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
For the fiscal year ended: December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 33-2294
PARTICIPATING DEVELOPMENT FUND 86
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A Real Estate Limited Partnership
Exact name of registrant as specified in its charter
Connecticut 06-1153833
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State or other jurisdiction of
incorporation or organization IRS employer identification No.
3 World Financial Center, 29th Floor
New York, New York ATTN: Andre Anderson 10285
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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, 1996
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, 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, unfavorable 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 Note 3 "Real Estate Investments" of the Notes
to the Financial Statements contained in the Partnership's Annual Report to
Unitholders for the year ended December 31, 1996 filed as an exhibit under Item
14.
Pebblebrook Apartments was sold on May 23, 1996 for a net sales price of
$10,210,955. The gain on disposition of the property totaled $2,405,209.
Additional information regarding the sale is incorporated by reference to Note
3 "Real Estate Investments" of the Notes to the Financial Statements contained
in the Partnership's Annual Report to Unitholders for the year ended December
31, 1996 filed as an exhibit under Item 14.
Additional information regarding the historical development of business is
incorporated by reference to Note 1 "Organization," Note 2 "Significant
Accounting Policies" and Note 3 "Real Estate Investments" of the Notes to the
Financial Statements contained in the Partnership's Annual Report to
Unitholders for the year ended December 31, 1996 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 the Financial Statements contained in the
Partnership's Annual Report to Unitholders for the year ended December 31, 1996
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, 1996 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
section entitled "Property Profiles & Leasing Update" and Note 3 "Real Estate
Investments" of the Notes to the Financial Statements contained in the
Partnership's Annual Report to Unitholders for the year ended December 31,
1996, filed as an exhibit under Item 14.
Item 3. Legal Proceedings
The Registrant is not subject to any material pending legal proceedings.
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 1996.
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, 1996, there were 7,731 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, 1996 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, 1996 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, 1996 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
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Pebblebrook Apartments was sold to an unaffiliated third party on May 23, 1996
for a net sales price of $10,210,955. The gain on disposition of the property
totaled $2,405,209. Proceeds from the sale were distributed to Limited
Partners on August 30, 1996.
At December 31, 1996, the Partnership had cash and cash equivalents of $736,429
compared with $1,480,034 at December 31, 1995. The decrease is primarily
attributable to cash distributions and real estate additions exceeding proceeds
from the sale of Pebblebrook Apartments and net cash provided by operating
activities. 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. Net cash provided
by operating activities totaled $1,382,587 for the year ended December 31, 1996
compared with $2,974,456 for the year ended December 31, 1995. The decrease is
primarily due to lower rental income resulting from the September 1995 sale of
Foothills Tech Plaza and the May 1996 sale of Pebblebrook Apartments. The
Partnership also maintains a restricted cash balance, which is comprised of
tenant security deposits. Restricted cash totaled $44,329 at December 31,
1996, compared with $100,286 at December 31, 1995. The decrease is primarily
due to the sale of Pebblebrook Apartments.
Prepaid expenses totaled $239,359 at December 31, 1996, compared with $273,681
at December 31, 1995. The decrease is primarily the result of the amortization
of prepaid insurance and leasing commissions associated with the lease-up of
1899 Powers Ferry in 1994 and the sale of Pebblebrook Apartments in 1996.
Incentives to lease were $155,595 at December 31, 1996 compared to $188,693 at
December 31, 1995. The decrease is largely the result of the amortization of a
lease buy-out at 1899 Powers Ferry.
Accounts payable and accrued expenses totaled $85,080 at December 31, 1996,
compared with $142,956 at December 31, 1995. The decrease is primarily due to
the sale of Foothills Tech Plaza in 1995 and lower accrued real estate taxes
resulting from the sale of Pebblebrook Apartments in 1996. Due to affiliates
totaled $3,658 at December 31, 1996, compared to $38,810 at December 31, 1995.
