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: MARCH 31, 1996
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: 0-14857
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
Virginia 04-2866287
State of organization) (I.R.S.Employer
dentification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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
Prospectus of registrant dated Part IV
July 18, 1985, as supplemented
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
1996 FORM 10-K
TABLE OF CONTENTS
PART I Page
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
Item 5 Market for the Partnership's Limited Partnership
Interests and Related Security Holder Matters II-1
Item 6 Selected Financial Data II-1
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations II-2
Item 8 Financial Statements and Supplementary Data II-7
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure II-7
PART III
Item 10 Directors and Executive Officers of the
Partnership III-1
Item 11 Executive Compensation III-3
Item 12 Security Ownership of Certain Beneficial
Owners and Management III-3
Item 13 Certain Relationships and Related Transactions III-3
PART IV
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-42
<PAGE>
PART I
Item 1. Business
PaineWebber Equity Partners One Limited Partnership (the "Partnership") is
a limited partnership formed on April 17, 1985, under the Uniform Limited
Partnership Act of the State of Virginia to invest in a diversified portfolio of
existing, newly constructed or to-be-built income-producing real properties such
as shopping centers, office buildings, apartment complexes, hotels and other
commercial income-producing properties. The Partnership authorized and issued
the maximum of 2,000,000 Partnership Units (the "Units"), at $50 per Unit,
offered to the public pursuant to a Registration Statement on Form S-11 filed
under the Securities Act of 1933 (Registration No. 2-97158). Gross proceeds of
$100,000,000 were contributed to the capital of the Partnership during the
offering period which ended on July 17, 1986. Limited Partners will not be
required to make any additional contributions.
As of March 31, 1996, the Partnership owned directly or through joint
venture partnerships the properties or interests in the properties set forth in
the following table, which consist of four office/R&D buildings, two apartment
complexes and one mixed-use retail/office property.
Name of Joint Venture Date of
Name and Type of Property Acquisition Type of
Location Size of Interest Ownership (1)
- ------------------------- ------------- ----------- -------------------
Crystal Tree Commerce
Center 74,923 square 10/23/85 Fee ownership of land
North Palm Beach, FL feet of retail and improvements
space and
40,115 square
feet of office
space
Warner/Red Hill Associates 93,895 12/18/85 Fee ownership of
Warner/Red Hill Business net rentable land and improvements
Center square feet of (through joint venture)
Tustin, CA office space
Crow PaineWebber LaJolla,
Ltd. 180 units 7/1/86 Fee ownership of land
Monterra Apartments and improvements
LaJolla, CA (through joint venture)
Sunol Center Associates 116,680 net 8/15/86 Fee ownership of land and
Sunol Center Office rentable improvements (through
Buildings square feet of joint venture)
office space (2)
Pleasanton, CA
Lake Sammamish Limited 166 units 10/1/86 Fee ownership of land and
Partnership improvements (through
Chandler's Reach Apartments joint venture)
Redmond, WA
Framingham - 1881 Associates 64,189 net 12/12/86 Fee ownership of land and
1881 Worcester Road rentable improvements (through
Office Building square feet of joint venture
Framingham, MA office space
Chicago-625 Partnership 324,829 net 12/16/86 Fee ownership of land and
625 North Michigan Avenue rentable improvements (through
Office Building square feet joint venture)
Chicago, IL
(1) See Notes to the Financial Statements filed with this Annual Report for a
description of agreements through which the Partnership has acquired these
real property investments and for a description of the indebtedness
secured by the Partnership's real property investments.
(2) On February 28, 1990 one of the three buildings comprising the Sunol
Center investment was sold for $8,150,000. The building that was sold
consisted of approximately 53,400 net rentable square feet, or 31% of the
original total net rentable square feet.
The Partnership's investment objectives are to invest the proceeds raised
from the offering of limited partnership units in a diversified portfolio of
income-producing properties in order to:
(i) preserve and protect the original capital invested in the Partnership,
ii) provide the Limited Partners with quarterly cash distributions, a portion
of which will be sheltered from current federal income tax liability, and
(iii) achieve long-term capital appreciation through potential appreciation in
the values of the Partnership's investment properties.
Through March 31, 1996, the Limited Partners had received cumulative cash
distributions totalling approximately $36,782,000. Quarterly distributions were
paid at the rate of 9% per annum on invested capital from inception through the
quarter ended December 31, 1988. The distributions were reduced to 6% per annum
effective for the quarter ended March 31, 1989 and were paid at that rate
through the quarter ended March 31, 1990, at which point they were reduced to 2%
per annum. Effective for the quarter ended December 31, 1992, the Partnership
suspended the payment of quarterly distributions as part of an overall strategy
aimed at accelerating the timetable for repaying the Partnership's zero coupon
loans. As discussed further in Item 7, during fiscal 1995 the Partnership
completed the refinancings of the zero coupon loans. As a result, distributions
were reinstated at a rate of 1% per annum on invested capital effective for the
quarter ended March 31, 1995. A substantial portion of the distributions paid to
date has been sheltered from current federal income tax liability. In addition,
the Partnership retains an ownership interest in all seven of its original
investment properties, although, as noted above, the Sunol Center joint venture
has sold one of its three office buildings. The proceeds of the sale transaction
were used to retire an outstanding zero coupon loan and for reinvestment in
certain of the existing joint ventures.
The Partnership's success in meeting its capital appreciation objective
will depend upon the proceeds received from the final liquidation of the
investments. The amount of such proceeds will ultimately depend upon the value
of the underlying investment properties at the time of their liquidation, which
cannot presently be determined. While market values for commercial office
buildings have generally stabilized over the past two years, such values
continue to be depressed due to the residual effects of the overbuilding which
occurred in the late 1980's and the trend toward corporate downsizing and
restructurings which occurred in the wake of the last national recession. In
addition, at the present time real estate values for retail shopping centers in
certain markets have begun to be affected by the effects of overbuilding and
consolidations among retailers which have resulted in an oversupply of space.
The market for multi-family residential properties in most markets throughout
the country continued its trend of gradual improvement during fiscal 1996, as
the ongoing absence of significant new construction activity further improved
upon the supply and demand characteristics facing existing properties.
Management's plans are presently to hold the majority of the investment
properties for long-term investment purposes and to direct the management of the
operations of the properties to maximize their long-term values.
All of the Partnership's investment properties are located in real estate
markets in which they face significant competition for the revenues they
generate. The apartment complexes compete with numerous projects of similar type
generally on the basis of price and amenities. Apartment properties in all
markets also compete 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 over the past few 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 this period. The Partnership's shopping center and office
buildings also compete for long-term commercial tenants with numerous projects
of similar type generally on the basis of price, location and tenant improvement
allowances. Market conditions for office/R&D space in Pleasanton, California,
where the Partnership's Sunol Center property is located, have begun to
stabilize after several years of decline. During the fourth quarter of fiscal
1995 the Partnership secured its first new lease at Sunol Center in over four
years. During fiscal 1996, several new leases were signed, bringing the
property's occupancy level up to 100%. The occupancy level at the 1881 Worcester
Road property also increased to 100% during fiscal 1996. However, subsequent to
year-end, the building's largest tenant, which occupied 49% of the leasable
space, vacated the property at the expiration of its lease agreement.
Nonetheless, because market conditions in the suburban Boston area have improved
in recent months, management expects to be able to re-lease this space in a
relatively short period of time. The competitive conditions faced by the
Partnership's Warner/Red Hill investment, on the other hand, remain severe at
the present time. Conditions in the market for suburban office/R&D space in the
Orange County area continue to be adversely affected by corporate
restructurings, cutbacks in government defense spending and by the reduced rate
of growth in the high technology industries. In addition, throughout fiscal 1996
the California real estate market continued to be negatively impacted by the
state of the region's economy, the recovery of which has generally lagged that
of the rest of the country.
The Partnership has no real property investments located 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 agreement 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 First
Equity Partners, Inc. and Properties Associates 1985, L.P. First Equity
Partners, Inc. (the "Managing General Partner"), 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. (the
"Associate General Partner"), a Virginia limited partnership, certain limited
partners of which are also officers of the Adviser and the Managing General
Partner.
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
At March 31, 1996, the Partnership had interests in seven operating
properties through direct ownership and joint venture partnerships. The
properties and the related joint venture partnerships are referred to under Item
1 above to which reference is made for the name, location and description of
each property.
Occupancy figures for each fiscal quarter during 1996, along with an
average for the year, are presented below for each property:
Percent Occupied At
----------------------------------------------
Fiscal
1996
6/30/95 9/30/95 12/31/95 3/31/96 Average
------- ------- -------- ------- ------
Crystal Tree 98% 87% 92% 92% 92%
Warner/Red Hill 83% 83% 86% 83% 84%
Monterra Apartments 96% 97% 98% 98% 97%
Sunol Center 66% 90% 100% 100% 89%
Chandler's Reach Apartments 96% 97% 96% 94% 96%
1881 Worcester Road 79% 100% 100% 100% 95%
625 North Michigan Avenue 87% 90% 88% 89% 89%
<PAGE>
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 First Equity Partners, 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 alleges
that, in connection with the sale of interests in PaineWebber Equity Partners
One Limited Partnership, PaineWebber, First Equity Partners, 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
purport to be suing on behalf of all persons who invested in PaineWebber Equity
Partners One Limited Partnership, also allege that following the sale of the
partnership interests, PaineWebber, First Equity Partners, Inc. and PA1985
misrepresented financial information about the Partnership's value and
performance. The amended complaint alleges that PaineWebber, First Equity
Partners, Inc. and PA1985 violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs seek
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
seek 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 have 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 which the parties expect
to submit to the court for its consideration and approval within the next
several months. Until a definitive settlement and plan of allocation is approved
by the court, there can be no assurance what, if any, payment or non-monetary
benefits will be made available to investors in PaineWebber Equity Partners One
Limited Partnership.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleges, 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 seeks
compensatory damages of $15 million plus punitive damages against PaineWebber.
The eventual outcome of this litigation and the potential impact, if any, on the
Partnership's unitholders cannot be determined at the present time.
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 is substantially similar to the
complaint in the Abbate action described above, and seeks compensatory damages
of $3.4 million plus punitive damages.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with this litigation.
At the present time, the Managing General Partner cannot estimate the impact, if
any, of the potential indemnification claims on the Partnership's financial
statements, taken as a whole. Accordingly, no provision for any liability which
could result from the eventual outcome of these matters has been made in the
accompanying financial statements of the Partnership.
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 March 31, 1996 there were 8,324 record holders of Units in the
Partnership. There is no public market for the Units, and it is not anticipated
that a public market for Units will develop. The Managing General Partner will
not redeem or repurchase Units.
Reference is made to Item 6 below for a discussion of cash distributions
made to the Limited Partners during fiscal 1996.
Item 6. Selected Financial Data
PaineWebber Equity Partners One Limited Partnership For the
years ended March 31, 1996, 1995, 1994, 1993 and 1992
(in thousands, except for per Unit data)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Revenues $ 2,726 $ 2,346 $ 1,971 $ 2,139 $ 2,052
Operating loss $ (1,739) $ (1,637) $ (2,196) $ (2,025) $ (1,711)
Interest income
on notes
receivable from
unconsolidated
ventures $ 800 $ 800 $ 800 $ 800 $ 800
Partnership's share
of unconsolidated
ventures' losses $ (324) $ (715) $ (1,072) $ (1,048) $ (1,364)
Partnership's share
of losses due to
permanent impairment
of operating
investment properties - $ (8,703) - - -
Net loss $ (1,263) $(10,255) $ (2,468) $ (2,273) $ (2,275)
Net loss
per Limited
Partnership Unit $ (0.62) $ (5.07) $ (1.22) $ (1.12) $ (1.13)
Cash distributions
per Limited
Partnership Unit $ 0.50 - - $ 0.75 $ 1.00
Total assets $ 51,255 $ 53,572 $ 64,370 $ 66,169 $ 69,022
Long-term debt and
deferred interest $ 11,356 $ 11,548 $ 12,148 $ 11,273 $ 10,389
The above selected financial data should be read in conjunction with the
consolidated financial statements and related notes appearing elsewhere in this
Annual Report.
The above net loss and cash distributions per Limited Partnership Unit
amounts are based upon the 2,000,000 Limited Partnership Units outstanding
during each year.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Partnership offered limited partnership interests to the public from
July 18, 1985 to July 17, 1986 pursuant to a Registration Statement filed under
the Securities Act of 1933. Gross proceeds of $100,000,000 were received by the
Partnership from the sale of Partnership Units. As discussed further below, the
Partnership also received proceeds of $17,000,000 from the issuance of four zero
coupon loans. The proceeds of such borrowings, net of financing expenses of
approximately $275,000, were used to pay the offering and organizational
expenses, acquisition fees and acquisition-related expenses of the Partnership
and to fund the Partnership's cash reserves. The Partnership initially invested
approximately $97,472,000 (excluding acquisition fees of $2,830,000) in seven
operating properties through joint venture investments. In fiscal 1990, the
Partnership received approximately $7,479,000 from the proceeds of a sale of a
part of one of the operating properties. The Partnership used the proceeds from
this sale to repay a zero coupon loan and replenish its cash reserves. As of
March 31, 1996, the Partnership retained an ownership interest in seven
operating investment properties, which consist of four office/R&D complexes, two
multi-family apartment complexes and one mixed-use retail/office property. The
Partnership does not have any commitments for additional investments but may be
called upon to fund its portion of operating deficits or capital improvements of
the joint ventures in accordance with the respective joint venture agreements.
As previously reported, subsequent to the completion of the last of the
zero coupon loan refinancing transactions during fiscal 1995, management
performed an analysis of its cash flows and liquidity needs for the purpose of
determining the timing and amount of the reinstatement of quarterly
distributions to the partners. Based on such analysis, quarterly distributions
were reinstated with the payment made on May 15, 1995 for the quarter ended
March 31, 1995 at the rate of 1% per annum on original invested capital.
Management had suspended the Partnership's regular quarterly distributions in
order to accumulate the funds necessary to complete the refinancings of the zero
coupon loans secured by the Warner/Red Hill, Monterra, Chandler's Reach and 625
North Michigan properties. The Partnership originally borrowed $17 million in
zero coupon loans to finance its offering costs and related acquisition expenses
in order to invest a greater portion of the initial offering proceeds in real
estate assets. Management believes that it is prudent to distribute cash flow
conservatively at the present time due to the capital needs associated with the
Partnership's four commercial office/R&D buildings and one retail/office
property. Significant capital improvements are planned at 625 North Michigan
over the next two years, including the completion of facade repairs, common area
enhancements, elevator control system upgrading and a possible lobby area retail
space expansion and renovation. The 625 North Michigan Office Building was 89%
occupied as of March 31, 1996. As discussed further below, substantial leasing
costs have been incurred at Sunol Center during fiscal 1996, and significant
leasing costs could be incurred at 1881 Worcester Road and the Crystal Tree
Commerce Center in the near term.
Leasing at Sunol Center had increased to 100% at March 31, 1996 from 32%
at March 31, 1995 as a result of two significant lease signings. A tenant that
signed a 7-year lease on 39,085 square feet took occupancy during the first
quarter of fiscal 1996, and a tenant which has committed to lease 60,000 square
feet took occupancy of 28,000 square feet of such space during the second
quarter and an additional 20,000 square feet during the fourth quarter. This
tenant will take occupancy of the remaining 12,000 square feet of its leased
space over the next 7 months. During fiscal 1996, the Partnership funded
$2,620,000 to the Sunol Center joint venture primarily to pay for tenant
improvements and leasing commissions in connection with the new leases. With the
new leasing activity, once all the required capital work is completed, no
further cash flow deficits are expected at Sunol Center for the next several
years. The capital work is expected to be substantially completed by the end of
the first quarter of fiscal 1997. None of the current leases at Sunol Center
expire before April 2001. At Crystal Tree, occupancy had recovered to 92% as of
March 31, 1996 after beginning the year at 98% and dropping to 87% in the second
quarter. Market conditions in the south Florida area remain very competitive and
continued tenant turnover is likely in the near term. In addition, management
completed certain capital improvements at Crystal Tree during fiscal 1996,
including resealing the parking lot, completing a major roof repair, restaining
the walkway, refurbishing the main front fountain and completing the repainting
and waterproofing of the majority of the property's exterior.
