PART I
Item 1. Business
PaineWebber Equity Partners Two Limited Partnership (the
"Partnership") is a limited partnership formed on May 16, 1986,
under the Uniform Limited Partnership Act of the State of
Virginia to invest in a diversified portfolio of existing, newly-
constructed or to-be-built income-producing real properties such
as apartments, shopping centers, hotels, office buildings and
industrial buildings. The Partnership had authorized the
issuance of a maximum of 150,000,000 Partnership Units (the
"Units") at $1 per Unit, pursuant to a Registration Statement on
Form S-11 filed under the Securities Act of 1933 (Registration
No. 33-5929). On June 2, 1988, the offering of Units in the
Partnership was completed and gross proceeds of $134,425,741 had
been received by the Partnership. Limited Partners will not be
required to make any additional capital contributions.
As of March 31, 1994, the Partnership owned interests in four
multi-family apartment complexes, two office/R&D buildings and
two retail shopping centers. The Partnership has acquired all of
its operating property investments through joint venture
partnerships as set forth in the following table:
Name of Joint Venture Percent Date of
Name and Type of Property Leased at Acquisition Type of
Location Size 3/31/94 of Interest Ownership (1)
Chicago-625 Partnership .38 acres; 82% 12/16/86 Fee ownership of land
625 North Michigan Avenue 324,829 net and improvements
Office Tower leasable (through joint venture)
Chicago, Illinois square feet
Richmond Gables Associates 224 units 95% 9/1/87 Fee ownership of land
The Gables at Erin Shades and improvements
Apartments (through joint
Richmond, Virginia venture)
Daniel/Metcalf
Associates 19 acres; 96% 9/30/87 Fee ownership of land
Partnership 142,363 net and improvements
Loehmann's Plaza Shopping leasable (through joint venture)
Center square feet
Overland Park, Kansas
Hacienda Park Associates 12.6 acres; 72% 12/24/87 Fee ownership of land
Saratoga Center & EG&G 184,905 net and improvements
Plaza leasable (through joint
Office Buildings square feet venture)
Pleasanton, California
TCR Walnut Creek Limited 160 units 98% 12/24/87 Fee ownership of land
Partnership and improvements
Treat Commons Phase II (through joint venture)
Apartments
Walnut Creek, California
Portland Pacific
Associates 183 units 98% 1/12/88 Fee ownership of land
Richland Terrace Apartments and improvements
and Richmond Park Apartments (through joint venture)
Portland, Oregon
West Ashley Shoppes
Associates 17.25 66% 3/10/88 Fee ownership of land
West Ashley Shoppes acres; and improvements
Charleston, South Carolina 134,406 net (through joint venture)
leasable
square feet
Atlanta Asbury
Partnership 204 units 92% 4/7/88 Fee ownership of land
Asbury Commons Apartments and improvements
Atlanta, GA (through joint venture)
(1) See Notes to the Financial Statements of the Registrant
filed with this Annual Report for a description of the
agreements through which the Partnership has acquired these
real estate investments.
Originally, the Partnership had interests in ten joint
venture partnerships, two of which have since been liquidated
through sale transactions. On May 31, 1990, the joint venture
that owned the Highland Village Apartments sold the property at a
gross sales price of $8,450,000. Net proceeds from the sale were
split between the Partnership and its co-venture partner, with
the Partnership receiving approximately $7,700,000. As a result
of the sale, the Partnership no longer owns any interest in the
Highland Village Apartments. Also, on November 29, 1989, the
Partnership entered into an agreement with Awbrey's Road II
Associates Limited Partnership (ARA) to sell the rights to its
interest in Ballston Place - Phase II Associates which was to own
and operate Ballston Place - Phase II, an apartment complex in
Arlington, Virginia. The Partnership received the return of
$9,050,000 which had been funded into escrow during the
construction phase of the project. In addition, the Partnership
received certain other compensation in connection with this
transaction. As of March 31, 1994, the Partnership has no
remaining interest in the Ballston Place property.
The Partnership's investment objectives are to invest in
operating properties in order to:
(1) preserve and protect Limited Partners' capital;
(2) provide the Limited Partners with quarterly cash
distributions, a portion of which will be sheltered from
current federal income tax liability; and
(3) achieve long-term capital appreciation in the value of the
Partnership's investment properties.
Through March 31, 1994, the limited partners had received
cumulative cash distributions totalling approximately
$67,358,000. This return includes a distribution of $57 per
$1,000 investment from the sale of the Highland Village
Apartments in May 1990. The remaining cash flow distributions
have been from net rental income, and a substantial portion of
such distributions has been sheltered from current federal income
tax liability. In addition, the Partnership retains its
ownership interest in eight of its ten original investment
properties. The proceeds from the Ballston Place sale referred
to above were retained by the Partnership and have been, or are
expected to be, used for capital improvements and leasing costs
at the Partnership's other properties in order to preserve and/or
enhance their values. These proceeds have also been used to
bolster reserves and to pay off a portion of the zero coupon
loans which were used to finance the offering costs and related
expenses of the Partnership.
The Partnership's success in meeting its capital appreciation
objective will depend upon the proceeds received from the final
liquidation of the investments. The amount of such proceeds will
ultimately depend upon the value of the underlying investment
properties at the time of their liquidation, which cannot
presently be determined. At the present time, real estate values
for commercial office buildings and, to a lesser extent, retail
shopping centers, remain depressed nationwide due to an
oversupply of competing space in many markets and the lingering
effects of the most recent national recession. Management
believes that such markets conditions are temporary and will
change as certain market corrections are allowed to occur. As
discussed further below, the multi-family residential market has
generally strengthened in most parts of the country during the
last year. Management's plans are presently to hold the majority
of the investment property for long-term investment purposes and
to direct the management of the operations of the properties to
maximize their long-term values.
All of the Partnership's investment properties are located in
real estate markets in which they face significant competition
for the revenues they generate. The apartment complexes compete
with numerous projects of similar type generally on the basis of
price and amenities. Apartment properties in all markets also
compete with the local single family home market for prospective
tenants. Over the past 12 months, home mortgage interest rates
have remained low, attracting some prospective tenants away from
multi-family apartment complexes and into single-family homes.
Despite this increased competition, the lack of new construction
of multi-family housing has allowed the oversupply which exists
in most markets to begin to be absorbed, with the result being a
gradual improvement in occupancy levels and effective rental
rates and a corresponding increase in property values.
Management of the Partnership expects to continue to see
improvement in this sector of the real estate market in the near-
term as further market corrections occur. The Partnership's
shopping centers and office buildings also compete for long-term
commercial tenants with numerous projects of similar type
generally on the basis of price, location and tenant improvement
allowances.
The Partnership has no real property investments located
outside the United States. The Partnership is engaged solely in
the business of real estate investment, therefore presentation of
information about industry segments is not applicable.
The Partnership has no employees; it has, however, entered
into an Advisory Contract with PaineWebber Properties
Incorporated (the "Adviser"), which is responsible for the day-to-
day operations of the Partnership. The Adviser is a wholly-owned
subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned
subsidiary of PaineWebber Group Inc. ("PaineWebber").
The General Partners of the Partnership (the "General
Partners") are Second Equity Partners, Inc., and Properties
Associates 1986, L. P. Second Equity Partners, Inc. (the
"Managing General Partner"), a wholly-owned subsidiary of
PaineWebber Group Inc. is the managing general partner of the
Partnership. Properties Associates 1986, L.P. (the "Associate
General Partner"), a Virginia limited partnership, certain
limited partners of which are also officers of the Managing
General Partner and the Adviser, is the associate general partner
of the Partnership.
The terms of transactions between the Partnership and
affiliates of the Managing General Partner of the Partnership are
set forth in Items 11 and 13 below to which reference is hereby
made for a description of such terms and transactions.
Item 2. Properties
As of March 31, 1994, the Partnership has interests in eight
operating properties through joint venture partnerships. These
joint venture partnerships and the related properties are
referred to under Item 1 above to which reference is made for the
name, location and description of each property.
Item 3. Legal Proceedings
The Partnership is not subject to any material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Partnership's Limited Partnership
Interests and Related Security Holder Matters
At March 31, 1994, there were 9,683 record holders of Units in
the Partnership. There is no public market for the Units, and it
is not anticipated that a public market for the Units will
develop. The Managing General Partner will not redeem or
repurchase Units.
Reference is made to Item 6 below for a discussion of cash
distributions made to the Limited Partners during fiscal 1994.
Item 6. Selected Financial Data
PaineWebber Equity Partners Two Limited Partnership
For the years ended March 31, 1994, 1993, 1992, 1991 and 1990
(in thousands, except for per Unit data)
Years ended March 31,
1994 1993 1992 (1) 1991 1990
Revenues $ 4,338 $ 4,793 $ 4,628 $ 789 $ 688
Operating loss $ (2,391) $(1,549) $ (2,658) $(3,128) $ (3,134)
Investment income $ 2,313 $ 2,699 $ 2,609 $ 5,593 $ 5,527
Net income (loss) $ (78) $ 1,150 $ (49) $ 2,465 $ 2,393
Net income (loss)
per 1,000 Limited
Partnership Units $ (0.57) $ 8.47 $ (0.36) $ 18.15 $ 17.61
Cash distributions
per 1,000 Limited
Partnership Units $ 49.52 $ 49.52 $ 49.52 $137.15 $ 82.51
Total assets $ 103,391 $107,382 $110,655 $110,496 $128,238
Long-term debt $ 36,828 $ 33,845 $ 31,041 $ 25,554 $ 27,310
(1)During fiscal 1992, as further discussed in Note 4 to the
accompanying financial statements, the Partnership assumed
complete control of the joint ventures which own and operate
Saratoga Center and EG&G Plaza and the Asbury Commons
Apartments. Accordingly, the joint ventures, which had been
accounted for under the equity method in prior years, have
been consolidated in the Partnership's financial statements
for years subsequent to fiscal 1991.
The above selected financial data should be read in
conjunction with the financial statements and related notes
appearing elsewhere in this Annual Report.
The above net income (loss) and cash distributions per 1,000
Limited Partnership Units are based upon the 134,425,741 Limited
Partnership Units outstanding during each year.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
The Partnership commenced an offering to the public on July
21, 1986 for up to 150,000,000 units (the "Units") of limited
partnership interest (at $1 per Unit) pursuant to a Registration
Statement filed under the Securities Act of 1933. The
Partnership raised gross proceeds of $134,425,741 between July
21, 1986 and June 2, 1988. As discussed further below, the
Partnership also received proceeds of $23 million from the
issuance of zero coupon loans. The loan proceeds, net of
financing expenses of approximately $908,000, were used to pay
the offering and organization costs, acquisition fees and
acquisition-related expenses of the Partnership and to fund the
Partnership's cash reserves. The Partnership originally invested
approximately $132,200,000 (net of acquisition fees) in ten
operating properties through joint venture investments. Through
March 31, 1994, two of these investments had been sold and a
portion of the zero coupon loans had been repaid. The
Partnership retains an interest in eight operating properties,
which are comprised of four multi-family apartment complexes, two
office/R&D complexes and two retail shopping centers. The
Partnership does not have any commitments for additional
investments but may be called upon to fund its portion of
operating deficits or capital improvement costs of its joint
venture investments in accordance with the respective joint
venture agreements.
The Partnership's focus during fiscal 1994 continued to be on
efforts to restructure or refinance the zero coupon loans secured
by all of the Partnership's operating investment properties prior
to their scheduled maturity dates in May and June of 1995. As
noted above, the Partnership originally borrowed $23,000,000 to
finance its offering costs and related acquisition expenses in
order to invest a greater portion of the initial offering
proceeds in real estate assets. During fiscal 1991, principal
and interest aggregating approximately $4,250,000 was repaid on
these borrowings in connection with the sale of the Ballston
Place and Highland Village investments. The outstanding loans
are with two different financial institutions, the first of which
issued a loan in the initial principal amount of $6,000,000 which
is secured by the 625 North Michigan Office Building, and the
other of which issued loans which are secured by the seven
remaining investment properties. Due to declines in the market
value of the 625 North Michigan property over the past several
years, management's efforts have been directed toward
negotiating a modification and extension agreement with the
existing lender on this loan. Such declines in value have
mirrored the state of commercial office buildings nationwide, and
particularly in major metropolitan areas such as Chicago.
Limited sources for the financing of commercial office buildings
in general and the stringent loan-to-value ratio requirements for
such loans would have made refinancing the 625 North Michigan
property by conventional means very difficult.
Throughout fiscal 1994, management was engaged in negotiations
with the 625 North Michigan lender. The terms of the original
loan agreement required that if the loan ratio, as defined,
exceeded 80%, then the Partnership would be required to deposit
additional collateral in an amount sufficient to reduce the loan
ratio to 80%. During fiscal 1994, the lender informed the
Partnership that, based on an interim property appraisal, the
loan ratio exceeded 80% and that a deposit of additional
collateral was required. Subsequently, the Partnership submitted
an appraisal which demonstrated that the loan ratio exceeded 80%
by an amount less than previously demanded by the lender. In
December 1993, the Partnership deposited additional collateral of
approximately $209,000 in accordance with the higher appraised
value. The lender accepted the Partnership's deposit of
additional collateral but disputed whether the Partnership had
complied with the terms of the loan agreement regarding the 80%
loan ratio. Subsequent to year-end, an agreement was reached
with the lender on a proposal to refinance the loan and resolve
the outstanding disputes. The terms of the agreement call for
the Partnership to make a principal paydown on the loan of
approximately $801,000, including the application of the
additional collateral referred to above. The new loan will have
an initial principal balance of approximately $9.7 million and a
scheduled maturity date of May 1999. From the date of the formal
closing of the modification and extension agreement to the new
maturity date of the loan, the loan will bear interest at a rate
of 9.125% per annum and will require monthly payments of
principal and interest aggregating approximately $81,000. The
terms of the loan agreement also require the establishment of
an escrow account for real estate taxes, as well as a
capital improvement escrow which is to be funded with monthly deposits
from the Partnership aggretating approximately $1 million through
the scheduled maturity date. Formal closing of the
modification and extension agreement occurred on May 31, 1994.
Subsequent to the modification agreement, the 625 North Michigan
property is expected to generate a small amount of cash flow from
operations after debt service, but prior to capital expenditures.
However, the majority of such cash flow will likely be required
by the joint venture to pay for capital and tenant improvements
in order to maintain the property's current occupancy rate in
light of the extremely competitive market conditions which
continue to adversely affect the market for office space in
downtown Chicago.
The Partnership is presently involved in negotiations with the
other zero coupon note lender regarding a possible modification
and extension agreement for the notes secured by the other seven
investment properties. Any such agreement would likely involve
the conversion of the zero coupon notes to conventional current-
pay loans with monthly principal amortization. Such a
modification could also require an initial principal paydown
similar to the 625 North Michigan transaction described above.
There are no assurances that the Partnership and the lender will
reach agreement on mutually acceptable terms for a modification
and extension of these loans. Consequently, management is also
investigating other refinancing options for these obligations.
This pool of seven mortgage notes becomes prepayable without
penalty at any time after August 1994. Since the pool of
properties which secures these loans is comprised primarily of
multi-family residential properties, a strong market sector as
compared to commercial office buildings, the Partnership should
have other viable alternatives in the event that a favorable
agreement cannot be reached with the current lender. Consent of
certain of the Partnership's co-venture partners may be required
in connection with any extension or refinancing transactions.
Regardless of whether the Partnership obtains extensions or
refinances the outstanding obligations, these transactions are
likely to require the current use of cash reserves to make
required principal paydowns and/or to cover transaction costs, in
addition to adversely impacting current cash flow due to the
commencement of regular debt service payments. Management
continues to believe that these outcomes will result in higher
overall returns to the Limited Partners than would result from
allowing the interest on the zero coupon loans to continue to
accrue and compound until their scheduled maturity dates.
Subsequent to the end of the Partnership's fiscal year, in
June 1994, the Board of Directors of the Partnership's Managing
General Partner gave approval for the communication to the Limited
Partners of a proposed reduction
in the Partnership's quarterly distribution rate. Such communication
to the Limited Partners is planned for release in August 1994.
