SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Fiscal Year Ended December 31, 1997
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
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(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) 862-7444
Securities registered pursuant to Section 12(b) of the Act:
None None
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(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
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(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]
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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, 1998, 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 1997, 568 Broadway and Matthews represented
22% and 15%, respectively; in 1996, 568 Broadway represented 18.8%; in 1995, 568
Broadway and Matthews Festival represented 17.4% and 16.4%, respectively.
The Partnership owned the following properties as of March 15,
1998:
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(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 91% leased as of January 1, 1998 compared to 74% at
January 1, 1997. There are no leases scheduled to expire in 1998. Capital
expenditures in 1997 included 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 sub-market. 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, 1998 and January 1, 1997. There are no leases which represent at
least 10% of the square footage of the property scheduled to expire in 1998.
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.
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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, 1998 was 95% compared to 96% at
January 1, 1997. There are no leases which represent at least 10% of the square
footage of the property scheduled to expire during 1998.
Roof replacement and exterior building facade projects,
originally budgeted for 1997 in the aggregate amount of approximately $630,000,
have been postponed until 1998.
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 site consists of
approximately 12.4 acres, with parking to accommodate 391 cars. The property was
87% leased as of January 1, 1998 and January 1, 1997. There are no leases which
represent at least 10% of the square footage of the property scheduled to expire
during 1998.
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.
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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 83% leased as of
January 1, 1998, compared to 95% as of January 1, 1997.
Office space in The West End of Richmond, Virginia, 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, 1998, the shopping center was 33% leased, compared
to 18% at January 1, 1997. There are no leases which represent 10% of the square
footage of the center that are scheduled to expire during 1998.
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.
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, 1998, the
center was 94% leased as compared to 86% as of January 1, 1997. There are no
leases which represent at least 10% of the square footage of the center
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scheduled to expire in 1998. 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.
Competitive retail in the area has grown significantly since
1996. 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 recent additions to the area.
(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 98% leased as of January 1, 1998 compared to 100% at January
1, 1997. There are no leases which represent at least 10% of the square footage
of the center scheduled to expire in 1998. Parking lot and landscaping upgrades
were completed in 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.
(9) 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, 1998 and 1997, the Orange
and Grove City buildings were each 100% leased to a single tenant. As of January
1, 1998, the Hilliard property was 74% leased compared to 100% as of January 1,
1997. The Volvo/GM Heavy Truck lease covering 583,000 square feet in Orange
Township extended its lease in 1997. The lease with Micro Electronics for
175,000 square feet at the Hilliard property expires in August 1998 and the
lease is not expected to be renewed.
The TMR Warehouses compete with numerous other warehouses in
the market area.
<PAGE>
(10) 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 alsoerformed 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. NorthStar
Presidio Management Company, LLC 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".
Forward-Looking Statements
Certain statements made in this report may constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities
<PAGE>
Exchange Act of 1934, as amended (the "Exchange Act"). Such forward-looking
statements include statements regarding the intent, belief or current
expectations of the Partnership and its management and involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of the Partnership to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, the
following: general economic and business conditions, which will, among other
things, affect the demand for retail space or retail goods, availability and
creditworthiness of prospective tenants, lease rents and the terms and
availability of financing, adverse changes in the real estate markets including,
among other things, competition with other companies; risks of real estate
development and acquisition; governmental actions and initiatives; and
environment/safety requirements.
Item 2. Properties.
A description of the Partnership's properties is contained in
Item 1 above (see Schedule III to the financial statements for additional
information with respect to the properties).
Item 3. Legal Proceedings.
The Broadway Joint Venture is currently involved in litigation
with a number of present or former tenants who are in default on their lease
obligations. Several of these tenants have asserted claims or counterclaims
seeking monetary damages. The plaintiffs' allegations include, but are not
limited to, claims for breach of contract, failure to provide certain services,
overcharging of expenses and loss of profits and income. These suits seek total
damages of in excess of $20 million plus additional damages of an indeterminate
amount. The Broadway Joint Venture's action for rent against Solo Press was
tried in 1992 and resulted in a judgment in favor of the Broadway Joint Venture
for rent owed. The Partnership believes this will result in dismissal of the
action brought by Solo Press against the Broadway Joint Venture. Since the facts
of the other actions which involve material claims or counterclaims are
substantially similar, the Partnership believes that the Broadway Joint Venture
will prevail in those actions as well.
A former retail tenant of 568 Broadway (Galix Shops, Inc.) and
a related corporation which is a retail tenant of a building adjacent to 568
Broadway filed a lawsuit in the Supreme Court of The State of New York, County
of New York, against the Broadway Joint Venture which owns 568 Broadway. The
action was filed on April 13, 1994. The plaintiffs alleged that by erecting a
sidewalk shed in 1991, 568 Broadway deprived plaintiffs of light, air and
visibility to their customers. The sidewalk shed was erected, as required by
local law, in connection with the inspection and restoration of the 568 Broadway
building facade, which is also required by local law. Plaintiffs further alleged
that the erection of the sidewalk shed for a continuous period of over two years
is unreasonable and unjustified and that such conduct by defendants has deprived
plaintiffs of the use and enjoyment of their property. The suit seeks a judgment
requiring removal of the sidewalk shed, compensatory damages of $20 million, and
punitive damages of $10 million. The Partnership believes that this suit is
meritless and intends to vigorously defend it.
On or about May 11, 1993 the Partnership was advised of the
existence of an action (the "California Action") in which a complaint (the "HEP
Complaint") was filed in the Superior Court for the State of California for the
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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 behalf of a class consisting of all of the
purchasers of limited partnership interests in the Partnership, Integrated
Resources High Equity Partners, Series 85 ("HEP-85") and High Equity Partners
L.P. - Series 88 ("HEP-88") which are both affiliated partnerships.
On November 30, 1995, after the Court preliminarily approved a
settlement of the California Action but ultimately declined to grant final
approval and after the Court granted motions to intervene, 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 (the "General Partners"), a subsidiary of the
indirect corporate parent of the General Partners, and the indirect corporate
parent of the General Partners. The Consolidated Complaint alleged various state
law class and derivative claims, including claims for breach of fiduciary
duties; breach of contract; unfair and fraudulent business practices under
California Bus. & Prof. Code Sec. 17200; negligence; dissolution, accounting and
receivership; fraud; and negligent misrepresentation. The Consolidated Complaint
alleged, among other things, that the General Partners caused a waste of the 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 HEP partnerships without
trying to run the HEP partnerships for the purposes for which they are intended;
that the General Partners acted improperly to enrich themselves in their
position of control over the HEP partnerships and that their actions prevented
non-affiliated entities from making and completing tender offers to purchase
units in the HEP partnerships; 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 took
a heavily overvalued partnership asset management fee; and that limited
partnership units were sold and marketed through the use of false and misleading
statements.
The Court entered an order on January 14, 1997 rejecting the
settlement and concluding that there had not been an adequate showing that the
settlement was fair and reasonable. On February 24, 1997, the Court granted the
request of one plaintiffs' law firm to withdraw as class counsel. Thereafter, in
June 1997, the plaintiffs again amended their complaint (the "Second Amended
Complaint"). The Seconded Amended Complaint asserts substantially the same
claims as the Consolidated Complaint, except that it no longer contains causes
of action for fraud, for negligent misrepresentation, or for negligence. The
defendants served answers denying the allegations and asserting numerous
affirmative defenses. In February 1998, the Court certified three plaintiff
classes consisting of current unit holders in each of the three HEP
partnerships. On March 11, 1998, the Court stayed the California Action
temporarily to permit the parties to engage in renewed settlement discussions.
The General Partners believe that each of the claims asserted
in the Consolidated Complaint are meritless and intend to continue to vigorously
defend the California Action. It is impossible at this time to predict what the
defense of the California Action 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.
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
<PAGE>
incurred in defending this litigation and the costs of preparing settlement
materials. Through December 31, 1997, the General Partners had billed the
Partnership a total of $1,058,511 for these costs $824,511 of which was paid in
February 1997.