While occupancy at the 1881 Worcester Road Office Building had increased to
100% as of March 31, 1996 from its level of 79% as of one year earlier, a lease
with the property's largest tenant will expire in July 1996. Subsequent to
year-end, this tenant, which had occupied 49% of the building's net leasable
area, vacated the building in order to consolidate its area lease obligations at
another location. The three remaining leases at 1881 Worcester Road are due to
expire in calendar 1998. In addition to its leasing efforts for the significant
vacancy which now exists at the property, management plans to make certain
capital improvements, primarily to the building's common areas, in fiscal 1997
aimed at making the 1881 Worcester Road property more appealing to traditional
office space users. Management believes that these improvements could allow for
increased rental rates and a potentially quicker lease up of vacant space in the
future. The total costs of completing these improvements are expected to be less
than $200,000. The market for office space in the suburban Boston area in which
1881 Worcester Road is located has strengthened during fiscal 1996. Average
vacancy levels at similar buildings in the area have now declined below 10%. As
a result, management is cautiously optimistic that the vacant space at 1881
Worcester Road will be re-leased within a relatively short period of time. At
the Warner/Red Hill Business Center, one of the property's major tenants that
occupies approximately 25% of the property's net rentable area has been
experiencing cash flow problems and has retained a commercial leasing agent to
market a portion of its space for sublease. Unless its operations improve in the
near-term, this tenant is unlikely to renew its lease which is scheduled to
expire in July 1998. Furthermore, to the extent that its operating results
deteriorate further, and if the tenant is unable to sublease the space, the
Partnership may be unable to collect future rent owed under the lease
obligation. The occupancy level at Warner/Red Hill was 83% as of March 31, 1996,
unchanged from its level of one year earlier. Throughout fiscal 1996, the
California real estate market in general continued to be adversely affected by
the state of the region's economy, which, over the past several years, has been
hit hard by the cutbacks in government defense spending and by the reduced rate
of growth in the high technology industries. The state's economic recovery has
generally lagged that of the rest of the country. The leasing activity at Sunol
Center during the latter half of fiscal 1996 reflects an overall improvement in
California's economic climate in recent months. If this general trend were to
continue, it could have a positive impact on the leasing status of the
Warner/Red Hill property in the near term.
While market values for commercial office buildings have generally
stabilized over the past two years, such values continue to be depressed due to
the residual effects of the overbuilding which occurred in the late 1980's and
the trend toward corporate downsizing and restructurings which occurred in the
wake of the last national recession. In addition, at the present time real
estate values for retail shopping centers in certain markets have begun to be
affected by the effects of overbuilding and consolidations among retailers which
have resulted in an oversupply of space. As a result of these market conditions,
the current estimated market values of the Partnership's four office building
properties and its one mixed-use retail/office property are significantly below
their acquisition prices. In light of such circumstances, and as previously
reported, in fiscal 1995 the Partnership elected early application of Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121). In
accordance with SFAS 121, an impairment loss with respect to an operating
investment property is recognized when the sum of the expected future net cash
flows (undiscounted and without interest charges) is less than the carrying
amount of the asset. An impairment loss is measured as the amount by which the
carrying amount of the asset exceeds its fair value, where fair value is defined
as the amount at which the asset could be bought or sold in a current
transaction between willing parties, that is other than a forced or liquidation
sale. The effect of such application was the recognition of impairment losses on
the operating investment properties owned by Warner/Red Hill Associates and
Framingham 1881 - Associates. Both impairment losses resulted because, in
management's judgment, the physical attributes of these properties and their
locations relative to their competition, combined with the lack of near-term
prospects for future improvement in market conditions in the local markets in
which the properties are located, were not expected to enable the ventures to
recover the carrying values of the assets within the Partnership's practicable
remaining holding period. In fiscal 1995, Warner/Red Hill Associates recognized
an impairment loss of $6,784,000 to write down the operating investment property
to its estimated fair value of $3,600,000 as of December 31, 1994. Also in
fiscal 1995, Framingham 1881 - Associates recognized an impairment loss of
$2,983,000 to write down the operating investment property to its estimated fair
value of $2,200,000 as of December 31, 1994. Fair value was estimated using
independent appraisals of the operating properties. Such appraisals make use of
a combination of certain generally accepted valuation techniques, including
direct capitalization, discounted cash flows and comparable sales analysis. The
Partnership's share of these impairment losses, including the write-off of the
related unamortized excess basis amounts, totalled $8,703,000 and is reflected
in the fiscal 1995 statement of operations. The estimated fair values of the
Sunol Center, 625 North Michigan and Crystal Tree properties are also below
their net carrying amounts. Management's estimates of undiscounted cash flows
for all three properties indicate that such carrying amounts are expected to be
recovered, but, in the case of 625 North Michigan and Crystal Tree, the
reversion values could be less that the carrying amounts at the time of
disposition. As a result of such assessment, the 625 North Michigan joint
venture commenced recording an additional annual depreciation charge of $350,000
in calendar 1995. The Partnership's share of such amount is reflected in the
Partnership's share of unconsolidated ventures' losses in the fiscal 1996
statement of operations. The Partnership commenced recording an additional
annual depreciation charge of $65,000 on the Crystal Tree property in fiscal
1996. Such annual charges will continue to be recorded in future periods. Based
on management's analysis, no change to the depreciation on Sunol Center was
required.
As previously reported, during the fourth quarter of fiscal 1995 the
Partnership received an offer to purchase the 1881 Worcester Road property. The
proposed purchase price, while in excess of the Partnership's most recent
independent appraised value for the property, was substantially below the amount
of the Partnership's original investment. Nonetheless, management had agreed to
accept the offer because, in their judgment, the property's future appreciation
potential was limited over the expected remaining holding period as a result of
the market conditions discussed above. However, during the first quarter of
fiscal 1996, the prospective buyer withdrew its offer to purchase 1881 Worcester
Road. The Partnership has no current plans to market any of its operating
investment properties for sale. As discussed further above, the market for
office properties in general has just begun to stabilize after several years of
decline and the market for retail properties is considered weak at the present
time. For these reasons, the Partnership's strategy, at present, would be to
hold the office and retail properties until the respective markets recover
sufficiently to provide favorable sales opportunities. Notwithstanding this, it
is unlikely that the values of the Partnership's office and retail properties
will fully recover to their levels of the mid-to-late 1980's within the
Partnership's remaining holding period. With respect to the Partnership's two
apartment properties, while the market for sales of multi-family properties in
most markets has been strong over the past two years, the Monterra and
Chandler's Reach properties, which represent a combined 26% of the original
investment portfolio, generate a stable cash flow which contributes to the
payment of the Partnership's operating costs and operating cash flow
distributions. As a result, the Partnership will most likely delay any active
sales efforts for these two apartment properties until conditions become more
favorable for potential dispositions of the five commercial properties.
Management's hold versus sell decisions will continue to be based on an
assessment of the best expected overall returns to the Limited Partners.
At March 31, 1996, the Partnership and its consolidated joint venture had
available cash and cash equivalents of approximately $4,042,000. These funds,
along with the future cash flow distributions from the operating properties,
will be utilized for the working capital requirements of the Partnership,
monthly loan payments, the funding of capital enhancements and potential leasing
costs for its commercial property investments, and for distributions to the
partners. Such sources of liquidity are expected to be sufficient to meet the
Partnership's needs on both a short-term and long-term basis. The source of
future liquidity and distributions to the partners is expected to be from the
sales or refinancings of the operating investment properties.
Results of Operations
1996 Compared to 1995
The Partnership's net loss decreased by $8,992,000 in fiscal 1996 when
compared to the prior year mainly due to the permanent impairment losses
recognized with respect to the Warner/Red Hill and 1881 Worcester Road
properties in fiscal 1995, as discussed further above. This favorable change in
net loss can also be partly attributed to a decrease of $391,000 in the
Partnership's share of unconsolidated ventures' losses. The decrease in the
Partnership's share of unconsolidated ventures' losses is primarily due to an
increase in net income at the 1881 Worcester Road and 625 North Michigan joint
ventures. A decrease in net loss of $280,000 at the Monterra Apartments joint
venture also contributed to the decrease in the Partnership's share of
unconsolidated ventures' losses in fiscal 1996. Net income at 1881 Worcester
Road increased mainly due to an increase in rental revenue of $171,000 as a
result of an increase in occupancy from 79% at December 31, 1994 to 100% at
December 31, 1995. As noted above, the occupancy at the 1881 Worcester Road
property declined to 51% subsequent to the fiscal 1996 year-end. In addition,
the venture's depreciation expense decreased in the current year as a result of
the impairment loss recorded in calendar 1995. Net income at 625 North Michigan
improved mostly due to a decrease in real estate tax expense of $289,000 due to
the property's lower value assessment in the current year. In addition, the
venture's rental income increased by almost $200,000 in calendar 1995 mainly due
to an increase in the property's average occupancy level from 83% in calendar
1994 to 88% in calendar 1995. The effect on the venture's net income of the
decrease in real estate taxes and the increase in rental income was partially
offset by the $350,000 increase in depreciation expense discussed further above.
The favorable change in the Monterra joint venture's net operating results is
mainly due to a decrease in interest expense of $268,000 resulting from the
refinancing of the zero coupon loan secured by Monterra in calendar 1994. The
refinancing transaction changed Monterra's debt from a compounding zero coupon
loan with a balance of $8,645,000, bearing interest at 9.36% at the time of the
refinancing, to a current pay mortgage loan with an outstanding balance of
$4,849,000, bearing interest at 8.45% as of September 27, 1994. The favorable
changes in the net operating results of the 1881 Worcester Road, 625 North
Michigan and Monterra joint ventures were partially offset by unfavorable
changes in the net operating results of the Warner/Red Hill and Chandler's Reach
joint ventures. At Warner/Red Hill, an increase in interest expense and a
decline in rental revenues, which were partially offset by a decrease in
depreciation expense as a result of the 1994 impairment loss, contributed to an
increase in the venture's net loss for calendar 1995. The unfavorable change in
the net operating results of the Chandler's Reach joint venture can be primarily
attributed to an increase in interest expense resulting from the September 1994
refinancing transaction in which the debt secured by Chandler's Reach was
transferred from the Partnership's books to the joint venture's books.
The decrease in the Partnership's share of unconsolidated ventures' losses
was partially offset by an increase in the Partnership's operating loss of
$102,000. This increase is primarily due to an increase in property operating
expenses of $297,000 and an increase in depreciation and amortization expense of
$296,000. The increase in property operating expenses is mainly attributable to
increases in repairs and maintenance and administrative expenses at both of the
consolidated operating properties, Sunol Center and Crystal Tree Commerce
Center. Depreciation and amortization expense increased at Sunol Center due to a
significant amount of capital expenditures for tenant improvement work and
leasing commissions in calendar 1995 which resulted from the leasing activity
discussed further above. Depreciation expense increased at Crystal Tree due to
the reassessment of the Partnership's depreciation policy discussed further
above. In addition, interest and other income decreased by $233,000 in fiscal
1996 when compared to the prior year. Interest income decreased due to a
decrease in average outstanding cash balances mainly as a result of the use of
reserves to pay for the Sunol Center leasing costs referred to above. The
increases in property operating expenses and depreciation and amortization
expense and the decrease in interest and other income were partially offset by
an increase in rental income of $613,000. Rental income increased primarily due
to the significant increase in occupancy at Sunol Center during calendar 1995.
1995 Compared to 1994
The Partnership's net loss increased by $7,787,000 in fiscal 1995 when
compared to the prior year due to the permanent impairment losses recognized
with respect to the Warner/Red Hill and 1881 Worcester Road properties in fiscal
1995, as discussed further above. The impact of the impairment losses was
partially offset by decreases in the Partnership's operating loss and the
Partnership's share of unconsolidated ventures' losses of $559,000 and $357,000,
respectively. The Partnership's fiscal 1995 operating loss decreased primarily
due to a decrease in the net loss of the Partnership's consolidated joint
venture, Sunol Center Associates, and an increase in the net income of the
wholly owned Crystal Tree Commerce Center. The net loss at Sunol Center
decreased by $198,000 primarily due to an increase in other revenues. Net income
of the Crystal Tree Commerce Center increased due to an increase in rental
income of $62,000 and a decrease in bad debt expense of $27,000. Rental income
increased due to an increase in average occupancy to 98% in fiscal 1995 from 97%
in fiscal 1994. In addition to the decrease in net loss at Sunol Center and the
increase in net income at Crystal Tree, operating loss decreased due to an
increase in interest income and decreases in general and administrative expenses
and interest expense. Interest income increased by $126,000 due to a steady
increase in interest rates earned on cash and cash equivalents throughout fiscal
1995. General and administrative expense decreased by $87,000 mainly due to a
decrease in legal expenses. Interest expense decreased by $41,000 due to the
modification and principal paydown of the loan secured by the 625 North Michigan
property and the refinancing and payoff of the zero coupon loan which was
secured by the Chandler's Reach Apartments. The impact of those two transactions
on interest expense was partially offset by the issuance of mortgage debt
secured by the Crystal Tree property in September 1994.
The Partnership's share of unconsolidated ventures' losses decreased by
$357,000 in fiscal 1995 when compared to the prior year primarily due to a
significant decrease in the net loss at the Warner/Red Hill joint venture prior
to the aforementioned impairment loss. Net loss at the Warner/Red Hill joint
venture prior to the impairment loss decreased by $336,000 primarily due to a
decrease in interest expense as a result of the modification of the zero coupon
loan secured by the property. The modification provided for the discontinuation
of the compounding of interest and significantly reduced the interest rate on
the debt. Rental revenues declined by $200,000 at Warner/Red Hill during
calendar 1994 due to a decrease in occupancy during the year. Operations at the
Monterra and Chandler's Reach joint ventures remained relatively unchanged in
calendar 1994 as slight increases in rental revenues were offset by higher
property operating expenses. At 625 North Michigan operations remained stable
despite a $219,000 drop in rental revenues due to a substantial decline in real
estate taxes for calendar 1994. Operations of the 1881 Worcester Road joint
venture improved slightly during calendar 1994 as an increase in occupancy at
the property resulted in a $51,000 increase in rental revenues.
1994 Compared to 1993
The Partnership's net loss for fiscal 1994 increased by $196,000 when
compared to the prior year, mainly due to an increase in the Partnership's
operating loss. The Partnership's operating loss increased by $171,000 primarily
due to decreases in rental income and interest and other income of $69,000 and
$99,000, respectively, and increases in interest expense and general and
administrative expenses of $63,000 and $96,000, respectively. Such unfavorable
changes were partially offset by a decline of $163,000 in bad debt expense
related to the Crystal Tree Commerce Center. The decline in rental revenues was
the result of increased rental concessions required at the Crystal Tree Commerce
Center due to the impact of prolonged sluggishness of the South Florida economy
on retail sales in general. Average occupancy levels at both Crystal Tree and
Sunol Center for fiscal 1994 remained virtually unchanged in comparison to the
prior year. The decline in interest and other income was primarily the result of
the receipt of $90,000 of insurance proceeds by the Sunol Center joint venture
during fiscal 1993 in settlement of a claim for weather-related damages.
Interest expense increased as the interest on the Partnership's zero coupon
loans continued to compound through March 31, 1994. General and administrative
expenses rose during fiscal 1994 mainly due to an increase in required legal
services. These items which increased the Partnership's operating loss were
partially offset by a decrease in the bad debt expense related to the Crystal
Tree property of $163,000.
An increase in the Partnership's share of unconsolidated ventures' losses
also contributed to the increase in net loss for fiscal 1994. The Partnership's
share of unconsolidated ventures' losses increased by $24,000 during fiscal
1994. This unfavorable change was primarily due to an increase in bad debt
expense and property operating expenses, particularly repairs and maintenance,
at 625 North Michigan Avenue and an increase in interest expense at the Monterra
Apartments, as the interest on the zero coupon loan continued to compound. These
items were partially offset by an increase in other income from the 625 North
Michigan joint venture and a decrease in real estate taxes at the Warner/Red
Hill Business Center due to the receipt of a tax refund in calendar 1993.
Increased rental revenues at the Warner/Red Hill, Monterra Apartments,
Chandler's Reach Apartments and 1881 Worcester Road properties were offset by a
decline in rental revenues at 625 North Michigan. The decline in rental revenues
at 625 North Michigan resulted from a slight decrease in average occupancy and
the continued deterioration of effective rental rates, which reflects the
extremely competitive market conditions in the downtown Chicago office market.
Average occupancy at 625 North Michigan declined from 82% in calendar 1992 to
80% for calendar 1993.
Inflation
The Partnership commenced operations in 1985 and completed its tenth full
year of operations in the current fiscal year. 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. Most of the
existing leases with tenants at the Partnership's shopping center and office
buildings contain rental escalation and/or expense reimbursement clauses based
on increases in tenant sales or property operating expenses. Tenants at the
Partnership's apartment properties have short-term leases, generally of one year
or less in duration. Rental rates at these properties can be adjusted, to the
extent market conditions allow, to keep pace with inflation 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 resulting from inflation. As noted above, the Warner/Red
Hill, 625 North Michigan and 1881 Worcester Road office buildings presently have
a significant amount of unleased space. During a period of significant
inflation, increased operating expenses attributable to space which remained
unleased at such time would not be recoverable and would adversely affect the
Partnership's net cash flow.
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 First Equity Partners,
Inc., a Virginia corporation, which is a wholly-owned subsidiary of PaineWebber
Group, Inc. 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 operations, 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
Lawrence A. Cohen President and Chief
Executive Officer 42 5/1/91
Albert Pratt Director 85 4/17/85*
J. Richard Sipes Director 49 6/9/94
Walter V. Arnold Senior Vice President and
Chief Financial Officer 48 10/29/85
James A. Snyder Senior Vice President 50 7/6/92
John B. Watts III Senior Vice President 43 6/6/88
David F. Brooks First Vice President and
Assistant Treasurer 53 4/17/85*
Timothy J. Medlock Vice President and Treasurer 35 6/1/88
Thomas W. Boland Vice President 33 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 or
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 PaineWebber Properties Incorporated ("PWPI") serves as the
investment adviser. The business experience of each of the directors and
principal executive officers of the Managing General Partner is as follows:
Lawrence A. Cohen is President and Chief Executive Officer of the Managing
General Partner and President and Chief Executive Officer of the Adviser which
he joined in January 1989. He is also a member of the Board of Directors and the
Investment Committee of the Adviser. From 1984 to 1988, Mr. Cohen was First Vice
President of VMS Realty Partners where he was responsible for origination and
structuring of real estate investment programs and for managing national
broker-dealer relationships. He is a member of the New York Bar and is a
Certified Public Accountant.
