UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K405
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to_____________
Commission file number 0-14268
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McNEIL REAL ESTATE FUND XXII, L.P.
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(Exact name of registrant as specified in its charter)
California 33-0085680
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13760 Noel Road, Suite 600, LB70, Dallas, Texas, 75240
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (972) 448-5800
------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
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Current Income Limited Partnership Units
Growth/Shelter Limited Partnership Units
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
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 ]
All of the Registrant's 33,003,117 limited partnership units are held by
non-affiliates. The aggregate market value of units held by non-affiliates is
not determinable since there is no public trading market for limited partnership
units and transfers of units are subject to certain restrictions.
Documents Incorporated by Reference: See Item 14, Page 35
TOTAL OF 38 PAGES
<PAGE>
PART I
ITEM 1. BUSINESS
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ORGANIZATION
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McNeil Real Estate Fund XXII, L.P., (the "Partnership"), formerly known as
Southmark Realty Partners II, Ltd. was organized on November 30, 1984 as a
limited partnership under the provisions of the California Revised Limited
Partnership Act to acquire and operate commercial and residential properties.
The general partner of the Partnership is McNeil Partners, L.P. (the "General
Partner"), a Delaware limited partnership, an affiliate of Robert A. McNeil
("McNeil"). The General Partner was elected at a meeting of limited partners on
March 26, 1992, at which time an amended and restated partnership agreement (the
"Amended Partnership Agreement") was adopted. Prior to March 26, 1992, the
general partner of the Partnership was Southmark Investment Group, Inc. (the
"Original General Partner"), a wholly-owned subsidiary of Southmark Corporation
("Southmark"). The principal place of business for the Partnership and the
General Partner is 13760 Noel Road, Suite 600, LB70, Dallas, Texas, 75240.
On February 26, 1985, the Partnership registered with the Securities and
Exchange Commission ("SEC") under the Securities Act of 1933 (File No. 2-94740)
and commenced a public offering for sale of $55,000,000 of limited partnership
units. There were two classes of limited partnership units, designated as
Current Income Units and Growth/Shelter Units offered (referred to collectively
as "Units"). The Units represent equity interests in the Partnership and entitle
the holders thereof to participate in certain allocations and distributions of
the Partnership. The sale of Units closed on December 31, 1985, with 33,333,867
Units (19,922,588 Current Income Units and 13,411,279 Growth/Shelter Units) sold
at one dollar each, or gross proceeds of $33,333,867. The Partnership
subsequently filed a Form 8-A Registration Statement with the SEC and registered
its Units under the Securities Exchange Act of 1934 (File No. 0-14268). During
the years 1991 through 1995, 125,750 Units were rescinded. In 1996, 32,000 Units
were relinquished leaving 33,176,117 Units (19,818,088 Current Income Units and
13,358,029 Growth/Shelter Units) outstanding at December 31, 1996.
SOUTHMARK BANKRUPTCY AND CHANGE IN GENERAL PARTNER
- --------------------------------------------------
On July 14, 1989, Southmark filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. Neither the Partnership, the General
Partner nor the Original General Partner were included in the filing.
Southmark's reorganization plan became effective August 10, 1990. Under the
plan, most of Southmark's assets, which included Southmark's interests in the
Original General Partner, were being sold or liquidated for the benefit of
creditors.
In accordance with Southmark's reorganization plan, Southmark, McNeil and
various of their affiliates entered into an asset purchase agreement on October
12, 1990, providing for, among other things, the transfer of control to McNeil
or his affiliates of 34 limited partnerships (including the Partnership) in the
Southmark portfolio.
<PAGE>
On February 14, 1991, pursuant to the asset purchase agreement as amended on
that date, McNeil Real Estate Management, Inc. ("McREMI"), an affiliate of
McNeil acquired the assets relating to the property management and partnership
administrative business of Southmark and its affiliates and commenced management
of the Partnership's properties pursuant to an assignment of the existing
property management agreements from the Southmark affiliates.
On March 26, 1992, the limited partners approved a restructuring proposal that
provided for (i) the replacement of the Original General Partners with a new
general partner, the General Partner; (ii) the adoption of the Amended
Partnership Agreement which substantially alters the provisions of the original
partnership agreement relating to, among other things, compensation,
reimbursement of expenses and voting rights; (iii) the approval of an amended
management agreement with McREMI, the Partnership's property manager; and (iv)
the approval to change the Partnership's name to McNeil Real Estate Fund XXII,
L.P. Under the Amended Partnership Agreement, the Partnership began accruing an
asset management fee, retroactive to February 14, 1991, which is payable to the
new General Partner. For a discussion of the methodology for calculating the
asset management fee, see Item 13 - Certain Relationships and Related
Transactions. The proposals approved at the March 26, 1992 meeting were
implemented as of that date.
Concurrent with the approval of the restructuring, the General Partner acquired
from Southmark and its affiliates, for aggregate consideration of $18,861, (i)
the right to receive payment on the advances owing from the Partnership to
Southmark and its affiliates in the amount of $16,397, and (ii) the general
partner interest of the Original General Partner. None of the Units are owned by
the General Partner or its affiliates.
Settlement Of Claims:
The Partnership filed claims with the United States Bankruptcy Court for the
Northern District of Texas, Dallas Division (the "Bankruptcy Court") against
Southmark for damages relating to improper overcharges, breach of contract and
breach of fiduciary duty. The Partnership settled these claims in 1991, and such
settlement was approved by the Bankruptcy Court.
An Order Granting Motion to Distribute Funds to Class 8 Claimants dated April
14, 1995 was issued by the Bankruptcy Court. In accordance with the Order, in
May 1995 the Partnership received in full satisfaction of its claims, $29,292 in
cash, and common and preferred stock in the reorganized Southmark which amounts
represent the Partnership's pro-rata share of Southmark assets available for
Class 8 Claimants. The Partnership sold the Southmark common and preferred stock
in May 1995 for $9,457 which, combined with the cash proceeds from Southmark,
resulted in a gain on legal settlement of $38,749.
CURRENT OPERATIONS
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General:
The Partnership is engaged in real estate activities, including the ownership,
operation and management of residential and retail real estate. At December 31,
1996, the Partnership owned one income-producing property as described in Item 2
- - Properties.
<PAGE>
The Partnership does not directly employ any personnel. The General Partner
conducts the business of the Partnership directly and through its affiliates.
The Partnership reimburses affiliates of the General Partner for such services
rendered in accordance with the Amended Partnership Agreement. See Item 8 - Note
2 - "Transactions With Affiliates".
The business of the Partnership to date has involved only one industry segment.
See Item 8 - Financial Statements and Supplementary Data. The Partnership has no
foreign operations. The business of the Partnership is not seasonal.
Business Plan:
The Partnership determined to evaluate market and other economic conditions to
establish the optimum time to commence liquidation of the Partnership's asset in
accordance with the terms of the Amended Partnership Agreement. Although there
can be no assurance as to the timing of the liquidation due to real estate
market conditions, the general difficulty of disposing of real estate, and other
general economic factors, it is anticipated that such liquidation would result
in the dissolution of the Partnership followed by a liquidating distribution to
Unit holders by December 2001. Until such time as the Partnership's asset is
liquidated, the Partnership's plan of operations is to preserve or increase the
net operating income of its asset whenever possible, while at the same time
making whatever capital expenditures are reasonable under the circumstances in
order to preserve and enhance the value of the Partnership's asset.
Competitive Conditions:
Since the principal business of the Partnership is to own and operate real
estate, the Partnership is subject to all of the risks incident to ownership of
real estate and interests therein, many of which relate to the illiquidity of
this type of investment. These risks include changes in general or local
economic conditions, changes in supply or demand for competing properties in an
area, changes in interest rates and availability of permanent mortgage funds
which may render the sale or refinancing of a property difficult or
unattractive, changes in real estate and zoning laws, increases in real property
tax rates and Federal or local economic or rent controls. The illiquidity of
real estate investments generally impairs the ability of the Partnership to
respond promptly to changed circumstances. The Partnership competes with
numerous established companies, private investors (including foreign investors),
real estate investment trusts, limited partnerships and other entities (many of
which have greater resources than the Partnership) in connection with the sale,
financing and leasing of properties. The impact of these risks on the
Partnership, including losses from operations and foreclosure of the
Partnership's property, is described in Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations. For a detailed
discussion of the competitive conditions for the Partnership's property see Item
2 - Properties.
<PAGE>
Forward Looking Information:
Within this document, certain statements are made as to the expected occupancy
trends, financial condition, results of operations, and cash flows of the
Partnership for periods after December 31, 1996. All of these statements are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These statements are not
historical and involve risks and uncertainties. The Partnership's actual
occupancy trends, financial condition, results of operations, and cash flows for
future periods may differ materially due to several factors. These factors
include, but are not limited to, the Partnership's ability to control costs,
make necessary capital improvements, negotiate the sale or refinancing of its
property and respond to changing economic and competitive factors
Other information:
The environmental laws of the Federal government and of certain state and local
governments impose liability on current property owners for the clean-up of
hazardous and toxic substances discharged on the property. This liability may be
imposed without regard to the timing, cause or person responsible for the
release of such substances onto the property. The Partnership could be subject
to such liability in the event that it owns a property having such environmental
problems. The Partnership has no knowledge of any pending claims or proceedings
regarding such environmental problems.
ITEM 2. PROPERTIES
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The following table sets forth the investment portfolio of the Partnership at
December 31, 1996. The buildings and the land on which they are located are
owned in fee, subject in each case to a first lien deed of trust as set forth
more fully in Item 8 - Note 5 - "Mortgage Note Payable". See also Item 8 - Note
4 - "Real Estate Investment" and Schedule III - "Real Estate Investment and
Accumulated Depreciation and Amortization". In the opinion of management, the
property is adequately covered by insurance.
<TABLE>
<CAPTION>
Net Basis of 1996 Date
Property Description Property Debt Property Tax Acquired
- -------- ----------- -------------- ---- ------------ --------
<S> <C> <C> <C> <C> <C>
Harbour Club III (1) Apartments
Belleville, MI 331 units $ 5,318,692 $ 5,979,501 $ 153,318 5/86
</TABLE>
(1) Harbour Club III Apartments is owned by Harbour Club Associates Limited
Partnership, which is wholly-owned by the Partnership and its General
Partner.
<PAGE>
The following table sets forth the property's occupancy rate and rent per square
foot for the last five years:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------------- ------------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Harbour Club III
Occupancy Rate............ 94% 96% 91% 90% 95%
Rent Per Square Foot...... $ 7.38 $ 7.21 $ 6.75 $ 6.74 $ 6.42
</TABLE>
Occupancy rate represents all units leased divided by the total number of units
of the property as of December 31 of the given year. Rent per square foot
represents all revenue, except interest, derived from the property's operations
divided by the leasable square footage of the property.
Competitive conditions
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Harbour Club III
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Harbour Club III, located in Belleville, Michigan, was built in 1972 as a part
of a four-phase apartment complex. The property offers a complete package of
amenities including a golf course, clubhouse, exercise room, tanning beds,
tennis courts, saunas, boat docks and launch, and playgrounds. The apartments
located in this phase of the complex offer lake and golf course views. The
Belleville market has significantly rebounded to an occupancy rate of 93%.
