<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
SCHEDULE 14A INFORMATION
CONSENT SOLICITATION STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
[_] CONFIDENTIAL, FOR USE OF
Check the appropriate box: COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[_] Preliminary Consent Solicitation Statement
[X] Definitive Consent Solicitation Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
CONAM REALTY INVESTORS 2, L.P.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(NAMES OF PERSONS FILING CONSENT SOLICITATION STATEMENT, IF OTHER THAN THE
REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: Units
of Limited Partnership Interest ("Units")
(2) Aggregate number of securities to which transaction applies: 80,000
Units
(3) Per Unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined): The filing
fee of $3,417 has been calculated in accordance with Rule 0-11 under
the Exchange Act and is equal to 1/50 of 1% of $17,084,130 (the
aggregate amount of the cash to be distributed to security holders).
(4) Proposed maximum aggregate value of transaction: $17,084,130
(5) Total fee paid: $3,417
[X] Fee paid previously with preliminary materials: $3,417
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
CONAM REALTY INVESTORS 2, L.P.
1764 SAN DIEGO AVENUE
SAN DIEGO, CALIFORNIA 92110-1906
December 16, 1998
Dear Limited Partner,
We are writing to inform you of an opportunity to liquidate your investment
in ConAm Realty Investors 2, L.P. (the "Partnership") through the sale of the
remaining four properties (the "Properties") of the Partnership for
$29,300,000 to a Delaware limited liability company (the "Purchaser") to be
formed if the sale is approved by the Limited Partners. Shortly after the sale
of the Properties, it is anticipated that the Partnership would be liquidated
and net proceeds from the sale, together with certain cash from operations,
would be distributed to the Limited Partners in accordance with their
respective interests in the Partnership. Two pension funds advised by Lend
Lease Real Estate Investments, Inc. ("Lend Lease"), which is unaffiliated with
the General Partner, will each own a 45.5% interest in the Purchaser, and
ConAm DOC Affiliates LLC, an affiliate of the General Partner, will own a 9%
interest in the Purchaser. In addition, ConAm Management Corporation, an
affiliate of the General Partner which will not be a member of the Purchaser,
will act as the initial property manager for the Purchaser if the sale is
approved. See "THE PROPOSALS--The Purchaser" in the enclosed Consent
Solicitation Statement.
The accompanying materials discuss the proposed sale and certain related
matters in detail, but we would like to summarize our reasons for recommending
that you consent to the sale.
.The General Partner believes that current market conditions are favorable
for the sale of the Properties.
. The Partnership has held the Properties substantially longer than the
originally anticipated holding period.
. If the sale is consummated, aggregate distributions to the Limited
Partners following the sale, including a distribution in respect of the
sale and a final distribution upon the anticipated liquidation of the
Partnership, are estimated to be $227.24 per Unit. This compares
favorably with a price of $170 per Unit offered in a recent tender offer
made by a party unaffiliated with the General Partner. See "MARKET FOR
THE UNITS" in the enclosed Consent Solicitation Statement.
. The purchase price for the Properties is greater than the fair market
value of the Properties set forth in an independent, annual appraisal of
the Properties made in the ordinary course of the Partnership's business
and greater than that offered by two other prospective purchasers. See
"SPECIAL FACTORS--Independent Appraisal" and "THE PROPOSALS--Background
of the Sale" in the enclosed Consent Solicitation Statement.
. The sale of the Properties will permit the Partnership to liquidate,
thus eliminating (i) the fixed costs associated with maintaining a
public limited partnership and (ii) the annual filing and reporting of
Schedule K-1 tax information by the Limited Partners.
Following for your consideration are some potential disadvantages to the
sale of the Properties:
. An affiliate of the General Partner will own a 9% interest in the
Purchaser in consideration of a pro rata cash contribution to the
Purchaser, and the General Partner will have other relationships with
the Purchaser. See "THE PROPOSALS--The Purchaser."
. The General Partner negotiated the terms of the sale with Lend Lease,
including the consideration to be received.
. As with most sales of real estate, the Partnership expects to recognize
taxable gains from the sale of the Properties. The Partnership estimates
that these taxable gains will equal approximately $266.11 per Unit,
which will result in federal taxes payable of approximately $65.08 per
Unit for Limited Partners who acquired their Units in the public
offering. See "CERTAIN FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE
SALE."
<PAGE>
. The Partnership will not benefit from possible improvements in economic
and market conditions, if any, which might be expected to produce
increased cash flow and potentially enhance the sales price of the
Properties.
. The sale of the Properties together may not result in as high an
aggregate gross sales price as if each were sold individually.
. Limited Partners will not be afforded appraisal rights or dissenters'
rights in connection with the sale.
Under the terms of the Partnership Agreement, the sale at one time of all or
substantially all of the Partnership's assets except in the ordinary course of
the Partnership's business requires the approval of a majority in interest of
the Limited Partners. In addition, certain affiliated transactions between the
General Partner and the Partnership are prohibited. Because the Purchaser may
be deemed to be an "affiliate" of the General Partner (under the Partnership
Agreement), the General Partner is also seeking to amend the Partnership
Agreement to permit such a sale, which requires the approval of a majority in
interest of the Limited Partners.
The accompanying materials contain a complete discussion of the purchase
price under the heading "SPECIAL FACTORS--Fairness of the Sale," together with
a discussion of all of the disadvantages and conflicts of interest arising in
connection with the sale under the heading "THE PROPOSALS--Conflicts of
Interest of the General Partner."
We have considered several alternatives to this transaction. After carefully
weighing the facts and circumstances associated with the transaction as well
as with alternative courses of action, we have concluded that the proposed
sale of the Properties is the best alternative for the Limited Partners. Our
conclusions are set forth in the section of the Consent Solicitation Statement
entitled "SPECIAL FACTORS--Alternatives Considered to the Sale." It is
anticipated that distributions to the Limited Partners of net proceeds from
the sale, together with certain cash from operations, will occur within 30
days after the closing date of the sale.
If the Limited Partners fail to approve the sale and the amendment, the
Partnership will attempt to refinance the existing loans secured by the
Properties and utilize the loan proceeds to implement certain capital
improvements, establish reserves for future capital improvements and make a
tax-deferred distribution to the Limited Partners. This course of action would
enable the Partnership to take advantage of future appreciation, if any, in
the value of the Properties, but could also increase the risk of loss of the
Properties because of increased debt service and might adversely affect the
timing and amount of future distributions to Limited Partners. See "THE
PROPOSALS--Failure to Approve the Sale."
YOU ARE ENCOURAGED TO READ THE CONSENT SOLICITATION STATEMENT IN ITS
ENTIRETY. WE REQUEST THAT YOU APPROVE THE SALE AND THE AMENDMENT BY SIGNING
AND RETURNING THE ENCLOSED CONSENT CARD IN THE ACCOMPANYING POSTAGE-PAID
ENVELOPE PRIOR TO JANUARY 15, 1999. YOUR VOTE IS IMPORTANT. PLEASE SIGN AND
DATE THE ENCLOSED CONSENT AND RETURN IT IMMEDIATELY SO THAT YOUR VOTE CAN BE
COUNTED.
If you have questions regarding the proposed sale or need assistance in
completing and returning your consent card, you may call the Partnership's
Solicitation Agent, D.F. King & Co., Inc., at (800) 735-3591 (toll-free).
Sincerely,
CONAM PROPERTY SERVICES II, LTD.,
General Partner
By: Continental American Development,
Inc., a General Partner
By: /s/ Daniel J. Epstein
---------------------------------
Daniel J. Epstein
President and Chief Executive
Officer
<PAGE>
CONAM REALTY INVESTORS 2, L.P.
1764 SAN DIEGO AVENUE
SAN DIEGO, CALIFORNIA 92110-1906
CONSENT SOLICITATION STATEMENT
This Consent Solicitation Statement ("Solicitation Statement") is being
furnished to limited partners ("Limited Partners") holding units of limited
partnership interest ("Units") in ConAm Realty Investors 2, L.P., a California
limited partnership (the "Partnership"), in connection with the solicitation
of written consents ("Consents") by ConAm Property Services II, Ltd. (the
"General Partner") to proposals (the "Proposals") to (i) sell the remaining
four income-producing, multi-family residential real properties, and all
intangible and personal property relating thereto (collectively, the
"Properties"), of the Partnership to a Delaware limited liability company,
which will be named DOC Investors, L.L.C. and formed if the Proposals are
approved (the "Purchaser"), in the manner described under the section of this
Solicitation Statement entitled "THE PROPOSALS" (the "Sale") and (ii) enact an
amendment (the "Amendment") to the Partnership's Amended and Restated
Certificate and Agreement of Limited Partnership (the "Partnership Agreement")
to permit the Sale to an "affiliate" of the General Partner as presently
defined in the Partnership Agreement. The full text of the proposed Amendment
is set forth in Appendix A attached hereto. If the Sale is approved by the
Limited Partners but the Amendment is not, the General Partner will have no
authority to consummate the Sale, and the Sale will not occur.
There is no assurance that the Sale will be consummated. However, assuming
the Sale is consummated, it is anticipated that an initial distribution to
Limited Partners of net proceeds from the Sale, together with certain cash
from operations, will aggregate approximately $222.86 per Unit and will occur
within 30 days after the closing date of the Sale. A final distribution of
cash from contingent reserves of up to $4.38 per Unit will be made upon
liquidation of the Partnership, approximately six months after the
consummation of the Sale. See "THE PROPOSALS--Description of the Partnership."
As with most sales of real estate, the Partnership expects to recognize
taxable gains from the Sale of the Properties. The Partnership estimates that
these taxable gains will equal approximately $266.11 per Unit, which will
result in federal taxes payable of approximately $65.08 per Unit for Limited
Partners who acquired their Units in the public offering. See "CERTAIN FEDERAL
AND STATE INCOME TAX CONSEQUENCES OF THE SALE."
While the General Partner, an affiliate of which will own a 9% interest in
the Purchaser, negotiated the terms of the Sale, including the consideration
to be received, holders of a majority of the outstanding Units must consent to
the Proposals for the transaction to proceed. Limited Partners will not be
afforded appraisal rights or dissenters' rights in connection with the Sale.
This Solicitation Statement and the accompanying consent card are first
being mailed to Limited Partners on or about December 16, 1998.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS
OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE DATE OF THIS CONSENT SOLICITATION STATEMENT IS DECEMBER 16, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY.................................................................... 3
ACTION BY CONSENT.......................................................... 7
General................................................................... 7
Matters to be Considered.................................................. 7
Record Date............................................................... 8
Action by Consent......................................................... 8
SPECIAL FACTORS............................................................ 9
Reasons for the Sale...................................................... 9
Alternatives Considered to the Sale....................................... 10
Effects of the Sale....................................................... 11
Fairness of the Sale...................................................... 12
Independent Appraisal..................................................... 14
THE PROPOSALS.............................................................. 16
Description of the Partnership............................................ 16
The Purchaser............................................................. 17
Description of the Properties to be Sold.................................. 17
Indebtedness on the Properties............................................ 18
Purchaser's Valuation..................................................... 18
General Partner's Valuation............................................... 19
Background of the Sale.................................................... 19
Conflicts of Interest of the General Partner.............................. 22
Failure to Approve the Sale............................................... 23
Terms of the Purchase Agreements.......................................... 24
The Amendment............................................................. 26
Indemnification........................................................... 26
CERTAIN FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE SALE.............. 27
General................................................................... 27
Capital Gains............................................................. 29
Passive Loss Limitations.................................................. 29
Certain State Income Tax Considerations................................... 29
Tax Conclusion............................................................ 30
DISTRIBUTIONS.............................................................. 30
NO APPRAISAL RIGHTS........................................................ 30
MARKET FOR THE UNITS....................................................... 30
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF............................ 31
YEAR 2000 INFORMATION...................................................... 31
VOTING PROCEDURES.......................................................... 31
AVAILABLE INFORMATION...................................................... 32
</TABLE>
APPENDIX A--THE PROPOSED AMENDMENT
APPENDIX B--FORM OF CONSENT OF LIMITED PARTNER
ANNEX 1--FORM 10-K
ANNEX 2--FORM 10-Q
2
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS
SOLICITATION STATEMENT. REFERENCES ARE MADE TO, AND THIS SUMMARY IS QUALIFIED
IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED IN THIS
SOLICITATION STATEMENT. UNLESS OTHERWISE DEFINED HEREIN, TERMS USED IN THIS
SUMMARY HAVE THE RESPECTIVE MEANINGS ASCRIBED TO THEM ELSEWHERE IN THIS
SOLICITATION STATEMENT. LIMITED PARTNERS ARE URGED TO READ THIS SOLICITATION
STATEMENT IN ITS ENTIRETY.
THE PARTNERSHIP
CONAM REALTY INVESTORS 2, L.P.
The Partnership owns four residential properties: Creekside Oaks Apartments
("Creekside Oaks"), a 120-unit apartment complex located in Jacksonville,
Florida, Ponte Vedra Beach Village I Apartments ("Ponte Vedra I"), a 122-unit
apartment complex located in Ponte Vedra Beach, Florida, Rancho Antigua
("Rancho Antigua"), a 220-unit apartment complex located in Scottsdale,
Arizona, and Village at the Foothills I Apartments ("Village I"), a 60-unit
apartment complex located in Tucson, Arizona. The principal offices of the
Partnership are located at 1764 San Diego Avenue, San Diego, California 92110-
1906, and its telephone number is (619) 297-6771.
The proposed transaction contemplates the Sale of the Partnership's remaining
real property assets, which are the only material assets currently owned by the
Partnership. The Partnership will retain no interests in any real property
following the Sale, and the General Partner anticipates liquidating the
Partnership within six months after consummation of the Sale.
THE PURCHASER
If the Proposals are approved, DOC Investors, L.L.C. ( the "Purchaser") will
be formed as a Delaware limited liability company in which two pension funds
(the "Pension Funds") advised by Lend Lease Real Estate Investments, Inc.
("Lend Lease"), which is unaffiliated with the General Partner, will each own a
45.5% interest and in which ConAm DOC Affiliates LLC, an affiliate of the
General Partner, will own a 9% interest. The principal offices of the Purchaser
will be located at 1764 San Diego Avenue, San Diego, CA 92110-1906.
THE PROPOSALS
THE SALE
Upon the approval of a majority in interest of the Limited Partners pursuant
to this Solicitation Statement, the Properties may be sold to the Purchaser for
an aggregate purchase price of $29,300,000 in cash, subject to certain
adjustments at closing (the "Purchase Price"), as described under "THE
PROPOSALS--Terms of the Purchase Agreements." After the payment of outstanding
indebtedness and expenses of the Sale, there will be approximately $17,084,130
of net proceeds from the Sale available for distribution.
THE AMENDMENT
The Partnership Agreement provides that the General Partner has no authority
to sell any Partnership property to the General Partner or an "affiliate" of
the General Partner. An affiliate of the General Partner will
3
<PAGE>
own a 9% interest in the Purchaser, will have a right of first offer and
certain buy/sell rights with respect to the property of and interests in the
Purchaser, and will be entitled to receive, under certain circumstances, a
percentage of the Purchaser's profits in excess of such affiliate's percentage
ownership interest in the Purchaser. In addition, an affiliate of the General
Partner which will not be a member of the Purchaser, ConAm Management
Corporation ("ConAm Management"), will serve as the initial property manager
for the Purchaser. The following charts set forth the proposed relationship
among the General Partner, ConAm Management, and, when formed, the Purchaser.
[CHART APPEARS HERE]
- --------
* RI 2 Real Estate Services, Inc. sold its co-general partner interest in the
Partnership to the General Partner effective July 1, 1997. See "THE
PROPOSALS--Background of the Sale."
Taken together, these relationships might cause the Purchaser to be an
"affiliate" of the General Partner under the terms of the Partnership
Agreement. In order to permit the Sale, the General Partner proposes to amend
the Partnership Agreement to permit proposed sales of Partnership properties to
"affiliates" of the General Partner, if such proposed sales are approved by the
Limited Partners. See "THE PROPOSALS--The Amendment" and "SPECIAL FACTORS--
Effects of the Sale."
FAIRNESS OF THE SALE AND CERTAIN CONFLICTS OF INTEREST
The General Partner has carefully considered the Sale and has concluded that
the Sale is in the best interests of the Partnership and the Limited Partners.
This conclusion is supported by (i) an appraisal of the Properties rendered by
an independent real estate valuation advisory firm, Bach Realty Advisors, Inc.
(the "Appraiser"), as of December 31, 1997 and (ii) an appraisal commissioned
by the prospective lender for the Purchaser in the course of obtaining
financing for the Sale and (iii) comparisons with other offers for the
Properties received by the General Partner within the last year. See "SPECIAL
FACTORS--Fairness of the Sale" and "THE PROPOSALS--Background of the Sale."
There are certain factors, including conflicts of interest, described in this
Solicitation Statement that Limited Partners should consider when determining
the fairness of the Sale. In particular, (i) the Purchase Price was negotiated
by the General Partner, an affiliate of which will have a 9%
4
<PAGE>
interest in the Purchaser, without the benefit of an independent representative
to negotiate on behalf of the Limited Partners, (ii) the General Partner
affiliate owning 9% of the Purchaser may, under certain circumstances, be
entitled to receive an additional 18% of the profits of the Purchaser, and will
have an option to purchase additional interests in the Purchaser and a right of
first offer with respect to sales of the Purchaser's property, and (iii)
another affiliate of the General Partner will serve as the initial property
manager for the Purchaser. See "THE PROPOSALS--Conflicts of Interest of the
General Partner," and "SPECIAL FACTORS--Effects of the Sale."
SECURITY OWNERSHIP AND VOTING THEREOF
As of the Record Date, the General Partner and its affiliates owned no Units.
See "VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF."
CONSUMMATION OF THE SALE
The material terms of the Agreements for Purchase and Sale and Joint Escrow
Instructions (the "Purchase Agreements") have been negotiated between Lend
Lease and the General Partner. If the Limited Partners approve the Proposals,
the Purchase Agreements will be executed and delivered. Assuming the requisite
approval of the Limited Partners is obtained promptly, the consummation of the
Sale is expected to occur during January 1999 and is required to occur no later
than February 1, 1999, unless extended by the mutual agreement of the parties
(the "Closing Date"). See "THE PROPOSALS--Terms of the Purchase Agreements."
NO APPRAISAL RIGHTS
If the Sale is approved by Limited Partners owning a majority in interest of
the outstanding Units, dissenting Limited Partners will not have appraisal
rights in connection with the Sale. See "NO APPRAISAL RIGHTS."
CERTAIN FEDERAL AND STATE INCOME TAX CONSEQUENCES
The General Partner expects that the Limited Partners will recognize taxable
gains of approximately $266.11 per Unit from the Sale. The Sale proceeds
distributed to the Limited Partners, together with certain distributions from
cash reserves, are expected to exceed the Limited Partners' income tax
liability attributable thereto. The Partnership estimates that these taxable
gains will result in federal taxes payable of approximately $65.08 per Unit for
Limited Partners who acquired their Units in the public offering. See "CERTAIN
FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE SALE."
DISTRIBUTION OF NET SALE PROCEEDS
Net proceeds from the Sale, together with certain cash from operations,
aggregating approximately $222.86 per Unit, are expected to be distributed to
the Limited Partners within 30 days after the Closing Date of the Sale. A final
distribution of cash from contingent reserves of up to $4.38 per Unit will be
made upon liquidation of the Partnership, approximately six months after the
consummation of the Sale. The General Partner intends to waive any right it may
have to receive distributions of net proceeds from the Sale.
ACTION BY CONSENT
TERMINATION OF CONSENT SOLICITATION
Consents must be received by mail or facsimile before January 15, 1999, at
5:00 P.M., Pacific Standard Time, unless such date or time is extended for an
aggregate of up to an additional 40 days in the sole discretion of the General
Partner or unless the necessary vote to approve the Proposals is received
earlier.
5
<PAGE>
RECORD DATE; UNITS ENTITLED TO CONSENT
Limited Partners of record at the close of business on December 10, 1998 (the
"Record Date") are entitled to approve the Proposals by written Consent. At
such date there were outstanding 80,000 Units, each of which will entitle the
record owner thereof to one vote.
PURPOSE OF THE ACTION
Written Consents are being solicited to approve the Proposals, which consist
of the Sale and the Amendment.
SOLICITATION AGENT
The Partnership has retained D.F. King & Co., Inc. (the "Solicitation Agent")
to assist in the solicitation of Consents. Completed, signed consent cards must
be returned to the Solicitation Agent by mail or facsimile before the
Expiration Date. If you have any questions, please call the Solicitation Agent
at (800) 735-3591 (toll-free).
VOTE REQUIRED
The Proposals must be approved by Limited Partners holding a majority of all
outstanding Units. If the Sale is approved but the Amendment is not, the
General Partner will have no authority to consummate the Sale, and the Sale
will not occur.
6
<PAGE>
ACTION BY CONSENT
GENERAL
This Solicitation Statement is being furnished on behalf of the Partnership
to the Limited Partners of the Partnership in connection with the solicitation
of Consents by ConAm Property Services II, Ltd., as the General Partner.
This Solicitation Statement and accompanying consent card are first being
mailed to Limited Partners on or about December 16, 1998.
MATTERS TO BE CONSIDERED
Consents are being solicited to approve (i) the Sale of the Properties to
the Purchaser pursuant to the Purchase Agreements and (ii) since the Purchaser
may be an "affiliate" of the General Partner under the Partnership Agreement,
the Amendment of the Partnership Agreement to permit proposed sales of
Partnership properties to "affiliates" of the General Partner, if such
proposed sales are approved by the Limited Partners. If the Proposals are
approved by the Limited Partners, and the Sale is consummated, there will be
approximately $17,084,130 of net proceeds from the Sale, after the payment of
outstanding indebtedness and expenses of the Sale. The following table sets
forth the calculations used in determining the estimated initial distribution
from the net proceeds from the Sale, together with certain cash from
operations, assuming a Sale as of November 30, 1998:
ESTIMATED NET CASH AVAILABLE BEFORE CONTINGENT RESERVES
<TABLE>
<CAPTION>
NET CASH
NET PROCEEDS FROM
FROM SALE OPERATIONS TOTAL
------------ ---------- -----------
<S> <C> <C> <C>
Gross Purchase Price.......... $ 29,300,000
Estimated Transaction
Costs(1)..................... (200,000)
------------
Net Sale Proceeds............. 29,100,000
Repayment of Secured Debt..... (11,342,947)
Prepayment Penalties(2)....... (672,923)
------------
Net Distributable Proceeds
from Sale.................... 17,084,130 $17,084,130
Other Available Cash(3)....... $1,216,868 1,216,868
Less: General Partner Por-
tion(10%).................... (121,687) (121,687)
------------ ---------- -----------
Net Cash Available Before Con-
tingent Reserves............. 17,084,130 1,095,181 18,179,311
============ ========== ===========
Net Cash Available Before Con-
tingent Reserves, per Unit
(80,000 Units)............... $ 227.24
===========
Net Asset Value Per Unit at
12/31/97..................... $ 222.73
===========
ESTIMATED PROJECTED INITIAL DISTRIBUTION TO LIMITED PARTNERS
<CAPTION>
PER
UNIT
-------
<S> <C> <C>
Net Cash Available Before Con-
tingent Reserves (from
above)....................... $18,179,311 $227.24
Less: Contingent Reserves
(4).......................... (350,000) $ (4.38)
----------- -------
Net Initial Distribution to
Limited Partners............. $17,829,311 $222.86
=========== =======
</TABLE>
- --------
(1) Includes estimated costs of consent solicitation and Sale which are
anticipated to be paid prior to the initial distribution.
(2) Calculated based on lender's loss of yield due to prepayment.
