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FORM 10K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number
December 31, 1999 0-15753
HIGH EQUITY PARTNERS L.P. - SERIES 86
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(Exact name of Registrant as specified in its charter)
Delaware 13-3314609
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
5 Cambridge Center, 9th Floor, Cambridge, MA 02142
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 234-3000
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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There is no public market for the Limited Partnership Units.
Accordingly, information with respect to the aggregate market value of Limited
Partnership Units held by non-affiliates of Registrant has not been supplied.
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Documents incorporated by reference
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None
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PART I
Item 1. Business.
High Equity Partners L.P. - Series 86 (the "Partnership") is a
Delaware limited partnership formed as of November 14, 1985. The Partnership is
engaged in the business of operating and holding for investment previously
acquired income-producing properties, consisting of office buildings, shopping
centers and other commercial and industrial properties such as industrial parks
and warehouses. See "Item 2. Properties" for a description of the Partnership's
properties.
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"). The
Investment General Partner and the Administrative General partner are each a
wholly owned subsidiary 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, Resources High Equity, Inc. was a wholly owned subsidiary 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. See "Management/Employees" below.
In 1986 and 1987, the Partnership offered 800,000 units of
limited partnership interest (the "Units") pursuant to a prospectus filed with
the Securities and Exchange Commission. Upon final admission of limited
partners, the Partnership had accepted subscriptions for 588,010 Units
(including the initial limited partner) 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.
The Partnership invested all of its net proceeds available for
investment, after establishing a working capital reserve, in ten properties. The
Partnership's property investments which contributed more than 15% of the
Partnership's total gross revenues were as follows: in 1999, 568 Broadway and
Matthews Township Festival represented 25% and 15% of gross revenues,
respectively; in 1998, 568 Broadway and Matthews represented 22% and 15% of
gross revenues, respectively and in 1997, 568 Broadway and Matthews represented
22% and 15%, respectively. See "Item 2. Properties" for a description of the
Partnership's properties.
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Settlement of Class Action Lawsuit
In April 1999, the California Superior Court approved the
terms of the settlement of a class action and derivative litigation involving
the Partnership. Under the terms of the settlement, the General Partners agreed
to take the actions described below subject to first obtaining the consent of
limited partners to amendments to the Agreement of Limited Partnership of the
Partnership summarized below. The settlement became effective in August 1999
following approval of the amendments. As amended, the Partnership Agreement (a)
provides for a Partnership Asset Management Fee equal to 1.25% of the gross
asset value of the Partnership and a fixed 1999 Partnership Asset Management Fee
of $973,293 or $312,139 less than the amount that would have been paid for 1999
under the prior formula and (b) fixes the amount that the General Partners will
be liable to pay to limited partners upon liquidation of the Partnership as
repayment of fees previously received (the "Fee Give-Back Amount"). As of
December 31, 1999, the Fee Give-Back Amount was $4.38 per Unit which amount will
be reduced by approximately $.49 per Unit for each full calendar year after 1999
in which a liquidation does not occur. As amended, the Partnership Agreement
provides that, upon a reorganization of the Partnership into a real estate
investment trust or other public entity, the General Partners will have no
further liability to pay the Fee Give-Back Amount. In accordance with the terms
of the settlement, Presidio Capital Corp., an affiliate of the General Partners,
guaranteed payment of the Fee Give-Back Amount.
As required by the settlement, an affiliate of the General
Partners, Millennium Funding III, LLC, made a tender offer to limited partners
to acquire up to 39,596 Units (representing approximately 6.7% of the
outstanding Units) at a price of $103.05 per Unit. The offer closed in January
2000 and all 39,596 Units were acquired in the offer.
The final requirement of the settlement obligated the General
Partners to use their best efforts to reorganize the Partnership into a real
estate investment trust or other entity whose shares were listed on a national
securities exchange or on the NASDAQ National Market System. A Registration
Statement was filed with the Securities and Exchange Commission on February 11,
2000 with respect to the restructuring of the Partnership into a publicly-traded
real estate investment trust. The Registration Statement has not yet become
effective and the consent of a majority of limited partners will be needed to
effect the restructuring.
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, 1999, the Partnership paid the General Partners a total of
$1,079,796 for these costs.
Competition
The real estate business is highly competitive and, as
discussed more particularly in "Item 2, Properties", 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 and agents that engage in businesses
that may be competitive
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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
On-site personnel perform services for the Partnership at the
properties. Salaries for such on-site personnel are paid by unaffiliated
management companies that service the Partnership's properties. Services are
also performed by the Managing General Partner 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 all of the Partnership's properties and subcontracts
certain management and leasing functions to unaffiliated third parties.
The Partnership does not have any employees. Presidio
previously retained Wexford Management LLC ("Wexford") to provide consulting and
administrative services to Presidio and its affiliates, including the General
Partners and the Partnership. The agreement with Wexford expired on May 3, 1998
at which time Presidio entered into a management agreement with NorthStar
Presidio Management Company, LLC ("NorthStar Presidio"). Under the terms of the
management agreement, NorthStar Presidio provided the day-to-day management of
Presidio and its direct and indirect subsidiaries and affiliates.
On October 21, 1999, Presidio entered into a Services
Agreement with AP-PCC III, L.P. (the "Agent") pursuant to which the Agent was
retained to provide asset management and investor relation services to
Partnership and other entities affiliated with Partnership.
As a result of this agreement, the Agent has the duty to
direct the day to day affairs of Partnership, including, without limitation,
reviewing and analyzing potential sale, financing or restructuring proposals
regarding the Partnership's assets, preparation of all reports, maintaining
records and maintaining bank accounts of Partnership. The Agent is not
permitted, however, without the consent of Presidio, or as otherwise required
under the terms of the Limited Partnership Agreement to, among other things,
cause Partnership to sell or acquire an asset or file for bankruptcy protection.
In order to facilitate the Agent's provision of the asset
management services and the investor relation services, effective October 25,
1999, the officers and directors of the General Partners resigned and nominees
of the Agent were elected as the officers and directors of the General Partners.
See Item 10, "Directors and Executive Officers of the Partnership", The Agent is
an affiliate of Winthrop Financial Associates, a Boston based company that
provides asset management services, investor relation services and property
management services to over 150 limited partnerships which own commercial
property and other assets. The General Partners do not believe this transaction
will have a material effect on the operations of Partnership.
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Item 2. Properties.
The Partnership owned the following properties as of March 15,
2000:
(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, 2000 and January 1, 1999.
There are no leases that represent at least 10% of the square footage of the
center scheduled to expire in 2000. Capital expenditures budgeted for 2000
include removal of mineral deposits on the glass curtain wall and new controls
for the HVAC. Capital expenditures for 1999 included a refurbishment allowance
to San Diego Gas & Electric 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
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%
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leased as of January 1, 2000 and January 1, 1999. There are no leases which
represent at least 10% of the square footage of the property scheduled to expire
during 2000.
