<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
SCHEDULE 14A INFORMATION
CONSENT SOLICITATION STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
[_] CONFIDENTIAL, FOR USE OF
Check the appropriate box: COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[_] Preliminary Consent Solicitation Statement
[X] Definitive Consent Solicitation Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
CONAM REALTY INVESTORS 3, L.P.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(NAMES OF PERSONS FILING CONSENT SOLICITATION STATEMENT, IF OTHER THAN THE
REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: Units
of Limited Partnership Interest ("Units")
(2) Aggregate number of securities to which transaction applies: 80,000
Units
(3) Per Unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined): The filing
fee of $3,298 has been calculated in accordance with Rule 0-11 under
the Exchange Act and is equal to 1/50 of 1% of $16,486,647 (the
aggregate amount of the cash to be distributed to security holders).
(4) Proposed maximum aggregate value of transaction: $16,486,647
(5) Total fee paid: $3,298
[X] Fee paid previously with preliminary materials: $3,298
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
CONAM REALTY INVESTORS 3, L.P.
1764 SAN DIEGO AVENUE
SAN DIEGO, CALIFORNIA 92110-1906
December 16, 1998
Dear Limited Partner,
We are writing to inform you of an opportunity to liquidate your investment
in ConAm Realty Investors 3, L.P. (the "Partnership") through the sale of the
remaining three properties (the "Properties") of the Partnership for
$25,200,000 to a Delaware limited liability company (the "Purchaser") to be
formed if the sale is approved by the Limited Partners. Shortly after the sale
of the Properties, it is anticipated that the Partnership would be liquidated
and net proceeds from the sale, together with certain cash reserves, would be
distributed to the Limited Partners in accordance with their respective
interests in the Partnership. Two pension funds advised by Lend Lease Real
Estate Investments, Inc. ("Lend Lease"), which is unaffiliated with the
General Partner, will each own a 45.5% interest in the Purchaser, and ConAm
DOC Affiliates LLC, an affiliate of the General Partner, will own a 9%
interest in the Purchaser. In addition, ConAm Management Corporation, an
affiliate of the General Partner which will not be a member of the Purchaser,
will act as the initial property manager for the Purchaser if the sale is
approved. See "THE PROPOSALS--The Purchaser" in the enclosed Consent
Solicitation Statement.
The accompanying materials discuss the proposed sale and certain related
matters in detail, but we would like to summarize our reasons for recommending
that you consent to the sale.
.The General Partner believes that current market conditions are favorable
for the sale of the Properties.
. The Partnership has held the Properties substantially longer than the
originally anticipated holding period.
. If the sale is consummated, aggregate distributions to the Limited
Partners following the sale, including a distribution in respect of the
sale and a final distribution upon the anticipated liquidation of the
Partnership, are estimated to be $211.01 per Unit. This compares
favorably with an average price of $138 per Unit offered in two recent
tender offers made by parties unaffiliated with the General Partner. See
"MARKET FOR THE UNITS" in the enclosed Consent Solicitation Statement.
. The purchase price for the Properties is greater than the fair market
value of the Properties set forth in an independent, annual appraisal of
the Properties made in the ordinary course of the Partnership's business
and greater than that offered by two other prospective purchasers. See
"SPECIAL FACTORS--Independent Appraisal" and "THE PROPOSALS--Background
of the Sale" in the enclosed Consent Solicitation Statement.
. The sale of the Properties will permit the Partnership to liquidate,
thus eliminating (i) the fixed costs associated with maintaining a
public limited partnership and (ii) the annual filing and reporting of
Schedule K-1 tax information by the Limited Partners.
Following for your consideration are some potential disadvantages to the
sale of the Properties:
. An affiliate of the General Partner will own a 9% interest in the
Purchaser in consideration of a pro rata cash contribution to the
Purchaser, and the General Partner will have other relationships with
the Purchaser. See "THE PROPOSALS--The Purchaser."
. The General Partner negotiated the terms of the sale with Lend Lease,
including the consideration to be received.
. As with most sales of real estate, the Partnership expects to recognize
taxable gains from the sale of the Properties. The Partnership estimates
that these taxable gains will equal approximately $188.63 per Unit,
which will result in federal taxes payable of approximately $47.23 per
Unit for Limited Partners who acquired their Units in the public
offering. See "CERTAIN FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE
SALE."
. The Partnership will not benefit from possible improvements in economic
and market conditions, if any, which might be expected to produce
increased cash flow and potentially enhance the sales price of the
Properties.
<PAGE>
. The sale of the Properties together may not result in as high an
aggregate gross sales price as if each were sold individually.
. Limited Partners will not be afforded appraisal rights or dissenters'
rights in connection with the sale.
Under the terms of the Partnership Agreement, the sale at one time of all or
substantially all of the Partnership's assets except in the ordinary course of
the Partnership's business requires the approval of a majority in interest of
the Limited Partners. In addition, certain affiliated transactions between the
General Partner and the Partnership are prohibited. Because the Purchaser may
be deemed to be an "affiliate" of the General Partner (under the Partnership
Agreement), the General Partner is also seeking to amend the Partnership
Agreement to permit such a sale, which requires the approval of a majority in
interest of the Limited Partners.
The accompanying materials contain a complete discussion of the purchase
price under the heading "SPECIAL FACTORS--Fairness of the Sale," together with
a discussion of all of the disadvantages and conflicts of interest arising in
connection with the sale under the heading "THE PROPOSALS--Conflicts of
Interest of the General Partner."
We have considered several alternatives to this transaction. After carefully
weighing the facts and circumstances associated with the transaction as well
as with alternative courses of action, we have concluded that the proposed
sale of the Properties is the best alternative for the Limited Partners. Our
conclusions are set forth in the section of the Consent Solicitation Statement
entitled "SPECIAL FACTORS--Alternatives Considered to the Sale." It is
anticipated that distributions to the Limited Partners of net proceeds from
the sale, together with certain cash reserves, will occur within 30 days after
the closing date of the sale.
If the Limited Partners fail to approve the sale and the amendment, the
Partnership will attempt to refinance the existing loans secured by the
Properties and utilize the loan proceeds to implement certain capital
improvements, establish reserves for future capital improvements and make a
tax-deferred distribution to the Limited Partners. This course of action would
enable the Partnership to take advantage of future appreciation, if any, in
the value of the Properties, but could also increase the risk of loss of the
Properties because of increased debt service and might adversely affect the
timing and amount of future distributions to Limited Partners. See "THE
PROPOSALS--Failure to Approve the Sale."
YOU ARE ENCOURAGED TO READ THE CONSENT SOLICITATION STATEMENT IN ITS
ENTIRETY. WE REQUEST THAT YOU APPROVE THE SALE AND THE AMENDMENT BY SIGNING
AND RETURNING THE ENCLOSED CONSENT CARD IN THE ACCOMPANYING POSTAGE-PAID
ENVELOPE PRIOR TO JANUARY 15, 1999. YOUR VOTE IS IMPORTANT. PLEASE SIGN AND
DATE THE ENCLOSED CONSENT AND RETURN IT IMMEDIATELY SO THAT YOUR VOTE CAN BE
COUNTED.
If you have questions regarding the proposed sale or need assistance in
completing and returning your consent card, you may call the Partnership's
Solicitation Agent, D.F. King & Co., Inc., at (800) 735-3591 (toll-free).
Sincerely,
CONAM PROPERTY SERVICES IV, LTD.,
General Partner
By: Continental American
Development, Inc.,
the General Partner
By: /s/ Daniel J. Epstein
---------------------------------
Daniel J. Epstein
President and Chief Executive
Officer
<PAGE>
CONAM REALTY INVESTORS 3, L.P.
1764 SAN DIEGO AVENUE
SAN DIEGO, CALIFORNIA 92110-1906
CONSENT SOLICITATION STATEMENT
This Consent Solicitation Statement ("Solicitation Statement") is being
furnished to limited partners ("Limited Partners") holding units of limited
partnership interest ("Units") in ConAm Realty Investors 3, L.P., a California
limited partnership (the "Partnership"), in connection with the solicitation
of written consents ("Consents") by ConAm Property Services IV, Ltd. (the
"General Partner") to proposals (the "Proposals") to (i) sell the remaining
three income-producing, multi-family residential real properties, and all
intangible and personal property relating thereto (collectively, the
"Properties"), of the Partnership to a Delaware limited liability company,
which will be named DOC Investors, L.L.C. and formed if the Proposals are
approved (the "Purchaser"), in the manner described under the section of this
Solicitation Statement entitled "THE PROPOSALS" (the "Sale") and (ii) enact an
amendment (the "Amendment") to the Partnership's Amended and Restated
Certificate and Agreement of Limited Partnership (the "Partnership Agreement")
to permit the Sale to an "affiliate" of the General Partner as presently
defined in the Partnership Agreement. The full text of the proposed Amendment
is set forth in Appendix A attached hereto. If the Sale is approved by the
Limited Partners but the Amendment is not, the General Partner will have no
authority to consummate the Sale, and the Sale will not occur.
There is no assurance that the Sale will be consummated. However, assuming
the Sale is consummated, it is anticipated that an initial distribution to
Limited Partners of net proceeds from the Sale, together with certain cash
from operations, will aggregate approximately $207.26 per Unit and will occur
within 30 days after the closing date of the Sale. A final distribution of
cash from contingent reserves of up to $3.75 per Unit will be made upon
liquidation of the Partnership, approximately six months after the
consummation of the Sale. See "THE PROPOSALS--Description of the Partnership."
As with most sales of real estate, the Partnership expects to recognize
taxable gains from the Sale of the Properties. The Partnership estimates that
these taxable gains will equal approximately $188.63 per Unit, which will
result in federal taxes payable of approximately $47.23 per Unit for Limited
Partners who acquired their Units in the public offering. See "CERTAIN FEDERAL
AND STATE INCOME TAX CONSEQUENCES OF THE SALE."
While the General Partner, an affiliate of which will own a 9% interest in
the Purchaser, negotiated the terms of the Sale, including the consideration
to be received, holders of a majority of the outstanding Units must consent to
the Proposals for the transaction to proceed. Limited Partners will not be
afforded appraisal rights or dissenters' rights in connection with the Sale.
This Solicitation Statement and the accompanying consent card are first
being mailed to Limited Partners on or about December 16, 1998.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS
OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE DATE OF THIS CONSENT SOLICITATION STATEMENT IS DECEMBER 16, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY.................................................................... 3
ACTION BY CONSENT.......................................................... 7
General.................................................................. 7
Matters to be Considered................................................. 7
Record Date.............................................................. 8
Action by Consent........................................................ 8
SPECIAL FACTORS............................................................ 9
Reasons for the Sale..................................................... 9
Alternatives Considered to the Sale...................................... 10
Effects of the Sale...................................................... 11
Fairness of the Sale..................................................... 12
Independent Appraisal.................................................... 14
THE PROPOSALS.............................................................. 16
Description of the Partnership........................................... 16
The Purchaser............................................................ 16
Description of the Properties to be Sold................................. 17
Indebtedness on the Properties........................................... 17
Purchaser's Valuation.................................................... 18
General Partner's Valuation.............................................. 18
Background of the Sale................................................... 18
Conflicts of Interest of the General Partner............................. 22
Failure to Approve the Sale.............................................. 22
Terms of the Purchase Agreements......................................... 23
The Amendment............................................................ 25
Indemnification.......................................................... 26
CERTAIN FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE SALE.............. 26
General.................................................................. 26
Capital Gains............................................................ 28
Passive Loss Limitations................................................. 28
Certain State Income Tax Considerations.................................. 29
Tax Conclusion........................................................... 29
DISTRIBUTIONS.............................................................. 29
NO APPRAISAL RIGHTS........................................................ 29
MARKET FOR THE UNITS....................................................... 30
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF............................ 30
YEAR 2000 INFORMATION...................................................... 30
VOTING PROCEDURES.......................................................... 31
AVAILABLE INFORMATION...................................................... 31
APPENDIX A--THE PROPOSED AMENDMENT......................................... A-1
APPENDIX B--FORM OF CONSENT OF LIMITED PARTNER............................. B-1
ANNEX 1--FORM 10-K
ANNEX 2--FORM 10-Q
</TABLE>
2
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS
SOLICITATION STATEMENT. REFERENCES ARE MADE TO, AND THIS SUMMARY IS QUALIFIED
IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED IN THIS
SOLICITATION STATEMENT. UNLESS OTHERWISE DEFINED HEREIN, TERMS USED IN THIS
SUMMARY HAVE THE RESPECTIVE MEANINGS ASCRIBED TO THEM ELSEWHERE IN THIS
SOLICITATION STATEMENT. LIMITED PARTNERS ARE URGED TO READ THIS SOLICITATION
STATEMENT IN ITS ENTIRETY.
THE PARTNERSHIP
CONAM REALTY INVESTORS 3, L.P.
The Partnership owns three residential properties: Autumn Heights Apartments
("Autumn Heights"), a 140-unit apartment complex located in Colorado Springs,
Colorado, Skyline Village ("Skyline Village"), a 168-unit apartment complex
located in Tucson, Arizona, and Ponte Vedra Beach Village II Apartments ("Ponte
Vedra II"), a 124-unit apartment complex located in Ponte Vedra Beach, Florida.
The principal offices of the Partnership are located at 1764 San Diego Avenue,
San Diego, California 92110-1906, and its telephone number is (619) 297-6771.
The proposed transaction contemplates the Sale of the Partnership's remaining
real property assets, which are the only material assets currently owned by the
Partnership. The Partnership will retain no interests in any real property
following the Sale, and the General Partner anticipates liquidating the
Partnership within six months after consummation of the Sale.
THE PURCHASER
If the Proposals are approved, DOC Investors, L.L.C. ( the "Purchaser") will
be formed as a Delaware limited liability company in which two pension funds
(the "Pension Funds") advised by Lend Lease Real Estate Investments, Inc.
("Lend Lease"), which is unaffiliated with the General Partner, will each own a
45.5% interest and in which ConAm DOC Affiliates LLC, an affiliate of the
General Partner, will own a 9% interest. The principal offices of the Purchaser
will be located at 1764 San Diego Avenue, San Diego, CA 92110-1906.
THE PROPOSALS
THE SALE
Upon the approval of a majority in interest of the Limited Partners pursuant
to this Solicitation Statement, the Properties may be sold to the Purchaser for
an aggregate purchase price of $25,200,000 in cash and assumption of debt,
subject to certain adjustments at closing (the "Purchase Price"), as described
under "THE PROPOSALS--Terms of the Purchase Agreements." After the payment of
outstanding indebtedness and expenses of the Sale, there will be approximately
$16,486,647 of net proceeds from the Sale available for distribution.
THE AMENDMENT
The Partnership Agreement provides that the General Partner has no authority
to sell any Partnership property to the General Partner or an "affiliate" of
the General Partner. An affiliate of the General Partner will own a 9% interest
in the Purchaser, will have a right of first offer and certain buy/sell rights
with respect to the property of and interests in the Purchaser, and will be
entitled to receive, under certain circumstances, a percentage of the
Purchaser's profits in excess of such affiliate's percentage ownership interest
in the Purchaser.
3
<PAGE>
In addition, an affiliate of the General Partner which will not be a member of
the Purchaser, ConAm Management Corporation ("ConAm Management") will serve as
the initial property manager for the Purchaser. The following charts set forth
the proposed relationship among the General Partner, ConAm Management, and,
when formed, the Purchaser.
[CHART APPEARS HERE]
- --------
* RI 3-4 Real Estate Services, Inc. sold its co-general partner interest in the
Partnership to the General Partner effective July 1, 1997. See "THE
PROPOSALS--Background of the Sale."
Taken together, these relationships might cause the Purchaser to be an
"affiliate" of the General Partner under the terms of the Partnership
Agreement. In order to permit the Sale, the General Partner proposes to amend
the Partnership Agreement to permit proposed sales of Partnership properties to
"affiliates" of the General Partner, if such proposed sales are approved by the
Limited Partners. See "THE PROPOSALS--The Amendment" and "SPECIAL FACTORS--
Effects of the Sale."
FAIRNESS OF THE SALE AND CERTAIN CONFLICTS OF INTEREST
The General Partner has carefully considered the Sale and has concluded that
the Sale is in the best interests of the Partnership and the Limited Partners.
This conclusion is supported by (i) an appraisal of the Properties rendered by
an independent real estate valuation advisory firm, Bach Realty Advisors, Inc.
(the "Appraiser"), as of November 30, 1997 and (ii) comparisons with other
offers for the Properties received by the General Partner within the last year.
See "SPECIAL FACTORS--Fairness of the Sale" and "THE PROPOSALS--Background of
the Sale." There are certain factors, including conflicts of interest,
described in this Solicitation Statement that Limited Partners should consider
when determining the fairness of the Sale. In particular, (i) the Purchase
Price was negotiated by the General Partner, an affiliate of which will have a
9% interest in the Purchaser, without the benefit of an independent
representative to negotiate on behalf of the Limited Partners, (ii) the General
Partner affiliate owning 9% of the Purchaser may, under certain circumstances,
be entitled to receive an additional 18% of the profits of the Purchaser, and
will have an option to purchase additional interests in the Purchaser and a
right of first offer with respect to sales of the Purchaser's property, and
(iii) another affiliate of the General Partner will serve as the initial
property manager for the Purchaser. See "THE PROPOSALS--Conflicts of Interest
of the General Partner," and "SPECIAL FACTORS--Effects of the Sale."
4
<PAGE>
SECURITY OWNERSHIP AND VOTING THEREOF
As of the Record Date, the General Partner and its affiliates owned no Units.
See "VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF."
CONSUMMATION OF THE SALE
The material terms of the Agreements for Purchase and Sale and Joint Escrow
Instructions (the "Purchase Agreements") have been negotiated between Lend
Lease and the General Partner. If the Limited Partners approve the Proposals,
the Purchase Agreements will be executed and delivered. Assuming the requisite
approval of the Limited Partners is obtained promptly, the consummation of the
Sale is expected to occur during January 1999 and is required to occur no later
than February 1, 1999, unless extended by the mutual agreement of the parties
(the "Closing Date"). See "THE PROPOSALS--Terms of the Purchase Agreements."
NO APPRAISAL RIGHTS
If the Sale is approved by Limited Partners owning a majority in interest of
the outstanding Units, dissenting Limited Partners will not have appraisal
rights in connection with the Sale. See "NO APPRAISAL RIGHTS."
CERTAIN FEDERAL AND STATE INCOME TAX CONSEQUENCES
The General Partner expects that the Limited Partners will recognize taxable
gains of approximately $188.63 per Unit from the Sale. The Sale proceeds
distributed to the Limited Partners, together with certain distributions from
cash reserves, are expected to exceed the Limited Partners' income tax
liability attributable thereto. The Partnership estimates that these taxable
gains will result in federal taxes payable of approximately $47.23 per Unit for
Limited Partners who acquired their Units in the public offering. See "CERTAIN
FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE SALE."
DISTRIBUTION OF NET SALE PROCEEDS
Net proceeds from the Sale, together with certain cash reserves, aggregating
approximately $207.26 per Unit, are expected to be distributed to the Limited
Partners within 30 days after the Closing Date of the Sale. A final
distribution of cash from contingent reserves of up to $3.75 per Unit will be
made upon liquidation of the Partnership, approximately six months after the
consummation of the Sale.
ACTION BY CONSENT
TERMINATION OF CONSENT SOLICITATION
Consents must be received by mail or facsimile before January 15, 1999, at
5:00 P.M., Pacific Standard Time, unless such date or time is extended for an
aggregate of up to an additional 40 days in the sole discretion of the General
Partner or unless the necessary vote to approve the Proposals is received
earlier.
RECORD DATE; UNITS ENTITLED TO CONSENT
Limited Partners of record at the close of business on December 10, 1998 (the
"Record Date") are entitled to approve the Proposals by written Consent. At
such date there were outstanding 80,000 Units, each of which will entitle the
record owner thereof to one vote.
PURPOSE OF THE ACTION
Written Consents are being solicited to approve the Proposals, which consist
of the Sale and the Amendment.
5
<PAGE>
SOLICITATION AGENT
The Partnership has retained D.F. King & Co., Inc. (the "Solicitation Agent")
to assist in the solicitation of Consents. Completed, signed consent cards must
be returned to the Solicitation Agent by mail or facsimile before the
Expiration Date. If you have any questions, please call the Solicitation Agent
at (800) 735-3591 (toll-free).
VOTE REQUIRED
The Proposals must be approved by Limited Partners holding a majority of all
outstanding Units. If the Sale is approved but the Amendment is not, the
General Partner will have no authority to consummate the Sale, and the Sale
will not occur.
6
<PAGE>
ACTION BY CONSENT
GENERAL
This Solicitation Statement is being furnished on behalf of the Partnership
to the Limited Partners of the Partnership in connection with the solicitation
of Consents by ConAm Property Services IV, Ltd., as the General Partner.
This Solicitation Statement and accompanying consent card are first being
mailed to Limited Partners on or about December 16, 1998.
MATTERS TO BE CONSIDERED
Consents are being solicited to approve (i) the Sale of the Properties to
the Purchaser pursuant to the Purchase Agreements and (ii) since the Purchaser
may be an "affiliate" of the General Partner under the Partnership Agreement,
the Amendment of the Partnership Agreement to permit proposed sales of
Partnership properties to "affiliates" of the General Partner, if such
proposed sales are approved by the Limited Partners. If the Proposals are
approved by the Limited Partners, and the Sale is consummated, there will be
approximately $16,486,647 of net proceeds from the Sale, after the payment of
outstanding indebtedness and expenses of the Sale. The following table sets
forth the calculations used in determining the estimated initial distribution
from the net proceeds from the Sale, together with certain cash reserves,
assuming a Sale as of November 30, 1998:
ESTIMATED NET CASH AVAILABLE BEFORE CONTINGENT RESERVES
<TABLE>
<CAPTION>
NET NET CASH
PROCEEDS FROM
FROM SALE OPERATIONS TOTAL
----------- ---------- -----------
<S> <C> <C> <C>
Gross Purchase Price............ $25,200,000
Estimated Transaction Costs(1).. (150,000)
-----------
Net Sale Proceeds............... 25,050,000
Repayment and Assumption of
Secured Debt(2)................ (8,151,572)
Credit to Purchase Price in
Respect of Prepayment
Penalties(3)................... (411,781)
-----------
Net Distributable Proceeds from
Sale........................... 16,486,647 $16,486,647
Other Available Cash(4)......... $438,231 438,231
Less: General Partner Portion
(10%).......................... (43,823) (43,823)
----------- -------- -----------
Net Cash Available Before
Contingent Reserves............ 16,486,647 394,408 16,881,056
=========== ======== ===========
Net Cash Available Before
Contingent Reserves, per Unit
(80,000 Units)................. $ 211.01
===========
Net Asset Value Per Unit at
11/30/97....................... $ 213.77
===========
ESTIMATED PROJECTED INITIAL DISTRIBUTION TO LIMITED PARTNERS
<CAPTION>
PER UNIT
--------
<S> <C> <C>
Net Cash Available Before
Contingent Reserves (from
above)......................... $16,881,056 $211.01
Less: Contingent Reserves(5).... (300,000) $ (3.75)
----------- -------
Net Initial Distribution to
Limited Partners............... $16,581,056 $207.26
=========== =======
</TABLE>
- --------
(1) Includes estimated costs of consent solicitation and Sale which are
anticipated to be paid prior to the initial distribution.
