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, 1997
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
A Real Estate Limited Partnership
Exact name of registrant as specified in its charter
Connecticut 06-1153833
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
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,
1997 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, previous unfavorable market conditions limited 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, 1997 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, 1997 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, 1997 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, 1997
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, 1997 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 "Message to Investors" 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, 1997, 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 1997.
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, 1997, there were 7,660 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, 1997 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, 1997 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, 1997 filed as an exhibit under Item 14.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
At December 31, 1997, the Partnership had cash and cash equivalents of
$739,170, largely unchanged from $736,429 at December 31, 1996. The cash and
cash equivalents balance includes funds held as a working capital reserve to
fund tenant improvements and leasing commissions. Net cash provided by
operating activities totaled $1,415,035 for the year ended December 31, 1997,
also largely unchanged from $1,382,587 for the year ended December 31, 1996.
The Partnership also maintains a restricted cash balance, which is comprised of
tenant security deposits. Restricted cash totaled $39,381 at December 31,
1997, compared with $44,329 at December 31, 1996.
Deferred leasing costs, net of accumulated amortization, totaled $180,242 at
December 31, 1997, compared with $233,090 a year earlier. The decrease
reflects scheduled leasing cost amortization during the year.
Prepaid rent totaled $71,594 at December 31, 1997, compared to $0 at December
31, 1996. The 1997 balance represents January 1998 rent prepayments by the
tenant at the Sunnyvale property.
Cobb County, Georgia, has notified the Partnership of its intent, under its
powers of eminent domain, to condemn a portion of the land at Powers Ferry for
the widening of Powers Ferry Road. The condemnation may occur in 1998,
however, the Partnership has not yet received a formal notice of condemnation
from Cobb County. The condemnation may have a substantial impact on the value
of the property since the road will be moved closer to the building, the
driveway will be relocated and reduced in size and the vast majority of the
landscaping in front of the building will be removed. Cobb County will be
required, as a part of the process, to compensate the Partnership for the
portion of the land actually taken and any consequential damages (damages
occurring to the portion of the property not taken). The Partnership has
retained legal counsel to ensure that it is sufficiently compensated for any
damages that may result from the condemnation.
The Partnership paid cash distributions to the Limited Partners of $1.20 per
Unit for the year ended December 31, 1997. Further details regarding cash
distributions is incorporated herein by reference to the section entitled
"Message to Investors" contained in the Partnership's Annual Report to
Unitholders for the year ended December 31, 1997 filed as an exhibit under Item
14. As a result of improving local market conditions, the General Partner has
decided to begin marketing Sunnyvale R&D and 1899 Powers Ferry for sale. In
light of this decision, the Partnership may need to make capital improvements
to better position the properties for sale. In order to fund these improvements
and maintain adequate cash reserves, cash distributions may be reduced or
suspended in the future. The timing and amount of future cash distributions
will be determined quarterly and will depend on the adequacy of the
Partnership's cash flow from operations and cash reserve requirements.
A discussion of leasing activity and material leases at the Partnership's
Properties is incorporated by reference to the section entitled "Message to
Investors " 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, 1997, filed as an exhibit under Item 14. As of
December 31, 1997, lease levels at each of the Properties were as follows:
Sunnyvale R&D - 100%; 1899 Powers Ferry - 87%.
Results of Operations
1997 Versus 1996
The Partnership's operations resulted in net income of $714,981 for the year
ended December 31, 1997, compared to $3,333,580 for the year ended December 31,
1996. Net income in 1996 included a gain from the sale of Pebblebrook
Apartments of $2,405,209. Excluding this gain, income before gain on sale of
real estate totaled $928,371 in 1996. The decrease from 1996 to 1997 is
primarily a result of the sale of Pebblebrook and the resulting reduction in
rental income.
As a result of the sale of Pebblebrook Apartments, the following income and
expense categories decreased from 1996 to 1997: rental income, property
operating expense and depreciation and amortization. Rental income for the
Partnership's two remaining properties, Sunnyvale R&D and 1899 Powers Ferry
(the "Remaining Properties") totaled $2,062,875 for the year ended December 31,
1997, largely unchanged from $2,065,537 in 1996.
