SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act
of 1934 (Amendment No. )
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[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
..............................................................................
(Name of Registrant as Specified In Its Charter)
Garment Capitol Associates
..............................................................................
(Name of Person(s) Filing Proxy Statement if
other than the Registrant)
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[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
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1) Title of each class of securities to which transaction applies:
Participations
2) Aggregate number of securities to which transaction applies: [____]
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pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
The fee is equal to 1/50th of 1% of the assumed fair market value
of the Property, which is presumed to be the aggregate of the cash
to be received by the Registrant.
4) Proposed maximum aggregate value of transaction: [$_____]
5) Total fee paid: $4,000
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PRELIMINARY COPY
GARMENT CAPITOL ASSOCIATES
STATEMENT ISSUED BY THE AGENTS IN CONNECTION WITH THE
SOLICITATION OF CONSENTS OF THE
PARTICIPANTS
Dated July [] 31, 1996 |
This Statement is issued in connection with the
solicitation of Consents of the Participants in Garment Capitol
Associates ("Associates") by Peter L. Malkin, Stanley Katzman and
John L. Loehr, as Agents ("Agents") for the Participants, in
connection with the "Sale Program" described below.
It is anticipated that this Statement and the accompanying
form of Consent will be mailed to the Participants on July [] 31, |
1996. The solicitation of Consents will terminate on October 31,
1996 unless subsequently extended, but in no event later than
December 31, 1996. The Agents will advise all the Participants of
the results of the solicitation as soon as may be practicable, but in
no event later than 90 days after the termination date noted above or
any extension thereof.
Sale of 498 Seventh Avenue
Associates was formed to acquire and own The Garment
Capitol Building and the underlying land (collectively, the
"Property") located at 498 Seventh Avenue, New York, New York. From
the time Associates acquired the Property through December 29, 1995,
Associates leased the Property to 498 Seventh Avenue Associates (the
"Original Lessee") pursuant to a long-term operating lease (the
"Operating Lease").
The Original Lessee operated the Property at a substantial
cash loss during 1994 and 1995. During this period, capital calls
were made upon the then partners in the Original Lessee. Because
several of the partners were unable or unwilling to meet the capital
calls, Peter L. Malkin personally assumed their interests, totalling
40% of the Original Lessee, and advanced the capital calls for those
acquired interests as well as for his own original 5% share, so as to
preserve the leasehold and to permit the Original Lessee to continue
to insulate Associates from liability relating to operation of the
Property. At the end of 1995, Peter L. Malkin again assumed
partnership interests equal to an additional 6.25%. See Section
IV.D. - Potential Conflicts of Interest.
Despite these new capital infusions, however, the Original
Lessee concluded that to return the Property to profitability would
require a very large additional capital investment, estimated by the<PAGE>
Original Lessee to be as high as $16,000,000. Therefore, on
December 29, 1995, in accordance with the terms of the Operating
Lease, the Original Lessee assigned the Operating Lease to 4987
Corporation (the "New Lessee"), thereby effectively terminating the
liability of the Original Lessee and its remaining partners under the
Operating Lease. The shares in the New Lessee are owned by the then
partners in the Original Lessee (except that a substantial portion of
the shares owned by Peter L. Malkin are held by him for the benefit
of members of his family but he retains voting control).
The New Lessee has paid basic rent under the Operating
Lease due on the first day of each month for the period January 1,
1996 through (and including) July 1, 1996. Associates applied or
reserved these rents to cover (1) its monthly mortgage payments to
the Apple Bank for Savings (the "Fee Mortgagee") on Associates' fee
mortgage on the Property (the "Fee Mortgage"), (2) its monthly
payment for supervisory services and (3) its distributions to the
Participants in Associates. The New Lessee did not pay the New York
City real estate taxes and Business Improvement District ("BID")
assessments in the amounts of $936,180.00 and $29,695.14,
respectively, and certain other minor assessments and charges
aggregating less than $1,500, all of which were due on January 1,
1996 or shortly thereafter (collectively, the "1/1/96 Real Estate
Taxes"). The New Lessee also failed to pay the New York City real
estate taxes and BID assessments in the amounts of $1,053,254.50 and
$28,529.26, respectively, which were due on July 1, 1996 (the "7/1/96
Real Estate Taxes"). As a result, although payment of the 1/1/96
Real Estate Taxes and the 7/1/96 Real Estate Taxes has been made as
described below, the New Lessee is in default of the Operating Lease
as of January 1, 1996.
The New Lessee has requested that Associates forbear from
exercising its rights and remedies under the Operating Lease,
including termination of the Operating Lease, by reason of the
failure to pay the 1/1/96 Real Estate Taxes and the 7/1/96 Real
Estate Taxes, while Associates solicits the consent of the
Participants to a sale of the Property on the terms described in this
Statement. If Associates does forbear, the New Lessee has agreed to
cooperate fully with Associates in connection with the sale of the
Property and to continue to perform its other obligations under the
Operating Lease, including payment of basic rent, to enable
Associates to continue its monthly distributions to the Participants,
pay its supervisory expense and pay its monthly mortgage obligation.
The continuation of the Operating Lease will also serve to insulate
Associates from third party liabilities attendant on property
operations. Because the program for Associates outlined in this
Statement includes the continuation of the Operating Lease with the
New Lessee, Associates has not yet sent a notice of default under the
Operating Lease based on the failure of the New Lessee to pay the
1/1/96 Real Estate Taxes or the 7/1/96 Real Estate Taxes, but the
Agents have been advised that Associates' right to send such a notice
has not been affected by this delay or by the acceptance of rent
since the default.
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Although the failure to pay the 1/1/96 Real Estate Taxes
and the 7/1/96 Real Estate Taxes also constitutes a breach of
Associates' obligations under the Fee Mortgage, the Fee Mortgagee has
agreed to forbear from exercising its rights and remedies during the
pendency of this solicitation through a sale of the Property based on
arrangements made between the shareholders of the New Lessee (or
designees on their behalf) and the Fee Mortgagee to fund the 1/1/96
Real Estate Taxes, the 7/1/96 Real Estate Taxes and certain future
real estate taxes and BID assessments on the Property (together with
the 1/1/96 Real Estate Taxes and the 7/1/96 Real Estate Taxes, the
"Real Estate Taxes") through protective advances under the Fee
Mortgage. The shareholders of the New Lessee (or designees on their
behalf) have personally borrowed from the Fee Mortgagee: (a) on
April 2, 1996, the sum of $1,012,274.18, equal to the 1/1/96 Real
Estate Taxes and interest thereon to the date of the borrowing (the
"1/1/96 Tax Borrowing"); and (b) on June 28, 1996, the sum of
$1,081,783.76, equal to the 7/1/96 Real Estate Taxes (the "7/1/96 Tax
Borrowing"). The 1/1/96 Tax Borrowing was used to fund a protective
advance by the Fee Mortgagee to pay the 1/1/96 Real Estate Taxes and
interest thereon through the purchase of a subordinate participating
interest in the Fee Mortgage in such amount. The 7/1/96 Tax
Borrowing was used to fund a protective advance by the Fee Mortgagee
to pay the 7/1/96 Real Estate Taxes through the purchase of an
additional subordinate participating interest in the Fee Mortgage in
such amount. Interest on the foregoing protective advances and on
any future protective advances will be paid by the New Lessee so long
as the Operating Lease continues in effect.
As to future Real Estate Taxes, the Fee Mortgagee has
agreed to make additional personal loans to such individual
shareholders (or their designees) to fund a further protective
advance to cover the Real Estate Taxes due January 1, 1997 (covering
the period to June 30, 1997). Those individual borrowers intend to
borrow the funds from the Fee Mortgagee and fund the protective
advance as required to pay the January 1, 1997 Real Estate Taxes if
the Sale Program described below is approved by the Participants and
so long as the Operating Lease continues in effect. Once the
Property is sold, no additional Real Estate Taxes will need to be
paid.
For the reasons described in this Statement, the Agents
believe that it is in the best interests of the Participants to
approve a sale of the Property and, pending a sale of the Property,
to forbear from exercising rights and remedies under the Operating
Lease so long as shareholders in the New Lessee (or designees on
their behalf) arrange that the Fee Mortgagee advance the Real Estate
Taxes and forbear from foreclosing (see Section II. - Sale Program).
Also described below is a recommended allocation of sale proceeds
between the New Lessee and Associates. The Agents' proposed
allocation is based on the opinions of independent experts but, as
described below (see Section II.B.3. - Distribution of Sale
Proceeds), varies from those opinions in ways which the Agents
believe benefit Associates in virtually all cases (and will be
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neutral in the special case described in the last paragraph of that
Section II.B.3.). Finally, the Agents recommend the liquidation of
Associates upon the consummation of the sale, the distribution to the
Participants of net sale proceeds paid to Associates and the winding
up of its affairs.
The Agents believe that the New Lessee will continue to |
perform its obligations under the Operating Lease (other than the |
obligation to pay Real Estate Taxes). The New Lessee's shareholders |
(or their designees) have already arranged for two advances of Real |
Estate Taxes under the Fee Mortgage. The New Lessee has not provided |
audited financial statements of its operations as it has been in |
existence only since December 21, 1995 and began to operate the |
Property December 29, 1995. In any event, it has no obligation to |
provide audited financial statements under the Operating Lease. The |
Agents feel that the New Lessee will continue to perform, however, |
because it will then be entitled to receive a share of net sale |
proceeds if the Sale Program is approved by the Participants. As the |
likely availability of the Property for sale has become known, the |
Agents have heard informally indications of interest from brokers |
which lead the Agents to believe that a Property sale can be |
consummated in relatively short order (45-90 days) from approval of |
the Sale Program by the Participants. Since the New Lessee has |
performed for six months already, its continued performance through |
sale if the Sale Program is approved seems likely. If the Sale |
Program is disapproved by the Participants, the Agents will then |
determine whether to exercise rights and remedies under the Operating |
Lease, or what other actions to consider, taking account of the then- |
likely impending obligation to pay Real Estate Taxes and the default |
under the Fee Mortgage that would result from non-payment. |
The Agents have arrived at these recommendations following
due consideration of alternatives, including discussions with
representatives of the Original Lessee and of the New Lessee and
review of legal documents with members of Wien, Malkin & Bettex,
supervisors of Associates' partnership agreement. See Section
II.C. - Consideration of Alternatives.
THE AGENTS RECOMMEND THAT THE PARTICIPANTS CONSENT
TO THE SALE PROGRAM (as herein defined)
The Agents recommend that the Participants consent to the
following (collectively herein referred to as the "Sale Program"):
(a) Authorizing the Agents to sell the Property to a third
party at a price, and on such other terms and conditions, as
determined by the Agents;
(b) Allocating the net sale proceeds pursuant to the
distribution formula proposed herein by the Agents; and
(c) Permitting the New Lessee to continue to operate the
Property in accordance with the terms of the Operating Lease,
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described below, while the sale is pursued, subject to (i) continued
compliance by the New Lessee with the terms of the Operating Lease
other than the requirement to pay the Real Estate Taxes and (ii) the
continuation of forbearance by the Fee Mortgagee based on the funding
of Real Estate Taxes through protective advances under the Fee
Mortgage through borrowings by individual shareholders of the New
Lessee (or designees on their behalf).
The Agents believe that the Property requires significant
capital improvements to be competitive. The Sale Program will permit
Associates to liquidate its investment in an orderly fashion, give
priority to Associates in the allocation of net sale proceeds, and
avoid the necessity of raising additional capital from the
Participants and others to support and renovate the Property, while
avoiding litigation costs and the risk of loss of the Property
through a Fee Mortgage foreclosure.
The Agents also recommend that the Participants consent to
the liquidation of Associates upon the consummation of the sale
(assuming it is approved), the distribution to the Participants of
net sale proceeds paid to Associates and the winding up of its
affairs. See Section VII. - Terms of Solicitations of Consents.
I. Background
A. Organization of Associates
Associates, a New York partnership, was organized on
January 10, 1957 for the purpose of acquiring the Property subject to
the Operating Lease. The late Mr. Lawrence A. Wien and two of his
then law partners (one of whom is now deceased) were the original
partners in Associates and joined in a public offering to the
Participants of the economic interests in Associates. Peter L.
Malkin, Stanley Katzman and John L. Loehr are the current partners in
Associates and serve as Agents on behalf of the Participants.
Mr. Katzman and Mr. Loehr become Agents during 1996 (see Section
IV.A. - Supervisory Services). Under the Participating Agreements of
the original offering, the Participants have the right to approve or
disapprove certain decisions, including sale of the Property and
modification of the Operating Lease. The percentage of Participants
required to approve the recommendations of the Agents as described in
this Statement and the related Participation Purchase Arrangement are
described in Section VII. - Terms of Solicitations of Consents.
B. Provisions of the Operating Lease
The Operating Lease provides that the lessee will pay all
operating and maintenance expenses, will make necessary repairs and
replacements and will keep the Property adequately insured against
fire and accident. The Agents believe the insurance maintained by
the New Lessee is adequate. The Operating Lease also requires that
the lessee pay real estate taxes. These taxes for the 1995/96 tax
year (July 1, 1995 - June 30, 1996) were $1,872,360, based on an
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assessed value for the Property of $18,000,000 and a tax rate of
$10.402 per $100. In addition, BID assessments of $59,390 were paid.
The taxes for the 96/97 tax year (July 1, 1996 - June 30, 1997) are
$2,076,132.52, based on an assessed value of $20,251,000 and a rate
of $10.252 per $100; BID assessments for the period are $57,058.52.
Because of delays in completing the New York City budget, however,
the 96/97 real estate taxes are payable in unequal installments of
$1,053,254.50 on July 1, 1996 and $1,022,878.02 on January 1, 1997;
the BID assessment is payable in two equal installments of $28,259.26
on July 1, 1996 and January 1, 1997. The Operating Lease does not
require the lessee to make new capital improvements to the Property.
