FORM 10-QSB-QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY OR TRANSITIONAL REPORT
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from.........to.........
Commission file number 0-14483
DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
(Exact name of small business issuer as specified in its charter)
Delaware 62-1207077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Insignia Financial Plaza
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days Yes X No .
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
September 30, 1997
Assets
Cash and cash equivalents:
Unrestricted $ 708
Restricted-tenant security deposits 191
Accounts receivable, net of allowance of $64 50
Escrow for taxes 550
Restricted escrows 1,233
Other assets 637
Investment properties:
Land $ 2,878
Buildings and related personal property 41,539
44,417
Less accumulated depreciation (20,928) 23,489
$ 26,858
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 176
Tenant security deposits 191
Accrued property taxes 688
Other liabilities 237
Mortgage notes payable 26,946
Partners' Deficit
General partners' $ (463)
Limited partners' (1,224.25 units
issued and outstanding) (917) (1,380)
$ 26,858
See Accompanying Notes to Consolidated Financial Statements
b) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Revenues:
Rental income $ 2,005 $ 2,157 $ 6,194 $ 6,497
Other income 196 160 607 545
Casualty gain -- 66 -- 252
Total revenues 2,201 2,383 6,801 7,294
Expenses:
Operating 802 817 2,372 2,393
General and administrative 71 76 204 236
Maintenance 336 407 860 875
Depreciation 518 495 1,515 1,448
Interest 588 627 1,846 1,870
Property taxes 187 192 540 537
Total expenses 2,502 2,614 7,337 7,359
Net loss $ (301) $ (231) $ (536) $ (65)
Net loss allocated
to general partners (2%) $ (6) $ (5) $ (11) $ (1)
Net loss allocated
to limited partners (98%) (295) (226) (525) (64)
Net loss $ (301) $ (231) $ (536) $ (65)
Net loss per limited
partnership unit $(240.96) $(184.60) $(428.83) $ (52.28)
See Accompanying Notes to Consolidated Financial Statements
c) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' DEFICIT
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partners' Partners' Total
Original capital contributions 1,224.25 $ 1 $24,485 $24,486
Partners' deficit at
December 31, 1996 1,224.25 $ (450) $ (294) $ (744)
Net loss for the nine months
ended September 30, 1997 -- (11) (525) (536)
Distributions paid -- (2) (98) (100)
Partners' deficit at
September 30, 1997 1,224.25 $ (463) $ (917) $(1,380)
See Accompanying Notes to Consolidated Financial Statements
d) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1997 1996
Cash flows from operating activities:
Net loss $ (536) $ (65)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation 1,515 1,448
Amortization of loan costs, discounts
and lease commissions 183 198
Casualty gain -- (252)
Bad debt 64 --
Change in accounts:
Restricted cash (9) (14)
Accounts receivable (44) --
Escrow for taxes and insurance (173) (153)
Other assets (56) (22)
Accounts payable (32) 203
Tenant security deposit liabilities 8 10
Accrued property taxes 103 189
Other liabilities (10) (29)
Net cash provided by operating activities 1,013 1,513
Cash flows from investing activities:
Property improvements and replacements (638) (879)
Deposits to restricted escrow (507) (353)
Receipts from restricted escrow -- 44
Insurance proceeds from property damage -- 227
Net cash used in investing activities (1,145) (961)
Cash flows from financing activities:
Principal payments on notes payable (396) (349)
Repayment of mortgage note payable (6,720) --
Proceeds from long-term borrowings 7,325 --
Loan costs paid (273) (4)
Distributions to partners (100) (100)
Net cash used in financing activities (164) (453)
Net (decrease) increase in unrestricted cash (296) 99
and cash equivalents
Unrestricted cash and cash equivalents at beginning of period 1,004 714
Unrestricted cash and cash equivalents at end of period $ 708 $ 813
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,650 $ 1,675
See Accompanying Notes to Consolidated Financial Statements
e) DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Davidson
Diversified Real Estate II Limited Partnership (the "Partnership") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of Davidson Diversified Properties, Inc.
(the "Managing General Partner"), all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine month periods ended
September 30, 1997, are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 1997. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Partnership's annual report on Form 10-KSB for the fiscal year ended
December 31, 1996.
Certain reclassifications have been made to the 1996 information to conform to
the 1997 presentation.
