FORM 10-KSB--ANNUAL OR TRANSITIONAL REPORT UNDER
SECTION 13 OR 15(D)
FORM 10-KSB
[X] Annual Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee Required]
For the fiscal year ended December 31, 1996
or
[ ] Transition Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee Required]
For the transition period.........to.........
Commission file number 0-14470
INVESTORS FIRST-STAGED EQUITY L.P.
(Name of small business issuer in its charter)
Delaware 36-3310965
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
630 Dundee Road, Suite 220
Northbrook, Illinois 60062
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (847) 562-4537
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Units of Limited Partnership Interest
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the past 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
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $7,363,000
State the aggregate market value of the voting partnership interests held by
non-affiliates computed by reference to the price at which the partnership
interests were sold, or the average bid and asked prices of such partnership
interests, as of December 31, 1996: Market value information for the
Registrant's partnership interests is not available. Should a trading market
develop for these interests, it is management's belief that such trading would
not exceed $25,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Prospectus of the Registrant dated August 16, 1985, as
supplemented by Supplement numbers 1, 2, 3, and 4 dated January 6, 1986, January
30, 1986, December 18, 1986 and September 9, 1987 (collectively, the
"Prospectus"), and filed pursuant to Rules 424(b) and (c) under the Securities
Act of 1933 are incorporated by reference into Part I of this Annual Report on
Form 10-KSB.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Investors First-Staged Equity L.P. (the "Partnership" or "Registrant") is a
limited partnership formed in May 1985 under the Delaware Revised Uniform
Limited Partnership Act. The business of the Partnership is to own, manage and
ultimately dispose of income-producing residential and commercial properties.
The Partnership raised total equity of $48,802,000 from the sale of Limited
Partnership Interests (the "Units", the "Limited Partnership Units") to the
public in 1985 pursuant to a Registration Statement on Form S-11 under the
Securities Act of 1933 (Registration Statement No. 2-97608). The Partnership
was subsequently granted on June 27, 1986, a 1934 Act file number (0-14470)
because of the Partnership's registration on Form 8-A as a Section 12(g)
reporting company under the Securities Exchange Act of 1934.
A total of 16,511 units were sold to the public at $3,000 per unit as of the
termination date of the offering, December 31, 1985. Limited Partners in the
Partnership paid $1,000 per unit upon subscription and executed a non-recourse
note for the remaining $2,000 per unit. The non-recourse note provided for the
optional payment, without interest, of $1,000 per unit on each of February 15,
1986 and 1987. The Partnership has collected capital contributions totaling
$48,802,000; $16,511,000 pertaining to the payments due in 1985, $16,511,000
pertaining to the payments due in 1986 and the remarketed units sold in 1986 and
$15,780,000 pertaining to the payments due in 1987 and the remarketed units sold
in 1987. As each whole unit represents capital contributions aggregating
$3,000, the final number of units outstanding is 16,267. The Limited Partners
share in the ownership of the Partnership's real property investments according
to the number of Limited Partnership Units held.
On October 2, 1985, the Partnership acquired interests in six (6) real
property investments, two of which, Village Green Apartments and Woodland
Meadows Apartments, were sold at foreclosure sales to parties unaffiliated with
the Partnership in May 1990 and June 1991, respectively. East Bluff Apartments
was foreclosed upon by the Federal Deposit Insurance Corporation ("FDIC"),
holder of the second mortgage, on May 23, 1994. The three (3) remaining real
property investments are described under "Description of Properties" in "Item
2". The Partnership acquired interests in the properties by purchasing a
99.99% interest in each subpartnership which directly owned fee title to the
individual properties. Proceeds of the offering were used for the payment of
the costs associated with the offering and the costs of acquiring the interests
in the properties, including acquisition fees payable to the General Partner and
the assumption of liabilities of the acquired subpartnerships. Such liabilities
included advances and accrued interest thereon made by affiliates of the General
Partner to the subpartnerships and expenses reimbursable to and brokerage fees
paid to non-affiliated entities by affiliates in connection with the acquisition
of properties by the subpartnerships. Additional information regarding the
properties is included on pages 40 through 61 of the Prospectus dated August 16,
1985, which is incorporated herein by reference.
The Partnership's real property investments are subject to competition from
similar types of properties owned by both affiliates and non-affiliates.
Average annual occupancy levels for the properties currently owned by the
Partnership are set forth in "Item 2, Description of Properties". The
Partnership's existing real property investments are located in California. For
information concerning the potential effect on the Partnership of VMS Realty
Partners' ("VMSRP", an affiliate of the General Partner) current liquidity
position, see "Recent Developments - VMS Realty Partners and Affiliates" below.
The Partnership is engaged solely in the business of real estate investment.
Therefore, a presentation of industry segment information is not applicable.
On January 1, 1986, the VMS organization underwent a restructuring. Under this
reorganization, the General Partner's name was changed from VMS Realty Partners
to VMS Realty Investment and certain of its assets were transferred by
assignment to a new partnership created under the laws of the State of Illinois.
Effective January 1, 1986, the General Partner, VMS Realty Investment (formerly
known as VMS Realty Partners) assigned its interest in future profits, losses,
operating cash flow and liquidation proceeds of the Partnership to VMS Realty
Investment II, which subsequently became the General Partner. VMS Realty
Investment II is a general partnership formed to be the sole general partner of
Investors First-Staged Equity L.P. and has the same constituent partners as VMS
Realty Investment, its predecessor. Effective January 1, 1987, VMS Realty
Investment II assigned its beneficial interest in the Partnership to VMS Realty
Investment.
The Partnership has no employees. Affiliates of Insignia Financial Group, Inc.
("Insignia") have provided real estate advisory and asset management services to
the Partnership since January 1, 1994. As advisor, such affiliates provide all
partnership accounting and administrative services, investment management and
supervisory services over property management and leasing.
The terms of transactions between the Partnership and affiliates of the General
Partner of the Partnership are set forth in "Item 12, Certain Relationships and
Related Transactions", to which reference is hereby made for a description of
such terms and transactions.
RECENT DEVELOPMENTS - VMS REALTY PARTNERS AND AFFILIATES
PAST LIQUIDITY DIFFICULTIES
As previously reported, VMS Realty Partners, an affiliate of VMS Realty
Investment, Ltd. ("VMSRIL"), and certain of its affiliates had experienced
severe liquidity problems. Because of VMS Realty Partners' inability to resolve
the liquidity problems affecting it and its affiliates, VMS Realty Partners had
generally suspended making payments relating to operating assets of it and its
affiliates, other than payments generally necessary to maintain the operation of
such assets and changed the business of VMS Realty Partners and its affiliates,
eliminating the acquisition and development of real estate assets. However,
VMSRIL and each of its affiliates that serve as general partners of the
Syndicated Partnerships, as defined below, continued and are continuing to
perform their responsibilities as general partners. On November 18, 1993, VMS
Realty Partners assigned (without change in terms, including compensation) its
asset management responsibilities for the Syndicated Partnerships, other than
VMS National Properties Joint Venture, to Strategic Realty Advisors ("SRA"), a
real estate company with primary emphasis on asset management and property
management. SRA is wholly owned by Joel A. Stone, who is the sole shareholder
of one of the corporate partners of VMSRIL. In the case of a number of the
Syndicated Partnerships, including the Partnership, SRA subsequently assigned
such responsibilities to an affiliate of Insignia Financial Group, Inc.
("Insignia"), a fully integrated real estate service organization. See
"Insignia and MAE." SRA has retained, and is performing, such asset management
responsibilities for Syndicated Partnerships owning hotels. VMS Realty Partners
had previously assigned its asset management responsibilities for VMS National
Properties Joint Venture directly to an affiliate of Insignia. See "Insignia
Transactions - Management". The "Syndicated Partnerships" are those
partnerships, including the Partnership, of which VMSRIL, one of the VMS
Principal Entities (as defined below), or an affiliate thereof, is the managing
general partner (or a general partner of a general partner) and as to which
limited partnership interests were sold to investors through syndications.
VMSRIL AGREEMENT AND CRA
In response to the above-described liquidity problems, on March 25, 1992,
VMSRIL, the managing general partner of the Partnership, and an affiliate of
(i.e., under common control with) the VMS Principal Entities, as defined below,
entered into an agreement (the "VMSRIL Agreement") with its single major
creditor, European American Bank, and one of its affiliates, EURAM (collectively
"EAB"), which held a lien on all of VMSRIL's assets.
The VMSRIL Agreement provided that for a 12-month period VMSRIL was prohibited
from engaging in business activities or operations unrelated to the orderly
liquidation of its existing assets, which liquidation was to be conducted
consistent with its duties as the managing general partner of the Syndicated
Partnerships. Notwithstanding the foregoing, the VMSRIL Agreement provided that
VMSRIL was not prohibited from engaging in any activities with respect to the
Syndicated Partnerships, including, but not limited to, the continuation of the
Syndicated Partnerships' business operations.
Under the VMSRIL Agreement, in order to facilitate VMSRIL's operation of its
assets in a manner intended to preserve and, if possible, enhance the value of
such assets prior to their disposition, EAB granted VMSRIL a moratorium on
enforcement of all indebtedness owed to EAB by VMSRIL. EAB agreed that, during
the one year term of the VMSRIL Agreement (assuming no default by VMSRIL in the
performance of its obligations under the VMSRIL Agreement), EAB would not take
any action which would materially adversely affect the interests of VMSRIL,
including, without limitation, demanding payment of indebtedness and filing a
petition to institute an involuntary bankruptcy proceeding against VMSRIL.
Also in response to the above-described liquidity problems, on March 31, 1992,
certain affiliates of VMSRIL, specifically VMS Realty Partners, Chicago Wheaton
Partners, VMS Realty Investors, VMS Financial Services, VMS Financial Guarantee
Limited Partnership and VMS Realty Guarantee Limited Partnership (the "VMS
Principal Entities") entered into the VMS Creditor Repayment Agreement
(the "CRA") with a number of parties including substantially all of the
unsecured and undersecured creditors (other than trade creditors) of the VMS
Principal Entities and certain of the unsecured or undersecured creditors (other
than trade creditors) of their affiliates (collectively, the "Creditors").
Although VMSRIL is a party to the CRA, it is generally not considered a VMS
Principal Entity thereunder.
The CRA was intended to achieve a purpose comparable to that described above for
the VMSRIL Agreement. In consideration of the benefits received by the
Creditors under the CRA, the Creditors granted the VMS Principal Entities a
moratorium similar to that contained in the VMSRIL Agreement.
During the respective terms of, and under certain circumstances specified in,
the VMSRIL Agreement and the CRA, VMS Realty Partners and certain of its
affiliates, including VMSRIL, were required to pay certain sums derived from
their operations and asset dispositions to be applied to their restructured
debts; these sums were paid by VMS Realty Partners and its affiliates, including
VMSRIL, as and when required under the terms of those agreements.