(2) Includes repayment of Skyline Village loan and credit to Purchase Price in
respect of assumption by Purchaser of Autumn Heights loan.
7
<PAGE>
(3) Calculated based on lender's loss of yield due to prepayment.
(4) Includes cash balance at 9/30/98, adjusted for projected cash flow from
10/01/98-11/30/98, refund of security deposits, projected 3rd quarter
distributions to Limited Partners, and costs incurred in the final
administration and liquidation of the Partnership.
(5) Represents a reserve for costs related to the consent solicitation not
paid prior to the initial distribution and for unanticipated costs related
to the Sale and liquidation of the Partnership. Any unused portion of this
reserve will be distributed upon liquidation of the Partnership.
Of the $211.01 total potential distribution per Unit, approximately $207.26
will be distributed within 30 days of the consummation of the Sale, and the
remaining $3.75 will be retained to cover contingencies related to the Sale
and the expenses of the Partnership's winding-up and liquidation. This
additional reserve equal to $3.75 per Unit will be distributed to Limited
Partners, to the extent available, upon liquidation of the Partnership, which
is expected to occur within six months of the consummation of the Sale.
THE GENERAL PARTNER PROPOSES THAT THE LIMITED PARTNERS TAKE THE FOLLOWING
ACTIONS BY CONSENT:
APPROVE THE SALE OF THE PARTNERSHIP'S RESIDENTIAL PROPERTIES KNOWN AS AUTUMN
HEIGHTS APARTMENTS, SKYLINE VILLAGE AND PONTE VEDRA BEACH VILLAGE II
APARTMENTS, TOGETHER WITH ALL INTANGIBLE AND PERSONAL PROPERTY NECESSARY TO
THE OPERATION THEREOF, TO THE PURCHASER, PURSUANT TO CERTAIN PURCHASE
AGREEMENTS TO BE ENTERED INTO BETWEEN THE PURCHASER, ON THE ONE HAND, AND THE
PARTNERSHIP OR A TITLE-HOLDING ENTITY WHICH THE PARTNERSHIP CONTROLS, ON THE
OTHER HAND, AND APPROVE THE AMENDMENT OF THE PARTNERSHIP AGREEMENT TO PERMIT
PROPOSED SALES OF PARTNERSHIP PROPERTIES TO "AFFILIATES" OF THE GENERAL
PARTNER, IF SUCH PROPOSED SALES ARE APPROVED BY THE LIMITED PARTNERS.
WHILE THE GENERAL PARTNER, AN AFFILIATE OF WHICH WILL OWN A 9% INTEREST IN
THE PURCHASER, NEGOTIATED THE TERMS OF THE SALE, INCLUDING THE CONSIDERATION
TO BE RECEIVED, HOLDERS OF A MAJORITY OF THE OUTSTANDING UNITS MUST CONSENT TO
THE PROPOSALS FOR THE TRANSACTION TO PROCEED.
RECORD DATE
The close of business on December 10, 1998 has been fixed by the General
Partner as the Record Date for determining the Limited Partners entitled to
receive notice of the solicitation of Consents and to give their consent to
the Proposals. As of the Record Date, there were 80,000 issued and outstanding
Units entitled to vote held of record by 3,642 holders.
ACTION BY CONSENT
Under the terms of the Partnership Agreement the sale at one time of all or
substantially all of the Partnership's assets except in the ordinary course of
the Partnership's business requires the approval of a majority in interest of
the Limited Partners. In addition, the sale of Partnership properties to the
General Partner or its affiliates is prohibited, unless the Partnership
Agreement is amended with the approval of a majority in interest of the
Limited Partners to permit such sales. Such approval will be obtained through
the solicitation of written Consents from Limited Partners, and no meeting of
Limited Partners will be held to vote on these matters. Consents must be
received by January 15, 1999, at 5:00 P.M., Pacific Standard Time, unless such
date or time is extended for an aggregate of up to an additional 40 days in
the sole discretion of the General Partner or unless the necessary vote to
approve the Proposals is received earlier (the "Expiration Date"). A vote
"for" or "against" either of the Proposals may be revoked by the person giving
it at any time before the Expiration Date by sending a written notice of
revocation or a later-dated Consent containing different instructions to the
Solicitation Agent before such date. Any written notice of revocation or
subsequent Consent should be sent to the Solicitation Agent at the address
that appears on the back cover of this Solicitation Statement.
8
<PAGE>
In addition to solicitation by use of the mails, officers, directors and
employees of the General Partner or its affiliates, or the Solicitation Agent,
may solicit Consents in person or by telephone, facsimile or other means of
communication. Such officers, directors and employees will not receive
additional compensation for such services but may be reimbursed for reasonable
out-of-pocket expenses in connection with such solicitation. Arrangements have
been made with custodians, nominees and fiduciaries for the forwarding of
Consent solicitation materials to beneficial owners of Units held of record by
such custodians, nominees and fiduciaries, and the Partnership will reimburse
such custodians, nominees and fiduciaries for reasonable expenses incurred in
connection therewith. In addition, the Partnership has hired the Solicitation
Agent to assist in the solicitation of the Consents, and will pay an estimated
fee of $1,750 plus the usual and customary fees and expenses associated with
such solicitation assistance. All costs and expenses of the solicitation of
Consents, including the costs of preparing and mailing this Solicitation
Statement, will be borne by the Partnership, whether or not the required
Consents are received and the Sale is consummated. The aggregate expenses
anticipated to be incurred by the Partnership relating to this solicitation
are expected to be approximately $103,327 and are detailed in the following
table:
<TABLE>
<S> <C>
Filing fees....................................................... $ 3,298
Legal fees........................................................ 65,000
Accounting fees................................................... 3,000
Solicitation fees................................................. 6,790
Printing fees..................................................... 25,239
--------
$103,327
========
</TABLE>
SPECIAL FACTORS
REASONS FOR THE SALE
The General Partner's decision to proceed with the Sale at this time is
based upon the belief that current market conditions are favorable for the
Sale; that the Properties have been held substantially longer than the
originally anticipated holding period; that the Purchase Price is attractive;
and that the Pension Funds and Lend Lease are highly likely to consummate the
transaction. The General Partner has also considered: (a) the amount likely to
be distributed to the Limited Partners if the Sale were to occur; (b) the
business risks to which the Partnership would be exposed if the Sale were not
to occur; and (c) the elimination of (i) the fixed costs associated with
maintaining a public limited partnership and (ii) the annual filing and
reporting of Schedule K-1 tax information by the Limited Partners.
If the Sale is consummated, aggregate distributions to the Limited Partners
following the Sale, including a distribution in respect of the Sale and a
final distribution upon the anticipated liquidation of the Partnership, are
estimated to be $211.01 per Unit. This compares favorably with an average
price of $138 per Unit offered in two recent tender offers made by parties
unaffiliated with the General Partner. See "MARKET FOR THE UNITS."
If the Sale does not occur, the Partnership will attempt to refinance the
existing loans secured by the Properties and utilize any loan proceeds to
implement certain capital improvements, establish reserves for future capital
improvements and make a tax-deferred distribution to the Limited Partners. The
Partnership might then take advantage of any future property appreciation
through a future sale of one or all of the Properties to the Purchaser or
otherwise. However, such a course of action could also increase the risk of
loss of the Properties due to any failure to make increased debt service
payments and might also adversely affect the timing and amount of future
distributions to Limited Partners. See "THE PROPOSALS--Failure to Approve the
Sale."
As indicated in the Partnership's annual reports to Limited Partners and
Form 10-Ks, the annual third party cost of administration of the Partnership
was $143,378 for 1995, $152,783 for 1996 and $177,129 for 1997. These
administrative costs are incurred irrespective of the number of properties
owned by the Partnership and cover the annual audit, preparation of the
Partnership's tax return, transfer agent fees and investor services and
9
<PAGE>
public reporting fees. In addition, the Limited Partners incur individual
costs associated with the preparation of appropriate schedules for their tax
returns.
The primary disadvantages of the Sale to Limited Partners include (i) a
potential loss of benefits resulting from any improvements in economic and
market conditions, (ii) a potentially lower aggregate gross sales price
resulting from sale of the Properties together as opposed to individually and
(iii) a lack of appraisal rights for dissenting Limited Partners. See "--
Fairness of the Sale."
ALTERNATIVES CONSIDERED TO THE SALE
Continued Ownership of the Properties. The decision to sell the Properties
at this time took into account the General Partner's opinion concerning the
limited prospects for capital appreciation of the Properties, unless
significant additional investments are made in the Properties. The General
Partner considered retaining one or all of the Properties for a longer period
with the expectation of achieving greater capital appreciation. However, due
to the fact that the Properties are aging, the General Partner believes that
the Partnership will need to expend significant funds for capital improvements
and maintenance costs in order for the Properties to compete in their
respective markets in the future. The improvements would involve ongoing
replacement of carpeting and appliances, repainting of unit interiors and
ongoing exterior maintenance, including painting, roof replacement, heating
and air conditioning refurbishment, repaving of common areas and access roads,
and ongoing repairs to plumbing, electrical systems and building exteriors.
The General Partner estimates that the average cost of these improvements in
1999, 2000 and 2001 would approximate $568,000 per year.
While the General Partner believes that the Partnership could borrow
additional funds in order to finance these improvements, the General Partner
does not believe that increasing the level of debt on the Properties would be
in the best interests of the Partnership, if another alternative such as the
Sale is feasible. Increasing indebtedness on the Properties would increase the
risk of loss and significantly decrease net cash flow, resulting in an
indefinite suspension of distributions to the Limited Partners. Such a plan of
action also would subject the Limited Partners to the continued risks of
ownership of the Properties and prolong the fixed costs associated with
maintaining a public limited partnership, including the administrative burden
of annual filing and reporting of Schedule K-1 tax information.
Tender Offer. From time to time, the Limited Partners have been approached
by investors seeking to acquire Units. Based on analyses of these proposals
and general market information as to other tender offers for real estate
limited partnership interests, the General Partner has concluded that such
tender offers are generally made at prices that reflect a significant discount
from the net asset value of the Units. For instance, those tender offers
during the past three years of which the General Partner is aware have been
made at prices that reflect approximately 30% to 75% of the net asset value of
the Units. The General Partner has consistently recommended that the Limited
Partners decline a tender offer on terms that reflect such a significant
discount from net asset value.
The General Partner has considered the possibility of making a tender offer
itself for all or a portion of the outstanding Units of the Partnership.
However, the General Partner determined that the purchase of less than a
controlling interest in the Partnership would be difficult to finance at a
fair approximation of the net asset value of the Units. Accordingly, the
General Partner decided not to pursue a tender offer for the Units.
Consolidation. The General Partner also considered a consolidation of the
Partnership with certain other partnerships for which it or its affiliates act
as general partner. Such a consolidation would have involved the merger of the
Partnership into, or the sale of the Partnership's interests in the Properties
to, a newly-formed entity, pursuant to which the Limited Partners would
receive securities in the surviving entity. Although the General Partner did
not perform any specific financial analysis in the context of evaluating the
merits of this
10
<PAGE>
alternative, it rejected this alternative because it would not necessarily
provide the Limited Partners with improved liquidity and might continue to
subject the Limited Partners to the market and other risks associated with the
ownership of securities which might not have an active trading market. In
addition, there has been significant negative publicity regarding such "roll-
up" transactions, and recently enacted legislation on both the
federal and state levels as well as increased regulation of such transactions
have made this alternative expensive and time consuming.
Other Sales. See "THE PROPOSALS--Background of the Sale" for a discussion of
other proposals to purchase the Properties received by the General Partner.
Conclusion. After considering all of the foregoing alternatives, the General
Partner concluded that it is in the best interests of the Partnership and the
Limited Partners to proceed with the Sale to the Purchaser for the Purchase
Price. The primary disadvantages of the Sale to Limited Partners include (i) a
potential loss of benefits resulting from any improvements in economic and
market conditions, (ii) a potentially lower aggregate gross sales price
resulting from sale of the Properties together as opposed to individually and
(iii) a lack of appraisal rights for dissenting Limited Partners. See "--
Fairness of the Sale."
EFFECTS OF THE SALE
Partnership. The Sale, if consummated, would effect a dissolution of the
Partnership under the Partnership Agreement and California law. Accordingly,
an initial distribution to Limited Partners of net proceeds from the Sale,
together with certain cash reserves, would be followed by a liquidation
distribution of cash from contingent reserves approximately six months after
consummation of the Sale. Any taxable income realized by the Partnership in
connection with the Sale or liquidation will be passed through to the partners
of the Partnership, in accordance with federal and state tax law and the
Partnership Agreement. The Partnership will not incur any income taxes in
respect of such transactions. See "CERTAIN FEDERAL AND STATE INCOME TAX
CONSEQUENCES OF THE SALE."
Affiliates of the Partnership. Continental American Development, Inc.
("CADI") is the general partner of the General Partner. The shareholders of
CADI are substantially identical to the partners of Continental American
Properties, Ltd. ("CAPL"), which is the managing member of ConAm DOC
Affiliates LLC ("ConAm DOC"), the prospective owner of a 9% interest in the
Purchaser. In addition, the shareholders of CADI are identical to the
shareholders of ConAm Management, which will act as the initial property
manager for the Purchaser if the Proposals are approved. As a result, the Sale
is subject to various conflicts of interest.
The General Partner anticipates benefiting from the Sale to the Purchaser
because ConAm DOC, an affiliate of the General Partner, will own a 9% interest
in the Purchaser and will benefit on any returns the Purchaser receives from
its investment in the Properties. The Purchaser will buy the Properties with a
view to generating a positive return on its investment, whether from operating
the Properties, selling the Properties or ultimately selling interests in the
Purchaser. Achieving this investment objective is possible, because the
Pension Funds are willing to invest funds in capital improvements and other
items necessary to enhance the value of the Properties and potentially
increase the revenues generated by the Properties. In addition, the Purchaser
would likely be able to borrow on more favorable terms than the Partnership if
it purchases additional properties and is therefore able to cross-
collateralize any loans with all of such properties, something the Partnership
is not in a position to do.
As further benefits of the Sale to the General Partner, ConAm DOC might
have, under certain circumstances and at certain times, an option to purchase
additional interests in the Purchaser and will have a right of first offer
with respect to the Purchaser's property. See "THE PROPOSALS--The Purchaser."
As a result of the Sale and subsequent liquidation of the Partnership, the
General Partner will recognize taxable income of $591,694. The General Partner
expects to receive $43,823 as its pro rata share of the cash reserves,
excluding net proceeds from the Sale.
11
<PAGE>
As a result of the Sale, the General Partner will retain without
modification its current interest in the net book value and net earnings of
the Partnership. No affiliate of the General Partner will obtain any interest
in the net book value and net earnings of the Partnership as a result of the
Sale.
Limited Partners. It is anticipated that, shortly after the Sale, the net
proceeds from the Sale, together with certain cash reserves, would be
distributed to the Limited Partners in accordance with their respective
interests in the Partnership. This initial distribution to Limited Partners of
net proceeds from the Sale and certain cash reserves will aggregate
approximately $207.26 per Unit and will occur within 30 days after the Closing
Date. A final distribution of cash from contingent reserves of up to $3.75 per
Unit will be made upon the subsequent liquidation of the Partnership,
approximately six months after the consummation of the Sale. The Sale will
thus eliminate (a) the fixed costs associated with maintaining a public
limited partnership and (b) the annual filing and reporting of Schedule K-1
tax information by the Limited Partners. The Sale and liquidation will also
have certain income tax consequences to the Limited Partners. See "CERTAIN
FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE SALE."
The primary disadvantages of the Sale to Limited Partners include (i) a
potential loss of benefits resulting from any improvements in economic and
market conditions, (ii) a potentially lower aggregate gross sales price
resulting from sale of the Properties together as opposed to individually and
(iii) a lack of appraisal rights for dissenting Limited Partners. See "--
Fairness of the Sale."
FAIRNESS OF THE SALE
The General Partner and its affiliates believe that the Sale is fair and
reasonable as to both price and structure and is in the best interests of the
Limited Partners and the Partnership and has, therefore, approved the Sale.
Because (i) the Purchase Price was negotiated by the General Partner, an
affiliate of which will have a 9% interest in the Purchaser, without the
benefit of an independent representative to negotiate on behalf of the Limited
Partners, (ii) the General Partner affiliate owning 9% of the Purchaser may,
under certain circumstances, be entitled to receive an additional 18% of the
profits of the Purchaser, and will have an option to purchase additional
interests in the Purchaser and a right of first offer with respect to sales of
the Purchaser's property, and (iii) another affiliate of the General Partner
will serve as the initial property manager for the Purchaser, the General
Partner has economic and other interests which are in conflict with the
interests of the Limited Partners. There interests of the General Partner may
conflict with its fiduciary obligations to the Limited Partners. The General
Partner believes, however, that it has fulfilled its fiduciary obligations to
the Partnership and that the Sale is fair to the Limited Partners. See "THE
PROPOSALS--Conflicts of Interest of the General Partner."
IN REACHING ITS DETERMINATION THAT THE SALE IS SUBSTANTIVELY AND
PROCEDURALLY FAIR, THE GENERAL PARTNER CONSIDERED THE FOLLOWING FACTORS WITH
RESPECT TO THE SALE. NEITHER CONAM DOC NOR CAPL HAS PERFORMED OR INTENDS TO
PERFORM AN INDEPENDENT ANALYSIS OF THE SUBSTANTIVE AND/OR PROCEDURAL FAIRNESS
OF THE SALE TO LIMITED PARTNERS. BOTH CONAM DOC AND CAPL, IN PUBLICLY-
AVAILABLE FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, HAVE EXPLICITLY
ADOPTED THE FOLLOWING PROCEDURAL AND SUBSTANTIVE FAIRNESS ANALYSIS OF THE
GENERAL PARTNER:
(i) The General Partner believes that the Purchase Price represents a
fair price for the Properties. For the reasons described in "--Independent
Appraisal," the General Partner relied during initial negotiations with
Lend Lease on the Independent Appraisal (as defined below) as
representative of a fair price for the Properties. As negotiations for the
Sale continued, the Lend Lease and General Partner learned of higher values
which had been attributed to the Properties by the prospective lender for
the Purchaser. See "THE PROPOSALS--Background of the Sale." Upon learning
of these higher values, the General Partner was able to negotiate an
increase in the purchase offer from the value set forth in the Independent
Appraisal to
the Purchase Price. See "THE PROPOSALS--Background of the Sale." In
addition, the Purchase Price exceeds two offers for the Properties which
were made to the General Partner prior to or during negotiations
12
<PAGE>
with Lend Lease. See "THE PROPOSALS--Background of the Sale." Because the
Purchase Price is equal to or in excess of these market indicators of a
fair market value for the Properties, the General Partner believes that the
Sale is fair and in the best interests of the Limited Partners.
(ii) The General Partner believes that current market conditions are
favorable for the Sale, because fair market values have generally
appreciated over the last few years. However, recent volatility and
uncertainty in the global capital markets is having (and is likely to
continue to have) an adverse effect on the financing of real estate
acquisitions. Therefore, in the General Partner's opinion, future
appreciation is unlikely in the near term and there is increased risk in
holding real estate generally. In addition, retention of the Properties
will continue to subject the Partnership to the risks inherent in the
ownership of property, such as fluctuations in occupancy rates, operating
expenses and rental rates, which in turn may be affected by general and
local economic conditions, the supply and demand for properties of the type
owned by the Partnership and federal and local laws and regulations
affecting the ownership and operation of real estate. Therefore, the
General Partner has determined that the Sale is more advantageous to the
Limited Partners than retaining the Properties at the present time.
(iii) Due to the age and physical condition of the Properties, the
General Partner anticipates a need for expenditures averaging approximately
$568,000 per year in 1999, 2000 and 2001 if the Partnership continues to
hold the Properties. These improvements would involve the ongoing
replacement of carpeting and appliances, repainting of unit interiors and
ongoing exterior maintenance, including painting, roof replacement, heating
and air conditioning refurbishment, repaving of common areas and access
roads, and ongoing repairs to plumbing, electrical systems and building
exteriors. While higher rents might be obtained if such improvements are
made, distributions might need to be reduced because of the increased debt
service. Given that continued long-term investment in the Properties would
thus subject the Limited Partners to the risk of reduced distributions, in
addition to the increased risk of holding real estate generally, the
General Partner believes that the Sale is in the best interests of the
Limited Partners.
(iv) The form of the Purchase Agreements, described under "THE
PROPOSALS--Terms of the Purchase Agreements," contains several favorable
provisions which are not customarily found in third party agreements,
including: limited representations and warranties; limited survivability of
representations and warranties; sale of the Properties on an "as is" basis;
lack of due diligence conditions precedent to closing; and lack of any
financing contingencies relating to the Sale. Because these favorable
provisions have the effect of limiting the prospective and other risks
inherent in a sale of real property, the General Partner has determined
that the Proposals are a fair opportunity to submit to the Limited Partners
for approval.
(v) Experience in the multi-family housing market indicates that selling
the Properties together will result in lower aggregate transaction costs,
particularly lower legal and title insurance fees. Furthermore, the Sale
will not be subject to the protracted timelines, contingencies and
administrative costs associated with individual sales. For example, if one
of the Properties were sold, the remaining Properties might not generate
sufficient revenues to service debt, pay Partnership administrative costs
and provide for distributions at the current level to Limited Partners.
(vi) As a result of changes in the federal capital gains tax rate which
became effective in 1997, the Limited Partners will receive more favorable
capital gains tax treatment on the distribution of Sale proceeds than they
would have received prior to such changes.
(vii) The Sale will accelerate distributions to the Limited Partners,
thereby permitting them to liquidate their investments. At present, there
is no established public trading market for the Units and liquidity is
limited to (a) sporadic sales which occur within an informal secondary
market or (b) tender offers for Units, both of which are generally at a
substantial discount to net asset value and often involve only a limited
number of Units.
(viii) The Sale will permit the Partnership to liquidate, thus
eliminating (a) the fixed costs associated with maintaining a public
limited partnership and (b) the annual filing and reporting of Schedule K-1
tax information by the Limited Partners.
13
<PAGE>
(ix) Consummation of the Sale is subject to approval of the Proposals by
a majority in interest of the Limited Partners. Given this procedural
safeguard, the General Partner has determined that offering the Limited
Partners the option of liquidating their investment at or above current
appraised values is preferable to subjecting the Limited Partners to the
increased risk associated with making additional capital investments and
continuing to hold properties in an already competitive market.
THE PRIMARY DISADVANTAGES OF DISPOSING OF THE PROPERTIES PURSUANT TO THE
SALE ARE AS FOLLOWS:
(i) The Partnership will not benefit from improvements in economic and
market conditions, if any, which might be expected to produce increased
cash flow and potentially enhance the sales price of the Properties.
(ii) The sale of the Properties together may not result in as high an
aggregate gross sales price as if they were sold individually.
