UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: AUGUST 31, 1997
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 0-15036
PAINEWEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
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(Exact name of registrant as specified in its charter)
Delaware 04-2841746
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(State of organization) (I.R.S. Employer
Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (617) 439-8118
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------- ------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
-------------------------------------
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No____
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
- --------- -------------------
Prospectus of registrant dated Part IV
December 14, 1984, as supplemented
Current Report on Form 8-K Part IV
of registrant dated July 16, 1997
<PAGE>
PAINEWEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
1997 FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1 Business I-1
Item 2 Properties I-3
Item 3 Legal Proceedings I-4
Item 4 Submission of Matters to a Vote of Security Holders I-5
Part II
Item 5 Market for the Partnership's Limited Partnership
Interests and Related Security Holder Matters II-1
Item 6 Selected Financial Data II-1
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations II-2
Item 8 Financial Statements and Supplementary Data II-7
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure II-7
Part III
Item 10 Directors and Executive Officers of the Partnership III-1
Item 11 Executive Compensation III-2
Item 12 Security Ownership of Certain Beneficial Owners and
Management III-3
Item 13 Certain Relationships and Related Transactions III-3
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
Financial Statements and Supplementary Data F-1 to F-17
<PAGE>
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Partnership's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such a difference are discussed in Item 7 in the section entitled
"Certain Factors Affecting Future Operating Results" beginning on page II-6 of
this Form 10-K.
PART I
Item 1. Business
Paine Webber Qualified Plan Property Fund Four, LP (the "Partnership") is
a limited partnership formed in October 1984 under the Uniform Limited
Partnership Act of the State of Delaware for the purpose of investing in a
diversified portfolio of income-producing operating properties through land
purchase-leaseback transactions and first mortgage loans. The Partnership sold
$44,849,650 in Limited Partnership Units (896,993 Units at $50 per Unit) from
December 14, 1984 to December 13, 1985 pursuant to a Registration Statement
filed on Form S-11 under the Securities Act of 1933 (Registration No. 2-93962).
Limited Partners will not be required to make any additional capital
contributions.
The Partnership originally owned land and made first mortgage loans
secured by buildings with respect to six operating properties. As of August 31,
1997, one of the Partnership's mortgage loan and land lease investments on the
original properties was still outstanding and the Partnership owned two
operating properties directly as the result of foreclosures resulting from
defaults on the Partnership's mortgage loans. The Partnership's investment
properties and security for its mortgage loan investment are described below.
Property name Type of Property and Type of
and Location Date of Investment Size Ownership (1)
- -------------- ------------------ ---- -------------
Martin Sunnyvale Research and 39,286 net Fee ownership
Research and Development Center leasable of land and
Development Center (2) 12/20/85 sq.ft.; improvements
Sunnyvale, CA 2.5 acres
of land
Bell Forge Square Shopping Center 126,890 net Fee ownership
Shopping Center (3) 4/29/86 leasable of land and
Nashville, TN sq. ft.; improvements
11 acres
of land
Park South Apartments 240 Units; Fee ownership
Apartments (4) 12/29/88 19 acres of land and
Charlotte, NC of land first mortgage
lien on
improvements
(1)See Notes to the Financial Statements filed with this Report for a
description of the transactions through which the Partnership has acquired
these real estate investments.
(2)On July 12, 1991, the Partnership foreclosed under the terms of the mortgage
loan secured by the Martin Sunnyvale Research and Development Center for
non-payment of the required monthly payments of interest. The Partnership has
been operating the property utilizing the services of a local management
company since the date of foreclosure. See Note 5 to the Financial Statements
accompanying this Annual Report for a further discussion of this investment.
(3)On October 4, 1991, the Partnership received a deed in lieu of foreclosure
on the mortgage loan secured by the Bell Forge Square Shopping Center due to
non-payment of the required monthly payments of interest in accordance with
the terms of the loan. The Partnership has been operating the property
utilizing the services of a local management company since the date of
foreclosure. See Note 5 to the Financial Statements accompanying this Annual
Report for a further discussion of this investment.
(4)The Partnership owns a 77% interest in the land underlying the Park South
Apartments and has an equivalent interest in the related secured mortgage
loan. The remaining 23% interest in the land and mortgage loan receivable is
owned by an affiliated partnership, PaineWebber Mortgage Partners Five, L.P.
In addition to the above properties, the Partnership previously had
investment interests in the Cordova Creek Apartments, a 196-unit, garden-style
apartment complex in Memphis, Tennessee, The Corner at Seven Corners Shopping
Center, a 70,890 leasable square foot shopping center located in Fairfax,
Virginia and the Willow Creek Apartments, a 138-unit apartment complex in
Wichita, Kansas. On February 20, 1990, the Partnership foreclosed under the
terms of the mortgage loan secured by the Cordova Creek Apartments for
non-payment of the required monthly payments of interest in accordance with the
terms of the loan. The Partnership operated the property, utilizing the services
of a local management company, for more than five years during which time the
Partnership received the majority of the net cash flow generated from property
operations after capital improvements. The Partnership owned a 96.5% interest in
the Cordova Creek operating property. The remaining 3.5% interest in the
property was owned by an affiliated partnership, PaineWebber Qualified Plan
Property Fund Three, LP ("QP3"). On April 12, 1995, the Partnership sold the
property to an unaffiliated third party for $9,100,000. After payment of
required transaction costs, including payment to QP3 for its 3.5% equity
interest, the net proceeds realized by the Partnership from the sale transaction
totalled approximately $8.7 million.
The mortgage loan secured by The Corner at Seven Corners Shopping Center
became prepayable in February 1995. On December 16, 1994, the borrower notified
the Partnership of its intent to prepay the loan and exercise the option to
purchase the land during 1995. On November 22, 1995, the borrower of The Corner
at Seven Corners loan prepaid the Partnership's first leasehold mortgage loan
and purchased the Partnership's interest in the underlying land for total
consideration of $9,628,000. The principal balance of the mortgage loan was
$6,188,000, and the Partnership's cost basis in the land was $2,062,000.
Pursuant to the ground lease, the Partnership received approximately $1.4
million in excess of its land investment as its share of the appreciation in
value of the operating investment property above a specified base amount.
During the quarter ended May 31, 1997, the owner of the Willow Creek
Apartments had given notice of an intent to repurchase the underlying land from
the Partnership and prepay its first leasehold mortgage loan, which was
scheduled to mature on October 31, 2000. On July 16, 1997, the Partnership
received $3,055,000 from the Willow Creek borrower, which represented the full
repayment of the first leasehold mortgage loan secured by the Willow Creek
Apartments. Simultaneously, the Willow Creek owner purchased the Partnership's
interest in the underlying land at a price equal to the Partnership's cost basis
in the land of $345,000. In addition, the Partnership received a mortgage loan
prepayment penalty of 4% of the mortgage note balance, or $122,200, and a land
lease termination fee of $13,800 in accordance with the terms of the agreements.
Although the structure of the Partnership's original investment in Willow Creek
entitled the Partnership to participate in the appreciated value of the property
upon a sale or refinancing, the value of the property had not increased to a
level at which the Partnership would receive a participation payment. As a
result of the Willow Creek prepayment transaction, the Partnership made a
Special Distribution of approximately $4,036,000, or $90 per original $1,000
investment, on August 15, 1997 to unit holders of record on July 16, 1997. Of
this amount, approximately $79 represented the net proceeds from the Willow
Creek transaction and approximately $11 represented a distribution from
Partnership reserves that exceeded future requirements.
The Partnership's investment objectives are to:
(1) preserve and protect Limited Partners' capital and related buying power;
(2) provide the Limited Partners with cash distributions from investment
income; and
(3) achieve long-term capital appreciation in the value of the Partnership's
investments.
Through August 31, 1997, the Limited Partners had received cumulative cash
distributions totalling approximately $55,173,000, or $1,260 per original $1,000
investment for the Partnership's earliest investors. This return includes a
distribution of $215 per original $1,000 investment following the sale of the
Cordova Creek Apartments in June 1995 ($195 from the sale of Cordova Creek and
$20 of excess Partnership reserves), a distribution of $214 per original $1,000
investment following the mortgage prepayment and related land sale of The Corner
at Seven Corners Shopping Center and a distribution of $90 per original $1,000
investment following the mortgage prepayment and related land sale of the Willow
Creek Apartments ($79 from the proceeds of the Willow Creek transactions and $11
of excess Partnership reserves). At August 31, 1997, the Partnership retains an
interest three of the six properties underlying its original mortgage loan and
land investments.
As noted above, to date the Partnership has made distributions of capital
proceeds to the Limited Partners totalling $519 per original $1,000 investment.
The Partnership's success in meeting its capital appreciation objective will
depend upon the proceeds received from the final liquidation of its remaining
investments. The amount of such proceeds will ultimately depend upon the value
of the underlying investment properties at the time of their final liquidation,
which cannot be determined with certainty at the present time. As discussed
further in Item 7, the Partnership is currently in the process of negotiating
the potential sales of the wholly-owned Martin Sunnyvale and Bell Forge Square
properties. In addition, the borrower of the mortgage loan secured by the Park
South Apartments has indicated an intent to prepay the loan and repurchase the
underlying land in early calendar year 1998. As a result of these circumstances,
it is highly probable that the disposition of the remaining real estate assets
will be accomplished in fiscal 1998. The proceeds from such sales, financings or
refinancings of the investments will not be reinvested but will be distributed
to the Partners, so that the Partnership will in effect be self-liquidating. The
liquidation of the Partnership would be expected to be completed within 1-to-3
months from the date of the disposition of the final real estate asset.
The Partnership's operating properties and the property securing its
mortgage loan investment are located in real estate markets in which they face
significant competition for the revenues they generate. The apartment complex
competes with numerous projects of similar type generally on the basis of price,
location and amenities. Apartment properties in all markets also compete with
the local single family home market for prospective tenants. The availability of
low home mortgage interest rates over the past several years has generally
caused this competition to increase in all areas of the country. The shopping
center and the research and development center compete for long-term commercial
tenants with numerous projects of similar type generally on the basis of rental
rates, location and tenant improvement allowances. At the present time, real
estate values for retail shopping centers in certain markets are being adversely
impacted by the effects of overbuilding and consolidations among retailers which
have resulted in an oversupply of space. As discussed further in Item 7, over
the past two years real estate values for R&D office properties in Northern
California have improved substantially as a result of the resurgence in the
growth of the high technology industries.
The Partnership has no real estate investments located outside the United
States. The Partnership is engaged solely in the business of real estate
investment. Therefore, a presentation of information about industry segments is
not applicable.
The Partnership has no employees; it has, however, entered into an
Advisory Contract with PaineWebber Properties Incorporated (the "Adviser"),
which is responsible for the day-to-day operations of the Partnership. The
Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a
wholly-owned subsidiary of PaineWebber Group Inc. ("PaineWebber").
The general partners of the Partnership are Fourth Qualified Properties,
Inc. and Properties Associates 1985, L.P. (the "General Partners"). Fourth
Qualified Properties, Inc., a wholly-owned subsidiary of PaineWebber, is the
Managing General Partner of the Partnership. The Associate General Partner is
Properties Associates 1985, L.P., a Virginia limited partnership, certain
limited partners of which are also officers of the Adviser and the Managing
General Partner. Subject to the Managing General Partner's overall authority,
the business of the Partnership is managed by the Adviser.
