U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: MARCH 31, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 0-17150
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
Texas 76-0147579
(State of organization) (I.R.S.Employer
Identification No.)
265 Franklin Street, Boston, Massachusetts
02110
(Address of principal executive office)
(Zip Code)
Registrant's telephone number, including area code (617) 439-8118
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
----
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. Not applicable.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K
Reference
Prospectus of registrant dated Parts III and
IV
September 11, 1985, as supplemented
The above per Limited Partnership Unit information is based upon the 41,644
Limited Partnership Units outstanding during each year.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Partnership offered limited partnership interests to the public from
September 11, 1985 to September 5, 1987 pursuant to a Registration Statement on
Form S-11 filed under the Securities Act of 1933. Gross proceeds of $41,644,000
were received by the Partnership and, after deducting selling expenses and
offering costs, approximately $32,751,000 was originally invested in joint
venture interests in six residential apartment properties. The performance of
the Partnership's investment properties has been adversely impacted by an
oversupply of competing apartment units throughout the country and in the six
local markets in which the properties are located. Through March 31, 1994,
these conditions have resulted in the loss of three of the properties to
foreclosure: Clipper Cove Apartments in March 1990, Quinten's Crossing
Apartments in August 1992 and Parrot's Landing Apartments in October 1992. The
foreclosures of these three properties represent a loss of approximately 38% of
the original investment portfolio.
The operations of the three remaining assets, The Lakes at South Coast
Apartments, the Harbour Pointe Apartments and the Lincoln Garden Apartments,
have been stabilized as a result of successful debt restructurings and do not
currently require the use of the Partnership's cash reserves to support
operations. Nonetheless, the properties would not operate at or above breakeven
under conventional financing arrangements at the current debt obligation levels.
All three of these properties have been financed with tax-exempt municipal bonds
issued by local housing authorities. The interest rates on all three of these
restructured debt obligations are now variable rates which are based on
comparable rates on similar tax-exempt obligations. Throughout fiscal 1994,
such rates have remained at their lowest levels in several years. However,
market interest rates increased somewhat in the fourth quarter of fiscal 1994,
and again subsequent to year-end. It is likely that such rates will rise
further in the future. As previously reported, the debt modification agreement
for The Lakes was structured with certain debt service reserves and accrual
features intended to help absorb interest rate fluctuations. In addition, a
portion of the calendar 1992 excess cash flow from The Lakes was used to buy a
one-year interest rate cap agreement, which fixed the maximum interest rate on
the venture's mortgage loan at less than 4% per annum for calendar year 1993.
This interest rate cap expired in December 1993 and was not renewed. The Lakes
Joint Venture still has significant reserves in place to help absorb future
increases in the mortgage interest rate. The Harbour Pointe and Lincoln Garden
joint ventures would require advances from the venture partners, principally the
Partnership, if future cash flows are insufficient to cover any increases in
debt service payments. Improved property operating results at all three of the
remaining properties will be required in the future to offset the expected
increases in the variable interest rates on the outstanding debt obligations and
to increase the long-term values of the operating properties. Despite a general
strengthening in the real estate market for multi-family residential properties
during fiscal 1994, based on current cash flows generated from operations, none
of the remaining properties would be expected to have a current value in excess
of the outstanding debt obligations. It remains to be seen whether further
improvement in market conditions will occur as rapidly or to the extent
necessary to enable the Partnership to recover any meaningful portion of its
original investments in the three remaining investment properties. In addition,
the terms of the current debt agreement on The Lakes contain certain restrictive
covenants, including a provision that the Venture provide the lender, in
September 1994, with an independent appraisal of the operating property showing
the value of the property to be equal to or greater than $92 million. Based on
current cash flow levels, the value of the property would be expected to be
considerably less than $92 million. Failure to provide such an appraisal would
constitute an event of default under the loan documents. The Managing General
Partner has had preliminary discussions with the lender regarding possible
changes to the 1994 appraisal requirement. Preliminary indications are that the
lender might consider waiving or modifying the minimum appraised value
requirement for September 1994 in exchange for a rearrangement of the timing and
amounts of certain payment priorities, as specified in the Reimbursement
Agreement. At the present time, management is optimistic regarding the chances
of waiving or modifying the appraisal requirement and remaining in compliance
with the debt agreement during fiscal 1995. However, there can be no assurances
that the lender will grant any relief in connection with this appraisal
covenant.
As a result of the low current market interest rates, each of the remaining
joint ventures is generating cash flow in excess of their current debt service
requirements. For The Lakes Joint Venture, such excess cash flow during fiscal
1994 has continued to be applied toward the reduction of the venture's
outstanding indebtedness. Additional principal paydowns during calendar 1993
totalled approximately $1,565,000. A portion of the funds for such principal
payments came from the release of certain restricted escrow reserves. In the
near term, if interest rates remain low, excess cash flow from Harbour Pointe
should be sufficient to cover the Partnership's operating expenses. Excess cash
flow from the Lincoln Garden joint venture has been minimal and is primarily
payable to the co-venturer for the repayment of prior advances. In the event
that management is successful in negotiating a waiver or modification of the
minimum appraised value requirement described above for The Lakes Joint Venture,
which represents approximately 49% of the Partnership's original investment
portfolio, the Partnership will continue to direct the management of the
remaining operating properties in order to generate sufficient cash flow to
sustain operations in the near-term while attempting to maximize their long-term
values. As discussed above, even under these circumstances, it remains to be
seen whether such a strategy would result in the return of any significant
amount of invested capital to the Limited Partners. If management cannot reach
an agreement with the mortgage lender on The Lakes and the result is a default
under the terms of the loan agreement and a foreclosure of the operating
property, the Partnership would have to weigh the costs of continued operations
against the realistic hopes for any future recovery of capital from the other
two investments. Under such circumstances, the Managing General Partner might
determine that it would be in the best interests of the Limited Partners to
liquidate the remaining investments and terminate the Partnership. In light of
these circumstances, the independent auditors' report on the Partnership's
financial statements as of and for the year ended March 31, 1994 includes
qualifying language which expresses uncertainty regarding the Partnership's
ability to continue as a going concern. This audit opinion qualification
language reflects the fact that circumstances beyond the Partnership's control
may indirectly lead to the termination of the Partnership's operations in the
near future. Management will reassess its future operating strategy once the
appraisal covenant compliance issue on The Lakes is resolved.
To the extent that the Partnership's operating properties continue to
generate excess cash flow after current debt service, a substantial portion of
such amounts will be re-invested in the properties to make certain repairs and
improvements aimed at maximizing long-term value. At The Lakes, planned capital
improvements for the next fiscal year include upgrading approximately one-half
of the hallways, elevator landings and lobbies. Improvements planned at Lincoln
Garden for fiscal 1995 include resurfacing the pool deck, replacing the roofs on
several buildings, repairing the sidewalks and upgrading the unit interiors on a
turnover basis. Management completed an improvement program at Harbour Pointe
during the first quarter of calendar 1994 which included exterior painting and
the installation of new window awnings. Future improvements at this property
are expected to include new pool furniture, additional exterior lighting and the
installation of individual water meters in all units. The amount and timing of
the funds to be spent on property improvements at all three of the remaining
ventures will depend upon the availability of cash flow from the respective
property's operations.
At March 31, 1994 the Partnership and its consolidated joint ventures had
available cash and cash equivalents of approximately $1,252,000. Such cash and
cash equivalents will be used for the working capital requirements of the
Partnership and the consolidated ventures and, to the extent necessary and
economically justified, to fund the Partnership's share of capital improvements
and operating deficits of its remaining joint venture investments. The source
of future liquidity and distributions to the partners is expected to be through
proceeds received from the sale, refinancing or other disposition of the
remaining investment properties and, to a lesser extent, from cash generated
from the operations of such properties.
RESULTS OF OPERATIONS
1994 Compared to 1993
The Partnership had a net loss of approximately $1,604,000 for the year
ended March 31, 1994 as compared to net income of approximately $4,618,000 in
the prior year. The primary reason for this significant change in reported net
operating results is the impact of the foreclosures of the Quinten's Crossing
and Parrot's Landing properties during fiscal year 1993. The effects of the
foreclosures were partially offset by the continued improvement in the net
operating results of The Lakes Joint Venture, as discussed further below.
During the prior year, the foreclosures of the Quinten's Crossing Apartments and
Parrot's Landing Apartments generated extraordinary gains on settlement of debt
obligations of approximately $9,322,000. The Partnership's share of such gains
was approximately $6,969,000. The transfers of Quinten Crossing's and Parrot's
Landing to the lenders through foreclosure proceedings were accounted for as
troubled debt restructurings in accordance with Statement of Financial
Accounting Standards No. 15, "Accounting by Debtors and Creditors for Troubled
Debt Restructurings." The extraordinary gains arise due to the fact that the
balance of the mortgage loans and related accrued interest exceeded the
estimated fair value of the respective joint ventures' investment properties and
certain other assets transferred to the lenders at the time of the foreclosure.