Capital improvements for 2000 include approximately $60,000
for fire protection improvements, $90,000 for corridor and restroom upgrades and
$25,000 for window replacement.
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, 2000 was 98% as compared to 96% at
January 1, 1999. 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 2000.
Major capital improvements for 2000 include replacing
galvanized water pipes with copper, and $638,388 has been budgeted to modernize
the mechanics of the elevators.
The Partnership believes that Seattle Tower's primary direct
competition comes from three office buildings of similar size or age in the
immediate vicinity of Seattle Tower, which buildings have current occupancy
rates which are comparable to Seattle Tower's.
(4) Commonwealth Industrial Park. On April 14, 1987, the
Partnership purchased a fee simple interest in the Commonwealth Industrial Park
("Commonwealth"), located in Fullerton, California. Commonwealth consists of
three light manufacturing/warehouse buildings, containing 273,576 square feet in
the aggregate.
Commonwealth is located within the western industrial sector
of the city of Fullerton. The property is bounded by Artesia Boulevard on the
north and Commonwealth Avenue on the South. The Artesia Freeway (State 91) and
the Santa Ana Freeway (Interstate 5) are nearby. The area is a mixture of
established residential neighborhoods and old and new retail and light
industrial buildings. The Fullerton Airport, accommodating small aircraft only,
is located one block from the property. Commonwealth is comprised of one
21-year-old building (164,650 square feet) and one 16-year-old building (51,600
square feet), both of which were completely renovated in 1985, and one building
of 57,326 square feet that was constructed in 1986. The site consists of
approximately 12.4
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acres, with parking to accommodate 391 cars. The property was 87% leased as of
January 1, 2000 and January 1, 1999. There are no leases which represent at
least 10% of the square footage of the property scheduled to expire during 2000.
To effectively market the vacant 34,000 square foot space,
work to separate the electrical service was performed to the tenant space during
1999. Roof repairs are budgeted for 2000 totaling $212,000.
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, 2000 and January 1, 1999.
Capital expenditures to refurbish the common areas of the
building were completed in 1999. Capital expenditures budgeted for 2000
primarily reflect costs anticipated with releasing tenant spaces that are
expiring in 2000.
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, 2000, the shopping center was 16% leased, compared
to 35% at January 1, 1999. There are no leases which represent 10% of the square
footage of the center that are scheduled to expire during 2000.
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),
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in an area comprised primarily of heavy industrial and dense residential
properties. The area is virtually 100% developed.
There are currently seven other retail centers within a
three-mile radius of Melrose Crossing that are considered competitive. These
centers have approximately one million square feet of rentable space, with an
overall average occupancy rate of approximately 85%. In 1993, several other
large retailers such as WalMart and Target opened stores on North Avenue in the
Melrose Park area, and Home Depot, Office Depot, and Sam's Club have all opened
stores nearby on North Avenue in the last year or two. However, Melrose Crossing
which is situated on Mannheim Road, suffers from poor roadway access from North
Avenue which has become the primary retail thoroughfare in the area. The
Partnership is continuing to market the space to national, local and regional
retailers. However, alternatives to traditional retail may have to be explored
to re-tenant the center. These alternatives include entertainment uses, medical
or educational uses and warehouse/industrial uses.
(7) Matthews Township Festival. On February 23, 1988, the
Partnership purchased a fee simple interest in Matthews Township Festival ("
Matthews Festival"), a community shopping center in suburban Charlotte, North
Carolina in the town of Matthews. Completed in November 1987, Matthews Festival
contains 127,388 square feet of rentable space. 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, 2000, the center was 93%
leased as compared to 93% as of January 1, 1999. There are no leases which
represent at least 10% of the square footage of the center scheduled to expire
in 2000.
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, 2000 and January 1, 1999. There
are no leases which represent at least 10% of the square footage of the center
scheduled to expire in 2000. There are no significant capital expenditures
budgeted for 2000.
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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, 2000 and 1999, the Orange
and Grove City buildings were each 100% leased to a single tenant. In 1999
Simmons Company renewed for five years in the Grove City facility with an
expansion option during the initial two years of the renewal term.
As of January 1, 1999 and 2000, the Hilliard property was 100%
vacant. On February 9, 2000, the Partnership signed a lease on 175,000 square
feet for a three-year term. As a result, the Hilliard property is currently
74% occupied.
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.
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Item 3. Legal Proceedings.
The Broadway Joint Venture is currently involved in litigation
with a number of present or former tenants who are in default on their lease
obligations. Several of these tenants have asserted claims or counterclaims
seeking monetary damages. The plaintiffs' allegations include, but are not
limited to, claims for breach of contract, failure to provide certain services,
overcharging of expenses and loss of profits and income. These suits seek total
damages of in excess of $20 million plus additional damages of an indeterminate
amount. The Broadway Joint Venture's action for rent against Solo Press was
tried in 1992 and resulted in a judgment in favor of the Broadway Joint Venture
for rent owed. The Partnership believes this will result in dismissal of the
action brought by Solo Press against the Broadway Joint Venture. Since the facts
of the other actions which involve material claims or counterclaims are
substantially similar, the Partnership believes that the Broadway Joint Venture
will prevail in those actions as well.
A former retail tenant of 568 Broadway (Galix Shops, Inc.) and
a related corporation which is a retail tenant of a building adjacent to 568
Broadway filed a lawsuit in the Supreme Court of The State of New York, County
of New York, against the Broadway Joint Venture which owns 568 Broadway. The
action was filed on April 13, 1994. The plaintiffs alleged that by erecting a
sidewalk shed in 1991, 568 Broadway deprived plaintiffs of light, air and
visibility to their customers. The sidewalk shed was erected, as required by
local law, in connection with the inspection and restoration of the 568 Broadway
building facade, which is also required by local law. Plaintiffs further alleged
that the erection of the sidewalk shed for a continuous period of over two years
is unreasonable and unjustified and that such conduct by defendants has deprived
plaintiffs of the use and enjoyment of their property. The suit seeks a judgment
requiring removal of the sidewalk shed, compensatory damages of $20 million, and
punitive damages of $10 million. The Partnership believes that this suit is
meritless and intends to vigorously defend it.
See "Item 1. Business-Settlement of Class Action Lawsuit" for
information relating to the settlement of the class action lawsuit in which the
Partnership was a defendant.
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.
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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, 2000, there were 10,760 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
1998 and 1999 were as follows:
Distributions for the Amount of Distribution
Quarter Ended Per Unit
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March 31, 1998 $1.15
June 30, 1998 $1.15
September 30, 1998 $1.15
December 31, 1998 $1.15
March 31, 1999 $1.15
June 30, 1999 $1.15
September 30, 1999 *
December 31, 1999 *
* Distributions have been suspended while the requirements of the settlement
are completed.