Effective November 17, 1993, the VMS Principal Entities entered into the
Fifth Amendment to the CRA, dated as of October 25, 1993, pursuant to which each
VMS Principal Entity (and not VMSRIL) has transferred certain of its assets in
lieu of foreclosure (other than general partnership interests in Syndicated
Partnerships and assets that the Creditors chose not to acquire based on their
view of the value of such assets and concerns about possible liability
associated with them) to separate trusts beneficially owned by the Creditors of
each of the respective transferring VMS Principal Entities, subject to the liens
of the applicable Creditors, in consideration of, among other things, the
granting of covenants not to sue by the respective Creditors (and their
successors and assigns) with respect to each of the VMS Principal Entities'
liability for the indebtedness owed such Creditors. Such transactions have
amicably concluded the debtor creditor relationship between the VMS Principal
Entities and the Creditors.
Pursuant to the CRA and the Fifth Amendment thereto, and as an inducement to the
VMS Principal Entities to engage in the deed in lieu transactions described
above, substantial cash consideration, at the direction of the VMS Principal
Entities, was paid by the Creditors to SRA as advanced payment for future
services to be performed by SRA for the benefit of the VMS Principal Entities.
During the summer of 1993, EAB introduced VMSRIL to Insignia, which was engaged
in discussions with EAB concerning the possible acquisition by an Insignia
affiliate of VMSRIL's debt to EAB and the assets securing that debt, and the
granting by that Insignia affiliate of a covenant not to sue VMSRIL. This
transaction has now occurred, effectively resolving VMSRIL's financial
difficulties with its single major creditor. See "Purchase of EAB and Creditor
Assets and Granting of Covenants Not to Sue."
Subsequently, Insignia entered into negotiations with VMSRIL that have resulted
in the execution of the Insignia Letter of Intent, and thereafter, following
consummation of certain transactions contemplated by the Insignia Letter of
Intent, an agreement dated July 14, 1994 ("Insignia Agreement"), which
terminated the Insignia Letter of Intent, restructured certain of the then
unconsummated transactions that had been contemplated by the Insignia Letter of
Intent and provided for certain other agreements of the parties. See "Insignia
Transactions."
INSIGNIA TRANSACTIONS
MANAGEMENT
Effective November 16, 1993, the Insignia Letter of Intent was executed by
VMSRIL and various of its affiliates, SRA, Insignia and a limited partnership
("ISLP").1 The Insignia Letter of Intent contemplated, among other things,
that VMSRIL and certain of its affiliates serving as general partners of
Syndicated Partnerships that do not own hotels ("Non-Hotel Syndicated
Partnership") would withdraw as such and be replaced by MAERIL, Inc. ("MAERIL"),
a single purpose affiliate of Metropolitan Asset Enhancement, L.P. ("MAE"). See
"Settlement Agreement Proxies." MAE is a limited partnership in which Insignia
owns a 19.13% limited partnership interest and the general partner of which is a
corporation owned by Andrew L. Farkas, the Chairman and Chief Executive Officer
of Insignia.
Pursuant to the Insignia Agreement, MAERIL will become the substitute general
partner of only the Selected Syndicated Partnerships,2 rather than all of the
Non-Hotel Syndicated Partnerships as originally contemplated in the Insignia
Letter of Intent. MAERIL has already become the substitute general partner of
many of the Selected Syndicated Partnerships.
Pursuant to the terms of the Partnership's secured loan obligations with respect
to each of the Partnership's properties, the substitution of MAERIL as general
partner of the Partnership also requires lender consent, which has been
requested but not received.
Each property owned by the Partnership, as well as the other Selected Syndicated
Partnerships, is subject to one or more secured project loans. The terms of
each loan require certain lender consents (including the FDIC and HUD) for a
change in (i) the general partner of the owner of the Selected Syndicated
Partnership, (ii) such general partner's general partner or (iii) the general
partner of any subpartnership which directly owns that particular property.
Although VMSRIL has attempted to obtain such consents with respect to all such
loans, it has been unsuccessful in obtaining any consents, and, in many cases,
VMSRIL has not received any response to its request; however, none of the
lenders have expressly rejected the proposed substitution.
1 An affiliate of MAE, as defined below, is the sole general partner in
ISLP, and an Insignia affiliate holds the limited partnership interest.
2"Selected Syndicated Partnerships" means, collectively, the VMS National
Realty Partners I, VMS National Realty Partners II, Boca Glades Associates,
Ltd., Boca West Shopping Center Associates, Ltd., Four Quarters Habitat
Apartments Associates, Ltd., Hearthwood Associates, Investors First-Staged
Equity, L.P., Kendall Townhome Investors, Ltd., Lynnhaven Associates,
Merrifields Apartments, Mount Regis Associates II, Pasadena Office Park
Associates, Prudential-Bache VMS Realty Associates L.P. I, Scarlett Oaks
Apartment Associates, Ltd., VMS Investors First-Staged Equity L.P. II,
Woodlawn Associates and Yorktown Towers Associates.
Although the respective Selected Syndicated Partnerships could contend that such
consent was unreasonably withheld, or that a lender's failure to respond should
constitute an implied consent (or waiver of its right to consent), it is
possible that one or more lenders might seek to declare a default and attempt to
foreclose on their respective collateral if the transfer of general partnership
interests to MAERIL were to proceed without such lender's express consent. The
substitution of MAERIL as general partner of the Selected Syndicated
Partnerships will transpire upon the occurrence of certain events (including
receiving certain of the above consents) as specified in the Insignia Agreement.
Furthermore, pursuant to the Insignia Letter of Intent most of the Non-Hotel
Syndicated Partnerships retained (to the extent permitted under applicable
mortgages and other governing documents) an Insignia affiliate to provide all
management and asset management services to such Non-Hotel Syndicated
Partnership for the maximum term permitted under the partnership agreement or
other governing documents of such Non-Hotel Syndicated Partnership. However,
pursuant to the Insignia Agreement, Insignia terminated it and its affiliates'
rights and obligations to provide management services to the following
Syndicated Partnerships: Fort Lauderdale Office Park Associates, Garden City
Plaza Associates, Ltd., Jacksonville/Windsong Apartments Associates, Natick
Village Apartment Associates, Oak Brook International Office Center Associates,
Ramblewood Associates, 1600 Arch Investors Ltd., 1600 Arch Limited Partnership,
Valley View Associates, Valley View Associates II, Village Green - Townhome
Associates, Woodmere Associates, Ltd. In addition, an Insignia affiliate will
not provide management services with respect to one property formerly owned by
VMS Investors First-Staged Equity L.P. II but foreclosed upon after execution of
the Insignia Letter of Intent. The Insignia Letter of Intent had contemplated
that the Insignia affiliate providing management services to Syndicated
Partnerships would retain SRA to assist it in the provision of such management
services; however, pursuant to the Insignia Agreement, SRA has been retained to
assist in the provision of management services only to VMS National Properties
Joint Venture and will not be retained to provide such services with respect
to any of the other Syndicated Partnerships. In particular, Insignia, SRA, and
the Partnership have reached an agreement under which certain affiliates of
Insignia are to become the asset manager and property manager of the apartment
complexes owned by the Partnership throughout the country, for a total fee to
Insignia of 5% of collected revenues on each property.
PURCHASE OF EAB AND CREDITOR ASSETS AND GRANTING OF COVENANTS NOT TO SUE
Pursuant to the Insignia Letter of Intent, ISLP purchased for an aggregate price
paid to EAB of $1,500,000 all of the debt of VMSRIL (the "EAB Debt") and of
VMSRP to VMSRIL's single major creditor, EAB. Subsequently, VMSRIL conveyed to
ISLP in a transfer in lieu of foreclosure, all of the assets (the "EAB Assets")
securing the EAB Debt. The EAB Assets constituted all of the assets owned by
VMSRIL other than its rights to act as general partner of the Syndicated
Partnerships in which it is a general partner. In connection with this
conveyance, ISLP has covenanted (i) not to sue VMSRIL with respect to the EAB
Debt, (ii) to look exclusively to the EAB Assets for payment of the EAB Debt and
(iii) to repay (but only out of the proceeds realized from the EAB Assets
acquired by ISLP) loans made to VMSRIL, of which approximately $845,000 was
outstanding as of November 16, 1993 (including principal and unpaid interest).
These loans, which were originally made to VMSRIL in 1992 by certain of its
principals to provide VMSRIL sufficient funds to permit it to meet its
obligations under the VMSRIL Agreement, were repaid in full by ISLP as of
December 31, 1993.
Upon exercise of an option granted SRA pursuant to the Insignia Letter of
Intent, SRA acquired from Insignia, without payment of separate consideration,
all of the EAB assets relating to the Syndicated Partnerships that own hotels.
Furthermore, the Insignia Agreement contemplates, as did the Insignia Letter of
Intent, that ISLP may seek to purchase certain assets (the "Creditor Assets")
conveyed to creditors of VMSRP pursuant to the Fifth Amendment to the CRA.
Following any such purchase, ISLP will (i) covenant not to sue VMSRP with
respect to debts associated with the Creditor Assets, and (ii) agree to look
exclusively to the beneficial interest of the applicable creditors in the
Creditor Assets for payment of such debts.
INDEMNITIES GRANTED BY INSIGNIA
Pursuant to the Insignia Letter of Intent, Insignia granted an indemnity to each
of the individual partners of each of the VMS Principal Entities and each of
their partners (the "Indemnified Partners") with respect to the Non-Hotel
Syndicated Partnerships, including the Partnership. Insignia agreed to indemnify
the Indemnified Partners for up to $500,000 of claims of creditors in connection
with (i) consummation of the transactions contemplated by the Insignia Letter of
Intent, (ii) the Indemnified Partners' roles as general partners of, and service
providers to, the Non-Hotel Syndicated Partnerships, and (iii) the EAB and
Creditor Assets. This indemnification obligation will be funded solely through a
cash reserve (the "Reserve") established by Insignia. The Reserve has been
funded with $333,333 and, pursuant to the Insignia Agreement, is to be funded
with an additional $166,667 upon the offering by VMSRIL or its affiliates to
cause the substitution of MAERIL for VMSRIL or such affiliates with respect to
60% of the Selected Syndicated Partnerships. In the event that the entire
Reserve is not applied to the payment of Insignia indemnity obligations, all of
the remaining funds in the Reserve will be paid over to SRA.
Pursuant to the Insignia Agreement, Insignia also will indemnify the Indemnified
Partners against all claims in connection with certain prospective actions which
may be taken by Insignia, MAE, and/or MAERIL. The Reserve may not be used to
pay Insignia's obligations with respect to this indemnity.