Under the Operating Lease, the lessee must pay to
Associates (i) annual basic rent of $1,090,000 (the "Basic Rent") in
monthly installments of $90,833.33 and (ii) annually for each lease
year ending April 30, additional rent equal to 50% of the lessee's
net income in excess of $200,000 for such lease year (the "Additional
Rent"). No Additional Rent was payable for the lease years ended
April 30, 1996, April 30, 1995 and April 30, 1994. Additional rent
of $1,010,196 was paid for the lease year ended April 30, 1993. See
Section I.E. - Financial Information.
The current term of the Operating Lease expires on
April 30, 2007. The Operating Lease includes a renewal option to
extend the term through April 30, 2032. Pursuant to the Operating
Lease, the lessee has the right to assign the Operating Lease,
without Associates' consent, so long as the assignee assumes, in
writing, all of the obligations of the Operating Lease. The Original
Lessee exercised such assignment right on December 29, 1995, and the
New Lessee assumed all lessee obligations under the Operating Lease
as of that date.
C. The Property
498 Seventh Avenue is located in the heart of New York
City's "Garment District", occupying a plot of approximately 39,000
square feet. Located on the southwest corner of Seventh Avenue and
37th Street, the building has frontages of 98'9" and 225' on these
two streets, respectively. There is additional frontage of 170'8" on
36th Street. The building is readily accessible to all New York City
subways and is a few blocks from Penn Station and The Port Authority
Bus Terminal on 40th-42nd Streets. Erected in 1921, the building is
of fireproof construction and contains 23 floors, a penthouse and
basement. It has a rentable floor area of approximately 800,000
square feet.
The building contains office, showroom and loft space,
which historically was used by manufacturers of ladies apparel.
D. Competition
Currently, tenant space leases at the Property are offered
at an average annual base rental of approximately $18.00 per square
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foot (exclusive of electricity charges and escalation). Space
tenants provide their own cleaning. The average asking rental rate
and other financial terms for space leases at the Property appear to
be competitive with the average rental rates charged by similar
buildings currently offering comparable space in the immediate
vicinity.
Based on market information believed to be accurate, the
Agents offer the following information regarding near-by properties:
* A neighboring office building located at 485 Seventh
Avenue (at 36th Street), which offers small showrooms
and has upgraded interior features, is offering tenant
space at rental rates between $18.00 and $25.00 per
square foot.
* Two similar buildings approximately the same age as the
Property, which are located across 39th Street from each
other at 530 Seventh Avenue and 550 Seventh Avenue and
have traditionally been the headquarters for
manufacturers of higher price women's apparel, currently
offer tenant space at rental rates between the mid $20's
to high $30's per square foot.
* At 1407 Broadway and 1411 Broadway, buildings which
offer more modern, upgraded amenities than the Property,
current rental rates are in the high $30's per square
foot.
The percentage occupancy rate for these buildings has
varied over the past several years from as low as 55% (for 485
Seventh Avenue before the internal make-over) to as high as 90% to
95%. The overall occupancy level in the Garment Center generally,
for buildings generally identified as buildings for garment industry
users, has been in the range of approximately 30% to approximately
95% over the past several years, but unrenovated buildings tend to
have lower occupancies than the renovated or more modern structures.
The Agents are not aware of any recent sales of buildings
in similar condition in the area of the Property which would provide
useful guidance as to an appropriate sale price for the Property.
The Agents will seek what they perceive to be the best possible sale
price on the best possible terms if the Participants approve the Sale
Program.
E. Financial Information
Associates acquired fee title to the Property on May 1,
1957 for $10,500,000, all cash. On November 1, 1957, Associates
closed a $5,250,000 first mortgage loan on the Property (the "Fee
Mortgage") and distributed the proceeds to the Participants, reducing
their cash investment to $5,250,000. The Fee Mortgage has been
refinanced a number of times since 1957, most recently on December 1,
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1992, but the principal balance has not been increased as a result.
The principal balance of the Fee Mortgage, after the July, 1996
payment, has been reduced to $2,976,474.30 (excluding the amount of
protective advances made under the Fee Mortgage to pay certain Real
Estate Taxes -- see Section II.A.2. below - Forbearance to the New
Lessee). The Fee Mortgage is currently held by Apple Bank for
Savings and matures on December 1, 1997. Payments are current on the
Fee Mortgage through (and including) July 1, 1996.
Each monthly installment of Basic Rent received by
Associates is applied to pay monthly debt service on the Fee |
Mortgage, supervisory compensation to [] Wien, Malkin & Bettex |
("WM&B") and distributions to the Participants. Additional rent is
used by Associates to pay Additional Supervisory Compensation to WM&B
(see Section IV.A. - Supervisory Services) and make additional
distributions to the Participants.
For the years 1995, 1994 and 1993, the Participants
received total distributions representing an annual return on their
remaining original cash investment at the rates of approximately
11.7%, 11.7% and 26.8%, respectively. These percentages were
calculated by dividing the cash payments to Participants in the year
in question by the remaining original cash investment in the Property
by the Participants ($5,250,000). Certain current Participants may
have purchased their interests for amounts in excess of the remaining
original cash investment amount and their rates of return on
investment will thus be lower.
During 1994 and 1995, the Property operated at a
substantial loss. During that period, Peter L. Malkin individually
assumed the interests of various partners in the Original Lessee who
could not or would not make the required capital investment in the
Original Lessee and who agreed to transfer their interests to
Mr. Malkin, so as to protect the Participants by preserving the
leasehold and thus to continue to insulate Associates against third
party liabilities that might result if it operated the Property
directly and to assure Associates' continued ability to meet its
monthly obligations and make its monthly distributions to the
Participants. Of the total recent investment in the Original Lessee
by its partners of $1,300,000 during this period, Mr. Malkin would
have been obliged to invest 5% and his wife 2.5%, or an aggregate of
$97,500, had he not assumed the additional partnership interests.
Instead, by acquiring an additional 40% of the partnership interests
in the Original Lessee, Mr. Malkin invested an additional $430,000.
At the end of 1995, Mr. Malkin assumed interests aggregating an
additional 6.25% and now owns in the Original Lessee 51.25%
individually, in addition to the 2.5% owned by his wife.
The Agents have been advised that, if the Sale Program is
approved by the Participants, the New Lessee intends to pay Basic
Rent until the sale is consummated. There is no expectation that
there will be Additional Rent payable in the near future.
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Attached are audited balance sheets of Associates as of
December 31, 1995 and December 31, 1994, and the related statements
of income, partners' capital deficit and cash flows for each of the
three years in the period ended December 31, 1995, and a Schedule of
Real Estate and Accumulated Depreciation as of December 31, 1995.
Also attached is a table showing selected financial data for the five
most recent, completed fiscal years of Associates ("Financial
Statements"). In addition, unaudited condensed balance sheets as of
March 31, 1996 and December 31, 1995 and the related condensed
statements of income and cash flows for each of the periods ended
March 31, 1996 and March 31, 1995 are also enclosed ("Quarterly
Financial Statements"). See Section VI. - Management's Discussion
and Analysis of Financial Condition and Results of Operations.
Jacobs Evall & Blumenfeld LLP ("JEB") has for more than ten
years served as Associates' independent certified public accountants
in connection with Securities and Exchange Commission ("SEC") filings
only. JEB provides no services to Associates other than such
services in connection with SEC filings, which include the
examination of financial statements and consultations relating to
professional and regulatory accounting matters.
II. Sale Program
A. Grant of Discretionary Authorization
to the Agents; Rationale for the Sale Program
The Agents seek discretionary authority from the
Participants to implement the Sale Program, including sale of the
Property, forbearance in favor of the New Lessee so long as it
complies with its lease obligations other than the obligation to pay
Real Estate Taxes and arranges the forbearance of the Fee Mortgagee,
and allocation of the net sale proceeds as hereinafter described.
See Section II.B. - Recommendations. The Agents will seek the best
price and terms but there is no minimum sale price, and the Property
will be sold for an amount, and on other terms, as the Agents may
determine. The approval of the New Lessee to the terms of sale,
including the price, has been obtained and is conditioned only upon
the approval of the Participants to the Sale Program outlined in this
Statement. The Agents will act by unanimous agreement among
themselves in determining the price and other terms of sale.
Over the last two years, the remaining partners in the
Original Lessee contributed substantial capital in an attempt to
reverse the Property's lack of profitability and to preserve the
leasehold so as to insulate Associates from third party liability
that might result if Associates operated the Property. Other
partners in the Original Lessee who were unable or unwilling to
provide their shares of the additional investment transferred their
interests in the Original Lessee to Peter L. Malkin, who invested all
the funds representing his original interest in the Original Lease
and the interests more recently acquired. See Section IV. -
Supervisory Services; Potential Conflicts of Interest.
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Despite the costly effort by the Original Lessee to turn
the Property around, operating losses have continued.
As the Agents are aware based on information distributed
from time to time by the Fashion Center Business Improvement District
(of which Mr. Malkin is a director) and the Real Estate Board of New
York (of which Mr. Malkin is a member of the Board of Governors), and
from other information available generally, the space needs of the
garment industry in Manhattan have changed dramatically since
Associates acquired the Property in 1957. The design of 498 Seventh
Avenue features very large, deep floors. Large showrooms and
manufacturing space, once the hallmark of garment firms operating in
New York City and for which the building is well-suited, generally
are no longer required. Many U.S. garment manufacturers failed in
the face of foreign competition, and others moved operations to lower
cost locations. Fashion firms which remain in Manhattan typically
maintain only small showrooms and limited offices in the City.
Because of the large size and deep dimensions of its floors, adapting
498 Seventh Avenue to these new market conditions will require a very
expensive conversion of space to use for smaller showrooms or, as an
alternative, general offices.
The Property's occupancy has declined as the garment
industry has contracted, and the Property's operating cash flow
during the last several years has not been sufficient to fund the
major renovations needed to be competitive in the market. Even with
substantial investment recently made by the Original Lessee for new
showrooms, entrance/facade, safety and security systems, elevator
cabs and lobbies, and handicap access features, the building is now
approximately 50% vacant.
Without materially reconfiguring the internal space in the
building to reflect these changes in the garment industry or for an
alternative use, the Agents believe it is likely that the Property
will operate at increasing deficits. To redesign the building and
thus make the Property competitive, additional, significant capital
infusions would be required. Additional capital investment by the
Participants cannot be compelled and would be inconvenient or
impossible for many Participants. The risks of investing substantial
new capital and of determining which use would be profitable are not
alternatives that the Agents recommend to the Participants. See
Section IV.C. - Consideration of Alternatives. The Agents believe
that implementation of the Sale Program is the best way for the
Participants to maximize the value of their remaining investment
without the need for additional funds, which could only hope to be
recouped over the long term. See Section VI. - Management's
Discussion and Analysis of Financial Condition and Results of
Operation.
B. Recommendations
Based on the foregoing review of the current situation at
the Property -- See Section I.D. - Competition; Section I.E. -
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Financial Information; and Section II.A. - Grant of Discretionary
Authorization to the Agents; Rationale for the Sale Program -- and
the assessment of various alternatives by the Agents -- See Section
II.C. - Consideration of Alternatives -- the Agents recommend that
the Participants approve the Sale Program. The Participants are
reminded that, if the Sale Program is approved, a portion of the net
sale proceeds to be distributed to the New Lessee will be shared by
one of the Agents for the Participants, Peter L. Malkin, as an owner
of shares in the New Lessee, his wife and other members of his
family. See Section IV. - Supervisory Services; Potential Conflicts
of Interest. The Agents also recommend the liquidation of Associates
once the sale is consummated, net sale proceeds paid to Associates
are distributed to the Participants and Associates' affairs are wound
up. Approval by the Participants of the Sale Program and the
subsequent liquidation of Associates will empower the Agents with
discretionary authority to implement the Sale Program and to
liquidate Associates thereafter.
If the Sale Program is not approved by the Participants -
see Section VII. - Terms of Solicitations of Consents - then the
Agents will consider whether to exercise rights and remedies under
the Operating Lease, or take such other actions or make such other
recommendations to the Participants, as then seem appropriate. Since
the solicitation of consents will likely extend until close to the
end of 1996, the Agents will also have to consider at that time how
to deal with the then pending obligation to pay Real Estate Taxes.
1. Sale
An original Participant who initially invested $10,000 in
1957 received aggregate cash distributions of $59,443 through
December 31, 1995 (including $5,000 of mortgage proceeds returned in
the first year of the investment). The Participants in Associates
have enjoyed a very successful venture for the last 39 years. The
Agents now recommend that it be concluded for the reasons outlined in
this Statement and that a sale of the Property on the terms of this
Statement be authorized.
The Agents do not believe that it is beneficial to set a
minimum price for the sale of the Property. The setting of a minimum
price may tend to inhibit buyers from bidding aggressively. The
Agents believe that not setting a minimum or target price, coupled
with a thorough marketing effort, should likely yield the best
possible result in a reasonable time. To assure an effective
marketing campaign and so as not to lose momentum pending approval of
the Sale Program pursuant to this Statement, the Agents and the New
Lessee have engaged Cushman & Wakefield Inc. ("C&W") to prepare
marketing materials for the possible sale of the Property. C&W will
also distribute the marketing materials and will assist in the
preparation of ads for placement in appropriate newspapers and other
periodicals and journals. All of the marketing materials,
-11-<PAGE>
distribution lists, ads and any other marketing activities to be
proposed by C&W are subject to prior review and approval by the
Agents on behalf of Associates and the officers of the New Lessee.
In consideration of its services as marketing
representative, C&W will receive a fee of $100,000 plus
disbursements. This fee will be an expense of sale. A portion of
the fee has been advanced by the New Lessee, and any additional
amounts owing to C&W for their work prior to the sale will also be
advanced by the New Lessee.
C&W is not a broker on behalf of Associates or the New
Lessee. All marketing materials regarding the sale will indicate
that neither Associates nor the New Lessee will agree to pay or be
liable for any brokerage commission in connection with the sale, and
that any purchaser must make independent arrangements to compensate
brokers acting on behalf of the purchaser.
