UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K405
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
-------------------------------------------------
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.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 33-0168395
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13760 Noel Road, Suite 600, LB70, Dallas, Texas, 75240
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (972) 448-5800
-----------------------------
Securities registered pursuant to Section 12(b) of the Act: None
- ----------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act: Limited partnership
units
- ----------------------------------------------------------
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. [ ]
83,535,671 of the registrant's 86,530,671 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 35
TOTAL OF 36 PAGES
<PAGE>
PART I
ITEM 1. BUSINESS
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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 principal place of business for the Partnership and the
General Partner is 13760 Noel Road, Suite 600, 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). Between 1995 and 1998, 23,242 Units were relinquished leaving
86,530,671 Units outstanding as of December 31, 1998.
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, were 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 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
- ------------------
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, 1998, the Partnership owned four 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:
As previously announced, the Partnership has retained PaineWebber, Incorporated
("PaineWebber") as its exclusive financial advisor to explore alternatives to
maximize the value of the Partnership, including, without limitation, a
transaction in which limited partnership interests in the Partnership are
converted into cash. The Partnership, through PaineWebber, provided financial
and other information to interested parties as part of an auction process and
until early March 1999 was conducting discussions with one bidder in an attempt
to reach a definitive agreement with respect to a sale transaction. In early
March 1999, because the Partnership had been unable to conclude negotiations for
a transaction with such bidder, the Partnership terminated such discussions and
commenced discussions with respect to a sale transaction with another
well-financed bidder who had been involved in the original auction process.
During the last full week of March, the Partnership entered into a 45 day
exclusivity agreement with such party. It is possible that the General Partner
and its affiliates will receive non-cash consideration for their ownership
interests in connection with any such transaction. There can be no assurance
regarding whether any such agreement will be reached nor the terms thereof.
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
<PAGE>
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.
Forward-Looking Information:
Within this document, certain statements are made as to the expected occupancy
trends, financial condition, results of operations, and cash flows of the
Partnership for periods after December 31, 1998. All of these statements are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These statements are not
historical and involve risks and uncertainties. The Partnership's actual
occupancy trends, financial condition, results of operations, and cash flows for
future periods may differ materially due to several factors. These factors
include, but are not limited to, the Partnership's ability to control costs,
make necessary capital improvements, negotiate sales or refinancings of its
properties and respond to changing economic and competitive factors.
Environmental Matters:
Environmental laws create potential liabilities that may affect property owners.
The environmental laws of Federal and certain state governments, for example,
impose liability on current and certain past owners of property from which there
is a release or threat of release of hazardous substances. This liability
includes costs of investigation and remediation of the hazardous substances and
natural resource damages. Liability for costs of investigation and remediation
is strict and may be imposed irrespective of whether the property owner was at
fault, although there are a number of defenses. Both governments and third
parties may seek recoveries under these laws.
Third parties also may seek recovery under the common law for damages to their
property or person, against owners of property from which there has been a
release of hazardous and other substances.
The presence of contamination or the failure to remediate contaminations may
adversely affect the owner's ability to sell or lease real estate or to borrow
using the real estate as collateral.
Various buildings at properties do or may contain building materials that are
the subject of various regulatory programs intended to protect human health.
Such building materials include, for example, asbestos, lead-based paint, and
lead plumbing components. The Company has implemented programs to deal with the
presence of those materials, which include, as appropriate, reduction of
potential exposure situations. The Company does not believe that the costs of
such programs are likely to have a material adverse effect. Failure to implement
such programs can result in regulatory violations or liability claims resulting
from alleged exposure to such materials.
In connection with the proposed sale transaction as more fully described above,
Phase I environmental site assessments have been completed for each property
owned by the Partnership. Such environmental assessments performed on the
properties have not revealed any environmental liability that the Partnership
believes would have a material adverse effect on the Partnership's business,
assets, or results of operations. The Partnership has not been notified by any
governmental authority of any non-compliance, liability or other claim in
connection with any of its properties. There can be no assurances, however, that
environmental liabilities have not developed since such environmental
assessments were prepared, or that future uses or conditions (including, without
limitation, changes in applicable environmental laws and regulations) will not
result in imposition of environmental liability.
Other Information:
In September 1996, High River Limited Partnership, a Delaware limited
partnership controlled by Carl C. Icahn ("High River") made an unsolicited
tender offer (the "HR Offer") to purchase any and all of the outstanding Units
of the Partnership for a purchase price of $0.092 (the original offer price of
$0.096 was reduced by the August 1996 distribution of $0.004 per Unit). In
addition, High River made unsolicited tender offers for certain other
partnerships controlled by the General Partner. The Partnership recommended that
the limited partners reject the HR Offer made with respect to the Partnership
and not tender their Units pursuant to the HR Offer. The HR Offer terminated,
after numerous extensions, on November 22, 1996. The General Partner believes
that as of February 1, 1999, High River has purchased approximately 1.03% of the
Partnership's outstanding Units. In addition, all litigation filed by High
River, Mr. Icahn and his affiliates in connection with the HR Offer has been
dismissed without prejudice.
<PAGE>
ITEM 2. PROPERTIES
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The following table sets forth the real estate investment portfolio of the
Partnership at December 31, 1998. 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 Continental Plaza and Westwood
Center. See Item 8 - Note 5 "Mortgage Notes Payable". 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>
<CAPTION>
Net Basis of 1998 Date
Property Description Property Debt Property Taxes Acquired
- -------- ----------- ------------- ---- -------------- --------
Real Estate Investments:
Amargosa Creek Apartments
<S> <C> <C> <C> <C> <C>
Lancaster, CA 216 units $ 5,035,018 $ 4,648,038 $ 37,440 12/86
Continental Plaza Office Building
Scottsdale, AZ 54,537 sq. ft. 2,226,394 - 116,764 11/86
Northway Mall Retail Center
Pittsburgh, PA 395,000 sq. ft. 21,637,071 14,333,349 437,204 6/87
Westwood Center Office Building
Tampa, FL 126,175 sq. ft. 6,710,205 - 230,676 3/87
------------ ------------ ----------
$ 35,608,688 $ 18,981,387 $ 822,084
============ ============ ==========
- -----------------------------------
</TABLE>
Total: Apartments - 216 Units
Retail Centers - 395,000 sq. ft.
Office Buildings - 180,712 sq. ft.
<PAGE>
The following table sets forth the properties' occupancy rate and rent per
square foot for the last five years:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------- ------------- -------------- ------------- ----------
Amargosa Creek
<S> <C> <C> <C> <C> <C>
Occupancy Rate............ 93% 94% 91% 92% 89%
Rent Per Square Foot...... $ 7.77 $ 7.39 $ 6.96 $ 7.15 $ 7.17
Continental Plaza
Occupancy Rate............ 90% 100% 100% 100% 98%
Rent Per Square Foot...... $13.14 $13.12 $12.55 $12.03 $10.50
Northway Mall
Occupancy Rate............ 94% 94% 90% 87% 61%
Rent Per Square Foot...... $12.55 $11.99 $11.19 $ 8.97 $ 5.74
Westwood Center
Occupancy Rate............ 99% 98% 99% 92% 90%
Rent Per Square Foot...... $15.01 $14.46 $13.44 $11.95 $11.78
</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
- ----------------------
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 proven to be effective, as the
property ended the year at an occupancy rate of 93%, which is slightly below the
market average of 94%. The rental rates at Amargosa Creek are comparable to the
average market rate. Amargosa Creek is expected to continue to demonstrate
stabilized economic growth during 1999 and beyond; however, since the market is
strongly affected by the aerospace industry, any layoffs or growth would
significantly impact the property's performance.
<PAGE>
Continental Plaza
- -----------------
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 90% occupancy rate as compared to a market average of 96%. New
construction in the area is adding an additional 100,000 square feet to the
market. Management is currently searching for tenants to fill the vacated space.