(iii) Limited Partners will not be afforded appraisal rights or
dissenters' rights in connection with the Sale. See "NO APPRAISAL RIGHTS."
(iv) The Purchase Price was negotiated by the General Partner, an
affiliate of which will have an interest in the Purchaser, without the
benefit of an independent committee or representative to negotiate the
terms of the Sale on behalf of the Limited Partners.
(v) The form of the Purchase Agreements contains provisions that may be
less advantageous to the Partnership than those found in many third party
agreements, in that (a) the purchase of the Properties by the Purchaser is
subject to the concurrent approval by the limited partners of five public
limited partnerships (the "Affiliated Partnerships") of which the General
Partner or affiliates of the General Partner are the general partners of
the sale of their respective properties to the Purchaser and (b) the
Purchaser may terminate the Purchase Agreements if, due to condemnation or
casualty, the Purchaser is entitled to terminate the purchase agreements
with respect to any two or more properties owned by the Affiliated
Partnerships.
INDEPENDENT APPRAISAL
Each year, in the ordinary course of Partnership business, the General
Partner commissions an appraisal of the fair market value of the Partnership's
properties. For the past four years, the Appraiser has rendered these
appraisals for properties of the Partnership, as well as those of the
Affiliated Partnerships. These appraisals have included appraisals of the
Properties and 11 other properties (together with the Properties, the "RI
Portfolio") which are owned by the Affiliated Partnerships and are currently
proposed to be sold to the Purchaser. The
General Partner retains the Appraiser based upon its reputation as a real
estate valuation advisory firm with experience in the valuation of real
property assets similar to those comprising the RI Portfolio. The Appraiser
was originally selected by the former co-general partner of the Partnership
based upon the principal's 30 years of experience as an appraiser and real
estate executive with several national real estate appraisal and research
companies and the principal's familiarity with the markets where the
Properties are located. The Appraiser has received annual fees of $10,400
during each of the last two years for rendering appraisals to the Partnership
with respect to the Properties. Total fees paid to the Appraiser by the
Partnership and its affiliates during 1996 and 1997 were $44,150 and $47,900,
respectively.
In March 1998, the Appraiser delivered its independent appraisals to the
General Partner (the "Independent Appraisal") that, as of November 30, 1997,
based on the Appraiser's review and subject to the limitations described
below, the value of Autumn Heights was $11,500,000, the value of Skyline
Village was $7,500,000, and the value of Ponte Vedra II was $6,000,000. The
Independent Appraisal does not constitute a recommendation to any Limited
Partner as to whether such Limited Partner should approve the Sale.
14
<PAGE>
In appraising the Properties, the Appraiser obtained pertinent property data
regarding income and expense figures and tenant rent rolls and conducted
inspections of the Properties. Additionally, the Appraiser conducted research
either personally or through associates to obtain information concerning
current market rental rates, construction trends, the sale of comparable
improved properties, anticipated investor returns, appropriate operating
expenses and the supply and demand of competitive apartment projects in the
general and immediate area. The value of the Properties was determined by the
Appraiser using both the sales comparison approach and the income approach to
value.
For Autumn Heights, the Appraiser used an actual sales price for six
apartment sales from November 1996 to November 1997 in order to implement the
sales comparison approach. The Appraiser implemented the income approach for
Autumn Heights under the direct capitalization model and the discounted cash
flow model. The Appraiser's assumptions under the direct capitalization model
included: a capitalization rate of 9.5%; current market rents; stabilized
vacancy rate of 5%; other income based on historical collections; operating
expenses based upon historical actuals and comparable projects; a replacement
reserve allowance of $300 per unit per year; a reduction for deferred
maintenance of $487,200; and a reduction for rent loss due to lease-up of
$232,316. The Appraiser's assumptions under the discounted cash flow model
included: a terminal capitalization rate of 10.5%; a discount rate of 12.0%; a
4% cost of sale; a 10-year holding period; income growth rate of 2% in 1998
and 4% thereafter; a vacancy rate of 15% in 1998, 10% in 1999 and 5%
thereafter; operating expense growth rate of 4% per year; and a replacement
reserve of $300 per unit per year, increasing by 4% per year.
For Skyline Village, the Appraiser used an actual sales price for ten
apartment sales from August 1996 to November 1997 in order to implement the
sales comparison approach. The Appraiser implemented the income approach for
Skyline Village under the direct capitalization model and the discounted cash
flow model. The Appraiser's assumptions under the direct capitalization model
included: a capitalization rate of 9.5%; current market rents; stabilized
vacancy rate of 8%; other income based on historical collections; operating
expenses based upon historical actuals and comparable projects; a replacement
reserve allowance of $300 per unit per year; a reduction for deferred
maintenance of $125,000; and a reduction for rent loss due to lease-up of
$16,803. The Appraiser's assumptions under the discounted cash flow model
included: a terminal capitalization rate of 10.5%; a discount rate of 12.5%; a
4% cost of sale; a 10-year holding period; income growth rate of 0% in 1998
and 4% thereafter; a vacancy rate of 10% in 1998 and 8% thereafter; operating
expense growth rate of 4% per year; and a replacement reserve of $300 per unit
per year, increasing by 4% per year.
For Ponte Vedra II, the Appraiser used an actual sales price for eight
apartment sales from May 1996 to August 1997 in order to implement the sales
comparison approach. The Appraiser implemented the income approach for Ponte
Vedra II under the direct capitalization model and the discounted cash flow
model. The Appraiser's assumptions under the direct capitalization model
included: a capitalization rate of 9.0%; current market rents; stabilized
vacancy rate of 5%; other income based on historical collections; operating
expenses based upon historical actuals and comparable projects; a replacement
reserve allowance of $300 per unit per year; a reduction for deferred
maintenance of $100,800; and a reduction for rent loss due to lease-up of
$69,194. The Appraiser's assumptions under the discounted cash flow model
included: a terminal capitalization rate of 10.0%; a discount rate of 12.0%; a
4% cost of sale; a 10-year holding period; income growth rate of 2% in 1998 and
4% thereafter; a vacancy rate of 10% in 1998 and 5% thereafter; operating
expense growth rate of 4% per year; and a replacement reserve of $300 per unit
per year, increasing by 4% per year.
The Appraiser estimated the leased fee market for Autumn Heights to be
$11,500,000, for Skyline Village to be $7,500,000 and for Ponte Vedra II to be
$6,000,000, a total of $25,000,000 for all three Properties. These estimates
were made after investigating the appropriate real estate markets and applying
the Appraiser's experience with and knowledge of similar real estate
properties. The estimated values assume an all cash, "as is" basis and a
minimum of six to twelve months to market and sell the Properties, but do not
take into consideration any potential costs which might be incurred in the
course of the marketing and sale of the Properties.
15
<PAGE>
The Independent Appraisal was made in accordance with the accepted
techniques, standards, methods and procedures of the Appraisal Institute and
was certified by the Appraiser. LIMITED PARTNERS SHOULD NOTE, HOWEVER, THAT
APPRAISALS ARE ONLY ESTIMATES OF CURRENT VALUE AND ACTUAL VALUES REALIZABLE
UPON SALE MAY BE SIGNIFICANTLY DIFFERENT. While the Appraiser may have a
conflict of interest in that it has prepared appraisals of properties for the
Affiliated Partnerships, it has not rendered appraisals for any other
affiliates of the General Partner. The General Partner has not commissioned
any appraisals of the Properties other than the Independent Appraisal, because
the General Partner believes that appraisals by the Appraiser accurately
reflect the fair market value of the properties appraised. This determination
is supported by certain offers received for the Properties by the General
Partner. See "THE PROPOSALS--Background of the Sale." While the General
Partner considered the Independent Appraisal in negotiating the terms of the
Sale, the Independent Appraisal was not determinative of the Purchase Price.
The Independent Appraisal is available for inspection and copying at the
principal executive offices of the General Partner during its regular business
hours by any interested Limited Partner or such Limited Partner's
representative who has been so designated in writing. In addition, the
Independent Appraisal has been filed as an exhibit to the Partnership's
Schedule 13E-3 in respect of the Sale, which is a publicly-available filing
with the Securities and Exchange Commission. See "AVAILABLE INFORMATION."
THE PROPOSALS
DESCRIPTION OF THE PARTNERSHIP
The Partnership was formed on July 15, 1983 for the primary purpose of
acquiring and operating multi-family, residential real properties. The
Partnership currently owns three apartment complexes: Autumn Heights, a 140-
unit apartment complex located in Colorado Springs, Colorado, Skyline Village,
a 168-unit apartment complex located in Tucson, Arizona, and Ponte Vedra II, a
124-unit apartment complex located in Ponte Vedra Beach, Florida. The
Partnership sold one residential apartment complex in 1990 and another in
1995. The Partnership will retain no interests in real property after the
Sale. See "--Description of the Properties to be Sold."
The Partnership was structured as a self-liquidating partnership with a
finite life, which would distribute its cash flow during its operating stage
and its proceeds of sale during its liquidating stage, whereupon the
Partnership would be liquidated and dissolved. It was originally anticipated
that the Partnership's properties would be held for approximately five years
after their acquisition although, depending on economic and market factors,
they could have been held for shorter or longer periods in the complete
discretion of the General Partner. The interests in the Properties were
purchased in 1985 and now have been held for substantially longer than the
originally anticipated holding period.
THE PURCHASER
Prior to the Sale, the Purchaser will be formed as a Delaware limited
liability company in which the Pension Funds will each own a 45.5% interest
and in which ConAm DOC, an affiliate of the General Partner, will own a 9%
interest.
Under the proposed limited liability company agreement of the Purchaser (the
"LLC Agreement"), ConAm DOC will be the administrative member of the Purchaser
and will have the obligation and responsibility to manage and conduct the day-
to-day business and affairs of the Purchaser. However, because significant
decisions (each, a "Major Decision") can be made only by or with the approval
of 66 2/3% of the membership interests in the Purchaser, Lend Lease and the
Pension Funds will effectively control the Purchaser. Major Decisions include:
the approval or amendment of property budgets; the sale, lease, refinancing,
or encumbrance of the Properties; the acquisition of any real property in
addition to the Properties; the making of capital improvements to the
Properties; the admission of a new member of the Purchaser; entering into any
contract with an affiliate of any member; the issuance or sale of equity or
debt securities of the Purchaser; the consummation of any business
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combination involving the Purchaser; the filing of any petition in bankruptcy
with respect to the Purchaser; the selection or replacement of a property
manager; and the distribution of net cash flow or capital proceeds.
Under the proposed LLC Agreement, the Purchaser will enter into a two-year
property management agreement with ConAm Management, an affiliate of the
General Partner. ConAm Management is required to manage the daily operations
of the Properties and will receive a management fee of 3.5% of each Property's
gross collected monthly revenues. If the Purchaser elects in its sole
discretion to retain ConAm Management beyond the initial two-year term, the
management fee will be reduced to 3% of each Property's gross collected
monthly revenues. If the Purchaser sells either or both of Skyline Village or
Ponte Vedra II during the year following the initial two-year term, ConAm
Management will be entitled to a termination fee equal to the management fee
otherwise payable in respect of such Property or Properties for the remainder
of that year.
The proposed LLC Agreement provides that, following the two-year anniversary
of the effective date of the LLC Agreement (or at any prior time if the
members of the Purchaser are unable to reach a consensus on any Major Decision
within a 30-day period), any member of the Purchaser, including any affiliate
of the General Partner which is a member of the Purchaser, may make an offer
for the other members' interests in the Purchaser. Each other member may elect
to either sell its interests in the Purchaser for the stated price or make an
offer to purchase the other members' interests in the Purchaser for the stated
price. Accordingly, ConAm DOC might have, under certain circumstances and at
certain times, an option to purchase additional interests in the Purchaser.
At any time following the two-year anniversary of the effective date of the
LLC Agreement, the Pension Funds will be able to solicit offers for the sale
of either or both of Skyline Village or Ponte Vedra II, and at any time
following the effective date of the LLC Agreement, the Pension Funds will be
able to solicit offers for the sale of Autumn Heights. In such a case, the
Pension Funds will have to provide ConAm DOC with the exclusive opportunity to
negotiate a purchase of the applicable Property for a 30-day period. If the
parties are unable to reach an agreement as to such a purchase, the Pension
Funds will then be able, without the consent of ConAm DOC, to cause the
Purchaser to sell the applicable Property to a third party.
DESCRIPTION OF THE PROPERTIES TO BE SOLD
Autumn Heights. Autumn Heights is a 140-unit apartment community located in
the Broadmoor area of southwest Colorado Springs, Colorado, approximately four
miles south of the Central Business District. Autumn Heights had an average
occupancy rate of 93% during the first six months of 1998 and 92.4% in 1997.
There is a major growth trend in single-family residential housing, as well as
significant growth in new apartment construction. The new apartment units may
destabilize the market in the short-term, although long-term destabilization
is not expected.
Skyline Village. Skyline Village is a 168-unit apartment community located
in the northern portion of the Tucson, Arizona metropolitan area near the
foothills of the Santa Catalina mountains. Skyline Village had an average
occupancy rate of 96% during the first six months of 1998 and 93.2% in 1997.
Low interest rates and affordable home prices have also increased competition
by luring many renters to purchase homes. This competition has led to the
reemergence of rental incentives and other concessions in the marketplace to
attract tenants.
Ponte Vedra II. Ponte Vedra II is a 124-unit apartment community located in
northeast St. Johns County, approximately 18 miles from the Jacksonville,
Florida Central Business District. The property had an average occupancy rate
of 94% during the first six months of 1998 and 93.4% in 1997. The Jacksonville
apartment market has experienced strong competition lately, and future
expected development in the area near Ponte Vedra II may impact occupancy at
Ponte Vedra II due to increased competition.
INDEBTEDNESS ON THE PROPERTIES
Skyline Village and Autumn Heights are currently financed with loans which
will be repaid or assumed in connection with the Sale.
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The Skyline Village loan was originated by the Penn Mutual Life Insurance
Company and matures on January 1, 1999. The loan was for an original term of
seven years, amortized over 25 years, and has an interest rate of 10.125%. Due
to the interest rate on the loan and the short remaining term to maturity, the
Partnership intends to repay this loan, which is no longer subject to any
prepayment penalties, if the Sale is consummated. If the Closing Date extends
beyond the maturity date of this loan, the General Partner intends to seek,
pursuant to the terms of the Partnership Agreement, to extend or refinance
this loan.
The Autumn Heights loan was originated by the John Hancock Life Insurance
Company and matures on January 1, 2001. The loan was for an original term of
seven years, amortized over 25 years, and has an interest rate of 8.00%. The
Autumn Heights loan documents provide for a standard prepayment penalty based
upon the loss in yield experienced by the lender in connection with the
prepayment of the loan prior to the maturity date. Based upon the fact that
the interest rate on the loan exceeds current interest rates and the total
remaining indebtedness as of November 1, 1998 in the approximate amount of
$8,151,572, the General Partner estimates that prepayment of the Autumn
Heights loan would subject the Partnership to a prepayment penalty to the
existing lender of approximately $411,781. However, because the Purchaser has
agreed to assume the Autumn Heights loan, the Partnership will credit the
Purchase Price in the amount of this prepayment penalty.
PURCHASER'S VALUATION
The Purchase Price for the Properties is $25,200,000, which is greater than
the aggregate appraised values of the Properties as of November 30, 1997. See
"SPECIAL FACTORS--Independent Appraisal." The Purchase Price was derived
through negotiations between Lend Lease and the General Partner. See "--
Background of the Sale." Lend Lease, acting on behalf of the Purchaser,
considered a number of factors, including the preceding twelve months of net
operating income of the Properties, the age, condition and location of the
Properties, and the significant costs necessary to appropriately manage
properties this age and undertake the capital improvements necessary to
position the Properties to meet competition from newer properties.
The Purchase Price is not subject to adjustment based on the results of Lend
Lease's due diligence investigation on behalf of the Pension Funds. In
addition, because the Properties are being sold on an "as is" basis, it is
more likely that the Partnership will receive and retain the full amount of
the Purchase Price without further adjustment. The Partnership has a high
degree of confidence in the Purchaser's ability to consummate the Sale,
because Lend Lease will have completed its due diligence investigation and
will have deposited $252,000 earnest money into escrow prior to consummation
of the Sale. Another advantage of the Sale is that, because the offer is for
multiple properties, the transaction costs are lower than they might otherwise
be if the Properties were listed with a broker and sold in separate sales, and
therefore the amount which can be distributed to the Limited Partners is
enhanced. However, for a discussion of certain disadvantages of the Sale, see
"SPECIAL FACTORS--Fairness of the Sale" and "--Terms of the Purchase
Agreements."
GENERAL PARTNER'S VALUATION
The General Partner has not prepared a formal valuation with respect to the
proposed Sale. The General Partner has relied on the Independent Appraisal,
prior offers for the Properties and its general familiarity with
and experience in the Properties' markets to establish that the Purchase Price
is a fair price for the Properties. See "SPECIAL FACTORS--Independent
Appraisal" and "--Background of the Sale."
BACKGROUND OF THE SALE
In 1994, the General Partner and RI 3-4 Real Estate Services, Inc., the then
co-general partners of the Partnership (the "General Partners"), determined,
in their business judgment, that it was an appropriate time to begin exploring
a means of converting the Partnership's interests in its properties to either
cash or marketable securities. This determination was based, in significant
part, upon their belief that the consummation of a sale or a "roll-up"
transaction would be consistent with (i) the Limited Partners' desire for
liquidity, (ii) the fact that a longer holding period could subject the
Limited Partners to risks associated with changing interest rates and
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property valuations, and (iii) the aging nature of the properties, which would
require increasingly larger commitments of funds to address on-going capital
expenditures and keep the properties competitive in their respective markets.
Under the terms of the Partnership Agreement, the General Partner or General
Partners have the responsibility to determine when Partnership properties
should be sold. As discussed in the Partnership's original offering
prospectus, the decision to sell the Partnership's properties would depend on
a variety of factors. Accordingly, it was not possible at the outset of the
Partnership to determine precisely when the Partnership's properties would be
sold. Although the terms of the Partnership Agreement do not provide for
termination of the Partnership until December 31, 2010, it was never intended
that the Partnership would hold its properties for the entire term of the
Partnership. In fact, the Partnership's offering prospectus originally
anticipated a holding period of approximately five years for the properties.
However, primarily as a result of extremely unfavorable market conditions in
the late 1980's and early 1990's, the properties were held beyond their
originally anticipated holding periods in order to take advantage of
recovering real estate markets and to avoid adverse tax and cash flow
consequences to the Limited Partners resulting from a sale of the properties
at significantly depressed values.
In 1994, the General Partners concluded that a "roll-up" of the Limited
Partners' interests with those of the Affiliated Partnerships was not in the
best interests of the Limited Partners. See "SPECIAL FACTORS--Alternatives
Considered to the Sale--Consolidation." Therefore, the decision was made to
begin marketing selected properties for sale. This decision was based upon the
General Partners' belief that the real estate capital markets were improving,
particularly in the multi-family sector. Pension funds, real estate investment
trusts and other institutional buyers had increased their purchasing activity
as compared to the early 1990's when these same institutional buyers were
largely out of the market. Lower interest rates had also improved the market
for selling properties, as entrepreneurial buyers who required debt financing
to purchase properties were able to borrow funds at more advantageous interest
rates. Further, with respect to the Partnership's properties, local real
estate market conditions were improving, resulting in improved operating
performances of certain properties and enhanced prospects for selling certain
properties at attractive prices.
Based upon the improvement in the real estate capital markets and certain of
the local real estate markets, the General Partners concluded that it would
then be easier to identify buyers for certain of the Partnership's properties
and that the offers might be at more favorable capitalization rates than were
previously available. Evaluating the effects to the Limited Partners of an
immediate sale and the prospects for near-term appreciation, the General
Partners made an assessment of each of the Partnership's properties and its
local market. In accordance with this assessment, certain properties were
identified for sale and subsequently sold. See "--Description of the
Partnership."
From time to time, the General Partners have received unsolicited
indications of interest in one or more of the remaining properties owned by
the Partnership, including the Properties. The General Partners did not pursue
these indications of interest for a variety of reasons. For instance, in some
cases, the General Partners could not obtain adequate information regarding
the proposed buyer and its sources of financing. In other cases,
investigations as to the proposed buyer's purchase criteria, return
requirements, sources of capital, experience in
the relevant real estate markets, and timelines did not indicate that the
proposed buyer was a realistic potential purchaser. Finally, certain
indications of interest were not pursued because the General Partners believed
that market conditions and, therefore, prices, were likely to improve over the
near-term.
In October 1997 and July 1998, respectively, an equity real estate
investment trust (the "REIT") and a real estate investment fund (the "Fund"),
parties unrelated to the General Partners, each expressed an interest in
acquiring the Properties and certain other properties owned by the Affiliated
Partnerships. The REIT and the Fund were familiar with these properties and
their respective locations within their respective trade areas. The REIT offer
included two properties which are no longer part of the RI Portfolio. Based on
the General Partner's understanding of the allocation of the REIT's offer, the
REIT offer for the RI Portfolio was $111,600,000, which was equal to the
appraised value of the RI Portfolio as of December 31, 1996. As to the
Partnership, this would
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have resulted in an aggregate purchase price for the Properties of $24,000,000.
The Fund offer indicated that the aggregate value of the RI Portfolio was
$115,650,000, which equaled the value set forth in the Independent Appraisal,
but, in consideration of the purported advantages to the seller of a single
transaction over an asset-by-asset sale, including the avoidance of seller-paid
brokerage commissions (estimated by the Fund to be 4% or more of the purchase
price) and reduced legal fees and related closing costs, the Fund's offer for
the RI Portfolio was $104,085,000. As to the Partnership, this would have
resulted in an aggregate purchase price for the Properties of $22,500,000. In
any event, these offers were not accepted because, in the opinion of the General
Partner and its affiliates, they either did not reflect the value of the
Properties at the time they were made and/or they were subject to significant
due diligence, underwriting and other contingencies.
Neither the General Partner, the Partnership nor any of their affiliates
have received any other offers for the RI Portfolio or the Partnership's
properties. Due to, among other things, the protracted timelines, contingencies
and administrative costs associated with sales of individual properties,
continued individual sales of RI Portfolio properties have not been pursued by
the General Partner and its affiliates subsequent to the REIT and Fund offers.
Effective July 1, 1997, the General Partner purchased the co-general partner
interest of RI 3-4 Real Estate Services, Inc. for $50,000 in cash. Subsequent
to this acquisition, the General Partner has considered alternative disposition
strategies for the Properties in light of the following:
(i) Due to previous sales of Partnership property, the Partnership currently
owns only three Properties, resulting in a disproportionate amount of fixed
costs associated with maintaining a public limited partnership;
(ii) The General Partner believes that the appropriate strategy for the
continued ownership of the Properties is the implementation of a physical
refurbishment program, which would result in capital expenditures that
would likely be unattractive to the Limited Partners, because they would
result in the suspension or reduction of cash distributions; and
(iii) Ponte Vedra II is part of an integrated apartment community, the
other property of which is owned by an Affiliated Partnership, making a sale
of the Properties on a stand-alone basis difficult.
