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, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 0-14857
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
Virginia 04-2866287
-------- ----------
(State of organization) (I.R.S. Employer
Identification 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 Parts II and IV
July 18, 1985, as supplemented
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
1997 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-8
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure II-8
PART III
Item 10 Directors and Executive Officers of the
Partnership III-1
Item 11 Executive Compensation III-2
Item 12 Security Ownership of Certain Beneficial
Owners and Management III-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-41
<PAGE>
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Partnership's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such a difference are discussed in Item 7 in the section entitled
"Certain Factors Affecting Future Operating Results" beginning on page II-6 of
this Form 10-K.
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, 1997, 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.
<TABLE>
<CAPTION>
Name of Joint Venture Date of
Name and Type of Property Acquisition
Location Size of Interest Type of Ownership (1)
- --------------------------- ---- ---------- ----------------------
<S> <C> <C> <C>
Crystal Tree Commerce Center 74,923 square 10/23/85 Fee ownership of land and
North Palm Beach, FL feet of retail improvements
space and
40,115 square
feet of office
space
Warner/Red Hill Associates 93,895 12/18/85 Fee ownership of land and
Warner/Red Hill Business Center net rentable improvements (through
Tustin, CA square feet of joint venture)
office space
Crow PaineWebber LaJolla, Ltd. 180 units 7/1/86 Fee ownership of land and
Monterra Apartments improvements (through
LaJolla, CA joint venture)
Sunol Center Associates 116,680 net 8/15/86 Fee ownership of land and
Sunol Center Office Buildings rentable improvements (through
Pleasanton, CA square feet of joint venture)
office space (2)
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name of Joint Venture Date of
Name and Type of Property Acquisition
Location Size of Interest Type of Ownership (1)
- --------------------------- ---- ---------- ----------------------
<S> <C> <C> <C>
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
</TABLE>
(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, 1997, the Limited Partners had received cumulative cash
distributions totalling approximately $37,782,000 or $428 per original $1,000
investment for the Partnership's earliest investors. 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, the refinancings of which were completed during fiscal 1995. As a result,
distributions were reinstated at a rate of 1% per annum on invested capital
effective for the quarter ended March 31, 1995. As discussed further below, as a
result of the improvement in operations of the properties in the Partnership's
portfolio, particularly at Sunol Center, the Partnership has increased the
quarterly distribution to a 2% annualized return, effective for the distribution
paid on May 15, 1997 for the quarter ended March 31, 1997. 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
this 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 begun to recover after several years of depressed
conditions, such values, for the most part, remain below the levels which
existed in the mid-1980's, which is when the Partnership's properties were
acquired. Such conditions are due, in part, 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 are being adversely impacted 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 remained strong during fiscal 1997 although
estimated market values in some markets appeared to have plateaued as a result
of the increase in development activity referred to below. Management is
currently focusing on potential disposition strategies for the investments in
its portfolio. Although no assurances can be given, it is currently contemplated
that sales of the Partnership's remaining assets could be completed within the
next 2- to- 3 years.
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 generally
been offset by the lack of significant new construction activity in the
multi-family apartment market over most of this period. In the past 12 months,
development activity for multi-family properties in many markets has escalated
significantly. The 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.
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, 1997, 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 1997, along with an
average for the year, are presented below for each property:
<TABLE>
<CAPTION>
Percent Occupied At
------------------------------------------------
Fiscal
1997
6/30/96 9/30/96 12/31/96 3/31/97 Average
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Crystal Tree 92% 96% 94% 96% 95%
Warner/Red Hill 82% 85% 85% 80% 83%
Monterra Apartments 98% 98% 99% 98% 98%
Sunol Center 100% 100% 100% 100% 100%
Chandler's Reach Apartments 94% 95% 94% 94% 94%
1881 Worcester Road 100% 51% 51% 51% 63%
625 North Michigan Avenue 89% 89% 86% 84% 87%
</TABLE>
<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 alleged
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
purported to be suing on behalf of all persons who invested in PaineWebber
Equity Partners One Limited Partnership, also alleged 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
sought unspecified damages, including reimbursement for all sums invested by
them in the partnerships, as well as disgorgement of all fees and other income
derived by PaineWebber from the limited partnerships. In addition, the
plaintiffs also sought treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties 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. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which provides for the complete resolution of the class action litigation,
including releases in favor of the Partnership and PWPI, and the allocation of
the $125 million settlement fund among investors in the various partnerships and
REITs at issue in the case. As part of the settlement, PaineWebber also agreed
to provide class members with certain financial guarantees relating to some of
the partnerships and REITs. The details of the settlement are described in a
notice mailed directly to class members at the direction of the court. A final
hearing on the fairness of the proposed settlement was held in December 1996,
and in March 1997 the court announced its final approval of the settlement. The
release of the $125 million of settlement proceeds has not occurred to date
pending the resolution of an appeal of the settlement by two of the plaintiff
class members. As part of the settlement agreement, PaineWebber has agreed not
to seek indemnification from the related partnerships and real estate investment
trusts at issue in the litigation (including the Partnership) for any amounts
that it is required to pay under the settlement.
In 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 alleged, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint sought
compensatory damages of $15 million plus punitive damages against PaineWebber.
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 plaintiffs'
purchases of various limited partnership interests, including those offered by
the Partnership. The complaint was very similar to the Abbate action described
above and sought compensatory damages of $3.4 million plus punitive damages
against PaineWebber. In September 1996, the court dismissed many of the
plaintiffs' claims in both the Abbate and Bandrowski actions as barred by
applicable securities arbitration regulations. Mediation with respect to the
Abbate and Bandrowski actions was held in December 1996. As a result of such
mediation, a settlement between PaineWebber and the plaintiffs was reached which
provided for the complete resolution of both actions. Final releases and
dismissals with regard to these actions were received subsequent to March 31,
1997.
Based on the settlement agreements discussed above covering all of the
outstanding unitholder litigation, and notwithstanding the appeal of the class
action settlement referred to above, management does not expect that the
resolution of these matters will have a material impact on the Partnership's
financial statements, taken as a whole.
The Partnership is not subject to any other material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Security Holder Matters
At March 31, 1997 there were 7,920 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.
The Partnership has a Distribution Reinvestment Plan designed to enable
Unitholders to have their distributions from the Partnership invested in
additional Units of the Partnership. The terms of the Plan are outlined in
detail in the Prospectus, a copy of which Prospectus, as supplemented, is
incorporated herein by reference.
Reference is made to Item 6 below for a discussion of cash distributions
made to the Limited Partners during fiscal 1997.