On February 6,1998, Everest Investors 8, LLC ("Everest")
commenced an action in the Superior Court of the State of California for the
County of Los Angeles (Case No. BC 185554), against, among others, the HEP
partnerships and Resources Pension Shares 5 LP (an affiliated partnership), the
general partners of each of the partnerships, and DCC Securities Corp. In the
action, Everest alleged, among other things, that the partnerships and the
general partners breached the provisions of the applicable partnership
agreements by refusing to recognize transfers to Everest of limited partnership
units purportedly acquired pursuant to tender offers that had been made by
Everest (the "Everest Tender Units"). Everest sought injunctive relief (a)
directing the recognition of transfers to Everest of the Everest Tender Units
and the admission of Everest as a limited partner with respect to the Everest
Tender Units and (b) enjoining the transfer of the Everest Tender Units to any
either party. Everest seeks damages, including punitive damages, for alleged
breach of contract, defamation and intentional interference with contractual
relations. Everest's motion for a temporary restraining order was denied on
February 6, 1998. A hearing on Everest's application for a preliminary
injunction had been scheduled for February 26, however, on February 20, 1998,
Everest asked the Court to take its application off calendar. The defendants
served answers denying the allegations and asserting numerous affirmative
defenses. Merits discovery has commenced. The partnerships and the general
partners believe that Everest's claims are without merit and intend to
vigorously contest the action.
On March 27, 1998, Everest commenced an action in the United
States District Court for the Central District of California against, among
others, the general partners of the HEP partnerships. In the action, Everest
alleged, among other things, various violations of the Williams Act Section
14(d) of the Securities Exchange Act of 1934 in connection with the general
partners' refusal to recognize transfers to Everest of limited partnership units
purportedly acquired pursuant to the Everest tender offers and the letters sent
by the general partners to the limited partners advising them of the general
partners' determination that the Everest tender offers violated applicable
securities laws. The general partners believe that Everest's claims are without
merit and intend to vigorously contest the action.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report through the
solicitation of proxies or otherwise.
<PAGE>
PART II
Item 5. Market for the Registrant's Securities and
Related Security Holder Matters
Units of the Partnership are not publicly traded. There are
certain restrictions set forth in the Partnership's amended limited partnership
agreement (the "Limited Partnership Agreement") which may limit the ability of a
limited partner to transfer Units. Such restrictions could impair the ability of
a limited partner to liquidate its investment in the event of an emergency or
for any other reason.
In 1987, the Internal Revenue Service adopted certain rules
concerning publicly traded partnerships. The effect of being classified as a
publicly traded partnership would be that income produced by the Partnership
would be classified as portfolio income rather than passive income. In order to
avoid this effect, the Limited Partnership Agreement contains limitations on the
ability of a limited partner to transfer Units in circumstances in which such
transfers could result in the Partnership being classified as a publicly traded
partnership. However, due to the low volume of transfers of Units, it is not
anticipated that this will occur.
As of March 15, 1998, there were 12,156 holders of Units of
the Partnership, owning an aggregate of 588,010 Units (including Units held by
the initial limited partner).
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Distributions per Unit of the Partnership for periods during
1996 and 1997 were as follows:
Distributions for the Amount of Distribution
Quarter Ended Per Unit
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March 31, 1996 $ .62
June 30, 1996 $ .62
September 30, 1996 $ .62
December 31, 1996 $ .62
March 31, 1997 $ .77
June 30, 1997 $ .96
September 30, 1997 $ 1.15
December 31, 1997 $ 1.15
The source of distributions and capital improvements in 1996
and in 1997 was cash flow from operations . 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.
Pursuant to an agreement dated as of March 6, 1998 among
Presidio Capital Corp., American Real Estate Holding L.P. and Olympia Investors
L.P. (the "Purchaser"), on March 12, 1998, the Purchaser commenced a tender
offer to purchase up to 40% of the outstanding units of limited partnership
interest at a purchase price of $85.00 per unit.
The agreement provides, among other things, for: (i) the
Purchaser's tender offers for up to 40% of the outstanding units of limited
partnership interest of the Partnership and of Integrated Resources High Equity
Partners, Series 85, and High Equity Partners L.P. -Series 88 (collectively the
"Partnerships") and the cooperation of the general partners of the Partnerships
(collectively, the "General Partners") to facilitate such offers (including
furnishing the Purchaser with limited partner lists for use in connection with
the tender offers and taking a neutral stance with respect to the tender offers)
and the transfer of tendered units to the Purchaser without transfer fees; (ii)
an agreement by the Purchaser and its affiliates to limit their acquisition of
units to those acquired in the tender offers and to limit their acquisition of
assets or properties of the Partnerships to properties or assets the General
Partners or their affiliates have publicly announced their intention to sell or
in respect of which they have hired a broker; (iii) an agreement by the
Purchaser and its affiliates not to (A) seek the removal of the General Partners
or call any meeting of limited partners of the Partnerships; (B) make any
proposal to or seek proxies from limited partners of the Partnerships; or (C)
act, either alone or in concert with others, to seek to control the management,
policies or affairs of the Partnerships or to effect any business combination or
other extraordianry transactions with the Partnerships or the General Partners;
(iv) an agreement by the Purchaser and its affiliates to vote all units owned by
them in favor of a proposal, if any, by the General Partners resulting in
limited partners receiving securities listed on NASDAQ or a national securities
exchange; (v) the Purchaser's grant to an affiliate of the General Partners of
an option to purchase 50% of the units acquired in the offers at a price equal
to the lesser of the price paid by the Purchaser or $85.00 per unit (except that
this limitation does not apply, if the purchase price in the offer is
<PAGE>
increased to more than $99.97 in response to a competing bid), plus 50% of the
Purchaser's costs associated with the offer; (vi) the grant to that same
affiliate of the General Partners of a similar option to purchase 50% of the
units in the other Partnerships acquired pursuant to the tender offers; and
(vii) an agreement pursuant to which either party can initiate so-called
"buy/sell" procedures by notifying the other of a specified price per unit (not
to exceed the then current net asset value of the units) and the other terms and
conditions on which the non-initiating party would then be requried to elect
(subject to certain exceptions) either to buy the units acquired in connection
with the tender offer from the initiating party or to sell the units to the
initiating party. The agreements of the Purchaser and its affiliates described
in clauses (ii), (iii), and (iv) above expire on March 6, 2001, but may expire
earlier under certain circumstances.
On March 25, 1998, the Partnership advised its limited
partners of its neutral stance on the offer.
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenue $12,199,975 5 $11,748,459 $ 10,452,432 $10,233,925 $ 11,436,166
Net Income (Loss) $ 2,845,625 5 $ 2,244,520 $(22,084,905)3 $ 936,307 2 $(16,511,584)1
Net Income (Loss) per Unit $ 4.60 $ 3.63 $ (35.68)3 $ 1.51 2 $ (26.68)1
Distribution Per Unit4 $ 4.03 $ 2.48 $ 2.48 $ 2.45 $ 2.96
Total Assets $ 61,919,546 $61,979,385 $ 60,266,933 $83,682,263 $ 84,394,634
</TABLE>
- ---------------
(1) 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.
(2) 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.
(3) 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.
<PAGE>
(4) 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
(5) Revenues and Net Income for the year ended December 31, 1997 includes a
$950,691 gain from the sale of 230 East Ohio.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
The Partnership's real estate properties are commercial
properties except for the Melrose Out Parcel which is an undeveloped parcel of
land for which the Partnership has entered into a ground lease. All properties
were acquired for cash. The Partnership's public offering of Units commenced on
April 28, 1986. As of October 1, 1987, the date of the final admission of
limited partners, the Partnership had accepted subscriptions for 588,010 Units
(including Units held by the initial limited partner) for aggregate net proceeds
of $142,592,500 (gross proceeds of $147,002,500 less organization and offering
expenses aggregating $4,410,000).