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 395,000 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. A $13.5 million renovation
completed early in 1995 has reestablished the mall in the area. Management is
currently searching for two tenants to occupy approximately 33,000 square feet.
The occupancy rate at December 31, 1998 was 94% and the greater Pittsburgh area
is very stable with occupancies approaching the 96% mark, with shopping centers
adjacent to Northway Mall currently 95% occupied.
Westwood Center
- ---------------
Westwood Center, an eight-story office building built in 1984, is located in the
Westshore Business District of Tampa, Florida. Improvements over the past few
years 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 99% 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. Westwood Center is
located in a stable market and management does not anticipate any difficulty in
re-leasing the space that may come available during the year.
<PAGE>
The following schedule shows lease expirations for each of the Partnership's
commercial properties for 1999 through 2008:
<TABLE>
<CAPTION>
Number of Annual % of Gross
Expirations Square Feet Rent Annual Rent
------------ ----------- ------ -----------
Continental Plaza
<C> <C> <C> <C> <C>
1999 2 1,631 $ 23,834 3%
2000 6 20,481 282,106 37%
2001 11 15,116 246,129 32%
2002 4 6,592 114,664 15%
2003 - - - -
2004 2 6,124 102,177 13%
2005-2008 - - - -
Northway Mall
1999 4 6,321 $ 115,073 5%
2000 9 18,917 240,313 10%
2001 9 34,397 408,074 17%
2002 7 16,114 237,245 10%
2003 3 8,037 90,924 4%
2004 4 157,244 892,646 37%
2005 2 15,958 226,276 9%
2006 - - - -
2007 1 11,096 99,864 4%
2008 1 4,947 71,736 3%
Westwood Center
1999 5 10,683 $ 157,173 8%
2000 3 10,955 177,217 9%
2001 1 35,811 525,828 28%
2002 4 11,535 179,525 10%
2003 3 31,937 453,209 24%
2004 4 25,641 377,663 20%
2005-2008 - - - -
</TABLE>
<PAGE>
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>
<CAPTION>
Nature of
Business Square Footage Lease
Use Leased Annual Rent Expiration
- --------- -------------- ----------- ----------
Continental Plaza
<S> <C> <C> <C>
General Business 5,952 $ 75,888 2000
General Business 10,433 140,846 2000
Northway Mall
Department Store 73,500 $ 294,000 2004
Department Store 69,639 461,954 2004
Westwood Center
General Office 35,811 $ 525,828 2001
General Office 31,266 438,944 2003
General Office 19,838 297,570 2004
</TABLE>
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:
1) James F. Schofield, Gerald C. Gillett, Donna S. Gillett, Jeffrey
Homburger, Elizabeth Jung, Robert Lewis, and Warren Heller et al. v. McNeil
Partners L.P., McNeil Investors, Inc., McNeil Real Estate Management, Inc.,
Robert A. McNeil, Carole J. McNeil, McNeil Pacific Investors Fund 1972,
Ltd., McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd.,
McNeil Real Estate Fund XI, Ltd., McNeil Real Estate Fund XII, Ltd., McNeil
Real Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real
Estate Fund XX, L.P., McNeil Real Estate Fund XXI, L.P., McNeil Real Estate
Fund XXII, L.P., McNeil Real Estate Fund XXIII, L.P., McNeil Real Estate
Fund XXIV, L.P., McNeil Real Estate Fund XXV, L.P., McNeil Real Estate Fund
XXVI, L.P., and McNeil Real Estate Fund XXVII, L.P., Hearth Hollow
Associates, McNeil Midwest Properties I, L.P. and Regency North Associates,
L.P., - Superior Court of the State of California for the County of Los
Angeles, Case No. BC133799 (Class and Derivative Action Complaint).
<PAGE>
The action involves purported class and derivative actions brought by
limited partners of each of the limited partnerships that were named as
nominal defendants as listed above (the "Partnerships"). Plaintiffs allege
that McNeil Investors, Inc., its affiliate McNeil Real Estate Management,
Inc. and three of their senior officers and/or directors (collectively, the
"Defendants") breached their fiduciary duties and certain obligations under
the respective Amended Partnership Agreement. Plaintiffs allege that
Defendants have rendered such Units highly illiquid and artificially
depressed the prices that are available for Units on the resale market.
Plaintiffs also allege that Defendants engaged in a course of conduct to
prevent the acquisition of Units by an affiliate of Carl Icahn by
disseminating purportedly false, misleading and inadequate information.
Plaintiffs further allege that Defendants acted to advance their own
personal interests at the expense of the Partnerships' public unit holders
by failing to sell Partnership properties and failing to make distributions
to unitholders.
On December 16, 1996, the Plaintiffs filed a consolidated and amended
complaint. Plaintiffs are suing for breach of fiduciary duty, breach of
contract and an accounting, alleging, among other things, that the
management fees paid to the McNeil affiliates over the last six years are
excessive, that these fees should be reduced retroactively and that the
respective Amended Partnership Agreements governing the Partnerships are
invalid.
Defendants filed a demurrer to the consolidated and amended complaint and a
motion to strike on February 14, 1997, seeking to dismiss the consolidated
and amended complaint in all respects. A hearing on Defendant's demurrer
and motion to strike was held on May 5, 1997. The Court granted Defendants'
demurrer, dismissing the consolidated and amended complaint with leave to
amend. On October 31, 1997, the Plaintiffs filed a second consolidated and
amended complaint. The case was stayed pending settlement discussions. A
Stipulation of Settlement dated September 15, 1998 has been signed by the
parties. Preliminary Court approval was received on October 6, 1998. A
hearing for Final Approval of Settlement, initially scheduled for December
17, 1998, has been continued to May 25, 1999.
Because McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates,
McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. would
be part of the transaction contemplated in the settlement and Plaintiffs
claim that an effort should be made to sell the McNeil Partnerships,
Plaintiffs have included allegations with respect to McNeil Real Estate
Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I,
L.P. and Regency North Associates, L.P. in the third consolidated and
amended complaint.
Plaintiff's counsel intends to seek an order awarding attorney's fees and
reimbursements of their out-of-pocket expenses. The amount of such award is
undeterminable until final approval is received from the court. Fees and
expenses shall be allocated amongst the Partnerships on a pro rata basis,
based upon tangible asset value of each such partnership, less total
liabilities, calculated in accordance with the Amended Partnership
Agreements for the quarter most recently ended.
<PAGE>
2) 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 (as defined in this Section 1, 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 Affiliated
Partnerships based on the statute of limitations; however, on appeal, the
Dallas Court of Appeals reversed the trial court and remanded for trial the
Affiliated Partnerships' fraud claims against Ernst & Young. The Texas
Supreme Court denied Ernst & Young's application for writ of error on
January 11, 1996. Shortly before trial, the district court judge once again
granted summary judgment against the Affiliated Partnerships on December 2,
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNERSHIP AND
- ------- ------------------------------------------------------------
RELATED SECURITY HOLDER MATTERS
-------------------------------
(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
Limited partnership units 6,204 as of February 1, 1999
(C) Distributions of $2,538,360 and $749,988 were paid to the limited partners
in 1998 and 1997, respectively. During the last week of March 1999, the
Partnership distributed approximately $500,000 to the limited partners of
record as of March 1, 1999. 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
- ------- ------------------------
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>
<CAPTION>
Statements of Years Ended December 31,
Operations 1998 1997 1996 1995 1994
- ------------------ ------------- ------------- -------------- ------------- --------
<S> <C> <C> <C> <C> <C>
Rental revenue............... $ 8,985,277 $ 8,824,653 $ 8,579,073 $ 7,568,361 $ 6,385,998
Write-down for impair-
ment of real estate....... - - (1,087,000) (2,200,000) -
Net loss..................... (695,742) (1,003,689) (2,347,920) (5,063,046) (1,938,063)
Loss per thousand limited
partnership units......... $ (7.96) $ (11.48) $ (26.86) $ (57.91) $ (22.17)
============ =========== ============= ============ ===========
Distributions per thousand
limited partnership
units..................... $ 29.33 $ 8.67 $ 4.33 $ - $ -
============ =========== ============= ============ ===========
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
Balance Sheets 1998 1997 1996 1995 1994
- -------------- ------------ ------------- -------------- ------------- --------------
Real estate investments,
<S> <C> <C> <C> <C> <C>
net....................... $ 35,608,688 $ 37,259,312 $ 38,979,116 $ 44,629,001 $ 41,738,690
Asset held for sale.......... - 3,047,765 3,008,374 -- -
Total assets................. 40,048,693 45,464,752 47,124,512 54,217,223 45,208,188
Mortgage notes payable....... 18,981,387 21,442,045 21,815,746 23,097,459 9,350,045
Partners' equity............. 19,628,145 22,862,247 24,615,924 27,338,809 32,401,855
</TABLE>
<PAGE>
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. On April 27, 1998, the Partnership sold its investment
in Edison Ford Square.
