FORM 10-K-ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
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 [No Fee Required]
For the transition period from________to________
Commission file number 0-14194
VMS NATIONAL PROPERTIES JOINT VENTURE
(Exact name of registrant as specified in its charter)
Illinois 36-3311347
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Insignia Financial Plaza, P.O. Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (864) 239-1000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Units
(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 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 partnership interests held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the partnership interests were sold, or the
average bid and asked prices of such partnership interests, as of a specified
date within the past 60 days prior to the date of filing. Market value
information for Registrant's partnership interests is not available.
PART I
ITEM 1. BUSINESS
VMS National Properties Joint Venture (the "Venture" or the "Registrant"), of
which the general partners are VMS National Residential Portfolio I ("Portfolio
I") and VMS National Residential Portfolio II ("Portfolio II"), was formed in
September 1984. Collectively, Portfolio I and Portfolio II are referred to as
the "Partnerships". The Partnerships are limited partnerships formed in
September 1984, under the Uniform Limited Partnership Act of the State of
Illinois. Effective December 12, 1997, the managing general partner of each of
the Partnerships was transferred from VMS Realty Investment, Ltd. ("VMSRIL")
(formerly VMS Realty Partners) to MAERIL, Inc. ("MAERIL" or the "Managing
General Partner"), a wholly-owned subsidiary of MAE GP Corporation ("MAE GP")
and an affiliate of Insignia Financial Group, Inc. ("Insignia"). Effective
February 25, 1998, MAE GP was merged with Insignia Properties Trust ("IPT"),
which is an affiliate of Insignia. Thus, the Managing General Partner is now a
wholly-owned subsidiary of IPT. On March 17, 1998, Insignia entered into an
agreement to merge its national residential property management operations, and
its controlling interest in IPT, with Apartment Investment and Management
Company ("AIMCO"), a publicly traded real estate investment trust. The closing,
which is anticipated to happen in the third quarter of 1998, is subject to
customary conditions, including government approvals and the approval of
Insignia's shareholders. If the closing occurs, AIMCO will then control the
Managing General Partner of the Partnerships.
From the period October 26, 1984, through June 16, 1985, the Partnerships sold
912 Limited Partnership Interests at a price of $150,000 per Limited Partnership
Interest for a total of $136,800,000. The Interests of each Partnership were
offered in reliance upon exemptions from registration under the Securities Act
of 1933, as amended (the "ACT"), and Regulation D thereunder. The participation
interest in the Venture of Portfolio I and Portfolio II is approximately 71% and
29%, respectively.
The Venture originally acquired 51 residential apartment complexes located
throughout the United States. At December 31, 1997, 34 of the Venture's
properties had been foreclosed and two had been sold. The Venture continues to
own and operate the remaining 15 residential apartment complexes.
The Managing General Partner intends to maximize the operating results and,
ultimately, the net realizable value of each of the Venture's properties in
order to achieve the best possible return for the investors. Such results may
best be achieved through property sales, refinancings, debt restructurings or
relinquishment of the assets. The Venture intends to evaluate each of its
holdings periodically to determine the most appropriate strategy for each of the
assets.
The business in which the Venture is engaged is highly competitive, and the
Venture is not a significant factor in its industry. Each of its apartment
properties is located in or near a major urban area and, accordingly, competes
for rentals not only with similar apartment properties in its immediate area but
with hundreds of similar apartment properties throughout the urban area. Such
competition is primarily on the basis of location, rents, services and
amenities. In addition, the Venture competes with significant numbers of
individuals and organizations (including similar partnerships, real estate
investment trusts and financial institutions) with respect to the sale of
improved real properties, primarily on the basis of the prices and terms of such
transactions.
The Venture has no employees. Management and administrative services are
performed by affiliates of Insignia. The property manager is responsible for
the day-to-day operations of each property. The Managing General Partner has
also selected affiliates of Insignia to provide real estate advisory and asset
management services to the Venture. As advisor, such affiliates provide all
partnership accounting and administrative services, investment management, and
supervisory services over property management and leasing. For a further
discussion of property and partnership management, see "Item 13. Certain
Relationships and Related Transactions".
There have been, and it is possible there may be other, Federal, state and local
legislation and regulations enacted relating to the protection of the
environment. The Venture is unable to predict the extent, if any, to which such
new legislation or regulations might occur and the degree to which such existing
or new legislation or regulations might adversely affect the properties owned by
the Venture.
The Venture monitors its properties for evidence of pollutants, toxins and other
dangerous substances, including the presence of asbestos. In certain cases
environmental testing has been performed, which resulted in no material adverse
conditions or liabilities. In no case has the Venture received notice that it
is a potentially responsible party with respect to an environmental clean up
site.
As a result of financial difficulties, the Venture filed for Chapter 11
bankruptcy protection in the United States Bankruptcy Court in the Central
District of California on February 22, 1991 (see "Note B" of the combined
financial statements included in "Item 8. Financial Statements and Supplemental
Data"). This voluntary filing encompassed the Venture's non-HUD properties
only. In March 1993, the substance of the Venture's Plan of Reorganization (the
"Plan") was approved by the Bankruptcy Court and a Confirmation Order was
entered and the Plan became effective on September 30, 1993. During 1997, the
Plan was modified in order to allow the Venture to refinance the debt
encumbering its properties. The Managing General Partner anticipates that the
bankruptcy plan will be closed in 1998.
On December 29, 1997, the Venture refinanced the mortgages encumbering all of
its remaining properties (see "Item 2. Description of Properties" for a further
discussion).
ITEM 2. DESCRIPTION OF PROPERTIES
The following table sets forth the Venture's remaining investment in properties:
Date of
Property (1) Purchase Use
Buena Vista Apartments 10/26/84 Apartment -
Pasadena, CA 92 Units
Casa de Monterey 10/26/84 Apartment -
Norwalk, CA 144 Units
Crosswood Park 12/05/84 Apartment -
Citrus Heights, CA 180 Units
Mountain View Apartments 10/26/84 Apartment -
San Dimas, CA 168 Units
Pathfinder 10/26/84 Apartment -
Fremont, CA 246 Units
Scotchollow 10/26/84 Apartment -
San Mateo, CA 418 Units
The Bluffs 10/26/84 Apartment -
Milwaukee, OR 137 Units
Vista Village Apartments 10/26/84 Apartment -
El Paso, TX 220 Units
Chapelle Le Grande 12/05/84 Apartment -
Merrillville, IN 105 Units
North Park Apartments 11/14/84 Apartment -
Evansville, IN 284 Units
Shadowood Apartments 11/14/84 Apartment -
Monroe, LA 120 Units
Towers of Westchester Park 10/26/84 Apartment -
College Park, MD 303 Units
Terrace Gardens 10/26/84 Apartment -
Omaha, NE 126 Units
Watergate Apartments 10/26/84 Apartment -
Little Rock, AR 140 Units
Forest Ridge Apartments 10/26/84 Apartment -
Flagstaff, AZ 278 Units
(1) All properties are fee ownership, each subject to a first and second
mortgage.
SCHEDULE OF PROPERTIES (IN THOUSANDS):
<TABLE>
<CAPTION>
Gross
Carrying Accumulated Federal
Property Value Depreciation Method Rate Tax Basis
<S> <C> <C> <C> <C> <C>
Buena Vista $ 5,861 $ 3,007 SL/200% DBL 5-27.5 yrs. $ 1,748
Casa de Monterey 7,795 4,086 SL/200% DBL 5-27.5 yrs. 2,328
Crosswood Park 8,727 4,612 SL/150% DBL 5-29 yrs. 3,656
Mountain View 10,810 5,120 SL/200% DBL 5-29 yrs. 3,063
Pathfinder 15,189 7,709 SL/200% DBL 5-27.5 yrs. 5,974
Scotchollow 27,817 14,313 SL/150% DBL 5-27.5 yrs. 8,846
The Bluffs 4,306 2,438 SL/200% DBL 5-27.5 yrs. 1,043
Vista Village 6,590 3,299 SL 5-27.5 yrs. 2,089
Chapelle Le Grande 4,653 2,557 SL/200% DBL 5-27.5 yrs. 1,238
North Park 10,292 5,620 SL 200%/DBL 5-27.5 yrs. 2,805
Shadowood 4,228 2,326 SL 5-27.5 yrs. 1,176
Towers of Westchester Park 16,172 9,098 SL 5-27.5 yrs. 4,119
Terrace Gardens 5,880 2,984 SL/150% and 5-27.5 yrs. 1,945
200% DBL
Watergate 6,994 3,746 SL/200% DBL 5-27.5 yrs. 2,021
Forest Ridge 8,693 4,496 SL/150% and 5-27.5 yrs. 2,722
200% DBL
Total $144,007 $75,411 $44,773
<FN>
See "Note A" to the combined financial statements included in "Item 8. Financial
Statements and Supplementary Data" for a description of the Partnership's
depreciation policy.
</FN>
</TABLE>
SCHEDULE OF MORTGAGES (IN THOUSANDS):
Principal Principal
Balance At Balance
December 31, Interest Period Maturity Due At
Property 1997 Rate Amortized Date Maturity
Buena Vista
1st mortgage $ 5,023 8.50% 25 years 01/08 $ 4,171
2nd mortgage 1,364 10.84% (A) 01/08 (A)
Casa de Monterey
1st mortgage 4,159 8.50% 25 years 01/08 3,454
2nd mortgage 1,130 10.84% (A) 01/08 (A)
Crosswood Park
1st mortgage 5,645 8.50% 25 years 01/08 4,688
2nd mortgage 1,533 10.84% (A) 01/08 (A)
Mountain View
1st mortgage 7,257 8.50% 25 years 01/08 6,026
2nd mortgage 1,971 10.84% (A) 01/08 (A)
Pathfinder
1st mortgage 13,649 8.50% 25 years 01/08 11,336
2nd mortgage 3,707 10.84% (A) 01/08 (A)
Scotchollow
1st mortgage 29,541 8.50% 25 years 01/08 24,533
2nd mortgage 7,595 10.84% (A) 01/08 (A)
The Bluffs
1st mortgage 3,775 8.50% 25 years 01/08 3,135
2nd mortgage 1,025 10.84% (A) 01/08 (A)
Vista Village
1st mortgage 3,368 8.50% 25 years 01/08 2,797
2nd mortgage 915 10.84% (A) 01/08 (A)
Chapelle Le Grande
1st mortgage 3,253 8.50% 25 years 01/08 2,702
2nd mortgage 884 10.84% (A) 01/08 (A)
SCHEDULE OF MORTGAGES (IN THOUSANDS) (CONTINUED):
<TABLE>
<CAPTION>
Principal Principal
Balance At Balance
December 31, Interest Period Maturity Due At
Property 1997 Rate Amortized Date Maturity
<S> <C> <C> <C> <C> <C>
North Park
1st mortgage 6,339 8.50% 25 years 01/08 $ 5,264
2nd mortgage 1,722 10.84% (A) 01/08 (A)
Shadowood
1st mortgage 2,283 8.50% 25 years 01/08 1,896
2nd mortgage 620 10.84% (A) 01/08 (A)
Towers of Westchester Park
1st mortgage 12,286 8.50% 25 years 01/08 10,203
2nd mortgage 3,337 10.84% (A) 01/08 (A)
Terrace Gardens
1st mortgage 4,502 8.50% 25 years 01/08 3,739
2nd mortgage 1,223 10.84% (A) 01/08 (A)
Watergate
1st mortgage 2,938 8.50% 25 years 01/08 2,440
2nd mortgage 798 10.84% (A) 01/08 (A)
Forest Ridge
1st mortgage 5,982 8.50% 25 years 01/08 4,968
2nd mortgage 1,625 10.84% (A) 01/08 (A)
Total $139,449
<FN>
(A) Payments based on excess monthly cash flow at each property, with any unpaid
balance due at maturity.
</FN>
</TABLE>
Pursuant to the Plan of Reorganization, the mortgages formerly held by the FDIC
were modified effective September 30, 1993. The face value of the notes were
restated to agreed valuation amounts. Under the terms of the modification, the
lender may reinstate the full claim upon the default of any note. As a result,
the Venture deferred recognition of a gain of $54,053,000, which was the
difference between the note face amounts and the agreed valuation amounts of the
modified debt.
On December 29, 1997, the Venture refinanced the mortgages encumbering all of
its remaining 15 properties. The refinancing resulted in each property being
encumbered by new senior and junior loans. The senior loans each have an
interest rate of 8.5% per annum and require monthly payments of principal and
interest. The junior loans each have an interest rate of 10.84% per annum and
the monthly payments are based on excess monthly cash flow for each property.
All of the loans mature on January 1, 2008, and the senior loans include
prepayment penalties if paid prior to January 1, 2007. The senior loans
retained similar terms regarding note face amounts and agreed valuation amounts.
These new loans are recorded at the agreed valuation amount of $110,000,000,
which is less than the $152,225,000 face amount of the senior loans. If the
Venture defaults on the new mortgage notes payable or is unable to pay the
outstanding agreed valuation amounts upon maturity, then the note face amounts
become due. Accordingly, the Partnership deferred recognition of a gain of
$42,225,000, which is the difference between the refinanced note face amounts
and the agreed valuation amounts. All the loans are cross-collateralized but
they are not cross-defaulted. As a result of the refinancing, the Venture
recognized an extraordinary gain on extinguishment of debt of $10,303,000, of
which $11,828,000 is the result of a decreased difference between the note face
amounts and agreed valuation amounts for the refinanced mortgage notes as
compared to the old indebtedness. This gain was partially offset by debt
extinguishment costs of $41,000 and the write-off of discounts and loan costs on
the old debt of $1,484,000.
SCHEDULE OF RENTAL RATES AND OCCUPANCY:
Average Annual Average
Rental Rates Per Unit Occupancy
Property 1997 1996 1997 1996
Buena Vista $11,491 $11,132 99% 96%
Casa de Monterey 7,922 7,793 94% 93%
Crosswood Park 8,543 8,251 96% 97%
Mountain View 9,977 9,556 98% 96%
Pathfinder 11,618 10,537 96% 96%
Scotchhollow 12,467 10,896 98% 99%
The Bluffs 6,642 6,358 95% 96%
Vista Village 6,219 6,065 92% 89%
Chapelle Le Grande 7,945 7,641 97% 98%
North Park 5,843 5,543 96% 97%
Shadowood 6,156 5,940 92% 95%
Towers of Westchester Park 10,827 10,297 91% 95%
Terrace Gardens 8,524 7,961 94% 95%
Watergate 6,925 6,674 95% 95%
Forest Ridge 7,274 7,080 84% 85%
The Managing General Partner attributes the decrease in occupancy at Towers of
Westchester Park to increased competition from newly renovated properties in the
local market.
As noted under "Item 1. Business," the real estate industry is highly
competitive. All of the properties of the Venture are subject to competition
from other residential apartment complexes in the area. The Managing General
Partner believes that all of the properties are adequately insured. All of the
lease terms are for one year or less. No individual tenant leases 10% or more
of the available rental space.
Real estate taxes (in thousands) and rates in 1997 for each property were as
follows:
1997 1997
Taxes Rate
Buena Vista $ 65 1.15%
Casa de Monterey 77 1.18%
Crosswood Park 94 1.02%
Mountain View 110 1.16%
Pathfinder 204 1.51%
Scotchollow 319 1.24%
The Bluffs 60 1.16%
Vista Village 90 2.83%
Chapelle Le Grande 55 13.28%
North Park 173 11.71%
Shadowood 32 12.36%
Towers of Westchester Park 195 3.73%
Terrace Gardens 82 2.59%
Watergate 57 6.34%
Forest Ridge 90 1.00%
ITEM 3. LEGAL PROCEEDINGS
The Venture is unaware of any pending or outstanding litigation that is not of a
routine nature. The Managing General Partner believes that all such pending or
outstanding litigation will be resolved without a material adverse effect upon
the business, financial condition, or operations of the Venture.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The unit holders of the Partnerships did not vote on any matter during the
fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is not a public market for the Limited Partnership Interests.
As of December 31, 1997, there were 823 holders of record of Portfolio I and 332
holders of record of Portfolio II.
As of December 31, 1997, there have been no cash distributions to the limited
partners of either of the Partnerships. In accordance with the respective
Agreements of Limited Partnership, there are no material restrictions on the
Partnerships' ability to make cash distributions; future cash distributions are,
however, subject to the order of distributions stipulated by the Venture's Plan
of Reorganization. The source of future cash distributions is dependent upon
cash generated by the Venture's properties and cash generated through the sale
or refinancing of these properties.
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER INTEREST DATA):
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Total revenues from rental
operations $ 25,869 $ 25,200 $ 27,874 $ 30,012 $ 41,788
Extraordinary Item-Gain on
Extinguishment of Debt $ 10,303(D) $ 14,095(C) $ 34,598(C) $ 27,418(C) $ 137,141
Net Income $ 606 $ 1,823 $ 15,626 $ 2,890 $ 92,529(A,B)
Net Income per Limited
Partnership Interest
Portfolio I -
644 Interests $ 654(D) $ 1,961(C) $ 16,791(C) $ 3,105(C) $ 99,394(A,B)
Portfolio II -
268 Interests $ 646(D) $ 1,953(C) $ 16,791(C) $ 3,111(C) $ 99,510(A,B)
Tax Income (Loss) $ (7,991) $ 3,188 $ 21,385 $ 14,412 $ 175,890
Tax Income (Loss) per Limited
Partnership Interest
Portfolio I -
644 Interests $ (8,514) $ 3,426 $ 23,448 $ 15,801 $ 188,987
Portfolio II -
268 Interests (E) $ (8,514) $ 3,426 $ 23,448 $ 15,807 $ 189,047
Total assets $ 73,542 $ 76,779 $ 88,440 $ 111,232 $ 133,383(B)
Mortgage loans and notes $ 172,904 $153,066 $ 158,733 $ 178,061 $ 198,802(B)
<FN>
A)During its bankruptcy proceedings the Venture followed AICPA Statement of
Position 90-7, Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code (SOP 90-7). In accordance therewith, unamortized deferred
loan costs and imputed interest related to the Venture's properties included
in the bankruptcy of $3,088,000 and $6,821,000, respectively, were written
off as of the bankruptcy filing date.
B)The Venture's Plan of Reorganization became effective on September 30, 1993.
As a result of the implementation of the Plan, 19 of the Venture's properties
were foreclosed during 1993 creating a gain of approximately $89,573,000 in
order to adjust liabilities compromised by the Plan to the present value of
amounts to be paid; $54,053,000 of this extraordinary gain was deferred by
the Venture.
C)During 1994, 1995 and 1996 respectively, four, five and two of the Ventures
nonretained properties were foreclosed. As a result of these events, the
Venture recognized extraordinary gains on the extinguishment of the related
debt. As of December 31, 1996, all of the nonretained properties have been
foreclosed.
D)During 1997, all of the Ventures' properties were refinanced. As a result,
the Venture recognized an extraordinary gain on the extinguishment of debt.
E)During 1997, one Partnership interest was abandoned. In abandoning
Partnership Units, a limited partner relinquishes all right, title and
interest in the Partnership as of the date of abandonment. However, during
the year of abandonment, the Limited Partner will still be allocated his or
her share of the income or loss for that year.
The above selected financial data should be read in conjunction with the
combined financial statements and the related notes.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This item should be read in conjunction with the combined financial statements
and other items contained elsewhere in this report.
