust's Trustees, executive
officers, and any persons holding more than ten percent of the Trust's shares
of beneficial interest are required to report their ownership of the Trust's
shares and any changes in that ownership to the Securities and Exchange
Commission (the "Commission"). Specific due dates for these reports have been
established and the Trust is required to report any failure to file by these
dates during fiscal 1994. All of these filing requirements, except as noted
below, were satisfied by its Trustees and executive officers and ten percent
holders. In making these statements, the
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ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Trust has relied on the written representations of its incumbent Trustees and
executive officers and its ten percent holders and copies of the reports that
they have filed with the Commission. The following reports filed under Section
16(a) of the Securities Exchange Act of 1934 during or with respect to the
fiscal year ended December 31, 1994, were not filed on a timely basis: Initial
Forms 3 of John A. Doyle, Ivan Roth, John C. Stricklin, Chris W. Clinton and
Katie Jackson.
The Advisor
Although the Trust's Board of Trustees is directly responsible for managing the
affairs of the Trust and for setting the policies which guide it, the
day-to-day operations of the Trust have traditionally been performed by a
contractual advisory firm under the supervision of the Trust's Board of
Trustees. The stated duties of the advisor include, among other things,
locating, investigating, evaluating and recommending real estate and mortgage
note investment and sales opportunities, as well as financing and refinancing
sources for the Trust. The advisor also serves as a consultant in connection
with the business plan and investment policy decisions made by the Trust's
Board of Trustees.
CCEC was the sponsor of and original advisor of the Trust. CCEC was replaced
as advisor on August 1, 1988, by Consolidated Advisors, Inc. ("CAI"), the
parent of CCEC. On December 2, 1988, CCEC filed a petition seeking
reorganization under Chapter 11 of the United States Bankruptcy Code in the
United States District Court for the Northern District of Texas. Mr. Friedman
was a director of CCEC and CAI from March 1988 through January 1989. Mr. Doyle
was President, Chief Executive Officer, Chief Operating Officer and sole
director of CCEC from 1989 through October 1990. Southmark was a controlling
shareholder of The Consolidated Companies, the parent of CAI, from March 1988
through February 1989.
BCM served as the Trust's advisor from March 1989 through March 1994. Mr.
Friedman served as President of BCM until May 1, 1993. BCM is beneficially
owned by a trust for the benefit of the children of Mr. Phillips, who served as
a Trustee of the Trust until December 31, 1992. At the Trust's annual meeting
of shareholders held on April 26, 1993, the Trust's shareholders approved the
renewal of the Trust's Advisory Agreement with BCM. BCM resigned as advisor to
the Trust effective March 31, 1994.
BCM also serves as advisor to CMET, IORT and TCI. Certain Trustees of the
Trust were also Trustees of CMET, IORT and TCI, but have since resigned their
positions. BCM served as advisor to VPT until February 28, 1994. Several of
the Trustees of the Trust are also directors or trustees of VPT. Mr. Friedman,
President of the Trust, also serves as President of VPT. Mr. Friedman was
general partner of the general partner of NRLP. BCM performs certain
administrative functions for NRLP and NOLP, the operating partnership of NRLP,
on a cost-reimbursement basis. BCM also serves as advisor to ART. Messrs.
Friedman and Phillips served as executive officers and directors of ART until
November 6, 1992 and December 31, 1992, respectively. Mr. Friedman resigned
from his positions with CMET, IORT and TCI in February 1994 and from his
position with NRLP in March 1994 to concentrate his attention on the Trust, VPT
and Tarragon.
On February 10, 1994, the Trust's Board of Trustees selected Tarragon to
replace BCM as the Trust's advisor. Since April 1, 1994, Tarragon has provided
advisory services to the Trust under an advisory agreement. Mr. Friedman
serves as a Director and Chief Executive Officer of Tarragon. Tarragon is
owned by Lucy N. Friedman, Mr. Friedman's wife, and Mr. Doyle, who serves as a
Director, President and Chief Operating Officer of Tarragon and Executive Vice
President of the Trust. The Friedman and Doyle families together own
approximately 32% of the outstanding shares of the Trust.
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ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
The provisions of the Trust's Advisory Agreement with Tarragon are
substantially the same to those of the BCM advisory agreement, except for the
annual base advisory fee and the elimination of the net income fee. The BCM
advisory agreement provided for BCM to receive an advisory fee comprised of a
gross asset fee of .0625% per month (.75% per annum) of the average of the
gross asset value of the Trust (total assets less allowance for amortization,
depreciation or depletion and valuation reserves) and an annual net income fee
equal to 7.5% per annum of the Trust's net income.
The advisory agreement with Tarragon provides for a base advisory fee of
$100,000, which was paid upon the execution of the Advisory Agreement on April
1, 1994. Tarragon is also to receive an incentive advisory fee equal to 16%
per annum of the Trust's adjusted funds from operations before deduction of the
advisory fee. Adjusted funds from operations is defined as net income (loss)
before gains or losses from the sales of properties and debt restructurings
plus depreciation and amortization plus any loss due to the write-down or sale
of any real property or mortgage loan acquired prior to January 1, 1989. The
incentive fee is cumulative within any fiscal year to maintain the 16% per
annum rate.
The following provisions are included in both the Tarragon and BCM advisory
agreements:
(1) the advisor or an affiliate of the advisor is to receive an
acquisition commission for supervising the acquisition,
purchase or long-term lease of real estate for the Trust equal
to the lesser of (i) up to 1% of the cost of acquisition,
inclusive of commissions, if any, paid to non-affiliated
brokers or (ii) the compensation customarily charged in
arm's-length transactions by others rendering similar property
acquisition services as an ongoing public activity in the same
geographical location and for comparable property; provided
that the purchase price of each property (including
acquisition commissions and all real estate brokerage fees)
may not exceed such property's appraised value at acquisition.
