UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1999
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
July 18, 1985, as supplemented Part IV
Current Report on Form 8-K of registrant
dated October 2, 1998 Part IV
Current Report on Form 8-K of registrant
dated November 20, 1998 Part IV
Current Report on Form 8-K of registrant
dated May 14, 1999 Part IV
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
1999 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-4
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 7A Market Risk Disclosures II-9
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-49
<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-7 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, 1999, 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 three office/R&D buildings 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
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.
The Partnership originally owned interests in seven operating investment
properties. On October 2, 1998, Lake Sammamish Limited Partnership and Crow
PaineWebber LaJolla Limited Partnership, two joint ventures in which the
Partnership had an interest, sold the properties known as the Chandler's Reach
Apartments and the Monterra Apartments to the same unrelated third party.
Chandler's Reach, located in Redmond, Washington, was sold for $17.85 million,
and Monterra, located in LaJolla, California, was sold for $20.1 million. The
Partnership received net proceeds of approximately $12,359,000 from the sale of
Chandler's Reach after deducting closing costs of approximately $561,000,
closing proration adjustments of approximately $55,000, the repayment of the
existing mortgage note of approximately $3,415,000 and a prepayment penalty of
approximately $354,000 (of which $205,000 was paid by the buyer), and a payment
of approximately $1,311,000 to the Partnership's co-venture partner for its
share of the sale proceeds in accordance with the joint venture agreement. The
Partnership received net proceeds of approximately $14,796,000 from the sale of
Monterra after deducting closing costs of approximately $306,000, closing
proration adjustments of approximately $114,000, the repayment of the existing
mortgage note of approximately $4,672,000 and a prepayment penalty of
approximately $500,000 (of which $295,000 was paid by the buyer), and a payment
of approximately $7,000 to the Partnership's co-venture partner for its share of
the sale proceeds in accordance with the joint venture agreement. On November
20, 1998, Sunol Center Associates, a joint venture in which the Partnership had
an interest, sold the property known as the Sunol Center Office Buildings,
located in Pleasanton, California, to an unrelated third party for $15.75
million. The Partnership received net proceeds of approximately $15,532,000 from
the sale of Sunol Center after deducting closing costs of approximately $161,000
and net closing proration adjustments of approximately $57,000.
In addition, subsequent to year-end, on May 14, 1999 the Partnership sold
the wholly-owned property known as the Crystal Tree Commerce Center, located in
North Palm Beach, Florida, to an unrelated third party for $10.55 million. The
Partnership received net proceeds of approximately $6,690,000 from the sale of
Crystal Tree after deducting closing costs of approximately $295,000, net
closing proration adjustments of approximately $287,000 and the repayment of the
outstanding first mortgage loan and accrued interest of $3,278,000.
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, 1999, the Limited Partners had received cumulative cash
distributions totalling approximately $82,102,000, or $871.52 per original
$1,000 investment for the Partnership's earliest investors. The Partnership's
earliest investor group represents those Limited Partners admitted to the
Partnership on October 29, 1985, the Partnership's first admittance date. Of the
total cash distributions paid through March 31, 1999, $468.32 was from
operations and $403.20 resulted from the sales of the Chandler's Reach
Apartments, Monterra Apartments and Sunol Center properties. Subsequent to
year-end, on June 15, 1999, the Partnership made a special capital distribution
of $67 per original $1,000 investment which represented the net proceeds from
the sale of the Crystal Tree property. 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
has been sheltered from federal income tax liability. As reported in the
Partnership's Quarterly Report on Form 10-Q for the quarter ended December 31,
1998, the sales of Sunol Center, Chandler's Reach Apartments and Monterra
Apartments significantly reduced the distributable cash flow to be received by
the Partnership. As a result, the payment of a regular quarterly distribution
was discontinued effective for the fourth quarter of fiscal 1999. The final
regular quarterly distribution payment was made on February 12, 1999 for the
quarter ended December 31, 1998.
The Partnership's success in meeting its capital appreciation objective
will depend upon the proceeds received from the final liquidation of the three
remaining 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. Management has been focusing
on potential disposition strategies for the remaining investments in the
Partnership's portfolio. Subsequent to the sale of Crystal Tree, the remaining
investments consist of joint venture interests in the Warner/Red Hill Business
Center, the 1881 Worcester Road Office Building and the 625 North Michigan
Office Building. Although there are no assurances, it is currently contemplated
that sales of the Partnership's remaining assets, which would be followed by a
liquidation of the Partnership, could be completed by the end of calendar year
1999.
All of the Partnership's remaining investment properties are located in
real estate markets in which they face significant competition for the revenues
they generate. The Partnership's office buildings compete for long-term
commercial tenants with numerous projects of similar type generally on the basis
of price, location and tenant improvement allowances. Limited new construction
and healthy economic growth have significantly improved the supply and demand
fundamentals for office buildings in many markets throughout the country during
fiscal 1999. Such factors have had a substantial influence on management's
decision to pursue a liquidation of the remaining investments in the near term.
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, 1999, the Partnership had interests in four 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 1999, along with
an average for the year, are presented below for each property owned during
fiscal 1999:
Percent Occupied At
------------------------------------------------------
Fiscal 1999
6/30/98 9/30/98 12/31/98 3/31/99 Average
------- ------- -------- ------- -------
Crystal Tree 100% 100% 100% 100% (3) 100%
Warner/Red Hill 98% 97% 99% 100% 99%
Monterra Apartments 96% N/A (1) N/A N/A N/A
Sunol Center 100% 100% N/A (2) N/A N/A
Chandler's Reach
Apartments 95% N/A (1) N/A N/A N/A
1881 Worcester Road 100% 100% 100% 100% 100%
625 North Michigan Avenue 95% 95% 96% 93% 95%
(1) The property was sold on October 2, 1998 as described in Item 1.
(2) The property was sold on November 20, 1998 as described in Item 1.
(3) The property was sold subsequent to year-end, on May 14, 1999, as described
in Item 1.
Item 3. Legal Proceedings
The Partnership is not subject to any 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, 1999 there were 7,163 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.
Reference is made to Item 6 below for a discussion of cash distributions
made to the Limited Partners during fiscal 1999.
Item 6. Selected Financial Data
PaineWebber Equity Partners One Limited Partnership
For the years ended March 31, 1999, 1998, 1997, 1996 and 1995
(in thousands, except for per Unit data)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Revenues $ 4,936 $ 4,308 $ 3,173 $ 2,726 $ 2,346
Operating loss $ (1,537) $ (878) $ (1,099) $ (1,739) $ (1,637)
Gain on sale of
operating
investment
property $ 7,373 - - - -
Interest income
on notes
receivable from
unconsolidated
ventures $ 400 $ 800 $ 800 $ 800 $ 800
Partnership's share
of unconsolidated
ventures' losses $ (233) $ (178) $ (107) $ (324) $ (715)
Partnership's share
of gain on sale
of operating
investment
properties $ 19,084 - - - -
Partnership's share
of losses due to
impairment of
operating
investment
properties - - - - $ (8,703)
Net income (loss) $ 25,087 $ (256) $ (406) $ (1,263) $(10,255)
Net income (loss)
per Limited
Partnership Unit $ 12.41 $ 0.13) $ (0.20) $ (0.62) $ (5.07)
Cash distributions
from operations
per Limited
Partnership Unit $ 1.00 $ 1.00 $ 0.50 $ 0.50 -
Cash distributions
from sale,
refinancing or
other disposition
transactions
per Limited
Partnership
Unit $ 20.16 - - - -
Total assets $ 34,107 $52,242 $ 49,736 $ 51,255 $ 53,572
Long-term debt $ 15,357 $16,140 $ 11,152 $ 11,356 $ 11,548
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 the beginning of fiscal 1999, the Partnership retained an
ownership interest in seven operating investment properties, which consisted of
four office/R&D complexes, two multi-family apartment complexes and one
mixed-use retail/office property. As discussed further below, during fiscal 1999
the two multi-family apartment complexes and one office/R&D complex were sold.
In addition, subsequent to year-end, the mixed-use retail/office property was
sold. 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
is an opportune time to sell the Partnership's portfolio of properties. As a
result, management has been 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 by the end of calendar year 1999. The sale
of the three remaining real estate investments would be followed by the
liquidation of the Partnership.
Marketing efforts for the sale of the Chandlers Reach and Monterra
apartment properties commenced during the quarter ended June 30, 1998. On
October 2, 1998, Lake Sammamish Limited Partnership and Crow PaineWebber LaJolla
Limited Partnership, two joint ventures in which the Partnership had an
interest, sold the properties known as the Chandler's Reach Apartments and the
Monterra Apartments to the same unrelated third parties. Chandler's Reach,
located in Redmond, Washington, was sold for $17.85 million, and Monterra,
located in LaJolla, California, was sold for $20.1 million. The Partnership
received net proceeds of approximately $12,359,000 from the sale of Chandler's
Reach after deducting closing costs of approximately $561,000, closing proration
adjustments of approximately $55,000, the repayment of the existing mortgage
note of approximately $3,415,000 and a prepayment penalty of approximately
$354,000 (of which $205,000 was paid by the buyer), and a payment of
approximately $1,311,000 to the Partnership's co-venture partner for its share
of the sale proceeds in accordance with the joint venture agreement. The
Partnership received net proceeds of approximately $14,796,000 from the sale of
Monterra after deducting closing costs of approximately $306,000, closing
proration adjustments of approximately $114,000, the repayment of the existing
mortgage note of approximately $4,672,000 and a prepayment penalty of
approximately $500,000 (of which $295,000 was paid by the buyer), and a payment
of approximately $7,000 to the Partnership's co-venture partner for its share of
the sale proceeds in accordance with the joint venture agreement.