Results from Operations
1997 Compared with 1996
The Venture realized net income of approximately $606,000 for the year ended
December 31, 1997, compared to approximately $1,823,000 for the year ended
December 31, 1996. Included in net income for the year ended December 31, 1997,
is approximately $10,303,000 of extraordinary gain on extinguishment of debt
related to the refinancing of the Venture's properties on December 29, 1997.
Included in net income for the year ended December 31, 1996, is an extraordinary
gain on extinguishment of debt of approximately $14,095,000 resulting from the
foreclosures of two properties during 1996. Loss before extraordinary gain on
extinguishment of debt was approximately $9,697,000 for 1997 compared to
approximately $12,272,000 for 1996. The decrease in loss before extraordinary
items is primarily attributable to the write-down of investment properties and
the foreclosures of Weatheridge and Sierra Gardens during 1996, which caused a
reduction in expenses. Loss before extraordinary items for Weatheridge and
Sierra Gardens was approximately $2,480,000 in 1996. Included in this loss were
write-downs of investment properties of approximately $1,850,000 to adjust the
properties to their estimated fair market value. Included in other income in
1996 was approximately $59,000 in gains from the sales of Carlisle Square and
Bellevue Towers.
With respect to the remaining properties, the loss before extraordinary items
decreased by approximately $173,000. The decrease is primarily attributable to
increased rental revenue of approximately $1,500,000 due to increased rental
rates at all of the Venture's properties. General and administrative expenses
decreased as a result of decreases in professional and asset management fees.
Partially offsetting the increased rental revenue and the decreased general and
administrative expenses were increases in operating and interest expenses.
Operating expenses increased primarily as a result of an increase in leasing
costs in an effort to increase occupancy and rental revenue at the properties.
Interest expense increased as a result of increasing accrued interest balances
causing compounded interest on the unpaid balances to increase.
Included in operating expenses for the year ended December 31, 1997, is
approximately $737,000 in major repairs and maintenance composed primarily of
landscaping, exterior painting, exterior building repairs, and parking lot
repairs at Watergate, Mountain View, and Casa de Monterey. Included in
operating expenses for the year ended December 31, 1996, is approximately
$847,000 in major repairs and maintenance composed primarily of exterior
painting, exterior building repairs, landscaping, swimming pool repairs, and
parking lot repairs at Scotchollow, Crosswood, The Bluffs, and Mountain View.
1996 Compared with 1995
The Venture realized net income of approximately $1,823,000 for the year ended
December 31, 1996 compared to approximately $15,626,000 for the year ended
December 31, 1995. Included in net income for the year ended December 31, 1996,
is approximately $14,095,000 of extraordinary gain on extinguishment of debt
resulting from the foreclosures of two properties during 1996. Included in net
income for the year ended December 31, 1995, is approximately $34,598,000 of
extraordinary gain on extinguishment of debt resulting from the foreclosures of
five properties during 1995. Loss before extraordinary gain on extinguishment
of debt was approximately $12,272,000 for 1996 compared to approximately
$18,972,000 for 1995. The decrease in loss before extraordinary items is
primarily due to the write-down of investment properties and the foreclosures of
The Winery, Venetian Bridges - Canal Court, Venetian Bridges - Grand Canal I,
Venetian Bridges - Grand Canal II, and Pacific Hacienda during 1995, which
contributed to the decrease in expenses in 1996. During 1995, the Venture
recorded approximately $3,257,000 in write-downs of investment properties to
adjust the properties to their fair market value. Excluding the impact of 1996
foreclosures and sales, as discussed above, and the 1995 foreclosures, total
revenues for the year ended December 31, 1996, increased approximately 4%
compared to the same period of 1995. Total property expenses increased
approximately 1%.
The ordinary losses recognized for the write-downs of the carrying values of
properties to their estimated fair values related to the properties that were
foreclosed upon in 1996 and 1995. The ordinary losses were recognized pursuant
to EITF Abstract Issue No. 91-2, "Debtor's Accounting for Forfeiture of Real
Estate Subject to a Nonrecourse Mortgage" which prescribes that a "two-step"
approach method be used to fairly present the economic transaction upon
foreclosure events.
As part of the ongoing business plan of the Venture, the Managing General
Partner monitors the rental market environment of its investment properties to
assess the feasibility of increasing rents, maintaining or increasing occupancy
levels and protecting the Venture from increases in expense. As part of this
plan, the Managing General Partner attempts to protect the Venture from the
burden of inflation-related increases in expenses by increasing rents and
maintaining a high overall occupancy level. However, due to changing market
conditions, which can result in the use of rental concessions and rental
reductions to offset softening market conditions, there is no guarantee that the
Managing General Partner will be able to sustain such a plan.
Liquidity and Capital Resources
At December 31, 1997, the Venture had unrestricted cash and cash equivalents of
approximately $2,510,000 compared to approximately $1,788,000 at December 31,
1996. The net increase in cash and cash equivalents for the year ended December
31, 1997, was approximately $722,000 compared to a net decrease of approximately
$196,000 for the year ended December 31, 1996. Net cash used in operating
activities increased for the year ended December 31, 1997, primarily due to
interest paid as a result of the debt refinancing on December 29, 1997 (see
discussion below). Net cash used in investing activities increased for the year
ended December 31, 1997, compared to the corresponding period of 1996, as a
result of proceeds received from the sales of Bellevue Towers and Carlisle
Square in 1996. Net cash provided by financing activities increased in 1997
primarily due to proceeds received from the December 29, 1997 refinancing.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
expenditures required at the properties to adequately maintain the physical
assets and other operating needs of the Venture. Such assets are currently
thought to be sufficient for any near-term needs of the Venture.
On December 29, 1997, the Venture refinanced the mortgages encumbering all of
its remaining 15 properties. The refinancing resulted in each property being
encumbered by new senior and junior loans. The senior loans all have an
interest rate of 8.5% per annum and require monthly payment of principal and
interest. The junior loans all have an interest rate of 10.84% per annum and
the monthly payments are based on excess monthly cash flow for each property.
All of the loans mature on January 1, 2008. The senior loans are recorded at
the agreed valuation amount of $110,000,000, which is less than the $152,225,000
face amount of the senior loans. In accordance with the terms of the notes, if
the related junior note is prepaid and the outstanding agreed valuation amount
of the senior note is paid between January 1, 2007 and January 1, 2008, the
notes will be discharged without further liability. All of the loans are cross-
collateralized, but they are not cross-defaulted. As a result of the
refinancing, the Venture recognized an extraordinary gain on extinguishment of
debt of $10,303,000. The extraordinary gain is the result of the recognition of
$11,828,000 of the deferred gain on extinguishment of debt, which was reduced by
debt extinguishment costs of $41,000 and the write-off of discounts and loan
costs on the old debt of $1,484,000. The reduction in the deferred gain on
extinguishment of debt results from the reduction of the difference between the
aggregate note face amounts and the aggregate agreed valuation amounts. Under
the terms of the old notes, the aggregate note face amounts exceeded the
aggregate valuation amounts by $54,053,000. Under the terms of the new notes,
the aggregate note face amounts exceed the aggregate agreed valuation amounts by
$42,225,000.
No cash distributions were made by either of the Partnerships in 1997, 1996, or
1995. Future cash distributions are subject to the order of distributions
stipulated by the Venture's Plan of Reorganization. The source of future cash
distributions is dependent upon cash generated by the Venture's properties and
the cash generated through the sale or refinancing of these properties. No
distributions are anticipated in 1998.
Year 2000
The Venture is dependent upon the Managing General Partner and Insignia for
management and administrative services. Insignia has completed an assessment
and will have to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter (the "Year 2000 Issue"). The project is estimated to be completed not
later than December 31, 1998, which is prior to any anticipated impact on its
operating systems. The Managing General Partner believes that with
modifications to existing software and conversions to new software, the Year
2000 Issue will not pose significant operational problems for its computer
systems. However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Venture.
Other
Certain items discussed in this annual report may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "Reform Act") and as such may involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Venture to be materially different from any future
results, performance, or achievements expressed or implied by such forward-
looking statements. Such forward-looking statements speak only as of the date
of this annual report. The Venture expressly disclaims any obligation or
undertaking to release publicly any updates of revisions to any forward-looking
statements contained herein to reflect any change in the Venture's expectations
with regard thereto or any change in events, conditions or circumstances on
which any such statement is based.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF COMBINED FINANCIAL STATEMENTS
Report of Independent Auditors
Combined Balance Sheets - Years ended December 31, 1997 and 1996
Combined Statements of Operations - Years ended December 31, 1997, 1996, and
1995
Combined Statements of Changes in Partners' Deficit - Years ended December 31,
1997, 1996, and 1995
Combined Statements of Cash Flows - Years ended December 31, 1997, 1996, and
1995
Notes to Combined Financial Statements
Report of Ernst & Young LLP, Independent Auditors
The Partners
VMS National Residential Portfolio I and
VMS National Residential Portfolio II
We have audited the accompanying combined balance sheets of VMS National
Residential Portfolio I (an Illinois Limited Partnership), VMS National
Residential Portfolio II (an Illinois Limited Partnership) and VMS National
Properties (an Illinois Partnership) and Subpartnerships (collectively the
"Venture") as of December 31, 1997 and 1996, and the related combined statements
of operations, changes in partners' deficit and cash flows for each of the three
years in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Venture's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of VMS
National Residential Portfolio I, VMS National Residential Portfolio II and VMS
National Properties and Subpartnerships at December 31, 1997 and 1996, and the
combined results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related 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.
/s/ ERNST & YOUNG LLP
Greenville, South Carolina
March 3, 1998,
except for Note K, as to which the date is
March 17, 1998
VMS NATIONAL RESIDENTIAL PORTFOLIO I
VMS NATIONAL RESIDENTIAL PORTFOLIO II
(Illinois limited partnerships)
VMS NATIONAL PROPERTIES (an Illinois partnership) AND SUBPARTNERSHIPS
COMBINED BALANCE SHEETS
(in thousands)
December 31, December 31,
1997 1996
Assets
Cash and cash equivalents $ 2,510 $ 1,788
Accounts receivable 42 19
Escrows and other deposits 1,916 2,589
Other assets 478 543
Investment properties:
Land 13,404 13,404
Buildings and personal property 130,603 128,455
Less accumulated depreciation (75,411) (70,019)
$ 73,542 $ 76,779
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 369 $ 302
Tenant security deposits payable 1,105 1,080
Accrued interest -- 11,948
Accrued property taxes 605 492
Other liabilities 994 1,134
Mortgage notes payable 139,449 119,229
Notes payable 33,455 33,837
Deferred gain on extinguishment of debt 42,225 54,053
Partners' Deficit (144,660) (145,296)
$ 73,542 $ 76,779
See Accompanying Notes to Combined Financial Statements
VMS NATIONAL RESIDENTIAL PORTFOLIO I
VMS NATIONAL RESIDENTIAL PORTFOLIO II
(Illinois limited partnerships)
VMS NATIONAL PROPERTIES (an Illinois partnership) AND SUBPARTNERSHIPS
COMBINED STATEMENTS OF OPERATIONS
(in thousands, except per interest data)
For The Years Ended December 31,
1997 1996 1995
Revenues:
Rental income $ 24,799 $ 24,046 $ 26,649
Other income 1,070 1,154 1,225
Total revenues 25,869 25,200 27,874
Expenses:
Operating 10,497 10,658 13,259
General and administrative 953 1,063 1,121
Depreciation 5,465 5,447 6,090
Interest 16,924 16,652 20,899
Property taxes 1,727 1,802 2,220
Write-down of investment properties -- 1,850 3,257
Total expenses 35,566 37,472 46,846
Loss before extraordinary item (9,697) (12,272) (18,972)
Extraordinary item - gain on
extinguishment of debt 10,303 14,095 34,598
Net income $ 606 $ 1,823 $ 15,626
Net income allocated to
general partners $ 12 $ 36 $ 313
Net income allocated to
limited partners 594 1,787 15,313
$ 606 $ 1,823 $ 15,626
Net income per limited
partnership interest:
Loss before extraordinary item
Portfolio I (644 interests) $(10,417) $(13,185) $(20,386)
Portfolio II (268 interests) $(10,425) $(13,193) $(20,386)
Extraordinary item
Portfolio I (644 interests) $ 11,071 $ 15,146 $ 37,177
Portfolio II (268 interests) $ 11,071 $ 15,146 $ 37,177
Net income
Portfolio I (644 interests) $ 654 $ 1,961 $ 16,791
Portfolio II (268 interests) $ 646 $ 1,953 $ 16,791
See Accompanying Notes to Combined Financial Statements
VMS NATIONAL RESIDENTIAL PORTFOLIO I
VMS NATIONAL RESIDENTIAL PORTFOLIO II
(Illinois limited partnerships)
VMS NATIONAL PROPERTIES (an Illinois partnership) AND SUBPARTNERSHIPS
COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
(in thousands)
<TABLE>
<CAPTION>
VMS National Residential Portfolio I
Limited Partners
General Accumulated Subscription
Partners Deficit Notes Total Total
<S> <C> <C> <C> <C>
Partners' deficit at December 31, 1994 $(3,603) $(110,429) $ (627) $ (111,056) $ (114,659)
Collections of subscription notes -- -- 41 41 41
Net income for year ended
December 31, 1995 221 10,813 -- 10,813 11,034
Partners' deficit at December 31, 1995 (3,382) (99,616) (586) (100,202) (103,584)
Collections of subscription notes -- -- 52 52 52
Net income for year ended
December 31, 1996 26 1,263 -- 1,263 1,289
Partners' deficit at December 31, 1996 (3,356) (98,353) (534) (98,887) (102,243)
Collections of subscription notes -- -- 23 23 23
Net income for the year
ended December 31, 1997 9 421 -- 421 430
Partner's deficit at December 31, 1997 $(3,347) $(97,932) $ (511) $ (98,443) $ (101,790)
<FN>
See Accompanying Notes to Combined Financial Statements
</FN>
</TABLE>
VMS NATIONAL RESIDENTIAL PORTFOLIO I
VMS NATIONAL RESIDENTIAL PORTFOLIO II
(Illinois limited partnerships)
VMS NATIONAL PROPERTIES (an Illinois partnership) AND SUBPARTNERSHIPS
COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT (CONTINUED)
(in thousands)
<TABLE>
<CAPTION>
VMS National Residential Portfolio II
Limited Partners
General Accumulated Subscription
Partners Deficit Notes Total Total
<S> <C> <C> <C> <C>
Partners' deficit at December 31, 1994 $(1,506) $ (46,331) $ (412) $ (46,743) $ (48,249)
Collections of subscription notes -- -- 28 28 28
Net income for year ended
December 31, 1995 92 4,500 -- 4,500 4,592
Partners' deficit at December 31, 1995 (1,414) (41,831) (384) (42,215) (43,629)
Collections of subscription notes -- -- 42 42 42
Net income for year ended
December 31, 1996 10 524 -- 524 534
Partners' deficit at December 31, 1996 (1,404) (41,307) (342) (41,649) (43,053)
Collections of subscription notes -- -- 7 7 7
Net income for the year
ended December 31, 1997 3 173 -- 173 176
Partner's deficit at December 31, 1997 $(1,401) $ (41,134) $ (335) $ (41,469) $ (42,870)
Combined partners' deficit at
December 31, 1997 $(4,748) $ (139,066) $ (846) $ (139,912) $(144,660)
<FN>
See Accompanying Notes to Combined Financial Statements
</FN>
</TABLE>
VMS NATIONAL RESIDENTIAL PORTFOLIO I
VMS NATIONAL RESIDENTIAL PORTFOLIO II
(Illinois limited partnerships)
VMS NATIONAL PROPERTIES (an Illinois partnership) AND SUBPARTNERSHIPS
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For The Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 606 $ 1,823 $ 15,626
Adjustments to reconcile net income to net
cash provided by operating activities:
Write-down of investment properties -- 1,850 3,257
Extraordinary gain on
extinguishment of debt (10,303) (14,095) (34,598)
Depreciation 5,465 5,447 6,090
Amortization of mortgage discounts
and loan costs 3,688 3,309 3,105
Loss on disposal of property 76 163 111
Gain on sale of properties -- (59) --
Change in accounts:
Accounts receivable (23) 65 (22)
Escrows and other deposits 673 (369) 2,143
Other assets 43 201 (221)
Accounts payable 67 (62) (522)
Tenant security deposit payable 25 4 (4)
Accrued interest (11,948) 4,220 7,966
Accrued property taxes 113 39 146
Other liabilities 197 (389) (160)
Net cash (used in) provided
by operating activities (11,321) 2,147 2,917
Cash flows from investing activities:
Property improvements and replacements (2,297) (2,029) (2,415)
Proceeds from sale of property -- 3,847 --
Net cash (used in) provided by
investing activities $(2,297) $ 1,818 $ (2,415)
<FN>
See Accompanying Notes to Combined Financial Statements
</FN>
</TABLE>
VMS NATIONAL RESIDENTIAL PORTFOLIO I
VMS NATIONAL RESIDENTIAL PORTFOLIO II
(Illinois limited partnerships)
VMS NATIONAL PROPERTIES (an Illinois partnership) AND SUBPARTNERSHIPS
COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
<TABLE>
<CAPTION>
For The Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Cash flows from financing activities:
Payments on mortgage notes payable $ (320) $ (318) $ (332)
Repayment of mortgage notes payable (120,441) (2,356) --
Proceeds from mortgage notes payable 139,449 -- --
Debt extinguishment costs (41) -- --
Payments received on subscription notes 30 94 69
Repayment of notes payable (4,000) -- --
Payments on advances from affiliates (337) (1,528) (82)
Cash released to lenders upon
foreclosure -- (53) (649)
Net cash provided by (used in)
financing activities 14,340 (4,161) (994)
Net increase (decrease) in cash and cash
equivalents 722 (196) (492)
Cash and cash equivalents at beginning
of year 1,788 1,984 2,476
Cash and cash equivalents at end of year $ 2,510 $ 1,788 $ 1,984
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 25,163 $ 9,103 $ 9,503
Supplemental non-cash disclosure of
Financing activities:
Assignment of advance from
affiliate to mortgage note holder $ 397 $ -- $ --
<FN>
See Accompanying Notes to Combined Financial Statements
</FN>
</TABLE>
VMS NATIONAL RESIDENTIAL PORTFOLIO I
VMS NATIONAL RESIDENTIAL PORTFOLIO II
(Illinois Limited Partnerships)
VMS NATIONAL PROPERTIES (an Illinois partnership) AND SUBPARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
Note A - Organization and Significant Accounting Policies
Organization:
VMS National Properties Joint Venture (the "Venture") was formed as a general
partnership pursuant to the Uniform Partnership Act of the State of Illinois and
a joint venture agreement (the "Venture Agreement") dated September 27, 1984,
between VMS National Residential Portfolio I ("Portfolio I") and VMS National
Residential Portfolio II ("Portfolio II") (collectively, the "Partnerships").
Effective December 12, 1997, the managing general partner of each of the
Partnerships was transferred from VMS Realty Investment, Ltd. ("VMSRIL" or the
"Former Managing General Partner") (formerly VMS Realty Partners) to MAERIL,
Inc. ("MAERIL" or the "Managing General Partner"), a wholly-owned subsidiary of
MAE GP Corporation ("MAE GP") and an affiliate of Insignia Financial Group, Inc.
("Insignia"). Effective February 25, 1998, MAE GP was merged with Insignia
Properties Trust ("IPT"), which is an affiliate of Insignia. Thus, the Managing
general partner is now a wholly-owned subsidiary of IPT.
