UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K405
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1995
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to_____________
Commission file number 0-15446
McNEIL REAL ESTATE FUND XXV, L.P.
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(Exact name of registrant as specified in its charter)
California 33-0120335
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13760 Noel Road, Suite 700, LB70, Dallas, Texas, 75240
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (214) 448-5800
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Limited partnership
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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, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
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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 ]
83,887,326 of the registrant's 83,894,648 limited partnership units are held by
non-affiliates. The aggregate market value of units held by non-affiliates is
not determinable since there is no public trading market for limited partnership
units and transfers of units are subject to certain restrictions.
Documents Incorporated by Reference: See Item 14, Page 38
TOTAL OF 40 PAGES
<PAGE>
PART I
ITEM 1. BUSINESS
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ORGANIZATION
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McNeil Real Estate Fund XXV, L.P. (the "Partnership"), formerly known as
Southmark Equity Partners II, Ltd., was organized on February 15, 1985 as a
limited partnership under the provisions of the California Revised Limited
Partnership Act to acquire and operate commercial and residential properties.
The general partner of the Partnership is McNeil Partners, L.P. (the "General
Partner"), a Delaware limited partnership, an affiliate of Robert A. McNeil
("McNeil"). The General Partner was elected at a meeting of limited partners on
March 26, 1992, at which time an amended and restated partnership agreement (the
"Amended Partnership Agreement") was adopted. Prior to March 26, 1992, the
general partner of the Partnership was Equity Partners (the "Original General
Partner"), a Texas general partnership, which was formed by affiliates of
Southmark Corporation ("Southmark"). The principal place of business for the
Partnership and the General Partner is 13760 Noel Road, Suite 700, LB70, Dallas,
Texas, 75240.
On December 23, 1985, the Partnership registered with the Securities and
Exchange Commission ("SEC") under the Securities Act of 1933 (File No. 33-746)
and commenced a public offering for sale of $72,000,000 of limited partnership
units ("Units"), with the general partner's right to increase the offering to
$84,000,000. The Units represent equity interests in the Partnership and entitle
the holders thereof to participate in certain allocations and distributions of
the Partnership. The sale of Units closed on August 8, 1986 with 84,000,000
Units sold at one dollar each, or gross proceeds of $84,000,000 to the
Partnership. The Partnership subsequently filed a Form 8-A Registration
Statement with the SEC and registered its Units under the Securities Exchange
Act of 1934 (File No. 0-15446). Effective November 1, 1986, 50,000 Units were
rescinded, and an additional 49,473 and 5,879 Units were rescinded in 1991 and
1995, respectively, leaving 83,894,648 Units outstanding at December 31, 1995.
SOUTHMARK BANKRUPTCY AND CHANGE IN GENERAL PARTNER
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On July 14, 1989, Southmark filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. Neither the Partnership, the General
Partner nor the Original General Partner were included in the filing.
Southmark's reorganization plan became effective August 10, 1990. Under the
plan, most of Southmark's assets, which included Southmark's interests in the
Original General Partner, are being sold or liquidated for the benefit of
creditors.
In accordance with Southmark's reorganization plan, Southmark, McNeil and
various of their affiliates entered into an asset purchase agreement on October
12, 1990, providing for, among other things, the transfer of control to McNeil
or his affiliates of 34 limited partnerships (including the Partnership) in the
Southmark portfolio.
On February 14, 1991, pursuant to the asset purchase agreement as amended on
that date, McNeil Real Estate Management, Inc. ("McREMI"), an affiliate of
McNeil, acquired the assets relating to the property management and partnership
administrative business of Southmark and its affiliates and commenced management
of the Partnership's properties pursuant to an assignment of the existing
property management agreements from the Southmark affiliates.
On March 26, 1992, the limited partners approved a restructuring proposal that
provided for (i) the replacement of the Original General Partner with a new
general partner, McNeil Partners, L.P.; (ii) the adoption of the Amended
Partnership Agreement which substantially alters the provisions of the original
partnership agreement relating to, among other things, compensation,
reimbursement of expenses and voting rights; (iii) the approval of an amended
property management agreement with McREMI, the Partnership's property manager;
and (iv) the approval to change the Partnership's name to McNeil Real Estate
Fund XXV, L.P. Under the Amended Partnership Agreement, the Partnership began
accruing an asset management fee, retroactive to February 14, 1991, which is
payable to the General Partner. For a discussion of the methodology for
calculating the asset management fee, see Item 13 Certain Relationships and
Related Transactions. The proposals approved at the March 26, 1992 meeting were
implemented as of that date.
Concurrent with the approval of the restructuring, the General Partner acquired
from Southmark and its affiliates, for aggregate consideration of $29,065, the
general partner interest of the Original General Partner. The General Partner
and its affiliates own in the aggregate less than 1% of the Units.
Settlement of Claims:
The Partnership filed claims with the United States Bankruptcy Court for the
Northern District of Texas, Dallas Division (the "Bankruptcy Court") against
Southmark for damages relating to improper overcharges, breach of contract and
breach of fiduciary duty. The Partnership settled these claims in 1991, and such
settlement was approved by the Bankruptcy Court.
An Order Granting Motion to Distribute Funds to Class 8 Claimants dated April
14, 1995 was issued by the Bankruptcy Court. In accordance with the Order, in
May 1995 the Partnership received in full satisfaction of its claims, $73,122 in
cash, and common and preferred stock in the reorganized Southmark which
represents the Partnership's pro-rata share of Southmark assets available for
Class 8 Claimants. The Partnership sold the Southmark common and preferred stock
in May 1995 for $23,609, which combined with the cash proceeds from Southmark,
resulted in a gain on legal settlement of $96,731.
CURRENT OPERATIONS
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General:
The Partnership is engaged in the ownership, operation and management of
commercial office, retail and residential real estate. At December 31, 1995, the
Partnership owned five income-producing properties as described in Item 2 -
Properties.
The Partnership does not directly employ any personnel. The General Partner
conducts the business of the Partnership directly and through its affiliates.
The Partnership reimburses affiliates of the General Partner for such services
rendered in accordance with the Amended Partnership Agreement. See Item 8 - Note
2 "Transactions With Affiliates."
The business of the Partnership to date has involved only one industry segment.
See Item 8 - Financial Statements and Supplementary Data. The Partnership has no
foreign operations. The business of the Partnership is not seasonal.
Business Plan:
The Partnership's anticipated plan of operations for 1996 is to preserve or
increase the net operating income of its properties whenever possible, while at
the same time making whatever capital expenditures are reasonable under the
circumstances in order to preserve and enhance the value of the Partnership's
properties. The General Partner is evaluating market and other economic
conditions to determine the optimum time to commence an orderly liquidation of
the Partnership's properties in accordance with the terms of the Amended
Partnership Agreement. In conjunction therewith, the General Partner will
continue to explore potential avenues to enhance the value of the Units in the
Partnership, which may include, among other things, asset sales or refinancings
of the Partnership's properties which may result in distributions to the limited
partners. See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Competitive Conditions:
Since the principal business of the Partnership is to own and operate real
estate, the Partnership is subject to all of the risks incidental to ownership
of real estate and interests therein, many of which relate to the illiquidity of
this type of investment. These risks include changes in general or local
economic conditions, changes in supply or demand for competing properties in an
area, changes in interest rates and availability of permanent mortgage funds
which may render the sale or refinancing of a property difficult or
unattractive, changes in real estate and zoning laws, increases in real property
tax rates and Federal or local economic or rent controls. The illiquidity of
real estate investments generally impairs the ability of the Partnership to
respond promptly to changed circumstances. The Partnership competes with
numerous established companies, private investors (including foreign investors),
real estate investment trusts, limited partnerships and other entities (many of
which have greater resources than the Partnership) in connection with the sale,
financing and leasing of properties. The impact of these risks on the
Partnership, including losses from operations and foreclosures of the
Partnership's properties, is described in Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations. See Item 2 -
Properties for a discussion of the competitive conditions at each of the
Partnership's properties.
Other Information:
The environmental laws of the Federal government and of certain state and local
governments impose liability on current property owners for the clean-up of
hazardous and toxic substances discharged on the property. This liability may be
imposed without regard to the timing, cause or person responsible for the
release of such substances onto the property. The Partnership could be subject
to such liability in the event that it owns properties having such environmental
problems. The Partnership has no knowledge of any pending claims or proceedings
regarding such environmental problems.
In August 1995, High River Limited Partnership ("High River"), a Delaware
limited partnership controlled by Carl C. Icahn, made an unsolicited tender
offer (the "HR Offer") to purchase from holders of Units up to approximately 45%
of the outstanding Units of the Partnership for a purchase price of $.24 per
Unit. In addition, High River made unsolicited tender offers for certain other
partnerships controlled by the General Partner. The Partnership recommended that
the limited partners reject the HR Offer made with respect to the Partnership
and not tender their Units pursuant to the HR Offer. The HR Offer terminated,
after numerous extensions, on October 6, 1995. The General Partner believes that
as of February 29, 1996, High River has purchased approximately 6.33% of the
outstanding Units pursuant to the HR Offer. In addition, all litigation filed by
High River, Mr. Icahn and his affiliates in connection with the HR Offer has
been dismissed without prejudice.
ITEM 2. PROPERTIES
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The following table sets forth the real estate investment portfolio of the
Partnership at December 31, 1995. All of the buildings and the land on which
they are located are owned by the Partnership in fee and are unencumbered by
mortgage indebtedness, with the exception of Harbour Club I Apartments, which is
subject to a first lien deed of trust as described more fully in Item 8 - Note 6
- - "Mortgage Note Payable" and Fidelity Plaza which is subject to four ground
leases as described more fully in Item 8 - Note 5 - "Leases." See also Item 8 -
Note 4 - "Real Estate Investments" and Schedule III - Real Estate Investments
and Accumulated Depreciation and Amortization. In the opinion of management, the
properties are adequately covered by insurance.
<TABLE>
Net Basis 1995 Date
Property Description of Property Debt Property Taxes Acquired
- -------- ----------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Century Park Office Building
Las Vegas, NV 113,459 sq. ft. $9,207,904 $ - $ 68,923 5/86
Fidelity Plaza Office Building
Long Beach, CA 123,872 sq. ft. 5,500,436 - 71,893 12/85
Harbour Club I Apartments
Belleville, MI (1) 294 units 6,598,793 7,381,507 140,889 6/86
Kellogg Office Building
Littleton, CO 112,766 ft. 6,141,678 - 108,516 12/85
Northwest Plaza Retail Center
Dayton, OH 443,551 sq. ft. 13,171,662 - 256,088 6/86
---------- --------- -------
$40,620,473 $7,381,507 $646,309
========== ========= =======
</TABLE>
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Total: Apartments - 294 units
Retail Center - 443,551 sq. ft.
Office Buildings - 350,097 sq. ft.
(1) Harbour Club I Apartments is owned by Van Buren Associates Limited
Partnership, which is wholly-owned by the Partnership and the General
Partner.
The following table sets forth the properties' occupancy rate and rent per
square foot for the last five years:
<TABLE>
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Century Park
Occupancy Rate............ 95% 92% 81% 86% 83%
Rent Per Square Foot...... $15.41 $15.21 $14.40 $14.59 $12.68
Fidelity Plaza
Occupancy Rate............ 79% 83% 76% 86% 82%
Rent Per Square Foot...... $14.04 $14.79 $15.24 $17.70 $15.00
Harbour Club I
Occupancy Rate............ 91% 90% 90% 92% 89%
Rent Per Square Foot...... $ 6.91 $ 6.39 $ 6.16 $ 5.96 $ 5.91
Kellogg
Occupancy Rate............ 99% 83% 99% 86% 93%
Rent Per Square Foot...... $12.53 $13.38 $13.37 $11.62 $13.31
Northwest Plaza
Occupancy Rate............ 98% 97% 88% 94% 96%
Rent Per Square Foot...... $ 4.59 $ 5.24 $ 5.31 $ 5.05 $ 5.38
</TABLE>
Occupancy rate represents all units leased divided by the total number of units
for residential properties and square footage leased divided by the total square
footage for other properties as of December 31 of the given year. Rent per
square foot represents all revenue, except interest, derived from the property's
operations divided by the leasable square footage of the property.
Competitive conditions:
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Century Park
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Century Park consists of twin two-story class "B" office buildings located in
the heart of the East Flamingo Corridor in southeast Las Vegas. The area
surrounding the building is abundant with commercial activity. A series of
professional buildings line the busy thoroughfare.
The Las Vegas economy has continued to expand since the early 1980's. Commercial
construction is struggling to keep pace with the widespread demand. Current
market conditions are very favorable for landlords because of the strong demand
and lack of space available. This environment has tenants competing for
available space so very few concessions are offered. Development of new office
space began toward the end of 1994 and Century Park is currently competing with
existing class "B" buildings that lost tenants to the new buildings. The
Partnership plans interior and exterior enhancements to the building, which
should allow it to maintain occupancy at Century Park in 1996.
Fidelity Plaza
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Fidelity Plaza is a ten-story office building located in downtown Long Beach,
California, on Ocean Boulevard, parallel to the Pacific Ocean. The area is a
strong business mix of legal and maritime businesses due to its close proximity
to the Ports of Long Beach and Los Angeles.
Due to depressed economic conditions in southern California, rental rates have
fallen. Several competing buildings in the area completed extensive capital
improvements in 1995. However, with extensive lobby and courtyard capital
improvements completed in 1995, management expects occupancy at Fidelity Plaza
to improve in 1996. The Partnership will need to upgrade the common areas on
each floor to continue to compete in the market place. The Partnership expects
decreased rental income and negative cash flow for the next three years due to
lower rental rates and extensive capital and tenant improvements. In 1995, the
Partnership has determined that the Partnership will not recover its costs over
the estimated holding period of the asset; accordingly, a write-down for
permanent impairment of $4,633,000 was recorded. See Item 7 - Financial
Condition.