Interest income totaled $33,664 for the year ended December 31, 1997, compared
to $201,466 for the year ended December 31, 1996. The decrease is largely due
to the Partnership's lower average cash balance in 1997.
Property operating expenses for the Remaining Properties totaled $571,035 for
the year ended December 31, 1997, compared with $817,102 in 1996. The decrease
is primarily a result of lower repairs and maintenance, real estate taxes and
administrative expenses at 1899 Powers Ferry. General and administrative
expenses totaled $220,607 for the year ended December 31, 1997, largely
unchanged from $225,804 in 1996, as decreases in legal, appraisal and other
professional fees were offset by increases in audit expense and printing costs.
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%.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to the Partnership's Annual Report to Unitholders for
the year ended December 31, 1997 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
Rocco F. Andriola Director
Jeffrey C. Carter Director and President
Michael T. Marron Vice President and Chief Financial Officer
Rocco F. Andriola, 39, is a Managing Director of Lehman Brothers in its
Diversified Asset Group and has held such position since October 1996. Since
joining Lehman in 1986, Mr. Andriola has been involved in a wide range of
restructuring and asset management activities involving real estate and other
direct investment transactions. From June 1991 through September 1996, Mr.
Andriola held the position of Senior Vice President in Lehman's Diversified
Asset Group. From June 1989 through May 1991, Mr. Andriola held the position
of First Vice President in Lehman's Capital Preservation and Restructuring
Group. From 1986 to 1989, Mr. Andriola served as a Vice President in the
Corporate Transactions Group of Shearson Lehman Brothers' office of the general
counsel. Prior to joining Lehman, Mr. Andriola practiced corporate and
securities law at Donovan Leisure Newton & Irvine in New York. Mr. Andriola
received a B.A. from Fordham University, a J.D. from New York University School
of Law, and an LL.M in Corporate Law from New York University's Graduate School
of Law.
Jeffrey C. Carter, 52, is a Senior Vice President of Lehman Brothers in the
Diversified Asset Group. Mr. Carter joined Lehman Brothers in September 1988.
From 1972 to 1988, Mr. Carter held various positions with Helmsley-Spear
Hospitality Services, Inc. and Stephen W. Brener Associates, Inc. including
Director of Consulting Services at both firms. From 1982 through 1987, Mr.
Carter was President of Keystone Hospitality Services, an independent hotel
consulting and brokerage company. Mr. Carter received his B.S. degree in Hotel
Administration from Cornell University and an M.B.A. degree from Columbia
University.
Michael T. Marron, 34, is a Vice President of Lehman Brothers and has been a
member of the Diversified Asset Group since 1990 where he has actively managed
and restructured a diverse portfolio of syndicated limited partnerships. Prior
to joining Lehman Brothers, Mr. Marron was associated with Peat Marwick
Mitchell & Co. serving in both its audit and tax divisions from 1985 to 1989.
Mr. Marron received his B.S. degree from the State University of New York at
Albany and an M.B.A. from Columbia University.
Certain Matters Involving Affiliates of RE Services
On July 31, 1993, Shearson Lehman Brothers, Inc. sold certain of its domestic
retail brokerage and asset management businesses to Smith Barney, Harris Upham
& Co. Incorporated ("Smith Barney"). Subsequent to the sale, Shearson changed
its name to Lehman Brothers Inc. The transaction did not affect the ownership
of the Partnership's General Partner. However, the assets acquired by Smith
Barney included the name "Shearson." Consequently, the Shearson Lehman
Brothers/PDF 86, Inc. general partner changed its name to 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' Capital (Deficit)" 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, 1997.
(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, 1997.
(c)Changes in Control
None.
Item 13. Certain Relationships and Related Transactions
(a)Transactions With Management and Others
Incorporated by reference to Note 5 "Transactions with Related Parties" and
Note 6 "Partners'Capital (Deficit)" of the Notes to the Financial Statements
contained in the Partnership's Annual Report to Unitholders for the year ended
December 31, 1997 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, 1997 and 1996 (1)
Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 (1)
Statements of Partners' Capital (Deficit)
for the Years Ended December 31, 1997, 1996 and 1995 (1)
Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 (1)
Notes to the Financial Statements (1)
Independent Auditors' Report (1)
(a)(ii) Financial Statement Schedule
Independent Auditors' Report 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, 1997.
