UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-11129
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BALCOR PENSION INVESTORS-III
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(Exact name of registrant as specified in its charter)
Illinois 36-3164211
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2355 Waukegan Road
Bannockburn, Illinois 60015
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 267-1600
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Interests
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(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 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 ]
<PAGE>
PART I
Item 1. Business
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Balcor Pension Investors-III (the "Registrant") is a limited partnership formed
in 1982 under the laws of the State of Illinois. The Registrant raised
$118,738,000 from sales of Limited Partnership Interests. The Registrant's
operations consisted of investment in wrap-around mortgage loans and, to a
lesser extent, other junior mortgage loans and first mortgage loans. The
Registrant also currently operates two properties acquired through foreclosure,
and holds a minority joint venture interest in one additional property. All
financial information included in this report relates to this industry segment.
The Registrant originally funded thirty-two loans collateralized by
twenty-eight properties. A portion of Mortgage Reductions generated by
repayments was reinvested in five additional loans. The remainder was added to
working capital reserves. As a result of repayments, foreclosures and sales of
loans, the Registrant has no loans in its portfolio as of December 31, 1996.
Eleven properties were acquired through foreclosures and two loans were
reclassified to investment in joint ventures with affiliates. The Registrant
sold nine of these properties and an investment in joint venture with
affiliates. The Registrant currently has two properties and one investment in
joint venture with affiliates in its portfolio as of December 31, 1996. See
"Item 2. Properties" for additional information.
The Registrant's remaining properties face various levels of competition for
retention of their tenants from similar types of properties in the vicinities
in which they are located. The Registrant has no plans to change the current
use of or to renovate any of its remaining properties.
Real estate values, especially for good quality, well located property,
increased significantly during 1996 due to a combination of readily available
capital, low interest rates, and decreased vacancy rates resulting from steady
demand and an acceptable level of new construction. While 1996 proved to be an
excellent year to sell real estate, projected yields by buyers on new
acquisitions have declined significantly due to competition and rising prices.
Although there will be variances by asset class and geographic area, the
investment climate is expected to remain strong for 1997. However, values could
begin to level off as they approach replacement cost triggering new
construction and an increase in capitalization rates.
The investment market for apartments was excellent during 1996 due to a number
of factors. Investor interest was strong, driven primarily by institutions, as
Real Estate Investment Trusts aggressively expanded their portfolios and
pension funds viewed apartments as an attractive asset class due to their
perceived low volatility and the emergence of large professional property
management companies. Operationally, existing apartment properties registered
on a national basis occupancy in the mid 90's and rental rate increases of 3-4%
in 1996. While above the rate of inflation, the rate of rental growth in 1996
was below that of the previous two years suggesting that the apartment cycle
may have plateaued, especially as the impact of new construction in many areas
is being felt. While 1997 is projected to be another solid year, values should
begin to level off as capitalization rates move upward continuing a trend which
began during the second half of 1996.
<PAGE>
The outlook for the retail sector of the investment real estate industry is
uncertain for 1997. The retail industry is being simultaneously impacted by a
number of factors which are likely to affect values for quite some time. As
retailers battle to gain market dominance, tenant bankruptcies have grown.
Consolidation among retailers has and is expected to continue to occur. Unlike
other asset classes, new construction of power centers went unabated in the
early 1990's, creating an oversupply of space including "big box" anchor tenant
space. Regional malls, which are not the dominant center in the market, face
continued out-migration of retailers to the power centers. Finally shopping
patterns continue to shift due to the aging baby boomers, high consumer debt,
alternative distribution channels, and the greater emphasis on entertainment.
As a result, the capital requirements necessary to maintain a shopping center's
competitiveness are all significant, but with uncertain returns. The Registrant
believes there is significant risk to holding retail assets for future upside
potential.
The Registrant received notice of an unsolicited offer for the purchase of
Limited Partnership Interests ("tender offer") on January 1, 1997. The tender
offer was made by First Trust Co., L.P. and stated that their primary motive in
making the offer is to make a profit from the purchase of the interests. First
Trust Co., L.P. is seeking to acquire up to 4.9% of the total interests
outstanding in the Registrant.
In addition, a tender offer was made on March 6, 1997 by Madison Partnership
Liquidity Investors XX, LLC and stated that their primary motive in making the
offer is to make a profit from the purchase of the interests. Madison
Partnership Liquidity Investors XX, LLC is seeking to acquire up to 4.9% of the
total interests outstanding in the Registrant. The Registrant will incur
administrative costs in responding to the tender offers and may incur
additional costs if additional tender offers are made in the future. The
General Partner cannot predict with any certainty what impact these tender
offers or any future tender offers will have on the operations or management of
the Registrant.
During 1996, the Registrant received a repayment of the Pepper Square
Apartments loan receivable and a discounted prepayment of the Corporate Campus
I Office Building loan receivable. In addition, the Registrant sold its
interest in the Seafirst Financial Center, Bannockburn Executive Plaza and
Carmel on Providence Apartments loans receivable. See "Item 7. Liquidity and
Capital Resources" for additional information. During December 1996, the
General Partner sold the Perimeter 400 Center Office Building, a property in
which the Registrant held a minority joint venture interest. Currently, the
Partnership has entered into a contract to sell The Woods Apartments for a sale
price of $10,300,000. The Registrant is actively marketing the Orchards
Shopping Center, the remaining property in its portfolio. In addition, the
General Partner is actively marketing the Brookhollow/Stemmons Office Building,
in which the Registrant holds a minority joint venture interest. The timing of
the termination of the Registrant and final distribution of cash will depend
upon the nature and extent of liabilities and contingencies which exist or may
arise. Such contingencies may include legal and other fees stemming from
litigation involving the Registrant including, but not limited to, the lawsuit
discussed in "Item 3. Legal Proceedings." In the absence of any contingency,
the reserves will be paid within twelve months of the last property being sold.
In the event a contingency exists, reserves may be held by the Registrant for a
longer period of time.
<PAGE>
The Registrant, by virtue of its ownership of real estate acquired through
foreclosure, is subject to federal and state laws and regulations covering
various environmental issues. Management of the Registrant utilizes the
services of environmental consultants to assess a wide range of environmental
issues and to conduct tests for environmental contamination as appropriate.
The General Partner is not aware of any potential liability due to
environmental issues or conditions that would be material to the Registrant.
The officers and employees of Balcor Mortgage Advisors-II, the General Partner
of the Registrant, and its affiliates perform services for the Registrant. The
Registrant currently has no employees engaged in its operations.
Item 2. Properties
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As of December 31, 1996, the Registrant owns the two properties described
below, both of which are owned in fee simple:
Location Description of Property
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Loveland, Colorado Orchards Shopping Center: a shopping center
containing 167,779 square feet located on
24 acres.
Austin, Texas The Woods Apartments: a 278-unit apartment
complex located on 13 acres.
The Registrant also holds a minority joint venture interest in the
Brookhollow/Stemmons Office Building located in Dallas, Texas. See Note 10 of
Notes to Financial Statements for additional information.
The average occupancy rates and effective average rent per unit for each of the
last five years for the residential property owned by the Registrant at
December 31, 1996 are described below. Apartment units in this property are
rented with leases of one year or less, with no tenant occupying greater than
10% of the property.
1996 1995 1994 1993 1992
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The Woods Apartments (1)
Occupancy rate 94% 95% 94% N/A N/A
Effective rent $685 $686 $653 N/A N/A
(1) The Woods Apartments was acquired through foreclosure in July 1994.
The average occupancy rates and effective average rent per square foot for each
of the last five years for the commercial property owned by the Registrant at
December 31, 1996 are described below.
1996 1995 1994 1993 1992
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Orchards Shopping Center
Occupancy rate 81% 83% 91% 81% 87%
Effective rent $5.89 $6.22 $6.12 $6.77 $6.18
<PAGE>
Information regarding tenants occupying 10% or more of the leasable square feet
of the commercial property is provided below.
Scheduled
Lease Lease
Square Base Rent Expiration Renewal
Property Tenant Feet Per Annum Date Option
Orchards King 54,600 $191,141 10/2001 Yes
Shopping Center Soopers
(Grocery
Store)
The Orchards Shopping Center is held subject to a mortgage loan as described in
more detail in Note 7 of Notes to Financial Statements.
Real estate taxes incurred in 1996 for the above properties totaled $384,021.
The Federal tax basis of the Registrant's properties totaled $17,152,235 as of
December 31, 1996. For Federal income tax purposes, the acquisition costs of
the properties are depreciated over 40 years, using the straight-line method.
Other minor assets are depreciated over their applicable recovery periods.
In the opinion of the General Partner, the Registrant has provided for adequate
insurance coverage for its real estate investment properties.
See Notes to Financial Statements for other information regarding real property
investments.
Item 3. Legal Proceedings
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Williams class action
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In February 1990, a proposed class-action complaint was filed, Paul Williams
and Beverly Kennedy, et al. vs. Balcor Pension Investors, et al., Case No.:
90-C-0726, U.S. District Court, Northern District of Illinois). The Registrant,
the General Partner, seven affiliated limited partnerships (together with the
Registrant, the "Related Partnerships") and other affiliates were the
defendants. The complaint alleged violations of Federal securities laws as to
the adequacy and accuracy of disclosure of information in the offering of
limited partnership interests in the Related Partnerships and alleged breach of
fiduciary duty, fraud, negligence and violations under the Racketeer Influenced
and Corrupt Organizations Act. The complaint sought compensatory and punitive
damages.