Harbour Club I
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Harbour Club I, located in Belleville, Michigan, was built in 1969 as a part of
a four-phase apartment complex. The property offers a complete package of
amenities including a golf course, clubhouse, exercise room, tanning beds,
tennis courts, saunas, boat docks and launch, and playgrounds. The apartments
located in this phase of the complex offer lake and golf course views. The
Belleville market has significantly rebounded to an occupancy rate of 95% and
the property's closest competitor has rental rates approximately $100 per month
above Harbour Club I's rates. At December 31, 1995, Harbour Club I operated at
an occupancy rate of 91% and has not increased rents for four years due to lack
of capital improvements. Security concerns are prompting demands from tenants
for improved lighting, limited access gates and fencing, as offered by
competitors. During the past four years, management has limited capital
expenditures which has significantly affected the property's ability to
effectively compete in the marketplace. The Partnership plans to minimize
capital improvements until a loan workout can be reached with the United States
Department of Housing and Urban Development ("HUD"). See Item 7 Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Kellogg
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Kellogg Building is located southwest of Denver and is the only high-rise office
building in the Littleton area. The building is located within a mile of one of
the strongest housing developments in the nation, with projected growth of over
100,000 residents expected over the next four years. The quality of lifestyle in
Colorado is placing higher demands for professionals to work closer to home.
Professionals are looking for nearby office space that replaces former downtown
locations. There is one building under construction which is trying to pre-lease
a 100,000 square foot office building, with occupancy scheduled for late 1997 or
early 1998. However, since no official commitment has been received from any
lender, development is not certain.
Rental rates are scheduled to increase for all tenants under signed lease
agreements and rental rate increases are projected for any new or renewing
tenants. The Partnership expects to maintain occupancy in the high 90% range
throughout 1996.
Northwest Plaza
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Northwest Plaza is a class "A" retail strip shopping center with three anchor
tenants that occupy 75% of the total leasable area. The area has experienced
increased criminal activity. However, management has increased security and is
evaluating options to increase lighting in the parking areas.
In late 1993, an anchor tenant vacated and the space was re-leased at a lower
rate. Another anchor tenant's lease was restructured to provide for lower rent
based on sales volume, and the tenant declared bankruptcy in late 1995. Due to
these factors, lower rental revenue was achieved in 1995. This decline in rental
revenues is considered to be a temporary setback, and management has concluded
that a permanent impairment has not occurred.
The property stands above the competition in occupancy and the Partnership
expects to maintain occupancy in the high 90% range. Should the bankrupt tenant
vacate, management expects that the property's strength in the market will allow
it to re-lease the space.
The following schedule shows lease expirations for each of the Partnership's
commercial properties for 1996 through 2005:
<TABLE>
Number of Annual % of Gross
Expirations Square Feet Rent Annual Rent
--------- ------- -------- -----------
<S> <C> <C> <C> <C>
Century Park
- ------------
1996 15 28,743 $ 483,980 24%
1997 12 19,640 338,018 17%
1998 12 44,662 815,688 41%
1999 4 4,925 79,291 4%
2000 4 7,476 126,288 6%
2001-2005 - - - -
Kellogg
- -------
1996 8 11,140 136,585 10%
1997 11 20,797 256,955 19%
1998 9 30,135 364,400 27%
1999 7 20,491 264,259 20%
2000 3 21,175 267,784 20%
2001-2005 - - - -
Fidelity Federal Plaza
- ----------------------
1996 17 30,934 514,105 27%
1997 14 16,331 258,997 13%
1998 8 11,671 201,428 10%
1999 4 10,075 167,044 9%
2000 3 14,280 212,425 11%
2001 2 6,000 77,040 4%
2002 - - - -
2003 1 6,300 88,893 5%
2004-2005 - - - -
Northwest Plaza
- ---------------
1996 5 17,592 120,788 7%
1997 6 15,048 136,402 8%
1998 5 17,667 146,101 8%
1999 5 10,859 105,413 6%
2000 1 1,200 14,952 1%
2001 1 8,954 42,531 2%
2002 2 5,393 24,642 1%
2003 2 8,806 95,992 5%
2004 1 24,358 73,100 4%
2005 1 6,000 48,000 3%
</TABLE>
No residential tenant leases 10% or more of the available rental space. The
following schedule reflects information on commercial tenants occupying 10% or
more of the leasable square feet for each property:
<TABLE>
Nature of
Business Square Footage Lease
Use Leased Annual Rent Expiration
- -------- -------- ------- --------
<S> <C> <C> <C>
Century Park
- ------------
General Office 11,640 $237,456 1998
Kellogg
- -------
General Office 14,522 $181,525 2000
Fidelity Federal Plaza
- ----------------------
None
Northwest Plaza
- ---------------
Department Store 266,560 $533,120 2007
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
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The Partnership is not party to, nor are any of the Partnership's properties the
subject of, any material pending legal proceedings, other than ordinary, routine
litigation incidental to the Partnership's business except, for the following:
1) High River Limited Partnership v. McNeil Partners, L.P., McNeil Investors,
Inc., McNeil Pacific Investors 1972, Ltd., McNeil Real Estate Fund V, Ltd.,
McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil
Real Estate Fund XI, Ltd., McNeil Real Estate Fund XIV, Ltd., McNeil Real
Estate Fund XV, Ltd., McNeil Real Estate Fund XX, L.P., McNeil Real Estate
Fund XXIV, L.P., McNeil Real Estate Fund XXV, L.P., Robert A. McNeil and
Carole J. McNeil (L95012) - High River ("HR") filed this action in the
United States District Court for the Southern District of New York against
McNeil Partners, L.P., McNeil Investors, Inc. and Mr. and Mrs. McNeil (as
defined in this Section 1, collectively, the "Defendants") requesting,
among other things, names and addresses of the limited partners in the
partnerships referenced above (as defined in this Section 1, the
"Partnerships"). The District Court issued a preliminary injunction against
the Partnerships requiring them to commence mailing materials relating to
the HR tender offer on August 14, 1995.
On August 18, 1995, the Defendants filed an Answer and Counterclaim. The
Counterclaim principally asserts (1) the HR tender offers have been
undertaken in violation of the Federal securities laws, on the basis of
material, non-public, and confidential information, and (2) that the HR
offer documents omit and/or misrepresent certain material information about
the HR tender offers. The Counterclaim seeks a preliminary and permanent
injunction against the continuation of the HR tender offers and,
alternatively, ordering corrective disclosure with respect to allegedly
false and misleading statements contained in the tender offer documents.
This action was dismissed without prejudice in November 1995.
2) High River Limited Partnership v. McNeil Partners, L.P., McNeil Investors,
Inc., McNeil Pacific Investors 1972, Ltd., McNeil Real Estate Fund V, Ltd.,
McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil
Real Estate Fund XI, Ltd., McNeil Real Estate Fund XIV, Ltd., McNeil Real
Estate Fund XV, Ltd., McNeil Real Estate Fund XX, L.P., McNeil Real Estate
Fund XXIV, L.P., McNeil Real Estate Fund XXV, L.P., Robert A. McNeil and
Carole J. McNeil - United States District Court for the Southern District
of New York, (Case No. 95 Civ. 9488) (Second Action).
On November 7, 1995, High River filed a second complaint with the District
Court which alleges, inter alia, that McNeil Partners, L.P.'s (the "General
Partner") Schedule 14D-9 filed in connection with the High River tender
offers was materially false and misleading, in violation of Sections 14(d)
and 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. Section 78n(d)
and (e), and the SEC Regulations promulgated thereunder; and that High
River further alleges that the General Partner has wrongfully refused to
admit High River as a limited partner to the ten partnerships referenced
above. Additionally, High River purports to assert claims derivatively on
behalf of McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund XI,
Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate Fund XXIV, L.P.
and McNeil Real Estate Fund XXV, L.P., for breach of contract and breach of
fiduciary duty, asserting that the General Partner has charged these
partnerships excessive fees. High River's complaint seeks, inter alia,
preliminary injunctive relief requiring the General Partner to admit High
River as a limited partner in each of the ten partnerships referenced above
and to transfer the tendered units of interest in the partnerships to High
River; an unspecified award of damages payable to High River and an
additional unspecified award of damages payable to certain of the
partnerships; an order that defendants must discharge their fiduciary
duties and must account for all fees they have received from certain of the
partnerships; and attorneys' fees.
On January 31, 1996, this action was dismissed without prejudice.
3) HCW Pension Real Estate Fund, Ltd. et al. v. Ernst & Young, BDO Seidman et
al. (Case #92-06560-A). This suit was filed on behalf of the Partnership
and other affiliated partnerships (the "Affiliated Partnerships") on May
26, 1992, in the 14th Judicial District Court of Dallas County. The
petition sought recovery against the Partnership's former auditors, Ernst &
Young, for negligence and fraud in failing to detect and/or report
overcharges of fees/expenses by Southmark, the former general partner. The
former auditors initially asserted counterclaims against the Affiliated
Partnerships based on alleged fraudulent misrepresentations made to the
auditors by the former management of the Affiliated Partnerships
(Southmark) in the form of client representation letters executed and
delivered to the auditors by Southmark management. The counterclaims sought
recovery of attorneys' fees and costs incurred in defending this action.
The counterclaims were later dismissed on appeal, as discussed below.
The trial court granted summary judgment against the Partnership based on
the statute of limitations; however, on appeal, the Dallas Court of Appeals
reversed the trial court and remanded for trial the Affiliated
Partnerships' fraud claims against Ernst & Young. The Texas Supreme Court
denied Ernst & Young's application for writ of error on January 11, 1996.
The Partnership is continuing to pursue vigorously its claims against Ernst
& Young; however, the final outcome of this litigation cannot be determined
at this time.
4) Martha Hess, et al. v. Southmark Equity Partners II, Ltd. (presently known
as McNeil Real Estate Fund XXV, L.P.), Southmark Income Investors, Ltd,
Southmark Equity Partners, Ltd., Southmark Realty Partners III, Ltd., and
Southmark Realty Partners II, Ltd., et al. ("Hess"); Kotowski v. Southmark
Equity Partners, Ltd. and Donald Arceri v. Southmark Income Investors, Ltd.
These cases were previously pending in the Illinois Appellate Court for the
First District ("Appellate Court"), as consolidated Case No. 90-107.
Consolidated with these cases are an additional 14 matters against
unrelated partnership entities. The Hess case was filed on May 20, 1988, by
Martha Hess, individually and on behalf of a putative class of those
similarly situated. The original, first, second and third amended
complaints in Hess sought rescission, pursuant to the Illinois Securities
Act, of over $2.7 million of principal invested in five Southmark (now
McNeil) partnerships, and other relief including damages for breach of
fiduciary duty and violation of the Illinois Consumer Fraud and Deceptive
Business Practices Act. The original, first, second and third amended
complaints in Hess were dismissed against the defendant-group because the
Appellate Court held that they were not the proper subject of a class
action complaint. Hess was, thereafter, amended a fourth time to state
causes of action against unrelated partnership entities. Hess went to
judgment against that unrelated entity and the judgment, along with the
prior dismissal of the class action, was appealed. The Hess appeal was
decided by the Appellate Court during 1992. The Appellate Court affirmed
the dismissal of the breach of fiduciary duty and consumer fraud claims.
The Appellate Court did, however, reverse in part, holding that certain
putative class members could file class action complaints against the
defendant-group. Although leave to appeal to the Illinois Supreme Court was
sought, the Illinois Supreme Court refused to hear the appeal. The effect
of the denial is that the Appellate Court's opinion remains standing. On
June 15, 1994, the Appellate Court issued its mandate sending the case back
to trial court.
In late January 1995, the plaintiffs filed a Motion to File an Amended
Consolidated Class Action Complaint, which amends the complaint to name
McNeil Partners, L.P. as the successor general partner to Southmark
Investment Group. In February 1995, the plaintiffs filed a Motion for Class
Certification. The amended cases against the defendant-group, and others,
are proceeding under the caption George and Joy Kugler v. I.R.E. Real
Estate Income Fund, Jerry and Barbara Neumann v. Southmark Equity Partners
II, Richard and Theresa Bartoszewski v. Southmark Realty Partners III, and
Edward and Rose Weskerna v. Southmark Realty Partners II.
In September 1995, the court granted the plaintiffs' Motion to File an
Amended Complaint, to Consolidate and for Class Certification. The
defendants have answered the complaint and have plead that the plaintiffs
did not give timely notice of their right to rescind within six months of
knowing that right. While the Partnership has objected to the Motion, the
ultimate resolution of this litigation, which is expected to occur within
one year, could result in a loss of up to $1.8 million in addition to
related legal fees. No accrual has been recorded related to this
litigation.
5) Robert Lewis v. McNeil Partners, L.P., McNeil Investors, Inc., Robert A.
McNeil et al. - In the District Court of Dallas County, Texas, A-14th
Judicial District, Cause No. 95-08535 (Class Action) - Plaintiff, Robert
Lewis, is a limited partner with McNeil Pacific Investors Fund 1972, Ltd.,
McNeil Real Estate Fund X, Ltd. and McNeil Real Estate Fund XV, Ltd.
Plaintiff brings this action on his own behalf and as a class action on
behalf of the class of all limited partners of McNeil Pacific Investors
Fund 1972, Ltd., McNeil Real Estate Fund V, Ltd., McNeil Real Estate Fund
IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil Real Estate Fund XI,
Ltd., McNeil Real Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd.,
McNeil Real Estate Fund XX, L.P., McNeil Real Estate Fund XXIV, L.P. and
McNeil Real Estate Fund XXV, L.P. (as defined in this Section 5, the
"Partnerships") as of August 4, 1995.