2. Forbearance to the New Lessee
While the Property is being marketed for sale, the Agents
recommend that the New Lessee be permitted to continue operating the
Property. See Section II.C. - Consideration of Alternatives. To
induce Associates to forbear from exercising its right to terminate
the Operating Lease based on the failure by the New Lessee to pay the
1/1/96 Real Estate Taxes and the 7/1/96 Real Estate Taxes, the New
Lessee will continue to perform all of its obligations under the
Operating Lease other than paying Real Estate Taxes and, as described
below, has arranged for payment of the 1/1/96, 7/1/96 and certain
future Real Estate Taxes. Monthly payments of Basic Rent will
continue, enabling Associates to make required mortgage payments to
the Fee Mortgagee, pay supervisory costs and make monthly
distributions to the Participants.
The shareholders of the New Lessee (or their designees)
have borrowed from the Fee Mortgagee an amount equal to the 1/1/96
Real Estate Taxes and interest thereon. This borrowing was used to
fund a protective advance under the Fee Mortgage to pay the 1/1/96
Real Estate Taxes and interest thereon to the date of payment. The
shareholders of the New Lessee (or their designees) have also
borrowed from the Fee Mortgagee an amount equal to the 7/1/96 Real
Estate Taxes. This borrowing was used to fund a protective advance
under the Fee Mortgage to pay the 7/1/96 Real Estate Taxes. As a
result, the borrowers acquired subordinate participating interests in
the Fee Mortgage in the amount of the loan used to fund the
protective advances. A similar arrangement will be used to fund the
Real Estate Taxes due January 1, 1997, if the Property has not been
sold by that date, so long as the Operating Lease has not been
terminated. The New Lessee will pay the interest which accrues under
the Fee Mortgage on each protective advance.
As a result of these arrangements regarding the 1/1/96 Real
Estate Taxes and the 7/1/96 Real Estate Taxes and so long as future
-12-<PAGE>
protective advances are similarly funded to pay Real Estate Taxes,
the Fee Mortgagee will forbear from exercising rights and remedies
under the Fee Mortgage based on the failure to pay Real Estate Taxes.
If the Participants reject the Sale Program (which includes
forbearance by Associates under the Operating Lease in favor of the
New Lessee), the shareholders of the New Lessee (or their designees)
will not continue the arrangement with the Fee Mortgagee for the
payment of future Real Estate Taxes, and the Agents may not be able
to arrange for an alternative method for funding future Real Estate
Taxes. If future Real Estate Taxes are unpaid, the Fee Mortgagee
will then likely elect to commence a foreclosure proceeding against
the Property. In that event, the Agents believe that the Property
would be viewed by potential buyers as a distressed situation, which
could significantly lower the potential sale price. If Real Estate
Taxes are unpaid, the City of New York could ultimately acquire title
to the Property, but the process is slow and can take years to
complete. There is also a redemption period after title is acquired
by the City.
If the Sale Program is not approved by the Participants,
the Agents will then determine whether to exercise rights and
remedies under the Operating Lease, or what other actions to
consider. The Agents will also have to consider at that time how to
deal with the then-impending obligation to pay Real Estate Taxes and
the default under the Fee Mortgage that would result from non-
payment.
3. Distribution of Sale Proceeds
The determination of the proper allocation of net sale
proceeds between Associates, as fee owner, and the lessee of the
Property depends upon the respective values of their interests in the
Property. To assure an appropriate allocation, opinions were sought
from two prominent, independent real estate appraisal concerns, Brown
Harris Stevens Appraisal and Consulting, LLC ("Brown Harris") and
Edward S. Gordon, Inc. ("ESG"). These firms were selected, by the
Agents in consultation with representatives of the New Lessee other
than Mr. Malkin, because of their stature and because they were
independent of both the Agents and the New Lessee. The two firms
then consulted and reached a consensus which is embodied in a report
(the "Consensus Report") addressed to Associates, the New Lessee and
WM&B.
The proposed allocation of sale proceeds between the fee
and leasehold interests was based primarily upon (a) assumptions of
potential sales prices, (b) the determination of the projected net
income required to justify the assumed sales prices, reflecting as
well appropriate capitalization rates and capital costs, and (c) the
apportioning of the Property's total estimated income between the fee
interest and the leasehold in accordance with the Operating Lease.
The only special instruction provided to the two consulting firms in
seeking their consensus was that they assume that the Property would
be sold as a unified whole rather than as separate interests. Their
-13-<PAGE>
methodology required that they assume a minimum sales price of
$20,000,000 for the Property. In reaching their conclusions, they
determined that, of the three conventional approaches to value -
Cost, Sales Comparison and Income Capitalization - only the Income
Capitalization approach applied. They felt that this approach was
the appropriate one because, in their experience, it is methodology
most often used by investors for this type of property. The
Consensus Report is available for inspection and copying at the
offices of WM&B (on behalf of Associates), 60 East 42nd Street, New
York, New York, during regular business hours by any Participant or
his representative who has been so designated in writing.
Appointments to inspect and copy the Consensus Report may be made by
contacting Stanley Katzman, Esq., at (212) 687-8700.
The formula in the Consensus Report allocates sale
proceeds, after closing expenses, between Associates and the lessee
as follows:
Amount of Sale Proceeds Percentage Percentage
after Expenses of Sale to Lessee to Associates
Up to first $25,000,000
of sale proceeds 20% 80%
Next $5,000,000 of sales 25% 75%
proceeds ($25,000,001
to $30,000,000)
Next $10,000,000 of sales 30% 70%
proceeds ($30,000,001
to $40,000,000)
Next $10,000,000 of sales 35% 65%
proceeds ($40,000,001
to $50,000,000)
Sale proceeds in 40% 60%
Excess of $50,000,000
The Agents propose a slightly different allocation formula
than that set forth in the Consensus Report. The Agents believe the
differences benefit Associates (except with respect to the unusual
case described in the last paragraph of this Section II.B.3., as to
which the result for Associates is no worse than the Consensus
Formula). As described in the next paragraph, the Agents accord
priorities to certain items, which consist of obligations of or
payments to Associates, and then follow the Consensus Report formula
as to the balance of sale proceeds. The New Lessee has agreed to
this application of sale proceeds. The Agents recommend this
allocation formula in place of the formula recommended in the
Consensus Report because, under the Agent's formula, the repayment to
Associates of the Participants' remaining original investment is
accorded priority. The Consensus Report merely allocated net sale
-14-<PAGE>
proceeds between the leasehold and fee interests without distinction.
Except for the special case described in the last paragraph of this
Section II.B.3. (as to which the Agent's formula and the formula in
the Consensus Report are essentially equivalent), the Agent's formula
will always result in a higher allocation to the Participants than
would result under the formula in the Consensus Report.
The Agents propose the allocation of net sale proceeds
(after expenses) as follows:
First Priority: To pay the principal balance of the Fee
Mortgage, interest thereon for the month in which the
closing occurs and the principal amount of the protective
advances for Real Estate Taxes made under the Fee Mortgage.
Second Priority: To return to the Participants the sum of
$5,250,000, representing the remaining balance of the
original cash investment in Associates.
Third Priority: To distribute 80% to Associates and 20% to
the New Lessee an amount of sale proceeds equal to the
lesser of (a) the remaining unapplied balance of sale
proceeds and (b) the remainder of the first $25,000,000 of
sale proceeds after deducting the amounts of sale proceeds
applied as First Priority and Second Priority above.
Fourth Priority: To distribute the balance of the sale
proceeds in excess of $25,000,000 (if any) in accordance
with the Consensus Report, as follows:
Percentage Percentage
Amount of Sale Proceeds to New Lessee to Associates
The first $5,000,000 of net 25% 75%
sale proceeds above $25,000,000
(i.e., sale proceeds in excess
of $25,000,000 and up to
$30,000,000)
Next $10,000,000 of net sales 30% 70%
proceeds (i.e., sale proceeds
in excess of $30,000,000 and
up to $40,000,000)
Next $10,000,000 of net sales 35% 65%
proceeds (i.e., sale proceeds
in excess of $40,000,000 and
up to $50,000,000)
Sale Proceeds in excess 40% 60%
of $50,000,000
-15-<PAGE>
The allocations within the Fourth Priority are referred to as the
"Fourth Priority Allocations."
The following chart shows four examples of the distribution
of sale proceeds between Associates and the New Lessee using the
Agents' proposed allocation formula. The assumed net sale proceeds,
after expenses, are shown at the top of each column. These examples
also assume that (i) the fee mortgage balance, together with accrued
interest from the beginning of the month in which the closing occurs
until the date of closing, is $3,000,000 (ii) the amount of each of
the two protective advances for Real Estate Taxes was $1,000,000, and
(iii) no additional protective advance was made. The actual amounts
of these various items will depend on the actual date of sale and
whether additional protective advances will be made.
Net sale proceeds $20,000,000 $30,000,000 $40,000,000 $50,000,000
----------- ----------- ----------- -----------
Allocation:
First Priority:
Mortgage, protective
advances $ 5,000,000 $ 5,000,000 $ 5,000,000 $ 5,000,000
----------- ----------- ----------- -----------
Associates:
Second Priority $ 5,250,000 $ 5,250,000 $ 5,250,000 $ 5,250,000
Third Priority 7,800,000 11,800,000 11,800,000 11,800,000
Fourth Priority -0- 3,750,000 10,750,000 17,250,000
----------- ----------- ----------- -----------
$13,050,000 $20,800,000 $27,800,000 $34,300,000
----------- ----------- ----------- -----------
New Lessee:
Second Priority $ -0- $ -0- $ -0- $ -0-
Third Priority 1,950,000 2,950,000 2,950,000 2,950,000
Fourth Priority -0- 1,250,000 4,250,000 7,750,000
----------- ----------- ----------- -----------
$ 1,950,000 $ 4,200,000 $ 7,200,000 $10,700,000
----------- ----------- ----------- -----------
Distribution to each
participant in
Associates holding an
original $10,000 unit
(as reduced to
$5,000): $12,428.57 $19,809.52 $26,476.19 $32,666.67
There can be no assurance that the sale results described in these
examples will be achieved. The Agents note that, as the likely
availability of the Property for sale has become known to real estate
brokers, the Agents have heard informally indications of interest
-16-<PAGE>
from brokers on behalf of their clients which would likely result in
a sale of the Property in relatively short order (45-90 days from
approval of the Sale Program by the Participants), with a result
likely to yield to the Participants from net sale proceeds a return
of a multiple of their remaining original investment.
Although shareholders of the New Lessee (or their
designees) have arranged for the funding of protective advances under
the Fee Mortgage to pay to the City of New York the 1/1/96 Real
Estate Taxes (and interest thereon) and the 7/1/96 Real Estate Taxes,
as between the New Lessee and Associates the New Lessee should be
responsible for the payment of those Real Estate Taxes. The formula
in the Consensus Report allocated the first $25,000,000 of net sale
proceeds 20% to the New Lessee and 80% to Associates. Thus, so long
as the amount of the net sale proceeds applied to the protective
advances (after taking account of closing adjustments for Real Estate
Taxes with the buyer) is less than 20% of the aggregate of net sales
proceeds applied to repay the Fee Mortgage debt including the
protective advances (the Agent's First Priority distribution) and to
the return to the Participants of their remaining $5,250,000 original
investment balance (the Agent's Second Priority distribution), the
Agent's recommended formula benefits Associates. Because the
principal of the Fee Mortgage (but not the amount of the protective
advances) is reduced each month and because there may be the need for
a third protective advance if the Property sale is not closed before
year end 1996 (or shortly thereafter), it is possible (but not
likely) that the amount of net sale proceeds to be applied to the
protective advances could exceed 20% of the aggregate of net sale
proceeds applied to the Agent's proposed First Priority and Second
Priority allocations. The New Lessee has agreed to pay to the Fee
Mortgagee from sale proceeds otherwise allocable to the New Lessee
the amount (if any) by which the amount of the protective advances
(as reduced through closing adjustments for Real Estate Taxes with
the buyer) exceeds 20% of the aggregate of net sale proceeds to be
applied to the Agent's proposed First Priority and Second Priority
allocations. As a result, the allocation formula proposed by the
Agents can never result in a less favorable allocation to Associates
than the formula proposed in the Consensus Report, and likely will
yield a more favorable result.
4. Liquidation
The Agents recommend that, once the Property is sold, the
net sale proceeds paid to Associates are distributed to the
Participants and Associates' business affairs are wound up (which
would occur promptly thereafter), Associates should be liquidated.
Associates' only business authorized by its partnership agreement,
the ownership of the fee interest in the Property subject to the
Operating Lease, will have ended and there would be no reason to
continue Associates' existence. If Associates were not liquidated at
that point, it would continue to incur expenses for such items as
accounting reports and SEC filings but would have no income to pay
those costs.
-17-<PAGE>
C. Consideration of Alternatives
The Agents considered various alternatives to the Sale
Program described in this Statement: (a) direct operation of the
Property by Associates; (b) creation of a controlled affiliate of
Associates to operate the Property; and (c) Property redevelopment by
Associates. Each has been rejected by the Agents in favor of the
Sale Program.
The initial alternative for Associates, once the New Lessee
had defaulted in its obligation to pay the 1/1/96 Real Estate Taxes,
was to seek to terminate the Operating Lease and take direct control
of operations at the Property. A related alternative was to create a
controlled entity affiliated with Associates to operate the Property
once the Operating Lease had been terminated. The Agents rejected
these alternatives. The Agents were concerned that the Participants
retain insulation from operating liability to the maximum extent
feasible. Accordingly, direct operation of the Property by
Associates was unacceptable. The use of an entity affiliated with
Associates may be subject to question in this regard as well. In
either event, the Agents would have been compelled to suspend monthly
distributions to the Participants to provide an operating reserve, a
step not required so long as the Operating Lease continues in effect.
Another reason for rejecting either direct operation by
Associates or use of a controlled, affiliated entity was the
administrative difficulties that would ensue if Associates were to be
involved in day-to-day operation of the Property. Because it was
intended from inception that Associates would hold a passive
investment, Associates was not organized in a manner which would
facilitate ease of management or decision-making for the Property.
