UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-14351
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BALCOR REALTY INVESTORS 85-SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Illinois 36-3327917
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2355 Waukegan
Bannockburn, Illinois 60015
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 267-1600
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Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Interests
-----------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
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 ]
<PAGE>
PART I
Item 1. Business
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Balcor Realty Investors 85-Series II A Real Estate Limited Partnership (the
"Registrant") is a limited partnership formed in 1984 under the laws of the
State of Illinois. The Registrant raised $83,936,000 from sales of Limited
Partnership Interests. The Registrant's operations consist exclusively of
investment in and operation of real property, and all information included in
this report relates to this industry segment.
The Registrant utilized the net offering proceeds to acquire thirteen real
property investments and a minority joint venture interest in one additional
property. The Registrant has since disposed of five of these properties. As of
December 31, 1995, the Registrant owned the eight properties and the minority
joint venture interest described under "Item 2. Properties". The Partnership
Agreement provides that the proceeds of any sale or refinancing of the
Registrant's properties will not be reinvested in new acquisitions.
Overall, the investment real estate market saw gradual improvement over the
last year. This improvement has taken place in an environment of generally low
interest rates and little or no new supply, parameters which may not exist in
the next few years. Demand for real estate space, while projected to improve in
line with the overall economy, is also vulnerable to external forces. The major
challenges facing the real estate industry today include increased
international competition, corporate restructurings, new computer and
communications technologies, an aging population and potential revisions of
the tax code. In addition, the increased flow of capital to real estate through
new vehicles such as commercial mortgage-backed securities and REITs could spur
new construction at unsupportable levels, as well as impact existing property
values.
Operationally, existing apartment properties continued to register occupancy
percentages in the 90s, with average rents rising at an annual rate of between
3 and 4 percent. Apartments are still considered one of the top real estate
asset classes in terms of performance. However, some markets are experiencing
new construction of rental units which, if unrestrained, could impact the
performance of existing properties. Most of the new construction is aimed at
the two segments of the rental market which are growing the fastest: low-income
households and upper-income households who prefer to rent rather than own. Of
all the major asset classes, apartments typically display the least volatility
in terms of property values.
The General Partner believes that the market for multifamily housing properties
has become increasingly favorable to sellers of these properties. As a result,
the General Partner is exploring an acceleration of its strategy to sell the
Registrant's properties.
Activity for the purchase of limited partnership interests ("tender offer") has
increased in real estate limited partnerships generally. Many of these tender
offers have been made by investors seeking to make a profit from the purchase
of the interests. In the event a tender offer is made for interests in the
Registrant, the General Partner will issue a response to limited partners
expressing the General Partner's opinion regarding the offer. Certain
administrative costs will be incurred to respond to a tender offer. The General
<PAGE>
Partner cannot predict with any certainty what impact a tender offer will have
on the operations or management of the Registrant.
During 1995, the Registrant completed the refinancing of the Country Oaks
Apartments mortgage note payable. See "Item 7. Liquidity and Capital Resources"
for additional information.
The Registrant, by virtue of its ownership of real estate, is subject to
federal and state laws and regulations covering various environmental issues.
Management of the Registrant utilizes the services of environmental consultants
to assess a wide range of environmental issues and to conduct tests for
environmental contamination as appropriate. The General Partner is not aware of
any potential liability due to environmental issues or conditions that would be
material to the Registrant.
The officers and employees of Balcor Partners-XVII, the General Partner of the
Registrant, and its affiliates perform services for the Registrant. The
Registrant currently has no employees engaged in its operations.
Item 2. Properties
- ------------------
As of December 31, 1995, the Registrant owns the eight properties described
below:
Location Description of Property
- -------- -----------------------
Fort Worth, Texas Chestnut Ridge Apartments - Phase I (formerly
Cottonwood Apartments - Phase I): a 192-unit
apartment complex located on approximately 7
acres.
Memphis, Tennessee Country Oaks Apartments: a 200-unit apartment
complex located on approximately 10 acres.
Arlington, Texas Forest Ridge Apartments - Phase II: a 328-unit
apartment complex located on approximately 15
acres.
St. Louis County, Missouri Hunter's Glen Apartments: a 192-unit apartment
complex located on approximately 10 acres.
Hillsborough County, Florida Marbrisa Apartments: a 224-unit apartment
complex located on approximately 37 acres.
Gwinnett County, Georgia Park Crossing Apartments: a 280-unit apartment
complex located on approximately 21 acres.
Lexington-Fayette, Kentucky Steeplechase Apartments: a 296-unit apartment
complex located on approximately 16 acres.
East Baton Rouge Parish, Willow Bend Lake Apartments: a 360-unit
Louisiana apartment complex located on approximately 22
acres.
Each of the above properties is held subject to various forms of financing.
<PAGE>
The Registrant also holds a 38.38% minority joint venture interest in Rosehill
Pointe Apartments located in Lenexa, Kansas. See Note 9 of Notes to Financial
Statements for additional information.
In the opinion of the General Partner, the Registrant has provided for adequate
insurance coverage for its real estate investment properties.
See Notes to Financial Statements for other information regarding real property
investments.
Item 3. Legal Proceedings
- -------------------------
On February 29, 1996, a proposed class action complaint was filed, Raymond
Masri vs. Lehman Brothers, Inc., et al., Case No. 96/103727 (Supreme Court of
the State of New York, County of New York). The Registrant, additional limited
partnerships which were sponsored by The Balcor Company, three limited
partnerships sponsored by the predecessor of Lehman Brothers, Inc. (together
with the Registrant and the affiliated partnerships, the "Defendant
Partnerships"), Lehman Brothers, Inc. and Smith Barney Holdings, Inc. are
defendants. The complaint alleges, among other things, common law fraud and
deceit, negligent misrepresentation and breach of fiduciary duty relating to
the disclosure of information in the offering of limited partnership interests
in the Defendant Partnerships. The complaint seeks judgment for compensatory
damages equal to the amount invested in the Defendant Partnerships by the
proposed class plus interest accrued thereon; general damages for injuries
arising from the defendants' actions; recovery from the defendants of all
profits received by them as a result of their actions relating to the Defendant
Partnerships; exemplary damages; attorneys' fees and other costs.
The defendants intend to vigorously contest this action. No class has been
certified as of this date. Management of each of the defendants believes they
have meritorious defenses to contest the claims. It is not determinable at this
time whether or not an unfavorable decision in this action would have a
material adverse impact on the Registrant.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
No matters were submitted to a vote of the Limited Partners of the Registrant
during 1995.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- -------------------------------------------------------------------------
Matters
- -------
There has not been an established public market for Limited Partnership
Interests and it is not anticipated that one will develop; therefore, the
market value of the Limited Partnership Interests cannot reasonably be
determined. The Registrant has not made distributions to date to investors. For
additional information, see Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources.
<PAGE>
As of December 31, 1995, the number of record holders of Limited Partnership
Interests of the Registrant was 7,384.
