SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Fiscal Year Ended December 31, 1996
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.
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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, 1997, 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: in 1996, 568 Broadway represented 18.8%; in 1995, 568
Broadway and Matthews Festival represented 17.4% and 16.4%, respectively; in
1994, Melrose Crossing and Matthews Festival represented approximately 16.1% and
15.8%, respectively.
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The Partnership owned the following properties as of March 15, 1997:
(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 200,002 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, 1997 compared to 74% at January 1,
1996. However, the leasing of 14,705 square feet to Health South/IMC Healthcare
Centers in January 1997 increased the occupancy rate to 81%. There are no leases
scheduled to expire in 1997. Capital expenditures budgeted for 1997 include
replacement of the roof and the installation of an HVAC monitoring system in
Building I.
Century Park I competes with other office parks and office buildings in
the Kearny Mesa submarket where the year-end 1996 vacancy rate was 15%. Net
absorption in the area was 209,397 square feet during 1996. The primary
competition continues to be Metropolitan Office Park with 100,000 square feet of
available space.
(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 100% leased as of
January 1, 1997 compared to 95% as of January 1, 1996. There are no leases which
represent at least 10% of the square footage of the property scheduled to expire
in 1996.
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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, 1997 was 96% compared to 92% at
January 1, 1996. There are no leases which represent at least 10% of the square
footage of the property scheduled to expire during 1996.
Roof replacement and exterior building facade projects have been
budgeted in the aggregate amount of approximately $630,000. The projects are
expected to be completed during the third quarter of 1997.
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 located one 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
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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. During 1996, a five year lease was executed with Alliance
Metals for 57,326 square feet. As a result, the property was 87% leased as of
January 1, 1997, compared to 66% as of January 1, 1996. There are no leases
which represent at least 10% of the square footage of the property scheduled to
expire during 1997.
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 95% leased as of January 1, 1997, compared to 92%
as of January 1, 1996. There are four leases with expirations in 1997 comprising
approximately 34,000 square feet, or 40% of the building. Of those, Robertshaw
Controls, whose lease comprises 13,000 square feet, has renewed. Two others,
totaling 5,650 square feet, are expected to renew. The fourth, Digital Equipment
Corp.("DEC"), which leases 14,876, expired January 31, 1997. Although the tenant
continues to occupy the space, it is expected that DEC will downsize to
approximately 4,000 square feet, with the balance of approximately 11,000 square
feet becoming available. The Partnership has commenced marketing the excess DEC
space.
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. New space continues
to be built in the nearby Innisbrook section; much of it speculative, which
should make the supply side of the market more competitive when it is completed.
(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, 1997, the shopping center was 18% leased, compared to 50% at January 1, 1996.
There are no leases which represent 10% of the square footage of the center that
are scheduled to expire during 1997.
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.
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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. In
January 1996, Coconuts music store defaulted on its lease and vacated its 5,000
square foot space. In July 1996, TJ Maxx closed its 25,000 square foot store,
and the lease expired in November 1996.
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 on North Avenue in the Melrose Park area,
and Home Depot, Office Depot, and Sam's Club have all opened stores nearby on
North Avenue in the last year or two. However, Melrose Crossing which is
situated on Mannheim Road, suffers from poor roadway access from North Avenue
which has become the primary retail thoroughfare in the area. The Partnership is
continuing to market the space to national, local and regional retailers.
However, alternatives to traditional retail may have to be explored to re-tenant
the center. These alternatives include entertainment uses, medical or
educational uses and warehouse/industrial uses.
(7) Matthews Township Festival. On February 23, 1988, the Partnership
purchased a fee simple interest in Matthews Township Festival (" Matthews
Festival"), a community shopping center in suburban Charlotte, North Carolina in
the town of Matthews. Completed in November 1987, Matthews Festival contains
127,388 square feet of rentable space. As of January 1, 1997, the center was 86%
leased as compared to 89% as of January 1, 1996. During 1996, new and renewal
leases were completed representing 6% of the center's leasable space. There are
no leases which represent at least 10% of the square footage of the center
scheduled to expire in 1997. As a result of modifications to the reciprocal
cross easements during 1996, an outparcel with building area of 4,500 square
feet was created in the parking lot. During 1990 the A&P anchor store closed and
the center has suffered a lower level of consumer traffic, sales and occupancy
as a result. A&P remains obligated pursuant to the terms of its lease until 2007
and continues to pay rent.
Matthews Festival is part of a larger overall retail complex containing
approximately 55 acres and zoned for 550,000 square feet of retail space. During
1996, construction of Phase II of the overall complex and a concept restaurant
on an outparcel in front of the center were completed by the original developer.
New retailers include Harris Teeter, Stein Mart, The Home Depot and Hollywood
Video and an additional 25,000 square feet of small shop space. The activity and
traffic resulting from the additional retail space appears to have
had a beneficial effect at Matthews Festival as activity during the last
two quarters has increased.
Competitive retail in the area has grown significantly over the past
year. Matthews Corners, an 180,000 square foot center opened across Independence
Boulevard and includes Hannaford Food and Drug, Marshall's, Linens' n Things and
MJ Designs. Office Max and Homeplace are also under construction in the area. A
large parcel of land directly across Independence Boulevard is zoned for 750,000
square feet of retail space. It has been thought to be a future mall site, but
may evolve as more competing open air retail shopping center space.
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(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 neighborhood shopping center located on a 10 acre site in North Raleigh.
Construction was completed in phases in 1984-85 and 1986-87. Anchor tenants,
Harris Teeter and Eckerd, comprise 44% of the leasable space. Sutton Square was
100% leased as of January 1, 1997 and 1996. During 1996, renewal leases were
completed on 13,833 square feet representing 13.6% of the center and new striped
canopies were installed throughout the center. There are no leases which
represent at least 10% of the square footage of the center scheduled to expire
in 1997. Parking lot and landscaping upgrades are budgeted for 1997.
Sutton Square and the overall North Raleigh market continue to reflect
high occupancy rates and with very little new construction underway, the demand
for small shop space should remain strong. The center is located on a main
retail corridor and competes with numerous other neighborhood and community
centers. Sixteen are located within a three mile radius. During 1996, Hannaford
Grocery and Kroger opened new and expanded stores in the North Raleigh market
but are not expected to have a long term impact on Harris Teeter's sales.
(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 74% leased as of January 1, 1997 compared
to 75% as of January 1, 1996. There are no leases which represent at least 10%
of the square footage of the property scheduled to expire during 1997.
The downtown Chicago market remains soft and rental rates remain
depressed by the widespread availability of sub-let space.