Despite incurring sizable prepayment penalties on the repayment of both
outstanding first mortgage loans, management believed that the current sale of
the Chandler's Reach and Monterra properties was in the best interests of the
Limited Partners due to the exceptionally strong market conditions that exist at
the present time and which resulted in the achievement of very favorable selling
prices. The Partnership distributed $24,800,000 of the net proceeds from the
sales of the Chandler's Reach and Monterra properties in the form of a special
distribution to the Limited Partners of $248 per original $1,000 investment on
November 13, 1998. The remainder of the net proceeds were retained and added to
the Partnership's cash reserves to ensure that the Partnership has sufficient
capital resources to fund its share of potential capital improvement expenses at
its remaining investment properties. The Partnership recorded gains of
$9,799,000 and $9,285,000, respectively, on the sales of the Chandler's Reach
and Monterra operating investment properties.
During the quarter ended June 30, 1998, the Partnership began exploring
potential opportunities to sell Sunol Center, a 116,680 square foot office/R&D
property in Pleasanton, California. As part of these efforts, the Partnership
initiated discussions with real estate firms with a strong background in selling
properties like Sunol Center. The Partnership subsequently selected a national
firm that is a leading seller of this type of property. Preliminary sales
materials were prepared and initial marketing efforts were undertaken. A
marketing package was then finalized and comprehensive sale efforts began in
June 1998. As a result of those efforts, several offers were received. After
completing an evaluation of these offers and the relative strength of the
prospective purchasers, the Partnership selected an offer. A purchase and sale
agreement was negotiated with an unrelated third-party prospective buyer on
September 21, 1998 and a non-refundable deposit of $750,000 was made on October
21, 1998. On November 20, 1998, Sunol Center Associates sold the Sunol Center
Office Buildings to this unrelated third party for $15.75 million. The
Partnership received net proceeds of approximately $15,532,000 from the sale of
Sunol Center after deducting closing costs of approximately $161,000 and net
closing proration adjustments of approximately $57,000. As a result of the sale,
the Partnership made a special distribution to the Limited Partners of
$15,520,000, or $155.20 per original $1,000 investment, on December 4, 1998. The
Partnership recorded a gain of $7,373,000 on the sale of the operating
investment property.
With the sales of the Chandler's Reach Apartments, Monterra Apartments and
Sunol Center Office Buildings during the quarter ended December 31, 1998, and
the resulting reduction in distributable cash flow to be received by the
Partnership, the payment of a regular quarterly distribution was discontinued
beginning with the quarter ended March 31, 1999. A final regular quarterly
distribution of $5.00 per original $1,000 investment, which is equivalent to a
2% annualized rate of return on an original $1,000 investment, was made on
February 12, 1999 for the quarter ended December 31, 1998.
The Crystal Tree Commerce Center in North Palm Beach, Florida was 100%
leased on average for the year ended March 31, 1999, a 2% increase from the
prior year. As previously reported, management had been positioning the Crystal
Tree Commerce Center for a possible 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.
As of March 31, 1999, 70% of the leases at the property were on a triple-net
basis, up from 61% at the end of the prior quarter. With an occupancy level of
100% and a stable base of tenants, the Partnership believed this was an
opportune time to sell the property. As part of its plan to market the property
for sale, the Partnership selected a Florida real estate firm that is a leading
seller of this type of property. Preliminary sales materials were prepared and
initial marketing efforts were undertaken. A marketing package was then
finalized and comprehensive sale efforts began in December 1998. As a result of
these sale efforts, twelve offers were received. As part of the sale efforts to
reduce the prospective buyer's due diligence work and the time required to
complete it, updated operating reports as well as environmental information on
the property were provided to the top prospective buyers, who were then asked to
submit best and final offers and did so. After completing an evaluation of these
offers and the relative strength of the prospective purchasers, the Partnership
selected an offer and negotiated a purchase and sale agreement which was signed
on March 4, 1999. Subsequent to year-end, on May 14, 1999, Crystal Tree was sold
for $10.55 million. The Partnership received net proceeds of approximately
$6,690,000 from the sale of Crystal Tree after deducting closing costs of
approximately $295,000, net closing proration adjustments of approximately
$287,000 and the repayment of the outstanding first mortgage loan and accrued
interest of $3,278,000. As a result of the sale, the Partnership made a special
distribution to the Limited Partners of $6,700,000, or $67 per original $1,000
investment, on June 15, 1999.
The 64,000 square foot 1881 Worcester Road Office Building remained 100%
leased as of March 31, 1999. As previously reported, while this two-story
property was leased to two financially strong tenants with no lease expirations
until December 31, 2002, the tenant leasing the entire second floor of the
property informed the Partnership that it is consolidating its operations at
another location and had requested a lease termination. This tenant's lease did
not expire until February 28, 2003. Negotiations with this tenant concerning a
lease termination agreement were completed during the fourth quarter of fiscal
1999. Because of the agreement on a lease termination, the property's leasing
team was then able to negotiate and secure a new lease for all of the space
being vacated by the former tenant. The new lease is at a higher rental rate
than the rate payable under the former tenant's lease. This new tenant is
expected to take occupancy by July 31, 1999. Now that this new lease has been
signed, the Partnership and its co-venture partner have decided to sell 1881
Worcester Road. A firm has been selected to market the property for sale and,
subsequent to the March 31, 1999 fiscal year-end, a sales package was finalized.
Comprehensive sale efforts were underway by late May 1999. As previously
reported, the owner 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. They also notified the Partnership that contamination has
migrated to the property because ground water flows in the direction of the 1881
Worcester Road building. At the time of the discovery of the gasoline leak, the
Partnership received an indemnification from the operator of the gas station
against any loss, cost or damage resulting from failure to remediate the
contamination. Any buyer of the 1881 Worcester Road property will receive these
same protections through an assignment of the indemnification agreement which
would be made as part of any sale. The Partnership continues to assess the
contamination of the property as well as monitor the status of any assessment
and remediation activities by the operator of the gas station.
The 625 North Michigan Office Building in Chicago, Illinois, was 95%
leased on average for the year ended March 31, 1999, up from the average of 88%
achieved for fiscal 1998. Approximately 21,000 square feet in five suites remain
to be leased. During the fourth quarter of fiscal 1999, a new tenant signed a
lease and took occupancy on 1,500 square feet of space. As previously reported
an existing tenant that occupied approximately 8,000 square feet relocated and
expanded into a total of 10,200 square feet. The space was renovated in
preparation for the tenant's occupancy, which occurred in March. In addition,
two tenants expanded their existing suites by a total of 2,724 square feet
during the fourth quarter. Over the next year, twelve leases representing a
total of 20,770 square feet are scheduled to expire. The property's leasing team
expects that five of these tenants occupying 7,817 square feet will renew, and
that the remaining space will be leased to new tenants. The property's leasing
team continues to negotiate with two prospective tenants that would lease a
total of approximately 6,500 square feet. As previously reported, the local
market continues to display an improving trend. In this local market, where
there is no current or planned new construction of office space, the market
vacancy level at March 31, 1999 has been reduced to 10.1%, which places more
upward pressure on rental rates. The higher effective rents currently being
achieved at 625 North Michigan Avenue are expected to increase cash flow and
value as new tenants sign leases and existing tenants sign lease renewals in
calendar year 1999. The Partnership has been actively working with the
co-venture partner on potential redevelopment and leasing opportunities with
specialty and fashion retailers looking to locate stores near the building.
These retailers pay significantly higher rental rates than office rental rates.
Formal approval received from the City Council during fiscal 1999 to enclose the
arcade sections of the first floor will greatly improve the chances of adding a
major retail component to the building's North Michigan Avenue frontage. Now
that this approval has been obtained, the Partnership is simultaneously
exploring potential opportunities to sell this property with the development
rights.
The Warner/Red Hill Business Center had an average leased level of 99% for
the year ended March 31, 1999, up from 87% for the prior year. There was a
decline in occupancy at the end of the fourth quarter of fiscal 1999 that was
expected and temporary. During the quarter, a tenant that occupies 15,266 square
feet moved from the property. The leasing team subsequently negotiated a lease
at the market's currently higher rental rates with a new tenant interested in
occupying the entire 15,266 square foot space. This new tenant is scheduled to
take occupancy by July 31, 1999. Also, this tenant has leased an additional
2,508 square feet space and is expected to take occupancy of this space in July
1999 when the tenant currently occupying the space moves from the property. In
addition, a lease was signed with a new tenant that moved into 1,702 square feet
during the quarter ended March 31, 1999. Also during the fourth quarter, a
tenant occupying 8,656 square feet renewed its lease at the market's currently
higher rental rate. Over the next twelve months one lease with a tenant
occupying 7,793 square feet is scheduled to expire. With a strong occupancy
level and a stable base of tenants, the Partnership believes it is an opportune
time to sell the Warner/Red Hill Business Center. As part of a plan to market
the property for sale, the Partnership selected a national real estate firm that
is a leading seller of this property type to market Warner/Red Hill for sale.
