UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED MARCH 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______ to _______ .
Commission File Number: 0-14857
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Virginia 04-2866287
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------- ------------------------
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
1998 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-9
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-9
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-51
<PAGE>
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Partnership's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such a difference are discussed in Item 7 in the section entitled
"Certain Factors Affecting Future Operating Results" beginning on page II-8 of
this Form 10-K.
PART I
Item 1. Business
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, 1998, 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 Type of
Location Size of Interest 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
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, 1998, the Limited Partners had received cumulative cash
distributions totalling approximately $39,782,000, or $448 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 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 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 continued to recover during fiscal 1998 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, 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 1998 although
estimated market values in some markets appear 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 a significant increase in the funds available in the capital
markets for investment in real estate and by the lack of significant new
construction activity in the multi-family apartment market over most of this
period. Over the past two years, 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, 1998, 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 1998, along with
an average for the year, are presented below for each property:
Percent Occupied At
-------------------------------------------------
Fiscal
1998
6/30/97 9/30/97 12/31/97 3/31/98 Average
------- ------- -------- ------- -------
Crystal Tree 95% 96% 100% 100% 98%
Warner/Red Hill 97% 91% 86% 74% 87%
Monterra Apartments 97% 96% 96% 96% 96%
Sunol Center 100% 100% 100% 100% 100%
Chandler's Reach Apartments 94% 95% 95% 91% 94%
1881 Worcester Road 51% 100% 100% 100% 88%
625 North Michigan Avenue 87% 89% 89% 88% 88%
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 agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which provides for the complete resolution of the class action litigation,
including releases in favor of the Partnership and PWPI, and the allocation of
the $125 million settlement fund among investors in the various partnerships and
REITs at issue in the case. As part of the settlement, PaineWebber also agreed
to provide class members with certain financial guarantees relating to some of
the partnerships and REITs. The details of the settlement are described in a
notice mailed directly to class members at the direction of the court. A final
hearing on the fairness of the proposed settlement was held in December 1996,
and in March 1997 the court announced its final approval of the settlement. The
release of the $125 million of settlement proceeds had been delayed pending the
resolution of an appeal of the settlement agreement by two of the plaintiff
class members. In July 1997, the United States Court of Appeals for the Second
Circuit upheld the settlement over the objections of the two class members. As
part of the settlement agreement, PaineWebber 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 during fiscal 1998.
Based on the settlement agreements discussed above covering all of the
outstanding unitholder litigation, management believes that the resolution of
these matters will not have a material impact on the Partnership's financial
statements, taken as a whole.
The Partnership is not subject to any other material pending legal
proceedings.
Item 4 Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Security Holder Matters
At March 31, 1998 there were 7,627 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. Upon request, the Managing General
Partner will endeavor to assist a Unitholder desiring to transfer his Units and
may utilize the services of PWI in this regard. The price to be paid for the
Units will be subject to negotiation by the Unitholder. The Managing General
Partner will not redeem or repurchase Units.
The Partnership had a Distribution Reinvestment Plan designed to enable
Unitholders to have their distributions from the Partnership invested in
additional Units of the Partnership. The Distribution Reinvestment Plan was
discontinued during fiscal 1998. 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 1998.
Item 6. Selected Financial Data
PaineWebber Equity Partners One Limited Partnership
For the years ended March 31, 1998, 1997, 1997, 1996 and 1995
(in thousands, except for per Unit data)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Revenues $ 4,308 $ 3,173 $ 2,726 $ 2,346 $ 1,971
Operating loss $ (878) $ (1,099) $ (1,739) $ (1,637) $ (2,196)
Interest income
on notes
receivable from
unconsolidated
ventures $ 800 $ 800 $ 800 $ 800 $ 800
Partnership's share
of unconsolidated
ventures' losses $ (178) $ (107) $ (324) $ (715) $ (1,072)
Partnership's share
of losses due to
impairment
of operating
investment properties - - - $ (8,703) -
Net loss $ (256) $ (406) $ (1,263) $(10,255) $ (2,468)
Net loss per
Limited
Partnership Unit $ (0.13) $ (0.20) $ (0.62) $ (5.07) $ (1.22)
Cash distributions per
Limited Partnership
Unit $ 1.00 $ 0.50 $ 0.50 - -
Total assets $52,242 $ 49,736 $ 51,255 $ 53,572 $ 64,370
Long-term debt $16,140 $ 11,152 $ 11,356 $ 11,548 $ 12,148
The above selected financial data should be read in conjunction with the
consolidated financial statements and related notes appearing elsewhere in this
Annual Report.
The above net loss and cash distributions per Limited Partnership Unit
amounts are based upon the 2,000,000 Limited Partnership Units outstanding
during each year.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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, 1998, the Partnership retained an ownership interest
in seven operating investment properties, which consist of four office/R&D
complexes, two multi-family apartment complexes and one mixed-use retail/office
property. The Partnership does not have any commitments for additional
investments but may be called upon to fund its portion of operating deficits or
capital improvements of the joint ventures in accordance with the respective
joint venture agreements.
As previously reported, in light of the continued strength in the national
real estate market with respect to multi-family apartment properties and the
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, marketing efforts for the sale of the Chandler's Reach
and Monterra apartment properties commenced subsequent to year-end. The
operations of the five commercial office and retail properties in the
Partnership's portfolio are either stable or improving. As discussed further
below, management plans to market the Sunol Center and 1881 Worcester Road
properties for sale during the second half of calendar 1998. With regard to the
three remaining properties, management believes that higher net sale prices can
be achieved for the 625 North Michigan and Crystal Tree properties, and most
likely for the Warner/Red Hill Business Center, by holding these assets over the
near term while the local markets improve and space is re-leased at higher
effective rental rates. 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, effective for the
distribution paid on May 15, 1997 for the quarter ended March 31, 1997.
The occupancy level at the Chandler's Reach Apartments in Redmond,
Washington, averaged 94% for the year ended March 31, 1998, unchanged from
fiscal 1997. This healthy occupancy level is a direct result of continued strong
employment growth at the major area employers, Microsoft and Boeing. As a
result, the property's leasing team raised rental rates by a total of 10% during
calendar 1997. Rental rate increases totalling 7% are expected during calendar
1998. The Redmond Town Center Mall, located approximately two miles from the
property, opened during August 1997, and occupancy of the Mall had exceeded 90%
by March 31, 1998. This new mall consists of 400,000 square feet of retail
space, a 44-acre park and bike trails covering 120 acres. These nearby amenities
add to the appeal of the Chandler's Reach Apartments. Capital improvements
completed during fiscal 1998 included a water/sewer sub-metering project. This
sub-metering project is expected to lower the property owner's costs by passing
water/sewer expenses through to the tenants. Given the positive performance of
the Chandler's Reach property and the current strength of the national real
estate market for the sale of apartment properties, management intends to test
the market by exploring potential sale opportunities for Chandler's Reach during
fiscal 1999. During the fourth quarter of fiscal 1998, the Partnership and its
co-venture partner held extensive discussions concerning marketing strategies
and requested broker proposals from national real estate firms with a strong
background in selling properties like Chandler's Reach. The Partnership and its
co-venture partner reviewed proposals from the broker finalist candidates and
completed interviews with them. Subsequent to year-end, the Partnership and its
co-venture partner selected a national brokerage firm that is a leading seller
of apartment properties in the Seattle area. A marketing package has been
prepared, and comprehensive sales efforts began in late May 1998.