The terms of transactions between the Partnership and affiliates of the
Managing General Partner of the Partnership are set forth in Items 11 and 13
below to which reference is hereby made for a description of such terms and
transactions.
Item 2. Properties
As of August 31, 1997, the Partnership owned, and had leased back to the
seller, the land related to the one investment referred to under Item 1 above to
which reference is made for the description, name and location. Additionally, as
of August 31, 1997 the Partnership owned two properties directly as a result of
foreclosures resulting from defaults on the Partnership's mortgage loans
receivable as noted in Item 1.
Occupancy figures for each fiscal quarter during 1997 along with an
average for the year, are presented below for each property:
Percent Occupied At
--------------------------------------------------
Fiscal
1997
11/30/96 2/28/97 5/31/97 8/31/97 Average
-------- ------- ------- ------- -------
Willow Creek Apartments 98% 95% 98% N/A N/A
Martin Sunnyvale Research
and Development Center 100% 100% 100% 100% 100%
Bell Forge Square Shopping
Center 90% 90% 90% 92% 91%
Park South Apartments 92% 90% 91% 92% 91%
Item 3. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly
dissatisfied partnership investors. In March 1995, after the actions were
consolidated under the title In re PaineWebber Limited Partnership Litigation,
the plaintiffs amended their complaint to assert claims against a variety of
other defendants, including Fourth Qualified Property Fund, Inc. and Properties
Associates 1985, L.P. ("PA85"), which are the General Partners of the
Partnership and affiliates of PaineWebber. On May 30, 1995, the court certified
class action treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleged
that, in connection with the sale of interests in Paine Webber Qualified Plan
Property Fund Four, LP, PaineWebber, Fourth Qualified Property Fund, Inc. and
PA85 (1) failed to provide adequate disclosure of the risks involved; (2) made
false and misleading representations about the safety of the investments and the
Partnership's anticipated performance; and (3) marketed the Partnership to
investors for whom such investments were not suitable. The plaintiffs, who
purported to be suing on behalf of all persons who invested in Paine Webber
Qualified Plan Property Fund Four LP, also alleged that following the sale of
the partnership interests, PaineWebber, Fourth Qualified Property Fund, Inc. and
PA85 misrepresented financial information about the Partnership's value and
performance. The amended complaint alleged that PaineWebber, Fourth Qualified
Property Fund, Inc. and PA85 violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs
sought unspecified damages, including reimbursement for all sums invested by
them in the partnerships, as well as disgorgement of all fees and other income
derived by PaineWebber from the limited partnerships. In addition, the
plaintiffs also sought treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which provides for the complete resolution of the class action litigation,
including releases in favor of the Partnership and PWPI, and the allocation of
the $125 million settlement fund among investors in the various partnerships and
REITs at issue in the case. As part of the settlement, PaineWebber also agreed
to provide class members with certain financial guarantees relating to some of
the partnerships and REITs. The details of the settlement are described in a
notice mailed directly to class members at the direction of the court. A final
hearing on the fairness of the proposed settlement was held in December 1996,
and in March 1997 the court announced its final approval of the settlement. The
release of the $125 million of settlement proceeds had been delayed pending the
resolution of an appeal of the settlement agreement by two of the plaintiff
class members. In July 1997, the United States Court of Appeals for the Second
Circuit upheld the settlement over the objections of the two class members. As
part of the settlement agreement, PaineWebber agreed not to seek indemnification
from the related partnerships and real estate investment trusts at issue in the
litigation (including the Partnership) for any amounts that it is required to
pay under the settlement.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleged, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint sought
compensatory damages of $15 million plus punitive damages against PaineWebber.
In September 1996, the court dismissed many of the plaintiffs' claims in the
Abbate action as barred by applicable securities arbitration regulations.
Mediation with respect to the Abbate action was held in December 1996. As a
result of such mediation, a settlement between PaineWebber and the plaintiffs
was reached which provided for the complete resolution of this matter. Final
releases and dismissals with regard to this action were received during fiscal
1997.
Based on the settlement agreements discussed above covering all of the
outstanding unitholder litigation, management does not expect that the
resolution of these matters will have a material impact on the Partnership's
financial statements, taken as a whole
The Partnership is not subject to any other material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Security Holder Matters
At August 31, 1997, there were 7,253 record holders of Units in the
Partnership. There is no public market for the resale of Units, and it is not
anticipated that a public market for Units will develop. Upon request, the
Managing General Partner will endeavor to assist a Unitholder desiring to
transfer his Units and may utilize the services of PWI in this regard. The price
to be paid for the Units will be subject to negotiation by the Unitholder. The
Managing General Partner will not redeem or repurchase Units.
Item 6. Selected Financial Data
PaineWebber Qualified Plan Property Fund Four, LP
For the years ended August 31, 1997, 1996, 1995, 1994 and 1993
(In thousands, except per Unit data)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Revenues $ 1,047 $ 2,665 $ 2,150 $ 1,963 $ 2,005
Operating income $ 448 $ 2,518 $ 1,375 $ 1,250 $ 1,297
Recovery of (provision for)
possible investment loss - $ 900 - $ (150) $ (250)
Gain on sale of
investment property
held for sale - - $ 1,779 - -
Income from
investment properties
held for sale, net $1,029 $ 1,034 $ 1,274 $ 1,703 $ 1,494
Net income $1,477 $ 4,452 $ 4,428 $ 2,803 $ 2,541
Per Limited Partnership Unit:
Net income $ 1.63 $ 4.91 $ 4.89 $ 3.09 $ 2.80
Cash distributions from
operations $ 1.43 $ 1.77 $ 3.00 $ 3.00 $ 3.00
Cash distributions from
sale, refinancing and
other disposition
transactions $ 4.50 $ 10.70 $ 10.75 - -
Total assets $ 18,941 $ 22,801 $ 29,551 $ 37,461 $ 37,429
The above selected financial data should be read in conjunction with the
financial statements and related notes appearing elsewhere in this Annual
Report.
The above net income and cash distributions per Limited Partnership Unit
are based upon the 896,993 Limited Partnership Units outstanding during each
year.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Information Relating to Forward-Looking Statements
- --------------------------------------------------
The following discussion of financial condition includes forward-looking
statements which reflect management's current views with respect to future
events and financial performance of the Partnership. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified below, which could cause actual results to differ materially from
historical results or those anticipated. The words "believe", "expect",
"anticipate," and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which were made based on facts and conditions as they existed as of
the date of this report. The Partnership undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Liquidity and Capital Resources
- -------------------------------
The Partnership offered Limited Partnership Interests to the public from
December 14, 1984 to December 13, 1985 pursuant to a Registration Statement
filed under the Securities Act of 1933. Gross proceeds of $44,849,650 were
received by the Partnership and, after deducting selling expenses and offering
costs, approximately $37,650,500 was originally invested in six operating
property investments in the form of first mortgage loans and land
purchase-leaseback transactions. Since the time that the original investments
were made, the Partnership has assumed direct ownership of the Cordova Creek,
Martin Sunnyvale and Bell Forge Square properties as a result of foreclosure
proceedings resulting from uncured monetary defaults on the Partnership's first
mortgage loans. During fiscal 1995, the Partnership sold the Cordova Creek
Apartments and the borrowers of the mortgage loans secured by The Corner at
Seven Corners Shopping Center and the Willow Creek Apartments prepaid the loans
and purchased the Partnership's interests in the underlying land in fiscal 1996
and fiscal 1997, respectively. The net proceeds of these transactions were
distributed to the Limited Partners.
During the quarter ended May 31, 1997, the owner of the Willow Creek
Apartments had given notice of an intent to repurchase the underlying land from
the Partnership and prepay its first leasehold mortgage loan, which was
scheduled to mature on October 31, 2000. On July 16, 1997, the Partnership
received $3,055,000 from the Willow Creek borrower, which represented the full
repayment of the first leasehold mortgage loan secured by the Willow Creek
Apartments. Simultaneously, the Willow Creek owner purchased the Partnership's
interest in the underlying land at a price equal to the Partnership's cost basis
in the land of $345,000. In addition, the Partnership received a mortgage loan
prepayment penalty of 4% of the mortgage note balance, or $122,200, and a land
lease termination fee of $13,800 in accordance with the terms of the agreements.
Although the structure of the Partnership's original investment in Willow Creek
entitled the Partnership to participate in the appreciated value of the property
upon a sale or refinancing, the value of the property had not increased to a
level at which the Partnership would receive a participation payment. As a
result of the Willow Creek prepayment transaction, the Partnership made a
Special Distribution of approximately $4,036,000, or $90 per original $1,000
investment, on August 15, 1997 to unitholders of record on July 16, 1997. Of
this amount, approximately $79 represented the net proceeds from the Willow
Creek transaction and approximately $11 represented a distribution from
Partnership reserves that exceeded future requirements.
Subsequent to the distribution of the Willow Creek proceeds and the excess
reserves, the Limited Partners had received capital distributions totalling $519
per original $1,000 investment. In addition, the Partnership intends to continue
to pay quarterly operating distributions at a rate equivalent to a 5% annualized
rate of return on the $481 remaining portion of an original $1,000 investment
for fiscal 1998 or until there is another capital transaction. The Partnership
has three remaining real estate investments, only one of which, Park South
Apartments, is still in its original structure of a first leasehold mortgage
loan and land investment. As noted above, the Partnership assumed direct
ownership of the Martin Sunnyvale Research and Development Center and Bell Forge
Square Shopping Center properties following foreclosure proceedings resulting
from defaults under the terms of the Partnership's first leasehold mortgage
loans. As discussed further below, the Partnership has determined that it may be
the appropriate time to sell each of these wholly-owned assets. Furthermore, as
discussed further below, the borrower of the mortgage loan secured by Park South
has indicated an intent to prepay the loan and repurchase the underlying land in
early calendar year 1998. As a result of these circumstances, it is highly
probable that the disposition of the remaining real estate assets and a
liquidation of the Partnership will be accomplished in fiscal 1998. The net
proceeds from such sales and financing transactions will be distributed to the
Limited Partners along with the remaining Partnership cash reserves after the
payment of all liquidation-related expenses. The liquidation of the Partnership
would be expected to be completed within 1-to-3 months from the date of the
disposition of the final real estate asset.
The Partnership's wholly-owned, 39,000 square foot Martin Sunnyvale
Research and Development Center remained 100% occupied by three tenants as of
August 31, 1997. No leases expire at the property until April 30, 1999. During
the first quarter of fiscal 1997, the largest tenant at Martin Sunnyvale vacated
17,784 square feet when its lease expired at the beginning of November 1996.
However, a replacement tenant executed a five-year lease through November 2001
for the entire 17,784 square foot space at an average rental rate which is 40%
higher than the previous tenant had been paying. This transaction completed the
successful re-leasing of the three tenant spaces at the property. The other two
spaces were re-leased at the end of fiscal 1996 at rental rates 40% and 60%
higher than the previous leases. As a result of the significant increase in
rental income, the market value of the Martin Sunnyvale property has increased
substantially. This increase is reflective of the current strength of the
Silicon Valley office market as a result of the resurgence in the growth of the
high technology industries over the past two years. Accordingly, management
believes that this would be the appropriate time to sell the Martin Sunnyvale
property. Based on the current estimated market value of the property, the
Partnership believes it could realize an amount close to its original $5.1
million investment in Martin Sunnyvale from a near-term sale. As previously
reported, during the third quarter of fiscal 1997 the Partnership contracted
with a national real estate firm with a strong background in selling R&D office
buildings to market Martin Sunnyvale for sale. The property was marketed
extensively during the second half of fiscal 1997, and the Partnership received
several offers from qualified third-party buyers to acquire the property. After
reviewing the offers, the Partnership accepted an offer from one of these
potential buyers and, subsequent to year-end, negotiated a purchase and sale
agreement. However, since any sale transaction remains subject certain due
diligence and financing contingencies, there are no assurances that a near-term
sale will be completed.