The Partnership also recognized a net gain during the prior year on the
transfers of assets at foreclosure in the amount of approximately $821,000. In
accordance with SFAS No. 15, a gain or loss on transfer of assets is calculated
as the difference between the net carrying value of the operating investment
property and its fair value at the time of foreclosure. Quinten's Crossing had
a loss on transfer of assets of approximately $4,897,000, of which approximately
$3,065,000 was allocated to the Partnership. Parrot's Landing had a gain on
transfer of assets of approximately $3,764,000 of which approximately $3,886,000
was allocated to the Partnership. The Partnership's share of the Parrot's
Landing ordinary gain was greater than the gain recognized by the joint venture
due to the method of allocating the gain as called for in the joint venture
agreement.
The Partnership's operating loss decreased by approximately $637,000 during
fiscal 1994 as compared to the prior year primarily as a result of the continued
reduction in the net operating loss of the consolidated Lakes Joint Venture. The
net loss of the Lakes Joint Venture decreased by approximately $652,000 during
the current year mainly as a result of a decrease in interest expense on the
venture's variable rate long-term debt of approximately $716,000. Interest
expense decreased due to the venture's purchase of a one-year interest rate cap,
which fixed the interest rate on the mortgage loan at less than 4% per annum for
calendar 1993. In addition, the variable interest rate on the venture's long-
term debt fell below the rate specified by the cap during portions of calendar
1993. The operating results of the consolidated Harbour Pointe joint venture
improved by approximately $29,000 during calendar 1993. The operating results
of Harbour Pointe also improved as a result of a decrease in interest expense of
approximately $49,000 on the venture's variable rate debt. The decrease in
interest expense was a result of a lower average rate on the variable rate debt
during calendar 1993 as compared to the prior year.
The Partnership's share of unconsolidated ventures' losses decreased by
approximately $931,000 during fiscal 1994 as compared to the prior year. The
Partnership's share of unconsolidated ventures' losses for fiscal 1993 included
the operating losses of the Quinten's Crossing and Parrot's Landing properties
prior to their foreclosures during fiscal 1993. The operating loss of the
Partnership's remaining unconsolidated venture, the Lincoln Garden Apartments,
decreased by approximately $50,000 as a result of an increase in rental income
and a decrease in interest expense on the venture's variable rate mortgage.
Rental income at Lincoln Garden increased by approximately 9%, almost entirely
due to an increase in rental rates. Property occupancy remained stable, in the
low 90's, throughout each of the last two years.
1993 Compared to 1992
The Partnership had net income of approximately $4,618,000 for the year
ended March 31, 1993, as compared to a net loss of approximately $6,873,000 in
the prior year. The primary reasons for this significant change in reported net
operating results were a substantial improvement in the net operating results of
the Partnership's consolidated joint ventures and the impact of the foreclosures
of the Quinten's Crossing and Parrot's Landing properties. The net operating
losses of The Lakes Joint Venture declined significantly in fiscal 1993 and
contributed an additional amount of approximately $1,446,000 to the
Partnership's net operating results as compared to the prior year, primarily due
to substantial decreases in interest expense and real estate taxes. The
decrease in interest expense was a result of the successful restructuring of the
venture's long-term debt, which had been in default. As noted above, the
interest rate on the restructured debt is a variable rate which was at its
lowest level in many years during calendar 1992. Interest was accruing on the
debt at a default rate for a portion of the prior year. In addition, the
venture's real estate tax expense declined by approximately $766,000 as a result
of certain refunds and abatements received. The Partnership also realized a
decrease in the operating loss of the consolidated Harbour Pointe joint venture
of approximately $272,000 primarily due to a decrease in interest expense of
approximately $173,000. This decrease was a result of the refinancing of the
loan secured by the Harbour Pointe Apartments in fiscal 1991. The variable
interest rate on the new loan continued to decline with general market rates
during calendar 1992
The Partnership's net operating results were also favorably impacted by the
foreclosures of the Quinten's Crossing Apartments and Parrot's Landing
Apartments, which, as discussed further above, generated extraordinary gains on
settlement of debt obligations of approximately $9,322,000. The Partnership's
share of such gains was approximately $6,969,000. Quinten's Crossing had a loss
on transfer of assets of approximately $4,897,000, of which approximately
$3,065,000 was allocated to the Partnership. Parrot's Landing had a gain on
transfer of assets of approximately $3,764,000 of which approximately $3,886,000
was allocated to the Partnership.
A decrease in the Partnership's share of unconsolidated ventures' losses of
approximately $756,000 also contributed to the change in the Partnership's net
operating results and could be primarily attributed to the foreclosures of
Quinten's Crossing and Parrot's Landing, which had generated net operating
losses prior to their foreclosures. The operations of the Partnership's
remaining unconsolidated venture, Lincoln Garden, did not change significantly
as compared to the prior year. However, the Partnership's share of the
venture's net loss increased by approximately $103,000 in fiscal 1993 due to the
method of allocating such losses between the venture partners as required by the
joint venture agreement.
1992 Compared to 1991
In fiscal 1992, the Partnership's operating results include the consolidated
results of The Lakes at South Coast Apartments, owned by The Lakes Joint
Venture. The Partnership assumed complete control over the affairs of the joint
venture effective September 26, 1991 as a result of the withdrawal of the co-
venture partner and the assignment of its remaining interest to Development
Partners, Inc., a wholly-owned subsidiary of Paine Webber Group, Inc. (see Note
4 to the accompanying financial statements). In prior years, the Partnership's
share of the operating results of The Lakes property had been reflected, under
the equity method, in the Partnership's share of unconsolidated ventures'
losses.
The Partnership's net loss decreased by approximately $2,512,000 for the
year ended March 31, 1992, as compared to the prior year, despite the
recognition of an extraordinary loss on early extinguishment of debt in during
fiscal 1992 totalling approximately $1,338,000. The extraordinary loss was
related to the debt restructuring of The Lakes Joint Venture. The decline in
net loss was also realized despite the fact that the prior year results included
a non-recurring gain of approximately $3 million related to the foreclosure of
the Clipper Cove Apartments and the liquidation of the related joint venture.
The favorable change in net loss was primarily due to improved net operating
results of The Lakes Joint Venture and the method used to allocate such
operating results between the venture partners during fiscal 1992. In addition
to the changes in the results of The Lakes Joint Venture during fiscal 1992,
decreases in the Partnership's share of losses from its four other joint
ventures contributed to the improved operating results.
Loss from the operations of The Lakes Joint Venture decreased by
approximately $1.7 million during fiscal 1992 due to a decrease in interest
expense and professional fees and an increase in rental income. The decreases
in interest expense and professional fees were a result of the successful
restructuring of the venture's long-term debt. The increase in rental income
from The Lakes reflected gains in both occupancy and rental rates achieved
during fiscal 1992. Occupancy at The Lakes averaged 95% for calendar 1991
versus the 88% level achieved for calendar 1990. The decrease in loss from
operations was almost entirely offset, however, by the recognition of the
aforementioned extraordinary loss on early extinguishment of debt, which
represented the write-off of certain unamortized financing costs and original
issue discount related to the venture's prior debt arrangements. The
Partnership's share of the net loss from The Lakes Joint Venture (including the
extraordinary loss on early extinguishment of debt) decreased by approximately
$4.1 million in fiscal 1992 largely as a result of an agreed-upon special
allocation of loss to the withdrawing co-venture partner to eliminate its
remaining capital account balance. The Partnership also realized a decrease in
the operating loss of the consolidated Harbour Pointe joint venture primarily
due to a decrease in interest expense of approximately $138,000. This decrease
was a result of the refinancing of the loan secured by the Harbour Pointe
Apartments during fiscal 1991. As discussed above, the new loan bears interest
at a variable rate which was at its lowest level in years during calendar 1991.
In addition, rental income from the Harbour Pointe Apartments increased slightly
over the prior year.