(2) the advisor is to receive an incentive sales compensation
equal to 10% of the amount, if any, by which the aggregate
sales consideration for all real estate sold by the Trust
during such fiscal year exceeds the sum of (i) the cost of
each such property as originally recorded in the Trust's books
for tax purposes (without deduction for depreciation,
amortization or reserve for losses), (ii) capital improvements
made to such assets during the period owned by the Trust and
(iii) all closing costs (including real estate commissions)
incurred in the sale of such property. However, no incentive
fee shall be paid unless (a) such real estate sold in such
fiscal year, in the aggregate, has produced an 8% simple
annual return of the Trust's net investment including capital
improvements, calculated over the Trust's holding period
before depreciation and inclusive of operating income and
sales consideration and (b) the aggregate net operating income
from all real estate owned by the Trust for each of the prior
and current fiscal years shall be at least 5% higher in the
current fiscal year than in the prior fiscal year.
(3) the advisor or an affiliate of the advisor is to receive a
mortgage or loan acquisition fee with respect to the
acquisition or purchase from an unaffiliated party of an
existing mortgage or loan by the Trust equal to the lesser of
(i) 1% of the amount of the mortgage or loan purchased or (ii)
a brokerage or refinancing fee which is reasonable and fair
under the circumstances. Such fee will not be paid in
connection with the origination or funding by the Trust of any
mortgage loan.
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ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
(4) the advisor or an affiliate of the advisor is also to receive
a mortgage brokerage and equity refinancing fee for obtaining
loans to the Trust or refinancing on Trust properties equal to
the lesser of (i) 1% of the amount of the loan or the amount
refinanced or (ii) a brokerage or refinancing fee which is
reasonable and fair under the circumstances; provided,
however, that no such fee shall be paid on loans from the
Advisor or an Affiliate of the Advisor without the approval of
the Trust's Board of Trustees. No fee shall be paid on loan
extensions.
(5) the advisor or any affiliate of the advisor must pay to the
Trust one-half of any compensation received from third parties
with respect to the origination, placement or brokerage of any
loan made by the Trust, provided, however, that the
compensation retained by the advisor or any affiliate of the
advisor shall not exceed the lesser of (i) 2% of the amount of
the loan committed by the Trust or (ii) a loan brokerage
commitment fee which is reasonable and fair under the
circumstances.
(6) the advisor is required to formulate and submit annually for
approval by the Trust's Board of Trustees a budget and
business plan for the Trust containing a twelve-month forecast
of operations and cash flow, a general plan for asset sales or
acquisitions, lending, foreclosure and borrowing activity, and
other investments, and the advisor is required to report
quarterly to the Trust's Board of Trustees on the Trust's
performance against the business plan. In addition, all
transactions or investments by the Trust shall require prior
approval by the Trust's Board of Trustees unless they are
explicitly provided for in the approved business plan or are
made pursuant to authority expressly delegated to the advisor
by the Trust's Board of Trustees.
(7) prior approval of the Trust's Board of Trustees is required
for retention of all consultants and third party
professionals, other than legal counsel. The advisory
agreement provides that the advisor shall be deemed to be in a
fiduciary relationship to the Trust's shareholders; contains a
broad standard governing the advisor's liability for losses by
the Trust; and contains guidelines for the advisor's
allocation of investment opportunities as among itself, the
Trust and other entities it advises.
As required by the Trust's Declaration of Trust, all or a portion of the annual
advisory fee must be refunded by the advisor to the Trust if the Operating
Expenses of the Trust (as defined in the Trust's Declaration of Trust) exceed
certain limits specified in the Declaration of Trust based on book value, net
asset value and net income of the Trust during such fiscal year. The operating
expenses of the Trust did not exceed such limitation in 1992, 1993 or 1994.
Also under the advisory agreements, the advisor is to receive reimbursement of
certain expenses incurred by it in the performance of the Advisory services to
the Trust.
Also, if the Trust were to request that the advisor render services to the
Trust other than those required by the advisory agreement, the advisor or an
affiliate of the advisor would be separately compensated for such additional
services on terms to be agreed upon from time to time. As discussed below
under "Property Management", in the past, the Trust had hired Carmel, Ltd., an
affiliate of BCM, to provide property management services for the Trust's
properties. Since April 1, 1994, Tarragon has provided property management
services for the Trust's properties. Also, as discussed under "Real Estate
Brokerage", the Trust engaged, on a non-exclusive basis, Carmel Realty, Inc.
("Carmel Realty"), also an affiliate of BCM, to perform
71
<PAGE> 72
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
brokerage services for the Trust until March 31, 1994.
Approval, and any renewal, of the Tarragon Advisory Agreement is required by
the Trust's shareholders.
The Advisory Agreement may only be assigned with the prior consent of the
Trust.
The directors and principal officers of Tarragon are set forth below:
WILLIAM S. FRIEDMAN: Director and Chief Executive
Officer
JOHN A. DOYLE: Director, President and
Chief Operating Officer
JOHN C. STRICKLIN: Executive Vice President
CHRIS W. CLINTON: Senior Vice President
ROBERT W. LOCKHART: Senior Vice President
TODD C. MINOR: Senior Vice President
KATIE JACKSON: Vice President - Chief
Accounting Officer
DAVID L. MILLER: Vice President - Legal
MARY E. MONTAGNINO: Secretary
Property Management
From February 1, 1990 to March 31, 1994, affiliates of BCM have provided
property management services to the Trust. Carmel, Ltd. provided property
management services for a fee of 5% or less of the monthly gross rents
collected on the properties under management. In many cases, Carmel, Ltd.
subcontracted with other entities for the provision of the property-level
management services to the Trust at various rates. The general partner of
Carmel, Ltd. is BCM. The limited partners of Carmel, Ltd. are (i) SWI, of
which Mr. Phillips is the sole shareholder, (ii) Mr. Phillips and (iii) a trust
for the benefit of the children of Mr. Phillips. Carmel, Ltd. subcontracted
the property-level management and leasing of eleven of the Trust's commercial
properties and the commercial properties owned by two of the real estate
partnerships in which the Trust is a partner to Carmel Realty, which is owned
by SWI. Carmel, Ltd. resigned as property manager for the Trust's properties
effective March 31, 1994.