A settlement of these proceedings was approved by the District Court on
November 20, 1996 on the terms previously described in the form of settlement
agreement attached as Exhibit 99 to the Registrant's Report on Form 10-Q for
the quarter ended June 30, 1996. Distributions to be paid pursuant to the
settlement were paid in February 1997. All proceedings relating to this matter
are now dismissed.
<PAGE>
Proposed Class and Derivative Action Lawsuits
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On June 14, 1996, a proposed class and derivative action complaint was filed,
Dee vs. Walton Street Capital Acquisition II, LLC (Circuit Court of Cook
County, Illinois, County Department, Chancery Division ("Chancery Court"), Case
No. 96 CH 06283) (the "Dee Case"), naming the General Partner and the general
partners (the "Balcor Defendants") of nine other limited partnerships sponsored
by The Balcor Company (together with the Registrant, the "Affiliated
Partnerships"), as well as the Affiliated Partnerships, as defendants.
Additional defendants were Insignia Management Group ("Insignia") and Walton
Street Capital Acquisition II, LLC ("Walton") and certain of their affiliates
and principals (collectively, the "Walton and Insignia Defendants"). The
complaint alleged, among other things, that the tender offers for the purchase
of limited partnership interests in the Affiliated Partnerships made by a joint
venture consisting of affiliates of Insignia and Walton were coercive and
unfair.
On July 1, 1996, another proposed class action complaint was filed in the
Chancery Court, Anderson vs. Balcor Mortgage Advisors (Case No. 96 CH 06884)
(the "Anderson Case"). An amended complaint consolidating the Dee and Anderson
Cases (the "Dee/Anderson Case") was filed on July 25, 1996.
The complaint seeks to assert class and derivative claims again the Walton and
Insignia Defendants and alleges that, in connection with the tender offers, the
Walton and Insignia Defendants misused the Balcor Defendants' and Insignia's
fiduciary positions and knowledge in breach of the Walton and Insignia
Defendants' fiduciary duty and in violation of the Illinois Securities and
Consumer Fraud Acts. The plaintiffs amended their complaint on October 8, 1996,
adding additional claims. The plaintiffs requested certification as a class and
derivative action, unspecified compensatory damages and rescission of the
tender offers. Each of the defendants filed motions to dismiss the complaint.
On January 7, 1997, the Chancery Court denied the plaintiffs' motion for leave
to amend the complaint and dismissed the matter with prejudice.
On February 3, 1997, the plaintiffs filed a Notice of Appeal of the Chancery
Court's order to the Appellate Court of Illinois.
The Balcor Defendants intend to vigorously contest this action. No class has
been certified as of this date. The Registrant believes it has meritorious
defenses to contest the claims. It is not determinable at this time whether or
not an unfavorable decision in this action would have a material adverse impact
on the Registrant.
Item 4. Submission of Matters to a Vote of Security Holders
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No matters were submitted to a vote of the Limited Partners of the Registrant
during 1996.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
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Matters
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There has not been an established public market for Limited Partnership
Interests and it is not anticipated that one will develop. For information
regarding previous distributions, see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
As of December 31, 1996, the number of record holders of Limited Partnership
Interests of the Registrant was 9,795.
Item 6. Selected Financial Data
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Year ended December 31,
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1996 1995 1994 1993 1992
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Total income $9,867,879 $7,464,674 $7,904,391 $6,125,896 $6,728,618
Recovery of losses
on loans and
accrued interest
receivable 3,475,817 756,370 None None None
Provision for
losses on loans
and accrued inter-
est receivable None 756,370 600,000 2,720,000 3,750,000
Income before net
gain on sales of
assets 9,170,726 6,001,706 6,379,013 2,541,797 2,166,157
Net income 10,489,409 8,542,352 6,498,855 3,141,300 2,166,157
Net income per
average number of
Limited Partner-
ship Interests
outstanding 35.60 34.90 26.35 12.68 8.72
Total assets 37,934,990 48,074,826 77,868,675 81,568,277 86,628,240
Mortgage notes
payable 1,622,593 1,666,291 7,153,074 8,436,279 10,997,864
Distributions per
Limited Partner-
ship Interest(A) 87.34 132.12 34.35 20.00 22.50
(A) These amounts include distributions of Original Capital of $58.84, $109.12
and $16.85 per Limited Partnership Interest for the years 1996, 1995 and 1994,
respectively.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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Operations
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Summary of Operations
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During 1996, Balcor Pension Investors-III (the "Partnership") recognized a
recovery of losses related to certain of the Partnership's loans. The
Partnership also recognized a gain on the sale of two loans and a gain related
to the sale of its interest in a minority joint venture with affiliates. The
combined effect of these events resulted in an increase in net income during
1996 as compared to 1995. During 1995, the Partnership recognized gains related
to the sales of two properties, which partially offset the above increase and
contributed to the increase in net income during 1995 as compared to 1994.
During 1995 and 1994, the Partnership received repayments on a total of four
loans. The Partnership also acquired The Woods Apartments through foreclosure
in July 1994. The combined effect of these events, resulted in an increase in
net income during 1995 as compared to 1994. Further discussion of the
Partnership's operations is summarized below.
1996 Compared to 1995
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The repayments and sales of five loans during 1996 and two loans during 1995
resulted in a decrease of approximately $1,473,000 in net interest income on
loans receivable during 1996 as compared to 1995. Deferred interest income of
approximately $406,000 received in connection with the 1996 sale of the
Partnership's interest in the Seafirst Financial Center loan was recognized as
interest income and partially offset the decrease in net interest income on
loans receivable due to the repayments and sales.
The Partnership had two loans on nonaccrual status at December 31, 1995 which
were collateralized by Carmel on Providence Apartments and Bannockburn
Executive Plaza. Both of these loans were sold in 1996. For nonaccrual loans,
income was recorded only as cash payments were received from the borrower. The
funds advanced by the Partnership for these two loans totaled approximately
$6,200,000, representing approximately 6% of original funds advanced. During
1996, the Partnership received cash payments of net interest income totaling
approximately $384,000 on the Carmel on Providence loan. The Partnership would
have received approximately $330,000 of net interest income under the terms of
the original loan agreement. Of the net interest income received, $54,000
relates to costs incurred by the Partnership prior to the borrower's bankruptcy
filing, which have been added to the principal of the loan and which accrued
interest, payable by the borrower on a quarterly basis. In addition,
approximately $457,000 was received on the Bannockburn Executive Plaza loan.
This loan originally matured in January 1994 and was subsequently extended to
December 1997.
<PAGE>
Operations of real estate held for sale represent the net operations of the
properties acquired by the Partnership through foreclosure. At December 31,
1996, the Partnership was operating The Woods Apartments and the Orchards
Shopping Center. Original funds advanced by the Partnership total approximately
$6,678,000 for these two properties, representing approximately 6% of original
funds advanced. The sale of the Crossings Shopping Center and the Candlewyck
Apartments in 1995, both of which had been generating income for the year, and
decreased rental and service income at the Orchards Shopping Center during
1996, resulted in a decrease of approximately $217,000 in income from real
estate held for sale during 1996 as compared to 1995. Improved operations at
the Woods Apartments of approximately $202,000 resulting primarily from
increased rental rates and decreased repair and maintenance expenses due to the
completion of structural repairs and exterior painting during 1995,
substantially offset this decrease.
Participation in income of joint ventures with affiliates represents the
Partnership's 27.5% and 12.68% shares of income from the Brookhollow/Stemmons
and Perimeter 400 Center office buildings, respectively. In December 1996, the
joint venture sold the Perimeter 400 Center Office Building and the Partnership
recognized its share of the gain on sale. This was the primary reason for the
increase in participation in income of joint ventures with affiliates during
1996 as compared to 1995.
Proceeds received in connection with the 1995 and 1994 loan repayments and
property sales were invested in short-term investments and subsequently
distributed to Limited Partners in 1995 and January 1996. This, along with
lower average interest rates on short-term interest bearing instruments in
1996, resulted in a decrease in interest income on short-term investments
during 1996 as compared to 1995.
Provisions are charged to income when the General Partner believes an
impairment has occurred to the value of its properties or in a borrower's
ability to repay a loan or in the value of the collateral property.
Determinations of fair value are made periodically on the basis of performance
under the terms of the loan agreement and assessments of property operations.
Determinations of fair value represent estimations based on many variables
which affect the value of real estate, including economic and demographic
conditions. The Partnership did not recognize any provisions for potential
losses related to its loans or real estate held for sale during 1996. During
1995, the Partnership recognized provisions of $756,370 related to one of its
loans. During 1996 and 1995, the Partnership recognized recoveries of
$3,475,817 and $756,370 related to its loans. In addition, allowances of
$467,813 related to the Corporate Campus I Office Building loan were written
off in connection with the loan repayment during 1996. Allowances of $1,070,329
related to the Colony loan were written off in connection with the repayment
during 1995.
During 1995, the Partnership incurred legal, consulting, printing and postage
costs in connection with its response to a tender offer. As a result,
administrative expenses decreased by approximately $164,000 during 1996 as
compared to 1995. The Partnership incurred legal, consulting, printing and
postage costs of approximately $155,000 in connection with its response to 1996
tender offers, which substantially offset the decrease.
<PAGE>
During 1996, the Partnership recognized gains of $392,954 and $925,729 in
connection with the sales of its interests in the Bannockburn Executive Plaza
and Carmel on Providence Apartments loans, respectively.
During 1995, the Partnership recognized gains of $717,900 and $1,822,746 in
connection with the sales of the Crossings Shopping Center and the Candlewyck
Apartments, respectively.
1995 Compared to 1994
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The repayment of the Colony Apartments loan in August 1995, the prepayment of
the Continental Park and North Morris Estates loans in June and November 1994,
respectively, and the foreclosure of The Woods Apartments in July 1994 resulted
in a decrease in net interest income on loans receivable during 1995 as
compared to 1994.