As previously reported, the Partnership was notified by a California state
water agency in fiscal 1994 of a potential environmental problem at the Martin
Sunnyvale property. As a result of governmental required testing, management
learned that there has been a contamination of the underground soil and water at
the site. The state water agency has issued a final report identifying two
tenants which had occupied the property prior to 1985 and may have caused the
environmental problem. Both prior tenants are Fortune 500 companies and both
have been ordered at their own expense to perform the necessary testing, cleanup
and documentation as required by the California state water agency. The
Partnership will be required to monitor the efforts of these two firms. The
environmental testing was paid for by one of the parties identified as a
potential contaminator. Management has engaged local counsel to monitor all
legal actions to insure that the Partnership's rights are fully protected. This
matter is not expected to have any long-term impact on the market value of the
Partnership's operating property and should not affect the possible near-term
sale of the property discussed further above.
At the Partnership's other wholly-owned commercial investment property,
the Bell Forge Square Shopping Center in Nashville, Tennessee, the occupancy
level at August 31, 1997 was 92%. During the first quarter of fiscal 1997, two
tenants, a furniture store and a pet store, occupying 10% of the center's
rentable area, vacated their spaces prior to the termination of their leases.
During the third quarter, the Partnership negotiated and received a termination
fee from the furniture store in exchange for a space reduction under its lease.
The space taken back by the Partnership, totalling 2,400 square feet, was then
leased to a dental operation for a seven-year term. The furniture store had been
paying its rent under the terms of the lease on the remaining 4,000 square feet,
which expires in October 2000. However, subsequent to year-end the tenant
defaulted on its rental payment obligations. The Partnership is currently
pursuing its legal remedies. The dental center's average annual rent per square
foot is approximately 50% higher than the rate under the lease with the
furniture store. The termination fee was used to pay for tenant improvements for
the dental center. The former pet store tenant which ceased operations and
stopped paying rent during the first quarter of fiscal 1997 has been issued a
court order to pay its rental obligation. Although the Partnership is pursuing
its rights under this court judgment to recover the rent due under the lease
agreement, management is not optimistic about the likelihood of collection given
the poor financial condition of the former pet store tenant. During the third
quarter, the property's leasing team executed a new five-year lease with a
restaurant tenant for the vacant space formerly occupied by the pet store at a
rental rate 19% higher than the previous tenant's. The restaurant agreed to fund
all of its own tenant improvements and working capital requirements. Also during
the third quarter, a 3,160 square foot sporting goods store renewed its lease
for an additional five years at a rate which is 17% more than its original lease
rate. Other leasing activity during the fourth quarter included the renewal of a
2,000 square foot lease with a finance company and the renewal of a 2,930 square
foot lease with a bookstore. The property's leasing team is in preliminary
discussions with a 3,300 square foot furniture store tenant whose lease expires
in fiscal year 1998. Subsequent to August 31, 1997, the occupancy level at Bell
Forge Square improved to 97% when the restaurant tenant which leased the former
6,000 square foot pet store completed renovations and opened for business on
October 9, 1997. Although Discovery Zone, which occupies 9% of the center's net
rentable area, has filed for protection under Chapter 11 of the U.S. Bankruptcy
Code, it continues to pay its post-petition rent and operate its store at Bell
Forge Square. While there are likely to be some store closings as part of the
company's bankruptcy reorganization plan, it is uncertain at this time whether
the Bell Forge Square location would be affected by such actions.
Based on management's assessment of the potential for appreciation in the
value of the Bell Forge Square property, the Partnership decided to market the
property for sale during fiscal 1997. During the second quarter, the Partnership
hired a Nashville-based real estate firm specializing in the sale of retail
properties to market the Bell Forge Square Shopping Center for sale. This
property was also marketed extensively during the second half of fiscal 1997. As
a result of these efforts, the Partnership received offers from two prospective
third-party buyers. After reviewing the offers, the Partnership accepted an
offer from one of these potential buyers and is currently negotiating a purchase
and sale agreement. However, since any sale transaction remains subject to the
execution of a definitive agreement, as well as certain due diligence and
financing contingencies, there are no assurances that a near-term sale will be
completed.
The average occupancy level at Park South Apartments in Charlotte, North
Carolina, was 92% for the quarter ended August 31, 1997. Operations of the
property continue to fully support the debt service and ground lease payments
owed to the Partnership despite a weakening in market conditions for existing
properties in the greater Charlotte area over the past year. A significant
number of new apartment units have been added to the overall Charlotte market
during this time period, including several hundred new units which are in Park
South's sub-market, and a substantial amount of additional units are either
currently under construction or in the planning stages. In order to remain
competitive with these new units, Park South currently offers reduced rental
rates and/or discounted move-in rates to prospective tenants. As an incentive to
renew leases, current tenants are offered minimal increases at the expiration of
their leases. The use of rental concessions and renewal incentives is expected
to continue for the near term. Notwithstanding the current market conditions,
management believes that the long-term prospects for the Park South property
remain positive due to the property's strong position within the marketplace and
the region's outlook for job and population growth over the next several years.
The current occupancy level is in line with the levels of the eight properties
which compete directly with Park South.
The first mortgage loan secured by Park South matures on December 28,
2001, however, it opens to prepayment without penalty on December 29, 1997. The
owner of the Park South Apartments has recently indicated that it may prepay the
first leasehold mortgage loan and repurchase the underlying land in early 1998
in conjunction with a sale of the property. However, there are no assurances
that this sale transaction and the resulting prepayments of the Partnership's
investments will occur within this time frame. The Partnership's Park South land
investment contains a participation feature which entitles the Partnership to
share in the appreciation of the property upon a sale or refinancing. Based on
recent third-party valuations, this property has an estimated value that is
higher than the Partnership's combined original loan and land investments. As a
result, it is anticipated that the Partnership will realize its original net
investments plus some portion of the appreciated value of the property when it
is sold.
At August 31, 1997, the Partnership had available cash and cash
equivalents of $1,711,000. Such cash and cash equivalents will be used for the
working capital needs of the Partnership, distributions to the partners and, if
necessary, for tenant improvement expenses and other leasing costs of the
Partnership's wholly-owned investment properties. The source of future liquidity
and distributions to the partners is expected to be through cash generated from
the Partnership's real estate and mortgage loan investments, the repayment of
the mortgage loan receivable and the future sales or refinancings of the
underlying land and the investment properties. Such sources of liquidity are
expected to be adequate to meet the Partnership's needs on both a short-term and
long-term basis.
Results of Operations
1997 Compared to 1996
- ---------------------
The Partnership's net income decreased by $2,975,000 for the year ended
August 31, 1997, when compared to the prior year. Net income decreased mainly
due to a $1,378,000 gain recognized in the prior year in connection with the
sale of the land underlying The Corner at Seven Corners Shopping Center and the
fiscal 1996 recoveries of a $900,000 prior provision for possible investment
loss with respect to the Martin Sunnyvale property and a $472,000 allowance for
uncollectible amounts related to the Partnership's mortgage loans receivable. In
addition, the Partnership's net income decreased due to reductions in interest
from mortgage loans (prior to the prepayment penalty discussed below), land rent
and interest and other income of $201,000, $85,000 and $76,000, respectively.
Interest from mortgage loans and land rent decreased primarily as a result of
The Corner at Seven Corners and Willow Creek mortgage prepayments and related
land sales which occurred in November 1995 and July 1997, respectively. Interest
earned on cash equivalents decreased due to the inclusion of The Corner at Seven
Corners' mortgage prepayment and land sale proceeds in the invested cash
balances in the prior year pending the special distribution to the Limited
Partners which was made on January 31, 1996. These unfavorable changes in net
income were partially offset by the $122,000 penalty received by the Partnership
from the July 1997 prepayment of the mortgage loan secured by the Willow Creek
Apartments, as discussed further above, and by a decrease in management fees of
$15,000. Management fees decreased due to a reduction in adjusted capital
contributions, upon which such fees are based, as a result of the capital
distribution which followed the prepayment transaction involving The Corner at
Seven Corners investments. Management fees will decline further in fiscal 1998
as a result of the distribution of the Willow Creek proceeds in August 1997.
A $5,000 decrease in income from investment properties held for sale also
contributed to the decrease in net income for fiscal 1997. Income from
investment properties held for sale decreased mainly due to a $158,000 increase
in property operating expenses which was partially offset by a $103,000 increase
in rental income and expense reimbursements and a $44,000 decrease in property
taxes and insurance expenses. Property operating expenses increased mainly due
to an increase in leasing commissions associated with the three new tenants at
the Martin Sunnyvale Research and Development Center and an increase in
advertising expense at the Bell Forge Square Shopping Center due to the decline
in occupancy from 100% at August 31, 1996 to 92% at August 31, 1997, as
discussed further above. Property taxes and insurance expenses decreased
primarily due to the receipt of prior years' property taxes refunds for Martin
Sunnyvale during fiscal 1997. Rental income and expense reimbursements increased
due to rental rate increases at both the Martin Sunnyvale and Bell Forge Square
properties.
1996 Compared to 1995
- ---------------------
The Partnership's net income increased by $24,000 for the year ended
August 31, 1996, when compared to the prior year. This increase in net income
was primarily due to a recovery of $900,000 from prior provisions for possible
investment loss with respect to the Martin Sunnyvale property, a $472,000
recovery of an allowance for uncollectible amounts related to the Partnership's
mortgage loans receivable and a gain of $1,378,000 recognized in fiscal 1996 in
connection with the sale of the land underlying The Corner at Seven Corners
Shopping Center. These favorable changes in net income were offset by a gain of
$1,779,000 recognized in fiscal 1995 from the sale of the Cordova Creek
Apartments, a decrease in income from investment properties held for sale of
$240,000 and by reductions in interest earned on mortgage loans of $538,000 and
land rent revenue of $310,000. Interest earned on mortgage loans and land rent
revenue decreased as a result of The Corner at Seven Corners mortgage repayment
and related land sale which occurred in November 1995. The declines in interest
and land rent revenues were partially offset by a decrease of $84,000 in both
management fees and general and administrative expenses. Management fees
decreased due to a reduction in adjusted capital contributions, upon which such
fees are based, as a result of the capital distributions which followed the
sales of the Cordova Creek Apartments and The Corner at Seven Corners
investments. General and administrative expenses declined as a result of a
decrease in certain required professional services during fiscal 1996.