Item 6. Selected Financial Data
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Year ended December 31,
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1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ------------
Total income $13,107,902 $12,877,418 $13,143,237 $14,216,484 $13,083,391
Loss before gain
on sale of
property (1,479,430) (2,019,363) (2,299,675) (2,647,166) (3,666,743)
Net (loss) income (1,479,430) (2,019,363) 1,348,884 (2,647,166) (3,666,743)
Net (loss) income
per Limited
Partnership
Interest (17.45) (23.82) 15.91 (31.22) (43.25)
Total assets 51,038,768 52,186,795 54,690,993 65,783,386 70,528,914
Mortgage notes
payable 53,469,385 53,346,903 57,225,506 65,457,125 66,975,920
Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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Operations
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Summary of Operations
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Improved property operations at several of the properties owned by Balcor
Realty Investors 85 - Series II A Real Estate Limited Partnership (the
"Partnership") was the primary reason the net loss decreased during 1995 as
compared to 1994. During 1993, the Partnership recognized a gain in connection
with the sale of Playa Palms Apartments. This caused the Partnership to
recognize net income during 1993 as compared to a net loss during 1994. Further
discussion of the Partnership's operations is summarized below.
1995 Compared to 1994
- ---------------------
The Partnership was able to achieve higher rental rates at most of the
Partnership's properties in 1995. As a result, rental and service income
increased at these properties during 1995 as compared to 1994.
In connection with the 1994 refinancings of certain of the properties' mortgage
loans, the Partnership retired $2,274,269, including deferred interest, and
replaced $4,215,546 of affiliate mortgage notes payable related to the Chestnut
Ridge - Phase I and Forest Ridge - Phase II apartment complexes with proceeds
from both third party mortgage loans and short-term loans from the General
Partner. As a result, interest expense on mortgage notes payable decreased and
interest expense on short-term loans from affiliates increased during 1995 as
<PAGE>
compared to 1994. The Partnership paid a prepayment penalty in connection with
the Country Oaks Apartments refinancing in June 1995 which partially offset the
decrease in interest expense on mortgage notes payable.
Due to the refinancing of the mortgage loans collateralized by Chestnut Ridge -
Phase I in 1994, deferred expenses related to the previous loan were fully
amortized. As a result, amortization of deferred expenses decreased during 1995
as compared to 1994.
Professional fees incurred in 1994 related to refinancings and legal fees
relating to the Park Crossing Apartments settlement incurred in 1994 resulted
in a decrease in administrative expenses during 1995 as compared to 1994.
Rental income increased at the Rosehill Pointe Apartments due to higher rental
rates, resulting in participation in income of joint venture with an affiliate
during 1995 as compared to participation in loss of joint venture with an
affiliate in 1994.
1994 Compared to 1993
- ---------------------
The July 1993 sale of Playa Palms Apartments caused decreases in rental and
service income, interest expense on mortgage notes payable, depreciation
expense, amortization expense, property operating expense, real estate taxes
and property management fees during 1994 as compared to 1993. These decreases
were offset by, or were in addition to, other activity as described below.
The Partnership was able to achieve higher rental rates at most of the
Partnership's eight remaining properties. As a result, rental and service
income, as well as the related property management fees, increased at these
properties during 1994, which partially offset the decreases due to the sale of
Playa Palms Apartments.
During the latter half of 1993, restricted investments of $1,995,000 were
released and the proceeds were used to repay the respective loans from the
General Partner relating to these cash collateral pledges. As a result of these
funds no longer being available for short-term investments, interest income on
short-term investments decreased during 1994 as compared to 1993.
During 1993, the Partnership reached a settlement with one of the defendants in
the litigation related to the Park Crossing Apartments and recognized
settlement income of $113,870 in connection with this transaction. The
Partnership reached a settlement with the remaining defendants during 1994 and
received $300,000 in settlement of all claims due to the Partnership.
In connection with the 1994 refinancings of the properties' mortgage loans, the
Partnership retired and replaced $4,215,546 of affiliated mortgage notes
payable related to the Chestnut Ridge - Phase I and Forest Ridge - Phase II
apartment complexes with General Partner loans. As a result, interest expense
on mortgage notes payable decreased and interest expense on short-term loans
from affiliates increased during 1994 as compared to 1993. Also contributing to
the decrease in interest expense on mortgage notes payable were lower interest
rates due to the Chestnut Ridge - Phase I refinancing in 1994 and the Hunter's
Glen, Marbrisa, Park Crossing and Steeplechase refinancings in 1993.
Due to the 1994 refinancings of the Chestnut Ridge - Phase I and Forest Ridge -
Phase II mortgage loans, deferred expenses related to the previous loans were
<PAGE>
fully amortized. As a result, amortization of deferred expenses increased
during 1994 as compared to 1993.
Increased insurance premiums at all of the Partnership's properties during
1994, as well as significantly higher maintenance and repairs expenses at the
Marbrisa Apartments as required by the 1993 mortgage refinancing, offset the
decrease in property operating expense due to the sale of Playa Palms
Apartments and exterior painting and parking lot repairs during 1993 at the
Hunter's Glen Apartments.
Real estate tax rates increased during 1994 at Park Crossing and Willow Bend
Lake apartment complexes and the assessed value of Park Crossing Apartments
also increased during 1994. This resulted in an increase in real estate tax
expense at these properties, during 1994 as compared to 1993, which partially
offset the decrease in real estate tax expense due to the Playa Palms sale.
Higher legal fees incurred due to the Park Crossing Apartments settlement along
with higher accounting, data processing and portfolio management expenses
during 1994 resulted in an increase in administrative expenses during 1994 as
compared to 1993.
The Partnership holds a minority joint venture interest in the Rosehill Pointe
Apartments, which realized a decrease in interest expense during 1994 due to a
reduction of the interest rate on the property's first mortgage loan during the
third quarter of 1993. This decrease was partially offset by increased
expenditures for insurance, utilities, payroll and advertising during 1994 as
compared to 1993. As a result of the combined effect of these events,
participation in loss of joint venture with an affiliate decreased during 1994
as compared to 1993.
The Partnership recognized a gain on sale of property of $3,648,559 during 1993
in connection with the sale of Playa Palms Apartments.
Liquidity and Capital Resources
- -------------------------------
The cash position of the Partnership increased as of December 31, 1995 when
compared to December 31, 1994. The Partnership's operating activities consisted
primarily of cash flow generated from property operations, which was partially
offset by the payment of administrative expenses, short-term interest expense
and deferred interest expense. The Partnership's investing activities consisted
of the release of the Country Oaks Apartments restricted investment and
distributions from the joint venture with an affiliate. The Partnership's
financing activities included the refinancing of the Country Oaks Apartments
mortgage loan. The proceeds from the new first mortgage loan were used to repay
the previous first mortgage loan and to fund required repair escrows and
related financing costs. Additional financing activities included payment of
principal on mortgage notes payable and a net repayment of a portion of the
loans from the General Partner.
The Partnership owes approximately $11,901,000 to the General Partner at
December 31, 1995 in connection with the funding of operating deficits and
other working capital requirements. These loans are expected to be repaid from
available cash flow from future property operations, or from proceeds received
from the disposition of the Partnership's real estate investments, prior to any
distributions to Limited Partners. The Partnership made a net repayment of
$395,000 to the General Partner during 1995.