The source of distributions and capital improvements in 1998
and in 1999 was cash flow from operations. 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.
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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.
Subsequent to the expiration of the tender offer described
above, Millennium Funding III Corp. purchased 18,769 limited partnership units
from August 1998 through July 1999. The total of these purchases and the units
purchased from Olympia (as described above) represents approximately 13.7% of
the outstanding limited partnership units of the Partnership.
Pursuant to the settlement agreement, Millennium III, LLC, a
wholly owned subsidiary of Presidio, completed a tender offer in January 2000
purchasing approximately 6.78% or 39,868 limited partnership units for $103.05
per unit or a total of $4,080,368.
Over the past few years many companies have begun making
"mini-tenders" (offers to purchase an aggregate of less than 5% of the total
outstanding units) for limited partnership interests in the Partnership.
Pursuant to the rules of the Securities and Exchange Commission, when a tender
offer is commenced for Units the Partnership is required to provide limited
partners with a statement setting forth whether it believes limited partners
should tender or whether it is remaining neutral with respect to the offer.
Unfortunately, the rules of the Securities and Exchange Commission do not
require that the bidders in certain tender offers provide the Partnership with a
copy of their offer. As a result, the General Partners often do not become aware
of such offers until shortly before they are scheduled to expire or even after
they have expired. Accordingly, the General Partners do not have sufficient time
to advise you of its position on the tender. In this regard, please be advised
that pursuant to the discretionary right granted to the General Partners of your
partnership in the Limited Partnership Agreement to reject any transfers of
units, the General Partners will not permit the transfer of any Unit in
connection with a tender offer unless: (i) the Partnership is provided with a
copy of the bidder's offering materials, including amendments thereto,
simultaneously with their distribution to the limited partners; (ii) the offer
provides for withdrawal rights at any time prior to the expiration date of the
offer and, if payment is not made by the bidder within 60 days of the date of
the offer, after such 60 day period; and (iii) the offer must be open for at
least 20 business days and, if a material change is made to the offer, for at
least 10 business days following such change.
12
<PAGE>
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
For the Year Ended December 31
---------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue $12,178,694 $11,390,709 $12,199,975 2 $11,748,459 $ 10,452,432
Net Income (Loss) 3,852,480 3,100,160 2,845,625 2 2,244,520 2 (22,084,905) 1
Net Income (Loss) per Unit 6.22 5.01 4.60 3.63 2 (35.68) 1
Distribution Per Unit 3 2.30 4.60 4.03 2.48 2.48
Total Assets 63,413,501 61,837,211 61,919,546 61,979,385 60,266,933
</TABLE>
- ---------------
(1) 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.
(2) 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.
(3) 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
The matters discussed in this Form 10-K contain certain
forward-looking statements and involve risks and uncertainties (including
changing market conditions, competitive and regulatory matters, etc.) detailed
in the disclosures contained in this Form 10-K and the other filings with the
Securities and Exchange Commission made by the Partnership from time to time.
The discussion of the Partnership's liquidity, capital resources and results of
operations, including forward-looking statements pertaining to such matters,
does not take into account the effects of any changes to the Partnership's
operations. Accordingly, actual results could differ materially from those
projected in the forward-looking statements as a result of a number of factors,
including those identified herein.
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 generates rental revenue from
the commercial properties and is responsible for each property's operating
expenses as well as its administrative cost.
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,
1999 all capital expenditures and distributions were funded from cash flows. As
of December 31, 1999, total remaining working capital reserves amounted to
approximately $10,464,713. 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.
The Partnership had $12,675,936 of cash and cash equivalents
at December 31, 1999 as compared to $10,220,165 at December 31, 1998. During the
year ended December 31, 1999, cash and cash equivalents increased $2,455,771 as
a result of $5,228,795 cash provided by operations which were partially offset
by $637,623 of capital and tenant improvements to the properties and $2,135,401
of distributions to partners. The Partnership's primary source of funds is cash
flow from the operations of its properties, principally rents received from
tenants.
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
1999 1998 1997
---------- ---------- ----------
Century Park I 173,238 $ 89,729 $ 506,704
568 Broadway 154,617 293,021 84,805
Seattle Tower 355,407 490,322 78,754
Commonwealth 0 128,526 41,003
Commerce Plaza I 162,046 90,857 220,935
Melrose Crossing 26,487 69,338 84,202
Matthews Festival 25,689 69,666 133,029
Sutton Square 33,918 110,775 52,625
TMR Warehouses 29,311 6,043 3,620
Melrose Out Parcel 0 0 0
---------- ---------- ----------
Totals $ 960,713 $1,348,277 $1,205,677
========== ========== ==========
The Partnership has budgeted expenditures for capital
improvements and capitalized tenant procurement costs of $1,255,000 in 2000 in
the normal course of business 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 future 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. Current working capital is
thought to be sufficient for any near term needs of the Partnership. 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. If there is an indication that the carrying
amount of a property may not be recoverable, the Partnership prepares an
estimate of the future undiscounted cash flows expected to result from the use
of the 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 undiscounted cash flows 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 adjustments to reduce the carrying value of the
real estate assets 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 reductions in the carrying value of the real estate assets, 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 adjustments in prior years. Improvements in the real estate market
and in the property's operations resulted in no adjustments for impairment being
needed in 1999, 1998 or 1997.
16
<PAGE>
The following table represents the write-downs for impairment
recorded against the Partnership's assets held at 12/31/99:
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
-----------
$54,471,150
Results Of Operations
1999 vs. 1998
The Partnership experienced an increase in net income of 24.3%
for the year ended December 31, 1999 to $3,852,476 compared to 1998 net income
of $3,100,160 primarily due to higher rental revenues, interest income and other
income which were partially offset by higher costs and expenses.
Rental revenues increased by 6.9% during the year ended
December 31, 1999 to $12,178,691 from $11,390,709 for the same period in 1998
primarily due to increases from higher rental rates in 568 Broadway, Century
Park I, Commerce Plaza I and Sutton Square. Seattle Tower's increase was the
result of higher occupancy rates in 1999 of 98% compared to 96% in 1998.
Costs and expenses increased by 1.9% during the year ended
December 31, 1999 to $8,948,143 compared to $8,783,086 in 1998, due to increases
in administrative expenses partially offset by decreases in Partnership asset
management and property management fees. Operating expenses and depreciation and
amortization remained relatively stable with the prior year. Administrative
expenses for the year ended December 31, 1999 increased $514,651 or 57% compared
to 1998 due to higher professional fees related to the settlement of the
litigation and reorganization of the Partnership. Partnership asset management
fees decreased by $312,139 in 1999 due to an amendment to the partnership
agreement.