Plaintiff alleges that McNeil Partners, L.P., McNeil Investors, Inc.,
Robert A. McNeil and other senior officers (as defined in this Section 5,
collectively, the "Defendants") breached their fiduciary duties by, among
other things, (1) failing to attempt to sell the properties owned by the
Partnerships (as defined in this Section 5, the "Properties") and extending
the lives of the Partnerships indefinitely, contrary to the Partnerships'
business plans, (2) paying distributions to themselves and generating fees
for their affiliates, (3) refusing to make significant distributions to the
class members, despite the fact that the Partnerships have positive cash
flows and substantial cash balances, and (4) failing to take steps to
create an auction market for equity interests of the Partnerships, despite
the fact that a third party bidder filed tender offers for approximately
forty-five percent (45%) of the outstanding units of each of the
Partnerships. Plaintiff also claims that Defendants have breached the
partnership agreements of the Partnerships by failing to take steps to
liquidate the Properties and by their alteration of the Partnerships'
primary purposes, their acts in contravention of these agreements, and
their use of the assets of the Partnerships for their own benefit instead
of for the benefit of the Partnerships.
The Defendants deny that there is any merit to Plaintiff's allegations and
intend to vigorously defend this action.
6) James F. Schofield, Gerald C. Gillett and Donna S. Gillett v. McNeil
Partners, L.P., McNeil Investors, Inc., McNeil Real Estate Management,
Inc., Robert A. McNeil, Carole J. McNeil, McNeil Real Estate Fund V, Ltd.,
McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil
Real Estate Fund XI, Ltd., McNeil Real Estate Fund XIV, Ltd., McNeil Real
Estate Fund XV, Ltd., McNeil Real Estate Fund XX, L.P., McNeil Real Estate
Fund XXIV, L.P., McNeil Real Estate Fund XXV, L.P. et al. - Superior Court
of the State of California for the County of Los Angeles, Case No. BC133799
(Class and Derivative Action Complaint) and United States District Court,
Southern District of New York, Case No. 95CIV.6711 (Class and Derivative
Action Complaint).
These are corporate/securities class and derivative actions brought in
state and Federal court by limited partners of each of the nine (9) limited
partnerships that are named as nominal defendants as listed above (as
defined in this Section 6, the "Partnerships"). Plaintiffs allege that
McNeil Investors, Inc., its affiliate McNeil Real Estate Management, Inc.
and four (4) of their senior officers and/or directors (as defined in this
Section 6, collectively, the "Defendants") have breached their fiduciary
duties. Specifically, Plaintiffs allege that Defendants have caused the
Partnerships to enter into several wasteful transactions that have no
business purpose or benefit to the Partnerships and which have rendered
such units highly illiquid and artificially depressed the prices that are
available for units on the limited resale market. Plaintiffs also allege
that Defendants have engaged in a course of conduct to prevent the
acquisition of units by Carl Icahn by disseminating false, misleading and
inadequate information. Plaintiffs further allege that Defendants have
acted to advance their own personal interests at the expense of the
Partnerships' public unit holders by failing to sell Partnership properties
and failing to make distributions to unitholders and, thereby, have
breached the partnership agreements.
The Defendants deny that there is any merit to Plaintiff's allegations and
intend to vigorously defend these actions.
7) Alfred Napoletano v. McNeil Partners, L.P., McNeil Investors, Inc., Robert
A. McNeil, Carole J. McNeil, McNeil Pacific Investors Fund 1972, Ltd.,
McNeil Real Estate Fund V, Ltd., McNeil Real Estate Fund IX, Ltd., McNeil
Real Estate Fund X, Ltd., McNeil Real Estate Fund XI, Ltd., McNeil Real
Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate
Fund XX, L.P., McNeil Real Estate Fund XXIV, L.P., McNeil Real Estate Fund
XXV, L.P. - Superior Court of the State of California, County of Los
Angeles, Case No. BC133849 (Class Action Complaint).
Plaintiff brings this class action on behalf of a class of all persons and
entities who are current owners of units and/or are limited partners in one
or more of the partnerships referenced above (as defined in this Section 7,
the "Partnerships"). Plaintiff alleges that McNeil Partners, L.P., McNeil
Investors, Inc., Robert A. McNeil and other senior officers (as defined in
this Section 7, collectively, the "Defendants") have breached their
fiduciary duties to the class members by, among other things, (1) taking
steps to prevent the consummation of the High River tender offers, (2)
failing to take steps to maximize unitholders' or limited partners' values,
including failure to liquidate the properties owned by the Partnerships,
(3) managing the Partnerships so as to extend indefinitely the present fee
arrangements, and (4) paying itself and entities owned and controlled by
the general partner excessive fees and reimbursements of general and
administrative expenses.
The Defendants deny that there is any merit to Plaintiff's allegations and
intend to vigorously defend this action.
8) Warren Heller v. McNeil Partners, L.P., McNeil Investors, Inc., Robert A.
McNeil, Carole J. McNeil, McNeil Pacific Investors Fund 1972, Ltd., McNeil
Real Estate Fund V, Ltd., McNeil Real Estate Fund IX, Ltd., McNeil Real
Estate Fund X, Ltd., McNeil Real Estate Fund XI, Ltd., McNeil Real Estate
Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate Fund
XX, L.P., McNeil Real Estate Fund XXIV, L.P., McNeil Real Estate Fund XXV,
L.P. - Superior Court of the State of California, County of Los Angeles,
Case No. BC133957 (Class Action Complaint).
Plaintiff brings this class action on behalf of a class of all persons and
entities who are current owners of units and/or are limited partners in one
or more of the partnerships referenced above (as defined in this Section 8,
the "Partnerships"). Plaintiff alleges that McNeil Partners, L.P., McNeil
Investors, Inc., Robert A. McNeil and other senior officers (as defined in
this Section 8, collectively, the "Defendants") have breached their
fiduciary duties to the class members by, among other things, (1) taking
steps to prevent the consummation of the High River tender offers, (2)
failing to take steps to maximize unitholders' or limited partners' values,
including failure to liquidate the properties owned by the Partnerships,
(3) managing the Partnerships so as to extend indefinitely the present fee
arrangements, and (4) paying itself and entities owned and controlled by
the general partner excessive fees and reimbursements of general and
administrative expenses.
The Defendants deny that there is any merit to Plaintiff's allegations and
intend to vigorously defend this action.
9) John and Christine Muccianti, et al. v. Southmark Equity Partners II, Ltd.
(presently known as McNeil Real Estate Fund XXV, L.P.) and Southmark
Investment Group, Inc. This case was consolidated with the Hess case as
described above.
For a discussion of the Southmark bankruptcy, see Item 1 - Business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNERSHIP AND
- ------ ------------------------------------------------------------
RELATED SECURITY HOLDER MATTERS
-------------------------------
(A) There is no established public trading market for limited partnership
units, nor is one expected to develop.
(B) Title of Class Number of Record Unit Holders
-------------- -----------------------------
Limited partnership units 8,741 as of February 16, 1996
(C) No distributions were paid to limited partners in 1995. Cash
distributions paid to limited partners totaled $400,207 in 1994 from
cash from operations. No distributions have been paid to the General
Partner. See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations and Item 8 - Note 1 - "Organization
and Summary of Significant Accounting Policies Distributions."
ITEM 6. SELECTED FINANCIAL DATA
- ------ -----------------------
The following table sets forth a summary of certain financial data for the
Partnership. This summary should be read in conjunction with the Partnership's
financial statements and notes thereto appearing in Item 8 - Financial
Statements and Supplementary Data.
<TABLE>
Years Ended December 31,
Statements of ---------------------------------------------------------------------------
Operations 1995 1994 1993 1992 1991
- ------------------ ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Rental revenue............... $ 8,783,408 $ 9,110,749 $ 9,041,611 $ 9,005,516 $ 8,774,208
Provision for loss on
affiliate advance......... - - - 113,000 -
Write-down for permanent
impairment of real estate. 4,633,000 - - 1,341,133 -
Loss before extraordinar
item...................... (5,943,886) (531,497) (183,926) (2,442,529) (214,032)
Extraordinary item........... - - - 224,839 -
Net loss..................... (5,943,886) (531,497) (183,926) (2,217,690) (214,032)
Net loss per thousand
limited partnership units:
Loss before extraordinary
item $ (70.14) $ (6.27) $ (2.17) $ (28.82) $ (2.52)
Extraordinary item - - - 2.65 -
------------ ---------- ----------- ----------- ------------
Net loss.................. $ (70.14) $ (6.27) $ (2.17) $ (26.17) $ (2.52)
============ ========== =========== =========== ============
Distributions per thousand
limited partnership units.... $ - $ 4.77 $ 17.80 $ 18.50 $ 30.00
============ ========== =========== =========== ============
As of December 31,
---------------------------------------------------------------------------
Balance Sheets 1995 1994 1993 1992 1991
- -------------- ------------ ----------- ----------- ---------- ------------
Real estate investments, net... $ 40,620,473 $46,683,563 $ 47,668,916 $49,587,222 $ 53,272,173
Total assets................... 47,723,941 53,432,562 54,109,784 55,641,482 59,819,253
Mortgage note payable.......... 7,381,507 7,381,507 7,366,449 7,384,442 7,415,155
Partners' equity............... 37,464,982 43,408,868 44,340,572 46,017,924 49,787,770
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------ -----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
FINANCIAL CONDITION
- -------------------
The Partnership was formed to engage in the business of acquiring and operating
income-producing real properties and holding the properties for investment.
Since completion of its capital formation and property acquisition phases in
1986, when it completed the purchase of five properties, the Partnership has
operated its properties for production of income. The Partnership's properties
were adversely affected by competitive and overbuilt markets, resulting in lower
levels of cash from operations. In 1989, the Partnership wrote down the carrying
values of two of its office buildings to reflect a permanent decline in value.
In 1992, the Partnership recorded a further write-down of one of its office
buildings and also wrote down the carrying value of its apartment complex. As
described below, the Partnership recorded a write-down of another of its office
buildings in 1995. The Partnership continues to operate its portfolio of one
apartment complex, three office buildings, and one shopping center.
Fidelity Plaza is a ten-story office building located in downtown Long Beach,
California. The southern California area has experienced declining economic
conditions over the past several years, and the Partnership has been monitoring
conditions closely with the expectations that a rebound would occur. Several
factors have led to the conclusion that the Partnership has sustained a
permanent impairment in the net realizable value of the asset as follows: The
Partnership had originally intended to hold the asset until such time as the
real estate market in the area and the performance of the property improved to
permit the Partnership to achieve its capital preservation and capital gains
objectives. While conditions have improved in 1995, the estimated holding period
of the asset has been reduced as it has become evident that economic factors
will not allow for the Partnership to recover its costs over a reasonable period
of time. Based upon projected cash flows over the reduced holding period, as
well as an analysis of comparable office buildings in the Long Beach area, the
Partnership has revised its estimated net realizable value of the property; and
accordingly, a write-down for permanent impairment of $4,633,000 was recorded in
1995.
Harbour Club I Apartments has continued to experience financial difficulties.
The cash flow from operations of the property has not been sufficient to fund
necessary capital improvements and to make the required monthly debt service
payments. Effective January 1, 1993, the Partnership ceased making regularly
scheduled debt service and escrow payments. In lieu of the aforementioned
payments, the Partnership is funding debt service with the excess cash flow of
the property. The Partnership has been notified that the mortgage note payable
is in default and that the servicing agent has assigned the mortgage to the
United States Department of Housing and Urban Development ("HUD"). If the
Partnership is unable to successfully cure the default, the mortgagee could
declare the entire indebtedness due and proceed with foreclosure on the property
or pursue other actions such as gaining control of the property or placing it in
receivership. As of year end, no steps have been taken toward foreclosure.
RESULTS OF OPERATIONS
- ---------------------
1995 compared to 1994
Revenue:
Total revenues decreased by $198,214 in 1995 as compared to 1994. The decrease
was due to a decrease in rental revenue, partially offset by an increase in
interest income and a gain on legal settlement, as discussed below.
Rental revenue decreased by $327,341 in 1995 in relation to 1994. Rental revenue
decreased by approximately $466,000 at Northwest Plaza Shopping Center as a
result of a decline in revenue based on sales volume of tenants, mainly due to a
bankruptcy filing by a major tenant. Rental revenue also decreased by
approximately $64,000 at Fidelity Plaza Office Building due to a decrease in
rental rates. These decreases were partially offset by an increase at Harbour
Club I of approximately $142,000 due to a reduction in average vacancies and a
decrease in discounts and concessions offered to tenants.
Interest income earned on short-term investments of cash and cash equivalents
increased by $32,396 in 1995 as compared to 1994. The increase was due to
greater average cash balances invested in these accounts during 1995. The
Partnership held $4 million of cash and cash equivalents at December 31, 1995 as
compared to $3.1 million at December 31, 1994. In addition, there was an
increase in interest rates earned on invested cash in 1995.
As discussed in Item 1 - Business, in 1995 the Partnership received cash and
common and preferred stock in the reorganized Southmark in settlement of its
bankruptcy claims against Southmark. The Partnership recognized a $96,731 gain
in 1995 as a result of this settlement. No such gain was recognized in 1994.
Expenses:
Total expenses increased by $5,214,175 in 1995 as compared to 1994. The increase
was primarily due to the Partnership recording a $4,633,000 write-down for
permanent impairment of Fidelity Plaza Office Building to its estimated net
realizable value (see Item 8 - Note 4 - "Real Estate Investments"), and to an
increase in depreciation and amortization and general and administrative
expenses, as discussed below.
Depreciation and amortization increased by $144,634 in 1995 in relation to 1994.
The increase was primarily due to the addition of depreciable capital
improvements at the Partnership's properties, the majority being at Kellogg and
Fidelity Plaza office buildings and Northwest Plaza Shopping Center.
In 1995, general and administrative expenses increased by $266,852 in relation
to 1994. The increase was due to costs incurred by the Partnership in 1995
relating to evaluation and dissemination of information regarding an unsolicited
tender offer as discussed in Item 1 - Business and Item 3 - Legal Proceedings.