7
<PAGE>
(3) Includes cash balance at 9/30/98, adjusted for projected cash flow from
10/01/98-11/30/98, refund of security deposits, projected 3rd quarter
distributions to Limited Partners, General Partner recontribution of
previous sale and refinance distributions, and costs incurred in the
final administration and liquidation of the Partnership. "General Partner
recontribution of previous sale and refinance distributions" refers to
$177,778 required pursuant to the terms of the Partnership Agreement to
be recontributed to the Partnership by the General Partner in respect of
distributions to the general partners of proceeds from prior sales and/or
refinancings of Partnership property. See "THE PROPOSALS--Description of
the Partnership."
(4) Represents a reserve for costs related to the consent solicitation not
paid prior to the initial distribution and for unanticipated costs related
to the Sale and liquidation of the Partnership. Any unused portion of this
reserve will be distributed upon liquidation of the Partnership.
Of the $227.24 total potential distribution per Unit, approximately $222.86
will be distributed within 30 days of the consummation of the Sale, and the
remaining $4.38 will be retained to cover contingencies related to the Sale
and the expenses of the Partnership's winding-up and liquidation. This
additional reserve equal to $4.38 per Unit will be distributed to Limited
Partners, to the extent available, upon liquidation of the Partnership, which
is expected to occur within six months of the consummation of the Sale.
The Partnership Agreement provides that, following consummation of the Sale,
the General Partner is entitled to receive an initial distribution equal to 1%
of the net proceeds from the Sale. Pursuant to this provision, approximately
$170,841 of net proceeds from the Sale would be distributable to the General
Partner. However, if the Sale is consummated, the General Partner intends to
waive any right it may have to receive any portion of this distribution.
THE GENERAL PARTNER PROPOSES THAT THE LIMITED PARTNERS TAKE THE FOLLOWING
ACTIONS BY CONSENT:
APPROVE THE SALE OF THE PARTNERSHIP'S RESIDENTIAL PROPERTIES KNOWN AS
CREEKSIDE OAKS APARTMENTS, PONTE VEDRA BEACH VILLAGE I APARTMENTS, RANCHO
ANTIGUA AND VILLAGE AT THE FOOTHILLS I APARTMENTS, TOGETHER WITH ALL
INTANGIBLE AND PERSONAL PROPERTY NECESSARY TO THE OPERATION THEREOF, TO THE
PURCHASER, PURSUANT TO CERTAIN PURCHASE AGREEMENTS TO BE ENTERED INTO BETWEEN
THE PURCHASER AND CERTAIN TITLE-HOLDING ENTITIES WHICH THE PARTNERSHIP
CONTROLS, AND APPROVE THE AMENDMENT OF THE PARTNERSHIP AGREEMENT TO PERMIT
PROPOSED SALES OF PARTNERSHIP PROPERTIES TO "AFFILIATES" OF THE GENERAL
PARTNER, IF SUCH PROPOSED SALES ARE APPROVED BY THE LIMITED PARTNERS.
WHILE THE GENERAL PARTNER, AN AFFILIATE OF WHICH WILL OWN A 9% INTEREST IN
THE PURCHASER, NEGOTIATED THE TERMS OF THE SALE, INCLUDING THE CONSIDERATION
TO BE RECEIVED, HOLDERS OF A MAJORITY OF THE OUTSTANDING UNITS MUST CONSENT TO
THE PROPOSALS FOR THE TRANSACTION TO PROCEED.
RECORD DATE
The close of business on December 10, 1998 has been fixed by the General
Partner as the Record Date for determining the Limited Partners entitled to
receive notice of the solicitation of Consents and to give their consent to
the Proposals. As of the Record Date, there were 80,000 issued and outstanding
Units entitled to vote held of record by 3,870 holders.
ACTION BY CONSENT
Under the terms of the Partnership Agreement the sale at one time of all or
substantially all of the Partnership's assets except in the ordinary course of
the Partnership's business requires the approval of a majority in interest of
the Limited Partners. In addition, the sale of Partnership properties to the
General Partner or its affiliates is prohibited, unless the Partnership
Agreement is amended with the approval of a majority in interest of the
Limited Partners to permit such sales. Such approval will be obtained through
the solicitation of written
8
<PAGE>
Consents from Limited Partners, and no meeting of Limited Partners will be
held to vote on these matters. Consents must be received by January 15, 1999,
at 5:00 P.M., Pacific Standard Time, unless such date or time is extended for
an aggregate of up to an additional 40 days in the sole discretion of the
General Partner or unless the necessary vote to approve the Proposals is
received earlier (the "Expiration Date"). A vote "for" or "against" either of
the Proposals may be revoked by the person giving it at any time before the
Expiration Date by sending a written notice of revocation or a later-dated
Consent containing different instructions to the Solicitation Agent before
such date. Any written notice of revocation or subsequent Consent should be
sent to the Solicitation Agent at the address that appears on the back cover
of this Solicitation Statement.
In addition to solicitation by use of the mails, officers, directors and
employees of the General Partner or its affiliates, or the Solicitation Agent,
may solicit Consents in person or by telephone, facsimile or other means of
communication. Such officers, directors and employees will not receive
additional compensation for such services but may be reimbursed for reasonable
out-of-pocket expenses in connection with such solicitation. Arrangements have
been made with custodians, nominees and fiduciaries for the forwarding of
Consent solicitation materials to beneficial owners of Units held of record by
such custodians, nominees and fiduciaries, and the Partnership will reimburse
such custodians, nominees and fiduciaries for reasonable expenses incurred in
connection therewith. In addition, the Partnership has hired the Solicitation
Agent to assist in the solicitation of the Consents, and will pay an estimated
fee of $1,750 plus the usual and customary fees and expenses associated with
such solicitation assistance. All costs and expenses of the solicitation of
Consents, including the costs of preparing and mailing this Solicitation
Statement, will be borne by the Partnership, whether or not the required
Consents are received and the Sale is consummated. The aggregate expenses
anticipated to be incurred by the Partnership relating to this solicitation
are expected to be approximately $105,316 and are detailed in the following
table:
<TABLE>
<S> <C>
Filing fees....................................................... $ 3,417
Legal fees........................................................ 65,000
Accounting fees................................................... 3,000
Solicitation fees................................................. 7,080
Printing fees..................................................... 26,819
--------
$105,316
========
</TABLE>
SPECIAL FACTORS
REASONS FOR THE SALE
The General Partner's decision to proceed with the Sale at this time is
based upon the belief that current market conditions are favorable for the
Sale; that the Properties have been held substantially longer than the
originally anticipated holding period; that the Purchase Price is attractive;
and that the Pension Funds and Lend Lease are highly likely to consummate the
transaction. The General Partner has also considered: (a) the amount likely to
be distributed to the Limited Partners if the Sale were to occur; (b) the
business risks to which the Partnership would be exposed if the Sale were not
to occur; and (c) the elimination of (i) the fixed costs associated with
maintaining a public limited partnership and (ii) the annual filing and
reporting of Schedule K-1 tax information by the Limited Partners.
If the Sale is consummated, aggregate distributions to the Limited Partners
following the Sale, including a distribution in respect of the Sale and a
final distribution upon the anticipated liquidation of the Partnership, are
estimated to be $227.24 per Unit. This compares favorably with a price of $170
per Unit offered in a recent tender offer made by a party unaffiliated with
the General Partner. See "MARKET FOR THE UNITS."
If the Sale does not occur, the Partnership will attempt to refinance the
existing loans secured by the Properties and utilize any loan proceeds to
implement certain capital improvements, establish reserves for future capital
improvements and make a tax-deferred distribution to the Limited Partners. The
Partnership might then take advantage of any future property appreciation
through a future sale of one or all of the Properties to the
9
<PAGE>
Purchaser or otherwise. However, such a course of action could also increase
the risk of loss of the Properties due to any failure to make increased debt
service payments and might also adversely affect the timing and amount of
future distributions to Limited Partners. See "THE PROPOSALS--Failure to
Approve the Sale."
As indicated in the Partnership's annual reports to Limited Partners and
Form 10-Ks, the annual third party cost of administration of the Partnership
was $222,881 for 1995, $181,896 for 1996 and $213,441 for 1997. These
administrative costs are incurred irrespective of the number of properties
owned by the Partnership and cover the annual audit, preparation of the
Partnership's tax return, transfer agent fees and investor services and public
reporting fees. In addition, the Limited Partners incur individual costs
associated with the preparation of appropriate schedules for their tax
returns.
The primary disadvantages of the Sale to Limited Partners include (i) a
potential loss of benefits resulting from any improvements in economic and
market conditions, (ii) a potentially lower aggregate gross sales price
resulting from sale of the Properties together as opposed to individually and
(iii) a lack of appraisal rights for dissenting Limited Partners. See "--
Fairness of the Sale."
ALTERNATIVES CONSIDERED TO THE SALE
Continued Ownership of the Properties. The decision to sell the Properties
at this time took into account the General Partner's opinion concerning the
limited prospects for capital appreciation of the Properties, unless
significant additional investments are made in the Properties. The General
Partner considered retaining one or all of the Properties for a longer period
with the expectation of achieving greater capital appreciation. However, due
to the fact that the Properties are aging, the General Partner believes that
the Partnership will need to expend significant funds for capital improvements
and maintenance costs in order for the Properties to compete in their
respective markets in the future. The improvements would involve ongoing
replacement of carpeting and appliances, repainting of unit interiors and
ongoing exterior maintenance, including painting, roof replacement, heating
and air conditioning refurbishment, repaving of common areas and access roads,
and ongoing repairs to plumbing, electrical systems and building exteriors.
The General Partner estimates that the average cost of these improvements in
1999, 2000 and 2001 would approximate $567,000 per year.
While the General Partner believes that the Partnership could borrow
additional funds in order to finance these improvements, the General Partner
does not believe that increasing the level of debt on the Properties would be
in the best interests of the Partnership, if another alternative such as the
Sale is feasible. Increasing indebtedness on the Properties would increase the
risk of loss and significantly decrease net cash flow, resulting in an
indefinite suspension of distributions to the Limited Partners. Such a plan of
action also would subject the Limited Partners to the continued risks of
ownership of the Properties and prolong the fixed costs associated with
maintaining a public limited partnership, including the administrative burden
of annual filing and reporting of Schedule K-1 tax information.
Tender Offer. From time to time, the Limited Partners have been approached
by investors seeking to acquire Units. Based on analyses of these proposals
and general market information as to other tender offers for real estate
limited partnership interests, the General Partner has concluded that such
tender offers are generally made at prices that reflect a significant discount
from the net asset value of the Units. For instance, those tender offers
during the past three years of which the General Partner is aware have been
made at prices that reflect approximately 28% to 76% of the net asset value of
the Units. The General Partner has consistently recommended that the Limited
Partners decline a tender offer on terms that reflect such a significant
discount from net asset value.
The General Partner has considered the possibility of making a tender offer
itself for all or a portion of the outstanding Units of the Partnership.
However, the General Partner determined that the purchase of less than a
controlling interest in the Partnership would be difficult to finance at a
fair approximation of the net asset value of the Units. Accordingly, the
General Partner decided not to pursue a tender offer for the Units.
10
<PAGE>
Consolidation. The General Partner also considered a consolidation of the
Partnership with certain other partnerships for which its affiliates act as
general partner. Such a consolidation would have involved the merger of the
Partnership into, or the sale of the Partnership's interests in the Properties
to, a newly-formed entity, pursuant to which the Limited Partners would
receive securities in the surviving entity. Although the General Partner did
not perform any specific financial analysis in the context of evaluating the
merits of this alternative, it rejected this alternative because it would not
necessarily provide the Limited Partners with improved liquidity and might
continue to subject the Limited Partners to the market and other risks
associated with the ownership of securities which might not have an active
trading market. In addition, there has been significant negative publicity
regarding such "roll-up" transactions, and recently enacted legislation on
both the federal and state levels as well as increased regulation of such
transactions have made this alternative expensive and time consuming.
Other Sales. See "THE PROPOSALS--Background of the Sale" for a discussion of
other proposals to purchase the Properties received by the General Partner.
Conclusion. After considering all of the foregoing alternatives, the General
Partner concluded that it is in the best interests of the Partnership and the
Limited Partners to proceed with the Sale to the Purchaser for the Purchase
Price. The primary disadvantages of the Sale to Limited Partners include (i) a
potential loss of benefits resulting from any improvements in economic and
market conditions, (ii) a potentially lower aggregate gross sales price
resulting from sale of the Properties together as opposed to individually and
(iii) a lack of appraisal rights for dissenting Limited Partners. See "--
Fairness of the Sale."
EFFECTS OF THE SALE
Partnership. The Sale, if consummated, would effect a dissolution of the
Partnership under the Partnership Agreement and California law. Accordingly,
an initial distribution to Limited Partners of net proceeds from the Sale,
together with certain cash from operations, would be followed by a liquidation
distribution of cash from contingent reserves approximately six months after
consummation of the Sale. Any taxable income realized by the Partnership in
connection with the Sale or liquidation will be passed through to the partners
of the Partnership, in accordance with federal and state tax law and the
Partnership Agreement. The Partnership will not incur any income taxes in
respect of such transactions. See "CERTAIN FEDERAL AND STATE INCOME TAX
CONSEQUENCES OF THE SALE."
Affiliates of the Partnership. Continental American Development, Inc.
("CADI") is a general partner of the General Partner. The shareholders of CADI
are substantially identical to the partners of Continental American
Properties, Ltd. ("CAPL"), which is the managing member of ConAm DOC
Affiliates LLC ("ConAm DOC"), the prospective owner of a 9% interest in the
Purchaser. In addition, the shareholders of CADI are identical to the
shareholders of ConAm Management, which will act as the initial property
manager for the Purchaser if the Proposals are approved. As a result, the Sale
is subject to various conflicts of interest.
The General Partner anticipates benefiting from the Sale to the Purchaser
because ConAm DOC, an affiliate of the General Partner, will own a 9% interest
in the Purchaser and will benefit on any returns the Purchaser receives from
its investment in the Properties. The Purchaser will buy the Properties with a
view to generating a positive return on its investment, whether from operating
the Properties, selling the Properties or ultimately selling interests in the
Purchaser. Achieving this investment objective is possible, because the
Pension Funds are willing to invest funds in capital improvements and other
items necessary to enhance the value of the Properties and potentially
increase the revenues generated by the Properties. In addition, the Purchaser
would likely be able to borrow on more favorable terms than the Partnership if
it purchases additional properties and is therefore able to cross-
collateralize any loans with all of such properties, something the Partnership
is not in a position to do.
11
<PAGE>
As further benefits of the Sale to the General Partner, an affiliate of the
General Partner which will be a member of the Purchaser might have, under
certain circumstances and at certain times, an option to purchase additional
interests in the Purchaser and will have a right of first offer with respect
to the Purchaser's property. See "THE PROPOSALS--The Purchaser."
As a result of the Sale and subsequent liquidation of the Partnership, the
General Partner (i) will recognize taxable income of $350,731, (ii) expects to
receive $121,687 as its pro rata share of the cash reserves, excluding net
proceeds from the Sale, and (iii) will be required to recontribute $177,778 to
the Partnership. The recontribution represents distributions previously made
to the General Partner in respect of refinancings or sales of the
Partnership's properties. As previously discussed, the General Partner intends
to waive any right it may have to receive any distributions of net proceeds
from the Sale.
As a result of the Sale, the General Partner will retain without
modification its current interest in the net book value and net earnings of
the Partnership. No affiliate of the General Partner will obtain any interest
in the net book value and net earnings of the Partnership as a result of the
Sale.
Limited Partners. It is anticipated that, shortly after the Sale, the net
proceeds from the Sale, together with certain cash from operations, would be
distributed to the Limited Partners in accordance with their respective
interests in the Partnership. This initial distribution to Limited Partners of
net proceeds from the Sale and certain cash from operations will aggregate
approximately $222.86 per Unit and will occur within 30 days after the Closing
Date. A final distribution of cash from contingent reserves of up to $4.38 per
Unit will be made upon the subsequent liquidation of the Partnership,
approximately six months after the consummation of the Sale. The Sale will
thus eliminate (a) the fixed costs associated with maintaining a public
limited partnership and (b) the annual filing and reporting of Schedule K-1
tax information by the Limited Partners. The Sale and liquidation will also
have certain income tax consequences to the Limited Partners. See "CERTAIN
FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE SALE."
The primary disadvantages of the Sale to Limited Partners include (i) a
potential loss of benefits resulting from any improvements in economic and
market conditions, (ii) a potentially lower aggregate gross sales price
resulting from sale of the Properties together as opposed to individually and
(iii) a lack of appraisal rights for dissenting Limited Partners. See "--
Fairness of the Sale."
FAIRNESS OF THE SALE
The General Partner and its affiliates believe that the Sale is fair and
reasonable as to both price and structure and is in the best interests of the
Limited Partners and the Partnership and has, therefore, approved the Sale.
Because (i) the Purchase Price was negotiated by the General Partner, an
affiliate of which will have a 9% interest in the Purchaser, without the
benefit of an independent representative to negotiate on behalf of the Limited
Partners, (ii) the General Partner affiliate owning 9% of the Purchaser may,
under certain circumstances, be entitled to receive an additional 18% of the
profits of the Purchaser, and will have an option to purchase additional
interests in the Purchaser and a right of first offer with respect to sales of
the Purchaser's property, and (iii) another affiliate of the General Partner
will serve as the initial property manager for the Purchaser, the General
Partner has economic and other interests which are in conflict with the
interests of the Limited Partners. These interests of the General Partner may
conflict with its fiduciary obligations to the Limited Partners. The General
Partner believes, however, that it has fulfilled its fiduciary obligations to
the Partnership and that the Sale is fair to the Limited Partners. See "THE
PROPOSALS--Conflicts of Interest of the General Partner."
IN REACHING ITS DETERMINATION THAT THE SALE IS SUBSTANTIVELY AND
PROCEDURALLY FAIR, THE GENERAL PARTNER CONSIDERED THE FOLLOWING FACTORS WITH
RESPECT TO THE SALE. NEITHER CONAM DOC NOR CAPL HAS PERFORMED OR INTENDS TO
PERFORM AN INDEPENDENT ANALYSIS OF THE SUBSTANTIVE AND/OR PROCEDURAL FAIRNESS
OF THE SALE TO LIMITED PARTNERS. BOTH CONAM DOC AND CAPL, IN PUBLICLY-
AVAILABLE
12
<PAGE>
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, HAVE EXPLICITLY ADOPTED
THE FOLLOWING PROCEDURAL AND SUBSTANTIVE FAIRNESS ANALYSIS OF THE GENERAL
PARTNER:
(i) The General Partner believes that the Purchase Price represents a
fair price for the Properties. For the reasons described in "--Independent
Appraisal," the General Partner relied during initial negotiations with Lend
Lease on the Independent Appraisal (as defined below) as representative of a
fair price for the Properties. As negotiations for the Sale continued, Lend
Lease and the General Partner learned of higher values which had been
attributed to the Properties by the prospective lender for the Purchaser. See
"THE PROPOSALS--Background of the Sale." Upon learning of these higher values,
the General Partner was able to negotiate an increase in the purchase offer
from the value set forth in the Independent Appraisal to the Purchase Price.
See "THE PROPOSALS--Background of the Sale." In addition, the Purchase Price
exceeds two offers for the Properties which were made to the General Partner
prior to or during negotiations with Lend Lease. See "THE PROPOSALS--
Background of the Sale." Because the Purchase Price is equal to or in excess
of certain market indicators of a fair market value for the Properties, the
General Partner believes that the Sale is fair and in the best interests of
the Limited Partners.
(ii) The General Partner believes that current market conditions are
favorable for the Sale, because fair market values have generally appreciated
over the last few years. However, recent volatility and uncertainty in the
global capital markets is having (and is likely to continue to have) an
adverse effect on the financing of real estate acquisitions. Therefore, in the
General Partner's opinion, future appreciation is unlikely in the near term
and there is increased risk in holding real estate generally. In addition,
retention of the Properties will continue to subject the Partnership to the
risks inherent in the ownership of property, such as fluctuations in occupancy
rates, operating expenses and rental rates, which in turn may be affected by
general and local economic conditions, the supply and demand for properties of
the type owned by the Partnership and federal and local laws and regulations
affecting the ownership and operation of real estate. Therefore, the General
Partner has determined that the Sale is more advantageous to the Limited
Partners than retaining the Properties at the present time.
(iii) Due to the age and physical condition of the Properties, the General
Partner anticipates a need for expenditures averaging approximately $567,000
per year in 1999, 2000 and 2001 if the Partnership continues to hold the
Properties. These improvements would involve the ongoing replacement of
carpeting and appliances, repainting of unit interiors and ongoing exterior
maintenance, including painting, roof replacement, heating and air
conditioning refurbishment, repaving of common areas and access roads, and
ongoing repairs to plumbing, electrical systems and building exteriors. While
higher rents might be obtained if such improvements are made, distributions
might need to be reduced because of the increased debt service. Given that
continued long-term investment in the Properties would thus subject the
Limited Partners to the risk of reduced distributions, in addition to the
increased risk of holding real estate generally, the General Partner believes
that the Sale is in the best interests of the Limited Partners.
(iv) The form of the Purchase Agreements, described under "THE
PROPOSALS--Terms of the Purchase Agreements," contains several favorable
provisions which are not customarily found in third party agreements,
including: limited representations and warranties; limited survivability of
representations and warranties; sale of the Properties on an "as is" basis;
lack of due diligence conditions precedent to closing; and lack of any
financing contingencies relating to the Sale. Because these favorable
provisions have the effect of limiting the prospective and other risks
inherent in a sale of real property, the General Partner has determined
that the Proposals are a fair opportunity to submit to the Limited Partners
for approval.
(v) Experience in the multi-family housing market indicates that selling
the Properties together will result in lower aggregate transaction costs,
particularly lower legal and title insurance fees. Furthermore, the Sale
will not be subject to the protracted timelines, contingencies and
administrative costs associated with individual sales. For example, if one
of the Properties were sold, the remaining Properties might not generate
sufficient revenues to service debt, pay Partnership administrative costs
and provide for distributions at the current level to Limited Partners.
13
<PAGE>
(vi) As a result of changes in the federal capital gains tax rate which
became effective in 1997, the Limited Partners will receive more favorable
capital gains tax treatment on the distribution of Sale proceeds than they
would have received prior to such changes.
(vii) The Sale will accelerate distributions to the Limited Partners,
thereby permitting them to liquidate their investments. At present, there
is no established public trading market for the Units and liquidity is
limited to (a) sporadic sales which occur within an informal secondary
market or (b) tender offers for Units, both of which are generally at a
substantial discount to net asset value and often involve only a limited
number of Units.
(viii) The Sale will permit the Partnership to liquidate, thus eliminating
(a) the fixed costs associated with maintaining a public limited partnership
and (b) the annual filing and reporting of Schedule K-1 tax information by the
Limited Partners.
(ix) Consummation of the Sale is subject to approval of the Proposals by
a majority in interest of the Limited Partners. Given this procedural
safeguard, the General Partner has determined that offering the Limited
Partners the option of liquidating their investment at or above current
appraised values is preferable to subjecting the Limited Partners to the
increased risk associated with making additional capital investments and
continuing to hold properties in an already competitive market.
THE PRIMARY DISADVANTAGES OF DISPOSING OF THE PROPERTIES PURSUANT TO THE
SALE ARE AS FOLLOWS:
(i) The Partnership will not benefit from improvements in economic and
market conditions, if any, which might be expected to produce increased cash
flow and potentially enhance the sales price of the Properties.
(ii) The sale of the Properties together may not result in as high an
aggregate gross sales price as if they were sold individually.
(iii) Limited Partners will not be afforded appraisal rights or dissenters'
rights in connection with the Sale. See "NO APPRAISAL RIGHTS."
(iv) The Purchase Price was negotiated by the General Partner, an affiliate
of which will have an interest in the Purchaser, without the benefit of an
independent committee or representative to negotiate the terms of the Sale on
behalf of the Limited Partners.
