UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
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SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: SEPTEMBER 30, 1995
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: 0-17148
PAINE WEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHI
(Exact name of registrant as specified in its charter)
Delaware 04-2921780
(State of organization) (I.R.S.Employer
Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(Title of class)
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
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
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
Prospectus of registrant dated Part IV
September 17, 1986, as supplemented
<PAGE>
PAINE WEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
1995 FORM 10-K
TABLE OF CONTENTS
PART I Page
Item 1 Business I-1
Item 2 Properties I-3
Item 3 Legal Proceedings I-4
Item 4 Submission of Matters to a Vote of Security Holders I-5
Part II
Item 5 Market for the Partnership's Limited Partnership
Interests and Related Security Holder Matters II-1
Item 6 Selected Financial Data II-1
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations II-2
Item 8 Financial Statements and Supplementary Data II-7
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-7
Part III
Item 10 Directors and Executive Officers of the Partnership III-1
Item 11 Executive Compensation III-3
Item 12 Security Ownership of Certain Beneficial Owners
and Management III-3
Item 13 Certain Relationships and Related Transactions III-3
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
Financial Statements and Supplementary Data F-1 to F-21
<PAGE>
PART I
Item 1. Business
Paine Webber Income Properties Eight Limited Partnership (the "Partnership")
is a limited partnership formed in April 1986 under the Uniform Limited
Partnership Act of the State of Delaware for the purpose of investing in a
diversified portfolio of existing income-producing real properties such as
apartments, shopping centers, office buildings, industrial buildings and hotels.
The Partnership sold $35,548,976 in Limited Partnership units (the "Units"), at
$1 per Unit, from September 17, 1986 to September 16, 1988 pursuant to an
Amended Registration Statement on Form S-11 filed under the Securities Act of
1933 (Registration No. 33-5179). Limited Partners will not be required to make
any additional capital contributions.
As of September 30, 1995, the Partnership owned directly or through joint
venture partnerships the properties or interests in the properties referred to
below:
Name of Joint Venture Date of
Name and Type of Property Acquisition
Location Size of Interest Type of Ownership (1)
Marriott Suites -
Newport Beach 254 8/10/88 Fee ownership of land
Hotel suites and improvements
Newport Beach, California
Daniel Meadows II
General Partnership 200 10/15/87 Fee ownership of land
The Meadows in the Park units and improvements
Apartments (through jointventure)
Birmingham, Alabama
Maplewood Drive Associates 144 6/14/88 Fee ownership of land
Maplewood Park Apartments units and improvements
Manassas, Virginia (through joint venture)
Spinnaker Bay Associates: Fee ownership of land
Bay Club Apartments 88 units 6/10/88 and improvements
Spinnaker Landing Apartments 66 units 6/10/88 (through joint venture)
Des Moines, Washington
Norman Crossing Associates 52,000 9/15/89 Fee ownership of land
Norman Crossing Shopping square and improvements
Center feet (through joint venture)
Charlotte, North Carolina
(1) See Notes to the Financial Statements filed with this Annual Report for a
description of the long-term indebtedness secured by the Partnership's
operating property investments and for a description of the agreements
through which the Partnership has acquired these real estate investments.
As discussed further in Note 4 to the accompanying financial statements, the
Partnership previously owned a fee simple interest in the Marriott Suites -
Perimeter Center, a 224-suite hotel located in Atlanta, Georgia. On December 3,
1991, the holder of the mortgage debt secured by the Atlanta Marriott hotel
foreclosed on the operating property due to the Partnership's inability to meet
the required debt service payments. As a result, the Partnership no longer has
any ownership interest in this property.
<PAGE>
The Partnership's original investment objectives were to:
(i) provide the Limited Partners with cash distributions which, to some
extent, will not constitute taxable income;
(ii) preserve and protect the Limited Partners' capital;
(iii) obtain long-term appreciation in the value of its properties;
(iv) increase the Limited Partners' return on investment by using leverage;
and
(v) provide a build-up of equity through the reduction of mortgage loans on
its properties.
Through September 30, 1995, the Limited Partners had received cumulative cash
distributions from operations totalling approximately $5,719,000, or $192 per
original $1,000 investment for the Partnership's earliest investors. A
substantial portion of the distributions paid to date has been sheltered from
current taxable income. Regular quarterly distributions of excess operating cash
flow were suspended indefinitely in fiscal 1991. The Partnership retains its
ownership interest in six of its seven original investment properties, all of
which were acquired using leverage of between approximately 60% and 75% of the
original purchase price. As stated above, the Partnership was forced to
relinquish its ownership of the Atlanta Marriott Suites hotel to the mortgage
lender in fiscal 1992 because the property could not generate sufficient income
to cover its debt service obligations. The inability of the hotel to meet the
debt service requirements of the mortgage loan resulted mainly from the
significant oversupply of competing hotels in the Atlanta market and its
negative impact on occupancy and room rates. The effects of the overbuilding
were compounded by the impact of the sustained national recession on the lodging
industry as a whole. Management did not foresee any improvement in the market
conditions for the next several years and believed that the use of cash reserves
to fund operating deficits would still not enable the Partnership to sell its
investment in the hotel for an amount in excess of the current or future
obligation to the mortgage lender. Due to the foreclosure loss of the Atlanta
Marriott, which represented 27% of the Partnership's original investment
portfolio, the Partnership will be unable to return the full amount of the
original capital contributed by the Limited Partners.
The amount of capital which will be returned will depend, in large part, upon
improvement of the operating performance of the Newport Beach Marriott Suites
Hotel, which represents 36% of the original investment portfolio, and on the
proceeds received from the final liquidation of the remaining investments. The
amount of such proceeds will ultimately depend upon the value of the underlying
investment properties at the time of their final disposition, which cannot
presently be determined. As discussed further in Item 7, the Partnership is
presently in default of the modified terms of the first mortgage loan secured by
the wholly-owned Newport Beach Marriott. During fiscal 1995, the Partnership
reached the limit on the debt service deferrals imposed by the 1993 loan
modification agreement, and the Hotel continues to generate sizable deficits. It
is uncertain at this time whether the lender will agree to a further
modification of the loan terms and an extension of the August 1996 maturity
date. In the event that an agreement with the lender cannot be reached, the
result could be a foreclosure on the operating investment property. At the
present time, the market value of the Newport Beach Marriott Suites Hotel is
estimated to be significantly less than the outstanding first mortgage loan
obligation. While increased demand from institutional buyers and an absence of
any significant new construction activity have led to an improvement in the
market for hotel properties in many areas of the country during 1995, it appears
unlikely that such improvement will occur as rapidly or to the extent necessary
for the Partnership to recover any portion of its original net investment in the
Newport Beach Marriott. The Managing General Partner's strategy has been, and
continues to be, to preserve the Partnership's equity interests, where possible,
while the respective local economies and rental markets improve in order to
return as much of the invested capital as possible.
All of the Partnership's investments are located in real estate markets in
which they face significant competition for the revenues they generate. The
apartment complexes compete with numerous projects of similar type generally on
the basis of price, location and amenities. Apartment properties in all markets
also compete with the local single family home market for revenues. The
continued availability of low interest rates on home mortgage loans has
increased the level of this competition over the past few years. However, the
impact of the competition from the single-family home market has been offset by
the lack of significant new construction activity in the multi-family apartment
market over this period. The shopping center competes for long-term commercial
tenants with numerous projects of similar type generally on the basis of price,
location, tenant mix and tenant improvement allowances. At the present time,
real estate values for retail shopping centers in certain markets have begun to
be affected by the effects of overbuilding and consolidations among retailers
which have resulted in an oversupply of space. The remaining hotel, which is
located in a populated market with a substantial hotel room supply, competes
with other "all-suites" type hotels, as well as traditional hotels, based on
room rates, location, amenities and dining and conference facilities. While the
occupancy levels of the Partnership's hotel have been maintained at or above the
national averages for hotel properties in recent years, due to the oversupply of
available hotel rooms in the Newport Beach market, along with Marriott's lack of
success in achieving separate name recognition for its suites hotel concept, the
Partnership's hotel has never been able to command its projected room rates.
The Partnership has no real property investments located outside the United
States. The Partnership is engaged solely in the business of real estate
investment, therefore, presentation of information about industry segments is
not applicable.
The Partnership has no employees; it has, however, entered into an Advisory
Contract with PaineWebber Properties Incorporated (the "Adviser"), which is
responsible for the day-to-day operations of the Partnership. The Adviser is a
wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned
subsidiary of PaineWebber Group Inc. ("PaineWebber").
In connection with the ownership of the Marriott Suites Hotel in Newport
Beach, California, the Partnership has entered into an agreement with Marriott
Corporation for the management of the Hotel's operations. The terms of this
agreement are set forth in the Notes to the Financial Statements listed in Item
14(a)(1) of this Annual Report to which reference is hereby made for a
description of such terms. All employees of the Hotel are employees of Marriott
Corporation or its affiliates, not of the Partnership.
The general partners of the Partnership (the "General Partners") are Eighth
Income Properties Inc. and Properties Associates 1986, L.P. Eighth Income
Properties, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of
PaineWebber Group, Inc., is the managing general partner of the Partnership. The
associate general partner of the Partnership is Properties Associates 1986, L.P.
(the "Associate General Partner"), a Virginia limited partnership, certain
limited partners of which are also officers of the Adviser and the Managing
General Partner. Subject to the Managing General Partner's overall authority,
the business of the Partnership is managed by the Adviser.
The terms of transactions between the Partnership and affiliates of the
Managing General Partner of the Partnership are set forth in Items 11 and 13
below to which reference is hereby made for a description of such terms and
transactions.
Item 2. Properties
As of September 30, 1995, the Partnership owned one operating investment
property directly and owned interests in five operating properties through joint
venture partnerships. Such properties are referred to under Item 1 above to
which reference is hereby made for the name, location and description of each
property.
Leasing levels for each fiscal quarter during 1995, along with an average for
the year, are presented below for each property:
Percent Leased At
Fiscal 1995
12/31/94 3/31/95 6/30/95 9/30/95 Average
Marriott Suites -
Newport Beach Hotel 72% 73% 82% 86% 78%
The Meadows in the Park 96% 93% 83% 79% 88%
Apartments
Maplewood Park Apartments 96% 93% 93% 99% 95%
Bay Club and 95% 92% 95% 95% 94%
Spinnaker Landing Apartments
Norman Crossing
Shopping Center (1) 94% 97% 100% 100% 98%
(1)In October 1993, the sole anchor tenant of the Norman Crossing Shopping
Center vacated the center to relocate its operations. This anchor tenant
continues to pay rent on its prior space, which represents 48% of the
property's net rentable area, under the terms of its lease which expires
in the year 2007. As a result of this anchor tenant vacancy, the physical
occupancy of the property is substantially lower than the leasing level
shown above (see Item 7).
Item 3. Legal Proceedings
As discussed further in the notes to the accompanying financial
statements, construction-related defects were discovered at the Bay Club and
Spinnaker Landing apartment complexes during fiscal 1991. The complexes, which
are located in a suburb of Seattle, Washington, were built by the same developer
in 1987. The Partnership's joint venture investee, Spinnaker Bay Associates,
which owns the two properties, brought suit against the developer to collect
damages caused by the defects. In December of 1991, the venture and the
developer executed a settlement agreement with regard to the
construction-related damage claim. The venture received $900,000 in net cash
proceeds from the settlement, which has been used to partially fund the repair
costs at the properties. In addition to the cash received at the time of the
settlement, the venture received a note in the amount of $161,500 from the
developer which was due in 1994. During fiscal 1993, the venture agreed to
accept a discounted payment of $113,050 in full satisfaction of the note if
payment was made by December 31, 1993. The developer made this discounted
payment to the venture in the first quarter of fiscal 1994. In addition, during
fiscal 1994 the venture received additional settlement proceeds totalling
approximately $351,000 from its pursuit of claims against certain subcontractors
of the development company and other responsible parties. Additional settlement
proceeds totalling approximately $402,000 were collected during fiscal 1995. No
significant further litigation proceeds are expected at the present time.
Also as discussed further in the notes to the accompanying financial
statements, during fiscal 1991 the Partnership discovered that certain materials
used to construct The Meadows in the Park Apartments were manufactured
incorrectly and would require substantial repairs. Daniel Meadows II General
Partnership, the joint venture which owns the property, engaged local legal
counsel during fiscal 1992 to seek recoveries from the joint venture's insurance
carrier, as well as various contractors and suppliers, for the venture's claim
of damages, which were estimated at between $1.6 and $2.1 million, not including
legal fees and other incidental expenses. During fiscal 1993, the insurance
carrier deposited approximately $522,000 into an escrow account controlled by
the venture's mortgage lender in settlement of the undisputed portion of the
venture's claim. Also during fiscal 1993, the insurer was denied summary
judgment for its contention that it was not liable for damages to the joint
venture. Subsequently, the insurer agreed to enter into non-binding mediation
towards settlement of the disputed claims out of court. On October 3, 1994, the
joint venture verbally agreed to settle its claims against the insurance
carrier, architect, general contractor and the surety/completion bond insurer
for $1,714,000, which is in addition to the $522,000 previously paid by the
insurance carrier. Upon execution of the release document required by the
defendant parties of the litigation, the settlement proceeds were escrowed with
the mortgage holder. Under the terms of the new mortgage loan which closed on
February 7, 1995, the settlement proceeds will be used to complete the required
repairs. The loan will be fully recourse to the joint venture and to the
partners of the joint venture until the repairs are completed, at which time the
entire obligation will become non-recourse. All repair work should be completed
during fiscal 1996.