Tarragon has provided property management services to the Trust since April 1,
1994 for a fee of 4.5% of the monthly gross rents collected on apartment
properties and of 1.5% to 4% of the monthly gross rents collected on commercial
properties. Tarragon subcontracts with other entities for the provision of
most of the property-level management services to the Trust.
72
<PAGE> 73
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
(Continued)
Real Estate Brokerage
Prior to December 1, 1992, affiliates of BCM provided brokerage services to the
Trust and received brokerage commissions in accordance with the advisory
agreement. Effective December 1, 1992, the Trust's Board of Trustees approved
the non-exclusive engagement by the Trust of Carmel Realty to provide brokerage
services for the Trust. Such agreement terminated March 31, 1994. Carmel
Realty was entitled to receive a real estate acquisition commission for
locating and negotiating the lease or purchase by the Trust of any property
equal to the lesser of (i) up to 3% of the purchase price, inclusive of
commissions, if any, paid by the Trust to other brokers or (ii) the
compensation customarily charged in arm's-length transactions by others
rendering similar property acquisition services in the same geographical
location and for comparable property. Any commission paid to Carmel Realty by
the seller was to be credited against the commission to be paid by the Trust.
Carmel Realty was also entitled to receive a real estate sales commission for
the sale of each Trust property equal to the lesser of (i) 3% (inclusive of
fees, if any, paid by the Trust to other brokers) of the sales price of each
property or (ii) the compensation customarily charged in arm's-length
transactions paid by others rendering similar services in the same geographic
location for comparable property.
At their March 9, 1995 meeting, the Trustees approved a new revised form of
Advisory Agreement to be effective April 1, 1995 and to be submitted to
shareholders for their approval at the next meeting of shareholders, whether
annual or special. In addition to technical changes designed to clarify the
responsibilities and rights of the Advisor, the new agreement eliminates the
$100,000 base annual fee and all incentive sales compensation. Moreover, it
provides that real estate commissions shall be payable to the Advisor and its
affiliates only following specific Board approval for each transaction rather
than pursuant to a general agreement.
ITEM 11. EXECUTIVE COMPENSATION
The Trust has no employees, payroll or benefit plans and pays no direct
compensation to the Officers of the Trust. The Trustees and Officers of the
Trust who are also officers or employees of the Trust's Advisor are compensated
by the Advisor, except as noted below. Such affiliated Trustees and Officers
of the Trust perform a variety of services for the Advisor and the amount of
their compensation is determined solely by the Advisor. Compensation of Trust
Officers responsible for legal and accounting services is allocated among the
various entities for which Tarragon serves as advisor and none of those
individual's annual salary exceeds $100,000. See ITEM 10. "TRUSTEES, EXECUTIVE
OFFICERS AND ADVISOR OF THE REGISTRANT - The Advisor" for a more detailed
discussion of the compensation payable to Tarragon by the Trust.
The only direct remuneration paid by the Trust is to the Trustees who are not
officers or directors of Tarragon or their affiliated companies. The
Independent Trustees (i) review the business plan of the Trust to determine
that it is in the best interest of the Trust's shareholders, (ii) review the
Trust's contract with the advisor, (iii) supervise the performance of the
Trust's advisor and review the reasonableness of the compensation which the
Trust pays to its advisor in terms of the nature and quality of services
performed, (iv) review the reasonableness of the total fees and expenses of the
Trust and (v) select, when necessary, a qualified independent real estate
appraiser to appraise properties acquired by the Trust. During 1994, the
Independent Trustees received compensation in the amount of $6,000 per year,
plus reimbursement for expenses. In addition, each Independent Trustee
received (i) $3,000 per year for each committee of the Board of Trustees on
which he serves, (ii) $2,500 per year for each committee chairmanship and (iii)
$1,000 per day for any special services
73
<PAGE> 74
ITEM 11. EXECUTIVE COMPENSATION (Continued)
rendered by him to the Trust outside of his ordinary duties as Trustee, plus
reimbursement for expenses, provided such services are specifically requested
by the Board.
During 1994, $42,750 were paid to the Independent Trustees in total Trustees'
fees for all services, including 1994 special service fees: Willie K. Davis,
$4,500 (a Trustee from October 1988 to March 1995); Geoffrey C. Etnire, $6,000
(a Trustee from January 1993 to March 1995); Dan L. Johnston, $12,000; Raymond
V.J. Schrag, $7,250; Bennett B. Sims, $3,000 (a Trustee from April 1990 to
August 1994); Ted P. Stokely, $3,000 (a Trustee from April 1990 to August
1994); and Carl Weisbrod, $7,000. Also during 1994, Trustees' fees paid
related to 1995 services totaled $12,000 and included; Irving E. Cohen, $6,000,
and Sally Hernandez-Pinero, $6,000.
Messrs. Davis and Schrag served on the Fairness Committee of NRLP (for which
they each received $4,000 in 1993) whose function is to review certain
transactions between NRLP and its general partner and affiliates of such
general partner.