During 1995, the Partnership received cash payments of net interest income
totaling approximately $346,000 on the Carmel on Providence loan. The
Partnership would have received approximately $295,000 of net interest income
under the terms of the original loan agreement. Of the net interest income
received, $48,000 relates to costs incurred by the Partnership prior to the
borrower's bankruptcy filing, which have been added to the principal of the
loan and which accrue interest, payable by the borrower on a quarterly basis.
In addition, $564,000 was received on the Bannockburn Executive Plaza loan in
1995.
The Partnership recognized provisions of $600,000 in 1994 related to certain of
its loans. In addition, during 1994, allowances of $3,715,406 related to the
Continental Park loan were written off in connection with the repayment of the
loan at a discount.
At December 31, 1995, the Partnership was operating The Woods Apartments and
the Orchards Shopping Center. The Partnership acquired The Woods Apartments in
July 1994, and this property generated income during 1995. In addition,
operations improved at the Orchards Shopping Center during 1995 primarily due
to increased occupancy levels and decreased interest expense resulting from the
paydown of the first mortgage loan in connection with the sale of the Orchards
Office Building in September 1994. The combined effect of these events resulted
in an increase in income from real estate held for sale of approximately
$875,000 during 1995 as compared to 1994. The 1995 sales of the Crossings
Shopping Center and the Candlewyck Apartments, which were generating income,
partially offset the above increase by approximately $201,000.
Participation in income of joint ventures with affiliates represents the
Partnership's 27.5% and 12.68% shares of income from the Brookhollow/Stemmons
and Perimeter 400 Center office buildings, respectively. During 1995, the
Partnership recognized $247,500 and $84,322 as its share of the recovery of
provisions related to the change in the estimates of the fair values of the
Brookhollow/Stemmons and Perimeter 400 Center office buildings, respectively,
which resulted in an increase in the participation in income during 1995 as
compared to 1994. Increased reimbursements from tenants for real estate taxes,
common area maintenance and tenant construction at the Brookhollow/Stemmons
Office Building also contributed to the increase in income.
<PAGE>
Proceeds received in connection with the 1995 and 1994 loan repayments and
property sales were invested when received and resulted in an increase in
interest income on short-term investments during 1995 as compared to 1994.
Higher average interest rates earned on short-term investments also contributed
to the increase. Portions of these proceeds were distributed to Limited
Partners in 1995 and January 1996.
The Partnership's loans generally bear interest at contractually-fixed interest
rates. Some loans also provide for additional interest in the form of
participations, usually consisting of either a share in the capital
appreciation of the property securing the Partnership's loan and/or a share in
the increase of the gross income of the property above a certain level.
Participation income was recognized during 1994 in connection with the North
Morris Estates and Carmel on Providence loans.
Decreases in legal expenses and reduced mortgage servicing fees due to the
repayment of four loans during 1995 and 1994 and the foreclosure of The Woods
Apartments in 1994 resulted in a decrease in administrative expenses during
1995 as compared to 1994.
During 1994, the Partnership recognized a gain of $119,842 on the sale of the
Orchards Office Building.
Liquidity and Capital Resources
- -------------------------------
The cash position of the Partnership as of December 31, 1996 increased by
approximately $7,700,000 when compared to December 31, 1995 primarily due to
the proceeds received from the sale of the Bannockburn Executive Plaza loan and
the Perimeter 400 Office Building, in which the Partnership held a minority
joint venture interest. The Partnership generated cash flow totaling
approximately $3,891,000 from its operating activities primarily as a result of
the net interest income earned on its loans receivable, which includes
approximately $406,000 of deferred interest income received in connection with
the sale of the Partnership's interest in the Seafirst Financial Center loan,
the operations of its properties, and the interest received on its short-term
investments, net of the payment of administrative expenses. The Partnership
received funds from investing activities due primarily to the receipt of
proceeds totaling approximately $4,308,000 from the repayment of the Pepper
Square Apartments and Corporate Campus I Office Building loans and
approximately $16,948,000 from the sale of the Partnership's interests in an
additional three loans, less closing costs of approximately $588,000. The
Partnership also received approximately $5,263,000 in distributions from joint
venture partners primarily representing the Partnership's share of proceeds
from the sale of the Perimeter 400 Office Building. The Partnership's financing
activities consisted primarily of the payment of distributions totaling
approximately $19,693,000 to the Partners, repurchases of Limited Partnership
Interests totaling approximately $984,000, an increase in restricted cash and
cash equivalents of approximately $854,000 in the Early Investment Incentive
Fund and principal payments on underlying loans and mortgage notes payable
totaling approximately $646,000. In addition, in January 1997, the Partnership
made a special distribution of $9,499,042 to Limited Partners from Mortgage
Reductions as described below.
<PAGE>
The Partnership classifies the cash flow performance of its properties as
either positive, a marginal deficit or a significant deficit, each after
consideration of debt service payments unless otherwise indicated. A deficit is
considered to be significant if it exceeds $250,000 annually or 20% of the
property's rental and service income. The Partnership defines cash flow
generated from its properties as an amount equal to the properties' revenue
receipts less property related expenditures, which include debt service
payments. The Orchards Shopping Center is the only property that has underlying
debt. During 1996 and 1995, all of the Partnership's remaining properties,
including The Brookhollow/Stemmons Office Building, in which the Partnership
holds a minority joint venture interest, generated positive cash flow. The
Perimeter 400 Center Office Building, in which the Partnership held a minority
joint venture interest, was sold in December 1996 and generated positive cash
flow during 1995 and prior to its sale in 1996. In addition, the Crossings
Shopping Center and the Candlewyck Apartments, which were sold in January and
August 1995, generated positive cash flow and a marginal cash flow deficit,
respectively, prior to their sales. As of December 31, 1996, The Woods
Apartments and the Orchards Shopping Center had occupancy rates of 91% and 83%,
respectively.
Currently, the Partnership has entered into a contract to sell The Woods
Apartments for a sale price of $10,300,000. The Partnership is actively
marketing the Orchards Shopping Center, the remaining property in its
portfolio. The Partnership will also examine the terms of the mortgage loan
collateralized by the Orchards Shopping Center, which matures in October 1997,
and may use Partnership reserves to repay the loan if the Partnership does not
sell the property prior to maturity. In addition, the General Partner is
actively marketing the Brookhollow/Stemmons Office Building, in which the
Partnership holds a minority joint venture interest. During December 1996, the
General Partner sold the Perimeter 400 Center Office Building, in which the
Partnership held a minority joint venture interest. The Partnership also
received repayments on two of its loans and sold its interest in three
additional loans during 1996.
The timing of the termination of the Partnership and final distribution of cash
will depend upon the nature and extent of liabilities and contingencies which
exist or may arise. Such contingencies may include legal and other fees
stemming from litigation involving the Partnership including, but not limited
to, the lawsuits discussed in "Item 3. Legal Proceedings." In the absence of
any contingency, the reserves will be paid within twelve months of the last
property being sold. In the event a contingency exists, reserves may be held by
the Partnership for a longer period of time.
In June 1996, the borrower of the $3,300,000 Pepper Square Apartments
wrap-around loan repaid the loan in full. The Partnership received proceeds of
$1,507,535, which consisted of the original funds advanced on the loan of
$913,765 and equity buildup related to principal payments of $593,770 made on
the underlying loan. The funds advanced by the Partnership represents the
difference between the original loan receivable balance of $3,300,000 and the
original balance of the underlying loan of $2,386,235. The remaining proceeds
were distributed to Partners in July 1996.
<PAGE>
In August 1996, the borrower of the $5,800,000 Corporate Campus I Office
Building wrap-around loan repaid the loan at a discount due to the diminished
value of the property. The Partnership received proceeds of $2,800,000 and the
borrower repaid the $2,532,187 underlying mortgage loan. The proceeds received
by the Partnership were distributed to the Partners in October 1996. See Note
11 of Notes to Financial Statements for additional information.
In August 1996, the Partnership sold its interest in the Seafirst Financial
Center loan for $8,344,608. The purchaser acquired the loan receivable subject
to the existing underlying mortgage loan in the amount of $24,376,892. From the
proceeds of the sale, the Partnership paid $296,500 in selling costs. In
addition, the Partnership received $406,426 of previously deferred interest
income. Pursuant to the terms of the sale, $250,000 of the proceeds was held in
escrow until November 1996, at which time the funds were released to the
Partnership. The proceeds received by the Partnership were distributed to the
Partners in October 1996. See Note 12 of Notes to Financial Statements for
additional information.
During October 1996, the Partnership sold its interest in the Bannockburn
Executive Plaza loan for $5,504,780. During February 1995, a plan of
reorganization related to the loan had been confirmed by the Bankruptcy Court
effective March 1995. Pursuant to the plan, the borrower was required to remit
all excess cash flow from property operations on a monthly basis directly to
the holder of the underlying loan to further reduce the principal balance of
the loan. Prior to the sale, excess cash flow of $47,270 was remitted to the
holder of the underlying loan during 1996. The purchaser of the loan receivable
also acquired the existing underlying mortgage loan in the amount of
$3,252,936. From the proceeds of the sale, the Partnership paid $161,500 in
selling costs. Pursuant to the terms of the sale, $250,000 of the proceeds was
held in escrow until December 1996, at which time the funds were released to
the Partnership. The proceeds received by the Partnership were distributed to
the Partners in January 1997. See Note 12 of the Notes to Financial Statements
for additional information.
