SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K405/A
AMENDMENT NO. 1
Filed pursuant to Section 12, 13, or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended
December 31, 1998 Commission File Number 0-15962
CARLYLE REAL ESTATE LIMITED PARTNERSHIP - XIV
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(Exact name of registrant as specified in its charter)
Illinois 36-3256340
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(State of organization) (I.R.S. Employer Identification No.)
900 N. Michigan Ave., Chicago, Illinois 60611
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(Address of principal executive office) (Zip Code)
The undersigned registrant hereby amends the following section of its
Report for the year ended December 31, 1998 on Form 10-K405 as set forth in
the pages attached hereto:
PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. Pages 17 through 27.
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, thereunto duly authorized.
CARLYLE REAL ESTATE LIMITED PARTNERSHIP - XIV
By: JMB Realty Corporation
Corporate General Partner
GAILEN J. HULL
By: Gailen J. Hull
Vice President and
Principal Accounting Officer
Dated: May 14, 1999
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Capitalized terms used herein but not defined have the same meanings
as in the Notes.
As a result of the public offering as described in Item 1, the
Partnership had approximately $351,747,000 after deducting selling expenses
and other offering costs with which to make investments in income-producing
commercial and residential real property, to pay legal fees and other costs
(including acquisition fees) related to such investments and for working
capital. A portion of such proceeds was utilized to acquire the properties
described in Item 1 above.
The board of directors of JMB Realty Corporation ("JMB") the Corporate
General Partner of the Partnership, has established a special committee
(the "Special Committee") consisting of certain directors of JMB to deal
with all matters relating to tender offers for Interests in the
Partnership, including any and all responses to such tender offer. The
Special Committee has retained independent counsel to advise it in
connection with any potential tender offers for Interests and previously
retained Lehman Brothers Inc. through June 1998 as financial advisor to
assist the Special Committee in evaluating and responding to potential
tender offers for Interests.
During 1997 and 1998, some of the Holders of Interests received
unsolicited offers from unaffiliated third parties to purchase up to 4.87%
of the Interests in the Partnership at prices ranging from $10 to $21 per
Interest. The Special Committee recommended against acceptance of these
offers on the basis that, among other things, the offer prices were
inadequate. All of such offers have expired. As of the date of this
report, the Partnership is aware that approximately 1.56% of the Interests
in the Partnership have been purchased by such unaffiliated third parties
either pursuant to such offers or through negotiated purchases. It is
possible that other offers for Interests may be made by unaffiliated third
parties in the future, although there is no assurance that any other third
party will commence an offer for Interests, the terms of any such offer or
whether any such offer, if made, will be consummated, amended or withdrawn.
At December 31, 1998, the Partnership had cash and cash equivalents of
approximately $6,876,000. Such funds were available for working capital
requirements.
As discussed more fully below, in March 1999 JMB/900 settled various
claims and acquired the interest of the FDIC and the unaffiliated venture
partners in Progress Partners, which owns the 900 Third Avenue office
building, for $16,300,000, of which $13,800,000 was paid upon closing of
the various transactions. In connection with these transactions, the
Partnership contributed its proportionate share (approximately $4,600,000)
of the $13,800,000 contributed to JMB/900.
The Partnership has currently budgeted in 1999 approximately $902,000
for tenant improvements and other capital expenditures. Such amount does
not include any portion of additional funds recently requested by the
replacement cinema operator at Louis Joliet Mall in connection with cost
overruns incurred in reconfiguring its tenants space, which is discussed
below. Such items and the Partnership's share of such similar items for
its unconsolidated ventures in 1999 is currently budgeted to be
approximately $1,870,000. Actual amounts expended in 1999 may vary
depending on a number of factors including actual leasing activity, results
of property operations, liquidity considerations and other market
conditions over the course of the year.
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The source of capital for such items and for both short-term and long-
term future liquidity and distributions to partners is dependent upon
existing working capital, net cash generated by the Partnership's
investment properties and the sale of such investments. However, due to
the property specific concerns discussed below, the Partnership currently
considers only Louis Joliet Mall and 900 Third Avenue to be potential
sources of future cash generated from operations or sales. In such regard,
reference is made to the Partnership's property specific discussions below.