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly
dissatisfied partnership investors. In March 1995, after the actions were
consolidated under the title In re PaineWebber Limited Partnership Litigation,
the plaintiffs amended their complaint to assert claims against a variety of
other defendants, including Eighth Income Properties, Inc. and Properties
Associates 1986, L.P. ("PA1986") which are the General Partners of the
Partnership and affiliates of PaineWebber. On May 30, 1995, the court certified
class action treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleges
that, in connection with the sale of interests in PaineWebber Income Properties
Eight Limited Partnership, PaineWebber, Eighth Income Properties, Inc. and
PA1986 (1) failed to provide adequate disclosure of the risks involved; (2) made
false and misleading representations about the safety of the investments and the
Partnership's anticipated performance; and (3) marketed the Partnership to
investors for whom such investments were not suitable. The plaintiffs, who
purport to be suing on behalf of all persons who invested in PaineWebber Income
Properties Eight Limited Partnership, also allege that following the sale of the
partnership interests, PaineWebber, Eighth Income Properties, Inc. and PA1986
misrepresented financial information about the Partnerships value and
performance. The amended complaint alleges that PaineWebber, Eighth Income
Properties, Inc. and PA1986 violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs seek
unspecified damages, including reimbursement for all sums invested by them in
the partnerships, as well as disgorgement of all fees and other income derived
by PaineWebber from the limited partnerships. In addition, the plaintiffs also
seek treble damages under RICO. The defendants' time to move against or answer
the complaint has not yet expired.
Pursuant to provisions of the Partnership Agreement and other contractual
obligations, under certain circumstances the Partnership may be required to
indemnify Eighth Income Properties, Inc., PA1986 and their affiliates for costs
and liabilities in connection with this litigation. The General Partners intend
to vigorously contest the allegations of the action, and believe that the action
will be resolved without material adverse effect on the Partnership's financial
statements, taken as a whole.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Security Holder Matters
At September 30, 1995, there were 1,733 record holders of Units in the
Partnership. There is no public market for the resale of the Units, and it is
not anticipated that a public market for resale of the Units will develop. The
Managing General Partner will not redeem or repurchase Units.
There were no cash distributions made to the Limited Partners during
fiscal 1995.
Item 6. Selected Financial Data
PaineWebber Income Properties Eight Limited Partnership For the years
ended September 30, 1995, 1994, 1993, 1992 and 1991
(In thousands, except per Unit data)
1995 1994 1993 1992 (2) 1991
---- ---- ---- -------- ----
Revenues $ 8,649 $ 8,195 $ 8,050 $ 8,717 $ 13,362
Operating loss $ (8,957) $ (2,940) $ (2,978) $ (5,325) $ (7,958)
Partnership's share of
ventures' losses $ (577) $ (1,036) $ (1,356) $ (1,246) $ (992)
Loss on transfer of
assets at foreclosure - - - $ (5,653) -
Loss before extraordinary
gain $ (9,534) $ (3,976) $ (4,334) $(12,224) $ (8,950)
Extraordinary gain from
settlement of debt
obligation - - - $ 11,360 -
Net loss $ (9,534) $ (3,976)$ (4,334) $ (864) $ (8,950)
Total assets $ 23,623 $ 31,090 $ 33,521 $ 36,660 $ 57,447
Mortgage debt payable$ 36,060 $ 35,237 $ 34,634 (1)$ 29,400 $ 29,400
Per 1,000 Limited
Partnership Units:
Loss before
extraordinary gain$ (265.38)$ (110.68) $ (120.64) $ (340.23) $(249.10)
Extraordinary gain from
settlement of debt
obligation - - - $ 316.19 -
Net loss $ (265.38) $ (110.68) $ (120.64) $ (24.04) $(249.10)
Cash distributions - - - - $ 25.00
<PAGE>
(1) The increase in long-term debt as of September 30, 1993 resulted from the
modification of the mortgage note payable secured by the Newport Beach
Marriott operating investment property. As more fully explained in Note 6 to
the accompanying financial statements, accrued interest payable as of August
11, 1992 was added to the outstanding principal balance in accordance with
the modification agreement which also permitted the future deferral of a
portion of the debt service obligation (see Item 7).
(2) The loss on transfer of assets at foreclosure and the extraordinary gain on
settlement of debt obligation recognized in fiscal 1992 resulted from the
foreclosure, on December 3, 1991, of the wholly-owned Atlanta Marriott
Suites Hotel. In anticipation of the foreclosure, the remaining assets and
liabilities of this operating investment property were aggregated and
separately classified on the Partnership's balance sheet as assets and
liabilities of investment property subject to foreclosure at September 30,
1991.
The above selected financial data should be read in conjunction with the
financial statements and the related notes appearing elsewhere in this Annual
Report.
The above per 1,000 Limited Partnership Unit information is based upon the
35,548,976 Limited Partnership Units outstanding during each year.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Partnership offered Units of Limited Partnership interests to the
public from September 17, 1986 to September 16, 1988 pursuant to a Registration
Statement filed under the Securities Act of 1933. Gross proceeds of $35,548,976
were received by the Partnership from the sale of Partnership Units and, after
deducting selling expenses and offering costs, approximately $28,474,000 was
originally invested in two wholly-owned operating investment properties and four
joint venture partnerships which own five operating investment properties. As
discussed in prior reports, the Partnership was forced to relinquish ownership
of one of its wholly-owned properties, the Atlanta Marriott Suites Hotel, on
December 3, 1991 as a result of uncured monetary defaults under the terms of the
property's first mortgage loan.
As previously reported, on January 25, 1993 the Managing General Partner
and the lender on the Newport Beach Marriott Suites Hotel finalized an agreement
on a modification of the first mortgage loan secured by the Hotel which was
retroactive to August 11, 1992. Per the terms of the modification, the maturity
date of the loan was extended one year to August 11, 1996. The principal amount
of the loan was adjusted to $32,060,518 (the original principal of $29,400,000
plus $2,660,518 of unpaid interest and fees). The outstanding balance of the
loan bears interest at a rate of 9.59% through August 11, 1995 and at a variable
rate of the adjusted LIBOR index, as defined (5.91% at September 30, 1995), plus
2.5% from August 11, 1995 through the final maturity date. The Partnership is
obligated to pay the lender on a monthly basis as debt service an amount equal
to Hotel Net Cash, as defined in the Hotel management agreement. In order to
increase Hotel Net Cash, Marriott agreed to reduce its Base Management Fee by
one percent of total revenue through January 3, 1997. In addition, the reserve
for the replacement of equipment and improvements, which is funded out of a
percentage of gross revenues generated by the Hotel, was reduced to two percent
of gross revenues in 1992 and is equal to three percent of gross revenues
thereafter through January 3, 1997. As part of the modification agreement, the
Partnership agreed to make additional debt service contributions to the lender
of $400,000, of which $50,000 was paid at the closing of the modification and
the balance was to be payable on a monthly basis in arrears for forty-two
months.
As part of the agreement to modify the Hotel's mortgage debt, an
additional loan facility of up to $4,000,000 was made available from the
existing lender to be used to pay debt service shortfalls. This additional loan
facility bears interest at a variable rate of adjusted LIBOR, as defined, plus
one percent per annum. Interest on the new loan facility is payable currently to
the extent of available cash flow from Hotel operations. Interest deferred due
to the lack of available cash flow could be added to the principal balance of
the new loan until the loan balance reached the $4,000,000 limitation. As of
March 31, 1995, the Partnership had exhausted the entire $4,000,000 of this
additional loan facility. On April 11, 1995, the Partnership received a default
notice from the lender. Under the terms of the loan agreement, as of April 25,
1995 additional default interest accrues at a rate of 4% per annum on the loan
amount of $32,060,518 and the additional loan facility of $4,000,000. Subsequent
to the date of the default, the Partnership suspended the monthly additional
debt service contributions of $8,333 referred to above. At September 30, 1995,
approximately $1,242,000 of accrued interest on this additional loan facility
remained unpaid and default interest of approximately $637,000 had accrued.
After preliminary discussions, it is unclear whether the lender will be willing
to allow for further modifications to the loan and an extension of the August
1996 maturity date. Despite an improvement in the Hotel's operating results
during fiscal 1995, the estimated value of the Hotel property is substantially
less than the obligation to the mortgage lender at the present time. While
increased demand from institutional buyers and an absence of any significant new
construction activity have led to an improvement in the market for hotel
properties in many areas of the country during 1995, it appears unlikely that
continued improvement will occur as rapidly or to the extent necessary for the
Partnership to recover any portion of its original net investment in the Newport
Beach Marriott. Management will continue to make every prudent effort to
preserve the Partnership's ownership of the Hotel property, but if the mortgage
holder were to choose to initiate foreclosure proceedings, as a practical
matter, there is very little that the Partnership could do to prevent
foreclosure from occurring.
In light of the circumstances facing the Newport Beach Marriott Hotel,
management reviewed the carrying value of the Hotel for potential impairment as
of September 30, 1995. In conjunction with such review, the Partnership elected
early application of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" (SFAS 121). In accordance with SFAS 121, an impairment loss with
respect to an operating investment property is recognized when the sum of the
expected future net cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset. An impairment loss is measured as
the amount by which the carrying amount of the asset exceeds its fair value,
where fair value is defined as the amount at which the asset could be bought or
sold in a current transaction between willing parties, that is other than a
forced or liquidation sale. In conjunction with the application of SFAS 121, the
Partnership recognized an impairment loss of $6,369,000 to write down the
operating investment property to its estimated fair value of $20,000,000 as of
September 30, 1995. Fair value was estimated using an independent appraisal of
the operating property. The impairment loss resulted because, in management's
judgment, the current default status of the mortgage loan secured by the
property discussed above, combined with the lack of near-term prospects for
sufficient future improvement in market conditions in the Orange County market
in which the property is located, are not expected to enable the Partnership to
recover the adjusted cost basis of the property. Because the net carrying value
of the Hotel is below the balance of the nonrecourse debt obligation secured by
the property as of September 30, 1995, the Partnership would recognize a sizable
net gain for financial reporting purposes upon a foreclosure of the operating
property and settlement of the debt obligation.
The loss of the Atlanta Marriott Suites to foreclosure in fiscal 1992 and
the unlikely prospects for recovery of the Partnership's investment in the
Newport Beach Marriott, as discussed further above, mean that the Partnership
will be unable to return the full amount of the original invested capital to the
Limited Partners. The two hotel investments represented 63% of the Partnership's
original investment portfolio. The amount of capital which will be returned will
depend upon the proceeds received from the disposition of the Partnership's
other investments, which cannot presently be determined. The Partnership's other
investments consist of four multi-family apartment complexes and one retail
shopping center. Based on the current estimated market values of these
investments, only the Partnership's interest in the Meadows in the Park
Apartments has any significant value above the outstanding mortgage indebtedness
secured by the properties. In October 1993, the sole anchor tenant of the Norman
Crossing Shopping Center vacated the center to relocate its operations. This
anchor tenant, which occupied 25,000 square feet of the property's 52,000 net
leasable square feet, is still obligated under the terms of its lease which runs
through the year 2007. To date, all rents due from this tenant have been
collected. Nonetheless the anchor tenant vacancy has resulted in several tenants
receiving rental abatements during fiscal 1995 and has had an adverse effect on
the ability to lease other vacant shop space at the center, which had been 100%
occupied prior to the anchor tenant's departure. During fiscal 1995, two vacant
shops were leased, both at below market rent levels necessitated by the anchor
tenant vacancy. The center was 49% occupied as of September 30, 1995. During the
last quarter of fiscal 1995, the former anchor tenant reached an agreement to
sub-lease its space to a new tenant. This new sublease tenant is scheduled to
take occupancy in January 1996. At such time, the rental abatements granted to
the other tenants will be terminated. However, the long-term impact of this
subleasing arrangement on the operations of the property remains uncertain at
the present time. The joint venture may have to continue to make significant
tenant improvements and grant further rental concessions in order to maintain a
high occupancy level. Funding for such improvements, along with any operating
cash flow deficits incurred during this period of re-stabilization for the
shopping center, would be provided primarily by the Partnership. The Partnership
funded cash flow deficits of approximately $56,000 for the Norman Crossing joint
venture during fiscal 1995. The Partnership also funded its share of the
deficits at the Maplewood joint venture during fiscal 1995. While occupancy
levels have been maintained in the mid-90% range at the Maplewood property,
gross collections have declined over the past twelve months due to slightly
deteriorating local market conditions. In December 1994, the Partnership
contributed $35,000 to the Maplewood joint venture to cover its share of the
venture's cash flow deficits. Subsequent to year-end, in December 1995 the
Partnership funded an additional $63,000 to the Maplewood joint venture.
Management is prepared to fund the Partnership's share of any additional amounts
required to support these two operating investment properties in the near-term.
Significant progress was made over the past two years toward resolving the
remedial repair work and associated litigation affecting the Partnership's
investments in the Meadows, Spinnaker Landing and Bay Club Apartments.
Management renewed marketing and leasing efforts at the Spinnaker Landing and
Bay Club Apartments during the latter part of fiscal 1993 upon the completion of
the repair work to correct the construction defects, and occupancy levels
stabilized in the mid-90% range during fiscal 1995. However, the venture had
negative operating cash flow during fiscal 1995, which was funded from available
recoveries on certain legal claims, as discussed further below. Management is
hopeful that further improvement in market conditions, combined with further
local market acceptance of the improved physical condition and appearance of the
renovated apartment properties, will enable the venture to achieve above
breakeven cash flow levels in the near future. As of September 30, 1995, the
venture has settled substantially all of the outstanding litigation related to
the construction defects. During fiscal 1995 the venture received additional
settlement proceeds totalling approximately $402,000 from its pursuit of claims
against certain subcontractors of the development company and other responsible
parties. The Partnership received distributions of $160,000 from the Spinnaker
Bay joint venture in fiscal 1995 as a result of these additional recoveries. No
significant further litigation proceeds are expected at the present time.
As part of the initial settlement with the developer of the Spinnaker
Landing and Bay Club Apartments, the venture also negotiated a loan modification
agreement which provided the majority of the additional funds needed to complete
the repairs to the operating properties and extended the maturity date for
repayment of the obligation to December 1996. Under the terms of the loan
modification, which was executed in December 1991, the lender agreed to loan to
the joint venture 80% of the additional amounts necessary to complete the repair
of the properties up to a maximum of $760,000. Advances through the completion
of the repair work totalled approximately $617,000. The loan modification
agreement also required the lender to defer all past due interest and all of the
interest due in calendar 1992. During 1993, the joint venture was not in
compliance with the loan modification agreement with respect to scheduled
payments of principal and interest due to negative cash flow from operations.
However, on November 1, 1993 a second loan modification was reached in which the
lender agreed to an additional deferral of debt service payments, through July
1, 1993, which was added to the loan principal. The execution of this second
modification agreement cured any defaults on the part of the joint venture.