RESULTS OF OPERATIONS
- ---------------------
1998 compared to 1997
Revenue:
Total Partnership revenues for 1998 increased by $292,893 or 3% as compared to
1997. Rental revenue increased $160,624 or 2% while interest income increased
$15,972 or 10%. Interest income increased due to an increase in the average cash
balance being invested in interest bearing accounts. A gain of $116,297 was
recognized in 1998 due to the sale of Edison Ford Square. No such gain was
recorded in 1997.
Expenses:
Total expenses decreased by $15,054 in 1998 as compared to 1997. Edison Ford
Square, sold in 1998, accounted for $180,183 of the decrease. The remaining
$165,129 increase in expenses was mainly due to an increase in property taxes
and general and administrative expenses. In addition, bad debt expense showed an
increase in 1998, which was offset by decreases in interest expense, other
property operating expense and utilities.
Interest expense decreased $71,133 in 1998 primarily due to mortgage note
payoff at Westwood Center in October 1998.
Property taxes for 1998 (excluding Edison Ford Square) increased $126,406 or 17%
as compared 1997 due to an increase in the estimated tax liability at
Continental Plaza, Northway Mall and Westwood Center.
Bad debt expense (excluding Edison Ford Square) increased $17,335 or 17% in 1998
as compared to 1997. This increase can be attributed to the write-off of tenant
balances that were deemed uncollectible at Northway Mall
General and administrative expenses increased by $207,482 in 1998 as compared to
the same period in 1997. The increase was mainly due to the costs incurred to
explore alternatives to maximize the value of the Partnership.
<PAGE>
1997 compared to 1996
Revenue:
Partnership revenues increased by $227,178 or 3% in 1997 as compared to 1996.
Rental revenue increased $245,580 and interest income decreased $18,402.
Rental revenue increases were mainly due to increased occupancies at Amargosa
Creek, Northway Mall and Edison Ford Square. The increase in rental revenue can
also be attributed to the increase in rental rates at four of the Partnership's
five properties.
Expenses:
Total expenses decreased by $1,117,053 or 10% in 1997 as compared to 1996. The
decrease was mainly due to a write-down for impairment of real estate at Edison
Ford Square of $1,087,000 in 1996. No such write-down was recorded in 1997.
Interest expense - affiliates decreased $16,090 due to the repayment of the loan
from McNeil Real Estate Fund XXVII, L.P. in January 1996, as well as the
repayment of all advances from affiliates in May 1996.
Property taxes increased by $78,966 or 12% in 1997 as compared to 1996. This
increase is due to an increase in estimated tax liability at Northway Mall.
During 1996, the Partnership also received a tax refund relating to Westwood; no
such refund was received in 1997.
Bad debt expense increased $91,384 in 1997 as compared to 1996. This increase
can be attributed to the write-off of tenant balances that were deemed
uncollectible at Northway Mall.
General and administrative expenses decreased $101,815 or 37% for the year ended
December 31, 1997 as compared to the same period in 1996. In 1996, the
Partnership incurred costs to evaluate and disseminate information regarding an
unsolicited tender offer. The decrease in 1997 as compared to 1996 was slightly
offset by charges for investor services, which beginning in 1997, were provided
by a third party vendor. In 1996, these costs were paid to an affiliate of the
General Partner and were included in general and administrative - affiliates.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Partnership has experienced positive cash flow from operations of $3,165,025
for the three years ended December 31, 1998. Over the last three years the
Partnership has used cash to fund $3,056,569 in additions to real estate
investments, $3,163,534 in principal payments and debt retirement, $28,183 for
additions to deferred borrowing costs, $1,083,055 for the repayment of advances
and mortgage loans from affiliates and $3,663,313 in limited partner
distributions.
During 1998, the Partnership received $3,324,955 as proceeds from the sale of
Edison Ford Square.
The Partnership generated $2,035,352 through operating activities in 1998 as
compared to $2,718,546 in 1997. The decrease of $683,194 can be attributed to an
increase in cash paid to suppliers and a increase in property taxes paid. These
increases were offset by a decrease in cash paid to affiliates.
<PAGE>
The Partnership generated $2,718,546 through operating activities in 1997 as
compared to cash used in operating activities of $1,588,873 in 1996. The
increase in cash provided by operating activities of $4,307,419 can be
attributed to the decrease of $3,047,898 in the cash paid to affiliates. In
1996, the Partnership used the proceeds from the mortgage note refinancing on
Northway Mall to pay all deferred asset management fees and overhead
reimbursements to McREMI.
Short-term liquidity:
At December 31, 1998, the Partnership held cash and cash equivalents of
$2,256,842. 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
$1.3 million for necessary capital improvements for all properties in 1999.
The Partnership had significant mortgage maturities during 1998. On October 1,
1998, the Partnership paid off the mortgage note payable on Westwood Center in
the amount of $2,091,627 and on November 1, 1998 the Partnership was successful
in negotiating a two-year extension on the mortgage note payable on Amargosa
Creek.
The General Partner has, at its discretion, advanced funds to the Partnership to
fund working capital requirements. All outstanding advances from affiliates and
the related accrued interest were repaid in 1996. The General Partner is not
obligated to advance funds to the Partnership and there is no assurance that the
Partnership will receive additional funds.
Long-term liquidity:
While the present outlook for Partnership's liquidity is favorable, market
conditions may change and property operations could 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. There is no assurance that affiliate
support could be arranged, since neither the General Partner nor any affiliates
have any obligation in this regard.
As previously announced, the Partnership has retained PaineWebber, Incorporated
("PaineWebber") as its exclusive financial advisor to explore alternatives to
maximize the value of the Partnership, including, without limitation, a
transaction in which limited partnership interests in the Partnership are
converted into cash. The Partnership, through PaineWebber, provided financial
and other information to interested parties as part of an auction process and
until early March 1999 was conducting discussions with one bidder in an attempt
to reach a definitive agreement with respect to a sale transaction. In early
March 1999, because the Partnership had been unable to conclude negotiations for
a transaction with such bidder, the Partnership terminated such discussions and
commenced discussions with respect to a sale transaction with another
well-financed bidder who had been involved in the original auction process.
During the last full week of March, the Partnership entered into a 45 day
exclusivity agreement with such party. It is possible that the General Partner
and its affiliates will receive non-cash consideration for their ownership
interests in connection with any such transaction. There can be no assurance
regarding whether any such agreement will be reached nor the terms thereof.
<PAGE>
Distributions:
During 1998, the limited partners received a cash distribution of $2,538,360.
The distribution consisted of funds from operations and cash reserves. During
the last week of March 1999, the Partnership distributed approximately $500,000
to the limited partners of record as of March 1, 1999. 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.
