SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Fiscal Year Ended December 31, 1995
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: 0-15753
HIGH EQUITY PARTNERS L.P. - SERIES 86
(Exact name of registrant as specified in its charter)
DELAWARE 13-3314609
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
411 West Putnam Avenue, Greenwich CT 06830
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 862-7000
Securities registered pursuant to Section 12(b) of the Act:
None None
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest, $250 Per Unit
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
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 the 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]
DOCUMENTS INCORPORATED BY REFERENCE
Exhibit A to the Prospectus of the registrant dated April 28, 1986, filed
pursuant to Rule 424(b) under the Securities Act of 1933, as amended, is
incorporated by reference in Part IV of this Form 10-K.
<PAGE>
PART I
Item 1. Business.
High Equity Partners L.P. - Series 86 (the "Partnership") is a
Delaware limited partnership formed as of November 14, 1985. The Partnership is
engaged in the business of operating and holding for investment previously
acquired income-producing properties, consisting of office buildings, shopping
centers and other commercial and industrial properties such as industrial parks
and warehouses. Resources High Equity, Inc., a Delaware corporation, is the
Partnership's investment general partner (the "Investment General Partner") and
Resources Capital Corp., a Delaware corporation, is the Partnership's
administrative general partner (the "Administrative General Partner"). Both the
Investment General Partner and the Administrative General Partner are
wholly-owned subsidiaries of Presidio Capital Corp., a British Virgin Islands
corporation ("Presidio"). Until November 3, 1994, both the Investment General
Partner and the Administrative General Partner were wholly-owned subsidiaries of
Integrated Resources, Inc. ("Integrated"). On November 3, 1994, Integrated
consummated its plan of reorganization under Chapter 11 of the United States
Bankruptcy Code at which time, pursuant to such plan of reorganization, the
newly-formed Presidio purchased substantially all of Integrated's assets.
Presidio AGP Corp., which is a wholly-owned subsidiary of Presidio, became the
associate general partner (the "Associate General Partner") on February 28, 1995
replacing Second Group Partners which withdrew as of that date. (The Investment
General Partner, the Administrative General Partner and the Associate General
Partner are referred to collectively hereinafter as the "General Partners.")
Affiliates of the General Partners are also engaged in businesses related to the
acquisition and operation of real estate.
The Partnership offered 800,000 units of limited partnership
interest (the "Units"), pursuant to the Prospectus of the Partnership dated
April 28, 1986, as supplemented by Supplements dated July 11, 1986, September
26, 1986, December 1, 1986, January 30, 1987, February 6, 1987, May 26, 1987,
and December 30, 1987 (collectively, the "Prospectus"), filed pursuant to Rules
424(b) and 424(c) under the Securities Act of 1933, as amended. The Prospectus
was filed as part of the Partnership's Registration Statement on Form S-11,
Commission File No. 33-1853, as amended (the "Registration Statement"), pursuant
to which the Units were registered. Upon termination of the offering in
September 1987, the Partnership had accepted subscriptions (including Units held
by the initial limited partner) for 588,010 Units for an aggregate of
$147,002,500 in gross proceeds, resulting in net proceeds from the offering of
$142,592,500 (gross proceeds of $147,002,500 less organization and offering
costs of $4,410,000). All underwriting and sales commissions were paid by
Integrated or its affiliates and not by the Partnership.
As of March 15, 1996, the Partnership had invested all of its
net proceeds available for investment after establishing a working capital
reserve and had acquired the eleven properties listed below. The Partnership's
property investments which contributed more than 15% of the Partnership's total
gross revenues were as follows: 568 Broadway and Matthews Festival represented
17.4% and 16.4%, respectively, in 1995; Melrose Crossing and Matthews Festival
represented approximately 16.1% and 15.8%, respectively, in 1994; and Melrose
Crossing represented approximately 21% in 1993.
The Partnership owned the following properties as of March 15,
1996:
(1) Century Park I. On November 7, 1986, a joint venture (the
"Century Park Joint Venture") comprised of the Partnership and Integrated
Resources High Equity Partners, Series 85, a California limited partnership
("HEP-85"), an affiliated public limited partnership, purchased the fee simple
interest in Century Park I ("Century Park I"), an office complex. The
Partnership and HEP-85 each have a 50% interest in the Century Park Joint
Venture.
Century Park I, situated on approximately 8.6 acres, is
located in the center of San Diego County in Kearny Mesa, California, directly
adjacent to Highway 163 at the northeast corner of Balboa Avenue and Kearny
Villa Road. Century Park I is part of an office park consisting of six office
buildings and two parking garages, in which Century Park Joint Venture owns
three buildings, comprising 203,188 net rentable square feet and one garage with
approximately 810 parking spaces. One of the three buildings was completed in
the latter half of 1985, and the other two buildings were completed in February
1986. The property was 74% leased as of January 1, 1996 compared to 26% at
January 1, 1995. During 1995, management executed lease agreements for an
aggregate of approximately 93,300 square feet with Medaphis, Pacific Bell, and
Honeywell. There are no leases which represent at least 10% of the square
footage of the property scheduled to expire in 1996.
Century Park I is subject to competition from other office
parks and office buildings in the area. Although vacancies still exist in the
suburban San Diego market, Century Park II, which is immediately adjacent to the
Partnership's property in the same office park, has been leased to San Diego Gas
& Electric on a long-term basis and will not represent competition to Century
Park I for the foreseeable future.
(2) 568 Broadway. On December 2, 1986, a joint venture (the
"Broadway Joint Venture") comprised of the Partnership and HEP-85 acquired a fee
simple interest in 568-578 Broadway ("568 Broadway"), a commercial building in
New York City, New York. Until February 1, 1990, the Partnership and HEP-85 each
had a 50% interest in the Broadway Joint Venture. On February 1, 1990, the
Broadway Joint Venture admitted a third joint venture partner, High Equity
Partners L.P. - Series 88 ("HEP-88"), an affiliated public limited partnership
sponsored by Integrated. HEP-88 contributed $10,000,000 for a 22.15% interest in
the joint venture. HEP-85 and the Partnership each retain a 38.925% interest in
the joint venture.
568 Broadway is located in the SoHo district of Manhattan on
the northeast corner of Broadway and Prince Street. 568 Broadway is a 12-story
plus basement and sub-basement building constructed in 1898. It is situated on a
site of approximately 23,600 square feet, has a rentable square footage of
approximately 299,000 square feet and a floor size of approximately 26,000
square feet. Formerly catering primarily to industrial light manufacturing, the
building has been converted to an office building and is currently being leased
to art galleries, photography studios, retail and office tenants. The last
manufacturing tenant vacated in January 1993. The building was 95% leased as of
January 1, 1996 compared to 73% as of January 1, 1995. There are no leases which
represent at least 10% of the square footage of the property scheduled to expire
in 1996.
568 Broadway competes with several other buildings in the SoHo
area.
(3) Seattle Tower. On December 16, 1986, a joint venture (the
"Seattle Landmark Joint Venture") comprised of the Partnership and HEP-85
acquired a fee simple interest in Seattle Tower, a commercial office building
located in downtown Seattle ("Seattle Tower"). The Partnership and HEP-85 each
have a 50% interest in the Seattle Landmark Joint Venture.
Seattle Tower is located at Third Avenue and University Street
on the eastern shore of Puget Sound in the financial and retail core of the
Seattle central business district. Seattle Tower, built in 1928, is a 27-story
commercial building containing approximately 141,000 rentable square feet,
including almost 10,000 square feet of retail space and approximately 2,211
square feet of storage space. The building also contains a 55-car garage.
Seattle Tower is connected to the Unigard Financial Center and the Olympic Four
Seasons Hotel by a skybridge system. Seattle Tower, formerly Northern Life
Tower, represented the first appearance in Seattle of a major building in the
Art Deco style. It was accepted into the National Register of Historic Places in
1975. Seattle Tower's occupancy at January 1, 1996 was 89% compared to 75% at
January 1, 1995. There are no leases which represent at least 10% of the square
footage of the property scheduled to expire during 1996.
The Partnership believes that Seattle Tower's primary direct
competition comes from three office buildings of similar size or age in the
immediate vicinity of Seattle Tower, which buildings have current occupancy
rates which are comparable to Seattle Tower's.
(4) Commonwealth Industrial Park. On April 14, 1987, the
Partnership purchased a fee simple interest in the Commonwealth Industrial Park
("Commonwealth"), located in Fullerton, California. Commonwealth consists of
three light manufacturing/warehouse buildings, containing 273,576 square feet in
the aggregate.
Commonwealth is located within the western industrial sector
of the city of Fullerton. The property is bounded by Artesia Boulevard on the
north and Commonwealth Avenue on the South. The Artesia Freeway (State 91) and
the Santa Ana Freeway (Interstate 5) are nearby. The area is a mixture of
established residential neighborhoods and old and new retail and light
industrial buildings. The Fullerton Airport, accommodating small aircraft only,
is a block from the property. Commonwealth is comprised of one 21-year-old
building (164,650 square feet) and one 16-year-old building (51,600 square
feet), both of which were completely renovated in 1985, and one building of
57,326 square feet that was constructed in 1986. The oldest building has a brick
exterior and a bow-truss roof system with skylights. The other two buildings are
of precast tilt-up concrete construction with wood beam supported roofs. A
two-story wood siding and glass office addition has been made to each of the
renovated buildings. The site consists of approximately 12.4 acres, with parking
to accommodate 391 cars. The property was 66% leased as of January 1, 1996,
compared to 46% as of January 1, 1995. There are no leases which represent at
least 10% of the square footage of the property scheduled to expire during 1996;
however, a tenant occupying 74,143 square feet or 27% of the property continues
on a month to month basis.
Commonwealth is subject to primary competition from many
industrial parks in north Orange County and southern Los Angeles County, many of
which are of more modern design with more efficient loading docks and greater
yard space.
(5) Commerce Plaza I. On April 23, 1987, the Partnership
purchased a fee simple interest in Commerce Plaza I located in Richmond,
Virginia.
Commerce Plaza I is located in the Commerce Center Business
Park, an office park situated at the intersection of I-64, Glenside Drive and
Broad Street in Henrico County, northwest of Richmond, Virginia. This area,
referred to as the West End, contains established residential neighborhoods as
well as corporate headquarters and many of Richmond's suburban office parks.
Commerce Plaza I's building is constructed of steel with red brick facade and
insulated bronze tinted glass. It is situated on a site of approximately 4.2
acres, has a net rentable area of approximately 85,000 square feet and provides
parking for approximately 300 cars. Commerce Plaza I was 92% leased as of
January 1, 1996, compared to 82% as of January 1, 1995. There are no leases
which represent at least 10% of the square footage of the property scheduled to
expire during 1996.
The West End of Richmond, Virginia presently has 8.3 million
square feet of office space with a vacancy rate of 3%. Of this space, 3.9
million square feet is in direct competition with Commerce Plaza I.
(6) Melrose Crossing. On January 5, 1988, the Partnership
purchased a fee simple interest in Melrose Crossing, a neighborhood shopping
center located in Melrose Park, Illinois. Completed in January 1987, Melrose
Crossing contains 138,355 square feet of rentable space in addition to 88,000
square feet which is leased to Venture department store (which is owned by a
third party). This store anchors both Melrose Crossing and Phase II of Melrose
Crossing Shopping Center which is to the north of Melrose Crossing and is owned
by HEP-88. It is situated on approximately 11.6 acres and has parking space for
1,150 cars. As of January 1, 1996, the shopping center was 50% leased, compared
to 69% at January 1, 1995. There is one lease which represents 18% of the square
footage of the center that is scheduled to expire during 1996.
Melrose Crossing is located 10 miles west of Chicago's Loop,
adjacent to another parcel of land purchased by the Partnership known as the
"Melrose Out Parcel" (described more fully below), in an area comprised
primarily of heavy industrial and dense residential properties. The area is
virtually 100% developed.
In December 1993, Reiters, Inc., a 6,400 square foot tenant
which had been experiencing financial difficulty, filed for bankruptcy
protection and disaffirmed its lease and vacated in 1994. The F&M Drug Store
("F&M Drug") filed bankruptcy and discontinued operations on January 25, 1995.
F&M Drug occupied 25,200 square feet and has since rejected its lease in the
bankruptcy court. Currently, negotiations are underway to lease the F&M Drug
space to a Chicago- based grocer. There are currently seven other retail centers
within a three-mile radius of Melrose Crossing that are considered competitive.
These centers have approximately one million square feet of rentable space, with
an overall average occupancy rate of approximately 85%. In 1993, several other
large retailers such as WalMart and Target opened stores in the Melrose Park
area. The Partnership believes this will ultimately help Melrose Crossing as the
area continues its growth as a retail hub.
(7) Matthews Township Festival. On February 23, 1988, the
Partnership purchased a fee simple interest in Matthews Township Festival
("Matthews Festival"), a neighborhood shopping center located in Matthews, North
Carolina.
Completed in November 1987, Matthews Festival contains 127,388
square feet of rentable space. As of January 1, 1996, Matthews Festival was 89%
leased compared to 91% at January 1, 1995. There are no leases which represent
at least 10% of the square footage of the center scheduled to expire in 1996.
During 1990 the "anchor" supermarket tenant vacated. Although this tenant
continues to pay rent on its lease, which expires in November 2007, the physical
vacancy has the effect of reducing traffic in the center. Presently A&P, the
lessee of the supermarket anchor space, is negotiating with Uptons to sublet
their space. The Partnership continues to provide some tenants with rent
concessions where appropriate.
Matthews Festival is located on the edge of an established
residential development in the city of Charlotte, North Carolina on Independence
Boulevard, the major thoroughfare linking the east end of Charlotte and the high
income eastern suburban communities of Matthews and Mint Hill. It was developed
as the first phase of an intended two phase shopping complex aggregating
approximately 550,000 square feet. Home Depot, Harris Teeter Grocery and
Steinmart are tenants on the adjacent property. Access is through the
Partnership's property and the Partnership believes that this development has
favorably affected shopper traffic at Matthews Festival. Highway construction
which was completed in 1994, provides major access improvement.
Matthews Festival competes with other shopping centers in the
Southeast Charlotte area, including Windsor Square, Crown Point, Sardis Village
and Sardis Crossing. In addition, a large parcel of land directly across the
road from Matthews Festival is zoned for development as a 750,000 square foot
regional mall. The construction of an 180,000 square foot strip center,
diagonally across the road has begun and is expected to be completed by the end
of 1996. Thus, in the future Matthews Festival may also have to compete with
additional development of the nearby properties.
(8) Sutton Square Shopping Center. On April 15, 1988, the
Partnership purchased a fee simple interest in Sutton Square Shopping Center
("Sutton Square"), located in Raleigh, North Carolina. Sutton Square is a
101,965 square foot open air shopping center that was 100% leased as of January
1, 1996 and 1995. In 1996, leases representing 20,073 square feet of space will
expire.
Sutton Square is subject to competition from numerous other
shopping centers. There are more than 15 centers within a three-mile radius of
Sutton Square. The only anchor tenant competition (food and drugs) within a
one-mile radius are the nearby centers of Falls Village and North Ridge. The
following centers are located within a two-mile radius of Sutton Square: Colony
Shopping Center, Wake Forest Square, Celebration at Six Forks and Quail Corners
Shopping Center. In addition, two other centers are under construction within a
two-mile radius. Major tenants at these centers include Kroger, Steinmart and
Ben Franklin.
