<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Sections 13 or 15 (d)
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
Commission File Number 2-94249
HALL INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP
(name of registrant)
Arizona 75-1982134
(State of Organization) (I.R.S. employer ID No.)
4455 East Camelback Road
Suite A-200
Phoenix, Arizona 85018
(address of principal executive office)
(602) 840-0060
(registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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
None
<PAGE> 2
PART I
Item 1. Business.
The Registrant, Hall Institutional Mortgage Fund Limited Partnership
(the "Partnership"), is an Arizona limited partnership organized in 1984
pursuant to a limited partnership agreement under the Arizona Uniform Limited
Partnership Act. The Partnership's general partner is Hall Pension Fund
Associates, a Texas general partnership (the "General Partner"). The managing
general partner of the General Partner is Hall 1985 Management Associates
Limited Partnership (the "Managing General Partner").
The Partnership filed its registration statement with the Securities
and Exchange Commission on Form S-11, effective January 18, 1985, pursuant to
the Securities Act of 1933 (File No. 2-04249).
At completion of the offering of limited partnership interests
("Units") on September 5, 1985, the Partnership had received and accepted
subscriptions for an aggregate of 2,568 Units ($12,835,600). All investors were
admitted as limited partners in 1985.
The Partnership's current primary business is the collection of funds
previously loaned to various partnerships organized by affiliates of the
General Partner ("Affiliated Borrowers") which upon origination were secured by
deeds of trust or mortgages on income producing real properties. Substantially
all loans made by the Partnership to the Affiliated Borrowers were subject at
the time of origination to the rights and restrictions set out in a specified
loan agreement ("Model Loan Agreement") and two specified forms of notes
("Participating Notes"). Such loans are hereafter referred to as "Specific
Loans". As described hereinafter, the Model Loan Agreement and the
Participating Notes have been modified subsequent to their origination on all
of the Specific Loans.
The Partnership will not (except for the advance to Arrowtree to
restructure Arrowtree's original first lien): (I) make loans to the General
Partner or any of its affiliates (excluding loans to the Affiliated Borrowers
made pursuant to the Model Loan Agreement); (ii) operate in such a manner as to
be classified as an investment company for purposes of the Investment Company
Act of 1940 (see Item 3 Legal Proceedings); (iii) relend payments received from
Affiliated Borrowers; (iv) incur any nonrecourse indebtedness wherein the
lender will have or acquire, at any time as a result of making such loan, any
direct or indirect interest in the profits, capital or property of the
Partnership other than as a secured creditor; or (v) invest in or underwrite
the securities of other issuers.
The Partnership will not borrow funds for the purpose of making loans
to the Affiliated Borrowers. However, if the working capital reserves
established for the Partnership are not adequate to provide for the
Partnership's liquidity needs, the Partnership may borrow funds for such
purpose.
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The Partnership is prohibited from purchasing real property, directly
or indirectly, except as may be necessary to protect the Partnership against
the foreclosure of a prior lien on property pledged as security for a Specific
Loan.
The purpose of the Partnership is to originate loans to the Affiliated
Borrowers pursuant to the Participating Notes and to engage in activities
incidental to such loans. Any change in the purpose of the Partnership will
require an amendment of the partnership agreement which may be done only with
the approval of limited partners owning a majority of the outstanding Units
held by all limited partners. However, limited partners have no voting rights
with respect to the implementation of the Partnership's objectives and
policies, such implementation being the sole responsibility of the General
Partner.
The Partnership has lent funds to the Affiliated Borrowers which at
the time the loan was originated such loans were secured by either a second or
third lien on real property (except for the loan to Arrowtree to restructure
its original first lien). All loans were made pursuant to the conditions and
restrictions in the partnership agreement. All of the properties purchased by
the Affiliated Borrowers are apartment complexes.
All real properties which secured Specific Loans at their origination
were supported by appraisals prepared at the time of acquisition by independent
appraisers who were members in good standing of the American Institute of Real
Estate Appraisers. These appraisals are maintained by the Affiliated Borrowers
and are available for inspection and duplication by the Partnership and its
limited partners.
Prior to the Partnership making a Specific Loan, an Affiliated
Borrower provided the Partnership with a mortgagee's or owner's title insurance
policy or commitment to evidence priority of the lien securing the Specific
Loan and title to the mortgaged real properties.
The Affiliated Borrowers used junior mortgages or "all inclusive"
(sometimes called "wraparound") notes and deeds of trust to purchase
properties. An all-inclusive note is a note for an amount which includes the
then existing balance of a loan which the seller owes to its lender. In a
wraparound note structure, the deed of trust or mortgage securing the existing
loan remains as a first lien against a property and the "all-inclusive" deed of
trust becomes a junior or secondary encumbrance. An Affiliated Borrower
obligated on a wraparound note is required to pay the monthly amount of the
all-inclusive note to the seller, and the seller, in turn, is obligated to make
the payments required by the existing note to its lender.
Those Specific Loans which are currently secured by real property have
senior mortgages that do not provide for the amortization of the entire
principal amount of such loans or a substantial portion thereof prior to
maturity. The ability of the Affiliated Borrowers to repay the outstanding
principal amount of these senior loans at maturity may be dependent upon the
Affiliated Borrowers' ability to sell the properties or to obtain adequate
refinancing, which will in turn be dependent upon economic conditions in
general and the value of the underlying
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<PAGE> 4
properties in particular. With respect to the Specific Loans which are
currently secured by real property, there is no assurance that the Affiliated
Borrowers will be able to sell the properties or refinance such mortgages at
maturity.
The Specific Loans to the Affiliated Borrowers are also balloon notes
in that the terms of repayment do not provide for full amortization of the
principal. In addition, terms of the Specific Loans permit a portion of the
interest due to remain unpaid and to accrue until maturity.
The General Partner obtained, at its expense, at the time each
Specific Loan was originated, a letter of opinion issued by an independent and
qualified adviser to the effect that each Specific Loan was fair and at least
as favorable to the Partnership as a loan to an unaffiliated borrower in
similar circumstances.
No loans were made to an Affiliated Borrower unless legal counsel to
the Partnership was satisfied that the amount to be invested in the purchase of
a mortgaged real property by such Affiliated Borrower (excluding funds borrowed
from the Partnership) was sufficient to determine that the Affiliated Borrower
would be treated as the owner of such mortgaged real property for Federal
income tax purposes.
There was no restriction upon the amount (as a percentage of total
loans) that the Partnership may advance to Affiliated Borrowers as a group.
Through December 31, 1996, the Partnership had made Specific Loans in
the amount of $10,571,000 to twelve Affiliated Borrowers that used these funds
to purchase or pay off existing indebtedness on twelve apartment complexes. The
Partnership's gross receipts are dependent upon each Affiliated Borrower's
ability to pay interest and principal on its respective Specific Loan. As of
December 31, 1996, $5,018,000 in principal of Specific Loans is outstanding,
all of which has been reserved through bad debt provisions and all of which
have been modified.