Interest income increased 10.4% from $458,990 in 1998 to
$506,778 in 1999 due to higher interest rates and higher cash balances during
the current year compared to 1998. Other income increased by $81,603 during the
year ended December 31, 1999 compared to 1998 due to an increase in fees from
investor servicing primarily related to an increase in investor transfers.
17
<PAGE>
1998 vs. 1997
The Partnership experienced an increase in net income of 8.9%
for the year ended December 31, 1998 to $3,100,160 compared to 1997 net income
of $2,845,625 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 by 1.3% during the year ended
December 31, 1998 to $11,390,709 from $11,249,284 for the same period in 1997
due to an increase in rental revenue of $221,078 at Century Park due to higher
occupancy rates in 1998 of 100% compared to 91% in 1997 and an increase of
$75,820 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 of $609,891 resulting from the sale of the 230 East Ohio property in
October 1997.
Costs and expenses decreased by 10.5% during the year ended
December 31, 1998 to $8,783,086 compared to $9,815,331 in 1997, due to decreases
in operating expenses, partnership asset management fee, and administrative
expenses, partially offset by increases in depreciation and property management
fees. Operating expenses decreased $735,518 or 15.3% 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 $345,230
or 27.7% 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 by $90,579 during 1998 because of
reduced assets under management due to the sale of 230 East Ohio in the prior
year. Depreciation increased by $153,610 due to higher depreciation recorded on
certain capitalized tenant improvements and property management fees increased
by $10,697 in 1998 due to higher revenues, as previously discussed.
Interest income increased by 22.4% from $374,716 in 1997 to
$458,990 during the year ended December 31, 1998 due to higher invested cash
balances. Other income decreased by $52,718 during the year ended December 31,
1998 compared to 1997 due to a decrease in fees from investor servicing
primarily related to a decrease in investor transfers in 1998.
Inflation is not expected to have a material impact on the
Partnership's operations or financial position.
Legal Proceedings
The Partnership is a party to certain litigation. See Item 3
and Note 7 to the Partnership's financial statements for a description thereof.
18
<PAGE>
Item 8. Financial Statements and Supplementary Data
HIGH EQUITY PARTNERS L.P. - SERIES 86
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
I N D E X
Page
Number
Independent Auditors' Report...............................................20
Financial statements, years ended December 31, 1999, 1998 and 1997
Balance Sheets ...................................................21
Statements of Operations..........................................22
Statements of Partners' Equity....................................23
Statements of Cash Flows..........................................24
Notes to Financial Statements.....................................25
19
<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, 1999 and 1998, and
the related statements of operations, partners' equity and cash flows for each
of the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 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.
DELOITTE & TOUCHE LLP
March 17, 2000
Boston, MA
20
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
---- ----
ASSETS
<S> <C> <C>
Real estate, net $47,277,773 $48,348,810
Cash and cash equivalents 12,675,936 10,220,165
Other assets 3,381,222 3,024,996
Receivables, net of allowances of $377,314 and
$131,499, respectively 78,570 243,240
----------- -----------
TOTAL ASSETS $63,413,501 $61,837,211
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Accounts payable and accrued expenses $1,774,695 $1,902,806
Due to affiliates 466,528 479,206
Distributions payable -- 711,801
----------- -----------
Total liabilities 2,241,223 3,093,813
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 7)
PARTNERS' EQUITY:
Limited partners' equity (588,010 units issued and outstanding) 58,112,718 55,805,281
General partners' equity 3,059,560 2,938,117
----------- -----------
Total partners' equity 61,172,278 58,743,398
----------- -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY $63,413,501 $61,837,211
=========== ===========
</TABLE>
See notes to financial statements
21
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Rental Revenue $12,178,694 $11,390,709 $11,249,284
----------- ----------- -----------
Costs and Expenses:
Operating expenses 4,076,117 4,065,020 4,800,538
Depreciation and amortization 2,092,145 2,102,684 1,974,299
Partnership asset management fee 973,293 1,285,432 1,376,011
Administrative expenses 1,417,475 902,824 1,248,054
Property management fee 389,113 427,126 416,429
----------- ----------- -----------
8,948,143 8,783,086 9,815,331
----------- ----------- -----------
Income before gain on sale of property, interest and other income 3,230,551 2,607,623 1,433,953
Gain on sale of property -- -- 950,691
Interest income 506,779 458,990 374,716
Other income 115,150 33,547 86,265
----------- ----------- -----------
Net Income $ 3,852,480 $ 3,100,160 $ 2,845,625
=========== =========== ===========
Net income attributable to:
Limited partners $ 3,659,856 $ 2,945,152 $ 2,703,344
General partners 192,624 155,008 142,281
----------- ----------- -----------
Net income $ 3,852,480 $ 3,100,160 $ 2,845,625
=========== =========== ===========
Net income per unit of limited partnership
Interest (588,010 units outstanding) $ 6.22 $ 5.01 $ $ 4.60
=========== =========== ===========
</TABLE>
See notes to financial statements
22
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
STATEMENTS OF PARTNERS' EQUITY
<TABLE>
<CAPTION>
General Limited
Partners' Partners'
Equity Equity Total
------ ------ -----
<S> <C> <C> <C>
Balance, December 31, 1996 2,907,909 55,231,308 58,139,217
Net Income 142,281 2,703,344 2,845,625
Distributions as return of capital (124,721) (2,369,679) (2,494,400)
($4.03 per limited partnership unit) ------------ ------------ ------------
Balance, December 31, 1997 2,925,469 55,564,973 58,490,442
Net Income 155,008 2,945,152 3,100,160
Distribution as a return of capital (142,360) (2,704,844) (2,847,204)
($4.60 per limited partnership unit) ------------ ------------ ------------
Balance, December 31, 1998 2,938,117 55,805,281 58,743,398
Net Income 192,624 3,659,856 3,852,480
Distributions as return of capital
($2.30 per limited partnership unit) (71,181) (1,352,419) (1,423,600)
------------ ------------ ------------
Balance, December 31, 1999 $ 3,059,560 $ 58,112,718 $ 61,172,278
============ ============ ============
</TABLE>
See notes to financial statements
23
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 3,852,480 $ 3,100,160 $ 2,845,625
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,092,145 2,102,684 1,974,299
Straight line adjustment for stepped lease rentals (433,619) (100,163) (103,605)
Gain on sale of real estate -- -- (950,691)
Changes in asset and liabilities:
Accounts payable and accrued expenses (128,111) (115,454) (112,941)
Receivables 164,670 4,474 52,736
Due to affiliates (12,678) (219,837) (626,170)
Other assets (306,092) (510,245) 135,436
------------ ------------ ------------
Net cash provided by operating activities 5,228,795 4,261,619 3,214,689
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of real estate -- -- 2,326,377
Improvements to real estate (637,623) (1,022,951) (955,591)
------------ ------------ ------------
Net cash (used in) provided by investing activities (637,623) (1,022,951) 1,370,786
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners (2,135,401) (2,847,204) (2,166,352)
------------ ------------ ------------
Increase in Cash and Cash Equivalents 2,455,771 391,464 2,419,123
Cash and Cash Equivalents, Beginning of Year 10,220,165 9,828,701 7,409,578
------------ ------------ ------------
Cash and Cash Equivalents, End of Year $ 12,675,936 $ 10,220,165 $ 9,828,701
============ ============ ============
</TABLE>
See notes to financial statements
24
<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.