The decrease is primarily attributable to the write-off of accrued management
fees. Security deposits payable totaled $40,070 at December 31, 1996, compared
to $100,286 at December 31, 1995. The decrease is mainly due to the sale of
Pebblebrook Apartments. Prepaid rent totaled $0 at December 31, 1996, compared
to $79,555 at December 31, 1995. The decrease is largely attributable to the
timing of rental payments.
A discussion of leasing activity and material leases at the Partnership's
Properties is incorporated by reference to the section entitled "Property
Profiles & Leasing Update" and Note 3 "Real Estate Investments" of the Notes to
the Financial Statements contained in the Partnership's Annual Report to
Unitholders for the year ended December 31, 1996, filed as an exhibit under
Item 14.
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, 1996, the Partnership declared cash
distributions to the Limited Partners totaling $10.75 per Unit. Included in
this total was a special distribution in the amount of $9.00 per Unit which was
paid on August 30, 1996 and represented proceeds from the sale of Pebblebrook
Apartments, and a fourth quarter cash distribution of $0.30 per Unit which was
paid on February 13, 1997. 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 legal
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.
Results of Operations
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1996 Versus 1995
Partnership operations resulted in net income of $3,333,580 for the year ended
December 31, 1996, compared with net income of $2,662,237 for the corresponding
period in 1995. Net income for the 1996 period includes a gain on sale of real
estate of $2,405,209, reflecting the sale of Pebblebrook Apartments on May 23,
1996. Net income for the 1995 period includes a gain on sale of real estate of
$1,088,860, reflecting the sale of Foothills Tech Plaza on September 29, 1995.
Excluding these gains, Partnership operations resulted in income before gain on
sale of real estate of $928,371 for the year ended December 31, 1996, compared
to $1,573,377 for the year ended December 31, 1995. The decrease is largely
due to lower rental income, partially offset by lower property operating and
depreciation and amortization expenses resulting from the sales of Pebblebrook
Apartments and Foothills Tech Plaza.
Rental income totaled $2,706,140 for the year ended December 31, 1996, compared
to $4,397,667 for the year ended December 31, 1995. The decrease is primarily
attributable to the sale of Foothills Tech Plaza in September 1995 and
Pebblebrook Apartments in May 1996. Interest income totaled $201,466 for the
year ended December 31, 1996, compared to $142,161 for the year ended December
31, 1995. The increase is largely due to the Partnership's higher average cash
balance in 1996 resulting from the sale of Pebblebrook Apartments. Other
income totaled $55,944 for the year ended December 31, 1996, compared to $8,807
for the year ended December 31, 1995. The increase is mainly attributable to
the write-off of accrued management fees due to Phoenix, the former co-General
Partner, and the receipt of an insurance reimbursement.
Property operating expenses totaled $1,131,167 for the year ended December 31,
1996, compared to $1,403,161 for the year ended December 31, 1995. The
decrease is primarily attributable to the sale of Pebblebrook Apartments in May
1996. Depreciation and amortization totaled $678,208 for the year ended
December 31, 1996, compared to $1,358,528 for the year ended December 31, 1995.
The decrease is primarily attributable to a lower depreciable asset base
resulting from the sale of Foothills Tech Plaza and Pebblebrook Apartments.
As of December 31, 1996, the lease levels at each of the properties were as
follows: 1899 Powers Ferry - 84%; Sunnyvale R&D - 100%.
1995 Versus 1994
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 was 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 was primarily
attributable to higher average occupancy at 1899 Powers Ferry and higher rental
rates at Pebblebrook Apartments and 1899 Powers Ferry, 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 was 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 was mainly attributable to the
receipt of a lease cancellation fee at 1899 Powers Ferry 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 was 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: 1899 Powers Ferry - 94%; Sunnyvale R&D - 100%; and Pebblebrook
Apartments - 96%.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to the Partnership's Annual Report to Unitholders for
the year ended December 31, 1996 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 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
Moshe Braver Vice President
Kenneth L. Zakin, 49, 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 was a director of Lexington Corporate
Properties, Inc. from 1993 to 1996. 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, 37, 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/E.F. Hutton merger in 1988, Mr.
Caulfield was a Senior Analyst with E.F. Hutton since October 1986 in E.F.
