UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: SEPTEMBER 30, 1997
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: 0-15037
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Delaware 04-2870345
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(State of organization) (I.R.S. Employer
Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. Not applicable.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
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Prospectus of the registrant dated Part IV
May 14, 1985, as supplemented
Current Report on Form 8-K of registrant dated Part IV
September 9, 1997
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
1997 FORM 10-K
TABLE OF CONTENTS
Part I Page
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Item 1 Business I-1
Item 2 Properties I-3
Item 3 Legal Proceedings I-4
Item 4 Submission of Matters to a Vote of Security Holders I-5
Part II
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Item 5 Market for the Partnership's Limited Partnership Interests II-1
and Related Security Holder Matters
Item 6 Selected Financial Data II-1
Item 7 Management's Discussion and Analysis of Financial II-2
Condition and Results of Operations
Item 8 Financial Statements and Supplementary Data II-9
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure II-9
Part III
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Item 10 Directors and Executive Officers of the Partnership III-1
Item 11 Executive Compensation III-2
Item 12 Security Ownership of Certain Beneficial Owners and
Management III-2
Item 13 Certain Relationships and Related Transactions III-3
Part IV
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Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
Financial Statements and Supplementary Data F-1 to F-35
<PAGE>
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Partnership's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such a difference are discussed in Item 7 in the section entitled
"Certain Factors Affecting Future Operating Results" beginning on page II-8 of
this Form 10-K.
PART I
Item 1. Business
Paine Webber Income Properties Seven Limited Partnership (the
"Partnership") is a limited partnership formed in January 1985 under the Uniform
Limited Partnership Act of the State of Delaware for the purpose of investing in
a diversified portfolio of income-producing real properties including
apartments, shopping centers and office buildings. The Partnership sold
$37,969,000 in Limited Partnership units (the "Units"), representing 37,969
Units at $1,000 per Unit, from May 14, 1985 to May 13, 1986 pursuant to a
Registration Statement on Form S-11 filed under the Securities Act of 1933
(Registration No. 2-95562). Limited Partners will not be required to make any
additional capital contributions.
The Partnership originally invested the net proceeds of the public
offering, through five joint venture partnerships, in seven operating
properties, comprised of five multi-family apartment complexes, one mixed-use
office and retail property and one shopping center. As discussed further below,
during fiscal 1997 three of the multi-family properties were sold. A fourth
multi-family property was sold subsequent to September 30, 1997. In addition,
the office portion of the investment in the mixed-use Concourse property was
lost through foreclosure proceedings on December 17, 1992. The Partnership
retains an interest in the retail plaza portion of the Concourse property. The
two office towers owned by the Concourse joint venture had comprised
approximately 28% of the Partnership's original investment portfolio. As of
September 30, 1997, the Partnership owned, through joint venture partnerships,
interests in the operating properties set forth in the following table:
Name of Joint Venture Date of
Name and Type of Property Acquisition
Location Size of Interest Type of Ownership (1)
- -------- ---- ----------- ---------------------
West Palm Beach Concourse 30,473 7/31/85 Fee ownership of land
Associates (2) gross and improvements
The Concourse leasable (through joint
Retail Plaza sq. ft. venture).
West Palm Beach, Florida
Chicago Colony Apartments 783 12/27/85 Fee ownership of land
Associates units and improvements
The Colony Apartments (through joint
Mount Prospect, Illinois venture).
Chicago Colony Square 39,572 12/27/85 Fee ownership of land
Associates gross and improvements
Colony Square Shopping Center leasable (through joint
Mount Prospect, Illinois sq. ft. venture).
Daniel Meadows Partnership 200 6/19/86 Fee ownership of land
The Meadows on the Lake units and improvements
Apartments (through joint
Birmingham, Alabama venture).
(1) See Notes to the Consolidated Financial Statements filed with this Annual
Report for a description of the long-term mortgage indebtedness secured by
the Partnership's operating property investments and for a description of
the agreements through which the Partnership has acquired these real estate
investments.
(2) On October 29, 1992, West Palm Beach Concourse Associates entered into a
settlement agreement with its mortgage lenders which resulted in the
retention of the ownership of the retail component of the original
investment property (30,473 square feet) and the foreclosure of the two
office towers (70,000 square feet each) by the first mortgage lender. The
foreclosure of the office towers was completed on December 17, 1992. West
Palm Beach Concourse Associates had been in default of the first and second
mortgage loans secured by the venture's mixed-use, office and retail
operating properties since May 1991. The inability of the venture to service
its debt obligations resulted from a significant deterioration in leasing
levels and effective rental rates for the office towers caused by severely
depressed local market conditions.
(3) Subsequent to year-end, on December 18, 1997 Daniel Meadows Partnership sold
its operating investment property, The Meadows on the Lakes Apartments, to
an unrelated party for $9.525 million. The sale generated net proceeds of
approximately $4.4 million after repayment of the outstanding first mortgage
loan of approximately $4.7 million and closing costs of approximately
$400,000. The Partnership received 100% of the net proceeds in accordance
with the terms of the joint venture agreement.
The Partnership previously had an interest in HMF Associates, a joint
venture which owned three multi-family apartment properties. On June 27, 1997,
HMF Associates sold the properties known as The Hunt Club Apartments located in
Seattle, Washington and The Marina Club Apartments located in Des Moines,
Washington to an unrelated third party for approximately $5.3 million and $3.1
million, respectively. The Partnership received net proceeds of approximately
$288,000 in connection with the sale of these two assets in accordance with a
discounted mortgage loan payoff agreement reached with the lender in April 1997.
On September 9, 1997, HMF Associates sold the property known as The Enchanted
Woods Apartments located in Federal Way, Washington to an unrelated third party
for approximately $9.2 million. The Partnership received net proceeds of
approximately $261,000 in connection with the sale in accordance with the
discounted mortgage loan payoff agreement. See Item 7 for a further discussion
of these transactions.
The Partnership's original investment objectives were to:
(i) provide the Limited Partners with cash distributions which, to some
extent, would not constitute taxable income;
(ii) preserve and protect Limited Partners' capital;
(iii)achieve long-term appreciation in the value of its properties; and
(iv) provide a build up of equity through the reduction of mortgage loans
on its properties.
Regular quarterly distributions of excess operating cash flow, which had
been suspended in 1990, were reinstated during fiscal 1997. Through September
30, 1997, the Limited Partners had received cumulative cash distributions
totalling approximately $11,816,000, or approximately $327 per original $1,000
investment for the Partnership's earliest investors. Of this total, $40 per
original $1,000 investment represents a distribution made in February 1997 of an
amount of Partnership cash reserves which exceeded expected future requirements,
and $50 per original investment represents a Special Capital Distribution made
on August 15, 1997 to unitholders of record as of June 27, 1997. Of this amount,
$7.60 per original $1,000 investment represented net sale proceeds from the
disposition of The Hunt Club Apartments and The Marina Club Apartments, $41.48
per original $1,000 investment represented proceeds from the settlements of
litigation covering construction-related defects at the Hunt Club, Marina Club
and Enchanted Woods properties and $0.92 per original $1,000 investment
represented an additional amount of cash reserves that exceeded expected future
requirements. The remaining distributions have been from operating cash flow. A
substantial portion of these cash distributions to date have been sheltered from
current taxable income.
As of September 30, 1997, the Partnership retained an ownership interest
in four of its seven original operating properties, although, as noted above, a
major portion of the investment in The Concourse was lost to foreclosure in
December 1992. In addtion, as noted above subsequent to year end, on December
18, 1997, the Meadows joint venture sold its operating investment property to an
unrelated third party for $9,525,000. The Partnership received net proceeds of
approximately $4.4 million after paying off the outstanding mortgage loan of
approximatley $4.7 million and closing costs. The Partnership received 100% of
the net proceeds in accordance with the joint venture agreement. The net
proceeds from the sale of The Meadows on the Lake Apartments will be distributed
to the Limited Partners on February 13, 1998 along with the proceeds received
from the sale of the Enchanted Woods property discussed further above. The loss
of the Concourse Office Towers to foreclosure in fiscal 1993 and the minimal
proceeds from the sale of the three properties owned by HMF Associates means
that the Partnership will be unable to return the full amount of the original
invested capital to the Limited Partners. The two office towers represented 28%
of the Partnership's original investment portfolio. The three apartment
complexes owned by HMF Associates comprised another 13% of the original
investment portfolio. The amount of capital which will be returned will depend
upon the proceeds received from the final liquidation of the remaining
investments. The amount of such proceeds will ultimately depend upon the value
of the underlying investment properties at the time of their final disposition,
which, for the most part, cannot presently be determined. Of the three assets
remaining after the sale of the Meadows on the Lake Apartments, the Colony
Apartments property has significant equity above the outstanding debt obligation
based on the estimated current property value, while the two retail properties
would not be expected to yield substantial net proceeds after the mortgage debt
if sold under current market conditions. At the present time, real estate values
for retail shopping centers in certain markets are being adversely impacted by
the effects of overbuilding and consolidations among retailers which have
resulted in an oversupply of space. It remains unclear at this time what impact,
if any, this general trend will have on the operations and/or market values of
the Partnership's two retail property investments. The Managing General
Partner's strategy is to preserve the Partnership's remaining equity interests
and to seek strategic opportunities to enhance property values while the
respective local economies and rental markets continue to improve in order to
return as much of the invested capital as possible.
All of the remaining properties in which the Partnership has an interest
are located in real estate markets in which they face significant competition
for the revenues they generate. The apartment complex competes with numerous
projects of similar types generally on the basis of price, location and
amenities. As in all markets, the apartment project also competes with the local
single family home market for prospective tenants. The continued availability of
low interest rates on home mortgage loans has increased the level of this
competition in all parts of the country over the past several years. However,
the impact of the competition from the single-family home market has been offset
by the lack of significant new construction activity in the multi-family
apartment market over most of this period. In the past 12 months, development
activity for multi-family properties in many markets has escalated
significantly. The shopping center and retail plaza also compete for long-term
commercial tenants with numerous projects of similar type generally on the basis
of location, rental rates, tenant mix and tenant improvement allowances.
The Partnership has no real estate investments outside the United States.
The Partnership is engaged solely in the business of real estate investment,
therefore, presentation of information about industry segments is not
applicable.
The Partnership has no employees; it has, however, entered into an
Advisory Contract with PaineWebber Properties Incorporated (the "Adviser"),
which is responsible for the day-to-day operations of the Partnership. The
Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a
wholly owned subsidiary of PaineWebber Group, Inc. ("PaineWebber").
The general partners of the Partnership (the "General Partners") are
Seventh Income Properties Fund, Inc. and Properties Associates 1985, L.P.
Seventh Income Properties Fund, Inc., a wholly-owned subsidiary of PaineWebber,
is the Managing General Partner of the Partnership. The Associate General
Partner of the Partnership is Properties Associates 1985, L.P., a Virginia
limited partnership, certain limited partners of which are also officers of the
Adviser and the Managing General Partner. Subject to the Managing General
Partner's overall authority, the business of the Partnership is managed by the
Adviser.
The terms of transactions between the Partnership and affiliates of the
Managing General Partner of the Partnership are set forth in Items 11 and 13
below to which reference is hereby made for a description of such terms and
transactions.
Item 2. Properties
As of September 30, 1997, the Partnership owned interests in four
operating properties through joint venture partnerships. The joint venture
partnerships and the related properties are referred to under Item 1 above to
which reference is made for the name, location and description of each property.
Occupancy figures of each fiscal quarter during 1997, along with an
average for the year, are presented below for each property.
Percent Occupied At
-------------------------------------------------
Fiscal
1997
12/31/96 3/31/97 6/30/97 9/30/97 Average
-------- ------- ------- ------- -------
The Concourse Retail Plaza 90% 90% 90% 90% 90%
The Colony Apartments 94% 95% 97% 97% 96%
Colony Square Shopping Center 93% 100% 94% 97% 96%
The Meadows on the Lake
Apartments 93% 89% 94% 94% 93%
Enchanted Woods Apartments (1) 87% 92% 92% N/A N/A
(formerly Forest Ridge
Apartments)
The Marina Club Apartments (2) 95% 93% N/A N/A N/A
The Hunt Club Apartments (2) 92% 97% N/A N/A N/A
(1) The Enchanted Woods Apartments was sold in September 1997 (see Item 7).
(2) The Marina Club Apartments and The Hunt Club Apartments were sold in June
1997 (see Item 7).
Item 3. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly
dissatisfied partnership investors. In March 1995, after the actions were
consolidated under the title In re PaineWebber Limited Partnership Litigation,
the plaintiffs amended their complaint to assert claims against a variety of
other defendants, including Seventh Income Properties Fund, Inc. and Properties
Associates 1985, L.P. ("PA1985"), which are the General Partners of the
Partnership and affiliates of PaineWebber. On May 30, 1995, the court certified
class action treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleged
that, in connection with the sale of interests in Paine Webber Income Properties
Seven Limited Partnership, PaineWebber, Seventh Income Properties Fund, Inc. and
PA1985 (1) failed to provide adequate disclosure of the risks involved; (2) made
false and misleading representations about the safety of the investments and the
Partnership's anticipated performance; and (3) marketed the Partnership to
investors for whom such investments were not suitable. The plaintiffs, who
purported to be suing on behalf of all persons who invested in Paine Webber
Income Properties Seven Limited Partnership, also alleged that following the
sale of the partnership interests, PaineWebber, Seventh Income Properties Fund,
Inc. and PA1985 misrepresented financial information about the Partnerships
value and performance. The amended complaint alleged that PaineWebber, Seventh
Income Properties Fund, Inc. and PA1985 violated the Racketeer Influenced and
Corrupt Organizations Act ("RICO") and the federal securities laws. The
plaintiffs sought unspecified damages, including reimbursement for all sums
invested by them in the partnerships, as well as disgorgement of all fees and
other income derived by PaineWebber from the limited partnerships. In addition,
the plaintiffs also sought treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which provides for the complete resolution of the class action litigation,
including releases in favor of the Partnership and PWPI, and the allocation of
the $125 million settlement fund among investors in the various partnerships and
REITs at issue in the case. As part of the settlement, PaineWebber also agreed
to provide class members with certain financial guarantees relating to some of
the partnerships and REITs. The details of the settlement are described in a
notice mailed directly to class members at the direction of the court. A final
hearing on the fairness of the proposed settlement was held in December 1996,
and in March 1997 the court announced its final approval of the settlement. The
release of the $125 million of settlement proceeds had been delayed pending the
resolution of an appeal of the settlement agreement by two of the plaintiff
class members. In July 1997, the United States Court of Appeals for the Second
Circuit upheld the settlement over the objections of the two class members. As
part of the settlement agreement, PaineWebber agreed not to seek indemnification
from the related partnerships and real estate investment trusts at issue in the
litigation (including the Partnership) for any amounts that it is required to
pay under the settlement.
In June 1996, approximately 50 plaintiffs filed an action entitled
Bandrowski v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiff's purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleged, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint sought
compensatory damages of $3.4 million plus punitive damages against PaineWebber.
In September 1996, the court dismissed many of the plaintiffs' claims in the
Bandrowski action as barred by applicable securities arbitration regulations.
Mediation with respect to the Bandrowski action was held in December 1996. As a
result of such mediation, a settlement between PaineWebber and the plaintiffs
was reached which provided for the complete resolution of this matter. Final
releases and dismissals with regard to this action were received during fiscal
1997.
Based on the settlement agreements discussed above covering all of the
outstanding unitholder litigation, management believes that the resolution of
these matters will not have a material impact on the Partnership's financial
statements, taken as a whole.
The Partnership is not subject to any other material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Security Holder Matters
At September 30, 1997 there were 2,280 record holders of Units in the
Partnership. There is no public market for the resale of Units, and it is not
anticipated that a public market for the Units will develop. . Upon request, the
Managing General Partner will endeavor to assist a Unitholder desiring to
transfer his Units and may utilize the services of PWI in this regard. The price
to be paid for the Units will be subject to negotiation by the Unitholder. The
Managing General Partner will not redeem or repurchase Units.
Reference is made to Item 6 below for a discussion of the amount of cash
distributions made to the Limited Partners during fiscal 1997.
Item 6. Selected Financial Data
Paine Webber Income Properties Seven Limited Partnership
(In thousands except per unit data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 808 $ 773 $ 835 $ 561 $ 905
Operating loss $(1,214) (1) $ (128) $ (101) $ (401) $ (530)
Partnership's share of
unconsolidated ventures'
income (losses) $ 36 $ (276) $ (1,100) $ (1,592) $ (2,484)
Partnership's share of gain on
sale of operating investment
properties $ 4,210 - - - -
Loss on transfer of assets
at foreclosure $ - - - - $ (6,468)
Income (loss) before
extraordinary gain $ 3,033 $ (404) $ (1,200) $ (1,992) $ (9,479)
Partnership's share of
extraordinary gain from
settlement of debt
obligations $ 7,463 - $ 1,600 - $ 6,405
Net income (loss) $10,496 $ (404) $ 400 $ (1,992) $ (3,074)
Per Limited Partnership Unit:
Income (loss) before
extraordinary gain $ 79.04 $(10.53) $ (31.29) $ (51.90) $(247.02)
Partnership's share of
extraordinary gain
from settlement of
debt obligations $194.50 - $ 41.72 - $ 166.91
Net income (loss) $273.54 $(10.53) $ 10.43 $ (51.90) $ (80.11)
Cash distributions
from operations $ 18.25 - - - -
Cash distribuitons from
captial transactions $ 90.00 - - - -
Total assets $ 6,789 $ 8,852 $ 7,148 $ 6,347 $ 5,191
Mortgage notes payable $ 1,614 $ 1,671 $ 1,723 $ 2,499 $ 2,523
</TABLE>
(1)The Partnership's operating loss for the year ended September 30, 1997
includes an impairment loss of $1,000,000 related to the consolidated
Concourse Retail Plaza. See Note 2 to the accompanying financial
statements for a further discussion of this writedown.
The above selected financial data should be read in conjunction with the
consolidated financial statements and the related notes appearing elsewhere in
this Annual Report.