The decrease in income from operations of investment properties held for
sale was primarily attributable to the inclusion of the operating results of the
Cordova Creek Apartments, through the date of sale in April 1995, in the prior
year's income. The decrease in income from Cordova Creek was partially offset by
an increase in income at the Bell Forge Square Shopping Center. Net income
increased at Bell Forge Square primarily due to an increase in rental income of
$83,000 and a decrease in capital improvement expenditures of $88,000. Rental
income increased due to an increase in occupancy from an average of 94% in
fiscal 1995 to an average of 98% for fiscal 1996. Capital improvement
expenditures were significantly higher in the prior year due to the repair and
improvement of the property's exterior facade. In accordance with the
Partnership's accounting policy for assets held for sale, capital improvement
costs are expensed as incurred.
The $900,000 recovery of possible investment loss in fiscal 1996 resulted
from the significant increase in the estimated fair value of the Martin
Sunnyvale property due to the leasing activity and improving market conditions
discussed further above. In accordance with the Partnership's policy of
accounting for foreclosed assets, increases in the estimated fair value of such
assets result in reductions of the related valuation allowance, but not below
zero. The $472,000 balance of a general loan loss reserve was reversed during
fiscal 1996 as well. Subsequent to the repayment in full of the mortgage loan
secured by The Corner at Seven Corners Shopping Center in fiscal 1996, the
Partnership's two remaining mortgage loans were secured by residential apartment
properties. As a result of the continued improvement in the operating
performance of these two properties and in the market for residential apartment
properties in general, management determined that this reserve account was no
longer required.
1995 Compared to 1994
- ---------------------
The Partnership's net income increased by $1,625,000 for the year ended
August 31, 1995, when compared to the prior year. The primary reason for the
increase in net income was the gain realized by the Partnership from the sale of
the Cordova Creek Apartments on April 12, 1995 of $1,779,000. In addition,
operating income increased by $125,000 primarily as a result of an increase in
interest income on cash equivalents of $141,000. Interest income increased due
to higher interest rates earned on invested cash reserves in fiscal 1995 when
compared to the prior year and a significant increase in average cash balances
as a result of the receipt and temporary investment of the Cordova Creek sale
proceeds. The net proceeds from the Cordova Creek sale of $8.7 million were
received in April 1995 and were invested pending the distribution to the Limited
Partners which occurred in June 1995. In addition, land rent revenue increased
by $46,000 due to an increase in additional rent received under the terms of The
Corner at Seven Corners and Park South ground leases. The increases in interest
income earned on short-term investments and land rent revenue were partially
offset by an increase in general and administrative expenses of $74,000. General
and administrative expenses increased mainly due to an increase in legal and
other professional fees as a result of the potential environmental problem
referred to above at the wholly-owned Martin Sunnyvale property.
The gain realized from the sale of the Cordova Creek Apartments and the
increase in the Partnership's operating income were partially offset by a
decrease in income from operations of investment properties held for sale of
$429,000 in fiscal 1995. This decrease was partly a result of the sale of the
Cordova Creek Apartments on April 12, 1995, as less than eight months of Cordova
Creek's operations were included in the fiscal 1995's results. In addition,
significant capital improvement expenses were incurred at the Bell Forge Square
Shopping Center during fiscal 1995 in connection with the repair and improvement
of the property's exterior facade. As noted above, in accordance with the
Partnership's accounting policy for assets held for sale, capital improvement
costs are expensed as incurred.
Certain Factors Affecting Future Operating Results
- --------------------------------------------------
The following factors could cause actual results to differ materially from
historical results or those anticipated:
Real Estate Investment Risks. Real property investments are subject to
varying degrees of risk. Revenues and property values may be adversely affected
by the general economic climate, the local economic climate and local real
estate conditions, including (i) the perceptions of prospective tenants of the
attractiveness of the property; (ii) the ability to retain qualified individuals
to provide adequate management and maintenance of the property; (iii) the
inability to collect rent due to bankruptcy or insolvency of tenants or
otherwise; and (iv) increased operating costs. Real estate values may also be
adversely affected by such factors as applicable laws, including tax laws,
interest rate levels and the availability of financing.
Effect of Uninsured Loss. The Partnership carries, or requires its
borrower to carry, comprehensive liability, fire, flood, extended coverage and
rental loss insurance with respect to its properties with insured limits and
policy specifications that management believes are customary for similar
properties. There are, however, certain types of losses (generally of a
catastrophic nature such as wars, floods or earthquakes) which may be either
uninsurable, or, in management's judgment, not economically insurable. Should an
uninsured loss occur, the Partnership could lose both its invested capital in
and anticipated profits from the affected property.
Possible Environmental Liabilities. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may become liable for the costs of the investigation,
removal and remediation of hazardous or toxic substances on, under, in or
migrating from such property. Such laws often impose liability without regard to
whether the owner or operator knew of, or was responsible for, the presence of
such hazardous or toxic substances.
The Partnership is not aware of any notification by any private party or
governmental authority of any non-compliance, liability or other claim in
connection with environmental conditions at any of its properties, including the
groundwater contamination at the Martin Sunnyvale property described above, that
it believes will involve any expenditure which would be material to the
Partnership, nor is the Partnership aware of any environmental condition with
respect to any of its properties that it believes will involve any such material
expenditure. However, there can be no assurance that any non-compliance,
liability, claim or expenditure will not arise in the future.
Competition. The financial performance of the Partnership's remaining real
estate investments will be significantly impacted by the competition from
comparable properties in its local market area. The occupancy levels and rental
rates achievable at the properties are largely a function of supply and demand
in the market. In many markets across the country development of new
multi-family properties has increased significantly in the past year. Existing
apartment properties in such markets could be expected to experience increased
vacancy levels, declines in effective rental rates and, in some cases, declines
in estimated market values as a result of the increased competition. The R&D
office segment has begun to experience limited new development activity in
selected areas after several years of virtually no new supply being added to the
market. The retail segment of the real estate market is currently suffering from
an oversupply of space in many markets resulting from overbuilding in recent
years and the trend of consolidations and bankruptcies among retailers prompted
by the generally flat rate of growth in overall retail sales. There are no
assurances that these competitive pressures will not adversely affect the
operations and/or market values of the Partnership's investment properties in
the future.
Availability of a Pool of Qualified Buyers. The availability of a pool of
qualified and interested buyers for the Partnership's remaining real estate
assets is critical to the Partnership's ability to realize the current estimated
fair market values of such assets and to complete the liquidation of the
Partnership on a timely basis. Demand by buyers of multi-family apartment,
office and retail properties is affected by many factors, including the size,
quality, age, condition and location of the subject property, potential
environmental liability concerns, the existing debt structure, the quality and
stability of the tenant roster, the terms of any long-term leases, the liquidity
in the debt and equity markets for asset acquisitions, the general level of
market interest rates and the general and local economic climates.
Inflation
- ---------
The Partnership completed its twelfth full year of operations in 1997 and
the effects of inflation and changes in prices on revenues and expenses to date
have not been significant.
The impact of inflation in future periods may be partially offset by an
increase in revenues because the Partnership's land lease provides for
additional rent based upon increases in the revenues of the related operating
property which would tend to rise with inflation. Revenues from the Bell Forge
Square Shopping Center and the Martin Sunnyvale Research and Development Center
would also be expected to rise with inflation because the tenant leases contain
rental escalation and/or expense reimbursement clauses based on increases in
tenant sales and property operating expenses. Such increases in revenues would
be expected to at least partially offset the increases in Partnership and
property operating expenses resulting from inflation. During a period of
significant inflation, increased operating expenses attributable to space which
remained unleased at such time would not be recoverable and would adversely
affect the Partnership's net cash flow.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included under Item 14
of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Partnership
The Managing General Partner of the Partnership is Fourth Qualified
Properties, Inc. a Delaware corporation, which is a wholly-owned subsidiary of
PaineWebber. The Associate General Partner of the Partnership is Properties
Associates 1985, L.P., a Virginia limited partnership, certain limited partners
of which are also officers of the Adviser and the Managing General Partner. The
Managing General Partner has overall authority and responsibility for the
Partnership's operation, however, the day-to-day business of the Partnership is
managed by the Adviser pursuant to an advisory contract.
(a) and (b) The names and ages of the directors and principal executive
officers of the Managing General Partner of the Partnership are as follows:
Date
Elected
Name Office Age to Office
---- ------ --- ---------
Bruce J. Rubin President and Director 38 8/22/96
Terrence E. Fancher Director 44 10/10/96
Walter V. Arnold Senior Vice President and Chief
Financial Officer 50 10/29/85
David F. Brooks First Vice President and Assistant
Treasurer 55 9/19/84*
Timothy J. Medlock Vice President and Treasurer 36 8/4/89
Thomas W. Boland Vice President and Controller 35 12/1/91
Dorothy F. Haughey Secretary 71 9/19/84*
* The date of incorporation of the Managing General Partner
(c) There are no other significant employees in addition to the directors
and executive officers mentioned above.
(d) There is no family relationship among any of the foregoing directors
or officers of the Managing General Partner of the Partnership. All of the
foregoing directors and executive officers have been elected to serve until the
annual meeting of the Managing General Partner.
(e) All of the directors and officers of the Managing General Partner hold
similar positions in affiliates of the Managing General Partner, which are the
corporate general partners of other real estate limited partnerships sponsored
by PWI, and for which PaineWebber Properties Incorporated ("PWPI") serves as the
Adviser. The business experience of each of the directors and principal
executive officers of the Managing General Partner is as follows:
Bruce J. Rubin is President and Director of the Managing General
Partner. Mr. Rubin was named President and Chief Executive Officer of PWPI
in August 1996. Mr. Rubin joined PaineWebber Real Estate Investment Banking
in November 1995 as a Senior Vice President. Prior to joining PaineWebber,
Mr. Rubin was employed by Kidder, Peabody and served as President for KP
Realty Advisers, Inc. Prior to his association with Kidder, Mr. Rubin was a
Senior Vice President and Director of Direct Investments at Smith Barney
Shearson. Prior thereto, Mr. Rubin was a First Vice President and a real
estate workout specialist at Shearson Lehman Brothers. Prior to joining
Shearson Lehman Brothers in 1989, Mr. Rubin practiced law in the Real Estate
Group at Willkie Farr & Gallagher. Mr. Rubin is a graduate of Stanford
University and Stanford Law School.
<PAGE>
Terrence E. Fancher was appointed a Director of the Managing General
Partner in October 1996. Mr. Fancher is the Managing Director in charge of
PaineWebber's Real Estate Investment Banking Group. He joined PaineWebber as
a result of the firm's acquisition of Kidder, Peabody. Mr. Fancher is
responsible for the origination and execution of all of PaineWebber's REIT
transactions, advisory assignments for real estate clients and certain of the
firm's real estate debt and principal activities. He joined Kidder, Peabody
in 1985 and, beginning in 1989, was one of the senior executives responsible
for building Kidder, Peabody's real estate department. Mr. Fancher
previously worked for a major law firm in New York City. He has a J.D. from
Harvard Law School, an M.B.A. from Harvard Graduate School of Business
Administration and an A.B. from Harvard College.
Walter V. Arnold is a Senior Vice President and Chief Financial Officer of
the Managing General Partner and a Senior Vice President and Chief Financial
Officer of the Adviser which he joined in October 1985. Mr. Arnold joined PWI in
1983 with the acquisition of Rotan Mosle, Inc. where he had been First Vice
President and Controller since 1978, and where he continued until joining the
Adviser. Mr. Arnold is a Certified Public Accountant licensed in the state of
Texas.