The occupancy level at the Monterra Apartments in La Jolla, California,
averaged 96% for the year ended March 31, 1998, down slightly from the average
of 98% achieved during fiscal 1997. The property's occupancy level is consistent
with competitive properties within the local market. The local apartment rental
market is strong, and Monterra's leasing team continues to raise the rental
rates on leases being signed by new tenants. Rental rates for new leases were
raised by a total of 7% during calendar year 1997. Rental rate increases
totalling 10% are expected during calendar 1998. A 1,250 unit apartment project
is beginning construction on one of the few land parcels available in the local
market and is expected to be completed in phases over the next three years.
Monterra will not compete directly with this property, which is expected to have
the highest rental rates in the market. A capital project to repair and replace
water-damaged stair towers and landings at the Monterra property was completed
during the fourth quarter of fiscal 1998. The Partnership and its co-venture
partner have been exploring potential opportunities for the sale of the Monterra
Apartments. As part of that plan, the Partnership initiated discussions during
the fourth quarter with national real estate brokerage firms with a strong
background in selling apartment properties. The Partnership solicited marketing
proposals from several of these firms. Subsequent to year-end, after reviewing
their respective proposals and conducting interviews, the Partnership and its
co-venture partner selected a national brokerage firm. Sales materials have been
prepared, and an extensive marketing campaign began in late May 1998.
Sunol Center in Pleasanton, California, remained 100% leased to three
tenants throughout fiscal 1998. The BART (Bay Area Rapid Transit) station which
serves the Hacienda Business Park in which Sunol Center is located, opened ahead
of schedule in early May 1997. 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. Selective development in the area is continuing
as a result of this low vacancy level. Construction of two new Pleasanton
build-to-suit office developments, totalling 410,000 square feet, was completed
during the fourth quarter of fiscal 1998. Two other office projects totalling
435,000 square feet are under construction in this market. One of these
properties is 100% pre-leased and the other is 95% pre-leased. In addition,
Peoplesoft Corporation, a major employer in the local market, purchased 17 acres
in Hacienda Business Park and has begun construction of an owner/user campus
totalling 350,000 square feet. The project is expected to be completed within
the next several months. 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 would be expected to
achieve a materially higher sale price for the Sunol Center property as the
existing leases with below-market rental rates approach their expiration dates.
The Partnership had been planning to hold the Sunol Center property over the
near term in order to capture this expected increase in value. However, during
the third quarter of fiscal 1998 management learned that the largest tenant at
Sunol Center, which occupies 52% of the property's leasable area, is considering
vacating in order to consolidate its operations at another building in the local
market and is interested in negotiating an early termination of their lease
agreement. This potential lease termination may provide the Partnership with an
opportunity to capture the expected increase in the value of Sunol Center sooner
than had been anticipated. Lease termination negotiations commenced with this
tenant subsequent to year-end. In light of this situation, and given the current
strength of the local market conditions, management is currently reviewing the
Pleasanton office market and has interviewed potential real estate brokers in
preparation for a possible marketing effort during the second half of calendar
1998.
The 64,000 square foot 1881 Worcester Road Office Building was 100% leased
for the last three quarters of fiscal 1998. As previously reported, a tenant
which had occupied 19% 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 of fiscal 1997, a
settlement payment in the amount of $100,000 was received from this tenant in
return for a release from its remaining lease obligation. Also, 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, currently occupies the entire second
floor of this two-story building. During August 1997, a new tenant signed a
lease for the entire first floor, comprising 31,400 square feet. Construction of
the improvements to this space was completed during the third quarter of fiscal
1998, and the tenant took occupancy in December 1997. With the property 100%
leased to two financially strong tenants and no lease expirations until 2002,
management had been developing potential sale strategies for this asset.
However, subsequent to year-end the tenant leasing the entire second floor of
the property informed the Partnership that it is consolidating its operations
and requested a lease termination which would be effective in the third quarter
of calendar year 1998. This tenant's lease does not expire until February 28,
2003. Negotiations with this tenant concerning a lease termination agreement are
currently underway. If a lease termination agreement with this tenant is
reached, the property's leasing team expects to re-lease this space at a
significantly higher rental rate, which could result in a higher sale price for
the property. Also during fiscal 1998, the former operator of a gas station
abutting the 1881 Worcester Road property notified the Partnership of a leak in
an underground storage tank on the gas station property and of the risk of
potential contamination of the Partnership's property. Subsequent to this
notification, the Partnership has received an indemnification from the former
operator of the gas station against any loss, cost or damage resulting from
failure to remediate the contamination. The extent of the contamination and any
resulting impact on the future operations and market value of the 1881 Worcester
Road property cannot be determined at the present time. Nonetheless, management
believes that the uncertainty regarding the lease termination request and the
contamination issue could depress the sale price for the property. As a result,
the marketing efforts for this property have been delayed. After the re-leasing
of the second floor and resolution of the potential ground water contamination
issue, this property is expected to be marketed for sale later in calendar year
1998.
The 625 North Michigan Office Building in Chicago, Illinois, was 88% leased
on average for the year ended March 31, 1998, up slightly from the average of
87% achieved for fiscal 1997. As previously reported, the property's leasing
team had been negotiating a lease with a prospective new tenant which would
occupy approximately 22,000 square feet of space. Subsequent to year-end, a
lease was signed with this prospective tenant for 24,276 square feet. The space
is now being renovated in preparation for the tenant's expected occupancy in
September 1998. Once this tenant moves into the building, the property's
occupancy level will increase by 7%. Over the next year, ten leases representing
a total of 22,024 square feet will expire. The property's leasing team expects
that eight of these tenants occupying a total of 17,262 square feet will renew,
and that the remaining space will be leased to new tenants. The downtown Chicago
real estate market continues to display an improving trend. A competitive office
property within the local market has recently obtained approvals to convert its
lower floors into a hotel. This should result in the removal of 290,000 square
feet of office space from the market. In addition, an office tenant at that
property has recently completed a 62,000 square foot expansion, which brings the
occupancy level in the building's office portion to 100%. In this local market,
where there is no current or planned new construction of office space, this
reduction in vacant office space has resulted in a reduction in the market
vacancy level at March 31, 1998 to 12% and places more upward pressure on rental
rates. The higher effective rents currently being achieved at 625 North Michigan
are expected to increase cash flow and value as new tenants sign leases and
existing tenants sign lease renewals in calendar year 1998. Retail and hotel
development in the local market continues, as evidenced by plans for a
Nordstrom's-anchored 95,000 square foot retail development which recently
received preliminary approval from the city. This proposed development, which
will be located two blocks from 625 North Michigan, is part of a master plan
that includes several new hotels, entertainment and parking facilities
encompassing five city blocks. Management continues to analyze a potential
project for the property which includes an upgrade to the building lobby and the
addition of a major retail component to the building's North Michigan Avenue
frontage. Rental rates paid by high-end retailers on North Michigan Avenue are
substantially greater than those paid by office tenants. While the costs of such
a project would be substantial, it could have a significant positive effect on
the market value of the 625 North Michigan property. A comprehensive
cost-benefit analysis of this potential project is expected to be completed over
the next several months.
The Crystal Tree Commerce Center in North Palm Beach, Florida was 98%
leased on average for the year ended March 31, 1998, a 3% increase from the
prior year. During the next twelve months, leases for twelve tenants occupying
14,048 square feet will expire. All twelve of these tenants are expected to
renew their leases. Rental rates and occupancy levels in the local market are
continuing to increase gradually. However, rents are not expected to rise to a
level over the near term that would justify new construction. Management is
continuing to position Crystal Tree Commerce Center for a future sale by having
the property's management and leasing team negotiate rental rates for new leases
on a triple-net basis. This requires each tenant to be 100% responsible for its
share of operating expenses. Currently, 52% of the leases at the property are on
a triple-net basis. Consequently, at this time the property owner is responsible
for the tenant's portion of operating expenses above a base amount for a total
of 48% of the leases. By the year 2000, the leasing plan for Crystal Tree calls
for 84% of the leases to have been converted to a triple-net basis. Because most
new leases in the local market are on a triple-net basis, this conversion is
expected to increase interest from prospective buyers and result in a higher
sale price for the Crystal Tree property.