Item 6. Selected Financial Data
PaineWebber Equity Partners One Limited Partnershi
For the years ended March 31, 1997, 1996, 1995, 1994 and 1993
(in thousands, except for per Unit data)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Revenues $ 3,173 $ 2,726 $ 2,346 $ 1,971 $ 2,139
Operating loss $ (1,099) $ (1,739) $ (1,637) $ (2,196) $ (2,025)
Interest income
on notes
receivable from
unconsolidated
ventures $ 800 $ 800 $ 800 $ 800 $ 800
Partnership's share
of unconsolidated
ventures' losses $ (107) $ (324) $ (715) $ (1,072) $ (1,048)
Partnership's share
of losses due to
impairment
of operating
investment
properties - - $ (8,703) - -
Net loss $ (406) $ (1,263) $(10,255) $ (2,468) $ (2,273)
Net loss per
Limited
Partnership Unit $ (0.20) $ (0.62) $ (5.07) $ (1.22) $ (1.12)
Cash distributions
per Limited
Partnership Unit $ 0.50 $ 0.50 - - $ 0.75
Total assets $ 49,736 $ 51,255 $ 53,572 $ 64,370 $ 66,169
Long-term debt $ 11,152 $ 11,356 $ 11,548 $ 12,148 $ 11,273
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.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
- --------------------------------------------------
The following discussion of financial condition includes forward-looking
statements which reflect management's current views with respect to future
events and financial performance of the Partnership. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified below under the heading "Certain Factors Affecting Future Operating
Results", which could cause actual results to differ materially from historical
results or those anticipated. The words "believe", "expect", "anticipate," and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which were made
based on facts and conditions as they existed as of the date of this report. The
Partnership undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Liquidity and Capital Resources
- -------------------------------
The Partnership offered 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. The Partnership also received
proceeds of $17,000,000 from the issuance of four zero coupon loans during the
initial acquisition period. 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, 1997, 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.
In light of the continued strength in the national real estate market with
respect to multi-family apartment properties and the recent improvements in the
office/R&D property markets, management believes that this may be the opportune
time to sell the Partnership's portfolio of properties. As a result, management
is currently focusing on potential disposition strategies for the remaining
investments in the Partnership's portfolio. Although there are no assurances, it
is currently contemplated that sales of the Partnership's remaining assets could
be completed within the next 2-to-3 years. The two multi-family apartment
properties in which the Partnership has an interest continue to experience
strong occupancy levels and increasing rental rates. As discussed further below,
the operations of the five commercial office and retail properties in the
Partnership's portfolio are either stable or improving. As a result of the
improvement in operations of the properties in the Partnership's portfolio,
particularly at Sunol Center, the Partnership increased the quarterly
distribution to $5.00 per original $1,000 investment, which is equivalent to a
2% annualized return. This increase was effective for the distribution paid on
May 15, 1997 for the quarter ended March 31, 1997.
Sunol Center, in Pleasanton, California, remained 100% leased to three
tenants throughout fiscal 1997. During the third quarter of fiscal 1997, the
property's largest tenant took occupancy of the final 12,000 square feet of its
leased space, representing the remaining vacant space at the property. This
tenant now occupies 61,621 square feet, or approximately 52% of the property's
net rentable area. During fiscal 1997, the Partnership funded approximately
$348,000 to the Sunol Center joint venture to pay for tenant improvements and
leasing commissions in connection with the final build-out of this major
tenant's space. Now that all the required capital work is completed, the Sunol
Center joint venture is not expected to require any further capital
contributions for the next several years. None of the current leases at Sunol
Center expire before October 2001. The overall market remains strong with
increasing rental rates and a low vacancy level of 2%. Selective development in
the area is continuing as a result of this low vacancy level. Four new
Pleasanton office projects, all owner/user developments or build-to-suits,
totalling 542,000 square feet commenced construction during the fourth quarter
of fiscal 1997. Two other major Pleasanton office/flex developments under
construction have pre-leased a significant amount of their space. The BART (Bay
Area Rapid Transit) station, which will serve the Hacienda Business Park in
which Sunol Center is located, opened ahead of schedule in early May 1997. The
existing rental rates on the leases at Sunol Center are significantly below
current market rates. Provided there is not a dramatic increase in either
planned speculative development or build-to-suit development with current
tenants in the local market, the Partnership can be expected to achieve a
materially higher sale price as the existing leases with below-market rental
rates approach their expiration dates. In the meantime, management will continue
to closely monitor all planned development activity in the market. Accordingly,
management plans to defer any sale efforts for the immediate future in order to
capture this expected increase in value.
The 64,000 square foot 1881 Worcester Road Office Building was 51% leased
as of March 31, 1997. As previously reported, a tenant which had occupied 49% of
the net leasable area moved out of the building during the second quarter of
fiscal 1997, although its lease obligation was scheduled to continue until
December 1998. During the third quarter, a settlement payment in the amount of
$100,000 was received from this tenant in return for a release from its
remaining lease obligation. The funds from this settlement will be used to pay
for leasing costs at the property. During the third quarter of fiscal 1997, a
lease expansion and extension agreement was signed with the building's sole
remaining tenant. This tenant, which agreed to extend its lease term from three
to six years, now occupies the entire second floor of this two-story building,
increasing its occupancy from 29% to 51% of the net rentable area. The market
for office space in the suburban Boston area in which 1881 Worcester Road is
located has continued to strengthen in recent months. Average vacancy levels at
similar buildings in the area have declined to approximately 5%. As a result,
very few large blocks of space are available. In addition, the property
management team has recently completed the renovation of the building's lobby,
and subsequent to year-end, a new leasing agent was retained to market the
vacant space at the property. The lobby renovations and the new leasing agent
appear to have stimulated leasing activity which has resulted in serious
discussions with two prospects that together would absorb all of the available
space at 1881 Worcester Road. Consequently, management is cautiously optimistic
that the leasing of the vacant first floor at 1881 Worcester Road, which
comprises over 31,000 square feet, will be successfully completed in the near
term.
The occupancy level at Warner/Red Hill decreased to 80% as of March 31,
1997, from its 83% level of one year earlier. The decline in occupancy occurred
because a tenant moved its operations to another location at the expiration of
its lease agreement in the fourth quarter of fiscal 1997. Subsequent to
year-end, a lease was executed with a new tenant to occupy 11,415 square feet,
or 12% or the property's rentable area. Leases with four tenants occupying a
total of 13,013 square feet are scheduled to expire over the next twelve months.
The largest of these tenants, which occupies 8,837 square feet, is expected to
renew its lease. Local rental rates for office space have experienced a modest
increase in recent months. This is the first positive sign of potentially
improving market conditions in the Tustin, California area in several years.
With the lack of speculative office construction in the local market, the
property's leasing team is cautiously optimistic that the general market
conditions will continue to improve in fiscal 1998.
625 North Michigan Avenue in Chicago, Illinois, was 84% leased at March
31, 1997, compared to 89% at the end of the prior year. This decrease is mainly
the result of the loss of a 15,639 square foot tenant which had occupied 5% of
the building's rentable area. This tenant vacated the property at the end of its
lease term to move to another building which was better able to accommodate the
tenant's need to expand and its desire to be on one floor. In addition, this
tenant's new space had been recently and expensively improved by a previous
tenant with a similar use. Although the building's current occupancy level
reflects the loss of a few larger tenants with recent lease expirations, the
local office market has been improving and its average occupancy level has risen
to 86%. As a result, management is cautiously optimistic that ongoing leasing
efforts will lead to improved occupancy at the property over the near term. In
fiscal 1998, eight tenants occupying a total of 15,053 square feet have leases
that will expire. The property's leasing team expects four of these tenants to
renew their leases. The modernization of the building's elevator controls is
currently underway, with work on two of the eight elevator cars now completed.
This work is expected to continue for the remainder of calendar year 1997 at an
estimated total cost of approximately $700,000.
As a result of several lease transactions at Crystal Tree Commerce Center
in North Palm Beach, Florida, the Center was 96% leased at March 31, 1997, an
increase from 92% at March 31, 1996. Ten new leases were signed during fiscal
1997 with tenants that moved into a total of 15,600 square feet of space. In
addition, seven leases covering 8,800 square feet were renewed during the year.