(9) 230 East Ohio Street. On May 2, 1988, the Partnership
purchased a fee simple interest in 230 East Ohio Street, located in the North
Michigan Avenue submarket of Chicago, Illinois. 230 East Ohio Street is a
renovated seven-story Class B office building containing approximately 83,600
net rentable square feet. 230 East Ohio Street was 75% leased as of January 1,
1996 compared to 61% as of January 1, 1995. There are no leases which represent
at least 10% of the square footage of the property scheduled to expire during
1996.
The downtown Chicago market remains soft. However, various
improvements to the facade and elevators, along with the leasing of the ground
floor to a restaurant, should improve the building's appeal to potential
tenants.
(10) TMR Warehouses. On September 15, 1988, Tri-Columbus
Associates ("Tri- Columbus"), a joint venture comprised of the Partnership,
HEP-88 and IR Columbus Corp. ("Columbus Corp."), a wholly owned subsidiary of
Integrated, purchased the fee simple interest in three warehouses (the "TMR
Warehouses"), located in Columbus, Ohio. The Partnership has a 20.66% undivided
interest in the Tri-Columbus. Columbus Corp. subsequently sold its interest in
Tri-Columbus to HEP-88. The Partnership's ownership was not affected by the
transfer of Columbus Corp.'s interest in the venture to HEP-88.
The TMR Warehouses are distribution and light manufacturing
facilities located in Orange, Grove City and Hilliard, all suburbs of Columbus,
Ohio and comprise 1,010,500 square feet of space in the aggregate, with
individual square footage of 583,000 square feet, 190,000 square feet and
237,500 square feet, respectively. As of January 1, 1996 and 1995, the Orange
and Grove City buildings were each 100% leased to a single tenant. As of January
1, 1995, the Hilliard property was 100% leased by Eddie Bauer, Inc., but Eddie
Bauer, Inc. vacated the property in the second quarter of 1995. During 1995,
management executed a three-year lease with Micro Electronics Inc. for 175,000
of Hilliard's 237,500 square foot space that had been leased to Eddie Bauer,
Inc., resulting in an overall occupancy rate at Hilliard of 74% as of January 1,
1996.
The TMR Warehouses compete with numerous other warehouses in
the market area which currently have in excess of one million square feet
available.
(11) The Melrose Out Parcel. On November 3, 1988, the
Partnership purchased the fee simple interest in a parcel of vacant land (the
"Melrose Out Parcel") adjacent to the Melrose Crossing Shopping Center, located
in Melrose Park, Illinois. (See "Melrose Crossing" above). The parcel consists
of approximately 18,000 square feet of vacant land. In 1993, the Partnership
entered into a ten year ground lease with Rally's Hamburgers, Inc. ("Rally's")
which constructed a drive- through hamburger restaurant on the site at its own
cost. In January 1995, Rally's ceased operating due to low sales volume. Rally's
is required to continue paying rent for the entire lease term which expires in
April 2004.
Write-downs for Impairment
See Note 4 to the financial statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations for a
discussion of write-downs for impairment.
Competition
The real estate business is highly competitive and, as
described more particularly above, the properties acquired by the Partnership
may have active competition from similar properties in the vicinity. In
addition, various limited partnerships have been formed by the General Partners
and/or their affiliates that engage in businesses that may compete with the
Partnership. The Partnership will also experience competition for potential
buyers at such time as it seeks to sell any of its properties.
Employees
Services are performed for the Partnership at the properties
by on-site personnel. Salaries for such on-site personnel are paid by the
Partnership or by unaffiliated management companies that service the
Partnership's properties from monies received by them from the Partnership.
Services are also performed by the Investment and Administrative General
Partners and by Resources Supervisory Management Corp. ("Resources
Supervisory"), each of which is an affiliate of the Partnership. Resources
Supervisory currently provides supervisory management and leasing services for
Century Park I, Seattle Tower, Commonwealth Industrial Park, Commerce Plaza I,
Melrose Crossing, Matthews Festival, 568 Broadway, Sutton Square and 230 East
Ohio and subcontracts certain management and leasing functions to unaffiliated
third parties. The TMR Warehouses are currently directly managed by Resources
Supervisory.
The Partnership does not have any employees. Wexford
Management LLC ("Wexford") performs accounting, secretarial, transfer and
administrative services for the Partnership. See Item 10, "Directors and
Executive Officers of the Registrant", Item 11, "Executive Compensation", and
Item 13, "Certain Relationships and Related Transactions".
Item 2. Properties.
A description of the Partnership's properties is contained in
Item 1 above (see Schedule III to the financial statements for additional
information with respect to the properties).
Item 3. Legal Proceedings.
The Broadway Joint Venture is currently involved in litigation
with a number of present or former tenants who are in default on their lease
obligations. Several of these tenants have asserted claims or counterclaims
seeking monetary damages. The plaintiffs' allegations include, but are not
limited to, claims for breach of contract, failure to provide certain services,
overcharging of expenses and loss of profits and income. These suits seek total
damages of in excess of $20 million plus additional damages of an indeterminate
amount. The Broadway Joint Venture's action for rent against Solo Press was
tried in 1992 and resulted in a judgment in favor of the Broadway Joint Venture
for rent owed. The Partnership believes this will result in dismissal of the
action brought by Solo Press against the Broadway Joint Venture. Since the facts
of the other actions which involve material claims or counterclaims are
substantially similar, the Partnership believes that the Broadway Joint Venture
will prevail in those actions as well.
A former retail tenant of 568 Broadway (Galix Shops, Inc.) and
a related corporation which is a retail tenant of a building adjacent to 568
Broadway filed a lawsuit in the Supreme Court of The State of New York, County
of New York, against the Broadway Joint Venture which owns 568 Broadway. The
action was filed on April 13, 1994. The plaintiffs alleged that by erecting a
sidewalk shed in 1991, 568 Broadway deprived plaintiffs of light, air and
visibility to their customers. The sidewalk shed was erected, as required by
local law, in connection with the inspection and restoration of the 568 Broadway
building facade, which is also required by local law. Plaintiffs further alleged
that the erection of the sidewalk shed for a continuous period of over two years
is unreasonable and unjustified and that such conduct by defendants has deprived
plaintiffs of the use and enjoyment of their property. The suit seeks a judgment
requiring removal of the sidewalk shed, compensatory damages of $20 million, and
punitive damages of $10 million. The Partnership believes that this suit is
meritless and intends to vigorously defend it.
On or about May 11, 1993, the Partnership was advised of the
existence of an action (the "B&S Litigation") in which a complaint (the "HEP
Complaint") was filed in the Superior Court for the State of California for the
County of Los Angeles (the "Superior Court") on behalf of a purported class
consisting of all of the purchasers of limited partnership interests in the
Partnership.
On April 7, 1994 the plaintiffs were granted leave to file an
amended complaint (the "Amended Complaint"). The Amended Complaint asserted
claims against the General Partners of the Partnership, the general partners of
HEP-85, the managing general partner of HEP-88 and certain officers of the
Administrative and Investment General Partners, among others. The Investment
General Partner of the Partnership is also a general partner of HEP-85 and
HEP-88.
On July 19, 1995, the Superior Court preliminarily approved a
settlement of the B&S Litigation and approved the form of a notice (the
"Notice") concerning such proposed settlement. In response to the Notice,
approximately 1.1% of the limited partners of the Partnership, HEP-85 and HEP-88
(collectively, the "HEP Partnerships") (representing approximately 4% of
outstanding units) requested exclusion and 15 limited partners filed written
objections to the proposed settlement. The California Department of Corporations
also sent a letter to the Superior Court opposing the settlement. Five objecting
limited partners, represented by two law firms, also made motions to intervene
so they could participate more directly in the action. The motions to intervene
were granted by the Superior Court on September 14, 1995.
In October and November 1995, the attorneys for the
plaintiffs-intervenors conducted extensive discovery. At the same time,
negotiations continued concerning possible revisions to the proposed settlement.
On November 30, 1995, the original plaintiffs and the
intervening plaintiffs filed a Consolidated Class and Derivative Action
Complaint (the "Consolidated Complaint") against the Administrative and
Investment General Partners , the managing general partner of HEP-85, the
managing general partner of HEP-88 and the indirect corporate parent of the
General Partners, that alleged various state law class and derivative claims,
including claims for breach of fiduciary duties, breach of contract, unfair and
fraudulent business practices under California Business & Professional Code ss.
17200, negligence, dissolution, accounting, receivership, removal of general
partner, fraud, and negligent misrepresentation. The Consolidated Complaint
alleged, among other things, the general partners caused a waste of HEP
Partnership assets by collecting management fees in lieu of pursuing a strategy
to maximize the value of the investments owned by the limited partners; the
general partners breached their duty of loyalty and due care to the limited
partners by expropriating management fees from the HEP Partnerships without
trying to run the HEP Partnerships for the purposes for which they were
intended; the general partners acted improperly to enrich themselves in their
position of control over the HEP Partnerships and their actions have prevented
non-affiliated entities from making and completing tender offers to purchase
units of the HEP Partnerships; by refusing to seek the sale of the HEP
Partnerships' properties, the general partners have diminished the value of the
limited partners' equity in the HEP Partnerships; the general partners have
taken a heavily overvalued partnership asset management fee; and limited
partnership units were sold and marketed through the use of false and misleading
statements.
On or about January 31, 1996, the parties to the B&S
Litigation agreed upon a revised settlement, which would be significantly more
favorable to limited partners than the previously proposed settlement. The
revised settlement proposal, like the previous proposal, involves the
reorganization of HEP Partnerships, through an exchange (the "Exchange") in
which limited partners (the "Participating Investors") of the partnerships
participating in the Exchange (the "Participating Partnerships") would receive,
in exchange for partnership units, shares of common stock ("Shares") of a
newly-formed corporation, Millennium Properties Inc. ("Millennium") which
intends to qualify as a real estate investment trust. Such reorganization would
only be effected with respect to a particular HEP Partnership if holders of a
majority of the outstanding units of such HEP Partnership consent to such
reorganization pursuant to a consent solicitation statement (the "Consent
Solicitation Statement") which would be sent to all limited partners after the
settlement is approved by the Superior Court. 84.65% of the Shares would be
allocated to Participating Investors in the aggregate (assuming each of the HEP
Partnerships participate in the Exchange) and 15.35% of the Shares would be
allocated to the general partners in consideration of the general partners'
existing interests in the Participating Partnerships, their relinquishment of
entitlement to receive fees and expense reimbursements, and the payment by the
general partners or an affiliate of certain amounts for legal fees.
As part of the Exchange, Shares issued to Participating
Investors would be accompanied by options granting the Participating Investors
the right to require an affiliate of the general partners to purchase Shares at
a price of $11.50 per Share, exercisable during the three-month period
commencing nine months after the effective date of the Exchange. A maximum of
1.5 million Shares (representing approximately 17.7% of the total Shares issued
to Participating Investors if all partnerships participate) would be required to
be purchased if all partnerships participate in the Exchange. Also as part of
the Exchange, the indirect parent of the General Partners would agree that in
the event that dividends paid with respect to the Shares do not aggregate at
least $1.10 per Share for the first four complete fiscal quarters following the
effective date of the Exchange, it would make a supplemental payment to holders
of such Shares in the amount of such difference. The general partners or an
affiliate would also provide an amount, not to exceed $2,232,500 in the
aggregate, for the payment of attorneys' fees and reimbursable expenses of class
counsel, as approved by the Superior Court, and the costs of providing notice to
the class (assuming that all of the HEP Partnerships participate in the
Exchange). In the event that fewer than all of the HEP Partnerships participate
in the Exchange, such amount would be reduced. The general partners would
advance to the HEP Partnerships the amounts necessary to cover such fees and
expenses of the Exchange (but not their litigation costs and expenses, which the
general partners would bear). Upon the effectuation of the Exchange, the B&S
Litigation would be dismissed with prejudice.
On February 8, 1996, at a hearing on preliminary approval of
the revised settlement, the Superior Court determined that in light of renewed
objections to the settlement by the California Department of Corporations, the
Superior Court would appoint a securities litigation expert to evaluate the
settlement. The Superior Court stated that it would rule on the issue of
preliminary approval of the settlement after receiving the expert's report. If
the settlement receives preliminary approval, a revised notice regarding the
proposed settlement would be sent to limited partners, after which the Superior
Court would hold a fairness hearing in order to determine whether the settlement
should be given final approval. If final approval of the settlement is granted
by the Superior Court, the Consent Solicitation Statement concerning the
settlement and the reorganization would be sent to all limited partners. There
would be at least a 60 day solicitation period and a reorganization of the
Partnership cannot be consummated unless a majority of the limited partners of
the Partnership affirmatively voted to approve it.
Item 4. Submission of Matters to
a Vote of Security Holders.
No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report through the
solicitation of proxies or otherwise.
<PAGE>
PART II
Item 5. Market for the Registrant's Securities and
Related Security Holder Matters.
Units of the Partnership are not publicly traded. There are
certain restrictions set forth in the Partnership's amended limited partnership
agreement (the "Limited Partnership Agreement") which may limit the ability of a
limited partner to transfer Units. Such restrictions could impair the ability of
a limited partner to liquidate its investment in the event of an emergency or
for any other reason.
In 1987, the Internal Revenue Service adopted certain rules
concerning publicly traded partnerships. The effect of being classified as a
publicly traded partnership would be that income produced by the Partnership
would be classified as portfolio income rather than passive income. In order to
avoid this effect, the Limited Partnership Agreement contains limitations on the
ability of a limited partner to transfer Units in circumstances in which such
transfers could result in the Partnership being classified as a publicly traded
partnership. However, due to the low volume of transfers of Units, it is not
anticipated that this will occur.
As of March 15, 1996, there were 13,096 holders of Units of
the Partnership, owning an aggregate of 588,010 Units (including Units held by
the initial limited partner).
Distributions per Unit of the Partnership for periods during
1994 and 1995 were as follows:
Distributions for the Amount of Distribution
Quarter Ended Per Unit
--------------------- ----------------------
March 31, 1994 $ .46
June 30, 1994 $ .76
September 30, 1994 $ .61
December 31, 1994 $ .62
March 31, 1995 $ .62
June 30, 1995 $ .62
September 30, 1995 $ .62
December 31, 1995 $ .62
The source of distributions in 1994 and in 1995 was cash flow
from operations (capital improvements were funded from working capital reserves
and cash flow in 1995 and from cash flow in 1994). All distributions are in
excess of accumulated undistributed net income and, therefore, represent a
return of capital to investors on a generally accepted accounting principles
basis. There are no material legal restrictions set forth in the Limited
Partnership Agreement upon the Partnership's present or future ability to make
distributions. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of factors which may
affect the Partnership's ability to pay distributions.
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 10,452,432 $ 10,233,925 $ 11,436,166 $ 11,716,082 $ 12,272,848
Net (Loss) Income $ (22,084,905)(4) $ 936,307(3) $ (16,511,584)(2) $ (19,060,477)(1) $ 2,029,759
Net (Loss) Income Per
Unit $ (35.68)(4) $ 1.51(3) $ (26.68)(2) $ (30.79)(1) $ 3.28
Distributions Per Unit(5) $ 2.48 $ 2.45 $ 2.96 $ 5.64 $ 7.36
Total Assets $ 60,266,933 $ 83,682,263 $ 84,394,634 $ 102,697,302 $ 125,341,400
</TABLE>
- - ---------------
(1) Net loss for the year ended December 31, 1992 includes a write-down for
impairment on Century Park I, Seattle Tower, Commonwealth, 230 East Ohio
Street and 568 Broadway in the aggregate amount of $21,101,450, or $34.09
per Unit.