In December 1996, the Partnership sold its interest in the Carmel on Providence
loan for $3,098,102. The purchaser acquired the loan receivable subject to the
existing underlying mortgage loan in the amount of $1,157,435. From the
proceeds of the sale, the Partnership paid $129,808 in selling costs. The
remaining available proceeds are expected to be distributed to the Partners in
1997. See Note 12 of Notes to Financial Statements for additional information.
The Perimeter 400 Office Building was owned by a joint venture consisting of
the Partnership and three affiliates. In December 1996, the joint venture sold
the property in an all cash sale for $40,700,000. From the proceeds of the
sale, the joint venture paid $882,765 in selling costs. The net proceeds of the
sale were $39,817,235 of which $5,048,825 was the Partnership's share. Pursuant
to the terms of the sale, $1,750,000 of proceeds will be retained by the joint
venture until September 1997. The remaining proceeds received by the
Partnership were distributed to the Partners in January 1997. See Note 10 of
Notes to Financial Statements for additional information.
<PAGE>
The Partnership made four distributions totaling $87.34, $132.12 and $34.55 per
Interest in 1996, 1995 and 1994, respectively. See Statement of Partners'
Capital for additional information. Distributions were comprised of $28.50 of
Cash Flow and $58.84 of Mortgage Reductions in 1996, $23.00 of Cash Flow and
$109.12 of Mortgage Reductions in 1995 and $17.50 of Cash Flow and $16.85 of
Mortgage Reductions in 1994. Cash Flow distributions increased in 1996 as
compared to 1995 due to the Cash Flow received in excess of original funds
advanced related to the 1996 loan repayments and sales. Cash flow distributions
increased between 1995 and 1994 due to the payment of a special distribution of
$7.00 per Interest from Cash Flow received from the Colony loan repayment in
October 1995 .
In January 1997, the Partnership paid a distribution of $10,448,946 ($44.00 per
Interest) to the holders of Limited Partnership Interests representing the
regular quarterly distribution for the fourth quarter of 1996 of $4.00 of Cash
Flow per Interest and a special distribution of Mortgage Reductions received
from the sales of the Bannockburn Executive Plaza loan and the Perimeter 400
Office Building, in which the Partnership held a minority joint venture
interest, of $40.00 per Interest. Including the January 1997 distribution,
Limited Partners have received cash distributions totaling $772.26 per $500
Interest. Of this amount, $479.30 represents Cash Flow from operations and
$292.96 represents a return of Original Capital. In January 1997, the
Partnership also paid $79,159 to the General Partner as its distributive share
of Cash Flow distributed for the fourth quarter of 1996 and made a contribution
to the Early Investment Incentive Fund in the amount of $26,386. Future
distributions will be made from the Partnership's remaining available reserves
and the sale of the Partnership's remaining properties, as to which there can
be no assurances.
In February 1997, the General Partner made a settlement payment of $71,243
($0.32 per $500 Interest) to members of the class pursuant to the settlement
approved by the court in November 1996 in the Paul Williams and Beverly Kennedy
et. al. v. Balcor Pension Investors, et. al. class action lawsuit.
During 1996, the General Partner used amounts placed in the Early Investment
Incentive Fund to repurchase 5,159 Interests from Limited Partners at a total
cost of $983,513. In February 1997, the Partnership discontinued the repurchase
of Interests from Limited Partners.
Changing interest rates can impact real estate values in several ways.
Generally, declining interest rates may lower the cost of capital allowing
buyers to pay more for a property whereas rising interest rates may increase
the cost of capital and lower the price of real estate.
Inflation has several types of potentially conflicting impacts on real estate
investments. Short-term inflation can increase real estate operating costs
which may or may not be recovered through increased rents and/or sale prices
depending on general or local economic conditions. In the long-term, inflation
can be expected to increase operating costs and replacement costs and may lead
to increased rental revenues and real estate values.
<PAGE>
Item 8. Financial Statements and Financial Statement Schedules and
- ------------------------------------------------------------------
Supplementary Data
- ------------------
See Index to Financial Statements in this Form 10-K.
The supplemental financial information specified by Item 302 of Regulation S-K
is not applicable.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
- --------------------
On September 14, 1995 the Registrant approved the engagement of Coopers &
Lybrand L.L.P. as its independent accountants for the fiscal year ending
December 31, 1995 to replace the firm of Ernst & Young LLP, who were dismissed
as auditors of the Registrant effective September 14, 1995. The General Partner
of the Registrant approved the change in auditors.
The reports of Ernst & Young LLP on the Registrant's financial statements for
each of the two fiscal years ended December 31, 1994 did not contain an adverse
opinion or a disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope, or accounting principles.
In connection with the audits of the Registrant's financial statements for each
of the fiscal years ended December 31, 1994 and in the subsequent interim
period, there were no disagreements with Ernst & Young LLP on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures which, if not resolved to the satisfaction of Ernst &
Young LLP would have caused Ernst & Young LLP to make reference to the matter
in their report.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
(a) Neither the Registrant nor Balcor Mortgage Advisors-II, its General
Partner, has a Board of Directors.
(b, c & e) The names, ages and business experiences of the executive officers
and significant employees of the General Partner of the Registrant are as
follows:
TITLE OFFICERS
Chairman, President and Chief Thomas E. Meador
Executive Officer
Senior Vice President Alexander J. Darragh
Senior Vice President James E. Mendelson
Senior Vice President John K. Powell, Jr.
Managing Director, Chief Jayne A. Kosik
Financial Officer, Treasurer
and Assistant Secretary
Thomas E. Meador (age 49) joined Balcor in July 1979. He is Chairman, President
and Chief Executive Officer and has responsibility for all ongoing day-to-day
activities at Balcor. He is a Director of The Balcor Company. He is also Senior
Vice President of American Express Company and is responsible for its real
estate operations worldwide. Prior to joining Balcor, Mr. Meador was employed
at the Harris Trust and Savings Bank in the commercial real estate division
where he was involved in various lending activities. Mr. Meador received his
M.B.A. degree from the Indiana University Graduate School of Business.
Alexander J. Darragh (age 42) joined Balcor in September 1988 and is
responsible for due diligence analysis and real estate advisory services for
Balcor and American Express Company. He also has supervisory responsibility for
Balcor's environmental matters. Mr. Darragh received masters' degrees in Urban
Geography from Queen's University and in Urban Planning from Northwestern
University.
James E. Mendelson (age 34) joined Balcor in July 1984 and is responsible for
Balcor's property sales activities. He also has supervisory responsibility for
Balcor's accounting, financial, treasury, investor services and investment
administration functions. From 1989 to 1995, Mr. Mendelson was Vice President -
Transaction Management and Vice President - Senior Transaction Manager and had
responsibility for various asset management matters relating to real estate
investments made by Balcor, including negotiations for the restructuring of
mortgage loan investments. Mr. Mendelson received his M.B.A. degree from the
University of Chicago.
John K. Powell, Jr. (age 46) joined Balcor in September 1985 and is responsible
for portfolio and asset management matters relating to Balcor's partnerships.
<PAGE>
Mr. Powell also has supervisory responsibility for Balcor's risk management
function. He received a Master of Planning degree from the University of
Virginia. Mr. Powell has been designated a Certified Real Estate Financier by
the National Society for Real Estate Finance and is a full member of the Urban
Land Institute.
Jayne A. Kosik (age 39) joined Balcor in August 1982 and, as Chief Financial
Officer, is responsible for Balcor's financial, human resources and treasury
functions. From June 1989 until October 1996, Ms. Kosik had supervisory
responsibility for accounting functions relating to Balcor's public and private
partnerships. She is also Treasurer and a Managing Director of The Balcor
Company. Ms. Kosik is a Certified Public Accountant.
(d) There is no family relationship between any of the foregoing officers.
(f) None of the foregoing officers or employees are currently involved in any
material legal proceedings nor were any such proceedings terminated during the
fourth quarter of 1996.
Item 11. Executive Compensation
- -------------------------------
The Registrant paid $4,918 in 1996 with respect to one of the executive
officers and directors of Balcor Mortgage Advisors-II, the General Partner. The
Registrant has not paid and does not propose to pay any remuneration to the
remaining executive officers and directors of the General Partner. Certain of
the remaining officers receive compensation from The Balcor Company (but not
from the Registrant) for services performed for various affiliated entities,
which may include services performed for the Registrant. However, the General
Partner believes that any such compensation attributable to services performed
for the Registrant is immaterial to the Registrant. See Note 9 of Notes to
Financial Statements for the information relating to transactions with
affiliates.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
(a) No person is known of record or is known by the Registrant to own
beneficially more than 5% of the outstanding Limited Partnership Interests of
the Registrant.
(b) Balcor Mortgage Advisors-II and its officers and partners own as a group
the following Limited Partnership Interests of the Registrant:
Amount
Beneficially
Title of Class Owned Percent of Class
-------------- ------------- ----------------
Limited Partnership
Interest 5 Interests Less than 1%
Relatives and affiliates of the partners and officers of the General Partner do
not own any additional interests.
<PAGE>
(c) The Registrant is not aware of any arrangement, the operations of which may
result in a change of control of the Registrant.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
(a, b) See Note 4 of Notes to Financial Statements for information relating to
the Partnership Agreement and the allocation of distributions and profits and
losses.
See Note 9 of Notes to Financial Statements for information relating to
transactions with affiliates.
(c) No management person is indebted to the Registrant.
(d) The Registrant has no outstanding agreements with any promoters.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements and Financial Statement Schedules,
- --------------------------------------------------------------------------
and Reports on Form 8-K
- -----------------------
(a)
(1 & 2) See Index to Financial Statements in this Form 10-K.