<PAGE>
Although affiliates of the General Partner have, in certain circumstances,
provided mortgage loans for certain properties of the Partnership, there can be
no assurance that loans of this type will be available from either affiliates
or the General Partner in the future. The General Partner may continue to
provide additional short-term loans to the Partnership to fund working capital
needs or property operating deficits, although there is no assurance that such
loans will be available. Should additional borrowings be needed and not be
available through the General Partner, its affiliates or third parties, the
Partnership may be required to dispose of some of its properties in order to
satisfy Partnership obligations.
The Partnership classifies the cash flow performance of its properties as
either positive, a marginal deficit or a significant deficit, each after
consideration of debt service payments unless otherwise indicated. A deficit is
considered to be significant if it exceeds $250,000 annually or 20% of the
property's rental and service income. The Partnership defines cash flow
generated from its properties as an amount equal to the property's revenue
receipts less property related expenditures, which include debt service
payments. During 1995 and 1994, six of the Partnership's eight remaining
properties generated positive cash flow. The Chestnut Ridge - Phase I
Apartments generated a marginal cash flow deficit in both 1995 and 1994. The
Marbrisa Apartments generated positive cash flow during 1995 as compared to a
marginal deficit during 1994 due to lower repair and maintenance costs. The
Forest Ridge - Phase II Apartments generated a marginal deficit during 1995 as
compared to positive cash flow during 1994 due to increased expenditures for
structural repairs. In addition, the property in which the Partnership holds a
minority joint venture interest generated positive cash flow in both 1995 and
1994. As of December 31, 1995, the occupancy rates ranged from 95% to 99%.
The General Partner believes that the market for multifamily housing properties
has become increasingly favorable to sellers of these properties. As a result,
the General Partner is exploring an acceleration of its strategy to sell the
Partnership's properties.
The Partnership's properties are owned through the use of third-party and
affiliate mortgage loans and therefore, the Partnership is subject to the
financial obligations required by such loans. See Note 4 of Notes to Financial
Statements for information concerning outstanding balances, maturity dates,
interest rates, and other terms related to each of these mortgage loans. As a
result of the General Partner's efforts to obtain loan refinancings, the
Partnership has no third party financing which matures prior to 1998.
In June 1995, the Country Oaks Apartments first mortgage loan was refinanced.
See Note 4 of Notes to Financial Statements for additional information.
In April 1995, a restricted deposit in the amount of $480,000 pledged as
additional collateral related to the mortgage loan on the Country Oaks
Apartments was released. See Note 7 of Notes to Financial Statements for
additional information.
Although investors have received certain tax benefits, the Partnership has not
commenced distributions. Future distributions to investors will depend on
improved cash flow from the Partnership's remaining properties, the repayment
of loans to the General Partner and proceeds from future property sales, as to
which there can be no assurances. In light of results to date and current
market conditions, the General Partner does not anticipate that investors will
recover a substantial portion of their original investment.
<PAGE>
In 1995, the Financial Accounting Standards Board issued Statement No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" which establishes accounting standards for impairment of
long-lived assets and long-lived assets to be disposed of. This statement has
been adopted by the Partnership as of January 1, 1995, and did not have a
material impact on the financial position or results of operations of the
Partnership.
Inflation has several types of potentially conflicting impacts on real estate
investments. Short-term inflation can increase real estate operating costs
which may or may not be recovered through increased rents and/or sales prices
depending on general or local economic conditions. In the long-term, inflation
can be expected to increase operating costs and replacement costs and may lead
to increased rental revenues and real estate values.
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
See Index to Financial Statements and Financial Statement Schedule in this
Form 10-K.
The supplemental financial information specified by Item 302 of Regulation S-K
is not applicable.
The net effect of the differences between the financial statements and the tax
returns is summarized as follows:
December 31, 1995 December 31, 1994
----------------------- -------------------------
Financial Tax Financial Tax
Statements Returns Statements Returns
---------- --------- ---------- ---------
Total assets $51,038,768 $30,235,662 $52,186,795 $ 41,006,290
Partners' deficit:
General Partner (921,508) (14,587,833) (906,714) (14,549,350)
Limited Partners (16,228,370) (16,576,162) (14,763,734) (14,363,891)
Net loss:
General Partner (14,794) (38,483) (20,194) (580,110)
Limited Partners (1,464,636) (2,212,271) (1,999,169) (3,092,338)
Per Limited Part-
nership Interest (17.45) (26.36) (23.82) (36.84)
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
- --------------------
There have been no changes in or disagreements with accountants on any matter
of accounting principles, practices or financial statement disclosure.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
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(a) Neither the Registrant nor Balcor Partners-XVII, its General Partner, has a
Board of Directors.
(b, c & e) The names, ages and business experiences of the executive officers
and significant employees of the General Partner of the Registrant are as
follows:
TITLE OFFICERS
----- --------
Chairman, President and Chief Thomas E. Meador
Executive Officer
Senior Vice President Alexander J. Darragh
Senior Vice President Josette V. Goldberg
Senior Vice President Alan G. Lieberman
Senior Vice President, Chief Brian D. Parker
Financial Officer, Treasurer
and Assistant Secretary
Senior Vice President John K. Powell, Jr.
Thomas E. Meador (July 1947) joined Balcor in July 1979. He is Chairman,
President and Chief Executive Officer and has responsibility for all ongoing
day-to-day activities at Balcor. He is a Director of The Balcor Company. He is
also Senior Vice President of American Express Company and is responsible for
its real estate operations worldwide. Prior to joining Balcor, Mr. Meador was
employed at the Harris Trust and Savings Bank in the commercial real estate
division where he was involved in various lending activities. Mr. Meador
received his M.B.A. degree from the Indiana University Graduate School of
Business.
Alexander J. Darragh (February 1955) joined Balcor in September 1988 and is
responsible for due diligence analysis and real estate advisory services for
Balcor and American Express Company. He also has supervisory responsibility for
Balcor's environmental matters. Mr. Darragh received masters' degrees in Urban
Geography from Queen's University and in Urban Planning from Northwestern
University.
Josette V. Goldberg (April 1957) joined Balcor in January 1985 and has primary
responsibility for all human resources matters. In addition, she has
supervisory responsibility for Balcor's MIS functions. Ms. Goldberg has been
designated as a Senior Human Resources Professional (SHRP).
Alan G. Lieberman (June 1959) joined Balcor in May 1983 and is responsible for
Balcor's property sales and capital markets functions. Mr. Lieberman is a
Certified Public Accountant.
Brian D. Parker (June 1951) joined Balcor in March 1986 and, as Chief Financial
Officer and Chief Accounting Officer, is responsible for Balcor's financial,
legal and treasury functions. He is a Director of The Balcor Company. Mr.
Parker is a Certified Public Accountant and holds an M.S. degree in Accountancy
from DePaul University.
<PAGE>
John K. Powell Jr. (June 1950) joined Balcor in September 1985 and is
responsible for portfolio and asset management matters relating to Balcor's
partnerships. Mr. Powell also has supervisory responsibility for Balcor's risk
management and investor services functions. He received a Master of Planning
degree from the University of Virginia. Mr. Powell has been designated a
Certified Real Estate Financier by the National Society for Real Estate Finance
and is a full member of the Urban Land Institute.
(d) There is no family relationship between any of the foregoing officers.
(f) None of the foregoing officers or employees are currently involved in any
material legal proceedings nor were any such proceedings terminated during the
fourth quarter of 1995.