NOTE B - TRANSACTIONS WITH AFFILIATED PARTIES
The Partnership has no employees and is dependent on the Managing General
Partner and its affiliates for the management and administration of all
partnership activities. The Partnership Agreement provides for payments to
affiliates for services and as reimbursement of certain expenses incurred by
affiliates on behalf of the Partnership. The following amounts were paid or
accrued to the Managing General Partner and affiliates in 1997 and 1996:
Nine Months Ended
September 30,
1997 1996
(in thousands)
Property management fees (included in operating expenses) $330 $285
Reimbursement for services of affiliates, including
approximately $31,000 and $17,000 of construction oversight
reimbursements in 1997 and 1996, respectively (included in
general and administrative expenses, maintenance expenses
and investment properties) 172 182
During 1996, Shoppes At River Rock (formerly Outlet's Ltd. Mall) was managed by
a third party. As of January 1997, an affiliate of the Managing General Partner
assumed management of the day to day operations.
For the period of January 1, 1996 to August 31, 1997, the Partnership insured
its properties under a master policy through an agency and insurer unaffiliated
with the Managing General Partner. An affiliate of the Managing General Partner
acquired, in the acquisition of a business, certain financial obligations from
an insurance agency which was later acquired by the agent who placed the master
policy. The agent assumed the financial obligations to the affiliate of the
Managing General Partner who received payments on these obligations from the
agent. The amount of the Partnership's insurance premiums accruing to the
benefit of the affiliate of the Managing General Partner by virtue of the
agent's obligations is not significant.
On September 26, 1997, an affiliate of the General Partner purchased Lehman
Brothers' class "D" subordinated bonds of SASCO, 1992-M1. These bonds are
secured by 55 multi-family apartment mortgage loan pairs held in Trust,
including Big Walnut Apartments and Greensprings Manor Apartments owned by the
Partnership.
NOTE C - DISTRIBUTION TO PARTNERS
In February 1997, the Partnership distributed approximately $100,000 to the
partners. The limited partners received approximately $98,000 ($80.05 per
limited partnership unit) and the general partners received approximately
$2,000.
NOTE D - MORTGAGE NOTES PAYABLE
On August 6, 1997, the Partnership refinanced the mortgage note payable
encumbering Lafontenay Apartments. The refinancing replaced indebtedness on
Lafontenay in the amount of approximately $6,720,000 which carried an interest
rate of 9.25% and had a maturity date of August 1, 1997. The new mortgage
indebtedness of $7,325,000 carries a stated interest rate of 7.5% and matures on
September 1, 2007.
The MultiFamily Housing Revenue Bonds and Note Agreement collateralized by The
Trails Apartments were called and, therefore, payable in full on February 1,
1997 in accordance with the terms of the agreements. On June 30, 1997 the
Partnership entered into a Modification of Bond Documents with the issuer.
Pursuant to the modification, the call notice was rescinded. The modification
converted the monthly payments from interest only to principal and interest
payments with an amortization period of twenty years. The note and bond mature
on December 1, 2009 with a balloon payment. Pursuant to the modified terms, the
Bondholder shall not exercise the call right of the Bond on a date prior to the
fifth anniversary of the modification.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The Partnership's investment properties consist of four apartment complexes and
one commercial property. The following table sets forth the average occupancy
of the properties for each of the nine months ended September 30, 1997 and 1996:
Average
Occupancy
1997 1996
Big Walnut Apartments
Columbus, Ohio 94% 96%
Lafontenay Apartments
Louisville, Kentucky 94% 94%
The Trails Apartments
Nashville, Tennessee 94% 93%
Greensprings Manor Apartments
Indianapolis, Indiana 87% 93%
Shoppes At River Rock
(Formerly Outlet's Ltd. Mall)
Murfreesboro, Tennessee 73% 83%
The Managing General Partner attributes the decrease in occupancy at
Greensprings Manor Apartments to numerous evictions in the current quarter.
Management is evicting tenants who are not complying with the collection policy
in an effort to improve the tenant base. Occupancy at the Shoppes At River Rock
has also decreased due to increased competition. The property is not located in
the retail corridor which makes it difficult to position the property. The
Managing General Partner is in the process of exploring different concepts such
as "big box", entertainment, and specialty center in an effort to reposition the
Mall in hopes of reestablishing occupancy levels.