(3) Exhibits:
(3) The Amended and Restated Agreement of Limited Partnership, and the Amended
and Restated Certificate of Limited Partnership of Balcor Pension
Investors-III, previously filed as Exhibits 3(a) and 3(b), respectively, to
Amendment No. 2 to the Registrant's Registration Statement on Form S-11 dated
May 20, 1982 (Registration No. 2-75938), and as Exhibits 3(a) and 3(b),
respectively, to the Registrant's Registration Statement on Form S-11 dated
November 2, 1982 (Registration No. 2-80123), are hereby incorporated herein by
reference.
(4) Form of Subscription Agreement, previously filed as Exhibit 4(a) to
Amendment No. 2 to the Registrant's Registration Statement on Form S-11 dated
May 20, 1982 (Registration Statement No. 2-75938) and as previously filed as
Exhibit 4(a) to Registrant's Registration Statement on Form S-11 dated
November 2, 1982 (Registration No. 2-80123), and Form of Confirmation regarding
Interests in the Registrant set forth as Exhibit 4.2 to the Registrant's Report
on Form 10-Q for the quarter ended June 30, 1992 are incorporated herein by
reference.
(10)(i)(a) Purchase and Sale Agreement regarding the sale of the Registrant's
interest in the Bannockburn Executive Plaza loan, previously filed as Exhibit
(10)(i) to the Registrant's Report on Form 10-Q for the quarter ended June 30,
1996, is incorporated herein by reference.
(i)(b) First Amendment to Sale Agreement regarding the sale of the Registrant's
interest in the Bannockburn Executive Plaza loan previously reported as Exhibit
(10)(i)(b) to the Registrant's Report on Form 10-Q for the quarter ended
September 30, 1996, is hereby incorporated herein by reference.
(ii) Purchase and Sale Agreement regarding the sale of the Registrant's
interest in the Seafirst Financial Center loan, previously filed as Exhibit
(10)(ii) to the Registrant's Report on Form 10-Q for the quarter ended June 30,
1996, is incorporated herein by reference.
(iii)(a) Agreement of Sale dated January 9, 1997 and amendment thereto relating
to the sale of The Woods Apartments, Austin, Texas, previously filed as Exhibit
(2) to the Registrant's Current Report on Form 8-K dated January 9, 1997, is
hereby incorporated herein by reference.
(iii)(b) Termination Letter relating to the agreement of sale dated January 9,
1997 for The Woods Apartments, Austin, Texas, previously filed as Exhibit
(2)(a) to the Registrant's Current Report on Form 8-K dated December 18, 1996
is incorporated herein by reference.
<PAGE>
(iii)(c) Agreement of Sale dated March 12, 1997 relating to the sale of The
Woods Apartments, Austin, Texas, previously filed as Exhibit (2)(b) to the
Registrant's Current Report on Form 8-K dated March 12, 1997 is incorporated
herein by reference.
(iii)(d) Letter Agreement dated March 20, 1997 relating to the sale of The
Woods Apartments, Austin, Texas, previously filed as Exhibit (2)(c) to the
Registrant's Current Report on Form 8-K dated December 18, 1996 is incorporated
herein by reference.
(16) Letter from Ernst & Young LLP dated September 19, 1995 regarding the
change in the Registrant's certifying accountant previously filed as Exhibit 16
to the Registrant's Report on Form 8-K/A dated October 27, 1995 is hereby
incorporated herein by reference.
(27) Financial Data Schedule of the Registrant for 1996 is attached hereto.
(99) Form of Notice of Proposed Class Action Settlement and Hearing relating to
Paul Williams and Beverly Kennedy, et al. vs. Balcor Pension Investors, et al.
previously filed as Exhibit (99) to the Registrant's Report on Form 10-Q for
the quarter ended June 30, 1996 is incorporated herein by reference.
(b) Reports on Form 8-K:
(i) A Current Report on Form 8-K dated December 2, 1996 and filed on December
17, 1996, reporting the contract to sell Perimeter 400 Office Center was filed.
(ii) A Current Report on Form 8-K dated January 9, 1997 and filed on January
24, 1997, reporting the sale of the Carmel on Providence Apartments loan and a
contract to sell The Woods Apartments, Austin, Texas, which contract was
subsequently terminated, was filed.
(iii) A Current Report on Form 8-K dated December 18, 1996 and filed on March
25, 1997, reporting the contract to sell The Woods Apartments, Austin, Texas,
was filed.
(c) Exhibits: See Item 14(a)(3) above.
(d) Financial Statement Schedules: None.
<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.
BALCOR PENSION INVESTORS-III
By: /s/ Jayne A. Kosik
-------------------------------------
Jayne A. Kosik
Managing Director and Chief
Financial Officer (Principal Accounting
Officer) of Balcor
Mortgage Advisors-II, the General Partner
Date: March 27, 1997
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- ---------------------- ------------------------------------------------
President and Chief Executive
Officer (Principal Executive
Officer) of Balcor Mortgage
/s/ Thomas E. Meador Advisors-II, the General Partner March 27, 1997
- ---------------------- --------------
Thomas E. Meador
Managing Director and Chief
Financial Officer (Principal
Accounting Officer) of Balcor
Mortgage Advisors-II, the
/s/ Jayne A. Kosik General Partner March 27, 1997
- ---------------------- --------------
Jayne A. Kosik
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants
Report of Independent Auditors
Financial Statements:
Balance Sheets, December 31, 1996 and 1995
Statements of Partners' Capital, for the years ended December 31, 1996, 1995
and 1994
Statements of Income and Expenses, for the years ended December 31, 1996, 1995
and 1994
Statements of Cash Flows, for the years ended December 31, 1996, 1995 and 1994
Notes to Financial Statements
Financial Statement Schedules are omitted for the reason that they are
inapplicable or equivalent information has been included elsewhere herein.
Audited Financial Statements for significant subsidiary investments in joint
ventures are omitted since the property was sold or is being marketed for sale
and the Partnership is in its liquidation phase.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Balcor Pension Investors-III:
We have audited the accompanying balance sheets of Balcor Pension Investors-III
(An Illinois Limited Partnership) as of December 31, 1996 and 1995 and the
related statements of partners' capital, income and expenses, and cash flows
for each of the two years in the period ended December 31, 1996. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Balcor Pension Investors-III
at December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
As described in Note 2 to the financial statements, the Partnership Agreement
provides for the dissolution of the Partnership upon the disposition of all its
real estate interests. The Partnership is presently marketing for sale its
remaining real estate assets. Upon disposition of its remaining real estate
assets and resolution of the litigation described in Note 15 to the financial
statements, the Partnership intends to cease operations and dissolve.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
March 26, 1997
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners of
Balcor Pension Investors-III:
We have audited the accompanying statements of partners' capital, income and
expenses, and cash flows of Balcor Pension Investors-III (An Illinois Limited
Partnership) for the year ended December 31, 1994. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these 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 financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Balcor
Pension Investors-III for the year ended December 31, 1994, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
March 6, 1995
<PAGE>
BALCOR PENSION INVESTORS-III
(AN ILLINOIS LIMITED PARTNERSHIP)
BALANCE SHEETS
December 31, 1996 and 1995
ASSETS
1996 1995
------------- -------------
Cash and cash equivalents $ 19,044,458 $ 11,344,948
Cash and cash equivalents - Early
Investment Incentive Fund 1,156,294 302,437
Escrow deposits 126,507 127,004
Accounts and accrued interest receivable 98,863 222,417
Prepaid expenses 33,582 31,897
Deferred expenses, net of accumulated
amortization of $53,115 in 1996 and
$40,618 in 1995 9,373 21,870
------------- -------------
20,469,077 12,050,573
------------- -------------
Investment in loans receivable:
Loans receivable - wrap-around
and first mortgages 53,030,966
Less:
Loans payable - underlying mortgages 33,761,548
Allowance for potential loan losses 3,943,630
-------------
Net investment in loans receivable 15,325,788
Real estate held for sale 14,214,705 14,214,705
Investment in joint ventures with affiliates 3,251,208 6,483,760
------------- -------------
17,465,913 36,024,253
------------- -------------
$ 37,934,990 $ 48,074,826
============= =============
<PAGE>
BALCOR PENSION INVESTORS-III
(AN ILLINOIS LIMITED PARTNERSHIP)
BALANCE SHEETS
December 31, 1996 and 1995
(Continued)
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 310,198 $ 101,455
Due to affiliates 74,164 36,011
Other liablilities, principally real
estate taxes and escrow deposits 384,433 534,113
Security deposits 83,571 89,848
Mortgage note payable 1,622,593 1,666,291
------------- -------------
Total liabilities 2,474,959 2,427,718
------------- -------------
Commitments and contingencies
Limited Partners' capital (237,476
Interests issued) 41,613,648 52,908,205
Less Interests held by Early Investment
Incentive Fund (21,249 at December 31,1996
and 16,090 at December 31,1995) (7,024,362) (6,040,849)
------------- -------------
34,589,286 46,867,356
General Partner's capital (deficit) 870,745 (1,220,248)
------------- -------------
Total partners' capital 35,460,031 45,647,108
------------- -------------
$ 37,934,990 $ 48,074,826
============= =============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS-III
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' CAPITAL
for the years ended December 31, 1996, 1995 and 1994
Partners' Capital (Deficit) Accounts
------------- -------------- -------------
General Limited
Total Partner Partners
------------- -------------- -------------
Balance at December 31, 1993 $ 70,949,498 $ (1,546,855) $ 72,496,353
Repurchase of 1,316 Limited
Partnership Interests (434,007) (434,007)
Cash distributions to:
Limited Partners (A) (7,844,967) (7,844,967)
General Partner (346,320) (346,320)
Net income for the year
ended December 31, 1994 6,498,855 487,414 6,011,441
------------- -------------- -------------