Item 11. Executive Compensation
- -------------------------------
The Registrant has not paid and does not propose to pay any remuneration to the
executive officers and directors of Balcor Partners-XVII, the General Partner.
Certain of these officers receive compensation from The Balcor Company (but not
from the Registrant) for services performed for various affiliated entities,
which may include services performed for the Registrant. However, the General
Partner believes that any such compensation attributable to services performed
for the Registrant is immaterial to the Registrant. See Note 11 of Notes to
Financial Statements for the information relating to transactions with
affiliates.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
(a) No person owns of record or is known by the Registrant to own beneficially
more than 5% of the outstanding Limited Partnership Interests of the
Registrant.
(b) Balcor Partners-XVII and its officers and partners own as a group the
following Limited Partnership Interests of the Registrant:
Amount
Beneficially
Title of Class Owned Percent of Class
-------------- ------------- ----------------
Limited Partnership
Interests 1,235 Interests 1.47%
Relatives and affiliates of the partners and officers of the General Partner
own 26 additional Interests.
(c) The Registrant is not aware of any arrangements, the operation of which may
result in a change of control of the Registrant.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
(a & b) See Note 3 of Notes to Financial Statements for information relating to
the Partnership Agreement and the allocation of distributions and profits and
losses.
<PAGE>
See Note 11 of Notes to Financial Statements for information relating to
transactions with affiliates.
(c) No management person is indebted to the Registrant.
(d) The Registrant has no outstanding agreements with any promoters.
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
- ------------------------------------------------------------------------
(a)
(1 & 2) See Index to Financial Statements and Financial Statement Schedule in
this Form 10-K.
(3) Exhibits:
(3) The Amended and Restated Agreement and Certificate of Limited Partnership
set forth as Exhibit 3 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-11 dated March 12, 1985 (Registration No. 2-95000) is
incorporated herein by reference.
(4) Subscription Agreement set forth as Exhibit 4.1 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-11 dated March 12, 1985
(Registration No. 2-95000) and Form of Confirmation regarding Interests in the
Registrant set forth as Exhibit 4.2 to the Registrant's Report on Form 10-Q for
the quarter ended June 30, 1992 (Commission File No. 0-14351) are incorporated
herein by reference.
(27) Financial Data Schedule of the Registrant for 1995 is attached hereto.
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter
ended December 31, 1995.
(c) Exhibits: See Item 14(a)(3) above.
(d) Financial Statement Schedule: See Index to Financial Statements and
Financial Statement Schedule in this Form 10-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of l934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BALCOR REALTY INVESTORS 85-SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
By:/s/Brian D. Parker
--------------------------------
Brian D. Parker
Senior Vice President, and Chief
Financial Officer (Principal
Accounting and Financial Officer)
of Balcor Partners-XVII, the
General Partner
Date: March 29, 1996
--------------
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.
Signature Title Date
- --------------------- ------------------------------ --------------
President and Chief Executive
Officer (Principal Executive
Officer) of Balcor Partners-XVII,
/s/Thomas E. Meador the General Partner March 29, 1996
- -------------------- --------------
Thomas E. Meador
Senior Vice President, and Chief
Financial Officer (Principal
Accounting and Financial Officer)
of Balcor Partners XVII, the General
/s/Brian D. Parker Partner March 29, 1996
- -------------------- --------------
Brian D. Parker
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Report of Independent Accountants
Financial Statements:
Balance Sheets, December 31, 1995 and 1994
Statements of Partners' Deficit, for the years ended December 31, 1995, 1994
and 1993
Statements of Income and Expenses, for the years ended December 31, 1995, 1994
and 1993
Statements of Cash Flows, for the years ended December 31, 1995, 1994 and 1993
Notes to Financial Statements
Financial Statement Schedule:
III - Real Estate and Accumulated Depreciation, as of December 31, 1995
Financial Statement Schedules, other than that listed, are omitted for the
reason that they are inapplicable or equivalent information has been included
elsewhere herein.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Balcor Realty Investors 85-Series II
A Real Estate Limited Partnership:
We have audited the financial statements and the financial statement schedule
of Balcor Realty Investors 85-Series II A Real Estate Limited Partnership (An
Illinois Limited Partnership) as listed in the index of this Form 10-K. These
financial statements and the financial statement schedule are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements and the financial statement
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 Balcor Realty Investors
85-Series II A Real Estate Limited Partnership at December 31, 1995 and 1994,
and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
March 23, 1996
<PAGE>
BALCOR REALTY INVESTORS -85 SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
BALANCE SHEETS
December 31, 1995 and 1994
ASSETS
1995 1994
------------ ------------
Cash and cash equivalents $ 1,125,457 $ 600,949
Restricted investments 480,000
Escrow deposits 1,693,209 1,041,462
Accounts and accrued interest receivable 143,573 183,575
Prepaid expenses 137,929
Deferred expenses, net of accumulated
amortization of $429,418 in 1995 and
$323,605 in 1994 1,013,846 1,070,071
------------ ------------
4,114,014 3,376,057
------------ ------------
Investment in real estate:
Land 10,525,187 10,525,187
Buildings and improvements 62,537,549 62,537,549
------------ ------------
73,062,736 73,062,736
Less accumulated depreciation 26,137,982 24,251,998
------------ ------------
Investment in real estate, net of
accumulated depreciation 46,924,754 48,810,738
------------ ------------
$ 51,038,768 $ 52,186,795
============ ============<PAGE>
LIABILITIES AND PARTNERS' DEFICIT
Loans payable - affiliate $ 11,900,605 $ 12,295,605
Accounts payable 142,159 243,758
Due to affiliates 756,004 216,455
Accrued liabilities, principally interest
and real estate taxes 480,390 423,967
Security deposits 233,034 228,573
Loss in excess of investment in joint
venture with an affiliate 1,207,069 1,101,982
Mortgage notes payable - affiliates 1,673,215 1,673,215
Mortgage notes payable 51,796,170 51,673,688
------------ ------------
Total liabilities 68,188,646 67,857,243
------------ ------------
Limited Partners' deficit (83,936
Interests issued and outstanding) (16,228,370) (14,763,734)
General Partner's deficit (921,508) (906,714)
------------ ------------
Total partners' deficit (17,149,878) (15,670,448)
------------ ------------
$ 51,038,768 $ 52,186,795
============ ============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR REALTY INVESTORS -85 SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
STATEMENTS OF PARTNERS' DEFICIT
for the years ended December 31, 1995, 1994, and 1993
Partners' Deficit Accounts
----------------------------------------
General Limited
Total Partner Partners
------------ ------------ ------------
Balance at December 31, 1992 $ (14,999,969)$ (900,009)$ (14,099,960)
Net income for the year
ended December 31, 1993 1,348,884 13,489 1,335,395
------------ ------------ ------------
Balance at December 31, 1993 (13,651,085) (886,520) (12,764,565)
Net loss for the year
ended December 31, 1994 (2,019,363) (20,194) (1,999,169)
------------ ------------ ------------