In January 1996, Hall 7 Trails Associates ("Arrowtree") refinanced the
Arrowtree apartments' mortgages. As part of the overall refinancing, the
property was transferred to Arrowtree Properties, Ltd. ("New Arrowtree"), with
Arrowtree retaining a 99% interest in New Arrowtree. The property was
refinanced with a new $2.75 million first lien mortgage which accrues interest
at 7.57% with principal and interest payments due monthly. The refinancing
allowed a repayment in full for the principal and related accrued interest the
Partnership had loaned to Arrowtree relating to a 1994 restructuring of
Arrowtree's first lien. In addition, the refinancing allowed Arrowtree to pay
off its Specific Loan of approximately $913,000. As a condition of the
refinancing agreement, however, the Partnership was required to release its
second lien position and retain an unsecured position on Arrowtree's related
accrued interest on Arrowtree's Specific Loan. Per Arrowtree's bankruptcy plan,
the accrued interest on Arrowtree's Specific Loan is subordinate to the
repayment of Arrowtree's partner's capital. The remaining balance on the
Arrowtree Specific Loan (ie. the related accrued interest) has the same
economic and payment terms as prior to the refinancing.
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In January 1996, Northtree Associates Limited Partnership
("Candlewick") refinanced the Candlewick apartments' mortgages. The property
was refinanced with a new $5.0 million first lien mortgage which accrues
interest at 7.58% with principal and interest payments due monthly based on a
22-year amortization schedule through maturity on February 1, 2003. As a
condition of the refinancing agreement, the Partnership was required to release
its second lien position and retain an unsecured loan from Candlewick for the
remaining balance on Candlewick's Specific Loan. The remaining balance on the
Candlewick Specific Loan has the same economic and payment terms as prior to
the refinancing. The Partnership believes it was in its best interest to
release its second lien position to allow the refinancing to be consummated,
thereby decreasing Candlewick's first lien mortgage interest rate and extending
the maturity date.
Fawntree Associates, Ltd. ("Fawntree"), was sold for $6,400,000 on
June 15, 1995. After the satisfaction of all claims having priority over the
Partnership, Fawntree distributed $582,682 to the Partnership per the terms on
the Fawntree Specific Loan. The Partnership had previously reserved the entire
amount of the Fawntree Specific Loan. As a result of the sale of the property
in 1995 and related payment to the Partnership, the Partnership reversed the
reserve related to the repayment and wrote off the remaining accrued but unpaid
interest of $397,408 and principal balance of $550,000 against the related
reserves.
On November 1, 1995, Midtree Associates, Ltd. ("Midtree") refinanced
the Midtree apartments' mortgages. The first lien mortgage in place prior to
the refinancing had an original maturity date of August 1, 1995, but was
extended to allow Midtree time to secure the refinancing proceeds. As part of
the overall refinancing, the property was transferred to Phoenix Square
Associates, Ltd. ("New Midtree"), with Midtree retaining a 99% interest in New
Midtree. The property was refinanced with a new $4.2 million first lien which
accrues interest at 8.1% through maturity on November 1, 2002. Monthly
principal and interest payments are based on a 30-year amortization schedule.
As a condition of the refinancing, the Partnership was required to release its
second lien position and retain an unsecured loan from Midtree for the
remaining balance on Midtree's Specific Loan. The remaining balance on the
Midtree Specific Loan has the same economic and payment terms as prior to the
refinancing. The Partnership believes it was in its best interest to agree to
release its second lien position pursuant to the refinancing. By doing so,
Midtree was able to avoid foreclosure on its underlying property from the
original first lien holder and reduce the interest rate on the first lien from
12%.
The suspension of interest payments from the Affiliated Borrowers
substantially reduced the cash flow of the Partnership during 1994. In 1995,
the Partnership's cash flow was substantially comprised of payments from two
Affiliated Borrowers. Fawntree Associates, Ltd. sold its underlying assets to a
non-affiliated third party resulting in a partial repayment of accrued but
unpaid interest to the Partnership. Lanetree Associates Limited Partnership
distributed cash to the Partnership pursuant to the NHP transaction described
hereinafter. In 1996, the Partnership's cash flow was mainly comprised of
payments resulting from Arrowtree's refinancing. As of March 7, 1997, except as
discussed in Liquidity and Capital Resources (see Item 7), the Partnership is
not receiving interest payments from any Affiliated Borrowers.
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<PAGE> 6
In April 1997, the Partnership's limited partners voted to sell all of
its loans receivable to HFGI for $1.6 million and make a final distribution to
liquidate the Partnership (see Item 3, Legal Proceedings).
The Partnership does not directly employ any persons on a full-time
basis. All persons rendering services on behalf of the Partnership are
affiliates of the General Partner. Such employees were not paid directly by the
Partnership.
Please see Item 6 and the financial statements filed herewith for
financial information pertaining to the amount of cash reserve and operating
income (loss) of the Partnership.
Item 2. Properties.
The Partnership does not directly own any real property. However, the
Partnership has receivables from the Affiliated Borrowers that were previously
secured by the Affiliated Borrower's underlying properties. During 1995 and in
the first quarter of 1996, the Partnership released its second lien mortgage
security positions on all the underlying properties except for Hall Brambletree
Associates.
<TABLE>
<CAPTION>
Specific Name of Affiliated Borrower
Loan Date Name of Property and Location Type of Form
And of Property Securing Property/ 8-K
Amount Specific Loans Purchase Date Filed
- ------ -------------- ------------- -----
<S> <C> <C> <C>
8/16/85 Hall Lanetree Associates Apt. Complex Aug. 1985
$620,000 The Lakes Apartments 3/29/85
Albuquerque, New Mexico
8/20/85 Hall Northtree Associates Apt. Complex Aug. 1985
$460,000 Candlewick Apartments 3/29/85
Albuquerque, New Mexico
8/21/85 Hall Twintree Associates Apt. Complex Aug. 1985
$720,000 Los Altos Towers Apartments 3/29/85
Albuquerque, New Mexico
8/21/85 Hall Midtree Associates Apt. Complex Aug. 1985
$410,000 Phoenix Square Apartments 3/29/85
Albuquerque, New Mexico
8/21/85 Hall Coachtree Associates Apt. Complex Aug. 1985
$615,000 The Villas Apartments 3/29/85
Albuquerque, New Mexico
10/16/85 Hall Brambletree Associates Apt. Complex Oct. 1985
$1,751,000 Springcreek Apartments 10/16/85
Garland, Texas
</TABLE>
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<TABLE>
<CAPTION>
Specific Name of Affiliated Borrower
Loan Date Name of Property and Location Type of Form
And of Property Securing Property/ 8-K
Amount Specific Loans Purchase Date Filed
- ------ -------------- ------------- -----
<S> <C> <C> <C>
12/23/86 Hall Seven Trails Associates Apt. Complex Dec. 1986
$850,000 Arrowtree Apartments 6/01/81
Okemos, Michigan
</TABLE>
For more information, see Form 8-K for a description of the real properties
securing the specific loans.
Item 3. Legal Proceedings.
In February 1996, the Partnership's attorneys advised the Partnership
that the release of the second lien positions on certain of the loan
receivables could cause the Partnership to be treated as an investment company
under the 1940 Investment Company Act (the "1940 Act") by the Securities and
Exchange Commission ("SEC"). The Partnership cannot become an investment
company under the 1940 Act because it is in conflict with its partnership
agreement and the purpose of the original offering. In the original offering,
it was anticipated that when the loans were repaid, the funds would be
distributed back to the unit holders rather than being allowed to be
reinvested. Therefore, based upon the Partnership's original partnership
documents, the intent was to have a liquidating fund after all the initial
loans were made. In order to adopt a liquidating plan, a proxy was sent to each
unit holder for their vote. A majority vote (over 50%) for the liquidating plan
was required of all unit holders. The Partnership received the necessary vote
in April 1997, and has begun the process of selling the loans to HFGI in order
to make a final distribution to its partners.
