<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]*
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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)
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)
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 14, 1997, the registrant had 3,523,070 shares of beneficial
interest outstanding. Of the total shares outstanding, 2,335,893 were held by
other than those who may be deemed to be affiliated, for an aggregate value of
$32,702,502 based on the last trade as reported by the National Association of
Securities Dealers Automated Quotations System on March 14, 1997. 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
1
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INDEX TO
ANNUAL REPORT ON FORM 10-K
<TABLE>
<CAPTION>
Page
PART I
<S> <C> <C>
Item 1. Business.............................................................. 3
Item 2. Properties............................................................ 5
Item 3. Legal Proceedings..................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders................... 15
PART II
Item 5. Market for Registrant's Shares of Beneficial Interest and Related
Shareholder Matters................................................ 16
Item 6. Selected Financial Data................................................ 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 19
Item 8. Financial Statements and Supplementary Data........................... 28
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 64
PART III
Item 10. Trustees, Executive Officers, and Advisor of the Registrant........... 64
Item 11. Executive Compensation................................................ 76
Item 12. Security Ownership of Certain Beneficial Owners and Management........ 78
Item 13. Certain Relationships and Related Transactions........................ 81
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...... 84
Signature Page........................................................ 86
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
General
National Income Realty Trust (the "Trust" or the "Registrant") is a California
business trust that was organized pursuant to a declaration of trust dated
October 31, 1978, as amended, (the "Declaration of Trust") and which 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 "Code") and, in the opinion of the
Trust's management, has qualified for federal taxation as a REIT for each year
subsequent to December 31, 1978.
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,
these offices are suitable and adequate for its present operations.
Business Plan and Investment Policy
The Trust's business and only industry segment is investing in real estate
through direct acquisitions and partnerships and, to a lesser extent, financing
real estate and real estate related activities through mortgage loans.
Presently, the Trust's policy is to make mortgage loans only in connection
with, or to facilitate, the sale or acquisition of real estate. Accordingly, as
existing mortgage loans are paid off, the Trust's portfolio of mortgage notes
receivable is expected to decline. At December 31, 1996, the Trust's real
estate portfolio consisted of 58 properties including 37 multifamily
properties, 14 shopping centers, three office buildings, three parcels of land,
and one single family residence, located throughout the continental United
States, with concentrations in Florida, Texas, California, and Colorado. The
Trust also held investments in four real estate partnerships reported on the
equity method (owning five industrial warehouses, three office buildings, and
an apartment complex).
Due to the nature and numerous geographic locations of the Trust's properties
and the diverse profile among tenants, the Trust's business is not
significantly affected by seasonal factors.
Unlike most REITs, the Trust acquires older and often troubled properties that
are not considered institutional quality as well as better performing, new or
high quality properties. The Trust's acquisition strategy is opportunistic but
focused on acquiring properties that add to the efficiency of the Trust's
portfolio. For example, all thirteen of the apartment properties purchased by
the Trust since the beginning of 1994 were in markets where the Trust already
had a presence. The Trust has a policy of continuously improving and upgrading
its older properties in order to achieve increased revenues. During 1996, $7.2
million in capital expenditures were made to improve the quality of the
apartment portfolio. In addition, $2.5 million ($368 per unit) was expensed for
recurring replacements and repairs and maintenance. Management believes that a
significant portion of such expenditures was required to remedy deferred
maintenance existing at the time of acquisition and to upgrade maintenance and
landscaping standards. Accordingly, such expenses are expected to decline as
the proportion of stabilized properties in the Trust's portfolio increases.
The Trust has financed acquisitions and capital improvements largely with
internally generated funds. As a matter of policy, cash distributions have been
held to less than fifty percent of funds from operations ("FFO"), as defined by
the National Association of Real Estate Investment Trusts (see ITEM 6.
"SELECTED FINANCIAL DATA - Other Data" for the definition of FFO). Funds for
investment have
3
<PAGE> 4
ITEM 1. BUSINESS (Continued)
also been generated from the collection of mortgages receivable and the sale of
commercial properties, which sources are expected to decline in the future.
Accordingly, proceeds realized from financing or refinancing are expected to
provide the bulk of funds available for investment. In this regard, the
availability and cost of long term mortgage funds are key factors in the Trust's
ability to continue to make new investments without additional equity offerings.
Management of the Trust
The Trust's Board of Trustees (the "Board"), elected annually by the
shareholders or appointed by the incumbent Board until the next annual
shareholder meeting, is responsible for managing the affairs of the Trust.
There are currently eight members on the Board, seven of whom are unaffiliated
with the Trust. Day-to-day management is performed by Tarragon Realty Advisors,
Inc. ("Tarragon" or the "Advisor"), which operates under the supervision of the
Board pursuant to a written advisory agreement approved by shareholders.
Tarragon's duties include, among other things, locating, investigating,
evaluating, and recommending real estate investment and sale opportunities and
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 Board.
Tarragon has provided advisory services to the Trust since April 1, 1994. At
the annual meeting of shareholders held on March 20, 1997, the shareholders
approved the renewal of the advisory agreement between the Trust and Tarragon.
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 Mr. Friedman and Lucy N. Friedman, his wife. The Friedman family
owns approximately 32% of the outstanding shares of the Trust. The officers of
the Trust are also officers of Tarragon.
The Trust has no employees. Employees of Tarragon provide executive and
administrative services to the Trust and manage most of the Trust properties.
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 multifamily
properties and 1.5% to 5% 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 to the Trust. Beginning April 1,
1996, Tarragon Management, Inc. ("TMI"), a wholly-owned subsidiary of Tarragon,
assumed the property-level management for most of the Trust's properties for a
fee of 4.5% of the monthly gross rents collected.
Competition
The Trust has not experienced material competition for acquisitions in the
areas in which it invests. Management believes that ownership of properties in
which the Trust invests is highly fragmented among individuals, partnerships,
public and private corporations, and other REITs. No single entity or person
particularly dominates the market for such properties. At any given time, a
significant number of multifamily properties are available for purchase in the
various markets where the Trust seeks additional acquisitions. Management
believes that there is and will continue to be a strong demand for well
maintained, affordable housing in these markets and that the factors discussed
above provide a market where a sufficient number of attractive investment
opportunities will be available to allow the Trust to continue to expand
through
4
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ITEM 1. BUSINESS (Continued)
Competition (Continued)
acquisitions. 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 living, 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.
Tarragon also serves as the advisor to Vinland Property Trust ("VPT"). All of
the officers of the Trust are also officers of VPT. Tarragon and the Trust
officers owe fiduciary duties to VPT as well as to the Trust. In determining to
which entity a particular investment opportunity will be allocated, Tarragon
and the Trust officers consider the respective investment objectives of each
entity and the appropriateness of a particular investment in light of each
entity's existing real estate portfolio. To the extent that any particular
investment opportunity is appropriate for both entities, such investment
opportunity will be allocated to the entity which has had uninvested funds for
the longer period of time, or, if appropriate, the investment may be shared
between both entities. Tarragon periodically informs the Board of real estate
investments made by any of its affiliates, and the Board periodically reviews
the performance of such other investments.
Certain Factors Associated with Real Estate and Related Investments
The Trust is subject to the risks associated with ownership, operation, and
financing of real estate. These risks include, but are not limited to,
liability for environmental hazards; 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; changes in income taxes, real estate
taxes, or 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 some of these risks are partially mitigated by the
diversification by geographic region and property type of the Trust's real
estate and mortgage portfolios. However, to the extent new equity investments
continue to be concentrated in any particular region or property type, the
advantages of diversification may diminish.
ITEM 2. PROPERTIES
Details of the Trust's real estate portfolio at December 31, 1996, are set
forth in Schedule III to the Consolidated Financial Statements and NOTE 4.
"REAL ESTATE AND DEPRECIATION" of the Notes to Consolidated Financial
Statements, both included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA." The discussion set forth below provides certain summary information
concerning the Trust's real estate portfolio.
To continue to qualify for federal taxation as a REIT under the Code, the Trust
is required, among other things, to hold at least 75% of the value of its
assets in real estate assets, government securities, and cash and cash
equivalents at the close of each quarter of each taxable year. At December 31,
1996, 92% of the Trust's assets consisted of equity investments in real estate
and real estate held for sale, 2% consisted of investments in partnerships
which own real estate, and 2% consisted of cash and cash equivalents. The
remaining 4% of the Trust's assets at December 31, 1996, was notes and interest
receivable, restricted cash, and other assets. It should be noted, however,
that the percentage of the Trust's assets invested in any one category at any
particular
5
<PAGE> 6
ITEM 2. PROPERTIES (Continued)
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.
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.]
Real Estate
At December 31, 1996, the Trust held investments in each of the geographic
regions of the continental United States, although its multifamily properties
were concentrated in the Southeast and Southwest, as shown more specifically in
the table below.
During 1996, the Trust purchased two multifamily properties, acquired one
shopping center through a deed in lieu of foreclosure of collateral securing a
mortgage note receivable, and sold one office building. Its multifamily
portfolio consists of 7,078 operating apartments, 265 apartments under
development, and 300 apartments in a 50% owned unconsolidated partnership. At
December 31, 1996, the Trust's real estate portfolio consisted of 58
properties, 49 of which were held for investment. The remaining nine
properties, some of which were obtained through foreclosure of collateral
securing the Trust's mortgage notes receivable, were held for
6
<PAGE> 7
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
sale. Thirteen Trust properties with an aggregate carrying value of $22.7
million were held free and clear. The other 45 Trust properties were pledged to
secure first mortgage debt totaling $133.0 million at December 31, 1996.
Types of Real Estate Investments. The Trust's real estate consists of
multifamily 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 Board 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 traditionally invested in a wide variety of developed,
income-producing real estate, the Trust intends to invest increasing amounts in
major apartment renovations and new construction or development projects either
directly or in partnership with unaffiliated partners. To the extent the Trust
invests in construction and development projects, it is subject to the business
risks, such as cost overruns and delays, associated with such higher risk
activities. The Trust purchased The Vistas at Lake Worth ("The Vistas") in Fort
Worth, Texas, in December 1994. The Trust is in the process of expanding and
redeveloping this property to a projected 265 operating units with funds from
the general working capital of the Trust at an estimated cost of $12.0 million,
$3.0 million of which had been incurred as of December 31, 1996. The
redevelopment and expansion of The Vistas is expected to be completed in the
fourth quarter of 1997. As of December 31, 1996, the Trust had substantially
completed the redevelopment of The Regent Apartments, a 304-unit property
located in Jacksonville, Florida, at a cost of $4.0 million. In January 1997,
the Trust acquired a 50% partnership interest in RI Windsor, Ltd., which was
established to construct The Mayfaire at Windsor Parke, a 324-unit luxury
apartment complex in Jacksonville, Florida, at an estimated cost of $19.0
million. Construction of this property is expected to be completed in the
fourth quarter of 1997.
The following table sets forth the percentages, by property type and geographic
region, of the Trust's operating real estate (other than the development
property, unimproved land, and a single-family residence) at December 31, 1996:
<TABLE>
<CAPTION>
Multifamily Commercial
Region Properties Properties
------ ---------- ----------
<S> <C> <C>
Northeast 7.6% - %
Southeast 40.3% 53.7%
Southwest 24.0% 11.6%
Midwest 9.2% 21.8%
Mountain 12.4% 3.7%
Pacific 6.5% 9.2%
-------- ---------
100.0% 100.0%
</TABLE>
The foregoing table is based solely on the number of operating apartment units
and amount of commercial square footage owned by the Trust and does not reflect
the value of the investments in each region.
7
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ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
A summary of 1996 activity in the Trust's owned real estate portfolio is as
follows:
<TABLE>
<S> <C>
Properties owned at January 1, 1996 ....................... 56*
Properties purchased ...................................... 2
Property acquired through deed in lieu of foreclosure ..... 1
Property sold ............................................. (1)
-----
Properties owned at December 31, 1996...................... 58
=====
</TABLE>
The following table presents certain information relating to real estate owned
at December 31, 1996. The Trust also owns three parcels of land, a single
family residence, and one development project (The Vistas in Fort Worth,
Texas), which are not included in the table.
- --------------
* Includes Devonshire/Dunhill/Sandstone combined. This property was previously
reported as two separate properties.
[This space intentionally left blank.]
8
<PAGE> 9
NATIONAL INCOME REALTY TRUST
REAL ESTATE SUMMARY
DECEMBER 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Average Rent Per Sq. Ft.(a) Current
Number Year Ended December 31, Market
of Square --------------------------- Rent Per
Property Location Units Feet 1996 1995 1994 Sq. Foot(b)
-------- -------- ----- ---- ------ ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PROPERTIES ACQUIRED PRIOR TO DECEMBER 31,1994:
Apartments:
Acadian Place Baton Rouge, LA 120 143,450 $ 3.74 $ 3.62 $ 3.70 $ 5.18
Bay West Bradenton, FL 299 323,774 5.22 5.35 5.25 6.11
Bayfront Houston, TX 200 172,720 5.56 5.92 5.93 7.18
Bryan Hill Bethany, OK 232 193,500 4.59 4.36 4.56 5.43
Carlyle Towers Detroit, MI 163 247,850 5.39 5.27 5.11 6.43
Cornell Los Angeles, CA 55 30,150 12.70 12.06 10.38 14.79
Creekwood North Altamonte Springs, FL 180 166,500 5.56 5.07 5.07 6.91
Cross Creek Lexington, KY 144 102,258 7.14 6.91 7.22 8.34
Devonshire/Dunhill/
Sandstone Denver, CO 760 525,660 5.80 4.85 4.20 7.62
Diamond Loch Fort Worth, TX 138 139,354 5.57 4.96 4.84 6.40
Fenway Hall Los Angeles, CA 53 27,175 11.68 11.04 8.67 12.33
Forest Oaks Lexington, KY 154 132,460 5.68 5.49 5.62 6.34
Heather Hills Temple Hills, MD 459 401,029 7.87 8.61 8.75 10.24
Huntington Green West Town, PA 80 80,240 6.64 6.46 6.47 7.77
Kirklevington Lexington, KY 126 99,080 6.56 5.97 5.99 7.84
Lake Point Memphis, TN 540 540,160 3.92 3.68 3.95 5.13
Mariposa Manor Los Angeles, CA 41 19,710 9.25 9.03 7.28 10.35
Martins Landing Lakeland, FL 236 207,704 6.41 6.15 6.05 7.06
Palm Court North Miami, FL 144 125,280 7.47 7.25 7.01 8.76
Park Dale Gardens Dallas, TX 224 206,640 5.26 5.04 4.54 6.29
Pheasant Pointe Sacramento, CA 215 178,666 7.31 6.68 6.64 8.42
Pinecrest Ft. Lauderdale, FL 324 226,065 12.06 11.42 11.19 14.07
Plaza Hills Kansas City, MO 66 67,464 6.93 6.61 5.91 7.59
Prado Bay N. Bay Village, FL 123 109,756 8.72 8.45 8.01 9.97
Spring Pines Houston, TX 136 118,430 5.27 4.93 4.69 6.01
Summit on the Lake Fort Worth, TX 198 138,262 7.51 7.11 6.80 8.37
Woodcreek (CO) Denver, CO 120 99,622 8.36 7.97 7.40 9.11
Woodcreek (FL) Jacksonville, FL 260 198,623 6.82 6.33 5.88 7.68
----- --------- ------ ------ ------ ------
SUBTOTAL OR WEIGHTED AVERAGE(e) 5,790 5,021,582 6.30 6.04 5.88 7.58
----- --------- ------ ------ ------ ------
Office Buildings:
Emerson Center Atlanta, GA - 126,979 7.51 5.47 5.36 12.47
NW O'Hare Des Plaines, IL - 105,363 11.38 10.94 10.91 13.75
Rancho Sorrento San Diego, CA - 147,973 6.16 4.74 7.55 7.85
----- --------- ------ ------ ------ ------
SUBTOTAL OR WEIGHTED AVERAGE(e) - 380,315 8.06 6.70 7.75 11.03
----- --------- ------ ------ ------ ------
<CAPTION>
Economic Occupancy(c)
Year Ended December 31, Physical
------------------------ Occupancy
Property 1996 1995 1994 Dec. 31, 1996(d)
-------- ---- ---- ---- ----------------
<S> <C> <C> <C> <C>
PROPERTIES ACQUIRED PRIOR TO DECEMBER 31,1994:
Apartments:
Acadian Place 84% 85% 90% 77%
Bay West 92% 94% 95% 91%
Bayfront 84% 92% 94% 81%
Bryan Hill 93% 91% 96% 97%
Carlyle Towers 91% 93% 92% 88%
Cornell 95% 94% 84% 100%
Creekwood North 90% 89% 89% 91%
Cross Creek 91% 90% 93% 92%
Devonshire/Dunhill/
Sandstone 88% 80% 71% 86%
Diamond Loch 95% 91% 92% 90%
Fenway Hall 97% 92% 83% 96%
Forest Oaks 92% 93% 97% 97%
Heather Hills 87% 92% 93% 81%
Huntington Green 93% 93% 96% 94%
Kirklevington 91% 91% 93% 95%
Lake Point 85% 83% 90% 85%
Mariposa Manor 93% 90% 79% 88%
Martins Landing 95% 96% 97% 94%
Palm Court 93% 96% 97% 95%
Park Dale Gardens 95% 96% 93% 94%
Pheasant Pointe 95% 90% 90% 96%
Pinecrest 92% 90% 90% 95%
Plaza Hills 98% 96% 95% 99%
Prado Bay 92% 92% 89% 94%
Spring Pines 95% 93% 89% 96%
Summit on the Lake 95% 95% 97% 94%
Woodcreek (CO) 96% 95% 97% 96%
Woodcreek (FL) 94% 94% 91% 94%
-- -- -- --
SUBTOTAL OR WEIGHTED AVERAGE(e) 91% 90% 90% 90%
-- -- -- --
Office Buildings:
Emerson Center 65% 55% 51% 79%
NW O'Hare 88% 78% 75% 88%
Rancho Sorrento 78% 63% 77% 96%
-- -- -- --
SUBTOTAL OR WEIGHTED AVERAGE(e) 77% 65% 68% 88%
-- -- -- --
</TABLE>
9
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NATIONAL INCOME REALTY TRUST
REAL ESTATE SUMMARY (CONTINUED)
DECEMBER 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Average Rent Per Sq. Ft.(a) Current
Number Year Ended December 31, Market
of Square --------------------------- Rent Per
Property Location Units Feet 1996 1995 1994 Sq. Foot(b)
-------- -------- ----- ---- ------ ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PROPERTIES ACQUIRED PRIOR TO DECEMBER 31,1994:
Shopping Centers:
Emerson Center Atlanta, GA - 17,733 $13.61 $12.41 $ 5.56 $13.61
K-Mart Plaza Charlotte, NC (f) - 117,200 0.39 0.42 0.54 1.66
K-Mart Plaza Temple Terrace, FL - 63,887 3.65 3.65 3.65 3.65
K-Mart Plaza Thomasville, GA (g) - 55,552 2.96 2.96 2.96 2.96
Lakeview Mall Manitowoc, WI - 214,620 1.43 1.33 1.26 3.45
Midland Plaza Midland, MI - 30,650 3.38 3.38 3.38 3.38
Midway Mills Carrollton, TX - 72,065 9.70 8.91 8.32 10.19
Mountain View Las Vegas, NV - 20,092 10.17 9.80 9.72 10.71
Northside Mall Gainesville, FL (h) - 139,337 3.93 3.86 4.19 4.16
Southgate Waco, TX - 94,675 2.10 2.50 2.62 4.35
Stewart Square Las Vegas, NV - 39,600 8.96 8.04 6.55 9.28
Times Square Lubbock, TX - 19,550 4.72 3.38 3.68 5.96
----- --------- ------- ------- ------- -------
SUBTOTAL OR WEIGHTED AVERAGE (e) - 884,961 3.61 3.45 3.27 4.64
----- --------- ------- ------- ------- -------
SUBTOTAL PRIOR TO ACQUISITIONS (e) - 6,286,858 6.03 5.72 5.62 7.37
----- --------- ------- ------- ------- -------
1995 Acquisitions:
Marina Park North Miami, FL 90 86,850 7.76 6.55 - 9.71
Meadowbrook Baton Rouge, LA 200 127,524 6.76 6.65 - 7.64
Mustang Creek Arlington, TX 120 167,880 5.11 5.06 - 6.19
Park Norton Los Angeles, CA 55 25,208 7.48 4.51 - 9.52
Park Place Los Angeles, CA 39 15,640 8.15 2.04 - 10.80
K-Mart Plaza Indianapolis, IN (i) - 96,268 .56 3.33 - 0.00
----- --------- ------- ------- ------- -------
SUBTOTAL OR WEIGHTED AVERAGE (e) 504 519,370 5.32 5.26 - 7.72
----- --------- ------- ------- ------- -------
1996 Acquisitions:
River City Landing Jacksonville, FL 352 356,800 2.79 - - 5.50
The Regent Jacksonville, FL (j) 304 288,320 1.74 - - 5.98
Woodbrier Oklahoma City, OK 128 114,900 4.59 - - 5.10
Jackson Square Jackson, MS - 341,624 1.31 - - 3.67
----- --------- ------- ------- ------- -------
SUBTOTAL OR WEIGHTED AVERAGE (e) 784 1,101,644 2.24 - - 5.02
----- --------- ------- ------- ------- -------
ACQUISITIONS SUBTOTAL OR WEIGHTED AVERAGE (e) 1,288 1,621,014 3.23 5.26 - 5.77
----- --------- ------- ------- ------- -------
GRAND TOTAL 7,078 7,907,872 $ 5.45 $ 5.68 $ 5.62 $ 7.06
===== ========= ======= ======= ======= =======
<CAPTION>
Economic Occupancy(c)
Year Ended December 31, Physical
------------------------ Occupancy
Property 1996 1995 1994 Dec. 31, 1996(d)
-------- ---- ---- ---- ----------------
<S> <C> <C> <C> <C>
PROPERTIES ACQUIRED PRIOR TO DECEMBER 31,1994:
Shopping Centers:
Emerson Center 100% 96% 63% 100%
K-Mart Plaza 21% 21% 27% 3%
K-Mart Plaza 100% 100% 100% 100%
K-Mart Plaza 100% 100% 100% 100%
Lakeview Mall 43% 45% 65% 40%
Midland Plaza 100% 100% 100% 100%
Midway Mills 99% 95% 91% 99%
Mountain View 100% 100% 100% 100%
Northside Mall 94% 94% 99% 95%
Southgate 50% 64% 68% 36%
Stewart Square 92% 87% 80% 94%
Times Square 80% 59% 64% 84%
-- -- -- --
SUBTOTAL OR WEIGHTED AVERAGE (e) 69% 69% 75% 64%
-- -- -- --
SUBTOTAL PRIOR TO ACQUISITIONS (e) 87% 86% 87% 86%
-- -- -- --
1995 Acquisitions:
Marina Park 88% 88% - 90%
Meadowbrook 94% 92% - 93%
Mustang Creek 89% 93% - 82%
Park Norton 81% 51% - 93%
Park Place 85% 43% - 98%
K-Mart Plaza 17% 100% - 0%
-- -- -- --
SUBTOTAL OR WEIGHTED AVERAGE (e) 76% 90% - 88%
-- -- -- --
1996 Acquisitions:
River City Landing 55% - - 47%
The Regent 31% - - 55%
Woodbrier 97% - - 95%
Jackson Square 46% - - 44%
-- -- -- --
SUBTOTAL OR WEIGHTED AVERAGE (e) 50% - - 53%
-- -- -- --
ACQUISITIONS SUBTOTAL OR WEIGHTED AVERAGE (e) 58% 90% - 63%
-- -- -- --
GRAND TOTAL 81% 86% 87% 82%
== == == ==
</TABLE>
10
<PAGE> 11
NATIONAL INCOME REALTY TRUST
REAL ESTATE SUMMARY (CONTINUED)
DECEMBER 31, 1996
(Unaudited)
(a) Amounts represent rental revenue per square foot on an annual basis.