The Venture originally acquired 51 residential apartment properties located
throughout the United States. Of these 51 properties, four were foreclosed
prior to 1993. As more fully described in "Note B", the Venture filed for
Chapter 11 bankruptcy protection on February 22, 1991. The Venture's Second
Amended and Restated Plan of Reorganization (the "Plan") became effective on
September 30, 1993. Pursuant to the Plan, 19 of the Venture's properties were
foreclosed in 1993, four properties were foreclosed in 1994, five properties
were foreclosed in 1995 and an additional two properties foreclosed in 1996.
Also, the Venture sold two of the residential properties during 1996. The
Venture continues to own and operate 15 of the residential apartment complexes
it originally acquired.
Pursuant to the terms of the Joint Venture Agreement for the Venture and the
respective Partnership Agreements for Portfolio I and Portfolio II, the Managing
General Partner will manage Portfolio I, Portfolio II, VMS National Properties
and each of the Venture's operating properties. The Limited Partners do not
participate in or control the management of their respective partnership, except
that certain events must be approved by the Limited Partners. These events
include: (1) voluntary dissolution of either Portfolio I or Portfolio II, and
(2) amending substantive provisions of either Partnership Agreement.
Basis of Accounting:
The accompanying combined financial statements include the accounts of Portfolio
I, Portfolio II, the Venture and Subpartnerships. Significant interpartnership
accounts and transactions have been eliminated from these combined financial
statements.
Allocation of Income, Loss, and Distributions:
The operating profits and losses of VMS National Properties and the Venture's
properties are allocated to Portfolio I and Portfolio II on a pro-rata,
cumulative basis using the ratio of their respective Limited Partnership
Interests issued and outstanding. The operating profits and losses of Portfolio
I and Portfolio II are allocated 98% to the respective Limited Partners and 2%
to the respective general partners.
Operating cash flow distributions for Portfolio I and Portfolio II will be made
at the discretion of the Managing General Partner subject to the order of
distribution indicated in the Plan and approved by the Bankruptcy Court. Such
distributions will be allocated first to the respective Limited Partners in an
amount equal to 12% per year (on a noncumulative basis) of their contributed
capital; then, to the general partners, a subordinated incentive fee equal to
10.45% of remaining operating cash flow; and finally, of the balance to be
distributed, 98% to the Limited Partners and 2% to the general partners.
Distributions of proceeds arising from the sale or refinancing of the Venture's
properties will be allocated to Portfolio I and Portfolio II in proportion to
their respective Venture interests subject to the order of distribution
indicated in the Plan and approved by Bankruptcy Court. Distributions by
Portfolio I and Portfolio II will then be allocated as follows: (1) first to
the Limited Partners in an amount equal to their aggregate capital
contributions; (2) then to the general partners in an amount equal to their
aggregate capital contributions; (3) then, among the Limited Partners, an amount
equal to $62,000,000 multiplied by the respective percentage interest of
Portfolio I or Portfolio II in the Venture; and (4) finally, of the balance, 76%
to the Limited Partners and 24% to the general partners.
In any event, there shall be allocated to the general partners not less than 1%
of profits or losses.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Fair Value of Financial Instruments:
The Venture believes that the carrying amount of its financial instruments
(except for long term debt) approximates their fair value due to the short term
maturity of these instruments. The fair value of the Venture's long term debt,
after discounting the scheduled loan payments at an estimated borrowing rate
currently available to the Venture, approximates its carrying balance.
Cash and Cash Equivalents:
The Venture considers all highly liquid investments with an original maturity of
three months or less at the time of purchase to be cash equivalents. At certain
times, the amount of cash deposited at a bank may exceed the limit on insured
deposits.
Security Deposits:
The Venture requires security deposits from lessees for the duration of the
lease and such deposits are included in escrows and other deposits. The
security deposits are refunded when the tenant vacates, provided the tenant has
not damaged its space, and is current on its rental payments.
Investment Properties:
During 1996, the Venture adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires
impairment losses to be recorded on long-lived assets used in operations when
events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets. The impairment loss is measured by
comparing the fair value of the asset to its carrying amount. The adoption of
this statement resulted in a write-down of investment properties of $1,850,000
in 1996.
Depreciation:
Depreciation is computed by the straight-line method over estimated useful lives
ranging from 25 to 29 years for buildings and improvements and the 150% or 200%
declining balance method for five to fifteen years for personal property.
Leases:
The Venture generally leases apartment units for twelve-month terms or less.
The Venture recognizes income as earned on its leases.
Advertising Costs:
Advertising costs of approximately $334,000, $313,000, and $428,000 were charged
to expense as incurred and are included in operating expenses for the years
ended December 31, 1997, 1996, and 1995, respectively.
Income Taxes:
Taxable income or loss of the Venture is reported in the income tax returns of
its partners. Accordingly, no provision for income taxes is made in the
financial statements of the Venture.
Reclassifications:
Certain reclassifications have been made to the 1995 and 1996 balances to
conform to the 1997 presentation.
Note B - Petition for relief under Chapter 11 and Plan of Reorganization
On February 22, 1991, the Venture filed for Chapter 11 bankruptcy protection in
the United States Bankruptcy court in the Central District of California. The
initial filing included only the residential apartment complexes directly owned
by the Venture (entities included in the filing herein after referred to
collectively as the Debtor) and excluded the 10 Subpartnerships consisting of 10
residential apartment complexes encumbered by financing insured or held by the
Department of Housing and Urban Development ("HUD"), and the investing limited
partnerships Portfolio I and Portfolio II. Due to the partnership agreements
existing between the Venture, Portfolio I and Portfolio II, which provide the
Venture with exclusive rights to the limited partner investor contributions, the
Venture's initial filing was amended to reflect the Venture's right to receive
any excess limited partner investor contributions.
The Venture's Plan was confirmed by the Bankruptcy Court in March 1993 and
became effective on September 30, 1993 (the "Effective Date"). During 1997, the
Plan was modified in order to allow the Venture to refinance the debt
encumbering it's properties (see Note C). The Managing General Partner
anticipates that the bankruptcy plan will be closed in 1998.
The Primary aspects of the Venture's Plan of Reorganization included the
following:
(a) The Venture retained 17 properties from the existing portfolio (the
"retained properties"), and abandoned title of the remaining properties (the
"non-retained properties") to the Federal Deposit Insurance Corporation (the
"FDIC"). The retained properties consisted of one HUD property and sixteen non-
HUD properties. Two of the seventeen retained properties were sold during the
second quarter of 1996. All of the non-retained properties were foreclosed upon
as of December 31, 1996 (see "Note C").
(b) The Venture restructured the existing senior-lien debt obligations on the
retained properties (except for one of the retained properties which had a first
mortgage lien insured by HUD and two of the retained properties which had senior
liens formerly payable to the FDIC, as successor to Beverly Hills Mortgage
Corporation ("BH")) to provide for an interest rate of 8.75% per annum effective
as of the first day of the month of the Effective Date with payments based on a
30 year amortization commencing on the first monthly payment due thereafter with
a maturity of January 15, 2000.
The senior lien collateralized by HUD on one of the retained properties was not
modified, and the senior liens formerly held by the FDIC were modified to accrue
at 9% per annum effective as of the first day of the month of the Effective Date
with monthly payments of interest only made at 7% per annum commencing with the
first monthly payments due thereafter on the FDIC value, as defined in "c"
below.
All of the senior-lien debt was refinanced on December 29, 1997 (see "Note C").
(c) As it pertained to the existing BH junior mortgages on the retained
properties, the FDIC reduced its claim on two of the properties to $300,000 per
property evidenced by a non-interest bearing note scheduled to mature January
15, 2000, and left in place liens for the full amount of its claims at the
petition date for all other retained properties. Interest on the former FDIC
loans for these retained properties accrued at 10% per annum on the FDIC value
(total property value per the FDIC's June 1992 valuations less the property's
senior lien indebtedness) commencing as of the first day of the month of the
Effective Date and monthly payments of interest only at 7% per annum on the FDIC
value will commence with the first monthly payment due thereafter. (The retained
property governed by a HUD Regulatory Agreement made payments of interest only
following the approval by HUD of the Surplus Cash calculation.) On October 28,
1995, the FDIC sold all of the debt it held related to the retained properties
to BlackRock Capital Finance, L.P. The debt amounts and terms were not modified.
On December 29, 1997, all of the junior mortgages were refinanced (see "Note
C").
(d) The Venture distributed the following amounts in conjunction with the terms
of the Plan: (1) approximately $5,980,000 to satisfy unsecured prepetition
creditor claims of the nonaffiliated note payable to Security Pacific National
Bank, trade creditors, and property taxes on the retained properties; (2)
approximately $1,056,000 to provide for allowed and unclassified administrative
claims; and (3) approximately $5,960,000 to make capital improvements at the
retained properties. This capital improvement reserve was exhausted during 1995.
(e) The VMS/Stout Joint Venture (the "VMS/Stout Venture") was formed pursuant to
an agreement dated August 18, 1984, which was amended and restated on October 4,
1984. VMS Realty Partners has a 50% interest and affiliates of the Seller (as
defined below) have a 50% interest in the VMS/Stout Venture. The VMS/Stout
Venture, the J.D. Stout Company ("Stout") and certain affiliates of Stout
entered into a contract of sale dated August 18, 1984, which was amended on
October 4, 1984. The contract provided for the sale by Stout and other owners
(collectively the "Seller") of the 51 residential apartment complexes to the
VMS/Stout Venture. The VMS/Stout Venture assigned its interest as purchaser to
the Venture. During 1987, Stout assigned its interest in the VMS/Stout Joint
Venture to ContiTrade Service Corporation ("ContiTrade"). On November 17, 1993,
VMS Realty Partners assigned its interest in the VMS/Stout Joint Venture to the
Partners Liquidating Trust (see "Note E"). The VMS/Stout Joint Venture was
granted an allowed claim in the amount of $49,535,000 for the Assignment and
Long-Term Loan Arrangement Notes payable to them by the Venture. Payments
totaling $3,475,000 in conjunction with this allowed claim were made to the
nonaffiliated members of the VMS/Stout Joint Venture on October 7, 1993. The
Venture also executed a $4,000,000 promissory note dated September 1, 1993, to
ContiTrade Services Corporation (the "ContiTrade Note") in connection with these
allowed note claims. The ContiTrade Note represents a prioritization of
payments to ContiTrade of the first $4,000,000 in repayments made under the
existing Assignment and Long-Term Loan Arrangement Notes payable to the
VMS/Stout Joint Venture, and does not represent an additional $4,000,000 claim
payable to ContiTrade. In addition to prioritizing ContiTrade's receipt of the
first $4,000,000 of repayments on the old notes, the ContiTrade Note provides
for 5% non-compounding interest on the outstanding principal balance calculated
daily on the basis of a 360 day year. The ContiTrade Note was secured by a Deed
of Trust, Assignment of Rents and Security Agreement on each of the Venture's
retained properties, and provided ContiTrade with other approval rights as to
the ongoing operations of the Venture's retained properties. The ContiTrade
Note, which was scheduled to mature January 15, 2000, was paid off on December
29, 1997 (see "Note C").
(f) The Venture entered into a Revised Restructured Amended and Restated Asset
Management Agreement (the "Revised Asset Management Agreement") with Insignia.
Effective October 1, 1993, Insignia took over the asset management of the
Venture's retained properties and partnership functions for the Venture. The
Revised Asset Management Agreement provides for an annual compensation of
$500,000 to be paid to Insignia in equal monthly installments. In addition,
Insignia will receive reimbursement for all out-of-pocket costs incurred in
connection with their services up to $200,000 per calendar year. These amounts
are to be paid from the available operating cash flow of the Venture's retained
complexes after the payment of operating expenses and priority reserve funding
for insurance, real estate and personal property taxes, senior mortgage
payments, minimum interest payment requirements on the former FDIC mortgages,
and any debt service and principal payments currently due on any liens of
encumbrances senior to the ContiTrade Deeds of Trust. If insufficient operating
cash flow exists after the funding of these items, the balance of Insignia's
fees and reimbursements may be paid from available partnership cash sources.
Additionally, the asset management fee payable to Insignia will be reduced
proportionately for each of the Venture's retained complexes which are sold or
otherwise disposed of from time to time. Accordingly, the fee was reduced upon
the disposition of Bellevue and Carlisle Square in 1996. The Venture engaged
Insignia to commence property management of all of the Venture's retained
complexes effective January 1, 1994.
Note C - Extraordinary Gain On Extinguishment Of Debt
Pursuant to the Plan of Reorganization (see "Note B"), the mortgages formerly
held by the FDIC were modified effective September 30, 1993. The face value of
the notes were restated to agreed valuation amounts. Under the terms of the
modification, the lender may reinstate the full claim upon the default of any
note. As a result, the Venture deferred recognition of a gain of $54,053,000,
which was the difference between the note face amounts and the agreed valuation
amounts of the modified debt.
On December 29, 1997, the Venture refinanced the mortgages encumbering all of
its remaining 15 properties. The refinancing resulted in each property being
encumbered by new senior and junior loans. The senior loans each have an
interest rate of 8.5% per annum and require monthly payments of principal and
interest. The junior loans each have an interest rate of 10.84% per annum and
require monthly payments based on excess monthly cash flow, as defined, for each
property. All of the loans mature on January 1, 2008, and the senior loans
include prepayment penalties if paid prior to January 1, 2007. The senior loans
retained similar terms regarding note face amounts and agreed valuation amounts.
These new loans are recorded at the agreed valuation amount of $110,000,000,
which is less than the $152,225,000 face amount of the senior loans. If the
Venture defaults on the new mortgage notes payable or is unable to pay the
outstanding agreed valuation amounts upon maturity, then the note face amounts
become due. Accordingly, the Partnership deferred recognition of a gain of
$42,225,000, which is the difference between the refinanced note face amounts
and the agreed valuation amounts. All the loans are cross-collateralized, but
they are not cross-defaulted. In conjunction with the refinancing, the Venture
paid the outstanding principal and accrued interest on the $4,000,000 ContiTrade
Note (see "Note E"). As a result of the refinancing, the Venture recognized an
extraordinary gain on extinguishment of debt of $10,303,000, of which
$11,828,000 is the result of a decreased difference between the note face
amounts and agreed valuation amounts for the refinanced mortgage notes as
compared to the old indebtedness. This gain was partially offset by debt
extinguishment costs of $41,000 and the write-off of discounts and loan costs on
the old debt of $1,484,000.
The Combined Statements of Operations for the years ended December 31, 1997,
1996 and 1995 reflect the following foreclosures:
1997 1996 1995
None Weatheridge The Winery
Sierra Gardens Venetian Bridges - Canal Court
Venetian Bridges - Grand Canal I
Venetian Bridges - Grand Canal II
Pacific Hacienda
As a result of these foreclosures, the following liabilities and assets were
written off (in thousands):
1997 1996 1995
Mortgage principal payable $-- $ 6,291 $ 22,074
Accrued interest payable -- 9,941 25,636
Other -- 26 (645)
Investment in properties -- (5,781) (23,453)
Accumulated depreciation -- 3,618 10,986
Extraordinary gain $-- $ 14,095 $ 34,598
Note D - Mortgage Notes Payable (in thousands)
Principal Monthly Principal
Balance At Payment Balance
December 31, Including Interest Maturity Due At
Property 1997 Interest Rate Date Maturity
Buena Vista
1st mortgage $ 5,023 $40 8.50% 01/08 $4,171
2nd mortgage 1,364 (A) 10.84% 01/08 (A)
Casa de Monterey
1st mortgage 4,159 33 8.50% 01/08 3,454
2nd mortgage 1,130 (A) 10.84% 01/08 (A)
Crosswood Park
1st mortgage 5,645 45 8.50% 01/08 4,688
2nd mortgage 1,533 (A) 10.84% 01/08 (A)
Mountain View
1st mortgage 7,257 58 8.50% 01/08 6,026
2nd mortgage 1,971 (A) 10.84% 01/08 (A)
Pathfinder
1st mortgage 13,649 109 8.50% 01/08 11,336
2nd mortgage 3,707 (A) 10.84% 01/08 (A)
Scotchollow
1st mortgage 29,541 236 8.50% 01/08 24,533
2nd mortgage 7,595 (A) 10.84% 01/08 (A)
Principal Monthly Principal
Balance At Payment Balance
December 31, Including Interest Maturity Due At
Property 1997 Interest Rate Date Maturity
The Bluffs
1st mortgage $ 3,775 $30 8.50% 01/08 $3,135
2nd mortgage 1,025 (A) 10.84% 01/08 (A)
Vista Village
1st mortgage 3,368 27 8.50% 01/08 2,797
2nd mortgage 915 (A) 10.84% 01/08 (A)
Chapelle Le Grande
1st mortgage 3,253 26 8.50% 01/08 2,702
2nd mortgage 884 (A) 10.84% 01/08 (A)
North Park
1st mortgage 6,339 51 8.50% 01/08 5,264
2nd mortgage 1,722 (A) 10.84% 01/08 (A)
Shadowood
1st mortgage 2,283 18 8.50% 01/08 1,896
2nd mortgage 620 (A) 10.84% 01/08 (A)
Towers of Westchester
1st mortgage 12,286 98 8.50% 01/08 10,203
2nd mortgage 3,337 (A) 10.84% 01/08 (A)
Principal Monthly Principal
Balance At Payment Balance
December 31, Including Interest Maturity Due At
Property 1997 Interest Rate Date Maturity
Terrace Gardens
1st mortgage $ 4,502 $ 36 8.50% 01/08 $3,739
2nd mortgage 1,223 (A) 10.84% 01/08 (A)
Watergate
1st mortgage 2,938 23 8.50% 01/08 2,440
2nd mortgage 798 (A) 10.84% 01/08 (A)
Forest Ridge
1st mortgage 5,982 48 8.50% 01/08 4,968
2nd mortgage 1,625 (A) 10.84% 01/08 (A)
$139,449 $878
(A) Payments are based on excess monthly cash flow, as defined, with any
unpaid balance due at maturity.
Scheduled principal payments on mortgage loans payable subsequent to December
31, 1997, are as follows:
1998 $ 1,144
1999 1,353
2000 1,473
2001 1,603
2002 1,745
Thereafter 132,131
$ 139,449
Note E - Notes Payable
Assignment Note:
The Venture executed a $29,000,000 purchase money subordinated note (the
"Assignment Note") payable to the VMS/Stout Venture in exchange for the
assignment by the VMS/Stout Venture of its interest in the contract of sale to
the Venture. The Assignment Note is collateralized by the pledge from Portfolio
I and Portfolio II of their respective interests in the Venture.
On November 17, 1993, VMS Realty Partners assigned its 50% interest in the
VMS/Stout Venture to the Partners Liquidating Trust which was established for
the benefit of the former creditors of VMS Realty Partners and its affiliates.
The stated rate of interest on the Assignment Note (prior to modification by the
Plan) was 12% per annum (compounded semi-annually) with monthly payments of
interest only at a rate of 6%. Monthly payments on this note were discontinued
in May 1990, and the accrual of interest was discontinued after the February 22,
1991, petition filing date. Additionally, effective April 10, 1991, VMS Realty
Partners waived its right to collect interest on its portion of the Assignment
Note.
Pursuant to the Plan, the allowed claim for the Assignment Note and related
interest was $46,285,000; $3,475,000 of this amount was paid in October 1993, in
accordance with the terms of the Plan. The Venture also executed a $4,000,000
promissory note payable dated September 1, 1993 to ContiTrade Services
Corporation ("ContiTrade Note") with interest at 5% per annum. This note
represented a prioritization of payment to ContiTrade and did not represent the
assumption of any additional debt. The ContiTrade Note was to mature on January
15, 2000, and was collateralized by a Deed of Trust, Assignment of Rents and
Security Agreement on each of the Venture's retained complexes. This note was
paid with the December 29, 1997, refinancing (see "Note C").
