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, 1998
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: 015753
HIGH EQUITY PARTNERS L.P. - SERIES 86
-------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3314609
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
411 West Putnam Avenue, Greenwich CT 06830 (Address of
principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 862-7444
Securities registered pursuant to Section 12(b) of the Act:
None None
--------------------- -------------------------------------------
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest, $250 Per Unit
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Exhibit A to the Prospectus of the registrant dated April 28, 1986, filed
pursuant to Rule 424(b) under the Securities Act of 1933, as amended, is
incorporated by reference in Part IV of this Form 10-K.
<PAGE>
PART I
Item 1. Business.
---------
High Equity Partners L.P. - Series 86 (the "Partnership") is a Delaware
limited partnership formed as of November 14, 1985. The Partnership is engaged
in the business of operating and holding for investment previously acquired
income-producing properties, consisting of office buildings, shopping centers
and other commercial and industrial properties such as industrial parks and
warehouses. Resources High Equity, Inc., a Delaware corporation, is the
Partnership's investment general partner (the "Investment General Partner") and
Resources Capital Corp., a Delaware corporation, is the Partnership's
administrative general partner (the "Administrative General Partner"). Both the
Investment General Partner and the Administrative General Partner are
wholly-owned subsidiaries of Presidio Capital Corp., a British Virgin Islands
corporation ("Presidio"). Effective July 31, 1998, Presidio is indirectly
controlled by NorthStar Capital Investment Corp., a Maryland corporation. 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, 1999, the Partnership had invested all of its net
proceeds available for investment after establishing a working capital reserve
and had acquired the ten properties listed below. The Partnership's property
investments which contributed more than 15% of the Partnership's total gross
revenues were as follows: in 1998, 568 Broadway and Matthews represented 22% and
15% of gross revenues, respectively; in 1997, 568 Broadway and Matthews
represented 22% and 15%, respectively; in 1996, 568 Broadway represented 18.8%;
2
<PAGE>
in 1995, 568 Broadway and Matthews Festival represented 17.4% and 16.4%,
respectively.
The Partnership owned the following properties as of March 15, 1999:
(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 100% leased as of January 1, 1999 compared to 91% at January 1,
1998. There are no leases that represent at least 10% of the square footage of
the center scheduled to expire in 1999. Capital expenditures during 1998
included an upgrade to the lobby of Building 2 and construction costs associated
with leasing the remaining vacant space will be paid in 1999. Additional capital
expenditures for 1999 include a refurbishment allowance to SDG&E as provided in
tenant's original lease.
Century Park I competes with other office parks and office buildings in
the Kearny Mesa sub-market. New competition in the sub-market includes the
redevelopment of the adjacent property into the Cabrillo Technology Center with
141,800 square feet available plus an additional 284,000 square feet planned and
redevelopment of the 234 acre former General Dynamics site, now known as New
Century Center. Plans for New Century Center call for development of the site
with mixed use commercial, industrial, retail and entertainment areas
(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
3
<PAGE>
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, 1999 and January 1, 1998. There are no leases which represent at
least 10% of the square footage of the property scheduled to expire in 1999.
568 Broadway competes with several other buildings in the SoHo area.
(3) Seattle Tower. On December 16, 1986, a joint venture (the "Seattle
Landmark Joint Venture") comprised of the Partnership and HEP-85 acquired a fee
simple interest in Seattle Tower, a commercial office building located in
downtown Seattle ("Seattle Tower"). The Partnership and HEP-85 each have a 50%
interest in the Seattle Landmark Joint Venture.
Seattle Tower is located at Third Avenue and University Street on the
eastern shore of Puget Sound in the financial and retail core of the Seattle
central business district. Seattle Tower, built in 1928, is a 27-story
commercial building containing approximately 141,000 rentable square feet,
including almost 10,000 square feet of retail space and approximately 2,211
square feet of storage space. The building also contains a 55-car garage.
Seattle Tower is connected to the Unigard Financial Center and the Olympic Four
Seasons Hotel by a skybridge system. Seattle Tower, formerly Northern Life
Tower, represented the first appearance in Seattle of a major building in the
Art Deco style. It was accepted into the National Register of Historic Places in
1975. Seattle Tower's occupancy at January 1, 1999 was 96% as it was at January
1, 1998. There are approximately seventy tenants occupying the building. Leasing
efforts are focused on consolidating space to create single floor tenants. There
are no leases which represent at least 10% of the square footage of the property
scheduled to expire during 1999.
Repairs to the exterior building facade to include pointing, caulking
and waterproofing were completed in 1998 at a cost of $825,000 and replacement
of the penthouse roof was postponed until 1999 due to weather.
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
4
<PAGE>
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, 1999 and January 1, 1998. There are no leases which represent at least 10% of
the square footage of the property scheduled to expire during 1999.
In order to effectively market the vacant 34,000 square foot space,
work to separate the electrical service to the space is budgeted for 1999 as are
parking lot and roof repairs.
Commonwealth is subject to primary competition from many industrial
parks in north Orange County and southern Los Angeles County, many of which are
of more modern design with more efficient loading
docks and greater yard space.
(5) Commerce Plaza I. On April 23, 1987, the Partnership purchased a
fee simple interest in Commerce Plaza I located in Richmond, Virginia.
Commerce Plaza I is located in the Commerce Center Business Park, an
office park situated at the intersection of I-64, Glenside Drive and Broad
Street in Henrico County, northwest of Richmond, Virginia. This area, referred
to as the West End, contains established residential neighborhoods as well as
corporate headquarters and many of Richmond's suburban office parks. Commerce
Plaza I's building is constructed of steel with red brick facade and insulated
bronze tinted glass. It is situated on a site of approximately 4.2 acres, has a
net rentable area of approximately 85,000 square feet and provides parking for
approximately 300 cars. Commerce Plaza I was 100% leased as of January 1, 1999,
compared to 83% as of January 1, 1998.
Capital expenditures to refurbish the common areas of the building are
budgeted for 1999 and waterproofing of the north and west sides of the building
was completed in 1998.
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, 1999, the shopping center was 35% leased, compared to 33% at January 1, 1998.
There are no leases which represent 10% of the square footage of the center that
are scheduled to expire during 1999.
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.
5
<PAGE>
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. 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. As of January 1, 1999, the center was 93%
leased as compared to 94% as of January 1, 1998. There are no leases which
represent at least 10% of the square footage of the center scheduled to expire
in 1999.
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 which is 100%
leased. In addition, Matthews Corners, an 180,000 square foot center opened
across Independence Boulevard and includes Hannaford Food and Drug, Marshall's,
Linens' n Things. The closing of MJ Designs and Best Products in neighboring
centers provides additional competition for 40,000 square foot replacement
tenants in the market.
(8) Sutton Square Shopping Center. On April 15, 1988, the Partnership
purchased a fee simple interest in Sutton Square Shopping Center ("Sutton
Square"), located in Raleigh, North Carolina. Sutton Square is a 101,965 square
foot neighborhood shopping center located on a 10 acre site in North Raleigh.
Construction was completed in phases in 1984-85 and 1986-87. Anchor tenants,
Harris Teeter and Eckerd, comprise 44% of the leasable space. Sutton Square was
100% leased as of January 1, 1999 compared to 98% at January 1, 1998. There are
no leases which represent at least 10% of the square footage of the center
scheduled to expire in 1999. There are no significant capital expenditures
budgeted for 1999.
6
<PAGE>
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, 1999 and 1998, the Orange and Grove City
buildings were each 100% leased to a single tenant. In 1998 Simmons Company
renewed for one year in the Grove City facility and a five year renewal with
expansion option during the initial two years of the renewal term should be
finalized during the second quarter of 1999.