Rental revenue is equal to gross potential rent after giving effect to all
rental losses including bad debts, vacancies, and discounts and
concessions. Gross potential rent equals actual lease rates on leased
units/space and market rates on vacant units/space.
(b) Represents annualized market rate per square foot at December 31, 1996,
based upon scheduled rents at such time.
(c) Computed as follows: [(Annual gross potential rent less annual vacancy
losses) divided by annual gross potential rent].
(d) Represents actual physical occupancy as of the end of the last week of the
fiscal year ended December 31, 1996.
(e) The weighted average rent per square foot and occupancy are based on the
square footage in each property.
(f) K-Mart's lease expired January 1994. At December 31, 1996, space had not
been re-leased.
(g) Lease expires September 2004. During the first quarter of 1995, K-Mart
moved out and sublet the space to two tenants.
(h) K-Mart's lease expires September 2002. K-Mart moved out in 1993 and
continues to pay the scheduled rent on the portion of the space it has not
sublet.
(i) Acquired through a deed in lieu of foreclosure on December 31, 1994. For
purposes of this schedule, it has been classified as a 1995 acquisition.
Prior to the Trust acquiring the property, K-Mart vacated the premises,
and the lease was assigned to the City of Indianapolis. The City of
Indianapolis ceased rent payments in March 1996 due to condemnation of the
property. See NOTE 4. "REAL ESTATE AND DEPRECIATION" to the Notes to
Consolidated Financial Statements for a discussion of the condemnation.
(j) This property is included with 1996 acquisitions because redevelopment was
substantially completed during 1996 although the property was purchased in
1995.
Management believes that its properties are adequately covered by liability and
casualty insurance, consistent with industry standards.
11
<PAGE> 12
NATIONAL INCOME REALTY TRUST
MORTGAGE LOANS SECURED BY OWNED PROPERTIES
DECEMBER 31, 1996
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Stated Balance
Original Balance Interest Maturity Due at
Name of Property Amount Dec 31, 1996 Rate (A) Date Maturity
- ---------------- ----------- ------------ ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Residential
Acadian Place....................... $ 600 $ 551 8.50% Apr - 97 $ 547
Bay West............................ 5,100 4,916 8.89% Jan - 19 -
Bayfront............................ 2,086 2,032 8.99% Jul - 00 1,953
Bryan Hill.......................... 3,500 2,999 8.50% Nov - 97 2,962
Carlyle Towers...................... 4,500 4,019 8.69% Mar - 99 3,625
Cornell............................. 1,623 1,508 8.38% Jan - 99 1,504
Creekwood North..................... 3,050 3,036 8.05% May - 06 2,683
Cross Creek......................... 2,000 1,962 9.78% Feb - 00 1,882
Fenway Hall......................... 1,375 1,320 8.38% Oct - 98 1,287
Forest Oaks......................... 3,075 3,056 8.16% Jun - 06 2,501
Heather Hills....................... 16,790 16,750 7.88% Jan - 31 117
Kirklevington....................... 2,470 2,440 9.00% Nov - 99 2,364
Lake Point.......................... 7,165 6,992 9.36% Oct - 01 6,466
Marina Park......................... 2,500 2,448 8.75% May - 98 2,385
Mariposa Manor...................... 784 767 8.13% Apr - 02 701
Martins Landing..................... 5,000 4,931 7.65% Dec - 05 4,014
Palm Court.......................... 3,000 2,937 9.67% Dec - 04 2,525
Park Dale Gardens................... 3,000 2,946 8.30% Jul - 05 2,448
Park Norton......................... 564 553 5.81% Jun - 05 341
Pheasant Pointe..................... 6,200 5,743 9.75% Oct - 97 5,682
Pinecrest........................... 9,250 8,202 7.33% May - 98 7,954
Plaza Hills......................... 1,773 1,764 8.35% Jul - 06 1,449
Prado Bay........................... 3,000 2,888 8.43% Nov - 99 2,663
River City Landing.................. 4,800 4,771 8.09% Dec - 99 4,578
River City Landing.................. 130 130 6.00% Jan - 97 130
Summit on the Lake.................. 5,500 3,555 8.63% Sep - 07 2,398
Woodbrier........................... 1,300 1,203 7.93% Nov - 03 872
Woodcreek (CO)...................... 3,000 2,862 8.69% Mar - 99 2,750
Woodcreek (FL)...................... 3,800 3,728 9.73% Feb - 05 3,203
----------- -------- --------- ---------
106,935 101,009 8.48% (B) 71,984
----------- -------- --------- ---------
</TABLE>
- --------------------
(A) For loans with variable interest rates, the rate in effect at December 31,
1996, is presented.
(B) Represents weighted average interest rate at December 31, 1996.
12
<PAGE> 13
NATIONAL INCOME REALTY TRUST
MORTGAGE LOANS SECURED BY OWNED PROPERTIES (Continued)
DECEMBER 31, 1996
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Stated Balance
Original Balance Interest Maturity Due at
Name of Property Amount Dec 31, 1996 Rate (A) Date Maturity
- ---------------- ------------ ------------ ------- --------- -------------
<S> <C> <C> <C> <C> <C>
Office Buildings
Emerson Center...................... $ 2,900 $ 2,883 8.75% May - 99 $ 2,808
Emerson Center......................(B) 1,218 977 - May - 99 841
Northwest O'Hare.................... 2,000 881 7.75% Nov - 98 676
Northwest O'Hare.................... 415 245 8.75% Feb - 01 159
Rancho Sorrento..................... 3,550 2,904 9.00% Aug - 00 2,414
------------ --------------- ------- -----------
10,083 7,890 8.73% (C) 6,898
------------ --------------- ------- -----------
Shopping Centers
Emerson Center...................... 1,250 1,224 9.50% Jul - 99 1,193
K-Mart - Charlotte.................. 1,360 1,279 9.75% Oct - 98 1,230
K-Mart - Indianapolis (D)........... 2,540 1,725 9.75% Sep - 06 -
K-Mart - Temple Terrace............. 1,750 1,031 8.50% May - 05 -
K-Mart - Temple Terrace............. 347 329 10.25% Oct - 98 317
K-Mart - Thomasville................ 1,300 805 9.63% Sep - 05 -
K-Mart - Thomasville................ 290 275 10.25% Oct - 98 267
Midland Plaza....................... 305 289 9.75% Oct - 98 277
Midway Mills........................ 4,200 4,155 8.64% Dec - 05 3,455
Mountain View....................... 1,050 1,047 11.68% Aug - 01 993
Northside Center.................... 3,100 1,853 9.00% Nov - 05 -
Southgate........................... 2,263 1,306 8.00% Oct - 03 982
------------ --------------- ------- -----------
19,755 15,318 9.25% (C) 8,714
------------ --------------- ------- -----------
Line of credit (E)................. 9,000 8,764 8.75% Sep - 98 -
------------ --------------- ------- -----------
Total................................... $ 145,773 $ 132,981 8.60% (C) $ 87,596
============ =============== ======= ===========
</TABLE>
- -------------------
(A) For loans with variable interest rates, the rate in effect at December 31,
1996, is presented.
(B) Represents non-interest bearing unsecured debt associated with the property
payable from 30% of Excess Cash Flow, as defined, of the property or funds
from the sale or refinance of the property.
(C) Represents weighted average interest rate at December 31, 1996.
(D) The Trust ceased making debt service payments on this non-recourse loan in
March 1996 upon condemnation of the collateral property. See NOTE 4. "REAL
ESTATE AND DEPRECIATION" in the Notes to Consolidated Financial Statements
for a discussion of the condemnation.
(E) The line of credit is secured by mortgages on Diamond Loch, Meadowbrook,
Mustang Creek, and The Regent.
13
<PAGE> 14
ITEM 2. PROPERTIES (Continued)
Real Estate (Continued)
Partnership Properties. The Trust and Continental Mortgage and Equity Trust
("CMET") own Sacramento Nine ("SAC 9"), which consists of two fully leased
office buildings in the vicinity of Sacramento, California, as
tenants-in-common. The Trust has a 70% undivided interest in SAC 9. Under the
terms of the joint tenancy agreement, unanimous consent is required of both the
Trust and CMET for any material changes in the operations of the properties,
including sales, refinancings, and changes in property management. The Trust,
as a noncontrolling partner, accounts for its investment in SAC 9 using the
equity method.
The Trust and CMET are also partners in Income Special Associates ("ISA"), a
general 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., formerly
known as Adams Properties Associates, which currently owns five industrial
warehouses. The Trust, as a noncontrolling partner, accounts for its investment
in ISA using the equity method.
The Trust holds a 49% limited partner interest and a 1% general partner
interest in English Village Partners, L.P. ("English Village"), which owns a
300-unit apartment complex in Memphis, Tennessee. The Trust, as a
noncontrolling partner, accounts for its investment in English Village using
the equity method.
In June 1995, the Trust acquired a 50% economic interest in an office building
located at 801 Pennsylvania Avenue, Washington, D.C., (the "Property") through
the purchase of a first lien mortgage note with a face value of $8.5 million
(the "Note") for $3.0 million. In accordance with the terms of the Note, the
Trust's $3.0 million investment, as well as any additional advances made to the
Property, is to be repaid from Property cash flow after operating expenses with
interest at the rate of 11% per annum. The $5.5 million remaining balance of
the Note plus accrued interest may be satisfied by payment of 50% of all funds
available after Property operating expenses plus 50% of the proceeds from any
sale and any refinancing. The Note is nonrecourse to all parties and is secured
only by the Property. The Trust accounts for this investment under the equity
method.
The following table sets forth certain information relating to the Trust's
partnerships' properties as of December 31, 1996.
<TABLE>
<CAPTION>
Average Rent Economic
Per Square Foot(a) Occupancy(b)
Property Square ---------------- -----------------
Partnership Location Footage 1996 1995 1996 1995
------------------ -------------- --------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Sacramento Nine Rancho Cordova, CA 103,764 $ 10.76 $ 11.14 91% 100%
801 Pennsylvania Washington, D.C. 58,153 9.32 12.03 56% 60%
Indcon, L.P. (C) Various locations 327,412 4.05 2.00 77% 95%
English Village Memphis, TN 364,680 4.64 4.62 93% 96%
</TABLE>
- ---------------------
(a) Amounts represent rental revenue per square foot on an annual basis.
Rental revenue is equal to gross potential rent after giving effect to all
rental losses including bad debts, vacancies, and discounts and
concessions. Gross potential rent equals actual lease rates on leased
units/space and market rates on vacant units/space.
(b) Computed as follows: [(Annual gross potential rent less annual vacancy
losses) divided by annual gross potential rent].
(c) The 1995 average rent per square foot and economic occupancy presented
related to over 3 million square feet in 32 warehouses which Indcon, L.P.,
owned at December 31, 1995. Indcon, L.P., owned five warehouses at
December 31, 1996.
14
<PAGE> 15
ITEM 3. LEGAL PROCEEDINGS
The Trust is a party to various claims and routine litigation arising in the
ordinary course of business. Management of the Trust does not believe that the
results of these claims and litigation, individually or in the aggregate, will
have a material adverse effect on its business or financial position. Also, see
ITEM 10. "TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT" for a
description of the results of the Olive modification.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no matter
was submitted to a vote of security holders.
[This space intentionally left blank.]
15
<PAGE> 16
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 under
the symbol "NIRTS." The following table sets forth the high and low bid
quotations of the Shares as reported by the NASDAQ system for the periods
indicated, which consist of the last two fiscal years and the quarter ending
for which this report is filed, all after giving retroactive effect to the 10%
share distributions in September 1995 and September 1996. Over-the-counter
market quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commissions, and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
1996 1995
--------------------- ------------------
High Low High Low
-------- -------- -------- -------
<S> <C> <C> <C> <C>
First quarter $12 $10 $ 9 3/4 $ 9 5/8
Second quarter 12 3/4 12 9 3/4 9 1/2
Third quarter 12 3/4 12 1/4 9 3/4 9 1/2
Fourth quarter 12 3/8 12 10 9 3/4
</TABLE>
For the first quarter of 1997 through March 27, 1997, the high and low bid
quotations of the Shares as reported by the NASDAQ system were $15 1/4 and
$12 1/4, respectively. During this period, the Trust's Shares traded as high
as $15 3/4. Such shares were held by approximately 6,100 holders of record and
approximately 4,000 beneficial holders.
Cash distributions paid to shareholders in 1996 and 1995 were as follows
(restated to give effect to the 1996 and 1995 share distributions):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
First quarter $ .18 $ .16
Second quarter .18 .17
Third quarter .18 .17
Fourth quarter .20 .18
</TABLE>
[This space intentionally left blank.]
16
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA (Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Income ............................. $ 49,962 $ 45,240 $ 40,135 $ 36,357 $ 30,047
Expenses ........................... (49,176) (46,214) (40,915) (40,370) (38,361)
----------- ----------- ----------- ----------- -----------
Income (loss) before gains on
sales of real estate and
investments and insurance
settlement and extraordinary
gain ............................. 786 (974) (780) (4,013) (8,314)
Gain on sale of real estate ........ 3,700 533 385 945 --
Gain on sale of investments ........ -- 412 141 -- --
Gain on insurance settlement ....... 451 -- -- -- --
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing
operations ....................... 4,937 (29) (254) (3,068) (8,314)
Extraordinary gain ................. -- 737 -- 8,888 --
----------- ----------- ----------- ----------- -----------
Net income (loss) .................. $ 4,937 $ 708 $ (254) $ 5,820 $ (8,314)
=========== =========== =========== =========== ===========
EARNINGS PER SHARE DATA (1)
Income (loss) from continuing
operations ....................... $ 1.32 $ (.01) $ (.06) $ (.74) $ (1.86)
Extraordinary gain ................. -- .20 -- 2.15 --
----------- ----------- ----------- ----------- -----------
Net income (loss) .................. $ 1.32 $ .19 $ (.06) $ 1.41 $ (1.86)
=========== =========== =========== =========== ===========
Distributions (2) .................. $ .74 $ .68 $ .52 $ .15 $ --
Weighted average shares (3) ........ 3,733,036 3,764,306 3,924,926 4,132,279 4,471,789
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Real estate ........................ $ 195,251 $ 195,675 $ 185,358 $ 172,634 $ 167,205
Notes and interest receivable ...... 2,007 12,662 16,271 19,394 30,611
Investments in partnerships ........ 4,739 10,780 11,026 11,804 12,583
Total assets ....................... 211,341 222,038 217,040 199,486 205,517
Notes, debentures, and
interest payable ................. 134,270 144,497 138,316 114,351 123,263
Shareholders' equity ............... 69,063 69,627 73,360 78,174 74,927
Book value per share ............... $ 19.60 $ 20.53 $ 22.81 $ 22.94 $ 20.31
</TABLE>
- -----------------
(1) Share and per share data have been restated to give effect to 10% share
distributions paid in September 1996, September 1995, September 1994, and
July 1993.
(2) Distributions in 1996, 1995, and 1994 represented return of capital. 1993
distributions were taxable to shareholders as ordinary income.
(3) Represents the weighted average shares of beneficial interest used in the
computation of earnings per share.
17
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA (Continued) (Dollars in thousands, except per
share data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OTHER DATA
Net income (loss) ................... $ 4,937 $ 708 $ (254) $ 5,820 $ (8,314)
Gain on sale of real estate ....... (3,700) (533) (385) (945) --
Gain on sale of investments ....... -- (412) (141) -- --
Gain on insurance settlement ...... (451) -- -- -- --
Extraordinary gain ................ (737) -- (8,888) --
Equity (income) loss .............. (1,500) (770) (105) 34 (204)
Depreciation ...................... 5,374 5,959 4,992 4,639 3,982
Provision for losses .............. 300 (425) -- 1,390 2,400
Funds from operations-
equity affiliates ............... 906 1,652 1,191 884 969
--------- --------- --------- --------- ---------
FUNDS FROM OPERATIONS (1) .............. $ 5,866 $ 5,442 $ 5,298 $ 2,934 $ (1,167)
========= ========= ========= ========= =========
FUNDS FROM OPERATIONS PER SHARE (2) .... $ 1.57 $ 1.45 $ 1.35 $ .71 $ (.26)
========= ========= ========= ========= =========
</TABLE>
(1) Funds from operations ("FFO"), as defined by the National Association of
Real Estate Investment Trusts, 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 - equity
affiliates" is calculated to reflect funds from operations in the same
manner. The amortization of deferred financing costs and prepaid leasing
commissions is not added to net income (loss) in the Trust's calculation
of FFO, which is consistent with the Trust's historical calculation of
FFO. FFO 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 distributions.
(2) Per share data have been restated to give effect to 10% share
distributions paid in September 1996, September 1995, September 1994, and
July 1993.
[This space intentionally left blank.]
18
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and the accompanying Notes thereto.
Introduction
National Income Realty Trust (the "Trust") invests in real estate through
acquisitions and joint ventures and, to a lesser extent, in mortgage loans
secured by real estate. The Trust was organized on October 31, 1978, and
commenced operations on March 27, 1979. At December 31, 1996, the Trust's real
estate portfolio included 58 properties (nine held for sale) located throughout
the United States, with concentrations in the Southeast and Southwest. These
properties consisted of 37 apartment complexes, 14 shopping centers, three
office buildings, three parcels of land, and one single-family residence. All
of the Trust's real estate, except for thirteen properties, is encumbered by
mortgages. The Trust's current policy is to make mortgage loans only in
connection with, and to facilitate, the sale or acquisition of real estate.
Accordingly, as existing mortgages are paid off, the Trust's portfolio of
mortgage notes receivable is expected to decline.
The Trust's objective is to maximize the long term value of its real estate
portfolio with an emphasis on increasing operating income and future cash
distributions to shareholders. Management focuses on both the appreciation of
the existing real estate portfolio, through intensive management and capital
improvements, and enlarging the portfolio with highly selective and
opportunistic acquisitions concentrated on older, undermanaged, and
underperforming multifamily projects in geographical regions where the Trust
presently owns properties. In addition to raising capital through operating
income, the Trust intends to generate capital through mortgage refinancings and
selective disposition of certain assets.
Liquidity and Capital Resources
Unrestricted cash and cash equivalents aggregated $3.9 million at December 31,
1996, compared with $1.7 million at December 31, 1995. The Trust's principal
sources of cash have been property operations, collections of mortgage notes
receivable, and external sources, such as property sales and refinancings. The
Trust expects these sources will continue to be sufficient to meet projected
cash requirements, including debt service obligations, property maintenance and
improvements, and continuation of regular distributions.
Operating Activities
The Trust's cash flow from property operations (rentals collected less payments
for property operating expenses) continues to increase from $14.7 million in
1994 to $17.6 million in 1995 and $19.3 million in 1996, primarily due to the
operations of properties acquired by the Trust during 1994, 1995, and 1996.
Additionally, during the first half of 1994, approximately $1.0 million of
prior year real estate taxes were paid. Along with the benefit derived from the
operations of the acquired properties, the Trust incurred higher interest
payments due to the associated mortgage debt secured by these properties. In
September 1996, the Trust sold Century Centre II Office Building ("Century
Centre"), the operations of which accounted for cash flow from property
operations in 1994, 1995, and 1996 of $1.6 million, $1.4 million, and $1.5
million, respectively. See NOTE 4. "REAL ESTATE AND DEPRECIATION" in the Notes
to Consolidated Financial Statements for a discussion of the sale.
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
The Trust purchased five properties in 1994, six properties in 1995, and two
properties in 1996, increasing the Trust's multifamily portfolio by 2,108
completed apartments and 265 units under construction to total 7,343 units at
December 31, 1996. The aggregate purchase prices for the 1994, 1995, and 1996
acquisitions were $16.2 million, $11.0 million, and $9.4 million, respectively.
The aggregate initial cash invested in the 1994, 1995, and 1996 acquisitions
was $3.0 million, $3.8 million, and $3.2 million, respectively. The balance of
the acquisition cost was financed through new mortgage debt or assumption of
existing mortgage debt.
In September 1996, the Trust sold Century Centre, receiving net cash proceeds
of $6.2 million. During 1995, major portions of Lake Highlands land in Dallas,
Texas, were sold. The Trust received aggregate net cash proceeds of $790,000 in
connection with these sales.
In July 1995, the Trust purchased a tract of land adjacent to the former K-Mart
Shopping Center in Kansas City, Missouri, for $125,000. Simultaneously with the
purchase, the Trust sold the former K-Mart Shopping Center and most of the
tract of land. The Trust received net cash proceeds of $856,000, including a
$414,000 lease termination payment from K-Mart, after the first lien payoff
$1.1 million and other related closing costs.
During 1995 and 1996, the Trust made real estate improvements totaling $8.0
million and $13.5 million, respectively, to its properties, including $1.1
million and $5.9 million, respectively, on construction at redevelopment
properties. Construction on The Regent was substantially complete at December
31, 1996. Projected construction costs for The Vistas at Lake Worth are $9.0
million for 1997. The Trust anticipates capital improvement expenditures on its
other properties during 1997 to total approximately $8.0 million.
In addition to capital improvements noted above, payments for property
operating expenses in 1996, 1995, and 1994 include property replacements of
$2.8 million, $2.5 million, and $2.3 million, respectively. Property
replacements are treated as current expenses and include such items as carpet,
appliances, landscaping, exterior painting, and parking lot improvements.