Hutton's Partnership Administration Group. Before joining E.F. Hutton, Mr.
Caulfield was a Business Systems Analyst at Eaton Corp. from 1985 to 1986.
Prior to Eaton Corp., 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.
Moshe Braver, 43, is currently a Managing Director of Lehman Brothers and has
held such position since October 1985. During this time, he has held positions
with the Business Analysis Group, International and Capital Markets
Administration and currently, with the Diversified Asset Group. Mr. Braver
joined Shearson Lehman Brothers in August 1983 as Senior Vice President. Prior
to joining Shearson, Mr. Braver was employed by the accounting firm of Coopers
& Lybrand from January 1975 through August 1983 as an Audit Manager. He
received a Bachelor of Business Administration degree from Bernard Baruch
College in January 1975 and is a Certified Public Accountant.
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 the 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, 1996.
(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, 1996.
(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 the Financial Statements contained in the Partnership's Annual Report to
Unitholders for the year ended December 31, 1996 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, 1996 and 1995 (1)
Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994 (1)
Statements of Partners' Capital (Deficit)
for the Years Ended December 31, 1996, 1995 and 1994 (1)
Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 (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, 1996.
(b) No reports on form 8-K were filed in the fourth quarter of the
calendar year 1996.
(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, 1996.
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 24, 1997
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
Dated: March 24, 1997
BY: /s/Kenneth L. Zakin
Kenneth L. Zakin
Director and President
Dated: March 24, 1997
BY: /s/William Caulfield
William Caulfield
Vice President and
Chief Financial Officer
Dated: March 24, 1997
BY: /s/Moshe Braver
Moshe Braver
Vice President
Exhibit 13
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Participating Development Fund 86
1996 Annual Report to Unitholders
Participating Development Fund 86
------------------------------------
Participating Development Fund 86 is a limited partnership formed in 1986 to
fund participating investments secured by commercial and multi-family
residential real estate properties. The Partnership subsequently took title to
four of the five participating investments. One of the participating
investments was sold and two of the Partnership's properties have been sold
including Pebblebrook Apartments, which was sold on May 23, 1996. The
Partnership's two remaining properties are a commercial office building and a
combined office/research and development facility. Provided below is a
comparison of lease levels at the properties as of December 31, 1996 and 1995.
Percentage Leased
Property Location 1996 1995
Sunnyvale R&D Sunnyvale, CA 100% 100%
1899 Powers Ferry Atlanta, GA 84% 94%
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 800-223-3464
Message to Investors
----------------------
We are pleased to present the 1996 Annual Report for Participating Development
Fund 86 (the "Partnership"). Included in this report is a review of national
market conditions, an update of Partnership operations, and financial
highlights for the year. As previously reported, Pebblebrook Apartments was
sold on May 23, 1996 for a net sales price of $10,210,955. Your share of the
net proceeds, totaling $9.00 per Unit, was distributed on August 30, 1996.
Please refer to the Property Profiles & Leasing Update section of this report
for additional information regarding local market conditions for both of the
Partnership's remaining properties, as well as their operating performance
during 1996.
Market Overview and Property Sales
The commercial office market continued to recover throughout the year,
particularly in the suburban office sector. Suburban office vacancy rates
declined to approximately 11% at year-end 1996 versus approximately 15% a year
earlier. Overall, demand for office space continues to increase, bringing
about continually lower vacancy rates and, in many regions of the country,
enabling property owners to raise rental rates. Accordingly, as many
traditional investors express increased interest, the availability of financing
for investment in this sector has risen substantially. Conditions in the
markets where the Partnership's two remaining properties are located generally
paralleled those in the national market.
In view of these ongoing improvements in the real estate and capital markets,
we believe that the current favorable environment may present further
opportunities to sell the Partnership's properties. Accordingly, the General
Partner anticipates marketing for sale at least one of the two remaining
properties in 1997 as various leasing issues are resolved. It should be noted
that there can be no assurance that any of the Partnership's future marketing
efforts will result in a sale of a property or that a sale, if completed, will
result in any particular price.
