UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
Commission file number: 33-2294
PARTICIPATING DEVELOPMENT FUND 86
A Real Estate Limited Partnership Exact Name
of Registrant as Specified in its Charter
Connecticut 06-1153833
State or other jurisdiction of incorporation IRS employer identification No.
3 World Financial Center, 29th Floor, New York, NY 10285
Address of principal executive offices zip code
Registrant's Telephone Number, Including Area Code: (212) 526-3237
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 INTERESTS
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant: Not applicable.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Prospectus dated February 21, 1986 filed with the Securities and
Exchange Commission pursuant to Rule 424(b) on February 27, 1986 are
incorporated by reference into Parts I, II, III, and IV of this report.
Portions of Parts I, II, III and IV are incorporated by reference to the
Partnership's Annual Report to Unitholders for the year ended December 31, 1994
filed as an exhibit under Item 14.
PART I
Item 1. Business
(a) General Development of Business
Participating Development Fund 86, A Real Estate Limited Partnership (the
"Partnership"), was formed on December 9, 1985 under the Uniform Limited
Partnership Act of the State of Connecticut. The Partnership was originally
formed to make five participating investments by entering into land purchase
leaseback transactions and concurrently funding leasehold mortgage loans
secured by commercial and multi-family residential real estate (the
"Participating Investments"). The Partnership made its Participating
Investments in the following five properties (the "Properties" or individually
a "Property"): Sunnyvale R&D, a one-story research and development building
located in Sunnyvale, California; Foothills Tech Plaza, two research and
development/service buildings in Phoenix, Arizona; Harris Pond Apartments, a
170-unit luxury apartment complex in Charlotte, North Carolina; Pebblebrook
Apartments, a 267-unit luxury apartment complex in Overland Park (Kansas City),
Kansas; and 1899 Powers Ferry Road, a four-story office building located in
Atlanta, Georgia. As a result of defaults under ground leases on the
Sunnyvale, Phoenix, Atlanta and Overland Park Properties, the Partnership now
owns these Properties in their entirety. The apartment complex located in
Charlotte, N.C. was sold on November 1, 1989. On April 16, 1991, the
Partnership took title to the Participating Investment in Overland Park, Kansas
through a special conveyance resulting from a bankruptcy proceeding. The
Partnership anticipated liquidating its remaining investments within seven
years from their respective dates of funding, however, competitive market
conditions limited favorable sales opportunities. The General Partner
continues to monitor the market to determine the best time to market the
properties for sale. The Partnership does not plan to invest in any additional
property.
On June 15, 1992, Phoenix Realty Management, Inc., (the "Phoenix") sent a
notice of resignation as co-General Partner of the Partnership to PDF86 Real
Estate Services Inc. ("RE Services" or the "General Partner"), formerly
Shearson Lehman Brothers/PDF 86, Inc. (See Item 10. "Certain Matters Involving
Affiliates of RE Services"), the Partnership's other co-General Partner. The
effective date of the resignation was June 16, 1992. As a result of the
resignation of Phoenix, RE Services, as sole General Partner, manages the
affairs of the Partnership.
Additional information regarding the historical development of business is
incorporated by reference to Note 1 "Organization," Note 2 "Accounting
Policies" and Note 3 "Real Estate Investments" of the Notes to Financial
Statements.
(b) Financial Information About Industry Segment
The Partnership's sole business is the ownership and operation of the
Properties. All of the Partnership's revenues, operating profit or losses and
assets relate solely to such industry segment.
(c) Narrative Description of Business
Incorporated by reference to Note 1 "Organization" and Note 3 "Real Estate
Investments" of the Notes to Financial Statements.
(d) Competition
Incorporated by reference to the section entitled Property Profiles & Leasing
Update on pages 3 - 4 of the Partnership's Annual Report to Unitholders for the
year ended December 31, 1994 filed as an exhibit under Item 14.
(e) Employees
The Partnership has no employees.
Item 2. Properties
Description of Properties and material leases incorporated by reference to the
Property Profiles & Leasing Update contained on pages 3 - 4 in the
Partnership's Annual Report to Unitholders for the year ended December 31,
1994, filed as an exhibit under Item 14, and Note 3 "Real Estate Investments"
of the Notes to Financial Statements.
Item 3. Legal Proceedings
Discussion regarding class action settlement agreement incorporated by
reference to Note 7 "Litigation" of Notes to Financial Statements in the
Partnership's Annual Report to Unitholders for the year ended December 31,
1994.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Unit Holders during the fourth quarter
of 1994.
PART II
Item 5. Market for the Partnership's Limited Partnership Units and Related
Security Holder Matters
(a) Market Information
There is no established trading market for the Units of the Partnership.
(b) Holders
As of December 31, 1994, there were 7,827 holders of record, owning an
aggregate of 1,124,000 Units.
(c) Distributions
A discussion of cash distributions paid to the Limited Partners for the two
years ended December 31, 1994 is incorporated by reference to the section
entitled Message to Investors on page 1 of the Partnership's Annual Report To
Unitholders for the year ended December 31, 1994 filed as an exhibit under Item
14.
Item 6. Selected Financial Data
Incorporated by reference to the section entitled Financial Highlights on page
5 of the Partnership's Annual Report to Unitholders for the year ended December
31, 1994 filed as an exhibit under Item 14.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
At December 31, 1994, the Partnership had cash and cash equivalents of $140,886
compared with $798,734 at December 31, 1993. The cash and cash equivalents
balance includes amounts reserved for capital and tenant improvements, leasing
costs, working capital reserves and cash flow generated from operations of the
properties. The decrease of $657,848 reflects payments of cash distributions
to the Partners in the amount of $1,390,516 and capital and tenant improvements
costs of $1,691,770. Partially offsetting these expenses is operating cash
generated at the properties totaling $2,424,438 in 1994. It is anticipated
that a significant portion of the cash and cash equivalents balance will be
used for tenant improvement costs and leasing commissions incurred in
association with re-leasing vacant space at 1899 Powers Ferry Road. The
Partnership also maintains a restricted cash balance, which is comprised of
tenant security deposits. Restricted cash totaled $152,162 at December 31,
1994, compared with $364,360 at December 31, 1993.
On September 27, 1993, the Partnership concluded lease negotiations with POS
Systems, Inc. ("POS") for 39,270 square feet, originally occupied by Acoustic
Imaging ("AI") at Foothills Tech Plaza. The ten-year lease with POS commenced
on April 1, 1994. The Partnership funded approximately $890,000 of tenant
improvements for POS in 1994. In addition, an agreement was reached with AI to
amend its lease and for AI's parent company to provide a lease guaranty. The
amended lease with AI reflects, among other things, the new square footage of
93,385 and new rental rates that increase over time.
Prepaid expenses totaled $389,472 at December 31, 1994, compared with $76,535
at December 31, 1993. The increase is primarily the result of leasing
commissions associated with lease-up of Powers Ferry in 1994. Incentives to
lease were $283,555 at December 31, 1994, as a result of an increase in
occupancy at Powers Ferry to 91% at December 31, 1994 from 81% at December 31,
1993.
Accounts payable totaled $323,897 at December 31, 1994, compared with $214,345
at December 31, 1993. The increase primarily reflects lease buy-out costs that
will be paid during 1995.
The General Partner has determined that an adequate cash reserve exists to fund
anticipated tenant improvement costs and leasing commissions associated with
leasing efforts at the properties, and quarterly cash distributions to the
Limited Partners. During the fourth quarter of 1993, the General Partner
decided to reduce the level of cash distributions to an amount approximating
actual cash flow. Lowering the cash distribution enabled the Partnership to
maintain an adequate reserve to fund leasing costs at the Powers Ferry Office
Building. The Partnership declared cash distributions to Limited Partners of
$1.20 per Unit for the year ended December 31, 1994. Included in this total is
a cash distribution of $.30 per Unit for the quarter ended December 31, 1994,
which was paid on February 6, 1995. The timing and amounts of future cash
distributions will be determined quarterly by the General Partner, and will
depend on the adequacy of cash flow after expenses and the Partnership's ca sh
reserve requirements.