The Partnership uses working capital reserves remaining from
the net proceeds of its public offering and any undistributed cash from
operations as its primary source of liquidity. For the year ended December 31,
1997 all capital expenditures and distributions were funded from cash flows. As
of December 31, 1997, total remaining working capital reserves amounted to
approximately $5,889,000. 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 If the real estate market
conditions deteriorate in any of the areas where the Partnership's properties
are located, there is substantial risk that this would have an adverse effect on
cash flow distributions. Working capital reserves are temporarily invested in
short-term money market instruments and are expected, together with cash flow
from operations, to be sufficient to fund future capital improvements to the
Partnership's properties.
During the year ended December 31, 1997, cash and cash
equivalents increased $2,419,123 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 $3,214,689 for the
year ended December 31, 1997. In addition, the Partnership received $2,326,377
from the sale of 230 East Ohio. The Partnership used $955,591 for capital
expenditures related to capital and tenant improvements to the properties and
$2,166,352 for distributions to partners during 1997.
<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
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Century Park I ........... $ 506,704 $ 28,010 $1,243,594
568 Broadway ............. 84,805 233,376 742,972
Seattle Tower ............ 78,754 352,522 227,677
Commonwealth ............. 41,003 227,741 5,353
Commerce Plaza I ........ 220,935 76,803 229,528
Melrose Crossing ......... 84,202 45,628 48,519
Matthews Festival ........ 133,029 24,586 57,699
Sutton Square ............ 52,625 106,766 43,771
230 East Ohio ............ 22,707 37,983 246,706
TMR Warehouses ........... 3,620 3,951 16,918
Melrose Out Parcel ...... 0 0 0
---------- ---------- ----------
Totals ................... $1,228,384 $1,137,366 $2,862,737
========== ========== ==========
</TABLE>
The Partnership has budgeted expenditures for capital
improvements and capitalized tenant procurement costs in 1998 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 has begun to recover from the effects
of the substantial decline in the market value of existing properties. However,
market values have been slow to recover, and high vacancy rates continue to
exist in some 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 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.
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. All of the Partnership's
properties have experienced varying degrees of operating difficulties and the
Partnership recorded significant impairment write-downs in 1995 and prior years.
Improvements in the real estate market and in the properties operations resulted
in no write-downs for impairment being needed in 1996 or 1997.
The following table represents the write-downs for impairment
recorded on certain of the Partnership's properties:
<TABLE>
<CAPTION>
Property 1995 Prior
-------- ------------ -------------
<S> <C> <C>
Century Park I $ 1,250,000 $ 10,450,000
568 Broadway 2,569,050 8,252,100
Seattle Tower 3,550,000 2,500,000
Commonwealth 1,700,000 4,100,000
Commerce Plaza I 0 2,700,000
Melrose Crossing 7,200,000 4,900,000
Matthews Festival 5,300,000 0
230 East Ohio 2,200,000 6,600,000
------------ -------------
$ 23,769,050 $ 39,502,100
============ ============
</TABLE>
The details of each 1995 write-down are as follows:
<PAGE>
Century Park I
During 1995, 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.
568 Broadway
During 1995, significantly greater capital improvement
expenditures than were previously anticipated were 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.
Seattle Tower
The Partnership did not achieve leasing expectations at
Seattle Tower and occupancy in 1995 remained at approximately 80%. In addition,
market rents remained lower than projected. 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.
Commonwealth
Commonwealth's occupancy in 1995 was low. In addition, the
property required 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.
<PAGE>
Melrose Crossing
Occupancy at Melrose Crossing declined to 50% in early 1995.
As a result, income did not meet projected 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.
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. 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.
230 East Ohio Street
In 1995, the Partnership did not achieve leasing expectations
at 230 East Ohio Street and occupancy remained low. In addition, real estate
taxes and other costs 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.
On October 2, 1997, the Partnership closed on the sale of the
230 East Ohio property, located in Chicago, Illinois, to an existing tenant in
the building for $2,800,000. As a result of the sale, the Partnership recognized
a Gain on the Sale of Property of $950,651 during the fourth quarter 1997.
<PAGE>
Results Of Operations
1997 vs. 1996
The Partnership experienced an increase in net income for the
year ended December 31, 1997 compared to 1996 primarily due to the gain on the
sale of 230 East Ohio, lower costs and expenses and higher interest income in
1997, partially offset by lower revenues.
Rental revenues decreased during the year ended December 31,
1997 at Melrose I due to certain tenants vacating the premises in late 1996 and
early 1997 and at 230 East Ohio because of the sale of the property on October
2, 1997. These decreases for the year ended December 31, 1997 were partially
offset by an increase in rental revenue at 568 Broadway and Commonwealth due to
higher rental rates and occupancy rates, respectively, as lease renewals and new
leases were executed in the second half of 1996 and in early 1997.
Costs and expenses decreased slightly during the year ended
December 31, 1997 compared to 1996, due to a decrease in administrative
expenses, asset management fee and property management fee partially offset by
and increase in operating expenses and depreciation. Administrative expenses for
the year ended December 31, 1997 decreased, as legal and accounting fees related
to ongoing litigation and the HEP reorganization were higher in 1996. The
Partnership's asset management fee and property management fees decreased
because of reduced assets under management and revenues received from tenants,
respectively, due to the sale of 230 East Ohio. Operating expenses increased
during the year ended December 31, 1997 due to primarily increases in real
estate taxes and bad debt expenses. Overall real estate tax expense was higher
at 568 Broadway in 1997 due to the significant refunds received in 1996 which
offset the annual tax payments. Bad debt expenses decreased at Commonwealth and
Melrose I because certain tenants vacated in 1996 at which time the receivables
deemed to be uncollectible were written off. No such bad debt expenses were
incurred in 1997.
Interest income increased during the year ended December 31,
1997 as compared to 1996 due to higher rates and higher invested cash balances.
Other income increased slightly during the year ended December 31, 1997 compared
to 1996 due to a greater number of investor transfers in 1997.
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.
<PAGE>
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 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.
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 7
to the Partnership's financial statements for a description thereof.
Year 2000 Compliance
The Partnership's accounting, administrative and property
management services are provided by affiliates of the General Partners. Those
affiliates have and will continue to make certain investments in their software
systems and applications to ensure that they are year 2000 compliant. The
Partnership's management believes that the financial impact to the Partnership
of ensuring its year 2000 compliance has not been and is not anticipated to be
material to the Partnership's financial position or results of operations.
<PAGE>
Item 8. Financial Statements and Supplementary Data
HIGH EQUITY PARTNERS L.P. - SERIES 86
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
I N D E X
Independent Auditors' report....................................................
Financial statements, years ended
December 31, 1997, 1996 and 1995
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, 1997 and 1996, and
the related statements of operations, partners' equity and cash flows for each
of the three years in the period ended December 31, 1997. 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 and the financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of High Equity Partners L.P. - Series 86 at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 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.
