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, 1998
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
------------- -------------
Commission file number 0-14351
-------
BALCOR REALTY INVESTORS 85-SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
------------------------------------------------------
(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 Road
Bannockburn, Illinois 60015
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 267-1600
--------------
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
- ----------------
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 has retained cash reserves from the sale
of its real estate investments for contingencies which exist or may arise. The
Registrant's operations currently consist of interest income earned on
short-term investments and the payment of administrative expenses.
The Registrant utilized the net offering proceeds to acquire thirteen real
property investments and a minority joint venture interest in one additional
property and has since disposed of all of these investments. The Partnership
Agreement provides that the proceeds of any sale or refinancing of the
Registrant's properties will not be reinvested in new acquisitions.
The Partnership Agreement provides for the dissolution of the Registrant upon
the occurrence of certain events, including the disposition of all interests in
real estate. The Registrant sold its final real estate investment in March
1997. The Registrant has retained a portion of the cash from the property sales
to satisfy obligations of the Registrant as well as establish a reserve for
contingencies. The timing of the termination of the Registrant and final
distribution of cash will depend upon the nature and extent of liabilities and
contingencies which exist or may arise. Such contingencies may include legal
and other fees and costs stemming from litigation involving the Registrant
including, but not limited to, the lawsuits discussed in "Item 3. Legal
Proceedings". Due to this litigation, the Registrant will not be dissolved and
reserves will be held by the Registrant until the conclusion of all
contingencies. There can be no assurances as to the time frame for conclusion
of these contingencies.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" for information regarding the
Registrant's Year 2000 readiness.
The Registrant no longer has an ownership interest in any real estate
investment. The General Partner is not aware of any material potential
liability relating to environmental issues or conditions affecting real estate
formerly owned by 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, 1998, the Registrant did not own any properties.
<PAGE>
In the opinion of the General Partner, the Registrant has obtained adequate
insurance coverage for property liability and property damage matters.
See Notes to Financial Statements for other information regarding former real
estate property investments.
Item 3. Legal Proceedings
- -------------------------
Klein, et al. vs. Lehman Brothers, Inc., et al.
- -----------------------------------------------
On August 30, 1996, a proposed class action complaint was filed, Lenore Klein,
et al. vs. Lehman Brothers, Inc., et al. (Superior Court of New Jersey, Law
Division, Union County, Docket No. Unn-L-5162-96). The complaint was amended on
each of October 18, 1996, December 5, 1997 and January 15, 1998. The
Registrant, additional limited partnerships which were sponsored by The Balcor
Company (together with the Registrant, the "Affiliated Partnerships"), The
Balcor Company, American Express Company, Lehman Brothers, Inc., Smith Barney,
Inc., American Express Financial Advisors, and other affiliated entities and
various individuals are named defendants in the action. The most recent amended
complaint, plaintiffs' Third Amended Complaint, alleges, among other things,
common law fraud and deceit, negligent misrepresentation, breach of contract,
breach of fiduciary duty and violation of certain New Jersey statutes relating
to the disclosure of information in the offering of limited partnership
interests in the Affiliated Partnerships, the marketing of interests in the
Affiliated Partnerships and the acquisition of real properties for the
Affiliated Partnerships. The Third Amended Complaint seeks judgment for
compensatory damages equal to the amount invested in the Affiliated
Partnerships by the proposed class plus interest; general damages for injuries
arising from the defendants' alleged actions; equitable relief, including
rescission, on certain counts; punitive damages; treble damages on certain
counts; recovery from the defendants of all profits received by them as a
result of their alleged actions relating to the Affiliated Partnerships;
attorneys' fees and other costs.
In June 1998, the defendants filed a motion to dismiss the complaint for
failure to state a cause of action. Oral arguments were heard by the court on
August 21, 1998. On September 24, 1998, the judge issued a letter opinion
granting the defendants' motion to dismiss the complaint. On October 23, 1998,
the judge announced that he would enter an order dismissing the complaint
without prejudice, but stated that the plaintiffs would be required to file any
new pleading in a separate action and would not be allowed to amend the
existing complaint. The plaintiffs moved for a reconsideration of the judge's
ruling, which was denied on November 20, 1998. On December 28, 1998, plaintiffs
filed a notice of appeal from both the judge's October 23 and November 20, 1998
rulings.
On March 11, 1999, an order was entered by the Superior Court of New Jersey,
Appellate Division, dismissing the appeal in this action with prejudice.
Therefore, this will be the final report to investors regarding this matter.
<PAGE>
Masri vs. Lehman Brothers, Inc., et al.
- ---------------------------------------
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, 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' alleged actions; recovery from the defendants of
all profits received by them as a result of their alleged 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. The Registrant believes it has meritorious defenses
to contest the claims. It is not determinable at this time how the outcome of
this action will impact the remaining cash reserves of the Registrant.
Plaintiffs' lead counsel also represents the plaintiffs in the Lenore Klein
matter discussed above. Plaintiffs' counsel has indicated an intent to withdraw
this complaint. Raymond Masri has joined as an additional plaintiff in the
Lenore Klein matter discussed above.
Bruss et al. vs. Lehman Brothers, Inc., et al.
- ----------------------------------------------
On January 25, 1999, a proposed class action complaint was filed, Dorothy
Bruss, et al. vs. Lehman Brothers, Inc., et al. (Superior Court of New Jersey,
Law Division, Essex County, Docket No. L-000898-99). The Registrant,
additional limited partnerships which were sponsored by The Balcor Company
(together with the Registrant, the "Affiliated Partnerships"), The Balcor
Company, American Express Company, Lehman Brothers, Inc., Smith Barney, Inc.,
American Express Financial Corporation, and other affiliated entities and
various individuals are named defendants in the action. Lead counsel
representing the plaintiffs in this case is the same counsel representing the
plaintiffs in each of the Lenore Klein and Raymond Masri cases discussed above.