Preliminary sales materials were prepared and initial marketing efforts were
undertaken in March 1999. A marketing package was then finalized and
comprehensive sale efforts began in early April 1999. As of April 30, 1999, six
offers were received, all of which were in excess of the property's 1998
year-end estimated value. To reduce the prospective buyer's due diligence work
and the time required to complete it, updated operating reports as well as
environmental information on the property were provided to the top prospective
buyers, who have been asked to submit best and final offers. After completing an
evaluation of these offers and the relative strength of the prospective
purchasers, the Partnership is currently in the process of negotiating a
purchase and sale agreement with a prospective buyer. However, since any sale
transaction remains contingent upon, among other things, the execution of a
definitive sale agreement and satisfactory completion of the buyer's due
diligence, there are no assurances that a sale will be completed. As previously
reported, during fiscal 1998 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 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 the fourth quarter
of fiscal 1998. Previously the venture had been accounted for on the equity
method.
At March 31, 1999, the Partnership and its consolidated joint venture had
available cash and cash equivalents of approximately $5,753,000. 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
As noted above, the Partnership expects to be liquidated prior to the end
of calendar year 1999. 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
1999 Compared to 1998
- ---------------------
The Partnership had net income of $25,087,000 for the year ended March 31,
1999 as compared to a net loss of $256,000 in the prior year. The favorable
change in net income (loss) was primarily a result of the gains realized from
the sale of three operating investment properties during the current year. As
discussed further above, the Partnership sold the consolidated Sunol Center
Office Buildings on November 20, 1998 and realized a gain of $7,373,000. The
Partnership also realized gains from the sales of the unconsolidated Chandler's
Reach Apartments and Monterra Apartments, which were both sold on October 2,
1998, in the amounts of $9,799,000 and $9,285,000, respectively.
Excluding the gains realized from the sales of the three operating
investment properties, the Partnership's net income (loss) declined by
$1,114,000 during fiscal 1999 due to a $659,000 increase in operating loss, a
$400,000 decrease in interest income on notes receivable and a $55,000 increase
in the Partnership's share of unconsolidated ventures' losses. The Partnership
reported an operating loss of $1,537,000 for the year ended March 31, 1999 as
compared to an operating loss of $878,000 for the prior year. This increase in
operating loss was the result of an increase in expenses of $1,287,000, which
was partially offset by an increase in revenues of $628,000. Expenses increasing
was mainly attributable to higher interest expense recorded in fiscal 1999 on
the Warner/Red Hill participating mortgage loan. Effective in fiscal 1999, the
Partnership adopted Statement of Position 97-1, Accounting by Participating
Mortgage Loan Borrowers ("SOP 97-1"), which establishes the borrower's
accounting for a participating mortgage loan if the lender participates in
increases in the market value of the mortgaged real estate project, the results
of operations of that mortgaged real estate project, or both. SOP 97-1 states
that if a lender is entitled to participate in the market value of the mortgaged
real estate project, the borrower should determine the fair value of the
participation feature at the inception of the loan and recognize a participation
liability in that amount, with a corresponding entry to a debt discount account.
The debt discount is to be amortized over the life of the loan using the
interest method and the effective interest rate. At the end of each reporting
period, the participation liability should be adjusted to equal the current fair
value of the participation feature. The Partnership's mortgage participation
liability related to the Warner/Red Hill debt totalled $1,830,000 at December
31, 1998. Due to the expected sale of the Warner/Red Hill property during fiscal
2000, the Partnership has elected to amortize the debt discount over the
expected remaining holding period of two years as opposed to over the remaining
term of the mortgage note. Amortization of the debt discount charged to interest
expense totalled $932,000 for fiscal 1999. The increase in revenues reflected
higher rental income and expense reimbursements due to the improved occupancies
and rental rates achieved at the consolidated Warner/Red Hill and Crystal Tree
properties during fiscal 1999, as well as higher interest and other income.
Interest and other income increased due to the interest income earned on the
temporary investment of the sales proceeds from the three operating investment
properties discussed above pending the special distributions to the Limited
Partners. In addition, as noted above, a portion of the sale proceeds from the
Monterra and Chandler's Reach transactions was retained and added to the
Partnership's cash reserves.
Interest income on notes receivable from unconsolidated ventures related
to loans made by the Partnership to the Monterra and Chandler's Reach joint
ventures and declined in fiscal 1999 due to the sale of the ventures'
properties. The Partnership's share of losses from unconsolidated ventures was
$233,000 during the year ended March 31, 1999, as compared to losses of $178,000
for the prior year. This unfavorable change in the Partnership's share of
unconsolidated ventures' losses was primarily the result of the prepayment
penalties incurred in order to sell the Monterra and Chandler's Reach
properties. As discussed further above, in order to prepay the outstanding debt
on these two properties, the joint ventures incurred prepayment penalties of
$500,000 and $354,000, respectively. The impact of the prepayment penalties was
partially offset by an increase in operating income from the Monterra and
Chandler's Reach properties, mainly due to higher rental rates achieved for the
current year prior to the sales of the properties.
<PAGE>
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 fiscal 1998. 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 fiscal
1997. 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 fiscal 1998. 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 fiscal 1998 as a
result of the strong local apartment market. 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 fiscal 1998, 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.
<PAGE>
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 during calendar year 1999.
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. Limited new construction and healthy economic growth have
significantly improved the supply and demand fundamentals for office buildings
in many markets throughout the country over the past year. The commercial office
segment has begun to experience new development activity in selected areas after
several years of virtually no new supply being added to the market. There are no
assurances that these competitive pressures will not adversely affect the
operations and/or market values of the Partnership's investment properties in
the future.
Impact of Joint Venture Structure. The ownership of the remaining
investments through joint venture partnerships could adversely impact the timing
of the Partnership's planned dispositions of its remaining assets and the amount
of proceeds received from such dispositions. It is possible that the
Partnership's co-venture partners could have economic or business interests
which are inconsistent with those of the Partnership. Given the rights which
both parties have under the terms of the joint venture agreements, any conflict
between the partners could result in delays in completing a sale of the related
operating property and could lead to an impairment in the marketability of the
property to third parties for purposes of achieving the highest possible sale
price.
<PAGE>
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 office 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 thirteenth
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 office buildings contain
expense reimbursement clauses based on increases in property operating expenses.
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.
Item 7A. Market Risk Disclosures
As discussed further in the notes to the accompanying financial
statements, the Partnership's financial instruments are limited to cash and cash
equivalents and mortgage notes payable. The cash equivalents are invested
exclusively in short-term money market instruments and the long-term debt
consists exclusively of fixed rate obligations. The Partnership does not invest
in derivative financial instruments or engage in hedging transactions. In light
of these facts, and due to the Partnership's expected liquidation by the end of
calendar year 1999, management does not believe that the Partnership's financial
instruments have any material exposure to market risk factors.
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 46 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*
Thomas W. Boland Vice President and Controller 36 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.
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, 1999, 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, as a result of the
sales of the Sunol Center, Chandler's Reach and Monterra properties during
fiscal 1999, the distributable cash flow to be received by the Partnership has
been significantly reduced. Accordingly, the payment of a regular quarterly
distribution was discontinued effective for the fourth quarter of fiscal 1999.
Furthermore, 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, 1999. 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, 1999 is $185,000, 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 $7,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during fiscal 1999. 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, 1999 accounts receivable - affiliates includes $26,000 of
investor servicing fees due from the Warner/Red Hill joint venture for
reimbursement of certain expenses incurred in reporting Partnership operations
to the Limited Partners of the Partnership. Accounts receivable - affiliates at
March 31, 1999 also includes $10,000 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. However, a Current Report on Form 8-K was filed by the Partnership
subsequent to year-end to report the sale of the wholly-owned Crystal
Tree Commerce Center and is hereby incorporated herein by reference.
(c) Exhibits
See (a)(3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this Report. See Index to Financial Statements and Financial
Statement Schedules at page F-1.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
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 28, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Partnership and
in the capacities and on the dates indicated.
By:/s/ Bruce J. Rubin Date: June 28, 1999
------------------------ -------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: June 28, 1999
------------------------ -------------
Terrence E. Fancher
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page Number in the Report
Exhibit No. Description of Document Or Other Reference
<S> <C> <C>
(3) and (4) Prospectus of the Partnership Filed with the Commission pursuant
dated July 18, 1985, as to Rule 424(c) and incorporated
supplemented, with particular herein by reference.
reference to the Restated
Certificate and Agreement of
Limited Partnership
(10) Material contracts previously Filed with the Commission pursuant
filed as exhibits to registration to Section 13 or 15(d) of the
statements and amendments thereto Securities Act of 1934 and
of the registrant together with all incorporated herein by reference.
such contracts filed as exhibits of
previously filed Forms 8-K and Forms
10-K are hereby incorporated herein
by reference.
(13) Annual Report to Limited Partners No Annual Report for fiscal year
1999 has been sent to the Limited
Partners. An Annual Report will be
sent to the Limited Partners
subsequent to this filing.
(22) List of subsidiaries Included in Item I of Part I of his
Report Page I-1, to which eference
is hereby made.
(27) Financial Data Schedule Filed as the last page of EDGAR
submission following the Financial
Statements and Financial Statement
Schedule required by Item 14.