Formal approval of the proposed distribution rate adjustment, which
would be effective for the second quarter of fiscal 1995, will
occur in October 1994. The rate reduction is being proposed by
management in light of the monthly payment of debt service which
will be required under the terms of the loan secured by the 625
North Michigan Office Building and the current debt service
expected to be required upon the modification or refinancing of
the Partnership's remaining zero coupon loans, as discussed
further above. In addition, management anticipates significant
cash needs over the next two years to pay for capital and tenant
improvements at its commercial office buildings and retail
shopping centers as efforts to lease vacant space at these
properties continue. The Hacienda Park investment property,
which was 72% leased as of March 31, 1994, consists of four
separate office/R&D buildings comprising approximately 185,000
square feet. As previously reported, two of these buildings had
been leased to a single tenant, lease payments from which
represented approximately 71% of the total rental income from the
property for fiscal 1993. The tenant's lease on one of the
buildings expired in June of 1993, while its lease on the second
building was scheduled to run through March of 1994 and contained
a one-year renewal option. Due to corporate reorganization and
downsizing measures, this tenant did not renew the lease which
expired in June. However, during the current fiscal year,
management negotiated the renewal of this tenant's other lease
for five years, although at market rents which are substantially
lower than the previous lease rental rate. In addition,
management has been aggressively pursuing tenants for the vacated
building in what is an extremely overbuilt office market.
Subsequent to year-end, the Partnership has secured a new tenant,
under a seven-year lease, for this 31,000 square foot building.
The Partnership has agreed to pay for the tenant improvement
costs to modify this space to the needs of the new user. Tenant
improvements and leasing commissions related to this lease will
total approximately $630,000. At Loehmann's Plaza, management
plans to invest between approximately $1.2 and $1.6 million over
the next 24 months to complete a general upgrade of the
property's exterior, including a 10,000 square foot expansion,
which is necessary in order for the property to remain
competitive in its market. As discussed further below,
significant capital requirements are also expected at West Ashley
Shoppes within the next 18-to-24 months.
In May 1994, subsequent to the Partnership's year-end, the
Partnership and the co-venturer of the West Ashley Shoppes joint
venture executed a settlement agreement to resolve their
outstanding disputes regarding the net cash flow shortfall
contributions owed by the co-venturer under the terms of the
joint venture's guaranty agreement. Under the terms of the
settlement agreement, the co-venturer assigned 96% of its
interest in the joint venture to the Partnership and the
remaining 4% of its interest in the joint venture to Second
Equity Partners, Inc., the Managing General Partner of the
Partnership. Prior to the assignment of its interest, the co-
venturer had agreed to retire certain debt in the amount of
approximately $400,000 which encumbered certain out-parcels of
the West Ashley property. Under the original terms of the
venture agreement, the potential future economic value to be
realized from these out-parcels would have accrued to the co-
venturer's benefit. As a result of the assignment, the future
economic value to be realized from the unencumbered out-parcels
will accrue solely to the benefit of the Partnership. In return
for such assignment, the Partnership agreed to release the co-
venturer from all claims regarding net cash flow shortfall
contributions owed to the joint venture. In conjunction with the
assignment of its interest and withdrawal from the joint venture,
the co-venturer agreed to release certain outstanding counter
claims against the Partnership. As a result of the settlement
agreement, the Partnership has effectively assumed full control
over the affairs of the joint venture. The Managing General
Partner has engaged a local property management company to
oversee the day-to-day operations of the retail center, which was
66% leased as of March 31, 1994. A significant amount of funds
may be needed to pay for tenant improvement costs to re-lease the
vacant anchor tenant space at West Ashley Shoppes in the near
future. As previously reported, Children's Palace closed its
retail store at the center in May 1991 and subsequently filed for
bankruptcy protection from creditors. Management does not expect
to receive any significant proceeds from the bankruptcy
liquidation proceedings. Accordingly, funds for tenant
improvements required to re-lease this space will have to come
from property operations, Partnership advances and/or short-term
borrowings. In addition, Phar-Mor, West Ashley's other major
anchor tenant is currently operating under the protection of
Chapter 11 of the U. S. Bankruptcy Code. While Phar-Mor has
closed a number of its locations nationwide as part of its
bankruptcy reorganization, the Phar-Mor drugstore at West Ashley
Shoppes is reported to be one of their top performing locations
in the southeast. As a result, management is optimistic that its
continued operation is likely, assuming Phar-Mor successfully
emerges from its current Chapter 11 status. Phar-Mor has
approached management seeking concessions on the terms of its
lease agreement, but discussions concerning this situation have
been deferred pending the release of Phar-Mor's reorganization
plan. Phar-Mor is expected to submit a reorganization plan for
bankruptcy court approval sometime during the first or second
quarter of fiscal 1995.
During fiscal 1994, the Partnership received operating cash
flow distributions totalling approximately $7,218,000 from its
operating investment properties (including approximately
$2,476,000 from the consolidated joint ventures). These property
distributions represent the primary source of future liquidity
for the Partnership prior to the sales or refinancings of its
operating investment properties. At March 31, 1994, the
Partnership and its consolidated joint ventures had available
cash and cash equivalents of approximately $4,290,000. Such
amounts will be utilized for the working capital requirements of
the Partnership, as well as for reinvestment in certain of the
Partnership's properties (as required), principal payments and
refinancing expenses related to the Partnership's zero coupon
loans and for distributions to the partners. The source of
future liquidity and distributions to the partners is expected to
be through cash generated from operations of the Partnership's
income-producing investment properties and proceeds received from
the sale or refinancing of such properties. Such sources of
liquidity are expected to be sufficient to meet the Partnership's
needs on both a short-term and long-term basis.
Results of Operations
1994 Compared to 1993
The Partnership reported a net loss of approximately $78,000
for the fiscal year ended March 31, 1994, as compared to net
income of approximately $1,150,000 for fiscal 1993. The
significant change in net operating results is attributable to an
increase in the Partnership's operating loss of approximately
$842,000 combined with a decrease in the Partnership's share of
unconsolidated ventures' income of approximately $385,000.
The increase in the Partnership's operating loss resulted from
a combination of a decline in the net income of the consolidated
Hacienda Park joint venture and an increase in Partnership
interest expense and general and administrative expenses. The
net income of the Hacienda Park joint venture declined by
approximately $488,000 in comparison with the prior year. The
primary reason for this unfavorable change in the venture's
operating results was a decline in rental revenues caused by a
drop in occupancy. The decline in occupancy during the current
fiscal year is a result of the expiration of a major tenant's
lease, as discussed further above. In addition, the decline in
revenues is also partly attributable to the renewal of another
major lease at current market rents, which are substantially
below the rates paid under the prior lease agreement, also as
discussed further above. Partnership general and administrative
expenses increased by approximately $96,000 as a result of
certain costs incurred in connection with an independent
valuation of the Partnership's operating properties, which is
currently in process in conjunction with management's ongoing
refinancing efforts. In addition, interest expense on the
Partnership's zero coupon loans increased by approximately
$282,000. As discussed above, interest on the zero coupon loans
continues to compound, resulting in an increased expense, which
will continue until the loans are repaid or refinanced.
The Partnership's share of unconsolidated ventures' income
decreased by approximately $385,000 in fiscal 1994, primarily due
to a significant decrease in net income from the 625 North
Michigan joint venture. The joint venture's net income decreased
due to the combined effects of a decrease in rental income and an
increase in property operating expenses. The decline in
operating results at 625 North Michigan reflects the extremely
competitive market conditions which continue to affect the market
for downtown Chicago office space. Similarly, the increase in
property expenses is the result of an increase in repairs and
maintenance expenses due to the implementation of a general
improvement program aimed at improving the property's leasing
status.
1993 Compared to 1992
The Partnership reported net income of approximately
$1,150,000 for the fiscal year ended March 31, 1993, as compared
to a net loss of approximately $49,000 for fiscal 1992. This
favorable change resulted from a decrease in the Partnership's
operating loss coupled with an increase in the Partnership's
share of unconsolidated ventures' income.
The decrease in the Partnership's operating loss resulted
mainly from a combination of improved operating results of the
consolidated Hacienda Park joint venture and a decrease in
Partnership general and administrative expenses. The net
operating results of the Hacienda Park joint venture improved by
approximately $1,002,000 when compared to fiscal 1991. The
primary reasons for this favorable change were an increase in
rental income, a decline in real estate tax expense and a
substantial decrease in non-cash depreciation charges. Hacienda
Business Park's rental revenue increased by approximately
$225,000, or 10%, mainly due to an increase in average occupancy.
As noted above, the Partnership expected to experience a decline
in occupancy at Hacienda Business Park in fiscal 1994 upon the
expiration of one of the two single-tenant building leases in
June of 1993. Real estate tax expense for the Hacienda Business
Park decreased by approximately $138,000 in fiscal 1993, mainly
as a result of the receipt of refunds totalling approximately
$104,000 related to prior years. Finally, depreciation charges
for the Hacienda Park joint venture declined by approximately
$767,000 in fiscal 1993 as a result of tenant improvement costs
totalling approximately $3.7 million having become fully
depreciated in the prior year. General and administrative
expenses decreased by approximately $148,000 as a result of
decreased legal expenses and various other administrative costs.
These favorable changes were partially offset by an increase in
interest expense on the Partnership's zero coupon loans of
approximately $227,000.
The Partnership's share of unconsolidated ventures' income
increased by approximately $99,000 in fiscal 1993 primarily due
to increases in net income from the 625 North Michigan and
Loehmann's Plaza joint ventures. The increased net income from
the 625 North Michigan joint venture was mainly due to increased
rental revenue, resulting from a slight increase in average
occupancy, and a decrease in repairs and maintenance expenses due
to the completion of a general improvement program implemented
during the prior year to enhance the building's appeal. Net
income from the Loehmann's Plaza joint venture increased due to
increased rental revenue which was partially offset by an
increase in real estate tax and insurance expense. These
favorable changes were partially offset by a decrease in net
income from West Ashley Shoppes resulting from decreased rental
revenue due to the anchor store closing of Children's Palace.
Despite the fact that the tenant was still liable under the lease
agreement, rent was no longer being accrued on this lease due to
the uncertainty of its collectibility.
1992 Compared to 1991
In fiscal 1992, the Partnership's operating results include
the consolidated results of Saratoga Center & EG&G Plaza and the
Asbury Commons Apartments. The Partnership assumed complete
control over the affairs of the joint ventures which own these
properties during fiscal 1992 as a result of the withdrawals of
the respective co-venture partners and the assignments of their
remaining interests to Second Equity Partners, Inc., the Managing
General Partner of the Partnership.
The Partnership reported a net loss of approximately $49,000
for the fiscal year ended March 31, 1992, as compared to net
income of approximately $2,465,000 for fiscal 1991. The fiscal
1991 results reflect a gain of approximately $2,068,000 on the
sale of the Highland Village Apartments. Excluding the effect of
the gain, the Partnership's net operating results declined by
approximately $447,000 in fiscal 1992, mainly as a result of a
significant decline in interest income earned on cash and cash
equivalents and the reserve established against the Ballston
Place note receivable due to the payment default referred to
above. The decrease in interest earned on cash and cash
equivalents is partly a result of a significant decrease in
interest rates earned on invested cash reserves during fiscal
1992. In addition, the Partnership had a substantially higher
average outstanding cash reserve balance during fiscal 1991 due
to the receipt of the proceeds from the sales of the Highland
Village Apartments and the Partnership's interest in Ballston
Place.
The unfavorable changes in net operating results were
partially offset by a decrease in management fee expense. No
management fees were earned after the first quarter of fiscal
1992 due to the reduction in the rate of quarterly distributions
to the Limited Partners from 8.25% to 5.25%. Per the Partnership
Agreement, no management fees are paid to the Adviser if the
distribution rate to the Limited Partners falls below 7.5%. The
Partnership's share of unconsolidated ventures' income, after
adjustment for the gain on sale and income from the operations of
the Highland Village Apartments, decreased by approximately 19%
in fiscal 1992 as compared to the prior year, primarily due to a
significant decrease in net income from the Chicago-625
Partnership. The joint venture's net income decreased due to a
significant decrease in rental income, an increase in property
operating expenses and an increase in real estate taxes. The
decline in rental income was reflective of the market conditions
in downtown Chicago. Likewise, the increase in property
operating expenses resulted from a general improvement program
implemented during the year to enhance the building's appeal, as
part of management's efforts to retain existing tenants and
attract new tenants. Net income of the Partnership's
consolidated joint ventures, Hacienda Business Park and Asbury
Commons, increased significantly due to increases in rental
income from increased occupancy and the first full year of
stabilized operations of the Asbury Commons Apartments.
Inflation
The Partnership completed its seventh full year of operations
in fiscal 1994. The effects of inflation and changes in prices
on the Partnership's operating results to date have not been
significant.
Inflation in future periods may increase revenues, as well as
operating expenses, at the Partnership's operating investment
properties. Most of the existing leases with tenants at the
Partnership's shopping centers and office buildings contain
rental escalation and/or expense reimbursement clauses based on
increases in tenant sales or property operating expenses.
Tenants at the Partnership's apartment properties have short-term
leases, generally of one year or less in duration. Rental rates
at these properties can be adjusted to keep pace with inflation,
to the extent market conditions allow, as the leases are renewed
or turned over. Such increases in rental income would be
expected to at least partially offset the corresponding increases
in Partnership and property operating expenses.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included
under Item 14 of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Partnership
The Managing General Partner of the Partnership is Second
Equity Partners, Inc., a Virginia corporation, which is a
wholly-owned subsidiary of PaineWebber Group, Inc. The Associate
General Partner of the Partnership is Properties Associates 1986,
L.P., a Virginia limited partnership, certain limited partners of
which are also officers of the Managing General Partner. The
Managing General Partner has overall authority and responsibility
for the Partnership's operations.
(a) and (b) The names and ages of the directors and principal
executive officers of the Managing General Partner of the
Partnership are as follows:
Date
elected
Name Office Age to
Office
Lawrence A. Cohen President and Chief Executive Officer 40 5/15/91
Albert Pratt Director 83 4/17/85 *
Clive D. Bull Director 39 6/29/93
Eugene M. Matalene, Jr. Director 46 6/29/93
Walter V. Arnold Senior Vice President and
Chief Financial Officer 46 10/29/85
James A. Snyder Senior Vice President 48 7/6/92
John B. Watts III Senior Vice President 41 6/6/88
Barbara A. Woolhandler Senior Vice President 43 1/3/90
David F. Brooks First Vice President and
Assistant Treasurer 51 4/17/85 *
Timothy J. Medlock Vice President and Treasurer 32 6/1/88
Thomas W. Boland Vice President 31 12/1/91
* The date of incorporation of the Managing General Partner.
(c) There are no other significant employees in addition to
the directors and executive officers mentioned above.
(d) There is no family relationship among any of the
foregoing directors or executive officers of the Managing General
Partner of the Partnership. All of the foregoing directors and
executive officers have been elected to serve until the annual
meeting of the Managing General Partner.
(e) All of the directors and officers of the Managing General
Partner hold similar positions in affiliates of the Managing
General Partner, which are the corporate general partners of
other real estate limited partnerships sponsored by PWI, and for
which PaineWebber Properties Incorporated serves as the
investment adviser. The business experience of each of the
directors and principal executive officers of the Managing
General Partner is as follows:
Lawrence A. Cohen is President and Chief Executive Officer of
the Managing General Partner and President and Chief Executive
Officer of the Adviser which he joined in January 1989. He is a
also member of the Board of Directors and the Investment
Committee of the Adviser. From 1984 to 1988, Mr. Cohen was First
Vice President of VMS Realty Partners where he was responsible
for origination and structuring of real estate investment
programs and for managing national broker-dealer relationships.
He is a member of the New York Bar and is a Certified Public
Accountant.
Albert Pratt is a Director of the Managing General Partner, a
Consultant of PWI and a limited partner of the Associate General
Partner. Mr. Pratt joined PWI as Counsel in 1946 and since that
time has held a number of positions including Director of both
the Investment Banking Division and the International Division,
Senior Vice President and Vice Chairman of PWI and Chairman of
PaineWebber International, Inc.
Clive D. Bull is a Director of the Managing General Partner
and is the manager of PaineWebber's Structured Finance Group
where he oversees the residential mortgage-backed, commercial
mortgage-backed and asset-backed structuring groups. Mr. Bull
joined PaineWebber in 1986 and ran futures and options research
in the Quantitative Research Group before assuming his current
responsibilities. Prior to joining PaineWebber, Mr. Bull was a
tenured associate professor in the Economics Department of New
York University. During his tenure at NYU, Mr. Bull published
articles in economics journals and served on the editorial board
of the American Economic Review. Mr. Bull received his B.A. from
Oxford University and a Ph.D. in Economics from UCLA.
