SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Amendment No. ______________)
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary proxy statement
/ / Confidential, for use of the Commission only (as permitted by
Rule 14a-6(e)(2))
/X/ Definitive proxy statement
/ / Definitive additional materials
/ / Soliciting material pursuant to Sec. 240.14a-11(c) or Sec. 240.14a-12
Rancon Realty Fund IV, a California Limited Partnership
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
/ / No fee required.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transactions applies:
Units of Limited Partnership Interest ("Units")
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(2) Aggregate number of securities to which transactions applies:
79,846 Units
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(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 $9,640.90 has been calculated in accordance with Rule 0-11
under the Exchange Act and is equal to 1/50 of 1% of $48,204,500 (the aggregate
amount of cash to be received by Registrant).
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(4) Proposed maximum aggregate value of transaction:
$48,204,500
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(5) Total fee paid:
$9,640.90
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/ / Fee paid previously with preliminary materials.
/ / 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>
October 17, 1997
Dear Unitholder:
We are writing to request your consent to sell Rancon Realty Fund IV's
("Fund IV") interests in its remaining properties to Glenborough Realty Trust
Incorporated and Glenborough Properties, L.P., the transfer of the General
Partners' interests in Fund IV to Glenborough Properties, L.P. and to complete
the liquidation of Fund IV. A majority of Fund IV's outstanding units must
consent to the proposal for the transaction to proceed.
The enclosed materials discuss the transaction in detail, but we would
like to summarize our reasons for recommending that you consent to proceeding
with the sale.
o Fund IV has held the properties for a longer period than anticipated
when Fund IV was organized, administrative costs have the effect of
reducing Fund IV's total assets, and therefore are too high to justify
continuing operations, and current market conditions appear favorable
for a sale.
o Fund IV expects to benefit substantially by selling properties in bulk
instead of individually. Benefits include lower aggregate sale costs,
more certainty as to the sale price, and faster liquidation of Fund IV.
o The price to be paid by Glenborough is equal to the recent appraised
value of the properties as determined in an appraisal performed by
Robert A. Stanger & Co., Inc.
o The General Partner has obtained a "Fairness Opinion" from Robert A.
Stanger & Co., Inc., indicating that the consideration offered in the
sale is fair to Fund IV and to its Unitholders from a financial point
of view.
After carefully weighing the facts and circumstances associated with
the proposed sale to Glenborough transaction as well as alternative courses of
action, we concluded that the bulk property sale to Glenborough and subsequent
liquidation of Fund IV is an opportunity to maximize value for investors.
Therefore, we recommend that you approve the proposed transaction by
signing the Consent Form and returning it in the postage-paid envelope. Your
participation is extremely important and your early response could save Fund IV
the substantial costs associated with a follow-up mailing. If you have any
questions, please feel free to call The Arlen Group at (800) 891-4105.
Sincerely,
Daniel L. Stephenson
General Partner and Chief Executive Officer of
Rancon Financial Corporation, General Partner
Questions about the enclosed material? Please call The Arlen Group,
toll-free, at (800) 891-4105.
<PAGE>
NOTICE OF CONSENT SOLICITATION
To the Unitholders of Rancon Realty Fund IV, a California Limited Partnership
NOTICE IS HEREBY GIVEN to limited partners ("Unitholders") holding
units of limited partnership interest ("Units") in Rancon Realty Fund IV, a
California Limited Partnership (the "Partnership") that Daniel L. Stephenson and
Rancon Financial Corporation (collectively, the "General Partner") are
soliciting written consents to approve a single proposal consisting of (i) the
sale of substantially all of the assets of the Partnership for cash (the
"Sale"), as contemplated by the Purchase Agreement, dated as of September 30,
1997, ("Purchase Agreement"), with Glenborough Realty Trust Incorporated and
Glenborough Properties, L.P., as to the buyers ("Purchaser"), (ii) the transfer
of the General Partner's interest in the Partnership to Glenborough Properties,
L.P. (the "Transfer"), and (iii) the complete liquidation and dissolution of the
Partnership (the "Liquidation"), in the manner described in the accompanying
Consent Solicitation Statement. Such Liquidation will result in (a) the
distribution to the Unitholders of all net cash proceeds of the Sale, (b) the
net cash proceeds from the sale of the remaining Partnership assets after
payment of all Partnership expenses, and (c) the payment by the General Partner
of the General Partner's negative capital account balance, all as more fully
described in the accompanying Consent Solicitation Statement.
The Sale, Transfer and Liquidation must be approved by Unitholders
holding a majority of the outstanding Units. Only Unitholders of record at the
close of business on September 30, 1997, are entitled to notice of the
solicitation of consents and to give their consent to the Sale, Purchase
Agreement, Transfer and Liquidation. In order to be valid, all consents must be
received before 5:00 P.M., Pacific time, on November 21, 1997, (unless such date
or time is extended). The vote will be obtained through the solicitation of
written consents and no meeting of Unitholders will be held. A consent 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 of the time by
which the consent card must be received.
Your Approval is Important. Please read the Consent Solicitation
Statement carefully and then complete, sign and date the enclosed Consent Form
and return it in the self-addressed postage-paid envelope. Any Consent Form
which is signed and does not specifically disapprove the Sale, Transfer and
Liquidation will be treated as approving the Sale, Transfer and Liquidation.
Your prompt response will be appreciated.
Dated October 17, 1997 RANCON REALTY FUND IV,
a California Limited Partnership
By:
Daniel L. Stephenson, General
Partner and Chief Executive Officer
of Rancon Financial Corporation,
General Partner
<PAGE>
CONSENT SOLICITATION STATEMENT
This Consent Solicitation Statement (this "Statement") is being
furnished to holders of record ("Unitholders") of units of limited partnership
interests ("Units") in Rancon Realty Fund IV, a California limited partnership
(the "Partnership"), as of the close of business on September 30, 1997, (the
"Record Date"), in connection with the solicitation (this "Solicitation") of
consents, upon the terms and subject to the conditions of this Statement and the
accompanying form of consent (the "Consent Form"), by Daniel L. Stephenson, an
individual, and Rancon Financial Corporation, a California corporation, the
general partners of the Partnership (collectively hereinafter referred to as the
"General Partner"), on behalf of the Partnership, to (i) the proposed sale of
all of the real estate assets of the Partnership to Glenborough Realty Trust
Incorporated, a Maryland corporation and Glenborough Properties, L.P., a
California limited partnership (collectively, the "Purchaser") pursuant to a
Purchase Agreement dated as of September 30, 1997, between the Partnership and
the Purchaser (the "Purchase Agreement"), (the sale of all of the Partnership's
real estate assets (the "Properties") and the other transactions contemplated by
the Purchase Agreement are hereinafter referred to collectively as the "Sale"),
and (ii) concurrently with the liquidation of the Partnership, the Transfer of
the General Partner's interests in the Partnership to Glenborough Properties,
L.P. (the "Transfer") and, (iii) the dissolution and liquidation of the
Partnership thereafter (the "Liquidation").
Upon consummation of the Sale, the Partnership will receive $48,204,500
in cash consideration (the "Purchase Price,") subject to reduction by the amount
of any mortgages which are secured by the Properties (the "Loans") and certain
adjustments and prorations. After the consummation of the Sale, the Partnership
intends to liquidate and distribute to Unitholders (A) the net proceeds of the
Sale after deducting the expenses of the Sale, (B) the net cash proceeds from
the sale of the remaining Partnership assets after payment of all Partnership
liabilities and (C) the payment by the General Partner of the General Partner's
negative capital account balance. Based on the sum of items (A), (B) and (C)
above and by dividing this amount by the number of Units issued and outstanding
as of the Record Date, the General Partner currently estimates that such
distribution will equal approximately $316 per Unit. There can, however, be no
assurances that this will be the actual amount distributed to Unitholders.
Furthermore, as more fully described under the caption entitled "LIQUIDATION OF
PARTNERSHIP; DISTRIBUTION OF PROCEEDS," the actual amount distributed per Unit
may vary from one Unitholder to another depending on the date of the
Unitholder's admission to the Partnership.
From 1985 through 1991, the Partnership has made aggregate
distributions to the Unitholders of approximately $20,080,000 and $1,361,000 to
the General Partner.
See "LIQUIDATION OF PARTNERSHIP; DISTRIBUTION OF PROCEEDS."
This Statement, and the enclosed Consent Form are being first mailed to
Unitholders of the Partnership on or about October 17, 1997.
This Statement, including the Fairness Opinion and Summary Appraisal,
attached hereto as Exhibits, contain important information which should be read
before any decision is made with respect to the Solicitation. All statements in
this Statement are qualified in their entirety by reference to the Fairness
Opinion and Summary Appraisal. Unitholders are urged also to read the text of
each of those documents.
The General Partner of the Partnership recommends that Unitholders
consent to the Sale, the Purchase Agreement, Transfer and the Liquidation.
THIS SOLICITATION FOR CONSENT FORMS WILL EXPIRE AT 5:00 P.M. PACIFIC
TIME, ON NOVEMBER 21, 1997, (THE "EXPIRATION DATE"), UNLESS EXTENDED BY THE
GENERAL PARTNER IN ITS SOLE DISCRETION. CONSENT FORMS MAY BE REVOKED AT ANY TIME
UNTIL THE EXPIRATION DATE, BUT MAY NOT BE REVOKED THEREAFTER.
Questions and requests for assistance or additional copies of the Solicitation
documents may be directed to The Arlen Group, (800) 891-4105; Facsimile Number
(619) 686-2056.
<PAGE>
<TABLE>
RANCON REALTY FUND IV
a California Limited Partnership
<CAPTION>
TABLE OF CONTENTS
<S> <C>
DESCRIPTION OF THE TERMS OF THE SOLICITATION.................................................................1
Purpose of Solicitation.............................................................................1
Expiration Date; Extension; Amendment...............................................................1
Record Date; Requisite Consents.....................................................................1
Consent Procedures..................................................................................2
Revocation of Instructions..........................................................................2
No Dissenting Unitholders' Rights...................................................................3
DESCRIPTION OF THE SALE......................................................................................3
Background and Reasons for the Sale.................................................................3
DESCRIPTION OF THE TERMS OF THE PURCHASE AGREEMENT...........................................................4
Parties to the Purchase Agreement...................................................................5
Properties Transferred..............................................................................5
Purchase Price......................................................................................5
Liabilities.........................................................................................6
Closing and Conditions to Closing...................................................................6
Representations and Warranties......................................................................6
Indemnification.....................................................................................6
Nonconsummation of the Purchase Agreement: Risk of Loss............................................6
Proration...........................................................................................7
Operation of the Properties Prior to Closing........................................................7
Condition of the Properties; Purchaser's Review of the Properties...................................7
Regulatory Requirements.............................................................................7
FAIRNESS OF SALE.............................................................................................8
General Partner Recommendation......................................................................8
Failure to Approve the Sale.........................................................................9
Appraisals..........................................................................................9
Summary of Methodology..............................................................................9
Valuation Methodology -- Improved Properties Income Approach.......................................10
Valuation Methodology -- Improved Properties -- Sales Comparison Approach..........................10
Valuation Methodology -- Unimproved Land...........................................................10
Conclusions as to Value............................................................................11
Assumptions, Limitations and Qualifications of Appraisals..........................................11
Fairness Opinion from Stanger......................................................................11
TRANSFER OF GENERAL PARTNER'S INTEREST......................................................................13
LIQUIDATION OF PARTNERSHIP; DISTRIBUTION OF PROCEEDS........................................................14
Distribution of Proceeds...........................................................................14
BENEFITS OF THE SALE AND TRANSFER TO AND POSSIBLE CONFLICTS
OF THE GENERAL PARTNER AND ITS AFFILIATES..........................................................15
CERTAIN FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE SALE...............................................15
General............................................................................................15
Taxation Prior to Liquidation......................................................................15
Taxation of Liquidation............................................................................17
Capital Gains......................................................................................17
<PAGE>
Passive Loss Limitations...........................................................................17
Certain State Income Tax Considerations............................................................17
Tax Conclusion.....................................................................................17
SELECTED FINANCIAL DATA.....................................................................................18
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF.............................................................18
Outstanding Voting Securities; Record Date.........................................................18
Security Ownership of Certain
Beneficial Owners and Management ..................................................................19
MARKET FOR UNITS; DISTRIBUTIONS.............................................................................19
OTHER MATTERS...............................................................................................19
INCORPORATION BY REFERENCE..................................................................................19
CONSENT FORM REGARDING SALE OF ASSETS, TRANSFER AND LIQUIDATION.............................................20
Exhibit A: Stanger Property Valuation...........................................................Exhibit A-1
Exhibit B: Stanger Fairness Opinion.............................................................Exhibit B-1
Appendix A: Financial Report on Form 10-K for the Year Ended December 31, 1996.................Appendix A-1
Appendix B: Financial Report on Form 10-Q for the Period Ended June 30, 1997...................Appendix B-1
</TABLE>
<PAGE>
DESCRIPTION OF THE TERMS OF THE SOLICITATION
Purpose of Solicitation
Upon the terms and subject to the conditions set forth in this
Statement and in the accompanying Consent Form, the General Partner on behalf of
the Partnership is soliciting consents from Unitholders for the purpose of
approving the proposed Sale, the Transfer and the Liquidation. See "FAIRNESS OF
THE SALE," "DESCRIPTION OF THE TERMS OF THE PURCHASE AGREEMENT," "DESCRIPTION OF
THE SALE," "TRANSFER OF GENERAL PARTNER INTEREST," and "LIQUIDATION OF
PARTNERSHIP; DISTRIBUTION OF PROCEEDS."
The cost of preparing, assembling, printing and mailing this Statement
and the enclosed Consent Form, and the cost of soliciting Consent Forms, will be
borne by the Partnership. Solicitation of the Consent Forms will be made
initially by mail. In addition to solicitation by mail, Consent Forms may also
be solicited personally, by telephone, by facsimile or by telegraph by the
director, officer or other regular employees of the General Partner and The
Arlen Group, the Soliciting Agent. No additional compensation will be paid to
the director, officer or other regular employees of the General Partner for such
services.
Expiration Date; Extension; Amendment
This Statement is furnished in connection with the solicitation of
Consent Forms by the General Partner to the Sale as contemplated by the Purchase
Agreement, the Transfer and the Liquidation. This Solicitation for Consent Forms
will expire at 5:00 P.M., Pacific Time, on the Expiration Date, unless extended
by the General Partner in its sole discretion. The Partnership expressly
reserves the right, in the sole discretion of the General Partner, (i) to extend
the Expiration Date, from time to time, until the Requisite Consents (as defined
below) have been obtained, and (ii) to amend, at any time or from time to time
before the Requisite Consents are obtained, the terms of this Solicitation. As
promptly as practicable following any such extension or amendment, notice
thereof shall be given by the Partnership to each Unitholder in writing.
Record Date; Requisite Consents
The Partnership has fixed the close of business on September 30, 1997,
(the "Record Date"), as the Record Date for determining the Unitholders entitled
to notice of and to consent to the Sale, the Transfer and the Liquidation. Only
Unitholders on the Record Date or their duly designated proxies may execute and
deliver a Consent Form. As of the Record Date, there were 79,846 Units
outstanding held by approximately 11,880 holders of record. Holders of Units are
entitled to one vote per Unit.
The Sale, Transfer, and the Liquidation must be approved by at least a
majority of the issued and outstanding Units (the "Requisite Consents") as
required by the Partnership's Second Amended and Restated Agreement of Limited
Partnership, as amended (the "Partnership Agreement").
Units represented by "broker non-votes" (i.e., Units held in record
name by brokers or nominees as to which (i) an executed Consent Form has not
been received from the beneficial owners or persons entitled to Consent, (ii)
the broker or nominee does not have discretionary voting authority under
applicable rules or the instrument under which it serves in such capacity, or
(iii) the recordholder has indicated on the Consent Form or has otherwise
notified the Partnership that it does not have authority to vote the Units with
respect to the Sale, the Transfer and the Liquidation) will not be included in
the vote totals, and therefore will have no effect on this Solicitation.
If the Partnership fails to receive the Requisite Consents on or before
the Expiration Date, or any extension thereof, then the Partnership will
continue with its present objective of maximizing the return to Unitholders by
actively managing and operating its Properties over a short holding period. In
that event, the Partnership's Properties will be disposed of at an appropriate
time while pursuing development opportunities for certain properties. See
"DESCRIPTION OF THE SALE."
1
<PAGE>
Consent Procedures
UNITHOLDERS WHO DESIRE TO CONSENT TO THE SALE, THE TRANSFER AND THE
LIQUIDATION SHOULD SO INDICATE BY MARKING THE APPROPRIATE BOX ON THE CONSENT
FORM INCLUDED HEREWITH, AND COMPLETING, SIGNING, DATING AND DELIVERING THE
CONSENT FORM TO THE ARLEN GROUP BY MAIL IN THE SELF-ADDRESSED, POSTAGE-PAID
ENVELOPE ENCLOSED FOR THAT PURPOSE, BY OVERNIGHT COURIER OR BY FACSIMILE AT THE
ADDRESS OR FACSIMILE NUMBER SET FORTH ABOVE AND ON THE CONSENT FORM, ALL IN
ACCORDANCE WITH THE INSTRUCTIONS CONTAINED HEREIN AND THEREIN. A UNITHOLDER MUST
CONSENT TO EACH OF THE SALE, THE PURCHASE AGREEMENT, THE TRANSFER AND THE
LIQUIDATION IF IT WISHES TO GRANT ITS CONSENT.
All Consent Forms that are properly completed, signed and delivered to
the Partnership and not properly revoked (See "Revocation of Instructions"
below) prior to the Expiration Date, will be given effect in accordance with the
specifications thereof. If a Consent Form is delivered and none of the "CONSENT"
nor the "DOES NOT CONSENT" nor the "ABSTAIN" box is marked with respect to the
Sale, the Transfer and the Liquidation, but the Consent Form is otherwise
properly completed and signed, the Unitholder will be deemed to have consented
to each of the Sale, the Transfer and the Liquidation.
Consent Forms should be executed in exactly the same manner as the
name(s) in which ownership of the Units is registered. If the Units to which a
Consent Form relates are held by two or more joint holders, all such holders
should sign the Consent Form. If a Consent Form is signed by a trustee, partner,
executor, administrator, guardian, attorney-in-fact, officer of a corporation or
other person acting in a fiduciary, agency or representative capacity, such
person must so indicate when signing and must submit with the Consent Form
evidence satisfactory to the Partnership of authority to execute the Consent
Form.
The execution and delivery of a Consent Form will not affect a
Unitholder's right to sell or transfer the Units. All Consent Forms received by
the Partnership (and not properly revoked) prior to the Expiration Date will be
effective notwithstanding a record transfer of such Units subsequent to the
Record Date, unless the Unitholder revokes such Consent Form prior to 5:00 P.M.,
Pacific Time, on the Expiration Date by following the procedures set forth under
"Revocation of Instructions" below.
All questions as to the validity, form and eligibility (including time
of receipt) regarding the consent procedures will be determined by the General
Partner in its sole discretion, which determination will be conclusive and
binding. The Partnership reserves the right to reject any or all Consent Forms
that are not in proper form. The Partnership also reserves the right to waive
any defects, irregularities or conditions of delivery as to particular Consent
Forms. Unless waived, all such defects or irregularities in connection with
deliveries of Consent Forms must be cured within such time as the General
Partner determines. Neither the General Partner nor any of its affiliates or any
other persons shall be under any duty to give any notification of any such
defects or irregularities or waivers, nor shall any of them incur any liability
for failure to give such notification. Deliveries of Consent Forms will not be
deemed to have been made until any irregularities or defects therein have been
cured or waived. The interpretations of the terms and conditions of this
Solicitation by the General Partner shall be conclusive and binding.
Revocation of Instructions
Any Unitholder who has delivered a Consent Form to the Partnership may
revoke the instructions set forth in such Consent Form by delivering to the
General Partner a written notice of revocation prior to 5:00 P.M., Pacific Time,
on the Expiration Date. In order to be effective, a notice of revocation of the
instructions set forth in a Consent Form must (i) contain the name of the person
who delivered the Consent Form, (ii) be in the form of a subsequent Consent Form
marked either as "CONSENT" or "DOES NOT CONSENT" or "ABSTAIN," as the case may
be, (iii) be signed by the Unitholder thereof in the same manner as the original
signature on the Consent Form, and (iv) be received by the General Partner prior
to 5:00 P.M., Pacific Time, on the Expiration Date at its address set forth on
the Consent Form. A purported notice of revocation that lacks any of the
required information, is dispatched to an improper address or is not received in
a timely manner will not be effective to revoke the instructions set forth in a
Consent Form previously given. A revocation of the instructions set forth in a
Consent Form can only be accomplished in accordance with the foregoing
procedures. No Unitholder may revoke the instructions set forth in a Consent
Form after 5:00 P.M., Pacific Time, on the Expiration Date.
2
<PAGE>
No Dissenting Unitholders' Rights
Under the California Uniform Limited Partnership Act and under the
Partnership Agreement, Unitholders do not have dissenter's appraisal rights in
connection with the Sale and the Purchase Agreement.
Suspension of Transfer of Units
Pending completion of the consent process, the General Partner has
suspended the transfer of Units by Unitholders.
DESCRIPTION OF THE SALE
Background and Reasons for the Sale
Prior to 1995, the Partnership's business strategy was to hold its
Properties for future development and operation. In 1995, the Partnership
modified its strategy to focus on eventual disposition of its Properties while
pursuing development opportunities for certain sites.
At its inception in 1985, the Partnership estimated that its Properties
would be developed and sold after a period of seven years of ownership after
completion of development or construction. The Partnership purchased one
Property which it sold and used the proceeds of that sale and proceeds from its
offering of Units to develop commercial offices, restaurant, retail, hotel,
transportation and light industrial facilities, primarily in the Tri City
Corporate Centre of San Bernardino, California.
After acquisition and development of some of its Properties, the
Partnership's Properties experienced a decrease in market value due to a
substantial weakening of the markets for commercial real estate in the Inland
Empire area of California, where the majority of the Partnership Properties are
located and in the United States real estate markets in general. Although the
markets in which the Partnership Properties are located and real estate markets
in general have improved from the bottom of the cycle, these markets have proven
to be volatile over time. Furthermore, it is an appropriate time for the sale of
the Partnership's Properties because (1) the operations of all the improved
Properties are relatively stable; (2) the real estate capital markets are
active; (3) development of the majority of the Partnership's unimproved
properties cannot be done on an economical basis for several years, and (iv) the
administrative costs of operating the Partnership have increased as a percentage
of such assets having the effect of reducing such assets.
In December 1994, Rancon Financial Corporation ("RCF"), a general
partner of the Partnership, entered into an agreement with Glenborough Inland
Realty Corporation ("GIRC") whereby RFC sold to GIRC, for the assumption of
$1,715,000 of RFC's debt and approximately $4,466,000, the contract to perform
the rights and responsibilities under RFC's agreement with the Partnership and
other related Partnerships (collectively, "the Rancon Partnerships") to perform
or contract on the Partnership's behalf for financial, accounting, data
processing, marketing, legal, investor relations, asset and development
management and consulting services for the Partnership for a period of ten years
or to the liquidation of the Partnership, whichever comes first. Under the
contract, the Partnership was required to pay GIRC for its services as follows:
(i) a specified asset administration fee of $993,000 per year, which is fixed
for five years subject to reduction in the year following the sale of assets;
(ii) sales fees of 2% for improved properties and 4% for land (which is not
payable in connection with the Sale); (iii) a refinancing fee of 1% and (iv) a
management fee of 5% of gross rental receipts. When Glenborough's REIT was
formed on December 31, 1995, it acquired 100% of the non-voting preferred stock
of GIRC. In July of 1997, GIRC was merged into Glenborough Corporation ("GC"),
in which Glenborough also held, and continues to hold, 100% of the non-voting
preferred stock. As part of this agreement, GIRC performed and GC now performs)
certain responsibilities for the General Partner of the Rancon Partnerships and
RFC agreed to cooperate with GIRC should GIRC attempt to obtain a majority vote
of the limited partners to substitute itself as the Sponsor for the Rancon
Partnerships. The compensation payable to GIRC under the agreement will
terminate when the Sale Transfer, and Liquidation are completed. None of GIRC,
GC or Glenborough is an affiliate of RFC.
RFC entered into the transaction with Glenborough described above, when
it determined to sell that portion of its business relating to investor
relations services, property management services and asset management services,
and those services are now rendered to the Partnership, eight other related
partnerships and third parties by Glenborough.
3
<PAGE>
In late 1994, during negotiations of the agreement described above,
Glenborough proposed that the Partnership contribute its Properties to
Glenborough's real estate investment trust ("REIT") then being formed, in return
for securities of the new REIT. The Partnership elected not to do so because of
the risk of investing in a start-up REIT. In addition, by contracting with GIRC
to perform services, the Partnership would establish a relationship to determine
its performance as a manager. Finally, the Partnership was of the opinion that
the bottom of the real estate cycle was near and did not want to consider a sale
until the cycle moved in a positive direction. Approximately 18 months later,
Glenborough's REIT had begun operations and its stock had begun trading, and
Glenborough once again proposed to acquire the Partnership's properties in
exchange for securities of the REIT. For the same reasons as stated above, the
Partnership again declined Glenborough's proposal.
In April of 1997, Glenborough again proposed to acquire the
Partnership's properties, but this time for cash rather than securities. For
this reason, and because the Partnership's general partner believed that the
real estate cycle has moved in a positive direction, it requested that
Glenborough submit a formal offer.
In May 1997, an offer was made to buy the Properties for $45,200,000 in
cash, subject to obtaining a fairness opinion as to the terms and conditions of
the Sale from the financial point of view of the Unitholders.
In June 1997, the Partnership and the Purchaser executed a letter of
intent setting forth an agreement in principle on the terms and conditions of
the Sale.
In July 1997, the Partnership received an appraisal that the fair
market value of the Properties was $48,575,000. Following receipt of the
appraisal, the Partnership made a counter-offer to Glenborough to sell the
properties for a price equal to the appraised fair market value. Glenborough
accepted the counter-offer, subject to a reduction of $370,500 from the
appraised value for certain lots that had been included in the appraisals but
subsequently sold.
On September 30, 1997, the Partnership and the Purchaser entered into
the Purchase Agreement. Under the terms of the Purchase Agreement, the Purchaser
will purchase all of the real estate assets of the Partnership for an aggregate
Purchase Price of $48,204,500 to be paid in the form of cash and/or assumption
of debt.
DESCRIPTION OF THE TERMS OF THE PURCHASE AGREEMENT
The following is a summary of the material terms of the Purchase
Agreement, dated as of September 30, 1997. This summary does not purport to be
complete. A complete copy of the Purchase Agreement will be provided to each
Unitholder, at no cost to the Unitholder, upon request. Capitalized terms used
but not defined have the meaning ascribed to them in the Purchase Agreement.
Parties to the Purchase Agreement
The Purchase Agreement has been entered into between the Partnership,
as the seller, and the Purchaser, as purchaser. Pursuant to the Purchase
Agreement, the Partnership has agreed to sell all of its Properties to the
Purchaser.
The Partnership is a California limited partnership with its principal
executive office at 27740 Jefferson Avenue, Temecula, California 92590;
Telephone Number (909) 676-6664. For a description of the Partnership and the
Properties see the Partnership's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, (the "Partnership's 10-K"), and the Partnership's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, (the
"Partnership's 10-Q"), copies of which are being mailed to Unitholders together
with this Statement and are incorporated herein by reference.
The Purchaser is a Maryland corporation and a California limited
partnership, with an address at 400 South El Camino Real, San Mateo, California
94402-1708; Telephone Number: (415) 343-9300. The Purchaser is a
self-administered and self-managed real estate investment trust with a
diversified portfolio of properties including industrial, office, multi-family,
retail and hotel properties. In addition, two associated companies of Purchaser
control similarly diversified portfolios. Combined, the portfolios encompass
approximately 11 million square feet and are spread among 26 states throughout
the country.