The Partnership's net loss for the three and nine month periods ended September
30, 1997, was approximately $301,000 and $536,000, respectively, compared to net
losses of approximately $231,000 and $65,000, respectively, for the
corresponding periods of 1996. The increase in net loss is primarily
attributable to a decrease in rental income and a casualty gain of $252,000 for
the nine months ended September 30, 1996. The decrease in rental income is due
to decreases in occupancy at Shoppes At River Rock and Greensprings Manor, as
discussed above. The Partnership recorded a net casualty gain in 1996 resulting
from two fires at the Trails Apartments which destroyed four apartment units and
caused minor smoke damage in one unit. The damage resulted in a net gain of
approximately $252,000 as of September 30, 1996 arising from proceeds from the
Partnership's insurance carrier which exceeded the basis of the property and
expenses to reconstruct the four destroyed apartment units and to repair the
other unit which incurred minor smoke damage. Offsetting the above increases to
net loss is an increase in other income and a decrease in general and
administrative expense. The increase in other income is due to increases in
tenant charges at Greensprings Apartments and lease cancellation fees for
Shoppes At River Rock. The decrease in general and administrative expense is
attributable to a decrease in partnership administration cost reimbursements.
Included in maintenance expense is approximately $118,000 of major repairs and
maintenance comprised of new gas service lines, water saving devices, and
window coverings for the nine months ended September 30, 1997. For the nine
months ended September 30, 1996, approximately $237,000 of major repairs and
maintenance is included in maintenance expense comprised of exterior building
repairs, interior building improvements, and major landscaping.
As part of the ongoing business plan of the Partnership, the Managing General
Partner monitors the rental market environment of each of its investment
properties to assess the feasibility of increasing rents, maintaining or
increasing occupancy levels and protecting the Partnership from increases in
expenses. As part of this plan, the Managing General Partner attempts to
protect the Partnership from the burden of inflation-related increases in
expenses by increasing rents and maintaining a high overall occupancy level.
However, due to changing market conditions which can result in the use of rental
concessions and rental reductions to offset softening market conditions, there
is no guarantee that the Managing General Partner will be able to sustain such a
plan.
The Partnership had unrestricted cash and cash equivalents of approximately
$708,000 at September 30, 1997, compared to unrestricted cash and cash
equivalents of approximately $813,000 at September 30, 1996. Net cash provided
by operating activities decreased primarily due to the increase in net loss as
discussed above. Net cash used in investing activities increased due to the
receipt in 1996 of insurance proceeds related to the casualty gain at The Trails
as discussed above. Net cash used in financing activities decreased due to the
refinancing of the mortgage on Lafontenay Apartments as discussed in Note D.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
expenditures required at the various properties to adequately maintain the
physical assets and other operating needs of the Partnership. Such assets are
currently thought to be sufficient for any near-term needs of the Partnership.
The mortgage indebtedness of approximately $26,946,000, net of discount, with
stated interest rates of 7.5% to 10.125%, has maturity dates ranging from
January 2000 to December 2009. During the first nine months of 1996
distributions in the amount of $100,000 were paid. In February 1997, the
Partnership distributed approximately $100,000 to the partners. The limited
partners received approximately $98,000 ($80.05 per limited partnership unit)
and the general partners received approximately $2,000. Future cash
distributions will depend on the levels of net cash generated from operations,
refinancings, property sales and the availability of the cash reserves.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 10 MM(a), Multifamily Note secured by a Mortgage or Deed
of Trust dated August 6, 1997, between La Fontenay, L.L.C. and
Patrician Financial Company Limited Partnership related to
Lafontenay Apartments, is filed as an exhibit to this report.
Exhibit 27, Financial Data Schedule, is filed as an exhibit to
this report.
b) Reports on Form 8-K:
None filed during the quarter ended September 30, 1997.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DAVIDSON DIVERSIFIED REAL ESTATE II
By: Davidson Diversified Properties, Inc.
Managing General Partner
By: /s/ Carroll D. Vinson
Carroll D. Vinson
President
By: /s/ Robert D. Long, Jr.
Robert D. Long, Jr.