The Warner/Red Hill Business Center had an average leased level of 87% for
the year ended March 31, 1998, up from 83% for the prior year. However, during
the fourth quarter of fiscal 1998, a tenant occupying 13,160 square feet
declared bankruptcy and moved from the building, reducing the occupancy level to
74% as of year-end. Subsequent to year-end, the property's leasing team
completed negotiations with a prospective tenant which will occupy this entire
13,160 square foot space. Over the next 12 months, leases with five tenants
occupying 27,863 square feet will expire. The property's leasing team expects
that four of these tenants occupying 26,396 square feet will renew at higher
rental rates and that the remaining space will be leased to new tenants. Local
rental rates for office space in Warner/Red Hill's local sub-market continue to
experience modest increases due to the lack of speculative office construction
and the continued demand for office space. The property's leasing team is
cautiously optimistic that the general market conditions will continue to
improve throughout fiscal 1999. Effective August 1, 1997, the co-venture partner
in Warner/Red Hill Associates assigned its interest in the joint venture to
First Equity Partners, Inc., the Managing General Partner of the Partnership, in
return for a release from any further obligations under the terms of the joint
venture agreement. As a result, the Partnership has assumed control of the
operations of the Warner/Red Hill joint venture. Accordingly, the venture is
presented on a consolidated basis in the Partnership's financial statements
beginning in fiscal 1998. Prior to fiscal 1998, the venture was accounted for on
the equity method.
At March 31, 1998, the Partnership and its consolidated joint venture had
available cash and cash equivalents of approximately $3,268,000. 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.
As noted above, the Partnership expects to be liquidated within the next
2- to -3 years. Notwithstanding this, the Partnership believes that it has made
all necessary modifications to its existing systems to make them year 2000
compliant and does not expect that additional costs associated with year 2000
compliance, if any, will be material to the Partnership's results of operations
or financial position.
Results of Operations
1998 Compared to 1997
- ---------------------
The Partnership's net loss decreased by $150,000 in fiscal 1998, when
compared to the prior year. This decrease in net loss was due to a $221,000
decrease in the Partnership's operating loss, which was partially offset by a
$71,000 increase in the Partnership's share of unconsolidated ventures' losses.
The Partnership's operating loss, which includes the operating results of the
wholly-owned Crystal Tree Commerce Center, the consolidated Sunol Center joint
venture and, beginning in fiscal 1998, the consolidated Warner/Red Hill joint
venture, decreased largely due to increases in rental income at Sunol Center and
Crystal Tree of $137,000 and $99,000, respectively, due to increases in the
average occupancy levels at both properties. In addition, the Warner/Red Hill
joint venture had net income of $55,000 for the current year. As noted above,
Warner/Red Hill's operating results were accounted for under the equity method
during fiscal 1997. The increases in rental income at Sunol Center and Crystal
Tree and the net income at Warner/Red Hill were partially offset by an increase
in general and administrative expenses of $70,000. General and administrative
expenses increased primarily due to increases in certain professional fees and
administrative costs related to the pursuit of management's disposition
strategies, as discussed further above.
The Partnership's share of unconsolidated ventures' losses increased by
$71,000 largely due to unfavorable changes in the net operating results of the
1881 Worcester Road and 625 North Michigan joint ventures. An unfavorable change
of $112,000 in the Partnership's share of the net operating results of the 1881
Worcester Road joint venture was mainly due to a $150,000 decrease in rental
revenue. Rental revenue decreased primarily due to a $100,000 termination fee
received from a tenant that vacated prior to its lease expiration in the prior
year. The unfavorable change in net operating results at 625 North Michigan was
primarily due to a $149,000 increase in repairs and maintenance expenses and a
$147,000 increase in real estate taxes in the current year. Repairs and
maintenance costs increased mainly due to the modernization of the building's
elevator controls. The unfavorable changes in net operating results of the 1881
Worcester Road and 625 North Michigan joint ventures were partially offset by a
favorable change of $35,000 in the net operating results of the Monterra joint
venture. The favorable change in the net operating results of the Monterra joint
venture was mainly due to an increase in average rental rates during the current
year as a result of the strong local apartment market, as discussed further
above. The resulting increase in rental revenues at Monterra was partially
offset by an increase in the venture's repairs and maintenance expenses as a
result of certain projects completed to prepare the property for a potential
sale transaction. At the Chandler's Reach joint venture, a substantial increase
in rental income was offset by the costs of certain maintenance projects
completed during the current year, the most significant of which was the
painting of the building exteriors.
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 was 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 occurred at Sunol Center during fiscal 1997 as a result of the
leasing activity at the property. Real estate tax expense increased by $54,000
primarily due to the receipt of a refund at Sunol Center during fiscal 1996.
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
was 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 during fiscal 1997 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 during fiscal 1997 largely due to an increase in rental income
resulting from rental rate increases. 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 at
the property. 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.
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. As discussed
further above, during fiscal 1998 the Partnership became aware of the
possibility of contamination at the 1881 Worcester Road property resulting from
a leak in an underground storage tank at an adjacent gas station. The
Partnership has received an indemnification from the former operator of the gas
station against any loss, cost or damage resulting from a failure to remediate
the contamination. There are no assurances, however, that the stigma associated
with any known environmental problems will not restrict the marketability of
this property over the near term, particularly in light of the Partnership's
plan to liquidate its remaining investments over the next 2- to-3 years.
Competition. The financial performance of the Partnership's remaining real
estate investments will be significantly impacted by the competition from
comparable properties in their local market areas. The occupancy levels and
rental rates achievable at the properties are largely a function of supply and
demand in the markets. In many markets across the country, development of new
multi-family properties has increased significantly over the past two years.
Existing apartment properties in such markets could be expected to experience
increased vacancy levels, declines in effective rental rates and, in some cases,
declines in estimated market values as a result of the increased competition.
The 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 in many markets resulting from
overbuilding in recent years and the trend of consolidations and bankruptcies
among retailers prompted by the generally flat rate of growth in overall retail
sales. There are no assurances that these competitive pressures will not
adversely affect the operations and/or market values of the Partnership's
investment properties in the future.
Impact of Joint Venture Structure. The ownership of 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, the existing debt structure, 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 twelfth
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
and 625 North Michigan 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 39 8/22/96
Terrence E. Fancher Director 45 10/10/96
Walter V. Arnold Senior Vice President and
Chief Financial Officer 50 10/29/85
David F. Brooks First Vice President and
Assistant Treasurer 56 4/17/85*
Timothy J. Medlock Vice President and Treasurer 37 6/1/88
Thomas W. Boland Vice President 35 12/1/91
* The date of incorporation of the Managing General Partner.
(c) There are no other significant employees in addition to the directors
and executive officers mentioned above.
(d) There is no family relationship among any of the foregoing directors
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.
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 and Controller of the Managing
General Partner and a Vice President and Controller of the Adviser which he
joined in 1988. From 1984 to 1987, Mr. Boland was associated with Arthur
Young & Company. Mr. Boland is a Certified Public Accountant licensed in the
state of Massachusetts. He holds a B.S. in Accounting from Merrimack College
and an M.B.A. from Boston University.