The above per Limited Partnership Unit information is based upon the
37,969 Limited Partnership Units outstanding during each year.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Information Relating to Forward-Looking Statements
- --------------------------------------------------
The following discussion of financial condition includes forward-looking
statements which reflect management's current views with respect to future
events and financial performance of the Partnership. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified below under the heading "Certain Factors Affecting Future Operating
Results", which could cause actual results to differ materially from historical
results or those anticipated. The words "believe," "expect," "anticipate," and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which were made
based on facts and conditions as they existed as of the date of this report. The
Partnership undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Liquidity and Capital Resources
- -------------------------------
The Partnership offered units of limited partnership interests to the
public from May 14, 1985 to May 13, 1986 pursuant to a Registration Statement
filed under the Securities Act of 1933. Gross proceeds of $37,969,000 were
received by the Partnership, and after deducting selling expenses and offering
costs, approximately $32,602,000 was invested in five joint venture partnerships
which owned seven operating properties, comprised of five multi-family apartment
complexes, one mixed-use office and retail property and one shopping center. As
discussed further below, during fiscal 1997 three of the multi-family properties
were sold. A fourth multi-family property was sold subsequent to September 30,
1997. In addition, the office portion of the investment in the mixed-use
Concourse property was lost through foreclosure proceedings on December 17,
1992. The Partnership retains an interest in the retail plaza portion of the
Concourse property. The Partnership does not have any commitments for additional
investments but may be called upon to fund its share of operating deficits or
capital needs of its existing investments in accordance with the respective
joint venture agreements.
As previously reported, despite the successful lease-up of all three
properties owned by HMF Associates following the completion of the required
construction-related repairs, the net operating income from the properties was
not sufficient to fully cover the interest accruing on the outstanding debt
obligations which matured on June 1, 1997 and July 1, 1997. As a result, the
total obligation due to the mortgage lender had continued to increase since the
date of a fiscal 1992 loan modification agreement. The balance of the original
mortgage loans on the Hunt Club, Marina Club and Enchanted Woods properties at
the time of their fiscal 1987 acquisition dates totalled $13,035,000. After
advances from the lender to pay for costs to repair the construction defects of
approximately $4.8 million and interest deferrals totalling approximately $6.2
million, the total obligation to the mortgage lender totalled approximately $24
million as of the fiscal 1997 maturity dates. As a result, the aggregate
estimated fair value of the operating investment properties was substantially
lower than the outstanding obligations to the first mortgage holder. In April
1997, the lender agreed to another modification agreement which provided the
joint venture with an opportunity to complete a sale transaction prior to the
loan maturity dates. Under the terms of the agreement, the Partnership and its
co-venture partner could qualify to receive a nominal payment from the sales
proceeds at a specified level if a sale was completed by June 30, 1997 and
certain other conditions were met. In May 1997, the agreement with the lender
was modified to reflect the terms and conditions of a sale involving only the
Hunt Club and Marina Club properties. The joint venture also obtained a
four-month extension from the lender of the discounted loan pay off agreement
with respect to the Enchanted Woods Apartments.
On June 27, 1997, HMF Associates sold the properties known as The Hunt
Club Apartments and The Marina Club Apartments to an unrelated third party for
approximately $5.3 million and $3.1 million, respectively. The Partnership
received net proceeds of approximately $288,000 in connection with the sale of
these two assets in accordance with the discounted mortgage loan payoff
agreement reached with the lender in April 1997. The third property owned by the
joint venture, the Enchanted Woods Apartments, located in Federal Way,
Washington, had been under contract for sale to the same buyer that purchased
The Hunt Club and Marina Club properties, however, the buyer subsequently
withdrew the offer to purchase Enchanted Woods. A Special Capital Distribution
of $1,898,450, or $50 per original $1,000 investment, was made on August 15,
1997, to unitholders of record as of June 27, 1997. Of this amount, $7.60 per
original $1,000 investment represented net sale proceeds from the disposition of
The Hunt Club Apartments and The Marina Club Apartments, $41.48 per original
$1,000 investment represented proceeds from the settlements of litigation
covering construction-related defects at the Hunt Club, Marina Club and
Enchanted Woods properties as discussed further below, and $0.92 per original
$1,000 investment represented Partnership reserves that exceed future
requirements. On September 9, 1997, HMF Associates sold The Enchanted Woods
Apartments to an unrelated third party for approximately $9.2 million. The
Partnership received net proceeds of approximately $261,000 in connection with
the sale in accordance with the discounted mortgage loan payoff agreement
referred to above. The net proceeds of this transaction will be distributed to
the Limited Partners on February 13, 1998.
As previously reported, the Partnership received $1,574,903 in fiscal
years 1994 and 1995 in connection with the various settlements of litigation
against the developer and subcontractors covering construction-related defects
at the Hunt Club, Marina Club and Enchanted Woods (formerly Forest Ridge)
apartment complexes. This $1,574,903 had been held in the Partnership's reserves
for potential use in an economically viable workout that the Partnership tried
to negotiate with the lender for these properties. Management had numerous
discussions with the mortgage holder for the properties owned by HMF Associates
over the past several years regarding a possible loan modification aimed at
preventing the further accumulation of deferred interest and reducing the
overall debt obligations. Such a plan would have required a sizable equity
infusion by the joint venture. During fiscal 1996, management of the Partnership
evaluated whether an additional investment in the venture would be economically
prudent in light of the future appreciation potential of the properties and
concluded that it would be unwise to commit the additional equity investment
required to effect the proposed debt restructuring. With the Hunt Club, Marina
Club and Enchanted Woods properties sold pursuant to the discounted loan payoff
agreement in fiscal 1997, as described above, the Partnership no longer had a
need to retain the litigation proceeds and distributed them to the Limited
Partners as part of the August 1997 Special Capital Distribution.
Notwithstanding the sales of the properties owned by HMF Associates for
net proceeds which were substantially less than the amounts of the Partnership's
original investments, due to improvements in the Partnership's cash flow during
fiscal 1996 and the expectation that it will continue in the future, the
Partnership reinstated the payment of regular quarterly distributions at the
annual rate of 2.5% on remaining invested capital effective with the payment
made on February 14, 1997 for the quarter ended December 31, 1996. The payment
of quarterly distributions was discontinued in early 1990 primarily due to the
lack of cash flow from several of the Partnership's investments. The plan to
reinstate quarterly distributions was the result of the improvement in property
operations and the lower debt service costs at the Colony Apartments and The
Meadows on the Lake Apartments, which represent a combined 48% of the
Partnership's original investment portfolio. The Partnership also made a special
distribution of $40 per original $1,000 investment on February 14, 1997 to
Unitholders of record on December 31, 1996. This amount represented a
distribution of Partnership reserves which exceeded expected future
requirements. Quarterly cash distributions were increased to an annualized rate
of 2.65% on remaining invested capital for the quarter ended September 30, 1997.
During fiscal 1997, the Partnership received cash flow distributions of
$774,000 from the Colony Apartments joint venture and $567,000 from the Meadows
joint venture. During the third quarter of fiscal 1996, the Meadows joint
venture completed the final phase of the repair work on the construction defects
at the property using the proceeds from the insurance settlement originally
escrowed with the lender plus excess cash flow from property operations. With
the repair work at The Meadows on the Lake Apartments completed, the venture
began generating regular distributions of excess cash flow to the Partnership.
The Partnership and its co-venture partner had received unsolicited offers from
prospective purchasers to acquire The Meadows on the Lake Apartments in early
fiscal 1997. After carefully reviewing the offers, the Partnership determined
that the property should sell at a higher price and directed the co-venture
partner to market the property for sale. During the fourth quarter of fiscal
1997, an offer was received from a qualified buyer which met the Partnership's
sale criteria. Subsequent to year-end, on December 18, 1997 the Meadows joint
venture sold the operating investment property to an unrelated third party for
$9,525,000. The sale generated net proceeds of approximately $4.4 million after
paying off the outstanding mortgage loan of approximately $4.7 million and
closing costs of approximately $400,000. The net proceeds from the sale of The
Meadows on the Lake Apartments will be distributed to the Limited Partners on
February 13, 1998. Future distributions from the Colony Apartments joint venture
are expected to be sufficient to fund the Partnership's operating costs, allow
for the payment of quarterly distributions to the Unitholders and provide
adequate liquidity to fund the capital needs which may exist at the other joint
venture investment properties.
The Partnership is focusing on potential disposition strategies for the
remaining investments in its portfolio, which consist of two retail properties
and one multi-family apartment complex. Although no assurances can be given, it
is currently contemplated that sales of the Partnership's remaining assets could
be completed within the next 2 to 3 years. Of the three assets remaining after
the sale of the Meadows on the Lake Apartments, the Colony Apartments property
has significant equity above the outstanding debt obligation based on the
estimated current property value, while the two retail properties would not be
expected to yield substantial net proceeds after the mortgage debt if sold under
current market conditions.
At Colony Apartments the occupancy level averaged 96% for fiscal 1997,
down from the average occupancy level of 98% for the prior fiscal year. The
slight decline in average occupancy is primarily attributable to the aggressive
rental rate increases implemented at the property during the year. Nonetheless,
occupancy did improve at Colony Apartments during the second half of fiscal
1997. Part of the improvement during the second half of the year is attributable
to the efforts of the property's management and leasing team to lease the
available one-bedroom units. During the first quarter of fiscal 1998, management
will focus on the two-bedroom units. The improving local economy is enabling
tenants who normally share two-bedroom apartments with roommates to afford
one-bedroom apartments on their own. Asking rental rates on vacant two-bedroom
units will be monitored closely by the property's leasing team and adjusted as
needed in order to maintain an overall occupancy level above 95%. The roofing
portion of the exterior capital improvement program was completed during the
fourth quarter of fiscal 1997, as was the renovation of the tennis court.
Assuming that the overall market for multi-family apartment properties remains
strong, the Partnership may have favorable opportunities to sell its interest in
the Colony Apartments in the near term. The potential to sell this asset, which
represents the Partnership's sole source of liquidity, on favorable terms may
prompt the accelerated dispositions of the two remaining retail properties.
Occupancy levels at the Concourse Retail Plaza and the Colony Square
Shopping Center were 90% and 97%, respectively, as of September 30, 1997. At the
present time, real estate values for retail shopping centers in certain markets
are being adversely impacted by the effects of overbuilding and consolidations
among retailers which have resulted in an oversupply of space and by the
generally flat rate of growth in retail sales. It remains unclear at this time
what impact, if any, this general trend will have on the operations and/or
market values of the Partnership's retail properties in the near term.
Management continues to closely monitor the operating performance of the three
restaurant tenants at the Concourse Retail Plaza. Two of these tenants, which
occupy approximately 40% of the property's leasable space, reported declining
sales during fiscal 1996 and fell behind on their rental payments. Management
negotiated agreements with both tenants to cure the rental delinquencies which,
in one of the cases, involved the forgiveness of a portion of the delinquency
and a reduction in the future monthly rent payment in return for an increase in
the term of the lease obligation. One of these tenants is currently meeting the
modified terms of its rental obligations. The Partnership had pursued legal
action for eviction against the other tenant, a locally owned southwestern
restaurant which occupies 28% of the Plaza, because of a failure to pay the
modified rent. Subsequently, a court judgement was entered against this
restaurant tenant. This tenant is now experiencing improved sales and is paying
its rent as modified under the court judgement. However, the Partnership is
pursuing additional legal action to obtain a summary judgement on the total
rental arrearage owed. The Partnership will continue to collect this tenant's
rent while also looking for a replacement tenant in the event of a default. In
addition, a locally owned and operated far eastern restaurant, which occupies
12% of the leasable area, experienced a slow down in sales due to the decline in
tourism during the off-season and fell behind in its rental obligations during
the fourth quarter of fiscal 1997. This tenant is attempting to pay its
arrearage as its seasonal tourist business increases during the winter months.
During the fourth quarter, the property's leasing team began discussions with a
popular south Florida Caribbean restaurant chain on a lease for a 3,953 square
foot vacant restaurant space. The Partnership believes that the potential
addition of this new restaurant would add stability to the tenant base and make
the Plaza more appealing to prospective future buyers.
As noted above, the Partnership is currently reviewing its disposition
options for the Concourse Retail Plaza. For the past four years 80% of the
Plaza's 30,473 square feet has been leased to restaurant operators which, for
the most part, have performed poorly. One of the options under review is the
development of a leasing plan that would put an emphasis on a greater mixture of
office and retail uses. This could involve the conversion of one of the larger
restaurant out parcel buildings into professional/service office space. Another
option would be to market the property for sale after attempting to stabilize
the current tenant base. However, the prospects for stabilizing the tenant
roster are uncertain at the present time in light of the bleak economic
conditions which currently exist in the local sub-market. Management is aware of
several restaurant tenants in the local market whose businesses have failed in
recent months, and, despite diligent efforts, the Partnership has been unable to
identify and secure viable tenants to replace any of the three financially
troubled restaurant tenants referred to above. Another factor impacting a
possible near term sale of the Concourse Retail Plaza is the property's first
mortgage loan. The mortgage loan, which is assumable, contains a prohibition on
prepayment through January 10, 2000. As a result, any sale transaction completed
prior to such date would have to involve an assumption of this mortgage loan.
Management expects to formalize its strategy for positioning the Concourse
property for sale during fiscal 1998. In light of the potential for an
accelerated disposition of the Concourse Retail Plaza and the continued
financial difficulties of a substantial portion of the property's tenant base,
management concluded during fiscal 1997 that the carrying value of the Concourse
operating investment property was impaired in accordance with Statement of
Financial Accounting Standards (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, an
impairment loss of $1,000,000 was recognized in the current year to write down
the net carrying value of the Concourse property to its current estimated fair
market value of approximately $2.3 million, as determined by an independent
appraisal.
At Colony Square, a lease for a 2,332 square foot martial arts studio, or
6% of the Center's available space, was not renewed by the tenant upon its
expiration during the third quarter of fiscal 1997. However, during the fourth
quarter, a new three-year lease was signed with a security systems company to
occupy this space. Also during the third quarter, a 2,344 square foot liquor
store renewed its lease for five years. Subsequent to the end of fiscal 1997,
the property's leasing team signed a renewal and expansion lease with a jewelry
repair store that relocated from its 600 square foot space into a 1,200 square
foot space. Subsequent to year-end, the Center's grocery store expanded into the
recently vacated jewelry store, which brought the Center leasing level to 100%.
There are seven tenants leasing a total of 10,170 square feet of the Center's
39,572 square foot leasable area that have leases coming up for renewal over the
next 12 months. The property's leasing team expects that most of these leases
will be renewed. Asking rental rates at the Center are up slightly from one year
ago which may provide an opportunity to renew the leases at slightly higher
rental rates. Capital improvements at Colony Square during fiscal 1997 included
the installation of a main gas line and the conversion of two spaces from
electric to gas heat.
At September 30, 1997, the Partnership and its consolidated venture had
cash and cash equivalents of approximately $2,856,000. Such cash and cash
equivalents will be utilized as needed for Partnership requirements such as the
payment of operating expenses, distributions to partners, as discussed further
above, and the funding of operating deficits or capital improvements of the
joint ventures, in accordance with the terms of the respective joint venture
agreements, to the extent economically justified. The source of future liquidity
and distributions to the partners is expected to be from available net cash flow
generated by the operations of the Partnership's investment properties and from
net proceeds from the sale or refinancing of such properties. Such sources of
liquidity are expected to be sufficient to meet the Partnership's needs on both
a short-term and long-term basis.
Results of Operations
1997 Compared to 1996
- ---------------------
The Partnership reported net income of $10,496,000 for the year
ended September 30, 1997, as compared to a net loss of $404,000 in fiscal 1996.
This favorable change in the Partnership's net operating results is primarily
attributable to the gains recognized by the Partnership on the sale of the Hunt
Club, Marina Club and the Enchanted Woods Apartments and the related
extraordinary gains from settlement of debt obligations, as discussed further
above. The HMF joint venture recognized gains from the forgiveness of
indebtedness in connection with the sales of the Enchanted Woods, Hunt Club and
Marina Club properties in the aggregate amount of $7,552,000 as a result of the
fiscal 1997 sale transactions. The venture also recognized gains in the
aggregate amount of $4,291,000 for the amount by which the sales prices, net of
closing costs, exceeded the net carrying values of the operating investment
properties. The Partnership's share of such gains totalled approximately
$7,463,000 and $4,210,000, respectively. The Partnership's net loss, prior to
the effect of these gains, increased by $773,000 for the year ended September
30, 1997 mainly as a result of the impairment loss of $1,000,000 recognized on
the Concourse operating property in fiscal 1997, as discussed further above. The
impact of the impairment loss was partially offset as a result of the
Partnership realizing income of $36,000 from its share of unconsolidated
ventures' operations in fiscal 1997 as compared to losses of $276,000 during
fiscal 1996.
The favorable change in the operations of the unconsolidated joint
ventures is primarily a result of the sale of the HMF Associates properties
during fiscal 1997, as discussed further above. HMF Associates had been
generating net losses from operations prior to the sale transactions. The
elimination of the net losses from HMF Associates was partially offset by the
recognition of a gain on settlement of insurance proceeds by the Meadows joint
venture during fiscal 1996 of $197,000. This gain was recognized due to a change
in the original estimate for the completion of required structural repairs to
the Meadows on the Lake Apartments.
An increase in bad debt expense of the consolidated Concourse Retail Plaza
of $61,000 and an increase in management fee expense of $58,000 also contributed
to the increase in the Partnership's net loss prior to the effect of the HMF
gains in fiscal 1997. Bad debt expense increased due to a financially troubled
tenant at Concourse defaulting on a previous workout arrangement during fiscal
1997. Management fee expense increased due to the reinstatement of distributions
during fiscal 1997, upon which management fees are based. The increases in bad
debt expense and management fee expense were partially offset by an increase in
interest and other income of $23,000. Interest and other income increased
primarily as a result of a larger average outstanding balance of cash and cash
equivalents during fiscal 1997 prior to the distributions of excess reserves to
the Limited Partners, as discussed further above.