Revenue recognition
Base rents are recognized on a straight line basis over the terms of
the related leases. Percentage rents charged to retail tenants based on
sales volume are recognized when earned. Recoveries from tenants for
taxes, insurance and other operating expenses are recognized as revenue
in the period the applicable costs are incurred..
25
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments in joint ventures
Certain properties were purchased in joint venture ownership with
affiliated partnerships that have the same, or affiliated, general
partners as the Partnership. The Partnership owns an undivided interest
and is severally liable for indebtedness it incurs in connection with
its ownership interest in those properties. Therefore, the
Partnership's financial statements present the assets, liabilities,
revenues and expenses of the joint ventures on a pro rata basis in
accordance with the Partnership's percentage of ownership.
Real estate
Real estate is carried at cost, net of adjustments for impairment.
Repairs and maintenance are charged to expense as incurred.
Replacements and betterments are capitalized. 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. If there is an indication that the carrying amount of a
property may not be recoverable, the Partnership prepares an estimate
the future undiscounted cash flows expected to result from the use of
the 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 undiscounted cash flows 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
26
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 impairment
adjustments. Tenant improvements are amortized over the applicable
lease term.
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 and distributions per unit of limited partnership interest
Net income and distributions per unit of limited partnership interest
are calculated based upon the number of units outstanding (588,010),
for each of the years ended December 31, 1999, 1998 and 1997.
Recently issued accounting pronouncements
In June of 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" as
amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement
No. 133." 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.
27
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
The Investment General Partner of the Partnership, Resources High
Equity, Inc. and the Administrative General Partner of the Partnership,
Resources Capital Corp. are wholly owned subsidiaries of Presidio
Capital Corp. ("Presidio"). Presidio AGP Corp., which is also a
wholly-owned subsidiary of Presidio, is the Associate General Partner
(together with the Investment and Administrative General Partners, the
"General Partners"). The General Partners and affiliates of the General
Partners are also engaged in businesses related to the acquisition and
operation of real estate.
Presidio is also the parent of other corporations that are or may in
the future be engaged in businesses that may be in competition with the
Partnership. Accordingly, conflicts of interest may arise between the
Partnership and such other businesses. Subject to the rights of the
Limited Partners under the Limited Partnership Agreement, Presidio
controls the Partnership through its indirect ownership of all the
shares of the General Partners. 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 years
ended December 31, 1999 and December 31, 1998, reimbursable expenses
incurred by NorthStar Presidio amounted to approximately $58,480 and
$102,025, respectively. Effective October 21, 1999, Presidio entered
into a Services Agreement with AP-PCC III, L.P. (the "Agent") pursuant
to which the Agent was retained to provide asset management and
investor relation services to Partnership and other entities affiliated
with Partnership.
As a result of this agreement, the Agent has the duty to direct the day
to day affairs of Partnership, including, without limitation, reviewing
and analyzing potential sale, financing or restructuring proposals
regarding the Partnership's assets, preparation of all reports,
maintaining records and maintaining bank accounts of Partnership. The
Agent is not permitted, however, without the consent of Presidio, or as
otherwise required under the terms of the Limited Partnership Agreement
to, among other things, cause Partnership to sell or acquire an asset
or file for bankruptcy protection.
28
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
In order to facilitate the Agent's provision of the asset management
services and the investor relation services, effective October 25,
1999, the officers and directors of the General Partner resigned and
nominees of the Agent were elected as the officers and directors of the
General Partner. The Agent is an affiliate of Winthrop Financial
Associates, a Boston based company that provides asset management
services, investor relation services and property management services
to over 150 limited partnerships which own commercial property and
other assets. The General Partner does not believe this transaction
will have a material effect on the operations of Partnership.
The Partnership has a property management services agreement with
Resources Supervisory Management Corp. ("Resources Supervisory"), an
affiliate of the General Partners, to perform certain functions
relating to the management of the properties of the Partnership. A
portion of the property management fees were paid to unaffiliated
management companies which are engaged for the purpose of performing
certain of the management functions for certain properties. For the
years ended December 31, 1999, 1998 and 1997, Resources Supervisory was
entitled to receive $389,113, $427,126 and $416,428 in total,
respectively, of which $319,610, $278,204 and $287,466, 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.
During 1998, for managing the affairs of the Partnership, the Managing
General Partner was entitled to receive an annual partnership
management fee equal to 1.05% of the amount of original gross proceeds
paid or allocable to the acquisition of property by the Partnership, as
adjusted for the properties sold. Pursuant to the amendment to the
Partnership Agreement, which became effective on August 20, 1999, the
annual partnership management fee for 1999 has been reduced to
$973,293. Further, the Partnership Agreement has been amended (for the
year 2000 and beyond) so that the partnership management fee well be
calculated equal to 1.25% of the Gross Asset Value of the Partnership,
defined as the appraised value of all the assets of the Partnership
based on the most recent appraisal. For the years ended December 31,
1999, 1998 and 1997, the Administrative General Partner earned
$973,293, $1,285,432 and $1,376,011, respectively.
29
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
The General Partners are allocated 5% of the net income of the
Partnership which amounted to $192,624, $155,008 and $142,281 in 1999,
1998 and 1997, respectively. The General Partners are also entitled to
receive 5% of distributions, which amounted to $71,181, $142,360 and
$124,721, in 1999, 1998 and 1997, 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.
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 18,769 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 13.7% of the outstanding limited partnership units of the
Partnership.
Pursuant to the settlement agreement (see Note 9), Millenium Funding
III LLC, a wholly owned subsidiary of Presidio completed a tender
offer in January 2000, purchasing approximately 6.7% or 39,596 limited
partnership units for $103.05 per unit or $4,080,368 in total.
30
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
4. REAL ESTATE
The Partnership recorded substantial write-downs for impairment prior
to 1996. No write-downs were required for 1999, 1998 or 1997. 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
-----------
$54,471,150
===========
The following table is a summary of the Partnership's real estate as
of:
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Land $ 11,669,652 $ 11,669,652
Buildings and improvements 59,545,284 58,907,661
------------ ------------
71,214,936 70,577,313
Less: Accumulated depreciation (23,937,163) (22,228,503)
------------ ------------
$ 47,277,773 $ 48,348,810
============ ============
</TABLE>
During 1999, revenues from the 568 Broadway and Matthews properties
represented 25% and 15% of gross revenues, respectively. No single
tenant accounted for more than 10% of the Partnership's rental revenues
in 1999.