Eugene M. Matalene, Jr. is a Director of the Managing General
Partner and a Director of the Adviser. Mr. Matalene joined
PaineWebber in April 1987 as First Vice President in the Private
Placement Group. Before joining PaineWebber, Mr. Matalene was
First Vice President in the Investment Banking Division at Drexel
Burnham Lambert from 1986 to 1987. Prior to Drexel Burnham
Lambert, Mr. Matalene was associated with Kidder, Peabody as Vice
President in the Investment Banking Division from 1979 to 1986.
He holds a B.A. from the University of North Carolina at Chapel
Hill and an M.B.A. from Columbia University. He is a member of
the Board of Directors of American Bankers Insurance Company.
Walter V. Arnold is a Senior Vice President and Chief
Financial Officer of the Managing General Partner and Senior Vice
President and Chief Financial Officer of the Adviser which he
joined in October 1985. Mr. Arnold joined PWI in 1983 with the
acquisition of Rotan Mosle, Inc. where he had been First Vice
President and Controller since 1978, and where he continued until
joining the Adviser. Mr. Arnold is a Certified Public Accountant
licensed in the state of Texas.
James A. Snyder is a Senior Vice President of the Managing
General Partner and a Senior Vice President and Member of the
Investment Committee of the Adviser. Mr. Snyder re-joined PWPI
in July 1992 having served previously as an officer of the
Adviser from July 1980 to August 1987. From January 1991 to July
1992, Mr. Snyder was with the Resolution Trust Corporation, most
recently as the Vice President of Asset Sales. During the period
August 1987 to February 1989, Mr. Snyder was Executive Vice
President and Chief Financial Officer of Southeast Regional
Management Inc., a real estate development company. From
February 1989 to October 1990, he was President of Kan Am
Investors, Inc., a real estate investment company.
John B. Watts III is a Senior Vice President of the Managing
General Partner and a Senior Vice President of the Adviser which
he joined in June 1988. Mr. Watts has had over 15 years of
experience in acquisitions, dispositions and finance of real
estate. He received degrees of Bachelor of Architecture,
Bachelor of Arts and Master of Business Administration from the
University of Arkansas.
Barbara A. Woolhandler is a Senior Vice President of the
Managing General Partner and a Senior Vice President of the
Adviser. Ms. Woolhandler joined PaineWebber in 1983 with its
acquisition of Rotan Mosle, Inc. where she was a First Vice
President in the Direct Investments Department. Ms. Woolhandler
joined Rotan Mosle, Inc. in 1980.
David F. Brooks is a First Vice President and Assistant
Treasurer of the Managing General Partner and a First Vice
President and an Assistant Treasurer of the Adviser which he
joined in March 1980. From 1972 to 1980, Mr. Brooks was an
Assistant Treasurer of Property Capital Advisors, Inc. and also,
from March 1974 to February 1980, the Assistant Treasurer of
Capital for Real Estate, which provided real estate investment,
asset management and consulting services.
Timothy J. Medlock is a Vice President and Treasurer of the
Managing General Partner and Vice President and Treasurer of the
Adviser which he joined in 1986. From June 1988 to August 1989,
Mr. Medlock served as the Controller of the Managing General
Partner and the Adviser. From 1983 to 1986, Mr. Medlock was
associated with Deloitte Haskins & Sells. Mr. Medlock graduated
from Colgate University in 1983 and received his Masters in
Accounting from New York University in 1985.
Thomas W. Boland is a Vice President of the Managing General
Partner and a Vice President and Manager of Financial Reporting
of the Adviser which he joined in 1988. From 1984 to 1987 Mr.
Boland was associated with Arthur Young & Company. Mr. Boland is
a Certified Public Accountant licensed in the state of
Massachusetts. He holds a B.S. in Accounting from Merrimack
College and an M.B.A. from Boston University.
(f) None of the directors and officers was involved in legal
proceedings which are material to an evaluation of his or her
ability or integrity as a director or officer.
(g) Compliance With Exchange Act Filing Requirements: The
Securities Exchange Act of 1934 requires the officers and
directors of the Managing General Partner, and persons who own
more than ten percent of the Partnership's limited partnership
units, to file certain reports of ownership and changes in
ownership with the Securities and Exchange Commission. Officers,
directors and ten-percent beneficial holders are required by SEC
regulations to furnish the Partnership with copies of all Section
16(a) forms they file.
Based solely on its review of the copies of such forms
received by it, the Partnership believes that, during the year
ended March 31, 1994, all filing requirements applicable to the
officers and directors of the Managing General Partner and ten-
percent beneficial holders were complied with.
Item 11. Executive Compensation
The directors and officers of the Partnership's Managing
General Partner receive no current or proposed remuneration from
the Partnership.
The General Partners are entitled to receive a share of
Partnership cash distributions and a share of profits and
losses. These items are described in Item 13.
The Partnership has paid cash distributions to the Limited
Partners on a quarterly basis at a rate of 8.25% per annum on
invested capital from April 1, 1989 through the quarter ended
December 31, 1990 and at a rate of 5.25% per annum on invested
capital from January 1, 1991 to the present. However, the
Partnership's Limited Partnership Units are not actively traded
on any organized exchange, and no efficient secondary market
exists. Accordingly, no accurate price information is available
for these Units. Therefore, a presentation of historical
unitholder total returns would not be meaningful.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
(a) The Partnership is a limited partnership issuing Units of
limited partnership interest, not voting securities. All the
outstanding stock of the Managing General Partner, Second Equity
Partners Fund, Inc. is owned by PaineWebber. Properties
Associates 1986, L.P., the Associate General Partner, is a
Virginia limited partnership, certain limited partners of which
are also officers of the Managing General Partner. No limited
partner is known by the Partnership to own beneficially more than
5% of the outstanding interests of the Partnership.
(b) The directors and officers of the Managing General
Partner do not directly own any Units of limited partnership
interest of the Partnership. No director or officer of the
Managing General Partner, nor any limited partner of the
Associate General Partner, possesses a right to acquire
beneficial ownership of Units of limited partnership interest of
the Partnership.
(c) There exists no arrangement, known to the Partnership,
the operation of which may, at a subsequent date, result in a
change in control of the Partnership.
Item 13. Certain Relationships and Related Transactions
The General Partners are entitled to receive a share of cash
distributions, and a share of profits and losses as described
under captions "Compensation and Fees" and "Profits and Losses
and Cash Distributions" of the Prospectus, as supplemented, a
copy of which is hereby incorporated herein by reference. The
General Partners received cash distributions of $67,242 for the
year ended March 31, 1994.
The Partnership is permitted to engage in transactions
involving affiliates of the General Partners of the Partnership,
as described under the captions "Management Compensation",
"Conflicts of Interest" and "Rights, Powers and Duties of General
Partners" of the Prospectus, as supplemented, a copy of which is
hereby incorporated herein by reference. PWI and PaineWebber
Properties Incorporated, ("PWPI"), a wholly-owned subsidiary of
PWI, are reimbursed for their direct expenses relating to the
offering of units, the administration of the Partnership and the
acquisition of the Partnership's real property investments.
Included in general and administrative expenses for the year
ended March 31, 1994 is $268,020, representing reimbursements to
an affiliate of the Managing General Partner for providing
certain financial, accounting and investor communication services
to the Partnership.
The Partnership uses the services of Mitchell Hutchins
Institutional Investors, Inc. ("Mitchell Hutchins") for the
managing of cash assets. Mitchell Hutchins is a subsidiary of
Mitchell Hutchins Asset Management, Inc., an independently
operated subsidiary of PaineWebber. Mitchell Hutchins earned
fees of $7,500 (included in general and administrative expenses)
for managing the Partnership's cash assets during fiscal 1994.
See Note 3 to the financial statements accompanying this
Annual Report for a further discussion of certain relationships
and related transactions.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a) The following documents are filed as part of this report:
(1) and (2) Financial Statements and Schedules:
The response to this portion of Item 14 is
submitted as a separate section of this Report. See
Index to Financial Statements and Financial Statement
Schedules at page F-1.
(3) Exhibits:
The exhibits on the accompanying index to
exhibits at page IV-3 are filed as part of this
Report.
(b)No reports on Form 8-K were filed during the last
quarter of fiscal 1994.
(c) Exhibits
See (a)(3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is
submitted as a separate section of this Report. See
Index to Financial Statements and Financial Statement
Schedules at page F-1.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Partnership has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PAINEWEBBER EQUITY PARTNERS
TWO LIMITED PARTNERSHIP
By: Second Equity Partners, Inc.
Managing General Partner
By: /s/ Lawrence A. Cohen
Lawrence A. Cohen
President and
Chief Executive Officer
By: /s/ Walter V. Arnold
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
By: /s/ Thomas W. Boland
Thomas W. Boland
Vice President
Dated: June 13, 1994
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Partnership and in the capacities and on the
dates indicated.
By:/s/ Albert Pratt Date: June 13, 1994
Albert Pratt
Director
By:/s/ Clive D. Bull Date: June 13, 1994
Clive D. Bull
Director
By:/s/ Eugene M. Matalene, Jr. Date: June 13, 1994
Eugene M. Matalene, Jr.
Director
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
INDEX TO EXHIBITS
Page Number in the Report
Exhibit No. Description of Document Or Other Reference
(3) and (4) Prospectus of the Partnership Filed with the Commission
dated July 21, 1986, as pursuant to Rule 424(c)
supplemented, with particular and incorporated herein
reference to the Restated by reference.
Certificate and Agreement of
Limited Partnership
(10) Material contracts previously Filed with the Commission
filed as exhibits to registration pursuant to Section 13 or
statements and amendments thereto 15(d) of the Securities
of the registrant together with Act of 1934 and incorporated
all such contracts filed as herein by reference.
exhibits of previously filed
Forms 8-K and Forms 10-K are
hereby incorporated herein
by reference.
(13) Annual Report to Limited Partners No Annual Report for the
fiscal year 1994 has been
sent to the Limited
Partners. An Annual
Report will be
sent to the Limited
Partners subsequent to this
filing.
(22) List of subsidiaries Included in Item I of Part I
of this Report Page I-1, to
which reference is hereby made.
ANNUAL REPORT ON FORM 10-K
Item 14(a)(1) and (2) and Item 14(d)
PAINEWEBBER EQUITY PARTNERS TWO
LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference
PaineWebber Equity Partners Two Limited Partnership:
Report of independent auditors F-2
Consolidated balance sheets as of March 31, 1994 and 1993 F-3
Consolidated statements of operations for the years ended March
31, 1994, 1993 and 1992 F-4
Consolidated statements of changes in partners' capital
(deficit) for the years
ended March 31, 1994, 1993 and 1992 F-5
Consolidated statements of cash flows for the years ended March
31, 1994, 1993 and 1992 F-6
Notes to consolidated financial statements F-7
Schedule XI - Real Estate and Accumulated Depreciation F-24
Combined Joint Ventures of PaineWebber Equity Partners Two
Limited Partnership:
Report of independent auditors F-25
Combined balance sheets as of December 31, 1993 and 1992 F-26
Combined statements of income and changes in ventures' capital
for the years ended December 31, 1993, 1992 and 1991 F-27
Combined statements of cash flows for the years ended December
31, 1993, 1992 and 1991 F-28
Notes to combined financial statements F-29
Schedule XI - Real Estate and Accumulated Depreciation F-35
Other schedules have been omitted since the required
information is not present or not present in amounts sufficient
to require submission of the schedule, or because the information
required is included in the financial statements, including the
notes thereto.
REPORT OF INDEPENDENT AUDITORS
The Partners
PaineWebber Equity Partners Two Limited Partnership:
We have audited the accompanying consolidated balance
sheets of PaineWebber Equity Partners Two Limited
Partnership as of March 31, 1994 and 1993, and the
related consolidated statements of operations, changes
in partners' capital (deficit) and cash flows for each
of the three years in the period ended March 31, 1994.
Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These
financial statements and schedule are the
responsibility of the Partnership's management. Our
responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are
free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements.
An audit also includes assessing the accounting
principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the
consolidated financial position of PaineWebber Equity
Partners Two Limited Partnership at March 31, 1994 and
1993, and the consolidated results of its operations
and its cash flows for each of the three years in the
period ended March 31, 1994, in conformity with
generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial
statements taken as a whole, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG
Boston, Massachusetts
June 13, 1994
PAINEWEBBER EQUITY PARTNERS TWO
LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
March 31, 1994 and 1993
ASSETS
1994 1993
Operating investment properties:
Land $ 5,008,793 $ 5,008,793
Building and improvements 36,514,727 36,423,906
41,523,520 41,432,699
Less accumulated depreciation (8,946,838) (7,722,461)
32,576,682 33,710,238
Investments in unconsolidated
joint ventures, at equity 65,519,150 68,054,010
Cash and cash equivalents 4,289,661 4,494,420
Escrowed cash 243,660 25,473
Accounts receivable 23,929 126,956
Accounts receivable - affiliates 67,805 57,805
Prepaid expenses 21,680 12,707
Deferred rent receivable 258,190 303,326
Deferred expenses, net of accumulated
amortization of $1,227,112
($977,560 in 1993) 390,504 597,136
$103,391,261 $107,382,071
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ - $ 45,456
Accounts payable and accrued expenses 211,591 185,642
Advances from consolidated ventures 387,859 558,020
Tenant security deposits 85,644 68,150
Bonds payable 2,864,047 2,955,931
Notes payable and accrued interest 33,964,059 30,888,809
Minority interest in net assets of
consolidated joint ventures 331,249 331,249
Total liabilities 37,844,449 35,033,257
Partners' capital:
General Partners:
Capital contributions 1,000 1,000
Cumulative net income 140,227 141,044
Cumulative cash distributions (619,868) (552,626)
Limited Partners ($1 per Unit;
134,425,741 Units issued):
Capital contributions, net of
offering costs 119,746,438 119,746,438
Cumulative net income 13,636,827 13,713,810
Cumulative cash distributions (67,357,812) (60,700,852)
Total partners' capital 65,546,812 72,348,814
$103,391,261 $107,382,071
See accompanying notes.
PAINEWEBBER EQUITY PARTNERS TWO
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 1994, 1993 and 1992
1994 1993 1992
Revenues:
Rental income and expense
reimbursements $ 4,157,608 $ 4,555,110 $ 4,345,983
Interest and other income 180,584 237,488 281,700
4,338,192 4,792,598 4,627,683
Expenses:
Interest expense 3,267,211 2,986,945 2,760,170
Depreciation and amortization 1,473,929 1,477,985 2,240,475
Property operating expenses 929,509 956,877 840,098
Real estate taxes 355,257 312,177 481,813
General and administrative 703,206 607,173 755,120
Provision for possible
uncollectible amounts - - 138,136
Management fees - - 69,880
6,729,112 6,341,157 7,285,692
Operating loss (2,390,920) (1,548,559) (2,658,009)
Investment income:
Interest income on notes
receivable 106,409 106,822 115,917
Partnership's share of
unconsolidated ventures'
income 2,206,711 2,592,147 2,492,657
2,313,120 2,698,969 2,608,574
Net income (loss) $ (77,800) $ 1,150,410 $ (49,435)
Net income (loss) per 1,000
Limited Partnership Units $ (0.57) $ 8.47 $ (0.36)
Cash distributions per 1,000
Limited Partnership Units $ 49.52 $ 49.52 $ 49.52
The above per Limited Partnership Unit information is based upon
the 134,425,741 Limited Partnership Units outstanding during
each year.
See accompanying notes.
PAINEWEBBER EQUITY PARTNERS TWO
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(DEFICIT)
For the years ended March 31, 1994, 1993 and 1992
General Limited
Partners Partners Total
Balance at March 31, 1991 $(286,205) $ 84,983,331 $ 84,697,126
Cash distributions (68,120) (6,656,965) (6,725,085)
Net loss (519) (48,916) (49,435)
Balance at March 31, 1992 (354,844) 78,277,450 77,922,606
Cash distributions (67,242) (6,656,960) (6,724,202)
Net income 11,504 1,138,906 1,150,410
Balance at March 31, 1993 (410,582) 72,759,396 72,348,814
Cash distributions (67,242) (6,656,960) (6,724,202)
Net loss (817) (76,983) (77,800)
Balance at March 31, 1994 $ (478,641) $ 66,025,453 $ 65,546,812
See accompanying notes.