(2) Net loss for the year ended December 31, 1993 includes a write-down for
impairment on 230 East Ohio Street, Century Park I, 568 Broadway,
Commerce Plaza I and Melrose Crossing in the aggregate amount of
$17,800,650, or $28.76 per Unit.
(3) Net income for the year ended December 31, 1994 includes a write-down for
the impairment of Commonwealth of $600,000, or $.97 per Unit.
(4) Net loss for the year ended December 31, 1995 includes a write-down for
impairment on 568 Broadway, Century Park I, Seattle Tower, 230 East Ohio
Street, Commonwealth, Commerce Plaza I, Melrose Crossing and Matthews
Festival in the aggregate amount of $23,769,050, or $38.40 per Unit.
(5) All distributions are in excess of accumulated undistributed net income
and therefore represent a return of capital to investors on a generally
accepted accounting principles basis.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Liquidity and Capital Resources
The Partnership's real estate properties are commercial
properties except for the Melrose Out Parcel which is an undeveloped parcel of
land for which the Partnership has entered into a ground lease. All properties
were acquired for cash. The Partnership's public offering of Units commenced on
April 28, 1986. As of October 1, 1987, the date of the final admission of
limited partners, the Partnership had accepted subscriptions for 588,010 Units
(including Units held by the initial limited partner) for aggregate net proceeds
of $142,592,500 (gross proceeds of $147,002,500 less organization and offering
expenses aggregating $4,410,000).
The Partnership uses working capital reserves remaining from
the net proceeds of its public offering and any undistributed cash from
operations as its primary source of liquidity. For the year ended December 31,
1995, 59% of capital expenditures were funded from cash flows, 41% of capital
expenditures were funded from working capital reserves and all distributions
were funded from cash flows. As of December 31, 1995, total remaining working
capital reserves amounted to approximately $2,873,000. The Partnership intends
to distribute less than all of its future cash flow from operations to maintain
adequate reserves for capital improvements and capitalized lease procurement
costs. In addition, if the real estate market conditions deteriorate in any of
the areas where the Partnership's properties are located, there is substantial
risk that this would have an adverse effect on cash flow distributions. Working
capital reserves are temporarily invested in short-term money market instruments
and are expected, together with cash flow from operations, to be sufficient to
fund future capital improvements to the Partnership's properties.
During the year ended December 31, 1995, cash and cash
equivalents decreased $998,065 as a result of capital expenditures and
distributions to partners in excess of cash provided by operations. The
Partnership's primary source of funds is cash flow from the operations of its
properties, principally rents received from tenants, which amounted to
$2,737,148 for the year ended December 31, 1995. The Partnership used $2,200,197
for capital expenditures related to capital and tenant improvements to the
properties and $1,535,016 for distributions to partners during 1995.
The following table sets forth, for each of the last three
fiscal years, the amount of the Partnership expenditures at each of its
properties for capital improvements and capitalized tenant procurement costs:
<TABLE>
<CAPTION>
Capital Improvements and Capitalized Tenant Procurement Costs
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Century Park I ................. $1,225,412 $ 51,542 $ 327,527
568 Broadway ................... 682,623 784,087 624,293
Seattle Tower .................. 227,677 152,114 106,679
Commonwealth ................... 5,079 7,894 50,042
Commerce Plaza I ............... 223,028 67,209 68,828
Melrose Crossing ............... 35,702 298,613 253,940
Matthews Festival .............. 57,699 19,353 17,617
Sutton Square .................. 43,771 32,457 20,511
230 East Ohio .................. 256,376 26,090 95,405
TMR Warehouses ................. 14,914 0 30,848
Melrose Out Parcel ............. 0 0 0
---------- ---------- ----------
Totals ......................... $2,772,281 $1,439,359 $1,595,690
========== ========== ==========
</TABLE>
The Partnership does not believe that, in the aggregate, its
1996 expenditures for capital improvements and capitalized tenant procurement
costs will differ materially from the previous three years (other than the 1995
tenant improvements and procurement costs of approximately $946,000 at Century
Park related to the placement of three new tenants ). However, such expenditures
will depend upon the level of leasing activity and other factors which cannot be
predicted with certainty.
The Partnership expects to continue to utilize a portion of
its cash flow from operations to pay for various capital and tenant improvements
to the properties and leasing commissions (the amount of which cannot be
predicted with certainty). Capital and tenant improvements and leasing
commissions may in the future exceed the Partnership's cash flow from operations
which would otherwise be available for distributions. In that event, the
Partnership would utilize the remaining working capital reserves, eliminate or
reduce distributions, or sell one or more properties. Except as discussed above,
management is not aware of any other trends, events, commitments or
uncertainties that will have a significant impact on liquidity.
Real Estate Market
The real estate market continues to suffer from the effects of
the substantial decline in the market value of existing properties which
occurred in the early 1990s. Market values have been slow to recover, and while
the pace of new construction has slowed, high vacancy rates continue to exist in
many areas. Technological changes are also occurring which may reduce the office
space needs of many users. These factors may continue to reduce rental rates. As
a result, the Partnership's potential for realizing the full value of its
investment in its properties is at increased risk.
Impairment of Assets
In March 1995, the Financial Accounting Standards Board issued
Statement #121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of" ("SFAS#121"). Although the adoption of the
statement is not required until fiscal years beginning after December 15, 1995,
early adoption is encouraged. The Partnership has decided to implement SFAS#121
for the year ended December 31, 1995.
Under SFAS#121 the initial test to determine if an impairment
exists is to compute the recoverability of the asset based on anticipated cash
flows (net realizable value) compared to the net carrying value of the asset. If
anticipated cash flows on an undiscounted basis are insufficient to recover the
net carrying value of the asset, an impairment loss should be recognized, and
the asset written down to its estimated fair value. The fair value of the asset
is the amount by which the asset could be bought or sold in a current
transaction between willing parties, that is, other than in a forced or
liquidation sale. The net realizable value of an asset will generally be greater
than its fair value because net realizable value does not discount cash flows to
present value and discounting is usually one of the assumptions used in
determining fair value.
Prior to the adoption of SFAS#121, a write-down for impairment
was recorded based upon a periodic review of each of the properties in the
Partnership's portfolio. Real estate property was previously carried at the
lower of depreciated cost or net realizable value. In performing the review,
management considered the estimated net realizable value of the property based
on undiscounted future cash flows taking into consideration, among other things,
the existing occupancy, the expected leasing prospects for the property and the
economic situation in the region where the property is located. Negative trends
in occupancy, leasing prospects, and the local economy have an adverse effect on
future undiscounted cash flows (net realizable value). In certain instances,
management retained the services of a certified independent appraiser to assist
in determining the market value of the property. In these cases, the independent
appraisers utilized both the Sales Comparison and Income Capitalization methods
in their determination of fair value.
Upon implementation of SFAS#121 in 1995, management performed
another review of its portfolio and determined that certain estimates and
assumptions had changed from its previous review, causing the net carrying value
of certain assets to exceed the undiscounted cash flows. An impairment was
indicated for such properties, so management estimated their fair values using
either discounted cash flows or market comparables, as most appropriate for each
property. As a result of this process, additional write-downs to fair value
totaling $23,769,050 were required in 1995.
After implementation of SFAS#121 as described above, certain
of the Partnership's assets have been written down to their estimated fair
values, while others remain at depreciated cost. Thus, the net carrying value of
the Partnership's asset portfolio may differ materially from its fair value.
However, the write-downs for impairment in 1995 and in prior years do not affect
the tax basis of the assets and the write-downs are not included in the
determination of taxable income or loss.
Because the determination of both net realizable value and
fair value is based upon projections of future economic events such as property
occupancy rates, rental rates, operating cost inflation and market
capitalization rates which are inherently subjective, the amounts ultimately
realized at disposition may differ materially from the net carrying values as of
December 31, 1995 and 1994. The cash flows used to determine fair values and net
realizable values are based on good faith estimates and assumptions developed by
management. Inevitably, unanticipated events and circumstances may occur and
some assumptions may not materialize; therefore, actual results may vary from
the estimate and the variances may be material. The Partnership may provide
additional losses in subsequent years and such write-downs could be material.
The following table represents the write-downs for impairment
recorded on certain of the Partnership's properties for the years set forth
below.
<TABLE>
<CAPTION>
During the Year Ended December 31,
-------------------------------------------------------------
Property 1995 1994 1993 1992
- - -------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Century Park I $ 1,250,000 $ 0 $ 5,900,000 $ 4,550,000
568 Broadway 2,569,050 0 700,650 7,551,450
Seattle Tower 3,550,000 0 0 2,500,000
Commonwealth 1,700,000 600,000 0 3,500,000
Commerce Plaza I 0 0 2,700,000 0
Melrose Crossing 7,200,000 0 4,900,000 0
Matthews Festival 5,300,000 0 0 0
230 East Ohio 2,200,000 0 3,600,000 3,000,000
----------- -------- ----------- -----------
$23,769,050 $600,000 $17,800,650 $21,101,450
=========== ======== =========== ===========
</TABLE>
The details of each write-down are as follows:
Century Park I
The former sole tenant at Century Park I, General Dynamics
Corp. vacated 52,740 square feet of space as of June 30, 1993 and the balance of
its space as of December 31, 1993 totaling 119,394 square feet pursuant to the
terms of its leases. On July 1, 1993 a 51,242 square foot lease was signed with
San Diego Gas and Electric for a 13-year, 10 month term with a cancellation
option exercisable between the fifth and sixth years. Due to the soft market in
the greater San Diego area, management concluded that the property's estimated
net realizable value was below its net carrying value. The net realizable value
was based on the property's estimated undiscounted future cash flows over a
5-year period and an assumed sale at the end of the holding period using a 10%
capitalization rate. Management, therefore, recorded a write-down for impairment
of $9,100,000 in 1992 of which the Partnership's share was $4,550,000.
Subsequently, management engaged the services of a certified independent
appraiser to perform a written appraisal of the market value of the property.
Based on the results of the appraisal, management recorded an additional
$11,800,000 write-down for impairment in 1993 of which the Partnership's share
was $5,900,000.
Since the date of the above mentioned appraisal, market
conditions surrounding Century Park I deteriorated causing higher vacancy and
lower rental rates. Leasing expectations were not achieved and capital
expenditures exceeded projections due to converting the building from a single
user to multi-tenancy capabilities. In early 1995, occupancy was only 25%. Since
the revised estimate of undiscounted cash flows over a 15-year holding period
prepared in connection with the implementation of SFAS#121 in 1995 yielded a
result lower than the asset's net carrying value, management determined that an
impairment existed. Management estimated the property's fair value using
expected cash flows discounted at 13% over 15 years and an assumed sale at the
end of the holding period using a 10% capitalization rate, in order to determine
the write-down for impairment. The fair value estimate resulted in a $2,500,000
write-down for impairment in 1995 of which the Partnership's share was
$1,250,000.
568 Broadway
The recession which occurred prior to 1992 had a particularly
devastating effect on the photography studios which depend heavily on
advertising budgets and art galleries as a source of business, resulting in many
tenant failures. Due to the poor market conditions in the Soho area of New York
City where 568 Broadway is located and the accompanying high vacancies and low
absorption rates which resulted in declining rental rates, management concluded
that the property's estimated net realizable value was below its net carrying
value. The net realizable value was based on sales of comparable buildings which
indicated a value of approximately $65 per square foot. Management, therefore,
recorded a write-down for impairment of $19,400,000 in 1992 of which the
Partnership's share was $7,551,450. Subsequently, management engaged the
services of a certified independent appraiser to perform a written appraisal of
the market value of the property. Based on the results of the appraisal,
management recorded an additional $1,800,000 write-down for impairment in 1993
of which the Partnership's share was $700,650.
Since the date of the above mentioned appraisal, significantly
greater capital improvement expenditures than were previously anticipated have
been required in order to render 568 Broadway more competitive in the New York
market. Since the revised estimate of undiscounted cash flows over a 15-year
holding period prepared in connection with the implementation of SFAS#121 in
1995 yielded a result lower than the asset's net carrying value, management
determined that an impairment existed. Management estimated the property's fair
value in order to determine the write-down for impairment. Because the estimate
of fair value using expected cash flows discounted at 13% over 15 years and an
assumed sale at the end of the holding period using a 10% capitalization rate
yielded a result which, in management's opinion, was lower than the property's
value in the marketplace, the property was valued using sales of comparable
buildings which indicated a fair value of $45 per square foot. This fair value
estimate resulted in a $6,600,000 write-down for impairment in 1995 of which the
Partnership's share was $2,569,050.
Seattle Tower
Seattle Tower's occupancy declined from 90% when originally
purchased to 80% as of December 31, 1991. While occupancy recovered somewhat to
83% at December 31, 1992, the average base rent per square foot declined 8% from
$14.00 per square foot at the date of acquisition to an average rate of
approximately $12.87 per square foot at December 31, 1992. Management concluded
that the property's estimated net realizable value was below its net carrying
value. The net realizable value was based on the property's estimated
undiscounted future cash flows over a 5- year period, reflecting expected cash
flow due to lower rental rates, and an assumed sale at the end of the holding
period using a 10% capitalization rate. Management, therefore, recorded a
write-down for impairment of $5,000,000 in 1992 of which the Partnership's share
was $2,500,000.
The Partnership has not been able to achieve leasing
expectations at Seattle Tower and occupancy has remained at approximately 80%
over the past few years. In addition, market rents have remained lower than
projected. As a result, actual income levels at Seattle Tower have not met and
are not expected to meet income levels projected during management's impairment
review in 1994. In addition, projected capital expenditures exceed amounts
previously anticipated for such expenditures. Since the revised estimate of
undiscounted cash flows over a 15-year holding period prepared in connection
with the implementation of SFAS#121 in 1995 yielded a result lower than the
asset's net carrying value management determined that an impairment existed.
Management estimated the property's fair value in order to determine the
write-down for impairment. Because the estimate of fair value using expected
cash flows discounted at 13% over 15 years and an assumed sale at the end of the
holding period using a 10% capitalization rate yielded a result which, in
management's opinion, was lower than the property's value in the marketplace,
the property was valued using sales of comparable buildings which indicated a
fair value of $25 per square foot. This fair value estimate resulted in a
$7,100,000 write-down for impairment in 1995 of which the Partnership's share
was $3,550,000.
Commonwealth
Commonwealth Industrial Park's occupancy and rental rates
declined sharply beginning in 1991. Due to these factors and the soft market
conditions for industrial warehouse space in the North Orange County,
California, management concluded that the property's estimated net realizable
value was below its net carrying value. The net realizable value was based on
the property's estimated undiscounted future cash flows over a 5-year period,
reflecting a 25% decrease in rental rates and a 19% decrease in occupancy since
the purchase of the property in 1987, and an assumed sale at the end of the
holding period using a 10% capitalization rate. Management, therefore, recorded
a write-down for impairment of $3,500,000 in 1992. Subsequently, management
engaged the services of a certified independent appraiser to perform a written
appraisal of the market value of the property. Based on the results of the
appraisal, management recorded an additional $600,000 write-down for impairment
in 1994.
Since the date of the above mentioned appraisal,
Commonwealth's occupancy has remained low. In addition, the property will
require more capital expenditures than were previously anticipated resulting in
lower expected cash flow in future periods. Since the revised estimate of
undiscounted cash flows over a 15-year holding period prepared in connection
with the implementation of SFAS#121 in 1995 yielded a result lower than the
asset's net carrying value, management determined that an impairment existed.