(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
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, 1997 and 1996, the Orange and Grove City
buildings were each 100% leased to a single tenant. As of January 1, 1997, the
Hilliard property was 100% leased compared to 74% as of January 1, 1996. This
includes a one-year, cancelable lease with The Packaging Group expiring on
September 30, 1997, representing approximately 26% of the building.
Additionally, the Volvo/GM Heavy Truck lease covering 583,000 square feet in
Orange Township expires on December 31, 1997. The Partnership is currently
negotiating an extension of this lease.
The TMR Warehouses compete with numerous other warehouses in the market
area which currently have in excess of one million square feet available.
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(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).
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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 "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").
On November 30, 1995, after the Court preliminarily approved a
settlement of the B&S Litigation but ultimately declined to grant final approval
and after the Court granted motions to intervene by the original plaintiffs, the
original and 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. The Consolidated Complaint alleges 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 and receivership; 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
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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.
In January, 1996, the parties to the B&S Litigation agreed upon a
revised settlement (the "Revised Settlement"). The core feature of the Revised
Settlement was the surrender by the general partners of certain fees that they
are entitled to receive, the reorganization of the Partnership, HEP-85 and
HEP-88 (collectively, the "HEP Partnerships") into a publicly traded real estate
investment trust ("REIT"), and the issuance of stock in the REIT to the limited
partners (in exchange for their limited partnership interests) and General
Partners (in exchange for their existing interest in the HEP Partnerships and
the fees being given up). The General Partners believe that the principal
benefits of the Revised Settlement were (1) substantially increased
distributions to limited partners, (2) market liquidity through a NASDAQ listed
security, and (3) the opportunity for growth and diversification that was not
permitted under the Partnership structure. There were also believed to be other
significant tax benefits, corporate governance advantages and other benefits of
the Revised Settlement.
On July 18, 1996, the Court preliminarily approved the Revised
Settlement and made a preliminary finding that the Revised Settlement was fair,
adequate and reasonable to the class. In August 1996, the Court approved the
form and method of notice regarding the Revised Settlement which was sent to
limited partners.
Only approximately 2.5% of the limited partners of the HEP Partnerships
elected to "opt out" of the Revised Settlement. Despite this, following the
submission of additional materials, the Court entered an order on January 14,
1997 rejecting the Revised Settlement and concluding that there had not been an
adequate showing that the settlement was fair and reasonable. Thereafter, the
plaintiffs filed a motion seeking to have the Court reconsider its order.
Subsequently, the defendants withdrew the revised settlement and at a hearing on
February 24, 1997, the Court denied the plaintiffs' motion. Also at the February
24, 1997 hearing, the Court recused itself from considering a motion to
intervene and to file a new complaint in intervention by one of the objectors to
the Revised Settlement, granted the request of one plaintiffs' law firm to
withdraw as class counsel and scheduled future hearings on various matters.
The Limited Partnership Agreement provides for indemnification of the
General Partners and their affiliates in certain circumstances. The Partnership
has agreed to reimburse the General Partners for their actual costs incurred in
defending this litigation and the costs of preparing settlement materials.
Through December 31, 1996, the General Partners had billed the Partnership a
total of $824,511 for these costs which was paid in February 1997.
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The Partnerships and the General Partners believe that each of the
claims asserted in the Consolidated Complaint are meritless and intend to
continue to vigorously defend the B&S Litigation. It is impossible at this time
to predict what the defense of the B&S Litigation will cost, the Partnership's
financial exposure as a result of the indemnification agreement discussed above,
and whether the costs of defending could adversely affect the Managing General
Partner's ability to perform its obligations to the Partnership.
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.
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, 1997, there were 12,684 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 1995 and
1996 were as follows:
<TABLE>
<CAPTION>
Distributions for the Amount of Distribution
Quarter Ended Per Unit
--------------------- --------
<S> <C>
March 31, 1995 $ .62
June 30, 1995 $ .62
September 30, 1995 $ .62
December 31, 1995 $ .62
March 31, 1996 $ .62
June 30, 1996 $ .62
September 30, 1996 $ .62
December 31, 1996 $ .62
</TABLE>
<PAGE>
The source of distributions in 1995 and in 1996 was cash flow from
operations (capital improvements were funded from working capital reserves and
cash flow in 1995 and from cash flow in 1996). 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,
-------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ----------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Revenues $ 11,748,459 $ 10,452,432 $10,233,925 $ 11,436,166 $ 11,716,082
Net Income (Loss) $ 2,244,520 $(22,084,905)(4) $ 936,307(3) $(16,511,584)(2) $(19,060,477)(1)
Net Income (Loss) Per Unit $ 3.63 $ (35.68)(4) $ 1.51(3) $ (26.68)(2) $ (30.79)(1)
Distributions Per Unit(5) $ 2.48 $ 2.48 $ 2.45 $ 2.96 $ 5.64
Total Assets $ 61,979,385 $ 60,266,933 $83,682,263 $ 84,394,634 $102,697,302
- ---------------
(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.
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
At December 31, 1996, 1995 and 1994, 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. As discussed
in Note 3, the General Partners hold a 5% equity interest in the Partnership.
However, at the inception of the Partnership, the General Partners' equity
account was credited with only the actual capital contributed in cash, $1,000.
Subsequent to the issuance of the 1996 financial statements, the Partnership's
management determined that this accounting does not appropriately reflect the
Limited Partners' and General Partners' relative participations in the
Partnerships's net assets, since it does not reflect the General Partners' 5%
interst in the Partnership. Thus, the Partnershp has restated its financial
statements to reallocate $7,350,125 (5% of the gross proceeds raised at the
Partnership's formation) of the partners' equity to the General Partners' equity
account. This reallocation was made as of the inception of the Partnership and
all periods presented in the financial statements have been restated to reflect
the reallocation. The reallocation has no impact on the Partnership's financial
position, results of operations, cash flows, distributions to partners, or the
partners' tax basis capital accounts.
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, 1996, all
capital expenditures and distributions were funded from cash flows. As of
December 31, 1996, total remaining working capital reserves amounted to
approximately $5,763,000. 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 March 1997, the
Administrative General Partner notified the limited partners of its intention to
increase the annual distribution from $2.48 per unit to $3.06 per unit as a
result of improved operating results. 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.
<PAGE>
During the year ended December 31, 1996, cash and cash equivalents
increased $2,657,554 as a result of cash provided by operations in excess of
capital expenditures and distributions to partners. The Partnership's primary
source of funds is cash flow from the operations of its properties, principally
rents received from tenants, which amounted to $4,879,769 for the year ended
December 31, 1996. The Partnership used $687,199 for capital expenditures
related to capital and tenant improvements to the properties and $1,535,016 for
distributions to partners during 1996.