(v) The form of the Purchase Agreements contains provisions that may be
less advantageous to the Partnership than those found in many third party
agreements, in that (a) the purchase of the Properties by the Purchaser is
subject to the concurrent approval by the limited partners of five public
limited partnerships (the "Affiliated Partnerships") of which affiliates of
the General Partner are the general partners of the sale of their respective
properties to the Purchaser and (b) the Purchaser may terminate the Purchase
Agreements if, due to condemnation or casualty, the Purchaser is entitled to
terminate the purchase agreements with respect to any two or more properties
owned by the Affiliated Partnerships.
INDEPENDENT APPRAISAL
Each year, in the ordinary course of Partnership business, the General Partner
commissions an appraisal of the fair market value of the Partnership's
properties. For the past four years, the Appraiser has rendered these appraisals
for properties of the Partnership, as well as those of the Affiliated
Partnerships. These appraisals have included appraisals of the Properties and 10
other properties (together with the Properties, the "RI Portfolio") which are
owned by the Affiliated Partnerships and are currently proposed to be sold to
the Purchaser. The General Partner retains the Appraiser based upon its
reputation as a real estate valuation advisory firm with experience in the
valuation of real property assets similar to those comprising the RI Portfolio.
The Appraiser was originally selected by the former co-general partner of the
Partnership based upon the principal's 30 years of experience as an appraiser
and real estate executive with several national real estate appraisal and
research companies and the principal's familiarity with the markets where the
Properties are located. The Appraiser has
14
<PAGE>
received annual fees of $11,800 during each of the last two years for rendering
appraisals to the Partnership with respect to the Properties. Total fees paid to
the Appraiser by the Partnership and its affiliates during 1996 and 1997 were
$44,150 and $47,900, respectively.
In March 1998, the Appraiser delivered its independent appraisals to the
General Partner (the "Independent Appraisal") that, as of December 31, 1997,
based on the Appraiser's review and subject to the limitations described below,
the value of Creekside Oaks was $5,500,000, the value of Ponte Vedra I was
$8,000,000, the value of Rancho Antigua was $12,600,000 and the value of Village
I was $2,400,000. The Independent Appraisal does not constitute a recommendation
to any Limited Partner as to whether such Limited Partner should approve the
Sale.
In appraising the Properties, the Appraiser obtained pertinent property data
regarding income and expense figures and tenant rent rolls and conducted
inspections of the Properties. Additionally, the Appraiser conducted research
either personally or through associates to obtain information concerning current
market rental rates, construction trends, the sale of comparable improved
properties, anticipated investor returns, appropriate operating expenses and the
supply and demand of competitive apartment projects in the general and immediate
area. The value of the Properties was determined by the Appraiser using both the
sales comparison approach and the income approach to value.
For Creekside Oaks, the Appraiser used an actual sales price for eight
apartment sales from May 1996 to August 1997 in order to implement the sales
comparison approach. The Appraiser implemented the income approach for Creekside
Oaks under the direct capitalization model and the discounted cash flow model.
The Appraiser's assumptions under the direct capitalization model included: a
capitalization rate of 9.0%; current market rents; stabilized vacancy rate of
5%; other income based on historical collections; operating expenses based upon
historical actuals and comparable projects; a replacement reserve allowance of
$300 per unit per year; and a reduction for deferred maintenance of $140,000.
The Appraiser's assumptions under the discounted cash flow model included: a
terminal capitalization rate of 10.0%; a discount rate of 12.0%; a 4% cost of
sale; a 10-year holding period; income growth rate of 2% in 1998 and 4%
thereafter; a vacancy rate of 5% during the holding period; operating expense
growth rate of 4% per year; and a replacement reserve of $300 per unit per year,
increasing by 4% per year.
For Ponte Vedra I, the Appraiser used an actual sales price for eight
apartment sales from May 1996 to August 1997 in order to implement the sales
comparison approach. The Appraiser implemented the income approach for Ponte
Vedra I under the direct capitalization model and the discounted cash flow
model. The Appraiser's assumptions under the direct capitalization model
included: a capitalization rate of 9.0%; current market rents; stabilized
vacancy rate of 5%; other income based on historical collections; operating
expenses based upon historical actuals and comparable projects; a replacement
reserve allowance of $300 per unit per year; a reduction for deferred
maintenance of $118,400; and a reduction for rent loss due to lease-up of
$69,593. The Appraiser's assumptions under the discounted cash flow model
included: a terminal capitalization rate of 10.0%; a discount rate of 12.0%; a
4% cost of sale; a 10-year holding period; income growth rate of 2% in 1998 and
4% thereafter; a vacancy rate of 10% in 1998 and 5% thereafter; operating
expense growth rate of 4% per year; and a replacement reserve of $300 per unit
per year, increasing by 4% per year.
For Rancho Antigua, the Appraiser used an actual sales price for nine
apartment sales from December 1996 to October 1997 in order to implement the
sales comparison approach. The Appraiser implemented the income approach for
Rancho Antigua under the direct capitalization model and the discounted cash
flow model. The Appraiser's assumptions under the direct capitalization model
included: a capitalization rate of 9.5%; current market rents; stabilized
vacancy rate of 7%; other income based on historical collections; operating
expenses based upon historical actuals and comparable projects; a replacement
reserve allowance of $300 per unit per year; a reduction for deferred
maintenance of $185,000; and a reduction for rent loss due to lease-up of
$34,121. The Appraiser's assumptions under the discounted cash flow model
included: a terminal capitalization rate of 10.5%; a discount rate of 12.5%; a
3% cost of sale; a 10-year holding period; income growth rate of 0% in 1998
and 4% thereafter; a vacancy rate of 9% in 1998 and 7% thereafter; operating
expense growth rate of 4% per year; and a replacement reserve of $300 per unit
per year, increasing by 4% per year.
15
<PAGE>
For Village I, the Appraiser used an actual sales price for ten apartment
sales from August 1996 to November 1997 in order to implement the sales
comparison approach. The Appraiser implemented the income approach for Village
I under the direct capitalization model and the discounted cash flow model.
The Appraiser's assumptions under the direct capitalization model included: a
capitalization rate of 9.5%; current market rents; stabilized vacancy rate of
8%; other income based on historical collections; operating expenses based
upon historical actuals and comparable projects; a replacement reserve
allowance of $300 per unit per year; a reduction for deferred maintenance of
$50,000; and a reduction for rent loss due to lease-up of $21,446. The
Appraiser's assumptions under the discounted cash flow model included: a
terminal capitalization rate of 10.5%; a discount rate of 12.5%; a 4% cost of
sale; a 10-year holding period; income growth rate of 0% in 1998 and 4%
thereafter; a vacancy rate of 10% in 1998 and 8% thereafter; operating expense
growth rate of 4% per year; and a replacement reserve of $300 per unit per
year, increasing by 4% per year.
The Appraiser estimated the leased fee market value for Creekside Oaks to be
$5,500,000, for Ponte Vedra I to be $8,000,000, for Rancho Antigua to be
$12,600,000 and for Village I to be $2,400,000, a total of $28,500,000 for all
four Properties. These estimates were made after investigating the appropriate
real estate markets and applying the Appraiser's experience with and knowledge
of similar real estate properties. The estimated values assume an all cash,
"as is" basis and a minimum of six to twelve months to market and sell the
Properties, but do not take into consideration any potential costs which might
be incurred in the course of the marketing and sale of the Properties.
The Independent Appraisal was made in accordance with the accepted
techniques, standards, methods and procedures of the Appraisal Institute and
was certified by the Appraiser. LIMITED PARTNERS SHOULD NOTE, HOWEVER, THAT
APPRAISALS ARE ONLY ESTIMATES OF CURRENT VALUE AND ACTUAL VALUES REALIZABLE
UPON SALE MAY BE SIGNIFICANTLY DIFFERENT. While the Appraiser may have a
conflict of interest in that it has prepared appraisals of properties for the
Affiliated Partnerships, it has not rendered appraisals for any other
affiliates of the General Partner. The General Partner has not commissioned
any appraisals of the Properties other than the Independent Appraisal, because
the General Partner believes that appraisals by the Appraiser accurately
reflect the fair market value of the properties appraised. This determination
is supported by certain offers received for the Properties by the General
Partner. See "THE PROPOSALS-- Background of the Sale." While the General
Partner considered the Independent Appraisal in negotiating the terms of the
Sale, the Independent Appraisal was not determinative of the Purchase Price.
The Independent Appraisal is available for inspection and copying at the
principal executive offices of the General Partner during its regular business
hours by any interested Limited Partner or such Limited Partner's
representative who has been so designated in writing. In addition, the
Independent Appraisal has been filed as an exhibit to the Partnership's
Schedule 13E-3 in respect of the Sale, which is a publicly-available filing
with the Securities and Exchange Commission. See "AVAILABLE INFORMATION."
THE PROPOSALS
DESCRIPTION OF THE PARTNERSHIP
The Partnership was formed on December 17, 1981 for the primary purpose of
acquiring and operating multi-family, residential real properties. The
Partnership currently owns four apartment complexes: Creekside Oaks, a 120-
unit apartment complex located in Jacksonville, Florida, Ponte Vedra I, a 122-
unit apartment complex located in Ponte Vedra Beach, Florida, Rancho Antigua,
a 220-unit apartment complex located in Scottsdale, Arizona, and Village I, a
60-unit apartment complex located in Tucson, Arizona. The Partnership sold one
residential apartment complex in 1995. The Partnership will retain no
interests in real property after the Sale. See "--Description of the
Properties to be Sold."
The Partnership was structured as a self-liquidating partnership with a
finite life, which would distribute its cash flow during its operating stage
and its proceeds of sale during its liquidating stage, whereupon the
Partnership would be liquidated and dissolved. It was originally anticipated
that the Partnership's properties
16
<PAGE>
would be held for approximately five years after their acquisition although,
depending on economic and market factors, they could have been held for
shorter or longer periods in the complete discretion of the General Partner.
The interests in the Properties were purchased between 1983 and 1985 and now
have been held for substantially longer than the originally anticipated holding
period.
THE PURCHASER
Prior to the Sale, the Purchaser will be formed as a Delaware limited
liability company in which the Pension Funds will each own a 45.5% interest and
in which ConAm DOC, an affiliate of the General Partner, will own a 9% interest.
Under the proposed limited liability company agreement of the Purchaser (the
"LLC Agreement"), ConAm DOC will be the administrative member of the Purchaser
and will have the obligation and responsibility to manage and conduct the day-
to-day business and affairs of the Purchaser. However, because significant
decisions (each, a "Major Decision") can be made only by or with the approval
of 66 2/3% of the membership interests in the Purchaser, Lend Lease and the
Pension Funds will effectively control the Purchaser. Major Decisions include:
the approval or amendment of property budgets; the sale, lease, refinancing,
or encumbrance of the Properties; the acquisition of any real property in
addition to the Properties; the making of capital improvements to the
Properties; the admission of a new member of the Purchaser; entering into any
contract with an affiliate of any member; the issuance or sale of equity or debt
securities of the Purchaser; the consummation of any business combination
involving the Purchaser; the filing of any petition in bankruptcy with respect
to the Purchaser; the selection or replacement of a property manager; and the
distribution of net cash flow or capital proceeds.
Under the proposed LLC Agreement, the Purchaser will enter into a two-year
property management agreement with ConAm Management, an affiliate of the General
Partner. ConAm Management is required to manage the daily operations of the
Properties and will receive a management fee of 3.5% of each Property's gross
collected monthly revenues. If the Purchaser elects in its sole discretion to
retain ConAm Management beyond the initial two-year term, the management fee
will be reduced to 3% of each Property's gross collected monthly revenues. If
the Purchaser sells one or all of the Properties during the year following the
initial two-year term, ConAm Management will be entitled to a termination fee
equal to the management fee otherwise payable in respect of such Property or
Properties for the remainder of that year.
The proposed LLC Agreement provides that, following the two-year anniversary
of the effective date of the LLC Agreement (or at any prior time if the members
of the Purchaser are unable to reach a consensus on any Major Decision within a
30-day period), any member of the Purchaser, including any affiliate of the
General Partner which is a member of the Purchaser, may make an offer for the
other members' interests in the Purchaser. Each other member may elect to either
sell its interests in the Purchaser for the stated price or make an offer to
purchase the other members' interests in the Purchaser for the stated price.
Accordingly, ConAm DOC might have, under certain circumstances and at certain
times, an option to purchase additional interests in the Purchaser.
At any time following the two-year anniversary of the effective date of the
LLC Agreement, the Pension Funds will be able to solicit offers for the sale of
either or both of the Properties. In such a case, the Pension Funds will have to
provide ConAm DOC with the exclusive opportunity to negotiate a purchase of the
applicable Property for a 30-day period. If the parties are unable to reach an
agreement as to such a purchase, the Pension Funds will then be able, without
the consent of ConAm DOC, to cause the Purchaser to sell the applicable Property
to a third party.
DESCRIPTION OF THE PROPERTIES TO BE SOLD
Creekside Oaks. Creekside Oaks is a 120-unit apartment community located in
southeast Jacksonville, Florida, approximately eight miles from downtown. The
property had an average occupancy rate of 96% during the first six months of
1998 and 94.7% in 1997. The Jacksonville apartment market has experienced strong
competition lately, particularly in the area near Creekside Oaks. Recently,
average occupancy rates in the area have declined, although average monthly
rents have increased modestly.
17
<PAGE>
Ponte Vedra I. Ponte Vedra I is a 122-unit apartment community located in
northeast St. Johns County, approximately 18 miles from the Jacksonville,
Florida Central Business District. The property had an average occupancy rate
of 93% during the first six months of 1998 and 92.9% in 1997. The Jacksonville
apartment market has experienced strong competition lately, and future expected
development in the area near Ponte Vedra I may impact occupancy at Ponte Vedra I
due to increased competition.
Rancho Antigua. Rancho Antigua is a 220-unit apartment community located in
northern Scottsdale, Arizona, approximately 17 miles northeast of the Phoenix
Central Business District. The property had an average occupancy rate of 96%
during the first six months of 1998 and 93.6% in 1997. The Scottsdale apartment
market has been strong, but has also experienced strong competition recently,
reflecting high levels of construction and notable competition from condominiums
and single family homes, as affordable prices and low mortgage rates enticed
renters to buy.
Village I. Village I is a 60-unit apartment community located in the northwest
portion of Tucson, Arizona, approximately 10 miles north of the Central Business
District. The property had an average occupancy rate of 97% during the first six
months of 1998 and 92.3% in 1997. Low interest rates and affordable home prices
have also increased competition by luring many renters to purchase homes. This
competition has led to the reemergence of rental incentives and other
concessions in the marketplace to attract tenants.
INDEBTEDNESS ON THE PROPERTIES
Three of the Properties are currently financed with loans originated by the
Penn Mutual Life Insurance Company which mature on November 1, 2000. Each loan
was for an original term of seven years, amortized over 25 years, and has an
interest rate of 7.75%. Due to the interest rate on the loans and the short
remaining term to maturity, the Purchaser will not be assuming the existing
loans.
In connection with the repayment of the loans, the existing loan documents
provide for a standard prepayment penalty based upon the loss in yield
experienced by the lender in connection with the prepayment of the loan prior
to the maturity date. Based upon the fact that the interest rate on the loans
exceeds current interest rates and the total remaining indebtedness as of
November 1, 1998 in the approximate amount of $11,342,947, the Partnership
will pay the lender approximately $672,923 in order to repay the loans in
connection with the Sale.
PURCHASER'S VALUATION
The Purchase Price for the Properties is $29,300,000, which is greater than
the aggregate appraised values of the Properties as of December 31, 1997. See
"SPECIAL FACTORS--Independent Appraisal." The Purchase Price was derived
through negotiations between Lend Lease and the General Partner. See "--
Background of the Sale." Lend Lease, acting on behalf of the Purchaser,
considered a number of factors, including the preceding twelve months of net
operating income of the Properties, the age, condition and location of the
Properties, and the significant costs necessary to appropriately manage
properties this age and undertake the capital improvements necessary to position
the Properties to meet competition from newer properties.
The Purchase Price is not subject to adjustment based on the results of Lend
Lease's due diligence investigation on behalf of the Pension Funds. In addition,
because the Properties are being sold on an "as is" basis, it is more likely
that the Partnership will receive and retain the full amount of the Purchase
Price without further adjustment. The Partnership has a high degree of
confidence in the Purchaser's ability to consummate the Sale, because Lend Lease
will have completed its due diligence investigation and will have deposited
$293,000 earnest money into escrow prior to consummation of the Sale. Another
advantage of the Sale is that, because the offer is for multiple properties, the
transaction costs are lower than they might otherwise be if the Properties were
listed with a broker and sold in separate sales, and therefore the amount which
can be distributed to the Limited Partners is enhanced. However, for a
discussion of certain disadvantages of the Sale, see "SPECIAL FACTORS--Fairness
of the Sale" and "--Terms of the Purchase Agreements."
18
<PAGE>
GENERAL PARTNER'S VALUATION
The General Partner has not prepared a formal valuation with respect to the
proposed Sale. The General Partner has relied on the Independent Appraisal,
prior offers for the Properties and its general familiarity with and
experience in the Properties' markets to establish that the Purchase Price is
a fair price for the Properties. See "SPECIAL FACTORS--Independent Appraisal"
and "--Background of the Sale."
BACKGROUND OF THE SALE
In 1994, the General Partner and RI 2 Real Estate Services, Inc., the then
co-general partners of the Partnership (the "General Partners"), determined,
in their business judgment, that it was an appropriate time to begin exploring
a means of converting the Partnership's interests in its properties to either
cash or marketable securities. This determination was based, in significant
part, upon their belief that the consummation of a sale or a "roll-up"
transaction would be consistent with (i) the Limited Partners' desire for
liquidity, (ii) the fact that a longer holding period could subject the
Limited Partners to risks associated with changing interest rates and property
valuations, and (iii) the aging nature of the properties, which would require
increasingly larger commitments of funds to address on-going capital
expenditures and keep the properties competitive in their respective markets.
Under the terms of the Partnership Agreement, the General Partner or General
Partners have the responsibility to determine when Partnership properties
should be sold. As discussed in the Partnership's original offering
prospectus, the decision to sell the Partnership's properties would depend on
a variety of factors. Accordingly, it was not possible at the outset of the
Partnership to determine precisely when the Partnership's properties would be
sold. Although the terms of the Partnership Agreement do not provide for
termination of the Partnership until December 31, 2010, it was never intended
that the Partnership would hold its properties for the entire term of the
Partnership. In fact, the Partnership's offering prospectus originally
anticipated a holding period of approximately five years for the properties.
However, primarily as a result of extremely unfavorable market conditions in
the late 1980's and early 1990's, the properties were held beyond their
originally anticipated holding periods in order to take advantage of
recovering real estate markets and to avoid adverse tax and cash flow
consequences to the Limited Partners resulting from a sale of the properties
at significantly depressed values.
In 1994, the General Partners concluded that a "roll-up" of the Limited
Partners' interests with those of the Affiliated Partnerships was not in the
best interests of the Limited Partners. See "SPECIAL FACTORS-- Alternatives
Considered to the Sale--Consolidation." Therefore, the decision was made to
begin marketing selected properties for sale. This decision was based upon the
General Partners' belief that the real estate capital markets were improving,
particularly in the multi-family sector. Pension funds, real estate investment
trusts and other institutional buyers had increased their purchasing activity
as compared to the early 1990's when these same institutional buyers were
largely out of the market. Lower interest rates had also improved the market
for selling properties, as entrepreneurial buyers who required debt financing
to purchase properties were able to borrow funds at more advantageous interest
rates. Further, with respect to the Partnership's properties, local real
estate market conditions were improving, resulting in improved operating
performances of certain properties and enhanced prospects for selling certain
properties at attractive prices.
Based upon the improvement in the real estate capital markets and certain of
the local real estate markets, the General Partners concluded that it would
then be easier to identify buyers for certain of the Partnership's properties
and that the offers might be at more favorable capitalization rates than were
previously available. Evaluating the effects to the Limited Partners of an
immediate sale and the prospects for near-term appreciation, the General
Partners made an assessment of each of the Partnership's properties and its
local market. In accordance with this assessment, certain properties were
identified for sale and one property was subsequently sold. See "--Description
of the Partnership."
From time to time, the General Partners have received unsolicited indications
of interest in one or more of the remaining properties owned by the Partnership,
including the Properties. The General Partners did not pursue
19
<PAGE>
these indications of interest for a variety of reasons. For instance, in some
cases, the General Partners could not obtain adequate information regarding the
proposed buyer and its sources of financing. In other cases, investigations as
to the proposed buyer's purchase criteria, return requirements, sources of
capital, experience in the relevant real estate markets, and timelines did not
indicate that the proposed buyer was a realistic potential purchaser. Finally,
certain indications of interest were not pursued because the General Partners
believed that market conditions and, therefore, prices, were likely to improve
over the near-term.
In October 1997 and July 1998, respectively, an equity real estate investment
trust (the "REIT") and a real estate investment fund (the "Fund"), parties
unrelated to the General Partners, each expressed an interest in acquiring the
Properties and certain other properties owned by the Affiliated Partnerships.
The REIT and the Fund were familiar with these properties and their respective
locations within their respective trade areas. The REIT offer included two
properties which are no longer part of the RI Portfolio. Based on the General
Partner's understanding of the allocation of the REIT's offer, the REIT offer
for the RI Portfolio was $111,600,000, which was equal to the appraised value of
the RI Portfolio as of December 31, 1996. As to the Partnership, this would have
resulted in an aggregate purchase price for the Properties of $27,400,000. The
Fund offer indicated that the aggregate value of the RI Portfolio was
$115,650,000, which equaled the value set forth in the Independent Appraisal,
but, in consideration of the purported advantages to the seller of a single
transaction over an asset-by-asset sale, including the avoidance of seller-paid
brokerage commissions (estimated by the Fund to be 4% or more of the purchase
price) and reduced legal fees and related closing costs, the Fund's offer for
the RI Portfolio was $104,085,000. As to the Partnership, this would have
resulted in an aggregate purchase price for the Properties of $25,650,000. In
any event, these offers were not accepted because, in the opinion of the General
Partner and its affiliates, they either did not reflect the value of the
Properties at the time they were made and/or they were subject to significant
due diligence, underwriting and other contingencies.
In August 1998 the General Partner received from a party unrelated to the
General Partner an offer to purchase Rancho Antigua for a gross purchase price
of $13,770,000 (the "Rancho Antigua Offer"). The Rancho Antigua Offer required:
payment of a commission to a party unrelated to the General Partner equal to
2.5% of the purchase price, which would result in a net offer to the Partnership
(before other costs associated with closing) of $13,425,750; extensive due
diligence subject to satisfaction in the sole and absolute discretion of the
proposed purchaser; a financing contingency without specific terms for the
financing and also subject to the approval of the purchaser in its sole and
absolute discretion; the free assignability of the purchase agreement by the
proposed purchaser without the consent of the Partnership; and the unlimited
survivability after closing of all representations and warranties made by the
Partnership under the purchase agreement. The General Partner concluded that the
net price and the conditions to closing were unacceptable, because they created
a high degree of uncertainty as to whether the proposed purchaser could or would
actually close the transaction. Furthermore, as discussed below, the portion of
the Purchase Price which is allocable to Rancho Antigua is $13,700,000, which is
$274,250 more than the net Rancho Antigua Offer after deducting commissions
required to be paid in connection with that offer. Finally, the Purchase
Agreements will not contain the extensive conditions to closing set forth in the
Rancho Antigua Offer.
Except as discussed above, none of the General Partner, the Partnership nor
any of their affiliates have received any other offers for the RI Portfolio or
the Partnership's properties. Due to, among other things, the protracted
timelines, contingencies and administrative costs associated with sales of
individual properties, continued individual sales of RI Portfolio properties
have not been pursued by the General Partner and its affiliates subsequent to
the REIT offer, the Fund offer and the Rancho Antigua Offer.
