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, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO 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 IRS employer identification No.
incorporation or organization
3 World Financial Center, 29th Floor
New York, New York ATTN: Andre Anderson 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, 1995
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. The Participating Investment in Harris Pond Apartments was
sold on November 1, 1989. As a result of defaults under ground leases on the
Sunnyvale, Phoenix, Atlanta and Overland Park Properties, the Partnership took
title to these Properties in their entirety. 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 Partnership does not plan to invest in any additional
property.
On June 15, 1992, Phoenix Realty Management, Inc., ("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.
Foothills Tech Plaza was sold on September 29, 1995 for $10,011,512, net of
$226,000 in contracted roof repairs. Additional information regarding the sale
is incorporated by reference to the section entitled "Message to Investors" and
Note 3 "Real Estate Investments" of the Notes to Financial Statements contained
in the Partnership's Annual Report to Unitholders for the year ended December
31, 1995 filed as an exhibit under Item 14.
On May 11, 1995, the General Partner executed a letter of intent with an
unaffiliated third party to sell Pebblebrook Apartments. During the 1995 third
quarter, the prospective buyer rescinded its offer. However, the General
Partner subsequently agreed to a letter of intent with another unaffiliated
third party to sell Pebblebrook Apartments, and on January 31, 1995 the General
Partner executed a purchase and sale agreement for a sales price of
$10,570,000, net of commissions. The sale was originally expected to close in
late January, 1996 and was subsequently posponed until March, 1996. However,
during the due diligence period, the prospective buyer raised certain concerns
regarding the physical condition of the Property. While negotiations are
continuing and the General Partner remains confident that the sale will be
successfully concluded, there is no assurance that an agreement can be reached
with the buyer concerning the remaining issues. Therefore, it remains possible
that the sale will be further delayed or possibly not close at all.
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 contained in the Partnership's Annual Report to Unitholders for the
year ended December 31, 1995 filed as an exhibit under Item 14.
(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 contained in the
Partnership's Annual Report to Unitholders for the year ended December 31, 1995
filed as an exhibit under Item 14.
(d) Competition
Incorporated by reference to the section entitled "Property Profiles & Leasing
Update" contained in the Partnership's Annual Report to Unitholders for the
year ended December 31, 1995 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" and Note 3 "Real Estate Investments" of
the Notes to Financial Statements contained in the Partnership's Annual Report
to Unitholders for the year ended December 31, 1995, filed as an exhibit under
Item 14.
Item 3. Legal Proceedings
Discussion regarding class action settlement agreement incorporated by
reference to Note 7 "Litigation" of Notes to Financial Statements contained in
the Partnership's Annual Report to Unitholders for the year ended December 31,
1995.
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 1995.
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, 1995, there were 7,759 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, 1995 is incorporated by reference to the section
entitled "Message to Investors" contained in the Partnership's Annual Report To
Unitholders for the year ended December 31, 1995 filed as an exhibit under Item
14.
Item 6. Selected Financial Data
Incorporated by reference to the section entitled "Financial Highlights"
contained in the Partnership's Annual Report to Unitholders for the year ended
December 31, 1995 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
- -------------------------------
Foothills Tech Plaza was sold to an unaffiliated third party on September 29,
1995 for $10,011,512, net of $226,000 in contracted roof repairs. The gain on
disposition of the property totaled $1,088,860. In anticipation of the sale of
Pebblebrook Apartments, the property was reclassified, in the amount of
$7,780,273, to "Real estate assets held for sale" on the Partnership's balance
sheet. Land, buildings and improvements, net of accumulated depreciation,
decreased by $17,452,829 from December 31, 1994 to December 31, 1995 primarily
as a result of the Foothills Tech Plaza sale and reclassification of
Pebblebrook Apartments.
At December 31, 1995, the Partnership had cash and cash equivalents of
$1,480,034 compared with $140,886 at December 31, 1994. The increase is
primarily attributable to proceeds from the sale of Foothills Tech Plaza and
net cash provided by operating activities in excess of cash distributions paid
to Partners. 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 Partnership
also maintains a restricted cash balance, which is comprised of tenant security
deposits. Restricted cash totaled $100,286 at December 31, 1995, compared with
$152,162 at December 31, 1994. The decrease is primarily due to the sale of
Foothills Tech Plaza.
Prepaid expenses totaled $273,681 at December 31, 1995, compared with $389,472
at December 31, 1994. The decrease is primarily the result of the amortization
of leasing commissions associated with the lease-up of Powers Ferry in 1994 and
the sale of Foothills Tech Plaza in 1995. Incentives to lease were $188,693 at
December 31, 1995 compared to $283,555 at December 31, 1994. The decrease is
largely the result of the amortization of a lease buyout at Powers Ferry Office
Building. Deferred rent receivable totaled $193,634 at December 31, 1995,
compared to $269,701 at December 31, 1994. The decrease is largely due to the
write-off of deferred rent resulting from the sale of Foothills Tech Plaza.