During 1996, 1995, and 1994, the Trust received $2.1 million, $3.6 million, and
$1.8 million, respectively, representing collections relating to notes
receivable. The Trust expects mortgage note collections to decline as existing
mortgage loans are paid off and does not anticipate funding mortgage loans in
the future, except in connection with, or to facilitate, the sale of real
estate.
In June 1994, the Trust sold 15,000 shares of beneficial interest of
Continental Mortgage and Equity Trust ("CMET") for $210,000. In January and
February 1995, the Trust sold its remaining 39,500 shares of beneficial
interest of CMET for $593,000 in cash.
In June 1995, the Trust acquired a 50% economic interest in an office building
in Washington, D.C., through the purchase of a first lien mortgage note with a
face value of $8.5 million (the "Note") for $500,000 in cash and a $2.5 million
promissory note which was repaid in September 1995. In accordance with the
terms of the agreement, the Trust's $3.0 million investment is to be repaid
with interest at 11% per annum from cash flow after operating expenses. The
remaining $5.5 million balance of the Note plus accrued interest may be
satisfied
20
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Investing Activities (Continued)
by payment of 50% of all funds available after property operating expenses plus
50% of the proceeds from any sale and any refinancing. The Trust intends to
refinance the property in 1997. At March 1997, the property was generating
$30,000 in net rental income (rental revenue less property operating expenses)
per month, and economic occupancy was 82%.
The Trust and CMET are partners in Income Special Associates ("ISA"), a general
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"),
which owned five industrial warehouses at December 31, 1996. In May 1994,
Indcon sold a warehouse for $4.4 million, receiving $2.2 million in cash, and
distributed to the Trust its share of the proceeds of $871,000. During the
first half of 1996, Indcon sold 27 warehouses for $41.2 million, receiving net
cash proceeds of $16.8 million, after the payoff of the existing $23.5 million
existing mortgage loan and related closing costs. Indcon distributed $6.8
million to the Trust as its proportionate share of the sales proceeds plus an
allowance for brokerage commissions.
Subsequent to year end, in January 1997, in exchange for a capital contribution
of $200,000, which was matched by the other partners, the Trust received a 1%
general partner interest and a 49% limited partner interest in RI Windsor,
Ltd., a limited partnership formed to construct a 324-unit apartment complex to
be known as The Mayfaire at Windsor Parke in Jacksonville, Florida, at an
estimated cost of $19.0 million. The property is expected to be completed in
the fourth quarter of 1997. The partnership has obtained an $18.0 million
construction loan to finance the construction. The Trust also loaned the
partnership $2.0 million which is to be repaid from construction loan proceeds
following completion. Until lease-up of the property, the construction loan is
guaranteed by the other general partner.
Financing Activities
During 1996, the Trust obtained first mortgage financing totaling $34.3 million
secured by nine Trust properties and received net cash proceeds of $7.3 million
after the payoff of $24.4 million in existing mortgage debt on such properties.
The Trust also paid off mortgage loans scheduled to mature in 1996 totaling
$689,000 and made $3.4 million of other principal payments.
During 1995, the Trust obtained first mortgage financing totaling $18.0 million
on five Trust properties and received net cash proceeds of $4.5 million after
the payoff of $12.2 million in existing mortgage debt. The Trust also obtained
short term financing totaling $5.5 million, $2.5 million of which was paid off
in 1996, which was used to facilitate the payoff of three mortgage loans
totaling $6.4 million. Additionally, in September 1995, the Trust paid $2.4
million in satisfaction of the note payable which financed the acquisition of
the 801 Pennsylvania Avenue investment. The Trust also extended or paid off
mortgage loans scheduled to mature in 1995 totaling $5.0 million and made other
principal payments totaling $2.3 million.
During 1994, the Trust obtained first mortgage financing totaling $26.9 million
on seven Trust properties, receiving net cash proceeds of $9.4 million after
the payoff of $15.8 million in existing debt ($7.0 million of which matured
during 1994). In addition, the Trust made other principal payments of $4.1
million during 1994.
21
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Financing Activities (Continued)
Mortgage principal payments totaling $11.7 million are due in 1997, including
$9.4 million of balloon payments. The Trust intends to either pay off the
maturing mortgages or extend the due dates while seeking to obtain long term
refinancing. However, while management is confident of its ability to acquire
financing as needed, there is no assurance that the Trust will continue to be
successful in its efforts in this regard.
Based on the performance of the Trust's properties, the Trust's Board of
Trustees (the "Board") voted in July 1993 to resume the payment of regular
quarterly distributions to shareholders. Cash distributions paid to
shareholders totaled $2.7 million, $2.5 million, and $2.1 million in 1996,
1995, and 1994, respectively. The Trust also paid a 10% share distribution in
each of 1996, 1995, and 1994.
During 1996, 1995, and 1994, the Trust repurchased 285,189, 123,500, and
192,000 of its shares of beneficial interest at a total cost of $3.7 million,
$1.4 million, and $2.3 million, respectively. In May 1994, the Board authorized
the repurchase of up to 300,000 additional shares of beneficial interest all of
which have been purchased. During 1996, the Board authorized the Trust to
repurchase up to an additional 281,592 shares of beneficial interest, of which
167,891 were purchased during 1996.
Two partnerships in which the Trust holds interests obtained first mortgage
financing during 1995. The Trust received distributions totaling $3.0 million
representing its share of the net refinancing proceeds.
Results of Operations
1996 COMPARED TO 1995. The Trust reported net income of $4.9 million for the
year ended December 31, 1996, as compared to $708,000 for the year ended
December 31, 1995. The primary reason for the improvement in operating results
is the $3.7 million gain on the sale of Century Centre in September 1996. The
other underlying components of the Trust's results of operations are discussed
in the following paragraphs.
Net rental income increased from $18.1 million for the year ended December 31,
1995, to $19.4 million for the corresponding period in 1996.
Multifamily Properties
The Trust's multifamily portfolio, which represented 75% of the Trust's
real estate and included 7,078 operating units at December 31, 1996,
reported an increase in net rental income of $1.2 million for the year
ended December 31, 1996, as compared to the corresponding period in 1995,
primarily due to properties acquired after 1994. Net rental income for
multifamily properties held in both years remained relatively stable.
Increased rental revenue from higher rental rates was offset by increased
operating expenses related to the Trust's continued efforts to improve its
properties. Overall, both physical and economic occupancy levels have
increased slightly for multifamily properties held in both years.
22
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Commercial Properties
The Trust's commercial portfolio included 1.7 million square feet at
December 31, 1996. An increase in net rental income of $206,000 resulted
from the addition of Jackson Square Shopping Center, acquired through a
deed in lieu of foreclosure in January 1996. A decrease of $139,000
resulted from the sale of K-Mart Shopping Center in Kansas City, Missouri,
in July 1995, and a decrease of $410,000 resulted from the sale of Century
Centre in September 1996. Net rental income generated by Century Centre
was $1.2 million in 1996 and $1.6 million in 1995. Commercial properties
held in both years reported an overall increase in net rental income of
$459,000, principally due to lower vacancies slightly offset by increased
operating expenses. After June 30, 1996, the Trust concluded leases on
124,000 square feet of previously vacant space generating monthly rental
revenue of over $117,000.
Interest revenue decreased from $1.1 million for the year ended December 31,
1995, to $631,000 for the corresponding period in 1996. A $564,000 decrease
resulted from the payoff of the Greentree mortgage note receivable in September
1995 and the acquisition of Jackson Square Shopping Center through deed in lieu
of foreclosure in January 1996.
Equity in income of partnerships was $1.5 million for the year ended December
31, 1996, compared to $770,000 for the corresponding period in 1995. This
increase was primarily due to distribution of financing proceeds by SAC 9 and
English Village in excess of the Trust's investments in those partnerships.
Interest expense was $12.0 million for the year ended December 31, 1996, as
compared to $12.3 million for the year ended December 31, 1995. An increase of
$302,000 resulted from interest on mortgage loans obtained or assumed in
connection with 1995 and 1996 property acquisitions. In addition, long term and
interim first mortgage financing obtained during 1995 and 1996 increased
mortgage loans by $14.2 million and the related interest expense by $459,000
for this period. These increases were more than offset by decreases totaling
$1.2 million due to the sale of K-Mart Shopping Center in Kansas City,
Missouri, in July 1995; ceasing payments on the mortgage loan secured by K-Mart
Shopping Center in Indianapolis, Indiana, in March 1996 upon condemnation of
the property; the sale of Century Centre in September 1996; and interest
capitalized to the carrying values of unencumbered development properties
during 1995 and 1996.
Depreciation expense decreased from $6.0 million for the year ended December
31, 1995, to $5.4 million for the corresponding period in 1996. Effective
January 1, 1996, the Trust's adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, which required the Trust to cease depreciation of
its assets held for sale, resulting in a decrease of $927,000.
Advisory fees to Tarragon Realty Advisors, Inc. ("Tarragon"), were $1.1 million
in 1996 and $1.0 million in 1995. The current advisory agreement calls for a
monthly incentive fee equal to 16% per annum of adjusted funds from operations,
as defined in the advisory agreement approved by the Board. The initial
advisory agreement also called for a $100,000 annual base fee, which was
eliminated in April 1995.
23
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
In September 1996, the Trust recorded a $300,000 provision for loss to reduce
the carrying value of Mariposa Manor Apartments to its then estimated fair
value.
During 1995, the Trust recorded a provision for loss credit of $425,000. This
credit was comprised of a provision for loss of $275,000 to reduce the net
carrying value of K-Mart Shopping Center in Kansas City, Missouri, to its net
sales proceeds and a reversal of a previously provided allowance for estimated
loss of $700,000 against Pepperkorn Office Building which was determined to no
longer be necessary after litigation involving the property was decided in
favor of the Trust.
In addition to the $3.7 million gain on the sale of Century Centre discussed
previously, during 1996, the Trust reported a gain of $22,000 on the sale of
real estate related to the sale of the Indcon warehouses and a $451,000 gain
due to Indcon's insurance settlement received as a result of the warehouse fire
in September 1995. During 1995, the Trust reported a gain of $412,000 on the
sale of shares of beneficial interest of CMET and gains totaling $533,000 on
sales of portions of Lake Highlands land.
1995 COMPARED TO 1994. The Trust reported improvement in 1995 net operating
results from a $254,000 net loss incurred in 1994 to $708,000 net income
recorded in 1995. The underlying reasons for this improvement are discussed in
the following paragraphs.
Net rental income increased from $16.2 million in 1994 to $18.1 million in
1995.
Multifamily Properties
The Trust's multifamily portfolio, which accounted for 66% of the Trust's
real estate portfolio and included 6,294 operating units at December 31,
1995, reported an increase in net rental income of $2.0 million, or 17%,
for 1995 as compared to 1994. Of this increase, $1.9 million is related to
properties acquired in 1994 and 1995. For multifamily properties held in
both years, net rental income increased $107,000 due to increased revenue
from higher rental rates, partially offset by increased operating expenses
and rental losses, including discounts and concessions and bad debt
expense, related to the Trust's continued efforts to improve physical
occupancy rates. Overall, both physical and economic occupancy levels
remained relatively stable for multifamily properties held in both years.
Commercial Properties
The Trust's commercial portfolio included 1.5 million square feet at
December 31, 1995. The K-Mart Shopping Center in Indianapolis, Indiana,
was a new addition to the Trust's commercial portfolio in December 1994
and contributed an additional $278,000 to 1995 net rental income. In
February 1996, this property was condemned, and both rental and mortgage
payments ceased. The sale of the K-Mart Shopping Center in Kansas City,
Missouri, in July 1995 caused a $105,000 decrease in net rental income.
Commercial properties held in both years reported an overall decrease in
net rental income of $250,000, principally due to higher economic
vacancies and increased operating expenses related to continued efforts to
increase physical occupancy levels, which remained relatively stable
between 1994 and 1995.
24
<PAGE> 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Interest revenue decreased from $1.7 million in 1994 to $1.1 million in 1995.
Of this decrease, $524,000 is attributable to the Alder Creek mortgage note
receivable, the balance of which was settled in 1994. Additionally, a $94,000
decrease resulted from the payoff of the Greentree mortgage note receivable in
September 1995.
Equity in income of partnerships increased from $105,000 in 1994 to $770,000 in
1995, mainly due to the Trust's investment in ISA, in which the Trust holds a
40% interest. Indcon, L.P., ("Indcon") in which ISA holds an effective 100%
interest, reported increases in rental income due to higher rental rates and
increases in common area cost recovery income. This partnership also
experienced decreases in certain expenses such as depreciation, insurance, and
real estate taxes. Effective October 1, 1995, Indcon ceased depreciation on a
majority of its properties, increasing the Trust's equity income by $134,000,
in accordance with SFAS No. 121 - "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" due to an impending sale of
most of these properties which was consummated during the first half of 1996.
Interest expense increased from $10.5 million for 1994 to $12.3 million for
1995. Of this increase, $1.4 million resulted from interest expense associated
with mortgage loans obtained or assumed in connection with 1994 and 1995
property acquisitions. In addition, first mortgage financing obtained on
properties held during 1994 and 1995 increased mortgage loans by $16.5 million
and the related interest expense by $1.0 million in 1995. These increases were
slightly offset by decreases totaling $356,000 related to the sale of K-Mart
Shopping Center in Kansas City, Missouri, in 1995, the payoff of the mortgage
loan secured by Mountain View Shopping Center in 1994, the settlement of
litigation involving the note payable secured by Pepperkorn Office Building in
May 1995, and interest capitalized to the carrying values of unencumbered
development properties during 1995.
Depreciation expense increased from $5.0 million in 1994 to $6.0 million in
1995 due to the depreciation of properties acquired during 1995 and 1994 and
the additional depreciation of capital improvements made to Trust properties
during 1994 and 1995 of $2.1 million and $8.0 million, respectively.
Advisory fees to Basic Capital Management, Inc., ("BCM") were $468,000 for the
first quarter of 1994. Advisory fees to Tarragon were $909,000 for the last
three quarters 1994 and $1.0 million during 1995. The Trust changed advisors
from BCM to Tarragon effective April 1, 1994. Under the BCM advisory agreement,
the Trust paid a monthly advisory fee equal to .0625% of the Trust's average
gross asset value and an incentive fee equal to 7.5% per annum of the Trust's
net income. The initial Tarragon advisory agreement called for a $100,000
annual base fee, which was eliminated in the first quarter of 1995, and a
monthly incentive fee equal to 16% per annum of adjusted funds from operations,
as defined in the advisory agreement approved by the Board. For a detailed
discussion of the advisory agreements, see ITEM 10. "TRUSTEES, EXECUTIVE
OFFICERS, AND ADVISOR OF THE REGISTRANT - The Advisor."
In May 1994, the Trust reported a gain on the sale of real estate of $385,000
related to the sale of a warehouse by Indcon. The Trust reported gains totaling
$533,000 on the sales of portions of Lake Highlands land in Dallas, Texas,
during 1995. The Trust also recognized gains on sales of investments of
$141,000 during 1994 and $412,000 during 1995 attributable to the sale of the
shares of beneficial interest of CMET.
25
<PAGE> 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
An extraordinary gain of $67,000 was recorded during the third quarter of 1995
related to the discounted payoff of the $2.5 million note payable which
financed the acquisition of the investment in an office building located in
Washington, D.C. In November and December 1995, the Trust recorded
extraordinary gains of $110,000 and $560,000, respectively, related to the
negotiated discounted payoffs of the mortgage notes payable secured by Bryan
Hill Apartments and Forest Oaks Apartments. For further discussion, see NOTE 7.
"NOTES, DEBENTURES, AND INTEREST PAYABLE" in the Notes to Consolidated
Financial Statements.
Allowance for Estimated Losses and Provisions for Losses
The Trust's management, on a quarterly basis, evaluates the carrying values of
the Trust's mortgage loans and properties held for sale. Generally accepted
accounting principles require that the carrying value of a mortgage loan or a
property held for sale cannot exceed the lower of its cost or its estimated
fair value less estimated costs to sell. In those instances in which estimates
of fair value less estimated selling costs of the collateral securing the
Trust's mortgage loans or properties held for sale are less than the carrying
values thereof at the time of evaluation, an allowance for loss is provided by
a charge against operations. The evaluation of the carrying values of the
mortgage loans is based on management's review and evaluation of the collateral
properties securing the mortgage loans. The review of collateral properties and
properties held for sale generally includes selective site inspections, a
review of the property's current rents compared to market rents, a review of
the property's expenses, a review of maintenance requirements, discussions with
the manager of the property, and a review of the surrounding area. Future
quarterly reviews could cause the Trust's management to adjust current
estimates of fair value.
The Trust's management also evaluates 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 evaluation
generally consists of a review of the property's cash flow and 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 its estimated fair value.
Environmental Matters
Under various federal, state, and local environmental laws, ordinances, and
regulations, the Trust may be potentially liable for removal or remediation
costs (including governmental fines and injuries to persons and property), as
well as certain other potential costs relating to hazardous or toxic substances
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.
26
<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Tax Matters
For the years ended December 31, 1996, 1995, and 1994, 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.
[This space intentionally left blank.]
27
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Reports of Independent Public Accountants................................... 29
Consolidated Balance Sheets -
December 31, 1996 and 1995................................................ 30
Consolidated Statements of Operations -
Years Ended December 31, 1996, 1995, and 1994............................. 31
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1996, 1995, and 1994............................. 32
Consolidated Statements of Cash Flows -
Years Ended December 31, 1996, 1995, and 1994............................. 33
Notes to Consolidated Financial Statements.................................. 36
Schedule III - Real Estate and Accumulated Depreciation.................... 56
Schedule IV - Mortgage Loans on Real Estate................................. 61
</TABLE>
All other schedules are omitted because they are not required or are not
applicable, or the information required is included in the Consolidated
Financial Statements or the notes thereto.
28
<PAGE> 29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Trustees of National Income Realty Trust
We have audited the accompanying consolidated balance sheets of National Income
Realty Trust and subsidiaries as of December 31, 1996 and 1995, and the related
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements 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 are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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 audits provide 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Our audits were 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 audits
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 13, 1997
29
<PAGE> 30
NATIONAL INCOME REALTY TRUST
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
--------- ---------
Assets (dollars in thousands)
<S> <C> <C>
Notes and interest receivable
Performing ......................................................... $ 1,030 $ 11,685
Nonperforming, nonaccruing ......................................... 977 977
--------- ---------
2,007 12,662
Real estate held for sale (net of accumulated depreciation
of $397 in 1996 and 1995) .......................................... 12,198 6,589
--------- ---------
14,205 19,251
Less - allowance for estimated losses ................................ (3,274) (6,274)
--------- ---------
10,931 12,977
Real estate held for investment (net of accumulated depreciation
of $41,854 in 1996 and $44,750 in 1995) ............................ 183,053 189,086
Investments in partnerships .......................................... 4,739 10,780
Cash and cash equivalents ............................................ 3,862 1,674
Restricted cash ...................................................... 2,850 2,329
Other assets (including $30 in 1996 and $11 in 1995 due
from affiliates) ................................................... 5,906 5,192
--------- ---------
$ 211,341 $ 222,038
========= =========
Liabilities and Shareholders' Equity
Liabilities
Notes, debentures, and interest payable .............................. $ 134,270 $ 144,497
Other liabilities (including $10 in 1996 and $838 in 1995
due to affiliates) ................................................. 8,008 7,914
--------- ---------
142,278 152,411
Commitments and contingencies.........................................