Additional amounts owed to the lender as a result of the deferred payments,
after the effect of the second modification agreement and including accrued
interest, total in excess of $1 million. These additional amounts owed to the
lender, while critical and necessary to the process of correcting the
construction defects, have further subordinated the equity position of the
Partnership in these investment properties. The current estimated market values
of the two apartment complexes are below the amount of the outstanding debt
obligations. Furthermore, under the terms of the second modification agreement,
100% of any net cash flow available after the payment of current debt service
requirements will be payable to the lender until all deferred interest has been
paid; thereafter 50% of any net cash flow will be payable to the lender to be
applied against outstanding principal. As a result, no additional funds are
expected to be received from this venture for the foreseeable future. During
fiscal 1995, management evaluated a proposal from the existing mortgage lender
to repay the outstanding debt at a significant discount. Such a plan would
require a sizable equity contribution by the Partnership. Management has
evaluated whether an additional investment of funds in the venture would be
economically prudent in light of the future appreciation potential of the
properties. At the present time, it does not appear likely that the Partnership
will choose to commit the additional equity investment required to effect the
proposed debt restructuring. Management continues to examine alternative value
creation scenarios, however, there are no assurances that the Partnership will
realize any future proceeds from the ultimate disposition of its interests in
these two properties.
During fiscal 1991, the Partnership discovered that certain materials used
to construct The Meadows in the Park Apartments, in Birmingham, Alabama, were
manufactured incorrectly and would require substantial repairs. During fiscal
1992, the Meadows joint venture engaged local legal counsel to seek recoveries
from the venture's insurance carrier, as well as various contractors and
suppliers, for the venture's claim of damages, which were estimated at between
$1.6 and $2.1 million, not including legal fees and other incidental costs.
During fiscal 1993, the insurance carrier deposited approximately $522,000 into
an escrow account controlled by the venture's mortgage lender in settlement of
the undisputed portion of the venture's claim. During fiscal 1994, the insurer
agreed to enter into non-binding mediation towards settlement of the disputed
claims out of court. On October 3, 1994, the joint venture verbally agreed to
settle its claims against the insurance carrier, architect, general contractor
and the surety/completion bond insurer for $1,714,000, which is in addition to
the $522,000 previously paid by the insurance carrier. These settlement proceeds
were escrowed with the mortgage holder. The nonrecourse mortgage payable secured
by the Meadows' operating property was scheduled to mature on November 1, 1994.
During the first quarter of fiscal 1995, the venture obtained an extension of
the maturity date from the lender to January 1, 1995. Delays in the closing
process for a new loan resulted in the inability to repay the mortgage loan upon
the expiration of the forbearance period. On January 3, 1995, the mortgage
lender sent a formal default notice to the venture stating that a default
interest rate of 15.5% per annum would be applied to the loan effective January
1, 1995. On February 7, 1995, the venture closed on a new loan and fully repaid
the prior mortgage debt obligation. The new debt, in the initial principal
amount of $5,500,000, bears interest at a variable rate equal to the 30-day
LIBOR rate plus 2.25% (equivalent to a rate of approximately 8.125% per annum as
of September 30, 1995). The loan has a 5-year term and requires monthly interest
and principal payments based on a 25-year amortization schedule. Under the terms
of the new loan, the settlement proceeds will be used to complete the required
repairs. The loan will be fully recourse to the joint venture and to the
partners of the joint venture until the repairs are completed, at which time the
entire obligation will become non-recourse. As of September 30, 1995, $996,000
had been disbursed for the renovations, which were approximately 67% complete,
leaving $718,000 in escrow for future repairs. All of the repair work is
expected to be completed by the end of fiscal 1996. The occupancy level at
Meadows dropped significantly to 79% at September 30, 1995, down from 98% at
September 30, 1994. This decline is due to ongoing construction activities
related to the repair work which have resulted in apartment units being taken
out of service while the repair work is performed. The overall Birmingham,
Alabama market remains strong and the occupancy level is expected to increase
back to stabilized levels as repairs to the property are completed.
As stated above, the Meadows in the Park Apartments is the only one of the
Partnership's investments which would appear to have any significant value above
the related mortgage loan obligations based on current estimated market values.
Assuming that the overall market for multi-family apartment properties remains
strong in the near-term, the Meadows joint venture may have a favorable
opportunity to sell the operating investment property subsequent to the
completion of the repair work discussed above. While there are no assurances
that a sale transaction will be completed, if the Partnership were to sell its
investment in the Meadows property, management would have to determine whether
to distribute all of the net proceeds from such a transaction to the Limited
Partners or to withhold all or a portion of such proceeds for potential
reinvestment in the remaining investment properties as part of a plan to create
value for the Partnership's remaining investment positions. Under such
circumstances, management would base its decisions on an assessment of the
expected overall returns to the Limited Partners. Management is currently in the
process of identifying and evaluating alternative operating plans for the
Partnership in light of the pending resolution of the Newport Beach Marriott
default situation, the potential future sale of the Meadows property and the
status of the Partnership's existing cash reserves.
At September 30, 1995, the Partnership had available cash and cash
equivalents of $1,362,000. Approximately $575,000 of such cash is held at the
wholly-owned Newport Beach Marriott Suites Hotel and is designated for use to
pay hotel operating expenses and required debt service. The balance of such cash
and cash equivalents will be utilized as needed for Partnership requirements
such as the payment of operating expenses and the funding of joint venture
capital improvements, operating deficits or refinancing expenses. In addition,
the Partnership had a cash reserve of approximately $618,000 as of September 30,
1995, which is held by Marriott Corporation and is available exclusively to be
used for repairs and replacements related to the Newport Beach Marriott Suites
Hotel. The source of future liquidity and distributions to the partners is
expected to be through cash generated from operations of the Partnership's
income-producing investment properties and proceeds received from the sale or
refinancing of such properties. Such sources of liquidity are expected to be
sufficient to meet the Partnership's needs on a short-term basis. As discussed
further above, management is currently evaluating alternative operating
strategies to address the Partnership's long-term liquidity needs.
Results of Operations
1995 Compared to 1994
The Partnership had a net loss of $9,534,000 for fiscal 1995, as compared
to a net loss of $3,976,000 in the prior year. This significant increase in net
loss is primarily due to the $6,369,000 impairment write-down recorded on the
Newport Beach Marriott Suites Hotel in fiscal 1995, as discussed further above.
In addition, an increase in interest expense on the Marriott loan arrangements
of $1,421,000 also contributed to the increase in net loss for the current year.
The increase in interest expense is the result of default interest being accrued
on the outstanding mortgage loan and additional loan facility secured by the
Newport Beach Marriott Suites Hotel beginning in April 1995, along with the
increase in the outstanding amount of the additional loan facility over the past
two years. The increase in net loss was partially offset by a decrease in Hotel
operating expenses of $716,000, an increase in Hotel revenues of $390,000, a
decrease in depreciation and amortization expense of $567,000 and a decline in
the Partnership's share of ventures' losses of $459,000. The decrease in
expenses at the wholly-owned Marriott Hotel is mainly due to a substantial real
estate tax refund received in fiscal 1995 as a result of a successful appeal of
prior year assessments. The refund, which totalled $731,000, was received late
in fiscal 1995 and, subsequent to year-end, was remitted to the mortgage lender
as additional debt service owed under the terms of the modified loan agreement.
Room revenues at the Newport Beach Hotal were up by $344,000, or 6%, for fiscal
1995 as a result of an increase in average occupancy. The increase in room
revenues resulted from an improvement in the Hotel's average occupancy level
from 75% for fiscal 1994 to 78% for fiscal 1995. Amortization expense was
significantly lower in fiscal 1995 as a result of certain fees becoming fully
amortized in the prior year. In addition, an increase of $64,000 in interest and
other income and a decrease of $36,000 in Partnership general and administrative
expenses also offset the increase in net loss for fiscal 1995. Interest income
in fiscal 1995 reflects interest received on certain advances to one of the
Partnership's joint ventures.
The decrease in the Partnership's share of ventures' losses is mainly the
result of increases in revenues at the Meadows, Spinnaker Landing, and Bay Club
Apartments, a decrease in depreciation expense at the Meadows joint venture and
a decrease in combined property operating expenses. Rental income at Bay Club
and Spinnaker Landing increased as a result of the lease-up achieved at the
renovated apartments over the past two years, as discussed further above.
Revenues were higher at the Meadows joint venture despite the decrease in
occupancy discussed above as a result of the designation of the excess of the
settlement proceeds received over the estimated repair costs as rental
interruption compensation, which was recorded as income in fiscal 1995.
Depreciation expense at the Meadows joint venture decreased by $100,000 as a
result of certain assets being fully depreciated during the prior fiscal year.
The decline in combined property operating expenses can be primarily attributed
to a decrease in repairs and maintenance expenses at the Meadows joint venture.
1994 Compared to 1993
The Partnership had a net loss of $3,976,000 for fiscal 1994, as compared
to a net loss of $4,334,000 in the prior year. The primary reason for this
decrease in net loss of $358,000 was a decrease in the Partnership's share of
ventures' losses in fiscal 1994. The Partnership's share of ventures' losses
decreased by $320,000 mainly due to an increase in rental income resulting from
a significant increase in occupancy at the Spinnaker Landing and Bay Club
Apartments as a result of the renewal of leasing efforts, as discussed further
above. The increase in rental income was partially offset by an increase in
interest expense on the Spinnaker Landing and Bay Club mortgage loans as a
result of the accrual of interest on debt service payments deferred by the
lender during fiscal 1993. The Partnership's operating loss decreased by $38,000
in fiscal 1994 primarily as a result of an increase in net operating income from
the Newport Beach Marriott Suites Hotel, due to the higher occupancy levels
achieved at the Hotel in fiscal 1994, and a decrease in depreciation and
amortization expense, due to certain deferred fees being fully amortized in the
prior year. The increase in hotel net operating income and the decrease in
depreciation and amortization expense were partially offset by increases in
interest expense and general and administrative expenses in 1994. Interest
expense increased due to the advances under the additional loan facility from
the Hotel's mortgage lender to pay debt service shortfalls and an increase in
the variable interest rate on this loan facility. The increase in Partnership
general and administrative expenses reflected certain costs incurred in
connection with an independent valuation of the Partnership's operating
properties which was commissioned during fiscal 1994 in conjunction with
management's ongoing refinancing efforts and portfolio management
responsibilities.
1993 Compared to 1992
The Partnership's net loss increased by $3,471,000 during fiscal 1993, when
compared to fiscal 1992. The increase in net loss primarily resulted from the
foreclosure of the Atlanta Marriott Suites Hotel in fiscal 1992 which, as
explained below, resulted in an extraordinary gain from settlement of debt
obligation of $11,360,000. The extraordinary gain was partially offset by a loss
on transfer of assets at foreclosure of $5,653,000. The transfer of the Atlanta
Hotel's title to the lender through foreclosure proceedings was accounted for as
a troubled debt restructuring in accordance with Statement of Financial
Accounting Standards No. 15, "Accounting by Debtors and Creditors for Troubled
Debt Restructurings" (SFAS No. 15). The extraordinary gain arose due to the fact
that the balance of the mortgage loan and related accrued interest exceeded the
estimated fair value of the Hotel investment and certain other assets
transferred to the lender at the time of the foreclosure. The loss on transfer
of assets resulted from the fact that the net carrying value of the Hotel
exceeded the Hotel's estimated fair value at the time of foreclosure.
Net loss also included operating loss and the Partnership's share of
ventures' losses. Operating loss decreased by approximately 44% during fiscal
1993 primarily due to the foreclosure of the Atlanta Hotel, which had been
generating significant losses from operations prior to the foreclosure. The
operating results for fiscal 1992 included the operations of the Atlanta Hotel
through December 3, 1991, the date of foreclosure. In addition, interest expense
on the mortgage loan secured by the Newport Beach Marriott Suites Hotel
decreased in fiscal 1993 as a result of the amortization of the deferred gain
which resulted from the modification described above. This modification was also
accounted for in accordance with SFAS No. 15. Accordingly, the forgiveness of
accrued interest and fees through August 11, 1992 of $1,767,000 was being
deferred and amortized as a reduction of interest expense prospectively, using
the effective interest method over the remaining term of the Hotel's
indebtedness. The reduction in interest expense which resulted from this
accounting treatment of the debt modification was partially offset by interest
incurred on the additional advances from the Marriott lender to cover the
deferred portion of the Partnership's debt service payments.
The Partnership's share of ventures' losses increased by approximately 9%
in fiscal 1993 mainly due to a decline in operating revenues at Spinnaker Bay
Associates. Due to the construction-related defects found at both of the
apartment complexes owned by the joint venture, management had temporarily
suspended leasing efforts while the repair work at the properties was being
performed, which resulted in a decline in average occupancy and revenues. In
addition, interest expense on the venture's mortgage loan increased as a result
of the accrual of interest on debt service payments deferred by the lender
during fiscal 1993.
Inflation
The Partnership completed its eighth full year of operations in fiscal
1995. The effects of inflation and changes in prices on the Partnership's
operating results to date have not been significant.
Inflation in future periods may increase revenues, as well as operating
expenses at the Partnership's operating investment properties. Some of the
existing leases with tenants at the Partnership's commercial investment property
contain rental escalation and/or expense reimbursement clauses based on
increases in tenant sales or property operating expenses. Tenants at the
Partnership's apartment properties have short-term leases, generally of
six-to-twelve months in duration. Rental rates at these properties can be
adjusted to keep pace with inflation, to the extent market conditions allow,
when the leases are renewed or turned over. In addition, rental rates at the
Partnership's remaining hotel property can be set daily to keep pace with
inflationary pressures, as market conditions will allow. Such increases in
rental income would be expected to at least partially offset the corresponding
increases in Partnership and property operating expenses.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included under Item 14
of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Partnership
The Managing General Partner of the Partnership is Eighth Income
Properties, Inc., a Delaware corporation, which is a wholly-owned subsidiary of
PaineWebber. The Associate General Partner of the Partnership is Properties
Associates 1986, L.P., a Virginia limited partnership, certain limited partners
of which are also officers of the Adviser and the Managing General Partner. The
Managing General Partner has overall authority and responsibility for the
Partnership's operation; however, the day-to-day business of the Partnership is
managed by the Adviser pursuant to an advisory contract.