Accounts payable and accrued expenses totaled $133,022 at December 31, 1995,
compared with $323,897 at December 31, 1994. The decrease primarily is due to
a reduction in accrued lease incentives relating to a lease buyout at Powers
Ferry Office Building. Security deposits payable totaled $100,286 at December
31, 1995, compared to $152,162 at December 31, 1994. The decrease is mainly
due to the sale of Foothills Tech Plaza. Prepaid rent totaled $79,555 at
December 31, 1995, compared to $4,085 at December 31, 1994. The increase is
largely attributable to the timing of rental payments.
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 pay cash distributions to the Limited
Partners. For the year ended December 31, 1995, the Partnership declared cash
distributions to the Limited Partners totaling $9.79 per Unit. Included in
this total was a special distribution in the amount of $8.59 per Unit which was
paid on November 24, 1995 and represented proceeds from the sale of Foothills
Tech Plaza, and a fourth quarter cash distribution of $0.30 per Unit which was
paid on February 9, 1996. In addition, on March 29, 1996 the Partnership paid
a special cash distribution in the amount of $.55 per Unit. The distribution
was made from the Partnership's cash reserves. 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.
On February 16, 1996, based upon, among other things, the advice of Partnership
counsel, Skadden, Arps, Slate, Meagher & Flom, the General Partner adopted a
resolution that states, among other things, if a Change of Control (as defined
below) occurs, the General Partner may distribute the Partnership's cash
balances not required for its ordinary course day-to-day operations. "Change
of Control" means any purchase or offer to purchase more than 10% of the Units
that is not approved in advance by the General Partner. In determining the
amount of the distribution, the General Partner may take into account all
material factors. In addition, the Partnership will not be obligated to make
any distribution to any partner and no partner will be entitled to receive any
distribution until the General Partner has declared the distribution and
established a record date and distribution date for the distribution. The
Partnership filed a form 8-K disclosing this resolution on February 23, 1996.
Results of Operations
1995 Versus 1994
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Partnership operations resulted in net income of $2,662,237 for the year ended
December 31, 1995, compared with net income of $1,449,548 for the corresponding
period in 1994. The increase in net income in 1995 is primarily attributable
to the gain on the sale of Foothills Tech Plaza in the amount of $1,088,860.
Rental income totaled $4,397,667 for the year ended December 31, 1995, compared
to $4,387,259 for the year ended December 31, 1994. The increase is primarily
attributable to higher average occupancy at Powers Ferry Office Building and
higher rental rates at Pebblebrook Apartments and Powers Ferry Office Building,
partially offset by the sale of Foothills Tech Plaza. Interest income totaled
$142,161 for the year ended December 31, 1995, compared to $11,912 for the year
ended December 31, 1994. The increase is largely due to the Partnership's
higher average cash balance in 1995 resulting from the sale of Foothills Tech
Plaza. Other income totaled $8,807 for the year ended December 31, 1995,
compared to $189,508 for the year ended December 31, 1994. The decrease is
mainly attributable to the receipt of a lease cancellation fee at Powers Ferry
Office Building in 1994.
Property operating expenses totaled $1,403,161 for the year ended December 31,
1995, relatively unchanged from $1,407,195 for the year ended December 31,
1994. Depreciation and amortization totaled $1,358,528 for the year ended
December 31, 1995, compared to $1,513,099 for the year ended December 31, 1994.
The decrease is primarily attributable to a lower depreciable asset base
resulting from the sale of Foothills Tech Plaza. The Partnership recognized
bad debt expense for the year ended December 31, 1994 totaling $16,905
reflecting the write-off of a former tenant's receivable balance.
As of December 31, 1995, the lease levels at each of the properties were as
follows: Powers Ferry Office Building - 94%; Sunnyvale R&D - 100%; and
Pebblebrook Apartments - 96%.
1994 Versus 1993
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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 $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 a tenant 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%.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to the Partnership's Annual Report to Unitholders for
the year ended December 31, 1995 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 Office
---------- -------------
Kenneth L. Zakin President and Director
William Caulfield Vice President and Chief Financial Officer
Lawrence M. Ostow Vice President
Kenneth L. Zakin, 48, is a Senior Vice President of Lehman Brothers Inc. 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 a member of the Real Estate Lender's
Association and 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, 36, is a Vice President of Lehman Brothers Inc. 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 - C.W. Post Campus.
Lawrence M. Ostow, 28, is a Vice President of Lehman Brothers and is
responsible for the management of commercial real estate in the Diversified
Asset Group. Mr. Ostow joined Lehman Brothers in September 1992. Prior to
that, Mr. Ostow was a Senior Consultant with Arthur Andersen & Co. in the Real
Estate Services Group, beginning in July 1990. Mr. Ostow is a candidate for an
M.B.A. from the Stern School of Business in 1997 and earned a B.A. degree in
Economics from the University of Michigan in 1990.
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 PDF86 Real Estate
Services Inc. to delete any reference to "Shearson."