Vice President/CAO
Date: November 13, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Davidson
Diversified Real Estate II Limited Partnership 1997 Third Quarter 10-QSB and is
qualified in its entirety by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000750258
<NAME> DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 708
<SECURITIES> 0
<RECEIVABLES> 114
<ALLOWANCES> 64
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 44,417
<DEPRECIATION> 20,928
<TOTAL-ASSETS> 26,858
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 26,946
0
0
<COMMON> 0
<OTHER-SE> (1,380)
<TOTAL-LIABILITY-AND-EQUITY> 26,858
<SALES> 0
<TOTAL-REVENUES> 6,801
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,337
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,846
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (536)
<EPS-PRIMARY> (428.83)<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
MULTIFAMILY NOTE
US $7,325,000.00 Louisville, Kentucky
City
as of August 6, 1997
For Value Received, the undersigned promise to pay PATRICIAN FINANCIAL
COMPANY LIMITED PARTNERSHIP, a Massachusetts limited partnership or order, the
principal sum of Seven Million Three Hundred Twenty-five Thousand and No/100ths
Dollars, with interest on the unpaid principal balance from the date of this
Note, until paid, at the rate of 7.5 percent per annum. The principal and
interest shall be payable at 4550 Montgomery Avenue, Suite 1150, Bethesda,
Maryland 20814, or such other place as the holder hereof may designate in
writing, in consecutive monthly installments of Fifty-One Thousand Two Hundred
Seventeen and 46/100ths Dollars (US $51,217.46) on the 1st day of each month
beginning October 1, 1997 (herein "amortization commencement date"), until the
entire indebtedness evidenced hereby is fully paid, except that any remaining
indebtedness, if not sooner paid, shall be due and payable on September 1, 2007.
If any installment under this Note is not paid when due, the entire
principal amount outstanding hereunder and accrued interest thereon shall at
once become due and payable, at the option of the holder hereof. The holder
hereof may exercise this option to accelerate during any default by the
undersigned regardless of any prior forbearance. In the event of any default in
the payment of this Note, and if the same is referred to an attorney at law for
collection or any action at law or in equity is brought with respect hereto,
the undersigned shall pay the holder hereof all expenses and costs, including,
but not limited to, attorney's fees.
If any installment under this Note is not received by the holder hereof
within ten (10) calendar days after the installment is due, the undersigned
shall pay to the holder hereof a late charge of five (5) percent of such
installment, such late charge to be immediately due and payable without demand
by the holder hereof. If any installment under this Note remains past due for
thirty (30) calendar days or more, the outstanding principal balance of this
Note shall bear interest during the period in which the undersigned is in
default at a rate of 11.5 percent per annum, or, if such increased rate of
interest may not be collected from the undersigned under applicable law, then at
the maximum increased rate of interest, if any, which may be collected from the
undersigned under applicable law.
From time to time, without affecting the obligation of the undersigned or
the successors or assigns of the undersigned to pay the outstanding principal
balance of this Note and observe the covenants of the undersigned contained
herein, without affecting the guaranty of any person, corporation, partnership
or other entity for payment of the outstanding principal balance of this Note,
without giving notice to or obtaining the consent of the undersigned, the
successors or assigns of the undersigned or guarantors, and without liability on
the part of the holder hereof, the holder hereof may, at the option of the
holder hereof, extend the time for payment of said outstanding principal balance
or any part thereof, reduce the payments thereon, release anyone liable on any
of said outstanding principal balance, accept a renewal of this Note, modify the
terms and time of payment of said outstanding principal balance, join in any
extension or subordination agreement, release any security given herefor, take
or release other or additional security, and agree in writing with the
undersigned to modify the rate of interest or period of amortization of this
Note or change the amount of the monthly installments payable hereunder.
Presentment, notice of dishonor, and protest are hereby waived by all
makers, sureties, guarantors and endorsers hereof. This Note shall be the joint
and several obligation of all makers, sureties, guarantors and endorsers, and
shall be binding upon them and their successors and assigns.
The indebtedness evidenced by this Note is secured by a Mortgage or Deed of
Trust dated as of even date herewith, and reference is made thereto for rights
as to acceleration of the indebtedness evidenced by this Note. This Note shall
be governed by the law of the jurisdiction in which the Property subject to the
Mortgage or Deed of Trust is located.
The attached Addendum to Multifamily Note dated the date of this Note is
incorporated into and are deemed to amend and supplement this Note.
LA FONTENAY, L.L.C
a South Carolina limited liability company
BY: DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
a Delaware limited partnership
Sole Member and Manager
BY: DAVIDSON DIVERSIFIED PROPERTIES, INC.,
a Tennessee corporation,
General Partner
BY: /s/ Leigh A. Watters
Leigh A. Watters
Vice President
ENDORSEMENT
TO MULTIFAMILY NOTE
dated as of August 6, 1997,
given by
LA FONTENAY, L.L.C.
TO
PATRICIAN FINANCIAL COMPANY LIMITED PARTNERSHIP
in the original principal amount of $7,325,000.00
Pay to the order of BERKSHIRE MORTGAGE FINANCE LIMITED PARTNERSHIP, without
recourse.