/s/DELOITTE & TOUCHE LLP
- ------------------------
DELOITTE & TOUCHE LLP
March 27, 1998
New York, NY
<PAGE>
<TABLE>
<CAPTION>
HIGH EQUITY PARTNERS L.P. - SERIES 86
BALANCE SHEETS
December 31,
---------------------------
ASSETS
1997 1996
----------- -----------
<S> <C> <C>
Real Estate .................................................. $48,015,174 $50,401,985
Cash and cash equivalents .................................... 9,828,701 7,409,578
Other assets ................................................. 3,827,957 3,867,372
Receivables .................................................. 247,714 300,450
----------- -----------
TOTAL ASSETS ................................................. $61,919,546 $61,979,385
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Accounts payable and accrued expenses ........................ $ 2,018,260 $ 2,131,201
Due to affiliates ............................................ 699,043 1,325,213
Distributions payable ........................................ 711,801 383,754
----------- -----------
Total liabilities ....................................... 3,429,104 3,840,168
----------- -----------
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY:
Limited partners' equity (588,010 units issued and outstanding 55,564,973 55,231,308
General partners' equity ..................................... 2,925,469 2,907,909
----------- -----------
Total partners' equity ................................. 58,490,442 58,139,217
----------- -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY ....................... $61,919,546 $61,979,385
=========== ===========
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
HIGH EQUITY PARTNERS L.P. - SERIES 86
STATEMENTS OF OPERATIONS
For the Years Ended
December 31,
----------------------------------------------
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
Rental Revenue .................................. $ 11,249,284 $ 11,748,459 $ 10,452,432
------------ ------------ ------------
Costs and Expenses:
Operating expenses .................. 4,800,538 4,632,225 4,962,913
Depreciation and amortization ....... 1,974,299 1,941,202 1,858,404
Partnership management fee .......... 1,376,011 1,406,204 1,406,204
Administrative expenses ............. 1,248,054 1,414,940 522,657
Property management fee ............. 416,429 435,467 379,720
Write-down for impairment ............ -- -- 23,769,050
------------ ------------ ------------
9,815,331 9,830,038 32,898,948
------------ ------------ ------------
Income (loss) before interest and other income .. 1,433,953 1,918,421 (22,446,516)
Gain on sale of property ................ 950,691 -- --
Interest income ........................ 374,716 245,027 303,186
Other income ........................... 86,265 81,072 58,425
------------ ------------ ------------
Net Income (loss) ............................... $ 2,845,625 $ 2,244,520 $(22,084,905)
============ ============ ============
Net income (loss) attributable to:
Limited partners ........................ $ 2,703,344 $ 2,132,294 $(20,980,660)
General partners ....................... 142,281 112,226 (1,104,245)
------------ ------------ ------------
Net income (loss) ............................... $ 2,845,625 $ 2,244,520 $(22,084,905)
============ ============ ============
Net income (loss) per unit of limited partnership
Interest (588,010 units outstanding) ....... $ 4.60 $ 3.63 $ (35.68)
============ ============ ============
</TABLE>
See notes to financial statements
<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, 1995 ........... $ 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 (76,752) (1,458,264) (1,535,016)
($2.48 per limited partnership unit) ------------ ------------ ------------
Balance, December 31, 1995 ......... 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 ......... 2,907,909 55,231,308 58,139,217
Net Income ......................... 142,281 2,703,344 2,845,625
Distributions as return of capital . (124,721) (2,369,679) (2,494,400)
($4.03 per limited partnership unit) ------------ ------------ ------------
Balance, December 31, 1997 ......... $ 2,925,469 $ 55,564,973 $ 58,490,442
============ ============ ============
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
HIGH EQUITY PARTNERS L.P. - SERIES 86
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss) ..................................... $ 2,845,625 $ 2,244,520 $(22,084,905)
Adjustments to reconcile net income (loss) to net
Cash provided by operating activities:
Write-down for impairment ........................ -- -- 23,769,050
Depreciation and amortization .................... 1,974,299 1,941,202 1,858,404
Straight line adjustment for stepped lease rentals (103,605) (164,035) (375,772)
Gain on sale of real estate ...................... (950,691) -- --
Changes in asset and liabilities:
Accounts payable and accrued expenses ............ (112,941) 167,830 208,913
Receivables ...................................... 52,736 297,494 (14,196)
Due to affiliates ................................ (626,170) 835,118 (4,322)
Other assets ..................................... 135,436 (442,360) (620,024)
------------ ------------ ------------
Net cash provided by operating activities ............. 3,214,689 4,879,769 2,737,148
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of real estate ................ 2,326,377 -- --
Improvements to real estate ...................... (955,591) (687,199) (2,200,197)
------------ ------------ ------------
Net cash provided by (used in) investing activities ... 1,370,786 (687,199) (2,200,197)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners ........................ (2,166,352) (1,535,016) (1,535,016)
------------ ------------ ------------
Increase (Decrease) in Cash and Cash Equivalents ...... 2,419,123 2,657,554 (998,065)
Cash and Cash Equivalents, Beginning of Year .......... 7,409,578 4,752,024 5,750,089
------------ ------------ ------------
Cash and Cash Equivalents, End of Year ................ $ 9,828,701 $ 7,409,578 $ 4,752,024
============ ============ ============
</TABLE>
See notes to financial statements
<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. The Partnership
invested in three shopping centers and eight office/industrial
properties (two of which were sold), none of which are
encumbered by debt.
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.
Leases
The Partnership accounts for its leases under the operating
method. Under this method, revenue is recognized as rentals
become due, except for stepped leases where the revenue from
the lease is averaged over the life of the lease.
Depreciation
Depreciation is computed using the straight-line method over
the useful life of the property, which is estimated to be 40
years. The cost of properties represents the initial cost of
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the properties to the Partnership plus acquisition and closing
costs less write-downs, if any. Tenant improvements are
amortized over the applicable lease term.
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 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.
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
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1997, 1996 and 1995.
Recently issued accounting pronouncements
The Financial Accounting Standards Board ("FASB") has recently
issued several new accounting pronouncements. Statement No.
130, "Reporting Comprehensive Income" establishes standards
for reporting and display of comprehensive income and its
components. Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information: establishes standards
for the way that public business enterprises report
information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial
reports issued to shareholders. It also establishes standards
for related disclosure about products and services, geographic
areas, and major customers. These two standards are effective
for the Partnership's 1998 financial statements, but the
Partnership does not believe that they will have any effect on
the Partnership's computation or presentation of net income or
other disclosures.
The implementation in 1997 of FASB Statement No. 128,
"Earnings per Share" and Statement No. 129, "Disclosure of
Information about capital Structure" did not have any impact
on the Partnership financial statements.
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
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 also 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. Accordingly, conflicts of interest may arise
between the Partnership and such other businesses. Subject to
the rights of the Limited Partners under the Limited
Partnership Agreement, Presidio controls the Partnership
through its indirect ownership of all the shares of the
General Partners. On August 28,1997, an affiliate of NorthStar
Capital Partners acquired all of the Class B shares of
Presidio. This acquisition, when aggregated which other
acquisitions, caused NorthStar Capital Partners to acquire
indirect control of the General Partners.
On November 2, 1997 the Administrative Services Agreement with
Wexford Management LLC ("Wexford"), the administrator for
Presidio, expired pursuant to its terms. Pursuant to that
agreement, Wexford had authority to designate directors of the
General Partners. Presidio also entered into a management
agreement with NorthStar Presidio Management Company, LLC
("NorthStar Presidio"). Under the terms of the management
agreement, NorthStar Presidio will provide the day-to-day
management of Presidio, and its direct and indirect
subsidiaries and affiliates. Effective November 3, 1997,
Wexford and Presidio entered into an Administrative Services
Agreement dated as of November 3, 1997 (the "ASA"). The ASA
provides that Wexford will continue to provide consulting and
administrative services to Presidio and its affiliates for a
term of six months. During the years ended December 31, 1997
and 1996, reimbursable expenses paid to Wexford by the
Partnership amounted to $43,361 and $83,516, respectively.
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
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
(CONTINUED)
management functions for certain properties. For the years
ended December 31, 1997, 1996 and 1995, Resources Supervisory
was entitled to receive $416,428, $435,467, and $379,720 in
total, respectively, of which $287,466, $254,005, and $196,480
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, 1997, 1996 and 1995, the
Administrative General Partner earned $1,376,011, $1,406,204,
and $1,406,204, respectively.
The general partners are allocated 5% of the net income or
(losses) of the Partnership which amounted to $142,281,
$112,226, and $(1,104,245) in 1997, 1996 and 1995,
respectively. The General Partners are also entitled to
receive 5% of distributions, which amounted to $124,721,
$76,752, and $76,752 in 1997, 1996 and 1995, 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. All fees received by the General Partners
are subject to certain limitations as set forth in the
Partnership Agreement.
During July 1996 through March 1998, Millennium Funding III
Corp., a wholly owned indirect subsidiary of Presidio,
contracted to purchase 45,320 units of the Partnership from
various limited partners, which represents approximately 7.7%
of the outstanding limited partnership units. During 1997,
distributions in the amount of $13,904 were received by
Millennium Funding III Corp. related to these units.
Pursuant to an agreement dated as of March 6, 1998 among
Presidio, American Real Estate Holding L.P. and Olympia
Investors L.P. (the "Purchaser"), on March 12, 1998, the
Purchaser commenced a tender offer to purchase up to 40% of
the outstanding units of limited partnership interest at a
purchase price of $85.00 per unit.