Albert Pratt is a Director of the Managing General Partner, a Consultant of
PWI and a general partner of the Associate General Partner. Mr. Pratt joined PWI
as Counsel in 1946 and since that time has held a number of positions including
Director of both the Investment Banking Division and the International Division,
Senior Vice President and Vice Chairman of PWI and Chairman of PaineWebber
International, Inc.
J. Richard Sipes is a Director of the Managing General Partner and a
Director of the Adviser. Mr. Sipes is an Executive Vice President at
PaineWebber. He joined the firm in 1978 and has served in various capacities
within the Retail Sales and Marketing Division. Before assuming his current
position as Director of Retail Underwriting and Trading in 1990, he was a Branch
Manager, Regional Manager, Branch System and Marketing Manager for a PaineWebber
subsidiary, Manager of Branch Administration and Director of Retail Products and
Trading. Mr. Sipes holds a B.S. in Psychology from Memphis State University.
Walter V. Arnold is a Senior Vice President and Chief Financial Officer of
the Managing General Partner and 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. Mr. Arnold is a Certified Public Accountant licensed in the state of
Texas.
James A. Snyder is a Senior Vice President of the Managing General Partner
and a Senior Vice President and Member of the Investment Committee of the
Adviser. Mr. Snyder re-joined the Adviser in July 1992 having served previously
as an officer of PWPI from July 1980 to August 1987. From January 1991 to July
1992, Mr. Snyder was with the Resolution Trust Corporation where he served as
the Vice President of Asset Sales prior to re-joining PWPI. From February 1989
to October 1990, he was President of Kan Am Investors, Inc., a real estate
investment company. During the period August 1987 to February 1989, Mr. Snyder
was Executive Vice President and Chief Financial Officer of Southeast Regional
Management Inc., a real estate development company.
John B. Watts III is a Senior Vice President of the Managing General Partner
and a Senior Vice President of the Adviser which he joined in June 1988. Mr.
Watts has had over 17 years of experience in acquisitions, dispositions and
finance of real estate. He received degrees of Bachelor of Architecture,
Bachelor of Arts and Master of Business Administration from the University of
Arkansas.
David F. Brooks is a First Vice President and Assistant Treasurer of the
Managing General Partner and a First Vice President and Assistant Treasurer of
the Adviser which he joined 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 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 of the Managing General Partner and a
Vice President and Manager of Financial Reporting 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 was 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 March 31, 1996, 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 current or proposed remuneration from the Partnership.
The General Partners are entitled to receive a share of Partnership cash
distributions and a share of profits and losses. These items are described in
Item 13.
The Partnership paid cash distributions to the Limited Partners on a
quarterly basis at a rate of 2% per annum on invested capital for all of fiscal
1992 and through the second quarter of fiscal 1993. Effective for the quarter
ended December 31, 1992, such distributions were suspended in order to
accumulate cash required to repay and refinance the Partnership's zero coupon
loans. The last of the refinancing transactions was completed during fiscal
1995. Distributions were reinstated at a rate of 1% per annum on invested
capital effective for the quarter ended March 31, 1995. However, the
Partnership's Limited Partnership Units 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, First Equity Partners, 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
All distributable cash, as defined, for each fiscal year shall be
distributed quarterly in the ratio of 99% to the Limited Partners and 1% to the
General Partners until the Limited Partners have received an amount equal to a
6% noncumulative annual return on their adjusted capital contributions. The
General Partners and PWPI will then receive distributions until they have
received concurrently an amount equal to 1.01% and 3.99%, respectively, of all
distributions to all partners. The balance will be distributed 95% to the
Limited Partners, 1.01% to the General Partners, and 3.99% to PWPI. Payments to
PWPI represent asset management fees for PWPI's services in managing the
business of the Partnership. No management fees were earned for the fiscal year
ended March 31, 1996. All sale or refinancing proceeds shall be distributed in
varying proportions to the Limited and General Partners, as specified in the
Partnership Agreement.
Taxable income (other than from a Capital Transaction) in each taxable year
will be allocated to the Limited Partners and the General Partners in an amount
equal to the distributable cash (excluding the asset management fee) to be
distributed to the partners for such year and in the same ratio as distributable
cash has been distributed. Any remaining taxable income, or if no distributable
cash has been distributed for a taxable year, shall be allocated 98.94802625% to
the Limited Partners and 1.05197375% to the General Partners. Tax losses (other
than from a Capital Transaction) will be allocated 98.94802625% to the Limited
Partners and 1.05197375% to the General Partners. 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.
Selling commissions incurred by the Partnership and paid to an affiliate of
the Managing General Partner for the sale of Limited Partnership interests
aggregated $8,416,000 through the conclusion of the offering period.
In connection with the acquisition of properties, PWPI was entitled to
receive acquisition fees in an amount not greater than 3% of the gross proceeds
from the sale of Partnership Units. Total acquisition fees of $2,830,000 were
incurred and paid by the Partnership in connection with the acquisition of its
operating property investments. In addition, PWPI received an acquisition fee of
$170,000 from Sunol Center Associates in 1986.
The Managing General Partner and its affiliates are reimbursed for their
direct expenses relating to the offering of Units, the administration of the
Partnership and the acquisition and operations of the Partnership's real
property investments.
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 March 31, 1996 is $203,000, representing reimbursements to this
affiliate of the Managing General Partner 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 $11,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during fiscal 1996. 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.
At March 31, 1996 accounts receivable - affiliates includes $117,000 due
from two unconsolidated joint ventures for interest earned on a permanent loan
and $123,000 of investor servicing fees due from several joint ventures for
reimbursement of certain expenses incurred in reporting Partnership operations
to the Limited Partners of the Partnership. Accounts receivable affiliates at
March 31, 1996 also includes $15,000 of expenses paid by the Partnership on
behalf of the joint ventures during fiscal 1993.
<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 on the accompanying index to exhibits at page IV-3 are
filed as part of this Report.
(b) No reports on Form 8-K were filed during the last quarter of fiscal
1996.
(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.
PAINEWEBBER EQUITY PARTNERS
ONE LIMITED PARTNERSHIP
By: First Equity Partners, Inc.
Managing General Partner
By: /s/ Lawrence A. Cohen
Lawrence A. Cohen
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
Dated: June 28, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Partnership and
in the capacities and on the dates indicated.
By:/s/ Albert Pratt Date: June 28, 1996
--------------------------- -------------
Albert Pratt
Director
By:/s/ J. Richard Sipes Date: June 28, 1996
--------------------------- -------------
J. Richard Sipes
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
INDEX TO EXHIBITS
Page Number in the Report
Exhibit No. Description of Document Or Other Reference
(3) and (4) Prospectus of the Partnership Filed with the Commission pursuant
dated July 18, 1985, as to Rule 424(c) and incorporated
supplemented, with particular herein by reference.
reference to the Restated
Certificate and Agreement of
Limited Partnership
(10) Material contracts previously Filed with the Commission pursuant
filed as exhibits to registra- to Section 13 or 15(d) of the
tion statements and amendments Securities Act of 1934
thereto of the registrant incorporated herein by
together with all such reference.
contracts filed as exhibits
of previously filed Forms 8-K
and Forms 10-K are hereby
incorporated herein by reference.
(13) Annual Report to Limited Partners No Annual Report for fiscal year
1996 has been sent to the Limited
Partners. An Annual Report will be
sent to the Limited Partners
subsequent to this filing.
(22) List of subsidiaries Included in Item I of Part I of
this Report Page I-1, to which
reference is hereby made.
(27) Financial Data Schedule Filed as the last page of EDGAR
submission following the Financial
Statements and Financial Statement
Schedule required by Item 14.
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(1) and (2) and Item 14(d)
PAINEWEBBER EQUITY PARTNERS ONE
LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference
PaineWebber Equity Partners One Limited Partnership:
Reports of independent auditors F-2
Consolidated balance sheets as of March 31, 1996 and 1995 F-4
Consolidated statements of operations for the years ended
March 31, 1996, 1995 and 1994 F-5
Consolidated statements of changes in partners' capital
(deficit) for the years ended March 31, 1996, 1995
and 1994 F-6
Consolidated statements of cash flows for the years
ended March 31, 1996, 1995 and 1994 F-7
Notes to consolidated financial statements F-8
Schedule III - Real Estate and Accumulated Depreciation F-29
Combined Joint Ventures of PaineWebber Equity Partners One Limited
Partnership:
Reports of independent auditors F-30
Combined balance sheets as of December 31, 1995 and 1994 F-32
Combined statements of operations and changes in venturers'
capital for the years ended December 31, 1995, 1994
and 1993 F-33
Combined statements of cash flows for the years ended
December 31, 1995, 1994 and 1993 F-34
Notes to combined financial statements F-35
Schedule III - Real Estate and Accumulated Depreciation F-42
Other financial statement 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 financial statements, including the notes thereto.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
PaineWebber Equity Partners One Limited Partnership:
We have audited the accompanying consolidated balance sheets of PaineWebber
Equity Partners One Limited Partnership as of March 31, 1996 and 1995, 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 March
31, 1996. 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. The
financial statements of Warner/Red Hill Associates (an unconsolidated joint
venture) as of December 31, 1994 and for each of the two years in the period
ended December 31, 1994 have been audited by other auditors whose report has
been furnished to us; insofar as our opinion on the consolidated financial
statements relates to data included for Warner/Red Hill Associates as of
December 31, 1994 and for each of the two years in the period ended December 31,
1994, it is based solely on their report. In the consolidated financial
statements, the Partnership's investment in Warner/Red Hill Associates is stated
at $(1,325,000) at March 31, 1995 and the Partnership's equity in the net loss
of Warner/Red Hill Associates is stated at $5,687,000 and $491,000 for the years
ended March 31, 1995 and 1994, respectively.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of PaineWebber Equity Partners One Limited
Partnership at March 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1996 in conformity with generally accepted accounting principles.
Also, in our opinion, based on our audits and the report of other auditors, 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.
As discussed in Note 2 to the consolidated financial statements, in fiscal
1995 the Partnership adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of."
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Boston, Massachusetts
June 26, 1996
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
Warner/Redhill Associates:
We have audited the accompanying balance sheets of Warner/Redhill
Associates (a California general partnership) as of December 31, 1994 and 1993
and the related statements of operations, changes in partners' capital and cash
flows for the years then ended. These financial statements are the
responsibility of management of Warner/Redhill Associates. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Warner/Redhill Associates as
of December 31, 1994 and 1993 and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the financial statements, Warner/Redhill
Associates changed its method of accounting for its operating investment
property during the year ended December 31, 1994 to adopt the provisions of the
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 121, "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of."
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Los Angeles, California
February 1, 1995, except
for the paragraph entitled
Operating Investment Property in
Note 2 to the financial statements,
which is as of July 7, 1995
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE
LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
March 31, 1996 and 1995
(In thousands, except for per Unit data)
ASSETS
1996 1995
---- ----
Operating investment properties:
Land $ 3,962 $ 3,962
Building and improvements 27,771 25,769
----------- -----------
31,733 29,731
Less accumulated depreciation (9,499) (8,222)
------------ -----------
22,234 21,509
Investments in unconsolidated joint ventures 23,728 25,036
Cash and cash equivalents 4,042 6,460
Prepaid expenses 13 12
Accounts receivable, less allowance for
possible uncollectible
amounts of $89 ($50 in 1995) 81 77
Accounts receivable - affiliates 255 215
Deferred rent receivable 185 29
Deferred expenses, net 717 234
------------ ------------
$ 51,255 $ 53,572
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 373 $ 224
Interest payable 60 61
Bonds payable 1,576 1,648
Mortgage notes payable 9,780 9,900
------------- ------------
Total liabilities 11,789 11,833
Co-venturer's share of net assets of
consolidated joint venture 187 187
Partners' capital:
General Partners:
Capital contributions 1 1
Cumulative net income (loss) 51 65
Cumulative cash distributions (988) (978)
Limited Partners ($50 per unit;
2,000,000 Units outstanding):
Capital contributions, net of offering costs 90,055 90,055
Cumulative net income (loss) (13,058) (11,809)
Cumulative cash distributions (36,782) (35,782)
------------ ------------
Total partners' capital 39,279 41,552
------------ ------------
$ 51,255 $ 53,572
=========== ===========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended
March 31, 1996, 1995 and 1994
(In thousands, except for per Unit data)
1996 1995 1994
---- ---- ----
Revenues:
Rental income and expense reimbursements $ 2,449 $ 1,836 $ 1,776
Interest and other income 277 510 195
------ ------ ------
2,726 2,346 1,971
Expenses:
Interest expense 1,027 1,022 1,063
Depreciation and amortization 1,364 1,068 1,057
Property operating expenses 1,279 982 963
Real estate taxes 217 248 307
General and administrative 539 613 700
Bad debt expense 39 50 77
----- ----- ------
4,465 3,983 4,167
----- ----- -----
Operating loss (1,739) (1,637) (2,196)
Investment income:
Interest income on notes receivable
from unconsolidated ventures 800 800 800
Partnership's share of
unconsolidated ventures' losses (324) (715) (1,072)
Partnership's share of
losses due to permanent
impairment of operating
investment properties - (8,703) -
----- ------ ------
Net loss $ (1,263) $ (10,255) $ (2,468)
======== ========= =========
Net loss per Limited Partnership Unit $ (0.62) $ (5.07) $(1.22)
======= ======= =======
Cash distributions per Limited
Partnership Unit $ 0.50 $ - $ -
======= ========== =========
The above net loss and cash distributions per Limited Partnership Unit are
based upon the 2,000,000 Limited Partnership Units outstanding for each year.
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) For the
years ended March 31, 1996, 1995 and 1994
(In thousands)
General Limited
Partners Partners Total
Balance at March 31, 1993 $ (778) $ 55,053 $54,275
Net loss (26) (2,442) (2,468)
--------- -------- -------
Balance at March 31, 1994 (804) 52,611 51,807
Net loss (108) (10,147) (10,255)
--------- -------- --------
Balance at March 31, 1995 (912) 42,464 41,552
Cash distributions (10) (1,000) (1,010)
Net loss (14) (1,249) (1,263)
--------- -------- -------
Balance at March 31, 1996 $ (936) $ 40,215 $39,279
========= ======== =======
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended
March 31, 1996, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net loss $ (1,263) $(10,255) $ (2,468)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Partnership's share of losses due to
permanent impairment of operating
investment properties - 8,703 -
Partnership's share of unconsolidated
ventures' losses 324 715 1,072
Depreciation and amortization 1,364 1,068 1,057
Amortization of deferred financing costs 20 10 -
Bad debt expense 39 50 77
Interest expense - 229 936
Changes in assets and liabilities:
Escrowed cash - 144 (144)
Prepaid expenses (1) (1) -
Accounts receivable (43) (72) 6
Accounts receivable - affiliates (40) 154 (28)
Deferred rent receivable (156) 17 3
Deferred expenses (33) (169) (38)
Accounts payable and accrued expenses 149 57 (103)
Accounts payable - affiliates - - (102)
Interest payable (1) - -
------ ------- ------
Total adjustments 1,622 10,905 2,736
------ ------- ------
Net cash provided by operating
activities 359 650 268
Cash flows from investing activities:
Additions to operating investment properties (2,002) (95) (150)
Payment of leasing commissions (557) - -
Distributions from unconsolidated
joint ventures 1,332 5,654 1,988
Additional investments in unconsolidated
joint ventures (348) 5,183) (252)
------ ------- ------
Net cash provided by (used in)
investing activities (1,575) 376 1,586
Cash flows from financing activities:
Repayment of principal and deferred interest
on long-term debt (120) (4,073) -
Payments on district bond assessments (72) (297) (61)
District bond assessments - 61 -
Distributions to partners (1,010) - -
Issuance of note payable - 3,480 -
------ ------- ------
Net cash used in financing activities (1,202) (829) (61)
------ ------- ------
Net (decrease) increase in cash and
cash equivalents (2,418) 197 1,793
Cash and cash equivalents, beginning of year 6,460 6,263 4,470
------ ------- ------
Cash and cash equivalents, end of year $ 4,042 $ 6,460 $ 6,263
======== ========= ========
Cash paid during the year for interest $ 1,008 $ 2,322 $ 127
======== ========= =========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE
LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
PaineWebber Equity Partners One Limited Partnership (the "Partnership")
is a limited partnership organized pursuant to the laws of the State of
Virginia on April 17, 1985 for the purpose of investing in a diversified
portfolio of existing newly constructed or to-be-built income-producing real
properties. The Partnership authorized the issuance of units (the "Units")
of Limited Partner interests (at $50 per Unit) of which 2,000,000 were
subscribed and issued between July 18, 1985 and July 17, 1986.
2. 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 requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of March 31, 1996 and 1995 and revenues
and expenses for each of the three years in the period ended March 31, 1996.
Actual results could differ from the estimates and assumptions used.
The accompanying financial statements include the Partnership's
investment in six joint venture partnerships which own operating properties.
In addition, the Partnership owns one property directly, as further
described in Note 4. Except as described below, the Partnership accounts for
its investments in joint venture partnerships using the equity method
because the Partnership does not have majority voting control. Under the
equity method the ventures are carried at cost adjusted for the
Partnership's share of the ventures' earnings and losses and distributions.