COMPENSATION TO VMSRIL AFFILIATE
The Insignia Letter of Intent also provided for certain business
relationships between Insignia (and its affiliates) and SRA. Pursuant to the
Insignia Letter of Intent, SRA was to perform certain services (the "Services")
for Insignia and its affiliates including:
(i) assisting Insignia and its affiliates in minimizing their
indemnity obligation under the Letter of Intent;
(ii) maximizing the return on ISLP's investment in the EAB and
Creditor Assets; and
(iii) assisting (a) Insignia or its affiliates in connection with the
management and asset management of properties owned by the Non-
Hotel Syndicated Partnerships and (b) MAERIL or its affiliates in
fulfillment of their obligations as substitute general partners.
As discussed below, under the Insignia Agreement, SRA's right to provide the
services and receive compensation therefore was bought-out by Insignia, and SRA
will not provide the services other than provision of asset management services
to VMS National Properties Joint Venture.
For its provision of the Services, SRA was to receive a variety of forms of
compensation, including a right to acquire for nominal consideration a 48.5%
limited partnership interest in ISLP. SRA exercised this right on May 24, 1994,
but, pursuant to the Insignia Agreement, subsequently revoked such exercise and
relinquished such right. Prior to its exercise of this right, SRA also received
48.5% of all amounts realized from the EAB assets and the other assets purchased
by ISLP pursuant to the Insignia Letter of Intent, net of certain specified
deductions; such right to receive such payments was not received, however,
following SRA's revocation of the exercise of its acquisition right. The
payments to SRA prior to its exercise of its acquisition right totaled $17,135.
As further consideration, to the extent Insignia became the property manager or
asset manager for Non-Hotel Syndicated Partnerships and retained SRA to assist
it, Insignia was to pay SRA the SRA Management Fee consisting of (a) 28% of the
management and asset management fees paid to Insignia affiliates by the Non-
Hotel Syndicated Partnerships and (b) 28% of all net income received by MAERIL
(including all fees and distributions) as a result of its acting as general
partner of the Non-Hotel Syndicated Partnerships. With certain exceptions, the
obligations of Insignia pursuant to the Insignia Letter of Intent were to be
secured.
Although Insignia and MAE desired to have MAERIL substituted as the general
partner of the Selected Syndicated Partnerships, Insignia, MAE and ISLP
determined that they did not require SRA's management and related services on a
long-term basis. Accordingly, the Insignia Agreement effects, among other
things, a buy out by Insignia of SRA's rights to provide the Services and to
receive the compensation discussed above. Pursuant to the Insignia Agreement,
SRA's right to provide the Services was terminated, except that SRA is required
to assist Insignia in performing asset management services for VMS National
Properties Joint Venture (but none of the other Syndicated Partnerships).
Furthermore, Insignia and SRA acknowledged that they no longer contemplate
seeking to maintain any future or ongoing mutual business relationships
(although such relationships had been contemplated by the Insignia Letter of
Intent). Additionally, SRA will be owed no further fees or obligations pursuant
to the Insignia Letter of Intent or on account of services it has provided or
will provide, but in lieu thereof will receive the following:
(a) $500,000 on closing;
(b) $100,000 on both of the first and second anniversaries of
closing;
(c) $226,250 each calendar quarter for 6 years commencing in the
calendar quarter beginning in July of 1994;
(d) 28% of all fees and other payments received by (i) Insignia or
its affiliates for the provision of management services to
Boca West Center Associates, ltd. and (ii) MAERIL in its capacity
of substitute general partner of such Syndicated Partnership or
otherwise related to such Syndicated Partnership;
(e) the first $1.2 million of all net proceeds ("Net Proceeds") in
excess of the Calculation Amount3 derived by Insignia or ISLP
from the sale of Creditor Assets and EAB Assets; and
(f) 50% of Net Proceeds in excess of the sum of (i) the Calculation
Amount plus (ii) $1.2 million.
The payments pursuant to Clauses (a), (b), (e) and (f) of this paragraph are
referred to herein the "Aggregate Payments." All of the obligations specified
in clauses (a) through (f) will be secured by a security interest in Insignia's
48.5% limited partnership interest in ISLP and Insignia's economic rights (but
not obligations) pursuant to each of the property and asset management
agreements between Insignia or its affiliates and the Non-Hotel Syndicated
Partnerships. In order to further secure payment of such obligations, Insignia
and MAERIL agreed that at such time and from time to time as MAERIL becomes
substitute general partner of a Selected Syndicated Partnership, at the election
of SRA either (i) Insignia and/or its affiliates owning 100% of the stock of
MAERIL shall pledge such stock to SRA or (ii) MAERIL shall pledge to SRA 100% of
its economic rights and entitlement of every kind and nature (but not
obligations) as general partner of each of the Selected Syndicated Partnerships,
including, but not limited to, rights to general partner distributions and fees.
In addition, pursuant to the Insignia Agreement, Insignia and its affiliates
granted SRA a right of first refusal with respect to any proposed future sale by
Insignia of EAB Assets and Creditor Assets to which Insignia or ISLP takes title
by foreclosure, deed-in-lieu of foreclosure or otherwise.
SETTLEMENT AGREEMENT PROXIES
Under the terms of the Settlement Agreement (defined below), the holders of 99%
of the limited partnership interests in the Partnership have given proxies to
consent to an amendment of the partnership agreement of the Partnership
permitting withdrawal of a general partner of the partnership and substitution
of a replacement general partner if the withdrawing general partner reasonably
determines that (x) the proposed withdrawal will not result in the
reclassification of such Partnership as an association taxable as a corporation
for Federal income tax purposes; and (y) any proposed substitute general partner
has experience in real estate management and is reasonably capitalized to carry
out its duties and obligations as general partner.
3 The Calculation Amount is equal to (x) $3.4 million plus (y) the
aggregate cost of each of the Creditor Assets acquired by ISLP (including
interest at a rate of 4% over Citibank's base rate from the date of
acquisition of each of the respective Creditor Assets) plus (z) the sum of
any amounts previously received by Insignia in repayment of its loan to
ISLP to acquire the EAB Assets and the Creditor Assets, or by ISLP as
proceeds of the sale, refinancing or disposition of any EAB Assets or
Creditor Assets, which Insignia or ISLP has been required to disgorge by
reason of a valid claim thereto asserted by an unaffiliated third party.
Similar proxies have been used to facilitate the substitution of MAERIL as
general partner of each of the Selected Syndicated Partnerships of which MAERIL
has become the substitute general partner.
DISPOSITION OF PROPERTIES
Certain of the Syndicated Partnerships have entered into a contract to sell
certain real estate assets. In addition, there are preliminary discussions and
negotiations with third parties regarding the sale of assets owned by certain
Syndicated Partnerships. There can be no assurance as to whether any such
negotiations, letters of intent or contracts will result in the contemplated
sales transactions. In addition, there can be no assurance as to the amount of
net proceeds which may result from any one or all of such contemplated
transactions. Since the CRA was entered into, Syndicated Partnerships have
consummated a number of property dispositions involving sales, foreclosures, or
deeds in lieu of foreclosure.
In the case of those Syndicated Partnerships, including the Partnership, covered
by the Settlement Agreement, the disposition of properties owned by said
partnerships is subject to the review of the Oversight Committee (as such term
is defined in the Settlement Agreement). To date, of approximately 13 proposed
property dispositions submitted to the Oversight Committee for approval, only
two have been challenged by a member of the Oversight Committee. A proposed
sale of the property owned by Lynnhaven Associates was challenged by Equity
Resources Group, a former member of the Oversight Committee as to only those
settling Limited Partnerships in which it is a limited partner, including
Lynnhaven Associates. Judge Zagel of the United States District Court for the
Northern District of Illinois approved the sale of the Lynnhaven property over
the objection of Equity Resources Group, in accordance with the terms of the
Settlement Agreement. Equity Resources Group then appealed Judge Zagel's
decision, which was subsequently affirmed by the United States Court of
Appeals for the Seventh Circuit. The Oversight Committee also objected to a
proposed transaction in which the mortgage loan on two office buildings owned by
Eaton Canyon Partners was to be restructured. As a result of the objection, the
restructuring was abandoned and the properties were foreclosed.
INSPECTOR GENERAL AUDIT
The Office of the Inspector General (OIG) for the Department of Housing and
Urban Development (HUD) has completed an audit of the books and records of VMS
Realty Management, Inc. relative to seven HUD projects which VMS Realty
Management, Inc. managed from 1987 to 1991, the years which were the subject of
the OIG audit. The OIG concluded that VMS Realty Management, Inc. did not
comply with the terms and conditions for the HUD Regulatory Agreements and
applicable HUD regulations and instructions relating to the financial and
general management practices for six of the seven HUD projects reviewed.
Specifically, the OIG audit concluded that VMS Management, Inc. inappropriately
disbursed $6,366,000 from the projects' funds for partnership expenses from 1987
to 1991 when the projects were in a non-surplus cash position or lacked adequate
surplus cash for the payments as the term "surplus cash" is defined pursuant to
the HUD Regulatory Agreements. $3,776,000 of the $6,366,000 which the OIG has
concluded to have been inappropriately disbursed in payment of partnership
obligations relates to two projects in which the Partnership is a partner.
These inappropriate disbursements included payments for second mortgages, asset
management fees, notes payable and other partnership expenses.
The OIG's Audit Report to HUD recommended that (1) the projects' owners
reimburse $6,366,000 to the projects' accounts for the excess distributions and
if the owners fail to comply, then HUD should initiate action for double damages
remedy, (2) take action to debar VMS Realty Management, Inc. and the individuals
which comprise it, and (3) require the appropriate HUD Regional/Field Offices to
conduct reviews of the 13 remaining HUD projects which VMS Realty Management,
Inc. previously managed which were not the subject of the OIG audit.
The Partnership, VMS Realty Mangement, Inc. and HUD entered into a Settlement
Agreement dated December 9, 1996, related to the appropriateness of certain
Richardson Highlands and Rivercrest Village disbursements totaling approximately
$2,168,000 and $1,608,000, respectively, made during the years 1987 through
1991. The Settlement Agreement provided an aggregate payment of $550,000 to the
Federal government, $391,000 of which was paid from available funds of
Richardson Highlands and the remainder of the settlement payment of $159,000 was
paid by entities other than the Partnership and its subpartnerships.
INSIGNIA AND MAE
Insignia is a publicly held fully integrated real estate service organization
performing property management, asset management, investor services, partnership
administration, mortgage banking, and real estate investment banking services
for various ownership entities, including approximately 900 limited partnerships
having approximately 360,000 limited partners. Based upon published industry
surveys, Insignia is the largest manager of multifamily residential properties
in the United States and is a significant manager of commercial property.
Insignia commenced operations in December 1990 and since then has grown to
provide property and/or asset management services for over 2,400 properties,
which include approximately 260,000 residential units and approximately
110,000,000 square feet of commercial space, located in over 500 cities in 48
states.