Harbour Club III is operating at an occupancy rate of 94% and has not increased
rents for six years due to restrictions imposed by the Department of Housing and
Urban Development ("HUD"), the property's former mortgage holder, as well as the
lack of capital improvements. The property's closest competitor has rental rates
approximately $100 per month above Harbour Club III's rates. Security concerns
are prompting demands from tenants for improved lighting, limited access gates
and fencing, as offered by competitors. The property has a large amount of
deferred maintenance and the property is unable to generate cash to meet its
capital improvement needs. Management is currently seeking alternatives to fund
the needed capital improvements. The ability of the property to compete in the
market will be directly determined by the amount of capital dollars spent to
upgrade the property to community standards.
ITEM 3. LEGAL PROCEEDINGS
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The Partnership is not party to, nor is the Partnership's property the subject
of, any material pending legal proceedings, other than ordinary routine
litigation incidental to the Partnership, except for the following:
1) HCW Pension Real Estate Fund, Ltd. et al. v. Ernst & Young, BDO Seidman
et al. (Case #92-06560-A). This suit was filed on behalf of the Partnership
and other affiliated partnerships (as defined in this Section 1, the
"Affiliated Partnerships") on May 26, 1992, in the 14th Judicial District
Court of Dallas County. The petition sought recovery against the
Partnership's former auditors, Ernst & Young, for negligence and fraud in
failing to detect and/or report overcharges of fees/expenses by Southmark,
the former general partner. The former auditors initially asserted
<PAGE>
counterclaims against the Affiliated Partnerships based on alleged
fraudulent misrepresentations made to the auditors by the former management
of the Affiliated Partnerships (Southmark) in the form of client
representation letters executed and delivered to the auditors by Southmark
management. The counterclaims sought recovery of attorneys' fees and costs
incurred in defending this action. The counterclaims were later dismissed
on appeal, as discussed below.
The trial court granted summary judgment against the Affiliated
Partnerships based on the statute of limitations; however, on appeal, the
Dallas Court of Appeals reversed the trial court and remanded for trial the
Affiliated Partnerships' fraud claims against Ernst & Young. The Texas
Supreme Court denied Ernst & Young's application for writ of error on
January 11, 1996. Shortly before trial, the district court judge once again
granted summary judgment against the Affiliated Partnerships on December 2,
1996. The Partnership is continuing to pursue vigorously its claims against
Ernst & Young; however, the final outcome of this litigation cannot be
determined at this time.
2) Martha Hess, et al. v. Southmark Equity Partners II, Ltd., Southmark
Income Investors, Ltd., Southmark Equity Partners, Ltd., Southmark Realty
Partners III, Ltd., Southmark Realty Partners II, Ltd. (McNeil Real Estate
Fund XXII, L.P.), McNeil Partners, L.P. et al. ("Hess"); Kotowski v.
Southmark Equity Partners, Ltd. and Donald Arceri v. Southmark Income
Investors, Ltd. - Illinois Appellate Court for the First District, Fifth
Division, as consolidated Case No. 90-107 (remanded back to Trial Court -
Circuit Court of Cook County, Illinois County Department, Chancery
Division, as consolidated Case No. 88 CH 4670 (L92026).
Consolidated with these cases were an additional 14 matters against
unrelated partnership entities. The Hess case was filed on May 20, 1988, by
Martha Hess, individually, and on behalf of a putative class of parties
similarly situated. The original, first, second and third amended
complaints in Hess sought rescission, pursuant to the Illinois Securities
Act, of over $2.7 million of principal invested in five (5) Southmark (now
McNeil) partnerships (as defined in this Section 2, the "Defendants"), and
other relief including damages for breach of fiduciary duty and violation
of the Illinois Consumer Fraud and Deceptive Business Practices Act. The
original, first, second and third amended complaints in Hess were dismissed
against the defendant-group because the Appellate Court held that they were
not the proper subject of a class action complaint. Hess was, thereafter,
amended a fourth time to state causes of action against unrelated
partnership entities. Hess went to judgment against that unrelated entity
and the judgment, along with the prior dismissal of the class action, was
appealed. The Hess appeal was decided by the Appellate Court during 1992.
The Appellate Court affirmed the dismissal of the breach of fiduciary duty
and consumer fraud claims. The Appellate Court did, however, reverse in
part, holding that certain putative class members could file class action
complaints against the defendant-group, which pursuant to the Appellate
Court's ruling, included the Partnership. Although leave to appeal to the
Illinois Supreme Court was sought, the Illinois Supreme Court refused to
hear the appeal. On June 15, 1994, the Appellate Court issued its mandate
sending the case back to Trial Court.
<PAGE>
In late January 1995, plaintiffs filed a Motion to File an Amended
Consolidated Class Action Complaint, which amends the complaint to name
McNeil Partners, L.P. as the successor general partner to Southmark
Investment Group. In February 1995, Plaintiffs filed a Motion for Class
Certification. The amended cases against the defendant-group, and others
are proceeding under the caption George and Joy Krugler v. I.R.E. Real
Estate Income Fund, Jerry and Barbara Neumann v. Southmark Equity Partners
II (McNeil Real Estate Fund XXV, L.P.), Richard and Theresa Bartoszewski v.
Southmark Realty Partners III (McNeil Real Estate Fund XXIII, L.P.), and
Edward and Rose Weskerna v. Southmark Realty Partners II (McNeil Real
Estate Fund XXII, L.P.).
In September 1995, the Court granted plaintiffs' Motion to File an Amended
Complaint, to Consolidate and for Class Certification. Defendants answered
the complaint and plead that the plaintiffs did not give timely notice of
their desire to rescind within six months of knowing that right, as
required by law.
Plaintiffs filed a Motion for Summary Judgment against the remaining
partnership defendants, as well as the initial general partners. The Court
ruled on plaintiffs' Motion for Summary Judgment on April 25, 1996, and
entered partial summary judgment against the Partnership, as well as the
initial general partner. Summary judgment against McNeil Partners, L.P., as
the successor general partner, was not sought.
On October 22, 1996, the Court entered judgment against the Partnership to
rescind 178,000 limited partnership Units with total claims of $347,809.
The claims consisted of the $178,000 original purchase price of the Units,
net of distributions previously paid of $23,713, plus $193,522 in interest.
The Defendants were able to negotiate a settlement for a lesser amount; and
accordingly, on December 23, 1996, the amount of $300,000 was paid as full
and complete settlement of all claims, including attorneys' fees.
3) Nicpon v. Southmark Realty Partners II (presently known as McNeil Real
Estate Fund XXII, L.P.) 89 CH 4118. Currently proceeding as Edward and Rose
Weskerna v. Southmark Realty Partners II (McNeil Real Estate Fund XXII,
L.P.).
This action was consolidated in September 1995 with the Hess case discussed
above.
4) Dick and Aloma Anderson v. McNeil Real Estate Fund XXII, L.P. , McNeil
Partners, L.P., Wayne T. Shipp, the Wayne Shipp Agency, Inc., Southmark
Investment Group, Inc. and Southmark Realty Partners, Ltd. This lawsuit was
filed in November 1993, in Washington State in the Clark County Superior
Court. In 1985, the plaintiffs apparently spent $22,000 to purchase limited
partnership interests in Southmark Realty Partners Ltd. II , (not named by
them as a defendant ) whose name is now McNeil Real Estate Fund XXII, L.P.
(the "Partnership"). Plaintiffs allege that in connection with the
transactions by which McNeil Partners, L.P. became general partner of the
Partnership, and by which certain changes were made in the Partnership, the
McNeil entities engaged in the offer and/or sale of unregistered securities
in violation of Washington law. The plaintiffs have alleged that certain of
the other defendants -- specifically Mr. Shipp and the Shipp Insurance
<PAGE>
Agency -- engaged in fraud in connection with the sale of limited
partnership interests in the Partnership to plaintiffs. The plaintiffs have
not made fraud allegations against any of the McNeil or Southmark entities.
The majority of plaintiffs' claims against the Partnership are based on
allegations that the securities are not registered in the State of
Washington. Counsel's research indicates that there are two possible
exemptions to the registration of securities which apply to this matter.
These statutory exceptions are under review by the plaintiffs' attorney.
Counsel for the Partnership was contacted recently and asked whether the
Partnership would be interested in repurchasing Plaintiffs' units at a
discount. Plaintiffs will be advised of their option to abandon their units
back to the Partnership for no consideration. The ultimate outcome of this
proceeding cannot be determined at this time.
5) James F. Schofield, Gerald C. Gillett, Donna S. Gillett, Jeffrey Homburger,
Elizabeth Jung, Robert Lewis, and Warren Heller et al. v. McNeil Partners
L.P., McNeil Investors, Inc., McNeil Real Estate Management, Inc., Robert
A. McNeil, Carole J. McNeil, McNeil Pacific Investors Fund 1972, Ltd.,
McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil
Real Estate Fund XI, Ltd., McNeil Real Estate Fund XII, Ltd., McNeil Real
Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate
Fund XX, L.P., McNeil Real Estate Fund XXI, L.P., McNeil Real Estate Fund
XXII, L.P., McNeil Real Estate Fund XXIV, L.P., McNeil Real Estate Fund
XXV, L.P., McNeil Real Estate Fund XXVI, L.P., and McNeil Real Estate Fund
XXVII, L.P., et al. - Superior Court of the State of California for the
County of Los Angeles, Case No. BC133799 (Class and Derivative Action
Complaint).
The action involves purported class and derivative actions brought by
limited partners of each of the fourteen limited partnerships that were
named as nominal defendants as listed above (as defined in this Section 5,
the "Partnerships"). Plaintiffs allege that McNeil Investors, Inc., its
affiliate McNeil Real Estate Management, Inc. and three of their senior
officers and/or directors (as defined in this Section 5, collectively, the
"Defendants") breached their fiduciary duties and certain obligations under
the respective Amended Partnership Agreement. Plaintiffs allege that
Defendants have rendered such Units highly illiquid and artificially
depressed the prices that are available for Units on the resale market.
Plaintiffs also allege that Defendants engaged in a course of conduct to
prevent the acquisition of Units by an affiliate of Carl Icahn by
disseminating purportedly false, misleading and inadequate information.
Plaintiffs further allege that Defendants acted to advance their own
personal interests at the expense of the Partnerships' public unit holders
by failing to sell Partnership properties and failing to make distributions
to unitholders.
On December 16, 1996, the Plaintiffs filed a consolidated and amended
complaint. Plaintiffs are suing for breach of fiduciary duty, breach of
contract and an accounting, alleging, among other things, that the
management fees paid to the McNeil affiliates over the last six years are
excessive, that these fees should be reduced retroactively and that the
respective Amended Partnership Agreements governing the Partnerships are
invalid. On January 7, 1997, the Court ordered consolidation with three
other similar actions.
<PAGE>
The Partnerships filed a demurrer to the complaint and a motion to strike
on February 14, 1997, seeking to dismiss the complaint in all respects. The
demurrer is pending. The Partnerships deny that there is any merit to
Plaintiff's allegations and intend to vigorously defend this action.
For a discussion of the Southmark bankruptcy, see Item 1 - Business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNERSHIP AND
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RELATED SECURITY HOLDER MATTERS
-------------------------------
(A) There is no established public trading market for limited partnership units,
nor is one expected to develop.