Management estimated the property's fair value, using expected cash flows
discounted at 13% over 15 years and an assumed sale at the end of the holding
period using a 10% capitalization rate, in order to determine the write-down for
impairment. This fair value estimate resulted in a $1,700,000 write-down for
impairment in 1995.
Commerce Plaza
Commerce Plaza's occupancy (originally comprised primarily of
insurance and high technology firms) declined from nearly 100% at the date of
acquisition in 1987 to 86% at December 31, 1993. As tenant leases were renewed,
the average rental rate per square foot declined from approximately $14.00 per
square foot at acquisition to $11.00 in 1993. Consequently, management engaged
the services of a certified independent appraiser to perform a written appraisal
of the market value of the property. Based on the results of the appraisal,
management recorded a $2,700,000 write-down for impairment in 1993.
Melrose Crossing
In 1993, management determined that the estimated net
realizable value of the Melrose Crossing property was below its net carrying
value. The net realizable value was based on undiscounted future cash flows over
5 years and an assumed sale at the end of the holding period using a 10%
capitalization rate. Consequently, management engaged the services of a
certified independent appraiser to perform a written appraisal of the market
value of the property. Based on the results of the appraisal, management
recorded a $4,900,000 write-down for impairment in 1993.
Occupancy at Melrose Crossing has declined from the date of
management's latest impairment review to 50% in early 1995. As a result, income
levels have not met and are not expected to meet projected income levels. In
addition, rental rates have declined and real estate taxes are in excess of
amounts previously projected resulting in lower cash flows. Since the revised
estimate of undiscounted cash flows over a 15-year holding period prepared in
connection with the implementation of SFAS#121 in 1995 yielded a result lower
than the asset's net carrying value, management determined that an impairment
existed. Management estimated the property's fair value in order to determine
the write-down for impairment. Because the estimate of fair value using expected
cash flows discounted at 13% over 15 years and an assumed sale at the end of the
holding period using a 10% capitalization rate yielded a result which, in
management's opinion, was lower than the property's value in the marketplace,
the property was valued using sales of comparable buildings which indicated a
fair value of $15 per square foot. This fair value estimate resulted in a
$7,200,000 write-down for impairment in 1995.
Matthews Festival
The anchor tenant has not operated its store at Matthews
Festival since 1990 while continuing to make rental payments under the terms of
the lease. However, the absence of an operating anchor tenant has adversely
impacted both the lease-up of the remaining space at the property and rental
rates, and has required additional tenant procurement costs. Therefore, actual
income levels have not met and are not expected to meet income levels projected
during management's impairment review in 1994. Since the revised estimate of
undiscounted cash flows over a 15-year holding period prepared in connection
with the implementation of SFAS#121 in 1995 yielded a result lower than the
asset's net carrying value, management determined that an impairment existed.
Management estimated the property's fair value in order to determine the
write-down for impairment. Because the estimate of fair value using expected
cash flows discounted at 13% over 15 years and an assumed sale at the end of the
holding period using a 10% capitalization rate yielded a result which, in
management's opinion, was lower than the property's value in the marketplace,
the property was valued using sales of comparable buildings which indicated a
fair value of $20 per square foot. This fair value estimate resulted in a
$5,300,000 write-down for impairment in 1995.
230 East Ohio Street
Occupancy at 230 East Ohio Street declined significantly in
1991 and 1992. This decline in occupancy and a concurrent decline in occupancy
rates and high operating costs in the Chicago area created a situation where the
property's rental revenue was approximately equal to operating expenses. Due to
the soft market conditions in the Chicago market (especially for Class B
buildings such as this) and the uncertainty that the situation would improve in
the future, management concluded that the property's estimated net realizable
value was below its net carrying value. The net realizable value was based on
the property's estimated undiscounted future cash flows over a 5-year period,
reflecting expected cash flow from lower occupancy anticipated for this
particular type of building, and an assumed sale at the end of the holding
period using a 10% capitalization rate. Management, therefore, recorded a
write-down for impairment of $3,000,000 in 1992. Subsequently, management
engaged the services of a certified independent appraiser to perform a written
appraisal of the market value of the property. Based on the results of the
appraisal, management recorded an additional $3,600,000 write-down for
impairment in 1993.
Since the date of the above mentioned appraisal, the
Partnership has not been able to achieve leasing expectations at 230 East Ohio
Street and occupancy has remained low. In addition, real estate taxes and other
costs have exceeded expectations. Since the revised estimate of undiscounted
cash flows over a 15-year holding period prepared in connection with the
implementation of SFAS#121 in 1995 yielded a result lower than the asset's net
carrying value, management determined that an impairment existed. Management
estimated the property's fair value in order to determine the write-down for
impairment. Because the estimate of fair value using expected cash flows
discounted at 13% over 15 years and an assumed sale at the end of the holding
period using a 10% capitalization rate yielded a result which, in management's
opinion, was lower than the property's value in the marketplace, the property
was valued using sales of comparable buildings which indicated a fair value of
$20 per square foot. This fair value estimate resulted in a $2,200,000
write-down for impairment in 1995.
Results Of Operations
1995 vs. 1994
The Partnership experienced a net loss in 1995 compared to net
income for the prior year due primarily to the significant write-downs for
impairment recorded during 1995 as previously discussed.
Rental revenue increased slightly during 1995 as compared to
1994. The most significant increases in revenues occurred at 568 Broadway and
Century Park due to higher occupancy rates during 1995. These increases,
however, were partially offset by decreases in revenues during 1995 at Melrose
Crossing as certain tenants filed for bankruptcy. Revenues at the other
properties generally remained consistent in 1995 as compared to 1994.
Costs and expenses increased during 1995 as compared to 1994
due primarily to the write-down for impairment recorded in 1995. Operating
expenses increased during 1995 due to increases in utility costs and real estate
taxes at certain properties, partially offset by decreases in professional fees.
The cost of utilities increased at 568 Broadway due to increased occupancy in
1995. Overall real estate tax expense increased in 1995 as tax refunds received
for 230 East Ohio Street in 1994 reduced the net expense in that year. However,
these increases were partially offset by a decrease in professional fees at
Melrose Crossing as litigation with a bankrupt tenant was substantially
completed in 1994. Depreciation expense for 1995 decreased due to lower asset
carrying values as a result of the write-down recorded during 1995. The
partnership asset management fee, administrative expenses, and property
management fees remained relatively constant in 1995 as compared to 1994.
Interest income increased due to higher interest rates and
higher cash investment balances for 1995 as compared to 1994. Other income,
which consists of investor ownership transfer fees, increased as compared to
1994 due to a greater number of transfers in 1995.
1994 vs. 1993
The Partnership experienced net income in 1994 compared to a
net loss in the prior year primarily due to the significant write-down for
impairment recorded in 1993. The Partnership experienced a decrease in costs and
expenses which exceeded the decrease in revenues for 1994 as compared to 1993.
Rental revenues decreased primarily at Century Park I, Commonwealth, Melrose
Crossing and 230 East Ohio Street. The decrease was partially offset by an
increase in rental revenue at Commerce Plaza. Century Park experienced a
decrease in rental revenues due to the move-out of General Dynamics at December
31, 1993, partially offset by the tenancy of San Diego Gas & Electric. The
decrease in rental revenues at Commonwealth was caused by two tenants filing for
bankruptcy in the latter part of 1993 which no longer occupy the premises.
Melrose Crossing experienced a decrease in rental revenues due to Herman's
bankruptcy, which occurred in mid-1993. The decrease in rental revenues at 230
East Ohio Street was a result of two tenant move-outs due to liquidation in late
1993. The increase in rental revenues at Commerce Plaza was due to a tenant
buying out its lease in May 1994.
Costs and expenses decreased for 1994 as compared to 1993 due
primarily to the decrease in the write-down for impairment in 1994 compared to
1993 as previously discussed. The decrease was also attributable to decreases in
operating expenses, depreciation and amortization, administrative expenses and
property management fees. The decrease in operating expenses was primarily
attributable to decreases in bad debt expense at Commonwealth, Matthews Festival
and Melrose Crossing, in addition to a reduction of real estate taxes at Melrose
Crossing and 230 East Ohio Street. The bad debt decreases were due to fewer
write-offs of non-paying tenants compared to the prior year as the financial
health of the Partnership's tenants continued generally to improve. The decrease
in the aforementioned expenses was partially offset by an increase in insurance
due to higher rates. The decrease in depreciation and amortization expense was
due to lower carrying values of certain properties as a result of write-downs
for impairment recorded on them, partially offset by increases due to capital
and tenant improvement work. The decrease in administrative expenses was mainly
due to lower legal fees and miscellaneous expenses partially offset by an
increase in partnership allocated payroll expenses. The decrease in property
management fees was due to lower rental revenue.
Interest income increased in 1994 as compared to 1993 due to
higher interest rates available on short-term investments. Other income
decreased in 1994 as compared to 1993 as a result of fewer investor ownership
transfers as compared to the prior year.
Inflation is not expected to have a material impact on the
Partnership's operations or financial position.
Legal Proceedings
The Partnership is a party to certain litigation. See Note 8
to the Partnership's financial statements for a description thereof.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
HIGH EQUITY PARTNERS L.P. - SERIES 86
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
I N D E X
Independent Auditors' report
Financial statements, years ended
December 31, 1995, 1994 and 1993
Balance Sheets
Statements of Operations
Statements of Partners' Equity
Statements of Cash Flows
Notes to Financial Statements
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of High Equity Partners L.P. - Series 86
We have audited the accompanying balance sheets of High Equity Partners L.P. -
Series 86 (a Delaware limited partnership) as of December 31, 1995 and 1994, and
the related statements of operations, partners' equity and cash flows for each
of the three years in the period ended December 31, 1995. Our audits also
included the financial statement schedule listed in the Index at Item 14(a)2.
These financial statements and the financial statement schedule are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements and financial statement 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, such financial statements present fairly, in all material
respects, the financial position of High Equity Partners L.P. - Series 86 at
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. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 2, in 1995 the Partnership changed its method of recording
write-downs for impairment of its investments in real estate to conform with
Statement of Financial Accounting Standards No. 121.
DELOITTE & TOUCHE LLP
March 15, 1996
New York, NY
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
REAL ESTATE .................................... $ 51,326,327 $ 74,536,039
CASH AND CASH EQUIVALENTS ...................... 4,752,024 5,750,089
OTHER ASSETS ................................... 3,590,638 2,812,387
RECEIVABLES .................................... 597,944 583,748
------------ ------------
TOTAL ASSETS ................................... $ 60,266,933 $ 83,682,263
============ ============
LIABILITIES AND PARTNERS' EQUITY
ACCOUNTS PAYABLE AND ACCRUED EXPENSES .......... $ 1,963,371 $ 1,754,458
DUE TO AFFILIATES .............................. 490,095 494,417
DISTRIBUTIONS PAYABLE .......................... 383,754 383,754
------------ ------------
Total liabilities ......................... 2,837,220 2,632,629
========= =========
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY
Limited partners' equity
(588,010 units issued and outstanding) .... 61,907,403 84,346,327
General partners' deficit ..................... (4,477,690) (3,296,693)
------------ ------------
Total partners' equity .................... 57,429,713 81,049,634
------------ ------------
TOTAL LIABILITIES AND PARTNERS' EQUITY ......... $ 60,266,933 $ 83,682,263
============ ============
</TABLE>
See notes to financial statements
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Rental revenue .................................. $ 10,452,432 $ 10,233,925 $ 11,436,166
------------ ------------ ------------
Costs and Expenses
Operating expenses ....................... 4,962,913 4,723,268 5,703,256
Depreciation and amortization ............ 1,858,404 1,901,778 2,202,622
Partnership asset management fee ......... 1,406,204 1,406,204 1,397,312
Administrative expenses .................. 522,657 493,944 581,111
Property management fee .................. 379,720 364,015 452,880
Write-down for impairment ................ 23,769,050 600,000 17,800,650
------------ ------------ ------------
32,898,948 9,489,209 28,137,831
------------ ------------ ------------
(Loss) income before interest and other income .. (22,446,516) 744,716 (16,701,665)
Interest income .......................... 303,186 157,726 131,717
Other income ............................. 58,425 33,865 58,364
------------ ------------ ------------
Net (loss) income ............................... $(22,084,905) $ 936,307 $(16,511,584)
============ ============ ============
Net (loss) income attributable to:
Limited partners ......................... $(20,980,660) $ 889,492 $(15,686,004)
General partners ......................... (1,104,245) 46,815 (825,580)
------------ ------------ ------------
Net (loss) income ............................... $(22,084,905) $ 936,307 $(16,511,584)
============ ============ ============
Net (loss) income per unit of limited partnership
interest (588,010 units outstanding) ..... $ (35.68) $ 1.51 $ (26.68)
============ ============ ============
</TABLE>
See notes to financial statements
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
STATEMENTS OF PARTNERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
General Limited
Partners' Partners'
Deficit Equity Total
------------- ------------- -------------
<S> <C> <C> <C>
Balance, January 1, 1993 .................. $ (2,350,500) $ 102,323,974 $ 99,973,474
Net loss .................................. (825,580) (15,686,004) (16,511,584)
Distributions as a return of capital
($2.96 per limited partnership unit) (91,606) (1,740,510) (1,832,116)
------------- ------------- -------------
Balance, December 31, 1993 ................ (3,267,686) 84,897,460 81,629,774
Net income ................................ 46,815 889,492 936,307
Distributions as a return of capital
($2.45 per limited partnership unit) (75,822) (1,440,625) (1,516,447)
------------- ------------- -------------
Balance, December 31, 1994 ................ (3,296,693) 84,346,327 81,049,634
Net loss .................................. (1,104,245) (20,980,660) (22,084,905)
Distributions as a return of capital
($2.48 per limited partnership unit) (76,752) (1,458,264) (1,535,016)
------------- ------------- -------------
Balance, December 31, 1995 ................ $ (4,477,690) $ 61,907,403 $ 57,429,713
============= ============= =============
</TABLE>
See notes to financial statements
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ..................................... $(22,084,905) $ 936,307 $(16,511,584)
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Write-down for impairment ........................ 23,769,050 600,000 17,800,650
Depreciation and amortization .................... 1,858,404 1,901,778 2,202,622
Straight-line adjustment for stepped lease rentals (375,772) (243,082) (75,724)
Changes in assets and liabilities
Accounts payable and accrued expenses ............ 208,913 (292,764) 238,171
Receivables ...................................... (14,196) 18,614 434,032
Due to affiliates ................................ (4,322) 476,201 (23,831)
Other assets ..................................... (620,024) (193,412) (231,409)
------------ ------------ -----------
Net cash provided by operating activities ........ 2,737,148 3,203,642 3,832,927
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from condemnation of land .................... -- -- 13,700
Improvements to real estate ........................... (2,200,197) (1,200,700) (1,328,282)
------------ ------------ -----------
Net cash used in investing activities ............ (2,200,197) (1,200,700) (1,314,582)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners ............................. (1,535,016) (1,832,115) (2,005,426)
------------ ------------ -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS ...................................... (998,065) 170,827 512,919
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD ................................... 5,750,089 5,579,262 5,066,343
------------ ------------ -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD ......................................... $ 4,752,024 $ 5,750,089 $ 5,579,262
============ ============ ============
</TABLE>
See notes to financial statements
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. ORGANIZATION
High Equity Partners L.P. - Series 86 (the "Partnership"), is a limited
partnership, organized under the Delaware Revised Uniform Limited
Partnership Act on November 14, 1985 for the purpose of investing in,
holding and operating income-producing real estate. The Partnership
will terminate on December 31, 2015 or sooner, in accordance with the
terms of the Agreement of Limited Partnership.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial statements
The financial statements were prepared on the accrual basis of
accounting and include only those assets, liabilities and results of
operations related to the business of the Partnership. The preparation
of financial statements in conformity with generally accepted
accounting principles 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.