Results of Operations
1994 Versus 1993
Partnership operations resulted in net income of $1,449,548 for the year ended
December 31, 1994, compared with net income of $931,882 for the corresponding
period in 1993. The increase in net income in 1994 is primarily attributable
to higher rental income and other income in 1994, as well as lower general
administrative, bad debt and depreciation expenses. These were offset by lower
interest income and higher property operating expenses.
Rental income totaled $4,387,259 for the year ended December 31, 1994, compared
with of $3,990,962 in 1993. The increase in 1994 is primarily attributable to
a rental rate increase at Sunnyvale, increased occupancy at Powers Ferry,
scheduled rental rate increases at Pebblebrook and POS taking occupancy at
Foothills. Other income was $189,508 for the year ended December 31, 1994,
compared to $67,093 for the year ended December 31, 1993. The increase of
$122,415 is due primarily to the receipt of a tenant's cancellation fee at
Powers Ferry. Interest income totaled $11,912 for the year ended December 31,
1994 compared with $42,812 in 1993, reflecting the Partnership's lower average
cash balances.
Property operating expenses totaled $1,407,195 for the year ended December 31,
1994, compared to $1,206,605 in 1993. The $200,590 increase is primarily due
to higher real estate taxes at the Pebblebrook property and higher repairs and
maintenance, payroll, administrative and utility expenses at the Powers Ferry
and Pebblebrook properties. Depreciation and amortization expense totaled
$1,513,099 for the year ended December 31, 1994, compared with $1,690,501 in
1993. Depreciation and amortization expense was lower for the twelve month
period in 1994 due to certain assets becoming fully depreciated during 1994,
primarily at the Sunnyvale and Pebblebrook properties.
As of December 31, 1994, the lease levels at each of the properties were as
follows: Foothills Tech Plaza - 100%; 1899 Powers Ferry Road - 91%; Sunnyvale
R&D - 100%; and Pebblebrook Apartments - 97%.
1993 Versus 1992
Partnership operations resulted in net income of $931,882 for the year ended
December 31, 1993, compared with net income of $1,280,091 for the year ended
December 31, 1992. The decrease in net income in 1993 is largely attributable
to higher property operating expenses and lower rental revenues and, to a
lesser extent, a bad debt expense associated with the write off of a tenant's
outstanding receivable balance.
Rental income remained stable during 1993 as a result of stable operations.
The slight decrease to $3,990,962 in 1993, compared with $4,172,043 for the
corresponding period in 1992 is largely attributable to the modification of the
lease agreement with AI at Foothills Tech Plaza. Interest income totaled
$42,812 for the year ended December 31, 1993 compared with $71,678 for the
corresponding period in 1992, reflecting lower interest rates and the
Partnership's decreased cash balance.
Depreciation and amortization expense totaled $1,690,501 for the year ended
December 31, 1993, compared with $1,640,663 a year earlier. The increase is
largely a result of higher depreciation in 1993 associated with property
improvements completed during the year. Property operating expenses totaled
$1,206,605 for the year ended December, 31, 1993 compared to $1,099,393 for the
corresponding period in 1992. The increase is primarily due to higher
advertising, administrative, and repairs and maintenance expenses during 1993.
At December 31, 1993, the lease levels at each of the properties were as
follows: Foothills Tech Plaza - 100%; 1899 Powers Ferry Road - 81%; Sunnyvale
R&D - 100%; and Pebblebrook Apartments - 94%
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to pages 6 - 15 of the Partnership's Annual Report to
Unitholders for the year ended December 31, 1994 filed as an exhibit under Item
14.
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 General Partner of the Partnership is PDF86 Real Estate Services Inc. ("RE
Services"), formerly Shearson Lehman Brothers, Inc./PDF 86, Inc., an affiliate
of Lehman Brothers Inc. ("Lehman"). See a section captioned "Certain Matters
Involving Affiliates of RE Services" for a description of the sale of certain
of Shearson Lehman Brothers, Inc. ("Shearson") domestic retail brokerage and
asset management business to Smith Barney, Harris Upham & Co. Incorporated,
which resulted in a change in the general partner's name. Brief descriptions
of the business experience of the directors and officers of the General Partner
are provided below. Each of the directors of the General Partner is elected
annually. There is no family relationship among any of the persons currently
serving as directors or officers of the General Partner.
Certain officers and directors of RE Services are now serving (or in the past
have served) as officers and directors of entities which act as general
partners of a number of real estate limited partnerships which have sought
protection under the provisions of the Federal Bankruptcy Code. The
partnerships which have filed bankruptcy petitions own real estate which has
been adversely affected by the economic conditions in the markets in which the
real estate is located and, consequently, the partnerships sought the
protection of bankruptcy laws to protect the partnership's assets from losses
through foreclosure.
The executive officers and directors of RE Services are listed below.
Name Age Office
Kenneth L. Zakin 47 President and Director
William Caulfield 35 Vice President and Chief Financial Officer
Kenneth L. Zakin is a Senior Vice President of Lehman Brothers and has held
such title since November 1988. He is currently a senior manager in Lehman
Brothers' Diversified Asset Group and was formerly group head of the Commercial
Property Division of Shearson Lehman Brothers' Direct Investment Management
Group responsible for the management and restructuring of limited partnerships
owning commercial properties throughout the United States. From January 1985
through November 1988, Mr. Zakin was a Vice President of Shearson Lehman
Brothers Inc. Mr. Zakin is a director of Lexington Corporate Properties, Inc.
He is a member of the Bar of the State of New York and previously practiced as
an attorney in New York City from 1973 to 1984 specializing in the financing,
acquisition, disposition, and restructuring of real estate transactions. Mr.
Zakin is currently an associate member of the Urban Land Institute and a member
of the New York District Council Advisory Services Committee. He received a
Juris Doctor degree from St. John's University School of Law in 1973 and a B.A.
degree from Syracuse University in 1969.
William Caulfield is a Vice President of Lehman Brothers and is responsible for
investment management of commercial real estate in the Diversified Asset Group.
Prior to the Shearson/Hutton merger in 1988, Mr. Caulfield was a Senior Analyst
with E.F. Hutton since October 1986 in Hutton's Partnership Administration
Group. Before joining Hutton, Mr. Caulfield was a Business Systems Analyst at
Eaton Corp. from 1985 to 1986. Prior to Eaton, he was an Assistant Treasurer
with National Westminster Bank USA. Mr. Caulfield holds a B.S. degree in
Finance from St. John's University and an M.B.A. from Long Island University.
Certain Matters Involving Affiliates of RE Services
On July 31, 1993, Shearson Lehman Brothers, Inc. sold certain of its domestic
retail brokerage and asset management businesses to Smith Barney, Harris Upham
& Co. Incorporated ("Smith Barney"). Subsequent to the sale, Shearson changed
its name to Lehman Brothers Inc. The transaction did not affect the ownership
of the Partnership's General Partner. However, the assets acquired by Smith
Barney included the name "Shearson." Consequently, the Shearson Lehman
Brothers/PDF 86, Inc. general partner changed its name to PDF Real Estate
Services Inc. to delete any reference to "Shearson."
Item 11. Executive Compensation
The General Partners and their Affiliates have received certain fees,
commissions and reimbursements for expenses incurred as provided for on pages
13 through 17 of the Prospectus which are contained under "Management
Compensation" (See Exhibit 3 incorporated herein by reference). The General
Partners are entitled to receive a share of cash distributed when and as cash
distributions are made to Unit Holders and a share of taxable income or taxable
loss, and may be reimbursed for certain out-of-pocket expenses. In addition,
the General Partners are entitled to receive various fees and distributions
during the liquidation stages of the Partnership. Descriptions of such fees,
distribution allocations, and reimbursements is incorporated by reference to
Note 5 "Transactions with Related Parties" and Note 6 "Partners' Equity" of the
Notes to Financial Statements. Officers and directors of the General Partner
are employees of Lehman Brothers Inc. and are not compensated by the
Partnership or the General Partner for services rendered in connection with the
Partnership.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security of Ownership of Certain Beneficial Owners
No person (including any "group" as that term is used in Section 13(d)(3) of
the Securities Exchange Act of 1934) is known to the Registrant to be the
beneficial owner of more than five percent of the outstanding voting Interests
as of December 31, 1994.