As of January 1, 1999, the Hilliard property was 100% vacant compared
to 74% leased on January 1, 1998. Needed parking lot repairs were completed in
1998 and the property is being actively marketed. The property's location away
from Interstate access is a deterrent to releasing.
The TMR Warehouses compete with numerous other warehouses in the market
area.
(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.
7
<PAGE>
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 unaffiliated
management companies that service the Partnership's properties. Services are
also performed by the Investment and Administrative General Partners and by
Resources Supervisory Management Corp. ("Resources Supervisory"), each of which
is an affiliate of the Partnership. Resources Supervisory currently provides
supervisory management and leasing services for Century Park I, Seattle Tower,
Commonwealth Industrial Park, Commerce Plaza I, Melrose Crossing, Matthews
Festival, 568 Broadway, and Sutton Square 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".
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).
8
<PAGE>
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.
In May 1993, limited partners in the Partnership commenced an
action (the "Action") 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 the purchasers of limited partnership interests in the Partnership. On April
7, 1994 the plaintiffs were granted leave to file an amended complaint on behalf
of a class consisting of all the purchasers of limited partnership interests in
the Partnership, Integrated Resources High Equity Partners, Series 85 and High
Equity Partners L.P. - Series 88 (collectively, the "HEP Partnerships").
9
<PAGE>
In November 1995, the original plaintiffs and intervening
plaintiffs filed a consolidated class and derivative action complaint (the
"Consolidated Complaint") alleging various state law class and derivative
claims, including claims for breach of fiduciary duty; breach of contract;
unfair and fraudulent business practices under California Bus. & Prof. Code
Section 17200; negligence; dissolution, accounting, receivership and removal of
general partner; fraud; and negligent misrepresentation. The Consolidated
Complaint alleges, among other things, that the general partners of the HEP
Partnerships collectively, "HEP General Partners" caused a waste of the HEP
Partnerships' assets by collecting management fees in lieu of pursuing a
strategy to maximize the value of the investments owned by the investors in the
HEP Partnerships, that the HEP General Partners breached their duty of loyalty
and due care to the investors by expropriating management fees from the HEP
Partnerships without trying to run the HEP Partnerships for the purposes for
which they were intended; that the HEP General Partners were acting improperly
to entrench 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 of limited partnership interest in
the HEP Partnerships (collectively, the "HEP Units"); that, by refusing to seek
the sale of the HEP Partnerships' properties, the HEP General Partners
diminished the value of the investors' equity in the HEP Partnerships; that the
HEP General Partners took heavily overvalued asset management fees; and that HEP
Units were sold and marketed through the use of false and misleading statements.
In early 1996, the parties submitted a proposed settlement to
the Court (the "Proposed Settlement"), which contemplated a reorganization of
the three HEP Partnerships into a single real estate investment trust, pursuant
to which approximately 85% of the shares of the real estate investment trust
would have been allocated to investors in the three HEP Partnerships (assuming
each of the HEP Partnerships participated in the reorganization), and
approximately 15% of the shares would have been allocated to the HEP General
Partners. As a consequence, the Proposed Settlement would, among other things,
have approximately tripled the HEP General Partners' equity interests in the HEP
Partnerships. In late 1996, the California Department of Corporations informed
the Court of the conclusion that the Proposed Settlement was unfair, and, in
early 1997, the Court declined to grant final approval of the Proposed
Settlement because the Court was not persuaded that the Proposed Settlement was
fair, adequate or reasonable as to the proposed class.
In July 1997, the plaintiffs filed an amended complaint, which
generally asserts the same claims as the earlier Consolidated Complaint but
contains more detailed factual assertions and eliminates some claims they had
previously asserted. The HEP General Partners challenged the amended complaint
on legal grounds and filed demurrers and a motion to strike. In October 1997,
the Court granted substantial portions of the HEP General Partners' motions.
Thereafter, the HEP General Partners served answers denying the allegations and
asserting numerous defenses.
10
<PAGE>
In February 1998, the Court certified three separate plaintiff
classes consisting of the current owners of record of HEP Units (but excluding
all defendants or entities related to such defendants), and appointed class
counsel and liaison counsel.
In mid-1998, the parties actively engaged in negotiations concerning a
possible settlement of the Action. In September 1998, the parties reached an
agreement in principle, and, during the following months, negotiated a more
formal settlement stipulation (the "Settlement Stipulation"), which they
executed in December 1998. The Settlement Stipulation was submitted to the Court
for preliminary approval in early January 1999. In February 1999, the Court gave
preliminary approval to the Settlement Stipulation and directed that notice of
the proposed settlement be sent to the previously certified class. The proposed
settlement contemplates (I) amendments to the Partnership Agreement that would
modify the existing fee struture; (II) a tender offer whereby the General
Partners would purchase up to 6.7% of the units from limited partners; and (III)
that the General Partners will use their best efforts to effect a reorganization
of the HEP Partnerships into REITs or other publicly traded entities. A hearing
to consider whether the Court should give final approval to the Settlement
Stipulation is scheduled for April 14, 1999. The settlement is subject to a
number of conditions. There can be no assurance that such conditions will be
fulfilled. The General Partners believe that each of the claims asserted in the
Action are meritless and, if for any reason a final settlement pursuant to the
Settlement Stipulation is not consummated, intend to continue to vigorously
defend the Action.
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, 1998, the Partnership paid the General Partners
a total of $1,034,510 for these costs.
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.
11
<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, 1999, there were 10,966 holders of Units of the
Partnership, owning an aggregate of 588,010 Units (including Units held by the
initial limited partner).
Distributions per Unit of the Partnership for periods during 1997 and
1998 were as follows:
Distributions for the Amount of Distribution
Quarter Ended Per Unit
------------- ----------------------
March 31, 1997 $ .77
June 30, 1997 $ .96
September 30, 1997 $1.15
December 31, 1997 $1.15
March 31, 1998 $1.15
June 30, 1998 $1.15
September 30, 1998 $1.15
December 31, 1998 $1.15
The source of distributions and capital improvements in 1997 and in
1998 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.
12
<PAGE>
From July 1996 through March 12, 1998, Millennium Funding III Corp., a
wholly owned indirect subsidiary of Presidio, purchased 45,320 units of the
Partnership from various limited partners.
In connection with a tender offer for units of the Partnership made
March 12, 1998 (the "Offer") by Olympia Investors, L.P., a Delaware limited
partnership controlled by Carl Ichan ("Olympia"), Olympia and Presidio entered
into an agreement dated March 6, 1998 (the "Agreement"). Subsequent to the
expiration of the offer, Olympia announced that it had accepted for payment
32,750 units properly tendered pursuant to the Offer. Pursuant to the Agreement,
Presidio purchased 50% of the units owned by Olympia as a result of the Offer,
or 16,375 units, for $91.73 per unit. Presidio may be deemed to beneficially own
the remaining units owned by Olympia as a consequence of the Agreement
Subsequent to the expiration of the tender offer described above,
Millennium Funding III Corp. purchased 13,206 limited partnership units from
August 1998 through February 1999. The total of these purchases and the units
purchased from Olympia (as described above) represents approximately 12.7% of
the outstanding limited partnership units of the Partnership.
Item 6. Selected Financial Data.
------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue ................... $ 11,390,709 $ 12,199,975 (3) $ 11,748,459 $ 10,452,432 $ 10,233,925
Net Income (Loss) ......... 3,100,160 2,845,625 (3) 2,244,520 (22,084,905) (2) 936,307 (1)
Net Income (Loss) per Unit. 5.01 4.60 3.63 (35.68) (2) 1.51 (1)
Distribution Per Unit4(4).. 4.60 4.03 2.48 2.48 2.45
Total Assets .............. 61,837,211 61,919,546 61,979,385 60,266,933 83,682,263
</TABLE>
- - ---------------
(1) 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.
(2) 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.