Balance at December 31, 1994 (15,670,448) (906,714) (14,763,734)
Net loss for the year
ended December 31, 1995 (1,479,430) (14,794) (1,464,636)
------------ ------------ ------------
Balance at December 31, 1995 $ (17,149,878)$ (921,508)$ (16,228,370)
============ ============ ============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR REALTY INVESTORS -85 SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
STATEMENTS OF INCOME AND EXPENSES
for the years ended December 31, 1995, 1994, and 1993
1995 1994 1993
------------ ------------ ------------
Income:
Rental and service $ 13,021,575 $ 12,521,580 $ 12,994,337
Interest on short-term
investments 65,886 67,424 88,477
Participation in income (loss)
of joint venture with
an affiliate 20,441 (11,586) (53,447)
Settlement income 300,000 113,870
------------ ------------ ------------
Total income 13,107,902 12,877,418 13,143,237
------------ ------------ ------------
Expenses:
Interest on mortgage
notes payable 4,899,174 5,138,352 6,142,371
Interest on short - term
loans from affiliate 815,156 572,915 370,180
Depreciation 1,885,984 1,885,983 2,051,056
Amortization of deferred
expenses 209,065 274,282 187,999
Property operating 4,649,658 4,716,555 4,500,559
Real estate taxes 988,743 1,039,756 1,061,532
Property management fees 644,856 626,989 657,359
Administrative 494,696 641,949 471,856
------------ ------------ ------------
Total expenses 14,587,332 14,896,781 15,442,912
------------ ------------ ------------
Loss before gain on sale of
property (1,479,430) (2,019,363) (2,299,675)
Gain on sale of property 3,648,559
------------ ------------ ------------
Net (loss) income $ (1,479,430)$ (2,019,363)$ 1,348,884
============ ============ ============
Net (loss) income allocated to
General Partner $ (14,794)$ (20,194)$ 13,489
============ ============ ============
Net (loss) income allocated to
Limited Partners $ (1,464,636)$ (1,999,169)$ 1,335,395
============ ============ ============
Net (loss) income per Limited
Partnership Interest (83,936
issued and outstanding) $ (17.45)$ (23.82)$ 15.91
============ ============ ============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR REALTY INVESTORS -85 SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1995, 1994, and 1993
1995 1994 1993
------------ ------------ ------------
Operating activities:
Net (loss) income $ (1,479,430)$ (2,019,363)$ 1,348,884
Adjustments to reconcile net
(loss) income to net cash
provided by or used in
operating activities:
Gain on sale of property (3,648,559)
Participation in (income)
loss of joint venture
with an affiliate (20,441) 11,586 53,447
Depreciation 1,885,984 1,885,983 2,051,056
Amortization of deferred
expenses 209,065 274,282 187,999
Deferred interest expense 196,599 306,255
Payment of deferred
interest expense (681,731) (1,392,348)
Net change in:
Escrow deposits (643,654) 178,438 (246,022)
Accounts and accrued
interest receivable 40,002 165,810 (27,516)
Prepaid expenses (137,929)
Accounts payable (101,599) 150,525 (76,283)
Due to affiliates 539,549 107,590 3,613
Accrued liabilities 56,423 (10,388) (83,557)
Security deposits 4,461 (17,400) (61,414)
------------ ------------ ------------
Net cash provided by or used
in operating activities 352,431 241,931 (1,584,445)
------------ ------------ ------------
Investing activities:
Redemption of restricted
investments 480,000 1,995,000
Distributions from joint
ventures with an affiliate 125,528 93,467 30,848
Proceeds from sale of property 13,200,000
Payment of selling costs (109,559)
Additions to properties (140,468)
------------ ------------ ------------
Net cash provided by
investing activities 605,528 93,467 14,975,821
------------ ------------ ------------
Financing activities:
Proceeds from issuance of
mortgage notes payable 6,010,000 11,664,000 34,916,121
Repayment of loans payable -
affiliate (480,000) (1,499,140) (4,505,372)
<PAGE>
Proceeds from loans payable -
affiliate 85,000 827,114 1,515,153
Repayment of mortgage notes
payable - affiliates (1,592,538) (1,027,935)
Repayment of mortgage notes
payable (5,480,512) (9,389,731) (41,842,846)
Principal payments on
mortgage notes payable (407,006) (344,788) (255,910)
Funding of repair escrows (157,500) (287,150) (549,045)
Releases from repair escrows 149,407 4,463 348,833
Payment of deferred expenses (152,840) (308,817) (981,606)
------------ ------------ ------------
Net cash used in financing
activities (433,451) (926,587) (12,382,607)
------------ ------------ ------------
Net change in cash and cash
equivalents 524,508 (591,189) 1,008,769
Cash and cash equivalents at
beginning of year 600,949 1,192,138 183,369
------------ ------------ ------------
Cash and cash equivalents at
end of year $ 1,125,457 $ 600,949 $ 1,192,138
============ ============ ============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR REALTY INVESTORS 85-SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. Nature of the Partnership's Business:
Balcor Realty Investors 85-Series II A Real Estate Limited Partnership (the
"Partnership") is engaged principally in the operation of residential real
estate located in various markets within the United States.
2. Accounting Policies:
(a) The preparation of the financial statements in conformity with generally
accepted accounting principles requires the General Partner 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 vary from those estimates.
(b) Depreciation expense is computed using the straight-line method. Rates used
in the determination of depreciation are based upon the following estimated
useful lives:
Buildings and improvements 30 years
Furniture and fixtures 5 years
Maintenance and repairs are charged to expense when incurred. Expenditures for
improvements are charged to the related asset account.
Interest incurred while properties were under construction was capitalized.
As properties are sold, the related costs and accumulated depreciation are
removed from the respective accounts. Any gain or loss on disposition will be
recognized in accordance with generally accepted accounting principles.
(c) Effective January 1, 1995 the Partnership adopted Statement of Financial
Accounting Standards, No. 121 (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of". Under SFAS 121, the
Partnership records its investments in real estate at the lower of cost or fair
value, and periodically assesses, but not less than on an annual basis,
possible impairment to the value of its properties. The General Partner
estimates the fair value of its properties by dividing the property's expected
net operating income by a risk adjusted rate of return which considers economic
and demographic conditions in the market. In the event the General Partner
determines an impairment in value has occurred, and the carrying amount of the
real estate asset will not be recovered, a provision is recorded to reduce the
carrying basis of the property to its estimated fair value. The General Partner
considers the method referred to above to result in a reasonable measurement
of a property's fair value, unless other factors affecting the property's value
indicate otherwise.
(d) Deferred expenses consist of financing fees which are amortized over the
terms of the respective agreements.
<PAGE>
(e) Investment in joint venture with an affiliate represents the recording of
the Partnership's 38.38% interest, under the equity method of accounting, in a
joint venture with an affiliated partnership. Under the equity method of
accounting, the Partnership records its initial investment at cost and adjusts
its investment account for additional capital contributions, distributions and
its share of joint venture income or loss. Depreciation recognized in
connection with the ownership of real estate by the joint venture has resulted
in the Partnership's share of cumulative losses exceeding the net amounts
invested in the joint venture. This has resulted in the classification of the
investment as "Loss in excess of investment in joint venture with an affiliate"
in the accompanying financial statements.