PAINEWEBBER EQUITY PARTNERS TWO
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 1994, 1993 and 1992
Increase (Decrease) in Cash and Cash Equivalents
1994 1993 1992
Cash flows from operating activities:
Net income (loss) $ (77,800) $ 1,150,410 $ (49,435)
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Partnership's share of
unconsolidated
ventures' income (2,206,711) (2,592,147) (2,492,657)
Interest expense 3,075,250 2,793,630 2,540,953
Depreciation and amortization 1,473,929 1,477,985 2,240,475
Provision for possible
uncollectible amounts - - 138,136
Changes in assets and liabilities:
Escrowed cash (218,187) 15,422 14,180
Accrued interest receivable - 12,961 11,432
Accounts receivable 103,027 36,561 (12,135)
Accounts receivable -
affiliates (10,000) (25,305) (1,667)
Deferred rent receivable 45,136 (70,882) (8,135)
Prepaid expenses (8,973) (3,074) (2,070)
Tenant security deposits 17,494 20,777 (6,369)
Accounts payable and accrued
expenses 25,949 70,553 (183,902)
Advances from consolidated
ventures (170,161) (513,597) 1,071,617
Accounts payable - affiliates (45,456) (80,396) (461,778)
Total adjustments 2,081,297 1,142,488 2,848,080
Net cash provided by
operating activities 2,003,497 2,292,898 2,798,645
Cash flows from investing activities:
Distributions from unconsolidated
ventures 4,741,571 4,611,870 4,701,234
Additional investments in
unconsolidated ventures - (168,670) (841,425)
Additions to operating
investment properties (90,821) (261,317) (902,579)
Reductions to operating
investment properties
resulting from mandatory payments - - 505,486
Payment of leasing commissions (42,920) (139,979) (250,276)
Net cash provided by
investing activities 4,607,830 4,041,904 3,212,440
Cash flows from financing activities:
Distributions to partners (6,724,202) (6,724,202) (6,725,085)
District bond assessments - 44,846 -
Payments on district bond
assessments (91,884) (34,759) (2,429)
Net cash used for
financing activities (6,816,086) (6,714,115) (6,727,514)
Net decrease in cash and cash
equivalents (204,759) (379,313) (716,429)
Cash and cash equivalents,
beginning of year 4,494,420 4,873,733 5,590,162
Cash and cash equivalents,
end of year $ 4,289,661 $ 4,494,420 $ 4,873,733
Cash paid during the year for
interest $ 191,961 $ 193,315 $ 219,217
Write-off of fully depreciated
tenant improvements $ - $ 832,336 $ -
See accompanying notes.
1. Organization
PaineWebber Equity Partners Two Limited Partnership (the
"Partnership") is a limited partnership organized pursuant to
the laws of the State of Virginia on May 16, 1986 for the
purpose of investing in a diversified portfolio of existing,
newly-constructed or to-be-built income-producing real
properties. The Partnership authorized the issuance of a
maximum of 150,000,000 Partnership Units (the "Units") of
which 134,425,741 Units, representing capital contributions
of $134,425,741, were subscribed and issued between June 1986
and June 1988.
2. Summary of Significant Accounting Policies
The accompanying financial statements include the
Partnership's investment in six unconsolidated joint venture
partnerships, each of which owns operating properties. The
Partnership accounts for its investments in the
unconsolidated joint ventures using the equity method. Under
the equity method the ventures are carried at cost adjusted
for the Partnership's share of the ventures' earnings or
losses and distributions. All of the unconsolidated joint
venture partnerships are required to maintain their
accounting records on a calendar year basis for income tax
reporting purposes. As a result, the Partnership recognizes
its share of the earnings or losses from the unconsolidated
joint ventures based on financial information which is three
months in arrears to that of the Partnership. See Note 5 for
a description of the unconsolidated joint venture
partnerships.
As further discussed in Note 4, the Partnership acquired
complete control of Hacienda Park Associates on December 10,
1991. In addition, the Partnership acquired complete control
of the Atlanta Asbury Partnership on February 14, 1992.
Accordingly, these joint ventures have been presented on a
consolidated basis in the accompanying financial statements.
As discussed above, these joint ventures also have a December
31 year-end and operations of the ventures continue to be
reported on a three-month lag. All material transactions
between the Partnership and the joint ventures have been
eliminated upon consolidation, except for lag-period cash
transfers. Such lag period cash transfers are accounted for
as advances from consolidated ventures on the accompanying
balance sheet.
The consolidated operating investment properties (Saratoga
Center and EG&G Plaza and the Asbury Commons Apartments) are
carried at the lower of cost, adjusted for certain guaranteed
payments from partners and accumulated depreciation, or net
realizable value. The net realizable value of a property
held for long-term investment purposes is measured by the
recoverability of the Partnership's investment from expected
future cash flows on an undiscounted basis, which may exceed
the property's current market value. The net realizable
value of a property held for sale approximates its market
value. The Partnership's investments in Saratoga Center and
EG&G Plaza and the Asbury Commons Apartments were considered
to be held for long-term investment purposes as of March 31,
1994 and 1993. Depreciation expense is computed using the
straight-line method over estimated useful lives of five to
thirty-one and one-half years. Acquisition fees paid to
PaineWebber Properties Incorporated and costs of identifiable
improvements, have been capitalized and are included in the
cost of the operating investment properties. Maintenance and
repairs are charged to expense when incurred.
Rental income is recognized on the straight-line basis over
the term of the related lease agreement,taking into consideration
scheduled cost increases and free-rent periods offered as inducements
to lease the property. Deferred rent receivable represents rental
income earned by Hacienda Park Associates which has been recognized
on the straight-line basis over the term of the related lease agreement.
Deferred expenses include legal fees incurred in connection
with the organization of the Partnership, which have been
amortized using the straight-line method over a sixty-month
term and legal fees incurred in connection with the notes
payable described in Note 6, which are being amortized using
the straight-line basis over the term of the loans. Deferred
expenses also include legal fees associated with the
organization of the Hacienda Park joint venture, which were
amortized on the straight-line basis over a sixty-month term,
and deferred commissions and lease cancellation fees of
Hacienda Park Associates, which are being amortized on a
straight-line basis over the term of the respective lease.
Escrowed cash includes funds escrowed for the payment of
property taxes and tenant security deposits of the Asbury
Commons Apartments. At March 31, 1994, escrowed cash also
includes funds escrowed as additional collateral under the
terms of the loan agreement secured by the 625 North Michigan
operating property (see Note 6).
For purposes of reporting cash flows, the Partnership
considers all highly liquid investments with original
maturities of 90 days or less to be cash equivalents.
Certain fiscal 1993 amounts have been reclassified to
conform to the fiscal 1994 presentation.
No provision for income taxes has been made as the liability
for such taxes is that of the partners rather than the
Partnership.
3. The Partnership Agreement and Related Party Transactions
The General Partners of the Partnership are Second Equity
Partners, Inc. (the "Managing General Partner"), a wholly-
owned subsidiary of PaineWebber Group Inc. ("PaineWebber")
and Properties Associates 1986, L.P. (the "Associate General
Partner"), a Virginia limited partnership, certain limited
partners of which are also officers of the Managing General
Partner. Affiliates of the General Partners will receive
fees and compensation determined on an agreed-upon basis, in
consideration of various services performed in connection
with the sale of the Units and the acquisition, management,
financing and disposition of Partnership properties.
All distributable cash, as defined, for each fiscal year
shall be distributed quarterly in the ratio of 99% to the
Limited Partners and 1% to the General Partners until the
Limited Partners have received an amount equal to a 7.5%
noncumulative annual return on their adjusted capital
contributions. The General Partners will then receive
distributions until they have received an amount equal to
1.01% of total distributions of distributable cash which has
been made to all partners and PWPI has received Asset
Management Fees equal to 3.99% of all distributions to all
partners. The balance will be distributed 95% to the Limited
Partners, 1.01% to the General Partners and 3.99% to PWPI as
an asset management fee. All sale or refinancing proceeds
shall be distributed in varying proportions to the Limited
and General Partners, as specified in the amended Partnership
Agreement.
All taxable income (other than from a Capital Transaction)
in each year will be allocated to the Limited Partners and
the General Partners in proportion to the amounts of
distributable cash distributed to them (excluding the asset
management fee) in that year or, if there are no
distributions of distributable cash, 98.95% to the Limited
Partners and 1.05% to the General Partners. All tax losses
(other than from a Capital Transaction) will be allocated
98.95% to the Limited Partners and 1.05% to the General
Partners. Taxable income or tax loss arising from a sale or
refinancing of investment properties will be allocated to the
Limited Partners and the General Partners in proportion to
the amounts of sale or refinancing proceeds to which they are
entitled; provided that the General Partners shall be
allocated at least 1% of taxable income arising from a sale
or refinancing. If there are no sale or refinancing
proceeds, tax loss or taxable income from a sale or
refinancing will be allocated 98.95% to the Limited Partners
and 1.05% to the General Partner. Allocations of the
Partnership's operations between the General Partners and the
Limited Partners for financial accounting purposes have been
made in conformity with the allocations of taxable income or
tax loss.
PaineWebber Properties Incorporated ("PWPI") received asset
management fees of $69,880 for the year ended March 31, 1992,
as compensation for providing asset management and advisory
services to the Partnership. The payment of management fees
to PWPI was suspended after the first quarter of fiscal 1992
due to a reduction in the quarterly distribution rate to the
limited partners. Per the terms of the advisory contract,
PWPI is not entitled to management fees unless the Limited
Partners receive a current cash return of at least 7.5% per
annum.
PWI and PWPI, a wholly-owned subsidiary of PWI, are
reimbursed for their direct expenses relating to the offering
of units, the administration of the Partnership and the
acquisition of the Partnership's real property investments.
Accounts payable - affiliates at March 31, 1993 includes
reimbursements of out-of-pocket expenses of $10,432, payable
to PWPI.
Included in general and administrative expenses for the
years ended March 31, 1994, 1993 and 1992 is $268,020,
$308,850 and $294,020, respectively, representing
reimbursements to an affiliate of the Managing General
Partner for providing certain financial, accounting and
investor communication services to the Partnership. Accounts
payable - affiliates at March 31, 1993 includes $35,024
payable to this affiliate for providing such services.
The Partnership uses the services of Mitchell Hutchins
Institutional Investors, Inc. ("Mitchell Hutchins") for the
managing of cash assets. Mitchell Hutchins is a subsidiary
of Mitchell Hutchins Asset Management, Inc., an independently
operated subsidiary of PaineWebber. Mitchell Hutchins earned
fees of $7,500, $8,438 and $7,985 (included in general and
administrative expenses) for managing the Partnership's cash
assets during fiscal 1994, 1993 and 1992, respectively.
Accounts receivable - affiliates at March 31, 1994 consists
of investor services fees of $52,500 due from the TCR Walnut
Creek Limited Partnership and $15,305 due from certain
unconsolidated joint ventures for expenses paid by the
Partnership on behalf of the joint ventures. Accounts
receivable - affiliates at March 31, 1993 consists of
investor services fees of $42,500 due from the TCR Walnut
Creek Limited Partnership and $15,305 due from certain
unconsolidated joint ventures for expenses paid by the
Partnership on behalf of the joint ventures.
4. Operating Investment Properties
At March 31, 1994 and 1993, the Partnership owned majority
and controlling interests in two joint venture partnerships
which own operating investment properties. As discussed
further below, the Partnership obtained controlling interests
in both of these joint ventures during fiscal 1992.
Accordingly, the accompanying financial statements present
the financial position and results of operations of these
ventures on a consolidated basis. Prior to fiscal 1992, the
Partnership's investments in these joint ventures were
accounted for on the equity method (see Note 5). The
Partnership's policy is to report the operations of these
consolidated joint ventures on a three-month lag.
Descriptions of the operating properties and the agreements
through which the Partnership owns its interests in the
properties are provided below:
Hacienda Park Associates
On December 24, 1987, the Partnership acquired an interest
in Hacienda Park Associates (the "joint venture"), a
California general partnership organized in accordance with a
joint venture agreement between the Partnership and Callahan
Pentz Properties (the "co-venturer"). The joint venture was
organized to own and operate three buildings in the Hacienda
Business Park, which is located in Pleasanton, California,
consisting of Saratoga Center, a multi-tenant office building
and EG&G Plaza, a single tenant facility. Saratoga Center,
completed in 1985, consists of approximately 83,000 net
rentable square feet located on approximately 5.6 acres of
land. Phase I of EG&G Plaza was completed in 1985 and Phase
II was completed in 1987. Both phases together consist of
approximately 102,000 net rentable square feet located on
approximately 7 acres of land. The aggregate cash investment
by the Partnership for its interest was $24,930,043
(including an acquisition fee of $890,000 paid to PWPI and
certain closing costs of $40,043). These three buildings
were 72% leased as of March 31, 1994. Subsequent to year-
end, the Partnership executed a lease agreement with a new
tenant for 31,000 square feet. The 7-year lease agreement
calls for the Partnership to pay for the tenant improvement
costs to modify this space to the needs of the new user.
Tenant improvements and leasing commissions related to this
lease will total approximately $630,000.
During the guaranty period, which was to have run from
December 24, 1987 to December 24, 1991, the co-venturer had
guaranteed to fund all operating deficits, capital costs and
the Partnership's preference return distribution in the event
that cash flow from property operations was insufficient.
The co-venturer defaulted on the guaranty obligations in
fiscal 1990 and negotiations between the Partnership and the
co-venturer to reach a resolution of the default were ongoing
until fiscal 1992, when the ventures reached a settlement
agreement. During fiscal 1992, the co-venturer assigned its
remaining joint venture interest to the Managing General
Partner of the Partnership. The co-venturer also executed a
five-year promissory note in the initial face amount of
$300,000 payable to the Partnership without interest. Unless
prepaid, the balance of the note escalates as to the
principal balance annually up to a maximum of $600,000. In
exchange, it was agreed that the co-venturer or its
affiliates will have no further liability to the Partnership
for any guaranteed preference payments. Due to the
uncertainty regarding the collection of the note receivable,
such compensation will be recognized as payments are
received. Any amounts received will be reflected as
reductions to the carrying value of the operating investment
properties. No payments have been received to date.
Concurrent with the execution of the settlement agreement,
the property's management contact with an affiliate of the co-
venturer was terminated.
Per the terms of the joint venture agreement, net cash flow
of the joint venture is to be distributed monthly in the
following order of priority: (1) the Partnership will receive
a cumulative preferred return of 9.25% on its net investment
until December 31, 1989, 9.75% for the next two years, and
10% per annum thereafter, (2) to pay any capital expenditures
and leasing costs, as defined (3) to the co-venturer in an
amount up to their mandatory contribution, (4) to capital
reserves (5) to pay interest on accrued preferences and
unpaid advances, and (6) the balance will be distributed 75%
to the Partnership and 25% to the co-venturer.
Net proceeds from sales or refinancings shall be distributed
as follows: (1) to the Partnership to the extent of any
unpaid preferred return and accrued interest thereon; (2) to
the Partnership to the extent of its net investment plus
$2,400,000 and (3) 75% to the Partnership and 25% to the co-
venturer. The co-venturer and the Partnership will also
receive pro rata, any outstanding advances, including
interest thereon, from proceeds from sales or refinancings
prior to a return of capital.
Net income from operations shall be allocated first to the
Partnership to the extent of its preference return and then
75% to the Partnership and 25% to the co-venturer. Net
losses from operations shall be allocated 75% to the
Partnership and 25% to the co-venturer.
Atlanta Asbury Partnership
On March 12, 1990 the Partnership acquired an interest in
Atlanta Asbury Partnership (the "joint venture"), a Georgia
general partnership organized in accordance with a joint
venture agreement between the Partnership and Asbury
Commons/Summit Limited Partnership, an affiliate of Summit
Properties (the "co-venturer"). The joint venture was
organized to own and operate Asbury Commons Apartments, a
newly constructed 204-unit residential apartment complex
located in Atlanta, Georgia. The aggregate cash investment by
the Partnership for its interest was $14,417,791 (including
an acquisition fee of $50,649 payable to PWPI and certain
closing costs of $67,142). The property was 92% occupied at
March 31, 1994.