(B) Title of Class Number of Record Unit Holders
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Limited partnership units 2,382 as of January 31, 1997
(C) No distributions were made to the partners in 1996 or 1995 and none are
anticipated in 1997. The General Partner will continue to monitor the
cash reserves and working capital needs of the Partnership to determine
when cash flows will support distributions to the partners. See Item 7
- Management's Discussion and Analysis of Financial Condition and
Results of Operations, and Item 8 - Note 1 "Organization and Summary of
Significant Accounting Policies - Distributions."
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
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The following table sets forth a summary of certain financial data for the
Partnership. This summary should be read in conjunction with the Partnership's
financial statements and notes thereto appearing in Item 8 - Financial
Statements and Supplementary Data.
<TABLE>
<CAPTION>
Statements of Years Ended December 31,
Operations 1996 1995 1994 1993 1992
- ------------------ ------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Rental revenue............... $ 2,251,970 $ 2,456,308 $ 2,950,795 $ 5,655,988 $ 6,168,199
Write-down for permanent
impairment of real estate.. - - - 735,288 5,101,763
Loss on disposition of real
estate...................... - 245,637 - 1,443,330 -
Loss before extraordinary
items....................... (220,762) (308,378) (565,993) (3,829,270)
(7,801,365)
Extraordinary items.......... - - - 3,583,014 119,606
Net loss..................... (220,762) (308,378) (565,993) (246,256) (7,681,759)
Net loss per thousand
limited partnership units:
Loss before extraordinary
items:
Current Income Units........ $ (1.00) $ (1.40) $ (2.56) $ (17.32) $ (35.24)
Growth/Shelter Units........ (14.88) (20.74) (38.04) (257.23) (524.05)
Extraordinary items:
Current Income Units........ - - - 16.20 .54
Growth/Shelter Units........ - - - 240.69 8.03
Net loss:
Current Income Units........ (1.00) (1.40) (2.56) (1.12) (34.70)
Growth/Shelter Units........ (14.88) (20.74) (38.04) (16.54) (516.02)
As of December 31,
Balance Sheets 1996 1995 1994 1993 1992
- -------------- ------------- ------------- -------------- ------------- -------------
Real estate, net............. $ 5,318,692 $ 5,504,538 $ 5,632,109 $ 10,543,632 $ 26,473,696
Asset held for sale.......... - - 4,393,157 - -
Total assets................. 6,164,365 6,407,931 11,314,161 11,558,910 27,626,566
Mortgage notes payable, net.. 5,979,501 6,026,515 9,534,751 9,622,454 25,289,348
Partners' deficit............ (1,794,073) (1,419,024) (1,110,646) (544,653) (298,397)
</TABLE>
Abbey Lane Apartments and Lexington Green Apartments were conveyed via a deed in
lieu of foreclosure on September 30, 1993. Wyoming Mall was sold on March 31,
1995. See Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------- -----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Partnership had $452,443 of cash provided by operations in 1996 as compared
to $448,347 in 1995. Cash received from tenants, cash paid to suppliers, cash
paid to affiliates, interest paid, and property taxes paid decreased due to the
sale of Wyoming Mall in March 1995. The Partnership paid $145,713 of interest
relating to the rescission of limited partnership units in 1996. With the
proceeds from the sale of Wyoming Mall, the Partnership was able to repay all
the affiliate advances and accrued interest in 1995. Therefore, no interest was
paid to affiliates in 1996.
The Partnership provided $448,347 of cash from operations during 1995 as
compared to $500,253 in 1994. The Partnership experienced a reduction in cash
received from tenants due to the sale of Wyoming Mall in March 1995. The
Partnership also experienced declines in cash paid to suppliers, interest paid
and property taxes paid as a result of the sale. With the proceeds from the sale
of Wyoming Mall, the Partnership was able make a $250,000 payment for asset
management fees and repay all the affiliate advances and accrued interest.
During 1995, the Partnership also received $38,749 for a legal settlement with
Southmark and $134,434 as a property tax refund as a result of a successful tax
appeal.
The Partnership expended $241,207, $270,552 and $146,836 for capital
improvements to its properties in 1996, 1995 and 1994, respectively. The
Partnership also received proceeds of $738,914 for the sale of Wyoming Mall on
March 31, 1995.
Net cash used in financing activities was $238,521 for 1996 as compared to
$876,173 and $142,626 in 1995 and 1994, respectively. The Partnership paid
$154,287 to the Limited Partners to rescind 178,000 units in 1996. Principal
payments on mortgage notes payable were $84,234, $91,519 and $121,752 in 1996,
1995 and 1994, respectively. The decrease since 1995 was due to the retirement
of the mortgage note related to Wyoming Mall. The Partnership had received cash
advances from the General Partner or its affiliates and $20,874 of such advances
were repaid in 1994, and during 1995, the improved cash position allowed the
Partnership to repay all outstanding advances from affiliates of the General
Partner in the amount of $784,654.
The Partnership's remaining property, through improved operations as well as
curtailment of expenses, has been able to provide sufficient cash flow to meet
its own working capital requirements. In addition, the sale of Wyoming Mall
enabled the Partnership to meet its general and administrative expenses.
<PAGE>
Short-term liquidity
At December 31, 1996, the Partnership held cash and cash equivalents of
$602,462. The General Partner considers this level of cash reserves to be
adequate to meet the Partnership's operating needs. The General Partner believes
that anticipated operating results for 1997 will be sufficient to fund the
Partnership's budgeted capital improvements for 1997 and to repay the current
portion of the Partnership's mortgage note. Effective January 23, 1997, the
mortgage note payable was sold by HUD to an unaffiliated buyer. The Partnership
is attempting to negotiate a restructuring or refinancing of the mortgage note
with the new lender.
Long-term liquidity
The Partnership determined to evaluate market and other economic conditions to
establish the optimum time to commence liquidation of the Partnership's asset in
accordance with the terms of the Amended Partnership Agreement. Although there
can be no assurance as to the timing of the liquidation due to real estate
market conditions, the general difficulty of disposing of real estate, and other
general economic factors, it is anticipated that such liquidation would result
in the dissolution of the Partnership followed by a liquidating distribution to
Unit holders by December 2001.
Distributions
To maintain adequate cash balances of the Partnership, distributions to Current
Income Unit holders were suspended in 1988. There have been no distributions to
Growth/Shelter Units holders. Distributions to Unit holders will remain
suspended for the foreseeable future. The General Partner will continue to
monitor the cash reserves and working capital needs of the Partnership to
determine when cash flows will support distributions to the Unit holders.
FINANCIAL CONDITION
- -------------------
The accompanying financial statements have been prepared assuming the
Partnership will continue as a going concern. The Partnership incurred losses of
$220,762, $308,378 and $565,993 in 1996, 1995, and 1994, respectively.
At December 31, 1996, the Partnership held cash and cash equivalents of
$602,462. The balance of cash and cash equivalents can be no more than a minimum
level of cash reserves for the remaining property's operations. Operations of
the property in 1997 are expected to provide sufficient positive cash flow for
normal operations and debt service payments. However, Harbour Club III is in
need of major capital improvements in order to maintain occupancy and rental
rates at a level to continue to support operations and debt service. The
necessary capital improvements will have to be funded from outside sources. No
such sources have been identified. Management is currently seeking to negotiate
a restructuring or refinancing to fund these improvements, however such
financing is not assured. If the property is unable to obtain additional funds
and cannot maintain operations at a level to support its current debt, the
property may ultimately be foreclosed on by the lender.
<PAGE>
Harbour Club III is part of a four-phase apartment complex located in
Belleville, Michigan. Phases I and II of the complex are owned by partnerships
in which McNeil Partners, L.P. is the general partner; while Phase IV is owned
by University Real Estate Fund 12, Ltd., ("UREF 12") whose general partner is an
affiliate of Southmark. McREMI had been managing all four phases of the complex
until December 1992, when the property management agreement between McREMI and
UREF 12 was canceled. Additionally, in January 1993, Phase I defaulted on its
mortgage loan to the United States Department of Housing and Urban Development
("HUD"), the former mortgage holder, and, unless a refinancing agreement can be
reached with the new mortgage holder, the property is subject to foreclosure. If
Phase I is lost to foreclosure, it would be extremely difficult to operate
Phases II and III because the pool and clubhouse are located in Phase I. As of
year end, no steps have been taken towards foreclosure of Phase I.
These conditions raise substantial doubt about the Partnership's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
The Partnership was formed to engage in the business of acquiring and operating
income-producing real properties and holding the properties for investment.
Since completion of its capital formation and property acquisition phases in
1986, when it completed the purchase of five properties, the Partnership has
operated its properties for production of income. The Partnership's properties
were adversely affected by competitive and overbuilt markets, resulting in
continuing cash flow problems. In 1988, Southmark Tower in Houston, Texas, was
foreclosed on by the lender in full settlement of the mortgage indebtedness on
the property. In 1993, two of the Partnership's properties, Abbey Lane and
Lexington Green, were conveyed via a deed in lieu of foreclosure in full
settlement of the mortgage indebtedness on the properties. After the sale of
Wyoming Mall in March 1995, the Partnership continues to operate its remaining
property, Harbour Club III.
The Partnership has had little ready cash reserves since its inception, and has
been largely dependent on affiliates to support its operations. Payable to
affiliates for property management fees, Partnership general and administrative
expenses and asset management fees totaled $1,756,367 at December 31, 1996.
Until the Partnership is able to generate cash from operations or sales, the
Partnership will be dependent on its present cash reserves, operation of the
property, or financial support from affiliates. Distributions will remain
suspended until cash reserves are judged adequate.
RESULTS OF OPERATIONS
- ---------------------
1996 compared to 1995
Revenue:
Total Partnership revenues in 1996 decreased $368,709 or 14% as compared to
1995. This decrease is due to the sale of Wyoming Mall in March 1995. Also, in
1995, the Partnership recorded a $38,749 gain on legal settlement and recorded
$134,434 in other income as a result of property tax refund on Harbour Club III.
No such income was recorded in 1996.
Rental revenue decreased $204,338 or 8% for the year ended December 31, 1996 as
compared to the same period in 1995, primarily due to the sale of Wyoming Mall.
<PAGE>
Interest income increased $8,812 or 34% in 1996 as compared to 1995. The
increase is primarily due to higher average cash balances that resulted from the
sale proceeds of Wyoming Mall.
Expenses:
Total expenses decreased $456,325 or 15% for the year ended December 31, 1996 as
compared to the same period of 1995.
During 1995, Wyoming Mall was sold and the effects from the sale were declines
of $97,610 in interest, $74,606 in depreciation and amortization, $10,516 in
property taxes, $24,740 in personnel expenses, $17,518 in property management
fees - affiliates, $11,916 in repairs and maintenance and $33,819 in other
property operating expenses. A $245,637 loss on the sale of Wyoming Mall was
recorded in 1995.
In addition to the sale of Wyoming Mall, other factors affected the level of
expenses reported by the remaining property.
Interest - affiliates decreased $18,568 as compared to 1995. This decrease is
due to the sale of Wyoming Mall which enabled the Partnership to repay all
outstanding affiliate advances, thereby eliminating affiliate interest expense.