4
<PAGE>
Properties Transferred
<TABLE>
The Purchase Agreement provides that at the closing of the Sale (the
"Closing") the Partnership will transfer and convey to the Purchaser all of the
Properties of the Partnership, which consist of approximately 86 acres of
undeveloped land, improved properties of approximately 460,741 square feet and
the Shadow Ridge Woodland Apartment complex of 240 units as follows:
<CAPTION>
Property Square
Property Name Type Footage Acres
- -------------------------------------- ---------------------- -------------------------- ----------------
<S> <C> <C> <C>
Income Producing
Carnegie Business Center Office/R&D 62,605 -
Circuit City Retail 38,600 -
Inland Regional Center Office 81,079 -
One Vanderbilt Way Office 73,089 -
Promotional Retail Center Retail 64,445 -
Service Retail Center Retail 20,780 -
TGI Friday's Retail 9,386 -
Two Vanderbilt Way Office 69,094 -
Shadowridge Woodland Apartments 240 units -
Apartments -
Land
North River Tower Land - 14.67
Brier Business Center Land - 2.80
Vanderbilt Tower Land - 7.58
Inland Regional - Phase II Land - 2.51
Palm Court West Land - 3.18
Brier Plaza Land - 2.41
South Palm Court Pad 1 Land - .68
South Palm Court Pad 2 Land - .82
Perris 17 (Retail) Land - 17.67
Lake Elsinore Land - 24.79
Rancon Town Village Land - 5.63
</TABLE>
The Purchaser is not acquiring any of the accounts receivable relating
to the Properties existing as of the Closing Date or cash reserves or other
similar assets of the Partnership such as prepaid expenses, if any. The net cash
proceeds from the sale of the remaining Partnership assets after payment of the
Partnership's liabilities will be distributed to Unitholders along with the net
proceeds of the Sale (after deducting expenses of the Sale, the amount of
mortgage loans on the Properties ("Loans")) and the payment by the General
Partner of the amount of the General Partner's negative capital account balance.
See "TRANSFER OF THE GENERAL PARTNER INTEREST" and "LIQUIDATION OF PARTNERSHIP;
DISTRIBUTION OF PROCEEDS."
Purchase Price
The Purchase Price for the Properties is $48,204,500 (which reflects a
reduction of $370,500 from the appraisal value to reflect the sale of certain
lots in Rancon Town Village), $520,000 of which has been deposited by the
Purchaser in escrow as earnest money with Chicago Title Insurance Company, and
the remainder of which will be paid in cash, reduced by Loans and certain
adjustments and prorations at the Closing. The Partnership will pay for the
Fairness Opinion, Appraisals, filing fees, legal fees and similar expenses,
which the General Partner estimates to be approximately $325,000.
5
<PAGE>
Liabilities
The Purchaser will assume all obligations of the Partnership relating
to the Properties, including obligations under leases, and may assume the Loans
on the Properties at the Closing.
Closing and Conditions to Closing
The Purchase Agreement provides that the Closing will occur on the
first day that is not less than five days after the date the Partnership has
received the approval of the Partnership's Unitholders to the Sale and the
Transfer (the "Closing Date").
Under the Purchase Agreement, the consummation of the Sale is subject
to the satisfaction of, among others, the following conditions: (i) the approval
of the Sale and the Liquidation by Daniel L. Stephenson, as the individual
general partner and as the Director of Rancon Financial Corporation (which
approvals were given on September 30, 1997), (ii) the requisite approval by the
Partnership's Unitholders of the Sale, and the Transfer, (iii) the Partnership's
receipt of the Fairness Opinion and Appraisal, (iv) the Purchaser's approval of
title to the Properties, (v) that the physical condition of the Properties at
Closing shall be substantially the same, wear and tear excepted as when the
Purchase Agreement was executed, and (vi) the delivery by the Partnership to the
Purchaser of appropriate instruments of conveyance and certain documents
relating to the Properties.
Representations and Warranties
The Purchase Agreement contains representations and warranties with
respect to the Partnership and the Properties which are generally customary in a
transaction of this type and relate to, among other things, (i) due organization
and authority to enter into the Purchase Agreement, (ii) the absence of any
conflicts under the documents to which it is a party and violation of agreements
and organizational documents by which it is formed, (iii) the absence of legal
proceedings, government investigation and violations of law, (iv) environmental
matters, (v) title matters, and (vi) the status of the Loans.
The Purchaser's representations and warranties relate to, among other
things, (i) due organization and ability to perform its obligations under the
Purchase Agreement, (ii) the absence of conflicts under any documents to which
it is a party and violation of agreements and organizational documents by which
it is formed, and (iii) no litigation is pending or threatened against the
Purchaser that might materially and detrimentally affect the ability to perform
its obligations under the Purchase Agreement.
Indemnification
The Partnership and the Purchaser have agreed to indemnify each other
from and against all costs, charges and expenses related to the breach of any of
the representations and warranties they have made in the Purchase Agreement.
The Partnership has agreed to indemnify the Purchaser from and against
all costs, charges and expenses related to the operation of the Properties
(other than as a consequence of acts or omissions of Purchaser), or failure to
perform any obligation under the Loan Documents prior to the Closing Date.
The Purchaser has agreed to indemnify the Partnership from and against
all costs, charges and expenses related to the ownership, management and
operation of the Properties and the payment of the Loans after the Closing Date.
Nonconsummation of the Purchase Agreement: Risk of Loss
If there is any damage or destruction to, or condemnation of, any
Properties as to which the cost of repair or the value of the portion taken
exceeds $482,000 the Purchaser may, at its option, within twenty days of
receiving notice thereof, elect to (i) terminate the Purchase Agreement as to
the damaged or condemned Property which would then reduce the Purchase Price by
the fair market value of the damaged or condemned Property, or (ii) consummate
the acquisition of the Property for all of the consideration provided the
Purchaser is given a credit against the consideration equal to the amount of any
insurance proceeds or condemnation awards collected by the Partnership as a
result of such loss. If any damage or destruction or condemnation of any of the
Properties does not exceed $482,000, the Purchaser
6
<PAGE>
must purchase the Properties but will receive as a credit against the Purchase
Price in an amount equal to the insurance proceeds or condemnation awards
provided and the Loan does not result in a default because of such loss or
condemnation.
If the Sale is not consummated for a reason other than a default by the
Partnership or the Purchaser, then the earnest money shall be returned to the
Purchaser with interest thereon, and the Partnership and Purchaser shall each
bear one-half of any escrow cancellation charges.
If the Sale is not consummated as a result of a default by the
Partnership, the Purchaser may terminate the Agreement and the earnest money and
interest thereon shall be returned to it and the Partnership shall pay all the
title, escrow, legal and inspection fees incurred by the Purchaser, or the
Purchaser may continue the Purchase Agreement pending the Purchaser's action for
specific performance and/or damages.
If the Sale is not consummated as a result of a default by the
Purchaser, the Purchaser shall pay all escrow cancellation charges and the
earnest money deposit of $520,000, plus interest thereon will be paid to the
Partnership as liquidated damages and the Partnership will not have any further
remedies. If that occurs, the Partnership will distribute the $520,000 (after
deducting expenses incurred by the Partnership in respect of the Sale) to
Unitholders, and will continue with its present objective of disposing of the
Properties at an appropriate time while pursuing development opportunities for
certain Properties. See "DESCRIPTION OF THE SALE."
Proration
All prorations shall be calculated as of 12:01 A.M. on the first day of
the month that the Sale closes.
Operation of the Properties Prior to Closing
Prior to the Closing, the Partnership shall operate and maintain the
Properties in substantially the same manner as they were operated prior to the
execution of the Purchase Agreement provided, however, that without the prior
written approval of the Purchaser, the Partnership shall not execute, renew or
terminate any lease or modify or waive any material term of any lease; enter
into any contract with respect to the property requiring payments to be made by
the Partnership in excess of $5,000 per year, or waive or modify any Loan
Documents.
Condition of the Properties; Purchaser's Review of the Properties
The Purchaser shall have the right to contact and interview Tenants and
inspect the surveys, title, use and zoning matters with respect to each of the
Properties. Purchaser shall have fifteen days after the receipt of the foregoing
materials to approve or disapprove of the due diligence materials. If the
Purchaser does not approve such materials, the Purchase Agreement may be
terminated and the Purchaser will be entitled to all amounts paid for earnest
money and any interest thereon.
Regulatory Requirements
There are no federal or state regulatory requirements which must be
complied with, nor are there any such governmental consents or approvals that
must be obtained, other than the approval of the Unitholders solicited by this
Statement, in connection with the Sale and the other transactions contemplated
by the Purchase Agreement. There are certain regulatory requirements under the
laws of the State of California which must be complied with in connection with
the Liquidation, principally the winding up of the affairs of the Partnership
and the filing of a Certificate of Cancellation (canceling the Partnership's
Certificate of Limited Partnership) with the Secretary of State of California in
accordance with the California Uniform Limited Partnership Act. These regulatory
requirements will be complied with at the time of the Liquidation.
FAIRNESS OF SALE
General Partner Recommendation
Daniel L. Stephenson, as the individual general partner and as the
Director of Rancon Financial Corporation
7
<PAGE>
has approved the Sale to the Purchaser pursuant to the Purchase Agreement and
the Liquidation, and directed that the Sale, Transfer, and the Liquidation be
submitted to the Partnership's Unitholders for consent with the recommendation
that Unitholders consent. The principal factors taken into consideration in
approving the Sale, Purchase Agreement and the Liquidation and in recommending
that Unitholders consent thereto were:
(i) The Purchase Price was achieved by arm's length negotiations and is
equal to the Properties' Appraised Value;
(ii) The Fairness Opinion of Robert A. Stanger & Co., Inc. ("Stanger")
that the consideration offered to the Partnership in connection with the Sale is
fair to the Partnership and the Unitholders from a financial point of view;
(iii) Prior to entering into the Purchase Agreement, the General
Partner determined that the Purchaser has a reputation for completing purchases
it contracts to make and for doing so in a timely and expeditious manner;
(iv) The terms and conditions of the Purchase Agreement described under
"Description of the Terms of the Purchase Agreement," in particular: (a) the
Purchaser's obligations are not subject to obtaining financing; (b) the
Purchaser will forfeit its $520,000 Escrow Deposit if it fails to consummate the
Sale other than for the due diligence reasons discussed under "Description of
the Terms of the Purchase Agreement"; and (c) it is unlikely that there will be
any significant adjustment to the Purchase Price because the Purchaser had early
access to information and because of the timing of the due diligence review;
(v) No brokerage commissions are required to be paid by the Partnership
in connection with the Sale therefore providing higher net proceeds to the
Unitholders;
(vi) Selling all of the Properties at one time will result in lower
aggregate Sale costs;
(vii) Selling all of the Properties at one time will eliminate the need
for the Partnership to incur the ongoing administrative and other expenses of
continuing to operate the Partnership and certain Properties during an extended
sales period;
(viii) Selling the Properties at one time provides certainty as to the
sales price of the Properties, whereas selling the Properties over a period of
time would not provide such certainty;
(ix) The Sale and Liquidation will result in the more accelerated
return of capital to the Unitholder; and
(x) The Sale and Liquidation is anticipated to result in the
opportunity for the Unitholders to receive their final Schedules
K-1 for the fiscal year 1997 and avoid future inconvenience and
expense from the requirement to reflect such schedules in their
federal income tax returns in subsequent years.
The General Partner considered the following additional factors with
respect to the disposition of the Properties in general:
(i) The fact that the Properties have been held longer than their
originally anticipated holding period;
(ii) The General Partner's belief that current market conditions are
favorable for a sale of the Properties due to the favorable interest rate
environment, the increased availability of investor capital and the improvement
in certain of the marketplaces in which the Partnership's Properties are
located.
(iii) The liquidity the Sale will provide to Unitholders that the
retention of Units does not provide. At present, there is no established public
trading market for Units and liquidity is limited to sporadic sales that occur
within an informal secondary market and pursuant to occasional tender offers for
Units.
(iv) The level of distributions to the Unitholders (which have been
lower than originally anticipated; no distributions have been made for five
years); and
8
<PAGE>
(v) Retaining the Properties will continue to subject the Partnership
to the risks inherent in the ownership of property such as the development of
properties, 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.
The primary disadvantages of disposing of the Properties pursuant to
the Sale are as follows:
(i) The Partnership will not benefit from possible improvements in
economic and market conditions which could produce increased cash flow and
enhance the sales price of the Properties. The concern in continuing to hold the
Properties in an improving market is that the market conditions which led to
this improvement may encourage an increasing supply of new properties (including
development of certain of the Partnership's Properties) which could eventually
lead to oversupply of the Properties and weakening of prices;
(ii) The sales of all the Properties at one time may not result in as
high a sale price as if they were sold individually; and
(iii) Unitholders who purchased their Units during the initial public
offerings of the Units may not receive aggregate distributions, including
distributions from the Sale, equal to the money that they originally invested in
the Partnership. See "CERTAIN FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE
SALE - Taxation Prior to Liquidation."
For the foregoing reasons, the General Partner of the Partnership has
approved the Sale and the Liquidation and recommends that Unitholders consent to
the Sale, the Purchase Agreement, Transfer and the subsequent Liquidation.
Failure to Approve the Sale
If the Unitholders fail to approve the Sale, Transfer and Liquidation,
the Partnership will continue to operate the Properties and attempt to sell the
Properties in single or multiple sales and develop properties deemed
developable.
Appraisals
In determining the fairness of the Sale, the General Partner has relied
in part upon appraisals (a summary of which is attached hereto as Exhibit A and
incorporated herein by this reference) prepared by Stanger, to establish the
fair market value ("Appraised Value") of the Partnership's Properties and such
Appraised Values were utilized in establishing whether the Purchase Price
offered by the Purchaser constitutes fair consideration in exchange for such
Properties. In preparing the Appraisals, Stanger was engaged to determine the
fair market value of the Properties without taking into account the specific
financial interest of any person. Stanger's Appraisals were certified by an MAI
appraiser.
Stanger has substantial experience and expertise in assessing the value
of real estate, having prepared real estate appraisals for over 10 years and
having appraised or rendered confirming opinions of value for a variety of
clients real estate assets with a value of over $10 billion. Furthermore, the
General Partner believes that the use of a single independent appraiser,
applying consistent methodology and criteria in assessing the value of the
Partnership's Properties, increased the likelihood that the value of such assets
would be determined on a fair, consistent and unbiased basis.
Summary of Methodology
Appraisers typically consider three approaches to value: the cost
approach, the market data or sales comparison approach, and the income approach.
The market data or sales comparison approach involves a comparative analysis of
the subject property with other similar properties that have sold recently or
that are currently offered for sale in the market. The income approach involves
an economic analysis of the property based on its potential to provide future
net annual income.
9
<PAGE>
Pursuant to the request of the Partnership, the Appraisals were
performed using the income approach and sales comparison approach for
income-producing properties and the sales comparison approach for land
properties.
Valuation Methodology -- Improved Properties -- Income Approach. Stanger's
valuation has been based in part upon information supplied to it by the
Purchaser, as the manager of the Properties, and the Partnerships, including but
not limited to: rent rolls, building reports; lease information; financial
schedules of current lease rates, income, expenses, cash flow and related
financial information; property descriptive information; prior appraisals; and,
where appropriate, proposed sales terms, sales agreements and supporting
documentation. Stanger relied upon such information and assumed that the
information provided by Purchaser and the Partnership was accurate and complete
and did not attempt to independently verify such information.
Stanger also interviewed and relied upon Purchaser's management
personnel to obtain information relating to the condition of each property,
including any deferred maintenance, capital budgets, environmental conditions,
status of on-going or newly planned property additions, reconfiguration,
improvements, and other factors affecting the physical condition of the property
improvements.
Stanger also interviewed Purchaser's management personnel regarding
competitive conditions in property markets, trends affecting the properties,
certain lease and financing factors, and historical and anticipated lease
revenues and expenses. Stanger also reviewed historical operating statements for
each of the properties.
Based on the lease and market rent analysis, rental revenue projections
were developed for each income-producing property based on the terms of existing
leases and based on an analysis of market rents and historical rents achieved at
the property.
Expenses were analyzed based upon a review of actual expenses for 1995
and 1996. Stanger also reviewed 1997 budgeted expenses and published data on
expenses for comparable properties.
In its income approach analysis, Stanger utilized a ten year discounted
cash flow analysis. To determine residual value, year eleven operating income
estimate was capitalized. The residual value was discounted, after deducting
appropriate sales expenses to a present value. The discount rate employed was
based on current acquisition criteria and target rates of return among
commercial property investors.
Valuation Methodology -- Improved Properties -- Sales Comparison Approach. Based
upon actual and proposed sales transactions identified in the respective
Properties' region, indices of value for the Properties were derived considering
the respective Properties' age, location and other factors. The indices of value
included price per square foot and overall capitalization rate. The indices of
value were applied to the Properties to estimate value in accordance with the
Sales Comparison Method. Price per square foot as estimated by reference to
comparable sales transactions was multiplied by the rentable square footage of
the respective Properties to derive an estimate of value. Net operating income
was capitalized at a capitalization rate as estimated in accordance with
comparable sales transaction data.
Valuation Methodology -- Unimproved Land. Since certain of the Properties are
unimproved land Stanger has estimated the value of the fee simple interest in
the Land based on the Sales Comparison Approach, and has not utilized the Income
or Cost Approaches to valuation.
The Sales Comparison Approach utilizes indices of value derived from
actual or proposed sales of comparable properties to estimate the value of the
subject Land. For land valuations, a unit of comparison typically analyzed for
similar properties, price per square foot of land or price per buildable square
foot, was utilized in applying the Sales Comparison Approach to the subject
Property.
In conducting the property valuation, representatives of Stanger
performed site inspection of the Properties in June 1997. In the course of each
Property site visit, the information on the local market was gathered.
Information gathered during the site inspection was supplemented by a review of
published information concerning economic, demographic and real estate trends in
the subjects' market.
10
<PAGE>
Conclusions as to Value
Based upon the review as described above, it is Stanger's opinion that
the market value of the leased fee interests or fee simple interests in the
Properties as of June 30, 1997, is:
Property Name Value
- ------------- -----
Carnegie Business Center $3,100,000
Circuit City 4,700,000
Inland Regional Center 5,300,000
One Vanderbilt Way 4,500,000
Promotional Retail Center 5,000,000
Service Retail Center 2,000,000
TGI Friday's 1,750,000
Two Vanderbilt Way 4,400,000
Shadowridge Woodbend Apartments 9,200,000
North River Tower 500,000
Brier Business Center 180,000
Vanderbilt Tower 1,300,000
Inland Regional - Phase II 290,000
Palm Court West 540,000
Brier Plaza 250,000
South Palm Court Pad 1 125,000
South Palm Court Pad 2 150,000
Perris 17 (Retail) 1,540,000
Lake Elsinore 2,200,000
Rancon Town Village 1,550,000
---------
TOTAL $48,575,000 *
* The Purchase Price is $370,500 less than the appraised value to reflect the
sale of certain lots of Rancon Town Village which took place subsequent to the
date of the appraisal.
Assumptions, Limitations and Qualifications of Appraisals
Stanger utilized certain assumptions to determine the appraised value
of the portfolios under the income approach. See Exhibit A for a discussion of
the specific assumptions, limitations and qualification of the Appraisals.
The Appraisals reflect Stanger's valuation of the real estate
portfolios of the Partnerships as of June 30, 1997, in the context of the
information available on such date. Events occurring after June 30, 1997, and
before the Closing of the Sale could affect the Properties or assumptions used
in preparing the Appraisals. Stanger has no obligation to update the Appraisals
on the basis of subsequent events. In connection with preparing the Appraisals,
Stanger was not engaged to, and consequently did not, prepare any written report
or compendium of its analysis for internal or external use beyond the analysis
set forth in Exhibit A. Stanger will not deliver any additional written summary
of the analysis.
Fairness Opinion from Stanger
Stanger was engaged by the General Partner on behalf of the
Partnership, to provide an opinion as to the fairness to the limited partners of
the Partnership from a financial point of view of the consideration to be
received in the Sale. The full text of the fairness opinion, which contains
descriptions of the assumptions and qualifications made, matters considered and
limitations on the review and opinion, is set forth in Exhibit B to this
Statement and should be read in its entirety. Certain of the material
assumptions, qualifications and limitations to the fairness opinion are set
forth below. The summary set forth below does not purport to be a complete
description of the analysis used by Stanger in rendering the fairness opinion.
Arriving at a fairness opinion is a complex analytical process not necessarily
susceptible to partial analysis or amenable to summary description.
11
<PAGE>
In connection with its analysis, Stanger made certain assumptions,
described more fully below, which the General Partner and the Partnership
advised Stanger it would be reasonable to make. The General Partner and the
Partnership imposed no conditions or limitations on the scope of Stanger's
investigation or with respect to the methods and procedures to be followed in
rendering the fairness opinion. The General Partner and the Partnership have
agreed to indemnify Stanger against certain liabilities arising out of its
engagement to render financial advisory services and to prepare and deliver the
fairness opinion.
Experience of Stanger. Stanger, founded in 1978, has provided
information, research, investment banking and consulting services to clients
located throughout the United States, including major New York Stock Exchange
member firms and insurance companies and over 70 companies engaged in the
management and operation of partnerships and real estate investment trusts. The
investment banking activities of Stanger include financial advisory services,
asset and securities valuations, industry and company research and analysis,
litigation support and expert witness services, and due diligence investigations
in connection with both publicly registered and privately placed securities
transactions.
Stanger, as part of its investment banking business, is regularly
engaged in the valuation of business and their securities in connection with
mergers, acquisitions, reorganizations and for estate, tax, corporate and other
purposes. In particular, Stanger's valuation practice principally involves
partnerships, partnership securities and the assets typically owned through
partnerships including, but not limited to, real estate, oil and gas reserves,
cable television systems and equipment leasing assets.
Summary of Materials Considered. In the course of Stanger's analysis to
render its opinion regarding the Transaction, Stanger: (i) reviewed the consent
solicitation statement (the "Statement") relating to the Sale; (ii) reviewed
historical operating statements for each income producing property for the two
years ended December 31, 1996, and the six months ended June 30, 1997; (iii)
reviewed the current rent roll, occupancy report and quoted rents at each income
producing property; (iv) conducted a site inspection of each Property; (v)
reviewed the most recent property tax assessment for each Property; (iv)
reviewed the master summary appraisal report prepared by Stanger, as of June 30,
1997, for the Properties; (vii) reviewed the letter of intent between the
Partnership and Glenborough; (viii) reviewed the operating history and financial
statements of the Partnership for the years ended December 31, 1995, and 1996 as
summarized on Forms 10-K filed with the Securities & Exchange Commission (the
"SEC") and for the quarter ended March 31, 1997, as summarized on Form 10-Q as
filed with the SEC; (ix) conducted such other studies, analyses and inquiries
Stanger deemed appropriate.
Summary of Analysis. Stanger observed that the purchase price paid is
equal to the appraised value of the real estate assets as of June 30, 1997,
(adjusted for certain assets sold after such date), and that no sales commission
will be paid in connection with the transaction. Such sales commissions can
range from 2% to 5% of sales prices, depending upon the total value of assets
sold in a single transaction. Stanger further observed that the purchase price
paid in the transaction ($48,204,500) exceeds the amount included in the
original letter of intent of $44,829,500 (adjusted for certain assets sold after
such date) by $3,375,000 or 7.5%.
Conclusions. Based on the foregoing, Stanger concluded that, based upon
its analysis and assumptions, and as of the date of the fairness opinion, the
consideration to be received in the Sale is fair to the limited partners of the
Partnership from a financial point of view.
Assumptions. In evaluating the Transaction, Stanger relied upon and
assumed, without independent verification, the accuracy and completeness of all
financial and other information contained in the Statement or that was furnished
or otherwise communicated to Stanger. Stanger did not perform an independent
appraisal of the non-real estate assets and liabilities of the Partnership and
relied upon and assumed the accuracy of the information provided. Stanger also
relied on the assurances of the General Partner, the Partnership and
Glenborough, as property manager, that any financial statements, proforma
statements or adjustments contained in the Statement or otherwise provided to
Stanger were reasonably prepared on a basis consistent with actual historical
experience and reflect the best currently available estimates and good faith
judgments; that no material changes have occurred in the value of the properties
or the information reviewed between the date of the appraisal and the date of
the opinion; and that the General Partner, the Partnership and Glenborough are
not aware of any information or facts that would cause the information supplied
to Stanger to be incomplete or misleading in any material respect.
12
<PAGE>
In connection with preparing the fairness opinion, Stanger was not
engaged to, and consequently did not, prepare any written report or compendium
of its analysis for internal or external use beyond the analysis set forth in
Exhibit B. Stanger does not intend to deliver any additional written summary of
its analysis.
Compensation and Prior Relationships. For preparing the fairness
opinion in connection with the Transaction, Stanger is being paid a fee of
$130,000 by the Partnership. For the appraisal services, Stanger was paid a fee
equal to $65,000, plus certain reimbursements for out-of-pocket expenses for
travel. An affiliated partnership paid Stanger a fee of $120,000 for preparing a
fairness opinion and $60,000 for appraisal services. In addition, Stanger will
be reimbursed for certain out-of-pocket expenses, including legal fees, and will
be indemnified against certain liabilities including certain liabilities under
the Federal securities laws.
Stanger has provided financial advisory services and appraisal services
to Glenborough Realty Trust Incorporated and affiliates during the past three
years as follows: (i) Stanger appraised the real estate assets and issued
opinions regarding the fairness of the allocation of shares in Glenborough
Realty Trust Incorporated to Partnerships affiliated with Glenborough, at the
time of formation of Glenborough in January 1996 for which Stanger was paid
$600,000, plus reimbursement of certain out-of-pocket expenses; (ii) Stanger was
paid a finders fee in connection with the acquisition by Glenborough of certain
rights to management contracts of Rancon Financial Corporation for which Stanger
was paid a fee equal to $350,000 by Glenborough; (iii) Stanger was engaged by
Trust Realty Advisors and affiliates in connection with a sale of certain assets
to Glenborough in 1996 for which Trust Realty Advisors and affiliates, an entity
not previously affiliated with Glenborough, paid Stanger a fee equal to $165,000
for opinions regarding the fairness of the allocation of consideration in the
transaction; (iv) during 1995 and 1996, Glenborough and certain Rancon
Partnerships (including the Partnership) retained Stanger to appraise
approximately thirty real estate assets. The aggregate fees paid to Stanger
approximated $200,000 plus out-of-pocket expenses; (v) Stanger was engaged by
entities affiliated with Ellis & Lane, an entity not previously affiliated with
Glenborough, to represent such entities in the sale or disposition of assets.
Such Ellis & Lane assets were sold or contributed to Glenborough in April 1997
and Stanger was paid a fee equal to approximately $430,000; (vi) in February
1997, Stanger was engaged by Glenborough to represent Glenborough in the
acquisition of a real estate portfolio owned by partnerships affiliated with T.
Rowe Price for which Glenborough has agreed to pay Stanger a fee equal to
$1,000,000 upon the closing of such transaction.
Limitations and Qualifications. Stanger was not requested to, and
therefore did not: (i) select method of determining or determine the
consideration offered in the Sale; (ii) make any recommendation to limited
partners as to whether to approve or reject the Sale; (iii) express any opinion
as to the business decision to effect the Sale, alternatives to the Sale, or tax
factors resulting from the Sale; or (iv) whether or not alternative methods of
determining the consideration would have also provided fair results or results
substantially similar to the method used. Stanger's opinion is based on
business, economic, real estate and securities markets, and other conditions as
of the date of its analysis. Events occurring after that date may materially
affect the assumptions used in preparing the Fairness Opinion.
Among the factors considered by the General Partner in its selection of
Stanger were Stanger's experience in connection with real estate assets and
mergers, acquisitions and reorganizations of real estate partnerships and its
expertise in real estate valuations and transactions.
TRANSFER OF GENERAL PARTNER'S INTEREST
Pursuant to a Contribution Agreement dated September 30, 1997, the
General Partner agreed to contribute to Glenborough its general partner interest
in the Partnership, and in return Glenborough agreed to issue the General
Partner $12,900 of partnership interests in Glenborough Properties, L.P., and to
assume and pay to the Partnership the General Partner's negative capital account
obligation of $778,617 ($681,700 of which is allocated to Daniel L. Stephenson
and $96,917 of which is allocated to Rancon Financial Corporation). It was also
agreed that the General Partner would provide a guaranty of up to $778,617 of
the mortgage debt of Glenborough or one of its affiliates. The transfer of the
general partner interest will take place only if all conditions for the Sale of
the Partnership's Properties to Glenborough have been satisfied, and the Sale of
the Properties will take place concurrently with the transfer of the general
partner's interest. Thus, Glenborough will not actually perform any duties as
general partner of the Partnership other than executing any documentation
required to complete the ultimate liquidation and winding up the Partnership.