In mid-February 1998, ConAm Management, an affiliate of the General Partner,
acquired Alliance Residential Management, Inc., a Phoenix-based property
management company ("Alliance"). At the time of the acquisition, Alliance was
managing property in Phoenix on behalf of Lend Lease, advisor to the Pension
Funds. Shortly after the acquisition of Alliance, Steve Walker, a Pension Fund
senior portfolio manager at Lend Lease, telephoned Jim Krohn, the former owner
of Alliance, who was at that time a newly-appointed officer at ConAm Management.
During this telephone conversation, Mr. Walker asked to be introduced to the
principals of ConAm Management, for the purpose of familiarizing himself with
Lend Lease's new property manager and exploring whether any further mutually
beneficial business relationships could be established between the two parties
and/or their affiliates.
On March 13, 1998, Mr. Krohn and J. Bradley Forrester, President of ConAm
Management and Vice President of the general partner of the General Partner,
flew to Atlanta to meet with Messrs. Ray D'Ardenne, Don Miller, Ted Klinck, and
Walker of Lend Lease. During this meeting, Messrs. Forrester and Krohn presented
the Lend Lease principals with general information about ConAm Management and
the multi-family real estate holdings of its affiliates, including the RI
Portfolio. The Lend Lease principals responded to this presentation by
expressing Lend Lease's desire to acquire well-located multi-family properties
where there was the opportunity to add value through physical refurbishment and
repositioning. At that time, Mr. D'Ardenne expressed a possible interest in
acquiring a small portfolio of multi-family residential housing properties from
ConAm Management's affiliates. While, as described above, the General Partner
and its affiliates had been contemplating a sale of the RI Portfolio for some
time, no formal presentations, proposals or solicitations for an offer relating
to the RI Portfolio were made to the Lend Lease principals on that date.
On March 16, Mr. Forrester sent Mr. Klinck at Lend Lease an informational
package relating to the RI Portfolio. The package included information relating
to the locations of the properties, the number of units at
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each property, a brief financial overview, and lists of amenities. Over the
next few days, Mr. Forrester continued to send information concerning the RI
Portfolio to Mr. Klinck. Subsequently, Mr. Klinck called Mr. Forrester and
expressed Lend Lease's interest in pursuing the acquisition of the RI
Portfolio. The General Partner believes that, during this time, Lend Lease
representatives may have made site visits to certain of the properties
comprising the RI Portfolio. The General Partner and its affiliates did not
consider retaining an independent advisor to represent the interests of the
Limited Partners in any prospective sale of the Properties, because they
determined that that the Independent Appraisal would provide adequate
assurance that a fair offer would be presented to the Limited Partners for
approval.
In late March and early April, the parties continued to exchange information
relating to the RI Portfolio. At the request of Mr. Klinck, Mr. Forrester
began to deliver more detailed financial reports and other information to Mr.
Klinck, in order to assist Lend Lease in its development of an offer. During
this time, Mr. Klinck and Mr. Forrester discussed the relative merits of
having affiliates of the General Partner contribute up to $5 million to the
purchase price of the RI Portfolio and provide property management services to
the RI Portfolio after the proposed sale. Through this alignment of interests,
Lend Lease believed that the underwriting risks inherent in the purchase of
real estate properties and the risks associated with the ongoing management of
the Properties would be reduced. The General Partner believes that this
reduction of risk to Lend Lease is reflected in the fact that the Purchase
Price is greater than the amounts offered by others.
During the following weeks, Lend Lease performed its own financial analysis
of the RI Portfolio and made several visits to the RI Portfolio property
sites. Also during this time, numerous telephone conversations took place
between Mr. Klinck and Mr. Forrester. Mr. Forrester informed Mr. Klinck that
if Lend Lease was not prepared to pay at least the appraised value of the RI
Portfolio, then the General Partner would not be interested in making a sale.
In arriving at this determination, the General Partner considered the original
Unit price of $500 and concluded that a sale at the appraised value of the
Properties, when taken together with all prior distributions with respect to
the Units, would provide the Limited Partners with a return of capital in
excess of their original investment. Mr. Klinck made several counteroffers for
the RI Portfolio at prices below the appraised value, but the General Partner
refused to consider a sale at those prices. During the same period, Mr. Klinck
attempted to negotiate a break-up fee of $250,000, to become payable to Lend
Lease if the proposed sale of the RI Portfolio did not close due to a lack of
approval by the limited partners of the Partnership or any Affiliated
Partnership. The General Partner refused to make these concessions.
On May 22, 1998, Mr. Klinck sent a proposed term sheet to Mr. Forrester,
including a proposed purchase offer for the RI Portfolio. On June 10, 1998,
Messrs. Klinck, Walker and Joe Thomas from Lend Lease met with Messrs.
Epstein, Dupree, Svatos and Tilley to discuss the transaction in general. On
July 7 and 8, 1998, Mr. Forrester and Michael Johnson, a regional vice
president of ConAm Management, went to Jacksonville, Florida to present the RI
Portfolio properties in that area to Messrs. Walker, Thomas and Klinck and
representatives of the Pension Funds. On July 28 and 29, 1998, a similar
meeting took place in Phoenix, Arizona. Over the next few months, Mr.
Forrester continued to send information on the RI Portfolio to Mr. Klinck,
including city maps, rental brochures, market summaries, occupancy
information, floor and site plans, management report summaries, operating
statements, rent rolls, location maps, memos regarding capital improvements
and management biographies.
During late July, the parties continued to negotiate the Purchase Price. In
arriving at the purchase offer contained in the proposed term sheet, Lend
Lease had performed independent evaluations of the historical financial
performance of the properties, the current and anticipated local real estate
market conditions affecting the properties, and the existing physical
condition of the properties. Lend Lease's purchase offer was less than the
value set forth in the Independent Appraisal, and the proposed purchase
agreements contained provisions obligating the Partnership to make additional
expenditures for capital improvements prior to closing (or credit the purchase
price for any unexpended amounts). As a result of the late July telephonic
negotiations between Mr. Klinck and Mr. Forrester, the purchase offer was
increased to the value set forth in the Independent Appraisal. In late August
and early September, the parties agreed to eliminate the obligation to make
additional expenditures for capital improvements.
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In the course of evaluating financing options for the proposed acquisition,
the prospective lender to the Purchaser had an independent appraisal of the RI
Portfolio prepared (the "Lender Appraisal"). The Lender Appraisal indicated
that the aggregate appraised value of the Properties was $25,900,000. After
deducting a sales commission of 2.5%, or $647,500, normally paid by the seller
but not applicable to the Sale, the Lender Appraisal indicated that the value
of the Properties was $25,252,500, or $252,500 more than the value of
$25,000,000 set forth in the Independent Appraisal. During late October 1998,
Mr. Forrester had numerous telephone conversations with Mr. Klinck in which
Mr. Forrester sought to have the purchase offer increased above $25,000,000.
As a result of these discussions, the purchase offer was increased from
$25,000,000 to the Purchase Price of $25,200,000. This brought the aggregate
amount offered by the Purchaser for the RI Portfolio to $117,900,000.
Thereafter, the parties finalized the material terms of the proposed LLC
Agreement, the property management agreement for ConAm Management, and the
Purchase Agreements. The definitive Purchase Agreements will be executed and
delivered immediately after the Proposals are approved by the Limited
Partners.
CONFLICTS OF INTEREST OF THE GENERAL PARTNER
The Sale contemplates that the properties will be sold to an entity in which
an affiliate of the General Partner will own a 9% interest. Because of this
ownership interest, the General Partner has a conflict with the interests of
the Limited Partners, and the interests of the General Partner may conflict
with its fiduciary obligation to the Limited Partners. The General Partner
believes, however, that the Sale is fair to the Limited Partners. The General
Partner believes that the fairness factors enumerated in "SPECIAL FACTORS--
Fairness of the Sale," and the fact that the Sale requires the approval of the
Limited Partners, provide sufficient procedural safeguards to minimize the
effects of the potential conflicts of interest inherent in any such
transaction.
Nevertheless, Limited Partners should consider the following factors when
examining the Sale:
(i) In consideration of a pro rata cash capital contribution to the
Purchaser, an affiliate of the General Partner, ConAm DOC, will own a 9%
interest in the Purchaser, and consequently, the General Partner faces
direct conflicts of interest in negotiating the Sale. Furthermore, ConAm
DOC has the potential to receive up to an additional 18% of the profits of
the Purchaser after pro rata distributions of profits to members of the
Purchaser have resulted in recoupment by such members of their aggregate
capital contributions and payment of cumulative returns of 15% per annum on
their previously unrecovered capital contributions.
(ii) No independent committee or representative has been appointed or
retained to negotiate the terms of the Sale on behalf of the Limited
Partners.
(iii) The Partnership has in the past and is currently being represented
by legal counsel who has also represented and is currently representing the
General Partner and certain of its affiliates in various matters, and the
Limited Partners will not be represented by separate legal counsel.
(iv) As an equity participant in the Purchaser, an affiliate of the
General Partner will benefit from any future cash flow attributable to, and
any future appreciation of, the Properties if the Sale is approved.
Furthermore, if the Sale is approved, ConAm Management, an affiliate of the
General Partner which will not be a member of the Purchaser, will be party
to a property management agreement relating to the Properties. ConAm
Management might not have otherwise obtained this contract if it were not
an affiliate of the General Partner. Finally, the General Partner and its
affiliates will benefit from the Sale as discussed in "SPECIAL FACTORS--
Effects of the Sale."
FAILURE TO APPROVE THE SALE
The General Partner believes that consummation of the Sale is the preferable
course of action at this time. If the Limited Partners fail to approve the
Proposals, however, the Partnership will attempt to refinance the existing
loans secured by the Properties and utilize any loan proceeds to implement
certain capital improvements.
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The Partnership might then take advantage of any future property appreciation
through a future sale of one or all of the Properties to the Purchaser or
otherwise (subject to any necessary amendment to the Partnership Agreement to
permit such sale or sales, which might require the consent of the Limited
Partners). There is no assurance that the General Partner could arrange for an
alternative sale of the Properties at an appropriate price or on terms
acceptable to the Partnership. Such a course of action could also increase the
risk of loss of the Properties due to any failure to make increased debt
service payments and might also adversely affect the timing and amount of
future distributions to Limited Partners.
The General Partner believes that a refinancing of the Properties at 75% of
the Lender Appraisal could generate $19,425,000 in new loan proceeds. After
deducting refinancing costs, repayment of the existing loans and related
prepayment penalties and reserves for capital expenditures required to maintain
the competitive position of the Properties, the General Partner expects that the
Partnership would make a tax-deferred distribution of approximately $117.51 per
Unit, as compared to an expected distribution of $211.01 per Unit from net
proceeds from the Sale and the subsequent liquidation of the Partnership.
If the Properties were leveraged to the extent set forth above at a 7%
interest rate, the increased annual debt service of $672,576 related to the
refinancing might result in the suspension of distributions or might affect
the timing and amount of future distributions. Furthermore, under current
lending practices, the loans would include provisions that could result in
material prepayment penalties if the loans were repaid prior to their maturity.
Consequently, the General Partner believes that the Sale is the preferable
course of action at this time.
TERMS OF THE PURCHASE AGREEMENTS
The following is a summary of the material terms of the proposed Purchase
Agreements. THIS SUMMARY DOES NOT PURPORT TO BE COMPLETE, AND REFERENCE IS
MADE TO THE FORM OF PURCHASE AGREEMENTS, WHICH IS AVAILABLE UPON REQUEST
PURSUANT TO THE PROCEDURES SET FORTH IN THE SECTION OF THIS SOLICITATION
STATEMENT ENTITLED "AVAILABLE INFORMATION." The Purchase Agreements will not be
executed unless the Limited Partners approve the Proposals. Capitalized terms
used but not defined in this summary of material terms have the meaning ascribed
to them in the form of the Purchase Agreements.
Structure of the Sale. The Partnership holds title to Autumn Heights and
Ponte Vedra II and holds a majority interest in and controls one limited
partnership which holds title to Skyline Village. In order to effectuate the
Sale, the Partnership and the other title-holding entity will transfer title
and deliver the deeds and other documents of transfer to the Purchaser on the
Closing Date.
Purchase Price. The Purchase Price for the Properties will be $25,200,000,
payable by the Purchaser on the Closing Date and subject to certain adjustments
at closing. Because the Purchaser will assume the existing loan secured by
Autumn Heights, the Purchase Price will be credited in the amount of the
prepayment penalty on this loan. See "--Indebtedness on the Properties." The
Purchase Price will be paid by this assumption of debt and a cash payment which
is expected to be paid out of proceeds from third party financing and capital
contributions made to the Purchaser. It is anticipated that the third party
financing will be provided by the Federal National Mortgage Association
("FNMA"). FNMA would be financing 65% of the aggregate purchase price for the RI
Portfolio under a $100,000,000 Master Credit Facility (the "Proposed Facility")
secured by the RI Portfolio. The Proposed Facility would have a five-year term
and a minimum borrowing base of $50,000,000. All loans under the Proposed
Facility would be cross-collateralized and cross-defaulted, and the Proposed
Facility would require a minimum of five properties in three geographically
distinct areas. For these reasons, a similar financing facility is not available
to the Partnership.
It is expected that borrowings under the Proposed Facility will bear a
variable interest rate of 0.52% plus the effective interest rate at which FNMA
is able to sell mortgage-backed securities collateralized by outstanding
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borrowings. The General Partner estimates that the effective interest rate
would be 5.74% if borrowings were outstanding at this time. The Pension Funds
intend to cause the Purchaser to enter into an interest rate swap agreement
with a commercial bank that will effectively fix the interest rate for five
years at approximately 6%.
The Proposed Facility will require the Purchaser to pay a prepayment penalty
if outstanding borrowings are repaid within the first three years. The
Purchaser has no plans to refinance or repay the Proposed Facility prior to
the earlier of its maturity date or the sale by it of any or all of the RI
Portfolio.
Condition of the Properties; Review of the Properties. The Purchaser will
purchase the Properties on an "As Is," "Where-Is" and "With All Faults" basis
with limited representations by the Partnership as to the condition of the
Properties or their fitness for any purpose. Lend Lease, on behalf of the
Pension Funds, has undertaken an extensive due diligence review of the
Properties. Unlike purchasers in many third party purchase agreements, Lend
Lease will complete its due diligence prior to execution of the Purchase
Agreements, and as such, satisfaction with the due diligence investigation
will not be a condition precedent to closing.
Conditions Precedent to Closing. The obligation of the Purchaser to close
under the Purchase Agreements will be subject to the concurrent approval by
the limited partners of the Affiliated Partnerships of the sale of their
respective properties to the Purchaser. There will be customary closing
conditions for real estate transactions, including issuance of appropriate
title policies.
Casualty to or Condemnation of the Properties. If any Property or any
portion thereof is damaged by fire or other casualty on or before the Closing
Date, and the cost of repairing such damage equals or exceeds the greater of
$400,000 or 5% of that portion of the Purchase Price allocable to the affected
Property, then the Purchaser may elect to terminate the Purchase Agreement
with respect to such Property. Further, if all or any material portion of any
Property is taken by eminent domain (or is a subject of a pending or
contemplated taking which has not been consummated) before the Closing Date,
then the Purchaser will have the right to terminate the Purchase Agreement as
to the affected Property. In the event of a fire or other casualty where the
damage is less than $400,000 or 5% of that portion of the Purchase Price
allocable to the affected Property, or if the condemnation does not affect a
material portion of the affected Property, the Purchaser will be required to
proceed with the closing without adjustment to the Purchase Price with respect
to the affected Property and will be entitled to receive, as applicable, an
assignment of the proceeds of any insurance in the event of a fire or other
casualty or an assignment of any award for such taking in the event of a
condemnation.
The purchase agreements relating to the properties of the Affiliated
Partnerships will contain provisions substantially similar to those outlined
above with respect to the rights of the Purchaser to terminate such purchase
agreements as a result of condemnation or destruction of the applicable
properties. While, as a general rule, the Purchaser will be able to terminate
the Purchase Agreements if any one of the sales to the Purchaser by the
Affiliated Partnerships is terminated, the Purchase Agreements will provide
that the Purchaser may terminate the Purchase Agreements in the case of
condemnation or destruction of the properties of the Affiliated Partnerships
only if two or more of such properties are condemned or destroyed. For
purposes of the foregoing determination, properties which comprise an
integrated apartment community will be counted as a single property. Because
Ponte Vedra II is part of an integrated apartment community, the Purchase
Agreement with respect to Ponte Vedra II permits the Purchaser to terminate
the Purchase Agreement if, because of condemnation or destruction, the
Purchaser is entitled to terminate the purchase agreement with respect to the
other property comprising such integrated apartment community, irrespective of
whether there has been condemnation or destruction of the Properties or any
other properties of the Affiliated Partnerships.
Representations and Warranties and Physical Due Diligence Conditions. Unlike
many third party agreements, the Purchase Agreements will not require the
Partnership to make substantial representations and warranties concerning the
condition or operation of the Properties, or other similar matters, such as
environmental studies or engineering. The Purchase Agreements also will not
provide the purchaser with a typical period to perform due diligence
investigations at the Properties or with a basis on which to refuse to close
the Sale based directly on the outcome of any due diligence investigation,
since such due diligence investigations will have been completed prior to
execution of the Purchase Agreements. Further, any representations and
warranties made by the Partnership pursuant to the Purchase Agreements will
survive for a
24
<PAGE>
period of only six months after the closing, which is a shorter period of time
than that found in many third party agreements.
Default and Damages. The Purchase Agreements will provide that the
Purchaser's recourse for any uncured breach ("Default") by the Partnership on
or prior to the Closing Date of any matter related to the Purchase Agreements
will be either to (i) seek from the escrow holder the return of the earnest
money deposits made on behalf of the Purchaser and any documents which have
been deposited with the escrow holder on behalf of the Purchaser and to seek
reimbursement from the Partnership for the reasonable and documented out-of-
pocket expenses incurred in connection with Lend Lease's due diligence
investigation (such as environmental and engineering studies) and other
transaction costs, but in no event an amount in excess of 1/4% of the Purchase
Price, or (ii) seek specific performance of the Partnership's obligations
under the Purchase Agreements.
In the event of the Purchaser's Default with respect to any of the Purchase
Agreements or the purchase agreements relating to the properties of the
Affiliated Partnerships, the Partnership's sole remedy will be to retain, as
liquidated damages, the earnest money deposits for the Properties. Further, in
the event the Purchaser objects or fails to cooperate with the release of such
earnest money deposit held by the escrow holder, the Partnership will also
have all of the remedies otherwise available to the Partnership at law or in
equity.
Pro-rations and Costs. All items of income and expense for the Properties,
such as collected rents and real estate taxes, will be apportioned and
adjusted between the Partnership and the Purchaser to the Closing Date. The
Partnership and the Purchaser will each pay one-half of any third party escrow
fees from the transaction, with the Partnership paying any documentary
transfer and stamp taxes in connection with the recordation of the applicable
deed and the Purchaser paying the premiums and other costs for title
insurance, including any endorsements requested by the Purchaser or its
lender.
Comparison to Third Party Agreements. The Purchase Agreements relating to
the Sale will contain several provisions which are not customarily found in
combination with each other in many third party agreements.
Provisions which may be more advantageous to the Partnership than those
found in many third party agreements include the following: the lack of due
diligence conditions precedent to closing; lack of a financing contingency;
limited representations and warranties; limited survivability of
representations and warranties; and sale of the Properties on an "as is"
basis.
Provisions which may be less advantageous to the Partnership than those
found in many third party agreements include the condition precedent to
closing of concurrent approval by the limited partners of the Affiliated
Partnerships of the sale of their respective properties to the Purchaser and
the ability of the Purchaser to terminate the Purchase Agreements if, due to
condemnation or casualty, the Purchaser is entitled to terminate the purchase
agreements with respect to any two or more properties owned by the Affiliated
Partnerships.
THE AMENDMENT
The Partnership Agreement prohibits sales of property to the General Partner
or an "affiliate" of the General Partner. "Affiliate" is defined in relevant
part as any person "that, directly or indirectly, is the beneficial owner of
10% or more of any class of equity securities of, or otherwise has a
substantial beneficial interest in," another person. While the Pension Funds
will own 91% of the Purchaser and will effectively control the Purchaser, an
affiliate of the General Partner will (i) own a 9% interest in the Purchaser,
(ii) have a right of first offer and certain buy/sell rights under the
proposed LLC Agreement and (iii) have the potential to receive up to an
additional 18% of the profits of the Purchaser after pro rata distributions of
profits to members of the Purchaser have resulted in recoupment by such
members of their aggregate capital contributions and payment of cumulative
returns of 15% per annum on their previously unrecovered capital
contributions. An affiliate of the General Partner which will not be a member
of the Purchaser will serve as the initial property manager for the Purchaser.
The foregoing factors might cause the Purchaser to be an "affiliate" of the
General Partner under the terms of the Partnership Agreement. In order to
permit the Sale, the General Partner proposes to amend the
25
<PAGE>
Partnership Agreement to permit proposed sales of Partnership properties to
"affiliates" of the General Partner, if such proposed sales are approved by
the Limited Partners. The proposed Amendment requires the approval of a
majority in interest of the Limited Partners. The full text of the proposed
Amendment is set forth in Appendix A hereto.
INDEMNIFICATION
If a claim is made against the General Partner in connection with its
actions on behalf of the Partnership with respect to the Sale, the General
Partner expects that it will seek to be indemnified by the Partnership with
respect to such claim. The Partnership Agreement provides that, except in the
case of fraud, negligence, misconduct or other breach of fiduciary duty to the
Partnership or any Partner, the General Partner will not be liable,
responsible or accountable in damages or otherwise to the Partnership or any
of the Limited Partners for any liabilities or other obligations imposed on,
incurred by or asserted against the General Partner or the Partnership in any
way relating to or arising out of, or alleged to relate to or arise out of,
any action or inaction on the part of the Partnership or on the part of the
General Partner as a general partner of the Partnership. However, the General
Partner will not be indemnified from any liability, loss, or damage incurred
by it in connection with any claim or settlement involving allegations that
any state securities law or the Securities Act of 1933, as amended, was
violated by the General Partner unless the General Partner is successful in
defending such action and such indemnification is specifically approved by a
court of law which has been advised as to the current position of both the
Securities Exchange Commission and the California Commissioner of Corporations
regarding indemnification for violations of securities laws.
As a result of these indemnification rights, a Limited Partner's remedy with
respect to claims against the General Partner relating to its involvement in
the Sale could be more limited than the remedy which might have been available
absent the existence of these rights in the Partnership Agreement. A
successful claim for indemnification would reduce the amount of Partnership
cash available for distributions to the Limited Partners by an amount
equivalent to that paid to the General Partner under such a claim.