(f) The Financial Accounting Standard Board's Statement No. 107, "Disclosures
About Fair Value of Financial Instruments", requires disclosure of fair value
information about financial instruments for which it is practicable to estimate
that value. Since quoted market prices are not available for the Partnership's
financial instruments, fair values have been based on estimates using present
value techniques. These techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, may not be realized in
immediate settlement of the instrument. Statement No. 107 does not apply to all
balance sheet items and excludes certain financial instruments and all
non-financial instruments such as real estate and investment in joint ventures
from its disclosure requirements.
(g) Revenue is recognized on an accrual basis in accordance with generally
accepted accounting principles.
(h) Cash and cash equivalents include all unrestricted, highly liquid
investments with an original maturity of three months or less.
(i) The Partnership is not liable for Federal income taxes, and each Partner
recognizes his proportionate share of the Partnership income or loss in his tax
return; therefore, no provision for income taxes is made in the financial
statements of the Partnership.
(j) A reclassification has been made to the previously reported 1994 and 1993
financial statements to conform with the classification used in 1995. This
reclassification has not changed the 1994 and 1993 results.
3. Partnership Agreement:
The Partnership was organized in October 1984. The Partnership Agreement
provides for Balcor Partners-XVII to be the General Partner and for the
admission of Limited Partners through the sale of up to 84,000 Limited
Partnership Interests at $1,000 per Interest, 83,936 of which were sold through
August 22, 1985, the termination date of the offering.
The Partnership Agreement generally provides that the General Partner will be
allocated 1% and the Limited Partners will be allocated 99% of the profits and
losses from operations. One hundred percent of Net Cash Receipts available for
distribution shall be distributed to the holders of Interests in proportion to
their participating percentages as of the record date for such distributions.
In addition, there shall be accrued for the benefit of the General Partner as
its distributive share from operations, an amount equivalent to approximately
1% of the total Net Cash Receipts being distributed, which will be paid only as
<PAGE>
a part of the General Partner's share of Net Cash Proceeds. Under certain
circumstances, the General Partner may participate in the Net Cash Proceeds
from the sale or refinancing of Partnership properties. The General Partner's
participation is equal to 15% of further Net Cash Proceeds distributed after
holders of Interests have received a return of Original Capital plus any
deficiency in a Cumulative Distribution of 6% on Adjusted Original Capital, as
defined in the Partnership Agreement.
4. Mortgage Notes Payable:
Mortgage notes payable at December 31, 1995 and 1994 consisted of the
following:
Carrying Carrying Current Final
Property Amount of Amount of Inter- Matur- Current Estimated
Pledged as Notes at Notes at est ity Monthly Balloon
Collateral 12/31/95 12/31/94 Rate Date Payment Payment
- -------------- ---------- ---------- ------ ------ ------- ----------
Mortgage Notes Payable - Nonaffiliates
Apartment Complexes
Chestnut Ridge I(a)$3,648,475 $3,675,362 9.02% 2001 $29,776 $3,460,000
Country Oaks(b) 5,983,640 5,502,374 7.655% 2002 42,663 5,531,000
Forest Ridge II(c) 7,894,311 7,948,748 9.188% 2001 65,209 7,479,000
Hunter's Glen 4,567,048 4,602,507 9.13% 2001 37,851 4,302,000
Marbrisa 5,404,320 5,452,288 8.23% 2000 41,242 5,102,000
Park Crossing 7,188,734 7,251,725 8.54% 1998 56,655 7,012,000
Steeplechase 7,312,127 7,369,371 9.13% 2001 60,643 6,893,000
Willow Bend Lake 9,797,515 9,871,313 9.33% 2001 82,641 9,253,000
----------- -----------
Subtotal 51,796,170 51,673,688
----------- -----------
Mortgage Notes Payable - Affiliates
Apartment Complexes
Chestnut Ridge I(a) 1,673,215 1,673,215 10.50% 2002 (a) 1,673,000
----------- -----------
Subtotal 1,673,215 1,673,215
----------- -----------
Total $53,469,385 $53,346,903
=========== ===========
(a) In March 1994, the Partnership completed the refinancing of these mortgage
loans. The original loans consisted of a $3,029,731 first mortgage loan from an
unaffiliated lender and a junior mortgage loan and an unsecured loan from
affiliates of the Partnership totaling $3,983,484, including deferred interest
of $450,185. The proceeds from the new first mortgage loan of $3,694,000 from
an unaffiliated lender were used to repay the previous first mortgage loan, the
deferred interest on the affiliated loans and $214,084 of the outstanding loans
from affiliates. The new first mortgage loan interest rate decreased from 9.75%
to 9.02%, the maturity date was changed from February 2002 to April 2001 and
the monthly payments increased from $25,667 to $29,776. As required by the
unaffiliated lender, $1,646,000 of the remaining balance of the affiliate loans
was retired and replaced with a General Partner loan and the remainder was
recharacterized as a subordinate nonrecourse loan of $1,473,215 and a preferred
limited partnership interest of $200,000 in the subsidiary partnership which
holds title to the property, both of which are included in mortgage notes
<PAGE>
payable - affiliates on the balance sheet. The contract interest rate on the
subordinate nonrecourse loan remains unchanged at 10.50%, which is the rate of
return earned on the preferred limited partnership interest as well. The
interest pay rate on the subordinate nonrecourse loan is the lower of the
contract rate or the net cash from the property after payment of debt service
on the first mortgage. The Limited Partners' position is unaffected by this
conversion of a portion of the affiliated loan to an equity position, as
Limited Partners' equity is subordinate to the preferred interest just as it
was subordinated to the affiliate loans prior to the recharacterization.
The affiliate loan and preferred equity interest are subordinate to the
Partnership's receipt of sale or refinancing proceeds in the amount of
$1,646,000.
(b) In June 1995, this loan was refinanced. The interest rate decreased from
10.0% to 7.655%, the maturity date was extended from October 1995 to July 2002
and the monthly payments decreased from $50,153 to $42,663. A portion of the
proceeds from the new $6,010,000 first mortgage loan were used to repay the
existing first mortgage loan of $5,480,512.
(c) In July 1994, the Partnership completed the refinancing of the mortgage
loans. The original loans consisted of a $6,360,000 first mortgage loan from an
unaffiliated lender and an unsecured loan from an affiliate of the Partnership
of $4,179,546, including deferred interest of $231,546. The proceeds from the
new first mortgage loan of $7,970,000 from an unaffiliated lender were used to
repay the previous first mortgage loan, the deferred interest on the affiliate
loan and $1,378,454 of the outstanding affiliate loan. The interest rate on the
new first mortgage loan increased from 9.025% to 9.188%, the maturity date was
extended from December 1994 to August 2001 and the monthly payments increased
from $47,833 to $65,209. As required by the unaffiliated lender, the remaining
$2,569,546 balance of the affiliate loan was retired and replaced with a
General Partner loan.
The Partnership's loans described above require current monthly payments of
principal and interest, except for the Chestnut Ridge - Phase I mortgage note
payable-affiliate which requires payments based on the cash flow of the
property.
See Note 7 of Notes to Financial Statements for additional information on cash
collateral pledges and letters of credit.
Real estate with an aggregate carrying value of $46,924,754 at December 31,
1995 was pledged as collateral for repayment of mortgage loans.