Cash Distributions
The Partnership paid cash distributions to Limited Partners totaling $10.75 per
Unit for the year ended December 31, 1996, including a fourth quarter cash
distribution of $0.30 per Unit that was either credited to your brokerage
account or sent directly to you on February 13, 1997. Since inception, the
Partnership has paid total cash distributions of $41.26 per original $50 Unit,
including $23.66 per Unit in return of capital payments which have reduced the
Unit size from $50 to $26.34. The timing and amount of future cash
distributions will be determined quarterly and will depend on the adequacy of
the Partnership's cash flow and cash reserve requirements.
Cash Distributions Per Limited Partnership Unit
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1995 $0.30 $0.30 $8.89(1) $0.30 $ 9.79
1996 $0.85(2) $0.30 $9.30(3) $0.30 $10.75
(1) Includes $8.59 in return of capital from the sale of Foothills Tech Plaza
paid on November 24, 1995.
(2) Includes a special one time cash distribution of $0.55 per Unit paid on
March 29, 1996.
(3) Includes $9.00 in return of capital from the sale of Pebblebrook
Apartments paid on August 30, 1996.
General Information
As you are probably aware, a third party has commenced a partial tender offer
to purchase units of the Partnership at a price which is substantially below
the Partnership's Net Asset Value. In response to the offer, we have
recommended that limited partners reject the offer because it does not reflect
the underlying value of the Partnership's assets. According to published
industry sources, most investors who hold units of limited partnerships similar
to the Partnership have rejected these types of tender offers due to their
inadequacy. Please be assured that if any additional tender offers are made
for your units, we will make every effort to provide you with our position
regarding those offers on a timely basis.
Summary
In the coming year the General Partner will continue to explore opportunities
to sell the Partnership's properties as market conditions warrant.
Additionally, we intend to focus on leasing the vacant space at 1899 Powers
Ferry so as to further improve the property's marketability and appeal. We
will keep you apprised of significant developments affecting your investment in
future reports.
Very truly yours,
PDF86 Real Estate Services Inc.
General Partner
/s/Kenneth L. Zakin
Kenneth L. Zakin
President
March 24, 1997
Property Profiles & Leasing Update
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SUNNYVALE R&D Sunnyvale, California
Located in California's Silicon Valley, Sunnyvale R&D is a one- story research
and development building containing 105,285 square feet of leasable area. The
property provides an attractive location for high technology companies.
Leasing Update - Tandem Computers, Inc. ("Tandem") leases 100% of the
property's space, pursuant to a lease scheduled to expire March 31, 1999.
Tandem, which subleases its space to a computer networking company, is
responsible for all lease obligations through the scheduled expiration of its
own lease. Tandem's lease generated $859,126 or 32% of the Partnership's 1996
rental income.
Sunnyvale Market Update - The continued expansion of the high- technology and
biotechnology industry contributed to the Silicon Valley's stable population
growth and low unemployment rate during the year, making the region one of the
strongest economies in the United States. The demand for space within the
area's research and development sector continued to increase throughout 1996,
leading to a decline in vacancy rates to approximately 3.1% at year-end 1996
from approximately 4.9% one year earlier. The Sunnyvale market, located within
the Silicon Valley, benefited from this increased demand as economic conditions
in the area remained very strong. Vacancy rates for research and development
space in Sunnyvale fell to 4.7% as of year-end 1996 from 5.2% a year earlier.
The area also experienced an increase in rental rates throughout the year,
which have contributed to significant increases in the values of most
properties.
1899 POWERS FERRY Atlanta, Georgia
Located in the northwest section of Atlanta, Georgia, 1899 Powers Ferry is a
96,508 square foot class-A office property. The property offers several
attractive amenities including a health club, cafe and a multi-user conference
room.