Unconsolidated joint venture operations included the operating results of
three joint ventures in fiscal 1992, as compared to four in the prior year, due
to the consolidation of the operating results of The Lakes Joint Venture in the
Partnership's financial statements. The Partnership's share of the losses from
the three remaining unconsolidated joint ventures decreased by approximately
$950,000 during fiscal 1992, primarily due to a decrease in the operating loss
of the Parrot's Landing Apartments and a special allocation of loss to the co-
venture partner of the Lincoln Garden Apartments Joint Venture. The decrease in
the loss from the Parrot's Landing Apartments, of approximately $246,000, was
mainly due to lower interest rates on its floating rate debt and certain fixed
assets having become fully depreciated during the prior year. The Partnership's
share of loss from the Lincoln Garden Apartments Joint Venture decreased by
approximately $412,000 during fiscal 1992 due to a special allocation of the
joint venture's net loss as required per the joint venture agreement. This
agreement required a special allocation of losses to the co-venture partner in
order to eliminate the positive balance in the co-venturer's capital account
while the Partnership had a deficit balance in its capital account. This special
allocation resulted in practically the entire fiscal 1992 loss from the Lincoln
Garden Apartments Joint Venture being allocated to the co-venturer. In
addition, the Partnership's share of unconsolidated ventures' losses increased
during fiscal 1992 due to the write-off of the unamortized balance of certain
costs capitalized in connection with the Partnership's acquisitions of its
Parrot's Landing and Quinten's Crossing joint venture interests. Due to the
uncertainty that existed with regard to whether these joint ventures would be
able to cure their debt defaults and continue their operations, management
believed it was appropriate to write-off the remaining balances of these costs,
which totalled approximately $317,000, in fiscal 1992.
INFLATION
The Partnership commenced operations in 1985 and completed its eighth full
year of operations in the current fiscal year. The effects of inflation and
changes in prices on the Partnership's operating results to date have not been
significant.
Inflation in future periods may increase revenues, as well as operating
expenses, at the Partnership's operating investment properties. Tenants at the
Partnership's apartment properties have short-term leases, generally of one year
or less in duration. Rental rates at these properties can be adjusted to keep
pace with inflation, to the extent market conditions allow, as the leases are
renewed or turned over. Such increases in rental income would be expected to at
least partially offset the corresponding increases in Partnership and property
operating expenses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are included under Item 14
of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
By: Fourth Development Fund Inc.
Managing General Partner
By: /s/ Walter V. Arnold
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
Dated: March 28, 1995
IV-2
ANNUAL REPORT ON FORM 10-K
ITEM 14(A)(1) AND (2) AND ITEM 14(D)
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Reference
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.:
Reports of independent auditors F-2
Consolidated balance sheets as of March 31, 1994 and 1993 F-4
Consolidated statements of operations for the years ended March 31, 1994,
1993 and 1992 F-5
Consolidated statements of changes in partners' deficit for the years ended
March 31, 1994, 1993 and 1992 F-6
Consolidated statements of cash flows for the years ended March 31, 1994,
1993 and 1992 F-7
Notes to consolidated financial statements F-8
Schedule XI - Real Estate and Accumulated Depreciation F-21
Other financial statement schedules have been omitted since the required
information is not present or not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the consolidated financial statements, including the notes thereto.
REPORT OF INDEPENDENT AUDITORS
The Partners
PaineWebber Development Partners Four, Ltd.:
We have audited the accompanying consolidated balance sheets of PaineWebber
Development Partners Four, Ltd. as of March 31, 1994 and 1993, and the related
consolidated statements of operations, changes in partners' deficit and cash
flows for each of the three years in the period ended March 31, 1994. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits. We did not audit
the financial statements of 71st Street Housing Partners, Ltd. for the year
ended December 31, 1993, which statements reflect 10% of the Partnership's
consolidated total assets as of March 31, 1994, and 1% of the Partnership's
consolidated net loss for the year ended March 31, 1994. Those statements were
audited by other auditors, whose report has been furnished to us, and our
opinion, insofar as it relates to data included for 71st Street Housing
Partners, Ltd., is based solely on the report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of PaineWebber Development
Partners Four, Ltd. at March 31, 1994 and 1993, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1994 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 7 to the financial statements, the ability of The Lakes
Joint Venture (a consolidated joint venture investee) to continue as a going
concern is dependent upon future events, including the waiver or modification of
a restrictive covenant on its existing non-recourse debt requiring The Lakes to
provide, by September 1994, a certified independent appraisal of The Lakes'
operating investment property for an amount equal to or greater than
$92,000,000. Failure to provide such an appraisal will result in a default
under The Lakes' loan agreement. These conditions raise substantial doubt about
the Partnership's ability to continue as a going concern. Management's plans as
to these matters are also described in Note 7 and include negotiating with the
lender regarding a possible waiver or modification of this appraisal
requirement. However, there are no assurances that the lender will grant any
relief. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Ernst & Young
ERNST & YOUNG
Boston, Massachusetts
June 15, 1994
INDEPENDENT AUDITORS' REPORT
To the Partners
71st Street Housing Partners, Ltd.
We have audited the accompanying balance sheet of 71st Street Housing
Partners, Ltd. as of December 31, 1993, and the related statements of
operations, changes in partners' deficit and cash flows for the year then ended.
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 audit. The financial statements of 71st Street Housing
Partners, Ltd. for the year ended December 31, 1992, were audited by other
auditors whose report, dated January 28, 1993, expressed an unqualified opinion
on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, based the 1993 financial statements referred to above
present fairly, in all material respects, the financial position of 71st Street
Housing Partners, Ltd. as of December 31, 1993, and the results of its
operations, changes in partners' deficit and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Reznick Fedder & Silverman
Reznick Fedder & Silverman
Baltimore, Maryland
January 12, 1994
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
CONSOLIDATED BALANCE SHEETS
March 31, 1994 and 1993
ASSETS
1994 1993
Operating investment properties:
Land $18,189,560 $18,189,560
Building and improvements 76,399,708 76,245,032
94,589,268 94,434,592
Less accumulated depreciation (19,339,055) (16,337,105)
75,250,213 78,097,487
Cash and cash equivalents 1,252,265 1,221,090
Restricted cash 2,900,060 2,913,963
Accounts receivable - affiliates 38,928 8,500
Prepaid and other assets 66,727 66,387
Deferred expenses, net of accumulated
amortization of $507,980 ($206,393 in 1993) 990,999 1,292,586
$80,499,192 $83,600,013
LIABILITIES AND PARTNERS' DEFICIT
Accounts payable and accrued expenses $ 310,675 $ 443,966
Accrued interest and fees 2,715,987 2,318,908
Accounts payable - affiliates - 13,739
Advances from consolidated ventures 99,866 81,611
Tenant security deposits 397,615 356,152
Minority interest in net assets of
consolidated ventures 1,221,258 1,221,517
Equity in losses of unconsolidated joint venture
in excess of investments and advances 2,064,122 1,962,929
Deferred gain on forgiveness of debt 4,430,199 4,773,183
Long-term debt 93,518,155 95,082,837
Total liabilities 104,757,877 106,254,842
Contingencies
Partners' deficit:
General Partners:
Capital contributions 1,000 1,000
Cumulative net loss (2,397,324) (2,317,132)
Limited Partners ($1,000 per unit; 41,644 Units issued):
Capital contributions, net of offering costs 36,640,945 36,640,945
Cumulative net loss (58,503,306) (56,979,642)
Total partners' deficit (24,258,685) (22,654,829)
$80,499,192 $83,600,013
See accompanying notes.
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 1994, 1993 and 1992
1994 1993 1992
REVENUES:
Rental income $ 9,851,043 $ 9,759,154 $ 9,791,528
Interest income 99,213 171,027 392,303
Other income 531,315 428,593 357,969
10,481,571 10,358,774 10,541,800
EXPENSES:
Interest expense 3,825,994 4,602,328 9,292,813
Property operating expenses 3,561,468 3,605,517 3,564,476
Depreciation and amortization 3,303,537 3,128,897 3,324,619
Real estate taxes 1,007,333 941,986 1,707,690
General and administrative 286,161 220,405 197,914
Bad debt expense - -
36,250
11,984,493 12,499,133 18,123,762
Operating loss (1,502,922) (2,140,359) (7,581,962)
Co-venturers' share of consolidated
ventures' losses 259 1,760 3,834,523
Partnership's share of unconsolidated
ventures' losses (101,193) (1,032,208) (1,787,780)
Partnership's share of net gain on
transfers of assets at foreclosure - 820,746 -
Loss before extraordinary items (1,603,856) (2,350,061) (5,535,219)
Partnership's share of extraordinary
gains on settlement of debt
obligations - 6,968,508 -
Extraordinary loss on early extinguishment
of debt - - (1,337,673)
NET INCOME (LOSS) $ (1,603,856) $ 4,618,447 $(6,872,892)
Per Limited Partnership Unit:
Loss before extraordinary items $ (36.59) $ (54.64) $ (126.27)
Partnership's share of extraordinary
gains on settlement of debt obligations - 150.23 -
Extraordinary loss on early extinguishment
of debt - - (30.52)
Net income (loss) $(36.59) $ 95.59 $ (156.79)
The above per Limited Partnership Unit information is based upon the 41,644
Limited Partnership Units outstanding for each year.
See accompanying notes.