Item 4. Submission of Matters to a Vote of Security Holders.
The Partnership's partners did not vote on any matter during the year
ending December 31, 1996.
PART II
Item 5. Market for Registrants' Units of Limited Partnership Interest.
(a) During 1996 and prior to the filing of this report, there was no
secondary market for the Units of limited partnership interest in the
Partnership and it is not anticipated that any market will develop in the
future. As a result of this factor as well as others, the market value of a
Partnership Unit may be substantially less than the pro rata net book value
attributable to a Unit.
The General Partner may, in its absolute discretion, purchase Units
during the periods between March 16 and March 31 and between December 16 and
December 31 of each year, beginning in 1986. However, the General Partner is
under no obligation to purchase any Units and there is no assurance that any
Units will be purchased by the General Partner. During 1986,
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<PAGE> 8
the General Partner repurchased 22 Units of limited partnership interests in
the Partnership for an aggregate purchase price of $98,648. Except for this
transaction, there has been no trading of the Units since the initial offering
in which the price was $5,000 per Unit.
(b) As of March 7, 1997, there were 582 investor accounts that had
purchased Units in the Partnership.
(c) No distributions have been made to the limited partners during the
past two years. There will be a final distribution in 1996 as a result of the
adopted liquidation plan.
Item 6. Selected Financial Data.
HALL INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP
Selected Financial Data as of or for the five years ended December 31
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total $ 3,634,453 $ 4,068,564 $ 2,313,283 $ 419,287 $ 384,801
Assets
Revenue $ 197,404 $ 177,535 $ 26,524 $ 125,494 $ 37,942
Operating
and Other
Expenses $ 165,279 $ 63,230 $ 34,655 $ 50,328 $ 53,876
Bad Debt
Expense $ 463,898 $(1,653,386) $(1,923,618) $ -- $ 702,877
(Reversal)
Net Income
(Loss) $ (431,773) $ 1,767,691 $ 1,915,487 $ 75,166 $ (718,811)
Funds provided
by (used in)
operations after
distributions
to Partners $ 49,729 $ 1,127,726 $ (27,222) $ 36,886 $ (38,391)
Net Income (Loss)
per limited
partnership
unit $ (166) $ 681 $ 738 $ 29 $ (277)
</TABLE>
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<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Distributions
per limited
partnership
unit $ 0 $ 0 $ 0 $ 0 $ 0
Weighted average
number Limited
Partnership
units
outstanding 2,568 2,568 2,568 2,568 2,568
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Liquidity and Capital Resources
The capital formation phase of the Partnership occurred in 1985, when
the Partnership sold a total of 2,568 Units, and received $12,835,600 of
capital contributions from the public offering, from which the Partnership
netted approximately $10,966,301 after underwriting commissions, syndication
costs and registration expenses. Since formation of the Partnership, the
General Partner has made capital contributions of $300,495 to the Partnership.
Under the terms of the partnership agreement, the General Partner is
required to maintain in the Partnership reasonable cash reserves for working
capital and contingencies, in an amount of not less than 1% of invested
capital, as defined. The Partnership maintained the required working capital
reserve at December 31, 1996 and 1995.
As of December 31, 1996, the Partnership had outstanding loans to
Affiliated Borrowers of $5,081,000. In April 1997, per a vote of the limited
partners, the Partnership decided to liquidate. The Partnership's loans
receivable will be sold to HFGI for $1.6 million after which all available cash
will be distributed to the partners (see Item 3, Legal Proceedings).
Results of Operations
For the years ended December 31, 1996, 1995 and 1994, the Partnership
recorded income (losses) of $(431,773), $1,767,691 and $1,915,487,
respectively.
The Partnership periodically reviews the amount of reserves which are
necessary on both its mortgages and interest receivables. Previously, the
process of reviewing the amount of reserves was based on the current market
value of each Affiliated Borrower's asset holdings and where the Partnership
stands in relation to the Affiliated Borrower's other creditors. Effective
January 1, 1995, the Partnership adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS
#114). SFAS #114 required the Partnership to evaluate its mortgage notes for
impairment based on a measurement of the present value of expected future cash
flows, the loan's observable market price, or the fair value of the loan's
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collateral if the loan is collateral dependent. In accordance with SFAS #114,
the Partnership obtained a third-party appraisal of its mortgage and interest
receivables which estimated values of the Partnership's mortgage and interest
receivables ranging from $1,275,000 - $1,600,000, exclusive of amounts received
in connection with the Arrowtree refinancing and inclusive of the amount
advanced in connection with the Brambletree refinancing as described earlier.
The accompanying financial statements and the net loss for 1996 in particular,
reflect the results of the receivables' appraised values based on the upper end
of the valuation range.
Item 8. Financial Statements and Supplemental Data.
Listed under Item 14 of the report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There has been no change in the Partnership's accountants since its
inception and no material disagreements with the accountants on accounting and
financial matters.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Partnership, as an entity, does not have any directors or
officers.
The executive offices of the General Partner are located at 750 N. St.
Paul, Suite 200, Dallas, Texas 75201. The General Partner manages and controls
the Partnership's affairs and has final responsibility and ultimate authority
in all matters affecting its business. Hall 1985 Management Associates Limited
Partnership is managing general partner of the General Partner and is a Texas
general partnership of which Hall Apartment Associates, Inc. is the Managing
General Partner.
Item 11. Executive Compensation.
Since the Partnership does not have any directors or officers, direct
compensation is neither paid nor payable to directors or officers.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) To the best of the Partnership's knowledge, no person of record or
as beneficiary owns more than five percent (5%) of the Units of limited
partnership interest of the Partnership.
(b) The Partnership, as an entity, does not have any directors or
officers. The General Partner owns 22 Units of limited partnership interest
representing less than 1% of the outstanding Units.
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(c) The Partnership's limited partners voted in April 1997 to sell all
of the Partnership's loan receivables to HFGI for $1.6 million and make a final
distribution to liquidate the Partnership (see Item 3, Legal Proceedings).
Item 13. Certain Relationships and Related Transactions.
(a) Transactions with Management and Others:
None
PART IV
Item 14. Financial Statements, Schedules, Exhibits Filed, and Reports on Form
8-K.
(a) Documents filed as part of this report:
1. Financial Statements:
Report of independent public accountants
Balance sheets at December 31, 1996 and 1995.
Statements of Operations
For the years ended December 31, 1996, 1995, and 1994.
Statements of Partners' Equity
For the years ended December 31, 1996, 1995, and 1994.
Statements of Cash Flows
For the years ended December 31, 1996, 1995, and 1994.
Notes to Financial Statements
2. Financial Statement Schedules:
XII - Mortgage Loans on Real Estate
All other schedules are omitted either because they are
not applicable or the required information is shown in the
financial statements or the notes thereto.