Balance at December 31, 1994 68,823,059 (1,405,761) 70,228,820
Repurchase of 5,882 Limited
Partnership Interests (1,426,239) (1,426,239)
Cash distributions to:
Limited Partners (A) (29,836,901) (29,836,901)
General Partner (455,163) (455,163)
Net income for the year
ended December 31, 1995 8,542,352 640,676 7,901,676
------------- -------------- -------------
Balance at December 31, 1995 45,647,108 (1,220,248) 46,867,356
Repurchase of 5,159 Limited
Partnership Interests (983,513) (983,513)
Cash distributions to:
Limited Partners (A) (19,128,967) (19,128,967)
General Partner (564,006) (564,006)
Net income for the year
ended December 31, 1996 10,489,409 2,654,999 7,834,410
------------- -------------- -------------
Balance at December 31, 1996 $ 35,460,031 $ 870,745 $ 34,589,286
============= ============== =============
(A) Summary of cash distributions paid per Limited Partnership Interest:
1996 1995 1994
------------- -------------- -------------
First Quarter $ 26.96 $ 4.00 $ 5.50
Second Quarter 4.00 29.00 20.85
Third Quarter 10.38 35.94 4.00
Fourth Quarter 46.00 63.18 4.00
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS-III
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF INCOME AND EXPENSES
for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
------------- -------------- -------------
Income:
Interest on loans receivable $ 4,553,996 $ 7,163,288 $ 10,162,922
Less interest on loans
payable - underlying
mortgages 2,157,804 3,700,302 4,280,261
------------- -------------- -------------
Net interest income on loans
receivable 2,396,192 3,462,986 5,882,661
Income from operations of
real estate held for sale 1,462,922 1,478,073 804,434
Participation in income
of joint ventures
with affiliates 2,029,975 859,887 438,608
Interest on short-term
investments 502,973 907,358 543,293
Participation income 235,395
Recovery of losses on loans
and accrued interest
receivable 3,475,817 756,370
------------- -------------- -------------
Total income 9,867,879 7,464,674 7,904,391
------------- -------------- -------------
Expenses:
Provision for potential
losses on loans and accrued
interest receivable 756,370 600,000
Administrative 697,153 706,598 925,378
------------- -------------- -------------
Total expenses 697,153 1,462,968 1,525,378
------------- -------------- -------------
Income before gain on sales of
loans receivable and real
estate 9,170,726 6,001,706 6,379,013
Gain on sales of loans
receivable 1,318,683
Gain on sales of real
estate 2,540,646 119,842
------------- -------------- -------------
Net income $ 10,489,409 $ 8,542,352 $ 6,498,855
============= ============== =============
<PAGE>
BALCOR PENSION INVESTORS-III
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF INCOME AND EXPENSES
for the years ended December 31, 1996, 1995 and 1994
(Continued)
Net income allocated to
General Partner $ 2,654,999 $ 640,676 $ 487,414
============= ============== =============
Net income allocated to
Limited Partners $ 7,834,410 $ 7,901,676 $ 6,011,441
============= ============== =============
Net income per average number
of Limited Partnership
Interests outstanding
(220,064 in 1996, 226,389 in
1995 and 228,132 in 1994) $ 35.60 $ 34.90 $ 26.35
============= ============== =============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS-III
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
------------- -------------- -------------
Operating activities:
Net income $ 10,489,409 $ 8,542,352 $ 6,498,855
Adjustments to reconcile net
income to net cash provided
by operating activities:
Gain on sales of loans
receivable (1,318,683)
Gain on sales of
real estate (2,540,646) (119,842)
Participation in income
of joint ventures
with affiliates (2,029,975) (859,887) (438,608)
Recovery of losses on
loans and accrued
interest receivable (3,475,817) (756,370)
Provision for potential
losses on loans
and accrued interest
receivable 756,370 600,000
Amortization of deferred
expenses 12,497 12,498 12,498
Net change in:
Escrow deposits 497 300,558 (52,534)
Escrow deposits -
restricted 899,929 338,709
Accounts and accrued
interest receivable 123,554 64,339 203,867
Prepaid expenses (1,685) (31,897)
Accounts payable 208,743 (18,028) (103,000)
Due to affiliates 38,153 (74,851) 48,261
Other liabilities (149,680) (1,007,214) (178,291)
Security deposits (6,277) (31,022) 47,120
------------- -------------- -------------
Net cash provided by
operating activities 3,890,736 5,256,131 6,857,035
------------- -------------- -------------
Investing activities:
Capital contributions to
joint venture partners -
affiliates $ (78,147)
Distributions from joint
venture partners -
affiliates $ 5,262,527 $ 399,211 227,855
Collection of principal
payments on loans
receivable 4,362,969 13,590,567 11,511,219
Additions to real estate (60,698) (256,770)
<PAGE>
BALCOR PENSION INVESTORS-III
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996, 1995 and 1994
(Continued)
1996 1995 1994
------------- -------------- -------------
Proceeds from sales of loans
receivable 16,947,490
Costs incurred in connection
with sales of loans
receivable (587,808)
Proceeds from sales of
real estate 10,856,240 1,200,000
Costs incurred in connection
with sales of real estate (461,794) (49,586)
Costs incurred in connection
with real estate acquired
through foreclosure (40,471)
------------- -------------- -------------
Net cash provided by investing
activities 25,985,178 24,323,526 12,514,100
------------- -------------- -------------
Financing activities:
Distributions to Limited
Partners (19,128,967) (29,836,901) (7,844,967)
Distributions to General
Partner (564,006) (455,163) (346,320)
(Increase) decrease in cash
and cash equivalents -
Early Investment
Incentive Fund (853,857) (281,266) 4,612
Repurchase of Limited
Partnership Interests (983,513) (1,426,239) (434,007)
Principal payments on
underlying loans payable (602,363) (987,626) (1,178,094)
Repayment of mortgage notes
payable (3,545,699)
Principal payments on
mortgage notes payable (43,698) (147,324) (1,283,205)
------------- -------------- -------------
Net cash used in financing
activities (22,176,404) (36,680,218) (11,081,981)
------------- -------------- -------------
Net change in cash and cash
equivalents 7,699,510 (7,100,561) 8,289,154
Cash and cash equivalents at
beginning of year 11,344,948 18,445,509 10,156,355
------------- -------------- -------------
Cash and cash equivalents
at end of year $ 19,044,458 $ 11,344,948 $ 18,445,509
============= ============== =============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS-III
(An Illinois Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. Nature of the Partnership's Business:
Balcor Pension Investors-III (the "Partnership") is engaged principally in the
operation of residential and retail real estate located in Loveland, Colorado;
Austin, Texas; and Dallas, Texas.
2. Partnership Termination:
The Partnership Agreement provides for the dissolution of the Partnership upon
the occurrence of certain events, including the disposition of all interests in
real estate. During 1996, the Registrant received a repayment of the Pepper
Square Apartments loan receivable, a discounted prepayment of the Corporate
Campus I Office Building loan receivable and sold its interest in the Seafirst
Financial Center, Bannockburn Executive Plaza and Carmel on Providence
Apartments loans receivable. In addition, during December 1996, the General
Partner sold the Perimeter 400 Center Office Building, a property in which the
Partnership held a minority joint venture interest. Currently, the Partnership
has entered into a contract to sell The Woods Apartments. The Partnership is
actively marketing the Orchards Shopping Center, the remaining property in its
portfolio. In addition, the General Partner is actively marketing the
Brookhollow/Stemmons Office Building, in which the Partnership holds a minority
joint venture interest. The timing of the termination of the Partnership and
final distribution of cash will depend upon the nature and extent of
liabilities and contingencies which exist or may arise. Such contingencies may
include legal and other fees stemming from litigation involving the Partnership
including, but not limited to, the lawsuits discussed in Note 15 of Notes to
Financial Statements. In the absence of any contingency, the reserves will be
paid within twelve months of the last property being sold. In the event a
contingency exists, reserves may be held by the Partnership for a longer period
of time.
3. Accounting Policies:
(a) The preparation of the financial statements in conformity with generally
accepted accounting principles requires the General Partner to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from those estimates.
(b) The Partnership recorded wrap-around mortgage loans at the face amount of
the mortgage instrument which includes the outstanding indebtedness of the
borrower under the terms of the underlying mortgage obligations. The underlying
mortgage obligations were recorded as a reduction of the wrap-around mortgage
loan and the resulting balance represented the Partnership's net advance to the
borrower. The Partnership was responsible for making periodic payments to the
underlying mortgage lenders only to the extent that payments as required by the
wrap-around mortgage agreement were received by the Partnership from the
borrower.
<PAGE>
(c) Income on loans was recorded as earned in accordance with the terms of the
related loan agreements. The accrual of interest was discontinued when a loan
became ninety days contractually delinquent or sooner when, in the opinion of
the General Partner, an impairment had occurred in the value of the collateral
property securing the loan. Income on nonaccrual loans or loans which were
otherwise not performing in accordance with their terms was recorded on a cash
basis.
Various loan agreements provided for participation by the Partnership in
increases in value of the collateral property when the loan was repaid or
refinanced. In addition, certain loan agreements allowed the Partnership to
receive a percentage of rental income exceeding a base amount. Participation
income was reflected in the accompanying Statements of Income and Expenses when
received.
Income from operations of real estate held for sale is reflected in the
accompanying Statements of Income and Expenses net of related direct operating
expenses.