PATRICIAN FINANCIAL COMPANY
LIMITED PARTNERSHIP,
a Massachusetts limited partnership
BY: BRF CORPORATION, a Massachusetts
corporation, General Partner
BY: /s/ Matthew Wherry
Matthew Wherry
Date: as of August 6, 1997 Authorized Signatory,
Patrician Operations
Pay to the order of ____________________________________________________,
without recourse.
BERKSHIRE MORTGAGE FINANCE
LIMITED PATRNERSHIP,
a Massachusetts limited partnership
BY: BRF CORPORATION, a Massachusetts
corporation, General Partner
BY: /s/ Matthew Wherry
Matthew Wherry
Date: as of August 6, 1997 Authorized Signatory,
Patrician Operations
ADDENDUM TO MULTIFAMILY NOTE
THIS ADDENDUM TO MULTIFAMILY NOTE (the "Addendum") is made as of this 6th
day of August, 1997 and is incorporated into and shall be deemed to amend and
supplement the Multifamily Note (the "Multifamily Note") made by the undersigned
(the "Borrower") to PATRICIAN FINANCIAL COMPANY LIMITED PARTNERSHIP and its
successors, assigns and transferees (the "Lender"), dated the same date as this
Addendum (the Multifamily Note as amended and supplemented by this Addendum, any
other addendum to the Multifamily Note, and any future amendments to the
Multifamily Note is referred to as the "Note"). The debt evidenced by the Note
is secured by a Multifamily Mortgage, Deed of Trust or Deed to Secure Debt of
the same date (the "Multifamily Instrument"), covering the property described in
the Multifamily Instrument and defined therein as the "Property," located at:
500 La Fontenay Court, Louisville, Kentucky 40223-3005
(Property Address)
This Property is located entirely within the state of Kentucky [Insert name of
state in which the property is located] (the "Property Jurisdiction"). The
Multifamily Instrument is amended and supplemented by the Rider to Multifamily
Instrument (the "Rider") and any other rider to Multifamily Instrument given by
Borrower to Lender and dated the same date as the Multifamily Instrument. (The
Multifamily Instrument as amended and supplemented by the Rider and any other
rider to the Multifamily Instrument and any future amendments to the Instrument
is referred to as the "Instrument".)
The term "Loan Documents" when used in this Addendum shall mean, collectively,
the following documents: (i) the Instrument, (ii) the Note, and (iii) all other
documents or agreements, including any Collateral Agreements (as defined in the
Rider) or O&M Agreement (as defined in the Rider), arising under, related to, or
made in connection with, the loan evidenced by the Note, as such Loan Documents
may be amended.
The covenants and agreements of this Addendum, and the covenants and agreements
of any other addendum to the Multifamily Note, shall be incorporated into and
shall amend and supplement the covenants and agreements of the Multifamily Note
as if this Addendum and other addenda were a part of the Multifamily Note, and
all references to the Note in the Loan Documents shall mean the Note as so
amended and supplemented. Any conflict between the provisions of the
Multifamily Note and this Addendum shall be resolved in favor of this Addendum.
ADDITIONAL COVENANTS. In addition to the covenants and agreements made in
the Multifamily Note Borrower and Lender further covenant and agree as follows:
A. PREPAYMENTS
1. YIELD MAINTENANCE PERIOD
During the first 9.5 [insert applicable number of years] years of the Note
term beginning with the date of the Note (the "Yield Maintenance Period") and
upon giving Lender 60 days prior written notice, Borrower may prepay the entire
unpaid principal balance of the Note on the last Business Day before a scheduled
monthly payment date by paying, in addition to the entire unpaid principal
balance, accrued interest and any other sums due Lender at the time of
prepayment, a prepayment premium equal to the greater of:
(a) 1% of the entire unpaid principal balance of the Note, or
(b) The product obtained by multiplying (1) the entire unpaid principal
balance of the Note at the time of prepayment, times (2) the difference
obtained by subtracting from the interest rate on the Note the yield
rate (the "Yield Rate") on the 6.625% U. S. Treasury Security due May,
2007 (the "Specified U.S. Treasury Security"), as the Yield Rate is
reported in the Wall Street Journal on the fifth Business Day preceding
(x) the date notice of prepayment is given to Lender where prepayment is
voluntary, or (y) the date Lender accelerates the loan, times (3) the
present value factor calculated using the following formula:
1 -(1 + r)-n
r
[r = Yield Rate
n = the number of years, and any fraction thereof, remaining between
the prepayment date and the expiration of the Yield Maintenance Period]
In the event that no Yield Rate is published for the Specified U.S.