(b) Security Ownership of Management
No officer or director of the General Partner beneficially owned or owned of
record directly or indirectly any Interests as of December 31, 1994.
(c) Changes in Control
On June 16, 1992, Phoenix resigned as a general partner of the Partnership.
Discussion is incorporated by reference to Item 1. "General Business."
Item 13. Certain Relationships and Related Transactions
(a) Transactions With Management and Others
Incorporated by reference to Note 3 "Real Estate Investments," Note 5
"Transactions with Related Parties" and Note 6 "Partners' Equity" of the Notes
to Financial Statements.
(b) Certain Business Relationships
There have been no business transactions between any of the Directors and the
Partnership.
(c) Indebtedness of Management
No management person is indebted in any amount to the Partnership.
(d) Transactions With Promoters
There have been no transactions with promoters other than as described above in
(a).
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(i) Index to Financial Statements
Balance Sheets at December 31, 1994 and 1993 (1)
Statements of Operations for the Years Ended
December 31, 1994, 1993 and 1992 (1)
Statements of Partners' Capital (Deficit)
for the Years Ended December 31, 1994, 1993 and 1992 (1)
Statements of Cash Flows for the Years Ended
December 31, 1994, 1993 and 1992 (1)
Notes to the Financial Statements (1)
Independent Auditors' Report (1)
(a)(ii) Financial Statement Schedule
Schedule III - Real Estate and Accumulated Depreciation F-1
(1) Incorporated by reference to the Partnership's Annual Report to
Unitholders for the year ended December 31, 1994.
(b) Reports on Form 8-K filed in the fourth quarter of 1994:
No reports on Form 8-K were filed in the fourth quarter of the calendar
year 1994.
(c) See Exhibit Index contained herein.
Exhibit
Number
3 - Agreement of Limited Partnership of Participating Development
Fund 86, A Real Estate Limited Partnership. Reference is made to Exhibit A
of the Prospectus (the "Prospectus") contained in Amendment No. 2 to
Registrant's Form S-11 Registration Statement filed with the Securities and
Exchange Commission on December 20, 1985 (the "Registration Statement").
13a - Annual Report to Unitholders for the year ended December 31, 1994.
-------------------------
SIGNATURES
-------------------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March 29, 1995
PARTICIPATING DEVELOPMENT FUND 86
BY: PDF86 Real Estate Services Inc.
General Partner
BY: /s/Kenneth L. Zakin
Name: Kenneth L. Zakin
Title: Director and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
PDF86 REAL ESTATE SERVICES INC.
General Partner
Date: March 29, 1995
BY: /s/Kenneth L. Zakin
Kenneth L. Zakin
Director and President
Date: March 29, 1995
BY: /s/William Caulfield
William Caulfield
Vice President and Chief Financial Officer
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
Under date of February 1, 1995 we reported on the balance sheets of
Participating Development Fund 86 (a Connecticut limited partnership) as of
December 31, 1994 and 1993, and the related statements of operations, partners'
capital and cash flows for each of the years in the three-year period ended
December 31, 1994, as contained in the 1994 annual report to unit holders.
These financial statements and our report thereon are incorporated by reference
in the annual report on Form 10-K for the year 1994. In connection with our
audits of the aforementioned financial statements, we also have audited the
related financial statement schedules as listed in the accompanying index.
These financial statement schedules are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits.
In our opinion, the financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 1, 1995
PARTICIPATING DEVELOPMENT FUND 86
(A Real Estate limited partnership)
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1994
Initial Cost to Partnership
Buildings and
Description Encumbrances (1) Land Improvements
Commercial Property:
Sunnyvale R&D Building
Sunnyvale, CA $ 6,336,962 $ 4,848,999
1899 Powers Ferry Road
Office Building
Marietta, GA 2,050,628 6,774,215
Foothills Tech Office/
Service Center
Phoenix, AZ 1,936,681 6,314,189
Pebblebrook Apartments
Apartment Buildings
Overland Park, KS 2,095,205 8,118,985
$12,419,476 $26,056,388
PARTICIPATING DEVELOPMENT FUND 86
(A Real Estate limited partnership)
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1994
Cost Capitalized
Subsequent
To Acquisition
Buildings and
Description Improvements (3) Retirement
Commercial Property:
Sunnyvale R&D Building
Sunnyvale, CA $ 3,137,329 $ (2,976,402)
1899 Powers Ferry Road
Office Building
Marietta, GA 2,067,225 (1,249,710)
Foothills Tech Office/
Service Center
Phoenix, AZ 3,614,104 0
Pebblebrook Apartments
Apartment Buildings
Overland Park, KS 777,811 (1,250,320)
$ 9,596,469 $ (5,476,432)
PARTICIPATING DEVELOPMENT FUND 86
(A Real Estate limited partnership)
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1994
Gross Amount at Which Carried at Close of Period
Buildings and Accumulated
Description Land Improvements Total(1) Depreciation(2)
Commercial Property:
Sunnyvale R&D Building
Sunnyvale, CA $ 6,336,962 $ 5,009,926 $11,346,888 $ (1,187,378)
1899 Powers Ferry Road
Office Building
Marietta, GA 2,050,628 7,591,730 9,642,358 (1,946,456)
Foothills Tech Office/
Service Center
Phoenix, AZ 1,936,681 9,928,293 11,864,974 (2,841,093)
Pebblebrook Apartments
Apartment Buildings
Overland Park, KS 2,095,205 7,646,476 9,741,681 (1,769,594)
$12,419,476 $30,176,425 $42,595,901 $ (7,744,521)
PARTICIPATING DEVELOPMENT FUND 86
(A Real Estate limited partnership)
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1994
Life on which
Depreciation
in Latest
Date of Date Income Statements
Description Construction Acquired is Computed
Commercial Property:
Sunnyvale R&D Building
Sunnyvale, CA 1986 08/28/86 5 - 35 years
1899 Powers Ferry Road
Office Building
Marietta, GA 1986 07/07/87 5 - 35 years
Foothills Tech Office/
Service Center
Phoenix, AZ 1985 05/30/86 5 - 35 years
Pebblebrook Apartments
Apartment Buildings
Overland Park, KS N/A 09/04/86 5 - 35 years
(1) For Federal Income Tax Purposes, the aggregate cost of land, building and
improvements is $49,026,929.
(2) For Federal income tax purposes, the amount
of accumulated depreciation is $7,093,733.
(3) Tenant improvements are depreciated over the terms of the respective
leases.
A reconciliation of the carrying amount of real estate and accumulated
depreciation for the years ended December 31, 1994, 1993 and 1992:
Real Estate investments: 1994 1993 1992
Beginning of year $46,380,563 $46,170,294 $45,369,914
Additions 1,691,770 493,591 800,380
Less Retirements (5,476,432) (283,322) -
End of year $42,595,901 $46,380,563 $46,170,294
Accumulated Depreciation:
Beginning of year $11,772,231 $10,371,081 $ 8,730,417
Depreciation expense 1,448,722 1,684,472 1,640,664
Less Retirements (5,476,432) (283,322)
End of year $ 7,744,521 11,772,231 $10,371,081
-------------------------
Exhibit 13a
-------------------------
Participating Development Fund 86
1994 Annual Report to Unitholders
Participating Development Fund 86 is a limited partnership formed in 1986 to
fund participating investments secured by commercial, industrial and
multi-family real estate properties. The Partnership has taken title to all of
its remaining participating investments which include three office/industrial
properties located in Arizona, California and Georgia, and an apartment complex
located in Kansas. Provided below is a comparison of lease levels at the
properties as of December 31, 1994 and 1993.