All of the joint venture partnerships are required to maintain their
accounting records on a calendar year basis for income tax reporting
purposes. As a result, the Partnership records its share of joint ventures'
income or losses based on financial information of the ventures which is
three months in arrears to that of the Partnership. See Note 5 for a
description of the unconsolidated joint venture partnerships.
As further discussed in Note 4, the Partnership acquired control of the
Sunol Center joint venture in fiscal 1992. Accordingly, the joint venture is
presented on a consolidated basis in the accompanying financial statements.
As discussed above, the Sunol Center joint venture has a December 31
year-end and operations of the venture continue to be reported on a
three-month lag. All material transactions between the Partnership and its
consolidated joint venture, except for lag-period cash transfers, have been
eliminated in consolidation. Such lag-period cash transfers are accounted
for as advances to or from consolidated venture.
Effective for fiscal 1995, the Partnership adopted Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," to account for its operating investment properties. In accordance with
SFAS 121, an impairment loss with respect to an operating investment
property is recognized when the sum of the expected future net cash flows
(undiscounted and without interest charges) is less than the carrying amount
of the asset. An impairment loss is measured as the amount by which the
carrying amount of the asset exceeds its fair value, where fair value is
defined as the amount at which the asset could be bought or sold in a
current transaction between willing parties, that is other than a forced or
liquidation sale. In conjunction with the application of SFAS 121,
impairment losses on the operating investment properties owned by certain
unconsolidated joint ventures were recognized in fiscal 1995. Such losses
are described in more detail in Note 5.
Through March 31, 1995, depreciation expense on the operating investment
properties carried on the Partnership's consolidated balance sheet was
computed using the straight-line method over estimated useful lives of
five-to-thirty years. During fiscal 1996, circumstances indicated that the
wholly owned Crystal Tree Commerce Center operating investment property
might be impaired. The Partnership's estimate of undiscounted cash flows
indicated that the property's carrying amount was expected to be recovered,
but that the reversion value could be less than the carrying amount at the
time of disposition. As a result of such assessment, the Partnership
commenced recording an additional annual charge to depreciation expense of
$65,000 in fiscal 1996 to adjust the carrying value of the Crystal Tree
property such that it will match the expected reversion value at the time of
disposition. Such an annual charge will continue to be recorded in future
periods. Interest and taxes incurred during the construction period, along
with acquisition fees paid to PaineWebber Properties Incorporated and costs
of identifiable improvements, have been capitalized and are included in the
cost of the operating investment properties. Maintenance and repairs are
charged to expense when incurred.
Rental revenues for the operating investment properties are recognized
on a straight-line basis over the life of the related lease agreements.
For purposes of reporting cash flows, the Partnership considers all
highly liquid investments with original maturities of 90 days or less to be
cash and cash equivalents.
Deferred expenses generally consist of deferred leasing commissions and
costs associated with the loans described in Note 6. The leasing commissions
are being amortized using the straight-line method over the term of the
related lease, and the loan costs are being amortized, on a straight-line
basis, over the terms of the respective loans. The amortization of loan
costs is included in interest expense on the accompanying statements of
operations.
No provision for income taxes has been made as the liability for such
taxes is that of the partners rather than the Partnership.
The cash and cash equivalents, receivables, accounts payable and accrued
expenses, interest payable, bonds payable and mortgage notes payable
appearing on the accompanying consolidated balance sheets represent
financial instruments for purposes of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments."
With the exception of bonds payable and mortgage notes payable, the carrying
amount of these assets and liabilities approximates their fair value as of
March 31, 1996 due to the short-term maturities of these instruments. It is
not practicable for management to estimate the fair value of the bonds
payable without incurring excessive costs due to the unique nature of such
obligations. The fair value of mortgage notes payable is estimated using
discounted cash flow analysis, based on the current market rates for similar
types of borrowing arrangements.
Certain fiscal 1995 and 1994 amounts have been reclassified to conform
to the fiscal 1996 presentation.
3. The Partnership Agreement and Related Party Transactions
The General Partners of the Partnership are First Equity Partners, 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 PaineWebber Properties
Incorporated ("PWPI") and the Managing General Partner. Subject to the
Managing General Partner's overall authority, the business of the
Partnership is managed by PWPI pursuant to an advisory and asset management
contract. PWPI is a wholly-owned subsidiary of PaineWebber. The General
Partners and PWPI receive fees and compensation, determined on an
agreed-upon basis, in consideration of 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.
All distributable cash, as defined, for each fiscal year shall be
distributed quarterly in the ratio of 99% to the Limited Partners and 1% to
the General Partners until the Limited Partners have received an amount
equal to a 6% noncumulative annual return on their adjusted capital
contributions. The General Partners and PWPI will then receive distributions
until they have received concurrently an amount equal to 1.01% and 3.99%,
respectively, of all distributions to all partners. The balance will be
distributed 95% to the Limited Partners, 1.01% to the General Partners, and
3.99% to PWPI. Payments to PWPI represent asset management fees for PWPI's
services in managing the business of the Partnership. During fiscal 1993,
the Partnership suspended all distributions to Limited Partners. Quarterly
distributions to Limited Partners were reinstated beginning with the quarter
ended March 31, 1995 at a rate of 1%. As a result no management fees were
earned for the fiscal years ended March 31, 1996, 1995 and 1994. All sale or
refinancing proceeds shall be distributed in varying proportions to the
Limited and General Partners, as specified in the Partnership Agreement.
Taxable income (other than from a Capital Transaction) in each taxable
year will be allocated to the Limited Partners and the General Partners in
an amount equal to the distributable cash (excluding the asset management
fee) to be distributed to the partners for such year and in the same ratio
as distributable cash has been distributed. Any remaining taxable income, or
if no distributable cash has been distributed for a taxable year, shall be
allocated 98.94802625% to the Limited Partners and 1.05197375% to the
General Partners. Tax losses (other than from a Capital Transaction) will be
allocated 98.94802625% to the Limited Partners and 1.05197375% to the
General Partners. 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.
Selling commissions incurred by the Partnership and paid to an affiliate
of the Managing General Partner for the sale of Limited Partnership
interests aggregated $8,416,000 through the conclusion of the offering
period.
In connection with the acquisition of properties, PWPI was entitled to
receive acquisition fees in an amount not greater than 3% of the gross
proceeds from the sale of Partnership Units. Total acquisition fees of
$2,830,000 were incurred and paid by the Partnership in connection with the
acquisition of its operating property investments. In addition PWPI received
an acquisition fee of $170,000 from Sunol Center Associates in 1986.
The Managing General Partner and its affiliates are reimbursed for their
direct expenses relating to the offering of Units, the administration of the
Partnership and the acquisition and operations of the Partnership's real
property investments.
Included in general and administrative expenses for the years ended
March 31, 1996, 1995 and 1994 is $203,000, $210,000 and $202,000,
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 $11,000, $19,000 and $7,000 (included in general and
administrative expenses) for managing the Partnership's cash assets during
fiscal 1996, 1995 and 1994, respectively.
At March 31, 1996 and 1995, accounts receivable - affiliates includes
$117,000 and $100,000, respectively, due from two unconsolidated joint
ventures for interest earned on permanent loans and $123,000 and $100,000,
respectively, of investor servicing fees due from several joint ventures for
reimbursement of certain expenses incurred in reporting Partnership
operations to the Limited Partners of the Partnership. Accounts receivable -
affiliates at March 31, 1996 and 1995 also includes $15,000 of expenses paid
by the Partnership on behalf of the joint ventures during fiscal 1993.
4. Operating Investment Properties
At March 31, 1996 and 1995, the Partnership's balance sheet includes two
operating investment properties: (1) the wholly-owned Crystal Tree Commerce
Center; and (2) the Sunol Center Office Buildings, owned by Sunol Center
Associates, a majority owned and controlled joint venture. The Partnership
acquired a controlling interest in Sunol Center Associates during fiscal
1992. Accordingly, the accompanying financial statements present the
financial position and results of operations of this joint venture on a
consolidated basis. Descriptions of the operating investment properties and
the agreements through which the Partnership acquired its interests in the
properties are provided below.
Crystal Tree Commerce Center
The Partnership acquired an interest in North Palm Crystal Associates
(the "joint venture"), a Florida general partnership organized on October
23, 1985 in accordance with a joint venture agreement between the
Partnership and Caruscan of Palm Beach Inc., a Florida corporation (the
"co-venturer") to own and operate the Crystal Tree Commerce Center (the
"property"). The property consists of three one-story retail plazas
containing an aggregate of 74,923 square feet of leasable space and one
four-story office building containing an aggregate of 40,115 square feet of
leasable office space, each of which was completed in 1983. The property,
which was 92% occupied as of March 31, 1996, is located in North Palm Beach,
Florida.
The aggregate cash investment made by the Partnership for its initial
interest was $19,367,000 (including a $200,000 consulting fee and a $540,000
acquisition fee paid to PaineWebber Properties Inc.).
Effective February 1, 1988, the venture partners restructured the joint
venture agreement to transfer full ownership and control of the operating
property to the Partnership. Additionally, all shortfall loans made by the
co-venturer prior to the restructuring, which were to be refunded (plus
interest) from sales proceeds, were cancelled. To complete the transaction,
during fiscal 1989 the co-venturer paid the Partnership approximately
$884,000 as a settlement of amounts owed through the date of the
restructuring and in exchange for a release from further obligations for
tenant improvements, as well as a release of a letter of credit which was to
be drawn down over the next eight years. The cash received was used at the
property to finance tenant improvements required to re-lease vacant space.
The Sunol Center Office Buildings
Sunol Center Associates, a California general partnership (the "joint
venture"), was formed by the Partnership and Callahan Pentz Properties,
Pleasanton-Site Thirty-four A, a California general partnership
("co-venturer") on August 15, 1986 to acquire and operate the Sunol Center
(the "Property"), which originally consisted of three office buildings on an
11.6-acre site in the Hacienda Business Park located in Pleasanton,
California. Prior to the formation of the Partnership, the Property was
owned and operated by the co-venturer. The initial aggregate cash investment
made by the Partnership for its interest was $15,610,000 (including a
$445,000 acquisition fee paid to the Adviser). The joint venture assumed
liability for public bonds of $2,141,000 upon acquisition of the property
(see Note 7). The Partnership paid the co-venturer an additional $1,945,000
toward the purchase price of its interest upon the occurrence of certain
events which were defined in the joint venture agreement, as amended.
On February 28, 1990 one of the three office buildings, comprising
approximately 31% of the total net rentable square feet, was sold for
$8,150,000. After payment of transaction costs and the deduction of the
co-venturer's share of the net proceeds, a distribution of approximately
$7,479,000 was made to the Partnership. A portion of these proceeds, in the
amount of approximately $4,246,000, was used to repay a zero coupon loan,
including accrued interest, that was secured by all three office buildings.
The joint venture agreement provided that for the period from August 15,
1986 to July 31, 1989 for two buildings (one of these two buildings was sold
on February 28, 1990) and August 15, 1986 to July 31, 1990 for one building,
to the extent that the Partnership required funds to cover operating
deficits or to fund shortfalls in the Partnership's Preference Return, as
defined, the co-venturer was required to contribute such amounts to the
Partnership. For financial reporting purposes, certain of the contributions
made by the co-venturer to cover such deficits and shortfalls were treated
as a reduction of the purchase price of the Property. The co-venturer
defaulted on the guaranty obligation in fiscal 1990 and negotiations between
the Partnership and the co-venturer to reach a resolution of the default
were ongoing until fiscal 1992 when the venturers reached a settlement
agreement. During fiscal 1992, the co-venturer assigned its remaining joint
venture interest to the Managing General Partner of the Partnership. The
co-venturer also executed a three-year non-interest bearing promissory note
payable to the Partnership in the amount of $126,000. In exchange, it was
agreed that the co-venturer or its affiliates would have no further
liability to the Partnership for any guaranteed preference payments.
Concurrent with the execution of the settlement agreement, the property's
management contract with an affiliate of the co-venturer was terminated. Due
to the uncertainty regarding the collection of the note receivable, such
compensation will be recognized as payments are received. Subsequent to the
execution of the note, the maturity date was extended to March 31, 1996.
Through March 31, 1996, payments totalling $53,726 had been received on the
note and recorded as a reduction to the carrying value of the operating
investment properties. The balance due on this note of $72,274 had not been
received as of March 31, 1996. The Partnership will pursue collection of
this balance in fiscal 1997.
The joint venture agreement provides for the allocation of profits and
losses, cash distributions, and a preference return, as defined to the
venture partners. Generally, until the preference return provisions are met,
all profits, losses and cash distributions are allocated to the Partnership.
Allocations of income or loss for financial reporting purposes have been
made in accordance with the allocations of taxable income or tax loss.
The following is a combined summary of property operating expenses for
the Crystal Tree Commerce Center and Sunol Center Office Building for the
years ended March 31, 1996, 1995 and 1994 (in thousands):
1996 1995 1994
---- ---- ----
Property operating expenses:
Repairs and maintenance $ 299 $ 187 $ 165
Utilities 170 132 130
Insurance 58 55 54
Administrative and other 726 582 523
Management fees 26 26 91
-------- ------- -------
$ 1,279 $ 982 $ 963
======== ======= ======
5. Investments in Unconsolidated Joint Ventures
As of March 31, 1996 and 1995, the Partnership had investments in five
unconsolidated joint ventures which own operating investment properties. The
unconsolidated joint ventures are accounted for on the equity method in the
Partnership's financial statements. As discussed in Note 2, these joint
ventures report their operations on a calendar year basis.
<PAGE>
Condensed combined financial statements of the unconsolidated joint
ventures, for the periods indicated, are as follows:
Condensed Combined Balance Sheets
December 31, 1995 and 1994
(in thousands)
Assets
1995 1994
Current assets $ 1,752 $ 1,471
Operating investment properties, net 57,677 59,942
Other assets 4,082 4,223
-------- --------
$ 63,511 $ 65,636
======== ========
Liabilities and Capital
Current liabilities $ 5,207 $ 5,169
Other liabilities 291 214
Long-term debt and notes payable to venturers 21,631 21,877
Partnership's share of combined capital 13,437 14,785
Co-venturers' share of combined capital 22,945 23,591
-------- --------
$ 63,511 $ 65,636
======== ========
Condensed Combined Summary of Operations For the years ended
December 31, 1995, 1994 and 1993
(in thousands)
1995 1994 1993
---- ---- ----
Revenues:
Rental income and expense recoveries $10,691 $10,326 $10,654
Interest and other income 246 262 338
------- ------- ------
Total revenues 10,937 10,588 10,992
Expenses:
Property operating expenses 3,928 4,107 4,103
Real estate taxes 1,980 2,263 2,581
Mortgage interest expense 1,089 945 1,371
Interest expense payable to partner 800 800 800
Depreciation and amortization 3,180 3,127 3,108
Losses due to permanent impairment of
operating investment properties - 9,767 -
------- ------- ------
10,977 21,009 11,963
------- ------- ------
Net loss $ (40) $(10,421) $ (971)
========= ======== =======
Net loss:
Partnership's share of
combined net income (loss) $ (278) $ (8,800) $ (987)
Co-venturers' share of
combined net income (loss) 238 (1,621) 16
-------- -------- ------
$ (40) $ (10,421) $ (971)
======= ======== =======
<PAGE>
Reconciliation of Partnership's Investment
March 31, 1996 and 1995
(in thousands)
1996 1995
Partnership's share of capital at
December 31, as shown above $ 13,437 $ 14,785
Excess basis due to investment in joint ventures,
net (1) 965 1,011
Partnership's share of ventures' current liabilities
and long-term debt 9,600 9,536
Timing differences due to distributions received
from and contributions sent to joint ventures
subsequent to December 31 (see Note 2) (274) (296)
------- --------
Investments in unconsolidated joint ventures,
at equity at March 31 $ 23,728 $ 25,036
======== ========
(1) The Partnership's investments in joint ventures exceeds its share of the
combined joint ventures' capital accounts by approximately $965,000 and
$1,011,000 at March 31, 1996 and 1995, respectively. This amount, which
represents acquisition fees and other expenses incurred by the Partnership
in connection with the acquisition of its joint venture interests is being
amortized over the estimated useful lives of the related operating
properties (generally 30 years). Excess basis related to investments in
joint ventures which have recognized impairment losses on their operating
investment properties during calendar 1994 were fully written off in fiscal
1995. Such write-off is included in the Partnership's share of losses due to
permanent impairment of operating investment properties on the accompanying
statement of operations. See the further discussion below.
Reconciliation of Partnership's Share of Operations
March 31, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
---- ---- ----
Partnership's share of combined net loss
as shown above $ (278) $(8,800) $ (987)
Amortization of excess basis (46) (618) (85)
-------- ------ -------
Partnership's share of unconsolidated
ventures' net loss $ (324) $(9,418) $(1,072)
========= ======= ========
Partnership's share of unconsolidated ventures' net loss is presented
as follows in the accompanying statements of operations (in thousands):
1996 1995 1994
---- ---- ----
Partnership's share of unconsolidated
ventures' losses $ (324) $ (715) $(1,072)
Partnership's share of losses due to
permanent impairment of
operating investment properties - (8,703) -
-------- ------- -------
$ (324) $(9,418) $(1,072)
========= ======= ========
Investments in unconsolidated joint ventures, at equity is the
Partnership's net investment in the unconsolidated joint venture
partnerships. These 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. As a result,
substantially all of the Partnership's investments in these joint ventures
are restricted as to distributions.