(b) No reports on form 8-K were filed in the fourth quarter of the
calendar year 1997.
(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,
1997.
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.
PARTICIPATING DEVELOPMENT FUND 86
BY: PDF86 Real Estate Services Inc.
General Partner
Date: March 30, 1998 BY: /s/Jeffrey C. Carter
Jeffrey C. Carter
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 30, 1998 BY: /s/Jeffrey C. Carter
Jeffrey C. Carter
President and Director
Date: March 30, 1998 BY: /s/Rocco F. Andriola
Rocco F. Andriola
Director
Date: March 30, 1998 BY: /s/Michael T. Marron
Michael T. Marron
Vice President and
Chief Financial Officer
Exhibit 13
Participating Development Fund 86
1997 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 and two of the Partnership's properties have been sold. 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, 1997 and 1996.
Percentage Leased
Property Location 1997 1996
Sunnyvale R&D Sunnyvale, CA 100% 100%
1899 Powers Ferry Atlanta, GA 87% 84%
Contents
1 Message to Investors
3 Financial Highlights
4 Financial Statements
7 Notes to the Financial Statements
13 Report of Independent Auditors
14 Net Asset Valuation
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 1997 Annual Report for Participating Development
Fund 86 (the "Partnership"). Included in this report is an update on market
conditions and operations at the Partnership's remaining properties, Sunnyvale
R & D and 1899 Powers Ferry. Also included are financial highlights and the
Partnership's 1997 audited financial statements.
Market Update
The commercial office market continued to improve during 1997, with a strong
economy boosting demand for office space in most areas of the country. Atlanta
and Silicon Valley, where the Partnership's properties are located, both
reflected these positive trends. In Atlanta, the strong local economy and
continuing influx of new businesses gave rise to an increase in rental rates
from 1996 to 1997, while vacancy rates in the Northwest submarket where 1899
Powers Ferry is located, were at 7.6% at year end. In Silicon Valley, demand
for research and development facilities such as the Partnership's remained
high, and the region continues to rank among the strongest markets nationwide.
As of third quarter 1997, vacancy rates declined to 4.4% from 5% a year earlier
and rental rates continue to gradually increase. Although construction of new
properties has commenced in Atlanta and Silicon Valley, it is expected that
operating conditions will remain stable in both markets in the near term.
Property Update
As a result of these strong operating conditions, we will begin marketing the
properties for sale and are in the process of selecting a broker to assist with
these efforts. While we currently anticipate that they will be sold and the
Partnership liquidated in 1998, there can be no assurance that either property
will be sold within this time frame, or that a sale will result in a particular
price. Once the properties are sold, the General Partner will distribute the
net proceeds together with the Partnership's remaining cash reserves (after
payment of or provision for, the Partnership's liabilities and expenses) and
dissolve the Partnership.
Sunnyvale R & D Sunnyvale, California
Tandem Computers Inc. ("Tandem"), which leases 100% of Sunnyvale R & D,
continues to sublease the entire space to a computer networking company. Tandem
is responsible for all lease obligations through the scheduled expiration of
the lease, on March 31, 1999.
1899 Powers Ferry Atlanta, Georgia
At 1899 Powers Ferry, leasing activity was minimal during 1997, with one new
lease for 874 square feet executed during the year and a tenant occupying 2,985
square feet pursuant to a lease which expired on September 30, 1997, continuing
to occupy its space on a month-to-month basis. Another tenant representing 700
square feet, vacated its space upon expiration of the lease. As a result, the
property was 87% leased at December 31, 1997, up slightly from 84% a year
earlier. In the coming year, three leases totaling 10,275 square feet, or
approximately 11% of the property's leasable area, are scheduled to expire. The
General Partner is negotiating renewals with two of the tenants and has a lease
out for signiture representing 3,311 square feet scheduled to close subsequent
to the end of first quarter 1998.