Treasury Security, then the nearest equivalent U.S. Treasury Security shall be
selected at Lender's sole discretion. If the publication of such Yield Rates in
the Wall Street Journal is discontinued, Lender shall determine such Yield Rates
from another source selected by Lender.
Except as provided in paragraph A.3 of this Addendum, no partial
prepayments are permitted.
2. AFTER YIELD MAINTENANCE PERIOD
After the expiration of the Yield Maintenance Period and upon giving Lender
60 days prior written notice, Borrower may prepay the entire unpaid principal
balance of the Note on the last Business Day before a scheduled monthly payment
date by paying, in addition to the entire unpaid principal balance, accrued
interest and any other sums due Lender at the time of prepayment, a prepayment
premium equal to 1% of the entire unpaid principal balance of the Note. No
prepayment premium shall be due for any full prepayment made by Borrower in
accordance with the provisions of the preceding sentence within 90 days of the
maturity date of the Note.
Except as provided in paragraph A.3 of this Addendum, no partial
prepayments are permitted.
3. PARTIAL PREPAYMENTS
Borrower shall have no right to make a partial prepayment of the
outstanding indebtedness during the Note term. However, in the event that
Lender shall require a partial prepayment of the outstanding indebtedness after
a default under the Note, the Instrument or any of the other Loan Documents, by
applying funds held by Lender pursuant to any Collateral Agreement (as defined
in Uniform Covenant 2B of the Instrument) against the indebtedness secured by
the Instrument, or, if Lender shall for any other reason accept a partial
prepayment by Borrower of the outstanding indebtedness, except as otherwise
provided in paragraph A.4 of this Addendum, a prepayment premium shall be due
and payable to Lender as follows:
(a) After Yield Maintenance Period. If Lender shall require or accept a
partial prepayment after the expiration of the Yield Maintenance
Period, the partial prepayment shall be made on the last Business Day
before a scheduled monthly payment date and a prepayment premium equal
to 1% of the partial principal prepayment amount shall be due and
payable to Lender. No prepayment premium shall be due for any partial
prepayment made by Borrower in accordance with the provisions of the
preceding sentence within 90 days of the maturity date of the Note.
(b) During Yield Maintenance Period. If Lender shall require or accept a
partial prepayment during the Yield Maintenance Period, the partial
prepayment shall be made on the last Business Day before a scheduled
monthly payment date and a prepayment premium shall be due and payable
to Lender equal to the greater of:
(i) 1% of the amount of principal being prepaid, or
(ii)the product obtained by multiplying (A) the amount of the principal
which is being prepaid, times (B) the difference obtained by
subtracting from the interest rate on the Note the yield rate (the
"Partial Prepayment Yield Rate") on the Specified U.S. Treasury
Security, as the Partial Prepayment Yield Rate is reported in the
Wall Street Journal on the fifth Business Day preceding (1) the day
Lender accelerates the loan (in connection with any partial
prepayment made in connection with an acceleration of the loan), or
(2) the day Lender applies funds held under any Collateral Agreement
(other than in connection with an acceleration of the loan), times
(C) the present value factor calculated using the following formula:
1 - (1 + y)-n
y
[y = Partial Prepayment Yield Rate
n = the number of years, and any fraction thereof, remaining
between the prepayment date and the expiration of the Yield
Maintenance Period]
When the total amount to be applied toward the unpaid principal balance of
the loan and the prepayment premium is known, but the amounts to be allocated
toward the unpaid principal balance of the loan and the prepayment premium,
respectively, are unknown, the Lender shall determine the allocation between the
prepaid principal amount and the prepayment premium as follows:
Given: a = total amount to be applied
b = prepaid principal amount
c = prepayment premium
N = note rate
F = present value factor = 1 - (1 + y)-n
y
["y" and "n" have the same meanings as set forth in subparagraph
(ii) above]
Then: a = b + c
b = a
F (N-y) + 1
c = a - b
Except as provided in the next sentence, any partial prepayment of the
outstanding indebtedness shall not extend the due date of any subsequent monthly
installments or change the amount of such installments, unless Lender shall
otherwise agree in writing. Upon any partial prepayment, Lender shall have the
option, in its sole and absolute discretion, to recast the monthly installments
due under the Note so that the maturity date of the Note shall remain the same.
4. PREMIUM DUE WHETHER VOLUNTARY OR INVOLUNTARY PREPAYMENT; INSURANCE AND
CONDEMNATION PROCEEDS
Borrower shall pay the prepayment premium due under this paragraph A whether
the prepayment is voluntary or involuntary (in connection with Lender's
acceleration of the unpaid principal balance of the Note) or the Instrument is
satisfied or released by foreclosure (whether by power of sale or judicial
proceeding), deed in lieu of foreclosure or by any other means. Notwithstanding
any other provision herein to the contrary, Borrower shall not be required to
pay any prepayment premium in connection with any prepayment occurring as a
result of the application of insurance proceeds or condemnation awards under the
Instrument.