The following is a summary of the Partnership's share of anticipated
future receipts under noncancellable leases:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Total $9,897,000 $8,948,000 $7,703,000 $5,497,000 $4,209,000 $11,338,000 $47,592,000
========== ========== ========== ========== ========== =========== ===========
</TABLE>
31
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
5. DISTRIBUTIONS PAYABLE
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
---- ----
<S> <C> <C>
Limited Partners $ -- $ 676,211
General Partners -- 35,590
------ ------
$ -- $ 711,801
====== =========
Such distributions were paid in the subsequent quarter
</TABLE>
6. DUE TO AFFILIATES
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
---- ----
<S> <C> <C>
Partnership asset management fee $330,577 $ 321,358
Reorganization and litigation cost reimbursement (Note 7) - -
Property management fee 35,951 107,848
Non-accountable expense reimbursement 100,000 50,000
-------- ---------
$466,528 $ 479,206
======== =========
</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.
32
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
b) A former retail tenant of 568 Broadway (Galix Shops, Inc.) and a
related corporation which is a retail tenant of a building adjacent to
568 Broadway filed a lawsuit in the Supreme Court of the State of New
York, County of New York, against the Broadway Joint Venture which owns
568 Broadway. The action was filed on April 13, 1994. The plaintiffs
allege that by erecting a sidewalk shed in 1991, 568 Broadway deprived
plaintiffs of light, air and visibility to their customers. The
sidewalk shed was erected, as required by local law, in connection with
the inspection and restoration of the 568 Broadway building facade,
which is also required by local law. Plaintiffs further 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.
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,
--------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income per financial statements $ 3,852,480 $ 3,100,160 $ 2,845,625
Difference in gain/loss from sale of 230 East Ohio -- -- (7,675,270)
Tax depreciation in excess of financial statement depreciation (2,035,029) (1,409,719) (1,800,699)
------------ ----------- -----------
Net taxable income (loss) $ 1,617,451 $ 1,690,441 $(6,630,344)
============ =========== ===========
</TABLE>
33
<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>
December 31, 1999
-----------------
<S> <C>
Net assets per financial statements $61,172,278
Write-down for impairment 54,471,150
Tax depreciation in excess of financial statement depreciation (14,881,863)
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 $104,717,359
============
</TABLE>
9. SETTLEMENT OF LAWSUIT
In April 1999, the California Superior Court approved the terms of the
settlement of a class action and derivative litigation involving the
Partnership. Under the terms of the settlement, the General Partners
agreed to take the actions described below subject to first obtaining
the consent of limited partners to amendments to the Agreement of
Limited Partnership of the Partnership summarized below. The settlement
became effective in August 1999 following approval of the amendments.
As amended, the Partnership Agreement (a) provides for a Partnership
Asset Management Fee equal to 1.25% of the gross asset value of the
Partnership and a fixed 1999 Partnership Asset Management Fee of
$973,293 or $312,139 less than the amount that would have been paid for
1999 under the prior formula and (b) fixes the amount that the General
Partners will be liable to pay to limited partners upon liquidation of
the Partnership as repayment of fees previously received (the "Fee
Give-Back Amount"). As of December 31, 1999, the Fee Give-Back Amount
was $4.38 per Unit which amount will be reduced by approximately $.49
per Unit for each full calendar year after 1999 in which a liquidation
does not occur. As amended, the Partnership Agreement provides that,
upon a reorganization of the Partnership into a real estate investment
trust or other public entity, the General Partners will have no further
liability to pay the Fee Give-Back Amount. In accordance with the terms
of the settlement, Presidio Capital Corp., an affiliate of the General
Partners, guaranteed payment of the Fee Give-Back Amount.
34
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
9. SETTLEMENT OF LAWSUIT (CONTINUED)
As required by the settlement, an affiliate of the General Partners,
Millennium Funding III, LLC, made a tender offer to limited partners to
acquire up to 39,596 Units (representing approximately 6.7% of the
outstanding Units) at a price of $103.05 per Unit. The offer closed in
January 2000 and all 39,596 Units were acquired in the offer.
The final requirement of the settlement obligated the General Partners
to use their best efforts to reorganize the Partnership into a real
estate investment trust or other entity whose shares were listed on a
national securities exchange or on the NASDAQ National Market System. A
Registration Statement was filed with the Securities and Exchange
Commission on February 11, 2000 with respect to the restructuring of
the Partnership into a publicly-traded real estate investment trust.
The Registration Statement has not yet become effective and the consent
of a majority of limited partners will be needed to effect the
restructuring.
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, 1999, the
Partnership paid the General Partners a total of $1,079,796 for these
costs which has historically been included in administrative expenses
in the statement of operations.
35
<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 General Partners
manage and control substantially all of the Partnership's affairs and has
general responsibility and ultimate authority in all matters affecting its
business. The names and positions held by the officers and directors of the
General Partners are described below.
<TABLE>
<CAPTION>
Has Served as
Position Held with the Has Served as a Director
Name General Partners or Officer Since
- ---- ---------------- ----------------
<S> <C> <C>
Michael L. Ashner President and Director 10-99
David G. King, Jr. Vice President 11-97
Peter Braverman Executive Vice President 10-99
Lara K. Sweeney Vice President and Secretary 10-99
Carolyn Tiffany Vice President and Treasurer 10-99
</TABLE>
Michael L. Ashner, age 47, has been the Chief Executive Officer of
Winthrop Financial Associates, A Limited Partnership ("WFA") since January 15,
1996. From June 1994 until January 1996, Mr. Ashner was a Director, President
and Co-chairman of National Property Investors, Inc., a real estate investment
company ("NPI"). Mr. Ashner was also a Director and executive officer of NPI
Property Management Corporation ("NPI Management") from April 1984 until January
1996. In addition, since 1981 Mr. Ashner has been President of Exeter Capital
Corporation, a firm which has organized and administered real estate limited
partnerships.
David G. King, Jr., 37, has been a Vice President and Assistant
Treasurer of NorthStar Capital Investment Corp. since November 1997. He is also
a Vice President of the General Partner. For more than the previous five years
he was a Senior Vice President of Finance at Olympia & York Companies (USA).
36
<PAGE>
Peter Braverman, age 48, has been a Vice President of WFA since January
1996. From June 1995 until January 1996, Mr. Braverman was a Vice President of
NPI and NPI Management. From June 1991 until March 1994, Mr. Braverman was
President of the Braverman Group, a firm specializing in management consulting
for the real estate and construction industries. From 1988 to 1991, Mr.