(f) None of the directors and officers 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, 1998, 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.
Effective for the quarter ended December 31, 1992, distributions to the
Limited Partners 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.
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, 1998 is $181,000, 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 $14,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during fiscal 1998. 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, 1998 accounts receivable - affiliates includes $126,000 due
from a certain unconsolidated joint venture for interest earned on a permanent
loan and $167,000 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, 1998 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
1998.
(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 and Controller
Dated: June 26, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Partnership and
in the capacities and on the dates indicated.
By:/s/ Bruce J. Rubin Date: June 26, 1998
--------------------------- -------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: June 26, 1998
--------------------------- -------------
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
dated July 18, 1985, as pursuant to Rule 424(c) and
supplemented, with particular incorporated herein by reference.
reference to the Amended and
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 incorporated herein by reference.
all 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
1998 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 1 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
<TABLE>
<CAPTION>
Reference
---------
<S> <C>
PaineWebber Equity Partners One Limited Partnership:
Report of independent auditors F-3
Consolidated balance sheets as of March 31, 1998 and 1997 F-4
Consolidated statements of operations for the years ended March 31, 1998,
1997 and 1996 F-5
Consolidated statements of changes in partners' capital (deficit) for the
years ended March 31, 1998, 1997 and 1996 F-6
Consolidated statements of cash flows for the years ended March 31, 1998,
1997 and 1996 F-7
Notes to consolidated financial statements F-8
Schedule III - Real Estate and Accumulated Depreciation F-28
1997 Combined Joint Ventures of PaineWebber Equity Partners One Limited Partnership:
Report of independent auditors F-29
Combined balance sheet as of December 31, 1997 F-30
Combined statement of operations and changes in venturers' capital for the
year ended December 31, 1997 F-31
Combined statement of cash flows for the year ended December 31, 1997 F-32
Notes to combined financial statements F-33
Schedule III - Real Estate and Accumulated Depreciation F-38
1996 and 1995 Combined Joint Ventures of PaineWebber Equity Partners One Limited Partnership:
Reports of independent auditors F-40
Combined balance sheets as of December 31, 1997 and 1996 F-42
Combined statements of operations and changes in venturers' capital for
the years ended December 31, 1997, 1996 and 1995 F-43
<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
---------
<S> <C>
Combined statements of cash flows for the years ended December 31, 1997,
1996 and 1995 F-44
Notes to combined financial statements F-45
Schedule III - Real Estate and Accumulated Depreciation F-51
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.
</TABLE>
<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, 1998 and
1997, 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, 1998. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
PaineWebber Equity Partners One Limited Partnership at March 31, 1998 and 1997,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended March 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/S/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Boston, Massachusetts
June 12, 1998
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE
LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and 1997
(In thousands, except for per Unit data)
ASSETS
1998 1997
---- ----
Operating investment properties:
Land $ 5,218 $ 3,962
Building and improvements 32,691 28,322
----------- -----------
37,909 32,284
Less accumulated depreciation (15,131) (10,823)
----------- ----------
22,778 21,461
Investments in and notes receivable
from unconsolidated joint ventures,
at equity 24,369 22,525
Cash and cash equivalents 3,268 4,325
Prepaid expenses 13 13
Accounts receivable 69 139
Accounts receivable - affiliates 308 260
Deferred rent receivable 415 353
Deferred expenses, net 732 660
Other assets 290 -
----------- -----------
$ 52,242 $ 49,736
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Net advances from consolidated ventures $ 32 $ -
Accounts payable and accrued expenses 412 474
Interest payable 71 60
Bonds payable 1,420 1,503
Mortgage notes payable 14,720 9,649
----------- -----------
Total liabilities 16,655 11,686
Co-venturer's share of net assets of
consolidated joint venture - 187
Partners' capital:
General Partners:
Capital contributions 1 1
Cumulative net income (loss) 44 47
Cumulative cash distributions (1,018) (998)
Limited Partners ($50 per unit; 2,000,000
Units outstanding):
Capital contributions, net of offering costs 90,055 90,055
Cumulative net income (loss) (13,713) (13,460)
Cumulative cash distributions (39,782) (37,782)
----------- -----------
Total partners' capital 35,587 37,863
----------- -----------
$ 52,242 $ 49,736
=========== ===========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 1998, 1997 and 1996
(In thousands, except for per Unit data)
1998 1997 1996
---- ---- ----
Revenues:
Rental income and expense
reimbursements $ 4,000 $ 2,882 $ 2,449
Interest and other income 308 291 277
--------- ---------- ----------
4,308 3,173 2,726
Expenses:
Interest expense 1,137 995 1,027
Depreciation expense 1,464 1,324 1,277
Property operating expenses 1,593 1,153 1,279
Real estate taxes 351 271 217
General and administrative 482 412 539
Amortization expense 143 117 87
Bad debt expense 16 - 39
--------- ---------- ----------
5,186 4,272 4,465
--------- ---------- ----------
Operating loss (878) (1,099) (1,739)
Investment income:
Interest income on notes receivable
from unconsolidated ventures 800 800 800
Partnership's share of
unconsolidated ventures' losses (178) (107) (324)
--------- ---------- ----------
Net loss $ (256) $ (406) $ (1,263)
========= ========== =========
Net loss per Limited Partnership Unit $(0.13) $ (0.20) $ (0.62)
====== ======= =======
Cash distributions per Limited
Partnership Unit $ 1.00 $ 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, 1998, 1997 and 1996
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
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
Cash distributions (20) (2,000) (2,020)
Net loss (3) (253) (256)
------- ------- -------
Balance at March 31, 1998 $ (973) $ 36,560 $35,587
======= ======== =======
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 1998, 1997 and 1996
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (256) $ (406) $ (1,263)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Partnership's share of unconsolidated ventures' losses 178 107 324
Depreciation and amortization 1,607 1,441 1,364
Amortization of deferred financing costs 23 20 20
Bad debt expense 16 (21) 39
Changes in assets and liabilities:
Prepaid expenses - - (1)
Accounts receivable 54 (37) (43)
Accounts receivable - affiliates (48) (5) (40)
Deferred rent receivable 91 (168) (156)
Deferred expenses - (80) (33)
Accounts payable and accrued expenses (138) 101 149
Interest payable (2) - (1)
Net advances from consolidated ventures (41) - -
--------- -------- ---------
Total adjustments 1,740 1,358 1,622
--------- -------- ---------
Net cash provided by operating activities 1,484 952 359
--------- -------- ---------
Cash flows from investing activities:
Additions to operating investment properties (216) (551) (2,002)
Payment of leasing commissions (128) - (557)
Distributions from unconsolidated joint ventures 1,052 2,150 1,332
Additional investments in unconsolidated
joint ventures (1,160) (1,054) (348)
--------- -------- ---------
Net cash (used in) provided by investing activities (452) 545 (1,575)
--------- -------- ---------
Cash flows from financing activities:
Repayment of principal
on long-term debt (278) (131) (120)
Payments on district bond assessments (83) (73) (72)
Distributions to partners (2,020) (1,010) (1,010)
--------- -------- ---------
Net cash used in financing activities (2,381) (1,214) (1,202)
--------- -------- ---------
Net (decrease) increase in cash and cash equivalents (1,349) 283 (2,418)
Cash and cash equivalents, beginning of year 4,325 4,042 6,460
Cash and cash equivalents, Warner/Red Hill,
beginning of year 292 - -
--------- -------- ---------
Cash and cash equivalents, end of year $ 3,268 $ 4,325 $ 4,042
========= ======== =========
Cash paid during the year for interest $ 1,116 $ 975 $ 1,008
========= ======== =========
</TABLE>
See accompanying notes.