(a) and (b) The names and ages of the directors and principal executive
officers of the Managing General Partner of the Partnership are as follows:
Date elected
Name Office Age to Office
Lawrence A. Cohen President and Chief Executive Officer 42 5/1/91
Albert Pratt Director 84
8/27/85 *
J. Richard Sipes Director 48 6/9/94
Walter V. Arnold Senior Vice President and Chief
Financial Officer 48 10/29/85
James A. Snyder Senior Vice President 50 7/6/92
John B. Watts III Senior Vice President 42 6/6/88
David F. Brooks First Vice President and
Assistant Treasurer 53 8/27/85 *
Timothy J. Medlock Vice President and Treasurer 34 6/1/88
Thomas W. Boland Vice President 33 12/1/91
* The date of incorporation of the Managing General Partner.
(c) There are no other significant employees in addition to the directors
and principal executive officers mentioned above.
(d) There is no family relationship among any of the foregoing directors
and principal executive officers of the Managing General Partner of the
Partnership. All of the foregoing directors and principal executive officers
have been elected to serve until the annual meeting of the Managing General
Partner.
(e) All of the directors and executive officers of the Managing General
Partner hold similar positions in affiliates of the Managing General Partner,
which are the corporate general partners of other real estate limited
partnerships sponsored by PWI, and for which Paine Webber Properties
Incorporated serves as the Adviser. The business experience of each of the
directors and principal executive officers of the Managing General Partner is as
follows:
Lawrence A. Cohen is President and Chief Executive Officer of the Managing
General Partner and President and Chief Executive Officer of the Adviser which
he joined in January 1989. He is also a member of the Board of Directors and the
Investment Committee of the Adviser. From 1984 to 1988, Mr. Cohen was First Vice
President of VMS Realty Partners where he was responsible for origination and
structuring of real estate investment programs and for managing national
broker-dealer relationships. He is a member of the New York Bar and is a
Certified Public Accountant.
Albert Pratt is a Director of the Managing General Partner, a Consultant
of PWI and a General Partner of the Associate General Partner. Mr. Pratt joined
PWI as Counsel in 1946 and since that time has held a number of positions
including Director of both the Investment Banking Division and the International
Division, Senior Vice President and Vice Chairman of PWI and Chairman of
PaineWebber International, Inc.
<PAGE>
J. Richard Sipes is a Director of the Managing General Partner and a
Director of the Adviser. Mr. Sipes is an Executive Vice President at
PaineWebber. He joined the firm in 1978 and has served in various capacities
within the Retail Sales and Marketing Division. Before assuming his current
position as Director of Retail Underwriting and Trading in 1990, he was a
Branch Manager, Regional Manager, Branch System and Marketing Manager for a
PaineWebber subsidiary, Manager of Branch Administration and Director of
Retail Products and Trading. Mr. Sipes holds a B.S. in Psychology from
Memphis State University.
Walter V. Arnold is Senior Vice President and Chief Financial Officer of
the Managing General Partner and Senior Vice President and Chief Financial
Officer of the Adviser which he joined in October 1985. Mr. Arnold joined PWI in
1983 with the acquisition of Rotan Mosle, Inc. where he had been First Vice
President and Controller since 1978, and where he continued until joining the
Adviser. He began his career in 1974 with Arthur Young & Company in Houston. Mr.
Arnold is a Certified Public Accountant licensed in the state of Texas.
James A. Snyder is a Senior Vice President of the Managing General Partner
and a Senior Vice President and Member of the Investment Committee of the
Adviser. Mr. Snyder re-joined the Adviser in July 1992 having served previously
as an officer of PWPI from July 1980 to August 1987. From January 1991 to July
1992, Mr. Snyder was with the Resolution Trust Corporation where he served as
the Vice President of Asset Sales prior to re-joining PWPI. From February 1989
to October 1990, he was President of Kan Am Investors, Inc., a real estate
investment company. During the period August 1987 to February 1989, Mr. Snyder
was Executive Vice President and Chief Financial Officer of Southeast Regional
Management Inc., a real estate development company.
John B. Watts III is a Senior Vice President of the Managing General
Partner and a Senior Vice President of the Adviser which he joined in June 1988.
Mr. Watts has had over 16 years of experience in acquisitions, dispositions and
finance of real estate. He received degrees of Bachelor of Architecture,
Bachelor of Arts and Master of Business Administration from the University of
Arkansas.
David F. Brooks is a First Vice President and Assistant Treasurer of the
Managing General Partner and a First Vice President and an Assistant Treasurer
of the Adviser. Mr. Brooks joined the Adviser in March 1980. From 1972 to 1980,
Mr. Brooks was an Assistant Treasurer of Property Capital Advisors, Inc. and
also, from March 1974 to February 1980, the Assistant Treasurer of Capital for
Real Estate, which provided real estate investment, asset management and
consulting services.
Timothy J. Medlock is a Vice President and Treasurer of the Managing
General Partner and Vice President and Treasurer of the Adviser which he joined
in 1986. From June 1988 to August 1989, Mr. Medlock served as the Controller of
the Managing General Partner and the Adviser. From 1983 to 1986, Mr. Medlock was
associated with Deloitte Haskins & Sells. Mr. Medlock graduated from Colgate
University in 1983 and received his Masters in Accounting from New York
University in 1985.
Thomas W. Boland is a Vice President of the Managing General Partner
and a Vice President and Manager of Financial Reporting of the Adviser which
he joined in 1988. From 1984 to 1987 Mr. Boland was associated with Arthur
Young & Company. Mr. Boland is a Certified Public Accountant licensed in the
state of Massachusetts. He holds a B.S. in Accounting from Merrimack College
and an M.B.A. from Boston University.
(f) None of the directors and officers were involved in legal proceedings
which are material to an evaluation of his or her ability or integrity as a
director or officer.
(g) Compliance With Exchange Act Filing Requirements: The Securities
Exchange Act of 1934 requires the officers and directors of the Managing General
Partner, and persons who own more than ten percent of the Partnership's limited
partnership units, to file certain reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and ten-percent
beneficial holders are required by SEC regulations to furnish the Partnership
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Partnership believes that, during the year ended September 30, 1995, all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
<PAGE>
Item 11. Executive Compensation
The directors and officers of the Partnership's Managing General Partner
received no current or proposed remuneration from the Partnership.
The Partnership is required to pay certain fees to the Adviser, and the
General Partners are entitled to receive a share of Partnership cash
distributions and a share of profits and losses. These items are described under
Item 13.
The Partnership paid cash distributions to the Limited Partners on a
quarterly basis at a rate equal to 5% per annum on invested capital from
inception through the first quarter of fiscal 1991. Effective for the quarter
ended March 31, 1991, such distributions were suspended indefinitely.
Furthermore, the Partnership's Limited Partnership Units are not actively traded
on any organized exchange, and no efficient secondary market exists.
Accordingly, no accurate price information is available for these Units.
Therefore, a presentation of historical Unitholder total returns would not be
meaningful.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) The Partnership is a limited partnership issuing Units of Limited
Partnership Interest, not voting securities. All the outstanding stock of the
Managing General Partner, Eighth Income Properties, Inc., is owned by
PaineWebber. Properties Associates 1986, L.P., the Associate General Partner, is
a Virginia limited partnership, the limited partners of which are also officers
of the Adviser and the Managing General Partner. Properties Associates 1986,
L.P. also is the Initial Limited Partner. An affiliate of the Managing General
Partner referred to below owned more than 5% of the outstanding Units of limited
partnership interest in the Partnership as of September 30, 1995.
Amount
Name and Address Beneficially Percent
Title of Class of Beneficial Owner Owned of Class
Units of Limited PaineWebber Incorporated 5,000,000 14.1%
Partnership 1285 Avenue of the Americas Units
New York, NY 10019
(b) The directors and officers of the Managing General Partner do not
directly own any Units of Limited Partnership Interest of the Partnership. No
director or officer of the Managing General Partner, nor any limited partner of
the Associate General Partner, possesses a right to acquire beneficial ownership
of Units of Limited Partnership Interest of the Partnership.
(c) There exists no arrangement, known to the Partnership, the operation
of which may, at a subsequent date, result in a change in control of the
Partnership.
Item 13. Certain Relationships and Related Transactions
The General Partners of the Partnership are Eighth Income Properties, Inc.
(the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group
Inc. ("PaineWebber"), and Properties Associates 1986, L.P. (the "Associate
General Partner"), a Virginia limited partnership, certain limited partners of
which are also officers of the Managing General Partner. Subject to the Managing
General Partner's overall authority, the business of the Partnership is managed
by PaineWebber Properties Incorporated (the "Adviser"), pursuant to an advisory
contract. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated
("PWI").
PaineWebber owned 5,000,000 units of Limited Partnership interest in the
Partnership as of both September 30, 1995 and 1994.
The General Partners, the Adviser and PWI receive fees and compensation,
determined on an agreed upon basis, in consideration of various services
performed in connection with the sale of the Units, the management of the
Partnership and the acquisition, management, financing and disposition of
Partnership investments.
In connection with the acquisition of properties, the Adviser received
acquisition fees in an amount not greater than 5% of the gross proceeds from the
sale of Partnership Units. In connection with the sale of each property, the
Adviser may receive a disposition fee, payable upon liquidation of the
Partnership, in an amount equal to the lesser of 1% of the aggregate sales price
of the property or 50% of the standard brokerage commissions, subordinated to
the payment of certain amounts to the Limited Partners.
Pursuant to the terms of the Partnership Agreement, as amended, any
taxable income or tax loss (other than from a Capital Transaction) of the
Partnership will be allocated 98.94802625% to the Limited Partners and
1.05197375% to the General Partners. Taxable income or tax loss arising from a
sale or refinancing of investment properties will be allocated to the Limited
Partners and the General Partners in proportion to the amounts of sale or
refinancing proceeds to which they are entitled; provided that the General
Partners shall be allocated at least 1% of taxable income arising from a sale or
refinancing. If there are no sale or refinancing proceeds, taxable income or tax
loss from a sale or refinancing will be allocated 98.94802625% to the Limited
Partners and 1.05197375% to the General Partners. Notwithstanding this, the
Partnership Agreement provides that the allocation of taxable income and tax
losses arising from the sale of a property which leads to the dissolution of the
Partnership shall be adjusted to the extent feasible so that neither the General
or Limited Partners recognize any gain or loss as a result of having either a
positive or negative balance remaining in their capital accounts upon the
dissolution of the Partnership. If the General Partner has a negative capital
account balance subsequent to the sale of a property which leads to the
dissolution of the Partnership, the General Partner may be obligated to restore
a portion of such negative capital account balance as determined in accordance
with the provisions of the Partnership Agreement. Allocations of the
Partnership's operations between the General Partners and the Limited Partners
for financial accounting purposes have been made in conformity with the
allocations of taxable income or tax loss.
All distributable cash, as defined, for each fiscal year shall be
distributed quarterly in the ratio of 95% to the Limited Partners, 1.01% to the
General Partners and 3.99% to the Adviser, as an asset management fee.
Under the advisory contract, the Adviser has specific management
responsibilities; to administer day-to-day operations of the Partnership, and to
report periodically the performance of the Partnership to the Managing General
Partner. The Adviser will be paid a basic management fee (3% of adjusted cash
flow, as defined in the Partnership Agreement) and an incentive management fee
(2% of adjusted cash flow subordinated to a noncumulative annual return to the
Limited Partners equal to 5% based upon their adjusted capital contributions),
in addition to the asset management fee referred to above, for services
rendered. The Adviser earned no management fees during the year ended September
30, 1995.
Both the Managing General Partner and the Adviser will receive
reimbursements for actual amounts paid on the Partnership's behalf including
offering and organization costs (not to exceed 5% of the gross offering proceeds
of the offering), acquisition expenses incurred in investigating or acquiring
real property investments and any other costs for goods or services used for or
by the Partnership.
An affiliate of the Managing General Partner performs certain accounting,
tax preparation, securities law compliance and investor communications and
relations services for the Partnership. The total costs incurred by this
affiliate in providing such services are allocated among several entities,
including the Partnership. Included in general and administrative expenses for
the year ended September 30, 1995 is $91,000 representing reimbursements to this
affiliate for providing such services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins"), an affiliate of the Managing General
Partner, for the managing of cash assets. Mitchell Hutchins is a subsidiary of
Mitchell Hutchins Asset Management, Inc., an independently operated subsidiary
of PaineWebber. Mitchell Hutchins earned fees of $4,000 (included in general and
administrative expenses) for managing the Partnership's cash assets during
fiscal 1995. Fees charged by Mitchell Hutchins are based on a percentage of
invested cash reserves which varies based on the total amount of invested cash
which Mitchell Hutchins manages on behalf of PWPI.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) and (2) Financial Statements and Schedules:
The response to this portion of Item 14 is submitted as
a separate section of this report. See Index to
Financial Statements and Financial Statement
Schedules at page F-1.
(3) Exhibits:
The exhibits listed on the accompanying index to
exhibits at Page IV-3 are filed as part of this Report.
(b) No Current Reports on Form 8-K were filed during the last quarter of the
period covered by this Report.
(c) Exhibits
See (a) (3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this Report. See Index to Financial Statements and
Financial Statement Schedules at page F-1.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINE WEBBER INCOME PROPERTIES EIGHT
LIMITED PARTNERSHIP
By: Eighth Income Properties, Inc.
Managing General Partner
By: /s/ Lawrence A. Cohen
Lawrence A. Cohen
President and Chief Executive Officer
By: /s/ Walter V. Arnold
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
By: /s/ Thomas W. Boland
Thomas W. Boland
Vice President
Dated: January 9, 1996
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 Partnership in
the capacity and on the dates indicated.
By:/s/ Albert Pratt Date:January 9, 1996
Albert Pratt
Director
By: /s/ J. Richard Sipes Date:January 9, 1996
J. Richard Sipes
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINE WEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
INDEX TO EXHIBITS
Page Number in the
Exhibit No. Description of Document Report or Other
Reference
- --------------- ----------------------------------- -----------------------
(3) and (4) Prospectus of the Registrant dated Filed with the
September 17, 1986, as supplemented, Commission pursuant to
with particular reference to the Rule 424(c) and
Restated Certificate and Agreement incorporated herein by
of Limited Partnership. reference.