</TABLE>
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(1) and (2) and Item 14(d)
PAINEWEBBER EQUITY PARTNERS ONE
LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference
---------
PaineWebber Equity Partners One Limited Partnership:
Report of independent auditors F-3
Consolidated balance sheets as of March 31, 1999 and 1998 F-4
Consolidated statements of operations for the years ended
March 31, 1999, 1998 and 1997 F-5
Consolidated statements of changes in partners' capital
(deficit) for the years ended March 31, 1999, 1998 and 1997 F-6
Consolidated statements of cash flows for the years ended
March 31, 1999, 1998 and 1997 F-7
Notes to consolidated financial statements F-9
Schedule III - Real Estate and Accumulated Depreciation F-28
1998 and 1997 Combined Joint Ventures of PaineWebber Equity Partners One Limited
Partnership:
Report of independent auditors F-29
Combined balance sheets as of December 31, 1998 and 1997 F-30
Combined statements of operations and changes in venturers'
capital for the years ended December 31, 1998 and 1997 F-31
Combined statements of cash flows for the years ended
December 31, 1998 and 1997 F-32
Notes to combined financial statements F-33
Schedule III - Real Estate and Accumulated Depreciation F-38
1996 Combined Joint Ventures of PaineWebber Equity Partners One Limited
Partnership:
Reports of independent auditors F-39
Combined balance sheets as of December 31, 1997 and 1996 F-40
Combined statements of operations and changes in venturers'
capital for the years ended December 31, 1997 and 1996 F-41
Combined statements of cash flows for the years ended
December 31, 1997 and 1996 F-42
Notes to combined financial statements F-43
Schedule III - Real Estate and Accumulated Depreciation F-49
Other financial statement schedules have been omitted since the required
information is not present or not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the financial statements, including the notes thereto.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
PaineWebber Equity Partners One Limited Partnership:
We have audited the accompanying consolidated balance sheets of
PaineWebber Equity Partners One Limited Partnership as of March 31, 1999 and
1998, 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, 1999. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
PaineWebber Equity Partners One Limited Partnership at March 31, 1999 and 1998,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended March 31, 1999, 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 18, 1999
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE
LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and 1998
(In thousands, except for per Unit data)
ASSETS
1999 1998
---- ----
Operating investment properties:
Land $ 3,700 $ 5,218
Building and improvements 18,767 32,691
-------- --------
22,467 37,909
Less accumulated depreciation (10,215) (15,131)
-------- --------
12,252 22,778
Investments in and notes receivable
from unconsolidated joint ventures,
at equity 15,129 24,369
Cash and cash equivalents 5,753 3,268
Prepaid expenses - 13
Accounts receivable 29 69
Accounts receivable - affiliates 36 308
Deferred rent receivable 138 415
Deferred expenses, net of accumulated
amortization of $227 ($589 in 1998) 292 732
Other assets 478 290
-------- --------
$ 34,107 $ 52,242
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Net advances from consolidated ventures $ 48 $ 32
Accounts payable and accrued expenses 368 412
Interest payable - 71
Bonds payable - 1,420
Mortgage notes payable (net of discount
of $898 in 1999) 13,527 14,720
Mortgage participation liability 1,830 -
-------- --------
Total liabilities 15,773 16,655
Partners' capital:
General Partners:
Capital contributions 1 1
Cumulative net income (loss) 308 44
Cumulative cash distributions (1,038) (1,018)
Limited Partners ($50 per unit;
2,000,000 Units outstanding):
Capital contributions, net of
offering costs 90,055 90,055
Cumulative net income (loss) 11,110 (13,713)
Cumulative cash distributions (82,102) (39,782)
-------- --------
Total partners' capital 18,334 35,587
-------- --------
$ 34,107 $ 52,242
======== ========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 1999, 1998 and 1997
(In thousands, except for per Unit data)
1999 1998 1997
---- ---- ----
Revenues:
Rental income and expense
reimbursements $ 4,276 $ 4,000 $ 2,882
Interest and other income 660 308 291
--------- --------- ---------
4,936 4,308 3,173
Expenses:
Interest expense 2,053 1,137 995
Depreciation expense 1,759 1,464 1,324
Property operating expenses 1,671 1,593 1,153
Real estate taxes 301 351 271
General and administrative 475 482 412
Amortization expense 198 143 117
Bad debt expense 16 16 -
--------- --------- ---------
6,473 5,186 4,272
--------- --------- ---------
Operating loss (1,537) (878) (1,099)
Gain on sale of operating investment
property 7,373 - -
Investment income:
Interest income on notes receivable
from unconsolidated ventures 400 800 800
Partnership's share of
unconsolidated ventures' losses (233) (178) (107)
Partnership's share of gains on sale
of unconsolidated operating
investment properties 19,084 - -
--------- --------- ---------
Net income (loss) $ 25,087 $ (256) $ (406)
========= ========= =========
Net income (loss) per Limited
Partnership Unit $ 12.41 $ (0.13) $ (0.20)
========= ========= =========
Cash distributions per Limited
Partnership Unit $ 21.16 $ 1.00 $ 0.50
========= ========== =========
The above net income (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, 1999, 1998 and 1997
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
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
Cash distributions (20) (42,320) (42,340)
Net income 264 24,823 25,087
-------- -------- --------
Balance at March 31, 1999 $ (729) $ 19,063 $ 18,334
======== ======== ========
See accompanying notes.
<PAGE>
<TABLE>
PAINEWEBBER EQUITY PARTNERS ONE
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 1999, 1998 and 1997
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 25,087 $ (256) $ (406)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Partnership's share of unconsolidated ventures' losses 233 178 107
Gain on sale of operating investment property (7,373) - -
Partnership share of gains on sale of unconsolidated
operating investment properties (19,084) - -
Depreciation and amortization 1,957 1,607 1,441
Amortization of discount on note payable to insurance
company 932 - -
Amortization of deferred financing costs 24 23 20
Bad debt expense 16 16 (21)
Changes in assets and liabilities:
Prepaid expenses 13 - -
Accounts receivable 24 54 (37)
Accounts receivable - affiliates 272 (48) (5)
Deferred rent receivable 277 91 (168)
Deferred expenses (95) - (80)
Accounts payable and accrued expenses (44) (138) 101
Interest payable (71) (2) -
Net advances from consolidated ventures 16 (41) -
---------- --------- --------
Total adjustments (22,908) 1,740 1,358
---------- --------- --------
Net cash provided by operating activities 2,184 1,484 952
---------- --------- --------
Cash flows from investing activities:
Net proceeds from sale of operating investment property 15,589 - -
Additions to operating investment properties (549) (216) (551)
Payment of leasing commissions (99) (128) -
Distributions from unconsolidated joint ventures 28,693 1,052 2,150
Additional investments in unconsolidated
joint ventures (602) (1,160) (1,054)
---------- --------- --------
Net cash provided by (used in) investing activities 43,032 (452) 545
---------- --------- --------
Cash flows from financing activities:
Repayment of principal on long-term debt (295) (278) (131)
Payments on district bond assessments (96) (83) (73)
Distributions to partners (42,340) (2,020) (1,010)
---------- --------- --------
Net cash used in financing activities (42,731) (2,381) (1,214)
---------- --------- --------
Net increase (decrease) in cash and cash equivalents 2,485 (1,349) 283
Cash and cash equivalents, beginning of year 3,268 4,325 4,042
Cash and cash equivalents, Warner/Red Hill,
beginning of year - 292 -
---------- --------- --------
Cash and cash equivalents, end of year $ 5,753 $ 3,268 $ 4,325
========== ========= ========
Cash paid during the year for interest $ 1,168 $ 1,116 $ 975
========== ========= ========
Supplemental Schedule of Noncash Financing Activity:
- ----------------------------------------------------
Discount on note payable to insurance company $ (1,830) $ - $ -
Mortgage participation liability 1,830 - -
</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. During fiscal 1999, the Partnership
sold its interests in an office/R&D complex and two multi-family apartment
complexes. As of March 31, 1999, the Partnership retained an ownership interest
in four operating investment properties, which consisted of three office/R&D
complexes and one mixed-use retail/office property. Subsequent to year-end, on
May 14, 1999 the Partnership sold its interest in the mixed-use retail/office
property. The Partnership is currently focusing on potential disposition
strategies for the three remaining 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 prior to the end of calendar
year 1999. The disposition of the remaining investments would be followed by a
liquidation of the Partnership.
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, 1999 and 1998 and revenues and expenses for each
of the three years in the period ended March 31, 1999. 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, or owned, 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 was
presented on a consolidated basis in the accompanying financial statements
through the date of the sale of the venture's operating investment property on
November 20, 1998. 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 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 are 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 on the accompanying balance sheets.
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.
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 additional annual charges to
depreciation expense 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. 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 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. Upon sale or
disposition of the Partnership's investments, the taxable gain or the tax loss
incurred will be allocated among the partners. The principal difference between
the Partnership's accounting on a federal income tax basis and the accompanying
financial statements prepared in accordance with generally accepted accounting
principals (GAAP) relates to the methods used to determine the depreciation
expense on the consolidated and unconsolidated operating investment properties.
As a result of the difference in depreciation, the gains calculated upon the
sale of the operating investment properties for GAAP purposes differ from those
calculated for federal income tax purposes.
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, 1999 and
1998 due to the short-term maturities of these instruments. It was 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 1998 and 1997 amounts have been reclassified to conform to
the fiscal 1999 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. No management fees were earned for the fiscal years
ended March 31, 1999, 1998 and 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.
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, 1999, 1998 and 1997 is $185,000, $181,000 and $179,000, 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 $7,000, $14,000 and $9,000 (included in general and administrative expenses)
for managing the Partnership's cash assets during fiscal 1999, 1998 and 1997,
respectively.
At March 31, 1999 and 1998, accounts receivable - affiliates includes
$26,000 and $167,000, 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. At March 31,
1998, accounts receivable - affiliates also included $126,000 due from the two
sold unconsolidated joint ventures for interest earned on permanent loans.
Accounts receivable - affiliates at March 31, 1999 and 1998 also includes
$10,000 and $15,000, respectively, of expenses paid by the Partnership on behalf
of the joint ventures during fiscal 1993.