Percentage Leased
Property Location 1994 1993
Foothills Tech Plaza Phoenix, AZ 100% 100%
Sunnyvale R&D Sunnyvale, CA 100% 100%
Powers Ferry Office Building Atlanta, GA 91% 81%
Pebblebrook Apartments Overland Park, KS 97% 94%
Administrative Inquiries Performance Inquiries/Form 10-Ks
Address Changes/Transfers The Shareholder Services Group
Service Data Corporation P.O. Box 1527
2424 South 130th Circle Boston, Massachusetts 02104-1527
Omaha, Nebraska 68144 Attn: Financial Communications
(800) 223-3464 (800) 223-3464
Contents
1 Message to Investors
3 Property Profiles & Leasing Update
5 Financial Highlights
6 Financial Statements
9 Notes to Financial Statements
15 Independent Auditors' Report
16 Net Asset Valuation
MESSAGE TO INVESTORS
The General Partner is pleased to present the 1994 Annual Report for
Participating Development Fund 86 (the "Partnership"). Partnership operations
improved in 1994, as we made significant leasing progress at Powers Ferry
Office Building and Foothills Tech Plaza. At Pebblebrook Apartments, strong
market conditions enabled the General Partner to increase rental rates at the
property by 8% in 1994. As previously reported, the tenant which occupies 100%
of Sunnyvale R&D's leasable space notified the General Partner in 1994 of its
plans to prematurely vacate the premises. With the General Partner's approval,
the tenant was able to sub-lease the entire space. Further details regarding
leasing activity at each property are provided in the section entitled Property
Profiles & Leasing Update beginning on page 3 of this report.
Cash Distributions
For the year ended December 31, 1994, the Partnership paid cash distributions
to the Limited Partners totaling $1.20 per Unit. Included in this total was a
fourth quarter cash distribution of $.30 per Unit which was paid on February 6,
1995. Since inception, the Partnership has paid cash distributions totalling
$20.72 per original $50 Unit of which $6.07 per Unit was return of capital. The
timing and amount of future distributions will depend on several factors,
including the adequacy of rental income being generated by current leases and
Partnership cash flow. During the fourth quarter of 1993, cash distributions
were reduced to an amount approximating actual cash flow. Distributions were
previously supplemented by cash reserves. Information regarding cash
distributions paid over the past two years is provided below.
CASH DISTRIBUTIONS PER LIMITED PARTNERSHIP UNIT
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
1993 $.80 $.80 $.80 $.30 $2.70
1994 $.30 $.30 $.30 $.30 $1.20
Market Overview
The real estate industry, in general, continued its slow recovery during 1994.
The apartment complex and warehouse and distribution sectors exhibited the
strongest performance, and certain types of commercial office space began to
show signs of improvement. Specifically, the suburban office market has
experienced declining vacancies and little new development to compete with the
existing inventory. While the downtown office market continues to lag in the
recovery, rental concessions have diminished, and rental rates have stabilized.
As a result of these conditions, the national vacancy rate for commercial
office space declined to approximately 16% as of the fourth quarter of 1994,
down from approximately 19% as of the fourth quarter of 1993. The ongoing
recovery of this market, however, is expected to be gradual, as technological
advancements have made it easier and more efficient for traditional users of
office space to work from home or satellite locations. As a result of this
trend and continued corporate layoffs in many markets, a meaningful recovery in
the value of office buildings, except for certain select markets, is not
anticipated in the immediate future.
The financing environment for commercial real estate also began to show signs
of improvement during 1994. According to National Investor Survey, a CB
Commercial publication, there are new sources of capital from commercial
securitization and mortgage conduits. Additionally, Emerging Trends in Real
Estate indicated that traditional sources of capital such as pension funds,
banks and, to a lesser degree, insurance companies are showing renewed interest
in commercial real estate investment. It is important to note, however, that
lenders are extremely selective in choosing their real estate investments, and
there remains a gap between supply and demand for funds, particularly with
respect to the office sector. As a result, it is difficult for many potential
buyers of commercial office space to obtain adequate financing, and sales
opportunities remain limited.
Summary
In 1995, the General Partner will focus on efficient and responsive management
to attract and retain tenants, and, accordingly enhance our ability to
ultimately sell the properties. As discussed in the Property Profiles &
Leasing Update section of this report, we have recently begun marketing the
Foothills and Pebblebrook properties for sale. While there can be no assurance
that our efforts will culminate in a sale of either property, we believe the
markets where the properties are located have become more conducive to sales.
Regarding the Powers Ferry and Sunnyvale R&D properties, it is the General
Partner's objective that as market conditions gradually improve, the
properties will be well positioned in their respective markets to take
advantage of any favorable sales opportunities which may arise. We will update
you with respect to these efforts in future investor reports.
Very truly yours,
PDF Real Estate Services Inc.
General Partner
/s/Kenneth L. Zakin
Kenneth L. Zakin
President
March 30, 1995
PROPERTY PROFILES & LEASING UPDATE
FOOTHILLS TECH PLAZA Phoenix, Arizona
The property is an office/service center located in a 68 acre technology park
in Phoenix's East Valley. It is comprised of two single-story buildings
containing approximately 40,000 square feet and 132,290 square feet of leasable
area, respectively. With a combination of office space and
assembly/distribution facilities, the property is designed to meet the needs of
emerging high technology companies.
Leasing Update - The larger of the two buildings was 100% leased as of December
31, 1994 to two tenants, Acoustic Imaging Technologies and POS Systems,
pursuant to leases scheduled to expire in the years 2000 and 2004,
respectively. Acoustic Imaging Technologies, whose lease generated $640,634 or
15% of the Partnership's 1994 rental income, is a subsidiary of Dornier
Medical, a wholly-owned subsidiary of Daimler Benz, which has executed a
guaranty of the lease. The smaller building is 100% leased to Fireman's Fund
pursuant to a lease originally scheduled to expire in 1999. During the second
quarter of 1994, the lease was extended to 2004, further stabilizing the
property's operations. As a result of the property's enhanced stability and
improved market conditions, the General Partner has begun marketing the
property for sale. There can be no assurance, however, that a sale can be
consummated during the year.
Phoenix Market Update - Arizona's pro-business laws continued to entice large
corporations to relocate to the state in 1994, resulting in higher employment
and improved economic conditions. The Phoenix area benefited from this influx
of new industry as the demand for available space increased. While this trend
contributed to an improved leasing market in the metropolitan Phoenix area, in
general, it has not impacted the industrial real estate market to any
significant degree. The vacancy rate for industrial space was 11.0% as of the
1994 third quarter, unchanged from 10.8% a year earlier, and rental rates
remain stable. In 1995, operating conditions for real estate owners in Phoenix
are expected to improve as the North American Free Trade Agreement is
anticipated to spur additional growth in Arizona.
PEBBLEBROOK APARTMENTS Overland Park, Kansas
Pebblebrook Apartments is a 267 unit luxury garden apartment complex comprised
of eleven two-story buildings. Located in Johnson County, a suburban area
southwest of Kansas City, Kansas, the property features a 2,088 square foot
clubhouse, two waterscapes, a swimming pool and a jogging path. The
landscaping is accented by brick sidewalks, park benches and street lamps.
Property and Market Update - As expected, 1994 was a strong year for apartment
complexes throughout the Kansas City area as continued job growth and higher
interest rates increased demand for available rental units. Coupled with a
lack of new construction, the average vacancy rate for apartment complexes in
the region was 4.5% as of December 1994, a slight improvement from 5.0% a year
earlier. In Johnson County, where the property is located, the average vacancy
rate was 4.0% as of June 1994, down from 5.0% in December 1993. Largely due to
increased demand, we were able to increase rental rates at Pebblebrook during
the year by 8% without adversely impacting the property's occupancy. As of
December 31, 1994, the property was 97% leased, largely unchanged from a year
earlier. Due to the consistently strong performance of the property and the
improved environment for property sales in the Kansas City region, the General
Partner has begun marketing Pebblebrook for sale. There can be no assurance,
however, that these ma rketing efforts will result in a sale of the property.
POWERS FERRY OFFICE BUILDING Atlanta, Georgia
Powers Ferry Office Building is located in the northeast section of Atlanta,
Georgia, approximately 11 miles from downtown. The 96,508 square foot, class-A
office property contains several attractive amenities including a health club,
cafe and a multi-user conference room.