<PAGE>
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
1996 1995 1994
---------- ----------- ----------
<S> <C> <C> <C>
Century Park I ........... $ 28,010 $1,243,594 $ 51,542
568 Broadway ............. 233,376 742,972 784,087
Seattle Tower ............ 352,522 227,677 152,114
Commonwealth ............. 227,741 5,353 7,894
Commerce Plaza I ......... 76,803 229,528 67,209
Melrose Crossing ......... 45,628 48,519 298,613
Matthews Festival ........ 24,586 57,699 19,353
Sutton Square ............ 106,766 43,771 32,457
230 East Ohio ............ 37,983 246,706 26,090
TMR Warehouses ........... 3,951 16,918 0
Melrose Out Parcel ....... 0 0 0
---------- ---------- ----------
Totals ................... $1,137,366 $2,862,737 $1,439,359
========== ========== ==========
</TABLE>
The Partnership has budgeted approximately $3 million in expenditures
for capital improvements and capitalized tenant procurement costs in 1997 which
is expected to be funded from cash flow from operations. 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 continued risk.
<PAGE>
Impairment of Assets
The Partnership evaluates the recoverability of the net carrying value
of its real estate and related assets at least annually, and more often if
circumstances dictate.
The Partnership adopted Statement of Financial Accounting Standards No.
121, "Accounting for Impairment of Long-Lived Assets and for Long- Lived Assets
to be Disposed Of" (SFAS #121) in 1995. Under SFAS #121, the Partnership
estimates the future cash flows expected to result from the use of each property
and its eventual disposition, generally over a five-year holding period. In
performing this review, management takes into account, among other things, the
existing occupancy, the expected leasing prospects of the property and the
economic situation in the region where the property is located.
If the sum of the expected future cash flows, undiscounted, is less
than the carrying amount of the property, the Partnership recognizes an
impairment loss, and reduces the carrying amount of the asset to its estimated
fair value. Fair value is the amount at 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. Management estimates fair value using discounted
cash flows or market comparables, as most appropriate for each property.
Independent certified appraisers are utilized to assist management, when
warranted.
Prior to the adoption of SFAS #121, real estate investments were
carried at the lower of depreciated cost or net realizable value. Net realizable
value was calculated by management using undiscounted future cash flows, in some
cases with the assistance of independent certified appraisers.
Impairment write-downs recorded by the Partnership do not affect the
tax basis of the assets and are not included in the determination of taxable
income or loss.
Because the cash flows used to evaluate the recoverability of the
assets and their fair values are 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 at the balance sheet dates. The cash flows and market comparables used in
this process are based on good faith estimates and assumptions developed by
management. 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 write-downs, which could be material in subsequent years if real
estate markets or local economic conditions change.
<PAGE>
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 1996 1995 1994 1993 1992
- -------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Century Park I .. $ 0 $ 1,250,000 $ 0 $ 5,900,000 $ 4,550,000
568 Broadway .... 0 2,569,050 0 700,650 7,551,450
Seattle Tower ... 0 3,550,000 0 0 2,500,000
Commonwealth .... 0 1,700,000 600,000 0 3,500,000
Commerce Plaza I 0 0 0 2,700,000 0
Melrose Crossing 0 7,200,000 0 4,900,000 0
Matthews Festival 0 5,300,000 0 0 0
230 East Ohio ... 0 2,200,000 0 3,600,000 3,000,000
----------- ----------- ----------- ----------- -----------
$ 0 $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%. Because the estimate of
undiscounted cash flows prepared 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.
<PAGE>
The economic outlook for Century Park has improved markedly since the
last write- down at March 31, 1995. The occupancy at the property has increased
from approximately 25% at the time of the write-down to approximately 74% at
December 31, 1996, and 81% at January 31, 1997, a 56% increase.
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. Because the estimate of undiscounted cash flows prepared 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.
The economic outlook for 568 Broadway has improved markedly since the
last write- down at March 31, 1995. Occupancy has increased from approximately
76% at the time of the write-down to approximately 100% at December 31, 1996, a
24% increase.
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.
<PAGE>
The Partnership was not able to achieve leasing expectations at Seattle
Tower and occupancy has remained at approximately 80%. In addition, market rents
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.
Because the estimate of undiscounted cash flows prepared 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.
The economic outlook for Seattle has improved considerably since the
last write- down at March 31, 1995. Occupancy has increased from approximately
81% at the time of the write-down to aproximately 96% at December 31, 1996, a
15% increase.
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. Because the estimate of undiscounted cash flows prepared
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 economic outlook for Commonwealth has improved markedly since the
last write-down at March 31, 1995. Occupancy has increased from approximately
46% at the time of the write-down to approximately 87% at December 31, 1996, a
41% increase.
<PAGE>
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. Because the estimate
of undiscounted cash flows prepared 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. Because the estimate of undiscounted
cash flows prepared 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.
<PAGE>
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. Because the estimate of undiscounted cash flows prepared
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
1996 vs. 1995
The Partnership experienced net income for the year ended December 31,
1996 compared to a net loss for the prior year due primarily to the significant
write-downs for impairment recorded during 1995 as previously discussed.
Rental revenue increased during the year ended December 31, 1996 as
compared to 1995. The most significant increases in revenues occurred at 568
Broadway, Century Park, Seattle Tower, Sutton Square and Commonwealth due to
higher occupancy rates during 1996 as compared to the prior year. These
increases, however, were partially offset by decreases in revenues during 1996
at Melrose Crossing and Matthews as certain tenants vacated and/or filed for
bankruptcy. Revenues at the other properties generally remained consistent in
1996 as compared to 1995.
Costs and expenses decreased during the year ended December 31, 1996 as
compared to 1995 due primarily to the significant write-downs for impairment
recorded in 1995. Operating expenses decreased during 1996 due to decreases in
real estate taxes at certain properties partially offset by increases in repairs
and maintenance and utility costs. Real estate taxes decreased significantly at
568 Broadway due to the receipt of refunds related to the 1992-1995 tax years of
<PAGE>
which the Partnership's share was $353,500. Real estate taxes also decreased at
Melrose I as the result of reduction of the assessed value pursuant to on-going
tax appeals. Repair and maintenance expenses increased at Century Park and
Sutton Square due to the higher occupancy in 1996 compared to 1995. The cost of
utilities increased at 568 Broadway due to increased occupancy in 1996 as
compared to the prior year. Depreciation expense for 1996 increased due to the
significant capitalized improvements and tenant procurement costs incurred and
capitalized during the year ended December 31, 1995. The partnership asset
management fee remained constant in 1996 as compared to 1995. Administrative
expenses increased due to the Partnership's reimbursement of the General
Partners' litigation and settlement costs as previously discussed and the
property management fee increase was the direct result of higher revenues at the
aforementioned properties.