<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, 1998, 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, 1998 and 1997 and revenues and expenses for each
of the three years in the period ended March 31, 1998. 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.
Effective August 1, 1997, the co-venture partner in Warner/Red Hill Associates
assigned its interest in the joint venture to First Equity Partners, Inc., the
Managing General Partner of the Partnership, in return for a release from any
further obligations under the terms of the joint venture agreement. As a result,
the Partnership has assumed control of the operations of the Warner/Red Hill
joint venture. Accordingly, the venture is presented on a consolidated basis in
the Partnership's financial statements beginning in fiscal 1998. Prior to fiscal
1998, the venture was accounted for on the equity method (see Note 5). As
discussed above, the Sunol Center and Warner/Red Hill joint ventures both have a
December 31 year-end and operations of the ventures continue to be reported on a
three-month lag. All material transactions between the Partnership and its
consolidated joint ventures, 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 ventures.
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 the estimated useful lives of the operating
investment properties, generally five years for furniture and fixtures and
thirty years for the buildings. 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 was also recorded in fiscal
1997 and 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, which
approximates the effective interest method, 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, 1998 and
1997 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 (see Note 6). 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 (see Note 5).
Certain fiscal 1997 and 1996 amounts have been reclassified to conform to
the fiscal 1998 presentation.
3. The Partnership Agreement and Related Party Transactions
- ------------------------------------------------------------
The General Partners of the Partnership are First Equity Partners, Inc.
(the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group
Inc. ("PaineWebber") and Properties Associates 1985, L.P. (the "Associate
General Partner"), a Virginia limited partnership, certain limited partners of
which are also officers of PaineWebber Properties Incorporated ("PWPI") and the
Managing General Partner. Subject to the Managing General Partner's overall
authority, the business of the Partnership is managed by PWPI pursuant to an
advisory and asset management contract. PWPI is a wholly-owned subsidiary of
PaineWebber. The General Partners and PWPI receive fees and compensation,
determined on an agreed-upon basis, in consideration of various services
performed in connection with the sale of the Units, the management of the
Partnership and the acquisition, management, financing and disposition of
Partnership investments.
All distributable cash, as defined, for each fiscal year shall be
distributed quarterly in the ratio of 99% to the Limited Partners and 1% to the
General Partners until the Limited Partners have received an amount equal to a
6% noncumulative annual return on their adjusted capital contributions. The
General Partners and PWPI will then receive distributions until they have
received concurrently an amount equal to 1.01% and 3.99%, respectively, of all
distributions to all partners. The balance will be distributed 95% to the
Limited Partners, 1.01% to the General Partners, and 3.99% to PWPI. Payments to
PWPI represent asset management fees for PWPI's services in managing the
business of the Partnership. During fiscal 1993, the Partnership suspended all
distributions to Limited Partners. Quarterly distributions to Limited Partners
were reinstated beginning with the quarter ended March 31, 1995 at a rate of 1%.
As a result no management fees were earned for the fiscal years ended March 31,
1998, 1997 and 1996. All sale or refinancing proceeds shall be distributed in
varying proportions to the Limited and General Partners, as specified in the
Partnership Agreement.
Taxable income (other than from a Capital Transaction) in each taxable
year will be allocated to the Limited Partners and the General Partners in an
amount equal to the distributable cash (excluding the asset management fee) to
be distributed to the partners for such year and in the same ratio as
distributable cash has been distributed. Any remaining taxable income, or if no
distributable cash has been distributed for a taxable year, shall be allocated
98.94802625% to the Limited Partners and 1.05197375% to the General Partners.
Tax losses (other than from a Capital Transaction) will be allocated
98.94802625% to the Limited Partners and 1.05197375% to the General Partners.
Allocations of the Partnership's operations between the General Partners and the
Limited Partners for financial accounting purposes have been made in conformity
with the allocations of taxable income or tax loss.
Selling commissions incurred by the Partnership and paid to an affiliate
of the Managing General Partner for the sale of Limited Partnership interests
aggregated $8,416,000 through the conclusion of the offering period.
In connection with the acquisition of properties, PWPI was entitled to
receive acquisition fees in an amount not greater than 3% of the gross proceeds
from the sale of Partnership Units. Total acquisition fees of $2,830,000 were
incurred and paid by the Partnership in connection with the acquisition of its
operating property investments. In addition PWPI received an acquisition fee of
$170,000 from Sunol Center Associates in 1986.
The Managing General Partner and its affiliates are reimbursed for their
direct expenses relating to the offering of Units, the administration of the
Partnership and the acquisition and operations of the Partnership's real
property investments.
Included in general and administrative expenses for the years ended March
31, 1998, 1997 and 1996 is $181,000, $179,000 and $203,000, 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 $14,000, $9,000 and $11,000 (included in general and administrative expenses)
for managing the Partnership's cash assets during fiscal 1998, 1997 and 1996,
respectively.
At March 31, 1998 and 1997, accounts receivable - affiliates includes
$126,000 and $100,000, respectively, due from two unconsolidated joint ventures
for interest earned on permanent loans and $167,000 and $145,000, 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 both March 31,
1998 and 1997 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, 1998, the Partnership's balance sheet includes three
operating investment properties (two at March 31, 1997): (1) the wholly-owned
Crystal Tree Commerce Center; (2) the Sunol Center Office Buildings, owned by
Sunol Center Associates, a majority owned and controlled joint venture and (3)
Warner/Red Hill Business Center, owned by Warner/Red Hill Associates, a majority
owned and controlled joint venture. The Partnership acquired a controlling
interest in Sunol Center Associates during fiscal 1992 and in Warner/Red Hill
Associates during fiscal 1998. Accordingly, the accompanying financial
statements present the financial position and results of operations of these
joint ventures on a consolidated basis beginning in the year in which control
was obtained. 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 100% occupied as of March 31, 1998, 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. As
of March 31, 1998, the two remaining office buildings were 100% leased to three
tenants.
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. Concurrent with the execution of the
settlement agreement, the property's management contract with an affiliate of
the co-venturer was terminated. 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. 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, 1998, payments totalling $56,726 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 $69,274 had not been
received as of March 31, 1998. The Partnership will continue to pursue
collection of this balance in fiscal 1999.
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>
Warner/Red Hill Business Center
-------------------------------
The Partnership acquired an interest in Warner/Red Hill Associates (the
"joint venture"), a California general partnership, 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 74% leased as of March 31, 1998, is part of a
4,200 acre business complex in Tustin, California.
Effective August 1, 1997, the co-venture partner in Warner/Red Hill
Associates assigned its interest in the joint venture to First Equity Partners,
Inc., the Managing General Partner of the Partnership, in return for a release
from any further obligations under the terms of the joint venture agreement. As
a result, the Partnership has assumed control of the operations of the
Warner/Red Hill joint venture. Accordingly, the venture is presented on a
consolidated basis in the Partnership's financial statements beginning in fiscal
1998. Prior to fiscal 1998, the venture was accounted for on the equity method
(see Note 5).
In connection with the consolidation of Warner/Red Hill Associates into the
Partnership's financial statements, the following assets and liabilities (in
thousands) of the joint venture at January 1, 1997 were recorded in the
Partnership's balance sheet at April 1, 1997 (see Note 2).
Cash $ 292
Operating investment property, net 2,565
Deferred rent receivable 153
Deferred expenses, net 110
Accounts payable and accrued liabilities (76)
Interest payable (13)
Mortgage note payable (5,349)
Distribution paid to PWEP1 subsequent
to 12/31/96, net (73)
Minority interest in net liabilities of
consolidated joint venture 477
--------
Investment in Warner/Red Hill
Associates, at equity,
at April 1, 1997 $ (1,914)
========
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. 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, 1997, the
property was encumbered by a loan with a principal balance of $5,215,000 (see
Note 6).