The Partnership recorded $145,713 of interest relating to the rescission of
Units in 1996. The Court entered judgment against the Partnership in October
1996 to rescind 178,000 Units with total claims of $347,809. The Plaintiffs
agreed to accept $300,000 in satisfaction of the judgment and the claims for
attorneys' fees pending the approval of the Court.
Depreciation expense increased by $36,042 in 1996 due to the capital
improvements made at Harbour Club III Apartments.
Repairs and maintenance decreased by $35,528 in 1996 as compared to 1995 after
the effect of the sale of Wyoming Mall, noted above. The decrease is due to
reductions in grounds maintenance, courtesy patrol, and other repairs.
1995 compared to 1994
Revenue:
Total Partnership revenues in 1995 decreased $312,327 or 11% as compared to
1994. This decrease is primarily due to the sale of Wyoming Mall in March 1995.
Rental revenue decreased $494,487 or 17% for the year ended December 31, 1995 as
compared to the same period in 1994, primarily due to the sale of Wyoming Mall.
Interest income increased $8,977 or 54% in 1995 as compared to 1994. The
increase is primarily due to higher average cash balances that resulted from the
sale proceeds of Wyoming Mall.
The Partnership recorded a $38,749 gain on legal settlement during the first
half of 1995. In May 1995, the Partnership received cash of $29,292 and common
and preferred stock in the reorganized Southmark that was subsequently sold for
$9,457, as full satisfaction of claims previously filed in the Bankruptcy Court.
The Partnership also recorded $134,434 in other income during 1995 as a result
of 1993-1994 property tax refund on Harbour Club III. This was the result of the
successful tax appeal to reduce the property's taxable base value.
<PAGE>
Expenses:
Total expenses decreased $569,942 or 16% for the year ended December 31, 1995 as
compared to the same period of 1994.
During 1995, Wyoming Mall was sold and the effects from the sale were declines
of $293,450 in interest, $225,217 in depreciation and amortization, $42,455 in
property taxes, $25,418 in personnel expenses, $35,249 in property management
fees - affiliates, $29,219 in repairs and maintenance and $79,833 in other
property operating expenses.
In addition to the sale of Wyoming Mall, other factors affected the level of
expenses reported by the remaining property.
Interest - affiliates decreased $53,034 or 74% in 1995 as compared to 1994. The
sale of Wyoming Mall enabled the Partnership to repay all outstanding affiliate
advances, thereby reducing affiliate interest expense.
Depreciation and amortization increased by $25,632, net of the effect of Wyoming
Mall, due to the capital improvements made at Harbour Club III.
Property tax expense decreased $53,554, net of the effect of Wyoming Mall, in
1995 as compared to 1994 due to the reduction in property tax expense at Harbour
Club III Apartments that occurred from a successful tax appeal.
Property management fees-affiliates increased by $7,272, net of the effect of
Wyoming Mall, in 1995 as compared to 1994 due to the increase in rental revenue
generated at Harbour Club III.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
<TABLE>
<CAPTION>
Page
Number
INDEX TO FINANCIAL STATEMENTS
- -----------------------------
<S> <C>
Financial Statements:
Report of Independent Public Accountants....................................... 15
Balance Sheets at December 31, 1996 and 1995................................... 16
Statements of Operations for each of the three years in the period
ended December 31, 1996........................................................ 17
Statements of Partners' Deficit for each of the three years in
the period ended December 31, 1996............................................. 18
Statements of Cash Flows for each of the three years in the period
ended December 31, 1996........................................................ 19
Notes to Financial Statements.................................................. 21
Financial Statement Schedules -
Schedule III - Real Estate Investment and Accumulated
Depreciation and Amortization............................................ 31
</TABLE>
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of McNeil Real Estate Fund XXII, L.P.:
We have audited the accompanying balance sheets of McNeil Real Estate Fund XXII,
L.P. (a California limited partnership) as of December 31, 1996 and 1995, and
the related statements of operations, partners' deficit 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
Partnership's management. Our responsibility is to express an opinion on these
financial statements and the 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 McNeil Real Estate Fund XXII,
L.P. 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 discussed in Note 7 to the
financial statements, the Partnership has suffered recurring losses from
operations and the Partnership's only property is in need of major capital
improvements in order to maintain occupancy and rental rates at a level to
continue to support operations and debt service. Additionally, the property is
part of a four phase complex. Phase I of the complex defaulted on its mortgage
loan in January 1993. The property is subject to foreclosure unless a
refinancing agreement can be reached with the lender. If Phase I is lost to
foreclosure, it would have a significant impact on the operations of Phase III,
owned by the Partnership, as the pool and clubhouse are located in Phase I. As
of year end, no steps have been taken towards the foreclosure of Phase I.
Management's plans in regard to these matters are also described in Note 7.
These conditions raise substantial doubt about the Partnership's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements 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 audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Dallas, Texas
March 10, 1997
<PAGE>
McNEIL REAL ESTATE FUND XXII, L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1996 1995
---------------- --------------
ASSETS
- ------
<S> <C> <C>
Real estate investments:
Land..................................................... $ 380,414 $ 380,414
Buildings and improvements............................... 10,084,053 9,842,846
-------------- -------------
10,464,467 10,223,260
Less: Accumulated depreciation and
amortization........................................... (5,145,775) (4,718,722)
-------------- -------------
5,318,692 5,504,538
Cash and cash equivalents................................... 602,462 629,747
Cash segregated for security deposits....................... 66,510 76,490
Accounts receivable......................................... 4,614 4,683
Escrow deposits............................................. 160,642 180,537
Prepaid expenses and other assets, net...................... 11,445 11,936
-------------- -------------
$ 6,164,365 $ 6,407,931
============== =============
LIABILITIES AND PARTNERS' DEFICIT
- ---------------------------------
Mortgage notes payable, net................................. $ 5,979,501 $ 6,026,515
Accounts payable and accrued expenses....................... 90,572 133,150
Accrued property taxes...................................... 66,427 65,931
Payable to affiliates - General Partner..................... 1,756,367 1,527,935
Security deposits and deferred rental income................ 65,571 73,424
-------------- -------------
7,958,438 7,826,955
-------------- -------------
Partners' deficit:
Limited partners - 55,000,000 Units authorized;
33,176,117 and 33,208,117 Units issued and
outstanding at December 31, 1996 and 1995,
respectively, (19,688,088 and 19,825,588
Current Income Units outstanding at December
31, 1996 and 1995, respectively, and
13,310,029 and 13,382,529 Growth/Shelter
Units at December 31, 1996 and 1995, respectively).... (1,541,156) (1,168,315)
General Partner.......................................... (252,917) (250,709)
-------------- -------------
(1,794,073) (1,419,024)
-------------- -------------
$ 6,164,365 $ 6,407,931
============== =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XXII, L.P.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------
1996 1995 1994
-------------- -------------- ---------------
<S> <C> <C> <C>
Revenue:
Rental revenue.......................... $ 2,251,970 $ 2,456,308 $ 2,950,795
Interest................................ 34,461 25,649 16,672
Gain on settlement of legal
expenses.............................. - 38,749 -
Other income............................ - 134,434 -
------------- ------------- --------------
Total revenue......................... 2,286,431 2,655,140 2,967,467
------------- ------------- --------------
Expenses:
Interest................................ 581,533 683,664 981,281
Interest - affiliates................... - 18,568 71,602
Interest - rescission of limited
partnership units..................... 145,713 - -
Depreciation and amortization........... 427,053 465,617 665,202
Property taxes.......................... 153,318 169,039 265,048
Personnel expenses...................... 291,417 317,753 350,089
Repairs and maintenance................. 266,224 313,668 310,645
Property management fees -
affiliates............................ 112,374 126,807 154,784
Other property operating expenses....... 227,802 279,043 365,478
General and administrative.............. 73,568 64,085 73,968
General and administrative -
affiliates............................ 228,191 279,637 295,363
Loss on disposition of real estate...... - 245,637 -
------------- ------------- --------------
Total expenses........................ 2,507,193 2,963,518 3,533,460
------------- ------------- --------------
Net loss................................... $ (220,762) $ (308,378) $ (565,993)
============ ============= =============
Net loss allocable to limited
partners - Current Income Unit.......... $ (19,868) $ (27,754) $ (50,939)
Net loss allocable to limited
partners - Growth/Shelter Unit.......... (198,686) (277,540) (509,394)
Net loss allocable to General
Partner................................. (2,208) (3,084) (5,660)
------------- ------------- --------------
Net loss................................... $ (220,762) $ (308,378) $ (565,993)
============= ============= ==============
Net loss per thousand limited partnership
units:
Current Income Units....................... $ (1.00) $ (1.40) $ (2.56)
============= ============= =============
Growth/Shelter Units....................... $ (14.88) $ (20.74) $ (38.04)
============= ============= =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XXII, L.P.
STATEMENTS OF PARTNERS' DEFICIT
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Total
General Limited Partners'
Partner Partners Deficit
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at December 31, 1993.............. $ (241,965) $ (302,688) $ (544,653)
Net loss
General Partner........................ (5,660) - (5,660)
Current Income Units................... - (50,939) (50,939)
Growth/Shelter Units................... - (509,394) (509,394)
------------- ------------- -------------
Total net loss............................ (5,660) (560,333) (565,993)
------------- ------------- -------------
Balance at December 31, 1994.............. (247,625) (863,021) (1,110,646)
Net loss
General Partner........................ (3,084) - (3,084)
Current Income Units................... - (27,754) (27,754)
Growth/Shelter Units................... - (277,540) (277,540)
------------- ------------- --------------
Total net loss............................ (3,084) (305,294) (308,378)
------------- ------------- -------------
Balance at December 31, 1995.............. (250,709) (1,168,315) (1,419,024)
Rescission of 178,000 limited
partnership units (net of distribution
previously paid of $23,713)............ - (154,287) (154,287)
Net loss
General Partner........................ (2,208) - (2,208)
Current Income Units................... - (19,868) (19,868)
Growth/Shelter Units................... - (198,686) (198,686)
------------- ------------- --------------
Total net loss............................ (2,208) (218,554) (220,762)
------------- ------------- -------------
Balance at December 31, 1996.............. $ (252,917) $ (1,541,156) $ (1,794,073)
============= ============= =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XXII, L.P.
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------
1996 1995 1994
-------------- -------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from tenants.............. $ 2,261,315 $ 2,527,267 $ 2,945,966
Cash received from legal settlement..... - 38,749 -
Cash paid to suppliers.................. (918,922) (945,403) (1,021,436)
Cash paid to affiliates................. (112,133) (380,456) (153,489)
Interest received....................... 34,461 25,649 16,672
Interest paid........................... (544,804) (676,971) (936,355)
Interest paid to affiliates............. - (149,043) -
Interest paid to Limited Partners for
rescission of units................... (145,713) - -
Property taxes paid..................... (121,761) (125,879) (351,105)
Property taxes refunded................. - 134,434 -
------------- ------------- --------------
Net cash provided by operating
activities.............................. 452,443 448,347 500,253
------------- ------------- --------------
Cash flows from investing activities:
Additions to real estate
investments........................... (241,207) (270,552) (146,836)
Proceeds from disposition
of real estate........................ - 738,914 -
------------- ------------- --------------
Net cash provided by (used in)
investing activities (241,207) 468,362 (146,836)
------------- ------------- --------------
Cash flows from financing activities:
Principal payments on mortgage
notes payable......................... (84,234) (91,519) (121,752)
Repayment of advances from
affiliates - General Partner.......... - (784,654) (20,874)
Rescission of limited partnership
units................................. (154,287) - -
------------- ------------- --------------
Net cash used in financing activities...... (238,521) (876,173) (142,626)
------------- ------------- --------------
Net increase (decrease) in cash and
cash equivalents........................ (27,285) 40,536 210,791
Cash and cash equivalents at
beginning of year....................... 629,747 589,211 378,420
------------- ------------- --------------
Cash and cash equivalents at end
of year................................. $ 602,462 $ 629,747 $ 589,211
============= ============= ==============
</TABLE>
See discussion of noncash investing and financing activities in Note 6.