The complaint relates largely to the same issues as those raised in the Lenore
Klein and the Raymond Masri cases. The complaint alleges, among other things,
common law fraud and deceit, negligent misrepresentation, breach of contract,
breach of fiduciary duty and violation of certain New Jersey and other similar
state statutes relating to the disclosure of information in the offering of
limited partnership interests in the Affiliated Partnerships, the marketing of
interests in the Affiliated Partnerships and the acquisition of real property
for the Affiliated Partnerships. The complaint seeks judgement for
compensatory damages equal to the amount invested in the Affiliated
<PAGE>
Partnerships by the proposed class plus interest; general damages for injuries
arising from the defendants' alleged actions; equitable relief, including
rescission on certain counts; punitive damages; treble damages on certain
counts; recovery from the Defendants of all profits received by them as a
result of their alleged actions relating to the Affiliated Partnerships; and
attorneys' fees and other costs.
The defendants intend to vigorously contest this action. No class has been
certified as of this date. The Registrant believes that it has meritorious
defenses to contest the claims. It is not determinable at this time how the
outcome of this action will impact the remaining cash reserves of 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 1998.
<PAGE>
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. For information
regarding distributions, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources".
As of December 31, 1998, the number of record holders of Limited Partnership
Interests of the Registrant was 7,362.
Item 6. Selected Financial Data
- -------------------------------
Year ended December 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ------------
Total income $109,223 $662,720 $13,494,868 $13,107,902 $12,877,418
(Loss) income
before gain on
sales of properties
and extra-
ordinary items (100,003) (79,115) 1,876,971 (1,479,430) (2,019,363)
Net (loss) income (100,003) 4,491,057 27,848,238 (1,479,430) (2,019,363)
Net (loss) income
per Limited
Partnership
Interest-Basic
and Diluted (1.19) 45.84 328.46 (17.45) (23.82)
Total assets 1,957,071 2,435,003 18,507,810 51,038,768 52,186,795
Mortgage notes
payable None None 7,249,433 53,469,385 53,346,903
Distributions per
Limited Partner-
ship Interest (A) 4.81 150.00 None None None
(A) These amounts represent distributions of original capital.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
Operations
- ----------
Summary of Operations
- ---------------------
<PAGE>
Balcor Realty Investors 85-Series II A Real Estate Limited Partnership (the
"Partnership") sold seven properties and its minority joint venture interest in
one additional property in 1996 and its remaining property in 1997. The
Partnership recognized gains in 1997 and 1996 in connection with the sales.
During 1998, administrative expenses were higher than interest income earned on
short-term investments, which resulted in a net loss in 1998 as compared to net
income during 1997. The gain related to the 1997 property sale was
significantly lower than the total gains related to the 1996 property sales. As
a result, the Partnership recognized higher net income during 1996 as compared
to 1997. Further discussion of the Partnership's operations is summarized
below.
1998 Compared to 1997
- ---------------------
The Partnership sold the Steeplechase Apartments in 1997 and recognized a gain
of $4,992,080. As a result of the sale, rental and service income, interest
expense on mortgage note payable, depreciation, amortization of deferred
expenses, property operating expenses and property management fees ceased
during 1997.
Higher average cash balances were available for investment during 1997 due to
proceeds received in connection with the sales of the Partnership's properties
during the latter part of 1996 and the first quarter of 1997 prior to
distribution to Limited Partners in 1997. As a result, interest income on
short-term investments decreased during 1998 as compared to 1997.
The Partnership recognized other income in 1997 primarily in connection with
partial refunds of prior years' insurance premiums relating to the
Partnership's properties.
As a result of the sale of Steeplechase Apartments in 1997, real estate tax
expense ceased in 1997. However, the estimate of 1996 real estate taxes for the
Steeplechase Apartments was higher than the actual expense incurred, resulting
in the Partnership recognizing income during 1997.
During 1998, the Partnership incurred lower accounting, portfolio management
and professional fees and bank charges. This was the primary reason
administrative expenses decreased during 1998 as compared to 1997. This
decrease was partially offset by an increase in accrued legal fees during 1998
in connection with the litigation discussed in "Item 3. Legal Proceedings".
In connection with the 1997 sale of the Steeplechase Apartments, the
Partnership paid $289,537 in prepayment penalties and wrote off the remaining
unamortized deferred expenses of $132,371. These amounts were recognized as an
extraordinary item and classified as debt extinguishment expense.
1997 Compared to 1996
- ---------------------
The Partnership sold Forest Ridge-Phase II, Country Oaks, Chestnut Ridge-Phase
I, Hunters Glen, Marbrisa, Willow Bend Lake and Park Crossing apartment
<PAGE>
complexes in 1996 and recognized gains in connection with these sales totaling
$25,641,050. The sales of these properties resulted in decreases in rental and
service income, interest expense on mortgage notes payable, depreciation,
amortization of deferred expenses, property operating expenses, real estate
taxes and property management fees during 1997 as compared to 1996.
Due to higher average cash balances resulting from the investment of net
proceeds received in connection with the sales of the Partnership's properties
during the latter part of 1996 prior to distribution to Limited Partners in
January 1997, interest income on short-term investments decreased during 1997
as compared to 1996.