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 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 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 to the Partnership at December 31,
1997 was $8,805,000, including accrued interest of $2,685,000.
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;
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 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.
The following is a combined summary of property operating expenses for the
Crystal Tree Commerce Center, Sunol Center Office Building and the Warner/Red
Hill Business Center as reported in the Partnership's statement of operations
for the year ended March 31, 1998 and for the Crystal Tree Commerce Center and
Sunol Center Office Building as reported in the Partnership's statements of
operations for the years ended March 31, 1997 and 1996 (in thousands):
1998 1997 1996
---- ---- ----
Property operating expenses:
Repairs and maintenance $ 393 $ 221 $ 299
Utilities 346 202 170
Insurance 82 61 58
Administrative and other 703 641 726
Management fees 69 28 26
--------- -------- --------
$ 1,593 $ 1,153 $ 1,279
========= ======== ========
5. Investments in Unconsolidated Joint Ventures
- ------------------------------------------------
As of March 31, 1998, the Partnership had investments in four
unconsolidated joint ventures which own operating investment properties (five at
March 31, 1997). As discussed further in Note 4, during fiscal 1998 the
Partnership obtained control over the affairs of the Warner/Red Hill joint
venture. Accordingly, this venture is presented on a consolidated basis in the
fiscal 1998 financial statements. 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:
<PAGE>
Condensed Combined Balance Sheets
December 31, 1997 and 1996
(in thousands)
Assets
1997 1996
---- ----
Current assets $ 1,104 $ 1,645
Operating investment properties, net 51,956 55,760
Other assets 3,913 4,006
--------- ---------
$ 56,973 $ 61,411
========= =========
Liabilities and Capital
Current liabilities $ 2,952 $ 5,399
Other liabilities 295 310
Long-term debt and notes payable to venturers 16,020 21,371
Partnership's share of combined capital 15,507 12,167
Co-venturers' share of combined capital 22,199 22,164
--------- ---------
$ 56,973 $ 61,411
========= =========
Condensed Combined Summary of Operations
For the years ended December 31, 1997, 1996 and 1995
(in thousands)
1997 1996 1995
---- ---- ----
Revenues:
Rental income and expense recoveries $ 10,194 $ 10,910 $ 10,691
Interest and other income 517 361 246
-------- --------- ---------
Total revenues 10,711 11,271 10,937
Expenses:
Property operating expenses 3,991 4,000 3,928
Real estate taxes 2,290 2,139 1,980
Mortgage interest expense 730 1,068 1,089
Interest expense payable to partner 800 800 800
Depreciation and amortization 2,953 3,163 3,180
-------- --------- ---------
10,764 11,170 10,977
-------- --------- ---------
Net income (loss) $ (53) $ 101 $ (40)
========= ========= =========
Net income (loss):
Partnership's share of
combined net income (loss) $ (132) $ (61) $ (278)
Co-venturers' share of
combined net income (loss) 79 162 238
-------- --------- ---------
$ (53) $ 101 $ (40)
======== ========= =========
Reconciliation of Partnership's Investment
March 31, 1998 and 1997
(in thousands)
1998 1997
---- ----
Partnership's share of capital at
December 31, as shown above $ 15,507 $ 12,167
Excess basis due to investment in joint
ventures, net (1) 873 919
Partnership's share of ventures' current
liabilities and long-term debt 8,039 9,631
Timing differences due to distributions received
from and contributions sent to joint ventures
subsequent to December 31 (see Note 2) (50) (192)
--------- --------
Investments in unconsolidated joint ventures,
at equity at March 31 $ 24,369 $ 22,525
========= ========
(1) The Partnership's investments in joint ventures exceeds its share of the
combined joint ventures' capital accounts by approximately $873,000 and
$919,000 at March 31, 1998 and 1997, 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. See the further discussion below.
Reconciliation of Partnership's Share of Operations
March 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
---- ---- ----
Partnership's share of combined net loss
as shown above $ (132) $ (61) $ (278)
Amortization of excess basis (46) (46) (46)
--------- -------- --------
Partnership's share of unconsolidated
ventures' losses $ (178) $ (107) $ (324)
========== ======== ========
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, 1998 and 1997 is comprised of the
following equity method carrying values (in thousands):
1998 1997
---- ----
Investments in joint ventures, at equity:
Warner/Red Hill Associates $ - $ (1,914)
Crow PaineWebber LaJolla, Ltd. 2,063 1,973
Lake Sammamish Limited Partnership (1,058) (921)
Framingham 1881 - Associates 2,672 2,153
Chicago-625 Partnership 12,692 13,234
---------- ---------
16,369 14,525
Notes receivable:
Crow PaineWebber LaJolla, Ltd. 4,000 4,000
Lake Sammamish Limited Partnership 4,000 4,000
---------- ---------
8,000 8,000
---------- ---------
$ 24,369 $ 22,525
========== ==========
Cash distributions received from the Partnership's unconsolidated joint
ventures for the years ended March 31, 1998, 1997 and 1996 are as follows (in
thousands):
1998 1997 1996
---- ---- ----
Warner/Red Hill Associates $ - $ 604 $ 333
Crow PaineWebber LaJolla, Ltd. 27 176 57
Lake Sammamish Limited Partnership - 22 76
Framingham 1881 - Associates - 200 70
Chicago - 625 Partnership 1,025 1,148 796
-------- ------- -------
$ 1,052 $ 2,150 $ 1,332
======== ======= =======
For each of the years ended March 31, 1998, 1997 and 1996, 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.
Descriptions of the properties owned by the unconsolidated joint ventures
and the terms of the joint venture agreements are summarized as follows:
a. 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 96% occupied as of March 31, 1998, 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 note receivable 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 $4,570,000
at December 31, 1997.
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, 1998, 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.
b. 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 91% occupied as of March 31,
1998, is located in Redmond, Washington.
The aggregate cash investment (including a note receivable 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, 1998, the
property was encumbered by a loan with a principal amount of $3,445,000 (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, 1997 was approximately $2,402,000.
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, 1998, 1997 and 1996.
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.
c. 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 100% leased as of March 31,
1998, is located in Framingham, Massachusetts. During fiscal 1998, the
Partnership became aware of potential contamination on the 1881 Worcester Road
property as a result of a leak in an underground storage tank of an adjacent gas
station. The Partnership received an indemnification from the former gas station
operator against any loss, cost or damage resulting from the failure to
remediate the contamination. The extent of the contamination and its ultimate
impact on the operations and market value of the 1881 Worcester Road property
cannot be determined at this time.
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. 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,
1997 was $5,064,000.
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.
<PAGE>
d. 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 88% leased as of March 31, 1998, 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
$2,499,000 through December 31, 1997.
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. Such an annual charge was also recorded in
calendar 1996 and 1997 and 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 $6,004,000 at December 31, 1997.