5. NOTICE; BUSINESS DAY
Any notice to Lender provided for in this Addendum shall be given in the
manner provided in the Instrument. The term "Business Day" means any day other
than a Saturday, a Sunday, or any other day on which Lender is not open for
business.
B. BORROWER'S EXCULPATION
Subject to the provisions of paragraph C and notwithstanding any other
provision in the Note or Instrument, the personal liability of Borrower, any
general partner of Borrower (if the Borrower is a partnership), and any "Key
Principal" (collectively, the individual(s) whose name(s) is (are) set forth at
the foot of this Addendum) to pay the principal of and interest on the debt
evidenced by the Note and any other agreement evidencing Borrower's obligations
under the Note and the Instrument shall be limited to (1) the real and personal
property described as the "Property" in the Instrument, (2) the personal
property described in or pledged under any Collateral Agreement (as defined in
Uniform Covenant 2B of the Instrument) executed in connection with the loan
evidenced by the Note, (3) the rents, profits, issues, products and income of
the Property received or collected by or on behalf of Borrower (the "Rents and
Profits") to the extent such receipts are necessary first, to pay the reasonable
expenses of operating, managing, maintaining and repairing the Property,
including but not limited to real estate taxes, utilities, assessments,
insurance premiums, repairs, replacements and ground rents, if any (the
"Operating Expenses") then due and payable as of the time of receipt of such
Rents and Profits, and then, to pay the principal and interest due under the
Note and any other sums due under the Instrument or any other Loan Document
(including but not limited to deposits or reserves due under any Collateral
Agreement), except to the extent that Borrower did not have the legal right,
because of a bankruptcy, receivership or similar judicial proceeding, to direct
the disbursement of such sums.
Except as provided in Paragraph C, Lender shall not seek (a) any judgment
for a deficiency against Borrower, any general partner of Borrower (if Borrower
is a partnership) or any Key Principal, or Borrower's or any general partner's
or Key Principal's heirs, legal representatives, successors or assigns, in any
action to enforce any right or remedy under the Instrument, or (b) any judgment
on the Note except as may be necessary in any action brought under the
Instrument to enforce the lien against the Property or to exercise any remedies
under any Collateral Agreement.
C. EXCEPTIONS TO NON-RECOURSE LIABILITY
If, without obtaining the Lender's prior written consent, (i) a Transfer
shall occur which, pursuant to Uniform Covenant 19 of the Instrument, gives
Lender the right, at its option, to declare all sums secured by the Instrument
immediately due and payable, (ii) Borrower shall encumber the Property with the
lien of any subordinate instrument in connection with any financing by Borrower,
or, (iii) Borrower shall violate the single asset covenant of paragraph J of the
Rider, any of such events shall constitute a default by Borrower under the Note,
the Instrument and the other Loan Documents, and if such event shall continue
for 30 days, Paragraph B shall not apply from and after the date which is 30
days after such event and the Borrower, any general partner of Borrower (if
Borrower is a partnership) and Key Principal (each individually on a joint or
several basis if more than one ) shall be personally liable on a joint and
several basis for full recourse liability under the Note and the other Loan
Documents.
Notwithstanding paragraph B, Borrower, any general partner of Borrower (if
Borrower is a partnership) and Key Principal (each individually on a joint and
several basis if more than one) shall be personally liable on a joint and
several basis, in the amount of any loss, damage or cost (including but not
limited to attorneys fees) resulting from (A) fraud or intentional
misrepresentation by Borrower or Borrower's agents or employees or any Key
Principal or general partner of Borrower in connection with obtaining the loan
evidenced by the Note, or in complying with any of Borrower's obligations under
the Loan Documents, (B) insurance proceeds, condemnation awards, security
deposits from tenants or other sums or payments received by or on behalf of the
Borrower in its capacity as owner of the Property and not applied in accordance
with the provisions of the Instrument (except to the extent that Borrower did
not have the legal right because of a bankruptcy, receivership or similar
judicial proceeding, to direct disbursement of such sums or payments, (C) all
Rents and Profits, (except to the extent that Borrower did not have the legal
right, because of a bankruptcy, receivership or similar judicial proceeding, to
direct the disbursement of such sums), and not applied, first, to the payment of
the reasonable Operating Expenses as such Operating Expenses become due and
payable, and then, to the payment of principal and interest then due and payable
under the Note and any other sums due under the Instrument and all other Loan
Document (including but not limited to deposits or reserves payable under any
Collateral Agreement), (D) Borrower's failure to pay transfer fees and charges
due Lender under paragraph 19(c) of the Instrument, or (E) Borrower's failure
following a default under any of the Loan Documents to deliver to Lender on
demand all Rents and Profits, security deposits (except to the extent that
Borrower did not have the legal right because of a bankruptcy, receivership or
similar judicial proceeding to direct the disbursement of such sums), books and
records relating to the Property.