Leasing Update - The General Partner executed a two-year lease extension
representing 1,200 square feet and a three-year lease renewal representing
2,324 square feet, during the year. A tenant expanded its space by 1,543
square feet, renewing its lease for five years. Another tenant extended its
lease for three years but reduced its space by 1,683 square feet. Additionally,
five tenants leasing a total of 10,799 square feet vacated their spaces upon
the expiration of their respective leases. As a result, the property was 84%
leased at December 31, 1996 compared with 94% at December 31, 1995. As
discussed below, market conditions in Atlanta are strong and we expect to
re-lease the property's vacant space in the near future. During 1997, two
leases totaling 3,690 square feet or approximately 4% of the property's space
are scheduled to expire.
Atlanta Market Update - Atlanta maintained its positioning as one of the
leading markets nationwide as general economic conditions remained strong
throughout the year. Aided in part by the 1996 Olympic Games, the services and
trade sectors continued to experience substantial growth and the market
sustained its high rate of job absorption. This growth positively impacted the
entire Atlanta region, including the property's submarket, as evidenced by the
submarket's slightly improved vacancy rate of approximately 5% at year-end 1996
versus 6% in 1995. As a result of these conditions, rental rates have risen
and property values are continuing to increase. While these trends are
expected to slow during the upcoming year, the region's economic forecast for
1997 is positive.
Financial Highlights
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For The Years Ended December 31, 1996 1995 1994 1993 1992
Dollars in thousands except per Unit data
Total revenues $ 2,964 $ 4,549 $ 4,589 $ 4,101 $ 4,270
Total expenses 2,035 2,975 3,139 3,169 2,990
Net income 3,334 2,662 1,450 932 1,280
Total assets 18,301 27,446 36,106 36,191 39,205
Net income per Unit 2.92 2.32 1.25 .80 1.10
Cash distributions per
Limited Partnership Unit 10.75(2) 9.79(1) 1.20 2.70 2.40
(1) Includes $8.59 in return of capital from the sale of Foothills Tech Plaza
paid on November 24, 1995.
(2) Includes a special one time cash distribution of $0.55 per Unit paid on
March 29, 1996, and $9.00 in return of capital from the sale of Pebblebrook
Apartments paid on August 30, 1996.
The above selected financial data should be read in conjunction with the
financial statements and related notes included in this report.
- - Total revenues and total expenses decreased in 1996 as a result of the sale
of both Foothills Tech Plaza and Pebblebrook Apartments.
- - The increase in net income is primarily attributable to the gain on the sale
of Pebblebrook Apartments in the amount of $2,405,209 in 1996.
Balance Sheets
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At December 31, At December 31,
1996 1995
Assets
Real estate, at cost:
Land $ 8,387,590 $ 8,387,590
Buildings and personal property 11,445,862 11,460,068
Tenant improvements 1,193,476 1,234,416
21,026,928 21,082,074
Less accumulated depreciation (4,131,094) (3,683,523)
16,895,834 17,398,551
Real estate assets held for sale - 7,780,273
Cash and cash equivalents 736,429 1,480,034
Restricted cash 44,329 100,286
Accounts and other receivables, net of allowance
for doubtful accounts of $10,000 in 1996 30,188 31,304
Prepaid expenses, net of accumulated amortization
of $175,007 in 1996 and $111,997 in 1995 239,359 273,681
Incentives to lease, net of accumulated amortization
of $87,892 in 1996 and $54,794 in 1995 155,595 188,693
Deferred rent receivable 199,336 193,634
Total Assets $18,301,070 $27,446,456
Liabilities and Partners' Capital (Deficit)
Liabilities:
Accounts payable and accrued expenses $ 85,080 $ 142,956
Due to affiliates 3,658 38,810
Security deposits payable 40,070 100,286
Prepaid rent - 79,555
Total Liabilities 128,808 361,607
Partners' Capital (Deficit):
General Partner (547,912) (436,797)
Limited Partners (1,124,000 units outstanding) 18,720,174 27,521,646
Total Partners' Capital 18,172,262 27,084,849
Total Liabilities and Partners' Capital $18,301,070 $27,446,456
Statement of Partners' Capital (Deficit)
For the years ended December 31, 1996, 1995 and 1994
General Limited
Partner Partners Total
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
Cash distributions (163,018) (12,083,149) (12,246,167)