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, 1998 and 1997 consist of the following (in thousands):
1998 1997
---- ----
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, 1998 and 1997. $ 6,188 $ 6,279
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, 1998 and 1997. 3,318 3,370
Nonrecourse note payable to an
insurance company, which is secured
by the Warner/RedHill 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. 5,214 -
-------- --------
$ 14,720 $ 9,649
======== ========
<PAGE>
The scheduled annual principal payments to retire notes payable are as
follows (in thousands):
1999 $ 295
2000 6,293
2001 214
2002 3,283
2003 156
` Thereafter 4,479
-------
$14,720
=======
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 term 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. 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. 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 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,
1998 $ 73
1999 78
2000 84
2001 91
` 2002 97
Thereafter 997
---------
$ 1,420
=========
8. Rental Revenues
- -------------------
The Crystal Tree, Sunol Center and Warner/RedHill 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
1998 $ 3,959
1999 3,569
2000 3,117
2001 2,671
2002 1,336
--------
$ 14,652
========
9. Subsequent Events
- ---------------------
On May 15, 1998, 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, 1998.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
March 31, 1998
(In thousands)
Cost
Capitalized
(Removed) Life on Which
Initial Cost to Subsequent to Depreciation
Partnership/ Acquisition Gross Amount at Which Carried at in Latest
Venture Land 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 $ 3,318 $3,217 $15,598 $(1,872) $2,444 $14,499 $16,943 $ 6,391 1983 10/23/85 5-27 yrs.
Office Building
Pleasanton, CA 1,420 2,318 15,429 (2,295) 1,518 13,934 15,452 5,739 1985 8/15/86 30 years
Office Building
Tustin, CA 5,214 3,124 9,126 (6,736) 1,256 4,258 5,514 3,001 1984 12/18/85 35 years
-------- ------ ------- -------- ------ ------- ------ --------
$ 9,952 $8,659 $40,153 $(10,903) $5,218 $32,691 $37,909 $15,131
======== ====== ======= ======== ====== ======= ======= =======
Notes
(A) The aggregate cost of real estate owned at December 31, 1997 for Federal income tax purposes is approximately $47,017.
(B) For financial reporting purposes, the initial cost of the operating investment properties have been
reduced by payments from former joint venture partners related to a guaranty to pay the Partnership
a certain Preference Return.
(C) See Notes 6 and 7 to the financial statements for a description of the terms of the debt encumbering the properties.
(D) Reconciliation of real estate owned:
1998 1997 1996
---- ---- ----
Balance at beginning of period $32,284 $31,733 $29,731
Consolidation of Warner/Red Hill joint venture 5,409 - -
Increase due to additions 216 551 2,002
------- ------- -------
Balance at end of period $37,909 $32,284 $31,733
======= ======= =======
(E) Reconciliation of accumulated depreciation:
Balance at beginning of period $10,823 $ 9,499 $ 8,222
Consolidation of Warner/Red Hill joint venture 2,844 - -
Depreciation expense 1,464 1,324 1,277
------- ------- -------
Balance at end of period $15,131 $10,823 $ 9,499
======= ======= =======
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
PaineWebber Equity Partners One Limited Partnership:
We have audited the accompanying combined balance sheet of the 1997
Combined Joint Ventures of PaineWebber Equity Partners One Limited Partnership
as of December 31, 1997, and the related combined statements of operations and
changes in venturers' capital, and cash flows for the year then ended. Our audit
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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the 1997
Combined Joint Ventures of PaineWebber Equity Partners One Limited Partnership
at December 31, 1997, and the combined results of their operations and their
cash flows for the year then ended, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/S/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Boston, Massachusetts
March 27, 1998
<PAGE>
1997 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
COMBINED BALANCE SHEET
December 31, 1997
(In thousands)
ASSETS
1997
----
Current assets:
Cash and cash equivalents $ 323
Accounts receivable 772
Other current assets 9
-----------
Total current assets 1,104
Operating investment properties:
Land 15,762
Building, improvements and equipment 61,008
76,770
Less accumulated depreciation (24,814)
-----------
51,956
Escrowed cash 979
Long-term rents receivable 1,319
Due from partners 269
Deferred expenses, net of accumulated
amortization of $1,512 1,281
Other assets 65
-----------
$ 56,973
===========
LIABILITIES AND VENTURERS' CAPITAL
Current liabilities:
Current portion of long-term debt $ 136
Accounts payable and accrued liabilities 351
Accounts payable - affiliates 159
Real estate taxes payable 1,975
Distributions payable to venturers 204
Other current liabilities 127
------------
Total current liabilities 2,952
Tenant security deposits 295
Notes payable to venturers 8,000
Long-term debt 8,020
Venturers' capital 37,706
------------
$ 56,973
============
See accompanying notes.
<PAGE>
1997 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
COMBINED STATEMENT OF OPERATIONS AND CHANGES IN VENTURERS' CAPITAL
For the year ended December 31, 1997
(In thousands)
1997
----
Revenues:
Rental income and expense recoveries $ 10,194
Interest income 25
Other income 492
---------
10,711
Expenses:
Depreciation expense 2,716
Real estate taxes 2,290
Interest expense 730
Interest expense payable to partner 800
Property operating expenses 1,159
Repairs and maintenance 1,371
Utilities 619
Management fees 391
Salaries and related expenses 381
Amortization expense 237
Insurance 70
----------
Total expenses 10,764
Net loss (53)
Contributions from venturers 2,093
Distributions to venturers (2,836)
Venturers' capital, beginning of year 38,502
----------
Venturers' capital, end of year $ 37,706
==========
See accompanying notes.
<PAGE>
1997 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
COMBINED STATEMENT OF CASH FLOWS
For the year ended December 31, 1997
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997
----
Cash flows from operating activities:
Net loss $ (53)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 2,953
Amortization of deferred financing costs 19
Changes in assets and liabilities:
Accounts receivable 87
Escrowed cash 35
Long-term rents receivable 49
Deferred expenses (324)
Other assets (230)
Accounts payable and accrued liabilities 233
Real estate taxes payable 120
Other current liabilities (24)
Tenant security deposits 9
-------
Total adjustments 2,927
-------
Net cash provided by operating activities 2,874
Cash flows from investing activities:
Additions to operating investment properties (2,219)
Cash flows from financing activities:
Repayment of long-term debt (125)
Contributions from venturers 2,093
Distributions to venturers (2,836)
-------
Net cash used in financing activities (868)
-------
Net decrease in cash and cash equivalents (213)
Cash and cash equivalents, beginning of year 536
-------
Cash and cash equivalents, end of year $ 323
=======
Cash paid during the year for interest $ 1,452
=======
See accompanying notes.
<PAGE>
1997 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
Notes to Combined Financial Statements
1. Organization
------------
The accompanying financial statements of the 1997 Combined Joint Ventures
of PaineWebber Equity Partners One Limited Partnership (Combined Joint Ventures)
include the accounts of 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
------------- -------------------
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, 1997 and revenues and expenses for the year
then ended. Actual results could differ from the estimates and assumptions used.
Operating investment properties
-------------------------------
Effective for 1995 for Chicago-625 Partnership and effective for 1994
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. The remaining 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 lives of the
operating investment properties, generally five years for the equipment and
fixtures and forty years for the buildings and improvements. 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 amount 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 was also recorded in
1996 and 1997 and 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):
1998 $ 6,225
1999 5,976
2000 5,735
2001 3,879
2002 2,897
Thereafter 4,097
---------
$ 28,809
=========
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, 1997 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 (see Note 6).
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. 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.
b. 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.
c. 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. During 1997, the joint venture became aware of
potential contamination on the 1881 Worcester Road property as a result of a
leak in an underground storage tank of an adjacent gas station. The joint
venture received an indemnification from the former gas station operator against
any loss, cost or damage resulting from the failure to remediate the
contamination. The extent of the contamination and its ultimate impact on the
operations and market value of the 1881 Worcester Road property cannot be
determined at this time.
d. Chicago - 625 Partnership
-------------------------
The joint venture constructed and operates the 625 North Michigan office
building consisting of a 27-story commercial office tower containing an
aggregate of 387,000 square feet (324,829 rentable space) located in Chicago,
Illinois.