(b) Reports on Form 8-K: The following reports on Form 8-K were filed
for the Partnership's fourth fiscal quarter:
None
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(c) Exhibits: The following exhibits are filed as part of this Form
10-K Annual Report:
<TABLE>
<CAPTION>
Sequential Page
Number of
Exhibit Description of Incorporation
Number Exhibit By Reference
- ------ ------- ------------
<S> <C> <C>
3.1 Amended and Restated Certificate *
and Agreement of Limited
Partnership of Hall Institutional
Mortgage Fund Limited Partnership
4.1 Specimen Certificate representing *
ownership of Units
10.1 Form of Senior Participating Note *
10.2 Form of Junior Participating Note *
10.3 Form of Model Loan Agreement *
10.4 Form of Model Guarantee Agreement *
27 Financial Data Schedule
</TABLE>
*Incorporated by reference from the Form S-11 filed by the Partnership with the
Commission on November 9, 1984.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HALL INSTITUTIONAL MORTGAGE FUND LIMITED PARTNERSHIP
By: Hall Pension Fund Associates,
General Partner
By: Hall 1985 Management Associates Limited Partnership
General Partner
By: Hall Apartment Associates, Inc.,
Managing General Partner
By: /s/ Donald L. Braun
-----------------------------------
Donald L. Braun
Its: President/ Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in their capacities indicated on April 8, 1996.
By: Hall Apartment Associates, Inc., the Managing
General Partner of Hall 1985 Management
Associates Limited Partnership, the General
Partner of Hall Pension Fund Associates, the
General Partner of Hall Institutional Mortgage
Fund
By: /s/ Craig Hall
------------------------------
Craig Hall
Its: Director
By: /s/ Donald L. Braun
------------------------------
Donald L. Braun
Its: President/Treasurer
13
<PAGE> 14
HALL INSTITUTIONAL MORTGAGE FUND
BALANCE SHEETS
DECEMBER 31, 1996, 1995 AND 1994
<PAGE> 15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Hall Institutional Mortgage Fund:
We have audited the accompanying balance sheets of Hall Institutional
Mortgage Fund (an Arizona limited partnership) as of December 31, 1996 and 1995,
and the related statements of operations, partners' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements and the schedule referred to below are the responsibility of the
management of Hall Institutional Mortgage Fund (the "Partnership"). Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Hall Institutional
Mortgage Fund as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Partnership will continue as a going concern. As further discussed in Note 7
to the financial statements, in February 1996, the Partnership learned that
certain transactions it had entered into during 1995 had caused the Partnership
to be in violation of the 1940 Investment Company Act (the "1940 Act"). The
Partnership is applying for an exemption under the 1940 Act and is planning to
solicit the approval of the partners concerning alternatives to liquidate the
Partnership. One of the alternatives would require an immediate liquidation of
all Partnership assets and subsequent dissolution. The accompanying financial
statements have not been prepared on the liquidation basis of accounting, as it
is not determinable if an immediate liquidation of the Partnership will be
required. This uncertainty raises substantial doubt about the Partnership's
ability to continue as a going concern. The accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
<PAGE> 16
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule XII is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not
part of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in our audit of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
Dallas, Texas,
March 7, 1997 /s/ ARTHUR ANDERSEN LLP
<PAGE> 17
<TABLE>
<CAPTION>
ASSETS 1996 1995
---------- ----------
<S> <C> <C>
Cash and cash equivalents (Note 2) $2,034,453 $1,332,041
Mortgage notes receivable - affiliates, net of an allowance for doubtful
receivables of $5,018,000 and $4,576,000 in 1996 and 1995, respectively
(Note 3), and net of loan origination fees of $2,338 for
1995 respectively (Note 1 and 4) -- 1,092,345
Accrued interest receivable - affiliates, net of deferred interest and an
allowance for doubtful interest receivable of $4,564,281 and $3,928,180 in
1996 and 1995, respectively (Note 3) 1,600,000 1,639,890
Deferred charges, net -- 1,950
---------- ----------
$3,634,453 $4,066,226
========== ==========
LIABILITIES AND PARTNERS' EQUITY
Accounts payable $ 9 $ 9
Partners' equity:
Limited partners - 2,568 units outstanding
at December 31, 1996 and 1995 3,600,848 4,028,303
General Partner 33,596 37,914
---------- ----------
3,634,444 4,066,217
---------- ----------
$3,634,453 $4,066,226
========== ==========
</TABLE>
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE BALANCE SHEETS.
F-2
<PAGE> 18
HALL INSTITUTIONAL MORTGAGE FUND
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (NOTE 1)
<TABLE>
<CAPTION>
Revenues: 1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Interest and loan origination
fees from affiliates (Notes 3 and 4) $ 197,404 $ 177,535 $ 26,524
Expenses:
Operating 163,329 60,830 32,255
Bad debt (reversal) (Note 3) 463,898 (1,653,386) (1,923,618)
Amortization 1,950 2,400 2,400
----------- ----------- -----------
(629,177) (1,590,156) (1,888,963)
----------- ----------- -----------
Net income (loss) $ (431,773) $ 1,767,691 $ 1,915,487
=========== =========== ===========
Net income (loss) allocable to
limited partners $ (427,455) $ 1,750,014 $ 1,896,322
Net income (loss) allocable to
General Partner (4,318) 17,677 19,155
----------- ----------- -----------
Net income (loss) $ (431,773) $ 1,767,691 $ 1,915,487
=========== =========== ===========
Net income (loss) per limited
partnership unit $ (166) $ 681 $ 738
=========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
F-3
<PAGE> 19
HALL INSTITUTIONAL MORTGAGE FUND
STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (NOTES 1 AND 5)
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
----------- ----------- -----------
<S> <C> <C> <C>
Balance, December 31, 1993 $ 1,798 $ 381,957 $ 383,755
Distributions (716) -- (716)
Net income 19,155 1,896,332 1,915,487
----------- ----------- -----------
Balance, December 31, 1994 20,237 2,278,289 2,298,526
Net income 17,677 1,750,014 1,767,691
----------- ----------- -----------
Balance, December 31, 1995 37,914 4,028,303 4,066,217
Net Loss (4,318) (427,455) (431,773)
----------- ----------- -----------
Balance, December 31, 1996 $ 33,596 $ 3,600,848 $ 3,634,444
=========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
F-4
<PAGE> 20
HALL INSTITUTIONAL MORTGAGE FUND
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (NOTE 1)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Receipt of interest on Specific Loans - affiliates
and short-term investments $ 213,058 $ 1,188,570 $ 8,596
Proceeds from debt settlement -- -- --
Payment of operating costs (163,329) (60,844) (33,735)
----------- ----------- -----------
Net cash provided by (used in) operating activities,
net of distributions 49,729 1,127,726 (25,139)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Loans to Affiliated Borrowers (442,000) -- --
Proceeds of Loans from Affiliated Borrowers 1,094,683 -- --
Distribution paid -- -- (2,083)
----------- ----------- -----------
Net cash from (used) in financing activities 652,683 -- (2,083)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 702,412 1,127,726 (27,222)
Cash and cash equivalents, beginning of year 1,332,041 204,315 231,537
----------- ----------- -----------
Cash and cash equivalents, end of year $ 2,034,453 $ 1,332,041 $ 204,315
=========== =========== ===========
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ (431,773) $ 1,767,691 $ 1,915,487
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Bad debt (reversal) 463,898 (1,653,386) (1,923,618)
Amortization expense 1,950 2,400 2,400
Amortization of deferred revenue (2,338) (12,396) (17,928)
Decrease in accrued interest receivable 17,992 1,023,431 --
Decrease in accounts payable -- (14) (1,480)
----------- ----------- -----------
Net cash provided by (used in) operating
activities, net of distributions $ 49,729 $ 1,127,726 $ (25,139)
=========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
F-5
<PAGE> 21
HALL INSTITUTIONAL MORTGAGE FUND
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Hall Institutional Mortgage Fund, an Arizona limited partnership (the
"Partnership"), was formed on October 12, 1984. The general partner of
the Partnership is Hall Pension Fund Associates (the "General Partner")
and the general partner of Hall Pension Fund Associates is Hall 1985
Management Associates Limited Partnership (the "Managing General
Partner"). The Partnership has invested in subordinated mortgages with
affiliated partnerships (the "Affiliated Borrowers") which were primarily
secured by income-producing real estate. The investments were made during
1985, 1986 and 1987 (except for the Arrowtree Loan and the Brambletree
Loan hereinafter defined). The limited partners in the Partnership are
primarily qualified pension, profit sharing and other retirement trusts
and plans, commingled trust funds managed by banks for such trusts,
government pension and retirement trusts, individual retirement accounts,
Keogh plans, certain endowment funds and other institutional investors
intended to be exempt from federal income taxation. The Partnership also
accepted nontax-exempt investors who desired current taxable income from
mortgage investments in real estate.
