UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1995
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to_____________
Commission file number 0-15460
MCNEIL REAL ESTATE FUND XXVI, L.P.
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(Exact name of registrant as specified in its charter)
California 33-0168395
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13760 Noel Road, Suite 700, LB70, Dallas, Texas, 75240
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (214) 448-5800
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Limited partnership
units
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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, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
83,583,671 of the registrant's 86,533,671 limited partnership units are held by
non-affiliates. The aggregate market value of units held by non-affiliates is
not determinable since there is no public trading market for limited partnership
units and transfers of units are subject to certain restrictions.
Documents Incorporated by Reference: See Item 14, Page 38
TOTAL OF 39 PAGES
<PAGE>
PART I
ITEM 1. BUSINESS
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ORGANIZATION
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McNeil Real Estate Fund XXVI, L.P., (the "Partnership"), formerly known as
Southmark Equity Partners III, Ltd., was organized on March 4, 1985 as a limited
partnership under the provisions of the California Revised Limited Partnership
Act to acquire and operate residential and commercial properties. The general
partner of the Partnership is McNeil Partners, L.P. (the "General Partner"), a
Delaware limited partnership, an affiliate of Robert A. McNeil ("McNeil"). The
General Partner was elected at a meeting of limited partners on March 30, 1992,
at which time an amended and restated partnership agreement (the "Amended
Partnership Agreement") was adopted. Prior to March 30, 1992, the general
partner of the Partnership was Southmark Investment Group 86, Inc. (the
"Original General Partner"), a wholly-owned subsidiary of Southmark Corporation
("Southmark"). The principal place of business for the Partnership and the
General Partner is 13760 Noel Road, Suite 700, LB70, Dallas, Texas 75240.
On July 22, 1986, the Partnership registered with the Securities and Exchange
Commission ("SEC") under the Securities Act of 1933 (File No. 33-5568) and
commenced a public offering for sale of $90,000,000 of limited partnership units
("Units"). The Units represent equity interests in the Partnership and entitle
the holders thereof to participate in certain allocations and distributions of
the Partnership. The sale of Units closed on July 21, 1987 with 86,553,913 Units
sold at one dollar each, or gross proceeds of $86,553,913 to the Partnership.
The Partnership subsequently filed a Form 8-A Registration Statement with the
SEC and registered its Units under the Securities Exchange Act of 1934 (File No.
0-15460). In 1995, 4,930 Units were relinquished leaving 86,548,983 Units
outstanding as of December 31, 1995. Subsequent to year end, 15,312 Units were
relinquished leaving 86,533,671 Units outstanding as of February 16, 1996.
SOUTHMARK BANKRUPTCY AND CHANGE IN GENERAL PARTNER
- --------------------------------------------------
On July 14, 1989, Southmark filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. Neither the Partnership, the General
Partner nor the Original General Partner were included in the filing.
Southmark's reorganization plan became effective August 10, 1990. Under the
plan, most of Southmark's assets, which included Southmark's interests in the
Original General Partner, are being sold or liquidated for the benefit of
creditors.
In accordance with Southmark's reorganization plan, Southmark, McNeil and
various of their affiliates entered into an asset purchase agreement on October
12, 1990, providing for, among other things, the transfer of control to McNeil
or his affiliates of 34 limited partnerships (including the Partnership) in the
Southmark portfolio.
On February 14, 1991, pursuant to the asset purchase agreement as amended on
that date, McNeil Real Estate Management, Inc. ("McREMI"), an affiliate of
McNeil, acquired the assets relating to the property management and partnership
administrative business of Southmark and its affiliates. On March 13, 1991,
McREMI commenced management of the Partnership's properties pursuant to an
assignment of the existing property management agreements from the Southmark
affiliates.
On March 30, 1992, the limited partners approved a restructuring proposal that
provided for (i) the replacement of the Original General Partner with a new
general partner, McNeil Partners, L.P.; (ii) the adoption of the Amended
Partnership Agreement which substantially alters the provisions of the original
partnership agreement relating to, among other things, compensation,
reimbursement of expenses and voting rights; (iii) the approval of an amended
property management agreement with McREMI, the Partnership's property manager;
and (iv) the approval to change the Partnership's name to McNeil Real Estate
Fund XXVI, L.P. Under the Amended Partnership Agreement, the Partnership began
accruing an asset management fee, retroactive to March 13, 1991, which is
payable to the new General Partner. For a discussion of the methodology for
calculating the asset management fee, see Item 13 Certain Relationships and
Related Transactions. The proposals approved at the March 30, 1992 meeting were
implemented as of that date.
<PAGE>
Settlement of Claims:
The Partnership filed claims with the United States Bankruptcy Court for the
Northern District of Texas, Dallas Division (the "Bankruptcy Court") against
Southmark for damages relating to improper overcharges, breach of contract and
breach of fiduciary duty. The Partnership settled these claims in 1991, and such
settlement was approved by the Bankruptcy Court.
An Order Granting Motion to Distribute Funds to Class 8 Claimants dated April
14, 1995 was issued by the Bankruptcy Court. In accordance with the Order, in
May 1995 the Partnership received in full satisfaction of its claims, $45,263 in
cash, and common and preferred stock in the reorganized Southmark which
represents the Partnership's pro-rata share of Southmark assets available for
Class 8 Claimants. The Partnership sold the Southmark common and preferred stock
in May 1995 for $14,611, which combined with the cash proceeds from Southmark,
resulted in a gain on legal settlement of $59,874.
CURRENT OPERATIONS
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General:
The Partnership is engaged in diversified real estate activities, including the
ownership, operation and management of residential, commercial office and retail
real estate. At December 31, 1995, the Partnership owned five income-producing
properties as described in Item 2 - Properties.
The Partnership does not directly employ any personnel. The General Partner
conducts the business of the Partnership directly and through its affiliates.
The Partnership reimburses affiliates of the General Partner for such services
rendered in accordance with the Amended Partnership Agreement.
The business of the Partnership to date has involved only one industry segment.
See Item 8 - Financial Statements and Supplementary Data. The Partnership has no
foreign operations. The business of the Partnership is not seasonal.
Business Plan:
The Partnership's anticipated plan of operations for 1996 is to preserve or
increase the net operating income of its properties whenever possible, while at
the same time making whatever capital expenditures are reasonable under the
circumstances in order to preserve and enhance the value of the Partnership's
properties. The General Partner is evaluating market and other economic
conditions to determine the optimum time to commence an orderly liquidation of
the Partnership's properties in accordance with the terms of the Amended
Partnership Agreement. In conjunction therewith, the General Partner will
continue to explore potential avenues to enhance the value of the Units in the
Partnership, which may include, among other things, asset sales or refinancings
of the Partnership's properties which may result in distributions to the limited
partners. See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Competitive Conditions:
Since the principal business of the Partnership is to own and operate real
estate, the Partnership is subject to all of the risks incident to ownership of
real estate and interests therein, many of which relate to the illiquidity of
this type of investment. These risks include changes in general or local
economic conditions, changes in supply or demand for competing properties in an
area, changes in interest rates and availability of permanent mortgage funds
which may render the sale or refinancing of a property difficult or
unattractive, changes in real estate and zoning laws, increases in real property
tax rates and Federal or local economic or rent controls. The illiquidity of
real estate investments generally impairs the ability of the Partnership to
respond promptly to changed circumstances. The Partnership competes with
numerous established companies, private investors (including foreign investors),
real estate investment trusts, limited partnerships and other entities (many of
which have greater resources than the Partnership) in connection with the sale,
financing and leasing of properties. The impact of these risks on the
Partnership, including losses from operations and foreclosures of the
Partnership's properties, is described in Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations. For a detailed
discussion of the competitive conditions for the Partnership's properties see
Item 2 - Properties.
Other Information:
The environmental laws of the Federal government and of certain state and local
governments impose liability on current property owners for the clean-up of
hazardous and toxic substances discharged on the property. This liability may be
imposed without regard to the timing, cause or person responsible for the
release of such substances onto the property. The Partnership could be subject
to such liability in the event that it owns properties having such environmental
problems. The Partnership has no knowledge of any pending claims or proceedings
regarding such environmental problems.
ITEM 2. PROPERTIES
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The following table sets forth the real estate investment portfolio of the
Partnership at December 31, 1995. All of the buildings and the land on which
they are located are owned by the Partnership in fee and are encumbered by
mortgage indebtedness, with the exception of Edison Ford Square. See Item 8 -
Note 5 - "Mortgage Notes Payable" and Note 7 - "Mortgage Notes Payable -
Affiliate". See also Item 8 - Note 4 - "Real Estate Investments" and Schedule
III - "Real Estate Investments and Accumulated Depreciation and Amortization."
In the opinion of management, the properties are adequately covered by
insurance.
<TABLE>
Net Basis of 1995 Date
Property Description Property Debt Property Taxes Acquired
- -------- ----------- ---------- ---------- -------------- --------
<S> <C> <C> <C> <C> <C>
Amargosa Creek Apartments
Lancaster, CA 216 units $5,970,957 $4,808,711 $ 74,373 12/86
Edison Ford
Square Retail Center
Ft. Myers, FL 144,069 sq. ft. 3,982,203 - 70,151 7/87
Continental Plaza Office Building
Scottsdale, AZ 54,538 sq. ft. 2,260,886 952,538 46,003 11/86
Northway Mall Retail Center
Pittsburgh, PA 390,045 sq. ft. 24,469,175 15,000,000 277,859 6/87
Westwood Center Office Building
Tampa, FL 126,107 sq. ft. 7,945,780 2,336,210 185,874 3/87
---------- ---------- -------
$44,629,001 $23,097,459 $654,260
========== ========== =======
- -----------------------------------------
Total: Apartments - 216 Units
Retail Centers - 534,114 sq. ft.
Office Buildings - 180,645 sq. ft.
</TABLE>
<PAGE>
<TABLE>
The following table sets forth the properties' occupancy rate and rent per
square foot for the last five years:
1995 1994 1993 1992 1991
------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Amargosa Creek
Occupancy Rate............ 92% 89% 86% 95% 78%
Rent Per Square Foot...... $ 7.15 $ 7.17 $ 6.94 $ 6.87 $ 6.98
Edison Ford Square
Occupancy Rate............ 46% 54% 80% 83% 78%
Rent Per Square Foot...... $ 4.80 $ 5.84 $ 6.43 $ 6.28 $ 6.24
Continental Plaza
Occupancy Rate............ 100% 98% 98% 72% 65%
Rent Per Square Foot...... $12.03 $10.50 $10.30 $ 8.68 $ 9.51
Northway Mall
Occupancy Rate............ 87% 61% 53% 78% 83%
Rent Per Square Foot...... $ 8.97 $ 5.74 $ 6.59 $ 8.37 $ 8.25
Westwood Center
Occupancy Rate............ 92% 90% 95% 88% 63%
Rent Per Square Foot...... $11.95 $11.78 $11.58 $ 8.77 $ 7.38
</TABLE>
Occupancy rate represents all units leased divided by the total number of units
for residential properties and square footage leased divided by total square
footage for other properties as of December 31 of the given year. Rent per
square foot represents all revenue, except interest, derived from the property's
operations divided by the leasable square footage of the property.
Competitive Conditions
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Amargosa Creek Apartments
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Amargosa Creek Apartments, built in 1984, is located in the Mojave Desert, east
of the Antelope Valley Freeway, south of downtown Lancaster, California. The
major industry in the Antelope Valley is aerospace and Edward's Air Force Base
is located 26 miles from the property. During the past three years the property
has had interior and exterior upgrades that were necessary to compete with the
market as well as to overcome the negative reputation created by being located
in a high-crime locale. These improvements have proved to be effective, as the
property ended the year at an occupancy rate of 92% which is three percent ahead
of the market average. Amargosa Creek is expected to continue to demonstrate
stabilized economic growth during 1996 and beyond; however, since the market is
strongly affected by the aerospace industry; any layoffs or growth will
significantly impact the property's performance.
Continental Plaza
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Continental Plaza is an office building located in prestigious north Scottsdale,
Arizona, an eastern suburb of Phoenix. The garden-style property consists of two
Spanish style buildings surrounding a courtyard. Continental Plaza ended the
year at a 100% occupancy rate as compared to a market average of 90%. Rental
rates in the Scottsdale market declined in the early 1990's due to an oversupply
of office space. Minimal commercial growth since then is allowing the market to
recover. Occupancy rates at Continental Plaza are expected to remain at current
levels during 1996 and revenue growth is expected due to escalating lease rates.
<PAGE>
Edison Ford Square
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Edison Ford Square, built in 1960 and located in downtown Fort Myers, Florida,
has evolved from primarily a retail center to more of a service center. This
transformation occurred as a result of demographic changes that reduced major
retailers' interest in this location. Formerly known as Boulevard Plaza, the
property was renamed to Edison Ford Square in 1993 due to the property's
proximity to the Thomas Edison and Henry Ford estates. The property is located
within walking distance of this historical attraction; thus the name was changed
to capitalize on the tourism market. Plans for a major renovation that would
capture the architecture and style of the Edison home began in 1993; however the
loss of two major anchors in 1994 made this renovation impractical. The
property, located in the center of the downtown entertainment district, offers
easy access, high visibility and expansive parking; however the property is
dated in appearance and has a lot of deferred maintenance.