Net income 51,903 3,281,677 3,333,580
Balance at December 31, 1996 $(547,912) $ 18,720,174 $ 18,172,262
Statements of Operations
For the years ended December 31, 1996 1995 1994
Income
Rental $2,706,140 $4,397,667 $4,387,259
Interest 201,466 142,161 11,912
Other 55,944 8,807 189,508
Total Income 2,963,550 4,548,635 4,588,679
Expenses
Property operating 1,131,167 1,403,161 1,407,195
Depreciation and amortization 678,208 1,358,528 1,513,099
General and administrative 225,804 213,569 201,932
Bad debt expense - - 16,905
Total Expenses 2,035,179 2,975,258 3,139,131
Income before gain on sale of real estate 928,371 1,573,377 1,449,548
Gain on sale of real estate 2,405,209 1,088,860 -
Net Income $3,333,580 $2,662,237 $1,449,548
Net Income Allocated:
To the General Partner $ 51,903 $ 58,090 $ 43,486
To the Limited Partners 3,281,677 2,604,147 1,406,062
$3,333,580 $2,662,237 $1,449,548
Per limited partnership unit
(1,124,000 outstanding) $2.92 $2.32 $1.25
Statements of Cash Flows
For the years ended December 31, 1996 1995 1994
Cash Flows From Operating Activities:
Net income $ 3,333,580 $ 2,662,237 $ 1,449,548
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 678,208 1,358,528 1,513,099
Gain on sale of real estate (2,405,209) (1,088,860) -
Increase (decrease) in cash arising from
changes in operating assets and liabilities:
Restricted cash 55,957 51,876 212,198
Accounts receivable 1,116 (12,567) 47,928
Prepaid expenses (42,564) 51,564 (358,425)
Incentives to lease - 58,957 (302,444)
Deferred rent receivable (5,702) 76,067 7,072
Accounts payable and accrued expenses (57,876) (208,995) 117,214
Due to affiliates (35,152) 2,055 (53,639)
Security deposits payable (60,216) (51,876) 30,366
Prepaid rent (79,555) 75,470 (238,479)
Net cash provided by operating activities 1,382,587 2,974,456 2,424,438
Cash Flows From Investing Activities:
Proceeds from sale of real estate assets 10,210,955 9,714,490 -
Additions to real estate (90,980) (211,470) (1,691,770)
Net cash provided by (used for) investing
activities 10,119,975 9,503,020 (1,691,770)
Cash Flows From Financing Activities:
Cash distributions (12,246,167) (11,138,328) (1,390,516)
Net cash used for financing activities (12,246,167) (11,138,328) (1,390,516)
Net increase (decrease) in cash and cash
equivalents (743,605) 1,339,148 (657,848)
Cash and cash equivalents, beginning of
year 1,480,034 140,886 798,734
Cash and cash equivalents, end of year $ 736,429 $ 1,480,034 $ 140,886
Supplemental Schedule of Non-Cash Investing
Activities:
Write-off of fully depreciated building
improvements $ 120,653 $ 33,152 $ 5,476,432
Notes to the Financial Statements
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December 31, 1996, 1995 and 1994
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 four of the Participating Investments funded. One Participating
Investment was sold during 1989 and two of the four properties directly owned
by the Partnership were sold during 1995 and 1996. The Partnership now leases
and operates the remaining two 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 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 was actively involved in the management of the Partnership since it
was formed, the resignation of Phoenix 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 legal
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.
2. Significant Accounting Policies
Real Estate Investments - Buildings and personal property 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 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.
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.
Rental Income and Deferred Rent - 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 and 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 - On May 30, 1986, the Partnership acquired the land and
participating mortgage loan receivable on 1899 Powers Ferry ("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 totaled $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, 1996 and 1995, Powers Ferry was 84% and 94% 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.
Sunnyvale R&D is 100% leased to a single tenant Tandem Computers Inc.
("Tandem") as of December 31, 1996. 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.
Pebblebrook Apartments was sold on May 23, 1996 for a net sales price of
$10,210,955. The transaction resulted in a gain on sale of $2,405,209.