To thus reorganize Associates would be subject to unanimous approval
of the Participants, and it is not clear whether the Participation
Purchase Arrangement -- see Section VII. - Terms of Solicitations of
Consents -- would be applicable.
Even if Associates, or an affiliate, had taken control of
Property operations, the prospects for the Property were not
considered by the Agents to be beneficial to the Participants.
Substantial capital infusions would be required to make the Property
more competitive. See Section I.E. - Financial Information. The
concerns of the Agents reflected the continuing downward trend of
occupancy and space needs in the garment industry, especially for
buildings which had not been modernized. See Section I.D. -
Competition.
The alternative to operating the Property in its current
condition -- substantial redevelopment -- would require significant
capital investment, either through capital calls upon the
Participants or the finding of alternative funding sources. The
Agents could not envision that the requisite percentage of the
Participants would be amenable to investing significant additional
capital beyond their initial investment in a new, speculative venture
-18-<PAGE>
when the Participants had initially invested with the intention of
passive receipt of distributions from property operations conducted
by others. As the Agents had had difficulty in refinancing the
modest mortgage which fell due in 1992, the Agents believed it
unlikely that significant capital could be found from alternative
sources on acceptable terms.
The Agents also believed that, with deteriorating Property
operations and with little prospect for new capital, and in the face
of the default under the Fee Mortgage by reason of the failure to pay
the 1/1/96 Real Estate Taxes, Associates risked a foreclosure of the
existing Fee Mortgage and loss of its entire investment. The fact
that the shareholders of the New Lessee (or their designees) were
able to forestall that result was another important factor in the
assessment made by the Agents in reaching their recommendation of the
Sale Program.
The Agents thus concluded that the Sale Program was in the
present circumstances the best alternative to realize the optimum
result for the Participants. See Section II.B. - Provisions of the
Operating Lease. The Agents recognize that there are costs to the
Participants attendant on this alternative, including the sharing of
net sale proceeds with the New Lessee. See Section II.B.3. -
Distribution of Sale Proceeds - and Section IV.C. - Certain Ownership
of Interests in the New Lessee. Nevertheless the Agents concluded
that the Sale Program was a preferred alternative to any of those
discussed above in the face of the perceived expectations of the
Participants and risks related to any of the other alternatives.
The Agents considered alternative programs for the Property
during mid to late 1995 as the Agents became aware that operating
results of the Original Lessee were continuing to weaken. See
Section I.E. - Financial Information. During this period, however,
there were no defaults under the Operating Lease so that there was no
formal step which could have been taken by Associates under the
Operating Lease to implement any of the alternatives then being
formulated by the Agents. As part of the deliberations in late 1995,
the Agents engaged Brown, Harris to begin its consideration of the
allocation of sale proceeds between Associates, as fee owner, and its
lessee. This action was initiated prior to the occurrence of a
default under the Operating Lease to ascertain whether a sale of the
Property by Associates together with the Original Lessee, one of the
alternatives then under informal consideration by the Agents, would
be beneficial to Associates.
The Agents were aware that major decisions among the
partners in the Original Lessee required an affirmative vote of 75%
in interest of the partnership interests in the Original Lessee.
Thus, when the Partners in the Original Lessee contributed funds in
1994 and 1995 to cover operating losses, more than 75% in interest of
the partners agreed to make the contributions in their respective
percentage interests in the Original Lessee after Peter Malkin
purchased and assumed the interests of those partners who initially
-19-<PAGE>
declined to participate in funding their shares. See Section I.E. -
Financial Information. In late fall 1995, Peter Malkin was advised
by representatives of certain other remaining partners in the
Original Lessee owning in excess of 25% of the partnership interests
that those partners were considering voting their interests in the
Original Lessee to terminate the Operating Lease in accordance with
the provisions thereof permitting the lessee thereunder to terminate
the Operating Lease on sixty (60) days notice. Mr. Malkin so advised
the other Agents of Associates. The Agents recognized that these
partners in the Original Lessee could not themselves cause the
Original Lessee to terminate the Operating Lease as they did not
control the required 75% in interest of partnership interests to
approve such an action. The Agents also recognized, however, the
risks to Associates if the Operating Lease were terminated and the
1/1/96 Real Estate Taxes were unpaid -- a default would occur under
the Fee Mortgage and Associates would not be in a position to cure
the default. Accordingly, Mr. Malkin on behalf of the Agents
contacted the Fee Mortgagee and proposed the arrangements whereby
partners in the Original Lessee would guarantee the proposed
protective advance under the Fee Mortgage to pay the 1/1/96 Real
Estate Taxes, the Fee Mortgagee would forebear from declaring a
default and Associates would similarly forbear from declaring a
default under the Operating Lease based solely on the failure to pay
the 1/1/96 Real Estate Taxes and the 7/1/96 Real Estate Taxes so long
as other obligations under the Operating Lease were timely performed.
Subsequent discussions of these proposals among Mr. Malkin
and representatives of these other partners in the Original Lessee
yielded the Sale Program described in this Statement: (a)
forbearance under the Fee Mortgage so long as protective advances
were arranged to pay the Real Estate Taxes; (b) forbearance under the
Operating Lease so long as (i) arrangements were made to cause the
Fee Mortgagee to forbear and (ii) other obligations under the
Operating Lease were timely performed; and (c) a sale of the Property
in cooperation with the lessee, with the proceeds to be allocated
between the lessee and Associates based on the formula recommended by
the Agents in this Statement. See Section II.B.3. - Distribution of
Sale Proceeds. In essence, the Agents and these other partners
viewed the Sale Program as a package arrangement. It was not until
the very last days of December 1995 that these partners in the
Original Lessee agreed to these proposals and also agreed that the
interest of the Original Lessee in the Operating Lease should be
assigned to the New Lessee so that they could not be personally
called upon pursuant to the Operating Lease to fund Real Estate Taxes
if they agreed to guaranty the protective advances to be made by the
Fee Mortgagee. The actual structure for the protective advances was
ultimately dictated by the Fee Mortgagee, but in all essential
respects comports with the initial proposals comprising the basis for
the Sale Program.
-20-<PAGE>
III. Certain Tax Consequences of the Sale Program and
Liquidation
When the Property is sold, an original Participant will
report long-term capital gain in an amount equal to the sum of (a)
the sale proceeds received by such Participant and (b) the negative
book value of such Participant's participation as of the date of
sale. As of December 31, 1995, the book value of each original
$10,000 participation (subsequently reduced by the distribution of
mortgage financing proceeds to $5,000) was a negative $410. The
maximum federal income tax rate on long-term capital gains for
individual investors is currently 28%.
Whether or not a Participant is a New York State resident,
any gain resulting from sale of the Property will be subject to New
York State income taxes. The gain also may be subject to taxation by
the state in which a Participant resides. Most states will allow a
credit for all or a portion of the tax paid to New York State. If
the Participant is a New York City resident, the gain also will be
subject to the New York City income tax.
There is no additional tax consequence to an original
Participant resulting from the liquidation of Associates following
the sale and the distribution to Participants of net sale proceeds
paid to Associates. A non-original Participant will recognize
additional gain or loss depending upon the tax basis of his or her
interest in Associates on the date of acquisition.
IV. Supervisory Services; Potential Conflicts of Interest
A. Supervisory Services
No remuneration is paid by Associates to any of the Agents
as such. Associates pays supervisory compensation to WM&B for legal,
administrative and financial services. The legal and administrative
services include acting as general counsel to Associates, maintaining
its partnership records, performing physical inspections of the
Property, reviewing insurance coverage and conducting annual
partnership meetings. Financial services include monthly receipt of
rent from the lessee, payment of monthly mortgage obligations,
payment of monthly and additional distributions to the Participants,
payment of all other disbursements, confirmation of the payment of
real estate taxes, review of financial statements submitted to
Associates by the lessee and financial statements audited by and tax
information prepared by Associates' independent certified public
accountants, and distribution of such materials to the Participants.
WM&B also prepares quarterly, annual and other periodic filings with
the Securities and Exchange Commission and applicable state
authorities. The Agents are members of WM&B.
The payment by Associates to WM&B is $42,500 per annum plus
Additional Supervisory Compensation equal to the sum of (i) the first
$37,500 of Additional Rent received by Associates in any lease year
-21-<PAGE>
and (ii) 10% of all amounts available for distribution to the
Participants in any year in excess of the amount representing an
aggregate return at the rate of 18% per annum (including monthly
distributions from Basic Rent) on the remaining original cash
investment. Associates paid WM&B $42,500 during each of the fiscal
years ended December 31, 1994 and December 31, 1995.
WM&B represents Associates and formerly represented the
Original Lessee. WM&B does not represent the New Lessee generally
but will represent the New Lessee in connection with a sale of the
Property and in certain leasing and other matters pending the sale.
B. Certain Ownership of Participants
As of January 2, 1996, the Agents beneficially owned,
directly or indirectly, the following Participations (expressed as
remaining cash investment):
Name & Address Amount of
of Beneficial Beneficial Percent
Title of Class Owners Ownership of Class
Participations Peter L. Malkin $ 47,500 .9048%
in Partnership 21 Bobolink Lane
Interests Greenwich, CT 06830
Stanley Katzman $ 2,500 .0476%
75-18 193rd Street
Flushing, NY 11366
John L. Loehr $ 5,000 .0952%
286 Alpine Circle
River Vale, NJ 07675
At such date, Peter L. Malkin owned of record as trustee,
but not beneficially, a $5,000 Participation and his wife owned
$16,250 of Participations. Mr. Malkin disclaims any beneficial
ownership of such Participations.
Other members of WM&B, their wives and minor children, or
trusts and estates in which they have beneficial interests, own an
aggregate of $15,625 of participations, or approximately .2976% of
the outstanding participations. An affiliate of WM&B, Agency
Holdings Associates, owns an aggregate of $5,000 of participations,
or approximately .0952% of the outstanding participations.
C. Certain Ownership of Interests in the New Lessee
Peter L. Malkin and Isabel W. Malkin own, respectively,
51.25% and 2.5% of the issued and outstanding shares of the New
Lessee. A substantial portion of the shares owned by Peter L. Malkin
are held by him for the benefit of members of his family, but he
-22-<PAGE>
retains voting control. Harry B. Helmsley owns 36.25% of the issued
and outstanding shares of the New Lessee, and adult children of
Helmsley Spear, Inc. executives own 10% of the issued and outstanding
shares of the New Lessee. All major actions by the New Lessee, such
as its agreement to the allocation of sale proceeds from the sale of
the Property recommended by the Agents (see Section II.B.3. -
Distribution of Sale Proceeds), require an affirmative vote of 75% of
the shares of the New Lessee.
D. Potential Conflicts of Interest
The Agents will only share in the proceeds of sale of the
Property received by Associates to the extent that they beneficially
hold participations in Associates. The Agents thus receive no extra
or special benefit for their service as such. Each Agent, as a member
in WM&B, will share in fees received by that firm for its service to
Associates as counsel in connection with the sale. Neither the
Agents, as such, nor WM&B will share in the proceeds of a sale.
The sale proceeds from the Property will be distributed as
described above (see Section II.B.3. - Distribution of Sale
Proceeds), based on the priorities accorded by the Agents for the
benefit of Associates and then based upon the Consensus Formula
reached by Brown, Harris and ESG. If Associates terminated the
Operating Lease and operated the Property itself, it would not be
obligated to pay the New Lessee any portion of the sale proceeds.
However, the Agents believe it is in the interest of Associates that
the New Lessee continue to operate the Property under the Operating
Lease. See Section II - Sale Program. Based on their ownership
interest in New Lessee, Mr. Malkin and his wife and, beneficially
through Mr. Malkin, other members of his family will receive 53.75%
of any net sale proceeds received by the New Lessee. Mr. Malkin will
also share some of those proceeds with some of the partners in the
Original Lessee from whom he assumed interests. His arrangements
with them allow him first to recoup any additional investment he made
since his assumption of their interests, together with interest on
such amounts. He then shares additional amounts, if any, in varying
percentages. It will not be clear until the sale is concluded
whether he will receive any amount or will share any proceeds with
any of them.
The Agents for the Participants, WM&B and Helmsley-Spear,
Inc., have received from the shareholders of the New Lessee (or their
designees) indemnities (in proportion to share ownership in the New
Lessee) to assure that, if the allocation of sale proceeds described
herein is challenged, the shareholders of the New Lessee (or their
designees) will bear the costs and result of that challenge. These
indemnities simply hold those parties harmless in connection with the
Sale Program.
Both Brown Harris and ESG are independent and not
affiliated with any party to the proposed Sale Program or this
investment. Each has received from Associates and the New Lessee
-23-<PAGE>
indemnities regarding challenges to the allocation formula for sale
proceeds recommended by those firms. No other independent party has
reviewed the transactions described herein.
C&W is independent and not affiliated with any party to the
proposed Sale Program or this investment.
V. Fees and Expenses
All fees and expenses relating to development of the
recommended program and the solicitation of Consents hereunder and
the fees of Brown Harris, ESG and C&W will be treated as expenses of
sale and paid from funds derived from the sale of the Property. If
the Sale Program is not approved, fees and expenses of C&W will be
paid by the New Lessee and the other costs described above will be
paid from rents paid to Associates under the Operating Lease.
Pursuant to a Tunnel Agreement, dated May 1, 1957, between
the Property and the property across 37th Street known as 500 Seventh
Avenue, a tunnel for utilities was constructed under 37th Street.
The only service to the Property which is supplied through the tunnel
consists of the sprinkler pump for both the Property and 500 Seventh
Avenue which is located in 500 Seventh Avenue. A new owner of the
Property must be acceptable to the City of New York and must assume
the obligations under this agreement or the tunnel must be closed.
The costs of closing the tunnel, if required, would be an expense of
the sale but the amount thereof cannot now be estimated as the cost
will be based on the extent of the work required by the City at the
time. The Agents are advised by engineers for the managing agent for
the Property that the cost of providing a sprinkler pump for the
Property if the tunnel is closed would be approximately $100,000.