During the Guaranty Period, from March 13, 1990 to March 15,
1992, as defined, the co-venturer had agreed to
unconditionally guarantee to fund any deficits and to ensure
that the joint venture could distribute to the Partnership
its preference return, (as defined below). The co-venturer
was not in compliance with the mandatory payment provisions
of the Partnership agreement for the period from November 30,
1990 to February 14, 1992. On February 14, 1992, a
settlement agreement between the Partnership and the co-
venturer was executed whereby the co-venturer agreed to do
the following: 1) pay the Partnership $275,000; (2) release
all escrowed purchase price funds, amounting to $230,489, to
the joint venture; (3) assign 99% of its joint venture
interest to the Partnership and 1% of its joint venture
interest to the Managing General Partner and withdraw from
the joint venture; and 4) reimburse the Partnership for legal
expenses up to $10,000. In return the co-venturer was
released from its obligations under the joint venture
agreement.
Subsequent to the withdrawal of the original co-venture
partner and the assignments of its interest in the venture to
the Partnership and the Managing General Partner, the terms
of the venture agreement call for net cash flow from
operations of the joint venture to be distributed as follows:
(1) to the Partnership in an amount equal to 10% of its net
cash investment on an annual basis; (2) next to pay interest
on certain additional contributions; and (3) thereafter, any
remaining cash is to be distributed 99.75% to the Partnership
and .25% to the co-venturer.
Proceeds from the sale or refinancing of the property will
be distributed in the following order of priority: (1) to
the Partnership in the aggregate amount of its cumulative
annual preferred return not previously paid; (2) to the
Partnership in an amount equal to the Partnership's net
investment times 1.10; (3) to the Partnership and co-
venturer to repay additional contributions; and (4)
thereafter, any remaining proceeds will be distributed 99.75%
to the Partnership and .25% to the co-venturer.
Net income will be allocated as follows: (1) income will be
allocated to the Partnership and the co-venturer to the
extent of and in the same proportion as cash distributions
and (2) thereafter 99.75% to the Partnership and .25% to the
co-venturer. Losses will be allocated as follows: (1)
losses will be allocated to the partners to the extent of and
in proportion to their positive capital accounts, (2)
thereafter 99.75% to the Partnership and .25% to the co-
venturer.
The following is a combined summary of property operating
expenses for Saratoga Center and EG&G Plaza and the Asbury
Commons Apartments for the years ended December 31, 1993,
1992 and 1991:
1993 1992 1991
Property operating expenses:
Utilities $ 186,984 $ 172,330 $ 182,765
Repairs and maintenance 264,438 256,634 167,793
Salaries and related costs 174,733 180,769 165,673
Administrative and other 153,766 166,784 183,593
Insurance 37,144 42,145 44,782
Management fees 112,444 138,215 95,492
$ 929,509 $ 956,877 $ 840,098
5. Investments in Unconsolidated Joint Ventures
The Partnership has investments in six unconsolidated joint
venture partnerships which own operating investment properties at
March 31, 1994 and 1993. The unconsolidated joint venture
partnerships are accounted for on the equity method in the
Partnership's financial statements. As discussed in Note 2,
these joint ventures report their operations on a calendar year.
Condensed combined financial statements of these
unconsolidated joint ventures, for the periods indicated, are as
follows.
Condensed Combined Balance Sheets
December 31, 1993 and 1992
Assets
1993 1992
Current assets $ 3,389,670 $ 3,890,089
Operating investment properties, net 82,290,951 84,904,636
Other assets 3,999,867 4,188,728
$ 89,680,488 $ 92,983,453
Liabilities and Venturers' Capital
Current liabilities $ 4,457,300 $ 3,661,095
Other liabilities 200,803 203,521
Notes payable 1,000,000 1,700,000
Partnership's share of
venturers' capital 63,366,901 65,967,495
Co-venturers' share of
venturers' capital 20,655,484 21,451,342
$ 89,680,488 $ 92,983,453
Condensed Combined Summary of Operations
For the years ended December 31, 1993, 1992 and 1991
1993 1992 1991
Rental revenues and
expense reimbursements $13,546,942 $13,507,464 $13,493,322
Interest income 41,192 44,337 68,577
13,588,134 13,551,801 13,561,899
Property operating and
other expenses 4,486,253 3,830,505 3,989,520
Real estate taxes 3,081,606 2,983,077 3,014,283
Interest expense 161,726 172,855 203,519
Depreciation and amortization 3,573,394 3,591,589 3,614,838
11,302,979 10,578,026 10,822,160
Net income $ 2,285,155 $ 2,973,775 $ 2,739,739
Net income:
Partnership's share
of combined income $ 2,304,661 $ 2,690,097 $ 2,590,607
Co-venturers' share
of combined income (loss) (19,506) 283,678 149,132
$ 2,285,155 $ 2,973,775 $ 2,739,739
Reconciliation of Partnership's Investment
March 31, 1994 and 1993
1994 1993
Partnership's share of
capital at December 31, as shown above $ 63,366,901 $ 65,967,495
Partnership's share of ventures' current
liabilities and long-term debt 1,574,256 1,542,448
Excess basis due to investments
in joint ventures, net (1) 2,194,710 2,292,660
Deficit fundings (2) (689,047) (689,047)
Timing differences (3) (927,670) (1,059,546)
Investments in unconsolidated
joint ventures, at equity at March 31 $ 65,519,150 $ 68,054,010
(1) At March 31, 1994 and 1993, the Partnership's investment exceeds
its share of the joint venture partnerships' capital
accounts by approximately $2,195,000 and $2,293,000 ,
respectively. This amount, which relates to certain
costs incurred by the Partnership in connection with
acquiring its joint venture investments, is being
amortized over the estimated useful life of the
investment properties (generally 30 years).
(2) Deficit fundings
represent cash contributed to the West Ashley Shoppes
joint venture by the Partnership's co-venturer pursuant
to a guaranty agreement. The joint venture recorded such
contributions as an increase to the Partnership's capital
account for financial reporting purposes.
(3) The timing
differences between the Partnership's share of capital
account balances and its investments in joint ventures
consist of capital contributions made to joint ventures
and cash distributions received from joint ventures
during the period from January 1 to March 31 in each
year. These differences result from the lag in reporting
period discussed in Note 2.
Reconciliation of Partnership's Share of Operations
For the years ended December 31, 1993, 1992 and 1991
1993 1992 1991
Partnership's share of operations,
as shown above $ 2,304,661 $ 2,690,097 $ 2,590,607
Amortization of excess basis (97,950) (97,950) (97,950)
Partnership's share of
unconsolidated ventures' income $ 2,206,711 $ 2,592,147 $ 2,492,657
Investments in unconsolidated joint ventures, at equity is
the Partnership's net investment in the joint venture
partnerships. These joint ventures are subject to
Partnership agreements which determine the distribution of
available funds, the disposition of the venture's assets and
the rights of the partners, regardless of the Partnership's
percentage ownership interest in the venture. Substantially
all of the Partnership's investments in these joint ventures
are restricted as to distributions.
Investments in unconsolidated joint ventures, at equity on
the balance sheet is comprised of the following investment
carrying values:
1994 1993
Chicago-625 Partnership $ 21,415,404 $ 22,651,836
Richmond Gables Associates 6,037,275 6,394,685
Daniel/Metcalf Associates Partnership 13,193,783 13,484,487
TCR Walnut Creek Limited Partnership 8,527,132 8,851,862
Portland Pacific Associates 6,261,781 6,499,180
West Ashley Shoppes Associates 9,083,775 9,171,960
64,519,1506 7,054,010
Note receivable:
Note receivable from TCR
Walnut Creek Limited
Partnership (see discussion below) 1,000,000 1,000,000
Investments in unconsolidated
joint ventures $ 65,519,150 $ 68,054,010
The Partnership received cash distributions from the
unconsolidated ventures during the years ended March 31,
1994, 1993 and 1992 as set forth below:
1994 1993 1992
Chicago-625 Partnership $ 1,252,199 $ 918,285 $ 890,728
Richmond Gables Associates 599,847 564,469 581,588
Daniel/Metcalf Associates
Partnership 1,079,697 1,144,533 1,185,196
TCR Walnut Creek Limited
Partnership 769,890 861,841 812,860
Portland Pacific Associates 659,938 699,300 747,862
West Ashley Shoppes Associates 380,000 423,442 483,000
$ 4,741,571$ 4,611,870 $ 4,701,234
A description of the ventures' properties and the terms of
the joint venture agreements are summarized as follows:
a. Chicago - 625 Partnership
The Partnership acquired an interest in Chicago - 625
Partnership (the "joint venture"), an Illinois general
partnership organized on December 16, 1986 in accordance with
a joint venture agreement between the Partnership, an
affiliate of the Partnership and Michigan-Ontario Limited, an
Illinois limited partnership and an affiliate of Golub &
Company (the "co-venturer"), to own and operate 625 North
Michigan Avenue Office Tower (the "property"). The property
is a 27-story commercial office tower containing an aggregate
of 324,829 square feet of leasable space on approximately .38
acres of land. The property is located in Chicago, Illinois.
The aggregate cash investment made by the Partnership for
its current interest was $26,010,350 (including an
acquisition fee of $1,316,600 paid to PWPI and certain
closing costs of $223,750). At the same time the Partnership
acquired its interest in the joint venture, PaineWebber
Equity Partners One Limited Partnership (PWEP1), an affiliate
of the Managing General Partner with investment objectives
similar to the Partnership's investment objectives, acquired
an interest in this joint venture. PWEP1's initial cash
investment for its interest was $10,000,000 plus an
acquisition fee of $383,400 paid to PWPI. In addition, PWEP1
had an option to purchase from the Partnership $6,880,000 of
additional interest in the joint venture. On June 12, 1987,
PWEP1 exercised a portion of its option by purchasing an
additional interest of $3,500,000 from the Partnership. On
May 18, 1988, PWEP1 exercised the remainder of its option by
purchasing the remaining interest of $3,380,000 from the
Partnership. No gain or loss was recorded on these
transactions.
During 1990 the joint venture agreement was amended to allow
the Partnership and PWEP1 the option to make contributions to
the joint venture equal to total costs of capital
improvements, leasehold improvements and leasing commissions
("Leasing Expense Contributions") incurred since April 1,
1989, not in excess of the accrued and unpaid Preference
Return due to the Partnership and PWEP1. The Partnership
made Leasing Expense Contributions in the amounts of $168,670
and $851,451 during fiscal 1993 and 1992, respectively. The
Partnership made no Leasing Expense Contributions during
fiscal 1994.
The joint venture agreement provides for aggregate
distributions of cash flow and sale or refinancing proceeds
to the Partnership and PWEP1. These amounts are then
distributed to the Partnership and PWEP1 based on their
respective cash investments in the joint venture exclusive of
acquisition fees. As a result of the transfers of the
Partnership's interests to PWEP1 as discussed above, cash
flow distributions and sale or refinancing proceeds will now
be split approximately 59% to the Partnership and 41% to
PWEP1.
Net cash flow will be distributed as follows: First, a
preference return, payable monthly, to the Partnership and
PWEP1 of 9% of their respective net cash investments, as
defined. Second, to the payment of any unpaid accrued
interest and principal on all outstanding default notes.
Third, to the payment of any unpaid accrued interest and
principal on all outstanding operating notes. Fourth, 70% in
total to the Partnership and PWEP1 and 30% to the co-
venturer. The cumulative unpaid and unaccrued Preference
Return due to the Partnership totalled $5,125,199 at December
31, 1993 ($4,039,564 at December 31, 1992).
Profits for each fiscal year shall be allocated, to the
extent that such profits do not exceed the net cash flow for
such fiscal year, in proportion to the amount of such net
cash flow distributed to the Partners for such fiscal year.
Profits in excess of net cash flow shall be allocated 99% in
total to the Partnership and PWEP1 and 1% to the co-venturer.
Losses shall be allocated 99% in total to the Partnership and
PWEP1 and 1% to the co-venturer.
Proceeds from the sale or refinancing of the property shall
be allocated as follows:
First, to the payment of all unpaid accrued interest and
principal on all outstanding default notes. Second, to the
Partnership, PWEP1 and the co-venturer for the payment of all
unpaid accrued interest and principal on all outstanding
operating notes. Third, 100% to the Partnership and PWEP1
until they have received the aggregate amount of their
respective Preference Return not yet paid. Fourth, 100% in
total to the Partnership and PWEP1 until they have received
an amount equal to their respective net investments. Fifth,
100% to the Partnership and PWEP1 until they have received an
amount equal to the PWEP Leasing Expense Contributions less
any amount previously distributed, pursuant to this
provision. Sixth, 100% to the co-venturer until it has
received an amount equal to $6,000,000, less any amount of
proceeds previously distributed to the co-venturer, as
defined. Seventh, 100% to the co-venturer until it has
received an amount equal to any reduction in the amount of
net cash flow that it would have received had the Partnership
not incurred indebtedness in the form of operating notes.
Eighth, 100% in total to the Partnership and PWEP1 until they
have received $2,067,500, less any amount of proceeds
previously distributed to the Partnership and PWEP1, pursuant
to this provision. Ninth, 75% in total to the Partnership
and PWEP1 and 25% to the co-venturer until the Partnership
and PWEP1 have received $20,675,000, less any amount
previously distributed to the Partnership and PWEP1, pursuant
to this provision. Tenth, 100% to the Partnership and PWEP1
until the Partnership and PWEP1 have received an amount equal
to a cumulative return of 9% on the PWEP Leasing Expense
Contributions. Eleventh, any remaining balance will be
distributed 55% in total to the Partnership and PWEP1 and 45%
to the co-venturer.
Gains resulting from the sale of the property shall be
allocated as follows:
First, capital profits shall be allocated to Partners having
negative capital account balances, until the balances of the
capital accounts of such Partners equal zero. Second, any
remaining capital profits up to the amount of capital
proceeds distributed to the Partners pursuant to distribution
of proceeds of a sale or refinancing with respect to the
capital transaction giving rise to such capital profits shall
be allocated to the Partners in proportion to the amount of
capital proceeds so distributed to the Partners. Third,
capital profits in excess of capital proceeds, if any, shall
be allocated between the Partners in the same proportions
that capital proceeds of a subsequent capital transaction
would be distributed if the capital proceeds were equal to
the remaining amount of capital profits to be allocated.
Capital losses shall be allocated as follows:
First, capital losses shall be allocated to the Partners in
an amount up to and in proportion to their respective
positive capital balances. Then, all remaining capital
losses shall be allocated 70% in total to the Partnership and
PWEP1 and 30% to the co-venturer.
The Partnership has a property management agreement with an
affiliate of the co-venturer that provides for management and
leasing commission fees to be paid to the property manager.
The management fee is 4% of gross rents and the leasing
commission is 7%, as defined. The property management
contract is cancellable at the Partnership's option upon the
occurrence of certain events and is currently cancellable by
the co-venturer at any time.
b) Richmond Gables Associates
On September 1, 1987 the Partnership acquired an interest in
Richmond Gables Associates (the "joint venture"), a Virginia
general partnership organized in accordance with a joint
venture agreement between the Partnership and Richmond Erin
Shades Company Limited Partnership, an affiliate of The
Paragon Group (the "co-venturer"). The joint venture was
organized to own and operate the Gables at Erin Shades, a
newly constructed apartment complex located in Richmond,
Virginia. The property consists of 224 units with
approximately 156,000 net rentable square feet on
approximately 15.6 acres of land.
The aggregate cash investment by the Partnership for its
interest was $9,076,982 (including an acquisition fee of
$438,500 paid to PWPI and certain closing costs of $84,716).
Net cash flow from operations of the joint venture will be
distributed in the following order of priority: first, a
preference return, payable monthly, to the Partnership of 9%
on its net cash investment as defined; second, to pay
interest on additional capital contributions; thereafter, 70%
to the Partnership and 30% to the co-venturer.