Effective July 1, 1997, the General Partner purchased the co-general partner
interest of RI 2 Real Estate Services, Inc. for $15,000 in cash and the
assumption of $118,518 in liabilities. Subsequent to this acquisition, the
General Partner has considered alternative disposition strategies for the
Properties in light of the following:
(i) Due to the previous sale of a Partnership property, the Partnership
currently owns only four Properties, resulting in a disproportionate amount
of fixed costs associated with maintaining a public limited partnership;
20
<PAGE>
(ii) The General Partner believes that the appropriate strategy for the
continued ownership of the Properties is the implementation of a physical
refurbishment program, which would result in capital expenditures that
would likely be unattractive to the Limited Partners, because they would
result in the suspension or reduction of cash distributions; and
(iii) Ponte Vedra I, Creekside Oaks and Village I are each part of an
integrated apartment community, the other property or properties of which
are owned by Affiliated Partnerships, making a sale of the Properties on a
stand-alone basis difficult.
In mid-February 1998, ConAm Management, an affiliate of the General Partner,
acquired Alliance Residential Management, Inc., a Phoenix-based property
management company ("Alliance"). At the time of the acquisition, Alliance was
managing property in Phoenix on behalf of Lend Lease, advisor to the Pension
Funds. Shortly after the acquisition of Alliance, Steve Walker, a Pension Fund
senior portfolio manager at Lend Lease, telephoned Jim Krohn, the former owner
of Alliance, who was at that time a newly-appointed officer at ConAm Management.
During this telephone conversation, Mr. Walker asked to be introduced to the
principals of ConAm Management, for the purpose of familiarizing himself with
Lend Lease's new property manager and exploring whether any further mutually
beneficial business relationships could be established between the two parties
and/or their affiliates.
On March 13, 1998, Mr. Krohn and J. Bradley Forrester, President of ConAm
Management and Vice President of a general partner of the General Partner, flew
to Atlanta to meet with Messrs. Ray D'Ardenne, Don Miller, Ted Klinck, and
Walker of Lend Lease. During this meeting, Messrs. Forrester and Krohn presented
the Lend Lease principals with general information about ConAm Management and
the multi-family real estate holdings of its affiliates, including the RI
Portfolio. The Lend Lease principals responded to this presentation by
expressing Lend Lease's desire to acquire well-located multi-family properties
where there was the opportunity to add value through physical refurbishment and
repositioning. At that time, Mr. D'Ardenne expressed a possible interest in
acquiring a small portfolio of multi-family residential housing properties from
ConAm Management's affiliates. While, as described above, the General Partner
and its affiliates had been contemplating a sale of the RI Portfolio for some
time, no formal presentations, proposals or solicitations for an offer relating
to the RI Portfolio were made to the Lend Lease principals on that date.
On March 16, Mr. Forrester sent Mr. Klinck at Lend Lease an informational
package relating to the RI Portfolio. The package included information relating
to the locations of the properties, the number of units at each property, a
brief financial overview, and lists of amenities. Over the next few days, Mr.
Forrester continued to send information concerning the RI Portfolio to Mr.
Klinck. Subsequently, Mr. Klinck called Mr. Forrester and expressed Lend Lease's
interest in pursuing the acquisition of the RI Portfolio. The General Partner
believes that, during this time, Lend Lease representatives may have made site
visits to certain of the properties comprising the RI Portfolio. The General
Partner and its affiliates did not consider retaining an independent advisor to
represent the interests of the Limited Partners in any prospective sale of the
Properties, because they determined that the Independent Appraisal would provide
adequate assurance that a fair offer would be presented to the Limited Partners
for approval.
In late March and early April, the parties continued to exchange information
relating to the RI Portfolio. At the request of Mr. Klinck, Mr. Forrester began
to deliver more detailed financial reports and other information to Mr. Klinck,
in order to assist Lend Lease in its development of an offer. During this time,
Mr. Klinck and Mr. Forrester discussed the relative merits of having affiliates
of the General Partner contribute up to $5 million to the purchase price of the
RI Portfolio and provide property management services to the RI Portfolio after
the proposed sale. Through this alignment of interests, Lend Lease believed that
the underwriting risks inherent in the purchase of real estate properties and
the risks associated with the ongoing management of the Properties would be
reduced. The General Partner believes that this reduction of risk to Lend Lease
is reflected in the fact that the Purchase Price is greater than the amounts
offered by others.
During the following weeks, Lend Lease performed its own financial analysis
of the RI Portfolio and made several visits to the RI Portfolio property sites.
Also during this time, numerous telephone conversations took
21
<PAGE>
place between Mr. Klinck and Mr. Forrester. Mr. Forrester informed Mr. Klinck
that if Lend Lease was not prepared to pay at least the appraised value of the
RI Portfolio, then the General Partner would not be interested in making a sale.
In arriving at this determination, the General Partner considered the original
Unit price of $500 and concluded that a sale at the appraised value of the
Properties, when taken together with all prior distributions with respect to the
Units, would provide the Limited Partners with a return of capital in excess of
their original investment. Mr. Klinck made several counteroffers for the RI
Portfolio at prices below the appraised value, but the General Partner refused
to consider a sale at those prices. During the same period, Mr. Klinck attempted
to negotiate a break-up fee of $250,000, to become payable to Lend Lease if the
proposed sale of the RI Portfolio did not close due to a lack of approval by the
limited partners of the Partnership or any Affiliated Partnership. The General
Partner refused to make these concessions.
On May 22, 1998, Mr. Klinck sent a proposed term sheet to Mr. Forrester,
including a proposed purchase offer for the RI Portfolio. On June 10, 1998,
Messrs. Klinck, Walker and Joe Thomas from Lend Lease met with Messrs. Epstein,
Dupree, Svatos and Tilley to discuss the transaction in general. On July 7 and
8, 1998, Mr. Forrester and Michael Johnson, a regional vice president of ConAm
Management, went to Jacksonville, Florida to present the RI Portfolio properties
in that area to Messrs. Walker, Thomas and Klinck and representatives of the
Pension Funds. On July 28 and 29, 1998, a similar meeting took place in Phoenix,
Arizona. Over the next few months, Mr. Forrester continued to send information
on the RI Portfolio to Mr. Klinck, including city maps, rental brochures, market
summaries, occupancy information, floor and site plans, management report
summaries, operating statements, rent rolls, location maps, memos regarding
capital improvements and management biographies.
During late July, the parties continued to negotiate the Purchase Price. In
arriving at the purchase offer contained in the proposed term sheet, Lend Lease
had performed independent evaluations of the historical financial performance of
the properties, the current and anticipated local real estate market conditions
affecting the properties, and the existing physical condition of the properties.
Lend Lease's purchase offer was less than the value set forth in the Independent
Appraisal, and the proposed purchase agreements contained provisions obligating
the Partnership to make additional expenditures for capital improvements prior
to closing (or credit the purchase price for any unexpended amounts). As a
result of the late July telephonic negotiations between Mr. Klinck and Mr.
Forrester, the purchase offer was increased to the value set forth in the
Independent Appraisal. In late August and early September, the parties agreed to
eliminate the obligation to make additional expenditures for capital
improvements.
In the course of evaluating financing options for the proposed acquisition,
the prospective lender to the Purchaser had an independent appraisal of the RI
Portfolio prepared (the "Lender Appraisal"). The Lender Appraisal indicated
that the aggregate appraised value of the Properties was $30,525,000. After
deducting a sales commission of 2.5%, or $763,125, normally paid by the seller
but not applicable to the Sale, the Lender Appraisal indicated that the value
of the Properties was $29,761,875, or $1,261,875 more than the value of
$28,500,000 set forth in the Independent Appraisal. During late October 1998,
Mr. Forrester had numerous telephone conversations with Mr. Klinck in which
Mr. Forrester sought to have the purchase offer increased above $28,500,000.
As a result of these discussions, the purchase offer was increased from
$28,500,000 to the Purchase Price of $29,300,000. This brought the aggregate
amount offered by the Purchaser for the RI Portfolio to $117,900,000.
Thereafter, the parties finalized the material terms of the proposed LLC
Agreement, the property management agreement for ConAm Management, and the
Purchase Agreements. The definitive Purchase Agreements will be executed and
delivered immediately after the Proposals are approved by the Limited Partners.
CONFLICTS OF INTEREST OF THE GENERAL PARTNER
The Sale contemplates that the properties will be sold to an entity in which
an affiliate of the General Partner will own a 9% interest. Because of this
ownership interest, the General Partner has a conflict with the interests of
the Limited Partners, and the interests of the General Partner may conflict
with its fiduciary obligation to the
22
<PAGE>
Limited Partners. The General Partner believes, however, that the Sale is fair
to the Limited Partners. The General Partner believes that the fairness factors
enumerated in "SPECIAL FACTORS--Fairness of the Sale," and the fact that the
Sale requires the approval of the Limited Partners, provide sufficient
procedural safeguards to minimize the effects of the potential conflicts of
interest inherent in any such transaction.
Nevertheless, Limited Partners should consider the following factors when
examining the Sale:
(i) In consideration of a pro rata cash capital contribution to the
Purchaser, an affiliate of the General Partner, ConAm DOC, will own a 9%
interest in the Purchaser, and consequently, the General Partner faces direct
conflicts of interest in negotiating the Sale. Furthermore, ConAm DOC has the
potential to receive up to an additional 18% of the profits of the Purchaser
after pro rata distributions of profits to members of the Purchaser have
resulted in recoupment by such members of their aggregate capital
contributions and payment of cumulative returns of 15% per annum on their
previously unrecovered capital contributions.
(ii) No independent committee or representative has been appointed or
retained to negotiate the terms of the Sale on behalf of the Limited Partners.
(iii) The Partnership has in the past and is currently being represented by
legal counsel who has also represented and is currently representing the
General Partner and certain of its affiliates in various matters, and the
Limited Partners will not be represented by separate legal counsel.
(iv) As an equity participant in the Purchaser, an affiliate of the General
Partner will benefit from any future cash flow attributable to, and any future
appreciation of, the Properties if the Sale is approved. Furthermore, if the
Sale is approved, ConAm Management, an affiliate of the General Partner which
will not be a member of the Purchaser, will be party to a property management
agreement relating to the Properties. ConAm Management might not have
otherwise obtained this contract if it were not an affiliate of the General
Partner. Finally, the General Partner and its affiliates will benefit from the
Sale as discussed in "SPECIAL FACTORS--Effects of the Sale."
FAILURE TO APPROVE THE SALE
The General Partner believes that consummation of the Sale is the preferable
course of action at this time. If the Limited Partners fail to approve the
Proposals, however, the Partnership will attempt to refinance the existing
loans secured by the Properties and utilize any loan proceeds to implement
certain capital improvements. The Partnership might then take advantage of any
future property appreciation through a future sale of one or all of the
Properties to the Purchaser or otherwise (subject to any necessary amendment to
the Partnership Agreement to permit such sale or sales, which might require the
consent of the Limited Partners). There is no assurance that the General Partner
could arrange for an alternative sale of the Properties at an appropriate price
or on terms acceptable to the Partnership. Such a course of action could also
increase the risk of loss of the Properties due to any failure to make increased
debt service payments and might also adversely affect the timing and amount of
future distributions to Limited Partners.
The General Partner believes that a refinancing of the Properties at 75% of
the Lender Appraisal could generate $22,882,500 in new loan proceeds. After
deducting refinancing costs, repayment of the existing loans and related
prepayment penalties and reserves for capital expenditures required to
maintain the competitive position of the Properties, the General Partner expects
that the Partnership would make a tax-deferred distribution of approximately
$112.79 per Unit, as compared to an expected distribution of $227.24 per Unit
from net proceeds from the Sale and the subsequent liquidation of the
Partnership.
If the Properties were leveraged to the extent set forth above at a 7%
interest rate, the increased annual debt service of $707,458 related to the
refinancing might result in the suspension of distributions or might affect the
timing and amount of future distributions. Furthermore, under current lending
practices, the loans would include provisions that could result in material
prepayment penalties if the loans were repaid prior to their maturity.
Furthermore, pursuant to the Partnership Agreement, the General Partner would be
entitled to 1% of the refinance proceeds or approximately $91,147. Consequently,
the General Partner believes that the Sale is the preferable course of action at
this time.
23
<PAGE>
TERMS OF THE PURCHASE AGREEMENTS
The following is a summary of the material terms of the proposed Purchase
Agreements. THIS SUMMARY DOES NOT PURPORT TO BE COMPLETE, AND REFERENCE IS
MADE TO THE FORM OF PURCHASE AGREEMENTS, WHICH IS AVAILABLE UPON REQUEST
PURSUANT TO THE PROCEDURES SET FORTH IN THE SECTION OF THIS SOLICITATION
STATEMENT ENTITLED "AVAILABLE INFORMATION." The Purchase Agreements will not
be executed unless the Limited Partners approve the Proposals. Capitalized
terms used but not defined in this summary of material terms have the meaning
ascribed to them in the form of the Purchase Agreements.
Structure of the Sale. The Partnership holds majority interests in and
controls three joint venture partnerships which hold title to Creekside Oaks,
Ponte Vedra I and Rancho Antigua and one limited partnership which holds title
to Village I. In order to effectuate the Sale, these title-holding entities will
transfer title and deliver the deeds and other documents of transfer to the
Purchaser on the Closing Date.
Purchase Price. The Purchase Price for the Properties will be $29,300,000,
payable by the Purchaser on the Closing Date and subject to certain adjustments
at closing. The Purchase Price will be paid in cash and is expected to be paid
out of proceeds from third party financing and capital contributions made to the
Purchaser. It is anticipated that the third party financing will be provided by
the Federal National Mortgage Association ("FNMA"). FNMA would be financing 65%
of the aggregate purchase price for the RI Portfolio under a $100,000,000 Master
Credit Facility (the "Proposed Facility") secured by the RI Portfolio. The
Proposed Facility would have a five-year term and a minimum borrowing base of
$50,000,000. All loans under the Proposed Facility would be cross-collateralized
and cross-defaulted, and the Proposed Facility would require a minimum of five
properties in three geographically distinct areas. For these reasons, a similar
financing facility is not available to the Partnership.
It is expected that borrowings under the Proposed Facility will bear a
variable interest rate of 0.52% plus the effective interest rate at which FNMA
is able to sell mortgage-backed securities collateralized by outstanding
borrowings. The General Partner estimates that the effective interest rate
would be 5.74% if borrowings were outstanding at this time. The Pension Funds
intend to cause the Purchaser to enter into an interest rate swap agreement
with a commercial bank that will effectively fix the interest rate for five
years at approximately 6%.
The Proposed Facility will require the Purchaser to pay a prepayment penalty
if outstanding borrowings are repaid within the first three years. The Purchaser
has no plans to refinance or repay the Proposed Facility prior to the earlier of
its maturity date or the sale by it of any or all of the RI Portfolio.
Condition of the Properties; Review of the Properties. The Purchaser will
purchase the Properties on an "As Is," "Where-Is" and "With All Faults" basis
with limited representations by the Partnership as to the condition of the
Properties or their fitness for any purpose. Lend Lease, on behalf of the
Pension Funds, has undertaken an extensive due diligence review of the
Properties. Unlike purchasers in many third party purchase agreements, Lend
Lease will complete its due diligence prior to execution of the Purchase
Agreements, and as such, satisfaction with the due diligence investigation will
not be a condition precedent to closing.
Conditions Precedent to Closing. The obligation of the Purchaser to close
under the Purchase Agreements will be subject to the concurrent approval by the
limited partners of the Affiliated Partnerships of the sale of their respective
properties to the Purchaser. There will be customary closing conditions for real
estate transactions, including issuance of appropriate title policies.
Casualty to or Condemnation of the Properties. If any Property or any portion
thereof is damaged by fire or other casualty on or before the Closing Date, and
the cost of repairing such damage equals or exceeds the greater of $400,000 or
5% of that portion of the Purchase Price allocable to the affected Property,
then the Purchaser may elect to terminate the Purchase Agreement with respect to
such Property. Further, if all or any material portion of any Property is taken
by eminent domain (or is a subject of a pending or contemplated taking
24
<PAGE>
which has not been consummated) before the Closing Date, then the Purchaser
will have the right to terminate the Purchase Agreement as to the affected
Property. In the event of a fire or other casualty where the damage is less
than $400,000 or 5% of that portion of the Purchase Price allocable to the
affected Property, or if the condemnation does not affect a material portion
of the affected Property, the Purchaser will be required to proceed with the
closing without adjustment to the Purchase Price with respect to the affected
Property and will be entitled to receive, as applicable, an assignment of the
proceeds of any insurance in the event of a fire or other casualty or an
assignment of any award for such taking in the event of a condemnation.
The purchase agreements relating to the properties of the Affiliated
Partnerships will contain provisions substantially similar to those outlined
above with respect to the rights of the Purchaser to terminate such purchase
agreements as a result of condemnation or destruction of the applicable
properties. While, as a general rule, the Purchaser will be able to terminate
the Purchase Agreements if any one of the sales to the Purchaser by the
Affiliated Partnerships is terminated, the Purchase Agreements will provide
that the Purchaser may terminate the Purchase Agreements in the case of
condemnation or destruction of the properties of the Affiliated Partnerships
only if two or more of such properties are condemned or destroyed. For
purposes of the foregoing determination, properties which comprise an
integrated apartment community will be counted as a single property. Because
Ponte Vedra I, Creekside Oaks and Village I are each part of an integrated
apartment community, the Purchase Agreement with respect to each of these
Properties permits the Purchaser to terminate the Purchase Agreement if,
because of condemnation or destruction, the Purchaser is entitled to terminate
the purchase agreement with respect to the other property or properties
comprising such integrated apartment community, irrespective of whether there
has been condemnation or destruction of the Properties or any other properties
of the Affiliated Partnerships.
Representations and Warranties and Physical Due Diligence Conditions. Unlike
many third party agreements, the Purchase Agreements will not require the
Partnership to make substantial representations and warranties concerning the
condition or operation of the Properties, or other similar matters, such as
environmental studies or engineering. The Purchase Agreements also will not
provide the purchaser with a typical period to perform due diligence
investigations at the Properties or with a basis on which to refuse to close
the Sale based directly on the outcome of any due diligence investigation,
since such due diligence investigations will have been completed prior to
execution of the Purchase Agreements. Further, any representations and
warranties made by the Partnership pursuant to the Purchase Agreements will
survive for a period of only six months after the closing, which is a shorter
period of time than that found in many third party agreements.
Default and Damages. The Purchase Agreements will provide that the
Purchaser's recourse for any uncured breach ("Default") by the Partnership on
or prior to the Closing Date of any matter related to the Purchase Agreements
will be either to (i) seek from the escrow holder the return of the earnest
money deposits made on behalf of the Purchaser and any documents which have
been deposited with the escrow holder on behalf of the Purchaser and to seek
reimbursement from the Partnership for the reasonable and documented
out-of-pocket expenses incurred in connection with Lend Lease's due diligence
investigation (such as environmental and engineering studies) and other
transaction costs, but in no event an amount in excess of 1/4% of the Purchase
Price, or (ii) seek specific performance of the Partnership's obligations
under the Purchase Agreements.
In the event of the Purchaser's Default with respect to any of the Purchase
Agreements or the purchase agreements relating to the properties of the
Affiliated Partnerships, the Partnership's sole remedy will be to retain, as
liquidated damages, the earnest money deposits for the Properties. Further, in
the event the Purchaser objects or fails to cooperate with the release of such
earnest money deposit held by the escrow holder, the Partnership will also
have all of the remedies otherwise available to the Partnership at law or in
equity.
Pro-rations and Costs. All items of income and expense for the Properties,
such as collected rents and real estate taxes, will be apportioned and
adjusted between the Partnership and the Purchaser to the Closing Date.
25
<PAGE>
The Partnership and the Purchaser will each pay one-half of any third party
escrow fees from the transaction, with the Partnership paying any documentary
transfer and stamp taxes in connection with the recordation of the applicable
deed and the Purchaser paying the premiums and other costs for title insurance,
including any endorsements requested by the Purchaser or its lender.
Comparison to Third Party Agreements. The Purchase Agreements relating to
the Sale will contain several provisions which are not customarily found in
combination with each other in many third party agreements.
Provisions which may be more advantageous to the Partnership than those found
in many third party agreements include the following: the lack of due diligence
conditions precedent to closing; lack of a financing contingency; limited
representations and warranties; limited survivability of representations and
warranties; and sale of the Properties on an "as is" basis.
Provisions which may be less advantageous to the Partnership than those found
in many third party agreements include the condition precedent to closing of
concurrent approval by the limited partners of the Affiliated Partnerships of
the sale of their respective properties to the Purchaser and the ability of the
Purchaser to terminate the Purchase Agreements if, due to condemnation or
casualty, the Purchaser is entitled to terminate the purchase agreements with
respect to any two or more properties owned by the Affiliated Partnerships.
THE AMENDMENT
The Partnership Agreement prohibits sales of property to the General Partner
or an "affiliate" of the General Partner. "Affiliate" is defined in relevant
part as any person "that, directly or indirectly, is the beneficial owner of 10%
or more of any class of equity securities of, or otherwise has a substantial
beneficial interest in," another person. While the Pension Funds will own 91% of
the Purchaser and will effectively control the Purchaser, an affiliate of the
General Partner will (i) own a 9% interest in the Purchaser, (ii) have a right
of first offer and certain buy/sell rights under the proposed LLC Agreement and
(iii) have the potential to receive up to an additional 18% of the profits of
the Purchaser after pro rata distributions of profits to members of the
Purchaser have resulted in recoupment by such members of their aggregate capital
contributions and payment of cumulative returns of 15% per annum on their
previously unrecovered capital contributions. An affiliate of the General
Partner which will not be a member of the Purchaser will serve as the initial
property manager for the Purchaser. The foregoing factors might cause the
Purchaser to be an "affiliate" of the General Partner under the terms of the
Partnership Agreement. In order to permit the Sale, the General Partner proposes
to amend the Partnership Agreement to permit proposed sales of Partnership
properties to "affiliates" of the General Partner, if such proposed sales are
approved by the Limited Partners. The proposed Amendment requires the approval
of a majority in interest of the Limited Partners. The full text of the proposed
Amendment is set forth in Appendix A hereto.
INDEMNIFICATION
If a claim is made against the General Partner in connection with its actions
on behalf of the Partnership with respect to the Sale, the General Partner
expects that it will seek to be indemnified by the Partnership with respect to
such claim. The Partnership Agreement provides that, except in the case of
fraud, negligence, misconduct or other breach of fiduciary duty to the
Partnership or any Partner, the General Partner will not be liable, responsible
or accountable in damages or otherwise to the Partnership or any of the Limited
Partners for any liabilities or other obligations imposed on, incurred by or
asserted against the General Partner or the Partnership in any way relating to
or arising out of, or alleged to relate to or arise out of, any action or
inaction on the part of the Partnership or on the part of the General Partner as
a general partner of the Partnership. However, the General Partner will not be
indemnified from any liability, loss, or damage incurred by it in connection
with any claim or settlement involving allegations that any state securities law
or the Securities Act of 1933, as amended, was violated by the General Partner
unless the General Partner is successful in defending such action and such
indemnification is specifically approved by a court of law which has been
advised as to the current position of both the Securities Exchange Commission
and the California Commissioner of Corporations regarding indemnification for
violations of securities laws.
26
<PAGE>
As a result of these indemnification rights, a Limited Partner's remedy with
respect to claims against the General Partner relating to its involvement in the
Sale could be more limited than the remedy which might have been available
absent the existence of these rights in the Partnership Agreement. A successful
claim for indemnification would reduce the amount of Partnership cash available
for distributions to the Limited Partners by an amount equivalent to that paid
to the General Partner under such a claim.