The Partnership distributed approximately $14,029,000 ($35/interest)
to the Holders of Interest in the third quarter of 1998. Although, it was
previously reported that the distribution was composed solely of sale
proceeds, it in fact represented a distribution of sales proceeds from the
sale of the Partnership's interest in 1090 Vermont of approximately
$6,013,000 ($15/Interest) and previously undistributed cash generated from
operations of approximately $8,016,000 ($20/Interest). Accordingly, the
General Partners were entitled to receive a distribution of previously
undistributed cash generated from operations of approximately $334,000,
which was paid in the fourth quarter of 1998. In connection with this
distribution, the Corporate General Partner received a management fee of
approximately $557,000. Additionally, the Partnership distributed
approximately $4,009,000 ($10/interest) to the Holders of Interest and
$167,000 to the General Partners of previously undistributed cash generated
from operations in the fourth quarter of 1998. In connection with this
distribution, the Corporate General Partner received a management fee of
approximately $278,000.
Piper Jaffray Tower
Occupancy of the building at the end of the fourth quarter of 1998 was
89%.
The property is subject to a mortgage loan in the original principal
amount of $100,000,000, of which approximately $95,741,000 is outstanding
as of December 31, 1998. The lender is essentially entitled to all
operating cash flow. In addition to fixed interest on the mortgage notes
secured by the Piper Jaffray Tower, contingent interest is payable in
annual installments on April 1 computed at 50% of gross receipts, as
defined, for each fiscal year in excess of $15,200,000. No such contingent
interest was due for 1996, 1997 or 1998. In addition, to the extent the
investment property generates cash flow after payment of the fixed interest
on the mortgage, contingent interest, if any, leasing and capital costs,
and 25% of the ground rent, such amount will be paid to the lender as a
reduction of the principal balance of the mortgage loan. The excess cash
flow payments remitted to the lender for 1996 and 1997 totalled $741,627
and $385,523, respectively. During 1998, no such excess cash flow was
generated.
In addition, the mortgage loan provides that upon sale or refinancing,
the lender is entitled to prepayment fees as well as a significant level of
proceeds in excess of the then unpaid principal balance prior to
JMB/Piper's receipt of proceeds. While the loan modification provides
JMB/Piper with an opportunity to retain an ownership position in the
property, under the current terms of the modified debt, there must be
significant additional improvement in current market and property operating
conditions resulting in a substantial increase in the value of the property
before JMB/Piper can share in sale or refinancing proceeds. Currently,
Piper generates enough operating cash flow to meet the required debt
service payments. However, Piper may not be able to pay the required debt
service over the next several years as a result of the Popham Haik
("Popham") and Piper Jaffray, Inc. ("PJI") situations discussed below.
JMB/Piper will not commit additional capital to Piper unless, among other
things, it believes that upon sale of the property it will receive a return
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of such funds and a reasonable rate of return thereon. If a funding
requirement arises and none of the Piper partners contribute the required
capital, the lender would likely take title to the property. Such
disposition of the property would result in JMB/Piper, and therefore the
Partnership, recognizing a significant amount of gain for financial
reporting and Federal income tax purposes with no corresponding
distributable proceeds.
During 1997, JMB/Piper, on behalf of Piper, explored refinancing
alternatives with the lender. Although JMB/Piper had intended to pursue
further discussions with the lender concerning possible refinancing and/or
loan modification alternatives, it currently appears unlikely that an
agreement with respect to such a transaction will be made.
On a monthly basis, Piper deposits the property management fee into an
escrow account to be used (including interest earned thereon) for future
leasing costs to the extent cash flow is not sufficient to cover such
items. To date, no escrow funds have been required to be used for leasing
costs. At December 31, 1998, the balance of such escrow account totaled
approximately $5,441,000. The manager of the property (which was an
affiliate of the Corporate General Partner through November 1994) has
agreed to defer receipt of its management fee until a later date. As of
December 31, 1998, the manager has deferred approximately $4,445,000
($1,839,000 of which represents deferred fees due to affiliates through
November 1994, of which $919,500 is the Partnership's share) of management
fees.
During the third quarter of 1997, Popham informed Piper that effective
in November 1997, it would cease operations as Popham and consolidate with
another law firm, Hinshaw & Culberson ("Hinshaw"). In December 1997, Piper
signed a non-binding letter of intent with Hinshaw to lease 31,920 square
feet of the Popham space for a term of five years, commencing January 1,
1998, at a market rental rate which exceeded Popham's modified rate that
became effective in August 1997. Popham had paid its modified rent through
the end of 1997. Commencing in January 1998, Hinshaw began paying rent in
accordance with the letter of intent. In May 1998, Piper executed the
lease with Hinshaw in accordance with the letter of intent and Piper
terminated Popham's lease (for approximately 47,000 square feet) effective
December 31, 1997 with no further consideration.