Northway Mall
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Northway Mall, built in the early 1960's and opened in 1962, is a multi-level
facility consisting of approximately 397,000 square feet of retail space and
mezzanine level office suites. It is located 12 miles south of the Pennsylvania
State Turnpike in the North Hills area of Pittsburgh, Pennsylvania. In August
1994 after the construction financing was secured, the mall was renovated and
had a grand opening and ribbon cutting on May 6, 1995. Management is currently
searching for two tenants to occupy approximately 20,000 square feet. The
occupancy rate at December 31, 1995 was 87% and is projected to reach 93% during
1996. The greater Pittsburgh area is very stable with occupancies approaching
the 90% mark and shopping centers adjacent to Northway Mall are currently 92%
occupied.
Westwood Center
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Westwood Center, an eight-story office building built in 1984, is located in the
Westshore Business District of Tampa, Florida. A three year capital plan to
renovate the exterior as well as the interior common areas began in 1991 and was
completed in 1993. These improvements have allowed the property to maintain
competitiveness with the local market. Overall, the Westshore Business District
continues to hold stable occupancies of 94% and Westwood Center ended the year
with a 92% occupancy. Current market concerns include the property's location
near a declining neighborhood and the area's higher than average crime rate.
Presently, there is no new office building construction in the Westshore
Business District, and the property is positioned for steady growth in the
coming years.
The following schedule shows lease expirations for each of the Partnership's
commercial properties for 1996 through 2005:
<TABLE>
Number of Annual % of Gross
Expirations Square Feet Rent Annual Rent
----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Continental Plaza
- -----------------
1996 6 7,668 $ 94,242 15%
1997 8 11,549 151,390 23%
1998 8 14,570 178,532 27%
1999 2 3,074 38,929 6%
2000 4 17,677 191,787 29%
2001-2005 - - - -
</TABLE>
<PAGE>
<TABLE>
Number of Annual % of Gross
Expirations Square Feet Rent Annual Rent
----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Edison Ford Square
- ------------------
1996 7 19,519 $ 138,789 15%
1997 2 1,979 13,081 1%
1998 3 3,268 27,363 3%
1999 10 34,443 201,862 22%
2000 3 8,379 49,731 6%
2001 - - - -
2002 1 7,132 53,847 6%
2003 - - - -
2004 2 5,028 54,655 6%
2005 - - - -
Northway Mall
- -------------
1996 12 39,559 $ 327,301 9%
1997 3 4,538 47,491 1%
1998 4 12,263 115,251 3%
1999 7 84,156 418,559 11%
2000 7 9,096 137,167 4%
2001 3 3,632 67,360 2%
2002 4 13,589 191,532 5%
2003 - - - -
2004 1 69,639 405,299 11%
2005 3 39,304 436,390 12%
Westwood Center
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1996 10 18,992 $ 254,916 15%
1997 10 53,407 693,234 42%
1998 2 2,392 32,269 2%
1999 8 32,981 454,533 27%
2000 3 4,110 55,486 3%
2001-2005 - - - -
</TABLE>
No residential tenant leases 10% or more of the available rental space. The
following schedule reflects information on commercial tenants occupying 10% or
more of the leasable square feet for each property:
<TABLE>
Nature of
Business Square Footage Lease
Use Leased Annual Rent Expiration
- --------- --------- ------------ ----------
<S> <C> <C> <C>
Continental Plaza
- -----------------
General Business 5,952 $ 71,424 2000
General Business 10,433 104,330 2000
Edison Ford Square
- ------------------
None
Northway Mall
- -------------
Department Store 73,500 $275,625 1999
Department Store 69,639 405,299 2004
Westwood Center
- ---------------
General Office 13,009 $164,121 1997
General Office 17,225 232,538 1997
General Office 14,640 209,352 1999
</TABLE>
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
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The Partnership is not party to, nor are any of the Partnership's properties the
subject of, any material pending legal proceedings, other than ordinary, routine
litigation incidental to the Partnership's business, except for the following:
HCW Pension Real Estate Fund, Ltd. et al. v. Ernst & Young, BDO Seidman et
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al (Case #92-06560-A). This suit was filed on behalf of the Partnership and
--------------------
other affiliated partnerships (the "Affiliated Partnerships") on May 26,
1992, in the 14th Judicial District Court of Dallas County. The petition
sought recovery against the Partnership's former auditors, Ernst & Young,
for negligence and fraud in failing to detect and/or report overcharges of
fees/expenses by Southmark, the former general partner. The former auditors
initially asserted counterclaims against the Affiliated Partnerships based
on alleged fraudulent misrepresentations made to the auditors by the former
management of the Affiliated Partnerships (Southmark) in the form of client
representation letters executed and delivered to the auditors by Southmark
management. The counterclaims sought recovery of attorneys' fees and costs
incurred in defending this action. The counterclaims were later dismissed
on appeal, as discussed below.
The trial court granted summary judgment against the Partnership based on
the statute of limitations; however, on appeal, the Dallas Court of Appeals
reversed the trial court and remanded for trial the Partnerships' fraud
claims against Ernst & Young. The Texas Supreme Court denied Ernst &
Young's application for writ of error on January 11, 1996. The Partnership
is continuing to pursue vigorously its claims against Ernst & Young;
however, the final outcome of this litigation cannot be determined at this
time.
For a discussion of the Southmark bankruptcy, see Item 1 - Business. See also
Item 8 - Note 9 - "Gain on Legal Settlement".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNERSHIP AND
- ------ ------------------------------------------------------------
RELATED SECURITY HOLDER MATTERS
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(A) There is no established public trading market for limited partnership
units, nor is one expected to develop.
(B) Title of Class Number of Record Unit Holders
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Limited partnership units 7,156 as of February 16, 1996
(C) No distributions were made to the partners in 1995 or 1994 and none are
anticipated in 1996. See Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operations and Item 8 - Note 1 -
"Organization and Summary of Significant Accounting Policies -
Distributions".
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
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The following table sets forth a summary of certain financial data for the
Partnership. This summary should be read in conjunction with the notes to the
Partnership's financial statements appearing in Item 8 - Financial Statements
and Supplementary Data.
<TABLE>
Statements of Years Ended December 31,
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Operations 1995 1994 1993 1992 1991
- ------------------ ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Rental revenue............... $ 7,568,361 $ 6,385,998 $ 6,708,736 $ 6,942,367 $ 6,773,720
Write-down for permanent
impairment of real estate. (2,200,000) - (7,239,353) (4,602,377) (620,000)
Loss before extraordinary
items..................... (5,063,046) (1,938,063) (8,843,767) (6,795,983) (4,563,202)
Extraordinary items.......... - - - 91,952 1,377,921
Net loss..................... (5,063,046) (1,938,063) (8,843,767) (6,704,031) (3,185,281)
Loss per thousand limited
partnership units:
Loss before
extraordinary items..... $ (57.91) $ (22.17) $ (101.15) $ (77.73) $ (52.19)
Extraordinary items....... - - - 1.05 15.76
------------ ------------ ------------ ------------ -----------
Net loss.................. $ (57.91) $ (22.17) $ (101.15) $ (76.68) $ (36.43)
============ ============ ============ ============ ===========
Distributions per thousand
limited partnership
units..................... $ - $ - $ - $ - $ 5.00
============ ============ ============ ============ ===========
As of December 31,
-------------------------------------------------------------------------
Balance Sheets 1995 1994 1993 1992 1991
- -------------- ---------- ---------- ---------- ---------- ----------
Real estate, net $44,629,001 $41,738,690 $39,917,222 $48,201,116 $54,925,023
Total assets 54,217,223 45,208,188 45,097,635 49,921,437 56,677,241
Mortgage notes payable 23,097,459 9,350,045 8,343,376 4,871,326 4,906,644
Partners' equity 27,338,809 32,401,855 34,339,918 43,183,685 49,887,716
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------ -----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
FINANCIAL CONDITION
- -------------------
The Partnership was formed to engage in the business of acquiring and operating
income-producing real properties, and holding the properties for investment.
Since completion of its capital formation and property acquisition phases in
1987, when it completed the purchase of five properties, the Partnership has
operated its properties for production of income. The original acquisitions of
properties were all cash. In 1993, the Partnership obtained refinancing on
Amargosa Creek Apartments, financing on Westwood Center and also obtained
financing on Continental Plaza from an affiliate of the General Partner. In
1994, the Partnership obtained a construction loan to finance the major capital
improvement program at Northway Mall. The capital improvement program at
Northway Mall was completed during 1995 and the property obtained permanent
financing in December 1995, as discussed below.
Occupancy rates at Continental Plaza increased in 1993, but rental rates in the
Scottsdale, Arizona market remained depressed. During 1993, the market
stabilized, but did so at a level which would have made it difficult for the
Partnership to ultimately realize its then carrying value over the next five to
seven years. Accordingly, the Partnership recorded a $1,239,353 write-down for
permanent impairment during the second quarter of 1993.
<PAGE>
Edison Ford Square is a 141,000 sq. ft. retail center in Ft. Myers, Florida that
has evolved from primarily retail, to more of a service center use It was 46%,
54% and 80% occupied at December 31, 1995, 1994 and 1993. The downtown area,
where the shopping center is located, has experienced decay due to a shift in
demographics. The center is within walking distance of the Thomas Edison and
Henry Ford estates, significant historical attractions in the area. Plans for a
major renovation that would have captured the architecture and style of the
Edison home began in 1993. However, with the loss of two major anchors in 1994,
it was not viable to continue this project. During 1995, a full, in-depth market
analysis was performed to determine the center's highest and best use. It was
determined that the only viable alternative would be a complete redevelopment
and renovation of the center; however, the Partnership has decided not to pursue
this alternative because of the inherent risks and economic uncertainties. An
unsolicited offer from an unaffiliated third party to purchase the center was
received during 1995, which approximated the value of the land. These facts have
led to the conclusion that a permanent impairment has been sustained.
Accordingly, the Partnership recorded a write-down for permanent impairment of
$2.2 million against Edison Ford's building and improvements during the fourth
quarter of 1995, to record the property at its estimated net realizable value,
which approximates the value of the land.
The Partnership has been undergoing a major capital improvements program to
convert Northway Mall into a value oriented retail shopping center specializing
in brand name merchandise at less-than-retail prices since 1994. In 1993,
mortgage loans totaling $3.4 million on Westwood Center and Continental Plaza,
previously unencumbered assets, were obtained. The proceeds from these loans
were used to partially finance the capital improvement program at Northway Mall.
In the third quarter of 1994, management finalized a construction loan on
Northway Mall totaling $11 million to finance the balance of the capital
improvement program. The mortgage note allowed for monthly withdrawals of
principal in the amount of approved invoices. The principal amount was due
August 1996 and accrued interest at a variable rate. The interest rate at
December 17, 1995 (the date the mortgage note was repaid) was 9.75%. Interest
payments were due from the Partnership upon repayment of the note. During 1995,
$91,000 of this interest was capitalized as an addition to real estate
investments, which is the portion related to the vacant square footage of
Northway Mall that was under construction during the year. The Partnership
incurred loan costs of $214,218 in 1994 related to the construction mortgage
note financing, of which $70,000 were capitalized in 1995 as an addition to real
estate investments to be depreciated over the life of the related asset. The
remaining loan costs of $144,218 were amortized over the life of the
construction mortgage note. The Partnership was provided cash flow of $1,121,473
during 1994 due to the construction mortgage note as discussed above.
Management obtained permanent financing for the capital improvements program in
December 1995. The new mortgage note, in the amount of $15 million, bears an
interest rate of 7.5% with monthly principal and interest payments of $110,849
and matures in December 2002. The proceeds from the refinancing were used to pay
off the construction mortgage note as well as the affiliate mortgage note
discussed below. The renovations were completed during 1995. As a part of the
renovations, assets valued at approximately $1,248,000 were demolished or
removed and written off in the fourth quarter of 1995. Four anchor tenants and
several smaller tenants have moved in during 1995 due to the completion of the
renovation. The decision to renovate the mall was made after exhaustive analyses
and studies conducted by management to determine future cash flows of the mall
based upon stabilized leases. Accordingly, based upon the level of rental
revenues that would be generated from these leases, management concluded at that
time that the Partnership could not ultimately realize its then carrying value
over the next five to seven years. Accordingly, a write-down for permanent
impairment in the amount of $6 million was recorded during 1993 to record the
asset to its net realizable value.
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
1995 compared to 1994
Revenue:
Partnership revenues increased by $1,271,972 or 20% in 1995 as compared to 1994.
Rental revenue and interest income increased by $1,182,363 and $29,735,
respectively.
Rental revenues for 1995 were $7,568,361 as compared to $6,385,998 for 1994.
This increase is primarily due to the increase in occupancy rates at four of the
five Partnership's properties, with the largest increase occurring at Northway
Mall.
Interest income increased $29,735 for 1995 as compared to 1994 primarily due to
the Partnership's increased cash balance. The proceeds from the Northway Mall
refinancing of approximately $5,800,000 were deposited in December 1995
resulting in an increase of approximately $11,000 of interest income for
December 1995.
In 1995 the Partnership received cash and common and preferred stock in the
reorganized Southmark in settlement of its bankruptcy claims against Southmark.
The Partnership recognized a $59,874 gain during 1995 as a result of this
settlement. No such gain was recognized in 1994.
Expenses:
Total expenses increased $4,396,955 or 52% in 1995 as compared 1994 primarily
due to an increase in interest, depreciation and amortization expense, the loss
on demolition and replacement of assets, and the write-down for permanent
impairment on Edison Ford Square, as discussed below.
Interest expense increased $469,121 or 69% in 1995 as compared 1994 due to the
construction financing at Northway Mall.
Interest expense - affiliates increased $26,553 or 28% in 1995 as compared to
1994 due to a higher interest rate on the affiliate mortgage.