TMC, a company of which Mr. Randall K. Gonzalez, a Trustee of the Trust until
February 18, 1994, is the Managing Partner and President, provided
property-level management services until April 1994, as a sub-contractor to
Carmel, Ltd., for certain properties owned by the Trust. In 1994, TMC earned
fees of $19,750 for performing such services.
TMC also provides property-level management services, as a subcontractor to
Carmel, Ltd., for properties owned by ART, CMET, NOLP and TCI and through April
1993, for a property owned by a partnership which includes IORT and TCI.
Christon, a company for which Mr. Gonzalez serves as Vice President, provides
property leasing services, as a subcontractor to Carmel, Ltd., to such
partnership. Mr. Gonzalez is the son of Al Gonzalez, an ART director not
affiliated with BCM.
Since January 1, 1993, FMS, a company of which Mr. Davis is Chairman, President
and sole shareholder, has been providing property-level management services, as
a subcontractor to Carmel, Ltd., for two properties owned by the Trust. In
1994, FMS earned fees of $55,886 for performing such services.
During 1994, Mr. Jordan (a Trustee from October 1992 to June 1994) performed
legal services for the Trust and was paid $5,400 in legal fees and cost
reimbursements.
The Trust believes that such fees received by FMS, TMC and Mr. Jordan were at
least as favorable to the Trust as those that would be paid to unaffiliated
third parties for the performance of similar services.
Effective March 9, 1995, the Trust will pay the Independent Trustees as
follows: (i) $15,000 annual fee, (ii) $2,000 per year for each committee of
the Board of Trustees on which he (she) serves and an additional $1,000 per
year for the Chair of each committee, (iii) $25,000 per year to the Chairman of
the Board of Trustees (Mr. Weisbrod), inclusive of any committee fees and (iv)
$1,000 per day for any special services rendered to the Trust outside of the
ordinary duties as Trustee, plus reimbursement for expenses, provided such
services are specifically requested by the Board.
[This space intentionally left blank.]
74
<PAGE> 75
ITEM 11. EXECUTIVE COMPENSATION (Continued)
Performance Graph
The following performance graph compares the cumulative total shareholder
return on the Trust's shares of beneficial interest with the Standard & Poor's
500 Stock Index ("S&P 500 Index") and the National Association of Real Estate
Investment Trusts, Inc. ("NAREIT") Hybrid REIT Total Return Index ("REIT
Index"). The comparison assumes that $100 was invested on December 31, 1989 in
the Trust's shares of beneficial interest and in each of the indices and
further assumes the reinvestment of all dividends. Past performance is not
necessarily an indicator of future performance.
COMPARISON OF FIVE FISCAL YEARS ENDED DECEMBER 31, 1994
COMPARATIVE TOTAL RETURN
[GRAPH]
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
The Trust 100.00 106.00 171.00 113.00 315.00 334.00
S&P 500 Stock Index 100.00 97.00 126.00 136.00 150.00 152.00
NAREIT Hybrid REIT Index 100.00 72.00 100.00 116.00 141.00 147.00
</TABLE>
The data set forth in the above graph and related table was obtained from
NAREIT. All of the data is based upon the last closing price of the month for
all tax-qualified REITs listed on the New York Stock Exchange ("NYSE"),
American Stock Exchange ("AMEX") and the NASDAQ National Market System. The
data is market weighted. The total return calculation is based upon the
weighting at the beginning of the period. Dividends are included in the month
based upon their payment date. The total return index includes dividends
reinvested on a monthly basis. At month-end December 1994, there were 21
tax-qualified REITs in the NAREIT Hybrid REIT Total Return Index with a total
market capitalization of $3.0 billion.
75
<PAGE> 76
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners. The following table sets
forth the ownership of the Trust's shares of beneficial interest, both
beneficially and of record, both individually and in the aggregate for those
persons or entities known by the Trust to be beneficial owners of more than 5%
of its shares of beneficial interest as of the close of business on March 10,
1995.
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial Percent of
Beneficial Owner Ownership Class (1)
- ------------------------------------ ----------------------------- ----------
<S> <C> <C> <C>
Lucy N. Friedman 916,839 (2)(3)(4)(5) 28.8%
280 Park Avenue (6)(7)(8)
East Building, 20th Floor
New York, New York 10017
</TABLE>
- -----------------------
(1) Percentages are based upon 3,178,267 shares of beneficial interest
outstanding at March 10, 1995.
(2) Includes 13,873 shares owned by Lucy N. Friedman's husband, William S.
Friedman.
(3) Includes 668,064 shares owned by Lucy N. Friedman.
(4) Does not include 54,883 shares owned by Lucy N. Friedman's adult son, Ezra
Friedman, and 18,264 shares owned by Lucy N. Friedman's adult daughter,
Tanya Friedman. Mrs. Friedman disclaims beneficial ownership of such
shares.
(5) Includes 26,336 shares owned by a trust for the benefit of the children
and grandchildren of Samuel Friedman, deceased, William S. Friedman's
father, for which Robert A. Friedman and Gerald C. Friedman, siblings of
William S. Friedman, and Ruth Friedman, his mother, are the trustees.
Lucy N. Friedman disclaims beneficial ownership of such shares.
(6) Includes 36,300 shares owned by Tarragon Capital Corporation, of which
Lucy N. Friedman and William S. Friedman are executive officers and
directors and 22,000 shares owned by Tarragon Partners, Ltd., of which
Lucy N. Friedman and William S. Friedman are limited partners. Mr.
Friedman disclaims beneficial ownership of such shares.
(7) Includes 8,567 shares and 8,684 shares owned by William S. Friedman's
minor sons, Gideon and Samuel Friedman. Mr. Friedman disclaims
beneficial ownership of such shares. It also includes 120,000 shares
owned by Beachwold Partners, L. P., in which L. N. Friedman is the
general partner and her four children are the limited partners. Mr.