1996 Compared to 1995
- ---------------------
The Partnership reported a net loss of $404,000 for the year ended
September 30, 1996, as compared to net income of $400,000 in fiscal 1995. This
change in the Partnership's net operating results was attributable to a $27,000
increase in the Partnership's operating loss and an extraordinary gain of
$1,600,000 recognized in fiscal 1995 which were partially offset by a decrease
of $824,000 in the Partnership's share of unconsolidated ventures' losses. The
$1,600,000 extraordinary gain resulted from the discounts obtained on the
repayment of the Concourse second mortgage loan and the refinancing of the
Colony Apartments first mortgage debt obligation during fiscal 1995. The
consolidated Concourse joint venture recognized an extraordinary gain on
settlement of debt obligation of $530,000 in fiscal 1995 resulting from the
November 1994 discounted repayment of the second mortgage note secured by the
Concourse Retail Plaza. In addition, the unconsolidated Colony Apartments joint
venture received a discount of $1,070,000 on the pay-off of the venture's
wraparound mortgage loan in connection with an August 1995 refinancing
transaction. This discount was recorded as an extraordinary gain on settlement
of debt obligation and was allocated 100% to the Partnership in accordance with
the joint venture agreement.
The Partnership's share of unconsolidated ventures' losses decreased by
$824,000 in fiscal 1996, when compared to fiscal 1995, partly due to a gain of
$197,000 recognized by the Meadows joint venture in fiscal 1996, along with a
$306,000 increase in combined revenues and a $507,000 decrease in combined
interest expense. As of September 30, 1995, management of the Meadows joint
venture had estimated that the costs to complete the required structural repairs
to the Meadows on the Lake Apartments would exceed the insurance settlement
proceeds by $300,000, and the venture recognized a loss of such amount in fiscal
1995. During fiscal 1996, management revised its plans for completing the
renovations resulting in the required repairs being accomplished for
substantially less than the prior estimates. This change in estimate resulted in
a gain of $197,000 for financial reporting purposes which was reflected in the
venture's fiscal 1996 income statement. Combined revenues increased by $306,000
due to a $250,000 increase in rental revenues and a $56,000 increase in other
income. Rental revenues at Colony Apartments and Colony Square increased by
$272,000 and $43,000, respectively, due to increases in rental rates while
combined rental revenues from the three properties owned by HMF Associates
decreased by $63,000 due to declines in average occupancy at two of the three
properties. The decrease in combined interest expense in fiscal 1996 was
primarily attributable to a $540,000 decrease in interest expense at the Colony
Apartments joint venture due to the lower interest rate obtained as a result of
the August 1995 refinancing. The impact of the accounting for the Meadows
insurance settlement, the increase in revenues and the decline in interest
expense were partially offset by increases in deprecation and amortization and
repairs and maintenance expenses during fiscal 1996. Depreciation and
amortization increased by $119,000 primarily due to the additional depreciation
associated with the capital improvements completed at the Colony Apartments,
Meadows Apartments, and the properties owned by HMF Associates during fiscal
1995 and 1996. Repairs and maintenance expenses increased by $112,000 due to
higher expenses incurred at three of the four unconsolidated joint ventures
during fiscal 1996.
The Partnership's operating loss increased by $27,000 when compared to
fiscal 1995 primarily due to a $88,000 decrease in interest income and a slight
increase in the net loss of the consolidated Concourse joint venture which were
partially offset by a decrease in the Partnership's general and administrative
expenses. The Partnership's interest income decreased by $88,000 due to the
recognition in fiscal 1995 of $175,000 of previously unrecorded interest
received on an optional loan to a joint venture which was repaid in fiscal 1995.
Interest income without the effect of this optional loan repayment increased by
$87,000 in fiscal 1996 as a result of higher average outstanding cash balances
during fiscal 1996. General and administrative expenses decreased by $79,000
primarily due additional professional fees incurred in fiscal 1995 associated
with an independent valuation of the Partnership's portfolio of real estate
assets and legal fees associated with the Concourse refinancing transaction. The
net loss of the consolidated Concourse joint venture increased by $6,000 in
fiscal 1996 primarily due to a bad debt of $89,000 recognized in fiscal 1996 in
connection with the rental obligation forgiveness discussed further above. The
fiscal 1996 bad debt expense was partially offset by a $20,000 decrease in
interest expense, a $16,000 decline in property operating expenses, a $5,000
reduction in real estate taxes and a $10,000 decrease in depreciation expense.
Interest expense decreased by $20,000 due to the lower interest rate on the
venture's first mortgage loan which was refinanced in January 1995.
1995 Compared to 1994
- ---------------------
The Partnership reported net income of $400,000 for the year ended
September 30, 1995, as compared to a net loss of $1,992,000 for the prior year.
This favorable change in the Partnership's net operating results was due to a
substantial decrease in the Partnership's share of unconsolidated ventures'
losses, extraordinary gains realized from discounts obtained on the Concourse
second mortgage loan and the Colony Apartments first mortgage debt obligation
and a decrease in the Partnership's operating loss.
The Partnership's share of unconsolidated ventures' losses decreased by
$492,000 in fiscal 1995 when compared to fiscal 1994 primarily due to an
increase of $429,000 in rental revenues from the lease-up of the renovated
apartment complexes owned by HMF Associates. As discussed further in the notes
to the accompanying financial statements, the apartments owned by HMF Associates
had construction-related defects that forced management to cease its leasing
activities during the majority of the remediation period from fiscal 1991
through 1993. Average occupancy at the three HMF apartment complexes increased
from 83% during the re-leasing phase in fiscal 1994 to 93% for fiscal 1995.
Increases in rental revenues at the Meadows Apartments, Colony Apartments and
Colony Square Shopping Center also had a positive impact on the Partnership's
share of unconsolidated ventures' losses for fiscal 1995. Revenues at the
Meadows Apartments and Colony Apartments increased due to slight increases in
both rental rates and average occupancy when compared to fiscal 1994. At The
Meadows on the Lake Apartments, rental revenues improved by $73,000, or 5%, in
fiscal 1995, when compared to the prior year, while average occupancy increased
from 97% to 98%. Rental revenues increased by $140,000, or 3%, at the Colony
Apartments where average occupancy also increased from 97% for fiscal 1994 to
98% for fiscal 1995. In addition, repairs and maintenance expenses decreased by
$339,000 at the Colony Apartments as a result of a shift in focus of the
property's maintenance program from deferred repairs and maintenance performed
in fiscal 1994 to capital expenditures incurred in fiscal 1995. Capital
expenditures of the Colony Apartments joint venture increased by $315,000 in
fiscal 1995. At the Colony Square Shopping Center, revenues (including tenant
reimbursements of operating expenses) were up by $41,000 over fiscal 1994 as a
result of the increase in average occupancy from 91% for fiscal 1994 to 93% for
fiscal 1995. The increases in rental revenues at all of the unconsolidated joint
ventures and the decrease in repairs and maintenance expenses at the Colony
Apartments were partially offset by increases in depreciation and amortization
expense at the Colony Apartments and HMF Associates joint ventures and by an
increase of $175,000 in real estate taxes at HMF Associates as a result of
certain refunds of prior year taxes received in fiscal 1994. In addition, a
$300,000 loss on insurance settlement recognized by the Meadows joint venture in
fiscal 1995 also offset the favorable change in unconsolidated ventures' losses.
The consolidated Concourse joint venture recognized a gain on settlement
of debt obligation of $530,000 in fiscal 1995 resulting from the discounted
repayment of the second mortgage note secured by the Concourse Retail Plaza. In
addition, the unconsolidated Colony Apartments joint venture received a discount
of $1,070,000 on the pay-off of the venture's wraparound mortgage loan in
connection with the venture's fiscal 1995 refinancing transaction. Such discount
was recorded as an extraordinary gain on settlement of debt obligation and was
allocated 100% to the Partnership in accordance with the joint venture
agreement. The Partnership's operating loss for fiscal 1995 decreased by
$300,000 when compared to fiscal 1994 as a result of an increase in interest
income and decreases in the operating loss of the consolidated Concourse joint
venture. Interest income in fiscal 1995 includes an amount of interest received
on an optional loan to a joint venture which was repaid in fiscal 1995. Interest
income also increased as a result of higher average outstanding cash balances
and an increase in interest rates in fiscal 1995. The operating loss at the
Concourse joint venture decreased by $38,000 in fiscal 1995 primarily due to a
slight increase in rental revenues and a decrease of $31,000 in interest expense
which resulted from the lower interest rate on the venture's new first mortgage
note. The increase in rental revenues of $18,000 resulted from an increase in
the average occupancy of the Concourse Retail Plaza from 90% for fiscal 1994 to
93% for fiscal 1995.
Certain Factors Affecting Future Operating Results
- --------------------------------------------------
The following factors could cause actual results to differ materially from
historical results or those anticipated:
Real Estate Investment Risks. Real property investments are subject to
varying degrees of risk. Revenues and property values may be adversely affected
by the general economic climate, the local economic climate and local real
estate conditions, including (i) the perceptions of prospective tenants of the
attractiveness of the property; (ii) the ability to retain qualified individuals
to provide adequate management and maintenance of the property; (iii) the
inability to collect rent due to bankruptcy or insolvency of tenants or
otherwise; and (iv) increased operating costs. Real estate values may also be
adversely affected by such factors as applicable laws, including tax laws,
interest rate levels and the availability of financing.
Effect of Uninsured Loss. The Partnership carries comprehensive liability,
fire, flood, extended coverage and rental loss insurance with respect to its
properties with insured limits and policy specifications that management
believes are customary for similar properties. There are, however, certain types
of losses (generally of a catastrophic nature such as wars, floods or
earthquakes) which may be either uninsurable, or, in management's judgment, not
economically insurable. Should an uninsured loss occur, the Partnership could
lose both its invested capital in and anticipated profits from the affected
property.
Possible Environmental Liabilities. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may become liable for the costs of the investigation,
removal and remediation of hazardous or toxic substances on, under, in or
migrating from such property. Such laws often impose liability without regard to
whether the owner or operator knew of, or was responsible for, the presence of
such hazardous or toxic substances.
The Partnership is not aware of any notification by any private party or
governmental authority of any non-compliance, liability or other claim in
connection with environmental conditions at any of its properties that it
believes will involve any expenditure which would be material to the
Partnership, nor is the Partnership aware of any environmental condition with
respect to any of its properties that it believes will involve any such material
expenditure. However, there can be no assurance that any non-compliance,
liability, claim or expenditure will not arise in the future.
Competition. The financial performance of the Partnership's remaining real
estate investments will be significantly impacted by the competition from
comparable properties in their local market areas. The occupancy levels and
rental rates achievable at the properties are largely a function of supply and
demand in the markets. In many markets across the country, development of new
multi-family properties has increased significantly in the past 12 months.
Existing apartment properties in such markets could be expected to experience
increased vacancy levels, declines in effective rental rates and, in some cases,
declines in estimated market values as a result of the increased competition.
The retail segment of the real estate market is currently suffering from an
oversupply of space in many markets resulting from overbuilding in recent years
and the trend of consolidations and bankruptcies among retailers prompted by the
generally flat rate of growth in overall retail sales. There are no assurances
that these competitive pressures will not adversely affect the operations and/or
market values of the Partnership's investment properties in the future.
Impact of Joint Venture Structure. The ownership of the remaining
investments through joint venture partnerships could adversely impact the timing
of the Partnership's planned dispositions of its remaining assets and the amount
of proceeds received from such dispositions. It is possible that the
Partnership's co-venture partners could have economic or business interests
which are inconsistent with those of the Partnership. Given the rights which
both parties have under the terms of the joint venture agreements, any conflict
between the partners could result in delays in completing a sale of the related
operating property and could lead to an impairment in the marketability of the
property to third parties for purposes of achieving the highest possible sale
price.
Availability of a Pool of Qualified Buyers. The availability of a pool of
qualified and interested buyers for the Partnership's remaining assets is
critical to the Partnership's ability to realize the estimated fair market
values of such properties at the time of their final dispositions. Demand by
buyers of multi-family apartment and retail properties is affected by many
factors, including the size, quality, age, condition and location of the subject
property, the quality and stability of the tenant roster, the terms of any
long-term leases, potential environmental liability concerns, the existing debt
structure, the liquidity in the debt and equity markets for asset acquisitions,
the general level of market interest rates and the general and local economic
climates.
Inflation
- ---------
The Partnership completed its twelfth full year of operations in fiscal
1997 and the effects of inflation and changes in prices on the Partnership's
operating results to date have not been significant.
Inflation in future periods may increase revenues, as well as operating
expenses, at the Partnership's operating investment properties. Some of the
existing leases with tenants at the Partnership's retail plaza and retail
shopping center contain rental escalation and/or expense reimbursement clauses
based on increases in tenant sales or property operating expenses, which would
tend to rise with inflation. Tenants at the Partnership's remaining apartment
property have short-term leases, generally of six-to-twelve months in duration.
Rental rates at this property can be adjusted to keep pace with inflation, as
market conditions allow, as the leases are renewed or turned over. Such
increases in rental income would be expected to at least partially offset the
corresponding increases in Partnership and property operating expenses caused by
future inflation.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included under Item 14
of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Partnership
The Managing General Partner of the Partnership is Seventh Income
Properties Fund, Inc., a Delaware corporation, which is a wholly-owned
subsidiary of PaineWebber. The Associate General Partner of the Partnership is
Properties Associates 1985, L.P., a Virginia limited partnership, certain
limited partners of which are also officers of the Adviser and the Managing
General Partner. The Managing General Partner has overall authority and
responsibility for the Partnership's operation, however, the day-to-day business
of the Partnership is managed by the Adviser pursuant to an advisory contract.
(a) and (b) The names and ages of the directors and principal executive
officers of the Managing General Partner of the Partnership are as follows:
Date
elected
Name Office Age to Office
---- ------ --- ---------
Bruce J. Rubin President and Director 38 8/22/96
Terrence E. Fancher Director 44 10/10/96
Walter V. Arnold Senior Vice President and
Chief Financial Officer 50 10/29/85
David F. Brooks First Vice President and
Assistant Treasurer 55 1/15/85 *
Timothy J. Medlock Vice President and Treasurer 36 6/1/88
Thomas W. Boland Vice President and Controller 35 12/1/91
* The date of incorporation of the Managing General Partner.
(c) There are no other significant employees in addition to the directors
and executive officers mentioned above.
(d) There is no family relationship among any of the foregoing directors
and executive officers of the Managing General Partner of the Partnership. All
of the foregoing directors and executive officers have been elected to serve
until the annual meeting of the Managing General Partner.
(e) All of the directors and officers of the Managing General Partner hold
similar positions in affiliates of the Managing General Partner, which are the
corporate general partners of other real estate limited partnerships sponsored
by PWI, and for which Paine Webber Properties Incorporated serves as the
Adviser. The business experience of each of the directors and principal
executive officers of the Managing General Partner is as follows:
Bruce J. Rubin is President and Director of the Managing General
Partner. Mr. Rubin was named President and Chief Executive Officer of PWPI
in August 1996. Mr. Rubin joined PaineWebber Real Estate Investment Banking
in November 1995 as a Senior Vice President. Prior to joining PaineWebber,
Mr. Rubin was employed by Kidder, Peabody and served as President for KP
Realty Advisers, Inc. Prior to his association with Kidder, Mr. Rubin was a
Senior Vice President and Director of Direct Investments at Smith Barney
Shearson. Prior thereto, Mr. Rubin was a First Vice President and a real
estate workout specialist at Shearson Lehman Brothers. Prior to joining
Shearson Lehman Brothers in 1989, Mr. Rubin practiced law in the Real Estate
Group at Willkie Farr & Gallagher. Mr. Rubin is a graduate of Stanford
University and Stanford Law School.
Terrence E. Fancher was appointed a Director of the Managing General
Partner in October 1996. Mr. Fancher is the Managing Director in charge of
PaineWebber's Real Estate Investment Banking Group. He joined PaineWebber as
a result of the firm's acquisition of Kidder, Peabody. Mr. Fancher is
responsible for the origination and execution of all of PaineWebber's REIT
transactions, advisory assignments for real estate clients and certain of the
firm's real estate debt and principal activities. He joined Kidder, Peabody
in 1985 and, beginning in 1989, was one of the senior executives responsible
for building Kidder, Peabody's real estate department. Mr. Fancher
previously worked for a major law firm in New York City. He has a J.D. from
Harvard Law School, an M.B.A. from Harvard Graduate School of Business
Administration and an A.B. from Harvard College.
Walter V. Arnold is a Senior Vice President and Chief Financial Officer of
the Managing General Partner and a Senior Vice President and Chief Financial
Officer of the Adviser which he joined in October 1985. Mr. Arnold joined PWI in
1983 with the acquisition of Rotan Mosle, Inc. where he had been First Vice
President and Controller since 1978, and where he continued until joining the
Adviser. He began his career in 1974 with Arthur Young & Company in Houston. Mr.
Arnold is a Certified Public Accountant licensed in the state of Texas.
David F. Brooks is a First Vice President and Assistant Treasurer of the
Managing General Partner and a First Vice President and an Assistant Treasurer
of the Adviser. Mr. Brooks joined the Adviser in March 1980. From 1972 to 1980,
Mr. Brooks was an Assistant Treasurer of Property Capital Advisors, Inc. and
also, from March 1974 to February 1980, the Assistant Treasurer of Capital for
Real Estate, which provided real estate investment, asset management and
consulting services.
Timothy J. Medlock is a Vice President and Treasurer of the Managing
General Partner and a Vice President and Treasurer of the Adviser which he
joined in 1986. From June 1988 to August 1989, Mr. Medlock served as the
Controller of the Managing General Partner and the Adviser. From 1983 to 1986,
Mr. Medlock was associated with Deloitte Haskins & Sells. Mr. Medlock graduated
from Colgate University in 1983 and received his Masters in Accounting from New
York University in 1985.
Thomas W. Boland is a Vice President and Controller of the Managing
General Partner and a Vice President and Controller of the Adviser which he
joined in 1988. From 1984 to 1987, Mr. Boland was associated with Arthur
Young & Company. Mr. Boland is a Certified Public Accountant licensed in the
state of Massachusetts. He holds a B.S. in Accounting from Merrimack College
and an M.B.A. from Boston University.
(f) None of the directors and officers were involved in legal proceedings
which are material to an evaluation of his or her ability or integrity as a
director or officer.