(3) Revenues and Net Income for the year ended December 31, 1997 include a
$950,691 gain, or $1.54 per Unit, from the sale of 230 East Ohio.
(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.
13
<PAGE>
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, 1998 all
capital expenditures and distributions were funded from cash flows. As of
December 31, 1998, total remaining working capital reserves amounted to
approximately $5,742,000. 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, 1998, cash and cash equivalents
increased $391,464 as a result of cash provided by operations in excess of
capital expenditures and distributions to partners. The Partnership's primary
source of funds is cash flow from the operations of its properties, principally
rents received from tenants, which amounted to $4,261,619 for the year ended
December 31, 1998. The Partnership used $1,022,951 for capital expenditures
related to capital and tenant improvements to the properties and $2,847,204 for
distributions to partners during 1998.
14
<PAGE>
The following table sets forth, for each of the last three fiscal
years, the Partnership's expenditures at each of its properties for capital
improvements and capitalized tenant procurement costs:
Capital Improvements and Capitalized Tenant Procurement Costs
-------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Century Park I ........... $ 89,729 $ 506,704 $ 28,010
568 Broadway ............. 293,021 84,805 233,376
Seattle Tower ............ 490,322 78,754 352,522
Commonwealth ............. 128,526 41,003 227,741
Commerce Plaza I ........ 90,857 220,935 76,803
Melrose Crossing ......... 69,338 84,202 45,628
Matthews Festival ........ 69,666 133,029 24,586
Sutton Square ............ 110,775 52,625 106,766
230 East Ohio(a) ......... 0 22,707 37,983
TMR Warehouses ........... 6,043 3,620 3,951
Melrose Out Parcel ...... 0 0 0
---------- ---------- ----------
Totals ................... $1,348,277 $1,228,384 $1,137,366
========== ========== ==========
</TABLE>
(a) Property sold in 1997
The Partnership has budgeted expenditures for capital improvements and
capitalized tenant procurement costs in 1999 which are 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.
15
<PAGE>
Real Estate Market
- - ------------------
The real estate market has begun to recover (for selected markets and
property types) 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. As a
result, the Partnership's potential for realizing the full value of its
investment in its properties is at continued risk.
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 prior years. Improvements in the real estate market and in the
properties' operations resulted in no write-downs for impairment being needed in
1998, 1997 or 1996.
16
<PAGE>
The following table represents the write-downs for impairment recorded
on certain of the Partnership's properties:
Property
--------
Century Park I $11,700,000
568 Broadway 10,821,150
Seattle Tower 6,050,000
Commonwealth 5,800,000
Commerce Plaza I 2,700,000
Melrose Crossing 12,100,000
Matthews Festival 5,300,000
230 East Ohio(a) 8,800,000
-----------
$63,271,150
===========
(a) Property sold in 1997.
Results Of Operations
- - ---------------------
1998 vs. 1997
-------------
The Partnership experienced an increase in net income for the year
ended December 31, 1998 compared to 1997 primarily due to higher rental
revenues, lower costs and expenses and higher interest income in 1998. These
increases to net income were partially offset by lower other income and the fact
that no gain on sale of property was recorded in 1998.
Rental revenues increased during the year ended December 31, 1998 due
to an increase in rental revenue at Century Park due to higher occupancy rates
in 1998 and at Commonwealth due to higher rental rates in place during 1998 as
compared to 1997. These increases were partially offset by the decrease in
revenues resulting from the sale of the 230 East Ohio property in October 1997.
Costs and expenses decreased during the year ended December 31, 1998
compared to 1997, due to decreases operating expenses, partnership asset
management fee, and administrative expenses, partially offset by increases in
depreciation and property management fees. Operating expenses decreased during
the year ended December 31, 1998 due primarily to lower real estate taxes and
repairs and maintenance costs resulting from the sale of the 230 East Ohio
property in 1997. Administrative expenses for the year ended December 31, 1998
decreased compared to 1997 due to lower legal and accounting fees related to the
ongoing litigation and possible reorganization of the Partnership. The
Partnership's asset management fee decreased during 1998 because of reduced
assets under management due to the sale of 230 East Ohio in the prior year.
Depreciation increased due to higher depreciation recorded on certain
capitalized tenant improvements and property management fees were higher in 1998
due to higher revenues, as previously discussed.
17
<PAGE>
Interest income increased during the year ended December 31, 1998 as
compared to 1997 due to higher invested cash balances. Other income decreased
during the year ended December 31, 1998 compared to 1997 due to fewer investor
transfers in 1998.
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.
Inflation is not expected to have a material impact on the
Partnership's operations or financial position.
18
<PAGE>
Legal Proceedings
- - -----------------
The Partnership is a party to certain litigation. See Item 3 and Note 7
to the Partnership's financial statements for a description thereof.
Year 2000 Compliance
- - --------------------
The Year 2000 compliance issue concerns the inability of computerized
information systems and equipment to accurately calculate, store or use a date
after December 31, 1999, as a result of the year being stored as a two digit
number. This could result in a system failure or miscalculations causing
disruptions of operations. The Partnership and its Manager (NorthStar Presidio
Management Co., LLC) recognize the importance of ensuring that its business
operations are not disrupted as a result of Year 2000 related computer system
and software issues.
The manager is in the process of assessing its internal computer
information systems and is now taking the further steps necessary to remediate
these systems so that they will be Year 2000 compliant. In connection therewith,
the manager is currently in the process of installing a new fully compliant
accounting and reporting system. The Manager is also currently reviewing its
other internal systems and programs, along with those of its unaffiliated third
party service providers, in order to insure compliance.
Further, the Manager and these service providers are currently
evaluating and assessing those computer systems not related to information
technology. These systems, that generally operate in a building include, without
limitation, telecommunication systems, security systems (such as card-access
door lock systems), energy management systems and elevator systems. As a result
of the technology used in this type of equipment, it is possible that this
equipment may not be repairable, and accordingly may require complete
replacement. Because this assessment is ongoing, the total cost of bringing all
systems and equipment into Year 2000 compliance has not been fully quantified.
Based upon available information, the Manager does not believe that these costs
will have a material adverse effect on the Partnership's business, financial
condition or results. However, it is possible that there could be adverse
consequences to the Partnership as a result of Year 2000 issues that are outside
the Partnership's control. The Manager is in the preliminary stages of
evaluating these issues and will be developing contingency plans.
19
<PAGE>
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 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.
20
<PAGE>
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
HIGH EQUITY PARTNERS L.P. - SERIES 86
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
I N D E X
Page
Number
------
Independent Auditors' Report................................ 22
Financial statements, years ended
December 31, 1998, 1997 and 1996
Balance Sheets ............................................. 23
Statements of Operations.................................... 24
Statements of Partners' Equity.............................. 25
Statements of Cash Flows.................................... 26
Notes to Financial Statements............................... 27
21
<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, 1998 and 1997, and
the related statements of operations, partners' equity and cash flows for each
of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a)2.