Item 11. Executive Compensation
The General Partner and its 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 Partner is 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
Partner is 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. Certain 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, 1995.
(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, 1995.
(c) Changes in Control
None.
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 contained in the Partnership's Annual Report to
Unitholders for the year ended December 31, 1995 filed as an exhibit under Item
14.
(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, 1995 and 1994 (1)
Statements of Operations for the Years Ended
December 31, 1995, 1994 and 1993 (1)
Statements of Partners' Capital (Deficit)
for the Years Ended December 31, 1995, 1994 and 1993 (1)
Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 (1)
Notes to the Financial Statements (1)
Independent Auditors' Report (1)
(a)(ii) Financial Statement Schedule
Independent Auditors' Report on Schedule III F-1
Schedule III - Real Estate and Accumulated Depreciation F-2
(1) Incorporated by reference to the Partnership's Annual Report to Unitholders
for the year ended December 31, 1995.
(b) Reports on Form 8-K filed in the fourth quarter of 1995:
The Partnership filed a report on Form 8-K on October 12, 1995 regarding
the sale of Foothills Tech Plaza.
(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").
13 - Annual Report to Unitholders for the year ended December 31, 1995.
27 - Financial Data Schedule
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, 1996
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, 1996
BY: /s/Kenneth L. Zakin
Kenneth L. Zakin
Director and President
Date: March 29, 1996
BY: /s/William Caulfield
William Caulfield
Vice President and
Chief Financial Officer
Date: March 29, 1996
BY: /s/Lawrence M. Ostow
Lawrence M. Ostow
Assistant Vice President
INDEPENDENT AUDITORS' REPORT
The Partners
Participating Development Fund 86:
Under date of February 16, 1996 we reported on the balance sheets of
Participating Development Fund 86 (a Connecticut limited partnership) as of
December 31, 1995 and 1994, 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, 1995, as contained in the 1995 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 1995. In connection
with our audits of the aforementioned financial statements, we also have
audited the related financial statements schedule as listed in the accompanying
index. This financial statement schedule is the responsibility of the
Partnership's management. Our responsibility is to express an opinion on the
financial statement schedule based on our audits.
In our opinion, the 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.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 16, 1996
PARTICIPATING DEVELOPMENT FUND 86
(A Real Estate Limited Partnership)
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1995
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
8,387,590 11,623,214
Real Estate Held for Sale
Pebblebrook Apartments
Apartment Buildings
Overland Park, KS -- 2,095,205 8,118,985
$10,482,795 $19,742,199
PARTICIPATING DEVELOPMENT FUND 86
(A Real Estate Limited Partnership)
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1995
Cost Capitalized
Subsequent
To Acquisition
--------------
Buildings and
Description Improvements (3) Retirements
Commercial Property:
Sunnyvale R&D Building
Sunnyvale, CA $3,141,469 $(2,976,402)
1899 Powers Ferry Road
Office Building
Marietta, GA 2,189,066 (1,282,863)
5,330,535 (4,259,265)
Real Estate Held for Sale
Pebblebrook Apartments
Apartment Buildings
Overland Park, KS 863,301 (1,250,320)
$6,193,836 $(5,509,585)
PARTICIPATING DEVELOPMENT FUND 86
(A Real Estate Limited Partnership)
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1995
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 $5,014,066 $11,351,028 $(1,369,338)
1899 Powers Ferry Road
Office Building
Marietta, GA 2,050,628 7,680,418 9,731,046 (2,314,185)
8,387,590 12,694,484 21,082,074 (3,683,523)
Real Estate Held for Sale
Pebblebrook Apartments
Apartment Buildings
Overland Park, KS 2,095,205 7,731,966 9,827,171 (2,046,898)
$10,482,795 $20,426,450 $30,909,245 $(5,730,421)
PARTICIPATING DEVELOPMENT FUND 86
(A Real Estate Limited Partnership)
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1995
Life on which
Depreciation
in Latest
Date of Date Income Statements
Description Construction Acquired is Computed
Commercial Property:
Sunnyvale R&D Building
Sunnyvale, CA 8/86 8/28/86 5 - 35 years
1899 Powers Ferry Road
Office Building
Marietta, GA 2/86 7/7/87 5 - 35 years
Real Estate Held for Sale
Pebblebrook Apartments
Apartment Buildings
Overland Park, KS N/A 9/4/86 5 - 35 years
(1) For Federal Income Tax Purposes, the aggregate cost of land, building and
improvements is $40,039,600.
(2) For Federal income tax purposes, the amount of accumulated depreciation is
$3,630,345.