(g) Compliance With Exchange Act Filing Requirements: The Securities
Exchange Act of 1934 requires the officers and directors of the Managing General
Partner, and persons who own more than ten percent of the Partnership's limited
partnership units, to file certain reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and ten-percent
beneficial holders are required by SEC regulations to furnish the Partnership
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Partnership believes that, during the year ended September 30, 1997, all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
Item 11. Executive Compensation
The directors and officers of the Partnership's Managing General Partner
receive no direct remuneration from the Partnership. The Partnership is required
to pay certain fees to the Adviser, and the General Partners are entitled to
receive a share of Partnership cash distributions and a share of profits and
losses. These items are described under Item 13.
Regular quarterly distributions to the Partnership's Unitholders were
suspended from fiscal 1990 through fiscal 1996. Distributions were reinstated at
an annual rate of 2.5% on remaining invested capital effective for the first
quarter of fiscal 1997. Distributions were increased to an annual rate of 2.65%
for the fourth quarter of fiscal 1997. However, the Partnership's Units of
Limited Partnership Interest are not actively traded on any organized exchange,
and no efficient secondary market exists. Accordingly, no accurate price
information is available for these Units. Therefore, a presentation of
historical Unitholder total returns would not be meaningful.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) The Partnership is a limited partnership issuing Units of limited
partnership interest, not voting securities. All the outstanding stock of the
Managing General Partner, Seventh Income Properties Fund, Inc. is owned by
PaineWebber. Properties Associates 1985, L.P., the Associate General Partner, is
a Virginia limited partnership, certain limited partners of which are also
officers of the Adviser and the Managing General Partner. No Limited Partner is
known by the Partnership to own beneficially more than 5% of the outstanding
interests of the Partnership.
(b) The directors and officers of the Managing General Partner do not
directly own any Units of limited partnership interest of the Partnership. No
director or officer of the Managing General Partner, nor any limited partner of
the Associate General Partner, possesses a right to acquire beneficial ownership
of Units of limited partnership interest of the Partnership.
(c) There exists no arrangement, known to the Partnership, the operation
of which may, at a subsequent date, result in a change in control of the
Partnership.
Item 13. Certain Relationships and Related Transactions
The General Partners of the Partnership are Seventh Income Properties
Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of
PaineWebber Group, Inc. ("PaineWebber") and Properties Associates 1985, L.P.
(the "Associate General Partner"), a Virginia limited partnership, certain
limited partners of which are also officers of the Managing General Partner and
PaineWebber Properties Incorporated. Subject to the Managing General Partner's
overall authority, the business of the Partnership is managed by PaineWebber
Properties Incorporated (the "Adviser") pursuant to an advisory contract. The
Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI").
The General Partners, the Adviser and PWI receive fees and compensation,
determined on an agreed-upon basis, in consideration for various services
performed in connection with the sale of the Units, the management of the
Partnership and the acquisition, management, financing and disposition of
Partnership investments.
In connection with the acquisition of properties, the Adviser received
acquisition fees in an amount equal to 5% of the gross proceeds from the sale of
the Partnership Units. In connection with the sale of each property, the Adviser
may receive a disposition fee in an amount equal to the lesser of 1% of the
aggregate sales price of the property or 50% of the standard brokerage
commissions, subordinated to the payment of certain amounts to the Limited
Partners.
Under the terms of the Partnership Agreement, as amended, any taxable
income or tax loss (other than from a Capital Transaction) of the Partnership
will be allocated 98.94802625% to the Limited Partners and 1.05197375% to the
General Partners. Taxable income or tax loss arising from a sale or refinancing
of investment properties will be allocated to the Limited Partners and the
General Partners in proportion to the amounts of sale or refinancing proceeds to
which they are entitled; provided, however, that the General Partners shall not
be allocated aggregate gain as a result of all sales or refinancings in excess
of the aggregate net losses previously allocated to them and the total cash
distributed to them; provided further, however, that the General Partners shall
be allocated at least 1% of taxable income arising from a sale or refinancing.
If there are no sale or refinancing proceeds, taxable income or tax loss from a
sale or refinancing will be allocated 98.94802625% to the Limited Partners and
1.05197375% to the General Partners. Notwithstanding this, the Partnership
Agreement provides that the allocation of taxable income and tax losses arising
from the sale of a property which leads to the dissolution of the Partnership
shall be adjusted to the extent feasible so that neither the General or Limited
Partners recognize any gain or loss as a result of having either a positive or
negative balance remaining in their capital accounts upon the dissolution of the
Partnership. If the General Partner has a negative capital account balance
subsequent to the sale of a property which leads to the dissolution of the
Partnership, the General Partner may be obligated to restore a portion of such
negative capital account balance as determined in accordance with the provisions
of the Partnership Agreement. Allocations of the Partnership's operations
between the General Partners and the Limited Partners for financial accounting
purposes have been made in conformity with the allocations of taxable income or
tax loss.
All distributable cash, as defined, for each fiscal year shall be
distributed quarterly in the ratio of 95% to the Limited Partners, 1.01% to the
General Partners and 3.99% to the Adviser, as an asset management fee. Under the
advisory contract, the Adviser has specific management responsibilities: to
administer day-to-day operations of the Partnership, and to report periodically
the performance of the Partnership to the Managing General Partner. The Adviser
will be paid a basic management fee (3% of adjusted cash flow, as defined in the
Partnership Agreement) and an incentive management fee (2% of adjusted cash flow
subordinated to a noncumulative annual return to the Limited Partners equal to
6% based upon their adjusted capital contributions), in addition to the asset
management fee described above, for services rendered. Basic and asset
management fees totalling $58,000 were earned by the Adviser for the year ended
September 30, 1997.
An affiliate of the Managing General Partner performs certain accounting,
tax preparation, securities law compliance and investor communications and
relations services for the Partnership. The total costs incurred by this
affiliate in providing such services are allocated among several entities,
including the Partnership. Included in general and administrative expenses for
the year ended September 30, 1997 is $86,000, representing reimbursements to
this affiliate for providing such services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an
independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees
of $17,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during the year ended September 30, 1997. Fees charged
by Mitchell Hutchins are based on a percentage of invested cash reserves which
varies based on the total amount of invested cash which Mitchell Hutchins
manages on behalf of PWPI.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) and (2) Financial Statements and Schedules:
The response to this portion of Item 14 is submitted as a
separate section of this report. See Index to Financial
Statements and Financial Statement Schedules at page F-1.
(3) Exhibits:
The exhibits listed on the accompanying Index to Exhibits at
Page IV-3 are filed as part of this Report.
(b) A Current Report on Form 8-K dated September 9, 1997 was filed during
the last quarter of fiscal 1997 to report the sale of The Enchanted
Woods Apartments and is hereby incorporated by reference.
(c) Exhibits
See (a)(3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a
separate section of this report. See Index to Financial
Statements and Financial Statement Schedules at page F-1.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINE WEBBER INCOME PROPERTIES SEVEN
LIMITED PARTNERSHIP
By: Seventh Income Properties Fund, Inc.
Managing General Partner
By: /s/ Bruce J. Rubin
-------------------
Bruce J. Rubin
President and Chief Executive Officer
By: /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
By: /s/ Thomas W. Boland
--------------------
Thomas W. Boland
Vice President and Controller
Dated: January 13, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Partnership in
the capacity and on the dates indicated.
By:/s/ Bruce J. Rubin Date: January 13, 1998
------------------------ ----------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: January 13, 1998
------------------------ ----------------
Terrence E. Fancher
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page Number in the Report
Exhibit No. Description of Document or Other Reference
- ----------- ------------------------ --------------------------
<S> <C> <C>
(3) and (4) Prospectus of the Registrant Filed with the Commission
dated May 14, 1985, supplemented, pursuant to Rule 424(c)
with particular reference to the and incorporated herein by
Restated Certificate and Agreement reference.
Limited Partnership.
(10) Material contracts previously filed as Filed with the Commission
exhibits to registration statements and pursuant to Section 13 or 15(d)
amendments thereto of the registrant of the Securities Exchange Act
together with all such contracts filed of 1934 and incorporated
as exhibits of previously filed Forms herein by reference.
8-K and Forms 10-K are hereby
incorporated herein by reference.
(13) Annual Reports to Limited Partners No Annual Report for the year
ended September 30, 1997 has
been sent to the
Limited Partners. An Annual
Report will be sent to
the Limited Partners
subsequent to this filing.
(21) List of Subsidiaries Included in Item 1 of Part I of this
Annual Report Page I-1, to which
Reference is hereby made.
(27) Financial Data Schedule Filed as last page of EDGAR
submission following the Financial
Statements and Financial
Statement Schedule required by
Item 14.
</TABLE>
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a) (1) and (2) and 14(d)
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference
---------
Paine Webber Income Properties Seven Limited Partnership:
Report of independent auditors F-2
Consolidated balance sheets as of September 30, 1997 and 1996 F-3
Consolidated statements of operations for the years ended
September 30, 1997, 1996 and 1995 F-4
Consolidated statements of changes in partners' capital
(deficit) for the years ended September 30, 1997, 1996
and 1995 F-5
Consolidated statements of cash flows for the years ended
September 30, 1997, 1996 and 1995 F-6
Notes to consolidated financial statements F-7
Schedule III - Real estate and accumulated depreciation F-22
Combined Joint Ventures of Paine Webber Income Properties Seven Limited
Partnership:
Report of independent auditors F-23
Combined balance sheets as of September 30, 1997 and 1996 F-24
Combined statements of operations and changes in venturers'
capital (deficit) for the years ended September 30, 1997,
1996 and 1995 F-25
Combined statements of cash flows for the years ended
September 30, 1997, 1996 and 1995 F-26
Notes to combined financial statements F-27
Schedule III - Real estate and accumulated depreciation F-35
Other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements, including the notes thereto.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners of
Paine Webber Income Properties Seven Limited Partnership:
We have audited the accompanying consolidated balance sheets of Paine
Webber Income Properties Seven Limited Partnership as of September 30, 1997 and
1996, and the related consolidated statements of operations, changes in
partners' capital (deficit), and cash flows for each of the three years in the
period ended September 30, 1997. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Paine Webber Income Properties Seven Limited Partnership at September 30, 1997
and 1996, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended September 30, 1997, in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
---------------------
ERNST & YOUNG LLP
Boston, Massachusetts
January 9, 1998
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN
LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and 1996
(In thousands, except per Unit amounts)
ASSETS
1997 1996
---- ----
Operating investment property:
Land $ 486 $ 698
Buildings and improvements 2,990 4,294
Equipment and fixtures 75 107
--------- ---------
3,551 5,099
Less accumulated depreciation (1,257) (1,651)
--------- ---------
2,294 3,448
Investments in unconsolidated ventures, at equity 1,406 -
Cash and cash equivalents 2,856 5,067
Escrowed funds 72 74
Accounts receivable, net 26 107
Accounts receivable - affiliates - 2
Deferred expenses, net of accumulated amortization
of $75 ($56 in 1996) 103 122
Other assets 32 32
--------- ----------
$ 6,789 $ 8,852
========= =========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Losses from unconsolidated joint ventures in excess
of investments and advances $ - $ 8,413
Mortgage note payable 1,614 1,671
Accounts payable and accrued expenses 84 61
Accounts payable - affiliates 7 -
Accrued interest payable 15 15
Accrued real estate taxes 58 59
Other liabilities 9 10
--------- ---------
Total liabilities 1,787 10,229
Partners' capital (deficit):
General Partners:
Capital contributions 1 1
Cumulative net loss (365) (475)
Cumulative cash distributions (289) (282)
Limited Partners ($1,000 per Unit; 37,969 Units issued):
Capital contributions, net of offering costs 33,529 33,529
Cumulative net loss (16,058) (26,444)
Cumulative cash distributions (11,816) (7,706)
--------- ---------
Total partners' capital (deficit) 5,002 (1,377)
--------- ---------
$ 6,789 $ 8,852
========= =========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended September 30, 1997, 1996 and 1995
(In thousands, except per Unit amounts)
1997 1996 1995
---- ---- ----
Revenues:
Rental income and expense recoveries $ 535 $ 523 $ 497
Interest and other income 273 250 338
------- ------- ------
808 773 835
Expenses:
Loss on impairment of operating
investment property 1,000 - -
Mortgage interest 188 195 215
Property operating expenses 92 103 119
Depreciation expense 154 139 149
Real estate taxes 80 77 82
General and administrative 287 285 364
Bad debt expense 150 89 -
Management fee expense 58 - -
Amortization expense 13 13 7
------- ------- ------
2,022 901 936
------- ------- ------
Operating loss (1,214) (128) (101)
Partnership's share of unconsolidated
ventures' income (losses) 36 (276) (1,100)
Partnership's share of gain on sale of
operating investment properties 4,210 - -
Venture partner's share of consolidated
venture's operations 1 - 1
------- ------- ------
Income (loss) before extraordinary gain 3,033 (404) (1,200)
Partnership's share of extraordinary gain
from settlement of debt obligations 7,463 - 1,600
------- ------- ------
Net income (loss) $10,496 $ (404) $ 400
======= ======= ======
Net income (loss) per Limited
Partnership Unit:
Income (loss) before extraordinary gain $ 79.04 $(10.53) $(31.29)
Partnership's share of extraordinary gain
from settlement of debt obligations 194.50 - 41.72
------- ------- -------
Net income (loss) $273.54 $(10.53) $ 10.43
======= ======= =======
Cash distributions per Limited
Partnership Unit $108.25 $ - $ -
======= ======= =======
The above per Limited Partnership Unit information is based upon the
37,969 Limited Partnership Units outstanding during each year.
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended September 30, 1997, 1996 and 1995
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
Balance at September 30, 1994 $ (756) $ (617) $ (1,373)
Net income 4 396 400
------ --------- --------
Balance at September 30, 1995 (752) (221) (973)
Net loss (4) (400) (404)
------ --------- --------
Balance at September 30, 1996 (756) (621) (1,377)
Net income 110 10,386 10,496
Cash distributions (7) (4,110) (4,117)
------ --------- --------
Balance at September 30, 1997 $ (653) $ 5,655 $ 5,002
====== ========= ========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended September 30, 1997, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 10,496 $ (404) $ 400
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Loss on impairment of operating investment
property 1,000 - -
Depreciation and amortization 167 152 156
Amortization of deferred financing costs 6 6 6
Partnership's share of unconsolidated
ventures' income (losses) (36) 276 1,100
Venture partner's share of consolidated
venture's operations (1) - (1)
Partnership's share of gain on sale
of operating investment properties (4,210) - -
Partnership's share of extraordinary gain
from settlement of debt obligations (7,463) - (1,600)
Changes in assets and liabilities:
Escrowed funds 2 1 2
Accounts receivable 81 (23) (34)
Accounts receivable - affiliates 2 - -
Deferred expenses - - (8)
Other assets - - (27)
Accounts payable - affiliates 7 - -
Accounts payable and accrued expenses 23 24 7
Accrued interest payable - (1) 7
Accrued real estate taxes (1) (1) 3
---------- --------- --------
Total adjustments (10,423) 434 (389)
---------- --------- --------
Net cash provided by operating activities 73 30 11
---------- --------- --------
Cash flows from investing activities:
Additions to operating investment property - (25) (132)
Distributions from unconsolidated joint ventures 1,890 1,862 1,211
---------- --------- --------
Net cash provided by investing activities 1,890 1,837 1,079
---------- --------- --------
Cash flows from financing activities:
Repayment of mortgage notes payable (57) (52) (2,077)
Proceeds from issuance of long-term debt - - 1,751
Deferred loan costs - - (83)
Distributions to partners (4,117) - -
---------- --------- --------
Net cash used in financing activities (4,174) (52) (409)
---------- --------- --------
Net (decrease) increase in cash and cash
equivalents (2,211) 1,815 681
Cash and cash equivalents, beginning of year 5,067 3,252 2,571
---------- --------- --------
Cash and cash equivalents, end of year $ 2,856 $ 5,067 $ 3,252
========= ========= ========
Cash paid during the year for interest $ 182 $ 190 $ 202
========= ========= ========
</TABLE>
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN
LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
1. Organization and Nature of Operations
-------------------------------------
Paine Webber Income Properties Seven Limited Partnership (the
"Partnership") is a limited partnership organized pursuant to the laws of the
State of Delaware in January 1985 for the purpose of investing in a diversified
portfolio of income-producing properties. The Partnership authorized the
issuance of Partnership units (the "Units"), at $1,000 per Unit, of which 37,969
were subscribed and issued between May 14, 1985 and May 13, 1986.
The Partnership originally invested the net proceeds of the public
offering, through five joint venture partnerships, in seven operating
properties, comprised of five multi-family apartment complexes, one mixed-use
office and retail property and one shopping center. During fiscal 1997, three of
the multi-family properties were sold. A fourth multi-family property was sold
subsequent to September 30, 1997. In addition, the office portion of the
investment in the mixed-use Concourse property was lost through foreclosure
proceedings on December 17, 1992. The Partnership retains an interest in the
retail plaza portion of the Concourse property. The two office towers owned by
the Concourse joint venture had comprised approximately 28% of the Partnership's
original investment portfolio. See Notes 4 and 5 for a description of these
transactions and of the remaining real estate investments.
2. Use of Estimates and Summary of Significant Accounting Policies
---------------------------------------------------------------
The accompanying consolidated financial statements have been prepared on
the accrual basis of accounting in accordance with generally accepted accounting
principles which require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of September 30, 1997 and 1996 and revenues
and expenses for each of the three years in the period ended September 30, 1997.
Actual results could differ from the estimates and assumptions used.
The accompanying consolidated financial statements include the
Partnership's investments in five joint venture partnerships which own seven
operating properties. Except as described below, the Partnership accounts for
its investments in joint venture partnerships using the equity method because
the Partnership does not have a voting control interest in the ventures. Under
the equity method, the venture is carried at cost adjusted for the Partnership's
share of the venture's earnings or losses and distributions. See Note 5 for a
description of these unconsolidated joint venture partnerships.
As further discussed in Note 4, on September 14, 1990, the co-venture
partner of West Palm Beach Concourse Associates assigned its 15% general
partnership interest to Seventh Income Properties Fund, Inc., the Managing
General Partner of the Partnership (see Note 3). The assignment gave the
Partnership control over the affairs of the joint venture. Accordingly, this
joint venture, which had been accounted for under the equity method in years
prior to fiscal 1990, is presented on a consolidated basis in the accompanying
financial statements. All transactions between the Partnership and the joint
venture have been eliminated in consolidation.