Interest income decreased due to lower interest rates in 1996 as
compared to 1995 partially offset by increases due to higher cash investment
balances for the year ended December 31, 1996 compared to 1995. Other income,
which consists of investor ownership transfer fees, increased during the current
year as compared to 1995 due to a greater number of transfers in 1996.
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.
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, 1996, 1995 AND 1994
I N D E X
Independent Auditors' report
Financial statements, years ended
December 31, 1996, 1995 and 1994
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, 1996 and 1995, and
the related statements of operations, partners' equity and cash flows for each
of the three years in the period ended December 31, 1996. Our audit 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 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, 1996 and 1995, and the results of its operations and its cash flows
for the three years in the period ended December 31, 1996 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.
As discussed in Note 7, the accompanying financial statements have been restated
to reflect a reallocation of partners' equity.
DELOITTE & TOUCHE LLP
March 14, 1997
(April 30, 1997 as to Note 7)
New York, NY
<PAGE>
<TABLE>
<CAPTION>
HIGH EQUITY PARTNERS L.P. - SERIES 86
BALANCE SHEETS
December 31,
--------------------------------
ASSETS 1996 1995
- ------ ------------ -------------
<S> <C> <C>
Real estate .............................. $ 50,401,985 $ 51,326,327
Cash and cash equivalents ................ 7,409,578 4,752,024
Other assets ............................. 3,867,372 3,590,638
Receivables .............................. 300,450 597,944
------------ ------------
TOTAL ASSETS ............................. $ 61,979,385 $ 60,266,933
============ ============
LIABILITIES AND PARTNERS' EQUITY
Accounts payable and accrued expenses .... $ 2,131,201 $ 1,963,371
Due to affiliates ........................ 1,325,213 490,095
Distributions payable .................... 383,754 383,754
------------ ------------
Total liabilities ............... 3,840,168 2,837,220
------------ ------------
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY:
Limited partners' equity (as restated)
(588,010 units issued and outstanding) . 55,231,308 54,557,278
General partners' equity (as restated) ... 2,907,909 2,872,435
------------ ------------
Total partners' equity .......... 58,139,217 57,429,713
------------ ------------
TOTAL LIABILITIES AND PARTNERS' EQUITY ... $ 61,979,385 $ 60,266,933
============ ============
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HIGH EQUITY PARTNERS L.P. - SERIES 86
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
-----------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Rental Revenue ............................. $ 11,748,459 $ 10,452,432 $ 10,233,925
------------ ------------ ------------
Costs and Expenses:
Operating expenses ................ 4,632,225 4,962,913 4,723,268
Depreciation and amortization ..... 1,941,202 1,858,404 1,901,778
Partnership management fee ........ 1,406,204 1,406,204 1,406,204
Administrative expenses ........... 1,414,940 522,657 493,944
Property management fee ........... 435,467 379,720 364,015
Write-down for impairment ......... -- 23,769,050 600,000
------------ ------------ ------------
9,830,038 32,898,948 9,489,209
------------ ------------ ------------
Income (loss) before interest
and other income .................. 1,918,421 (22,446,516) 744,716
Interest income ................... 245,027 303,186 157,726
Other income ...................... 81,072 58,425 33,865
------------ ------------ ------------
Net income (loss) .......................... $ 2,244,520 $(22,084,905) $ 936,307
============ ============ ============
Net income (loss) attributable to:
Limited partners .................. $ 2,132,294 $(20,980,660) $ 889,492
General partners .................. 112,226 (1,104,245) 46,815
------------ ------------ ------------
Net income (loss) .......................... $ 2,244,520 $(22,084,905) $ 936,307
============ ============ ============
Net income (loss) per unit of limited
partnership interest (588,010 units
outstanding) ...................... $ 3.63 $ (35.68) $ 1.51
============ ============ ============
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HIGH EQUITY PARTNERS L.P. - SERIES 86
STATEMENT OF PARTNERS' EQUITY
General Limited
Partners' Partners'
Equity Equity Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance, January 1, 1994 (as previously reported) $ (3,267,686) $ 84,897,460 $ 81,629,774
Reallocation of partners' equity ................ 7,350,125 (7,350,125) --
Balance, January 1, 1994 (as restated) .......... 4,082,439 77,547,335 81,629,774
Net income ...................................... 46,815 889,492 936,307
Distributions as a return of capital
($2.45 limited partnership unit) ................ (75,822) (1,440,625) (1,516,447)
------------ ------------ ------------
Balance, December 31, 1994 (as restated)........ 4,053,432 76,996,202 81,049,634
Net loss ........................................ (1,104,245) (20,980,660) (22,084,905)
Distributions as a return of capital
($2.48 per limited partnership unit) ............ (76,752) (1,458,264) (1,535,016)
------------ ------------ ------------
Balance, December 31, 1995 (as restated)......... 2,872,435 54,557,278 57,429,713
Net income ...................................... 112,226 2,132,294 2,244,520
Distributions as return of capital
($ 2.48 per limited partnership unit) ........... (76,752) (1,458,264) (1,535,016)
------------ ------------ ------------
Balance, December 31, 1996 (as restated)......... $ 2,907,909 $ 55,231,308 $ 58,139,217
============ ============ ============
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HIGH EQUITY PARTNERS L.P. - SERIES 86
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................... $ 2,244,520 $(22,084,905) $ 936,307
Adjustments to reconcile net income
(loss) to net cash provided by operating activities:
Write-down for impairment .............................. -- 23,769,050 600,000
Depreciation and amortization .......................... 1,941,202 1,858,404 1,901,778
Straight line adjustment for stepped lease rentals ..... (164,035) (375,772) (243,082)
Changes in asset and liabilities:
Accounts payable and accrued expenses .................. 167,830 208,913 (292,764)
Receivables ............................................ 297,494 (14,196) 18,614
Due to affiliates ...................................... 835,118 (4,322) 476,201
Other assets ........................................... (442,360) (620,024) (193,412)
------------ ------------ ------------
Net cash provided by operating activities .............. 4,879,769 2,737,148 3,203,642
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements to real estate ............................ (687,199) (2,200,197) (1,200,700)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners .............................. (1,535,016) (1,535,016) (1,832,115)
------------ ------------ ------------
Increase (Decrease) in Cash and Cash Equivalents ............ 2,657,554 (998,065) 170,827
Cash and Cash Equivalents, Beginning of Year ................ 4,752,024 5,750,089 5,579,262
------------ ------------ ------------
Cash and Cash Equivalents, End of Year ...................... $ 7,409,578 $ 4,752,024 $ 5,750,089
============ ============ ============
See notes to financial statements.
</TABLE>
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
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 are prepared on the accrual basis of
accounting. 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 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.
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 less write-downs, if any.
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
The Partnership evaluates the recoverability of the net
carrying value of its real estate and related assets at least
annually, and more often if circumstances dictate.