The Transfer will not have any effect on the amount of liquidation
proceeds to be distributed to the Unitholders. See "LIQUIDATION OF PARTNERSHIP;
DISTRIBUTIONS OF PROCEEDS." The Unitholders will
13
<PAGE>
receive 100% of such proceeds, which amount is equal to the fair market value of
the Properties as determined by the Appraisal and is fair, to the Unitholders,
from a financial point of view, as set forth in the Fairness Opinion. The
General Partner will not receive any portion of such proceeds. See "FAIRNESS OF
SALE."
LIQUIDATION OF PARTNERSHIP; DISTRIBUTION OF PROCEEDS
Distribution of Proceeds
The General Partner estimates that the net proceeds from the Sale
(after deduction of the amount of the Loans and estimated expenses of the Sale)
together with the net cash from the payment by the General Partner of its
negative capital account of balance of $778,617 and the net cash proceeds from
the sale of the remaining assets of the Partnership after payment of all
Partnership liabilities, will be approximately $316 per Unit. See "CERTAIN
FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE SALE-TAXATION PRIOR TO
LIQUIDATION." This amount was determined dividing the net proceeds described
above by the number of issued and outstanding Units.
<TABLE>
The Partnership has made the following distributions since its
inception:
<CAPTION>
Weighted
Average Number Distributions Per
General Partners Unitholders Total of Limited Partnership Limited Partnership
Year Distributions Distributions Distributions Units Outstanding Unit
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1985 $ 44,000 $ 400,000 $ 444,000 22,121 $ 18.08
1986 213,000 1,914,000 2,127,000 40,958 46.73
1987 252,000 8,000,000 8,252,000 63,202 126.58
1988 223,000 4,100,000 4,323,000 80,000 51.25
1989 180,000 1,619,000 1,799,000 80,000 20.24
1990 179,000 1,619,000 1,798,000 80,000 20.24
1991 270,000 2,428,000 2,698,000 80,000 30.35
1992 - - - 80,000 -
1993 - - - 79,949 -
1994 - - - 79,901 -
1995 - - - 79,850 -
1996 - - - 79,846 -
1997 - - - 79,846 -
---------- ----------- -----------
Totals $1,361,000 $20,080,000 $21,441,000
========== =========== ===========
</TABLE>
Any remaining accounts receivable and accounts payable of the
Partnership relating to the Properties after the Sale will be sold and/or paid
and distributed to the partners.
The Partnership intends to liquidate as soon as possible, but no later
than December 31, 1997, after the consummation of the Sale and distribute the
net proceeds of the Sale, the cash payment by the General Partner of its
negative capital account balance, along with the net cash proceeds from the sale
of the remaining assets of the Partnership to the Unitholders. There can be no
assurances, however, that the liquidation of the Partnership will take place
within the estimated time frame. It is possible that it will take more time than
was initially estimated to wind up the affairs of the Partnership and dissolve,
but it is the Partnership's intention to do so as quickly as events allow.
After the Closing and pending the distribution to Unitholders, the
proceeds of the Sale will be held by the Partnership in short-term,
interest-bearing liquid investments.
14
<PAGE>
BENEFITS OF THE SALE AND TRANSFER TO AND POSSIBLE CONFLICTS
OF THE GENERAL PARTNER AND ITS AFFILIATES
The General Partner will not receive any fees or distributions in
connection with the Sale of the Properties.
There was a potential conflict created by the Sale because the
Purchaser simultaneously offered to purchase all of the real estate assets of an
affiliate of the Partnership, Rancon Realty Fund V, a California limited
partnership ("Fund V"). The General Partner is the general partner of Fund V, as
well as the Partnership. The apparent conflict was addressed by insisting that
the Purchaser negotiate and sign separate contracts with the Partnership and
Fund V. In order to further confirm the fairness of these third party contracts,
the General Partner has obtained from Stanger an Appraisal of the Properties for
the Partnership and Fund V and has obtained a Fairness Opinion from Stanger that
the consideration to be received by the Partnership and Fund V from the Sale to
the Purchaser of the Partnership's and Fund V's properties is fair, from a
financial view point, to the Unitholders of the Partnership, the Unitholders of
Fund V and Fund V.
The General Partner is obligated to contribute to the Partnership for
distribution to the Unitholders an amount not in excess of $778,617 (the amount
of the General Partner's negative capital account deficit) in connection with
the Liquidation. The Transfer by the General Partner and the payment of such
amount by Glenborough Properties, L.P., will enable the General Partner to meet
this obligation. Since the General Partner will not receive any fees or
distributions in connection with the Sale of the Properties and to confirm the
fairness of this arrangement, the General Partner has obtained the Fairness
Opinion and Appraisals. The Unitholders will receive 100% of all the
distributions made by the Partnership upon its Liquidation.
Conversely, the General Partner may be adversely affected by the Sale
because distributions which it would be entitled to receive will be eliminated
(however, it has not received any distributions since 1991). However, the
consummation of the Sale, Transfer and Liquidation will also eliminate any
liability of the General Partner for liabilities of the Partnership which could
arise from the continued operation of the Partnership.
CERTAIN FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE SALE
General
The Sale, if approved, will have certain tax implications to the
Unitholders that must be considered. The following summarizes the material
estimated federal income tax consequences 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 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. Further, this summary is not
intended to provide tax or other legal advice to any Unitholder.
Taxation Prior to Liquidation
A partnership is not a taxable entity; therefore, no federal income tax
liability may be imposed upon a partnership. 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 limited partners' or partners' economic interest in the
partnership. Generally, the distribution of cash attributable to partnership
income is generally not a separate taxable event.
For tax purposes, the Partnership realizes and recognizes gain or loss
separately for each Property sold (and in some cases, for each building which is
part of a Property). The amount of gain recognized for tax purposes with respect
to an asset, if any, will be an amount equal to the excess of the amount
realized (i.e., cash or consideration received
15
<PAGE>
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 a Property is its cost (including nondeductible
capital expenditures made by the Partnership at the time of purchase) or other
basis with certain additions or subtractions for expenditures, receipts, losses,
or other items that are properly chargeable to capital accounts during the
period of time from acquisition of the Property until the sale or other
disposition. To determine the gain or loss on the sale or other disposition of a
Property the unadjusted basis must be (i) increased to include the cost of
capital expenditures such as improvements, betterments, commissions and other
nondeductible charges; and (ii) decreased by (a) items that represent a return
of capital and (b) depreciation and amortization.
Each Unitholder must report his or her allocable share of these gains
and losses in the year in which the Properties are sold. Actual gain or loss
amounts may vary from the estimates set forth below. Each Unitholder's allocable
share of any Section 1245 gain, Section 1231 gain or loss and Partnership net
taxable income or loss from operations will be reflected on his or her
applicable Schedule K-l (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 the partners are required to account separately for, their
distributive share of all gains and losses. Accordingly, each Unitholder'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 (2) real properly
used in a trade or business and held for more than one (1) 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 Unitholders.
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 shall 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 Section
1250 gains as a result of the Sale, and that Section 1245 gains, if any, will be
de minimis.
In general, under Paragraph 11.3.5 of the Partnership Agreement, gains
from the sale of properties are allocated first to Unitholders having negative
capital account balances in proportion to and to the extent of their respective
negative capital account balances prior to making distributions of the sale
proceeds. Thereafter, any gain generally will be allocated among the Unitholders
until the capital account balance of each Unitholder equals the sum of the
Unitholder's "Adjusted Invested Capital," of his or her Unit plus the return
provided for in paragraph 11.2.1 of the Partnership Agreement. For this purpose,
Adjusted Invested Capital equals the Unitholder's original capital contribution
less any distributions (other than distributions of cash from operations) made
to the Unitholder. Thereafter, if any amount of unallocated gain remains, the
remainder shall be allocated pursuant to subparagraphs (i)(c) and (i)(d) of
Paragraph 11.3.5 of the Partnership Agreement. In the event, any portion of the
gain is characterized as ordinary income pursuant to the recapture provisions of
the Code then such income shall be allocated in the same ratio as prior
allocations of loss attributable to depreciation deductions.
In accordance with the Partnership Agreement, distributions upon
termination and dissolution of the Partnership are determined based on positive
capital account balances for the Unitholder. The Partnership expects to
recognize taxable losses of approximately $26,000,000 as a result of the Sale.
The expected distributions as a result of the Sale and Liquidation are
anticipated to be approximately $316 per Unit.
16
<PAGE>
Taxation of Liquidation
After allocating income or loss to the Unitholders, with the
concomitant tax basis adjustments, the distribution of proceeds from the Sale
and Liquidation will reduce each Unitholder's federal income tax basis in his or
her 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 Unitholder's holding period. If upon the subsequent termination
of the Partnership a Unitholder has a basis remaining for his or her Unit, the
amount of such remaining basis will give rise, in the year of the termination,
to a long-term or short-term capital loss, depending on the Unitholder's holding
period.
Capital Gains
Pursuant to the Taxpayer Relief Act of 1997 net long-term capital gains
of individuals, trusts and estates will be taxed at a maximum rate of 20%, while
ordinary income (such as Section 1245 gain or Section 1250 gain) will be taxed
at a maximum rate of up to 39.6%. Long-term capital gain is defined as the gain
realized from the disposition of a capital asset that was held for at least
eighteen (18) months. 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 Unitholder 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
Unitholders who are individuals, trusts, estates, or personal service
corporations are subject to the passive activity loss limitations rules. A
Unitholder's allocable share of Partnership income or loss is treated as derived
from a passive activity. A Unitholder's allocable share of any Partnership gain
realized on the Sale will be characterized as passive activity income. Such
passive activity income may be offset by passive activity losses from other
passive activity investments. Moreover, because the Sale and Liquidation will
terminate the Unitholder's interest in the passive activity, a Unitholder's
allocable share of any Partnership loss realized on the sale of its investments,
or loss realized by the Unitholder upon liquidation of his or her Units, will
not be subject to the loss limitations.
Certain State Income Tax Considerations
Because each state's tax law varies, it is impossible to predict the
tax consequences to the Unitholders in all the state tax jurisdictions in which
they are already 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 Unitholder will depend upon the
provisions of the state tax laws to which the Unitholder 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 Unitholders would generally
be treated as doing business in such states and therefore subject to tax in such
state. 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 Unitholders from the Sale of the
Properties and of certain state income tax considerations. It does not address
all potential tax consequences that may be applicable to a Unitholder and may
not be applicable to certain categories of Unitholders, such as non-United
States persons, corporations, insurance companies, subchapter S corporations,
partnerships, tax-exempt entities or financial institutions. It also does not
address the state, local or foreign tax consequences of the transactions.
ACCORDINGLY, UNITHOLDERS SHOULD CONSULT THEIR OWN TAX
17
<PAGE>
ADVISORS REGARDING THE SPECIFIC INCOME TAX CONSEQUENCES OF THE SALE AND
LIQUIDATION TO THEM, INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE,
LOCAL AND FOREIGN TAX LAWS.
<TABLE>
SELECTED FINANCIAL DATA
(in thousands except for per Unit data)
The following selected historical financial data for the Partnership
for each of the years in the five year period ended December 31, 1996, have been
derived from the Partnership's financial statements, which have been audited by
Arthur Anderson LLP, and Price Waterhouse independent accountants. The data for
the quarter ended June 30, 1997, and June 30, 1996, have been derived from
unaudited financial statements appearing in the Partnership's 10-Q, and which,
in the opinion of the General Partner, includes all adjustments, consisting only
of normal adjustments, necessary for the fair statement of the results for the
unaudited periods. The selected financial data are qualified in their entirety
by and should be read in conjunction with the Partnership's financial statements
and related notes appearing in the Partnership's 10-K, and in the Partnership's
10-Q.
<CAPTION>
For the six months For the For the two
Ended June 30, year ended months ended
(unaudited) Dec. 31, Dec. 31, For the years ended October 31,
1997 1996 1996 1995 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rental Income $ 3,287 $ 2,169 $ 5,149 $ 768 $ 5,784 $ 5,465 $ 5,294 $ 4,708
Gain on sale of $ -- $ -- $ -- $ -- $ -- $ -- $ 150 $ --
real estate
Provision for
impairment of $ 378 $ -- $ -- $ -- $(12,224) $ -- $ (1,800) $ (250)
real estate
investments
Net loss $ (1,197) $ (1,192) $ (1,510) $ (308) $(13,417) $ (663) $ (2,027) $ (1,026)
Net loss Allocable
to Unitholders $ (1,197) $ (1,192) $ (1,510) $ (308) $(13,417) $ (663) $ (2,034) $ (1,026)
Net loss per Unit $ (14.99) $ (14.92) $ (18.91) $ (3.86) $(168.03) $ (8.30) $ (25.44) $ (12.83)
Total assets $ 56,286 $ 54,179 $ 52,695 $ 48,282 $ 49,321 $ 59,537 $ 59,937 $ 61,377
Long-term $ 22,135 $ 15,525 $ 17,256 $ 11,757 $ 11,766 $ 8,860 $ 8,647 $ 8,000
obligations
Cash Distribution $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
per Unit
</TABLE>
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Outstanding Voting Securities; Record Date
As of the Record Date, there were 79,846 Units outstanding, which
represent all of the voting securities of the Partnership. Each Unit is entitled
to one vote. Only Unitholders of record as of the Record Date, will be entitled
to notice of and to execute and deliver a Consent Form.
18
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of the Record Date, the beneficial ownership
of Units of the Partnership held by Daniel L. Stephenson, the individual general
partner and the sole shareholder, director and officer of Rancon Financial
Corporation.
Name and Address Units Beneficially Owned Percent of Class
Daniel L. Stephenson (IRA) 4 *
Daniel L. Stephenson 100 *
Family Trust
27740 Jefferson Avenue
Temecula, CA 92590
*Less than 1%.
There are no Unitholders holding five percent (5%) or more of the Partnership's
issued and outstanding Units.
MARKET FOR UNITS; DISTRIBUTIONS
There is no established public trading market for the Units.
The Partnership has not declared or paid any cash distributions to Unitholders
since 1991. See "LIQUIDATION OF THE PARTNERSHIP; DISTRIBUTIONS OF PROCEEDS."
OTHER MATTERS
There are no other matters other than as set forth in this Statement for which
Consent Forms are being solicited.
INCORPORATION BY REFERENCE
The following documents, which have been previously filed by the Partnership
with the Securities and Exchange Commission, are hereby incorporated herein by
reference:
(1) The Partnership's 1996 10-K;
(2) The information set forth in Part 1 of the Partnership's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997; and
(3) All other reports filed pursuant to Sections 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, since the end of the fiscal year
covered by the Annual Report referred to in (1) above.
Pursuant to the regulations of the Securities and Exchange Commission, the
Partnership will provide to each Unitholder of record on the Record Date,
without charge and upon written or oral request of such person, copies all
reports (excluding exhibits) filed pursuant to Sections 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, since the end of the fiscal year
covered by the Annual Report in (1) above.
A copy of the Partnership's 10-K, and a copy of the Partnership's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997, are being sent to
Unitholders concurrently with this Statement.
Rancon Realty Fund IV,
a California limited partnership
Daniel L. Stephenson, General
Partner and Chief Executive
Officer of Rancon Realty
Corporation, General Partner
October 17, 1997
19
<PAGE>
RANCON REALTY FUND IV,
a California Limited Partnership
CONSENT FORM REGARDING SALE OF ASSETS,
TRANSFER AND LIQUIDATION
The undersigned, a holder of units of limited partnership interests
("Units") (as set forth below) in Rancon Realty Fund IV, a California limited
partnership (the "Partnership"), hereby
[ ] CONSENTS [ ] DOES NOT CONSENT [ ] ABSTAINS
(i) to the sale of all of the real estate assets of the Partnership (the
"Sale") pursuant to the Purchase Agreement dated as of September 30, 1997,
between the Partnership, and Glenborough Realty Trust Incorporated and
Glenborough Properties, L.P. (the "Purchase Agreement"), (ii) the transfer of
the General Partner's interest in the Partnership to Glenborough Properties,
L.P., and (iii) the dissolution and liquidation of the Partnership (the
"Liquidation") as described in the Partnership's Consent Solicitation Statement
dated October 17, 1997, (the "Solicitation Statement"). The Units represented by
this Consent will be voted in accordance with the election specified by the
holder named below. If no election is specified, any otherwise properly
completed and signed Consent Form will be deemed to be a consent to each of the
Sale, Transfer and the Liquidation. By execution hereof, the undersigned
acknowledges receipt of the Solicitation Statement.
This Consent is proposed and solicited by the General Partner on behalf of
the Partnership. The Partnership reserves the right to waive any conditions to,
or modify the terms of, the Solicitation (as defined in the Solicitation
Statement). A Consent Form given, if effective, will be binding upon the holder
of the Units who gives such Consent Form and upon any subsequent transferees of
such Units, subject only to revocation by the delivery of a written notice of
revocation by the Unitholder, executed and filed in the manner and within the
time period described in the Solicitation Statement. In order to count, this
Consent Form must be received by the Partnership prior to 5:00 P.M., Pacific
Time, on November 21, 1997.
This fully completed and executed consent form should be sent by mail in
the self-addressed, postage-paid envelope enclosed for that purpose, or by
overnight courier, or by facsimile, to the Partnership, as follows:
If delivered by mail or by courier, to: If delivered by facsimile, to:
The Arlen Group The Arlen Group
1650 Hotel Circle North, Suite 200 Facsimile Number: (619) 686-2056
San Diego, California 92108 Telephone Number: (800) 891-4105
Please sign your name below exactly in the same manner as the name(s) in
which ownership of the Units is registered. When Units are held by two or more
joint holders, all such holders should sign. When signing as attorney-in-fact,
executor, administrator, trustee or guardian, please give full title as such. If
a corporation, please sign in full corporate name by the President or other
authorized officer. If a partnership, please sign in partnership name by an
authorized person.
Date:___________________________________________, 1997
Signature__________________________________________________________________
Signature if held jointly__________________________________________________
Address____________________________________________________________________
City/State/Zip_____________________________________________________________
Number of Units_________________________________
20
<PAGE>
EXHIBIT A
- --------------------------------------------------------------------------------
1129 Broad Street
ROBERT A STANGER & CO., INC. Shrewsbury, NJ 07702-4314
FINANCIAL AND MANAGEMENT CONSULTANTS (908) 389-3600
FAX: (908) 389-1751
(908) 544-0779
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
July 21, 1997
Rancon Realty Fund IV
27740 Jefferson Avenue, Suite 200
Temecula, CA 92596
Gentlemen:
You have engaged Robert A. Stanger & Co., Inc. ("Stanger") to estimate
the market value of the real properties (the "Property") owned by Rancon Realty
Fund IV (hereinafter the "Partnership"). Such appraisal reflects the estimated
market value of the leased fee interests or, where appropriate, fee simple
interests in the properties (the "Portfolio Valuation") as of June 30, 1997.
This report is prepared in accordance with an agreement between Robert
A. Stanger & Co., Inc. and the Partnership, dated June 5, 1997. Pursuant to the
agreement, Stanger has been engaged to perform the appraisal on a limited scope
basis in conformity with the departure provisions of the Uniform Standards of
Professional Appraisal Practice of the Appraisal Institute, relying upon the
Income Approach and Sales Comparison Approach to value for income-producing
properties and the Sales Comparison Approach to Value for land assets. We have
been engaged to deliver to the Partnership a master limited summary appraisal
report for the Portfolio.
Our valuation has been based in part upon information supplied to us by
Glenborough Realty Trust ("Glenborough"), as manager of the Properties, and the
Partnerships including but not limited to: rent rolls, building reports; lease
information; financial schedules of current lease rates, income, expenses, cash
flow and related financial information; property descriptive information; prior
appraisals; and, where appropriate, proposed sales terms, sales agreements and
supporting documentation. We have also interviewed relevant property management
personnel. We have relied upon such information and have assumed that the
information provided by Glenborough and the Partnership is accurate and
complete. We have not attempted to independently verify such information.
We are advised by the Partnership that the purpose of the appraisal is
to estimate the value of the leased fee interests or, where appropriate, fee
simple interests in the Partnership's properties under present market
conditions, and that the Portfolio Valuation will be used in connection with a
proposed sale of such Properties to Glenborough (the "Transaction"). Stanger
understands that the Portfolio Valuation may be reviewed and utilized in
connection with the
Exhibit A-1
<PAGE>
ROBERT A. STANGER & CO. INC.
Transaction and Stanger agrees to the use of the appraisal for this purpose
subject to the terms and conditions of the agreements related thereto.
For these purposes, this master limited summary appraisal report was
prepared stating our opinion as to the market value of the Properties as of June
30, 1997. This report may be summarized and referenced in the proxy statement
for the Partnership relating to the Transaction, subject to prior review by
Stanger. However, the attached summary appraisal report should be reviewed in
its entirety and is subject to the assumptions and limiting conditions contained
herein. Background information and analysis upon which value conclusions are
based has been retained in our files.
Our review was undertaken solely for the purpose of providing an
opinion of value, and we make no representation as to the adequacy of such
review for any other purpose. Our opinion is expressed with respect to the total
value of the Properties, in which the Partnership has an interest and not with
respect to joint venture participation or to limited partners' allocations.
Stanger has no present or contemplated future interest in the Properties or the
Partnership.
The appraisal is only an estimate of the aggregate market value of the
leased fee interests or, where appropriate, fee simple interests in each
Property as of the date of valuation and should not be relied upon as being the
equivalent of the price that would necessarily be received in the event of a
sale or other disposition of each Property. Changes in corporate financing rates
generally, changes in individual tenant creditworthiness, changes in tenant
motivation with respect to the exercise of renewal options, or changes in real
estate property markets may result in higher or lower values of real property.
The use of other valuation methodologies might produce a higher or lower value.
Our opinion is subject to the assumptions and limiting conditions set
forth herein. We have used methods and assumptions deemed appropriate in our
professional judgment; however, future events may demonstrate that the
assumptions were incorrect or that other, different methods or assumptions may
have been more appropriate.
This summary appraisal report provides our value conclusion with
respect to each Property, definitions of value, and discussions of the valuation
methodology employed, assumptions, and limiting conditions.
Sincerely,
/s/Robert A. Stanger & Co., Inc.
--------------------------------
Robert A. Stanger & Co., Inc.
Shrewsbury, New Jersey
Exhibit A-2
<PAGE>
ROBERT A. STANGER & CO. INC.
PORTFOLIO VALUE CONCLUSION
Based upon the review as described above, it is our opinion that the
market value of the leased fee interests or fee simple interests in the
Properties as of June 30, 1997 is:
Property Name Value
------------- -----
Carnegie Business Center 3,100,000
Circuit City 4,700,000
Inland Regional Center 5,300,000
One Vanderbilt Way 4,500,000
Promotional Retail Center 5,000,000
Service Retail Center 2,000,000
TGI Friday's 1,750,000
Two Vanderbilt Way 4,400,000
Shadowridge Woodbend Apartments 9,200,000
North River Tower 500,000
Brier Business Center 180,000
Vanderbilt Tower 1,300,000
Inland Regional - Phase II 290,000
Palm Court West 540,000
Brier Plaza 250,000
South Palm Court Pad 1 125,000
South Palm Court Pad 2 150,000
Perris 17 (Retail) 1,540,000
Lake Elsinore 2,200,000
Rancon Town Village 1,550,000
-----------
TOTAL $48,575,000
===========
Exhibit A-3
<PAGE>
EXHIBIT B
- --------------------------------------------------------------------------------
1129 Broad Street
ROBERT A STANGER & CO., INC. Shrewsbury, NJ 07702-4314
FINANCIAL AND MANAGEMENT CONSULTANTS (908) 389-3600
FAX: (908) 389-1751
(908) 544-0779
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
September 9, 1997
Rancon Realty Fund IV
27740 Jefferson Avenue
Suite 200
Temecula, CA 92590
Gentlemen:
We have been advised by the general partner ("the General partner") of
Rancon Realty Fund IV (the "Partnership") that the Partnership is contemplating
a transaction (the "Transaction") in which Glenborough Realty Trust, Inc. or an
affiliate ("Glenborough") will acquire nine income producing real estate assets
and eleven land parcels (the "Properties") from the Partnership for an aggregate
purchase price of $48,204,500 (the "Consideration"), payable in cash upon the
closing of the Transaction. We have also been advised that the limited partners
(the "Limited Partners") of the Partnership will be asked to approve the
Transaction pursuant to which they will receive the Consideration.
The General Partner has requested that Robert A. Stanger & Co., Inc.
("Stanger") provide its opinion to the Partnership, as to the fairness, from a
financial point of view to the Limited Partners, of the Consideration to be
received by the Partnership in the Transaction.
Stanger, founded in 1978, has provided information, research,
investment banking and consulting services to clients located throughout the
United States, including major New York Stock Exchange member firms and
insurance companies and over seventy companies engaged in the management and
operation of partnerships. The investment banking activities of Stanger include
financial advisory services, asset and securities valuations, industry and
company research and analysis, litigation support and expert witness services,
and due diligence investigations in connection with both publicly registered and
privately placed securities transactions.
Stanger, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers, acquisitions, and reorganizations and for estate, tax, corporate and
other purposes. In particular, Stanger's valuation practice principally involves
partnerships, partnership securities and the assets typically owned through
partnerships including, but not limited to, real estate, oil and gas reserves,
cable television systems, and equipment leasing assets.
Exhibit B-1
<PAGE>
ROBERT A. STANGER & CO. INC.
In arriving at the opinion set forth below, we have:
o Reviewed the consent solicitation statement (the "Consent Statement")
relating to the Transaction;
o Reviewed historical operating statements for each income producing
property for the two years ended December 31, 1996 and the six months
ended June 30, 1997;
o Reviewed the current rent roll, occupancy report and quoted rents at
each income producing property;
o Conducted a site inspection of each Property;
o Reviewed the most recent property tax assessment for each Property;
o Reviewed the master summary appraisal report prepared by Robert A.
Stanger & Co., Inc., as of June 30, 1997, for the Properties;
o Reviewed the letter of intent between the Partnership and Glenborough;
o Reviewed the operating history and financial statements of the
Partnership for the years ended December 31, 1995 and 1996 as
summarized on Forms 10-K fried with the Securities & Exchange
Commission (the "SEC") and for the quarter ended March 31, 1997 as sram
arized on Form 10-Q as filed with the SEC;
o Conducted such other studies, analyses and inquiries as we deemed
appropriate.
In rendering this opinion, we have relied, without independent
verification, on the accuracy and completeness of all financial and other
information contained in the consent statement or that was otherwise publicly
available or furnished or otherwise communicated to us. We have not made an
independent evaluation or appraisal of the non-real estate assets and
liabilities of the Partnership. We have also relied on the assurance of
Glenborough, the Partnership and the General Partners that: any financial
projections or pro forma statements or adjustments provided to us were
reasonably prepared or adjusted on bases consistent with actual historical
experience or reflected the best currently available estimates and good faith
judgments; that no material changes have occurred in the value of the
Partnership's real estate portfolio between June 30, 1997 (the date of the
appraisal) and the date of this Opinion; and that Glenborough, the Partnership,
and the General Partners are not aware of any information or facts regarding the
Partnership that would cause the information supplied to us to be incomplete or
misleading in any material respect.
We have not been requested to, and therefore did not: (i) select the
method of determining the amount of Consideration offered to the Partnership
(Glenborough and the General
Exhibit B-2
<PAGE>
ROBERT A. STANGER & CO. INC.
Partners initiated and structured the Transaction and selected the method of
determining the amount of Consideration); (ii) make any recommendation to the
Limited Partners, the General Partner or Glenborough with respect to whether to
approve or reject the Transaction; (iii) express an opinion as to the business
decision to affect the Transaction, alternatives to the Transaction or the tax
consequences of the Transaction for Limited Partners in the Partnership; or (iv)
whether or not altemative methods of determining the Consideration would have
also provided fair results or results substantially similar to that method used.