Investments in unconsolidated joint ventures at equity on the balance
sheet at March 31, 1996 and 1995 is comprised of the following equity method
carrying values (in thousands):
1996 1995
Investments in joint ventures, at equity:
Warner/Red Hill Associates $ (1,541) $ (1,325)
Crow PaineWebber LaJolla, Ltd. 2,198 2,485
Lake Sammamish Limited Partnership (775) (575)
Framingham 1881 - Associates 2,243 2,243
Chicago-625 Partnership 13,603 14,208
-------- -------
15,728 17,036
Notes receivable:
Crow PaineWebber LaJolla, Ltd. 4,000 4,000
Lake Sammamish Limited Partnership 4,000 4,000
-------- --------
8,000 8,000
-------- -------
$23,728 $25,036
======= =======
Cash distributions received from the Partnership's unconsolidated joint
ventures for the years ended March 31, 1996, 1995 and 1994 are as follows
(in thousands):
1996 1995 1994
---- ---- ----
Warner/Red Hill Associates $ 333 $ 713 $ 60
Crow PaineWebber LaJolla, Ltd. 57 414 800
Lake Sammamish Limited Partnership 76 3,759 264
Framingham 1881 - Associates 70 - -
Chicago - 625 Partnership 796 768 864
------- ------- -------
$ 1,332 $ 5,654 $ 1,988
======= ======= =======
For each of the years ended March 31, 1996, 1995 and 1994, the
Partnership earned interest income of $800,000 from the notes receivable
described below in the discussions of Crow PaineWebber LaJolla, Ltd. and
Lake Sammamish Limited Partnership. It is not practicable for management to
estimate the fair value of the notes receivable from the joint ventures
without incurring excessive costs because the loans were provided in
non-arm's length transactions without regard to collateral issues or other
traditional conditions and covenants.
Descriptions of the properties owned by the unconsolidated joint
ventures and the terms of the joint venture agreements are summarized as
follows:
a. Warner/Red Hill Associates
The Partnership acquired an interest in Warner/Red Hill Associates (the
"joint venture"), a California general partnership organized on December 18,
1985 in accordance with a joint venture agreement between the Partnership
and Los Angeles Warner Red Hill Company Ltd., (the co-venturer), to own and
operate the Warner/Red Hill Business Center (the "Property"). The
co-venturer is an affiliate of The Paragon Group. The Property consists of
three two-story office buildings totalling 93,895 net rentable square feet
on approximately 4.76 acres of land. The Property, which was 83% leased as
of March 31, 1996, is part of a 4,200 acre business complex in Tustin,
California.
As discussed in Note 2, the Partnership elected early application of
SFAS 121 effective for fiscal 1995. The effect of such application was the
recognition of an impairment loss on the operating investment property owned
by Warner/Red Hill Associates. The impairment loss resulted because, in
management's judgment, the physical attributes of this property and its
location relative to its competition, combined with the lack of near-term
prospects for future improvement in market conditions in the Orange County
market in which the property is located, were not expected to enable the
venture to recover the carrying value of the asset within the practicable
remaining holding period given the improving market conditions of the
Partnership's other investment properties and the possible opportunities to
sell these other properties over the next 5 to 7 years. Warner/Red Hill
Associates recognized an impairment loss of $6,784,000 to write down the
operating investment property to its estimated fair value of $3,600,000 as
of December 31, 1994. The Partnership's share of the impairment loss was
$5,251,000. Fair value was estimated using an independent appraisal of the
operating property. Such appraisals make use of a combination of certain
generally accepted valuation techniques, including direct capitalization,
discounted cash flows and comparable sales analysis.
The aggregate cash investment in the joint venture by the Partnership
was $12,658,000 (including acquisition fees of $367,000 paid to the Adviser
and closing costs of $6,000). The property was encumbered by a construction
loan payable to a bank and a note payable to the co-venturer totalling
$11,200,000 at the time of purchase. The construction loan was repaid during
1986 from the proceeds of the Partnership's capital contribution. At March
31, 1996 the property is encumbered by a $5,481,000 loan (see Note 6).
The co-venturer agreed to contribute, in the form of loans to the joint
venture, all funds that were necessary so the joint venture could distribute
the Partnership's full minimum preference return (described below) through
December 31, 1989. Such contributions (the "Mandatory Capital") will accrue
a return to the co-venturer at prime plus 1%, compounded annually. Through
December 31, 1989 the co-venturer had contributed $524,000 pursuant to such
requirements. The unpaid accrued preference return on Mandatory Capital was
$403,000 and $320,000 at December 31, 1995 and 1994, respectively. If the
joint venture requires additional funds subsequent to December 31, 1989,
such funds are to be provided in the form of loans, 85% by the Partnership
and 15% by the co-venturer. In the event that a partner does not contribute
its share of additional funds (Defaulting Partner), the other partner may
contribute such funds to the joint venture in the form of loans (Default
Loans). Such Default Loans bear interest at twice the rate of regular notes
to partners up to the maximum rate legally allowed. In addition, the
Defaulting Partner's share of net cash flow and cash flow from the sale or
refinancing proceeds are to be reduced, with a corresponding increase in the
other partner's share, in accordance with a formula defined in the
partnership agreement. The Partnership advanced 100% of the funds required
by the joint venture during calendar 1995. Such advances totalled $63,000,
of which $10,000 was classified as Default Loans. Unpaid accrued interest on
Notes to Partners totals $657,000 and $482,000 at December 31, 1995 and
1994, respectively.
The joint venture agreement provides that net cash flow (as defined), to
the extent available, will be distributed as follows: First, the Partnership
will receive a cumulative preference return, payable quarterly until paid in
full, of $1,225,000 per year (or, if less, 10% per annum of the
Partnership's investment). Second, remaining available net cash flow shall
be used to make payments to the partners at a percentage equal to the prime
rate of interest plus 1% on additional loans, (as described above) made by
the partners to the Partnership. Third, remaining available net cash flow
shall be used to make a payment to the co-venturer at a percentage equal to
the prime rate of interest plus 1%, compounded annually, of capital
contributions which, in accordance with the joint venture agreement, were
required to be made by the co-venturer during 1988 and 1989 if net cash flow
was insufficient to fund the Partnership's preference return. Fourth, any
remaining net cash flow shall be used to make a payment to the Partnership
at a percentage equal to the prime rate of interest plus 1% of any
accumulated but unpaid Partnership preference return. Fifth, any remaining
net cash flow shall be distributed on an annual basis in the ratio of 92.5%
to the Partnership and 7.5% to the co-venturer (including adjustments for
Default Loans). The cumulative unpaid preference return due the Partnership
at December 31, 1995 is $6,023,000, including accrued interest of
$1,358,000.
Net income is allocated in a manner similar to the distribution of net
cash flows. Net losses will be allocated in proportion to the partners'
positive capital accounts, provided that any deductions attributable to any
fees paid to the Partnership pursuant to the joint venture agreement shall
be allocated solely to the Partnership, and further provided that the
co-venturer shall be allocated any additional losses in an amount equal to
the lesser of the amount of additional capital contributed by it or 15% of
such losses.
Proceeds from sale or refinancing shall be distributed as follows:
1) to the Partnership in an amount equal to the Partnership's original
investment (including the additional contributions discussed above; 2) to
the co-venturer in an amount equal to any required additional capital
contributions made by it as discussed above; 3) to the Partnership in an
amount equal to the cumulative Partnership preference return not yet
paid; 4) to each partner pro rata to the extent of any other additional
contributions of capital made by that partner and 5) the remaining
balance 90% to the Partnership and 10% to the co-venturer (including
adjustments for Default Loans).
Gains resulting from the sale or refinancing of the property shall be
allocated as follows: capital gains shall first be used to bring any
negative balances of the capital accounts to zero. The remaining capital
profits shall be allocated in a manner similar to the allocation of proceeds
from sale or refinancing. Capital losses shall be allocated to the partners
in an amount up to and in proportion to their positive capital balances. If
additional losses exist, then the losses shall be allocated to the
Partnership to bring its capital account to zero, then to the co-venturer to
bring its capital account to zero and finally, all remaining capital losses
shall be allocated 80% to the Partnership and 20% to the co-venturer.
The joint venture agreement provides that beginning in 1991, either
partner may elect to purchase the property. The partner not initiating such
a purchase, however, has the option to purchase the property on the same
terms contemplated by the initiating partner. In addition, beginning in 1991
the Partnership has the right to compel a sale of the property.
The Partnership is entitled to receive an annual investor servicing fee
of $2,500 for the reimbursement of certain costs incurred to report the
operations of the joint venture to the Limited Partners of the Partnership.
The joint venture has entered into a property management contract with
an affiliate of the co-venturer cancelable at the joint venture's option
upon the occurrence of certain events. The management fee is equal to 4% of
gross rents, as defined.
b. Crow PaineWebber LaJolla, Ltd.
On July 1, 1986 the Partnership acquired an interest in Crow PaineWebber
LaJolla, Ltd. (the "joint venture"), a Texas limited partnership organized
in accordance with a joint venture agreement between the Partnership and
Crow-Western #302 - San Diego Limited Partnership, a Texas limited
partnership (the "co-venturer"), to construct and operate the Monterra
Apartments (the "Property"). The co-venturer is an affiliate of the Trammell
Crow organization. The Property, which was 98% occupied as of March 31,
1996, consists of garden-style apartments situated on 7 acres of land and
includes 180 one-and two-bedroom units, comprising approximately 136,000
square feet in LaJolla, California.
The aggregate cash investment (including a Permanent Loan of $4,000,000)
in the joint venture by the Partnership was $15,363,000 (including
acquisition fees of $490,000 paid to the Adviser). The Property was
encumbered by a construction loan payable to a bank of $11,491,000 at the
time of purchase. The construction loan was repaid upon completion of
construction during fiscal 1988 from the proceeds of the Partnership's
capital contribution. At March 31, 1994, the property was encumbered by a
$4,500,000 nonrecourse zero coupon loan, and the related accrued interest of
$3,805,000, which was scheduled to mature in June of 1994, at which time a
total payment of approximately $8,645,000 was due. During fiscal 1995, this
loan was repaid with the proceeds of a new $4,920,000 loan and a capital
contribution from the Partnership of $3,869,000 (see Note 6).
In accordance with the joint venture agreement, upon the completion of
construction of the operating property the co-venturer received, as a
capital withdrawal, 10% of certain development costs incurred, as defined in
the joint venture agreement.
Net cash flow from operations of the joint venture is to be distributed
quarterly in the following order of priority: 1) the Partnership and the
co-venturer will each be repaid accrued interest and principal, in that
order, on any optional loans (as described below) they made to the joint
venture; 2) the Partnership will receive a cumulative annual preferred
return of 10% per annum on the Partnership's Investment; and 3) any
remaining net cash flow will be distributed 85% to the Partnership and 15%
to the co-venturer. The cumulative unfunded amount relating to the
Partnership's preferential return is $4,043,000 at December 31, 1995.
Proceeds from the sale or refinancing of the Property in excess of debt
repayment will be distributed in the following order of priority: (1) the
Partnership and the co-venturer will each receive proceeds to repay accrued
interest and principal on any outstanding optional loans they made to the
joint venture, (2) the Partnership will receive the aggregate amount of its
cumulative annual 10% preferred return not theretofore paid; (3) the
Partnership will receive an amount equal to the Partnership Investment; and
(4) thereafter, any remaining proceeds will be distributed 85% to the
Partnership and 15% to the co-venturer.
To the extent that there are distributable funds, as defined, net income
(other than gain from a sale or other disposition of the Property) will be
allocated to the Partnership to the extent of its preferential return, with
the remainder 85% to the Partnership and 15% to the co-venturer. In the
event there are no distributable funds, as defined, net income will be
allocated 85% to the Partnership and 15% to the co-venturer; net losses
(other than losses from a sale or other disposition of the Property) shall
be allocated 99% to the Partnership and 1% to the co-venturer, provided that
if the co-venturer has a credit balance in its capital account, it shall be
entitled to its appropriate share of losses to offset any such credit
balance prior to any further allocation of net losses to the Partnership.
Gains from a sale or other disposition of the Property will be allocated
as follows: (i) to the Partners to the extent of, and among them in the
ratio of, their respective capital account deficit balances; (ii) to the
Partnership until the Partnership's capital account has been increased to a
credit equal to the net proceeds to be distributed to the Partnership
pursuant to subparagraphs (2) and (3) of the distribution of net proceeds
paragraph, (iii) to the co-venturer in the ratio necessary to cause the
co-venturer's capital account balance to be in the ratio of 85% to the
Partnership and 15% to the co-venturer, and (iv) the balance, if any, 85% to
the Partnership and 15% to the co-venturer.
The joint venture has a note payable to the Partnership in the amount of
$4,000,000 which bears interest at 10% per annum. As a result of the debt
modification discussed in Note 6, this note is now unsecured. All unpaid
principal and interest on the note is due on July 1, 2011. Interest expense
on the note, which is payable on a quarterly basis, amounted to $400,000 for
each of the years ended March 31, 1996, 1995 and 1994.
The Partnership receives an annual investor servicing fee of $10,000 for
the reimbursement of certain costs incurred to report the operations of the
joint venture to the Limited Partners of the Partnership.
The joint venture entered into a management contract with an affiliate
of the co-venturer which is cancelable at the option of the Partnership upon
the occurrence of certain events. The management fee is 5% of gross rents
collected.
c. Lake Sammamish Limited Partnership
The Partnership acquired an interest in Lake Sammamish Limited
Partnership (the "Joint Venture"), a Texas limited partnership organized on
October 1, 1986 in accordance with a joint venture agreement between the
Partnership, Crow-Western #504-Lake Sammamish Limited Partnership ("Crow")
and Trammell S. Crow (the "Limited Partner") to own and operate Chandler's
Reach Apartments (the "Property"). The Property is situated on 8.5 acres of
land and consists of 166 units with approximately 135,110 net rentable
square feet in eleven two-and three-story buildings. The property, which was
94% occupied as of March 31, 1996, is located in Redmond, Washington.
The aggregate cash investment (including a Permanent Loan of $4,000,000)
in the joint venture by the Partnership was $10,541,000 (including an
acquisition fee of $340,000 paid to the Adviser). At March 31, 1996, the
property was encumbered by a loan with a principal amount of $3,547,000 (see
Note 6).
Net cash flow (as defined) is to be distributed quarterly in the
following order of priority: First, the Partnership and Crow will each be
repaid accrued interest and principal, in that order, on any optional loans.
Second, the Partnership will receive a cumulative annual preferred return of
10% per annum of its Investment. Third, to the extent of available net cash
flow prior to the end of the Guaranty Period, the Partnership will receive a
distribution equal to $350,000. Fourth, any remaining net cash flow will be
distributed 75% to the Partnership and 25% to Crow and the Limited
Partnership (subject to "Adjustment" as defined below). The preference
payable to the Partnership pursuant to the second clause above will be
reduced by any amounts distributed as a return on capital and in proportion
to the amount distributed as a return of capital through sale or
refinancing. The cumulative amount of the preference return due to the
Partnership at December 31, 1995 is approximately $2,243,000.
Proceeds from the sale or refinancing of the Property in excess of debt
repayment will be distributed in the following order of priority: First, the
Partnership and Crow will each receive proceeds to repay accrued interest
and principal on any outstanding optional loans. Second, the Partnership
will receive the aggregate amount of its cumulative annual 10% preferred
return not theretofore paid. Third, the Partnership will receive an amount
equal to its Investment. Fourth, thereafter, any remaining proceeds will be
distributed 75% to the Partnership and 25% to Crow and the Limited Partners
(subject to Adjustment as defined above).
Net income (other than gains from a sale or other disposition of the
Property) will be allocated to the Partnership, to the extent of
distributable funds distributed to the Partnership with the remainder
allocated 75% to the Partnership and 25% to Crow. In the event there are no
distributable funds from operations, net income will be allocated 75% to the
Partnership and 25% to Crow and the Limited Partner; net losses (other than
losses from a sale or other disposition) shall be allocated 99% to the
Partnership and 1% to Crow and the Limited Partner, provided that if Crow or
the Limited Partner has a credit balance in its capital account, it shall be
entitled to its appropriate share of losses to offset any such credit
balance prior to any further allocation of net losses to the Partnership.
The Partnership and Crow agreed that until the fifth anniversary of the
closing date, the joint venture would not be entitled to sell the Property
without the prior written consent of both Crow and the Partnership.
Thereafter, Crow and the Partnership shall each have the right of first
refusal to acquire the other's interest in the Property on the same terms as
any offer made by a third party.
If the joint venture requires additional funds, such funds may be
provided, in the form of optional loans, by either one of the co-venturers
or 75% by the Partnership and 25% by Crow and the Limited Partner. Optional
loans will bear interest at the rate of 1% over the prime rate.
The joint venture has a note payable to the Partnership in the amount of
$4,000,000 which bears interest at 10% per annum. As a result of the debt
modification discussed in Note 6, this note is now unsecured. All unpaid
principal and interest on the note is due on October 1, 2011. Interest
expense on the note, which is payable on a quarterly basis, amounted to
$400,000 for each of the years ended March 31, 1996, 1995 and 1994.