These financial statements and the financial statement schedule are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements and 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, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 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 17, 1999
New York, NY
22
<PAGE>
<TABLE>
<CAPTION>
HIGH EQUITY PARTNERS L.P. - SERIES 86
BALANCE SHEETS
December 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Real estate .................................................. $47,232,184 $48,015,174
Cash and cash equivalents .................................... 10,220,165 9,828,701
Other assets ................................................. 4,141,622 3,827,957
Receivables .................................................. 243,240 247,714
----------- -----------
TOTAL ASSETS ................................................. $61,837,211 $61,919,546
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Accounts payable and accrued expenses ........................ $ 1,902,806 $ 2,018,260
Due to affiliates ............................................ 479,206 699,043
Distributions payable ........................................ 711,801 711,801
----------- -----------
Total liabilities ....................................... 3,093,813 3,429,104
----------- -----------
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY:
Limited partners' equity (588,010 units issued and outstanding) 55,805,281 55,564,973
General partners' equity ..................................... 2,938,117 2,925,469
----------- -----------
Total partners' equity ................................. 58,743,398 58,490,442
----------- -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY ....................... $61,837,211 $61,919,546
=========== ===========
</TABLE>
See notes to financial statements
23
<PAGE>
<TABLE>
<CAPTION>
HIGH EQUITY PARTNERS L.P. - SERIES 86
STATEMENTS OF OPERATIONS
For the years ended December 31,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Rental Revenue .................................................. $11,390,709 $11,249,284 $11,748,459
----------- ----------- -----------
Costs and Expenses:
Operating expenses .................................. 4,065,020 4,800,538 4,632,225
Depreciation and amortization ....................... 2,102,684 1,974,299 1,941,202
Partnership asset management fee .................... 1,285,432 1,376,011 1,406,204
Administrative expenses ............................. 902,824 1,248,054 1,414,940
Property management fee ............................. 427,126 416,429 435,467
----------- ----------- -----------
8,783,086 9,815,331 9,830,038
----------- ----------- -----------
Income before gain on sale of property, interest and other income 2,607,623 1,433,953 1,918,421
Gain on sale of property ................................ -- 950,691 --
Interest income ........................................ 458,990 374,716 245,027
Other income ........................................... 33,547 86,265 81,072
----------- ----------- -----------
Net Income ...................................................... $ 3,100,160 $ 2,845,625 $ 2,244,520
=========== =========== ===========
Net income attributable to:
Limited partners ........................................ $ 2,945,152 $ 2,703,344 $ 2,132,294
General partners ....................................... 155,008 142,281 112,226
----------- ----------- -----------
Net income ...................................................... $ 3,100,160 $ 2,845,625 $ 2,244,520
=========== =========== ===========
Net income per unit of limited partnership
Interest (588,010 units outstanding) ....................... $ 5.01 $ 4.60 $ 3.63
=========== =========== ===========
</TABLE>
See notes to financial statements
24
<PAGE>
<TABLE>
<CAPTION>
HIGH EQUITY PARTNERS L.P. - SERIES 86
STATEMENTS OF PARTNERS' EQUITY
General Limited
Partners Partners
Equity Equity Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance, January 1, 1996 ........... $ 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 .
($4.03 per limited partnership unit) (124,721) (2,369,679) (2,494,400)
------------ ------------ ------------
Balance, December 31, 1997 ......... 2,925,469 55,564,973 58,490,442
Net Income ......................... 155,008 2,945,152 3,100,160
Distribution as a return of capital
($4.60 per limited partnership unit) (142,360) (2,704,844) (2,847,204)
------------ ------------ ------------
Balance, December 31, 1998 ......... $ 2,938,117 $ 55,805,281 $ 58,743,398
============ ============ ============
</TABLE>
See notes to financial statements
25
<PAGE>
<TABLE>
<CAPTION>
HIGH EQUITY PARTNERS L.P. - SERIES 86
STATEMENTS OF CASH FLOWS
For the years Ended December 31,
-------------------------------------------------
1998 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income ............................................ $ 3,100,160 $ 2,845,625 $ 2,244,520
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .................... 2,102,684 1,974,299 1,941,202
Straight line adjustment for stepped lease rentals (100,163) (103,605) (164,035)
Gain on sale of real estate ...................... -- (950,691) --
Changes in asset and liabilities:
Accounts payable and accrued expenses ............ (115,454) (112,941) 167,830
Receivables ...................................... 4,474 52,736 297,494
Due to affiliates ................................ (219,837) (626,170) 835,118
Other assets ..................................... (510,245) 135,436 (442,360)
------------ ------------ ------------
Net cash provided by operating activities ............. 4,261,619 3,214,689 4,879,769
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of real estate ................ -- 2,326,377 --
Improvements to real estate ...................... (1,022,951) (955,591) (687,199)
------------ ------------ ------------
Net cash (used in) provided by investing activities ... (1,022,951) 1,370,786 (687,199)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners ........................ (2,847,204) (2,166,352) (1,535,016)
------------ ------------ ------------
Increase in Cash and Cash Equivalents ................. 391,464 2,419,123 2,657,554
Cash and Cash Equivalents, Beginning of Year .......... 9,828,701 7,409,578 4,752,024
------------ ------------ ------------
Cash and Cash Equivalents, End of Year ................ $ 10,220,165 $ 9,828,701 $ 7,409,578
============ ============ ============
</TABLE>
See notes to financial statements
26
<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 balance sheets and 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.
27
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
-------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Leases
------
The Partnership accounts for its leases under the operating
method. Under this method, revenue is recognized as rentals
become due, except for stepped leases where the revenue from
the lease is averaged over the life of the lease.
Depreciation
------------
Depreciation is computed using the straight-line method over
the useful life of the property, which is estimated to be 40
years. The cost of properties represents the initial cost of
the properties to the Partnership plus acquisition and closing
costs 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.
28
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
-------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Impairment write-downs recorded by the Partnership do not
affect the tax basis of the assets and are not included in the
determination of taxable income or loss.
Because the cash flows used to evaluate the recoverability of
the assets and their fair values are based upon projections of
future economic events such as property occupancy rates,
rental rates, operating cost inflation and market
capitalization rates which are inherently subjective, the
amounts ultimately realized at disposition may differ
materially from the net carrying values at the balance sheet
dates. The cash flows and market comparables used in this
process are based on good faith estimates and assumptions
developed by management. Unanticipated events and
circumstances may occur and some assumptions may not
materialize; therefore, actual results may vary from the
estimates and the variances may be material. The Partnership
may provide additional write-downs, which could be material in
subsequent years if real estate markets or local economic
conditions change.
Income taxes
------------
No provision has been made for federal, state and local income
taxes since they are the personal responsibility of the
partners.
Net income (loss) and distributions per unit of limited
partnership interest
--------------------------------------------------------------
Net income (loss) and distributions per unit of limited
partnership interest is calculated based upon the number of
units outstanding (588,010), for each of the years ended
December 31, 1998, 1997 and 1996.
Comprehensive Income
--------------------
Because the Partnership has no items of other comprehensive
income, the Partnership's net income and comprehensive net
income are the same for all periods presented.
29
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
-------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Recently Issued Accounting Pronouncements
-----------------------------------------
In June of 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging
activities, and will be effective for the Partnership in
January of 2000. Because the Partnership does not currently
utilize derivatives or engage in hedging activities,
management does not believe that implementation of this
standard will have a material effect on the Partnership's
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. Effective July 31, 1998, Presidio is
indirectly controlled by NorthStar Capital Investment Corp., a
Maryland corporation.
Effective as of August 28, 1997, Presidio has a management
agreement with NorthStar Presidio Management Company LLC
("NorthStar Presidio), an affiliate of NorthStar Capital
Investment Corp., pursuant to which NorthStar Presidio will
provide the day-to-day management of Presidio and its direct
and indirect subsidiaries and affiliates. For the year ended
December 31, 1998, reimbursable expenses incurred by NorthStar
Presidio amounted to approximately $102,025.
30
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
-------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
(CONTINUED)
-----------------------------------------------------------
The Partnership has a property management services agreement
with Resources Supervisory Management Corp. ("Resources
Supervisory"), an affiliate of the General Partners, to
perform certain functions relating to the management of the
properties of the Partnership. A portion of the property
management fees were paid to unaffiliated management companies
which are engaged for the purpose of performing certain of the
management functions for certain properties. For the years
ended December 31, 1998, 1997 and 1996, Resources Supervisory
was entitled to receive $427,126, $416,428 and $435,467, in
total, respectively, of which $278,204, $287,466, and
$254,005, 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, 1998, 1997 and 1996, the Administrative
General Partner earned $1,285,432, $1,376,011, and $1,406,204,
respectively.