1994 compared to 1993
Revenue:
Total Partnership revenues decreased by $86,525 in 1994 as compared to 1993. The
decrease was mainly due to the fact that the Partnership received a property tax
refund and recorded a gain on sale of marketable securities in 1993. These
decreases were partially offset by increases in rental revenue and interest
income in 1994 as discussed below.
Rental revenue increased by $69,138 in 1994 in relation to 1993. Rental revenue
increased by approximately $92,000 at Century Park Office Building due to an
increase in occupancy and by approximately $62,000 at Harbour Club I Apartments
due to an increase in rental rates. These increases were partially offset by
decreases of approximately $55,000 and $33,000 at Fidelity Plaza Office Building
and Northwest Plaza Shopping Center, respectively. The decrease at Fidelity
Plaza was mainly due to a decrease in rental rates while the decrease at
Northwest Plaza was due to a decline in revenue based on sales volume of
tenants.
Interest income increased by $31,140 in 1994 as compared to the prior year. The
increase was partially the result of higher interest rates earned on invested
cash in 1994. In addition, there was more cash available for short-term
investment in 1994 than in 1993. The Partnership held $2 million of cash and
cash equivalents at the beginning of 1993 which increased to $2.8 million by the
end of 1993. The Partnership held $3.1 million of cash and cash equivalents at
the end of 1994.
In 1993, Harbour Club I Apartments received a $142,948 property tax refund as
the result of an appeal filed on behalf of the property. No such income was
recorded in 1994.
In 1993, the Partnership recognized a $43,855 gain on the sale of marketable
securities as discussed in Item 8 - Note 8 - "Deferred Gain." No such gain was
recognized in 1994.
Expenses:
Total expenses for 1994 increased by $261,046 as compared to 1993. The increase
was primarily due to an increase in depreciation and amortization as discussed
below.
Depreciation and amortization increased by $322,266 in 1994 in relation to 1993.
The increase was mainly the result of the addition of depreciable tenant
improvements in 1994, primarily at Century Park and Fidelity Plaza office
buildings.
Property taxes decreased by $202,928 in 1994 as compared to 1993. The decrease
was primarily due to a decrease in the assessed taxable value of Harbour Club I
by taxing authorities as a result of an appeal filed on behalf of the property.
Personnel expenses increased by $79,641 in 1994 as compared to 1993. The
increase was partially due to the addition of a maintenance technician at
Northwest Plaza Shopping Center. In addition, there was an increase in workers'
compensation insurance rates at Harbour Club I, Fidelity Plaza and Northwest
Plaza.
Other property operating expenses increased by $101,625 in 1994 as compared to
1993. The increase was partially due to an increase in the amortization of
leasing commissions in 1994, primarily at Century Park, which were paid in 1994
and 1993 in an effort to increase the property's occupancy. Also, due to the
lack of capital expenditures made to maintain marketability, Harbour Club I
Apartments has had difficulty attracting higher profile tenants. As a result,
bad debt expense and professional fees related to eviction of tenants have
increased. In addition, there was an overall increase in the cost of property
liability insurance at all the properties.
General and administrative expenses decreased by $45,549 in 1994 as compared to
1993. The decrease was partially due to a decrease in legal expenses relating to
a lawsuit against the officers and directors of the Original General Partner and
against the Partnership's former auditors. In addition, there was a decrease in
consulting and other professional fees paid in connection with the proposed
workout of the Harbour Club I loan.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Partnership generated $2,949,445 of cash through operating activities in
1995 as compared to $2,803,617 in 1994 and $3,110,664 in 1993. The increase in
1995 as compared to 1994 was the result of an increase in cash received from
tenants resulting from increased rental revenues as discussed above, as well as
a decrease in cash paid to suppliers due to the timing of the payment of
invoices at the end of the year. Additionally, in 1995 the Partnership received
$96,731 in connection with the settlement of the Southmark bankruptcy, as
previously discussed. The decrease in 1994 as compared to 1993 was primarily the
result of an increase in cash paid to suppliers due to the timing of the payment
of invoices at the end of the year.
The Partnership expended $2,044,998, $2,015,525 and $1,089,882 on capital
additions to its real estate investments in 1995, 1994 and 1993, respectively.
In 1995, approximately $317,000 of improvements were made at Northwest Plaza
Shopping Center for asbestos remediation. A greater amount of lobby and
courtyard improvements were performed at Fidelity Plaza Office Building in 1994
as compared to 1993.
In 1993, the Partnership received $243,855 in proceeds from the sale of
marketable securities received in connection with the modification of a tenant's
lease at Kellogg Office Building.
The Partnership distributed $400,207 and $1,493,426 to the limited partners in
1994 and 1993, respectively. Distributions to the partners were reduced in 1994
and eliminated in 1995 due to the Partnership's anticipated cash needs for
capital improvements and due to the uncertainties surrounding the lawsuit
involving the sale of the Partnership's Units (see Item 3 - Legal Proceedings)
and the default on the Harbour Club I mortgage loan.
Short-term liquidity:
At December 31, 1995, the Partnership held cash and cash equivalents of
$3,987,381. This balance provides a reasonable level of working capital for the
Partnership's immediate needs in operating its properties.
For the Partnership as a whole, management projects positive cash flow from
operations in 1996. Only one property, Harbour Club I Apartments, is encumbered
with mortgage debt and another property, Fidelity Plaza is encumbered with lease
obligations. The Partnership has budgeted $2,273,000 for necessary capital
improvements for all properties in 1996, which are expected to be funded from
available cash reserves or from operations of the properties. An escrow account
restricted to the funding of priority capital needs is held by the lender for
Harbour Club I in the amount of $376,096, which is included in escrow deposits
on the Balance Sheets. However, since the loan is in default, draws from the
escrow account for capital needs must be approved by the lender. The lender has
agreed to reimburse the Partnership $273,200 from the escrow account for repairs
that are scheduled to be completed in 1996.
Due to the Partnership's projected cash needs for capital improvements, the
uncertain outcome of the lawsuit involving the sale of the Partnership's Units
(see Item 3 - Legal Proceedings) and the default on the Harbour Club I mortgage
loan, the Partnership does not anticipate making distributions to the limited
partners in 1996. There can be no assurance as to when the Partnership will
rebuild cash reserves judged adequate to resume distributions to the partners.
Additional efforts to maintain and improve Partnership liquidity have included
continued attention to property management activities. The objective has been to
obtain maximum occupancy rates while holding expenses to levels necessary to
maximize cash flows. The Partnership has made capital expenditures on its
properties where improvements were expected to increase the competitiveness and
marketability of the properties.
Long-term liquidity:
While the outlook for maintenance of adequate levels of liquidity is favorable,
should operations deteriorate and present cash resources be insufficient for
current needs, the Partnership would require other sources of working capital.
No such sources have been identified. The Partnership has no established lines
of credit from outside sources. Other possible actions to resolve cash
deficiencies include refinancings, deferral of capital expenditures on
Partnership properties except where improvements are expected to increase the
competitiveness and marketability of the properties, arranging financing from
affiliates or the ultimate sale of the properties. Sales and refinancings are
possibilities only, and there are at present no plans for any such sales or
refinancings.
The General Partner has established a revolving credit facility not to exceed
$5,000,000 in the aggregate which is available on a "first-come, first-served"
basis to the Partnership and other affiliated partnerships, if certain
conditions are met. Borrowings under the facility may be used to fund deferred
maintenance, refinancing obligations and working capital needs. There is no
assurance that the Partnership will receive any funds under the facility because
no amounts are reserved for any particular partnership. As of December 31, 1995,
$2,662,819 remained available for borrowing under the facility; however,
additional funds could become available as other partnerships repay existing
borrowings. This commitment will terminate on March 26, 1997.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
<TABLE>
Page
Number
------
INDEX TO FINANCIAL STATEMENTS
- -----------------------------
Financial Statements:
<S> <C>
Report of Independent Public Accountants....................................... 17
Balance Sheets at December 31, 1995 and 1994................................... 18
Statements of Operations for each of the three years in the period
ended December 31, 1995..................................................... 19
Statements of Partners' Equity (Deficit) for each of the three years in the
period ended December 31, 1995.............................................. 20
Statements of Cash Flows for each of the three years in the period
ended December 31, 1995..................................................... 21
Notes to Financial Statements.................................................. 23
Financial Statement Schedule -
Schedule III - Real Estate Investments and Accumulated Depreciation
and Amortization......................................................... 33
</TABLE>
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of McNeil Real Estate Fund XXV, L.P.:
We have audited the accompanying balance sheets of McNeil Real Estate Fund XXV,
L.P. (a California limited partnership) as of December 31, 1995 and 1994, and
the related statements of operations, partners' equity (deficit) and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements and the schedule referred to below are the responsibility
of the Partnership's management. Our responsibility is to express an opinion on
these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of McNeil Real Estate Fund XXV,
L.P. as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in our audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Dallas, Texas
March 13, 1996
<PAGE>
McNEIL REAL ESTATE FUND XXV, L.P.
BALANCE SHEETS
<TABLE>
December 31,
------------------------------
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
- ------
Real estate investments:
Land..................................................... $ 5,524,462 $ 5,524,462
Buildings and improvements............................... 64,330,457 66,918,459
---------- ----------
69,854,919 72,442,921
Less: Accumulated depreciation and amortization......... (29,234,446) (25,759,358)
---------- ----------
40,620,473 46,683,563
Cash and cash equivalents................................... 3,987,381 3,125,937
Cash segregated for security deposits....................... 300,223 283,793
Note receivable............................................. 344,225 344,225
Accounts receivable, net of allowance for doubtful
accounts of $714,050 and $561,426 at
December 31, 1995 and 1994, respectively................. 802,426 1,169,888
Escrow deposits............................................. 979,938 1,155,277
Deferred borrowing costs, net of accumulated
amortization of $67,623 and $58,491 at
December 31, 1995 and 1994, respectively................. 251,127 260,259
Prepaid expenses and other assets........................... 438,148 409,620
---------- ----------
$47,723,941 $53,432,562
========== ==========
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
- -----------------------------------------
Mortgage note payable....................................... $ 7,381,507 $ 7,381,507
Accounts payable and accrued expenses....................... 694,624 175,019
Accrued interest............................................ 686,502 554,342
Accrued property taxes...................................... 450,530 858,300
Payable to affiliates - General Partner..................... 98,407 82,427
Land lease obligation....................................... 277,132 320,135
Deferred gain............................................... 344,225 348,340
Security deposits and deferred rental revenue............... 326,032 303,624
---------- ----------
10,258,959 10,023,694
---------- ----------
Partners' equity (deficit):
Limited partners - 84,000,000 limited partnership
units authorized; 83,894,648 and 83,900,527 limited
partnership units issued and outstanding at
December 31, 1995 and 1994, respectively............... 37,898,581 43,783,028
General Partner.......................................... (433,599) (374,160)
---------- ----------
37,464,982 43,408,868
---------- ----------
$47,723,941 $53,432,562
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XXV, L.P.
STATEMENTS OF OPERATIONS
<TABLE>
For the Years Ended December 31,
-----------------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Revenue:
Rental revenue.......................... $8,783,408 $9,110,749 $9,041,611
Interest................................ 207,714 175,318 144,178
Property tax refund..................... - - 142,948
Gain on sale of marketable securities... - - 43,855
Gain on legal settlement................ 96,731 - -
--------- --------- ---------
Total revenue......................... 9,087,853 9,286,067 9,372,592
--------- --------- ---------
Expenses:
Interest................................ 826,447 829,172 838,839
Depreciation and amortization........... 3,475,088 3,330,454 3,008,188
Property taxes.......................... 646,309 609,868 812,796
Personnel expenses...................... 712,901 653,002 573,361
Repairs and maintenance................. 1,181,599 1,168,248 1,133,302
Property management fees -
affiliates............................ 523,338 534,044 528,577
Utilities............................... 832,683 825,605 856,997
Other property operating expenses....... 876,510 852,211 750,586
General and administrative.............. 385,661 118,809 164,358
General and administrative -
affiliates............................ 938,203 896,151 889,514
Write-down for permanent impairment
of real estate........................ 4,633,000 - -
---------- --------- ---------
Total expenses........................ 15,031,739 9,817,564 9,556,518
---------- --------- ---------
Net loss................................... $(5,943,886) $ (531,497) $ (183,926)
========== ========= =========
Net loss allocable to limited partners..... $(5,884,447) $ (526,182) $ (182,087)
Net loss allocable to General Partner...... (59,439) (5,315) (1,839)
---------- --------- ---------
Net loss................................... $(5,943,886) $ (531,497) $ (183,926)
========== ========= =========
Net loss per weighted average
thousand limited partnership
units................................... $ (70.14) $ (6.27) $ (2.17)
========== ========= =========
Distributions per weighted
average thousand limited
partnership units....................... $ - $ 4.77 $ 17.80
========== ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XXV, L.P.
STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1995, 1994 and 1993
<TABLE>
Total
General Limited Partners'
Partner Partners Equity
--------- ---------- ----------
<S> <C> <C> <C>
Balance at December 31, 1992.............. $ (367,006) $46,384,930 $46,017,924
Net loss.................................. (1,839) (182,087) (183,926)
Distributions............................. - (1,493,426) (1,493,426)
--------- ---------- ----------
Balance at December 31, 1993.............. (368,845) 44,709,417 44,340,572
Net loss.................................. (5,315) (526,182) (531,497)
Distributions............................. - (400,207) (400,207)
--------- ---------- ----------
Balance at December 31, 1994.............. (374,160) 43,783,028 43,408,868
Net loss (59,439) (5,884,447) (5,943,886)
--------- ---------- ----------
Balance at December 31, 1995.............. $ (433,599) $37,898,581 $37,464,982
========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XXV, L.P.