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
For the years ended March 31, 1994, 1993 and 1992
General Limited
Partners Partners Total
Balance at March 31, 1991 $ (2,610,287) $ (17,790,097) $ (20,400,384)
Net loss (343,645) (6,529,247) (6,872,892)
BALANCE AT MARCH 31, 1992 (2,953,932) (24,319,344) (27,273,276)
Net income 637,800 3,980,647 4,618,447
BALANCE AT MARCH 31, 1993 (2,316,132) (20,338,697) (22,654,829)
Net loss (80,192) (1,523,664) (1,603,856)
BALANCE AT MARCH 31, 1994 $ (2,396,324) $(21,862,361) $(24,258,685)
See accompanying notes.
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 1994, 1993 and 1992
Increase (Decrease) in Cash and Cash Equivalents
1994 1993 1992
Cash flows from operating activities:
Net income (loss) $ (1,603,856)$ 4,618,447 $(6,872,892)
Adjustments to reconcile net income
(loss) to net cash provided by
(used for) operating activities:
Co-venturers' share of consolidated
ventures' losses (259) (1,760)(3,834,523)
Partnership's share of unconsolidated
ventures' losses 101,193 1,032,208 1,787,780
Depreciation and amortization 3,303,537 3,128,897 3,324,619
Bond discount amortization - - 58,539
Amortization of deferred gain on
forgiveness of debt (342,984) (346,410) (158,995)
Partnership's share of net gain on
transfers of assets at foreclosure - (820,746) -
Partnership's share of extraordinary
gains from settlement of debt
obligations - (6,968,508) -
Extraordinary loss on early
extinguishment of debt - - 1,337,673
Changes in assets and liabilities:
Accounts receivable - 2,478 13,196
Due from co-venture partner - - 3,061,508
Accounts receivable - affiliates (30,428) 4,200 51,050
Deferred expenses - (125,878) (894,358)
Prepaid and other assets (340) (494) (27,059)
Accounts payable and accrued
expenses (133,291) 6,548 297,262
Accrued interest and fees 397,079 1,328,597 100,696
Accrued management fees - - (97,189)
Tenant security deposits 41,463 18,328 7,162
Accounts payable - affiliates (13,739) 9,827 (2,196)
Advances from consolidated ventures 18,255 37,645 43,966
Other liabilities - - (2,446,658)
Total adjustments 3,340,486 (2,695,068) 2,622,473
Net cash provided by (used for)
operating activities 1,736,630 1,923,37 (4,250,419)
Cash flows from investing activities:
Additional investments in joint
ventures - (10,000) (8,677)
Additions to operating investment
properties (154,676) (129,338) (307,634)
Net cash used for investing
activities (154,676) (139,338) (316,311)
Cash flows from financing activities:
Decrease (increase) in restricted cash 13,903 322,722 (3,198,210)
Repayment of long-term debt (1,564,682) (2,291,832)(77,522,583)
Issuance of long-term debt - - 77,821,269
Contribution from venture partner - - 4,125,000
Net cash provided by (used for)
financing activities (1,550,779) (1,969,110) 1,225,476
Net increase (decrease) in cash and
cash equivalents 31,175 (185,069) (3,341,254)
Cash and cash equivalents, beginning
of year 1,221,090 1,406,159 4,747,413
Cash and cash equivalents, end of year $ 1,252,265 $ 1,221,090 $ 1,406,159
Cash paid for interest $ 3,785,528 $ 3,588,698 $ 6,969,757
See accompanying notes.
1. Organization
PaineWebber Development Partners Four, Ltd. (the "Partnership") is a
limited partnership organized pursuant to the laws of the State of Texas on
June 24, 1985 for the purpose of investing in a diversified portfolio of
newly-constructed and to-be-constructed income-producing real properties.
On September 9, 1986 the Partnership elected to extend the offering period
to the public through September 10, 1987 (beyond its original termination
date of September 10, 1986) and reduced the maximum offering amount to
42,000 Partnership Units (at $1,000 per Unit) from 100,000 Units. Through
the conclusion of the offering period, 41,644 Units were issued representing
capital contributions of $41,644,000.
The Partnership originally invested the net proceeds of the offering,
through joint venture partnerships, in six rental apartment properties. As
further discussed in Notes 4 and 5, the Partnership's operating properties
have encountered major adverse business developments which, to date, have
resulted in the loss of three of the original investments to foreclosure.
As of March 31, 1994, the remaining three joint ventures are operating in
compliance with their mortgage debt agreements and their operating
properties are being held for long-term investment purposes. However, as
discussed further in Note 7, one of these ventures may be unable to remain
in compliance with the terms of its debt agreement during fiscal 1995
without certain concessions from the lender.
2. Summary of Significant Accounting Policies
The accompanying financial statements include the Partnership's
investments in three joint venture partnerships which own operating
properties. The joint ventures in which the Partnership has invested are
required to maintain their accounting records on a calendar year basis for
income tax purposes. As a result, the Partnership records its share of
ventures' income or losses based on financial information of the ventures
which is three months in arrears to that of the Partnership.
The Partnership accounts for certain of its investments in joint venture
partnerships using the equity method. Under the equity method the
investments are carried at cost adjusted for the Partnership's share of the
ventures' earnings and losses and distributions. See Note 5 for a
description of the unconsolidated joint venture partnerships. As further
discussed in Note 4, the Partnership acquired complete control of 71st
Street Housing Partners, Ltd., which owns the Harbour Pointe Apartments, in
fiscal 1990. In addition, the Partnership acquired complete control of The
Lakes Joint Venture, which owns The Lakes at South Coast Apartments, in
fiscal 1992. As a result, the accompanying financial statements present the
financial position and results of operations of these joint ventures on a
consolidated basis. As discussed above, the joint ventures have December 31
year-ends and operations of the consolidated ventures continue to be
reported on a three-month lag. All material transactions between the
Partnership and the joint ventures have been eliminated in consolidation,
except for lag-period cash transfers. Such lag period cash transfers are
accounted for as advances from consolidated ventures on the accompanying
balance sheets.
The consolidated joint ventures' operating investment properties are
carried at the lower of cost, reduced by accumulated depreciation, or net
realizable value. The net realizable value of a property held for long-term
investment purposes is measured by the recoverability of the investment
through expected future cash flows on an undiscounted basis, which may
exceed the property's current market value. The net realizable value of a
property held for sale approximates its market value. Both of the
consolidated ventures' operating investment properties were considered to be
held for long-term investment purposes as of March 31, 1994 and 1993.
Depreciation expense is computed using the straight-line method over
estimated useful lives of five-to-thirty years. Interest and taxes incurred
during the construction period, along with acquisition fees paid to
PaineWebber Properties Incorporated and costs of identifiable improvements,
have been capitalized and are included in the cost of the operating
investment properties. Maintenance and repairs are charged to expense when
incurred.
For purposes of reporting cash flows, the Partnership considers all highly
liquid investments with original maturities of 90 days or less to be cash
equivalents. In connection with the restructuring of the debt of The Lakes
Joint Venture, $191,338 of accrued interest payable and $190,755 of accrued
legal fees incurred in 1990 were forgiven in fiscal 1993 pursuant to the
debt restructuring. Additionally, $3,337,495 of accrued interest payable,
$1,259,000 of accounts payable and accrued liabilities and $300,000 of long-
term debt was forgiven during fiscal 1992 (see Note 7). Such forgiveness of
debt has been treated as a noncash transaction.
Deferred expenses on the balance sheet at March 31, 1994 and 1993 consist
of joint venture modification cost and deferred loan costs. Joint venture
modification cost represents a payment by the Partnership to the co-venturer
in 71st Street Housing Partners, Ltd. during fiscal 1990, in return for the
relinquishment of the general partner's rights to control the operations of
the joint venture, and is being amortized on a straight-line basis over the
term of the joint venture's mortgage note payable. Deferred loans costs are
being amortized using the straight-line method over the term of the related
debt.
No provision for income taxes has been made as the liability for such
taxes is that of the partners rather than the Partnership. Upon the sale or
disposition of the Partnership's investments, the taxable gain or loss
incurred with be allocated among the partners. In the case where a taxable
gain would be incurred, gain would first be allocated to the General
Partners in an amount at least sufficient to eliminate their deficit capital
balance. Any remaining gain would then be allocated to the Limited
Partners. In certain cases, the Limited Partners could be allocated taxable
income in excess of any liquidation proceeds that they may receive.
Additionally, in cases where the disposition of an investment involves a
foreclosure by, or voluntary conveyance to, the mortgage lender, taxable
income could occur without distribution of cash. Income from the sale or
disposition of the Partnership's investments would represent passive income
to the partners which could be offset by each partner's existing passive
losses, including any carryovers from prior years.
3. The Partnership Agreement and Related Party Transactions
The General Partners of the Partnership are Fourth Development Fund Inc.