David F. Brooks is a First Vice President and Assistant Treasurer of the
Managing General Partner and a First Vice President and an Assistant Treasurer
of the Adviser. Mr. Brooks joined the Adviser in March 1980. From 1972 to 1980,
Mr. Brooks was an Assistant Treasurer of Property Capital Advisors, Inc. and
also, from March 1974 to February 1980, the Assistant Treasurer of Capital for
Real Estate, which provided real estate investment, asset management and
consulting services.
Timothy J. Medlock is a Vice President and Treasurer of the Managing
General Partner and a Vice President and Treasurer of the Adviser which he
joined in 1986. From June 1988 to August 1989, Mr. Medlock served as the
Controller of the Managing General Partner and the Adviser. From 1983 to 1986,
Mr. Medlock was associated with Deloitte Haskins & Sells. Mr. Medlock graduated
from Colgate University in 1983 and received his Masters in Accounting from New
York University in 1985.
Thomas W. Boland is a Vice President and Controller of the Managing
General Partner and a Vice President and Controller of the Adviser which he
joined in 1988. From 1984 to 1987, Mr. Boland was associated with Arthur
Young & Company. Mr. Boland is a Certified Public Accountant licensed in the
state of Massachusetts. He holds a B.S. in Accounting from Merrimack College
and an M.B.A. from Boston University.
Dorothy F. Haughey is Secretary of the Managing General Partner,
Assistant Secretary of PaineWebber and Secretary of PWI. Ms. Haughey joined
PaineWebber in 1962.
(f) None of the directors and officers was involved in legal proceedings
which are material to an evaluation of his or her ability or integrity as a
director or officer.
(g) Compliance With Exchange Act Filing Requirements: The Securities
Exchange Act of 1934 requires the officers and directors of the Managing General
Partner, and persons who own more than ten percent of the Partnership's limited
partnership units, to file certain reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and ten-percent
beneficial holders are required by SEC regulations to furnish the Partnership
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Partnership believes that, during the year ended August 31, 1997, all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
Item 11. Executive Compensation
The directors and officers of the Partnership's Managing General Partner
receive no current or proposed remuneration from the Partnership.
The Partnership is required to pay certain fees to the Adviser and the
General Partners are entitled to receive a share of cash distributions and a
share of profits and losses. These items are described in Item 13.
The Partnership has paid cash distributions to the Unitholders on a
quarterly basis at rates ranging from 4.5% to 6% per annum on remaining invested
capital over the past five years. However, the Partnership's Units of Limited
Partnership Interest are not actively traded on any organized exchange, and no
efficient secondary market exists. Accordingly, no accurate price information is
available for these Units. Therefore, a presentation of historical Unitholder
total returns would not be meaningful.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) The Partnership is a limited partnership issuing Units of Limited
Partnership Interest, not voting securities. All the outstanding stock of the
Managing General Partner, Fourth Qualified Properties, Inc., is owned by
PaineWebber. Properties Associates 1985, L.P., the Associate General Partner, is
a Virginia limited partnership, limited partners of which are also officers of
the Adviser and the Managing General Partner. Properties Associates 1985 was the
Initial Limited Partner of the Partnership. No limited partner is known by the
Partnership to own beneficially more than 5% of the outstanding interests of the
Partnership.
(b) Neither the directors and officers of the Managing General Partner nor
the limited partners of the Associate General Partner individually own any Units
of Limited Partnership interest of the Partnership. No director or officer of
the Managing General Partner nor the limited partners of the Associate General
Partner possess a right to acquire beneficial ownership of Units of Limited
Partnership interest of the Partnership.
(c) There exists no arrangement, known to the Partnership, the operation
of which may at a subsequent date result in a change in control of the
Partnership.
Item 13. Certain Relationships and Related Transactions
The General Partners of the Partnership are Fourth Qualified Properties,
Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber
Group Inc. ("PaineWebber"), and Properties Associates 1985, L.P. (the "Associate
General Partner"), a Virginia limited partnership, certain limited partners of
which are also officers of the Adviser and the Managing General Partner. Subject
to the Managing General Partner's overall authority, the business of the
Partnership is managed by the Adviser pursuant to an advisory contract. The
Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a
wholly-owned subsidiary of PaineWebber.
The General Partners, the Adviser and PWI receive fees and compensation
determined on an agreed-upon basis, in consideration of various services
performed in connection with the sale of the Units, the management of the
Partnership and the acquisition, management and disposition of Partnership
investments.
Distributable Cash, as defined, of the Partnership will be distributed 98%
to the Limited Partners, 1% to the General Partners and 1% to the Adviser as an
asset management fee. Residual proceeds resulting from disposition of
Partnership investments will be distributed generally, 95% to the Limited
Partners, 3.99% to the Adviser as an asset management fee and 1.01% to the
General Partners after the prior receipt by the Limited Partners of their
original capital contributions and a cumulative annual return of 12%, as set
forth in the Amended Partnership Agreement.
All taxable income or tax loss (other than from a Capital Transaction) of
the Partnership will be allocated 98.989899% to the Limited Partners and
1.010101% to the General Partners. Taxable income or tax loss arising from a
sale or refinancing of investment properties will be allocated to the Limited
Partners and the General Partners in proportion to the amounts of sale or
refinancing proceeds to which they are entitled; provided that the General
Partners shall be allocated at least 1% of taxable income arising from a sale or
refinancing. Allocations of the Partnership's operations between the General
Partners and the Limited Partners for financial accounting purposes have been
made in conformity with the allocations of taxable income or tax loss.
Acquisition fees in the amount of 3% of the gross offering proceeds were
paid to the Adviser for analyzing, structuring and negotiating the acquisitions
of the Partnership's investments. The Adviser may receive a commission, in an
amount not yet determinable, upon the disposition of certain Partnership
investments.
The Adviser has been contracted to perform specific management
responsibilities, to administer the day-to-day operations of the Partnership and
to report periodically the performance of the Partnership to the Managing
General Partner. The Adviser will be paid a basic management fee of 1/2 of 1% of
the gross proceeds of the offering, in addition to the asset management fee
described above, for these services. Basic and asset management fees totalling
$141,000 were earned for the year ended August 31, 1997.
The Managing General Partner and the Adviser are reimbursed for their
direct expenses relating to the offering of Units, the administration of the
Partnership and the acquisition and operations of the Partnership's real
property investments.
An affiliate of the Managing General Partner performs certain accounting,
tax preparation, securities law compliance and investor communications and
relations services for the Partnership. The total costs incurred by this
affiliate in providing such services are allocated among several entities,
including the Partnership. Included in general and administrative expenses for
the year ended August 31, 1997 is $184,000, representing reimbursements to this
affiliate for providing such services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an
independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees
of $7,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during fiscal 1997. Fee charged by Mitchell Hutchins
are based on a percentage of invested cash reserves which varies based on the
total amount of invested cash which Mitchell Hutchins manages on behalf of PWPI.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) and (2) Financial Statements and Schedules:
The response to this portion of Item 14 is submitted as a separate
section of this report. See Index to Financial Statements and
Financial Statement Schedules at page F-1.
Financial statements for the properties securing the Partnership's
mortgage loans have not been included since the Partnership has no
contractual right to the information and cannot otherwise
practicably obtain the information.
(3) Exhibits:
The exhibits listed on the accompanying index to exhibits at page
IV-3 are filed as part of this Report.
(b) A Current Report on Form 8-K dated July 16, 1997 was filed to report
the repayment of the first leasehold mortgage loan secured by the
Willow Creek Apartments and related sale of the Partnership's interest
in the underlying land and is hereby incorporated herein by reference.
(c) Exhibits
See (a)(3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this report. See Index to Financial Statements and
Financial Statement Schedules at page F-1.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 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.
PAINE WEBBER QUALIFIED PLAN
PROPERTY FUND FOUR, LP
By: Fourth Qualified Properties, Inc.
Managing General Partner
By: /s/ Bruce J. Rubin
------------------
Bruce J. Rubin
President and Chief Executive Officer
By: /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
By: /s/ Thomas W. Boland
--------------------
Thomas W. Boland
Vice President and Controller
Dated: November 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Partnership in
the capacity and on the dates indicated.
By:/s/ Bruce J. Rubin Date: November 26, 1997
-------------------- -----------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: November 26, 1997
----------------------- -----------------
Terrence E. Fancher
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page Number in the Report
Exhibit No. Description of Document or Other Reference
- ----------- ----------------------- ------------------
<S> <C> <C>
(3) and (4) Prospectus of the Registrant Filed with the Commission
dated December 3, 1985, supplemented, pursuant to Rule 424(c)
with particular reference to the and incorporated herein by
Restated Certificate and Agreement reference.
Limited Partnership.
(10) Material contracts previously filed Filed with the Commission
as exhibits to registration statements pursuant to Section 13 or 15(d)
and amendments thereto of the registrant of the Securities Exchange Act
together with all such contracts filed of 1934 and incorporated
as exhibits of previously filed Forms herein by reference.
8-K and Forms 10-K are hereby
incorporated herein by reference.
(13) Annual Reports to Limited Partners No Annual Report for the year
ended August 31, 1997 has been
sent to the Limited Partners. An
Annual Report will be sent to the
Limited Partners subsequent to
this filing.
(27) Financial Data Schedule Filed as last page of EDGAR
submission following the Financial
Statements and Financial Statement
Schedule required by Item 14.
</TABLE>
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(1) and (2) and 14(d)
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference
Paine Webber Qualified Plan Property Fund Four, LP:
Report of independent auditors F-2
Balance sheets as of August 31, 1997 and 1996 F-3
Statements of income for the years ended August 31, 1997,
1996 and 1995 F-4
Statements of changes in partners' capital (deficit) for the years
ended August 31, 1997, 1996 and 1995 F-5
Statements of cash flows for the years ended August 31, 1997,
1996 and 1995 F-6
Notes to financial statements F-7
Financial Statement Schedules:
Schedule III - Real Estate Owned F-15
Schedule IV - Investments in Mortgage Loans on Real Estate F-17
Other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements, including the notes thereto.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners of
Paine Webber Qualified Plan Property Fund Four, LP:
We have audited the accompanying balance sheets of Paine Webber Qualified
Plan Property Fund Four, LP as of August 31, 1997 and 1996, and the related
statements of income, changes in partners' capital (deficit), and cash flows for
each of the three years in the period ended August 31, 1997. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedules are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Paine Webber Qualified Plan
Property Fund Four, LP at August 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
August 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Boston, Massachusetts
November 20, 1997
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
BALANCE SHEETS
August 31, 1997 and 1996
(In thousands, except per Unit data)
ASSETS
1997 1996
---- ----
Real estate investments:
Investment properties held for sale, net
of allowance for possible investment
loss of $300 $ 12,100 $ 12,100
Land 770 1,115
Mortgage loans 4,230 7,285
-------- --------
17,100 20,500
Cash and cash equivalents 1,711 2,060
Interest receivable 32 60
Accounts receivable 9 14
Deferred expenses, net of accumulated
amortization of $295 ($266 in 1996) 70 99
Other assets 19 68
-------- --------
$ 18,941 $ 22,801
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 32 $ 32
Accounts payable and accrued expenses 190 201
Unearned rental income 3 26
Tenant security deposits 72 45
-------- --------
Total liabilities 297 304
Partners' capital:
General Partners:
Capital contributions 1 1
Cumulative net income 418 404
Cumulative cash distributions (407) (394)
Limited Partners ($50 per Unit,
896,993 Units issued):
Capital contributions, net of offering costs 40,309 40,309
Cumulative net income 33,496 32,033
Cumulative cash distributions (55,173) (49,856)
-------- --------
Total partners' capital 18,644 22,497
-------- --------
$ 18,941 $ 22,801
======== ========
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
STATEMENTS OF INCOME
For the years ended August 31, 1997, 1996 and 1995
(In thousands, except per Unit data)
1997 1996 1995
---- ---- ----
Revenues:
Interest from mortgage loans $ 796 $ 875 $ 1,413
Land rent 117 202 512
Interest earned on cash equivalents
and other income 134 210 225
Gain on sale of land - 1,378 -
--------- -------- ---------
1,047 2,665 2,150
Expenses:
Management fees 141 156 240
General and administrative 429 424 508
Amortization of deferred expenses 29 39 27
Recovery of allowance for
uncollectible amounts - (472) -
--------- -------- ---------
599 147 775
--------- -------- ---------
Operating income 448 2,518 1,375
Investment properties held for sale:
Recovery of possible investment loss - 900 -
Gain on sale of investment property
held for sale - - 1,779
Income from investment properties
held for sale, net 1,029 1,034 1,274
--------- -------- ---------
1,029 1,934 3,053
--------- -------- ---------
Net income $ 1,477 $ 4,452 $ 4,428
========= ======== =========
Net income per Limited Partnership Unit $ 1.63 $ 4.91 $ 4.89
====== ====== =======
Cash distributions per Limited
Partnership Unit $ 5.93 $12.47 $13.75
====== ====== ======
The above net income and cash distributions per Limited Partnership Unit are
based upon the 896,993 Units ($50 per Unit) of Limited Partnership Interest
outstanding during each year.