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
For the Years Ended December 31,
------------------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from tenants.............. $ 9,129,170 $ 9,042,034 $ 9,163,132
Cash paid to suppliers.................. (3,488,428) (3,660,436) (3,373,265)
Cash paid to affiliates................. (1,445,561) (1,421,135) (1,466,129)
Interest received....................... 207,714 175,318 144,178
Interest paid........................... (685,155) (578,964) (582,822)
Property taxes paid and escrowed........ (865,026) (753,200) (774,430)
Cash received from legal settlement..... 96,731 - -
---------- ---------- ----------
Net cash provided by operating
activities.............................. 2,949,445 2,803,617 3,110,664
---------- ---------- ----------
Cash flows from investing activities:
Additions to real estate
investments........................... (2,044,998) (2,015,525) (1,089,882)
Proceeds from sale of marketable
securities............................ - - 243,855
---------- ---------- ----------
Net cash used in investing activities...... (2,044,998) (2,015,525) (846,027)
---------- ---------- ----------
Cash flows from financing activities:
Principal payments on mortgage
note payable.......................... - - (17,993)
Reinstatement of mortgage principal..... - 15,058 -
Payments on capitalized land
lease obligation...................... (43,003) (36,893) (33,342)
Distributions paid...................... - (400,207) (1,493,426)
---------- ---------- ----------
Net cash used in financing activities...... (43,003) (422,042) (1,544,761)
---------- ---------- ----------
Net increase in cash and
cash equivalents........................ 861,444 366,050 719,876
Cash and cash equivalents at
beginning of year....................... 3,125,937 2,759,887 2,040,011
---------- ---------- ----------
Cash and cash equivalents at end
of year................................. $ 3,987,381 $ 3,125,937 $ 2,759,887
========== ========== ==========
</TABLE>
See discussion of noncash investing and financing activites in Note 4 - "Real
Estate Investments" and Note 8 "Deferred Gain."
See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XXV, L.P.
STATEMENTS OF CASH FLOWS
Reconciliation of Net Loss to Net Cash Provided by
Operating Activities
<TABLE>
For the Years Ended December 31,
------------------------------------------------
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Net loss................................... $(5,943,886) $ (531,497) $ (183,926)
---------- --------- ---------
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation and amortization........... 3,475,088 3,330,454 3,008,188
Amortization of deferred borrowing
costs................................. 9,132 9,132 9,131
Amortization of deferred gain........... (4,115) (60,062) (193,325)
Allowance for doubtful accounts......... 152,624 48,242 7,134
Gain on sale of marketable securities... - - (43,855)
Write-down for permanent impairment
of real estate........................ 4,633,000 - -
Changes in assets and liabilities:
Cash segregated for security deposits. (16,430) (32,920) (1,321)
Note receivable....................... - 67,316 79,723
Accounts receivable................... 214,838 (37,793) 84,926
Escrow deposits....................... 175,339 20,200 (68,638)
Prepaid expenses and other
assets.............................. (28,528) (16,258) 22,313
Accounts payable and accrued
expenses............................ 519,605 (207,123) 212,070
Accrued interest...................... 132,160 241,076 246,886
Accrued property taxes................ (407,770) (45,345) (43,706)
Payable to affiliates - General
Partner............................. 15,980 9,060 (48,038)
Security deposits and deferred
rental revenue...................... 22,408 9,135 23,102
--------- --------- ---------
Total adjustments................. 8,893,331 3,335,114 3,294,590
--------- --------- ---------
Net cash provided by operating
activities.............................. $2,949,445 $2,803,617 $3,110,664
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XXV, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ------ -----------------------------------------------------------
Organization
- ------------
McNeil Real Estate Fund XXV, L.P. (the "Partnership"), formerly known as
Southmark Equity Partners II, Ltd., was organized on February 15, 1985 as a
limited partnership under the provisions of the California Revised Limited
Partnership Act to acquire and operate commercial and residential properties.
The general partner of the Partnership is McNeil Partners, L.P. (the "General
Partner"), a Delaware limited partnership, an affiliate of Robert A. McNeil. The
General Partner was elected at a meeting of limited partners on March 26, 1992,
at which time an amended and restated partnership agreement (the "Amended
Partnership Agreement") was adopted. Prior to March 26, 1992, the general
partner of the Partnership was Equity Partners (the "Original General Partner"),
a Texas general partnership, which was formed by affiliates of Southmark
Corporation. The principal place of business for the Partnership and the General
Partner is 13760 Noel Road, Suite 700, LB70, Dallas, Texas, 75240.
The Partnership is engaged in diversified real estate activities including the
ownership, operation and management of commercial office, retail and residential
real estate. At December 31, 1995, the Partnership owned five income-producing
properties as described in Note 4 - Real Estate Investments.
Basis of Presentation
- ---------------------
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP"). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Partnership's financial statements include the accounts of Van Buren
Associates Limited Partnership ("Van Buren"), a single asset limited partnership
formed to accommodate the refinancing of Harbour Club I Apartments. The
Partnership is the general partner of Van Buren, and holds a 99.99% interest in
Van Buren. The Partnership exercises effective control of Van Buren. The
minority interest is not presented as it is both negative and immaterial.
Real Estate Investments
- -----------------------
Real estate investments are generally stated at the lower of cost or net
realizable value. Real estate investments are monitored on an ongoing basis to
determine if the property has sustained a permanent impairment in value. At such
time, a write-down is recorded to reduce the basis of the property to its net
realizable value. A permanent impairment is determined to have occurred when a
decline in property value is considered to be other than temporary based upon
management's expectations with respect to projected cash flows and prevailing
economic conditions.
Improvements and betterments are capitalized and expensed through depreciation
charges. Repairs and maintenance are charged to operations as incurred.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. This statement is effective for financial statements for fiscal
years beginning after December 15, 1995. The Partnership has not adopted the
principles of this statement within the accompanying financial statements;
however, it is not anticipated that adoption will have a material effect on the
carrying value of the Partnership's long-lived assets.
Depreciation and Amortization
- -----------------------------
Buildings and improvements are depreciated using the straight-line method over
the estimated useful lives of the assets, ranging from 5 to 25 years. Tenant
improvements are capitalized and are amortized over the terms of the related
tenant lease, using the straight-line method.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include cash on hand and cash on deposit in financial
institutions with original maturities of three months or less. Carrying amounts
for cash and cash equivalents approximate fair value.
Escrow Deposits
- ---------------
The Partnership is required to maintain escrow accounts in accordance with the
terms of its mortgage indebtedness agreement. These escrow accounts are
controlled by the mortgagee and are used for payment of property taxes, hazard
insurance, capital improvements and/or property replacements. Carrying amounts
for escrow deposits approximate fair value.
Deferred Borrowing Costs
- ------------------------
Loan fees and other related costs incurred to obtain long-term financing on real
property are capitalized and amortized using a method that approximates the
effective interest method over the term of the related mortgage note payable.
Amortization of deferred borrowing costs is included in interest expense on the
Statements of Operations.
Rental Revenue
- --------------
The Partnership leases its residential property under short-term operating
leases. Lease terms generally are less than one year in duration. Rental revenue
is recognized as earned.
The Partnership leases its commercial properties under non-cancelable operating
leases. Certain leases provide concessions and/or periods of escalating or free
rent. Rental revenue is recognized on a straight-line basis over the life of the
related leases. The excess of the rental revenue recognized over the contractual
rental payments is recorded as accrued rent receivable and is included in
accounts receivable on the Balance Sheets.
Income Taxes
- ------------
No provision for Federal income taxes is necessary in the financial statements
of the Partnership because, as a partnership, it is not subject to Federal
income tax and the tax effect of its activities accrues to the partners.
Allocation of Net Income and Net Loss
- -------------------------------------
The Amended Partnership Agreement generally provides that net income and net
loss (other than net income arising from sales or refinancing) shall be
allocated 1% to the General Partner and 99% to the limited partners.
For financial statement purposes, net income arising from sales or refinancing
shall be allocated 1% to the General Partner and 99% to the limited partners.
For tax reporting purposes, net income arising from sales or refinancing shall
be allocated as follows: (a) first, amounts of such net income shall be
allocated among the General Partner and limited partners in proportion to, and
to the extent of, the portion of such partners' share of the net decrease in
Partnership Minimum Gain determined under Treasury Regulations, (b) second, to
the General Partner and limited partners in proportion to, and to the extent of,
the amount by which their respective capital account balances are negative by
more than their respective remaining shares of the Partnership's Minimum Gain
attributable to properties still owned by the Partnership and (c) third, 1% of
such net income shall be allocated to the General Partner and 99% of such net
income shall be allocated to the limited partners.
Federal income tax law provides that the allocation of loss to a partner will
not be recognized unless the allocation is in accordance with a partner's
interest in the partnership or the allocation has substantial economic effect.
Internal Revenue Code Section 704(b) and accompanying Treasury Regulations
establish criteria for allocation of Partnership deductions attributable to
debt. The Partnership's tax allocations for 1995, 1994 and 1993 have been made
in accordance with these provisions.
Distributions
- -------------
At the discretion of the General Partner, distributable cash (other than cash
from sales or refinancing) shall be distributed 100% to the limited partners,
with such distributions first paying the limited partners' Priority Return and
then to all limited partners on a per limited partnership unit ("Unit") basis.
At the discretion of the General Partner, the limited partners will receive 100%
of distributable cash from sales or refinancing with such distributions first
paying the limited partners Priority Return, then repayment of Original Invested
Capital, and of the remainder, to the limited partners on a per Unit basis. The
limited partners' Priority Returns represent a 9.25% cumulative return on their
Adjusted Invested Capital balance, as defined.
In connection with a Terminating Disposition, as defined, cash from sales or
refinancing and any remaining reserves shall be allocated among, and distributed
to, the General Partner and limited partners in proportion to, and to the extent
of, their positive capital account balances after the net income has been
allocated pursuant to the above.
The Partnership distributed $400,207 and $1,493,426 of cash from operations to
the limited partners during 1994 and 1993, respectively. No distributions were
paid to the limited partners in 1995 and no distributions have been paid to the
General Partner.
Net Loss Per Thousand Limited Partnership Units
- -----------------------------------------------
Net loss per thousand limited partnership units is computed by dividing net loss
allocated to the limited partners by the weighted average number of Units
outstanding expressed in thousands. Per thousand Unit information has been
computed based on 83,895, 83,901 and 83,901 weighted average thousand Units
outstanding in 1995, 1994 and 1993, respectively.
NOTE 2 - TRANSACTIONS WITH AFFILIATES
- ------ ----------------------------
The Partnership pays property management fees equal to 5% of the gross rental
receipts for its residential property and 6% of gross rental receipts for
commercial properties to McNeil Real Estate Management, Inc. ("McREMI"), an
affiliate of the General Partner, for providing property management services for
the Partnership's residential and commercial properties and leasing services for
its residential properties. McREMI may also choose to provide leasing services
for the Partnership's commercial properties, in which case McREMI will receive
property management fees from such commercial properties equal to 3% of the
property's gross rental receipts plus leasing commissions based on the
prevailing market rate for such services where the property is located.
The Partnership reimburses McREMI for its costs, including overhead, of
administering the Partnership's affairs.
Under the terms of the Amended Partnership Agreement, the Partnership is paying
an asset management fee to the General Partner. Through 1999, the asset
management fee is calculated as 1% of the Partnership's tangible asset value.
Tangible asset value is determined by using the greater of (i) an amount
calculated by applying a capitalization rate of 9 percent to the annualized net
operating income of each property or (ii) a value of $10,000 per apartment unit
for residential properties and $50 per gross square foot for commercial
properties to arrive at the property tangible asset value. The property tangible
asset value is then added to the book value of all other assets excluding
intangible items. The fee percentage decreases subsequent to 1999.
Compensation and reimbursements paid to or accrued for the benefit of the
General Partner or its affiliates are as follows:
<TABLE>
For the Years Ended December 31,
---------------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Property management fees - affiliates ..... $ 523,338 $ 534,044 $ 528,577
Charged to general and
administrative - affiliates:
Partnership administration.............. 290,839 269,869 256,131
Asset management fee.................... 647,364 626,282 633,383
--------- --------- ---------
$1,461,541 $1,430,195 $1,418,091
========= ========= =========
</TABLE>
Payable to affiliates - General Partner at December 31, 1995 and 1994 consisted
primarily of unpaid property management fees, Partnership general and
administrative expenses and asset management fees and are due and payable from
current operations.
In May 1992, the Partnership advanced $113,000 to an affiliate of the General
Partner which owns a phase in a multi-phased property which includes the
Partnership's Harbour Club I Apartments. This advance, which was unsecured and
due on demand, accrued interest at a rate equal to the prime lending rate of
Bank of America on the date of demand plus 1%. In 1995, the debt was dismissed
in the borrowing affiliate's bankruptcy proceeding. Accordingly, the advance and
related accrued interest, which were fully reserved for, were written off in
1995.
NOTE 3 - TAXABLE INCOME
- ------ --------------
McNeil Real Estate Fund XXV, L.P. is a partnership and is not subject to Federal
and state income taxes. Accordingly, no recognition has been given to income
taxes in the accompanying financial statements of the Partnership since the
income or loss of the Partnership is to be included in the tax returns of the
individual partners. The tax returns of the Partnership are subject to
examination by Federal and state taxing authorities. If such examinations result
in adjustments to distributive shares of taxable income or loss, the tax
liability of the partners could be adjusted accordingly.
The Partnership's net assets and liabilities for tax purposes exceeded the net
assets and liabilities for financial reporting purposes by $21,873,312 in 1995,
$16,552,291 in 1994 and $16,426,414 in 1993.