The operating investment property owned by the consolidated joint venture
is carried at cost, net of accumulated depreciation and certain guaranteed
payments, or an amount less than cost if indicators of impairment are present in
accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," which was adopted in fiscal 1997. SFAS 121 requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. The Partnership
generally assesses indicators of impairment by a review of independent appraisal
reports on the operating investment property. Such appraisals make use of a
combination of certain generally accepted valuation techniques, including direct
capitalization, discounted cash flows and comparable sales analysis. During
fiscal 1997, the independent appraisal of the Concourse operating investment
property indicated that certain operating assets, consisting of land, buildings
and improvements, and equipment and fixtures were impaired. In accordance with
SFAS No. 121, the consolidated Concourse joint venture recorded a reduction in
the net carrying value of such assets amounting to $1,000,000 relating to the
land ($212,000), buildings and improvements ($1,304,000), equipment and fixtures
($32,000) and accumulated depreciation ($548,000).
Depreciation expense on the operating investment property is computed
using the straight-line method over an estimated useful life of thirty years for
the buildings and improvements and five years for the equipment and fixtures.
Acquisition fees have been capitalized and are included in the cost of the
operating investment property.
Deferred expenses at September 30, 1997 and 1996 include leasing
commissions and deferred refinancing cost related to the Concourse Retail Plaza.
The leasing commissions are being amortized on a straight-line basis over the
terms of the related leases. The deferred refinancing costs are being amortized
on a straight-line basis over the term of the new loan, which approximates the
effective interest method. Amortization of deferred refinancing costs is
included in interest expense on the accompanying statements of operations.
The consolidated joint venture leases retail space at the operating
investment property under short-term and long-term operating leases. Rental
revenues are recognized on a straight-line basis over the term of the respective
leases.
For the purposes of reporting cash flows, cash and cash equivalents
include all highly liquid debt instruments which have original maturities of 90
days or less.
The cash and cash equivalents and escrowed funds appearing on the
accompanying balance sheets represent financial instruments for purposes of
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments." The carrying amount of these assets
approximates their fair value as of September 30, 1997 and 1996 due to the
short-term maturities of these instruments. The mortgage note payable is also a
financial instrument for purposes of SFAS 107. The fair value of the mortgage
note payable is estimated using discounted cash flow analysis based on the
current market rate for a similar type of borrowing arrangement (see Note 6).
No provision for income taxes has been made in the accompanying financial
statements as the liability for such taxes is that of the individual partners
rather than the Partnership. Upon sale or disposition of the Partnership's
investments, the taxable gain or the tax loss incurred will be allocated among
the partners. In cases where the disposition of the investment involves the
lender foreclosing on the investment, taxable income could occur without
distribution of cash. This income would represent passive income to the partners
which could be offset by each partners' existing passive losses, including any
passive loss carryovers from prior years.
3. The Partnership Agreement and Related Party Transactions
--------------------------------------------------------
The General Partners of the Partnership are Seventh Income Properties
Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of
PaineWebber Group, Inc. ("PaineWebber") and Properties Associates 1985, L.P.
(the "Associate General Partner"), a Virginia limited partnership, certain
limited partners of which are also officers of the Managing General Partner and
PaineWebber Properties Incorporated. Subject to the Managing General Partner's
overall authority, the business of the Partnership is managed by PaineWebber
Properties Incorporated (the "Adviser") pursuant to an advisory contract. The
Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"). The
General Partners, the Adviser and PWI receive fees and compensation, determined
on an agreed-upon basis, in consideration for various services performed in
connection with the sale of the Units, the management of the Partnership and the
acquisition, management, financing and disposition of Partnership investments.
In connection with the acquisition of properties, the Adviser received
acquisition fees in an amount equal to 5% of the gross proceeds from the sale of
the Partnership Units. In connection with the sale of each property, the Adviser
may receive a disposition fee in an amount equal to the lesser of 1% of the
aggregate sales price of the property or 50% of the standard brokerage
commissions, subordinated to the payment of certain amounts to the Limited
Partners.
Under the terms of the Partnership Agreement, as amended, any taxable
income or tax loss (other than from a Capital Transaction) of the Partnership
will be allocated 98.94802625% to the Limited Partners and 1.05197375% to the
General Partners. Taxable income or tax loss arising from a sale or refinancing
of investment properties will be allocated to the Limited Partners and the
General Partners in proportion to the amounts of sale or refinancing proceeds to
which they are entitled; provided, however, that the General Partners shall not
be allocated aggregate gain as a result of all sales or refinancings in excess
of the aggregate net losses previously allocated to them and the total cash
distributed to them; provided further, however, that the General Partners shall
be allocated at least 1% of taxable income arising from a sale or refinancing.
If there are no sale or refinancing proceeds, taxable income or tax loss from a
sale or refinancing will be allocated 98.94802625% to the Limited Partners and
1.05197375% to the General Partners. Notwithstanding this, the Partnership
Agreement provides that the allocation of taxable income and tax losses arising
from the sale of a property which leads to the dissolution of the Partnership
shall be adjusted to the extent feasible so that neither the General or Limited
Partners recognize any gain or loss as a result of having either a positive or
negative balance remaining in their capital accounts upon the dissolution of the
Partnership. If the General Partner has a negative capital account balance
subsequent to the sale of a property which leads to the dissolution of the
Partnership, the General Partner may be obligated to restore a portion of such
negative capital account balance as determined in accordance with the provisions
of the Partnership Agreement. Allocations of the Partnership's operations
between the General Partners and the Limited Partners for financial accounting
purposes have been made in conformity with the allocations of taxable income or
tax loss.
All distributable cash, as defined, for each fiscal year shall be
distributed quarterly in the ratio of 95% to the Limited Partners, 1.01% to the
General Partners and 3.99% to the Adviser, as an asset management fee. The
Partnership reinstated its quarterly distribution payments in fiscal 1997. Such
distributions had been suspended since 1990. Under the advisory contract, the
Adviser has specific management responsibilities: to administer day-to-day
operations of the Partnership, and to report periodically the performance of the
Partnership to the Managing General Partner. The Adviser will be paid a basic
management fee (3% of adjusted cash flow, as defined in the Partnership
Agreement) and an incentive management fee (2% of adjusted cash flow
subordinated to a noncumulative annual return to the Limited Partners equal to
6% based upon their adjusted capital contributions), in addition to the asset
management fee described above, for services rendered. The Adviser earned basic
and asset management fees totalling $58,000 for the year ended September 30,
1997. No basic or asset management fees were earned by the Adviser for the years
ended September 30, 1996 and 1995. No incentive management fees have been earned
to date.
Included in general and administrative expenses for the years ended
September 30, 1997, 1996 and 1995 is $86,000, $81,000 and $86,000, respectively,
representing reimbursements to an affiliate of the Managing General Partner for
providing certain financial, accounting and investor communication services to
the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an
independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees
of $17,000, $13,000 and $4,000 (included in general and administrative expenses)
for managing the Partnership's cash assets during fiscal 1997, 1996 and 1995,
respectively.
4. Operating Investment Property
-----------------------------
Operating investment property at September 30, 1997 and 1996 represents
the fixed assets of West Palm Beach Concourse Associates, a joint venture in
which the Partnership has a controlling interest. The Partnership acquired an
interest in West Palm Beach Concourse Associates (the "Joint Venture"), a
Florida general partnership organized on July 31, 1985 in accordance with a
joint venture agreement between the Partnership and Palm Beach Lake Associates
(co-venturer), to own and operate The Concourse Towers I and II and Retail Plaza
(the "Properties"). The Properties originally consisted of two office towers
with 140,000 square feet of rentable space and a 30,473 rentable square foot
retail plaza located in West Palm Beach, Florida. On September 14, 1990, the
co-venture partner of West Palm Beach Concourse Associates assigned its general
partnership interest to Seventh Income Properties Fund, Inc. ("SIPF"), the
Managing General Partner of the Partnership, in return for a release from any
further obligations or duties called for under the terms of the joint venture
agreement. As a result, the Partnership assumed control over the affairs of the
joint venture.
The aggregate cash investment made by the Partnership for its original
interest in West Palm Beach Concourse Associates was approximately $11,325,000
(including an acquisition fee of $663,000 paid to the Adviser). At September 30,
1992, the Properties were encumbered by three separate nonrecourse first
mortgage loans and a nonrecourse second mortgage loan with an aggregate balance
of approximately $12,873,000. The Concourse joint venture suspended payments to
the second mortgage lender in May of 1991 and suspended payments to the first
mortgage lender in January of 1992 due to the continued deterioration of
operating results that reduced the venture's net cash flow below levels required
to cover the scheduled mortgage loan payments. The venture's cash flow problems
resulted from a significant decline in market rental rates, as a result of the
oversupply of competing office space in the West Palm Beach, Florida market. The
venture's net cash flow dropped dramatically upon the expiration, in August of
1991, of a master lease which had covered all of Tower II. Upon expiration of
the master lease, which had been in effect since the time of the property's
acquisition, several sub-lessees decided to vacate the building and the leased
percentage of the Tower II space fell from 100% to less than 50%. Upon
suspending debt service payments, management requested certain concessions and
modifications from the lenders necessary for the venture to be able to compete
effectively in the marketplace for tenants and service its debt obligations.
After protracted negotiations, the first mortgage lender was ultimately
unwilling or unable to grant the sought-after modifications and filed suit
against the venture to foreclose on the entire mixed-use complex, under the
cross-collateralization provisions of the three first mortgage loans.
On October 29, 1992, the Partnership consummated a settlement agreement
with the first mortgage lender regarding the foreclosure suits on the Concourse
office towers and retail plaza whereby the foreclosure action against the retail
plaza was dismissed and the first mortgage loan on the retail property was
reinstated. In return for this reinstatement, the Partnership agreed not to
contest a stipulated order of foreclosure on the two office towers. The
foreclosure of the two office towers was completed on December 17, 1992. In
conjunction with this settlement agreement, the second mortgage lender, in
return for a payment of $100,000 from the venture, agreed to release the two
office towers from the second mortgage lien, to reduce the principal balance on
the second mortgage on the retail plaza to $750,000, and to extend the maturity
date of this loan to July 1997. As described in Note 6, this second mortgage
loan was repaid in fiscal 1995.
Effective January 1, 1991, SIPF assigned to the Partnership that portion
of its venture interest which is equal to 14% of the interests in the venture.
In connection with the assignment, the venture partners agreed to amend and
restate the entire Joint Venture Agreement. The terms of the Amended and
Restated Joint Venture Agreement are summarized below.
The Amended and Restated Joint Venture Agreement provides that net cash
flow (as defined) shall be distributed in the following order of priority: (i)
First, to the Partnership until the Partnership has received a cumulative
non-compounded return of 10% on its net investment of $10,450,000 plus any
additional contributions made subsequent to January 1, 1991; (ii) Second, any
remaining net cash flow shall be distributed to the partners in proportion to
their venture interests (99% to the Partnership and 1% to SIPF).
Under the terms of the Amended and Restated Joint Venture Agreement,
taxable income from operations in each year shall be allocated first to the
Partnership until the Partnership has been allocated an amount equal to a 10%
cumulative non-compounded return on the Partnership's net investment plus any
additional contributions. Any remaining taxable income shall be allocated 99% to
the Partnership and 1% to SIPF. All tax losses from operations shall be
allocated 99% to the Partnership and 1% to SIPF. Allocations of income or loss
for financial accounting purposes have been made in accordance with the
allocations of taxable income or tax loss.
Net profits and losses arising from a capital transaction shall be
allocated among the venture partners under the specific provisions of the
Amended and Restated Joint Venture Agreement. Any net proceeds available to the
venture, arising from the sale, refinancing or other disposition of the
property, after the payment of all obligations to the mortgage lenders and the
repayment of certain advances from the Partnership shall be distributed to the
venture partners in proportion to their positive capital account balances after
the allocation of all gains or losses.
If additional cash is required in connection with the operation of the
Joint Venture, the venture partners shall contribute such required funds in
proportionate amounts as may be determined by the venture partners at such time.
The following is a summary of property operating expenses for the years
ended September 30, 1997, 1996 and 1995 (in thousands):
1997 1996 1995
---- ---- ----
Property operating expenses:
Repairs and maintenance $ 50 $ 59 $ 55
Utilities 5 5 4
Insurance 6 6 6
General and administrative 16 18 42
Management fees 15 15 12
------ ---- ------
$ 92 $103 $ 119
====== ==== ======
5. Investments in Unconsolidated Joint Venture Partnerships
--------------------------------------------------------
At September 30, 1997, the Partnership had investments in three
unconsolidated joint ventures (four at September 30, 1996) which owned three
operating properties (six at September 30, 1996). HMF Associates, a joint
venture in which the Partnership had an interest, owned three multi-family
apartment properties located in the Seattle, Washington area. On June 27, 1997,
HMF Associates sold the properties known as The Hunt Club Apartments and The
Marina Club Apartments, and then, on September 9, 1997, HMF Associates sold the
remaining property known as The Enchanted Woods Apartments. Subsequent to the
sale of Enchanted Woods, HMF Associates was liquidated. See below for a further
discussion of these sale transactions. The unconsolidated joint ventures are
accounted for on the equity method in the Partnership's financial statements.
<PAGE>
Condensed combined financial statements of these joint ventures follow:
Condensed Combined Balance Sheets
September 30, 1997 and 1996
(in thousands)
Assets
1997 1996
---- ----
Current assets $ 3,445 $ 3,162
Operating investment properties, net 22,481 36,019
Other assets, net 238 327
------- -------
$26,164 $39,508
======= =======
Liabilities and Partners' Capital (Deficit)
Current liabilities $ 3,069 $25,832
Long-term debt, less current portion 22,185 22,602
Loans from venturers - 366
Partnership's share of combined capital (deficit) 1,167 (8,531)
Co-venturers' share of combined capital (deficit) (257) (761)
------- -------
$26,164 $39,508
======= =======
Reconciliation of Partnership's Investment
1997 1996
---- ----
Partnership's share of combined capital
(deficit), as shown above $ 1,167 $ (8,531)
Prepaid distributions to Partnership (76) (234)
Partnership's share of current liabilities
and long-term debt 168 168
Excess basis due to investment in ventures, net (1) 147 184
-------- --------
Investment in unconsolidated ventures, at equity $ 1,406 $ (8,413)
======== ========
(1) At September 30, 1997 and 1996, the Partnership's investment exceeded
its share of the joint venture partnerships' capital accounts by
approximately $147,000 and $184,000, respectively. This amount, which
relates to certain expenses incurred by the Partnership in connection
with acquiring its joint venture investments, is being amortized over
the estimated useful life of the investment properties. As discussed
further below, the Meadows joint venture was liquidated subsquent to
year-end upon the sale of its operating investment property. Included in
the net excess basis as of September 30, 1997 is $129,000 related to the
Meadows joint venture which will be written off in the first quarter of
fiscal 1998 as a result of this sale transaction.
<PAGE>
Condensed Combined Summary of Operations
For the years ended September 30, 1997, 1996 and 1995
(in thousands)
1997 1996 1995
---- ---- ----
Rental revenues and expense recoveries $ 10,391 $ 10,372 $ 10,122
Interest and other income 466 521 465
--------- -------- --------
10,857 10,893 10,587
Mortgage interest 3,652 3,892 4,468
Property operating expenses 5,539 5,609 5,285
Depreciation and amortization 1,649 1,849 1,661
(Gain) loss on insurance settlement - (197) 300
--------- -------- --------
10,840 11,153 11,714
--------- -------- --------
Operating income (loss) 17 (260) (1,127)
Gain on sale of operating investment
properties 4,291 - -
--------- -------- --------
Income (loss) before extraordinary gain 4,308 (260) (1,127)
Extraordinary gain from settlement of
debt obligations 7,552 - 1,070
--------- -------- --------
Net income (loss) $ 11,860 $ (260) $ (57)
========= ========= ========
Net income (loss):
Partnership's share of combined net
income (loss) $ 11,746 $ (269) $ (23)
Co-venturers' share of combined
net income (loss) 114 9 (34)
--------- --------- --------
$ 11,860 $ (260) $ (57)
========= ========= ========
Reconciliation of Partnership's Share of Operations
(in thousands)
1997 1996 1995
---- ---- ----
Partnership's share of combined net income
(loss), as shown above $11,746 $ (269) $ (23)
Amortization of excess basis (37) (7) (7)
------- ------- --------
Partnership's share of unconsolidated
ventures' net income (losses) $11,709 $ (276) $ (30)
======= ======= ========
<PAGE>
The Partnership's share of the unconsolidated ventures' net income
(losses) is presented as follows in the consolidated statements of operations
(in thousands):
Partnership's share of unconsolidated
ventures' income (losses) $ 36 $ (276) $ (1,100)
Partnership's share of gain on sale
of operating investment properties 4,210 - -
Partnership's share of extraordinary
gain on settlement of debt obligations 7,463 - 1,070
------- ------- --------
$11,709 $ (276) $ (30)
======= ======= ========
The unconsolidated joint ventures are subject to partnership agreements
which determine the distribution of available funds, the disposition of the
ventures' assets and the rights of the partners, regardless of the Partnership's
percentage ownership interest in the venture. Substantially all of the
Partnership's investments in these unconsolidated joint ventures are restricted
as to distributions.
Investments in unconsolidated joint ventures, at equity, on the balance
sheet is comprised of the following equity method carrying values (in
thousands):
1997 1996
---- ----
Chicago Colony Apartments Associates $ 77 $ (241)
Chicago Colony Square Associates 1,256 1,138
Daniel Meadows Partnership 73 506
HMF Associates - (9,816)
-------- --------
$ 1,406 $ (8,413)
======== ========
The Partnership received cash distributions from the unconsolidated joint
ventures during fiscal 1997, 1996 and 1995 as set forth below (in thousands):
1997 1996 1995
---- ---- ----
Chicago Colony Apartments Associates $ 774 $ 1,517 $ 797
Daniel Meadows Partnership 567 345 14
HMF Associates 549 - 400
-------- ------- -------
$ 1,890 $ 1,862 $ 1,211
======== ======= =======
<PAGE>
A description of the ventures' properties and the terms of the joint
venture agreements are summarized as follows:
a. Chicago Colony Apartments Associates
------------------------------------
On December 27, 1985, the Partnership acquired a general partnership
interest in Chicago Colony Apartments Associates (the "Joint Venture"), an
Illinois general partnership that purchased and operates The Colony Apartments;
a 783-unit apartment complex located in Mount Prospect, Illinois. The
Partnership's co-venture partner is an affiliate of the Paragon Group.