YEAR 2000 DISCLOSURE
- --------------------
State of readiness
- ------------------
The year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in major systems failure or
miscalculations.
Management has assessed its information technology ("IT") infrastructure to
identify any systems that could be affected by the year 2000 problem. The IT
used by the Partnership for financial reporting and significant accounting
functions was made year 2000 compliant during recent systems conversions. The
software utilized for these functions are licensed by third party vendors who
have warranted that their systems are year 2000 compliant.
Management is in the process of evaluating the mechanical and embedded
technological systems at the various properties. Management has inventoried all
such systems and queried suppliers, vendors and manufacturers to determine year
2000 compliance. Management will complete assessment of findings by May 1, 1999.
In circumstances of non-compliance management will work with the vendor to
remedy the problem or seek alternative suppliers who will be in compliance.
Management believes that the remediation of any outstanding year 2000 conversion
issues will not have a material or adverse effect on the Partnership's
operations. However, no estimates can be made as to the potential adverse impact
resulting from the failure of third party service providers and vendors to be
year 2000 compliant.
Cost
- ----
The cost of IT and embedded technology systems testing and upgrades is not
expected to be material to the Partnership. Because all the IT systems have been
upgraded over the last three years, all such systems were compliant, or made
compliant at no additional cost by third party vendors. Management anticipates
the costs of assessing, testing, and if necessary replacing embedded technology
components will be less than $50,000. Such costs will be funded from operations
of the Partnership.
<PAGE>
Risks
- -----
Ultimately, the potential impact of the year 2000 issue will depend not only on
the corrective measures the Partnership undertakes, but also on the way in which
the year 2000 issue is addressed by government agencies and entities that
provide services or supplies to the Partnership. Management has not determined
the most likely worst case scenario to the Partnership. As management studies
the findings of its property systems assessment and testing, management will
develop a better understanding of what would be the worst case scenario.
Management believes that progress on all areas is proceeding and that the
Partnership will experience no adverse effect as a result of the year 2000
issue. However, there is no assurance that this will be the case.
Contingency plans
- -----------------
Management is developing contingency plans to address potential year 2000
non-compliance of IT and embedded technology systems. Management believes that
failure of any IT system could have an adverse impact on operations. However,
management believes that alternative systems are available that could be
utilized to minimize such impact. Management believes that any failure in the
embedded technology systems could have an adverse impact on that property's
performance. Management will assess these risks and develop plans to mitigate
possible failures by June, 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------- ----------------------------------------------------------
Not Applicable.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
<TABLE>
<CAPTION>
Page
Number
------
INDEX TO FINANCIAL STATEMENTS
- -----------------------------
Financial Statements:
<S> <C>
Report of Independent Public Accountants....................................... 16
Balance Sheets at December 31, 1998 and 1997................................... 17
Statements of Operations for each of the three years in the period
ended December 31, 1998..................................................... 18
Statements of Partners' Equity (Deficit) for each of the three years in
the period ended December 31, 1998.......................................... 19
Statements of Cash Flows for each of the three years in the period
ended December 31, 1998..................................................... 20
Notes to Financial Statements.................................................. 22
Financial Statement Schedule -
Schedule III - Real Estate Investments and Accumulated
Depreciation and Amortization............................................ 30
</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, 1998 and 1997, and
the related statements of operations, partners' equity (deficit) and cash flows
for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998, 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 19, 1999
<PAGE>
McNEIL REAL ESTATE FUND XXVI, L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
------------ -------------
ASSETS
- ------
Real estate investments:
<S> <C> <C>
Land ...................................................... $ 6,750,456 $ 6,750,456
Buildings and improvements ................................ 55,757,865 54,854,340
------------ ------------
62,508,321 61,604,796
Less: Accumulated depreciation and amortization .......... (26,899,633) (24,345,484)
------------ ------------
35,608,688 37,259,312
Asset held for sale .......................................... -- 3,047,765
Cash and cash equivalents .................................... 2,256,842 2,823,216
Cash segregated for security deposits ........................ 232,083 235,617
Accounts receivable, net of allowance for doubtful
accounts of $203,657 and $572,392 at
December 31, 1998 and 1997 ................................ 1,123,136 1,221,528
Prepaid commissions .......................................... 387,092 381,923
Prepaid expenses and other assets ............................ 254,614 229,664
Deferred borrowing costs, net of accumulated
amortization of $255,443 and $307,435 at
December 31, 1998 and 1997, respectively .................. 186,238 265,727
------------ ------------
$ 40,048,693 $ 45,464,752
============ ============
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
- ------------------------------------------
Mortgage notes payable ....................................... $ 18,981,387 $ 21,442,045
Accounts payable and accrued expenses ........................ 247,764 488,719
Accrued property taxes ....................................... 40,161 81,308
Payable to affiliates - General Partner ...................... 931,891 292,574
Security deposits and deferred rental income ................. 219,345 297,859
------------ ------------
20,420,548 22,602,505
------------ ------------
Partners' equity (deficit):
Limited partners - 90,000,000 limited partnership
units authorized; 86,530,671 limited partnership
units issued and outstanding at December 31,
1998 and 1997 ........................................... 20,046,031 23,273,176
General Partner ........................................... (417,886) (410,929)
------------ ------------
19,628,145 22,862,247
------------ ------------
$ 40,048,693 $ 45,464,752
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XXVI, L.P.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Revenue:
<S> <C> <C> <C>
Rental revenue ......................... $ 8,985,277 $ 8,824,653 $ 8,579,073
Interest ............................... 173,940 157,968 176,370
Gain on sale of real estate ............ 116,297 -- --
------------ ------------ ------------
Total revenue ........................ 9,275,514 8,982,621 8,755,443
------------ ------------ ------------
Expenses:
Interest ............................... 1,671,325 1,742,458 1,770,932
Interest - affiliates .................. -- -- 16,090
Depreciation and amortization .......... 2,554,149 2,663,083 2,713,247
Property taxes ......................... 838,337 752,719 673,753
Bad debt ............................... 111,651 105,143 13,759
Personnel expenses ..................... 830,841 816,221 799,842
Repairs and maintenance ................ 935,321 942,549 971,273
Property management fees -
affiliates ........................... 516,838 524,356 499,835
Utilities .............................. 936,911 985,081 996,025
Other property operating expenses....... 482,950 559,091 584,823
General and administrative ............. 377,580 170,098 271,913
General and administrative -
affiliates ........................... 715,353 725,511 704,871
Write-down for impairment
of real estate ....................... -- -- 1,087,000
------------ ------------ ------------
Total expenses ....................... 9,971,256 9,986,310 11,103,363
------------ ------------ ------------
Net loss .................................. $ (695,742) $(1,003,689) $ (2,347,920)
============ ============ ============
Net loss allocable to limited
partners ............................... $ (688,785) $ (993,652) $ (2,324,441)
Net loss allocable to General
Partner ................................ (6,957) (10,037) (23,479)
------------ ------------ ------------
Net loss .................................. $ (695,742) $ (1,003,689) $ (2,347,920)
============ ============ ============
Net loss per thousand limited
partnership units ...................... $ (7.96) $ (11.48) $ (26.86)
============ ============ ============
Distribution per thousand limited
partnership units ...................... $ 29.33 $ 8.67 $ 4.33
============ ============ ============
</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, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Total
General Limited Partners'
Partner Partners Equity
------------- ------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1995 ........... $ (377,413) $ 27,716,222 $ 27,338,809
Net loss ............................... (23,479) (2,324,441) (2,347,920)
Distributions to limited partners....... -- (374,965) (374,965)
------------ ------------ ------------
Balance at December 31, 1996 ........... (400,892) 25,016,816 24,615,924
Net loss ............................... (10,037) (993,652) (1,003,689)
Distributions to limited partners ...... -- (749,988) (749,988)
------------ ------------ ------------
Balance at December 31, 1997 ........... (410,929) 23,273,176 22,862,247