As previously reported, Cobb County, Georgia has notified the Partnership of
its intent, under the powers of eminent domain, to condemn a portion of the
land at Powers Ferry for the widening of Powers Ferry Road. The condemnation
may occur in 1998, however, the Partnership has not yet received a formal
notice of condemnation from Cobb County. The condemnation may have a
substantial impact on the value of the property since the road will be moved
closer to the building, the driveway will be relocated and reduced in size and
the vast majority of the landscaping in front of the building will be removed.
Cobb County will be required to compensate the Partnership for the portion of
the land actually taken and any consequential damages (damages occurring to the
portion of the property not taken). The Partnership has retained legal counsel
to ensure that it is sufficiently compensated for any damages that may result
from the condemnation.
Cash Distributions
The Partnership paid cash distributions to Limited Partners totaling $1.20 per
Unit for the year ended December 31, 1997, 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, 1998. Since inception, the
Partnership has paid total cash distributions of $42.46 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
1996 $0.851 $0.30 $9.302 $0.30 $ 10.75
1997 $0.30 $0.30 $0.30 $0.30 $ 1.20
1 Includes a special one-time cash distribution of $0.55 per
Unit paid on March 29, 1996.
2 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, several third parties have commenced tender offers
to purchase Units of the Partnership at prices which are below the
Partnership's estimate of net asset value per Unit. In response, we
recommended that Limited Partners reject these offers because we believe that
they do not reflect the underlying value of the Partnership's assets. According
to published industry sources, most of the investors who hold units of limited
partnerships similar to the Partnership have rejected these types of tender
offers due to their inadequacy.
Summary
As a result of the improving local market conditions and favorable capital
markets, the General Partner has decided to begin marketing Sunnyvale R&D and
1899 Powers Ferry for sale. We are currently in the process of selecting a
real estate broker to assist with our efforts to sell both of the Partnership's
properties. While we are hopeful that the properties will be sold in 1998,
there can be no assurance as to when the sales will occur or that the sales
will result in a particular price. In the interim, we will continue 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/Jeffrey C. Carter
Jeffrey C. Carter
President
March 30, 1998
Financial Highlights
For The Years Ended December 31,
1997 1996 1995 1994 1993
Dollars in thousands
except per Unit data
Total revenues $2,142 $2,964 $4,549 $4,589 $4,101
Total expenses 1,427 2,035 2,975 3,139 3,169
Gain on sale of
real estate - 2,405 1,089 - -
Net income 715 3,334 2,662 1,450 932
Total assets 17,709 18,301 27,446 36,106 36,191
Net income per Unit .62 2.92 2.32 1.25 .80
Cash distributions per
Limited Partnership Unit 1.20 10.75(1) 9.79(2) 1.20 2.70
(1) 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.
(2) Includes $8.59 in return of capital from the sale of Foothills Tech Plaza
paid on November 24, 1995.
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 1997 primarily as a result of
the sale of Pebblebrook Apartments in 1996.
- - The decrease in net income is primarily attributable to the gain on the sale
of Pebblebrook Apartments in 1996. Income before the gain totaled $928,371
in 1996. The decrease from 1996 to 1997 is primarily a result of the sale of
Pebblebrook and the resulting reduction in rental income.