No provision of paragraphs B or C shall (i) affect any guaranty or similar
agreement executed in connection with the debt evidenced by the Note, (ii)
release or reduce the debt evidenced by the Note, (iii) impair the right of
Lender to enforce the provisions of paragraph D of the Rider, (iv) impair the
lien of the Instrument, or (v) impair the right of Lender to enforce the
provisions of any Collateral Agreement.
D. BUSINESS, COMMERCIAL OR INVESTMENT PURPOSE
Borrower represents that the Loan evidenced by the Note is being made solely
for business, commercial or investment purposes.
E. GOVERNING LAW
1. CHOICE OF LAW
The validity of the Note, and the other Loan Documents, each of their terms
and provisions, and the rights and obligations of Borrower under the Note, and
the other Loan Documents shall be governed by, interpreted, construed, and
enforced pursuant to and in accordance with the laws of the Property
Jurisdiction.
2. CONSENT TO JURISDICTION
Borrower irrevocably consents to the exclusive jurisdiction of any and all
state and federal courts with jurisdiction in the Property Jurisdiction over
Borrower and Borrower's assets. Borrower agrees that such assets shall be used
to first satisfy all claims of creditors organized or domiciled in the United
States of America ("USA") and that no assets of the Borrower in the USA shall be
considered part of any foreign bankruptcy estate.
Borrower agrees that any controversy arising under or in relation to the
Note, the Instrument or any of the other Loan Documents shall be litigated
exclusively in the Property Jurisdiction. The state and federal courts and
authorities with jurisdiction in the Property Jurisdiction shall have exclusive
jurisdiction over all controversies which may arise under or in relation to the
Note, including without limitation those controversies relating to the
execution, interpretation, breach, enforcement, or compliance with the Note, the
Instrument, or any other issue arising under, related to, or in connection with
any of the Loan Documents. Borrower irrevocably consents to service,
jurisdiction, and venue of such courts for any litigation arising from the Note,
the Instrument or any of the other Loan Documents, and waives any other venue to
which it might be entitled by virtue of domicile, habitual residence, or
otherwise.
F. SUCCESSORS AND ASSIGNS
The provisions of the Note, the Instrument, and all other Loan Documents
shall be binding on the successors and assigns, including, but not limited to,
any receiver, trustee, representative or other person appointed under foreign or
domestic bankruptcy, receivership, or similar proceedings of Borrower and any
person having an interest in Borrower.
G. NO THIRD PARTY BENEFICIARY
Borrower acknowledges and agrees that (i) any loss sharing arrangement or
arrangement for interim advancement of funds that originally is made by the
Lender named in the Note to Federal National Mortgage Association is made
pursuant to a contractual obligation of such Lender to Federal National Mortgage
Association that is independent of, and separate and distinct from, the
obligation of Borrower for the full and prompt payment of the indebtedness
evidenced by the Note, (ii) Borrower shall not be deemed to be a third party
beneficiary of such loss sharing arrangement or arrangement for interim
advancement of funds, and (iii) no such loss sharing or interim advancement
arrangement shall constitute any person or entity making such payment as a
guarantor or surety of the Borrower's obligations, notwithstanding the fact that
the obligations under any such loss sharing or interim advancement arrangement
may be calculated with reference to amounts payable under the Note or other Loan
Documents.
BY SIGNING BELOW, Borrower accepts and agrees to the covenants and
agreements contained in this Addendum.
BORROWER:
LA FONTENAY, L.L.C.
a South Carolina limited liability company
BY: DAVIDSON DIVERSIFIED REAL ESTATE II, L.P.
a Delaware limited partnership
Sole Member and Manager
BY: DAVIDSON DIVERSIFIED PROPERTIES, INC.,
a Tennessee corporation,
General Partner
BY: /s/ Leigh A. Watters
Leigh A. Watters
Vice President