Rosehill Pointe Apartments, in which the Partnership held a minority joint
venture interest, was sold during June 1996. As a result, income from
participation in joint venture with an affiliate ceased during 1996. The
Partnership's share of the gain on the sale is included in participation in
joint venture with an affiliate for 1996. In connection with the sale, the
Partnership also recognized its share of debt extinguishment expense of
$20,945, which was classified as an extraordinary item.
During 1996, the Partnership repaid its General Partner loan with proceeds from
the property sales. As a result, interest expense on short-term loans from
affiliate ceased during 1996.
The Partnership incurred higher professional, legal and portfolio management
fees during 1996, which resulted in a decrease in administrative expenses
during 1997 as compared to 1996.
In connection with the 1996 property sales, the Partnership wrote-off the
remaining unamortized deferred expenses of $709,329. In addition, in connection
with the 1996 sales of Chestnut Ridge - Phase I, Hunters Glen, Willow Bend Lake
and Park Crossing apartment complexes, the Partnership paid $804,428 in
prepayment penalties. These amounts were recognized as extraordinary items and
classified as debt extinguishment expense for financial statement purposes.
In connection with the 1996 sale of Chestnut Ridge - Phase I Apartments, the
Partnership recognized an extraordinary gain on forgiveness of debt of
$1,864,919.
Liquidity and Capital Resources
- -------------------------------
The cash position of the Partnership decreased by approximately $469,000 as of
December 31, 1998 when compared to December 31, 1997 primarily due to the
distribution of remaining available Net Cash Proceeds to Limited Partners in
January 1998. The Partnership used cash of approximately $66,000 in its
operating activities to pay administrative expenses, which was partially offset
by interest income earned on short-term investments. The Partnership used cash
of approximately $403,000 in its financing activities to pay a distribution to
Limited Partners.
The Partnership Agreement provides for the dissolution of the Partnership upon
the occurrence of certain events, including the disposition of all interests in
real estate. The Partnership sold its final real estate investment in March
<PAGE>
1997. The Partnership has retained a portion of the cash from the property
sales to satisfy obligations of the Partnership as well as to establish a
reserve for contingencies. The timing of the termination of the Partnership and
final distribution of cash will depend upon the nature and extent of
liabilities and contingencies which exist or may arise. Such contingencies may
include legal and other fees and costs stemming from litigation involving the
Partnership including, but not limited to, the lawsuits discussed in "Item 3.
Legal Proceedings". Due to this litigation, the Partnership will not be
dissolved and reserves will be held by the Partnership until the conclusion of
all contingencies. There can be no assurances as to the time frame for
conclusion of these contingencies.
The Partnership made distributions from Net Cash Proceeds in 1998 and 1997
totaling $4.81 and $150.00 per Limited Partnership Interest, respectively. The
Partnership did not make any distributions to Limited Partners in 1996. See
Statements of Partners' Capital (Deficit) for additional information.
Limited Partners have received cumulative distributions of Net Cash Proceeds of
$154.81 per $1,000 Interest, as well as certain tax benefits. No additional
distributions are anticipated to be made prior to the termination of the
Partnership. However, after paying final partnership expenses, any remaining
cash reserves will be distributed. Limited Partners will not recover a
substantial portion of their original investment.
The Partnership sold all of its remaining real property investments and
distributed a majority of the proceeds from these sales to Limited Partners in
1997. Since the Partnership no longer has any operating assets, the number of
computer systems and programs necessary to operate the Partnership has been
significantly reduced. The Partnership relies on third party vendors to perform
most of its functions and has implemented a plan to determine the Year 2000
compliance status of these key vendors. The Partnership is within its timeline
for having these plans completed prior to the year 2000.
The Partnership's plan to determine the Year 2000 compliance status of its key
vendors involves the solicitation of information from these vendors through the
use of surveys, follow-up discussions and review of data where needed. The
Partnership has sent out surveys to these vendors and received back a majority
of these surveys. While the Partnership cannot guarantee Year 2000 compliance
by its key vendors, and in many cases will be relying on statements from these
vendors without independent verification, preliminary surveys indicate that the
key vendors performing services for the Partnership are aware of the issues and
are working on a solution to achieve compliance before the year 2000. The
Partnership is in the process of developing a contingency plan in the event any
of its key vendors are not Year 2000 compliant prior to the year 2000. As part
of its contingency plan, the Partnership will identify replacement vendors in
the event that current vendors are not substantially Year 2000 compliant by
June 30, 1999. The Partnership does not believe that failure by any of its key
vendors to be Year 2000 compliant by the year 2000 would have a material effect
on the business, financial position or results of operations of the
Partnership.
<PAGE>
Certain statements in this report constitute "forward looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. These
statements may include statements regarding income or losses as well as
assumptions relating to the foregoing.
The forward-looking statements made by the Partnership are subject to known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Partnership to differ from any
future results, performance or achievements expressed or implied by the
forward-looking statements.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
The supplemental financial information specified by Item 305 of Regulation S-K
is not applicable.
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
See Index to Financial Statements 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, 1998 December 31, 1997
----------------------- --------------------------
Financial Tax Financial Tax
Statements Returns Statements Returns
---------- --------- ---------- ----------
Total assets $1,957,071 $10,892,121 $2,435,003 $11,364,614
Partners' capital:
General Partner None None None None
Limited Partners 1,875,995 10,810,540 2,379,460 11,320,015
Net (loss) income:
General Partner None None 643,026 191,265
Limited Partners (100,003) (106,013) 3,848,031 6,521,210
Per Limited Part-
nership Interest (1.19)(A) (1.26) 45.84(A) 77.69
(A) Amount represents basic and diluted net (loss) income per Limited
Partnership Interest.