Approximate principal maturities of the above mortgage notes payable during
each of the next five years are as follows:
1996 $ 438,000
1997 499,000
1998 7,498,000
1999 494,000
2000 5,689,000
During the year ended December 31, 1995, 1994 and 1993, the Partnership
incurred interest expense on nonaffiliated mortgage notes payable of
$4,742,339, $4,680,137 and $5,281,113 and paid interest expense of $4,742,339,
$4,680,137 and $6,239,776, respectively.
<PAGE>
5. Settlement Income:
The Partnership had ongoing litigation with the seller and certain of its
principals and affiliates on claims under terms of the original management and
guarantee agreement on the Park Crossing Apartments. During July 1993, the
Partnership settled with one defendant and received $113,870, and during 1994
the Partnership accepted $300,000 as settlement in full on all remaining
amounts owed to the Partnership. In addition, $139,946 which had been held in
an escrow, was released to the Partnership in 1994.
6. Property Sale:
During 1993, the Partnership sold the Playa Palms Apartments in an all cash
sale for $13,200,000. From the proceeds of the sale, the Partnership paid
$12,701,189 in full satisfaction of the property's first mortgage loan, which
included $1,117,006 of accrued interest, and a second mortgage loan of $32,349
was repaid at a discount of $21,049. The remaining proceeds from the sale were
used to repay a portion of the loans from the General Partner. The basis of
the property was $9,462,931, net of accumulated depreciation of $4,353,876. For
financial statement purposes, the Partnership recognized a gain of $3,648,559
during 1993.
7. Restricted Investments:
During 1995, a restricted investment of $480,000, which partially
collateralized the Country Oaks mortgage loan, was released. The amount pledged
as collateral had been invested in short-term instruments pursuant to the terms
of the pledge agreement with the lending institution, and the accumulated
interest was paid to the Partnership upon release.
8. Management Agreements:
As of December 31, 1995, all of the properties owned by the Partnership,
including the property in which the Partnership holds a minority joint venture
interest, are under management agreements with a third-party management
company. These management agreements provide for annual fees of 5% of gross
operating receipts.
9. Investment in Joint Venture with an Affiliate:
The Partnership owns a 38.38% joint venture interest in the Rosehill Pointe
Apartments. The joint venture partner is an affiliate with investment
objectives similar to those of the Partnership. During 1995, 1994 and 1993, the
Partnership received net distributions from property operations totaling
$125,528, $93,467 and $30,848, respectively.
10. Tax Accounting:
The Partnership keeps its books in accordance with the Internal Revenue Code,
rules and regulations promulgated thereunder and existing interpretations
thereof. The accompanying financial statements, which are prepared in
accordance with generally accepted accounting principles, will differ from the
tax returns due to the different treatment of various items as specified in the
Internal Revenue Code. The net effect of these accounting differences is that
the net loss for 1995 in the financial statements is $771,324 less than the tax
loss of the Partnership for the same period.
<PAGE>
11. Transactions with Affiliates:
Fees and expenses paid and payable by the Partnership to affiliates are:
Year Ended Year Ended Year Ended
12/31/95 12/31/94 12/31/93
-------------- -------------- --------------
Paid Payable Paid Payable Paid Payable
------ ------- ------ ------- ------ -------
Property management fees None None $572,620 None $663,957 $50,530
Reimbursement of expenses
to the General Partner
at cost:
Accounting $46,401 $2,528 70,337 $25,737 66,172 5,468
Data processing 42,184 2,976 54,271 15,312 31,524 5,786
Investor communica-
tions 6,252 None 19,725 5,681 18,544 1,532
Legal 30,317 3,090 14,649 8,055 11,713 968
Portfolio management 107,761 11,525 40,873 25,281 47,486 4,314
Other 11,185 1,304 17,062 4,912 14,582 1,205
The Partnership participates in an insurance deductible program with other
affiliated partnerships in which the program pays claims up to the amount of
the deductible under the master insurance policies for its properties. The
program is administered by an affiliate of the General Partner who receives no
fee for administering the program, however, the General Partner is reimbursed
for expenses. The Partnership paid premiums to the deductible insurance program
of $85,753, $120,176 and $80,248 in 1995, 1994 and 1993, respectively.
Allegiance Realty Group, Inc., an affiliate of the General Partner, managed the
Partnership's properties, including the property in which the Partnership holds
a minority joint venture interest, until the affiliate was sold to a third
party in November 1994.
In July 1994, the Partnership repaid a loan to The Balcor Company (successor in
interest to Balcor Real Estate Holding, Inc.), an affiliate of the General
Partner on the Forest Ridge - Phase II Apartments. In March 1994, the
Partnership partially repaid and refinanced the balance of the Chestnut Ridge -
Phase I Apartments affiliated mortgage loans. See Note 4 of Notes to Financial
Statements for additional information on these loans.
During 1995, 1994 and 1993, the Partnership incurred interest expense on the
loans from The Balcor Company of $156,835, $458,215 and $861,258 and paid
interest expense of $175,241, $943,347 and $991,101, respectively. As of
December 31, 1995 and 1994, interest expense of $12,092 and $30,498,
respectively, was payable and is included in accrued liabilities on the balance
sheet.
As of December 31, 1995, the Partnership owes $11,900,605 to the General
Partner in connection with the funding of additional working capital and other
Partnership obligations. During 1994, the Partnership retired and replaced
$1,646,000 and $2,569,546 of The Balcor Company loans related to the Chestnut
Ridge - Phase I and Forest Ridge - Phase II apartment complexes, respectively,
with General Partner loans in connection with the 1994 refinancings of the
properties' mortgage loans. The Partnership repaid $395,000 during 1995 on the
General Partner loans. In connection with the loans from the General Partner,
<PAGE>
the Partnership incurred interest expense of $815,156, $572,915 and $370,180
and paid interest expense of $212,052, $480,500 and $366,296 during 1995, 1994
and 1993, respectively. As of December 31, 1995 and 1994, interest expense of
$734,581 and $131,477, respectively, was payable. Interest expense is computed
at the American Express Company cost of funds rate plus a spread to cover
administrative costs. As of December 31, 1995, this rate was 6.307%.
The General Partner may continue to make arrangements with an affiliate to
provide additional short-term loans to the Partnership to fund future working
capital needs or operating deficits, although there is no assurance that such
loans will be available. Should additional borrowings be needed and not be
available either through affiliates of the General Partner or third parties,
the Partnership may be required to dispose of some of its properties earlier
than intended in order to satisfy Partnership obligations.
12. Fair Value of Financial Investments:
The carrying amounts and fair values of the Partnership's financial instruments
at December 31, 1995 are as follows:
The carrying amounts of cash and cash equivalents, accounts and accrued
interest receivable and accounts payable approximates fair value.
Based on borrowing rates available to the Partnership at the end of 1995 for
mortgage loans with similar terms and maturities, the fair value of the
mortgage notes payable approximates the carrying value.