Net loss ............................... (6,957) (688,785) (695,742)
Distributions to limited partners ...... -- (2,538,360) (2,538,360)
------------ ------------ ------------
Balance at December 31, 1998 ........... $ (417,886) $ 20,046,031 $ 19,628,145
============ ============ ============
</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>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Cash flows from operating activities:
<S> <C> <C> <C>
Cash received from tenants ................ $ 8,782,369 $ 8,834,211 $ 8,380,164
Cash paid to suppliers .................... (3,832,374) (2,840,370) (3,723,971)
Cash paid to affiliates ................... (592,874) (1,048,755) (4,096,653)
Interest received ......................... 173,940 157,968 176,370
Interest paid ............................. (1,581,247) (1,653,436) (1,587,720)
Interest paid to affiliates ............... -- -- (53,903)
Property taxes paid ....................... (914,462) (731,072) (683,160)
----------- ----------- -----------
Net cash provided by (used in)
operating activities .................... 2,035,352 2,718,546 (1,588,873)
----------- ----------- -----------
Cash flows from investing activities:
Additions to real estate investments
and asset held for sale ................ (915,163) (982,670) (1,158,736)
Proceeds from sale of real estate ......... 3,324,955 -- --
----------- ----------- -----------
Net cash provided by (used in)
investing activities .................... 2,409,792 (982,670) (1,158,736)
----------- ----------- -----------
Cash flows from financing activities:
Principal payments on mortgage
notes payable ........................... (369,031) (373,701) (329,175)
Retirement of mortgage note payable ....... (2,091,627) -- --
Repayment of mortgage note -
affiliate ............................... -- -- (952,538)
Repayment of advances from
affiliates - General Partner ............ -- -- (130,517)
Deferred borrowing costs paid ............. (12,500) -- (15,683)
Distributions to limited partners ......... (2,538,360) (749,988) (374,965)
----------- ----------- -----------
Net cash used in financing activities ........ (5,011,518) (1,123,689) (1,802,878)
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents .......................... (566,374) 612,187 (4,550,487)
Cash and cash equivalents at
beginning of year ....................... 2,823,216 2,211,029 6,761,516
----------- ----------- -----------
Cash and cash equivalents at end
of year ................................. $ 2,256,842 $ 2,823,216 $ 2,211,029
=========== =========== ===========
</TABLE>
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 (Used in)
Operating Activities
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net loss ................................... $ (695,742) $(1,003,689) $(2,347,920)
----------- ----------- -----------
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization ........... 2,554,149 2,663,083 2,713,247
Amortization of deferred borrowing
costs ................................. 91,989 91,795 89,999
Allowance for doubtful accounts ......... -- -- (23,764)
Interest added to advances from
affiliates - General Partner, net ..... -- -- (37,813)
Write-down for impairment
of real estate ........................ -- -- 1,087,000
Gain on sale of real estate ............. (116,297) -- --
Changes in assets and liabilities:
Cash segregated for security
deposits ............................ 3,534 (2,191) (31,030)
Accounts receivable ................... (16,277) 55,469 (156,296)
Prepaid commissions ................... (39,755) (32,905) 30,426
Prepaid expenses and other
assets .............................. (24,950) 479,366 7,061
Accounts payable and accrued
expenses ............................ (240,955) 182,435 (52,572)
Accrued property taxes ................ (41,147) 22,648 (1,204)
Payable to affiliates - General
Partner ............................. 639,317 201,112 (2,891,947)
Security deposits and deferred
rental income ....................... (78,514) 61,423 25,940
----------- ----------- -----------
Total adjustments ................. 2,731,094 3,722,235 759,047
----------- ----------- -----------
Net cash provided by (used in)
operating activities .................. $ 2,035,352 $ 2,718,546 $(1,588,873)
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
McNEIL REAL ESTATE FUND XXVI, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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. The principal place of business for the
Partnership and the General Partner is 13760 Noel Road, Suite 600, 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, 1998, the Partnership owned four income-producing
properties as described in Note 4 - Real Estate Investments.
As previously announced, the Partnership has retained PaineWebber, Incorporated
("PaineWebber") as its exclusive financial advisor to explore alternatives to
maximize the value of the Partnership, including, without limitation, a
transaction in which limited partnership interests in the Partnership are
converted into cash. The Partnership, through PaineWebber, provided financial
and other information to interested parties as part of an auction process and
until early March 1999 was conducting discussions with one bidder in an attempt
to reach a definitive agreement with respect to a sale transaction. In early
March 1999, because the Partnership had been unable to conclude negotiations for
a transaction with such bidder, the Partnership terminated such discussions and
commenced discussions with respect to a sale transaction with another
well-financed bidder who had been involved in the original auction process.
During the last full week of March, the Partnership entered into a 45 day
exclusivity agreement with such party. It is possible that the General Partner
and its affiliates will receive non-cash consideration for their ownership
interests in connection with any such transaction. There can be no assurance
regarding whether any such agreement will be reached nor the terms thereof.
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.
<PAGE>
Adoption of Recent Accounting Pronouncements
- --------------------------------------------
The Partnership has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information ("SFAS
131"). SFAS 131 requires an enterprise to report financial information about its
reportable operating segments, which are defined as components of a business for
which separate financial information is evaluated regularly by the chief
decision maker in allocating resources and assessing performance. The
Partnership does not prepare such information for internal use, since it
analyzes the performance of and allocates resources for each property
individually. The Partnership's management has determined that it operates one
line of business and it would be impracticable to report segment information.
Therefore, the adoption of SFAS 131 has no impact on the Partnership's financial
statements.
Real Estate Investments
- -----------------------
Real estate investments are generally stated at the lower of depreciated cost or
fair value. Real estate investments are reviewed for impairment whenever events
or changes in circumstances indicate that their carrying amounts may not be
recoverable in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". When the carrying value of a property exceeds the sum
of all estimated future cash flows, an impairment loss is recognized. At such
time, a write-down is recorded to reduce the basis of the property to its
estimated fair value.
Improvements and betterments are capitalized and expensed through depreciation
charges. Repairs and maintenance are charged to operations as incurred.
Asset Held for Sale
- -------------------
The asset held for sale is stated at the lower of depreciated cost or fair value
less costs to sell. Depreciation and amortization on this asset ceased at the
time it was placed on the market for sale.
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.
<PAGE>
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. Amortization of leasing commissions is included in other
property operating expenses in the Statement of Operations.
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 1998, 1997 and 1996 have been made
in accordance with these provisions.
<PAGE>
Distributions
- -------------
At the discretion of the General Partner, distributable cash (other than cash
from sales or refinancings) 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 refinancings 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 Return represents a 8 1/4% cumulative return on their
Adjusted Invested Capital balance, as defined. The limited partners' Additional
Priority Return represents a 1% cumulative return on their Adjusted Invested
Capital balance, as defined.
In connection with a Terminating Disposition, as defined, cash from sales or
refinancings 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.
Cash distributions of $2,538,360, $749,988 and $374,965 were made to the limited
partners during 1998, 1997 and 1996, respectively. During the last week of March
1999, the Partnership distributed approximately $500,000 to the limited partners
of record as of March 1, 1999.
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 86,531 thousand
Units outstanding in 1998 and 1997 and 86,534 thousand Units outstanding in
1996.
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 reimburses McREMI for its costs, including overhead, of
administering the Partnership's affairs.
Under the terms of its partnership agreement, the Partnership pays a disposition
fee to the General Partner equal to 3% of the gross sales price for brokerage
services performed in connection with the sale of the Partnership's properties.
The fee is due and payable at the time the sale closes. The Partnership paid a
disposition fee of $106,500 in connection with the sale of Edison Ford Square.
Under the terms of the Amended Partnership Agreement, the Partnership is paying
an asset management fee 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 to .75% in 2000, .50% in 2001 and .25%
thereafter.