The Partnership receives an annual investor servicing fee of $10,000 for
the reimbursement of certain expenses incurred to report the operations of
the joint venture to the Limited Partners of the Partnership.
Crow or an affiliate will receive an annual management fee of $10,000
for services rendered in managing the joint venture. In addition, the joint
venture entered into a management contract with an affiliate of Crow, which
is cancelable at the option of the Partnership upon the occurrence of
certain events. The annual management fee, payable monthly, is 5% of gross
rents collected.
d. Framingham - 1881 Associates
The Partnership acquired an interest in Framingham - 1881 Associates
(the "joint venture"), a Massachusetts general partnership on December 12,
1986 in accordance with a joint venture agreement between the Partnership,
Furrose Associates Limited Partnership, and Spaulding and Slye Company, to
own and operate the 1881 Worcester Road office building (the "Property").
Prior to the Partnership's acquisition, Furrose Associates Limited
Partnership and Spaulding & Slye Company had formed an existing Partnership.
They each had sold a portion of their interest to the Partnership and
hereafter will be referred to as "the Selling Partners". The Property
consists of 64,189 net rentable square feet in one two-story building. The
Property is located in Framingham, Massachusetts.
As discussed in Note 2, the Partnership elected early application of
SFAS 121 effective for fiscal 1995. The effect of such application was the
recognition of an impairment loss on the operating investment property owned
by Framingham 1881 - Associates. The impairment loss resulted because, in
management's judgment, the physical attributes of this property and its
location relative to its competition, combined with the lack of near-term
prospects for future improvement in market conditions in the local Boston
area market in which the property is located, were not expected to enable
the venture to recover the carrying value of the asset within the
practicable remaining holding period given the improving market conditions
of the Partnership's other investment properties and the possible
opportunities to sell these other properties over the next 5 to 7 years.
Framingham 1881 - Associates recognized an impairment loss of $2,983,000 to
write down the operating investment property to its estimated fair value of
$2,200,000 as of December 31, 1994. The Partnership's share of the
impairment loss was $2,919,000. Fair value was estimated using an
independent appraisal of the operating property. Such appraisals make use of
a combination of certain generally accepted valuation techniques, including
direct capitalization, discounted cash flows and comparable sales analysis.
The aggregate cash investment in the joint venture by the Partnership
was $7,377,000 (including an acquisition fee of $265,000 paid to the Adviser
and legal and audit fees of $7,000). The Property was originally encumbered
by a construction note payable totalling $4,029,000. This note was repaid
from the proceeds of the contribution from the Partnership.
The Selling Partners agreed to contribute to the joint venture through
November 30, 1987 the amount by which the Partnership's minimum preference
return (described below) for each month exceeds the greater of (i) the
amount of Net Cash Flow (if Net Cash Flow was a positive amount) or (ii)
zero (if Net Cash Flow was a negative amount). Such contributions (the
"Mandatory Contributions") will be deemed as capital contributions by the
Selling Partners. Thereafter, and until November 30, 1989, the Selling
Partners agreed to contribute, as capital contributions, to the joint
venture all funds that were required to eliminate the Net Cash Flow
Shortfall and enable the Partnership to receive its monthly Preference
Return. Any contributions made in the period commencing December 1, 1987 and
ending November 30, 1989 were subject to a cumulative rate of return payable
out of available Net Cash Flow of 9.5% per annum from the date the Mandatory
Contribution was made until returned (or until November 30, 1991) and if
still outstanding as of November 30, 1991 at the rate of 9.75% per annum
thereafter. Amounts contributed by the Selling Partners and not yet returned
aggregate $288,000 at December 31, 1995. These contributions commencing
December 1, 1987 are also subject to a priority return from Capital Proceeds
as outlined in the joint venture agreement.
The joint venture agreement provides that net cash flow (as defined), to
the extent available, will generally be distributed monthly in the following
order of priority: First, beginning December 31, 1989 the Partnership and
the Selling Partners will each be paid accrued interest on any advances they
made to the Partnership. Second, the Partnership will receive a cumulative
annual preferred return of 9.5% per annum on its Net Investment for the
first five years after the Closing Date and 9.75% per annum on its Net
Investment thereafter. Third, the Partnership and the Selling Partners will
be paid accrued interest on advances from net cash flow generated through
November 30, 1989. Fourth, the Selling Partners will receive an amount equal
to Mandatory Contributions. Fifth, the Selling Partners will receive a
preferred return on Mandatory Contributions made in year 2 and year 3, if
any, of 9.5% per annum through November 30, 1991 and 9.75% per annum
thereafter. Sixth, payment will be made to the Capital Reserve, as defined
in the joint venture agreement. Seventh, remaining net cash flow will be
distributed 70% to the Partnership and 30% to the Selling Partners. The
amount of the preference payable to the Partnership pursuant to the second
clause above is calculated as a percentage of capital remaining after any
amounts are distributed as a return on capital and by any amounts
distributed as a return of capital through sale or refinancing. The
cumulative unpaid preference return payable to the Partnership at December
31, 1995 was $3,879,000.
Proceeds from the sale or refinancing of the Property will be
distributed in the following order of priority: First, to the Partnership
and the Selling Partners in proportion to accrued interest and outstanding
principal on any advances to the Partnership. Second, to the Selling
Partners until any Mandatory Contributions are returned and the Selling
Partners have received any previously unpaid preferred return on such
Mandatory Contributions. Third, the Partnership will receive the aggregate
amount of its cumulative annual preferred return not theretofore paid.
Fourth, the Partnership will receive an amount equal to its Net Investment.
Fifth, thereafter, any remaining proceeds will be distributed 70% to the
Partnership and 30% to the Selling Partners.
Net income and losses will generally be allocated to the Partnership and
the Selling Partners in any year in the same proportions as actual cash
distributions. Gains resulting from the sale or refinancing of the Property
shall be allocated as follows: First, capital gains shall be used to bring
any negative balances of the capital accounts to zero. Second, the Selling
Partners and then the Partnership in an amount to each equal to the excess
of the distributions to the received over the positive capital account of
each immediately prior to the sale or refinancing. Third, remaining capital
gains distributed 70% to the Partnership and 30% to the Selling Partners.
Capital losses shall be allocated to the Partners in an amount up to and in
proportion to their positive capital balances. Additional losses shall be
allocated 70% to the Partnership and 30% to the Selling Partners.
The joint venture entered into a management contract with Spaulding and
Slye Company (the "Manager"), an affiliate of the Selling Partners, which is
cancelable at the option of the Partnership upon the occurrence of certain
events. The Manager will receive an annual management fee at prevailing
market rates.
<PAGE>
e. Chicago - 625 Partnership
The Partnership acquired an interest in Chicago - 625 Partnership (the
"joint venture"), an Illinois general partnership organized on December 16,
1986 in accordance with a joint venture agreement between the Partnership,
an affiliate of the Partnership and Michigan-Ontario Limited, an Illinois
limited partnership and affiliate of Golub & Company (the "co-venturer"), to
own and operate 625 North Michigan Avenue Office Tower (the "property"). The
property is a 27-story commercial office tower containing an aggregate of
324,829 square feet of leasable space on approximately .38 acres of land.
The property, which was 89% leased as of March 31, 1996, is located in
Chicago, Illinois.
The aggregate cash investment made by the Partnership for its current
interest was $17,278,000 (including an acquisition fee of $383,000 paid to
the Adviser). At the same time the Partnership acquired its interest in the
joint venture, PaineWebber Equity Partners Two Limited Partnership (PWEP2),
an affiliate of the Managing General Partner with investment objectives
similar to the Partnership's investment objectives, acquired an interest in
this joint venture. PWEP2's aggregate cash investment for its current
interest was $26,010,000 (including an acquisition fee of $1,316,000 paid to
PWPI). During 1990, the joint venture agreement was amended to allow the
Partnership and PWEP2 the option to make contributions to the joint venture
equal to total costs of capital improvements, leasehold improvements and
leasing commissions ("Leasing Expense Contributions") incurred since April
1, 1989, not in excess of the accrued and unpaid Preference Return due to
the Partnership and PWEP2. The Partnership made Leasing Expense
Contributions totalling approximately $2,244,000 through March 31, 1993. No
Leasing Expense Contributions have been made since March 31, 1993.
During calendar 1995, circumstances indicated that Chicago 625
Partnership's operating investment property might be impaired. The joint
venture's estimate of undiscounted cash flows indicated that the property's
carrying amount was expected to be recovered, but that the reversion value
could be less than the carrying amount at the time of disposition. As a
result of such assessment, the venture commenced recording an additional
annual depreciation charge of $350,000 in calendar 1995 to adjust the
carrying value of the operating investment property such that it will match
the expected reversion value at the time of disposition. The Partnership's
share of such amount is reflected in the Partnership's share of
unconsolidated ventures' losses in fiscal 1996. Such an annual charge will
continue to be recorded in future periods.
The joint venture agreement provides for aggregate distributions of cash
flow and sale or refinancing proceeds to the Partnership and PWEP2
(collectively, the "PWEP Partners"). These amounts are then distributed to
the Partnership and PWEP2 based on their respective cash investments in the
joint venture exclusive of acquisition fees (approximately 41% to the
Partnership and 59% to PWEP2).
Net cash flow, as defined, is to be distributed, within 15 days after
the end of each calendar month, in the following order of priority: First,
to the PWEP Partners until the PWEP Partners have received an amount equal
to one-twelfth of the lesser of $3,722,000 or 9% of the PWEP net investment,
as defined, for the month ("PWEP Preference Return") plus any amount of PWEP
Preference Return not theretofore paid in respect to that fiscal year for
which such distribution is made. Second, to the payment of all unpaid
accrued interest on all outstanding default notes, as defined in the
Agreement, and then to the repayment of any principal amounts on such
outstanding default notes. Third, to the payment of all unpaid accrued
interest on all outstanding operating notes, as defined in the Agreement,
and then to the repayment of any principal amounts on such outstanding
operating notes. Fourth, 70% to the PWEP Partners and 30% to
Michigan-Ontario. The cumulative unpaid and unaccrued Preference Return due
to the Partnership totalled $5,208,000 at December 31, 1995.
Net income shall be allocated in the same proportion as net cash flow
distributed to the Partners for each fiscal year to the extent that such
profits do not exceed the net cash flow distributed in the year. Net income
in excess of net cash flow shall be allocated 99% to the PWEP Partners and
1% to Michigan-Ontario. Losses shall be allocated 99% to the PWEP Partners
and 1% to Michigan-Ontario.
Proceeds from sale or refinancing shall be distributed in the following
order of priority:
First, to the payment of all unpaid accrued interest on all outstanding
default notes, as defined in the Agreement, and then to the repayment of any
principal amounts on such outstanding default notes. Second, to the PWEP
Partners and Michigan-Ontario for the payment of all unpaid accrued interest
on all outstanding operating notes, as defined in the Agreement, and then to
the repayment of any principal amounts on such outstanding operating notes.
Third, 100% to the PWEP Partners until they have received the aggregate
amount of the PWEP Preference Return not theretofore paid. Fourth, 100% to
the PWEP Partners until they have received an amount equal to its net
investment. Fifth, 100% to the PWEP Partners until they have received an
amount equal to the PWEP leasing expense contributions less any amount
previously distributed, pursuant to this provision. Sixth, 100% to
Michigan-Ontario until it has received an amount equal to $6,000,000, less
any amount of proceeds previously distributed to Michigan-Ontario, pursuant
to this provision. Seventh, 100% to Michigan-Ontario until it has received
an amount equal to any reduction in the amount of Net Cash Flow that it
would have received had the Partnership not incurred indebtedness in the
form of operating notes. Eighth, 100% to the PWEP Partners until they have
received $2,068,000, less any amount of proceeds previously distributed to
the PWEP Partners, pursuant to this provision. Ninth, 75% to the PWEP
Partners and 25% to Michigan-Ontario until the PWEP Partners have received
$20,675,000, less any amount previously distributed to the PWEP Partners,
pursuant to this provision. Tenth, 100% to the PWEP Partners until the PWEP
Partners have received an amount equal to a cumulative return of 9% on the
PWEP leasing expense contributions. Eleventh, any remaining balance thereof
55% to the PWEP Partners and 45% to Michigan-Ontario.
Gains resulting from the sale of the property shall be allocated as
follows:
First, capital profits shall be allocated to Partners having negative
capital account balances, until the balances of the capital accounts of such
Partners equal zero. Second, any remaining capital profits up to the amount
of capital proceeds distributed to the Partners pursuant to distribution of
proceeds of a sale or refinancing with respect to the capital transaction
giving rise to such capital profits shall be allocated to the Partners in
proportion to the amount of capital proceeds so distributed to the Partners.
Third, capital profits in excess of capital proceeds, if any, shall be
allocated between the Partners in the same proportions that capital proceeds
of a subsequent capital transaction would be distributed if the capital
proceeds were equal to the remaining amount of capital profits to be
allocated.
Capital losses shall be allocated as follows:
First, capital losses shall be allocated to the Partners in an amount up
to and in proportion to their respective positive capital balances. Then,
all remaining capital losses shall be allocated 70% in total to the
Partnership and PWEP1 and 30% to the co-venturer.
The Partnership has a property management agreement with an affiliate of
the co-venturer that provides for management and leasing commission fees to
be paid to the property manager. The management fee is 4% of gross rents and
the leasing commission is 7%, as defined. The property management contract
is cancellable at the Partnership's option upon the occurrence of certain
events and is currently cancellable by the co-venturer at any time.
<PAGE>
6. Mortgage Notes Payable
Mortgage notes payable on the Partnership's consolidated balance sheets
at March 31, 1996 and 1995 consist of the following (in thousands):
1996 1995
---- ----
9.125% nonrecourse loan payable
to an insurance company, which
is secured by the 625 North
Michigan Avenue operating
investment property (see
discussion below). Monthly
payments including interest of
$55,000 are due beginning July
1, 1994 through maturity on May
31, 1999. The terms of the note
were modified effective May 31,
1994. The fair value of the
mortgage note payable
approximated its carrying value
at March 31, 1996. $ 6,362 $ 6,437
8.39% nonrecourse note payable
to an insurance company, which
is secured by the Crystal Tree
Commerce Center operating
investment property (see
discussion below). Monthly
payments including interest of
$28,000 are due beginning
November 15, 1994 through
maturity on September 19, 2001.
The fair value of the mortgage
note payable approximated its
carrying value at March 31, 1996. 3,418 3,463
-------- --------
$ 9,780 $ 9,900
======== ========
The scheduled annual principal payments to retire notes payable are as
follows (in thousands):
1997 $ 131
1998 143
1999 157
2000 6,150
` 2001 67
Thereafter 3,132
---------
$ 9,780
=========
On April 29, 1988, the Partnership borrowed $4,000,000 in the form of a
zero coupon loan secured by the 625 North Michigan operating property which
had a scheduled maturity date in May of 1995. The terms of the loan
agreement required that if the loan ratio, as defined, exceeded 80%, the
Partnership was required to deposit additional collateral in an amount
sufficient to reduce the loan ratio to 80%. During fiscal 1994, the lender
informed the Partnership that based on an interim property appraisal, the
loan ratio exceeded 80% and that a deposit of additional collateral was
required. Subsequently, the Partnership submitted an appraisal which
demonstrated that the loan ratio exceeded 80% by an amount less than
previously demanded by the lender. In December 1993, the Partnership
deposited additional collateral of $144,000 in accordance with the higher
appraised value. The lender accepted the Partnership's deposit of additional
collateral but disputed whether the Partnership had complied with the terms
of the loan agreement regarding the 80% loan ratio. During the quarter ended
June 30, 1994, an agreement was reached with the lender of the zero coupon
loan on a proposal to refinance the loan and resolve the outstanding
disputes. The terms of the agreement required the Partnership to make a
principal pay down of $541,000, including the application of the additional
collateral referred to above. The maturity date of the loan which requires
principal and interest payments on a monthly basis as set forth above, was
extended to May 31, 1999. The terms of the loan agreement also required the
establishment of an escrow account for real estate taxes, as well as a
capital improvement escrow which is to be funded with monthly deposits from
the Partnership aggregating approximately $700,000 through the scheduled
maturity date. Formal closing of the modification and extension agreement
occurred on May 31, 1994.
In addition, during 1986 and 1987 the Partnership received the proceeds
from three additional nonrecourse zero coupon loans in the initial amounts
of $3 million, $4.5 million and approximately $1.9 million, which were
secured by the Warner/Red Hill office building, the Monterra Apartments and
the Chandler's Reach Apartments, respectively. Legal liability for the
repayment of the loans secured by the Warner/Red Hill and Monterra
properties rested with the related joint ventures and, accordingly, these
amounts were recorded on the books of the joint ventures. The Partnership
indemnified Warner/Red Hill Associates and Crow/PaineWebber - LaJolla, Ltd.,
along with the related co-venture partners, against all liabilities, claims
and expenses associated with these borrowings. Interest expense on the
Warner/Red Hill and Monterra loans accrued at 9.36%, compounded annually,
and was due at maturity in August of 1993 and September of 1994,
respectively, at which time total principal and interest payments
aggregating $5,763,000 and $8,645,000, respectively, became due and payable.