Friedman disclaims beneficial ownership of such shares.
(8) Includes 13,015 shares held by William S. Friedman Grantor Trust for
benefit of the children of William S. Friedman, of which Mrs. Friedman is
the Trustee. Mrs. Friedman disclaims beneficial interest of such shares.
76
<PAGE> 77
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(Continued)
Security Ownership of Management. The following table sets forth the ownership
of the Trust's shares of beneficial interest, both beneficial and of record,
both individually and in the aggregate for the Trustees and executive officers
of the Trust as of the close of business on March 10, 1995. (Those individual
Trustees not named in the table below own no shares of beneficial interest of
the Trust.)
<TABLE>
<CAPTION>
Amount and Nature
Name of of Beneficial Percent of
Beneficial Owner Ownership Class (1)
- ------------------------------------ ----------------------------- ----------
<S> <C> <C> <C>
William S. Friedman 916,839 (2)(3)(4)(5) 28.8%
(6)(7)(10)(11)
Irving E. Cohen 453 (14) *
John A. Doyle 87,761 (8) 2.8%
Dan L. Johnston 96 (13) *
Ivan Roth 330 (15) *
Raymond V.J. Schrag 5,025 (9) *
Carl B. Weisbrod 220 (12) *
All Trustees and Executive 1,010,724 (2)(3)(4) 31.8%
Officers as a group (5)(6)(7)
(10 individuals) (8)(9)(10)(11)
(12)(13)(14)(15)
</TABLE>
- ---------------------------
* Less than 1%.
(1) Percentages are based upon 3,178,267 shares of beneficial interest
outstanding at March 10, 1995.
(2) Mr. Friedman owns 13,873 shares of beneficial interest personally.
(3) Includes 668,064 shares owned by William S. Friedman's wife, Lucy
Friedman. Mr. Friedman disclaims beneficial ownership of such shares.
(4) Does not include 54,883 shares owned by William S. Friedman's adult son,
Ezra Friedman, and 18,264 shares owned by William S. Friedman's adult
daughter, Tanya Friedman. Mr. Friedman disclaims beneficial ownership of
such shares.
(5) Includes 26,336 shares owned by a trust for the benefit of the children
and grandchildren of Samuel Friedman, deceased, William S. Friedman's
father, for which Robert A. Friedman and Gerald C. Friedman, siblings of
William S. Friedman, and Ruth Friedman, his mother, are the trustees. Mr.
Friedman disclaims beneficial ownership of such shares.
77
<PAGE> 78
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(Continued)
(6) Includes 36,300 shares owned by Tarragon Capital Corporation, of which
Lucy N. Friedman and William S. Friedman are executive officers and
directors.
(7) Includes 22,000 shares owned by Tarragon Partners, Ltd., of which Lucy N.
Friedman and William S. Friedman are limited partners. Mr. Friedman
disclaims beneficial ownership of such shares.
(8) Includes 84,615 shares which Mr. Doyle has beneficial interest as a
result of a $1.0 million subordinated debenture which is convertible to
84,615 of the Trust's shares. John A. Doyle also owns 3,146 shares
personally.
(9) Raymond V.J. Schrag owns 5,025 shares personally.
(10) Includes 8,567 shares and 8,684 shares owned by William S. Friedman's
minor sons, Gideon and Samuel Friedman. Mr. Friedman disclaims
beneficial ownership of such shares. It also includes 120,000 shares
owned by Beachwold Partners, L. P., in which L. N. Friedman is the
general partner and her four children are the limited partners. Mr.
Friedman disclaims beneficial ownership of such shares.
(11) Includes 13,015 shares held by William S. Friedman Grantor Trust for
benefit of the children of William S. Friedman, of which Mrs. Friedman is
the Trustee. Mrs. Friedman disclaims beneficial interest of such shares.
(12) Carl B. Weisbrod owns 220 shares jointly with Jody Weisbrod, his spouse.
(13) Dan L. Johnston owns 96 shares personally.
(14) Irving E. Cohen owns 453 shares in an IRA account.
(15) Ivan Roth owns 330 shares jointly with Gerda Roth, his spouse.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Business Relationships
From March 1989 through March 31, 1994, BCM was retained as the Trust's advisor
as discussed in ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT - The Advisor." Messrs. Phillips and Friedman served as directors
of BCM until December 22, 1989. Mr. Phillips served as Chief Executive Officer
of BCM until September 1, 1992 and Mr. Friedman served as President of BCM
until May 1, 1993. BCM is beneficially owned by a trust for the benefit of the
children of Mr. Phillips.
On February 10, 1994, the Trust's Board of Trustees selected Tarragon to
replace BCM as the Trust's advisor. Since April 1, 1994, Tarragon has provided
advisory services to the Trust under an advisory agreement. Mr. Friedman
serves as director and Chief Executive Officer of Tarragon. Tarragon is owned
by Lucy N. Friedman, Mr. Friedman's wife, and Mr. Doyle, who serves as
President and Chief Operating Officer of Tarragon and Executive Vice President
of the Trust. The Friedman and Doyle families together own approximately 32%
of the outstanding shares of the Trust.
78
<PAGE> 79
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Certain Business Relationships (Continued)
Also on February 10, 1994, VPT's Board of Trustees selected Tarragon to replace
BCM as VPT's advisor commencing March 1, 1994. Messrs. Friedman, Johnston,
Schrag and Weisbrod, Trustees of the Trust, serve as trustees of VPT. The
Trust's Trustees owe fiduciary duties to VPT as well as to the Trust under
applicable law. VPT has the same relationship with Tarragon as the Trust.
Tarragon occupies office space at VPT's One Turtle Creek Office/Retail Complex.