CERTAIN FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE SALE
GENERAL
The Sale, if approved, will have certain tax implications to the Limited
Partners that must be considered. The following summarizes the material
estimated federal income tax consequences to Limited Partners arising from the
Sale and provides a general overview of certain state income tax
considerations. This summary is based upon the Internal Revenue Code of 1986,
as amended (the "Code"), Treasury regulations, court decisions and published
positions of the Internal Revenue Service (the "Service"), each as in effect on
the date of this Solicitation Statement. There can be no assurance that the
Service will agree with the conclusions stated herein or that future legislation
or administrative changes or court decisions will not significantly modify the
federal or state income tax law regarding the matters described herein,
potentially with retroactive effect. This summary is not intended to, and should
not, be considered an opinion respecting the federal or state income tax
consequences of the Sale.
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner is required to take into account in computing
his or her income tax liability, his or her allocable share of the partnership's
items of income, gain, loss, deduction and credit (hereinafter referred to as
"income or loss") in accordance with the partnership agreement. If the
allocation of income or loss in the partnership agreement does not have
"substantial economic effect" as defined in Code Section 704(b), the law
requires the partnership's income or loss to be allocated in accordance with the
partners' economic interests in the partnership. The distribution of cash
attributable to partnership income is generally not a separate taxable event.
For tax purposes, the Partnership will realize and recognize gain or loss
separately for each Property (and in some cases, for each building which is part
of a Property). The amount of gain for tax purposes recognized with respect to
an asset, if any, will be an amount equal to the excess of the amount realized
(i.e., cash or consideration received reduced by the expenses of the Sale) over
the Partnership's adjusted tax basis for such asset. Conversely, the amount of
loss recognized with respect to an asset, if any, will be an amount equal to the
excess of the Partnership's adjusted tax basis over the amount realized by the
Partnership for such asset. The "adjusted tax basis" of an asset is its cost
(including nondeductible capital expenditures made by the Partnership at the
time of purchase) or other basis with certain additions or subtractions,
including (i) additions for the cost of capital expenditures such as
improvements, betterments, commissions and other nondeductible charges and (ii)
subtractions for depreciation and amortization.
Each Limited Partner must report his or her allocable share of these gains
and losses in the year in which the Properties are sold. Each Limited Partner's
allocable share of any Section 1245 gain, Section 1231 gain, Section 1250 gain
or loss and Partnership net taxable income or loss from operations will be
reflected on his or her applicable Schedule K-1 (as determined in accordance
with the allocation provisions contained in the Partnership Agreement discussed
below).
Under Section 702(a)(3) of the Code, a partnership is required to separately
state, and partners are required to account separately for, their distributive
share of all gains and losses. Accordingly, each Limited Partner's allocable
share of any Section 1231 gain or loss and depreciation recapture realized by
the Partnership as a result of the Sale would be reportable by such Limited
Partner on his or her individual tax return. Section 1231 gains are those
gains arising from the sale or exchange of "Section 1231 Property" which means
(i) depreciable assets used in a trade or business or (ii) real property used
in a trade or business and held for more than one year. Conversely, Section
1231 losses are those losses arising from the sale or exchange of Section 1231
Property. If
27
<PAGE>
Section 1231 losses exceed Section 1231 gains, such losses would be treated as
ordinary losses by the Partners.
To the extent that Section 1231 gains for any taxable year exceed certain
Section 1231 losses for the year, subject to certain exceptions (such as
depreciation recapture, as discussed below), such gains and losses will be
treated as long-term capital gains. However, Section 1231 gains will be
treated as ordinary income to the extent of prior Section 1231 losses from any
source that were treated as ordinary in any of the previous five years.
Under Sections 1245 and 1250 of the Code, a portion of the amount allowed as
depreciation expense with respect to Section 1231 Property may be "recaptured"
as ordinary income upon sale or other disposition rather than as long-term
capital gains ("Section 1245 gains" and "Section 1250 gains," respectively). The
Partnership does not anticipate that it would have material amounts of Section
1245 or Section 1250 gains as a result of the Sale. Therefore, it is anticipated
that the Sale will result in capital gain without the re-capture of any
significant gain to be reported at ordinary income tax rates. (It is not
anticipated that any Property will be sold at a tax loss.)
The Partnership Agreement provides that distributions from the Sale will be
made:
(i) First, 99% to the Limited Partners and 1% to the General Partner until
each Limited Partner has received an amount equal to his Adjusted Capital
Value (as defined in the Partnership Agreement);
(ii) Second, and subject to certain reductions, 99% to the Limited Partners,
1% to the General Partner until each Limited Partner has received an amount
equal to a 7% cumulative annual return with respect to his Adjusted Capital
Value, which amount shall be calculated commencing with the first anniversary
date of the last Additional Closing Date (as defined in the Partnership
Agreement) (but in no event less than a 6% cumulative annual return with
respect to the Limited Partner's Adjusted Capital Value calculated from the
date of the Limited Partner's admission to the Partnership); and
(iii) Third, the balance 85% to the Limited Partners and 15% to the General
Partner.
The General Partner expects that the Limited Partners will recognize taxable
gain from the Sale of approximately $266.11 per Unit. Actual gain will be
allocated among the General Partner and the Limited Partners (the "Partners")
as follows: (i) first, gain attributable to the excess, if any, of the
indebtedness relating to a Property immediately prior to the Sale of such
Property over the Partnership's adjusted basis in the Property will be allocated
to each Partner having a negative balance in its capital account, to the extent
of such negative balance, in the proportion that the negative balance of each
Partner bears to the aggregate negative balances of all Partners; and (ii)
second, the balance of any gain will be treated on a cumulative basis as if it
constituted an equivalent amount of Net Proceeds From Sale or Refinancing and
will be allocated to the General Partner to the extent that the General Partner
would have received Net Proceeds From Sale or Refinancing in connection
therewith, and the balance will be allocated to the Limited Partners. Any
passive losses which have been suspended from this or other passive investments
may be available to reduce this gain. The Partnership's accountants have
estimated that, for Limited Partners who have not utilized prior Partnership
passive activity losses to offset passive activity income from other sources,
approximately $91 per Unit in suspended passive losses will be available from
the Partnership. Furthermore, unamortized syndication costs in the amount of $48
per Unit will reduce the amount of gain reportable by the Limited Partners. The
expected distribution to the Limited Partners from net proceeds from the Sale
and certain cash from operations, together with the planned distribution upon
liquidation, is anticipated to be approximately $227.24 per Unit and is expected
to exceed the Limited Partners' income tax liability attributable thereto of
Limited Partners who acquired their Units in the public offering.
28
<PAGE>
The Partnership anticipates that approximately $65.08 per Unit in federal
income taxes ($29.04 per Unit for those partners with unused suspended passive
losses from the Partnership) may be incurred as a result of the Sale and
liquidation by Limited Partners who acquired their Units in the public
offering, as reflected in the following table, which assumes that a Limited
Partner has a marginal federal income tax rate of 39.6%.
<TABLE>
<CAPTION>
GAIN EST.
PER UNIT FEDERAL TAX
-------- -----------
<S> <C> <C>
Taxed at a 39.6% federal rate......................... $ 2.40 $ 0.95
Taxed at a 25% federal rate........................... $227.82 $ 56.95
Taxed at a 20% federal rate........................... $ 35.89 $ 7.18
------- -------
Total (without regard to suspended passive losses).... $266.11 $ 65.08
=======
Potential suspended passive losses of $91 at 39.6%.... $(36.04)
-------
Total potential taxes (including suspended passive
losses).............................................. $ 29.04
=======
</TABLE>
After allocating income or loss to the Partners, with the concomitant tax
basis adjustments, the distribution of proceeds from the Sale will reduce each
Limited Partner's federal income tax basis in its Unit. To the extent that the
amount of the distribution is in excess of that basis, such excess will be
taxed as a long-term or short-term capital gain depending on a Limited
Partner's holding period. To the extent that the distribution received is less
than that basis, the remaining basis, representing a Partner's share of the
Partnership syndication cost incurred at the inception of the Partnership, may
represent a tax benefit in connection with the termination of such Partner's
partnership interest. Limited Partners are encouraged to consult their
respective tax advisors with respect to the foregoing.
CAPITAL GAINS
Net long-term capital gains allocated to individuals, trusts and estates
from the Sale will be taxed at a maximum rate of 20% (except that the rate
will be 25% on that portion of the gain which is equal to the amount of real
estate depreciation not recaptured as ordinary income under Section 1250),
while ordinary income will be taxed at a maximum rate of up to 39.6%. The
amount of net capital loss that can be utilized to offset income will be
limited to the sum of net capital gains from other sources recognized by the
Limited Partner during the tax year, plus $3,000 ($1,500 in the case of a
married individual filing a separate return). The excess amount of such net
long-term capital loss may be carried forward and utilized in subsequent years
subject to the same limitations.
PASSIVE LOSS LIMITATIONS
Limited Partners who are individuals, trusts, estates, or personal service
corporations are subject to the passive activity loss limitations rules. A
Limited Partner's allocable share of Partnership income or loss is treated as
derived from a passive activity, except to the extent of the Partnership's
portfolio income. Portfolio income includes such items as interest and
dividends. A Limited Partner's allocable share of any Partnership gain
realized on the Sale will be characterized as passive activity income, and the
liquidation of the Partnership will permit the deduction of any previously
deferred passive losses, if any, allocated to the Limited Partners.
CERTAIN STATE INCOME TAX CONSIDERATIONS
Because each state's tax law varies, it is impossible to predict the tax
consequences to the Limited Partners in all the state tax jurisdictions in
which they are subject to tax. Accordingly, the following is a general summary
of certain common (but not necessarily uniform) principles of state income
taxation. State income tax consequences to each Limited Partner will depend
upon the provisions of the state tax laws to which the Limited Partner is
subject. The Partnership will generally be treated as engaged in business in
each of the states in which the Properties are located, and the Limited
Partners would generally be treated as doing business in such states and
therefore subject to tax in such states. Most states modify or adjust the
taxpayer's federal taxable income to arrive at the amount of income
potentially subject to state tax. Resident individuals generally pay state tax
on
29
<PAGE>
100% of such state-modified income, while corporations and other taxpayers
generally pay state tax only on that portion of state-modified income assigned
to the taxing state under the state's own apportionment and allocation rules.
TAX CONCLUSION
The discussion set forth above is only a summary of the material federal
income tax consequences to the Limited Partners of the Sale and of certain
state income tax considerations. It does not address all potential tax
consequences that may be applicable to the Limited Partners and to certain
other categories of Limited Partners, such as non-United States persons,
corporations, insurance companies, subchapter S corporations, partnerships or
financial institutions. It also does not address local or foreign tax
consequences of the Sale. ACCORDINGLY, LIMITED PARTNERS SHOULD CONSULT THEIR
OWN TAX ADVISORS REGARDING THE SPECIFIC INCOME TAX CONSEQUENCES OF THE SALE TO
THEM, INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND
FOREIGN TAX LAWS.
DISTRIBUTIONS
Since its inception on December 17, 1981, the Partnership has made quarterly
distributions aggregating $121.69 per Unit and returns of capital of $220.00
per Unit. The Partnership has made three quarterly distributions of $2.25 per
Unit during the last two years and intends to make a distribution of $2.25 per
Unit in respect of the most recently-completed fiscal quarter. With the
projected distribution of $227.24 per Unit upon liquidation of the Partnership,
Limited Partners will have received aggregate distributions of approximately
$168.93 per Unit and a full return of their initial investment of $500.
NO APPRAISAL RIGHTS
If Limited Partners owning a majority of the outstanding Units on the Record
Date consent to the Proposals, such approval will bind all Limited Partners.
The Partnership Agreement and the California Uniform Limited Partnership Act,
under which the Partnership is governed, do not give rights of appraisal or
similar rights to Limited Partners who dissent from the consent of the majority
in approving or disapproving the Proposals. Accordingly, dissenting Limited
Partners do not have the right to have their Units appraised or to have the
value of their Units paid to them if they disapprove of the action of a majority
in interest of the Limited Partners.
MARKET FOR THE UNITS
The General Partner has no knowledge of a formal, established public trading
market for the Units and believes that secondary sales activity for the Units
is limited and sporadic. Due to the fact that the Units are not listed on any
exchange or quoted on NASDAQ, privately negotiated sales and sales through
intermediaries are the primary means available to a Limited Partner to liquidate
an investment in the Units. While some information is available through private
publications regarding the prices at which such secondary sales transactions in
the Units have been made, these publications expressly disclaim the accuracy and
reliability of the information regarding such trades. Accordingly, the General
Partner does not believe that such information is of comparative value in
analyzing the distributions to be made in connection with the Sale. No sales of
Units were made by or to affiliates of the Partnership during the last two
years.
In addition to informal secondary market sales, investors have periodically
sought to acquire Units by means of a tender offer for outstanding Units.
However, such tender offers generally involve only a limited number of Units,
are held open only for a limited time, and are available only on a limited
basis. Furthermore, those tender offers during the past three years of which
the General Partner is aware have been made at approximately 28% to 76% of the
net asset value of the Units. In particular, during the last six months, a
tender offer for outstanding Units was made by a party unaffiliated with the
General Partner for the price of $170 per Unit. The estimated
30
<PAGE>
aggregate distribution to the Limited Partners following consummation of the
Sale and the anticipated liquidation of the Partnership, equal to $227.24 per
Unit, compares favorably with the price of $170 per Unit represented by this
recent tender offer.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
On the Record Date, there were 80,000 Units issued and outstanding and
entitled to vote held of record by 3,870 Limited Partners. At the Record Date,
the General Partner and its affiliates owned no Units. No person is known by
the Partnership to be the beneficial owner of more than 5% of the Units.
YEAR 2000 INFORMATION
The Partnership has assessed the potential impact of the "Year 2000"
computer systems issue on its operations. If the Sale is consummated, the
Partnership will liquidate prior to January 1, 2000, and no Year 2000 issues
will be presented.
In the event that the Sale is not consummated, the Partnership has relied on
the efforts of ConAm Management, which has been retained by the Partnership to
manage the business and financial operations of the Properties, to resolve any
potential Year 2000 issues. In the course of providing property management
services for the Partnership, ConAm Management retained a third party
consultant to modify all applicable software to provide for 4-digit year
fields. The General Partner believes that the modifications undertaken by
ConAm Management are sufficient to address any potential Year 2000 problems
and that the impact of the Year 2000 issue will not materially affect the
Partnership's operating results or financial condition if the Sale is not
consummated. Accordingly, neither ConAm Management nor the Partnership has
taken any further actions with respect to the Year 2000 issue.
VOTING PROCEDURES
Each Limited Partner is entitled to one (1) vote for each Unit owned of
record by such Limited Partner on the Record Date. Approval of the Proposals
requires the affirmative consent of Limited Partners holding a majority in
interest of the Units. A duly executed consent card on which a consent or an
indication of withholding consent is not indicated will be deemed a consent to
the Proposals. A vote "for" or "against" either of the Proposals may be
revoked by written notice of revocation or by a later-dated consent containing
different instructions at any time on or before the Expiration Date.
This Solicitation Statement is accompanied by a separate consent card.
Consent cards should be completed, signed and returned by the Expiration Date
to the Solicitation Agent at the address specified below or by facsimile
transmission of the front and back of the card to the number specified below.
A self-addressed, prepaid envelope for return of the consent card is included
with this Solicitation Statement.
By Mail: By Facsimile:
D.F. King & Co., Inc. (212) 809-8839
77 Water Street
20th Floor
New York, NY 10005
For Information Call:
(800) 735-3591
(TOLL-FREE)
31
<PAGE>
AVAILABLE INFORMATION
The Partnership is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports,
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and should be available at the Commission's regional
offices at 500 West Madison, 14th Floor, Chicago, Illinois 60661-2511 and 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such
material may also be accessed on the World Wide Web through the Commission's
Internet address at "http://www.sec.gov."
The following documents, which have been filed with the Commission, contain
important information about the Partnership and its financial condition and
are annexed hereto as Annex 1 and Annex 2, respectively:
(i) The Partnership's Annual Report on Form 10-K, as amended and restated
for the year ended December 31, 1997 (Commission File No. 0-11085) (the
"Form 10-K").
(ii) The Partnership's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1998 (Commission File No. 0-11085) (the "Form
10-Q").
The Commission permits the Partnership to "incorporate by reference"
information into this Solicitation Statement, which means that the Partnership
can disclose important information to Limited Partners by referring them to
another document filed separately with the Commission. The information
incorporated by reference is deemed to be a part of this Solicitation
Statement, except for any information superseded by information in this
Solicitation Statement.
The Partnership hereby incorporates by reference the Form 10-K, all reports
filed pursuant to Section 13(a) or 15(d) of the Exchange Act that it may file
or has already filed with the Commission between December 31, 1997 and the
date of action by Consent, other than those delivered in connection herewith,
and the financial information contained in Part I of the Form 10-Q.
A Limited Partner of the Partnership may obtain from the Partnership or the
Commission any of the documents incorporated by reference. Documents
incorporated by reference are available from the Partnership without charge,
excluding all exhibits unless such exhibits have been specifically
incorporated by reference in the document incorporated by reference in this
Solicitation Statement. Limited Partners may obtain documents incorporated by
reference in this Solicitation Statement, or a copy of the Partnership
Agreement or the form of Purchase Agreements, by written or oral request, by
first class mail or other equally prompt means within one business day of
receipt of such request, from ConAm Property Services II, Ltd., 1764 San Diego
Avenue, San Diego, California 92110-1906, telephone number (619) 297-6771.
If you would like to request documents from the Partnership, please do so by
January 8, 1999 in order to ensure receipt before action by Consent.
San Diego, California
December 16, 1998
CONAM PROPERTY SERVICES II, LTD.,
General Partner
By: Continental American Development,
Inc., a General Partner
By: /s/ Daniel J. Epstein
-----------------------------
Daniel J. Epstein
President and Chief Executive
Officer
32
<PAGE>
APPENDIX A
THE PROPOSED AMENDMENT
Set forth below is the provision of the Partnership Agreement that would be
modified by the proposed Amendment. The following is qualified in its entirety
by reference to the form of Amendment, a copy of which can be obtained without
charge from the Solicitation Agent.
IF THE PROPOSED AMENDMENT IS ADOPTED, THE FOLLOWING SECTION WILL BE MODIFIED
AS FOLLOWS (underlines indicate where text has been added):
12. RIGHTS, DUTIES AND LIABILITY OF GENERAL PARTNERS.
....
d. Limitations on General Partners' Authority. The General Partners shall
have no authority to do any act prohibited by law, nor shall the General
Partners have any authority to:
....
(xi) Except as provided in Subsection 12f.(vi), permit the Partnership to
purchase or lease property in which a General Partner or any Affiliate has an
interest or sell any Property to a General Partner or any Affiliate, unless
--------
such transaction is specifically approved by Limited Partners owning a
- ----------------------------------------------------------------------
majority of the Units outstanding at that time.
- ----------------------------------------------
[The remainder of Section 12 is unaffected.]
A-1
<PAGE>
APPENDIX B
FORM OF CONSENT OF LIMITED PARTNER
CONAM REALTY INVESTORS 2, L.P.
CONSENT OF LIMITED PARTNER
THIS CONSENT IS SOLICITED BY AND ON BEHALF OF CONAM REALTY INVESTORS 2, L.P.
(THE "PARTNERSHIP") BY CONAM PROPERTY SERVICES II, LTD., A GENERAL PARTNER OF
THE PARTNERSHIP. The General Partner recommends a vote "FOR" the Proposals, as
defined in the accompanying Consent Solicitation Statement. A vote "FOR" the
Proposals also will constitute your consent to all actions necessary to
consummate all transactions with respect to the Proposals contemplated by the
Consent Solicitation Statement. All capitalized terms used herein without
definition have the meanings assigned to them in the Consent Solicitation
Statement.
THIS CONSENT WILL BE RECORDED IN ACCORDANCE WITH THE INSTRUCTIONS BELOW. IF
NO INSTRUCTIONS ARE INDICATED, YOU WILL BE DEEMED BY YOUR SIGNATURE BELOW TO
HAVE CONSENTED TO THE PROPOSALS AS RECOMMENDED BY THE GENERAL PARTNER.
PLEASE MARK THE APPROPRIATE BOX WITH RESPECT TO EACH PROPOSAL:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
With the General Partner's recommendation to
approve the Sale of the Property (as set
forth in "ACTION BY CONSENT--Matters to be
Considered"), the undersigned votes all of
the undersigned's Units: [_] [_] [_]
With the General Partner's recommendation to
amend the Partnership Agreement to permit
sales of Partnership property to affiliates
of the General Partner, including the Sale
(as set forth in Appendix A to the Consent
Solicitation Statement), the undersigned
votes all of the undersigned's Units: [_] [_] [_]
</TABLE>
IF THE SALE IS APPROVED BUT THE AMENDMENT OF THE PARTNERSHIP AGREEMENT IS
NOT, THE GENERAL PARTNER WILL HAVE NO AUTHORITY TO CONSUMMATE THE SALE, AND
THE SALE WILL NOT OCCUR. If the Amendment of the Partnership Agreement is
approved but the Sale is not, the General Partner anticipates amending the
Partnership Agreement in accordance with Appendix A to the Consent
Solicitation Statement.
The undersigned acknowledges receipt from the General Partner of the Consent
Solicitation Statement dated December 16, 1998 pertaining to the Proposals.
Dated: ________, 199_ -------------------------------
Signature
-------------------------------
Print Name
-------------------------------
Signature (if held jointly)
-------------------------------
Print Name
-------------------------------
Title
B-1
<PAGE>
Please sign exactly as name appears hereon. When Units are held by joint
tenants, both should sign. When signing as an attorney, executor,
administrator, trustee or guardian, please give full title. If a corporation,
please sign in full corporate name by President or other authorized officer.
If a partnership, please sign in partnership name by authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THIS CONSENT, PRIOR TO 5:00 P.M. PACIFIC
STANDARD TIME ON JANUARY 15, 1999 (UNLESS SUCH TIME IS EXTENDED PURSUANT TO
THE CONSENT SOLICITATION STATEMENT), BY FACSIMILE TO (212) 809-8839 OR BY
MAIL, USING THE ENCLOSED PRE-PAID ENVELOPE, TO D.F. KING & CO., INC., WALL
STREET STATION, P.O. BOX 411, NEW YORK, NY 10269-0069. IF YOU NEED ASSISTANCE
IN FILLING OUT THIS CONSENT, PLEASE CALL THE SOLICITATION AGENT AT (800) 735-
3591.
B-2
<PAGE>
Annex 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number: 0-11085
CONAM REALTY INVESTORS 2 L.P.
formerly known as
HUTTON/CONAM REALTY INVESTORS 2
Exact name of Registrant as specified in its charter
California 13-3100545
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
1764 San Diego Avenue
San Diego, CA 92110 Attn.: Robert J. Svatos 92110-1906
Address of principal executive offices Zip Code
Registrant's telephone number, including area code (619) 297-6771
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
Title of Class
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 the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. (X)
Documents Incorporated by Reference:
Portions of Parts I, II, III and IV are incorporated herein by reference to
the Partnership's Annual Report to Unitholders for the year ended
December 31, 1997.
<PAGE>
PART I
Item 1. Business
General Description of Business and Objectives
ConAm Realty Investors 2 L.P., formerly known as Hutton/ConAm Realty Investors
2 (the "Partnership"), is a California limited partnership formed on October 8,
1992. ConAm Property Services II, Ltd. ("CPS II"), a California limited
partnership, and RI 2 Real Estate Services Inc. ("RI 2"), a Delaware
corporation, were the original co-general partners of the Partnership. On
January 27, 1998, CPS II acquired RI 2's co-general partner interest in the
Partnership, effective July 1, 1997, pursuant to a Purchase Agreement between
CPS II and RI 2 dated August 29, 1997. As a result, CPS II now serves as the
sole general partner (the "General Partner") of the Partnership. In
conjunction with this transaction, the name of the Partnership was changed from
Hutton/ConAm Realty Investors 2 to ConAm Realty Investors 2 L.P.