(10) Material contracts previously filed Filed with the
as exhibits to registration Commission pursuant to
statements and amendments thereto Section 13 or 15(d) of
of the registrant together with of the Securities
all such contracts filed as Exchange Act of 1934
exhibits of previously filed and incorporated
Forms 8-K and Forms 10-K are herein by reference.
hereby incorporated
by reference.
(13) Annual Report to Limited Partners No Annual Report for
the year ended
September 30, 1995
has been sent to the
Limited Partners. An
Annual Report will be
sent to the Limited
Partners subsequent to
this filing.
(22) List of subsidiaries Included in Item 1 of
Part I of this Report
Page I-1, to
which reference is
hereby made.
(27) Financial data schedule Filed as the last
page of EDGAR
submission following
the Financial
Statements and
Financial Statement
Schedule required by
Item 14.
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a) (1) and (2) and 14(d)
PAINE WEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Reference
Paine Webber Income Properties Eight Limited Partnership:
Report of independent auditors F-2
Balance sheets as of September 30, 1995 and 1994 F-3
Statements of operations for the years ended
September 30, 1995, 1994 and 1993 F-4
Statements of changes in partners' deficit for the years
ended September 30, 1995, 1994 and 1993 F-5
Statements of cash flows for the years ended September 30, 1995,
1994 and 1993 F-6
Notes to financial statements F-7
Schedule III - Real Estate and Accumulated Depreciation F-21
Other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements, including the notes thereto.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners of
PaineWebber Income Properties Eight Limited Partnership:
We have audited the accompanying balance sheets of PaineWebber Income
Properties Eight Limited Partnership as of September 30, 1995 and 1994, and the
related statements of operations, changes in partners' deficit, and cash flows
for each of the three years in the period ended September 30, 1995. 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
Partnership'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 financial statements referred to above present fairly,
in all material respects, the financial position of PaineWebber Income
Properties Eight Limited Partnership at September 30, 1995 and 1994, and the
results of its operations and its cash flows for each of the three years in the
period ended September 30, 1995, 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.
As discussed in Notes 2 and 4 to the financial statements, in fiscal 1995
the Partnership adopted Statement of Financial Accounting Standards No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of."
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
December 28, 1995
<PAGE>
PAINE WEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
BALANCE SHEETS
September 30, 1995 and 1994
(In thousands, except per Unit data)
ASSETS
1995 1994
Operating investment property:
Land $ 5,488 $ 6,664
Buildings 21,377 25,791
Equipment and improvements 2,868 3,482
-------- ---------
29,733 35,937
Less accumulated depreciation (9,733) (8,840)
---------- ---------
20,000 27,097
Investments in joint ventures, at equity 412 1,058
Cash and cash equivalents 1,362 1,496
Cash reserved for capital expenditures 618 758
Accounts receivable 240 286
Due from Marriott Corporation 680 -
Inventories 124 138
Other assets 50 51
Deferred expenses, net of accumulated amortization
of $2,425 ($2,356 in 1994) 137 206
----------- -----------
$ 23,623 $ 31,090
======== ========
LIABILITIES AND PARTNERS' DEFICIT
Accounts payable and accrued expenses $ 182 $ 481
Accounts payable - affiliates 2 2
Accrued interest payable 1,242 287
Due to Marriott Corporation - 12
Loan payable to Marriott Corporation 6,328 5,728
Mortgage debt payable 36,060 35,237
-------- --------
Total liabilities 43,814 41,747
Partners' deficit:
General Partners:
Capital contributions 1 1
Cumulative net loss (510) (410)
Cumulative cash distributions (86) (86)
Limited Partners ($1 per Unit; 35,548,976
Units subscribed and issued):
Capital contributions, net of offering
costs of $4,791 30,758 30,758
Cumulative net loss (44,635) (35,201)
Cumulative cash distributions (5,719) (5,719)
----------- ----------
Total partners' deficit (20,191) (10,657)
--------- ----------
$ 23,623 $ 31,090
======== ========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
For the years ended September 30, 1995, 1994 and 1993
(In thousands, except per Unit data)
1995 1994 1993
---- ---- ----
Revenues:
Hotel revenues $ 8,512 $ 8,122 $ 7,969
Interest and other income 137 73 81
-------- ------- --------
8,649 8,195 8,050
Expenses:
Hotel operating expenses 5,550 6,266 6,234
Interest expense 4,389 2,968 2,887
Depreciation and amortization 962 1,529 1,695
General and administrative 336 372 212
Loss due to impairment
of operating investment property 6,369 - -
--------- -------- -------
17,606 11,135 11,028
-------- -------- --------
Operating loss (8,957) (2,940) (2,978)
Partnership's share of ventures' losses (577) (1,036) (1,356)
----------- ---------- ---------
Net loss $ (9,534) $ (3,976) $ (4,334)
========== ========= ==========
Net loss per 1,000 Limited Partnership Unit $(265.38) $(110.68) $(120.64)
======== ======== =========
The above net loss per 1,000 Limited Partnership Units is based upon the
35,548,976 Limited Partnership Units outstanding during each year.
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
For the years ended September 30, 1995, 1994 and 1993
(In thousands)
General Limited
Partners Partners Total
Balance at September 30, 1992 $(407) $(1,940) $(2,347)
Net loss (46) (4,288) (4,334)
-------- -------- --------
Balance at September 30, 1993 (453) (6,228) (6,681)
Net loss (42) (3,934) (3,976)
-------- ---------- ----------
Balance at September 30, 1994 (495) (10,162) (10,657)
Net loss (100) (9,434) (9,534)
---------- ----------- ----------
Balance at September 30, 1995 $(595) $(19,596) $(20,191)
====== ========= =========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the years ended September 30, 1995, 1994 and 1993
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
Net loss $(9,534) $(3,976) $(4,334)
Adjustments to reconcile net loss to
net cash used for operating activities:
Interest expense 600 543 492
Depreciation and amortization 962 1,529 1,695
Amortization of deferred gain on
forgiveness of debt (324) (768) (675)
Partnership's share of ventures' losses 577 1,036 1,356
Loss due to impairment of
operating investment property 6,369 - -
Changes in assets and liabilities:
Accounts receivable 46 (68) 13
Due to/from Marriott Corporation (692) 47 (149)
Inventories 14 (6) (4)
Deferred expenses - - (71)
Other assets 1 5 6
Accounts payable and accrued expenses (299) 263 53
Accounts payable - affiliates - (21) 3
Accrued interest payable 955 144 (44)
---------- ---------- -----------
Total adjustments 8,209 2,704 2,675
Net cash used for operating
activities (1,325) (1,272) (1,659)
Cash flows from investing activities:
Additions to operating investment property (165) (536) -
Net (deposits to) withdrawals from capital
expenditure reserve 140 53 (200)
Investments in joint ventures (152) - (60)
Distributions from joint ventures 221 398 130
--------- --------- --------
Net cash provided by (used for)
investing activities 44 (85) (130)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 1,147 1,371 1,482
--------- --------- --------
Net cash provided by
financing activities 1,147 1,371 1,482
--------- -------- --------
Net increase (decrease) in cash
and cash equivalents (134) 14 (307)
Cash and cash equivalents, beginning of year 1,496 1,482 1,789
--------- --------- --------
Cash and cash equivalents, end of year $ 1,362 $ 1,496 $ 1,482
======== ======== ========
Cash paid during the year for interest $ 3,157 $ 3,049 $ 3,114
======== ======== ========
See accompanying notes.
<PAGE>
PAINEWEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
Notes to Financial Statements
1. Organization
PaineWebber Income Properties Eight Limited Partnership (the
"Partnership") is a limited partnership organized in April 1986 for the
purpose of investing in a diversified portfolio of income-producing real
properties. The Partnership authorized the issuance of Partnership units
(the "Units"), at $1 per Unit, of which 35,548,976 were subscribed and
issued between September 17, 1986 and September 16, 1988.
2. Summary of Significant Accounting Policies
The accompanying financial statements include the Partnership's
investments in four joint venture partnerships which own five operating
properties. The Partnership accounts for its investments in joint ventures
using the equity method because the Partnership does not have a voting
control interest in the ventures. Under the equity method the ventures are
carried at cost adjusted for the Partnership's share of the ventures'
earnings and losses and distributions. See Note 5 for a description of the
joint venture investments.
Through September 30, 1994, the Partnership carried its operating
investment property at the lower of cost, reduced by accumulated
depreciation and guaranteed payments received from Marriott Corporation
(see Note 4), or net realizable value. Effective for fiscal 1995, the
Partnership adopted Statement of Financial Accounting Standards No. 121
(SFAS 121), "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," to account for its operating
investment properties, including those owned through joint venture
partnerships. In accordance with SFAS 121, an impairment loss with respect
to an operating investment property is recognized when the sum of the
expected future net cash flows (undiscounted and without interest charges)
is less than the carrying amount of the asset. An impairment loss is
measured as the amount by which the carrying amount of the asset exceeds
its fair value, where fair value is defined as the amount at which the
asset could be bought or sold in a current transaction between willing
parties, that is other than a forced or liquidation sale. In conjunction
with the application of SFAS 121, an impairment loss on the Partnership's
wholly-owned Hotel investment property was recognized in fiscal 1995. Such
loss is described in more detail in Note 4.
Depreciation expense on the operating investment property is computed
using the straight-line method over an estimated useful life of thirty
years for the buildings, and seven years for equipment and improvements.
Acquisition expenses, including professional fees and guaranty fees, have
been capitalized and are included in the cost of the operating investment
property.
Inventories are valued at the lower of cost or market on a first-in,
first-out (FIFO) basis. Inventories consist of supply inventories of
$111,000 ($120,000 in 1994) and food and beverage inventories of $13,000
($18,000 in 1994).
Deferred expenses consist of capitalized pre-opening costs related to the
Newport Beach hotel property, prepaid management fees, non-competition fees
paid to Marriott Corporation (see Note 4), and financing costs associated
with the Partnership's mortgage note payable. These expenses are being
amortized using the straight-line method primarily over three- to
seven-year periods. Certain closing costs associated with the modification
of the mortgage note payable secured by the Newport Beach Marriott are
being amortized over the remaining term of the loan.
For the purposes of reporting cash flows, cash and cash equivalents
include all highly liquid investments which have original maturities of 90
days or less.
Certain prior year balances have been reclassified to conform to the 1995
presentation.
No provision for income taxes has been made as the liability for such
taxes is that of the individual partners rather than the Partnership. Upon
sale or disposition of the Partnership's investments, the taxable gain or
the tax loss incurred will be allocated among the partners. In cases where
the disposition of the investment involves the lender foreclosing on the
investment, taxable income could occur without distribution of cash. This
income would represent passive income to the partners which could be
offset by each partners' existing passive losses, including any passive
loss carryovers from prior years.
3. The Partnership Agreement and Related Party Transactions
The General Partners of the Partnership are Eighth Income Properties, Inc.
(the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber
Group Inc. ("PaineWebber"), and Properties Associates 1986, L.P. (the
"Associate General Partner"), a Virginia limited partnership, certain
limited partners of which are also officers of the Managing General
Partner. Subject to the Managing General Partner's overall authority, the
business of the Partnership is managed by PaineWebber Properties
Incorporated (the "Adviser"), pursuant to an advisory contract. The Adviser
is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI").
PaineWebber owned 5,000,000 units of Limited Partnership interest in the
Partnership as of both September 30, 1995 and 1994.
The General Partners, the Adviser and PWI receive fees and compensation,
determined on an agreed upon basis, in consideration of various services
performed in connection with the sale of the Units, the management of the
Partnership and the acquisition, management, financing and disposition of
Partnership investments.
In connection with the acquisition of properties, the Adviser received
acquisition fees in an amount not greater than 5% of the gross proceeds
from the sale of Partnership Units. In connection with the sale of each
property, the Adviser may receive a disposition fee, payable upon
liquidation of the Partnership, in an amount equal to the lesser of 1% of
the aggregate sales price of the property or 50% of the standard brokerage
commissions, subordinated to the payment of certain amounts to the Limited
Partners.
Pursuant to the terms of the Partnership Agreement, as amended, any
taxable income or tax loss (other than from a Capital Transaction) of the
Partnership will be allocated 98.94802625% to the Limited Partners and
1.05197375% to the General Partners. Taxable income or tax loss arising
from a sale or refinancing of investment properties will be allocated to
the Limited Partners and the General Partners in proportion to the amounts
of sale or refinancing proceeds to which they are entitled; provided that
the General Partners shall be allocated at least 1% of taxable income
arising from a sale or refinancing. If there are no sale or refinancing
proceeds, taxable income or tax loss from a sale or refinancing will be
allocated 98.94802625% to the Limited Partners and 1.05197375% to the
General Partners. Notwithstanding this, the Partnership Agreement provides
that the allocation of taxable income and tax losses arising from the sale
of a property which leads to the dissolution of the Partnership shall be
adjusted to the extent feasible so that neither the General or Limited
Partners recognize any gain or loss as a result of having either a positive
or negative balance remaining in their capital accounts upon the
dissolution of the Partnership. If the General Partner has a negative
capital account balance subsequent to the sale of a property which leads to
the dissolution of the Partnership, the General Partner may be obligated to
restore a portion of such negative capital account balance as determined in
accordance with the provisions of the Partnership Agreement. Allocations of
the Partnership's operations between the General Partners and the Limited
Partners for financial accounting purposes have been made in conformity
with the allocations of taxable income or tax loss.
All distributable cash, as defined, for each fiscal year shall be
distributed quarterly in the ratio of 95% to the Limited Partners, 1.01% to
the General Partners and 3.99% to the Adviser, as an asset management fee.
Under the advisory contract, the Adviser has specific management
responsibilities; to administer day-to-day operations of the Partnership,
and to report periodically the performance of the Partnership to the
Managing General Partner. The Adviser will be paid a basic management fee
(3% of adjusted cash flow, as defined in the Partnership Agreement) and an
incentive management fee (2% of adjusted cash flow subordinated to a
noncumulative annual return to the Limited Partners equal to 5% based upon
their adjusted capital contributions), in addition to the asset management
fee referred to above, for services rendered. The Adviser earned no
management fees during the three-year period ended September 30, 1995.