This leasing activity was partially offset by the loss of seven tenants that had
occupied 10,647 square feet and vacated the Center during fiscal 1997. During
fiscal 1998, leases with eleven tenants totalling 10,200 square feet are
scheduled to expire. Of these expiring leases, seven tenants are expected to
renew. Property improvements completed during the year included restriping the
parking lot, resurfacing the retail walkways, installing new awnings on the
fourth floor balconies in the office section of the property, installation of a
new air conditioning unit and repair and refurbishment of the courtyard
fountain.
The average occupancy level at Chandler's Reach Apartments in Redmond,
Washington, remained at 94% for the quarter ended March 31, 1997, unchanged from
the prior quarter. Conditions in the local market remain favorable as evidenced
by high occupancy levels that average 97%, minimal new construction and
increasing rental rates. For calendar year 1997, rental rates at Chandler's
Reach are targeted to increase by 7%. The use of concessions in the form of free
rent is no longer common in this market. Construction of Microsoft Corporation's
37-acre campus, which is located within two miles of Chandler's Reach, is
ongoing and is expected to add 2,500 employees to the area. The Redmond Town
Center Mall, also located within two miles of the property, is scheduled to open
in August of 1997. This new mall will consist of 400,000 square feet of retail
space, a 44-acre park and bike trails covering 120 acres. These nearby amenities
are expected to add to the appeal of Chandler's Reach Apartments. Capital
improvement plans at Chandler's Reach for the remainder of calendar 1997 include
the repainting of all of the building exteriors.
The average occupancy level at Monterra Apartments in La Jolla,
California, was 98% for the quarter ended March 31, 1997, compared to 99% for
the prior quarter. Rental rates were increased by 2% during the fourth quarter,
which is ahead of schedule to meet the 1997 budget of 7% for the calendar year.
The current occupancy level for competing properties averages 97%, and no new
construction is planned in the local market area. A major capital project to
repair and/or replace water-damaged stair towers and landings at the Monterra
Apartments is scheduled to be completed during fiscal 1998. The preliminary cost
estimate to complete this capital project is approximately $300,000.
At March 31, 1997, the Partnership and its consolidated joint venture had
available cash and cash equivalents of approximately $4,325,000. 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. The source of future liquidity and distributions to the partners is
expected to be from the sales or refinancing of the operating investment
properties. Such sources of liquidity are expected to be sufficient to meet the
Partnership's needs on both a short-term and long-term basis. 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
1997 Compared to 1996
- ---------------------
The Partnership's net loss decreased by $857,000 in fiscal 1997, when
compared to the prior year. This decrease in net loss is largely attributable to
a decrease in the Partnership's operating loss of $640,000. The Partnership's
operating loss, which includes the operating results of the wholly-owned Crystal
Tree Commerce Center and the consolidated Sunol Center joint venture, decreased
mainly due to an increase in rental income and decreases in general and
administrative expenses and property operating expenses. Rental income increased
by $433,000 as a result of an increase in occupancy at Sunol Center from an
average of 89% during fiscal 1996 to 100% for fiscal 1997. General and
administrative expenses decreased by $127,000 mainly due to a decrease in
certain required professional services. Property operating expenses decreased by
$126,000 as a result of declines in repairs and maintenance costs at the Crystal
Tree Commerce Center and certain administrative expenses at Sunol Center. The
increase in rental income and the decreases in general and administrative
expenses and property operating expenses were partially offset by increases in
depreciation charges and real estate tax expense in fiscal 1997. Depreciation
expense increased by $77,000 mainly due to the substantial tenant improvement
work which has occurred at the Sunol Center property over the past year as a
result of the leasing activity. Real estate tax expense increased by $54,000
primarily due to the receipt of a refund at Sunol Center during the prior year.
A decrease in the Partnership's share of unconsolidated ventures' losses
of $217,000 also contributed to the decline in net loss for fiscal 1997. The
improvement in the Partnership's share of unconsolidated ventures' operations is
primarily attributable to a decrease in the net losses of the Warner/Red Hill
and Monterra joint ventures. Net loss at Warner/Red Hill decreased by $113,000
for the current year mainly due to the receipt of a real estate tax refund and a
small increase in rental income. Net loss at Monterra decreased by $163,000 for
the current year largely due to an increase in rental income resulting from
rental rate increases implemented over the past year. The increase in the net
income of the Warner/Red Hill joint venture and the decrease in the net loss of
the Monterra joint venture were partially offset by small decreases in net
income at the 625 North Michigan and 1881 Worcester Road joint ventures. Net
income decreased by $33,000 at 625 North Michigan due to an increase in real
estate taxes. Net income decreased at 1881 Worcester Road by $56,000 mainly due
to the write-off of certain leasehold improvements and deferred leasing costs
resulting from former tenants vacating the property.
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 impairment losses recognized with
respect to the Warner/Red Hill and 1881 Worcester Road properties in fiscal
1995, as discussed further in the notes to the accompanying financial
statements. This favorable change in net loss was also 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 was 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. In addition, the venture's depreciation
expense decreased during fiscal 1996 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 fiscal 1996. 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 a $350,000
increase in depreciation expense. The favorable change in the Monterra joint
venture's net operating results was 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, 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 was 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 was 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 was 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
referred to above. Depreciation expense increased at Crystal Tree due to the
reassessment of the Partnership's depreciation policy. 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 Sunol Center
leasing costs. 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 impairment losses recognized with respect
to the Warner/Red Hill and 1881 Worcester Road properties in fiscal 1995, as
discussed further in the notes to the accompanying financial statements. 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.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
- --------------------------------------------------
The following factors could cause actual results to differ materially from
historical results or those anticipated:
Real Estate Investment Risks. Real property investments are subject to
varying degrees of risk. Revenues and property values may be adversely affected
by the general economic climate, the local economic climate and local real
estate conditions, including (i) the perceptions of prospective tenants of the
attractiveness of the property; (ii) the ability to retain qualified individuals
to provide adequate management and maintenance of the property; (iii) the
inability to collect rent due to bankruptcy or insolvency of tenants or
otherwise; and (iv) increased operating costs. Real estate values may also be
adversely affected by such factors as applicable laws, including tax laws,
interest rate levels and the availability of financing.
Effect of Uninsured Loss. The Partnership carries comprehensive liability,
fire, flood, extended coverage and rental loss insurance with respect to its
properties with insured limits and policy specifications that management
believes are customary for similar properties. There are, however, certain types
of losses (generally of a catastrophic nature such as wars, floods or
earthquakes) which may be either uninsurable, or, in management's judgment, not
economically insurable. Should an uninsured loss occur, the Partnership could
lose both its invested capital in and anticipated profits from the affected
property.
Possible Environmental Liabilities. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may become liable for the costs of the investigation,
removal and remediation of hazardous or toxic substances on, under, in or
migrating from such property. Such laws often impose liability without regard to
whether the owner or operator knew of, or was responsible for, the presence of
such hazardous or toxic substances.
The Partnership is not aware of any notification by any private party or
governmental authority of any non-compliance, liability or other claim in
connection with environmental conditions at any of its properties that it
believes will involve any expenditure which would be material to the
Partnership, nor is the Partnership aware of any environmental condition with
respect to any of its properties that it believes will involve any such material
expenditure. However, there can be no assurance that any non-compliance,
liability, claim or expenditure will not arise in the future.