(the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber
Group Inc. ("PaineWebber") and Properties Associates 1985, L.P. (the
"Associate General Partner"), a Virginia limited partnership, certain
limited partners of which are also officers of the Managing General Partner
and PaineWebber Properties Incorporated ("PWPI"), a wholly-owned subsidiary
of PaineWebber Incorporated ("PWI"). PWI, a wholly-owned subsidiary of
PaineWebber, acted as the selling agent for the Limited Partnership Units.
The General Partners, PWPI and PWI will receive fees and compensation,
determined on an agreed-upon basis, in consideration of various services
performed in connection with the sale of the Units, the management of the
Partnership and the acquisition, management, financing and disposition of
Partnership investments. The Managing General Partner is reimbursed for its
direct expenses relating to the offering of Units, the administration of the
Partnership and the acquisition and operation of the Partnership's real
property investments.
All distributable cash, as defined, for each fiscal year shall be
distributed annually in the ratio of 95% to the Limited Partners and 5% to
the General Partners. All sale or refinancing proceeds shall be distributed
in varying proportions to the Limited and General Partners, as specified in
the Partnership Agreement.
Pursuant to the terms of the Partnership Agreement, net income or loss of
the Partnership, other than net gains resulting from Capital Transactions,
as defined, will generally be allocated 95% to the Limited Partners and 5%
to the General Partners.
Additionally, the Partnership Agreement provides for the allocation of
net gains resulting from Capital Transactions, as defined, first, to those
partners whose capital accounts reflect a deficit balance (after all
distributions for the year and all allocations of net income and losses from
operations have been made) in the ratio of such deficits and up to an amount
equal to the sum of such deficits; second, to the General and Limited
Partners in such amounts as are necessary to bring the General Partners'
capital account balance in the ratio of 5 to 95 to the Limited Partners'
capital account balances; then, 95% to the Limited Partners and 5% to the
General Partners.
Selling commissions incurred by the Partnership and paid to PWI for the
sale of Partnership interests were approximately $3,540,000 through the
completion of the offering period which expired in September of 1987.
In connection with the acquisition of properties, PWPI was entitled to
receive acquisition fees in an amount not greater than 5% of the gross
proceeds from the sale of the Partnership units. Total acquisition fees
incurred by the Partnership and paid to PWPI aggregated $2,077,200.
The Partnership recorded as income a total of $82,700, $47,700 and $42,600
of investor servicing fees from certain of its joint ventures for the years
ended March 31, 1994, 1993 and 1992, respectively.
Included in general and administrative expenses for the years ended March
31, 1994, 1993 and 1992 is $92,526, $82,205 and $107,124, respectively,
representing reimbursements to an affiliate of the Managing General Partner
for providing certain financial, accounting and investor communication
services to the Partnership. Accounts payable - affiliates at March 31,
1993 consists of reimbursement of expenses owed to PWPI of $13,739.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets.
Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management,
Inc., an independently operated subsidiary of PaineWebber. Mitchell
Hutchins earned fees of $1,692, $2,648 and $2,438 (included in general and
administrative expenses) for managing the Partnership's cash assets during
fiscal 1994, 1993 and 1992, respectively.
4. Operating Investment Properties
As of March 31, 1994 and 1993, the Partnership owns majority and
controlling interests in two joint venture partnerships which own operating
investment properties as described below. As discussed in Note 2, the
Partnership's policy is to report the operations of the joint ventures on a
three-month lag.
71st Street Housing Partners, Ltd.
On December 16, 1985, the Partnership acquired an interest in 71st Street
Housing Partners, Ltd., a joint venture formed to develop, own and operate
the Harbour Pointe Apartments, a 234-unit two-story garden apartment complex
located in Bradenton, Florida. Construction of this complex was completed
in January, 1987. The Partnership's co-venture partners are affiliates of
The Lieberman Corporation. The Partnership made a capital investment of
$2,658,000 (including an acquisition fee of $150,000 paid to PWPI) for a 60%
interest in the Joint Venture. The property was acquired subject to a
nonrecourse mortgage note in the amount of $9,200,000. On May 1, 1990, the
joint venture refinanced its mortgage note under more favorable terms, as
further discussed in Note 7. Pursuant to an Amended and Restated Agreement
of the Limited Partnership dated August 4, 1989, the general partner
interests of the co-venturers were converted to limited partnership
interests. The co-venturers received a payment of $125,000 from the
Partnership in return for their agreement to relinquish their general
partner rights and the property management contract. As a result of the
amendment, the Partnership, as the sole general partner, assumed full
control of the operations of the property and has hired a third-party
property manager to manage the day-to-day operations of the apartment
complex.
Per the terms of the amended joint venture agreement, income is allocated
to the Partnership until such time as the Partnership's capital account
balance equals 250% of all capital contributions theretofore made by the
Partnership. Thereafter, income is allocated 60% to the Partnership and 40%
to the co-venturers. Net losses are generally allocated 95% to the
Partnership and 5% to the co-venturers.
Allocations of gains and losses from capital transactions will be
allocated according to the formulas provided in the joint venture agreement.
Distributions of cash from a sale or operations of the operating property
will be made in the following order of priority: first, to repay accrued
interest and principal on optional loans (none outstanding as of March 31,
1994); second, to the Partnership until the Partnership has received an
amount equal to 250% of all capital contributions theretofore made by the
Partnership; and third, any remainder, will be distributed 60% to the
Partnership and 40% to the co-venturers. Distributions of cash from a
refinancing of the operating property shall be distributed 60% to the
Partnership and 40% to the co-venturers.
The Lakes Joint Venture
The Lakes Joint Venture ("Venture") was formed May 30, 1985 (inception) in
accordance with the provisions of the laws of the State of California for
the purpose of developing, owning and operating a 770-unit apartment complex
(operating investment property) in Costa Mesa, California. On November 1,
1985 the Partnership acquired a 65% general partnership interest in the
joint venture. The Partnership's original co-venture partner was The Lakes
Development Company ("Developer"), a California general partnership and an
affiliate of Regis Homes Corporation. Construction of the operating
investment property was completed in December 1987. The initial aggregate
cash investment made by the Partnership for its interest was approximately
$16,226,000 (including an acquisition fee of $1,130,325 paid to PWPI).
Construction of the property was financed from the proceeds of a nonrecourse
$76,000,000 mortgage loan. On September 26, 1991, in conjunction with a
refinancing and modification of the Venture's long-term indebtedness, the
Developer transferred its interest in the Venture to Development Partners,
Inc. ("DPI"), a Delaware corporation and a wholly-owned subsidiary of Paine
Webber Group, Inc., and withdrew from the Venture. As a result of the
original co-venturer's withdrawal, the Partnership assumed full control over
the operations of the Venture.
Concurrent with the Developer's withdrawal from the Venture and the
admission of DPI as a Venturer, the Venture Agreement was amended and
restated effective September 26, 1991. The Venture Agreement between the
Partnership and DPI provides that, if the Venture's operating revenues are
insufficient to pay its operating expenses, the Venturers shall have the
right, but not the obligation, to arrange third-party loans to the Venture.
Alternatively, the Venturers may choose to make Optional Loans to the
Venture. If both Venturers desire to make such loans, the loans shall be
made in the ratio of 99.98% from the Partnership and .02% from DPI.
Distributable Funds and Net Proceeds of the Venture are to be allocated
first to the Partnership until the Partnership shall have received
cumulative distributions equal to any Additional Capital Contributions, as
defined. Thereafter, any remaining Distributable Funds or Net Proceeds are
to be distributed next to repay accrued interest and principal on any
Optional Loans and then to the Partnership until the Partnership shall have
received cumulative distributions equal to $17,250,000. Any remainder is to
be distributed 99.98% to the Partnership and .02% to DPI.
Net losses are to be allocated 99.98% to the Partnership and .02% to DPI.
Net income shall be allocated to Venturers to the extent of and in the ratio
of the distribution of Distributable Funds, with any remainder allocated
99.98% to the Partnership and .02% to DPI. In the event that there are no
Distributable Funds, net income would be allocated 99.98% to the Partnership
and .02% to DPI. Allocations of gain or losses from sales or other
dispositions of the operating investment property are set forth in the
Venture Agreement.
The following is a summary of combined property operating expenses for
Harbour Pointe Apartments and for The Lakes at South Coast Apartments for
the years ended December 31, 1993, 1992 and 1991:
1993 1992 1991
Property operating expenses:
Repairs and maintenance $ 767,672 $ 775,567 $ 756,329
Salaries and related expenses 634,645 663,331 577,375
Utilities 547,184 540,542 547,477
Administrative and other 1,032,930 1,035,368 1,161,807
Management fee 353,826 350,221 328,320
Leasing commissions and fees 111,764 126,153 102,509
Insurance 113,447 114,335 90,659
$3,561,468 $3,605,517 $3,564,476
5. Investments in Unconsolidated Joint Ventures
The Partnership has an investment in one unconsolidated joint venture at
March 31, 1994 and 1993. During fiscal 1993, two of the Partnership's joint
venture investment properties were transferred to the respective mortgage
lenders through foreclosure proceedings. The unconsolidated joint ventures
are accounted for on the equity method in the Partnership's financial
statements. As discussed in Note 2, these joint ventures report their
operations on a calendar year basis.