The remaining $38,810,000 of the Assignment Note is non-interest bearing and is
payable only after payment of debt of higher priority, including the senior and
junior mortgage notes payable. Pursuant to SOP 90-7, the Assignment Note, the
Long-Term Loan Arrangement Fee Note (as defined below) and related accrued
interest were adjusted to the present value of amounts to be paid using an
estimated current interest rate of 11.5%. At December 31, 1997, the carrying
amount of the Assignment Note is $30,205,000, net of discount for imputed
interest of $8,605,000. Interest expense is being recognized through the
amortization of the discount which totaled approximately $3,618,000, $3,227,000
and $2,878,000 in 1997, 1996, and 1995, respectively.
Long-Term Loan Arrangement Fee Note:
The Venture executed a $3,000,000 unsecured, nonrecourse promissory note, the
"Long-Term Loan Arrangement Fee Note" payable to the VMS/Stout Venture as
consideration for arranging long-term financing.
The stated rate of interest on this note prior to modification by the Plan is
10% per annum, payable on a monthly basis. Monthly interest payments on this
Note were discontinued in May 1990. Additionally, the accrual of interest on
this Note was discontinued after the February 22, 1991, petition filing date.
Pursuant to the Plan, the entire $3,250,000 balance, including $250,000 in
unpaid accrued interest which was rolled into principal, was granted as an
allowed claim. None of this balance bears interest, and the balance is payable
only after debt of a higher priority, including senior and junior mortgage
loans.
Note F - Transactions With Affiliated Parties
The Venture has no employees and is dependent on the Managing General Partner
and its affiliates for the management and administration of all partnership
activities. Effective December 12, 1997, MAERIL, a wholly-owned subsidiary of
MAE GP Corporation ("MAE GP") and an affiliate of Insignia, became the Managing
General Partner of the Partnerships, replacing VMSRIL. Effective February 25,
1998, MAERIL became a wholly-owned subsidiary of Insignia Properties Trust,
which is an affiliate of Insignia. The following transactions have occurred
between the Venture and the Managing General Partner, the Former Managing
General Partner, and their affiliates during 1997, 1996, and 1995.
The Venture entered into agreements with affiliates of the Former Managing
General Partner to provide asset management services at a fee equal to 1.5% (.5%
to 1.5% for HUD properties) of monthly gross revenues. Subsequent to the
February 22, 1991, bankruptcy filing, payment of these fees had been restricted
by Bankruptcy Court approvals. Pursuant to the terms of the Venture's Plan,
asset management fees of $1,734,100 for services rendered through September 30,
1993, were approved by the Bankruptcy Court as allowed claim payments. Fees of
$950,000 were approved for immediate payment and were paid in 1993. In
addition, payments of $82,000 and $116,000 were made in 1995 and 1994,
respectively. The remaining prepetition portion of the allowed claim was paid
during 1996 from cash received relating to the sale of Carlisle Square and
Bellevue Towers. Effective October 1, 1993, the Venture entered into an asset
management agreement with Insignia in conjunction with the implementation of the
Plan (see "Note B").
Prepetition property management fees of $356,000 were approved by the Bankruptcy
Court for payment to a former affiliate. This allowed claim may be paid only
from available partnership cash. During the year ended December 31, 1997,
payments of approximately $336,000 were made. At December 31, 1997, the
outstanding balance of $20,000 is included in other liabilities.
Property management services were performed by Insignia in 1997, 1996, and 1995
(see "Note B"). Affiliates of Insignia also have provided real estate advisory
and asset management services to the Venture in 1997, 1996, and 1995. As
advisory, such affiliates provide all partnership accounting and administrative
services, investment management, and supervisory services over property
management and leasing. Insignia received property management fees of
approximately $1,013,000, $994,000, and $1,026,000 during 1997, 1996, and 1995,
respectively. Asset management fees of approximately $441,000, $461,000, and
$500,000 were paid to an affiliate of Insignia during 1997, 1996, and 1995,
respectively. In addition, Insignia received $200,000 in each of the three
years ended December 31, 1997, for reimbursement of out-of-pocket costs incurred
in connection with the services it performed for the Venture.
Payment of reimbursable costs to a former affiliate during the bankruptcy
proceedings was restricted to $25,000 per month pursuant to court-approved cash
collateral orders. No such payments were made in 1994 and 1995; however $755,000
in prepetition reimbursable costs was approved for payment as part of the Plan.
During 1996, these costs were reimbursed primarily from proceeds received from
the sale of Carlisle Square and Bellevue Towers.
Under the terms of the Venture agreement, the Former Managing General Partner
and its affiliates provided management and other services to the Venture through
December 31, 1991. Pursuant to the Plan, a prepetition portion of fees totaling
$583,000 was approved for payment from available partnership cash. Approximately
$186,000 of this amount was paid during 1996 from proceeds received from the
sale of Carlisle Square and Bellevue Towers. In December 1997, the remaining
unpaid balance of approximately $397,000 was assigned to MF VMS, L.L.C., the
note holder for the senior and junior notes.
Certain affiliates of the former general partners and the VMS/Stout Venture may
be entitled to receive various fees upon disposition of the properties. These
fees will be paid from the disposition proceeds and are subordinated to the
distributions required by the Plan. There were no property dispositions for
which proceeds were received through December 31, 1997.
Note G - Subscription Notes And Accrued Interest Receivable
Portfolio I and Portfolio II executed promissory notes requiring cash
contributions from the partners aggregating $136,800,000 to the capital of
Portfolios I and II for 644 and 268 units, respectively. Of this amount,
approximately $135,044,000 was contributed in cash through December 31, 1997,
and $910,000 was deemed uncollectible and written-off prior to December 31,
1997. The following table represents the remaining Limited Partners'
subscription notes principal balances and the related accrued interest
receivable at December 31, 1997 (in thousands):
Portfolio I Portfolio II
Subscription notes receivable $ 511 $ 335
Accrued interest receivable 65 67
Total subscription notes and
accrued interest receivable $ 576 $ 402
All amounts outstanding at December 31, 1997, are considered past due and bear
interest at the default rate of 18%. The subscription notes receivable and the
related interest are not recognized until collection is assured.
Note H - Investment Properties and Accumulated Depreciation (in thousands)
<TABLE>
<CAPTION>
Initial Cost
Buildings and Costs Capitalized Provision to
Related Personal Subsequent To Reduce to
Description Encumbrances Land Property Acquisition Fair Value
<S> <C> <C> <C> <C> <C>
The Bluffs $ 4,800 $ 193 $ 3,667 $ 446 $ --
Buena Vista 6,387 893 4,538 430 --
Casa De Monterey 5,289 869 6,136 790 --
Chapelle Le Grand 4,137 166 3,873 614 --
Crosswood Park 7,178 611 8,597 1,519 (2,000)
Forest Ridge 7,607 701 6,930 1,062 --
Mountain View 9,228 1,289 8,490 1,031 --
North Park 8,061 557 8,349 1,386 --
Pathfinder 17,356 3,040 11,698 1,701 (1,250)
Scotchollow 37,136 3,510 19,344 4,963 --
Shadowood 2,903 209 3,393 626 --
Terrace Gardens 5,725 433 4,517 930 --
Towers Of Westchester 15,623 529 13,491 2,152 --
Vista Village 4,283 568 5,209 813 --
Watergate 3,736 263 5,625 1,106 --
TOTAL $139,449 $13,831 $ 113,857 $19,569 $(3,250)
</TABLE>
<TABLE>
<CAPTION>
Gross Amount At Which Carried
At December 31, 1997
Buildings
And Related
Personal Accumulated Year of Date of Depreciable
Description Land Property Total Depreciation Construction Acquisition Life-Years
<S> <C> <C> <C> <C> <C> <C> <C>
The Bluffs $193 $ 4,113 $ 4,306 $ 2,438 1968 10/26/84 5-27.5
Bunea Vista 893 4,968 5,861 3,007 1972 10/26/84 5-27.5
Casa De Monterey 869 6,926 7,795 4,086 1970 10/26/84 5-27.5
Chapelle Le Grand 166 4,487 4,653 2,557 1972 12/05/84 5-27.5
Crosswood Park 471 8,256 8,727 4,612 1977 12/05/84 5-29
Forest Ridge 701 7,992 8,693 4,496 1974 10/26/84 5-27.5
Mountain View 1,289 9,521 10,810 5,120 1978 10/26/84 5-29
North Park 557 9,735 10,292 5,620 1968 11/14/84 5-27.5
Pathfinder 2,753 12,436 15,189 7,709 1971 10/26/84 5-27.5
Scotchollow 3,510 24,307 27,817 14,313 1973 10/26/84 5-27.5
Shadowood 209 4,019 4,228 2,326 1974 11/14/84 5-27.5
Terrace Gardens 433 5,447 5,880 2,984 1973 10/26/84 5-27.5
Towers Of
Westchester 529 15,643 16,172 9,098 1971 10/26/84 5-27.5
Vista Village 568 6,022 6,590 3,299 1971 10/26/84 5-27.5
Watergate 263 6,731 6,994 3,746 1972 10/26/84 5-27.5
TOTAL $13,404 $130,603 $144,007 $75,411
</TABLE>
The aggregate costs of the investment properties for Federal income tax purposes
at December 31, 1997 and 1996, is approximately $160,565,000 and $157,577,000,
respectively. The accumulated depreciation taken for Federal income tax
purposes at December 31, 1997 and 1996, is approximately $115,792,000 and
$109,473,000, respectively.
Reconciliation of Investment Properties and Accumulated Depreciation:
1997 1996 1995
Investment Properties
Balance at beginning of year $141,859 $155,440 $180,146
Property improvements 2,297 2,029 2,415
and replacements
Write-down of investment property -- (1,850) (3,257)
Dispositions of property (149) (13,760) (23,864)
Balance at end of Year $144,007 $141,859 $155,440
Accumulated Depreciation
Balance at beginning of year $ 70,019 $ 72,219 $ 77,414
Additions charged to expense 5,465 5,447 6,090
Dispositions of property (73) (7,647) (11,285)
Balance at end of Year $ 75,411 $ 70,019 $ 72,219
Note I - Sale of Investment Properties
The Venture sold two of the retained properties, Carlisle Square Apartments and
Bellevue Towers Apartments, to an unaffiliated party on April 19, 1996, and
April 30, 1996, respectively. The properties sold had a net book value of
approximately $2,247,000 for Carlisle Square Apartments and approximately
$1,541,000 for Bellevue Towers Apartments. The Venture received net proceeds
from the sales of Carlisle Square and Bellevue Towers after payments of costs
related to the sales of approximately $2,291,000 and $1,556,000, respectively.
The total gains on the sale of Carlisle Square and Bellevue Towers were
approximately $44,000 and $15,000, respectively, and are included in other
income in the accompanying combined statements of operations. The gain has been
allocated to the partners in accordance with the Limited Partnership Agreement.
Of the combined proceeds, approximately $2,356,000 was used to pay down the
mortgage note payable and $1,388,000, was used to repay advances from affiliates
of the Former Managing General Partner.
Note J - Income Taxes
The following is a reconciliation of reported net income per the financial
statements to the Federal taxable income to partners (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net income as reported $ 606 $ 1,823 $15,626
Depreciation and amortization
differences (260) (1,036) (2,342)
Prepaid rent 16 -- (24)
Accrued audit 44 81 (125)
Unapplied cash 165 (179) 33
Gain on refinancing (8,787) -- --
Gains on foreclosures and sales -- 793 (640)
Mortgage interest expense -- -- (33)
Write-down of fixed assets 208 1,936 7,212
Other 85 (230) 1,678
Federal taxable (loss) income $(7,923) $ 3,188 $21,385
</TABLE>
The following is a reconciliation between the Venture's reported amounts and
Federal tax basis of net assets and liabilities at December 31, 1997 (in
thousands):
Net liabilities as reported $(144,660)
Land and buildings 16,558
Accumulated depreciation (40,381)
Syndication costs 17,650
Deferred gain 42,225
Other deferred costs 9,601
Other (52,179)
Notes payable 4,882
Subscription note receivable 1,853
Mortgage payable (47,727)
Accounts payable - affiliates 8,454
Net liabilities - Federal tax basis $(183,724)
Note K - Subsequent Event
On March 17, 1998, Insignia entered into an agreement to merge its national
residential property management operations, and its controlling interest in
Insignia Properties Trust, with Apartment Investment and Management Company
("AIMCO"), a publicly traded real estate investment trust. The closing, which
is anticipated to happen in the third quarter of 1998, is subject to customary
conditions, including government approvals and the approval of Insignia's
shareholders. If the closing occurs, AIMCO will then control the Managing
General Partner of the Partnerships.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with Ernst & Young, LLP regarding the 1997, 1996, or
1995 audits of the Venture's financial statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnerships have no officers or directors. The managing general partner
manages substantially all of the affairs and has general responsibility in all
matters affecting the business of the Venture. Effective December 12, 1997, the
managing general partner of each of the Partnerships was transferred from VMS
Realty Investment, Ltd. ("VMSRIL") (formerly VMS Realty Partners) to MAERIL,
Inc. ("MAERIL" or the "Managing General Partner"), a wholly-owned subsidiary of
MAE GP Corporation ("MAE GP") and an affiliate of Insignia Financial Group, Inc.
("Insignia"). Effective February 25, 1998, MAE GP was merged with Insignia
Properties Trust ("IPT"), which is an affiliate of Insignia. Thus, the Managing
General Partner is now a wholly-owned subsidiary of IPT.
The names of the directors and executive officers of the Managing General
Partner, their ages and the nature of all positions with the Managing General
Partner presently held by them are as follows:
Name Age Position
Carroll D. Vinson 57 President and Director
Robert D. Long, Jr. 30 Vice President and Chief
Accounting Officer
William H. Jarrard, Jr. 51 Vice President
Daniel M. LeBey 32 Secretary
Kelley M. Buechler 40 Assistant Secretary
Carroll D. Vinson has been President and Director of the Managing General
Partner since December 12, 1997, and President of Metropolitan Asset
Enhancement, L.P. ("MAE") and subsidiaries since August 1994. He has acted as
Chief Operating Officer of IPT since May 1997. During 1993 to August 1994, Mr.
Vinson was affiliated with Crisp, Hughes & Co. (regional CPA firm) and engaged
in various other investment and consulting activities which included portfolio
acquisitions, asset dispositions, debt restructurings and financial reporting.
Briefly, in early 1993, Mr. Vinson served as President and Chief Executive
Officer of Angeles Corporation, a real estate investment firm. From 1991 to
1993, Mr. Vinson was employed by Insignia in various capacities including
Managing Director - President during 1991.
Robert D. Long, Jr. has been Vice President and Chief Accounting Officer of the
Managing General Partner since December 12, 1997. Mr. Long joined MAE in
September 1993. Since 1994 he has acted as Vice President and Chief Accounting
Officer of the MAE subsidiaries. Mr. Long was an accountant for Insignia until
joining MAE in 1993. Prior to joining Insignia, Mr. Long was an auditor for the
State of Tennessee and was associated with the accounting firm of Harsman Lewis
and Associates.
William H. Jarrard, Jr. has been Vice President of the Managing General Partner
since December 12, 1997. He has acted as Senior Vice President of IPT since May
1997. Mr. Jarrard previously acted as Managing Director - Partnership
Administration of Insignia from January 1991 through September 1997 and served
as Managing Director - Partnership Administration and Asset Management of
Insignia from July 1994 until January 1996.
Daniel M. LeBey has been Vice President and Secretary of the Managing General
Partner since January 29, 1998, and Insignia's Assistant Secretary since April
30, 1997. Since July 1996 he has also served as Insignia's Associate General
Counsel. From September 1992 until June 1996, Mr. LeBey was an attorney with
the law firm of Alston & Bird LLP, Atlanta, Georgia.
Kelley M. Buechler has been Assistant Secretary of the Managing General Partner
since December 12, 1997, and Assistant Secretary of Insignia since 1991.
No family relationships exist among any of the officers or directors of the
Managing General Partner.
ITEM 11. EXECUTIVE COMPENSATION
No direct form of compensation or remuneration was paid by the Venture to any
officer or director of the Managing General Partner. The Venture has no plan,
nor does the Venture presently propose a plan, which will result in any
remuneration being paid to any officer or director upon termination of
employment. However, reimbursements and other payments have been made to the
Venture's current and former managing general partners and their affiliates, as
described in "Item 13. Certain Relationships and Related Transactions" below.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security ownership of certain beneficial owners.
No persons owns of record or is known by the Partnerships to own beneficially
more than 5% of the outstanding Interests of either of the Partnerships as of
December 31, 1997.
(b) Security ownership of management.
No officers or directors of MAERIL or of Prudential-Bache Properties, Inc., the
general partners of the Partnerships, own any Limited Partnership Interests in
the Partnerships.
No general partners, officers or directors of the general partners of the
Partnerships possess the right to acquire a beneficial ownership of Interests of
either of the Partnerships.
(c) Changes in Control
On March 17, 1998, Insignia entered into an agreement to merge its national
residential property management operations, and its controlling interest in
Insignia Properties Trust, with Apartment Investment and Management Company
("AIMCO"), a publicly traded real estate investment trust. The closing, which
is anticipated to happen in the third quarter of 1998, is subject to customary
conditions, including government approvals and the approval of Insignia's
shareholders. If the closing occurs, AIMCO will then control the Managing
General Partner of the Partnerships.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Venture has no employees and is dependent on the Managing General Partner
and its affiliates for the management and administration of all partnership
activities. Effective December 12, 1997, MAERIL, a wholly-owned subsidiary of
MAE GP and an affiliate of Insignia, became the Managing General Partner of the
Partnerships. MAERIL replaced VMS Realty Investment, Ltd. (the "Former Managing
General Partner"). Effective February 25, 1998, MAERIL became a wholly-owned
subsidiary of IPT, which is an affiliate of Insignia. The following
transactions have occurred between the Venture and the Managing General Partner,
the Former Managing General Partner, and their affiliates during 1997, 1996, and
1995.
The Venture entered into agreements with affiliates of the Former Managing
General Partner to provide asset management services at a fee equal to 1.5% (.5%
to 1.5% for HUD properties) of monthly gross revenues. Subsequent to the
February 22, 1991, bankruptcy filing, payment of these fees had been restricted
by Bankruptcy Court approvals. Pursuant to the terms of the Venture's Plan,
asset management fees of $1,734,100 for services rendered through September 30,
1993, were approved by the Bankruptcy Court as allowed claim payments. Fees of
$950,000 were approved for immediate payment and were paid in 1993. In addition,
payments of $82,000 and $116,000 were made in 1995 and 1994, respectively. The
remaining prepetition portion of the allowed claim was paid during 1996 from
cash received relating to the sale of Carlisle Square and Bellevue Towers.
Effective October 1, 1993, the Venture entered into an asset management
agreement with Insignia in conjunction with the implementation of the Plan.
Prepetition property management fees of $356,000 were approved by the Bankruptcy
Court for payment to a former affiliate. This allowed claim may be paid only
from available partnership cash. During the year ended December 31, 1997,
payments of approximately $336,000 were made. At December 31, 1997, the
outstanding balance of $20,000 is included in other liabilities.
Property management services were performed by Insignia in 1997, 1996, and 1995.