(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, 1995, 1994 and 1993:
Real Estate Investments: 1995 1994 1993
Beginning of year $42,595,901 $46,380,563 $46,170,294
Additions 211,470 1,691,770 493,591
Less Retirements (33,151) (5,476,432) (283,322)
Dispositions (11,864,975) 0 0
End of year $30,909,245 $42,595,901 $46,380,563
Accumulated Depreciation:
Beginning of year $ 7,744,521 $11,772,231 $10,371,081
Depreciation 1,251,637 1,448,722 1,684,472
Less Retirements (26,391) (5,476,432) (283,322)
Depositions (3,239,346) 0 0
End of year $ 5,730,421 $ 7,744,521 $11,772,231
Exhibit 13
Participating Development Fund 86
1995 Annual Report to Unitholders
Participating Development Fund 86 (the "Partnership") is a limited partnership
formed in 1986 to fund participating investments secured by commercial real
estate properties. The Partnership subsequently took title to all of its
remaining participating investments. Foothills Tech Plaza was sold on
September 29, 1995 (See Message to Investors for details). The Partnership's
remaining properties are a commercial office building, a combined
office/research and development facility and an apartment complex. Provided
below is a comparison of lease levels at the properties as of December 31, 1995
and 1994.
Percentage Leased
Property Location 1995 1994
Sunnyvale R&D Sunnyvale, CA 100% 100%
Powers Ferry Office Building Atlanta, GA 94% 91%
Pebblebrook Apartments Overland Park, KS 96% 97%
Administrative Inquiries Performance Inquiries/Form 10-Ks
Address Changes/Transfers First Data Investor Services Group
Service Data Corporation P.O. Box 1527
2424 South 130th Circle Boston, Massachusetts 02104-1527
Omaha, Nebraska 68144-2596 Attn: Financial Communications
800-223-3464 (select option 1) 800-223-3464 (select option 2)
---------- Message to Investors ----------
The General Partner is pleased to present the 1995 Annual Report for
Participating Development Fund 86 (the "Partnership"). Included in this report
is information on the sale of Foothills Tech Plaza, an update on the pending
sale of Pebblebrook Apartments and a discussion of operations and leasing
progress at the Partnership's properties, and audited financial statements for
the year ended December 31, 1995.
Property Sales
Pebblebrook Apartments - As previously reported, on May 11, 1995, the General
Partner executed a letter of intent with an unaffiliated third party to sell
Pebblebrook Apartments. During the 1995 third quarter, the prospective buyer
rescinded its offer. However, the General Partner subsequently agreed to a
letter of intent with another unaffiliated third party to sell Pebblebrook
Apartments, and on January 31, 1995 the General Partner executed a purchase and
sale agreement for a sales price of $10,570,000, net of commissions. The sale
was originally expected to close in late January, 1996 and was subsequently
postponed until March, 1996. However, during the due diligence period, the
prospective buyer raised certain concerns regarding the physical condition of
the Property. While negotiations are continuing and the General Partner
remains confident that the sale will be successfully concluded, there is no
assurance that an agreement can be reached with the buyer concerning the
remaining issues. Therefore, it remains possible that the sale will be further
delayed or possibly not close at all.
Foothills Tech Plaza - As previously reported, on September 29, 1995, Foothills
Tech Plaza was sold for $10,011,512, net of $226,000 in contracted roof
repairs. Net proceeds to the Partnership, after accounting for selling
expenses, were $9,714,490 and the Partnership distributed your share of the net
proceeds on November 24, 1995.
Cash Distributions
For the year ended December 31, 1995, the Partnership paid cash distributions
to the Limited Partners totaling $9.79 per Unit. Included in this total was a
return of capital distribution in the amount of $8.59 per Unit representing
proceeds from the sale of Foothills Tech Plaza paid on November 24, 1995, and
the Partnership's fourth quarter cash distribution of $0.30 per Unit which was
paid on February 9, 1996. In addition, on March 29, 1996 the Partnership paid
a special cash distribution in the amount of $.55 per Unit. This distribution
was made from the Partnership's cash reserves.
Since inception, including the special distribution, the Partnership has paid
cash distributions totaling $31.06 per original $50 Unit, including $14.66 per
Unit in return of capital payments which have reduced the Unit size from $50 to
$35.34. The timing and amount of future cash distributions will depend on
several factors, including the adequacy of cash flow and the Partnership's cash
reserve requirements. 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
1994 $.30 $.30 $.30 $.30 $1.20
1995 $.30 $.30 $8.89* $.30 $9.79
* Includes $8.59 in return of capital resulting from the sale of Foothills
Tech Plaza.
Market Overview
Although still lagging behind other sectors of real estate, the commercial
office market continued to improve during 1995, particularly in the suburban
office sector. The national vacancy rate declined to approximately 11.5% as of
the fourth quarter of 1995, down from approximately 16% as of year-end 1994.
In general, the gap between supply and demand is gradually narrowing as the
existing supply of office space is absorbed. However, demand for office space
varies widely from region to region as corporate layoffs persist and companies
continue to be selective in their choice of location. Moreover, despite the
resurgence of investment in other segments of the real estate industry, lenders
continue to be selective in providing capital for commercial office properties.