Piper had discussed an early renewal with PJI which occupies 332,823
square feet or approximately 46% of the building's rentable square feet,
with a lease expiration date at March 31, 2000. Piper and PJI were unable
to come to terms and PJI announced that it would be moving to a new
building (to be built in Minneapolis) upon expiration of its existing lease
in 2000.
As a result of a flood in 1997, the property incurred significant
repair costs in 1998. Piper completed such repairs and the balance
(approximately $1,100,000) is expected to be reimbursed by the insurance
carrier in 1999. JMB/Piper made certain advances to Piper for such costs,
and expects to have the advances repaid upon reimbursement from the
insurance carrier.
As of September 30, 1997, the JMB/Piper venture has classified the
property as held for sale or disposition. The Property will therefore no
longer be subject to continued depreciation.
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Wells Fargo Center - South Tower
The Wells Fargo Center ("South Tower") operates in the downtown Los
Angeles office market, which has become extremely competitive over the last
several years. The Partnership expects that the competitive market
conditions in Southern California will have an adverse affect on the
building through lower effective rental rates achieved on re-leasing of
existing space which expires or is given back over the next several years.
In addition, new leases are expected to require substantial expenditures
for lease commissions and tenant improvements prior to occupancy. This
anticipated decline in rental rates, the anticipated increase in re-leasing
time and the costs upon releasing will result in a decrease in cash flow
from operations over the next several years.
During 1996, the Partnership, the joint venture, and the lenders
reached an agreement to modify the mortgage note and the promissory note
secured by the Partnership's interest in the property. In conjunction with
the note modifications, the Maguire/Thomas Partners - South Tower LLC was
converted to a limited liability company with members' interests in the
same ratio as the prior venture ownership interests. The conversion of the
Partnership's interest to a member's interest in a limited liability
company eliminates any potential additional obligation of the Partnership
in the future to provide additional funds under the previous joint venture
agreement. As a result, previously recognized losses of $5,712,902 have
been reversed and the Partnership's 1998 and 1997 shares of income for
financial reporting purposes (approximately $267,000 and $152,000,
respectively) have not been recognized as such amounts are not considered
realizable. Since the terms of modified mortgage note and the amended and
restated promissory note make it unlikely that the Partnership would
recover any incremental investment, the Partnership has decided not to
commit any significant additional amounts to the property. Reference is
made to the Notes for a further description of these events.
JMB/NYC
Bankruptcy filings for the Joint Ventures owning the 237 Park Avenue
and 1290 Avenue of the Americas properties (the "Properties") were made in
April 1996, and in August 1996, an Amended Plan of Reorganization and
Disclosure Statement (the "Plan") was filed with the Bankruptcy Court for
these Joint Ventures. The Plan was accepted by the various classes of debt
and equity holders and confirmed by the Court on September 20, 1996 and
became effective October 10, 1996 ("Effective Date"). The Plan provides
that JMB/NYC has an indirect limited partnership interest which, before
taking into account significant preferences to other partners, equals
approximately 4.9% of the reorganized and restructured ventures owning 237
Park and 1290 Avenue of the Americas (the "Properties"). The new ownership
structure gives control of the Properties to an unaffiliated real estate
investment trust ("REIT") is owned primarily by holders of the first
mortgage debt that encumbered the Properties prior to the bankruptcy.
JMB/NYC has, under certain limited circumstances, through January 1, 2001
rights of consent regarding sale of the Properties or the consummation of
certain other transactions that significantly reduce indebtedness of the
Properties. In general, at any time on or after January 2, 2001, an
affiliate of the REIT has the right to purchase JMB/NYC's interest in the
Properties for certain amounts relating to the operations of the
Properties. There can be no assurance that such REIT affiliate will not
exercise such right on or after January 2, 2001. In addition, the original
purchase money notes made by JMB/NYC for its interest in the Properties
which had an outstanding principal and accrued and deferred interest of
approximately $117,679,000 at December 31, 1998, mature on January 2, 2001.