Balance Sheets At December 31, At December 31,
1997 1996
Assets
Real estate, at cost:
Land $8,387,590 $8,387,590
Buildings
and personal property 11,450,426 11,445,862
Tenant improvements 915,023 1,193,476
20,753,039 21,026,928
Less accumulated
depreciation (4,372,698) (4,131,094)
16,380,341 16,895,834
Cash and cash equivalents 739,170 736,429
Restricted cash 39,381 44,329
Accounts receivable, net of allowance
for doubtful accounts of $10,000 in 1996 44,091 30,188
Deferred leasing costs, net of
accumulated amortization
of $173,403 in 1997 and $175,007 in 1996 180,242 233,090
Incentives to lease, net of
accumulated amortization
of $113,606 in 1997 and $87,892 in 1996 123,652 155,595
Deferred rent receivable 195,868 199,336
Prepaid expenses 5,816 6,269
Total Assets $17,708,561 $18,301,070
Liabilities and Partners' Capital (Deficit)
Liabilities:
Accounts payable and accrued expenses $ 93,906 $ 85,080
Due to General Partner 6,953 3,658
Security deposits payable 39,381 40,070
Prepaid rent 71,594 -
Total Liabilities 211,834 128,808
Partners' Capital (Deficit):
General Partner (568,179) (547,912)
Limited Partners (1,124,000
units outstanding) 18,064,906 18,720,174
Total Partners' Capital 17,496,727 18,172,262
Total Liabilities and
Partners' Capital $17,708,561 $18,301,070
Statement of Partners' Capital (Deficit)
For the years ended December 31, 1997, 1996 and 1995
General Limited
Partner Partners Total
Balance at December 31, 1994 $(355,690) $35,916,630 $35,560,940
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
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
Distributions (41,716) (1,348,800) (1,390,516)
Net income 21,449 693,532 714,981
Balance at December 31, 1997 $(568,179) $18,064,906 $17,496,727
Statements of Operations
For the years ended
December 31, 1997 1996 1995
Income
Rental $2,062,875 $2,706,140 $4,397,667
Interest 33,664 201,466 142,161
Other 45,631 55,944 8,807
Total Income 2,142,170 2,963,550 4,548,635
Expenses
Property operating 575,893 1,131,167 1,403,161
Depreciation and amortization 630,689 678,208 1,358,528
General and administrative 220,607 225,804 213,569
Total Expenses 1,427,189 2,035,179 2,975,258
Income before gain on
sale of real estate 714,981 928,371 1,573,377
Gain on sale of real estate - 2,405,209 1,088,860
Net Income $ 714,981 $3,333,580 $2,662,237
Net Income Allocated:
To the General Partner $ 21,449 $ 51,903 $ 58,090
To the Limited Partners 693,532 3,281,677 2,604,147
$714,981 $3,333,580 $2,662,237
Per limited partnership unit
(1,124,000 outstanding) $.62 $2.92 $2.32
Statements of Cash Flows
For the years ended December 31, 1997 1996 1995
Cash Flows From Operating
Activities:
Net income $ 714,981 $ 3,333,580 $ 2,662,237
Adjustments to reconcile
net income to net cash
provided by operating activities:
Depreciation 537,271 678,208 1,251,637
Amortization 93,418 - 106,891
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 4,948 55,957 51,876
Accounts receivable (13,903) 1,116 (12,567)
Prepaid expenses 453 (42,564) 51,564
Deferred leasing costs (8,627) - -
Incentives to lease - - 58,957
Deferred rent receivable 3,468 (5,702) 76,067
Accounts payable and
accrued expenses 8,826 (57,876) (208,995)
Due to General Partner 3,295 (35,152) 2,055
Security deposits payable (689) (60,216) (51,876)
Prepaid rent 71,594 (79,555) 75,470
Net cash provided by
operating activities 1,415,035 1,382,587 2,974,456
Cash Flows From
Investing Activities:
Proceeds from sale
of real estate - 10,210,955 9,714,490
Additions to real estate (21,778) (90,980) (211,470)
Net cash (used for) provided
by investing activities (21,778) 10,119,975 9,503,020
Cash Flows From
Financing Activities:
Cash distributions (1,390,516) (12,246,167) (11,138,328)
Net cash used for
financing activities (1,390,516) (12,246,167) (11,138,328)
Net increase (decrease) in
cash and cash equivalents 2,741 (743,605) 1,339,148
Cash and cash equivalents,
beginning of year 736,429 1,480,034 140,886
Cash and cash equivalents,
end of year $ 739,170 $ 736,429 $ 1,480,034
Supplemental Schedule of
Non-Cash Investing Activities:
Write-off of fully
depreciated tenant improvements $295,667 $120,653 $33,152
Notes to the Financial Statements
December 31, 1997, 1996 and 1995
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. ("RE Services"), 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 RE Services. The effective date of 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. Since RE Services 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."
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.
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, deferred leasing costs and incentives to lease are
amortized over the term of the related lease agreements using the straight-line
method.