The Partnership was organized to engage in the business of acquiring, operating
and holding for investment multifamily residential properties. The Partnership
originally invested in four joint ventures and one limited partnership, each of
which was formed to own a specified residential apartment property. As
described below one property has been sold. Funds held as a working capital
reserve are invested in bank certificates of deposit, unaffiliated money market
funds or other highly liquid short-term investments where there is appropriate
safety of principal in accordance with the Partnership's investment objectives
and policies.
The Partnership's principal investment objectives with respect to its interests
in real property are:
(1) capital appreciation;
(2) distributions of Net Cash From Operations attributable to rental
income; and
(3) preservation and protection of capital.
<PAGE>
Distribution of net cash from operations is the Partnership's objective during
its operational phase, while preservation and appreciation of capital are the
Partnership's long-term objectives. The attainment of the Partnership's
investment objectives will depend on many factors, including future economic
conditions in the United States as a whole and, in particular, in the
localities in which the Partnership's properties are located, especially with
regard to achievement of capital appreciation.
From time to time the Partnership expects to sell its real property interests
taking into consideration such factors as the amount of appreciation in value,
if any, to be realized and the possible risks of continued ownership. Proceeds
from any future sale, financing or refinancing of properties will not be
reinvested and may be distributed to the Limited Partners and General Partner
(sometimes referred to together herein as the "Partners"), so that the
Partnership will, in effect, be self-liquidating. If deemed necessary, the
Partnership may retain a portion of the proceeds from any sale, financing or
refinancing as capital reserves. As partial payment for properties sold, the
Partnership may receive purchase money obligations secured by mortgages or
deeds of trust. In such cases, the amount of such obligations will not be
included in Net Proceeds From Sale or Refinancing (distributable to the
Partners) until and only to the extent the obligations are realized in cash,
sold or otherwise liquidated.
Originally, the Partnership utilized the net proceeds of its public offering to
acquire five residential apartment complexes (collectively, the "Properties")
through investments in four joint ventures and one limited partnership, as
follows: (1) Creekside Oaks, a 120-unit apartment complex located in
Jacksonville, Florida; (2) Ponte Vedra Beach Village I, a 122-unit apartment
complex located in Ponte Vedra Beach, Florida; (3) Rancho Antigua, a 220-unit
apartment complex located in the McCormick Ranch area of Scottsdale, Arizona;
(4) Village at the Foothills I, a 60-unit apartment complex located in Tucson,
Arizona, and; (5) Country Place Village I, an 88-unit apartment complex located
in Clearwater, Florida. On July 20, 1995, Country Place Village I, was sold to
an unaffiliated institutional buyer for $3,665,000.
The Partnership considers itself to be engaged in only one industry segment,
real estate investment.
Competition
The Partnership's real property investments are subject to competition from
similar types of properties in the vicinities in which they are located and
such competition has increased since the Partnership's investment in the
Properties due principally to the addition of newly constructed apartment
complexes offering increased residential and recreational amenities. The
Properties have also been subject to competition from condominiums and
single-family properties especially during periods of low mortgage interest
rates. The Partnership competes with other real estate owners and developers
in the rental and leasing of its Properties by offering competitive rental
rates and, if necessary, leasing incentives. Such competition may affect the
occupancy levels and revenues of the Properties. The occupancy levels at all
four Properties reflect some seasonality, which is typical in the markets in
which they are located. In some cases, Partnership properties may compete with
properties owned by other partnerships affiliated with the General Partner.
For a discussion of current market conditions in the areas where the
Partnership's Properties are located, reference is made to the Partnership's
Annual Report to Unitholders for the year ended December 31, 1997, which is
filed as an exhibit under Item 14.
Employees
The Partnership has no employees. Services are provided by CPS II, ConAm
Management Corporation ("ConAm Management"), an affiliate of CPS II, as well as
Service Data Corporation and First Data Investor Services Group, both
unaffiliated companies. The Partnership has entered into property management
agreements pursuant to which ConAm Management provides management services with
respect to the Properties. First Data Investor Services Group had been
retained by the Partnership to provide all accounting and investor
communication functions, while Service Data Corporation provides transfer agent
services. Effective January 1, 1998, the accounting functions of the
Partnership were transferred to the firm of Brock, Tibbetts, & Snell, an
unaffiliated company located in San Diego, California. See Item 13, "Certain
Relationships and Related Transactions", for a further description of the
service and management agreements between the Partnership and affiliated
entities.
<PAGE>
Item 2. Properties
For a description of the Partnership's Properties, a discussion of current
market conditions in the areas where the Properties are located and appraised
values, reference is made to the Partnership's Annual Report to Unitholders for
the fiscal year ended December 31, 1997, which is filed as an exhibit under
Item 14. For information on the purchase of the Properties, reference is made
to Note 4 of the Consolidated Financial Statements, included herein by
reference to the Partnership's Annual Report to Unitholders. Average occupancy
rates at each property are incorporated by reference to Item 7.
Item 3. Legal Proceedings
The Partnership is not subject to any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year ended December 31, 1997, no matter
was submitted to a vote of Unitholders through the solicitation of proxies or
otherwise.
PART II
Item 5. Market for the Registrant's Limited Partnership Units and Related
Security Holder Matters
As of December 31, 1997, the number of Unitholders of record was 3,967.
No established public trading market exists for the Units, and it is not
anticipated that such a market will develop in the future.
Distributions of Net Cash From Operations, when made, are paid on a quarterly
basis, with distributions generally occurring approximately 45 days after the
end of each fiscal quarter. Such distributions have been made primarily from
net operating income with respect to the Partnership's investment in the
Properties and from interest on short-term investments, and partially from
excess cash reserves. Information on cash distributions paid by the
Partnership for the past two fiscal years is incorporated by reference to the
Partnership's Annual Report to Unitholders for the fiscal year ended
December 31, 1997, which is filed as an exhibit under Item 14. The level of
future distributions will be evaluated on a quarterly basis and will depend
on the Partnership's operating results and future cash needs.
Item 6. Selected Financial Data
Incorporated by reference to the Partnership's Annual Report to Unitholders for
the year ended December 31, 1997, which is filed as an exhibit under Item 14.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
<PAGE>
Liquidity and Capital Resources
At December 31, 1997, the Partnership had cash and cash equivalents of
$1,109,506, that were invested in unaffiliated money market funds, an increase
from $962,290 at December 31, 1996. The increase is attributable to net cash
provided by operating activities exceeding cash used for distributions,
mortgage principal payments, and additions to investments in real estate. The
Partnership also maintains a restricted cash balance, which totaled $342,282 at
December 31, 1997, an increase from $317,268 at December 31, 1996, representing
escrows for insurance and real estate taxes required under the terms of the
current mortgage loans. The Partnership expects sufficient cash to be
generated from operations to meet its current operating expenses.
Accounts payable and accrued expenses totaled $197,443 at December 31, 1997, an
increase from $127,810 at December 31, 1996. The increase is primarily due to
differences in the timing of payments between the two periods.
Distribution payable decreased from $200,000 at December 31, 1996 to $0 at
December 31, 1997. The decrease reflects the suspension of quarterly
distributions commencing in the first quarter of 1997 in order to fund roof
replacements at Ponte Vedra Beach Village I. In future quarters, the General
Partner will assess the Partnership's ability to reinstate cash distributions
based on the Partnership's operating results and future cash needs.
The Partnership continues to perform various improvements at the Properties,
which include roof replacements at Ponte Vedra Beach Village I. Other repair
work was also performed to prepare vacant units for reoccupancy. Existing
problems with the roofs at Ponte Vedra Beach Village I were aggravated by
severe tropical rain storms late in 1996. The roof replacements were
substantially completed in September 1997 at a cost of approximately $400,000
which was funded from the Partnership's operating cash flow and cash reserves.
The Partnership will evaluate the need for additional improvement work at the
Properties on an ongoing basis.
The General Partner is continuing to evaluate the sale potential of the
remaining properties and other options with respect to the Partnership's
investments. One of these options includes refinancing certain loans secured
by the Properties in order to return capital to the limited partners on a
tax-free basis and lock in favorable fixed interest rates. This would also
potentially enhance the marketability of the Properties, while enabling the
Partnership to take advantage of possible future property appreciation. The
Partnership's ability to sell the properties is dependent upon a variety of
factors, many of which are not within the Partnership's control. There can be
no assurance that any specific property or all the Properties can be sold, that
particular prices will be achieved, or that the Properties can be sold within a
specific time frame.
Results of Operations
1997 versus 1996
Partnership operations for the year ended December 31, 1997 resulted in a net
loss of $202,655 compared with a net loss of $2,600 in 1996. The higher net
loss in 1997 is due primarily to an increase in property operating expenses and
the write-off of the remaining basis of the roofs replaced in 1997. Net cash
provided by operating activities decreased to $979,104 for the year ended
December 31, 1997, from $1,333,646 in 1996. The decrease is primarily due to
the higher net loss in 1997, as discussed above, and a reduction in the amount
of restricted cash released.
Rental income for the year ended December 31, 1997 was $4,327,499, up slightly
from $4,264,370 in 1996, primarily as a result of increases in rental rates at
Rancho Antigua and Creekside Oaks. Interest and other income totaled $56,229
for the year ended December 31, 1997, largely unchanged from $63,467 in 1996.
<PAGE>
Property operating expenses increased to $2,329,300 for the year ended December
31, 1997, from $2,222,474 for 1996. The increase is primarily attributable to
higher repairs and maintenance expenses at Ponte Vedra Beach Village I and
Rancho Antigua, and higher landscaping costs at Rancho Antigua. The increase
is also due to higher rental administration costs at both properties.
General and administrative expenses increased from $181,896 for the year ended
December 31, 1996 to $213,441 in 1997. The increase is primarily due to an
increase in expenses for Partnership accounting, tax and other administrative
services. During the 1997 period, certain expenses incurred by RI 2, its
affiliates, and an unaffiliated third party service provider in servicing the
Partnership, which were voluntarily absorbed by affiliates of RI 2 in prior
periods, were reimbursable to RI 2 and its affiliates.
1996 versus 1995
Partnership operations for the year ended December 31, 1996 resulted in a net
loss of $2,600, compared with a net loss of $112,522 in 1995. As a result of
the sale of Country Place Village I in July 1995, the Partnership realized a
gain of $232,402. Excluding this gain, the Partnership incurred a loss from
operations of $344,924 for the year ended December 31, 1995. The decline in net
loss is primarily the result of a decline in property operating expenses and
other expense categories due to the sale of Country Place Village I in July
1995.
Rental income totaled $4,264,370 for the year ended December 31, 1996 compared
with $4,448,549 in 1995. The decrease is primarily due to the sale of Country
Place Village I in July 1995. This was partially offset by increases in rental
income at Creekside Oaks, Rancho Antigua and Ponte Vedra Beach Village I,
primarily reflecting rental rate increases instituted during the year.
Property operating expenses totaled $2,222,474 for the year ended December 31,
1996, compared with $2,515,717 in 1995. The decrease is primarily due to the
sale of Country Place Village I, and lower repairs and maintenance expenses at
Creekside Oaks. This was partially offset by an increase in repairs and
maintenance expenses at Ponte Vedra Beach Village I. Interest expense and
depreciation and amortization expense both decreased from 1995, primarily due
to the sale of Country Place Village I. General and administrative expense
totaled $181,896 for the year ended December 31, 1996 compared with $222,881
for the year ended December 31, 1995. The decrease primarily reflects a
reduction in legal expenses and lower Partnership administrative expenses in
the 1996 period.
The average occupancy levels at each of the properties owned for the full year
during the years ended December 31, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
-----------------------------------------------------------
<S> <C> <C> <C>
Property 1997 1996 1995
Creekside Oaks 95% 94% 93%
Ponte Vedra Beach Village I 93% 95% 96%
Rancho Antigua 94% 94% 92%
Village at the Foothills I 92% 94% 95%
-----------------------------------------------------------
</TABLE>
<PAGE>
New Accounting Pronouncements
The Financial Accounting Standards Board also issued SFAS No. 129, "Disclosure
of Information about Capital Structure," SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information." These statements, which are effective for fiscal years
beginning after December 15, 1997, expand or modify disclosures and,
accordingly, will have no impact on the Partnership's reported financial
position, results of operations or cash flows.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to the Partnership's Annual Report to Unitholders for
the fiscal year ended December 31, 1997, which is filed as an exhibit under
Item 14. Supplementary Data is incorporated by reference to F-1 of this
report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Effective December 1, 1997, the Partnership advised Coopers & Lybrand L.L.P.
that it was changing accounting firms and engaged KPMG Peat Marwick LLP.
Coopers & Lybrand L.L.P.'s report on the financial statements for the years
ended December 31, 1996 and December 31, 1995 contained no adverse opinion or
disclaimer of opinion and was not qualified as to uncertainty, audit scope or
accounting principles. There have been no disagreements with Coopers & Lybrand
L.L.P. on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope procedure.
The decision to change accountants was approved by CPS II and RI 2, the
General Partners of the Partnership at that time.
PART III
Item 10. Directors and Executive Officers of the Partnership
The Partnership has no officers or directors. CPS II, the General Partner of
the Partnership, manages and controls the affairs of the Partnership and has
general responsibility and authority in all matters affecting its business.
ConAm Property Services II, Ltd. ("CPS II") is a California limited partnership
organized on August 30, 1982. The general partners of CPS II are Continental
American Development, Inc. ("ConAm Development") and ConAm Development Corp.
("ConAm Corp."). The names and positions held by the directors and executive
officers of both ConAm Development and ConAm Corp. are set forth below. There
are no family relationships between any officers or directors.
Name Office
Daniel J. Epstein President and Director
E. Scott Dupree Vice President and Director
Robert J. Svatos Vice President and Director
Ralph W. Tilley Vice President
J. Bradley Forrester Vice President
Daniel J. Epstein, 58, has been the President and a Director of ConAm
Development and ConAm Corp. and a general partner of Continental American
Properties, Ltd. ("ConAm"), an affiliate of CPS II, since their inception. He
is also Chairman and Chief Executive Officer of ConAm Management. Prior to
organizing ConAm, Mr. Epstein was Vice President and a Director of American
Housing Guild, which he joined in 1969. At American Housing Guild, he was
responsible for the formation of the Multi-Family Division and directed its
development and property management activities. Mr. Epstein holds a Bachelor
of Science degree in Engineering from the University of Southern California.
<PAGE>
E. Scott Dupree, 47, is a Senior Vice President and general counsel of ConAm
Management responsible for negotiation, documentation, review and closing of
acquisition, sale and financing proposals. Mr. Dupree also acts as principal
legal advisor on general legal matters ranging from issues and contracts
involving the management company to supervision of litigation and employment
issues. Prior to joining ConAm Management in 1985, he was corporate counsel to
Trusthouse Forte, Inc., a major international hotel and restaurant corporation.
Mr. Dupree holds a B.A. from United States International University and a Juris
Doctorate degree from the University of San Diego.
Robert J. Svatos, 39, is a Senior Vice President and is the Chief Financial
Officer of ConAm Management. His responsibilities include the accounting,
treasury and data processing functions of the organization. Prior to joining
ConAm Management in 1988, he was the Chief Financial Officer for AmeriStar
Financial Corporation, a nationwide mortgage banking firm. Mr. Svatos holds an
M.B.A. in Finance from the University of San Diego and a Bachelor's of Science
degree in Accounting from the University of Illinois. He is a Certified Public
Accountant.
Ralph W. Tilley, 43, is a Senior Vice President and Treasurer of ConAm
Management. He is responsible for the financial aspects of syndications and
acquisitions, the company's asset management portfolio and risk management
activities. Prior to joining ConAm Management in 1980, he was a senior
accountant with KPMG Peat Marwick LLP, specializing in real estate. He holds a
Bachelor's of Science degree in Accounting from San Diego State University and
is a Certified Public Accountant.
J. Bradley Forrester, 40, is the President of ConAm Management. He is
currently responsible for overseeing all aspects of the operations of the firm.
His primary focus is on new business related activities including property
acquisitions, property development and rehabilitation, and the acquisition of
other property management companies. Prior to joining ConAm in 1994, Mr.
Forrester served as Senior Vice President - Commercial Real Estate for First
Nationwide Bank in San Francisco, where he was responsible for a $2 billion
problem asset portfolio including bank-owned real estate and non-performing
commercial real estate loans for three years. His past experience includes
significant involvement in real estate development and finance, property
acquisitions and dispositions and owner's representation matters. Prior to
entering the real estate profession, he worked for KPMG Peat Marwick LLP in
Dallas, Texas. Mr. Forrester holds a Bachelor of Science degree in Accounting
from Louisiana State University. He received his CPA certification in the
State of Texas.
Item 11. Executive Compensation
Neither the General Partner nor any of its directors or executive officers
received any compensation from the Partnership. See Item 13 of this report for
a description of certain costs of the General Partner and its affiliates
reimbursed by the Partnership.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of March 1, 1998, no person was known by the Partnership to be the
beneficial owner of more than five percent of the Units of the Partnership.
Neither the General Partner nor any of its executive officers or directors own
any Units.
Item 13. Certain Relationships and Related Transactions
Pursuant to the Certificate and Agreement of Limited Partnership of the
Partnership, for the year ended December 31, 1997, $2,027 of the Partnership's
net loss was allocated to CPS II and RI 2. For a description of the share of
Net Cash From Operations and the allocation of income and loss to which the
General Partner and former co-General Partner are entitled, reference is made
to Note 3 to the Consolidated Financial Statements, included in the
Partnership's Annual Report to Unitholders for the year ended December 31,
1997, which is filed as an exhibit under item 14. Effective July 1, 1997, all
General Partner allocations will be made solely to CPS II.
<PAGE>
The Partnership has entered into property management agreements with ConAm
Management pursuant to which ConAm Management has assumed direct responsibility
for day-to-day management of the Properties. It is the responsibility of ConAm
Management to select resident managers and to monitor their performance. ConAm
Management's services also include the supervision of leasing, rent collection,
maintenance, budgeting, employment of personnel, payment of operating expenses,
strategic asset management and related services. For such services, ConAm
Management is entitled to receive a management fee equal to five percent of
gross revenues. A summary of property management fees earned by ConAm
Management during the past three fiscal years is incorporated by reference to
Note 7 to the Consolidated Financial Statements, included in the Partnership's
Annual Report to Unitholders for the fiscal year ended December 31, 1997, which
is filed as an exhibit under Item 14.
Pursuant to Section 12(g) of the Partnership's Certificate and Agreement of
Limited Partnership, the General Partner may be reimbursed by the Partnership
for certain of its costs. A summary of amounts paid to the General Partners or
their affiliates during the past three years is incorporated by reference to
Note 7, "Transactions with Related Parties," of Notes to the Consolidated
Financial Statements, included in the Partnership's Annual Report to
Unitholders for the fiscal year ended December 31, 1997, which is filed as an
exhibit under Item 14.
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a)(1) Financial Statements: Page
Consolidated Balance Sheets - December 31, 1997 and 1996 (1)
Consolidated Statements of Operations - For the years ended
December 31, 1997, 1996 and 1995 (1)
Consolidated Statements of Partners' Capital (Deficit) -
For the years ended December 31, 1997, 1996 and 1995 (1)
Consolidated Statements of Cash Flows - For the years ended
December 31, 1997, 1996 and 1995 (1)
Notes to the Consolidated Financial Statements (1)
Independent Auditors' Report (1)
Report of former Independent Accountants (1)
(a)(2) Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation (F-1)
Independent Auditors' Report (F-2)
Report of Former Independent Accountants (F-3)
(1) Incorporated by reference to the Partnership's Annual Report to
Unitholders for the year ended December 31, 1997 filed as an exhibit
under Item 14.
(a)(3) Exhibits:
(3) Amended and Restated Certificate and Agreement of Limited Partnership
(included as, and incorporated herein by reference to, Exhibit A to
the Prospectus of Registrant dated July 9, 1982 (the "Prospectus"),
contained in Amendment No. 1 to Registration Statement, No. 2-75519,
of Registrant filed July 9, 1982).
(4) Subscription Agreement and Signature Page (included as, and
incorporated herein by reference to, Exhibit B to the Prospectus).
<PAGE>
(10)(A) Settlement Agreement by and among the Managing Joint Venturers and
the Epoch Joint Venturers dated July 1, 1992 (included as, and
incorporated herein by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q (Commission File No. 0-11085)).
(B) Amended and Restated Agreement of General Partnership of Country
Place Village I Joint Venture dated as of July 1, 1992 (included as,
and incorporated herein by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-
11085)).
(C) Amended and Restated Agreement of General Partnership of Creekside
Oaks Joint Venture dated as of July 1, 1992 (included as, and
incorporated herein by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q (Commission File No. 0-11085)).
(D) Amended and Restated Agreement of General Partnership of Ponte Vedra
Beach Village I dated July 1, 1992 (included as, and incorporated
herein by reference to Exhibit 10.4 of the Registrant's Quarterly
Report on Form 10-Q (Commission File No. 0-11085)).
(E) Joint Venture Agreement of Rancho Antigua (included as, and
incorporated herein by reference to Exhibit 10(M) to the Registrant's
1991 Annual Report on Form 10-K for the year ended December 31, 1991
(Commission File No. 0-11085)).
(F) Amended and Restated Agreement of General Partnership of Village at
the Foothills I Joint Venture Limited Partnership dated July 1, 1992
(included as, and incorporated herein by reference to Exhibit 10.5
to the Registrant's Quarterly Report on Form 10-Q (Commission File
No. 0-11085)).
(G) Property Management Agreement between Creekside Oaks Joint Venture
and ConAm Management Corporation for the Creekside Oaks property
(included as, and incorporated herein by reference to Exhibit 10-G
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993 (Commission File No. 0-11085)).
(H) Property Management Agreement between Ponte Vedra Beach Joint
Venture and ConAm Management Corporation for the Ponte Vedra Beach
Village I property (included as, and incorporated herein by
reference to Exhibit 10-H to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1993 (Commission File No. 0-
11085)).
(I) Property Management Agreement between Rancho Antigua Joint Venture
and ConAm Management Corporation for the Rancho Antigua property
(included as, and incorporated herein by reference to Exhibit 10-I
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993 (Commission File No. 0-11085)).
(J) Property Management Agreement between Country Place Village I Joint
Venture and ConAm Management Corporation for the Country Place
Village I property (included as, and incorporated herein by
reference to Exhibit 10-J to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1993 (Commission File No.
0-11085)).
(K) Property Management Agreement between Village at the Foothills I
Joint Venture and ConAm Management for the Village at the Foothills
I property (included as, and incorporated herein by reference to
Exhibit 10-K to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993 (Commission File No. 0-11085)).
(L) Loan Documents: Mortgage and Security Agreement, Promissory Note
and Assignment of Rents and Leases with respect to the refinancing
of Country Place Village I, between Registrant and The Penn Mutual
Insurance Company (included as, and incorporated herein by reference
to Exhibit 10-L to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1993 (Commission File No. 0-11085)).
<PAGE>
(M) Loan Documents: Mortgage and Security Agreement, Promissory Note
and Assignment of Rents and Leases with respect to the refinancing
of Creekside Oaks, between Registrant and The Penn Mutual Insurance
Company (included as, and incorporated herein by reference to
Exhibit 10-M to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993 (Commission File No. 0-11085)).
(N) Loan Documents: Mortgage and Security Agreement, Promissory Note
and Assignment of Rents and Leases with respect to the refinancing
of Ponte Vedra Beach Village I, between Registrant and The Penn
Mutual Insurance Company (included as, and incorporated herein by
reference to Exhibit 10-N to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1993 (Commission File No.