Both the Managing General Partner and the Adviser receive reimbursements
for actual amounts paid on the Partnership's behalf including offering and
organization costs (not to exceed 5% of the gross offering proceeds of the
offering), acquisition expenses incurred in investigating or acquiring real
property investments and any other costs for goods or services used for or
by the Partnership.
Included in general and administrative expenses for the years ended
September 30, 1995, 1994 and 1993 is $91,000, $111,000 and $122,000,
respectively, representing reimbursements to an affiliate of the Managing
General Partner for providing certain financial, accounting and investor
communication services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins"), an affiliate of the Managing General
Partner, for the managing of cash assets. Mitchell Hutchins is a subsidiary
of Mitchell Hutchins Asset Management, Inc., an independently operated
subsidiary of PaineWebber. Mitchell Hutchins earned fees of $4,000, $3,000
and $2,000 (included in general and administrative expenses) for managing
the Partnership's cash assets during fiscal 1995, 1994 and 1993,
respectively.
4. Operating Investment Property
The Partnership acquired a 100% interest in the Marriott Suites Hotel
located in Newport Beach, California from the Marriott Corporation
("Marriott") on August 10, 1988. The Hotel consists of 254 two-room suites
encompassing 201,606 square feet located on approximately 4.8 acres of land.
It is managed by Marriott and its affiliates (the "Manager"), as described
below.
The Hotel has experienced substantial recurring losses after debt service.
As discussed further in Note 6, the Partnership is currently in default of
the modified terms of the first mortgage loan agreement secured by the
Newport Beach Marriott Suites Hotel. During fiscal 1995, the Partnership
reached the limit on the debt service deferrals imposed by the 1993 loan
modification agreement. It is uncertain at this time whether the lender will
agree to a further modification of the loan terms and an extension of the
August 1996 maturity date. In the event that an agreement with the lender
cannot be reached, the result could be a foreclosure on the operating
investment property.
As discussed in Note 2, the Partnership elected early application of SFAS
121 effective for fiscal 1995. The effect of such application was the
recognition of an impairment loss on the wholly-owned Hotel property. The
impairment loss resulted because, in management's judgment, the current
default status of the mortgage loan secured by the property referred to
above and discussed further in Note 6, combined with the lack of near-term
prospects for sufficient future improvement in market conditions in the
Orange County market in which the property is located, are not expected to
enable the Partnership to recover the adjusted cost basis of the property.
The Partnership recognized an impairment loss of $6,369,000 to write down
the operating investment property to its estimated fair value of $20,000,000
as of September 30, 1995. Fair value was estimated using an independent
appraisal of the operating property. Such appraisals make use of a
combination of certain generally accepted valuation techniques, including
direct capitalization, discounted cash flows and comparable sales analysis.
Because the net carrying value of the Hotel is below the balance of the
nonrecourse debt obligation secured by the property as of September 30,
1995, the Partnership would recognize a sizable net gain for financial
reporting purposes upon a foreclosure of the operating investment property
and settlement of the debt obligation.
The Partnership purchased the operating investment property for
approximately $39,946,000, including an acquisition fee paid by Marriott to
the Adviser of $580,000 and a $325,000 guaranty fee paid to Marriott. The
Hotel was acquired subject to a first mortgage loan with an initial
principal balance of $29,400,000 (see Note 6). In addition, the Partnership
provided an initial working capital reserve of approximately $554,000 to the
Manager for Hotel operations.
The guaranty fee was paid in exchange for an agreement (the "Payment
Agreement") by Marriott to fund, for a four-year period, the amounts
necessary in the event that revenues generated by the Hotel were not
sufficient to pay: (1) debt service payments on the mortgage loan; (2) a
cumulative preferred return to the Partnership equal to 7.5% of the
Partnership's Net Investment, as defined (the "Preferred Return"); and (3)
operating losses incurred by the Hotel; if any, up to $5,000,000. The
Partnership has no obligation to reimburse Marriott for the first $1,500,000
of funds so advanced. Funds advanced in excess of $1,500,000 were in the
form of non-recourse loans (the "Loans"). The Loans are payable to Marriott,
with interest on the amounts advanced calculated at a monthly compounded
rate of 10% per annum, only under certain circumstances, out of excess
proceeds generated by any sale or refinancing of the Hotel. Through
September 30, 1991, Marriott had fulfilled its obligation by funding the
full $5,000,000 under this agreement. At September 30, 1995 and 1994, the
loan payable to Marriott Corporation of $6,328,000 and $5,728,000,
respectively, represents advances from Marriott in excess of the $1,500,000
ceiling, plus accrued interest calculated per the terms of the Payment
Agreement. The payment by Marriott Corporation of the $1,500,000
non-refundable advance has been accounted for as a reduction to the basis of
the operating investment property.
The Partnership also paid to Marriott Corporation a $250,000 non-competition
fee in exchange for which Marriott agreed not to operate, manage or commence
construction of any other first-class suite hotels anywhere within a
five-mile radius of the Hotel with the exclusion of a Marriott Suites Hotel
in Costa Mesa, California, through the earlier to occur of 1) August 9, 1993
or 2) the date when average annual occupancy of the Hotel shall have been
75% or more for a period of two consecutive years.
The Partnership has entered into an agreement with the Manager to manage the
Hotel (the "Agreement"). The initial term of the Agreement runs through
January 3, 1997, after which the Agreement can be renewed for a total of 12
successive 5-year periods at the option of the manager. Under the terms of
the Agreement, the Manager receives a base management fee equal to 2% of the
gross revenues generated by the Hotel during the initial term of the
Agreement. Such fee increases to 3% of gross revenues in the event that any
of the renewal options are exercised. In addition to the base management
fee, an incentive management fee equal to 50% of the annual Net House
Profit, as defined, in excess of $4,000,000 is payable to Marriott under the
terms of the Agreement. The incentive management fee is limited to an amount
not to exceed 25% of total Net House Profit for any fiscal year. No
incentive management fees have been earned to date. The Partnership has the
right to terminate the Agreement after the initial term if the Hotel fails
to generate certain minimum cash flow levels during two out of three
consecutive fiscal years commencing after fiscal 1994.
A reserve for the replacement of equipment and improvements is funded out of
gross revenues generated by the Hotel. This reserve was 3% of gross revenues
for calendar 1991. As part of the debt modification agreement described in
Note 6, the reserve was reduced to 2% of gross revenues for 1992 and will be
equal to 3% thereafter through the initial term of the Agreement. Such
reserve increases to 4% of gross revenues in the event that the first
renewal option is exercised and then to 5% for any subsequent renewal
periods. Based on the Manager's experience, it is anticipated that this
reserve should be sufficient to fund all ordinary replacements. The balance
of the cash reserve for replacements and improvements for the Hotel at
September 30, 1995 and 1994 was $618,000 and $758,000, respectively.
<PAGE>
The following is a summary of the Newport Beach Hotel's revenues and
operating expenses for the years ended September 30, 1995, 1994 and 1993,
respectively (in thousands):
1995 1994 1993
---- ---- ----
Revenues:
Guest rooms $6,465 $6,121 $5,996
Food and beverage 1,621 1,604 1,568
Other revenues 426 397 405
-------- -------- --------
$8,512 $8,122 $7,969
====== ====== ======
Operating expenses:
Guest rooms $1,772 $1,681 $1,658
Food and beverage:
Cost of sales 443 426 426
Operating expenses 883 928 906
Other operating expenses 850 913 993
Management fees - Manager 170 162 157
Selling, general and administrative 1,370 1,325 1,267
Repairs and maintenance 424 421 504
Real estate taxes, net of
refunds of $731 in 1995 (362) 410 323
$5,550 $6,266 $6,234
====== ====== ======
The operating expenses of the Hotel noted above include significant
transactions with the Manager. All Hotel employees are employees of the
Manager and the related payroll costs are allocated to the Hotel operations
by the Manager. A majority of the supplies and food purchased during fiscal
1995, 1994 and 1993 were purchased from an affiliate of the Manager. In
addition, the Manager also allocates certain central reservation center
expenses, employee benefit costs, advertising costs and management training
costs to the Hotel.
Due from Marriott Corporation at September 30, 1995 consists principally of
a real estate tax refund received by Marriott Corporation on behalf of the
Partnership. Subsequent to year-end, this amount was remitted to the
mortgage holder as additional debt service (see Note 6). Due to Marriott
Corporation at September 30, 1994 represented amounts paid directly by
Marriott Corporation for the benefit of the Partnership's Hotel.
5. Investments in Joint Venture Partnerships
The Partnership has investments in four joint ventures that own five
operating investment properties. These joint ventures are accounted for
under the equity method in the Partnership's financial statements. Under
the equity method the investment in a joint venture is carried at cost
adjusted for the Partnership's share of the ventures' earnings and losses
and distributions. Condensed combined financial statements of these joint
ventures follow.
<PAGE>
Condensed Combined Balance Sheets
September 30, 1995 and 1994
(in thousands)
Assets
1995 1994
---- ----
Current assets $ 391 $ 511
Operating investment properties, net 19,741 20,848
Other assets 1,226 273
--------- ----------
$21,358 $21,632
======= =======
Liabilities and Partners' Capital
Current liabilities $ 1,191 $ 5,922
Other liabilities 280 527
Long-term debt, less current portion 19,600 14,246
Partnership's share of combined capital 160 634
Co-venturers' share of combined capital 127 303
---------- ----------
$21,358 $21,632
Reconciliation of Partnership's Investment
1995 1994
---- ----
Partnership's share of capital, as shown above $ 160 $ 634
Partnership's share of ventures' liabilities - 161
Excess basis due to investment in ventures,
net (1) 252 263
-------- --------
Investment in joint ventures, at equity $ 412 $1,058
======= ======
(1) At September 30, 1995 and 1994, the Partnership's investment exceeds its
share of the combined joint venture capital accounts and liabilities by
approximately $252,000 and $263,000, respectively. These amounts, which
relate to certain expenses incurred by the Partnership in connection with
acquiring its joint venture investments, are being amortized on a
straight-line basis over the estimated useful life of the properties.
Condensed Combined Summary of Operations
For the years ended September 30, 1995, 1994 and 1993
(in thousands)
1995 1994 1993
---- ---- ----
Rental revenues and expense recoveries $ 3,954 $ 3,820 $ 3,323
Interest income 2 3 33
----------- ----------- ----------
3,956 3,823 3,356
Interest expense 1,609 1,559 1,490
Property operating expenses 2,048 2,177 2,044
Depreciation and amortization 864 976 1,024
--------- --------- --------
4,521 4,712 4,558
-------- -------- --------
Net loss $ (565) $ (889) $(1,202)
========= ======== ========
Net loss:
Partnership's share of
combined operations $ (566) $(1,025) $(1,345)
Co-venturers' share of
combined operations 1 136 143
--------- -------- ---------
$ (565) $ (889) $(1,202)
========= ======== =======
Reconciliation of Partnership's Share of Operations
1995 1994 1993
---- ---- ----
Partnership's share of combined operations,
as shown above $ (566) $(1,025) $(1,345)
Amortization of excess basis (11) (11) (11)
----------- ---------- ----------
Partnership's share of ventures' losses $ (577) $ (1,036) $(1,356)
========= ======== =======
The joint ventures are subject to partnership agreements which determine the
distribution of available funds, the disposition of the ventures' assets and
the rights of the partners, regardless of the Partnership's percentage
ownership interest in the venture. Substantially all of the Partnership's
investments in these joint ventures are restricted as to distributions.
Investment in joint ventures, at equity on the balance sheet is comprised of
the following joint venture investments (in thousands):
1995 1994
---- ----
Daniel Meadows II General Partnership $ 19 $ (38)
Spinnaker Bay Associates (1,082) (539)
Maplewood Drive Associates 548 702
Norman Crossing Associates 927 933
--------- --------
$ 412 $ 1,058
======== =======
The Partnership received cash distributions from the ventures as set forth
below (in thousands):
1995 1994 1993
---- ---- ----
Daniel Meadows II General Partnership $ 61 $ 200 $ -
Spinnaker Bay Associates 160 - -
Maplewood Drive Associates - 198 85
Norman Crossing Associates - - 45
---------- ----------- --------
$ 221 $ 398 $ 130
======= ======= ======
A description of the ventures' properties and the terms of the joint venture
agreements are summarized as follows:
Daniel Meadows II General Partnership
On October 15, 1987 the Partnership acquired a general partnership interest
in Daniel Meadows II General Partnership (the "Joint Venture"), a Virginia
general partnership which was formed to develop, own and operate The Meadows
in the Park Apartments, a 200-unit apartment complex located in Birmingham,
Alabama. The Partnership's co-venture partner is an affiliate of Daniel
Realty Company.
The aggregate cash investment by the Partnership for its interest was
approximately $3,754,000 (including an acquisition fee of $223,000 paid to
the Adviser). On July 20, 1989, the Partnership paid $215,000 in additional
capital contributions to the joint venture pursuant to the terms of the
Partnership agreement. These funds were subsequently paid to Daniel Realty
Company in final settlement of the contingent portion of the purchase price
of the property. The project is encumbered by a nonrecourse first mortgage
loan with a principal balance of approximately $5,468,000 at September 30,
1995. The nonrecourse mortgage note payable secured by the operating
property at September 30, 1994 was scheduled to mature on November 1, 1994.
During the first quarter of fiscal 1995, the venture obtained an extension
of the maturity date from the lender to January 1, 1995. Delays in the
closing process for a new loan resulted in the inability to repay the
mortgage loan upon the expiration of the forbearance period. On January 3,
1995, the mortgage lender sent a formal default notice to the venture
stating that a default interest rate of 15.5% per annum would be applied to
the loan effective January 1, 1995. On February 7, 1995, the venture closed
on a new loan and fully repaid the prior mortgage debt obligation. The new
debt, in the initial principal amount of $5,500,000, bears interest at a
variable rate equal to the 30-day LIBOR rate plus 2.25% (equivalent to a
rate of approximately 8.125% per annum as of September 30, 1995). The loan
has a 5-year term and requires monthly interest and principal payments based
on a 25-year amortization schedule.