<PAGE>
Compensation and reimbursements paid to or accrued for the benefit of the
General Partner or its affiliates are as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Property management fees - affiliates ........ $ 516,838 $ 524,356 $ 499,835
Charged to gain on sale of real estate:
Disposition fee ........................... 106,500 -- --
Charged to interest - affiliates:
Interest on mortgage note payable -
affiliate ............................... -- -- 11,398
Interest on advances from
affiliates - General Partner ............ -- -- 4,692
Charged to general and administrative -
affiliates:
Partnership administration ................ 184,697 147,389 198,810
Asset management fee ...................... 530,656 578,122 506,061
---------- ---------- ----------
$1,338,691 $1,249,867 $1,220,796
========== ========== ==========
</TABLE>
Payable to affiliates - General Partner at December 31, 1998 and 1997 consisted
primarily of unpaid property management fees, Partnership general and
administrative expenses and asset management fees and is due and payable from
current operations. During 1998, the Partnership paid or accrued a total of
$715,353 to McREMI for asset management fees and overhead reimbursements.
The General Partner has, at its discretion, advanced funds to the Partnership to
meet its working capital requirements. The advances were repaid during 1996. 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 were unsecured, due on demand and accrued interest at the prime
lending rate of the Bank of America plus 1%. The prime lending rate was 8.25% on
May 20, 1996, the date when the Partnership repaid all outstanding affiliate
advances and the related accrued interest.
In 1993, the Partnership obtained a loan from McNeil Real Estate Fund XXVII,
L.P., an affiliate of the General Partner, totaling $952,538. The note was
secured by Continental Plaza and required monthly interest-only payments equal
to the prime lending rate of Bank of America plus 2 1/2% with the principal
balance due March 1, 1996. On January 8, 1996, the Partnership repaid the
mortgage loan.
NOTE 3 - TAXABLE INCOME (LOSS)
- ------------------------------
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.
<PAGE>
The Partnership's net assets and liabilities for tax purposes exceeded the net
assets and liabilities for financial reporting purposes by $19,628,145 in 1998,
$38,816,004 in 1997and $38,453,377 in 1996.
NOTE 4 - REAL ESTATE INVESTMENTS
- --------------------------------
The basis and accumulated depreciation and amortization of the Partnership's
real estate investments at December 31, 1998 and 1997, are set forth in the
following tables:
<TABLE>
<CAPTION>
Accumulated
Buildings and Depreciation Net Book
1998 Land Improvements & Amortization Value
---- -------------- ------------ -------------- ----------------
Amargosa Creek
<S> <C> <C> <C> <C>
Lancaster, CA $ 794,635 $ 8,697,067 $ (4,456,684) $ 5,035,018
Continental Plaza
Scottsdale, AZ 1,975,324 2,232,521 (1,981,451) 2,226,394
Northway Mall
Pittsburgh, PA 2,965,329 31,603,934 (12,932,192) 21,637,071
Westwood Center
Tampa, FL 1,015,168 13,224,343 (7,529,306) 6,710,205
------------- -------------- -------------- --------------
$ 6,750,456 $ 55,757,865 $ (26,899,633) $ 35,608,688
============= ============== ============== ==============
Accumulated
Buildings and Depreciation Net Book
1997 Land Improvements & Amortization Value
---- -------------- ------------ -------------- ---------------
Amargosa Creek $ 794,635 $ 8,626,877 $ (4,085,865) $ 5,335,647
Continental Plaza 1,975,324 2,072,184 (1,903,860) 2,143,648
Northway Mall 2,965,329 31,280,032 (11,396,878) 22,848,483
Westwood Center 1,015,168 12,875,247 (6,958,881) 6,931,534
------------- -------------- -------------- --------------
$ 6,750,456 $ 54,854,340 $ (24,345,484) $ 37,259,312
============= ============== ============== ==============
</TABLE>
<PAGE>
On April 1, 1996, the General Partners placed Edison Ford Square, located in
Fort Meyers, Florida, on the market for sale. A write-down for impairment in the
amount of $1,087,000 was recorded against the property's buildings and
improvements during the fourth quarter of 1996 after a major tenant announced
termination of their lease in 1997 and determination that its carrying value
could not be realized through future cash flows. Edison Ford Square was sold to
an unaffiliated buyer on April 28, 1998 (See Note 6).
The results of operations for the asset held for sale are $40,483 for the period
from January 1, 1998 to April 28, 1998 and $213,631 and $312,321 for the years
ended December 31, 1997 and 1996, respectively. Results of operations are
operating revenues less operating expenses including depreciation and
amortization and interest expense.
The Partnership leases its commercial properties under non-cancelable operating
leases. Future minimum rents to be received as of December 31, 1998 are as
follows:
1999.............................. $ 5,304,573
2000.............................. 5,018,352
2001.............................. 3,647,958
2002.............................. 2,792,427
2003.............................. 2,490,304
Thereafter........................ 7,994,336
-----------
Total $ 27,247,950
===========
<PAGE>
Future minimum rents do not include contingent rentals based on sales volume of
tenants. Contingent rents amounted to $18,984, $21,625 and $7,943 for the years
ended December 31, 1998, 1997 and 1996, respectively. Future minimum rents also
do not include expense reimbursements for common area maintenance, property
taxes, and other expenses. These expense reimbursements amounted to $1,518,211,
$1,398,132 and $1,563,150 for the years ended December 31, 1998, 1997, and 1996,
respectively. These contingent rents and expense reimbursements, which include
amounts for the asset held for sale, are included in rental revenue on the
Statement of Operations.
NOTE 5 - MORTGAGE NOTES PAYABLE
- -------------------------------
The following sets forth the mortgage notes payable of the Partnership at
December 31, 1998 and 1997. The mortgage notes are secured by the related real
estate investments.
<TABLE>
<CAPTION>
Mortgage Annual Monthly
Lien Interest Payments/ December 31,
Property Position (a)Rates % Maturity Date(d) 1998 1997
- -------- ------------------- ------------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Amargosa Creek First (b) 7.875 $ 35,528 11/00 $ 4,648,038 $ 4,705,850
Northway Mall First 7.500 110,849 12/02 14,333,349 14,578,464
Westwood Center First (c) 8.000 22,457 12/98 - 2,157,731
------------ -----------
$ 18,981,387 $ 21,442,045
============ ===========
</TABLE>
(a) The debt is non-recourse to the Partnership.
(b) On November 1, 1998, the Partnership extended the maturity date on the
mortgage note payable. The note was extended until November 1, 2000. The
Partnership incurred $12,500 of deferred borrowing costs related to the
extension of the mortgage note.
(c) On October 1, 1998, the Partnership paid off the mortgage note payable.
(d) Balloon payments on the mortgage notes are due as follows:
Property Balloon Payment Date
-------- --------------- ----
Amargosa Creek $ 4,529,511 11/00
Northway Mall 13,118,565 12/02
<PAGE>
Scheduled principal maturities of the mortgage notes payable are as follows:
1999.................................... $ 326,677
2000.................................... 4,870,155
2001.................................... 306,749
2002.................................... 13,477,806
2003 and thereafter..................... -
----------
Total $18,981,387
==========
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 $19,003,000 at December 31, 1998 and $21,404,000
at December 31, 1997.
NOTE 6 - DISPOSITION OF REAL ESTATE
- -----------------------------------
On April 28, 1998, the Partnership sold Edison Ford Square, an 145,417 square
foot shopping center located in Fort Myers, Florida to an unaffiliated buyer for
a cash purchase price of $3,550,000. Cash proceeds from this transaction, as
well as the gain on sale is detailed below:
<TABLE>
<CAPTION>
Gain on Sale Cash Proceeds
------------ -------------
<S> <C> <C>
Cash sales price.................................... $ 3,550,000 $ 3,550,000
Selling costs....................................... (225,045) (225,045)
Straight-line rents receivable written off.......... (114,669) -
Prepaid leasing commissions written off............. (34,586)
Basis of real estate sold........................... (3,059,403)
-------------
Gain on sale of real estate......................... $ 116,297
============= ------------
Proceeds from sale of real estate................... $ 3,324,955
============
</TABLE>
The selling costs above include a disposition fee at 3% of the gross sales price
paid to the General Partner in the amount of $106,500 - see Note 2.