4. REAL ESTATE
Management recorded write-downs for impairment totaling
$23,769,050 in 1995. No write-downs were required for the
years ended December 31, 1996 or 1997. The details of
write-downs recorded in 1995 are as follows:
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
4. REAL ESTATE (CONTINUED)
Commonwealth's occupancy in 1995 was low. In addition, the
property required 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.
During 1995, 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.
In 1995, the Partnership did not achieve leasing expectations
at 230 East Ohio and occupancy 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.
On October 2, 1997, the Partnership closed on the sale of the
230 East Ohio property, located in Chicago, Illinois, to an
existing tenant in the building for $2,800,000. As a result of
the sale, the Partnership recognized a Gain on the Sale of
Property of $950,651 during the fourth quarter 1997. The
Partnership did not achieve leasing expectations at Seattle
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
4. REAL ESTATE (CONTINUED)
Tower in 1995 and occupancy remained at approximately 80%. In
addition, market rents were lower than projected. 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.
During 1995, 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.
Occupancy at Melrose Crossing declined to 50% in early 1995.
As a result, income levels did not 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.
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
4. REAL ESTATE (CONTINUED)
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.
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.
The following table is a summary of the Partnership's real
estate as of:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996
------------ -------------
<S> <C> <C>
Land ................................... $ 11,669,652 $ 12,305,557
Buildings and improvements ............. 56,768,084 58,172,943
------------ ------------
68,437,736 70,478,500
Less: Accumulated depreciation ........ (20,422,562) (20,076,515)
------------ ------------
$ 48,015,174 $ 50,401,985
============ ============
</TABLE>
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
4. REAL ESTATE (CONTINUED)
The following is a summary of the Partnership's share of
anticipated future receipts under noncancellable leases:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-----------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 8,214,000 $ 7,758,000 $ 7,251,000 $ 6,422,000 $ 5,787,000 $17,598,000 $53,030,000
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
5. DISTRIBUTION PAYABLE
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Limited Partners ($1.15 and $.62 per unit) ....... $676,211 $364,566
General Partners ................................. 35,590 19,188
--------- --------
$711,801 $383,754
======== ========
</TABLE>
Such distributions were paid in the subsequent quarters
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
6. DUE TO AFFILIATES
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Partnership asset management fee ........................ $ 321,358 $ 351,551
Reorganization and litigation cost reimbursement (Note 7) 234,000 824,511
Property management fee ................................. 93,685 99,151
Non-accountable expense reimbursement .................. 50,000 50,000
---------- ----------
$ 699,043 $1,325,213
========== ==========
</TABLE>
Such amounts were paid in the subsequent quarters
7. COMMITMENTS AND CONTINGENCIES
a) 568 Broadway Joint Venture is currently involved in litigation
with a number of present or former tenants who are in default
on their lease obligations. Several of these tenants have
asserted claims or counter claims seeking monetary damages.
The plaintiffs' allegations include but are not limited to
claims for breach of contract, failure to provide certain
services, overcharging of expenses and loss of profits and
income. These suits seek total damages of in excess of $20
million plus additional damages of an indeterminate amount.
The Broadway Joint Venture's action for rent against Solo
Press was tried in 1992 and resulted in a judgement in favor
of the Broadway Joint Venture for rent owed. The Partnership
believes this will result in dismissal of the action brought
by Solo Press against the Broadway Joint Venture. Since the
facts of the other actions which involve material claims or
counterclaims are substantially similar, the partnership
believes that the Broadway Joint Venture will prevail in those
actions as well.
b) A former retail tenant of 568 Broadway (Galix Shops, Inc.) and
a related corporation which is a retail tenant of a building
adjacent to 568 Broadway filed a lawsuit in the Supreme Court
of the State of New York, County of New York, against the
Broadway Joint Venture which owns 568 Broadway. The action was
filed on April 13, 1994. The plaintiffs allege that by
erecting a sidewalk shed in 1991, 568 Broadway deprived
plaintiffs of light, air and visibility to their customers.
The sidewalk shed was erected, as required by local law, in
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
connection with the inspection and restoration of the 568
Broadway building facade, which is also required by local law.
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, 1995 the Partnership was advised of the
existence of an action (the "California Action") 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 behalf of a class consisting of all of the
purchasers of limited partnership interests in the
Partnership, Integrated Resources of High Equity Partners,
Series 85 ("HEP-85") and High Equity Partners L.P. - Series 88
("HEP-88") which are both affiliated partnership.
On November 30, 1995, after the Court preliminarily approved a
settlement of the California Action but ultimately declined to
grant final approval and after the Court granted motions to
intervene, 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 (collectively
the "General Partners"), a subsidiary of the indirect
corporate parent of the General Partners, and the indirect
corporate parent of the General Partners. The Consolidated
Complaint alleged various state law class and derivative
claims, including claims for breach of fiduciary duties;
breach of contract; unfair and fraudulent business practices
under California Bus. & Prof. Code Sec. 17200; negligence;
dissolution, accounting and receivership; fraud; and negligent
misrepresentation. The Consolidated Complaint alleged, among
other things, that the General Partners caused a waste of the
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 HEP
partnerships without trying to run the HEP partnerships for
the purposes for which they are intended; that the General
Partners acted improperly to enrich themselves in their
position of control over the HEP partnerships and that their
actions prevented non-affiliated entities from making and
completing tender offers to purchase units in the HEP
partnerships; 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 took a heavily
overvalued partnership asset management fee; and that limited
partnership units were sold and marketed through the use of
false and misleading statements.
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Court entered an order on January 14, 1997 rejecting the
settlement and concluding that there had not been an adequate
showing that the settlement was fair and reasonable. On
February 24, 1997, the Court granted the request of one
plaintiffs' law firm to withdraw as class counsel. Thereafter,
in June 1997, the plaintiffs again amended their complaint
(the "Second Amended Complaint"). The Seconded Amended
Complaint asserts substantially the same claims as the
Consolidated Complaint, except that it no longer contains
causes of action for fraud, for negligent misrepresentation,
or for negligence. The defendants served answers denying the
allegations and asserting numerous affirmative defenses. In
February 1998, the Court certified three plaintiff classes
consisting of current unit holders in each of the three HEP
partnerships. On March 11, 1998, the Court stayed the
California Action temporarily to permit the parties to engage
in renewed settlement discussions.
The General Partners believe that each of the claims asserted
in the Consolidated Complaint are meritless and intend to
continue to vigorously defend the California Action. It is
impossible at this time to predict what the defense of the
California Action 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.
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, 1997, the General Partners had
billed the Partnership a total of $1,058,511 for these costs
$824,511 of which was paid in February 1997.
d) On February 6, 1998, Everest Investors 8, LLC ("Everest")
commenced an action in the Superior Court of the State of
California for the County of Los Angeles (Case No. BC 185554),
against, among others, the HEP partnerships, Resources Pension
Shares 5 LP (an affiliated partnership), the general partners
of each of the partnerships and DCC Securities Corp. In the
action, Everest alleged, among other things, that the
partnerships and the general partners breached the provisions
of the applicable partnership agreements by refusing to
recognize transfers to Everest of limited partnership units
purportedly acquired pursuant to tender offers that had been
made by Everest (the "Everest Tender Units"). Everest sought
injunctive relief (a) directing the recognition of transfers
to Everest of the Everest Tender Units and the admission of
Everest as a limited partner with respect to the Everest
Tender Units and (b) enjoining the
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
transfer of the Everest Tender Units to any either party.
Everest seeks damages, including punitive damages, for alleged
breach of contract, defamation and intentional interference
with contractual relations. Everest's motion for a temporary
restraining order was denied on February 6, 1998. A hearing on
Everest's application for a preliminary injunction had been
scheduled for February 26, however, on February 20, 1998,
Everest asked the Court to take its application off calendar.
The defendants served answers denying the allegations and
asserting numerous affirmative defenses. Merits discovery has
commenced. The partnerships and the general partners believe
that Everest's claims are without merit and intend to
vigorously contest the action.