If such REIT affiliate exercises such right to purchase, due to the level
of indebtedness remaining on the Properties, the original purchase money
notes payable by JMB/NYC, and the significant preference levels within the
reorganized structure and liabilities of the Partnership, it is unlikely
that such purchase would result in any significant distributions to the
partners of the Partnership. Additionally, at any time, JMB/NYC has the
right to require such REIT affiliate to purchase the interest of JMB/NYC in
the Properties for the same price at which such REIT affiliate can require
JMB/NYC to sell such interest as described above.
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The restructuring and reorganization discussed above eliminates any
potential additional obligation of the Partnership in the future to provide
additional funds under its previous joint venture agreements(other than
that related to a certain indemnification agreement provided in connection
with the restructuring). The Affiliated Partners entered into a joint and
several obligation to indemnify, through a date no later than January 2,
2001, the REIT to the extent of $25 million to ensure their compliance with
the terms and conditions relating to JMB/NYC's indirect limited partnership
interest in the restructured and reorganized joint ventures that own the
Properties. The Affiliated Partners contributed approximately $7.8 million
(of which the Partnership's share was approximately $3.9 million) to
JMB/NYC which was deposited into an escrow account as collateral for such
indemnification. These funds have been invested in stripped U.S.
Government obligations with a maturity date of February 15, 2001. The
Partnership's share of the reduction of the maximum unfunded obligation
under the indemnification agreement recognized as income is a result of
interest earned on amounts contributed by the Partnership and held in
escrow by JMB/NYC. Such income earned reduces the Partnership's share of
the maximum unfunded obligation under the indemnification agreement, which
is reflected as a liability in the accompanying financial statements.
The provisions of the indemnification agreement generally prohibit the
Affiliated Partners from taking actions that could have an adverse effect
on the operations of the REIT. Compliance, therefore, is within the
control of the Affiliated Partners and non-compliance with such provisions
by either the Partnership or the other Affiliated Partners is highly
unlikely. Therefore, it is highly likely that the Partnership's share of
the collateral will be returned (including interest earned) at the
termination of the indemnification agreement.
1090 Vermont Avenue Building
On May 29, 1998, the Partnership sold its interest in the 1090 Vermont
venture to the unaffiliated venture partner for $4,725,409. Reference is
made to the Notes for a further description of such transaction.
900 Third Avenue Building
Occupancy of this building at the end of the fourth quarter of 1998
was 97%.
Progress Partners had been negotiating with the building's major
tenant, Schulte, Roth & Zabel (120,991 square feet with a lease expiration
date of May 31, 2000), for an early renewal and expansion of its lease.
However, in the second quarter of 1998, the tenant informed Progress
Partners of its intent to vacate all of its space upon the expiration of
its current lease.
Pursuant to the extension of the mortgage loan, net cash flow (as
defined) is paid into an escrow account controlled by the lender. The
escrow account, including interest earned thereon, will be used by Progress
Partners for payment of property taxes and releasing costs associated with
leases which expire in 1999 and 2000 (approximately 50% of the building
including the Schulte, Roth & Zabel lease discussed above). The remaining
proceeds in this escrow plus interest earned thereon, if any, will be
released to Progress Partners once 90% of such space has been renewed or
released. During 1998, approximately $10,262,000 has been deposited into
escrow from net cash flow from property operations. Additionally,
approximately $5,149,000 has been withdrawn from the escrow account for
payment of real estate taxes in 1998.