VI. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Associates was organized solely for the purposes of
acquiring the Property subject to the Operating Lease. Associates is
required to pay from Basic Rent the Fee Mortgage charges and the
basic payment for supervisory services and disbursements, and dis-
tributes the balance to the Participants. Additional Rent, reduced
by Additional Supervisory Compensation to WM&B, is distributed to the
Participants. Because pursuant to the Operating Lease the lessee
assumes sole responsibility for the condition, operation, repair,
maintenance and management of the Property, so long as the Operating
Lease continues Associates does not, and need not, maintain reserves
to defray operating expenses of the Property or professional fees.
See Section II.C. - Consideration of Alternatives. In fact, if
Associates accumulated cash reserves by withholding or reducing
distributions to the Participants from Basic Rent or Additional Rent,
the Participants would suffer adverse tax consequences because the
amounts held back by Associates would nevertheless be taxable to the
Participants.
-24-<PAGE>
During the twelve months ended December 31, 1995, and in
the first three months of 1996, Associates made regular monthly
distributions of $48.58 for each original $10,000, (as reduced to
$5,000) participation (or $582.96 per annum for each remaining
original $10,000 participation as reduced). Because no Additional
Rent was paid to Associates for the lease year ended April 30, 1995,
there was no additional distribution in 1995. See Section I.E. -
Financial Information.
Distributions by Associates depend solely on the payment by
the New Lessee of Basic Rent and Additional Rent in accordance with
the terms of the Operating Lease. Associates expects to make the
monthly distributions so long as it receives the payments of Basic
Rent under the Operating Lease. Because no Additional Rent will be
paid for the lease year ended April 30, 1996, Associates will not
make any Additional Distribution in 1996. See Notes 4, 7 and 8 to
Financial Statements. Annually, on or about June 30 of each year,
the Agents distribute to the Participants information regarding the
lessee's results of operations for the lease year ended April 30 and
a calculation of any Additional Rent due for the lease year then
expired. The information for the lease year ended April 30, 1996
should be distributed on or about July 31, 1996. Those annual
operating statements from the lessee of its income and expense are
reviewed by the outside accountants for the lessee and are prepared
substantially in accordance with the requirements of the Operating
Lease.
Associates' results of operations are affected primarily by
the amount of rent payable to it under the Operating Lease. The
following summarizes the material factors affecting Associates'
results of operations for the three preceding years, and for the
first three months of 1996:
(a) Total income decreased for the year ended December 31, 1995
as compared with the year ended December 31, 1994. Such
decrease is directly attributable to the reduction in
dividend income earned on funds invested with Fidelity U.S.
Treasury Income Portfolio in the year 1995. Total income
decreased for the year ended December 31, 1994 as compared
with the year ended December 31, 1993. Such decrease is
mainly attributable to the fact that no Additional Rent was
received by Associates in 1994. See Note 4 to the
Financial Statements.
(b) Total expenses decreased for the year ended December 31,
1995 as compared with the year ended December 31, 1994.
Such decrease was the net result of (i) a decrease in
interest expense on the Fee Mortgage and (ii) an increase
in amortization of mortgage refinancing costs. See Notes
2(c) and 3 to the Financial Statements. Total expenses
decreased for the year ended December 31, 1994 as compared
with the year ended December 31, 1993. Such decrease was
the net result of (x) a decrease in the additional payment
-25-<PAGE>
for supervisory services payable in 1994, (y) an increase
in interest expense on the Fee Mortgage and (z) an increase
in the amortization of mortgage refinancing costs. See
Notes 2(c), 3, 4 and 5 to the Financial Statements.
(c) Total income decreased for the three-month period ended
March 31, 1996, as compared with the three-month period
ended March 31, 1995. Such decrease resulted from a
decrease in dividend income earned on funds invested with
Fidelity U.S. Treasury Income Portfolio. Total expenses
decreased for the three month period ended March 31, 1996,
as compared with the three month period ended March 31,
1995. Such decrease resulted from a decrease in interest
expense on the mortgage. See Note B to the Quarterly
Financial Statements.
The following events and considerations, of which
Associates is aware, have affected and will continue to affect
Associates' operations and financial condition:
* The Original Lessee operated the Property at a
substantial loss during the years ended December 31,
1995 and December 31, 1994. In 1994 and 1995, the
Original Lessee made capital calls on its partners in
the aggregate amount of $1,300,000 to defray certain
operating expenses and improvement costs at the
Property. In addition, shareholders in the New Lessee
(or their designees) borrowed approximately $1,000,000
to fund the protective advance under the Fee Mortgage to
pay the 1/1/96 Real Estate Taxes and approximately
$1,000,000 to fund the protective advance under the Fee
Mortgage to pay the 7/1/96 Real Estate Taxes.
The downturn and changes in methods of operations in the
garment industry have had and will continue to have a
major impact on the Property and its operations and
profitability. Associates has been advised that the
loss of tenants at the Property and the related
reduction in operating income (or increase in operating
losses) affecting the Property are primarily due to
insolvencies affecting tenants in the garment business
and reduced demand for space.
* The New Lessee has the right to abandon or assign its
interest in the Operating Lease. See Section I.B. -
Provisions of the Operating Lease. No assurance can be
provided that the New Lessee will not exercise its right
to terminate the Operating Lease in the future but, if
the New Lessee does so, it will lose its right to share
in net sale proceeds. Similarly, although the Agents
have received no written assurances that the New Lessee
will not default in the timely performance of its
obligations under the Operating Lease (other than the
-26-<PAGE>
payment of Real Estate Taxes), a default by the New
Lessee would allow the Agents to seek to terminate the
Operating Lease, in which event the New Lessee would
lose its right to share in net sale proceeds.
Accordingly, the Agents do not believe it likely that
the New Lessee will default if the Sale Program is
approved by the Participants. The Agents believe that,
if the Operating Lease is terminated for any reason,
Associates will be able to sell the Property for an
amount in excess of the Fee Mortgage, including any
protective advances made thereunder, and future Real
Estate Taxes.
Liquidity and Capital Resources
There has been no significant change in Associates'
liquidity for the twelve-months period ended December 31, 1995, as
compared with the twelve-months period ended December 31, 1994, or
for the three month period ended March 31, 1996 as compared to the
same period in 1995. If the Sale Program is not approved by the
Participants, then, when the Fee Mortgage falls due in November,
1997, Associates would be required either to refinance the Fee
Mortgage or raise new capital from the Participants to repay the
balance then due. Whether the Fee Mortgage can then be refinanced is
speculative but the Agents note the difficulty Associates faced in
refinancing the Fee Mortgage when it last matured in 1992. See
Section II.C. - Consideration of Alternatives.
Inflation
Inflationary trends in the economy should have no material
impact during the Sale Program.
VII. Terms of Solicitations of Consents
Each Agent acts as agent for a group of Participants owning
a one-third interest in Associates. Originally, each group of
Participants owned $3,500,000 in interests of the original
$10,500,000 investment in Associates. As a result of the $5,250,000
mortgage financing during the initial year of Associates' ownership
of the Property, each group owns $1,750,000 in interests of the
remaining $5,250,000 originally invested by the Participants. At
December 31, 1995, no person held participations aggregating more
than 5% of the total outstanding participations.
On December 31, 1995, there were 908 Participants holding
participations in the three groups. Each Participant's voting
percentage in his group is determined by a fraction, the numerator of
which is the face amount of the participation owned and the
denominator of which is the group's original $3,500,000 investment in
Associates. There is no record date establishing the identity of the
Participants entitled to vote for the Sale Program. Holders of
participations as of July 2, 1996 will be recognized as entitled to
-27-<PAGE>
vote. However, if any participation is transferred before the
consent with respect to that Participation is given, the transferee
will be entitled to vote. If consent to the Sale Program or the
liquidation of Associates has been given prior to the transfer of a
Participation, however, the transferee will be bound by the vote of
the transferor. In addition, the Agents and their designees will be
entitled to vote the participation of any non-consenting Participant
whose interest is purchased by them under the Participation Purchase
Arrangement (as defined in the following paragraph).
The consent of all Participants is required to authorize
the Sale Program and to authorize liquidation. However, under the
terms of the Participating Agreement between each Agent and his
Participants, if Participants owning 90% of the outstanding
participations in such Agent's group consent to the Sale Program and
to liquidation, the Agent for that group or his designee has the
right to purchase the interest of any Participant in that group who
failed to consent (or, if the Participant is not an individual, has
not furnished evidence of authority for giving such consent) within
10 days after the mailing by the Agent of a written request therefor,
by certified or registered mail ("Participation Purchase
Arrangement"). The purchase price is the greater of (i) the book
value of such participation at the time of purchase, i.e., the
original capital contribution of such Participant or such
Participant's predecessor, less any repayment thereon to the date of
purchase and (ii) $100. As of December 31, 1995, the book value of
each original $10,000 participation (subsequently reduced by mortgage
proceeds to $5,000) was a negative $410 (computed by dividing
Associates' negative equity of $430,670 by the remaining cash
investment of $5,250,000, and then multiplying the resulting amount
by the remaining participation amount of $5,000). Accordingly, the
purchase price would be $100 for each original $10,000 Participation.
If 90% or more of the Participants in an Agent's group
consent to the Sale Program and liquidation, each Agent (or his
designee) presently intends to purchase the interest of any
non-consenting Participant for $100. Funds for the purchase of the
interests of non-consenting Participants will not be provided by
Associates. Any Participant whose participation is purchased by an
Agent (or his designee) will not receive any Additional Rent paid in
respect of the year of purchase. Due to the operating loss at the
Property, there is no reasonable expectation that there will be
Additional Rent in the near future.
Notwithstanding the provisions in Associates' Participating
Agreements relating to the Participation Purchase Arrangement, no
purchase of a participation will be effected without (i) prior
written notice to a non-consenting Participant that Participants
owning at least 90% of the outstanding participations in the relevant
group have consented to the Sale Program and liquidation and (ii)
affording such non-consenting Participant an opportunity to consent
to the Sale Program and liquation.
-28-<PAGE>
Forms of Consent that are signed and returned without a
choice indicated as to any matter for which Consent is sought will be
deemed to constitute a consent to the Sale Program or to the
liquidation of Associates, as the case may be, and will be binding on
each Participant as if such Participant had actually indicated such
choice on such form. If the Consent is returned undated, it will be
deemed dated as of the date received by the Agents.
Participations are not traded on an established securities
market, nor are they readily tradeable on a secondary market or the
substantial equivalent thereof. Based on Associates' transfer
records, participations are sold by holders from time to time in
privately negotiated transactions, and, in many instances, Associates
is unaware of the prices at which such transactions occur (other than
certain intra-family transfers involving participations owned by
members of WM&B or their families). However, Associates has been
advised that the range of sales prices during the past two calendar
years for an original $10,000 participation as reduced to $5,000 was
$2,500 to $5,000.
There is no document not included herewith which is
incorporated by reference.
If you have any question or desire any additional
information concerning the proposed Sale Program, please communicate
in writing with any partner in Wien, Malkin & Bettex, 60 East 42nd
Street, New York, NY 10165-0015 or by telephone at 212-687-8700.
PLEASE SIGN, DATE AND IMMEDIATELY RETURN THE COLORED COPY
OF THE CONSENT IN THE ENCLOSED ENVELOPE. ONCE GIVEN, THE CONSENT MAY
NOT BE REVOKED.
-29-<PAGE>
April 15, 1996
Garment Capitol Associates
New York, N.Y.
We have issued our reports dated April 10, 1996 accompanying the
financial statements and schedule of Garment Capitol Associates
appearing in the Annual Report of the Company on Form 10-K to the
Securities and Exchange Commission for the year ended December
31, 1995. We consent to the use of the aforementioned reports in
the proxy statement of Garment Capitol Associates, which is being
filed pursuant to the rules under Regulation 14A of the
Securities Exchange Act of 1934 and included in Commission File
Number: 0-768. Our consent relates only to the financial
statements and financial statement schedule, and we do not opine
on the adequacy or completeness of the textual disclosures
contained in the proxy material.
Jacobs Evall & Blumenfeld LLP
Certified Public Accountants
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the participants in Garment Capitol Associates
(a Partnership)
New York, N. Y.
We have audited the accompanying balance sheets of Garment Capitol Associates
(the "Company") as of December 31, 1995 and 1994, and the related statements of
income, partners' capital deficit and cash flows for each of the three years in
the period ended December 31, 1995, and the supporting financial statement
schedule as contained in Item 14(a)(2) of this Form 10-K. These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule 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 Garment Capitol Associates as
of December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles, and the related
financial statement schedule, when considered in relation to the basic
financial statements, presents fairly, in all material respects, the
information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company owns commercial property
situated in New York City. As discussed more fully in Note 11 to these
financial statements, the original lessee of this property had sustained
substantial operating losses during 1995 and 1994, and on December 29, 1995
assigned the operating lease to a new lessee, thereby effectively terminating
the liability under the operating lease of the original lessee and its
remaining partners. The new lessee has failed to pay the property's real
estate taxes that fell due on January 1, 1996, which constitutes a default of
<PAGE>
- 2 -
the operating lease as of that date, as well as a breach of the Company's
obligations under the fee mortgage. These events raise substantial doubt
about the Company's ability to continue as a going concern.
Management's actions subsequent to these events, and its plans in regard to
these matters, including the proposed solicitation of consents from the
participants in the Company to sell the property, are also described in Note
11. The financial statements do not include any adjustments that might result
from the outcome of these uncertainties.
Jacobs Evall & Blumenfeld LLP
Certified Public Accountants
New York, N. Y.