The aggregate cash investment by the Partnership for its interest was
approximately $11,848,000 (including an acquisition fee of $687,500 paid to the
Adviser). On August 1, 1995, the $16.75 million non-recourse wraparound mortgage
note secured by the Colony Apartments property was refinanced with a new $17.4
million non-recourse mortgage note at a fixed interest rate of 7.6% per annum.
The joint venture received a discount of approximately $1,070,000 on the pay-off
of the wraparound mortgage loan under the terms of the loan agreement and did
not require any contributions from the venture partners to complete the
refinancing transaction. The discount was recorded by the venture as an
extraordinary gain on settlement of debt obligation. The Partnership was
allocated 100% of such extraordinary gain. As a condition of the new loan, the
Colony Apartments joint venture was required to establish an escrow account in
the amount of $685,000 for the completion of agreed upon repairs, $156,600 for
capital replacement reserves and $600,000 for real estate taxes. The outstanding
balance of the first mortgage loan, which is scheduled to mature in August 2002,
was $16,873,000 as of September 30, 1997.
The Joint Venture Agreement provides that cash flow for any year shall
first be distributed to the Partnership in the amount of $1,100,000, payable
monthly (the Partnership preference return). The Partnership's preference return
is cumulative monthly but not annually. The next $317,500 thereafter will be
distributed to the co-venturer on a noncumulative annual basis, payable
quarterly. Any cash flow not previously distributed at the end of each fiscal
year will be applied in the following order of priority: first to the payment of
all unpaid accrued interest on all outstanding operating notes, if any, the next
$425,000 of cash flow in any year will be distributed 80% to the Partnership and
20% to the co-venturer, the next $425,000 of cash flow in any year will be
distributed 70% to the Partnership and 30% to the co-venturer, and any remaining
balance will be distributed 65% to the Partnership and 35% to the co-venturer.
After the end of each month during the year in which the Partnership has not
received its cumulative preference return, the co-venturer shall distribute to
the Partnership the lesser of (a) the excess, if any, of the cumulative
Partnership preference return over the aggregate amount of net cash flow
previously distributed to the Partnership during the year or (b) any net cash
flow distributed to the co-venturer during the year.
The Joint Venture Agreement further provides that net sale or refinancing
proceeds shall be distributed (after payment of mortgage debt and other
indebtedness of the Joint Venture) as follows and in the following order of
priority: (1) the Partnership and the co-venturer shall receive amounts due for
operating loans or additional cash contributions, if any, made to the Joint
Venture, (2) the amount of any undistributed preference payments to the
Partnership, (3) the Partnership shall receive $12,680,281, (4) the next
$3,619,500 of such proceeds shall be distributed to the co-venturer, (5) the
Manager of the apartment complex shall receive any subordinated management fees
not previously paid, (6) the next $8,750,000 of such proceeds shall be
distributed 80% to the Partnership and 20% to the co-venturer, (7) any remaining
balance shall then be distributed 85% to the Partnership and 15% to the
co-venturer until the Partnership receives an amount equal to the sum of net
losses allocated to the Partnership through 1989 times a percentage equal to 50%
less the weighted average maximum Federal income tax rate for individuals plus a
simple rate of return equal to 8% per annum; (8) the next $4,000,000 of such
proceeds shall be distributed 70% to the Partnership and 30% to the co-venturer,
and (9) the balance of such proceeds, if any, shall be distributed 65% to the
Partnership and 35% to the co-venturer.
Taxable income and tax losses from operations in each year shall be
allocated to the Partnership and the co-venturer in any year in the same
proportions as actual cash distributions, except that, through December 31,
1987, all net losses shall be allocated to the Partnership, and thereafter, in
no event, shall the co-venturer be allocated less than 10% of the taxable income
or losses nor shall the co-venturer be allocated income without a like cash
distribution. Allocations of income and loss for financial accounting purposes
have been made in conformity with the actual allocations of taxable income or
tax loss.
If additional cash is required for any reason in connection with the Joint
Venture after December 31, 1988, it will be provided 80% by the Partnership and
20% by the co-venturer as interest-bearing loans to the Joint Venture.
The Joint Venture has entered into a property management contract with an
affiliate of the co-venturer, cancellable at the option of the Partnership upon
the occurrence of certain events. The management fee is 5% of gross receipts
collected from the property (excluding interest on certain Joint Venture reserve
funds), and 40% of such fee was subordinated to the receipt by the Partnership
and the co-venturer of their preferred returns during the period through
December 31, 1988. Cumulative subordinated management fees at September 30, 1997
totalled approximately $275,000.
b. Chicago Colony Square Associates
--------------------------------
On December 27, 1985, the Partnership also acquired a general partnership
interest in Chicago Colony Square Associates (the "Joint Venture") an Illinois
general partnership that purchased and operates Colony Square Shopping Center; a
shopping center consisting of two one-story buildings with 39,572 net rentable
square feet, located in Mount Prospect, Illinois. The Partnership's co-venture
partner is an affiliate of the Paragon Group.
The aggregate cash investment by the Partnership for its investment was
approximately $1,416,000 (including an acquisition fee of $81,250 paid to the
Adviser). The shopping center is encumbered by a nonrecourse assumable first
mortgage loan with a balance of approximately $1,011,000 at September 30, 1997.
This mortgage loan is scheduled to mature in November 2006.
The Joint Venture Agreement provides that cash flow for any year shall
first be distributed to the Partnership in the amount of $130,000, payable
monthly (the Partnership preference return). The Partnership's preference return
is cumulative monthly but not annually. The next $22,900 thereafter will be
distributed to the co-venturer on a noncumulative annual basis, payable
quarterly (the co-venturer preference return). Any cash flow not previously
distributed at the end of each fiscal year will be applied in the following
order: first to the payment of all unpaid accrued interest on all outstanding
operating notes, if any, the next $50,000 of annual cash flow will be
distributed 80% to the Partnership and 20% to the co-venturer, the next $50,000
of annual cash flow will be distributed 70% to the Partnership and 30% to the
co-venturer and any remaining balance will be distributed 60% to the Partnership
and 40% to the co-venturer. After the end of each month during the year in which
the Partnership has not received its cumulative preference return, the
co-venturer shall distribute to the Partnership the lesser of (a) the excess, if
any, of the cumulative Partnership preference return over the aggregate amount
of the net cash flow previously distributed to the Partnership during the year
or (b) any net cash flow distributed to the co-venturer during the year.
The Joint Venture Agreement further provides that sale or refinancing
proceeds shall be distributed (after payment of mortgage debt and other
indebtedness of the Joint Venture) as follows and in the following order of
priority: (1) the Partnership and the co-venturer shall receive amounts due for
operating loans and accrued interest or additional cash contributions, if any,
made to the Joint Venture, (2) the amount of any undistributed preference
payments not previously collected by the Partnership shall then be paid, (3) the
Partnership shall receive $1,508,127, (4) the next $261,060 of such proceeds
shall be distributed to the co-venturer, (5) the Manager of the Shopping Center
shall receive any subordinated management fees not previously paid, (6) the next
$1,000,000 of such proceeds shall be distributed 80% to the Partnership and 20%
to the co-venturer, (7) any remaining balance shall then be distributed 85% to
the Partnership and 15% to the co-venturer until the Partnership receives an
amount equal to the sum of net losses allocated to the Partnership through 1989
times a percentage equal to 50% less the weighted average maximum Federal income
tax rate for individuals plus a simple rate of return equal to 8% per annum, (8)
the next $450,000 of such proceeds shall be distributed 70% to the Partnership
and 30% to the co-venturer, and (9) the balance of such proceeds, if any, shall
be distributed 60% to the Partnership and 40% to the co-venturer.
Taxable income and tax losses from operations in each year will be
allocated to the Partnership and the co-venturer in any year in the same
proportions as actual cash distributions, except that, through December 31,
1987, all net losses were allocated to the Partnership, and thereafter, in no
event, will the co-venturer ever be allocated less than 10% of the taxable
income or tax losses nor will the co-venturer be allocated income without a like
cash distribution. Allocations of income and loss for financial accounting
purposes have been made in conformity with the actual allocations of taxable
income or tax loss.
If additional cash is required for any reason in connection with the Joint
Venture, it will be provided 80% by the Partnership and 20% by the co-venturer
as interest-bearing loans to the Joint Venture.
The Joint Venture entered into a property management contract with an
affiliate of the co-venturer, cancellable at the option of the Partnership upon
the occurrence of certain events. The management fee will be 5% of gross
receipts collected (excluding interest on certain Joint Venture reserve funds),
and 40% of such fee was subordinated to the receipt by of the Partnership and
the co-venturer of their preferred returns during the period through December
31, 1988. Cumulative subordinated management fees at September 30, 1997 totalled
approximately $27,000.
c. Daniel Meadows Partnership
--------------------------
On June 19, 1986, the Partnership acquired a general partnership interest
in Daniel Meadows Partnership (the "Joint Venture"), a Virginia general
partnership which has been formed to develop, own and operate The Meadows on the
Lake Apartments, a 200-unit apartment complex located in Birmingham, Alabama.
The Partnership's co-venture partner was an affiliate of Daniel Realty Company.
The aggregate cash investment by the Partnership for its interest was
approximately $3,807,000 (including an acquisition fee of $207,000 paid to the
Adviser). The apartment complex was encumbered by a mortgage note with a balance
of approximately $4,719,000 at September 30, 1997. The mortgage debt, in the
initial principal amount of $4,850,000, bore interest at a variable rate of
2.25% over the 30-day LIBOR rate (equivalent to a rate of approximately 7.90625%
per annum as of September 30, 1997). The loan required monthly interest and
principal payments based on a 25-year amortization schedule and was scheduled to
mature on February 5, 2000.
Subsequent to year-end, on December 18, 1997 the Joint Venture sold the
operating investment property to an unrelated third party for $9,525,000. The
Partnership received net proceeds of approximately $4.4 million after paying off
the outstanding mortgage loan of approximately $4.7 million and closing costs of
approximately $400,000. The Partnership received 100% of the net proceeds in
accordance with the terms of the Joint Venture Agreement. The net proceeds from
the sale of The Meadows property will be distributed to the Limited Partners on
February 13, 1998.
During fiscal 1991, the Partnership discovered that certain materials used
to construct The Meadows on the Lake Apartments were installed incorrectly and
would require substantial repairs. During fiscal 1992, the Meadows joint venture
engaged local legal counsel to seek recoveries from the venture's insurance
carrier, as well as various contractors and suppliers, for the venture's claim
of damages, which were estimated at approximately $1 million, not including
legal fees and other incidental costs. During fiscal 1993, the insurance carrier
deposited approximately $38,000 into an escrow account controlled by the
venture's mortgage lender in settlement of the undisputed portion of the
venture's claim. During fiscal 1994, the insurer agreed to enter into
non-binding mediation towards settlement of the disputed claims out of court. On
October 3, 1994, the joint venture agreed to settle its claims against the
insurance carrier, architect, general contractor and the surety/completion bond
insurer for $1,076,000, which was in addition to the $38,000 previously paid by
the insurance carrier. These settlement proceeds were escrowed with the mortgage
holder, which agreed to release such funds as needed for structural renovations.
The venture's mortgage loan described above was to be fully recourse to the
joint venture and to the partners of the joint venture until the repairs were
completed, at which time the entire obligation becomes non-recourse. Through
September 30, 1996, a total of $103,000 in excess of the available settlement
proceeds had been spent for the renovations, which were completed during fiscal
1996. The venture had recognized a loss of $300,000 in fiscal 1995 equal to the
amount by which the total repair costs, including estimated costs to complete,
exceeded the total settlement proceeds. During fiscal 1996, management revised
its plans for completing the renovations resulting in the required repairs being
accomplished for substantially less than the prior estimates. This change in
estimate resulted in a gain of $197,000 for financial reporting purposes which
is reflected in the venture's fiscal 1996 income statement.
The Joint Venture Agreement provided that from available cash flow, after
the repayment of any optional loans made by the partners, the Partnership would
receive an 8% per annum cumulative preferred return on $3,600,000, payable
monthly through June 30, 1989; 9% per annum through June 30, 1991 and 10% per
annum thereafter. The General Partners of the co-venturer personally guaranteed
payment of the Partnership's preferred return through June 30, 1988. Any excess
cash remaining, after payment to the Partnership of its preferred distribution,
was to be distributed 60% to the Partnership and 40% to the co-venturer,
respectively. In addition, the Partnership was entitled to receive $2,500
annually as an investor servicing fee. As of September 30, 1997, the
Partnership's unpaid cumulative preference return amounted to approximately
$2,175,000. Such amount was payable only from available sale or refinancing
proceeds. Accordingly, the unpaid cumulative preference return was not accrued
in the venture's financial statements as of September 30, 1997.
The Joint Venture Agreement provided that Net Proceeds, as defined, (other
than refinancing proceeds, which were to be distributed 60% to the Partnership
and 40% to the co-venturer) were to be distributed, after payment of mortgage
debt and other indebtedness of the Joint Venture, as follows and in the
following order of priority: (1) to repay accrued interest and principal, in
that order, on any optional loans made by the partners, (2) to the Partnership
until the Partnership had received the cumulative annual preferred distributions
following the guaranty period specified above, (3) to the Partnership until it
had received cumulative distributions of $4,140,000, and (4) thereafter, the
balance, if any, 60% to the Partnership and 40% to the co-venturer.
Taxable income from operations in each year was to be allocated to the
Partnership and the co-venturer in accordance with distributions of cash, to the
extent of such distributions, and then 60% to the Partnership and 40% to the
co-venturer, respectively. Until the date upon which the Partnership had been
allocated cumulative tax losses equal to $3,600,000, tax losses were to be
allocated 98% to the Partnership and 2% to the co-venturer, respectively.
Thereafter, tax losses were to be allocated 60% to the Partnership and 40% to
the co-venturer. Allocations of income or loss for financial accounting purposes
have been made in conformity with the allocations of taxable income or tax loss.
Generally, gains and losses arising from a sale of the property were to be
allocated first on the basis of the partner's capital balances; thereafter,
remaining gains and losses were to be allocated 60% to the Partnership and 40%
to the co-venturer.
The Joint Venture entered into a property management contract with an
affiliate of the co-venturer, cancellable at the option of the Partnership upon
the occurrence of certain events. The management fee was 5% of rents and other
income collected from the property, as defined in the management agreement.
d. HMF Associates
--------------
On March 5, 1987, the Partnership formed a joint venture with Pacific
Union Investment Corporation (the co-venturer) pursuant to a joint venture
agreement. The joint venture was formed as a California general partnership and
purchased and operated the Enchanted Woods (formerly Forest Ridge), Hunt Club
and Marina Club apartment complexes, all of which are located in the Seattle,
Washington area. The Enchanted Woods property is a 217-unit garden apartment
complex and contains approximately 212,463 net rentable square feet. The Hunt
Club property is a 130-unit garden apartment complex and contains approximately
101,912 net rentable square feet, and the Marina Club property is a 77-unit
garden court apartment complex and contains approximately 60,331 net rentable
square feet. The original aggregate cash investment by the Partnership for its
interest was approximately $4,206,000 (including an acquisition fee of $259,700
paid to the Adviser).
Construction-related defects were discovered at all three apartment
complexes prior to fiscal 1991. During 1991, HMF Associates participated as a
plaintiff in a lawsuit filed against the developer, which also involved certain
other properties constructed by the developer. The joint venture's claim against
the developer was settled during fiscal 1991 for $4,189,000. Such funds were
received in December of 1991 and were recorded by the venture as a reduction to
the basis of the operating properties. Of the settlement proceeds, $1,397,000
was paid to legal counsel in connection with the litigation and was capitalized
as an addition to the carrying value of the operating investment properties. In
addition to the cash received at the time of the settlement, the venture
received a note of approximately $584,000 from the developer which was due in
1994. During fiscal 1993, the venture agreed to accept a discounted payment of
approximately $409,000 in full satisfaction of the note if payment was made by
December 31, 1993. The developer made this discounted payment to the venture in
the first quarter of fiscal 1994. In addition, during fiscal 1994 the venture
received additional settlement proceeds totalling approximately $1,270,000 from
its pursuit of claims against certain subcontractors of the development company
and other responsible parties. Additional settlement proceeds totalling
approximately $1,444,000 were collected during fiscal 1995. As of September 30,
1995, all claims had been settled and no additional proceeds were anticipated.
Per the terms of the joint venture agreement, as amended, available net
litigation proceeds, after payment of all associated expenses, were distributed
90% to the Partnership and 10% to the co-venturer. During fiscal 1994, the
Partnership received a distribution of $1,000,000 from the joint venture,
representing its share of the available settlement proceeds. During fiscal 1995,
the Partnership received a repayment of a $400,000 optional loan, plus
approximately $175,000 in accrued interest on such loan, from its share of the
additional settlement proceeds. The repairs to the operating investment
properties, which were completed during fiscal 1994, net of insurance proceeds,
were capitalized or expensed in accordance with the joint venture's normal
accounting policy for such items.
As part of the initial settlement, the venture also negotiated a loan
modification agreement which provided the remainder of the funds required to
complete the repairs of the operating investment properties. Under the terms of
the HMF Associates loan modification executed in fiscal 1992, all accrued and
unpaid interest outstanding as of March 31, 1992 was converted to principal. The
loans and additional advances bore interest at a rate of 9% per annum. Monthly
payments were made in an amount equal to the "net operating income', as defined,
for the prior month. Unpaid interest was added to the principal balance of the
indebtedness on a monthly basis. The final maturity date of the loan secured by
the Enchanted Woods Apartments was June 1, 1997, while the maturity date of the
loans secured by the Hunt Club and Marina Club properties was July 1, 1997, at
which time all unpaid principal, interest and advances were due. Despite the
successful lease-up of all three properties owned by HMF Associates following
the completion of the construction-related repairs, the net operating income
from the properties was not sufficient to fully cover the interest accruing on
the outstanding debt obligations. As a result, the total obligation due to the
mortgage lender had continued to increase since the date of the fiscal 1992 loan
modification agreement. The balance of the original mortgage loans on the Hunt
Club, Marina Club and Enchanted Woods properties at the time of their fiscal
1987 acquisition dates totalled $13,035,000. After advances from the lender to
pay for costs to repair the construction defects of approximately $4.8 million
and interest deferrals totalling approximately $6.2 million, the total
obligation to the mortgage lender totalled approximately $24 million as of the
fiscal 1997 maturity dates. As a result, the aggregate estimated fair value of
the operating investment properties was substantially lower than the outstanding
obligations to the first mortgage holder. In April 1997, the lender agreed to
another modification agreement which provided the joint venture with an
opportunity to complete a sale transaction prior to the loan maturity dates.