Reclassifications
Certain reclassifications have been made to the financial statements
shown for the prior years in order to conform to the current year's
classifications.
Cash and cash equivalents
For purposes of the statements of cash flows, the Partnership considers
all short-term investments which have original maturities of three
months or less from the date of issuance to be cash equivalents.
Organization costs
Organization costs were charged against partners' equity upon the
closing of the public offering on October 1, 1987, in accordance with
prevalent industry practice.
Leases
The Partnership accounts for its leases under the operating method.
Under this method, revenue is recognized as rentals become due, except
for stepped leases where the revenue from the lease is averaged over
the life of the lease.
Depreciation
Depreciation is computed using the straight-line method over the useful
life of the property, which is estimated to be 40 years. The cost of
properties represents the initial cost of the properties to the
Partnership plus acquisition and closing costs.
Investments in joint ventures
For properties purchased in joint venture ownership with affiliated
partnerships, the financial statements present the assets, liabilities,
income and expenses of the joint venture on a pro rata basis in
accordance with the Partnership's percentage of ownership.
Impairment of Assets
In March 1995, the Financial Accounting Standards Board issued
Statement #121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed of ("SFAS #121"). Although the
adoption of the statement is not required until fiscal years beginning
after December 15, 1995, early adoption is encouraged. The Partnership
has decided to implement SFAS #121 for the year ended December 31,
1995.
Under SFAS #121 the initial test to determine if an impairment exists
is to compute the recoverability of the asset based on anticipated cash
flows (net realizable value) compared to the net carrying value of the
asset. If anticipated cash flows on an undiscounted basis are
insufficient to recover the net carrying value of the asset, an
impairment loss should be recognized, and the asset written down to its
estimated fair value. The fair value of the asset is the amount by
which the asset could be bought or sold in a current transaction
between willing parties, that is, other than in a forced or liquidation
sale. The net realizable value of an asset will generally be greater
than its fair value because net realizable value does not discount cash
flows to present value and discounting is usually one of the
assumptions used in determining fair value.
Prior to the adoption of SFAS #121, a write-down for impairment was
recorded based upon a periodic review of each of the properties in the
Partnership's portfolio. Real estate property was previously carried at
the lower of depreciated cost or net realizable value. In performing
the review, management considered the estimated net realizable value of
the property based undiscounted future cash flows taking into
consideration, among other things, the existing occupancy, the expected
leasing prospects for the property and the economic situation in the
region where the property is located. Negative trends in occupancy,
leasing prospects, and the local economy have an adverse effect on
future undiscounted cash flows (net realizable value). In certain
instances, management retained the services of a certified independent
appraiser to assist in determining the market value of the property. In
these cases, the independent appraisers utilized both the Sales
Comparison and Income Capitalization methods in their determination of
the property's value.
Upon implementation of SFAS #121 in 1995, management performed another
review of its portfolio and determined that certain estimates and
assumptions had changed from its previous review, causing the net
carrying value of certain assets to exceed the undiscounted cash flows.
An impairment was indicated for such properties, so management
estimated their fair values using either discounted cash flows or
market comparables as most appropriate for each property. As a result
of this process, additional write-downs to fair value totaling
$23,769,050 were required.
After implementation of SFAS #121 as described above, certain of the
Partnership's assets have been written down to their estimated fair
values, while others remain at depreciated cost. Thus, the net carrying
value of the Partnership's asset portfolio may differ materially from
its fair value. However, the write-downs for impairment in 1995 and in
prior years do not affect the tax basis of the assets and the
write-downs are not included in determination of taxable income or
loss.
Because the determination of both net realizable value and fair value
is based upon projections of future economic events such as property
occupancy rates, rental rates, operating cost inflation and market
capitalization rates which are inherently subjective, the amount
ultimately realized at disposition may differ materially from the net
carrying values as of December 31, 1995 and 1994. The cash flows used
to determine fair value and net realizable value are based on good
faith estimates and assumptions developed by management. Inevitably,
unanticipated events and circumstances may occur and some assumptions
may not materialize; therefore actual results may vary from the
estimates and the variances may be material. The Partnership may
provide additional losses in subsequent years if the real estate market
or local economic conditions change and such write-downs could be
material.
Income taxes
No provision has been made for federal, state and local income taxes
since they are the personal responsibility of the partners.
Net (loss) income and distributions per unit of
limited partnership interest
Net (loss) income and distributions per unit of limited partnership
interest is calculated based upon the number of units outstanding
(588,010), for each of the years ended December 31, 1995, 1994 and
1993.
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
The Investment General Partner of the Partnership, Resources High
Equity, Inc. and the Administrative General Partner of the Partnership,
Resources Capital Corp., were, until November 3, 1994, wholly-owned
subsidiaries of Integrated Resources, Inc. ("Integrated") at which
time, pursuant to the consummation of Integrated's plan of
reorganization, substantially all of the assets of Integrated were sold
to Presidio Capital Corp., a British Virgin Islands Corporation
("Presidio") and the Investment General Partner and the Administrative
General Partner (the "General Partners") became wholly owned
subsidiaries of Presidio. Presidio AGP Corp., which is a wholly-owned
subsidiary of Presidio, became the Associate General Partner on
February 28, 1995, replacing Second Group Partners which withdrew as of
that date. The General Partners and affiliates of the General Partners
are also engaged in businesses related to the acquisition and operation
of real estate. Presidio is also the parent of other corporations that
are or may in the future be engaged in businesses that may be in
competition with the Partnership. Accordingly, conflicts of interest
may arise between the Partnership and such other businesses. Wexford
Management LLC ("Wexford") has been engaged to perform administrative
services to Presidio and its direct and indirect subsidiaries as well
as the Partnership. Wexford is engaged to perform similar services for
other similar entities that may be in competition with the Partnership.
The Partnership has entered into a property management services
agreement with Resources Supervisory Management Corp. ("Resources
Supervisory"), an affiliate of the General Partners, to perform certain
functions relating to the management of the properties of the
Partnership. A portion of the property management fees were paid to
unaffiliated management companies which are engaged for the purpose of
performing certain of the management functions for certain properties.
For the years ended December 31, 1995, 1994 and 1993, Resources
Supervisory was entitled to receive $379,720, $364,015, and $452,880 in
total, respectively, of which $183,240, $201,205 and $212,486 was paid
to unaffiliated management companies.
For the administration of the Partnership, the Administrative General
Partner is entitled to receive reimbursement of expenses of a maximum
of $200,000 per year. The Administrative General Partner was entitled
to receive $200,000 for each of the years ended December 31, 1995, 1994
and 1993.
For managing the affairs of the Partnership, the Administrative General
Partner is entitled to receive a partnership asset management fee equal
to 1.05% of the amount of original gross proceeds paid or allocable to
the acquisition of property by the Partnership. For the years ended
December 31, 1995 and 1994, the Administrative General Partner earned
$1,406,204. For the year ended December 31, 1993, the Administrative
General Partner earned $1,397,312.
The general partners are allocated 5% of the net income or (losses) of
the Partnership which amounted to $(1,104,245), $46,815 and $(825,580)
in 1995, 1994 and 1993, respectively. They are also entitled to receive
5% of distributions, which amounted to $76,752, $75,822 and $91,606 in
1995, 1994 and 1993, respectively.
During the liquidation stage of the Partnership, the Investment General
Partner or an affiliate may be entitled to receive certain fees which
are subordinated to the limited partners receiving their original
invested capital and certain invested capital and certain specified
minimum returns on their investments.
4. REAL ESTATE
Management recorded write-downs for impairment totaling $21,101,450,
$17,800,650, and $600,000 in 1992, 1993, and 1994, respectively. Based
on additional review performed in 1995, and pursuant to adoption of
SFAS #121 as discussed in Note 2, management determined that an
additional write-down of $23,769,050 was required. The details of
write-downs recorded are as follows:
Commonwealth Industrial Park's occupancy and rental rates declined
sharply beginning in 1991. Due to these factors and the soft market
conditions for industrial warehouse space in the North Orange County,
California, management concluded that the property's estimated net
realizable value was below its net carrying value. The net realizable
value was based on the property's estimated undiscounted future cash
flows over a 5 year period, reflecting a 25% decrease in rental rates
and a 19% decrease in occupancy since the purchase of the property in
1987, and an assumed sale at the end of the holding period using a 10%
capitalization rate. Management, therefore, recorded a write-down for
impairment of $3,500,000 in 1992. Subsequently, management engaged the
services of a certified independent appraiser to perform a written
appraisal of the market value of the property. Based on the results of
the appraisal, management recorded an additional $600,000 write-down
for impairment in 1994.
Since the date of the above mentioned appraisal, Commonwealth's
occupancy has remained low. In addition, the property will require more
capital expenditures than were previously anticipated resulting in
lower expected cash flow in future periods. Since the revised estimate
of undiscounted cash flows over a 15 year holding period prepared in
connection with the implementation of SFAS #121 in 1995 yielded a
result lower than the asset's net carrying value, management determined
that an impairment existed. Management estimated the property's fair
value, using expected cash flows discounted at 13% over 15 years and an
assumed sale at the end of the holding period using a 10%
capitalization rate, in order to determine the write-down for
impairment. This fair value estimate resulted in a $1,700,000
write-down for impairment in 1995.
The former sole tenant at Century Park, General Dynamics Corp. vacated
52,740 square feet of space as of June 30, 1993 and the balance of its
space as of December 31, 1993 totaling 119,394 square feet pursuant to
the terms of its leases. On July 1, 1993 a 51,242 square foot lease was
signed with San Diego Gas and Electric for a thirteen-year, ten month
term with a cancellation option exercisable between the fifth and sixth
years. Due to the soft market in the greater San Diego area, management
concluded that the property's estimated net realizable value was below
its net carrying value. The net realizable value was based on the
property's estimated undiscounted future cash flows over a 5 year
period and an assumed sale at the end of the holding period using a 10%
capitalization rate. Management, therefore, recorded a write-down for
impairment of $9,100,000 in 1992 of which the Partnership's share was
$4,550,000. Subsequently, management engaged the services of a
certified independent appraiser to perform a written appraisal of the
market value of the property. Based on the results of the appraisal,
management recorded an additional $11,800,000 write-down for impairment
in 1993 of which the Partnership's share was $5,900,000.
Since the date of the above mentioned appraisal, market conditions
surrounding Century Park deteriorated causing higher vacancy and lower
rental rates. Leasing expectations were not achieved and capital
expenditures exceeded projections due to converting the building from a
single user to multi-tenancy capabilities. In early 1995, occupancy was
only 25%. Since the revised estimate of undiscounted cash flows over a
15 year holding period prepared in connection with the implementation
of SFAS #121 in 1995 yielded a result lower than the asset's net
carrying value, using expected cash flows discounted at 13% over 15
years and an assumed sale at the end of the holding period using a 10%
capitalization rate, in order to determine the write-down for
impairment. This fair value estimate resulted in a $2,500,000
write-down for impairment in 1995 of which the Partnership's share was
$1,250,000.
Occupancy at 230 East Ohio Street declined significantly in 1991 and
1992. This decline in occupancy and a concurrent decline in occupancy
rates and high operating costs in the Chicago area created a situation
where the property's rental revenue was approximately equal to
operating expenses. Due to the soft market conditions in the Chicago
market (especially for Class B buildings such as this) and the
uncertainty that the situation would improve in the future, management
concluded that the property's estimated net realizable value was below
its net carrying value. The net realizable value was based on the
property's estimated undiscounted future cash flows over a 5 year
period, reflecting expected cash flow from lower occupancy anticipated
for this particular type of building, and an assumed sale at the end of
the holding period using a 10% capitalization rate. Management,
therefore, recorded a write-down for impairment of $3,000,000 in 1992.
Subsequently, management engaged the services of a certified
independent appraiser to perform a written appraisal of the market
value of the property. Based on the results of the appraisal,
management recorded an additional $3,600,000 write-down for impairment
in 1993.
Since the date of the above mentioned appraisal, the Partnership has
not been able to achieve leasing expectations at 230 East Ohio and
occupancy has remained low. In addition, real estate taxes and other
costs have exceeded expectations. Since the revised estimate of
undiscounted cash flows over a 15 year holding period prepared in
connection with the implementation of SFAS #121 in 1995 yielded a
result lower than the asset's netcarrying value, management determined
that an impairment existed. Management estimated the property's fair
value in order to determine the write-down for impairment. Because the
estimate of fair value using expected cash flows discounted at 13% over
15 years and an assumed sale at the end of the holding period using a
10% capitalization rate yielded a result which, in management's
opinion, was lower than the property's value in the marketplace, the
property was valued using sales of comparable buildings which indicated
a fair value of $20 per square foot. This fair value estimate resulted
in a $2,200,000 write-down for impairment in 1995.
Seattle Tower's occupancy declined from 90% when originally purchased
to 80% as of December 31, 1991. While occupancy recovered somewhat to
83% at December 31, 1992, the average base rent per square foot
declined 8% from $14.00 per square foot at the date of acquisition to
an average rate of approximately $12.87 per square foot at December 31,
1992. Management concluded that the property's estimated net realizable
value was below its net carrying value. The net realizable value was
based on the property's estimated undiscounted future cash flows over a
5 year period, reflecting expected cash flow due to lower rental rates,
and an assumed sale at the end of the holding period using a 10%
capitalization rate. Management, therefore, recorded a write-down for
impairment of $5,000,000 in 1992 of which the Partnership's share was
$2,500,000.
The Partnership has not been able to achieve leasing expectations at
Seattle Tower and occupancy has remained at approximately 80% over the
past few years. In addition, market rents have remained lower than
projected. As a result, actual income levels at Seattle Tower have not
met and are not expected to meet income levels projected during
management's impairment review in 1994. In addition, projected capital
expenditures exceed amounts previously anticipated for such
expenditures. Since the revised estimate of undiscounted cash flows
over a 15 year holding period prepared in connection with the
implementation of SFAS #121 in 1995 yielded a result lower than the
asset's net carrying value management determined that an impairment
existed. Management estimated the property's fair value in order to
determine the write-down for impairment. Because the estimate of fair
value using expected cash flows discounted at 13% over 15 years and an
assumed sale at the end of the holding period using a 10%
capitalization rate yielded a result which, in managements opinion, was
lower than the property's value in the marketplace, the property was
valued using sales of comparable buildings which indicated a fair value
of $25 per square foot. This fair value estimate resulted in a
$7,100,000 write-down for impairment in 1995 of which the Partnership's
share was $3,550,000.
The recession which occurred prior to 1992 had a particularly
devastating effect on the photography studios which depend heavily on
advertising budgets and art galleries as a source of business,
resulting in many tenant failures. Due to the poor market conditions in
the Soho area of New York City where 568 Broadway is located and the
accompanying high vacancies and low absorption rates which resulted in
declining rental rates, management concluded that the property's
estimated net realizable value was below its net carrying value. The
net realizable value was based on sales of comparable buildings which
indicated a value of approximately $65 per square foot. Management,
therefore, recorded a write-down for impairment of $19,400,000 in 1992
of which the Partnership's share was $7,551,450. Subsequently,
management engaged the services of a certified independent appraiser to
perform a written appraisal of the market value of the property. Based
on the results of the appraisal, management recorded an additional
$1,800,000 write-down for impairment in 1993 of which the Partnership's
share was $700,650.