0-11085)).
(O) Loan Documents: Deed of Trust and Assignment of Rents with Security
Agreement and Financing Statement with respect to the refinancing of
Rancho Antigua, between Registrant and The Penn Mutual Insurance
Company (included as, and incorporated herein by reference to
Exhibit 10-O to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993 (Commission File No. 0-11085)).
(13) Annual Report to Unitholders for the year ended December 31, 1997.
(21) List of Subsidiaries - Joint Ventures (included as, and incorporated
herein by reference to Exhibit 22 to the Registrant's Annual Report
for the year ended December 31, 1995, on Form 10-K (Commission File
No. 0-11085)).
(27) Financial Data Schedule
(99) Portions of Prospectus of Registrant dated July 9, 1983 (included as,
and incorporated herein by reference to Exhibit 28 of the Registrant's
1988 Annual Report filed on Form 10-K for the fiscal year ended
December 31, 1988 (Commission File No. 0-11085)).
(b) Reports on Form 8-K:
On December 15, 1997, and as amended on December 17, 1997, the
Partnership filed a Form 8-K reporting the change in Partnership's
Certifying Accountants.
On February 3, 1998, the Partnership filed a Form 8-K disclosing the
sale of RI 2's co-General Partner interest in the Partnership to CPS
II.
<PAGE>
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.
Dated: March 25, 1998
BY: ConAm Property Services II, Ltd.
General Partner
BY: Continental American Development, Inc.
General Partner
BY: /s/ Daniel J. Epstein
Name: Daniel J. Epstein
Title: President, Director and
Principal Executive Officer
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 in the capacities and on the dates indicated.
CONAM PROPERTY SERVICES II, LTD.
A General Partner
By: Continental American Development, Inc.
General Partner
Date: March 25, 1998
BY: /s/ Daniel J. Epstein
Daniel J. Epstein
Director, President and
Principal Executive Officer
Date: March 25, 1998
BY: /s/ E. Scott Dupree
E. Scott Dupree
Vice President and Director
Date: March 25, 1998
BY: /s/ Robert J. Svatos
Robert J. Svatos
Vice President and Director
Date: March 25, 1998
BY: /s/ Ralph W. Tilley
Ralph W. Tilley
Vice President
Date: March 25, 1998
BY: /s/ J. Bradley Forrester
J. Bradley Forrester
Vice President
<PAGE>
Exhibit 13
ConAm Realty Investors 2 L.P.
1997 ANNUAL REPORT
ConAm Realty Investors 2 L.P.
ConAm Realty Investors 2 L.P. is a California limited
partnership formed in 1982 to acquire, operate and hold
for investment multifamily residential properties. At
December 31, 1997, the Partnership's portfolio consisted
of four apartment properties located in Arizona and Florida.
Provided below is a comparison of average occupancy levels
for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Average Occupancy
Property Location 1997 1996
--------------------------------------------------------------------------
<S> <C> <C> <C>
Creekside Oaks Jacksonville, Florida 95% 94%
Ponte Vedra Beach Village I Ponte Vedra Beach, Florida 93% 95%
Rancho Antigua Scottsdale, Arizona 94% 94%
Village at the Foothills I Tucson, Arizona 92% 94%
--------------------------------------------------------------------------
</TABLE>
Contents
1 Message to Investors
2 Performance Summary
3 Financial Highlights
4 Consolidated Financial Statements
7 Notes to the Consolidated
Financial Statements
12 Independent Auditors' Report and
Report of Former Independent Accountants
14 Net Asset Valuation
Administrative Inquiries Performance Inquiries/Form 10-Ks
Address Changes/Transfers First Data Investor Services Group
Service Data Corporation P.O. Box 1527
2424 South 130th Circle Boston, Massachusetts
02104-1527 02104-1527
Omaha, Nebraska 68144-2596 Attn: Financial Communications
800-223-3464 800-223-3464
<PAGE>
Message to Investors
Presented for your review is the 1997 Annual Report for ConAm Realty Investors
2 L.P. (the "Partnership"). In this report we discuss general market
conditions affecting the Partnership's four remaining properties (the
"Properties"). We have also included a performance summary which addresses
operations at each of the properties and financial highlights for the year.
Cash Distributions
- ------------------
As previously reported, the Partnership suspended quarterly cash distributions
beginning in the first quarter of 1997 in order to fund roof replacements at
Ponte Vedra Beach Village I. The replacements were completed in September 1997
at a cost of approximately $400,000. Since inception, the Partnership has paid
distributions totaling $337.19 per original $500 Unit, including $220.00 in
return of capital payments. In future quarters, the General Partner will
assess the Partnership's ability to reinstate cash distributions based on the
Partnership's operating results and future cash needs.
Operations Overview
- -------------------
In 1997, operations at the Partnership's properties continued to be impacted to
varying degrees by strong competition for tenants in the markets where the
properties are located. Although population and job growth remained strong in
Arizona and Florida, the addition of newly constructed complexes, especially in
the Jacksonville market, limited rental rate increases and caused overall
vacancy rates to rise. In Tucson, where Village at the Foothills I is located,
many high-end renters opted to purchase homes due to low interest rates. In
Scottsdale, where Rancho Antigua is located, the market again experienced slow
growth during the year as a result of increased construction. Despite these
trends, strong economic growth in all three areas helped strengthen
multi-family housing, and the Properties sustained a collective average
occupancy of 93.5% in 1997 compared with 94.3% in 1996. In addition, the
appraised values of the Properties increased by 4.1% in total when compared to
the prior year.
The General Partner is continuing to evaluate the sale potential of the
remaining properties and other options with respect to the Partnership's
investments. One of these options includes refinancing certain loans secured
by the Properties in order to return capital to the limited partners on a
tax-free basis and lock in favorable fixed interest rates. This would also
potentially enhance the future marketability of the Properties, while enabling
the Partnership to take advantage of possible future property appreciation. The
Partnership's ability to sell the Properties is dependent upon a variety of
factors, many of which are not within the Partnership's control. There can be
no assurance that any specific property or all the properties can be sold, that
particular prices will be achieved, or that the Properties can be sold within a
specific time frame. We will keep you apprised of our sales efforts in future
correspondence.
Summary
- -------
We will continue to monitor market conditions at the Properties, and evaluate
the potential refinancing of the Partnership's mortgage obligations. In the
interim, we intend to maximize the performance of the Properties and further
improve their appearance and condition. We will keep you apprised of
significant developments affecting your investment in future reports.
Very truly yours,
/s/ Daniel J. Epstein
Daniel J. Epstein
President
Continental American Development Inc.
and ConAm Development Corporation,
General Partners of ConAm Property
Services II, Ltd.
March 25, 1998
<PAGE>
Performance Summary
Creekside Oaks - Jacksonville, Florida
- --------------------------------------
Creekside Oaks is a 120-unit apartment community situated in the
Baymeadows-Deerwood neighborhood of southeast Jacksonville. The property
reported average occupancy of 95% in 1997, up slightly from 94% in 1996, and a
3% increase in rental income. In 1997, the Jacksonville market experienced a
significant increase in new construction and the issuance of new construction
permits, partially due to its 1996 ranking as one of the fastest growing labor
markets in the country. This new construction is expected to soften the market
by outpacing population and job growth and will continue to affect the region
for the next several months, as new units become available. While vacancy
rates remained low in 1997, the use of rental concessions in the marketplace
has recently increased to attract and retain tenants in anticipation of the new
competition.
Ponte Vedra Beach Village I - Ponte Vedra Beach, Florida
- --------------------------------------------------------
Ponte Vedra Beach Village I is a 122-unit luxury apartment complex located in
an oceanside residential area to the southeast of Jacksonville. The property
reported an average occupancy level of 93% in 1997, down slightly from 95% in
1996. Property improvements for the year included extensive roof replacements,
carpet replacement and other improvements to increase the appearance of the
property. Favorable market conditions in the Jacksonville area have led to an
increase in new multifamily construction, with new construction permits issued
for approximately 3,831 new apartment units throughout the year. Although
population and job growth in the Jacksonville area remains high, continuing
construction at this pace could lead to softness in the market in the future.
Rancho Antigua - Scottsdale, Arizona
- ------------------------------------
Rancho Antigua is a 220-unit apartment community located eight miles northeast
of Phoenix in southwest Scottsdale. The property reported average occupancy of
94% in 1997, unchanged from 94% in 1996, and an increase in rental income due
to an increase in rental rates. The Scottsdale apartment market experienced
continued strong competition during 1997, reflecting high levels of
construction and notable competition from condominiums and single family
houses, as affordable prices and low mortgage rates enticed renters to buy.
Although vacancy rates in Phoenix and the Scottsdale submarket remained low in
1997, occupancy levels are expected to decline due to the significant new
construction. The Scottsdale market is experiencing strong job and population
growth with over 70,000 new jobs created in the first six months of 1997 and
over 100,000 new residents added to the market during the year. This economic
growth should favorably impact the market, and ease competition until the pace
of new construction subsides.
Village at the Foothills I - Tucson, Arizona
- --------------------------------------------
Village at the Foothills I is a 60 unit apartment community located in the
northwest area of Tucson. The property maintained an average occupancy rate of
92% during 1997, compared to 94% in 1996. Apartment vacancy rates remain high
in this market, but significant population growth in Tucson over the last few
years is slowly reducing the number of available units. Low interest rates and
affordable home prices have also increased competition by luring many renters
to purchase homes. This competition has led to the reemergence of rental
incentives and other concessions in the marketplace to attract tenants. Strong
competition for tenants is likely to continue as the addition of new properties
puts further pressure on occupancies.
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Selected Financial Data
For the periods ended December 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dollars in thousands, except for
per unit data
Total Income $4,384 $4,328 $4,516 $4,718 $4,479
Gain on Sale of Property _ _ 232 _ _
Net Income (Loss) (203) (3) (113) 37 (528)
Net Cash Provided by (Used for)
Operating Activities 979 1,334 864 1,150 (180)
Long-term Obligations 11,555 11,770 11,969 14,219 14,418
Total Assets at Year End 18,370 18,920 19,931 24,772 25,237
Net Income (Loss) per
Limited Partnership Unit* (2.51) (.03) (4.27) .42 (6.53)
Distributions per
Limited Partnership Unit* _ 9.00 9.00 5.50 _
Special Distributions per
Limited Partnership Unit* _ _ 20.00 _ _
- ------------------------------------------------------------------------------
</TABLE>
* 80,000 Units outstanding
<TABLE>
<CAPTION>
Cash Distributions
Per Limited Partnership Unit
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
First Quarter _ 2.25
Second Quarter _ 2.25
Third Quarter _ 2.25
Fourth Quarter _ 2.25
------ ------
Total $ _ $ 9.00
- -------------------------------------------------------------------------------
</TABLE>
Quarterly cash distributions were suspended beginning in the first quarter of
1997 in order to fund roof replacements at Ponte Vedra Beach Village I.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets At December 31, At December 31,
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments in real estate:
Land $5,744,972 $5,744,972
Buildings and improvements 23,681,664 23,525,644
------------------------------
29,426,636 29,270,616
Less accumulated depreciation (12,689,727) (11,874,334)
------------------------------
16,736,909 17,396,282
Cash and cash equivalents 1,109,506 962,290
Restricted cash 342,282 317,268
Other assets, net of accumulated amortization
of $260,496 in 1997 and $197,977 in 1996 181,421 243,940
- -------------------------------------------------------------------------------
Total Assets $18,370,118 $18,919,780
- -------------------------------------------------------------------------------
Liabilities and Partners' Capital (Deficit)
Liabilities:
Mortgages payable 11,554,935 $11,769,703
Accounts payable and accrued expenses 197,443 127,810
Due to affiliates 18,504 17,931
Security deposits 103,908 106,353
Distribution payable _ 200,000
-------------------------------
Total Liabilities 11,874,790 12,221,797
-------------------------------
Partners' Capital (Deficit):
General Partners (567,156) (565,129)
Limited Partners (80,000 Units outstanding) 7,062,484 7,263,112
-------------------------------
Total Partners' Capital 6,495,328 6,697,983
- -------------------------------------------------------------------------------
Total Liabilities and Partners' Capital $18,370,118 $18,919,780
- -------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Operations
For the years ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Rental $4,327,499 $4,264,370 $4,448,549
Interest and other 56,229 63,467 67,819
----------------------------------
Total Income 4,383,728 4,327,837 4,516,368
- -------------------------------------------------------------------------------
Expenses
Property operating 2,329,300 2,222,474 2,515,717
Depreciation and amortization 1,017,912 1,005,471 1,099,215
Interest 904,630 920,596 1,023,479
General and administrative 213,441 181,896 222,881
Write-off of assets 121,100 _ _
----------------------------------
Total Expenses 4,586,383 4,330,437 4,861,292
- -------------------------------------------------------------------------------
Loss from operations (202,655) (2,600) (344,924)
Gain on sale of property _ _ 232,402
- -------------------------------------------------------------------------------
Net Loss $ (202,655) $ (2,600) $ (112,522)
- -------------------------------------------------------------------------------
Net Income (Loss) Allocated:
To the General Partners $ (2,027) $ (26) $ 228,953
To the Limited Partners (200,628) (2,574) (341,475)
- -------------------------------------------------------------------------------
$ (202,655) $ (2,600) $ (112,522)
- -------------------------------------------------------------------------------
Per limited partnership Unit
(80,000 Units outstanding)
Loss from operations $(2.51) $(.03) $(4.27)
- -------------------------------------------------------------------------------
Net Loss $(2.51) $(.03) $(4.27)
- -------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
Consolidated Statement of Partners' Capital (Deficit)
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1994 $(618,500) $10,647,161 $10,028,661
Net Loss 228,953 (341,475) (112,522)
Distributions ($29.00 per Unit) (95,556) (2,320,000) (2,415,556)
- -------------------------------------------------------------------------------
Balance at December 31, 1995 (485,103) 7,985,686 7,500,583
Net Loss (26) (2,574) (2,600)
Distributions ($9.00 per Unit) (80,000) (720,000) (800,000)
- -------------------------------------------------------------------------------
Balance at December 31, 1996 (565,129) 7,263,112 6,697,983
Net Loss (2,027) (200,628) (202,655)
Balance at December 31, 1997 $(567,156) $ 7,062,484 $ 6,495,328
- -------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
For the years ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (202,655) $ (2,600)$ (112,522)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 1,017,912 1,005,471 1,099,215
Write-off of assets 121,100 _ _
Gain on sale of property _ _ (232,402)
Increase (decrease) in cash arising from
changes in operating assets and liabilities:
Fundings to restricted cash (325,093) (327,279) (361,130)
Release of restricted cash 300,079 661,672 488,797
Other assets _ 5,900 _
Accounts payable and accrued expenses 69,633 (10,135) 10,996
Due to affiliates 573 482 (2,462)
Security deposits (2,445) 135 (26,992)
--------------------------------
Net cash provided by operating activities 979,104 1,333,646 863,500
- -------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Net proceeds from sale of property _ _ 1,522,242
Additions to real estate (417,120) (83,241) (199,476)
--------------------------------
Net cash provided by (used for)
investing activities (417,120) (83,241) 1,322,766
- -------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Distributions (200,000) (800,000)(2,460,001)
Mortgage principal payments (214,768) (198,801) (199,366)
Net cash used for financing activities (414,768) (998,801)(2,659,367)
- -------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 147,216 251,604 (473,101)
Cash and cash equivalents, beginning of year 962,290 710,686 1,183,787
- -------------------------------------------------------------------------------
Cash and cash equivalents, end of year $1,109,506 $ 962,290 $ 710,686
- -------------------------------------------------------------------------------
Supplemental Disclosure of Cash
Flow Information:
Cash paid during the period for interest $ 940,630 $ 920,596 $1,023,479
- -------------------------------------------------------------------------------
Supplemental Disclosure of Non-Cash Investing Activities:
Write-off of buildings & improvements $ (261,100) $ _ $ _
Write-off of accumulated depreciation 140,000 _ _
- -------------------------------------------------------------------------------
</TABLE>
Supplemental Disclosure of Non-Cash Financing Activities:
In connection with the sale of Country Place Village I in 1995, the $ 2,051,078
mortgage obligation on the property was assumed by the buyer, thereby releasing
the Partnership from its mortgage obligation.
See accompanying notes to the consolidated financial statements.
<PAGE>
Notes to the Consolidated Financial Statements
December 31, 1997, 1996 and 1995
1. Organization
ConAm Realty Investors 2 L.P. (formerly Hutton/ConAm Realty Investors 2) (the
"Partnership") was organized as a limited partnership under the laws of the
State of California pursuant to a Certificate and Agreement of Limited
Partnership (the "Partnership Agreement") dated December 17, 1981, as amended
and restated October 8, 1982. The Partnership was formed for the purpose of
acquiring and operating certain types of residential real estate. The original
co-General Partners of the Partnership were RI 2 Real Estate Services Inc.
("RI-2"), an affiliate of Lehman Brothers Inc., and ConAm Property Services II,
Ltd. ("CPS II"), an affiliate of Continental American Properties, Ltd. (the
"General Partners"). On January 27, 1998, CPS II acquired RI-2's co-general
partner interest in the Partnership effective July 1, 1997, pursuant to a
purchase agreement between CPS II and RI-2 dated August 29, 1997. As a result,
CPS II now serves as the sole general partner of the Partnership. The
Partnership will continue until December 31, 2010 unless sooner terminated
pursuant to the terms of the Partnership Agreement.
2. Significant Accounting Policies and Practices
Financial Statements The consolidated financial statements are prepared on the
accrual basis of accounting and include the accounts of the Partnership and its
affiliated ventures when the Partnership has a controlling interest in the
ventures. The effect of transactions between the Partnership and its ventures
have been eliminated in consolidation.
Investments in Real Estate Investments in real estate are recorded at cost
less accumulated depreciation and include the initial purchase price of the
property, legal fees, acquisition and closing costs.
Revenue is recognized when earned and expenses (including depreciation) are
recognized when incurred in accordance with generally accepted accounting
principles. Leases are generally for terms of one year or less.
Depreciation is computed using the straight-line method based upon the
estimated useful lives of the properties (25 years). Maintenance and repairs
are charged to operations as incurred. Costs incurred for significant
betterments and improvements are capitalized and depreciated over their
estimated useful lives.
For assets sold or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
reflected in net income (loss) for the period.
Impairment of Long-Lived Assets Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("FAS 121"), requires the Partnership to assess its
real estate investments for impairment whenever events or changes in
circumstances indicate that the carrying amount of the real estate may not be
recoverable. Recoverability of real estate to be held and used is measured by
a comparison of the carrying amount of the real estate to future net cash flows
(undiscounted and without interest) expected to be generated by the real
estate. If the real estate is considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the real
estate exceeds the fair value of the real estate.
Other Assets Included in other assets are costs incurred in connection with
obtaining financing for the Partnership's properties. Such costs are amortized
over the initial term of the mortgages payable on a method which approximates
the effective-interest method.
Income Taxes No provision for income taxes has been made in the financial
statements as the liability for such taxes is that of the partners rather than
the Partnership.
Cash and Cash Equivalents Cash and cash equivalents consist of highly liquid
short-term investments with original maturities of three months or less.
Concentration of Credit Risk Financial instruments which potentially subject
the Partnership to a concentration of credit risk principally consist of cash
and cash equivalents and restricted cash in excess of the financial
institution's federally insured limits. The Partnership invests its cash and
cash equivalents and restricted cash with high credit quality federally insured
financial institutions.
Restricted Cash Restricted cash consists of escrows for real estate taxes and
insurance as required by the first mortgage lender.
Use of Estimates Management of the Partnership has made a number of estimates
and assumptions relating to the reporting of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
<PAGE>
statements and the reported amounts of revenue and expenses during the
reporting period to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ from
those estimates.
3. The Partnership Agreement
The Partnership Agreement provides that net cash from operations, as defined,
is to be distributed quarterly, 90% to the limited partners and 10% to the
General Partners.
Net loss is to be allocated 99% to the limited partners and 1% to the General
Partners. Net income is to be generally allocated in accordance with the
distribution of net cash from operations.
Net proceeds from sales or refinancing are to be distributed 99% to the limited
partners and 1% to the General Partners until each limited partner has received
an amount equal to his adjusted capital value (as defined) and an annual,
non-compounded cumulative 7% return thereon. The balance, if any, is to be
distributed 85% to the limited partners and 15% to the General Partners. Gain
from sales is to be allocated to each partner having a negative capital account
balance, pro-rata, to the extent of such negative balance. Thereafter, such
gain is to be allocated in accordance with the distribution of net proceeds
from sale or refinancing, with the balance allocated to the limited partners.
4. Investments in Real Estate
The Partnership owns four residential apartment complexes that were acquired
either directly or through investments in joint ventures as follows:
<TABLE>
<CAPTION>
Apartment Date Purchase
Property Name Units Location Acquired Price
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Creekside Oaks 120 Jacksonville, FL 11/18/83 $6,254,953
Ponte Vedra Beach
Village I 122 Ponte Vedra Beach, FL 2/10/84 7,196,318
Rancho Antigua 220 Scottsdale, AZ 3/8/84 11,465,844
Village at the
Foothills I 60 Tucson, AZ 2/27/85 3,804,103
- ------------------------------------------------------------------------------
</TABLE>
On July 20, 1995, the Partnership sold Country Place Village I to an
institutional buyer (the "Buyer"), which was unaffiliated with the Partnership.
The selling price was determined by arm's length negotiations between the
Partnership and the Buyer. Country Place Village I was sold for $3,665,000,
which includes the assumption of the mortgage payable on Country Place Village
I by the Buyer in the amount of $2,051,078. The Partnership received net
proceeds of $1,522,242. On August 17, 1995, the Partnership paid a special
distribution of $1,600,000 to the partners. The special distribution was
comprised of net proceeds from the sale of Country Place Village I and
Partnership cash reserves. The transaction resulted in a gain on sale of
$232,402. The gain was allocated in accordance with the Partnership Agreement.
The joint venture agreement of Rancho Antigua substantially provides that:
a. Net cash from operations is to be distributed 100% to the
Partnership until it has received an annual, noncumulative
12% return on its adjusted capital contribution. Any
remaining balance is to be distributed 60% to the Partnership
and 40% to the co-venturer.
b. Net income of the joint venture and gain from sale is to be
allocated basically in accordance with the distribution of
net cash from operations, as defined, and net proceeds from
sales, respectively. All net losses are to be allocated 98%
to 100% to the Partnership depending on the joint venture
agreement.
c. Net proceeds from a sale or refinancing is to be distributed
100% to the Partnership until it has received an amount equal
to 120% of its adjusted capital contribution and an annual,
<PAGE>
cumulative 12% return on its adjusted capital contribution.
Thereafter, the Partnership is to receive approximately 50%
to 75% of the balance depending on the joint venture
agreement.
The joint venture agreements and limited partnership agreements of Country
Place Village I, Creekside Oaks, Ponte Vedra Beach Village I and Village at
the Foothills I substantially provide that:
a. Available cash from operations is to be distributed 100% to
the Partnership until it has received an annual, non-
cumulative preferred return, as defined. Any remaining
balance is to be distributed 99% to the Partnership and 1% to
the General Partners.
b. Net income is to be allocated first, proportionately to
partners with negative capital accounts, as defined, until
such capital accounts, as defined, have been increased to
zero then, to the Partnership up to the amount of any
payments made on account of its preferred return; thereafter,
99% to the Partnership and 1% to the General Partners. All
losses are to be allocated first, to the partners with
positive capital accounts, as defined, until such accounts
have been reduced to zero then 99% to the Partnership and 1%
to the General Partners.
c. Income from a sale is to be allocated first, to the
Partnership until the Partnership's capital accounts, as
defined, are equal to the fair market value of the ventures'
assets at the date of the amendments then, any remaining
balance will be allocated 99% to the Partnership and 1% to
the General Partners. Net proceeds from a sale or
refinancing are to be distributed first to the partners with
a positive capital account balance, as defined; thereafter,
99% to the Partnership and 1% to the General Partners.