BASIS OF PRESENTATION -
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP"). The preparation
of financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates. Certain prior years amounts have been reclassified
to conform with the 1996 presentation.
REVENUE RECOGNITION -
Interest income derived from mortgage notes receivable is deferred to the
extent the underlying mortgage notes receivable are determined, by the
Managing General Partner, to be either partially or completely
uncollectible on the basis described in note 3. If in future periods such
mortgage notes receivable and related interest are deemed to be
collectible, the deferred interest income will be recognized. Deferred
interest is classified in the accompanying balance sheets as a reduction
in accrued interest receivable.
Cash receipts on impaired loans are first applied to recognize perviously
deferred interest and then as a reduction of accrued interest and then
finally as a reduction of principal.
For the purpose of the statement of cash flows the Partnership considers
all highly liquid investments
F-6
<PAGE> 22
with a maturity of three months or less to be cash equivalents.
INCOME TAXES -
The Partnership is not subject to federal, state, or local income taxes
and, accordingly, none have been provided in the accompanying financial
statements. Such taxes are the responsibility of the partners and are,
therefore, included in their individual tax returns.
LOAN ORIGINATION FEE -
A 3 percent loan origination fee was earned by the Partnership on each
participating mortgage loan made. This revenue was initially deferred and
is being recognized ratably over the life of the specific related loans.
AMORTIZATION OF ORGANIZATION COSTS -
Organization costs are amortized on a straight-line basis over twelve
years.
ALLOCATION OF PROFIT AND LOSS -
Partnership net profits are allocated 99 percent to the limited partners
and 1 percent to the General Partner. Net losses are allocated to the
limited partners and General Partner in proportion to the positive
balances in their capital accounts. However, all net losses will be
allocated to the General Partner if the allocation to the limited
partners would result in a negative capital account balance for the
limited partners.
DISTRIBUTIONS OF DISTRIBUTABLE CASH FROM OPERATIONS
AND SURPLUS FUNDS -
Distributable cash from operations and surplus funds, as defined, is
allocated 99 percent to the limited partners and 1 percent to the General
Partner. However, the General Partner, exercising reasonable discretion,
may retain in the Partnership all or any part of the funds available for
distributions to meet the working capital needs of the Partnership (see
Note 2).
NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT -
Net income (loss) per limited partnership unit ("Unit") is computed by
dividing net income (loss) allocated to the limited partners by the
weighted average number of Units outstanding. Per Unit information has
been computed based on 2,568 Units outstanding in 1996, 1995 and 1994.
F-7
<PAGE> 23
(2) CASH AND CASH EQUIVALENTS:
Cash and cash equivalents at December 31, 1996 and 1995, consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Cash $ 51,718 $ 55,804
Certificates of deposit/Money
Market account 1,982,785 1,276,237
---------- ----------
$2,034,453 $1,332,041
========== ==========
</TABLE>
Under the terms of the partnership agreement, the General Partner is
required to maintain in the Partnership reasonable cash reserves for
working capital and contingencies in an amount of not less than 1% of
invested capital, as defined ($72,442 and $74,400 in 1996 and 1995
respectively). The Partnership maintained the required working capital
reserve at December 31, 1996 and 1995.
(3) MORTGAGE NOTES RECEIVABLE:
The Partnership's loans to Affiliated Borrowers (See Notes 1 and 4 for
relationships) are nonrecourse obligations of the Affiliated Borrowers.
During 1995 and 1996, the Partnership released its second lien position
on the loans to Affiliated Borrowers. All loans, except a certain amount
advanced to Hall Seven Trails Associates and Hall Brambletree Associates,
as more fully discussed hereafter (the "Arrowtree Loan") and (the
"Brambletree Loan"), made by the Partnership to the Affiliated Borrowers
were subject at the time of origination to the rights and restrictions
set out in a specified loan agreement ("Model Loan Agreement") and two
specified forms of notes ("Participating Notes"). Such loans are
hereafter referred to as "Specific Loans". As described hereinafter, all
of the Specific Loans set out in the Model Loan Agreement and the
Participating Notes have been modified subsequent to their origination.
As a result of a detailed analysis the Partnership performs on the
estimated values of the underlying assets relating to and impacting the
collectibility of the Specific Loans, as hereafter described, certain
amounts of the Specific Loans have been reserved through bad debt
provisions. The following table describes the terms and status of
outstanding Specific Loans at December 31, 1995 and 1996:
F-8
<PAGE> 24
<TABLE>
<CAPTION>
Outstanding Principal
Loan Amount Accrual
Borrower 1996 1995 Location Rate Status
- -------- ---- ---- -------- ---- ------
<S> <C> <C> <C> <C> <C>
Arrowtree $ -- $ 913,683 Okemos, MI (A) Modified
Brambletree 2,193,000 1,751,000 Garland, TX 7.00% Modified
Twintree 720,000 720,000 Albuquerque, NM 8.00% Modified
Midtree 410,000 410,000 Albuquerque, NM 8.00% Modified
Lanetree 620,000 620,000 Albuquerque, NM 8.00% Modified
Candlewick 460,000 460,000 Albuquerque, NM 8.00% Modified
Coachtree 615,000 615,000 Albuquerque, NM 8.00% Modified
--------------- ---------------
$ 5,018,000 $ 5,489,683
=============== ===============
</TABLE>
(A) Arrowtree's Specific Loan accrual rate in 1995 was equal to the
principal payments Arrowtree made on its first lien mortgage.