4. Operating Investment Properties
-------------------------------
At March 31, 1999, the Partnership's balance sheet includes two operating
investment properties (three at March 31, 1998): the wholly-owned Crystal Tree
Commerce Center and the Warner/Red Hill Business Center, owned by Warner/Red
Hill Associates, a majority-owned and controlled joint venture. On November 20,
1998, Sunol Center Associates, a joint venture in which the Partnership had an
interest, sold the property known as the Sunol Center Office Buildings, to an
unrelated third party for $15.75 million. 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.
<PAGE>
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, 1999, 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.
Subsequent to year-end, on May 14, 1999, the Partnership sold the
wholly-owned Crystal Tree Commerce Center to an unrelated third party for $10.55
million. The Partnership received net proceeds of approximately $6,690,000 from
the sale of Crystal Tree after deducting closing costs of approximately
$295,000, net closing proration adjustments of approximately $287,000 and the
repayment of the outstanding first mortgage loan and accrued interest of
$3,278,000. As a result of the sale, the Partnership made a special distribution
to the Limited Partners of $6,700,000, or $67 per original $1,000 investment, on
June 15, 1999. The Partnership will recognize a gain of approximately $1 million
in fiscal 2000 in conjunction with the sale of the Crystal Tree property.
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, 1999, 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, 1999. The Partnership will continue to pursue
collection of this balance during fiscal 2000. However, there are no assurances
that any portion of this balance will be collected.
On November 20, 1998, Sunol Center Associates sold the property known as
the Sunol Center Office Buildings, to an unrelated third party for $15.75
million. The Partnership received net proceeds of approximately $15,532,000 from
the sale of Sunol Center after deducting closing costs of approximately $161,000
and net closing proration adjustments of approximately $57,000. As a result of
the sale, the Partnership made a special distribution to the Limited Partners of
$15,520,000, or $155.20 per original $1,000 investment, on December 4, 1998. The
Partnership recognized a gain of $7,373,000 in fiscal 1999 in connection with
the sale of the Sunol Center property.
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 original co-venturer was
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 100% leased as of March 31, 1999, 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).
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, 1998, the
property was encumbered by a loan with a principal balance of $5,076,000 (see
Note 6).
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,
1998 was $10,943,000, including accrued interest of $3,595,000.
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 (net of the mortgage lender's
participation interest which is discussed further in Note 6) 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; 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.
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 original 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 years ended March 31, 1999 and 1998 and for the Crystal Tree Commerce
Center and Sunol Center Office Building as reported in the Partnership's
statements of operations for the year ended March 31, 1997 (in thousands):
1999 1998 1997
---- ---- ----
Property operating expenses:
Repairs and maintenance $ 573 $ 393 $ 221
Utilities 374 346 202
Insurance 64 82 61
Administrative and other 590 703 641
Management fees 70 69 28
--------- -------- --------
$ 1,671 $ 1,593 $ 1,153
========= ======== ========
5. Investments in Unconsolidated Joint Ventures
--------------------------------------------
As of March 31, 1999, the Partnership had investments in two
unconsolidated joint ventures which own operating investment properties (four at
March 31, 1998). 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.
On October 2, 1998, Lake Sammamish Limited Partnership and Crow
PaineWebber LaJolla Limited Partnership, two joint ventures in which the
Partnership had an interest, sold the properties known as the Chandler's Reach
Apartments and the Monterra Apartments to the same unrelated third party.
Chandler's Reach, located in Redmond, Washington, was sold for $17.85 million,
and Monterra, located in LaJolla, California, was sold for $20.1 million. The
Partnership received net proceeds of approximately $12,359,000 from the sale of
Chandler's Reach after deducting closing costs of approximately $561,000,
closing proration adjustments of approximately $55,000, the repayment of the
existing mortgage note of approximately $3,415,000 and a prepayment penalty of
approximately $354,000 (of which $205,000 was paid by the buyer), and a payment
of approximately $1,311,000 to the Partnership's co-venture partner for its
share of the sale proceeds in accordance with the joint venture agreement. The
Partnership received net proceeds of approximately $14,796,000 from the sale of
Monterra after deducting closing costs of approximately $306,000, closing
proration adjustments of approximately $114,000, the repayment of the existing
mortgage note of approximately $4,672,000 and a prepayment penalty of
approximately $500,000 (of which $295,000 was paid by the buyer), and a payment
of approximately $7,000 to the Partnership's co-venture partner for its share of
the sale proceeds in accordance with the joint venture agreement. The
Partnership distributed $24,800,000 of the net proceeds from the sales of the
Chandler's Reach and Monterra properties in the form of a special distribution
to the Limited Partners of $248 per original $1,000 investment on November 13,
1998. The remainder of the net proceeds were retained and added to the
Partnership's cash reserves to ensure that the Partnership has sufficient
capital resources to fund its share of potential capital improvement expenses at
its remaining investment properties. The Partnership recorded gains of
$9,799,000 and $9,285,000, respectively, on the sales of the Chandler's Reach
and Monterra operating investment properties.
<PAGE>
Condensed combined financial statements of the unconsolidated joint
ventures, for the periods indicated, are as follows:
Condensed Combined Balance Sheets
December 31, 1998 and 1997
(in thousands)
Assets
1998 1997
---- ----
Current assets $ 1,185 $ 1,104
Operating investment properties, net 35,564 51,956
Other assets 4,043 3,913
--------- ---------
$ 40,792 $ 56,973
========= =========
Liabilities and Capital
Current liabilities $ 2,054 $ 2,952
Other liabilities 220 295
Long-term debt and notes payable to venturers - 16,020
Partnership's share of combined capital 14,990 15,507
Co-venturers' share of combined capital 23,528 22,199
--------- ---------
$ 40,792 $ 56,973
========= =========
Condensed Combined Summary of Operations
For the years ended December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
---- ---- ----
Revenues:
Rental income and expense
recoveries $ 10,540 $ 10,194 $ 10,910
Interest and other income 486 517 361
--------- --------- ---------
Total revenues 11,026 10,711 11,271
Expenses:
Property operating expenses 3,618 3,991 4,000
Real estate taxes 1,852 2,290 2,139
Mortgage interest expense 1,379 730 1,068
Interest expense payable to partner 600 800 800
Depreciation and amortization 3,175 2,953 3,163
--------- --------- ---------
10,624 10,764 11,170
--------- --------- ---------
Operating income (loss) 402 (53) 101
Gain on sale of operating
investment properties 21,963 - -
--------- --------- ---------
Net income (loss) $ 22,365 $ (53) $ 101
========= ========= =========
Net income (loss):
Partnership's share of
combined net income (loss) $ 19,396 $ (132) $ (61)
Co-venturers' share of
combined net income (loss) 2,969 79 162
--------- --------- ----------
$ 22,365 $ (53) $ 101
========= ========= ==========
Reconciliation of Partnership's Investment
March 31, 1999 and 1998
(in thousands)
1998 1997
---- ----
Partnership's share of capital at
December 31, as shown above $ 14,990 $ 15,507
Excess basis due to investment in joint
ventures, net (1) 328 873
Partnership's share of ventures' current
liabilities and long-term debt - 8,039
Timing differences due to distributions received
from and contributions sent to joint ventures
subsequent to December 31 (see Note 2) (189) (50)
--------- ---------
Investments in unconsolidated joint
ventures, at equity at March 31 $ 15,129 $ 24,369
========= =========
<PAGE>
(1) The Partnership's investments in joint ventures exceeds its share of the
combined joint ventures' capital accounts by approximately $328,000 and
$873,000 at March 31, 1999 and 1998, 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).
Reconciliation of Partnership's Share of Operations
March 31, 1999, 1998 and 1997
(in thousands)
1998 1997 1996
---- ---- ----
Partnership's share of combined net
income (loss) as shown above $ 19,396 $ (132) $ (61)
Amortization of excess basis (545) (46) (46)
-------- --------- ---------
Partnership's share of unconsolidated
ventures' net income (losses) $ 18,851 $ (178) $ (107)
======== ========== =========
The Partnership's share of the unconsolidated ventures' net income (losses)
is presented as follows in the consolidated statements of operations (in
thousands):
1998 1997 1996
---- ---- ----
Partnership's share of
unconsolidated ventures' losses $ (233) $ (178) $ (107)
Partnership's share of gain on sale
of operating investment properties 19,084 - -
--------- -------- ---------
$ 18,851 $ (178) $ (107)
========= ======== =========
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, 1999 and 1998 is comprised of the
following equity method carrying values (in thousands):
1998 1997
---- ----
Investments in joint ventures, at equity:
Crow PaineWebber LaJolla, Ltd. $ - $ 2,063
Lake Sammamish Limited Partnership - (1,058)
Framingham 1881 - Associates 2,418 2,672
Chicago-625 Partnership 12,711 12,692
-------- ----------
15,129 16,369
Notes receivable:
Crow PaineWebber LaJolla, Ltd. - 4,000
Lake Sammamish Limited Partnership - 4,000
-------- ----------
- 8,000
-------- ----------
$ 15,129 $ 24,369
======== ==========
Cash distributions received from the Partnership's unconsolidated joint
ventures for the years ended March 31, 1999, 1998 and 1997 are as follows (in
thousands):
1999 1998 1997
---- ---- ----
Warner/Red Hill Associates $ - $ - $ 604
Crow PaineWebber LaJolla, Ltd. 14,779 27 176
Lake Sammamish Limited Partnership 12,320 - 22
Framingham 1881 - Associates 610 - 200
Chicago - 625 Partnership 984 1,025 1,148
-------- --------- ---------
$ 28,693 $ 1,052 $ 2,150
======== ========= =========
For the years ended March 31, 1999, 1998 and 1997, the Partnership earned
interest income of $400,000, $800,000 and $800,000, respectively, 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 was an affiliate of the Trammell Crow organization.