CERTAIN FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE SALE
GENERAL
The Sale, if approved, will have certain tax implications to the Limited
Partners that must be considered. The following summarizes the material
estimated federal income tax consequences to Limited Partners arising from the
Sale and provides a general overview of certain state income tax
considerations. This summary is based upon the Internal Revenue Code of 1986,
as amended (the "Code"), Treasury regulations, court decisions and published
positions of the Internal Revenue Service (the "Service"), each as in effect
on the date of this Solicitation Statement. There can be no assurance that the
Service will agree with the conclusions stated herein or that future
legislation or administrative changes or court decisions will not
significantly modify the federal or state income tax law regarding the matters
described herein, potentially with retroactive effect. This summary is not
intended to, and should not, be considered an opinion respecting the federal
or state income tax consequences of the Sale.
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner is required to take into account in computing
his or her income tax liability, his or her allocable share of the
partnership's items of income, gain, loss, deduction and credit (hereinafter
referred to as "income or loss") in accordance with the partnership agreement.
If the allocation of income or loss in the partnership agreement does not have
"substantial economic effect" as defined in Code Section 704(b), the law
requires the partnership's income or loss to be allocated in accordance with
the partners' economic interests in the partnership. The distribution of cash
attributable to partnership income is generally not a separate taxable event.
For tax purposes, the Partnership will realize and recognize gain or loss
separately for each Property (and in some cases, for each building which is
part of a Property). The amount of gain for tax purposes recognized with
26
<PAGE>
respect to an asset, if any, will be an amount equal to the excess of the
amount realized (i.e., cash or consideration received reduced by the expenses
of the Sale) over the Partnership's adjusted tax basis for such asset.
Conversely, the amount of loss recognized with respect to an asset, if any,
will be an amount equal to the excess of the Partnership's adjusted tax basis
over the amount realized by the Partnership for such asset. The "adjusted tax
basis" of an asset is its cost (including nondeductible capital expenditures
made by the Partnership at the time of purchase) or other basis with certain
additions or subtractions, including (i) additions for the cost of capital
expenditures such as improvements, betterments, commissions and other
nondeductible charges and (ii) subtractions for depreciation and amortization.
Each Limited Partner must report his or her allocable share of these gains
and losses in the Limited Partner's taxable year in which or with which the
Partnership's fiscal year in which the Properties are sold ends. Each Limited
Partner's allocable share of any Section 1245 gain, Section 1231 gain, Section
1250 gain or loss and Partnership net taxable income or loss from operations
will be reflected on his or her applicable Schedule K-1 (as determined in
accordance with the allocation provisions contained in the Partnership
Agreement discussed below).
Under Section 702(a)(3) of the Code, a partnership is required to separately
state, and partners are required to account separately for, their distributive
share of all gains and losses. Accordingly, each Limited Partner's allocable
share of any Section 1231 gain or loss and depreciation recapture realized by
the Partnership as a result of the Sale would be reportable by such Limited
Partner on his or her individual tax return. Section 1231 gains are those
gains arising from the sale or exchange of "Section 1231 Property" which means
(i) depreciable assets used in a trade or business or (ii) real property used
in a trade or business and held for more than one year. Conversely, Section
1231 losses are those losses arising from the sale or exchange of Section 1231
Property. If Section 1231 losses exceed Section 1231 gains, such losses would
be treated as ordinary losses by the Partners.
To the extent that Section 1231 gains for any taxable year exceed certain
Section 1231 losses for the year, subject to certain exceptions (such as
depreciation recapture, as discussed below), such gains and losses will be
treated as long-term capital gains. However, Section 1231 gains will be
treated as ordinary income to the extent of prior Section 1231 losses from any
source that were treated as ordinary in any of the previous five years.
Under Sections 1245 and 1250 of the Code, a portion of the amount allowed as
depreciation expense with respect to Section 1231 Property may be "recaptured"
as ordinary income upon sale or other disposition rather than as long-term
capital gains ("Section 1245 gains" and "Section 1250 gains," respectively).
The Partnership does not anticipate that it would have material amounts of
Section 1245 or Section 1250 gains. Therefore, it is anticipated that the Sale
will result in capital gain without the re-capture of any significant gain to
be reported at ordinary income tax rates. (It is not anticipated that any
Property will be sold at a tax loss.)
The Partnership Agreement provides that distributions from the Sale will be
made:
(i) First, 100% to the Limited Partners until each Limited Partner has
received an amount equal to his Adjusted Capital Value (as defined in the
Partnership Agreement);
(ii) Second, and subject to certain reductions, 100% to the Limited
Partners until each Limited Partner has received an amount equal to a 7%
cumulative annual return with respect to his Adjusted Capital Value, which
amount shall be calculated commencing with the first anniversary date of
the last Additional Closing Date (as defined in the Partnership Agreement)
(but in no event less than a 6% cumulative annual return with respect to
the Limited Partner's Adjusted Capital Value calculated from the date of
the Limited Partner's admission to the Partnership); and
(iii) Third, the balance 85% to the Limited Partners and 15% to the
General Partner.
The General Partner expects that the Limited Partners will recognize taxable
gain from the Sale of approximately $188.63 per Unit. Actual gain will be
allocated among the General Partner and the Limited Partners (the "Partners")
as follows: (i) first, gain attributable to the excess, if any, of the
indebtedness relating
27
<PAGE>
to a Property immediately prior to the Sale of such Property over the
Partnership's adjusted basis in the Property will be allocated to each Partner
having a negative balance in its capital account, to the extent of such
negative balance, in the proportion that the negative balance of each Partner
bears to the aggregate negative balances of all Partners; and (ii) second, the
balance of any gain will be treated on a cumulative basis as if it constituted
an equivalent amount of Net Proceeds From Sale or Refinancing and will be
allocated to the General Partner to the extent that the General Partner would
have received Net Proceeds From Sale or Refinancing in connection therewith,
and the balance will be allocated to the Limited Partners. Any passive losses
which have been suspended from this or other passive investments may be
available to reduce this gain. The Partnership's accountants have estimated
that, for Limited Partners who have not utilized prior Partnership passive
activity losses to offset passive activity income from other sources,
approximately $15 per Unit in suspended passive losses will be available from
the Partnership. Furthermore, unamortized syndication costs in the amount of
$49 per Unit will reduce the amount of gain reportable by the Limited
Partners. The expected distribution to the Limited Partners from net proceeds
from the Sale and certain cash reserves, together with the planned
distribution upon liquidation, is anticipated to be approximately $211.01 per
Unit and is expected to exceed the Limited Partners' income tax liability
attributable thereto of Limited Partners who acquired their Units in the
public offering.
The Partnership anticipates that approximately $47.23 per Unit in federal
income taxes ($41.29 per Unit for those partners with unused suspended passive
losses from the Partnership) may be incurred as a result of the Sale and
liquidation by Limited Partners who acquired their Units in the public
offering, as reflected in the following table, which assumes that a Limited
Partner has a marginal federal income tax rate of 39.6%.
<TABLE>
<CAPTION>
GAIN EST.
PER FEDERAL
UNIT TAX
------- -------
<S> <C> <C>
Taxed at a 39.6% federal rate.............................. $ 7.13 $ 2.82
Taxed at a 25% federal rate................................ $162.28 $40.57
Taxed at a 20% federal rate................................ $ 19.22 $ 3.84
------- ------
Total (without regard to suspended passive losses)......... $188.63 $47.23
=======
Potential suspended passive losses of $15 at 39.6%......... $(5.94)
------
Total potential taxes (including suspended passive loss-
es)....................................................... $41.29
======
</TABLE>
After allocating income or loss to the Partners, with the concomitant tax
basis adjustments, the distribution of proceeds from the Sale will reduce each
Limited Partner's federal income tax basis in its Unit. To the extent that the
amount of the distribution is in excess of that basis, such excess will be
taxed as a long-term or short-term capital gain depending on a Limited
Partner's holding period. To the extent that the distribution received is less
than that basis, the remaining basis, representing a Partner's share of the
Partnership syndication cost incurred at the inception of the Partnership, may
represent a tax benefit in connection with the termination of such Partner's
partnership interest. Limited Partners are encouraged to consult their
respective tax advisors with respect to the foregoing.
CAPITAL GAINS
Net long-term capital gains allocated to individuals, trusts and estates
from the Sale will be taxed at a maximum rate of 20% (except that the rate
will be 25% on that portion of the gain which is equal to the amount of real
estate depreciation not recaptured as ordinary income under Section 1250),
while ordinary income will be taxed at a maximum rate of up to 39.6%. The
amount of net capital loss that can be utilized to offset income will be
limited to the sum of net capital gains from other sources recognized by the
Limited Partner during the tax year, plus $3,000 ($1,500 in the case of a
married individual filing a separate return). The excess amount of such net
long-term capital loss may be carried forward and utilized in subsequent years
subject to the same limitations.
PASSIVE LOSS LIMITATIONS
Limited Partners who are individuals, trusts, estates, or personal service
corporations are subject to the passive activity loss limitations rules. A
Limited Partner's allocable share of Partnership income or loss is treated
28
<PAGE>
as derived from a passive activity, except to the extent of the Partnership's
portfolio income. Portfolio income includes such items as interest and
dividends. A Limited Partner's allocable share of any Partnership gain
realized on the Sale will be characterized as passive activity income, and the
liquidation of the Partnership will permit the deduction of any previously
deferred passive losses, if any, allocated to the Limited Partners.
CERTAIN STATE INCOME TAX CONSIDERATIONS
Because each state's tax law varies, it is impossible to predict the tax
consequences to the Limited Partners in all the state tax jurisdictions in
which they are subject to tax. Accordingly, the following is a general summary
of certain common (but not necessarily uniform) principles of state income
taxation. State income tax consequences to each Limited Partner will depend
upon the provisions of the state tax laws to which the Limited Partner is
subject. The Partnership will generally be treated as engaged in business in
each of the states in which the Properties are located, and the Limited
Partners would generally be treated as doing business in such states and
therefore subject to tax in such states. Most states modify or adjust the
taxpayer's federal taxable income to arrive at the amount of income
potentially subject to state tax. Resident individuals generally pay state tax
on 100% of such state-modified income, while corporations and other taxpayers
generally pay state tax only on that portion of state-modified income assigned
to the taxing state under the state's own apportionment and allocation rules.
TAX CONCLUSION
The discussion set forth above is only a summary of the material federal
income tax consequences to the Limited Partners of the Sale and of certain
state income tax considerations. It does not address all potential tax
consequences that may be applicable to the Limited Partners and to certain
other categories of Limited Partners, such as non-United States persons,
corporations, insurance companies, subchapter S corporations, partnerships or
financial institutions. It also does not address local or foreign tax
consequences of the Sale. ACCORDINGLY, LIMITED PARTNERS SHOULD CONSULT THEIR
OWN TAX ADVISORS REGARDING THE SPECIFIC INCOME TAX CONSEQUENCES OF THE SALE TO
THEM, INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND
FOREIGN TAX LAWS.
DISTRIBUTIONS
Since its inception on July 15, 1983, the Partnership has made quarterly
distributions aggregating $163.00 per Unit and returns of capital of $250.00
per Unit. The Partnership has made distributions averaging $1.63 per Unit
during each of the last eight fiscal quarters. With the projected distribution
of $211.01 per Unit upon liquidation of the Partnership, Limited Partners will
have received aggregate distributions of approximately $124.01 per Unit and a
full return of their initial investment of $500.
NO APPRAISAL RIGHTS
If Limited Partners owning a majority of the outstanding Units on the Record
Date consent to the Proposals, such approval will bind all Limited Partners.
The Partnership Agreement and the California Uniform Limited Partnership Act,
under which the Partnership is governed, do not give rights of appraisal or
similar rights to Limited Partners who dissent from the consent of the
majority in approving or disapproving the Proposals. Accordingly, dissenting
Limited Partners do not have the right to have their Units appraised or to
have the value of their Units paid to them if they disapprove of the action of
a majority in interest of the Limited Partners.
29
<PAGE>
MARKET FOR THE UNITS
The General Partner has no knowledge of a formal, established public trading
market for the Units and believes that secondary sales activity for the Units
is limited and sporadic. Due to the fact that the Units are not listed on any
exchange or quoted on NASDAQ, privately negotiated sales and sales through
intermediaries are the primary means available to a Limited Partner to
liquidate an investment in the Units. While some information is available
through private publications regarding the prices at which such secondary
sales transactions in the Units have been made, these publications expressly
disclaim the accuracy and reliability of the information regarding such
trades. Accordingly, the General Partner does not believe that such
information is of comparative value in analyzing the distributions to be made
in connection with the Sale. No sales of Units were made by or to affiliates
of the Partnership during the last two years.
In addition to informal secondary market sales, investors have periodically
sought to acquire Units by means of a tender offer for outstanding Units.
However, such tender offers generally involve only a limited number of Units,
are held open only for a limited time, and are available only on a limited
basis. Furthermore, those tender offers during the past three years of which
the General Partner is aware have been made at approximately 30% to 75% of the
net asset value of the Units. In particular, during the last six months, two
tender offers for outstanding Units were made by parties unaffiliated with the
General Partner for prices of $160 and $115 per Unit. The estimated aggregate
distribution to the Limited Partners following consummation of the Sale and
the anticipated liquidation of the Partnership, equal to $211.01 per Unit,
compares favorably with the average price of $138 per Unit represented by
these recent tender offers.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
On the Record Date, there were 80,000 Units issued and outstanding and
entitled to vote held of record by 3,642 Limited Partners. At the Record Date,
the General Partner and its affiliates owned no Units. No person is known by
the Partnership to be the beneficial owner of more than 5% of the Units.
YEAR 2000 INFORMATION
The Partnership has assessed the potential impact of the "Year 2000"
computer systems issue on its operations. If the Sale is consummated, the
Partnership will liquidate prior to January 1, 2000, and no Year 2000 issues
will be presented.
In the event that the Sale is not consummated, the Partnership has relied on
the efforts of ConAm Management, which has been retained by the Partnership to
manage the business and financial operations of the Properties, to resolve any
potential Year 2000 issues. In the course of providing property management
services for the Partnership, ConAm Management retained a third party
consultant to modify all applicable software to provide for 4-digit year
fields. The General Partner believes that the modifications undertaken by
ConAm Management are sufficient to address any potential Year 2000 problems
and that the impact of the Year 2000 issue will not materially affect the
Partnership's operating results or financial condition if the Sale is not
consummated. Accordingly, neither ConAm Management nor the Partnership has
taken any further actions with respect to the Year 2000 issue.
30
<PAGE>
VOTING PROCEDURES
Each Limited Partner is entitled to one (1) vote for each Unit owned of
record by such Limited Partner on the Record Date. Approval of the Proposals
requires the affirmative consent of Limited Partners holding a majority in
interest of the Units. A duly executed consent card on which a consent or an
indication of withholding consent is not indicated will be deemed a consent to
the Proposals. A vote "for" or "against" either of the Proposals may be
revoked by written notice of revocation or by a later-dated consent containing
different instructions at any time on or before the Expiration Date.
This Solicitation Statement is accompanied by a separate consent card.
Consent cards should be completed, signed and returned by the Expiration Date
to the Solicitation Agent at the address specified below or by facsimile
transmission of the front and back of the card to the number specified below.
A self-addressed, prepaid envelope for return of the consent card is included
with this Solicitation Statement.
<TABLE>
<S> <C>
By Mail: By Facsimile:
D.F. King & Co., Inc. (212) 809-8839
77 Water Street
20th Floor
New York, NY 10005
</TABLE>
For Information Call:
(800) 735-3591
(TOLL-FREE)
AVAILABLE INFORMATION
The Partnership is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports,
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and should be available at the Commission's regional
offices at 500 West Madison, 14th Floor, Chicago, Illinois 60661-2511 and 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such
material may also be accessed on the World Wide Web through the Commission's
Internet address at "http://www.sec.gov."
The following documents, which have been filed with the Commission, contain
important information about the Partnership and its financial condition and
are annexed hereto as Annex 1 and Annex 2, respectively:
(i) The Partnership's Annual Report on Form 10-K, as amended and restated
for the year ended November 30, 1997 (Commission File No. 0-11769) (the
"Form 10-K").
(ii) The Partnership's Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 1998 (Commission File No. 0-11769) (the "Form 10-
Q").
The Commission permits the Partnership to "incorporate by reference"
information into this Solicitation Statement, which means that the Partnership
can disclose important information to Limited Partners by referring them to
another document filed separately with the Commission. The information
incorporated by reference is deemed to be a part of this Solicitation
Statement, except for any information superseded by information in this
Solicitation Statement.
The Partnership hereby incorporates by reference the Form 10-K, all reports
filed pursuant to Section 13(a) or 15(d) of the Exchange Act that it may file
or has already filed with the Commission between November 30, 1997 and the
date of action by Consent, other than those delivered in connection herewith,
and the financial information contained in Part I of the Form 10-Q.
31
<PAGE>
A Limited Partner of the Partnership may obtain from the Partnership or the
Commission any of the documents incorporated by reference. Documents
incorporated by reference are available from the Partnership without charge,
excluding all exhibits unless such exhibits have been specifically
incorporated by reference in the document incorporated by reference in this
Solicitation Statement. Limited Partners may obtain documents incorporated by
reference in this Solicitation Statement, or a copy of the Partnership
Agreement or the form of Purchase Agreements, by written or oral request, by
first class mail or other equally prompt means within one business day of
receipt of such request, from ConAm Property Services IV, Ltd., 1764 San Diego
Avenue, San Diego, California 92110-1906, telephone number (619) 297-6771.
If you would like to request documents from the Partnership, please do so by
January 8, 1999 in order to ensure receipt before action by Consent.
San Diego, California
December 16, 1998
CONAM PROPERTY SERVICES IV, LTD.,
General Partner
By: Continental American Development,
Inc., the General Partner
By: /s/ Daniel J. Epstein
-----------------------------
Daniel J. Epstein
President and Chief
Executive Officer
32
<PAGE>
APPENDIX A
THE PROPOSED AMENDMENT
Set forth below is the provision of the Partnership Agreement that would be
modified by the proposed Amendment. The following is qualified in its entirety
by reference to the form of Amendment, a copy of which can be obtained without
charge from the Solicitation Agent.
IF THE PROPOSED AMENDMENT IS ADOPTED, THE FOLLOWING SECTION WILL BE MODIFIED
AS FOLLOWS (underlines indicate where text has been added):
12. RIGHTS, DUTIES AND LIABILITY OF GENERAL PARTNERS.
....
d. Limitations on General Partners' Authority. The General Partners shall
have no authority to do any act prohibited by law, nor shall the General
Partners have any authority to:
....
(xi) Except as provided in Subsection 12f.(vi), permit the Partnership to
purchase or lease property in which a General Partner or any Affiliate has
an interest or sell or lease any Property to a General Partner or any
Affiliate, unless such transaction is specifically approved by Limited
-------------------------------------------------------------
Partners owning a majority of the Units outstanding at that time.
----------------------------------------------------------------
[The remainder of Section 12 is unaffected.]
A-1
<PAGE>
APPENDIX B
FORM OF CONSENT OF LIMITED PARTNER
CONAM REALTY INVESTORS 3, L.P.
CONSENT OF LIMITED PARTNER
THIS CONSENT IS SOLICITED BY AND ON BEHALF OF CONAM REALTY INVESTORS 3, L.P.
(THE "PARTNERSHIP") BY CONAM PROPERTY SERVICES IV, LTD., THE GENERAL PARTNER
OF THE PARTNERSHIP. The General Partner recommends a vote "FOR" the Proposals,
as defined in the accompanying Consent Solicitation Statement. A vote "FOR"
the Proposals also will constitute your consent to all actions necessary to
consummate all transactions with respect to the Proposals contemplated by the
Consent Solicitation Statement. All capitalized terms used herein without
definition have the meanings assigned to them in the Consent Solicitation
Statement.
THIS CONSENT WILL BE RECORDED IN ACCORDANCE WITH THE INSTRUCTIONS BELOW. IF
NO INSTRUCTIONS ARE INDICATED, YOU WILL BE DEEMED BY YOUR SIGNATURE BELOW TO
HAVE CONSENTED TO THE PROPOSALS AS RECOMMENDED BY THE GENERAL PARTNER.
PLEASE MARK THE APPROPRIATE BOX WITH RESPECT TO EACH PROPOSAL:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
With the General Partner's recommendation to
approve the Sale of the Properties (as set
forth in "ACTION BY CONSENT--Matters to be
Considered), the undersigned votes all of the
undersigned's Units: [_] [_] [_]
With the General Partner's recommendation to
amend the Partnership Agreement to permit
sales of Partnership property to affiliates
of the General Partner, including the Sale
(as set forth in Appendix A to the Consent
Solicitation Statement), the undersigned
votes all of the undersigned's Units: [_] [_] [_]
</TABLE>
IF THE SALE IS APPROVED BUT THE AMENDMENT OF THE PARTNERSHIP AGREEMENT IS
NOT, THE GENERAL PARTNER WILL HAVE NO AUTHORITY TO CONSUMMATE THE SALE, AND
THE SALE WILL NOT OCCUR. If the Amendment of the Partnership Agreement is
approved but the Sale is not, the General Partner anticipates amending the
Partnership Agreement in accordance with Appendix A to the Consent
Solicitation Statement.
The undersigned acknowledges receipt from the General Partner of the Consent
Solicitation Statement dated December 16, 1998 pertaining to the Proposals.
Dated:____________, 199_ -------------------------------
Signature
-------------------------------
Print Name
-------------------------------
Signature (if held jointly)
-------------------------------
Print Name
-------------------------------
Title
B-1
<PAGE>
Please sign exactly as name appears hereon. When Units are held by joint
tenants, both should sign. When signing as an attorney, executor,
administrator, trustee or guardian, please give full title. If a corporation,
please sign in full corporate name by President or other authorized officer.
If a partnership, please sign in partnership name by authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THIS CONSENT, PRIOR TO 5:00 P.M. PACIFIC
STANDARD TIME ON JANUARY 15, 1999 (UNLESS SUCH TIME IS EXTENDED PURSUANT TO
THE CONSENT SOLICITATION STATEMENT), BY FACSIMILE TO (212) 809-8839 OR BY
MAIL, USING THE ENCLOSED PRE-PAID ENVELOPE, TO D.F. KING & CO., INC., WALL
STREET STATION, P.O. BOX 411, NEW YORK, NY 10269-0069. IF YOU NEED ASSISTANCE
IN FILLING OUT THIS CONSENT, PLEASE CALL THE SOLICITATION AGENT AT (800) 735-
3591.
B-2
<PAGE>
Annex 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: November 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number: 0-11769
CONAM REALTY INVESTORS 3 L.P.
formerly known as
HUTTON/CONAM REALTY INVESTORS 3
Exact name of Registrant as specified in its charter
California 13-3176625
State or other jurisdiction of incorporation I.R.S. Employer Identification No.
1764 San Diego Avenue
San Diego, CA 92110 Attn.: Robert J. Svatos 92110-1906
Address of principal executive offices Zip Code
Registrant's telephone number, including area code (619) 297-6771
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. (X)
Documents Incorporated by Reference:
Portions of Parts I, II, III and IV are incorporated by reference to the
Partnership's Annual Report to Unitholders for the fiscal year ended
November 30, 1997.