Shareholders' equity
Shares of beneficial interest, no par value; authorized
shares, unlimited; shares outstanding, 3,523,729 in 1996 and
3,390,727 in 1995 (after deducting 767,294 shares in 1996 and
450,857 shares in 1995 held in treasury) ........................... 10,579 10,181
Paid-in capital ...................................................... 277,795 276,716
Accumulated distributions in excess of
accumulated earnings ............................................... (219,311) (217,270)
--------- ---------
69,063 69,627
--------- =========
$ 211,341 $ 222,038
========= =========
</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,
----------------------------------------
1996 1995 1994
----------- ----------- -----------
(dollars in thousands, except per share data)
<S> <C> <C> <C>
Income
Rentals .................................................. $ 47,831 $ 43,381 $ 38,309
Interest ................................................. 631 1,089 1,721
Equity in income of partnerships ......................... 1,500 770 105
----------- ----------- -----------
49,962 45,240 40,135
Expenses
Property operations (including $1,014 in 1996,
$330 in 1995, and $397 in 1994 to affiliates) ......... 28,411 25,279 22,085
Interest ................................................. 12,042 12,306 10,538
Depreciation ............................................. 5,374 5,959 4,992
Advisory fee to affiliate ................................ 1,117 1,037 909
Advisory fee to prior advisor ............................ -- -- 468
General and administrative (including $1,159 in 1996,
$960 in 1995, and $1,022 in 1994 to affiliates) ....... 1,932 2,058 1,923
Provision for losses ..................................... 300 (425) --
----------- ----------- -----------
49,176 46,214 40,915
----------- ----------- -----------
Income (loss) before gains on sales of real estate and
investments and insurance settlement and
extraordinary gain ....................................... 786 (974) (780)
Gain on sale of real estate ................................ 3,700 533 385
Gain on sale of investments ................................ -- 412 141
Gain on insurance settlement ............................... 451 -- --
----------- ----------- -----------
Income (loss) from continuing operations ................... 4,937 (29) (254)
Extraordinary gain ......................................... -- 737 --
----------- ----------- -----------
Net income (loss) .......................................... $ 4,937 $ 708 $ (254)
=========== =========== ===========
Earnings per share
Income (loss) from continuing operations ................... $ 1.32 $ (.01) $ (.06)
Extraordinary gain ......................................... -- .20 --
----------- ----------- -----------
Net income (loss) .......................................... $ 1.32 $ .19 $ (.06)
=========== =========== ===========
Weighted average shares of beneficial interest
used in computing earnings per share ..................... 3,733,036 3,764,306 3,924,926
=========== =========== ===========
</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 Unrealized
Distributions Gains on
Shares of in Excess of Marketable
Beneficial Interest Paid-in Accumulated Equity Shareholders'
Shares Amount Capital Earnings Securities Equity
---------- ---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 ................. 3,126,116 $ 9,387 $ 274,515 $ (206,180) $ 452 $ 78,174
Repurchase of shares of beneficial interest. (192,000) (576) (1,771) -- -- (2,347)
Cash distributions ($0.52 per share) ....... -- -- -- (2,173) -- (2,173)
Share distributions ........................ 282,151 846 2,434 (3,280) -- --
Unrealized gains on marketable
equity securities ....................... -- -- -- -- 101 101
Realized gains on marketable equity
securities .............................. -- -- -- -- (141) (141)
Net (loss) ................................. -- -- -- (254) -- (254)
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1994 ................. 3,216,267 9,657 275,178 (211,887) 412 73,360
Repurchase of shares of beneficial interest. (123,500) (370) (1,069) -- -- (1,439)
Cash distributions ($0.68 per share) ....... -- -- -- (2,590) -- (2,590)
Share distributions ........................ 297,960 894 2,607 (3,501) -- --
Realized gains on marketable equity
securities .............................. -- -- -- -- (412) (412)
Net income ................................. -- -- -- 708 -- 708
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1995 ................. 3,390,727 10,181 276,716 (217,270) -- 69,627
Repurchase of shares of beneficial interest. (285,189) (856) (2,812) -- -- (3,668)
Conversion of convertible subordinated
debenture ............................... 93,076 279 721 -- -- 1,000
Cash distributions ($0.74 per share) ....... -- -- -- (2,833) -- (2,833)
Share distributions ........................ 325,115 975 3,170 (4,145) -- --
Net income ................................. -- -- -- 4,937 -- 4,937
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1996 ................. 3,523,729 $ 10,579 $ 277,795 $ (219,311) $ -- $ 69,063
========== ========== ========== ========== ========== ==========
</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,
--------------------------------
1996 1995 1994
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Rentals collected ...................................... $ 48,054 $ 42,763 $ 38,402
Interest collected ..................................... 553 1,062 1,587
Interest paid .......................................... (11,336) (12,638) (9,900)
Payments for property operations (including
$1,014 in 1996, $330 in 1995, and $397
in 1994 to affiliates) ............................... (28,752) (25,179) (23,703)
General and administrative expenses paid
(including $1,256 in 1996, $898 in 1995,
and $1,022 in 1994 to affiliates) .................... (2,117) (2,179) (1,877)
Advisory fee paid to affiliate ......................... (1,168) (1,022) (860)
Advisory fee paid to prior advisor ..................... -- -- (342)
Deferred borrowing costs paid .......................... (1,439) (777) (1,455)
-------- -------- --------
Net cash provided by operating activities .............. 3,795 2,030 1,852
-------- -------- --------
Cash Flows from Investing Activities
Acquisition of real estate ............................. (3,199) (3,786) (3,006)
Proceeds from sale of real estate ...................... 6,156 1,646
Real estate improvements ............................... (13,547) (8,022) (2,052)
Collections on notes receivable ........................ 2,140 3,609 1,841
Proceeds from sale of investments ...................... -- 593 210
Acquisition of partnership interest .................... -- (462) --
Distributions from partnership's investing
activities ........................................... 6,817 -- 871
Distribution of partnership's insurance settlement
proceeds ............................................. 760 -- --
Net distributions from partnerships .................... 437 986 727
-------- -------- --------
Net cash (used in) investing activities ................ (436) (5,436) (1,409)
-------- -------- --------
</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,
--------------------------------
1996 1995 1994
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Financing Activities
Proceeds from borrowings ...................................... $ 34,323 $ 23,500 $ 26,913
Payments on notes payable ..................................... (28,500) (23,571) (19,904)
Repair escrow (deposits) receipts, net ........................ (292) 1,214 (545)
Payments to prior advisor ..................................... -- -- (132)
Distributions to shareholders ................................. (2,731) (2,486) (2,098)
Repurchase of shares of beneficial interest ................... (3,668) (1,439) (2,347)
Borrowings on margin account .................................. 280 785 94
Advances from (payments to) affiliates ........................ (583) 583 --
Distributions from partnerships'
financing activities ........................................ -- 3,010 --
-------- -------- --------
Net cash provided by (used in)
financing activities ........................................ (1,171) 1,596 1,981
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents ............................................ 2,188 (1,810) 2,424
Cash and cash equivalents, beginning of year ..................... 1,674 3,484 1,060
-------- -------- --------
Cash and cash equivalents, end of year ........................... $ 3,862 $ 1,674 $ 3,484
======== ======== ========
Reconciliation of net income (loss) to net cash
provided by operating activities
Net income (loss) ........................................... $ 4,937 $ 708 $ (254)
Gain on sale of real estate ................................. (3,700) (533) (385)
Gain on sale of investments ................................. -- (412) (141)
Gain on insurance settlement ................................ (451) -- --
Extraordinary gain .......................................... -- (737) --
Depreciation and amortization ............................... 6,333 6,499 5,357
Provision for losses ........................................ 300 (425) --
Equity in (income) of partnerships .......................... (1,500) (770) (105)
Changes in other assets and other liabilities, net of
effects of noncash investing and financing activities:
(Increase) in interest receivable ........................ (55) (7) (134)
(Increase) in other assets ............................... (2,665) (1,962) (1,734)
Increase (decrease) in other liabilities ................. 543 333 (1,179)
Increase (decrease) in interest payable .................. 53 (664) 427
-------- -------- --------
Net cash provided by operating activities ................... $ 3,795 $ 2,030 $ 1,852
======== ======== ========
</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,
--------------------------------
1996 1995 1994
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Changes in assets and liabilities in connection with the
acquisition or foreclosure of real estate:
Real estate .............................................................. $ 14,954 $ 11,024 $ 19,585
Notes and interest receivable ............................................ (8,568) -- (750)
Allowance for estimated losses ........................................... 3,000 -- --
Other assets ............................................................. 44 525 851
Notes and interest payable ............................................... (6,157) (7,556) (16,611)
Other liabilities ........................................................ (74) (207) (69)
-------- -------- --------
Cash paid .............................................................. $ 3,199 $ 3,786 $ 3,006
======== ======== ========
Assets disposed of and liabilities released in
connection with the sale of real estate:
Real estate .............................................................. $ 23,221 $ 2,464 $ --
Allowance for estimated losses ........................................... -- (275) --
Other assets ............................................................. 596 -- --
Notes and interest payable ............................................... (21,127) (1,076) --
Other liabilities ........................................................ (212) -- --
Gain on sale ............................................................. 3,678 533 --
-------- -------- --------
Cash received .......................................................... $ 6,156 $ 1,646 $ --
======== ======== ========
Mortgage debt released in connection with
litigation settlement .................................................. $ -- $ 1,020 $ --
</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, subsidiaries, and the consolidated partnerships (the "Trust") have been
prepared in conformity with generally accepted accounting principles ("GAAP"),
the most significant of which are described in NOTE 1. "SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES." The preparation of financial statements in accordance
with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. The Notes to the Consolidated Financial
Statements are an integral part of the Consolidated Financial Statements. The
data presented in the Notes 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 1994 have been reclassified to conform to the 1995 and
1996 presentation.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Trust business. National Income Realty Trust and its
subsidiaries ("NIRT") is a California business trust organized on October 31,
1978. The Trust was formed to invest in real estate, including commercial and
multifamily properties, and, to a lesser extent, to finance real estate through
mortgage loans. 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 which it controls. All significant
intercompany transactions and balances have been eliminated.
Real estate and depreciation. Real estate held for sale is carried at the lower
of cost or estimated fair value less estimated costs to sell. Real estate held
for investment is carried at cost unless an impairment is determined to exist,
as discussed below. Impaired properties are written down to their estimated
fair values. Foreclosed real estate is initially recorded at new cost, defined
as the lower of the Trust's note receivable carrying amount or the fair value
of the collateral property less estimated costs of sale. The Trust capitalizes
property improvements and major rehabilitation projects which increase the
value of the respective property and have useful lives greater than one year,
except for individual expenditures less than $10,000 which are not part of a
planned renovation project. Under this policy, during 1996, expenditures of
$13.5 million were capitalized, including $5.9 million related to development
properties, and property replacements of $2.8 million were expensed. Property
replacements include, but are not limited to, such items as carpet, appliances,
landscaping, exterior painting, and parking lot improvements. Depreciation is
provided against real estate held for investment by the straight-line method
over the estimated useful lives of the assets, which range from 5 to 40 years.
The Trust capitalizes interest on funds used in constructing property from the
date of initiation of construction activities through the time the property is
ready for leasing. The Trust also capitalizes property taxes and insurance
costs during the construction period. Interest, property taxes, and insurance
expenditures of $693,000 and $240,000 were capitalized during 1996 and 1995,
respectively.
36
<PAGE> 37
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Trust's management evaluates 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 evaluation generally
consists of a review of the properties' cash flow and 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.
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 (the "Code"); (iv) property improvements have
been funded; and (v) the Trust's financial resources are such that the property
can be held long-term.
The Trust adopted Statement of Financial Accounting Standards ("SFAS") No. 121
- - "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" on January 1, 1996. There was no cumulative effect nor any
impact on the Trust's financial position as a result of the adoption. Pursuant
to the adoption, the Trust ceased depreciation of its properties held for sale.
Allowance for estimated losses. Valuation allowances are provided for estimated
losses on mortgage notes receivable and properties held for sale to the extent
that the investment in the notes or properties exceeds the Trust's estimate of
fair value less estimated selling costs of the collateral securing the notes or
the properties. The provisions for losses are based on estimates, and actual
losses may vary from current estimates. Such estimates are reviewed
periodically. Any additional provision determined to be necessary or the
reversal of any existing allowance no longer required is recorded by a charge
or credit to current earnings.
Interest recognition on notes receivable. Interest income is recognized on the
Trust's notes receivable according to the contractual loan terms. However,
accrued but unpaid interest income is recognized only to the extent the fair
value of the underlying collateral exceeds the carrying value of the
receivable. Notes receivable are considered nonperforming when they become 60
days or more delinquent. Interest income is recognized on these notes to the
extent of cash received. A loan is considered impaired when, based on current
information and events, it is probable that the Trust will be unable to collect
all amounts due according to the contractual terms of the loan agreement. The
Trust's policy with respect to interest income recognition on impaired loans is
determined based on whether the loan is performing or nonperforming and the
associated Trust policies with respect to these categories.
Cash equivalents. The Trust considers all highly liquid debt instruments
purchased with maturities of three months or less to be cash equivalents.
Restricted cash. Restricted cash represents escrow accounts, generally held by
the lenders of certain of the Trust's mortgage notes payable, for taxes,
insurance, and property repairs.
37
<PAGE> 38
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other assets. Other assets consist primarily of tenant accounts receivable,
deferred borrowing costs, and prepaid leasing commissions. Deferred borrowing
costs are amortized on the straight-line method (which approximates the
effective interest method) over the related loans terms, and such amortization
is included in interest expense. Prepaid leasing commissions are amortized to
leasing commission expense, included in property operating expenses, on the
straight-line method over the related lease terms.
Revenue recognition on the sale of real estate. Gains on sales of real estate
are recognized when and to the extent permitted by SFAS No. 66. Until the
requirements of SFAS No. 66 for full profit recognition have been met,
transactions are accounted for using the deposit, installment, cost recovery,
or financing method, whichever is appropriate.
Investment in noncontrolled partnerships. The Trust uses the equity method to
account for investments in partnerships it 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. Share and per share data have been
restated to give effect to 10% share distributions paid in September 1995 and
September 1996.
Fair value of financial instruments. SFAS No. 107 - "Disclosures About Fair
Value of Financial Instruments" requires the Trust to disclose the estimated
fair values of its financial instrument assets and liabilities.
Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 1996. Considerable
judgment is necessary to interpret market data and develop estimated fair
values. Accordingly, the estimated fair values presented do not purport to
present amounts to be ultimately realized or paid by the Trust, which may vary
significantly from the estimated fair values presented. The use of different
market assumptions and/or estimation methodologies may have a material effect
on the estimated fair values.
As of December 31, 1996, the Trust's management estimates that the carrying
amounts approximate fair value for cash and cash equivalents and restricted
cash because of the short maturities of those instruments. In addition, the
carrying amounts of notes receivable and other liabilities approximate fair
value. The fair values of the Trust's notes and debentures payable are
estimated by discounting future expected cash flows using current rates for
loans with similar terms and maturities.
38
<PAGE> 39
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Share option plans. On January 1, 1996, the Trust adopted SFAS No. 123
"Accounting and Disclosure of Stock-Based Compensation," which requires
disclosures based on the fair values of share options at the date of grant.
There was no cumulative effect nor any impact on the Trust's financial position
as a result of the adoption. The Trust will continue to measure any
compensation costs associated with the issue of share options using the
guidance provided by the Accounting Principles Board's Opinion ("APB") No. 25.
Under APB No. 25, compensation costs related to share options issued pursuant
to compensatory plans are measured based on the difference between the quoted
market price of the shares at the measurement date (ordinarily the date of
grant) and the exercise price and should be charged to expense over the periods
during which the grantee performs the related services. All share options
issued to date by the Trust have exercise prices equal to the market price of
the shares at the dates of grant. See NOTE 9. "SHARE OPTIONS."
NOTE 2. NOTES AND INTEREST RECEIVABLE
Notes and interest receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Notes receivable
Performing ..................... $ 1,170 $ 11,801
Nonperforming, nonaccruing ..... 943 943
---------- ----------
2,113 12,744
Accrued interest ................... 46 70
Deferred gain ...................... (152) (152)
---------- ----------
2,007 12,662
Allowance for estimated losses ..... (1,745) (6,274)
---------- ----------
$ 262 $ 6,388
========== ==========
</TABLE>
Notes receivable at December 31, 1996, mature from 1997 through 2016, with
interest rates ranging from 7.5% to 12% per annum. They are generally
nonrecourse and collateralized by real estate. Scheduled principal maturities
of $1.7 million are due in 1997, including $943,000 which represents the
principal balance of the nonperforming loan in the table above.
For 1996, 1995, and 1994, unrecognized interest income on nonperforming notes
totaled $476,000, $452,000, and $470,000, respectively. Recognized interest
income on nonperforming notes receivable, recorded to the extent of cash
received, amounted to $555,000 during 1994. No interest income was recognized
on nonperforming notes receivable during 1995 or 1996.
In October 1995, the Trust and the borrower on an $8.6 million first mortgage
receivable, which matured in December 1995, negotiated a settlement of the
outstanding balance whereby the borrower agreed to relinquish the collateral
property, a 342,000 square foot shopping center in Jackson, Mississippi,
through a deed in lieu of foreclosure. The Trust took possession of the
property in January 1996. As the estimated fair value of the property exceeded
the Trust's net carrying value of the mortgage loan, the Trust recognized no
loss in excess of amounts previously provided.
39
<PAGE> 40
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>
1996 1995
--------- ---------
<S> <C> <C>
Balance January 1 ......................................................... $ 6,274 $ 6,974
Provision for losses ...................................................... -- (425)
Amounts charged off ....................................................... (3,000) (275)
--------- ---------
Balance December 31 ....................................................... $ 3,274 $ 6,274
========= =========
</TABLE>
The 1995 provision for loss credit was comprised of the reversal of a $700,000
allowance, provided in 1993 against Pepperkorn Office Building, and a provision
for loss of $275,000 recorded to reduce the carrying value of the K-Mart
Shopping Center in Kansas City, Missouri, to the net sales proceeds received in
July 1995. See NOTE 4. "REAL ESTATE AND DEPRECIATION" for detailed discussions
of the related transactions.
Amounts charged off in 1996 relate to the acquisition of Jackson Square
Shopping Center through deed in lieu of foreclosure.
Additionally, during 1996, the Trust recorded a provision for loss of $300,000
to write down Mariposa Manor Apartments to its estimated fair value.
NOTE 4. REAL ESTATE AND DEPRECIATION
During 1996, 1995, and 1994, the Trust purchased thirteen multifamily
properties comprising 2,108 operating units, as presented below, and The
Vistas, a redevelopment property with 265 projected units, and, in connection
with these acquisitions, paid Tarragon Realty Advisors, Inc. ("Tarragon"), the
Trust's advisor since April 1, 1994, real estate acquisition fees totaling
$488,000. These properties are located in the same geographical areas where the
Trust currently operates and were acquired in separate transactions.
[This space intentionally left blank.]
40
<PAGE> 41
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE AND DEPRECIATION (Continued)
<TABLE>
<CAPTION>
Cost of Acquisition
Date ---------------------
Property Location Acquired Units Cash Debt
-------- -------- -------- ----- ---- ----
<S> <C> <C> <C> <C> <C>
1996 Acquisitions
Woodbrier Oklahoma City, OK Apr - 96 128 $ 1,277 $ 1,230
River City Landing Jacksonville, FL Jun - 96 352 1,922 4,930
------ ----------- ---------
480 3,199 6,160
------ ----------- ---------
1995 Acquisitions
Park Place Los Angeles, CA Feb - 95 39 380 --
Marina Park North Miami, FL Apr - 95 90 993 2,500
Mustang Creek Arlington, TX May - 95 120 830 2,680
Park Norton Los Angeles, CA Jun - 95 55 154 564
The Regent Jacksonville, FL Sep - 95 304 1,480 --
Meadowbrook Baton Rouge, LA Oct - 95 200 -- 1,813
------ ----------- ---------
808 3,837 7,557
------ ----------- ---------
1994 Acquisitions
Summit on the Lake Fort Worth, TX Mar - 94 198 776 3,711
Bryan Hill Bethany, OK Nov - 94 232 301 2,216
Forest Oaks Lexington, KY Nov - 94 154 95 3,329
Martins Landing Lakeland, FL Nov - 94 236 990 4,571
The Vistas Fort Worth, TX Dec - 94 -- 844 --
------ ----------- ---------
820 3,006 13,827
------ ----------- ---------
2,108 $ 10,042 $ 27,544
====== =========== =========
</TABLE>
In connection with obtaining the acquisition financing of $2.7 million and
$564,000 for Mustang Creek and Park Norton, the Trust paid Tarragon mortgage
brokerage fees totaling $32,440. Also, in connection with the acquisition of
River City Landing in 1996, the seller paid Mr. Bruce A. Schnitz, Chief
Operating Officer of the Trust and Tarragon, a commission of $82,563 pursuant
to a brokerage agreement entered into prior to Mr. Schnitz's affiliation with
Tarragon and the Trust.
The Trust is in the process of reconstructing and expanding The Vistas to 265
apartment units for approximately $12.0 million of development costs, $3.0
million of which had been expended as of December 31, 1996, with completion
estimated in the fourth quarter of 1997. As of December 31, 1996, the
redevelopment of The Regent Apartments was substantially complete at a cost of
$4.0 million.
In September 1996, the Trust sold Century Centre II Office Building for $28.2
million in cash. After closing costs, prorations, and the payoff of the $21.0
million first mortgage loan secured by the property, the Trust received net
cash proceeds of $6.2 million. In connection with this transaction, the Trust
recognized a gain of $3.7 million.
During 1995, the Trust sold portions of the Lake Highlands land in Dallas,
Texas, for $885,000 in cash. Net cash proceeds were $790,000 after closing
costs. The Trust recorded gains of $533,000 from these sales.
In July 1995, the Trust purchased a tract of land adjacent to its K-Mart
Shopping Center in Kansas City, Missouri, for $125,000 and simultaneously sold
the K-Mart Shopping Center and the tract of land, keeping a portion of the
undeveloped land, for $1.8 million, including a $414,000 lease termination
payment from K-Mart. After the first lien payoff of $1.1 million and other
related closing costs, net cash proceeds to the Trust were $856,000. In June
1995, the Trust recorded a provision for loss of $275,000 to account for the
excess carrying value of the property over the related sales price.
41
<PAGE> 42
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE AND DEPRECIATION (Continued)
During 1994, the Trust acquired two properties through deeds in lieu of
foreclosure of collateral securing two mortgage notes receivable, Mariposa
Manor Apartments ("Mariposa") in Los Angeles, California, and K-Mart Shopping
Center in Indianapolis, Indiana. These properties were acquired subject to
senior underlying debt totaling $2.6 million. In November 1995, the City of
Indianapolis (the "City") initiated condemnation proceedings against the K-Mart
Shopping Center. The shopping center was vacant at the time the Trust acquired
it, although leased to K-Mart under a net lease expiring in 1999. The lease was
assigned by K-Mart to the City in September 1995. In February 1996, the City
offered preliminary condemnation proceeds of $1.6 million which the Trust
rejected in light of property appraisals prepared for the City and the Trust
which exceed $2.0 million. In March 1996, the Trust ceased payments on the $1.7
million non-recourse mortgage note secured by the shopping center. The Trust
has provided an allowance for estimated losses of $500,000 which represents the
excess of the property's carrying value over the estimated condemnation
settlement. In September 1996, the Trust determined a permanent impairment in
value existed on Mariposa. A provision for loss of $300,000 was recorded to
reduce the carrying value of the property to its then estimated fair value.
The Trust purchased Pepperkorn Office Building located in Manitowoc, Wisconsin,
("Pepperkorn") in July 1991 for $1.1 million, paying $130,000 in cash and
financing the remainder through a $1.0 million promissory note. Concurrently
with the acquisition, the former owner and primary tenant (the "Seller") signed
a lease at another one of the Trust's properties, the Lakeview Mall, also
located in Manitowoc, Wisconsin. In 1993, the State of Wisconsin commenced
eminent domain proceedings to acquire Pepperkorn, and the Trust recorded a
provision for loss of $700,000, equal to the amount by which the carrying value
of the property exceeded the proposed condemnation award. The terms of the
acquisition, lease, and the initial condemnation proceeds offered by the State
of Wisconsin have been in litigation since 1993. In May 1995, the court ordered
the $1.0 million promissory note executed by the Trust rescinded and found
certain provisions of the Seller's lease at Lakeview Mall were unenforceable.
Accordingly, the note balance was offset against the carrying value of the
property, the net rent receivable, and the initial condemnation award offer of
approximately $164,000. As a result, the Trust reversed the $700,000 allowance
during the second quarter of 1995 with a corresponding credit to earnings.
NOTE 5. EQUITY METHOD INVESTMENTS IN PARTNERSHIPS
The Trust's equity method investments in partnerships consisted of the
following at December 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Sacramento Nine ("SAC 9") ............. $ 469 $ (162)
Income Special Associates ("ISA") ..... 1,508 8,636
801 Pennsylvania Avenue ............... 2,762 2,898
English Village ....................... -- (592)
-------- --------
$ 4,739 $ 10,780
======== ========
</TABLE>
42
<PAGE> 43
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. EQUITY METHOD INVESTMENTS IN PARTNERSHIPS (Continued)
The Trust and Continental Mortgage and Equity Trust ("CMET") own SAC 9, a
tenancy-in-common which currently owns two office buildings in the vicinity of
Sacramento, California. The Trust has a 70% undivided interest in SAC 9. Under
the terms of the joint tenancy, unanimous consent is required of both the Trust
and CMET for any material changes in the operations of the properties,
including sales, refinancings, and changes in property management. The Trust,
as a noncontrolling partner, accounts for its investment in SAC 9 under the
equity method.