As of March 31, 1992, two unconsolidated joint ventures (Quinten's
Crossing and Parrot's Landing) had been in violation of their mortgage loan
agreements for extended periods of time and had incurred significant cash
flow deficits. In both of these cases, management determined that the
expense of continuing to contest the lenders' foreclosure actions was not in
the best interests of the Partnership because the joint venture interests
had no current or potential future value without substantial concessions
that the lenders were ultimately unwilling or unable to give. The
Partnership forfeited its interest in Quinten's Crossing to the mortgage
lender on August 27, 1992. This transaction resulted in a net gain to the
Partnership of approximately $1,024,000, comprised of an extraordinary gain
of approximately $4,089,000 and an ordinary loss of approximately
$3,065,000. The Parrott's Landing joint venture had filed for bankruptcy in
fiscal 1992 in order to forestall the lender's foreclosure actions. Under
generally accepted accounting principles, entities in reorganization under a
Chapter 11 bankruptcy proceeding generally recognize interest expense on a
nonrecourse debt obligation only to the extent that such interest is paid in
cash. This accounting treatment resulted in the non-recognition of
contractual interest expense in the amounts of approximately $510,000 and
$627,000 for calendar 1992 and 1991, respectively. On October 16, 1992, the
Partnership and its co-venture partner forfeited their interests in the
Parrot's Landing Apartments to the mortgage lender in settlement of the
foreclosure litigation. This transaction resulted in a net gain to the
Partnership of approximately $6,765,000, comprised of an extraordinary gain
of approximately $2,879,000 and an ordinary gain of approximately
$3,886,000. The transfer of each joint venture's operating property to the
lender was accounted for as a troubled debt restructuring in accordance with
Statement of Financial Accounting Standards No. 15, "Accounting by Debtors
and Creditors for Troubled Debt Restructurings". As a result, each joint
venture's extraordinary gain from settlement of debt obligation arose due to
the fact that the balance of the mortgage loan and related accrued interest
exceeded the estimated fair market value of each joint venture's operating
property and other assets transferred to the lender at the time of the
foreclosure. In accordance with SFAS No. 15, an ordinary gain or loss on
transfer of assets is calculated as the difference between the net carrying
value of each joint venture's net operating investment property and its
estimated fair value at the time of the foreclosure.
Condensed combined financial statements of the unconsolidated joint
ventures, for the periods indicated, follow. The operating results
reflected in the condensed combined summary of operations for 1992 include
the results of the Quinten's Crossing and Parrot's Landing apartment
complexes up through the date that the operating properties were transferred
to the lenders.
CONDENSED COMBINED BALANCE SHEETS
December 31, 1993 and 1992
Assets
1993 1992
Current assets $ 17,237 $ 16,803
Operating investment property, net 5,081,289 5,238,040
Other assets 447,115 434,930
$ 5,545,641 $ 5,689,773
Liabilities and Partners' Deficit
Current liabilities $ 362,633 $ 311,782
Loans payable to affiliates 536,770 531,916
Long-term debt 6,965,000 7,015,000
Partnership's share of combined deficit (2,208,352) (2,110,959)
Co-venturer's share of combined deficit (110,410) (57,966)
$ 5,545,641 $ 5,689,773
Condensed Combined Summary of Operations
For the years ended December 31, 1993, 1992 and 1991
1993 1992 1991
Rental revenues $ 1,038,049 $ 3,897,437 $ 4,489,669
Interest and other income 50,640 189,654 203,400
1,088,689 4,087,091 4,693,069
Property operating expenses 656,219 2,272,536 3,154,896
Depreciation and amortization 280,881 865,534 1,296,031
Interest expense (contractual
interest $2,566,464 and
$2,565,924 in 1992 and 1991,
respectively) 301,426 2,056,631 1,939,132
1,238,526 5,194,701 6,390,059
Net loss from operations (149,837) (1,107,610) (1,696,990)
Net loss on transfer of assets
at foreclosure - (1,133,031) -
Loss before extraordinary
gains (149,837) (2,240,641) (1,696,990)
Extraordinary gains on
settlement of debt
obligations - 9,322,459 -
Net income (loss) $ (149,837) $ 7,081,818 $ (1,696,990)
Net income (loss):
Partnership's share of
income (loss) $ (97,393) $ 6,760,846 $ (1,452,824)
Co-venturers' share of
income (loss) (52,444) 320,972 (244,166)
$ (149,837) $ 7,081,818 $ (1,696,990)
Reconciliation of Partnership's Investment
March 31, 1994 and 1993
1994 1993
Partnership's share of combined deficit
as shown above at December 31 $ (2,208,352) $ (2,110,959)
Partnership's share of current liabilities 60,370 60,370
Excess basis due to investment in joint
venture, net (1) 83,860 87,660
Equity in losses of unconsolidated joint
venture in excess of investment
and advances at March 31 (2) $ (2,064,122) $ (1,962,929)
(1) At March 31, 1994 and 1993, the Partnership's investment exceeds its
share of the combined joint venture's deficit account by approximately
$84,000 and $88,000, respectively. These amounts, which relate to certain
expenses incurred by the Partnership in connection with acquiring its
remaining unconsolidated joint venture investment, are being amortized
using the straight-line method over the estimated useful life of the
related operating investment property. Amounts related to operating
investment properties foreclosed upon during fiscal 1993 were written off
in fiscal 1992.
(2) Investments in unconsolidated joint ventures, at equity at March 31,
1994 and 1993 represents the Partnership's net investment in the Lincoln
Garden joint venture partnership. This joint venture is subject to a
partnership agreement which determines the distribution of available
funds, the disposition of the venture's assets and the rights of the
partners, regardless of the Partnership's percentage ownership interest in
the venture. Substantially all of the Partnership's investment in this
joint venture is restricted as to distributions.
Reconciliation of Partnership's Share of Operations
For the years ended March 31, 1994, 1993 and 1992
1994 1993 1992
Partnership's share of
operations, as shown above $ (97,393)$ 6,760,846 $(1,452,824)
Amortization of excess basis (3,800) (3,800) (334,956)
Partnership's share of
unconsolidated ventures' net
income (loss) $ (101,193)$ 6,757,046 $(1,787,780)
The Partnership's share of unconsolidated ventures' net income (loss) is
presented as follows on the accompanying statement of operations:
1994 1993 1992
Partnership's share of
unconsolidated ventures' losses $ (101,193)$(1,032,208)$(1,787,780)
Partnership's share of
net gain on transfers
of assets at foreclosure - 820,746 -
Partnership's share of
extraordinary gains on
settlement of debt obligations - 6,968,508 -
Partnership's share of unconsolidated
ventures' net income (loss) $ (101,193)$ 6,757,046 $(1,787,780)
Descriptions of the property owned by the remaining unconsolidated joint venture
and certain other matters are summarized below:
Lincoln Garden Apartments Joint Venture
On November 15, 1985, the Partnership acquired an interest in a joint
venture which developed, owns and operates Lincoln Garden Apartments, a 200-
unit complex located on an 8.1-acre tract of land in Tucson, Arizona.
Construction of this complex was completed in June, 1986. The Partnership's
co-venture partner is an affiliate of Lincoln Property Company. The
Partnership made a cash investment of approximately $1,762,000 (including an
acquisition fee of $103,125 paid to PWPI) for a 65% interest in the Joint
Venture. The property was acquired subject to a nonrecourse mortgage note
in the amount of $7,700,000.
During fiscal 1989, the joint venture ceased to meet the debt service
requirements of its mortgage financing and, technically, was in default of
the loan agreements. In March 1989, the Partnership refinanced its loan and
obtained a lower interest rate which reduced the venture's debt service
requirements. Interest rates on the previous financing arrangement ranged
from 7.2% to 8.8% per annum. The new financing arrangement bore interest at
varying rates ranging from 2.515% to 3.112% and 3.25% to 4.375% during
calendar 1993 and 1992, respectively. The venture has remained current on
its debt service payments since the date of the refinancing. The mortgage
note has a remaining principal balance of $7,015,000 as of December 31, 1993
and is scheduled to mature on May 1, 1997. To improve the credit rating of
the outstanding debt and provide a more favorable variable interest rate, in
1993 the lender provided to the joint venture a confirming letter of credit
for $7,109,500. The confirming letter of credit requires fees based on a
0.3% annual rate and expires on June 4, 1996.