Leasing Update - The General Partner made significant leasing progress at the
property during 1994, executing six new leases totaling 35,366 square feet.
The largest is a seven-year lease representing 15,572 square feet or
approximately 17% of the property's leasable area. Additionally, two lease
renewals, totaling 5,985 square feet, and three lease expansions totaling 3,269
square feet, were executed during 1994. This activity was partially offset by
several tenants who vacated the premises upon expiration of their leases. As a
result, the property was 91% occupied as of December 31, 1994, compared to 81%
a year earlier. We are continuing to aggressively market the property's
remaining space for lease during 1995.
Atlanta Market Update - Strong job growth spurred economic improvement in 1994,
generally benefiting real estate owners throughout the Atlanta region. While
this improvement primarily impacted multifamily and retail properties, certain
office submarkets, such as the north suburban markets have shown notable
improvement. However, the region still suffers from an oversupply of available
office space, as evidenced by the 1994 third quarter vacancy rate of 10.3%,
down from 13.7% a year earlier. As a result of improving market conditions,
coupled with international activity arising from the upcoming Olympics in 1996,
the General Partner is reviewing the possibility of marketing the property for
sale during the latter part of 1995. We will keep you informed of developments
in future reports.
SUNNYVALE R&D Sunnyvale, California
Located in California's Silicon Valley, Sunnyvale R&D provides an attractive
location for high technology companies. The property is a one-story research
and development building containing 105,285 square feet of leasable area.
Leasing Update - The property was 100% leased to Tandem Computers, Inc.
("Tandem") as of December 31, 1994, pursuant to a lease scheduled to expire
March 31, 1999. Tandem's lease generated $846,491 or 19% of the Partnership's
1994 rental income. In the second quarter of 1994, Tandem notified the General
Partner of its intent to prematurely vacate the premises in order to
consolidate its operations into a single facility, but indicated that it would
continue making full rental payments according to the terms of its lease
agreement. During the fourth quarter of 1994, Tandem secured a computer
networking company to sublease 100% of the space pursuant to an agreement
scheduled to expire March 31, 1999. The Partnership is not responsible for any
of the costs of the sublease since Tandem will fund the tenant improvement
costs and leasing commissions associated with the sublease. It is important to
note that Tandem remains responsible for all lease obligations. In light of
the depressed real estate market and the short-term nature of the Tandem lease,
it is unlikely that this property will be marketed for sale during 1995.
Sunnyvale Market Update - While the entire Silicon Valley region continues to be
adversely impacted by the downsizing of large corporations, the research and
development ("R&D") market improved in 1994, as continued growth in the
semiconductor, communications, software and biotechnology industries, has
offset declines in the defense, aerospace and electronics industries. As of
the third quarter of 1994, the vacancy rate for the R&D sector in the Silicon
Valley market declined to 10.8%, from 12.9% a year earlier. Sunnyvale's
vacancy rate for R&D space increased slightly to 14% as of the 1994 third
quarter from approximately 12% a year earlier. The area has not yet
experienced any meaningful increase in rental rates and property values remain
depressed.
For the years ended December 31,
1994 1993 1992 1991 1990
Total revenues $ 4,588,679 $ 4,100,867 $ 4,270,283 $ 4,182,842 $ 2,566,057
Total expenses 3,139,131 3,168,985 2,990,192 3,220,001 2,506,015
Net income 1,449,548 931,882 1,280,091 962,841 60,042
Net income per Unit 1.25 .80 1.10 .83 .05
Cash distributions
per Unit 1.20 2.70 2.40 2.04 .22
Total assets $36,105,893 $36,191,399 $39,204,700 $40,003,550 $41,003,550
The 1994 increase in total revenues over 1993 is largely due to
increased rental income associated with higher occupancy and increased
rental rates at the properties in 1994.
Total expenses in 1994 remained largely unchanged from 1993 as an
increase in property operating expense was offset by lower depreciation
and amortization expense.
Net income increased in 1994 primarily as a result of higher total
revenues and lower depreciation and amortization expense.
Balance Sheets December 31, 1994 and 1993
Assets 1994 1993
Land $12,419,476 $12,419,476
Buildings and personal property 25,346,253 26,280,194
Tenant improvements 4,830,172 7,680,893
42,595,901 46,380,563
Less-accumulated depreciation (7,744,521) (11,772,231)
34,851,380 34,608,332
Restricted cash 152,162 364,360
Cash and cash equivalents 140,886 798,734
293,048 1,163,094
Accounts receivable, net of allowance
of $24,773 in 1993 18,737 66,665
Prepaid expenses, net of accumulated
amortization of $47,360 in 1994 and
$6,029 in 1993 389,472 76,535
Incentives to lease, net of accumulated
amortization of $18,889 in 1994 283,555 -
Deferred rent receivable 269,701 276,773
Total Assets $36,105,893 $36,191,399
Liabilities and Partners' Capital (Deficit)
Liabilities:
Due to affiliates $ 64,809 $ 110,786
Accounts payable and accrued expenses 323,897 214,345
Security deposits payable 152,162 121,796
Prepaid rent 4,085 242,564
Total Liabilities 544,953 689,491
Partners' Capital (Deficit):
General Partner (355,690) (357,460)
Limited Partners 35,916,630 35,859,368
Total Partners' Capital 35,560,940 35,501,908
Total Liabilities and Partners' Capital $36,105,893 $36,191,399
Statements of Partners' Capital (Deficit)
For the years ended December 31, 1994, 1993 and 1992
General Limited
Partner Partners Total
Balance at December 31, 1991 $ (242,919) $39,562,904 $39,319,985
Cash distributions (69,660) (2,252,350) (2,322,010)
Net income 38,403 1,241,688 1,280,091
Balance at December 31, 1992 (274,176) 38,552,242 38,278,066
Cash distributions (111,240) (3,596,800) (3,708,040)
Net income 27,956 903,926 931,882
Balance at December 31, 1993 (357,460) 35,859,368 35,501,908
Cash distributions (41,716) (1,348,800) (1,390,516)
Net income 43,486 1,406,062 1,449,548
Balance at December 31, 1994 $ (355,690) $35,916,630 $35,560,940
Statements of Operations
For the years ended December 31, 1994, 1993 and 1992
Income 1994 1993 1992
Rental $4,387,259 $3,990,962 $4,172,043
Other 189,508 67,093 26,562
Interest 11,912 42,812 71,678
Total Income 4,588,679 4,100,867 4,270,283
Expenses
Depreciation and amortization 1,513,099 1,690,501 1,640,663
Property operating 1,407,195 1,206,605 1,099,393
General and administrative 201,932 247,106 250,136
Bad debt expense 16,905 24,773 -
Total Expenses 3,139,131 3,168,985 2,990,192
Net Income $1,449,548 $ 931,882 $1,280,091
Net Income Allocated:
To the General Partner(s) $ 43,486 $ 27,956 $ 38,403
To the Limited Partners 1,406,062 903,926 1,241,688
$1,449,548 $ 931,882 $1,280,091
Per limited partnership unit
(1,124,000 outstanding) $1.25 $.80 $1.10
Statements of Cash Flows
For the years ended December 31, 1994, 1993 and 1992
Cash Flows from Operating Activities: 1994 1993 1992
Net income $1,449,548 $ 931,882 $1,280,091
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 1,513,099 1,690,501 1,640,663
Provision for losses on
rent receivable - 24,773 -
Increase (decrease) in cash
arising from changes in
operating assets and liabilities:
Restricted cash 212,198 146,279 24,353
Accounts receivable 47,928 (14,229) (6,773)
Prepaid expenses (358,425) (60,019) (22,545)
Incentives to lease (302,444) - -
Deferred rent receivable 7,072 460,347 256,018
Accounts payable and
accrued expenses 109,552 67,434 (41,718)
Due to affiliates (45,977) (21,959) 91,453
Security deposits payable 30,366 (14,572) 22,547
Prepaid rent (238,479) (268,046) 95,633
Net cash provided by operating
activities 2,424,438 2,942,391 3,339,722
Cash Flows from Investing Activities:
Additions to real estate assets (1,691,770) (493,591) (800,379)
Net cash used for investing
activities (1,691,770) (493,591) (800,379)
Cash Flows from Financing Activities:
Cash distributions (1,390,516) (3,708,040) (2,322,010)
Net cash used for financing
activities (1,390,516) (3,708,040) (2,322,010)
Net increase (decrease) in cash
and cash equivalents (657,848) (1,259,240) 217,333
Cash and cash equivalents at
beginning of period 798,734 2,057,974 1,840,641
Cash and cash equivalents at
end of period $ 140,886 $ 798,734 $ 2,057,974
Supplemental Schedule of Non-Cash Investing Activity:
Write-off of fully
depreciated real estate assets $5,476,432 $ 283,322 $ 1,042,941
Notes to Financial Statements
December 31, 1994, 1993 and 1992
1. Organization
Participating Development Fund 86, a Real Estate Limited Partnership (the
"Partnership") was formed on December 9, 1985, under the Uniform Limited
Partnership Act of the State of Connecticut. The Partnership was originally
formed to invest in participating investments, secured by commercial and
multi-family residential real estate, by entering into land purchase leaseback
transactions and funding leasehold mortgage loans on improvements constructed
on such land (the "Participating Investments"). The Partnership ultimately
took title to all five participating investments funded. One Participating
Investment was sold during 1989. The Partnership now leases and operates the
remaining properties. The General Partners were PDF86 Real Estate Services,
Inc. ("PDF86"), formerly Shearson Lehman Brothers/PDF 86, Inc. (see below), and
Phoenix Realty/PDF 86, Inc. ("Phoenix"), a Connecticut corporation and an
indirect wholly-owned subsidiary of Phoenix Home Life Mutual Insurance Company
("Phoenix Mutual"). The Partnership commenced operations on April 23, 1986.