Since February 1, 1990, Carmel, Ltd., an affiliate of BCM, has provided
property management services to the Trust for a fee of 5% or less of the
monthly gross rents collected on the properties under management. In many
cases, Carmel, Ltd. subcontracted with other entities for the property-level
management services to the Trust at various rates. The general partner of
Carmel, Ltd. is BCM. The limited partners of Carmel, Ltd. are (i) SWI, of
which Mr. Phillips is the sole shareholder, (ii) Mr. Phillips and (iii) a trust
for the benefit of the children of Mr. Phillips. Carmel, Ltd. subcontracted
the property-level management and leasing of eleven of the Trust's commercial
properties and the commercial properties owned by two of the real estate
partnerships in which the Trust is a partner to Carmel Realty, which is owned
by SWI. Carmel, Ltd. resigned as property manager for the Trust's properties
effective March 31, 1994. Commencing April 1, 1994, Tarragon has provided
property management services to the Trust.
Prior to December 1, 1992, affiliates of BCM provided brokerage services to the
Trust and received brokerage commissions in accordance with the advisory
agreement. Effective December 1, 1992, the Trust engaged Carmel Realty, on a
non-exclusive basis, to provide brokerage services for the Trust. Carmel
Realty is owned by SWI. Such agreement terminated March 31, 1994.
As discussed in ITEM 11. "EXECUTIVE COMPENSATION," Messrs. Davis and Schrag
served on the Fairness Committee of NRLP, whose function is to review certain
transactions between NRLP and its general partner and affiliates of such
general partner. TMC, a company of which Mr. Gonzalez, a trustee of the Trust
until February 18, 1994, is the Managing Partner and President, provided
property-level management services as a subcontractor to Carmel, Ltd. for
certain properties owned by ART, CMET, NOLP, TCI and the Trust and through
April 30, 1993, for a property owned by a partnership which includes IORT and
TCI. Christon, a company of which Mr. Gonzalez serves as Vice President,
provided property leasing services, as a subcontractor to Carmel, Ltd., for
such partnership property. Mr. Randall K. Gonzalez is the son of Al Gonzalez,
a director of ART.
From April 1992 to December 31, 1993, Mr. Stokely, a Trustee of the Trust until
August 1, 1994, was employed as a Real Estate Consultant for Eldercare, a
nonprofit corporation engaged in the acquisition of low income and elderly
housing. Eldercare has a revolving loan commitment from SWI which is owned by
Mr. Phillips and affiliated with BCM. In addition, in November 1991, the
Trust funded a $230,000 loan to Eldercare. Eldercare filed for bankruptcy
protection in October 1993. At December 31, 1994, the Trust's loan to
Eldercare was in default.
During 1993, Mr. Jordan performed legal services for BCM and its affiliates, as
well as for TCI, ART and the Trust.
79
<PAGE> 80
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Related Party Transactions
Historically, the Trust has engaged in and may continue to engage in business
transactions, including real estate partnerships, with related parties. All
related party transactions entered into by the Trust must be approved by a
majority of the Trust's Board of Trustees, including a majority of the
Independent Trustees. Under the Modification to Settlement, such transactions
(other than the Advisory Agreement and property management arrangements)
require unanimous approval of the Independent Trustees and a finding that such
transaction is more beneficial to the Trust than any available alternative. It
is now the policy of the Trust to discourage related party transactions unless
clearly more beneficial than alternatives or essential in order to eliminate
existing affiliated relationships.
As more fully described in NOTE 5. "INVESTMENT IN EQUITY PARTNERSHIPS", the
Trust is a partner with CMET in Sacramento Nine and Indcon.
On December 10, 1990, the Trust's Board of Trustees, based on the
recommendation of its Related Party Transaction Committee, authorized the
purchase of up to $1.0 million of the shares of beneficial interest of CMET
through negotiated or open market transactions. At December 31, 1993, the
Trust owned 54,500 shares of beneficial interest of CMET which it purchased in
1990 and 1991 through open market transactions, at a total cost to the Trust of
$250,000. In June 1994, the Trust sold 15,000 shares of beneficial interest of
CMET for $210,000 through open market transactions and, as a result, recorded a
$141,000 gain on sale of investments in the second quarter of 1994. The market
value of the remaining 39,500 shares held by the Trust was $593,000 at December
31, 1994. In the first quarter of 1995, the remaining shares were sold through
open market transactions for $593,000 and, as a result, the Trust recorded a
$411,200 gain on sale of investments.
In December 1993, the Trust's Board of Trustees approved the issuance of a $1.0
million convertible subordinated debenture to Mr. Doyle, Executive Vice
President of the Trust since February 1994, in exchange for his 10%
participation in the profits of the Consolidated Capital Properties II ("CCP
II") assets, which the Trust had acquired in November 1992. This participation
was granted as consideration for Mr. Doyle's services to the Trust in
connection with the CCP II portfolio. The debenture bears interest at a rate
of 6% per annum, matures in December 1999 and is convertible into 84,615 shares
of beneficial interest of the Trust. Mr. Doyle also serves as Director,
President and Chief Operating Officer and is a 50% shareholder of Tarragon
Realty Advisors, Inc. ("Tarragon"), the Trust's advisor since April 1, 1994.
See NOTE 4. "REAL ESTATE AND DEPRECIATION."
In 1994, the Trust paid Tarragon $909,000 in advisory fees, $267,000 in real
estate and mortgage brokerage commissions and $285,000 in property management
fees and leasing commissions. In addition, as provided in the advisory
agreement, Tarragon received cost reimbursements from the Trust of $999,000 in
1994.