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
- -----------------------------------------------------------
(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 Managing Director, Chief Jayne A. Kosik
Financial Officer, Treasurer
and Assistant Secretary
Thomas E. Meador (age 51) 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 member of the board of directors 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.
Mr. Meador is on the Board of Directors of Grubb & Ellis Company, a publicly
traded commercial real estate firm. Mr. Meador was elected to the Board of
Grubb & Ellis Company in May 1998. Mr. Meador is also a director of AMLI
Commercial Properties Trust, a private real estate investment trust that owns
office and industrial buildings in the Chicago, Illinois area. Mr. Meador was
elected to the Board of AMLI Commercial Properties Trust in August 1998.
Alexander J. Darragh (age 44) joined Balcor in September 1988 and is
responsible for real estate advisory services for Balcor and American Express
Company. Mr. Darragh received masters' degrees in Urban Geography from Queen's
University and in Urban Planning from Northwestern University.
Jayne A. Kosik (age 41) joined Balcor in August 1982 and, as Chief Financial
Officer, is responsible for Balcor's financial, human resources and treasury
functions. Ms. Kosik is also a member of the board of directors of The Balcor
Company. From June 1989 until October 1996, Ms. Kosik had supervisory
responsibility for accounting functions relating to Balcor's public and private
partnerships. She is also Treasurer and a Senior Managing Director of The
Balcor Company. Ms. Kosik is a Certified Public Accountant.
(d) There is no family relationship between any of the foregoing officers.
<PAGE>
(e) 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 1998.
Item 11. Executive Compensation
- -------------------------------
The Registrant has not paid and does not propose to pay any remuneration to the
executive officers and directors of the General Partner. The executive 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 9 of Notes to Financial Statements for
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
Interest 10 Interests Less than 1%
Relatives of the officers and affiliates of the partners of the General Partner
owned 2,775 additional Interests as of December 31, 1998.
In addition, Balcor LP Corp., an affiliate of the General Partner, holds title
to 51 Limited Partnership Interests in the Partnership due exclusively to
instances in which Limited Partners abandoned title to their Limited
Partnership Interests. Balcor LP Corp. is a nominee holder only of such
Interests and has disclaimed any economic or beneficial ownership in said
Interests. All distributions of cash payable with respect to such Interests
held by Balcor LP Corp. are returned to the Partnership for distribution to
other Limited Partners in accordance with the Partnership Agreement.
(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 4 of Notes to Financial Statements for information relating to
the Partnership Agreement and the allocation of distributions and profits and
losses.
<PAGE>
See Note 9 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.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
- ------------------------------------------------------------------------
(a)
(1 & 2) See Index to Financial Statements 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 are incorporated herein by reference.
(27) Financial Data Schedule of the Registrant for 1998 is attached hereto.
(b) Reports on Form 8-K: No Reports were filed on Form 8-K during the quarter
ended December 31, 1998.
(c) Exhibits: See Item 14(a)(3) above.
<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/Jayne A. Kosik
--------------------------------
Jayne A. Kosik
Senior Managing Director and Chief
Financial Officer (Principal
Accounting and Financial Officer)
of Balcor Partners-XVII, the
General Partner
Date: March 19, 1999
--------------
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,
the General Partner
/s/Thomas E. Meador March 19, 1999
- -------------------- --------------
Thomas E. Meador
Senior Managing Director and Chief
Financial Officer (Principal
Accounting and Financial Officer)
of Balcor Partners XVII, the General
Partner
/s/Jayne A. Kosik March 19, 1999
- -------------------- --------------
Jayne A. Kosik
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants
Financial Statements:
Balance Sheets, December 31, 1998 and 1997
Statements of Partners' Capital (Deficit), for the years ended December 31,
1998, 1997 and 1996
Statements of Income and Expenses, for the years ended December 31, 1998, 1997
and 1996
Statements of Cash Flows, for the years ended December 31, 1998, 1997 and 1996
Notes to Financial Statements
Financial Statement Schedules 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:
In our opinion, the accompanying balance sheets and the related statements of
partners' capital (deficit), of income and expenses and of cash flows present
fairly, in all material respects, the financial position of Balcor Realty
Investors 85-Series II A Real Estate Limited Partnership (An Illinois Limited
Partnership, the "Partnership") at December 31, 1998 and 1997, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As described in Note 2 to the financial statements, the partnership agreement
provides for the dissolution of the Partnership upon the disposition of all its
real estate interests. As of December 31, 1998, the Partnership no longer has
an ownership interest in any real estate investment. Upon resolution of the
litigation described in Note 12 to the financial statements, the Partnership
intends to cease operations and dissolve.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 17, 1999
<PAGE>
BALCOR REALTY INVESTORS 85 - SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
BALANCE SHEETS
December 31, 1998 and 1997
ASSETS
1998 1997
-------------- --------------
Cash and cash equivalents $ 1,948,772 $ 2,418,169
Accounts and accrued interest receivable 8,299 16,834
-------------- --------------
$ 1,957,071 $ 2,435,003
============== ==============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 59,820 $ 20,861
Due to affiliates 21,256 34,682
-------------- --------------
Total liabilities 81,076 55,543
-------------- --------------
Commitments and contingencies
Limited Partners' capital (83,936
Interests issued and outstanding) 1,875,995 2,379,460
General Partner's capital None None
-------------- --------------
Total partners' capital 1,875,995 2,379,460
-------------- --------------
$ 1,957,071 $ 2,435,003
============== ==============
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' CAPITAL (DEFICIT)
for the years ended December 31, 1998, 1997, and 1996
Partners' Capital (Deficit) Accounts
-------------------------------------------
General Limited
Total Partner Partners
------------- -------------- --------------
Balance at December 31, 1995 $(17,149,878) $ (921,508) $ (16,228,370)
Deemed distribution to
Limited Partners (A) (219,557) (219,557)
Net income for the year
ended December 31, 1996 27,848,238 278,482 27,569,756
------------- -------------- --------------
Balance at December 31, 1996 10,478,803 (643,026) 11,121,829
Cash distributions
to Limited Partners (B) (12,590,400) (12,590,400)
Net income for the year
ended December 31, 1997 4,491,057 643,026 3,848,031
------------- -------------- --------------
Balance at December 31, 1997 2,379,460 None 2,379,460
Cash distribution
to Limited Partners (B) (403,462) (403,462)
Net loss for the year
ended December 31, 1998 (100,003) (100,003)
------------- -------------- --------------
Balance at December 31, 1998 $ 1,875,995 None $ 1,875,995
============= ============== ==============
(A) This amount represents a state withholding tax paid on behalf of
Limited Partners relating to the gain on the sale of Park Crossing
Apartments.