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In July 1998, JMB/900 entered into an agreement with the Venture
Partners and a judgment creditor of JRA and PPI (such judgment creditor,
JRA and PPI, are hereinafter collectively referred to as the "Progress
Parties") to resolve outstanding claims. The agreement was subject to
occurrence of various terms and conditions, which failed to occur. In a
further effort to resolve outstanding claims and to place JMB/900 in a
position to control and market the property, JMB/900 entered into a
settlement agreement with the Progress Parties effective as of March 17,
1999 ("Settlement Agreement"). The Settlement Agreement generally provides
for the settlement and release of all claims and causes of action by and
against JMB/900 and the Progress Parties related to or arising from the
joint venture relationship or the property including, without limitation,
any claims by the Venture Partners to Guaranteed Payments and any claims by
Progress Partners for capital contributions from JMB/900. Under the
Settlement Agreement and related transactions, JMB/900 and an affiliate
acquired all of the right, title and interest of the Progress Parties in
the property, Progress Partners and PC-900 and resolved all outstanding
litigation in exchange for a total payment of $16.0 million, $13.5 million
of which was paid at closing of the Settlement Agreement with the remaining
$2.5 million to be paid upon the earlier of (i) closing of a sale of the
property by Progress Partners or (ii) January 3, 2000. In a related
agreement and for the payment of $300,000 and the release of various
claims, the litigation and claims by and between the FDIC and JMB/900 were
resolved and dismissed. As part of the settlement, the limited partnership
interests in PC-900 in Progress Partners were assigned to 14-15 Office
Associates, L.P. ("Office Associates"), in which JMB/900 owns a 99% limited
partnership interest. P-C 900's interest in Progress Partners was then
transferred to JMB/900 and Office Associates, which are now the sole
remaining partners in Progress Partners. Amendments to the joint venture
agreement of Progress Partners were made to effectuate the terms of the
settlement and the substitution of partners.
Louis Joliet Mall
Occupancy of this mall at the end of the fourth quarter of 1998 was
84%.
The Partnership has negotiated a lease with Silver Cinemas, Inc., a
replacement operator for General Cinema, Inc. (approximately 5% of the mall
space). In connection with the new lease, the Partnership agreed to
contribute $700,000 to reconfigure the current four screen cinema to a six
screen cinema. The replacement operator has encountered cost overruns in
reconfiguring its tenant space and has requested that the Partnership agree
to contribute additional funds for the reconfiguration. The Partnership is
currently considering this request. Additionally, such tenant's credit
rating was recently downgraded. Two other tenants occupying approximately
8,900 square feet of space recently filed for protection from creditors
under chapter 11 of the Bankruptcy Code. There is no assurance that either
of these tenants will continue to honor their respective leases.
The Partnership had been marketing the property for sale. In March
1999, the Partnership entered into a contract for the sale of the Louis
Joliet Mall to BRE/Louis Joliet LLC, an unaffiliated third party. The sale
is subject to the satisfaction of various conditions and there is no
assurance that such sale will occur. In light of issues concerning one or
more of the tenants discussed above, it is expected that a modification of
the existing sale contract will be required if the sale is to be completed.
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Yerba Buena Office Building
Due to the default of the joint venture that owned the Yerba Buena
Office Building (a partnership comprised of the Partnership, two other
partnerships sponsored by the Partnership's Corporate General Partner, and
four unaffiliated limited partners) in the payment of required debt
service, the former lender to such joint venture realized on its security
by taking title to the property in June 1992. In return for a smooth
transition of title and management of the property (relative to which the
existing property manager that was affiliated with the Partnership's
Corporate General Partner agreed to continue to manage the property), the
joint venture was able to negotiate, among other things, a right of first
opportunity to purchase the property during the time frame from June 1995
through May 1998 should the lender wish to market the property for sale.
The lender sold the property in 1996. However, the joint venture was not
given an opportunity to purchase the property as required by the previous
settlement with the lender. As previously reported, such joint venture
filed a lawsuit against the lender for breach of its obligations. In June
1998, the court granted the lender's motion for summary judgement and
dismissed the lawsuit. In dismissing the action, the court apparently
relied upon a release given by the management company (an affiliate of the
Partnership's Corporate General Partner) relative to the settlement of its
claims against the lender and the termination of its management contract
for the property. Such settlement was the result of claims made by the
management company in a separate lawsuit, due to the non-payment of
management fees. Though the intent of the management company in providing
the release was confined to matters relative to management only, the court
apparently ruled that it covered the earlier transaction with the joint
venture as well. The joint venture has appealed such dismissal. In
addition, the former lender has filed an action and subsequently received
an order against the joint venture for fees expended in the litigation (the
Partnership's potential share of such order is approximately $245,000). In
December 1998, one of the affiliated venture partners, to resolve its
claims and liabilities, paid an agreed upon amount to the joint venture in
respect of its estimated liabilities related to the litigation and withdrew
from the venture. As of the date of this report, the joint venture does
not anticipate reimbursing the former lender for fees expended in the
litigation. There can be no assurance that the litigation will ultimately
be successful, or that the Partnership will ultimately realize any amounts
(or avoid any further payments) with respect thereto.