In 1994, the Trust paid BCM and its affiliates $468,000 in advisory fees,
$103,000 in real estate and mortgage brokerage commissions and $112,000 in
property management fees and leasing commissions for their services during the
period ending March 31, 1994. In addition, as provided in the advisory
agreement, BCM received cost reimbursements from the Trust of $140,000 in 1994.
80
<PAGE> 81
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Restrictions on Related Party Transactions
The Trust's Declaration of Trust provides that:
"[t]he Trustees shall not . . . purchase, sell or lease any Real
Properties or Mortgages to or from . . . the Advisor or any of [its]
Affiliates," and that "[t]he Trustees shall not . . . make any loan
to . . . the Advisor or any of [its] Affiliates."
Moreover, the Declaration of Trust further provides that:
[t]he Trust shall not purchase or lease, directly or indirectly, any Real
Property or purchase any Mortgage from the Advisor or any affiliated
Person, or any partnership in which any of the foregoing may also be a
general partner, and the Trust will not sell or lease, directly or
indirectly, any of its Real Property or sell any Mortgage to any of the
foregoing Persons." The Declaration of Trust further provides that "the
Trust shall not directly or indirectly, engage in any transaction with
any Trustee, officer or employee of the Trust or any director, officer or
employee of the Advisor . . . or of any company or other organization of
which any of the foregoing is an Affiliate, except for . . . [among other
things] transactions with . . . the Advisor or Affiliates thereof
involving loans, real estate brokerage services, real property management
services, the servicing of Mortgages, the leasing of real or personal
property, or other services, provided such transactions are on terms not
less favorable to the Trust than the terms on which nonaffiliated parties
are then making similar loans or performing similar services for
comparable entities in the same area and are not entered into on an
exclusive basis.
The Declaration of Trust defines "Affiliate" as follows:
[A]s to any Person, any other Person who owns beneficially, directly, or
indirectly, 1% or more of the outstanding capital stock, shares, or
equity interests of such Person or of any other Person which controls, is
controlled by, or is under common control with, such Person or is an
officer, retired officer, director, employee, partner, or trustee
(excluding independent trustees not otherwise affiliated with the entity)
of such Person or of any other Person which controls, is controlled by,
or is under common control with, such Person.
The Declaration of Trust further provides that:
The Trustees shall not . . . invest in any equity Security, including the
shares of other REITs for a period in excess of 18 months, except for
shares of a qualified REIT subsidiary, as defined in Section 856(i) of
the Internal Revenue Code, and regular or residual interests in
REMICs . . . [or] acquire Securities in any company holding investments or
engaging in activities prohibited by this Section . . .
As discussed in "Related Party Transactions," above, since September 1990, the
Trust has invested in shares of CMET. As of December 31, 1994, the Trust owned
39,500 shares of CMET. CMET had the same advisor as the Trust until March 31,
1994, and certain of its Trustees were also trustees of CMET. As noted above,
under the terms of its Declaration of Trust, the Trust is prohibited from
investing in equity securities for a period in excess of 18 months. The
Trust's shareholders approved an amendment to the Trust's Declaration of Trust
allowing the Trust to hold these shares of CMET until July 30, 1996. In the
first quarter of 1995, the remaining shares were sold through open market
transactions for $593,000 and, as a result, the Trust recorded a $411,200 gain
on sale of investments.
81
<PAGE> 82
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Restrictions on Related Party Transactions (Continued)
Prior to January 11, 1995, all related party transactions that the Trust
contemplated were to be reviewed by the Related Party Transaction Committee of
the Trust's Board of Trustees to determine whether such transactions were (i)
fair to the Trust and (ii) permitted by the Trust's governing documents. Each
of the members of the Related Party Transaction Committee was a Trustee who is
not an officer, director or employee of the Trust's advisor, Tarragon, and is
not an officer or employee of the Trust. Such committee was disbanded in
February 1995 and its responsibilities assumed by the Independent Trustees.
Pursuant to the terms of the Modification in the Olive case, which became
effective on January 11, 1995, any related party transaction which the Trust
may enter into prior to April 27, 1999, with two categories of exceptions,
will require the unanimous approval of the Trust's Board of Trustees. In
addition, except for the categories noted below, certain defined related party
transactions may only be entered into in exceptional circumstances and after a
determination by the Trust's Board of Trustees that the transaction is in the
best interests of the Trust and that no other opportunity exists that is as
good as the opportunity presented by such transaction. Two categories of
exception are:
(i) direct contractual agreements for services between the Trust and
the Advisor or one of its affiliates (i.e., the Advisory
Agreement, property management contracts, etc.) which require
prior approval by two-thirds of the Trustees of the Trust and,
if required, approval by a majority of the Shareholders;
(ii) joint ventures among the Trust and another party to the
Modification in the Olive case or any of their affiliates or
subsidiaries and a third party having no prior or intended future
business or financial relationship with specified persons, or
any affiliate of such persons, may be entered into on the
affirmative vote of a majority of the Trustees of the Trust.
[This space intentionally left blank.]
82
<PAGE> 83
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements
Reports of Independent Public Accountants - BDO Seidman
- Arthur Andersen LLP
Consolidated Balance Sheets -
December 31, 1994 and 1993
Consolidated Statements of Operations -
Years Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows -
Years Ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation
Schedule IV - Mortgage Loans on Real Estate
All other schedules are omitted because they are not applicable or because the
required information is shown in the Consolidated Financial Statements or the
notes thereto.
3. Exhibits
The following documents are filed as Exhibits to this report:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ------------------------------------------------------------------------------------------------------------------
<S> <C>
3.1 Second Amended and Restated Declaration of Trust (incorporated by reference to the Registrant's Current Report on Form
8-K dated August 14, 1987).
3.2 Amendment No. 1 to the Second Amended and Restated Declaration of Trust, (incorporated by reference to the Registrant's
Current Report on Form 8-K dated July 5, 1989) reporting change in name of Trust.