The Property 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. As discussed above, the property was sold on
October 2, 1998 to an unrelated third party for $20.1 million.
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 was distributed
quarterly in the following order of priority: 1) the Partnership and the
co-venturer were each repaid accrued interest and principal, in that order, on
any optional loans (as described below) they made to the joint venture; 2) the
Partnership received a cumulative annual preferred return of 10% per annum on
the Partnership's Investment; and 3) any remaining net cash flow was to be
distributed 85% to the Partnership and 15% to the co-venturer. The cumulative
unfunded amount relating to the Partnership's preferential return was $4,940,000
at October 2, 1998, the date the property was sold.
To the extent that there were distributable funds, as defined, net income
(other than gain from a sale or other disposition of the Property) was allocated
to the Partnership to the extent of its preferential return, with the remainder
allocated 85% to the Partnership and 15% to the co-venturer. In the event there
were no distributable funds, as defined, net income was 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) were allocated 99% to the Partnership
and 1% to the co-venturer, provided that if the co-venturer had a credit balance
in its capital account, it was 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 were 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 was 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 had a note payable to the Partnership in the amount of
$4,000,000 which bore interest at 10% per annum. As a result of the debt
modification discussed in Note 6, this note was unsecured. All unpaid principal
and interest on the note was due on July 1, 2011. This note was repaid out of
the proceeds from the sale of the property. Interest expense on the note, which
was payable on a quarterly basis, amounted to $200,000, $400,000 and $400,000,
respectively, for the years ended March 31, 1999, 1998 and 1997.
The Partnership received 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 was cancelable at the option of the Partnership upon the
occurrence of certain events. The management fee was 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 is located in Redmond, Washington. As
discussed above, the Property was sold on October 2, 1998 to an independent
third party for $17.85 million.
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 October 2, 1998, the date
the property was sold, the property was encumbered by a loan with a principal
amount of $3,402,000 (see Note 6).
Net cash flow (as defined) was distributed quarterly in the following
order of priority: First, the Partnership and Crow were each repaid accrued
interest and principal, in that order, on any optional loans. Second, the
Partnership received 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 was to receive a distribution equal to
$350,000. Fourth, any remaining net cash flow was to be distributed 75% to the
Partnership and 25% to Crow and the Limited Partnership. The cumulative amount
of the preference return due to the Partnership at October 2, 1998, the date the
property was sold, was approximately $2,497,000.
Net income (other than gains from a sale or other disposition of the
Property) was 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 were no distributable funds from
operations, net income was allocated 75% to the Partnership and 25% to Crow and
the Limited Partner; net losses (other than losses from a sale or other
disposition) were allocated 99% to the Partnership and 1% to Crow and the
Limited Partner, provided that if Crow or the Limited Partner had a credit
balance in its capital account, it was 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 joint venture had a note payable to the Partnership in the amount of
$4,000,000 which bore interest at 10% per annum. As a result of the debt
modification discussed in Note 6, this note was unsecured. All unpaid principal
and interest on the note was due on October 1, 2011. This note was repaid out of
the proceeds from the sale of the property. Interest expense on the note, which
was payable on a quarterly basis, amounted to $200,000, $400,000 and $400,000,
respectively, for the years ended March 31, 1999, 1998 and 1997.
The Partnership received 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 received 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 was
cancelable at the option of the Partnership upon the occurrence of certain
events. The annual management fee, payable monthly, was 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,
1999, 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.
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,
1998 was $5,756,000.
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.
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 the 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 93% leased as of March 31, 1999, 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 has made Leasing Expense Contributions totalling approximately
$3,177,000 through December 31, 1998.
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 additional annual depreciation charges 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 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 $6,459,000 at December 31, 1998.
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, 1999 and 1998 consist of the following (in thousands):
1999 1998
---- ----
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,
2000. 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, 1999 and 1998. $ 6,088 $ 6,188
8.39% nonrecourse note payable to
an insurance company, which was
secured by the Crystal Tree
Commerce Center operating
investment property (see discussion
below). Monthly payments including
interest of $28 were 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, 1999 and 1998. 3,261 3,318
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. 5,076 5,214
------- -------
14,425 14,720
Less: Discount on Warner/Red Hill
debt, net of amortization of $932
in 1999 (see discussion below) (898) -
------- -------
$13,527 $14,720
======= =======
The scheduled annual principal payments to retire notes payable are as
follows (in thousands):
2000 $ 314
2001 6,193
2002 3,283
2003 156
Thereafter 4,479
--------
$ 14,425
========
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. Subsequent to
year-end, the Partnership negotiated a one-year extension of the maturity date
to May 31, 2000. The interest rate of 9.125% and monthly principal and interest
payments of $55,000 remain unchanged. The Partnership paid an extension fee of
$30,000 to the lender to obtain the extension.
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 plus "appreciation interest" which is due upon the sale of
the property or at maturity, will be required The loan payable is subject to a
prepayment penalty as described in the amended and restated loan agreement.
Additionally, the insurance company has the option to purchase the Business
Center in accordance with the terms of the "purchase option" described in the
loan agreement if the Partnership desires or intends to sell the Business
Center. 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 or at
maturity, which ever is sooner, the lender will receive appreciation interest
equal to 40% of the amount by which the fair market value of the Business Center
exceeds the sum of the outstanding principal and accrued interest for the
subject loan and $350,000. The $350,000 is an equity contribution which was
required by the extension and modification agreement. 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. The
balance of the escrow account was $153,000 and $150,000 at December 31, 1998 and
1997, respectively. 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.
Effective in fiscal 1999, the Partnership adopted Statement of Position
97-1, Accounting by Participating Mortgage Loan Borrowers ("SOP 97-1"), which
establishes the borrower's accounting for a participating mortgage loan if the
lender participates in increases in the market value of the mortgaged real
estate project, the results of operations of that mortgaged real estate project,
or both. SOP 97-1 states that if a lender is entitled to participate in the
market value of the mortgaged real estate project, the borrower should determine
the fair value of the participation feature at the inception of the loan and
recognize a participation liability in that amount, with a corresponding entry
to a debt discount account. The debt discount is to be amortized over the life
of the loan using the interest method and the effective interest rate. At the
end of each reporting period, the participation liability should be adjusted to
equal the current fair value of the participation feature. The Partnership's
mortgage participation liability related to the Warner/Red Hill debt totalled
$1,830,000 at December 31, 1998. Due to the expected sale of the Warner/Red Hill
property during fiscal 2000, the Partnership has elected to amortize the debt
discount over the expected remaining holding period of two years as opposed to
over the remaining term of the mortgage note. Amortization of the debt discount
charged to interest expense totalled $932,000 for fiscal 1999.
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 rested
with the related joint ventures and, accordingly, these amounts were recorded on
the books of the joint ventures. These loans were repaid in full during fiscal
1999 from the proceeds of the sales of the properties as described in Note 5.
The legal liability for the loan secured by the Crystal Tree Commerce Center
rested with the Partnership and, accordingly, this loan was recorded on the
books of the Partnership. The Crystal Tree loan bore interest at a rate of 8.39%
and required monthly principal and interest payments of $28,000 through maturity
in September 2001. This loan was repaid in full subsequent to year-end upon the
sale of the Crystal Tree operating property (see Note 4).
7. Bonds Payable
-------------
Bonds payable consisted 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. Since the operating investment property was sold on
November 20, 1998, the liability for the bond assessments has been transferred
to the buyer. Therefore, the Sunol Center joint venture is no longer be liable
for the bond assessments.
8. Rental Revenues
---------------
The Crystal Tree and Warner/Red Hill 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
------------------------ ------
1999 $ 2,500
2000 2,131
2001 1,833
2002 1,413
2003 242
-------
$ 8,119
=======
<PAGE>
Schedule III - Real Estate and Accumulated Depreciation
<TABLE>
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
March 31, 1999
(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 $ 3,261 $3,217 $15,598 $(1,747) $2,444 $14,624 $17,068 $ 7,269 1983 10/23/85 5-27 yrs
Office
Building
Tustin, CA 5,076 3,124 9,126 (6,851) 1,256 4,143 5,399 2,946 1984 12/18/85 35 years
------- ------ ------- ------- ------ ------- ------- -------
$ 8,337 $6,341 $24,724 $(8,598) $3,700 $18,767 $22,467 $10,215
======= ====== ======= ======= ====== ======= ======= =======
Notes:
(A) The aggregate cost of real estate owned at December 31, 1998 for Federal income tax purposes is approximately $30,805.
(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 Note 6 to the financial statements for a description of the terms of the debt encumbering the properties.