Competition. The financial performance of the Partnership's remaining real
estate investments will be significantly impacted by the competition from
comparable properties in their local market areas. The occupancy levels and
rental rates achievable at the properties are largely a function of supply and
demand in the markets. In many markets across the country, development of new
multi-family properties has surged in the past 12 months. Existing apartment
properties in such markets have generally experienced increased vacancy levels,
declines in effective rental rates and, in some cases, declines in estimated
market values as a result of the increased competition. The commercial office
segment has begun to experience limited new development activity in selected
areas after several years of virtually no new supply being added to the market.
The retail segment of the real estate market is currently suffering from an
oversupply of space resulting from overbuilding in recent years and the trend of
consolidations and bankruptcies among retailers prompted by the generally flat
rate of growth in overall retail sales. There are no assurances that these
competitive pressures will not adversely affect the operations and/or market
values of the Partnership's investment properties in the future.
Impact of Joint Venture Structure. The ownership of certain of the remaining
investments through joint venture partnerships could adversely impact the timing
of the Partnership's planned dispositions of its remaining assets and the amount
of proceeds received from such dispositions. It is possible that the
Partnership's co-venture partners could have economic or business interests
which are inconsistent with those of the Partnership. Given the rights which
both parties have under the terms of the joint venture agreements, any conflict
between the partners could result in delays in completing a sale of the related
operating property and could lead to an impairment in the marketability of the
property to third parties for purposes of achieving the highest possible sale
price.
Availability of a Pool of Qualified Buyers. The availability of a pool of
qualified and interested buyers for the Partnership's remaining assets is
critical to the Partnership's ability to realize the estimated fair market
values of such properties at the time of their final dispositions. Demand by
buyers of multi-family apartment, office and retail properties is affected by
many factors, including the size, quality, age, condition and location of the
subject property, the quality and stability of the tenant roster, the terms of
any long-term leases, potential environmental liability concerns, the liquidity
in the debt and equity markets for asset acquisitions, the general level of
market interest rates and the general and local economic climates.
INFLATION
- ---------
The Partnership commenced operations in 1985 and completed its eleventh
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
---- ------ --- ---------
Bruce J. Rubin President and Director 37 8/22/96
Terrence E. Fancher Director 43 10/10/96
Walter V. Arnold Senior Vice President and
Chief Financial Officer 49 10/29/85
David F. Brooks First Vice President and
Assistant Treasurer 54 4/17/85 *
Timothy J. Medlock Vice President and Treasurer 36 6/1/88
Thomas W. Boland Vice President 34 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:
Bruce J. Rubin is President and Director of the Managing General
Partner. Mr. Rubin was named President and Chief Executive Officer of PWPI
in August 1996. Mr. Rubin joined PaineWebber Real Estate Investment Banking
in November 1995 as a Senior Vice President. Prior to joining PaineWebber,
Mr. Rubin was employed by Kidder, Peabody and served as President for KP
Realty Advisers, Inc. Prior to his association with Kidder, Mr. Rubin was a
Senior Vice President and Director of Direct Investments at Smith Barney
Shearson. Prior thereto, Mr. Rubin was a First Vice President and a real
estate workout specialist at Shearson Lehman Brothers. Prior to joining
Shearson Lehman Brothers in 1989, Mr. Rubin practiced law in the Real Estate
Group at Willkie Farr & Gallagher. Mr. Rubin is a graduate of Stanford
University and Stanford Law School.
<PAGE>
Terrence E. Fancher was appointed a Director of the Managing General
Partner in October 1996. Mr. Fancher is the Managing Director in charge of
PaineWebber's Real Estate Investment Banking Group. He joined PaineWebber as
a result of the firm's acquisition of Kidder, Peabody. Mr. Fancher is
responsible for the origination and execution of all of PaineWebber's REIT
transactions, advisory assignments for real estate clients and certain of the
firm's real estate debt and principal activities. He joined Kidder, Peabody
in 1985 and, beginning in 1989, was one of the senior executives responsible
for building Kidder, Peabody's real estate department. Mr. Fancher previously
worked for a major law firm in New York City. He has a J.D. from Harvard Law
School, an M.B.A. from Harvard Graduate School of Business Administration and
an A.B. from Harvard College.
Walter V. Arnold is a Senior Vice President and Chief Financial Officer of
the Managing General Partner and 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.
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, 1997, all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
Item 11. Executive Compensation
The directors and officers of the Partnership's Managing General Partner
receive no 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 and were increased to a
rate of 2% per annum on invested capital effective for the quarter ended March
31, 1997. 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.
<PAGE>
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, 1997. 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, 1997 is $179,000, 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 $9,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during fiscal 1997. Fees charged by Mitchell Hutchins
are based on a percentage of invested cash reserves which varies based on the
total amount of invested cash which Mitchell Hutchins manages on behalf of PWPI.
At March 31, 1997 accounts receivable - affiliates includes $100,000 due
from a certain unconsolidated joint venture for interest earned on a permanent
loan and $145,000 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, 1997 also includes $15,000 of expenses paid by the Partnership on
behalf of certain 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
1997.
(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/ Bruce J. Rubin
-------------------
Bruce J. Rubin
President and
Chief Executive Officer
By: /s/ Walter V. Arnold
-------------------
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
By: /s/ Thomas W. Boland
-------------------
Thomas W. Boland
Vice President
Dated: June 30, 1997
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/ Bruce J. Rubin Date: June 30, 1997
----------------------- -------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: June 30, 1997
----------------------- -------------
Terrence E. Fancher
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page Number in the Report
Exhibit No. Description of Document Or Other Reference
- ----------- ----------------------- ------------------
<S> <C> <C>
(3) and (4) Prospectus of the 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 registration to Section 13 or 15(d)of the
statements and amendments thereto Securities Act of 1934 and
of the registrant together with all incorporated herein by reference.
such 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
1997 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.
</TABLE>
<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, 1997 and 1996 F-4
Consolidated statements of operations for the years ended
March 31, 1997, 1996 and 1995 F-5
Consolidated statements of changes in partners' capital
(deficit) for the years ended March 31, 1997, 1996 and 1995 F-6
Consolidated statements of cash flows for the years ended
March 31, 1997, 1996 and 1995 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, 1996 and 1995 F-32
Combined statements of operations and changes in venturers'
capital for the years ended December 31, 1996, 1995 and 1994 F-33
Combined statements of cash flows for the years ended
December 31, 1996, 1995 and 1994 F-34
Notes to combined financial statements F-35
Schedule III - Real Estate and Accumulated Depreciation F-41
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, 1997 and 1996, and the
related consolidated statements of operations, changes in partners' capital
(deficit), and cash flows for each of the three years in the period ended March
31, 1997. Our audits also included the financial statement schedule listed in
the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits. The
financial statements of Warner/Red Hill Associates (an unconsolidated joint
venture) as of December 31, 1994 and for the year then ended 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 for the year ended December 31, 1994, it is based solely on
their report. In the consolidated financial statements, the Partnership's equity
in the net loss of Warner/Red Hill Associates is stated at $5,687,000 for the
year ended March 31, 1995.
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, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1997 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.