A primary method of growth for Insignia has been by acquiring, directly or
through related entities (principally MAE), controlling positions in general
partners of real estate limited partnerships. Many of the sellers of such
assets, and in some cases the partnerships which own the properties, were
financially distressed, but the partnerships own properties that Insignia in
most cases believes to be fundamentally sound. Following each acquisition,
Insignia takes steps to enhance the value and stability of the acquired
properties, including a thorough analysis of each property's operations,
develops a detailed marketing strategy, and, when appropriate, develops a
program for restructuring its indebtedness. Insignia or MAE has, where
consistent with its fiduciary obligations to the property owner, caused the
controlled entity to retain Insignia to provide property management and other
services for the property, and will continue to do so in the future.
Insignia's services include property management, providing all of the day-to-day
services necessary to operate a property, whether residential or commercial;
asset management, including long-term financial planning, capital improvements,
and development and execution of refinancings and dispositions; maintenance and
construction services; marketing and advertising; investor reporting and
accounting, including preparation of quarterly reports and annual K-1 tax
reporting forms for limited partners as well as regular reporting under the
Securities Exchange Act of 1934 where applicable; investment banking, including
assistance in workouts and restructurings, mergers and acquisitions, and debt
and equity securitizations; and mortgage banking and real estate brokerage.
Insignia was incorporated in Delaware in July 1990. Insignia's principal
executive offices are located at One Insignia Financial Plaza, P.O. Box 1089,
Greenville, South Carolina 29602, telephone number (864) 239-1000.
Originally, MAE was formed to be the principal vehicle for acquiring interests
in real property that would be managed or serviced by Insignia. MAE, directly
or through subsidiaries, holds general partnership interests in approximately
500 partnerships, all of which have retained Insignia as manager for all or
certain aspects of their operations. MAE has no other material assets and has
no material cash flow. MAE has various liabilities associated with prior
acquisitions, certain of which have been guaranteed or are joint obligations
with Insignia or one or more of its subsidiaries.
Insignia holds a 19.13% limited partnership interest in MAE. Andrew L.
Farkas, the Chairman of the Board and Chief Executive Officer of Insignia, owns
the general partner of MAE, which has a 1% partnership interest. In addition, a
3% limited partnership interest in MAE is owned by five officers and one
employee of Insignia. Although the general partner may not assign its interest
in MAE without the consent of holders of a majority in interest of the limited
partners' interests, there are no restrictions on Mr. Farkas' ability to sell
such general partner. Insignia may not transfer its limited partnership
interest in MAE without the consent of the general partner of MAE. The general
partner has complete authority over the management of MAE and its assets,
provided that, except in connection with acquisitions, the general partner may
not cause MAE to sell all or a substantial portion of its assets without the
consent of holders of a majority in interest of the limited partners' interests.
The limited partners, including Insignia, have no other rights with regard to
the business or operations of MAE.
MAERIL is a Delaware corporation, formed in March 1994, for the purpose of
serving as general partner of the Partnerships and certain of the other
Syndicated Partnerships. MAE GP Corporation is the sole stockholder of MAERIL
and MAE is the sole stockholder of MAE GP Corporation.
ITEM 2. DESCRIPTION OF PROPERTIES:
The following table sets forth the Registrant's investments in properties:
<TABLE>
<CAPTION>
Date of
Property Purchase Type of Ownership Use
<S> <C> <C> <C>
Rivercrest Village 10/85 Fee ownership subject Apartment
Apartments to first and second 328 units
mortgage
Richardson Highlands 10/85 Fee ownership subject Apartment
Apartments to first and second 198 units
mortgage
Serramonte Plaza 10/85 Fee ownership subject Commercial complex
Office Center to first mortgage of 248,154 s.f.
located on approx.
21 acres
</TABLE>
SCHEDULE OF PROPERTIES:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Gross
Carrying Accumulated Federal
Property Value Depreciation Rate Method Tax Basis
<S> <C> <C> <C> <C> <C>
Rivercrest Village 5-7 yrs 150% B
Apartments $18,025 $10,060 17-25 yrs S/L $ 5,722
Richardson Highlands 5-7 yrs 150% B
Apartments 16,878 6,986 17-25 yrs S/L 8,506
Serramonte Plaza 5-7 yrs
Office Center 16,222 7,167 20-25 yrs S/L 8,609
$51,125 $24,213 $22,837
</TABLE>
See "Note A" of the Consolidated Financial Statements included in "Item 7" for a
description of the partnership's depreciation policy.
SCHEDULE OF MORTGAGES:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Principal Principal
Balance At Balance
December 31, Interest Period Maturity Due At
Property 1996 Rate Amortized Date Maturity
<S> <C> <C> <C> <C> <C>
Rivercrest Village
1st mortgage $ 6,253 7.5% 40 yrs 12/01/18 $ 48
2nd mortgage 11,803 10.0% (1) 01/15/00 11,803
Richardson Highlands
1st mortgage 6,289 7.5% 41 yrs 11/01/19 48
2nd mortgage 10,603 10.0% (1) 01/15/00 10,603
Serramonte Plaza
1st mortgage 11,767 (2) 3 yrs 06/28/99 (3)
Total $46,715
<FN>
1) Interest only payments at a 7% rate are made to the extent of surplus cash,
as defined in the HUD regulatory agreement.
2) The interest rate is a varibale rate equal to the sum of the greater of
LIBOR or 3.75% plus 5.0%, or, from and after the date that Insignia or any
other entity under common control with Insignia acquires the general
partnership interest of VMS Realty Investment II in the Partnership, the sum
of the greater of LIBOR or 4.625% plus 4.125%.
3) Dependent upon excess cash flow payments made during the note term.
</TABLE>
In October 1990, the Partnership defaulted on the Richardson Highlands and
Rivercrest Village subordinate notes payable (the second mortgage loans) due to
the failure to make the required monthly debt service payments. The Partnership
and the lender finalized an agreement on June 22, 1994, retroactive to July 1,
1993, to restructure the debt held on Richardson Highlands and Rivercrest
Village. The junior lien mortgages were restructured to mature on January 15,
2000, and provide for a 10% interest rate (with a 7% pay rate), based on the
"Agreed Valuation Amount",as defined in the restructure agreement. Interest
payments are payable from surplus cash as provided by the HUD Regulatory
Agreement. The Agreed Valuation Amounts for Richardson Highlands and Rivercrest
Village are approximately $7,268,000 and $7,110,000, respectively. A Note Face
Amount of $8,126,000 for Richardson Highlands and $8,417,000 for Rivercrest
Village is payable if an event of default under the restructure agreements is
uncured.
Prior to the restructuring of the loans, interest accrued under the terms of the
original subordinate notes payable. This accrued interest of $1,732,000 for
Richardson Highlands and $2,327,000 for Rivercrest Village was added to the
carrying amount of the loans at the date of restructure. The debt
restructurings were accounted for as a modification of terms in which total
future cash payments under the restructured loans exceeded the carrying values
of the loans as of the date of restructure. Consequently, the carrying amounts
of the loans were not changed and no gains were recognized on the
restructurings. Interest accrues at an effective interest rate of 6.14% for
Richardson Highlands and 4.37% for Rivercrest Village to equate the present
values of the total future cash payments under the new terms with the carrying
amounts of the loans at the date of restructure.
During 1995 and 1996, the Partnership was in default of the provisions of these
restructured subordinate loans as a result of not paying the scheduled interest
payments. Subsequently, during the fourth quarter of 1996, the Partnership
disbursed approximately $1,290,000 and $678,000 from available cash at
Richardson Highlands and Rivercrest Village, respectively, which was applied to
the accrued interest related to the subordinate notes payable. These payments
effectively cured the default.
On June 28, 1996, the Serramonte first mortgage note was refinanced by Lehman
Brothers Holdings, Inc. ("LBHI") with the outstanding principal balance being
increased to $12,000,000. The old mortgage note in the amount of $10,577,000
was repaid from loan proceeds received from the refinancing. The new mortgage
note matures on June 28, 1999, and requires monthly interest-only payments. The
interest rate is a variable rate equal to the sum of the greater of LIBOR or
3.75% plus 5.0%, or, from and after the date that Insignia or any other entity
under common control with Insignia acquires the general partnership interest of
VMS Realty Investment II in the Partnership, the sum of the greater of LIBOR or
4.625% plus 4.125%. Also, commencing on the fifteenth day of July 1996, and
continuing on the fifteenth day of each calendar month thereafter until the new
mortgage is paid in full, one hundred percent of the Excess Cash Flow for the
calendar month immediately preceding the payment due date shall be paid to LBHI
and applied in reduction of the then outstanding principal balance. As of
December 31, 1996, approximately $233,000 of excess cash flow payments had been
made and applied to the principal balance. On the maturity date, in addition to
all other sums, including, without limitation, all principal, interest and other
amounts now or hereafter owed, additional interest equal to $1,680,000 is owed
to the lender and becomes a part of the indebtedness. This additional interest
is being accrued over the term of the loan and increases the effective interest
rate of the new debt to approximately 15.00%.
Under the terms of the new mortgage, a capital reserve account in the amount of
$500,000 was required by LBHI to fund any captial improvements needed at the
property. In addition, a mechanic's-lien escrow in the amount of $45,000 was
required by LBHI relating to tenant litigation.
SCHEDULE OF RENTAL RATES AND OCCUPANCY:
Average Annual Average
Rental Rates Occupancy
Property 1996 1995 1996 1995
Rivercrest Village $ 7,355/unit $ 7,194/unit 91% 94%
Richardson Highlands $11,886/unit $11,511/unit 98% 95%
Serramonte Plaza $11.39/sq.ft. $ 9.13/sq.ft. 88% 93%
The decrease in occupancy at Serramonte Plaza is primarily due to the move-out
of a major tenant occupying approximately 21,000 square feet of the property.
The tenant's lease expired during July of 1996. The Partnership is pursuing the
possible sale of the parcel containing this vacant space.
As noted under "Item 1. Description of Business", the real estate industry is
highly competitive. All of the properties of the Partnership are subject to
competition from other buildings in the area. The General Partner believes that
all of the properties are adequately insured.