Since the date of the above mentioned appraisal, significantly greater
capital improvement expenditures than were previously anticipated have
been required in order to render 568 Broadway more competitive in the
New York market. In addition, occupancy levels have remained low. Since
the revised estimate of undiscounted cash flows over a 15 year holding
period prepared in connection with the implementation of SFAS #121 in
1995 yielded a result lower than the asset's net carrying value,
management determined that an impairment existed. Management estimated
the property's fair value in order to determine the write-down for
impairment. Because the estimate of fair value using expected cash
flows discounted at 13% over 15 years and an assumed sale at the end of
the holding period using a 10% capitalization rate yielded a result
which, in management's opinion, was lower than the property's value in
the marketplace, the property was valued using sales of comparable
buildings which indicated a fair value of $45 per square foot. This
fair value estimate resulted in a $6,600,000 write-down for impairment
in 1995 of which the Partnership's share was $2,569,050.
Commerce Plaza's occupancy (originally comprised primarily of insurance
and high technology firms) declined from nearly 100% at the date of
acquisition in 1987 to 86% at December 31, 1993. As tenant leases were
renewed, the average rental rate per square foot declined from
approximately $14.00 per square foot at acquisition to $11.00 in 1993.
Consequently, management engaged the services of a certified
independent appraiser to perform a written appraisal of the market
value of the property. Based on the results of the appraisal,
management recorded a $2,700,000 write-down for impairment in 1993.
In 1993, management determined that the estimated net realizable value
of the Melrose Crossing property was below its net carrying value. The
net realizable value was based on undiscounted future cash flows over 5
years and an assumed sale at the end of the holding period using a 10%
capitalization rate. Consequently, management engaged the services of a
certified independent appraiser to perform a written appraisal of the
market value of the property. Based on the results of the appraisal,
management recorded a $4,900,000 write-down for impairment in 1993.
Occupancy at Melrose Crossing has declined from the date of
management's impairment review in 1994 to 50% in early 1995. As a
result, income levels have not met and are not expected to meet
projected income levels. In addition, rental rates have declined and
real estate taxes are in excess of amounts previously projected
resulting in lower cash flows. Since the revised estimate of
undiscounted cash flows over a 15 year holding period prepared in
connection with the implementation of SFAS #121 in 1995 yielded a
result lower than the asset's net carrying value, management determined
that an impairment existed. Management estimated the property's fair
value in order to determine the write-down for impairment. Because the
estimate of fair value using expected cash flows discounted at 13% over
15 years and an assumed sale at the end of the holding period using a
10% capitalization rate yielded a result which, in management's
opinion, was lower than the property's value in the marketplace, the
property was valued using sales of comparable buildings which indicated
a fair value of $15 per square foot. This fair value estimate resulted
in a $7,200,000 write-down for impairment in 1995.
The anchor tenant has not operated its store at Matthews Festival since
1990 while continuing to make rental payments under the terms of the
lease. However, the absence of an operating anchor tenant has adversely
impacted both the lease-up of the remaining space at the property and
rental rates, and has required additional tenant procurement costs.
Therefore, actual income levels have not met and are not expected to
meet income levels projected during management's impairment review in
1994. Since the revised estimate of undiscounted cash flows over a 15
year holding period prepared in connection with the implementation of
SFAS #121 in 1995 yielded a result lower than the asset's net carrying
value, management determined that an impairment existed. Management
estimated the property's fair value in order to determine the
write-down for impairment. Because the estimate of fair value using
expected cash flows discounted at 13% over 15 years and an assumed sale
at the end of the holding period using a 10% capitalization rate
yielded a result which, in management's opinion, was lower than the
property's value in the marketplace, the property was valued using
sales of comparable buildings which indicated a fair value of $20 per
square foot. This fair value estimate resulted in a $5,300,000
write-down for impairment in 1995.
The following table is a summary of the Partnership's real estate as
of:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1995 1994
------------ ------------
<S> <C> <C>
Land ..................................... $ 12,305,557 $ 16,813,783
Buildings and improvements .............. 57,485,744 74,546,371
------------ ------------
69,791,301 91,360,154
Less: Accumulated depreciation .......... (18,464,974) (16,824,115)
------------ ------------
$ 51,326,327 $ 74,536,039
============ ============
</TABLE>
The following is a summary of the Partnership's share of anticipated
future receipts under noncancellable leases:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
1996 1997 1998 1999 2000 Thereafter Total
------------ ------------ ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Century Park $ 822,000 $ 837,000 $ 852,000 $ 873,000 $ 862,000 $ 4,703,000 $ 8,949,000
568 Broadway 2,030,000 2,047,000 1,783,000 1,530,000 1,468,000 5,215,000 14,073,000
Seattle Tower 613,000 436,000 298,000 231,000 143,000 235,000 1,956,000
Commonwealth 449,000 370,000 311,000 186,000 187,000 398,000 1,901,000
Commerce Plaza 969,000 627,000 485,000 407,000 323,000 124,000 2,935,000
Matthews Festival 1,263,000 1,228,000 1,231,000 1,155,000 1,122,000 8,505,000 14,504,000
Melrose Park 702,000 245,000 91,000 59,000 49,000 33,000 1,179,000
230 East Ohio 759,000 552,000 404,000 331,000 291,000 806,000 3,143,000
Sutton Square 1,163,000 987,000 917,000 705,000 608,000 4,437,000 8,817,000
TMR 547,000 547,000 181,000 0 0 0 1,275,000
------------ ------------ ----------- ----------- ----------- ------------ ------------
$ 9,317,000 $ 7,876,000 $ 6,553,000 $ 5,477,000 $5,053,000 $ 24,456,000 $58,732,000
============ ============ =========== =========== ========== ============ ===========
</TABLE>
5. DISTRIBUTIONS PAYABLE
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1994
-------- --------
<S> <C> <C>
Limited Partners ($.62 per unit) ............... $364,566 $364,566
General Partners ............................... 19,188 19,188
-------- --------
$383,754 $383,754
======== ========
</TABLE>
Such distributions were paid in the first quarter of 1996 and 1995,
respectively.
6. DUE TO AFFILIATES
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1994
-------- --------
<S> <C> <C>
Partnership asset management fee ................. $351,551 $351,551
Property management fee .......................... 88,544 92,866
Non-accountable expense reimbursement ............ 50,000 50,000
-------- --------
$490,095 $494,417
======== ========
</TABLE>
Such amounts were paid in the first quarter of 1996 and 1995,
respectively.
7. PARTNERS' EQUITY
Units of limited partnership interest are at a stated value of $250. At
December 31, 1995, 1994 and 1993, a total of 588,010 units of limited
partnership interest, including the initial limited partner, had been
issued, for aggregate capital contributions of $147,002,500. In
addition, the general partners contributed a total of $1,000 to the
Partnership.
8. COMMITMENTS AND CONTINGENCIES
a) 568 Broadway Joint Venture is currently involved in litigation with a
number of present or former tenants who are in default on their lease
obligations. Several of these tenants have asserted claims or counter
claims seeking monetary damages. The plaintiffs' allegations include
but are not limited to claims for breach of contract, failure to
provide certain services, overcharging of expenses and loss of profits
and income. These suits seek total damages of in excess of $20 million
plus additional damages of an indeterminate amount. The Broadway Joint
Venture's action for rent against Solo Press was tried in 1992 and
resulted in a judgement in favor of the Broadway Joint Venture for rent
owed. The Partnership believes this will result in dismissal of the
action brought by Solo Press against the Broadway Joint Venture. Since
the facts of the other actions which involve material claims or
counterclaims are substantially similar, the partnership believes that
the Broadway Joint Venture will prevail in those actions as well.
b) A former retail tenant of 568 Broadway (Galix Shops, Inc.) and a
related corporation which is a retail tenant of a building adjacent to
568 Broadway filed a lawsuit in the Supreme Court of the State of New
York, County of New York, against the Broadway Joint Venture which owns
568 Broadway. The action was filed on April 13, 1994. The plaintiffs
allege that by erecting a sidewalk shed in 1991, 568 Broadway deprived
plaintiffs of light, air and visibility to their customers. The
sidewalk shed was erected, as required by local law, in connection with
the inspection and restoration of the 568 Broadway building facade,
which is also required by local law. Plaintiffs further allege that the
erection of the sidewalk shed for a continuous period of over two years
is unreasonable and unjustified and that such conduct by defendants has
deprived plaintiffs of the use and enjoyment of their property. The
suit seeks a judgment requiring removal of the sidewalk shed,
compensatory damages of $20 million, and punitive damages of $10
million. The Partnership believes that this suit is meritless and
intends to vigorously defend it.
c) On or about May 11, 1993 the Partnership was advised of the existence
of an action (the "B&S Litigation") in which a complaint (the "HEP
Complaint") was filed in the Superior Court for the State of California
for the County of Los Angeles (the "Court") on behalf of a purported
class consisting of all of the purchasers of limited partnership
interests in the Partnership.
On April 7, 1994 the plaintiffs were granted leave to file an amended
complaint (the "Amended Complaint"). The Amended Complaint asserted
claims against the General Partners of the Partnership, the general
partners of HEP-85, the managing general partner of HEP-88 and certain
officers of the Administrative and Investment General Partner, among
others. The Investment General Partner of the Partnership is also a
general partner of HEP-85 and HEP-88.
On July 19, 1995, the Court preliminarily approved a settlement of the
B&S Litigation and approved the form of a notice (the "Notice")
concerning such proposed settlement. In response to the Notice,
approximately 1.1% of the limited partners of the three HEP
partnerships (representing approximately 4% of outstanding units)
requested exclusion and 15 limited partners filed written objections to
the settlement. The California Department of Corporations also sent a
letter to the Court opposing the settlement. Five objecting limited
partners, represented by two law firms, also made motions to intervene
so they could participate more directly in the action. The motions to
intervene were granted by the Court on September 14, 1995.
In October and November 1995, the attorneys for the
plaintiffs-intervenors conducted extensive discovery. At the same time,
there were continuing negotiations concerning possible revisions to the
proposed settlement.
On November 30, 1995, the original plaintiffs and the intervening
plaintiffs filed a Consolidated Class and Derivative Action Complaint
("Consolidated Complaint") against the Administrative and Investment
General Partners, the managing general partner of HEP-85, the managing
general partner of HEP-88 and the indirect corporate parent of the
General Partners, alleging various state law class and derivative
claims, including claims for breach of fiduciary duties; breach of
contract; unfair and fraudulent business practices under California
Bus. & Prof. Code Sec. 17200; negligence; dissolution, accounting,
receivership, and removal of general partner; fraud; and negligent
misrepresentation. The Consolidated Complaint alleges, among other
things, that the general partners caused a waste of HEP Partnership
assets by collecting management fees in lieu of pursuing a strategy to
maximize the value of the investments owned by the limited partners;
that the general partners breached their duty of loyalty and due care
to the limited partners by expropriating management fees from the
partnerships without trying to run the HEP Partnerships for the
purposes for which they are intended; that the general partners are
acting improperly to enrich themselves in their position of control
over the HEP Partnerships and that their actions prevent non-affiliated
entities from making and completing tender offers to purchase HEP
Partnership Units; that by refusing to seek the sale of the HEP
Partnerships' properties, the general partners have diminished the
value of the limited partners' equity in the HEP Partnerships; that the
general partners have taken a heavily overvalued partnership asset
management fee; and that limited partnership units were sold and
marketed through the use of false and misleading statements.
On or about January, 1996, the parties to the B & S Litigation agreed
upon a revised settlement, which would be significantly more favorable
to limited partners than the previously proposed settlement. The
revised settlement proposal, like the previous proposal, involves the
reorganization of (i) HEP-85, (ii) the Partnership and, (iii) HEP-88
(collectively, the "HEP Partnerships"), through an exchange (the
"Exchange") in which limited partners (the "Participating Investors")
of the partnerships participating in the Exchange (the "Participating
Partnerships") would receive, in exchange for the partnership units,
shares of common stock ("Shares") of a newly-formed corporation,
Millennium Properties Inc. ("Millennium") which intends to qualify as a
real estate investment trust. Such reorganization would only be
effected with respect to a particular Partnership if holders of a
majority of the outstanding units of that Partnership consent to such
reorganization pursuant to a Consent Solicitation Statement (the
"Consent Solicitation Statement") which would be sent to all limited
partners after the settlement is approved by the Court. In connection
with the Exchange, Participating Investors would receive Shares of
Millennium in exchange for their limited partnership units. 84.65% of
the Shares would be allocated to Participating Investors in the
aggregate (assuming each of the partnerships participate in the
Exchange) and 15.35% of the Shares would be allocated to the general
partners in consideration of the general partners' existing interests
in the Participating Partnerships, their relinquishment of entitlement
to receive fees and expense reimbursements, and the payment by the
general partners of an affiliate of certain amounts for legal fees.
As part of the Exchange, Shares issued to Participating Investors would
be accompanied by options granting such Investors the right to require
an affiliate of the general partners to purchase Shares at a price of
$11.50 per Share, exercisable during the three month period commencing
nine months after the effective date of the Exchange. A maximum of 1.5
million Shares (representing approximately 17.7% of the total Shares
issued to investors if all partnerships participate) would be required
to be purchased if all partnerships participate in the Exchange. Also
as part of the Exchange, the indirect parent of the General Partners
would agree that in the event that dividends paid with respect to the
Shares do not aggregate at least $1.10 per Share for the first four
complete fiscal quarters following the Effective Date, it would make a
supplemental payment to holders of such Shares in the amount of such
difference. The general partners or an affiliate would also provide an
amount, not to exceed $2,232,500 in the aggregate, for the payment of
attorneys' fees and reimbursable expenses of class counsel, as approved
by the Court, and the costs of providing notice to the class (assuming
that all three Partnerships participate in the Exchange). In the event
that fewer than all of the Partnerships participate in the Exchange,
such amount would be reduced. The general partners would advance to the
Partnerships the amounts necessary to cover such fees and expenses of
the Exchange (but not their litigation costs and expenses, which the
general partners would bear). Upon the effectuation of the Exchange,
the B & S Litigation would be dismissed with prejudice.
On February 8, 1996, at a hearing on preliminary approval of the
revised settlement, the Court determined that in light of renewed
objections to the settlement by the California Department of
Corporations, the Court would appoint a securities litigation expert to
evaluate the settlement. The Court stated that it would rule on the
issue of preliminary approval of the settlement after receiving the
expert's report. If the settlement receives preliminary approval, a
revised notice regarding the proposed settlement would be sent to
limited partners, after which the Court would hold a fairness hearing
in order to determine whether the settlement should be given final
approval. If final approval of the settlement is granted by the Court,
the Consent Solicitation Statement concerning the settlement and the
reorganization would be sent to all limited partners. There would be at
least a 60 day solicitation period and a reorganization of the
Partnership cannot be consummated unless a majority of the limited
partners in the Partnership affirmatively voted to approve it.