The General Partners are allocated 5% of the net income of the
Partnership which amounted to $155,008, $142,281, and
$112,226, in 1998, 1997 and 1996, respectively. The General
Partners are also entitled to receive 5% of distributions,
which amounted to $142,360, $124,721, and $76,752, in 1998,
1997 and 1996, 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
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
From July 1996 through March 12, 1998, Millennium Funding III
Corp., a wholly owned indirect subsidiary of Presidio,
purchased 45,320 units of the Partnership from various limited
partners.
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
-------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
(CONTINUED)
--------------------------------------------------------------
In connection with a tender offer for units of the Partnership
made March 12, 1998 (the "Offer") by Olympia Investors, L.P.,
a Delaware limited partnership controlled by Carl Ichan
("Olympia"), Olympia and Presidio entered into an agreement
dated March 6, 1998 (the "Agreement"). Subsequent to the
expiration of the offer, Olympia announced that it had
accepted for payment 32,750 units properly tendered pursuant
to the Offer. Pursuant to the Agreement, Presidio purchased
50% of the units owned by Olympia as a result of the Offer, or
16,375 units, for $91.73 per unit. Presidio may be deemed to
beneficially own the remaining units owned by Olympia as a
consequence of the Agreement.
Subsequent to the expiration of the tender offer described
above, Millennium Funding II Corp. purchased 13,206 limited
partnership units from August 1998 through February 1999. The
total of these purchases and the units purchased from Olympia
(as described above) represents approximately 12.7% of the
outstanding limited partnership units of the Partnership.
4. REAL ESTATE
-----------
The Partnership recorded substantial write-downs for
impairment prior to 1996. No write-downs were required for
1998, 1997 or 1996. The following table summarizes the
write-downs recorded on the properties:
Property
--------
Century Park I $11,700,000
568 Broadway 10,821,150
Seattle Tower 6,050,000
Commonwealth 5,800,000
Commerce Plaza I 2,700,000
Melrose Crossing 12,100,000
Matthews Festival 5,300,000
230 East Ohio(a) 8,800,000
-----------
$63,271,150
===========
(a) Sold in 1997
32
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
-------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
4. REAL ESTATE (CONTINUED)
-----------------------
The following table is a summary of the Partnership's real
estate as of:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Land ................................... $ 11,669,652 $ 11,669,652
Buildings and improvements ............. 57,791,035 56,768,084
------------ ------------
69,460,687 68,437,736
Less: Accumulated depreciation ........ (22,228,503) (20,422,562)
------------ ------------
$ 47,232,184 $ 48,015,174
============ ============
</TABLE>
During 1998, revenues from the 568 Broadway and Matthews
properties represented 22% and 15% of gross revenues,
respectively. No single tenant accounted for more than 10% of
the Partnership's rental revenues in 1998.
The following is a summary of the Partnership's share of
anticipated future receipts under noncancellable leases:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total
---------- ----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total $ 9,146,000 $ 8,648,000 $ 7,589,000 $ 6,613,000 $ 5,429,000 $12,599,000 $50,024,000
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
5. DISTRIBUTIONS PAYABLE
---------------------
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Limited Partners ($1.15 per unit) ........ $676,211 $676,211
General Partners ......................... 35,590 35,590
-------- --------
$711,801 $711,801
======== ========
</TABLE>
Such distributions were paid in the subsequent quarters
33
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
-------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
6. DUE TO AFFILIATES
-----------------
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Partnership asset management fee ............................ $321,358 $321,358
Reorganization and litigation cost reimbursement (Note 7) ... -- 234,000
Property management fee ..................................... 107,848 93,685
Non-accountable expense reimbursement ....................... 50,000 50,000
-------- --------
$479,206 $699,043
======== ========
</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
34
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
-------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
-----------------------------------------
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 excavation 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 the 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.
In May 1993, limited partners in the Partnership commenced an
action (the "Action") 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 the purchasers
of limited partnership interests in the Partnership. On April
7, 1994 the plaintiffs were granted leave to file an amended
complaint on behalf of a class consisting of all the
purchasers of limited partnership interests in the
Partnership, Integrated Resources High Equity Partners, Series
85 and High Equity Partners L.P. - Series 88 (collectively,
the "HEP Partnerships").
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
-------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
-----------------------------------------
In November 1995, the original plaintiffs and intervening
plaintiffs filed a consolidated class and derivative action
complaint (the "Consolidated Complaint") alleging various
state law class and derivative claims, including claims for
breach of fiduciary duty; breach of contract; unfair and
fraudulent business practices under California Bus. & Prof.
Code Section 17200; negligence; dissolution, accounting,
receivership and removal of general partner; fraud; and
negligent misrepresentation. The Consolidated Complaint
alleges, among other things, that the general partners of the
HEP Partnerships collectively, "HEP General Partners" caused a
waste of the HEP Partnerships' assets by collecting management
fees in lieu of pursuing a strategy to maximize the value of
the investments owned by the investors in the HEP
Partnerships, that the HEP General Partners breached their
duty of loyalty and due care to the investors by expropriating
management fees from the HEP Partnerships without trying to
run the HEP Partnerships for the purposes for which they were
intended; that the HEP General Partners were acting improperly
to entrench 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 of limited partnership interest in
the HEP Partnerships (collectively, the "HEP Units"); that, by
refusing to seek the sale of the HEP Partnerships' properties,
the HEP General Partners diminished the value of the
investors' equity in the HEP Partnerships; that the HEP
General Partners took heavily overvalued asset management
fees; and that HEP Units were sold and marketed through the
use of false and misleading statements.
35
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
-------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
-----------------------------------------
In early 1996, the parties submitted a proposed settlement to
the Court (the "Proposed Settlement"), which contemplated a
reorganization of the three HEP Partnerships into a single
real estate investment trust, pursuant to which approximately
85% of the shares of the real estate investment trust would
have been allocated to investors in the three HEP Partnerships
(assuming each of the HEP Partnerships participated in the
reorganization), and approximately 15% of the shares would
have been allocated to the HEP General Partners. As a
consequence, the Proposed Settlement would, among other
things, have approximately tripled the HEP General Partners'
equity interests in the HEP Partnerships. In late 1996, the
California Department of Corporations informed the Court of
the conclusion that the Proposed Settlement was unfair, and,
in early 1997, the Court declined to grant final approval of
the Proposed Settlement because the Court was not persuaded
that the Proposed Settlement was fair, adequate or reasonable
as to the proposed class.
In July 1997, the plaintiffs filed an amended complaint, which
generally asserts the same claims as the earlier Consolidated
Complaint but contains more detailed factual assertions and
eliminates some claims they had previously asserted. The HEP
General Partners challenged the amended complaint on legal
grounds and filed demurrers and a motion to strike. In October
1997, the Court granted substantial portions of the HEP
General Partners' motions. Thereafter, the HEP General
Partners served answers denying the allegations and asserting
numerous defenses.
In February 1998, the Court certified three separate plaintiff
classes consisting of the current owners of record of HEP
Units (but excluding all defendants or entities related to
such defendants), and appointed class counsel and liaison
counsel.
In mid-1998, the parties actively engaged in negotiations
concerning a possible settlement of the Action. In September
1998, the parties reached an agreement in principle, and,
during the following months, negotiated a more formal
settlement stipulation (the "Settlement Stipulation"), which
they executed in December 1998. The Settlement Stipulation was
submitted to the Court for preliminary approval in early
January 1999. In February 1999, the Court gave preliminary
approval to the Settlement Stipulation and directed that
notice of the proposed settlement be sent to the previously
certified class. The proposed settlement contemplates (I)
amendments to the Partnership Agreement that would modify the
existing fee structure; (II) a tender offer whereby the
General Partners would purchase up to 6.7% of the units from
limited partners; and (III) that the General Partners will use
their best efforts to effect a reorganization of the HEP
Partnerships into REITs or other publicly traded entitites. A
hearing to consider whether the Court should give final
approval to the Settlement Stipulation is scheduled for April
14, 1999. The settlement is subject to a number of conditions.