With respect to the Partnership's properties, the Atlanta market continued to
lead the nation in economic growth, and the commercial office market mirrored
this improvement. The Sunnyvale market also strengthened during 1995,
particularly in the latter half of the year, as a result of the recent business
expansion in the computer technology, semiconductor and computer software
industries.
Summary
We are pleased that we were able to close the sale of Foothills Tech Plaza
during 1995 and remain confident that we can resolve the issues which have
delayed the sale of Pebblebrook, in the near term. During the upcoming year,
the General Partner intends to closely monitor generally improving market
conditions to determine our future strategy for the Partnership's remaining
properties. We will update you with respect to these efforts in future
investor reports.
Very truly yours,
PDF86 Real Estate Services Inc.
General Partner
/s/Kenneth L. Zakin
Kenneth L. Zakin
President
March 29, 1996
---------- Property Profiles and Leasing Update ----------
POWERS FERRY OFFICE BUILDING Atlanta, Georgia
Powers Ferry Office Building is a 96,508 square foot class-A office property
located in the northwest section of Atlanta, Georgia, approximately 11 miles
from downtown. The property offers several attractive amenities including a
health club, cafe and a multi-user conference room.
Leasing Update - During the year, the General Partner executed two new leases
for a total of 2,383 square feet and one lease expansion for 2,091 square feet
with a tenant which now leases 4,101 square feet. One tenant occupying 1,191
square feet vacated its space in April 1995 upon expiration of its lease. As a
result, the property was 94% leased at December 31, 1995 compared with 91% at
December 31, 1994. During 1996, nine leases totaling 18,459 square feet or
20% of the property's space are scheduled to expire. Some of these tenants
have been contacted to discuss the renewal of their leases and we will contact
the other tenants when appropriate. However, it is uncertain whether any of
these tenants will renew.
Atlanta Market Update - According to Market Focus, a respected industry
publication, Atlanta continued to lead the nation in economic and job growth in
1995, with approximately 36,400 jobs created during the first half of the year.
In particular, the services and trade sectors have experienced substantial
growth. This growth positively impacted the entire Atlanta region, including
the property's submarket, as evidenced by the submarket's improved vacancy rate
of approximately 6% at year-end 1995 versus a rate of 10% in 1994. These
conditions have spurred a gradual increase in rental rates and, consequently,
property values have also begun to rise. These trends are expected to sustain
their momentum beyond the upcoming 1996 Olympic Games which have created
renewed interest in the Atlanta market.
SUNNYVALE R&D Sunnyvale, California
Sunnyvale R&D is a one-story research and development building containing
105,285 square feet of leasable area. The property, located in California's
Silicon Valley, provides an attractive location for high technology companies.
Leasing Update - Tandem Computers, Inc. ("Tandem"), continues to lease 100% of
the property's space, pursuant to a lease scheduled to expire March 31, 1999.
As previously reported, Tandem subleased its space to a computer networking
company in 1994, but remains responsible for all lease obligations through the
scheduled expiration of its own lease. Tandem's lease generated $859,126 or
20% of the Partnership's 1995 rental income.
Sunnyvale Market Update - Market conditions in the Silicon Valley strengthened
throughout the year. According to the 1996 edition of industry publication
Emerging Trends in Real Estate, the turn-around in the research and development
sector can be greatly attributed to the wave of high-technology and
biotechnology industry expansions, in addition to an increasing number of
start-up companies. Vacancy rates for the research and development sector in
the Silicon Valley market declined at year-end 1995 to 4.9% from 10.8% a year
earlier. The Sunnyvale market, located within Silicon Valley, also benefited
from these trends. The vacancy rate in Sunnyvale fell to 5.2% as of the fourth
quarter of 1995, from 13.6% for the corresponding period in 1994. The area
started experiencing increases in rental rates during the latter half of 1995
which are expected to continue to increase during 1996.
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.
Market and Property Update - The strong recovery of multifamily housing in most
regions of the country began to level off during 1995. New construction
intensified competition in many areas with building permits for multifamily
units up almost 22% in 1995 compared to 1994 levels. In addition, falling
interest rates induced many renters to purchase homes. Despite these trends,
overall vacancy rates for multifamily properties nationwide remained below 8%
during 1995 as population and job growth contributed to a stable demand.
Conditions in the Johnson County multifamily housing market mirrored these
trends, as the property was 96% occupied at December 31, 1995, largely
unchanged from 97% a year earlier. These trends are expected to continue
throughout 1996.
For the years ended December 31,
1995 1994 1993 1992 1991
Total revenues $ 4,548,635 $ 4,588,679 $ 4,100,867 $ 4,270,283 $ 4,182,842
Total expenses 2,975,258 3,139,131 3,168,985 2,990,192 3,220,001
Net income 2,662,237 1,449,548 931,882 1,280,091 962,841
Total assets 27,446,456 36,105,893 36,191,399 39,204,700 40,003,550
Net income per Unit 2.32 1.25 .80 1.10 .83
Cash distributions
per Unit 9.79 1.20 2.70 2.40 2.04
The above selected financial data should be read in conjunction with the
financial statements and related notes in this report.