On June 15, 1992, Phoenix Realty Management, Inc. ("Phoenix Realty") sent a
notice of resignation as co-General Partner of the Partnership to PDF86. The
effective date of resignation was June 16, 1992. As a result of the
resignation of Phoenix, PDF86 as sole General Partner manages the affairs of
the Partnership. Since PDF86 had been a co-General Partner and actively
involved in the management of the Partnership since it was formed, the
resignation of Phoenix Realty has not had any adverse impact on the continuing
operations of the Partnership.
On July 31, 1993, Shearson Lehman Brothers Inc. sold certain of its domestic
retail brokerage and asset management businesses to Smith Barney, Harris Upham
& Co. Incorporated ("Smith Barney"). Subsequent to the sale, Shearson Lehman
Brothers Inc. changed its name to Lehman Brothers Inc. The transaction did not
affect the ownership of the general partner. However, the assets acquired by
Smith Barney included the name "Shearson." Consequently, effective October 22,
1993, Shearson Lehman Brothers/PDF 86, Inc. changed its name to PDF86 Real
Estate Services Inc. to delete any reference to "Shearson."
2. Accounting Policies
Cash and Cash Equivalents Cash equivalents consist of short-term, highly
liquid debt instruments purchased with an original maturity of three months or
less.
Properties Properties are stated at cost, less accumulated depreciation and
amortization. Costs related to the selection and acquisition of the
Partnership's properties have been capitalized as part of the costs of those
Properties. Leasing costs and costs incurred to construct tenant improvements
are amortized over the term of the related lease agreements using the
straight-line method.
Depreciation on buildings, building improvements and personal property is
provided over the estimated economic lives of the Properties (5 - 35 years)
using the straight-line method. Tenant improvements and leasing costs are
amortized over the term of the related lease agreements using the straight-line
method.
Rental Income and Deferred Rent The Partnership rents its Properties to
tenants under operating leases with terms ranging from one to eleven years.
Rental income is recognized as earned over the terms of the lease agreements.
Deferred rent receivable consists of rental income which is recognized on a
straight line basis over the lease terms, but will not be received until later
periods as a result of scheduled rental increases.
Restricted Cash Restricted cash represents cash held in connection with tenant
security deposits.
Income Taxes The Partnership files Federal and applicable state partnership
income tax returns which indicate each partner's and unit holder's share of
taxable income or loss to be reported on their respective individual income tax
returns. As a result, no provision for income taxes has been made in the
accompanying financial statements.
3. Real Estate Investments
Foothills Tech Plaza - On May 30, 1986, the Partnership acquired the land and
participating mortgage loan receivable on Foothills Tech Plaza from Phoenix
Mutual, which had funded the investment on behalf of the Partnership on
November 12, 1985. Foothills Tech Plaza is an office/service center located in
Phoenix, Arizona, comprised of two single-story buildings containing an
aggregate of 172,655 square feet of net leasable space.
On May 20, 1986, Phoenix Mutual in its capacity as mortgagee, with the consent
and on behalf of the Partnership, served notice of default for non-payment of
rent and debt service to the mortgagor/lessee. As a result of the default and
pursuant to certain terms provided in the Agreement of Ground Lease, the lessee
transferred all of its rights and title under the ground lease to the
Partnership on June 25, 1986, on which date the Partnership became the owner of
the property in its entirety, including the improvements located thereon, in
full satisfaction of the mortgagor/lessee's obligation under the terms of the
mortgage and ground lease.
The smaller of the two buildings, approximately 23% of the total property, is
100% leased to a single tenant (Fireman's Fund). The lease, which commenced in
April 1989, is for a ten-year term with three five-year renewal options and has
an annual rental rate of $5.52 per square foot, triple net, for the first five
years and is adjusted according to a specified formula in the lease agreement
for the second five years. During the second quarter of 1994 Fireman's Fund
extended its lease to 2004. The extension of this lease, which does not
contain a cancellation clause, further enhances the overall stability of the
property and increases its appeal to prospective purchasers.
The larger building was leased to a single tenant (Acoustic Imaging
Technologies) with partial occupancy that commenced in May, 1990. The original
lease was for eleven years and contains cancellation provisions which are
exercisable commencing May 1, 1995. The original lease provided annual rent of
$6.21 per square foot, triple net, with months two through seven free and
months eight through nineteen at one-half rent. During the first eight months
of the lease, the tenant occupied 75,000 square feet and paid rent for 90,000
square feet. The tenant occupied the additional 15,000 square feet in the
ninth month. The tenant prepaid $360,000 of rent in addition to a $40,000
security deposit. The prepaid rent, together with the accumulated interest,
was used to offset rent in months thirty-seven through forty-eight.
During the fourth quarter of 1992, Acoustic Imaging Technologies ("AI")
approached the General Partner to propose a lease restructuring. During the
first quarter of 1993, AI and the General Partner agreed to restructure the
lease. The current rents paid by AI were reduced to reflect the actual space
occupied. On February 18, 1994, a ten-year lease was executed with POS Systems
("POS") for 39,270 square feet, the entire space vacated by AI. Tenant
improvements of approximately $890,000 were completed during the first quarter,
and POS took occupancy on April 1, 1994. The lease also requires AI's parent
Dornier Medical (a wholly owned subsidiary of Daimler Benz) to guarantee AI's
obligations under the lease up to $2,000,000 and obligates AI to pay all
commissions related to the POS lease. The amended AI lease reduces the AI
space to 93,385 square feet and establishes new rental rates that increase over
time.
The General Partner has recently begun marketing the property for sale in 1995.
The property is 100% leased to three tenants as of December 31, 1994.
1899 Powers Ferry Road - On May 30, 1986, the Partnership acquired the land and
participating mortgage loan receivable on 1899 Powers Ferry Road ("Powers
Ferry") from Phoenix Mutual, which had funded the investment on behalf of the
Partnership on April 4, 1986. Powers Ferry is a four-story office building
located in Marietta, Georgia containing 89,200 square feet of net leasable
space.