Depreciation and amortization increased $241,374 or 10% in 1995 as compared to
1994 due to the renovation at Northway Mall.
Personnel expenses increased $66,274 or 9% in 1995 as compared to 1994, due to
an increase in personnel at Northway Mall because of the increased occupancy, as
well as higher compensation for property personnel at the Partnership's
remaining properties.
Property management fees - affiliates increased $51,890 or 13% in 1995 as
compared to 1994. The increased occupancy at Northway Mall led to an increase in
tenant receipts on which the management fee is based.
Bad debt expense decreased approximately $122,000 in 1995 as compared to 1994 at
Westwood Center, Edison Ford Square, and Northway Mall due to 1994's tenant
evictions and relocations.
Other property operating expenses increased $51,470 or 9% in 1995 as compared to
1994 due to an increase in marketing and leasing expenses at Northway Mall.
General and administrative expenses decreased $48,079 or 43% in 1995. During
1994, Westwood Center incurred $22,500 in professional fees for an appraisal; no
such fees were incurred during 1995. The decrease was also due to decreased
expenses relating to legal proceedings against an unaffiliated management
company for mismanagement and other causes of action at Northway Mall.
General and administrative - affiliates expenses increased $109,627 or 15% in
1995 as compared to 1994. There was an increase of $54,364 in asset management
fees in 1995 due to the increase in the tangible assets of the Partnership, on
which the fee is based. There was an increase of $55,263 in reimbursement to
affiliates due to an increase in services provided in connection with the
Northway Mall renovation.
Edison Ford Square is a 141,000 sq. ft. retail center in Ft. Myers, Florida that
has evolved from primarily retail, to more of a service center use It was 46%,
54% and 80% occupied at December 31, 1995, 1994 and 1993. The downtown area,
where the shopping center is located, has experienced decay due to a shift in
demographics. The center is within walking distance of the Thomas Edison and
Henry Ford estates, significant historical attractions in the area. Plans for a
major renovation that would have captured the architecture and style of the
Edison home began in 1993. However, with the loss of two major anchors in 1994,
it was not viable to continue this project. During 1995, a full, in-depth market
analysis was performed to determine the center's highest and best use. It was
determined that the only viable alternative would be a complete redevelopment
and renovation of the center; however, the Partnership has decided not to pursue
this alternative because of the inherent risks and economic uncertainties. An
unsolicited offer from an unaffiliated third party to purchase the center was
received during 1995, which approximated the value of the land. These facts have
led to the conclusion that a permanent impairment has been sustained.
Accordingly, the Partnership recorded a write-down for permanent impairment of
$2.2 million against Edison Ford's building and improvements during the fourth
quarter of 1995, to record the property at its estimated net realizable value,
which approximates the value of the land.
The Partnership recognized a loss on Northway Mall renovation of $1,247,940 in
1995. This loss is due to the demolition or removal of assets that were
previously capitalized.
1994 compared to 1993
Revenue:
Total Partnership revenues decreased by $392,393 in 1994 as compared to 1993.
Rental revenue decreased $322,738 primarily due to decreased rental revenues at
Northway Mall. Due to the capital improvement program, portions of the mall were
unavailable for leasing in 1994. Rental revenues at Edison Ford Square also
decreased during 1994 due to the loss of two anchor tenants in December 1993.
Interest income increased $50,059 in 1994 as compared to 1993 due to higher cash
balances from mortgage financings.
In 1992, an anchor tenant at Northway Mall filed for bankruptcy protection and
management deemed the amounts due from the tenant as uncollectible. During 1993,
the Partnership received $119,714 of claims settlement from the tenant which
were recorded as other income.
Expenses:
Total expenses decreased $7,298,097 in 1994 as compared to 1993. The 1993
expenses include a $7,239,353 write-down for permanent impairment of real estate
on Northway Mall and Continental Plaza.
Interest expense increased $146,568 in 1994 as compared to 1993. In October
1993, the Partnership obtained a $2.5 million loan secured by Westwood Center.
The increase in interest expense from this loan was slightly offset by a
decrease in interest expense at Amargosa Creek Apartments, due to the
refinancing in October 1993 at a lower interest rate.
Interest expense - affiliates increased $40,939 in 1994 as compared to 1993. The
Partnership borrowed $952,538 from McNeil Real Estate Fund XXVII, L.P., an
affiliate of the General Partner, during 1993.
Property tax expense decreased $110,142 in 1994 as compared to 1993. During
1994, Amargosa Creek and Continental Plaza received tax refunds of $88,849 and
$26,113, respectively, due to successful tax appeals for a reduction in taxable
basis. The remaining properties' tax expenses were comparable to 1993.
Personnel expenses increased $65,687 during 1994 as compared to 1993. Northway
Mall had an increase in salaries expense of approximately $32,000 during 1994
due to the addition of personnel necessary to oversee the renovation. The
remainder of the increase is attributable to higher employee and workers'
compensation insurance expense due to higher rates.
<PAGE>
General and administrative expense decreased $82,416 in 1994 as compared to
1993. Prior to December 1991, Northway Mall had been managed by an unaffiliated
management company. The Partnership instituted legal proceedings against the
management company for mismanagement and other causes of action. The legal
proceedings were stopped due to the bankruptcy filing by the management company
in August 1993. Additionally, during 1993, the property required legal
representation to amend tenant leases for relocations necessary for the capital
renovations project.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Partnership generated $1,472,199 of cash through operating activities in
1995 as compared to $966,845 in 1994 and $1,144,158 in 1993. The change in cash
provided by operations in 1995 as compared to 1994 is primarily due to an
increase in tenant receipts and a decrease in property taxes paid and a gain on
the settlement of bankruptcy claims against Southmark as discussed in Item 1 -
Southmark Bankruptcy and Change in General Partner. These cash changes were
offset by an increase in interest paid. The increased occupancy at Northway Mall
and Continental Plaza which was substantially responsible for the increase in
tenant receipts. The decrease in property tax payments is primarily due to a
change in the due date of the tax payments for Edison Ford Square. The 1993
taxes were paid in February 1994 and the 1994 taxes were paid in December 1994.
The decrease in cash from operations in 1994 as compared to 1993 was primarily
due to the decrease of the outstanding accounts payable balance. During 1994,
the Partnership was able to reduce the payables due to the improved cash
position of the Partnership. Additionally, the Partnership incurred an increase
in interest paid due to the new financings during 1993. These increases in cash
used in operations were partially offset by a decrease in cash paid to
affiliates due to the deferral of certain affiliate payables.
Expenditures related to additions to real estate in 1995 utilized $9,732,038 of
Partnership cash flows as compared to $3,551,769 during 1994 and $1,447,238
during 1993. The increase in the additions to real estate is primarily due to
the capital improvement program at Northway Mall. In 1993, mortgage loans
totaling $3.4 million on Westwood Center and Continental Plaza, previously
unencumbered assets, were obtained. The proceeds from these loans were used to
partially finance the capital improvement program at Northway Mall. In the third
quarter of 1994, management finalized a construction loan on Northway Mall
totaling $11 million to finance the balance for the capital improvement program.
The mortgage note allowed for monthly withdrawals of principal in the amount of
approved invoices. The principal amount was due August 1996 and accrued interest
at a variable rate. The interest rate a December 17, 1995 (the date the mortgage
note was repaid) was 9.75%. Interest payments were due from the Partnership upon
repayment of the note. During 1995, $91,000 of this interest was capitalized as
an addition to real estate investments, which is the portion related to the
vacant square footage of Northway Mall that was under construction during the
year. The Partnership incurred loan costs of $214,218 in 1994 related to the
construction mortgage note financing, of which $70,000 were capitalized in 1995
as an addition to real estate investments to be depreciated over the life of the
related asset. The remaining loan costs of $144,218 were amortized over the life
of the construction mortgage note. The Partnership was provided cash flow of
$1,121,473 during 1994 due to the construction mortgage note as discussed above.
Management obtained permanent financing for the capital improvements program in
December 1995. The new mortgage note, in the amount of $15 million, bears an
interest rate of 7.5% with monthly principal and interest payments of $110,849
and matures in December 2002. The proceeds from the refinancing were used to pay
off the construction mortgage note as well as the affiliate mortgage note
discussed below. The renovations were completed during 1995. As a part of the
renovation, assets valued at approximately $1,248,000 were demolished or removed
and written off in the fourth quarter of 1995. Four anchor tenants and several
smaller tenants have moved in during 1995 due to the completion of the
renovation.
In March 1993, the Partnership obtained a loan from McNeil Real Estate Fund
XXVII, L.P. which allows the Partnership to borrow funds totaling $1,536,000. Of
this amount available, $952,538 was borrowed during 1993. The note is secured by
Continental Plaza and requires monthly interest payments only equal to the prime
lending rate the Bank of America plus 2 1/2%, with the principal balance due
March in 1996. The mortgage note was repaid in January 1996.
In October 1993, the Partnership refinanced the mortgage note secured by
Amargosa Creek Apartments that had a principal balance of $4,839,966 and an
interest rate of 9.875% with monthly payments of $43,458. The new mortgage loan,
in the amount of $4,900,000, bears an interest rate of 7.875% with monthly
payments of $35,528 and will mature in December 1998.
In October 1993, the Partnership also obtained financing for Westwood Center, a
previously unencumbered property. The new mortgage loan, in the amount of $2.5
million, bears an interest rate of 8% with monthly payments of $22,457 and will
mature in December 1998.
At December 31, 1995, the Partnership held cash and cash equivalents of
$6,761,516.
Short-term liquidity:
The General Partner has established a revolving credit facility not to exceed
$5,000,000 in the aggregate which is available on a "first-come, first-served"
basis to the Partnership and other affiliated partnerships, if certain
conditions are met. Borrowings under the facility may be used to fund deferred
maintenance, refinancing obligations and working capital needs. There is no
assurance that the Partnership will receive any funds under the facility because
no amounts are reserved for any particular partnership. As of December 31, 1995,
$2,662,819 remained available for borrowing under the facility; however,
additional funds could become available as other partnerships repay existing
borrowings. This commitment will terminate on March 30, 1997.
The General Partner has, at its discretion, advanced funds to the Partnership.
As discussed below, the Partnership received such advances that were used to
fund working capital requirements. The General Partner is not obligated to
advance funds to the Partnership and there is no assurance that the Partnership
will receive additional funds.
The advances from affiliates at December 31, 1995 and 1994 consist of the
following:
<TABLE>
1995 1994
----------- -----------
<S> <C> <C>
Advances from General Partner $ 130,518 $ 130,518
Accrued interest payable 37,812 24,984
------------ -----------
$ 168,330 $ 155,502
============ ===========
</TABLE>
The advances are unsecured, due on demand and accrue interest at the prime
lending rate of Bank of America plus 1%. The prime lending rate was 8.5% at
December 31, 1995 and 1994.
The present cash balance plus cash to be provided by operating activities is
considered adequate to meet the Partnership's needs for debt service, normal
amounts of repairs and maintenance and capital improvements to preserve and
enhance the value of the properties. The Partnership has budgeted $1,941,000 for
necessary capital improvements for all properties in 1996.
Long-term liquidity:
For the long term, property operations will remain the primary source of funds.
While the present outlook for the Partnership's liquidity is favorable, market
conditions may change and property operations can deteriorate. In that event,
the Partnership would require other sources of working capital. No such other
sources have been identified, and the Partnership has no established lines of
credit. Other possible actions to resolve working capital deficiencies include
refinancing or renegotiating terms of existing loans, deferring major capital
expenditures on Partnership properties except where improvements are expected to
enhance the competitiveness or marketability of the properties, or arranging
working capital support from affiliates. All or a combination of these steps may
be inadequate or unfeasible in resolving such potential working capital
deficiencies.
Distributions:
To maintain adequate cash balances of the Partnership, distributions to the
limited partners were suspended in 1991. The General Partner will continue to
monitor the cash reserves and working capital needs of the Partnership to
determine when cash flows will support distributions to the limited partners.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
<TABLE>
Page
Number
------
INDEX TO FINANCIAL STATEMENTS
- -----------------------------
<S> <C>
Financial Statements:
Report of Independent Public Accountants....................................... 16
Balance Sheets at December 31, 1995 and 1994................................... 17
Statements of Operations for each of the three years in the period
ended December 31, 1995..................................................... 18
Statements of Partners' Equity (Deficit) for each of the three years in
the period ended December 31, 1995.......................................... 19
Statements of Cash Flows for each of the three years in the period
ended December 31, 1995..................................................... 20
Notes to Financial Statements.................................................. 22
Financial Statement Schedule -
Schedule III - Real Estate Investments and Accumulated
Depreciation and Amortization............................................ 31
</TABLE>
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of McNeil Real Estate Fund XXVI, L.P.:
We have audited the accompanying balance sheets of McNeil Real Estate Fund XXVI,
L.P. (a California limited partnership) as of December 31, 1995 and 1994, and
the related statements of operations, partners' equity (deficit) and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements and the schedule referred to below are the responsibility
of the Partnership's management. Our responsibility is to express an opinion on
these financial statements and the 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 McNeil Real Estate Fund XXVI,
L.P. as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in our audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Dallas, Texas
March 13, 1996
<PAGE>
McNEIL REAL ESTATE FUND XXVI, L.P.