(D) Reconciliation of real estate owned:
1999 1998 1997
---- ---- ----
Balance at beginning of period $ 37,909 $32,284 $31,733
Consolidation of Warner/Red Hill joint venture - 5,409 -
Increase due to additions 549 216 551
Dispositions (15,991) - -
-------- ------- -------
Balance at end of period $ 22,467 $37,909 $32,284
======== ======= =======
(E) Reconciliation of accumulated depreciation:
Balance at beginning of period $15,131 $10,823 $ 9,499
Consolidation of Warner/Red Hill joint venture - 2,844 -
Depreciation expense 1,759 1,464 1,324
Dispositions and retirements (6,675) - -
-------- -------- -------
Balance at end of period $ 10,215 $15,131 $10,823
======== ======= =======
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
PaineWebber Equity Partners One Limited Partnership:
We have audited the accompanying combined balance sheets of the 1998 and
1997 Combined Joint Ventures of PaineWebber Equity Partners One Limited
Partnership as of December 31, 1998 and 1997, and the related combined
statements of operations and changes in venturers' capital, and cash flows for
the years then ended. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position of the
1998 and 1997 Combined Joint Ventures of PaineWebber Equity Partners One Limited
Partnership at December 31, 1998 and 1997, and the combined results of their
operations and their cash flows for the years 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
February 22, 1999
<PAGE>
1998 and 1997 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
December 31, 1998 and 1997
(In thousands)
ASSETS
1998 1997
---- ----
Current assets:
Cash and cash equivalents $ 357 $ 323
Accounts receivable 824 772
Other current assets 4 9
-------- ---------
Total current assets 1,185 1,104
Operating investment properties:
Land 8,785 15,762
Building, improvements and equipment 48,342 61,008
-------- ---------
57,127 76,770
Less accumulated depreciation (21,563) (24,814)
-------- ---------
35,564 51,956
Escrowed cash 1,188 979
Long-term rents receivable 1,264 1,319
Due from partners 269 269
Deferred expenses, net of accumulated
amortization of $1,604 ($1,512 in 1997) 1,224 1,281
Other assets 98 65
-------- ---------
$ 40,792 $ 56,973
======== =========
LIABILITIES AND VENTURERS' CAPITAL
Current liabilities:
Current portion of long-term debt $ - $ 136
Accounts payable and accrued liabilities 215 351
Accounts payable - affiliates 4 159
Real estate taxes payable 1,775 1,975
Distributions payable to venturers - 204
Other current liabilities 60 127
-------- ---------
Total current liabilities 2,054 2,952
Tenant security deposits 220 295
Notes payable to venturers - 8,000
Long-term debt - 8,020
Venturers' capital 38,518 37,706
--------- ---------
$ 40,792 $ 56,973
========= =========
See accompanying notes.
<PAGE>
1998 and 1997 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, 1998 and 1997
(In thousands)
1998 1997
---- ----
Revenues:
Rental income and expense recoveries $ 10,540 $ 10,194
Interest income 30 25
Other income 456 492
--------- ---------
11,026 10,711
Expenses:
Depreciation expense 2,741 2,716
Real estate taxes 1,852 2,290
Interest expense 1,379 730
Interest expense payable to partner 600 800
Property operating expenses 1,721 1,159
Repairs and maintenance 905 1,371
Utilities 512 619
Management fees 239 391
Salaries and related expenses 169 381
Amortization expense 434 237
Insurance 72 70
--------- ---------
Total expenses 10,624 10,764
--------- ---------
Operating income (loss) 402 (53)
Gain on sales of operating investment
properties 21,963 -
--------- ---------
Net income (loss) 22,365 (53)
Contributions from venturers 1,814 2,093
Distributions to venturers (23,367) (2,836)
Venturers' capital, beginning of year 37,706 38,502
--------- ---------
Venturers' capital, end of year $ 38,518 $ 37,706
========= =========
See accompanying notes.
<PAGE>
1998 and 1997 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998 and 1997
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) $ 22,365 $ (53)
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities:
Gain on sales of operating investment
properties (21,963) -
Depreciation and amortization 3,175 2,953
Amortization of deferred financing costs 19 19
Changes in assets and liabilities:
Accounts receivable (52) 87
Other current assets 5 -
Escrowed cash (209) 35
Long-term rents receivable 55 49
Deferred expenses (396) (324)
Other assets (33) (230)
Accounts payable and accrued liabilities (136) 233
Accounts payable - affiliates (155) -
Real estate taxes payable (200) 120
Other current liabilities (67) (24)
Tenant security deposits (75) 9
--------- ----------
Total adjustments (20,032) 2,927
---------- ----------
Net cash provided by
operating activities 2,333 2,874
--------- ----------
Cash flows from investing activities:
Additions to operating investment properties (1,969) (2,219)
Net proceeds from sales of operating
investment properties 37,583 -
--------- ----------
Net cash provided by (used in)
investing activities 35,614 (2,219)
--------- ----------
Cash flows from financing activities:
Repayment of long-term debt (8,156) (125)
Repayment of notes payable to venturers (8,000) -
Contributions from venturers 1,814 2,093
Distributions to venturers (23,571) (2,836)
--------- ----------
Net cash used in financing activities (37,913) (868)
--------- ----------
Net increase (decrease) in cash and cash equivalents 34 (213)
Cash and cash equivalents, beginning of year 323 536
--------- ----------
Cash and cash equivalents, end of year $ 357 $ 323
========= ==========
Cash paid during the year for interest $ 1,960 $ 1,452
========= ==========
See accompanying notes.
<PAGE>
1998 and 1997 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARNERSHIP
Notes to Combined Financial Statements
1. Organization
------------
The accompanying financial statements of the 1998 and 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
On October 2, 1998, Lake Sammamish Limited Partnership and Crow PaineWebber
LaJolla Limited Partnership sold the properties known as the Chandler's Reach
Apartments and the Monterra Apartments to the same unrelated third party.
Chandler's Reach, located in Redmond, Washington, was sold for $17.85 million,
and Monterra, located in LaJolla, California, was sold for $20.1 million. PWEP1
received net proceeds of approximately $12,359,000 from the sale of Chandler's
Reach after deducting closing costs of approximately $561,000, closing proration
adjustments of approximately $55,000, the repayment of the existing mortgage
note of approximately $3,415,000 and a prepayment penalty of approximately
$354,000, of which $205,000 was paid by the buyer, and a payment of
approximately $1,311,000 to the PWEP1's co-venture partner for its share of the
sale proceeds in accordance with the joint venture agreement. PWEP1 received net
proceeds of approximately $14,796,000 from the sale of Monterra after deducting
closing costs of approximately $306,000, closing proration adjustments of
approximately $114,000, the repayment of the existing mortgage note of
approximately $4,672,000 and a prepayment penalty of approximately $500,000, of
which $295,000 was paid by the buyer, and a payment of approximately $7,000 to
PWEP1's co-venture partner for its share of the sale proceeds in accordance with
the joint venture agreement.
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, 1998 and 1997 and revenues and expenses for
the years 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 additional annual
depreciation charges to adjust the carrying value of the operating investment
property such that it will match the expected reversion value at the time of
disposition.
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):
1999 $ 6,184
2000 6,008
2001 4,264
2002 3,381
2003 2,188
Thereafter 6,898
---------
$ 28,923
=========
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, 1998 and 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 operated 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. As
discussed in Note 1, the property was sold on October 2, 1998.
b. Lake Sammamish Limited Partnership
----------------------------------
The joint venture owned and operated 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. As
discussed in Note 1, the property was sold on October 2, 1998.
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 1998 and 1997 revenues include $184,000 and $178,000, respectively,
relating to this lease.
Accounts payable - affiliates at December 31, 1998 consists of management
fees payable to a property manager. 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 included 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 were at 10%
per annum, payable quarterly. Principal was 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 bore interest
at 10% per annum. Accrued interest was payable quarterly. Principal was due on
July 1, 2011. Interest expense on these two notes payable aggregated $800,000
for the year ended December 31, 1997 and $600,000 for the year ended December
31, 1998. These notes were paid in full upon the sales of these properties on
October 2, 1998.
6. Mortgage Notes Payable
----------------------
Mortgage notes payable at December 31, 1997 consisted of the following (in
thousands):
1997
----
8.45% nonrecourse loan payable to a third
party which was secured by the Monterra
Apartments. The loan required monthly
principal and interest payments of $40 and was
due to mature 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 was secured by the Chandler's
Reach Apartments. The loan required monthly
principal and interest payments of $29 and was
due to mature 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 repayment of principal and interest on the loans described above was
the responsibility of PWEP1, which received the loan proceeds. PWEP1 had
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. These notes were paid in
full upon the sales of these properties on October 2, 1998.
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, 1998 and 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 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. The terms of the agreement extended the maturity date of the loan to May
1999. Subsequent to year-end, PWEP1 and the affiliated partnership negotiated a
one-year extension of the maturity date to May 31, 2000. The interest rate of
9.125% and monthly principal and interest payments of $55,000 remain unchanged.
At December 31, 1998, the aggregate indebtedness of EP1 and its affiliated
partnership which is secured by the 625 North Michigan Office Building was
approximately $15,284,000. 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
1998 and 1997 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(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 $15,284 $8,112 $35,683 $9,509 $8,112 $45,192 $53,304 $19,992 1968 12/16/86 5-17 yrs.
Office
Building
Framingham,
MA - 1,317 5,510 (3,004) 673 3,150 3,823 1,571 1987 12/12/86 5-40 yrs.
------- ------ ------- ------ ------ ------- ------- -------
$15,284 $9,429 $41,193 $6,505 $8,785 $48,342 $57,127 $21,563
======= ====== ======= ====== ====== ======= ======= =======
Notes:
(A) The aggregate cost of real estate owned at December 31, 1998 for Federal income tax purposes is approximately $49,995.