The Partnership adopted Statement of Financial Accounting
Standards No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long- Lived Assets to be Disposed Of" (SFAS
#121) in 1995. Under SFAS #121, the Partnership estimates the
future cash flows expected to result from the use of each
property and its eventual disposition, generally over a
five-year holding period. In performing this review,
management takes into account, among other things, the
existing occupancy, the expected leasing prospects of the
property and the economic situation in the region where the
property is located.
If the sum of the expected future cash flows, undiscounted, is
less than the carrying amount of the property, the Partnership
recognizes an impairment loss, and reduces the carrying amount
of the asset to its estimated fair value. Fair value is the
amount at 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. Management estimates fair value
using discounted cash flows or market comparables, as most
appropriate for each property. Independent certified
appraisers are utilized to assist management, when warranted.
Prior to the adoption of SFAS #121, real estate investments
were carried at the lower of depreciated cost or net
realizable value. Net realizable value was calculated by
management using undiscounted future cash flows, in some cases
with the assistance of independent certified appraisers.
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of Assets (continued)
Impairment write-downs recorded by the Partnership do not
affect the tax basis of the assets and are not included in the
determination of taxable income or loss.
Because the cash flows used to evaluate the recoverability of
the assets and their fair values are 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 at the balance sheet
dates. The cash flows and market comparables used in this
process are based on good faith estimates and assumptions
developed by management. 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 write-downs, which could be material in
subsequent years if real estate markets or local economic
conditions change.
Income taxes
No provision has been made for federal, state and local income
taxes since they are the personal responsibility of the
partners.
Net income (loss) and distributions per unit of limited
partnership interest
Net income (loss) 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, 1996, 1995 and 1994.
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. are wholly owned
subsidiaries of Presidio Capital Corp. ("Presidio"). Presidio
AGP Corp., which is a wholly-owned subsidiary of Presidio, is
the Associate General Partner (together with the Investment
and Administrative General Partners, the "General Partners").
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.
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
(CONTINUED)
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 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, 1996, 1995 and 1994, Resources Supervisory
was entitled to receive $435,467, $379,720 and $364,015 in
total, respectively, of which $254,005, $196,480 and $201,205
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.
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, 1996, 1995 and 1994, the Administrative
General Partner earned $1,406,204.
The general partners are allocated 5% of the net income or
(losses) of the Partnership which amounted to $112,226,
$(1,104,245) and $46,815 in 1996, 1995 and 1994, respectively.
The General Partners are also entitled to receive 5% of
distributions, which amounted to $76,752, $76,752 and $75,822
in 1996, 1995 and 1994, 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.
During July 1996 through February 28, 1997, Millennium Funding
III Corp., a wholly owned indirect subsidiary of Presidio,
contracted to purchase 3,117 units of the Partnership from
various limited partners, which represents less than .6% of
the outstanding limited partnership units. 1996 distributions
in the amount of $529 were received by Millenium Funding III
Corp. related to these units.
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
4. REAL ESTATE
Management recorded write-downs for impairment totaling
$21,101,450, $17,800,650, $600,000 and $23,769,050 in 1992,
1993, 1994 and 1995, respectively. No write-downs were
required for the year ended December 31, 1996. 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. Because the estimate of undiscounted cash
flows prepared 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
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
4. REAL ESTATE (CONTINUED)
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%. Because the estimate of undiscounted cash flows
prepared 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 did not achieve leasing expectations at 230 East
Ohio and occupancy has remained low. In addition, real estate
taxes and other costs have exceeded expectations. Because the
estimate of undiscounted cash flows prepared 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
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
4. REAL ESTATE (CONTINUED)
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 did not achieve leasing expectations at
Seattle Tower and occupancy remained at approximately 80%. In
addition, market rents were lower than projected. As a result,
actual income levels at Seattle Tower did not meet and were
not expected to meet income levels projected during
management's impairment review in 1994. In addition, projected
capital expenditures exceeded amounts previously anticipated
for such expenditures. Because the estimate of undiscounted
cash flows prepared 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
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
4. REAL ESTATE (CONTINUED)
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 were required in order to render 568 Broadway more
competitive in the New York market. In addition, occupancy
levels remained low. Because the estimate of undiscounted cash
flows prepared 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
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
4. REAL ESTATE (CONTINUED)
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 declined from the date of
management's impairment review in 1994 to 50% in early 1995.
As a result, income levels did not meet and were not expected
to meet projected income levels. In addition, rental rates
declined and real estate taxes were in excess of amounts
previously projected resulting in lower cash flows. Because
the estimate of undiscounted cash flows prepared 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 did not and are not expected
to meet income levels projected during management's impairment
review in 1994. Because the revised estimate of undiscounted
cash flows prepared 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 $75 per square foot. This fair value estimate
resulted in a $5,300,000 write-down for impairment in 1995.
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
4. REAL ESTATE (CONTINUED)
The following table is a summary of the Partnership's real
estate as of:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Land ................................... $ 12,305,557 $ 12,305,557
Buildings and improvements ............ 58,172,943 57,485,744
------------ ------------
70,478,500 69,791,301
Less: Accumulated depreciation ........ (20,076,515) (18,464,974)
------------ ------------
$ 50,401,985 $ 51,326,327
============ ============
</TABLE>
The following is a summary of the Partnership's share of
anticipated future receipts under noncancellable leases:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
1997 1998 1999 2000 2001 Thereafter Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Century Park .... $ 837,000 $ 852,000 $ 873,000 $ 862,000 $ 862,000 $ 3,841,000 $ 8,127,000
568 Broadway .... 2,115,000 1,891,000 1,736,000 1,679,000 1,459,000 4,734,000 13,614,000
Seattle Tower ... 613,000 436,000 298,000 231,000 143,000 235,000 1,956,000
Commonwealth .... 790,000 686,000 611,000 622,000 686,000 629,000 4,024,000
Commerce Plaza .. 561,000 456,000 312,000 324,000 150,000 0 1,803,000
Matthews Festival 1,304,000 1,274,000 1,233,000 1,087,000 1,067,000 1,051,000 7,016,000
Melrose Park .... 274,000 100,000 60,000 19,000 0 0 453,000
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 ............. 547,000 181,000 0 0 0 0 728,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 8,963,000 $ 7,415,000 $ 6,444,000 $ 5,860,000 $ 5,266,000 $15,733,000 $49,681,000
=========== =========== =========== =========== =========== ----------- ===========
</TABLE>
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
5. DISTRIBUTIONS PAYABLE
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995
---------- -----------
<S> <C> <C>
Limited Partners ($.62 per unit) $ 364,566 $ 364,566
General Partners 19,188 19,188
---------- -----------
$ 383,754 $ 383,754
========== ===========
</TABLE>
Such distributions were paid in the subsequent quarters.