Proceeds from the sale or refinancing of the property will
be distributed in the following order of priority: (1) the
Partnership will receive the aggregate amount of its
cumulative annual preferred return not previously paid, (2)
the Partnership will receive an amount equal to the
Partnership's net investment, (3) $450,000 each to the
Partnership and the co-venturer, (4) the Partnership and co-
venturer will receive proceeds in proportion to contribution
loans made plus accrued interest, (5) 70% to the Partnership
and 30% to the co-venturer until the Partnership has received
an additional $5,375,000; and (6) thereafter, any remaining
proceeds will be distributed 60% to the Partnership and 40%
to the co-venturer.
Net income and loss will be allocated as follows: (1)
depreciation will be allocated to the Partnership, (2) income
will be allocated to the Partnership and co-venturer in the
same proportion as cash distributions. Losses will be
allocated in amounts equal to the positive capital accounts
of the Partnership and co-venturer and (3) all other profits
and losses will be allocated 70% to the Partnership and 30%
to the co-venturer.
During the Guaranty Period, which expired in September 1990,
the co-venturer agreed to unconditionally guarantee to fund
any deficits and to ensure that the joint venture could
distribute to the Partnership its preference return. Total
mandatory payments contributed by the co-venturer amounted to
$152,048 in 1990. At December 31, 1993 there was a
cumulative unpaid preferred distribution payable to the
Partnership of $740,062. This amount will be paid to the
Partnership if and when there is available cash flow.
The joint venture has entered into a management contract
with an affiliate of the co-venturer which is cancellable at
the option of the Partnership upon the occurrence of certain
events. The annual management fee is 5% of gross rents, as
defined.
c) Daniel/Metcalf Associates Partnership
The Partnership acquired an interest in Daniel/Metcalf
Associates Partnership (the "joint venture"), a Virginia
general partnership organized on September 30, 1987 in
accordance with a joint venture agreement between the
Partnership and Plaza 91 Investors, L.P., an affiliate of
Daniel Realty Corp., organized to own and operate Loehmann's
Plaza, a community shopping center located in Overland Park,
Kansas. The property consists of approximately 142,000 net
rentable square feet on approximately 19 acres of land.
The aggregate cash investment by the Partnership for its
interest was $15,488,352 (including an acquisition fee of
$689,000 paid to PWPI and certain closing costs of $64,352).
As of December 31, 1993, the property was encumbered by a
$700,000 nonrecourse mortgage note. The entire principal
amount of the mortgage is payable upon maturity on December
1, 1994.
Net cash flow of the joint venture is to be distributed
monthly in the following order of priority: (1) the
Partnership will receive a cumulative preferred return (the
"Preferred Return") of 9.25% on its initial net investment of
$14,300,000 from October, 1987 through September, 1989, 9.75%
from October, 1989 through September, 1990 and 10%
thereafter, (2) to the Partnership and co-venturer for the
payment of all unpaid accrued interest and principal on all
outstanding notes. Any additional cash flow shall be
distributed 75% to the Partnership and 25% to the co-
venturer.
The co-venturer agreed to contribute to the joint venture
all funds that were necessary so the joint venture could
distribute to the Partnership its preference return for 36
months from the date of closing (the "Guaranty Period").
Contributions for the final 12 months of the Guaranty Period,
which ended September 30, 1990, were in the form of mandatory
loans. Such loans are non-interest bearing and will be
repaid upon sale or refinancing of the Property. The
Partnership's cumulative unpaid preferential return as of
December 31, 1993 amounted to $1,528,589. If the joint
venture requires additional funds after the Guaranty Period,
and such funds are not available from third party sources,
they are to be provided in the form of operating and capital
deficit loans, 75% by the Partnership and 25% by the co-
venturer. At December 31, 1993, the co-venturer is obligated
to make additional capital contributions of a least $88,644
with respect to cumulative unfunded shortfalls in the
Partnership's preferential return through September 30, 1990.
Proceeds from the sale or refinancing of the property will
be distributed in the following order of priority: (1) to
the Partnership and to the co-venturer, to repay any
additional capital contributions and loans and unpaid
preferential returns, (2) $15,015,000 to the Partnership, (3)
$200,000 to the co-venturer and (4) 75% to the Partnership
and 25% to the co-venturer.
Taxable income will be allocated to the Partnership and the
co-venturer in any year in the same proportions as actual
cash distributions, except to the extent partners are
required to make capital contributions, as defined, then an
amount equal to such contribution will be allocated to the
partners. Profits in excess of net cash flow are allocated
75% to the Partnership and 25% to the co-venturer. Losses
are allocated 99% to the Partnership and 1% to the co-
venturer. Contributions or loans made to the joint venture
by the Partnership or co-venturer will result in a loss
allocation to the Partnership or co-venturer of an equal
amount.
The joint venture has entered into a management contract
with an affiliate of the co-venturer cancellable at the
option of the Partnership upon the occurrence of certain
events. The annual management fee is equal to 1.5% of gross
rents, as defined. In addition, the affiliate of the co-
venturer also earns a subordinated management fee of 2% of
gross rents during any year in which the net cash flow of the
operating property exceeds the Partnership's preference
return. Otherwise the fee is accrued subject to a maximum
amount of $50,000 and payable only from the proceeds of a
capital transaction.
d) TCR Walnut Creek Limited Partnership
The Partnership acquired an interest in TCR Walnut Creek
Limited Partnership (the "joint venture"), a Texas limited
partnership organized on December 24, 1987 in accordance with
a joint venture agreement between the Partnership and
Trammell S. Crow (the "co-venturer") organized to own and
operate Treat Commons Phase II Apartments, an apartment
complex located in Walnut Creek, California. The property
consists of 160 units on approximately 3.98 acres of land.
The aggregate cash investment by the Partnership for its
interest was $13,143,079 (including an acquisition fee of
$602,400 payable to PWPI and certain closing costs of
$40,679). The initial cash investment also includes the sum
of $1,000,000 that was contributed in the form of a permanent
nonrecourse loan to the venture on which the Partnership
receives interest payments at the rate of 10% per annum until
the commencement of the guaranty period, 9.5% per annum
during the guaranty period and 10% per annum thereafter. The
balance of the permanent loan is included in the
Partnership's investment in the joint venture on the
accompanying balance sheet.
Net cash flow from operations of the Joint Venture will be
distributed quarterly in the following order of priority:
(1) first, to repay accrued interest and principal on any
optional loans, (2) second, a preference return to the
Partnership of an interest rate equal to a rate obtainable on
a six-month jumbo certificate of deposit for the period
ending six months after the earlier of the date construction
commenced or August 15, 1987 on its net cash investment, then
9.5% until the end of the guaranty period and 10% thereafter,
and (3) third, the balance, 75% to the Partnership and 25% to
the co-venturer. The cumulative unpaid preference return as
of December 31, 1993 is $1,320,004.
Proceeds from the sale or refinancing of the property will
be distributed in the following order of priority: (1)
first, to repay accrued interest and principal on any
optional loans, (2) second, 100% to the Partnership until the
Partnership has received cumulative distributions, as
defined, and (3) third, the balance, 75% to the Partnership
and 25% to the co-venturer.
Net income will be allocated to the Partnership to the
extent of net cash flow from operations. Any excess income
or all net income, in the event there is no net cash flow
from operations, will be allocated 75% to the Partnership and
25% to the co-venturer. In general, net loss will be
allocated as follows: (i) prior to January 1, 1988, 1% to
the Partnership and 99% to the co-venturer, and (ii)
subsequent to December 31, 1987, 99% to the Partnership and
1% to the co-venturer.
During the guaranty period, from September 1, 1988 to August
31, 1990, the co-venturer agreed to contribute to the joint
venture all funds that were necessary to cover any deficits
and to ensure that the joint venture could distribute the
Partnership's preference return.
The joint venture has entered into a management contract
with an affiliate of the co-venturer which is cancellable at
the option of the Partnership upon the occurrence of certain
events. The annual management fee is 5% of gross revenues,
as defined.
e) Portland Pacific Associates
On January 12, 1988 the Partnership acquired an interest in
Portland Pacific Associates (the "joint venture"), a
California limited partnership organized in accordance with a
joint venture agreement between the Partnership and Pacific
Union Investment Corporation (the "co-venturer"). The joint
venture was organized to own and operate Richland Terrace and
Richmond Park Apartments located in Portland, Oregon. The
property consists of a total of 183 units located on 9.52
acres of land.
The aggregate cash investment by the Partnership for its
interest was $8,251,500 (including an acquisition fee of
$380,000 paid to PWPI and certain closing costs of $33,500).
During the guaranty period, from January 14, 1988 through
February 1, 1991, the co-venturer agreed to unconditionally
guarantee to fund any deficits and to ensure that the joint
venture could distribute to the Partnership its preference
return. The Partnership shall receive a preferred annual
return of 9.25% of the Partnership's net investment for the
two-year period commencing on the date of closing, 9.75%
during the subsequent two years and 10% commencing on the
fourth anniversary date and extending until the termination
and dissolution of the joint venture. The computation of the
preferred return is based upon the Partnership's net
investment of $7,700,000, as defined in the joint venture
agreement.
Net cash flow from operations of the joint venture will be
distributed in the following order of priority: during the
guaranty period 1) to the Partnership until it has received
its cumulative preference return, as defined, (2) to the
partners to pay any guaranty period operating loans or
advances and accrued interest, (3) to the co-venturer to pay
guaranty preference loans, (4) to the co-venturer until the
co-venturer has received the cumulative amount of $60,000,
and (5) then 50% to the Partnership and 50% to the co-
venturer. Following the guaranty period, until all guaranty
period preference loans and related accrued interest have
been paid in full, 50% of the net cash flow is to be
distributed to the co-venturer to the extent necessary to
repay any principal and accrued interest and 37.5% to the
Partnership and 12.5% to the co-venturer. After all guaranty
period preference loans and accrued interest have been paid
in full, 50% to the Partnership to pay any accrued preference
and 37.5% to the Partnership and 12.5% to the co-venturer.
Then 50% to the manager for unpaid management fees and 37.5%
to the Partnership and 12.5% to the co-venturer, and
thereafter 75% to the Partnership and 25% to the co-venturer.
The Partnership's cumulative unpaid preference return as of
December 31, 1993 is $212,974.
Proceeds from the sale or refinancing of the property will
be distributed in the following order of priority: (1) the
Partnership will receive the aggregate amount of its
cumulative annual preferred return not previously paid, (2)
to the Partnership and co-venturer in proportion to any
guaranty period loans, (3) to the Partnership until it has
received an amount equal to its net investment plus $380,000,
(4) to the co-venturer until all principal and accrued
preference return on guaranty period loans have been repaid
(5) to pay any unpaid subordinated management fees and (6)
thereafter, any remaining proceeds will be distributed 80% to
the Partnership and 20% to the co-venturer.
Net income and loss will be allocated as follows: (1)
income will be allocated to the Partnership and co-venturer
in the same proportion as cash distributions (2) then 75% to
the Partnership and 25% to the co-venturer. Losses will be
allocated in proportion to net cash flow distributed.
The joint venture has entered into a management contract
with an affiliate of the co-venturer which is cancellable at
the option of the Partnership upon the occurrence of certain
events. The annual management fee is 5% of gross rents.
f) West Ashley Shoppes Associates
On March 10, 1988 the Partnership acquired an interest in
West Ashley Shoppes Associates (the "joint venture"), a South
Carolina general partnership organized in accordance with a
joint venture agreement between the Partnership and Orleans
Road Development Company, an affiliate of the Leo Eisenberg
Company (the "co-venturer"). The joint venture was organized
to own and operate West Ashley Shoppes, a newly constructed
shopping center located in Charleston, South Carolina. The
property consists of 134,000 net rentable square feet on
approximately 17.25 acres of land. One tenant occupies
55,850 square feet, representing approximately 41% of the
total shopping center. This tenant, Phar-Mor, Inc., is in
Chapter 11 Bankruptcy Reorganization as of March 31, 1994.
The aggregate cash investment by the Partnership for its
interest was $10,503,841 (including an acquisition fee of
$365,000 paid to PWPI and certain closing costs of $123,841).
During the Guaranty Period, from March 10, 1988 to March 10,
1993, the co-venturer had agreed to unconditionally guarantee
to fund any deficits and to ensure that the joint venture
could distribute to the Partnership its preference return.
During fiscal 1990, the co-venturer defaulted on its guaranty
obligation. On April 25, 1990, the Partnership and the co-
venturer entered into the second amendment to the joint
venture agreement. In accordance with the amendment, the
Partnership contributed $300,000 to the joint venture, in
exchange for the co-venturer's transfer of rights to certain
out-parcel land. The $300,000 was then repaid to the
Partnership as a distribution to satisfy the co-venturer's
obligation to fund net cash flow shortfalls in arrears at
December 31, 1989. Subsequent to the amendment to the joint
venture agreement, the co-venturer defaulted on the guaranty
obligations again. Net cash flow shortfall contributions of
approximately $1,060,000 were in arrears at December 31,
1993. During 1991, the Partnership had filed suit against
the co-venturer and the individual guarantors to collect the
amount of the cash flow shortfall contributions in arrears.
In May 1994, subsequent to the Partnership's year-end, the
Partnership and the co-venturer executed a settlement
agreement to resolve their outstanding disputes regarding the
net cash flow shortfall contributions described above. Under
the terms of the settlement agreement, the co-venturer
assigned 96% of its interest in the joint venture to the
Partnership and the remaining 4% of its interest in the joint
venture to Second Equity Partners, Inc. (SEPI), Managing
General Partner of the Partnership. In return for such
assignment, the Partnership agreed to release the co-venturer
from all claims regarding net cash flow shortfall
contributions owed to the joint venture. In conjunction with
the assignment of its interest and withdrawal from the joint
venture, the co-venturer agreed to release certain
outstanding counter claims against the Partnership. The
Partnership and SEPI intend to continue the operations of the
joint venture as a going concern. The settlement agreement
effectively gives the Partnership complete control over the
affairs of the joint venture. Accordingly, beginning in the
first quarter of fiscal 1995, the financial position and
results of operations of this joint venture will be presented
on a consolidated basis in the Partnership's financial
statements.
Subsequent to the settlement agreement and assignment of
joint venture interest described above, the terms of the
joint venture agreement calls for net cash flow from
operations of the joint venture to be distributed as follows:
(1) the Partnership will receive a preference return of 10%
per annum on its net cash investment; (2) next to the
partners on a pro rata basis to repay unpaid additional
contribution returns and return on accrued preference, as
defined; (3) net, until all additional contributions, tenant
improvement contributions and accrued preference returns have
been paid in full, 50% of remaining cash flow to the partners
on a pro rata basis to repay such items, 49.5% to the
Partnership, and 0.5% to the co-venturer; and (4) thereafter,
any remaining cash would be distributed 99% to the
Partnership and 1% to the co-venturer.
Proceeds from the sale or refinancing of the property will
be distributed in the following order of priority: (1) the
Partnership will receive the aggregate amount of its
cumulative annual preferred return not previously paid, (2)
to the Partnership and co-venturer to pay additional
contributions, (3) the Partnership will receive an amount
equal to the Partnership's net investment and (4)
thereafter, any remaining proceeds will be distributed 99% to
the Partnership and 1% to the co-venturer.
Net income or loss will be allocated to the Partnership and
the co-venturer in the same proportion as cash distributions
except for certain items which are specifically allocated to
the partners, as defined, in the joint venture agreement.
Such items include amortization of acquisition fee and
organization expenses and allocation of depreciation related
to recording of the building at fair value based upon its
purchase price.
The joint venture originally entered into a management
contract with an affiliate of the co-venturer which was
cancellable at the option of the Partnership upon the
occurrence of certain events. The annual management fee was
4% of gross rents. During fiscal 1992, the Partnership
exercised its option to terminate the management agreement
and hired third-party management and leasing agents to
administer the day-to-day operations of the property.
6. Notes Payable
On April 29, 1988, the Partnership borrowed $6,000,000 in
the form of a zero coupon loan which had a scheduled maturity
date in May of 1995. The note bears interest at an
effective compounded annual rate of 9.8% and is secured by
the 625 North Michigan Avenue Office Building. Payment of
all interest is deferred until maturity, at which time
principal and interest totalling approximately $11,556,000
was to be due and payable. The carrying value on the
Partnership's balance sheet at March 31, 1994 of the loan
plus accrued interest aggregated approximately $10,404,000.