(B) Summary of distributions per Limited Partnership Interest:
1998 1997 1996
------------- -------------- --------------
First Quarter $ 4.81 $ 110.00 None
Second Quarter None 14.00 None
Third Quarter None 26.00 None
Fourth Quarter None None None
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, 1998, 1997, and 1996
1998 1997 1996
------------- -------------- --------------
Income:
Rental and service $ 438,523 $ 10,194,675
Interest on short-term
investments $ 109,223 190,124 229,901
Participation in income
of joint venture
with an affiliate 3,070,292
Other income 34,073
------------- -------------- --------------
Total income 109,223 662,720 13,494,868
------------- -------------- --------------
Expenses:
Interest on mortgage notes
payable 167,177 3,629,339
Interest on short-term
loan from affiliate 477,434
Depreciation 51,564 1,461,603
Amortization of deferred
expenses 7,943 164,203
Property operating 220,161 3,975,275
Real estate taxes (19,829) 747,563
Property management fees 24,335 517,242
Administrative 209,226 290,484 645,238
------------- -------------- --------------
Total expenses 209,226 741,835 11,617,897
------------- -------------- --------------
(Loss) income before gain
on sales of properties
and extraordinary items (100,003) (79,115) 1,876,971
Gain on sales of properties 4,992,080 25,641,050
------------- -------------- --------------
(Loss) income before
extraordinary items (100,003) 4,912,965 27,518,021
------------- -------------- --------------
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, 1998, 1997, and 1996
(Continued)
1998 1997 1996
------------- -------------- --------------
Extraordinary items:
Debt extinguishment
expenses (421,908) (1,513,757)
Gain on forgiveness of debt 1,864,919
Participation in debt
extinguishment expense
from joint venture with
an affiliate (20,945)
-------------- -------------
Total extraordinary items (421,908) 330,217
------------- -------------- --------------
Net (loss) income $ (100,003) $ 4,491,057 $ 27,848,238
============= ============== ==============
Income before extraordinary
items allocated to General
Partner None $ 703,434 $ 275,180
============= ============== ==============
(Loss) income before
extraordinary items
allocated to Limited
Partners $ (100,003) $ 4,209,531 $ 27,242,841
============= ============== ==============
(Loss) income before
extraordinary items per
Limited Partnership
Interest (83,936 Interests
issued and outstanding) -
Basic and Diluted $ (1.19) $ 50.15 $ 324.57
============= ============== ==============
Extraordinary items allocated
to General Partner None $ (60,408) $ 3,302
============= ============== ==============
Extraordinary items allocated
to Limited Partners None $ (361,500) $ 326,915
============= ============== ==============
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, 1998, 1997, and 1996
(Continued)
1998 1997 1996
------------- -------------- --------------
Extraordinary items per
Limited Partnership
Interest (83,936 issued
and outstanding) - Basic
and Diluted None $ (4.31) $ 3.89
============= ============== ==============
Net income allocated
to General Partner None $ 643,026 $ 278,482
============= ============== ==============
Net (loss) income allocated
to Limited Partners $ (100,003) $ 3,848,031 $ 27,569,756
============= ============== ==============
Net (loss) income per
Limited Partnership
Interest (83,936 issued
and outstanding) - Basic
and Diluted $ (1.19) $ 45.84 $ 328.46
============= ============== ==============
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, 1998, 1997, and 1996
1998 1997 1996
------------- -------------- --------------
Operating activities:
Net (loss) income $ (100,003) $ 4,491,057 $ 27,848,238
Adjustments to reconcile
net (loss) income to
net cash used in
operating activities:
Gain on sales of
properties (4,992,080) (25,641,050)
Debt extinguishment
expenses 132,371 709,329
Gain on forgiveness of
debt (1,864,919)
Participation in income
of joint venture
with an affiliate (3,070,292)
Participation in debt
extinguishment
expense from joint
venture with an
affiliate 20,945
Depreciation of
properties 51,564 1,461,603
Amortization of
deferred expenses 7,943 164,203
Net change in:
Escrow deposits 82,469 1,119,748
Accounts and accrued
interest receivable 8,535 515,531 (388,792)
Prepaid expenses 19,833 118,096
Accounts payable 38,959 (613,020) 491,722
Due to affiliates (13,426) (80,252) (641,070)
Accrued liabilities (431,506)
Security deposits (30,759) (202,275)
------------- -------------- --------------
Net cash used in operating
activities (65,935) (415,343) (306,020)
------------- -------------- --------------
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, 1998, 1997, and 1996
(Continued)
1998 1997 1996
------------- -------------- --------------
Investing activities:
Distributions from joint
venture with an affiliate 1,997,578
Contribution to joint
venture with an affiliate (155,300)
Proceeds from sales of
properties 10,400,000 61,516,507
Payment of selling costs (184,415) (1,634,268)
-------------- --------------
Net cash provided by
investing activities 10,215,585 61,724,517
-------------- --------------
Financing activities:
Distributions to Limited
Partners (403,462) (12,590,400)
Repayment of mortgage notes
payable (7,238,418) (38,271,532)
Repayment of loan payable -
affiliate (11,900,605)
Proceeds from issuance of
mortgage note payable -
affiliate 142,820
Principal payments on
mortgage notes payable (11,015) (328,312)
Releases from escrows 490,992
Deemed distribution
to Limited Partners (219,557)
------------- -------------- --------------
Net cash used in financing
activities (403,462) (19,839,833) (50,086,194)
------------- -------------- --------------
Net change in cash and cash
equivalents (469,397) (10,039,591) 11,332,303
Cash and cash equivalents at
beginning of year 2,418,169 12,457,760 1,125,457
------------- -------------- --------------
Cash and cash equivalents at
end of year $ 1,948,772 $ 2,418,169 $ 12,457,760
============= ============== ==============
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") has retained cash reserves from the sale of its real estate
investments for contingencies which exist or may arise. The Partnership's
operations currently consist of interest income earned on short-term
investments and the payment of administrative expenses.