General
To the extent that additional payments related to certain properties
are required or if properties do not produce adequate amounts of cash to
meet their needs, the Partnership may utilize the working capital which it
maintains. However, based upon current market conditions, the Partnership
may decide not to, or may not be able to, commit additional funds to
certain of its investment properties. This would result in the Partnership
no longer having an ownership interest in such property, and generally
would result in taxable income to the Partnership with no corresponding
distributable proceeds. The Partnership's and its ventures' mortgage
obligations generally are separate non-recourse loans secured individually
by the investment properties and are not obligations of the entire
investment portfolio, and the Partnership and its ventures are not
personally liable for the payment of the mortgage indebtedness.
There are certain risks and uncertainties associated with the
Partnership's investments made through joint ventures including the
possibility that the Partnership's joint venture partner in an investment
might become unable or unwilling to fulfill its financial or other
obligations, or that such joint venture partner may have economic or
business interests or goals that are inconsistent with those of the
Partnership.
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The Partnership has held certain of its investment properties longer
than originally anticipated in an effort to maximize the return of their
investment to the Holders of Interests. All properties have been
classified by the Partnership or its ventures as held for sale or
disposition, and therefore, will no longer be subject to continued
depreciation. The Partnership currently expects to be able to conduct an
orderly liquidation of its interests in 900 Third Avenue, Piper Jaffray
Tower and Louis Joliet Mall investment properties during 1999, barring
unforeseen economic developments. However, the Partnership may be unable
to dispose of the Piper Jaffray Tower prior to December 31, 1999. In
addition, the Partnership currently expects to retain its indirect
interests in the 237 Park Avenue and the 1290 Avenue of the Americas
investment properties and the Partnership's interests in the Wells Fargo
Center - South Tower beyond 1999. Although the Partnership expects to
distribute sale proceeds from the sale of the 900 Third Avenue and Louis
Joliet Mall investment properties, aggregate distributions of sale and
refinancing proceeds received by Holders of Interest over the entire term
of the Partnership will be substantially less than one-fourth of their
original investment. However, in connection with sales or other
dispositions (including transfers to lenders) of properties (or interests
therein) owned by the Partnership or its joint ventures, Holders of
Interests will be allocated gain for Federal income tax purposes,
regardless of whether any proceeds are distributable from such sales or
other dispositions. In particular, the Piper Jaffray Tower, 237 Park
Avenue, 1290 Avenue of the Americas and the Wells Fargo Center - South
Tower investment properties continue to suffer from the effects of the high
levels of debt secured by each property and provide no cash flow to the
Partnership. While loan and joint venture modifications have been obtained
which enable the Partnership to retain an ownership interest in these
properties, it is currently unlikely under existing arrangements that the
Partnership will receive significant proceeds from operations or sales of
these properties. However, upon disposition of these properties or the
Partnership's interest therein, the Partnership, and therefore the Holders
of Interest will recognize a substantial amount of taxable income with no
distributable proceeds. For certain Holders of Interests, such taxable
gain may be offset by their suspended passive activity losses (if any).
Each Holder's tax consequences will depend on such Holder's own tax
situation.
RESULTS OF OPERATIONS
At December 31, 1998, 1997 and 1996, the Partnership owned six, seven
and seven investment properties, respectively, all of which were operating.
Significant variances between periods reflected in the accompanying
consolidated financial statements not otherwise reported are primarily the
result of the sale of the Mariners Pointe Apartments in October 1996, the
lender realizing upon its security in the Wilshire Bundy Plaza in March
1996, and the restructuring of the Partnership's interest in JMB/NYC and
South Tower in 1996 and the sale of the Partnership's interest in the 1090
Vermont Venture in May 1998.
The decrease in cash and cash equivalents at December 31, 1998 as
compared to December 31, 1997 is primarily due to the distributions of
sales proceeds and previously undistributed cash flow from operations to
the General Partners of approximately $501,000 and Holders of Interests of
approximately $18,037,000 in 1998. The decrease is partially offset by
proceeds received from the sale of the Partnership's interest in the 1090
Vermont venture of approximately $4,725,000.
The increase in interest, rents and other receivable at December 31,
1998 as compared to December 31, 1997 is primarily due to advances to
JMB/Piper for payments of repairs for flood damage, which are expected to
be reimbursed by insurance proceeds.
The decrease in accounts payable and other current liabilities at
December 31, 1998 as compared to December 31, 1997 is primarily due to the
timing of redemption of gift certificates at the Louis Joliet Mall.