The following table shows the changes in the Partnership's allowance for loan
losses for the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Balance at beginning of period $ 4,576,000 $ 5,571,770
Allowance recorded on loans 442,000 620,000
Reduction in allowance for loan losses -- (1,094,683)
Write offs against the reserve -- (521,087)
----------- -----------
Balance at end of period $ 5,018,000 $ 4,576,000
=========== ===========
</TABLE>
The following table shows the changes in the Partnership's allowance for
interest receivable losses for the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Balance at beginning of period $ 3,928,180 $ 4,826,539
Allowance recorded on interest receivables 21,898 493,225
Reduction in allowance for interest receivable -- (1,671,928)
Write offs against the reserve -- (376,237)
Deferred interest 614,203 656,581
----------- -----------
Balance at end of period $ 4,564,281 $ 3,928,180
=========== ===========
</TABLE>
The Partnership periodically reviews the amount of reserves which are necessary
on both its mortgages and interest receivables. Previously, the process of
reviewing the amount of reserves was based on the current market value of each
Affiliated Borrower's asset holdings and where the Partnership stands in
relation to the Affiliated Borrower's other creditors. Effective January 1,
1995, the Partnership adopted Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" (SFAS #114). SFAS #114
required the Partnership to evaluate its mortgage notes for impairment based on
a measurement of the present value of expected future
F-9
<PAGE> 25
cash flows, the loans observable market price, or the fair value of the loans
collateral if the loan is collateral dependent. In accordance with SFAS #114,
the Partnership obtained a third-party appraisal of its mortgages and interest
receivables which estimated values of the Partnership's mortgages and interest
receivables ranging from $1,275,000 - $1,600,000, exclusive of amounts received
in connection with the Arrowtree refinancing and inclusive of the amount
advanced in connection with the Brambletree refinancing as described below. The
accompanying financial statements reflect the results of the receivables
appraised values at December 31, 1995, and is based on the upper end of the
valuation range.
The resulting appraised valuations were based on the discounted cash flow
analysis' of the underlying properties (discounted at 12%) assuming a five-year
holding period with a sale occurring at the end of the fifth year. The total
discounted cash flows were further discounted (at 50%-60%) to compensate for
the risk associated with owning a minority non-controlling equity interest
which the Partnership is deemed to possess as a lender to each of the
Affiliated Borrowers.
For the years ended December 31, 1995 and 1994, respectively, the Partnership
reversed bad debt reserves totaling $1,653,386 and $1,923,618. The amounts
reversed during 1995 were primarily based on interest payments received during
the year on previously reserved amounts and the expected principal payments to
be received in connection with the Arrowtree refinancing discussed in Note 8.
The amounts reversed during 1994 were based upon management's process of
reviewing the necessary reserves as discussed above and resulted from the
increased values of the properties that collateralized the mortgage notes at
that time. The Partnership increased the reserve during 1996 by $463,898,
primarily related to the increase in the Hall Brambletree Associates Specific
Loan.
On November 1, 1995, Midtree Associates, Ltd. ("Midtree") refinanced the
Midtree apartments' mortgages. The first lien mortgage in place prior to the
refinancing had an original maturity date of August 1, 1995, but was extended
to allow Midtree time to secure the refinancing proceeds. As part of the
overall refinancing, the property was transferred to Phoenix Square Associates,
Ltd. ("New Midtree"), with Midtree retaining a 99% interest in New Midtree. The
property was refinanced with a new $4.2 million first lien which accrues
interest at 8.1% through maturity on November 1, 2002. Monthly principal and
interest payments are based on a 30-year amortization schedule. As a condition
of the refinancing, the Partnership was required to release its second lien
position and retain an unsecured loan from Midtree for the remaining balance on
Midtree's Specific Loan. The remaining balance on the Midtree Specific Loan has
the same economic and payment terms as prior to the refinancing. The
Partnership believes it was in its best interest to agree to release its second
lien position pursuant to the refinancing. By doing so, Midtree was able to
avoid foreclosure on its underlying property from the original first lien
holder and reduce the interest rate on the first lien from 12%.
In January 1996, Northtree Associates Limited Partnership ("Candlewick"), an
Affiliated Borrower, refinanced the Candlewick apartments' mortgages. The
property was refinanced with a new $5.0 million first lien mortgage which
accrues interest at 7.58% with principal and interest payments due monthly
based on a 22-year amortization schedule through maturity on February 1, 2003.
As a condition of the refinancing agreement, the Partnership was required to
release its second lien position and retain an unsecured recourse promissory
note from Candlewick for the remaining balance on
F-10
<PAGE> 26
Candlewick's Specific Loan. The remaining balance on the Candlewick
Specific Loan has the same economic terms as prior to the refinancing.
The partnership believes it was in its best interest to release its
second lien position to allow the refinancing to be consummated, thereby
decreasing Candlewick's first lien mortgage interest rate and extending
the maturity date.
Hall Seven Trails Associates ("Arrowtree") completed an agreement with
Prudential Insurance Company ("Prudential") in 1994 regarding
restructuring its first lien encumbrance on which Arrowtree had been in
default since March 1, 1989. The agreement with Prudential required
Arrowtree to raise $345,000 in cash and funding commitments (the "New
Capital") to fund a capital improvement escrow account, pay the lender's
administrative costs, and to bring debt service current under its new
terms. Arrowtree issued a capital call to equity investors and raised
approximately $171,000 of the New Capital. The Partnership loaned
Arrowtree $181,000 ("Arrowtree Reorganization Advance") with such funds
being used by Arrowtree as part of the New Capital. The Arrowtree
Reorganization Advance accrues interest at 10% compounded monthly
beginning January 1, 1994. Interest and principal on the Arrowtree
Reorganization Advance was deferred and reserved, respectively, in 1994.
Pursuant to the Partnership's analysis of the collectibility of
receivables from the Affiliated Borrowers, a portion of this reserve was
reversed in 1995. In 1994, the Partnership modified its Specific Loan
from Arrowtree to agree with various modifications called for as part of
the agreement with Prudential and in the Arrowtree plan of reorganization
(the "1994 Arrowtree Modification"). The 1994 Arrrowtree Modification
provided that repayment of the principal portion of Arrowtree's Specific
Loan and the repayment of the Arrowtree Reorganization Advance and its
related accrued interest is subordinate to Prudential receiving their
entire first lien and related accrued interest. The interest portion of
Arrowtree's Specific Loan, in addition to being subordinate to
Prudential, is also subordinate to the repayment of all the New Capital
contributed by equity investors plus a 10% annual preference on such
funds. The Partnership believes it was in its best interest to have
consented to the 1994 modification of the first lien, to have consented
to the 1994 Arrowtree Modification, and to make the Arrowtree
Reorganization Advance. As a result of these events, the Partnership was
able to retain its second lien on the property since the first lien was
not assumable by the Partnership and the Partnership did not have the
capability of paying off the first lien. As of December 31, 1995, the
Arrowtree Reorganization Advance was secured by the Partnership's second
lien on the property. In January 1996, Arrowtree refinanced its
mortgages. As part of the overall refinancing, the property was
transferred to Arrowtree Properties, Ltd. ("New Arrowtree"), with
Arrowtree retaining a 99% interest in New Arrowtree. The property was
refinanced with a new $2.75 million first lien mortgage which accrues
interest at 7.57% with principal and interest payments due monthly. The
refinancing allowed Arrowtree to repay the Partnership in full the
$181,000 of principal and $44,274 of accrued interest on a loan the
Partnership made to Arrowtree pursuant to the 1994 restructuring of
Arrowtree's first lien mortgage. Arrowtree also made a full principal
payment of $913,683 on Arrowtree's Specific Loan. As a condition of the
refinancing agreement, the Partnership was required to release its second
lien position and retain an unsecured recourse promissory note from
Arrowtree for the remaining balance on Arrowtree's Specific Loan. The
Partnership is to receive the remaining interest of $547,237 on the
Arrowtree Specific Loan after the return of the New Capital to the equity
investors of Arrowtree.