Affiliates of Insignia also have provided real estate advisory and asset
management services to the Venture in 1997, 1996, and 1995. As advisory, such
affiliates provide all partnership accounting and administrative services,
investment management, and supervisory services over property management and
leasing. Insignia received property management fees of approximately
$1,013,000, $994,000, and $1,026,000 during 1997, 1996, and 1995, respectively.
Asset management fees of approximately $441,000, $461,000, and $500,000 were
paid to an affiliate of Insignia during 1997, 1996, and 1995, respectively. In
addition, Insignia received $200,000 in each of the three years ended December
31, 1997, for reimbursement of out-of-pocket costs incurred in connection with
the services it performed for the Venture.
Payment of reimbursable costs to a former affiliate during the bankruptcy
proceedings was restricted to $25,000 per month pursuant to court-approved cash
collateral orders. No such payments were made in 1994 and 1995; however $755,000
in prepetition reimbursable costs was approved for payment as part of the Plan.
During 1996, these costs were reimbursed primarily from proceeds received from
the sale of Carlisle Square and Bellevue Towers.
Under the terms of the Venture agreement, the Former Managing General Partner
and its affiliates provided management and other services to the Venture through
December 31, 1991. Pursuant to the Plan, a prepetition portion of fees totaling
$583,000 was approved for payment from available partnership cash. Approximately
$186,000 of this amount was paid during 1996 from proceeds received from the
sale of Carlisle Square and Bellevue Towers. In December 1997, the remaining
unpaid balance of approximately $347,000 was assigned to MF VMS, L.L.C., the
noteholder for the senior and junior notes.
Certain affiliates of the former general partners and the VMS/Stout Venture may
be entitled to receive various fees upon disposition of the properties. These
fees will be paid from the disposition proceeds and are subordinated to the
distributions required by the Plan. There were no property dispositions for
which proceeds were received through December 31, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following combined financial statements of the Registrant are included
in Item 8:
Combined Balance Sheets at December 31, 1997 and 1996.
Combined Statements of Operations for the years ended December 31, 1997, 1996
and 1995.
Combined Statements of Changes in Partners' Deficit for the years ended December
31, 1997, 1996 and 1995.
Combined Statements of Cash Flows for the years ended December 31, 1997, 1996
and 1995.
Notes to Combined Financial Statements
Schedules, other than those listed, are omitted for the reason that they are
inapplicable or equivalent information has been included elsewhere herein.
The following items are incorporated:
Part V - Amended Restated Certificate and Agreement of:
Item 1(b)(i) Limited Partnership of VMS National Residential Portfolio I.
Item 1(b)(ii) Limited Partnership of VMS National Residential Portfolio II.
Item 1(b)(iii) Joint Venture Agreement between VMS National Residential
Portfolio I and VMS National Residential Portfolio II.
(b) No reports on Form 8-K were filed during the quarter ended December 31,
1997.
(c) EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
(3) and (21) Portions of the Prospectus of the Partnership dated May 15, 1986
as supplemented by Supplement Numbers 1 through 7 dated December
18, 1986, February 11, 1987, March 31, 1987, August 19, 1987,
January 4, 1988, April 18, 1988 and June 30, 1988 as filed with the
Commission pursuant to Rule 424(b) and (c), as well as the
Restated Limited Partnership Agreement set forth as Exhibit A to
the Prospectus, are hereby incorporated by reference, specifically
pages 15 - 21, 44 - 68, 76, 86 - 90, 106 - 108, A9 - A13, A16 - A20
and Supplements Numbers 1 and 2.
(10.1)Stipulation Regarding Entry of Agreed Final Judgment of Foreclosure and
Order Relieving Receiver of Obligation to Operate Subject Property -
Kendall Mall is incorporated by reference to the Form 10-QSB dated June
30, 1995.
(10.2)Form of Amended, Restated and Consolidated Senior Secured Promissory Note
between the Venture and MF VMS, L.L.C. relating to each of the Venture's
properties.
(10.3)Form of Amended, Restated and Consolidated Junior Secured Promissory Note
between the Venture and MF VMS, L.L.C. relating to each of the Venture's
properties.
(27)Financial Data Schedule
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
VMS NATIONAL PROPERTIES JOINT VENTURE
(Registrant)
VMS National Residential Portfolio I
By: MAERIL, Inc.
Managing General Partner
Date: March 31, 1998 By: /s/Carroll D. Vinson
Carroll D. Vinson
President and Director
VMS National Residential Portfolio II
By: MAERIL, Inc.
Managing General Partner
Date: March 31, 1998 By: /s/Carroll D. Vinson
Carroll D. Vinson
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/Carroll D. Vinson President and Director March 31, 1998
Carroll D. Vinson
/s/Robert D. Long, Jr. Vice President and Chief March 31, 1998
Robert D. Long, Jr. Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from VMS National
Joint Venture 1997 Year-End 10-K and is qualified in its entirety by reference
to such 10-K filing.
</LEGEND>
<CIK> 0000789089
<NAME> VMS NATIONAL PROPERTIES JOINT VENTURE
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,510
<SECURITIES> 0
<RECEIVABLES> 42
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 144,007
<DEPRECIATION> (75,411)
<TOTAL-ASSETS> 73,542
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 172,904
0
0
<COMMON> 0
<OTHER-SE> (144,660)
<TOTAL-LIABILITY-AND-EQUITY> 73,542
<SALES> 0
<TOTAL-REVENUES> 25,869
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 18,642
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,924
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 606
<EPS-PRIMARY> 1,300<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
SENIOR LOAN
AMENDED, RESTATED AND CONSOLIDATED
SENIOR SECURED PROMISSORY NOTE
$____________ New York, New York
As of December ___, 1997
FOR VALUE RECEIVED VMS NATIONAL PROPERTIES, an Illinois general
partnership, having an address at c/o MAERIL, Inc., One Insignia Financial
Plaza, Greenville, South Carolina 29602 (hereinafter referred to as "BORROWER"),
promises to pay to the order of MF VMS, L.L.C., a Delaware limited liability
company, having an address c/o BlackRock Capital Finance L.P., 345 Park Avenue,
New York, New York 10154 (hereinafter referred to as "LENDER"), or at such other
place as the holder hereof may from time to time designate in writing, the
principal sum of _____________________________________________________________
AND ________ DOLLARS ($____________) (the "NOTE FACE AMOUNT"), in lawful money
of the United States of America with interest thereon to be computed from the
date of this Amended, Restated and Consolidated Senior Secured Promissory Note
(this "NOTE") at the Applicable Interest Rate (hereinafter defined), and to be
paid as hereinafter provided.
A. PAYMENT TERMS
Borrower shall pay to Lender:
(i) a payment of interest only in the amount of __________________________
and ______ Dollars ($______) calculated at the Applicable Interest
Rate based on ________________________________________________________
AND _______ DOLLARS ($_____________) (the "AGREED VALUATION AMOUNT")
on January 1, 1998;
(ii) a constant payment of $__________ (the "MONTHLY PAYMENT") on February
1, 1998 and on the first day of each calendar month (the "MONTHLY
PAYMENT DATE") thereafter to and including January 1, 2008 (the
"MATURITY DATE"); and
(iii)the balance of the Note Face Amount then outstanding and all
interest thereon shall be due and payable on the Maturity Date.
Each of such payments shall be applied as follows:
(i) First, to the payment of interest computed on the Agreed Valuation
Amount at the Applicable Interest Rate; and
(ii) The balance applied toward the reduction of the Note Face Amount and
the Agreed Valuation Amount;
provided, however, so long as there shall not exist an Event of Default
(hereinafter defined) remaining uncured, and provided, further, that Borrower
simultaneously therewith prepays the then outstanding principal balance of the
Related Junior Note (hereinafter defined) in accordance with the terms thereof,
Borrower (and not any third party) may obtain a full and complete discharge of
this Note, by paying to Lender, on any Monthly Payment Date from and after
January 1, 2007 up to and including the Maturity Date, an amount equal to the
sum of: (i) the unpaid principal balance of the Agreed Valuation Amount; plus
(ii) all accrued and unpaid amounts resulting from application of the Applicable
Interest Rate to said unpaid principal balance of the Agreed Valuation Amount
(together with such additional amounts provided in, and all paid in accordance
with Article D hereof, collectively, the "REDUCED PAYOFF AMOUNT"). Upon
Lender's receipt of such payment and satisfaction of the foregoing conditions,
(a) this Note shall be discharged without further liability, and (b) the
Property (hereinafter defined) shall be released from the lien of the Security
Instrument (hereinafter defined).
The constant payment required hereunder is based on an amortization
schedule of three hundred (300) months (the "AMORTIZATION TERM"). The first
(1st) interest accrual period hereunder shall commence on and include the date
hereof and shall end on and include the last day of the present calendar month;
unless principal is advanced on the last day of a month, in which case the first
(1st) interest accrual period shall consist of only such last day. Each
interest accrual period thereafter shall commence on the first (1st) day of each
calendar month during the term of this Note and shall end on and include the
last day of such calendar month. All amounts due under this Note shall be
payable without setoff, counterclaim or any other deduction whatsoever.
This Note is made and delivered pursuant to (and in accordance with)
the Second Amended and Restated Plan of Reorganization of Borrower (the "PLAN")
in the Chapter 11 bankruptcy proceeding, In re VMS National Properties (Bank.
C.D. Cal., Case No. LA 91-65783-GM), as confirmed pursuant to an order dated
March 12, 1993 of the United States Bankruptcy Court for the Central District of
California (the "BANKRUPTCY COURT"), and as modified pursuant to a certain Order
Clarifying Plan Provisions and Approving Refinancing of Debtor's Secured
Obligations entered by the Bankruptcy Court on October 24, 1997 (the Plan, as
amended by such order, the "BANKRUPTCY DOCUMENTS").
B. INTEREST
The term "APPLICABLE INTEREST RATE" as used in this Note shall mean
eight and fifty one-hundredths (50/100) percent (8.50%) per annum. Interest on
the Agreed Valuation Amount shall be calculated in arrears on the basis of the
actual number of days elapsed and a three hundred sixty (360) day year. Until
the occurrence of an Event of Default, no interest shall accrue or be payable on
the excess of the unpaid principal balance of the Note Face Amount over the
unpaid balance of the Agreed Valuation Amount.
C. DEFAULT AND ACCELERATION
The whole of the Note Face Amount, together with all interest accrued
and unpaid thereon and all other sums due under the Security Instrument and this
Note (all such sums hereinafter collectively referred to as the "DEBT") shall
without notice become immediately due and payable at the option of Lender if (i)
the payments required under Sections L(2)(a), L(2)(c) and L(2)(d) hereof are not
paid within five (5) days after an applicable Monthly Payment Date, or (ii) any
other payment required in this Note is not paid within ten (10) days after
written notice from the Lender notifying Borrower that the same is due or on the
happening of any other default, after the expiration of any applicable notice
and grace periods, herein or under the terms of the Security Instrument
(hereinafter collectively an "EVENT OF DEFAULT"); provided, however, that no
Event of Default shall be deemed to have occurred if and to the extent that
Lender actually receives payment of the amounts required to be paid under
Sections L(2)(a), L(2)(c) and L(2)(d) hereof within five (5) days after the
applicable Monthly Payment Date as a payment of an Aggregate Operating Revenue
Shortfall Amount (hereinafter defined) under one (1) or more of the Other Senior
Notes (hereinafter defined); and provided, further, that there shall be no grace
period for failure to pay the Reduced Payoff Amount on the Maturity Date. All
of the terms, covenants and conditions contained in the Security Instrument and
the Other Security Documents (hereinafter defined) are hereby made part of this
Note to the same extent and with the same force as if they were fully set forth
herein. In the event that it should become necessary to employ counsel to
collect the Debt or to protect, sell or foreclose the security hereof, Borrower
also agrees to pay reasonable attorneys' fees for the services of such counsel
whether or not suit be brought.
D. PREPAYMENT
Borrower shall not have the right or privilege to prepay all or any
portion of the unpaid principal balance of this Note until January 1, 2007 (the
"LOCK OUT TERMINATION DATE"). Beginning on the Lock Out Termination Date,
provided no Event of Default exists, the principal balance of this Note may be
prepaid prior to the Maturity Date, in whole but not in part, upon: (i) not less
than 30 days and not more than 45 days prior written notice (the "PREPAYMENT
NOTICE") to Lender specifying the Monthly Payment Date on which prepayment is to
be made (the "PREPAYMENT DATE"); (ii) payment to Lender of the Reduced Payoff
Amount; (iii) payment of all accrued and unpaid interest on the outstanding
principal balance of the Reduced Payoff Amount to and including the Prepayment
Date, together with a payment of all interest which would have accrued on the
Reduced Payoff Amount to and including the first day of the calendar month
immediately following the Prepayment Date, if such prepayment occurs on a date
which is not the first day of a calendar month (the "SHORTFALL INTEREST
PAYMENT"); and (iv) payment of all other sums then due under this Note, the
Security Instrument and the Other Security Documents. If a Prepayment Notice is
given by Borrower to Lender pursuant to this Article D, any principal balance of
this Note and the other sums required under this Article D shall be due and
payable on the Prepayment Date. In the event of any permitted partial prepayment
of the principal balance of this Note pursuant to paragraph 3 or 6 of the
Security Instrument, the amount of principal prepaid shall be applied to the
principal last due under this Note and shall not release Borrower from the
obligation to pay the Monthly Payments next becoming due under this Note and the
Monthly Payment shall not be adjusted or recalculated as a result of such
partial prepayment.
If a Default Prepayment (defined herein) occurs, Borrower shall pay to
Lender (i) the entire Debt (calculated using the Note Face Amount), plus (ii)
the Prepayment Consideration (hereinafter defined). For the purposes of this
Note, the term "PREPAYMENT CONSIDERATION" shall mean an amount equal to the
greater of the following based upon the Agreed Valuation Amount: (A) one (1%)
percent of the Agreed Valuation Amount; and (B) the present value of a series of
payments each equal to the Payment Differential (hereinafter defined) and
payable on each Monthly Payment Date over the remaining original term of this
Note and on the Maturity Date discounted at the Reinvestment Yield (hereinafter
defined) for the number of months remaining from the date prepayment is received
(the "DEFAULT PREPAYMENT DATE") through and including the Maturity Date. The
term "REINVESTMENT YIELD" as used herein shall be equal to the lesser of (a) the
yield on the U.S. Treasury issue (primary issue) with a maturity date closest to
the Maturity Date, or (b) the yield on the U.S. Treasury issue (primary issue)
with a term equal to the remaining average life of the Debt, with each such
yield being based on the bid price for such issue as published in The Wall
Street Journal on the date that is 14 days prior to the Default Prepayment Date
(or, if such bid price is not published on that date, the next preceding date on
which such bid price is so published). The term "PAYMENT DIFFERENTIAL" as used
herein shall be equal to (x) the Applicable Interest Rate minus the Reinvestment
Yield, divided by (y) 12 and multiplied by (z) the Agreed Valuation Amount (or
such other amount being prepaid in order to reinstate the Debt, provided such
amount does not exceed the Agreed Valuation Amount) on the Default Prepayment
Date, provided that the Payment Differential shall in no event be less than
zero. In no event, however, shall Lender be required to reinvest any prepayment
proceeds in U.S. Treasury obligations or otherwise. Lender shall notify
Borrower of the amount, and the basis of determination, of the required
Prepayment Consideration. For purposes of this Note, the term "DEFAULT
PREPAYMENT" shall mean a prepayment of any principal amount of this Note made
during the continuance of any Event of Default or after an acceleration of the
Maturity Date under any circumstances, including, without limitation, a
prepayment occurring in connection with reinstatement of the Security Instrument
provided by statute under foreclosure proceedings or exercise of a power of
sale, any statutory right of redemption exercised by Borrower or any other party
having a statutory right to redeem or prevent foreclosure, any sale in
foreclosure or under exercise of a power of sale or otherwise.
E. DEFAULT INTEREST
Borrower does hereby agree that upon the occurrence of an Event of
Default or upon the failure of Borrower to pay the Debt in full on the Maturity
Date, Lender shall be entitled to receive and Borrower shall pay interest
("DEFAULT INTEREST") on the Note Face Amount at the rate (the "DEFAULT INTEREST
RATE") of (i) the greater of (a) two percent (2%) per annum over the Prime Rate
(hereinafter defined), as such Prime Rate shall change from time to time or (b)
five percent (5%) per annum over the Applicable Interest Rate then in effect or
(ii) the maximum rate of interest which Borrower may by law pay, whichever is
lower, to be computed from the occurrence of the Event of Default until the
actual receipt and collection of the Debt (calculated using the Note Face
Amount). This charge shall be added to the Debt, and shall be deemed secured by
the Security Instrument. This clause, however, shall not be construed as an
agreement or privilege to extend the date of the payment of the Debt, nor as a
waiver of any other right or remedy accruing to Lender by reason of the
occurrence of any Event of Default. The term "PRIME RATE" as used in this Note
shall mean the daily "prime rate" published in The Wall Street Journal from the
date of the Event of Default, as such "prime rate" shall change from time to
time. In the event The Wall Street Journal ceases to publish the "prime rate"
then Lender shall select an equivalent publication which publishes such "prime
rate"; and in the event such prime rates are no longer generally published or
are limited, regulated or administered by a governmental or quasi-governmental
body, then Lender shall select a comparable interest rate index.
F. SECURITY
This Note is secured by (i) a certain Amended, Restated and
Consolidated Senior Mortgage and Security Agreement of even date herewith (the
"SECURITY INSTRUMENT") in an original principal amount equal to the Note Face
Amount, covering certain premises located in Pulaski County, State of Arkansas
and other property (collectively, the "PROPERTY"), as more particularly
described therein and intended to be duly recorded in said County, (ii) a
certain Amended, Restated and Consolidated Senior Assignment of Leases and Rents
of even date herewith executed by Borrower in favor of Lender with respect to
the Property (the "ASSIGNMENT OF LEASES"), (iii) the Other Security Documents
(hereinafter defined), and (iv) the Other Senior Security Instruments
(hereinafter defined) and the Amended, Restated and Consolidated Senior
Assignments of Leases and Rents executed in connection therewith. The term
"OTHER SECURITY DOCUMENTS" as used in this Note means, collectively, this Note,
the Security Instrument, the Assignment of Leases and any and all other
documents securing, evidencing, or guaranteeing all or any portion of the loan
evidenced by this Note (the "LOAN"), or otherwise executed and/or delivered in
connection with this Note and the Loan.