See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XXII, L.P.
STATEMENTS OF CASH FLOWS
Reconciliation of Net Loss to Net Cash Provided by
Operating Activities
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------
1996 1995 1994
--------------- --------------- ----------------
<S> <C> <C> <C>
Net loss................................... $ (220,762) $ (308,378) $ (565,993)
------------- ------------- --------------
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization........... 427,053 465,617 665,202
Amortization of discounts on
mortgage notes payable................ 37,220 35,620 34,049
Amortization of deferred borrowing
costs................................. - 2,936 11,744
Interest added to advances from
affiliates - General Partner.......... - - 71,602
Loss on disposition of real estate...... - 245,637 -
Changes in assets and liabilities:
Cash segregated for security
deposits............................ 9,980 11,348 (14,465)
Accounts receivable................... 69 54,836 32,100
Escrow deposits....................... 19,895 177,321 (101,497)
Prepaid expenses and other assets..... 491 7,902 9,292
Accounts payable and accrued
expenses............................ (42,578) (145,096) 28,306
Accrued property taxes ............... 496 (130,323) 17,911
Payable to affiliates - General
Partner............................. 228,432 25,988 296,658
Security deposits and deferred
rental income....................... (7,853) 4,939 15,344
------------- ------------- --------------
Total adjustments................. 673,205 756,725 1,066,246
------------- ------------- --------------
Net cash provided by
operating activities.................... $ 452,443 $ 448,347 $ 500,253
============= ============= ==============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XXII, L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------
Organization
- ------------
McNeil Real Estate Fund XXII, L.P., (the "Partnership"), formerly known as
Southmark Realty Partners II, Ltd. was organized on November 30, 1984 as a
limited partnership under the provisions of the California Revised Limited
Partnership Act to acquire and operate commercial and residential properties.
The general partner of the Partnership is McNeil Partners, L.P. (the "General
Partner"), a Delaware limited partnership, an affiliate of Robert A. McNeil
("McNeil"). The General Partner was elected at a meeting of limited partners on
March 26, 1992, at which time an amended and restated partnership agreement (the
"Amended Partnership Agreement") was adopted. The principal place of business
for the Partnership and the General Partner is 13760 Noel Road, Suite 600, LB70,
Dallas, Texas, 75240.
The Partnership is engaged in real estate activities, including the ownership,
operation and management of residential and retail real estate and other real
estate related assets. The Partnership has determined to evaluate market and
other economic conditions to establish the optimum time to commence a
liquidation of the Partnership's asset in accordance with the terms of the
Amended Partnership Agreement. At December 31, 1996, the Partnership owned one
income-producing property as described in Note 4 - Real Estate Investment.
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.
The Partnership's financial statements include the accounts of Harbour Club
Associates Limited Partnership ("Harbour Club"), a single asset limited
partnership formed to accommodate the refinancing of Harbour Club III
Apartments. The Partnership is the general partner of Harbour Club, and holds a
99.99% interest in Harbour Club. The Partnership exercises effective control of
Harbour Club. The minority interest is not presented as it is both negative and
immaterial.
% of Ownership Interest
Tier Partnership Partnership General Partner
- ---------------- ----------- ---------------
General Partnerships:
Harbour Club Associates 99% 1%
<PAGE>
Real Estate Investments
- -----------------------
The real estate investment is generally stated at the lower of depreciated cost
or fair value. The real estate investment is reviewed for impairment whenever
events or changes in circumstances indicate that its carrying amount may not be
recoverable. When the carrying value of a property exceeds the sum of all
estimated future cash flows, an impairment loss is recognized. At such time, a
write-down is recorded to reduce the basis of the property to its estimated
recoverable amount.
The Partnership's method of accounting for real estate investments is in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("SFAS 121"), which the Partnership adopted effective January 1, 1996. The
adoption of SFAS 121 did not have a material impact on the accompanying
financial statements.
Improvements and betterments are capitalized and expensed through depreciation
charges. Repairs and maintenance are charged to operations as incurred.
Depreciation and Amortization
- -----------------------------
Buildings and improvements are depreciated using the straight-line method over
the estimated useful lives of the assets, ranging from 5 to 25 years. Tenant
improvements were capitalized and amortized over the terms of the related tenant
lease using the straight-line method.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include cash on hand and cash on deposit with
financial institutions with original maturities of three months or less.
Carrying amounts for cash and cash equivalents approximate fair value.
Escrow Deposits
- ---------------
The Partnership is required to maintain escrow accounts in accordance with the
terms of its mortgage indebtedness agreement. These escrow accounts are
controlled by the mortgagee and are used for payment of property taxes, hazard
insurance, capital improvements and/or property replacements. Carrying amounts
for escrow deposits approximate fair value.
Deferred Borrowing Costs
- ------------------------
Loan fees and other related costs incurred to obtain long-term financing on real
property are capitalized and are included in prepaid expenses and other assets.
Amortization is recorded using a method that approximates the effective interest
method over the term of the related mortgage note payable. Amortization of
deferred borrowing costs is included in interest expense on the Statements of
Operations.
<PAGE>
Discount on Mortgage Note Payable
- ---------------------------------
Discount on mortgage note payable is being amortized over the remaining term of
the related notes using the effective interest method. Amortization of discount
on mortgage note payable is included in interest expense on the Statements of
Operations.
Rental Revenue
- --------------
The Partnership leases its residential property under short-term operating
leases. Lease terms generally are less than one year in duration. Rental income
is recognized as earned.
The Partnership leased its commercial property (which was sold in 1995 - see
Note 6 - "Property Disposition") under non-cancelable operating leases. Certain
leases provided concessions and/or periods of escalating or free rent. Rental
income was recognized on a straight-line basis over the term of the related
lease.
Income Taxes
- ------------
No provision for Federal income taxes is necessary in the financial statements
of the Partnership because, as a partnership, it is not subject to Federal
income tax and the tax effect of its activities accrues to the partners.
Allocation of Net Income and Net Loss
- -------------------------------------
The Amended Partnership Agreement generally provides that net income (other than
net income arising from sales or refinancing) shall be allocated one percent
(1%) to the General Partner and ninety-nine percent (99%) to the limited
partners equally as a group, and net loss shall be allocated one percent (1%) to
the General Partner, nine percent (9%) to the limited partners owning Current
Income Units and ninety percent (90%) to the limited partners owning
Growth/Shelter Units.
For financial statement purposes, net income arising from sales or refinancings
shall be allocated one percent (1%) to the General Partner and ninety-nine
percent (99%) to the limited partners equally as a group, and net loss shall be
allocated one percent (1%) to the General Partner, nine percent (9%) to the
limited partners owning Current Income Units and ninety percent (90%) to the
limited partners owning Growth/Shelter Units.
For tax reporting purposes, net income arising from sales or refinancing shall
be allocated as follows: (a) first, amounts of such net income shall be
allocated among the General Partner and limited partners in proportion to, and
to the extent of, the portion of such partner's share of the net decrease in
Partnership Minimum Gain determined under Treasury Regulations, (b) second, to
the General Partner and limited partners in proportion to, and to the extent of,
the amount by which their respective capital account balances are negative by
more than their respective remaining shares of the Partnership's Minimum Gain
attributable to property still owned by the Partnership and (c) third, 1% of
such net income shall be allocated to the General Partner and 99% of such net
income shall be allocated to the limited partners.
<PAGE>
Federal income tax law provides that the allocation of loss to a partner will
not be recognized unless the allocation is in accordance with a partner's
interest in the partnership or the allocation has substantial economic effect.
Internal Revenue Code Section 704(b) and accompanying Treasury Regulations
establish criteria for allocation of Partnership deductions attributable to
debt. The Partnership's tax allocations for 1996, 1995 and 1994 have been made
in accordance with these provisions.
Distributions
- -------------
At the discretion of the General Partner, distributable cash (other than cash
from sales or refinancing) shall be distributed 100% to the limited partners,
with such distributions first paying the Current Income Priority Return and then
the Growth/Shelter Priority Return. Also at the discretion of the General
Partner, the limited partners will receive 100% of distributable cash from sales
or refinancings, with such distributions first paying the Current Income
Priority Return, then the Growth/Shelter Priority Return, then repayment of
Original Invested Capital, and of the remainder, 16.66% to limited partners
owning Current Income Units and 83.34% to limited partners owning Growth/Shelter
Units. The limited partners' Current Income and Growth/Shelter Priority Returns
represent a 10% cumulative return on their Adjusted Invested Capital balance, as
defined. No distributions of Current Income Priority Returns have been made
since 1988, and no distributions of Growth/Shelter Priority Returns have been
made since the Partnership began.
In connection with a Terminating Disposition, as defined, cash from sales or
refinancings and any remaining reserves shall be allocated among, and
distributed to, the General Partner and limited partners in proportion to, and
to the extent of, their positive capital account balances after the net income
has been allocated pursuant to the above.
Net Loss Per Thousand Limited Partnership Units
- -----------------------------------------------
Net loss per thousand limited partnership units ("Units") is computed by
dividing net loss allocated to the limited partners by the weighted average
number of limited partnership Units outstanding expressed in thousands. Per
thousand unit information has been computed based on 19,794, 19,826 and 19,876
weighted average Current Income Units outstanding in 1996, 1995 and 1994,
respectively, and 13,349, 13,383 and 13,393 weighted average Growth/Shelter
Units outstanding in 1996, 1995, and 1994, respectively.
NOTE 2 - TRANSACTIONS WITH AFFILIATES
- --------------------------------------
The Partnership pays property management fees equal to 5% of the gross rental
receipts for its residential property and paid 6% of gross rental receipts for
its commercial property to McNeil Real Estate Management, Inc. ("McREMI"), an
affiliate of the General Partner, for providing property management services for
the Partnership's residential and commercial properties and leasing services for
its residential property.
The Partnership reimburses McREMI for its costs, including overhead, of
administering the Partnership's affairs.
<PAGE>
Under the terms of the Amended Partnership Agreement, the Partnership is paying
an asset management fee, retroactive to February 14, 1991, which is payable to
the new General Partner. Through 1999, the asset management fee is calculated as
1% of the Partnership's tangible asset value. Tangible asset value is determined
by using the greater of (i) an amount calculated by applying a capitalization
rate of 9 percent to the annualized net operating income of each property or
(ii) a value of $10,000 per apartment unit for residential property and $50 per
gross square foot for commercial property to arrive at the property tangible
asset value. The property tangible asset value is then added to the book value
of all other assets, excluding intangible items. The fee percentage decreases
subsequent to 1999.