<PAGE>
PART I
Item 1. Business
(a) General Description of Business and Objectives
ConAm Realty Investors 3 L.P., formerly known as Hutton/ConAm Realty
Investors 3, (the "Partnership") is a California limited partnership formed
on July 14, 1983. ConAm Property Services IV, Ltd. ("CPS IV"), a
California limited partnership, and RI 3-4 Real Estate Services, Inc. ("RI
3-4"), a Delaware corporation, were the original co-general partners of the
Partnership. On January 27, 1998, CPS IV acquired RI 3-4's co-general
partner interest in the Partnership, effective July 1, 1997, pursuant to a
Purchase Agreement between CPS IV and RI 3-4 dated August 29, 1997. As a
result, CPS IV now serves as the sole general partner (the "General
Partner") of the Partnership. In conjunction with this transaction, the
name of the Partnership was changed from Hutton/ConAm Realty Investors 3 to
ConAm Realty Investors 3 L.P.
The Partnership was organized to engage in the business of acquiring,
operating and holding for investment multifamily residential properties.
The Partnership originally invested in three residential apartment
properties and two joint ventures, each of which owned a specified
property. As described below two properties have been sold. Funds held as
a working capital reserve are invested in bank certificates of deposit,
unaffiliated money market funds or other highly liquid short-term
investments where there is appropriate safety of principal in accordance
with the Partnership's investment objectives and policies.
The Partnership's principal investment objectives with respect to its
interests in real property are:
(1) capital appreciation;
(2) distribution of net cash from operations attributable to rental income; and
(3) preservation and protection of capital.
<PAGE>
Distribution of net cash from operations is the Partnership's objective
during its operational phase, while preservation and appreciation of
capital are the Partnership's long-term objectives. The attainment of the
Partnership's investment objectives will depend on many factors, including
future economic conditions in the United States as a whole and, in
particular, in the localities in which the Partnership's properties are
located, especially with regard to achievement of capital appreciation.
From time to time the Partnership expects to sell its real property
interests taking into consideration such factors as the amount of
appreciation in value, if any, to be realized and the possible risks of
continued ownership. Proceeds from any future sale, financing or
refinancing of properties will not be reinvested and may be distributed to
the Limited Partners and General Partner (sometimes referred to together
herein as the "Partners"), so that the Partnership will, in effect, be
self-liquidating. If deemed necessary, the Partnership may retain a
portion of the proceeds from any sale, financing or refinancing as capital
reserves. As partial payment for properties sold, the Partnership may
receive purchase money obligations secured by mortgages or deeds of trust.
In such cases, the amount of such obligations will not be included in Net
Proceeds From Sale or Refinancing (distributable to the Partners) until and
only to the extent the obligations are realized in cash, sold or otherwise
liquidated.
Originally, the Partnership utilized the net proceeds of its public
offering to acquire five residential apartment complexes (collectively, the
"Properties") either directly or through investments in joint ventures, as
follows: (1) Autumn Heights, a 140-unit apartment complex, located in
Colorado Springs, Colorado; (2) Skyline Village, a 168-unit apartment
complex, located in Tucson, Arizona; (3) Ponte Vedra Beach Village II, a
124-unit apartment complex, located in Ponte Vedra Beach, Florida; (4)
Country Place Village II, a 100-unit apartment complex, located in
Clearwater, Florida; and (5) Bernardo Point Apartments, a 200-unit
apartment complex, located in San Diego, California. On December 20, 1990,
Bernardo Point Apartments was sold to an unaffiliated institutional buyer
for $19,915,000, and on July 20, 1995, Country Place Village II was sold
for $3,890,000 to an unaffiliated institutional buyer.
The Partnership's mortgage loan secured by Autumn Heights was refinanced in
January 1994 and matures in January 2001. For information concerning the
Partnership's current mortgage indebtedness, see Note 5, "Mortgages
Payable," of the Notes to the Consolidated Financial Statements, included
herein by reference to the Partnership's Annual Report to Unitholders for
the fiscal year ended November 30, 1997, which is filed as an exhibit under
Item 14.
The Partnership considers itself to be engaged in only one industry
segment, real estate investment.
<PAGE>
Competition
The Partnership's real property investments are subject to competition from
similar types of properties in the vicinities in which they are located and
such competition has increased since the Partnership's investment in the
Properties due principally to the addition of newly constructed apartment
complexes offering increased residential and recreational amenities. The
Properties have also been subject to competition from condominiums and
single-family properties especially during periods of low mortgage interest
rates. The Partnership competes with other real estate owners and
developers in the rental and leasing of its Properties by offering
competitive rental rates and, if necessary, leasing incentives. Such
competition may affect the occupancy levels and revenues of the Properties.
The occupancy levels at the properties in Arizona and Florida reflect some
seasonality, which is typical in these markets. In some cases, the
Partnership may compete with properties owned by partnerships affiliated
with the General Partner.
For a discussion of current market conditions in the areas where the
Partnership's Properties are located, reference is made to the
Partnership's Annual Report to Unitholders for the fiscal year ended
November 30, 1997, which is filed as an exhibit under Item 14.
Employees
The Partnership has no employees. Services are provided by ConAm Services,
ConAm Management Corporation ("ConAm Management"), an affiliate of CPS IV,
as well as Service Data Corporation and First Data Investor Services Group,
both unaffiliated companies. The Partnership has entered into management
agreements pursuant to which ConAm Management provides management services
with respect to the Properties. First Data Investor Services Group had
been retained by the Partnership to provide all accounting and investor
communication functions, while Service Data Corporation provides transfer
agent services. Effective December 1, 1997, the accounting functions of
the Partnership have been transferred to the firm of Brock, Tibbetts, &
Snell, an unaffiliated company located in San Diego, California. See Item
13, "Certain Relationships and Related Transactions", for a further
description of the service and management agreements between the
Partnership and affiliated entities.
Item 2. Properties
For a description of the Partnership's Properties, a discussion of current
market conditions in the areas where the Properties are located and
appraised values, reference is made to the Partnership's Annual Report to
Unitholders for the fiscal year ended November 30, 1997, which is filed as
an exhibit under Item 14. For information on the purchase of the
Properties, reference is made to Note 4 of the Consolidated Financial
Statements, included herein by reference to the Partnership's Annual Report
to Unitholders. Average occupancy rates at each property are incorporated
by reference to Item 7.
Item 3. Legal Proceedings
The Partnership is not subject to any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year ended November 30, 1997, no
matter was submitted to a vote of Unitholders through the solicitation of
proxies or otherwise.
PART II
Item 5. Market for Partnership's Limited Partnership Units and Related
Security Holder Matters
As of November 30, 1997, the number of Unitholders of record was 3,767.
<PAGE>
No established public trading market exists for the Units, and it is not
anticipated that such a market will develop in the future.
Distributions of Net Cash From Operations, when made, are paid on a
quarterly basis, with distributions generally occurring approximately 45
days after the end of each fiscal quarter. Such distributions have been
made primarily from net operating income with respect to the Partnership's
investment in the Properties and from interest on short-term investments,
and partially from excess cash reserves. Information on cash distributions
paid by the Partnership for the past two fiscal years is incorporated by
reference to the Partnership's Annual Report to Unitholders for the fiscal
year ended November 30, 1997, which is filed as an exhibit under Item 14.
The level of future distributions will be evaluated on a quarterly basis
and will depend on the Partnership's operating results and future cash
needs.
Item 6. Selected Financial Data
Incorporated by reference to the Partnership's Annual Report to Unitholders
for the year ended November 30, 1997, which is filed as an exhibit under
Item 14.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
At November 30, 1997, the Partnership had cash and cash equivalents of
$796,824 that were invested in unaffiliated money market funds, a decrease
from $1,084,483 at November 30, 1996. The decrease is primarily
attributable to additions to real estate, mortgage principal payments and
cash distributions, all of which in total exceeded cash provided by
operating activities. The Partnership also maintains a restricted cash
balance, which totaled $109,843 at November 30, 1997, an increase from
$84,934 at November 30, 1996. The Partnership expects sufficient cash to
be generated from operations to meet its current operating expenses.
Distribution payable decreased from $222,222 at November 30, 1996 to
$146,659 at November 30, 1997. The decrease is primarily due to the
decline in the quarterly distribution level as a result of lower rental
revenue projections and the use of cash for capital improvements in 1997.
Accounts payable and accrued expenses totaled $218,266 at November 30,
1997, an increase from $156,786 at November 30, 1996. The increase is
primarily due to real estate tax accruals for Skyline Village, and higher
partnership administrative expenses.
The Partnership continues to perform various improvements at the Properties
which include roof replacements at Autumn Heights and Ponte Vedra Beach
Village II and exterior painting at Skyline Village. The anticipated costs
of the roof replacements at Autumn Heights and Ponte Vedra Beach Village II
are $100,000, and $200,000, respectively, and will be funded from the
Partnership's operating cash flow and cash reserves. It is expected that
work at these Properties will be finished by the end of the first quarter
of 1998. The Partnership will evaluate the need for additional improvement
work at the Properties on an ongoing basis.
The Partnership declared a cash distribution of $1.50 per Unit for the
quarter ended November 30, 1997 which was paid to investors on January 21,
1998. The level of future distributions will be evaluated on a quarterly
basis and will depend on the Partnership's operating results and future
cash needs.
The General Partner is continuing to evaluate the sale potential of the
remaining properties and other options with respect to the Partnership's
investments. One of these options includes refinancing certain loans
secured by the properties in order to return capital to the limited
partners on a tax-free basis and lock in favorable fixed interest rates.
This would also potentially enhance the marketability of the properties,
while enabling the Partnership to take advantage of possible future
<PAGE>
property appreciation. The Partnership's ability to sell the properties is
dependent upon a variety of factors, many of which are not within the
Partnership's control. There can be no assurance that any specific
property or all the properties can be sold, that particular prices will be
achieved, or that the Properties can be sold within a specific time frame.
Results of Operations
1997 versus 1996
Partnership operations for the fiscal year ended November 30, 1997 resulted
in a net loss of $195,483 compared with net income $354,135 in fiscal 1996.
The change from net income in 1996 to a net loss in 1997 is due primarily
to a decline in rental income, an increase in property operating expenses
and the write-off of the remaining basis of the roofs replaced in fiscal
1997. Net cash provided by operating activities decreased to $921,300 for
the fiscal year ended November 30, 1997, from $1,205,239 in fiscal 1996.
The decrease is primarily due to the decline in net income, as discussed
above.
Rental income for the fiscal year ended November 30, 1997 was $3,593,135
compared with $3,688,364 in fiscal 1996. The decrease is primarily due to
lower occupancy and rental rates at Autumn Heights. Interest income
totaled $38,921 for the fiscal year ended November 30, 1997 compared to
$57,109 in fiscal 1996. The decrease is due to the Partnership maintaining
lower average cash balances in the 1997 period when compared to the 1996
period.
Property operating expenses increased to $1,838,576 for the fiscal year
ended November 30, 1997, from $1,581,543 for fiscal 1996. The increase is
primarily attributable to higher repairs and maintenance expenses at all
three properties for flooring and carpet replacement, and other interior
and exterior repairs. The increase is also due to higher rental
administration costs for each property.
General and administrative expenses increased from $152,783 for the fiscal
year ended November 30, 1996 to $177,129 in fiscal 1997. The increase is
primarily due to an increase in expenses for Partnership accounting, tax
and other administrative services. During the 1997 period, certain
expenses incurred by RI 3-4, its affiliates, and an unaffiliated third
party service provider in servicing the Partnership, which were voluntarily
absorbed by affiliates of RI 3-4 in prior periods, were reimbursable to RI
3-4 and its affiliates.
1996 versus 1995
Partnership operations for the fiscal year ended November 30, 1996 resulted
in net income of $354,135 compared with $85,405 in fiscal 1995. Excluding
the $83,992 loss recognized on the July 1995 sale of Country Place Village
II, income from operations in fiscal 1995 was $169,397. The increases in
net income and income from operations for the fiscal year ended
November 30, 1996 are due primarily to reductions in property operating
expenses and most other major expense categories resulting from the sale of
Country Place Village II. The decreases were partially offset by a decline
in rental income due to the sale of the property. Net cash provided by
operating activities increased slightly to $1,205,239 for the fiscal year
ended November 30, 1996, from $1,184,714 in fiscal 1995.
Rental income for the fiscal year ended November 30, 1996 was $3,688,364
compared with $4,027,970 in fiscal 1995. The decrease reflects the sale of
Country Place Village II in July 1995, partially offset by increases in
rental income at Autumn Heights and Ponte Vedra Beach Village II. Interest
income totaled $57,109 for the fiscal year ended November 30, 1996 compared
to $174,780 in fiscal 1995. The decrease is the result of the Partnership
maintaining lower average cash balances in the 1996 period compared to the
1995 period.
Property operating expenses declined to $1,581,543 for the fiscal year
ended November 30, 1996, from $1,912,816 for fiscal 1995. The decrease is
attributable to the sale of Country Place Village II and is partially
offset by higher utilities and property administrative expenses at Ponte
Vedra Beach Village II. Depreciation and amortization was lower in fiscal
<PAGE>
1996 compared to fiscal 1995 due to the July 1995 sale of Country Place
Village II. Interest expense also declined due to the June 1995 repayment
of the Country Place Village II mortgage.
The average occupancy levels at each of the properties owned for the full
year during the years ended November 30, 1997, 1996 and 1995 were as
follows:
<TABLE>
<CAPTION>
Twelve Months Ended November 30,
Property 1997 1996 1995
<S> <C> <C> <C>
Autumn Heights 92% 96% 96%
Ponte Vedra Beach Village II 95% 95% 93%
Skyline Village 97% 93% 94%
</TABLE>
New Accounting Pronouncements
The Financial Accounting Standards Board also issued SFAS No. 129,
"Disclosure of Information about Capital Structure," SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." These statements,
which are effective for fiscal years beginning after December 15, 1997,
expand or modify disclosures and, accordingly, will have no impact on the
Partnership's reported financial position, results of operations or cash
flows.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to the Partnership's Annual Report to Unitholders
for the fiscal year ended November 30, 1997, which is filed as an exhibit
under Item 14. Supplementary Data is incorporated by reference to F-1 and
F-2 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Effective December 1, 1997, the Partnership advised Coopers & Lybrand
L.L.P. that it was changing accounting firms and engaged KPMG Peat Marwick
LLP.
Coopers & Lybrand L.L.P.'s report on the financial statements for the years
ended December 31, 1996 and December 31, 1995 contained no adverse opinion
or disclaimer of opinion and was not qualified as to uncertainty, audit
scope or accounting principles. There have been no disagreements with
Coopers & Lybrand L.L.P. on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope procedure.
The decision to change accountants was approved by CPS IV, Ltd. and RI 3-4,
Inc., the General Partners of the Partnership at that time.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Partnership
The Partnership has no officers or directors. CPS IV, the General Partner
of the Partnership, manages and controls the affairs of the Partnership and
has general responsibility and authority in all matters affecting its
business.
ConAm Property Services IV, Ltd. ("CPS IV") is a California limited
partnership organized on August 30, 1982. The sole general partner of CPS
IV is Continental American Development, Inc. ("ConAm Development"). The
names and positions held by the directors and executive officers of ConAm
Development are set forth below. There are no family relationships between
any officers or directors.
Name Office
Daniel J. Epstein President and Director
E. Scott Dupree Vice President and Director
Robert J. Svatos Vice President and Director
Ralph W. Tilley Vice President
J. Bradley Forrester Vice President
Daniel J. Epstein, 58, has been the President and a Director of ConAm
Development. and a general partner of Continental American Properties, Ltd.
("ConAm"), an affiliate of ConAm Services, since their inception. He is
also Chairman and Chief Executive Officer of ConAm Management. Prior to
organizing ConAm, Mr. Epstein was Vice President and a Director of American
Housing Guild, which he joined in 1969. At American Housing Guild, he was
responsible for the formation of the Multi-Family Division and directed its
development and property management activities. Mr. Epstein holds a
Bachelor of Science degree in Engineering from the University of Southern
California.
E. Scott Dupree, 47, is a Senior Vice President and general counsel of
ConAm Management responsible for negotiation, documentation, review and
closing of acquisition, sale and financing proposals. Mr. Dupree also acts
as principal legal advisor on general legal matters ranging from issues and
contracts involving the management company to supervision of litigation and
employment issues. Prior to joining ConAm Management in 1985, he was
corporate counsel to Trusthouse Forte, Inc., a major international hotel
and restaurant corporation. Mr. Dupree holds a B.A. from United States
International University and a Juris Doctorate degree from the University
of San Diego.
Robert J. Svatos, 39, is a Senior Vice President and is the Chief Financial
Officer of ConAm Management. His responsibilities include the accounting,
treasury and data processing functions of the organization. Prior to
joining ConAm Management in 1988, he was the Chief Financial Officer for
AmeriStar Financial Corporation, a nationwide mortgage banking firm. Mr.
Svatos holds an M.B.A. in Finance from the University of San Diego and a
Bachelor's of Science degree in Accounting from the University of Illinois.
He is a Certified Public Accountant.
Ralph W. Tilley, 43, is a Senior Vice President and Treasurer of ConAm
Management. He is responsible for the financial aspects of syndications
and acquisitions, the company's asset management portfolio and risk
management activities. Prior to joining ConAm Management in 1980, he was a
senior accountant with KPMG Peat Marwick LLP, specializing in real estate.
He holds a Bachelor's of Science degree in Accounting from San Diego State
University and is a Certified Public Accountant.
J. Bradley Forrester, 40, is the President of ConAm Management. He is
currently responsible for overseeing all aspects of the operations of the
firm. His primary focus is on new business related activities including
property acquisitions, property development and rehabilitation, and the
acquisition of other property management companies. Prior to joining
ConAm, Mr. Forrester served as Senior Vice President - Commercial Real
Estate for First Nationwide Bank in San Francisco, where he was responsible
for a $2 billion problem asset portfolio including bank-owned real estate
and non-performing commercial real estate loans. His past experience
includes significant involvement in real estate development and finance,
property acquisitions and dispositions and owner's representation matters.
Prior to entering the real estate profession, he worked for KPMG Peat
Marwick LLP in Dallas, Texas. Mr. Forrester holds a Bachelor of Science
degree in Accounting from Louisiana State University. He received his CPA
certification in the State of Texas.
<PAGE>
Item 11. Executive Compensation
Neither the General Partner nor any of its directors or executive officers
received any compensation from the Partnership. See Item 13 of this report
for a description of certain costs of the General Partner and its
affiliates reimbursed by the Partnership.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of November 30, 1997, no person was known by the Partnership to be the
beneficial owner of more than five percent of the Units of the Partnership.
Neither the General Partner nor any of its executive officers or directors
own any Units.
Item 13. Certain Relationships and Related Transactions
RI 3-4 and CPS IV received a total $53,327 as the General Partners'
allocable share of Net Cash from Operations with respect to the fiscal year
ended November 30, 1997. Pursuant to the Certificate and Agreement of
Limited Partnership of the Partnership, for the fiscal year ended November
30, 1997, $1,955 of the Partnership's net loss was allocated to CPS IV and
RI 3-4. For a description of the share of Net Cash From Operations and the
allocation of income and loss to which the General Partner and former co-
General Partner are entitled, reference is made to Note 3 to the
Consolidated Financial Statements, included in the Partnership's Annual
Report to Unitholders for the year ended November 30, 1997, which is filed
as an exhibit under item 14. Effective July 1, 1997, all General Partner
allocations will be made solely to CPS IV.
The Partnership has entered into property management agreements with ConAm
Management pursuant to which ConAm Management has assumed direct
responsibility for day-to-day management of the Properties. It is the
responsibility of ConAm Management to select resident managers and to
monitor their performance. ConAm Management's services also include the
supervision of leasing, rent collection, maintenance, budgeting, employment
of personnel, payment of operating expenses, strategic asset management and
related services. For such services, ConAm Management is entitled to
receive a management fee equal to five percent of gross revenues. A
summary of property management fees earned by ConAm Management during the
past three fiscal years is incorporated by reference to Note 7 to the
Consolidated Financial Statements, included in the Partnership's Annual
Report to Unitholders for the fiscal year ended November 30, 1997, which is
filed as an exhibit under Item 14.
Pursuant to Section 12(g) of the Partnership's Certificate and Agreement of
Limited Partnership, the General Partner may be reimbursed by the
Partnership for certain of its costs. A summary of amounts paid to the
General Partners or their affiliates during the past three years is
incorporated by reference to Note 7, "Transactions with Related Parties,"
of Notes to the Consolidated Financial Statements, included in the
Partnership's Annual Report to Unitholders for the fiscal year ended
November 30, 1997, which is filed as an exhibit under Item 14.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a)(1) Financial Statements: Page
Consolidated Balance Sheets - November 30, 1997 and 1996 (1)
Consolidated Statements of Operations - For the years
ended November 30, 1997, 1996 and 1995 (1)
Consolidated Statements of Partners' Capital (Deficit)
- For the years ended November 30, 1997, 1996 and 1995 (1)
Consolidated Statements of Cash Flows - For the years
ended November 30, 1997, 1996 and 1995 (1)
Notes to the Consolidated Financial Statements (1)
Independent Auditors' Report (1)
Report of Former Independent Accountants (1)
(a)(2) Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation (F-1)
Independent Auditors' Report (F-2)
Report of Former Independent Accountants (F-3)
(1) Incorporated by reference to the Partnership's Annual Report to
Unitholders for the fiscal year ended November 30, 1997, filed as an
exhibit under Item 14.
(a)(3) Exhibits:
(4)(A) Certificate and Agreement of Limited Partnership (included as,
and incorporated herein by reference to, Exhibit A to the
Prospectus of Registrant dated March 31, 1983, contained in
Amendment No. 1 to Registration Statement No. 2-80991, of
Registrant filed March 29, 1983 (the "Registration Statement")).
(B) Subscription Agreement and Signature Page (included as, and
incorporated herein by reference to, Exhibit 3.1 to Amendment No.
1 to the Registration Statement).
(10)(A) Purchase Agreement relating to Autumn Heights, between the
Registrant and Highland Properties, Inc., and the exhibits
thereto (included as, and incorporated herein by reference to,
Exhibit (10)(A) to the Partnership's Annual Report on Form 10-K
filed February 28, 1985 for the fiscal year ended November 30,
1984 (the "1984 Annual Report")).
(B) Purchase Agreement relating to Skyline Village, between the
Registrant and Epoch Properties, Inc., and the exhibits thereto
(included as, and incorporated herein by reference to, Exhibit
(10)(C) to the Partnership's Annual Report on Form 10-K filed
February 28, 1984 for the fiscal year ended November 30, 1983).
(C) Purchase Agreement relating to Country Place Village II, between
the Registrant and Epoch Properties, Inc. and the exhibits thereto
(included as, and incorporated herein by reference to, Exhibit
(10)(C) to the 1984 Annual Report).
(D) Purchase Agreement relating to Ponte Vedra Beach Village II,
between the Registrant and Epoch Properties, Inc., and the exhibits
thereto (included as, and incorporated herein by reference to,
Exhibit (10)(A) to the Quarterly Report).
(E) Loan Documents: Promissory Note and Deed of Trust, Assignment of
Rents and Security Agreement with respect to the mortgaging of
Skyline Village dated December 20, 1991 (included as, and
incorporated herein by reference to, Exhibit 10(K) to the
Partnership's 1991 Annual Report on Form 10-K filed on February
27, 1992).