A plan of reorganization (the "Plan") for Hall Brambletree Associates
("Brambletree") was confirmed on May 19, 1993. According to the Plan, the
principal and interest of $2,037,324 due to the
F-11
<PAGE> 27
Partnership on its mortgage note receivable will bear interest at 7% per
annum beginning January 1, 1993. Property cash flow and sale and
refinance proceeds will be allocated first to the investors who provided
additional equity of $250,000 to Brambletree as part of the Plan (the
"Participating Investors"), plus a 12% annual preference, then 50% to the
Participating Investors and 50% to Hall Financial Group, Inc. ("HFGI")
and the Partnership to be shared pro rata until HFGI and the Partnership
are paid in full, and then 100% to the Participating Investors. In August
1996, Hall Brambletree refinanced the Brambletree apartments' mortgages.
The property was refinanced with a new $6.105 million first lien mortgage
which accrues interest at 8.245% with principal and interest payments due
monthly based on a 30-year amortiztion schedule through maturity on
September 1, 2006. As a condition of the refinancing, the Partnership was
required to loan Brambletree an additional $442,000 pro rata with HFGI.
This advance will be repaid pro rata with HFGI out of the first available
proceeds before repayment of amounts due under the Brambletree Specific
Loan. Along with the additional loan, the Partnership was required to
release its second lien position and retain an unsecured recourse
promissory note from Brambletree for the remaining balance on
Brambletree's Specific Loan. The remaining balance on the Brambletree
specific Loan has the same economic terms as prior to the refinancing.
The Partnership believes it was in its best interest to release its
second lien position to allow the refinancing to be consummated, thereby
decreasing Brambletree's first lien mortgage interest rate, extending the
maturity date, and take advantage of a discount in the amount of
$295,624.
Fawntree Associates, Ltd. ("Fawntree"), an Affiliated Borrower, was sold
for $6,400,000 on June 15, 1995. After the satisfaction of all claims
having priority over the Partnership, Fawntree distributed $582,682 to
the Partnership per the terms on the Fawntree Specific Loan. The
Partnership had previously reserved the entire amount of the Fawntree
Specific Loan. As a result of the sale of the property in 1995 and
related payment to the Partnership, the Partnership reversed the reserve
related to the repayment and wrote off the remaining accrued but unpaid
interest of $397,408 and principal balance of $550,000 against the
related reserves.
In February 1995, three of the Affiliated Borrowers, along with 25 other
partnerships (collectively hereafter referred to as the "Hall LPs"),
entered into a transaction with affiliates of NHP, Inc., Paine Webber and
HFGI whereby the properties were transferred to separate limited
partnerships (the "New LPs") by the respective Affiliated Borrower (the
"NHP Transaction"). As a result of the NHP Transaction, Lanetree
Associates Limited Partnership, Twintree Associates Limited Partnership
and Coachtree Associates Limited Partnership ("NHP Transaction
Partnerships") each hold a limited partnership interest in its respective
New LP in which affiliates of NHP, Inc. and Paine Webber are general
partners. As part of the NHP Transaction, the senior mortgage for each
property involved in the NHP Transaction was paid in full. In addition,
as part of the NHP Transaction, each Hall LP (including the NHP
Transaction Partnerships) received cash at closing, and is entitled to a
defined priority equity amount in the New LPs (the "Preferred Equity")
and an annual return on the Preferred Equity of 6% per annum (the
"Operational Preference") provided that all of the New LPs have been paid
the full amount of the Operational Preference due at the end of each
calender quarter. In the event all of the New LPs have not been paid the
amount of the Operational Preference due at the end of each calender
quarter, the annual return on the Preferred Equity in calculating
Operational Preference increases to 9% per annum (hereafter referred to
as a "Non-Major Default"). A Non- Major Default occurred in April 1996,
and is continuing. In addition to Operational Preference, each
F-12
<PAGE> 28
NHP Transaction Partnership is entitled to a priority return of the
Preferred Equity and any accrued and unpaid Operational Preference upon
refinancing or sale of the properties over other equity classes and a 20%
participation in net proceeds available from sale or refinancing after
payment of the Preferred Equity and any accrued and unpaid Operational
Preference ("Sale or Refinancing Participation Proceeds"). As a condition
of the NHP Transaction, the Partnership was required to release its
second lien positions and retain unsecured loans from the NHP Transaction
Partnerships for the remaining balances on their respective Specific
Loans. The remaining balances on the NHP Transaction Partnerships'
Specific Loans have the same economic and payment terms as prior to the
NHP Transaction. Lanetree Associates Limited Partnership distributed
$569,419 to the Partnership in March 1995 in partial payment of its loan
obligation to the Partnership from proceeds it received at closing of the
NHP Transaction. There were not sufficient proceeds at closing (after the
payment of priority repayments) to distribute funds to the Partnership
from Coachtree Associates Limited Partnership or Twintree Associates
Limited Partnership. However, the NHP Transaction Partnerships remain
obligated to the Partnership pursuant to each partnership's Bankruptcy
Plan. The terms of the Preferred Equity held by the NHP Transaction
Partnerships provided that defined amounts be paid not later than
December 10, 2000. The amounts the Partnership would receive on December
10, 2000, excluding Sale or Refinancing Participation Proceeds and
assuming a Non-Major Default has occurred, is estimated to be:
<TABLE>
<S> <C>
Coachtree $ 500,055
Lanetree $ 1,189,524
Twintree $ 684,098
</TABLE>
(4) TRANSACTIONS WITH AFFILIATES:
Loan origination fees of $2,338, $12,396 and $17,928 were recognized in
1996, 1995 and 1994, respectively. Pursuant to the Partnership's analysis
of the collectibility of receivables from the Affiliated Borrowers,
interest income of $97,794 and $128,670 was recognized on the Specific
Loan from Lanetree Associates Limited Partnership in 1996 and 1995
respectively. No interest income was recognized on Specific Loans in
1994. The interest income is net of deferred interest of $614,203,
$656,581, and $849,228 on non-performing mortgage notes receivable in
1996, 1995 and 1994, respectively.
HFGI performs administrative services for the Partnership. The
Partnership agreement does not allow the partnership to pay HFGI for
these services. No provision has been made in these financial statements
to record the value of these services. It is estimated that these
services are worth less than $5,000 per year and are therefore
insignificant to the operations of the partnership.
(5) DISTRIBUTIONS TO PARTNERS:
During the year ended December 31, 1994, distributions of $2,083 (of
which $1,367 had been previously accrued) were paid to the General
Partner. No distributions were made in 1996 and 1995. Such distributions
were made in accordance with the partnership agreement which requires
quarterly distributions of Partnership distributable cash flow, as
defined.
F-13
<PAGE> 29
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires the Partnership to
disclose the estimated fair values of its financial instruments.
The carrying amount of the Partnership's cash and cash equivalents
approximates its fair value due to the short maturity of these
instruments. The Partnership's mortgage note receivables and accrued
interest receivables have been recorded at their estimated fair value
based upon an independent third-party appraisal (see Note 3).