6. DUE TO AFFILIATES
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Partnership asset management fee .................... $ 351,551 $ 351,551
Settlement and litigation cost reimbursement (Note 8) 824,511 --
Property management fee ............................. 99,151 88,544
Non-accountable expense reimbursement ............... 50,000 50,000
---------- ----------
$1,325,213 $ 490,095
========== ==========
</TABLE>
Such amounts were paid in the subsequent quarters.
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
7. PARTNERS' EQUITY
At December 31, 1996, 1995 and 1994, 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. As discussed in Note 3,
the General Partners hold a 5% equity interest in the
Partnership. However, at the inception of the Partnership, the
General Partners' equity account was credited with only the
actual capital contributed in cash, $1,000. Subsequent to the
issuance of the 1996 financial statements, the Partnership's
management determined that this accounting does not
appropriately reflect the Limited Partners' and General
Partners' relative participations in the Partnerships's net
assets, since it does not reflect the General Partners' 5%
interst in the Partnership. Thus, the Partnershp has restated
its financial statements to reallocate $7,350,125 (5% of the
gross proceeds raised at the Partnership's formation) of the
partners' equity to the General Partners' equity account. This
reallocation was made as of the inception of the Partnership
and all periods presented in the financial statements have
been restated to reflect the reallocation. The reallocation
has no impact on the Partnership's financial position, results
of operations, cash flows, distributions to partners, or the
partners' tax basis capital accounts.
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.
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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").
On November 30, 1995, after the Court preliminarily approved a
settlement of the B&S Litigation but ultimately declined to
grant final approval and after the Court granted motions to
intervene by the original plaintiffs, the original and
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. The Consolidated Complaint alleges various
state law class and derivative claims, including claims for
breach of fiduciary duties; breach of contract; unfair and
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
fraudulent business practices under California Bus. & Prof.
Code Sec. 17200; negligence; dissolution, accounting and
receivership; 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.
In January, 1996, the parties to the B&S Litigation agreed
upon a revised settlement (the "Revised Settlement"). The core
feature of the Revised Settlement was the surrender by the
general partners of certain fees that they are entitled to
receive, the reorganization of the Partnership, HEP-85 and
HEP- 88 (collectively, the "HEP Partnerships") into a publicly
traded real estate investment trust ("REIT"), and the issuance
of stock in the REIT to the limited partners (in exchange for
their limited partnership interests) and General Partners (in
exchange for their existing interest in the HEP Partnerships
and the fees being given up). The General Partners believe
that the principal benefits of the Revised Settlement were (1)
substantially increased distributions to limited partners, (2)
market liquidity through a NASDAQ listed security, and (3) the
opportunity for growth and diversification that was not
permitted under the Partnership structure. There were also
believed to be other significant tax benefits, corporate
governance advantages and other benefits of the Revised
Settlement.
On July 18, 1996, the Court preliminarily approved the Revised
Settlement and made a preliminary finding that the Revised
Settlement was fair, adequate and reasonable to the class. In
August 1996, the Court approved the form and method of notice
regarding the Revised Settlement which was sent to limited
partners.
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Only approximately 2.5% of the limited partners of the HEP
Partnerships elected to "opt out" of the Revised Settlement.
Despite this, following the submission of additional
materials, the Court entered an order on January 14, 1997
rejecting the Revised Settlement and concluding that there had
not been an adequate showing that the settlement was fair and
reasonable. Thereafter, the plaintiffs filed a motion seeking
to have the Court reconsider its order. Subsequently, the
defendants withdrew the revised settlement and at a hearing on
February 24, 1997, the Court denied the plaintiffs' motion.
Also at the February 24, 1997 hearing, the Court recused
itself from considering a motion to intervene and to file a
new complaint in intervention by one of the objectors to the
Revised Settlement, granted the request of one plaintiffs' law
firm to withdraw as class counsel and scheduled future
hearings on various matters.
The Limited Partnership Agreement provides for indemnification
of the General Partners and their affiliates in certain
circumstances. The Partnership has agreed to reimburse the
General Partners for their actual costs incurred in defending
this litigation and the costs of preparing settlement
materials. Through December 31, 1996, the General Partners had
billed the Partnership a total of $824,511 for these costs
which was paid in February 1997.
The Partnerships and the General Partners believe that each of
the claims asserted in the Consolidated Complaint are
meritless and intend to continue to vigorously defend the B&S
Litigation. It is impossible at this time to predict what the
defense of the B&S Litigation will cost, the Partnership's
financial exposure as a result of the indemnification
agreement discussed above, and whether the costs of defending
could adversely affect the Managing General Partner's ability
to perform its obligations to the Partnership.
9. RECONCILIATION OF NET INCOME (LOSS) 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 income (loss) per the financial
statements to the net taxable income (loss):
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
9. RECONCILIATION OF NET INCOME (LOSS) AND NET ASSETS PER
FINANCIAL STATEMENTS TO TAX REPORTING (CONTINUED)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss) per financial statements $ 2,244,520 $(22,084,905) $ 936,307
Write-down for impairment ................ -- 23,769,050 600,000
Tax depreciation in excess of financial
statement depreciation ................... (1,820,559) (1,755,692) (1,704,513)
------------ ------------ ------------
Net taxable income (loss) ................ $ 423,961 $ (71,547) $ (168,206)
============ ============ ============
</TABLE>
The differences between the Partnership's assets and
liabilities for tax purposes and financial reporting purposes
are as follows:
<TABLE>
<CAPTION>
December 31,
1996
-------------
<S> <C>
Net assets per financial statements .................... $ 58,139,217
Write-down for impairment .............................. 63,271,150
Tax depreciation in excess
of financial statement depreciation .................. (10,761,148)
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 ........................... $ 114,605,013
=============
</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.
<PAGE>
As of March 15, 1997, 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 44 Director and President November 1994
Jay L. Maymudes 36 Director, Vice President, November 1994
Secretary and Treasurer
Robert Holtz 29 Vice President November 1994
Arthur H. Amron 40 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.
<PAGE>
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, 1997, 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 Positon Director Since
- ---- --- ------- --------------
<S> <C> <C> <C>
Robert Holtz 29 Director and President March 1995
Mark Plaumann 41 Director and Vice President March 1995
Jay L. Maymudes 36 Vice President, Secretary and March 1995
Treasurer
Arthur H. Amron 40 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. Mr. Plaumann is also a director of
Wahlco Environmental Systems, Inc. (a NYSE registrant engaged in the sale of air
pollution control and specially engineered products and is majority-owned by
investment funds managed by Wexford) since June 1996 and a director of
Technology Service Group, Inc. (a NASDAQ registrant engaged in the sale of smart
pay phones and is majority-owned by investment funds managed by Wexford) since
March 1997. Mr. Plaumann 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.