2. Partnership Termination:
The Partnership Agreement provides for the dissolution of the Partnership upon
the occurrence of certain events, including the disposition of all interests in
real estate. The Partnership sold its final real estate investment in March
1997. The timing of the termination of the Partnership and final distribution
of cash will depend upon the nature and extent of liabilities and contingencies
which exist or may arise. Such contingencies may include legal and other fees
and costs stemming from litigation involving the Partnership including, but not
limited to, the lawsuits discussed in Note 12 of Notes to the Financial
Statements. Due to this litigation, the Partnership will not be dissolved and
reserves will be held by the Partnership until the conclusion of all
contingencies. There can be no assurances as to the time frame for conclusion
of these contingencies.
3. 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 was computed using the straight-line method. Rates
used in the determination of depreciation were based upon the following
estimated useful lives:
Buildings and improvements 30 years
Furniture and fixtures 5 years
Maintenance and repairs were charged to expense when incurred. Expenditures for
improvements were charged to the related asset account.
As properties were sold, the related costs and accumulated depreciation were
removed from the respective accounts. Any gain or loss on disposition was
recognized in accordance with generally accepted accounting principles.
<PAGE>
(c) The Partnership recorded its investments in real estate at the lower of
cost or fair value, and periodically assessed, but not less than on an annual
basis, possible impairment to the value of its properties. The General Partner
estimated the fair value of its properties based on the current sales price
less estimated closing costs. The General Partner determined that no impairment
in value had occurred prior to the sales of the properties. The General Partner
considered 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
indicated otherwise.
(d) Deferred expenses consisted of financing fees which were amortized over the
terms of the respective loan agreements. Upon sale, any remaining unamortized
balance was recognized as debt extinguishment expense and classified as an
extraordinary item.
(e) Investment in joint venture with an affiliate represented 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 recorded its initial investment at cost and
adjusted its investment account for additional capital contributions,
distributions and its share of joint venture income or loss.
(f) The Partnership calculates the fair value of its financial instruments
based on estimates using present value techniques. The Partnership includes
this additional information in the notes to the financial statements when the
fair value is different than the carrying value of those financial instruments.
When the fair value reasonably approximates the carrying value, no additional
disclosure is made.
(g) Revenue is recognized on an accrual basis in accordance with generally
accepted accounting principles.
(h) For financial statement purposes, prior to 1997, the partners were
allocated income and losses in accordance with the provisions in the
Partnership Agreement. In order for the capital account balances to
appropriately reflect the partners' remaining economic interests in the
Partnership, the income (loss) allocations have been adjusted.
(i) Cash and cash equivalents include all unrestricted, highly liquid
investments with an original maturity of three months or less. Cash is held or
invested primarily in one financial institution.
(j) 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.
(k) Statement of Financial Accounting Standards, No. 128, "Earnings per Share"
was adopted by the Partnership effective for the year-ended December 31, 1997
and has been applied to the prior earnings period presented in the financial
statements. Since the Partnership has no dilutive securities, there is no
difference between basic and diluted net income (loss) per Limited Partnership
Interest.
<PAGE>
(l) Certain reclassifications of prior years information were made to conform
to the 1998 presentation.
4. 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 provides that the General Partner will be allocated
1% and the Limited Partners will be allocated 99% of the profits and losses
from operations. For financial statement purposes, prior to 1997, the partners
were allocated income and losses in accordance with the provisions in the
Partnership Agreement. In order for the capital account balances to
appropriately reflect the partners' remaining economic interests in the
Partnership, the income (loss) allocations have been adjusted.
One hundred percent of Net Cash Receipts available for distribution was
distributed to the holders of Interests in proportion to their participating
percentages as of the record date for such distributions. Under certain
circumstances, the General Partner would have participated in the Net Cash
Proceeds from the sale or refinancing of Partnership properties. The General
Partner's participation was limited to 15% of excess Net Cash Proceeds after
the return of Original Capital plus a Cumulative Distribution of 6% on Adjusted
Original Capital to holders of Interests, as defined in the Partnership
Agreement. Since the required subordination levels were not met, the General
Partner has not received any distributions of Net Cash Receipts or Net Cash
Proceeds during the lifetime of the Partnership.