In August 1995, SAC 9 obtained first mortgage financing in the amount of $3.5
million secured by a previously unencumbered office building. Net financing
proceeds of $3.4 million were distributed, of which the Trust's proportionate
share was $2.4 million. In connection with the financing, SAC 9 paid a mortgage
brokerage fee of $35,000 to Tarragon. Distribution of the financing proceeds to
the Trust resulted in cumulative distributions exceeding the Trust's investment
in SAC 9. Accordingly, during 1996, the Trust recorded income of $129,000
representing the excess of cumulative distributions over the Trust's investment
in SAC 9.
The Trust and CMET are also partners in ISA, a general 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"), which owned five industrial
warehouses at December 31, 1996. The Trust, as a noncontrolling partner,
accounts for its investment in ISA using the equity method.
During the first half of 1996, Indcon sold 27 warehouses for $41.2 million,
receiving net cash proceeds of $16.8 million after the payoff of the existing
$23.5 million mortgage loan and closing costs. The Trust's share of the sales
proceeds was $6.7 million plus $130,000 representing an allowance for brokerage
commissions which the Trust retained and which offset the Trust's share of
Indcon's loss on the sale, resulting in a net gain on the sale of $22,000.
In September 1995, one of Indcon's warehouses was destroyed in a fire. An
insurance settlement totaling $2.2 million was reached by the partnership in
March 1996 resulting in a $1.1 million gain, of which the Trust's proportionate
share was $451,000. The Trust received cash proceeds of $759,000 representing
its proportionate share of the insurance settlement proceeds. Indcon does not
anticipate rebuilding the property.
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 share
was $871,000, after the payoff of the existing first mortgage. A gain on the
sale of $962,000 was recognized, of which the Trust's share was $385,000. In
connection with the sale, a brokerage commission of $26,100 was paid to
Tarragon.
The Trust also holds a 49% limited partner interest and a 1% general partner
interest in English Village Partners, L.P., (the "Partnership") which owns a
300-unit apartment complex located in Memphis, Tennessee ("English Village").
The Trust, as a noncontrolling partner, accounts for its investment in the
Partnership under the equity method. In November 1995, the Partnership
refinanced the mortgage debt secured by English Village, increasing the first
mortgage loan balance to $6.2 million. Net refinancing proceeds were $1.3
million, of which the Trust's portion was $619,000. Distribution of the
refinancing proceeds resulted in cumulative distributions exceeding the Trust's
investment in the Partnership. Also, during 1996, the Partnership's
distributions to the Trust from the operations of English Village exceeded the
Trust's share of the Partnership's
43
<PAGE> 44
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. EQUITY METHOD INVESTMENTS IN PARTNERSHIPS (Continued)
net income. Accordingly, during 1996, the Trust recorded income of $771,000
representing the excess of cumulative distributions over the Trust's investment
in the Partnership.
In June 1995, the Trust acquired a 50% economic interest in an office building
located at 801 Pennsylvania Avenue, Washington, D.C. (the "Property"). This
interest was acquired through the purchase of a first lien mortgage note with a
face value of $8.5 million (the "Note") for $500,000 in cash and a $2.5 million
promissory note, which bore interest at the Prime Rate plus 1% per annum and
was repaid at a $67,000 discount in September 1995. In accordance with the
terms of the Note, the Trust's $3.0 million investment, as well as any
additional advances made to the Property, is to be repaid from Property cash
flow after operating expenses with interest at the rate of 11% per annum. The
$5.5 million remaining balance of the Note plus accrued interest may be
satisfied by payment of 50% of all funds available after Property operating
expenses plus 50% of the proceeds from any sale and any refinancing. The Note
is nonrecourse to all parties and is secured only by the Property.
Set forth below are summarized financial data for all partnerships the Trust
accounts for under the equity method (unaudited):
<TABLE>
<CAPTION>
December 31,
1996 1995
-------- --------
<S> <C> <C>
Real estate (net of accumulated depreciation of
$5,817 in 1996 and $22,235 in 1995) .............. $ 14,316 $ 51,345
Other assets ........................................ 1,525 6,176
Notes payable ....................................... (8,937) (32,798)
Other liabilities ................................... (276) (490)
-------- --------
Partners' capital ................................... $ 6,628 $ 24,233
======== ========
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Rentals .................................................. $ 5,090 $ 9,889 $ 8,917
Depreciation ............................................. (535) (2,013) (2,541)
Property operations ...................................... (2,179) (3,290) (3,585)
Interest ................................................. (1,421) (3,202) (3,059)
--------- --------- ---------
Income (loss) before loss on sale of real estate and
gain on insurance settlement ........................... 955 1,384 (268)
Loss on sale of real estate .............................. (270) -- 962
Gain on insurance settlement ............................. 1,126 -- --
--------- --------- ---------
Net income ............................................... $ 1,811 $ 1,384 $ 694
========= ========= =========
</TABLE>
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 of these shares for $210,000
and recorded a $141,000 gain on the disposition. During the first quarter of
1995, the Trust sold the remaining 39,500 shares for $593,000 and recognized a
$412,000 gain on the sale.
44
<PAGE> 45
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. NOTES, DEBENTURES, AND INTEREST PAYABLE
Notes, debentures, and interest payable consisted of the following at December
31:
<TABLE>
<CAPTION>
1996 1995
--------------------------- ----------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Notes and debentures payable .................. $ 134,988 $ 132,981 $ 148,768 $ 143,137
========== ==========
Accrued interest............................... 1,289 1,363
Unamortized discounts.......................... -- (3)
---------- ----------
$ 134,270 $ 144,497
========== ==========
</TABLE>
Notes payable at December 31, 1996, bear interest at rates ranging from 5.81%
to 11.68% per annum and mature from 1997 through 2031. These notes are
generally nonrecourse and are collateralized by deeds of trust on real estate
with an aggregate carrying value of $172.6 million.
During 1996, 1995, and 1994, the Trust obtained long term first mortgage
financing on sixteen Trust properties, including Martins Landing and Forest
Oaks as discussed below, totaling $70.6 million, receiving net cash proceeds of
$17.1 million after the payoff of $48.0 million in existing debt. The remainder
of the financing proceeds was used to fund escrows for replacements and repairs
and to pay the associated closing costs. In connection with these financings,
the Trust paid commissions of $103,000 to Basic Capital Management, Inc.
("BCM"), the Trust's former advisor, and $343,000 to Tarragon.
At December 31, 1996, scheduled principal payments on notes payable are due as
follows:
<TABLE>
<S> <C>
1997 ................................................. $ 11,726
1998 ................................................. 25,335
1999 ................................................. 24,172
2000 ................................................. 7,887
2001 ................................................. 9,233
Thereafter................................................ 54,628
-----------
$ 132,981
===========
</TABLE>
In September 1995, the Trust negotiated a $2.7 million payoff of the $3.2
million mortgage loan secured by Forest Oaks Apartments in Lexington, Kentucky,
originally scheduled to mature in January 1996. In exchange for the discounted
payoff of the Forest Oaks mortgage loan, the Trust agreed to pay the full
balance of the $4.5 million mortgage loan, originally scheduled to mature
February 2023, secured by Martins Landing Apartments located in Lakeland,
Florida. In December 1995, the Trust obtained interim financing in the amount
of $2.0 million secured by Forest Oaks. For services provided in connection
with obtaining the interim financing, the Trust paid Tarragon a mortgage
brokerage fee of $20,000. The combined $6.7 million proceeds of the interim
financing and the new $5.0 million first mortgage loan secured by Martins
Landing, which was also obtained in December 1995, along with general working
capital of the Trust, were used to satisfy the mortgage payoffs, and, in
December 1995, the Trust recognized an extraordinary gain of $560,000 due to
the forgiveness of debt. In May 1996, the Trust obtained long term first
mortgage financing secured by Forest Oaks in the amount of $3.1 million.
45
<PAGE> 46
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. NOTES, DEBENTURES, AND INTEREST PAYABLE (Continued)
Also in September 1995, the Trust entered into a Loan Sale Agreement (the
"Agreement") with the U. S. Department of Housing and Urban Development ("HUD")
for the discounted purchase of two mortgage loans for $3.9 million, secured
separately by Bryan Hill Apartments located in Bethany, Oklahoma, acquired in
November 1994, and Meadowbrook Apartments, a 200-unit complex in Baton Rouge,
Louisiana. The Trust paid $3.5 million of the purchase price with funds
obtained in November 1995 through interim financing secured by first mortgages
against both properties. The balance was paid through the application of
existing escrow accounts and general working capital of the Trust. In November
1995, simultaneously with the final payment to HUD, the Trust recognized an
extraordinary gain of $110,000 in connection with the purchase of the $2.2
million Bryan Hill mortgage. Through the discounted purchase of the mortgage
loan secured by Meadowbrook, effective October 1, 1995, the Trust acquired
control of the property and recorded the acquisition as of the same date. The
Trust paid a mortgage brokerage fee of $35,000 to Tarragon for obtaining the
interim financing.
Pursuant to a Master Repurchase Agreement (the "Agreement") with an investment
bank entered into in April 1996, the Trust purchased the $3.1 million Fannie
Mae mortgage backed security ("Fannie Mae Certificate") issued by the lender in
connection with the financing of Forest Oaks at a 1/2% discount in June 1996
and the $16.8 million Government National Mortgage Association mortgage backed
security ("GNMA Certificate") issued by the lender in connection with the
financing of Heather Hills at a 2.7% discount in July 1996. The investment bank
purchased the Fannie Mae Certificate and the GNMA Certificate from the Trust
for 92% of the aggregate value, or $17.9 million, and the Trust agreed to
repurchase the Certificates from the investment bank one month later at the
same price plus interest at the London Interbank Offered Rate ("LIBOR") plus
1/2% per annum. As provided for in the Agreement, the Trust and the investment
bank extended the repurchase date monthly. The December 1996 purchase price
and, consequently, the January 1997 repurchase price were increased to 95% of
the collective value of the Certificates, or $19.3 million, and the interest
rate associated with the repurchase agreement was reduced to LIBOR plus 1/4%
per annum. The repurchase transaction has resulted in effective interest rates
as of December 31, 1996, on the Forest Oaks and Heather Hills financings of
6.9% and 6.5%, respectively.
In January 1997, the Trust entered into a similar repurchase transaction with a
government sponsored enterprise which purchased the Certificates for 97% of
their aggregate value, or $19.3 million, and the Trust agreed to repurchase
them in February 1997 for the same price plus interest at 5.4% per annum. In
February 1997, the repurchase date was extended to April 1997.
The Trust is exposed to a demand for additional collateral or, in the
alternative, credit loss in the event the interest rate associated with the
repurchase transaction fluctuates in a manner that is unfavorable to the Trust's
interest in the Certificates. However, the Trust intends to either pay off the
mortgage or modify the mortgage to increase the interest rate prior to any
significant credit loss.
46
<PAGE> 47
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. NOTES, DEBENTURES, AND INTEREST PAYABLE (Continued)
In August 1996, the Trust obtained a $9.0 million line of credit secured by
mortgages on four of its multifamily properties, Diamond Loch, Meadowbrook,
Mustang Creek, and The Regent. All of these properties except The Regent
previously collateralized other mortgage loans. The prior loans totaling $3.9
million secured by Diamond Loch and Mustang Creek were paid off at closing.
Additionally, a principal payment of $500,000 was made at closing on the $3.5
million interim mortgage loan obtained in 1995 secured by both Meadowbrook and
Bryan Hill in exchange for the release of Meadowbrook. During 1996, $8.8
million was advanced under the line of credit, and, after prior loan payoffs
and closing costs, the Trust received net cash proceeds of $4.2 million. The
Trust paid Tarragon financing fees totaling $88,000 for services rendered in
connection with this transaction.
In December 1993, the Trust issued a $1 million convertible subordinated
debenture to Mr. John A. Doyle, Chief Financial Officer of the Trust until
September 1996, in exchange for his participation interest in the profits of
the Consolidated Capital Properties II ("CCP II") assets, which the Trust
acquired in November 1992. Mr. Doyle was granted this participation as
consideration for his services in connection with the CCP II acquisition. In
February 1996, Mr. Doyle converted the debenture into 93,076 Shares. In
September 1996, the Trust repurchased 50,000 of these Shares from Mr. Doyle for
$700,000.
NOTE 8. DISTRIBUTIONS TO SHAREHOLDERS
The Trust paid cash distributions in 1994, 1995, and 1996 of $2.2 million, $2.6
million, and $2.8 million, respectively. The Trust reported to the Internal
Revenue Service that these distributions represented return of capital.
Additionally, in September 1994, 1995, and 1996, the Trust paid 10% share
distributions which resulted in the Trust issuing 282,151 Shares, 297,960
Shares, and 325,115 Shares, respectively.
NOTE 9. SHARE OPTIONS
In November 1995, the Trust's shareholders approved two share option plans: the
Independent Trustee Share Option (the "Trustee Plan") and the Share Option and
Incentive Plan (the "Incentive Plan"). Options granted pursuant to the Trustee
Plan are immediately exercisable and expire on the earlier of the first
anniversary of the date on which a Trustee ceases to be a Trustee of the Trust
or ten years from the date of grant. For each year of service, an Independent
Trustee will be awarded an option to purchase 1,000 shares on January 1 of such
year. The Trustee Plan provides for options for 60,000 shares.
Under the Incentive Plan, options have been granted to certain Trust officers
and key employees of Tarragon. The Incentive Plan provides for options for
300,000 shares. All grants are determined by a committee presently comprised of
two Trustees, Mr. Friedman and Mr. Carl B. Weisbrod (Chairman of the Board).
Options granted pursuant to the Incentive Plan are exercisable beginning one
year after the date of grant and expire five years from the date of grant.
47
<PAGE> 48
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. SHARE OPTIONS (Continued)
The following table summarizes share option activity:
<TABLE>
<CAPTION>
Option Price
per Share Outstanding Exercisable
------------ ----------- -----------
<S> <C> <C> <C>
December 31, 1994, balance $-- -- --
Options granted 10 23,100 23,100
------------ ------- ------
December 31, 1995, balance 10 23,100 23,100
Options granted 10 - 12 3/4 95,300 7,700
Options forfeited 10 (22,700) --
------------ ------- ------
December 31, 1996, balance $10 - 12 3/4 95,700 30,800
============ ======= ======
</TABLE>
Subsequent to year end, in January 1997, the Trust granted options covering
24,700 shares, 7,000 of which were immediately exercisable, pursuant to the
Trustee Plan and the Incentive Plan. Also, an additional 36,300 of the December
31, 1996, outstanding options became exercisable in January 1997.
The Trust applies APB No. 25 and related Interpretations in accounting for its
plans. All share options issued to date by the Trust have exercise prices equal
to the market price of the shares at the dates of grant. Accordingly, no
compensation cost has been recognized for its share option plans. Had
compensation cost for the Trust's two share option plans been determined based
on the fair value at the grant dates for awards under those plans consistent
with the method of SFAS No. 123, the Trust's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------- ----------------------
1996 1995
--------------------- ----------------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net income ............. $ 4,937 $ 4,841 $ 708 $ 672
Earnings per share
Net income ............. $ 1.32 $ 1.30 $ .19 $ .18
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------
1996 1995
-------------------- --------------------
<S> <C> <C>
Dividend yield ................... 6% 6%
Expected volatility .............. 25% 29%
Risk-free interest rate .......... 5.5% 5.4%
Expected lives (in years) ........ 3 3
Forfeitures ...................... 10% --
</TABLE>
48
<PAGE> 49
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. SHARE OPTIONS (Continued)
At December 31, 1996, the weighted average remaining contractual life of the
options then outstanding was 4.8 years, and the weighted average exercise price
for options then outstanding was $10.82. At December 31, 1995, the weighted
average remaining contractual life of the options then outstanding was 8.83
years, and the weighted average exercise price for options then outstanding was
$10.
NOTE 10. ADVISORY AGREEMENT
Although the Trust's Board of Trustees (the "Board") is directly responsible
for managing the affairs of the Trust and setting the policies which guide it,
the day-to-day operations of the Trust are performed by an advisory firm which
operates under the supervision of the Board pursuant to a written advisory
agreement approval by shareholders. The duties of the advisor include, among
other things, locating, investigating, evaluating, and recommending real estate
investment and sale opportunities and 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 Board.
On February 10, 1994, the Board 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 approved by the Board and ratified by the
shareholders on November 20, 1995. 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 Mr. Friedman and Lucy N. Friedman,
his wife. The Friedman family owns approximately 32% of the outstanding shares
of the Trust.
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 resigned as advisor to the
Trust effective March 31, 1994.
Except for lower fees, the terms of the Trust's Initial Advisory Agreement
("Initial Advisory Agreement") with Tarragon were similar to those of the BCM
advisory agreement. Under the Initial Advisory Agreement, the Trust paid
Tarragon 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 funds from
operations ("FFO"), as defined by the National Association of Real Estate
Investment Trusts, plus any loss due to the write-down or sale of any real
property or mortgage loan acquired prior to January 1, 1989. FFO represents net
income (loss), computed in accordance with GAAP, excluding gains (or losses)
from debt restructuring and sales of property, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. Additionally, Tarragon could receive commissions of 1% based upon (i)
acquisition cost of real estate, (ii) mortgage loans acquired, and (iii)
mortgage loans obtained or refinanced and a 10% incentive sales commission
based on gains from the sale of real estate.
The BCM advisory agreement provided for an advisory fee comprised of a gross
asset fee of .0625% per month of the average gross asset value of the Trust
(total assets less allowance for amortization, depreciation, or depletion and
valuation reserves) and an incentive fee (annual net income fee) equal to 7.5%
per annum of the Trust's net income. In addition, BCM could receive commissions
of up to 1% based upon (i) acquisition cost of real estate, (ii) mortgage loans
acquired, and (iii) mortgage loans obtained or refinanced and a 10% incentive
sales commission based on gains from the sale of real estate.
49
<PAGE> 50
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. ADVISORY AGREEMENT (Continued)
At the March 1995 Board meeting, a majority of the Trustees approved a revised
advisory agreement, effective April 1, 1995, which was approved by the
shareholders at the November 20, 1995, shareholder meeting. In addition to
technical changes designed to clarify the responsibilities and rights of
Tarragon, the new agreement eliminated the $100,000 annual base fee, the
incentive sales compensation, and mortgage loan acquisition commissions.
Moreover, it provides that real estate brokerage commissions shall be payable
to Tarragon and its affiliates only following specific Board approval for each
transaction rather than pursuant to a general agreement, and no such
commissions have been paid under the revised agreement. The renewal of the
advisory agreement between the Trust and Tarragon was approved by shareholders
at the March 20, 1997, annual shareholder meeting.
Employees of Tarragon render services to the Trust, as the Trust has no
employees. In accordance with the terms of the advisory agreements, certain
services provided by the advisor, including, but not limited to, accounting,
legal, investor relations, data processing, and the related departmental
overhead, are reimbursed directly by the Trust.
Under 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 Operating Expenses, as defined, exceed certain
specified limitations based on the 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 1994, 1995, or 1996.
For additional information regarding compensation paid to Tarragon and BCM, see
NOTE 12. "RELATED PARTY TRANSACTIONS" and ITEM 10. "TRUSTEES, EXECUTIVE
OFFICERS, AND ADVISOR OF THE REGISTRANT - The Advisor."
NOTE 11. 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 multifamily
properties and 1.5% to 5% of the monthly gross rents collected on commercial
properties. Tarragon subcontracts with other entities for the provision of some
of the property-level management services for the Trust. Beginning April 1,
1996, Tarragon Management Inc. ("TMI"), a wholly-owned subsidiary of Tarragon,
assumed the property-level management of a majority of the Trust's properties
for a fee of 4.5% of the monthly gross rents collected.
From February 1, 1990, through March 31, 1994, affiliates of BCM provided,
under contracts approved by the Board, 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 Realty Services, Ltd., ("Carmel, Ltd.")
provided such property management services. In many cases, Carmel, Ltd.,
subcontracted with other entities for the provision 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., of which Mr. Phillips is the sole shareholder, (ii) Mr.
Phillips, and (iii) a trust for the benefit of the children of Mr. Phillips.
50
<PAGE> 51
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. RELATED PARTY TRANSACTIONS
Fees and expense reimbursements to Tarragon and BCM, including affiliates of
each, for 1996, 1995, and 1994 were as follows:
<TABLE>
<CAPTION>
Tarragon BCM
------------------------------ --------
1996 1995 1994 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Fees
Advisory ............................. $ 1,117 $ 1,037 $ 909 $ 468
Real estate acquisition and
mortgage brokerage commissions ..... 293 445 268 103
Property management and
leasing commissions* ............... 1,014 330 285 112
-------- -------- -------- --------
$ 2,424 $ 1,812 $ 1,462 $683
======== ======== ======== ========
Expense reimbursements ................. $ 1,159 $ 960 $ 882 $ 140
======== ======== ======== ========
</TABLE>
Other liabilities at December 31, 1995, included non-interest bearing cash
advances of $300,000 and $283,000 from Lucy N. Friedman, 50% stockholder of
Tarragon and a principal shareholder of the Trust, and Tarragon, respectively.
Such advances were made to the Trust on a short term basis to facilitate the
negotiated discounted payoffs of the mortgage loans secured by Bryan Hill,
Meadowbrook, and Forest Oaks. In connection with the discounted payoffs, the
Trust realized extraordinary gains on debt forgiveness totaling $670,000. The
Trust repaid the advances during 1996. The remaining $255,000 due to affiliates
at December 31, 1995, represented accrued mortgage brokerage commissions,
advisory fees, and expense reimbursements to Tarragon which were paid in
January 1996.
- ----------------------
* Net of property management fees paid to subcontractors
NOTE 13. INCOME TAXES
For the years 1996, 1995, and 1994, 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 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 TO SHAREHOLDERS." 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 or
liability or related valuation allowance was recorded.
No provision has been made for federal income taxes because the Trust believes
it has qualified as a REIT and expects that it will continue to do so.
The Trust's basis in its net assets for tax purposes differs from that 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 partnerships. At December
31, 1996, the Trust's tax basis
51
<PAGE> 52
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13. INCOME TAXES (Continued)
in its net assets exceeded its basis for financial statement purposes by $21.5
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, 1996, the Trust had a tax net
operating loss carryforward of $39.3 million expiring through 2008.
NOTE 14. 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 2010. The
following is a schedule of future minimum rentals on non-cancelable operating
leases as of December 31, 1996:
<TABLE>
<S> <C>
1997 ............................................................... $ 6,240
1998 ............................................................... 5,413
1999 ............................................................... 4,684
2000 ............................................................... 3,728
2001 ............................................................... 2,840
Thereafter ........................................................ 6,557
---------
$ 29,462
=========
</TABLE>
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.
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 was
January 11, 1995.
The Modification provided for, among other things, 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 were appointed to the Board. In addition, BCM, Mr. Phillips, and Mr.