(F) Settlement Agreement by and among the Managing Joint Venturers and
the Epoch Joint Venturers dated July 1, 1992 (included as, and
incorporated herein by reference to, Exhibit 10.1 to the
Partnership's Quarterly Report on From 10-Q filed on October
14, 1992).
(G) Amended and Restated Agreement of Limited Partnership of Skyline
Village Joint Venture Limited Partnership dated as of July 1, 1992
(included as, and incorporated herein by reference to, Exhibit
10.2 to the Partnership's Quarterly Report on Form 10-Q filed on
October 14, 1992).
(H) Amended and Restated Agreement of General Partnership of Country
Place Village II Joint Venture dated as of July 1, 1992 (included
as, and incorporated herein by reference to, Exhibit 10.3 to the
Partnership's Quarterly Report on Form 10-Q filed on October 14,
1992).
<PAGE>
(I) Loan Documents: Promissory Note and Assignment of Rents and Leases
with respect to the refinancing of Autumn Heights, between
Registrant and John Hancock Life Insurance Company (included as,
and incorporated herein by reference to, Exhibit 10-J to the
Partnership's 1993 Annual Report on Form 10-K filed on March 30,
1994).
(J) Property Management Agreement between Registrant and Con Am
Management Corporation for the Ponte Vedra Beach Village II
property (included as, and incorporated herein by reference to,
Exhibit 10(L) to the Partnership's 1993 Annual Report on Form
10-K filed on March 30, 1994).
(K) Property Management Agreement between Registrant and Con Am
Management Corporation for the Skyline Village property (included
as, and incorporated herein by reference to, Exhibit 10(M) to the
Partnership's 1993 Annual Report on Form 10-K filed on March 30,
1994).
(L) Property Management Agreement between Registrant and ConAm
Colorado, Inc. for the Autumn Heights property (included as, and
incorporated herein by reference to, Exhibit 10(N) to the
Partnership's 1993 Annual Report on Form 10-K filed on March
30, 1994).
(13) Annual Report to Unitholders for the fiscal year ended
November 30, 1997.
(22) List of Subsidiaries - Joint Ventures (included as, and
incorporated herein by reference to, Exhibit 22 to the
Partnership's 1991 Annual Report on Form 10-K filed on
February 27, 1992 for the fiscal year ended November 30, 1991).
(27) Financial Data Schedule.
(99) Portions of Prospectus of Registrant dated March 31, 1983
(included as, and incorporated herein by reference to, Exhibit 28
to the Partnership's Annual Report on Form 10-K filed on
February 28, 1988 for the fiscal year ended November 30, 1987).
(b) Reports on Form 8-K:
On December 1, 1997, the Partnership filed a Form 8-K reporting
the change in Partnership's Certifying Accountants.
On February 3, 1998, the Partnership filed a Form 8-K disclosing
the sale of RI 3-4's co-General Partner interest in the
Partnership to CPS IV.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: February 28, 1998
BY: ConAm Property Services IV, Ltd.
General Partner
BY: Continental American Development, Inc.
General Partner
BY: /s/ Daniel J. Epstein
Name: Daniel J. Epstein
Title: President, Director and
Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
CONAM PROPERTY SERVICES IV, LTD.
A General Partner
By: Continental American Development, Inc.
General Partner
Date: February 28, 1998
BY: /s/ Daniel J. Epstein
Daniel J. Epstein
Director, President and
Principal Executive Officer
Date: February 28, 1998
BY: /s/ E. Scott Dupree
E. Scott Dupree
Vice President and Director
Date: February 28, 1998
BY: /s/ Robert J. Svatos
Robert J. Svatos
Vice President and Director
Date: February 28, 1998
BY: /s/ Ralph W. Tilley
Ralph W. Tilley
Vice President
Date: February 28, 1998
BY: /s/ J. Bradley Forrester
J. Bradley Forrester
Vice President
<PAGE>
Exhibit 13
ConAm Realty Investors 3 L.P.
1997 ANNUAL REPORT
ConAm Realty Investors 3 L.P. is a California limited partnership formed
in 1983 to acquire, operate and hold for investment multifamily
residential properties. At November 30, 1997, the Partnership's
portfolio consisted of three apartment properties located in Colorado,
Arizona and Florida. Provided below is a comparison of average occupancy
levels for the years ended November 30, 1997 and 1996.
Average Occupancy
Property Location 1997 1996
Autumn Heights Colorado Springs, Colorado 92% 96%
Ponte Vedra Beach
Village II Ponte Vedra Beach, Florida 95% 95%
Skyline Village Tucson, Arizona 97% 93%
Contents
1 Message to Investors
3 Performance Summary
4 Financial Highlights
5 Consolidated Financial Statements
8 Notes to the Consolidated
Financial Statements
13 Independent Auditors' Report and
Report of Former Independent Accountants
15 Net Asset Valuation
Administrative Inquiries Performance Inquiries/Form 10-Ks
Address Changes/Transfers First Data Investor Services Group
Service Data Corporation P.O. Box 1527
2424 South 130th Circle Boston, Massachusetts 02104-1527
Omaha, Nebraska 68144-2596 Attn: Financial Communications
800-223-3464 800-223-3464
<PAGE>
Message to Investors
Presented for your review is the 1997 Annual Report for ConAm
Realty Investors 3 L.P. (the "Partnership"). In this report we
discuss general market conditions affecting the Partnership's
three properties (the "Properties"). We have also included a
performance summary which addresses operations at each of the
properties and financial highlights for the year.
Cash Distributions
The Partnership paid cash distributions totaling $6.00 per Unit
for the year ended November 30, 1997, including the fourth
quarter distribution of $1.50 per Unit, which was credited to
your brokerage account or sent directly to you on January 21,
1998. Since inception, the Partnership has paid distributions
totaling $408.50 per original $500 Unit, including $250 per Unit
in return of capital payments. The level of future distributions
will be evaluated on a quarterly basis and will depend on the
Partnership's operating results and future cash needs.
Operations Overview
Operations at the Properties remained stable in 1997, reflecting
healthy economic conditions, tempered by increased competition
for tenants in the markets where the properties are located. As a
result of new apartment construction in the Jacksonville and
Colorado Springs markets, several large apartment properties have
begun to offer rental concessions to attract tenants. In Tucson,
where Skyline Village is located, many high-end renters opted to
purchase homes due to low interest rates. Despite these trends,
strong economic growth in all three areas helped strengthen multi-
family housing, and the Properties sustained average occupancy
levels at or above 95% in 1997. In addition, the appraised
values of the Properties increased by 4.2% in total when compared
to the prior year.
Several interior and exterior repairs were performed at each
property during 1997, including carpet and flooring replacement
and other routine repairs. In addition, ongoing roof
replacements at Ponte Vedra Beach Village II were completed in
the fourth quarter of 1997, while roof replacements required on
five of the buildings at Autumn Heights commenced in July. These
replacements are anticipated to cost approximately $100,000 and
will be finished by the end of the year. The General Partner
will evaluate the need for capital improvements to increase the
appeal of the Properties and position them for an eventual sale.
The General Partner is continuing to evaluate the sale potential
of the remaining properties and other options with respect to the
Partnership's investments. One of these options includes
refinancing certain loans secured by the Properties in order to
return capital to the limited partners on a tax-free basis and
lock in favorable fixed interest rates. This would also
potentially enhance the future marketability of the Properties,
while enabling the Partnership to take advantage of possible
future property appreciation. The Partnership's ability to sell
the Properties is dependent upon a variety of factors, many of
which are not within the Partnership's control. There can be no
assurance that any specific property or all the properties can be
sold, that particular prices will be achieved, or that the
Properties can be sold within a specific time frame. We will
keep you apprised of our sales efforts in future correspondence.
Summary
We will continue to monitor market conditions to determine the
opportune time to sell the Properties, and are also evaluating a
potential refinance of the Partnership's mortgage obligations.
In the interim, we intend to maximize the performance of the
Properties and further improve their appearance and condition.
We will keep you apprised of significant developments affecting
your investment in future reports.
Very truly yours,
/s/ Daniel J. Epstein
Daniel J. Epstein
President
Continental American Development Inc.
General Partner of ConAm Property Services IV, Ltd.
February 27, 1998
<PAGE>
Performance Summary
Autumn Heights Colorado Springs, Colorado
Autumn Heights is a 140-unit apartment complex located in the
southwest section of Colorado Springs. The property reported
stable operations in 1997, although average occupancy declined to
92% in fiscal 1997, down from 96% in fiscal 1996. Due to a
growing population and healthy economy, Colorado Springs is
considered to be one of the fastest growing markets in the
country. Strong market conditions over the last two years,
however, have prompted a rise in new construction of multifamily
properties. The recent addition of several new apartments to the
market has led to increased competition and a decline in rental
rates. As a result, rental income and average occupancy at
Autumn Heights declined slightly from the prior year. The
property requires extensive roof replacements in 1998, which,
when completed, should enhance its overall value.
Ponte Vedra Beach Village II Ponte Vedra Beach, Florida
Ponte Vedra Beach Village II is a 124-unit luxury apartment
complex located in an oceanside residential area to the southeast
of Jacksonville. The property reported an average occupancy
level of 95% in fiscal 1997, unchanged from fiscal 1996.
Property improvements for the year included roof replacements,
carpet replacement and other improvements to increase the
appearance of the property. Favorable market conditions in the
Jacksonville area have led to an increase in new multifamily
construction, with new construction permits issued for
approximately 3,831 new apartment units throughout the year.
Although population and job growth in the Jacksonville area
remains high, continuing construction at this pace could lead to
softness in the market in the future.
Skyline Village Tucson, Arizona
Skyline Village contains 168 units and is located in the
northwest area of Tucson. The property continued to perform well
despite strong competition, and maintained an average occupancy
rate of 97% during 1997, compared to 93% for 1996. Apartment
vacancy rates remain high in this market, but significant
population growth in Tucson over the last few years is slowly
reducing the number of available units. Low interest rates and
affordable home prices have also increased competition by luring
many renters to purchase homes. This competition has led to the
reemergence of rental incentives and other concessions to attract
tenants. Property improvements in 1997 included painting, carpet
replacement and ceiling fan replacement in selected units.
<PAGE>
Financial Highlights
Selected Financial Data
For the periods ended November 30, 1997 1996 1995 1994 1993
Dollars in thousands,
except for per unit data
Total Income $ 3,632 $ 3,745 $ 4,203 $ 4,298 $ 4,033
Loss on Sale of Property _ _ (84) _ _
Net Income (loss) (195) 354 85 18 3
Net Cash Provided by
Operating Activities 921 1,205 1,185 1,197 1,154
Long-term Obligations 8,293 8,435 8,565 11,599 10,636
Total Assets at Year End 18,075 18,977 19,650 27,614 30,184
Net Income (loss) per
Limited Partnership Unit* (2.42) 3.98 .87 .20 .03
Distributions per
Limited Partnership Unit* 6.00 10.00 10.00 14.00 8.00
Special Distributions per
Limited Partnership Unit* _ _ 50.00 30.00 -
* 80,000 Units outstanding
Cash Distributions
Per Limited Partnership Unit
1997 1996 1995
Special Distributions* $ _ $ _ $ 50.00
First Quarter 1.50 2.50 2.50
Second Quarter 1.50 2.50 2.50
Third Quarter 1.50 2.50 2.50
Fourth Quarter 1.50 2.50 2.50
Total $ 6.00 $ 10.00 $ 60.00
* On August 22, 1995, the Partnership paid a special cash
distribution totaling $50 per Unit, reflecting a return of
capital from the net proceeds of the July 1995 sale of Country
Place Village II and the remaining proceeds from the sale of
Bernardo Point in 1990.
Cash Distributions were reduced in 1997 due to the decrease in net
cash provided by operating activities, primarily due to the roof
replacements at Autumn Heights and Ponte Vedra Beach Village II.
<PAGE>
Consolidated Balance Sheets At November 30, At November 30,
1997 1996
Assets
Investments in real estate:
Land $ 5,817,668 $ 5,817,668
Buildings and improvements 22,465,678 22,326,780
28,283,346 28,144,448
Less accumulated depreciation (11,223,921) (10,510,777)
17,059,425 17,633,671
Cash and cash equivalents 796,824 1,084,483
Restricted cash 109,843 84,934
Other assets, net of accumulated amortization
of $206,209 in 1997 and $163,192 in 1996 109,293 173,569
Total Assets $18,075,385 $18,976,657
Liabilities and Partners' Capital
Liabilities:
Mortgages payable $ 8,292,972 $ 8,434,843
Distribution payable 146,659 222,222
Accounts payable and accrued expenses 218,266 156,786
Due to general partners and affiliates 16,703 15,808
Security deposits 101,198 118,601
Total Liabilities 8,775,798 8,948,260
Partners' Capital (Deficit):
General Partners (955,059) (899,777)
Limited Partners (80,000 Units outstanding) 10,254,646 10,928,174
Total Partners' Capital 9,299,587 10,028,397
Total Liabilities and Partners' Capital $18,075,385 $18,976,657
Consolidated Statements of Operations
For the years ended November 30, 1997 1996 1995
Income
Rental $ 3,593,135 $ 3,688,364 $ 4,027,970
Interest and other 38,921 57,109 174,780
Total Income 3,632,056 3,745,473 4,202,750
Expenses
Property operating 1,838,576 1,581,543 1,912,816
Depreciation and amortization 922,261 908,783 1,047,513
Interest 736,373 748,229 929,646
General and administrative 177,129 152,783 143,378
Write-off of assets 153,200 _ _
Total Expenses 3,827,539 3,391,338 4,033,353
Income (loss) from operations (195,483) 354,135 169,397
Loss on sale of property _ _ (83,992)
Net Income (Loss) $ (195,483) $ 354,135 $ 85,405
Net Income (Loss) Allocated:
To the General Partners $ (1,955) $ 35,413 $ 16,100
To the Limited Partners (193,528) 318,722 69,305
$ (195,483) $ 354,135 $ 85,405
Per limited partnership unit
(80,000 Units outstanding):
Income (loss) from operations $(2.42) $3.98 $1.91
Loss on sale of property _ _ (1.04)
Net Income (Loss) $(2.42) $3.98 $ .87
<PAGE>
Consolidated Statements of Partners' Capital (Deficit)
For the years ended November 30, 1997, 1996, and 1995
General Limited
Partners Partners Total
Balance at November 30, 1994 $ (773,514) $16,140,147 $15,366,633
Net income 16,100 69,305 85,405
Distributions ($60.00 per Unit) (88,888) (4,800,000) (4,888,888)
Balance at November 30, 1995 $ (846,302) $11,409,452 $10,563,150
Net income 35,413 318,722 354,135
Distributions ($10.00 per Unit) (88,888) (800,000) (888,888)
Balance at November 30, 1996 $ (899,777) $10,928,174 $10,028,397
Net income (loss) (1,955) (193,528) (195,483)
Distributions ($6.00 per Unit) (53,327) (480,000) (533,327)
Balance at November 30, 1997 $ (955,059) $10,254,646 $ 9,299,587
Consolidated Statements of Cash Flows
For the years ended November 30, 1997 1996 1995
Cash Flows From Operating Activities:
Net income (loss) $ (195,483) $ 354,135 $ 85,405
Adjustments to reconcile net income to
netcash provided by operating activities:
Depreciation and amortization 922,261 908,783 1,047,513
Write-off of assets 153,200 _ _
Loss on sale of property _ _ 83,992
Increase (decrease) in cash arising from
changes in operating assets and
liabilities:
Fundings to restricted cash (128,748) (156,654) (152,988)
Release of restricted cash to property
operations 103,839 132,861 149,827
Other assets 21,259 (25,471) 8,738
Accounts payable and accrued expenses 61,480 (17,938) 16,885
Due to general partners and affiliates 895 798 (2,867)
Security deposits (17,403) 8,725 (51,791)
Net cash provided by operating activities 921,300 1,205,239 1,184,714
Cash Flows From Investing Activities:
Net proceeds from sale of property _ _ 3,832,290
Additions to real estate (458,198) (162,200) (158,367)
Net cash provided by (used for) investing
activities (458,198) (162,200) 3,673,923
Cash Flows From Financing Activities:
Mortgage principal payments (141,871) (130,016) (3,033,660)
Distributions (608,890) (888,888) (4,977,777)
Net cash used for financing activities (750,761) (1,018,904) (8,011,437)
Net increase (decrease) in cash and cash
equivalents (287,659) 24,135 (3,152,800)
Cash and cash equivalents,
beginning of period 1,084,483 1,060,348 4,213,148
Cash and cash equivalents, end of period $ 796,824 $1,084,483 $ 1,060,348
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 736,373 $ 748,229 $ 929,646
Supplemental Disclosure of Non-Cash
Investing Activities:
Write-off of buildings and improvements $ (319,300) $ _ $ _
Write-off of accumulated depreciation $ 166,100 $ _ $ _
<PAGE>
Notes to the Consolidated Financial Statements
November 30, 1997, 1996 and 1995
1. Organization
ConAm Realty Investors 3 L.P., (formerly Hutton/ConAm Realty
Investors 3) (the "Partnership") was organized as a limited
partnership under the laws of the State of California pursuant to
a Certificate and Agreement of Limited Partnership (the
"Partnership Agreement") dated July 14, 1983. The Partnership
was formed for the purpose of acquiring and operating multi-
family residential real estate. The general partners of the
Partnership were RI 3-4 Real Estate Services, Inc. ("RI 3-4"), an
affiliate of Lehman Brothers, Inc. (see below), and ConAm
Property Services IV, Ltd. ("CPS IV"), an affiliate of
Continental American Properties, Ltd. (the "General Partners").
On January 27, 1998, CPS IV acquired RI 3-4's co general partner
interest in the Partnership pursuant to a purchase agreement
between CPS IV and RI 3-4 dated August 29, 1997. As a result,
CPS IV now serves as the sole general partner (the "General
Partner") of the Partnership. In conjunction with this
transaction, the name of the Partnership changed from
Hutton/ConAm Realty Investors 3 to ConAm Realty Investors 3 L.P.
The Partnership will continue until December 31, 2010 unless
sooner terminated pursuant to the terms of the Partnership
Agreement.
2. Significant Accounting Policies and Practices
Financial Statements - The consolidated financial statements are
prepared on the accrual basis of accounting and include the
accounts of the Partnership and its affiliated ventures when the
Partnership has a controlling interest in the ventures. The
effect of transactions between the Partnership and its ventures
have been eliminated in consolidation.
Investments in Real Estate - Investments in real estate are
recorded at cost less accumulated depreciation and include the
initial purchase price of the property, legal fees, acquisition
and closing costs.
Revenue is recognized when earned and expenses (including
depreciation) are recognized when incurred in accordance with
generally accepted accounting principles. Leases are generally
for terms of one year or less.
Depreciation is computed using the straight-line method based
upon the estimated useful lives of the properties (25 years).
Maintenance and repairs are charged to operations as incurred.
Costs incurred for significant betterments and improvements are
capitalized and depreciated over their estimated useful lives.
For assets sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any
resulting gain or loss is reflected in net income for the period.
Impairment of Long-Lived Assets - Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of"
<PAGE>
("FAS 121"), requires the Partnership to assess its real estate
investments for impairment whenever events or changes in
circumstances indicate that the carrying amount of the real
estate may not be recoverable. Recoverability of real estate to
be held and used is measured by a comparison of the carrying
amount of the real estate to future net cash flows (undiscounted
and without interest) expected to be generated by the real
estate. If the real estate is considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying amount of the real estate exceeds the fair value of
the real estate.
Other Assets - Included in other assets are costs incurred in
connection with obtaining financing for the Partnership's
properties. Such costs are amortized over the initial term of
the loan on a method which approximates the effective-interest
method.
Income Taxes - No provision for income taxes has been made in the
financial statements as the liability for such taxes is that of
the partners rather than the Partnership.
Cash and Cash Equivalents - Cash and cash equivalents consist of
highly liquid short-term investments with original maturities of
three months or less.
Concentration of Credit Risk - Financial instruments which
potentially subject the Partnership to a concentration of credit
risk principally consist of cash and cash equivalents and
restricted cash in excess of the financial institution's
federally insured limits. The Partnership invests its cash and
cash equivalents and restricted cash with high credit quality
federally insured financial institutions.
Restricted Cash - Restricted cash consists of escrows for real
estate taxes as required by the first mortgage lender.
Use of Estimates - Management of the Partnership has made a number
of estimates and assumptions relating to the reporting of assets
and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could
differ from those estimates.
3. The Partnership Agreement
The Partnership Agreement provides that net cash from operations,
as defined, is to be distributed quarterly, 90% to the limited
partners and 10% to the General Partners.
Net loss for any fiscal year is to be allocated 99% to the
limited partners and 1% to general partners. Net income for any
fiscal year will generally be allocated 90% to the limited
partners and 10% to the General Partners.
Net proceeds from sales or refinancing are to be distributed 100%
to the limited partners until each limited partner has received
an amount equal to his adjusted capital value (as defined) and an
annual, non-compounded cumulative 7% return thereon. The
balance, if any, is to be distributed 85% to the limited partners
and 15% to the General Partners. Generally, all gain from sales
is to be allocated in the same manner as net proceeds from sales
or refinancing.
Effective July 1, 1997, all general partner allocations are to be
made solely to CPS IV.
<PAGE>
4. Investments in Real Estate
The Partnership owns three residential apartment complexes that
were acquired either directly or through investments in joint
ventures as follows:
Apartment Date Purchase
Property Name Units Location Acquired Price
Autumn Heights 140 Colorado Springs, CO 1/25/85 $ 9,234,438
Skyline Village 168 Tucson, AZ 3/20/85 10,388,068
Ponte Vedra Beach
Village II 124 Jacksonville, FL 8/22/85 6,547,829
On July 20, 1995, the Partnership sold its former property,
Country Place Village II (the "Property") for $3,890,000 to an
institutional buyer (the "Buyer"), which was unaffiliated with
the Partnership. The selling price was determined by arm's
length negotiations between the Partnership and the Buyer. The
Partnership received net proceeds of $3,832,290. The transaction
resulted in a loss on sale for the Property of $83,992 which was
allocated in accordance with the Partnership Agreement. On
August 22, 1995, the General Partners paid a special distribution
of $4,000,000 to the limited partners. The special distribution
was comprised of a portion of the net proceeds from the sale of
the Property and Partnership cash reserves.
Skyline Village and Country Place Village II were acquired
through joint ventures with an unaffiliated developer. To each
venture, the Partnership assigned its rights to acquire the above
properties and contributed cash equal to the purchase price of
the properties. The developer did not make an initial capital
contribution to these ventures.
In the case of Country Place Village II, the joint venture form
was retained. The Partnership entered into an amended and
restated Agreement of General Partnership, dated as of July 1,
1992 with its two corporate General Partners, RI 3-4 Real Estate
Services, Inc. and ConAm Property Services IV, Ltd. In the case
of Skyline Village, the joint venture was converted to a limited
partnership. The Partnership entered into an amended and
restated Agreement of Limited Partnership, dated as of July 1,
1992 with its two corporate General Partners, RI 3-4 Real Estate
Services, Inc. and ConAm Property Services IV, Ltd., as General
Partners, and the Partnership as the sole limited partner. There
was no interruption in either management or operating activities
of the Partnership as a result of the settlement.