5. Mortgages Payable
On October 28, 1993, the Partnership obtained replacement financing on its
Creekside Oaks, Ponte Vedra Beach I, Rancho Antigua and Country Place Village I
properties totaling $14,450,000. The loans are secured by the respective
properties and an assignment of rents and leases and bear interest at an annual
rate of 7.75%. Each of the loans is a non-recourse loan with monthly payments
of principal and interest of $93,283 based on a twenty-five year amortization
schedule and a seven year term with the balance of the principal due on
November 1, 2000. On July 20, 1995, County Place Village I was sold and the
underlying mortgage, in the amount of $2,051,078, was assumed by the Buyer.
Mortgages payable at December 31, 1997, consist of the following first mortgage
loans:
Property Principal
---------------------------------------------------
Creekside Oaks $ 2,479,399
Ponte Vedra Beach Village I 3,742,489
Rancho Antigua 5,333,047
---------------------------------------------------
Annual maturities of mortgage principal at December 31, 1997 are as follows:
Year Amount
---------------------------------
1998 $232,016
1999 250,650
2000 11,072,269
---------------------------------
Total $11,554,935
---------------------------------
<PAGE>
6. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires that the fair values be disclosed for
the Partnership's financial instruments. The carrying amount of cash and cash
equivalents, restricted cash, distribution payable, accounts payable and
accrued expenses, due to affiliates and security deposits are reasonable
estimates of their fair values due to the short-term nature of those
instruments.
The carrying amount of the mortgages payable is a reasonable estimate of fair
value based on management's belief that the interest rates and terms of the
debt are comparable to those commercially available to the Partnership in the
marketplace for similar instruments.
7. Transactions With Related Parties
The following is a summary of fees earned and reimbursable expenses to the
General Partners and their affiliate for the years ended December 31, 1997,
1996, and 1995, and the unpaid portion at December 31, 1997:
<TABLE>
<CAPTION>
Earned and
Unpaid at
December 31, Earned
1997 1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RI 2 Real Estate Services Inc.:
Out-of-pocket expenses $ _ $ 402 $ 807 $ 2,577
ConAm and affiliates:
Property operating salaries _ 321,517 323,312 336,760
Property management fees 18,504 216,432 213,281 223,677
Administrative expenses _ 18,425 _ _
- ----------------------------------------------------------------------------
Total $18,504 $556,776 $537,400 $563,014
- ----------------------------------------------------------------------------
</TABLE>
8. Reconciliation of Financial Statement and Tax Information
The following is a reconciliation of the net loss for financial statement
purposes to net income (loss) for federal income tax purposes for the years
ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss per financial statements $(202,655) $ (2,600) $ (112,522)
Tax basis joint venture net
loss in excess of GAAP basis
joint venture loss (unaudited) (201,705) (193,019) (233,232)
Gain on sale of property for tax
purposes in excess of gain per
financial statements (unaudited) _ _ 1,536,333
Loss on write-off of assets per
financial statements not
recognized for tax purposes (unaudited) 121,100 _ _
Other (unaudited) 11,000 1,397 (5,457)
- -------------------------------------------------------------------------------
Taxable net income (loss)(unaudited) $(272,260) $(194,222) $1,185,122
- -------------------------------------------------------------------------------
</TABLE>
The following is a reconciliation of partners' capital for financial statement
purposes to partners' capital for federal income tax purposes as of December
31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Partners' capital per financial statements $6,495,328 $6,697,983 $7,500,583
Adjustment for cumulative difference
between tax basis loss and loss
per financial statements (unaudited) (5,054,580) (4,984,975) (4,793,353)
Partners' capital per income
tax return (unaudited) $1,440,748 $1,713,008 $2,707,230
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
At December 31, 1997, the tax basis of the Partnership's assets was $13,281,545
and the tax basis of the Partnership's liabilities was $11,840,797.
9. Distributions Paid
Cash distributions, per the consolidated statements of partners' capital
(deficit) are recorded on the accrual basis, which recognizes specific record
dates for payments within each calendar year. The consolidated statements of
cash flows recognize actual cash distributions paid during the calendar year.
The following table discloses the annual amounts as presented on the
consolidated financial statements:
<TABLE>
<CAPTION>
Distributions Distributions
Payable Distributions Distributions Payable
Beginning of Year Declared Paid December 31,
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 $200,000 $ - $ 200,000 $ -
1996 200,000 800,000 800,000 200,000
1995 244,445 2,415,556 2,460,001 200,000
- ------------------------------------------------------------------------------
</TABLE>
<PAGE>
Independent Auditors' Report
The General Partner
ConAm Realty Investors 2 L.P.:
We have audited the accompanying consolidated balance sheet of ConAm Realty
Investors 2 L.P. (a California limited partnership) (formerly Hutton/ConAm
Realty Investors 2) and consolidated ventures (the "Partnership"), as of
December 31, 1997, and the related consolidated statements of operations,
partners' capital (deficit), and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 1997 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ConAm
Realty Investors 2 L.P. and consolidated ventures as of December 31, 1997, and
the results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
San Diego, California
March 3, 1998
<PAGE>
Report of Former Independent Accountants
To the Partners of
ConAm Realty Investors 2 L.P.:
We have audited the consolidated balance sheet of ConAm Realty Investors 2 L.P.
(formerly Hutton/ConAm Realty Investors 2), a California limited partnership,
and Consolidated Ventures as of December 31, 1996 and the related consolidated
statements of operations, partners' capital (deficit) and cash flows for each
of the two years in the period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ConAm
Realty Investors 2 L.P., a California limited partnership, and Consolidated
Ventures as of December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
February 14, 1997
<PAGE>
Net Asset Valuation
Comparison of Acquisition Costs to Appraised Value and
of Net Asset Value Per Unit at December 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Acquisition Cost
(Purchase Price
Plus General
Partners' December 31,
Date of Acquisition 1997 Appraised
Property Acquisition Fees) Value (1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Creekside Oaks 11-18-83 $ 6,238,445 $ 5,500,000
Ponte Vedra Beach Village I 02-10-84 7,123,950 8,000,000
Rancho Antigua 03-08-84 11,446,176 12,600,000
Village at the Foothills I 02-27-85 3,756,741 2,400,000
----------- -----------
$28,565,312 $28,500,000
Cash and cash equivalents 1,451,788
Other assets 4,283
-----------
$29,956,071
Less:
Total liabilities 11,874,790
-----------
Partnership Net Asset Value (2) $18,081,281
-----------
Net Asset Value Allocated:
Limited Partners $17,818,248
General Partner 263,033
-----------
$18,081,281
-----------
Net Asset Value Per Unit
(80,000 Units outstanding) $222.73
- -------------------------------------------------------------------------------
</TABLE>
(1) This represents the December 31, 1997 Appraised Values which were
determined by an independent property appraisal firm.
(2) The Partnership Net Asset Value assumes a hypothetical sale at
December 31, 1997 of all the Partnership's properties at a price based
upon their value as a rental property as determined by an independent
property appraisal firm, and the distribution of the proceeds of such
sale, combined with the Partnership's cash after liquidation of the
Partnership's assets and liabilities, to the partners.
Limited Partners should note that appraisals are only estimates of current
value and actual values realizable upon sale may be significantly different. A
significant factor in establishing an appraised value is the actual selling
price for properties which the appraiser believes are comparable. In addition,
the appraised value does not reflect the actual costs which would be incurred
in selling the properties. As a result of these factors and the illiquid
nature of an investment in Units of the Partnership, the variation between the
appraised value of the Partnership's properties and the price at which Units of
the Partnership could be sold may be significant. Fiduciaries of Limited
Partners which are subject to ERISA or other provisions of law requiring
valuations of Units should consider all relevant factors, including, but not
limited to Net Asset Value per Unit, in determining the fair market value of
the investment in the Partnership for such purposes.
<PAGE>
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1997
Residential Property:
<TABLE>
<CAPTION>
Ponte Vedra Village
Creekside Beach Rancho at the
Oaks Village 1 Antigua Foothills Total
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Location Jacksonville, Ponte Vedra Scottsdale, Tucson, na
FL Beach, FL AZ AZ
Construction date 1982 1983 1984 1984 na
Acquisition date 11-18-83 02-10-84 03-08-84 02-27-85 na
Life on which
depreciation in
latest income
statements is
computed (3) (3) (3) (3) na
Encumbrances $ 2,479,399 $ 3,742,489 $ 5,333,047 $ - $ 11,554,935
Initial cost to
Partnership:
Land 400,317 1,015,028 3,490,498 798,823 5,704,666
Buildings and
improvements 5,854,636 6,181,290 7,975,346 3,005,280 23,016,552
Costs capitalized
subsequent to
acquisition:
Land, buildings
and improvements 281,499 554,569 118,634 11,816 966,518
Write-off of buildings
and improvements - (261,100) - - (261,100)
Gross amount at which
carried at close
of period: (1)
Land $ 403,193 $ 1,045,472 $ 3,497,484 $ 798,823 $ 5,744,972
Buildings and
improvements 6,133,259 6,444,315 8,086,994 3,017,096 23,681,664
- ----------------------------------------------------------------------------------------------
$ 6,536,452 $ 7,489,787 $11,584,478 $ 3,815,919 $ 29,426,636
- ----------------------------------------------------------------------------------------------
Accumulated
depreciation (2) (3,366,254) (3,327,647) (4,449,485) (1,546,341) (12,689,727)
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) Represents aggregate cost for both financial reporting and Federal income
tax purposes.
(2) The amount of accumulated depreciation for Federal income tax purposes is
$21,910,933.
(3) Buildings and improvements - 25 years; personal property - 10 years
A reconciliation of the carrying amount of real estate and accumulated
depreciation for the years ended December 31, 1997, 1996, and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Investments in real estate:
Beginning of period $29,270,616 $29,187,375 $34,056,223
Additions 417,120 83,241 199,476
Dispositions and disposals (261,100) - (5,068,324)
- -------------------------------------------------------------------------------
End of period $29,426,636 $29,270,616 $29,187,375
- -------------------------------------------------------------------------------
Accumulated depreciation:
Beginning of period $11,874,334 $10,931,382 $11,699,378
Depreciation expense 955,393 942,952 1,029,336
Dispositions and disposals (140,000) - (1,797,332)
- -------------------------------------------------------------------------------
End of period $12,689,727 $11,874,334 $10,931,382
- -------------------------------------------------------------------------------
</TABLE>
See accompanying independent auditors' report.
<PAGE>
Independent Auditors' Report
The General Partner
ConAm Realty Investors 2 L.P.:
Under date of March 3, 1998, we reported on the consolidated balance sheet
of ConAm Realty Investors 2 L.P. (a California limited partnership) (formerly
Hutton/ConAm Realty Investors 2) and consolidated ventures (the
"Partnership") as of December 31, 1997, and the related consolidated
statements of operations, partners' capital (deficit), and cash flows for
the year then ended, as contained in the 1997 annual report to Unitholders.
These consolidated financial statements and our report thereon are
incorporated by reference in the 1997 annual report on Form 10-K. In
connection with our audit of the aforementioned consolidated financial
statements, we also have audited the related consolidated financial
statement schedule. This consolidated financial statement schedule is the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on this consolidated financial statement schedule based on
our audit.
In our opinion, the consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
San Diego, California
March 3, 1998
<PAGE>
Report of Former Independent Accountants
Our report on the consolidated financial statements of ConAm Realty Investors 2
L.P. (formerly Hutton/ConAm Realty Investors 2), a California Limited
Partnership, and Consolidated Ventures has been incorporated by reference in
this Form 10-K from the Annual Report to Unitholders of ConAm Realty Investors
2 for the year ended December 31, 1996. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in the index of this Form 10- K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
February 14, 1997
<PAGE>
Annex 2
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
------- Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
or
------- Transition Report Pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____ to ____
COMMISSION FILE NUMBER: 0-11085
CONAM REALTY INVESTORS 2 L.P.
-----------------------------
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER
California 13-3100545
---------- ----------
STATE OR OTHER JURISDICTION OF I.R.S. EMPLOYER IDENTIFICATION NO.
INCORPORATION OR ORGANIZATION
1764 San Diego Avenue
San Diego, CA 92110 92110-1906
- -------------------- -----------
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES ZIP CODE
(619) 297-6771
--------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
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
----- -----
<PAGE>
CONAM REALTY INVESTORS 2 L.P.
AND CONSOLIDATED VENTURES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, AT DECEMBER 31,
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in real estate:
Land $ 5,744,972 $ 5,744,972
Buildings and improvements 23,681,664 23,681,664
-------------------------------------------
29,426,636 29,426,636
Less accumulated depreciation (13,402,882) (12,689,727)
-------------------------------------------
16,023,754 16,736,909
Cash and cash equivalents 1,298,970 1,109,506
Restricted cash 521,854 342,282
Other assets, net of accumulated amortization
of $307,385 in 1998 and $260,496 in 1997 247,615 181,421
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 18,092,193 $ 18,370,118
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgages payable 11,382,614 11,554,935
Distribution payable 200,000 -
Accounts payable and accrued expenses 386,699 197,443
Due to general partner and affiliates 18,766 18,504
Security deposits 92,286 103,908
-------------------------------------------
Total Liabilities 12,080,365 11,874,790
-------------------------------------------
Partners' Capital (Deficit):
General Partner (615,506) (567,156)
Limited Partners (80,000 Units outstanding) 6,627,334 7,062,484
-------------------------------------------
Total Partners' Capital 6,011,828 6,495,328
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 18,092,193 $ 18,370,118
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONAM REALTY INVESTORS 2 L.P.
AND CONSOLIDATED VENTURES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME
Rental $ 1,092,226 $ 1,071,005 $ 3,333,733 $ 3,208,782
Interest and other 12,070 18,623 32,241 40,760
----------------------------------------------------------------------------------
Total Income 1,104,296 1,089,628 3,365,974 3,249,542
- ----------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Property operating 595,287 661,158 1,682,747 1,729,543
Depreciation and amortization 253,369 255,279 760,045 762,085
Interest 221,296 225,649 667,227 680,038
General and administrative 50,882 46,470 139,455 149,793
----------------------------------------------------------------------------------
Total Expenses 1,120,834 1,188,556 3,249,474 3,321,459
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (16,538) $ (98,928) $ 116,500 $ (71,917)
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) ALLOCATED:
To the General Partner $ (1,654) $ (9,893) $ 11,650 $ (7,192)
To the Limited Partners (14,884) (89,035) 104,850 (64,725)
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (16,538) $ (98,928) $ 116,500 $ (71,917)
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
PER LIMITED PARTNERSHIP UNIT
(80,000 UNITS OUTSTANDING)
NET INCOME (LOSS) $ (0.19) $ (1.11) $ 1.31 $ (0.81)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE (DEFICIT) AT DECEMBER 31, 1997 $ (567,156) $ 7,062,484 $ 6,495,328
Net income 11,650 104,850 116,500
Distributions ($6.75 per Unit) (60,000) (540,000) (600,000)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE (DEFICIT) AT SEPTEMBER 30, 1998 $ (615,506) $ 6,627,334 $ 6,011,828
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONAM REALTY INVESTORS 2 L.P.
AND CONSOLIDATED VENTURES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 116,500 $ (71,917)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 760,044 762,085
Increase (decrease) in cash arising from changes in
operating assets and liabilities:
Fundings to restricted cash (232,496) (245,218)
Release of restricted cash 52,924 53,150
Other assets (113,083) -
Accounts payable and accrued expenses 189,256 232,165
Due to general partner and affiliates 262 357
Security deposits (11,622) (2,055)
-------------------------------------------
Net cash provided by operating activities 761,785 728,567
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES-
Additions to real estate - (388,231)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions (400,000) (200,000)
Mortgage principal payments (172,321) (159,511)
-------------------------------------------
Net cash used for financing activities (572,321) (359,511)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 189,464 (19,175)
Cash and cash equivalents, beginning of period 1,109,506 962,290
- ----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,298,970 $ 943,115
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION-
Cash paid during the period for interest $ 667,227 $ 680,038
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONAM REALTY INVESTORS 2 L.P.
AND CONSOLIDATED VENTURES
- -------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements should be read in
conjunction with the Partnership's annual 1997 audited consolidated financial
statements within Form 10-K.
The unaudited interim consolidated financial statements include all normal and
recurring adjustments which are, in the opinion of management, necessary to
present a fair statement of financial position as of September 30, 1998 and the
results of operations for the three and nine months ended September 30, 1998 and
1997, cash flows for the nine months ended September 30, 1998 and 1997, and the
consolidated statement of partners' capital for the nine months ended September
30, 1998. Results of operations are not necessarily indicative of the results to
be expected for the full year.
No significant events have occurred subsequent to the year ended December 31,
1997, and no material contingencies exist, which would require disclosure in
this interim report per Regulation S-X, Rule 10-01, Paragraph (a) (5).
<PAGE>
CONAM REALTY INVESTORS 2 L.P.
AND CONSOLIDATED VENTURES
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Partnership had cash and cash equivalents of
$1,298,970 which were invested in money market funds, compared with $1,109,506
at December 31, 1997. The increase is attributable to net cash provided by
operating activities exceeding cash used for mortgage principal payments and
distributions. The Partnership also maintains a restricted cash balance which
totaled $521,854 at September 30, 1998 compared to $342,282 at December 31,
1997. The restricted cash funds represent escrows for insurance and real estate
taxes required under the terms of the current mortgage loans. The Partnership
expects sufficient cash to be generated from operations to meet its current
operating expenses.
The General Partner declared a regular cash distribution of $2.25 per Unit for
the quarter ended September 30, 1998 which will be paid in October, 1998. The
General Partner will determine the amount of future quarterly distributions
based on the Partnership's available cash flow and future cash needs.
The General Partner, on behalf of the Partnership, is negotiating and expects to
enter into an agreement for the sale of the Partnership's remaining properties
and properties owned by various other limited partnerships affiliated with the
General Partner (the "Affiliated Partnerships") to DOC Investors LLC, a Delaware
limited liability company to be formed to acquire real property ( the
"Purchaser"). An Affiliate of the General Partner will hold a 9% interest in the
Purchaser. Consummation of the sale is subject to various conditions, including
the execution of definitive documents, the approval of a majority in interest of
the Limited Partners, and approval by the limited partners of the Affiliated
Partnerships. Accordingly, there can be no assurance that the sale will be
consummated.
Following satisfaction of applicable securities regulatory requirements, the
General Partner will solicit the approval of the Limited Partners to the sale
and to a related amendment to the Partnership's agreement of limited partnership
by means of a Consent Solicitation Statement. Such Consent Solicitation
Statement will set forth the terms and conditions of the proposed sale, the text
of the proposed amendment to the Partnership's agreement of limited partnership,
and other matters with respect to the sale. If the sale and related amendment
are approved, and the other conditions to the sale satisfied, the sale, which is
expected to occur before December 31, 1998, would result in distributions
approximating the net asset value of the Units and the final liquidation of the
Partnership. The terms of the proposed sale are contained in the Preliminary
Consent Solicitation Statement filed by the Partnership with the Securities and
Exchange Commission pursuant to Section 14(a) of the Securities Exchange Act of
1934 on October 30, 1998.
RESULTS OF OPERATIONS
Partnership operations for the three and nine months ended September 30, 1998
generated a net loss of ($16,538) and net income of $116,500, for the three and
six months ended September 30, 1998. This compares with a net loss of ($98,928)
and ($71,917) for the corresponding periods in 1997. The decrease in net loss
for the three month period ended September 30, 1998 is primarily attributable to
an increase in rental revenues and a decrease in property operating expenses.
The increase in net income for the nine month period ended September 30, 1998 is
primarily attributable to an increase in rental revenues and a decrease in
property operating expenses.
Property operating expenses for the three and nine months ended September 30,
1998 totaled $595,287 and $1,682,747 compared with $661,158 and $1,729,543 for
the corresponding periods in 1997. The decrease for the three month period is
primarily attributable to reduced repair and maintenance expenses at Ponte Vedra
Beach Village I. The decrease for the nine month period is due to a decrease in
repair and maintenance expenses at Ponte Vedra Beach Village I and Rancho
Antigua.
<PAGE>
CONAM REALTY INVESTORS 2 L.P.
AND CONSOLIDATED VENTURES
RESULTS OF OPERATIONS - CONTINUED
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
During the first nine months of 1998 and 1997, average occupancy levels at the
Partnership's properties were as follows:
PROPERTY 1998 1997
---------------------------------------------------------------
Creekside Oaks 95% 94%
Ponte Vedra Beach Village I 92% 93%
Rancho Antigua 95% 91%
Village at the Foothills I 96% 89%
---------------------------------------------------------------
YEAR 2000
The Partnership has assessed the potential impact of the Year 2000 issue on its
computer systems, operating equipment with imbedded microchips and major third
party vendors. If the proposed sale of its remaining properties is consummated,
the Partnership will liquidate prior to January 1, 2000, and no Year 2000 issues
will be presented.
In the event that the sale is not consummated, the Partnership has relied on the
efforts of ConAm Management Corporation ("ConAm Management"), which has been
retained by the Partnership to manage the business and financial operation of
the Partnership's properties, to resolve any potential Year 2000 issues. In the
course of providing property management services for the Partnership, ConAm
Management retained a third party consultant to modify all applicable software
to provide for a 4-digit year field. The General Partner believes that the
modifications undertaken by ConAm Management related to computer systems are
sufficient to address any potential Year 2000 problems and that the impact of
the Year 2000 issue will not materially affect the Partnership's operating
results or financial condition if the Partnership is not liquidated prior to
January 1, 2000. Accordingly, neither ConAm Management nor the Partnership has
taken any further actions with respect to the Year 2000 issue related to the
computer systems.
The Partnership plans to initiate a program to evaluate the Year 2000 readiness
of each property's operating equipment with embedded microchips and replace as
considered necessary. In the event that the replacement project is not completed
by the Year 2000, failure of the property's operating equipment as a result of
the Year 2000 issue is not expected to have a significant impact on operations.
The Partnership plans to initiate discussion with significant suppliers and
other third parties to determine the extent to which the Partnership may be
vulnerable to the failure of these parties to address and correct their own Year
2000 issues. However, there can be no guarantee that the systems of other
companies that support the Partnership's operations will be timely converted or
that a failure by these companies to correct their Year 2000 problems would not
have a material adverse effect on the Partnership. At the present time the
Partnership does not have a contingency plan in place, in the event of Year 2000
failure related to significant suppliers and other third parties, but plans to
create one within the next year.
The Partnership currently has no indication that the costs associated with any
remedial actions in connection with the Year 2000 related to its operating
equipment with imbedded microchips and major third party vendors issue will be
material. All costs related to the remediation plan of the computer system were
incurred by ConAm Management in connection with their management services.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CONAM PROPERTY SERVICES II, LTD.
General Partner of ConAm Realty Investors 2 L.P.
BY: CONTINENTAL AMERICAN DEVELOPMENT, INC.
GENERAL PARTNER
Date: November 13, 1998 BY:/s/ DANIEL J. EPSTEIN
----------------------------------
Daniel J. Epstein
Director, President, and Principal Executive
Officer
Date: November 13, 1998 BY:/s/ ROBERT J. SVATOS
----------------------------------
Robert J. Svatos
Vice President and Director
<PAGE>
CONAM REALTY INVESTORS 2 L.P.
AND CONSOLIDATED VENTURES
PART II OTHER INFORMATION
ITEMS 1-5 Not applicable
ITEMS 6 Exhibits
(a) Exhibits -
(27) Financial Data Schedule
(b) Reports on Form 8-K - No reports on Form 8-K were filed
during the quarter ended September 30, 1998.