The mortgagor/lessee of Powers Ferry did not make the ground rent and mortgage
loan payments due May 1, 1987, and, as a result, the Partnership issued a
notice of default. On July 7, 1987, the Partnership became the owner of the
property in its entirety through a foreclosure sale transaction. On that date,
the Partnership's Participating Investment in Powers Ferry, net of escrowed
funds returned and debt service payments received totalled $8,916,094. For
Federal income tax purposes, the debt service payments paid from mortgage loan
proceeds in escrow ($904,593 including interest) were recorded as income and no
depreciation was recorded through July 7, 1987. As a result, the Partnership's
depreciable basis in the Powers Ferry property is greater for tax purposes than
for financial reporting purposes.
In connection with the acquisitions of Powers Ferry and Foothills Tech Plaza,
the Partnership paid Phoenix Mutual $19,392,519, representing the cost to
Phoenix Mutual plus net interest of $102,482 on funds disbursed by Phoenix
Mutual.
The General Partner made significant leasing progress at the property during
1994, executing six new leases totaling 35,366 square feet. The largest is a
seven-year lease representing 15,572 square feet or approximately 17% of the
property's leasable area. Additionally, PDF86 executed two lease renewals,
totalling 5,985 square feet, and three lease expansions, totaling 3,269 square
feet, during 1994. This activity was partially offset by several tenants that
vacated the premises upon expiration of their leases. As a result, the
property was 91% occupied as of December 31, 1994, compared to 81% a year
earlier. PDF86 will aggressively market the property's remaining space for
lease during 1995.
Sunnyvale R&D - On August 28, 1986, the Partnership acquired the land and
funded a participating mortgage loan on the improvements for the Sunnyvale R&D
building located in Sunnyvale, California. Sunnyvale R&D is a one-story
research and development building containing approximately 105,285 square feet
of net leasable space. The Partnership purchased the land from the lessee for
$6,050,000 and concurrently funded a mortgage loan of $4,531,190.
On October 30, 1986, the Partnership served notice of default on the
mortgagor/lessee for non-payment of amounts due under the ground lease and
mortgage. As a result of the default and pursuant to certain terms provided in
the Agreement of Ground Lease , the lessee transferred all of its right and
title under the ground lease to the Partnership on November 26, 1986 and the
Partnership became the owner of the Property in its entirety, including the
improvements located thereon in full satisfaction of the mortgagor/lessee's
obligation under the terms of the mortgage and ground lease.
The Property is 100% leased to a single tenant (Tandem Computers Inc.) as of
December 31, 1994. The tenant signed a six-year lease which commenced April 1,
1988 at an annual rental rate of $7.68 per square foot, triple net, and has
exercised a five-year option at an average annual rental rate of $8.16 per
square foot that commenced on April 1, 1994. The tenant has the option,
beginning at the end of the third year, to terminate the lease by providing the
Partnership with written notification at least twelve months in advance and
paying a lease termination penalty specified in the lease agreement.
During the second quarter of 1994 Tandem notified the General Partner of its
intent to prematurely vacate the premises in early 1995 in order to consolidate
its operations into one facility. During the fourth quarter of 1994 Tandem
agreed to sublease its entire space, effective April 1, 1995. The sublease is
subject to the terms, conditions and termination date of the above mentioned
Master Lease and rent will continue accordingly.
In 1993, a defect in the building's floor was discovered. This defect caused
water condensation to form on the property's floor, which, over time, loosened
the adhesive that secures the floor tiling. Approximately 70,000 square feet
of the building's leasable area was affected by the defect and approximately
$165,000 was expended during 1994 to correct the situation.
Pebblebrook Apartments - On September 4, 1986, the Partnership acquired the
land for $2,000,000 and funded a mortgage loan of $7,750,000 on the
improvements for the Pebblebrook Apartments ("Pebblebrook") located in Overland
Park, Kansas. Pebblebrook is a 267-unit luxury garden apartment complex located
in a suburb of Kansas City.
During February of 1990, the General Partners on behalf of the Partnership
initiated foreclosure proceedings against the mortgagor/lessee of Pebblebrook
Apartments, which resulted in that entity filing for bankruptcy. On April 16,
1991, the bankruptcy proceedings were resolved and the Partnership became the
owner of the property in its entirety through a special conveyance transaction.
As of that date, the property has been considered a wholly-owned investment.
The General Partner has recently begun marketing the property for sale in 1995.
As of December 31, 1994 and 1993 the property was 97% and 94% leased,
respectively.
4. Leases and Rental Revenues
The following is a schedule of future minimum annual rental payments receivable
based on non-cancelable leases as of December 31, 1994 assuming no exercise of
tenant renewal options:
1995 $ 2,595,291
1996 2,357,234
1997 1,515,367
1998 1,162,340
1999 1,066,406
Thereafter 3,053,160
$ 11,749,798
Certain leases contain provisions whereby the rent can change annually based
upon changes in the Consumer Price Index. All the leases at Powers Ferry
provide that tenants pay their pro-rata share of any increases in operating
expenses over a base amount. The leases at Sunnyvale R&D and Foothills Tech
Plaza are triple net with the tenants paying their pro-rata share of operating
expenses.
Leases of two tenants, Acoustic Imaging at Foothills Tech Plaza and Tandem at
Sunnyvale R&D, generated rental revenue in excess of 10% of the Partnership's
rental revenues for the year ended December 31, 1994. The rental income
derived from these leases for 1994 was $640,634 and $846,491, respectively, or
15% and 19% of the Partnership's 1994 total rental income. As of December 31,
1994, both tenants are current in their rent payments.
5. Transactions With Related Parties
Cash and cash equivalents reflected on the Partnership's balance sheet at
December 31, 1994 contains cash that was on deposit with an affiliate of the
General Partner commencing October 5, 1994. Cash reflected on the Partnership's
balance sheet at December 31, 1993 was on deposit with an unaffiliated party.
Pursuant to the Partnership Agreement, the General Partner(s) and their
affiliates were paid fees and expenses for services rendered in connection with
the formation of the Partnership and the acquisition of the Properties. In
addition, the General Partners and their affiliates were paid or are due the
following fees and expense reimbursements for ongoing services rendered to the
Partnership:
a) In connection with the acquisition of the Partnership's investments,
the General Partners were paid Investment Fees totalling $2,248,000,
which had been capitalized as part of the cost of the investments and
allocated to land, buildings, tenant improvements and participating
mortgage loans receivable based upon their relative valuations.
b) The Partnership has agreed to pay the General Partner(s) a fee for
managing and servicing the Partnership's investments. The Asset
Management Fee will be equal to the lesser of $50,000 per annum or 1%
of all cash revenues received by the Partnership, including any
deferred interest after deducting (i) operating expenses, (ii) amounts
set aside for working capital reserves, and (iii) payments on the
Partnership's other current obligations as defined in the Partnership
Agreement. Such fees incurred and expensed by the Partnership totalled
$8,111, $37,080 and $23,220 in 1994, 1993 and 1992, respectively.
Prior to Phoenix Realty's resignation as co-General Partner in 1992,
the asset management fee was split between PDF86 and Phoenix.
c) The Partnership has agreed to reimburse the General Partner(s) and
affiliates for the actual cost of goods and materials used for and by
the Partnership and insurance premiums for insurance coverage provided
through affiliates of the General Partners not to exceed the comparable
costs for the same services charged by unaffiliated parties. The
General Partners and affiliates incurred $0, $0 and $15,197 of such
costs on behalf of and expensed by the Partnership in 1994, 1993 and
1992, respectively. During 1993, the $15,197 representing
reimbursement of insurance costs to Phoenix were no longer deemed to be
outstanding and therefore were written-off.
d) The Partnership has agreed to pay the General Partner a Subordinated
Disposition Fee, in an amount not to exceed the lesser of (i) one half
of the competitive real estate commission applicable at the date of
sale, or (ii) 3% of the amount payable to the Partnership in connection
with the disposition of such investment. The fee is payable only after
the Unit Holders have been returned their original investment and any
unpaid Preferred Return.