There can be no assurance that such conditions will be
fulfilled.
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
-------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
-----------------------------------------
The General Partners believe that each of the claims asserted
in the Action are meritless and, if for any reason a final
settlement pursuant to the Settlement Stipulation is not
consummated, intend to continue to vigorously defend the
Action.
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, 1998, the Partnership paid the
General Partners a total of $1,034,510 for these costs.
36
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
-------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
-----------------------------------------
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.
A hearing to consider whether the Court should give its final
approval to the settlement is scheduled for April 14, 1999.
The Memorandum of Understanding is subject to a number of
conditions. There can be no assurance that such conditions
will be fulfilled.
8. RECONCILIATION OF NET INCOME AND NET ASSETS PER FINANCIAL
STATEMENTS TO TAX REPORTING
----------------------------------------------------------
The Partnership files its tax returns on an accrual basis and
has computed depreciation for tax purposes using the
accelerated cost recovery and modified accelerated cost
recovery systems, which are not in accordance with generally
accepted accounting principles. The following is a
reconciliation of the net income per the financial statements
to the net taxable income (loss):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net income per financial statements .......................... $ 3,100,160 $ 2,845,625 $ 2,244,520
Difference in gain/loss from sale of 230 East Ohio ........... -- (7,675,270) --
Tax depreciation in excess of financial statement depreciation (1,409,719) (1,800,699) (1,820,559)
----------- ----------- -----------
Net taxable income (loss) .................................... $ 1,690,441 $(6,630,344) $ 423,961
=========== =========== ===========
</TABLE>
37
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
-------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
8. RECONCILIATION OF NET INCOME AND NET ASSETS PER FINANCIAL
STATEMENTS TO TAX REPORTING (Continued)
---------------------------------------------------------
The differences between the Partnership's assets and
liabilities for tax purposes and financial reporting purposes
are as follows:
<TABLE>
<CAPTION>
<S> <C>
Net assets per financial statements ...................................... $ 58,743,398
Write-down for impairment ................................................ 54,471,150
Tax depreciation in excess of financial statement depreciation ........... (12,846,834)
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 ............................................. $ 104,323,508
=============
</TABLE>
38
<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.
39
<PAGE>
As of March 1, 1999 the names and ages of, as well as the
positions held by, the officers and directors of the Managing and Associate
General Partners were as follows:
<TABLE>
<CAPTION>
Name Age Position Held Has served as a
Director and/or
Officer of the
Managing
General Partner
since
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
W. Edward Scheetz 34 Director November 1997
David Hamamoto 39 Director November 1997
Dallas E. Lucas 36 Director August 1998
David King 36 Executive Vice President and Assistant Treasurer, Director November 1997
Lawrence R. Schachter 42 Senior Vice President and Chief Financial Officer January 1998
J. Peter Paganelli 40 Senior Vice President, Secretary and Treasurer March 1998
Allan B. Rothschild 37 President, Director December 1997
Marc Gordon 34 Vice President November 1997
Charles Humber 25 Vice President November 1997
Adam Anhang 25 Vice President November 1997
Gregory Peck 24 Assistant Secretary November 1997
</TABLE>
- - ----------------
There are no family relationships between or among any of the
directors and/or executive officers of the General Partner.
W. Edward Scheetz co-founded NorthStar Capital Partners LLC
with David Hamamoto in July 1997, From 1993 through 1997, Mr. Scheetz was a
partner at Apollo Real Estate Advisors L.P. From 1989 to 1993, Mr. Scheetz was a
principal with Trammell Crow Ventures.
David Hamamoto co-founded NorthStar Capital Partners LLC with
W. Edward Scheetz in July 1997. From 1988 to 1997, Mr Hamamoto was a partner and
a co-head of the real estate principal investment area at Goldman, Sachs & Co.
40
<PAGE>
Dallas E. Lucas joined Northstar Capital Partners LLC in
August 1998. From 1994 until then he was the Chief Financial Officer of Crescent
Real Estate Equities Company. Prior to that he was a financial consulting and
audit manager in the real estate services group of Arthur Anderson LLP.
David King joined NorthStar Capital Partners LLC in November
1997. From 1990 to 1997, Mr. King was associated with Olympia & York Companies
(USA) where he held the position of Senior Vice President of Finance. Prior to
that Mr. King was employed with Bankers Trust in its real estate finance group.
Lawrence R. Schachter joined NorthStar Presidio in January
1998 From 1996 to 1998, Mr. Schachter was Controller at CB Commercial/Hampshire
LLC. From 1995 to 1996, Mr. Schachter was Controller at Goodrich Associates.
From 1992 to 1995, Mr. Schachter was Controller at Greenthal/Harlan Realty
Services Co.
J. Peter Paganelli joined NorthStar Presido in March 1998.
From 1997 to 1998, Mr. Paganelli was Director of Asset Management at Argent
Ventures LLC, a private real estate aompany. From 1994 to 1997, Mr. Paganelli
was a Vice President at Starwood Capital Group, LLC in its Asset Management
Group. From 1986 to 1994, Mr. Paganelli was an Associate Director at Cushman &
Wakefield, Inc. in its Financial Services and Asset Services Groups.
Allan B. Rothschild joined NorthStar Presidio in December 1997
From 1995 to 1997, Mr. Rothschild was Senior Vice President and General Counsel
of Newkirk Limited Partnership. From 1987 to 1995, Mr. Rothschild was associated
with the law firm of Proskauer, Rose LLP in its real estate group.
Marc Gordon joined NorthStar Capital Partners LLC in October
1997 From 1993 to 1997, Mr. Gordon was Vice President in the real estate
investment banking group at Merrill Lynch. Prior to That, Mr. Gordon was
associated with the law firm of Irell & Manella in its real estate and banking
group.
Charles Humber joined NorthStar Capital Partners LLC in
September 1997. From 1996 to 1997, Mr Humber was employed with Merrill Lynch in
its real estate investment banking group. Prior to that, Mr. Humber was a
student at Brown University.
Adam Anhang joined NorthStar Capital Partners LLC in August
1997. From 1996 to 1997, Mr. Anhang was employed by The Athena Group as part of
its Russia and former Soviet Union development team. Prior to that, Mr. Anhang
was a student at the Wharton School of the University of Pennsylvania.
41
<PAGE>
Gregory Peck joined NorthStar Capital Partners LLC in July
1997. From 1996 to 1997, Mr. Peck was employed by Morgan Stanley as part of
Morgan Stanley Realty Real Estate Funds (MSREF) and Morgan Stanley's Real Estate
Investment Banking Group. From 1994 to 1996, Mr. Peck worked for Lazard Freres &
Co. LLC in the Real Estate Investment Banking Group.
Many of the above officers and directors of the Managing
General Partner and Associate General Partner are also officers and/or directors
of the general partners of other public partnerships affiliated with Presidio or
of various subsidiaries of Presidio.
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."
42
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
As of March 1, 1999, an affiliate of the General Partners
owned approximately 12.7% of the Units. No directors, officers or partners of
the Investment General Partner or Administrative General Partner presently own
any Units.