<PAGE>
NOTE 7 - 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:
1) James F. Schofield, Gerald C. Gillett, Donna S. Gillett, Jeffrey
Homburger, Elizabeth Jung, Robert Lewis, and Warren Heller et al. v. McNeil
Partners L.P., McNeil Investors, Inc., McNeil Real Estate Management, Inc.,
Robert A. McNeil, Carole J. McNeil, McNeil Pacific Investors Fund 1972,
Ltd., McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd.,
McNeil Real Estate Fund XI, Ltd., McNeil Real Estate Fund XII, Ltd., McNeil
Real Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real
Estate Fund XX, L.P., McNeil Real Estate Fund XXI, L.P., McNeil Real Estate
Fund XXII, L.P., McNeil Real Estate Fund XXIII, L.P., McNeil Real Estate
Fund XXIV, L.P., McNeil Real Estate Fund XXV, L.P., McNeil Real Estate Fund
XXVI, L.P., and McNeil Real Estate Fund XXVII, L.P., Hearth Hollow
Associates, McNeil Midwest Properties I, L.P. and Regency North Associates,
L.P., - Superior Court of the State of California for the County of Los
Angeles, Case No. BC133799 (Class and Derivative Action Complaint).
The action involves purported class and derivative actions brought by
limited partners of each of the limited partnerships that were named as
nominal defendants as listed above (the "Partnerships"). Plaintiffs allege
that McNeil Investors, Inc., its affiliate McNeil Real Estate Management,
Inc. and three of their senior officers and/or directors (collectively, the
"Defendants") breached their fiduciary duties and certain obligations under
the respective Amended Partnership Agreement. Plaintiffs allege that
Defendants have rendered such Units highly illiquid and artificially
depressed the prices that are available for Units on the resale market.
Plaintiffs also allege that Defendants engaged in a course of conduct to
prevent the acquisition of Units by an affiliate of Carl Icahn by
disseminating purportedly false, misleading and inadequate information.
Plaintiffs further allege that Defendants acted to advance their own
personal interests at the expense of the Partnerships' public unit holders
by failing to sell Partnership properties and failing to make distributions
to unitholders.
On December 16, 1996, the Plaintiffs filed a consolidated and amended
complaint. Plaintiffs are suing for breach of fiduciary duty, breach of
contract and an accounting, alleging, among other things, that the
management fees paid to the McNeil affiliates over the last six years are
excessive, that these fees should be reduced retroactively and that the
respective Amended Partnership Agreements governing the Partnerships are
invalid.
<PAGE>
Defendants filed a demurrer to the consolidated and amended complaint and a
motion to strike on February 14, 1997, seeking to dismiss the consolidated
and amended complaint in all respects. A hearing on Defendant's demurrer
and motion to strike was held on May 5, 1997. The Court granted Defendants'
demurrer, dismissing the consolidated and amended complaint with leave to
amend. On October 31, 1997, the Plaintiffs filed a second consolidated and
amended complaint. The case was stayed pending settlement discussions. A
Stipulation of Settlement dated September 15, 1998 has been signed by the
parties. Preliminary Court approval was received on October 6, 1998. A
hearing for Final Approval of Settlement, initially scheduled for December
17, 1998, has been continued to May 25, 1999.
Because McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates,
McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. would
be part of the transaction contemplated in the settlement and Plaintiffs
claim that an effort should be made to sell the McNeil Partnerships,
Plaintiffs have included allegations with respect to McNeil Real Estate
Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I,
L.P. and Regency North Associates, L.P. in the third consolidated and
amended complaint.
Plaintiff's counsel intends to seek an order awarding attorney's fees and
reimbursements of their out-of-pocket expenses. The amount of such award is
undeterminable until final approval is received from the court. Fees and
expenses shall be allocated amongst the Partnerships on a pro rata basis,
based upon tangible asset value of each such partnership, less total
liabilities, calculated in accordance with the Amended Partnership
Agreements for the quarter most recently ended.
2) 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 (as defined in this Section 1, 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 Affiliated
Partnerships based on the statute of limitations; however, on appeal, the
Dallas Court of Appeals reversed the trial court and remanded for trial the
Affiliated Partnerships' fraud claims against Ernst & Young. The Texas
Supreme Court denied Ernst & Young's application for writ of error on
January 11, 1996. Shortly before trial, the district court judge once again
granted summary judgment against the Affiliated Partnerships on December 2,
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.
<PAGE>
NOTE 8 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Environmental laws create potential liabilities that may affect property owners.
The environmental laws of Federal and certain state governments, for example,
impose liability on current and certain past owners of property from which there
is a release or threat of release of hazardous substances. This liability
includes costs of investigation and remediation of the hazardous substances and
natural resource damages. Liability for costs of investigation and remediation
is strict and may be imposed irrespective of whether the property owner was at
fault, although there are a number of defenses. Both governments and third
parties may seek recoveries under these laws.
Third parties also may seek recovery under the common law for damages to their
property or person, against owners of property from which there has been a
release of hazardous and other substances.
The presence of contamination or the failure to remediate contaminations may
adversely affect the owner's ability to sell or lease real estate or to borrow
using the real estate as collateral.
Various buildings at properties do or may contain building materials that are
the subject of various regulatory programs intended to protect human health.
Such building materials include, for example, asbestos, lead-based paint, and
lead plumbing components. The Company has implemented programs to deal with the
presence of those materials, which include, as appropriate, reduction of
potential exposure situations. The Company does not believe that the costs of
such programs are likely to have a material adverse effect. Failure to implement
such programs can result in regulatory violations or liability claims resulting
from alleged exposure to such materials.
In connection with the proposed sale transaction as more fully described in Note
1 - "Organization and Summary of Significant Accounting Policies", Phase I
environmental site assessments have been completed for each property owned by
the Partnership. Such environmental assessments performed on the properties have
not revealed any environmental liability that the Partnership believes would
have a material adverse effect on the Partnership's business, assets, or results
of operations. The Partnership has not been notified by any governmental
authority of any non-compliance, liability or other claim in connection with any
of its properties. There can be no assurances, however, that environmental
liabilities have not developed since such environmental assessments were
prepared, or that future uses or conditions (including, without limitation,
changes in applicable environmental laws and regulations) will not result in
imposition of environmental liability.
<PAGE>
McNEIL REAL ESTATE FUND XXVI, L.P.
SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
December 31, 1998
<TABLE>
<CAPTION>
Costs
Initial Cost Cumulative Capitalized
Related Buildings and Write-down Subsequent
Description Encumbrances Land Improvements for Impairment To Acquisition
- ----------- -------------- ---- ------------- -------------- ---------------
Apartments:
Amargosa Creek
<S> <C> <C> <C> <C> <C>
Lancaster, CA (b) $ 4,648,038 $ 947,277 $ 9,578,026 $ (1,696,024) $ 662,423
Office Buildings:
Continental Plaza
Scottsdale, AZ (c) - 4,211,854 4,059,113 (5,662,360) 1,599,238
Westwood Center
Tampa, FL (d) - 1,465,168 14,814,477 (5,000,000) 2,959,866
Retail Center:
Northway Mall
Pittsburgh, PA (e) 14,333,349 4,523,305 17,186,915 (6,000,000) 18,859,043
-------------- -------------- -------------- ------------- -------------
$ 18,981,387 $ 11,147,604 $ 45,638,531 $ (18,358,384) $ 24,080,570
============== ============== ============== ============= =============
</TABLE>
(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 Northway Mall was reduced by $6,000,000 in 1993.