4. Leases and Rental Revenues
The following is a schedule of future minimum annual rental payments for Powers
Ferry and Sunnyvale R&D based on non-cancelable leases as of December 31, 1996
assuming no exercise of tenant renewal options:
1997 $ 1,936,138
1998 1,846,046
1999 1,042,801
2000 637,679
2001 468,694
Thereafter _
$ 5,931,358
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 lease at Sunnyvale R&D is triple net with the
tenant paying its pro-rata share of operating expenses.
Tandem, occupying 100% of the Sunnyvale R&D building, generated rental revenue
in excess of 10% of the Partnership's rental revenues for the years ended
December 31, 1996, 1995 and 1994. For the years ended December 31, 1996, 1995
and 1994, Tandem has contributed $859,126 (32%), $859,126 (20%), and $846,491
(19%), respectively, of the Partnership's rental income and is current on its
rent payments.
5. Transactions With Related Parties
Certain cash and cash equivalents were on deposit with an affiliate of a
General Partner during a portion of 1996 and all of 1995. As of December 31,
1996, no cash and cash equivalents were on deposit with an affiliate of the
General Partner or the Partnership.
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 totaling $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 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 totaled $17,382, $10,428 and
$8,111 in 1996, 1995 and 1994, respectively.
c) The Partnership has agreed to reimburse the General Partner 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 Partner 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, amounts due to affiliates of the Partnership are as follows:
1996 1995
Accounts payable to the General Partner and affiliates:
Asset management fee $3,476 $38,744
Out - of - pocket expenses 182 66
Total accounts payable to affiliates $3,658 $38,810
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. At
December 31, 1996 the Unit Holders have not yet received their cumulative
preferred return.
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 $12,083,149, $10,999,131, and $1,348,800 to the Unit Holders in
1996, 1995 and 1994, respectively. In addition, the Partnership distributed
$163,018, $139,197 and $41,716 to the General Partners in 1996, 1995 and 1994.
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, 1996, in the first quarter of 1997.
7. 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,
1996 1995 1994
Financial statement basis net income $ 3,333,580 $2,662,237 $1,449,548
Financial statement amortization over
(under) tax basis amortization (12,285) (328,909) 302,281
Financial statement depreciation over
(under) tax basis depreciation (106,954) 157,590 (82,705)
Financial statement rental income (over)
under tax basis rental income (85,257) 151,538 (231,408)
Financial statement gain on sale of property
under tax basis gain on sale of property (2,213,064) 70,288 -
Other 305 30,944 (24,774)
(2,417,255) 81,451 (36,606)
Federal income tax basis net income $ 916,325 $2,743,688 $1,412,942
Reconciliation of financial statement partners' capital to federal income tax
basis partners' capital:
Year Ended December 31,
1996 1995 1994
Financial statement basis partners'
capital $18,172,262 $27,084,849 $35,560,940
Current year financial statement basis
net income under federal income
tax basis net income (loss) (2,417,255) 81,451 (36,606)
Other - - -
Current year accrued distribution - - -
Cumulative Federal income tax basis
net income over financial statement
net income 12,157,552 12,076,101 12,112,707
Federal income tax basis partners'
capital $27,912,559 $39,242,401 $47,637,041
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, 1996 and 1995, 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, 1996. 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 as of December 31, 1996 and 1995, and the results of
its operations and its cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 4, 1997
Net Asset Valuation
---------------------
Comparison of Acquisition Costs to Appraised Value and Determination of Net
Asset Value Per $26.34 Unit at December 31, 1996 (Unaudited)
Acquisition 1996 Appraised
Property Date of Acquisition Cost (1) Value (2)
Sunnyvale R&D 08-28-86 $ 11,185,961 $ 10,200,000
1899 Powers Ferry 07-07-87 8,916,095 7,300,000
$ 20,102,056 17,500,000
Cash and cash equivalents 736,429
Restricted cash 44,329
Accounts receivable 30,188
Prepaid expenses 6,269
18,317,215
Less:
Total liabilities (128,808)
Partnership Net Asset Value (3) $ 18,188,407
Net Asset Value Allocated:
Limited Partners $ 18,006,523
General Partner 181,884
$ 18,188,407
Net Asset Value Per Unit
(1,124,000 Units outstanding) $16.02
(1) Purchase price plus General Partners' acquisition fees.