Friedman 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. As of December 31, 1996, the Trust
had collected the entire $150,000.
52
<PAGE> 53
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. COMMITMENTS AND CONTINGENCIES (Continued)
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 and 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 party to various claims and routine
litigation arising in the ordinary course of business. Management of the Trust
does not believe that the results of such claims and litigation, individually
or in the aggregate, will have a material adverse effect on its business or
financial position.
NOTE 16. SUBSEQUENT EVENTS
In January 1997, in exchange for a capital contribution of $200,000, which was
matched by the other partners, the Trust received a 1% general partner interest
and a 49% limited partner interest in RI Windsor, Ltd., a limited partnership
formed to construct a 324-unit luxury apartment complex to be known as The
Mayfaire at Windsor Parke in Jacksonville, Florida, at an estimated cost of
$19.0 million. The property is expected to be completed in the fourth quarter
of 1997. The partnership has obtained an $18.0 million construction loan to
finance the construction. The Trust also loaned the partnership $2.0 million
which is to be repaid from construction loan proceeds following completion.
Until lease-up of the property, the construction loan is guaranteed by the
other general partner. As the Trust holds a non-controlling interest, it will
account for its investment in the partnership using the equity method.
In February 1997, the Trust purchased Morningside Apartments, a 112-unit
property located in Jacksonville, Florida. The purchase price was $2.1 million,
$1.6 million of which was financed through the assumption of an existing
mortgage loan secured by the property. In connection with the transaction, the
Trust paid Tarragon an acquisition fee of $20,000.
Also in February 1997, the Trust closed two mortgage loans, secured separately
by Pinecrest Apartments and Rancho Sorrento Office Building, totaling $17.2
million. After the payoff of the existing mortgage secured by Pinecrest,
establishing escrows for taxes, insurance, and repairs, and closing costs, the
Trust received net cash proceeds of $8.4 million. In connection with these
transactions, the Trust paid Tarragon mortgage brokerage commissions totaling
$172,000.
53
<PAGE> 54
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 17. QUARTERLY RESULTS OF OPERATIONS
The following is a tabulation of the quarterly results of operations for the
years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income ....................................... $ 12,020 $ 13,233 $ 12,566 $ 12,143
Expenses ..................................... (12,048) (12,332) (13,037) (11,759)
----------- ----------- ----------- -----------
Income (loss) before gain (loss) on sale
of real estate and gain on insurance
settlement ................................. (28) 901 (471) 384
Gain (loss) on sale of real estate ........... 224 (213) 3,681 8
Gain on insurance settlement ................. 451 -- -- --
----------- ----------- ----------- -----------
Net income ................................... $ 647 $ 688 $ 3,210 $ 392
=========== =========== =========== ===========
Earnings per share
Net income ................................... $ .17 $ .18 $ .86 $ .11
=========== =========== =========== ===========
Weighted average shares (1) .................. 3,740,737 3,786,643 3,750,170 3,655,260
=========== =========== =========== ===========
</TABLE>
- ---------------------
(1) Represents weighted average shares of beneficial interest used in
computing earnings per share. Share and per share amounts have been
restated to give effect to the September 1996 10% share distribution.
54
<PAGE> 55
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 17. QUARTERLY RESULTS OF OPERATIONS (Continued)
<TABLE>
<CAPTION>
First Second Third Fourth
1995 Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income ....................................... $ 10,978 $ 11,217 $ 11,218 $ 11,827
Expenses ..................................... (11,315) (11,204) (11,889) (11,806)
----------- ----------- ----------- -----------
Income (loss) before gains on sales of
real estate and investments and
extraordinary gain ......................... (337) 13 (671) 21
Gain on sale of real estate .................. -- 110 -- 423
Gain on sale of investments .................. 412 -- -- --
----------- ----------- ----------- -----------
Income (loss) from continuing operations ..... 75 123 (671) 444
Extraordinary gain ........................... -- -- 67 670
----------- ----------- ----------- -----------
Net income (loss) ............................ $ 75 $ 123 $ (604) $ 1,114
=========== =========== =========== ===========
Earnings per share
Income (loss) from continuing operations ..... $ .02 $ .03 $ (.18) $ .12
Extraordinary gain ........................... -- -- .02 .18
----------- ----------- ----------- -----------
Net income (loss) ............................ $ .02 $ .03 $ (.16) $ .30
=========== =========== =========== ===========
Weighted average shares (1) .................. 3,813,142 3,781,441 3,739,994 3,723,896
=========== =========== =========== ===========
</TABLE>
The Trust recorded an extraordinary gain of $67,000 during the third quarter of
1995 related to the discounted payoff of the note payable which financed the
acquisition of the investment in an office building located in Washington, D.C.
In November and December 1995, the Trust recorded extraordinary gains of
$110,000 and $560,000, respectively, related to the negotiated discounted
payoffs of the mortgage loans secured by Bryan Hill Apartments and Forest Oaks
Apartments. For further discussion, see NOTE 7. "NOTES, DEBENTURES, AND
INTEREST PAYABLE."
- -----------------------
(1) Represents weighted average shares of beneficial interest used in computing
earnings per share. Share and per share amounts have been restated to give
effect to the September 1995 and 1996 10% share distributions.
55
<PAGE> 56
SCHEDULE III
NATIONAL INCOME REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS (A)
CAPITALIZED GROSS CARRYING AMOUNTS
INITIAL COST TO TRUST SUBSEQUENT AT END OF YEAR
--------------------- TO ACQUISITION ------------------------------------
BUILDINGS AND ------------ BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL (B)
- ----------- ------------ ---- ------------- ------------ ----- ------------ ---------
PROPERTIES HELD FOR INVESTMENT
Apartments
<S> <C> <C> <C> <C> <C> <C> <C>
Acadian Place .............. $ 551 $ 897 $ 2,608 $ 1,278 $ 897 $ 3,886 $ 4,783
Baton Rouge, LA
Bay West ................... 4,915 891 3,566 379 891 3,945 4,836
Bradenton, FL
Bayfront ................... 2,032 457 2,052 507 457 2,559 3,016
Houston, TX
Bryan Hill ................. 2,999 447 1,803 151 447 1,954 2,401
Bethany, OK
Carlyle Towers ............. 4,019 559 5,939 410 559 6,349 6,908
Southfield, MI
Cornell .................... 1,508 822 1,183 128 822 1,311 2,133
Los Angeles, CA
Creekwood North ............ 3,035 532 2,127 572 532 2,699 3,231
Altamonte Springs, FL
Cross Creek ................ 1,962 221 883 104 221 987 1,208
Lexington, KY
Diamond Loch ............... 8,764(C) 380 2,791 761 380 3,552 3,932
North Richland Hills, TX
Dunhill/Devonshire/Sandstone -- 1,048 3,162 1,431 792 4,849 5,641
Denver, CO
Fenway Hall ................ 1,320 461 1,460 14 461 1,474 1,935
Los Angeles, CA
Forest Oaks ................ 3,056 691 2,685 280 691 2,965 3,656
Lexington, KY
Heather Hills .............. 16,750 643 14,562 5,034 765 19,474 20,239
Temple Hills, MD
Huntington Green ........... -- 446 1,336 138 446 1,474 1,920
West Town, PA
Kirklevington .............. 2,440 490 1,961 178 490 2,139 2,629
Lexington, KY
Lake Point ................. 6,992 2,075 6,225 1,583 2,075 7,808 9,883
Memphis, TN
Marina Park ................ 2,448 657 2,625 846 657 3,471 4,128
North Miami, FL
Mariposa Manor ............. 767 225 901 (293) 225 608 833
Los Angeles, CA
Martins Landing ............ 4,931 1,038 4,201 195 1,038 4,396 5,434
Lakeland, FL
<CAPTION>
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
ACCUMULATED DATE OF DATE OF OPERATIONS
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
- ----------- ------------- ------------ ------ --------------
<S> <C> <C> <C> <C>
PROPERTIES HELD FOR INVESTMENT
Apartments
Acadian Place .............. $ 1,120 1922 Mar-84 5 - 40 years
Baton Rouge, LA
Bay West ................... 497 1974 Nov-92 5 - 40 years
Bradenton, FL
Bayfront ................... 819 1971 Feb-87 5 - 40 years
Houston, TX
Bryan Hill ................. 96 1970 Nov-94 5 - 40 years
Bethany, OK
Carlyle Towers ............. 1,470 1970 Nov-88 5 - 40 years
Southfield, MI
Cornell .................... 225 1929 Apr-90 5 - 40 years
Los Angeles, CA
Creekwood North ............ 200 1973 Nov-92 5 - 40 years
Altamonte Springs, FL
Cross Creek ................ 111 1966 Nov-92 5 - 40 years
Lexington, KY
Diamond Loch ............... 1,015 1978 Oct-85 5 - 40 years
North Richland Hills, TX
Dunhill/Devonshire/Sandstone 1,048 1969 Mar-89 5 - 40 years
Denver, CO
Fenway Hall ................ 249 1929 Apr-90 5 - 40 years
Los Angeles, CA
Forest Oaks ................ 155 1971 Nov-94 5 - 40 years
Lexington, KY
Heather Hills .............. 7,040 1976 May-86 5 - 40 years
Temple Hills, MD
Huntington Green ........... 181 1963 Mar-93 5 - 40 years
West Town, PA
Kirklevington .............. 265 1975 Nov-92 5 - 40 years
Lexington, KY
Lake Point ................. 621 1974 May-93 5 - 40 years
Memphis, TN
Marina Park ................ 115 1974 Apr-95 5 - 40 years
North Miami, FL
Mariposa Manor ............. 53 1924 Sep-94 5 - 40 years
Los Angeles, CA
Martins Landing ............ 241 1973 Nov-94 5 - 40 years
Lakeland, FL
</TABLE>
56
<PAGE> 57
SCHEDULE III
(Continued)
NATIONAL INCOME REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS (A)
CAPITALIZED GROSS CARRYING AMOUNTS
INITIAL COST TO TRUST SUBSEQUENT AT END OF YEAR
--------------------- TO ACQUISITION -----------------------------
BUILDINGS AND -------------- BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL (B)
- ----------- ------------ ---- ------------ -------------- ---- ------------- ------
PROPERTIES HELD FOR INVESTMENT (Continued)
Apartments (Continued)
<S> <C> <C> <C> <C> <C> <C> <C>
Meadowbrook .................. (C) $ 307 $ 1,230 $ (5) $ 307 $ 1,225 $ 1,532
Baton Rouge, LA
Mustang Creek ................ (C) 718 2,872 961 718 3,833 4,551
Arlington, TX
Palm Court ................... 2,937 599 2,393 388 599 2,781 3,380
North Miami, FL
Park Dale Gardens ............ 2,946 354 1,416 467 531 1,706 2,237
Dallas, TX
Park Norton .................. 553 144 576 457 144 1,033 1,177
Los Angeles, CA
Park Place ................... -- 76 304 152 76 456 532
Los Angeles, CA
Pheasant Pointe .............. 5,743 810 8,073 227 789 8,321 9,110
Sacramento, CA
Pinecrest .................... 8,202 3,612 8,427 5,456 3,612 13,883 17,495
Ft. Lauderdale, FL
Plaza Hills .................. 1,764 253 1,195 254 253 1,449 1,702
Kansas City, MO
Prado Bay .................... 2,888 614 3,482 804 614 4,286 4,900
North Bay Village, FL
The Regent ................... (C) 303 1,212 3,991 303 5,203 5,506
Jacksonville, FL
River City Landing ........... 4,902 1,236 5,602 1,077 1,236 6,679 7,915
Jacksonville, FL
Spring Pines ................. -- 371 1,486 35 371 1,521 1,892
Houston, TX
Summit on the Lake ........... 3,555 895 3,582 283 895 3,865 4,760
Ft. Worth, TX
Woodbrier .................... 1,203 508 2,034 52 508 2,086 2,594
Oklahoma City, OK
Woodcreek (CO) ............... 2,862 913 3,193 (600) 690 2,816 3,506
Denver, CO
Woodcreek (FL) ............... 3,728 472 4,977 1,118 451 6,116 6,567
Jacksonville, FL
Vistas at Lake Worth ......... -- 752 92 3,036 752 3,128 3,880
Ft. Worth, TX
<CAPTION>
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
ACCUMULATED DATE OF DATE OF OPERATIONS
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
- ----------- ------------ ------------ -------- --------------
PROPERTIES HELD FOR INVESTMENT (Continued)
Apartments (Continued)
<S> <C> <C> <C> <C>
Meadowbrook .................. $ 38 1968 Oct-95 5 - 40 years
Baton Rouge, LA
Mustang Creek ................ 120 1974 May-95 5 - 40 years
Arlington, TX
Palm Court ................... 522 1971 Oct-89 5 - 40 years
North Miami, FL
Park Dale Gardens ............ 211 1975 Dec-91 5 - 40 years
Dallas, TX
Park Norton .................. -- 1924 Jun-95 5 - 40 years
Los Angeles, CA
Park Place ................... 12 1929 Sep-95 5 - 40 years
Los Angeles, CA
Pheasant Pointe .............. 2,463 1985 Sep-86 5 - 40 years
Sacramento, CA
Pinecrest .................... 2,076 1965 Jul-90 5 - 40 years
Ft. Lauderdale, FL
Plaza Hills .................. 370 1967 Oct-91 5 - 40 years
Kansas City, MO
Prado Bay .................... 775 1966 Oct-90 5 - 40 years
North Bay Village, FL
The Regent ................... -- 1972 Sep-95 N/A
Jacksonville, FL
River City Landing ........... 38 1965 Jun-96 40 years
Jacksonville, FL
Spring Pines ................. 406 1964 Feb-88 5 - 40 years
Houston, TX
Summit on the Lake ........... 247 1986 Mar-94 5 - 40 years
Ft. Worth, TX
Woodbrier .................... 38 1970 Apr-96 5 - 40 years
Oklahoma City, OK
Woodcreek (CO) ............... 1,057 1980 Aug-86 5 - 40 years
Denver, CO
Woodcreek (FL) ............... 2,116 1975 Nov-86 5 - 40 years
Jacksonville, FL
Vistas at Lake Worth ......... -- 1970 Dec-94 N/A
Ft. Worth, TX
</TABLE>
57
<PAGE> 58
SCHEDULE III
(Continued)
NATIONAL INCOME REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS (A)
CAPITALIZED GROSS CARRYING AMOUNTS
INITIAL COST TO TRUST SUBSEQUENT AT END OF YEAR
--------------------- TO ACQUISITION --------------------------------------
BUILDINGS AND -------------- BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL (B)
- ----------- ------------ ---- ------------- ------------- ---- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
PROPERTIES HELD FOR INVESTMENT (Continued)
Office Buildings
Emerson Center ..... $ 3,860(D) $ 131 $ 8,781 $ (562) $ 1,048 $ 7,302 $ 8,350
Atlanta, GA
NW O'Hare .......... 1,126 1,990 7,965 (2,456) 1,104 6,395 7,499
Des Plaines, IL
Rancho Sorrento .... 2,904 1,251 12,901 (868) 968 12,316 13,284
San Diego, CA
Shopping Centers
Emerson Center ..... 1,224 -- 363 -- -- 363 363
Atlanta, GA
K-Mart Plaza ....... 1,360 689 1,608 -- 689 1,608 2,297
Temple Terrace, FL
Lakeview Mall ...... -- 513 2,050 612 341 2,834 3,175
Manitowoc, WI
Midland Plaza ...... 289 321 748 -- 321 748 1,069
Midland, MI
Midway Mills ....... 4,155 588 2,365 1,461 1,227 3,187 4,414
Carrollton, TX
Mountain View ...... 1,047 118 578 227 140 783 923
Las Vegas, NV
Northside Mall ..... 1,853 1,591 3,712 228 1,591 3,940 5,531
Gainesville, FL
Southgate .......... 1,306 578 2,430 638 602 3,044 3,646
Waco, TX
Stewart Square ..... -- 294 1,460 620 294 2,080 2,374
Las Vegas, NV ------- ------ ------- ------ ------ ------- ----------
128,896 33,981 159,177 31,749 34,020 190,887 224,907
------- ------ ------- ------ ------ ------- ----------
</TABLE>
<TABLE>
<CAPTION>
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
ACCUMULATED DATE OF DATE OF OPERATIONS
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
- ----------- ------------ ------------ -------- -----------
PROPERTIES HELD FOR INVESTMENT (Continued)
Office Buildings
<S> <C> <C> <C> <C>
Emerson Center ..... $ 3,758 1974 Jul-86 5 - 40 years
Atlanta, GA
NW O'Hare .......... 3,193 1972 Apr-86 5 - 40 years
Des Plaines, IL
Rancho Sorrento .... 4,506 1980 May-86 5 - 40 years
San Diego, CA
Shopping Centers
Emerson Center ..... 95 1974 Jul-86 5 - 40 years
Atlanta, GA
K-Mart Plaza ....... 203 1979 Dec-91 5 - 40 years
Temple Terrace, FL
Lakeview Mall ...... 1,074 1968 Apr-87 5 - 40 years
Manitowoc, WI
Midland Plaza ...... 94 1976 Dec-91 5 - 40 years
Midland, MI
Midway Mills ....... 1,064 1986 Oct-91 5 - 40 years
Carrollton, TX
Mountain View ...... 227 1971 Oct-87 5 - 40 years
Las Vegas, NV
Northside Mall ..... 520 1977 Dec-91 5 - 40 years
Gainesville, FL
Southgate .......... 398 1959 Jul-91 5 - 40 years
Waco, TX
Stewart Square ..... 712 1971 Oct-87 5 - 40 years
Las Vegas, NV --------
41,854
--------
</TABLE>
58
<PAGE> 59
Schedule III
(Continued)
NATIONAL INCOME REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS (A)
CAPITALIZED GROSS CARRYING AMOUNTS
INITIAL COST TO TRUST SUBSEQUENT AT END OF YEAR
--------------------- ACQUISITION ---------------------------------
BUILDINGS AND ------------- BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL (B)
- ----------- ------------ ---- ------------ -------------- ---- --------------- ---------
PROPERTIES HELD FOR SALE
Shopping Centers
<S> <C> <C> <C> <C> <C> <C> <C>
Jackson Square ..................... $ - $ 1,115 $ 4,451 $ -- $ 1,115 $ 4,451 $ 5,566
Jackson, MS
K-Mart Plaza ....................... 1,279 571 1,333 12 571 1,345 1,916
Charlotte, NC
K-Mart Plaza ....................... 1,725 451 1,808 -- 451 1,808 2,259
Indianapolis, IN
K-Mart Plaza ....................... 1,081 497 1,159 -- 497 1,159 1,656
Thomasville, GA
Times Square ....................... -- 125 499 46 125 545 670
Lubbock, TX
Other
Snyder Residence ................... -- -- 39 -- -- 39 39
Gilbert, AZ
Land
Orangeburg, SC ..................... -- 123 -- -- 123 -- 123
Dallas, TX ......................... -- 737 3,782 (4,453)(E) 66 -- 66
Kansas City, MO .................... -- 802 1,871 (2,373) 300 -- 300
-------- ------- -------- ------- ------- -------- --------
4,085 4,421 14,942 (6,768) 3,248 9,347 12,595
-------- ------- -------- ------- ------- -------- --------
$132,981 $38,402 $174,119 $24,981 $37,268 $200,234 237,502
======== ======= ======== ======= ======= ========
Allowance for estimated losses ..... (1,529)
--------
$235,973
========
</TABLE>
<TABLE>
<CAPTION>
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
ACCUMULATED DATE OF DATE OF OPERATIONS
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
- ----------- ------------ ------------ -------- -------------
PROPERTIES HELD FOR SALE
Shopping Centers
<S> <C> <C> <C> <C>
Jackson Square ..................... $ -- 1970 Jan-96 40 years
Jackson, MS
K-Mart Plaza ....................... 135 1977 Dec-91 5 - 40 years
Charlotte, NC
K-Mart Plaza ....................... 50 1974 Dec-94 5 - 40 years
Indianapolis, IN
K-Mart Plaza ....................... 117 1974 Dec-91 5 - 40 years
Thomasville, GA
Times Square ....................... 93 1985 Jul-89 5 - 40 years
Lubbock, TX
Other
Snyder Residence ................... 2 -- -- --
Gilbert, AZ
Land
Orangeburg, SC ..................... -- -- Jun-89 --
Dallas, TX ......................... -- -- Jun-86 --
Kansas City, MO .................... -- -- Dec-91 --
-------
397
-------
$42,251
=======
</TABLE>
- -------------------
(A) Represents property improvements and write-down of properties due to
permanent impairment.
(B) The aggregate cost for federal income tax purposes is $213,364.
(C) The Trust's line of credit with a current balance of $8,764 is
collateralized by Diamond Loch, Meadowbrook, Mustang Creek, and The
Regent.
(D) Includes $977 of unsecured debt associated with the property.
(E) Basis charged against allowance previously provided.
59
<PAGE> 60
SCHEDULE III
(Continued)
NATIONAL INCOME REALTY TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Reconciliation of real estate
Balance at January 1, ................................... $ 240,822 $ 224,785 $ 208,462
Additions
Acquisitions and improvements ...................... 22,896 20,025 18,253
Foreclosures ....................................... 5,575 -- 3,384
Deductions
Sales .............................................. (31,491) (2,598) --
Write-off of Pepperkorn Office Building ............ -- (1,390) --
Write-downs due to permanent impairment ............ (300) -- (5,314)
--------- --------- ---------
Balance at December 31, ................................. $ 237,502 $ 240,822 $ 224,785
========= ========= =========
Reconciliation of accumulated depreciation
Balance at January 1, ................................... $ 45,147 $ 39,427 $ 35,828
Additions
Depreciation ....................................... 5,374 5,959 4,992
Deductions
Sale of real estate ................................ (8,270) (166) --
Write-off of Pepperkorn Office Building ............ -- (73) --
Write-off due to permanent impairment .............. -- -- (1,393)
--------- --------- ---------
Balance at December 31, ................................. $ 42,251 $ 45,147 $ 39,427
========= ========= =========
</TABLE>
60
<PAGE> 61
SCHEDULE IV
NATIONAL INCOME REALTY TRUST
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
FACE CARRYING SUBJECT TO
AMOUNT AMOUNT DELINQUENT
INTEREST MATURITY PRIOR OF OF PRINCIPAL OR
DESCRIPTION RATE DATE PERIODIC PAYMENT TERMS LIENS MORTGAGE MORTGAGE(1) INTEREST
----------- -------- ------- ---------------------- ----- --------- ------------- ------------
FIRST MORTGAGE LOANS
<S> <C> <C> <C> <C> <C> <C>
Casa Bonita 18.00% Jun-88 Monthly payments of $ - $ 1,000 $ 943 $ 943
$1 million mortgage interest only.
loan secured by
apartments in Paris, TX.