NOTE 4 - REAL ESTATE INVESTMENTS
- ------ -----------------------
The basis and accumulated depreciation of the Partnership's real estate
investments at December 31, 1995 and 1994 are set forth in the following tables:
<TABLE>
Accumulated
Buildings and Depreciation Net Book
1995 Land Improvements and Amortization Value
---- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Century Park
Las Vegas, NV $1,439,077 $14,499,831 $ (6,731,004) $9,207,904
Fidelity Plaza
Long Beach, CA 553,946 12,094,420 (7,147,930) 5,500,436
Harbour Club I
Belleville, MI 1,069,513 9,005,791 (3,476,511) 6,598,793
Kellogg Office Building
Littleton, CO 1,142,889 9,814,830 (4,816,041) 6,141,678
Northwest Plaza
Dayton, OH 1,319,037 18,915,585 (7,062,960) 13,171,662
--------- ---------- ----------- ----------
$5,524,462 $64,330,457 $(29,234,446) $40,620,473
========= ========== =========== ==========
Accumulated
Buildings and Depreciation Net Book
1994 Land Improvements and Amortization Value
---- --------- ---------- ----------- ---------
Century Park $1,439,077 $14,178,895 $ (5,977,437) $ 9,640,535
Fidelity Plaza 553,946 16,047,622 (6,147,635) 10,453,933
Harbour Club I 1,069,513 8,852,626 (3,072,712) 6,849,427
Kellogg Office Building 1,142,889 9,496,890 (4,338,813) 6,300,966
Northwest Plaza 1,319,037 18,342,426 (6,222,761) 13,438,702
--------- ---------- ----------- ----------
$5,524,462 $66,918,459 $(25,759,358) $46,683,563
========= ========== =========== ==========
</TABLE>
Fidelity Plaza is a ten-story office building located in downtown Long Beach,
California. The southern California area has experienced declining economic
conditions over the past several years, and the Partnership has been monitoring
conditions closely with the expectations that a rebound would occur. Several
factors have led to the conclusion that the Partnership has sustained a
permanent impairment in the net realizable value of the asset as follows: The
Partnership had originally intended to hold the asset until such time as the
real estate market in the area and the performance of the property improved to
permit the Partnership to achieve its capital preservation and capital gains
objectives. While conditions have improved in 1995, the estimated holding period
of the asset has been reduced as it has become evident that economic factors
will not allow for the Partnership to recover its costs over a reasonable period
of time. Based upon projected cash flows over the reduced holding period, as
well as an analysis of comparable office buildings in the Long Beach area, the
Partnership has revised its estimated net realizable value of the property; and
accordingly, a write-down for permanent impairment of $4,633,000 was recorded in
1995.
Harbour Club I is part of a four-phase apartment complex located in Belleville,
Michigan. Phases II and III of the complex are also owned by partnerships in
which McNeil Partners, L.P. is the general partner, while Phase IV is owned by
University Real Estate Fund 12, Ltd. ("UREF 12"), whose general partner is an
affiliate of Southmark. McREMI had been managing all four phases of the complex
until December 1992, when the property management agreement between McREMI and
UREF 12 was canceled. The Partnership had previously applied for an additional
loan from the United States Department of Housing and Urban Development ("HUD")
for a significant capital improvement program that is essential to the operation
of the property. During 1993, this loan was denied and management is developing
an alternative plan for funding necessary capital improvements.
In November 1994, the Partnership settled a lawsuit concerning a golf course and
driving range associated with Harbour Club I Apartments. Under the settlement,
the Partnership received not only the golf course and driving range, but also
two adjacent parcels that the Harbour Club tenants are using for a playground
and boat storage area. The Partnership agreed to accept such transfer subject to
the outstanding delinquent property taxes of $329,576. The land was recorded at
the amount of the outstanding property taxes.
The Partnership leases its commercial properties under non-cancelable operating
leases. Future minimum rents to be received as of December 31, 1995 are as
follows:
1996.................................... $ 5,815,000
1997.................................... 4,777,000
1998.................................... 3,524,000
1999.................................... 2,325,000
2000.................................... 1,579,000
Thereafter.............................. 6,328,000
----------
Total $24,348,000
Future minimum rentals do not include contingent rentals based on sales volume
of tenants. Contingent rentals amounted to $0, $485,412 and $630,936 for the
years ended December 31, 1995, 1994 and 1993, respectively. Future minimum rents
also do not include expense reimbursements for common area maintenance, property
taxes and other expenses. These expense reimbursements amounted to $320,960,
$339,690 and $252,848 for the years ended December 31, 1995, 1994 and 1993,
respectively.
Harbour Club I Apartments is encumbered by mortgage indebtedness as discussed in
Note 6 - "Mortgage Note Payable." Fidelity Plaza is subject to four ground
leases as discussed in Note 5 - "Leases."
NOTE 5 - LEASES
- ------ ------
The Partnership leases the land on which Fidelity Plaza is located under four
ground leases (one capital lease and three noncancelable operating leases). At
December 31, 1995, minimum rental payments under such leases were as follows.
Capital Operating
Lease Leases
------- ----------
1996............................... $103,563 $ 202,854
1997............................... 103,538 204,396
1998............................... 103,538 204,396
1999............................... 103,538 204,396
2000............................... 94,910 204,396
Thereafter......................... - 12,056,756
------- ----------
Total minimum payments due......... $509,087 $13,077,194
Less amount representing
interest......................... (231,955)
-------
Present value of land lease
obligation....................... $277,132
=======
Monthly payments are required under the terms of the leases. The capital lease
expires in December 2000. The largest operating lease expires in December 2065,
while the other two operating leases expire in June and August 2021.
Land recorded under the capital lease totaled $553,946 at December 31, 1995,
1994 and 1993. The lease contains an option to purchase the land for $1 in 2001.
Ground lease expense of $201,544, $200,694 and $196,473 relating to the three
operating leases is included in the Statements of Operations with other property
operating expenses for the years ended December 31, 1995, 1994 and 1993,
respectively.
The ground leases contain certain provisions that may give the lessor the right
to terminate the leases as a result of the March 1992 restructuring of the
Partnership. The Original General Partner requested that the lessors waive their
right to terminate the leasehold. The lessors may require the payment of fees as
a condition to granting such waiver. If the waivers are not obtained, the leases
could be terminated. However, management believes the likelihood of this outcome
is remote.
NOTE 6 - MORTGAGE NOTE PAYABLE
- ------ ---------------------
The following sets forth the mortgage note payable of the Partnership at
December 31, 1995 and 1994. The mortgage note payable is secured by the related
real estate investment.
<TABLE>
Mortgage Annual Monthly December 31,
Lien Interest Payments/ ---------------------------
Property Position (a)Rate % Maturity 1995 1994
- -------- --------- --------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Harbour Club I First 10.25 $ (b) 06/23 $ 7,381,507 $7,381,507
============ =========
</TABLE>
(a) The debt is non-recourse to the Partnership.
(b) Effective January 1, 1993, the Partnership ceased making regularly scheduled
debt service and escrow payments. In lieu of the aforementioned payments, the
Partnership is funding debt service with the excess cash flow of the property.
The Partnership has been notified that the mortgage note payable is in default
and that the servicing agent has assigned the mortgage to HUD. If the
Partnership is unable to successfully cure the default, the mortgagee could
declare the entire indebtedness due and proceed with foreclosure on the property
or pursue other actions such as gaining control of the property or placing it in
receivership.
Based on borrowing rates currently available to the Partnership for a mortgage
loan with similar terms and average maturities, the fair value of the mortgage
note payable was approximately $9,018,000 at December 31, 1995.
NOTE 7 - ACCOUNTS RECEIVABLE
- ------ -------------------
The accounts receivable balance includes amounts due from tenants for base rent,
common area maintenance, percentage rents and other miscellaneous amounts. In
addition, accounts receivable includes amounts relating to rental guarantees
from the seller of Century Park Office Building of approximately $470,000 at
December 31, 1995 and 1994. The allowance for doubtful accounts primarily
consists of amounts for those rental guarantee payments which are not expected
to be collected.
NOTE 8 - DEFERRED GAIN
- ------ -------------
In October 1992, the Partnership agreed to restructure a lease with a major
tenant of Kellogg Office Building. Under the terms of the restructuring, the
tenant relinquished approximately 20,000 square feet of office space, of which
approximately 10,000 square feet was subleased to another tenant, and retained
existing space at a reduced rate. In connection with the restructuring, the
tenant signed a promissory note in the amount of $500,000 secured by an interest
in a coal mine, assigned an interest in a sublease with a third party, and
transferred 50,000 shares of Confertech International, Inc. common stock to the
Partnership. In 1992, the Partnership recorded a deferred gain of $628,938 as a
result of this transaction. In 1993, the Partnership sold all 50,000 shares of
the stock for $243,855 and recognized a $43,855 gain on sale of marketable
securities. The Partnership also recognized the portion of the deferred gain
that related to the common stock. The portion of the deferred gain that relates
to the promissory note is being amortized as payments on the note are received.
The recognition of deferred gain of $64,158 in 1994 and $191,936 in 1993 is
included in rental revenue on the Statements of Operations. No deferred gain was
recognized in 1995 since no payments were received on the promissory note. The
note receivable is currently in default and management has commenced collection
efforts.
NOTE 9 - LEGAL PROCEEDINGS
- ------ -----------------
The Partnership is not party to, nor are any of the Partnership's properties the
subject of, any material pending legal proceedings, other than ordinary, routine
litigation incidental to the Partnership's business, except for the following:
1) High River Limited Partnership v. McNeil Partners, L.P., McNeil Investors,
Inc., McNeil Pacific Investors 1972, Ltd., McNeil Real Estate Fund V, Ltd.,
McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil
Real Estate Fund XI, Ltd., McNeil Real Estate Fund XIV, Ltd., McNeil Real
Estate Fund XV, Ltd., McNeil Real Estate Fund XX, L.P., McNeil Real Estate
Fund XXIV, L.P., McNeil Real Estate Fund XXV, L.P., Robert A. McNeil and
Carole J. McNeil (L95012) - High River ("HR") filed this action in the
United States District Court for the Southern District of New York against
McNeil Partners, L.P., McNeil Investors, Inc. and Mr. and Mrs. McNeil (as
defined in this Section 1, collectively, the "Defendants") requesting,
among other things, names and addresses of the limited partners in the
partnerships referenced above (as defined in this Section 1, the
"Partnerships"). The District Court issued a preliminary injunction against
the Partnerships requiring them to commence mailing materials relating to
the HR tender offer on August 14, 1995.
On August 18, 1995, the Defendants filed an Answer and Counterclaim. The
Counterclaim principally asserts (1) the HR tender offers have been
undertaken in violation of the Federal securities laws, on the basis of
material, non-public, and confidential information, and (2) that the HR
offer documents omit and/or misrepresent certain material information about
the HR tender offers. The Counterclaim seeks a preliminary and permanent
injunction against the continuation of the HR tender offers and,
alternatively, ordering corrective disclosure with respect to allegedly
false and misleading statements contained in the tender offer documents.
This action was dismissed without prejudice in November 1995.
2) High River Limited Partnership v. McNeil Partners, L.P., McNeil Investors,
Inc., McNeil Pacific Investors 1972, Ltd., McNeil Real Estate Fund V, Ltd.,
McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil
Real Estate Fund XI, Ltd., McNeil Real Estate Fund XIV, Ltd., McNeil Real
Estate Fund XV, Ltd., McNeil Real Estate Fund XX, L.P., McNeil Real Estate
Fund XXIV, L.P., McNeil Real Estate Fund XXV, L.P., Robert A. McNeil and
Carole J. McNeil - United States District Court for the Southern District
of New York, (Case No. 95 Civ. 9488) (Second Action).
On November 7, 1995, High River filed a second complaint with the District
Court which alleges, inter alia, that McNeil Partners, L.P.'s (the "General
Partner") Schedule 14D-9 filed in connection with the High River tender
offers was materially false and misleading, in violation of Sections 14(d)
and 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. Section 78n(d)
and (e), and the SEC Regulations promulgated thereunder; and that High
River further alleges that the General Partner has wrongfully refused to
admit High River as a limited partner to the ten partnerships referenced
above. Additionally, High River purports to assert claims derivatively on
behalf of McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund XI,
Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate Fund XXIV, L.P.
and McNeil Real Estate Fund XXV, L.P., for breach of contract and breach of
fiduciary duty, asserting that the General Partner has charged these
partnerships excessive fees. High River's complaint seeks, inter alia,
preliminary injunctive relief requiring the General Partner to admit High
River as a limited partner in each of the ten partnerships referenced above
and to transfer the tendered units of interest in the partnerships to High
River; an unspecified award of damages payable to High River and an
additional unspecified award of damages payable to certain of the
partnerships; an order that defendants must discharge their fiduciary
duties and must account for all fees they have received from certain of the
partnerships; and attorneys' fees.
On January 31, 1996, this action was dismissed without prejudice.
3) HCW Pension Real Estate Fund, Ltd. et al. v. Ernst & Young, BDO Seidman et
al. (Case #92-06560-A). This suit was filed on behalf of the Partnership
and other affiliated partnerships (the "Affiliated Partnerships") on May
26, 1992, in the 14th Judicial District Court of Dallas County. The
petition sought recovery against the Partnership's former auditors, Ernst &
Young, for negligence and fraud in failing to detect and/or report
overcharges of fees/expenses by Southmark, the former general partner. The
former auditors initially asserted counterclaims against the Affiliated
Partnerships based on alleged fraudulent misrepresentations made to the
auditors by the former management of the Affiliated Partnerships
(Southmark) in the form of client representation letters executed and
delivered to the auditors by Southmark management. The counterclaims sought
recovery of attorneys' fees and costs incurred in defending this action.
The counterclaims were later dismissed on appeal, as discussed below.
The trial court granted summary judgment against the Partnership based on
the statute of limitations; however, on appeal, the Dallas Court of Appeals
reversed the trial court and remanded for trial the Affiliated
Partnerships' fraud claims against Ernst & Young. The Texas Supreme Court
denied Ernst & Young's application for writ of error on January 11, 1996.