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The increase in long-term debt, less current portion at December 31,
1998 as compared to December 31, 1997 is primarily due to the accumulation
of deferred accrued interest related to the promissory note secured by the
Partnership's interest in the Wells Fargo - South Tower joint venture.
The decrease in interest income for the year ended December 31, 1998
as compared to the year ended December 31, 1997 is primarily due to a
decrease in average cash balances due to the distributions of sales
proceeds and previously undistributed cash flow from operations to the
General Partners and the Holders of Interests. The increase in interest
income for the year ended December 31, 1997 as compared to December 31,
1996 is primarily due to a higher average cash balance for investments in
1997.
The increase in other income for the year ended December 31, 1997 as
compared to the year ended December 31, 1996 is primarily due to the
receipt of the final settlement payment of $1,400,000 related to Turtle
Creek in December 1997. Other income for the year ended December 31, 1998
is due to the sale of stock in 1998 that was received in the settlement of
claims against a tenant in bankruptcy related to the Partnership's interest
in the Old Orchard venture (sold in August 1993).
The decrease in depreciation for the year ended December 31, 1997 as
compared to the year ended December 31, 1996 is primarily due to the
classification of Louis Joliet Mall as held for sale or disposition as of
December 31, 1996, and therefore, the property is no longer subject to
continuing depreciation.
The increase in professional fees for the year ended December 31, 1998
as compared to the year ended December 31, 1997 is primarily due to the
Partnership incurring additional legal fees for the Yerba Buena litigation.
The decrease in professional fees for the year ended December 31, 1997 as
compared to the year ended December 31, 1996 is primarily due to the
Partnership no longer incurring legal fees related to the restructurings in
1996 of the Partnership's interest in Wells Fargo Center and JMB/NYC's
interest in the 237 Park and 1290 Avenue of the Americas.
The increase in management fees to Corporate General Partner for the
year ended December 31, 1998 as compared to the years ended December 31,
1997 and December 31, 1996 is due to operating distributions made in 1998.
The decrease in general and administrative expenses for the year ended
December 31, 1998 as compared to the year ended December 31, 1997 is
primarily due to a decrease in certain expenses related to the
administration of the Partnership. The increase in general and
administrative expenses for the year ended December 31, 1997 as compared to
December 31, 1996 is primarily due to an increase in costs for the use of
independent third parties to perform certain administrative services for
the Partnership.
The restructuring fee for the year ended December 31, 1996 is due to
the loan modification of the Partnership's note payable to Wells Fargo and
restructuring of the South Tower venture during the fourth quarter of 1996.
The Partnership's share of the reduction of the maximum unfunded
obligation under the indemnification agreement recognized as income for the
period ending December 31, 1998 and December 31, 1997 is a result of
interest income earned on amounts contributed by the Partnership and held
in escrow by JMB/NYC. Such income reduces the Partnership's proportionate
share of its unfunded maximum obligation under the indemnification
agreement.
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The decrease in Partnership's share of operations of unconsolidated
ventures for the year ended December 31, 1998 as compared to December 31,
1997 is primarily due to the reversal of $18,600,000 of accrued contingent
interest related to the mortgage loan at the Piper Jaffray Tower. This
resulted in additional income allocated to the Partnership in 1997. The
decrease in Partnership's share of operations of unconsolidated ventures
for the year ended December 31, 1997 as compared to the year ended
December 31, 1996 is primarily due to the restructuring of JMB/NYC's
interests in the 237 Park Avenue, 1290 Avenue of the Americas and Wells
Fargo Center - South Tower Properties. During 1996, the Partnership
recognized income from restructuring of $163,226,750, which is included
with losses from operations of unconsolidated ventures. Pursuant to the
terms of the Plan, JMB/NYC converted its general partnership interest in
the joint ventures which owned the Properties to a limited partnership
interest and accordingly no longer has a commitment to provide financial
support to the joint ventures owning the Properties. As of the Effective
Date, the Partnership has discontinued the application of the equity method
of accounting for its indirect interests in the properties and additional
losses from the investment in unconsolidated venture will not be
recognized. Additionally, the decrease in 1997 is partially offset by the
reversal of accrued contingent interest discussed above.