The terms of the loan agreement require that if the loan
ratio, as defined, exceeds 80%, the Partnership is required
to deposit additional collateral in an amount sufficient to
reduce the loan ratio to 80%. During fiscal 1994, the lender
informed the Partnership that based on an interim property
appraisal, the loan ratio exceeded 80% and that a deposit of
additional collateral was required. Subsequently, the
Partnership submitted an appraisal which demonstrated that
the loan ratio exceeded 80% by an amount less than previously
demanded by the lender. In December 1993, the Partnership
deposited additional collateral of $208,876 in accordance
with the higher appraised value. The lender accepted the
Partnership's deposit of additional collateral (included in
escrowed cash on the accompanying balance sheet at March 31,
1994) but disputed whether the Partnership had complied with
the terms of the loan agreement regarding the 80% loan ratio.
Subsequent to the Partnership's year-end, an agreement was
reached with the lender of the zero coupon loan on a proposal
to refinance the loan and resolve the outstanding disputes.
The terms of the agreement call for the Partnership to make a
principal pay down of approximately $801,000, including the
application of the additional collateral referred to above.
The new loan will have an initial principal balance of
approximately $9.7 million and a scheduled maturity date of
May 1999. From the date of the formal closing of the
modification and extension agreement to the new maturity date
of the loan, the loan will bear interest at a rate of 9.125%
per annum. Monthly payments of principal and interest
aggregating approximately $81,000 will be required. The
terms of the loan agreement also require the establishment of
an escrow account for real estate taxes, as well as a capital
improvement escrow which is to be funded with monthly
deposits from the Partnership aggregating approximately $1 million
through the scheduled maturity date. Formal closing of the
modification and extension agreement occurred on May 31, 1994.
On June 20, 1988, the Partnership borrowed $17,000,000 from
a financial institution in the form of zero coupon loans due
in June of 1995. These notes bear interest at an annual rate
of 10% compounded annually and are secured by Saratoga Center
and EG&G Plaza, Loehmann's Plaza Shopping Center, Richland
Terrace and Richmond Park Apartments, West Ashley Shoppes,
The Gables at Erin Shades, Treat Commons Phase II Apartments
and Asbury Commons Apartments. Payment of all interest is
deferred until maturity. During fiscal 1991, the Partnership
repaid the portion of the zero coupon loans which had been
secured by the Highland Village Apartments, which was sold in
May of 1990. The aggregate amount of principal and accrued
interest repaid on May 31, 1990 amounted to approximately
$1,660,000. Additionally, a paydown of principal and accrued
interest, totalling approximately $2,590,000 was made on
August 20, 1990. This paydown represented a mandatory
repayment of the full amount of the principal and accrued
interest which had been secured by the Ballston Place
property which was sold in fiscal 1990 and an optional
partial prepayment of the principal and accrued interest
secured by The Gables Apartments. The remaining balances of
these loans and the related accrued interest, aggregating
approximately $23,560,000, are reflected on the balance sheet
of the Partnership as of March 31, 1994. Based on the
current loan balances, principal and interest aggregating
approximately $26,419,000 would be due and payable at
maturity, in June of 1995. The Partnership is presently
involved in negotiations with the lender regarding a possible
modification and extension agreement regarding these seven
notes. Any such agreement would likely involve the
conversion of the zero coupon notes to conventional current-
pay loans with monthly principal amortization. Such a
modification could also require an initial principal paydown.
There are no assurances that a modification and extension
agreement will be completed. Management is also
investigating other refinancing options for these
obligations. Consent of certain of the Partnership's co-
venture partners may be required in connection with any
extension or refinancing transactions.
7. Bonds Payable
Bonds payable consist of the Hacienda Park joint venture's
share of liabilities for bonds issued by the City of
Pleasanton, California for public improvements that benefit
Hacienda Business Park and the operating investment property
and are secured by liens on the operating investment
property. The bonds for which the operating investment
property is subject to assessment bear interest at rates
ranging from 5% to 7.87%, with an average rate of
approximately 7.2%. Principal and interest are payable in
semi-annual installments.
Future scheduled principal payments on bond assessments are
as follows:
Year ended
December 31
1994 $ 71,859
1995 83,529
1996 91,431
1997 100,597
1998 110,136
Thereafter 2,406,495
$ 2,864,047
In the event the operating investment property is sold, the
Hacienda Park joint venture will no longer be liable for the
bond assessments.
8. Rental Revenue
The buildings owned by Hacienda Park Associates are leased
under noncancellable, multi-year leases. Minimum future
rentals due under the terms of these leases at December 31,
1993 are as follows:
Future
Minimum
Contractual
Payments
1994 $ 1,482,435
1995 1,235,671
1996 1,057,651
1997 998,311
1998 730,826
Thereafter 104,029
$ 5,608,923
The joint venture has one major tenant which paid
approximately $1,466,000 in rent for the year ended December
31, 1993, representing 63% of the venture's rental income.
At December 31, 1993, monthly rents from this tenant are
$97,074 through March 1994 and $41,612 thereafter until the
lease expiration in March 1999.
9. Subsequent Events
On May 15, 1994 the Partnership distributed $1,664,240 to
the Limited Partners and $16,811 to the General Partners for
the quarter ended March 31, 1994.
In June 1994, the Board of Directors of the Partnership's
Managing General Partner gave approval for the communication
to the Limited Partners of a proposed reduction in the Partnership's
quarterly distribution rate. Such communication to the Limited
Partners is planned for release in August 1994. Formal approval
of the proposed distribution rate adjustment, which would be effective
for the second quarter of fiscal 1995, will occur in October 1994.
The rate reduction is being proposed by management in light of the
monthly payment of debt service now required under the terms of the
loan secured by the 625 North Michigan Office Building and the
current debt service expected to be required upon the modification
or refinancing of the Partnership's remaining zero coupon loans
(see Note 6). In addition, management anticipates significant
cash needs over the next two years to pay for capital and tenant
improvements at its commercial office buildings and retail
properties.
Schedule XI - Real Estate and Accumulated Depreciation
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
March 31, 1994
<TABLE>
<CAPTION>
Cost Life on Which
Initial Cost to Capitalized Depreciation
Consolidated (Removed) in Latest
Joint Subsequent to Gross Amount at Which Carried at Income
Ventures Acquisition End of Year Statement
Buildings & Buildings & Buildings & Accumulated Date of Date is
Description Encumbrances Land Improvements Improvements Land Improvements Total Depreciation Construction Acquired Computed
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Business Center
Pleasanton, CA$8,538,480 $3,315,297 $23,336,952 $1,436,778 $3,370,033 $24,718,994 $28,089,027 $7,163,733 1985 12/24/87 5 - 31.5 yrs
Apartment Complex
Atlanta, GA 3,326,268 1,701,946 11,949,920 (217,373) 1,638,760 11,795,733 13,434,493 1,783,105 1990 3/12/90 10 - 27.5 yrs
$11,864,748 $5,017,243 $35,286,872 $1,219,405 $5,008,793 $33,464,354 $41,523,520 $8,946,838
Notes
(A) The aggregate cost of real estate owned at December 31, 1993 for Federal
income tax purposes is approximately $42,689,000.
(B) See Notes 6 and 7 to the Financial Statements for a description of the terms
of the debt encumbering the properties.
(C) Reconciliation of real estate owned:
1993 1992 1991
Balance at beginning of period $ 41,432,699 $ 42,003,718 $ -
Consolidation of joint ventures - - 41,606,625
Acquisitions and improvements 90,821 261,317 902,579
Write-offs due to disposals - (832,336) -
Reduction in basis due
to guaranty payments - - (505,486)
Balance at end of period $ 41,523,520 $ 41,432,699 $42,003,718
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 7,722,461 $ 7,347,309 $ -
Consolidation of joint ventures - - 5,322,139
Depreciation expense 1,224,377 1,207,488 2,025,170
Write-offs due to disposals - (832,336) -
Balance at end of period $ 8,946,838 $ 7,722,461 $ 7,347,309
</TABLE>
REPORT OF INDEPENDENT AUDITORS
The Partners of
PaineWebber Equity Partners Two Limited Partnership:
We have audited the accompanying combined balance sheets of the
Combined Joint Ventures of PaineWebber Equity Partners Two
Limited Partnership as of December 31, 1993 and 1992 and the
related combined statements of income and changes in venturers'
capital and cash flows for each of the three years in the period
ended December 31,1993. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the
Partnership's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the combined financial
position of the Combined Joint Ventures of PaineWebber Equity
Partners Two Limited Partnership at December 31, 1993 and 1992,
and the combined results of their operations and their cash flows
for each of the three years in the period ended December 31, 1993
in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG
Boston, Massachusetts
March 18, 1994,
except for Note 9,
as to which the
date is May 16, 1994, and
the second paragraph of Note 8,
as to which the date is
June 13, 1994
COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
December 31, 1993 and 1992
Assets
1993 1992
Current assets:
Cash and cash equivalents $ 1,202,805 $ 2,299,439
Investments 729,558 -
Accounts receivable, net of allowance
for doubtful accounts
of $570,533 ($331,228 in 1992) 1,384,275 1,388,735
Accounts receivable - affiliates - 116,306
Prepaid expenses 19,911 35,003
Other current assets 53,121 50,606
Total current assets 3,389,670 3,890,089
Operating investment properties:
Land 24,247,822 24,247,822
Buildings, improvements and equipment 78,105,218 77,488,825
102,353,040 101,736,647
Less accumulated depreciation (20,062,089) (16,832,011)
82,290,951 84,904,636
Escrow funds 62,405 58,159
Due from affiliates 269,479 269,479
Deferred expenses, net of accumulated
amortization of $1,753,360
($1,444,927 in 1992) 1,789,471 1,912,530
Other assets, net 1,878,512 1,948,560
$ 89,680,488 $ 92,983,453
Liabilities and Venturers' Capital
Current liabilities:
Accounts payable and accrued expenses $ 591,171 $ 590,756
Accounts payable - affiliates 167,881 163,821
Accrued real estate taxes 2,491,992 2,432,070
Distributions payable to venturers 506,256 474,448
Current portion - notes payable 700,000 -
Total current liabilities 4,457,300 3,661,095
Tenant security deposits 150,803 153,521
Subordinated management fee payable
to affiliate 50,000 50,000
Notes payable 1,000,000 1,700,000
Venturers' capital 84,022,385 87,418,837
$ 89,680,488 $ 92,983,453
See accompanying notes.
COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
COMBINED STATEMENTS OF INCOME AND CHANGES IN VENTURERS' CAPITAL
For the years ended December 31, 1993, 1992 and 1991
1993 1992 1991
Revenues:
Rental income and expense
reimbursements $13,546,942 $13,507,464 $13,493,322
Interest income 41,192 44,337 68,577
13,588,134 13,551,801 13,561,899
Expenses:
Real estate taxes 3,081,606 2,983,077 3,014,283
Depreciation and amortization 3,573,394 3,591,589 3,614,838
Property operating expenses 809,964 797,255 819,399
Repairs and maintenance 1,169,867 938,488 1,069,211
Management fees 481,996 478,045 484,906
Professional fees 137,392 103,886 117,577
Salaries 764,696 699,633 712,078
Advertising 62,731 66,141 69,650
Interest expense 161,726 172,855 203,519
General and administrative 663,352 529,601 519,287
Bad debt expense 272,855 97,228 10,432
Other 123,400 120,228 186,980
11,302,979 10,578,026 10,822,160
Net income 2,285,155 2,973,775 2,739,739
Contributions from venturers - 294,450 1,725,000
Distributions to venturers (5,681,607) (5,181,550) (5,665,441)
Venturers' capital,
beginning of year 87,418,837 89,332,162 90,532,864
Venturers' capital, end of year $84,022,385 $87,418,837 $89,332,162
See accompanying notes.
COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
COMBINED STATEMENT OF CASH FLOWS
For the years ended December 31, 1993, 1992 and 1991
Increase (Decrease) in Cash and Cash Equivalents
1993 1992 1991
Cash flows from operating activities:
Net income $ 2,285,155 $ 2,973,775 $ 2,739,739
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,573,394 3,591,589 3,614,838
Changes in assets and liabilities:
Accounts receivable 4,460 (67,023) 102,780
Accounts receivable - affiliates - - (43,399)
Prepaid expenses 15,092 (723) (1,207)
Other current assets (2,515) 7,560 (40,746)
Escrow funds (4,246) (4,100) (4,352)
Other assets 66,864 (123,262) (1,134,301)
Accounts payable and accrued expenses (22,634) 203,293 (151,674)
Accounts payable - affiliates 4,060 23,049 -
Tenant security deposits (2,718) 4,087 1,422
Accrued real estate taxes 59,922 (108,684) 133,819
Total adjustments 3,691,679 3,525,786 2,477,180
Net cash provided by
operating activities 5,976,834 6,499,561 5,216,919
Cash flows from investing activities:
Additions to operating investment
properties (648,092) (513,251) (1,084,784)
Increase in deferred expenses (185,374) (273,515) (47,279)
Purchase of investment securities (729,558) - -
Net cash used for investing
activities (1,563,024) (786,766) (1,132,063)
Cash flows from financing activities:
Distributions to venturers (5,533,493) (4,964,166) (5,496,292)
Proceeds from capital contributions - 281,111 1,714,073
Principal payments under capital
lease obligation - (111,639) (89,391)
Net cash used for
financing activities (5,533,493) (4,794,694) (3,871,610)
Net increase (decrease) in cash
and cash equivalents (1,119,683) 918,101 213,246
Cash and cash equivalents,
beginning of year 2,322,488 1,404,387 1,191,141
Cash and cash equivalents, end of year $ 1,202,805 $ 2,322,488 $ 1,404,387
Cash paid during the year for interest $ 148,708 $ 170,066 $ 196,423
See accompanying notes.
1. Organization
The accompanying financial statements of the Combined Joint
Ventures of PaineWebber Equity Partners Two Limited
Partnership (Combined Joint Ventures) include the accounts of
Chicago-625 Partnership, an Illinois general partnership;
Richmond Gables Associates, a Virginia general partnership;
Daniels/Metcalf Associates Partnership, a Kansas general
partnership; TCR Walnut Creek Limited Partnership, a Texas
limited partnership; Portland Pacific Associates, a
California general partnership and West Ashley Shoppes
Associates, a Virginia limited partnership. The financial
statements of the Combined Joint Ventures are presented in
combined form due to the nature of the relationship between
each of the co-venturers and PaineWebber Equity Partners Two
Limited Partnership ("EP2").
The financial statements of the Combined Joint Ventures have
been prepared based on the periods that EP2 held an interest
in the individual joint ventures. The dates of EP2's
acquisition of interests in the joint ventures are as
follows:
Date of Acquisition
Joint Venture of Interest
Chicago-625 Partnership December 16, 1986
Richmond Gables Associates September 1, 1987
Daniel/Metcalf Associates Partnership September 30, 1987
TCR Walnut Creek
Limited Partnership December 24, 1987
Portland Pacific Associates January 12, 1988
West Ashley Shoppes Associates March 10, 1988
2. Summary of significant accounting policies
Operating investment properties
The operating investment properties are carried at the lower
of cost, reduced by accumulated depreciation, or net
realizable value. The net realizable value of a property
held for long-term investment purposes is measured by the
recoverability of the investment from expected future cash
flows on an undiscounted basis, which may exceed the
property's current market value. The net realizable value of
a property held for sale approximates its market value. All
of the operating investment properties owned by the Combined
Joint Ventures were considered to be held for long-term
investment purposes as of December 31, 1993 and 1992. The
Combined Joint Ventures capitalized property taxes and
interest incurred during the construction period of the
projects along with the costs of identifiable improvements.
The Combined Joint Ventures also capitalized certain
acquisition, construction and guaranty fees paid to
affiliates. In certain circumstances the carrying values of
the operating properties have been adjusted for mandatory
payments received from venture partners (see Note 2).
Depreciation expense is computed on a straight-line basis
over the estimated useful life of the buildings, improvements
and equipment, generally 5 to 31.5 years.
Deferred expenses
Deferred expenses consist primarily of organization costs
which are being amortized over 5 years and lease commissions
and rental concessions which are being amortized over the
life of the applicable leases.
Income tax matters
The Combined Joint Ventures are comprised of entities which
are not taxable and, accordingly, the results of their
operations are included on the tax returns of the various
partners. Accordingly, no income tax provision is reflected
in the accompanying combined financial statements.
Cash and cash equivalents
For purposes of reporting cash flows, the Combined Joint
Ventures consider all highly liquid investments, money market
funds and certificates of deposit purchased with original
maturities of three months or less to be cash equivalents.