Our opinion is based upon business, economic, real estate markets, securities
markets and other conditions as they existed and could be evaluated on the date
of our analysis. Events occurring after that date may materially affect the
assumptions used in preparing this opinion.
Based upon and subject to the foregoing, it is our opinion that, as of
the date of the information considered in this analysis, the Consideration
offered to the Partnership for its Properties pursuant to the Transaction is
fair to the Limited Partners of the Partnership from a financial point of view.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Stanger has
advised the Partnership and the General Partner that its entire analysis must be
considered as a whole and that selecting portions of its analyses and the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the evaluation process underlying this opinion.
Sincerely,
/s/Robert A. Stanger & Co., Inc.
--------------------------------
Robert A. Stanger & Co., Inc.
Shrewsbury, New Jersey
Exhibit B-3
<PAGE>
APPENDIX A
Financial Report on Form 10-K
for the Year Ended December 31, 1996
PART I
Item 1. Business
Rancon Realty Fund IV, a California Limited Partnership, ("the Partnership") was
organized in accordance with the provisions of the California Uniform Limited
Partnership Act for the purpose of acquiring, developing, operating and
ultimately selling real property. The Partnership was organized in 1984 and
reached final funding in July, 1987. The general partners of the Partnership are
Daniel L. Stephenson ("DLS") and Rancon Financial Corp. ("RFC"). RFC is wholly
owned by DLS. At December 31, 1996, 79,846 limited partnership units ("Units")
were outstanding. The Partnership has no employees.
In April, 1996, the Partnership formed Rancon Realty Fund IV Tri-City Limited
Partnership, a Delaware limited partnership ("RRF IV Tri-City") to satisfy
certain lender requirements for a loan obtained in 1996. This loan is secured by
three properties (see Item 2) which have been contributed to RRF IV Tri-City by
the Partnership. The limited partner of RRF IV Tri-City is the Partnership and
the general partner is Rancon Realty Fund IV, Inc. ("RRF IV, Inc."), a
corporation wholly owned by the Partnership. Since the Partnership owns 100% of
RRF IV, Inc. and indirectly owns 100% of RRF IV Tri-City, the Partnership
considers all assets owned by RRF IV, Inc. and RRF IV Tri-City to be owned by
the Partnership.
At December 31, 1996, the Partnership owns six rental properties totaling
approximately 412,000 square feet of space in a master-planned development known
as Tri-City Corporate Centre ("Tri-City") in San Bernardino, California and a
240-unit apartment complex in Vista, California. Tri-City is zoned for mixed
commercial, office, hotel, transportation-related, and light industrial uses and
all of the parcels thereof are separately owned by the Partnership and Rancon
Realty Fund V ("Fund V"), a partnership sponsored by the general partners of the
Partnership. The Partnership also owns for development or sale approximately
35.3 acres in Tri-City, 24.8 acres in Lake Elsinore, California, 17.14 acres in
Perris, California and 11.29 acres in Temecula, California.
Competition Within the Market
Management believes that characteristics influencing the competitiveness of a
real estate project are the geographic location of the property, the
professionalism of the property manager and the maintenance and appearance of
the property, in addition to external factors such as general economic
circumstances, trends, and the existence of new, competing properties in the
vicinity. Additional competitive factors with respect to commercial and
industrial properties are the ease of access to the property, the adequacy of
related facilities, such as parking, and the ability to provide rent concessions
and tenant improvements commensurate with local market conditions. Although
management believes the Partnership properties are competitive with comparable
properties as to those factors within the Partnership's control, over-building
and other external factors could adversely affect the ability of the Partnership
to attract and retain tenants. The marketability of the properties may also be
affected (either positively or negatively) by these factors as well as by
changes in general or local economic conditions, including prevailing interest
rates. Depending on market and economic conditions, the Partnership may be
required to retain ownership of its properties for periods longer than
anticipated, or may need to sell earlier than anticipated or refinance a
property, at a time or under terms and conditions that are less advantageous
than would be the case if unfavorable economic or market conditions did not
exist.
Working Capital
The Partnership's practice is to maintain cash reserves for normal repairs,
replacements, working capital and other contingencies. The Partnership knows of
no statistical information which allows comparison of its cash reserves to those
of its competitors.
Other Factors
Approximately 23 acres of the Tri-City Corporate Centre land owned by the
Partnership was part of a landfill operated by the City of San Bernardino ("the
City") from approximately 1950 to 1960. There are no records of which the
Partnership is aware disclosing that hazardous wastes exist at the landfill. The
Partnership's landfill monitoring program currently meets or exceeds all
regulatory requirements. The Partnership is currently working with the Santa Ana
Region of the California Regional Water Quality Control Board and the City to
determine the need and responsibility for any further testing. There is
Appendix A-1
<PAGE>
no current requirement to ultimately clean up the site, however, no assurance
can be made that circumstances will not arise which could impact the
Partnership's responsibility related to the property.
Item 2. Properties
Tri-City Corporate Centre
On December 24, 1984, the Partnership acquired 68.97 acres on seven parcels of
partially developed land in Tri-City. On August 19, 1985, the Partnership
acquired an additional 7.59 acres on 4 parcels in Tri-City. During that time,
Fund V acquired the remaining 76.21 acres within Tri-City.
The Partnership acquired the initial seven parcels of land in Tri-City for
$9,019,000 and the additional 7.59 acres for $898,000.
Tri-City is located at the northeastern quadrant of the intersection of
Interstate 10 (San Bernardino Freeway) and Waterman Avenue in the southernmost
part of the City of San Bernardino.
The Partnership has constructed and owns the following six operating properties
in Tri-City:
Property Type Square Feet
- - ----------------------- ----------------------------- -----------
One Vanderbilt Four story office building 73,809
Two Vanderbilt Four story office building 69,094
Carnegie Business
Center I Two light industrial buildings 62,605
Service Retail Center Two retail buildings 20,780
Promotional Retail Center Four strip center retail buildings 104,865
Inland Regional Center Two story office building 81,079
These properties total approximately 412,000 leasable square feet and offer a
wide range of retail, commercial, industrial and office product to the market.
The I-10/San Bernardino corridor consists of approximately 2,865,000 square feet
of office space, with a vacancy rate of 28% as of October, 1996, and
approximately 12,806,000 square feet of light industrial space, with a vacancy
rate of 23% as of October, 1996 (the vacancy rates and square feet amounts are
according to research conducted by the Partnership's property manager).
Within the Tri-City Corporate Centre at December 31, 1996, the Partnership has
223,982 square feet of office space with a vacancy rate of 28%, 125,645 square
feet of retail space with a vacancy rate of 1% and 62,605 square feet of light
industrial space with a vacancy rate of 10%.
The following are the occupancy levels for the Partnership's Tri-City buildings
at December 31, 1996, October 31, 1995, 1994 and 1993, expressed as a percentage
of the total net rentable square feet:
December 31, October 31, October 31, October 31,
1996 1995 1994 1993
----------- ---------- ---------- ----------
One Vanderbilt 86% 70% 100% 95%
Two Vanderbilt 25% 95% 100% 100%
Carnegie Business Center I 90% 97% 100% 89%
Service Retail Center 100% 90% 98% 82%
Promotional Retail Center 98% 97% 94% 94%
Inland Regional Center 100% N/A N/A N/A
In 1996, management renewed three leases totaling 5,709 square feet of space and
executed six new leases totaling 111,457 square feet of space. A major tenant
who occupied 73,914 square feet at various Tri-City properties vacated upon the
expiration of their lease on November 15, 1995. This tenant occupied 56,744
square feet in Two Vanderbilt which is approximately 82% of the total leasable
square feet of that property. Management has entered into a temporary ground
lease convertible to a 20-year triple net operating lease, when construction is
completed in April or May of 1997, with a nationally recognized retailer for a
38,600 square feet build-to-suit retail building. Management is currently in
various stages of negotiation for two new leases totaling 39,965 square feet of
space. In addition, management is negotiating three lease renewals totaling
27,801 square feet of space.
Appendix A-2
<PAGE>
The annual effective rent per square foot for the years ended December 31, 1996
and October 31, 1995 were:
1996 1995
-------- --------
One Vanderbilt $ 18.07 $ 20.94
Two Vanderbilt $ 13.91 $ 19.16
Carnegie Business Center I $ 10.02 $ 11.00
Service Retail Center $ 14.37 $ 14.63
Promotional Retail Center $ 9.85 $ 10.49
Inland Regional Center $ 13.49 N/A
At December 31, 1996, annual rental rates ranged from $13.44 to $18.77 per
square foot for office space; $9.00 to $16.67 per square foot for retail space;
and $7.32 to $13.90 per square foot for industrial space. The Partnership also
has a temporary ground lease for $3.89 per square foot until construction is
completed in April or May of 1997.
The Two Vanderbilt property's annual effective rental rate decreased by 27% in
fiscal year 1996 compared to fiscal year 1995 due to the vacancy in November,
1995 of a tenant who occupied 73,914 total square feet of office space, 56,744
square feet of which was in Two Vanderbilt.
According to research conducted by the property manager, the average annual
effective rent per square foot in the Partnership's competitive market averages
$17.76 for office buildings, $10.44 for retail and $9.00 for light industrial
space.
Tri-City's rental properties had the following five tenants which occupied a
significant portion of the net rentable square footage as of December 31, 1996:
Inland ITT
Regional Educational Comp Circuit
Tenant Center Services USA PetsMart City
------ ------ -------- --- -------- ----
Inland Carnegie
Regional Business Promotional Promotional Promotional
Building Center Center I Retail Retail Retail
Social Educational Pet
Nature of Business Services Services Computer Retail Electronics
Lease Term 13 yrs. 12 yrs. 10 yrs. 15 yrs. 20 yrs.
Expiration Date 7/16/09 12/31/04 8/31/03 1/10/09 1/31/18
Square Feet 81,079 33,551 23,000 25,015 38,600
(% of rentable total) 20% 8% 6% 6% 9%
Annual Rent $1,104,000 $330,089 $207,000 $249,940 $150,000
Future Rent Increases 6% every between 3% 10% in 5% in lesser of 10%
2.5 yrs. and 3.75% 1998 1999 and or 5 yr.CPI
annually 2004 every 5 yr.
during lease
three term
four 5-year 5 year
5 year options, fixed four 5-year
Renewal Options options None fixed rate rate options
In the opinion of management, the properties are adequately covered by
insurance.
The Partnership's Tri-City rental properties are owned by the Partnership, in
fee, subject to the following notes and deeds of trust:
Appendix A-3
<PAGE>
Service Retail
Center, Carnegie Inland
One Business Center and Regional
Security Vanderbilt Promotional Retail Center Center
- -------- ---------- ------------------------- ------
Principal balance
at December 31, 1996 $2,351,000 $6,457,000 $2,488,000
Interest Rate 9% 8.74% 8.75%
Monthly Payment $20,141 $53,413 $20,771
Maturity Date 1/1/05 5/1/06 4/23/01
Approximately 26 acres of the Tri-City property owned by the Partnership remain
undeveloped. It is the Partnership's intention to develop parcels of this
property as tenants become available or dispose of the property at the optimal
time and sales price.
During 1996, the Partnership's Tri-City properties were assessed $751,000 in
property taxes based on an average realty tax rate of 2.62% (including
additional assessments and bonds).
Shadowridge Woodbend Apartments
On June 26, 1987, the Partnership acquired an apartment complex known as
Shadowridge Woodbend Apartments ("Shadowridge") in an all cash transaction for
$12,850,000. The apartment complex contains 240 units, consisting of 124 one
bedroom/one bath units, 44 two bedroom/one bath units and 72 two bedroom/two
bath units and is located in Vista, California. Some of the amenities the
complex has to offer include pool and spa, indoor racquetball court, tennis
court, fitness center and laundry facilities.
Seven communities within the area are considered to be in competition with
Shadowridge. At December 31, 1996, Shadowridge is 96% leased, just under the
average of its competition of 97% (according to research conducted by the
property manager). Also according to the property manager's research, all
complexes are offering some type of concessions. Shadowridge is offering lower
required security deposit on approved credit with a six or twelve month lease.
The other complexes in the area are offering from $150 up to the first month
rent free for a six or twelve month lease.
The December 31, 1996 average rental rates at Shadowridge and the market rents
at the competing properties are as follows:
Shadowridge Competition
---------- -----------
1 Bedroom/1 bath $587 $590-$640
2 Bedroom/1 bath $657 $660-$690
2 Bedroom/2 bath $708 $710-$750
The current rents at Shadowridge are slightly below market due to a number of
older leases with tenants that have below market rents.
In the opinion of management, the property is adequately covered by insurance.
The Shadowridge property is secured by a note and first deed of trust with a
current balance of $5,960,000. The note bears interest at 7.95% payable in
monthly installments of principal and interest of $48,416 and matures on April
15, 1998.
During 1996, the Shadowridge property was assessed $147,000 in property taxes
based on an average realty tax rate of 1.32%.
Lake Elsinore Property
In 1988, the Partnership acquired 17 parcels, totaling approximately 24.8 acres
in Lake Elsinore, Riverside County, California for a purchase price of
$4,475,000.
The property is immediately west of Interstate 15 near the Lake Elsinore Outlet
Center. The undeveloped property is commercially zoned. The Partnership had
originally planned to develop this site as a neighborhood shopping center,
Appendix A-4
<PAGE>
however, improvements to the property have been put on hold indefinitely. A
tentative parcel map expired and there is no development activity planned for
the near future.
In the opinion of management, the property is adequately covered by insurance.
At December 31, 1996, the Lake Elsinore Square property is unencumbered.
During 1996, the Lake Elsinore Square property was assessed $36,000 in property
taxes based on an average realty tax rate of 1.29%.
Perris Property
In 1988, the Partnership acquired 17.14 acres of unimproved land near Perris
Lake in Perris, Riverside County, California at a purchase price of $3,000,000.
There has been no development of this property to date. The Partnership
currently holds the property for sale to retail users and interested developers.
In the opinion of management, the property is adequately covered by insurance.
At December 31, 1996, the Perris property is unencumbered.
During 1996, the Perris property was assessed $17,000 in property taxes based on
an average realty tax rate of 1.12%.
Temecula Property
In June, 1992, the Partnership acquired 12.4 acres of undeveloped commercial
property in Temecula, Riverside County, California. The property has been
divided into twelve parcels via a tentative parcel map intending to accommodate
retail and commercial development. Final map approval was received on January 2,
1996. The Partnership sold a 1.11 acre parcel in March, 1996 for a sales price
of $275,000. The Partnership has completed the street utility and sewer
improvements on this site which will greatly assist in the marketing efforts of
the property. The Partnership currently has 3.16 acres under contract to sell to
a mini storage operator for $607,000, pending satisfactory completion of due
diligence. Negotiations are currently underway to sell another two lots totaling
1.56 acres. The remaining lots are currently held for sale by the Partnership.
In the opinion of management, the property is adequately covered by insurance.
The Partnership is also contingently liable for a subordinated note payable in
connection with the 11.29 acre property in Temecula, California, that the
Partnership reacquired in June, 1992 through a deed in lieu of foreclosure in
satisfaction of a $2,276,000 note receivable held by the Partnership that had
gone into default during 1991. The subordinated note payable and accrued
interest total $532,000 as of December 31, 1996. This amount is payable upon the
sale of the property only after the Partnership receives the full amount of the
prior note receivable with accrued and unpaid interest, costs of development,
costs of sale, and other amounts paid to obtain good title to the property,
subject to certain release provisions.
During 1996, the Temecula property was assessed $75,000 in property taxes based
on an average realty tax rate of 2.60% (including additional assessments and
bonds).
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Appendix A-5
<PAGE>
PART II
Item 5. Market for Partnership's Common Equity and Related Stock Holder Matters
Market Information
There is no established trading market for the Units issued by the Partnership.
Holders
As of December 31, 1996, there were 11,880 holders of Partnership Units.
Dividends
Distributions are paid from either Cash From Operations or Cash From Sales or
Refinancing.
Cash From Operations is defined in the Partnership Agreement as all cash
receipts from operations in the ordinary course of business (except for the
sale, refinancing, exchange or other disposition of real property in the
ordinary course of business) after deducting payments for operating expenses.
All distributions of Cash From Operations are paid in the ratio of 90% to the
Limited Partners and 10% to the General Partners.
Cash From Sales or Refinancing is defined in the Partnership Agreement as the
net cash realized by the Partnership from the sale, disposition or refinancing
of any property after retirement of applicable mortgage debt and all expenses
related to the transaction, together with interest on any notes taken back by
the Partnership upon the sale of a property. All distributions of Cash From
Sales or Refinancing are generally allocated as follows (a more explicit
statement of these distribution policies is set forth in the Partnership
Agreement):
(i) First, 1 percent to the General Partners and 99 percent to
the Limited Partners until the Limited Partners have received
an amount equal to their capital contributions, plus a 12
percent return on their unreturned capital contributions (less
prior distributions of Cash from Operations); (ii) Second, to
Limited Partners who purchased their units of limited
partnership interest prior to April 1, 1985, an additional
return (depending on the date on which they purchased the
units) on their unreturned capital of either 9 percent, 6
percent or 3 percent (calculated through October 31, 1985);
and (iii) Third, 20 percent to the General Partners and 80
percent to the Limited Partners.
There were no distributions made by the Partnership during the three most recent
fiscal years (including the two month stub period ended December 31, 1995).
Item 6. Selected Financial Data
<TABLE>
The following is selected financial data for the year ended December 31, 1996,
the two months ended December 31, 1995 and the years ended October 31, 1995,
1994, 1993 and 1992 (in thousands, except per Unit data):
<CAPTION>
For the For the two
year ended months ended For the years ended October 31,
Dec. 31, Dec. 31, ------------------------------------------------------
1996 1995 1995 1994 1993 1992
---- ---- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Rental Income $ 5,149 $ 768 $ 5,784 $ 5,465 $ 5,294 $ 4,708
Gain on sale of real estate $ -- $ -- $ -- $ -- $ 150 $ --
Provision for impairment
of real estate investments $ -- $ -- $ (12,224) $ -- $ (1,800) $ (250)
Net loss $ (1,510) $ (308) $ (13,417) $ (663) $ (2,027) $ (1,026)
Net loss Allocable
to Limited Partners $ (1,510) $ (308) $ (13,417) $ (663) $ (2,034) $ (1,026)
Net loss per Unit $ (18.91) $ (3.86) $ (168.03) $ (8.30) $ (25.44) $ (12.83)
Total assets $ 52,695 $ 48,282 $ 49,321 $ 59,537 $ 59,937 $ 61,377
Long-term obligations $ 17,256 $ 11,757 $ 11,766 $ 8,860 $ 8,647 $ 8,000
Cash distributions per Unit $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
Appendix A-6
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
LIQUIDITY AND CAPITAL COMMITMENTS:
Background
At December 31, 1996, the Partnership had cash of $97,000. The remainder of the
Partnership's assets consist primarily of its investments in real estate,
totaling approximately $50,058,000 at December 31, 1996.
The Partnership's primary sources of funds consist of permanent financing,
construction financing, property sales and interest income on certificates of
deposit and other deposits of funds invested temporarily, pending their use in
the development of properties.
A majority of the Partnership's assets are located within the Inland Empire, a
submarket of Southern California, and have been directly affected by the
economic weakness of the region. Management believes, however, that the market
has flattened and is no longer falling in terms of sales prices. While prices
have not increased significantly, the Southern California real estate market
appears to be improving. Management continues to evaluate the real estate
markets in which the Partnership's assets are located in an effort to determine
the optimal time to dispose of them and realize their maximum value.
Tri-City
The Partnership owns and operates six properties within the Tri-City Corporate
Centre project in San Bernardino, California ("Tri-City") totaling approximately
412,000 leasable square feet. This includes a 81,079 square foot build-to-suit
office building for Inland Regional Center ("IRC") which was completed in 1996.
A 38,600 square foot build-to-suit retail building is currently under
construction and is scheduled to be completed in April or May, 1997.
On April 19, 1996, the Partnership obtained permanent financing of $6,500,000
secured by Service Retail Center, Carnegie Business Center I and Promotional
Retail Center. The loan is a 10-year fixed rate loan with a 25-year
amortization, bearing interest at 8.744% per annum with monthly principal and
interest payments of $53,413. The loan proceeds were used to payoff three loans.
After paying refinancing and other fees, and placing funds in escrow for tenant
improvements for the Promotional Retail Center, the Partnership netted
approximately $448,000 in proceeds. The Partnership benefited from the extension
of the weighted average maturity of 1.75 years for the three previous loans to
10 years on the new loan, and the reduction of the weighted average interest
rate from 9.72% to 8.74%.
On May 14, 1996, the Partnership obtained a $2,500,000 construction loan,
secured by the IRC building. The loan converted to a permanent loan on July 23,
1996 and requires $20,771 in monthly principal and interest payments through the
maturity date of April 23, 2001.
At December 31, 1996, the Partnership holds a note receivable in the amount of
$405,000 related to the 1990 sale of the TGI Friday's restaurant. On February
28, 1997, the Partnership purchased the property known as TGI Friday's in San
Bernardino, California for $1,750,000. The Partnership paid $1,345,000 in cash
and the $405,000 note receivable was retired at the time of this acquisition. By
acquiring the TGI Friday's parcel, the Partnership will own all parcels within a
certain maintenance association. This gives the Partnership a greater control
over the future development of the remaining unimproved parcel within the
maintenance association.
The Partnership remains contingently liable for subordinated real estate
commissions payable to the Sponsor in the amount of $643,000 at December 31,
1996 for sales that transpired in previous years. The subordinated real estate
commissions are payable only after the Limited Partners have received
distributions equal to their original invested capital plus a cumulative
non-compounded return of 6% per annum on their adjusted invested capital.
Lake Elsinore
Offsite improvements remain on hold at Lake Elsinore Square in Lake Elsinore,
California. The tentative parcel map expired and there is no development
activity planned for the near future.
Perris
There has been no development of the Perris property to date. The property is
being marketed for sale by the Partnership to retail users and interested
developers. Negotiations are underway for the sale of two additional lots
totaling 1.56 acres. The remaining lots are currently held for sale by the
Partnership.
Appendix A-7
<PAGE>
Temecula
Final map approval was received on January 2, 1996 on the 12.4 acre property in
Temecula, California. The Partnership has an executed sales contract on a 3.16
acre parcel for $607,000, pending a due diligence period. The sale is expected
to close between June, 1997 and January, 1998. Negotiations are currently
underway for the sale of two additional lots totaling 1.56 acres and the
remaining lots are held for sale.
The Partnership has a $100,000 certificate of deposit ("CD") held as collateral
for subdivision improvements and monument bonds related to the 11.29 acres of
land held for sale in Temecula, California. It is anticipated that this CD will
be released in 1997. The Partnership also has a $2,000 CD pledged as security to
a utility district for construction of a sewer crossing which has been
completed. Management is currently waiting for the utility district to close
this project and release the pledged CD.
General Matters
The $357,000 or 100% increase in accounts payable and other liabilities at
December 31, 1996 from December 31, 1995 is only due to the timing of payments
of current payables. The balance in accounts payable at December 31, 1996 was
paid in early 1997.
Management believes that the Partnership's 1997 cash flow from operations will
improve primarily as a result of (i) the placement of the Inland Regional Center
into service and (ii) management of working capital and capital expenditures
such that, when taken together with the Partnership's cash balance at December
31, 1996 of $97,000, will allow the Partnership to meet its cash obligations,
including debt service, without requiring the disposal of the Partnership's
assets other than in the normal course of business.
In January, 1997, the Partnership obtained an unsecured promissory note for a
$1,500,000 revolving line of credit from Glenborough Inland Realty Corporation,
a California corporation, an affiliate of the Partnership. In February and
March, 1997, the Partnership drew a total of $1,000,000 on this line of credit
to fund capital expenditures and miscellaneous charges until permanent financing
can be obtained for the TGI Friday's and Circuit City properties. The promissory
note requires interest to be paid monthly at 11% per annum and matures on
December 31, 1997. In February 1997, the Partnership obtained a $1,200,000
unsecured loan to finance the acquisition of the TGI Friday's property.
Management is currently under negotiations for a $5,000,000 loan that would be
secured by the Circuit City property. The proceeds from the loan would be used
to pay-off the $1,200,000 unsecured loan as well as finance tenant improvements
at the Circuit City property and other Partnership expenditures.
The General Partners continue to assess the real estate market in Southern
California in an effort to determine an appropriate time to liquidate the
Partnership and realize the maximum value for its assets. Cash generated from
property sales may be utilized in the development of other properties or
distributed to the partners.
RESULTS OF OPERATIONS:
In 1995, the Partnership's reporting year end changed from October 31 to
December 31. Since the Partnership's operations are not seasonal, the analysis
of results of operations compares the fiscal years ended December 31, 1996 and
October 31, 1995.
Revenues
Rental income for the year ended December 31, 1996 decreased $635,000 or 11%
from the year ended October 31, 1995, primarily as a result of the November,
1995 vacancy upon lease expiration of one tenant, Aetna Health Management
("Aetna"), who occupied an aggregate of 74,000 square feet of space at One
Vanderbilt, Two Vanderbilt and Carnegie Business Center I. This caused a
decrease in average occupancy, as reflected in the table of Tri-City properties
below. Aetna's vacancy was primarily a function of the tenant's desire to
consolidate its operations into one building. This decrease was partially offset
by the $40,000 income recognized by the Partnership as part of a settlement
agreement with a former tenant. $40,000 was received in cash with the remaining
$80,000 in the form of a note which has been fully reserved. The increase in
rental income of $319,000 or 6% for the year ended October 31, 1995 over the
year ended October 31, 1994 is largely due to the addition of Phase I of the
Promotional Retail Center in Tri-City.
The Tri-City properties account for 68%, 72% and 71% of the Partnership's total
rental income during the years ended December 31, 1996, October 31, 1995 and
October 31, 1994, respectively. The Shadowridge Woodbend Apartments in Vista,
California accounted for 32%, 28% and 29% of the total rental income during the
same periods (and was 96%
Appendix A-8
<PAGE>
leased at December 31, 1996).
Occupancy rates at the Partnership's Tri-City properties as of December 31,
1996, October 31, 1995, 1994 and 1993 were as follows:
1996 1995 1994 1993
---- ---- ---- ----
One Vanderbilt 86% 70% 100% 95%
Two Vanderbilt 25% 95% 100% 100%
Carnegie Business Center I 90% 97% 100% 89%
Service Retail Center 100% 90% 98% 82%
Promotional Retail Center 98% 97% 94% 94%
Inland Regional Center 100% N/A N/A N/A
In 1996, tenants at Tri-City occupying substantial portions of leased rental
space included: (i) ITT Educational Services with a lease which expires in
December, 2004; (ii) Inland Regional Center with a lease through July, 2009;
(iii) CompUSA with a lease through August, 2003; (iv) PetsMart with a lease
through January, 2009; and (v) Circuit City, currently on a ground lease which
will convert to a twenty year lease expiring in January, 2018 when construction
is completed in 1997. These five tenants, in the aggregate, occupied
approximately 201,000 square feet of the 412,000 total leasable square feet at
Tri-City in 1996. As of December 31, 1996, management is in various stages of
negotiation for two new leases totaling 39,965 square feet of space. In
addition, management is negotiating three lease renewals for 27,801 square feet
of space.
Interest and other income for the year ended December 31, 1996 decreased $88,000
or 58% from the year ended October 31, 1995 primarily due to the significant
decrease in cash during 1996 compared to fiscal year 1995, as cash was used to
fund the construction of the Inland Regional Center property. Interest and other
income for the year ended October 31, 1995 decreased $35,000 or 19% from the
year ended October 31, 1994 due to the $720,000 principal reduction to the
Partnership's note receivable received during 1995.
Expenses
Operating expenses for the year ended December 31, 1996 remained comparable to
the operating expenses for the year ended October 31, 1995. The increase of
$286,000 or 12% during the fiscal year ended October 31, 1995 over the prior
year is primarily due to an increase in property taxes upon the completion of
Phase I of the Promotional Retail Center.
Depreciation and amortization decreased $98,000 or 6% during the year ended
December 31, 1996 compared to the year ended October 31, 1995 and increased
$43,000 or 3% while comparing the year ended October 31, 1995 to the year ended
October 31, 1994 as a result of fully amortizing lease commissions paid in
connection with a tenant's early vacancy in the One Vanderbilt building in 1995.