Under the terms of the agreement, the Partnership and the co-venture partner
could qualify to receive a nominal payment from the sales proceeds at a
specified level if a sale was completed by June 30, 1997 and certain other
conditions were met. In May 1997, the agreement with the lender was modified to
reflect the terms and conditions of a sale involving only the Hunt Club and
Marina Club properties. On June 27, 1997, HMF Associates sold The Hunt Club
Apartments and The Marina Club Apartments to an unrelated third party for
approximately $5.3 million and $3.1 million, respectively. The Partnership
received net proceeds of approximately $288,000 in connection with the sale of
these two assets in accordance with the discounted mortgage loan payoff
agreement. The joint venture also obtained a four-month extension from the
lender of the discounted loan pay off agreement with respect to the Enchanted
Woods Apartments, and, in July 1997, entered into an agreement with another
third-party buyer for the sale of this remaining asset for $9.2 million. The
sale, which closed on September 9, 1997, satisfied the conditions in the loan
modification agreement which allowed the Partnership to share in the net
proceeds from the sale transaction even though the sale price was below the
amount of the debt obligation. The Partnership received net proceeds of
approximately $261,000 from the sale of Enchanted Woods. As a result of these
sale transactions, the Partnership no longer has any interest in these
properties.
The joint venture recognized gains from the forgiveness of indebtedness in
connection with the sales of the Enchanted Woods, Hunt Club and Marina Club
properties in the aggregate amount of $7,552,000 as a result of the fiscal 1997
sale transactions. The venture also recognized gains in the aggregate amount of
$4,291,000 for the amount by which the sales prices, net of closing costs,
exceeded the net carrying values of the operating investment properties. The
Partnership's share of such gains totalled approximately $7,463,000 and
$4,210,000, respectively.
Taxable income from operations was to be allocated in accordance with the
allocation of net cash flow distributions called for in the venture agreement.
Tax losses from operations, after consideration of certain priority items, was
to be allocated between the Partnership and the co-venturer in proportion to net
cash flow actually distributed or distributable during any fiscal year. Interest
expense on loans from the venture partners were specifically allocated to the
respective venture partners. Capital profits were to be allocated as follows:
First, to the partners to relieve their capital accounts of any negative balance
and second, to the partners in the manner that capital proceeds are distributed.
Capital losses were to be allocated to partners with positive capital accounts,
then 80% to the Partnership and 20% to the co-venturer. Allocations of income
and loss for financial accounting purposes have been made in conformity with the
allocations of taxable income or tax loss.
The joint venture originally entered into a property management agreement
with an affiliate of the co-venturer for property management services. The
management fee was equal to the greater of 5% of gross receipts, as defined in
the agreement, or $9,000 a month. The co-venturer was also reimbursed for
certain accounting expenses. In addition, under an amendment to the joint
venture agreement and as consideration for services provided in conjunction with
the litigation discussed above, the venture paid the co-venturer fees of $96,000
during fiscal 1995.
6. Mortgage note payable
---------------------
Mortgage note payable on the consolidated balance sheets relates to the
Partnership's consolidated joint venture, West Palm Beach Concourse Associates,
and is secured by the venture's operating investment property. At September 30,
1997 and 1996, mortgage note payable consists of the
following (in thousands):
1997 1996
---- ----
11.12% first mortgage, payable in
installments of $20 per month, including
interest, through January 1, 2005. The
fair value of this note payable
approximated its carrying value as of
September 30, 1997 and 1996. $ 1,614 $ 1,671
======= =======
During fiscal 1994, the venture reached an agreement with the second
mortgage lender to fully extinguish a $750,000 second mortgage lien on the
Concourse operating property in return for a cash payment of $300,000. The
Partnership advanced the funds required to complete this transaction in November
1994. The transaction resulted in an extraordinary gain recognized in fiscal
1995 of $530,000.
In accordance with the Concourse mortgage loan agreements, certain
insurance premiums and real estate taxes are required to be held in escrow. The
balance of escrowed funds on the accompanying balance sheets at September 30,
1997 and 1996 consist of such escrowed insurance premiums and real estate taxes
in the aggregate amounts of $72,000 and $74,000, respectively.
Scheduled maturities of long-term debt are summarized as follows (in
thousands):
1998 $ 64
1999 71
2000 80
2001 89
2002 100
Thereafter 1,210
---------
$ 1,614
=========
7. Leases
------
The Partnership's consolidated joint venture, West Palm Beach Concourse
Associates, derives its revenues from non cancelable operating leases. The
initial terms of the leases range from 1 to 40 years with the majority of leases
providing for the pass through of certain property expenses to the tenants.
Approximate minimum future rentals due to be received on existing non
cancelable leases of the retail plaza owned by the consolidated venture for the
next five years ending September 30 and thereafter are as follows (in
thousands):
1998 $ 398
1999 334
2000 298
2001 184
2002 134
Thereafter 1,247
-------
$ 2,595
=======
The above amounts do not include contingent rentals based on
cost-of-living increases and rentals which may be received under certain leases
on the basis of a percentage of sales in excess of stipulated minimums.
Percentage rents received during fiscal 1995 was $2,000. No percentage rents
were received during fiscal 1997 and 1996.
8. Subsequent event
----------------
On November 14, 1997, the Partnership distributed $229,000 to the Limited
Partners, $2,000 to the General Partners and $10,000 to the Adviser as an asset
management fee for the quarter ended September 30, 1997.
As discussed further in Note 5, on December 18, 1997 the joint venture
which owned the Meadows on the Lake Apartments sold the operating property to a
third party and distributed the net proceeds to the Partnership.
<PAGE>
Schedule III - Real Estate and Accumulated Depreciation
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
September 30, 1997
(In thousands)
<TABLE>
<CAPTION>
Initial Cost to Gross Amount at Which Carried at Life on Which
Partnership Costs Close of period Depreciation
Buildings Capitalized Buildings, in Latest
Improvements (Removed) Improvements Income
& Personal Subsequent to & Personal Accumulated Date of Date Statement
Description Encumbrances Land Property Acquisition Land Property Total Depreciation Construction Acquired is Computed
- ----------- ------------ ----- -------- ----------- ---- -------- ----- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Retail Plaza
West Palm
Beach,
FL $1,614 $ 742 $4,518 $(1,709) $486 $3,065 $3,551 $ 1,257 1979-80 7/31/85 5-30 yrs
Notes
(A) The aggregate cost of real estate owned at September 30, 1997 for Federal income tax purposes is approximately $5,416,000.
(B) See Notes 4 and 6 of Notes to Financial Statements.
(C) Reconciliation of real estate owned:
1997 1996 1995
---- ---- ----
Balance at beginning of year $ 5,099 $ 5,074 $ 4,942
Acquisitions and improvements - 25 132
Write off due to permanent
impairment (see Note 2) (1,548) - -
-------- -------- --------
Balance at end of year $ 3,551 $ 5,099 $ 5,074
======== ======== ========
(D) Reconciliation of accumulated depreciation:
Balance at beginning of year $ 1,651 $ 1,512 $ 1,363
Depreciation expense 154 139 149
Write off due to permanent
impairment (see Note 2) (548) - -
-------- - -------- --------
Balance at end of year $ 1,257 $ 1,651 $ 1,512
======== ======== ========
</TABLE>
(E)Costs removed subsequent to acquisition include an impairment writedown
recognized in fiscal 1997 (see Note 2), as well as certain guaranteed
payments received from the co-venturer of the consolidated joint venture (see
Note 4).
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners of
Paine Webber Income Properties Seven Limited Partnership:
We have audited the accompanying combined balance sheets of the Combined
Joint Ventures of Paine Webber Income Properties Seven Limited Partnership as of
September 30, 1997 and 1996, and the related combined statements of operations
and changes in venturers' capital (deficit), and cash flows for each of the
three years in the period ended September 30, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position of the
Combined Joint Ventures of Paine Webber Income Properties Seven Limited
Partnership at September 30, 1997 and 1996, and the combined results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ Ernst & Young LLP
---------------------
ERNST & YOUNG LLP
Boston, Massachusetts
November 20, 1997
<PAGE>
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
September 30, 1997 and 1996
(In thousands)
Assets
1997 1996
---- ----
Current assets:
Cash and cash equivalents $ 1,844 $ 1,958
Escrow deposits 1,302 896
Prepaid distributions to venturer - 234
Other current assets 299 74
-------- --------
Total current assets 3,445 3,162
Operating investment properties
Land 4,563 6,472
Buildings, improvements and equipment 35,763 51,632
-------- --------
40,326 58,104
Less accumulated depreciation (17,845) (22,085)
-------- --------
Net operating investment properties 22,481 36,019
Deferred expenses, net of accumulated amortization
of $120 ($345 in 1996) 173 238
Other assets 65 89
-------- --------
$ 26,164 $ 39,508
======== ========
Liabilities and Venturers' Capital (Deficit)
Current liabilities:
Current portion of long-term debt $ 418 $ 23,691
Real estate taxes payable 1,872 1,181
Accounts payable and accrued liabilities 144 263
Accounts payable - affiliates 3 30
Accrued interest 143 142
Tenant security deposits 273 309
Distributions payable to venturers 216 216
-------- --------
Total current liabilities 3,069 25,832
Loans from venturers - 366
Long-term debt 22,185 22,602
Venturers' capital (deficit) 910 (9,292)
-------- --------
$ 26,164 $ 39,508
======== ========
See accompanying notes.
<PAGE>
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN VENTURERS' CAPITAL (DEFICIT)
For the years ended September 30, 1997, 1996 and 1995
(In thousands)
1997 1996 1995
---- ---- ----
Revenues:
Rental revenues and expense recoveries $ 10,391 $ 10,372 $ 10,122
Interest and other income 466 521 465
-------- -------- --------
10,857 10,893 10,587
Expenses:
Interest expense 3,652 3,961 4,468
Depreciation expense 1,635 1,766 1,651
Real estate taxes 1,835 1,830 1,799
Repairs and maintenance 741 780 668
Management fees 537 541 534
Utilities 607 620 598
Salaries and related expenses 1,026 979 914
General and administrative 793 859 772
Amortization expense 14 14 10
(Gain) loss on insurance settlement - (197) 300
-------- -------- --------
10,840 11,153 11,714
-------- -------- --------
Operating income (loss) 17 (260) (1,127)
Gain on sale of operating investment
properties 4,291 - -
-------- -------- --------
Income (loss) before extraordinary gain 4,308 (260) (1,127)
Extraordinary gain from settlement of
debt obligations 7,552 - 1,070
-------- -------- --------
Net income (loss) 11,860 (260) (57)
Distributions to venturers (2,049) (1,254) (1,085)
Contributions from partners 391 - -
Venturers' deficit, beginning of year (9,292) (7,778) (6,636)
-------- -------- --------
Venturers' capital (deficit), end of year $ 910 $ (9,292) $(7,778)
======== ======== =======
See accompanying notes.
<PAGE>
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS For the
years ended September 30, 1997, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 11,860 $ (260) $ (57)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Gain on sale of operating investment propertie (4,291) - -
Extraordinary gain from settlement of debt
obligations (7,552) - -
Depreciation and amortization 1,649 1,780 1,661
Amortization of deferred financing costs 46 69 45
Interest added to long-term debt principal 770 2,053 1,976
Interest on loans from venturers 25 17 28
Changes in assets and liabilities:
Escrow deposits (406) 1,129 (372)
Accounts receivable 10 - (83)
Prepaid distribution to venturer 7 - -
Other current assets 14 70 (12)
Deferred expenses - (13) (16)
Other assets (17) 25 (105)
Accounts payable and accrued liabilities (87) (194) 101
Accounts payable - affiliates (30) 28 (12)
Real estate taxes payable 690 (753) 872
Accrued interest 1 (5) (20)
Tenant security deposits (36) 10 (8)
Other current liabilities (30) - -
---------- ----------- ----------
Total adjustments (9,237) 4,216 4,055
---------- ----------- ----------
Net cash provided by operating activities 2,623 3,956 3,998
Cash flows from investment activities:
Additions to operating investment properties (800) (1,188) (1,624)
Proceeds from sale of operating investment
properties 17,013 - -
Proceeds from insurance settlements - - 2,520
---------- ----------- ----------
Net cash provided by (used in)
investing activities 16,213 (1,188) 896
---------- ----------- ----------
Cash flows from financing activities:
Loan proceeds - - 22,250
Escrow deposits funded from refinancing proceeds - - (1,442)
Increase in deferred financing costs - (37) (204)
Repayment of long-term debt (16,909) (1,412) (22,842)
Repayment of loans to venturers - (100) (805)
Distributions to venturers (2,041) (1,750) (931)
---------- ----------- ----------
Net cash used in financing activities (18,950) (3,299) (3,974)
---------- ----------- ----------
Net (decrease) increase in cash and cash
equivalents (114) (531) 920
Cash and cash equivalents, beginning of year 1,958 2,489 1,569
--------- ----------- ----------
Cash and cash equivalents, end of year $ 1,844 $ 1,958 $ 2,489
========= =========== ==========
Cash paid during the year for interest $ 2,798 $ 1,827 $ 2,438
========= =========== ==========
</TABLE>
See accompanying notes.
<PAGE>
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES SEVEN
LIMITED PARTNERSHIP
Notes to Combined Financial Statements
1. Organization and Nature of Operations
-------------------------------------
The accompanying financial statements of the Combined Joint Ventures of
Paine Webber Income Properties Seven Limited Partnership (the "Combined Joint
Ventures") include the accounts of Chicago Colony Apartments Associates, an
Illinois general partnership; Chicago Colony Square Associates, an Illinois
general partnership; Daniel Meadows Partnership, a Virginia general partnership;
and HMF Associates, a California general partnership. The financial statements
of the Combined Joint Ventures are presented in combined form, rather than
individually, due to the nature of the relationship between the co-venturers and
Paine Webber Income Properties Seven Limited Partnership ("PWIP7") which owns a
majority financial interest but does not have voting control in each joint
venture.
The dates of PWIP7's acquisition of interests in the joint ventures are as
follows:
Date of Acquisition
Joint Venture of Interest
------------- -----------
Chicago Colony Apartments Associates 12/27/85
Chicago Colony Square Associates 12/27/85
Daniel Meadows Partnership 6/19/86
HMF Associates 5/29/87
On June 27, 1997, HMF Associates sold the properties known as The Hunt
Club Apartments located in Seattle, Washington and The Marina Club Apartments
located in Des Moines, Washington to an unrelated third party for approximately
$5.3 million and $3.1 million, respectively. PWIP 7 received net proceeds of
approximately $288,000 in connection with the sale of these two assets in
accordance with a discounted mortgage loan payoff agreement reached with the
lender in April 1997. On September 9, 1997, HMF Associates sold its remaining
asset, the property known as The Enchanted Woods Apartments located in Federal
Way, Washington, to an unrelated third party for approximately $9.2 million.
PWIP 7 received net proceeds of approximately $261,000 in connection with the
sale in accordance with the discounted mortgage loan payoff agreement. See Note
5 for a further discussion of these transactions. Subsequent to year-end, on
December 18, 1997, Daniel Meadows Partnership sold its operating investment
property, The Meadows on the Lakes Apartments, located in Birmingham, Alabama,
to an unrelated party for $9.525 million. The sale generated net proceeds of
approximately $4.4 million after repayment of the outstanding first mortgage
loan of approximately $4.7 million and closing costs of approximately $400,000.
PWIP 7 received 100% of the net proceeds in accordance with the terms of the
joint venture agreement.
2. Use of Estimates and Summary of Significant Accounting Policies
---------------------------------------------------------------
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
which require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of September 30, 1997 and 1996 and revenues and expenses for
each of the three years in the period ended September 30, 1997. Actual results
could differ from the estimates and assumptions used.
Basis of presentation
---------------------
Generally, the records of the Combined Joint Ventures are maintained on
the income tax basis of accounting and adjusted to generally accepted accounting
principles for financial reporting purposes, principally for depreciation.
Operating investment properties
-------------------------------
The operating investment properties are carried at cost, less accumulated
depreciation, certain guaranteed payments from partners (see Note 3) and
insurance proceeds, or an amount less than cost if indicators of impairment are
present in accordance with Statement of Financial Accounting Standards (SFAS)
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which was adopted in fiscal 1997. SFAS No. 121
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Management generally assesses indicators of impairment by a
review of independent appraisal reports on each operating investment property.
Such appraisals make use of a combination of certain generally accepted
valuation techniques, including direct capitalization, discounted cash flows and
comparable sales analysis. Depreciation expense is computed on a straight-line
basis over the estimated useful lives of the buildings, improvements and
equipment, generally five to thirty years. Professional fees, including deferred
acquisition fees paid to an affiliate of PWIP7 (see Note 4), and other costs
incurred in connection with the acquisition of the properties have been
capitalized and are included in the cost of the land and buildings.
Deferred expenses
-----------------
Deferred expenses consist primarily of loans fees which are being
amortized on a straight-line basis, which approximates the effective interest
method, over the terms of the related loans. Such amortization expense is
included in interest expense on the accompanying statements of operations.
Revenue Recognition
-------------------
The Combined Joint Ventures lease space at the operating investment
properties under short-term and long-term operating leases. Rental revenues are
recognized on a straight-line basis as earned pursuant to the terms of the
leases.
Reclassifications
-----------------
Certain prior year balances have been reclassified to conform to the
current year presentation.
Income tax matters
------------------
The Combined Joint Ventures are comprised of entities which are not
taxable and accordingly, the results of their operations are included on the tax
returns of the various partners. Accordingly, no income tax provision is
reflected in the accompanying combined financial statements.