Investments
Investments consist of United States Treasury Bills with
maturities greater than three months from the date of
purchase. The fair value approximates cost at December 31,
1993.
Rental revenues
Certain joint ventures have operating leases with tenants
which provide for fixed minimum rents and reimbursements of
certain operating costs. Rental revenues are recognized on a
straight-line basis over the term of the related lease
agreements.
Reclassifications
Certain 1992 amounts have been reclassified to conform to
the 1993 presentation.
3. Joint Ventures
See Note 5 to the financial statements of EP2 included in
this Annual Report for a more detailed description of the
joint ventures. Descriptions of the ventures' properties are
summarized below:
a. Chicago-625 Partnership
The joint venture owns and operates 625 North
Michigan Avenue, a 325,000 square foot office building
located in Chicago, Illinois.
b. Richmond Gables Associates
The joint venture owns and operates The Gables of
Erin Shades, a 224-unit apartment complex located in
Richmond, Virginia.
c. Daniel/Metcalf Associates Partnership
The joint venture owns and operates Loehmann's
Plaza, a 142,000 square foot shopping center located in
Overland Park, Kansas.
d. TCR Walnut Creek Limited Partnership
The joint venture owns and operates Treat Commons
Phase II Apartments, a 160-unit apartment complex located
in Walnut Creek, California.
e. Portland Pacific Associates
The joint venture owns and operates two apartment
complexes, Richmond Park Apartments and Richland Terrace
Apartments, a total of 183 units located in Washington
County, Oregon.
f. West Ashley Shoppes Associates
The joint venture owns and operates West Ashley
Shoppes, a 134,000 square foot shopping center located in
Charleston, South Carolina.
The following description of the joint venture agreements
provides certain general information.
Allocations of net income and loss
Except for certain items which are specifically allocated
to the partners, as defined in the joint venture agreements,
the joint venture agreements generally provide that profits
up to the amount of net cash flow distributable shall be
allocated between EP2 and the co-venturers in proportion to
the amount of net cash flow distributed to each partner for
such year. Profits in excess of net cash flow shall be
allocated between 59% -99% to EP2 and 1% - 41% to the co-
venturers. Losses are allocated in varying proportions 59% -
100% to EP2 and 0% - 41% to the co-venturers as specified in
the joint venture agreements.
Gains or losses resulting from sales or other dispositions
of the projects shall be allocated as specified in the joint
venture agreements.
Distributions
The joint venture agreements provide that distributions
will generally be paid from net cash flow monthly or
quarterly, equivalent to 9% - 10% per annum return on EP2's
net investment in the joint ventures. Any remaining cash
flow is generally to be distributed first, to repay accrued
interest and principal on certain loans and second, to EP2
and the co-venturers until they have received their accrued
preference returns. The balance of any net cash flow is to
be distributed in amounts ranging from 59% - 75% to EP2 and
25% - 41% to the co-venturers as specified in the joint
venture agreements.
Distributions of net proceeds upon the sale or disposition
of the projects shall be made in accordance with formulas
provided in the joint venture agreements.
Guaranty Period
The joint venture agreements provided that during the
Guaranty Periods (as defined in the joint venture
agreements), in the event that net cash flow was insufficient
to fund operations including amounts necessary to pay EP2
preferred distributions, the co-venturers were to be required
to fund amounts equal to such deficiencies. The co-
venturers' obligation to fund such amounts pursuant to their
guarantees was generally to be in the form of capital
contributions to the joint ventures. For a specified period
of time subsequent to the Guaranty Period, one of the joint
venture agreements required that mandatory loans be made to
the joint venture by the co-venturer to the extent that
operating revenues were insufficient to pay operating
expenses.
The Guaranty and Mandatory Loan Periods of the joint
ventures were generally from the date EP2 entered a joint
venture for a period ranging from one to five years.
The expiration dates of the Guaranty and Mandatory Loan
Periods for the joint ventures were as follows:
Mandatory
Guaranty Period Loan Period
Chicago-625 Partnership December 15, 1989 N/A
Richmond Gables Associates September 1,1990 N/A
Daniel/Metcalf Associates
Partnership September 30, 1989 September 30, 1990
TCR Walnut Creek
Limited Partnership August 31, 1990 N/A
Portland Pacific Associates February 1, 1991 N/A
West Ashley Shoppes Associates March 10, 1993 N/A
During 1989, the co-venture partner in the West Ashley
Shoppes joint venture defaulted on its guaranty obligation.
On April 25, 1990, EP2 and the co-venturer entered into the
second amendment to the joint venture agreement. In
accordance with the amendment, EP2 contributed $300,000 to
the joint venture. In exchange for the $300,000 contributed
by EP2, the co-venturer transferred to EP2 its rights to
certain out-parcel land. Immediately thereon, the co-
venturer satisfied its obligations to fund net cash flow
shortfall contributions in arrears at December 31, 1989. As
a result of this transaction, EP2 will receive an increased
preferred return and is entitled to the first $300,000 in
proceeds upon sale and/or refinancing of the out-parcel land
described above. Subsequent to the amendment to the joint
venture agreement, the co-venturer defaulted on the guaranty
obligations again. Net cash flow shortfall contributions
owed by the co-venturer pursuant to the guaranty totalled
approximately $1,060,000 at December 31, 1993. During 1991,
EP2 filed suit against the co-venturer and the individual
guarantors to collect the amount of the cash flow shortfall
contributions in arrears. As of December 31, 1993, EP2 was
negotiating with the co-venturer and the individual
guarantors for their removal and the collection of all
amounts owed by them to the Partnership. Any uncollected
receivable amounts due from the co-venturer are expected to
be offset against the co-venturer's capital account at the
conclusion of the negotiations (see Note 9).
As of December 31, 1993, the co-venturer in the
Daniel/Metcalf Associates Partnership is obligated to make
additional capital contributions of at least $88,644 (subject
to adjustment pending the venture partners' determination of
an additional amount, if any, of working capital reserves to
be funded by the co-venturer) with respect to cumulative
unfunded shortfalls in EP2's preferred return through
September 30, 1990. Such additional capital contributions
are not recorded as a receivable in the accompanying
financial statements.
4. Related Party Transactions
The Combined Joint Ventures
originally entered into property management agreements with
affiliates of the co-venturers, cancellable at EP2's option
upon the occurrence of certain events. The management fees
are equal to 3.5%-5% of gross receipts, as defined in the
agreements. During 1992, EP2 exercised its option to
terminate the management contract for West Ashley Shoppes and
hired third-party management and leasing agents to administer
the day-to-day operations of the property. The new property
manager was hired for a management fee of 3% of gross
receipts, as defined. Affiliates of certain co-venturers
also receive leasing commissions with respect to new leases
acquired.
Accounts payable - affiliates at December 31, 1993 includes
advances owed to a partner of Richmond Gables Associates of
$47,949 for amounts paid to the manager of the venture's
operating property for reimbursement of expenses paid on
behalf of the joint venture and $15,434 owed to EP2 for
organization costs paid in connection with the formation of
Portland Pacific Associates. Accounts payable - affiliates
at December 31, 1993 also includes advances totalling $85,722
from the venture partners of Portland Pacific Associates and
$18,776 payable to related parties of Portland Pacific
Associates in connection with services rendered to the
venture.
Accounts payable - affiliates at December 31,1992 includes
advances owed to a partner of Richmond Gables Associates of
$47,949 for amounts paid to the manager of the venture's
operating property for reimbursement of expenses paid on
behalf of the joint venture and $15,434 owed to EP2 for
organization costs paid in connection with the formation of
Portland Pacific Associates. Accounts payable - affiliates
at December 31, 1992 also includes advances totalling $85,909
from the venture partners of Portland Pacific Associates in
connection with services rendered to the venture.
5. Capital Reserves
The joint venture agreements generally provide that reserves
for future capital expenditures be established and
administered by affiliates of the co-venturers. The co-
venturers are to pay periodically into the reserve (as
defined) as funds are available after paying all expenses and
the EP2 preferred distribution. No contributions were made
to the reserves in 1993 and 1992.
6. Rental Revenues
Certain joint ventures have operating leases with tenants
which provide for fixed minimum rents and reimbursements of
certain operating costs. Rental revenues are recognized on a
straight-line basis over the life of the related lease
agreements.
Minimum rental revenues to be recognized on the straight-
line basis in the future on noncancellable leases are as
follows:
1994 $ 7,200,428
1995 6,169,042
1996 5,317,377
1997 4,415,874
1998 4,279,934
Thereafter 14,336,350
$41,719,005
Leases with four tenants of the 625 North Michigan Office
Building accounted for approximately $2,231,000 (44%) of the
rental revenue generated by that property for 1993. One
tenant of West Ashley Shoppes occupies 55,850 square feet,
representing approximately 41% of the total shopping center.
This tenant, Phar-Mor, Inc., is in Chapter 11 Bankruptcy
Reorganization as of December 31, 1993. Base rental income
from this tenant for 1993 totalled $348,353. Minimum rents
due from this tenant and included in the above amounts are
$348,353 annually for 1994 through 1996, $357,070 for 1997,
$374,503 for 1998 and $1,498,012 thereafter.
7. Notes Payable
Notes payable at December 31, 1993 and 1992 include
permanent financing for the Treat Commons joint venture
provided by EP2 in the amount of $1,000,000. The nonrecourse
permanent loan is secured by a deed of trust and security
agreement with an assignment of rents. Interest only
payments were 9.5% until the end of the guaranty period
(August 31, 1990), and are to be paid at 10% thereafter.
Principal is due December 2012. Interest expense on this
debt was $100,000 in 1993, 1992 and 1991.
In addition, notes payable at December 31, 1993 and 1992
include a nonrecourse mortgage payable arrangement entered
into by Daniel/Metcalf Associates on January 15, 1990 in the
principal sum of $700,000. The mortgage payable is secured
by the joint venture's operating investment property. The
mortgage is due in full December 1, 1994, with interest
payable monthly at the prime rate plus 1.5% per annum (7.5%
at December 31, 1993).
8. Encumbrances on Operating Investment Properties
Under the terms of the joint venture agreements, EP2 is
entitled to use the joint venture operating properties as
security for certain borrowings, subject to various
restrictions. EP2 (together in one instance with an
affiliated partnership) has exercised its options pursuant to
this arrangement by issuing certain zero coupon notes. The
operating investment properties of all of the Combined Joint
Ventures have been pledged as security for these loans which
mature in 1995. These borrowings are direct obligations of
EP2 and its affiliate and, therefore, are not reflected in
the accompanying financial statements. At December 31, 1993,
the aggregate indebtedness of EP2 (and its affiliated
partnership) under these loan agreements, including accrued
interest, was approximately $30,424,000 ($27,682,000 at
December 31, 1992). Under these borrowing arrangements, EP2
is required to make all loan payments and has indemnified the
joint ventures and the other partners against all
liabilities, claims and expenses associated with the
borrowings. Based on the loan balances outstanding as of
December 31, 1993, principal and interest on the obligations
aggregating approximately $45.7 million is scheduled to
mature in 1995.
One of the zero coupon loans, which is secured by the 625
North Michigan Office Building, requires that if the loan
ratio, as defined, exceeds 80%, then EP2, together with its
affiliated partnership, shall be required to deposit
additional collateral in an amount sufficient to reduce the
loan ratio to 80%. During 1993, the lender informed EP2 and
its affiliated partnership that based on an interim property
appraisal, the loan ratio exceeded 80% and demanded that
additional collateral be deposited. Subsequently, EP2 and
its affiliated partnership submitted an appraisal which
demonstrated that the loan ratio exceeded 80% by an amount
less than previously demanded by the lender and deposited
additional collateral in accordance with the higher appraised
value. The lender accepted the deposit of additional
collateral, but disputed whether EP2 and its affiliated
partnership had complied with the terms of the loan agreement
regarding the 80% loan ratio. Subsequent to year-end, an
agreement was reached with the lender on a proposal to
refinance the loan and resolve the outstanding disputes. The
terms of the agreement, which was formally executed in June
1994, extend the maturity date of the loan to May 1999. The
new principal balance of the loan, after a principal paydown
to be funded by EP2 and its affiliated partnership, will be
approximately $16,225,000. The new loan will bear interest
at a rate of 9.125% per annum and will require the current
payment of interest and principal on a monthly basis based on
a 25-year amortization period. The terms of the loan
agreement also require the establishment of an escrow
account for real estate taxes, as well as a capital
improvement escrow which is to be funded with monthly deposits to be
made by EP2 and its affiliated Partnership in the aggregate amount
of $1,750,000 thorugh the scheduled maturity date of the loan.
9. Subsequent Event
In May 1994, EP2 and its co-venture partner in the West
Ashley Shoppes joint venture executed a settlement agreement to
resolve their outstanding disputes, which are described in Note
2. Under the terms of the settlement agreement, the co-venturer
assigned 96% of its interest in the joint venture to EP2 and the
remaining 4% of its interest to the joint venture to Second
Equity Partners, Inc. (SEPI), a Virginia corporation and an
affiliate of EP2. In return for such assignment, EP2 agreed to
release the co-venturer from all claims regarding net cash flow
shortfall contributions owed to the joint venture. In
conjunction with the assignment of its interest and withdrawal
from the joint venture, the co-venturer agreed to release certain
outstanding counter claims against EP2. EP2 and SEPI intend to
continue the operations of the joint venture as a going concern.
However, the settlement agreement has effectively given EP2
complete control over the affairs of the joint venture.
Accordingly, beginning in 1994, the joint venture will be
presented on a consolidated basis in the financial statements of
EP2.
Schedule XI - Real Estate and Accumulated Depreciation
COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1993
<TABLE>
<CAPTION>
Cost
Initial Cost to Capitalized Life on Which
Combined (Removed) Depreciation
Joint Subsequent to Gross Amount at Which Carried at in Latest
Ventures Acquisition End of Year Income
Buildings & Buildings & Buildings & Accumulated Date of Date Statement
Description Encumbrances Land Improvements Improvements Land Improvements Total Depreciation Construction Acquired is Computed
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED JOINT VENTURES:
Office Building
Chicago, IL $17,006,196 $ 8,112,250 $35,682,472 $5,116,364 $8,112,250 $40,798,836 $48,911,086 $10,806,555 1968 12/16/86 5 -
30 yrs
Shopping Center
Overland Park,KS
4,382,758 6,265,016 8,873,984 1,113,044 6,265,016 9,987,028 16,252,044 2,193,153 1980 9/30/87 7 -
31.5 yr
Apartment Complex
Richmond, VA 2,169,416 963,414 7,906,393 (377,608) 901,291 7,590,908 8,492,199 2,289,362 1987 9/1/87 10 -
27.5 yrs
Apartment Complex
Walnut Creek, CA
4,124,160 3,983,598 1,111,564 5,184,623 3,994,805 6,284,980 10,279,785 1,787,190 1988 12/24/87
5 - 27.5
yrs
Apartment Complex
Portland, OR 1,941,978 732,000 7,267,789 78,193 732,000 7,345,982 8,077,982 1,708,804 1986 1/12/88 5 - 27.5
yrs
Shopping Center
Charleston, SC 2,499,328 4,242,460 5,668,760 428,724 4,242,460 6,097,484 10,339,944 1,277,025 1988 3/10/88 15 - 31.5
yrs
$32,123,836 $24,298,738 $66,510,962$11,543,340 $24,247,822$78,105,218$102,353,040 $20,062,089
Notes
(A)The aggregate cost of real estate owned at December 31, 1993 for Federal
income tax purposes is approximately $91,684,000.
(B)See Notes 7 and 8 to the Combined Financial Statements for a description of
the terms of the debt encumbering the properties.
(C) Reconciliation of real estate owned:
1993 1992 1991
Balance at beginning of period $101,736,647 $101,290,964 $100,083,194
Acquisitions and improvements 648,092 513,251 1,207,770
Write-offs due to disposals (31,699) (67,568) -
Balance at end of period $102,353,040 $101,736,647 $101,290,964
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 16,832,011 $ 13,631,465 $ 10,461,624
Depreciation expense 3,261,777 3,268,114 3,169,841
Write-offs due to disposals (31,699) (67,568) -
Balance at end of period $ 20,062,089 $ 16,832,011 $ 13,631,465
</TABLE>