As of the date of this Note, Lender is the owner and holder of those
certain promissory notes described on SCHEDULE A annexed hereto (collectively,
the "EXISTING NOTES"), which are secured by certain mortgages and deeds of trust
(collectively, the "EXISTING SECURITY INSTRUMENTS") encumbering the fifteen (15)
apartment building complexes (the "REMAINING COMPLEXES;" the Remaining Complexes
other than the Property, collectively, the "OTHER ENCUMBERED PROPERTY") listed
on said SCHEDULE A. Included among the Existing Notes are certain promissory
notes which relate specifically to certain of the Existing Security Instruments
which encumber the Property, as more particularly described on said SCHEDULE A
(collectively, the "RELATED EXISTING NOTES"). Lender and Borrower hereby agree
to consolidate the indebtedness evidenced by the Existing Notes into one (1)
consolidated indebtedness in the amount of $182,101,926.00 (the "AGGREGATE
INDEBTEDNESS AMOUNT"). In connection with such consolidation, Lender and
Borrower hereby agree to sever the Aggregate Indebtedness Amount into thirty
(30) individual portions, which, from and after the date hereof, shall be
evidenced by (i) fifteen (15) amended, restated and consolidated senior secured
promissory notes (collectively, the "RESTATED SENIOR NOTES;" the Restated Senior
Notes other than this Note, collectively, the "OTHER SENIOR NOTES"), and (ii)
fifteen (15) amended, restated and consolidated junior secured promissory notes
(collectively, the "RESTATED JUNIOR NOTES"), as more particularly described on
SCHEDULE B annexed hereto. The Restated Senior Notes shall be secured by
certain amended, restated and consolidated senior mortgages and/or deeds of
trust (the "RESTATED SENIOR SECURITY INSTRUMENTS;" the Restated Senior Security
Instruments other than the Security Instrument, collectively, the "OTHER SENIOR
SECURITY INSTRUMENTS"), and the Restated Junior Notes shall be secured by
certain amended, restated and consolidated junior mortgages and/or deeds of
trust (the "RESTATED JUNIOR SECURITY INSTRUMENTS;" the Restated Junior Security
Instruments other than the Related Junior Security Instrument, collectively, the
"OTHER JUNIOR SECURITY INSTRUMENTS") encumbering the Remaining Complexes as
senior and junior (subordinated) liens in the amounts set forth on SCHEDULE C
annexed hereto. This Note is one (1) of the Restated Senior Notes, and together
with the Related Junior Note (hereinafter defined), is a modification and
restatement of and substitute for the indebtedness evidenced by the Related
Existing Notes, and this Note and the Related Junior Note are intended to be a
recast, restatement and replacement of the Related Existing Notes made as of the
date hereof. On the date hereof, Borrower and Lender are also entering into
that certain amended, restated and consolidated junior secured promissory note
(the "RELATED JUNIOR NOTE") with respect to the Property. The Related Junior
Note is one (1) of the Restated Junior Notes. The Related Junior Note shall be
secured by a certain amended, restated and consolidated junior mortgage or deed
of trust (the "RELATED JUNIOR SECURITY INSTRUMENT"), which is one (1) of the
Restated Junior Security Instruments. Borrower and Lender intend for the
indebtedness evidenced by the Related Junior Note to be subordinate to the
indebtedness evidenced hereby, and intend for the lien of the Related Junior
Security Instrument to be subject and subordinate in all respects to the lien of
the Security Instrument.
Notwithstanding any provision in this Note, the Security Instrument,
the Other Senior Security Instruments or any other agreement, document or
instrument to the contrary, any default by Borrower under this Note shall not,
by itself, constitute a default or Event of Default under the Other Senior
Security Instruments or the Other Senior Notes, and Lender shall not be entitled
by such failure to foreclose the Other Senior Security Instruments or accelerate
the Other Senior Notes, it being the intent of the parties that this Note and
the Security Instrument, on the one hand, and the Other Senior Security
Instruments and the Other Senior Notes, on the other hand, shall not be "cross-
defaulted."
However, if the proceeds realized by Lender out of any enforcement of
this Note, whether by judicial or non-judicial foreclosure, power of sale or
other similar remedy, exceed the Note Face Amount and any additional amounts due
to Lender under the provisions of this Note, then unless otherwise required by
law, such excess proceeds may be retained by Lender, and, if so retained, shall
be applied in such proportion as Lender shall determine in Lender's sole
discretion to reduce the outstanding principal indebtedness of one (1) or more
of the Other Senior Notes.
G. SAVINGS CLAUSE
This Note is subject to the express condition that at no time shall
Borrower be obligated or required to pay interest on the principal balance due
hereunder at a rate which could subject Lender to either civil or criminal
liability as a result of being in excess of the maximum interest rate which
Borrower is permitted by applicable law to contract or agree to pay. If by the
terms of this Note, Borrower is at any time required or obligated to pay
interest on the principal balance due hereunder at a rate in excess of such
maximum rate, the Applicable Interest Rate shall be deemed to be immediately
reduced to such maximum rate and all previous payments in excess of the maximum
rate shall be deemed to have been payments in reduction of principal and not on
account of the interest due hereunder.
H. LATE CHARGE
If any sum payable under this Note is not received by Lender within
five (5) days after the date on which it is due, without taking into account or
including within said five (5) day period any applicable notice or grace period,
Borrower shall pay to Lender upon demand an amount equal to the lesser of (i)
five percent (5%) of such unpaid sum or (ii) the maximum amount permitted by
applicable law to defray the expenses incurred by Lender in handling and
processing such delinquent payment and to compensate Lender for the loss of the
use of such delinquent payment and such amount shall be secured by the Security
Instrument and the Other Security Documents. Nothing contained herein is
intended to affect the rights of Lender in and to any Default Interest due to
Lender pursuant to the provisions of paragraph E hereof entitled "Default
Interest".
I. MISCELLANEOUS
This Note may not be modified, amended, waived, extended, changed,
discharged or terminated orally or by any act or failure to act on the part of
Borrower or Lender, but only by an agreement in writing signed by the party
against whom enforcement of any modification, amendment, waiver, extension,
change, discharge or termination is sought.
If Borrower consists of more than one person or party, the obligations
and liabilities of each such person or party shall be joint and several. The
foregoing sentence, however, is not intended to affect the limited liability of
any limited partner or stockholder of Borrower afforded by applicable
partnership or corporate law. The terms and provisions hereof shall be binding
upon and inure to the benefit of Borrower and Lender and their respective heirs,
executors, legal representative, successors, successors-in-title, and assigns,
whether by voluntary action of the parties or by operation of law.
Borrower and all others who may become liable for the payment of all
or any part of the Debt do hereby severally waive presentment and demand for
payment, notice of dishonor, protest and notice of protest and non-payment. No
release of any security for the Debt or extension of time for payment of this
Note or any installment hereof, and no alteration, amendment or waiver of any
provision of this Note, the Security Instrument or the Other Security Documents
made by agreement between Lender and any other person or party shall release,
modify, amend, waive, extend, change, discharge, terminate or affect the
liability of Borrower, and any other who may become liable for the payment of
all or any part of the Debt, under this Note, the Security Instrument or the
Other Security Documents.
Borrower (and the undersigned representative of Borrower, if any)
represents that Borrower has full power, authority and legal right to execute
and deliver this Note, the Security Instrument and the Other Security Documents
and that this Note, the Security Instrument and the Other Security Documents
constitute valid and binding obligations of Borrower.
This Note shall be governed and construed in accordance with the laws
of the State of New York and the applicable laws of the United States of
America.
All notices or other communications required or permitted to be given
pursuant hereto shall be given in the manner specified in the Security
Instrument directed to the parties at their respective addresses as provided
therein.
BORROWER HEREBY AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE
TRIABLE OF RIGHT BY JURY, AND WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE
EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THE OTHER
SECURITY DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN
CONNECTION THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY
AND VOLUNTARILY BY BORROWER, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH
INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE
ACCRUE. LENDER IS HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY
PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY BORROWER.
J. EXCULPATION
Lender shall not enforce the liability and obligation of Borrower to
perform and observe the obligations contained in this Note or the Security
Instrument by any action or proceeding wherein a money judgment shall be sought
against Borrower or any general or limited partner or member of Borrower
(hereinafter collectively referred to as the "EXCULPATED PARTIES"), except that
Lender may bring a foreclosure action, action for specific performance or other
appropriate action or proceeding to enable Lender to enforce and realize upon
this Note, the Security Instrument, the Other Security Documents, and the
interest in the Property, the Rents (as defined in the Security Instrument) and
any other collateral given to Lender created by this Note, the Security
Instrument and the Other Security Documents; provided, however, that any
judgment in any such action or proceeding shall be enforceable against the
Exculpated Parties only to the extent of Borrower's interest in the Property, in
the Rents and in any other collateral given to Lender. Lender, by accepting
this Note and the Security Instrument, agrees that it shall not sue for, seek or
demand any deficiency judgment against the Exculpated Parties in any such action
or proceeding, under or by reason of or under or in connection with the Security
Instrument, the Other Security Documents or this Note. The provisions of this
paragraph shall not, however, (i) constitute a waiver, release or impairment of
any obligation evidenced or secured by the Security Instrument, the Other
Security Documents or this Note; (ii) impair the right of Lender to name
Borrower as a party defendant in any action or suit for judicial foreclosure and
sale under the Security Instrument; (iii) affect the validity or enforceability
of any guaranty made in connection with the Security Instrument, this Note, or
the Other Security Documents; (iv) impair the right of Lender to obtain the
appointment of a receiver upon the occurrence and continuance of an Event of
Default; (v) impair the enforcement of the Assignment of Leases and Rents dated
the date hereof given by Borrower to Lender executed in connection herewith;
(vi) impair the right of Lender to bring suit with respect to fraud or
intentional misrepresentation by Borrower, the Exculpated Parties or any other
person or entity in connection with the Security Instrument, this Note or the
Other Security Documents; (vii) impair the right of Lender to obtain the Rents
received by any of the Exculpated Parties after the occurrence and continuance
of an Event of Default; (viii) impair the right of Lender to bring suit with
respect to the Exculpated Parties' misappropriation of tenant security deposits
or Rents collected in advance; (ix) impair the right of Lender to obtain
insurance proceeds or condemnation awards due to Lender under the Security
Instrument; (x) impair the right of Lender to enforce the provisions of sub-
paragraphs 36(g) through 36(k), inclusive and paragraphs 34 and 35 of the
Security Instrument against the Borrower (excluding the general and limited
partners or members of Borrower); or (xi) impair the right of Lender to recover
any part of the Debt from the Borrower (excluding the general and limited
partners or members of Borrower) following the breach of any covenant contained
in paragraphs 9 or 55 of the Security Instrument.
Nothing herein shall be deemed to be a waiver of any rights which
Lender may have under Sections 506(a), 506(b), 1111(b) or any other provisions
of the U.S. Bankruptcy Code of file a claim for the full amount of the
indebtedness secured by the Security Instrument or to require that all
collateral shall continue to secure all of the indebtedness owing to Lender in
accordance with this Note, the Security Instrument and other Documents executed
and delivered in connection with the Loan.
THIS NOTE, AND THE OTHER SECURITY DOCUMENTS EMBODY THE ENTIRE
AGREEMENT AND UNDERSTANDING BETWEEN LENDER, BORROWER AND THE OTHER RESPECTIVE
PARTIES HERETO AND THERETO AND SUPERSEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS
BETWEEN SUCH PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR CONTEMPORANEOUS OR SUBSEQUENT
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
K. SALE OF NOTE AND SECURITIZATION
Borrower acknowledges that Lender may elect to sell this Note and the
Other Senior Notes or participation therein or cause this Note to be included in
a securitization (such sale and/or securitization, the "SECURITIZATION") of
rated single or multi-class securities (the "SECURITIES") secured by or
evidencing ownership interests in this Note, the Other Senior Notes, the
Security Instrument and the Other Senior Security Instruments.
L. APPLICATION OF GROSS RECEIPTS FROM THE PROPERTY
1. The following terms have the meanings set forth below
(capitalized terms not defined herein shall have the meaning provided in the
Security Instrument):
"AGGREGATE OPERATING REVENUE SHORTFALL AMOUNT" shall mean on any
Monthly Payment Date, the amount, if any, by which the aggregate amount of Gross
Receipts from the Other Encumbered Property is less than the sum of the Basic
Carrying Costs (hereinafter defined) required to be made by Borrower with
respect to the Other Encumbered Property (pursuant to the terms of the Other
Senior Notes) on such Monthly Payment Date.
"BASIC CARRYING COSTS" shall mean, on any Monthly Payment Date, the
aggregate amount of funds required to be paid by Borrower (or deposited by
Borrower into an escrow or reserve account) with respect to the following: (i)
the Taxes and Insurance Monthly Amount, (ii) the Monthly Payment under this
Note, and (iii) the Monthly Deposit (as defined in the CapEx Reserve Agreement),
required to be paid pursuant to the CapEx Reserve Agreement and such other
reserves as otherwise required under the Other Security Documents.
"CAPEX RESERVE AGREEMENT" shall mean that certain Multifamily
Replacement Reserve and Security Agreement dated as of the date hereof, between
Borrower and Lender, with respect to the Property.
"GROSS RECEIPTS" shall mean, for any period, all revenues and receipts
of every kind derived from or otherwise relating to the Property and all
departments and parts thereof during such period (from both cash and credit
transactions) from rental of rooms, stores, offices, exhibit or sales space of
every kind; license, lease and concession fees and rentals; income from vending
machines; health club membership fees; golf club membership dues; food and
beverage sales (not including in any of the foregoing gross receipts of
licensees, lessees and concessionaires); wholesale and retail sales of
merchandise, service charges, and proceeds, if any, from business interruption
or other loss of income insurance; excluding, however, (i) gratuities to
employees of the Property, (ii) federal, state or municipal sales or use taxes
or similar taxes collected directly from patrons or guests or included as part
of the sales price of any goods or services, (iii) any Net Award (as defined in
the Security Instrument) in connection with a taking or condemnation of all or
any portion of the Property (or any deed in lieu thereof), (iv) any amounts paid
as a result of a claim under any of the Policies (as defined in the Security
Instrument) required to be maintained by the Borrower pursuant to the Security
Instrument (other than from rental loss or business interruption insurance), (v)
charges or payments collected from patrons or guests for telephone, telegraph or
other communication systems or other pass-through services to the extent such
charges are remitted to the provider of such services, and (vi) security
deposits, until forfeited.
"MONTHLY OPERATING EXPENSE PAYMENT AMOUNT" shall mean, for any
Monthly Payment Date, the amount of Operating Expenses (subject to the terms of
Section 15(b) of the Security Instrument) for the calendar month immediately
preceding the Monthly Payment Date in question.
"OPERATING EXPENSES" shall mean, for any period, all expenditures by
or on behalf of Borrower as and to the extent required to be expensed or allowed
to be expensed and in fact expensed under generally accepted accounting
principles during such period in connection with the ownership, operation,
maintenance, repair or leasing of the Property, or have otherwise been approved
in writing by Lender, including (i) fees payable under any Management Agreement
in an amount not to exceed four percent (4%) of Rents (as defined below)
actually collected during any monthly period; Insurance Premiums; bank charges;
expenses for accounting, advertising, marketing, architectural services,
utilities, extermination, cleaning, trash removal, window washing, landscaping
and security; and reasonable and necessary legal expenses incurred in connection
with the operation of the Property or in connection with the legal operation of
Borrower and/or its constituent general partners; (ii) Taxes and Other Charges
(as such terms are defined in the Security Instrument), excluding fines,
penalties, interest or Taxes or Other Charges payable by reason of Maker's
failure to pay an imposition timely; (iii) wages, benefits, payroll taxes,
uniforms, insurance costs and all other related expenses for employees of
Borrower engaged in the repair, operation or maintenance of the Property; (iv)
the cost of routine interior and exterior maintenance, repairs and minor
alterations; (v) departmental expenses incurred at departments within the
Property; (vi) reasonable administrative and general expenses for all of
Borrower and its constituent general partners; (vii) the cost of inventories and
fixed asset supplies consumed in the operation of the Property; (viii) a
reasonable reserve for uncollectible accounts; (ix) reasonable costs and fees of
independent professionals, technical consultants, operational experts (including
quality assurance inspectors) or other third parties retained to perform
services required or permitted hereunder; (x) cost of attendance by employees at
training and manpower development programs; (xi) association dues; (xii) costs
of making reservations at or for the Property; (xiii) fees under any franchise
agreement; (xiv) computer processing charges; and (xv) operational equipment and
other lease payments as approved by Payee; provided that Operating Expenses will
not include debt service on this Note, capital expenditures, non-cash items such
as depreciation and amortization or any extraordinary one-time expenditures not
considered operating expenses under generally accepted accounting principles.
For the purposes of this definition of the term "Operating Expenses", the term
"Rents" shall mean the following items, collectively, collected during any
monthly period: (A) tenant rentals pursuant to tenant leases; (B) cleaning,
security and damage deposits forfeited by tenants; (C) net income from laundry
and vending machines; (D) parking income; (E) income from utility bill-backs to
tenants; (F) clubhouse income; (G) proceeds from rental interruption insurance;
and (H) any other sums and charges collected in connection with termination of
the tenant leases. It is expressly understood that rent for such purposes shall
not include: (i) tenant security deposits; (ii) the proceeds, if any, payable
to Borrower from the sale, refinancing or other disposal of all or any part of
the Property; (iii) the proceeds payable to Borrower by reason of any hazard
insurance policies, title insurance policies, or terms of a similar nature; (iv)
the proceeds of any taking by condemnation or eminent domain by a public or
quasi-public authority of all or any part of the Property; (v) any reversal of
any contingency for tax or insurance reserves; (vi) interest on security
deposits; or (vii) refunds of any taxes, water, sewer, electric charges or any
other extraordinary income.
"PERMITTED JUNIOR INDEBTEDNESS" shall mean the indebtedness evidenced
by the Restated Junior Notes and secured by the Restated Junior Security
Instruments, or any debt which refinances such junior indebtedness.
"TAXES AND INSURANCE MONTHLY AMOUNT" shall mean, on each Payment Date,
the aggregate amount of (i) one-twelfth (1/12) of the Taxes and Other Charges
(as such terms are defined in the Security Instrument) that Lender estimates
will be payable during the next twelve (12) months (the "TAX MONTHLY AMOUNT") in
order for Borrower to accumulate sufficient funds to pay all such Taxes and
Other Charges at least thirty (30) days prior to their respective due dates, and
(ii) one-twelfth (1/12) of the Insurance Premiums (the "INSURANCE PREMIUM
MONTHLY AMOUNT") that Lender estimates will be payable for the renewal of the
coverage afforded by the Policies upon the expiration thereof in order for
Borrower to accumulate sufficient funds to pay all such Insurance Premiums at
least thirty (30) days prior to the expiration of the Policies.
"UNSATISFIED DEFICIENCY JUDGMENTS" shall mean any amounts owing to
Lender relating to any deficiency owing to Lender as a result of any judicial or
non-judicial foreclosure of one (1) or more of the Other Senior Security
Instruments.
2. On each Monthly Payment Date, Borrower shall apply Gross Receipts
received since the immediately preceding Monthly Payment Date, in the following
amounts, for the following purposes, and in the following order of priority:
(a) in an amount equal to the Taxes and Insurance Monthly Amount
as follows:
(i) the Tax Monthly Amount, to be deposited by Borrower
into the Escrow Funds to be held and disbursed by
Lender in accordance with the last paragraph of this
Section L(2) and the Security Instrument, and
(ii) the Insurance Premium Monthly Amount, to be paid by
Borrower as its monthly premiums of all insurance
policies required to be maintained pursuant to the
terms of the Security Instrument; provided, however,
that if Borrower discontinues paying for its insurance
on a monthly basis, Borrower shall commence to pay the
Insurance Premium Monthly Amount to Lender, to be
deposited into the Escrow Funds to be held and
disbursed by Lender in accordance with the last
paragraph of this Section L(2);
(b) to the payment of the Monthly Operating Expense Payment
Amount with respect to the month in which such Monthly
Payment Date occurs;
(c) to the payment to Lender of:
(i) first, the Monthly Payment, then due and payable, and
(ii) second, any other Debt then due and payable;
(d) to the Reserve (as defined in the CapEx Reserve Agreement),
in the amount of the Monthly Deposit, together with such other reserves as
are required under the Other Security Documents;
(e) to the payment to Lender of the Aggregate Operating Revenue
Shortfall Amount, if any;
(f) to the payment to Lender of any Unsatisfied Deficiency
Judgments then outstanding; and
(g) the balance, to the holder of the Permitted Junior
Indebtedness in satisfaction of any amount payable in connection therewith.