<PAGE>
Affiliates of the General Partners are also engaged in
business.
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, 1997, 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. An affiliate
of the general partners contracted to purchase 3,117 Units from various limited
partners, which represents less than .6% of the outstanding Units.
As of March 1, 1997, there were 8,797,255 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.
<PAGE>
The following table sets forth certain information known to
Presidio with respect to beneficial ownership of the Class A Shares as of March
1, 1997 (based on 8,797,255 Class A Shares outstanding on such date) by: (i)
each person who beneficially owns 5% or more of the Class A Shares, (ii) the
executive officers of Presidio, (iii) each of Presidio's directors, and (iv) all
directors and executive officers as a group:
<TABLE>
<CAPTION>
Beneficial Ownership
---------------------------------
Number of Percentage
Name of Beneficial Owner Shares Outstanding
------------------------ ------ -----------
<S> <C> <C>
Thomas F. Steyer 4,553,560 (1) 51.8%
Fleur A. Fairman
John M. Angelo
Michael L. Gordon 1,231,762 (2) 14.0%
Intermarket Corp. 1,000,918 (3) 11.4%
M. H. Davidson & Co. 474,205 (4) 5.4%
Michael Steinhardt -- (5) --
Joseph M. Jacobs -- (5) --
Robert Holtz -- --
Jay L. Maymudes -- --
Charles E. Davidson -- (5) --
Martin L. Edelman 4,550 (6) *
Dean J. Takahashi 4,550 (6) *
Paul T. Walker 4,550 (6) *
Directors and executive officers
as a group (7 persons) 13,650 *
-----------------------
* Less than 1% of the outstanding Common Stock.
(1) As the managing partners of each of Farallon Capital Partners, L.P.
("FCP"), Farallon Capital Institutional Partners, L.P. ("FCIP"), Farallon
Capital Institutional Partners II, L.P. ("FCIP II") and Tinicum Partners
L.P. ("Tinicum"), (collectively, the "Farallon Partnerships"), may each
be deemed to own beneficially for purposes of Rule 13d-3 of the Exchange
Act the 1,397,318, 1,610,730, 607,980 and 241,671 shares held,
respectively, by each of such Farallon Partnerships. Farallon Capital
Management, LLC ("FCMLLC"), the investment advisor to certain
discretionary accounts which collectively hold 695,861 shares and Enrique
H. Boilini, David I. Cohen, Joseph F. Downes, Jason M. Fish, Andrew B.
Fremder, William F. Mellin, Stephen L. Millham, Meridee A. Moore and
Thomas F. Steyer, as a managing member of FCMLLC (collectively the
"Managing Members") may be deemed to be the beneficial owner of all of
the shares owned by such discretionary accounts. FCMLLC and each Managing
Member disclaims any beneficial ownership of such shares.
<PAGE>
Farallon Partners, LLC ("FPLLC") (the general partner of FCP, FCIP, FCIP
II and Tinicum), and each of Fleur A. Fairman, Mr. Boilini, Mr. Cohen,
Mr. Downes, Mr. Fish, Mr. Fremder, Mr. Mellin, Mr. Millham, Ms. Moore and
Mr. Steyer, each as managing member of FPLLC (collectively, the "Managing
Members"), may be deemed to be the beneficial owner of all of the shares
owned by FCP, FCIP, FCIP II and Tinicum. FPLLC and each Managing Member
disclaims any beneficial ownership of such shares.
(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 Section 13(d) 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 advisor, serves as general partner of
various limited partnerships and as investment advisor 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) Intermarket Corp. serves as General Partner for certain limited
partnerships and as investment advisor to 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.
(4) Marvin H. Davidson, Thomas L. Kemper Jr., Stephen M. Dowicz, Scott E.
Davidson and Michael J. Leffell, the general partners, members and
stockholders of certain entities that are general partners or investment
advisors of Davidson Kempner Endowment Partners, L.P., Davidson Kempner
Partners L.P., Davidson Kempner Institutional Partners, L.P., M. H.
Davidson and Co., and Davidson Kempner International Ltd. (collectively,
the "Investment Funds") may be deemed to be the beneficial owners under
Section 13(d) of the Exchange Act of the securities beneficially owned by
the Investment Funds and their affiliates.
In addition, Mr. Kempner owns 800 shares and may be deemed to
beneficially own certain securities held by certain foundations and
trusts. Mr. Kempner disclaims beneficial ownership of such shares.
(5) Excludes 1,200,000 Class B Shares owned by IR Partners. Such Class B
Shares are convertible in 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, 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 principal of Presidio
Management, the Chairman of the Board of Presidio and a Member of
Wexford. Joseph M. Jacobs, the Chief Executive Officer and President of
Presidio and a Member 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 its affiliates and Charles E. Davidson may
be deemed to be beneficial owners of such 1,200,000 shares.
(6) Shares held by each Class A Director of Presidio were issued pursuant to
a Memorandum of Understanding Regarding Compensation of Class A Directors
of Presidio. See "Executive Compensation -- Compensation of Directors."
</TABLE>
<PAGE>
The address of Thomas F. Steyer and the other individuals mentioned in footnote
1 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 Angelo, Gordon & Co., L.P. and its
affiliates is 245 Park Avenue, 26th Floor, New York, New York 10167. The address
for Intermarket Corp. is 667 Madison Avenue, New York, New York 10021. The
address for M. H. Davidson & co. is 885 Third Avenue, New York, New York 10022.
<PAGE>
Item 13. Certain Relationships and Related Transactions
The General Partners and certain affiliated entities have,
during the year ended December 31, 1996, earned or received compensation or
payments for services or reimbursements 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 $826,046 (1)
Resources Capital Corp. Administrative General Partner $1,679,886 (2)
Presidio AGP Corp. Associate General Partner $1,535 (3)
Resources Supervisory Affiliated Property Manager $196,480 (4)
Management Corp.
- --------------------
(1) Of this amount, $1,535 represents the Investment General Partner's share
of distributions of cash from operations and $824,511 represents
reimbursements at actual costs incurred in defending the B&S Litigation
and the cost of preparing settlement materials. 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, 1996, $427 of
the Partnership's taxable income 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, 1996 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, 1996, $20,350
of the Partnership's taxable income 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, 1996, $427 of the Partnership's taxable income 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 $435,467, of which
$254,005 was paid to unaffiliated management companies. All property
management fees payable at December 31, 1996 have subsequently been paid.
</TABLE>
<PAGE>
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.
<PAGE>
(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, 1996, 1995 AND 1994
INDEX
Additional financial information furnished
pursuant to the requirements of Form 10-K:
Schedules - December 31, 1996, 1995 and 1994
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: May 7, 1997 By: /s/ Joseph M. Jacobs
--------------------
Joseph M. Jacobs
(Principal Executive Officer)
By: RESOURCES CAPITAL CORP.