Pioneer Office Bldg. 7.50% Apr-97 Monthly payments of - 550 550 -
$550,000 mortgage to interest at 7.5% through
loan secured by office 9.50% April 1994; 8.5% through
building in Milwaukee, April 1995; 9.5% there-
WI. after to maturity.
Other Residential 7.50% Nov-07 Monthly payments of - 151 134 -
2 mortgage loans to to principal and interest.
secured by single- 10.00% Nov-16
family homes located
in AZ.
WRAPAROUND MORTGAGE LOANS
K-Mart, Fairbault 7.58% Jan-03 Monthly payments of 955 2,624 266 -
$2.6 million mortgage principal and interest
loan secured by shopping from available cash flow.
center in Fairbault, MN.
</TABLE>
61
<PAGE> 62
SCHEDULE IV
(CONTINUED)
NATIONAL INCOME REALTY TRUST
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
FACE CARRYING SUBJECT TO
AMOUNT AMOUNT DELINQUENT
INTEREST MATURITY PRIOR OF OF PRINCIPAL OR
DESCRIPTION RATE DATE PERIODIC PAYMENT TERMS LIENS MORTGAGE MORTGAGE(1) INTEREST
----------- -------- ------- ---------------------- ----- --------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
JUNIOR MORTGAGE LOANS
Villa Maria 12.00% Dec-97 Monthly principal and $ 5,673 $ 230 $ 220 $ -
$230,000 mortgage to interest payments of
loan secured by 14.00% $5,000
apartment complex ------- ------ ------- -----
in Dallas, TX. $ 6,628 $4,555 $ 2,113 $ 943
======= ====== =====
Accrued interest 46
Deferred gain (152)
-------
2,007
Allowance for estimated losses (1,745)
-------
$ 262
=======
</TABLE>
- -----------------
(1) The aggregate cost for federal income tax purposes is $2,003.
62
<PAGE> 63
SCHEDULE IV
(Continued)
NATIONAL INCOME REALTY TRUST
MORTGAGE LOANS ON REAL ESTATE
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Balance at January 1, ................................. $ 12,744 $ 16,313 $ 19,416
Additions
Accrued interest shortfall and participation ..... 77 40 50
Deductions
Collections of principal ......................... (2,140) (3,609) (1,841)
Foreclosures ..................................... (8,568) -- (727)
Other ............................................ -- -- (585)(1)
-------- -------- --------
Balance at December 31, ............................... $ 2,113 $ 12,744 $ 16,313
======== ======== ========
</TABLE>
(1) Note receivable carrying value in excess of sales price. Remaining amount
reclassed to other assets.
63
<PAGE> 64
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
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 and controlled by a Board of Trustees (the "Board"), presently
consisting of eight members. The Trustees are elected at the annual meeting of
shareholders or appointed by the incumbent Board and serve until the next
annual meeting of shareholders or until a successor has been elected or
approved.
In May 1994, the Trust, together with Continental Mortgage and Equity Trust
("CMET"), Income Opportunity Realty Trust ("IORT"), and Transcontinental Realty
Investors, Inc. ("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 approved
by the Court on December 12, 1994, and became effective January 11, 1995.
The Modification provided for, among other things, the resignation of certain
trustees, the addition of at least three new, unaffiliated members to be
appointed to the Board, 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 William S.
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, 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.
Pursuant to the requirements (and 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 on April
22, 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, Geoffrey C. Etnire ( a Trustee since January 1993)
ceased to be a Trustee on March 9, 1995, and Willie K. Davis (a Trustee since
October 1988) retired as a Trustee effective March 31, 1995. Carl B. Weisbrod
(a Trustee since February 1994) was elected Chairman of the Board on March 9,
1995, to replace Mr. Friedman, who remains as President, Chief Executive
Officer, and Trustee of the
64
<PAGE> 65
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT
(Continued)
Trustees (Continued)
Trust. During the period from May 1994 to March 9, 1995, the Board appointed
four new, independent Trustees to replace a number of those who resigned, and
the number of members of the Board was reduced from ten at December 31, 1993,
to eight at March 31, 1995. Independent Trustees appointed are Irving E. Cohen
(June 2, 1994), Sally Hernandez-Pinero (May 19, 1994), Lance Liebman (March 9,
1995), and L. G. Schafran (March 9, 1995). Messrs. Friedman, Dan L. Johnston,
Raymond V. J. Schrag, and Weisbrod have continued as Trustees. All of the
Trustees listed below were re-elected as members of the Board at the annual
meeting of shareholders held on March 20, 1997.
The current Trustees are listed below, together with their ages, terms of
service, all positions and offices with the Trust and Tarragon Realty Advisors,
Inc. ("Tarragon"), the Trust's advisor since April 1, 1994, 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 50, Trustee (since June 1994) (Independent).
Managing Director and Chief Acquisition Officer (since 1996), Dames &
Moore/Brookhill, LLC, a real estate development company; Managing Director
(since 1994), CPR Group, a real estate consulting company; Managing
Partner (1990 to 1994), Fuller Corporate Realty Partners, a New York City
real estate asset management entity; Director of Real Estate Consulting
Services for Price Waterhouse (1989 to 1990); Special Advisor (1988 to
1989) and Trustee (1985 to 1989), Mellon Participating Mortgage Trust, a
mortgage real estate investment trust ("REIT"); and Executive Vice
President, E.F. Hutton Properties, Inc. (1983 to 1987).
WILLIAM S. FRIEDMAN: Age 53, 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 Vinland Property Trust ("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 May 1993)
and Director (February to December 1989) of Basic Capital Management, Inc.
("BCM"), the advisor to the Trust (March 1989 to March 1994); 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
65
<PAGE> 66
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT
(Continued)
Trustees (Continued)
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)
with the Law Offices of William S. Friedman; 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 44, Trustee (since May 1994) (Independent).
Of Counsel (since October 1994), Kalkines, Arky, Zall and Bernstein, New
York City; 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; Director (since July 1994) of Consolidated
Edison; Director (since April 1994) of Dime Savings Bank; Attorney at Law
(since 1978).
DAN L. JOHNSTON: Age 58, Trustee (April 1990 to June 1990 and since February
1991) (Independent).
Attorney in solo practice, New York, New York (1991 to 1994 and since
August 1995); Partner in the law firm of Johnston, Kaplan and Lombardi
(January to July 1995), New York City; 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 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 (December 1992 to May 1995) of VPT.
LANCE LIEBMAN: Age 55, Trustee (since March 1995) (Independent).
Lucy G. Moses Professor of Law (since 1991) Columbia School of Law, New
York City; Dean (1991-1995), Columbia School of Law, 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 (since 1991) of Greater New York Insurance Co. (both mutual and
stock companies); Director (since 1995) of Power Control Technology, Inc.;
author of numerous articles published in a number of legal periodicals and
seven books; Attorney at Law (since 1967).
66
<PAGE> 67
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT
(Continued)
Trustees (Continued)
L. G. SCHAFRAN: Age 58, Trustee (since March 1995) (Independent).
Managing General Partner (since 1984) L. G. Schafran & Associates, a real
estate investment and development firm in New York City; Director,
Publicker Industries, Inc. (since 1986), an Old Greenwich, Connecticut,
NYSE listed holding company that operates through subsidiaries in
manufacturing services; Director, Capsure Holdings Corp. (since 1986), a
Chicago, Illinois, NYSE listed property and casualty insurer; Director,
Oxigene, Inc. (since March 1993), a U.S. and Swedish pharmaceutical
developer; Director, Glasstech, Inc. (1) (since January 1995), Perrysberg,
Ohio, manufacturer of glass bending and tempering equipment; and Director
(since December 1993), Member (since September 1994), and Chairman (since
December 1994) of the Executive Committee of The Dart Group Corporation, a
Landover, Maryland, NYSE listed holding company engaged with other
publicly traded subsidiaries in discount automotive parts and accessories
(Trak Auto Corporation), discount bookstores (Crown Bookstores), discount
supermarkets, beverages, and real estate, and; Chairman (since January
1996) Delta-Omega Technologies, Inc., a Broussard, Louisiana manufacturer
and distributor of environmentally safe line foams and industrial cleaners
and degreasers.
RAYMOND V.J. SCHRAG: Age 51, Trustee (since October 1988) (Independent).
Attorney, Law Offices of Raymond V. J. Schrag in New York, New York (since
January 1995); attorney, Law Offices of Paul J. Schrag in New York, New
York (since 1975); Trustee (1986 to December 1989) of Hidden Strength
Mutual Funds; Trustee (October 1988 to May 1995) of VPT; and Director or
Trustee (October 1988 to August 1994) of CMET, IORT, and TCI.
CARL B. WEISBROD: Age 52, Chairman of the Board (since March 1995) and Trustee
(since February 1994) (Independent).
Trustee (since 1996), Ford Foundation; President (since 1994), Alliance
for Downtown New York, Inc.; Trustee (February 1994 to May 1995) 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
Separation of Messrs. Phillips and Friedman from Southmark. Until January
1989, Mr. Friedman 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
- ------------
(1) On May 24, 1993, Glasstech, Inc., filed a voluntary petition under Chapter
11 of The United States Bankruptcy Code for the District of Delaware. An
Order confirming a plan of reorganization became effective January 3,
1995, which is the same day Mr. Schafran became a director of Glasstech,
Inc.
67
<PAGE> 68
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT
(Continued)
Trustees (Continued)
December 7, 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 positions 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 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 denies all of such allegations. Those lawsuits in
which Mr. Friedman was also a defendant during the last five years are
summarized below. The Trust was not a defendant in any of these lawsuits, all
of which have been dismissed or settled.
In Burt v. Grant Thornton, Gene E. Phillips and William S.
Friedman, the plaintiff, a purchaser of Southmark preferred stock, alleged that
the defendants disseminated false or misleading corporate reports, financial
analysis, and news releases in order to induce the public to continue investing
in Southmark. Grant Thornton served as independent certified public accountants
to Southmark and, for fiscal 1988 and 1989, to the Trust. The plaintiff sought
actual damages in the amount of less than $10,000, treble damages, and punitive
damages in an unspecified amount plus attorneys' fees and costs. This case was
settled in October 1993 for a nominal payment.
Consolidated actions entitled Salsitz v. Phillips et al.,
purportedly brought as class actions on behalf of purchasers of Southmark
securities during specified periods, were pending before the United States
District Court for the Northern District of Texas. Mr. Friedman entered into a
settlement agreement with the plaintiffs, which was approved by the court in
October 1993.
Mr. Friedman also served as a director of Pacific Standard Life
Insurance Company ("PSL"), a wholly-owned subsidiary of Southmark, from October
1984 to January 1989. In a proceeding brought by the California Insurance
commissioner (the "Commissioner"), a California Superior Court appointed a
conservator for PSL on December 11, 1989. On October 12, 1990, the Commissioner
filed suit against the former directors of PSL (including Mr. Friedman) seeking
damages of $12 million and additional punitive damages. Such lawsuit alleged,
among other things, that the defendants knowingly and willfully conspired among
themselves to breach their duties as directors of PSL to benefit Southmark.
Such suit further alleged that PSL's board of directors failed to convene
meetings and delegated to Mr. Phillips authority to make decisions regarding
loans, investments, and other transfers and exchanges of PSL assets. In August
1993, five former directors of PSL, including Mr. Friedman, settled this
lawsuit without admitting any liability (the "PSL Settlement"). At that time, a
judgment was entered securing certain payments agreed to be made by Mr.
Friedman and other individuals. After making two of the scheduled payments, the
payment due in November 1994 was not made. After discussions and additional
litigation, effective December 13, 1995, the Commissioner and Messrs. Phillips
and Friedman entered into a modification of the PSL Settlement (the "PSL
Modification") pursuant to which the $4.45 million balance of the original
payments is to be paid over a ten-year period. Mr. Friedman's liability
terminates when the Commissioner has received an aggregate of $1.2 million
under the PSL Modification. Tarragon has guaranteed 80% of each of Mr.
Friedman's scheduled payments under the PSL Modification.
68
<PAGE> 69
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT
(Continued)
Trustees (Continued)
One of Southmark's principal businesses was real estate syndication, and,
from 1981 through 1987, Southmark raised over $500 million in investments from
limited partners in several hundred limited partnerships. Seven lawsuits were
filed by investors alleging breach of fiduciary duties on the part of Mr.
Friedman and others. Two cases were settled in July and October 1993, for
nominal payments. In one case, all claims were dismissed by the Court, and the
defendants (including Mr. Friedman) were awarded sanctions against plaintiff's
counsel. The other four cases were voluntarily dismissed by the plaintiffs
without payment of any kind by the defendants.
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
affiliates. During late November 1994, Mr. Friedman entered into certain
agreements with the RTC and OTS settling all claims relating to (i) his
involvement with SJSA and (ii) any guarantor arrangement of Mr. Friedman as to
other financial institutions taken over by the RTC. Pursuant to such
arrangements, Mr. Friedman and certain other respondents (including Mr.
Phillips) agreed to pay restitution over a ten year period in the amount of $20
million. Mr. Friedman's liability terminated on September 30, 1996, when the
respondents as a group had paid a total of $4 million out of the total
requirement. Mr. Friedman also 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 Board held three meetings and acted by written consent eight times during
1996. For such year, no incumbent Trustee attended fewer than 75% of the
aggregate of (i) the total number of meetings held by the Board during the
period for which he had been a Trustee and (ii) the total number of meetings
held by all committees of the Board on which he served during the periods that
he served.
The Board has an Audit Committee, an Advisory Review Committee, and an Option
Committee. The Audit Committee, consisting of three Independent trustees,
Messrs. Schrag (Chairman), Johnston, and Weisbrod, reviews the Trust's
operating and accounting procedures. This committee met one time during 1996.
The Advisory Review Committee, established in March 1995, monitors actions
taken by the Advisor which have the potential for a conflict of interest, in
particular decisions relating to the allocation of investment opportunities
among the Trust and the other entities affiliated with the Advisor. The
committee consists of Mr. Weisbrod (Chairman), Ms. Hernandez-Pinero, and Mr.
Cohen and met once during 1996. The Option Committee was formed in 1995 for
purposes of authorizing options under the Share Option and Incentive Plan,
approved at the November 1995 shareholder meeting. This committee is presently
comprised of two members including Messrs. Friedman and Weisbrod and acted by
written consent six times during 1996.
The Board does not have Nominating or Compensation Committees.
69
<PAGE> 70
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT
(Continued)
Executive Officers
William S. Friedman, President and Chief Executive Officer, currently serves as
the only executive officer of the Trust. His position with the Trust is not
subject to a vote of shareholders. Mr. Friedman's age, term of service, all
positions and offices with the Trust and Tarragon, other principal occupations,
business experience, and directorships with other companies during the last
five years or more are set forth above.
Officers
Although not executive officers of the Trust, the following persons currently
serve as officers of the Trust. 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 and Tarragon, other principal occupations, business
experience, and directorships with other companies during the last five years
are set forth below:
BRUCE SCHNITZ: Age 47, Chief Operating Officer.
Chief Operating Officer (since January 1996) of the Trust, VPT, and
Tarragon; President and Chief Executive Officer (1993-1994) of McNeil
Acquisition Corporation; President, Chief Operating Officer, and Director
(1991-1993), McNeil Real Estate Management, Inc.; Executive Vice President
(1989-1991) Southmark Corporation; President and Chief Executive Officer
(1986-1991) Southmark Public Syndications.
ROBERT C. IRVINE: Age 47, Executive Vice President and Chief Financial Officer.
Chief Financial Officer (since September 1996) of the Trust, VPT, and
Tarragon; Executive Vice President and Chief Financial Officer of FYI,
Inc. (February 1996 to July 1996); Executive Vice President, Secretary,
Treasurer, Chief Financial Officer, and a director of McNeil Real Estate
Management, Inc., and a Vice President of McNeil Investors, an affiliated
entity (1991-1995); and Certified Public Accountant (since 1977).
CHRIS W. CLINTON: Age 50, Senior Vice President - Asset Management.
Senior Vice President - Asset Management (since May 1995), and Senior Vice
President - Commercial Asset Management (March 1994 to April 1995) of the
Trust and VPT; Senior Vice President (since March 1994) of Tarragon; Vice
President (October 1988 to March 1994) of the Trust, ART, CMET, IORT,
NIRT, TCI, and BCM.
R.W. LOCKHART: Age 51, Senior Vice President - Asset Management.
Senior Vice President - Asset Management (since May 1995) of the Trust and
VPT; Senior Vice President (since March 1994) of Tarragon; Independent
Consultant (March 1992 to February 1994); Senior Vice President (July 1989
to March 1992) of BCM and CRSI.
70
<PAGE> 71
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT
(Continued)
Officers (Continued)
TODD C. MINOR: Age 38, Treasurer.
Treasurer (since December 1996), Senior Vice President - Mortgage
Servicing and Financing (May 1995 to November 1996), and Senior Vice
President - Finance (March 1994 to April 1995 and from July 1993 to
January 1994) of the Trust and VPT; Senior Vice President (since March
1994) of Tarragon; Senior Vice President - Finance (July 1993 to March
1994) of BCM, ART, CMET, IORT, and TCI; Vice President (January 1989 to
July 1993) of BCM and (April 1991 to July 1993) of the Trust, ART, CMET,
IORT, VPT, and TCI.
ERIN D. DAVIS: Age 35, Vice President and Chief Accounting Officer.
Vice President and Chief Accounting Officer (since September 1996) of the
Trust, VPT, and Tarragon; Accounting Manager of the Trust, VPT, and
Tarragon (June 1995 to August 1996); Senior Associate, BDO Seidman
(January 1993 to June 1995); Senior Accountant and other positions with
E&Y Kenneth Leventhal Real Estate Group (formerly Kenneth Leventhal &
Company) (January 1988 to December 1992); and Certified Public Accountant
(since 1990).
LAWRENCE S. HARTMAN: Age 31, Vice President and Secretary.
Vice President and Secretary of the Trust and VPT (since June 1996); Vice
President of Tarragon (since May 1996); Associate (March 1994 through May
1996), Coudert Brothers; Partner (September 1990 through March 1994),
Anderson, Kill, Olick & Oshinsky.
In addition to the foregoing officers, the Trust has other officers who are not
listed herein.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Under the securities laws of the United States, the Trust's Trustees, certain
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 1996. Except as noted below, all of these filing
requirements were satisfied. In making these statements, the Trust has relied
on the written representations of its incumbent Trustees and officers, 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 year ended December 31,
1996, were not filed on a timely basis: Forms 4 for Messrs. Cohen, Johnston,
Liebman, Schafran, Schrag, and Weisbrod and Mrs. Hernandez-Pinero for the
options granted to each of them by the Trust on January 1, 1996.
71
<PAGE> 72
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor
Although the Board 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 an advisory firm under the supervision of the Board
pursuant to a written advisory agreement approved by shareholders. The duties
of the advisor include, among other things, locating, investigating,
evaluating, and recommending real estate and mortgage loan investment and sale
opportunities and 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 Board.
Consolidated Capital Equities Corporation ("CCEC"), the sponsor and original
advisor of the Trust, 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. 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 7, 1992. BCM also serves as advisor to
CMET, IORT, TCI, and ART and served as advisor to VPT until February 28, 1994.
Certain Trustees of the Trust were also Trustees or Directors of CMET, IORT,
and TCI but have since resigned their positions. Mr. Friedman, President of the
Trust, also serves as President of VPT. BCM also performs certain
administrative functions for NRLP and NOLP, the operating partnership of NRLP,
on a cost-reimbursement basis. Mr. Friedman resigned from his positions with
CMET, IORT, and TCI in February 1994, from his position as an executive officer
and director of ART in December 1992, and from his position with NRLP in March
1994 to concentrate his attention on the Trust, VPT, and Tarragon.
Tarragon has provided advisory services to the Trust since April 1, 1994. At
the annual meeting of shareholders held on March 20, 1997, the shareholders
approved the renewal of the advisory agreement between Tarragon and the Trust.
Mr. Friedman serves as a Director and Chief Executive Officer of Tarragon.
Tarragon is owned by Mr. Friedman and Lucy N. Friedman, his wife. The Friedman
family owns approximately 32% of the outstanding shares of the Trust.
The provisions of the Trust's initial advisory agreement ("Initial Advisory
Agreement") with Tarragon were substantially the same as those of the BCM
advisory agreement. Under the Initial Advisory Agreement, the Trust paid
Tarragon 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 funds from
operations ("FFO"), as defined by the National Association of Real Estate
Investment Trusts, plus any loss due to the write-down or sale of any real
property or mortgage loan acquired prior to January 1, 1989. FFO represents 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.
Additionally, Tarragon could receive commissions of 1% based upon (i)
acquisition cost of real estate, (ii) mortgage loans acquired, and (iii)
mortgage loans obtained or refinanced and a 10% incentive sales commission
based on gains from the sale of real estate.
72
<PAGE> 73
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
A majority of the Board approved certain revisions to the Initial Advisory
Agreement which was approved by the shareholders at the November 1995 annual
meeting. The Initial Advisory Agreement was replaced, effective April 1, 1995,
with the revised advisory agreement. The revised advisory agreement is very
similar to the Initial Advisory Agreement but eliminates the $100,000 annual
base fee, incentive sales compensation, and mortgage loan acquisition
commissions and makes various technical changes designed to further clarify the
responsibilities of Tarragon. In addition, the revised advisory agreement
provides that real estate commissions shall be payable to Tarragon and its
affiliates only following specific Board approval for each transaction rather
than pursuant to a general agreement.