13. Subsequent Event:
On February 29, 1996, a proposed class action complaint was filed, Raymond
Masri vs. Lehman Brothers, Inc., et al., Case No. 96/103727 (Supreme Court of
the State of New York, County of New York). The Partnership, additional limited
partnerships which were sponsored by The Balcor Company, three limited
partnerships sponsored by the predecessor of Lehman Brothers, Inc. (together
with the Partnership and the affiliated partnerships, the "Defendant
Partnerships"), Lehman Brothers, Inc. and Smith Barney Holdings, Inc. are
defendants. The complaint alleges, among other things, common law fraud and
deceit, negligent misrepresentation and breach of fiduciary duty relating to
the disclosure of information in the offering of limited partnership interests
in the Defendant Partnerships. The complaint seeks judgment for compensatory
damages equal to the amount invested in the Defendant Partnerships by the
proposed class plus interest accrued thereon; general damages for injuries
arising from the defendants' actions; recovery from the defendants of all
profits received by them as a result of their actions relating to the Defendant
Partnerships; exemplary damages; attorneys' fees and other costs.
The defendants intend to vigorously contest this action. No class has been
certified as of this date. Management of each of the defendants believes they
have meritorious defenses to contest the claims. It is not determinable at this
time whether or not an unfavorable decision in this action would have a
material adverse impact on the Partnership.
<PAGE>
BALCOR REALTY INVESTORS 85-SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
<TABLE>
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 1995
<CAPTION>
Col. A Col. B Col. C Col. D
- --------------------- -------- -------------------- ---------------------------------
Initial Cost Cost Adjustments
to Partnership Subsequent to Acquisition
-------------------- ---------------------------------
Buildings Carrying Reduction
Encum- and Im- Improve- Costs of Basis
Description brances Land provements ments (a) (b)
- --------------------- ------- -------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Chestnut Ridge - Phase I,
192-unit apt complex
in Fort Worth, TX (e) $1,242,000 $4,983,000 None $733,224 None
Country Oaks, 200-unit
apartment complex in
Memphis, TN (e) 413,000 6,690,000 $15,000 11,540 None
Forest Ridge - Phase II,
328-unit apt. complex
in Arlington, TX (e) 2,579,000 8,303,000 $49,061 1,812,065 $(565,960)
Hunter's Glen, 192-unit
apt. complex in
St. Louis County, MO (e) 1,141,750 5,277,250 None 404,756 (264,011)
Marbrisa, 224-unit apt.
complex in Hills-
borough County, FL (e) 890,000 6,300,000 None 87,699 (5,685)
Park Crossing, 280-unit
apt. complex in
Gwinnett County, GA (e) 1,260,000 9,623,000 None 727,943 None
Steeplechase, 296-unit
apt. complex in
Lexington-Fayette, KY (e) 1,493,779 7,106,221 None 447,095 (333,696)
Willow Bend Lake,
360-unit apt.
complex in East Baton
Rouge Parish, LA (e) 1,799,200 9,437,800 125,468 1,829,522 (550,285)
----------- ----------- -------- ---------- -----------
Total $10,818,729 $57,720,271 $189,529 $6,053,844 $(1,719,637)
=========== =========== ======== ========== ===========
</TABLE>
<PAGE>
BALCOR REALTY INVESTORS 85-SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
<TABLE>
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 1995
(Continued)
<CAPTION>
Col. A Col. E Col. F Col. G Col. H Col. I
------------------ -------------------------------- -------- -------- ------ --------------
Gross Amounts at Which Life Upon
Carried at Close of Period Which Depre-
--------------------------- ciation in
Buildings Accumulated Date Date Latest Income
and Im- Total Deprecia- of Con- Acq- Statement
Description Land provements (c)(d) tion(d) struction uired is Computed
- ------------------- -------- ---------- ---------- --------- --------- ----- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Chestnut Ridge - Phase I,
192-unit apt. complex
in Fort Worth, TX $1,244,215 $5,714,009 $6,958,224 $2,492,028 1985 8/83 (f)
Country Oaks, 200-unit
apartment complex in
Memphis, TN 413,489 6,716,051 7,129,540 2,788,209 1985 9/85 (f)
Forest Ridge - Phase II,
328-unit apt. complex
in Arlington, TX 2,464,557 9,712,609 12,177,166 4,137,787 1985 10/83 (f)
Hunter's Glen, 192-unit
apt. complex in
St. Louis County, MO 1,096,602 5,463,143 6,559,745 2,280,731 1985 1/85 (f)
Marbrisa, 224-unit apt.
complex in Hills-
borough County, FL 890,630 6,381,384 7,272,014 2,548,055 1985 1/85 (f)
Park Crossing, 280-unit
apt. complex in
Gwinnett County, GA 1,261,598 10,349,345 11,610,943 4,034,830 1985 4/85 (f)
Steeplechase, 296-unit
apt. complex in
Lexington-Fayette, KY 1,436,769 7,276,630 8,713,399 3,229,210 1985 1/85 (f)
Willow Bend Lake,
360-unit apt.
complex in East Baton
<PAGE>
Rouge Parish, LA 1,717,327 10,924,378 12,641,705 4,627,132 1985 6/84 (f)
----------- ----------- ----------- -----------
Total $10,525,187 $62,537,549 $73,062,736 $26,137,982
=========== =========== =========== ===========
</TABLE>
<PAGE>
BALCOR REALTY INVESTORS 85-SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
NOTES TO SCHEDULE III
(a) Consists of legal fees, appraisal fees, title costs, other related
professional fees and capitalized construction-period interest.
(b) Guaranteed income earned on properties under the terms of certain
management and guarantee agreements was recorded by the Partnership as a
reduction of the basis of the property to which the guaranteed income relates.
(c) The aggregate cost of land for Federal income tax purposes is $10,794,040
and the aggregate cost of buildings and improvements for Federal income tax
purposes is $20,729,477. The total of these is $31,523,517.
(d) Reconciliation of Real Estate
-----------------------------
1995 1994 1993
---------- ---------- ----------
Balance at beginning of year $73,062,736 $73,062,736 $86,739,075
Additions during year:
Improvements None None 140,468
Cost of real estate sold None None (13,816,807)
----------- ----------- -----------
Balance at end of year $73,062,736 $73,062,736 $73,062,736
=========== =========== ===========
Reconciliation of Accumulated Depreciation
-------------------------------------------
1995 1994 1993
---------- ---------- ----------
Balance at beginning of year $24,251,998 $22,366,015 $24,668,835
Depreciation expense for
the year 1,885,984 1,885,983 2,051,056
Accumulated depreciation of
real estate sold None None (4,353,876)
---------- ---------- ----------
Balance at end of year $26,137,982 $24,251,998 $22,366,015
=========== =========== ===========
(e) See description of Mortgage Notes Payable in Note 4 of Notes to Financial
Statements.
(f) Depreciation expense is computed based upon the following estimated useful
lives:
Years
-----
Buildings and improvements 30
Furniture and fixtures 5
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 1125
<SECURITIES> 0
<RECEIVABLES> 144
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3100
<PP&E> 73062
<DEPRECIATION> 26138
<TOTAL-ASSETS> 51039
<CURRENT-LIABILITIES> 13512
<BONDS> 53469
0
0
<COMMON> 0
<OTHER-SE> 17150
<TOTAL-LIABILITY-AND-EQUITY> 51039
<SALES> 0
<TOTAL-REVENUES> 13108
<CGS> 0
<TOTAL-COSTS> 6283
<OTHER-EXPENSES> 2590
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5714
<INCOME-PRETAX> (1479)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1479)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1479)
<EPS-PRIMARY> (17.45)
<EPS-DILUTED> (17.45)
</TABLE>