To the knowledge of the Registrant, the following sets forth
certain information regarding ownership of the Class A shares of Presidio as of
March 15, 1999 (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 share-holders 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
Name of Beneficial Owner Ownership in Presidio
------------------------ ---------------------
Five Percent Holders:
NorthStar Presidio Capital Holding Corp.(1) 71.93%
AG Presidio Investors, LLC (2) 14.12%
DK Presidio Investors, LLC (3) 8.45%
Stonehill Partners, L.P. (4) 5.50%
43
<PAGE>
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%
Dallas Lucas (5) 0%
Allan Rothschild (5) 0%
J. Peter Paganelli (5) 0%
Lawrence Schachter (5) 0%
W. Edward Scheetz (5) 71.93%
Directors and Officers as a group: 71.93%
----------------------------------
(1) NorthStar Presidio Capital Holding Corp. ("NS Presidio") is a
Delaware corporation whose address is c/o NorthStar Capital
Investment Corp., 527 Madison Avenue, 16th Floor, New York,
New York, 10022. NS Presidio has three shareholders: (1)
NorthStar Partnership L.P., a Delaware limited partnership
whose address is c/o NorthStar Capital Investment Corp., 527
Madison Avenue, 16th Floor, New York, New York, 10022, holds
99% of the common stock (non-voting); (II) David T. Hamamoto
holds 0.5& of the common stock (voting); and (III) W. Edward
Scheetz holds 0.5% of the common stock (voting).
44
<PAGE>
(2) Each of Angelo, Gordon & Co., L.P., 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 & Co., L.P., may be deemed to beneficially own for
purposes of Rule 13d-3 of the Exchange Act the securities
beneficially owned by AG Presidio Investors, LLC. Each of John
M. Angelo and Michael L. Gordon disclaims such beneficial
ownership. The business address for such persons is c/o
Angelo, Gordon & Co., L.P., 245 Park Avenue, 26th Floor, New
York, New York 10167.
(3) M.H. Davidson & Company, 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 persons 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 Partners, L.P. John A.
Motulsky is a managing general partner of Stonehill Partners,
L.P., a managing member of the investment advisor to Stonehill
Offshore Partners Limited and a general partner of Stonehill
Institutional Partners L.P. John A. Motulsky disclaims
beneficial ownership of the shares held by these entities. The
business address for such persons 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
45
<PAGE>
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
The General Partners and certain affiliated entities have,
during the year ended December 31, 1998, earned or received compensation or
payments for services or reimbursements from the Partnership or subsidiaries of
Presidio as follows:
<TABLE>
<CAPTION>
Compensation from
Name of Recipient Capacity in Which Served the Partnership
- - ----------------- ------------------------ ---------------
<S> <C> <C>
Resources High Equity Inc. Investment General Partner $2,848 (1)
Resources Capital Corp. Administrative General Partner $1,622,096 (2)
Presidio AGP Corp. Associate General Partner $2,848 (3)
Resources Supervisory Management Corp. Affiliated Property Manager $148,922 (4)
</TABLE>
(1) This amount represents the Investment General Partner's share of
distributions of cash from operations. Furthermore, under the
Partnership's Limited Partnership Agreement, 0.1% of the net
income and net loss of the Partnership is allocated to the
Investment General Partner. Pursuant thereto, for the year ended
December 31, 1998, $1,685 of the Partnership's taxable income
was allocated to the Investment General Partner.
(2) Of this amount, $136,664 represents the Administrative General
Partner's share of distributions of cash from operations,
$200,000 represents payment for expenses of the Administrative
General Partner based upon the total number of Units outstanding,
and $1,285,432 represents the Partnership Asset Management Fee
for managing the affairs of the Partnership. 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, 1998, $80,887 of the Partnership's taxable
income was allocated to the Administrative General Partner.
(3) This amount represents the Associate General Partner's share of
distributions of cash from operations. In addition, for the year
ended December 31, 1998, $1,685 of the Partnership's taxable
income was allocated to the Associate General Partner pursuant to
the Partnership's Limited Partnership Agreement (the Associate
General Partner is entitled to receive .1% of the Partnership's
net income or net loss).
46
<PAGE>
(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 $427,126, of which $278,204 was paid to
unaffiliated management companies.
47
<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).
48
<PAGE>
(c)Agreement among Resources High Equity Inc., Integrated
Resources, Inc. and Second Group Partners, incorporated by
reference to Exhibit 10D to the Partnership's Registration
Statement on Form S-11 (Reg. No. 33-1853).
(d)Joint Venture Agreement dated November 2, 1986 between the
Partnership and Integrated Resources High Equity Partners, Series
85, A California Limited the Partnership, with respect to Century
Park I, incorporated by reference to Exhibit 10(b) to the
Partnership's Current Report on Form 8-K dated November 7, 1986.
(e)Joint Venture Agreement dated October 27, 1986 between the
Partnership and Integrated Resources High Equity Partners, Series
85, A California Limited Partnership, with respect to 568
Broadway, incorporated by reference to Exhibit 10(b) to the
Partnership's Current Report on Form 8-K dated November 19, 1986.
(f)Joint Venture Agreement dated November 24, 1986 between the
Partnership and Integrated Resources High Equity Partners, Series
85, A California Limited Partnership, with respect to Seattle
Tower, incorporated by reference to Exhibit 10(b) to the
Partnership's Current Report on Form 8-K dated December 8, 1986.
(g)Amended and Restated Joint Venture Agreement dated February 1,
1990 among the Partnership, Integrated Resources High Equity
Partners, Series 85, A California Limited the Partnership and
High Equity Partners L.P., Series 88, with respect to 568
Broadway, incorporated by reference to Exhibit 10(a) to the
Partnership's Current Report on Form 8-K dated February 1, 1990
as filed on March 30, 1990.
(h)Agreement, dated as of March 23, 1990, among the Partnership,
Resources Capital Corp. and Resources Property Management Corp.,
with respect to the payment of deferred fees, incorporated by
reference to Exhibit 10(r) to the Partnership's Annual Report on
Form 10-K for the year ended December 31, 1990.
(i)First Amendment to Amended and Restated Joint Venture
Agreement of 568 Broadway Joint Venture, dated as of February 1,
1990, among the Partnership, High Equity Partners, L.P. - Series
85 and High Equity Partners, L.P. - Series 88, incorporated by
reference to Exhibit 10(s) to the Partnership's Annual Report on
Form 10-K for the year ended December 31, 1990.
(j)Form of Termination of Supervisory Management Agreement
(separate agreement entered into with respect to each individual
property) and Form of Supervisory Management Agreement between
the Partnership and Resources Supervisory (separate agreement
entered into with respect to each individual property),
incorporated by reference to Exhibit 10(t) to the Partnership's
Annual Report on Form 10-K for the year ended December 31, 1991.
49
<PAGE>
(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.