The Partnership is continuing to pursue vigorously its claims against Ernst
& Young; however, the final outcome of this litigation cannot be determined
at this time.
4) Martha Hess, et al. v. Southmark Equity Partners II, Ltd. (presently known
as McNeil Real Estate Fund XXV, L.P.), Southmark Income Investors, Ltd,
Southmark Equity Partners, Ltd., Southmark Realty Partners III, Ltd., and
Southmark Realty Partners II, Ltd., et al. ("Hess"); Kotowski v. Southmark
Equity Partners, Ltd. and Donald Arceri v. Southmark Income Investors, Ltd.
These cases were previously pending in the Illinois Appellate Court for the
First District ("Appellate Court"), as consolidated Case No. 90-107.
Consolidated with these cases are an additional 14 matters against
unrelated partnership entities. The Hess case was filed on May 20, 1988, by
Martha Hess, individually and on behalf of a putative class of those
similarly situated. The original, first, second and third amended
complaints in Hess sought rescission, pursuant to the Illinois Securities
Act, of over $2.7 million of principal invested in five Southmark (now
McNeil) partnerships, and other relief including damages for breach of
fiduciary duty and violation of the Illinois Consumer Fraud and Deceptive
Business Practices Act. The original, first, second and third amended
complaints in Hess were dismissed against the defendant-group because the
Appellate Court held that they were not the proper subject of a class
action complaint. Hess was, thereafter, amended a fourth time to state
causes of action against unrelated partnership entities. Hess went to
judgment against that unrelated entity and the judgment, along with the
prior dismissal of the class action, was appealed. The Hess appeal was
decided by the Appellate Court during 1992. The Appellate Court affirmed
the dismissal of the breach of fiduciary duty and consumer fraud claims.
The Appellate Court did, however, reverse in part, holding that certain
putative class members could file class action complaints against the
defendant-group. Although leave to appeal to the Illinois Supreme Court was
sought, the Illinois Supreme Court refused to hear the appeal. The effect
of the denial is that the Appellate Court's opinion remains standing. On
June 15, 1994, the Appellate Court issued its mandate sending the case back
to trial court.
In late January 1995, the plaintiffs filed a Motion to File an Amended
Consolidated Class Action Complaint, which amends the complaint to name
McNeil Partners, L.P. as the successor general partner to Southmark
Investment Group. In February 1995, the plaintiffs filed a Motion for Class
Certification. The amended cases against the defendant-group, and others,
are proceeding under the caption George and Joy Kugler v. I.R.E. Real
Estate Income Fund, Jerry and Barbara Neumann v. Southmark Equity Partners
II, Richard and Theresa Bartoszewski v. Southmark Realty Partners III, and
Edward and Rose Weskerna v. Southmark Realty Partners II.
In September 1995, the court granted the plaintiffs' Motion to File an
Amended Complaint, to Consolidate and for Class Certification. The
defendants have answered the complaint and have plead that the plaintiffs
did not give timely notice of their right to rescind within six months of
knowing that right. While the Partnership has objected to the Motion, the
ultimate resolution of this litigation, which is expected to occur within
one year, could result in a loss of up to $1.8 million in addition to
related legal fees. No accrual has been recorded related to this
litigation.
5) Robert Lewis v. McNeil Partners, L.P., McNeil Investors, Inc., Robert A.
McNeil et al. - In the District Court of Dallas County, Texas, A-14th
Judicial District, Cause No. 95-08535 (Class Action) - Plaintiff, Robert
Lewis, is a limited partner with McNeil Pacific Investors Fund 1972, Ltd.,
McNeil Real Estate Fund X, Ltd. and McNeil Real Estate Fund XV, Ltd.
Plaintiff brings this action on his own behalf and as a class action on
behalf of the class of all limited partners of McNeil Pacific Investors
Fund 1972, Ltd., McNeil Real Estate Fund V, Ltd., McNeil Real Estate Fund
IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil Real Estate Fund XI,
Ltd., McNeil Real Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd.,
McNeil Real Estate Fund XX, L.P., McNeil Real Estate Fund XXIV, L.P. and
McNeil Real Estate Fund XXV, L.P. (as defined in this Section 3, the
"Partnerships") as of August 4, 1995.
Plaintiff alleges that McNeil Partners, L.P., McNeil Investors, Inc.,
Robert A. McNeil and other senior officers (as defined in this Section 5,
collectively, the "Defendants") breached their fiduciary duties by, among
other things, (1) failing to attempt to sell the properties owned by the
Partnerships (as defined in this Section 5, the "Properties") and extending
the lives of the Partnerships indefinitely, contrary to the Partnerships'
business plans, (2) paying distributions to themselves and generating fees
for their affiliates, (3) refusing to make significant distributions to the
class members, despite the fact that the Partnerships have positive cash
flows and substantial cash balances, and (4) failing to take steps to
create an auction market for equity interests of the Partnerships, despite
the fact that a third party bidder filed tender offers for approximately
forty-five percent (45%) of the outstanding units of each of the
Partnerships. Plaintiff also claims that Defendants have breached the
partnership agreements of the Partnerships by failing to take steps to
liquidate the Properties and by their alteration of the Partnerships'
primary purposes, their acts in contravention of these agreements, and
their use of the assets of the Partnerships for their own benefit instead
of for the benefit of the Partnerships.
The Defendants deny that there is any merit to Plaintiff's allegations and
intend to vigorously defend this action.
6) James F. Schofield, Gerald C. Gillett and Donna S. Gillett v. McNeil
Partners, L.P., McNeil Investors, Inc., McNeil Real Estate Management,
Inc., Robert A. McNeil, Carole J. McNeil, McNeil Real Estate Fund V, Ltd.,
McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil
Real Estate Fund XI, Ltd., McNeil Real Estate Fund XIV, Ltd., McNeil Real
Estate Fund XV, Ltd., McNeil Real Estate Fund XX, L.P., McNeil Real Estate
Fund XXIV, L.P., McNeil Real Estate Fund XXV, L.P. et al. - Superior Court
of the State of California for the County of Los Angeles, Case No. BC133799
(Class and Derivative Action Complaint) and United States District Court,
Southern District of New York, Case No. 95CIV.6711 (Class and Derivative
Action Complaint).
These are corporate/securities class and derivative actions brought in
state and Federal court by limited partners of each of the nine (9) limited
partnerships that are named as nominal defendants as listed above (as
defined in this Section 6, the "Partnerships"). Plaintiffs allege that
McNeil Investors, Inc., its affiliate McNeil Real Estate Management, Inc.
and four (4) of their senior officers and/or directors (as defined in this
Section 6, collectively, the "Defendants") have breached their fiduciary
duties. Specifically, Plaintiffs allege that Defendants have caused the
Partnerships to enter into several wasteful transactions that have no
business purpose or benefit to the Partnerships and which have rendered
such units highly illiquid and artificially depressed the prices that are
available for units on the limited resale market. Plaintiffs also allege
that Defendants have engaged in a course of conduct to prevent the
acquisition of units by Carl Icahn by disseminating false, misleading and
inadequate information. Plaintiffs further allege that Defendants have
acted to advance their own personal interests at the expense of the
Partnerships' public unit holders by failing to sell Partnership properties
and failing to make distributions to unitholders and, thereby, have
breached the partnership agreements.
The Defendants deny that there is any merit to Plaintiff's allegations and
intend to vigorously defend these actions.
7) Alfred Napoletano v. McNeil Partners, L.P., McNeil Investors, Inc., Robert
A. McNeil, Carole J. McNeil, McNeil Pacific Investors Fund 1972, Ltd.,
McNeil Real Estate Fund V, Ltd., McNeil Real Estate Fund IX, Ltd., McNeil
Real Estate Fund X, Ltd., McNeil Real Estate Fund XI, Ltd., McNeil Real
Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate
Fund XX, L.P., McNeil Real Estate Fund XXIV, L.P., McNeil Real Estate Fund
XXV, L.P. - Superior Court of the State of California, County of Los
Angeles, Case No. BC133849 (Class Action Complaint).
Plaintiff brings this class action on behalf of a class of all persons and
entities who are current owners of units and/or are limited partners in one
or more of the partnerships referenced above (as defined in this Section 7,
the "Partnerships"). Plaintiff alleges that McNeil Partners, L.P., McNeil
Investors, Inc., Robert A. McNeil and other senior officers (as defined in
this Section 7, collectively, the "Defendants") have breached their
fiduciary duties to the class members by, among other things, (1) taking
steps to prevent the consummation of the High River tender offers, (2)
failing to take steps to maximize unitholders' or limited partners' values,
including failure to liquidate the properties owned by the Partnerships,
(3) managing the Partnerships so as to extend indefinitely the present fee
arrangements, and (4) paying itself and entities owned and controlled by
the general partner excessive fees and reimbursements of general and
administrative expenses.
The Defendants deny that there is any merit to Plaintiff's allegations and
intend to vigorously defend this action.
8) Warren Heller v. McNeil Partners, L.P., McNeil Investors, Inc., Robert A.
McNeil, Carole J. McNeil, McNeil Pacific Investors Fund 1972, Ltd., McNeil
Real Estate Fund V, Ltd., McNeil Real Estate Fund IX, Ltd., McNeil Real
Estate Fund X, Ltd., McNeil Real Estate Fund XI, Ltd., McNeil Real Estate
Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate Fund
XX, L.P., McNeil Real Estate Fund XXIV, L.P., McNeil Real Estate Fund XXV,
L.P. - Superior Court of the State of California, County of Los Angeles,
Case No. BC133957 (Class Action Complaint).
Plaintiff brings this class action on behalf of a class of all persons and
entities who are current owners of units and/or are limited partners in one
or more of the partnerships referenced above (as defined in this Section 8,
the "Partnerships"). Plaintiff alleges that McNeil Partners, L.P., McNeil
Investors, Inc., Robert A. McNeil and other senior officers (as defined in
this Section 8, collectively, the "Defendants") have breached their
fiduciary duties to the class members by, among other things, (1) taking
steps to prevent the consummation of the High River tender offers, (2)
failing to take steps to maximize unitholders' or limited partners' values,
including failure to liquidate the properties owned by the Partnerships,
(3) managing the Partnerships so as to extend indefinitely the present fee
arrangements, and (4) paying itself and entities owned and controlled by
the general partner excessive fees and reimbursements of general and
administrative expenses.
The Defendants deny that there is any merit to Plaintiff's allegations and
intend to vigorously defend this action.
9) John and Christine Muccianti, et al. v. Southmark Equity Partners II, Ltd.
(presently known as McNeil Real Estate Fund XXV, L.P.) and Southmark
Investment Group, Inc. This case was consolidated with the Hess case as
described above.
NOTE 10 - GAIN ON LEGAL SETTLEMENT
- ------- ------------------------
The Partnership filed claims with the United States Bankruptcy Court for the
Northern District of Texas, Dallas Division (the "Bankruptcy Court") against
Southmark for damages relating to improper overcharges, breach of contract and
breach of fiduciary duty. The Partnership settled these claims in 1991, and such
settlement was approved by the Bankruptcy Court.
An Order Granting Motion to Distribute Funds to Class 8 Claimants dated April
14, 1995 was issued by the Bankruptcy Court. In accordance with the Order, in
May 1995 the Partnership received in full satisfaction of its claims, $73,122 in
cash, and common and preferred stock in the reorganized Southmark which
represents the Partnership's pro-rata share of Southmark assets available for
Class 8 Claimants. The Partnership sold the Southmark common and preferred stock
in May 1995 for $23,609, which combined with the cash proceeds from Southmark,
resulted in a gain on legal settlement of $96,731.
<PAGE>
McNEIL REAL ESTATE FUND XXV, LTD.
SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
December 31, 1995
<TABLE>
Initial Cost (b) Cumulative Costs
--------------------------- Write-down Capitalized
Related (b) Buildings and and Permanent Subsequent
Description Encumbrances Land Improvements Impairment To Acquisition
- ----------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
APARTMENTS:
Harbour Club I
Belleville, MI $7,381,507 $ 763,364 $ 8,792,575 $ (338,092) $ 857,457
OFFICE BUILDINGS:
Century Park
Las Vegas, NV - 1,549,077 12,537,373 (1,000,000) 2,852,458
Fidelity Plaza
Long Beach, CA 277,132 541,239 13,172,687 (4,633,000) 3,567,440
Kellogg Office Building
Littleton, CO - 1,743,070 12,804,735 (5,003,041) 1,412,955
RETAIL CENTER
Northwest Plaza
Dayton, OH - 1,319,037 17,528,258 - 1,387,327
--------- --------- ---------- ---------- ----------
$7,658,639 $5,915,787 $64,835,628 $(10,974,133) $10,077,637
========= ========= ========== =========== ==========
</TABLE>
See accompanying notes to Schedule III.
<PAGE>
McNEIL REAL ESTATE FUND XXV, LTD.
SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
December 31, 1995
<TABLE>
Gross Amount at
Which Carried at Close of Period
--------------------------------------------------- Accumulated
Buildings and Depreciation
Description Land Improvements Total (a) and Amortization
- ----------- ------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
Apartments:
Harbour Club I
Belleville, MI $ 1,069,513 $ 9,005,791 $ 10,075,304 $ (3,476,511)
OFFICE BUILDINGS
Century Park
Las Vegas, NV 1,439,077 14,499,831 15,938,908 (6,731,004)
Fidelity Plaza
Long Beach, CA 553,946 12,094,420 12,648,366 (7,147,930)
Kellogg Office Building
Littleton, CO 1,412,889 9,814,830 10,957,719 (4,816,041)
RETAIL CENTER
Northwest Plaza
Dayton, OH 1,319,037 18,915,585 20,234,622 (7,062,960)
-------------- ------------- -------------- ------------
$ 5,524,462 $ 64,330,457 $ 69,854,919 $ (29,234,446)
============== ============= ============== ============
</TABLE>
(a) For Federal Income tax purposes, the properties are depreciated over lives
ranging from 15-25 years using ACRS or MACRS methods. The aggregate cost of
real estate investments for Federal income tax purposes was $80,718,449 and
accumulated depreciation was $29,884,217 at December 31, 1995.