BALANCE SHEETS
<TABLE>
December 31,
------------------------------
1995 1994
---------- ----------
ASSETS
- ------
<S> <C> <C>
Real estate investments:
Land..................................................... $ 9,189,092 $ 9,189,092
Buildings and improvements............................... 56,695,050 51,745,169
---------- ----------
65,884,142 60,934,261
Less: Accumulated depreciation and amortization......... (21,255,141) (19,195,571)
---------- ----------
44,629,001 41,738,690
Cash and cash equivalents................................... 6,761,516 1,473,850
Cash segregated for security deposits....................... 202,396 233,759
Accounts receivable, net of allowance for doubtful
accounts of $596,156 and $864,014 at
December 31, 1995 and 1994, respectively................. 1,096,937 789,641
Prepaid commissions......................................... 379,444 404,543
Prepaid expenses and other assets........................... 716,091 179,445
Deferred borrowing costs, net of accumulated
amortization of $125,641 and $101,065 at
December 31, 1995 and 1994, respectively................. 431,838 388,260
---------- ----------
$54,217,223 $45,208,188
========== ==========
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
- -----------------------------------------
Mortgage notes payable...................................... $22,144,921 $ 8,397,507
Mortgage note payable - affiliate........................... 952,538 952,538
Accounts payable and accrued expenses....................... 358,856 171,067
Accounts payable - Northway Mall renovation ................ - 711,056
Accrued property taxes...................................... 59,864 35,325
Payable to affiliates - General Partner..................... 2,983,409 2,151,614
Advances from affiliates - General Partner.................. 168,330 155,502
Security deposits and deferred rental income................ 210,496 231,724
---------- ----------
26,878,414 12,806,333
---------- ----------
Partners' equity (deficit):
Limited partners - 90,000,000 limited partnership
units authorized; 86,548,983 and 86,553,913 limited
partnership units issued and outstanding at
December 31, 1995 and 1994, respectively................ 27,716,222 32,728,638
General Partner.......................................... (377,413) (326,783)
---------- ----------
27,338,809 32,401,855
---------- ----------
$54,217,223 $45,208,188
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XXVI, L.P.
STATEMENTS OF OPERATIONS
<TABLE>
For the Years Ended December 31,
------------------------------------------------
1995 1994 1993
---------- --------- ---------
Revenue:
<S> <C> <C> <C>
Rental revenue.......................... $7,568,361 $6,385,998 $6,708,736
Interest ............................... 98,207 68,472 18,413
Other income............................ - - 119,714
Gain on legal settlement................ 59,874 - -
--------- --------- ---------
Total revenue......................... 7,726,442 6,454,470 6,846,863
--------- --------- ---------
Expenses:
Interest................................ 1,148,546 679,425 532,857
Interest - affiliates................... 120,765 94,212 53,273
Depreciation and amortization........... 2,682,731 2,441,357 2,491,779
Property taxes.......................... 654,260 614,985 725,127
Bad debt................................ (13,025) 109,404 109,284
Personnel expenses...................... 781,301 715,027 649,340
Utilities............................... 1,060,645 1,003,866 1,023,452
Repairs and maintenance................. 962,791 955,631 975,508
Property management fees -
affiliates............................ 437,006 385,116 373,823
Other property operating expenses....... 623,705 572,235 621,672
General and administrative.............. 62,701 110,780 193,196
General and administrative -
affiliates............................ 820,122 710,495 701,966
Write-down for permanent
impairment of real estate............. 2,200,000 - 7,239,353
Loss on demolition and replacement
of assets............................. 1,247,940 - -
---------- ---------- ----------
Total expenses........................ 12,789,488 8,392,533 15,690,630
---------- ---------- ----------
Net loss................................... $(5,063,046) $(1,938,063) $(8,843,767)
========== ========== ==========
Net loss allocable to limited
partners................................ $(5,012,416) $(1,918,682) $(8,755,329)
Net loss allocable to General
Partner................................. (50,630) (19,381) (88,438)
---------- ---------- ----------
Net loss................................... $(5,063,046) $(1,938,063) $(8,843,767)
========== ========== ==========
Net loss per thousand limited
partnership units....................... $ (57.91) $ (22.17) $ (101.15)
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XXVI, L.P.
STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1995, 1994 and 1993
<TABLE>
Total'
General Limited Partners
Partner Partners Equity
---------- ---------- ----------
<S> <C> <C> <C>
Balance at December 31, 1992.............. $ (218,964) $43,402,649 $43,183,685
Net loss.................................. (88,438) (8,755,329) (8,843,767)
---------- ---------- ----------
Balance at December 31, 1993.............. (307,402) 34,647,320 34,339,918
Net loss.................................. (19,381) (1,918,682) (1,938,063)
---------- ---------- ----------
Balance at December 31, 1994.............. (326,783) 32,728,638 32,401,855
Net loss.................................. (50,630) (5,012,416) (5,063,046)
---------- ---------- ----------
Balance at December 31, 1995.............. $ (377,413) $27,716,222 $27,338,809
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XXVI, L.P.
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
For the Years Ended December 31,
------------------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from tenants.............. $ 7,284,225 $ 6,369,873 $ 6,327,093
Cash received from legal settlement..... 59,874 - -
Cash paid to suppliers.................. (3,729,096) (3,625,342) (3,319,961)
Cash paid to affiliates................. (425,333) (408,803) (562,050)
Interest received....................... 98,207 68,472 18,413
Interest paid........................... (1,008,659) (581,020) (485,764)
Interest paid to affiliates............. (107,937) (98,941) (29,223)
Property taxes paid..................... (699,082) (757,394) (804,350)
---------- ---------- ----------
Net cash provided by
operating activities.................. 1,472,199 966,845 1,144,158
---------- ---------- ----------
Net cash used in investing activities:
Additions to real estate
investments........................... (9,732,038) (3,551,769) (1,447,238)
---------- ---------- ----------
Cash flows from financing activities:
Principal payments on mortgage
notes payable......................... (131,113) (114,804) (40,522)
Proceeds from mortgage notes
refinancing........................... 13,878,527 1,121,473 2,560,034
Proceeds from mortgage note ............
payable - affiliate................... - - 952,538
Deferred borrowing costs paid........... (199,909) (214,218) (284,762)
Advances from affiliates - General
Partner............................... - - 12,570
---------- ---------- ----------
Net cash provided by
financing activities.................. 13,547,505 792,451 3,199,858
---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents........................ 5,287,666 (1,792,473) 2,896,778
Cash and cash equivalents at
beginning of year..................... 1,473,850 3,266,323 369,545
---------- ---------- ----------
Cash and cash equivalents at end
of year............................... $ 6,761,516 $ 1,473,850 $ 3,266,323
========== ========== ==========
</TABLE>
See discussion of noncash investing and financing activities in Note 4
See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XXVI, L.P.
STATEMENTS OF CASH FLOWS
Reconciliation of Net Loss to Net Cash Provided by Operating Activities
<TABLE>
For the Years Ended December 31,
-----------------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Net loss................................... $(5,063,046) $(1,938,063) $(8,843,767)
---------- ---------- ----------
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization........... 2,682,731 2,441,357 2,491,779
Amortization of deferred borrowing
costs................................. 156,331 99,166 38,418
Allowance for doubtful accounts......... (267,858) 28,391 (141,593)
Interest added to mortgage note
payable - affiliate, net of payments.. - - 15,353
Interest added to advances from
affiliates - General Partner.......... 12,828 10,624 8,697
Write-down for permanent
impairment of real estate............. 2,200,000 - 7,239,353
Loss on demolition and replacement
of assets............................ 1,247,940 - -
Changes in assets and liabilities:
Cash segregated for security
deposits............................ 31,363 (14,079) (40,440)
Accounts receivable................... (39,438) 72,453 (106,654)
Prepaid expenses and other
assets.............................. (536,646) 12,563 (28,841)
Prepaid commissions................... 25,099 (65,834) 558
Accounts payable and accrued
expenses............................ 187,789 (215,007) 4,365
Accrued property taxes................ 24,539 (142,695) (46,988)
Payable to affiliates - General
Partner............................. 831,795 671,455 513,739
Security deposits and deferred
rental income....................... (21,228) 6,514 40,179
--------- --------- ---------
Total adjustments................. 6,535,245 2,904,908 9,987,925
--------- --------- ---------
Net cash provided by
operating activities.................. $1,472,199 $ 966,845 $1,144,158
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XXVI, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ------ -----------------------------------------------------------
Organization
- ------------
McNeil Real Estate Fund XXVI, L.P., (the "Partnership"), formerly known as
Southmark Equity Partners III, Ltd., was organized on March 4, 1985 as a limited
partnership under the provisions of the California Revised Limited Partnership
Act to acquire and operate residential and commercial properties. The general
partner of the Partnership is McNeil Partners, L.P. (the "General Partner"), a
Delaware limited partnership, an affiliate of Robert A. McNeil ("McNeil"). The
General Partner was elected at a meeting of limited partners on March 30, 1992,
at which time an amended and restated partnership agreement (the "Amended
Partnership Agreement") was adopted. Prior to March 30, 1992, the general
partner of the Partnership was Southmark Investment Group 86, Inc. (the
"Original General Partner"), a wholly-owned subsidiary of Southmark Corporation
("Southmark"). The Original General Partner was purchased from Southmark by
McNeil on March 13, 1991. The principal place of business for the Partnership
and the General Partner is 13760 Noel Road, Suite 700, LB70, Dallas, Texas
75240.
The Partnership is engaged in diversified real estate activities, including the
ownership, operation and management of residential, commercial office and retail
real estate. At December 31, 1995, the Partnership owned five income-producing
properties as described in Note 4 - Real Estate Investments.
Basis of Presentation
- ---------------------
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP"). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Real Estate Investments
- -----------------------
Real estate investments are generally stated at the lower of cost or net
realizable value. Real estate investments are monitored on an ongoing basis to
determine if the property has sustained a permanent impairment in value. At such
time, a write-down is recorded to reduce the basis of the property to its net
realizable value. A permanent impairment is determined to have occurred when a
decline in property value is considered to be other than temporary based upon
management's expectations with respect to projected cash flows and prevailing
economic conditions.
Improvements and betterments are capitalized and expensed through depreciation
charges. Repairs and maintenance are charged to operations as incurred.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. This statement is effective for financial statements for fiscal
years beginning after December 15, 1995. The Partnership has not adopted the
principles of this statement within the accompanying financial statements;
however, it is not anticipated that adoption will have a material effect on the
carrying value of the Partnership's long-lived assets.
Depreciation and Amortization
- -----------------------------
Buildings and improvements are depreciated using the straight-line method over
the estimated useful lives of the assets, ranging from 5 to 25 years. Tenant
improvements are capitalized and are amortized over the terms of the related
tenant lease using the straight-line method.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include cash on hand and cash on deposit in financial
institutions with original maturities of three months or less. Carrying amounts
for cash and cash equivalents approximate fair value.
Deferred Borrowing Costs
- ------------------------
Loan fees and other related costs incurred to obtain long-term financing on real
property are capitalized and amortized using a method that approximates the
effective interest method over the terms of the related mortgage notes payable.
Amortization of deferred borrowing costs is included in interest expense on the
Statements of Operations.
Prepaid Commissions
- -------------------
Leasing commissions incurred to obtain leases on commercial properties are
capitalized and amortized using the straight-line method over the term of the
related leases.
Rental Revenue
- --------------
The Partnership leases its residential property under short-term operating
leases. Lease terms generally are less than one year in duration. Rental income
is recognized as earned.
The Partnership leases its commercial properties under non-cancelable operating
leases. Certain leases provide concessions and/or periods of escalating or free
rent. Rental income is recognized on a straight-line basis over the life of the
related leases. The excess of the rental revenue recognized over the contractual
rental payments is recorded as accrued rent receivable and is included in
accounts receivable on the Balance Sheets.
Income Taxes
- ------------
No provision for Federal income taxes is necessary in the financial statements
of the Partnership because, as a partnership, it is not subject to Federal
income tax and the tax effect of its activities accrues to the partners.
Allocation of Net Income and Net Loss
- -------------------------------------
The Amended Partnership Agreement generally provides that net income and net
loss (other than net income arising from sales or refinancing) shall be
allocated one percent (1%) to the General Partner and ninety-nine percent (99%)
to the limited partners.
For financial statement purposes, net income and net loss arising from sales or
refinancing shall be allocated one percent (1%) to the General Partner and
ninety-nine percent (99%) to the limited partners.
For tax reporting purposes, net income arising from sales or refinancing shall
be allocated as follows: (a) first, amounts of such net income shall be
allocated among the General Partner and limited partners in proportion to, and
to the extent of, the portion of such partner's share of the net decrease in
Partnership Minimum Gain determined under Treasury Regulations, (b) second, to
the General Partner and limited partners in proportion to, and to the extent of,
the amount by which their respective capital account balances are negative by
more than their respective remaining shares of the Partnership's Minimum Gain
attributable to properties still owned by the Partnership and (c) third, 1% of
such net income shall be allocated to the General Partner and 99% of such net
income shall be allocated to the limited partners.
Federal income tax law provides that the allocation of loss to a partner will
not be recognized unless the allocation is in accordance with a partner's
interest in the partnership or the allocation has substantial economic effect.
Internal Revenue Code Section 704(b) and accompanying Treasury Regulations
establish criteria for allocation of Partnership deductions attributable to
debt. The Partnership's tax allocations for 1995, 1994 and 1993 have been made
in accordance with these provisions.
Distributions
- -------------
At the discretion of the General Partner, distributable cash (other than cash
from sales or refinancing) shall be distributed 100% to the limited partners,
with such distributions first paying the limited partners' Priority Return and
then to all limited partners on a per limited partnership unit ("Unit") basis.