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended August 31, 1997, 1996 and 1995
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
Balance at August 31, 1994 $ (35) $ 37,215 $ 37,180
Net income 45 4,383 4,428
Cash distributions (28) (12,333) (12,361)
------ -------- --------
Balance at August 31, 1995 (18) 29,265 29,247
Net income 45 4,407 4,452
Cash distributions (16) (11,186) (11,202)
------ -------- --------
Balance at August 31, 1996 11 22,486 22,497
Net income 14 1,463 1,477
Cash distributions (13) (5,317) (5,330)
------ -------- --------
Balance at August 31, 1997 $ 12 $ 18,632 $ 18,644
====== ======== ========
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
STATEMENTS OF CASH FLOWS
For the years ended August 31, 1997, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income $ 1,477 $ 4,452 $ 4,428
Adjustments to reconcile net income to net
cash provided by operating activities:
Recovery of allowance for
uncollectible amounts - (472) -
Recovery of possible investment loss - (900) -
Gain on sale of land - (1,378) -
Gain on sale of investment property
held for sale - - (1,779)
Amortization of deferred expenses 29 39 27
Changes in assets and liabilities:
Interest receivable 28 58 -
Accounts receivable 5 9 14
Tax and tenant security deposits escrows - - 94
Other assets 49 (25) 43
Accounts payable - affiliates - (12) (12)
Accounts payable and accrued expenses (11) 64 7
Tenant security deposits 27 (2) (22)
Unearned rental income (23) - -
Other liabilities - (50) 50
------- ------- -------
Total adjustments 104 (2,669) (1,578)
------- ------- -------
Net cash provided by
operating activities 1,581 1,783 2,850
------- ------- -------
Cash flows from investing activities:
Net proceeds from sale of land 345 3,440 -
Repayment of mortgage loan receivable 3,055 6,188 -
Net proceeds from sale of
investment property held for sale - - 8,680
------- ------- --------
Net cash provided by
investing activities 3,400 9,628 8,680
------- ------- -------
Cash flows from financing activities:
Distributions to partners (5,330) (11,202) (12,361)
------- ------- -------
Net (decrease) increase in cash and
cash equivalents (349) 209 (831)
Cash and cash equivalents,
beginning of year 2,060 1,851 2,682
------- ------- -------
Cash and cash equivalents,
end of year $ 1,711 $ 2,060 $ 1,851
======= ======= =======
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
NOTES TO FINANCIAL STATEMENTS
1. Organization and Nature of Operations
-------------------------------------
Paine Webber Qualified Plan Property Fund Four, LP (the "Partnership") is
a limited partnership organized pursuant to the laws of the State of Delaware in
October 1984 for the purpose of investing in a diversified portfolio of existing
income-producing real properties through land purchase-leasebacks and first
mortgage loans. The Partnership authorized the issuance of Units (the "Units")
of Limited Partnership Interest of which 896,993 Units (at $50 per Unit) were
subscribed and issued between December 14, 1984 and December 13, 1985.
The Partnership originally owned land and made first mortgage loans
secured by buildings with respect to six operating investment properties. To
date, the Partnership has sold or been prepaid on its investments with respect
to three of the original operating properties. As of August 31, 1997, one of the
Partnership's mortgage loan and land lease investments on the original
properties was still outstanding, and the Partnership owned two operating
properties directly as a result of foreclosing under the terms of its mortgage
loans receivable. See Notes 4 and 5 for a further discussion of the
Partnership's outstanding real estate investments.
As discussed further in Notes 4 and 5, the Partnership is in the process
of actively marketing its two wholly-owned properties for sale and expects to be
prepaid during fiscal 1998 on the remaining mortgage loan and land investments.
The disposition of all of the remaining real estate assets would be followed by
a liquidation of the Partnership which could be accomplished prior to the end of
fiscal 1998. There are no assurances, however, that the disposition of the
remaining assets and the liquidation of the Partnership will be completed within
this time frame.
2. Use of Estimates and Summary of Significant Accounting Policies
---------------------------------------------------------------
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
which require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of August 31, 1997 and 1996 and revenues and expenses for
each of the three years in the period ended August 31, 1997. Actual results
could differ from the estimates and assumptions used.
The Partnership's investments in land subject to ground leases are carried
at cost or an amount less than cost if indicators of impairment are present in
accordance with statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," which was adopted in fiscal 1997. SFAS No. 121 requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets carrying amount. The
Partnership generally assesses indicators of impairment by a review of
independent appraisal reports on each operating investment property. Such
appraisals make use of a combination of certain generally accepted valuation
techniques, including direct capitalization, discounted cash flows and
comparable sales analysis. SFAS No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of.
Investment properties held for sale represent assets acquired by the
Partnership through foreclosure proceedings on first mortgage loans. In
accordance with SFAS No. 121, the Partnership's policy is to carry these assets
at the lower of cost or estimated fair value (net of selling expenses). The
Partnership's cost basis is equal to the fair value of the assets at the date of
foreclosure. Declines in the estimated fair value of the assets subsequent to
foreclosure are recorded through the use of a valuation allowance. Subsequent
increases in the estimated fair value of the assets result in reductions of the
valuation allowance, but not below zero. All costs incurred to hold the assets,
including capital improvements and leasing costs, are charged to expense and no
depreciation expense is recorded.
Mortgage loans receivable are carried at the lower of cost or fair value.
The Partnership's policy is to provide for any valuation allowances for its
mortgage loan investments on a specific identification basis, principally by
evaluating the market value of the underlying collateral since the loans are
collateral dependent. In addition, a general loan loss reserve of $860,000 was
recorded in fiscal 1990 reflecting management's assessment of the general credit
risk applicable to the Partnership's portfolio of mortgage loan investments
taken as a whole. During fiscal 1991, $388,000 of this loan loss reserve was
reversed due to the acquisition of certain properties through foreclosure on the
outstanding mortgage loans receivable. In fiscal 1996, the remainder of this
loan loss reserve of $472,000 was reversed as a result of continued improvements
in the operating performances of the underlying collateral properties and in
real estate market conditions in general.
Deferred expenses represent acquisition fees paid to PaineWebber
Properties Incorporated (the "Adviser") as compensation for analyzing,
structuring and negotiating the Partnership's real estate investments. These
fees are being amortized using the straight-line method over the term of the
remaining mortgage loan receivable, of thirteen years. Deferred expenses
attributable to investments that are sold or prepaid are fully amortized in the
year of disposal.
For purposes of reporting cash flows, the Partnership considers all highly
liquid investments with original maturities of 90 days or less to be cash
equivalents.
The mortgage loans receivable and cash and cash equivalents appearing on
the accompanying balance sheets represent financial instruments for purposes of
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments." The carrying amount of cash and cash
equivalents approximates its fair value as of August 31, 1997 and 1996 due to
the short-term maturities of these instruments. Information regarding the fair
value of the Partnership's mortgage loans receivable is provided in Note 4. The
fair value of mortgage loans receivable is estimated using discounted cash flow
analysis and further considers independent appraisals of the underlying
collateral properties (see Note 4 for a further discussion).
No provision for income taxes has been made as the liability for such
taxes is that of the partners rather than the Partnership.
3. The Partnership Agreement and Related Party Transactions
--------------------------------------------------------
The General Partners of the Partnership are Fourth Qualified Properties,
Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber
Group Inc. ("PaineWebber"), and Properties Associates 1985, L.P. (the "Associate
General Partner"), a Virginia limited partnership, certain limited partners of
which are also officers of the Adviser and the Managing General Partner. Subject
to the Managing General Partner's overall authority, the business of the
Partnership is managed by the Adviser pursuant to an advisory contract. The
Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a
wholly-owned subsidiary of PaineWebber.
Acquisition fees in the amount of 3% of the gross offering proceeds were
paid to the Adviser for analyzing, structuring and negotiating the acquisitions
of the Partnership's investments. The Adviser may receive a commission, in an
amount not yet determinable, upon the disposition of certain Partnership
investments.
The General Partners, the Adviser and PWI receive fees and compensation
determined on an agreed-upon basis, in consideration of various services
performed in connection with the sale of the Units, the management of the
Partnership and the acquisition, management and disposition of Partnership
investments.
Distributable Cash, as defined, of the Partnership will be distributed 98%
to the Limited Partners, 1% to the General Partners and 1% to the Adviser as an
asset management fee. Residual proceeds resulting from disposition of
Partnership investments will be distributed generally, 95% to the Limited
Partners, 3.99% to the Adviser as an asset management fee and 1.01% to the
General Partners after the prior receipt by the Limited Partners of their
original capital contributions and a cumulative annual return of 12%, as set
forth in the Amended Partnership Agreement.
All taxable income or tax loss (other than from a Capital Transaction) of
the Partnership will be allocated 98.989899% to the Limited Partners and
1.010101% to the General Partners. Taxable income or tax loss arising from a
sale or refinancing of investment properties will be allocated to the Limited
Partners and the General Partners in proportion to the amounts of sale or
refinancing proceeds to which they are entitled; provided that the General
Partners shall be allocated at least 1% of taxable income arising from a sale or
refinancing. Allocations of the Partnership's operations between the General
Partners and the Limited Partners for financial accounting purposes have been
made in conformity with the allocations of taxable income or tax loss.
The Adviser has been contracted to perform specific management
responsibilities, to administer the day-to-day operations of the Partnership and
to report periodically the performance of the Partnership to the Managing
General Partner. The Adviser will be paid a basic management fee of 1/2 of 1% of
the gross proceeds of the offering, in addition to the asset management fee
described above, for these services. Basic and asset management fees totalling
$141,000, $156,000 and $240,000 were earned for the years ended August 31, 1997,
1996 and 1995, respectively. Accounts payable - affiliates at both August 31,
1997 and 1996 consists of management fees of $32,000 payable to the Adviser.