- - The slight decline in total revenues is largely due to lower other income, in
addition to lower rental income associated with the sale of Foothills Tech
Plaza. Other income was higher in 1994 due to the receipt of a lease
cancellation fee at Powers Ferry Office Building.
- - Total expenses decreased in 1995 primarily due to lower depreciation and
amortization expense resulting from the sale of Foothills Tech Plaza.
- - Net income increased in 1995 mainly due to the gain on sale of Foothills Tech
Plaza totaling $1,088,860.
Balance Sheets
December 31, 1995 and 1994
Assets 1995 1994
Land $ 8,387,590 $12,419,476
Buildings and personal property 11,460,068 25,346,253
Tenant improvements 1,234,416 4,830,172
21,082,074 42,595,901
Less-accumulated depreciation (3,683,523) (7,744,521)
17,398,551 34,851,380
Real estate assets held for sale 7,780,273 --
Cash and cash equivalents 1,480,034 140,886
Restricted cash 100,286 152,162
1,580,320 293,048
Accounts receivable 31,304 18,737
Prepaid expenses, net of accumulated
amortization of $111,997 in 1995 and
$47,360 in 1994 273,681 389,472
Incentives to lease, net of accumulated
amortization of $54,794 in 1995
and $18,889 in 1994 188,693 283,555
Deferred rent receivable 193,634 269,701
Total Assets $27,446,456 $36,105,893
Liabilities and Partners' Capital (Deficit)
Liabilities:
Accounts payable and accrued expenses $ 133,022 $ 323,897
Due to affiliates 48,744 64,809
Security deposits payable 100,286 152,162
Prepaid rent 79,555 4,085
Total Liabilities 361,607 544,953
Partners' Capital (Deficit):
General Partner (436,797) (355,690)
Limited Partners (1,124,000 units outstanding) 27,521,646 35,916,630
Total Partners' Capital 27,084,849 35,560,940
Total Liabilities and Partners' Capital $27,446,456 $36,105,893
Statements of Partners' Capital (Deficit)
For the years ended December 31, 1995, 1994 and 1993
General Limited
Partner Partners Total
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
Cash distributions (139,197) (10,999,131) (11,138,328)
Net income 58,090 2,604,147 2,662,237
Balance at December 31, 1995 $ (436,797) $27,521,646 $27,084,849
Statements of Operations
For the years ended December 31, 1995, 1994 and 1993
Income 1995 1994 1993
Rental $4,397,667 $4,387,259 $3,990,962
Interest 142,161 11,912 42,812
Other 8,807 189,508 67,093
Total Income 4,548,635 4,588,679 4,100,867
Expenses
Property operating 1,403,161 1,407,195 1,206,605
Depreciation and amortization 1,358,528 1,513,099 1,690,501
General and administrative 213,569 201,932 247,106
Bad debt expense -- 16,905 24,773
Total Expenses 2,975,258 3,139,131 3,168,985
Income before gain on sale
of real estate 1,573,377 1,449,548 931,882
Gain on sale of real estate 1,088,860 -- --
Net Income $2,662,237 $1,449,548 $ 931,882
Net Income Allocated:
To the General Partner $ 58,090 $ 43,486 $ 27,956
To the Limited Partners 2,604,147 1,406,062 903,926
$2,662,237 $1,449,548 $ 931,882
Per limited partnership unit
(1,124,000 outstanding) $2.32 $1.25 $.80
Statements of Cash Flows
For the years ended December 31, 1995, 1994 and 1993
Cash Flows from Operating Activities: 1995 1994 1993
Net income $2,662,237 $1,449,548 $ 931,882
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,358,528 1,513,099 1,690,501
Gain on sale of real estate (1,088,860) -- --
Provision for losses on rent receivable -- -- 24,773
Increase (decrease) in cash arising from changes
in operating assets and liabilities:
Restricted cash 51,876 212,198 146,279
Accounts receivable (12,567) 47,928 (14,229)
Prepaid expenses 51,564 (358,425) (60,019)
Incentives to lease 58,957 (302,444) --
Deferred rent receivable 76,067 7,072 460,347
Accounts payable and accrued expenses (190,875) 109,552 67,434
Due to affiliates (16,065) (45,977) (21,959)
Security deposits payable (51,876) 30,366 (14,572)
Prepaid rent 75,470 (238,479) (268,046)
Net cash provided by operating activities 2,974,456 2,424,438 2,942,391
Cash Flows from Investing Activities:
Proceeds from sale of real estate assets 9,714,490 -- --
Additions to real estate assets (211,470) (1,691,770) (493,591)
Net cash provided by (used for)
investing activities 9,503,020 (1,691,770) (493,591)
Cash Flows from Financing Activities:
Cash distributions (11,138,328) (1,390,516) (3,708,040)
Net cash used for financing activities (11,138,328) (1,390,516) (3,708,040)
Net increase (decrease) in cash
and cash equivalents 1,339,148 (657,848) (1,259,240)
Cash and cash equivalents at
beginning of year 140,886 798,734 2,057,974
Cash and cash equivalents at end of year $1,480,034 $ 140,886 $ 798,734
Supplemental Schedule of Non-Cash Investing Activity:
Write-off of fully depreciated
tenant improvements $ 33,152 $ 5,476,432 $ 283,322
Notes to the Financial Statements
December 31, 1995, 1994 and 1993
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. Two Participating
Investments were sold during 1989 and 1995. 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."