Borrower hereby pledges to Lender and grants to Lender a security
interest in any and all monies now or hereafter collected for the Tax Monthly
Amount and Insurance Monthly Amount as additional security for the payment of
this Note and the other Restated Senior Notes (collectively the "ESCROW FUNDS").
Lender will apply the Tax Monthly Amount and Insurance Monthly Amount collected
in the Escrow Funds to payments of Taxes and Insurance Premiums required to be
made by Borrower pursuant to this Section and in accordance with the terms of
the Security Instrument. In making any payment out of the Escrow Fund, Lender
may do so according to any bill, statement or estimate procured from the
appropriate public office (with respect to Taxes) or insurer or agent (with
respect to Insurance Premiums), without inquiry into the accuracy of such bill,
statement or estimate or into the validity of any tax, assessment, sale,
forfeiture, tax lien or title or claim thereof. If the amount deposited into
the Escrow Fund shall exceed the amounts due for Taxes and Other Charges and
Insurance Premiums pursuant to this Section, Lender shall return any excess to
Borrower or credit such excess against future payments to be made to the Escrow
Fund. In allocating such excess, Lender may deal with the person shown on the
records of Lender to be the owner of the Property. If at any time Lender
determines that the funds on deposit in the Escrow Fund are not or will not be
sufficient to pay the items set forth in clauses 2(a)(i) and 2(a)(ii) above,
Lender shall notify Borrower of such determination and Borrower shall increase
its monthly payments to Lender by the amount that Lender estimates is sufficient
to make up the deficiency at least thirty (30) days prior to delinquency of the
Taxes and Other Charges and/or expiration of the Policies, as the case may be.
The Escrow Fund shall not constitute a trust fund and may be commingled with
other monies held by Lender, provided that the Escrow Fund shall be held in an
interest bearing account. Lender shall have no responsibility or liability for
the amount of interest earned on the Escrow Fund. All interest earned on the
funds in the Escrow Fund shall be added to and become part of the Escrow Fund
and shall be for the benefit of Borrower, subject to Lender's rights pursuant to
the terms of this Note. All earnings or interest on the Escrow Fund shall be
disbursed as provided in this section.
3. Borrower hereby acknowledges and agrees that in accordance with
Section 2(e) of this Article L, Gross Receipts from the Property shall be
available to pay Basic Carrying Costs in connection with the Other Encumbered
Property.
4. Notwithstanding any provision of this Note to the contrary, upon
the occurrence of an Event of Default, Lender (or its agent), to the extent
permitted under applicable law without adversely affecting the other rights and
remedies provided to Lender under this Note or the Other Security Documents, may
apply any funds then held by, or thereafter received by, Lender in accordance
with any of the Other Security Documents in such order as Lender in its sole
discretion shall determine, to (a) the payment of (i) principal and interest
payments on this Note, (ii) the other Debt, (iii) principal and interest on the
Other Senior Notes, and (iv) payment of any other indebtedness secured by the
Other Senior Security Instruments, until all such amounts are paid in full, and
(b) to preserve the Property or the Other Encumbered Property.
5. Nothing in this Article L shall limit, reduce or otherwise affect
Borrower's obligations to make payments of the Monthly Payment or payments of
the Taxes and Insurance Monthly Amount, or the Monthly Deposit or any other
payments (or deposits) of any other amounts due hereunder and under the Other
Security Documents, whether or not Gross Receipts are available in sufficient
amounts to fund such payments.
IN WITNESS WHEREOF, Borrower and Lender have duly executed this Note
under seal as of the day and year first above written.
BORROWER:
VMS NATIONAL PROPERTIES,
an Illinois general partnership
By: VMS NATIONAL RESIDENTIAL PORTFOLIO I, an Illinois
limited partnership, its general partner
By: MAERIL, INC., a Delaware corporation, its
general partner
By:_____________________________
Name:
Title: Vice President
By: VMS NATIONAL RESIDENTIAL PORTFOLIO II, an Illinois
limited partnership, its general partner
By: MAERIL, INC., a Delaware corporation, its
general partner
By:_____________________________
Name:
Title: Vice President
LENDER:
MF VMS, L.L.C.,
a Delaware limited liability company
By: BlackRock Capital Finance L.P.,
its managing member
By: BlackRock Asset Investors,
its general partner
By:________________________
Name:
Title:
This instrument prepared by:
Robert L. Golub, Esq.
Sidley & Austin
875 Third Avenue
New York, New York 10022
JUNIOR LOAN
AMENDED, RESTATED AND CONSOLIDATED
JUNIOR SECURED PROMISSORY NOTE
$_____________ New York, New York
As of December ___, 1997
FOR VALUE RECEIVED VMS NATIONAL PROPERTIES, an Illinois general
partnership, having an address at c/o MAERIL, Inc., One Insignia Financial
Plaza, Greenville, South Carolina 29602 (hereinafter referred to as "BORROWER"),
promises to pay to the order of MF VMS, L.L.C., a Delaware limited liability
company, having an address c/o BlackRock Capital Finance L.P., 345 Park Avenue,
New York, New York 10154 (hereinafter referred to as "LENDER"), or at such other
place as the holder hereof may from time to time designate in writing, the
principal sum of ____________________________________________________ AND ______
DOLLARS ($__________) (the "NOTE FACE AMOUNT"), in lawful money of the United
States of America with interest thereon to be computed from the date of this
Amended, Restated and Consolidated Junior Secured Promissory Note (this "NOTE")
at the Applicable Interest Rate (hereinafter defined), and to be paid as
hereinafter provided.
A. PAYMENT TERMS
Borrower shall pay to Lender the following amounts:
(i) Commencing on January 1, 1998 and on the first day of each calendar
month (the "MONTHLY PAYMENT DATE") thereafter to and including January
1, 2008 (the "MATURITY DATE"), a monthly payment (the "MONTHLY
PAYMENT") equal to the Net Operating Revenue from the Collection
Period; and
(ii) the balance of the Note Face Amount then outstanding and all interest
thereon shall be due and payable on the Maturity Date.
Each of such payments shall be applied as follows:
(i) First, to the payment of interest computed on the Note Face Amount;
and
(ii) The balance applied toward the reduction of the Note Face Amount;
provided, however, so long as there shall not exist an Event of Default
(hereinafter defined) remaining uncured, Borrower (and not any third party) may
obtain a full and complete discharge of this Note, by paying to Lender, on any
Monthly Payment Date up to and including the Maturity Date, an amount equal to
the sum of: (i) the unpaid principal balance of the Note Face Amount; plus (ii)
all accrued and unpaid amounts resulting from application of the Applicable
Interest Rate to said unpaid principal balance of the Note Face Amount, together
with such additional amounts provided in, and all paid in accordance with,
Article D hereof. Upon Lender's receipt of such payment and satisfaction of the
foregoing conditions, (a) this Note shall be discharged without further
liability, and (b) the Property (hereinafter defined) shall be released from the
lien of the Security Instrument (hereinafter defined). As used herein, the term
"COLLECTION PERIOD" shall mean, with respect to any Monthly Payment Date, the
period of time commencing on and including the first (1st) day of the calendar
month immediately preceding the calendar month in which such Monthly Payment
Date occurs and ending on and including the last day of the calendar month
immediately preceding the calendar month in which such Monthly Payment Date
occurs. The first (1st) Collection Period shall commence on the date hereof and
end on December 31, 1997.
The first (1st) interest accrual period hereunder shall commence on
and include the date hereof and shall end on and include the last day of the
present calendar month; unless principal is advanced on the last day of a month,
in which case the first (1st) interest accrual period shall consist of only such
last day. Each interest accrual period thereafter shall commence on the first
(1st) day of each calendar month during the term of this Note and shall end on
and include the last day of such calendar month. All amounts due under this
Note shall be payable without setoff, counterclaim or any other deduction
whatsoever.
This Note is made and delivered pursuant to (and in accordance with)
the Second Amended and Restated Plan of Reorganization of Borrower (the "PLAN")
in the Chapter 11 bankruptcy proceeding, In re VMS National Properties (Bank.
C.D. Cal., Case No. LA 91-65783-GM), as confirmed pursuant to an order dated
March 12, 1993 of the United States Bankruptcy Court for the Central District of
California (the "BANKRUPTCY COURT"), and as modified pursuant to a certain Order
Clarifying Plan Provisions and Approving Refinancing of Debtor's Secured
Obligations entered by the Bankruptcy Court on October 24, 1997 (the Plan, as
amended by such order, the "BANKRUPTCY DOCUMENTS").
B. INTEREST
The term "APPLICABLE INTEREST RATE" as used in this Note shall mean
ten and eighty-four one hundredths (84/100) percent (10.84%) per annum.
Interest on the Note Face Amount shall be calculated in arrears on the basis of
the actual number of days elapsed and a three hundred sixty (360) day year.
C. DEFAULT AND ACCELERATION
The whole of the Note Face Amount, together with all interest accrued
and unpaid thereon and all other sums due under the Security Instrument and this
Note (all such sums hereinafter collectively referred to as the "DEBT") shall
without notice become immediately due and payable at the option of Lender if (i)
there is sufficient Net Operating Revenue to pay the amounts required under
Article L hereof and any portion of such amounts is not paid within ten (10)
days after an applicable Monthly Payment Date, or (ii) any other payment
required in this Note is not paid within ten (10) days after written notice from
the Lender notifying Borrower that the same is due or on the happening of any
other default, after the expiration of any applicable notice and grace periods,
herein or under the terms of the Security Instrument (hereinafter collectively
an "EVENT OF DEFAULT"); provided, however, that there shall be no grace period
for failure to pay the Note Face Amount on the Maturity Date. All of the terms,
covenants and conditions contained in the Security Instrument and the Other
Security Documents (hereinafter defined) are hereby made part of this Note to
the same extent and with the same force as if they were fully set forth herein.
In the event that it should become necessary to employ counsel to collect the
Debt or to protect, sell or foreclose the security hereof, Borrower also agrees
to pay reasonable attorneys' fees for the services of such counsel whether or
not suit be brought.
D. PREPAYMENT
Provided no Event of Default exists, Borrower shall have the right and
privilege to prepay all or any portion of the unpaid principal balance of this
Note at any time prior to the Maturity Date, upon: (i) not less than 30 days and
not more than 45 days prior written notice (the "PREPAYMENT NOTICE") to Lender
specifying the Monthly Payment Date on which prepayment is to be made (the
"PREPAYMENT DATE"); (ii) payment to Lender of the Note Face Amount; (iii)
payment of all accrued and unpaid interest on the outstanding principal balance
of the Note Face Amount to and including the Prepayment Date, together with a
payment of all interest which would have accrued on the Note Face Amount to and
including the first day of the calendar month immediately following the
Prepayment Date, if such prepayment occurs on a date which is not the first day
of a calendar month (the "SHORTFALL INTEREST PAYMENT"); and (iv) payment of all
other sums then due under this Note, the Security Instrument and the Other
Security Documents. In the event of any permitted partial prepayment of the
principal balance of this Note pursuant to paragraph 3 or 6 of the Security
Instrument, the amount of principal prepaid shall be applied to the principal
last due under this Note and shall not release Borrower from the obligation to
pay the Monthly Payments next becoming due under this Note.
E. DEFAULT INTEREST
Borrower does hereby agree that upon the occurrence of an Event of
Default or upon the failure of Borrower to pay the Debt in full on the Maturity
Date, Lender shall be entitled to receive and Borrower shall pay interest
("DEFAULT INTEREST") on the Note Face Amount at the rate (the "DEFAULT INTEREST
RATE") of (i) the greater of (a) two percent (2%) per annum over the Prime Rate
(hereinafter defined), as such Prime Rate shall change from time to time or (b)
five percent (5%) per annum over the Applicable Interest Rate then in effect or
(ii) the maximum rate of interest which Borrower may by law pay, whichever is
lower, to be computed from the occurrence of the Event of Default until the
actual receipt and collection of the Debt (calculated using the Note Face
Amount). This charge shall be added to the Debt, and shall be deemed secured by
the Security Instrument. This clause, however, shall not be construed as an
agreement or privilege to extend the date of the payment of the Debt, nor as a
waiver of any other right or remedy accruing to Lender by reason of the
occurrence of any Event of Default. The term "PRIME RATE" as used in this Note
shall mean the daily "prime rate" published in The Wall Street Journal from the
date of the Event of Default, as such "prime rate" shall change from time to
time. In the event The Wall Street Journal ceases to publish the "prime rate"
then Lender shall select an equivalent publication which publishes such "prime
rate"; and in the event such prime rates are no longer generally published or
are limited, regulated or administered by a governmental or quasi-governmental
body, then Lender shall select a comparable interest rate index.
F. SECURITY
This Note is secured by (i) a certain Amended, Restated and
Consolidated Junior Mortgage and Security Agreement of even date herewith (the
"SECURITY INSTRUMENT") in an original principal amount equal to the Note Face
Amount, covering certain premises located in Pulaski County, State of Arkansas
and other property (collectively, the "PROPERTY"), as more particularly
described therein and intended to be duly recorded in said County, (ii) a
certain Amended, Restated and Consolidated Junior Assignment of Leases and Rents
of even date herewith executed by Borrower in favor of Lender with respect to
the Property (the "ASSIGNMENT OF LEASES"), (iii) the Other Security Documents
(hereinafter defined), and (iv) the Other Junior Security Instruments and the
Amended, Restated and Consolidated Junior Assignments of Leases and Rents
executed in connection therewith. The term "OTHER SECURITY DOCUMENTS" as used
in this Note means, collectively, this Note, the Security Instrument, the
Assignment of Leases and any and all other documents securing, evidencing, or
guaranteeing all or any portion of the loan evidenced by this Note (the "LOAN"),
or otherwise executed and/or delivered in connection with this Note and the
Loan.
As of the date of this Note, Lender is the owner and holder of those
certain promissory notes described on SCHEDULE A annexed hereto (collectively,
the "EXISTING NOTES"), which are secured by certain mortgages and deeds of trust
(collectively, the "EXISTING SECURITY INSTRUMENTS" encumbering the fifteen (15)
apartment building complexes (the "REMAINING COMPLEXES;" the Remaining Complexes
other than the Property, collectively, the "OTHER ENCUMBERED PROPERTY") listed
on said SCHEDULE A. Included among the Existing Notes are certain promissory
notes which relate specifically to certain of the Existing Security Instruments
which encumber the Property, as more particularly described on said SCHEDULE A
(collectively, the "RELATED EXISTING NOTES"). Lender and Borrower hereby agree
to consolidate the indebtedness evidenced by the Existing Notes into one (1)
consolidated indebtedness in the amount of $182,101,926.00 (the "AGGREGATE
INDEBTEDNESS AMOUNT"). In connection with such consolidation, Lender and
Borrower hereby agree to sever the Aggregate Indebtedness Amount into thirty
(30) individual portions, which, from and after the date hereof, shall be
evidenced by (i) fifteen (15) amended, restated and consolidated senior secured
promissory notes (collectively, the "RESTATED SENIOR NOTES") and (ii) fifteen
(15) amended, restated and consolidated junior secured promissory notes
(collectively, the "RESTATED JUNIOR NOTES;" the Restated Junior Notes other than
this Note, collectively, the "OTHER JUNIOR NOTES"), as more particularly
described on SCHEDULE B annexed hereto. The Restated Senior Notes shall be
secured by certain amended, restated and consolidated senior mortgages and/or
deeds of trust (the "RESTATED SENIOR SECURITY INSTRUMENTS;" the Restated Senior
Security Instruments other than the Related Senior Security Instrument
(hereinafter defined), collectively, the "OTHER SENIOR SECURITY INSTRUMENTS"),
and the Restated Junior Notes shall be secured by certain amended, restated and
consolidated junior mortgages and/or deeds of trust (the "RESTATED JUNIOR
SECURITY INSTRUMENTS;" the Restated Junior Security Instruments other than the
Security Instrument, collectively, the "OTHER JUNIOR SECURITY INSTRUMENTS")
encumbering the Remaining Complexes as senior and junior (subordinated) liens in
the amounts set forth on SCHEDULE C annexed hereto. This Note is one (1) of the
Restated Junior Notes, and together with the Related Senior Note (hereinafter
defined), is a modification and restatement of and substitute for the
indebtedness evidenced by the Related Existing Notes, and this Note and the
Related Senior Note are intended to be a recast, restatement and replacement
thereof made as of the date hereof. On the date hereof, Borrower and Lender are
also entering into that certain amended, restated and consolidated senior
secured promissory note (the "RELATED SENIOR NOTE") with respect to the
Property. The Related Senior Note is one (1) of the Restated Senior Notes. The
Related Senior Note shall be secured by a certain amended, restated and
consolidated senior mortgage or deed of trust (the "RELATED SENIOR SECURITY
INSTRUMENT"), which is one (1) of the Restated Senior Security Instruments.
Borrower and Lender intend for the indebtedness evidenced by this Note to be
subordinate to the indebtedness evidenced by the Related Senior Note, and intend
for the lien of the Security Instrument to be subject and subordinate in all
respects to the lien of the Related Senior Security Instrument.
Notwithstanding any provision in this Note, the Security Instrument,
the Other Junior Security Instruments or any other agreement, document or
instrument to the contrary, any default by Borrower under this Note shall not,
by itself, constitute a default or Event of Default under the Other Junior
Security Instruments or the Other Junior Notes, and Lender shall not be entitled
by such failure to foreclose the Other Junior Security Instruments or accelerate
the Other Junior Notes, it being the intent of the parties that this Note and
the Security Instrument, on the one hand, and the Other Junior Security
Instruments and the Other Junior Notes, on the other hand, shall not be "cross-
defaulted."
However, if the proceeds realized by Lender out of any enforcement of
this Note, whether by judicial or non-judicial foreclosure, power of sale or
other similar remedy, exceed the Note Face Amount and any additional amounts due
to Lender under the provisions of this Note, then unless otherwise required by
law, such excess proceeds may be retained by Lender, and, if so retained, shall
be applied in such proportion as Lender shall determine in Lender's sole
discretion to reduce the outstanding principal indebtedness of one (1) or more
of the Other Junior Notes.
G. SAVINGS CLAUSE
This Note is subject to the express condition that at no time shall
Borrower be obligated or required to pay interest on the principal balance due
hereunder at a rate which could subject Lender to either civil or criminal
liability as a result of being in excess of the maximum interest rate which
Borrower is permitted by applicable law to contract or agree to pay. If by the
terms of this Note, Borrower is at any time required or obligated to pay
interest on the principal balance due hereunder at a rate in excess of such
maximum rate, the Applicable Interest Rate shall be deemed to be immediately
reduced to such maximum rate and all previous payments in excess of the maximum
rate shall be deemed to have been payments in reduction of principal and not on
account of the interest due hereunder.
H. LATE CHARGE
If any sum payable under this Note is not received by Lender within
ten (10) days after the date on which it is due, without taking into account or
including within said ten (10) day period any applicable notice or grace period,
Borrower shall pay to Lender upon demand an amount equal to the lesser of (i)
five percent (5%) of such unpaid sum or (ii) the maximum amount permitted by
applicable law to defray the expenses incurred by Lender in handling and
processing such delinquent payment and to compensate Lender for the loss of the
use of such delinquent payment and such amount shall be secured by the Security
Instrument and the Other Security Documents. Nothing contained herein is
intended to affect the rights of Lender in and to any Default Interest due to
Lender pursuant to the provisions of paragraph E hereof entitled "Default
Interest".