5. Mortgage Note Payable:
During 1997 and 1996, the Partnership incurred and paid interest expense on
non-affiliated mortgage notes payable of $167,177 and $3,510,851, respectively.
6. Management Agreements:
The Partnership's properties were managed by a third-party management company
prior to the sale of the properties. These management agreements provided for
annual fees of 5% of gross operating receipts.
7. Investment in Joint Venture with an Affiliate:
The Rosehill Pointe Apartments was owned by a joint venture consisting of the
Partnership and an affiliate. The joint venture partner was an affiliate with
investment objectives similar to those of the Partnership. The Partnership and
the affiliate held participating percentages in the joint venture of 38.38% and
61.62%, respectively. In June 1996, the joint venture sold the property in an
all cash sale for $20,700,000. From the proceeds of the sale, the joint venture
paid $15,537,677 to the third party mortgage holders in full satisfaction of
<PAGE>
the first and second mortgage loans, and paid $170,250 in selling costs. The
joint venture recognized a gain of $7,920,199 from the sale of this property,
of which $3,055,484 was the Partnership's share. During 1996, the Partnership
received distributions of $1,997,578 and made a capital contribution of
$155,300 to the joint venture.
The following information for the year ended December 31, 1996 has been
summarized from the financial statements of the joint venture:
Total income $4,967,399
Loss before gain on sale (15,995)
Gain on sale 7,920,199
Net income 7,904,204
8. 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 1998 in the financial statements is $6,010 less than the tax
loss of the Partnership for the same period.
9. Transactions with Affiliates:
Fees and expenses paid and payable by the Partnership to affiliates are:
Year Ended Year Ended Year Ended
12/31/98 12/31/97 12/31/96
-------------- -------------- --------------
Paid Payable Paid Payable Paid Payable
------ -------- ------ ------- ------ -------
Reimbursement of expenses
to the General Partner
at cost:
Accounting $ 8,804 $4,519 $31,951 $11,118 $16,454 $16,162
Data processing 2,224 872 2,104 None 4,300 None
Legal 5,990 3,215 18,964 4,640 13,521 13,243
Portfolio management 24,059 12,650 64,905 15,838 68,346 64,228
Other 3,086 None 21,301 3,086 21,302 21,301
Prior to May 1995, the Partnership participated in an insurance deductible
program with other affiliated partnerships in which the program paid claims up
to the amount of the deductible under the master insurance policy for its
properties. The program was administered by an affiliate of the General Partner
who received no fee for administering the program. However, the General Partner
was reimbursed for expenses. The Partnership paid premiums to the deductible
insurance program relating to claims for periods prior to May 1, 1995 of
$16,968 in 1996.
<PAGE>
The Partnership had a junior loan outstanding from The Balcor Company ("TBC"),
an affiliate of the General Partner, relating to the Chestnut Ridge - Phase I
Apartments. The loan of $1,816,035 along with accrued interest of $48,884 was
forgiven in connection with the sale of the property in September 1996. See
Notes 10 and 11 of Notes to Financial Statements for additional information.
During 1996, the Partnership incurred interest expense on the mortgage note
payable-affiliate of $118,488 and paid interest expense of $130,580.
During 1996, the Partnership repaid the General Partner loan, which had an
outstanding balance of $11,900,605 plus accrued interest expense payable of
$734,581 at December 31, 1995, with proceeds received from the sales of
properties. The Partnership incurred interest expense of $477,434 and paid
interest expense of $1,212,015 on this loan during 1996. Interest expense on
the General Partner loan was computed at the American Express Company cost of
funds rate plus a spread to cover administrative costs. The interest rate was
5.839% at the date of the loan repayment.
10. Property Sales:
(a) In March 1997, the Partnership sold the Steeplechase Apartments in an all
cash sale for $10,400,000. From the proceeds of the sale, the Partnership paid
$7,238,418 to the third party mortgage holder in full satisfaction of the first
mortgage loan, and paid $184,415 in selling costs and $289,537 in prepayment
penalties. The basis of the property was $5,223,505, which is net of
accumulated depreciation of $3,489,894. For financial statement purposes, the
Partnership recognized a gain of $4,992,080 from the sale of this property.
(b) In November 1996, the Partnership sold the Park Crossing Apartments in an
all cash sale for $11,350,000. From the proceeds of the sale, the Partnership
paid $7,131,987 to the third party mortgage holder in full satisfaction of the
first mortgage loan, paid $191,995 in selling costs and $142,639 in prepayment
penalties. In addition, the Partnership paid a state withholding tax of
$219,557 on behalf of the Limited Partners relating to the gain on the sale of
the property which has been recorded as a deemed distribution for financial
statement purposes. The basis of the property was $7,282,328, which is net of
accumulated depreciation of $4,328,615. For financial statement purposes, the
Partnership recognized a gain of $3,875,677 from the sale of this property.
(c) In October 1996, the Partnership sold the Willow Bend Lake Apartments in an
all cash sale for $14,350,000. From the proceeds of the sale, the Partnership
paid $9,737,486 to the third party mortgage holder in full satisfaction of the
first mortgage loan, paid $366,660 in selling costs and $389,499 in prepayment
penalties. The basis of the property was $7,745,500, which is net of
accumulated depreciation of $4,896,205. For financial statement purposes, the
Partnership recognized a gain of $6,237,840 from the sale of this property.