/S/ ERNST & YOUNG
-----------------
ERNST & YOUNG LLP
Boston, Massachusetts
June 20, 1997
<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, 1997 and 1996
(In thousands, except for per Unit data)
ASSETS
1997 1996
---- ----
Operating investment properties:
Land $ 3,962 $ 3,962
Building and improvements 28,322 27,771
--------- ---------
32,284 31,733
Less accumulated depreciation (10,823) (9,499)
--------- ---------
21,461 22,234
Investments in unconsolidated joint ventures 22,525 23,728
Cash and cash equivalents 4,325 4,042
Prepaid expenses 13 13
Accounts receivable, less allowance for
possible uncollectible amounts of $1
($89 in 1996) 139 81
Accounts receivable - affiliates 260 255
Deferred rent receivable 353 185
Deferred expenses, net 660 717
--------- ---------
$ 49,736 $ 51,255
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 474 $ 373
Interest payable 60 60
Bonds payable 1,503 1,576
Mortgage notes payable 9,649 9,780
--------- ---------
Total liabilities 11,686 11,789
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) 47 51
Cumulative cash distributions (998) (988)
Limited Partners ($50 per unit; 2,000,000
Units outstanding):
Capital contributions, net of offering costs 90,055 90,055
Cumulative net income (loss) (13,460) (13,058)
Cumulative cash distributions (37,782) (36,782)
Total partners' capital 37,863 39,279
--------- ---------
$ 49,736 $ 51,255
========= =========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 1997, 1996 and 1995
(In thousands, except for per Unit data)
1997 1996 1995
---- ---- ----
Revenues:
Rental income and expense reimbursements $ 2,882 $ 2,449 $ 1,836
Interest and other income 291 277 510
------- -------- --------
3,173 2,726 2,346
Expenses:
Interest expense 995 1,027 1,022
Depreciation expense 1,324 1,277 993
Property operating expenses 1,153 1,279 982
Real estate taxes 271 217 248
General and administrative 412 539 613
Amortization expense 117 87 75
Bad debt expense - 39 50
------- -------- --------
4,272 4,465 3,983
------- -------- --------
Operating loss (1,099) (1,739) (1,637)
Investment income:
Interest income on notes receivable
from unconsolidated ventures 800 800 800
Partnership's share of
unconsolidated ventures' losses (107) (324) (715)
Partnership's share of
losses due to impairment of
operating investment properties - - (8,703)
------- -------- --------
Net loss $ (406) $ (1,263) $(10,255)
======= ======== ========
Net loss per Limited Partnership Unit $ (0.20) $ (0.62) $ (5.07)
======= ======== ========
Cash distributions per Limited
Partnership Unit $ 0.50 $ 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, 1997, 1996 and 1995
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
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
Cash distributions (10) (1,000) (1,010)
Net loss (4) (402) (406)
-------- --------- -------
Balance at March 31, 1997 $ (950) $ 38,813 $37,863
======== ========= =======
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 1997, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (406) $ (1,263) $ (10,255)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Partnership's share of losses due to
impairment of operating investment properties - - 8,703
Partnership's share of unconsolidated ventures' losses 107 324 715
Depreciation and amortization 1,441 1,364 1,068
Amortization of deferred financing costs 20 20 10
Bad debt expense (21) 39 50
Interest expense - - 229
Changes in assets and liabilities:
Escrowed cash - - 144
Prepaid expenses - (1) (1)
Accounts receivable (37) (43) (72)
Accounts receivable - affiliates (5) (40) 154
Deferred rent receivable (168) (156) 17
Deferred expenses (80) (33) (169)
Accounts payable and accrued expenses 101 149 57
Interest payable - (1) -
------ -------- -------
Total adjustments 1,358 1,622 10,905
------ -------- -------
Net cash provided by operating activities 952 359 650
------ -------- -------
Cash flows from investing activities:
Additions to operating investment properties (551) (2,002) (95)
Payment of leasing commissions - (557) -
Distributions from unconsolidated joint venture 2,150 1,332 5,654
Additional investments in unconsolidated
joint ventures (1,054) (348) (5,183)
------- ------- -------
Net cash provided by (used in) investing
activities 545 (1,575) 376
------- ------- -------
Cash flows from financing activities:
Repayment of principal and deferred interest
on long-term debt (131) (120) (4,073)
Payments on district bond assessments (73) (72) (297)
District bond assessments - - 61
Distributions to partners (1,010) (1,010) -
Issuance of note payable - - 3,480
------ --------- --------
Net cash used in financing activities (1,214) (1,202) (829)
------ --------- --------
Net increase (decrease) in cash and cash equivalents 283 (2,418) 197
Cash and cash equivalents, beginning of year 4,042 6,460 6,263
------- -------- --------
Cash and cash equivalents, end of year $ 4,325 $ 4,042 $ 6,460
======= ======== ========
Cash paid during the year for interest $ 975 $ 1,008 $ 2,322
======= ======== ========
See accompanying notes.
</TABLE>
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE
LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of Operations
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. The
Partnership also received proceeds of $17,000,000 from the issuance of four
zero coupon loans during the initial acquisition period. 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, 1997, 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 is currently focusing on potential disposition strategies for
the investments in its portfolio. Although no assurances can be given, it is
currently contemplated that sales of the Partnership's remaining assets
could be completed within the next 2- to- 3 years.
2. Use of Estimates and Summary of Significant Accounting Policies
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles which 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, 1997 and 1996 and revenues
and expenses for each of the three years in the period ended March 31, 1997.
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 in the
ventures. 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.
The operating investment properties carried on the Partnership's
consolidated balance sheets are stated at cost, reduced by accumulated
depreciation, or an amount less than cost if indicators or impairment are
present in accordance with statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," which was adopted in fiscal 1995. SFAS
No. 121 requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the
assets carrying amount. The Partnership generally assesses indicators of
impairment by a review of independent appraisal reports on each operating
investment property. Such appraisals make use of a combination of certain
generally accepted valuation techniques, including direct capitalization,
discounted cash flows and comparable sales analysis. SFAS No. 121 also
addresses the accounting for long-lived assets that are expected to be
disposed of. 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
reassessed its depreciation policy and 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, 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."
The carrying amount of cash and cash equivalents approximates their fair
value as of March 31, 1997 and 1996 due to the short-term maturities of
these instruments. It is not practicable for management to estimate the fair
value of the 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 1996 and 1995 amounts have been reclassified to conform
to the fiscal 1997 presentation.
<PAGE>
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, 1997, 1996 and 1995 is $179,000, $203,000 and $210,000,
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 $9,000, $11,000 and $19,000 (included in general and
administrative expenses) for managing the Partnership's cash assets during
fiscal 1997, 1996 and 1995, respectively.
At March 31, 1997 and 1996, accounts receivable - affiliates includes
$100,000 and $117,000, respectively, due from two unconsolidated joint
ventures for interest earned on permanent loans and $145,000 and $123,000,
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, 1997 and 1996 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, 1997 and 1996, 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 96% occupied as of March 31, 1997, 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 remainder of the net proceeds were added to the Partnership's cash
reserves.
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, 1997, 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, 1997. The Partnership will continue to pursue
collection of this balance in fiscal 1998.
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.
<PAGE>
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, 1997, 1996 and 1995 (in thousands):
1997 1996 1995
---- ---- ----
Property operating expenses:
Repairs and maintenance $ 221 $ 299 $ 187
Utilities 202 170 132
Insurance 61 58 55
Administrative and other 641 726 582
Management fees 28 26 26
-------- ------- -------
$ 1,153 $ 1,279 $ 982
======== ======= =======
5. Investments in Unconsolidated Joint Ventures
As of March 31, 1997 and 1996, 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.