(b) The carrying values of Century Park and Kellogg Office Building were
reduced by $1,000,000 and $4,000,000, respectively, in 1989. In 1992, the
carrying value of Kellogg Office Building was further reduced by $1,003,041
and the carrying value of Harbour Club I Apartments was reduced by
$338,092. The carrying value of Fidelity Plaza was reduced by $4,633,000 in
1995.
(c) Related encumbrances include a mortgage note payable and a capitalized land
lease obligation.
See accompanying notes to Schedule III.
<PAGE>
McNEIL REAL ESTATE FUND XXV, LTD.
SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
December 31, 1995
<TABLE>
Date of Date Depreciable
Description Construction Acquired lives (years)
- ----------- ---------- -------- ------------
<S> <C> <C> <C>
Apartments:
Harbour Club I
Belleville, MI 1969 06/86 5-25
OFFICE BUILDINGS
Century Park
Las Vegas, NV 1984 05/86 5-25
Fidelity Plaza
Long Beach, CA 1968 12/85 5-25
Kellogg Office Building
Littleton, CO 1983 12/85 5-25
RETAIL CENTER
Northwest Plaza
Dayton, OH 1964-1980 06/86 5-25
</TABLE>
<PAGE>
McNEIL REAL ESTATE FUND XXV, L.P.
Notes to Schedule III
Real Estate Investments and Accumulated Depreciation and Amortization
A summary of activity for the Partnership's real estate investments and
accumulated depreciation and amortization is as follows:
<TABLE>
For the Years Ended December 31,
------------------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Real estate investments:
- -----------------------
Balance at beginning of year............... $72,442,921 $70,097,820 $69,007,938
Improvements............................... 2,044,998 2,015,525 1,089,882
Land acquired in settlement of lawsuit..... - 329,576 -
Write-down for permanent impairment
of real estate.......................... (4,633,000) - -
----------- ---------- ----------
Balance at end of year..................... $69,854,919 $72,442,921 $70,097,820
========== ========== ==========
Accumulated depreciation and amortization:
Balance at beginning of year............... $25,759,358 $22,428,904 $19,420,716
Depreciation and amortization.............. 3,475,088 3,330,454 3,008,188
---------- ---------- ----------
Balance at end of year..................... $29,234,446 $25,759,358 $22,428,904
========== ========== ==========
</TABLE>
<PAGE>
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ ---------------------------------------------------------------
FINANCIAL DISCLOSURES
---------------------
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
Neither the Partnership nor the General Partner has any directors or executive
officers. The names and ages of, as well as the positions held by, the officers
and directors of McNeil Investors, Inc., the general partner of the General
Partner, are as follows:
<TABLE>
Other Principal Occupations and Other
Name and Position Age Directorships During the Past 5 Years
- ----------------- --- -------------------------------------
<S> <C> <C>
Robert A. McNeil, 75 Mr. McNeil is also Chairman of the Board and Director of McNeil Real
Chairman of the Estate Management, Inc. ("McREMI") which is an affiliate of the General
Board and Director Partner. He has held the foregoing positions since the formation of such
entity in 1990. Mr. McNeil received his B.A. degree from Stanford
University in 1942 and his L.L.B. degree from Stanford Law School in
1948. He is a member of the State Bar of California and has been involved
in real estate financing since the late 1940's and in real estate
acquisitions, syndications and dispositions since 1960. From 1986 until
active operations of McREMI and McNeil Partners, L.P. began in February
1991, Mr. McNeil was a private investor. Mr. McNeil is a member of the
International Board of Directors of the Salk Institute, which promotes
research in improvements in health care.
Carole J. McNeil 52 Mrs. McNeil is Co-Chairman, with husband Robert A. McNeil, of McNeil
Co-Chairman of the Investors, Inc. Mrs. McNeil has twenty years of real estate experience,
Board most recently as a private investor from 1986 to 1993. In 1982, she
founded Ivory & Associates, a commercial real estate brokerage firm in San
Francisco, CA. Prior to that, she was a commercial real estate associate
with the Madison Company and, earlier, a commercial sales associate and
analyst with Marcus and Millichap in San Francisco. In 1978, Mrs. McNeil
established Escrow Training Center, California's first accredited
commercial training program for title company escrow officers and real
estate agents needing college credits to qualify for brokerage licenses.
She began in real estate as Manager and Marketing Director of Title
Insurance and Trust in Marin County, CA. Mrs. McNeil serves on the
International Board of Directors of the Salk Institute.
Other Principal Occupations and Other
Name and Position Age Directorships During the Past 5 Years
- ----------------- --- -------------------------------------
Donald K. Reed, 50 Mr. Reed is President, Chief Executive Officer and Director of McREMI
Director, President, which is an affiliate of the General Partner. Prior to joining McREMI in
and Chief Executive March 1993, Mr. Reed was President, Chief Operating Officer and Director
Officer of Duddlesten Management Corporation and Duddlesten Realty Advisors, Inc.,
with responsibility for a management portfolio of office, retail,
multi-family and mixed-use land projects representing $2 billion in asset
value. He was also Chief Operating Officer, Director and member of the
Executive Committee of all Duddlesten affiliates. Mr. Reed started with the
Duddlesten companies in 1976 and served as Senior Vice President and Chief
Financial Officer and as Executive Vice President and Chief Operating
Officer of Duddlesten Management Corporation before his promotion to
President in 1982. He was President and Chief Operating Officer of
Duddlesten Realty Advisors, Inc., which has been engaged in real estate
acquisitions, marketing and dispositions, since its formation in 1989.
Ron K. Taylor 38 Mr. Taylor is a Senior Vice President of McREMI and has been in this
Vice President capacity since McREMI commenced active operations in 1991. He also serves
as Acting Chief Financial Officer of McREMI since the resignation of
Robert C. Irvine on January 31, 1996. Mr. Taylor is primarily responsible
for Asset Management functions at McREMI, including property
dispositions, commercial leasing, real estate finance and portfolio
management. Prior to joining McREMI, Mr. Taylor served as an Executive
Vice President for a national syndication/property management company.
Mr. Taylor has been involved in the real estate industry since 1983.
</TABLE>
Each director shall serve until his successor shall have been duly elected and
qualified.
ITEM 11. EXECUTIVE COMPENSATION
- ------- ----------------------
No direct compensation was paid or payable by the Partnership to directors or
officers (since it does not have any directors or officers) for the year ended
December 31, 1995, nor was any direct compensation paid or payable by the
Partnership to directors or officers of the general partner of the General
Partner for the year ended December 31, 1995. The Partnership has no plans to
pay any such remuneration to any directors or officers of the general partner of
the General Partner in the future.
See Item 13 - Certain Relationships and Related Transactions for amounts of
compensation and reimbursements paid by the Partnership to the General Partner
and its affiliates.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
(A) Security ownership of certain beneficial owners.
No individual or group, as defined by Section 13(d)(3) of the Securities
Exchange Act of 1934, was known by the Partnership to own more than 5% of the
Units, other than High River Limited Partnership which owns 5,306,367 Units at
February 29, 1996 (approximately 6.33% of the outstanding Units). The business
address for High River Limited Partnership is 100 South Bedford Road, Mount
Kisco, New York 10549.
(B) Security ownership of management.
The General Partner and the officers and directors of its general partner,
collectively own 7,322 limited partnership units, which represents less than 1%
of the outstanding limited partnership units.
(C) Change in control.
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
The amendments to the Partnership compensation structure included in the Amended
Partnership Agreement provide for an asset management fee to replace all other
forms of general partner compensation other than property management fees and
reimbursements of certain costs. Through 1999, the asset management fee is
calculated as 1% of the Partnership's tangible asset value. Tangible asset value
is determined by using the greater of (i) an amount calculated by applying a
capitalization rate of 9 percent to the annualized net operating income of each
property or (ii) a value of $10,000 per apartment unit for residential
properties and $50 per gross square foot for commercial properties to arrive at
the property tangible asset value. The property tangible asset value is then
added to the book value of all other assets excluding intangible items. The fee
percentage decreases subsequent to 1999. For the year ended December 31, 1995,
the Partnership paid or accrued $647,364 of such asset management fees.
The Partnership pays property management fees equal to 5% of the gross rental
receipts of residential properties and 6% for commercial properties to McREMI,
an affiliate of the General Partner, for providing property management services.
Additionally, the Partnership reimburses McREMI for its costs, including
overhead, of administering the Partnership's affairs. For the year ended
December 31, 1995, the Partnership paid or accrued $814,177 of such property
management fees and reimbursements. See Item 1 - Business, Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Item 8 - Note 2 - "Transactions With Affiliates."
In May 1992, the Partnership advanced $113,000 to an affiliate of the General
Partner which owns a phase in a multi-phased property which includes the
Partnership's Harbour Club I Apartments. This advance, which was unsecured and
due on demand, accrued interest at a rate equal to the prime lending rate of
Bank of America on the date of demand plus 1%. In 1995, the debt was dismissed
in the borrowing affiliate's bankruptcy proceeding. Accordingly, the advance and
related accrued interest, which were fully reserved for, were written off in
1995.
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
- ------- -----------------------------------------------------------------
See accompanying Index to Financial Statements at Item 8.
(A) Exhibits
--------
Exhibit
Number Description
------ -----------
4. Amended and Restated Limited
Partnership Agreement dated March
26, 1992 (incorporated by reference
to the Current Report of the
registrant on Form 8-K dated March
26, 1992, as filed on April 9,
1992).
4.1 Amendment No. 1 to the Amended and
Restated Limited Partnership
Agreement of McNeil Real Estate Fund
XXV, L.P. dated June 1995
(incorporated by reference to the
Quarterly Report of the registrant
on Form 10-Q for the period ended
June 30, 1995, as filed on August
14, 1995).
4.2 Certificate and Agreement of Van
Buren Associates Limited Partnership
(incorporated by reference to the
Annual Report of the registrant on
Form 10-K for the period ended
December 31, 1991, as filed on March
24, 1992).
10.1 Revolving Credit Agreement dated
August 6, 1991, between McNeil
Partners, L.P. and various selected
partnerships, including the
registrant (incorporated by
reference to the Annual Report on
Form 10-K for the period ended
December 31, 1993, as filed on March
30, 1994).
10.2 Portfolio Services Agreement dated
February 14, 1991, between Southmark
Equity Partners II, Ltd. and McNeil
Real Estate Management, Inc. (1)
10.3 Mortgage note dated May 6, 1988,
among Van Buren Associates Limited
Partnership, Southmark Equity
Partners II, Ltd. and DRG Funding
Corporation relating to Harbour Club
I. (1)
10.4 Property Management Agreement dated
March 26, 1992, between McNeil Real
Estate Fund XXV, L.P. and McNeil
Real Estate Management, Inc. (2)
10.5 Amendment of Property Management
Agreement dated March 5, 1993 by
McNeil Real Estate Fund XXV, L.P.
and McNeil Real Estate Management,
Inc. (2)
10.6 Property Management Agreement dated
March 26, 1992 between Van Buren
Associates Limited Partnership and
McNeil Real Estate Management, Inc.
(2)
<PAGE>
Exhibit
Number Description
------ -----------
10.7 Amendment of Property Management
Agreement dated March 5, 1993, by
Van Buren Associates Limited
Partnership and McNeil Real Estate
Management, Inc. (2)
11. Statement regarding computation of
Net Income (Loss) per Thousand
Limited Partnership Unit (see Note 1
to Financial Statements).
22. Following is a list of subsidiaries
of the Partnership:
<TABLE>
Names Under
Jurisdiction of Which It Is
Name of Subsidiary Incorporation Doing Business
------------------ --------------- --------------
<S> <C> <C>
Van Buren Associates
Limited Partnership Michigan None
</TABLE>
(1) Incorporated by reference to the
Quarterly Report of the registrant
on Form 10-Q for the period ended
March 31, 1991, as filed on May 14,
1991.
(2) Incorporated by reference to the
Annual Report of the registrant on
Form 10-K for the period ended
December 31, 1992, as filed on March
30, 1993.
(B) Reports on Form 8-K. There were no reports on Form 8-K filed during the
quarter ended December 31, 1995.
<PAGE>
McNEIL REAL ESTATE FUND XXV, L.P.
A Limited Partnership
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
<TABLE>
McNEIL REAL ESTATE FUND XXV, L.P.
<S> <C>
By: McNeil Partners, L.P., General Partner
By: McNeil Investors, Inc., General Partner
April 1, 1996 By: /s/ Robert A. McNeil
- ---------------------- ----------------------------------------
Date Robert A. McNeil
Chairman of the Board and Director
Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
April 1, 1996 By: /s/ Donald K. Reed
- ---------------------- ----------------------------------------
Date Donald K. Reed
President and Director of McNeil Investors, Inc.
April 1, 1996 By: /s/ Ron K. Taylor
- ---------------------- ----------------------------------------
Date Ron K. Taylor
Acting Chief Financial Officer
of McNeil Investors, Inc.
April 1, 1996 By: /s/ Carol A. Fahs
- ---------------------- ----------------------------------------
Date Carol A. Fahs
Chief Accounting Officer of McNeil Real Estate
Management, Inc.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 3,987,381
<SECURITIES> 0
<RECEIVABLES> 1,516,476
<ALLOWANCES> 714,050
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 69,854,919
<DEPRECIATION> (29,234,446)
<TOTAL-ASSETS> 47,723,941
<CURRENT-LIABILITIES> 0
<BONDS> 7,381,507
<COMMON> 0
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 47,723,941
<SALES> 8,783,408
<TOTAL-REVENUES> 9,087,853
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 14,205,292
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 826,447
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,943,886)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,943,886)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