(2) This represents the Partnership's share of the December 31, 1996 Appraised
Values which were determined by an independent property appraisal firm.
(3) The Net Asset Value assumes a hypothetical sale at December 31, 1996 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.
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
------------------------------------------
The Partners
Participating Development Fund 86:
Under date of February 4, 1997 we reported on the balance sheets of
Participating Development Fund 86 (a Connecticut limited partnership) as of
December 31, 1996 and 1995, 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, 1996, as contained in the 1996 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 1996. In connection
with our audits of the aforementioned financial statements, we also 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 4, 1997
Schedule III - Real Estate and Accumulated Depreciation December 31, 1996
Sunnyvale 1899
Office Buildings: R & D Powers Ferry Total
Location Sunnyvale, CA Marietta, GA na
Construction date 1986 1986 na
Acquisition date 08-28-86 07-07-87 na
Life on which depreciation
in latest income statements
is computed (3) (3) na
Encumbrances - - -
Initial cost to Partnership (1):
Land 6,336,962 2,050,628 8,387,590
Buildings and
improvements 4,848,999 6,774,215 11,623,214
Costs capitalized
subsequent to acquisition:
Land, buildings
and improvements 3,141,469 2,254,573 5,396,042
Retirements (2,976,402) (1,403,516) (4,379,918)
Gross amount at which
carried at close of period:
Land $ 6,336,962 $ 2,050,628 $ 8,387,590
Buildings and
improvements 5,014,066 7,625,272 12,639,338
11,351,028 9,675,900 21,026,928
Accumulated depreciation 1,551,841 2,579,253 4,131,094
(1) Represents aggregate cost for both financial reporting and Federal
income tax purposes.
(2) The amount of accumulated depreciation for Federal income tax purposes is
$5,371,049.
(3) Buildings and personal property : 5 - 35 years, tenant improvements :
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, 1996, 1995, and 1994 follows:
1996 1995 1994
Real estate investments:
Beginning of year $30,909,245 $42,595,901 $46,380,563
Additions 90,980 211,470 1,691,770
Retirements (120,653) (33,151) (5,476,432)
Dispositions (9,852,644) (11,864,975) -
End of year $21,026,928 $30,909,245 $42,595,901
Accumulated depreciation:
Beginning of year $ 5,730,421 $ 7,744,521 $11,772,231
Depreciation expense 568,224 1,251,637 1,448,722
Retirements (120,653) (26,391) (5,476,432)
Dispositions (2,046,898) (3,239,346) -
End of year $ 4,131,094 $ 5,730,421 $ 7,744,521
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Participating Development Fund 86
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> December-31-1996
<PERIOD-END> December-31-1996
<CASH> 736,429
<SECURITIES> 000
<RECEIVABLES> 40,188
<ALLOWANCES> (10,000)
<INVENTORY> 000
<CURRENT-ASSETS> 000
<PP&E> 21,026,928
<DEPRECIATION> (4,131,094)
<TOTAL-ASSETS> 18,301,070
<CURRENT-LIABILITIES> 70,580
<BONDS> 000
<COMMON> 000
000
000
<OTHER-SE> 18,172,262
<TOTAL-LIABILITY-AND-EQUITY> 18,301,070
<SALES> 2,706,140
<TOTAL-REVENUES> 2,963,550
<CGS> 000
<TOTAL-COSTS> 1,131,167
<OTHER-EXPENSES> 904,012
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> 000
<INCOME-PRETAX> 928,371
<INCOME-TAX> 000
<INCOME-CONTINUING> 928,371
<DISCONTINUED> 000
<EXTRAORDINARY> 2,405,209
<CHANGES> 000
<NET-INCOME> 3,333,580
<EPS-PRIMARY> 2.92
<EPS-DILUTED> 2.92
</TABLE>