During fiscal 1991, the Partnership discovered that certain materials used
to construct the operating property were manufactured incorrectly and would
require substantial repairs. During fiscal 1992, the Meadows joint venture
engaged local legal counsel to seek recoveries from the venture's insurance
carrier, as well as various contractors and suppliers, for the venture's
claim of damages, which are estimated at between $1.6 and $2.1 million, not
including legal fees and other incidental costs. During fiscal 1993, the
insurance carrier deposited approximately $522,000 into an escrow account
controlled by the venture's mortgage lender in settlement of the undisputed
portion of the venture's claim. During fiscal 1994, the insurer agreed to
enter into non-binding mediation towards settlement of the disputed claims
out of court. On October 3, 1994, the joint venture verbally agreed to
settle its claims against the insurance carrier, architect, general
contractor and the surety/completion bond insurer for $1,714,000, which is
in addition to the $522,000 previously paid by the insurance carrier. These
settlement proceeds have been escrowed with the mortgage holder, which has
agreed to release such funds as needed for structural renovations. The loan
will be fully recourse to the joint venture and to the partners of the joint
venture until the repairs are completed, at which time the entire obligation
will become non-recourse. As of September 30, 1995, $995,510 had been
disbursed for renovations, leaving $718,490 in escrow for future repairs.
All of the repair work is expected to be completed in fiscal 1996. There
should be minimal disruption to the property's tenants during this repair
process and the situation, once corrected, is not expected to have an
adverse effect on the future market value of the investment property.
Included in rental income on the above condensed combined summary of
ventures' operations is $165,000 of income attributed to rent loss recovery
for the apartment units taken out of service to complete interior
renovations. During the first quarter of fiscal 1992, the Partnership
advanced $250,000 to the joint venture to be used to pay for costs of some
initial repair work and to provide funds to pursue the aforementioned legal
remedies. During 1994, $200,000 of this capital contribution was returned to
the Partnership.
The Joint Venture Agreement provides that from available cash flow, after
the repayment of any optional loans made by the partners, the Partnership
will receive an 8% per annum cumulative preferred return on its funded
capital contributions ($3,788,000 at September 30, 1995) during the period
from October 14, 1987 to April 30, 1990 (the "Guaranty Period"), a
cumulative preferred return of 8% from May 1, 1990 to September 30, 1990; a
cumulative preferred return of 9% from October 1, 1990 to September 30, 1992
and a 10% cumulative preferred return thereafter. The general partners of
the co-venturer personally guaranteed payment of the Partnership's return
through April 30, 1990. Under the terms of the Agreement, the general
partners of the co-venturer were required to contribute capital of $141,562
to fund deficits in the Partnership's preference return during fiscal 1990
(through the end of the Guaranty Period). As of September 30, 1995, the
co-venturer was obligated to make additional capital contributions of
$96,822 with respect to shortfalls which accumulated through the expiration
of the Guaranty Period. Any excess cash remaining, after payment to the
Partnership of its preferred distribution, will be distributed 60% to the
Partnership and 40% to the co-venturer. In addition, the Partnership is
entitled to receive $2,500 annually as an investor servicing fee.
The Joint Venture Agreement generally provides that net sale proceeds, as
defined, shall be distributed (after payment of mortgage debt and other
indebtedness of the Joint Venture) as follows and in the following order of
priority: (1) to repay accrued interest and principal, in that order, on any
optional loans made by the partners, (2) to the Partnership in the amount of
any unpaid cumulative preferred return ($1,794,000 as of September 30,
1995), (3) to the Partnership until it has received cumulative distributions
equal to 115% of its funded capital contributions, (4) 100% to co-venturer
until they receive distributions equal to $375,000, (5) 70% to the
Partnership and 30% to co-venturer until $2,000,000 has been cumulatively
distributed and (6) thereafter, the balance, if any, 60% to the Partnership
and 40% to the co-venturer.
Taxable income from operations in each year shall be allocated to the
Partnership and the co-venturer in accordance with distributions of cash, to
the extent of such distributions, and then 60% to the Partnership and 40% to
the co-venturer, respectively. Through the date upon which the Partnership
has been allocated tax losses equal to $3,515,000, losses will be allocated
98% to the Partnership and 2% to the co-venturer, respectively. However, if
the co-venturer has a positive capital balance and the Partnership has a
zero or negative capital balance, then 100% of the tax losses will be
allocated to the co-venturer until its capital balance is reduced to zero.
Thereafter, net tax losses are allocated 60% to the Partnership and 40% to
the co-venturer. Allocations of income and loss for financial accounting
purposes have been made in conformity with the allocations of taxable income
or tax loss.
Generally, gains and losses arising from the sale or disposition of the
property are allocated first on the basis of the partners' capital balances
after consideration of any cash distributions generated from the sale or
disposition; thereafter, remaining gains and losses are allocated 60% to the
Partnership and 40% to the co-venturer.
If additional working capital is required in connection with the operating
property, it may be provided as optional loans by the Partnership and the
co-venturer in the proportion of 60% and 40%, respectively.
The Joint Venture entered into a property management contract with an
affiliate of the co-venturer, cancellable at the option of the Partnership
upon the occurrence of certain events. The management fee is 5% of rents
collected from the property and certain other income, as defined in the
management agreement.
Spinnaker Bay Associates
On June 10, 1988 the Partnership acquired a general partnership interest in
Spinnaker Bay Associates (the "Joint Venture"), a California general
partnership, which was formed to own and operate the Bay Club Apartments and
Spinnaker Landing Apartments, two complexes located in Des Moines,
Washington comprised of 88 units and 66 units, respectively. The
Partnership's co-venture partner is an affiliate of Pacific Union Investment
Corporation.
The aggregate cash investment by the Partnership for its interest was
approximately $2,415,000 (including an acquisition fee of $310,000 paid to
the Adviser). The projects are encumbered by two nonrecourse mortgage loans
with an aggregate balance of approximately $4,794,000 at September 30,
1995. Construction-related defects were discovered at both the Bay Club and
Spinnaker Landing apartment complexes during fiscal 1991. The deficiencies
and damages included lack of adequate fire blocking materials in the walls
and other areas and insufficient structural support, as required by the
Uniform Building Code. During 1991, Spinnaker Bay Associates participated
as a plaintiff in a lawsuit filed against the developer, which also
involved certain other properties constructed by the developer. The suit
alleged, among other things, that the developer failed to construct the
buildings in accordance with the plans and specifications, as warranted,
used substandard materials and provided inadequate workmanship. The joint
venture's claim against the developer was settled during fiscal 1991 for
$1,350,000. Such funds were received in December of 1991 and were recorded
by the joint venture as a reduction in the basis of the operating
properties. From the proceeds of this settlement, $450,000 was paid to
legal counsel in connection with the litigation and was capitalized as an
addition to the carrying value of the operating properties. In addition to
the cash received at the time of the settlement, the venture received a
note in the amount of $161,500 from the developer which was due in 1994.
During fiscal 1993, the venture agreed to accept a discounted payment of
$113,050 in full satisfaction of the note if payment was made by December
31, 1993. The developer made this discounted payment to the venture in the
first quarter of fiscal 1994. In addition, during fiscal 1994 the venture
received additional settlement proceeds totalling approximately $351,000
from its pursuit of claims against certain subcontractors of the
development company and other responsible parties. Additional settlement
proceeds totalling approximately $402,000 were collected during fiscal
1995. No significant further litigation proceeds are expected at the
present time.
As part of the initial settlement, the venture also negotiated a loan
modification agreement which provided the majority of the additional funds
needed to complete the repairs to the operating properties and extended the
maturity date for repayment of the obligation to December 1996. Under the
terms of the loan modification, which was executed in December 1991, the
lender agreed to loan to the joint venture 80% of the additional amounts
necessary to complete the repair of the properties up to a maximum of
$760,000. Advances through the completion of the repair work totalled
approximately $617,000. The loan modification agreement also required the
lender to defer all past due interest and all of the interest due in
calendar 1992. During 1993, the joint venture was not in compliance with
the loan modification agreement with respect to scheduled payments of
principal and interest due to negative cash flow from operations. However,
on November 1, 1993 a second loan modification was reached in which the
lender agreed to an additional deferral of debt service payments, through
July 1, 1993, which would be added to the loan principal. The execution of
this second modification agreement cured any defaults on the part of the
joint venture. Additional amounts owed to the lender as a result of the
deferred payments, after the effect of the second modification agreement
and including accrued interest, total approximately $1,181,000 and
$1,073,000 as of September 30, 1995 and 1994, respectively. The repairs to
the operating investment properties, which were completed during fiscal
1994, net of insurance proceeds, have been capitalized or expensed in
accordance with the joint venture's normal accounting policy for such
items.
The Joint Venture Agreement currently provides that from available cash
flow, the Partnership will receive a 10% per annum cumulative preferred
return on $2,050,000, payable monthly until the termination and dissolution
of the Partnership. Such preferred return shall be cumulative from year to
year. After the guaranty period, available cash is distributed 50% to the
co-venturer to the extent necessary to repay principal and accrued
preference return on any guaranty period preference loan, 37.5% to the
Partnership and 12.5% to the co-venturer. After all guaranty period
preference loans have been paid in full, 50% is distributed to the
Partnership to pay any accrued preference, 37.5% to the Partnership and
12.5% to the co-venturer. Thereafter, the Partnership will receive 75% and
the co-venturer will receive 25%.
Capital proceeds, as defined, are to be distributed first to the
Partnership, to the extent of its aggregate preference return, then to the
Partnership and to the co-venturer until all outstanding advances and
guaranty period capital loans, including accrued preference return, are
paid off. Proceeds are next to be distributed to the Partnership until it
has received an amount equal to the Partnership's net investment plus
$310,000, then to the co-venturer until all principal and accrued
preference return on guaranty period preference loans and guaranty period
operating loans have been repaid. Thereafter, the Partnership is to receive
80%, and the co-venturer 20%, of remaining proceeds.
Taxable income from operations is to be allocated in accordance with the net
cash flow distributions described above. Tax losses from operations are to
be allocated between the Partnership and the co-venturer in proportion to
net cash flow actually distributed or distributable during any fiscal year.
Interest expense on loans from the venture partners are specifically
allocated to the respective venture partners. Allocations of income and loss
for financial accounting purposes have been made in conformity with the
allocations of taxable income or tax loss.
Generally, gains and losses arising from a sale of the property are to be
allocated first on the basis of the partners' capital balances; thereafter,
remaining gains and losses are to be allocated 80% to the Partnership and
20% to the co-venturer.
If additional working capital is required in connection with the operating
property, it may be provided as additional capital contributions by the
Partnership and the co-venturer in the proportion of 80% and 20%,
respectively.
The Joint Venture entered into a property management contract with an
affiliate of the co-venturer, cancellable at the option of the Partnership
upon the occurrence of certain events. The management fee is equal to the
greater of 5% of gross rents collected from the property or $3,000 a month.
In addition, under an amendment to the joint venture agreement and as
consideration for services provided in conjunction with the litigation
discussed above, the venture paid the manager a fee of $29,000 and $21,000
during fiscal 1995 and 1994, respectively.
Maplewood Drive Associates
On June 14, 1988 the Partnership acquired a general partnership interest in
Maplewood Drive Associate (the "Joint Venture") which was formed to own and
operate Maplewood Park Apartments, a 144-unit apartment complex located in
Manassas, Virginia. The Partnership's co-venture partner is Maplewood
Associates Limited Partnership, an affiliate of Amurcon
Corporation of Virginia.
The original aggregate cash investment by the Partnership for its interest
was approximately $2,563,000 paid to the Joint Venture. Approximately
$800,000 of such amount was used to fund the Guaranty Escrow, $50,000 was
placed in a reserve to pay for the cost of certain improvements and the
remaining portion of such amount was distributed to the co-venturer. The
Partnership also paid the Adviser an acquisition fee in the amount of
$143,000 in connection with acquiring the investment. The property is
encumbered by a nonrecourse first mortgage note with a balance of $5,635,000
at September 30, 1995. This mortgage loan is currently scheduled to mature
in June 1997.
The co-venturer unconditionally guaranteed, for a 60-month period (the
Guaranty Period), to fund cash to the Joint Venture in an amount necessary
to fund any Joint Venture negative net cash flows, as defined, and to ensure
that the Joint Venture had sufficient funds to distribute to the
Partnership, on a monthly basis, no less than an 8% per annum preferred
return on the Partnership's Net Investment of $2,350,000. Amounts
contributed by the co-venturer pursuant to the foregoing guaranty through
June 14, 1991 were treated as Non-Refundable Capital Contributions. From
June 15, 1991 to June 14, 1993, amounts contributed by the co-venturer under
the terms of the guaranty are treated as Refundable Guaranty Contributions,
bearing interest at 10% per annum. Refundable Guaranty Contributions
totalled $532,129 through the end of the guaranty period. After June 14,
1993, when the Joint Venture requires funds to meet its cash needs, the
Partnership and the co-venturer must contribute the funds required
("Additional Contributions") in the proportions of 70% and 30%,
respectively. Such contributions will bear interest at 1% per annum over the
prime rate of a certain bank.
During the life of the joint venture, with certain limited exceptions, the
co-venturer's share of any distributable funds, as defined in the Joint
Venture Agreement, shall be deposited in an escrow account to be used solely
to make required principal payments on the joint venture's outstanding debt.
Amounts actually used from such escrow account to make principal payments
shall be considered capital contributions ("Mandatory Capital
Contributions"). No Mandatory Contributions were made during the three-year
period ended September 30, 1995. To the extent that the total cost of debt,
as defined in the Joint Venture Agreement, exceeds a simple interest rate of
8.25% per annum, the co-venturer is obligated to make contributions in the
amount of such excess ("Interest Rate Contributions").
Net cash flow from operations of the Joint Venture will be distributed
monthly in the following order of priority: (1) 100% to the co-venturer to
the extent that the cost of debt to the Joint Venture is less than 8.25%;
(2) 100% to the Partnership until the Partnership has received distributions
pursuant to the Partnership Agreement equal to an 8% per annum cumulative
return on the Partnership's Net Investment of $2,350,000; (3) during the
Guaranty Period only, 100% to the co-venturer to the extent of the excess,
if any, of $15,667 over the amount distributed to the Partnership during any
month from the Guaranty Escrow; (4) 100% to the Partnership until the
Partnership has received certain cumulative distributions per the
Partnership Agreement; (5) 100% to pay accrued interest on Additional
Contributions and (6) the balance, if any, will be distributed 70% to the
Partnership and 30% to the co-venturer.