I. MISCELLANEOUS
This Note may not be modified, amended, waived, extended, changed,
discharged or terminated orally or by any act or failure to act on the part of
Borrower or Lender, but only by an agreement in writing signed by the party
against whom enforcement of any modification, amendment, waiver, extension,
change, discharge or termination is sought.
If Borrower consists of more than one person or party, the obligations
and liabilities of each such person or party shall be joint and several. The
foregoing sentence, however, is not intended to affect the limited liability of
any limited partner or stockholder of Borrower afforded by applicable
partnership or corporate law. The terms and provisions hereof shall be binding
upon and inure to the benefit of Borrower and Lender and their respective heirs,
executors, legal representatives, successors, successors-in-title, and assigns,
whether by voluntary action of the parties or by operation of law.
Borrower and all others who may become liable for the payment of all
or any part of the Debt do hereby severally waive presentment and demand for
payment, notice of dishonor, protest and notice of protest and non-payment. No
release of any security for the Debt or extension of time for payment of this
Note or any installment hereof, and no alteration, amendment or waiver of any
provision of this Note, the Security Instrument or the Other Security Documents
made by agreement between Lender and any other person or party shall release,
modify, amend, waive, extend, change, discharge, terminate or affect the
liability of Borrower, and any other who may become liable for the payment of
all or any part of the Debt, under this Note, the Security Instrument or the
Other Security Documents.
Borrower (and the undersigned representative of Borrower, if any)
represents that Borrower has full power, authority and legal right to execute
and deliver this Note, the Security Instrument and the Other Security Documents
and that this Note, the Security Instrument and the Other Security Documents
constitute valid and binding obligations of Borrower.
This Note shall be governed and construed in accordance with the laws
of the State of New York and the applicable laws of the United States of
America.
All notices or other communications required or permitted to be given
pursuant hereto shall be given in the manner specified in the Security
Instrument directed to the parties at their respective addresses as provided
therein.
BORROWER HEREBY AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE
TRIABLE OF RIGHT BY JURY, AND WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE
EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THE OTHER
SECURITY DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN
CONNECTION THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY
AND VOLUNTARILY BY BORROWER, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH
INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE
ACCRUE. LENDER IS HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY
PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY BORROWER.
J. EXCULPATION
Lender shall not enforce the liability and obligation of Borrower to
perform and observe the obligations contained in this Note or the Security
Instrument by any action or proceeding wherein a money judgment shall be sought
against Borrower or any general or limited partner or member of Borrower
(hereinafter collectively referred to as the "EXCULPATED PARTIES"), except that
Lender may bring a foreclosure action, action for specific performance or other
appropriate action or proceeding to enable Lender to enforce and realize upon
this Note, the Security Instrument, the Other Security Documents, and the
interest in the Property, the Rents (as defined in the Security Instrument) and
any other collateral given to Lender created by this Note, the Security
Instrument and the Other Security Documents; provided, however, that any
judgment in any such action or proceeding shall be enforceable against the
Exculpated Parties only to the extent of Borrower's interest in the Property, in
the Rents and in any other collateral given to Lender. Lender, by accepting
this Note and the Security Instrument, agrees that it shall not sue for, seek or
demand any deficiency judgment against the Exculpated Parties in any such action
or proceeding, under or by reason of or under or in connection with the Security
Instrument, the Other Security Documents or this Note. The provisions of this
paragraph shall not, however, (i) constitute a waiver, release or impairment of
any obligation evidenced or secured by the Security Instrument, the Other
Security Documents or this Note; (ii) impair the right of Lender to name
Borrower as a party defendant in any action or suit for judicial foreclosure and
sale under the Security Instrument; (iii) affect the validity or enforceability
of any guaranty made in connection with the Security Instrument, this Note, or
the Other Security Documents; (iv) impair the right of Lender to obtain the
appointment of a receiver upon the occurrence and continuance of an Event of
Default; (v) impair the enforcement of the Assignment of Leases and Rents dated
the date hereof given by Borrower to Lender executed in connection herewith;
(vi) impair the right of Lender to bring suit with respect to fraud or
intentional misrepresentation by Borrower, the Exculpated Parties or any other
person or entity in connection with the Security Instrument, this Note or the
Other Security Documents; (vii) impair the right of Lender to obtain the Rents
received by any of the Exculpated Parties after the occurrence and continuance
of an Event of Default; (viii) impair the right of Lender to bring suit with
respect to the Exculpated Parties' misappropriation of tenant security deposits
or Rents collected in advance; (ix) impair the right of Lender to obtain
insurance proceeds or condemnation awards due to Lender under the Security
Instrument; (x) impair the right of Lender to enforce the provisions of sub-
paragraphs 36(g) through 36(k), inclusive and paragraphs 34 and 35 of the
Security Instrument against the Borrower (excluding the general and limited
partners or members of Borrower); or (xi) impair the right of Lender to recover
any part of the Debt from the Borrower (excluding the general and limited
partners or members of Borrower) following the breach of any covenant contained
in paragraphs 9 or 55 of the Security Instrument.
Nothing herein shall be deemed to be a waiver of any rights which
Lender may have under Sections 506(a), 506(b), 1111(b) or any other provisions
of the U.S. Bankruptcy Code of file a claim for the full amount of the
indebtedness secured by the Security Instrument or to require that all
collateral shall continue to secure all of the indebtedness owing to Lender in
accordance with this Note, the Security Instrument and other documents executed
and delivered in connection with the Loan.
THIS NOTE, AND THE OTHER SECURITY DOCUMENTS EMBODY THE ENTIRE
AGREEMENT AND UNDERSTANDING BETWEEN LENDER, BORROWER AND THE OTHER RESPECTIVE
PARTIES HERETO AND THERETO AND SUPERSEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS
BETWEEN SUCH PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR CONTEMPORANEOUS OR SUBSEQUENT
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
K. SALE OF NOTE AND SECURITIZATION
Borrower acknowledges that Lender may elect to sell this Note and the
Other Junior Notes or participation therein or cause this Note to be included in
a securitization (such sale and/or securitization, the "SECURITIZATION") of
rated single or multi-class securities (the "SECURITIES") secured by or
evidencing ownership interests in this Note, the Other Junior Notes, the
Security Instrument and the Other Junior Security Instruments.
L. APPLICATION OF GROSS RECEIPTS FROM THE PROPERTY
1. The following terms have the meanings set forth below
(capitalized terms not defined herein shall have the meaning provided in the
Security Instrument):
"3-B CLAIM" shall mean that certain "3-B Claim" (as defined in the
Bankruptcy Documents), pursuant to which the holder thereof is entitled to
receive the sum of $396,980, as more particularly described in the Bankruptcy
Documents.
"AGGREGATE NET OPERATING REVENUE SHORTFALL AMOUNT" shall mean on any
Monthly Payment Date, the amount, if any, by which the aggregate amount of Net
Operating Revenue from the Other Encumbered Property is less than the sum of the
payments required under Sections L(2)(a), L(2)(c) and L(2)(d) in each of the
Other Junior Notes on such Monthly Payment Date.
"CAPEX RESERVE AGREEMENT" shall mean that certain Multifamily
Replacement Reserve and Security Agreement dated as of the date hereof, between
Borrower and Lender, with respect to the Property.
"GROSS RECEIPTS" shall mean, for any period, all revenues and receipts
of every kind derived from or otherwise relating to the Property and all
departments and parts thereof during such period (from both cash and credit
transactions) from rental of rooms, stores, offices, exhibit or sales space of
every kind; license, lease and concession fees and rentals; income from vending
machines; health club membership fees; golf club membership dues; food and
beverage sales (not including in any of the foregoing gross receipts of
licensees, lessees and concessionaires); wholesale and retail sales of
merchandise, service charges, and proceeds, if any, from business interruption
or other loss of income insurance; excluding, however, (i) gratuities to
employees of the Property, (ii) federal, state or municipal sales or use taxes
or similar taxes collected directly from patrons or guests or included as part
of the sales price of any goods or services, (iii) any Net Award (as defined in
the Security Instrument) in connection with a taking or condemnation of all or
any portion of the Property (or any deed in lieu thereof), (iv) any amounts paid
as a result of a claim under any of the Policies (as defined in the Security
Instrument) required to be maintained by the Borrower pursuant to the Security
Instrument (other than from rental loss or business interruption insurance), (v)
charges or payments collected from patrons or guests for telephone, telegraph or
other communication systems or other pass-through services to the extent such
charges are remitted to the provider of such services, and (vi) security
deposits, until forfeited.
"MONTHLY OPERATING EXPENSE PAYMENT AMOUNT" shall mean, for any Monthly
Payment Date, the amount of Operating Expenses (subject to the terms of Section
15(b) of the Security Instrument) for the calendar month immediately preceding
the Monthly Payment Date in question.
"NET OPERATING REVENUE" shall mean, on each Monthly Payment Date, an
amount equal to (i) Gross Receipts received by Borrower during the calendar
month which ended immediately preceding the applicable Monthly Payment Date,
minus (ii) the amounts applied under clauses 2(a) through 2(f), inclusive, of
Section L under the Related Senior Note during such calendar month.
"OPERATING EXPENSES" shall mean, for any period, all expenditures by
or on behalf of Borrower as and to the extent required to be expensed or allowed
to be expensed and in fact expensed under generally accepted accounting
principles during such period in connection with the ownership, operation,
maintenance, repair or leasing of the Property, or have otherwise been approved
in writing by Lender, including (i) fees payable under any Management Agreement
in an amount not to exceed four percent (4%) of Rents (as defined below)
actually collected during any monthly period; Insurance Premiums; bank charges;
expenses for accounting, advertising, marketing, architectural services,
utilities, extermination, cleaning, trash removal, window washing, landscaping
and security; and reasonable and necessary legal expenses incurred in connection
with the operation of the Property or in connectin with the legal operations of
Borrower and/or its constituent general partners; (ii) Taxes and Other Charges
(as such terms are defined in the Security Instrument), excluding fines,
penalties, interest or Taxes or Other Charges payable by reason of Maker's
failure to pay an imposition timely; (iii) wages, benefits, payroll taxes,
uniforms, insurance costs and all other related expenses for employees of
Borrower engaged in the repair, operation or maintenance of the Property; (iv)
the cost of routine interior and exterior maintenance, repairs and minor
alterations; (v) departmental expenses incurred at departments within the
Property; (vi) reasonable administrative and general expenses for all of
Borrower and its constituent general partners; (vii) the cost of inventories and
fixed asset supplies consumed in the operation of the Property; (viii) a
reasonable reserve for uncollectible accounts; (ix) reasonable costs and fees of
independent professionals, technical consultants, operational experts (including
quality assurance inspectors) or other third parties retained to perform
services required or permitted hereunder; (x) cost of attendance by employees at
training and manpower development programs; (xi) association dues; (xii) costs
of making reservations at or for the Property; (xiii) fees under any franchise
agreement; (xiv) computer processing charges; and (xv) operational equipment and
other lease payments as approved by Payee; provided that Operating Expenses will
not include debt service on this Note, capital expenditures, non-cash items such
as depreciation and amortization or any extraordinary one-time expenditures not
considered operating expenses under generally accepted accounting principles.
For the purposes of this definition of the term "Operating Expenses", the term
"Rents" shall mean the following items, collectively, collected during any
monthly period: (A) tenant rentals pursuant to tenant leases; (B) cleaning,
security and damage deposits forfeited by tenants; (C) net income from laundry
and vending machines; (D) parking income; (E) income from utility bill-backs to
tenants; (F) clubhouse income; (G) proceeds from rental interruption insurance;
and (H) any other sums and charges collected in connection with termination of
the tenant leases. It is expressly understood that rent for such purposes shall
not include: (i) tenant security deposits; (ii) the proceeds, if any, payable
to Borrower from the sale, refinancing or other disposal of all or any part of
the Property; (iii) the proceeds payable to Borrower by reason of any hazard
insurance policies, title insurance policies, or terms of a similar nature; (iv)
the proceeds of any taking by condemnation or eminent domain by a public or
quasi-public authority of all or any part of the Property; (v) any reversal of
any contingency for tax or insurance reserves; (vi) interest on security
deposits; or (vii) refunds of any taxes, water, sewer, electric charges or any
other extraordinary income.
"SENIOR INDEBTEDNESS" shall mean the indebtedness evidenced by the
Restated Senior Notes and secured by the Restated Senior Security Instruments.
"TAXES AND INSURANCE MONTHLY AMOUNT" shall mean, on each Payment Date,
the aggregate amount of (i) one-twelfth (1/12) of the Taxes and Other Charges
(as such terms are defined in the Security Instrument) that Lender estimates
will be payable during the next twelve (12) months (the "TAX MONTHLY AMOUNT") in
order for Borrower to accumulate sufficient funds to pay all such Taxes and
Other Charges at least thirty (30) days prior to their respective due dates, and
(ii) one-twelfth (1/12) of the Insurance Premiums (the "INSURANCE PREMIUM
MONTHLY AMOUNT") that Lender estimates will be payable for the renewal of the
coverage afforded by the Policies upon the expiration thereof in order for
Borrower to accumulate sufficient funds to pay all such Insurance Premiums at
least thirty (30) days prior to the expiration of the Policies.
"UNSATISFIED DEFICIENCY JUDGMENTS" shall mean any amounts owing to
Lender relating to any deficiency owing to Lender as a result of any judicial or
non-judicial foreclosure of one (1) or more of the Other Junior Security
Instruments.
2. On each Monthly Payment Date, Borrower shall apply the Monthly
Payment in the following amounts, for the following purposes, and in the
following order of priority:
(a) if the Related Senior Security Instrument has been satisfied
or released, in an amount equal to the Taxes and Insurance
Monthly Amount as follows:
(i) the Tax Monthly Amount, to be deposited by Borrower
into the Escrow Funds (hereinafter defined) to be held
and disbursed by Lender in accordance with the last
paragraph of this Section L(2), and
(ii) the Insurance Premium Monthly Amount, to be paid by
Borrower as its monthly premiums of all insurance
policies required to be maintained pursuant to the
terms of the Security Instrument; provided, however,
that if Borrower discontinues paying for its insurance
on a monthly basis, Borrower shall commence to pay the
Insurance Premium Monthly Amount to Lender, to be
deposited into the Escrow Funds to be held and
disbursed by Lender in accordance with the last
paragraph of this Section L(2);
(b) to the payment of the Monthly Operating Expense Payment
Amount with respect to the month in which such Monthly
Payment Date occurs to the extent not paid in accordance
with the Related Senior Security Instrument;
(c) to the payment to Lender of:
(i) first, to the payment of interest calculated at the
Applicable Interest Rate on the then outstanding
principal amount of the Note Face Amount; provided,
however, that if there is insufficient Net Operating
Revenue to pay such interest, the unpaid portion
thereof shall accrue and be added to the principal
amount then outstanding under this Note and thereafter
accrue interest at the Applicable Interest Rate, and
(ii) second, any other Debt then due and payable;
(d) if the Related Senior Security Instrument has been satisfied
or released, to the Reserve (as defined in the CapEx Reserve Agreement), in
the amount of the Monthly Deposit (as defined in the CapEx Reserve
Agreement), together with such other reserves as are required under the
Other Security Documents;
(e) to the payment to Lender of the Aggregate Net Operating
Revenue Shortfall Amount, if any;
(f) to the holder of the 3-B Claim, until such claim has been
paid in full;
(g) to the payment to Lender of any Unsatisfied Deficiency
Judgments then outstanding;
(h) to the payment of the outstanding principal balance of the
Note Face Amount; and
(i) the balance, to the holder of the Senior Indebtedness to
hold as additional collateral for the Senior Indebtedness.
Borrower hereby pledges to Lender and grants to Lender a security
interest in any and all monies now or hereafter collected for the Tax Monthly
Amount and Insurance Monthly Amount as additional security for the payment of
this Note and the other Restated Junior Notes (collectively the "ESCROW FUNDS").
Lender will apply the Tax Monthly Amount and Insurance Monthly Amount collected
in the Escrow Funds to payments of Taxes and Insurance Premiums required to be
made by Borrower pursuant to this Section and in accordance with the terms of
the Security Instrument. In making any payment out of the Escrow Fund, Lender
may do so according to any bill, statement or estimate procured from the
appropriate public office (with respect to Taxes) or insurer or agent (with
respect to Insurance Premiums), without inquiry into the accuracy of such bill,
statement or estimate or into the validity of any tax, assessment, sale,
forfeiture, tax lien or title or claim thereof. If the amount deposited into
the Escrow Fund shall exceed the amounts due for Taxes and Other Charges and
Insurance Premiums pursuant to this Section, Lender shall return any excess to
Borrower or credit such excess against future payments to be made to the Escrow
Fund. In allocating such excess, Lender may deal with the person shown on the
records of Lender to be the owner of the Property. If at any time Lender
determines that the funds on deposit in the Escrow Fund are not or will not be
sufficient to pay the items set forth in clauses 2(a)(i) and 2(a)(ii) above,
Lender shall notify Borrower of such determination and Borrower shall increase
its monthly payments to Lender by the amount that Lender estimates is sufficient
to make up the deficiency at least thirty (30) days prior to delinquency of the
Taxes and Other Charges and/or expiration of the Policies, as the case may be.
The Escrow Fund shall not constitute a trust fund and may be commingled with
other monies held by Lender, provided that the Escrow Fund shall be held in an
interest bearing account. Lender shall have no responsibility or liability for
the amount of interest earned on the Escrow Fund. All interest earned on the
funds in the Escrow Fund shall be added to and become part of the Escrow Fund
and shall be for the benefit of Borrower, subject to Lender's rights pursuant to
the terms of this Note. All earnings or interest on the Escrow Fund shall be
disbursed as provided in this section.
3. Borrower hereby acknowledges and agrees that in accordance with
Section 2(e) of this Article L, Net Operating Revenue from the Property shall be
available to pay the Monthly Payment(s) due and payable under the Other Junior
Notes.
4. Notwithstanding any provision of this Note to the contrary, upon
the occurrence of an Event of Default, Lender (or its agent), to the extent
permitted under applicable law without adversely affecting the other rights and
remedies provided to Lender under this Note or the Other Security Documents, may
apply any funds then held by, or thereafter received by, Lender in accordance
with any of the Other Security Documents in such order as Lender in its sole
discretion shall determine, to (a) the payment of (i) principal and interest
payments on this Note, (ii) the other Debt, (iii) principal and interest on the
Other Junior Notes, and (iv) payment of any other indebtedness secured by the
Other Junior Security Instruments, until all such amounts are paid in full, and
(b) to preserve the Property or the Other Encumbered Property.
IN WITNESS WHEREOF, Borrower and Lender have duly executed this Note
under seal as of the day and year first above written.
BORROWER:
VMS NATIONAL PROPERTIES,
an Illinois general partnership
By: VMS NATIONAL RESIDENTIAL PORTFOLIO I, an Illinois
limited partnership, its general partner
By: MAERIL, INC., a Delaware corporation, its
general partner
By:_____________________________
Name:
Title: Vice President
By: VMS NATIONAL RESIDENTIAL PORTFOLIO II, an Illinois
limited partnership, its general partner
By: MAERIL, INC., a Delaware corporation, its
general partner
By:_____________________________
Name:
Title: Vice President
LENDER:
MF VMS, L.L.C.,
a Delaware limited liability company
By: BlackRock Capital Finance L.P.,
its managing member
By: BlackRock Asset Investors,
its general partner
By:________________________
Name:
Title:
This instrument prepared by:
Robert L. Golub, Esq.
Sidley & Austin
875 Third Avenue
New York, New York 10022