Compensation and reimbursements paid to or accrued for the benefit of the
General Partner or its affiliates are as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------
1996 1995 1994
-------------- -------------- ---------------
<S> <C> <C> <C>
Property management fees................... $ 112,374 $ 126,807 $ 154,784
Charged to interest - affiliates:
Interest on advances from
affiliates - General Partner.......... - 18,568 71,602
Charged to general and
administrative - affiliates:
Partnership administration.............. 81,704 114,003 114,924
Sale disposition fee - Wyoming Mall..... - 138,750 -
Asset Management Fee.................... 146,487 165,634 180,439
------------- ------------- --------------
$ 340,565 $ 563,762 $ 521,749
============= ============= ==============
</TABLE>
Payable to affiliates - General Partner at December 31, 1996 and 1995 consisted
primarily of unpaid property management fees, Partnership general and
administrative expenses, and asset management fees and are due and payable from
current operations.
Prior to the restructuring of the Partnership, affiliates of the Original
General Partner advanced funds to enable the Partnership to meet its working
capital requirements. These advances were purchased by, and were repaid to, the
General Partner.
The General Partner has, at its discretion, advanced funds to the Partnership to
fund working capital requirements. The advances were unsecured, due on demand
and accrued interest at the prime lending rate of Bank of America plus 1%. All
advances to the General Partner were paid in full during 1995. The General
Partner is not obligated to advance funds to the Partnership and there is no
assurance that the Partnership will receive additional funds.
McNeil Real Estate Fund XXI, L.P., an affiliate of the General Partner and the
joint owner of Wyoming Mall, advanced $320,874 in 1992 to the Partnership for
use in tenant improvements and operations at Wyoming Mall. During 1994, the
Partnership repaid $20,874 of these advances. During 1995, the Partnership
repaid the $300,000 remaining advance. The advances were unsecured, due on
demand and accrued interest at a rate of prime plus 3 1/2%.
<PAGE>
In April 1995, the Partnership utilized the proceeds from the sale of Wyoming
Mall to repay all outstanding affiliate advances and the related accrued
interest.
NOTE 3 - TAXABLE LOSS
- ---------------------
McNeil Real Estate Fund XXII, L.P. is a partnership and is not subject to
Federal and state income taxes. Accordingly, no recognition has been given to
income taxes in the accompanying financial statements of the Partnership since
the income or loss of the Partnership is to be included in the tax returns of
the individual partners. The tax returns of the Partnership are subject to
examination by Federal and state taxing authorities. If such examinations result
in adjustments to distributive shares of taxable income or loss, the tax
liability of the partners could be adjusted accordingly.
The Partnership's net assets and liabilities for tax purposes exceeded the net
assets and liabilities for financial reporting purposes by $6,503,402 in 1996,
$6,235,169 in 1995 and $6,774,370 in 1994.
NOTE 4 - REAL ESTATE INVESTMENT
- -------------------------------
The basis and accumulated depreciation of the Partnership's real estate
investment at December 31, 1996 and 1995, is set forth in the following tables:
<TABLE>
<CAPTION>
Buildings and Accumulated Net Book
Land Improvements Depreciation Value
----------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Harbour Club III
Belleville, MI
1996 $ 380,414 $ 10,084,053 $ (5,145,775) $ 5,318,692
========== ============ ============ ===========
1995 $ 380,414 $ 9,842,846 $ (4,718,722) $ 5,504,538
========== ============ ============ ===========
</TABLE>
<PAGE>
NOTE 5 - MORTGAGE NOTE PAYABLE
- ------------------------------
The following sets forth mortgage note payable of the Partnership at December
31, 1996 and 1995. The mortgage note is secured by the underlying real estate
investment.
<TABLE>
<CAPTION>
Mortgage Annual Monthly
Lien Interest Payments/ December 31,
Property Position (a) Rates % Maturity 1996 1995
- -------- --------------- ------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Harbour Club III First 7.000 $ 49,395 04/24 $ 7,218,427 $ 7,302,661
Discount (b) (1,238,926) (1,276,146)
-------------- -------------
$ 5,979,501 $ 6,026,515
============== =============
</TABLE>
(a) The debt is non-recourse to the Partnership.
(b) The discount is based on an effective interest rate of 9.09%.
Scheduled principal maturities of the mortgage note under the existing
agreement, excluding the discount of $1,238,926, are as follows:
1997.................................... $ 90,321
1998.................................... 96,851
1999.................................... 103,852
2000.................................... 111,360
2001.................................... 119,410
Thereafter.............................. 6,696,633
----------
Total $ 7,218,427
==========
Based on borrowing rates currently available to the Partnership for a mortgage
loan with similar terms and average maturities, the fair value of the mortgage
note payable was approximately $6,262,000 as of December 31, 1996 and $6,507,000
as of December 31, 1995.
<PAGE>
NOTE 6 - PROPERTY DISPOSITION
- -----------------------------
On March 31, 1995, Wyoming Mall was sold to an unrelated third party for a cash
price of $9,250,000. The Partnership had a 50% undivided interest in the assets,
liabilities and operations of Wyoming Mall, owned jointly with McNeil Real
Estate Fund XXI, L.P. Cash proceeds and the loss on the disposition is detailed
below:
Loss on Sale Cash Proceeds
------------ -------------
Sales Price............................. $ 4,625,000 $ 4,625,000
Selling costs........................... (234,838) (234,838)
Mortgage note prepayment penalty........ (138,441) (138,441)
Carrying value.......................... (4,325,663)
Accounts receivable..................... (81,749)
Deferred borrowing costs................ (49,910)
Prepaid expenses........................ (40,036)
------------
Loss on disposition of real estate...... $ (245,637)
============
Retirement of mortgage note............. (3,452,337)
Payment of 1994 taxes at closing........ (23,735)
Real estate tax proration............... (14,154)
Credit for security deposit liability... (22,581)
-----------
Net cash proceeds....................... $ 738,914
===========
The selling costs above include a disposition fee at 3% of the gross sales price
paid the to General Partner in the amount of $138,750.
NOTE 7 - FINANCIAL CONDITION AND GOING CONCERN CONSIDERATIONS
- -------------------------------------------------------------
The accompanying financial statements have been prepared assuming the
Partnership will continue as a going concern. The Partnership incurred losses of
$220,762, $308,378 and $565,993 in 1996, 1995, and 1994, respectively.
The Partnership's remaining property, through improved operations as well as
curtailment of expenses, has been able to provide sufficient cash flow to meet
its own working capital requirements. In addition, the sale of Wyoming Mall
enabled the Partnership to meet its general and administrative expenses;
therefore, no cash advances were required during 1996.
At December 31, 1996, the Partnership held cash and cash equivalents of
$602,462. The balance of cash and cash equivalents can be no more than a minimum
level of cash reserves for the remaining property's operations. Operations of
the property in 1997 are expected to provide sufficient positive cash flow for
normal operations and debt service payments. However, Harbour Club III is in
need of major capital improvements in order to maintain occupancy and rental
<PAGE>
rates at a level to continue to support operations and debt service. The
necessary capital improvements will have to be funded from outside sources. No
such sources have been identified. Management is currently seeking to negotiate
a restructuring or refinancing to fund these improvements, however such
financing is not assured. If the property is unable to obtain additional funds
and cannot maintain operations at a level to support its current debt, the
property may ultimately be foreclosed on by the lender.
Harbour Club III is part of a four-phase apartment complex located in
Belleville, Michigan. Phases I and II of the complex are owned by partnerships
in which McNeil Partners, L.P. is the general partner; Phase IV is owned by
University Real Estate Fund 12, Ltd., ("UREF 12") whose general partner is an
affiliate of Southmark. McREMI had been managing all four phases of the complex
until December 1992, when the property management agreement between McREMI and
UREF 12 was canceled. Additionally, in January 1993, Phase 1 defaulted on its
mortgage loan to the United States Department of Housing and Urban Development,
the former mortgage holder, and, unless a refinancing agreement can be reached
with the new mortgage holder, the property is subject to foreclosure. If Phase I
is lost to foreclosure, it would be extremely difficult to operate Phases II and
III because the pool and clubhouse are located in Phase I. As of year end, no
steps have been taken towards the foreclosure of Phase I.
These conditions raise substantial doubt about the Partnership's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
NOTE 8 - LEGAL PROCEEDINGS
- --------------------------
The Partnership is not party to, nor are any of the Partnership's property the
subject of, any material pending legal proceedings, other than ordinary routine
litigation incidental to the Partnership, except for the following:
1) HCW Pension Real Estate Fund, Ltd. et al. v. Ernst & Young, BDO Seidman
et al. (Case #92-06560-A). This suit was filed on behalf of the Partnership
and other affiliated partnerships (as defined in this Section 1, the
"Affiliated Partnerships") on May 26, 1992, in the 14th Judicial District
Court of Dallas County. The petition sought recovery against the
Partnership's former auditors, Ernst & Young, for negligence and fraud in
failing to detect and/or report overcharges of fees/expenses by Southmark,
the former general partner. The former auditors initially asserted
counterclaims against the Affiliated Partnerships based on alleged
fraudulent misrepresentations made to the auditors by the former management
of the Affiliated Partnerships (Southmark) in the form of client
representation letters executed and delivered to the auditors by Southmark
management. The counterclaims sought recovery of attorneys' fees and costs
incurred in defending this action. The counterclaims were later dismissed
on appeal, as discussed below.
The trial court granted summary judgment against the Affiliated
Partnerships based on the statute of limitations; however, on appeal, the
Dallas Court of Appeals reversed the trial court and remanded for trial the
Affiliated Partnerships' fraud claims against Ernst & Young. The Texas
Supreme Court denied Ernst & Young's application for writ of error on
January 11, 1996. Shortly before trial, the district court judge once again
granted summary judgment against the Affiliated Partnerships on December 2,
1996. The Partnership is continuing to pursue vigorously its claims against
Ernst & Young; however, the final outcome of this litigation cannot be
determined at this time.
<PAGE>
2) Martha Hess, et al. v. Southmark Equity Partners II, Ltd., Southmark
Income Investors, Ltd., Southmark Equity Partners, Ltd., Southmark Realty
Partners III, Ltd., Southmark Realty Partners II, Ltd. (McNeil Real Estate
Fund XXII, L.P.), McNeil Partners, L.P. et al. ("Hess"); Kotowski v.
Southmark Equity Partners, Ltd. and Donald Arceri v. Southmark Income
Investors, Ltd. - Illinois Appellate Court for the First District, Fifth
Division, as consolidated Case No. 90-107 (remanded back to Trial Court -
Circuit Court of Cook County, Illinois County Department, Chancery
Division, as consolidated Case No. 88 CH 4670 (L92026).
Consolidated with these cases were an additional 14 matters against
unrelated partnership entities. The Hess case was filed on May 20, 1988, by
Martha Hess, individually, and on behalf of a putative class of parties
similarly situated. The original, first, second and third amended
complaints in Hess sought rescission, pursuant to the Illinois Securities
Act, of over $2.7 million of principal invested in five (5) Southmark (now
McNeil) partnerships (as defined in this Section 2, the "Defendants"), and
other relief including damages for breach of fiduciary duty and violation
of the Illinois Consumer Fraud and Deceptive Business Practices Act. The
original, first, second and third amended complaints in Hess were dismissed
against the defendant-group because the Appellate Court held that they were
not the proper subject of a class action complaint. Hess was, thereafter,
amended a fourth time to state causes of action against unrelated
partnership entities. Hess went to judgment against that unrelated entity
and the judgment, along with the prior dismissal of the class action, was
appealed. The Hess appeal was decided by the Appellate Court during 1992.