Interest expense increased $39,000 or 5% and $33,000 or 5% during the year ended
December 31, 1996 compared to the year ended October 31, 1995 and during the
year ended October 31, 1995 compared to the year ended October 31, 1994,
respectively, due to the increased debt to finance the construction of
properties over this two year period.
Prior to 1995, the Partnership's business strategy was to hold its properties
for future development and operations. Conclusions about the carrying value of
the Partnership's properties were based upon this strategy. In 1995, the
Partnership modified this strategy to focus on eventual disposition of its
assets at the optimal time and sales price, however, development opportunities
will be pursued for certain sites. The Partnership revalued certain of its
assets based upon the change in strategy, independent appraisals and
management's estimates of development value. Appraisals and development values
are estimates of fair value based upon assumptions about the property and the
market in which it is located. Due to the uncertainties inherent in these
processes, these valuations do not purport to be the price at which a sale
transaction involving these properties can or will take place. The Partnership
made the following provisions to reduce the carrying value of investments in
real estate for the year ended October 31, 1995:
Unimproved Land:
San Bernardino, CA $ 6,158,000
Perris, CA 2,024,000
Lake Elsinore, CA 4,042,000
-----------
Total $12,224,000
===========
No such provisions were recorded in 1996, the two month period ended December
31, 1995 or in 1994.
Appendix A-9
<PAGE>
Expenses associated with undeveloped land include property taxes as well as
maintenance association fees. Any expenses associated with land currently under
construction (i.e., undergoing activities necessary to get it ready for its
intended use) have been capitalized pursuant to Statement of Financial
Accounting Standards No. 67 (SFAS 67) "Accounting for Costs and Initial Rental
Operations of Real Estate Projects". The $197,000 or 26% decrease in expenses
associated with undeveloped land during the year ended December 31, 1996
compared to the year ended October 31, 1995 was in large part due to the
capitalization of expenses at the Circuit City and Rancon Town Village projects
in 1996. Expenses associated with undeveloped land during the year ended October
31, 1995 compared to the year ended October 31, 1994 decreased by $116,000 or
13% due to: (i) the capitalization of property taxes during the construction of
a 15,000 square foot retail building in the Promotional Retail Center and the
81,000 square foot build-to-suit office building for Inland Regional Center and
(ii) a decrease in the assessed value of certain portions of the Partnership's
unimproved land and refunds of previously paid property taxes.
Administrative expenses decreased $109,000 or 8% during the year ended December
31, 1996 from the year ended October 31, 1995, a result of a one-time severance
payment to RFC's terminated employees in 1995, but partially offset by a $72,000
increase in general overhead expenses related to the management of the
Partnership and a $28,000 increase in general partnership legal costs in 1996.
The increase in administrative expenses of $568,000 or 70% during the year ended
October 31, 1995 over the year ended October 31, 1994 is largely due to: (i) the
aforementioned severance payment to RFC; (ii) an increase in investor update
meetings and the associated costs in 1995; and (iii) the payment and expense of
1994 audit and tax return fees in 1995. Since January 1, 1995, audit and tax
fees have been accrued in the year to which they relate.
In December, 1994, RFC entered into an agreement with Glenborough Inland Realty
Corporation ("Glenborough") whereby RFC sold to Glenborough, for approximately
$4,466,000 and the assumption of $1,715,000 of RFC's debt, the contract to
perform the rights and responsibilities under RFC's agreement with the
Partnership and other related Partnerships (collectively, "the Rancon
Partnerships") to perform or contract on the Partnership's behalf for financial,
accounting, data processing, marketing, legal, investor relations, asset and
development management and consulting services for the Partnership for a period
of ten years or to the liquidation of the Partnership, whichever comes first.
According to the contract, the Partnership will pay Glenborough for its services
as follows: (i) a specified asset administration fee of $993,000 per year, which
is fixed for five years subject to reduction in the year following the sale of
assets; (ii) sales fees of 2% for improved properties and 4% for land; (iii) a
refinancing fee of 1% and (iv) a management fee of 5% of gross rental receipts.
As part of this agreement, Glenborough will perform certain responsibilities for
the General Partner of the Rancon Partnerships and RFC agreed to cooperate with
Glenborough, should Glenborough attempt to obtain a majority vote of the limited
partners to substitute itself as the Sponsor for the Rancon Partnerships.
Glenborough is not an affiliate of RFC.
RFC entered into the transaction with Glenborough described above, when it
determined to sell that portion of its business relating to investor relations
services, property management services and asset management services, and those
services are now rendered to the Partnership, eight other related partnerships
and third parties by Glenborough.
Item 8. Financial Statements and Supplementary Data
For information with respect to this Item 8, see Financial Statements and
Schedules as listed in Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On June 6, 1995, Price Waterhouse LLP was dismissed as the principal independent
accountant for the Partnership. The decision to dismiss Price Waterhouse LLP was
made by the Partnership's General Partner.
The reports of Price Waterhouse LLP on the Partnership's financial statements
for the period ending October 31, 1994, do not contain an adverse opinion or a
disclaimer of an opinion, nor were such opinions modified as to uncertainty,
audit scope, or accounting principles.
During the fiscal years ended October 31, 1994 and 1993 and the subsequent
interim period from November 1, 1994 to June 6, 1995, there were no
disagreements between the Partnership and Price Waterhouse LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which, if not resolved to the satisfaction of Price
Waterhouse LLP, would have caused it to make a reference to the subject matter
of the disagreement in connection with its reports. For this purpose the term
disagreement does not include initial differences of opinion based on incomplete
facts or preliminary information that were later resolved to the satisfaction of
Price Waterhouse LLP by obtaining additional relevant facts or information.
Appendix A-10
<PAGE>
During the fiscal years ended October 31, 1994 and 1993 and the subsequent
interim period from November 1, 1994 to June 6, 1995, there were no "reportable
events" of the type described in Rule 304(a)(1)(v)(A) through (D) of Regulation
S-K.
On June 6, 1995, the Partnership engaged Arthur Andersen LLP as its new
principal independent accountant. During the fiscal years ended October 31, 1994
and 1993 and the subsequent interim period from November 1, 1994 through June 6,
1995, the Partnership did not consult with Arthur Andersen LLP as to the
application of accounting principles to a specified transaction or the type of
audit opinion that might be rendered on the Partnership's financial statements.
Part III
Item 10. Directors and Executive Officers of the Partnership
Daniel Lee Stephenson and RFC are the General Partners of the Partnership. The
executive officer and director of Rancon is:
Daniel L. Stephenson Director, President, Chief Executive Officer and Chief
Financial Officer
There is no fixed term of office for Mr. Stephenson.
Mr. Stephenson, age 53, founded RFC (formerly known as Rancon Corporation) in
1971 for the purpose of establishing itself as a commercial, industrial and
residential property syndication, development and brokerage concern. Mr.
Stephenson has, from inception, held the position of Director. In addition, Mr.
Stephenson was President and Chief Executive Officer of RFC from 1971 to 1986,
from August 1991 to September 1992 and from March 31, 1995 to present. Mr.
Stephenson is Chairman of the Board of PacWest Group, Inc., a real estate firm
which has acquired a portfolio of assets from the Resolution Trust Corporation.
Effective January 1, 1994 RFC acquired all the outstanding shares of Partnership
Asset Management Company, a California corporation, which previously performed
or contracted on the Partnership's behalf for financial, accounting, data
processing, marketing, legal, investor relations, asset and development
management and consulting services for the Partnership. These services were
provided to the Partnership by RFC subject to the provisions of the Partnership
Agreement during calendar year 1994.
Rancon Development Fund VII (RDFVII), a partnership sponsored by the General
Partners, filed for protection under Chapter 11 of Federal Bankruptcy Law on May
6, 1994 in order to put an automatic stay on RDFVII's property and to forestall
the pending foreclosure. In March, 1994, the General partners were approached by
a non-affiliated party interested in acquiring the interests of RDFVII's general
partners and attempting to restructure the partnership and its secured debt.
Although the necessary majority-in-interest of RDFVII's limited partners was
received, an agreement regarding the terms of the transfer and the plan of
reorganization could not be reached. The holder of the note secured by RDFVII's
property filed for and was granted a relief from the stay thereby allowing the
foreclosure sale to proceed. Such sale took place on September 15, 1994 and the
bankruptcy was subsequently dismissed, as the property was RDFVII's only asset.
Six Stoneridge L.P. (SSRLP), a partnership formed by Rancon Development Fund VI
(RDFVI), a partnership sponsored by the General Partners filed for protection
under Chapter 11 of Federal Bankruptcy Law in December, 1992. Efforts to
negotiate a modification of the purchase agreement of StoneRidge I, to obtain
loans, joint venture partners or other vehicles to meet or modify the cash
payment requirements were unsuccessful. In February, 1993, an adversary
complaint was filed against SSRLP in the bankruptcy court to determine the
nature and extent of SSRLP's interest in StoneRidge I and the debt associated
with the property. A tentative agreement has been reached and the bankruptcy was
dismissed effective November 8, 1995. As of December 31, 1996, SSRLP and RDFVI
have been dissolved.
Item 11. Executive Compensation
The Partnership has no executive officers. For information relating to fees,
compensation, reimbursement and distributions paid to related parties, reference
is made to Item 13 below.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners
No person is known by the Partnership to be the beneficial owner of more than 5%
of the Units.
Appendix A-11
<PAGE>
Security Ownership of Management
Title Amount and Nature of Percent
of Class Name of Beneficial Owner Beneficial Ownership of Class
- --------- -------------------------------- -------------------- --------
Units Daniel Lee Stephenson (I.R.A.) 4 Units (direct) *
Units Daniel Lee Stephenson Family Trust 100 Units (direct) *
* Less than 1 percent
Changes in Control
The Limited Partners have no right, power or authority to act for or bind the
Partnership. However, the Limited Partners have the power to vote upon the
following matters affecting the basic structure of the Partnership, each of
which shall require the approval of Limited Partners holding a majority of the
outstanding Units: (i) amendment of the Partnership's Partnership Agreement;
(ii) termination and dissolution of the Partnership; (iii) sale, exchange or
pledge of all or substantially all of the assets of the Partnership; (iv)
removal of the General Partners or any successor General Partner; (v) election
of a new General Partner or General Partners upon the removal, retirement,
death, insanity, insolvency, bankruptcy or dissolution of the General Partners
or any successor General Partner; and (vi) extension of the term of the
Partnership.
Item 13. Certain Relationships and Related Transactions
Due to the agreement with Glenborough whereby RFC sold to Glenborough the
contract to perform the rights and responsibilities under RFC's agreement with
the Partnership, there were no such fees or reimbursements for the year ended
December 31, 1996 or the two months ended December 31, 1995.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of the report
(1) Financial Statements:
Reports of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1995
and October 31, 1995
Consolidated Statements of Operations for the year ended
December 31, 1996, the two months ended December 31, 1995,
and the years ended October 31, 1995 and 1994
Consolidated Statements of Partners' Equity (Deficit) for the
year ended December 31, 1996, the two months ended December
31, 1995, and the years ended October 31, 1995 and 1994
Consolidated Statements of Cash Flows for the year ended
December 31, 1996, the two months ended December 31, 1995,
and the years ended October 31, 1995 and 1994
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation as of
December 31, 1996 and Note thereto
(3) Exhibits:
(3.1) Second Amended and Restated Certificate and Agreement
of Limited Partnership of the Partnership (included
as Exhibit B to the Prospectus dated December 29,
1986, as amended on January 5, 1987, filed pursuant
to Rule 424(b), file number 2-90327, is incorporated
herein by reference).
(3.2) First Amendment to the Second Amended and Restated
Agreement and Certificate of Limited Partnership of
the Partnership, dated March 11, 1991 (included as
Exhibit 3.2 to 10-K dated October 31, 1992, File
number 0-14207, is incorporated herein by reference).
(3.3) Limited Partnership Agreement of RRF IV Tri-City
Limited Partnership, A Delaware limited partnership
of which Rancon Realty Fund IV, A California Limited
Partnership is the limited partner (filed as Exhibit
3.3 to the Partnership's annual report on Form 10-K
for the year ended December 31, 1996 is incorporated
herein by reference)
Appendix A-12
<PAGE>
(10.1) Management, administration and consulting agreement
and amendment thereto for services rendered by
Glenborough Inland Realty Corporation dated December
20, 1994 and March 30, 1995, respectively.
(10.2) Construction loan agreement and promissory note on
the Discovery Zone site in the Promotional Retail
Center at Tri-City Corporate Centre in the amount of
$1,000,000 dated February 15, 1995.
(10.3) Promissory note secured by a deed of trust on the One
Vanderbilt building at the Tri-City Corporate Centre
in the amount of $2,400,000 dated January 17, 1995.
(10.4) Construction loan agreement and promissory note on
the Inland Regional Center at Tri-City Corporate
Centre in the amount of $1,000,000 dated May 12,
1995.
(10.5) Note secured by deed of trust on Carnegie Business
Center I and Service Retail Center at Tri-City
Corporate Centre in the amount of $2,800,000 dated
June 1, 1995.
(10.6) Promissory note in the amount of $6,500,000, dated
April 19, 1996, secured by Deeds of Trust on three of
the Partnership Properties (filed as Exhibit 10.6 to
the Partnership's annual report on Form 10-K for the
year ended December 31, 1996 is incorporated herein
by reference).
(27) Financial Data Schedule.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
RANCON REALTY FUND IV,
a California Limited Partnership
(Partnership)
Date: March 27, 1997 By: /s/ DANIEL L. STEPHENSON
--------------------------
Daniel L. Stephenson, General Partner and Director,
President, Chief Executive Officer and Chief
Financial Officer of Rancon Financial Corporation,
General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by following persons on behalf of the Partnership and in the
capacities and on the dates indicated.
Date: March 27, 1997 By: /s/ DANIEL L. STEPHENSON
--------------------------
Daniel L. Stephenson, General Partner and Director,
President, Chief Executive Officer and Chief
Financial Officer of Rancon Financial Corporation,
General Partner
Appendix A-13
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND SCHEDULE
Financial Statements and Schedule Page
Financial Statements:
Reports of Independent Public Accountants ............. Appendix A-15 and A-16
Consolidated Balance Sheets as of December 31, 1996
and 1995 and October 31, 1995 ................................. Appendix A-17
Consolidated Statements of Operations for the year
ended December 31, 1996 the two months ended December
31, 1995, and the years ended October 31, 1995 and
1994 .......................................................... Appendix A-18
Consolidated Statements of Partners' Equity (Deficit)
for the year ended December 31, 1996, the two months
ended December 31, 1995, and the years ended October
31, 1995 and 1994 ............................................. Appendix A-19
Consolidated Statements of Cash Flows for the year
ended December 31, 1996, the two months ended
December 31, 1995, and the years ended October 31,
1995 and 1994 ................................................. Appendix A-20
Notes to Consolidated Financial Statements .................... Appendix A-21
Schedule:
III - Real Estate and Accumulated Depreciation
as of December 31, 1996 and Note thereto ................... Appendix A-29
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
Appendix A-14
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
RANCON REALTY FUND IV, A CALIFORNIA LIMITED PARTNERSHIP:
We have audited the accompanying consolidated balance sheets of RANCON REALTY
FUND IV, A CALIFORNIA LIMITED PARTNERSHIP as of December 31, 1996 and 1995 and
October 31, 1995, and the related statements of operations, partners' equity
(deficit) and cash flows for the year ended December 31, 1996, the two months
ended December 31, 1995 and the year ended October 31, 1995. These consolidated
financial statements and the schedule referred to below are the responsibility
of the Partnership's management. Our responsibility is to express an opinion on
these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of RANCON
REALTY FUND IV, A CALIFORNIA LIMITED PARTNERSHIP, as of December 31, 1996 and
1995 and October 31, 1995 and the results of its operations and its cash flows
for the year ended December 31, 1996, the two months ended December 31, 1995,
and the year ended October 31, 1995, in conformity with generally accepted
accounting principles.
/s/Arthur Andersen LLP
------------------------
San Francisco, California
February 12, 1997 (except with regards to
the matter discussed in Note 3, as to which
the date is February 28, 1997)
Appendix A-15
<PAGE>
[PRICE WATERHOUSE LLP LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
January 20, 1995
To the General and Limited Partners of
Rancon Realty Fund IV
In our opinion, the accompanying statements of operations, of partners' equity
and of cash flows present fairly, in all material respects, the results of
operations and cash flows of Rancon Realty Fund IV for the year ended October
31, 1994, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the statements of Rancon Realty Fund IV for any
period subsequent to October 31, 1994.
/s/PRICE WATERHOUSE LLP
- -----------------------
Appendix A-16
<PAGE>
<TABLE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Balance Sheets
December 31, 1996 and 1995 and October 31, 1995
(in thousands, except units outstanding)
<CAPTION>
December 31, December 31, October 31,
Assets 1996 1995 1995
----------- ---------- ---------
<S> <C> <C> <C>
Investments in real estate:
Rental property, net of accumulated
depreciation of $13,077 as of December
31, 1996, $11,799 as of December 31, 1995
and $11,609 as of October 31, 1995 $ 38,094 $ 30,766 $ 30,915
Construction in progress 2,184 2,931 2,646
Land held for development 4,911 9,088 9,063
Land held for sale 4,869 1,632 1,630
--------- --------- --------
Total real estate investments 50,058 44,417 44,254
--------- --------- --------
Cash and cash equivalents 97 1,296 1,934
Restricted cash 102 926 1,213
Accounts and interest receivable 188 8 14
Notes receivable 405 405 405
Deferred financing costs and other fees,
net of accumulated amortization of $775
as of December 31, 1996, $675 as of December
31, 1995 and $643 as of October 31, 1995 1,223 640 643
Prepaid expenses and other assets 622 590 858
--------- -------- --------
Total assets $ 52,695 $ 48,282 $ 49,321
========= ======== ========
Liabilities and Partners' Equity (Deficit)
Notes payable $ 17,256 $ 11,757 $ 11,766
Accounts payable and accrued expenses 713 356 1,034
Interest payable 67 -- 44
--------- -------- --------
Total liabilities 18,036 12,113 12,844
--------- -------- --------
Commitments and contingent liabilities (see Note 8)
Partners' equity (deficit):
General partners (891) (891) (891)
Limited partners, 79,846 limited partnership
units outstanding at December 31, 1996,
December 31, 1995 and October 31, 1995 35,550 37,060 37,368
--------- -------- --------
Total partners' equity 34,659 36,169 36,477
--------- -------- --------
Total liabilities and partners' equity $ 52,695 $ 48,282 $ 49,321
========= ======== ========
<FN>
The accompanying notes are an integral part of these financial statements
</FN>
</TABLE>
Appendix A-17
<PAGE>
<TABLE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Operations
For the year ended December 31, 1996, the two months ended
December 31, 1995, and the years ended October 31, 1995 and 1994
(in thousands, except per unit amounts and units outstanding)
<CAPTION>
For the For the two For the For the
year ended months ended year ended year ended
December 31, December 31, October 31, October 31,
1996 1995 1995 1994
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 5,149 $ 768 $ 5,784 $ 5,465
Interest and other income 65 16 153 188
--------- -------- --------- ---------
Total revenues 5,214 784 5,937 5,653
--------- -------- --------- ---------
Expenses:
Operating, including $54 and $278
paid to Sponsor for the years ended
October 31, 1995 and 1994, respectively 2,642 411 2,683 2,397
Depreciation and amortization 1,449 207 1,547 1,504
Interest expense 792 139 753 720
Provision for impairment of real
estate investments -- -- 12,224 --
Expenses associated with undeveloped land 571 124 768 884
Administrative, including $345 and $840 paid
to Sponsor in 1995 and 1994, respectively 1,270 211 1,379 811
--------- -------- --------- --------
Total expenses 6,724 1,092 19,354 6,316
--------- -------- --------- --------
Net loss $ (1,510) $ (308) $ (13,417) $ (663)
========= ======== ========= ========
Net loss per limited partnership unit $ (18.91) $ (3.86) $ (168.03) $ (8.30)
======== ======= ========= =======
Weighted average number of limited partnership
units outstanding during each period used
to compute net loss per limited partnership unit 79,846 79,846 79,850 79,901
======= ======= ======= =======
<FN>
The accompanying notes are an integral part of these financial statements
</FN>
</TABLE>
Appendix A-18
<PAGE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Partners' Equity (Deficit)
For the year ended December 31, 1996, the two months ended
December 31, 1995, and the years ended October 31, 1995 and 1994
(in thousands)
General Limited
Partners Partners Total
-------- -------- --------
Balance at October 31, 1993 $ (891) $ 51,484 $ 50,593
Retirement of Limited Partnership Units -- (24) (24)
Net loss -- (663) (663)
------- -------- --------
Balance at October 31, 1994 (891) 50,797 49,906
Retirement of Limited Partnership Units -- (12) (12)
Net loss -- (13,417) (13,417)
------- -------- --------
Balance at October 31, 1995 (891) 37,368 36,477
Net loss -- (308) (308)
------- -------- --------
Balance at December 31, 1995 (891) 37,060 36,169
Net loss -- (1,510) (1,510)
------- -------- --------
Balance at December 31, 1996 $ (891) $ 35,550 $ 34,659
======= ======== ========
The accompanying notes are an integral part of these financial statements
Appendix A-19
<PAGE>
<TABLE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
For the year ended December 31, 1996, the two months ended
December 31, 1995, and the years ended October 31, 1995 and 1994
(in thousands)
<CAPTION>
For the For the two For the For the
year ended months ended year ended year ended
Dec. 31, 1996 Dec. 31, 1995 Oct. 31, 1995 Oct. 31, 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,510) $ (308) $ (13,417) $ (663)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,449 207 1,496 1,417
Amortization of loan fees,
included in interest expense 68 15 51 87
Provision for impairment of real estate investments -- -- 12,224 --
Changes in certain assets and liabilities:
Deferred fees (596) (6) (13) (140)
Accounts and interest receivable (180) 6 (6) 1,143
Prepaid expenses and other assets 155 268 32 (37)
Accounts payable and accrued expenses 357 (678) 349 266
Interest payable 67 (44) 22 --
Payable to Sponsor -- -- (8) (73)
----------- -------- --------- -------
Net cash provided by (used for)
operating activities (190) (540) 730 2,000
----------- -------- --------- -------
Cash flows from investing activities:
Collection on note receivable -- -- 720 --
Net proceeds from sale of real estate 248 -- -- --
Additions to real estate and property
development costs (7,166) (353) (2,538) (1,537)
----------- -------- --------- -------
Net cash used for investing activities (6,918) (353) (1,818) (1,537)
----------- -------- --------- -------
Cash flows from financing activities:
Net loan proceeds 5,492 -- 3,083 --
Reduction (addition) of restricted cash, net 824 287 (1,213) --
Payment of loan fees (211) (23) (224) (77)
Notes payable principal payments (196) (9) (178) (100)
Retirement of Limited Partnership Units -- -- (12) (24)
Other liabilities -- -- 11 (22)
----------- -------- --------- -------
Net cash provided by (used for) financing activities 5,909 255 1,467 (223)
----------- -------- --------- -------
Net increase (decrease) in cash and cash equivalents (1,199) (638) 379 240
Cash and cash equivalents at beginning of period 1,296 1,934 1,555 1,315
----------- ---------- --------- -------
Cash and cash equivalents at end of period $ 97 $ 1,296 $ 1,934 $ 1,555
=========== ========== ========= =======
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,254 $ 176 $ 861 $ 616
=========== ========== ========= =======
Interest capitalized $ 597 $ 28 $ 130 $ --
=========== ========== ========= =======
Supplemental disclosure of non-cash refinancing activity:
New financing $ 11,273 $ -- $ -- $ --
Original financing paid-off in escrow (5,586) -- -- --
Increase in other assets and loan fees paid (195) -- -- --
----------- ---------- --------- -------
Net loan proceeds $ 5,492 $ -- $ -- $ --
=========== ========== ========= =======
<FN>
The accompanying notes are an integral part of these financial statements
</FN>
</TABLE>
Appendix A-20
<PAGE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1996, October 31, 1995 and 1994
Note 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Rancon Realty Fund IV, a California Limited Partnership, ("the Partnership"),
was organized in accordance with the provisions of the California Uniform
Limited Partnership Act for the purpose of acquiring, developing and operating
real property. The General Partners of the Partnership are Daniel L. Stephenson
and Rancon Financial Corporation, ("RFC") hereinafter referred to as the
Sponsor. RFC is wholly-owned by Daniel L. Stephenson. The Partnership reached
final funding in July, 1987. 79,846 Partnership units were outstanding at
December 31, 1996 and 1995.
Allocation of profits, losses and cash distributions from operations and cash
distributions from sale or financing are made pursuant to the terms of the
Partnership Agreement. Generally, net income and distributions from operations
are allocated 90% to the limited partners and 10% to the general partners. Net
losses from operations are allocated 99% to the limited partners and 1% to the
general partners until such time as a partner's account is reduced to zero.
Additional losses will be allocated entirely to those partners with positive
account balances until such balances are reduced to zero.
A majority of the Partnership's assets are located within the Inland Empire, a
submarket of Southern California, and have been directly affected by the
economic weakness of the region. Management believes, however, that the market
has flattened and is no longer falling in terms of sales prices. While prices
have not increased significantly, the Southern California real estate market
appears to be improving. Management continues to evaluate the real estate
markets in which the Partnership's assets are located in an effort to determine
the optimal time to dispose of them and realize their maximum value.
General Partners and Management Matters
Effective January 1, 1994, the Partnership contracted with RFC to perform or
contract on the Partnership's behalf for financial, accounting, data processing,
marketing, legal, investor relations, asset and development management and
consulting services for the Partnership. These services were provided by RFC
subject to the provisions of the Partnership Agreement.
In December 1994, RFC entered into an agreement with Glenborough Inland Realty
Corporation ("Glenborough") whereby RFC sold to Glenborough the contract to
perform the rights and responsibilities under RFC's agreement with the
Partnership and other related Partnerships (collectively, "the Rancon
Partnerships") to perform or contract on the Partnership's behalf for financial,
accounting, data processing, marketing, legal, investor relations, asset and
development management and consulting services for the Partnership for a period
of ten years or to the liquidation of the Partnership, whichever comes first.
According to the contract, the Partnership will pay Glenborough for its services
as follows: (i) a specified asset administration fee of $993,000 per year, which
is fixed for five years subject to reduction in the year following the sale of
assets; (ii) sales fees of 2% for improved properties and 4% for land; (iii) a
refinancing fee of 1% and (iv) a management fee of 5% of gross rental receipts.
As part of this agreement, Glenborough will perform certain responsibilities for
the General Partner of the Rancon Partnerships and RFC agreed to cooperate with
Glenborough, should Glenborough attempt to obtain a majority vote of the limited
partners to substitute itself as the Sponsor for the Rancon Partnerships. This
agreement became effective January 1, 1995. Glenborough is not an affiliate of
RFC or the Partnership.
As a result of this agreement, RFC terminated several of its employees between
December 31, 1994 and February 28, 1995. Also as a result of this agreement,
certain of the officers of RFC resigned from their positions effective February
28, 1995, March 31, 1995 and July 1, 1995.
Significant Accounting Policies
Basis of Accounting - The accompanying financial statements have been prepared
on the accrual basis of accounting in accordance with generally accepted
accounting principles under the presumption that the Partnership will continue
as a going concern.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and liabilities and
Appendix A-21
<PAGE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1996, October 31, 1995 and 1994
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported results of operations during the reporting period.
Actual results could differ from those estimates.
Risks and Uncertainties - The Partnership's ability to (i) achieve positive cash
flow from operations, (ii) meet its debt obligations, (iii) provide
distributions either from operations or the ultimate disposition of the
Partnership's properties or (iv) continue as a going concern, may be impacted by
changes in interest rates, property values, geographic economic conditions, or
the entry of other competitors into the market. The accompanying financial
statements do not provide for adjustments with regard to these uncertainties.
Investments in Real Estate - In March, 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121 (SFAS 121),
"Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of." The Partnership adopted SFAS 121 in the fourth quarter of fiscal
year 1995. SFAS 121 requires that an evaluation of an individual property for
possible impairment be performed whenever events or changes in circumstances
indicate that an impairment may have occurred and that long-lived assets to be
disposed of be carried at the lower of carrying amount or fair value. The
specific accounting policies for assets to be held and used and those to be
disposed of are described in more detail below.