</TABLE>
83
<PAGE> 84
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K (Continued)
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ------------------------------------------------------------------------------------------------------------------
<S> <C>
3.3 Amendment No. 2 to the Second Amended and Restated Declaration of Trust, (incorporated by reference to the Registrant's
Current Report on Form 8-K dated March 22, 1990,) reporting deletion of liquidation provisions.
3.4 Amendment No. 3 to the Second Amended and Restated Declaration of Trust, (incorporated by reference to the Registrant's
Current Report on Form 8-K dated June 3, 1992) reporting the extension of the holding period of the Trust's marketable
equity securities.
3.5 Restated Trustees' Regulations dated as of April 21, 1989, (incorporated by reference to the Registrant's Current Report
on Form 8-K dated March 24, 1989).
10.1 Advisory Agreement dated as of December 1, 1992, between National Income Realty Trust and Basic Capital Management, Inc.
(incorporated by reference to Exhibit No. 10.2 to the Registrant's Annual Report on Form 10-K for the year ended December
31, 1992).
10.2 Brokerage Agreement dated as of December 1, 1992, between National Income Realty Trust and Carmel Realty, Inc.
(incorporated by reference to Exhibit No. 10.3 to the Registrant's Annual Report on Form 10-K for the year ended December
31, 1992).
10.3 Advisory Agreement dated as of February 15, 1994, between National Income Realty Trust and Tarragon Realty Advisors, Inc.
(incorporated by reference to Exhibit No. 10 to the Registrant's Current Report on Form 8-K dated February 10, 1994).
27.0 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K.
During the last quarter of the period covered by this report, no
reports on Form 8-K were filed on behalf of the Trust.
[This space intentionally left blank.]
84
<PAGE> 85
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NATIONAL INCOME REALTY TRUST
Dated: October 13, 1995 By: /s/ William S. Friedman
------------------------------ --------------------------
William S. Friedman
President, Chief Executive
Officer and Trustee
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Capacities In Which Signed Date
<S> <C> <C>
/s/ Carl B. Weisbrod Trustee and Chairman of the Board October 10, 1995
- ------------------------------------- ------------------------------
Carl B. Weisbrod
/s/ William S. Friedman President and Trustee October 13, 1995
- ------------------------------------- (Principal Executive Officer) ------------------------------
William S. Friedman
/s/ John A. Doyle Chief Financial Officer and October 10, 1995
- ------------------------------------- Chief Operating Officer (Principal ------------------------------
John A. Doyle Financial Officer)
/s/ Ivan Roth Treasurer
- ------------------------------------- ------------------------------
Ivan Roth
/s/ Katie Jackson Vice President and October 13, 1995
- ------------------------------------- Chief Accounting Officer ------------------------------
Katie Jackson (Principal Accounting Officer)
/s/ Irving E. Cohen Trustee
- ------------------------------------- ------------------------------
Irving E. Cohen
/s/ Sally Hernandez Pinero Trustee October 10, 1995
- ------------------------------------- ------------------------------
Sally Hernandez Pinero
/s/ Dan L. Johnston Trustee October 13, 1995
- ------------------------------------- ------------------------------
Dan L. Johnston
/s/ Lance Liebman Trustee October 11, 1995
- ------------------------------------- ------------------------------
Lance Liebman
/s/ Lawrence G. Schafran Trustee October 10, 1995
- ------------------------------------- ------------------------------
Lawrence G. Schafran
/s/ Raymond V.J. Schrag Trustee October 13, 1995
- ------------------------------------- ------------------------------
Raymond V. J. Schrag
</TABLE>
85
<PAGE> 86
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ------------------------------------------------------------------------------------------------------------------
<S> <C>
3.3 Amendment No. 2 to the Second Amended and Restated Declaration of Trust, (incorporated by reference to the Registrant's
Current Report on Form 8-K dated March 22, 1990,) reporting deletion of liquidation provisions.
3.4 Amendment No. 3 to the Second Amended and Restated Declaration of Trust, (incorporated by reference to the Registrant's
Current Report on Form 8-K dated June 3, 1992) reporting the extension of the holding period of the Trust's marketable
equity securities.
3.5 Restated Trustees' Regulations dated as of April 21, 1989, (incorporated by reference to the Registrant's Current Report
on Form 8-K dated March 24, 1989).
10.1 Advisory Agreement dated as of December 1, 1992, between National Income Realty Trust and Basic Capital Management, Inc.
(incorporated by reference to Exhibit No. 10.2 to the Registrant's Annual Report on Form 10-K for the year ended December
31, 1992).
10.2 Brokerage Agreement dated as of December 1, 1992, between National Income Realty Trust and Carmel Realty, Inc.
(incorporated by reference to Exhibit No. 10.3 to the Registrant's Annual Report on Form 10-K for the year ended December
31, 1992).
10.3 Advisory Agreement dated as of February 15, 1994, between National Income Realty Trust and Tarragon Realty Advisors, Inc.
(incorporated by reference to Exhibit No. 10 to the Registrant's Current Report on Form 8-K dated February 10, 1994).
27.0 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 3,484
<SECURITIES> 593
<RECEIVABLES> 16,271
<ALLOWANCES> (6,974)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 185,936
<DEPRECIATION> 39,427
<TOTAL-ASSETS> 217,040
<CURRENT-LIABILITIES> 138,316
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 73,360
<TOTAL-LIABILITY-AND-EQUITY> 217,040
<SALES> 0
<TOTAL-REVENUES> 40,135
<CGS> 0
<TOTAL-COSTS> 22,166
<OTHER-EXPENSES> 6,369
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,457
<INCOME-PRETAX> (780)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (254)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