(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:
1998 1997
---- ----
Balance at beginning of period $ 76,770 $ 74,551
Increase due to additions 1,969 2,219
Dispositions (21,612) -
-------- --------
Balance at end of period $ 57,127 $ 76,770
======== ========
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 24,814 $ 22,098
Depreciation expense 2,741 2,716
Dispositions (5,992) -
-------- --------
Balance at end of period $ 21,563 $ 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
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 the years then
ended. Our audits also included the financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the 1996
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 the years 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
February 8, 1997
<PAGE>
1996 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 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 and 1995
(In thousands)
1996 1995
---- ----
Revenues:
Rental income and expense recoveries $ 10,910 $ 10,691
Interest income 32 23
Other income 329 223
--------- --------
11,271 10,937
Expenses:
Depreciation expense 2,893 2,827
Real estate taxes 2,139 1,980
Interest expense 1,068 1,089
Interest expense payable to partner 800 800
Property operating expenses 1,151 1,203
Repairs and maintenance 1,201 1,178
Utilities 756 701
Management fees 450 440
Salaries and related expenses 368 333
Amortization expense 270 353
Insurance 74 72
Bad debt expense - 1
--------- --------
Total expenses 11,170 10,977
--------- --------
Net income (loss) 101 (40)
Contributions from venturers 1,494 441
Distributions to venturers (3,646) (2,395)
Venturers' capital, beginning of year 36,382 38,376
--------- --------
Venturers' capital, end of year $ 34,331 $ 36,382
========= ========
See accompanying notes.
<PAGE>
1996 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995
---- ----
Cash flows from operating activities:
Net income (loss) $ 101 $ (40)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 3,163 3,180
Amortization of deferred financing costs 43 40
Bad debts - 1
Changes in assets and liabilities:
Accounts receivable 75 141
Other current assets (1) -
Escrowed cash 10 43
Long-term rents receivable 95 -
Deferred expenses (312) (309)
Other assets 1 14
Accounts payable and accrued liabilities 140 243
Accounts payable - affiliates - (136)
Real estate taxes payable (18) (233)
Other current liabilities 24 (45)
Tenant security deposits 20 77
------- --------
Total adjustments 3,240 3,016
------- --------
Net cash provided by operating activities 3,341 2,976
------- --------
Cash flows from investing activities:
Additions to operating investment properties (976) (562)
------- --------
Net cash used in investing activities (976) (562)
------- --------
Cash flows from financing activities:
Repayment of long-term debt and deferred interest (246) (234)
Contributions from venturers 1,494 441
Distributions to venturers (3,646) (2,198)
------- --------
Net cash used in financing activities (2,398) (1,991)
------- --------
Net (decrease) increase in cash and cash equivalents (33) 423
Cash and cash equivalents, beginning of year 861 438
------- --------
Cash and cash equivalents, end of year $ 828 $ 861
======= ========
Cash paid during the year for interest $ 1,657 $ 1,670
======= ========
Write-off of fully depreciated building improvements $ 1,041 $ -
======= ========
See accompanying notes.
<PAGE>
1996 COMBINED JOINT VENTUES OF
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Organization
------------
The accompanying financial statements of the 1996 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 the years 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
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. 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 additional annual depreciation
charges to adjust the carrying value of the operating investment property
such that it will match the expected reversion value at the time of
disposition.
Deferred expenses
-----------------
Deferred expenses consist primarily of organization costs which have
been amortized over five years, loan fees which are being amortized over the
terms of the related loans, and lease commissions and rental concessions
which are being amortized over the term of the applicable lease.
Cash and cash equivalents
-------------------------
For purposes of the statement of cash flows, the Combined Joint Ventures
consider all highly liquid investments, money market funds and certificates
of deposit purchased with original maturity dates of three months or less to
be cash equivalents.
Rental revenues
---------------
Certain joint ventures have operating leases with tenants which provide
for fixed minimum rents and reimbursements of certain operating costs.
Rental revenues are recognized on a straight-line basis over the term of the
related lease agreements. Rental revenues for the residential properties are
recognized when earned.
Minimum rental revenues to be recognized on the straight-line basis in
the future on noncancellable leases are as follows (in thousands):
1997 $ 5,647
1998 5,089
1999 4,239
2000 4,029
2001 2,140
Thereafter 2,734
----------
$ 23,878
==========
Income tax matters
------------------
The Combined Joint Ventures are comprised of entities which are not
taxable and, accordingly, the results of their operations are included on
the tax returns of the various partners. Accordingly, no income tax
provision is reflected in the accompanying combined financial statements.
Fair value of financial instruments
-----------------------------------
The carrying amounts of cash and cash equivalents and escrowed cash
approximate their respective fair values at December 31, 1996 and 1995 due
to the short-term maturities of such instruments. It is not practicable for
management to estimate the fair value of the notes payable to venturers
without incurring excessive costs because the loans were provided in
non-arm's length transactions without regard to collateral issues or other
traditional conditions and covenants. Where practicable, the fair value of
long-term debt is estimated using discounted cash flow analysis, based on
the current market rates for similar types of borrowing arrangements.
3. Joint Ventures
---------------
See Note 5 to the financial statements of PWEP1 included in this Annual
Report for a more detailed description of the joint venture partnerships.
Descriptions of the ventures' properties are summarized below:
a. Warner/Red Hill Associates
--------------------------
The joint venture owns and operates the Warner/Red Hill Business Center
consisting of three two-story office buildings totalling 93,895 net
rentable square feet on approximately 4.76 acres of land. The business
center is part of a 4,200 acre business complex in Tustin, California
(see Note 4).
b. Crow PaineWebber LaJolla, Ltd.
------------------------------
The joint venture constructed and operates the Monterra Apartments
consisting of garden-style apartments and includes 180 one- and
two-bedroom units totalling approximately 136,000 square feet in
LaJolla, California.
c. Lake Sammamish Limited Partnership
----------------------------------
The joint venture owns and operates the Chandler's Reach Apartments
consisting of 166 units with approximately 135,110 net rentable square
feet in eleven two- and three-story buildings located in Redmond,
Washington.
d. Framingham - 1881 Associates
----------------------------
The joint venture owns and operates the 1881 Worcester Road office
building consisting of 64,189 net rentable square feet in one two-story
building located in Framingham, Massachusetts (see Note 4).
e. Chicago - 625 Partnership
-------------------------
The joint venture constructed and operates the 625 North Michigan office
building consisting of a 27-story commercial office tower containing an
aggregate of 387,000 square feet (324,829 rentable space) located in
Chicago, Illinois.
The following description of the joint venture agreements provides
certain general information.
Allocations of net income and loss
----------------------------------
The agreements generally provide that net income and losses (other than
those resulting from sales or other dispositions of the projects) will be
allocated to the venture partners in the same proportions as actual cash
distributions from operations.
Gains or losses resulting from sales or other dispositions of the
projects shall be allocated according to the formulas provided in the joint
venture agreements.
Distributions
-------------
Distributable funds will generally be distributed first, to repay
co-venturer negative cash flow contributions; second, to repay accrued
interest and principal on certain loans and, third, specified amounts to
PWEP1, with the balance distributed in amounts ranging from 85% to 29% to
PWEP1 and 15% to 71% to the co-venturers, as described in the joint venture
agreements.
Distributions of net proceeds upon the sale or disposition of the
projects shall be made in accordance with formulas provided in the joint
venture agreements.
4. 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.
5. 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
6, these notes are unsecured.
6. 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 7. The
fair value of this mortgage note approximated its carrying value as of
December 31, 1996 and 1995.
<PAGE>
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, 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 6, 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 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(In thousands)
Costs
Capitalized Life on Which
(Removed) Depreciation
Initial Cost to Subsequent to Gross Amount at Which Carried at in Latest
Venture Acquisition End of Year Income
Buildings & Buildings & Buildings & Accumulated Date of Date Statement
Description Encumbrances Land Improvements Improvements Land Improvements Total Depreciation Construction Acquired is Computed
- ----------- ------------ ---- ------------ ------------ ---- ------------ ----- ------------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED JOINT VENTURES:
Office
Building
Chicago, IL $15,868 $ 8,112 $35,683 $ 6,357 $ 8,112 $42,040 $50,152 $15,547 1968 12/16/86 5-17 yrs.
Office
Building
Tustin, CA 5,350 3,124 9,126 (6,099) 1,428 4,723 6,151 2,844 1984 12/18/85 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 $80,696,000.
(B) See Notes 6 and 7 to theCombined Financial Statements for a description of the terms of the debt
encumbering the properties.
(C) Reconciliation of real estate owned:
1996 1995
---- ----
Balance at beginning of period $ 80,767 $ 80,205
Increase due to additions 976 562
Write-offs due to disposals (1,041) -
--------- ----------
Balance at end of period $ 80,702 $ 80,767
========= ==========
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 23,090 $ 20,263
Depreciation expense 2,893 2,827
Write-offs due to disposals (1,041) -
--------- ----------
Balance at end of period $ 24,942 $ 23,090
========= ==========
(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, 1999 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-31-1999
<PERIOD-END> Mar-31-1999
<CASH> 5,753
<SECURITIES> 0
<RECEIVABLES> 203
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,818
<PP&E> 37,596
<DEPRECIATION> 10,215
<TOTAL-ASSETS> 34,107
<CURRENT-LIABILITIES> 416
<BONDS> 13,527
0
0
<COMMON> 0
<OTHER-SE> 18,334
<TOTAL-LIABILITY-AND-EQUITY> 34,107
<SALES> 0
<TOTAL-REVENUES> 31,793
<CGS> 0
<TOTAL-COSTS> 4,420
<OTHER-EXPENSES> 233
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,053
<INCOME-PRETAX> 25,087
<INCOME-TAX> 0
<INCOME-CONTINUING> 25,087
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,087
<EPS-BASIC> 12.41
<EPS-DILUTED> 12.41
</TABLE>