The co-venturer guaranteed to fund negative cash flow, as defined, of the
Joint Venture during the guarantee period, which ended September 30, 1988.
Operating expenses and debt service, if any, in excess of the amounts
available for expenditure were to be funded by the co-venturer during the
guarantee period. The co-venturer's obligation to fund cash pursuant to
these guarantees was in the form of nonreturnable capital contributions
through September 30, 1987, and mandatory additional capital contributions,
as defined, through September 30, 1988. From October 1, 1988 until July 2,
1990, the co-venturer was required to make mandatory loans, as defined, to
the Joint Venture to the extent operating revenues were insufficient to pay
the operating expenses. Thereafter, if operating revenues are insufficient
to pay operating expenses, either the co-venturer or the Partnership may
make optional loans, as defined, to the Joint Venture, but there is no
assurance that any will be made. All mandatory and optional loans bear
interest at prime (6% at December 31, 1993) plus 1% per annum and are to be
repaid from distributable funds, as defined. At December 31, 1993,
mandatory and optional loans payable to the co-venturer amounted to
$522,361. Unpaid interest on mandatory and optional loans at December 31,
1993, amounted to $241,389. Loans payable to the Partnership at December
31, 1993, amounted to $14,408 and are being accounted for as mandatory loans
similar to those made by the co-venturer.
The joint venture agreement provides that distributable funds, as defined,
and net proceeds arising from the sale, refinancing, or other disposition of
the Operating Investment Property of the Joint Venture, as defined, will be
distributed as follows: 1) for repayment of accrued interest and principal
on optional loans, 2) for repayment of accrued interest and principal on
mandatory loans, 3) to the Partnership until the Partnership has received
cumulative distributions equal to $1,897,500, 4) to the co-venturer until
the co-venturer has received a cumulative distribution equal to, first, a
preferred return on mandatory additional capital contributions of prime plus
1% per annum and, second, any mandatory additional capital contributions,
and 5) the balance, 65% to the Partnership and 35% to the co-venturer. The
obligation to distribute distributable funds is cumulative.
Losses of the joint venture, other than losses resulting from the sale of
the Operating Investment Property, were allocated 100% to the Partnership
through December 31, 1990, and thereafter, are allocated 65% to the
Partnership and 35% to the co-venturer unless the allocation of additional
losses to the Partnership would result in the Partnership's capital account
having a deficit balance while the co-venturer's capital account has a
credit balance. In such cases, the co-venturer will be allocated losses
until the capital account of the co-venturer is reduced to zero. Income of
the Joint Venture, other than gains resulting from the sale or other
disposition of the Operating Investment Property, will be allocated 65% to
the Partnership and 35% to the co-venturer if there are no distributable
funds. If there are distributable funds, income will be allocated as
follows: 1) to the Partnership to the extent of its preferred
distributions, 2) to the co-venturer to the extent of its preferred
distributions, and 3) the balance, 65% to the Partnership and 35% to the co-
venturer.
Gains arising from the sale, refinancing, or other disposition of the
Operating Investment Property are to be allocated in accordance with
specific formulas set forth in the joint venture agreement.
6. Restricted Cash
In September 1991, The Lakes Joint Venture entered into an agreement with
its mortgage lender whereby restricted cash accounts were established for
the purpose of making specific disbursements for debt service, property
taxes and insurance, security deposit refunds, and funding operating
deficits. These accounts are controlled by the bank in which all
disbursements and transfers are dictated by the related Reimbursement
Agreement (Note 7). These cash accounts are included in Restricted Cash on
the accompanying balance sheet.
7. Long-term debt
Long-term debt on the Partnership's balance sheet at March 31, 1994 and 1993
consists of the following:
1994 1993
Nonrecourse mortgage note payable which
secures Manatee County Housing Finance
Authority Revenue Refunding Bonds. The
mortgage loan is secured by a deed to
secure debt and a security agreement
covering the real and personal property
of the Harbour Pointe Apartments. $ 9,125,000$ 9,125,000
Developer loan payable which secures
County of Orange, California Tax-Exempt
Apartment Development Revenue Bonds. The
mortgage loan is nonrecourse and is
secured by a first deed of trust plus all
future rents and income generated by The
Lakes at South Coast Apartments. 75,600,000 75,600,000
Nonrecourse loan payable to bank secured
by a third deed of trust plus all future
rents and income generated by The Lakes
at South Coast Apartments. 5,232,126 6,086,044
Prior indebtedness principal payable to
bank. This obligation is related to The
Lakes Joint Venture and is nonrecourse. 3,561,029 4,271,793
$93,518,155 $95,082,837
Mortgage loan secured by the Harbour Pointe Apartments
Original financing for construction of the Harbour Pointe Apartments was
provided through $9,200,000 Multi-Family Housing Mortgage Revenue Bonds,
Series 1985 E due December 1, 2007 (the original Bonds) issued by the
Manatee County Housing Finance Authority. The original bond issue was
refinanced on May 1, 1990 with $9,125,000 Weekly Adjustable/Fixed Rate
Multi-Family Housing Revenue Refunding Bonds, Series 1990A, due December 1,
2007 (the Bonds). The interest rate on the Bonds is adjusted weekly to a
minimum rate that would be necessary to remarket the Bonds in a secondary
market as determined by a bank remarketing agent. The rates on the Bonds
averaged 3.03% and 3.46% per annum during calendar 1993 and 1992,
respectively.
Interest on the underlying bonds is intended to be exempt from federal
income tax pursuant to Section 103 of the Internal Revenue Code. In
connection with obtaining the mortgage loan, the joint venture executed a
Land Use Restriction Agreement with the Manatee County Housing Finance
Authority which provides, among other things, that substantially all of the
proceeds of the bonds issued be utilized to finance multi-family housing of
which 20% or more of the units are to be leased to low and moderate income
families as established by the United States Department of Housing and Urban
Development. In the event that the underlying bonds do not maintain their
tax-exempt status, whether by a change in law or by noncompliance with the
rules and regulations related thereto, repayment of the note may be
accelerated.
Pursuant to the financing agreement, a bank has issued an irrevocable
letter of credit to the bond trustee in the joint venture's name for
$9,247,500. An annual fee equal to 1% of the letter of credit balance is
payable monthly to the extent of net cash operating income available to pay
such fees. Accrued letter of credit fees amounted to $96,965 at December
31, 1993 and 1992. A letter of credit agreement under the original
financing called for an annual fee of 1.25% on a letter of credit of
$9,674,000.
Debt secured by The Lakes at South Coast Apartments
Original financing for construction of The Lakes at South Coast Apartments
was provided from a developer loan in the amount of $76,000,000 funded by
the proceeds of a public offering of tax-exempt apartment development
revenue bonds issued, at a discount totalling $741,500, by the County of
Orange, California. The Lakes Joint Venture (the "Venture") had been in
default of the developer loan since December of 1989 for failure to make
full and timely payments on the loan. As a result of the Venture's default,
the required semi-annual interest and principal payments due to the bond
holders through June of 1991 were made by the bank which had issued an
irrevocable letter of credit securing the bonds. Under the terms of the
loan agreement, the Venture was responsible for reimbursing the letter of
credit issuer for any draws made against the letter of credit. During
calendar 1990 and 1991, the Venture failed to reimburse the issuer for draws
made against the letter of credit on December 1, 1989, June 1, 1990,
December 31, 1990 and June 1, 1991 in the aggregate net amount of
$7,748,391. While the Venture was in default of the developer loan, these
unreimbursed amounts were payable on demand with interest at 4% over the
Citibank, N.A. prime rate.
The original bond issue was refinanced during 1991 and the original
developer loan was extinguished. The Venture recognized an extraordinary
loss on early extinguishment of debt in the amount of $1,337,673,
representing the write-off of unamortized deferred financing costs and
original issue discount related to the original developer loan. The new
developer loan, in the amount of $75,600,000, is payable to the County of
Orange and was funded by the proceeds of a public offering of tax-exempt
apartment development revenue bonds issued, at par, by the County of Orange,
California in September 1991. Principal is payable upon maturity, December
1, 2006. Interest on the bonds is variable, with the rate determined weekly
by a remarketing agent (ranging from 1.7% to 4.0% during calendar 1993), and
is payable in arrears on the first of each month. In November 1992, the
Venture entered into an interest rate cap agreement for an amount which
covered the $75,600,000 developer loan. The cap agreement, which cost the
Venture $208,000, provided an interest rate ceiling of 3.49% and was
effective from November 30, 1992 to December 15, 1993. The cost of the
interest rate cap was amortized on a straight-line basis over the 13 month
period covered by the agreement.