On February 16, 1996, based upon, among other things, the advice of Partnership
counsel, Skadden, Arps, Slate, Meagher & Flom, the General Partner adopted a
resolution that states, among other things, if a Change of Control (as defined
below) occurs, the General Partner may distribute the Partnership's cash
balances not required for its ordinary course day-to-day operations. "Change
of Control" means any purchase or offer to purchase more than 10% of the Units
that is not approved in advance by the General Partner. In determining the
amount of the distribution, the General Partner may take into account all
material factors. In addition, the Partnership will not be obligated to make
any distribution to any partner and no partner will be entitled to receive any
distribution until the General Partner has declared the distribution and
established a record date and distribution date for the distribution. The
Partnership filed a form 8-K disclosing this resolution on February 23, 1996.
2. Accounting Policies
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.
Real Estate Assets Held for Sale - Real estate held for sale is carried at the
lower of cost or fair market value less selling costs. Effective December 31,
1995, depreciation on real estate held for sale has been suspended.
Accounting for Impairment - In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" ("FAS 121"), which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. FAS 121 also addresses the accounting
for long-lived assets that are expected to be disposed of. The Partnership
adopted FAS 121 during the fourth fiscal quarter of 1995. Based on current
circumstances, the adoption of FAS 121 had no impact on the financial
statements.
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.
Cash and Cash Equivalents - Cash equivalents consist of short-term, highly
liquid debt instruments purchased with an original maturity of three months or
less. The carrying value approximates fair value because of the short maturity
of these instruments.
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.
Use of Estimates - 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.
Fair Value of Financial Instruments - Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments ("FAS
107"), requires that the Partnership disclose the estimated fair values of its
financial instruments. Fair values generally represent estimates of amounts at
which a financial instruments could be exchanged between willing parties in a
current transaction other than in forced liquidation.
Fair value estimates are subjective and are dependent on a number of
significant assumptions based on management's judgment regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. In addition, FAS 107 allows
a wide range of valuation techniques, therefore, comparisons between entities,
however similar, may be difficult.
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.
On September 29, 1995, Foothills Tech Plaza was sold for $10,011,512 net of
$226,000 in contracted roof repairs. The gain on disposition totaled
$1,088,860. Write-offs related to the sale of the property consisted of
deferred rent receivable and leasing costs in the amounts of $129,846 and
$30,058, respectively, which have been included in Property operations.
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 approximately 93,000 square feet of
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.
As of December 31, 1995 and 1994, the Property was 94% and 91% leased,
respectively.
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, 1995. The tenant signed a six-year lease (the "Master Lease")
which commenced April 1, 1988 at an annual rental rate of $7.68 per square
foot, triple net, and on April 1, 1994 negotiated a five year extension at an
average annual rental rate of $8.16 per square foot. The tenant has the
option, beginning at the end of the third year of this extension period, to
terminate the lease by providing the Partnership with written notification at
least twelve months in advance and paying a substantial lease termination
penalty specified in the lease agreement.
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. As long as the sublease is in full force and effect, Tandem will
be unable to exercise its termination option under the Master Lease.
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.
During the 1995 third quarter the General Partner received an offer from an
unaffiliated third party to purchase Pebblebrook Apartments. On January 31,
1995 the General Partner executed a purchase and sale agreement for a sales
price of $10,570,000, net of commissions. The sale was originally expected to
close in late March, 1996. However, during the due diligence period, the
prospective buyer raised certain concerns regarding the physical condition of
the Property. While negotiations are continuing, the General Partner remains
confident that the sale will be successfully concluded. However, there is no
assurance that an agreement can be reached with the buyer concerning the
remaining issues. Therefore, it remains possible that the sale will be further
delayed or possibly not close at all.
As of December 31, 1995 and 1994 the property was 96% and 97% 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, 1995 assuming no exercise of
tenant renewal options:
1996 $2,000,702
1997 1,332,924
1998 1,006,145
1999 773,078
2000 539,682
Thereafter 372,586
$6,025,117
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, 1995. The rental income
derived from these leases for 1995 was $470,664 and $859,126, respectively, or
11% and 20% of the Partnership's 1995 total rental income. As of December 31,
1995, Tandem is current in the rent payments.
5. Transactions With Related Parties
Certain cash accounts reflected on the Partnership's balance sheet at December
31, 1995 and 1994 were on deposit with an affiliate of the General Partner.