The following is a schedule of the lease expirations for the years 1997-2007:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Number of % of Gross
Expirations Square Feet Annual Rent Annual Rent
<S> <C> <C> <C> <C>
Serramonte Plaza
1997 13 15,343 $ 330 15%
1998 14 26,011 509 24%
1999 6 37,917 487 23%
2000 5 10,318 161 7%
2001 5 13,793 114 5%
2002 1 10,000 144 7%
2003 -- -- -- --
2004 1 2,419 50 2%
2005 1 12,136 197 9%
2006 5 14,517 123 6%
2007 1 48,492 48 2%
</TABLE>
The following schedule reflects information on tenants occupying 10% or more of
the leasable square feet for Serramonte Plaza, the Partnership's only commercial
property:
Nature of Square Footage Annual Rent Per Lease
Business Leased Square Foot Expiration
Office Space 48,492 $0.99 1/16/07
Real estate taxes and rates in 1996 for each property were:
(dollar amounts in thousands)
1996 1996
Taxes Rate
Rivercrest Village $ 154 1.13%
Richardson Highlands 200 1.39%
Serramonte Plaza 100 1.11%
ITEM 3. LEGAL PROCEEDINGS
The Registrant is unaware of any pending or outstanding litigation that is not
of a routine nature. The Managing General Partner of the Registrant believes
that all such pending or outstanding litigation will be resolved without a
material adverse effect upon the business, financial condition, or operations of
the Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Partnership did not submit any matter to a vote of its holders of Limited
Partnership Interests during the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR PARTNERSHIP EQUITY AND RELATED PARTNER MATTERS
MARKET INFORMATION AND HOLDERS
As of December 31, 1996, there were 3,019 holders of record owning an aggregate
of 16,267 Units. There is not, nor is it anticipated that there will be, a
public market for the Units. The General Partner will not redeem or repurchase
the Units, nor will the General Partner facilitate the matching of potential
buyers and sellers of Units.
Pursuant to the terms of the Restated Limited Partnership Agreement, there are
restrictions on the ability of the Limited Partners to transfer their
Units. In all cases, the General Partner must consent to any transfer.
CASH DISTRIBUTIONS
In accordance with the Restated Limited Partnership Agreement, there are no
material restrictions on the Partnership's ability to make cash distributions.
The amount of cash distributions is dependent upon the ability of the
Partnership's properties to generate positive cash flow and the sale or
refinancing of these properties in future years. In the short term, it is
unlikely that the Partnership will be able to make cash distributions. See
"Item 6, Management's Discussion and Analysis and Plan of Operation," for a
discussion of VMS Realty Partners' liquidity position and its possible impact on
the Partnership's properties.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
The Partnership held unrestricted cash and cash equivalents of $1,557,000 at
December 31, 1996, compared to unrestricted cash and cash equivalents of
$2,807,000 at December 31, 1995. Net cash used in operating activities
increased due to the payment of accrued expense reimbursements and accrued
interest. Approximately $549,000 of accrued expense reimbursements to
affiliates of Insignia, included in other liabilities, were paid during the
second quarter of 1996. These expense reimbursements had been accrued from
January 1994 to the date of payment. Interest payments of approximately
$1,968,000 relating to accrued interest on the second mortgages of Richardson
Highlands and Rivercrest Village were paid in 1996. Also negatively impacting
net cash used in operating activities was a $391,000 settlement payment to the
Federal government related to certain Richardson Highlands and Rivercrest
Village disbursements (see "Note K" of the Consolidated Financial Statements).
These uses of cash were slightly offset by decreased operating and interest
expenses and the receipt of tax and insurance escrows related to the Bruener
building sale in late 1995 (See "Note H" of the Notes to Consolidated Financial
Statements). Excluding the impact of the $5,670,000 proceeds from sale of
property in 1995, net cash used in investing activities increased due to
deposits of $545,000 to restricted escrows required by the refinancing of the
Serramonte Plaza mortgage (See "Note C" of the Notes to Consolidated Financial
Statements), offset by reductions in property improvements and replacements
after significant additions in the prior year. Net cash provided by financing
activities increased due to net proceeds received from the refinancing of the
Serramonte Plaza mortgage during the second quarter of 1996. Loan costs of
$368,000 relating to the refinancing of the Serramonte Plaza mortgage were paid
during 1996.
RESULTS OF OPERATIONS
The partnership realized a net loss of $2,118,000 for the year ended December
31, 1996, compared to net income of $664,000 for the year ended December 31,
1995. The increase in net loss was primarily attributable to the non-recurring
nature of the $3,078,000 gain during 1995 relating to the sale of a building at
Serramonte Plaza (see "Note H" of the Consolidated Financial Statements).
Excluding the impact of this gain on sale, the 1995 net loss would have been
$2,414,000 which is comparable to the 1996 net loss.
Additionally, the net loss for the year ended December 31, 1996, increased due
to a $373,000 decrease in rental income and a $195,000 increase in general and
administrative expenses. The decrease in rental income was due in part to the
decline in rental revenues at Serramonte of approximately $440,000
(approximately 5.9% of the Partnership's rental revenues) due primarily to the
sale of the Breuner Building. General and administrative expenses increased as
a result of the settlement payment of approximately $391,000 made to the
Department of Housing and Urban Development related to certain Richardson
Highlands and Rivercrest Village disbursements.
Offsetting the decrease in rental income and increase in general and
administrative expense was a $481,000 decrease in interest expense. The
decrease in interest expense was due to the payment of approximately $3,860,000
towards the principal balance of the Serramonte Plaza mortgage in December of
1995.
The loss on disposal of property for the year ended December 31, 1995, related
to roof replacements at Richardson Highlands.
Included in maintenance expense for 1996 is approximately $207,000 of major
repairs and maintenance comprised primarily of major landscaping expenses,
exterior building repairs and exterior painting expenses.
ITEM 7.FINANCIAL STATEMENTS
INVESTORS FIRST-STAGED EQUITY L.P.
LIST OF CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors
Consolidated Balance Sheet at December 31, 1996
Consolidated Statements of Operations for the years
ended December 31, 1996 and 1995
Consolidated Statements of Changes in Partners' Deficit for the years
ended December 31, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1995
Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
The Partners
Investors First-Staged Equity L.P.
We have audited the accompanying consolidated balance sheet of Investors First-
Staged Equity L.P. (A Limited Partnership) as of December 31, 1996, and the
related consolidated statements of operations, changes in partners' deficit and
cash flows for each of the two years in the period ended December 31, 1996.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by the Partnership's management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Investors First-
Staged Equity L.P. as of December 31, 1996, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Greenville, South Carolina
February 10, 1997
INVESTORS FIRST-STAGED EQUITY L.P.
CONSOLIDATED BALANCE SHEET
(in thousands, except unit data)
December 31, 1996
Assets
Cash and cash equivalents:
Unrestricted $ 1,557
Restricted-tenant security deposits 447
Accounts receivable, net of allowance
for doubtful accounts of $96 67
Note receivable (Note E) 120
Escrows for taxes and insurance 236
Restricted escrows 897
Other assets 580
Investment properties (Notes C and J):
Land $ 9,088
Buildings and related improvements 42,037
51,125
Less accumulated depreciation (24,213) 26,912
$ 30,816
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 78
Accrued interest 1,934
Tenant security deposits 446
Other liabilities 411
Advances from affiliates of General
Partner 282
Mortgage notes payable (Note C) 46,715
Partners' Deficit
General partner $ (372)
Limited partners (16,267 units
issued and outstanding) (18,678) (19,050)
$ 30,816
See Accompanying Notes to Consolidated Financial Statements
INVESTORS FIRST-STAGED EQUITY L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit data)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995
<S> <C> <C>
Revenues:
Rental income $ 7,071 $ 7,444
Other income 292 298
Total revenues 7,363 7,742
Expenses:
Operating 1,880 2,079
General and administrative 529 334
Maintenance 824 834
Depreciation 1,907 2,017
Interest 3,887 4,368
Property taxes 454 427
Total expenses 9,481 10,059
Loss on disposal of property -- (97)
Gain on sale of property -- 3,078
Net (loss) income $ (2,118) $ 664
Net (loss) income allocated to general partners (1%) $ (21) $ 39
Net (loss) income allocated to limited partners (99%) (2,097) 625
$ (2,118) $ 664
Net (loss) income per limited partnership unit $(128.91) $ 38.40
<FN>
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
INVESTORS FIRST-STAGED EQUITY L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
(in thousands, except unit data)
<TABLE>
<CAPTION>
Limited
Partnership General Limited
Units Partners Partners Total
<S> <C> <C> <C> <C>
Partners' deficit at
December 31, 1994 16,267 (390) (17,206) (17,596)
Net income for the year
ended December 31, 1995 -- 39 625 664
Partners' deficit at
December 31, 1995 16,267 $(351) $(16,581) $(16,932)
Net loss for the year
ended December 31, 1996 -- (21) (2,097) (2,118)
Partner's deficit at
December 31, 1996 16,267 $(372) $(18,678) $(19,050)
<FN>
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
INVESTORS FIRST-STAGED EQUITY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (2,118) $ 664
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities:
Depreciation 1,907 2,017
Amortization of loan costs and leasing commissions 114 124
Bad debt expense 119 92
Gain on sale of property -- (3,078)
Loss on disposal of property -- 97
Change in accounts:
Restricted cash (109) (130)
Accounts receivable (27) (130)
Tenant notes receivable 40 36
Escrows for taxes and insurance 290 (256)
Other assets (137) 11
Accounts payable (17) 24
Accrued interest (391) 1,487
Tenant security deposit liabilities 40 (22)
Other liabilities (191) 281
Net cash (used in) provided by
operating activities (480) 1,217
Cash flows from investing activities:
Proceeds from sale of property -- 5,670
Property improvements and replacements (193) (347)
Receipts from restricted escrows 161 71
Deposits to restricted escrows (618) (65)
Net cash (used in) provided by
investing activities (650) 5,329
Cash flows from financing activities:
Payment of loan costs (368) --
Payments on mortgage notes payable (630) (4,138)
Payments on advances from affiliates (545) (1,500)
Repayment of mortgage note payable (10,577) --
Proceeds from refinance of mortgage 12,000 --
Net cash provided by (used in)
financing activities (120) (5,638)
Net (decrease) increase in cash and cash equivalents (1,250) 908
Cash and cash equivalents at beginning of year 2,807 1,899
Cash and cash equivalents at end of year $ 1,557 $ 2,807
Supplemental disclosure of cash flow information:
Cash paid for interest $ 4,156 $ 2,744
<FN>
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
INVESTORS FIRST-STAGED EQUITY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investors First-Staged Equity L.P. (the "Partnership") was organized in May
1985, and began operations on October 2, 1985. The Restated Limited Partnership
Agreement provides for VMS Realty Investment (formerly known as VMS Realty
Partners) to be the General Partner and for the admittance of Limited Partners
through the sale of up to 23,220 Limited Partnership Units at $3,000 for each
unit. The Partnership has collected capital contributions totaling $48,802,000
representing 16,267 Units outstanding.
Effective January 1, 1986, VMS Realty Investment assigned its interest in future
profits, losses, operating cash flow and liquidation proceeds of the Partnership
to VMS Realty Investment II, which subsequently became the General Partner. VMS
Realty Investment II is a general partnership formed to be the sole general
partner of Investors First-Staged Equity L.P. and has the same constituent
partners as VMS Realty Investment, its predecessor. Effective January 1, 1987,
VMS Realty Investment II assigned its beneficial interest in the Partnership to
VMS Realty Investment.