April 10, 1996
<PAGE>
EXHIBIT A
GARMENT CAPITOL ASSOCIATES
BALANCE SHEETS
A S S E T S
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents (Note 10):
Morgan Guaranty Trust Company of New York $ 37,547 $ 37,467
Distribution account held by
Wien, Malkin & Bettex................... 49,826 51,009
Fidelity U.S. Treasury Income
Portfolio............................... 826 232,847
TOTAL CURRENT ASSETS............... 88,199 321,323
Real Estate (Notes 2b, 3 and 11):
Land....................................... 2,500,000 2,500,000
Building................................... $8,000,000 $8,000,000
Less: Accumulated depreciation.......... 8,000,000 - 8,000,000 -
Other Assets:
Mortgage refinancing costs, less
accumulated amortization of $53,025
in 1995 and $24,838 in 1994 (Note 2c)..... 54,025 44,644
TOTAL ASSETS....................... $2,642,224 $2,865,967
</TABLE>
LIABILITIES AND PARTNERS' CAPITAL DEFICIT
<TABLE>
<S> <C> <C> <C> <C>
Current Liabilities:
Principal payments of first
mortgage payable within one
year (Notes 3 and 11)..................... $ 133,052 $3,312,692
Accrued interest payable................... 26,906 65,371
TOTAL CURRENT LIABILITIES.......... 159,958 3,378,063
Long-term Liabilities:
Bonds, mortgages and similar debt:
First mortgage payable (Notes 3 and 11).. $3,045,988 -
Less: Current installments shown above.. 133,052 2,912,936 - -
TOTAL LIABILITIES.................. 3,072,894 3,378,063
Partners' capital deficit (Exhibit C)........ (430,670) (512,096)
TOTAL LIABILITIES AND PARTNERS'
CAPITAL DEFICIT................... $2,642,224 $2,865,967
</TABLE>
See accompanying notes to financial statements.
<PAGE>
EXHIBIT B
GARMENT CAPITOL ASSOCIATES
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Revenues:
Rent income, from a related
party (Notes 4 and 11)................... $1,090,000 $1,090,000 $2,100,196
Dividend income........................... 3,027 7,994 1,683
1,093,027 1,097,994 2,101,879
Expenses:
Interest on mortgage (Note 3)............. 328,802 348,479 324,445
Supervisory services, to a
related party (Note 5)................... 42,500 42,500 135,601
Amortization of mortgage
refinancing costs (Note 2c).............. 28,187 15,307 7,748
399,489 406,286 467,794
NET INCOME, CARRIED TO PARTNERS'
CAPITAL DEFICIT (NOTE 8)......... $ 693,538 $ 691,708 $1,634,085
Earnings per $5,000 participation
unit, based on 1,050 participation
units outstanding during each year......... $ 661 $ 659 $ 1,556
</TABLE>
See accompanying notes to financial statements.
<PAGE>
EXHIBIT C-1
GARMENT CAPITOL ASSOCIATES
STATEMENT OF PARTNERS' CAPITAL DEFICIT
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Partners' Partners'
capital deficit Share of capital deficit
January 1, 1995 net income Distributions December 31, 1995
<S> <C> <C> <C> <C>
Donald A. Bettex Group........ $(170,699) $231,179 $ 204,037 $(143,557)
Peter L. Malkin Group......... (170,699) 231,179 204,037 (143,557)
Martin D. Newman Group
(formerly Alvin
Silverman Group)............ (170,698) 231,180 204,038 (143,556)
$(512,096) $693,538 $ 612,112 $(430,670)
</TABLE>
See accompanying notes to financial statements.
<PAGE>
EXHIBIT C-2
GARMENT CAPITOL ASSOCIATES
STATEMENT OF PARTNERS' CAPITAL DEFICIT
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
Partners' Partners'
capital deficit Share of capital deficit
January 1, 1994 net income Distributions December 31, 1994
<S> <C> <C> <C> <C>
Donald A. Bettex Group...... $(197,231) $ 230,570 $ 204,038 $(170,699)
Peter L. Malkin Group....... (197,231) 230,569 204,037 (170,699)
Alvin Silverman Group....... (197,230) 230,569 204,037 (170,698)
$(591,692) $ 691,708 $ 612,112 $(512,096)
</TABLE>
See accompanying notes to financial statements.
<PAGE>
EXHIBIT C-3
GARMENT CAPITOL ASSOCIATES
STATEMENT OF PARTNERS' CAPITAL DEFICIT
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
Partners' Partners'
capital deficit Share of capital deficit
January 1, 1993 net income Distributions December 31, 1993
<S> <C> <C> <C> <C>
Donald A. Bettex Group........ $(272,190) $ 544,695 $ 469,736 $(197,231)
Peter L. Malkin Group......... (272,190) 544,695 469,736 (197,231)
Alvin Silverman Group......... (272,190) 544,695 469,735 (197,230)
$(816,570) $1,634,085 $1,409,207 $(591,692)
</TABLE>
See accompanying notes to financial statements.
<PAGE>
EXHIBIT D
GARMENT CAPITOL ASSOCIATES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 693,538 $ 691,708 $1,634,085
Adjustments to reconcile net income to
cash provided by operating activities:
Amortization of mortgage refinancing
costs (Note 2c)............................. 28,187 15,307 7,748
Changes in operating liabilities:
Accrued interest payable................... (38,465) 32,091 5,163
Rent received in advance................... - - (33,763)
Mortgage refinancing costs paid............ (37,568) (25,493) (10,226)
Net cash provided by
operating activities................ 645,692 713,613 1,603,007
Cash flows from financing activities:
Cash distributions.............................. (612,112) (612,112)(1,409,207)
Principal payments on first mortgage payable.... (266,704) (32,118) (29,218)
Net cash used in financing
activities.......................... (878,816) (644,230)(1,438,425)
Net increase (decrease) in cash
and cash equivalents................ (233,124) 69,383 164,582
Cash and cash equivalents, beginning of year...... 321,323 251,940 87,358
CASH AND CASH EQUIVALENTS,
END OF YEAR......................... $ 88,199 $ 321,323 $251,940
Supplemental disclosures of cash flow information:
1995 1994 1993
Cash paid for:
Interest...................................... $ 367,267 $ 316,388 $ 319,282
</TABLE>
See accompanying notes to financial statements.
<PAGE>
GARMENT CAPITOL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
1. Business Activity
Garment Capitol Associates ("Associates") is a general partnership which
owns commercial property situated at 498 Seventh Avenue, New York, New
York. Through December 28, 1995 the property was net leased to 498
Seventh Avenue Associates (the "Original Lessee"). Effective December 29,
1995 the operating lease was assigned to 4987 Corporation (the "New
Lessee"). See Notes 4 and 11.
2. Summary of Significant Accounting Policies
a. Cash and Cash Equivalents:
Cash and cash equivalents include investments in money market funds
and all highly liquid debt instruments purchased with a maturity of
three months or less.
b. Real Estate and Depreciation of Building:
Real estate, consisting of land and building (the "Property"), is
stated at cost. The building is fully depreciated. Depreciation of
the building had been provided on the straight-line method based on a
thirty-year life (3-1/3% per annum).
c. Mortgage Refinancing Costs and Amortization:
Mortgage refinancing costs totaling $107,050 have been incurred in
connection with the December 1, 1992 refinancing of the first
mortgage payable (see Note 3), and are being charged to income
ratably over the five year term of the first mortgage. Such costs
include payments of $49,564 to the firm of Wien, Malkin & Bettex, a
related party (see Note 5).
d. Use of Estimates:
In preparing financial statements in conformity with generally
accepted accounting principles, management often makes estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements, as well as the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
3. First Mortgage Payable
On November 30, 1987, a first mortgage was placed on the Property with
Apple Bank for Savings in the amount of $3,485,000. Annual mortgage
charges were $348,500, payable in equal monthly installments, applied
first to interest at the rate of 9-1/2% per annum and the balance to
principal. The mortgage was scheduled to mature on December 1, 1992 with
a balance of $3,376,341 but was extended until June 16, 1993, when the
bank issued a commitment to extend and modify the mortgage for a five year
<PAGE>
GARMENT CAPITOL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
(continued)
3. First Mortgage Payable (continued)
period from December 1, 1992 through December 1, 1997. The closing, which
had been delayed, occurred on March 23, 1995. The terms of the extended
mortgage provide for constant monthly payments totalling $435,388 per
annum, including interest at the rate of 10% per annum from December 1,
1992 through October 31, 1993; constant monthly payments totalling
$447,316 per annum, including interest at the rate of 10 1/2% per annum
from November 1, 1993 through November 30, 1994; and constant payments
totalling $449,586 per annum, including interest at the rate of 10.6% per
annum from December 1, 1994 through maturity. The constant payments are
based on a fifteen year amortization schedule. Payments of principal and
interest made subsequent to the original maturity date (December 1, 1992)
were reapplied according to these new repayment terms and, at the closing,
a retroactive payment of $218,081 was made to bring the payments current
with the new mortgage schedule. The balance of the mortgage at maturity
will be $2,778,001.
Principal payments required to be made on long-term debt are as follows:
Year ending December 31,
1996................................................ $ 133,052
Through December 1, 1997............................ 2,912,936
$3,045,988
The Property is pledged as collateral for the first mortgage. See Note
11.
4. Related Party Transactions - Rent Income
Rent income for the years ended December 31, 1995, 1994 and 1993
represents twelve equal monthly installments of an annual net rent of
$1,090,000 (the "Basic Rent") under a net operating lease dated May 1,
1957 (the "Operating Lease") with the Original Lessee, plus, where
applicable, payments of additional rent as provided under certain
conditions with respect to the lessee's defined net income from operations
for lease years ending April 30th.
For the years ended December 31, 1995 and 1994, no additional rent was
earned from the Original Lessee for its lease years ended April 30, 1995
and 1994. For the year ended December 31, 1993 additional rent of
$1,010,196 was earned from the Original Lessee for its lease year ended
April 30, 1993.
No additional rent is accrued by Associates for the period between the end
of the lessee's lease year and the end of Associates' fiscal year.
<PAGE>
GARMENT CAPITOL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
(continued)
4. Related Party Transactions - Rent Income (continued)
The current term of the Operating Lease expires on April 30, 2007. The
Operating Lease includes a renewal option to extend the term to April 30,
2032. Pursuant to the Operating Lease, the lessee has the right to
surrender its leasehold interest at any time, upon 60 days' prior written
notice, without further liability after the date of surrender. The lessee
also has the right to assign the Operating Lease, without Associates'
consent, so long as the assignee assumes, in writing, all of the
obligations of the Operating Lease. The Original Lessee exercised such
assignment right on December 29, 1995, and the New Lessee assumed all
lessee obligations under the Operating Lease as of that date; such
assignment effectively terminated the liability of the Original Lessee and
its remaining partners under the Operating Lease. The shares in the New
Lessee are owned by the partners in the Original Lessee. See Note 11.
A partner in Associates is also a partner in the Original Lessee.
5. Related Party Transactions - Supervisory Services
Supervisory services (including disbursements and cost of regular
accounting services) for the years ended December 31, 1995, 1994 and 1993,
totaling $42,500, $42,500 and $135,601, respectively, were paid to the
firm of Wien, Malkin & Bettex. Some partners in that firm are also
partners in Associates. Fees for supervisory services are paid pursuant
to an agreement, which amount is based on a rate of return of investment
achieved by the participants in Associates each year.
6. Number of Participants
There were approximately 900 participants in the participating groups at
December 31, 1995, 1994 and 1993.
7. Determination of Distributions to Participants
Distributions to participants represent mainly the excess of rent income
received over the mortgage requirements, as anticipated, and expenses
paid.
8. Distributions and Amount of Income per $5,000 Participation Unit
Distributions per $5,000 participation unit during the years 1995, 1994
and 1993, based on 1,050 participation units outstanding during each year,
totaled $583, $583 and $1,342, respectively. All such distributions
consisted of income only.
<PAGE>
GARMENT CAPITOL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
(continued)
8. Distributions and Amount of Income per $5,000 Participation Unit
(continued)
Net income is computed without regard to income tax expense since
Associates does not pay a tax on its income; instead, any such taxes are
paid by the participants in their individual capacities.
Generally, financial and income tax reporting have been the same.
However, for income tax purposes in 1992, the rent received in advance
from the lessee in 1992 in excess of the overage rent earned (Note 4),
amounting to $33,763, was treated as taxable income in 1992 and reduced
taxable income in 1993.
9. Economic Dependency on Operations of Building
Associates' building is located in the heart of New York City's "Garment
District", and its tenants are almost exclusively in the garment business.
The property, as well as other buildings in the district, has suffered
significant vacancies in recent years. As a result, the Original Lessee
has experienced continuous decreases in
its revenue stream, causing its net income from operations, as defined in
the Operating Lease, in 1994 and 1995 to fall below the amount necessary
to require payment of any additional rent for such years. For the lease
year ended April 30, 1995 the Original Lessee reported a net loss
(unaudited) of $2,222,031. See Note 11.
10. Concentration of Credit Risk
Associates maintains cash balances in a bank, money market fund (Fidelity
U.S. Treasury Income Portfolio), and a distribution account held by Wien,
Malkin & Bettex. The bank balance is insured by the Federal Deposit
Insurance Corporation up to $100,000, and at December 31, 1995 was
completely insured. The cash in the money market fund and the
distribution account held by Wien, Malkin & Bettex is not insured. The
funds held in the distribution account were paid to the participants on
January 1, 1996.
11. Subsequent Events Regarding Default by New Lessee of the Operating Lease,
Breach of Associates' Obligations Under the Fee Mortgage, and Proposed
Solicitation of Consents from the Participants to a Sale of the Property
The New Lessee has paid Basic Rent under the Operating Lease due January
1, 1996, February 1, 1996, March 1, 1996 and April 1, 1996. Associates in
turn has continued to pay (1) the monthly mortgage payments to the Apple
Bank for Savings (the "Fee Mortgagee") on Associates' fee mortgage on the
Property (the "Fee Mortgage") through April 1, 1996; (2) its monthly fee
for supervisory services through April, 1996; and (3) its monthly
distributions to the participants in Associates. Associates holds the
April 1, 1996 rent to cover the May 1996 mortgage payment and a May 1996
distribution to participants. The New Lessee failed to pay the New York
City real estate and Business Improvement District ("BID") assessments in
the amounts of $936,180 and $29,695, respectively, which were due on
<PAGE>
GARMENT CAPITOL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
(continued)
11. Subsequent Events Regarding Default by New Lessee of the Operating Lease,
Breach of Associates' Obligations Under the Fee Mortgage, and Proposed
Solicitation of Consents from the Participants to a Sale of the Property
(continued)
January 1, 1996 (collectively, the "1/1/96 Real Estate Taxes"). As a
result, the New Lessee is in default of the Operating Lease as of that
date.