(d) Loan losses on mortgage notes receivable were charged to income and an
allowance account was established when the General Partner believed the loan
balance would not be recovered. The General Partner assessed the collectibility
of each loan on a periodic basis through a review of the collateral property
operations, the property value and the borrower's ability to repay the loan.
Upon foreclosure, the loan, net of the allowance, was transferred to real
estate held for sale after the fair value of the property, less costs of
disposal was assessed. Upon the transfer to real estate held for sale, a new
basis in the property was established.
Effective January 1, 1995 the Partnership adopted Statement of Financial
Accounting Standards, No. 121 (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of." Under SFAS 121, the
General Partner periodically assesses, but not less than on an annual basis,
the fair value of its real estate properties held for sale. The General Partner
estimates the fair value of its properties based on the current sales price
less estimated closing costs. Changes in the property's fair value are recorded
by an adjustment to the property allowance account and are recognized in the
income statement as an increase or decrease through recovery income or a
provision for loss in the period the change in fair value is determined. The
General Partner considers the methods referred to above to result in a
reasonable measurement of a property's fair value, unless other factors
affecting the property's value indicate otherwise.
(e) Investment in joint ventures with affiliates represents the Partnership's
percentage interests, under the equity method of accounting, in joint ventures
with affiliated partnerships. Under the equity method of accounting, the
Partnership records its initial investment at cost and adjusts its investment
account for additional capital contributions, distributions and its share of
income or loss.
<PAGE>
(f) Deferred expenses consist of leasing commissions which are amortized over
the life of each respective lease, and financing fees which are amortized over
the terms of the respective loan agreements. Upon sale, any remaining balance
is recognized as debt extinguishment expense and classified as an extraordinary
item.
(g) Revenue is recognized on an accrual basis in accordance with generally
accepted accounting principles. Income from operating leases with significant
abatements and/or scheduled rent increases is recognized on a straight line
basis over the respective lease term. Service income includes reimbursements
from operating costs such as real estate taxes, maintenance and insurance and
is recognized as revenue in the period the applicable costs are incurred.
(h) The Financial Accounting Standard Board's Statement No. 107, "Disclosures
About Fair Value of Financial Instruments", requires disclosure of fair value
information about financial instruments for which it is practicable to estimate
that value. Since quoted market prices are not available for the Partnership's
financial instruments, fair values have been based on estimates using present
value techniques. These techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, may not be realized in
immediate settlement of the instrument. Statement No. 107 does not apply to all
balance sheet items and excludes certain financial instruments and all
non-financial instruments such as real estate and investment in joint ventures
from its disclosure requirements.
(i) The Partnership records repurchases of Interests by the Early Investment
Incentive Fund as a reduction of Limited Partners' Capital (see Note 4 of Notes
to Financial Statements). Cash and cash equivalents not yet utilized to
repurchase Interests, but which are part of the Early Investment Incentive
Fund, are classified as restricted assets of the Partnership.
(j) Cash and cash equivalents include all unrestricted, highly liquid
investments with an original maturity of three months or less. Cash is held or
invested in one financial institution.
(k) The Partnership is not liable for Federal income taxes as each partner
recognizes his proportionate share of the Partnership income or loss in his tax
return; therefore, no provision for income taxes is made in the financial
statements of the Partnership.
(l) For financial statement purposes, in previous years partners were allocated
income and loss in accordance with the profit and loss percentages in the
Partnership Agreement. In order for the capital accounts of the General Partner
and Limited Partners to appropriately reflect their respective remaining
economic interests as provided for in the Partnership Agreement, the General
Partner was allocated additional income in 1996 for financial statement
purposes.
(m) A reclassification was made to the previously reported 1994 financial
statements to conform with the classification used in 1996 and 1995. This
reclassification has not changed the 1994 results.
<PAGE>
4. Partnership Agreement:
The Partnership was organized on January 22, 1982. The Partnership Agreement
provides for Balcor Mortgage Advisors-II to be the General Partner and for the
admission of Limited Partners through the sale of Limited Partnership Interests
at $500 per Interest, 237,476 of which were sold on or prior to November 10,
1982, the termination date of the offering.
For financial statement purposes, profits and losses are allocated 92.5% to the
Limited Partners, of which 2.5% relates to the Early Investment Incentive Fund,
and 7.5% to the General Partner.
To the extent that Cash Flow is distributed, distributions will be made as
follows: (i) 90% of such Cash Flow will be distributed to the Limited Partners,
(ii) 7.5% of such Cash Flow will be distributed to the General Partner, and
(iii) 2.5% of such Cash Flow will be set aside in a separate account for
repurchase of Interests and for payment on dissolution of the Partnership to
investors who subscribed prior to December 31, 1982 ("Early Investors") if
necessary for them to receive an amount equal to their Original Capital plus a
specified cumulative return based on the date of investment. Amounts, if any,
remaining in the account after the Early Investors have received their
cumulative return will be distributed 90% to all Limited Partners and 10% to
the General Partner.
Amounts placed in the Early Investment Incentive Fund were, at the sole
discretion of the General Partner and subject to certain limitations as set
forth in the Partnership Agreement, used to repurchase Interests from existing
Limited Partners. During 1996, 5,159 Interests were repurchased at a cost of
$983,513. All repurchases of Interests have been made at 95% of the then
current valuation of such Limited Partnership Interests at the previous quarter
end less any distributions made after the previous quarter end. Distributions
of Cash Flow and Mortgage Reductions pertaining to any repurchased Interests
are paid to the Early Investment Incentive Fund. To the extent that amounts in
the Early Investment Incentive Fund have not been utilized to repurchase
Interests, such amounts are invested in short-term interest-bearing instruments
with earnings thereon credited to this account. In February 1997, the
Partnership discontinued the repurchase of Interests from Limited Partners.
5. Investment in Loans Receivable:
In June 1996, the Pepper Square Apartments wrap-around mortgage loan matured
and the borrower repaid the loan in full. In August 1996, the borrower of the
Corporate Campus I Office Building wrap-around mortgage loan repaid the loan at
a discount. See Note 11 of Notes to Financial Statements for additional
information regarding the discounted repayment.
In August, October and December 1996, the Partnership sold its interest in the
Seafirst Financial Center, Bannockburn Executive Plaza and Carmel on Providence
Apartments wrap-around mortgage loans, respectively. See Note 12 of Notes to
Financial Statements for additional information.
Loans which were classified as nonaccrual as a result of delinquency or other
noncompliance with terms of loan agreements aggregated $11,505,966 at December
31, 1995.
<PAGE>
Under certain circumstances, the General Partner entered into negotiations with
borrowers which resulted in a reduction of interest rates, periodic payments or
the modification of other loan terms. Loans whose monetary terms had been
restructured amounted to $38,225,000 at December 31, 1995. Nonaccrual loans and
loans which were restructured are hereinafter referred to as impaired loans.
Net interest income relating to all of the impaired loans except for The Woods
Apartments loan would have been approximately $1,478,000 in 1996, $2,025,000 in
1995 and $1,915,000 in 1994. Net interest income from impaired loans included
in the accompanying Statements of Income and Expenses amounted to approximately
$2,288,000 ($2,497,000 cash basis) in 1996, $2,001,000 ($2,002,000 cash basis)
in 1995 and $1,958,000 ($1,877,000 cash basis) in 1994.
The Woods Apartments wrap-around mortgage loan was placed on non-accrual status
in 1988. The borrower failed to repay the loan upon maturity and the
Partnership obtained title to the property through a non-judicial foreclosure
in July 1994. The Partnership received net interest income of approximately
$653,000 in 1994.
Impaired loans totaled $49,730,966 at December 31, 1995. Impaired loans of
$41,425,000 had related allowances for losses of $3,943,630, and the $8,305,966
impaired loan had no allowance for losses in 1995. The average recorded
investments in impaired loans during the years ended December 31, 1996 and 1995
were approximately $24,865,000 and $49,942,000, respectively.
6. Allowances for Losses on Loans:
Activity recorded in the allowances for losses on loans during the three years
ended December 31, 1996 is described in the table below:
1996 1995 1994
------------ ------------- ------------
Loans:
Balance at beginning of
year $3,943,630 $5,013,959 $ 8,129,365
Provision charged to
income None 756,370 600,000
Recovery of provision
previously charged
to income (3,475,817) (756,370) None
Direct write-off
of loans against
allowance (467,813) (1,070,329) (3,715,406)
------------- ------------ ------------
Balance at the end of
the year None $3,943,630 $ 5,013,959
============= ============= ============
7. Mortgage Note Payable:
The mortgage note payable collateralized by the Orchards Shopping Center had
balances of $1,622,593 and $1,666,291 at December 31, 1996 and 1995,
respectively. Currently the Partnership is making monthly principal and
<PAGE>
interest payments of $16,334 and the interest rate of the loan is 9.25%. The
maturity is scheduled for October 1997 at which time the estimated balloon
payment will be $1,587,000. The Partnership may sell the property prior to the
maturity of the loan or use reserves to repay the loan.
Real estate held for sale with an aggregate carrying value of $6,691,000 at
December 31, 1996 was pledged as collateral for repayment of the mortgage loan.
During the years ended December 31, 1996, 1995 and 1994, the Partnership
incurred and paid interest expense on mortgage notes payable of $152,310,
$463,817 and $780,047, respectively.
8. Management Agreements:
As of December 31, 1996, both properties owned by the Partnership are under
management agreements with a third-party management company. These management
agreements provide for annual fees of 5% of gross operating receipts for the
residential property and 3% to 6% of gross operating receipts for the
commercial property.