Cash and Cash Equivalents
-------------------------
For purposes of the statement of cash flows, the Combined Joint Ventures
consider all short-term investments with original maturity dates of 90 days or
less to be cash equivalents.
Escrow deposits
---------------
In accordance with the mortgage loan agreements of the Combined Joint
Ventures, certain building repair reserves, capital improvement reserves,
insurance premiums and real estate taxes are required to be held in escrow. The
escrow deposit amounts on the balance sheet at September 30, 1997 and 1996 are
principally comprised of such escrowed amounts.
Fair Value of Financial Instruments
-----------------------------------
The carrying amounts of cash and cash equivalents and escrow deposits
approximate their fair values as of September 30, 1997 and 1996 due to the
short-term maturities of these instruments. It is not practicable for management
to estimate the fair value of the loans from venturers without incurring
excessive costs because the obligations were provided in non-arm's length
transactions without regard to fixed maturities, collateral issues or other
traditional conditions and covenants. The fair value of long-term debt is
estimated, where applicable, using discounted cash flow analyses, based on the
current market rate for similar types of borrowing arrangements (see Note 6).
3. Joint Ventures
--------------
See Note 5 to the financial statements of PWIP7 included in this Annual
Report for a more detailed description of the joint venture partnerships.
Descriptions of the ventures' properties are summarized below:
a. Chicago Colony Apartments Associates
------------------------------------
The joint venture owns and operates The Colony Apartments, a 783-unit
apartment complex located in Mount Prospect, Illinois.
b. Chicago Colony Square Associates
--------------------------------
The joint venture owns and operates Colony Square Shopping Center, a
39,572 gross leasable square foot shopping center, located in Mount Prospect,
Illinois.
c. Daniel Meadows Partnership
--------------------------
The joint venture owned and operated The Meadows on the Lake Apartments, a
200-unit apartment complex, located in Birmingham, Alabama. As discussed in Note
1, subsequent to year-end, on December 18, 1997 the joint venture sold its
operating investment property and distributed the net proceeds to PWIP7.
During fiscal 1991, the venture had discovered that certain materials used
to construct the operating property were installed incorrectly and would require
substantial repairs. During fiscal 1992, the Meadows joint venture engaged local
legal counsel to seek recoveries from the venture's insurance carrier, as well
as various contractors and suppliers, for the venture's claim of damages, which
were estimated at approximately $1 million, not including legal fees and other
incidental costs. During fiscal 1993, the insurance carrier deposited
approximately $38,000 into an escrow account controlled by the venture's
mortgage lender in settlement of the undisputed portion of the venture's claim.
During fiscal 1994, the insurer agreed to enter into non-binding mediation
towards settlement of the disputed claims out of court. On October 3, 1994, the
joint venture verbally agreed to settle its claims against the insurance
carrier, architect, general contractor and the surety/completion bond insurer
for $1,076,000, which was in addition to the $38,000 previously paid by the
insurance carrier. These settlement proceeds were escrowed with the mortgage
holder, which agreed to release such funds as needed for structural renovations.
The loan was to be fully recourse to the joint venture and to the partners of
the joint venture until the repairs were completed, at which time the entire
obligation becomes non-recourse. As of September 30, 1996, a total of $103,000
in excess of the available settlement proceeds had been spent for the
renovations, which were completed during fiscal 1996. The venture had recognized
a loss of $300,000 in fiscal 1995 equal to the amount by which the total repair
costs, including estimated costs to complete, exceeded the total settlement
proceeds. During fiscal 1996, management revised its plans for completing the
renovations resulting in the required repairs being accomplished for
substantially less than the prior estimates. This change in estimate resulted in
a gain of $197,000 for financial reporting purposes which is reflected in the
accompanying fiscal 1996 statement of operations.
d. HMF Associates
--------------
The joint venture owned and operated three properties, Enchanted Woods
(formerly Forest Ridge) Apartments, a 217-unit apartment complex, The Marina
Club Apartments, a 77-unit apartment complex, and The Hunt Club Apartments, a
130-unit apartment complex, all located in the Seattle, Washington area. As
discussed in Note 1, during fiscal 1997 the joint venture sold all three of its
operating investment properties and distributed the net proceeds to the venture
partners in accordance with a discounted loan payoff agreement which is
described further in Note 5. The joint venture recognized gains from the
forgiveness of indebtedness in connection with the sales of the Enchanted Woods,
Hunt Club and Marina Club properties in the aggregate amount of $7,552,000 as a
result of the fiscal 1997 sale transactions. The venture also recognized gains
in the aggregate amount of $4,291,000 for the amount by which the sales prices,
net of closing costs, exceeded the net carrying values of the operating
investment properties. PWIP7's share of such gains totalled approximately
$7,463,000 and $4,210,000, respectively.
Construction-related defects had been discovered at all three apartment
complexes owned by HMF Associates prior to fiscal 1991. During 1991, HMF
Associates participated as a plaintiff in a lawsuit filed against the developer,
which also involved certain other properties constructed by the developer. The
joint venture's claim against the developer was settled during fiscal 1991 for
$4,189,000. Such funds were received in December of 1991 and were recorded by
the venture as a reduction to the basis of the operating properties. Of the
settlement proceeds, $1,397,000 was paid to legal counsel in connection with the
litigation and was capitalized as an addition to the carrying value of the
operating investment properties. In addition to the cash received at the time of
the settlement, the venture received a note of approximately $584,000 from the
developer which was due in 1994. During fiscal 1993, the venture agreed to
accept a discounted payment of approximately $409,000 in full satisfaction of
the note if payment was made by December 31, 1993. The developer made this
discounted payment to the venture in the first quarter of fiscal 1994. In
addition, during fiscal 1995 and 1994 the venture received additional settlement
proceeds totalling approximately $1,444,000 and $1,270,000 respectively, from
its pursuit of claims against certain subcontractors of the development company
and other responsible parties. As of September 30, 1995, the venture had settled
all of the outstanding litigation related to the construction defects and no
additional litigation proceeds were expected. The repairs to the operating
investment properties, which were completed during fiscal 1994, net of insurance
proceeds, were capitalized or expensed in accordance with the joint venture's
normal accounting policy for such items. Per the terms of the joint venture
agreement, as amended, available net litigation proceeds, after payment of all
associated expenses, were distributed 90% to the Partnership and 10% to the
co-venturer.
The following description of the joint venture agreements provides certain
general information.
Allocations of net income and loss
----------------------------------
The agreements generally provide that taxable income and tax losses (other
than those resulting from sales or other dispositions of the projects) will be
allocated between PWIP7 and the co-venturers in the same proportions as cash
flow distributed or distributable for such year, except for certain items which
are specifically allocated to the partners as set forth in the joint venture
agreements. Internal Revenue Service regulations require partnership allocations
of income and loss to the respective partners to have "substantial economic
effect". For certain of the joint ventures this requirement resulted in joint
venture losses for the years ended September 30, 1997, 1996 and 1995 being
allocated in a manner different from that provided in the joint venture
agreements. Allocations of income and loss for financial reporting purposes have
been made in accordance with the actual allocations of taxable income and tax
loss.
Gains or losses resulting from sales or other dispositions of the projects
shall be allocated as specified in the joint venture agreements.
Distributions
-------------
Subsequent to the Guaranty Periods, distributable funds will generally be
distributed first, to repay accrued interest and principal on certain loans;
second, to pay specified amounts to PWIP7; third, to pay specified amounts to
the co-venturers; and fourth, to distribute the balance in proportions ranging
from 80% to 60% to PWIP7 and 20% to 40% to the co-venturers, as set forth in the
joint venture agreements.
Distributions of net proceeds upon the sale or disposition of the projects
shall be made in accordance with formulas provided in the joint venture
agreements.
Guaranty Periods
----------------
The joint venture agreements generally provided that during the Guaranty
Periods (as defined in the joint venture agreements), in the event that net cash
flow was insufficient to fund operations including amounts necessary to pay
PWIP7 preferred distributions, the co-venturers were required to fund amounts
equal to such deficiencies. The co-venturers obligation to fund such amounts
pursuant to their guarantees was generally to be in the form of capital
contributions to the joint ventures.
4. Related party transactions
--------------------------
The Combined Joint Ventures originally entered into property management
agreements with affiliates of the co-venturers, cancellable at the joint
ventures' option upon the occurrence of certain events. The management fees are
generally equal to 5% of gross receipts, as defined in the agreements. Pursuant
to an amendment to the joint venture agreement and as consideration for services
provided relating to the litigation discussed in Note 6, HMF Associates paid the
property manager fees of $96,000 during fiscal 1995. Such fees were capitalized
as part of the basis of the property.
The Meadows joint venture was required to pay a yearly investor servicing
fee to PWIP7 of $2,500.
Accounts payable - affiliates at September 30, 1997 and 1996 consist
primarily of management fees and reimbursements owed to the property managers of
the operating properties. Loans from venturers at September 30, 1996 of $366,000
represented loans plus accrued interest payable to the partners of the HMF
Associates joint venture. Included in interest expense for the years ended
September 30, 1997, 1996 and 1995 is $25,000, $17,000 and $36,000, respectively,
of interest on such loans which were converted to capital contributions during
fiscal 1997 in connection with the liquidation of the joint venture subsequent
to the sale of the venture's operating properties (see Note 3).
5. Long-term debt
--------------
Long-term debt at September 30, 1997 and 1996 consists of the following
(in thousands):
1997 1996
---- ----
7.6% mortgage loan, secured by the
Colony Apartments property, payable in
monthly installments, including
principal and interest of $130 through
August 1, 2002, at which time the final
principal installment of $15,277 plus
any accrued interest is due. The fair
value of this note payable approximated
its carrying value as of September 30,
1997 and 1996. $ 16,873 $17,136
9-1/2% mortgage loan, secured by
the Colony Square Shopping Center
property, payable in monthly
installments of $14 through October 1,
2006 with the remaining balance
($10,581) due and payable on November 1,
2006. The fair value of this note
payable approximated its carrying value
as of September 30, 1997 and 1996. 1,011 1,078
First mortgage loan, secured by the
Meadows on the Lake Apartments property.
Monthly installments of principal, based
on a 25-year amortization schedule, and
interest, based on LIBOR plus 2.25%
(7.90625% at September 30, 1996), were
due through maturity on February 5,
2000. The fair value of this note
payable approximated its carrying value
as of September 30, 1997 and 1996. This
loan was repaid in full subsequent to
year end in connection with a sale of
the operating investment property (see
Note 1). 4,719 4,773
First mortgage loans made to the
HMF Associates joint venture, which
loans were secured by first deeds of
trust on the operating investment
properties owned by the joint venture.
The original loans were modified on
March 31, 1992 (see discussion below). - 23,306
22,603 46,293
Less current portion (418) (23,691)
-------- ---------
$ 22,185 $ 22,602
======== =========
On August 1, 1995, a $16.75 million non-recourse wraparound mortgage note
secured by the Colony Apartments property was refinanced with a new $17.4
million non-recourse mortgage note at a fixed interest rate of 7.6% per annum.
The joint venture received a discount of approximately $1,070,000 on the pay-off
of the wraparound mortgage loan under the terms of the loan agreement and did
not require any contributions from the venture partners to complete the
refinancing transaction. The discount was recorded by the venture as an
extraordinary gain on settlement of debt obligation. PWIP7 was allocated 100% of
such extraordinary gain. As a condition of the new loan, the Colony Apartments
joint venture was required to establish an escrow account in the amount of
$685,000 for the completion of agreed upon repairs, $156,600 for capital
replacement reserves and $600,000 for real estate taxes. Despite the significant
decrease in the interest rate on the mortgage loan, the venture's monthly debt
service will only decrease by approximately $28,000 due to the higher principal
balance and the monthly principal amortization required under the new loan
agreement.
On March 31, 1992 the loans secured by the apartment properties owned by
HMF Associates were modified whereby all accrued and unpaid interest was
converted to principal. Subject to lender approval, the joint venture could
obtain additional advances up to $9,100,000 to fund certain operating expenses
of the Partnership and to cure construction damages in the operating investment
properties (see Note 3). The loans and additional advances bore interest at a
rate of 9% per annum. Monthly payments were made in an amount equal to the "net
operating income", as defined, for the prior month. Unpaid interest was added to
the principal balance of the indebtedness on a monthly basis. The final maturity
date of the loan secured by the Enchanted Woods Apartments was June 1, 1997,
while the maturity date of the loans secured by the Hunt Club and Marina Club
properties was July 1, 1997, at which time all unpaid principal, interest and
advances were due. Despite the successful lease-up of all three properties owned
by HMF Associates following the completion of the construction-related repairs,
the net operating income from the properties was not sufficient to fully cover
the interest accruing on the outstanding debt obligations. As a result, the
total obligation due to the mortgage lender had continued to increase since the
date of a fiscal 1992 loan modification agreement. The balance of the original
mortgage loans on the Hunt Club, Marina Club and Enchanted Woods properties at
the time of their fiscal 1987 acquisition dates totalled $13,035,000. After
advances from the lender to pay for costs to repair the construction defects of
approximately $4.8 million and interest deferrals totalling approximately $6.2
million, the total obligation to the mortgage lender totalled approximately $24
million as of the fiscal 1997 maturity dates. As a result, the aggregate
estimated fair value of the operating investment properties was substantially
lower than the outstanding obligations to the first mortgage holder. In April
1997, the lender agreed to another modification agreement which provided the
joint venture with an opportunity to complete a sale transaction prior to the
loan maturity dates. Under the terms of the agreement, PWIP 7 and the co-venture
partner could qualify to receive a nominal payment from the sales proceeds at a
specified level if a sale was completed by June 30, 1997 and certain other
conditions were met. In May 1997, the agreement with the lender was modified to
reflect the terms and conditions of a sale involving only the Hunt Club and
Marina Club properties. On June 27, 1997, HMF Associates sold The Hunt Club
Apartments and The Marina Club Apartments to an unrelated third party for
approximately $5.3 million and $3.1 million, respectively. PWIP7 received net
proceeds of approximately $288,000 in connection with the sale of these two
assets in accordance with the discounted mortgage loan payoff agreement. The
joint venture also obtained a four-month extension from the lender of the
discounted loan payoff agreement with respect to the Enchanted Woods Apartments,
and, in July 1997, entered into an agreement with another third-party buyer for
the sale of this remaining asset for $9.2 million. The sale, which closed on
September 9, 1997, satisfied the conditions in the loan modification agreement
which allowed PWIP7 to share in the net proceeds from the sale transaction even
though the sale price was below the amount of the debt obligation. PWIP7
received net proceeds of approximately $261,000 from the sale of Enchanted
Woods.
Scheduled maturities of long-term debt for each of the next five years and
thereafter are as follows (in thousands):
1998 $ 418
1999 454
2000 5,012
2001 455
2002 15,704
Thereafter 560
---------
$ 22,603
=========
6. Leases
------
Chicago Colony Square Associates leases shopping center space to retail
tenants under operating leases. Lease effective dates range from 12 to 192
months. Approximate future minimum payments to the joint venture under non
cancelable operating lease agreements are as follows (in thousands):
1998 $ 342
1999 269
2000 214
2001 186
2002 61
--------
$ 1,072
========
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
September 30, 1997
(In thousands)
<CAPTION>
Initial Cost to Gross Amount at Which Carried at Life on Which
Partnership Costs Close of period Depreciation
Buildings Capitalized Buildings, in Latest
Improvements (Removed) Improvements Income
& Personal Subsequent to & Personal Accumulated Date of Date Statement
Description Encumbrances Land Property Acquisition Land Property Total Depreciation Construction Acquired is Computed
- ----------- ------------ ----- -------- ----------- ---- -------- ----- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED JOINT VENTURES:
Apartment Complex
Mount
Prospect,
IL $16,873 $ 3,132 $25,378 $ 309 $ 2,875 $25,944 $28,819 $12,847 1975 12/27/85 5-30 yrs.
Shopping Center
Mount
Prospect,
IL 1,011 1,014 1,883 31 985 1,943 2,928 734 1978 12/27/85 5-30 yrs.
Apartment Complex
Birmingham,
AL 4,719 480 7,497 602 703 7,876 8,579 4,264 1985-86 6/19/86 5-30 yrs.
------ -------- -------- ------ ------- ------- ------- -------
$22,603 $ 4,626 $34,758 $ 942 $ 4,563 $35,763 $40,326 $17,845
======= ======= ======= ======= ======= ======= ======= =======
Notes:
(A) The aggregate cost of real estate owned at September 30, 1997 for Federal income tax purposes is approximately $42,839,000.
(B) See Note 5 to Combined Financial Statements for a description of the terms of the debt encumbering the properties.
(C) Reconciliation of real estate owned:
1997 1996 1995
---- ---- ----
Balance at beginning of year $ 58,104 $56,916 $57,812
Acquisitions and improvements 800 1,188 1,624
Reductions due to dispositions (18,578) - -
Reductions due to receipt of insurance
settlement proceeds - - (2,520)
-------- ------- ------
Balance at end of year $ 40,326 $58,104 $56,916
======== ======= =======
(D) Reconciliation of accumulated depreciation:
Balance at beginning of year $ 22,085 $20,319 $18,668
Depreciation expense 1,635 1,766 1,651
Decreases due to dispositions (5,875) - -
-------- ------- -------
Balance at end of year $ 17,845 $22,085 $20,319
======== ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the year ended September 30, 1997
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,856
<SECURITIES> 0
<RECEIVABLES> 176
<ALLOWANCES> 150
<INVENTORY> 0
<CURRENT-ASSETS> 2,954
<PP&E> 4,957
<DEPRECIATION> 1,257
<TOTAL-ASSETS> 6,789
<CURRENT-LIABILITIES> 164
<BONDS> 1,614
0
0
<COMMON> 0
<OTHER-SE> 5,002
<TOTAL-LIABILITY-AND-EQUITY> 6,789
<SALES> 0
<TOTAL-REVENUES> 5,054
<CGS> 0
<TOTAL-COSTS> 833
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,000
<INTEREST-EXPENSE> 188
<INCOME-PRETAX> 3,033
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,033
<DISCONTINUED> 0
<EXTRAORDINARY> 7,463
<CHANGES> 0
<NET-INCOME> 10,496
<EPS-PRIMARY> 273.54
<EPS-DILUTED> 273.54
</TABLE>