Basis of Consolidation
The accompanying consolidated financial statements of the Partnership include
the accounts of three remaining subsidiary partnerships in which the Partnership
owns 99.99% interests. All significant transactions between the Partnership and
its sub-tier partnerships have been eliminated in consolidation. The
Partnership acquired six income producing real estate properties during 1986
through the purchase of 99.99% general partnership interests in six sub-tier
partnerships that owned the properties. Of the original six subpartnerships,
three currently own and operate real estate properties and three had their
properties sold at foreclosure sales or were foreclosed on by the FDIC. Village
Green Apartments and Woodland Meadows Apartments were sold at foreclosure sales
in 1990 and 1991, respectively. East Bluff Apartments was foreclosed upon in
1994 by the FDIC.
Depreciation
Depreciation is computed using the following methods and estimated useful lives:
<TABLE>
<CAPTION>
GAAP BASIS TAX BASIS
Lives Lives
Method (Years) Method (Years)
Buildings and
improvements:
<S> <C> <C> <C> <C>
Commercial Straight-line 20-25 Straight-line 18, 19, 31.5
(ACRS & MACRS) and 39
Residential Straight-line 17-25 175% Declining 18, 19 and
Balance (ACRS & 27.5
MACRS)
Personal Property 150% Declining 5 & 7 150% Declining 5 & 7
Balance Balance (ACRS &
and MACRS)
</TABLE>
Investment Properties
During 1995 the Partnership adopted "FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of,"
which 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 impairment loss is measured by comparing the fair value of
the asset to its carrying amount. The effect of adoption was not material.
Other Assets
Deferred loan fees are amortized over the lives of the respective loans.
Deferred leasing commissions are amortized over the term of the leases to which
they relate.
Cash and Cash Equivalents
Unrestricted - Unrestricted cash includes cash on hand and in banks and money
market funds and certificates of deposit. At certain times the amount of cash
deposited at a bank may exceed the limit on insured deposits.
Restricted cash - tenant security deposits - The Partnership requires security
deposits from new lessees for the duration of the lease which are considered
restricted cash. Deposits are refunded when the tenant vacates, provided the
tenant has not damaged its space and is current on its rental payments.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Reclassifications
Certain reclassifications have been made to the 1995 balances to conform to the
1996 presentation.
Fair Value
In 1995, the Partnership implemented "Statement of Financial Accounting
Standards No. 107, Disclosure about Fair Value of Financial Instruments," which
requires disclosure of fair value information about financial instruments for
which it is practicable to estimate that value. The Partnership estimates the
fair value of its fixed rate mortgages by discounted cash flow analysis, based
on estimated borrowing rates currently available to the Partnership ("Note C").
The carrying amounts of variable-rate mortgages approximate fair value due to
frequent re-pricing.
Leases
The Partnership leases certain commercial space to tenants under various lease
terms. For leases with fixed rental increases, rents are recognized on a
straight-line basis over the terms of the lease. This straight-line basis
recognized $110,000 more in rental income than was collected in 1996 and prior
years. This amount will be collected in future years as cash collections under
the terms of the leases exceed the straight-line basis of revenue recognition.
NOTE B - RESTATED LIMITED PARTNERSHIP AGREEMENT
The Partnership was organized in May 1985, and commenced operations on October
2, 1985. The General Partner is VMS Realty Investment II.
Pursuant to the terms in the Agreement, net operating profits or losses and
operating cash flow beginning October 2, 1985, are allocated 1% to the General
Partner and 99% to the Limited Partners. The allocation of profits and losses
to and among the Limited Partners is subject to certain special allocations as
described in the Agreement.
In general, net proceeds from any sale or refinancing of the properties will be
allocated 85% to the Limited Partners and 15% to the General Partner, after the
Limited Partners have received an amount equal to their original capital
contributions and a cumulative 6% per annum, noncompounded, return on their
adjusted capital contributions from such proceeds.
The net profit of the Partnership from any sale or refinancing of the properties
shall be allocated (with ordinary income being allocated first) as follows: (i)
first, an amount equal to the aggregate deficit balances of the Partners'
capital accounts shall be allocated to each Partner that has a deficit capital
account balance in the same ratio as the deficit balance of such Partner's
capital account bears to the aggregate of the deficit balance of all Partners'
capital accounts; (ii) second, to the Limited Partners in an amount equal to the
excess of their adjusted capital contribution over the balance of their
respective capital accounts after taking into account the allocation provided
for in subparagraph (i) above; (iii) third, to the Limited Partners in an amount
equal to any unpaid preferred cumulative return; (iv) fourth, to the General
Partner in an amount equal to the excess of its adjusted capital contribution
over its capital account balance; and (v) thereafter, 85% to the Limited
Partners and 15% to the General Partner. The net loss to the Partnership from
any sale or other disposition of the properties shall be allocated as follows:
(i) first, in an amount equal to the aggregate positive balances in the
partners' capital accounts, to each partner in the same ratio as the positive
balance in such partner's capital account bears to the aggregate of all such
partners' positive capital accounts; and (ii) thereafter, 99% to the Limited
Partners and 1% to the General Partner.
NOTE C - MORTGAGE NOTES PAYABLE
(dollar amounts in thousands)
Principal Monthly Principal
Balance At Payment Stated Balance
December 31, Including Interest Maturity Due At
Property 1996 Interest Rate Date Maturity
Rivercrest Village
1st mortgage $ 6,253 $ 48 7.5% 12/01/18 $ 48
2nd mortgage 11,803 (1) 10.0% 01/15/00 11,803
Richardson Highlands
1st mortgage 6,289 48 7.5% 11/01/19 48
2nd mortgage 10,603 (1) 10.0% 01/15/00 10,603
Serramonte Plaza
1st mortgage 11,767 (2) (3) 06/28/99 (4)
Totals $46,715
(1) Interest only payments at a 7% rate are made to the extent of surplus cash,
as defined in the HUD regulatory agreement.
(2) Interest payment based on variable rate. Monthly principal payments equal
100% of the excess cash flow for the preceeding calendar month.
(3) The interest rate is a varibale rate equal to the sum of the greater of
LIBOR or 3.75% plus 5.0%, or, from and after the date that Insignia or any
other entity under common control with Insignia acquires the general
partnership interest of VMS Realty Investment II in the Partnership, the sum
of the greater of LIBOR or 4.625% plus 4.125%.
(4) Dependent upon excess cash flow payments made during the note term.
All first mortgage agreements include non-recourse provisions which limit the
lenders' remedies in the event of default to the specific properties
collateralizing each loan. The second mortgage agreements are collateralized by
all the Partnership's interests in the sub-tier partnerships that own the
related properties.
In October 1990, the Partnership defaulted on the Richardson Highlands and
Rivercrest Village subordinate notes payable (the second mortgage loans) due to
the failure to make the required monthly debt service payments. The Partnership
and the lender finalized an agreement on June 22, 1994, retroactive to July 1,
1993, to restructure the debt held on Richardson Highlands and Rivercrest
Village. The junior lien mortgages were restructured to mature on January 15,
2000, and provide for a 10% interest rate (with a 7% pay rate), based on the
"Agreed Valuation Amount",as defined in the restructure agreement. Interest
payments are payable from surplus cash as provided by the HUD Regulatory
Agreement. The Agreed Valuation Amounts for Richardson Highlands and Rivercrest
Village are approximately $7,268,000 and $7,110,000, respectively. A Note Face
Amount of $8,126,000 for Richardson Highlands and $8,417,000 for Rivercrest
Village is payable if an event of default under the restructure agreements is
uncured.
Prior to the restructuring of the loans, interest accrued under the terms of the
original subordinate notes payable. This accrued interest of $1,732,000 for
Richardson Highlands and $2,327,000 for Rivercrest Village was added to the
carrying amount of the loans at the date of restructure. The debt
restructurings were accounted for as a modification of terms in which total
future cash payments under the restructured loans exceeded the carrying values
of the loans as of the date of restructure. Consequently, the carrying amounts
of the loans were not changed and no gains were recognized on the
restructurings. Interest accrues at an effective interest rate of 6.14% for
Richardson Highlands and 4.37% for Rivercrest Village to equate the present
values of the total future cash payments under the new terms with the carrying
amounts of the loans at the date of restructure.
During 1995 and 1996, the Partnership was in default of the provisions of these
restructured subordinate loans as a result of not paying the scheduled interest
payments. Subsequently, during the fourth quarter of 1996, the Partnership
disbursed approximately $1,290,000 and $678,000 from available cash at
Richardson Highlands and Rivercrest Village, respectively, which was applied to
the accrued interest related to the subordinate notes payable. These payments
effectively cured the default.
On June 28, 1996, the Serramonte first mortgage note was refinanced by Lehman
Brothers Holdings, Inc. ("LBHI") with the outstanding principal balance being
increased to $12,000,000. The old mortgage note in the amount of $10,577,000 was
repaid from loan proceeds received from the refinancing. The new mortgage note
matures on June 28, 1999, and requires monthly interest-only payments. The
interest rate is a variable rate equal to the sum of the greater of LIBOR or
3.75% plus 5.0%, or, from and after the date that Insignia or any other entity
under common control with Insignia acquires the general partnership interest of
VMS Realty Investment II in the Partnership, the sum of the greater of LIBOR or
4.625% plus 4.125%. Also, commencing on the fifteenth day of July, 1996 and
continuing on the fifteenth day of each calendar month thereafter until the
new mortgage is paid in full,one hundred percent of the Excess Cash Flow for the
calendar month immediately preceding the payment due date shall be paid to LBHI
and applied in reduction of the then outstanding principal balance. As of
December 31, 1996, approximately $233,000 of excess cash flow payments had been
made and applied to the principal balance. On the maturity date, in addition to
all other sums, including, without limitation, all principal, interest and other
amounts now or hereafter owed, additional interest equal to $1,680,000 is
owed to the lender and becomes a part of the indebtedness. This additional
interest is being accrued over the term of the loan and increases the effective
interest rate of the new debt to approximately 15.00%.
Unders the terms of the new mortgage, a capital reserve account in the amount of
$500,000 was required by LBHI to fund any captial improvements needed at the
property. In addition, a mechanic's-lien escrow in the amount of $45,000 was
required by LBHI relating to tenant litigation.
The carrying value of the Partnership's aggregate first mortgages approximates
their estimated fair value.
The General Partner believes that it is not appropriate to use the Partnership's
incremental borrowing rate for the second mortgages as there is currently no
market in which the Partnership could obtain similar financing. Therefore, the
General Partner considers estimation of fair value to be impracticable.