9. Transactions with Affiliates:
Fees and expenses paid and payable by the Partnership to affiliates are:
Year Ended Year Ended Year Ended
12/31/96 12/31/95 12/31/94
-------------- -------------- --------------
Paid Payable Paid Payable Paid Payable
------ ------- ------ ------- ------ -------
Mortgage servicing fees $22,757 $192 $ 52,651 $ 2,392 $ 88,396 $ 4,839
Property management fees None None None None 238,090 None
Reimbursement of expenses
to the General Partner
at cost:
Accounting 18,510 13,452 61,773 8,041 74,803 30,698
Data processing 3,629 1,181 23,072 2,369 41,023 9,216
Investor communica-
tions None None 10,247 None 27,664 8,893
Legal 11,415 8,059 20,531 2,751 16,094 9,316
Portfolio management 53,992 39,402 116,877 20,400 84,441 38,103
Other 15,497 11,878 12,555 58 26,381 9,797
The Partnership participates in an insurance deductible program with other
affiliated partnerships in which the program pays claims up to the amount of
the deductible under the master insurance policies for its properties. The
program is administered by an affiliate of the General Partner who receives no
fee for administering the program; however, the General Partner is reimbursed
for program expenses. The Partnership paid premiums to the deductible insurance
program of $4,586, $32,357 and $46,538 for 1996, 1995 and 1994, respectively.
Allegiance Realty Group, Inc., an affiliate of the General Partner, managed the
Partnership's properties until the affiliate was sold to a third party in
November 1994.
<PAGE>
10. Investments in Joint Ventures with Affiliates:
In 1990 and 1991, the joint ventures, consisting of the Partnership and certain
affiliates, acquired title to the Brookhollow/Stemmons and Perimeter 400 Center
office buildings, respectively. Profits and losses, all capital contributions
and distributions are allocated in accordance with the participants' original
funding percentages. The Partnership's sharing percentages for the
Brookhollow/Stemmons and Perimeter 400 Center office buildings are 27.5% and
12.68%, respectively. In December 1996, the joint venture sold the Perimeter
400 Center Office Building in an all cash sale for $40,700,000. From the
proceeds of the sale, the joint venture paid $882,765 in selling costs. The
joint venture recognized a gain of $12,420,983 from the sale of the property,
of which $1,641,502 is the Partnership's share. During 1995, the Partnership
recognized $331,822 as its share of the recoveries of provisions related to the
change in the estimates of the fair value of the properties. These amounts are
included in the Partnership's participation in income of joint ventures with
affiliates. In addition, during 1996, 1995, and 1994, the Partnership received
distributions from these joint ventures totaling $5,262,527, $399,111 and
$227,855, respectively; and made a contribution of $78,147 in 1994.
The following combined information has been summarized from the financial
statements of the joint ventures:
1996 1995 1994
----------- ---------- ------------
Net investment in
real estate as
of December 31 $9,474,128 $36,015,862 $34,174,946
Total liabilities
as of December 31 256,262 451,150 391,765
Total income before
gain on sale 7,077,975 7,588,538 7,319,405
Gain on sale 12,420,983 None None
Net income before
recovery 14,505,983 3,052,398 2,733,148
Recovery of loss None 1,565,000 None
Net income 14,505,983 4,617,398 2,733,148
11. Discounted Prepayments of Loans Receivable:
(a) In August 1996, the borrower of the $5,800,000 Corporate Campus I Office
Building wrap-around loan repaid the loan. The Partnership received proceeds of
$2,800,000 and the borrower repaid the $2,532,187 underlying mortgage loan. The
remaining wrap-around loan receivable balance of $467,813 was written off
against the previously established allowance for losses in connection with the
prepayment of the loan. For financial statement purposes, the Partnership
recognized a recovery of a provision of $95,187 related to the change in the
estimate of the fair value of the loan.
(b) In August 1995, the borrower of the $16,750,000 Colony Apartments
wrap-around loan repaid the loan. The Partnership received proceeds of
$8,301,516 and the borrower repaid the $7,378,155 underlying mortgage loan.
Allowances of $1,070,329 were written off in connection with the prepayment of
the loan.
<PAGE>
(c) In June 1994, the borrower of the $12,767,949 Continental Park wrap-around
loan prepaid the loan at a discount. The Partnership received proceeds of
$4,873,085 and the borrower repaid the $4,143,890 underlying mortgage loan.
Allowances of $3,715,406 were written off in connection with the prepayment of
the loan.
12. Sale of Loans Receivable:
(a) In August 1996, the Partnership sold its interest in the Seafirst Financial
Center loan for $8,344,608. The purchaser acquired the loan receivable subject
to the existing underlying mortgage loan in the amount of $24,376,892. From the
proceeds of the sale, the Partnership paid $296,500 in selling costs. In
addition, the Partnership received $406,426 of previously deferred interest
income. For financial statement purposes, the Partnership did not recognize a
gain or loss related to the sale of its interest in this loan and recognized a
recovery of provision of $2,692,630 related to the change in the estimate of
the value of the loan.
(b) In October 1996, the Partnership sold its interest in the Bannockburn
Executive Plaza loan for $5,504,780. The purchaser acquired the loan receivable
subject to the existing underlying mortgage loan in the amount of $3,252,936.
From the proceeds of the sale, the Partnership paid $161,500 in selling costs.
For financial statement purposes, the Partnership recognized a gain of $392,954
related to the sale of its interest in this loan.
(c) In December 1996, the Partnership sold its interest in the Carmel on
Providence loan for $3,098,102. The purchaser acquired the loan receivable
subject to the existing underlying mortgage loan in the amount of $1,157,435.
From the proceeds of the sale, the Partnership paid $129,808 in selling costs.
For financial statement purposes, the Partnership recognized a gain of $925,729
related to the sale of its interest in this loan and a recovery of provision of
$688,000 related to the change in the estimate of the value of the loan.
13. Sale of Real Estate:
The Partnership sold the Crossings Shopping Center and Candlewyck Apartments
during 1995 and the Orchards Office Building during 1994 in separate all cash
sales for $12,650,000 and $1,200,000, respectively. From the proceeds of the
Candlewyck Apartments sale, the Partnership paid $3,545,699 to the third party
mortgage holders in full satisfaction of the property's mortgage loans. From
the proceeds of the 1994 Orchards Office Building sale, the Partnership repaid
$1,000,000 of the first mortgage loan. The Partnership continues to own the
Orchards Shopping Center. The purchasers of the Crossings Shopping Center took
title subject to the existing first mortgage loan which had a balance of
$1,793,760. The carrying value of the real estate sold during 1995 and 1994
totaled $9,647,560 and $1,030,572, respectively. For financial statement
purposes, the Partnership recognized net gains of $2,540,646 and $119,842 from
the sale of the real estate during 1995 and 1994, respectively.
14. Settlement of Litigation:
A settlement has received final approval by the court in November 1996 in the
class action, Paul Williams and Beverly Kennedy et. al. v. Balcor Pension
Investors, et. al. upon the terms described in the notice to class members in
September 1996. The settlement had no material impact on the Partnership.
<PAGE>
15. Contingency:
The Partnership is currently involved in a lawsuit whereby the Partnership, the
General Partner and certain third parties have been named as defendants seeking
damages relating to tender offers to purchase interests in the Partnership and
nine affiliated partnerships initiated by the third party defendants in 1996.
The defendants continue to vigorously contest this action. The action has been
dismissed with prejudice and plaintiffs have filed an appeal. It is not
determinable at this time whether or not an unfavorable decision in this action
would have a material adverse impact on the financial position, operations and
liquidity of the Partnership. The Partnership believes it has meritorious
defenses to contest the claims.
16. Fair Value of Financial Instruments:
The carrying amounts and fair values of the Partnership's financial instruments
at December 31, 1996 and 1995 are as follows:
The carrying value of cash and cash equivalents, accounts and accrued interest
receivable and accounts and accrued interest payable approximates fair value.
Based on borrowing rates available to the Partnership at the end of 1996 and
1995 for mortgage loans with similar terms and maturities, the fair value of
mortgage notes payable approximates the carrying value.
The fair value for the Partnership's investments in loans receivable and
mortgage notes payable was estimated using discounted cash flow analyses. The
discount rates were based upon rates at the end of 1996 and 1995 comparable to
those the Partnership could have received or charged in the commercial real
estate lending market with terms and maturities comparable to the Partnership's
loans receivable and mortgage notes payable held.
17. Subsequent Events:
(a) In January 1997, the Partnership paid $10,448,946 ($44.00 per Interest) to
the holders of Limited Partnership Interests representing the regular quarterly
distribution of available Cash Flow of $4.00 per Interest for the fourth
quarter of 1996 and a special distribution of Mortgage Reductions of $40.00 per
Interest received from the sales of the Partnership's interest in the
Bannockburn Executive Plaza loan and the Perimeter 400 Office Building, in
which the Partnership held a minority joint venture interest.
(b) In February 1997, the General Partner made a settlement payment of $71,243
($0.32 per $500.00 Interest) to members of the class pursuant to the settlement
approved by the court in November 1996 in the Paul Williams and Beverly Kennedy
et. al. v. Balcor Pension Investors, et. al. class action lawsuit.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 20201
<SECURITIES> 0
<RECEIVABLES> 99
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20460
<PP&E> 14215
<DEPRECIATION> 0
<TOTAL-ASSETS> 37935
<CURRENT-LIABILITIES> 852
<BONDS> 1623
0
0
<COMMON> 0
<OTHER-SE> 35460
<TOTAL-LIABILITY-AND-EQUITY> 37935
<SALES> 0
<TOTAL-REVENUES> 11186
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 697
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10489
<INCOME-TAX> 0
<INCOME-CONTINUING> 10489
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10489
<EPS-PRIMARY> 35.60
<EPS-DILUTED> 35.60
</TABLE>