The gain on sale of interest in unconsolidated venture for the year
ended December 31, 1998 and related decrease in investment in
unconsolidated ventures, at equity is due to the sale of the Partnership's
interest in the 1090 Vermont venture in May 1998. Additionally, the
decrease is also due the Partnership's receipt of approximately $600,000 of
undistributed operating cash flow from that venture in 1998.
INFLATION
Due to the decrease in the level of inflation in recent years,
inflation generally has not had a material effect on rental income or
property operating expenses.
Inflation in future periods may have an adverse impact on property
operating expenses, which would generally be offset by amounts recovered
from tenants as many of the long-term leases at the Partnership's
commercial properties have escalation clauses covering increases in the
cost of operating the properties as well as real estate taxes. Therefore,
the effect on operating earnings generally will depend upon the extent to
which the properties are occupied. In addition, substantially all of the
leases at the Partnership's shopping center investment contain provisions
which entitle the property owner to participate in gross receipts of
tenants above fixed minimum amounts.
YEAR 2000
The year 2000 problem is the result of computer programs being written
with two digits rather than four to define a year. Consequently, any
computer programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations
including, among other things, an inability to process transactions or
engage in other normal business activities. In addition, other date-
sensitive electronic devices could experience various operational
difficulties as a result of not being year 2000 compliant.
The Partnership uses the telephone, accounting, transfer agent and
other administrative systems, which include both hardware and software,
provided by affiliates of the Corporate General Partner and certain third
party vendors. Except as noted in the following sentence, the Partnership
or its affiliates have received representations to the effect that the
telephone, accounting, transfer agent and other administrative systems are
year 2000 compliant in all material respects. Both the hardware and
software for individual personal computers used in the Partnership's
administrative systems are expected to be tested for their year 2000
compliance during the summer of 1999.
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The property managers for 900 Third Avenue, Piper Jaffray Tower and
Louis Joliet Mall have conducted assessments of various aspects of these
properties' respective operating systems in regard to their year 2000
compliance. In general, such assessments were performed through written
inquiries to third party vendors and service personnel for these properties
and, to some extent, testing of some of the components at certain of these
properties. Based upon the information received from the property
managers., the Partnership believes that the major operating systems for
these properties, including HVAC controls, elevators and alarm and safety
systems, are or will be year 2000 compliant in all material respects.
Certain of the operating systems at these properties require minor
upgrading, which has been undertaken and completed, or will be undertaken
and completed in the near future, without the incurrence of material
expense. The Partnership does not have information concerning the extent
to which the Wells Fargo Center-South Tower is year 2000 compliant, but
will seek to obtain such information in the near future. However, the
Partnership does not believe that it is obligated for year 2000 compliance
for the Wells Fargo Center-South Tower.
The Partnership does not believe that the year 2000 problem presents
any material additional risks to its business, results of operations or
financial condition and has not developed, and does not intend to develop,
any contingency plans to address the year 2000 problem. Given its limited
operations, the Partnership believes that its accounting, transfer agent
and most of its other administrative systems functions could, if necessary,
be performed manually (i.e., without significant information technology)
for an extended period of time without a material increase in costs to the
Partnership. The Partnership has not incurred and does not expect to
incur, any material direct costs for year 2000 compliance.
The Partnership is relying on the information obtained and
representations made by the property managers, as well as the
representations made by third party vendors and service personnel, for 900
Third Avenue, Piper Jaffray Tower and Louis Joliet Mall regarding the
ability of those properties to be year 2000 compliant in all material
respects. The Partnership is also relying on the assessments made by the
property managers of the third party vendors and service personnel to be
contacted in regard to those properties' year 2000 compliance. In the
event that the Partnership's investment properties are not year 2000
compliant in all material respects, the relevant investment property or
properties could experience various operational difficulties, such as
possible systems failures. Such operational difficulties could result in
remediation and, under certain circumstances, possibly other costs and
expenses. If such were to occur, there is no assurance that such costs and
expenses would not, under certain circumstances, have a material adverse
effect on the Partnership or its investment in 900 Third Avenue, Piper
Jaffray Tower and/or Louis Joliet Mall in the event such properties are not
sold during 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership has identified interest rate changes as a potential
market risk. However, as the Partnership's long-term debt bears interest
at a fixed rate and is due to mature subsequent to the Partnership's
expected liquidation and termination date, the Partnership does not believe
that it is exposed to market risk relating to interest rate changes.
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