On October 28, 1995, the FDIC sold all the debt it held to BlackRock Capital
Finance, L.P. The debt amounts and terms were not modified.
Scheduled principal payments of mortgage notes payable subsequent to December
31, 1996, are as follows:
1997 $ 223
1998 241
1999 12,027
2000 22,685
2001 301
Thereafter 11,238
$46,715
NOTE D - INCOME TAXES
(dollar amounts in thousands, except unit data)
The Partnership has received a ruling from the Internal Revenue Service that it
will be classified as a partnership for Federal income tax purposes.
Accordingly, no provision for income taxes is made in the consolidated financial
statements of the Partnership. Taxable income or loss of the Partnership is
reported in the income tax returns of its partners.
Differences between the net income (loss) as reported and Federal taxable income
(loss) result primarily from (1) allowance for doubtful accounts, (2)
depreciation over different methods and lives and on differing cost bases of
investment properties, and (3) interest on advances from affiliates.
The following is a reconciliation of reported net (loss) income and Federal
taxable income (loss):
1996 1995
Net (loss) Income as reported $ (2,118) $ 664
Add (deduct)
Depreciation differences (467) (448)
Interest on advances from
affiliates (258) 111
Bad debt allowance -- (37)
Deferred revenue (382) --
Other (190) 16
Federal taxable (loss) income $ (3,415) $ 306
Federal taxable (loss) income
per limited partnership unit $(207.83) $17.26
The following is a reconciliation between the partnership's reported amounts and
Federal tax basis of net assets and liabilities as of December 31, 1996:
Net deficit as reported $(19,050)
Land and buildings 7,672
Accumulated depreciation (11,747)
Syndication 6,832
Accrued liabilities (272)
Other (132)
Net deficit - Federal tax basis $(16,697)
NOTE E - NOTE RECEIVABLE
During 1990, Serramonte Plaza advanced $305,000 for tenant improvements to one
of its tenants as provided for in the related lease documents. The note bears
interest at 12% per annum and is to be repaid over the remaining term of the
lease through monthly additional rent payments of approximately $5,000 from
October 1990 through May 1999. The outstanding balance of the note receivable
was $120,000 at December 31, 1996.
NOTE F - TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
The Partnership has no employees and is dependent on the General Partner or its
affiliates for the management and administration of all partnership activities.
The General Partner or its affiliates may be reimbursed for direct expenses
relating to the Partnership's administration and other costs charged on behalf
of the Partnership.
Pursuant to an agreement dated July 14, 1994, a transaction is pending in which
the current General Partner would be replaced by MAERIL, Inc., an affiliate of
Insignia Financial Group, Inc. ("Insignia"). The substitution of MAERIL, Inc.
as the General Partner is expected, but there is no assurance that the
transaction will be consummated.
The Partnership has engaged affiliates of Insignia to provide day-to-day
management of the Partnership's properties. These affiliates received
approximately $385,000 and $424,000 of such fees during 1996 and 1995,
respectively. An affiliate of Insignia also provided partnership administration
and management services for the Partnership in 1996 and 1995. Reimbursements
for direct expenses relating to these services totaled approximately $153,000
for 1996 and $242,000 for 1995. Approximately $549,000 was paid during the
second quarter of 1996 for accrued expense reimbursements which had been
accruing since 1994 and were included in other liabilities. As of December
31, 1996, approximately $82,000 of the 1996 reimbursements remain unpaid and
are included in other liabilities. Sales commissions of approximately $180,000
were paid to an affiliate of Insignia in 1995 in connection with the sale of a
building at Serramonte Plaza.
NOTE G - OPERATING LEASES
(dollar amounts in thousands)
The Partnership receives rental income from commercial leases under operating
leases with various terms. Minimum future rentals under operating leases with
terms of one year or more for the Partnership as of December 31, 1996, are as
follows:
1997 $2,184
1998 1,798
1999 1,186
2000 950
2001 814
Thereafter 2,118
$9,050
NOTE H - SALE OF PROPERTY
On December 12, 1995, Serramonte Plaza, LTD. sold a building at Serramonte Plaza
to an unaffiliated party for $6 million. This building, the Breuner building,
had a net book value of $2,592,000. The Partnership received net proceeds of
$5,670,000 after payment of closing costs. The resulting gain on the sale was
$3,078,000. The gain has been allocated to the partners in accordance with the
Restated Limited Partnership Agreement. $3,861,000 of the proceeds were applied
to the mortgage note payable and $1,500,000 of the proceeds were used to repay
advances from affiliates of the General Partner.
NOTE I - REFINANCING OF SERRAMONTE PLAZA MORTGAGE
The Serramonte Plaza first mortgage matured in November 1995. Prior to
maturity, a 30 day extension was granted during which time an additional monthly
payment was made. On December 15, 1995, the debt was purchased by ALI, INC.
("ALI") with an additional extension being granted through March 22, 1996. A
payment of $3,861,000 was made in conjunction with the sale of the Bruener
building at Serramonte Plaza as discussed in "Note H" of the Notes to
Consolidated Financial Statements.
On June 28, 1996, the first mortgage note was refinanced by Lehman Brothers
Holdings, Inc. ("LBHI") with the outstanding principal balance being increased
to $12,000,000. The old mortgage note in the amount of $10,577,000 was repaid
from loan proceeds received from the refinancing. The new mortgage note matures
on June 29, 1999, and requires monthly interest-only payments. The interest
rate is a variable rate equal to the sum of the greater of LIBOR or 3.75% plus
5.0%, or, from and after the date that Insignia or any other entity under common
control with Insignia acquires the general partnership interest of VMS Realty
Investment II in the Partnership, the sum of the greator of LIBOR or 4.625% plus
4.125%. Also, commencing on the fifteenth day of July 1996, and continuing on
the fifteenth day of each calendar month thereafter until the new mortgage is
paid in full, one hundred percent of the Excess Cash Flow for the calendar month
immediately preceding the payment due date shall be paid to LBHI and applied in
reduction of the then outstanding principal balance. During 1996, approximately
$233,000 of excess cash flow payments were made and applied to the principal
balance. On the maturity date, in addition to all other sums, including,
without limitation, all principal, interest and other amounts now or hereafter
owed, additional interest equal to $1,680,000 is owed to the lender and becomes
a part of the indebtedness. This additional interest is being accrued over the
term of the loan and increases the effective interest rate of the new debt to
15.00%.
Under the terms of the new mortgage, a capital reserve escrow account in the
amount of $500,000 was required by LBHI to fund any capital improvements needed
at the property. In addition, a mechanic's-lien escrow in the amount of $45,000
was required by LBHI relating to tenant litigation.
NOTE J - REAL ESTATE AND ACCUMULATED DEPRECIATION
(dollar amounts in thousands)
Initial Cost
To Partnership
Buildings,
Leasehold Cost
interests Capitalized
and Related (Written down)
Encumbrances Land Personal Subsequent
Rivercrest Village
Sacramento, CA $18,056 $ 1,230 $15,171 $ 1,624
Richardson Highlands
Marin County, CA 16,892 5,196 10,455 1,227
Serramonte Plaza
Daly City, CA 11,767 4,272 20,278 (8,328)
Totals $46,715 $10,698 $45,904 $(5,477)
Gross Amount At Which Carried
At December 31, 1996
Buildings
And Related
Personal
Description Land Property Total Depreciation Construction Acquired
Rivercrest Village $1,231 $16,794 $18,025 $10,060 1975 10/85
Richardson Highlands 5,200 11,678 16,878 6,986 1979 10/85
Serramonte Plaza 2,657 13,565 16,222 7,167 1971-1981 10/85
Totals $9,088 $42,037 $51,125 $24,213
The depreciable lives for the buildings and components are 5 to 25 years. The
depreciable lives for related personal property are 5 to 7 years.
Reconciliation of "Investment Properties and Accumulated Depreciation":
Year Ended Year Ended
December 31, December 31,
1996 1995
Investment Properties
Balance at beginning of year $50,932 $55,286
Property improvements 193 347
Sale of Property -- (4,409)
Disposition of Property -- (292)
Balance at End of Year $51,125 $50,932
Accumulated Depreciation
Balance at beginning of year $22,306 $22,301
Additions charged to expense 1,907 2,017
Sale of property -- (1,817)
Disposition of property -- (195)
Balance at end of year $24,213 $22,306
The aggregate cost of the real estate for Federal income tax purposes at
December 31, 1996, is $58,797,000. The accumulated depreciation taken for
Federal income tax purposes at December 31, 1996, is $35,960,000.
NOTE K - HUD CONTINGENCIES
The Office of the Inspector General (OIG) for the Department of Housing and
Urban Development (HUD) has completed an audit of the books and records of VMS
Realty Management, Inc. relative to seven HUD projects which VMS Realty
Management, Inc. managed from 1987 to 1991, the years which were the subject of
the OIG audit. The OIG concluded that VMS Realty Mangement, Inc. did not comply
with the terms and conditions for the HUD Regulatory Agreements and applicable
HUD regulations and instructions relating to the financial and general
management practices for six of the seven HUD projects reviewed.
The Partnership, VMS Realty Management, Inc. and HUD entered into a Settlement
Agreement dated December 9, 1996, related to the appropriateness of certain
Richardson Highlands and Rivercrest Village disbursements totaling approximately
$2,168,000 and $1,608,000, respectively, made during the years 1987 through
1991. The Settlement Agreement provided an aggregate payment of $550,000 to the
Federal government, $391,000 of which was paid from available funds of
Richardson Highlands and the remainder of the settlement payment of $159,000 was
paid by entities other than the Partnership and its subpartnerships.
NOTE L - LEGAL PROCEEDINGS
The Registrant is unaware of any pending or outstanding litigation that is not
of a routine nature. The Managing General Partner of the Registrant believes
that all such pending or outstanding litigation will be resolved without a
material adverse effect upon the business, financial condition, or operations of
the Partnership.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The General Partner of the Partnership at December 31, 1996, was VMS Realty
Investment II, an Illinois General Partnership.