The Managing General Partner and the Adviser are reimbursed for their
direct expenses relating to the offering of Units, the administration of the
Partnership and the acquisition and operations of the Partnership's real
property investments.
Included in general and administrative expenses for the years ended August
31, 1997, 1996 and 1995 is $184,000, $169,000 and $207,000, respectively,
representing reimbursements to an affiliate of the Managing General Partner for
providing certain financial, accounting and investor communication services to
the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an
independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees
of $7,000, $15,000 and $5,000 (included in general and administrative expenses)
for managing the Partnership's cash assets during fiscal 1997, 1996 and 1995,
respectively.
4. Real Estate Investments
-----------------------
The following first mortgage loans were outstanding at August 31, 1997 and
1996 (in thousands):
<TABLE>
<CAPTION>
Date of
Amount of Loan Loan and
Property 1997 1996 Interest Rate Maturity
-------- ---- ---- ------------- --------
<S> <C> <C> <C> <C>
Willow Creek $ - $ 3,055 Years 1 to 5 - 10.50% 10/31/85
Apartments Thereafter 11% 10/31/00
Wichita, KS (1)
Park South 4,230 4,230 9% 12/29/88
Apartments 12/28/01
Charlotte, NC
------- -------
$ 4,230 $ 7,285
======= =======
</TABLE>
(1) As discussed further below, the mortgage loan secured by the Willow Creek
Apartments was prepaid on July 16, 1997.
The remaining loan is secured by a first mortgage on the Park South
property, the owner's leasehold interest in the land and an assignment of all
tenant leases. Interest is payable monthly and the principal is due at maturity.
The first mortgage loan secured by the Park South Apartments is scheduled to
mature on December 28, 2001, however, it opens to prepayment without penalty on
December 29, 1997. Subsequent to the end of fiscal 1997, the owner of the Park
South Apartments has indicated that it may prepay the first leasehold mortgage
loan and repurchase the underlying land described below in early 1998 in
conjunction with a sale of the property. There are no assurances, however, that
this sale transaction and the resulting prepayment of the Partnership's
investments will occur within this time frame. The fair value of the Park South
loan approximates its carrying value as of August 31, 1997.
In relation to the above-mentioned mortgage loans, the following land
purchase-leaseback transactions had also been entered into as of August 31, 1997
and 1996 (in thousands):
Cost of Land
to the Partnership
Property 1997 1996 Annual Base Rent
-------- ---- ---- ----------------
Willow Creek Apartments $ - $ 345 Years 1 to 5 - $36
Wichita, KS (1) Thereafter - $38
Park South Apartments (2) 770 770 $ 69
Charlotte, NC
------ -------
$ 770 $ 1,115
====== =======
(1)As discussed further below, the Partnership sold the land underlying the
Willow Creek Apartments on July 16, 1997.
(2)The Partnership owns a 77% interest in the land underlying the Park South
Apartments and has an equivalent interest in the first mortgage loan secured
by the improvements. The remaining 23% interest in the land and mortgage loan
receivable is owned by an affiliated partnership, PaineWebber Mortgage
Partners Five, L.P.
The land leases have terms of 40 years. Among the provisions of the lease
agreements, the Partnership is entitled to additional rent based upon gross
revenues from the operating properties in excess of a base amount, as defined.
During fiscal 1995, the Partnership received additional rent of $126,000 from
The Corner at Seven Corners Shopping Center land investment (see discussion
below). In addition, during fiscal 1997, 1996 and 1995, the Partnership received
additional rent of $13,000, $44,000 and $47,000, respectively, from the Park
South Apartments land investment. The remaining lessee has the option to
purchase the land for a specified period of time, beginning in December of 1997,
at a price based on the fair market value, as defined, but not less than the
original cost to the Partnership.
The objectives of the Partnership with respect to its mortgage loan and
land investments are to provide current income from fixed mortgage interest
payments and base land rents, then to provide increases to this current income
through participation in the annual revenues generated by the property as they
increase above a specified base amount. In addition, the Partnership's
investments are structured to share in the appreciation in value of the
underlying real estate. Accordingly, upon either sale, refinancing, maturity of
the mortgage or exercise of the option to repurchase the land, the Partnership
will receive a 50% share of the appreciation above a specified base amount.
During the quarter ended May 31, 1997, the owner of the Willow Creek
Apartments had given notice of an intent to repurchase the underlying land from
the Partnership and prepay its first leasehold mortgage loan which was scheduled
to mature on October 31, 2000. On July 16, 1997, the Partnership received
$3,055,000 from the Willow Creek borrower, which represented the full repayment
of the first leasehold mortgage loan secured by the Willow Creek Apartments.
Simultaneously, the Willow Creek owner purchased the Partnership's interest in
the underlying land at a price equal to the Partnership's cost basis in the land
of $345,000. In addition, the Partnership received a mortgage loan prepayment
penalty of 4% of the mortgage note balance, or $122,200, and a land lease
termination fee of $13,800 in accordance with the terms of the agreements.
Although the structure of the Partnership's original investment in Willow Creek
entitled the Partnership to participate in the appreciated value of the property
upon a sale or refinancing, the value of the property had not increased to a
level at which the Partnership would receive a participation payment. The
proceeds of this transaction were distributed to the Limited Partners on August
15, 1997 in the form of a special distribution of $90 per original $1,000
investment. Of this amount, approximately $79 represented the net proceeds from
the Willow Creek transaction and approximately $11 represented a distribution of
Partnership reserves that exceeded future requirements.
The mortgage loan secured by The Corner at Seven Corners Shopping Center
became prepayable in February 1995. On December 16, 1994, the borrower notified
the Partnership of its intent to prepay the loan and exercise the option to
purchase the land in conjunction with a refinancing of the operating property.
During fiscal 1996, the Partnership and the borrower agreed to terms for the
repayment of the mortgage loan and purchase of the underlying land. The terms of
the transaction included the full repayment of the Partnership's mortgage loan
of $6,188,000 and the payment of $3,440,000 for obligations owing under the
ground lease, representing the repurchase of the $2,062,000 ground investment
and $1,378,000 as the Partnership's share of the appreciation in value of the
property. On November 22, 1995, the transaction closed and the Partnership
received gross proceeds of $9.6 million. The proceeds of this transaction, in
the amount of $214 per original $1,000 investment, were distributed to the
Limited Partners in the second quarter of fiscal 1996.
5. Investment Properties Held for Sale
-----------------------------------
At August 31, 1997 and 1996, the Partnership owned two operating
investment properties directly as a result of foreclosure proceedings prompted
by defaults under the terms of the first mortgage loans held by the Partnership.
In addition, the Partnership sold an operating investment property which it had
owned directly during fiscal 1995. The balance of investment properties held for
sale on the accompanying balance sheet at August 31, 1997 and 1996 is comprised
of the following net carrying values (in thousands):
1997 1996
---- ----
Martin Sunnyvale Research and
Development Center $ 3,400 $ 3,400
Bell Forge Square Shopping Center 8,700 8,700
-------- --------
$ 12,100 $ 12,100
======== ========
The Partnership complies with the guidelines set forth in SFAS No. 121
(see Note 2) to account for its investment properties held for sale. Under SFAS
No. 121, a foreclosed asset deemed to be held for sale is recorded at the lower
of cost or estimated fair value, reduced by the estimated costs to sell the
asset. Cost is defined as the fair value of the asset at the date of the
foreclosure. Declines in the estimated fair value of the assets subsequent to
foreclosure are recorded through the use of a valuation allowance. Subsequent
increases in the estimated fair value of the assets result in reductions of the
valuation allowance, but not below zero. As of August 31, 1997, the aggregate
cost basis of the investment properties held for sale for federal income tax
purposes is approximately $15,053,000.
Descriptions of the transactions through which the Partnership acquired
these properties and of the properties themselves are summarized below:
Martin Sunnyvale Research and Development Center
- ------------------------------------------------
On July 12, 1991, the Partnership foreclosed under the terms of the
mortgage loan secured by the Martin Sunnyvale Research and Development Center.
The borrower had defaulted on the payment terms of the loan due to significant
lease turnover during 1991. The property, which was 100% occupied as of August
31, 1997, is comprised of 39,286 leasable square feet and is located in
Sunnyvale, California. No leases expire at the property until April 30, 1999.
The Partnership recognized a loss on foreclosure of $1,742,000 in fiscal 1991 in
connection with its acquisition of the property. The loss consisted of a
write-down of $1,700,000 to the combined cost basis of the land and the face
amount of the mortgage loan and a $42,000 write-off of the unamortized balance
of deferred expenses incurred in connection with the original acquisition of the
investment in 1985. The $1,700,000 write-down reflected management's estimate of
the fair value of the investment property, net of selling expenses, at the date
of the foreclosure. The combined carrying value of the original land and loan
investments, of $5,100,000, was adjusted to this estimate of $3,400,000, and
reclassified to investment properties held for sale. During fiscal 1994, 1993
and 1992, the Partnership recorded provisions for possible investment loss of
$150,000, $550,000 and $200,000, respectively, to write down the carrying value
of the Martin Sunnyvale investment property to reflect additional declines in
its estimated fair value, net of selling expenses. During fiscal 1996, real
estate values for R&D office properties in Northern California recovered
somewhat as a result of the resurgence in the growth of the high technology
industries. As a result of lower market vacancy levels and increasing rental
rates, the estimated fair value of the Martin Sunnyvale property improved
significantly during fiscal 1996 to an amount which exceeded the cost basis
established for the property in fiscal 1991 of $3,400,000. Accordingly, the
Partnership adjusted the valuation account with respect to the Martin Sunnyvale
property and recognized a recovery of possible investment loss of $900,000
effective in the fourth quarter of fiscal 1996. The carrying value of the
investment, of $3,400,000, is included in the balance of investment properties
held for sale on the accompanying balance sheets as of August 31, 1997 and 1996.
During fiscal 1997, the Partnership contracted with a national real estate
firm with a strong background in selling R&D office buildings to market Martin
Sunnyvale for sale. The property was marketed extensively during the second half
of fiscal 1997, and the Partnership received several offers from qualified
third-party buyers to acquire the property. After reviewing the offers, the
Partnership accepted an offer from one of these potential buyers and, subsequent
to year-end, negotiated a purchase and sale agreement. Based upon the current
estimated market value of the Martin Sunnyvale property, the Partnership expects
to recognize a sizable gain if a sale transaction is completed in the near-term.
However, since the sale transaction remains subject to certain due diligence and
financing contingencies, there are no assurances that a near-term sale will be
completed.
During fiscal 1994, the Partnership was notified by a California state
water agency of a potential environmental problem at Martin Sunnyvale. As a
result of governmental required testing, management learned that there has been
a contamination of the underground soil and water at the site. The environmental
testing was paid for by one of the parties identified as a potential
contaminator. Management believes that this contamination occurred prior to the
Partnership's initial mortgage loan and ground lease investments in the
property, which were made in 1985. The California state water agency has issued
a site cleanup order identifying two companies which had occupied the Martin
Sunnyvale property prior to the Partnership's investment. Management has engaged
local counsel to monitor all legal actions to insure that the Partnership's
rights are fully protected. This matter is not expected to affect the possible
near-term sale of the operating investment property discussed further above.