(7) INVESTMENT ACT OF 1940:
The accompanying financial statements have been prepared assuming that
the Partnership will continue as a going concern. In February 1996, the
Partnership's attorneys advised the Partnership that the release of the
second lien positions on certain of the loan receivables could cause the
Partnership to be treated as an investment company under the 1940
Investment Company Act (the "1940 Act") by the Securities and Exchange
Commission. The Partnership cannot become an investment company under the
1940 Act because it is in conflict with its partnership agreement and the
purpose of the original offering. In the original offering, it was
anticipated that when the loans were repaid, the funds would be
distributed back to the unit holders rather than being allowed to be
reinvested. Therefore, based upon the Partnership's original partnership
documents, the intent was to have a liquidating fund after all the
initial loans were made. In order to adopt a liquidating plan, a proxy
will be sent to each unit holder for their vote. A majority vote (over
50%) for the liquidating plan will be required of all unit holders.
The liquidating plan calls for the Partnership to sell all of the loans
receivable to HFGI for $1.6 million. This amount was determined by taking
the highest range of value as determined by an independent third party
appraisal. The proceeds from the sale of the loans receivable plus the
cash on hand will then be distributed to the unit holders based upon
their percentage interest. The Partnership would then be dissolved.
Management expects a proxy statement will be sent out in March 1997 to
all unit holders.
The accompanying financial statements have not been prepared on the
liquidation basis of accounting, as it is not determinable if an
immediate liquidation of the Partnership will be required. This
uncertainty raises substantial doubt about the Partnership's ability to
continue as a going concern. The accompanying financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
F-14
<PAGE> 30
Schedule XII
HALL INSTITUTIONAL MORTGAGE FUND
Mortgage Loans on Real Estate
December 31, 1996
<TABLE>
<CAPTION>
Description Interest Rate Maturity Date Periodic Payment Terms
- ----------- ------------- ------------- ----------------------
<S> <C> <C> <C>
Subordinate Notes on
Apartment Complexes in
New Mexico:
Hall Lanetree 8% December 10, Interest payments will be
Associates Compounded 2000 made to the Partnership
annually as funds are available
pursuant to the NHP
Transaction described in
Note 3.
Hall Midtree 8% November 1, No interest payments
Associates compounded 2002 will be made to the
annually Partnership until such
time as accrued but
unpaid interest on the
first lien is paid. A
balloon payment of the
entire principal balance
plus accrued but unpaid
interest is due at maturity.
Hall Coachtree 8% December 10, Interest payments will be
Associates compounded 2000 made to the Partnership
annually as funds are available
pursuant to the NHP
Transaction described in
Note 3.
Hall ???tree 8% January 1, 1999 No interest payments
Associates- compounded will be made to the
Candlewick annually Partnership until such
Apartments time as accrued but
unpaid interest on the
first lien is paid. A
balloon payment of the
entire principal balance
plus accrued but unpaid
interest is due at
maturity.
Hall Twintree 8% December 10, Interest payments will be
Associates compounded 2000 made to the Partnership
annually as funds are available
pursuant to the NHP
Transaction described in
Note 3.
TOTAL NEW MEXICO
<CAPTION>
Principal
Amount
of Loans
Subject to
Face Carrying Delinquent
Amount of Amount of Principal or
Description Prior Liens Mortgages Mortgages Interest
- ----------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C>
Subordinate Notes on
Apartment Complexes in
New Mexico:
Hall Lanetree (A) $620,000 $620,000 --
Associates
Hall Midtree First lien note 410,000 410,000 --
Associates of $4,200,000
to Secore
Financial
Corporation
bearing interest
at 8.1% per
annum until the
maturity date of
November 1,
2002
Hall Coachtree (A) 615,000 615,000 --
Associates
Hall ???tree First lien note 460,000 460,000 --
Associates- of $4,300,000
Candlewick to Aetna Life
Apartments Insurance
Company
bearing interest
at 12% per
annum through
February 1,
1992 and 11%
thereafter until
maturity,
January 1,
1999.
Hall Twintree (A) 720,000 720,000 --
Associates
---------- ---------- -----
TOTAL NEW MEXICO $2,825,000 $2,825,000 $ --
---------- ---------- -----
</TABLE>
<PAGE> 31
Schedule XII
HALL INSTITUTIONAL MORTGAGE FUND
Mortgage Loans on Real Estate
December 31, 1996
<TABLE>
<CAPTION>
Description Interest Rate Maturity Date Periodic Payment Terms
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Subordinate Notes on
Apartment Complexes in
Texas:
Hall Brambletree 7% per annum November 1, Principal and interest
Associates as of January 1, 1998 payments are subordinate
1993. to the first lien interest
and principal being paid
in full and Participating
Investors contributions
plus a 12% annual
preference. (See note 3)
TOTAL TEXAS
GROSS MORTGAGE LOANS ON REAL ESTATE
ALLOWANCE FOR DOUBTFUL RECEIVABLES
NET MORTGAGE LOANS ON REAL ESTATE
<CAPTION>
Principal
Amount
of Loans
Subject to
Face Carrying Delinquent
Amount of Amount of Principal or
Description Prior Liens Mortgages Mortgages Interest
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Subordinate Notes on First lien note $2,193,000 $2,193,000 $ --
Apartment Complexes in of $6,105,000
Texas: to AMRESCO
bearing an
accrual rate
Hall Brambletree ranging at
Associates 8.245% per
annum until the
maturity date of
September 1,
2006.
---------- --------- -----
2,193,000 2,193,000 --
TOTAL TEXAS ---------- --------- -----
$5,018,000 5,018,000 $ --
GROSS MORTGAGE LOANS ON REAL ESTATE ========== =====
ALLOWANCE FOR DOUBTFUL RECEIVABLES 5,018,000
---------
NET MORTGAGE LOANS ON REAL ESTATE $ 0
=========
</TABLE>
(A) In February 1995, these partnerships entered into a transaction with
affiliates of NHP, Inc. and Paine Webber whereby the properties were
transferred to separate limited partnerships (the "New LP's"), by the
respective affiliated borrower in exchange for limited partnership
interests in the New LP's. As part of this transaction, the senior
mortgage for each property was paid in full. In addition, these
partnerships are entitled to certain priority payments as discussed further
in Item 7.
<PAGE> 32
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description of
Number Exhibit
- ------ -------
<S> <C> <C>
3.1 Amended and Restated Certificate *
and Agreement of Limited
Partnership of Hall Institutional
Mortgage Fund Limited Partnership
4.1 Specimen Certificate representing *
ownership of Units
10.1 Form of Senior Participating Note *
10.2 Form of Junior Participating Note *
10.3 Form of Model Loan Agreement *
10.4 Form of Model Guarantee Agreement *
27 Financial Data Schedule
</TABLE>
*Incorporated by reference from the Form S-11 filed by the Partnership with the
Commission on November 9, 1984.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,034,453
<SECURITIES> 0
<RECEIVABLES> 11,182,281
<ALLOWANCES> 9,582,281
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,634,453
<CURRENT-LIABILITIES> 9
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 3,634,444
<TOTAL-LIABILITY-AND-EQUITY> 3,634,453
<SALES> 0
<TOTAL-REVENUES> 197,404
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 165,279
<LOSS-PROVISION> 463,898
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (431,773)
<INCOME-TAX> 0
<INCOME-CONTINUING> (431,773)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (431,773)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