VMS Realty Partners ("VMS"), an affiliate of the General Partner, assisted the
General Partner in the management and control of the Venture's affairs through
November 17, 1993, and Strategic Realty Advisors, Inc. ("SRA"), also an
affiliate of the General Partner, replaced VMS in assisting the General Partner
effective November 18, 1993. VMS Realty Partners is an Illinois general
partnership whose partners are Van Kampen/Morris/Stone, Inc. (100% owned by
Robert D. Van Kampen, Peter R. Morris and Joel A. Stone), Residential Equities,
Ltd. (100% owned by Mr. Morris), XCC Investment Corporation (a subsidiary of
Xerox Credit Corporation) and Brewster Realty, Inc. (100% owned by Messrs. Van
Kampen and Stone). A substantial number of the officers of VMS are also
officers of entities affiliated with VMS. The principal executive officers of
VMS are the following:
Joel A. Stone ............. President and Chief Executive Officer and
Member of the Executive Committee
Peter R. Morris ........... Member of the Executive Committee
Robert D. Van Kampen ...... Member of the Executive Committee
Stuart Ross ............... Member of the Executive Committee
The principal executive officers of SRA are the following:
Joel A. Stone ............. President and Chief Executive Officer
Richard A. Berman ........... Senior Vice President/Secretary
Thomas A. Gatti ............. Senior Vice President
JOEL A. STONE, age 52, is President and Chief Executive Officer of Strategic
Realty Advisors, Inc., since November 1993. From the inception in 1981 of VMS
Realty Partners, he held the positions of President and then Chief Executive
Officer. Mr. Stone began his career as an Internal Revenue Agent and worked as
a certified public accountant and an attorney specializing in taxation and real
estate law. In 1972, Mr. Stone co-founded the certified public accounting firm
formerly known as Moss, Stone and Gurdak. In 1979, Mr. Stone joined the Van
Kampen group of companies, a privately held business engaged in investment
banking and in real estate activities. He served as Senior Vice President of
Van Kampen Merritt, Inc. until its sale to Xerox Corporation in 1984. An
alumnus of DePaul University, Mr. Stone earned a Bachelor of Science degree in
Accounting in 1966 and a Juris Doctorate in 1970. Mr. Stone is a member of the
Illinois Bar and a certified public accountant.
PETER R. MORRIS, age 47, is a member of the Executive Committee of VMS, and is
one of the three individuals owning the entities that own VMS. From July 1970
to June 1973, Mr. Morris was employed by Continental Wingate Company, Inc., a
firm engaged in the development of inner city housing projects, in the
capacities of Vice President/Finance, Director/Consulting Division and Executive
Assistant to the President. He has published a book and numerous articles
relating to real estate development and syndication. Mr. Morris has been
involved in the real estate and finance business with Messrs. Van Kampen and
Stone since 1977. He received a Bachelor of Arts degree (summa cum laude) from
Princeton University in 1971 and a Juris Doctorate (cum laude) from Harvard Law
School in 1975.
ROBERT D. VAN KAMPEN, age 58, is a member of the Executive Committee of VMS and
is one of the three individuals owning the entities that own VMS. Mr. Van
Kampen has been involved in various facets of the municipal and corporate bond
business for over 20 years. In 1967, he co-founded the company now known as Van
Kampen Merritt, Inc., which specializes in municipal bonds and acts as a sponsor
of unit investment trusts. The firm was sold to Xerox Corporation in January
1984. Mr. Van Kampen is a general partner of Van Kampen Enterprises. Mr. Van
Kampen received his Bachelor of Science degree from Wheaton College in 1960.
STUART ROSS, age 60, is a member of the Executive Committee of VMS. He is an
executive vice president of Xerox Corporation and chairman and chief executive
officer of Xerox Financial Services, Inc., a wholly owned subsidiary. Mr. Ross
joined Xerox in 1966 and has held a series of financial management positions.
He assumed his current position in May 1990. Prior to Xerox, Mr. Ross was a
financial representative for The Macmillan Publishing Company from 1963 to 1966,
and a public accountant for Harris, Kerr, Forster & Company from 1958 to 1963.
Mr. Ross is a director of Crum and Forster, Inc. and Ekco Group, Inc., and a
trustee of the State University of New York at Purchase. He received a bachelor
of science degree in accounting from New York University in 1958 and a master of
business administrative degree from the City College of New York in 1966. Mr.
Ross is a certified public accountant.
RICHARD A. BERMAN, age 45, is a Senior Vice President and General Counsel of
Strategic Realty Advisors, Inc. From 1986 through 1993, Mr. Berman was employed
by VMS Realty Partners and was First Vice President and Corporate Counsel.
Prior to joining VMS Realty Partners, Mr. Berman was a partner in the law firm
of Gottlieb and Schwartz with his practice concentrated in corporate and real
estate law. He received a Juris Doctorate from Northwestern University School
of Law (Cum laude, 1976) and a Bachelor of Arts degree from the University of
Illinois (high honors, 1973). Mr. Berman is a member of the Illinois Bar.
THOMAS A. GATTI, age 40, is Senior Vice President - Partnership Accounting of
Strategic Realty Advisors, Inc., effective November 18, 1993. Prior to this
time, Mr. Gatti was First Vice President - Partnership Accounting with VMS
Realty Partners, where he was employed since January, 1982. Prior to joining
VMS Realty Partners, he was with Coopers & Lybrand. Mr. Gatti received a
Bachelor of Science in Accounting from DePaul University in 1978. Mr. Gatti is
a Certified Public Accountant.
LEGAL PROCEEDINGS
See "Item 3, Legal Proceedings," for a discussion of legal proceedings during
the past five years which may be material to an evaluation of the ability or
integrity of any of the aforementioned directors or officers and VMS Realty
Partners and its affiliates.
ITEM 10. EXECUTIVE COMPENSATION
None of the directors and officers of the General Partner received any
remuneration from the Partnership.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) No person owns of record or is known by the Registrant to own beneficially
more than 5% of the outstanding Limited Partnership Units of the
Partnership as of December 31, 1996 and as of the date of this filing.
(b) No officers of the General Partner or its affiliates own any Limited
Partnership Units in the Partnership.
No officer of the General Partner or its affiliates possesses a right to
acquire a beneficial ownership of Limited Partnership Units of the
Partnership.
(c) There are no known arrangements which at a subsequent date may result in a
change in control of the Partnership, except as disclosed in "Item 1" of
Part I (see "Insignia Transaction").
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Neither the General Partner nor its affiliates are prohibited from providing
services to, and otherwise dealing or doing business with, persons who deal with
the Partnership. However, no rebates or "concessions" may be received by the
General Partner or any such affiliates of the General Partner, nor may the
General Partner or any such affiliates participate in any reciprocal business
arrangements which would have the effect of circumventing any of the provisions
of the Restated Limited Partnership Agreement.
The Partnership may borrow or enter into other transactions with an affiliate;
provided, however, that such borrowings and other transactions will be conducted
by the General Partner on terms which are not less favorable to the Partnership
than those available from others. See Section Q of the Restated Limited
Partnership Agreement on pages A-16 to A-20 of the Prospectus which is
incorporated by reference.
Upon the sale or refinancing of a real estate investment purchased by the
Partnership, provided that the Limited Partners have first recovered their
adjusted capital contributions together with their preferred cumulative return,
and that the General Partner or its affiliates have rendered such services, the
General Partner will receive real estate brokerage commissions in an amount
equal to the lesser of: (a) 3% of the sales or refinancing proceeds of the
property or (b) 1/2 of the competitive real estate commission. Such real estate
brokerage commissions will be paid directly by the Partnership except that the
General Partner may receive such real estate brokerage commissions from the
buyers of properties from the Partnership. In no event, however, will the
aggregate real estate brokerage commissions paid to the General Partner from all
sources in connection with the sale or refinancing of properties by the
Partnership exceed 3% of the sales or refinancing proceeds of the properties
sold or refinanced. In the event an unaffiliated real estate broker assists in
any such sale or refinancing the total of all fees paid to all parties for such
services shall not exceed 6% of the purchase price (or refinancing proceeds) of
the property. Real estate brokerage commissions paid to the General Partner by
buyers of properties from the Partnership are taken into account by buyers in
determining the purchase price of properties so that, in effect, the
Partnership, as seller, bears such commissions as a reduction in the sales
prices of properties.
Reference is made to "Note F" to the Consolidated Financial Statements in "Item
7" for various transactions with affiliates.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27, Financial Data Schedule, is filed as an exhibit to this
report.
(b) Reports on Form 8-K filed during the fourth quarter of 1996: None.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
INVESTORS FIRST-STAGED EQUITY L.P.
(Registrant)
By: VMS Realty Investment II,
its General Partner
By: JAS Realty Corporation
Date: March 28, 1997 By: /s/Joel A. Stone
Joel A. Stone, President
Date: March 28, 1997 By: /s/Thomas A. Gatti
Thomas A. Gatti, Senior Vice
President and Principal
Accounting Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities on
the date indicated.
/s/Joel A. Stone President March 28, 1997
Joel A. Stone
/s/Thomas A. Gatti Senior Vice President and March 28, 1997
Thomas A. Gatti Principal Accounting Officer
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3 The Partnership Agreement is incorporated by reference to
the Form 10-K dated December 31, 1987 (file number 0-
14470).
10A Assignment and Assumption Agreement dated May 23, 1994
between the Federal Deposit Insurance Corporation, VMS
Apartment Portfolio Associates I, VMS Apartment Portfolio
Associates, Ltd., and Investors First-Staged Equity L.P.
related to East Bluff Apartments is incorporated by
reference to the Form 10-QSB dated June 30, 1994.
10B Contracts related to debt restructure:
a) Restated note dated July 1, 1993 between VMS Apartment
Portfolio Associates Ltd. and the Federal Deposit
Insurance Corporation related to Rivercrest Village is
incorporated by reference to the Form 10-QSB dated June
30, 1994.
b) Modification of Security Agreement between Investors
First-Staged Equity, L.P., VMS Apartment Portfolio
Associates, Ltd., and the Federal Deposit Insurance
Corporation dated July 1, 1993 related to Rivercrest
Village is incorporated by reference to the Form 10-QSB
dated June 30, 1994.
10C Contracts related to debt restructure:
a) Restated note dated July 1, 1993 between VMS Apartment
Portfolio Associates Ltd. and the Federal Deposit
Insurance Corporation related to Richardson Highlands
is incorporated by reference to the Form 10-QSB dated
June 30, 1994.
b) Modification of Security Agreement between Investors
First-Staged Equity, L.P., VMS Apartment Portfolio
Associates, Ltd., and the Federal Deposit Insurance
Corporation dated July 1, 1993 related to Richardson
Highlands is incorporated by reference to the Form 10-
QSB dated June 30, 1994.
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Investors
First-Staged Equity L.P. 1996 Year-End 10-KSB and is qualified in its entirety
by reference to such 10-KSB filing.
</LEGEND>
<CIK> 0000768834
<NAME> INVESTORS FIRST-STAGED EQUITY L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,557
<SECURITIES> 0
<RECEIVABLES> 163
<ALLOWANCES> 96
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 51,125
<DEPRECIATION> 24,213
<TOTAL-ASSETS> 30,816
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 46,715
0
0
<COMMON> 0
<OTHER-SE> (19,050)
<TOTAL-LIABILITY-AND-EQUITY> 30,816
<SALES> 0
<TOTAL-REVENUES> 7,363
<CGS> 0
<TOTAL-COSTS> 9,481
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,887
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,118)
<EPS-PRIMARY> (128.91)<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