Bell Forge Square Shopping Center
- ---------------------------------
On October 4, 1991, the Partnership received a deed in lieu of foreclosure
on the mortgage loan secured by the Bell Forge Square Shopping Center. The
property, which was 92% occupied as of August 31, 1997, is comprised of 126,890
leasable square feet and is located in Nashville, Tennessee. The Managing
General Partner estimated that the fair value of the investment property, net of
selling expenses, at the date title to the mortgaged property was transferred
was approximately equal to the combined cost of the land and the face amount of
the Partnership's mortgage loan. The Partnership recognized a loss in fiscal
1991 of $101,000, representing the write-off of the unamortized balance of
deferred expenses incurred in connection with the original acquisition of the
Bell Forge Square investment. The combined value of the land and the face amount
of the mortgage loan, of $9,000,000, was reclassified to investment properties
held for sale. During fiscal 1992, the Partnership had recorded a provision for
possible investment loss of $600,000 to write down the carrying value of the
Bell Forge Square investment property to reflect a decline in its estimated fair
value, net of selling expenses, as of August 31, 1992. During fiscal 1993, the
Partnership recorded an adjustment to reduce the valuation allowance by $300,000
to reflect an increase in the estimated fair value of the Bell Forge Square
property as of August 31, 1993. The resulting net carrying value of $8,700,000
is included in the balance of investment properties held for sale on the
accompanying balance sheets at August 31, 1997 and 1996.
During fiscal 1997, the Partnership hired a Nashville-based real estate
firm specializing in the sale of retail properties to market Bell Forge Square
Shopping Center for sale. This property was also marketed extensively during the
second half of fiscal 1997. As a result of these efforts, the Partnership
received offers from two prospective third-party buyers. After reviewing the
offers, the Partnership accepted an offer from one of these potential buyers and
is negotiating a purchase and sale agreement. Based on the current estimated
market value of the Bell forge Square property, the Partnership expects to
realize an amount equal to or greater than the net carrying value of the
operating investment property if a sale transaction is completed in the
near-term. However, since any sale transaction remains subject to the execution
of a definitive agreement, as well as certain due diligence and financing
contingencies, there are no assurances that a near-term sale will be completed.
Cordova Creek Apartments
- ------------------------
The Partnership foreclosed under the terms of the mortgage loan secured by
Cordova Creek Apartments on February 20, 1990, due to non-payment of the
required interest payments. As a result of the foreclosure, the Partnership
owned the land and improvements and employed a local property management company
to manage the day-to-day operations of the apartment complex, which is located
in Memphis, Tennessee. An affiliated partnership, PaineWebber Qualified Plan
Property Fund Three, LP ("QP3"), originally invested $250,000 for a 3.5%
interest in the mortgage loan secured by Cordova Creek and the related ground
lease. As a result of the foreclosure, QP3 retained a 3.5% interest in the net
cash flow and the eventual sale proceeds related to the operating property. The
fair value of the operating property, net of selling expenses, at the date of
foreclosure was estimated by management to be approximately equal to the
combined cost basis of the land and the original face amount of the mortgage
loan, totalling $6,900,500.
On April 12, 1995, the Partnership sold the Cordova Creek Apartments to an
unaffiliated third party for $9,100,000. After payment of required transaction
costs, including payment to QP3 for its 3.5% equity interest, the net proceeds
realized by the Partnership from the sale were approximately $8.7 million. A
special distribution of $215 per original $1,000 investment, or $9,643,000, was
made to Limited Partners on June 15, 1995, which represented approximately $195
from the Cordova Creek net sales proceeds and $20 as a distribution from cash
reserves which were deemed to be in excess of the Partnership's expected future
requirements.
The Partnership recognizes income from the investment properties held for
sale equal to its share of the excess of the properties' gross revenues over
property operating expenses (including capital improvement costs), taxes and
insurance. Combined summarized operating results of the Cordova Creek Apartments
(through the date of sale), Martin Sunnyvale Research and Development Center and
Bell Forge Square Shopping Center for the years ended August 31, 1997, 1996 and
1995 are as follows (in thousands):
1997 1996 1995
---- ---- ----
Rental income and expense
reimbursements $1,552 $1,449 $2,121
Other income 283 277 282
------ ------ ------
1,835 1,726 2,403
Property operating expenses (1) 619 461 774
Property taxes and insurance 187 231 329
------ ------ ------
806 692 1,103
------ ------ ------
Income from operations, net $1,029 $1,034 $1,300
====== ====== ======
Partnership's share of combined
operations $1,029 $1,034 $1,274
QP3's share of Cordova Creek
operations - - 26
------ ------ ------
$1,029 $1,034 $1,300
====== ====== ======
(1) As discussed in Note 2, in accordance with the Partnership's accounting
policy for assets held for sale, capital improvement costs are expensed as
incurred. Included in property operating expenses for the years ended August
31, 1997, 1996 and 1995 is capital improvement costs of $246,000, $239,000
and $326,000, respectively.
<PAGE>
6. Leases
------
The Martin Sunnyvale and Bell Forge Square investment properties have
operating leases with tenants which provide for fixed minimum rents and
reimbursements of certain operating costs. Rental revenues are recognized on
a straight-line basis over the life of the related lease agreements. Minimum
future rental revenues to be received by the Partnership under
noncancellable operating leases for the next five years and thereafter are
as follows (in thousands):
Year ending August 31, Amount
---------------------- ------
1998 $1,600
1999 1,407
2000 1,089
2001 924
2002 586
Thereafter 778
------
$6,384
======
7. Subsequent Event
----------------
On October 15, 1997, the Partnership distributed $3,000 to the General
Partners, $320,000 to the Limited Partners and paid $3,000 to the Adviser as an
asset management fee for the quarter ended August 31, 1997.
<PAGE>
Schedule III - Real Estate Owned
Paine Webber Qualified Plan Property Fund Four, LP
August 31, 1997
(In thousands)
Gross Amount at
Cost of Which Carried Date of
Investment to at Close of Original Size of
Description (A) Partnership (B) Period (B) Investment Investment
- --------------- --------------- ----------- ---------- ----------
Research and $ 5,100 $ 3,400 (1) 12/20/85 2.5 acres
Development Center 39,286
Sunnyvale, CA sq. ft.
Shopping Center 9,000 9,000 (2) 4/29/86 11 acres
Nashville, TN 126,890
sq. ft.
Land underlying 770 770 12/29/88 19 acres
apartment complex
Charlotte, NC -------- -------
$14,870 $13,170
======== =======
Notes:
(A) Senior mortgages on the properties related to the land investments listed
above are held by Paine Webber Qualified Plan Property Fund Four, LP as of
August 31, 1997. See Schedule IV.
(B) These amounts represent the cost of each investment and the gross amount
at which the investment is carried on the balance sheet as of August 31,
1997. The aggregate cost of the investments for federal income tax
purposes is approximately $15,823,000.
(C) Reconciliation of real estate owned:
1997 1996 1995
---- ---- ----
Balance at beginning of year $13,515 $ 15,577 $22,478
Sale of land and investment
property (3) (345) (2,062) (6,901)
------- -------- -------
Balance at end of year $13,170 $ 13,515 $15,577
======= ======== =======
(1)The Partnership foreclosed on the mortgage loan secured by the Martin
Sunnyvale Research and Development Center on July 12, 1991. The combined
cost of the land and the face amount of the mortgage loan were estimated by
management to be greater than the fair value of the investment, net of
selling costs, at the date of foreclosure by $1,700,000. During fiscal 1994,
1993 and 1992, the Partnership recorded provisions for possible investment
loss of $150,000, $550,000 and $200,000, respectively, to provide for
further declines in the estimated fair value, net of selling expenses, of
the Martin Sunnyvale investment property. During fiscal 1996, the
Partnership recorded a recovery of possible investment loss of $900,000 to
reverse the existing allowance account as a result of a significant increase
in the estimated fair value of the operating property. The carrying value of
$3,400,000 is included in the balance of investment properties held for sale
on the accompanying balance sheet at August 31, 1997. See discussion in Note
5 to the financial statements.
<PAGE>
Schedule III - Real Estate Owned (continued)
(2)On October 4, 1991, the Partnership received a deed in lieu of foreclosure
on the mortgage loan secured by the Bell Forge Square Shopping Center. The
fair value of the investment, net of estimated selling costs, at the date of
foreclosure was estimated to be approximately equal to the combined cost of
the land and face amount of the mortgage loan. At August 31, 1991, the
balance of the mortgage loan and land investments of $9,000,000 was
reclassified to investment property subject to acquisition by foreclosure.
During fiscal 1992, the Partnership recorded a provision for possible
investment loss of $600,000 to provide for a decline in the estimated fair
value, net of selling costs, of the Bell Forge Square investment property.
During fiscal 1993, the Partnership recorded an adjustment to reduce the
valuation allowance by $300,000 to reflect an increase in the estimated fair
value of the property. The net carrying value of $8,700,000 is included in
the balance of investment properties held for sale on the accompanying
balance sheet as of August 31, 1997. See discussion in Note 5 to the
financial statements.
(3)See discussion in Notes 4 and 5 to the financial statements regarding the
fiscal 1997 sale of the land underlying the Willow Creek Apartments, the
fiscal 1996 sale of the land underlying The Corner at Seven Corners Shopping
Center and the fiscal 1995 sale of the Cordova Creek Apartments.
<PAGE>
<TABLE>
Schedule IV - Investments in Mortgage Loans on Real Estate
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
August 31, 1997
(In thousands)
<CAPTION>
Principal
amount of
loans subject
Periodic Face Carrying to delinquent
Interest Final maturity payment amount of amount of principal
Description rate date terms mortgage mortgage or interest
- ----------- -------- ----------------- ------ -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
First Mortgage Loan:
Apartment Complex 9% December 28, 2001 Interest monthly, $ 4,230 $ 4,230 -
Charlotte, NC principal at
maturity
TOTALS -------- --------
$ 4,230 $ 4,230
======== ========
1997 1996 1995
---- ---- ----
Balance at beginning of year $ 7,285 $13,001 $13,001
Additions during the year (1) - 472 -
Reductions during year (2) (3,055) (6,188) -
-------- ------- -------
Balance at end of year $ 4,230 $ 7,285 $13,001
======== ======== =======
(1) See Notes 2 and 4 to the accompanying financial statements for information
regarding the fiscal 1996 adjustment of a certain valuation account related
to the outstanding mortgage loans receivable.
(2) As discussed further in Note 4 to the accompanying financial statements,
the Partnership's mortgage loans receivable secured by the Willow Creek
Apartments and The Corner at Seven Corners Shopping Center were repaid in
full on July 16, 1997 and November 22, 1995, respectively.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the twelve months ended August
31, 1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<CASH> 1,711
<SECURITIES> 0
<RECEIVABLES> 4,271
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,752
<PP&E> 12,870
<DEPRECIATION> 0
<TOTAL-ASSETS> 18,941
<CURRENT-LIABILITIES> 297
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 18,644
<TOTAL-LIABILITY-AND-EQUITY> 18,941
<SALES> 0
<TOTAL-REVENUES> 2,076
<CGS> 0
<TOTAL-COSTS> 599
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,477
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,477
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,477
<EPS-PRIMARY> 1.63
<EPS-DILUTED> 1.63
</TABLE>