The Appellate Court affirmed the dismissal of the breach of fiduciary duty
and consumer fraud claims. The Appellate Court did, however, reverse in
part, holding that certain putative class members could file class action
complaints against the defendant-group, which pursuant to the Appellate
Court's ruling, included the Partnership. Although leave to appeal to the
Illinois Supreme Court was sought, the Illinois Supreme Court refused to
hear the appeal. On June 15, 1994, the Appellate Court issued its mandate
sending the case back to Trial Court.
In late January 1995, plaintiffs filed a Motion to File an Amended
Consolidated Class Action Complaint, which amends the complaint to name
McNeil Partners, L.P. as the successor general partner to Southmark
Investment Group. In February 1995, Plaintiffs filed a Motion for Class
Certification. The amended cases against the defendant-group, and others
are proceeding under the caption George and Joy Krugler v. I.R.E. Real
Estate Income Fund, Jerry and Barbara Neumann v. Southmark Equity Partners
II (McNeil Real Estate Fund XXV, L.P.), Richard and Theresa Bartoszewski v.
Southmark Realty Partners III (McNeil Real Estate Fund XXIII, L.P.), and
Edward and Rose Weskerna v. Southmark Realty Partners II (McNeil Real
Estate Fund XXII, L.P.).
In September 1995, the Court granted plaintiffs' Motion to File an Amended
Complaint, to Consolidate and for Class Certification. Defendants answered
the complaint and plead that the plaintiffs did not give timely notice of
their desire to rescind within six months of knowing that right, as
required by law.
Plaintiffs filed a Motion for Summary Judgment against the remaining
partnership defendants, as well as the initial general partners. The Court
ruled on plaintiffs' Motion for Summary Judgment on April 25, 1996, and
entered partial summary judgment against the Partnership, as well as the
initial general partner. Summary judgment against McNeil Partners, L.P., as
the successor general partner, was not sought.
<PAGE>
On October 22, 1996, the Court entered judgment against the Partnership to
rescind 178,000 limited partnership Units with total claims of $347,809.
The claims consisted of the $178,000 original purchase price of the Units,
net of distributions previously paid of $23,713, plus $193,522 in interest.
The Defendants were able to negotiate a settlement for a lesser amount; and
accordingly, on December 23, 1996, the amount of $300,000 was paid as full
and complete settlement of all claims, including attorneys' fees.
3) Nicpon v. Southmark Realty Partners II (presently known as McNeil Real
Estate Fund XXII, L.P.) 89 CH 4118. Currently proceeding as Edward and Rose
Weskerna v. Southmark Realty Partners II (McNeil Real Estate Fund XXII,
L.P.).
This action was consolidated in September 1995 with the Hess case discussed
above.
4) Dick and Aloma Anderson v. McNeil Real Estate Fund XXII, L.P. , McNeil
Partners, L.P., Wayne T. Shipp, the Wayne Shipp Agency, Inc., Southmark
Investment Group, Inc. and Southmark Realty Partners, Ltd. This lawsuit was
filed in November 1993, in Washington State in the Clark County Superior
Court. In 1985, the plaintiffs apparently spent $22,000 to purchase limited
partnership interests in Southmark Realty Partners Ltd. II , (not named by
them as a defendant ) whose name is now McNeil Real Estate Fund XXII, L.P.
(the "Partnership"). Plaintiffs allege that in connection with the
transactions by which McNeil Partners, L.P. became general partner of the
Partnership, and by which certain changes were made in the Partnership, the
McNeil entities engaged in the offer and/or sale of unregistered securities
in violation of Washington law. The plaintiffs have alleged that certain of
the other defendants -- specifically Mr. Shipp and the Shipp Insurance
Agency -- engaged in fraud in connection with the sale of limited
partnership interests in the Partnership to plaintiffs. The plaintiffs have
not made fraud allegations against any of the McNeil or Southmark entities.
The majority of plaintiffs' claims against the Partnership are based on
allegations that the securities are not registered in the State of
Washington. Counsel's research indicates that there are two possible
exemptions to the registration of securities which apply to this matter.
These statutory exceptions are under review by the plaintiffs' attorney.
Counsel for the Partnership was contacted recently and asked whether the
Partnership would be interested in repurchasing Plaintiffs' units at a
discount. Plaintiffs will be advised of their option to abandon their units
back to the Partnership for no consideration. The ultimate outcome of this
proceeding cannot be determined at this time.
5) James F. Schofield, Gerald C. Gillett, Donna S. Gillett, Jeffrey Homburger,
Elizabeth Jung, Robert Lewis, and Warren Heller et al. v. McNeil Partners
L.P., McNeil Investors, Inc., McNeil Real Estate Management, Inc., Robert
A. McNeil, Carole J. McNeil, McNeil Pacific Investors Fund 1972, Ltd.,
McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil
Real Estate Fund XI, Ltd., McNeil Real Estate Fund XII, Ltd., McNeil Real
Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate
Fund XX, L.P., McNeil Real Estate Fund XXI, L.P., McNeil Real Estate Fund
XXII, L.P., McNeil Real Estate Fund XXIV, L.P., McNeil Real Estate Fund
XXV, L.P., McNeil Real Estate Fund XXVI, L.P., and McNeil Real Estate Fund
XXVII, L.P., et al. - Superior Court of the State of California for the
County of Los Angeles, Case No. BC133799 (Class and Derivative Action
Complaint).
<PAGE>
The action involves purported class and derivative actions brought by
limited partners of each of the fourteen limited partnerships that were
named as nominal defendants as listed above (as defined in this Section 5,
the "Partnerships"). Plaintiffs allege that McNeil Investors, Inc., its
affiliate McNeil Real Estate Management, Inc. and three of their senior
officers and/or directors (as defined in this Section 5, collectively, the
"Defendants") breached their fiduciary duties and certain obligations under
the respective Amended Partnership Agreement. Plaintiffs allege that
Defendants have rendered such Units highly illiquid and artificially
depressed the prices that are available for Units on the resale market.
Plaintiffs also allege that Defendants engaged in a course of conduct to
prevent the acquisition of Units by an affiliate of Carl Icahn by
disseminating purportedly false, misleading and inadequate information.
Plaintiffs further allege that Defendants acted to advance their own
personal interests at the expense of the Partnerships' public unit holders
by failing to sell Partnership properties and failing to make distributions
to unitholders.
On December 16, 1996, the Plaintiffs filed a consolidated and amended
complaint. Plaintiffs are suing for breach of fiduciary duty, breach of
contract and an accounting, alleging, among other things, that the
management fees paid to the McNeil affiliates over the last six years are
excessive, that these fees should be reduced retroactively and that the
respective Amended Partnership Agreements governing the Partnerships are
invalid. On January 7, 1997, the Court ordered consolidation with three
other similar actions.
The Partnerships filed a demurrer to the complaint and a motion to strike
on February 14, 1997, seeking to dismiss the complaint in all respects. The
demurrer is pending. The Partnerships deny that there is any merit to
Plaintiff's allegations and intend to vigorously defend this action.
NOTE 9 - PRO FORMA INFORMATION (UNAUDITED)
- ------------------------------------------
The following unaudited pro forma information for the years ended December 31,
1995 and 1994 reflects the results of operations of the Partnership as if the
sale of Wyoming Mall had occurred as of January 1, 1994. The unaudited pro forma
information is not necessarily indicative of the results of operations which
actually would have occurred or those which might be expected to occur in the
future.
1995 1994
------------- ------------
Total revenue.................. $ 2,389,866 $ 2,086,148
Net loss....................... (57,289) (445,746)
Net loss per thousand limited
partnership units:
Current Income Units......... (.26) (2.02)
Growth/Shelter Units......... (3.85) (29.95)
<PAGE>
NOTE 10 - RESCISSION OF LIMITED PARTNERSHIP UNITS
- -------------------------------------------------
As discussed in Note 8, on October 22, 1996, a judgment was entered against the
Partnership which effectively rescinded 178,000 Units of the Partnership as of
October 31, 1996. The judgment was for $347,809. As part of a negotiation,
however, the plaintiffs agreed to accept $300,000 as full and complete
settlement of all claims, including attorney fees. Accordingly, the Partnership
made settlement payments to an escrow agent on behalf of the plaintiff limited
partners totaling $300,000 on December 23, 1996. The payments consisted of two
components. The first component of $154,287, which is recorded as a rescission
of limited partnership units on the Statements of Partners' Deficit, represents
the return of the limited partners' equity investments net of all distributions
previously paid to them. The second component of $145,713, which is recorded as
interest rescission of limited partnership units on the Statements of
Operations, represents interest paid on the rescinded Units pursuant to the
court judgment.
<PAGE>
McNEIL REAL ESTATE FUND XXII, L.P.
SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
December 31, 1996
<TABLE>
<CAPTION>
Cumulative Costs
Initial Cost Write-down Capitalized
Related Buildings and and Permanent Subsequent
Description Encumbrances (b) Land Improvements Impairment To Acquisition
- ----------- ---------------- ---- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
APARTMENTS:
Harbour Club III
Belleville, MI (c) $ 5,979,501 $ 561,491 $ 13,475,784 $ 4,526,936 $ 954,128
============= ========= ============= ============= ===========
</TABLE>
(b) The encumbrances reflect the present value of future loan payments
discounted, if appropriate, at a rate estimated to be the prevailing
interest rate at the date of acquisition or refinancing.
(c) The carrying value of Harbour Club III Apartments was reduced by
$4,526,936 in 1992.
See accompanying notes to Schedule III.
<PAGE>
McNEIL REAL ESTATE FUND XXII, L.P.
SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
December 31, 1996
<TABLE>
<CAPTION>
Gross Amount at
Which Carried at Close of Period Accumulated
Buildings and Depreciation
Description Land Improvements Total (a) and Amortization
- ----------- ---- -------------- --------- ----------------
<S> <C> <C> <C> <C>
APARTMENTS:
Harbour Club III
Belleville, MI (c) $ 380,414 $ 10,084,053 $ 10,464,467 $ (5,145,775)
============= ============= ============ ===========
</TABLE>
(a) For Federal income tax purposes, the properties are depreciated over lives
ranging from 5-27.5 years using ACRS or MACRS methods. The aggregate cost
of real estate investments for Federal income tax purposes was
approximately $16,475,705 and accumulated depreciation was $9,921,399
at December 31, 1996.
(c) The carrying value of Harbour Club III Apartments was reduced by $4,526,936
in 1992.
See accompanying notes to Schedule III.
<PAGE>
McNEIL REAL ESTATE FUND XXII, L.P.
SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
December 31, 1996
<TABLE>
<CAPTION>
Date of Date Depreciable
Description Construction Acquired lives (years)
- ----------- ------------ -------- -------------
<S> <C> <C> <C>
APARTMENTS:
Harbour Club III
Belleville, MI (c) 1972 5/86 5-25
</TABLE>
(c) The carrying value of Harbour Club III Apartments was reduced by $4,526,936
in 1992.