9. RECONCILIATION OF NET (LOSS) INCOME AND NET ASSETS PER FINANCIAL
STATEMENTS TO TAX REPORTING
The Partnership files its tax returns on an accrual basis and has
computed depreciation for tax purposes using the accelerated cost
recovery and modified accelerated cost recovery systems, which are not
in accordance with generally accepted accounting principles. The
following is a reconciliation of the net (loss) income per the
financial statements to the net taxable loss:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Net (loss) income per financial statements $(22,084,905) $ 936,307 $(16,511,584)
Write-down for impairment ................ 23,769,050 600,000 17,800,650
Tax depreciation in excess of financial
statement depreciation ......... (1,755,692) (1,704,513) (1,359,667)
------------ ------------ ------------
Net taxable loss ......................... $ (71,547) $ (168,206) $ (70,601)
============ ============ ============
</TABLE>
9. RECONCILIATION OF NET (LOSS) INCOME AND NET ASSETS PER FINANCIAL
STATEMENTS TO TAX REPORTING (CONTINUED)
The differences between the Partnership's assets and liabilities for
tax purposes and financial reporting purposes are as follows:
<TABLE>
<CAPTION>
December 31,
1995
------------
<S> <C>
Net assets per financial statements $ 57,429,713
Write-down for impairment 63,271,150
Tax depreciation in excess
of financial statement depreciation (8,940,589)
Gain on admission of joint venture
partner not recognized for tax purposes (454,206)
Organization costs not charged to
partner's equity for tax purposes 4,410,000
------------
Net assets per tax reporting $115,716,068
============
</TABLE>
<PAGE>
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Partnership has no officers or directors. The
Administrative General Partner has overall administrative responsibility for the
Partnership and for operations and for resolving conflicts of interest after the
net proceeds of the offering are invested in properties. The Investment General
Partner has responsibility for the selection, evaluation, negotiation and
disposition of properties. The Associate General Partner does not devote any
material amount of its business time and attention to the affairs of the
Partnership. The Investment General Partner also serves as the managing general
partner of HEP-85 and HEP-88, both limited partnerships with investment
objectives similar to those of the Partnership. The Associate General Partner is
also a general partner in other partnerships affiliated with Presidio and whose
investment objectives are similar to those of the Partnership.
Based on a review of Forms 3 and 4 and amendments thereto
furnished to the Partnership pursuant to Rule 16a-3(e) during its most recent
fiscal year and Forms 5 and amendments thereto furnished to the Partnership with
respect to its most recent fiscal year, and written representations pursuant to
Item 405(b)(2)(i) of Regulation S-K, none of the General Partners, directors or
officers of the Administrative and Investment General Partners or beneficial
owners of more than 10% of the Units failed to file on a timely basis reports
required by Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") during the most recent fiscal or prior fiscal years. No written
representations were received from the partners of the Associate General
Partner.
As of March 15, 1996, the names and ages of, as well as the
positions held by, the officers and directors of the Administrative and
Investment General Partners are as follows:
<TABLE>
<CAPTION>
Has Served as an
Officer and/or
Name Age Position Director Since
- - ---------------------------------- ----- ------------------------------------- ----------------
<S> <C> <C> <C>
Joseph M. Jacobs 43 Director and President November 1994
Jay L. Maymudes 35 Director, Vice President, November 1994
Secretary and Treasurer
Robert Holtz 28 Vice President November 1994
Arthur H. Amron 39 Vice President and Assistant November 1994
Secretary
Frederick Simon 42 Vice President February 1996
</TABLE>
All of the current executive officers and directors were
elected following the consummation of Integrated's plan of reorganization under
which the Administrative and Investment General Partners became indirectly
wholly-owned by Presidio. Biographies for the executive officers and directors
follow:
Joseph M. Jacobs has been a director and President of Presidio
since its formation in August 1994 and a director, Chief Executive Officer,
President and Treasurer of Resurgence Properties Inc., a company engaged in
diversified real estate activities ("Resurgence"), since its formation in March
1994. Since January 1, 1996, Mr. Jacobs has been a member and the President of
Wexford. From May 1994 to December 1995, Mr. Jacobs was the President of Wexford
Management Corp. From 1982 through May 1994, Mr. Jacobs was employed by, and
since 1988 was the President of, Bear Stearns Real Estate Group, Inc., a firm
engaged in all aspects of real estate, where he was responsible for the
management of all activities, including maintaining worldwide relationships with
institutional and individual real estate investors, lenders, owners and
developers.
Jay L. Maymudes has been the Chief Financial Officer, a Vice
President and Treasurer of Presidio since its formation in August 1994 and the
Chief Financial Officer and a Vice President of Resurgence since July 1994,
Secretary of Resurgence since January 1, 1995 and Assistant Secretary from July
1994 to January 1995. Since January 1, 1996, Mr. Maymudes has been the Chief
Financial Officer and a Senior Vice President of Wexford and was the Chief
Financial Officer and a Vice President of Wexford Management Corp. from July
1994 to December 1995. From December 1988 through June 1994, Mr. Maymudes was
the Secretary and Treasurer, and since February 1990 was a Senior Vice President
of Dusco, Inc., a real estate investment advisor.
Robert Holtz has been a Vice President and Secretary of
Presidio since its formation in August 1994 and a Vice President and Assistant
Secretary of Resurgence since its formation in March 1994. Since January 1,
1996, Mr. Holtz has been a Senior Vice President and member of Wexford and was a
Vice President of Wexford Management Corp. from May 1994 to December 1995. From
1989 through May 1994, Mr. Holtz was employed by, and since 1993 was a Vice
President of, Bear Stearns Real Estate Group, Inc., where he was responsible for
analysis, acquisitions and management of the assets owned by Bear Stearns Real
Estate and its clients.
Arthur H. Amron has been a Vice President of certain
subsidiaries of Presidio since November 1994. Since January 1996, Mr. Amron has
been a Senior Vice President and the general counsel of Wexford. Also, from
November 1994 through December 1995, Mr. Amron was the general counsel and, from
March 1995 through December 1995 a Vice President, of Wexford Management Corp.
From 1992 through November 1994, Mr. Amron was an attorney with the law firm of
Schulte, Roth and Zabel.
Frederick Simon was Senior Vice President of Wexford
Management Corp. from November 1995 through December 1995. Since January 1996,
Mr. Simon has been a Senior Vice President of Wexford. He is also a Vice
President of Resurgence. Prior to joining Wexford Management Corp., Mr. Simon
was Executive Vice President and a Partner of Greycoat Real Estate Corporation,
the U.S. arm of Greycoat PLC, a London stock exchange real estate investment and
development company.
All of the directors will hold office, subject to the bylaws
of the Administrative General Partner or the Investment General Partner (as the
case may be), until the next annual meeting of the stockholders of the
Administrative General Partner or the Investment General Partner (as the case
may be) and until their successors are elected and qualified.
There are no family relationships between any executive
officer and any other executive officer or any director of the Administrative
General Partner or the Investment General Partner.
As of March 15, 1996, the names and ages of, as well as the
positions held by, the officers and directors of the Associate General Partner
are as follows:
<TABLE>
<CAPTION>
Has Served as an
Officer and/or
Name Age Position Director Since
- - ---------------------------------- --- ------------------------------------- -----------------
<S> <C> <C> <C>
Robert Holtz 28 Director and President March 1995
Mark Plaumann 40 Director and Vice President March 1995
Jay L. Maymudes 35 Vice President, Secretary and March 1995
Treasurer
Arthur H. Amron 39 Vice President and Assistant March 1995
Secretary
</TABLE>
See the biographies of the above named officers and directors
in the preceding section, except as noted below.
Mark Plaumann has been a Senior Vice President of Wexford
since January 1996. Mr. Plaumann was a Vice President of Wexford Management
Corp. from February 1995 to December 1995 and was employed by Alvarez & Marsal,
Inc., a workout firm as a Managing Director from February 1990 to January 1995.
Mr. Plaumann was employed by American Healthcare Management, Inc. a hospital
management company from February 1985 to January 1990 and by Ernst & Young from
January 1973 to February 1985.
Affiliates of the General Partners are also engaged in
businesses related to the acquisition and operation of real estate.
Many of the officers, directors and partners of the Investment
General Partner, the Administrative General Partner and the Associate General
Partner listed above are also officers and/or directors of the general partners
of other public partnerships controlled by Presidio and various subsidiaries of
Presidio.
Item 11. Executive Compensation.
The Partnership is not required to and did not pay
remuneration to the officers and directors of the Investment General Partner,
Administrative General Partner or the partners of the Associate General Partner.
Certain officers and directors of the Investment General Partner and the
Administrative General Partner receive compensation from the Investment General
Partner and the Administrative General Partner and/or their affiliates (but not
from the Partnership) for services performed for various affiliated entities,
which may include services performed for the Partnership; however, the
Investment General Partner and the Administrative General Partner believe that
any compensation attributable to services performed for the Partnership is
immaterial. See also "Item 13. Certain Relationships and Related Transactions."
Item 12. Security Ownership of Certain Beneficial
Owners and Management.
As of March 15, 1996, no person was known by the Partnership
to be the beneficial owner of more than 5% of the Units.
No directors, officers or partners of the Investment General
Partner or Administrative General Partner presently own any Units.
As of March 1, 1996, there were 8,766,569 outstanding shares
of common stock of Presidio (the "Class A Shares"). As of that date, neither the
individual directors nor the officers and directors of the Investment General
Partner or Administrative General Partner as a group were known by the
Partnership to own more than 1% of the Class A Shares.
The following table sets forth certain information known to
the Partnership with respect to beneficial ownership of the Class A Shares of
Presidio as of March 1, 1996, by each person who beneficially owns 5% or more of
the Class A Shares, $.01 par value. The holders of Class A Shares are entitled
to elect three out of the five members of Presidio's Board of Directors with the
remaining two directors being elected by holders of the Class B Shares, $.01 par
value, of Presidio.
<TABLE>
<CAPTION>
Beneficial Ownership
-------------------------------------------
Number of Percentage
Name of Beneficial Owner Shares Outstanding
- - ------------------------ ----------- -----------
<S> <C> <C>
Thomas F. Steyer 3,169,083(1) 36.1%
Fleur A. Fairman
John M. Angelo 1,223,294(2) 14.0%
Michael L. Gordon
The TCW Group, Inc. 1,151,769(3) 13.1%
and affiliates
Intermarket Corp. 1,000,918(4) 11.4%
</TABLE>
- - ---------------------
(1) As the managing partners of each of Farallon Capital Partners, L.P.,
Farallon Capital Institutional Partners, L.P., Farallon Capital
Institutional Partners II, L.P. and Tinicum Partners, L.P.
(collectively, the "Farallon Partnerships"), Thomas F. Steyer and Fleur
A. Fairman may each be deemed to own beneficially for purposes of Rule
13d-3 of the Exchange Act the 985,135, 1,104,240, 484,180 and 159,271
shares held, respectively, by each of such Farallon Partnerships. These
shares are included in the listed ownership. By virtue of investment
management agreements between Farallon Capital Management, Inc.
("FCMI") and various managed accounts, FCMI has the authority to
purchase, sell and trade in securities on behalf of such accounts and,
therefore, may be deemed the beneficial owner of the 436,257 shares
held in such accounts. Mr. Steyer and Ms. Fairman are the sole
stockholders of FCMI and its Chairman and President, respectively. The
shares beneficially owned by FCMI are included in the listed ownership.
The other general partners of the Farallon Partnerships are David
Cohen, Joseph Downes, Jason Fish, William Mellin, Meridee Moore and
Eric Ruttenberg and such persons may also be deemed to own beneficially
the shares held by the Farallon Partnerships. Each of such persons also
serves as a managing director of FCMI.
(2) John M. Angelo and Michael L. Gordon, the general partners and
controlling persons of AG Partners, L.P., which is the general partner
of Angelo, Gordon & Co., L.P., may be deemed to have beneficial
ownership under Rule 13d-3 of the Exchange Act of the securities
beneficially owned by Angelo, Gordon & Co., L.P. and its affiliates.
Angelo, Gordon & Co., L.P., a registered investment adviser, serves as
general partner of various limited partnerships and as investment
adviser of third party accounts with power to vote and direct the
disposition of Class A Shares owned by such limited partnerships and
third party accounts.
(3) TCW Special Credits, an affiliate of The TCW Group, Inc. serves as
general partner of various limited partnerships and investment advisor
of various trusts and third party accounts with power to vote and
direct the disposition of Class A Shares owned by such limited
partnerships, trusts and third party accounts. TCW Asset Management
Company, a subsidiary of The TCW Group, Inc., is the managing general
partner of TCW Special Credits. The TCW Group, Inc. may be deemed to be
a beneficial owner of such shares for purposes of the reporting
requirements under Rule 13d-3 of the Exchange Act; however, The TCW
Group, Inc. and its affiliates disclaim beneficial ownership of these
shares.
(4) Intermarket Corp. serves as general partner for certain limited
partnerships and as investment advisor for certain corporations and
foundations. As a result of such relationships, Intermarket Corp. may
be deemed to have the power to vote and the power to dispose of Class A
Shares held by such partnerships, corporations, and foundations.
All of Presidio's Class B Shares are owned by IR Partners.
These 1,200,000 Class B Shares are convertible in the future under certain
circumstances into 1,200,000 Class A Shares, however, such shares are not
convertible at present. IR Partners is a general partnership whose general
partners are Steinhardt Management Company Inc. ("Steinhardt Management"),
certain of its affiliates and accounts managed by it and Roundhill Associates.
Roundhill Associates is a limited partnership whose general partner is Charles
E. Davidson, the Chairman of the Board of Presidio. Joseph M. Jacobs, the Chief
Executive Officer and President of Presidio and the President of Wexford, has a
limited partner's interest in Roundhill Associates. Pursuant to Rule 13d-3 under
the Exchange Act, each of Michael H. Steinhardt, the controlling person of
Steinhardt Management and affiliates, and Charles E. Davidson may be deemed to
be beneficial owners of such 1,200,000 shares.
The address of Thomas F. Steyer and the other individuals
mentioned in footnote 1 to the table above (other than Fleur A. Fairman) is c/o
Farallon Capital Partners, L.P., One Maritime Plaza, San Francisco, California
94111 and the address of Fleur A. Fairman is c/o Farallon Capital Management,
Inc., 800 Third Avenue, 40th Floor, New York, New York 10022. The address of IR
Partners and Michael Steinhardt and his affiliates is 605 Third Avenue, 33rd
Floor, New York, New York 10158; the address of Charles E. Davidson is c/o
Wexford Management LLC, 411 West Putnam Avenue, Greenwich, CT 06830. The address
of The TCW Group, Inc. and its affiliates is 865 South Figueroa Street, 18th
Floor, Los Angeles, California 90017. The address of Angelo, Gordon & Co., L.P.
and its affiliates is 245 Park Avenue, 26th Floor, New York, New York 10167. The
address of Intermarket Corp. is 667 Madison Avenue, 7th Floor, New York, New
York 10021.
Item 13. Certain Relationships and Related Transactions.
The General Partners and certain affiliated entities have,
during the year ended December 31, 1995, earned or received compensation or
payments for services from the Partnership or subsidiaries of Presidio as
follows:
<TABLE>
<CAPTION>
Compensation from
Name of Recipient Capacity in Which Served the Partnership
- - ------------------------------------- ------------------------------------ -------------------------
<S> <C> <C>
Resources High Equity Inc. Investment General Partner $1,535 (1)
Resources Capital Corp. Administrative General $1,679,886 (2)
Partner
Presidio AGP Corp. Associate General Partner $1,535 (3)
Second Group Partners
Resources Supervisory Affiliated Property Manager $196,480 (4)
Management Corp.