Also at the discretion of the General Partner, the limited partners will receive
100% of distributable cash from sales or refinancing with such distributions
first paying the limited partners Priority Return; as defined, then the limited
partners' Additional Priority Return, then repayment of Original Invested
Capital, and of the remainder, to the limited partners on a per Unit basis. The
limited partners' Priority Returns represent a 8 1/4% cumulative return on their
Adjusted Invested Capital balance, as defined. The limited partners' Additional
Priority Returns represent a 1% cumulative return on their Adjusted Invested
Capital balance, as defined.
In connection with a Terminating Disposition, as defined, cash from sales or
refinancing and any remaining reserves shall be allocated among, and distributed
to, the General Partner and limited partners in proportion to, and to the extent
of, their positive capital account balances after the net income has been
allocated pursuant to the above.
There were no distributions to partners in 1995, 1994 and 1993.
Net Loss Per Thousand Limited Partnership Units
- -----------------------------------------------
Net loss per thousand Units is computed by dividing net loss allocated to the
limited partners by the weighted average number of Units outstanding expressed
in thousands. Per Unit information has been computed based on 86,549 thousand
Units outstanding in 1995, and 86,554 thousand Units outstanding in 1994 and
1993.
Reclassification
- ----------------
Certain reclassifications have been made to prior period amounts to conform with
the current year presentation.
NOTE 2 - TRANSACTIONS WITH AFFILIATES
- ------ ----------------------------
The Partnership pays property management fees equal to 5% of the gross rental
receipts for its residential property and 6% of gross rental receipts for its
commercial properties to McNeil Real Estate Management, Inc. ("McREMI"), an
affiliate of the General Partner, for providing property management services for
the Partnership's residential and commercial properties and leasing services for
its residential properties. McREMI may also choose to provide leasing services
for the Partnership's commercial properties, in which case McREMI will receive
property management fees from such commercial properties equal to 3% of the
property's gross rental receipts plus leasing commissions based on the
prevailing market rate for such services where the property is located.
The Partnership reimbursed an affiliate of the General Partner for costs
incurred in connection with refinancing and modification of mortgage notes
payable in 1993. These costs were recorded as prepaid expense until the
refinancing or modification occurred, at which time the costs were capitalized
and are amortized over the remaining term of the related mortgage. If these
refinancings or modifications did not occur, these costs were expensed.
The Partnership reimburses McREMI for its costs, including overhead, of
administering the Partnership's affairs.
<PAGE>
Under the terms of the Amended Partnership Agreement, the Partnership is paying
an asset management fee, retroactive to March 13, 1991, which is payable to the
General Partner. Through 1999, the asset management fee is calculated as 1% of
the Partnership's tangible asset value. Tangible asset value is determined by
using the greater of (i) an amount calculated by applying a capitalization rate
of 9% to the annualized net operating income of each property or (ii) a value of
$10,000 per apartment unit for residential property and $50 per gross square
foot for commercial property to arrive at the property tangible asset value. The
property tangible asset value is then added to the book value of all other
assets excluding intangible items. The fee percentage decreases subsequent to
1999.
Compensation and reimbursements paid to or accrued for the benefit of the
General Partner or its affiliates are as follows:
<TABLE>
For the Years Ended December 31,
-----------------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Charged to prepaid expenses and other assets:
Deferred borrowing costs................ $ - $ - $ 9,654
Charged to deferred borrowing costs........ - - 27,028
Property management fees - affiliates...... 437,006 385,116 373,823
Charged to interest - affiliates:
Interest on mortgage note payable -
affiliate............................. 107,937 83,588 44,576
Interest on advances from
affiliates - General Partner.......... 12,828 10,624 8,697
Charged to general and administrative -
affiliates:
Partnership administration.............. 300,846 245,583 237,431
Asset management fee.................... 519,276 464,912 464,535
--------- --------- ---------
$1,377,893 $1,189,823 $1,165,744
========= ========= =========
</TABLE>
The payable to affiliates - General Partner at December 31, 1995 and 1994
consisted primarily of unpaid property management fees, Partnership general and
administrative expenses and asset management fees and is due and payable from
current operations.
The General Partner has, at its discretion, advanced funds to the Partnership.
As discussed below, the Partnership received such advances for the purpose of
funding working capital requirements. The General Partner is not obligated to
advance funds to the Partnership and there is no assurance that the Partnership
will receive additional funds.
The advances from affiliates at December 31, 1995 and 1994 consist of the
following:
<TABLE>
1995 1994
----------- -----------
<S> <C> <C>
Advances from General Partner $ 130,518 $ 130,518
Accrued interest payable 37,812 24,984
------------ -----------
$ 168,330 $ 155,502
============ ===========
</TABLE>
The advances are unsecured, due on demand and accrue interest at the prime
lending rate of the Bank of America plus 1%. The prime lending rate was 8.5% at
December 31, 1995 and 1994.
In March 1993, the Partnership obtained a loan from McNeil Real Estate Fund
XXVII, L.P., an affiliate of the General Partner, which allows the Partnership
to borrow funds totaling $1,536,000. Of this amount available, $952,538 was
borrowed in 1993. The principal balance is due March 1, 1996. On January 8, 1996
the Partnership repaid the mortgage loan.
<PAGE>
NOTE 3 - TAXABLE INCOME
- ------ --------------
McNeil Real Estate Fund XXVI, L.P. is a partnership and is not subject to
Federal and state income taxes. Accordingly, no recognition has been given to
income taxes in the accompanying financial statements of the Partnership since
the income or loss of the Partnership is to be included in the tax returns of
the individual partners. The tax returns of the Partnership are subject to
examination by Federal and state taxing authorities. If such examinations result
in adjustments to distributive shares of taxable income or loss, the tax
liability of the partners could be adjusted accordingly.
The Partnership's net assets and liabilities for tax purposes exceeded the net
assets and liabilities for financial reporting purposes by $39,813,538 in 1995,
$35,628,694 in 1994 and $34,539,956 in 1993.
NOTE 4 - REAL ESTATE INVESTMENTS
- ------ -----------------------
The basis and accumulated depreciation and amortization of the Partnership's
real estate investments at December 31, 1995 and 1994, are set forth in the
following tables:
<TABLE>
Accumulated
Buildings and Depreciation Net Book
1995 Land Improvements & Amortization Value
---- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Amargosa Creek
Lancaster, CA $ 794,635 $8,517,021 $ (3,340,699) $5,970,957
Edison Ford Square
Ft. Myers, FL 2,438,636 3,786,804 (2,243,237) 3,982,203
Continental Plaza
Scottsdale, AZ 1,975,324 1,955,198 (1,669,636) 2,260,886
Northway Mall
Pittsburgh, PA 2,965,329 29,897,021 (8,393,175) 24,469,175
Westwood Center
Tampa, FL 1,015,168 12,539,006 (5,608,394) 7,945,780
--------- ---------- ---------- ----------
$9,189,092 $56,695,050 $(21,255,141) $44,629,001
========= ========== =========== ==========
Accumulated
Buildings and Depreciation Net Book
1994 Land Improvements & Amortization Value
---- ---------- ---------- ----------- ----------
Amargosa Creek $ 794,635 $8,439,269 $ (2,968,399) $ 6,265,505
Edison Ford Square 2,438,636 5,858,285 (1,951,908) 6,345,013
Continental Plaza 1,975,324 1,811,174 (1,554,713) 2,231,785
Northway Mall 2,965,329 23,603,663 (7,758,265) 18,810,727
Westwood Center 1,015,168 12,032,778 (4,962,286) 8,085,660
--------- ---------- ----------- ----------
$9,189,092 $51,745,169 $(19,195,571) $41,738,690
========= ========== =========== ==========
</TABLE>
Edison Ford Square is a 141,000 sq. ft. retail center in Ft. Myers, Florida that
has evolved from primarily retail, to more of a service center use It was 46%,
54% and 80% occupied at December 31, 1995, 1994 and 1993. The downtown area,
where the shopping center is located, has experienced decay due to a shift in
demographics. The center is within walking distance of the Thomas Edison and
Henry Ford estates, significant historical attractions in the area. Plans for a
major renovation that would have captured the architecture and style of the
Edison home began in 1993. However, with the loss of two major anchors in 1994,
it was not viable to continue this project. During 1995, a full, in-depth market
analysis was performed to determine the center's highest and best use. It was
determined that the only viable alternative would be a complete redevelopment
and renovation of the center; however, the Partnership has decided not to pursue
this alternative because of the inherent risks and economic uncertainties. An
unsolicited offer from an unaffiliated third party to purchase the center was
received during 1995, which approximated the value of the land. These facts have
led to the conclusion that a permanent impairment has been sustained.
Accordingly, the Partnership recorded a write-down for permanent impairment of
$2.2 million against Edison Ford's building and improvements during the fourth
quarter of 1995, to record the property at its estimated net realizable value,
which approximates the value of the land.
Occupancy rates at Continental Plaza increased in 1993, but rental rates in the
Scottsdale, Arizona market remained depressed. During 1993, the market
stabilized, but did so at a level which would have made it difficult for the
Partnership to ultimately realize its then carrying value over the next five to
seven years. Accordingly, the Partnership recorded a $1,239,353 write-down for
permanent impairment during the second quarter of 1993.
In 1993, mortgage loans totaling $3.4 million on Westwood Center and Continental
Plaza, previously unencumbered assets, were obtained. The proceeds from these
loans were used to partially finance the capital improvement program at Northway
Mall. In the third quarter of 1994, management finalized a construction loan on
Northway Mall totaling $11 million to finance the balance for the capital
improvement program. The mortgage note allowed for monthly withdrawals of
principal in the amount of approved invoices. The principal amount was due
August 1996 and accrued interest at a variable rate. The interest rate a
December 17, 1995 (the date the mortgage note was repaid) was 9.75%. Interest
payments were due from the Partnership upon repayment of the note. During 1995,
$91,000 of this interest was capitalized as an addition to real estate
investments, which is the portion related to the vacant square footage of
Northway Mall that was under construction during the year. The Partnership
incurred loan costs of $214,218 in 1994 related to the construction mortgage
note financing, of which $70,000 was capitalized in 1995 as an addition to real
estate investments to be depreciated over the life of the related asset. The
remaining loan costs of $144,218 were amortized over the life of the
construction mortgage note. The Partnership was provided cash flow of $1,121,473
during 1994 due to the construction mortgage note as discussed above.
Management obtained permanent financing for the capital improvements program in
December 1995. The new mortgage note, in the amount of $15 million, bears an
interest rate of 7.5% with monthly principal and interest payments of $110,849
and matures in December 2002. The proceeds from the refinancing were used to pay
off the construction mortgage note as well as the affiliate mortgage note
discussed below. The renovations were completed during 1995. As a part of the
renovation, assets valued at approximately $1,248,000 were demolished or removed
and written off in the fourth quarter of 1995. Four anchor tenants and several
smaller tenants have moved in during 1995 due to the completion of the
renovation. The decision to renovate the mall was made after exhaustive analyses
and studies conducted by management to determine future cash flows of the mall
based upon stabilized leases. Accordingly, based upon the level of rental
revenues that would be generated from these leases, management concluded that at
the time that the Partnership could not ultimately realize its then carrying
value over the next five to seven years. Accordingly, a write-down for permanent
impairment in the amount of $6 million was recorded during 1993 to record the
asset to its net realizable value.
The Partnership leases its commercial properties under non-cancelable operating
leases. Future minimum rents received as of Decemer 31, 1995 are as follows:
<TABLE>
<S> <C>
1996.................................... $5,403,000
1997.................................... 4,686,000
1998.................................... 3,925,000
1999.................................... 3,059,000
2000.................................... 2,502,000
Thereafter.............................. 13,795,000
----------
Total $33,370,000
==========
</TABLE>
Future minimum rents do not include contingent rentals based on sales volume of
tenants. Contingent rents amounted to $15,094, $11,793 and $81,620 for the years
ended December 31, 1995, 1994 and 1993, respectively. Future minimum rents also
do not include expense reimbursements for common area maintenance, property
taxes, and other expenses. These expense reimbursements amounted to $1,176,119,
$886,698 and $792,448 for the years ended December 31, 1995, 1994, and 1993,
respectively.
<PAGE>
NOTE 5 - MORTGAGE NOTES PAYABLE
- ------ ----------------------
The following sets forth the mortgage notes payable of the Partnership at
December 31, 1995 and 1994. The mortgage notes are secured by the related real
estate investments.
<TABLE>
Mortgage Annual Monthly December 31,
Lien Interest Payments/ ------------------------------
Property Position (a) Rates % Maturity Date(d) 1995 1994
- -------- ----------- -------- ----------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Amargosa Creek First 7.875 $ 35,528 12/98 $ 4,808,711 $ 4,854,394
---------- ----------
Northway Mall (b) First Variable Variable 8/96 - 1,121,473
Northway Mall (c) First 7.500 110,849 12/02 15,000,000 -
---------- ----------
15,000,000 1,121,473
---------- ----------
Westwood Center First 8.000 22,457 12/98 2,336,210 2,421,640
---------- ----------
$22,144,921 $ 8,397,507
========== ==========
</TABLE>
(a) The debt is non-recourse to the Partnership.