50
<PAGE>
Financial Statement Schedule Filed Pursuant to
Item 14(a)(2)
HIGH EQUITY PARTNERS L.P. - SERIES 86
ADDITIONAL INFORMATION
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
INDEX
Page
number
------
Additional financial information furnished pursuant to the
requirements of Form 10-K:
Schedules - December 31, 1998, 1997 and 1996
and years then ended, as required:
Schedule III -Real estate and accumulated depreciation S-1
- Notes to Schedule III - Real estate
and accumulated depreciation S-2
All other schedules have been omitted because they are
inapplicable, not required, or the information is included in the financial
statements or notes thereto.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, 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 29, 1999 By: /s/ Allan Rothschild
--------------------
Allan Rothschild
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 29, 1999 By: /s/ Allan Rothschild
--------------------
Allan Rothschild
President and Director
(Principal Executive Officer)
Dated: March 29, 1999 By: /s/ Lawrence Schachter
----------------------
Lawrence Schachter
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: March 29, 1999 By: /s/ Dallas Lucas
----------------
Dallas Lucas
Director
Dated: March 29, 1999 By: /s/ David King
--------------
David King
Director and Executive Vice President
52
<PAGE>
<TABLE>
<CAPTION>
HIGH EQUITY PARTNERS L.P. - SERIES 86
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
Initial Cost
------------------------------
Buildings
And
Description Encumbrances Land Improvements
----------- ------------ ---- ------------
<S> <C> <C> <C> <C>
RETAIL:
Melrose Crossing Shopping Center ......... Melrose Park, IL $ -- $ 2,002,532 $ 12,721,968
Matthews Township Festival Shopping Center Matthews, NC -- 2,973,646 12,571,750
Sutton Square Shopping Center ............ Raleigh, NC -- 2,437,500 10,062,500
---------- ------------ ------------
-- 7,413,678 35,356,218
---------- ------------ ------------
OFFICE:
Commerce Plaza Office Building ........... Richmond, VA -- 733,279 7,093,435
Century Park I Office Complex ............ Kearny Mesa, CA -- 3,122,064 12,717,936
568 Broadway Office Building ............. New York, NY -- 2,318,801 9,821,517
Seattle Tower Office Building ........... Seattle, WA -- 2,163,253 5,030,803
---------- ------------ ------------
-- 8,337,397 34,663,691
---------- ------------ ------------
INDUSTRIAL:
Commonwealth Industrial Park ............. Fullerton, CA -- 3,749,700 7,125,300
TMR Warehouses ........................... Various, OH -- 369,215 5,363,935
Melrose (Lot #7) ......................... Melrose Park, IL -- 450,000 --
---------- ------------ ------------
4,568,915 12,489,235
---------- ------------ ------------
$ -- $ 20,319,990 $ 82,509,144
========== ============= ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Costs Reductions
Capitalized Recorded
Subsequent to Subsequent to
Acquisition Acquisition
------------------------------ -------------
Improvement Carrying Costs Write Downs
------------ ------------ ------------
<S> <C> <C> <C> <C>
RETAIL:
Melrose Crossing Shopping Center ......... Melrose Park, IL $ 828,834 $ 1,064,777 $(12,100,000)
Matthews Township Festival Shopping Center Matthews, NC 368,892 1,581,384 (5,300,000)
Sutton Square Shopping Center ............ Raleigh, NC 291,438 1,025,898 --
------------ ------------ ------------
1,489,164 3,672,059 $(17,400,000)
------------ ------------ ------------
OFFICE:
Commerce Plaza Office Building ........... Richmond, VA 1,754,092 468,324 (2,700,000)
Century Park I Office Complex ............ Kearny Mesa, CA 1,966,127 1,203,130 (11,700,000)
568 Broadway Office Building ............. New York, NY 5,106,279 1,220,484 (10,821,150)
Seattle Tower Office Building ........... Seattle, WA 2,124,134 486,969 (6,050,000)
------------ ------------ ------------
10,950,632 3,378,907 (31,271,150)
------------ ------------ ------------
INDUSTRIAL:
Commonwealth Industrial Park ............. Fullerton, CA 342,761 767,573 (5,800,000)
TMR Warehouses ........................... Various, OH 29,326 435,653 --
Melrose (Lot #7) ......................... Melrose Park, IL -- 36,628 --
------------ ------------ ------------
372,087 1,239,854 (5,800,000)
------------ ------------ ------------
$ 12,811,883 $ 8,290,820 $(54,471,150)
============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Gross Amount at Which
Carried at Close of Period
------------------------------------------------ Accumulated
Buildings and Accumulated
Land Improvements Total Depreciation
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
RETAIL:
Melrose Crossing Shopping Center ......... Melrose Park, IL $ 569,462 $ 3,948,649 $ 4,518,111 $ 2,753,147
Matthews Township Festival Shopping Center Matthews, NC 2,249,562 9,946,110 12,195,672 3,552,445
Sutton Square Shopping Center ............ Raleigh, NC 2,637,550 11,179,786 13,817,336 3,115,944
------------ ------------ ------------ ------------
5,456,574 25,074,545 30,531,119 9,421,536
------------ ------------ ------------ ------------
OFFICE:
Commerce Plaza Office Building ........... Richmond, VA 556,352 6,792,778 7,349,130 2,285,139
Century Park I Office Complex ............ Kearny Mesa, CA 1,092,744 6,216,513 7,309,257 3,046,013
568 Broadway Office Building ............. New York, NY 922,338 6,723,593 7,645,931 2,792,955
Seattle Tower Office Building ........... Seattle, WA 724,808 3,030,351 3,755,159 1,406,134
------------ ------------ ------------ ------------
3,296,242 22,763,235 26,059,477 9,530,241
------------ ------------ ------------ ------------
INDUSTRIAL:
Commonwealth Industrial Park ............. Fullerton, CA 2,032,937 4,152,397 6,185,334 1,788,776
TMR Warehouses ........................... Various, OH 397,271 5,800,858 6,198,129 1,487,950
Melrose (Lot #7) ......................... Melrose Park, IL 486,628 -- 486,628 --
------------ ------------ ------------ ------------
2,916,836 9,935,255 12,870,091 3,276,726
------------ ------------ ------------ ------------
$11,669,652 $ 57,791,035 $ 69,460,687 $ 22,228,503
=========== ============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Date
Acquired
--------
<S> <C> <C>
RETAIL:
Melrose Crossing Shopping Center ......... Melrose Park, IL 1988
Matthews Township Festival Shopping Center Matthews, NC 1988
Sutton Square Shopping Center ............ Raleigh, NC 1988
OFFICE:
Commerce Plaza Office Building ........... Richmond, VA 1987
Century Park I Office Complex ............ Kearny Mesa, CA 1986
568 Broadway Office Building ............. New York, NY 1986
Seattle Tower Office Building ........... Seattle, WA 1986
INDUSTRIAL:
Commonwealth Industrial Park ............. Fullerton, CA 1987
TMR Warehouses ........................... Various, OH 1988
Melrose (Lot #7) ......................... Melrose Park, IL 1988
</TABLE>
Note: The aggregate cost for Federal income tax purposes is $123,931,837 at
December 31, 1998
S-1
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(A) RECONCILIATION OF REAL ESTATE OWNED:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR ... $ 68,437,736 $ 70,478,500 $ 69,791,301
ADDITIONS DURING THE YEAR
Improvements to Real Estate 1,022,951 955,591 687,199
SUBTRACTIONS DURING THE YEAR
Sales - Net ............... -- (2,996,355) --
------------ ------------ ------------
BALANCE AT END OF YEAR (1) ..... $ 69,460,687 $ 68,437,736 $ 70,478,500
============ ============ ============
</TABLE>
(1) INCLUDES INITIAL COST OF THE PROPERTIES PLUS ACQUISITION AND CLOSING COSTS.
(B) RECONCILIATION OF ACCUMULATED DEPRECIATION:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR $ 20,422,562 $ 20,076,515 $ 18,464,974
ADDITIONS DURING THE YEAR
Depreciation Expense(1) 1,805,941 1,652,331 1,611,541
SUBTRACTIONS DURING THE YEAR
Sales ................. -- (1,306,284) --
------------ ------------ ------------
BALANCE AT END OF YEAR ..... $ 22,228,503 $ 20,422,562 $ 20,076,515
============ ============ ============
</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 AND ON
TENANT IMPROVEMENTS OVER THE ESTIMATED TERM OF THE RELATED LEASE.
S-2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary information extracted from the financial
statements of the December 31, 1998 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-31-1998
<PERIOD-END> DEC-30-1998
<CASH> 10,220,165
<SECURITIES> 0
<RECEIVABLES> 243,240
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 61,837,311
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 58,743,398
<TOTAL-LIABILITY-AND-EQUITY> 61,837,211
<SALES> 0
<TOTAL-REVENUES> 11,390,709
<CGS> 0
<TOTAL-COSTS> 4,065,020
<OTHER-EXPENSES> 4,718,066
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,100,160
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,100,160
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,100,160
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