Braverman was a Vice President and Assistant Secretary of Fischbach Corporation,
a publicly traded, international real estate and construction firm.
Lara K. Sweeney, age 27, has been a Senior Vice President of WFA since
January 1996. Prior to joining WFA, Ms. Sweeney was an officer of NPI and NPI
Management in the asset management and investor relations departments.
Carolyn Tiffany, age 33, has been employed with WFA since January 1993.
From 1993 to September 1995, Ms. Tiffany was a Senior Analyst and Associate in
WFA's accounting and asset management departments. From October 1995 to present
Ms. Tiffany was a Vice President in the asset management and investor relations
departments of WFA until December 1997, at which time she became the Chief
Operating Officer of WFA.
Each director and officer of the General Partner will hold office until
the next annual meeting of stockholders of the General Partner and until his
successor is elected and qualified.
One or more of the above persons are also directors or officers of a
general partner (or general partner of a general partner) of a number of limited
partnerships which either have a class of securities registered pursuant to
Section 12(g) of the Securities and Exchange Act of 1934, or are subject to the
reporting requirements of Section 15(d) of such Act.
There are no family relationships among the officers and directors of
the General Partner.
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."
37
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners.
Except as set forth below, no person or group is known by the
Partnership to be the beneficial owner of more than 5% of the outstanding Units
at March 1, 2000:
Number of
Name of Beneficial Owner Units owned % of Class
------------------------ ----------- ----------
Millennium Funding III Corp.(1) 80,444 13.68%
Millennium Funding III LLC(1) 39,858 6.78%
(1) The principal business address of both Millennium Funding III Corp. and
Millennium Funding III LLC, both of which are affiliates of the General
Partners, is 527 Madison Avenue, New York, New York 10022.
(b) Security Ownership of Management.
At March 1, 2000, Presidio, the General Partner and their affiliates,
officers and directors owned as a group own 123,274 Units representing
approximately 20.96% of the total number of Units outstanding.
(c) Changes in Control.
There exists no arrangement known to the Partnership the operation of
which may at a subsequent date result in a change in control of the Partnership.
38
<PAGE>
Item 13. Certain Relationships and Related Transactions
The General Partners and certain affiliated entities have, during the
year ended December 31, 1999, earned or received compensation or payments for
services or reimbursements from the Partnership or subsidiaries of Presidio as
follows:
<TABLE>
<CAPTION>
Compensation from the
Name of Recipient Capacity in Which Served the Partnership
- ----------------- ------------------------ ---------------
<S> <C> <C>
Resources High Equity Inc. Investment General Partner $1,424 (1)
Resources Capital Corp. Administrative General
Partner $1,241,626 (2)
Presidio AGP Corp. Associate General Partner $1,424 (3)
Resources Supervisory Management Affiliated Property Manager $69,503 (4)
Corp.
</TABLE>
- -----------------
(1) This amount represents the Investment General Partner's share of
distributions of cash from operations. Furthermore, under the
Partnership's Limited Partnership Agreement, 0.1% of the net income and
net loss of the Partnership is allocated to the Investment General
Partner. Pursuant thereto, for the year ended December 31, 1999, $1,817
of the Partnership's taxable income was allocated to the Investment
General Partner.
(2) Of this amount, $68,333 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 $973,293
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, 1999, $87,237 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, 1999, $1,817 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).
39
<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
$389,113, of which $319,610 was paid to unaffiliated management
companies
40
<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.
(e) Amendment to the Amended and Restated Agreement of Limited
Partnership dated August 20, 1999, incorporated by reference to the
Partnership's Quarterly Report on Form 10-Q for the three months ended
September 30, 1999.
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).
41
<PAGE>
(b) Acquisition and Disposition Services Agreement among the
Partnership, Realty Resources Inc. and Resources High Equity, Inc.,
incorporated by reference to Exhibit 10C to the Partnership's
Registration Statement on Form S-11 (Reg. No. 33-1853).
(c) Agreement among Resources High Equity Inc., Integrated Resources,
Inc. and Second Group Partners, incorporated by reference to Exhibit
10D to the Partnership's Registration Statement on Form S-11 (Reg. No.
33-1853).
(d) Joint Venture Agreement dated November 2, 1986 between the
Partnership and Integrated Resources High Equity Partners, Series 85, A
California Limited the Partnership, with respect to Century Park I,
incorporated by reference to Exhibit 10(b) to the Partnership's Current
Report on Form 8-K dated November 7, 1986.
(e) Joint Venture Agreement dated October 27, 1986 between the
Partnership and Integrated Resources High Equity Partners, Series 85, A
California Limited Partnership, with respect to 568 Broadway,
incorporated by reference to Exhibit 10(b) to the Partnership's Current
Report on Form 8-K dated November 19, 1986.
(f) Joint Venture Agreement dated November 24, 1986 between the
Partnership and Integrated Resources High Equity Partners, Series 85, A
California Limited Partnership, with respect to Seattle Tower,
incorporated by reference to Exhibit 10(b) to the Partnership's Current
Report on Form 8-K dated December 8, 1986.
(g) Amended and Restated Joint Venture Agreement dated February 1, 1990
among the Partnership, Integrated Resources High Equity Partners,
Series 85, A California Limited the Partnership and High Equity
Partners L.P., Series 88, with respect to 568 Broadway, incorporated by
reference to Exhibit 10(a) to the Partnership's Current Report on Form
8-K dated February 1, 1990 as filed on March 30, 1990.
(h) Agreement, dated as of March 23, 1990, among the Partnership,
Resources Capital Corp. and Resources Property Management Corp., with
respect to the payment of deferred fees, incorporated by reference to
Exhibit 10(r) to the Partnership's Annual Report on Form 10-K for the
year ended December 31, 1990.
(i) First Amendment to Amended and Restated Joint Venture Agreement of
568 Broadway Joint Venture, dated as of February 1, 1990, among the
Partnership, High Equity Partners, L.P. - Series 85 and High Equity
Partners, L.P. - Series 88, incorporated by reference to Exhibit 10(s)
to the Partnership's Annual Report on Form 10-K for the year ended
December 31, 1990.
(j) Form of Termination of Supervisory Management Agreement (separate
agreement entered into with respect to each individual property) and
Form of Supervisory
42
<PAGE>
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.
(k) Guarantee by Presidio Capital Corp. dated August 20, 1999,
incorporated by reference to the Partnership's Quarterly Report on Form
10-Q for the three months ended September 30, 1999.
(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.
43
<PAGE>
Financial Statement Schedule Filed Pursuant to
Item 14(a)(2)
HIGH EQUITY PARTNERS L.P. - SERIES 86
ADDITIONAL INFORMATION
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
INDEX
Page
number
------
Additional financial information furnished
pursuant to the requirements of Form 10-K:
Schedules - December 31, 1999, 1998 and 1998
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.