(b) In August 1994, the Partnership obtained financing for the capital
improvements program at Northway Mall. The construction mortgage note
allowed for monthly withdrawals of principal in the amount of approved
invoices up to $11 million. The principal amount was due August 1996 and
accrued interest at a variable rate. The interest rate was 9.75% at
December 17, 1995 (the date of repayment of the note). Interest payments
were due from the Partnership to the extent of the excess cash flow from
the property. The remaining amount of interest was due upon repayment of
the note. During 1995, $91,000 of this interest was capitalized as an
addition to real estate investments, which is the portion related to the
vacant square footage of Northway Mall that was under construction during
the year. The Partnership incurred loan costs of $214,218 in 1994 related
to the construction mortgage note financing, of which $70,000 was
capitalized as an addition to real estate investments to be depreciated
over the related life of the asset. The remaining loan costs of $144,218
were amortized over the life of the construction mortgage note.
(c) In December 1995, the Partnership obtained permanent financing for the
capital improvements program at Northway Mall. The new mortgage note, in
the amount of $15 million, bears an interest rate of 7.5% with monthly
principal and interest payments of $110,849 and matures in December 2002.
The proceeds from the refinancing were used to pay off the construction
mortgage note of $9,153,530 as discussed above.
(d) Balloon payments on the mortgages notes are due as follows:
Property Balloon Payment Date
-------- --------------- -------
Amargosa Creek $ 4,653,031 12/98
Westwood Center 2,074,545 12/98
Northway Mall 13,118,565 10/02
Scheduled principal maturities of the mortgage notes payable are as follows:
1996.................................... $ 340,083
1997.................................... 374,508
1998.................................... 7,118,247
1999.................................... 265,795
2000.................................... 286,429
Thereafter.............................. 13,759,859
----------
Total $22,144,921
==========
Based on borrowing rates currently available to the Partnership for mortgage
loans with similar terms and average maturities, the fair value of the mortgage
notes payable was approximately $21,796,000 at December 31, 1995.
<PAGE>
NOTE 6 - REFINANCING OF MORTGAGE NOTES PAYABLE
- ------ -------------------------------------
On December 17, 1995, the Partnership refinanced the mortgage note payable on
Northway Mall. The new mortgage loan bears an interest rate of 7.5%, requires
monthly principal and interest payments of $110,849 and matures in December
2002. The following is a summary of the transaction:
New loan proceeds....................... $15,000,000
Existing debt retired................... (9,153,530)
----------
Cash proceeds from refinancing.......... $ 5,846,470
==========
The Partnership deposited $591,500 into property tax and deferred maintenance
escrows and incurred loan costs of $269,910.
During 1995, the Partneship received additional proceeds of $8,0832,057 from the
construction loan for Northway Mall's capital improvement program.
On October 29, 1993, the Partnership obtained financing for Westwood Center, a
previously unencumbered property. The new mortgage loan, in the amount of $2.5
million, bears an interest rate of 8% with monthly payments of $22,457 and
matures in December 1998. The Partnership incurred loan costs of $142,641
related to the financing, which are being amortized over the life of the loan.
On October 7, 1993, the Partnership refinanced the mortgage note payable on
Amargosa Creek Apartments. The new mortgage loan bears an interest rate of
7.875%, requires monthly principal and interest payments of $35,528 and matures
in December 1998.
New loan proceeds....................... $4,900,000
Existing debt retired................... (4,839,966)
---------
Cash proceeds from refinancing.......... $ 60,034
=========
The Partnership incurred loan costs of $142,121 related to the refinancing.
NOTE 7 - MORTGAGE NOTE PAYABLE - AFFILIATE
- ----- ---------------------------------
The following sets forth the mortgage note payable - affiliate of the
Partnership at December 31, 1995 and 1994. The mortgage note is secured by the
underlying real estate investment.
<TABLE>
Mortgage Annual Monthly December 31,
Lien Interest Payments/ ------------------------
Property Position(a) Rates % Maturity Date 1995 1994
- -------- ------------ ------- ------------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Continental Plaza (b) First (c) Variable 03/96 $ 952,538 $ 952,538
========= ========
</TABLE>
(a) The debt is non-recourse to the Partnership.
(b) In March 1993, the Partnership obtained a loan from McNeil Real Estate
Fund XXVII, L.P., an affiliate of the General Partner, which allows the
Partnership to borrow funds totaling $1,536,000. Of this amount available,
$952,538 was borrowed in 1993. The principal balance is due March 1, 1996.
On January 8, 1996 the Partnership repaid the mortgage loan.
(c) The note requires monthly payments of interest only equal to the prime
lending rate of the Bank of America plus 2 1/2%. The prime rate at
December 31, 1995 and 1994 was 8.5%.
Under the terms of the Amended Partnership Agreement, borrowings from affiliates
approximate fair market value.
<PAGE>
NOTE 8 - LEGAL PROCEEDINGS
- ------ -----------------
The Partnership is not party to, nor are any of the Partnership's properties the
subject of, any material pending legal proceedings, other than ordinary, routine
litigation incidental to the Partnership's business, except for the following:
HCW Pension Real Estate Fund, Ltd. et al. v. Ernst & Young, BDO Seidman et
---------------------------------------------------------------------------
al (Case #92-06560-A). This suit was filed on behalf of the Partnership and
--------------------
other affiliated partnerships (the "Affiliated Partnerships") on May 26,
1992, in the 14th Judicial District Court of Dallas County. The petition
sought recovery against the Partnership's former auditors, Ernst & Young,
for negligence and fraud in failing to detect and/or report overcharges of
fees/expenses by Southmark, the former general partner. The former auditors
initially asserted counterclaims against the Affiliated Partnerships based
on alleged fraudulent misrepresentations made to the auditors by the former
management of the Affiliated Partnerships (Southmark) in the form of client
representation letters executed and delivered to the auditors by Southmark
management. The counterclaims sought recovery of attorneys' fees and costs
incurred in defending this action. The counterclaims were later dismissed
on appeal, as discussed below.
The trial court granted summary judgment against the Partnership based on
the statute of limitations; however, on appeal, the Dallas Court of Appeals
reversed the trial court and remanded for trial the Partnerships' fraud
claims against Ernst & Young. The Texas Supreme Court denied Ernst &
Young's application for writ of error on January 11, 1996. The Partnership
is continuing to pursue vigorously its claims against Ernst & Young;
however, the final outcome of this litigation cannot be determined at this
time.
See also Note 9 - "Gain on Legal Settlement".
NOTE 9 - GAIN ON LEGAL SETTLEMENT
- ------ ------------------------
The Partnership filed claims with the United States Bankruptcy Court for the
Northern District of Texas, Dallas Division (the "Bankruptcy Court") against
Southmark for damages relating to improper overcharges, breach of contract and
breach of fiduciary duty. The Partnership settled these claims in 1991, and such
settlement was approved by the Bankruptcy Court.
An Order Granting Motion to Distribute Funds to Class 8 Claimants dated April
14, 1995 was issued by the Bankruptcy Court. In accordance with the Order, in
May 1995 the Partnership received in full satisfaction of its claims, $45,263 in
cash, and common and preferred stock in the reorganized Southmark which
represents the Partnership's pro-rata share of Southmark assets available for
Class 8 Claimants. The Partnership sold the Southmark common and preferred stock
in May 1995 for $14,611, which combined with the cash proceeds from Southmark,
resulted in a gain on legal settlement of $59,874
<PAGE>
McNEIL REAL ESTATE FUND XXVI, LTD.
SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
December 31, 1995
<TABLE>
Initial Cost Cumulative Costs
----------------------------- Write-down Capitalized
Related (b) Buildings and and Permanent Subsequent
Description Encumbrances Land Improvements Impairment To Acquisition
- ----------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
APARTMENTS:
Amargosa Creek
Lancaster, CA (b) $ 4,808,711 $ 947,277 $ 9,578,026 $ (1,696,024) $ 482,377
OFFICE BUILDINGS:
Continental Plaza
Scottsdale, AZ (c) 952,538 4,211,854 4,059,113 (5,662,360) 1,321,915
Westwood Center
Tampa, FL (d) 2,336,210 1,465,168 14,814,477 (5,000,000) 2,274,529
RETAIL CENTER
Edison Ford Square
Fort Myers, FL (e) - 2,791,707 5,932,380 (3,303,346) 804,699
Northway Mall
Pittsburgh, PA 15,000,000 4,523,305 17,186,915 (6,000,000) 17,152,130
---------- ---------- ---------- ----------- ----------
$23,097,459 $13,939,311 $51,570,911 $(21,661,730) $22,035,650
========== ========== ========== =========== ==========
</TABLE>
See accompanying notes to Schedule III.
<PAGE>
McNEIL REAL ESTATE FUND XXVI, LTD.
SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
December 31, 1995
<TABLE>
Gross Amount at
Which Carried at Close of Period
------------------------------------------------ Accumulated
Buildings and Depreciation
Description Land Improvements Total (a) and Amortization
- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
APARTMENTS:
Amargosa Creek
Lancaster, CA (b) $ 794,635 $ 8,517,021 $ 9,311,656 $(3,340,699)
OFFICE BUILDINGS
Continental Plaza
Scottsdale, AZ (c) 1,975,324 1,955,198 3,930,522 (1,669,636)
Westwood Center
Tampa, FL (d) 1,015,168 12,539,006 13,554,174 (5,608,394)
RETAIL CENTER
Edison Ford Square
Fort Myers, FL (e) 2,438,636 3,786,804 6,225,440 (2,243,237)
Northwest Plaza
Pittsburgh, PA (f) 2,965,329 29,897,021 32,862,350 (8,393,175)
---------- ---------- ---------- -----------
$ 9,189,092 $56,695,050 $65,884,142 $(21,255,141)
========== ========== ========== ===========
</TABLE>
(a) For Federal Income tax purposes, the properties are depreciated over lives
ranging from 15-25 years using ACRS or MACRS methods. The aggregate cost of
real estate investments for Federal income tax purposes was approximately
$88,408,467 and accumulated depreciation was $18,141,496 at December 31,
1995.
(b) The carrying value of Amargosa Creek apartments was reduced by $1,696,024
in 1992.
(c) The carrying value of Continental Plaza was reduced by $1,239,353 in 1993,
$1,803,007 in 1992, $620,000 in 1991 and $2,000,000 in 1989.
(d) The carrying value of Westwood Center was reduced by $5,000,000 in 1989.
(e) The carrying value of Edison Ford Square was reduced by $2,200,000 in 1995
and $1,103,346 in 1992.
(f) The carrying value of Northway Mall was reduced by $6,000,000 in 1993.
See accompanying notes to Schedule III.
<PAGE>
McNEIL REAL ESTATE FUND XXVI, LTD.
SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
December 31, 1995
<TABLE>
Date of Date Depreciable
Description Construction Acquired lives (years)
- ----------- ------------ -------- ------------
APARTMENTS:
<S> <C> <C> <C>
Amargosa Creek
Lancaster, CA (b) 1984/85 12/86 5-25
OFFICE BUILDINGS
Continental Plaza
Scottsdale, AZ (c) 1984 11/86 5-25
Westwood Center
Tampa, FL (d) 1984 03/87 5-25
RETAIL CENTER
Edison Ford Square
Fort Myers, FL (e) 1960 07/87 5-25
Northway Mall
Pittsburgh, PA (f) 1962 06/87 5-25
</TABLE>
<PAGE>
McNEIL REAL ESTATE FUND XXVI, L.P.
Notes to Schedule III
Real Estate Investments and Accumulated Depreciation and Amortization
A summary of activity for the Partnership's real estate investments and
accumulated depreciation and amortization is as follows:
<TABLE>
For the Years Ended December 31,
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Real estate investments:
Balance at beginning of year............... $60,934,261 $56,671,436 $62,463,551
Improvements............................... 9,020,982 4,262,825 1,447,238
Write-down for permanent
impairment of real estate............... (2,200,000) - (7,239,353)
Demolition and replacement of assets
due to capital improvements............. (1,871,101) - -
---------- ---------- ----------
Balance at end of year..................... $65,884,142 $60,934,261 $56,671,436
========== ========== ==========
Accumulated depreciation and amortization:
Balance at beginning of year............... $19,195,571 $16,754,214 $14,262,435
Depreciation and amortization.............. 2,682,731 2,441,357 2,491,779
Demolition and replacement of assets
due to capital improvements............. (623,161) - -
---------- ---------- ----------
Balance at end of year..................... $21,255,141 $19,195,571 $16,754,214
========== ========== ==========
</TABLE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
Neither the Partnership nor the General Partner has any directors or executive
officers. The names and ages of, as well as the positions held by, the officers
and directors of McNeil Investors, Inc., the general partner of the General
Partner, are as follows:
<TABLE>
Other Principal Occupations and Other
Name and Position Age Directorships During the Past 5 Years
- ----------------- --- -------------------------------------
<S> <C> <C>
Robert A. McNeil, 75 Mr. McNeil is also Chairman of the Board and Director of McNeil Real
Chairman of the Estate Management, Inc. ("McREMI") which is an affiliate of the General
Board and Director Partner. He has held the foregoing positions since the formation of such
entity in 1990. Mr. McNeil received his B.A. degree from Stanford
University in 1942 and his L.L.B. degree from Stanford Law School in
1948. He is a member of the State Bar of California and has been involved
in real estate financing since the late 1940's and real estate
acquisitions, syndications and dispositions since 1960. From 1986 until
active operations of McREMI and McNeil Partners, L.P. began in February
1991, Mr. McNeil was a private investor. Mr. McNeil is a member of the
International Board of Directors of the Salk Institute, which promotes
research in improvements in health care.