Taxable income, after certain specific allocations of income and expense,
will be generally allocated to the Partnership and the co-venturer in any
year to the extent of and in the same proportions as actual cash
distributions from operations, with any remaining income being allocated 70%
to the Partnership and 30% to the co-venturer. In the event there are no
distributable funds from operations, net income will be allocated 70% to the
Partnership and 30% to the co-venturer. Tax losses will be generally
allocated 99% to the Partnership and 1% to the co-venturer. Allocations of
income and loss for financial reporting purposes have been made in
conformity with the allocations of taxable income or loss.
Net proceeds from the sale or refinancing of the Property will be
distributed in the following order of priority: (1) 100% to the co-venturer
to repay accrued interest and principal on any Additional Contributions (2)
100% to repay accrued interest and principal on Refundable Guaranty
Contributions, as defined, made to the Joint Venture; (3) 100% to the
Partnership to the extent of any unpaid cumulative preference return; (4)
100% to the Partnership in an amount equal to $2,605,000; (5) 100% to the
co-venturer in the amount of any previously unreturned Mandatory Capital
Contributions made to the Joint Venture; (6) 100% to the co-venturer in an
amount equal to $150,000; and (7) the balance, if any, 70% to the
Partnership and 30% to the co-venturer.
The Joint Venture entered into a management contract with Amurcon Realty
Corporation, an affiliate of the co-venturer, which is cancellable at the
option of the Partnership upon the occurrence of certain events. In
consideration for their services, the property manager will receive: (i)
during the Guaranty Period, a base monthly management fee equal to 2 1/2% of
gross rents collected, plus an incentive management fee equal to all Joint
Venture cash flow, calculated on an annualized basis, in excess of $206,800,
but in no event shall such incentive management fee be in excess of 2 1/2%
of gross rents collected for such month, and (ii) after the Guaranty Period,
a monthly management fee equal to 5% of gross rents collected. To the extent
the incentive management fee is not earned in any month, it shall lapse with
respect to such period.
Norman Crossing Associates
On September 15, 1989 the Partnership acquired a general partnership
interest in Norman Crossing Associates (the "Joint Venture"), a North
Carolina general partnership which was formed to own and operate the Norman
Crossing Shopping Center, a 52,000 square foot shopping center located in
Charlotte, North Carolina. The Partnership's co-venture partner is an
affiliate of the Paragon Group.
The aggregate cash investment by the Partnership for its interest in Phase
I was approximately $1,261,000 (including an acquisition fee of $71,000
paid to the Adviser). The project is encumbered by a nonrecourse first
mortgage loan of approximately $2,744,000 at September 30, 1995. This
mortgage loan is scheduled to mature in November 2002. In October 1993, the
property's anchor tenant vacated the shopping center. The tenant, which
occupied 25,000 square feet of the property's net leasable area, is still
obligated under the terms of their lease which runs through the year 2007.
To date, all rents due from this tenant have been collected. Nonetheless,
the anchor tenant vacancy has resulted in several tenants receiving rental
abatements during fiscal 1995 and has had an adverse effect on the ability
to lease other vacant shop space. During the last quarter of fiscal 1995,
the former anchor tenant reached an agreement to sub-lease its space to a
new tenant. The sublease tenant is scheduled to take occupancy in January
1996. It is uncertain at this time what impact, if any, the new anchor
tenant will have on the property. The joint venture may have to continue to
make significant tenant improvements and grant rental concessions in order
to maintain a high occupancy level. Funding for such improvements, along
with any operating cash flow deficits incurred during this period of
re-stabilization for the shopping center, would be provided primarily by
the Partnership. During fiscal 1995, the Partnership funded cash flow
deficits of approximately $56,000. Management is prepared to fund the
Partnership's share of any additional amounts required in the near-term.
The Joint Venture Agreement provides that from available cash flow the
Partnership will receive an 8% per annum cumulative preference return on
$1,115,000 during the period from September 15, 1989 to September 14, 1992
(the "Guaranty Period"); a cumulative preference return of 9% from September
15, 1992 to September 14, 1993; and a 10% cumulative preference return
thereafter, payable monthly from available cash flow, as defined. The
general partners of the co-venturer have personally guaranteed a 7.5%
minimum return on the Partnership's net investment of $1,115,000 through
September 14, 1992. Any excess cash remaining, after payment to the
Partnership of its distribution, will first be used to pay interest, but not
principal, compounded annually on additional loans made by the Partnership
and the co-venturer. Any remaining cash flow shall be distributed 80% to the
Partnership and 20% to the co-venturer. As of September 30, 1995, there was
a cumulative unpaid distribution of $307,000. The cumulative preferred
distribution will be paid to the Partnership if and when there is available
future cash flow.
The Joint Venture Agreement generally provides that net sale and refinancing
proceeds, as defined, shall be distributed (after payment of mortgage debt
and other indebtedness of the Joint Venture) as follows and in the following
order of priority: (1) to the Partnership until the Partnership has received
the cumulative annual preference return not previously paid, (2) to the
Partnership until it has received an amount equal to its gross investment,
(3) to the Partnership and to the co-venturer in proportion to additional
loans made until both have received the return of all additional loans plus
unpaid interest and (4) thereafter, the balance, if any, 80% to the
Partnership and 20% to the co-venturer.
Taxable income from operations in each year shall be allocated to the
Partnership and the co-venturer as follows: (1) all deductions for
depreciation with respect to the property shall be allocated to the
Partnership (2) income up to the amount of net cash flow distributed in each
year shall be allocated to the Partnership and the co-venturer in proportion
to the amount of the distributions to each partner for such year. Tax losses
will be allocated each year up to the sum of the positive capital accounts
of the Partnership and co-venturer to the partners with positive capital
accounts in proportion to such positive capital accounts. All other income
and losses will be allocated 80% to the Partnership and 20% to the
co-venturer. Allocations of income and loss for financial accounting
purposes have been made in conformity with the allocations of taxable income
or tax loss.
The Joint Venture entered into a property management contract with an
affiliate of the co-venturer, cancellable at the option of the Partnership
upon the occurrence of certain events. The management fee is 4% of rents
collected from the property and certain other income, as defined in the
management agreement.
6. Mortgage Debt Payable
Mortgage debt payable at September 30, 1995 and 1994 consists of (in
thousands):
1995 1994
Permanent mortgage loan secured
by the Marriott Suites Hotel-Newport
Beach (see Note 4), bearing interest
at 10.09% per annum from disbursement through
August 10, 1992. Interest accrues
at 9.59% per annum from August 11, 1992
through August 10, 1995 and at a variable
rate of adjusted LIBOR (5.9141% at
September 30, 1995), as defined,
plus 2.5% per annum from August 11, 1995
until maturity. On August 11, 1996
the balance of principal together with
all accrued but unpaid interest
thereon shall be due. See discussion
regarding
modification below. $32,060 $32,060
Add: Unamortized deferred gain from
forgiveness of debt - 324
----------- ----------
32,060 32,384
Nonrecourse senior promissory notes
payable, bearing interest at a variable
rate of adjusted LIBOR (5.9141% and
5.875% at September 30, 1995 and 1994,
respectively), as defined, plus one
percent per annum. Payments on the loan
are to be made from available cash
flow of the Newport Beach Marriott Suites
Hotel (see discussion below). 4,000 2,853
--------- ---------
$36,060 $35,237
On January 25, 1993, the Managing General Partner and the lender on the
Newport Beach Marriott Hotel finalized an agreement on a modification of the
first mortgage loan secured by the Hotel which was retroactive to August 11,
1992. Per the terms of the modification, the maturity date of the loan was
extended one year to August 11, 1996. The principal amount of the loan was
adjusted to $32,060,518 (the original principal of $29,400,000 plus
$2,660,518 of unpaid interest and fees). The outstanding balance of the loan
bears interest at a rate of 9.59% through August 11, 1995 and at a variable
rate of the adjusted LIBOR index, as defined (5.9141% at September 30,
1995), plus 2.5% from August 11, 1995 through the final maturity date. The
Partnership will pay to the lender on a monthly basis as debt service, an
amount equal to Hotel Net Cash, as defined in the Hotel management
agreement. In order to increase Hotel Net Cash, Marriott agreed to reduce
its Base Management Fee by one percent of total revenue through January 3,
1997. In addition, the reserve for the replacement of equipment and
improvements, which is funded out of a percentage of gross revenues
generated by the Hotel, was reduced to two percent of gross revenues in 1992
and will be equal to three percent of gross revenues thereafter through
January 3, 1997. As part of the modification agreement, the Partnership
agreed to make additional debt service contributions to the lender of
$400,000, of which $50,000 was paid at the closing of the modification and
the balance will be payable on a monthly basis in arrears for forty-two
months. Under the terms of the modification, events of default include
payment default with respect to the Partnership's additional debt service
contributions to the lender, failure of the Hotel to meet certain
performance tests, as defined, plus additional default provisions as
specified in the modification agreement.
An additional loan facility from the existing lender of up to $4,000,000
was available to be used to pay expected debt service shortfalls after
August 11, 1992. This additional loan facility bears interest at a variable
rate of adjusted LIBOR (5.9141% and 5.875% at September 30, 1995 and 1994,
respectively), as defined, plus one percent per annum. Interest on the new
loan facility is payable currently only to the extent of available cash
flow from Hotel operations. Interest deferred due to the lack of available
cash flow could be added to the principal balance of the new loan until the
loan balance reached the $4,000,000 limitation. As of March 31, 1995, the
Partnership had exhausted the entire $4,000,000 of this additional loan
facility. On April 11, 1995, the Partnership received a default notice from
the lender. Under the terms of the loan agreements, as of April 25, 1995
additional default interest accrues at a rate of 4% per annum on the loan
amount of $32,060,518 and the additional loan facility of $4,000,000. At
September 30, 1995, approximately $1,242,000 of accrued interest on this
additional loan facility remained unpaid and default interest of
approximately $637,000 had accrued. After preliminary discussions, it is
unclear whether the lender will be willing to allow for further
modifications to the loan and an extension of the August 1996 maturity
date. The estimated value of the Hotel property is substantially less than
the obligation to the mortgage lender at the present time. Accordingly, the
Partnership would only agree to provide additional debt service support if
the lender agreed to grant significant concessions which would afford the
Partnership the opportunity to recover such additional investments plus a
portion of its original investment in the Hotel. In the event that an
agreement with the lender cannot be reached, the result could be a
foreclosure on the operating investment property. Under any circumstances,
the operating results of the Hotel which represents 36% of the
Partnership's original investment portfolio, will have to continue to show
dramatic improvement in order for the Partnership to recover any of its
original net investment in the Newport Beach Marriott Suites Hotel (see
Note 4). The eventual outcome of this matter cannot be determined at the
present time.
The restructuring of the mortgage note payable in fiscal 1993 was
accounted for in accordance with Statement of Financial Accounting Standards
No. 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructurings". Accordingly, the forgiveness of debt aggregating
$1,766,609, which represented the difference between accrued interest and
fees recorded under the original loan agreement and the agreed upon amount
of the outstanding interest and fees of $2,660,518 per the terms of the
modification at September 30, 1992, was deferred and amortized as a
reduction of interest expense prospectively, using the effective interest
method. During fiscal 1995, this deferred gain was fully amortized.
7. Contingencies
The Partnership is involved in certain legal actions. The Managing General
Partner believes that these actions will be resolved without material
adverse effect on the Partnership's financial statements, taken as a whole.
<PAGE>
- ----------------------------------------------------------------------------
- ---------------------------------------------------------------------------
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
PAINE WEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
September 30, 1995
(In thousands)
<CAPTION>
Initial Cost to Gross Amount at Which Carried at Life on Which
Partnership Costs Close of period Depreciation
Buildings Capitalized Buildings, in Latest
Improvements (Removed) Improvements Income
& Personal Subsequent to & Personal Accumulated Date of Date Statement
Description Encumbrances Land Property Acquisition Land Property Total Depreciation Construction Acquired is Computed
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Marriott
Hotel
Newport
Beach,
CA $37,302 $ 6,950 $29,952 $(7,169) $ 5,488 $24,245 $29,733 $9,733 1987 8/10/88 7-30 yrs.
Notes
(A) The aggregate cost of real estate owned at September 30, 1995 for Federal
income tax purposes is approximately $36,760,000.
(B) See Notes 4 and 6 of Notes to Financial Statements.
(C) Reconciliation of real estate owned:
1995 1994 1993
---- ---- ----
Balance at beginning of year $ 35,937 $ 35,401 $ 35,401
Additions 165 536 -
Write-down due to permanent
impairment (1) (6,369) - -
---------- -------- --------
Balance at end of year $ 29,733 $ 35,937 $ 35,401
======== ======== ========
(D) Reconciliation of accumulated depreciation:
Balance at beginning of year $ 8,840 $ 7,434 $ 5,929
Depreciation expense 893 1,406 1,505
---------- --------- --------
Balance at end of year $ 9,733 $ 8,840 $ 7,434
========= ========= ========
<FN>
(1) See Note 4 of Notes to Financial Statements for a discussion of the impairment write-down recorded in fiscal
1995.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Partnership's audited financial
statements for the year ended September 30, 1995 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 1,362
<SECURITIES> 0
<RECEIVABLES> 920
<ALLOWANCES> 0
<INVENTORY> 124
<CURRENT-ASSETS> 3,024
<PP&E> 30,145
<DEPRECIATION> (9,733)
<TOTAL-ASSETS> 23,623
<CURRENT-LIABILITIES> 1,426
<BONDS> 42,388
<COMMON> 0
0
0
<OTHER-SE> (20,191)
<TOTAL-LIABILITY-AND-EQUITY> 23,623
<SALES> 0
<TOTAL-REVENUES> 8,649
<CGS> 0
<TOTAL-COSTS> 6,848
<OTHER-EXPENSES> 577
<LOSS-PROVISION> 6,369
<INTEREST-EXPENSE> 4,389
<INCOME-PRETAX> (9,534)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,534)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,534)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