44
<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, 2000 By: /s/ Michael L. Ashner
-------------------------
Michael L. Ashner
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, 2000 By: /s/ Michael L. Ashner
-------------------------
Michael L. Ashner
President and Director
(Principal Executive Officer)
Dated: March 29, 2000 By: /s/ Carolyn Tiffany
-----------------------
Carolyn Tiffany
Vice President and Treasurer
(Principal Financial and Accounting Officer)
45
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
<TABLE>
<CAPTION>
Reductions
Costs Recorded
Capitalized Subsequent
Subsequent to to
Initial Cost Acquisition Acquisition
-------------------- --------------------------- -----------
Buildings
And
Description Encumbrances Land Improvements Improvement Carrying Costs Write Downs
----------- ------------ ---- ------------ ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
RETAIL:
Melrose Crossing Shopping Melrose Park, IL $ -- $2,002,532 $ 12,721,968 $ 1,157,596 $1,064,777 $(12,100,000)
Matthews Township Festival
Shopping Center Matthews, NC -- 2,973,646 12,571,750 374,135 1,581,384 (5,300,000)
Sutton Square Shopping
Center Raleigh, NC -- 2,437,500 10,062,500 452,096 1,025,898 --
----------- ---------- ------------ ----------- ---------- ------------
-- 7,413,678 35,356,218 1,983,827 3,672,059 (17,400,000)
----------- ---------- ------------ ----------- ---------- -------------
OFFICE:
Commerce Plaza Office Building Richmond, VA -- 733,279 7,093,435 2,091,552 468,324 (2,700,000)
Century Pak I Office Complex Kearny Mesa, CA -- 3,122,064 12,717,936 2,128,484 1,203,130 (11,700,000)
568 Broadway Office Building New York, NY -- 2,318,801 9,821,517 5,158,788 1,220,484 (10,821,150)
Seattle Tower Office Building Seattle, WA -- 2,163,253 5,030,803 2,536,224 486,969 (6,050,000)
----------- ---------- ------------ ----------- ---------- ------------
8,337,397 34,663,691 11,915,048 3,378,907 (31,271,150)
----------- ---------- ------------ ----------- ---------- ------------
INDUSTRIAL:
Commonwealth Industrial Park Fullerton, CA -- 3,749,700 7,125,300 633,633 767,573 (5,800,000)
TMR Warehouses Various, OH -- 369,215 5,363,935 33,624 435,653 --
Melrose (Lot #7) Melrose Park, IL -- 450,000 -- -- 36,628 --
----------- ----------- ------------ ----------- ---------- ------------
4,568,915 12,489,235 667,257 1,239,854 (5,800,000)
----------- ----------- ------------ ----------- ---------- ------------
$ -- $20,319,990 $ 82,509,144 $14,566,132 $8,290,820 $(54,471,150)
=========== =========== ============ =========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
Gross Amount at Which
Carried at Close of Period
------------------------------
Buildings
And Accumulated Date
Description Land Improvements Total Depreciation Acquired
----------- ---- ------------ ----- ----------- --------
<S> <C> <C> <C> <C> <C>
RETAIL:
Melrose Crossing Shopping Melrose Park, IL $ 569,462 $ 4,277,411 $ 4,846,873 $ 2,876,182 1988
Matthews Township Festival
Shopping Center Matthews, NC 2,249,562 9,951,353 12,200,915 3,846,623 1988
Sutton Square Shopping Raleigh, NC 2,637,550 11,340,444 13,977,994 3,448,891 1988
Center ----------- ------------ ----------- -----------
5,456,574 25,569,208 31,025,782 10,171,696
----------- ------------ ----------- -----------
OFFICE:
Commerce Plaza Office Building Richmond, VA 556,352 7,130,238 7,686,590 2,497,192 1987
Century Pak I Office Complex Kearny Mesa, CA 1,092,744 6,378,870 7,471,614 3,236,213 1986
568 Broadway Office Building New York, NY 922,338 6,776,102 7,698,440 2,971,853 1986
Seattle Tower Office Building Seattle, WA 724,808 3,442,441 4,167,249 1,503,865 1986
----------- ------------ ----------- -----------
3,296,242 23,727,651 27,023,893 10,209,123
----------- ------------ ----------- -----------
INDUSTRIAL:
Commonwealth Industrial Park Fullerton, CA 2,032,937 4,443,269 6,476,206 1,922,821 1987
TMR Warehouses Various, OH 397,271 5,805,156 6,202,427 1,633,523 1988
Melrose (Lot #7) Melrose Park, IL 486,628 -- 486,628 -- 1988
----------- ------------ ----------- -----------
2,916,836 10,248,425 13,165,261 3,556,344
----------- ------------ ----------- -----------
$11,669,652 $ 59,545,284 $71,214,936 $23,937,163
=========== ============ =========== ===========
</TABLE>
Note: The aggregate cost for Federal income tax purposes is $125,685,557 at
December 31, 1999
S-1
<PAGE>
HIGH EQUITY PARTNERS L.P. - SERIES 86
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(A) RECONCILIATION OF REAL ESTATE OWNED:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR $70,577,313 $69,554,362 $ 71,595,126
ADDITIONS DURING THE YEAR
Improvements to Real Estate 637,623 1,022,951 955,591
SUBTRACTIONS DURING THE YEAR
Sales - Net -- -- (2,996,355)
----------- ----------- ------------
BALANCE AT END OF YEAR (1) $71,214,936 $70,577,313 $69,554,362
=========== =========== ===========
</TABLE>
(1) INCLUDES INITIAL COST OF THE PROPERTIES PLUS ACQUISITION
AND CLOSING COSTS.
(B) RECONCILIATION OF ACCUMULATED DEPRECIATION:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR $22,228,503 $20,422,562 $ 20,076,515
ADDITIONS DURING THE YEAR
Depreciation Expense(1) 1,708,660 1,805,941 1,652,331
SUBTRACTIONS DURING THE YEAR
Sales -- -- (1,306,284)
----------- ----------- ------------
BALANCE AT END OF YEAR $23,937,163 $22,228,503 $ 20,422,562
=========== =========== ============
</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>
This schedule contains summary financial information
extracted from audited financial statements for the
year ended December 31, 1999 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 12,675,936
<SECURITIES> 0
<RECEIVABLES> 455,884
<ALLOWANCES> (377,314)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 71,214,936
<DEPRECIATION> (23,937,163)
<TOTAL-ASSETS> 63,413,501
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 61,172,278
<TOTAL-LIABILITY-AND-EQUITY> 63,413,501
<SALES> 0
<TOTAL-REVENUES> 12,178,694
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,530,668
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,852,480
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,852,480
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,852,480
<EPS-BASIC> 6.22
<EPS-DILUTED> 6.22
</TABLE>