On March 27, 1998, Everest commenced an action in the United
States District Court for the Central District of California
against, among others, the general partners of the HEP
partnerships. In the action, Everest alleged, among other
things, various violations of the Williams Act Section 14(d)
of the Securities Exchange Act of 1934 in connection with the
general partners' refusal to recognize transfers to Everest of
limited partnership units purportedly acquired pursuant to the
Everest tender offers and the letters sent by the general
partners to the limited partners advising them of the general
partners' determination that the Everest tender offers
violated applicable securities laws. The general partners
believe that Everest's claims are without merit and intend to
vigorously contest the action.
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
8. 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):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss) per financial statements ................... $ 2,845,625 $ 2,244,520 $(22,084,905)
Write-down for impairment .................................... -- -- 23,769,050
Difference in gain/loss from sale of 230 East Ohio ........... (7,675,270) -- --
Tax depreciation in excess of financial statement depreciation (1,800,699) (1,820,559) (1,755,692)
------------ ------------ ------------
Net taxable (loss) income .................................... $ (6,630,344) $ 423,961 $ (71,547)
============ ============ ============
</TABLE>
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
8. RECONCILIATION OF NET INCOME (LOSS) AND NET ASSETS PER
FINANCIAL STATEMENTS TO TAX REPORTING (CONTINUED)
The differences between the Partnership's assets and
liabilities for tax purposes and financial reporting purposes are as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------
<S> <C>
Net assets per financial statements .................... $ 58,490,442
Write-down for impairment .............................. 54,471,150
Tax depreciation in excess
of financial statement depreciation .................. (11,437,115)
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 ........................... $ 105,480,271
=============
</TABLE>
<PAGE>
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Partnership has no officers or directors. The
Administrative General Partner has overall administrative responsibility for the
Partnership and for operations and for resolving conflicts of interest after the
net proceeds of the offering are invested in properties. The Investment General
Partner has responsibility for the selection, evaluation, negotiation and
disposition of properties. The Associate General Partner does not devote any
material amount of its business time and attention to the affairs of the
Partnership. The Investment General Partner also serves as the managing general
partner of HEP-85 and HEP-88, both limited partnerships with investment
objectives similar to those of the Partnership. The Associate General Partner is
also a general partner in other partnerships affiliated with Presidio and whose
investment objectives are similar to those of the Partnership.
Based on a review of Forms 3 and 4 and amendments thereto
furnished to the Partnership pursuant to Rule 16a-3(e) during its most recent
fiscal year and Forms 5 and amendments thereto furnished to the Partnership with
respect to its most recent fiscal year, and written representations pursuant to
Item 405(b)(2)(i) of Regulation S-K, none of the General Partners, directors or
officers of the Administrative and Investment General Partners or beneficial
owners of more than 10% of the Units failed to file on a timely basis reports
required by Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") during the most recent fiscal or prior fiscal years. No written
representations were received from the partners of the Associate General
Partner.
As of March 15, 1998, the names and ages of, as well as the
positions held by, the officers and directors of the Administrative and
Investment General Partners and Associate General Partners are as follows:
<TABLE>
<CAPTION>
Has Served as an Officer and/or
Name Age Position Director Since
---- --- -------- --------------
<S> <C> <C> <C>
W. Edward Scheetz 33 Director November 1997
David Hamamoto 38 Director November 1997
Richard Sabella 42 President, Director November 1997
David King 35 Executive VP, Director and Assistant Treasurer November 1997
Larry Schacter 41 Senior VP, CFO January 1998
Kevin Reardon 39 VP, Secretary, Treasurer & Director November 1997
Allan B. Rothschild 36 Executive Vice President December 1997
Marc Gordon 33 Vice President November 1997
Charles Humber 24 Vice President November 1997
Adam Anhang 24 Vice President November 1997
Gregory Peck 23 Assistant Secretary November 1997
</TABLE>
<PAGE>
W. Edward Scheetz co-founded NorthStar with David Hamamoto in
July 1997 having previously been a partner at Apollo Real Estate Advisors L.P.
since 1993. From 1989 to 1993, Mr. Scheetz was a principal with Trammell Crow
Ventures.
David Hamamoto co-founded NorthStar with W. Edward Scheetz in
July 1997, having previously been a partner and co-head of the Real Estate
Principal Investment Area at Goldman, Sachs & Co., where he initiated the effort
to build a real estate principal investment business in 1988 under the auspices
of the Whitehall Funds.
Richard Sabella joined NorthStar in November 1997, having
previously been the head of real estate and a partner at the law firm of Cahill,
Gordon & Reindel since 1989. Mr. Sabella has also been associated with the law
firms of Milgrim, Thomajian, Jacobs & Lee, P.C. and Cravath, Swaine & Moore.
David King joined NorthStar in November 1997, having
previously been a Senior Vice President of Finance at Olympia & York Companies
(USA). Prior to joining Olympia & York in 1990. Mr. King worked for Bankers
Trust in its real estate finance group.
Larry Schachter joined NorthStar Presidio in January 1998,
having previously held the position as Controller at CB Commercial/Hampshhire,
LLC from 1996 to 1997. Prior to joining CB, Mr. Schachter held the position of
Controller at Goodrich Associates in 1996, and at Greenthal/Harlan Realty
Services Co. from 1992 to 1995. Mr. Schachter, who holds a CPA, graduated from
Miami University (Ohio).
Kevin Reardon joined NorthStar in October 1997, having
previously held the position of Controller at Lazard Freres Real Estate
Investors from 1996 to 1997. Prior to joing Lazard Freres, MR. Reardon was the
Director of Finance in charge of European expansion at the law firm of Dewey
Ballantine from 1993 to 1996. Prior to 1993, Mr. Reardon held a financial
position at Hearst-ABC-Viacom Entertainment Services. Mr. Reardon, who holds a
CPA, graduated from Fordham University with a B.S. in accounting.
Allan B. Rothschild joined NorthStar in December 1997, having
previously been the Senior Vice President and General Counsel of Newkirk Limited
Partnership wehre he managed a large portfolio of net-leased real estate assets.
Prior to joining Newkirk, Mr. Rothschild was associated with the law firm of
Proskauer, Rose LLP in its real estate group.
Marc Gordon joined NorthStar in October 1997, having
previously been a Vice President in the Real Estate Investment Banking Group at
Merrill Lynch where he executed corporate finance and strategic transactions for
public and private real estate ownership companies, including REITs, real estate
service companies, and real estate intensive operating companies. Prior to joing
Merrill Lynch, in 1993, Mr. Gordon was in the Real Estate and Banking Group at
the law firm of Irell & Manella. Mr. Gordon graduated from Dartmouth College
with an A.B. in economics and also holds a J.D. from the UCLA School of Law.
Charles Humber joined NorthStar in September 1997, having
previously worked for Merrill Lynche's Real Estate Investment Banking group from
1996 to 1997. Mr. Humber graduated from Brown University with a B.A. in
international relations and organizational behavior and management.
Adam Anhang joined NorthStar in August 1997, having previously
worked for the Athena Group's Russia and Former Soviet Union development tean
from 1996 to 1997. Mr. Anhang graduated from the Wharton School of the
University of Pennsylvania with a B.S. in economics with concentrations in
finance and real estate.
<PAGE>
Gregory Peck joined NorthStar in July 1997, having previously
worked for the Morgan Stanley Realty Real Estate Funds (MSREF) and Morgan
Stanley's Real Estate Investment Banking group from 1996 to 1997. Prior to
joining Morgan Stanley, Mr. Peck worked for Lazard Freres & Co. LLC in the Real
Estate Investment Banking group from 1994 to 1996. Mr. Peck graduated from
Columbia College with a A.B. in mathematics and a A.B. in economics.
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.
Affiliates of the General Partners are also engaged in
businesses related to the acquisition and operation of real estate.
Many of the officers, directors and partners of the Investment
General Partner, the Administrative General Partner and the Associate General
Partner listed above are also officers and/or directors of the general partners
of other public partnerships controlled by Presidio and various subsidiaries of
Presidio.