See accompanying notes to Schedule III.
<PAGE>
McNEIL REAL ESTATE FUND XXII, L.P.
Notes to Schedule III
Real Estate Investments and Accumulated Depreciation and Amortization
A summary of activity for the Partnership's real estate investments and
accumulated depreciation and amortization is as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------
1996 1995 1994
-------------- ------------- -------------
<S> <C> <C> <C>
Real estate investments:
Balance at beginning of year............... $ 10,223,260 $ 9,959,820 $ 16,906,946
Improvements............................... 241,207 263,440 146,836
Reclassification to asset held for sale.... - (7,093,962)
------------- ------------ ------------
Balance at end of year..................... $ 10,464,467 $ 10,223,260 $ 9,959,820
============= ============ ============
Accumulated depreciation and amortization:
Balance at beginning of year............... $ 4,718,722 $ 4,327,711 $ 6,363,314
Depreciation and amortization.............. 427,053 391,011 665,202
Reclassification to asset held for sale.... - - (2,700,805)
------------- ------------ ------------
Balance at end of year..................... $ 5,145,775 $ 4,718,722 $ 4,327,711
============= ============ ============
Asset held for sale:
Balance at beginning of year............... $ - $ 4,393,157 $ -
Improvements............................... - 7,112 -
Depreciation and amortization.............. - (74,606) -
Reclassification from real estate
investment.............................. - - 4,393,157
Dispositions............................... - (4,325,663) -
------------- ----------- ------------
Balance at end of year..................... $ - $ - $ 4,393,157
============= =========== ============
</TABLE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ----------------------------------------------------------------
FINANCIAL DISCLOSURES
---------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
Neither the Partnership nor the General Partner has any directors or executive
officers. The names and ages of, as well as the positions held by, the officers
and directors of McNeil Investors, Inc., the general partner of the General
Partner, are as follows:
Other Principal Occupations and Other
Name and Position Age Directorships During the Past 5 Years
- ----------------- --- -------------------------------------
Robert A. McNeil, 76 Mr. McNeil is also Chairman of the
Chairman of the Board and Director of McNeil Real Estate
Board and Director Management, Inc. ("McREMI") which is an
affiliate of the General Partner. He has
held the foregoing positions since the
formation of such an entity in 1990. Mr.
McNeil received his B.A. degree from
Stanford University in 1942 and his
L.L.B. degree from Stanford Law School
in 1948. He is a member of the State Bar
of California and has been involved in
real estate financing since the late
1940's and in real estate acquisitions,
syndications and dispositions since
1960. From 1986 until active operations
of McREMI and McNeil Partners, L.P.
began in February 1991, Mr. McNeil was a
private investor. Mr. McNeil is a member
of the International Board of Directors
of the Salk Institute, which promotes
research in improvements in health care.
Carole J. McNeil 53 Mrs. McNeil is Co-Chairman, with
Co-Chairman of the husband Robert A. McNeil, of McNeil
Board Investors, Inc. Mrs. McNeil has twenty
years of real estate experience, most
recently as a private investor from 1986
to 1993. In 1982, she founded Ivory &
Associates, a commercial real estate
brokerage firm in San Francisco, CA.
Prior to that, she was a commercial real
estate associate with the Madison
Company and, earlier, a commercial sales
associate and analyst with Marcus and
Millichap in San Francisco. In 1978,
Mrs. McNeil established Escrow Training
Centers, California's first accredited
commercial training program for title
company escrow officers and real estate
agents needing college credits to
qualify for brokerage licenses. She
began in real estate as Manager and
Marketing Director of Title Insurance
and Trust in Marin County, CA. Mrs.
McNeil serves on the International Board
of Directors of the Salk Institute.
<PAGE>
Other Principal Occupations and Other
Name and Position Age Directorships During the Past 5 Years
- ----------------- --- -------------------------------------
Ron K. Taylor 39 Mr. Taylor is the President and Chief
President and Chief Executive Officer of McNeil Real Estate
Executive Officer Management which is an affiliate of the
General Partner. Mr. Taylor has been in
this capacity since the resignation of
Donald K. Reed on March 4, 1997. Prior
to assuming his current
responsibilities, Mr. Taylor served as a
Senior Vice President of McREMI. Mr.
Taylor has been in this capacity since
McREMI commenced operations in 1991.
Prior to joining McREMI, Mr. Taylor
served as an Executive Vice President
for a national syndication/property
management firm. In this capacity, Mr.
Taylor had the responsibility for the
management and leasing of a 21,000,000
square foot portfolio of commercial
properties. Mr. Taylor has been actively
involved in the real estate industry
since 1983.
Each director shall serve until his successor shall have been duly elected and
qualified.
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
No direct compensation was paid or payable by the Partnership to directors or
officers (since it does not have any directors or officers) for the year ended
December 31, 1996, nor was any direct compensation paid or payable by the
Partnership to directors or officers of the general partner of the General
Partner for the year ended December 31, 1996. The Partnership has no plans to
pay any such remuneration to any directors or officers of the General Partner in
the future.
See Item 13 - Certain Relationships and Related Transactions for amounts of
compensation and reimbursements paid by the Partnership to the General Partner
and its affiliates.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
(A) Security ownership of certain beneficial owners.
No individual or group as defined by Section 13(d)(3) of the Securities
Exchange Act of 1934, known to the Partnership is the beneficial owner of
more than 5 percent of the Partnership's Units.
(B) Security ownership of management.
Neither the General Partner nor any of its officers or directors of its
general partner own any limited partnership units.
(C) Change in control.
None.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
The amendments to the Partnership compensation structure included in the Amended
Partnership Agreement provide for an asset management fee to replace all other
forms of General Partner compensation other than property management fees and
reimbursements of certain costs. Through 1999, the asset management fee is
calculated as 1% of the Partnership's tangible asset value. Tangible asset value
is determined by using the greater of (i) an amount calculated by applying a
capitalization rate of 9 percent to the annualized net operating income of each
property or (ii) a value of $10,000 per apartment unit for residential property
and $50 per gross square foot for commercial property to arrive at the property
tangible asset value. The property tangible asset value is then added to the
book value of all other assets excluding intangible items. The fee percentage
decreases subsequent to 1999. For the year ended December 31, 1996, the
Partnership paid or accrued $146,487 of such asset management fees. Total
accrued but unpaid asset management fees of $1,135,278 were outstanding at
December 31, 1996.
The Partnership pays property management fees equal to 5% of the gross receipts
of the residential property and paid 6% for the commercial property to McREMI,
an affiliate of the General Partner, for providing property management services.
Additionally, the Partnership reimburses McREMI for its costs, including
overhead of administering the Partnership's affairs. For the year ended December
31, 1996, the Partnership paid or accrued $194,078 of such property management
fees and reimbursements.
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
- -------- -----------------------------------------------------------------
See accompanying Index to Financial Statements at Item 8.
(A) Exhibits
The following exhibits are incorporated by reference and are an
integral part of this Form 10-K.
Exhibit
Number Description
------- -----------
4. Amended and Restated Limited Partnership
Agreement dated March 26, 1992.
(Incorporated by reference to the Current
Report of the Registrant on Form 8-K dated
March 26, 1992, as filed on April 9, 1992).
10.2 Portfolio Services Agreement, dated
February 14, 1991, between Southmark Realty
Partners II, Ltd. and McNeil Real Estate
Management, Inc. (1)
10.3 Promissory Note, dated June 14, 1989, among
Southmark Realty Partners, Ltd., Southmark
Realty Partners II, Ltd. and Woodmen of the
World Life Insurance Society relating to
Wyoming Mall. (1)
10.6 Modification of Note and Mortgage, dated
May 1, 1984, between Knoblinks Associates
III and Samuel R. Pierce, Jr., as Secretary
of Housing and Urban Development relating to
Harbour Club III. (1)
10.7 Property Management Agreement dated March
26, 1992, between McNeil Real Estate Fund
XXII, L.P. and McNeil Real Estate
Management, Inc. (2)
10.8 Amendment of Property Management Agreement
dated March 5, 1993. (2)
10.9 Revolving Credit Agreement dated August 6,
1991, between McNeil Partners, L.P. and
various selected partnerships, including the
Registrant. (Incorporated by reference to
the Annual Report of McNeil Real Estate Fund
XI, Ltd., on Form 10-K for the period ended
December 31, 1991 as filed on March 29,
1992.)
<PAGE>
Exhibit
Number Description
------- -----------
10.10 Property Management Agreement dated March
26, 1992, between Harbour Club Associates
and McNeil Real Estate Management Inc.
(Incorporated by reference to the Annual
Report of the Registrant on Form 10-K for
the period ended December 31, 1993, as filed
on March 31, 1994.)
11. Statement regarding computation of Net Loss
per Limited Partnership Unit (see Item 8 -
Note 1 - "Organization and Summary of
Significant Accounting Policies".)
22. Following is a list of subsidiaries of the
Partnership:
<TABLE>
<CAPTION>
Names Under
Jurisdiction Which It Is
Name of Subsidiary Incorporation Doing Business
------------------ ------------- --------------
<S> <C> <C> <C>
Harbour Club Associates
Limited Partnership Michigan None
</TABLE>
The Partnership has omitted instruments with respect to long-term debt
where the total amount of the securities authorized thereunder does not
exceed 10% of the total assets of the Partnership. The Partnership agrees
to furnish a copy of each such instrument to the Commission upon request.
(1) Incorporated by reference to the Quarterly
Report of the Registrant, on Form 10-Q for the
period ended March 31, 1991, as filed on May
14, 1991.
(2) Incorporated by reference to the Annual Report
of the Registrant on Form 10-K for the period
ended December 31, 1992, as filed on March 30,
1993.
(B) Reports on Form 8-K. There were no reports on Form 8-K filed
during the quarter ended December 31, 1996.
<PAGE>
McNEIL REAL ESTATE FUND XXII, L.P.
A Limited Partnership
SIGNATURE PAGE
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.
McNEIL REAL ESTATE FUND XXII, L.P.
By: McNeil Partners, L.P., General Partner
By: McNeil Investors, Inc., General Partner
March 28, 1997 By: /s/ Robert A. McNeil
- -------------- ----------------------------------------
Date Robert A. McNeil
Chairman of the Board and Director
Principal Executive Officer
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 the capacities and on the dates indicated.
March 28, 1997 By: /s/ Ron K. Taylor
- -------------- ----------------------------------------
Date Ron K. Taylor
President and Director of McNeil
Investors, Inc.
(Principal Financial Officer)
March 28, 1997 By: /s/ Carol A. Fahs
- -------------- ----------------------------------------
Date Carol A. Fahs
Vice President of McNeil Investors, Inc.
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 602,462
<SECURITIES> 0
<RECEIVABLES> 4,614
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 10,464,467
<DEPRECIATION> (5,145,775)
<TOTAL-ASSETS> 6,164,365
<CURRENT-LIABILITIES> 0
<BONDS> 5,979,501
<COMMON> 0
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,164,365
<SALES> 2,251,970
<TOTAL-REVENUES> 2,286,431
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,925,660
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 581,533
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (220,762)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (220,762)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