Carole J. McNeil 52 Mrs. McNeil is Co-Chairman, with husband Robert A. McNeil, of McNeil
Co-Chairman of the Investors, Inc. Mrs. McNeil has twenty years of real estate experience,
Board most recently as a private investor from 1986 to 1993. In 1982, she
founded Ivory & Associates, a commercial real estate brokerage firm in
San Francisco, CA. Prior to that, she was a commercial real estate
associate with the Madison Company and, earlier, a commercial sales
associate and analyst with Marcus and Millichap in San Francisco. In 1978,
Mrs. McNeil established Escrow Training Centers, California's first
accredited commercial training program for title company escrow officers
and real estate agents needing college credits to qualify for brokerage
licenses. She began in real estate as Manager and Marketing Director of
Title Insurance and Trust in Marin County, CA. Mrs. McNeil serves on the
International Board of Directors of the Salk Institute.
<PAGE>
Other Principal Occupations and Other
Name and Position Age Directorships During the Past 5 Years
- ----------------- --- -------------------------------------
Donald K. Reed, 50 Mr. Reed is President, Chief Executive Officer and Director of McREMI
Director, President, which is an affiliate of the General Partner. Prior to joining McREMI in
and Chief Executive March 1993, Mr. Reed was President, Chief Operating Officer and Director
Officer of Duddlesten Management Corporation and Duddlesten Realty Advisors, Inc.,
with responsibility for a management portfolio of office, retail,
multi-family and mixed-use land projects representing $2 billion in asset
value. He was also Chief Operating Officer, Director and member of the
Executive Committee of all Duddlesten affiliates. Mr. Reed started with the
Duddlesten companies in 1976 and served as Senior Vice President and Chief
Financial Officer and as Executive Vice President and Chief Operating
Officer of Duddlesten Management Corporation before his promotion to
President in 1982. He was President and Chief Operating Officer of
Duddlesten Realty Advisors, Inc., which has been engaged in real estate
acquisitions, marketing and dispositions, since its formation in 1989.
Ron K. Taylor 38 Mr. Taylor is a Senior Vice President of McREMI and has been in this
Vice President capacity since McREMI commenced active operations in 1991. He also serves
as Acting Chief Financial Officer of McREMI since the resignation of
Robert C. Irvine on January 31, 1996. Mr. Taylor is primarily responsible
for Asset Management functions at McREMI, including property
dispositions, commercial leasing, real estate finance and portfolio
management. Prior to joining McREMI, Mr. Taylor served as an Executive
Vice President for a national syndication/property management company.
Mr. Taylor has been involved in the real estate industry since 1983.
</TABLE>
Each director shall serve until his successor shall have been duly elected and
qualified.
Section 16 (a) of the Securities Exchange Act of 1934 requires the Partnership's
General Partner and the directors and executive offers of the General Partner
(Including McNeil Investors, inc. as the general partner of the General Partner
and the officers and directors of McNeil Investors, Inc.) to file, with the
Securities and Exchange Commission, reports of ownership and changes in
ownership of the Partnership's Units. The Partnership is required to identify
any of those persons who failed to file such reports on a timely basis.
During 1995, Mrs. McNeil inadvertently failed to file on a timely basis one
report relating to one transaction. In making this disclosure, the Partnership
has relied solely on written representations of these and other individuals and
on copies of the reports that they have filed with the Securities and Exchange
Commission.
ITEM 11. EXECUTIVE COMPENSATION
- ------- ----------------------
No direct compensation was paid or payable by the Partnership to directors or
officers (since it does not have any directors or officers) for the year ended
December 31, 1995, nor was any direct compensation paid or payable by the
Partnership to directors or officers of the general partner of the General
Partner for the year ended December 31, 1995. The Partnership has no plans to
pay any such remuneration to any directors or officers of the General Partner in
the future.
See Item 13 - Certain Relationships and Related Transactions for amounts of
compensation and reimbursements paid by the Partnership to the General Partner
and its affiliates.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
(A) Security ownership of certain beneficial owners.
No individual or group, as defined by Section 13(d)(3) of the Securities
Exchange Act of 1934, known to the Partnership is the beneficial owner of
more than 5 percent of the Partnership's securities.
(B) Security ownership of Management.
The General Partner and the officers or directors of its general partner,
collectively, own 2,950,000 Units, which is 3% of the outstanding any
Units.
(C) Change in control.
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
The amendments to the Partnership compensation structure included in the Amended
Partnership Agreement provide for an asset management fee to replace all other
forms of General Partner compensation other than property management fees and
reimbursements of certain costs. Through 1999, the asset management fee is
calculated as 1% of the Partnership's tangible asset value. Tangible asset value
is determined by using the greater of (i) an amount calculated by applying a
capitalization rate of 9 percent to the annualized net operating income of each
property or (ii) a value of $10,000 per apartment unit for residential property
and $50 per gross square foot for commercial property to arrive at the property
tangible asset value. The property tangible asset value is then added to the
book value of all other assets excluding intangible items. The fee percentage
decreases subsequent to 1999. For the year ended December 31, 1995, the
Partnership paid or accrued $519,276 of such asset management fees.
The Partnership pays property management fees equal to 5% of the gross receipts
of its residential property and 6% for commercial properties to McREMI, an
affiliate of the General Partner, for providing property management services.
Additionally, the Partnership reimburses McREMI for its costs, including
overhead of administering the Partnership's affairs. For the year ended December
31 1995, the Partnership paid or accrued $737,852 of such property management
fees and reimbursements. See Item 1 - Business, Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations and Item 8 - Note
2 - "Transactions With Affiliates".
The General Partner has, at its discretion, advanced funds to the Partnership.
As of December 31, 1995, the Partnership had received $168,330 of such advances
(including accrued interest of $37,812) that were used to meet working capital
requirements. The advances, which are unsecured and due on demand, accrue
interest at a rate equal to the prime lending rate of the Bank of America, plus
1%. In March 1993, the Partnership obtained a loan from McNeil Real Estate Fund
XXVII, L.P., an affiliate of the General Partner, which allows the Partnership
to borrow funds totaling $1,536,000. Of this amount available, $952,538 was
borrowed in 1993. The note requires monthly interest-only payments equal to the
prime lending rate of Bank of America plus 2.5% with the principal balance due
March 1, 1996. At December 31, 1995, the prime lending rate was 8.5%. The loan
was repaid in January 1996.
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
- ------- -----------------------------------------------------------------
See accompanying Index to Financial Statements at Item 8.
(A) Exhibits
--------
Exhibit
Number Description
------- -----------
4. Amended and Restated Limited Partnership
Agreement dated March 30, 1992. (Incorporated
by reference to Current Report of the
Registrant on Form 8-K dated March 30, 1992,
as filed on April 10, 1992).
10.1 Assignment of Partnership Advances dated March
13, 1991 between Southmark Investment Group
86, Inc. and McNeil Partners, L.P.
(Incorporated by reference to the Annual
Report of the registrant on Form 10-K for the
period ended December 31, 1990, as filed on
March 29, 1991).
10.5 Property Management Agreement dated March 30,
1992, between McNeil Real Estate Fund XXVI,
L.P. and McNeil Real Estate Management,
Inc.(1)
10.6 Amendment of Property Management Agreement
dated March 5, 1993 by McNeil Real Estate Fund
XXVI, L.P. and McNeil Real Estate Management,
Inc.(1)
10.7 Promissory Note dated October 7, 1993, between
McNeil Real Estate Fund XXVI, L.P. .and John
Hancock Mutual Life Insurance Company relating
to Amargosa Creek Apartments.(2)
10.8 Secured Promissory Note dated October 27,
1993, between McNeil Real Estate Fund XXVI,
L.P. and Sun Life Assurance Company of Canada
(U.S.) relating to Westwood Center.(2)
10.9 Promissory Note dated March 1, 1993, between
McNeil Real Estate Fund XXVI, L.P. and McNeil
Real Estate Fund XXVII, L.P.(2)
10.10 Mortgage note payable dated August 24,1994
between McNeil Real Estate Fund XXVI L.P. and
PNC Bank, National Association relating to
Northway Mall.(Incorporated by reference to
the Quarterly Report of the registrant on Form
10-Q for the period ended September 30, 1994,
as filed on November 14, 1994).
10.11 Promissory note payable dated December 15,
1995, between McNeil Real Estate Fund XXVI,
L.P. and The Variable Annuity Life Insurance.
11. Statement regarding computation of Net Loss
per Limited Partnership Unit (see Note 1 to
Financial Statements).
(1) Incorporated by reference to the Annual Report
of the registrant on Form 10-K for the period
ended December 31, 1992, as filed on March 30,
1993.
(2) Incorporated by reference to the Annual Report
of the registrant on Form 10-K for the period
ended December 31, 1993, as filed on March 31,
1994.
(B) Reports on Form 8-K. There were no reports on Form 8-K filed by the
Partnership during the quarter ended December 31, 1995.
<PAGE>
McNEIL REAL ESTATE FUND XXVI, L.P.
A Limited Partnership
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
McNEIL REAL ESTATE FUND XXVI, L.P.
By: McNeil Partners, L.P., General Partner
By: McNeil Investors, Inc., General Partner
March 29, 1996 By: /s/ Robert A. McNeil
- ---------------------------------- --------------------------------------
Date Robert A. McNeil
Chairman of the Board and Director
Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
March 29, 1996 By: /s/ Donald K. Reed
- ----------------------------------- --------------------------------------
Date Donald K. Reed
President and Director of McNeil Investors, Inc.
March 29, 1996 By: /s/ Ron K. Taylor
- ----------------------------------- --------------------------------------
Date Ron K. Taylor
Acting Chief Financial Officer
of McNeil Investors, Inc.
March 29, 1996 By: /s/ Carol A. Fahs
- ----------------------------------- --------------------------------------
Date Carol A. Fahs
Chief Accounting Officer of McNeil Real Estate
Management, Inc.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 6,761,516
<SECURITIES> 0
<RECEIVABLES> 1,693,093
<ALLOWANCES> (596,156)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 65,884,142
<DEPRECIATION> (21,255,141)
<TOTAL-ASSETS> 54,217,223
<CURRENT-LIABILITIES> 0
<BONDS> 23,097,459
<COMMON> 0
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 54,217,223
<SALES> 7,568,361
<TOTAL-REVENUES> 7,726,442
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,640,942
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,148,546
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,063,046)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,063,046)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
PROMISSORY NOTE
$15,000,000 00 Pittsburgh, Pennsylvania December 15, 1995
FOR VALUE RECEIVED, the undersigned, MCNEIL REAL ESTATE FUND XXVI,
L.P., a California limited partnership (hereinafter called "Maker"), with
offices at 13760 Noel Road, Suite 700, LB70, Dallas, Texas 75240, hereby agrees
and promises to pay to the order of THE VARIABLE ANNUITY LIFE INSURANCE COMPANY,
a Texas corporation (hereinafter called "Payee"), at 2929 Allen Parkway,
Houston, Harris County, Texas, 77019 Attn: Director - Mortgage Loans, or at such
other place as the holder hereof may from time to time designate in writing, the
principal sum of FIFTEEN MILLION AND NO/100 DOLLARS ($15,000,000.00) in lawful
money of the United States of America, with interest on the principal balance
from time to time remaining unpaid from the date of advancement until maturity
at the rate of seven and one-half percent (7.50%) per annum, said principal and
interest being payable in the manner and form as follows:
An installment of interest on the unpaid principal balance hereof from the date
of funding through December 31, 1995, shall be due and payable at the funding of
this Note.
Commencing January 1, 1996, this Note shall be payable in eighty-three (83)
consecutive monthly installments of principal and interest in the amount of ONE
HUNDRED TEN THOUSAND EIGHT HUNDRED FORTY-NINE AND NO/100 DOLLARS ($110,849.00)
each (calculated on the basis of a 360-day year and an amortization period of
twenty-five [25] years); the first installment shall be due and payable on
February 1, 1996, and a like installment shall be due and payable on the first
day of each of the next eighty-two (82) calendar months.
A FINAL INSTALLMENT IN THE AMOUNT OF THE ENTIRE UNPAID PRINCIPAL BALANCE HEREOF
TOGETHER WITH INTEREST ACCRUED THEREON SHALL BE DUE AND PAYABLE ON DECEMBER 1,
2002 (THE "MATURITY DATE").
Each payment shall be credited first to prepayment fees or other
charges hereunder (other than interest), next on interest then due and the
remainder on principal, and interest shall thereupon cease upon the principal so
credited.
Should default be made in payment of any of the indebtedness evidenced
hereby, after the entire principal amount hereof shall have become due and
payable, whether by acceleration, at maturity or otherwise, the entire unpaid
balance of that principal shall bear interest at the lesser of (I) the maximum
rate of interest permitted by applicable state and federal law or (ii) the rate
of eighteen percent (18%) per annum.
In the event that any payment required hereunder or under the "Security
Instruments" (as hereinafter defined) shall not be made within ten (10) days
after the date due, a late charge equal to the lesser of (I) an amount which,
when added to all other amounts constituting "interest" under applicable state
or federal law, does not exceed the maximum non-usurious amount permitted by
applicable state or federal law, or (ii) four percent (4%) of the amount of any
such delinquent payment so overdue may be charged by Payee for the purpose of
defraying the expense incident to handling such delinquent payments. Such late
charge represents the reasonable estimate of Payee and Maker of a fair average
compensation for the loss that may be sustained by Payee due to the failure of
Maker to make timely payments. Such late charge shall be paid without prejudice
to the right of Payee to collect any other amounts provided to be paid or to
declare a default hereunder or under the Security Instruments.