The following table sets forth the changes or alterations in compensation
payable to the advisor under the BCM advisory agreement and the Tarragon
advisory agreements during the periods indicated:
<TABLE>
<CAPTION>
COMPENSATION
DESCRIPTION ADVISOR; EFFECTIVE DATES OF ADVISORY AGREEMENT
------------ --------------------------------------------------------------------------------------
BCM TARRAGON TARRAGON
------------------- ------------------- ------------------
DEC 1992 - MAR 1994 APR 1994 - MAR 1995 APR 1995 - PRESENT
------------------- ------------------- ------------------
<S> <C> <C>
Base fixed annual fee None $100,000 None
Gross asset fee .0625% per month (.75% None None
per annum) of the
average "Gross Asset Value"
Incentive advisory fee 7.5% per annum of "Net 16% per annum of 16% per annum of
Income" "Adjusted Funds "Adjusted Funds
from Operations" from Operations"
Acquisition commission The lesser of (i) up to 1% 1% of the acquisition cost 1% of the acquisition cost
of the acquisition cost (inclusive of commissions (inclusive of commissions
(inclusive of commissions paid to non-affiliated paid to non-affiliated brokers),
paid to non-affiliated brokers), brokers), but no fee on but no fee on acquisitions
or (ii) compensation customarily acquisitions from from affiliates
charged in arm's-length affiliates
transactions
Mortgage brokerage The lesser of (i) 1% of The lesser of (i) 1% of The lesser of (i) 1% of
and refinancing fees the amount of the loan or the amount of the loan or the amount of the loan or
amount refinanced or amount refinanced or amount refinanced or
(ii) a fee which is (ii) a fee which is (ii) a fee which is
reasonable and fair reasonable and fair reasonable and fair
under the under the under the
circumstances circumstances circumstances
</TABLE>
73
<PAGE> 74
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
<TABLE>
<CAPTION>
COMPENSATION
DESCRIPTION ADVISOR; EFFECTIVE DATES OF ADVISORY AGREEMENT
- ------------- -----------------------------------------------------------------------------------------
BCM TARRAGON TARRAGON
------------------- ------------------- ---------------------
DEC 1992 - MAR 1994 APR 1994 - MAR 1995 APR 1995 - PRESENT
------------------- ------------------- ---------------------
<S> <C> <C> <C>
Mortgage or loan The lesser of (i) 1% of The lesser of (i) 1% of None
acquisition fees the amount of the the amount of the
mortgage or loan mortgage or loan
purchased or (ii) a fee purchased or (ii) a fee
which is reasonable which is reasonable
and fair under the and fair under the
circumstances circumstances
Real estate brokerage None - included in None - included in Subject to approval by the
commissions "Incentive Sales "Incentive Sales Board, may pay if the
Compensation" below Compensation" below Advisor or affiliate acts as
the broker upon purchase or
sale, in amounts not to exceed
customary fees charged
by nationally recognized
real estate brokers for
normal,similar transactions
Incentive sales Fee equal to 10% of Fee equal to 10% of None
compensation the amount by which the amount by which
aggregate sales aggregate sales
consideration for all consideration for all
real property sold which real property sold which
exceeds the results of a exceeds the results of a
formula, as defined formula, as defined
Third-party mortgage Advisor to pay Trust Advisor to pay Trust Advisor shall pay to
placement fees 1/2 of any compensation 1/2 of any compensation Trust all compensation
received from third received from third received from third
parties for origination, parties for origination, parties for origination,
placement or placement or placement or
brokerage of any loan brokerage of any loan brokerage of any loan
made by the Trust, but made by the Trust, but made by the Trust
Advisor compensation Advisor compensation
retained shall not retained shall not
exceed lesser of (i) 2% exceed lesser of (i) 2%
of amount of loan of amount of loan
committed or (ii) a fee committed or (ii) a fee
which is reasonable which is reasonable
and fair under the and fair under the
circumstances circumstances
</TABLE>
74
<PAGE> 75
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
Also, if the Trust were to request that the advisor or an affiliate of the
advisor render services to the Trust other than those required by the advisory
agreement, the advisor or the affiliate of the advisor would be separately
compensated for such additional services on terms to be agreed upon from time
to time. 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. Since April 1, 1996, Tarragon Management, Inc. ("TMI"), a
wholly-owned subsidiary of Tarragon, has also provided property management
services for certain of the Trust's properties. The Trust also engaged, on a
non-exclusive basis, CRSI, also an affiliate of BCM, to perform brokerage
services for the Trust until March 31, 1994.
The advisor is required to formulate and submit annually for approval by the
Board 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 Board on
the Trust's performance against the business plan. In addition, all
transactions or investments made by the Trust shall require prior approval by
the Board unless they are explicitly provided for in the approved business plan
or are made pursuant to authority expressly delegated to the advisor by the
Board.
The advisory agreements also require prior approval of the Board for retention
of all consultants and third party professionals, other than legal counsel. The
agreements provide that the advisor shall be deemed to be in a fiduciary
relationship to the Trust's shareholders; contains guidelines for the advisor's
allocation of investment opportunities as among itself, the Trust, and other
entities it advises; and contains a broad standard governing the advisor's
liability for losses incurred by the Trust. Under the advisory agreements, none
of the advisors nor any of its shareholders, directors, officers, or employees
shall be liable to the Trust, the Trustees, or the holders of securities of the
Trust for any losses from the operations of the Trust if the advisor had
determined, in good faith, that the course of conduct which caused the loss or
liability was in the best interests of the Trust and the loss or liability was
not the result of negligence or misconduct by the advisor. In no event will the
directors, officers, or employees of the advisor be personally liable for any
action unless it was the result of willful misfeasance, bad faith, gross
negligence, or reckless disregard of duty.
Employees of the advisor render services to the Trust, as the Trust has no
employees. In accordance with the terms of the advisory agreements, certain
services provided by the advisor including, but not limited to, accounting,
legal, investor relations, data processing, and the related departmental
overhead are reimbursed directly by the Trust.
As required by the 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, exceed certain specified limits based on
book value, net asset value, and net income during such fiscal year. The
operating expenses of the Trust did not exceed such limitation in 1994, 1995,
or 1996.
The Declaration of Trust requires shareholder approval for any renewal of the
advisory agreement.
The advisory agreement may be assigned only with the prior consent of the
Trust.
75
<PAGE> 76
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS, AND ADVISOR OF THE REGISTRANT
(Continued)
The Advisor (Continued)
The directors and principal officers of Tarragon are set forth below:
WILLIAM S. FRIEDMAN: Director and Chief Executive Officer
BRUCE A. SCHNITZ: Chief Operating Officer
ROBERT C. IRVINE: Executive Vice President and Chief Financial Officer
CHRIS W. CLINTON: Senior Vice President
ROBERT W. LOCKHART: Senior Vice President
TODD C. MINOR: Treasurer
ERIN D. DAVIS: Vice President and Chief Accounting Officer
LAWRENCE S. HARTMAN: Vice President and Secretary
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 multifamily
properties and 1.5% to 5% of the monthly gross rents collected on commercial
properties. Tarragon subcontracts with other entities for the provision of some
of the property-level management services to the Trust. Beginning April 1996,
TMI has assumed the property-level management of certain of the Trust's
properties for a fee of 4.5% of the monthly gross rents collected.
Since March 1, 1994, Tarragon's real estate brokerage affiliate has been
available to and may act as a broker in both purchases and sales of Trust
property with commissions payable in amounts customarily charged in
arm's-length transactions by others rendering similar property acquisition
services in the same geographical location and for comparable property. Such
commissions require Board approval.
ITEM 11. EXECUTIVE COMPENSATION
The Trust has no employees and pays no compensation to the executive officers
of the Trust. The Trustees and executive officers of the Trust who are also
officers or employees of Tarragon are compensated by Tarragon. Such affiliated
Trustees and executive officers perform a variety of services for the advisor,
and the amount of their compensation is determined solely by Tarragon.
The Independent Trustees are paid an annual stipend directly by the Trust, as
well as granted certain share options, as discussed below. The Independent
Trustees (i) review the business plan of the Trust to determine that it is in
the best interest of the shareholders, (ii) review the Trust's contract with
the advisor, (iii) supervise the performance of the 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
76
<PAGE> 77
ITEM 11. EXECUTIVE COMPENSATION (Continued)
appraise properties acquired by the Trust. The Independent Trustees receive
compensation in the amount of $15,000 per year, plus $25,000 per year to the
Chairman of the Board and reimbursement of expenses. In addition, each
Independent Trustee receives (i) $2,000 per year for each committee of the
Board of Trustees on which he (she) serves, (ii) $1,000 per year for each
committee chairmanship, and (iii) $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.
1995 Independent Trustees fees totaled $146,500 for all services, including the
annual stipend, as follows: Irving E. Cohen, $17,000; Sally Hernandez-Pinero,
$17,000; Dan L. Johnston, $17,000; Lance Liebman, $15,000; L. G. Schafran,
$15,000; Raymond V. J. Schrag, $18,000; Carl B. Weisbrod, $40,000; Willie K.
Davis, $7,500.
1996 Independent Trustees fees totaled $139,000 for all services, including the
annual stipend, as follows: Irving E. Cohen, $17,000; Sally Hernandez-Pinero,
$17,000; Dan L. Johnston, $17,000; Lance Liebman, $15,000; L. G. Schafran,
$15,000; Raymond V. J. Schrag, $18,000; and Carl B. Weisbrod, $40,000.
Pursuant to the approval of the Independent Trustee Share Option Plan (the
"Trustee Plan") at the November 1995 shareholder meeting, the Trust issued to
each of the seven Independent Trustees on November 20, 1995, options to acquire
3,000 shares (a total of 21,000 shares). The exercise price of the options is
equal to the market price on the grant date. The options expire on the earlier
of the first anniversary of the date on which a Trustee ceases to be a Trustee
of the Trust or November 20, 2005 (the "Termination Date"), and are exercisable
at any time between the date of grant and the Termination Date. In addition,
for each year such Trustee continues to serve as a Trustee, he (she) will be
awarded an option covering 1,000 shares on January 1 of each year. Accordingly,
on each of January 1, 1996 and 1997, the Trust issued to each Independent
Trustee additional options covering 1,000 shares (a total of 14,000 shares)
with exercise prices equal to the market price on the dates of grant and the
same Termination Date as the options granted in November 1995. Subsequent to
the 10% share distribution paid in September 1996, the options issued in
November 1995 and January 1996 were adjusted so that they now cover a total of
30,800 shares. The Trustee Plan provides for a total of 60,000 shares.
Since January 1, 1993, FMS, Inc., a company of which Mr. Davis is Chairman,
President, and sole shareholder, has been providing property-level management
services for several properties owned by the Trust. In 1995 and 1996, FMS,
Inc., earned fees of $66,490 and $80,920, respectively, for performing such
services. The Trust believes that such fees were at least as favorable to the
Trust as those that would be paid to unaffiliated third parties for the
performance of similar services.
[This space intentionally left blank.]
77
<PAGE> 78
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 14, 1997.
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial Percent of
Beneficial Owner Ownership Class (1)
---------------- --------- ---------
<S> <C> <C>
Lucy N. Friedman 1,141,738 (2)(3)(4)(5) 32.4%
280 Park Avenue (6)(7)(8)
East Building, 20th Floor
New York, New York 10017
</TABLE>
(1) Percentages are based upon 3,523,070 shares of beneficial interest
outstanding at March 14, 1997.
(2) Includes 16,786 shares owned by Lucy N. Friedman's husband, William S.
Friedman.
(3) Includes 731,266 shares owned by Mrs. Friedman.
(4) Does not include 19,218 shares owned by Mrs. Friedman's adult son, Ezra
Friedman, and 23,003 shares owned by Mrs. Friedman's adult daughter, Tanya
Friedman. Mrs. Friedman disclaims beneficial ownership of such shares.
(5) Includes 31,865 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. Mrs.
Friedman disclaims beneficial ownership of such shares.
(6) Includes 43,142 shares owned by Tarragon Capital Corporation ("TCC"), of
which Mrs. Friedman and Mr. Friedman are executive officers and directors,
and 35,440 shares owned by Tarragon Partners, Ltd., of which Mrs. Friedman
and Mr. Friedman are limited partners.
(7) Includes 12,675 shares and 12,817 shares owned by Mr. Friedman's minor
sons, Gideon and Samuel Friedman. Mr. Friedman disclaims beneficial
ownership of such shares. It also includes 242,000 shares owned by
Beachwold Partners, L. P., in which Mr. Friedman and Mrs. Friedman are the
general partners and their four children are the limited partners.
(8) Includes 15,747 shares held by William S. Friedman Grantor Trust for
benefit of the children of Mr. Friedman, of which Mrs. Friedman is the
trustee.
[This space intentionally left blank.]
78
<PAGE> 79
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 14, 1997.
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial Percent of
Beneficial Owner Ownership Class (1)
---------------- --------- ---------
<S> <C> <C>
William S. Friedman 1,141,738 (2)(3)(4)(5) 32.4%
(6)(7)(8)(9)
Irving E. Cohen 5,974 (10) *
Sally Hernandez-Pinero 5,400 (11) *
Dan L. Johnston 5,515 (12) *
Lance Liebman 6,005 (13) *
L. G. Schafran 5,400 (11) *
Raymond V.J. Schrag 11,479 (14) *
Carl B. Weisbrod 5,666 (15) *
All Trustees and Executive 1,187,177 (2)(3)(4)(5)(6) 33.7%
Officers as a group (7)(8)(9)(10)(11)
(8 individuals) (12)(13)(14)(15)
</TABLE>
- -----------
* Less than 1%.
(1) Percentages are based upon 3,523,070 shares of beneficial interest
outstanding at March 14, 1997.
(2) Mr. Friedman owns 16,786 shares of beneficial interest personally.
(3) Includes 731,266 shares owned by Mrs. Friedman. Mr. Friedman disclaims
beneficial ownership of such shares.
(4) Does not include 19,218 shares owned by Mr. Friedman's adult son, Ezra
Friedman, and 23,003 shares owned by Mr. Friedman's adult daughter, Tanya
Friedman. Mr. Friedman disclaims beneficial ownership of such shares.
(5) Includes 31,865 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.
(6) Includes 43,142 shares owned by TCC.
79
<PAGE> 80
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(Continued)
(7) Includes 35,440 shares owned by Tarragon Partners, Ltd.
(8) Includes 12,675 shares and 12,817 shares owned by Mr. Friedman's minor
sons, Gideon and Samuel Friedman. Mr. Friedman disclaims beneficial
ownership of such shares. It also includes 242,000 shares owned by
Beachwold Partners, L. P.
(9) Includes 15,747 shares held by William S. Friedman Grantor Trust.
(10) Includes 574 shares owned by Irving E. Cohen directly and 5,400 shares
covered by three separate presently exercisable options.
(11) Includes 5,400 shares covered by three separate presently exercisable
options.
(12) Includes 115 shares owned by Dan L. Johnston directly and 5,400 shares
covered by three separate presently exercisable options.
(13) Includes 605 shares owned by Lance Liebman directly and 5,400 shares
covered by three separate presently exercisable options.
(14) Includes 6,079 shares owned by Raymond V. J. Schrag directly and 5,400
shares covered by three separate presently exercisable options. Does not
include 1,210 shares owned by Mr. Schrag's wife as custodian for his two
children as to which Mr. Schrag disclaims any beneficial ownership.
(15) Includes 266 shares owned by Carl B. Weisbrod directly and 5,400 shares
covered by three separate presently exercisable options.
[This space intentionally left blank.]
80
<PAGE> 81
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Business Relationships
Since April 1, 1994, Tarragon has served as the Trust's advisor pursuant to an
advisory agreement. Mr. Friedman serves as Director and Chief Executive Officer
of Tarragon. Tarragon is owned by Mr. Friedman and Lucy N. Friedman, his wife.
The Friedman family owns approximately 32% of the outstanding shares of the
Trust.
Since March 1, 1994, Tarragon has also served as VPT's advisor. William S.
Friedman also serves as a Trustee, President, and Chief Executive Officer of
VPT. VPT has the same relationship with Tarragon as the Trust. Mr. Friedman
owes fiduciary duties to VPT as well as the Trust under applicable law.
Related Party Transactions
Historically, the Trust has engaged in and may continue to engage in business
transactions, including real estate partnerships, with related parties. Prior
to January 11, 1995, all related party transactions entered into by the Trust
were to be approved by a majority of the Trust's Board of Trustees, including a
majority of the Independent Trustees. In addition, the Related Party
Transaction Committee of the Board was to review all such transactions prior to
their submission to the Trust's Board for consideration. The Trust's management
believes that all of the related party transactions were at least as
advantageous to the Trust as could have been obtained from unrelated third
parties.
The Trust is a partner with CMET in Sacramento Nine ("SAC 9") and Income
Special Associates ("ISA"). SAC 9, which currently owns two office buildings in
the vicinity of Sacramento, California, is owned 70% by the Trust which is a
non-controlling partner. The SAC 9 tenancy-in-common agreement requires
unanimous consent of both the Trust and CMET for any material changes in the
operations of SAC 9's properties, including sales, refinancings, and property
management changes. ISA is a general partnership in which the Trust has a 40%
interest and CMET holds a 60% interest. ISA in turn owns all of Indcon, L.P.,
(formerly known as Adams Properties Associates) which owns five industrial
warehouse facilities. The Indcon, L.P., partnership agreement requires consent
of both the Trust and CMET for any material changes in the operations of the
partnership properties, including sales, refinancings, and changes in property
manager. Until March 9, 1995, Geoffrey C. Etnire, a Trustee of CMET, was also a
Trustee of the Trust. Since that time, the Trust and CMET have no Trustee who
serves on both boards.
On December 10, 1990, the Board, 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 of these shares for $210,000 through open market transactions and,
as a result, recorded a $141,000 gain on sale of investments. During the first
quarter of 1995, the Trust sold the remaining 39,500 CMET shares for $592,500
and, as a result, recorded a $412,000 gain on sale of investments.
In December 1993, the Board approved the issuance of a $1 million convertible
subordinated debenture to Mr. Doyle, Chief Financial Officer of the Trust until
September 1996, in exchange for his 10% participation in the
81
<PAGE> 82
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Related Party Transactions (Continued)
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 bore interest at 6% per annum and was scheduled to
mature in December 1999. In February 1996, Mr. Doyle converted the debenture
into 93,076 Shares. The Trust repurchased 50,000 of these shares from Mr. Doyle
in September 1996 for $700,000.
Other liabilities at December 31, 1995, included non-interest bearing cash
advances of $300,000 and $283,000 from Lucy N. Friedman, 50% stockholder of
Tarragon and a principal shareholder of the Trust, and Tarragon, respectively.
Such advances were made to the Trust on a short term basis to facilitate the
negotiated discounted payoffs of the mortgage loans secured by Bryan Hill,
Meadowbrook, and Forest Oaks. In connection with the discounted payoffs, the
Trust realized extraordinary gains on debt forgiveness totaling $670,000. The
Trust repaid the advances in 1996. The remaining $255,000 due to affiliates at
December 31, 1995, represented accrued mortgage brokerage commissions, advisory
fees, and expense reimbursements to Tarragon which were paid in January 1996.
In 1995, the Trust paid Tarragon $1.0 million in advisory fees, $445,000 in
real estate acquisition fees and mortgage brokerage commissions, and $330,000
in property management fees. In addition, the Trust paid Tarragon $960,000 in
expense reimbursements.
In 1996, the Trust paid Tarragon and affiliates $1.1 million in advisory fees,
$293,000 in real estate acquisition fees and mortgage brokerage commissions,
$1.0 million in property management fees, and $1.2 million in expense
reimbursements.
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."
82
<PAGE> 83
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Related Party Transactions (Continued)
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."
As discussed in "Related Party Transactions" above, beginning September 1990,
the Trust had 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 and certain
of its Trustees were also Trustees of CMET at the time such shares were
acquired. Under the terms of its Declaration of Trust, as amended, the Trust
was prohibited from holding the shares of CMET beyond July 30, 1996. Prior to
March 31, 1995, all remaining 39,500 CMET shares were sold in open market
transactions.
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 was
not an officer, director, or employee of the Trust's advisor, Tarragon, and was
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 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
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.
83
<PAGE> 84
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements
Report of Independent Public Accountants - Arthur Andersen LLP
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Operations -
Years Ended December 31, 1996, 1995, and 1994
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows -
Years Ended December 31, 1996, 1995, and 1994
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:
Exhibit
Number Description
- ------- -----------------------
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.
84
<PAGE> 85
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K (Continued)
Exhibit
Number Description
- ------- -----------
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 April 1, 1995, between National Income Realty
Trust and Tarragon Realty Advisors, Inc. (incorporated by reference to
Exhibit No. 10.1 to the Registrant's Current Report on Form 8-K dated
April 1, 1995).
27.0 Financial Data Schedule.
(b) The following report on Form 8-K was filed during the fourth quarter by
this report or with respect to events occurring after the period covered
by this report but prior to the filing of this report.
<TABLE>
<CAPTION>
<S> <C> <C>
Date of Event Date Filed Items Reported
------------------ --------------- ---------------------------------------------
September 27, 1996 October 15, 1996 Item 2. Acquisition or Disposition of Assets
Item 5. Other Events
Item 7. Financial Statements and Exhibits
</TABLE>
[This space intentionally left blank.]
85
<PAGE> 86
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: March 31, 1997 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 March 31, 1997
- ------------------------------- ------------------
Carl B. Weisbrod
/s/ William S. Friedman President, Chief Executive Officer, March 31, 1997
- ------------------------------- and Trustee (Principal Executive ------------------
William S. Friedman Officer)
/s/ Robert C. Irvine Executive Vice President and March 31, 1997
- ------------------------------- Chief Financial Officer ------------------
Robert C. Irvine (Principal Financial Officer)
/s/ Erin D. Davis
- ------------------------------- Vice President and March 31, 1997
Erin D. Davis Chief Accounting Officer ------------------
(Principal Accounting Officer)
/s/ Irving E. Cohen Trustee March 31, 1997
- ------------------------------- ------------------
Irving E. Cohen
/s/ Sally Hernandez-Pinero Trustee March 20, 1997
- ------------------------------- ------------------
Sally Hernandez-Pinero
/s/ Dan L. Johnston Trustee March 31, 1997
- ------------------------------- ------------------
Dan L. Johnston
/s/ Lance Liebman Trustee March 31, 1997
- ------------------------------- ------------------
Lance Liebman
/s/ Lawrence G. Schafran Trustee March 31, 1997
- ------------------------------- ------------------
Lawrence G. Schafran
/s/ Raymond V.J. Schrag Trustee March 31, 1997
- ------------------------------- ------------------
Raymond V. J. Schrag
</TABLE>
86
<PAGE> 87
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------------------
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.
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 April 1, 1995, between National Income Realty
Trust and Tarragon Realty Advisors, Inc. (incorporated by reference to
Exhibit No. 10.1 to the Registrant's Current Report on Form 8-K dated
April 1, 1995).
27.0 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,862
<SECURITIES> 0
<RECEIVABLES> 2,007
<ALLOWANCES> (3,274)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 237,502
<DEPRECIATION> (42,251)
<TOTAL-ASSETS> 211,341
<CURRENT-LIABILITIES> 0
<BONDS> 134,270
0
0
<COMMON> 0
<OTHER-SE> 69,063
<TOTAL-LIABILITY-AND-EQUITY> 211,341
<SALES> 0
<TOTAL-REVENUES> 49,962
<CGS> 0
<TOTAL-COSTS> 28,411
<OTHER-EXPENSES> 6,491
<LOSS-PROVISION> 300
<INTEREST-EXPENSE> 12,042
<INCOME-PRETAX> 4,937
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,937
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,937
<EPS-PRIMARY> 1.32
<EPS-DILUTED> 1.32
</TABLE>