The New Lessee has requested that Associates forbear from exercising its
rights and remedies under the Operating Lease, including termination of
the Operating Lease, by reason of the failure to pay the 1/1/96 Real
Estate Taxes, while management of Associates solicits the consent of its
participants to a sale of the Property (the "Solicitation"). If
Associates does forbear, the New Lessee has agreed to cooperate fully with
Associates in connection with the sale of the Property and to continue to
perform its other obligations under the Operating Lease, including payment
of the Basic Rent, to enable Associates to continue its monthly
distributions to the participants, pay its supervisory fee and pay its
monthly mortgage obligation.
The failure to pay the 1/1/96 Real Estate Taxes also constituted a breach
of Associates obligations under the Fee Mortgage. The shareholders of the
New Lessee (or designees on their behalf) have borrowed from the Fee
Mortgagee a sum equal to the 1/1/96 Real Estate Taxes and interest thereon
to the date of the borrowing. This sum was used to fund a protective
advance by the Fee Mortgagee to pay the 1/1/96 Real Estate Taxes and
interest thereon through the purchase of a subordinate participating
interest in the Fee Mortgage in such amount. As a result, the Fee
Mortgagee has agreed to forbear from exercising rights and remedies under
the Fee Mortgage based on Associates' failure to pay (or cause to be paid
by the New Lessee) the 1/1/96 Real Estate Taxes. Interest on the
protective advance will be paid by the New Lessee so long as the Operating
Lease continues in effect.
As to future real estate taxes and BID assessments on the Property
(together with the 1/1/96 Real Estate Taxes, the "Real Estate Taxes"), the
Fee Mortgagee has agreed to make additional loans to such individual
shareholders (or their designees) to fund further protective advances to
cover the Real Estate Taxes due July 1, 1996 (covering the period to
December 31, 1996) and January 1, 1997 (covering the period to June 30,
1997). Those individual borrowers intend to borrow the funds from the Fee
Mortgagee and fund the protective advances as required to pay the July 1,
1996 and January 1, 1997 Real Estate Taxes if the participants in
Associates authorize a sale of the Property and so long as the Operating
Lease continues in effect.
Management advises that the Solicitation, which is scheduled to be
completed no later than August 30, 1996, will express its belief that the
Property cannot be operated on a profitable basis without significant
capital improvements; it will also opine that the program to sell the
Property will permit Associates to liquidate its investment in an orderly
fashion and avoid the necessity of raising additional capital from the
participants and others to support and renovate the Property while
avoiding litigation costs and the risk of loss of the Property through a
Fee Mortgage foreclosure.
<PAGE>
GARMENT CAPITOL ASSOCIATES
OMITTED SCHEDULES
The following schedules have been omitted as not applicable in the present
instance:
SCHEDULE I - Condensed financial information of registrant.
SCHEDULE II - Valuation and qualifying accounts.
SCHEDULE IV - Mortgage loans on real estate.
<PAGE>
SCHEDULE III
GARMENT CAPITOL ASSOCIATES
Real Estate and Accumulated Depreciation
December 31, 1995
<TABLE>
<S> <C> <C>
Column
A Description Office building and land located at
498 Seventh Avenue, New York, N. Y.
B Encumbrances - Apple Bank for Savings
Balance at December 31, 1995................................. $3,045,988
C Initial cost to company
Land......................................................... $2,500,000
Building..................................................... $8,000,000
D Cost capitalized subsequent to acquisition..................... None
E Gross amount at which carried at close of period
Land........................................................ $2,500,000
Building.................................................... 8,000,000
Total....................................................... $10,500,000(a)
F Accumulated depreciation....................................... $8,000,000(b)
G Date of construction 1921
H Date acquired May 1, 1957
I Life on which depreciation in latest
income statements is computed Not applicable
</TABLE>
(a) There have been no changes in the carrying values of real estate for
the years ended December 31, 1995, December 31, 1994 and December 31,
1993. The costs for federal income tax purposes are the same as for
financial statement purposes.
(b) Accumulated depreciation
Balance at January 1, 1993 $8,000,000
Depreciation:
F/Y/E 12/31/93 None
12/31/94 None
12/31/95 None
Balance at December 31, 1995 $8,000,000
<PAGE>
Item 6.
GARMENT CAPITOL ASSOCIATES
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Basic rent income................ $1,090,000 $1,090,000 $1,090,000 $1,090,000 $1,090,000
Additional rent income........... - - 1,010,196 1,986,498 3,026,069
Dividend income.................. 3,027 7,994 1,683 - -
Total revenue................. $1,093,027 $1,097,994 $2,101,879 $3,076,498 $4,116,069
Net income....................... $ 693,538 $ 691,708 $1,634,085 $2,480,001 $3,414,459
Earnings per $5,000 participation
unit, based on 1,050 participa-
tion units outstanding during the
year............................ $ 661 $ 659 $ 1,556 $ 2,362 $ 3,252
Total assets..................... $2,642,224 $2,865,967 $2,786,398 $2,619,338 $2,608,657
Long-term obligations * ......... $2,912,936 $ - $ - $ - $ -
Distributions per $5,000 par-
ticipation unit, based on 1,050
participation units outstanding
during the year:
Income........................ $ 583 $ 583 $ 1,342 $ 2,360 $ 3,251
Return of capital............. - - - - -
Total distributions........... $ 583 $ 583 $ 1,342 $ 2,360 $ 3,251
</TABLE>
* As described in Note 3 to the Financial Statements, the mortgage
modification retroactive to Decemnber 1, 1992 was closed on
March 23, 1995. As of December 31, 1991 and at December 31 for
the succeeding three years, the mortgage debt ws deemed as current
while the negotiations continued.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Garment Capitol Associates
Condensed Statement of Income
(Unaudited)
For the Three Months Ended
March 31,
1996 1995
Income:
Basic rent, from a related
party (Note B) $ 272,500 $ 272,500
Dividend Income 11 2,846
--------- ---------
Total income 272,511 275,346
--------- ---------
Expenses:
Interest on mortgage 80,156 83,385
Supervisory services, to a
related party (Note C) 10,625 10,625
Amortization of mortgage
refinancing costs 7,042 7,042
--------- --------
Total expenses 97,823 101,052
--------- ----------
Net income $ 174,688 $ 174,294
========= ==========
Earnings per $5,000 participation
unit, based on 1,050 participation
units outstanding during the year $ 166.37 $ 165.99
======== ==========
Distributions per $5,000
participation consisted of
the following:
Income $ 142.36 $ 145.74
========= ==========
At March 31, 1996 and 1995, there were $5,250,000 of participations
outstanding.<PAGE>
<PAGE>
Garment Capitol Associates
Condensed Balance Sheet
(Unaudited)
March 31, 1996 December 31, 1995
Assets
Current assets:
Cash $ 88,210 $ 88,199
Due from lessee 1,011,053 -0-
----------- -----------
Total current assets 1,099,263 88,199
----------- -----------
Real estate
Land 2,500,000 2,500,000
Building 8,000,000 8,000,000
Less, allowance for depreciation ( 8,000,000) ( 8,000,000)
----------- -----------
2,500,000 2,500,000
----------- -----------
Intangible assets
Mortgage refinancing costs 107,050 107,050
Less, allowance for amortization 60,067 53,025
----------- -----------
46,983 54,025
----------- -----------
Total assets $ 3,646,246 $ 2,642,224
=========== ===========
Liabilities and Capital
Current liabilities
Accrued interest on mortgage $ 26,624 $ 26,906
Real estate taxes and interest payable 1,011,053 -0-
Principal payments of first mortgage
payable within one year 3,014,029 133,052
----------- -----------
Total current liabilities 4,051,706 159,958
----------- -----------
Long-term debt -0- 2,912,936
----------- -----------
Capital
Capital deficit, January 1, ( 430,670) ( 512,096)
Add, Net income:
January 1, 1996 through March 31, 1996 174,688
January 1, 1995 through December 31, 1995 693,538
----------- -----------
( 255,982) 181,442
Less, Distributions:
Monthly distributions,
January 1, 1996 through March 31, 1996 149,478
January 1, 1995 through December 31, 1995 612,112
----------- -----------
Total distributions 149,478 612,112
----------- -----------
Capital (deficit)
March 31, 1996 ( 405,460)
December 31, 1995 ( 430,670)
----------- -----------
Total liabilities and capital:
March 31, 1996 $ 3,646,246
December 31, 1995 $ 2,642,224
=========== ===========
<PAGE>
<PAGE>
Garment Capitol Associates
Condensed Statement of Cash Flows
(Unaudited)
January 1, 1996 January 1, 1995
through through
March 31, 1996 March 31, 1995
Cash flows from operating activities:
Net income $ 174,688 $ 174,294
Adjustments to reconcile net income
to cash provided by operating
activities:
Amortization of mortgage refinancing
costs 7,042 7,042
Change in accrued interest payable ( 282) ( 65,371)
Change in real estate taxes payable 1,011,053 -0-
Change in due from lessee ( 1,011,053) -0-
Change in accrued expense -0- 22,957
----------- -----------
Net cash provided by operating
activities 181,448 138,922
----------- -----------
Cash flows from financing activities:
Cash distributions ( 149,478) ( 153,028)
Principal payments on first mortgage ( 31,959) ( 185,491)
Mortgage refinancing costs -0- ( 37,516)
----------- -----------
Net cash used in financing activities ( 181,437) ( 376,035)
----------- -----------
Net increase (decrease) in cash 11 ( 237,113)
Cash, beginning of period 88,199 321,323
----------- -----------
Cash, end of period $ 88,210 $ 84,210
=========== ===========
January 1, 1996 January 1, 1995
through through
March 31, 1996 March 31, 1995
Cash paid for:
Interest $ 80,438 $ 148,756
=========== ===========
<PAGE>
<PAGE>
Garment Capitol Associates
March 31, 1996
Notes to Condensed Financial Statements (Unaudited)
Note A - Basis of Presentation
The accompanying unaudited condensed financial
statements have been prepared in accordance with the instructions
to Form 10-Q and therefore do not include all information and
footnotes necessary for a fair presentation of financial position,
results of operations and statement of cash flows in conformity
with generally accepted accounting principles. The accompanying
unaudited condensed financial statements include all adjustments
(consisting only of normal recurring accruals) which are, in the
opinion of the partners in Registrant, necessary for a fair
statement of the results for such interim periods. The partners
in Registrant believe that the accompanying unaudited condensed
financial statements and the notes thereto fairly disclose the
financial condition and results of Registrant's operations for the
periods indicated and are adequate to make the information pre-
sented therein not misleading.
Note B - Interim Period Reporting
The results for the interim period are not necessarily
indicative of the results to be expected for a full year.
Registrant was organized on January 10, 1957. On May 1,
1957, Registrant acquired fee title to the Garment Capitol
Building (the "Building") and the land thereunder, located at 498
Seventh Avenue, New York, New York (the "Property"). Registrant's
partners are Stanley Katzman, John L. Loehr and Peter L. Malkin
(collectively the "Partners"), each of whom also acts as an agent
for holders of participations in their respective partnership
interests in Registrant (the "Participants").
Registrant does not operate the Property. Registrant
leased the Property to 498 Seventh Avenue Associates (the
"Original Lessee") under a net operating lease (the "Lease") which
commenced as of May 1, 1957 and currently expires on April 30,
2007. Lessee has one 25-year renewal option which has not been
exercised and which, if exercised, will extend the Lease to April
30, 2032.
In 1994 and 1995 the Original Lessee made capital calls
on its partners in the aggregate amount of $1,300,000 to defray
certain operating expenses and improvement costs at the Property.
Despite these new capital infusions, however, the Original Lessee
concluded that to return the Property to profitability would
require a very large additional capital investment, estimated by
the Original Lessee to be as high as $16,000,000. Therefore, on
December 29, 1995, in accordance with the terms of the Operating
Lease, the Original Lessee assigned the Operating Lease to 4987
<PAGE>
<PAGE>
Garment Capitol Associates
March 31, 1996
Corporation (the "New Lessee"), thereby effectively terminating
the liability of the Original Lessee and its partners under the
Lease. The shares in the New Lessee are owned by the partners in
the Original Lessee.
The New Lessee has paid basic rent under the Lease through
May 1, 1996. Registrant applied or reserved these rents to cover
(1) its monthly mortgage payments to the Apple Bank for Savings
("Apple Bank") on Registrants' fee mortgage on the Property (the
"Mortgage Loan"), (2) its monthly fee for supervisory services and
(3) its distributions to the Participants in Registrant. The New
Lessee did not pay the New York City real estate taxes and
Business Improvement District ("BID") assessments in the amounts
of $936,180.00 and $29,695.14, respectively, which were due on
January 1, 1996. As a result, although payment of the January 1,
1996 real estate taxes and BID assessments has been made as
described below, the New Lessee is in default of the Operating
Lease as of that date.
The New Lessee has requested that Registrant forbear from
exercising its rights and remedies under the Lease, including
termination of the Lease, by reason of the failure to pay the
January 1, 1996 real estate taxes and BID assessments, while
Registrant solicits the consent of the Participants to a sale of
the Property. The Partners have submitted a draft of a
solicitation of consents to authorize a sale of the Property,
which includes forbearance in favor of the New Lessee, to the
Securities and Exchange Commission for their review. The details
of the Partners' proposal will be provided in the statement to be
issued by the Partners in connection with the solicitation. If
Registrant does forbear, the New Lessee has agreed to cooperate
fully with Registrant in connection with the sale of the Property
and to continue to perform its other obligations under the Lease,
including payment of basic rent, to enable Registrant to continue
its monthly distributions to the Participants, pay its supervisory
fee and pay its monthly mortgage obligation. The continuation of
the Lease will also serve to insulate Registrant from third party
liabilities attendant on property operations. Because the consent
solicitation program to be made by the Partners for approval of a
sale of the property includes the continuation of the Lease with
the New Lessee, Registrant has not yet sent a notice of default
under the Lease based on the failure of the New Lessee to pay the
January 1, 1996 real estate taxes and BID assessments but the
Agents have been advised that Registrant's right to send such a
notice has not been affected by this delay or by the acceptance of
rent since the default.