The following description of the joint venture agreements provides certain
general information.
Allocations of net income and loss
----------------------------------
The agreements generally provide that net income and losses (other than
those resulting from sales or other dispositions of the projects) will be
allocated to the venture partners in the same proportions as actual cash
distributions from operations.
Gains or losses resulting from sales or other dispositions of the projects
shall be allocated according to the formulas provided in the joint venture
agreements.
Distributions
-------------
Distributable funds will generally be distributed first, to repay
co-venturer negative cash flow contributions; second, to repay accrued interest
and principal on certain loans and, third, specified amounts to PWEP1, with the
balance distributed in amounts ranging from 85% to 29% to PWEP1 and 15% to 71%
to the co-venturers, as described in the joint venture agreements.
Distributions of net proceeds upon the sale or disposition of the projects
shall be made in accordance with formulas provided in the joint venture
agreements.
4. 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.
The related property manager of the 625 North Michigan property leases
space in the property under a lease agreement extending through October 31,
2001. The 1997 revenues include $178,000 relating to this lease.
Accounts payable - affiliates at December 31, 1997 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.
5. Notes Payable to Venturers
--------------------------
Notes payable to venturers at December 31, 1997 includes an unsecured
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, 1997 also includes an unsecured 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 the
year ended December 31, 1997.
6. Mortgage Notes Payable
----------------------
Mortgage notes payable at December 31, 1997 consists of the following (in
thousands):
1997
----
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. The fair
value of this mortgage note
approximated its carrying value as
of December 31, 1997. $ 4,711
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. The fair
value of this mortgage note
approximated its carrying value as
of December 31, 1997. 3,445
-------
8,156
Less: current portion (136)
-------
$ 8,020
=======
The scheduled annual principal payments to retire notes payable are as
follows (in thousands):
1998 $ 136
1999 148
2000 161
2001 175
` 2002 191
Thereafter 7,345
--------
$ 8,156
========
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. and Lake Sammamish Limited
Partnership from all liabilities, claims and expenses associated with any
defaults by PWEP1 in connection with these borrowings.
7. 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, 1997, PWEP1 (together with
an affiliated partnership) had borrowed funds, originally in the form of a zero
coupon loan, using the 625 North Michigan property as collateral pursuant to
this arrangement. This obligation is a direct obligation of PWEP1 and its
affiliated partnership and, therefore, is not reflected in the accompanying
financial statements. 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, 1997, the aggregate indebtedness of EP1 and its
affiliated partnership which is secured by the 625 North Michigan Office
Building was approximately $15,644,000. 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 sheet.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
1997 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(In thousands)
<CAPTION>
Cost
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>
Office Building
Chicago, IL $15,644 $ 8,112 $35,683 $7,784 $ 8,112 $43,467 $ 51,579 $17,693 1968 12/16/86 5-17 yrs.
Apartment Complex
LaJolla, CA 4,711 4,615 7,219 867 4,615 8,086 12,701 3,039 1987 7/1/86 30 yrs.
Apartment Complex
Redmond, WA 3,445 2,362 6,163 143 2,362 6,306 8,668 2,672 1987 10/1/86 5-27.5 yrs.
Office Building
Framingham, MA - 1,317 5,510 (3,005) 673 3,149 3,822 1,410 1987 12/12/86 5-40 yrs.
------- ------- ------- ------- ------- ------- -------- -------
$23,800 $16,406 $54,575 $ 5,789 $15,762 $61,008 $ 76,770 $24,814
======= ======= ======= ======= ======= ======= ======== =======
Notes
(A) The aggregate cost of real estate owned at December 31, 1997 for Federal income tax purposes is approximately $68,337
(B) See Notes 6 and 7 to the Combined Financial Statements for a description of the terms of the debt
encumbering the properties.
(C) Reconciliation of real estate owned:
1997
----
Balance at beginning of period $ 74,551
Increase due to additions 2,219
--------
Balance at end of period $ 76,770
========
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 22,098
Depreciation expense 2,716
--------
Balance at end of period $ 24,814
========
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
PaineWebber Equity Partners One Limited Partnership:
We have audited the accompanying combined balance sheets of the 1996 and
1995 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 1996 and 1995 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 1996 and 1995 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>
KPMG Peat Marwick LLP [letterhead]
INDEPENDENT AUDITORS' REPORT
The Partners
Warner/Redhill Associates:
We have audited the statements of operations, changes in partners' capital
(deficit) and cash flows of Warner/Redhill Associates (a California general
partnership) for the year ended December 31, 1994. These financial statements
are the responsibility of management of Warner/Redhill Associates. Our
responsibility is to express an opinion on these financial statements 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 results of operations and cash flows of
Warner/Redhill Associates for the year ended December 31, 1994 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>
1996 AND 1995 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>
1996 AND 1995 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
COMBINED STATEMENTS 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>
1996 AND 1995 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>
1996 AND 1995 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Organization
-----------
The accompanying financial statements of the 1996 and 1995 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.
<PAGE>
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.
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.
<PAGE>
d. Framingham - 1881 Associates
----------------------------
The joint venture owns and operates the 1881 Worcester Road office
building consisting of 64,189 net rentable square feet in one two-story
building located in Framingham, Massachusetts (see Note 4).
e. Chicago - 625 Partnership
-------------------------
The joint venture constructed and operates the 625 North Michigan office
building consisting of a 27-story commercial office tower containing an
aggregate of 387,000 square feet (324,829 rentable space) located in
Chicago, Illinois.
The following description of the joint venture agreements provides
certain general information.
Allocations of net income and loss
----------------------------------
The agreements generally provide that net income and losses (other than
those resulting from sales or other dispositions of the projects) will be
allocated to the venture partners in the same proportions as actual cash
distributions from operations.
Gains or losses resulting from sales or other dispositions of the projects
shall be allocated according to the formulas provided in the joint venture
agreements.
Distributions
-------------
Distributable funds will generally be distributed first, to repay
co-venturer negative cash flow contributions; second, to repay accrued interest
and principal on certain loans and, third, specified amounts to PWEP1, with the
balance distributed in amounts ranging from 85% to 29% to PWEP1 and 15% to 71%
to the co-venturers, as described in the joint venture agreements.
Distributions of net proceeds upon the sale or disposition of the projects
shall be made in accordance with formulas provided in the joint venture
agreements.
4. Losses Due to 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
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
1996 AND 1995 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(In thousands)
<CAPTION>
Cost
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 12/18/85 35 yrs.
Apartment Complex
LaJolla, CA 4,783 4,615 7,219 657 4,615 7,876 12,491 2,794 1987 7/1/86 30 yrs.
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 5-40 yrs.
------- ------- ------- ------- ------- ------- -------- -------
$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.
(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, 1998 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-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,268
<SECURITIES> 0
<RECEIVABLES> 378
<ALLOWANCES> 1
<INVENTORY> 0
<CURRENT-ASSETS> 3,658
<PP&E> 62,278
<DEPRECIATION> 15,131
<TOTAL-ASSETS> 52,242
<CURRENT-LIABILITIES> 515
<BONDS> 16,140
0
0
<COMMON> 0
<OTHER-SE> 35,587
<TOTAL-LIABILITY-AND-EQUITY> 52,242
<SALES> 0
<TOTAL-REVENUES> 5,108
<CGS> 0
<TOTAL-COSTS> 4,049
<OTHER-EXPENSES> 178
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,137
<INCOME-PRETAX> (256)
<INCOME-TAX> 0
<INCOME-CONTINUING> (256)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (256)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