Rental Property - Rental properties including the related land, are stated at
cost unless events or circumstances indicate that cost cannot be recovered in
which case carrying value is reduced to estimated fair value. Estimated fair
value: (i) is based upon the Partnership's plans for the continued operations of
each property; (ii) is computed using estimated sales price, as determined by
prevailing market values for comparable properties and/or the use of
capitalization rates multiplied by annualized rental income based upon the age,
construction and use of the building, and (iii) does not purport, for a specific
property, to represent the current sales price that the Partnership could obtain
from third parties for such property. The fulfillment of the Partnership's plans
related to each of its properties is dependent upon, among other things, the
presence of economic conditions which will enable the Partnership to continue to
hold and operate the properties prior to their eventual sale. Due to
uncertainties inherent in the valuation process and in the economy, it is
reasonably possible that the actual results of operating and disposing of the
Partnership's properties could be materially different than current
expectations.
Depreciation is provided using the straight line method over the useful lives of
the respective assets.
Land Held for Development and Construction in Progress - Land held for
development and construction in progress is stated at cost unless events or
circumstances indicate that cost cannot be recovered in which case the carrying
value is reduced to estimated fair value. Estimated fair value: (i) is based on
the Partnership's plans for the development of each property; (ii) is computed
using estimated sales price, based upon market values for comparable properties;
(iii) considers the cost to complete and the estimated fair value of the
completed project; and (iv) does not purport, for a specific property, to
represent the current sales price that the Partnership could obtain from third
parties for such property. The fulfillment of the Partnership's plans related to
each of its properties is dependent upon, among other things, the presence of
economic conditions which will enable the Partnership to either hold the
properties for eventual sale or obtain financing to further develop the
properties.
Land Held for Sale - Land held for sale is stated at the lower of cost or
estimated fair value. During fiscal year ended October 31, 1995, the Partnership
wrote down the carrying value of the land held for sale based upon independent
appraisals obtained in 1995. Appraisals are estimates of fair value based upon
assumptions about the property and the market in which it is located. Due to the
uncertainties inherent in the appraisal process, these valuations do not purport
to be the price at which a sale transaction involving these properties can or
will take place.
Cash and Cash Equivalents - The Partnership considers certificates of deposit
and money market funds with original maturities of less than ninety days to be
cash equivalents.
Deferred Financing Costs and Other Fees - Deferred loan fees are amortized on a
straight-line basis over the life of the related loan and deferred lease
commissions are amortized over the initial fixed term of the related lease
agreement.
Rental Income - Rental income is recognized as earned over the life of the
respective leases.
Appendix A-22
<PAGE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1996, October 31, 1995 and 1994
Net Loss Per Limited Partnership Unit - Net loss per limited partnership unit is
calculated using the weighted average number of limited partnership units
outstanding during the period and the Limited Partners' allocable share of the
net loss.
Income Taxes - No provision for income taxes is included in the accompanying
financial statements, as the Partnership's results of operations are allocated
to the partners for inclusion in their respective income tax returns. Net loss
and partners' equity (deficit) for financial reporting purposes will differ from
the Partnership income tax return because of different accounting methods used
for certain items, including depreciation expense, provisions for impairment of
investments in real estate, capitalization of development period interest and
income and loss recognition.
Consolidation - In order to satisfy certain lender requirements for the
Partnership's 1996 loan secured by Service Retail Center, Promotional Retail
Center and Carnegie Business Center (see Note 6), Rancon Realty Fund IV Tri-City
Limited Partnership, a Delaware limited partnership ("RRF IV Tri-City") was
formed in April, 1996. The three properties securing the loan were contributed
to RRF IV Tri-City by the Partnership. The limited partner of RRF IV Tri-City is
the Partnership and the general partner is Rancon Realty Fund IV, Inc., a
corporation wholly owned by the Partnership. Since the Partnership indirectly
owns 100% of RRF IV Tri-City, the financial statements of RRF IV Tri-City have
been consolidated with those of the Partnership. All intercompany transactions
have been eliminated in consolidation.
Reclassifications - Certain 1995 and 1994 balances have been reclassified to
conform with the current year presentation.
Note 2. RELATED PARTY TRANSACTIONS
Payable to Sponsor - As a result of the agreement between RFC and Glenborough
(see Note 1), RFC terminated certain employees who were previously responsible
for performing the administrative, legal and development services for the
Partnership. Upon termination, certain employee costs including severance
benefits were allocated to the various Rancon partnerships. Such costs allocated
to the Partnership aggregated $200,000 and are included in administrative costs
for the year ended October 31, 1995.
Reimbursable Expenses and Management Fees to Sponsor - Through December 31,
1994, the Partnership had an agreement with the Sponsor for property management
services. The agreement provided for a management fee equal to 5% of gross
rentals collected while managing the properties. Fees incurred under this
agreement totaled $54,000 and $278,000 for the years ended October 31, 1995 and
1994, respectively. Effective January 1, 1995 the Partnership contracted with
Glenborough to provide these services to the Partnership (see Note 1).
The Partnership paid $4,000 and $25,000 in program management fees to the
Sponsor during the years ended October 31, 1995 and 1994, respectively. The
Sponsor received this fee for its management and administration of unimproved or
non-income producing properties. As a result of the agreement with Glenborough,
effective January 1, 1995 this fee was no longer payable.
The Partnership Agreement also provides for the reimbursement of actual costs
incurred by the Sponsor in providing certain administrative, legal and
development services necessary for the prudent operation of the Partnership.
Reimbursable costs incurred by the Partnership totaled $341,000 and $815,000 for
the years ended October 31, 1995 and 1994, of which the Partnership capitalized
$43,000 and $274,000 in fiscal years 1995 and 1994, respectively.Effective
January 1, 1995, such services are being provided by Glenborough.
Note 3. NOTES RECEIVABLE
Included in notes receivable at December 31, 1996, the Partnership had a
$405,000 note receivable secured by a deed of trust on the TGI Friday's property
(which the Partnership sold in December, 1990). The note bore interest at 10%
per annum and matured on December 31, 2000.
On February 28, 1997, the Partnership purchased the property known as TGI
Friday's in San Bernardino, California for $1,750,000. The Partnership paid
$1,345,000 in cash and the $405,000 note receivable was retired at the time of
this acquisition.
Appendix A-23
<PAGE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1996, October 31, 1995 and 1994
In 1996, the Partnership reached a $120,000 settlement with a former tenant. The
Partnership received cash of $40,000 and an $80,000 note receivable which has
been fully reserved. The note bears interest at ten percent per annum and
requires monthly principal and interest payments of $4,805 commencing January 1,
1998 until the note matures on June 1, 1999.
Note 4. INVESTMENTS IN REAL ESTATE
Rental property components are as follows (in thousands):
December 31, December 31, October 31,
1996 1995 1995
----------- ------------ ----------
Land $ 4,976 $ 4,226 $ 4,226
Buildings 37,378 30,954 30,921
Leasehold and other improvements 8,817 7,385 7,377
----------- ----------- ----------
51,171 42,565 42,524
Less: accumulated depreciation (13,077) (11,799) (11,609)
----------- ----------- ----------
Total rental property, net $ 38,094 $ 30,766 $ 30,915
=========== =========== ==========
The Partnership's rental property includes projects at the Tri-City Corporate
Centre in San Bernardino, California and Shadowridge Woodbend Apartments in
Vista, California. In the second quarter of 1996, construction was completed on
the IRC project, an 81,000 square foot office building, and the tenant commenced
a 13-year lease. Upon completion of IRC, the Partnership reclassified $8,599,000
of construction in progress to rental property.
Land held for development consists of the following (in thousands):
December 31, December 31, October 31,
1996 1995 1995
---------- --------- ---------
26.0 acres in 1996 and 27.2 acres
in 1995 at Tri-City Corporate
Centre, San Bernardino, CA $ 2,975 $ 4,648 $ 4,643
24.8 acres in Lake Elsinore, CA 1,936 1,935 1,935
11.29 acres in 1995, in Temecula, CA -- 2,505 2,485
---------- ---------- ----------
Total land held for development $ 4,911 $ 9,088 $ 9,063
========== ========== ==========
In 1996, the Partnership reclassed $1,874,000 (after 1996 additions) from land
held for development (Circuit City project in Tri-City) to construction in
progress. Construction is expected to be completed by April 1, 1997. The
Partnership also reclassed $3,483,000 (after 1996 additions) from land held for
development (11.29 acres in Temecula, CA) to land held for sale.
The above land held for development remains unencumbered at December 31, 1996.
Land held for sale consists of the following (in thousands):
December 31, December 31, October 31,
1996 1995 1995
--------- ---------- -----------
17.14 acres in Perris, CA $ 1,386 $ 1,386 $ 1,384
11.29 acres and 1.11 acres
in Temecula, CA in 1996
and 1995, respectively 3,483 246 246
--------- ---------- -----------
Total land held for sale $ 4,869 $ 1,632 $ 1,630
========= ========== ===========
The 1.11 acres of land in Temecula, California was sold on March 26, 1996 for
$275,000 which after commissions and other fees, approximated cost. The
Partnership currently has 3.16 acres under contract to sell to a mini storage
operator for $607,000, pending satisfactory completion of due diligence.
Negotiations are currently underway to sell another two lots totaling 1.56
acres.
Appendix A-24
<PAGE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1996, October 31, 1995 and 1994
The Partnership does not intend to develop the remaining sites held for sale.
The proceeds generated from the future sale would be used to reduce the
Partnership's existing debt or to increase reserves.
The above land remains unencumbered at December 31, 1996.
During the year ended October 31, 1995, the Partnership recorded the following
provisions to reduce the carrying value of investments in real estate (in
thousands):
Land held for development:
San Bernardino, CA $ 6,158
Lake Elsinore, CA 4,042
Land held for sale:
Perris, CA 2,024
----------
Total provision for impairment of
real estate investments $ 12,224
==========
Prior to 1995, the Partnership's business strategy was to hold its properties
for future development and operations. Conclusions about the carrying value of
the Partnership's properties were based upon this strategy. In 1995, the
Partnership modified this strategy to focus on eventual disposition of its
assets at the optimal time and sales price, however, development opportunities
will be pursued for certain sites. The Partnership revalued certain of its
assets based on the business strategy for the assets. Due to the uncertainties
inherent in the valuation process, the carrying values do not purport to be the
price at which a sale transaction involving these properties can or will take
place.
Approximately 23 acres of the Tri-City Corporate Centre land owned by the
Partnership was part of a landfill operated by the City of San Bernardino ("the
City") from approximately 1950 to 1960. There are no records of which the
Partnership is aware disclosing that hazardous wastes exist at the landfill. The
Partnership's landfill monitoring program currently meets or exceeds all
regulatory requirements. The Partnership is currently working with the Santa Ana
Region of the California Regional Water Quality Control Board and the City to
determine the need and responsibility for any further testing. There is no
current requirement to ultimately clean up the site, however, no assurance can
be made that circumstances will not arise which could impact the Partnership's
responsibility related to the property.
Construction in progress of $2,184,000 at December 31, 1996 primarily represents
development costs incurred on the Circuit City site in Tri-City. The
construction in progress of $2,931,000 at December 31, 1995 and $2,646,000 at
October 31, 1995 represented development costs incurred on the 81,000 square
foot build-to-suit office building for Inland Regional Center which was
completed and reclassed to rental property in 1996.
Note 5. RESTRICTED CASH
Restricted cash of $102,000 at December 31, 1996 is comprised of two
certificates of deposit ("CD"). The first is a $100,000 CD which is held as
collateral for subdivision improvement bonds related to the 11.29 acres of land
held for development in Temecula, California. The other is a $2,000 CD pledged
as security to a utility district for construction of a sewer crossing.
Note 6. NOTES PAYABLE
Notes payable as of the stated balance sheet dates was as follows (in
thousands):
December 31, December 31, October 31,
1996 1995 1995
----------- ---------- ---------
Note payable, secured by first deed
of trust on Service Retail Center,
Promotional Retail Center and
Carnegie Business Center I. The
loan, which matures May 1, 2006, is
a 10-year, 8.744% fixed rate loan
with a 25-year amortization and
requires $53 in principal and
interest payments due monthly. $6,457 $ -- $ --
Appendix A-25
<PAGE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1996, October 31, 1995 and 1994
Permanent construction loan secured
by the IRC building. Interest
accrues at a fixed rate of 8.75%
per annum. Monthly payments of $21
of principal and interest are due
until the loan matures on April 23,
2001. 2,488 -- --
Note payable, secured by first deed
of trust on the Shadowridge
Woodbend Apartments. Interest
accrues at a fixed rate of 7.95%
per annum. Monthly installments of
$48 of principal and interest are
due until the loan matures on April
15, 1998. $ 5,960 $ 6,063 $ 6,079
Permanent loan, converted from a
construction loan secured by a
first deed of trust on Phase I of
the Promotional Retail Center.
Interest accrued at a fixed rate of
8.75% with monthly installments of
principal and interest of $22. The
unpaid principal and interest was
due on May 3, 1999, but was paid
off in April, 1996. -- 2,650 2,658
Construction loan secured by a
portion of Phase II of the
Promotional Retail Center. Interest
accrued at a variable rate and was
payable monthly upon full
utilization of the $98 interest
reserve portion of the $1,000 loan.
The unpaid principal and accrued
interest was due on February 15,
1996, but was extended until April,
1996 and then paid off. -- 649 629
Note payable secured by first deed
of trust on the One Vanderbilt
building. Interest accrues at a
fixed rate of 9%. Monthly
installments of $20 are payable
which include principal and
interest amortized over 25 years.
The unpaid principal and interest
is due on January 1, 2005. 2,351 2,380 2,385
Note payable secured by Carnegie
Business Center I and Service
Retail Center. Interest was payable
monthly at the Imperial Bank Prime
Rate plus 2%. The unpaid principal
and interest was due on May 15,
1997, but was paid off in April,
1996. -- 15 15
--------- ---------- ---------
Total notes payable $ 17,256 $ 11,757 $ 11,766
========= ========== =========
The annual maturities of notes payable subsequent to December 31, 1996 are as
follows (in thousands):
1997 $ 254
1998 6,005
1999 171
2000 186
2001 2,498
Thereafter 8,142
------------
Total $ 17,256
============
Note 7. LEASES
The Partnership's rental properties are leased under operating leases that
expire at various dates through January, 2018. In addition to monthly base
rents, several of the leases provide for additional rents based upon a
percentage of sales levels attained by the tenants; however, no contingent
rentals were realized during the years ended December 31, 1996, October 31, 1995
and 1994. Future minimum rents on non-cancelable operating leases as of December
31, 1996 are as follows (in thousands):
Appendix A-26
<PAGE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1996, October 31, 1995 and 1994
1997 $ 4,696
1998 4,076
1999 4,073
2000 3,889
2001 3,667
Thereafter 23,410
-----------
Total $ 43,811
===========
Note 8. COMMITMENTS AND CONTINGENT LIABILITIES
The Partnership is contingently liable for subordinated real estate commissions
payable to the Sponsor in the amount of $643,000 at December 31, 1996 for sales
that transpired in previous years. The subordinated real estate commissions are
payable only after the Limited Partners have received distributions equal to
their original invested capital plus a cumulative non-compounded return of six
percent per annum on their adjusted invested capital.
Note 9. TAXABLE INCOME
The Partnership's tax returns, the qualification of the Partnership as a
partnership for federal income tax purposes, and the amount of income or loss
are subject to examination by federal and state taxing authorities. If such
examinations result in changes to the Partnership's taxable income or loss, the
tax liability of the partners could change accordingly.
The Partnership's tax returns are filed on a calendar year basis. As such, the
following reconciliation has been prepared using tax amounts estimated on a
calendar year basis.
The following is a reconciliation for the years ended December 31, 1996 and
October 31, 1995 and 1994 of the net loss for financial reporting purposes to
the estimated taxable income (loss) determined in accordance with accounting
practices used in preparation of federal income tax returns (in thousands).
December 31, October 31, October 31,
1996 1995 1994
----------- ----------- ----------
Net loss per financial statements $ (1,510) $ (13,417) $ (663)
Financial reporting depreciation
in excess of tax reporting
depreciation 191 599 578
Provision for impairment of
investments in real estate -- 12,224 --
Operating expenses recognized in a
different period for financial
reporting than for income tax
reporting, net (692) (271) --
Property taxes capitalized for tax 465 476 --
----------- ----------- --------
Estimated net loss for federal
income tax purposes $ (1,546) $ (389) $ (85)
=========== ========== ========
The following is a reconciliation as of December 31, 1996 and October 31, 1995
of partner's capital for financial reporting purposes to estimated partners'
capital for federal income tax purposes (in thousands).
1996 1995
---------- --------
Partners' equity per financial statements $ 34,659 $ 36,477
Cumulative provision for impairment of
investments in real estate 14,274 14,274
Financial reporting depreciation in excess
of tax reporting depreciation 4,386 4,195
Operating expenses recognized in a
different period for financial reporting
than for income tax reporting, net (692) (271)
Property taxes capitalized for tax 941 476
Other, net (287) (325)
---------- ---------
Estimated partners' capital for federal
income tax purposes $ 53,281 $ 54,826
========== =========
Appendix A-27
<PAGE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1996, October 31, 1995 and 1994
Note 10. SUBSEQUENT EVENT
In January, 1997, the Partnership obtained an unsecured promissory note for a
$1,500,000 revolving line of credit from Glenborough Inland Realty Corporation,
a California corporation, an affiliate of the Partnership. In February and
March, 1997, the Partnership drew a total of $1,000,000 on this line of credit
to fund capital expenditures and miscellaneous charges until permanent financing
can be obtained for the TGI Friday's and Circuit City properties. The promissory
note requires interest to be paid monthly at 11% per annum and matures on
December 31, 1997. In February 1997, the Partnership obtained a $1,200,000
unsecured loan to finance the acquisition of the TGI Friday's property.
Management is currently under negotiations for a $5,000,000 loan that would be
secured by the Circuit City property. The proceeds from the loan would be used
to pay-off the $1,200,000 unsecured loan as well as finance tenant improvements
at the Circuit City property and other Partnership expenditures.
Appendix A-28
<PAGE>
<TABLE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(in thousands)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D
- ----------------------------------------------------------------------------------------------------------
Initial Cost to Cost Capitalized Subsequent
Partnership to Acquisition
-------------------- ---------------------
Buildings
and Carrying
Description Encumbrances Land Improvements Improvements Cost
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rental Properties:
Commercial Office Complexes, San Bernardino County, CA:
4.0 acres - One Vanderbilt $ 2,351 $ 572 $ -- $ 8,599 $ 9
2.9 acres - Two Vanderbilt -- 443 -- 6,310 --
5.3 acres - Carnegie Business Center I (c) 380 -- 5,268 --
2.2 acres - Service Retail Center (c) 300 -- 1,717 --
Less: Provision for impairment of
real estate investment (b) -- -- -- (250) --
5.2 acres: - Promo Retail (c) 811 -- 5,677 282
Less: Provision for impairment of
real estate investment (b) -- -- -- (119) --
7.4 acres - Inland Regional Center 2,488 608 -- 7,437 --
Less Provision for impairment of
real estate investment (b) -- (196) -- -- --
Residential Property, San Diego County, CA:
Shadowridge Woodbend Apartments 5,960 1,766 11,118 439 --
------- ------ ------ -------- -----
17,256 4,684 11,118 35,078 291
------- ------ ------ -------- -----
Construction in Progress:
San Bernardino County, CA:
Circuit City -- 284 -- 2,010 --
Less: Provision for impairment of
real estate investment (b) -- -- -- (419) --
Inland Regional Center -- -- -- 309 --
------- ------ ------ -------- -----
-- 284 -- 1,900 --
------- ------ ------ -------- ------
Land Held for Development: San Bernardino County, CA:
26 acres - Tri-City -- 4,186 -- 5,597 417
Less: Provision for impairment of
real estate investment (b) -- (244) -- (6,980) --
Riverside County, CA:
Lake Elsinore property 24.8 acres -- 4,495 -- 1,482 --
Less: Provision for impairment of
real estate investment (b) -- (2,560) -- (1,482) --
------- ------- ------ -------- -----
-- 5,877 -- (1,383) 417
------- ------- ------ -------- -----
Land Held for Sale:
Riverside County, CA:
Perris property 17.14 acres -- 3,005 -- 327 78
Less: Provision for impairment of
real estate investment (b) -- (1,697) -- (327) --
Temecula property 11.29 acres -- 2,280 -- 1,203 --
------- ------- ------- -------- -----
-- 3,588 -- 1,203 78
------- ------- ------- -------- -----
$17,256 $14,433 $11,118 $ 36,798 $ 786
======= ======= ======= ======== =====
</TABLE>
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I
- - --------------------------------------------------------------------------------------------------------------------------
Gross Amount Carried
at December 31, 1996
---------------------------
Buildings Date Life
and (a) Accumulated Construction Date Depreciated
Description Land Improvements Total Depreciation Began Acquired Over
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Rental Properties:
Commercial Office Complexes, San Bernardino County, CA:
4.0 acres - One Vanderbilt $ 573 $ 8,607 $ 9,180 $ 3,714 11/30/85 11/06/84 3-40 yrs.
2.9 acres - Two Vanderbilt 443 6,310 6,753 3,040 1/30/86 11/06/84 3-40 yrs.
5.3 acres - Carnegie Business Center I 380 5,268 5,648 2,457 7/31/86 11/06/84 3-40 yrs.
2.2 acres - Service Retail Center 301 1,716 2,017 483 7/31/86 11/06/84 3-40 yrs.
Less: Provision for impairment of
real estate investment (b) (41) (209) (250) --
5.2 acres: - Promo Retail 811 5,959 6,770 396 2/01/93 11/06/84 10-40 yrs.
Less: Provision for impairment of
real estate investment (b) (7) (112) (119) --
7.4 acres - Inland Regional Center 946 7,099 8,045 115 1/96 6/26/87 10-40 yrs.
Less Provision for impairment of
real estate investment (b) (196) -- (196) --
Residential Property, San Diego County, CA:
Shadowridge Woodbend Apartments 1,766 11,557 13,323 2,872 N/A 6/26/87 5-40 yrs.
------- ------- ------- -------
4,976 46,195 51,171 13,077
------- ------- ------- -------
Construction in Progress:
San Bernardino County, CA:
Circuit City 2,294 -- 2,294 --
Less: Provision for impairment of
real estate investment (b) (419) -- (419) --
Inland Regional Center 309 -- 309 -- 8/95 11/06/84 N/A
------- ------ ------- -------
2,184 -- 2,184 --
------- ------ ------- -------
Land Held for Development: San Bernardino County, CA:
26 acres - Tri-City 10,200 -- 10,200 -- N/A 11/06/84 N/A
Less: Provision for impairment of
real estate investment (b) (7,224) -- (7,224) --
Riverside County, CA:
Lake Elsinore property 24.8 acres 5,977 -- 5,977 -- N/A 7/06/88 N/A
Less: Provision for impairment of
real estate investment (b) (4,042) -- (4,042) -- N/A 11/07/88 N/A
------- ------ ------- -------
4,911 -- 4,911 --
------- ------ ------- -------
Land Held for Sale:
Riverside County, CA:
Perris property 17.14 acres 3,410 -- 3,410 -- N/A 11/07/88 N/A
Less: Provision for impairment of
real estate investment (b) (2,024) -- (2,024) --
Temecula property 11.29 acres 3,483 -- 3,483 --
------- ------ ------- -------
4,869 -- 4,869 --
------- ------ ------- -------
$16,940 $46,195 $ 63,135 $ 13,077
======= ======= ======== ========
<FN>
(a) The aggregate cost for federal income tax purposes is $ 79,748.
(b) See Note 4 to Financial Statements.
(c) Service Retail Centre, Carnegie Business Center I and Promotional Retail
Center are collateral for the debt in the aggregate amount of $6,457.
</FN>
</TABLE>
Appendix A-29
<PAGE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
Reconciliation of gross amount at which real estate was carried:
For the For the For the For the
year ended two months year ended year ended
Dec.31, ended Dec.31, Oct. 31, Oct. 31,
1996 1995 1995 1994
--------- --------- --------- ---------
Investment in real estate
Balance at beginning of period $ 56,216 $ 55,863 $ 65,560 $ 63,790
Additions during period:
Improvements 7,166 353 2,351 1,770
Capitalized carrying costs -- -- 176 --
Provision for impairment of
investments in real estate -- -- (12,224) --
Sales (247) -- -- --
-------- ------- -------- --------
Balance at end of period $ 63,135 $ 56,216 $ 55,863 $ 65,560
======== ======== ======== ========
Accumulated Depreciation
Balance at beginning of period $ 11,799 $ 11,609 $ 10,332 $ 9,042
Additions charged to expenses 1,278 190 1,277 1,290
Sales during period -- -- -- --
-------- -------- -------- --------
Balance at end of period $ 13,077 $ 11,799 $ 11,609 $ 10,332
======== ======== ======== ========
Appendix A-30
<PAGE>
RANCON REALTY FUND IV,
a California Limited Partnership
INDEX TO EXHIBITS
Sequentially
Exhibit Number Exhibit Numbered Page
(3.3) Limited Partnership Agreement of RRF IV Tri-
City Limited Partnership, A Delaware limited
partnership of which Rancon Realty Fund IV, A
California Limited Partnership is the limited
partner ....................................... Appendix A-32
(10.6) Promissory note in the amount of $9,600,000,
dated April 19, 1996, secured by Deeds of
Trust on three of the Partnership Properties .. Appendix A-37
Appendix A-31
<PAGE>
Exhibit 3.3
LIMITED PARTNERSHIP AGREEMENT
OF
RRF IV TRI CITY LIMITED PARTNERSHIP
THIS LIMITED PARTNERSHIP AGREEMENT is made as of this 1 5th day of
March, 1996. between RRF IV, Inc., a Delaware corporation (the "General
Partner") and Rancon Realty Fund IV. a California limited partnership (the
"Limited Partner"), herein referred to collectively as the "Partners" and
individually as a "Partner," and whose names and addresses are set forth in
Exhibit A
ARTICLE I
NAME AND PURPOSE
1. Formation. The undersigned parties hereby form a partnership (herein
called the "Partnership") pursuant to the provisions of the Delaware Revised
Uniform Limited Partnership Act (the "Act").
2. Name and Office. The name of the Partnership is RRF IV TRI CITY
LIMITED PARTNERSHIP. The principal office of the Partnership shall be located at
400 South E1 Camino Real, San Mateo, California 94402-1708, but the Partnership
may select and otherwise operate and conduct its business in any and all parts
of the United States as the parties may deem advisable.
3. Purposes. The Partnership has been formed for the purposes of:
(a) acquiring all that certain real estate more particularly described
on Exhibit B hereto and all improvements thereon and all personally associated
therewith and all rentals, leases and agreements relating, thereto
(collectively, the "Real Estate") from the transferor identified opposite the
description of each such Real Estate described on Exhibit B hereto and financing
each such Real Estate with a loan (collectively, the "Loans") from Bear. Stearns
Funding. Inc. (the "Lender") and selling, conveying, mortgaging and otherwise
disposing of all or any part of the Real Estate subject to the requirement of
the documents evidencing and securing the Loans:
(b) entering into and performing obligations pursuant to agreements
necessary or desirable to effectuate the foregoing (such agreements and the
agreements referred to in subparagraph (a) above shall be collectively referred
to herein as the "Agreements"); and
(c) engaging in any lawful act or activity that may be taken by, and
exercising any powers permitted to, limited partnerships organized under the Act
that are incidental to and necessary or desirable for the accomplishment of the
above-mentioned purposes.
The Partnership is authorized to engage in any and all acts necessary, advisable
or incidental to the conduct of its business and, after repayment in full of the
Loans. may engage in any other business or activity which may be lawfully
conducted by partnerships organized under the Act.
4. Term. The term of the Partnership shall be from the date hereof to
December 31, 2095. unless Terminated earlier as hereinafter provided or as
otherwise provided by law.