The nonrecourse zero coupon loan secured by the Chandler's Reach Apartments,
which bore interest at 10.5%, compounded annually, matured on August 1, 1994
with an outstanding balance of $3,462,000. During the quarter ended December
31, 1993, the Partnership negotiated and signed a letter of intent to modify
and extend the maturity of the Warner/Red Hill zero coupon loan with the
existing lender. The terms of the extension and modification agreement,
which was finalized in August 1994, provide for a 10-year extension of the
note effective as of the original maturity date of August 15, 1993. During
the terms of the agreement, the loan will bear interest at 2.875% per annum
and monthly principal and interest payments of $24,000 will be required. The
Partnership made principal and interest payments on behalf of the venture
totalling approximately $246,000 for the period from August 15, 1993 through
June 30, 1994 in conjunction with the closing of the modification agreement.
In addition, the lender required a participation in the proceeds of a future
sale or debt refinancing in order to enter into this agreement. Accordingly,
upon the sale or refinancing of the Warner/Red Hill property, the lender
will receive 40% of the residual value of the property, as defined, after
the payment of the outstanding balance of the loan payable. The extension
and modification agreement also required the Partnership to establish an
escrow account in the name of the joint venture and to fund such escrow with
an equity contribution of $350,000. The escrowed funds are to be used solely
for the payment of capital and tenant improvements, leasing commissions and
real estate taxes related to the Warner/Red Hill property. The balance of
the escrow account is to be maintained at a minimum level of $150,000. In
the event that the escrow balance falls below $150,000, all net cash flow
from the property is to be deposited into the escrow until the minimum
balance is re-established.
During September 1994, the Partnership obtained three new nonrecourse,
current-pay mortgage loans and used the proceeds to pay off the zero coupon
loans secured by the Monterra and Chandler's Reach apartment properties.
These three new loans were in the amounts of $3,600,000 secured by the
Chandler's Reach Apartments, $4,920,000 secured by the Monterra Apartments
and $3,480,000 secured by the Crystal Tree Commerce Center. The legal
liability for the loans secured by the Chandler's Reach Apartments and the
Monterra Apartments rests with the related joint ventures and, accordingly,
these amounts are recorded on the books of the joint ventures. The legal
liability for the loan secured by the Crystal Tree Commerce Center rests
with the Partnership and, accordingly, this loan is recorded on the books of
the Partnership. The Partnership has indemnified the Monterra and Chandler's
Reach joint ventures, along with the related co-venture partners, against
all liabilities, claims and expenses associated with these borrowings. The
three new nonrecourse loans all have terms of seven years and mature in
September of 2001. The Chandler's Reach loan bears interest at a rate of
8.33% and requires monthly principal and interest payments of $29,000. This
loan will have an outstanding balance of $3,199,000 at maturity. The
Monterra loan bears interest at a rate of 8.45% and requires monthly
principal and interest payments of $40,000. This loan will have an
outstanding balance of approximately $4,380,000 at maturity. The Crystal
Tree loan bears interest at a rate of 8.39% and requires monthly principal
and interest payments of $28,000. This loan will have an outstanding balance
of $3,095,000 at maturity. In order to close the above refinancings, the
Partnership was required to contribute net capital of $583,000. This amount
consisted of $350,000 for transaction fees and closing costs, $128,000 for
interest payments due for August and September on the matured Monterra note
balance and a partial paydown of outstanding principal of $105,000.
7. Bonds Payable
Bonds payable consist of the Sunol Center joint venture's share of
liabilities for bonds issued by the City of Pleasanton, California for
public improvements that benefit the Sunol Center operating investment
property. Bond assessments are levied on a semi-annual basis as interest and
principal become due on the bonds. The bonds for which the property is
subject to assessment bear interest at rates ranging from 5% to 7.875%, with
an average rate of 7.2%. Principal and interest are payable in semi-annual
installments and mature in years 2004 through 2017. In the event that the
operating investment property is sold, the Sunol Center joint venture will
no longer be liable for the bond assessments.
Future scheduled principal payments on bond assessments are as follows (in
thousands):
Year ending December 31,
1996 $ 60
1997 66
1998 73
1999 78
` 2000 84
Thereafter 1,215
---------
$ 1,576
=========
8. Rental Revenues
The Crystal Tree and Sunol Center operating investment properties have
operating leases with tenants which provide for fixed minimum rents and
reimbursements of certain operating costs. Approximate minimum future rental
revenues to be recognized on the straight-line basis in the future on
noncancellable leases are as follows (in thousands):
Year ending December 31,
Amount
1996 $ 2,621
1997 2,796
1998 2,626
1999 2,419
2000 1,961
Thereafter 2,177
--------
$ 14,600
=========
9. 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 First Equity Partners, 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
alleges that, in connection with the sale of interests in PaineWebber Equity
Partners One Limited Partnership, PaineWebber, First Equity Partners, 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 purport to be suing on behalf of all persons who
invested in PaineWebber Equity Partners One Limited Partnership, also allege
that following the sale of the partnership interests, PaineWebber, First
Equity Partners, Inc. and PA1985 misrepresented financial information about
the Partnership's value and performance. The amended complaint alleges that
PaineWebber, First Equity Partners, Inc. and PA1985 violated the Racketeer
Influenced and Corrupt Organizations Act ("RICO") and the federal securities
laws. The plaintiffs seek 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 seek 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 have 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 which the parties expect to submit to the court for its
consideration and approval within the next several months. Until a
definitive settlement and plan of allocation is approved by the court, there
can be no assurance what, if any, payment or non-monetary benefits will be
made available to investors in PaineWebber Equity Partners One Limited
Partnership.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including
those offered by the Partnership. The complaint alleges, 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 seeks compensatory damages of $15 million plus punitive
damages against PaineWebber. The eventual outcome of this litigation and the
potential impact, if any, on the Partnership's unitholders cannot be
determined at the present time.
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 is substantially
similar to the complaint in the Abbate action described above, and seeks
compensatory damages of $3.4 million plus punitive damages.
Under certain limited circumstances, pursuant to the Partnership
Agreement and other contractual obligations, PaineWebber affiliates could be
entitled to indemnification for expenses and liabilities in connection with
this litigation. At the present time, the Managing General Partner cannot
estimate the impact, if any, of the potential indemnification claims on the
Partnership's financial statements, taken as a whole. Accordingly, no
provision for any liability which could result from the eventual outcome of
these matters has been made in the accompanying financial statements.
10. Subsequent Events
On May 15, 1996, the Partnership paid distributions to the Limited and
General Partners in the amounts of $250,000 and $2,500, respectively, for
the quarter ended March 31, 1996.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
March 31, 1996
(In thousands)
<CAPTION>
Cost
Capitalized Life on Which
Initial Cost to (Removed) Depreciation
Venture Subsequent to Gross Amount at Which Carried at in Latest
Acquisition End of Year Income
Buildings & Buildings & Buildings & Accumulated Date of Date Statement
Description Encumbrances Land Improvements Improvements Land Improvements Total Depreciation Construction Acquired Computed
- ----------- ------------ ---- ------------ ------------ ---- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shopping Center
North Palm
Beach, FL $ 3,418 $3,217 $15,598 $(2,047) $2,444 $14,324 $16,768 $5,305 1983 10/23/85 5-27 yrs.
Office Building
Pleasanton, CA 1,576 2,318 15,429 (2,782) 1,518 13,447 14,965 4,194 1985 8/15/86 30 yrs.
------ ------ ------ ------- ----- ------ ------ -----
$ 4,994 $5,535 $31,027 $(4,829) $3,962 $27,771 $31,733 $9,499
====== ====== ======= ======= ====== ======= ======= ======
Notes
(A) The aggregate cost of real estate owned at December 31, 1995 for Federal
income tax purposes is approximately $32,819. (B) For financial reporting
purposes, the initial cost of the operating investment properties have been
reduced by payments from
former joint venture partners related to a guaranty to pay the Partnership
a certain Preference Return.
(C) See Notes 6 and 7 to the financial statements for a description of the terms
of the debt encumbering the property. (D) Reconciliation of real estate owned:
1996 1995 1994
---- ---- ----
Balance at beginning of period $29,731 $29,636 $29,486
Increase due to additions 2,002 95 150
--------- ----------- ----------
Balance at end of period $31,733 $29,731 $29,636
======= ======= =======
(E) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 8,222 $ 7,229 $ 6,248
Depreciation expense 1,277 993 981
---------- ---------- ---------
Balance at end of period $ 9,499 $ 8,222 $ 7,229
======== ======== =======
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
PaineWebber Equity Partners One Limited Partnership:
We have audited the accompanying combined balance sheets of the Combined
Joint Ventures of PaineWebber Equity Partners One Limited Partnership as of
December 31, 1995 and 1994 and the related combined statements of operations and
changes in venturers' capital, and cash flows for each of the three years in the
period ended December 31, 1995. 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 did not audit the financial statements of
Warner/Red Hill Associates as of December 31, 1994 and for each of the two years
in the period ended December 31, 1994, which statements reflect 7% of the
combined assets of the Combined Joint Ventures of PaineWebber Equity Partners
One Limited Partnership at December 31, 1994, and 9% and 10%, respectively, of
the combined revenues of the Combined Joint Ventures of PaineWebber Equity
Partners One Limited Partnership for the years ended December 31, 1994 and 1993.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to data included for Warner/Red
Hill Associates as of December 31, 1994 and for each of the two years in the
period ended December 31, 1994, is based solely on the report of the other
auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the combined financial position of the Combined Joint Ventures of PaineWebber
Equity Partners One Limited Partnership at December 31, 1995 and 1994, and the
combined results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles. Also, in our opinion, based on our audits and
the report of other auditors, 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.
As discussed in Note 2 to the combined financial statements, in 1995 and
1994 certain of the Combined Joint Ventures adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of."
/s/ Ernst & Young
ERNST & YOUNG LLP
Boston, Massachusetts
February 6, 1996
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
Warner/Redhill Associates:
We have audited the accompanying balance sheets of Warner/Redhill
Associates (a California general partnership) as of December 31, 1994 and 1993
and the related statements of operations, changes in partners' capital and cash
flows for the years then ended. These financial statements are the
responsibility of management of Warner/Redhill Associates. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Warner/Redhill Associates as
of December 31, 1994 and 1993 and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the financial statements, Warner/Redhill
Associates changed its method of accounting for its operating investment
property during the year ended December 31, 1994 to adopt the provisions of the
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of."
/s/ KPMG PEAT MARWICK
KPMG PEAT MARWICK
Los Angeles, California
February 1, 1995, except
for the paragraph entitled
Operating Investment Property in
Note 2 to the financial statements,
which is as of July 7, 1995
<PAGE>
COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
December 31, 1995 and 1994
(In thousands)
ASSETS
1995 1994
Current assets:
Cash and cash equivalents $ 861 $ 438
Accounts receivable, less allowance for
doubtful accounts of $321 ($320 in 1994) 888 1,030
Other current assets 3 3
------- ------
Total current assets 1,752 1,471
Operating investment properties:
Land 17,189 17,189
Building, improvements and equipment 63,578 63,016
-------- ------
80,767 80,205
Less accumulated depreciation (23,090) (20,263)
-------- -------
57,677 59,942
Escrowed cash 1,024 1,067
Long-term rents receivable 1,462 1,462
Due from partners 269 269
Deferred expenses, net of accumulated
amortization of $1,312 ($919 in 1994) 1,243 1,327
Other assets 84 98
-------- ---------
$ 63,511 $ 65,636
======== ========
LIABILITIES AND VENTURERS' CAPITAL
Current liabilities:
Current portion of long-term debt $ 246 $ 234
Accounts payable and accrued liabilities 942 699
Accounts payable - affiliates 101 237
Real estate taxes payable 1,873 2,106
Distributions payable to venturers 1,938 1,741
Other current liabilities 107 152
------- ------
Total current liabilities 5,207 5,169
Tenant security deposits 291 214
Notes payable to venturers 8,000 8,000
Long-term debt 13,631 13,877
------- -------
Venturers' capital 36,382 38,376
------- -------
$ 63,511 $ 65,636
======== ========
See accompanying notes.
<PAGE>
COMBINED JOINT VENTURES OF PAINEWEBBER EQUITY PARTNERS ONE
LIMITED PARTNERSHIP
COMBINEDSTATEMENTS OF OPERATIONS AND CHANGES IN
VENTURERS' CAPITAL For the years ended
December 31, 1995, 1994 and 1993
(In thousands)
1995 1994 1993
Revenues:
Rental income and expense recoveries $ 10,691 $ 10,326 $10,654
Interest income 23 23 32
Other income 223 239 306
------- ------- ------
10,937 10,588 10,992
Expenses:
Losses due to permanent impairment
of operating investment properties - 9,767 -
Depreciation and amortization 3,180 3,127 3,108
Real estate taxes 1,980 2,263 2,581
Interest expense 1,089 945 1,371
Interest expense payable to partner 800 800 800
Property operating expenses 1,203 1,114 1,280
Repairs and maintenance 1,178 1,160 1,075
Utilities 701 713 778
Management fees 440 433 423
Salaries and related expenses 333 300 300
Insurance 72 69 80
Bad debt expense 1 318 167
------- ------ ------
Total expenses 10,977 21,009 11,963
------- ------ ------
Net loss (40) (10,421) (971)
Contributions from venturers 441 5,254 -
Distributions to venturers (2,395) (6,814) (3,151)
Venturers' capital, beginning of year 38,376 50,357 54,479
--------- --------- -------
Venturers' capital, end of year $ 36,382 $ 38,376 $50,357
========= ========= =======
See accompanying notes.
<PAGE>
COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS For
the years ended December 31, 1995, 1994 and
1993
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
Net loss $ (40) $ (10,421) $ (971)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Increase in deferred interest on long-term debt - 468 1,273
Losses due to permanent impairment
of operating investment properties - 9,767 -
Depreciation and amortization 3,180 3,127 3,108
Amortization of deferred financing costs 40 16 -
Bad debts 1 318 -
Changes in assets and liabilities:
Accounts receivable 141 93 (189)
Other current assets - 1 8
Escrowed cash 43 (1,067) -
Long-term rents receivable - 335 83
Deferred expenses (309) (226) (344)
Other assets 14 (22) 11
Accounts payable and accrued liabilities 243 12 257
Accounts payable - affiliates (136) (2) (99)
Real estate taxes payable (233) (180) 17
Other current liabilities (45) 58 (21)
Tenant security deposits 77 12 (3)
----- ------ -----
Total adjustments 3,016 12,710 4,101
----- ------ -----
Net cash provided by operating
activities 2,976 2,289 3,130
Cash flows from investing activities:
Additions to operating investment properties (562) (1,256) (828)
Purchase/sale of investment securities - 730 (730)
----- ----- -----
Net cash used in investing activities (562) (526) (1,558)
Cash flows from financing activities:
Repayment of long-term debt and deferred
interest (234) (9,157) -
Deferred financing costs - (269) -
Proceeds of new loans - 8,520 -
Contributions from venturers 441 5,254 -
Distributions to venturers (2,198) (6,601) (2,735)
----- ----- -----
Net cash used in financing activities (1,991) (2,253) (2,735)
----- ----- -----
Net increase (decrease) in cash and cash
equivalents 423 (490) (1,163)
Cash and cash equivalents, beginning of year 438 928 2,091
----- ------ -----
Cash and cash equivalents, end of year $ 861 $ 438 $ 928
======= ======= ======
Cash paid during the year for interest $ 1,670 $ 5,562 $ 800
======= ======= ======
Write-off of fully depreciated building
improvements$ - $ 1,121 $ 270
======= ======= ======
See accompanying notes.
<PAGE>
COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
Notes to Combined Financial Statements
1. Organization
The accompanying financial statements of the Combined Joint Ventures of
PaineWebber Equity Partners One Limited Partnership (Combined Joint
Ventures) include the accounts of Warner/Red Hill Associates (Warner/Red
Hill), a California general partnership, Crow PaineWebber LaJolla, Ltd.
(Crow PaineWebber), a Texas limited partnership; Lake Sammamish Limited
Partnership (Lake Sammamish), a Texas limited partnership; Framingham - 1881
Associates (1881 Worcester Road), a Massachusetts general Partnership; and
Chicago-625 Partnership (Chicago-625), an Illinois limited partnership. The
financial statements of the Combined Joint Ventures are presented in
combined form due to the nature of the relationship between each of the
joint ventures and PaineWebber Equity Partners One Limited Partnership
(PWEP1).
The dates of PWEP1's acquisition of interests in the joint ventures are
as follows:
Date of Acquisition
Joint Venture of Interest
Warner/Red Hill Associates December 18, 1985
Crow PaineWebber LaJolla, Ltd. July 1, 1986
Lake Sammamish Limited Partnership October 1, 1986
Framingham 1881 - Associates December 12, 1986
Chicago-625 Partnership December 16, 1986
2. 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 requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of December 31, 1995 and 1994 and
revenues and expenses for each of the three years in the period ended
December 31, 1995.
Actual results could differ from the estimates and assumptions used.
Operating investment properties
Effective for 1995 for Chicago-625 Partnership and effective for 1994
for Warner/Red Hill Associates and Framingham 1881 - Associates, these
ventures elected early application of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" (SFAS 121). In accordance with SFAS
121, an impairment loss with respect to an operating investment property is
recognized when the sum of the expected future net cash flows (undiscounted
and without interest charges) is less than the carrying amount of the asset.