(d) In October 1996, the Partnership sold the Marbrisa Apartments in an all
cash sale for $7,800,000. From the proceeds of the sale, the Partnership paid
$5,361,230 to the third party mortgage holder in full satisfaction of the first
mortgage loan and paid $325,361 in selling costs. The basis of the property was
$4,565,345, which is net of accumulated depreciation of $2,706,669. For
financial statement purposes, the Partnership recognized a gain of $2,909,294
from the sale of this property.
<PAGE>
(e) In September 1996, the Partnership sold the Hunters Glen Apartments in an
all cash sale for $9,100,000. From the proceeds of the sale, the Partnership
paid $4,541,552 to the third party mortgage holder in full satisfaction of the
first mortgage loan, paid $270,215 in selling costs and $90,832 in prepayment
penalties. The basis of the property was $4,156,017, which is net of
accumulated depreciation of $2,403,728. For financial statement purposes, the
Partnership recognized a gain of $4,673,768 from the sale of this property.
(f) In September 1996, the Partnership sold the Chestnut Ridge - Phase I
Apartments in an all cash sale for $5,513,400. From the proceeds of the sale,
the Partnership paid $3,629,161 to the third party mortgage holder in full
satisfaction of the first mortgage loan, paid $199,601 in selling costs and
$181,458 in prepayment penalties. The Partnership received net proceeds of
$1,503,180 from the sale. However, the terms of the 1994 refinancing of this
property provided that minimum net proceeds of $1,646,000 were to be received
from the sale of this property. As a result, $142,820 was contributed to the
Partnership through an increase to the balance of the junior loan outstanding
from TBC. The basis of the property was $4,336,015, which is net of accumulated
depreciation of $2,622,209. For financial statement purposes, the Partnership
recognized a gain of $977,784 from the sale of this property.
(g) In September 1996, the Partnership sold the Country Oaks Apartments for
$8,250,000. The purchaser of the property took title subject to the existing
first mortgage loan in the amount of $5,946,893 which represents a noncash
transaction to the Partnership. Accordingly, the noncash aspect of this
transaction is not presented in the Partnership's Statements of Cash Flows.
From the proceeds of the sale, the Partnership paid $154,436 in selling costs.
The basis of the property was $4,191,573, which is net of accumulated
depreciation of $2,937,967. For financial statement purposes, the Partnership
recognized a gain of $3,903,991 from the sale of this property.
(h) In June 1996, the Partnership sold the Forest Ridge - Phase II Apartments
in an all cash sale for $11,100,000. From the proceeds of the sale, the
Partnership paid $7,870,116 to the third party mortgage holder in full
satisfaction of the first mortgage loan, and paid $126,000 in selling costs.
The basis of the property was $7,911,304, which is net of accumulated
depreciation of $4,265,862. For financial statement purposes, the Partnership
recognized a gain of $3,062,696 from the sale of this property.
11. Extraordinary Items:
(a) In connection with the sale of the Steeplechase Apartments in 1997, the
Partnership paid $289,537 in prepayment penalties and wrote off the remaining
unamortized deferred expenses related to the property of $132,371. These
amounts were recognized as an extraordinary item and classified as debt
extinguishment expense.
(b) In connection with the sales of properties during 1996, the Partnership
wrote off the remaining unamortized deferred expenses in the amount of
$709,329. In addition, in connection with the sales of the Chestnut Ridge -
Phase I and Hunters Glen, Willow Bend Lake and Park Crossing apartment
complexes, the Partnership paid $804,428 in prepayment penalties. These amounts
were recognized as an extraordinary item and classified as debt extinguishment
expenses.
<PAGE>
(c) In June 1996, the joint venture consisting of the Partnership and an
affiliate sold the Rosehill Pointe Apartments. In connection with the sale, the
joint venture wrote off the remaining unamortized deferred expenses. The
Partnership's share of this amount of $20,945 was recognized as an
extraordinary item and classified as debt extinguishment expense.
(d) In connection with the sale of the Chestnut Ridge - Phase I Apartments in
September 1996, the junior loan due to TBC, which had an outstanding balance of
$1,864,919, including accrued interest of $48,884, was forgiven which resulted
in an extraordinary gain on forgiveness of debt.
12. Contingencies:
The Partnership is currently involved in two related lawsuits, Masri vs.
Lehman Brothers, Inc., et al. and Bruss, et al. vs. Lehman Brothers, Inc., et
al., whereby the Partnership and certain affiliates have been named as
defendants alleging substantially similar claims involving certain state
securities and common law violations with regard to the property acquisition
process of the Partnership, and to the adequacy and accuracy of disclosures
of information concerning, as well as marketing efforts related to, the
offering of the Limited Partnership Interests of the Partnership. The
defendants continue to vigorously contest these actions. A plaintiff class
has not been certified in either action. With respect to the Masri case, no
determinations upon any significant issues have been made. The Bruss complaint
was filed on January 25, 1999. It is not determinable at this time how the
outcome of either action will impact the remaining cash reserves of the
Partnership. The Partnership believes it has meritorious defenses to contest
the claims.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1949
<SECURITIES> 0
<RECEIVABLES> 8
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1957
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1957
<CURRENT-LIABILITIES> 81
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1876
<TOTAL-LIABILITY-AND-EQUITY> 1957
<SALES> 0
<TOTAL-REVENUES> 109
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 209
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (100)
<INCOME-TAX> 0
<INCOME-CONTINUING> (100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (100)
<EPS-PRIMARY> (1.19)
<EPS-DILUTED> (1.19)
</TABLE>