The amended limited partnership and general partnership
agreements of Skyline Village and Country Place Village II
substantially provide that:
a. Available cash from operations is to be distributed 100% to
the Partnership until it has received an annual, non-cumulative
preferred return for Skyline Village and Country Place Village of
$675,000 and $450,000, respectively. Any remaining balance is to
be distributed 99% to the Partnership and 1% to the corporate
General Partners.
b. Net income is to be allocated first, proportionately to
partners with negative capital accounts, as defined, until such
capital accounts have been increased to zero then, to the
Partnership up to the amount of any payments made on account
of its preferred return and thereafter, 99% to the Partnership
and 1% to the corporate General Partners. All net losses are to
be allocated first, to the partners with positive capital
accounts, as defined, until such accounts have been reduced to
zero and then, 99% to the Partnership and 1% to the corporate
General Partners.
c. Income from a sale is to be allocated first, to the Partnership
until the Partnership's capital accounts, as defined, are equal
to the fair market value of the ventures' assets at the date of
<PAGE>
the amendment. Then, any remaining balance is to be allocated 99%
to the Partnership and 1% to the corporate General Partners. Net
proceeds from a sale or refinancing are to be distributed first,
to the partners with the positive capital account balance, as
defined; thereafter, 99% to the Partnership and 1% to the corporate
General Partners.
5. Mortgages Payable
The Partnership's first mortgage loans payable are comprised as
follows:
Autumn Heights - On January 6, 1994, the Partnership obtained a
first mortgage loan from John Hancock. Total proceeds of
$5,500,000 were received and are collateralized by a Deed of
Trust, Security Agreement and Fixture Filing with Assignment of
Rents Agreement encumbering the property. The loan is for a term
of seven years and bears interest at an annual rate of 8%
requiring monthly installments of principal and interest based on
a 25 year amortization schedule. The loan requires monthly real
estate tax escrow fundings. The loan matures on January 1, 2001,
upon which time a balloon payment of $4,736,587 and any accrued
interest are due.
Skyline Village - On December 20, 1991, the venture obtained a
first mortgage loan of $3,350,000 from the Penn Mutual Life
Insurance Company ("Penn Mutual") collateralized by a deed of
trust on the land and the improvements, and an assignment of
rents. During 1996, Penn Mutual transferred the first mortgage
loan to GE Capital Asset Management Corp. under the existing
terms. The loan is for a term of seven years and bears interest
at an annual rate of 10.125% requiring monthly installments of
principal and interest. The loan matures on December 31, 1998,
upon which time a balloon payment of $3,054,594 and any accrued
interest are due. Management intends to pursue refinancing
options for this property.
Country Place Village II - On July 15, 1985, the venture obtained
a first mortgage loan of $3,000,000 collateralized by a mortgage
encumbering Country Place Village II. The loan had an initial
term of five years and bore interest at an annual rate of 12.5%
with monthly interest payments only. The loan was extended in
1990 for an additional five years bearing interest at an annual
rate of 10.15% with monthly principal and interest payments. The
mortgage matured in July 1995, with the remaining principal of
$2,900,075 due. On June 29, 1995, the Partnership paid
$2,925,099, representing principal and interest, from cash
reserves to fully satisfy its mortgage obligation on Country
Place Village II.
Annual maturities of mortgage principal at November 30 1997, for
the next four fiscal years are as follows:
Year Amount
1998 $ 154,825
1999 3,161,160
2000 115,411
2001 4,861,576
$8,292,972
6. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments", requires that the
fair values be disclosed for the Partnership's financial
instruments. The carrying amount of cash and cash equivalents,
distributions payable, accounts payable and accrued expenses, due
to general partners and affiliates and security deposits are
reasonable estimates of their fair values due to the short-term
nature of those instruments.
The carrying amount of the mortgages payable is a reasonable
<PAGE>
estimate of fair value based on management's belief that the
interest rates and terms of the debt are comparable to those
commercially available to the Partnership in the marketplace for
similar instruments.
7. Transactions with Related Parties
The following is a summary of fees earned and reimbursable
expenses to the General Partners and affiliates for the years
ended November 30, 1997, 1996 and 1995, and the unpaid portion at
November 30, 1997:
Earned and
Unpaid at
November 30, Earned
Year 1997 1997 1996 1995
RI 3-4 Real Estate Services,
Inc. and affiliates:
Out-of-pocket expenses $ _ $ 2,216 $ 1,125 $ 3,105
ConAm and affiliates:
Property operating salaries _ 258,808 233,653 258,010
Property management fees 16,703 180,111 184,685 203,107
Total $ 16,703 $441,135 $419,463 $464,222
8. Reconciliation of Financial Statement and Tax Information
The following is a reconciliation of consolidated net income for
financial statement purposes to net income (loss) for federal
income tax purposes for the years ended November 30, 1997, 1996
and 1995:
1997 1996 1995
Net income (loss) per financial statements $ (195,483) $ 354,135 $ 85,405
Depreciation deducted for tax purposes
less than (in excess) of depreciation
expense per financial statements 17,787 (143,654) (117,445)
Tax basis gain on sale in excess of
GAAP loss on sale _ _ 852,564
Tax basis joint venture net income
(loss) in excess of GAAP basis joint
venture net loss (72,635) (72,634) (74,889)
Other 13,854 (11,175) 3,951
Taxable net income (loss) (unaudited) $ (236,477) $ 126,672 $749,586
<PAGE>
The following is a reconciliation of partners' capital for
financial statement purposes to partners' capital for federal
income tax purposes as of November 30, 1997, 1996 and 1995:
1997 1996 1995
Partners' capital per
financial statements $9,299,587 $10,028,397 $10,563,150
Adjustment for cumulative difference
between tax basis net income (loss) and
net income per financial statements (3,493,754) (3,452,760) (3,225,297)
Partners' capital per income tax
return (unaudited) $5,805,833 $ 6,575,637 $ 7,337,853
At November 30, 1997, the tax basis of the Partnership's assets
was $14,532,746 and the tax basis of the Partnership's
liabilities was $8,726,913.
9. Distributions Paid
Distributions, per the consolidated statements of partners'
capital (deficit), are recorded on the accrual basis, which
recognizes specific record dates for payments within each fiscal
year. The consolidated statements of cash flows recognize actual
cash distributions paid during the fiscal year. The following
table discloses the annual differences as presented on the
consolidated financial statements:
Distributions Distributions
Payable Distributions Distributions Payable
Beginning of Year Declared Paid November 30,
1997 $222,222 $533,327 $608,890 $146,659
1996 222,222 888,888 888,888 222,222
1995 311,111 4,888,888 4,977,777 222,222
<PAGE>
Independent Auditors' Report
The General Partner
ConAm Realty Investors 3 L.P.:
We have audited the accompanying consolidated balance sheet of
ConAm Realty Investors 3 L.P. (a California limited partnership)
(formerly Hutton/ConAm Realty Investors 3) and consolidated
ventures (the "Partnership"), as of November 30, 1997, and the
related consolidated statements of operations, partners'
capital(deficit), and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of ConAm Realty Investors 3 L.P. and
consolidated ventures as of November 30, 1997, and the results of
their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
San Diego, California
February 5, 1998
<PAGE>
Report of Former Independent Accountants
To the Partners of
ConAm Realty Investors 3 L.P.:
We have audited the consolidated balance sheet of ConAm Realty
Investors 3 L.P. (formerly Hutton/ConAm Realty Investors 3), a
California limited partnership, and Consolidated Ventures as of
November 30, 1996 and the related consolidated statements of
operations, partners' capital (deficit) and cash flows for each
of the two years in the period ended November 30, 1996. These
consolidated financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of ConAm Realty Investors 3 L.P., a California
limited partnership, and Consolidated Ventures as of November 30,
1996 and 1995, and the consolidated results of their operations
and their cash flows for each of the two years in the period
ended November 30, 1996, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
February 14, 1997
<PAGE>
Net Asset Valuation
Comparison of Acquisition Costs to Appraised Value and
Determination of Net Asset Value Per Unit at November 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Acquisition Cost
(Purchase Price Partnership's
Plus General Share of
Partners' November 30,
Acquisition 1997 Appraised
Property Date of Acquisition Fees) Value (1)
<S> <C> <C> <C>
Autumn Heights 01-25-85 $ 9,687,174 $ 11,500,000
Skyline Village 03-20-85 10,838,195 7,500,000
Ponte Vedra Beach Village II 08-22-85 6,869,917 6,000,000
$27,395,286 $ 25,000,000
Cash and cash equivalents
(including restricted cash) 906,667
Other assets 14,387
25,921,054
Less:
Total liabilities (8,775,798)
Partnership Net Asset Value (2) 17,145,256
Net Asset Value Allocated:
Limited Partners 17,101,433
General Partner 42,823
17,145,256
Net Asset Value Per Unit
(80,000 units outstanding) $ 213.77
</TABLE>
(1) This represents the Partnership's share of the November 30,
1997 Appraised Values which were determined by an independent
property appraisal firm.
(2) The Partnership Net Asset Value assumes a hypothetical sale
at November 30, 1997 of all the Partnership's properties at a
price based upon their value as a rental property as
determined by an independent property appraisal firm, and the
distribution of the proceeds of such sale, combined with the
Partnership's cash after liquidation of the Partnership's
assets and liabilities, to the Partners.
Limited Partners should note that appraisals are only estimates
of current value and actual values realizable upon sale may be
significantly different. A significant factor in establishing an
appraised value is the actual selling price for properties which
the appraiser believes are comparable. In addition, the
appraised value does not reflect the actual costs which would be
incurred in selling the properties. As a result of these factors
and the illiquid nature of an investment in Units of the
Partnership, the variation between the appraised value of the
Partnership's properties and the price at which Units of the
Partnership could be sold may be significant. Fiduciaries of
Limited Partners which are subject to ERISA or other provisions
of law requiring valuations of Units should consider all relevant
factors, including, but not limited to Net Asset Value per Unit,
in determining the fair market value of the investment in the
Partnership for such purposes.
<PAGE>
Schedule III - Real Estate and Accumulated Depreciation
November 30, 1997
<TABLE>
<CAPTION>
Ponte Vedra Consolidated Venture
Autumn Beach Skyline
Residential Property: Heights Village II Village Total
<S> <C> <C> <C> <C>
Location Colorado Jacksonville
Springs, CO FL Tucson, AZ na
Construction date 1983-1985 1984-1985 1984-1985 na
Acquisition date 01-25-85 08-22-85 03-20-85 na
Life on which depreciation
in latest income statements
is computed 25 years 25 years 25 years na
Encumbrances $ 5,181,951 $ _ $3,111,021 $8,292,972
Initial cost to
Partnership:
Land $ 1,581,000 $ 788,000 $3,410,000 $5,779,000
Buildings and
improvements $ 8,123,598 $6,138,289 $7,510,205 $21,772,092
Costs capitalized
subsequent to acquisition:
Land, buildings
and improvements $ 513,166 $ 433,416 $ 104,972 $ 1,051,554
Write-off of buildings
and improvements $ (163,000) $ (156,300) $ _ $ (319,300)
Gross amount at which
carried at close of
period: (1)
Land $ 1,589,840 $ 789,882 $ 3,437,946 $ 5,817,668
Buildings and
improvements 8,464,924 6,413,523 7,587,231 22,465,678
$10,054,764 $7,203,405 $11,025,177 $28,283,346
Accumulated
depreciation(2) $ 4,228,236 $3,043,130 $ 3,952,555 $11,223,921
</TABLE>
(1) Represents aggregate cost for both financial reporting for Federal income
tax purposes.
(2) The amount of accumulated depreciation for Federal income tax purposes
is $18,666,499.
A reconciliation of the carrying amount of real estate and accumulated
depreciation for the years ended November 30, 1997, 1996, and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Investments in real estate:
Beginning of period $28,144,448 $27,982,248 $33,729,426
Additions 458,198 162,200 158,367
Dispositions and disposals (319,300) _ (5,905,545)
End of period $28,283,346 $28,144,448 $27,982,248
Accumulated depreciation:
Beginning of period $10,510,777 $ 9,645,010 $10,629,776
Depreciation expense 879,244 865,767 1,004,497
Dispositions and disposals (166,100) _ (1,989,263)
End of period $11,223,921 $10,510,777 $9,645,010
</TABLE>
<PAGE>
Independent Auditors' Report
The General Partner
ConAm Realty Investors 3 L.P.:
Under date of February 5, 1998, we reported on the
consolidated balance sheet of ConAm Realty Investors 3 L.P. (a
California limited partnership) (formerly Hutton/ConAm Realty
Investors 3) and consolidated ventures (the "Partnership") as
of November 30, 1997, and the related consolidated statements
of operations, partnersO capital (deficit), and cash flows for
the year then ended, as contained in the 1997 annual report to
Unitholders. These consolidated financial statements and our
report thereon are incorporated by reference in the 1997
annual report on Form 10-K. In connection with our audit of
the aforementioned consolidated financial statements, we also
have audited the related consolidated financial statement
schedule. This consolidated financial statement schedule is
the responsibility of the Partnership's management. Our
responsibility is to express an opinion on this consolidated
financial statement schedule based on our audit.
In our opinion, the consolidated financial statement schedule,
when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG Peat Marwick LLP
San Diego, California
February 5, 1998
<PAGE>
Report of Former Independent Accountants
Our report on the consolidated financial statements of ConAm
Realty Investors 3 L.P. (formerly Hutton/ConAm Realty Investors
3), a California Limited Partnership, and Consolidated Ventures
has been incorporated by reference in this Form 10-K from the
Annual Report to Unitholders of ConAm Realty Investors 3 for the
year ended November 30, 1996. In connection with our audits of
such financial statements, we have also audited the related
financial statement schedule listed in the index of this Form 10-K.
In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
February 14, 1997
<PAGE>
Annex 2
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1998
or
Transition Report Pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____ to ____
COMMISSION FILE NUMBER: 0-11769
CONAM REALTY INVESTORS 3 L.P.
-----------------------------
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER
California 13-3176625
---------- ----------
(State or other jurisdiction of ( I.R.S. Employer
Incorporation or organization) Identification No.)
1764 San Diego Avenue
San Diego, CA 92110 Attn. Robert J. Svatos 92110-1906
- --------------------------------------------- ----------
Address of principal executive offices Zip Code
(619) 297-6771
--------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
<PAGE>
CONAM REALTY INVESTORS 3 L.P.
AND CONSOLIDATED VENTURES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
AT AUGUST 31, AT NOVEMBER 30,
1998 1997
------------- ---------------
<S> <C> <C>
ASSETS
Investments in real estate:
Land $ 5,817,668 $ 5,817,668
Buildings and improvements 22,506,515 22,465,678
------------ ------------
28,324,183 28,283,346
Less accumulated depreciation (11,833,274) (11,223,921)
------------ ------------
16,490,909 17,059,425
Cash and cash equivalents 852,951 796,824
Restricted cash 132,846 109,843
Other assets, net of accumulated amortization
of $238,471 in 1998 and $206,209 in 1997 142,026 109,293
------------ ------------
TOTAL ASSETS $ 17,618,732 $ 18,075,385
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgages payable 8,191,266 8,292,972
Distribution payable 133,333 146,659
Accounts payable and accrued expenses 323,380 218,266
Due to general partner and affiliates 15,397 16,703
Security deposits 101,113 101,198
------------ ------------
Total Liabilities 8,764,489 8,775,798
------------ ------------
Partners' Capital
General Partner (995,512) (955,059)
Limited Partners (80,000 Units outstanding) 9,849,755 10,254,646
------------ ------------
Total Partners' Capital 8,854,243 9,299,587
------------ ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 17,618,732 $ 18,075,385
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
1998 1997 1998 1997
----------------------- -----------------------------
<S> <C> <C> <C> <C>
INCOME
Rental $ 918,651 $ 881,207 $ 2,733,857 $ 2,677,955
Interest and other 7,465 7,864 12,708 28,965
--------- --------- ----------- -----------
Total Income 926,116 889,071 2,746,565 2,706,920
EXPENSES
Property operating 455,940 432,699 1,356,044 1,313,253
Depreciation and amortization 229,604 231,094 688,690 689,467
Interest 180,441 183,714 543,843 553,449
General and administrative 39,330 35,812 141,653 124,443
Write-off of assets 44,793 - 61,680 -
--------- --------- ----------- -----------
Total Expenses 950,108 883,319 2,791,910 2,680,612
NET INCOME (LOSS) $ (23,992) $ 5,752 $ (45,345) $ 26,308
========= ========= =========== ===========
NET INCOME (LOSS) ALLOCATED:
To the General Partner $ (240) $ 575 $ (454) $ 2,631
To the Limited Partners (23,752) 5,177 (44,891) 23,677
--------- --------- ----------- -----------
NET INCOME (LOSS) $ (23,992) $ 5,752 $ (45,345) $ 26,308
========== ========= =========== ===========
PER LIMITED PARTNERSHIP UNIT
(80,000 UNITS OUTSTANDING) $ (0.30) $ 0.07 $ (0.56) $ 0.30
========== ========= =========== ===========
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
THE NINE MONTHS ENDED AUGUST 31, 1998
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE (DEFICIT) AT NOVEMBER 30, 1997 $ (955,059) $ 10,254,646 $ 9,299,587
Net income (loss) (454) (44,891) (45,345)
Distributions ($4.50 per Unit) (39,999) (360,000) (399,999)
------------ ------------ ------------
BALANCE (DEFICIT) AT AUGUST 31, 1998 $ (995,512) $ 9,849,755 $ 8,854,243
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED AUGUST 31, 1998 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (45,345) $ 26,308
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 688,690 689,467
Write-off of assets 61,680 -
Increase (decrease) in cash arising from changes in operating
assets and liabilities:
Fundings to restricted cash (107,082) (119,936)
Release of restricted cash to property operations 84,079 81,926
Other assets (64,995) 28,127
Accounts payable and accrued expenses 105,114 68,458
Due to general partner and affiliates (1,306) (1,063)
Security deposits (85) (15,268)
----------- -----------
Net cash provided by operating activities 720,750 758,019
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate (203,783) (353,096)
Insurance recovery of real estate additions 54,191 -
----------- -----------
Net cash used for investing activities (149,592) (353,096)
----------- -----------
Cash Flows from Financing Activities:
Mortgage principal payments (101,706) (105,234)
Distributions (413,325) (488,889)
----------- -----------
Net cash used for financing activities (515,031) (594,123)
----------- -----------
Net increase (decrease) in cash and cash equivalents 56,127 (189,200)
Cash and cash equivalents, beginning of period 796,824 1,084,483
----------- -----------
Cash and cash equivalents, end of period $ 852,951 $ 895,283
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 483,791 $ 553,449
----------- -----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Write-off of buildings and improvements $ (108,755) $ -
Write-off of accumulated depreciation $ (47,075) $ -
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements should be read in
conjunction with the Partnership's 1997 Annual Report.
The unaudited interim consolidated financial statements include all normal and
recurring adjustments which are, in the opinion of management, necessary to
present a fair statement of financial position as of August 31, 1998 and the
results of operations for the three and nine months ended August 31, 1998 and
1997, consolidated cash flows for the nine months ended August 31, 1998 and
1997, and the statement of consolidated partners' capital for the nine months
ended August 31, 1998. Results of operations for the periods are not necessarily
indicative of the results to be expected for the full year.
No significant events have occurred subsequent to fiscal year 1997, and no
material contingencies exist, which would require disclosure in this interim
report per Regulation S-X, Rule 10-01, Paragraph (a) (5).
<PAGE>
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 1998, the Partnership had cash and cash equivalents of $852,951
compared with $796,824 at November 30, 1997. The increase in cash and cash
equivalents is due to less cash being used for fixed assets additions, lower
distributions, and the insurance recovery of $54,191 for defective roofing
repairs. The Partnership expects sufficient cash to be generated from operations
to meet its current operating expenses.
The General Partner declared a regular cash distribution of $1.50 per unit for
the quarter ended August 31, 1998 which is to be paid in October, 1998. The
General Partner will determine the amount of future quarterly distributions
based on the Partnership's available cash flow and future cash needs.
RESULTS OF OPERATIONS
Partnership operations for the three and nine months ended August 31, 1998
generated net losses of ($23,992) and ($45,345), respectively, compared with net
income of $5,752 and $26,308, respectively, for the corresponding periods in
fiscal 1997. The decrease for the three months ended August 31, 1998 is
primarily attributable to an increase in property operating expenses and a
write-off of assets of $44,793, partially off-set by an increase in rental
income. The decrease for the nine months ended August 31, 1998 is primarily
attributable to an increase in property operating expenses and general and
administrative expenses and a write-off of assets of $61,680, somewhat offset by
the increase in rental income.
Rental income totaled $918,651 and $2,733,857 for the three and nine months,
respectively, ended August 31, 1998 compared with $881,207 and $2,677,955,
respectively, for the corresponding periods in fiscal 1997 resulting from an
increase in rental income primarily from increased rental rates at Autum Heights
and Ponte Vedra Beach Village II and increased occupancy at Skyline Village.
Property operating expenses for the three and nine months ended August 31, 1998
totaled $455,940 and $1,356,044, respectively, compared with $432,699 and
$1,313,253, respectively, for the corresponding period in fiscal 1997. The
increase for the three months ended August 31, 1998 is due to an increase in
rental administration expenses. The increase for the nine months ended August
31, 1998 is primarily attributable to increased utilities expense.
During the first nine months of fiscal 1998 and 1997, average occupancy levels
at the Partnership's properties were as follows:
<TABLE>
<CAPTION>
PROPERTY 1998 1997
-------------------------------------------------------------------
<S> <C> <C>
Autumn Heights 94% 94%
Ponte Vedra Beach Village II 92% 94%
Skyline Village 94% 90%
-------------------------------------------------------------------
</TABLE>
The decreae in occupancy at Ponte Vedra Beach Village II is due to strong
competition associated with increased construction in Florida. This decrease in
occupancy is off-set by increased rental rates resulting in increased total
rental income. The Tucson market continues to improve from its overbuilt
situation of two years ago, resulting in increased occupancy and total rental
income at Skyline Village, however, rental concessions are still required to
maintain current occupancy levels.
<PAGE>
OTHER INFORMATION
PART II Not applicable
ITEMS 1-5 Exhibits and reports on Form 8-K
ITEMS 6 (a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K - No reports on Form 8-K were filed
during the quarter ended August 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CONAM PROPERTY SERVICES IV, LTD.
General Partner of ConAm Realty Investors 3 L.P.
BY: CONTINENTAL AMERICAN DEVELOPMENT, INC.
GENERAL PARTNER
Date: October 13, 1998 By: /s/ Daniel J. Epstein
----------------------
Daniel J. Epstein
Director, President, and Principal
Executive Officer
Date: October 13, 1998 By: /s/ Robert J. Svatos
--------------------
Robert J. Svatos
Vice President and Director