Impairment of Long-Lived Assets 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"), requires the Partnership to assess its
real estate investments for impairment whenever events or changes in
circumstances indicate that the carrying amount of the real estate may not be
recoverable. Recoverability of real estate to be held and used is measured by
a comparison of the carrying amount of the real estate to future net cash flows
(undiscounted and without interest) expected to be generated by the real
estate. If the real estate is considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the real
estate exceeds the fair value of the real estate.
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 The carrying amount of trade receivables
and payables approximates fair value.
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 June 25, 1986, the
Partnership acquired 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, 1997 and 1996, Powers Ferry was 87% and 84% 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, 1997. 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 with an
option for an additional five years, by written notice, on or before six months
from the expiration of this extension period. The rental rate over the
additional option period will be equal to 95% of the fair market value for the
Sunnyvale market at the time of notice. 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
addition, Tandem has assigned the option rights for the sublessee to negotiate
with the Partnership.
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.
On April 16, 1991, the Partnership became the owner of the property in its
entirety through a special conveyance transaction.
On May 23, 1996 Pebblebrook Apartments was sold by the Partnership 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, 1997
assuming no exercise of tenant renewal options:
1998 $1,895,699
1999 1,078,098
2000 700,765
2001 511,173
Thereafter -
$4,185,735
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, 1997, 1996 and 1995. For the years ended December 31, 1997, 1996
and 1995, Tandem has contributed $859,126 (42%), $859,126 (32%), and $859,126
(20%), respectively, of the Partnership's rental income and is current on its
rent payments.
5. Transactions With Related Parties
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 $13,905, $17,382 and $10,428 in 1997, 1996 and 1995, respectively.
c) 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 General Partner are as
follows:
1997 1996
Asset management fee $6,953 $3,476
Out - of - pocket expenses - 182
Total due to General Partner $6,953 $3,658
6. Partners' Capital (Deficit)
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, 1997 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, 1997, 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 $1,348,800, $12,083,149, and $10,999,131 to the Unit Holders in
1997, 1996 and 1995, respectively. In addition, the Partnership distributed
$41,716, $163,018 and $139,197 to the General Partner in 1997, 1996 and 1995.
An additional cash distribution in the amount of $337,200 was paid to the Unit
Holders ($.30 per unit) and $10,428 was paid to the General Partner for the
quarter ended December 31, 1997, in the first quarter of 1998.
7. Condemnation Issue
Cobb County, Georgia, has notified the Partnership of its intent, under powers
of eminent domain, to condemn a portion of the land located at Powers Ferry for
the widening of Powers Ferry Road. The condemnation may occur in 1998, however,
the Partnership has not yet received a formal notice of condemnation from Cobb
County. The condemnation may have a substantial impact on the value of the
property since the road will be moved closer to the building, the driveway will
be relocated and reduced in size and the vast majority of the landscaping in
front of the building will be removed. Cobb County will be required, as a part
of the process, to compensate the Partnership for the portion of the land
actually taken and any consequential damages (damages occurring to the portion
of the property not taken). The Partnership has retained legal counsel to
ensure that it is sufficiently compensated for any damages that may result from
condemnation.
8. Reconciliation of Financial Statement Basis Net Income and Partners' Capital
to Federal Income Tax Basis Net Income and Partners' Capital
Reconciliation of financial statement basis net income to federal income tax
basis net income:
Year Ended
December 31,
1997 1996 1995
Financial statement
basis net income $714,981 $3,333,580 $2,662,237
Financial statement
amortization under
tax basis amortization (12,286) (12,285) (328,909)
Financial statement
depreciation over (under)
tax basis depreciation (20,870) (106,954) 157,590
Financial statement
rental income (over) under
tax basis rental income 75,063 (85,257) 151,538
Financial statement
gain on sale of property
(over) under tax basis
gain on sale of property - (2,213,064) 70,288
Other 291 305 30,944
42,198 (2,417,255) 81,451
Federal income tax basis
net income $757,179 $916,325 $2,743,688
Reconciliation of financial statement partners' capital to
federal income tax basis partners' capital:
Year Ended December 31,
1997 1996 1995
Financial statement basis
partners' capital $17,496,727 $18,172,262 $27,084,849
Current year financial
statement basis
net income (over)
under federal income
tax basis net income 42,198 (2,417,255) 81,451
Cumulative Federal
income tax basis
net income over
financial statement
net income 9,740,297 12,157,552 12,076,101
Federal income tax
basis partners' capital $27,279,222 $27,912,559 $39,242,401
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of
its operations and its cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 18, 1998
Net Asset Valuation
Comparison of Acquisition Costs to Appraised Value and Determination of
Net Asset Value Per $26.34 Unit at December 31, 1997 (Unaudited)
Acquisition 1997 Appraised
Property Date of Acquisition Cost (1) Value (2)
Sunnyvale R&D 08-28-86 $ 11,185,961 $ 15,500,000
1899 Powers Ferry 07-07-87 8,916,095 8,300,000
$ 20,102,056 23,800,000
Cash and cash equivalents 739,170
Accounts receivable 44,091
Prepaid expenses 5,816
24,589,077
Less:
Total liabilities (172,453)
Partnership Net Asset Value (3) $ 24,416,624
Net Asset Value Allocated:
Limited Partners $ 24,172,458
General Partner 244,166
$ 25,216,624
Net Asset Value Per Unit
(1,124,000 Units outstanding) $21.51
(1) Purchase price plus general partners' acquisition fees.