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 $10,428, $8,111 and $37,080 in
1995, 1994 and 1993, respectively.
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.
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:
1995 1994
Accounts payable to the General Partner:
Administrative services $48,678 $63,256
Accounts payable to affiliates of the General Partner
Operational expenses: 66 1,553
Total accounts payable to affiliates $48,744 $64,809
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, 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.
As of December 31, 1995, the Preferred Return has not been met.
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 $10,999,131, $1,348,800, and $3,596,800 to the Unit
Holders in 1995, 1994 and 1993, respectively. In addition, the Partnership
distributed $139,197, $41,716 and $111,240 to the General Partners in 1995,
1994 and 1993. An additional cash distribution in the amount of $337,200 was
paid to the Unit Holders ($.30 per unit) and $10,429 to the General Partner for
the quarter ended December 31, 1995, in the first quarter of 1996, as was a
special cash distribution in the amount of $618,200 and $19,120 to the Unit
Holders ($.55 per Unit) and General Partner, respectively.
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,
1995 1994 1993
Financial statement basis net income $2,662,237 $1,449,548 $ 931,882
Financial statement amortization
over (under) tax basis amortization (328,909) 302,281 610,073
Financial statement depreciation
over (under) tax basis depreciation 157,590 (82,705) (129,963)
Financial statement rental income
(over) under tax basis rental income 151,538 (231,408) 191,502
Financial statement gain on sale of
property under tax basis gain
on sale of property 70,288 -- --
Other 30,944 (24,774) 24,928
81,451 (36,606) 696,540
Federal income tax basis net income $2,743,688 $1,412,942 $1,628,422
Reconciliation of financial statement partners' capital to federal income tax
basis partners' capital:
Year Ended December 31,
1995 1994 1993
Financial statement basis partners'
capital $27,084,849 $35,560,940 $35,501,908
Current year financial statement basis
net income under federal income
tax basis net income (loss) 81,451 (36,606) 696,540
Other -- (492) --
Current Year Accrued Distribution -- -- 579,381
Cumulative Federal income tax basis
net income over financial statement
net income 12,076,101 12,112,707 10,837,278
Federal income tax basis partners'
capital $39,242,401 $47,637,041 $47,614,615
Because many types of transactions are susceptible to varying interpretations
under Federal and State income tax laws and regulations, the amounts reported
above may be subject to change at a later date upon final determination by the
respective taxing authorities.
---------- 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, 1995 and 1994,
and the related statements of operations, partner's capital (deficit) and cash
flows for each of the years in the three-year period ended December 31, 1995.
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 disclosure 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 as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1995 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 16, 1996
Comparison of Acquisition Costs to Appraised Value and Determination of
Net Asset Value Per $35.34 Unit at December 31, 1995 (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 $ 9,000,000
1899 Powers Ferry 07-07-87 8,916,095 6,100,000
Pebblebrook Apartments 09-04-86 10,214,190 10,570,000
$30,316,246 $25,670,000
Cash and cash equivalents 1,480,034
Accounts receivable 31,304
Prepaid expenses 273,681
27,455,019
Less:
Accounts payable and accrued expenses (133,022)
Due to affiliates (48,744)
Prepaid rent (79,555)
Partnership Net Asset Value (3) $27,193,698
Net Asset Value Allocated:
Limited Partners $26,921,761
General Partners 271,937
$27,193,698
Net Asset Value Per Unit
(1,124,000 units outstanding) $23.95
(1) Purchase price plus General Partners' acquisition fees.
(2) This represents the Partnership's share of the December 31, 1995 Appraised
Values which were determined by an independent property appraisal firm,
except for Pebblebrook Apartments which is currently in negotiation for
sale with an unaffiliated buyer and accordingly, the tentative sale price,
net of closing costs, has been used.
(3) The Net Asset Value assumes a hypothetical sale at December 31, 1995 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.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,580,320
<SECURITIES> 000
<RECEIVABLES> 31,304
<ALLOWANCES> 000
<INVENTORY> 000
<CURRENT-ASSETS> 000
<PP&E> 21,082,074
<DEPRECIATION> 3,683,523
<TOTAL-ASSETS> 27,446,456
<CURRENT-LIABILITIES> 361,607
<BONDS> 000
<COMMON> 000
000
000
<OTHER-SE> 27,084,849
<TOTAL-LIABILITY-AND-EQUITY> 27,446,456
<SALES> 4,397,667
<TOTAL-REVENUES> 4,548,635
<CGS> 000
<TOTAL-COSTS> 1,403,161
<OTHER-EXPENSES> 1,572,097
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> 000
<INCOME-PRETAX> 1,573,377
<INCOME-TAX> 000
<INCOME-CONTINUING> 1,573,377
<DISCONTINUED> 000
<EXTRAORDINARY> 1,088,860
<CHANGES> 000
<NET-INCOME> 2,662,237
<EPS-PRIMARY> 2.32
<EPS-DILUTED> 000
</TABLE>