At December 31, due to affiliates of the Partnership is as follows:
1994 1993
Accounts payable to the General Partner:
Operational expenses and
administrative services $64,809 $ 38,932
Accounts payable to affiliates of the
General Partners:
Investor Servicing Fee and expenses - 71,854
Total accounts payable to affiliates $64,809 $110,786
6. Partners' Equity
The Unit Holders will be entitled to receive from distributions of cash from
operations ("Current Cash Receipts") or Net Proceeds from Sales, Investment
Repayment and Participation Proceeds (as defined in the Partnership Agreement)
a cumulative, non-compounded Preferred Return on their average adjusted
unreturned invested capital equal to 14% per annum calculated from January 1,
1987. To the extent that Current Cash Receipts distributed to the Unit Holders
is less than the Preferred Return for that year, the unpaid amount may be paid
from Current Cash Receipts in subsequent years, or upon sale of a Property or
repayment of the Partnership's investments and any Participating Proceeds.
The Partnership Agreement provides for the allocation of income, losses and the
distribution of cash generally as follows:
All items of income, gain, loss, deduction and credit from Current Cash
Receipts, as defined, will be distributed 97% to Unit Holders and 3% to the
General Partner.
Net proceeds from Sales, Investment Repayment and Participating Proceeds shall
be distributed as follows:
a) 99% to the Unit Holders and 1% to the General Partner until the Unit
Holders have received cumulative distributions of net proceeds from
Sales, Investment Repayment and Participating Proceeds plus Current
Cash Receipts equal to their original invested capital plus any unpaid
Preferred Return.
b) To the General Partner in payment of any unpaid Subordinated
Disposition Fee.
c) 85% to the Unit Holders and 15% to the General Partner.
All items of income, gain, loss, deduction and credit attributable to net
proceeds from Sales, Investment Repayment and Participating Proceeds will be
allocated between the Unit Holders, as a group, and the General Partner, in the
same ratio that each such group received distributions of such net proceeds
from Sales, Investment Repayment and Participating Proceeds.
The Partnership distributed $1,348,800, $3,596,800, and $2,252,350 to the Unit
Holders in 1994, 1993 and 1992, respectively. In addition, the Partnership
distributed $41,716, $111,240 and $69,660 to the General Partners in 1994, 1993
and 1992. An additional cash distribution in the amount of $337,200 was
scheduled to be paid to the Unit Holders ($.30 per unit) and $10,429 to the
General Partner for the quarter ended December 31, 1994, on February 6, 1995.
7. Litigation
In May 1989, a group of Unit Holders in the Partnership commenced a purported
class action on behalf of themselves and all other Unit Holders, claiming that
the Unit Holders were induced to purchase Units in reliance upon
misrepresentations of material facts allegedly made by the defendants. The
action arose under the Federal securities law and principles of common law, and
was brought against the Partnership, its General Partners, and the
broker-dealer that acted as underwriter in the offering. In July, 1990, the
court granted the plaintiffs' motion seeking class certification and in
October, 1991, the parties reached a settlement agreement. According to the
settlement agreement, proceeds of approximately $39,000 were paid to the Unit
Holders in the cash distribution for the quarter ended March 31, 1993, on May
27, 1993. No Partnership funds were expended with respect to this lawsuit or
its settlement.
8. Reconciliation of Financial Statement Net Income and Partners' Capital to
Federal Income Tax Basis Net Income and Partners' Capital
Reconciliation of financial statement net income to federal income tax basis
net income:
Year Ended December 31,
1994 1993 1992
Financial statement basis net income $1,449,548 $931,882 $1,280,091
Financial statement amortization over
tax basis amortization 302,281 610,073 444,303
Financial statement depreciation over
(under) tax basis depreciation (82,705) (129,963) 16,001
Financial statement rental income (over)
under tax basis rental income (231,408) 191,502 244,427
Other (24,774) 24,928 (58,666)
(36,606) 696,540 646,065
Federal income tax basis net income $1,412,942 $1,628,422 $1,926,156
Reconciliation of financial statement partners' capital to federal income tax
basis partners' capital:
Year Ended December 31,
1994 1993 1992
Financial statement basis partners' capital $35,560,940 $35,501,908 $38,278,066
Current year financial statement basis
net income under federal income
tax basis net income (36,606) 696,540 646,065
Other - (492) -
Current Year Accrued Distribution - 579,381 -
Cumulative Federal income tax basis
net income over financial statement
net income 12,112,707 10,837,278 10,191,213
Federal income tax basis partners' capital $47,637,041 $47,614,615 $49,115,344
INDEPENDENT AUDITORS' REPORT
The Partners
Participating Development Fund 86:
We have audited the accompanying balance sheets of Participating Development
Fund 86 (a Connecticut limited partnership) as of December 31, 1994 and 1993,
and the related statements of operations, partners' capital (deficit) and cash
flows for each of the years in the three-year period ended December 31, 1994.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Participating Development Fund
86 at December 31, 1994 and 1993, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1994 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
February 1, 1995
Comparison of Acquisition Costs to Appraised Value and Determination of
Net Asset Value Per $43.93 Unit at December 31, 1994 (Unaudited)
Date of Acquisition
or Funding of Equity Acquisition Appraised
Property Convertible Loan Cost (1) Value (2)
Sunnyvale R&D 08-28-86 $11,185,961 $ 6,340,000
1899 Powers Ferry 07-07-87 8,916,095 5,800,000
Pebblebrook Apartments 09-04-86 10,214,190 10,000,000
Foothills Tech Plaza 05-30-86 8,250,870 9,500,000
$38,567,116 $31,640,000
Cash and cash equivalents 798,734
Accounts receivable 66,665
Prepaid expenses 36,779
32,542,178
Less:
Accounts payable and accrued expenses (214,345)
Due to affiliates (110,786)
Security deposits (121,796)
Partnership Net Asset Value (3) $32,095,251
Net Asset Value Allocated:
Limited Partners $31,774,298
General Partners 320,953
$32,095,251
Net Asset Value Per Unit
(1,124,000 units outstanding) $28.27
(1) Purchase price plus General Partners' acquisition fees.
(2) This represents the Partnership's share of the December 31, 1993
Appraised Values which were determined by an independent property appraisal
firm.
(3) The Net Asset Value assumes a hypothetical sale at December 31, 1993 of
all the Partnership's properties at their appraised values and the distribution
of the proceeds of such sale, combined with the Partnership's cash, after
liquidation of the Partnership's liabilities to the Partners. Real Estate
Brokerage commissions payable to the General Partner or others are not
determinable at this time and have not been included in the determination.
Since the Partnership would incur real estate brokerage commissions and other
selling expenses in connection with the sale of its properties and other
assets, cash available for distribution to the Partners would be less than the
appraised Net Asset Value.
Limited Partners should note that appraisals are only estimates of current
value and actual values realizable upon sale may be significantly different. A
significant factor in establishing an appraised value is the actual selling
price for properties which the appraiser believes are comparable. Further, the
appraised value does not reflect the actual costs which would be incurred in
selling the property. As a result of these factors and the illiquid nature of
an investment in Units of the Partnership, the variation between the appraised
value of the Partnership's properties and the price at which Units of the
Partnership could be sold is likely to be significant. Fiduciaries of Limited
Partners which are subject to ERISA or other provisions of law requiring
valuation of Units should consider all relevant factors including, but not
limited to Net Asset Value per Unit, in determining the fair market value of an
investment in the Partnership for such purposes.
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 293,048
<SECURITIES> 000
<RECEIVABLES> 18,737
<ALLOWANCES> 000
<INVENTORY> 000
<CURRENT-ASSETS> 000
<PP&E> 42,595,901
<DEPRECIATION> 7,744,521
<TOTAL-ASSETS> 36,105,893
<CURRENT-LIABILITIES> 544,953
<BONDS> 000
<COMMON> 000
000
000
<OTHER-SE> 35,560,940
<TOTAL-LIABILITY-AND-EQUITY> 36,105,893
<SALES> 000
<TOTAL-REVENUES> 4,588,679
<CGS> 000
<TOTAL-COSTS> 000
<OTHER-EXPENSES> 3,139,131
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> 000
<INCOME-PRETAX> 1,469,548
<INCOME-TAX> 000
<INCOME-CONTINUING> 1,469,548
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> 1,449,548
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 000
</TABLE>