ARTICLE II
CAPITAL
1. Initial Capital contributions of Partners. The initial capital
required to carry on the business purposes described in Article 1, Paragraph 3
above shall be advanced by the General Partner and the Limited Partner in the
amounts as shown on the attached Exhibit A, which Exhibit is incorporated herein
by this reference; provided, that the General Partner s initial capital
contribution shall be in an amount equal to the lesser of $500,000 and 1% of the
net asset value of the assets of the Partnership. No interest shall be paid by
the Partnership to the Partners on any Capital Contribution paid to the
Partnership. Except as otherwise provided in the Act or in this Agreement! no
Partner shall be required to make any further contribution to the capital of the
Partnership.
Appendix A-32
<PAGE>
Exhibit 3.3
2. Distributions of Capital. Under circumstances requiring a return of
any Capital Contribution, no Partner shall have the right to receive property
other than cash.
3. Admission of Additional Partners. Neither the Partnership nor the
General Partner on behalf of the Partnership may admit additional Partners
without the consent of all of the Partners.
ARTICLE III
MANAGEMENT
1. Management Decisions. The parties hereto agree that the General
Partner is solely responsible for the day-to-day operations of the Partnership.
Subject to express limitations set forth in this Partnership Agreement, the
General Partner is authorized to do anything necessary and appropriate to
achieve the purposes detailed in Article 1, Paragraph 3 above. The General
Partner may be removed for cause by a vote of the Partners holding a majority
interest in the Partnership but may not otherwise dissolve or resign as General
Partner without the vote of the majority interest in the Partnership; provided,
the General Partner may not resign or be removed in any event unless a successor
bankruptcy remote corporation shall have been appointed and be ready and able to
succeed to the General Partner as general partner of the Partnership.
Sale of all or a substantial portion of the Partnership assets must be
approved by a vote of the Partners holding a majority interest in the
Partnership.
The General Partner shall devote such time to the Partnership as shall
be reasonably required for its welfare and success. The General Partner shall
use its best efforts to enable the Partnership to carve out the purposes set
forth in Article 1. Paragraph 3.
2. Expenses. The General Partner may be reimbursed by the Partnership
for reasonable out-of-pocket expenses incurred by it in connection with the
business of the Partnership.
3. Covenants Regarding Operation.
(a) The Partnership shall not incur, assume or guarantee any
indebtedness except for such indebtedness as may be incurred by the Partnership
in connection with the Loans or as Otherwise permitted by the Lender.
(b) The Partnership shall not engage in any business or activity other
than in connection with or relating to the Partnership s purposes.
(c) The Partnership shall not consolidate or merge with or into any
other entity or convey or transfer its properties and assets substantially as an
entirety to any entity.
(d) The Partnership shall not dissolve or liquidate. in whole or in
part, except in the event the Loans have been satisfied in full.
(e) The funds and other assets of the Partnership shall not be
commingled with those of any other entity.
(f) The Partnership shall not guaranty or become obligated or hold
itself out as being liable for the debts of any other party. The Partnership
shall not plead its assets for the benefit of any other person or entity.
(g) The Partnership shall not form. or cause to be formed, any
subsidiaries.
(h) The Partnership shall make no asset distributions, including,
without limitation, any distribution of dividends, except to the extent of cash
on hand in excess of that needed to cover the expected operating expenses of the
Partnership.
(i) The Partnership shall not make any loans to any person or entity.
(j) The Partnership shall act solely in its name and through the
General Partner in the conduct of its business, and shall conduct its business
so as not to mislead others as to the identity of the entity with which they are
concerned. The Partnership shall pay its own liabilities from its own funds.
(k) The Partnership shall not file any voluntary petition or consent to
the filing of any petition in or institute any bankruptcy. reorganization.
arrangement, insolvency or liquidation proceeding or other proceeding under any
federal or state bankruptcy or similar law without the unanimous consent of the
Partners.
Appendix A-33
<PAGE>
Exhibit 3.3
( 1 ) The Partnership shall maintain partnership records and books of
account and shall not commingle its partnership records and books of account
with the corporate records and books of account of any entirety. The books of
the Partnership may be kept (subject to any provision contained in the statutes)
inside or outside the State of Delaware at such place or places as may be
designated from time to time by the members of the General Partner
(m) The Partnership shall maintain an arms-length relationship with the
Partners and their affiliates and, in particular shall compensate such Partners
or affiliates on a commercial reasonable basis for any services or office space
provided by them.
(n) The Partnership shall maintain a separate telephone number and use
its own stationary, invoice and checks.
(o) The Partnership shall observe all partnership formalities.
ARTICLE IV
RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS
1. Management of the Partnership.
(a) No Limited Partner may take part in the management of or control of
the business of the Partnership, transact any business in the name of the
Partnership, incur expenditures on behalf of the Partnership, bind the
Partnership or sign any agreement or document in the name of the Partnership.
(b) No Limited Partner will have any power or authority with respect to
the Partnership or Partnership affairs except to the extent that the express
provisions of this Agreement or the Act require or permit the Limited Partner to
take certain actions with respect to the Partnership.
2. Liability of Limited Partners. Except as otherwise provided in the
Act or this Agreement and irrespective of any deficit in a Limited Partners'
Capital Account, no Limited Partner will be required to contribute funds to the
Partnership other than its Capital Contribution and will not be personally
liable for any obligations of the Partnership beyond the amount of its Capital
Contribution. Except as provided in this Agreement, no Limited Partner in its
capacity as limited partner is required to loan funds to the Partnership.
ARTICLE V
ACCOUNTING
1. Books and Records. The Partnership through the General Partner shall
cause full and accurate books of the Partnership to be maintained at the
Partnership's principal place of business. Such books and records shall include
all receipts and expenditures, assets and liabilities, profits and losses and
all other records necessary for recording the Partnership's business and
affairs. Such books and records shall be open to inspection and examination by
all Partners, in person or by their duly authorized representatives, at
reasonable times.
2. Fiscal Year. The fiscal years the Partnership will end on the last
day of December, unless changed by the General Partner with the consent of the
Limited Partner.
3. Reports. Annual balance sheets and statements showing the income and
expenses of the Partnership. Together with the Partnership federal and state
income tax returns. shall be prepared and submitted to the Partners not later
than 60 days after the end of the fiscal year. The General Partner is hereby
authorized to designate itself as tax matters partner of the Partnership.
4. Bank Accounts and Investment of Funds. All funds of the Partnership
shall be deposited in its name in such checking and savings accounts or time
certificates as shall be designated by the Partners. Withdrawals therefrom shall
be made upon such signature or Signatures as the Partners may designate.
5. Method of Accounting. The books of the Partnership shall be kept on
the accrual basis of accounting.
Appendix A-34
<PAGE>
Exhibit 3.3
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
1. Profits and Losses. The profits and losses of the Partnership shall
be determined each year in accordance with accounting methods used for federal
income tax purposes and shall be allocated among the Partners and credited (or
charged) to their Capital Accounts (as defined and maintained in accordance with
Regulations under Section 704(b) of the Internal Revenue Code of 1986, as
amended) in accordance with the Partnership Percentages (as such percentages are
set forth on Exhibit A hereto).
2. Cash Distributions. All cash distributions of the Partnership shall
be distributed among the Partners and charged to their Capital Accounts in
accordance with the Partnership Percentages.
ARTICLE VII
TERMINATION OF THE PARTNERSHIP
1. Termination. The Partnership shall be dissolved upon the first to
occur of the following:
(a) the sale of all or substantially all of the Partnership assets;
(b) the mutual unanimous agreement of the Partners; provided, that the
Partners shall not agree to dissolve the Partnership while the Loans are
outstanding.
(c) the date December 31, 2095; or
(d) the General Partner shall dissolve or file. or be the subject of,
any reorganization, bankruptcy, insolvency or liquidation proceeding or other
proceeding under any federal or state bankruptcy or similar law; provided, that
any such act shall not cause a dissolution of the Partnership if within 90 days
after such withdrawal, dissolution filing or commencement of proceeding the
limited partners shall unanimously (i) elect to continue the Partnership, and
(ii) appoint a successor General Partner.
2. Dissolution. Upon the occurrence of any one of the above events. the
Partnership will be dissolved. the affairs of the Partnership wound up and the
assets liquidated. allocated and distributed, as realized, in the following
order:
(a) to creditors of the Partnership; and
(b) to the Partners in accordance with their Capital Account balances.
If, upon liquidation. the General Partner has a deficit Capital Account balance,
the General Partner shall be required to contribute cash to the Partnership in
an amount equal to such deficit Capital Account balance
ARTICLE VIII
TRANSFER OF INTEREST
No partner may sell, transfer or otherwise assign its interest in the
Partnership, in whole or in part; provided, that the initial General Partner may
transfer its general partner interest in the Partnership to a corporation which
is a wholly owned, qualified real estate investment trust subsidiary of Rancon
Financial Corporation and is otherwise approved by the Lender, and following
such transfer such transferee shall be the General Partner for all purposes of
this Agreement. Anything contained herein to the contrary notwithstanding, in no
event shall the Partners or any of them have the authority to amend the
provisions of this Article VIII.
ARTICLE IX
GENERAL PROVISIONS
1. Indemnification. If the General Partner shall violate any of the
terms, provisions and conditions of this Partnership Agreement, it shall, in
addition to being subjected to the other remedies. liabilities and obligations
herein imposed upon it therefor, keep and save harmless the Partnership property
and indemnify the other Partners from any and all claims. demands and actions
that may arise out of or by reason of such a violation of any of the terms,
provisions and conditions thereof.
2. Amendments. This Partnership Agreement may not be modified or
amended except with the
Appendix A-35
<PAGE>
Exhibit 3.3
unanimous written consent of the Partners. Notwithstanding anything herein to
the contrary, Article VIII may not be amended at any time.
3. Governing Law; Binding. This Partnership Agreement shall be
construed and enforceable in accordance with the laws of the State of Delaware
and shall be binding upon all the parties and their assigns, successors,
estates, heirs or legatees.
4. Counterparts. This Partnership Agreement may be executed in any
number of counterparts. each of which shall be deemed to constitute an original
and all of which together shall constitute one instrument.
IN WITNESS WHEREOF. we have hereunto set our hands the day and year
heretofore mentioned.
GENERAL PARTNER:
RRF IV. INC.
By: /s/ Robert Batinovich
Robert Batinovich. President
LIMITED PARTNER:
Rancon Realty Fund IV. L.P.,
a California limited partnership
By: /s/ Daniel Lee Stephenson
Daniel Lee Stephenson,
General Partner
By: Rancon Financial Corporation,
General Partner
By: /s/ Daniel Lee Stephenson
Its: President
Appendix A-36
<PAGE>
Exhibit 10.6
PROMISSORY NOTE
$6,500,000 New York, New York
April 19, 1996
FOR VALUE RECEIVED RRF IV TRI CITY LIMITED PARTNERSHIP, a Delaware
limited partnership, as maker, having its principal place of business at c/o
Glenborough Inland Realty Corporation, 400 South El Camino Real, San Mateo,
California 94402 ("Borrower"), hereby unconditionally promises to pay to the
order of BEAR, STEARNS FUNDING, INC., a Delaware corporation, as payee, having
an address at 245 Park Avenue, New York, New York 10167 ("Lender"), or at such
other place as the holder hereof may from time to time designate in writing, the
principal sum of SIX MILLION FIVE HUNDRED THOUSAND Dollars ($6,500,000), in
lawful money of the United States of America with interest thereon to be
computed from the date of this Note at the Applicable Interest Rate (defined
below), and to be paid in installments as follows:
ARTICLE 1: PAYMENT TERMS
(a) A payment on the date hereof on account of all interest that will
accrue on the principal amount of this Note from and after the date hereof
through and including the last day of the present month;
(b) A constant payment of $53,412.84 on the first day of June, 1996 and
on the first day of each calendar month thereafter (the "Monthly Payment") up to
and including the first day of April, 2006;
each Monthly Payment to be applied as follows:
(i) first, to the payment of interest computed at the Applicable
Interest Rate; and
(ii) the balance toward the reduction of the principal sum
and the balance of the principal sum and all interest thereon shall be due and
payable on the first day of May, 2006 (the "Maturity Date"). Interest on the
principal sum of this Note shall be calculated on the basis of a three hundred
sixty (360) day year based on twelve (12) thirty (30) day months, except that
interest due and payable for a period of less than a full month shall be
calculated by multiplying the actual number of days elapsed in such period by a
daily rate based on said 360-day year.
ARTICLE 2: INTEREST
The term "Applicable Interest Rate" as used in the Security Instrument
(defined below) and this Note shall mean an interest rate equal to eight and
seven hundred forty four thousandths percent (8.744%) per annum.
ARTICLE 3: DEFAULT AND ACCELERATION
(a) The whole of the principal sum of this Note, (b) interest, default
interest, late charges and other sums, as provided in this Note, the Security
Instrument or the Other Security Documents (defined below), (c) all other monies
agreed or provided to be paid by Borrower in this Note, the Security Instrument
or the Other Security Documents, (d) all sums advanced pursuant to the Security
Instrument to protect and preserve the Property (defined below) and the lien and
the security interest created thereby, and (e) all sums advanced and costs and
expenses incurred by Lender in connection with the Debt (defined below) or any
part thereof, any renewal, extension, or change of or substitution for the Debt
or any part thereof, or the acquisition or perfection of the security therefor,
whether made or incurred at the request of Borrower or Lender (all the sums
referred to in (a) through (e) above shall collectively be referred to as the
"Debt") shall without notice become immediately due and payable at the option of
Lender if any payment required in this Note is not paid within ten (10) days of
the date the same is due or on the Maturity Date or on the happening of any
other default, after the expiration of any applicable notice and grace periods,
herein or under the terms of the Security Instrument or any of the Other
Security Documents (collectively, an "Event of Default").
ARTICLE 4: DEFAULT INTEREST
Borrower does hereby agree that upon the occurrence of an Event of
Default, Lender shall be entitled to receive and Borrower shall pay interest on
the entire unpaid principal sum at a rate equal to the lesser of (a) five
percent (5%) plus the Applicable Interest Rate and (b) the maximum interest rate
which Borrower may by law pay (the "Default Rate"). The Default Rate shall be
computed from the occurrence of the Event of Default until the earlier of the
date upon which the Event of Default is
Appendix A-37
<PAGE>
Exhibit 10.6
cured or the date upon which the Debt is paid in full. Interest calculated at
the Default Rate shall be added to the Debt, and shall be deemed secured by the
Security Instrument. This clause, however, shall not be construed as an
agreement or privilege to extend the date of the payment of the Debt, nor as a
waiver of any other right or remedy accruing to Lender by reason of the
occurrence of any Event of Default.
ARTICLE 5: PREPAYMENT
Borrower shall not have the right or privilege to prepay all or any
portion of the unpaid principal balance of this Note until the third anniversary
of the date hereof.
During the period commencing on the third anniversary of the date
hereof and ending on or before the date which is six (6) months prior to the
Maturity Date, Borrower may, provided it has given Lender prior written notice
in accordance with the terms of this Note, prepay the unpaid principal balance
of this Note in whole or in part by paying, together with the amount to be
prepaid, (a) interest accrued and unpaid on the portion of the principal balance
of this Note being prepaid to and including the date of prepayment, (b) unless
prepayment is tendered on the first day of a calendar month, an amount equal to
the interest that would have accrued on the amount being prepaid after the date
of prepayment through and including the last day of the calendar month in which
the prepayment occurs had the prepayment not been made (which sum shall
constitute additional consideration for the prepayment), (c) all other sums then
due under this Note, the Security Instrument and the Other Security Documents,
and (d) a prepayment consideration (the "Prepayment Consideration") equal to the
greater of (i) one percent (1%) of the principal balance of this Note being
prepaid and (ii) the excess, if any, of (A) the product of (1) the sum of the
present values of all then-scheduled payments of principal and interest under
this Note including, but not limited to, principal and interest on the Maturity
Date, (with each such payment discounted to its present value at the date of
prepayment at the rate which, when compounded monthly, is equivalent to the
Prepayment Rate (hereinafter defined)) and (2) a fraction, the numerator of
which is the principal amount of this Note being prepaid and the denominator of
which is the then outstanding principal amount of this Note, over (B) the
principal amount of this Note being prepaid. Partial prepayments of the
principal amount of this Note shall not be in increments of less than $100,000,
be permitted more than once in any period of one year commencing on the date
hereof or any anniversary hereof or result in a recalculation of the Monthly
Payment.
The term "Prepayment Rate" means the bond equivalent yield (in the
secondary market) on the United States Treasury Security that as of the
Prepayment Rate Determination Date (hereinafter defined) has a remaining term to
maturity closest to, but not exceeding, the remaining term to the Maturity Date,
as most recently published in the "Treasury Bonds, Notes and Bills" section in
The Wall Street Journal as of such Prepayment Rate Determination Date. If more
than one issue of United States Treasury Securities has the remaining term to
the Maturity Date referred to above, the "Prepayment Rate" shall be the yield on
the United States Treasury Security most recently issued as of the Prepayment
Rate Determination Date. The rate so published shall control absent manifest
error. The term "Prepayment Rate Determination Date" shall mean the date which
is five (5) Business Days prior to the scheduled prepayment date. As used
herein, "Business Day"" shall mean any day other than Saturday, Sunday or any
other day on which banks are required or authorized to close in New York, New
York.
Lender shall notify Borrower of the amount and the basis of
determination of the required prepayment consideration. If the publication of
the Prepayment Rate in The Wall Street Journal is discontinued, Lender shall
determine the Prepayment Rate on the basis of "Statistical Release H.15 (519),
Selected Interest Rates," or any successor publication, published by the Board
of Governors of the Federal Reserve System, or on the basis of such other
publication or statistical guide as Lender may reasonably select.
After the date which is six (6) months prior to the Maturity Date,
Borrower may, provided that it has given Lender prior written notice in
accordance with the terms of this Note, prepay the unpaid principal balance of
this Note in whole or in part, by paying, together with the amount to be
prepaid, (a) interest accrued and unpaid on the portion of the principal balance
of this Note being prepaid to and including the date of prepayment, (b) unless
the prepayment is tendered on the first day of a calendar month, an amount equal
to the interest that would have accrued on the amount being prepaid after the
date of prepayment through and including the last day of the calendar month in
which the prepayment occurs had the prepayment not been made (which amount shall
constitute additional consideration for the prepayment), and (c) all other sums
then due under this Note, the Security Instrument and the Other Security
Documents. Partial prepayments of this Note during such period shall not be in
increments of less than $100,000 or result in a recalculation of the amount of
monthly debt service payments due under this Note.
Borrower's right to prepay any portion of the principal balance of this
Note shall be subject to (i) Borrower's submission of a notice to Lender setting
forth the amount to be prepaid and the projected date of prepayment, which date
shall
Appendix A-38
<PAGE>
Exhibit 10.6
be no less than thirty (30) or more than sixty (60) days from the date of such
notice, and (ii) Borrower's actual payment to Lender of the amount to be prepaid
as set forth in such notice on the projected date set forth in such notice or
any day following such projected date occurring in the same calendar month as
such projected date.
Following an Event of Default and acceleration of this Note, if
Borrower or anyone on Borrower's behalf makes a tender of payment of the amount
necessary to satisfy the indebtedness evidenced by this Note and secured by the
Security Instrument at any time prior to foreclosure sale (including, but not
limited to, sale under power of sale under the Security Instrument), or during
any redemption period after foreclosure, (i) the tender of payment shall
constitute an evasion of Borrower's obligation to pay any Prepayment
Consideration due under this Note and such payment shall, therefore, to the
maximum extent permitted by law, include a premium equal to the Prepayment
Consideration that would have been payable on the date of such tender had this
Note not been so accelerated, or (ii) if at the time of such tender a prepayment
of the principal amount of this Note would have been prohibited under this Note
had the principal amount of this Note not been so accelerated, the tender of
payment shall constitute an evasion of such prepayment prohibition and shall,
therefore, to the maximum extent permitted by law, include an amount equal to
the greater of (i) 1% of the then principal amount of this Note and (ii) an
amount equal to the excess of (A) the sum of the present values of a series of
payments payable at the times and in the amounts equal to the payments of
principal and interest (including, but not limited to the principal and interest
payable on the Maturity Date) which would have been scheduled to be payable
after the date of such tender under this Note had this Note not been
accelerated, with each such payment discounted to its present value at the date
of such tender at the rate which when compounded monthly is equivalent to the
Prepayment Rate, over (B) the then principal amount of this Note.
ARTICLE 6: SECURITY
This Note is secured by the Security Instrument and the Other Security
Documents. The term "Security Instrument" as used in this Note shall mean those
three (3) Deeds of Trust, Fixture Filings and Security Agreements dated as of
the date hereof in the principal sum of this Note given by Borrower to (or for
the benefit of) Lender each covering the fee simple estate of Borrower in
certain premises located in Riverside County, State of California, and other
property, as more particularly described therein (collectively, the "Property")
and intended to be duly recorded in said County. The term "Other Security
Documents" as used in this Note shall mean all and any of the documents other
than this Note or the Security Instrument now or hereafter executed by Borrower
and/or others and by or in favor of Lender, which wholly or partially secure or
guarantee payment of this Note. Whenever used, the singular number shall include
the plural, the plural number shall include the singular, and the words "Lender"
and "Borrower" shall include their respective successors, assigns, heirs,
executors and administrators.
All of the terms, covenants and conditions contained in the Security
Instrument and the Other Security Documents are hereby made part of this Note to
the same extent and with the same force as if they were fully set forth herein.
All capitalized terms not defined herein shall have the meanings ascribed to
them in the Security Instrument and the Other Security Documents.
ARTICLE 7: SAVINGS CLAUSE
This Note is subject to the express condition that at no time shall
Borrower be obligated or required to pay interest on the principal balance due
thereunder at a rate which could subject Lender to either civil or criminal
liability as a result of being in excess of the maximum interest rate which
Borrower is permitted by applicable law to contract or agree to pay. If by the
terms of this Note, Borrower is at any time required or obligated to pay
interest on the principal balance due thereunder at a rate in excess of such
maximum rate, the Applicable Interest Rate or the Default Rate, as the case may
be, shall be deemed to be immediately reduced to such maximum rate and all
previous payments in excess of the maximum rate shall be deemed to have been
payments in reduction of principal and not on account of the interest due
thereunder. All sums paid or agreed to be paid to Lender for the use,
forbearance, or detention of the Debt, shall, to the extent permitted by
applicable law, be amortized, prorated, allocated, and spread throughout the
full stated term of the Note until payment in full so that the rate or amount of
interest on account of the Debt does not exceed the maximum lawful rate of
interest from time to time in effect and applicable to the Debt for so long as
the Debt is outstanding.
ARTICLE 8: LATE CHARGE
If any sum payable under this Note is not paid prior to the tenth
(10th) day after the date on which it is due, Borrower shall pay to Lender upon
demand an amount equal to the lesser of five percent (5%) of the unpaid sum or
the maximum amount permitted by applicable law to defray the expenses incurred
by Lender in handling and processing the delinquent
Appendix A-39
<PAGE>
Exhibit 10.6
payment and to compensate Lender for the loss of the use of the delinquent
payment and the amount shall be secured by the Security Instrument and the Other
Security Documents.
ARTICLE 9: NO ORAL CHANGE
This Note may not be modified, amended, waived, extended, changed,
discharged or terminated orally or by any act or failure to act on the part of
Borrower or Lender, but only by an agreement in writing signed by the party
against whom enforcement of any modification, amendment, waiver,' extension,
change, discharge or termination is sought.
ARTICLE 10: JOINT AND SEVERAL LIABILITY
If Borrower consists of more than one person or party, the obligations
and liabilities of each person or party shall be joint and several.
ARTICLE 11: WAIVERS
Borrower and all others who may become liable for the payment of all or
any part of the Debt do hereby severally waive presentment and demand for
payment, notice of dishonor, protest and notice of protest and non-payment and
all other notices of any kind. No release of any security for the Debt or
extension of time for payment of this Note or any installment hereof, and no
alteration, amendment or waiver of any provision of this Note, the Security
Instrument or the Other Security Documents made by agreement between Lender or
any other person or party shall release, modify, amend, waive, extend, change,
discharge, terminate or affect the liability of Borrower, and any other person
or entity who may become liable for the payment of all or any part of the Debt,
under this Note, the Security Instrument or the Other Security Documents. No
notice to or demand on Borrower shall be deemed to be a waiver of the obligation
of Borrower or of the right of Lender to take further action without further
notice or demand as provided for in this Note, the Security Instrument or the
Other Security Documents. If Borrower is a partnership, the agreements herein
contained shall remain in force and applicable, notwithstanding any changes in
the individuals comprising the partnership. If Borrower is a corporation, the
agreements contained herein shall remain in full force and applicable
notwithstanding any changes in the shareholders comprising, or the officers and
directors relating to, the corporation. If Borrower is a limited liability
company, the agreements contained herein shall remain in full force and
applicable notwithstanding any changes in the members comprising, or the
managers, officers or agents relating to, the limited liability company. The
term "Borrower", as used herein, shall include any alternate or successor
partnership, corporation, limited liability company or other entity or person to
the Borrower named herein, but any predecessor partnership (and their partners),
corporation, limited liability company, other entity or person shall not thereby
be released from any liability. Nothing in this Article 11 shall be construed as
a consent to, or a waiver of, any prohibition or restriction on transfers of
interests in such partnership which may be set forth in the Security Instrument
or any Other Security Document.
ARTICLE 12: TRANSFER
Lender may, at any time, sell, transfer or assign this Note, the
Security Instrument and the Other Security Documents, and any or all servicing
rights with respect thereto, or grant participations therein or issue mortgage
passthrough certificates or other securities evidencing a beneficial interest in
a rated or unrated public offering or private placement (the "Securities").
Lender may forward to each purchaser, transferee, assignee, servicer,
participant, investor in such Securities or any Rating Agency rating such
Securities (collectively, the "Investor") and each prospective Investor, all
documents and information which Lender now has or may hereafter acquire relating
to the Debt and to Borrower, any guarantor and the Property, whether furnished
by Borrower, any guarantor or otherwise, as Lender determines necessary or
desirable. Borrower and any guarantor agree to cooperate with Lender in
connection with any transfer made or any Securities created pursuant to the
Security Instrument, including, without limitation, the delivery of an estoppel
certificate in accordance therewith, and such other documents as may be
reasonably requested by Lender. Borrower shall also furnish and Borrower and any
guarantor consent to Lender furnishing to such Investors or such prospective
Investors any and all information concerning the Property, the Leases, the
financial condition of Borrower and any guarantor as may be requested by Lender,
any Investor or any prospective Investor in connection with any sale, transfer
or participation interest. Lender may retain or assign responsibility for
servicing the Loan, including the Note, the Security Instrument, this Agreement
and the Other Security Documents, or may delegate some or all of such
responsibility and/or obligations to a servicer including, but not limited to,
any subservicer or master servicer. Lender may make such assignment or
delegation on behalf of the Investors if the Note is sold or this Agreement or
the Other Security Documents are assigned. All references to Lender herein shall
refer to and include any such
Appendix A-40
<PAGE>
Exhibit 10.6
servicer to the extent applicable.
ARTICLE 13: WAIVER OF TRIAL BY JURY
BORROWER HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE
RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM, WHETHER IN
CONTRACT, TORT OR OTHERWISE, RELATING DIRECTLY OR INDIRECTLY TO THE LOAN
EVIDENCED BY THIS NOTE, THE APPLICATION FOR THE LOAN EVIDENCED BY THIS NOTE,
THIS NOTE, THE SECURITY INSTRUMENT OR THE OTHER SECURITY DOCUMENTS OR ANY ACTS
OR OMISSIONS OF LENDER, ITS OFFICERS, EMPLOYEES, DIRECTORS OR AGENTS IN
CONNECTION THEREWITH.