Bond principal and interest payments are secured by and payable from an
irrevocable letter of credit issued by a bank in the amount of $76,569,337,
expiring December 15, 1998. The Venture pays an annual letter of credit fee
equal to 1.0% of the outstanding amount, payable 60% monthly with the
remaining 40% (Unpaid Accrued Letter of Credit Fees) deferred and paid in
accordance with the Reimbursement Agreement (see below). Such unpaid
Accrued Letter of Credit Fees were $693,109 and $386,832 at December 31,
1993 and 1992, respectively. The bank letter of credit is secured by a
second deed of trust on the operating investment property, and future rents
and income from the operating investment property.
In conjunction with the refinancing of the developer loan in 1991, the
Venture entered into a Reimbursement Agreement with the letter of credit
issuer regarding the unreimbursed letter of credit draws referred to above.
The issuer agreed to forgive all outstanding accrued interest through
September 26, 1991, aggregating $1,131,708, along with a portion of the
outstanding principal in the amount of $300,000. In return, the Venture
made a principal payment of $925,585, leaving an unpaid balance of
$6,522,806 (Prior Indebtedness). The outstanding amount of such
indebtedness ($3,561,029 and $4,271,793 at December 31, 1993 and 1992,
respectively) will bear interest payable to the issuer at the rate of 11%
per annum. Interest accruing on the Prior Indebtedness from the date of
closing through June 1992, in the aggregate amount of $556,000, has been
forgiven by the issuer. At the time of the refinancing the Venture also
owed the issuer letter of credit fees totalling $2,184,253. The issuer
agreed to forgive $1,259,000 of such unpaid fees, leaving an unpaid balance
of $925,253 (Deferred Prior Letter of Credit Fees). The Venture has a
limited right to defer payment of interest and principal on the Prior
Indebtedness and the Unpaid Accrued Letter of Credit Fees to the extent that
the net cash flow from operations is not sufficient after the payment of
debt service on the developer loan and the funding of certain required
reserves. In addition, upon a sale or other disposition of the operating
property, the Reimbursement Agreement allows for the payment to the Venture
of an amount of $5,500,000, plus a simple return thereon at the rate of 8%
per annum, prior to the repayment to the issuer of the accrued interest on
the Prior Indebtedness and the Deferred Prior Letter of Credit Fees.
In November 1988, a borrowing arrangement with a bank was entered into to
provide funds for The Lakes. The Venture obtained a line of credit secured
by a third trust deed on the subleasehold interest, buildings and
improvements, and rents and income in the amount of $6,300,000. Interest on
the line of credit, which was to expire on December 15, 1994, was originally
payable monthly at 1-1/2% over the Citibank, N.A. prime rate. However,
because of the default status of this obligation during calendar 1990,
interest had accrued at a rate of prime plus 4% through September 26, 1991.
Accrued interest on the line of credit, which is payable to the same bank
which issued the letter of credit in connection with the bonds, totalled
$1,841,125 at September 26, 1991. In conjunction with the refinancing of
the developer loan described above, the lender agreed to forgive all of the
outstanding accrued interest at the date of the refinancing. Interest
accrues on the outstanding principal balance at the rate of 11% per annum
beginning September 27, 1991. Payment of interest and principal on the line
of credit borrowings, which totalled $5,232,126 and $6,086,044 at December
31, 1993 and 1992, respectively, prior to a sale or other disposition of the
operating property, is limited to the extent of available cash flow after
the payment of debt service on the developer loan and the funding of certain
required reserves. In addition, as with the Prior Indebtedness principal
and interest described above, upon a sale or other disposition of the
operating property, the payment of accrued interest on the line of credit
borrowings is subordinated to the receipt by the Venture of $5,500,000 plus
a simple return thereon of 8% per annum.
The restructuring of the Prior Indebtedness, the Deferred Letter of Credit
Fees and the line of credit borrowings, as described above, have been
accounted for in accordance with Statement of Financial Accounting Standards
No. 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructurings". Accordingly, the forgiveness of debt (including interest
forgiven on the Prior Indebtedness principal through June 1992 and $190,755
of accrued legal fees forgiven), aggregating $5,278,588, has been deferred
and is being amortized as a reduction of interest expense prospectively
using a method approximating the effective interest method over the
estimated remaining term of the Venture's indebtedness. At December 31,
1993 and 1992, $4,430,200 and $4,773,183, respectively of such forgiven debt
(net of accumulated amortization) has been reflected in the accompanying
balance sheet and $342,984, $346,410 and $158,995 for the years ended
December 31, 1993, 1992 and 1991, respectively, has been amortized as a
reduction of interest expense in the accompanying statement of operations.
The new developer loan required the establishment of a $2,000,000 deficit
reserve account, funded from the Venturers' 1991 contributions. The loan
also requires the funding of an additional reserve amount on a monthly basis
to the extent that the interest rate on the bonds is below 6%, until the
balance in this reserve account totals $1,000,000. The requirement for this
additional reserve account may be eliminated if the operating property
generates a certain minimum level of net operating income. The $2,000,000
deficit reserve account and the additional reserve account funded by
operations may be used under certain circumstances to fund the Venture's
debt service obligations to the extent that net operating income is
insufficient. In the event that such reserves no longer become necessary
under the terms of the Reimbursement Agreement, any remaining balances in
the reserve accounts are to be paid to the issuer, to be applied against
certain of the Venture's outstanding obligations. In November 1992, the
bank and the Venture agreed to release $1,764,140 from the deficit reserve
account to pay down the Prior Indebtedness. As of December 31, 1993, the
balances in the deficit reserve account and the additional reserve account
totalled $150,193 and $1,016,894, respectively ($150,204 and $823,626 at
December 31, 1992, respectively), and are included in restricted cash on the
accompanying balance sheet.
The new developer loan contains several restrictive covenants, including a
requirement that the Venture furnish the issuer in September 1994 with a
certified independent appraisal of the operating investment property for an
amount equal to or greater than $92,000,000. Failure to provide such an
appraisal would constitute an event of default under the loan agreements.
Management is presently negotiating with the lender regarding a possible
waiver or modification of the 1994 appraisal requirement. If management is
successful in these negotiations, it plans to continue to manage the
property to achieve growth in net operating income while applying the
majority of excess cash flow toward a paydown of the Venture's outstanding
indebtedness. However, there are no assurances that the lender will grant
any relief or waiver of the appraisal requirement in 1994. These conditions
raise substantial doubt about the Venture's and the Partnership's ability to
continue as going concerns. The financial statements do not include any
adjustments that may result from the outcome of this uncertainty. The total
assets, total liabilities, gross revenues and total expenses of The Lakes
Joint Venture included in the fiscal 1994 consolidated financial statements
total approximately $70,936,000, $92,065,000, $8,899,000 and $10,236,000,
respectively.
<TABLE>
Schedule XI - Real Estate and Accumulated Depreciation
PAINEWEBBER DEVELOPMENT PARTNERS FOUR LTD.
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
March 31, 1994
<CAPTION> Life
on which
Costs Depreciation
Initial Cost to Capitalized in Latest
Consolidated Subsequent to Gross Amount at Which Carried at Income
Joint Venture Acquisition End of Year Statement
Buildings & Buildings & Buildings & Accumulated Date of Date is
Description Encumbrances (B) Land Improvements Improvements Land Improvements Total DepreciationConstruction Acquired Computed
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment Complex
Bradenton,
FL $ 9,125,000 $1,542,633 $ 8,309,220 $ 216,080 $ 1,542,633 $8,525,300 $10,067,933 $2,059,860 1987 12/16/85 5-30 yrs.
Apartment Complex
Costa Mesa,
CA 84,393,155 16,646,927 64,349,318 3,525,090 16,646,927 67,874,408 84,521,335 17,279,195 1987 11/1/85 5-30 yrs.
$93,518,155 $18,189,560 $72,658,538 $3,741,170 $18,189,560$76,399,708 $94,589,268$19,339,055
Notes
(A) The aggregate cost of real estate owned at December 31, 1993 for Federal income tax purposes is approximately $81,236,000
(B) See Note 7 to the financial statements for a description of the terms of the debt encumbering the property.
(C) Reconciliation of real estate owned:
1994 1993 1992
</TABLE>
Balance at beginning of period $ 94,434,592 $ 94,305,254 $ 10,033,677
Increase due to additions 154,676 129,338 307,634
Consolidation of joint venture - - 83,963,943
Balance at end of period $ 94,589,268 $ 94,434,592 $ 94,305,254
(D)Reconciliation of accumulated depreciation:
Balance at beginning of period $ 16,337,105 $ 13,336,461 $ 1,198,565
Depreciation expense 3,001,950 3,000,644 2,977,259
Consolidation of joint venture - - 9,160,637
Balance at end of period $ 19,339,055 $ 16,337,105 $ 13,336,461
F-21