</TABLE>
- - --------------------
(1) This amount represents the Investment General Partner's share of
distributions of cash from operations. Furthermore, under the
Partnership's Limited Partnership Agreement, 0.1% of the net income and
net loss of the Partnership is allocated to the Investment General
Partner. Pursuant thereto, for the year ended December 31, 1995, $72 of
the Partnership's taxable loss was allocated to the Investment General
Partner.
(2) Of this amount, $73,682 represents the Administrative General Partner's
share of distributions of cash from operations, $200,000 represents
payment for expenses of the Administrative General Partner based upon
the total number of Units outstanding and $1,406,204 represents the
Partnership Asset Management Fee for managing the affairs of the
Partnership. All fees payable to the Administrative General Partner for
the year ended December 31, 1995 have been paid. Furthermore, under the
Partnership's Limited Partnership Agreement 4.8% of the net income and
net loss of the Partnership is allocated to the Administrative General
Partner. Pursuant thereto, for the year ended December 31, 1995, $3,433
of the Partnership's taxable loss was allocated to the Administrative
General Partner.
(3) This amount represents the Associate General Partner's share of
distributions of cash from operations. In addition, for the year ended
December 31, 1995, $72 of the Partnership's taxable loss was allocated
to the Associate General Partner pursuant to the Partnership's Limited
Partnership Agreement (the Associate General Partner is entitled to
receive .1% of the Partnership's net income or net loss).
(4) This amount was earned pursuant to a management agreement with
Resources Supervisory, a wholly-owned subsidiary of Presidio, for
performance of certain functions relating to the management of the
Partnership's properties and the placement of certain tenants at those
properties. The total fee payable to Resources Supervisory was
$379,720, of which $183,240 was paid to unaffiliated management
companies. All property management fees payable at December 31, 1995
have subsequently been paid.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.
(a)(1) Financial Statements: See Index to Financial Statements in
Item 8.
(a)(2) Financial Statement Schedule:
III. Real Estate and Accumulated Depreciation
(a)(3) Exhibits:
3, 4. (a) Amended and Restated Partnership Agreement ("the
Partnership Agreement") of the Partnership incorporated by
reference to Exhibit A to the Prospectus of the Partnership
dated April 25, 1986 included in the Partnership's
Registration Statement on Form S-11 (Reg. No. 33-1853).
(b) First Amendment to the Partnership's Partnership
Agreement, dated as of July 1, 1986, incorporated by reference
to Exhibit 3, 4(b) to the Partnership's Annual Report on Form
10-K for the year ended December 31, 1986.
(c) Amendment dated as of December 1, 1986 to the
Partnership's Partnership Agreement, incorporated by reference
to Exhibits 3, 4 to the Partnership's Current Report on Form
8-K dated December 8, 1986.
(d) Amendment dated as of April 1, 1988 to the Partnership's
Partnership Agreement incorporated by reference to Exhibit 3,
4(d) to the Partnership's Annual Report on Form 10-K for the
year ended December 31, 1988.
10. (a) Management Agreement between the Partnership and Resources
Property Management Corp., incorporated by reference to
Exhibit 10B to the Partnership's Registration Statement on
Form S-11 (Reg. No. 33-1853).
(b) Acquisition and Disposition Services Agreement among the
Partnership, Realty Resources Inc. and Resources High Equity,
Inc., incorporated by reference to Exhibit 10C to the
Partnership's Registration Statement on Form S-11 (Reg. No.
33-1853).
(c) Agreement among Resources High Equity Inc., Integrated
Resources, Inc. and Second Group Partners, incorporated by
reference to Exhibit 10D to the Partnership's Registration
Statement on Form S-11 (Reg. No. 33-1853).
(d) Joint Venture Agreement dated November 2, 1986 between the
Partnership and Integrated Resources High Equity Partners,
Series 85, A California Limited the Partnership, with respect
to Century Park I, incorporated by reference to Exhibit 10(b)
to the Partnership's Current Report on Form 8-K dated November
7, 1986.
(e) Joint Venture Agreement dated October 27, 1986 between the
Partnership and Integrated Resources High Equity Partners,
Series 85, A California Limited Partnership, with respect to
568 Broadway, incorporated by reference to Exhibit 10(b) to
the Partnership's Current Report on Form 8-K dated November
19, 1986.
(f) Joint Venture Agreement dated November 24, 1986 between
the Partnership and Integrated Resources High Equity Partners,
Series 85, A California Limited Partnership, with respect to
Seattle Tower, incorporated by reference to Exhibit 10(b) to
the Partnership's Current Report on Form 8-K dated December 8,
1986.
(g) Amended and Restated Joint Venture Agreement dated
February 1, 1990 among the Partnership, Integrated Resources
High Equity Partners, Series 85, A California Limited the
Partnership and High Equity Partners L.P., Series 88, with
respect to 568 Broadway, incorporated by reference to Exhibit
10(a) to the Partnership's Current Report on Form 8-K dated
February 1, 1990 as filed on March 30, 1990.
(h) Agreement, dated as of March 23, 1990, among the
Partnership, Resources Capital Corp. and Resources Property
Management Corp., with respect to the payment of deferred
fees, incorporated by reference to Exhibit 10(r) to the
Partnership's Annual Report on Form 10-K for the year ended
December 31, 1990.
(i) First Amendment to Amended and Restated Joint Venture
Agreement of 568 Broadway Joint Venture, dated as of February
1, 1990, among the Partnership, High Equity Partners, L.P. -
Series 85 and High Equity Partners, L.P. - Series 88,
incorporated by reference to Exhibit 10(s) to the
Partnership's Annual Report on Form 10-K for the year ended
December 31, 1990.
(j) Form of Termination of Supervisory Management Agreement
(separate agreement entered into with respect to each
individual property) and Form of Supervisory Management
Agreement between the Partnership and Resources Supervisory
(separate agreement entered into with respect to each
individual property), incorporated by reference to Exhibit
10(t) to the Partnership's Annual Report on Form 10-K for the
year ended December 31, 1991.
(b) Reports on Form 8-K:
The Partnership filed the following reports on Form 8-K during the last
quarter of the fiscal year:
None.
<PAGE>
Financial Statement Schedule Filed Pursuant to
Item 14(a)(2)
HIGH EQUITY PARTNERS L.P. - SERIES 86
ADDITIONAL INFORMATION
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
INDEX
Additional financial information furnished pursuant to the requirements of Form
10-K:
Schedules - December 31, 1995, 1994 and 1993 and years then ended, as required:
Schedule III - Real estate and accumulated
depreciation
- Notes to Schedule III - Real
estate and accumulated depreciation
All other schedules have been omitted because they are
inapplicable, not required, or the information is included in the financial
statements or notes thereto.
<PAGE>
SIGNATURES
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.
HIGH EQUITY PARTNERS L.P. - SERIES 86
By: RESOURCES HIGH EQUITY, INC.
Investment General Partner
Dated: March 29, 1996 By: /s/ Joseph M. Jacobs
--------------------
Joseph M. Jacobs
(Principal Executive Officer)
By: RESOURCES CAPITAL CORP.
Administrative General Partner
Dated: March 29, 1996 By: /s/ Jay L. Maymudes
-------------------
Jay L. Maymudes
(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 in
their capacities as officers and directors of Resources High Equity, Inc. and
Resources Capital Corp. on the dates indicated.
Dated: March 29, 1996 By: /s/ Joseph M. Jacobs
--------------------
Joseph M. Jacobs
(Principal Executive Officer)
Dated: March 29, 1996 By: /s/ Jay L. Maymudes
-------------------
Jay L. Maymudes
(Principal Financial and
Accounting Officer)
<PAGE>
<TABLE>
<CAPTION>
HIGH EQUITY PARTNERS L.P. - SERIES 86
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1995
====================================================================================================================================
Costs
Capitalized
Subsequent to
Initial Cost Acquisition
-------------------------- -------------------------
Buildings
and Carrying
Description Encumbrances Land Improvements Improvements Costs
- - -------------------------------------------------------------- ------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
RETAIL:
Melrose Crossing Shopping Center Melrose Park IL $ -- $ 2,002,532 $ 12,721,968 $ 746,647 $ 1,064,777
Matthews Township Festival
Shopping Center Matthews NC -- 2,973,646 12,571,750 223,314 1,581,384
Sutton Square Shopping Center Raleigh NC -- 2,437,500 10,062,500 79,096 1,025,898
------------ ----------- ------------ ----------- -----------
-- 7,413,678 35,356,218 1,049,057 3,672,059
------------ ----------- ------------ ----------- -----------
OFFICE:
Commerce Plaza Office Building Richmond VA -- 733,279 7,093,435 1,433,069 468,324
230 East Ohio Office Building Chicago IL -- 2,472,000 7,828,000 767,818 726,989
Century Park I Office Complex Kearny Mesa CA -- 3,122,064 12,717,936 1,430,301 1,203,130
568 Broadway Office Building New York NY -- 2,318,801 9,821,517 4,746,147 1,220,484
Seattle Tower Office Building Seattle WA -- 2,163,253 5,030,803 1,345,940 486,969
------------ ----------- ------------ ----------- -----------
-- 10,809,397 42,491,691 9,723,275 4,105,896
------------ ----------- ------------ ----------- -----------
INDUSTRIAL:
Commonwealth Industrial Park Fullerton CA -- 3,749,700 7,125,300 125,542 767,573
TMR Warehouses Various OH -- 369,215 5,363,935 17,632 435,653
Melrose (Lot #7) Melrose Park IL -- 450,000 -- -- 36,628
------------ ----------- ------------ ----------- -----------
-- 4,568,915 12,489,235 143,174 1,239,854
------------ ----------- ------------ ----------- -----------
$ -- $22,791,990 $90,337,144 $10,915,506 $ 9,017,809
============ =========== =========== =========== ===========
Note: The aggregate cost for Federal income tax purposes is $133,062,451 at December 31, 1995.
<PAGE>
<CAPTION>
HIGH EQUITY PARTNERS L.P. - SERIES 86
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION -- Continued
December 31, 1995
====================================================================================================================================
Gross Amounts at Which
Reductions Carried at Close Of Period
Recorded --------------------------------------------
Subsequent to
Acquisition Buildings
------------ and
Description Write-downs Land Improvements Total
- - -------------------------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
RETAIL:
Melrose Crossing Shopping Center Melrose Park IL $(12,100,000) $ 569,462 $ 3,866,462 $ 4,435,924
Matthews Township Festival
Shopping Center Matthews NC (5,300,000) 2,249,562 9,800,532 12,050,094
Sutton Square Shopping Center Raleigh NC -- 2,637,550 10,967,444 13,604,994
------------ ----------- ----------- ------------
(17,400,000) 5,456,574 24,634,438 30,091,012
------------ ----------- ----------- ------------
OFFICE:
Commerce Plaza Office Building Richmond VA (2,700,000) 556,352 6,471,755 7,028,107
230 East Ohio Office Building Chicago IL (8,800,000) 635,907 2,358,901 2,994,808
Century Park I Office Complex Kearny Mesa CA (11,700,000) 1,092,744 5,680,687 6,773,431
568 Broadway Office Building New York NY (10,821,150) 922,338 6,363,463 7,285,801
Seattle Tower Office Building Seattle WA (6,050,000) 724,808 2,252,157 2,976,965
------------ ----------- ----------- ------------
(40,071,150) 3,932,149 23,126,963 27,059,112
------------ ----------- ----------- ------------
INDUSTRIAL:
Commonwealth Industrial Park Fullerton CA (5,800,000) 2,032,937 3,935,177 5,968,114
TMR Warehouses Various OH -- 397,271 5,789,164 6,186,435
Melrose (Lot #7) Melrose Park IL -- 486,628 -- 486,628
------------ ----------- ----------- ------------
(5,800,000) 2,916,836 9,724,341 12,641,177
------------ ----------- ----------- ------------
$(63,271,150) $12,305,559 $57,485,742 $ 69,791,301
============ =========== =========== ============
Note: The aggregate cost for Federal income tax purposes is $133,062,451 at December 31, 1995.
<PAGE>
<CAPTION>
HIGH EQUITY PARTNERS L.P. - SERIES 86
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION -- Continued
December 31, 1995
====================================================================================================================================
Accumulated Date
Description Depreciation Acquired
- - ----------------------------------------------------------- ------------ --------
<S> <C> <C>
RETAIL:
Melrose Crossing Shopping Center Melrose Park IL $ 2,407,872 1988
Matthews Township Festival
Shopping Center Matthews NC 2,669,502 1988
Sutton Square Shopping Center Raleigh NC 2,131,477 1988
-----------
7,208,851
-----------
OFFICE:
Commerce Plaza Office Building Richmond VA 1,673,478 1987
230 East Ohio Office Building Chicago IL 1,216,089 1988
Century Park I Office Complex Kearny Mesa CA 2,492,524 1986
568 Broadway Office Building New York NY 2,274,834 1986
Seattle Tower Office Building Seattle WA 1,143,320 1986
-----------
8,800,245
-----------
INDUSTRIAL:
1,402,482 1987
Commonwealth Industrial Park Fullerton CA 1,053,396 1988
TMR Warehouses Various OH -- 1988
Melrose (Lot #7) Melrose Park IL ------------
2,455,878
------------
$ 18,464,974
============
Note: The aggregate cost for Federal income tax purposes is $133,062,451 at December 31, 1995.
</TABLE>
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
================================================================================
(A) RECONCILIATION OF REAL ESTATE OWNED:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR $ 91,360,154 $ 90,759,454 $107,245,522
ADDITIONS DURING THE YEAR
Improvements to Real Estate 2,200,197 1,200,700 1,328,282
OTHER CHANGES
Condemnation of Land (2) -- -- (13,700)
Write-down for Impairment (23,769,050) (600,000) (17,800,650)
------------ ------------ ------------
BALANCE AT END OF YEAR (1) $ 69,791,301 $ 91,360,154 $ 90,759,454
============ ============ ============
</TABLE>
(1) INCLUDES THE INITIAL COST OF THE PROPERTIES PLUS ACQUISTION AND CLOSING
COSTS.
(2) PROCEEDS RECEIVED FOR CONDEMNATION OF LAND AT MATTHEWS FESTIVAL
(B) RECONCILIATION OF ACCUMULATED DEPRECIATION:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------
1995 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR $ 16,824,115 $ 15,175,230 $ 13,214,515
ADDITIONS DURING THE YEAR
Depreciation Expense (1) 1,640,859 1,648,885 1,960,715
------------ ------------ ------------
BALANCE AT END OF YEAR $ 18,464,974 $ 16,824,115 $ 15,175,230
============ ============ ============
</TABLE>
(1) DEPRECIATION IS PROVIDED ON BUILDINGS USING THE STRAIGHT-LINE METHOD OVER
THE USEFUL LIFE OF THE PROPERTY, WHICH IS ESTIMATED TO BE 40 YEARS.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS CONTAINED IN ITEM 8 TO THE HIGH EQUITY PARTNERS L.P. - SERIES 86 1995
FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 4,752,024
<SECURITIES> 0
<RECEIVABLES> 597,944
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 60,266,933
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 57,429,713
<TOTAL-LIABILITY-AND-EQUITY> 60,266,933
<SALES> 0
<TOTAL-REVENUES> 10,452,432
<CGS> 0
<TOTAL-COSTS> 4,962,913
<OTHER-EXPENSES> 27,936,035
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (22,446,516)
<INCOME-TAX> 0
<INCOME-CONTINUING> (22,446,516)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,446,516)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