ARTICLE 14: EXCULPATION
(a) Except as otherwise provided herein, in the Security Instrument or
in the Other Security Documents, Lender shall not enforce the liability and
obligation of Borrower, to perform and observe the obligations contained in this
Note, the Security Instrument or the Other Security Documents by any action or
proceeding wherein a money judgment shall be sought against Borrower or any
partner of Borrower, except that Lender may bring a foreclosure action, an
action for specific performance or any other appropriate action or proceeding to
enable Lender to enforce and realize upon this Note, the Security Instrument,
the Other Security Documents, and the interests in the Property; and any other
collateral given to Lender pursuant to the Security Instrument and the Other
Security Documents; provided, however, that, except as specifically provided
herein, any judgment in any such action or proceeding shall be enforceable
against Borrower or any partner of Borrower only to the extent of Borrower's
interest in the Property and in any other collateral given to Lender, and
Lender, by accepting this Note, the Security Instrument and the Other Security
Documents, agrees that it shall not sue for, seek or demand any deficiency
judgment against Borrower or any partner of Borrower, in any such action or
proceeding, under or by reason of or in connection with this Note, the Security
Instrument or the Other Security Documents. The provisions of this paragraph
shall not, however, (i) constitute a waiver, release or impairment of any
obligation evidenced or secured by the Security Instrument or the Other Security
Documents, (ii) impair the right of Lender to name Borrower as a party defendant
in any action or suit for foreclosure and sale under the Security Instrument,
(iii) affect the validity or enforceability of any guaranty made in connection
with this Note, the Security Instrument or the Other Security Documents, (iv)
impair the right of Lender to obtain the appointment of a receiver, (v) impair
the enforcement of any assignment, or (vi) constitute a waiver of the right of
Lender to enforce the liability and obligation of Borrower, by money judgment or
otherwise, to the extent of any loss, damage, cost, expense, liability, claim or
other obligation incurred by Lender (including attorneys' fees and costs
reasonably incurred) arising out of or in connection with the following:
(a) fraud or misrepresentation by Borrower in connection with this
Note, the Security Instrument or the Other Security Documents;
(b) the gross negligence or willful misconduct of Borrower;
(c) material physical waste of the Property by Borrower;
(d) the breach of provisions in this Note, the Security Instrument or
the Other Security Documents concerning Environmental Laws and Hazardous
Substances and any indemnification of Lender with respect thereto in either
document;
(e) the removal or disposal of any portion of the Property by Borrower
after default under this Note, the Security Instrument or the Other Security
Documents;
(f) the misapplication or conversion by Borrower of (i) any insurance
proceeds paid by reason.- of any loss, damage or destruction to the Property,
(ii) any a-wards or other amounts received in connection with the condemnation
of all or a portion of the Property, or (iii) any Rents following default under
this Note, the Security Instrument or the Other Security Documents;
(g) Borrower's failure to pay Taxes (provided that the liability of
Borrower shall be only for amounts in excess of the amount held by Lender in
escrow for the payment of Taxes), assessments, charges for labor or materials or
other charges that can create liens on any portion of the Property; and
(h) Borrower's failure to deliver any security deposits collected with
respect to the Property which are not delivered to Lender upon a foreclosure of
the Property or action in lieu thereof, except to the extent any such security
deposits were applied in accordance with the terms and conditions of any of the
Leases prior to the occurrence of the Event of Default that gave rise to such
foreclosure or action in lieu thereof.
Notwithstanding anything to the contrary in this Note, the Security
Instrument or the Other Security Documents (i) the Debt shall be fully recourse
to Borrower; and (ii) Lender shall not be deemed to have waived any right which
Lender may have under Section 506(a), 506(b), ll.(b) or any other provisions of
the US Bankruptcy Code to file a claim for the full
Appendix A-41
<PAGE>
Exhibit 10.6
amount of the Debt or to require that all collateral shall continue to secure
all of the Debt owing to Lender in accordance with this Note, the Security
Instrument or the Other Security Documents, in the event that: (A) the first
full Monthly Payment is not paid when due; (B) Borrower fails to permit on-site
inspections of the Property, fails to provide financial information, or fails to
maintain its status as a single purpose entity, as required by the Security
Instrument; (C) Borrower fails to obtain Lender's prior written consent to any
subordinate financing or other voluntary lien encumbering the Property; (D)
Borrower fails to obtain Lender's prior written consent to any assignment,
transfer, or conveyance of the Property or any interest therein as required by
the Security Instrument.
ARTICLE 15: AUTHORITY
Borrower (and the undersigned representative of Borrower, if any)
represents that Borrower has full power, authority and legal right to execute
and deliver this Note, the Security Instrument and the Other Security Documents
and that this Note, the Security Instrument and the Other Security Documents
constitute valid and binding obligations of Borrower.
ARTICLE 16: APPLICABLE LAW
This Note shall be deemed to be a contract entered into pursuant to the
laws of the State of New York and shall in all respects be governed, construed,
applied and enforced in accordance with the laws of the State of New York.
ARTICLE 17: SERVICE OF PROCESS
(a) (i) Borrower will maintain a place of business or an agent for
service of process in California and give prompt notice to Lender of the address
of such place of business and of the name and address of any new agent appointed
by it, as appropriate. Borrower further agrees that the failure of its agent for
service of process to give it notice of any service of process will not impair
or affect the validity of such service or of any judgment based thereon. If,
despite the foregoing, there is for any reason no agent for service of process
of Borrower available to be served, and if it at that time has no place of
business in California then Borrower irrevocably consents to service of process
by registered or certified mail, postage prepaid, to it at its address given in
or pursuant to the first paragraph hereof.
(ii) Borrower initially and irrevocably designates CT Corporation
System, with offices on the date hereof at 818 West Seventh Street, Los Angeles,
California 90017, to receive for and on behalf of Borrower service of process in
California with respect to this Note.
(b) With respect to any claim or action arising thereunder or under the
Security Instrument or the Other Security Documents, Borrower (a) irrevocably
submits to the nonexclusive jurisdiction of the courts of the State of New York
and the United States District Court located in the Borough of Manhattan in New
York, New York, and appellate courts from any thereof, and (b) irrevocably
waives any objection which it may have at any time to the laying on venue of any
suit, action or proceeding arising out of or relating to this Note brought in
any such court, irrevocably waives any claim that any such suit, action or
proceeding brought in any such court has been brought in an inconvenient forum.
(c) Nothing in this Note will be deemed to preclude Lender from
bringing an action or proceeding with respect hereto in any other jurisdiction.
ARTICLE 18: COUNSEL FEES
In the event that it should become necessary to employ counsel to
collect the Debt or to protect or foreclose the security therefor, Borrower also
agrees to pay all reasonable fees and expenses of Lender, including, without
limitation, reasonable attorney's fees for the services of such counsel whether
or not suit be brought.
ARTICLE 19: NOTICES
All notices or other written communications thereunder shall be deemed
to have been properly given (i) upon delivery, if delivered in person with
receipt acknowledged by the recipient thereof, (ii) one (1) Business Day
(defined below) after having been deposited for overnight delivery with any
reputable overnight courier service, or (iii) three (3) Business Days after
having been deposited in any post office or mail depository regularly maintained
by the U.S. Postal Service and sent by registered or certified mail, postage
prepaid, return receipt requested, addressed as follows:
Appendix A-42
<PAGE>
Exhibit 10.6
If to Borrower: RRF IV Tri City Limited Partnership
c/o Glenborough Inland Realty Corporation
400 South El Camino Real
San Mateo, CA 94402-1708
Attention: Mr. Robert Batinovich
With a copy to: Morrison & Foerster LLP
345 California Street
San Francisco, CA 94104
Attn: Noel Nellis, Esq.
If to Lender: Bear, Stearns Funding, Inc.
245 Park Avenue
New York, New York 10167
Attention: Kenneth A. Rubin
or addressed as such party may from time to time designate by written notice to
the other parties.
Either party by notice to the other may designate additional or
different addresses for subsequent notices or communications.
"Business Day" shall mean any day other than Saturday, Sunday or any
other day on which banks are required or authorized to close in New York, New
York.
ARTICLE 20: MISCELLANEOUS
(a) Wherever pursuant to this Note (i) Lender exercises any right given
to it to approve or disapprove, (ii) any arrangement or term is to be
satisfactory to Lender, or (iii) any other decision or determination is to be
made by Lender, the decision of Lender to approve or disapprove, all decisions
that arrangements or terms are satisfactory or not satisfactory and all other
decisions and determinations made by Lender, shall be in the sole and absolute
discretion of Lender and shall be final and conclusive, except as may be
otherwise expressly and specifically provided herein.
(b) Wherever pursuant to this Note it is provided that Borrower pay any
costs and expenses, such costs and expenses shall include, but not be limited
to, legal fees and disbursements of Lender, whether retained firms, the
reimbursement for the expenses of in-house staff, or otherwise.
ARTICLE 21: DEFINITIONS
All capitalized terms not otherwise defined herein shall have the
meanings ascribed to such terms in the Security Instrument.
IN WITNESS WHEREOF, Borrower has duly executed this Note as of the day
and year first above written.
RRP IV TRI CITY LIMITED PARTNERSHIP
By: RRF IV, Inc.,
its general partner
By: /s/ Robert Batinovich
Name: Robert Batinovich
Title: President
Appendix A-43
<PAGE>
APPENDIX B
Financial Report on Form 10-Q
for the Period Ended June 30, 1997
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Balance Sheets
(in thousands, except units outstanding)
(Unaudited)
June 30, December 31,
1997 1996
--------- ---------
Assets
Investments in real estate:
Rental property, net of accumulated depreciation
of $13,824 and $13,077 at June 30, 1997
and December 31, 1996, respectively $ 43,765 $ 38,094
Construction in progress -- 2,184
Land held for development 4,915 4,911
Land held for sale 4,495 4,869
--------- ---------
Total real estate investments 53,175 50,058
Cash and cash equivalents 663 97
Restricted cash 371 102
Accounts and interest receivable 37 188
Note receivable -- 405
Deferred financing costs and other fees, net of
accumulated amortization of $896 and $775
at June 30, 1997 and December 31, 1996,
respectively 1,496 1,223
Prepaid expenses and other assets 544 622
--------- ---------
Total assets $ 56,286 $ 52,695
========= =========
Liabilities and Partners' Equity (Deficit)
Liabilities:
Notes payable $ 22,135 $ 17,256
Accounts payable and accrued expenses 604 713
Interest payable 85 67
--------- ---------
Total liabilities 22,824 18,036
--------- ---------
Commitments and contingent liabilities (see Note 4)
Partners' equity (deficit):
General partners (891) (891)
Limited partners, 79,846 limited partnership units
outstanding at June 30, 1997 and December 31, 1996 34,353 35,550
--------- ---------
Total partners' equity 33,462 34,659
--------- ---------
Total liabilities and partners' equity $ 56,286 $ 52,695
========= =========
See accompanying notes to financial statements.
Appendix B-1
<PAGE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Operations
(in thousands, except per unit amounts and units outstanding)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
----------------- -----------------
1997 1996 1997 1996
------- ------- ------- -------
Revenues:
Rental income $ 1,748 $ 1,049 $ 3,287 $ 2,169
Interest and other income 3 26 11 54
------- ------- ------- -------
Total revenues 1,751 1,075 3,298 2,223
------- ------- ------- -------
Expenses:
Operating 758 527 1,470 1,052
Interest expense 468 356 861 617
Depreciation and amortization 429 386 820 689
Provision for impairment of land
held for sale 378 -- 378 --
Expenses associated with
undeveloped land 148 219 325 402
General and administrative expenses 325 330 641 655
------- ------- ------- -------
Total expenses 2,506 1,818 4,495 3,415
------- ------- ------- -------
Net loss $ (755) $ (743) $(1,197) $(1,192)
======= ======= ======= =======
Net loss per limited partnership unit $ (9.45) $ (9.31) $(14.99) $(14.93)
======= ======= ======= =======
Weighted average number of limited
partnership units outstanding during
each period used to compute net loss
per limited partnership unit 79,846 79,846 79,846 79,846
======= ======= ======= =======
See accompanying notes to financial statements.
Appendix B-2
<PAGE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Partners' Equity (Deficit)
For the six months ended June 30, 1997 and 1996
(in thousands)
(Unaudited)
General Limited
Partners Partners Total
------- --------- ---------
Balance at December 31, 1996 $ (891) $ 35,550 $ 34,659
Net loss -- (1,197) (1,197)
------- --------- ---------
Balance at June 30, 1997 $ (891) $ 34,353 $ 33,462
======= ========= =========
Balance at December 31, 1995 $ (891) $ 37,060 $ 36,169
Net loss -- (1,192) (1,192)
------- --------- ---------
Balance at June 30, 1996 $ (891) $ 35,868 $ 34,977
======= ========= =========
See accompanying notes to financial statements.
Appendix B-3
<PAGE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Six months ended
June 30,
1997 1996
-------- --------
Cash flows from operating activities:
Net loss $ (1,197) $ (1,192)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 820 689
Amortization of loan fees, included in interest expense 48 39
Provision for impairment of land held for sale 378 --
Changes in certain assets and liabilities:
Accounts and interest receivable 151 (1)
Prepaid expenses and other assets 78 (284)
Accounts payable and accrued expenses (109) 1,274
Interest payable 18 47
Deferred financing costs and other fees (272) (38)
-------- --------
Net cash provided by (used for) operating activities (85) 534
-------- --------
Cash flows from investing activities:
Net proceeds from sale of real estate -- 248
Additions to real estate and property development costs (3,837) (5,556)
-------- --------
Net cash used for investing activities (3,837) (5,308)
-------- --------
Cash flows from financing activities:
Net loan proceeds 6,500 3,845
Decrease (increase) in restricted cash, net (269) 826
Payment of loan fees (122) (199)
Notes payable principal payments (1,621) (77)
-------- --------
Net cash provided by financing activities 4,488 4,395
-------- --------
Net increase (decrease) in cash and cash equivalents 566 (379)
Cash and cash equivalents at beginning of period 97 1,296
-------- --------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 795 $ 528
======== ========
Supplemental disclosure of additions to real estate
and property development costs:
Purchase price of real estate $(1,750) $ --
Reduction of note receivable 405 --
Additions to real estate and property development costs (2,492) (5,556)
------- --------
Net additions to real estate and property development costs $(3,837) $ (5,556)
======= ========
Supplemental disclosure of non-cash refinancing activity:
New financing $ 7,700 $ 9,425
Original financing paid off in escrow (1,200) (5,580)
------- --------
Net loan proceeds $ 6,500 $ 3,845
======= ========
See accompanying notes to financial statements.
Appendix B-4
<PAGE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
June 30, 1997 (Unaudited)
Note 1. THE PARTNERSHIP AND SIGNIFICANT ACCOUNTING POLICIES
In the opinion of Rancon Financial Corporation ("RFC") and Daniel Lee Stephenson
(the "Sponsors") and Glenborough Corporation (successor by merger with
Glenborough Inland Realty Corporation), the accompanying unaudited financial
statements contain all adjustments (consisting of only normal accruals)
necessary to present fairly the financial position of Rancon Realty Fund IV, A
California Limited Partnership (the "Partnership") as of June 30, 1997 and
December 31, 1996, and the related statements of operations for the three and
six months ended June 30, 1997 and 1996, and the changes in partners' equity
(deficit) and cash flows for the six months ended June 30, 1997 and 1996.
In December, 1994, RFC entered into an agreement with Glenborough Corporation
("Glenborough") whereby RFC sold to Glenborough the contract to perform the
rights and responsibilities under RFC's agreement with the Partnership and other
related Partnerships (collectively, the "Rancon Partnerships") to perform or
contract on the Partnership's behalf, for financial, accounting, data
processing, marketing, legal, investor relations, asset and development
management and consulting services for the Partnership for a period of ten years
or until the liquidation of the Partnership, whichever comes first. Pursuant to
the contract, the Partnership will pay Glenborough for its services as follows:
(i) a specified asset administration fee, which is fixed for five years subject
to reduction in the year following the sale of assets, currently $989,000 per
year; (ii) sales fees of 2% for improved properties and 4% for land; (iii) a
refinancing fee of 1% and (iv) a management fee of 5% of gross rental receipts.
As part of this agreement, Glenborough will perform certain tasks for the
General Partner of the Rancon Partnerships and RFC agreed to cooperate with
Glenborough, should Glenborough attempt to obtain a majority vote of the limited
partners to substitute itself as the General Partner for the Rancon
Partnerships. This agreement became effective January 1, 1995. Glenborough is
not an affiliate of RFC or the Partnership.
Consolidation - In order to satisfy certain lender requirements for the
Partnership's 1996 loan secured by Service Retail Center, Promotional Retail
Center, and Carnegie Business Center I, Rancon Realty Fund IV Tri-City Limited
Partnership, a Delaware limited partnership ("RRF IV Tri-City") was formed in
April 1996. The three properties securing the loan were contributed to RRF IV
Tri-City by the Partnership. The limited partner of RRF IV Tri-City is the
Partnership and the general partner is Rancon Realty Fund IV, Inc., a
corporation wholly owned by the Partnership. Since the Partnership indirectly
owns 100% of RRF IV Tri-City, the financial statements of RRF IV Tri-City have
been consolidated with those of the Partnership. All intercompany transactions
and account balances have been eliminated in consolidation.
Reclassification - Certain 1996 balances have been reclassified to conform to
the current period presentation.
Note 2. REFERENCE TO 1996 AUDITED FINANCIAL STATEMENTS
These unaudited financial statements should be read in conjunction with the
Notes to Financial Statements included in the December 31, 1996 audited
financial statements.
Note 3. INVESTMENTS IN REAL ESTATE
On February 28, 1997, the Partnership purchased the property known as TGI
Friday's for $1,750,000. The Partnership paid $1,345,000 in cash and the
existing $405,000 note receivable secured by a deed of trust on the TGI Friday's
property was retired as part of this transaction.
In May 1997, construction of the Circuit City site in the Tri-City Corporate
Center was completed for a total cost of approximately $3,840,000 and was
classified as rental property.
In the second quarter of 1997, due to the sales price of pending land sales,
management concluded that the carrying value of the Partnership's investment in
the land held for sale in Temecula, California was in excess of its fair value
and a provision for impairment of the land held for sale in the amount of
$378,000 was recorded.
Appendix B-5
<PAGE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
June 30, 1997 (Unaudited)
Note 4. RESTRICTED CASH
On March 12, 1997, pursuant to the Inland Regional Center ("IRC") lease, a
$269,000 certificate of deposit ("DC") was opened. The $269,000 represents a
security deposit which the Partnership will retain in the event of a default by
IRC. Provisions in the lease allow for the security deposit plus accrued
interest to be converted to prepaid rent after the 60th month of the lease if
the tenant is not in default of the provisions of the lease.
Note 5. COMMITMENTS AND CONTINGENT LIABILITIES
The Partnership is contingently liable for subordinated real estate commissions
payable to the Sponsor in the amount of $643,000 at June 30, 1997 for sales that
transpired in previous years. The subordinated real estate commissions are
payable only after the Limited Partners have received distributions equal to
their original invested capital plus a cumulative non-compounded return of six
percent per annum on their adjusted invested capital.
Note 6. NOTES PAYABLE
On January 31, 1997, the Partnership obtained an unsecured promissory note for a
$1,500,000 revolving line of credit from Glenborough at a rate of eleven percent
(11%) per annum to fund capital expenditures and other partnership costs. By
April 1997, the Partnership had drawn the total $1,500,000 available on the line
of credit and the loan was paid off in May 1997, from new permanent financing
proceeds (see below).
On February 28, 1997, the Partnership obtained a $1,200,000 unsecured loan at an
interest rate of one percent (1%) per annum in excess of the bank "Prime Rate."
The loan was used to finance the acquisition of the TGI Friday's property. This
loan was also paid off in May 1997, from the new permanent financing proceeds
(see below).
On May 8, 1997, the Partnership obtained new permanent financing of $5,000,000
from Wells Fargo Bank, secured by real estate referred to as Circuit City and
TGI Friday's. The Partnership used the proceeds to pay off the $1,500,000
Glenborough line of credit and $1,221,000 to pay off the unsecured Wells Fargo
Bank loan (including accrued interest). In addition, the Partnership incurred
approximately $193,000 in loan fees and closing costs and $1,956,000 for the
Circuit City tenant improvement allowance, of which $35,000 remains to be paid
as of June 30, 1997, pending final completion of all tenant improvements. The
remaining net proceeds of approximately $130,000 were added to the Partnership's
cash reserves.
The new loan bears interest at one percent (1%) per annum in excess of the
lender's "Prime Rate," requires monthly payments of interest only, and matures
on May 31, 1999 with an option for a one-year extension.
Note 7. SUBSEQUENT EVENT
On July 1, 1997 and August 7, 1997, the Partnership sold four of the 11
remaining available lots of Rancon Towne Village for an aggregate sales price of
$936,000.
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Partnership had cash of $932,000. The remainder of the
Partnership's assets consist primarily of its investments in real estate,
totaling approximately $53,553,000.
The Partnership's primary source of funds consist of cash provided by rental
activities, permanent financing, construction financing, property sales and
interest income on certificates of deposit and other deposits of funds invested
temporarily, pending their use in the development of properties.
Appendix B-6
<PAGE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
June 30, 1997 (Unaudited)
The Partnership's improved cash position at June 30, 1997 compared to December
31, 1996 is largely due to the placement of the Inland Regional Center into
service in June 1996, the acquisition of TGI Friday's in February 1997, and the
net proceeds from various financing obtained in 1997.
On May 8, 1997, the Partnership obtained new permanent financing of $5,000,000
from Wells Fargo Bank, secured by real estate referred to as Circuit City and
TGI Friday's. The Partnership used the proceeds to pay off a $1,500,000 line of
credit and $1,221,000 to pay off the unsecured Wells Fargo Bank loan. In
addition, the Partnership incurred approximately $193,000 in loan fees and
closing costs and $1,956,000 for the Circuit City tenant improvement allowance.
The remaining net proceeds of approximately $130,000 were added to the
Partnership's cash reserves.
A majority of the Partnership's assets are located within the Inland Empire, a
submarket of Southern California, and have been directly affected by the
economic weakness of the region. Management believes, however, that while prices
have not increased significantly, the Southern California real estate market
appears to be improving. Management continues to evaluate the real estate
markets in which the Partnership's assets are located in an effort to determine
the optimal time to dispose of them and realize their maximum value.
Tri-City
The Partnership currently owns the following properties in the Tri-City
Corporate Center area within the Inland Empire submarket of the Southern
California region:
Property Type Square Feet
--------------------------- ---------------------------------- -----------
One Vanderbilt Four story office building 73,809
Two Vanderbilt Four story office building 69,094
Carnegie Business Center I Two light industrial buildings 62,605
Service Retail Center Two retail buildings 20,780
Promotional Retail Center Four strip center retail buildings 104,865
Inland Regional Center Two story office building 81,079
TGI Friday's Restaurant 9,386
Circuit City Build-to-suit retail building 39,123
The Partnership also owns approximately 26 acres of unimproved land in the
Tri-City area.
Additionally, the Partnership owns the Shadowridge Woodbend Apartments (a
240-unit apartment complex) in Vista, California plus unimproved land in
Riverside County, California as described below.
Lake Elsinore
Lake Elsinore is 24.8 acres of undeveloped land, commercially zoned in Lake
Elsinore, Riverside County, California. Offsite improvements remain on hold at
the Lake Elsinore property and there is no development activity planned for the
near future.
Perris
Perris is 17.14 acres of unimproved land near Perris Lake in Perris, Riverside
County, California. There has been no development of the Perris property to
date. The property is being marketed for sale to retail users and interested
developers.
Temecula
The subdivision of the 12.4 gross acre property in Temecula, California, also
known as Rancon Towne Village, into 12
Appendix B-7
<PAGE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
June 30, 1997 (Unaudited)
lots was approved January 2, 1996. From February 1996 through August 1997, the
Partnership sold five lots totaling approximately 3.7 acres for a cumulative
sales price of $1,211,000. The Partnership has executed a sales contract on one
lot consisting of approximately 1.06 acres for a sales price of $270,000. The
sale is expected to close by January 1998. Negotiations are currently underway
for the sale of one additional .76 acre lot while the remaining lots continue to
be marketed for sale. The Partnership has a $100,000 certificate of deposit
("CD") held as collateral for subdivision improvements and monument bonds
related to the land for sale in Temecula, California. It is anticipated that
this CD will be released during 1997.
General Matters
The $5,671,000 increase in rental property at June 30, 1997 from December 31,
1996 is primarily due to the acquisition of the TGI Friday's property, the
reclassification of Circuit City from construction in progress to rental
property, and the tenant improvement allowance paid for the completion of the
Circuit City property.
The General Partners continue to assess the real estate market in Southern
California in an effort to determine an appropriate time to liquidate the
Partnership and realize the maximum value for its assets. Cash generated from
property sales may be utilized in the development of other properties or
distributed to the partners.
RESULTS OF OPERATIONS
Revenues
Rental income for the six and three months ended June 30, 1997 increased
$1,118,000 or 52% and $699,000 or 67% over the six and three months ended June
30, 1996, respectively, primarily as a result of: (i) the commencement of
operations of the Inland Regional Center in June 1996; (ii) ground lease revenue
earned from Circuit City as the project was under construction from September
1996 through May 1997; (iii) the commencement of the Circuit City operating
lease in May 1997; (iv) the acquisition of the TGI Friday's property in February
1997; and (v) the increased occupancy at One Vanderbilt, Two Vanderbilt, Service
Retail Center, and Shadowridge Woodbend Apartments during the six and three
months ended June 30, 1997 over the six and three months ended June 30, 1996.
Occupancy rates at the Partnership's Tri-City properties as of June 30, 1997 and
1996 were as follows:
June 30,
1997 1996
-------- -------
One Vanderbilt 90% 59%
Two Vanderbilt 90% 25%
Service Retail Center 100% 97%
Carnegie Business Center I 81% 87%
Promotional Retail Center-Phase I 97% 97%
Inland Regional Center (commenced operations
June, 1996) 100% 100%
TGI Friday's (acquired February 28, 1997) 100% n/a
Circuit City (commenced operations May, 1997) 100% n/a
As of June 30, 1997, tenants at Tri-City occupying substantial portions of
leased rental space included: (i) ITT Educational Services with a lease which
expires in December 2004; (ii) Inland Regional Center with a lease through July
2009; (iii) CompUSA with a lease through August 2003; (iv) PetsMart with a lease
through January 2009; (v) Circuit City with a lease through January 2018; and
(vi) Fidelity National Title with a lease through August 2003. These six
tenants, in the aggregate, occupied approximately 219,000 square feet of the
412,000 total leasable square feet at Tri-City as of June 30, 1997 and account
for 52% of the rental income generated at Tri-City and 38% of the total rental
income for the Partnership during the first half of 1997.
Appendix B-8
<PAGE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
June 30, 1997 (Unaudited)
Interest income decreased $43,000 or 80% and $23,000 or 88% during the six and
three months ended June 30, 1997 compared to the six and three months ended June
30, 1996, respectively, due to a lower average cash balance in 1997 as a result
of additions to real estate and property development costs in the second half of
calendar year 1996 and the elimination of the interest income on the $405,000
note receivable that was retired as part of the acquisition of TGI Friday's on
February 28, 1997.
Expenses:
Operating expenses increased $418,000 or 40% and $231,000 or 44% during the six
and three months ended June 30, 1997 over the six and three months ended June
30, 1996, respectively, due to: (i) the addition of the Inland Regional Center
as an operating property in June 1996; (ii) increased utility and operational
expenses related to increased occupancy at selected properties; and (iii)
property tax refunds received in the first half of 1996.
Interest expense increased $244,000 or 40% and $112,000 or 31% during the six
and three months ended June 30, 1997 compared to the same periods in 1996,
respectively, due to the increased debt to finance the acquisition and
construction of properties over the past year.
Depreciation and amortization for the six and three months ended June 30, 1997
increased $131,000 or 19% and $43,000 or 11% from the six and three months ended
June 30, 1996, respectively, primarily as a result of the acquisition/operations
of the Inland Regional Center, TGI Friday's and Circuit City properties over the
past year.
Expenses associated with undeveloped land decreased $77,000 or 19% and $71,000
or 32% during the six and three months ended June 30, 1997 compared to the six
and three months ended June 30, 1996, respectively, due to the reduction of
property taxes resulting from a reduction by the Assessor's office of assessed
values of selected parcels of land.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
#27 - Financial Data Schedule
(b) Reports on Form 8-K:
None.
Appendix B-9
<PAGE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
June 30, 1997 (Unaudited)
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 thereunto duly authorized.
RANCON REALTY FUND IV,
a California Limited Partnership
(Registrant)
Date: August 13, 1997 By: /s/ Daniel L. Stephenson
------------------------
Daniel L. Stephenson
Chief Executive Officer and
Chief Financial Officer of
Rancon Financial Corporation,
General Partner of
Rancon Realty Fund IV,
a California Limited Partnership
Appendix B-10