Although the failure to pay the January 1, 1996 real
estate taxes and BID assessments also constitutes a breach of
Registrant's obligations under the Mortgage Loan, Apple Bank has
agreed to forbear from exercising its rights and remedies during
the period of the solicitation of consents through a sale of the
<PAGE>
<PAGE>
Garment Capitol Associates
March 31, 1996
Property based on arrangements made between the shareholders of
the New Lessee (or designees on their behalf) and Apple Bank to
fund the January 1, 1996 real estate taxes and BID assessments and
certain future real estate taxes and BID assessments on the
Property (together with the January 1, 1996 real estate taxes, the
"Real Estate Taxes") through protective advances under the
Mortgage Loan. The shareholders of the New Lessee (or designees
on their behalf) have borrowed from Apple Bank the sum of
$1,012,274.18, equal to the January 1, 1996 real estate taxes and
BID assessments, interest thereon to the date of the borrowing,
and certain other minor city charges and interest aggregating less
than $1,500. This sum was used on April 2, 1996 to fund a protective
advance by Apple Bank to pay the January 1, 1996 real estate taxes
and BID assessments, interest thereon and such minor charges, through
the purchase of a subordinate participating interest in the Mortgage
Loan in such amount. Interest on the protective advance will be
paid by the New Lessee so long as the Lease continues in effect.
As to future Real Estate Taxes, Apple Bank has agreed to
make additional loans to such individual shareholders (or their
designees) to fund further protective advances to cover the Real
Estate Taxes due July 1, 1996 (covering the period to December 31,
1996) and January 1, 1997 (covering the period to June 30, 1997).
Those individual borrowers intend to borrow the funds from Apple
Bank and fund the protective advances as required to pay the July
1, 1996 and January 1, 1997 Real Estate Taxes if the Participants
approve a program to sell the Property and so long as the Lease
continues in effect.
The Original Lessee was a partnership in which Peter L.
Malkin was amoung the partners. The stockholders in the New
Lessee are the partners in the Original Lessee. The Partners in
Registrant are also members of the law firm of Wien, Malkin &
Bettex, 60 East 42nd Street, New York, New York, counsel to
Registrant and to Original Lessee (the "Counsel").
Under the Lease, New Lessee must pay (i) annual basic
rent of $1,090,000 (the "Basic Rent") to Registrant and (ii)
additional rent equal to 50% of New Lessee's net operating profit
in excess of $200,000 for each Lease year (the "Additional Rent").
Additional Rent income is recognized when earned from
the New Lessee, at the close of the lease years ending April 30.
Such income, if any, is not determinable until the New Lessee,
pursuant to the Lease, renders to Registrant a certified report on
the operation of the Property. The Lease does not provide for the
New Lessee to render interim reports to Registrant, so no
Additional Rent income is reflected for the period between the end
of the lease year and the end of Registrant's fiscal year. <PAGE>
<PAGE>
Garment Capitol Associates
March 31, 1996
The current term of the Lease expires on April 30, 2007,
and the Lease is subject to the renewal option described above.
Pursuant to the Lease, the Lessee has the option of surrendering
its leasehold interest, at any time, upon 60 days' prior written
notice without further liability after the date of surrender. In
addition, the New Lessee has the right to assign the Lease,
without Registrant's consent, so long as the assignee assumes, in
writing, all of the obligations of the Lease.
On March 23, 1995, Registrant entered into a
Modification and Extension Agreement (the "Modification"), as of
December 1, 1992, with Apple Bank the Mortgage Loan, which was
originally made on November 30, 1987 in the principal amount of
$3,485,000. The Mortgage Loan is secured by a first mortgage on
the Property.
Lessee reported net loss of $2,222,031 for the lease
year ended April 30, 1995; therefore, there was no additional rent
payable for such lease year. Consequently, no additional payments
for supervisory services were payable to Counsel for the lease
year ended April 30, 1995.
Note C - Supervisory Services
Registrant pays Counsel for supervisory services and
disbursements (i) the basic payment of $42,500 per annum ("Basic
Payment"); (ii) an additional annual basic payment of the first
$37,500 of Additional Rent paid by Lessee in any lease year
("Additional Basic Payment"); and (iii) an additional payment of
10% of all distributions to Participants in any year in excess of
the amount representing a return at the rate of 18% per annum on
their remaining cash investment in any year (the "Additional
Payment"). The Additional Basic Payment will be payable in each
year only from Additional Rent received by Registrant from New
Lessee. If Additional Rent in any year is inadequate to cover the
Additional Basic Payment, such deficiency shall be payable in the
following year in which Additional Rent is sufficient.
No remuneration was paid during the three month period
ended March 31, 1996 by Registrant to any of the Partners as such.
Pursuant to the fee arrangements described herein, Registrant paid
Counsel $42,500 during the fiscal year ended December 31, 1995.
Registrant also paid Counsel $10,625 of the Basic Payment for
supervisory services for the three month period ended March 31,
1996.
The supervisory services provided to Registrant by
Counsel include legal, administrative services and financial
services. The legal and administrative services include acting as
general counsel to Registrant, maintaining all of its partnership
records, performing physical inspections of the Building,<PAGE>
<PAGE>
Garment Capitol Associates
March 31, 1996
reviewing insurance coverage and conducting annual partnership
meetings. Financial services include monthly receipt of rent from
the New Lessee, payment of monthly and additional distributions to
the Participants, payment of all other disbursements, confirmation
of the payment of real estate taxes, and active review of
financial statements submitted to Registrant by the Lessee and
financial statements audited by and tax information prepared by
Registrants' independent certified public accountant, and
distribution of such materials to the Participants. Counsel also
prepares quarterly, annual and other periodic filings with the
Securities and Exchange Commission and applicable state
authorities.
Reference is made to Note B for a description of the
terms of the Lease between Registrant and New Lessee. As of March
31, 1996, Mr. and Mrs. Peter L. Malkin own shares in the New
Lessee. Mr. Malkin disclaims any beneficial ownership of Mrs.
Malkin's interests in the New Lessee.
The respective interests of Messrs. Katzman, Loehr and
Malkin, if any, in Registrant arise solely from the ownership of
their respective participations in Registrant and Mr. Malkin's
interests in the New Lessee. The Partners receive no extra or
special benefit not shared on a pro rata basis with all other
Participants in Registrant or partners in the New Lessee.
However, each of the Partners, by reason of his respective
interest in Counsel, is entitled to receive his pro rata share of
any legal fees or other remuneration paid to Counsel for legal
services rendered to Registrant and the New Lessee.
As of March 31, 1996, the Partners owned of record and
beneficially an aggregate $50,000 of Participations, representing
less than 1% of the currently outstanding Participations in
Registrant.
In addition, as of March 31, 1996, certain of the
Partners in Registrant (or their respective spouses) held
additional Participations in Registrant as follows:
Peter L. Malkin owned of record as trustee, but not
beneficially, $5,000 of Participations. Mr. Malkin
disclaims any beneficial ownership of such
Participations.
Isabel Malkin, the wife of Peter L. Malkin, owned of
record and beneficially, $21,250 of Participations.
Mr. Malkin disclaims any beneficial ownership of such
Participations. <PAGE>
July 21, 1995
TO PARTICIPANTS IN GARMENT CAPITOL ASSOCIATES:
We enclose the comparative operating report of the lessee,
498 Seventh Avenue Associates, for the lease years ended April
30, 1995 and April 30, 1994. Additional rent is payable to
Garment Capitol Associates equal to 50% of net profit in excess
of $200,000 per annum. The lessee incurred a loss of $2,222,031
for the lease year ended April 30, 1995; therefore, there was no
additional rent.
On April 27, 1995, we advised participants that we had
concluded the refinancing and extension of the first mortgage on
March 31, 1995. Our letter reported that the building was expe-
riencing serious difficulties in a depressed garment district
market and that occupancy in the building was approximately 55%.
Neither occupancy in the building nor general market conditions
have improved. The lessee has prepaid real estate taxes through
December 31, 1995. However, a very substantial cash infusion is
required to improve the competitive position of the building.
We expect that the lessee will soon be submitting a program that
will seek cooperation from Garment Capitol Associates. Until
then, we expect that regular monthly distributions will continue
at the current rate of about 11.7% per annum on the cash invest-
ment of $5,250,000.
If you have any question on the above, please communicate
with us at our New York office or, if it is more convenient, at
our branch office in Palm Beach, Florida.
Cordially yours,
WIEN, MALKIN & BETTEX
BY: Stanley Katzman
SK:mg
Encs.
<PAGE>
498 Seventh Avenue Associates
60 East 42nd Street
New York, New York 10165
Gentlemen:
In accordance with our engagement, we have reviewed the
special-purpose comparative statement of income and expense, as
defined, of 498 Seventh Avenue Associates for the lease years
ended April 30, 1995 and 1994.
Our engagement included the examination of statements of
receipts and disbursements, together with supporting records,
submitted by Helsmley-Spear, Inc., the managing agent for the
property, but did not include the verification by direct
communication of the income from tenants or liabilities and
disbursements to vendors.
In our opinion, subject to the above, the accompanying
special-purpose comparative statement of income and expense
presents fairly the net operating profit (loss), as defined, of
498 Seventh Avenue Associates for the lease years ended April 30,
1995 and 1994.
Respectfully submitted,
Kaufman Goldstein
New York, New York
May 25, 1995
<PAGE>
498 Seventh Avenue Associates
Comparative Statement of Income and Expense
(Unaudited)
May l, 1994 May l, 1993
through through Increase
April 30, 1995 April 30, 1994 (Decrease)
Income:
Rent $6,395,782 $8,097,433 ($1,701,651)
Electricity - net ( 32,770) ( 22,674) ( 10,096)
Real estate tax refund 470,454 - 470,454
Miscellaneous 105,293 121,529 ( 16,236)
Total Income 6,938,759 8,196,288 ( 1,257,529)
Expenses:
Rent paid 1,090,000 1,090,000 -
Labor costs 1,348,879 1,322,827 26,052
Real estate taxes 2,455,608 3,000,860 ( 545,252)
Repairs, supplies and improvements 2,684,061 1,578,697 1,105,364
Management and leasing 588,076 232,090 355,986
Steam 196,903 221,664 ( 24,761)
Water - net ( 28,315) 86,659 ( 114,974)
Professional fees 280,256 122,036 158,220
Insurance 190,016 172,721 17,295
Amortization of elevator improvements 201,183 201,183 -
Interest on notes payable -
re elevator improvements 2,937 16,606 ( 13,669)
Fire alarm service 30,356 24,934 5,422
Cartage 50,240 61,993 ( 11,753)
Miscellaneous 70,590 59,061 11,529
Total Expenses 9,160,790 8,191,331 969,459
Net income (loss) for the lease year ( 2,222,031) 4,957 ( 2,226,988)
Less, exclusion under lease - ( 4,957) ( 4,957)
Net income subject to additional rent $ - $ - $ -
Additional rent, at 50% $ - $ - $ -
The accompanying letter of transmittal is an integral part of this statement.
-2-
<PAGE>
APPENDIX
APPENDIX
PRELIMINARY COPY
CONSENT
[Solicited by Peter L. Malkin, John L. Loehr and Stanley Katzman, as
Agents ("Agents"), on behalf of Garment Capitol Associates]
A. CONSENT TO SALE PROGRAM
As a Participant in Garment Capitol Associates ("Associates"),
the undersigned hereby
CONSENTS TO
DISAPPROVES OF
ABSTAINS FROM
authorizing the Agents and their respective successors, on behalf of
Associates, as follows:
1. To sell the land and building located at 498 Seventh
Avenue, New York, New York (the "Property") to a third party at a
price, and on such terms and conditions, as determined by the Agents;
2. To distribute the sale proceeds in accordance with the
distribution schedule recommended by the Agents and described in the
Statement dated July [] 31, 1996 referred to below; and |
3. To forbear from terminating the Operating Lease for the
Property with 4987 Corporation (the "New Lessee") subject to (i)
continued compliance by the New Lessee with the terms of the
Operating Lease other than the requirement to pay the Real Estate
Taxes and (ii) the continuation of forbearance by the Fee Mortgagee
based on the funding of Real Estate Taxes through protective advances
under the Fee Mortgage through borrowings by individual shareholders
of the New Lessee (or designees on their behalf) (all such
capitalized terms being defined in Statement (defined below)).
B. CONSENT TO LIQUIDATION
As a Participant in Garment Capitol Associates ("Associates"),
the undersigned hereby
CONSENTS TO
DISAPPROVES OF
ABSTAINS FROM
<PAGE>
authorizing the Agents and their respective successors, on behalf of
Associates, to liquidate Associates following consummation of the
sale of the Property (if the Sale Program is approved), distribution
to the Participants of the net sale proceeds paid to Associates and
the winding up by the Agents of Associates' affairs.
Each of the matters for which a consent or authorization is being
solicited is more fully described in the Statement Issued by the
Agents in Connection with the Solicitation of Consents of the
Participants in Garment Capitol Associates, dated July [] 31, 1996 |
(the "Statement"), receipt of which is hereby acknowledged and which
is incorporated herein by reference.
Once given, this Consent is irrevocable and may not be revoked.
Forms of Consent that are signed and returned without a choice
indicated as to any matter for which Consent is sought will be deemed
to constitute a consent to the Sale Program or to the liquidation of
Associates, as the case may be, and will be binding on each
Participant as if such Participant had actually indicated such choice
on such form. If the Consent is returned undated, it will be deemed
dated as of the date received by the Agents.
Dated:_______________, 1996
_______________________________
(Signature)