Administrative General Partner
Dated: May 7, 1997 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
esources Capital Corp. on the dates indicated.
Dated: May 7, 1997 By: /s/ Joseph M. Jacobs
--------------------
Joseph M. Jacobs
(Principal Executive Officer)
By: RESOURCES CAPITAL CORP.
Administrative General Partner
Dated: May 7, 1997 By: /s/ Jay L. Maymudes
-------------------
Jay L. Maymudes
(Principal Executive Officer)
<PAGE>
<TABLE>
<CAPTION>
HIGH EQUITY PARTNERS L.P. - SERIES 86
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
Costs Reductions
Capitalized Recorded
Subsequent to Subsequent to
Initial Costs Acquisition Acquistion
---------------------- ----------------------------- ------------
Buildings
Encum- and
Description brances Land Improvements Improvements Carrying Costs Write-downs
----------- ------- ---- ------------ ------------ -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
RETAIL:
Melrose Crossing Shopping Center Melrose Park IL $ --- $ 2,002,532 $12,721,968 $ 763,387 $ 1,064,777 $ (12,100,000)
Matthews Township Festival
Shopping Center Matthews NC --- 2,973,646 12,571,750 224,314 1,581,384 (5,300,000)
Sutton Square Shopping Center Raleigh NC --- 2,437,500 10,062,500 161,016 1,025,898 ---
------- ----------- ----------- ------------ ----------- -------------
--- 7,413,678 35,356,218 1,148,717 3,672,059 (17,400,000)
------- ----------- ----------- ------------ ----------- -------------
OFFICE:
Commerce Plaza Office Building Richmond VA --- 733,279 7,093,435 1,484,191 468,324 (2,700,000)
230 East Ohio Office Building Chicago IL --- 2,472,000 7,828,000 778,177 726,989 (8,800,000)
Century Park I Office Complex Kearny Mesa CA --- 3,122,064 12,717,936 1,452,816 1,203,130 (11,700,000)
568 Broadway Office Building New York NY --- 2,318,801 9,821,517 4,872,883 1,220,484 (10,821,150)
Seattle Tower Office Building Seattle WA --- 2,163,253 5,030,803 1,620,883 486,969 (6,050,000)
------- ----------- ----------- ------------ ----------- -------------
--- 10,809,397 42,491,691 10,208,950 4,105,896 (40,071,150)
------- ----------- ----------- ------------ ----------- -------------
INDUSTRIAL:
Commonwealth Industrial Park Fullerton CA --- 3,749,700 7,125,300 224,172 767,573 (5,800,000)
TMR Warehouses Various OH --- 369,215 5,363,935 20,866 435,653 ---
Melrose (Lot #7) Melrose Park IL --- 450,000 --- --- 36,628 ---
------- ----------- ----------- ------------ ----------- -------------
--- 4,568,915 12,489,235 245,038 1,239,854 (5,800,000)
------- ----------- ----------- ------------ ----------- -------------
$ --- $22,791,990 $90,337,144 $11,602,705 $ 9,017,809 $ (63,271,150)
======= =========== =========== =========== =========== =============
<PAGE>
<CAPTION>
Gross Amount at Which
Carried at Close of Period
----------------------------------------------
Buildings
and Accumulated Date
Description Land Improvements Total Depreciation Acquired
----------- ------------ ------------ ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
RETAIL:
Melrose Crossing Shopping Center $ 569,462 $ 3,884,382 $ 4,453,844 $ 2,519,888 1988
Matthews Township Festival
Shopping Center 2,249,562 9,816,182 12,065,744 2,957,234 1988
Sutton Square Shopping Center 2,637,550 11,049,364 13,686,914 2,454,735 1988
------------ ----------- ----------- -----------
5,456,574 24,749,928 30,206,502 7,931,857
------------ ----------- ----------- -----------
OFFICE:
Commerce Plaza Office Building 556,352 6,522,877 7,079,229 1,863,463 1987
230 East Ohio Office Building 635,907 2,348,572 2,984,479 1,252,102 1988
Century Park I Office Complex 1,092,744 5,703,202 6,795,946 2,657,349 1986
568 Broadway Office Building 922,338 6,490,199 7,412,537 2,439,798 1986
Seattle Tower Office Building 724,808 2,527,100 3,251,908 1,210,239 1986
------------ ----------- ----------- -----------
3,932,149 23,591,950 27,524,099 9,422,951
------------ ----------- ----------- -----------
INDUSTRIAL:
Commonwealth Industrial Park 2,032,935 4,038,667 6,071,602 1,523,544 1987
TMR Warehouses 397,271 5,792,398 6,189,669 1,198,164 1988
Melrose (Lot #7) 486,628 --- 486,628 --- 1988
------------ ----------- ----------- -----------
2,916,834 9,831,065 12,747,899 2,721,708
------------ ----------- ----------- -----------
$12,305,557 $58,172,943 $70,478,500 $20,076,515
=========== =========== =========== ===========
Note: The aggregate cost for Federal income tax purposes is $133,749,651 at
December 31, 1996.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(A) RECONCILIATION OF REAL ESTATE OWNED:
For the Years Ended December 31,
-----------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR ....... $ 69,791,301 $ 91,360,154 $ 90,759,454
ADDITIONS DURING THE YEAR
Improvements to Real Estate 687,199 2,200,197 1,200,700
OTHER CHANGES
Write-down for impairment . -- (23,769,050) (600,000)
------------ ------------ ------------
BALANCE AT END OF YEAR (1) ......... $ 70,478,500 $ 69,791,301 $ 91,360,154
============ ============ ============
(1) INCLUDES THE INITIAL COST OF THE PROPERTIES PLUS ACQUISITION AND CLOSING
COSTS.
</TABLE>
(B) RECONCILIATION OF ACCUMULATED DEPRECIATION:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR $18,464,974 $16,824,115 $15,175,230
ADDITIONS DURING THE YEAR
Depreciation Expense (1) 1,611,541 1,640,859 1,648,885
----------- ----------- -----------
BALANCE AT END OF YEAR $20,076,515 $18,464,974 $16,824,115
=========== =========== ===========
(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>
<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 1996
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-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,409,578
<SECURITIES> 0
<RECEIVABLES> 300,450
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 61,979,385
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 58,139,217
<TOTAL-LIABILITY-AND-EQUITY> 61,979,385
<SALES> 0
<TOTAL-REVENUES> 11,748,459
<CGS> 0
<TOTAL-COSTS> 4,632,225
<OTHER-EXPENSES> 5,197,813
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,244,520
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,244,520
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,244,520
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