Item 11. Executive Compensation
The Partnership is not required to and did not pay
remuneration to the officers and directors of the Investment General Partner,
Administrative General Partner or the partners of the Associate General Partner.
Certain officers and directors of the Investment General Partner and the
Administrative General Partner receive compensation from the Investment General
Partner and the Administrative General Partner and/or their affiliates (but not
from the Partnership) for services performed for various affiliated entities,
which may include services performed for the Partnership; however, the
Investment General Partner and the Administrative General Partner believe that
any compensation attributable to services performed for the Partnership is
immaterial. See also "Item 13. Certain Relationships and Related Transactions."
Item 12. Security Ownership of Certain Beneficial
Owners and Management
As of March 15, 1998, an affiliate of the General Partners
owned approximately 7.7% of the Units. No directors, officers or partners of the
Investment General Partner or Administrative General Partner presently own any
Units
<PAGE>
To the knowledge of the Registrant, the following sets forth
certain information regarding ownership of the Class A shares of Presidio as of
March 11, 1998 (except as otherwise noted) by (i) each person or entity who owns
of record or beneficially five percent or more of the Class A shares, (ii) each
director and executive officer of Presidio, and (iii) all directors and
executive officers of Presidio as a group. To the knowledge of Presidio, each of
such shareholders has sole voting and investment power as to the shares shown
unless otherwise noted.
All outstanding shares of Presidio are owned by Presidio
Capital Investment Company, LLC ("PCIC"), a Delaware limited liability company.
The interests in PCIC (and beneficial ownership in Presidio) are held as
follows:
Percentage Ownership
in PCIC and Percentage
Beneficial Ownership
Name of Beneficial Owner in Presidio
------------------------ ------------------------
Five Percent Holders:
Presidio Holding Company, LLC(1) 71.93%
AG Presidio Investors, LLC(2) 14.12%
DK Presidio Investors, LLC(3) 8.45%
Stonehill Partners, LP(4) 5.50%
The holdings of the directors and executive officers of Presidio are as follows:
Directors and Officers:
Adam Anhang(5) 0%
Marc Gordon(5) 0%
David Hamamoto(5) 71.93%
Charles Humber(5) 0%
David King(5) 0%
Gregory Peck(5) 0%
Kevin Reardon(5) 0%
Allan Rothschild(5) 0%
Richard J. Sabella(5) 0%
Lawrence Schachter(5) 0%
W. Edward Scheetz(5) 71.93%
Directors and Officers as a group: 71.93%
(1) Presidio Holding Company, LLC is a New York limited liability
company whose address is 527 Madison Avenue, 16th Floor, New
York, New York 10022. PHC has two members, Polaris Operating
LLC ("Polaris") which holds a 1% interest, and Northstar
Operating, LLC ("Northstar") which holds a 99% interest.
Polaris is a Delaware limited liability company whose address
is 527 Madison Avenue, 16th Floor, New York, New York 10022.
Polaris has two members, Sextant Operating Corp. ("Sextant"),
which holds a 1% interest, and Northstar, which holds a 99%
interest. Sextant is a Delaware corporation whose address is
527 Madison Avenue, 16th Floor, New York, New York 10022 and
whose sole shareholder is Northstar. Northstar is a Delaware
limited liability company whose address is 527 Madison Avenue,
16th Floor, New York, New York 10022. Northstar has two
members, Northstar Capital Partners ("NCP"), which holds a 99%
interest, and Northstar Capital Holdings I, LLC ("NCHI"),
which holds a 1% interest. Both NCP and NCHI are Delaware
limited liability companies, whose business address is 527
Madison Avenue, 16th Floor, New York, New York 10022. NCP has
two members, NCHI, which holds a 74.75% interest, and
Northstar Capital Holdings II LLC ("NCHII"), which holds a
<PAGE>
25.25% interest. The business address for NCHII, a Delaware
limited liability company is 527 Madison Avenue, 16th Floor,
New York, New York 10022. NCHII has three members, NCHI, which
holds a 99% interest, Edward Scheetz, who holds a 0.5%
interest and David Hamamoto, who holds a 0.5% interest. Mr.
Scheetz, a U.S. citizen whose business address is 527 Madison
Avenue, 16th Floor, New York, New York 10022, is a founding
member of NCP. Mr. Hamamoto, a U.S. citizen whose business
address is 527 Madison Avenue, 16th Floor, New York, New York
10022, is a founding member of NCP. NCHI has two members, Mr.
Scheetz and Mr. Hamamoto, each of whom holds a 50% interest.
Pursuant to that certain Amended and Restated Pledge and
Security Agreement (the "Pledge Agreement") dated March 5,
1998 made by PHC in favor of Credit Suisse First Boston
Mortgage Capital LLC ("CSFB"), PHC pledged all of its
membership interest in PCIC to CSFB as security for loans
issued under the Loan Agreement dated as of February 20, 1998
by and among PHC and CSFB and the First Amendment thereon
dated March 5, 1998 (together, the "Loan Agreement"). The
Pledge Agreement and Loan Agreement contain standard default
and event of default provisions which may at a subsequent date
result in a change of control of PCIC and, therefore, the
Registrant.
(2) Each of Angelo, Gordon & Company, LP, as sole manager of AG
Presidio Investors, LLC, and John M. Angelo and Michael L.
Gordon, as general partners of the general partner of Angelo,
Gordon & Company, LP may be deemed to beneficially own for
purposes of rule 13 d-3 of the Exchange Act, the securities
beneficially owned by AG Presidio Investors, LLC. Each of John
M. Angelo and Michael L. Gordon disclaim such beneficial
ownership. The business address for such persons is c/o
Angelo, Gordon & Company, LP, 345 Park Avenue, 26th Floor, New
York, New York 10167.
(3) M.H. Davidson & Company, Inc., as sole manager of DK Presidio
Investors, LLC may be deemed to beneficially own for purposes
of Rule 13d-3 of the Exchange Act, the securities beneficially
owned by DK Presidio Investors, LLC. The business address for
such person is c/o M.H. Davidson & Company, 885 Third Avenue,
New York, New York 10022.
(4) Includes shares of PCIC beneficially owned by Stonehill
Offshore Partners Limited and Stonehill Institutional
Partners, LP. John A. Motulsky is a managing general partner
of Stonehill Partners, LP, a managing member of the investment
advisor to Stonehill Offshore Partners Limited and is a
general partner of Stonehill Institutional Partners, LP. John
A. Motulsky disclaims beneficial ownership of the shares held
by these entities. The business address for such person is c/o
Stonehill Investment Corporation, 110 East 59th Street, New
York, New York 10022.
(5) The business address for such person is 527 Madison Avenue,
16th Floor, 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, 1997, earned or received compensation or
payments for services or reimbursements from the Partnership or subsidiaries of
Presidio as follows:
<TABLE>
<CAPTION>
Name of Recipient Capacity in Which Served Compensation from the Partnership
- ----------------- ------------------------ ---------------------------------
<S> <C> <C>
Resources High Equity Inc. Investment General Partner $158,494 (1)
Resources Capital Corp. Administrative General Partner $1,773,744 (2)
Presidio AGP Corp. Associate General Partner $2,494 (3)
Resources Supervisory Management Corp. Affiliated Property Manager $128,962 (4)
</TABLE>
<PAGE>
(1) Of this amount, $2,494 represents the Investment General Partner's
share of distributions of cash from operations and $156,000 represents
reimbursements of actual costs incurred in defending the California
Action 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,
1997, ($6,685) of the Partnership's taxable loss was allocated to the
Investment General Partner.
(2) Of this amount, $119,732 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 $1,376,012 represents
the Partnership Asset Management Fee for managing the affairs of the
Partnership., and $78,000 represents reimbursements of actual costs
incurred in defending the California Action and the cost of preparing
settlement materials.
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, 1997, ($320,893) of the Partnership's taxable loss was
allocated to the Administrative General Partner.