An impairment loss is measured as the amount by which the carrying amount of
the asset exceeds its fair value, where fair value is defined as the amount
at which the asset could be bought or sold in a current transaction between
willing parties, that is other than a forced or liquidation sale (see Note
4). All of the other joint ventures record their investments in operating
investment properties at the lower of cost, reduced by accumulated
depreciation, or net realizable value. These joint ventures have reviewed
SFAS 121, which is effective for financial statements for years beginning
after December 15, 1995, and believe this new pronouncement will not have a
material effect on their financial statements.
One of the Joint Ventures was acquired prior to the completion of
construction. Interest costs and property taxes incurred during the
construction period were capitalized. Through December 31, 1994,
depreciation expense was computed on a straight-line basis over the
estimated useful life of the buildings, improvements and equipment,
generally five to forty years. During 1995, circumstances indicated that
Chicago 625 Partnership's operating investment property might be impaired.
The joint venture's estimate of undiscounted cash flows indicated that the
property's carrying amounts was expected to be recovered, but that the
reversion value could be less that the carrying amount at the time of
disposition. As a result of such assessment, the venture commenced recording
an additional annual depreciation charge of $350,000 in 1995 to adjust the
carrying value of the operating investment property such that it will match
the expected reversion value at the time of disposition. Such an annual
charge will continue to be recorded in future periods.
Deferred expenses
Deferred expenses consist primarily of organization costs which have
been amortized over five years, loan fees which are being amortized over the
terms of the related loans, and lease commissions and rental concessions
which are being amortized over the term of the applicable lease.
Cash and cash equivalents
For purposes of the statement of cash flows, the Combined Joint Ventures
consider all highly liquid investments, money market funds and certificates
of deposit purchased with original maturity dates of three months or less to
be cash equivalents.
Rental revenues
Certain joint ventures have operating leases with tenants which provide
for fixed minimum rents and reimbursements of certain operating costs.
Rental revenues are recognized on a straight-line basis over the term of the
related lease agreements. Rental revenues for the residential properties are
recognized when earned.
Minimum rental revenues to be recognized on the straight-line basis in
the future on noncancellable leases are as follows (in thousands):
1996 $ 6,651
1997 5,564
1998 4,849
1999 3,808
2000 3,641
Thereafter 4,088
-------
$ 28,601
=========
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.
Fair value of financial instruments
The carrying amount of cash and cash equivalents, tenant receivables,
escrowed cash and other current and long-term liabilities (with the
exception of notes payable to venturers and long-term debt approximates
their respective fair values at December 31, 1995 due to the short-term
maturities of such instruments. It is not practicable for management to
estimate the fair value of the notes payable to venturers without incurring
excessive costs because the loans were provided in non-arm's length
transactions without regard to collateral issues or other traditional
conditions and covenants. Where practicable, the fair value of long-term
debt is estimated using discounted cash flow analysis, based on the current
market rates for similar types of borrowing arrangements.
3. Joint Ventures
See Note 5 to the financial statements of PWEP1 included in this Annual
Report for a more detailed description of the joint venture partnerships.
Descriptions of the ventures' properties are summarized below:
a. Warner/Red Hill Associates
The joint venture owns and operates the Warner/Red Hill Business Center
consisting of three two-story office buildings totalling 93,895 net
rentable square feet on approximately 4.76 acres of land. The business
center is part of a 4,200 acre business complex in Tustin, California
(see Note 4).
b. Crow PaineWebber LaJolla, Ltd.
The joint venture constructed and operates the Monterra Apartments
consisting of garden-style apartments and includes 180 one- and
two-bedroom units totalling approximately 136,000 square feet in
LaJolla, California.
c. Lake Sammamish Limited Partnership
The joint venture owns and operates the Chandler's Reach Apartments
consisting of 166 units with approximately 135,110 net rentable square
feet in eleven two- and three-story buildings located in Redmond,
Washington.
d. Framingham - 1881 Associates
The joint venture owns and operates the 1881 Worcester Road office
building consisting of 64,189 net rentable square feet in one two-story
building located in Framingham, Massachusetts (see Note 4).
e. Chicago - 625 Partnership
The joint venture constructed and operates the 625 North Michigan office
building consisting of a 27-story commercial office tower containing an
aggregate of 387,000 square feet (324,829 rentable space) located in
Chicago, Illinois.
The following description of the joint venture agreements provides
certain general information.
Allocations of net income and loss
The agreements generally provide that net income and losses (other than
those resulting from sales or other dispositions of the projects) will be
allocated to the venture partners in the same proportions as actual cash
distributions from operations.
Gains or losses resulting from sales or other dispositions of the
projects shall be allocated according to the formulas provided in the joint
venture agreements.
Distributions
Distributable funds will generally be distributed first, to repay
co-venturer negative cash flow contributions; second, to repay accrued
interest and principal on certain loans and, third, specified amounts to
PWEP1, with the balance distributed in amounts ranging from 85% to 29% to
PWEP1 and 15% to 71% to the co-venturers, as described 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.
4. Losses Due to Permanent Impairment
As discussed in Note 2, Warner/Red Hill Associates and Framingham 1881 -
Associates elected early application of SFAS 121 in 1994. The effect of such
application was the recognition of impairment losses on the operating
investment properties owned by both joint ventures. The impairment losses
resulted because, in management's judgment, the physical attributes of these
properties and their locations relative to their competition, combined with
the lack of near-term prospects for future improvement in market conditions
in the local markets in which the properties are located, were not expected
to enable the ventures to recover the carrying values of the assets within
the practicable remaining holding period given the improving market
conditions of PWEP1's other operating investment properties and the possible
opportunities for PWEP1 to sell these other properties over the next 5 to 7
years.
Warner/Red Hill Associates recognized an impairment loss of $6,784,000
to write down the operating investment property to its estimated fair value
of $3,600,000. Framingham 1881 - Associates recognized an impairment loss of
$2,983,000 to write down the operating investment property to its estimated
fair value of $2,200,000. In both cases, fair value was estimated using an
independent appraisal of the operating property. Such appraisals make use of
a combination of certain generally accepted valuation techniques, including
direct capitalization, discounted cash flows and comparable sales analysis.
5. Related Party Transactions
The joint ventures entered into management contracts with affiliates of
the co-venturers which are cancelable at the option of PWEP1 upon the
occurrence of certain events. The management fees generally range from 3% to
5% of gross rents collected.
Accounts payable - affiliates at December 31, 1995 and 1994 principally
consist of accrued interest on notes payable to venturers, advances from
venturers, and management fees and reimbursements payable to the property
managers.
Certain of the Combined Joint Ventures are also required to pay an
investor servicing fee to PWEP1 ranging from $2,500 to $10,000 per year.
6. Notes Payable to Venturers
Notes payable to venturers at December 31, 1995 and 1994 include a
permanent loan provided by PWEP1 to the Lake Sammamish joint venture in the
amount of $4,000,000. Interest-only payments on the permanent loan are at
10% per annum, payable quarterly. Principal is due in October 2011. Notes
payable to venturers at December 31, 1995 and 1994 also include a note
payable to PWEP1 from the Crow PaineWebber joint venture of $4,000,000. This
note bears interest at 10% per annum. Accrued interest is payable quarterly.
Principal is due on July 1, 2011. Interest expense on these two notes
payable aggregated $800,000 for each of the three years in the period ended
December 31, 1995. As a result of the debt modifications discussed below in
Note 7, these notes are unsecured.
<PAGE>
7. Mortgage Notes Payable
Mortgage notes payable at December 31, 1995 and 1994 consists of the
following (in thousands):
1995 1994
Nonrecourse note payable to an insurance
company which is secured by the
Warner/Red Hill operating investment
property. The note was amended and
restated during 1994 (see discussion
below). The note bears interest at
2.875% per annum, requires monthly
payments of $24,000 and has a scheduled
maturity date of August 1, 2003. $ 5,481 $ 5,608
8.45% nonrecourse loan payable to a
third party which is secured by the
Monterra Apartments. The loan requires
monthly principal and interest payments
of $40,000 and matures in September
2001. 4,849 4,910
8.33% nonrecourse loan payable to a
third party which is secured by the
Chandler's Reach Apartments. The loan
requires monthly principal and interest
payments of $29,000 and matures in
September 2001 (see discussion below).
3,547 3,593
13,877 14,111
Less: current portion (246) (234)
--------- --------
$ 13,631 $13,877
========= ========
The scheduled annual principal payments to retire notes payable are as
follows (in thousands):
1996 $ 246
1997 260
1998 269
1999 284
` 2000 301
Thereafter 12,517
---------
$ 13,877
=========
The repayment of principal and interest on the loans described above is
the responsibility of PWEP1, which received the loan proceeds. PWEP1 has
indemnified Crow PaineWebber-LaJolla, Ltd., Warner/Red Hill Associates and
Lake Sammamish Limited Partnership from all liabilities, claims and expenses
associated with any defaults by PWEP1 in connection with these borrowings.
During 1993, PWEP1 attempted to obtain refinancing or extend the note
secured by the Warner/Red Hill Business Center; however, as of December 31,
1993, such efforts had not been successfully completed and the note was in
default. During 1994, PWEP1 reached an agreement with the lender regarding
an extension and modification of the note payable. The terms of the
extension and modification agreement, which was finalized in August 1994,
provide for a 10-year extension of the note effective as of the original
maturity date of August 15, 1993. During the term of the agreement, the loan
will bear interest at 2.875% per annum and monthly principal and interest
payments of $24,000 are required. PWEP1 made principal and interest payments
on behalf of the venture totalling $246,000 for the period from August 15,
1993 through June 30, 1994 in conjunction with the closing of the
modification agreement. In addition, the lender required a participation in
the proceeds of a future sale or debt refinancing in order to enter into
this agreement. Accordingly, upon the sale or refinancing of Warner/Red Hill
investment property, the lender will receive 40% of the residual value of
the property, as defined, after the payment of the outstanding balance of
the loan payable and unpaid interest. The extension and modification
agreement also required PWEP1 to establish an escrow account in the name of
Warner/Red Hill Associates and to fund such escrow with an equity
contribution of $350,000. The escrowed funds are to be used solely for the
payment of capital and tenant improvements, leasing commissions and real
estate taxes related to the Warner/Red Hill property. The balance of the
escrow account is to be maintained at a level of no less than $150,000. In
the event that the escrow balance falls below $150,000, all net cash flow
from the property is to be deposited into the escrow until the minimum
balance is re-established. It is not practicable for management to estimate
the fair value of the mortgage note secured by the Warner/Red Hill property
without incurring excessive costs due to the unique terms of the note.
During September 1994, the note payable secured by the Monterra
Apartments was refinanced in conjunction with the issuance of a new
nonrecourse, current-pay mortgage loan secured by the Monterra property in
the initial principal amount of $4,920,000. PWEP1 was required to contribute
capital of $3,869,000 in connection with this refinancing transaction. This
amount consisted of $146,000 for transaction fees and closing costs and a
paydown of remaining principal of $3,723,000. The fair value of this
mortgage note approximated its carrying value as of December 31, 1995.
The proceeds of the note secured by the Chandler's Reach property were
distributed to PWEP1 in 1994 pursuant to an agreement of the partners. PWEP1
used the proceeds of this note to retire the prior outstanding indebtedness
secured by the Chandler's Reach Apartments which is described in Note 8. The
fair value of this mortgage note approximated its carrying value as of
December 31, 1995.
8. Encumbrances
Under the terms of the joint venture agreements, PWEP1 is entitled to
use the joint venture operating properties as security for certain
borrowings, subject to various restrictions. As of December 31, 1993 PWEP1
(together in one instance with an affiliated partnership) had borrowed
$11,886,000 under two zero coupon loan agreements pursuant to this
arrangement. These obligations were direct obligations of PWEP1 and its
affiliated partnership and, therefore, were not reflected in the
accompanying financial statements. The outstanding balance of principal and
accrued interest outstanding under the borrowing arrangements aggregated
$20,225,000 at December 31, 1993. The operating investment properties of the
Lake Sammamish and Chicago-625 joint ventures had been pledged as security
for these loans which were scheduled to mature in 1995, at which time
payments aggregating approximately $23,056,000 were to become due and
payable. As discussed in Note 7, the note payable secured by the Lake
Sammamish operating investment property was refinanced in September 1994
from the proceeds of a new loan issued directly to the joint venture.
The zero coupon loan secured by the 625 North Michigan Office Building
required that if the loan ratio, as defined, exceeded 80%, then PWEP1,
together with its affiliated partnership, was required to deposit additional
collateral in an amount sufficient to reduce the loan ratio to 80%. During
1993, the lender informed PWEP1 and its affiliated partnership that based on
an interim property appraisal, the loan ratio exceeded 80% and demanded that
additional collateral be deposited. Subsequently, PWEP1 and its affiliated
partnership submitted an appraisal which demonstrated that the loan ratio
exceeded 80% by an amount less than previously demanded by the lender and
deposited additional collateral in accordance with the higher appraised
value. The lender accepted the deposit of additional collateral, but
disputed whether PWEP1 and its affiliated partnership had complied with the
terms of the loan agreement regarding the 80% loan ratio. On May 31, 1994,
an agreement was reached with the lender to refinance the loan and resolve
the outstanding disputes. The terms of the agreement extended the maturity
date of the loan to May 1999. The new principal balance of the loan, after a
principal paydown of $1,353,000, which was funded by PWEP1 and its
affiliated partnership in the ratios of 41% and 59%, respectively, was
$16,225,000. The new loan bears interest at a rate of 9.125% per annum and
requires the current payment of interest and principal on a monthly basis
based on a 25-year amortization period. At December 31, 1995, the aggregate
indebtedness of EP1 and its affiliated partnership which is secured by the
625 North Michigan Office Building was approximately $15,953,000. The terms
of the loan agreement also required the establishment of an escrow account
for real estate taxes, as well as a capital improvement escrow which is to
be funded with monthly deposits from PWEP1 and its affiliated partnership
aggregating $1,750,000 through the scheduled maturity date of the loan. Such
escrow accounts are recorded on the books of the joint venture and are
included in the balance of escrowed cash on the accompanying balance sheets.
.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1995
(In thousands)
<CAPTION>
Cost
Capitalized Life on Which
Initial Cost to (Removed) Depreciation
Venture Subsequent to Gross Amount at Which Carried at in Latest
Acquisition End of Year Income
Buildings & Buildings & Buildings & Accumulated Date of Date Statement
Description Encumbrances Land Improvements Improvements Land Improvements Total Depreciation Construction Acquired Computed
- ----------- ------------ ---- ------------ ------------ ---- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED JOINT VENTURES:
Office Building
Chicago, IL $15,953 $ 8,112 $35,683 $5,747 $ 8,112 $41,430 $49,542 $13,731 1968 12/16/86 5-17 yrs.
Office Building
Tustin, CA 5,481 3,124 9,126 (6,092) 1,428 4,730 6,158 2,696 1984 12/18/85 35 yrs.
Apartment Complex
LaJolla, CA 4,849 4,615 7,219 646 4,615 7,865 12,480 2,529 1987 7/1/86 30 yrs.
Apartment Complex
Redmond, WA 3,547 2,362 6,163 12 2,362 6,175 8,537 2,253 1987 10/1/86 5-27.5
yrs.
Office Building
Framingham, MA - 1,317 5,510 (2,777) 672 3,378 4,050 1,881 1987 12/12/86 5-40 yrs.
-------------------------------------------------------------------------------
$29,830 $19,530 $63,701 $(2,464) $17,189 $63,578 $80,767 $23,090
======= ======= ======= ======= ======= ======= ======= =======
Notes
(A) The aggregate cost of real estate owned at December 31, 1995 for Federal
income tax purposes is approximately $79,462. (B) See Notes 7 and 8 to the
Combined Financial Statements for a description of the terms of the debt
encumbering the properties. (C) Reconciliation of real estate owned:
1995 1994 1993
---- ---- ----
Balance at beginning of period $ 80,205 $ 89,837 $ 89,279
Increase due to additions 562 1,256 828
Write-offs due to disposals - (1,121) (270)
Write-offs due to permanent
impairment (see Note 4) - (9,767) -
--------- ------- - -------
Balance at end of period $ 80,767 $ 80,205 $ 89,837
========== ======== ========
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 20,263 $ 18,649 $ 16,106
Depreciation expense 2,827 2,735 2,813
Write-offs due to disposals - (1,121) (270)
---------- ---------- -------
Balance at end of period $ 23,090 $ 20,263 $ 18,649
========== ========== ========
(E) Costs removed include guaranty payments from co-venturers (see Note 3)
F-42
</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 March 31, 1996 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> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 4042
<SECURITIES> 0
<RECEIVABLES> 425
<ALLOWANCES> 89
<INVENTORY> 0
<CURRENT-ASSETS> 4391
<PP&E> 55461
<DEPRECIATION> 9499
<TOTAL-ASSETS> 51255
<CURRENT-LIABILITIES> 433
<BONDS> 11356
0
0
<COMMON> 0
<OTHER-SE> 39279
<TOTAL-LIABILITY-AND-EQUITY> 51255
<SALES> 0
<TOTAL-REVENUES> 3526
<CGS> 0
<TOTAL-COSTS> 3399
<OTHER-EXPENSES> 324
<LOSS-PROVISION> 39
<INTEREST-EXPENSE> 1027
<INCOME-PRETAX> (1263)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1263)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1263)
<EPS-PRIMARY> (0.62)
<EPS-DILUTED> (0.62)
</TABLE>