Condensed combined financial statements of the unconsolidated joint
ventures, for the periods indicated, are as follows:
Condensed Combined Balance Sheets
December 31, 1996 and 1995
(in thousands)
Assets
1996 1995
---- ----
Current assets $ 1,645 $ 1,752
Operating investment properties, net 55,760 57,677
Other assets 4,006 4,082
--------- --------
$ 61,411 $ 63,511
========= ========
Liabilities and Capital
Current liabilities $ 5,399 $ 5,207
Other liabilities 310 291
Long-term debt and notes payable to venturers 21,371 21,631
Partnership's share of combined capital 12,167 13,437
Co-venturers' share of combined capital 22,164 22,945
--------- --------
$ 61,411 $ 63,511
========= ========
<PAGE>
Condensed Combined Summary of Operation
For the years ended December 31, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
---- ---- ----
Revenues:
Rental income and expense recoveries $ 10,910 $10,691 $ 10,326
Interest and other income 361 246 262
-------- ------- --------
Total revenues 11,271 10,937 10,588
Expenses:
Property operating expenses 4,000 3,928 4,107
Real estate taxes 2,139 1,980 2,263
Mortgage interest expense 1,068 1,089 945
Interest expense payable to partner 800 800 800
Depreciation and amortization 3,163 3,180 3,127
Losses due to permanent impairment of
operating investment properties - - 9,767
-------- -------- --------
11,170 10,977 21,009
-------- -------- --------
Net income (loss) $ 101 $ (40) $(10,421)
======== ======== ========
Net loss:
Partnership's share of
combined net income (loss) $ (61) $ (278) $ (8,800)
Co-venturers' share of
combined net income (loss) 162 238 (1,621)
-------- -------- --------
$ 101 $ (40) $(10,421)
======== ======== ========
Reconciliation of Partnership's Investment
March 31, 1997 and 1996
(in thousands)
1997 1996
---- ----
Partnership's share of capital at
December 31, as shown above $ 12,167 $ 13,437
Excess basis due to investment in joint
ventures, net (1) 919 965
Partnership's share of ventures' current liabilities
and long-term debt 9,631 9,600
Timing differences due to distributions received
from and contributions sent to joint ventures
subsequent to December 31 (see Note 2) (192) (274)
-------- --------
Investments in unconsolidated joint ventures,
at equity at March 31 $ 22,525 $ 23,728
======== ========
(1) The Partnership's investments in joint ventures exceeds its share of the
combined joint ventures' capital accounts by approximately $919,000 and
$965,000 at March 31, 1997 and 1996, 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, 1997, 1996 and 1995
(in thousands)
1997 1996 1995
---- ---- ----
Partnership's share of combined net loss
as shown above $ (61) $ (278) $(8,800)
Amortization of excess basis (46) (46) (618)
-------- --------- -------
Partnership's share of unconsolidated
ventures' net loss $ (107) $ (324) $(9,418)
======== ========= =======
Partnership's share of unconsolidated ventures' net loss is presented
as follows in the accompanying statements of operations (in thousands):
1997 1996 1995
---- ---- ----
Partnership's share of unconsolidated
ventures' losses $ (107) $ (324) $ (715)
Partnership's share of losses due to
permanent impairment of
operating investment properties - - (8,703)
--------- --------- --------
$ (107) $ (324) $(9,418)
======== ========= =======
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
accompanying balance sheets at March 31, 1997 and 1996 is comprised of the
following equity method carrying values (in thousands):
1997 1996
---- ----
Investments in joint ventures, at equity:
Warner/Red Hill Associates $ (1,914) $ (1,541)
Crow PaineWebber LaJolla, Ltd. 1,973 2,198
Lake Sammamish Limited Partnership (921) (775)
Framingham 1881 - Associates 2,153 2,243
Chicago-625 Partnership 13,234 13,603
--------- --------
14,525 15,728
Notes receivable:
Crow PaineWebber LaJolla, Ltd. 4,000 4,000
Lake Sammamish Limited Partnership 4,000 4,000
--------- --------
8,000 8,000
--------- --------
$ 22,525 $ 23,728
========= ========
<PAGE>
Cash distributions received from the Partnership's unconsolidated joint
ventures for the years ended March 31, 1997, 1996 and 1995 are as follows
(in thousands):
1997 1996 1995
---- ---- ----
Warner/Red Hill Associates $ 604 $ 333 $ 713
Crow PaineWebber LaJolla, Ltd. 176 57 414
Lake Sammamish Limited Partnership 22 76 3,759
Framingham 1881 - Associates 200 70 -
Chicago - 625 Partnership 1,148 796 768
------- ------- -------
$ 2,150 $ 1,332 $ 5,654
======= ======= =======
For each of the years ended March 31, 1997, 1996 and 1995, 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 80% leased as
of March 31, 1997, 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. 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
December 31, 1996, the property is encumbered by a $5,350,000 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
$489,000 and $403,000 at December 31, 1996 and 1995, 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 1996. Such advances totalled $31,000,
of which $5,000 was classified as Default Loans. Unpaid accrued interest on
Notes to Partners totalled $828,000 and $657,000 at December 31, 1996 and
1995, 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 93% to
the Partnership and 7% to the co-venturer (including adjustments for Default
Loans). The cumulative unpaid preference return due the Partnership at
December 31, 1996 is $7,330,000, including accrued interest of $1,954,000.
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 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,
1997, 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 $4,987,000 at December 31, 1996.
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, 1997, 1996 and 1995.
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, 1997, 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, 1997, the
property was encumbered by a loan with a principal amount of $3,448,000 (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, 1996 is approximately $2,811,000.
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, 1997, 1996 and 1995.
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, which was 51% leased as of March 31, 1997, 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. 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, 1996. 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, 1996 was $4,371,000.
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 receives a management fee equal to the greater of $750
per month or the sum of 2% of the gross receipts from all triple net leases
and 3% of the gross receipts from all gross leases.
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 82% leased as of March 31, 1997, 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 had made Leasing Expense
Contributions totalling approximately $1,902,000 through December 31, 1996.
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 reassessed its depreciation policy
and 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 1997 and
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 $5,609,000 at December 31, 1996.
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 cancelable at the Partnership's option upon the occurrence of certain
events.
6. Mortgage Notes Payable
Mortgage notes payable on the Partnership's consolidated balance sheets
at March 31, 1997 and 1996 consist of the following (in thousands):
1997 1996
---- ----
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 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, 1997 and 1996. $ 6,279 $ 6,362
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 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, 1997
and 1996. 3,370 3,418
-------- --------
$ 9,649 $ 9,780
======== ========
The scheduled annual principal payments to retire notes payable are as
follows (in thousands):
1998 $ 143
1999 157
2000 6,150
2001 67
` 2002 3,132
-------
$ 9,649
=======
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.
The outstanding principal balance of the Warner/Red Hill loan totalled
$5,350,000 as of December 31, 1996. 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 liability for the bond
assessments would be transferred to the buyer. Therefore, the Sunol Center
joint venture would no longer be liable for the bond assessments.