(3) This amount represents the Associate General Partner's share of
distributions of cash from operations. In addition, for the year ended
December 31, 1997, ($6,685) of the Partnership's taxable loss was
allocated to the Associate General Partner pursuant to the
Partnership's Limited Partnership Agreement (the Associate General
Partner is entitled to receive .1% of the Partnership's net income or
net loss).
(4) This amount was earned pursuant to a management agreement with
Resources Supervisory, a wholly-owned subsidiary of Presidio, for
performance of certain functions relating to the management of the
Partnership's properties and the placement of certain tenants at those
properties. The total fee payable to Resources Supervisory was
$416,428, of which $287,466 was paid to unaffiliated management
companies.
<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, 1997, 1996 AND 1995
INDEX
Additional financial information furnished
pursuant to the requirements of Form 10-K:
Schedules - December 31, 1997, 1996 and 1995
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 CAPITAL CORP.
Administrative General Partner
Dated: March 27, 1998 By: /s/ Richard Sabella
--------------------
Richard Sabella
President and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, This report has been signed below by the following persons on behalf of
the registrant and in their capacities on the dates indicated.
Dated: March 27, 1998 By: /s/ Richard Sabella
--------------------
Richard Sabella
President and Director
(Principal Executive Officer)
Dated: March 27, 1998 By: /s/ Lawrence Schachter
----------------------
Lawrence Schachter
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Dated: March 27, 1998 By: /s/ Kevin Reardon
------------------
Kevin Reardon
Director, Vice President,
Treasurer and Secretary
Dated: March 27, 1998 By: /s/ David King
---------------
David King
Director and
Executive Vice President
<PAGE>
<TABLE>
<CAPTION>
HIGH EQUITY PARTNERS L.P. - SERIES 86
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
Costs
Capitalized
Subsequent to
Initial Cost Acquisition
--------------------------- ---------------------------
Buildings
And
Description Encumbrances Land Improvements Improvement Carrying Costs
----------- ------------ ---- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C<
RETAIL:
Melrose Crossing Shopping
Center Melrose Park, IL $ -- $ 2,002,532 $ 12,721,968 $ 811,061 $ 1,064,777
Matthews Township
Festival Shopping Center Matthews, NC -- 2,973,646 12,571,750 312,077 1,581,384
Sutton Square Shopping Center Raleigh, NC -- 2,437,500 10,062,500 190,948 1,025,898
----- ----------- ------------ ----------- ------------
7,413,678 35,356,218 1,314,086 3,672,059
----- ----------- ------------ ----------- ------------
OFFICE:
Commerce Plaza Office Building Richmond, VA -- 733,279 7,093,435 1,693,242 468,324
Century Pak I Office Complex Kearny Mesa, CA -- 3,122,064 12,717,936 1,899,861 1,203,130
568 Broadway Office Building New York, NY -- 2,318,801 9,821,517 4,914,353 1,220,484
Seattle Tower Office Building Seattle, WA -- 2,163,253 5,030,803 1,678,774 486,969
-------- ----------- ------------ ----------- ------------
-- 8,337,397 34,663,691 10,186,230 3,378,907
-------- ----------- ------------ ----------- ------------
INDUSTRIAL:
Commonwealth Industrial Park Fullerton, CA -- 3,749,700 7,125,300 265,333 767,573
TMR Warehouses Various, OH -- 369,215 5,363,935 23,283 435,653
Melrose (Lot #7) Melrose Park, IL -- 450,000 -- -- 36,628
------- ----------- ----------- ----------- ----------
-- 4,568,915 12,489,235 288,616 1,239,854
------- ----------- ----------- ----------- ----------
$ -- $20,319,990 $82,509,144 $11,788,932 $8,290,820
======= =========== =========== =========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Reductions
Recorded
Subsequent to Gross Amount at Which
Acquisition Carried at Close of Period
------------- ----------------------------------------
Buildings
And Accumulated Date
Write Downs Land Improvements Total Depreciation Acquired
----------- ---- ------------ ----- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
RETAIL:
Melrose Crossing Shopping
Center $ (12,100,000) $ 569,462 $ 3,930,876 $ 4,500,338 $ 2,631,342 1988
Matthews Township
Festival Shopping Center (5,300,000) 2,249,562 9,889,295 12,138,857 3,246,053 1988
Sutton Square Shopping Center -- 2,637,550 11,079,296 13,716,846 2,779,381 1988
------------- ----------- ------------ ------------- ------------
(17,400,000) 5,456,574 24,899,467 30,356,041 8,656,776
------------- ----------- ------------ ------------- ------------
OFFICE:
Commerce Plaza Office Building (2,700,000) 556,352 6,731,928 7,288,280 2,053,255 1987
Century Pak I Office Complex (11,700,000) 1,092,744 6,150,247 7,242,991 2,831,912 1986
568 Broadway Office Building (10,821,150) 922,338 6,531,667 7,454,005 2,612,701 1986
Seattle Tower Office Building (6,050,000) 724,808 2,584,991 3,309,799 1,279,809 1986
------------- ----------- ------------ ------------- ------------
(31,271,150) 3,296,242 21,998,833 25,295,075 8,777,677
------------- ----------- ------------ ------------- ------------
INDUSTRIAL:
Commonwealth Industrial Park (5,800,000) 2,032,937 4,074,969 6,107,906 1,645,105 1987
TMR Warehouses -- 397,271 5,794,815 6,192,086 1,343,004 1988
Melrose (Lot #7) -- 486,628 -- 468,628 -- 1988
------------- ----------- ------------ ------------- ------------
(5,800,000) 2,916,836 9,869,784 12,786,620 2,988,109
------------- ----------- ------------ ------------- ------------
$(54,471,150) $11,669,652 $56,768,084 $68,437,736 $20,422,562
============= =========== =========== =========== ============
</TABLE>
Note: The aggregate cost for Federal income tax purposes is $122,908,886 at
December 31, 1997.
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(A) RECONCILIATION OF REAL ESTATE OWNED:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR ... $ 70,478,500 $ 69,791,301 $ 91,360,154
ADDITIONS DURING THE YEAR ...... 955,591 687,199 2,200,197
Improvements to Real Estate
SUBTRACTIONS DURING THE YEAR ... (2,996,355) -- --
Sales - Net
OTHER CHANGES .................. -- -- (23,769,050)
Write-down for impairment ------------ ------------ ------------
BALANCE AT END OF YEAR (1) ..... $ 68,437,736 $ 70,478,500 $ 69,791,301
============ ============ ============
</TABLE>
(1) INCLUDES INITIAL COST OF THE PROPERTIES PLUS ACQUISITION AND CLOSING COSTS.
(B) RECONCILIATION OF ACCUMULATED DEPRECIATION:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR $ 20,076,515 $ 18,464,974 $ 16,824,115
ADDITIONS DURING THE YEAR .. 1,652,331 1,611,541 1,640,859
Depreciation Expense(1)
SUBTRACTIONS DURING THE YEAR (1,306,284) -- --
Sales ------------ ------------ ------------
BALANCE AT END OF YEAR ..... $ 20,422,562 $ 20,076,515 $ 18,464,974
============ ============ ============
</TABLE>
(1) DEPRECIATION IS PROVIDED ON BUILDINGS USING THE STRAIGHT-LINE METHOD OVER
THE USEFUL LIFE OF THE PROPERTY, WHICH IS ESTIMATED TO BE 40 YEARS.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary information extracted from the financial
statements of the December 31, 1997 Form 10-K of High Equity Partners
L.P.-Series 86 and is qualified in its entirety by reference to such financial
statemens.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,828,701
<SECURITIES> 0
<RECEIVABLES> 247,714
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 61,919,546
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 58,490,442
<TOTAL-LIABILITY-AND-EQUITY> 61,919,546
<SALES> 0
<TOTAL-REVENUES> 11,249,284
<CGS> 0
<TOTAL-COSTS> 4,800,538
<OTHER-EXPENSES> 5,014,793
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,894,934
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,894,934
<DISCONTINUED> 0
<EXTRAORDINARY> 950,691
<CHANGES> 0
<NET-INCOME> 2,845,625
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