1. Maker shall have the right to prepay the entire principal sum (but
not any lesser amount) of this Note on any regular monthly installment date for
the payment of principal and interest hereunder, provided that (I) Payee shall
have received at least sixty (60) days' prior written notice (the "Notice") of
such full prepayment, (ii) at the time specified in the Notice for any
prepayment there shall be no default under this Note or under any of the other
Security Instruments, and (iii) such prepayment is accompanied by a prepayment
fee in an amount equal to the lesser of (x) an amount which, when added to all
other sums received, charged, or contracted for by Payee which are interest or
are deemed to be interest by applicable laws, does not exceed the maximum
non-usurious rate that may be received, charged, or contracted for by Payee
under applicable laws from time to time in effect (the "Maximum Lawful Rate") or
(y) the greater of an amount calculated as set forth in Paragraphs (a) or (b)
(as applicable), below:
(a) at the time of receipt by Payee of the Notice, the difference between
(I) the then present value of all unpaid installments of principal
and interest due and payable under this Note, calculated from the
date of the proposed prepayment to the Maturity I) rate, discounted
at the "Reinvestment Rate" (as hereinafter defined), and (ii) the
outstanding principal balance under this Note on the date of the
proposed prepayment; or
(b) one percent (1%) of the then outstanding principal balance of this Note.
As used in this Note, "Reinvestment Rate" shall be the yield to maturity on a
United States treasury bond or note (the choice of which security to be used for
such purposes being in the sole and absolute discretion of Payee), having a
maturity date of December 1, 2002 (or the maturity date closest thereto if no
such bond or note has a maturity date of December 1, 2002).
2. If Payee shall at any time come into possession of proceeds
resulting from an acceleration of the maturity of this Note, tender prior to
foreclosure, foreclosure, or any other reason (other than as a result of
application of insurance or condemnation proceeds), such possession shall be
deemed to be and shall be treated as a voluntary prepayment hereunder and
consequently there shall be added to the outstanding unpaid principal sum of
this Note as additional indebtedness immediately due and payable hereunder and
secured by the Security Instruments, a prepayment fee equal to greater of that
provided for in Paragraph (lXa) or (b), above, whichever is applicable.
3. Upon receipt by Payee of the Notice, Payee shall, within thirty (30)
days thereafter, give notice to Maker of the Reinvestment Rate and, if
applicable, the amount of the prepayment fee payable under Paragraph (1)(a),
above. Determination of the Reinvestment Rate and the amount of any such
prepayment fee by Payee shall be ending on Maker absent mathematical error.
4. If Maker gives Payee Notice of prepayment as herein provided and
thereafter fails to prepay this Note (with payment of the applicable prepayment
fee) at which time specified in the Notice, such failure shall be a default
hereunder and, without further notice by Payee, entitle Payee, at its option, to
accelerate the maturity of this Note and exercise any and all remedies available
to Payee under the Security , instruments.
5. Notwithstanding any provisions to the contrary contained herein,
there shall be no prepayment premium or fee payable hereunder with respect to
prepayments made in accordance with the terms hereof during the last 90 days
prior to the Maturity Date provided that Maker has timely delivered the Notice
to Payee as required herein.
This Note is secured by all mortgages, security agreements,
assignments, and lien instruments (the "Security Instruments") executed by
Maker, the "Principals" of Maker (as hereinafter defined), or any other party
acting on behalf of Maker in favor of the Payee, pertaining to and securing the
Note, including those executed simultaneously herewith, those executed
heretofore and those executed hereafter and including specifically and without
limitation that certain Mortgage and Security Agreement of even date herewith
(the "Mortgage") executed by Maker, as Mortgagor, in favor of Payee, as
Mortgagee, covering approximately 29.30 acres of land located in Allegheny
County, Pennsylvania, together with all buildings and improvements now or
hereafter erected thereon (hereinafter called the "Mortgaged Property"), all as
more fully set forth and described in such instrument.
This Note shall become immediately due and payable at the option of the
Payee or other holder hereof, without presentment or demand or any notice
(including, without limitation, notice of intent to accelerate or notice of
acceleration) to the Maker, on Maker's failure to pay any installment hereon on
the date such installment is due, upon default under the terms of any Security
Instruments, or if any event occurs or condition exists which authorizes the
acceleration of maturity hereof under any agreement made by the Maker in
connection with the Security Instruments.
If this Note is collected by suit, through probate, or bankruptcy
court, or by any other judicial proceedings, or if this Note is not paid at
maturity, howsoever such maturity may be brought about, and is placed in the
hands of an attorney for collection, then the Maker promises to pay in addition
to all other amounts owing hereunder, reasonable attorney's fees.
It is the intention of the parties hereto to comply with the usury laws
of the State of Pennsylvania and of the United States of America; accordingly,
it is agreed that notwithstanding any provision to the contrary in this Note or
in any Security Instrument, no such provision shall require the charging of,
payment of, or permit the collection of sums deemed to be interest in excess of
the maximum permitted by applicable state and federal law. If any excess of
interest in such respect is provided for, or shall be adjudicated to be so
provided for, in this Note or in any Security Instrument, then in such event (a)
the provisions of this paragraph shall govern and control, (b) neither the Maker
nor its successors or assigns or any other party liable for the payment hereof
shall be obligated to pay the amount of such interest to the extent that it is
in excess of the maximum amount permitted by applicable state and federal law,
and the same shall be construed as a mutual mistake of the parties and, (c) any
such excess which may have been collected shall be, at the option of Payee or
any legal holder hereof, either applied as a credit against the then unpaid
principal amount hereof or refunded to Maker.
The Maker and all sureties, endorsers, and guarantors of this Note, to
the extent permitted by law (I) waive demand, presentment for payment, notice of
non-payment, protest, notice of protest, notice of intent to accelerate,
acceleration and all other notice, filing of suit and diligence in collecting
this Note or enforcing any of the security herefor, (ii) agree to any
substitution, exchange or release of any party primarily or secondarily liable
hereon, (iii) agree that the Payee or other holder hereof shall not be required
first to institute suit or exhaust its remedies hereon against the Maker or
others liable or to become liable hereon or to enforce its rights against any
security hereof in order to enforce payment of this Note by them, and (iv)
consent to any extension or postponement of time of payment of this note and to
any other indulgence with respect hereto Without notice thereof to any of them.
If an event of default occurs, Maker hereby authorizes and empowers the
Prothonotary, Clerk of Court or similar official or any attorney of any court of
record of Pennsylvania, or elsewhere, to appear for and to confess judgment
against Maker in favor of Payee, its successors or assigns, as of any term,
past, present or future, with or without declaration, or to sign for Maker an
amicable action or actions and to confess judgment therein against Maker, for
the debt evidenced by this Note and all other sums payable hereunder or on
account hereof with interest thereon and/or under the Security Instruments,
together with costs of suit and attorneys' fee for collection of $10,000.00,
with release of all errors, and on which judgment Payee may, on failure of Maker
to comply with any of the terms, provisions and conditions of this Note, or any
of the Security Instruments, issue or cause to be issued, an execution or
executions. The authority herein granted to confess judgment shall not be
exhausted by any exercise thereof, but shall continue from time to time and at
all times until full payment of all amounts due hereunder.
This Note is intended to be performed in accordance with and only to
the extent permitted by all applicable law. If any portion of this Note or the
application thereof to any person or circumstance shall, for any reason and to
any extent, be invalid or unenforceable, neither the remainder of this
instrument nor the application of such provisions to other persons or
circumstances shall be affected thereby, but rather shall be enforced to the
greatest extent permitted by law.
The liability of Maker and the Principals of Maker for failure to
perform Maker's obligations hereunder or under the Mortgage and Security
Instruments is expressly limited to the security for payment of the Note, the
same being all properties, rights, and estates subject to the Security
Instruments and Payee agrees not to seek any damages or money judgment against
Maker or the Principals of Maker for any default on the part of Maker under the
Note or any of the Security Instruments. Notwithstanding anything to the
contrary contained in the Note or in any of the Security Instruments, and
notwithstanding any delay on the part of Payee in exercising any right, power or
remedy in connection with any default under the Note, the Mortgage or any of the
other Security Instruments, Payee shall have full recourse against Maker and the
Principals of Maker and Maker and the Principals of Maker shall be personally
liable, jointly and severally, for and shall promptly account (by delivery of
funds or proof that the same have been theretofore expended for costs incurred
in connection with the Mortgaged Property) to Payee for (a) all condemnation
awards and proceeds and insurance proceeds (to the extent same have not
therefore been applied toward payment of the sums due under the Note or used for
repair of the Mortgaged Property or otherwise used with Payee's written consent)
and, with respect to such insurance proceeds which represent proceeds paid under
any rent insurance, to the additional extent such rent insurance proceeds have
not heretofore been applied toward the payment of taxes and insurance premiums
or otherwise used with Payee's written consent); (b) all amounts necessary to
repair any damage to the Mortgaged Property, excluding normal wear and tear,
caused by acts or omissions of Maker, its agents, employees, or contractors; (c)
all tenant security deposits as to which the tenants still have rights under
applicable law; (d) failure to pay, in accordance with the Mortgage, taxes,
assessments or other charges which can create liens on any portion of the
Mortgaged Property and are payable hereunder or under the Security Instruments
(to the full extent of any such taxes, assessments or other charges); (e)
failure to pay charges for labor or materials or other charges which can create
liens on any portion of the Mortgaged Property (to the full extent of the amount
rightfully claimed by any such claimant); (f) prepaid rent (rent paid more than
one (1) month in advance) and rental or other income derived from the Mortgaged
Property (to the extent such rental or other income has not been applied toward
payment of sums due hereunder or for repair of the Mortgaged Property or for
payment of bonafide, third party operating costs of the Mortgaged Property) from
and after receipt by Maker of notice of the occurrence of a default under the
Note or the Security Instruments (g) any loss incurred by Payee as a result of
Maker's forfeiture of the Mortgaged Property resulting from criminal activity by
any person whether or not such criminal activity is conducted on or in any
manner relates to the Mortgaged Property; and (h) all sums due Payee (excluding
payments of principal and interest under this Note) following exercise by Payee
of its right to perform Maker's obligations under the Security Instruments to
preserve, protect and defend the Mortgaged Property after such notice and
opportunity to cure as may be provided in the Security Instruments.
Additionally, Payee shall have the right to offset against any sums owed by
Maker under items (a) through (h), above, any funds held by Payee (including,
without limitation, escrows for taxes and insurance) pursuant to the Note and
any of the Security Instruments. Nothing herein contained shall be construed to
prevent Payee from exercising and enforcing any other remedy allowed at law or
in equity or by any statute or by the terms of the Note or the Security
Instruments nor shall anything herein contained be deemed to be a release or
impairment of the Mortgage, any of the other Security Instruments or the
indebtedness evidenced by the Note or secured thereby or shall be deemed to
prejudice the right of Payee as against Maker or any other entity now or
hereafter liable under any guaranty, bond, or lease covering the Mortgaged
Property or any portion thereof, policy of insurance or other agreement which
Maker may have delivered to Payee in compliance with any of the terms,
covenants, and conditions of the Note or any of the Security Instruments, or
preclude the Payee from exercising its right to foreclose under the Mortgage
(either by judicial means or nonjudicial means) in the event of a default under
the Note or any of the Security Instruments, or except as may be limited by the
foregoing provisions of this paragraph or any other express provisions of the
Security Documents or this Note, from enforcing any of the Payee's rights under
the Note or under any of the Security Instruments including, without limitation,
the right to the appointment of a receiver for the Mortgaged Property, or limit
the rights or remedies which Payee would otherwise be entitled to at law or in
equity absent the limitation of liability provisions set forth in this paragraph
against Maker for fraud perpetrated by Maker against Payee. In addition,
notwithstanding any other provisions of the Note or the Security Instruments,
Maker, jointly and severally, shall be personally liable for any loss, damage or
injury sustained by Payee arising from the breach by Maker of any warranty or
representation of Maker contained in any affidavit made by or on behalf of Maker
or in any of the Security Instruments regarding hazardous wastes or other
hazardous or toxic substances. Additionally, Maker shall be jointly and
severally liable for any breach of the warranties, representations, covenants or
indemnities contained in Article 11 of the Mortgage relating to "Hazardous
Materials" (as therein defined).
For purposes hereof the "Principals" of Maker shall mean McNeil Partners,
L.P. (the general partner of Maker) and McNeil Investors, Inc. (the general
partner of the general partner of Maker).
This Note and the Security Instruments shall be governed by and
construed in accordance with the laws of the State of Pennsylvania.
McNeil Real Estate Fund XXVI, L.P., a
California limited partnership, by its
undersigned General Partner
(SEAL)
By: McNeil Partners, L.P., a Delaware
limited partnership, by its undersigned
sole General Partner
(SEAL)
By: McNeil Investors,
Delaware corporation
(SEAL)
By: /s/ Donald K. Reed
------------------
Name: Donald K. Reed
Title: President
The undersigned McNeil Partners, L.P. and McNeil Investors, Inc. join
in the execution hereof to acknowledge their liability as "Principals" of Maker
subject to, as limited by and in accordance with, the terms of this Promissory
Note.
McNeil Partners, L.P., a Delaware
limited partnership, by its undersigned
sole General Partner
(SEAL)
By: McNeil Investors, Inc., a
Delaware corporation
(SEAL)
By:
Name:
Title:
<PAGE>
McNeil Investors, Inc., a Delaware
corporation
By:
Name
Title:
(SEAL)
SIGNATURE PAGE TO $15,000,000.00 PROMISSORY NOTE
DATED DECEMBER ls3 ,1995, EXECUTED BY
MCNEIL REAL ESTATE FUND XXVI, L.P.
PAYABLE TO THE ORDER OF
THE VARIABLE ANNUITY LIFER INSURANCE COMPANY