See accompanying notes to Schedule III.
<PAGE>
McNEIL REAL ESTATE FUND XXVI, L.P.
SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
December 31, 1998
<TABLE>
<CAPTION>
Gross Amount at
Which Carried at Close of Period Accumulated
Buildings and Depreciation
Description Land Improvements Total (a) and Amortization
- ----------- ---- ------------- --------- ----------------
Apartment:
Amargosa Creek
<S> <C> <C> <C> <C>
Lancaster, CA (b) $ 794,635 $ 8,697,067 $ 9,491,702 $ (4,456,684)
Office Buildings:
Continental Plaza
Scottsdale, AZ (c) 1,975,324 2,232,521 4,207,845 (1,981,451)
Westwood Center
Tampa, FL (d) 1,015,168 13,224,343 14,239,511 (7,529,306)
Retail Center:
Northway Mall
Pittsburgh, PA (e) 2,965,329 31,603,934 34,569,263 (12,932,192)
------------- ------------- --------------- -------------
$ 6,750,456 $ 55,757,865 $ 62,508,321 $ (26,899,633)
============= ============= =============== =============
</TABLE>
(a) For Federal Income tax purposes, the properties are depreciated over
lives ranging from 5-39 years using ACRS or MACRS methods. The aggregate
cost of real estate investments for Federal income tax purposes was
$86,128,424 and accumulated depreciation was $23,180,125 at December
31, 1998.
(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 Northway Mall was reduced by $6,000,000 in 1993.
See accompanying notes to Schedule III.
<PAGE>
McNEIL REAL ESTATE FUND XXVI, L.P.
SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
December 31, 1998
<TABLE>
<CAPTION>
Date of Date Depreciable
Description Construction Acquired lives (years)
- ----------- ------------ -------- -------------
Apartment:
Amargosa Creek
<S> <C> <C> <C> <C>
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:
Northway Mall
Pittsburgh, PA (e) 1962 06/87 5-25
</TABLE>
(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 Northway Mall was reduced by $6,000,000 in 1993.
See accompanying notes to Schedule III.
<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>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------
1998 1997 1996
------------ ------------- ------------
Real estate investments:
<S> <C> <C> <C>
Balance at beginning of year ................... $ 61,604,796 $ 60,661,517 $ 65,884,142
Improvements ................................... 903,525 943,279 1,002,815
Reclassification to asset held for sale ........ -- -- (6,225,440)
------------ ------------ ------------
Balance at end of year ......................... $ 62,508,321 $ 61,604,796 $ 60,661,517
============ ============ ============
Accumulated depreciation and amortization:
Balance at beginning of year ................... $ 24,345,484 $ 21,682,401 $ 21,255,141
Depreciation and amortization .................. 2,554,149 2,663,083 2,713,247
Reclassification to asset held for sale ........ -- -- (2,285,987)
------------ ------------ ------------
Balance at end of year ......................... $ 26,899,633 $ 24,345,484 $ 21,682,401
============ ============ ============
Asset held for sale:
Balance at beginning of year ................... $ 3,047,765 $ 3,008,374 $ --
Sale of asset .................................. (3,059,403) -- --
Reclassification to asset held for sale ........ -- -- 3,939,453
Improvements ................................... 11,638 39,391 155,921
Write-down for impairment
of real estate .............................. -- -- (1,087,000)
------------ ------------ ------------
Balance at end of year ......................... $ -- $ 3,047,765 $ 3,008,374
============ ============ ============
</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:
Other Principal Occupations and Other
Name and Position Age Directorships During the Past 5 Years
- ----------------- --- -------------------------------------
Robert A. McNeil, 78 Mr. McNeil is also Chairman of the
Chairman of the Board and Director of McNeil Real Estate
Board and Director Management, Inc. ("McREMI") which is an
affiliate of the General Partner. He has
held the foregoing positions since the
formation of such an 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 in 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.
<PAGE>
Carole J. McNeil 55 Mrs. McNeil is Co-Chairman, with husband
Co-Chairman of the Robert A. McNeil, of McNeil Investors,
Board Inc. Mrs. McNeil has twenty years of
real estate experience, 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.
Ron K. Taylor 41 Mr. Taylor is the President and Chief
President and Chief Executive Officer of McNeil Real Estate
Executive Officer Management which is an affiliate of the
General Partner. Mr. Taylor has been in
this capacity since the resignation of
Donald K. Reed on March 4, 1997. Prior
to assuming his current
responsibilities, Mr. Taylor served as a
Senior Vice President of McREMI. Mr.
Taylor has been in this capacity since
McREMI commenced operations in 1991.
Prior to joining McREMI, Mr. Taylor
served as an Executive Vice President
for a national syndication/property
management firm. In this capacity, Mr.
Taylor had the responsibility for the
management and leasing of a 21,000,000
square foot portfolio of commercial
properties. Mr. Taylor has been actively
involved in the real estate industry
since 1983.
Each director shall serve until his successor shall have been duly elected and
qualified.
<PAGE>
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, 1998, 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, 1998. 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.
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.
Affiliates of the General Partner and the officers or directors of its
general partner, collectively, own 2,995,000 Units at February 1, 1999,
which is 3.5% of the outstanding Units.
(C) Change in control.
None.
<PAGE>
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 to .75% in 2000, .50% in 2001 and .25% thereafter. For the year ended
December 31, 1998, the Partnership paid or accrued $530,656 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, 1998, the Partnership paid or accrued $701,535 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".
Under the terms of its partnership agreement, the Partnership pays a disposition
fee to the General Partner equal to 3% of the gross sales price for brokerage
services performed in connection with the sale of the Partnership's properties.
The fee is due and payable at the time the sale closes. The Partnership paid a
$106,500 disposition fee to the General Partner during 1998 in connection with
the sale of Edison Ford Square.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
- -------- -----------------------------------------------------------------
See accompanying Index to Financial Statements at Item 8 - Financial Statements
and Supplementary Data.
(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).
4.1 Amendment No. 1 to the Amended and Restated
Limited Partnership Agreement of McNeil Real
Estate Fund XXVI, L.P. dated June 1995
(incorporated by reference to the Quarterly
Report of the registrant on Form 10-Q for the
period ended June 30, 1995, as filed on August
14, 1995).
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)
10.11 Promissory note payable dated December 15,
1995, between McNeil Real Estate Fund XXVI,
L.P. and The Variable Annuity Life Insurance.
(Incorporated by reference to the Annual
Report of the registrant on Form 10-K for the
period ended December 31, 1995, as filed on
March 29, 1996).
11. Statement regarding computation of Net Loss
per Limited Partnership Unit (see Item 8 -
Note 1 - "Organization and Summary of
Significant Accounting Policies").
(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, 1998.
<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.
McNEIL REAL ESTATE FUND XXVI, L.P.
By: McNeil Partners, L.P., General Partner
By: McNeil Investors, Inc., General Partner
March 31, 1999 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 31, 1999 By: /s/ Ron K. Taylor
- -------------- --------------------------------------------
Date Ron K. Taylor
President and Director of McNeil
Investors, Inc.
(Principal Financial Officer)
March 31, 1999 By: /s/ Carol A. Fahs
- -------------- --------------------------------------------
Date Carol A. Fahs
Vice President of McNeil Investors, Inc.
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,256,842
<SECURITIES> 0
<RECEIVABLES> 1,326,793
<ALLOWANCES> (203,657)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 62,508,321
<DEPRECIATION> (26,899,633)
<TOTAL-ASSETS> 40,048,693
<CURRENT-LIABILITIES> 0
<BONDS> 18,981,387
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 40,048,693
<SALES> 8,985,277
<TOTAL-REVENUES> 9,275,514
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,299,931
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,671,325
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (695,742)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (695,742)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>