Future scheduled principal payments on bond assessments are as follows
(in thousands):
Year ending December 31,
1997 $ 66
1998 73
1999 78
2000 84
` 2001 91
Thereafter 1,111
-------
$ 1,503
=======
<PAGE>
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
------
1997 $ 2,599
1998 2,582
1999 2,466
2000 2,269
2001 1,810
Thereafter 382
--------
$ 12,108
========
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
alleged 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 purported to be suing on behalf of all persons who
invested in PaineWebber Equity Partners One Limited Partnership, also
alleged 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 alleged
that PaineWebber, First Equity Partners, Inc. and PA1985 violated the
Racketeer Influenced and Corrupt Organizations Act ("RICO") and the federal
securities laws. The plaintiffs sought unspecified damages, including
reimbursement for all sums invested by them in the partnerships, as well as
disgorgement of all fees and other income derived by PaineWebber from the
limited partnerships. In addition, the plaintiffs also sought treble damages
under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with
the plaintiffs in the New York Limited Partnership Actions outlining the
terms under which the parties 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. On July 17, 1996, PaineWebber and the class plaintiffs
submitted a definitive settlement agreement which provides for the complete
resolution of the class action litigation, including releases in favor of
the Partnership and PWPI, and the allocation of the $125 million settlement
fund among investors in the various partnerships and REITs at issue in the
case. As part of the settlement, PaineWebber also agreed to provide class
members with certain financial guarantees relating to some of the
partnerships and REITs. The details of the settlement are described in a
notice mailed directly to class members at the direction of the court. A
final hearing on the fairness of the proposed settlement was held in
December 1996, and in March 1997 the court announced its final approval of
the settlement. The release of the $125 million of settlement proceeds has
not occurred to date pending the resolution of an appeal of the settlement
by two of the plaintiff class members. As part of the settlement agreement,
PaineWebber has agreed not to seek indemnification from the related
partnerships and real estate investment trusts at issue in the litigation
(including the Partnership) for any amounts that it is required to pay
under the settlement.
In 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 alleged, among other things,
that PaineWebber and its related entities committed fraud and
misrepresentation and breached fiduciary duties allegedly owed to the
plaintiffs by selling or promoting limited partnership investments that were
unsuitable for the plaintiffs and by overstating the benefits, understating
the risks and failing to state material facts concerning the investments.
The complaint sought compensatory damages of $15 million plus punitive
damages against PaineWebber. 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 plaintiffs' purchases of various limited partnership
interests, including those offered by the Partnership. The complaint was
very similar to the Abbate action described above and sought compensatory
damages of $3.4 million plus punitive damages against PaineWebber. In
September 1996, the court dismissed many of the plaintiffs' claims in both
the Abbate and Bandrowski actions as barred by applicable securities
arbitration regulations. Mediation with respect to the Abbate and Bandrowski
actions was held in December 1996. As a result of such mediation, a
settlement between PaineWebber and the plaintiffs was reached which provided
for the complete resolution of both actions. Final releases and dismissals
with regard to these actions were received subsequent to March 31, 1997.
Based on the settlement agreements discussed above covering all of the
outstanding unitholder litigation, and notwithstanding the appeal of the
class action settlement referred to above, management does not expect that
the resolution of these matters will have a material impact on the
Partnership's financial statements, taken as a whole
10. Subsequent Events
On May 15, 1997, the Partnership paid distributions to the Limited and
General Partners in the amounts of $500,000 and $5,000, respectively, for
the quarter ended March 31, 1997.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
March 31, 1997
(In thousands)
<CAPTION>
Cost
Capitalized Life on Which
Initial Cost to (Removed) Depreciation
Partnership/ Subsequent to Gross Amount at Which Carried at in Latest
Venture Acquisition End of Year Income
Buildings & Buildings & Buildings & Accumulated Date of Date Statement
Description Encumbrances Land Improvements Improvements Land Improvements Total Depreciation Construction Acquired is Computed
----------- ------------ ---- ------------- ------------ ---- ------------ ----- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shopping Center
North Palm Beach,
FL $ 3,370 $3,217 $15,598 $(1,947) $2,444 $14,424 $16,86 $ 5,849 1983 10/23/85 5-27 yrs.
Office Building
Pleasanton, CA 1,503 2,318 15,429 (2,331) 1,518 13,898 15,416 4,974 1985 8/15/86 30 years
------- ------ ------- -------- ------ ------- ------- -------
$ 4,873 $5,535 $31,027 $(4,278) $3,962 $28,322 $32,284 $10,823
======= ====== ======= ======= ====== ======= ======= =======
Notes
(A) The aggregate cost of real estate owned at December 31, 1996 for Federal income tax purposes is approximately $33,346,000.
(B) For financial reportingpurposes, 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:
1997 1996 1995
---- ---- ----
Balance at beginning of period $31,733 $29,731 $29,636
Increase due to additions 551 2,002 95
------- ------- -------
Balance at end of period $32,284 $31,733 $29,731
======= ======= =======
(E) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 9,499 $ 8,222 $ 7,229
Depreciation expense 1,324 1,277 993
------- ------- -------
Balance at end of period $10,823 $ 9,499 $ 8,222
======= ======= =======
</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, 1996 and 1995, 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, 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. We did not audit the financial statements of
Warner/Red Hill Associates as of December 31, 1994 and for the year then ended,
which statements reflect 9% of the combined revenues of the Combined Joint
Ventures of PaineWebber Equity Partners One Limited Partnership for the year
ended December 31, 1994. 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 for the year 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
combined 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, 1996 and
1995, and the combined results of their operations and their cash flows for each
of the three years in the period ended December 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.
/S/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Boston, Massachusetts
February 8, 1997
<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, 1996 and 1995
(In thousands)
ASSETS
1996 1995
---- ----
Current assets:
Cash and cash equivalents $ 828 $ 861
Accounts receivable, less allowance for
doubtful accounts of $321 ($321 in 1995) 813 888
Other current assets 4 3
--------- ---------
Total current assets 1,645 1,752
Operating investment properties:
Land 17,189 17,189
Building, improvements and equipment 63,513 63,578
-------- --------
80,702 80,767
Less accumulated depreciation (24,942) (23,090)
-------- --------
55,760 57,677
Escrowed cash 1,014 1,024
Long-term rents receivable 1,367 1,462
Due from partners 269 269
Deferred expenses, net of accumulated
amortization of $1,367 ($1,263 in 1995) 1,294 1,264
Other assets 62 63
-------- --------
$ 61,411 $ 63,511
======== ========
LIABILITIES AND VENTURERS' CAPITAL
Current liabilities:
Current portion of long-term debt $ 260 $ 246
Accounts payable and accrued liabilities 1,082 942
Accounts payable - affiliates 101 101
Real estate taxes payable 1,855 1,873
Distributions payable to venturers 1,970 1,938
Other current liabilities 131 107
-------- --------
Total current liabilities 5,399 5,207
Tenant security deposits 310 291
Notes payable to venturers 8,000 8,000
Long-term debt 13,371 13,631
Venturers' capital 34,331 36,382
-------- --------
$ 61,411 $ 63,511
======== ========
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, 1996, 1995 and 1994
(In thousands)
1996 1995 1994
---- ---- ----
Revenues:
Rental income and expense recoveries $ 10,910 $ 10,691 $ 10,326
Interest income 32 23 23
Other income 329 223 239
--------- -------- --------
11,271 10,937 10,588
Expenses:
Losses due to impairment
of operating investment properties - - 9,767
Depreciation expense 2,893 2,827 2,735
Real estate taxes 2,139 1,980 2,263
Interest expense 1,068 1,089 945
Interest expense payable to partner 800 800 800
Property operating expenses 1,151 1,203 1,114
Repairs and maintenance 1,201 1,178 1,160
Utilities 756 701 713
Management fees 450 440 433
Salaries and related expenses 368 333 300
Amortization expense 270 353 392
Insurance 74 72 69
Bad debt expense - 1 318
--------- -------- --------
Total expenses 11,170 10,977 21,009
--------- -------- --------
Net income (loss) 101 (40) (10,421)
Contributions from venturers 1,494 441 5,254
Distributions to venturers (3,646) (2,395) (6,814)
Venturers' capital, beginning of year 36,382 38,376 50,357
--------- -------- ---------
Venturers' capital, end of year $ 34,331 $ 36,382 $ 38,376
========= ======== =========
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, 1996, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 101 $ (40) $ (10,421)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Increase in deferred interest on long-term debt - - 468
Losses due to impairment
of operating investment properties - - 9,767
Depreciation and amortization 3,163 3,180 3,127
Amortization of deferred financing costs 43 40 16
Bad debts - 1 318
Changes in assets and liabilities:
Accounts receivable 75 141 93
Other current assets (1) - 1
Escrowed cash 10 43 (1,067)
Long-term rents receivable 95 - 335
Deferred expenses (312) (309) (226)
Other assets 1 14 (22)
Accounts payable and accrued liabilities 140 243 12
Accounts payable - affiliates - (136) (2)
Real estate taxes payable (18) (233) (180)
Other current liabilities 24 (45) 58
Tenant security deposits 20 77 12
------ ------- -------
Total adjustments 3,240 3,016 12,710
------ ------- -------
Net cash provided by operating activities 3,341 2,976 2,289
Cash flows from investing activities:
Additions to operating investment properties (976) (562) (1,256)
Purchase/sale of investment securities - - 730
----- -------- -------
Net cash used in investing activities (976) (562) (526)
----- -------- -------
Cash flows from financing activities:
Repayment of long-term debt and deferred interest (246) (234) (9,157)
Deferred financing costs - - (269)
Proceeds of new loans - - 8,520
Contributions from venturers 1,494 441 5,254
Distributions to venturers (3,646) (2,198) (6,601)
-------- ------- -------
Net cash used in financing activities (2,398) (1,991) (2,253)
-------- ------- --------
Net (decrease) increase in cash and cash equivalents (33) 423 (490)
Cash and cash equivalents, beginning of year 861 438 928
-------- ------- -------
Cash and cash equivalents, end of year $ 828 $ 861 $ 438
======== ======= =======
Cash paid during the year for interest $ 1,657 $ 1,670 $ 5,562
======== ======= =======
Write-off of fully depreciated building improvements $ 1,041 $ - $ 1,121
======= ======= =======
See accompanying notes.
</TABLE>
<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, 1996 and 1995 and
revenues and expenses for each of the three years in the period ended
December 31, 1996. 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 adopted SFAS 121 during 1996.
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 reassessed its
depreciation policy and 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):
1997 $ 5,647
1998 5,089
1999 4,239
2000 4,029
2001 2,140
Thereafter 2,734
----------
$ 23,878
==========
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 amounts of cash and cash equivalents and escrowed cash
approximate their respective fair values at December 31, 1996 and 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.
<PAGE>
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.
<PAGE>
4. Losses Due to Impairment Operating Investment Properties
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. 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. 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. 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, 1996 and 1995 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, 1996 and 1995 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, 1996 and 1995 also include a note
payable to PWEP1 from Crow PaineWebber LaJolla, Ltd. 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, 1996. As a result of the debt modifications discussed in Note
7, these notes are unsecured.
7. Mortgage Notes Payable
Mortgage notes payable at December 31, 1996 and 1995 consists of the
following (in thousands):
1996 1995
---- ----
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
and has a scheduled maturity date
of August 1, 2003. $ 5,350 $ 5,481
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 and
matures in September 2001. 4,783 4,849
<PAGE>
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 and
matures in September 2001 (see
discussion below). 3,498 3,547
------ ------
13,631 13,877
Less: current portion (260) (246)
------- -------
$13,371 $13,631
======= =======
The scheduled annual principal payments to retire notes payable are as
follows (in thousands):
1997 $ 260
1998 275
1999 291
2000 308
` 2001 327
Thereafter 12,170
-------
$13,631
=======
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 1994, PWEP1 reached an agreement with the lender of the
Warner/Red Hill loan regarding an extension and modification of the note
payable. The terms of the extension and modification agreement, which was
finalized in August 1994, provided 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, 1996 and
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, 1996 and 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
had 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, 1996, the aggregate
indebtedness of EP1 and its affiliated partnership which is secured by the
625 North Michigan Office Building was approximately $15,868,000. 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, 1996
(In thousands)
<CAPTION>
Costs
Capitalized Life on Which
(Removed) Depreciation
Initial Cost to Subsequent to Gross Amount at Which Carried at in Latest
Venture Acquisition End of Year Income
Buildings & Buildings & Buildings & Accumulated Date of Date Statement
Description Encumbrances Land Improvements Improvements Land Improvements Total Depreciation Construction Acquired is Computed
- ----------- ------------ ---- ------------ ------------ ---- ------------ ----- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED JOINT VENTURES:
Office
Building
Chicago, IL $15,868 $ 8,112 $35,683 $6,357 $ 8,112 $42,040 $ 50,152 $15,547 1968 12/16/86 5-17 yrs.
Office Building
Tustin, CA 5,350 3,124 9,126 (6,099) 1,428 4,723 6,151 2,844 1984 12/18/8 35yrs.
Apartment Complex
LaJolla, CA 4,783 4,615 7,219 657 4,615 7,876 12,491 2,794 1987 7/1/86 30yrs.
Apartment Complex
Redmond, WA 3,498 2,362 6,163 40 2,362 6,203 8,565 2,460 1987 10/1/86 5-27.5 yrs.
Office Building
Framingham, MA - 1,317 5,510 (3,484) 672 2,671 3,343 1,297 1987 12/12/86 5-40yrs.
------- ------- ----- ------ ----- ------- -------- -------
$29,499 $19,530 $63,701 $(2,529) $17,189 $63,513 $ 80,702 $24,942
======= ======= ======= ======= ======= ======= ======== =======
Notes
(A) The aggregate cost of real estate owned at December 31, 1996 for Federal income tax purposes is approximately $80,696,000.
(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:
1996 1995 1994
---- ---- ----
Balance at beginning of period $ 80,767 $ 80,205 $ 89,837
Increase due to additions 976 562 1,256
Write-offs due to disposals (1,041) - (1,121)
Write-offs due to permanent impairment (see Note 4) - - (9,767)
-------- -------- --------
Balance at end of period $ 80,702 $ 80,767 $ 80,205
======== ======== ========
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 23,090 $ 20,263 $ 18,649
Depreciation expense 2,893 2,827 2,735
Write-offs due to disposals (1,041) - (1,121)
-------- -------- --------
Balance at end of period $ 24,942 $ 23,090 $ 20,263
======== ======== ========
(E) Costs removed include write-offs due to impairment and disposals, as well as guaranty payments from co-venturers (see Note 3).
</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, 1997 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,325
<SECURITIES> 0
<RECEIVABLES> 400
<ALLOWANCES> 1
<INVENTORY> 0
<CURRENT-ASSETS> 4,737
<PP&E> 54,809
<DEPRECIATION> 10,823
<TOTAL-ASSETS> 49,736
<CURRENT-LIABILITIES> 534
<BONDS> 11,152
0
0
<COMMON> 0
<OTHER-SE> 37,863
<TOTAL-LIABILITY-AND-EQUITY> 49,736
<SALES> 0
<TOTAL-REVENUES> 3,973
<CGS> 0
<TOTAL-COSTS> 3,277
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 995
<INCOME-PRETAX> (406)
<INCOME-TAX> 0
<INCOME-CONTINUING> (406)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (406)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