(2)This represents the Partnership's share of the December 31, 1997 appraised
values which were determined by an independent property appraisal firm.
(3)The Net Asset Value assumes a hypothetical sale at December 31, 1997 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.
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1997
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 3,146,034 2,271,786 5,417,820
Retirements (2,976,402) (1,699,183) (4,675,585)
Gross amount at which
carried at close of period:
Land $ 6,336,962 $ 2,050,628 $ 8,387,590
Buildings and
improvements 5,018,631 7,346,818 12,365,449
$ 11,355,593 $ 9,397,446 $ 20,753,039
Accumulated
depreciation $ 1,735,017 $ 2,637,681 $ 4,372,698
(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
$5,623,052.
(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, 1997, 1996, and 1995 follows:
1997 1996 1995
Real estate investments:
Beginning of year $21,026,928 $30,909,245 $42,595,901
Additions 21,778 90,980 211,470
Retirements (295,667) (120,653) (33,151)
Dispositions - (9,852,644) (11,864,975)
End of year $20,753,039 $21,026,928 $30,909,245
Accumulated depreciation:
Beginning of year $4,131,094 $ 5,730,421 $ 7,744,521
Depreciation expense 537,271 568,224 1,251,637
Retirements (295,667) (120,653) (26,391)
Dispositions - (2,046,898) (3,239,346)
End of year $4,372,698 $4,131,094 $ 5,730,421
INDEPENDENT AUDITORS' REPORT ON SCHEDULE III
The Partners
Participating Development Fund 86:
Under date of February 18, 1998, we reported on the balance sheets of
Participating Development Fund 86 (a Connecticut limited partnership) as of
December 31, 1997 and 1996, 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, 1997, as contained in the 1997 annual report to unitholders.
These financial statements and our report thereon are incorporated by reference
in the annual report on Form 10-K for the year 1997. In connection with our
audits of the aforementioned financial statements, we also have audited the
related financial statement 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 18, 1998
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> Dec-31-1997
<PERIOD-END> December-31-1997
<CASH> 739,170
<SECURITIES> 000
<RECEIVABLES> 44,091
<ALLOWANCES> 000
<INVENTORY> 000
<CURRENT-ASSETS> 000
<PP&E> 20,753,039
<DEPRECIATION> (4,372,698)
<TOTAL-ASSETS> 17,708,561
<CURRENT-LIABILITIES> 211,834
<BONDS> 000
<COMMON> 000
000
000
<OTHER-SE> 17,496,727
<TOTAL-LIABILITY-AND-EQUITY> 17,708,561
<SALES> 000
<TOTAL-REVENUES> 2,142,170
<CGS> 000
<TOTAL-COSTS> 575,893
<OTHER-EXPENSES> 851,296
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> 000
<INCOME-PRETAX> 714,981
<INCOME-TAX> 000
<INCOME-CONTINUING> 714,981
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> 714,981
<EPS-PRIMARY> .62
<EPS-DILUTED> .62
</TABLE>
